Inside Self-Storage

OCT 2018

Inside Self-Storage (ISS) is an information source for industry owners, managers, developers and investors covering news, trends, facility operation, finance, real estate, construction, development, marketing, technology, insurance and legality.

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The portfolio is attractive to us because it broadens our geographic scope. Through this transaction, we'll be adding five new states and six new major markets to our geographic diversification. It also increases the scale of our iStorage management company, because almost all these properties will be managed under that brand. Plus, the join t-v enture relationship we have with Heitman Capital Management LLC allows us to manage 100 percent of the properties while we only need to invest 25 percent of the capital. This makes it very accretive to us and very financially beneficial for our shareholders. It also gives us future growth potential when Heitman or our other JV c o-i nvestor partners want to exit that investment. They usually do after a certain hold period, and we have the option to buy them out at that time. It's a wi n-w in scenario for everybody involved—for Brookfield, for us, for Heitman and the JV partners—so we're very pleased. It's been two years since NSA acquired the iStorage portfolio. How has that purchase impacted the company? It's been very successful. That acquisition is also a joint venture with Heitman and the Florida Retirement System Pension Plan. Before that transaction, all our properties were managed only by the PROs. The addition of our own internal PRO through that transaction, along with the iStorage division, gives us more flexibility. Financially, it's done very well. It's added to our operating scale from the standpoint of having funds to do more sophisticated things on the technology and marketing side. And, as I said, it's been very accretive to NSA from a standpoint of helping our shareholder value and funds for operations (FFO) per share. What are the primary factors you look for when pursuing a portfolio acquisition? Are they different based on portfolio size? I'd say there are two major things we look at. The first is a strategic synergy, and that relates to the geographic location and benefits we would get from scale through that acquisition. That might be increasing our geographic diversification, or in a lot of cases, it's increasing our market share in areas we're already in. Second, we look at the economic benefits the acquisition can deliver for us and our shareholders. We consider both the short term—how it will do in the first year or two of our ownership—but also the long term, which is ultimately most important. We look at how this acquisition will add value to our shareholders in terms of accretion, improving our lon g-t erm FFO per share and dividends per share we can pay as a result. We also consider our ultimate stock price. We know in the long run that stock price will grow as FFO per share grows. Although there can be a lot of noise in the short run where stock price goes up and down a lot, we know over the long term that growth in FFO per share is what delivers value to our shareholders. The size of the acquisition doesn't really change the factors, but it's true that larger deals often have more scale and strategic advantages. It's also true that larger deals tend to have slightly fewer economic advantages. You generally need to pay a portfolio premium for a large deal vs. individual assets. Obviously, our focus is to try to do both. In an ideal world, we'd love to be able to buy 100 properties at one time at a lower price. The reality is it's very difficult to do that, so we try to do a mixture of on e-o ff deals and portfolios when they become available and can benefit us long-term. How do the dynamics change when considering or pursuing a deal to integrate a new PRO? When we're thinking about adding a new PRO to our group, we look at all the factors, but also consider whether this is a good fit from a personality and teamwork standpoint, because this is really a partnership. Will the PRO be a real team player? Does it fit with the management team? It's critical that the prospective PRO's management team be hig h-q uality and its reputation will enhance NSA rather than detract from it. Then we look at geography to make sure there isn't too much overlap or competition with our existing PROs. The one thing I would say that's different when we're looking at adding a PRO vs. acquiring properties from a thir d-p arty seller is the integration of the operations is usually quite a bit easier. The PRO has already been managing these properties. It knows them really well, and it just continues to manage them. Now, it does have to add in some of the publi c-c ompany procedures in terms of our reporting and accounting and things. Those add some complexity. But other than that, the integration is easier than if we're buying a bunch of properties from an unknown third party. How has the unusual operating structure of NSA contributed to its growth and performance? Our structure and uniqueness has been a key driver in terms of our ability to grow rapidly and succeed without major integration issues. We've been the fastest growing of all the sel f-s torage REITs since we came onto the scene. That's because we have nine acquisition teams out there, not just one. Every PRO has its own team focused on finding acquisitions within its market. Our PROs have allocated territories where they look to add properties to the NSA portfolio. Then we have the internal acquisition team that's part of the iStorage platform as well. It's also true that we have nine propert y-i ntegration teams and not just one, so we can do a lot of acquisitions in a year and not have the kind of stress you might expect if you had one team trying to add all these properties at once from a single headquarters. Every PRO is involved in the integration of new properties in its territories. It makes acquisitions go much smoother. Those have been key parts of our ability to grow so quickly. When we're thinking about adding a new PRO to our group, we look at all the factors, but also consider whether this is a good ft from a personality and teamwork standpoint, because this is really a partnership. —Arlen Nordhagen, NSA Founder and CEO 48 ISS I October 2018 www.insideselfstorage.com

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