N
A
T
I
O
N
A
L
S
T
O
R
A
G
E
A
F
F
I
L
I
A
T
E
S
|
2
0
1
8
A
N
N
U
A
L
R
E
P
O
R
T
PROGRESS
Seventh
Dividend Increase
Since IPO
NOVEMBER 15, 2018
Energy Efficiency
Leadership with
LED Lighting
Initiative Across
its Portfolio
OCTOBER 23, 2018
Opening Bell Ceremony at the New York Stock Exchange
MAY 24, 2018
NSA formed with
Three Founding
PROs: SecurCare,
Northwest and Optivest
4th PRO:
Guardian
5th PRO:
Move It
6th PRO:
Storage Solutions
Successful IPO
2016 Joint Venture:
iStorage Management
Platform Acquisition
7th PRO:
Hide-Away
8th PRO:
Personal
Mini Storage
2018 Joint
Venture
9th PRO:
Southern
10th PRO:
Moove In
N AT I O N A L S TO R AG E A F F I L I AT E S .C O M
44818_Cover.indd 1
4/9/19 8:22 PM
DEAR FELLOW
SHAREHOLDERS
2018 was a major growth year for National Storage Affiliates
as we continued to deliver industry leading internal and external
growth. Although the self storage sector is facing challenges from
elevated new supply, the economy continues to expand and
household formation and job growth continue. Further, we
believe the combination of our diversified portfolio, our proven
PRO platform, and our focused strategy of acquiring stabilized
properties will be a differentiator as we continue to drive strong
shareholder returns.
In 2018, we completed a record $1.7 billion of acquisitions,
including the fourth largest acquisition in the history of the self
storage industry by acquiring the Simply Self Storage portfolio.
The $1.325 billion transaction was completed in a joint venture
with an affiliate of Heitman Real Estate. We also completed
approximately $357 million of wholly-owned acquisitions and
announced the addition of our ninth PRO, Southern Self Storage.
Subsequent to year end, we added our tenth PRO, Moove In Self
Storage, led by a former chairman of the national Self Storage
Association, which further deepens our relationships with smaller
owner/operators. It is these local relationships that help fuel our
robust acquisition growth.
This robust external growth, combined with peer-leading same-
store NOI growth of 4.7% in 2018, has resulted in total return to
our shareholders of over 140% since our IPO in 2015.
Supporting this strong growth is our low levered balance sheet
and our access to multiple capital sources. In July, we raised
$176 million of equity in a follow on offering to help fund our
Simply Self Storage acquisition. We ended the year with net debt
to EBITDA of 5.6 times (at the low end of our target range), with
no debt maturities in 2019. As such, we remain well-positioned to
fund our growth in 2019 and beyond.
We are off to a strong start in 2019 with nearly $200 million of
acquisitions completed or under contract year-to-date. Here is
what you should expect from us going forward:
• Robust internal and external growth facilitated by our
PRO structure.
“ In 2018, we completed a record
$1.7 billion of acquisitions, including
the fourth largest acquisition in the
history of the self storage industry…”
• Continued evolution of our technology platform as we
continue to invest in honing our revenue management and
internet marketing capabilities to further maximize revenues
while improving cost efficiencies.
• Commitment to a conservative balance sheet strategy
including adding more arrows in the “capital quiver.”
• A commitment to investing in and developing our
team members.
• An increased focus on environmental, social and governance
(“ESG”) issues as we build off the recent enhancements to
our board and recent energy saving initiatives.
As ESG initiatives garner increased focus, we note that 2018
marked an important year as we improved the diversity of our
board, adding our first female trustee, and we also enacted energy
saving initiatives across our portfolio. We will explore additional
ESG enhancements going forward and expect to demonstrate
the depth of our management team in 2019. We look forward to
continuing our service as prudent stewards of your capital, aiming
to deliver robust returns for the foreseeable future, while keeping
a watchful eye on risk.
We thank our shareholders for their continued support, our NSA
team members nationwide for their dedication and our PROs for
their continued leadership. Finally, we greatly appreciate our Board
of Trustees for their advice and counsel.
ARLEN D. NORDHAGEN
Chairman of the Board of Trustees
and Chief Executive Officer
TAMARA D. FISCHER
President and Chief Financial Officer
ARLEN D. NORDHAGEN
TAMARA D. FISCHER
NSA’S GROWTH PROFORMANCE
TOTAL RETURN PERFORMANCE †
140.4% Total Return
l
e
u
a
V
x
e
d
n
I
$300
$250
$200
$150
$100
$50
$0
4/23/15
12/31/15
12/31/16
12/31/17
12/31/18
National Storage
Affiliates Trust
S&P 500 Index
NAREIT All Equity
REIT Index
Russell 2000 Index
† Assumes $100.00 invested on April 23, 2015, with dividends reinvested. The Performance Graph will not be deemed
to be incorporated by reference into any filing by NSA under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except to the extent that NSA specifically incorporates the same by reference.
NSA DELIVERS ROBUST
PORTFOLIO GROWTH
s
e
i
t
r
e
p
o
r
P
f
o
r
e
b
m
u
N
800
700
600
500
400
300
200
100
0
675
698(1)
)
1
F o r m a t i o n (
448
e
S i n c
515
277
0 % G r o w t h
0
6
219
100
137
At Formation
2013
2014
2015
2016
2017
2018
2019
Captive Pipeline
3rd Party Acquisitions
New PROs
Strategic Joint Ventures
(1)As of February 6, 2019, NSA’s por tfolio consisted of 522 wholly-owned proper ties and 176 JV-owned proper ties.
(2) The financial highlights in the table above summarize cer tain items that we believe are impor tant for investors to
understand our company and our operations, including Core FFO and NOI, which are non-GAAP financial measures.
For additional information regarding these financial highlights, including cer tain footnote disclosure related to cer tain of
these highlights and reconciliation of non-GAAP Core FFO and NOI to GAAP net income (loss), see Item 6, “Selected
Financial Data,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and
Item 8, “Financial Statements and Supplementary Data in our Annual Repor ts on Form 10-K filed with the Securities
and Exchange Commission (“SEC”) on March 10, 2016, February 28, 2017, February 27, 2018, and February 26, 2019.
(3) Total Enterprise Value is defined as the sum of the Company’s debt principal outstanding plus the perpetual preferred
and common equity (on a fully diluted basis) valued at the closing price per share, respectively, as of each quar ter end.
SP equity is assumed conver ted using the hypothetical conversion ratio for the trailing twelve months ended at each
respective quar ter end, which we publicly disclose each quar ter. See Supplemental Schedule 4 to each of our earnings
releases which are furnished with the SEC.
GROWTH IN TOTAL PROPERTIES
AND RENTABLE SQUARE FEET
800
700
600
500
400
300
200
100
0
5
1
-
2
Q
5
1
-
3
Q
5
1
-
4
Q
6
1
-
1
Q
6
1
-
2
Q
6
1
-
3
Q
6
1
-
4
Q
7
1
-
1
Q
7
1
-
2
Q
7
1
-
3
Q
7
1
-
4
Q
8
1
-
1
Q
8
1
-
2
Q
8
1
-
3
Q
8
1
-
4
Q
# Properties
RSF (MM)
GROWTH IN CORE FFO/
SHARE AND DIVIDEND/SHARE
$0.40
$0.35
$0.30
$0.25
$0.20
$0.15
$0.10
$0.05
$-
5
1
-
2
Q
5
1
-
3
Q
5
1
-
4
Q
6
1
-
1
Q
6
1
-
2
Q
6
1
-
3
Q
6
1
-
4
Q
7
1
-
1
Q
7
1
-
2
Q
7
1
-
3
Q
7
1
-
4
Q
8
1
-
1
Q
8
1
-
2
Q
8
1
-
3
Q
8
1
-
4
Q
Core FFO/Share(2)
Dividend/Share
GROWTH IN SHARE PRICE
AND TOTAL ENTERPRISE VALUE
$5.00
$4.00
$3.00
$2.00
$1.00
$-
5
1
-
2
Q
5
1
-
3
Q
5
1
-
4
Q
6
1
-
1
Q
6
1
-
2
Q
6
1
-
3
Q
6
1
-
4
Q
7
1
-
1
Q
7
1
-
2
Q
7
1
-
3
Q
7
1
-
4
Q
8
1
-
1
Q
8
1
-
2
Q
8
1
-
3
Q
8
1
-
4
Q
Total Enterprise
Value ($BN)(3)
Share Price
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
-
$0.40
$0.35
$0.30
$0.25
$0.20
$0.15
$0.10
$0.05
$-
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$-
44818_Cover.indd 2
4/9/19 8:22 PM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-37351
National Storage Affiliates Trust
(Exact name of Registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
46-5053858
(I.R.S. Employer
Identification No.)
8400 East Prentice Avenue
9th Floor
Greenwood Village, Colorado 80111
(Address of principal executive offices) (Zip code)
(720) 630-2600
(Registrant's telephone number including area code)
Title of each Class
Common Shares of Beneficial Interest, $0.01 par value per share
Name of Each Exchange on Which Registered
New York Stock Exchange
Series A Cumulative Redeemable Preferred Shares of Beneficial
Interest, par value $0.01 per share
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-accelerated Filer
☒
☐
☐
Accelerated Filer
Smaller Reporting Company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common shares of beneficial interest of National Storage
Affiliates Trust held by non-affiliates of National Storage Affiliates Trust was approximately $1.6 billion as of June 30,
2018. As of February 25, 2019, 56,699,541 common shares of beneficial interest, $0.01 par value per share, were
outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for its annual meeting of shareholders are incorporated by reference
into Part III of this Annual Report on Form 10-K.
NATIONAL STORAGE AFFILIATES TRUST
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2018
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
Item
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
15.
16.
Page
5
15
32
32
33
33
34
36
37
57
58
58
58
59
59
59
59
59
59
59
63
3
Table of Contents
FORWARD-LOOKING STATEMENTS
National Storage Affiliates Trust and its consolidated subsidiaries (the "Company", "NSA," "we," "our", and "us")
make forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking
statements include information about possible or assumed future results of our business, financial condition, liquidity,
results of operations, plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan,"
"continue," "intend," "should," "may," or similar expressions, we intend to identify forward-looking statements.
The forward-looking statements contained in this report reflect our current views about future events and are
subject to numerous known and unknown risks, uncertainties, assumptions, and changes in circumstances that may
cause our actual results to differ significantly from those expressed in any forward-looking statement.
Statements regarding the following subjects, among others, may be forward-looking:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
market trends in our industry, interest rates, the debt and lending markets or the general economy;
our business and investment strategy;
the acquisition of properties, including those under contract, and the ability of our acquisitions to achieve
underwritten capitalization rates and our ability to execute on our acquisition pipeline;
the timing of acquisitions;
our relationships with, and our ability and timing to attract additional, participating regional operators
("PROs");
our ability to effectively align the interests of our PROs with us and our shareholders;
the integration of our PROs and their managed portfolios into the Company, including into our financial
and operational reporting infrastructure and internal control framework;
our operating performance and projected operating results, including our ability to achieve market rents
and occupancy levels, reduce operating expenditures and increase the sale of ancillary products and services;
our ability to access additional off-market acquisitions;
actions and initiatives of the U.S. federal, state and local government and changes to U.S. federal, state
and local government policies and the execution and impact of these actions, initiatives and policies;
the state of the U.S. economy generally or in specific geographic regions, states, territories or municipalities;
economic trends and economic recoveries;
our ability to obtain and maintain financing arrangements on favorable terms;
general volatility of the securities markets in which we participate;
changes in the value of our assets;
projected capital expenditures;
the impact of technology on our products, operations, and business;
the implementation of our technology and best practices programs (including our ability to effectively
implement our integrated Internet marketing strategy);
changes in interest rates and the degree to which our hedging strategies may or may not protect us from
interest rate volatility;
impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar
matters;
our ability to continue to qualify and maintain our qualification as a real estate investment trust for U.S.
federal income tax purposes ("REIT");
availability of qualified personnel;
the timing of conversions of each series of Class B common units of limited partner interest ("subordinated
performance units") in NSA OP, LP (our "operating partnership") and subsidiaries of our operating
4
partnership into Class A common units of limited partner interest ("OP units") in our operating partnership,
the conversion ratio in effect at such time and the impact of such convertibility on our diluted earnings
(loss) per share;
the risks of investing through joint ventures, including whether the anticipated benefits from a joint venture
are realized or may take longer to realize than expected;
estimates relating to our ability to make distributions to our shareholders in the future; and
our understanding of our competition.
•
•
•
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance,
taking into account all information currently available to us. Forward-looking statements are not predictions of future
events. These beliefs, assumptions, and expectations can change as a result of many possible events or factors, not all
of which are known to us. Readers should carefully review our financial statements and the notes thereto, as well as
the sections entitled "Business," "Risk Factors," "Properties," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," described in Item 1, Item 1A, Item 2 and Item 7, respectively, of this Annual
Report on Form 10-K and the other documents we file from time to time with the Securities and Exchange Commission.
If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those
expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is
made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may
affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Item 1. Business
General
PART I
National Storage Affiliates Trust is a fully integrated, self-administered and self-managed real estate investment
trust organized in the state of Maryland on May 16, 2013. We have elected and we believe that we have qualified to
be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2015.
We serve as the sole general partner of our operating partnership subsidiary, NSA OP, LP (our "operating partnership"),
a Delaware limited partnership formed on February 13, 2013 to conduct our business, which is focused on the ownership,
operation, and acquisition of self storage properties located within the top 100 metropolitan statistical areas ("MSAs")
throughout the United States. As of December 31, 2018, we held ownership interests in and operated a geographically
diversified portfolio of 675 self storage properties, located in 34 states and Puerto Rico, comprising approximately 43.0
million rentable square feet, configured in approximately 345,000 storage units. According to the 2019 Self-Storage
Almanac, we are the fifth largest owner and operator of self storage properties in the United States based on number
of properties, self storage units, and rentable square footage. We completed our initial public offering in 2015 and our
common shares are listed on the New York Stock Exchange under the symbol "NSA."
Our chairman and chief executive officer, Arlen D. Nordhagen, co-founded SecurCare Self Storage, Inc. in 1988
to invest in and manage self storage properties. While growing SecurCare to over 150 self storage properties, Mr.
Nordhagen recognized a market opportunity for a differentiated public self storage REIT that would leverage the benefits
of national scale by integrating multiple experienced regional self storage operators with local operational focus and
expertise. We believe that his vision, which is the foundation of the Company, aligns the interests of our participating
regional operators ("PROs"), with those of our public shareholders by allowing our PROs to participate alongside our
shareholders in our financial performance and the performance of our PROs' "managed portfolios", which means, with
respect to each PRO, the portfolio of properties that such PRO manages on our behalf. A key component of this strategy
is to capitalize on the local market expertise and knowledge of regional self storage operators by maintaining the
continuity of their roles as property managers.
We believe that our structure creates the right financial incentives to accomplish these objectives. We require our
PROs to exchange the self storage properties they contribute to the Company for a combination of OP units and
subordinated performance units in our operating partnership or subsidiaries of our operating partnership that issue units
intended to be economically equivalent to the OP units and subordinated performance units issued by our operating
partnership ("DownREIT partnerships"). OP units, which are economically equivalent to our common shares, create
alignment with the performance of the Company as a whole. Subordinated performance units, which are linked to the
performance of specific managed portfolios, incentivize our PROs to drive operating performance and support the
5
sustainability of the operating cash flow generated by the self storage properties that they manage on our behalf. Because
subordinated performance unit holders receive distributions only after portfolio-specific minimum performance
thresholds are satisfied, subordinated performance units play a key role in aligning the interests of our PROs with us
and our shareholders. Our structure thus offers PROs a unique opportunity to serve as regional property managers for
their managed portfolios and directly participate in the potential upside of those properties while simultaneously
diversifying their investment to include a broader portfolio of self storage properties. We believe our structure provides
us with a competitive growth advantage over self storage companies that do not offer property owners the ability to
participate in the performance and potential future growth of their managed portfolios.
We believe that our national platform has significant potential for continued external and internal growth. We seek
to further expand our platform by continuing to recruit additional established self storage operators as well as
opportunistically partnering with institutional funds and other institutional investors in strategic joint venture
arrangements while integrating our operations through the implementation of centralized initiatives, including
management information systems, revenue enhancement, and cost optimization programs. We are currently engaged
in preliminary discussions with additional self storage operators and believe that we could add one to three PROs in
addition to the ten PROs we have currently identified, which will enhance our existing geographic footprint and allow
us to enter regional markets in which we currently have limited or no market share.
Our PROs
The Company had eight PROs as of December 31, 2018: SecurCare Self Storage, Inc. and its controlled affiliates
("SecurCare"), Kevin Howard Real Estate Inc., d/b/a Northwest Self Storage and its controlled affiliates ("Northwest"),
Optivest Properties LLC and its controlled affiliates ("Optivest"), Guardian Storage Centers LLC and its controlled
affiliates ("Guardian"), Move It Self Storage and its controlled affiliates ("Move It"), Arizona Mini Storage Management
Company d/b/a Storage Solutions and its controlled affiliates ("Storage Solutions"), Hide-Away Storage Services, Inc.
and its controlled affiliates ("Hide-Away") and an affiliate of Shader Brothers Corporation d/b/a Personal Mini Storage
("Personal Mini").
In October 2018, we entered into definitive agreements with affiliates of Southern Self Storage, LLC d/b/a Southern
Self Storage of Palm Beach Gardens, Florida, to add Southern Self Storage ("Southern") as our ninth PRO. In January
2019, we completed the initial contribution transaction with Southern, which included the acquisition of six self storage
properties by us. In addition, in February 2019, we entered into definitive agreements with affiliates of Investment Real
Estate Management, LLC d/b/a Moove In Self Storage of York, Pennsylvania to add Moove In Self Storage ("Moove
In") as our tenth PRO. Moove In is led by John Gilliland, a past Chairman of the national Self Storage Association.
Moove In currently owns 19 self storage properties in Pennsylvania, Maryland, New Jersey, and New York. Upon
closing, Moove In intends to contribute six self storage properties to us as part of the initial contribution transaction,
and its remaining properties will be added to our captive pipeline. We expect the initial contribution transaction and
related closing documentation, including the entry into a facilities portfolio management agreement, to close during
the first quarter of 2019, subject to customary closing conditions.
To capitalize on their recognized and established local brands, our PROs continue to function as property managers
for their managed portfolios under their existing brands (which include various brands in addition to those discussed
below). Over the long-run, we may seek to brand or co-brand each location as part of NSA.
•
•
•
SecurCare, which is headquartered in Lone Tree, Colorado, has been operating since 1988 and is one of our
PROs responsible for covering the west, mountain, midwest and southeast regions. SecurCare provided
property management services to 207 of our properties located in California, Colorado, Florida, Georgia,
Indiana, Kentucky, Louisiana, Mississippi, North Carolina, Ohio, Oklahoma, South Carolina and Texas as of
December 31, 2018. SecurCare is currently managed by David Cramer, who has worked in the self storage
industry for more than 20 years.
Northwest, which is headquartered in Portland, Oregon, is our PRO responsible for covering the northwest
region. Northwest provided property management services to 75 of our properties located in Oregon and
Washington as of December 31, 2018. Northwest is run by Kevin Howard, one of our trustees, who founded
the company over 30 years ago and is recognized in the industry for his successful track record as a self storage
specialist in the areas of design and development, operations and property management, consultation, and
brokerage.
Optivest, which is based in Dana Point, California, is one of our PROs responsible for covering portions of
the northeast and southwest regions. Optivest managed 57 of our properties located in Arizona, California,
6
Massachusetts, Nevada, New Hampshire, New Mexico and Texas as of December 31, 2018. Optivest is run
by its co-founder, Warren Allan, who has more than 25 years of financial and operational management
experience in the self storage industry and is recognized as a self storage acquisition and development specialist.
•
Guardian, which is based in Irvine, California, is one of our PROs responsible for covering portions of the
southern California and southwest regions. Guardian managed 54 of our properties located in California,
Arizona and Nevada as of December 31, 2018. Guardian is led by John Minar, who has nearly 40 years of
self storage acquisition, rehabilitation, ownership, operations and development experience.
• Move It, which is based in Dallas, Texas, is one of our PROs responsible for covering portions of the Texas
and southeast markets. Move It managed 29 of our properties located in Alabama, Florida, Louisiana,
Mississippi and Texas as of December 31, 2018. Move It is led by its founder, Tracy Taylor, who has more
than 40 years of experience in self storage development, acquisition and management, and is currently on the
board of directors for the Large Owners Council of the Self Storage Association and is a former Chairman of
the national Self Storage Association.
•
•
•
•
Storage Solutions, which is based in Chandler, Arizona, is our PRO responsible for covering portions of the
Arizona and Nevada markets. Storage Solutions managed 10 of our properties in Arizona and Nevada as of
December 31, 2018. Storage Solutions is led by its founder, Bill Bohannan, who is one of the largest operators
in Phoenix and has more than 35 years of self storage acquisition, development and management experience.
Mr. Bohannan is recognized in the industry as a self storage acquisition, development and management
specialist.
Hide-Away, which is based in Sarasota, Florida, is our PRO responsible for covering the western Florida
market. Hide-Away managed 21 of our properties in western Florida as of December 31, 2018. Hide-Away
is led by its founder, Steve Wilson, one of the early developers of the self storage business, who served for
more than 35 years as the President of Hide-Away and its related entities, and is a former Chairman of the
national Self-Storage Association.
Personal Mini, which is based in Orlando, Florida, is our PRO responsible for covering portions of the central
Florida market. Personal Mini managed seven of our properties in central Florida as of December 31, 2018.
Personal Mini is led by Marc Smith, an active self storage investor who has been involved in all facets of the
self storage business. Mr. Smith is a past Chairman of the Self Storage Association, and also previously served
as president of the Southeast Region of the Self Storage Association.
Southern, which is based in Palm Beach Gardens, Florida, is our PRO responsible for covering portions of
the southeast region, including New Orleans, the Florida Panhandle, and southern Georgia, and Puerto Rico.
Southern is led by Bob McIntosh and Peter Cowie, who are active real estate operators with more than 30
years of self storage experience. At the beginning of 2019, Southern contributed six of its nine self storage
properties to us as part of the initial contribution transaction. As part of its initial contribution, Southern also
co-invested sufficient subordinated equity to manage our six properties located in Puerto Rico as well as an
additional 11 properties in Louisiana that we acquired in January 2019.
We benefit from the local market knowledge and active presence of our PROs, allowing us to build and foster
important customer and industry relationships. These local relationships provide attractive off-market acquisition
opportunities that we believe will continue to fuel additional external growth.
We believe our structure allows our PROs to optimize their established property management platforms while
addressing financial and operational hurdles. Before joining us, our PROs faced challenges in securing low cost capital
and had to manage multiple investors and lending relationships, making it difficult to compete with larger competitors,
including public REITs, for acquisition and investment opportunities. Our PROs were also limited in their ability to
raise growth capital through the sale of assets, a portfolio refinancing, or capital contributions from new equity partners.
Serving as our on-the-ground acquisition teams, our PROs now have access to our broader financing sources and lower
cost of capital, while our national platform allows them to benefit from our economies of scale to drive operating
efficiencies in a rapidly evolving, technology-driven industry.
7
Our Consolidated Properties
We seek to own properties that are well located in high quality sub-markets with highly accessible street access
and attractive supply and demand characteristics, providing our properties with strong and stable cash flows that are
less sensitive to the fluctuations of the general economy. Many of these markets have multiple barriers to entry against
increased supply, including zoning restrictions against new construction and new construction costs that we believe
are higher than our properties' fair market value. As of December 31, 2018, we owned a geographically diversified
portfolio of 499 self storage properties, located in 26 states and Puerto Rico, comprising approximately 30.4 million
rentable square feet, configured in approximately 242,000 storage units. Of these properties, 247 were acquired by us
from our PROs and 252 were acquired by us from third-party sellers. A complete listing of, and additional information
about, our self storage properties is included in Item 2 of this report.
During the year ended December 31, 2018, we acquired 57 consolidated self storage properties and an expansion
project adjacent to an existing property, of which four were acquired by us from our PROs and 53 were acquired by us
from third-party sellers. The following is a summary of our 2018 consolidated acquisition activity (dollars in thousands):
State/Territory
2018 Acquisitions:
Arizona
Kansas
Florida
Missouri
North Carolina
California
Nevada
Oregon
Texas
Other(1)
Total
Number of
Properties
Number of
Units
Rentable
Square Feet
Fair Value
13
13
5
4
4
2
2
2
2
10
57
6,943
4,443
2,893
2,000
2,296
895
837
486
956
6,411
28,160
$
758,623
548,415
322,111
235,300
285,975
102,207
108,065
63,805
125,087
662,175
3,211,763
74,168
59,876
32,483
28,175
39,596
15,741
11,172
8,137
9,549
77,752
356,649
(1) Self storage properties in other states and territories acquired during the year ended December 31, 2018 include Georgia, Maryland, Ohio,
Washington, and Puerto Rico.
During the year ended December 31, 2018, we sold two self storage properties to unrelated third parties for $5.5
million. The self storage properties comprised approximately 0.1 million rentable square feet configured in
approximately 1,500 storage units.
During the year ended December 31, 2017, we acquired 65 consolidated self storage properties, of which 10 were
acquired by us from our PROs and 55 were acquired by us from third-party sellers. The following is a summary of our
2017 consolidated acquisition activity (dollars in thousands):
State
2017 Acquisitions:
Georgia
Florida
Texas
Nevada
California
Illinois
Louisiana
Kansas
Missouri
Number of
Properties
Number of
Units
Rentable
Square Feet
Fair Value
6,836
4,774
3,180
2,640
2,194
1,992
1,806
1,297
1,013
$
934,780
520,728
475,134
311,547
304,504
270,911
229,259
215,035
152,889
84,631
61,955
36,930
35,446
36,547
17,252
18,982
20,558
13,346
13
8
7
5
4
4
4
3
3
8
State
Oregon
Indiana
Maryland
Other(1)
Total
Number of
Properties
Number of
Units
Rentable
Square Feet
3
2
2
7
65
1,135
950
1,167
3,208
32,192
139,492
127,570
120,773
419,907
4,222,529
Fair Value
26,334
11,665
10,939
52,215
426,800
$
(1) Self storage properties in other states acquired during the year ended December 31, 2017 include Arizona, Colorado, Massachusetts, New
Hampshire, North Carolina, Virginia and Washington.
During the year ended December 31, 2017, we sold three self storage properties to unrelated third parties and
excess land parcels adjacent to our self storage properties for $17.8 million. The self storage properties comprised
approximately 0.2 million rentable square feet configured in approximately 1,200 storage units.
Our Unconsolidated Real Estate Ventures
We seek to opportunistically partner with institutional funds and other institutional investors to acquire attractive
portfolios utilizing a promoted return structure. We believe there is significant opportunity for continued external growth
by partnering with institutional investors seeking to deploy capital in the self storage industry.
2018 Joint Venture
During the year ended December 31, 2018, we formed the 2018 Joint Venture (as defined in Note 5 to the
consolidated financial statements in Item 8), in which we have a 25% ownership interest, with an affiliate of Heitman
America Real Estate REIT LLC. In September 2018, the 2018 Joint Venture completed the acquisition of a portfolio
of 112 self storage properties located across 17 states and Puerto Rico, consisting of approximately 8.2 million rentable
square feet configured in over 68,000 storage units for an aggregate purchase price of approximately $1.325 billion
(the "Portfolio").
Immediately following the closing of the acquisition, the 2018 Joint Venture distributed six self storage properties
located in Puerto Rico and a single self storage property located in Ohio acquired as part of the Portfolio to our
consolidated portfolio in exchange for a $64.2 million cash contribution from NSA. In addition, two of the properties
acquired as part of the Portfolio were combined with other properties for operational efficiency. As of December 31,
2018, our 2018 Joint Venture owned and operated 103 properties containing approximately 7.6 million rentable square
feet, configured in approximately 63,000 storage units and located across 17 states.
2016 Joint Venture
As of December 31, 2018, our 2016 Joint Venture (as defined in Note 5 to the consolidated financial statements
in Item 8), in which we have a 25% ownership interest, owned and operated a portfolio of 73 properties containing
approximately 4.9 million rentable square feet, configured in approximately 40,000 storage units and located across
14 states.
During the year ended December 31, 2018, our 2016 Joint Venture acquired three self storage properties and an
expansion project at an existing property for $28.5 million, comprising approximately 0.2 million rentable square feet,
configured in approximately 1,300 storage units. During the year ended December 31, 2018, our 2016 Joint Venture
sold to an unrelated third party one self storage property for $9.3 million, comprising approximately 0.2 million rentable
square feet, configured in approximately 800 storage units.
Our Property Management Platform
Through our property management platform, we direct, manage and control the day-to-day operations and affairs
of certain consolidated properties and our unconsolidated real estate ventures. We earn certain customary fees for
managing and operating the properties in the unconsolidated real estate ventures and we facilitate tenant insurance and/
or tenant warranty protection programs for tenants at these properties in exchange for half of all proceeds from such
programs.
As of December 31, 2018, our property management platform managed and controlled 39 of our consolidated
properties in select markets in California, Illinois, Kansas, Maryland, Missouri, Ohio, Virginia and Puerto Rico. As
discussed above, in January 2019, Southern began managing our six properties located in Puerto Rico.
9
Our Competitive Strengths
We believe our unique PRO structure combined with our property management platform allows us to differentiate
ourselves from other self storage operators, and the following competitive strengths enable us to effectively compete
against our industry peers:
High Quality Properties in Key Growth Markets. We held ownership interests in and operated a geographically
diversified portfolio of 675 self storage properties, located in 34 states and Puerto Rico, comprising approximately 43.0
million rentable square feet, configured in approximately 345,000 storage units as of December 31, 2018. Over 75%
of our consolidated portfolio is located in the top 100 MSAs, based on our 2018 net operating income ("NOI"). We
believe that these properties are primarily located in high quality growth markets that have attractive supply and demand
characteristics and are less sensitive to the fluctuations of the general economy. Many of these markets have multiple
barriers to entry against increased supply, including zoning restrictions against new construction and new construction
costs that we believe are higher than our properties' fair market value. Furthermore, we believe that our significant size
and the overall geographic diversification of our portfolio reduces risks associated with specific local or regional
economic downturns or natural disasters.
Differentiated, Growth-Oriented Strategy Focused on Established Operators. We are a self storage REIT with
a unique structure that supports our differentiated external growth strategy. Our structure appeals to operators who are
looking for access to growth capital while maintaining an economic stake in the self storage properties that each manages
on the Company's behalf. These attributes entice operators to join the Company rather than sell their properties for cash
consideration. Our strategy is to attract operators who are confident in the future performance of their properties and
desire to participate in the growth of the Company. We have successfully recruited established operators across the
United States with a history of efficient property management and a track record of successful acquisitions. Our structure
and differentiated strategy have enabled us to build a substantial captive pipeline from existing operators as well as
potentially create external growth from the recruitment of additional PROs.
Integrated Platform Utilizing Advanced Technology for Enhanced Operational Performance and Best
Practices. Our national platform allows us to capture cost savings through integration and centralization, thereby
eliminating redundancies and utilizing economies of scale across the property management platforms of our PROs. As
compared to a stand-alone operator, our national platform has greater access to lower-cost capital, reduced Internet
marketing costs per customer lead, discounted property insurance expense, and reduced overhead costs. In addition,
the Company has sufficient scale for various centralized functions, including financial reporting, the operation of call
centers, expanding cell tower leasing, a national credit card processing program, marketing, information technology,
legal support, and capital market functions, to achieve substantial cost savings over smaller, individual operators.
Our national platform utilizes advanced technology for our data warehouse program, Internet marketing, our
centralized call centers, financial and property analytic dashboards, revenue optimization analytics and expense
management tools to enhance operational performance. These centralized programs, which are run through our
Technology and Best Practices Group, are positively impacting our business performance, and we believe that they
will continue to be a driver of organic growth going forward. We will utilize our Technology and Best Practices Group
to help us benefit from the collective sharing of key operating strategies among our PROs in areas like human resource
management, local marketing and operating procedures and building tenant insurance-related arrangements.
Aligned Incentive Structure with Shareholder Downside Protection. Our structure promotes operator
accountability as subordinated performance units issued to our PROs in exchange for the contribution of their properties
are entitled to distributions only after those properties satisfy minimum performance thresholds. In the event of a
material reduction in operating cash flow, distributions on our subordinated performance units will be reduced before
or disproportionately to distributions on our common shares held by our common shareholders. In addition, we expect
our PROs will generally co-invest subordinated equity in the form of subordinated performance units in each acquisition
that they source from a third-party seller, and the value of these subordinated performance units will fluctuate with the
performance of their managed portfolios. Therefore, our PROs are incentivized to select acquisitions that are expected
to exceed minimum performance thresholds, thereby increasing the value of their subordinated equity stake. We expect
that our shareholders will benefit from the higher levels of property performance that our PROs are incentivized to
deliver.
10
Our Business and Growth Strategies
By capitalizing on our competitive strengths, we seek to increase scale, achieve optimal revenue-producing
occupancy and rent levels, and increase long-term shareholder value by achieving sustainable long-term growth. Our
business and growth strategies to achieve these objectives are as follows:
Maximize Property Level Cash Flow. We strive to maximize the cash flows at our properties by leveraging the
economies of scale provided by our national platform, including through the implementation of new ideas derived from
our Technology and Best Practices Group. We believe that our unique PRO structure, centralized infrastructure and
efficient national platform will enable us to achieve optimal market rents and occupancy, reduce operating expenses
and increase the sale by our PROs of ancillary products and services, including tenant insurance, of which we receive
a portion of the proceeds, truck rentals and packing supplies.
Acquire Built-in Captive Pipeline of Target Properties from Existing PROs. We have an attractive, high quality
potential acquisition pipeline (our "captive pipeline") of over 100 self storage properties valued at over $900 million
that will continue to drive our future growth. We consider a property to be in our captive pipeline if it (i) is under a
management service agreement with one of our PROs, (ii) meets our property quality criteria, and (iii) is either required
to be offered to us under the applicable facilities portfolio management agreement or a PRO has a reasonable basis to
believe that the controlling owner of the property intends to sell the property in the next seven years.
Our PROs have management service agreements with all of the properties in our captive pipeline and hold
controlling and non-controlling ownership interests in some of these properties. With respect to each property in our
captive pipeline in which a PRO holds a controlling ownership interest, such PRO has agreed that it will not transfer
(or permit the transfer of, to the extent possible) any interest in such self storage property without first offering or
causing to be offered (if permissible) such interest to us. In addition, upon maturity of the outstanding mortgage
indebtedness encumbering such property, so long as occupancy is consistent with or exceeds average local market
levels, which we determine in our sole discretion, such PRO has agreed to offer or cause to be offered (if permissible)
such interest to us. With respect to captive pipeline properties in which our PROs have a non-controlling ownership
interest or no ownership interest, each PRO has agreed to use commercially reasonable good faith efforts to facilitate
our purchase of such property. We preserve the discretion to accept or reject any of the properties that our PROs are
required to, or elect to, offer (or cause to be offered) to us.
Access Additional Off-Market Acquisition Opportunities. Our PROs and their "on-the-ground" personnel have
established an extensive network of industry relationships and contacts in their respective markets. Through these local
connections, our PROs are able to access acquisition opportunities that are not publicly marketed or sold through
auctions. Our structure incentivizes our PROs to source acquisitions in their markets from third-party sellers and
consolidate these properties into the Company. Other public self storage companies generally have acquisition teams
located at their central offices, which in many instances are far removed from regional and local markets. We believe
our operators' networks and close familiarity with the other operators in their markets provide us clear competitive
advantages in identifying and selecting attractive acquisition opportunities. Our PROs have sourced 252 acquisitions
from third-party sellers comprising approximately 17.0 million rentable square feet as of December 31, 2018.
Recruit Additional New PROs in Target Markets. We intend to continue to execute on our external growth
strategy through additional acquisitions and contributions from future PROs in key markets. We believe there is
significant opportunity for growth through consolidation of the highly fragmented composition of the market. We
believe that future operators will be attracted to our unique structure, providing them with lower cost of capital, better
economies of scale, and greater operational and overhead efficiencies while preserving their existing property
management platforms. We intend to add one to three additional PROs to complement our existing geographic footprint
and to achieve our goal of creating a highly diversified nationwide portfolio of properties focused in the top 100 MSAs.
When considering a PRO candidate, we consider various factors, including the size of the potential PRO's portfolio,
the quality and location of its properties, its market exposure, its operating expertise, its ability to grow its business,
and its reputation with industry participants.
Strategic Joint Venture Arrangements. We intend to continue to opportunistically partner with institutional funds
and other institutional investors to acquire attractive portfolios utilizing a promoted return structure. We believe there
is significant opportunity for continued external growth by partnering with institutional investors seeking to deploy
capital in the self storage industry. We intend to leverage our property management platform to provide property and
asset management services for future strategic joint ventures, generating additional operating profits and third party
fee income.
11
Our Financing Strategy
We expect to maintain a flexible approach in financing new property acquisitions. In general, we expect to fund
our property acquisitions through a combination of borrowings under bank credit facilities (including term loans and
revolving facilities), property-level debt, issuances of OP equity and public and private equity and debt issuances.
As of December 31, 2018, our unsecured credit facility provided for total borrowings of $1.0 billion, consisting
of five components: (i) a revolving line of credit (the "Revolver") which provides for a total borrowing commitment
up to $400.0 million, whereby we may borrow, repay and re-borrow amounts under the Revolver, (ii) a $235.0 million
tranche A term loan facility (the "Term Loan A"), (iii) a $155.0 million tranche B term loan facility (the "Term Loan
B"), (iv) a $105.0 million tranche C term loan facility (the "Term Loan C") and (v) a $125.0 million tranche D term
loan facility (the "Term Loan D" and together with the Revolver, the Term Loan A, the Term Loan B, and Term Loan
C, the "credit facility"). As of December 31, 2018, we had the entire amounts drawn on Term Loan A, Term Loan B,
Term Loan C and Term Loan D and we had $139.5 million of outstanding borrowings under the Revolver, and the
capacity to borrow an additional $254.8 million under the Revolver while remaining in compliance with the credit
facility's financial covenants. As of December 31, 2018, we have an expansion option under the credit facility, which,
if exercised in full, would provide for a total credit facility of $1.3 billion.
We also have a credit agreement with a syndicated group of lenders for a term loan facility that matures in June
2023 (the "2023 Term Loan Facility") and is separate from the credit facility in an aggregate amount of $175.0 million,
which amount is outstanding. We have an expansion option under the 2023 Term Loan Facility, which, if exercised in
full, would provide for total availability in an aggregate amount up to $400.0 million.
During the year ended December 31, 2018, we entered into a credit agreement with a lender for a term loan facility
that matures in December 2028 (the "2028 Term Loan Facility") and is separate from the credit facility and 2023 Term
Loan Facility in an aggregate amount of $75.0 million, which amount is outstanding. We have an expansion option
under the 2028 Term Loan Facility, which, if exercised in full, would provide for total borrowings in an aggregate
amount up to $125.0 million.
The credit facility, 2023 Term Loan Facility and 2028 Term Loan Facility each contain the same financial covenants
and customary affirmative and negative covenants that, among other things, could limit the Company's ability to make
distributions or certain investments, incur debt, incur liens and enter into certain transactions.
We expect to employ leverage in our capital structure in amounts determined from time to time by our board of
trustees. Although our board of trustees has not adopted a policy which limits the total amount of indebtedness that we
may incur, it will consider a number of factors in evaluating our level of indebtedness from time to time, as well as the
amount of such indebtedness that will be either fixed and variable-rate, and in making financial decisions, including,
among others, the following:
•
•
•
•
•
•
•
•
•
•
•
•
the interest rate of the proposed financing;
the extent to which the financing impacts our flexibility in managing our properties;
prepayment penalties and restrictions on refinancing;
the purchase price of properties we acquire with debt financing;
our long-term objectives with respect to the financing;
our target investment returns;
the ability of particular properties, and the Company as a whole, to generate cash flow sufficient to cover
expected debt service payments;
overall level of consolidated indebtedness;
timing of debt maturities;
provisions that require recourse and cross-collateralization;
corporate credit ratios including debt service coverage, debt to total market capitalization and debt to
undepreciated assets; and
the overall ratio of fixed- and variable-rate debt.
12
Our indebtedness may be recourse, non-recourse or cross-collateralized. If the indebtedness is non-recourse, the
collateral will be limited to the particular properties to which the indebtedness relates. In addition, we may invest in
properties subject to existing loans secured by mortgages or similar liens on our properties, or may refinance properties
acquired on a leveraged basis. We may use the proceeds from any borrowings to refinance existing indebtedness, to
refinance investments, including the redevelopment of existing properties, for general working capital or for other
purposes when we believe it is advisable.
Dividend Reinvestment Plan
In the future, we may adopt a dividend reinvestment plan that will permit shareholders who elect to participate in
the plan to have their cash dividends reinvested in additional common shares.
Regulation
General
Generally, self storage properties are subject to various laws, ordinances and regulations, including those relating
to lien sale rights and procedures, public accommodations, insurance, and the environment. Changes in any of these
laws, ordinances or regulations could increase the potential liability existing or created by tenants or others on our
properties. Laws, ordinances, or regulations affecting development, construction, operation, upkeep, safety and taxation
requirements may result in significant unanticipated expenditures, loss of self storage sites or other impairments to
operations, which would adversely affect our cash flows from operating activities.
Under the Americans with Disabilities Act of 1990 ("the ADA"), all places of public accommodation are required
to meet certain federal requirements related to access and use by disabled persons. For additional information on the
ADA, see "Item 1A. Risk Factors—Risks Related to Our Business—Costs associated with complying with the ADA
may result in unanticipated expenses."
Insurance activities are subject to state insurance laws and regulations as determined by the particular insurance
commissioner for each state in accordance with the McCarran-Ferguson Act, as well as subject to the Gramm-Leach-
Bliley Act and the privacy regulations promulgated by the Federal Trade Commission pursuant thereto.
Under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (the
"CERCLA"), and comparable state laws, we may be required to investigate and remediate regulated hazardous materials
at one or more of our properties. For additional information on environmental matters and regulation, see "Item 1A.
Risk Factors—Risks Related to Our Business—Environmental compliance costs and liabilities associated with
operating our properties may affect our results of operations."
Property management activities are often subject to state real estate brokerage laws and regulations as determined
by the particular real estate commission for each state.
REIT Qualification
We have elected and we believe that we have qualified to be taxed as a REIT under the Internal Revenue Code of
1986, as amended, (the "Code"), commencing with our taxable year ended on December 31, 2015. We generally will
not be subject to U.S. federal income tax on our net taxable income to the extent that we distribute annually all of our
net taxable income to our shareholders and maintain our qualification as a REIT. We believe that we have been organized
and have operated in conformity with the requirements for qualification and taxation as a REIT under the Code, and
we expect that our intended manner of operation will enable us to continue to meet the requirements for qualification
and taxation as a REIT. To qualify, and maintain our qualification, as a REIT, we must meet on a continuing basis,
through our organization and actual investment and operating results, various requirements under the Code relating to,
among other things, the sources of our gross income, the composition and values of our assets, our distribution levels
and the diversity of ownership of our shares. If we fail to qualify as a REIT in any taxable year and do not qualify for
certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate rates and may be
precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we failed
to qualify as a REIT. Even if we qualify for taxation as a REIT, we still may be subject to some U.S. federal, state and
local taxes on our income or assets. In addition, subject to maintaining our qualification as a REIT, a portion of our
business is conducted through, and a portion of our income is earned by, one or more taxable REIT subsidiaries ("TRSs"),
which are subject to U.S. federal corporate income tax at regular rates. Distributions paid by us generally will not be
eligible for taxation at the preferential U.S. federal income tax rates that currently apply to certain distributions received
13
by individuals from taxable corporations, unless such distributions are attributable to dividends received by us from a
TRS.
Recent U.S. Federal Income Tax Legislation
On December 22, 2017, Congress enacted H.R. 1, also known as the Tax Cuts and Jobs Act of 2017 ("TCJA").
The TCJA made major changes to the Internal Revenue Code, including the reduction of the tax rates applicable to
individuals and subchapter C corporations, a reduction or elimination of certain deductions (including new limitations
on the deductibility of interest expense), permitting immediate expensing of capital expenditures and significant changes
in the taxation of earnings from non-U.S. sources. The effect of the significant changes made by the TCJA is highly
uncertain, and additional administrative guidance is still required in order to fully evaluate the effect of many provisions.
Technical corrections or other amendments to the new rules, and additional administrative guidance interpreting these
new rules, may be forthcoming at any time but may also be significantly delayed. While we do not currently expect
this reform to have a significant impact to the Company's consolidated financial statements, stockholders are urged to
consult with their tax advisors regarding the effects of the TCJA or other legislative, regulatory or administrative
developments on an investment in the Company's common stock.
Competition
We compete with many other entities engaged in real estate investment activities for customers and acquisitions
of self storage properties and other assets, including national, regional, and local owners, operators, and developers of
self storage properties. We compete based on a number of factors including location, rental rates, security, suitability
of the property's design to prospective tenants' needs, and the manner in which the property is operated and marketed.
We believe that the primary competition for potential customers comes from other self storage properties within a three
to five mile radius. We have positioned our properties within their respective markets as high-quality operations that
emphasize tenant convenience, security, and professionalism.
We also may compete with numerous other potential buyers when pursuing a possible property for acquisition,
which can increase the potential cost of a project. These competing bidders also may possess greater resources than us
and therefore be in a better position to acquire a property. However, our use of OP units and subordinated performance
units as transactional currency allows us to structure our acquisitions in tax-deferred transactions. As a result, potential
targets who are tax-sensitive might favor us as a suitor.
Our primary national competitors in many of our markets for both tenants and acquisition opportunities include
local and regional operators, institutional investors, private equity funds, as well as the other public self storage REITs,
including Public Storage, Cubesmart, Extra Space Storage Inc. and Life Storage, Inc. These entities also seek financing
through similar channels to the Company. Therefore, we will continue to compete for institutional investors in a market
where funds for real estate investment may decrease.
Employees
As of December 31, 2018, the Company had 461 employees, which includes employees of our property management
platform but does not include persons employed by our PROs. As of December 31, 2018, our PROs, collectively, had
approximately 1,100 full-time and part-time employees involved in management, operations, and reporting with respect
to our self storage property portfolio.
Available Information
We file registration statements, proxy statements, our Annual Report on Form 10-K, Quarterly Reports on Form 10-
Q, Current Reports on Form 8-K, and all amendments to those statements and reports with the Securities and Exchange
Commission (the "SEC"). Investors may obtain copies of these statements and reports by accessing the SEC's website
at www.sec.gov. Our statements and reports and any amendments to any of those statements and reports that we file
with the Securities and Exchange Commission are available free of charge as soon as reasonably practicable on our
website at www.nationalstorageaffiliates.com. The information contained on our website is not incorporated into this
Annual Report on Form 10-K. Our common shares are listed on the New York Stock Exchange under the symbol
"NSA."
14
Item 1A. Risk Factors
An investment in our common shares involves a high degree of risk. Before making an investment decision, you
should carefully consider the following risk factors, together with the other information contained in this Annual Report
on Form 10-K. If any of the risks discussed in this Annual Report on Form 10-K occurs, our business, financial condition,
liquidity and results of operations could be materially and adversely affected.
Risks Related to Our Business
Adverse economic or other conditions in the markets in which we do business and more broadly associated with the
real estate industry could negatively affect our occupancy levels and rental rates and therefore our operating results
and the value of our self storage properties.
Our operating results are dependent upon our ability to achieve optimal occupancy levels and rental rates at our
self storage properties. Adverse economic or other conditions in the markets in which we do business, particularly in
our markets in California, Oregon, Texas, Florida, Arizona, Georgia and North Carolina, which accounted for
approximately 24%, 12%, 10%, 9%, 6%, 5% and 5%, respectively, of our total rental and other property-related revenues
for the year ended December 31, 2018, may lower our occupancy levels and limit our ability to maintain or increase
rents or require us to offer rental discounts. No single customer represented a significant concentration of our 2018
revenues. The following adverse developments, among others, in the markets in which we do business may adversely
affect the operating performance of our properties:
•
•
•
•
business layoffs or downsizing, industry slowdowns, relocation of businesses and changing demographics;
periods of economic slowdown or recession, declining demand for self storage or the public perception that
any of these events may occur;
local or regional real estate market conditions, such as competing properties or products, the oversupply of
self storage, vacancies or changes in self storage space market rents, or a reduction in demand for self storage
in a particular area; and
perceptions by prospective tenants of the safety, convenience and attractiveness of our properties and the
neighborhoods in which they are located.
We are also susceptible to the effects of adverse macro-economic events and business conditions that can result in
higher unemployment, shrinking demand for products, large-scale business failures and tight credit markets. Our results
of operations are sensitive to changes in overall economic conditions that impact consumer spending, including
discretionary spending, as well as to increased bad debts due to recessionary pressures. Adverse economic conditions
affecting disposable consumer income, such as employment levels, business conditions, interest rates and the availability
of financing, tax rates, fuel and energy costs, could reduce consumer spending or cause consumers to shift their spending
to other products and services. A general reduction in the level of discretionary spending or shifts in consumer
discretionary spending could adversely affect our growth and profitability. Our operating results and cash available for
distribution could also be adversely impacted if we experience increased operating costs, including maintenance,
insurance premiums and real estate taxes, whether due to economic conditions, government regulation or otherwise.
In addition, our operating expenses, including taxes, insurance, maintenance and debt service payments, may not be
reduced even if we experience a reduction in revenues, which may exacerbate the impact on our profitability.
We may not be successful in identifying and consummating suitable acquisitions, adding additional suitable new
PROs, or integrating and operating such acquisitions, including integrating them into our financial and operational
reporting infrastructure and internal control framework in a timely manner, which may impede our growth.
Our ability to expand through acquisitions is integral to our business strategy and requires us to identify suitable
acquisition candidates or investment opportunities that meet our criteria and are compatible with our growth strategy.
We may not be successful in identifying suitable properties or other assets that meet our acquisition criteria or in
consummating acquisitions on satisfactory terms or at all. Failure to identify or consummate acquisitions will slow our
growth, which could in turn adversely affect our share price.
For the potential acquisitions in our captive pipeline, we have not entered into negotiations with the respective
owners of these properties and there can be no assurance as to whether we will acquire any of these properties or the
actual timing of any such acquisitions. Each captive pipeline property is subject to additional due diligence and the
determination by us to pursue the acquisition of the property. In addition, with respect to the captive pipeline properties
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in which our PROs have a non-controlling ownership interest or no ownership interest, the current owner of each
property is not required to offer such property to us and there can be no assurance that we will acquire these properties.
Our ability to acquire properties on favorable terms and successfully integrate and operate them, including
integrating them into our financial and operational reporting infrastructure in a timely manner, may be constrained by
the following significant risks:
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•
•
•
•
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we face competition from national (e.g., large public and private self storage companies, institutional investors
and private equity funds), regional and local owners, operators and developers of self storage properties, which
may result in higher property acquisition prices and reduced yields;
we may not be able to achieve satisfactory completion of due diligence investigations and other customary
closing conditions;
we may fail to finance an acquisition on favorable terms or at all;
we may spend more time and incur more costs than budgeted to make necessary improvements or renovations
to acquired properties;
we may experience difficulties in effectively integrating the financial and operational reporting systems of the
properties or portfolios we acquire into (or supplanting such systems with) our financial and operational
reporting infrastructure and internal control framework in a timely manner; and
we may acquire properties subject to liabilities without any recourse, or with only limited recourse, with respect
to unknown liabilities such as liabilities for clean-up of undisclosed environmental contamination, tax
liabilities, claims by persons dealing with the former owners of the properties and claims for indemnification
by general partners, trustees, officers and others indemnified by the former owners of the properties. The
sellers or contributors of properties may make limited representations and warranties to us about the properties
and may agree to indemnify us for a certain period of time following the closing for breaches of those
representations and warranties. However, any resulting liabilities identified may not fall within the scope or
time frame covered by the indemnification, and we may be required to bear those liabilities, which may
materially and adversely affect our operating results, financial condition and business.
We face competition for tenants.
We compete with many other entities engaged in real estate investment activities for tenants, including national,
regional and local owners, operators and developers of self storage properties. Our primary national competitors for
tenants in many of our markets are the large public and private self storage companies, institutional investors, and
private equity funds. Actions by our competitors may decrease or prevent increases in the occupancy and rental rates,
while increasing the operating expenses of our properties.
Rental revenues are significantly influenced by demand for self storage space generally, and a decrease in such
demand would likely have a greater adverse effect on our rental revenues than if we owned a more diversified real
estate portfolio.
Because our portfolio of properties consists primarily of self storage properties, we are subject to risks inherent in
investments in a single industry. A decrease in the demand for self storage space would have a greater adverse effect
on our rental revenues than if we owned a more diversified real estate portfolio. Demand for self storage space has
been and could be adversely affected by weakness in the national, regional and local economies, changes in supply of,
or demand for, similar or competing self storage properties in an area and the excess amount of self storage space in a
particular market. To the extent that any of these conditions occur, they are likely to affect market rents for self storage
space, which could cause a decrease in our rental revenue. Any such decrease could impair our operating results, ability
to satisfy debt service obligations and ability to make cash distributions to our shareholders.
Increases in taxes and regulatory compliance costs may reduce our income and adversely impact our cash flows.
Increases in income or other taxes generally are not passed through to tenants under leases and may reduce our
net income, funds from operations ("FFO"), cash flows, financial condition, ability to pay or refinance our debt
obligations, ability to make cash distributions to shareholders, and the trading price of our securities. Similarly, changes
in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions
on discharges or other conditions may result in significant unanticipated expenditures, which could result in similar
adverse effects.
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Many states and jurisdictions are facing severe budgetary problems. Action that may be taken in response to these
problems, such as changes to sales taxes or other governmental efforts, including mandating medical insurance for
employees, could adversely impact our business and results of operations.
Our property taxes could increase due to various reasons, including a reassessment as a result of our contribution
transactions, which could adversely impact our operating results and cash flow.
The value of our properties may be reassessed for property tax purposes by taxing authorities including as a result
of our acquisition and contribution transactions. Accordingly, the amount of property taxes we pay in the future may
increase substantially from what we have paid in the past or from what we expected in connection with our underwriting
activities. If the property taxes we pay increase, our operating results and cash flow would be adversely impacted, and
our ability to pay any expected dividends to our shareholders could be adversely affected.
Our storage leases are relatively short-term in nature, which exposes us to the risk that we may have to re-lease our
units and we may be unable to do so on attractive terms, on a timely basis or at all.
Our storage leases are relatively short-term in nature, typically month-to-month, which exposes us to the risk that
we may have to re-lease our units frequently and we may be unable to do so on attractive terms, on a timely basis or
at all. Because these leases generally permit the tenant to leave at the end of the month without penalty, our revenues
and operating results may be impacted by declines in market rental rates more quickly than if our leases were for longer
terms. In addition, any delay in re-leasing units as vacancies arise would reduce our revenues and harm our operating
results.
Security breaches through cyber-attacks, cyber-intrusions, or other methods could disrupt our information
technology networks and related systems.
We and our PROs are increasingly dependent upon automated information technology processes and Internet
commerce, and many of our and their tenants come from the telephone or over the Internet. Moreover, the nature of
our and our PROs' business involves the receipt and retention of certain personal information about such tenants. In
many cases, we and our PROs also rely significantly on third-party vendors to retain data, process transactions and
provide other systems services. Our networks and operations could be disrupted, and sensitive data could be
compromised, by physical or electronic security breaches, targeted against us, our PROs, our vendors or other
organizations, including financial markets or institutions, including by way of or through cyber-attacks or cyber-
intrusions over the Internet, malware, computer viruses, attachments to e-mails, phishing, employee theft or misuse,
or inadequate security controls. Although we make efforts to protect the security and integrity of our networks and
systems, there can be no assurance that these efforts and measures will be effective or that attempted security breaches
or disruptions would not be successful, as such attacks and breaches may be difficult to detect (or not detected at all)
and are becoming more sophisticated. In such event, we may experience business interruptions; data loss, ransom,
misappropriation, or corruption; theft or misuse of confidential or proprietary information; or litigation and investigation
by tenants, governmental or regulatory agencies, or other third parties. Such events could also have other adverse
impacts on us, including breaches of debt covenants or other contractual or REIT compliance obligations, late or
misstated financial reports, and significant diversion of management attention and resources. As a result, such events
could have a material adverse effect on our financial condition, results of operations and cash flows and harm our
business reputation or have such effects on our PROs.
We may become subject to litigation or threatened litigation that may divert management's time and attention, require
us to pay damages and expenses or restrict the operation of our business.
We may become subject to disputes, including class or collective actions, with customers (or prospective customers),
employees, commercial parties with whom we maintain relationships or other parties with whom we do business. Any
such dispute could result in litigation between us and the other parties. Whether or not any dispute actually proceeds
to litigation, we may be required to devote significant management time and attention to its successful resolution
(through litigation, settlement or otherwise), which would detract from our management's ability to focus on our
business. Any such resolution could involve the payment of damages or expenses by us, which may be significant and
may not be covered by insurance. In addition, any such resolution could involve our agreement with terms that restrict
the operation of our business.
There are other commercial parties, at both a local and national level, that may assert that our use of our brand
names and other intellectual property conflict with their rights to use brand names and other intellectual property that
they consider to be similar to ours. Any such commercial dispute and related resolution would involve all of the risks
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described above, including, in particular, our agreement to restrict the use of our brand name or other intellectual
property.
We also could be sued for personal injuries and/or property damage occurring on our properties. The liability
insurance we maintain may not cover all costs and expenses arising from such lawsuits.
The acquisition of new properties that lack operating history with us will make it more difficult to predict our
operating results.
With respect to acquisitions, if we fail to accurately estimate occupancy levels, rental rates, operating costs or costs
of improvements to bring an acquired property up to the standards established for our intended market position, the
performance of the property may be below expectations. Acquired properties may have characteristics or deficiencies
affecting their valuation or profitability potential that we have not yet discovered. We cannot assure that the performance
of properties acquired by us will increase or be maintained following our acquisition.
Costs associated with complying with the ADA may result in unanticipated expenses.
Under the ADA, places of public accommodation are required to meet certain federal requirements related to access
and use by disabled persons. These requirements became effective in 1992. A number of additional U.S. federal, state
and local laws may also require modifications to our properties, or restrict certain further renovations of the properties,
with respect to access thereto by disabled persons. Noncompliance with the ADA could result in the imposition of fines
or an award of damages to private litigants and also could result in an order to correct any non-complying feature,
which could result in substantial capital expenditures. If one or more of our properties is not in compliance with the
ADA or other legislation, then we would be required to incur additional costs to bring the property into compliance. If
we incur substantial costs to comply with the ADA or other legislation, our financial condition, results of operations,
cash flow, per share trading price of our common shares and our ability to satisfy our debt service obligations and to
make cash distributions to our shareholders could be adversely affected.
Environmental compliance costs and liabilities associated with operating our properties may affect our results of
operations.
Under various U.S. federal, state and local laws, ordinances and regulations, owners and operators of real estate
may be liable for the costs of investigating and remediating certain hazardous substances or other regulated materials
on or in such property. CERCLA and comparable state laws typically impose strict joint and several liabilities without
regard to whether the owner or operator knew of, or was responsible for, the presence of such substances or materials.
The presence of such substances or materials, or the failure to properly remediate such substances, may adversely affect
the owner's or operator's ability to lease, sell or rent such property or to borrow using such property as collateral. Persons
who arrange for the disposal or treatment of hazardous substances or other regulated materials may be liable for the
costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is
owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing
materials into the air and third-parties may seek recovery from owners or operators of real properties for personal injury
associated with asbestos-containing materials.
Certain environmental laws also impose liability, without regard to knowledge or fault, for removal or remediation
of hazardous substances or other regulated materials upon owners and operators of contaminated property even after
they no longer own or operate the property. Moreover, the past or present owner or operator of a property from which
a release emanates could be liable for any personal injuries or property damages that may result from such releases, as
well as any damages to natural resources that may arise from such releases.
Certain environmental laws impose compliance obligations on owners and operators of real property with respect
to the management of hazardous materials and other regulated substances. For example, environmental laws govern
the management of asbestos-containing materials and lead-based paint. Failure to comply with these laws can result
in penalties or other sanctions.
In connection with the ownership, operation and management of our current or past properties and any properties
that we may acquire and/or manage in the future, we could be legally responsible for environmental liabilities or costs
relating to a release of hazardous substances or other regulated materials at or emanating from such property. In order
to assess the potential for such liability, we conduct an environmental assessment of each property prior to acquisition
and manage our properties in accordance with environmental laws while we own or operate them. We have engaged
qualified, reputable and adequately insured environmental consulting firms to perform environmental site assessments
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of all of our properties prior to acquisition and are not aware of any environmental issues that are expected to materially
impact the operations of any property.
No assurances can be given that existing environmental studies with respect to any of our properties reveal all
environmental liabilities, that any prior owner or operator of our properties did not create any material environmental
condition not known to us, or that a material environmental condition does not otherwise exist as to any one or more
of our properties. There also exists the risk that material environmental conditions, liabilities or compliance concerns
may have arisen after the review was completed or may arise in the future. Finally, future laws, ordinances or regulations
and future interpretations of existing laws, ordinances or regulations may impose additional material environmental
liability.
We rely on on-site personnel to maximize tenant satisfaction at each of our properties, and any difficulties we or
they encounter in hiring, training and maintaining skilled on-site personnel may harm our operating performance.
The general professionalism of site managers and staff are contributing factors to a site's ability to successfully
secure rentals and retain tenants and we rely on on-site personnel to maintain clean and secure self storage properties.
If we or our PROs are unable to successfully recruit, train and retain qualified on-site personnel, the quality of service
we and our PROs strive to provide at our properties could be adversely affected, which could lead to decreased occupancy
levels and reduced operating performance of our properties.
We and certain of our PROs have tenant insurance- and/or tenant protection plan-related arrangements that are
in some cases subject to state-specific governmental regulation, which may adversely affect our results.
We and certain of our PROs have tenant insurance- and/or tenant protection plan-related arrangements with
regulated insurance companies and our tenants. Some of our PROs earn access fees in connection with these
arrangements. We receive a portion of the fees from these PROs. The tenant insurance and tenant protection plan
businesses, including the payments associated with these arrangements, are in some cases subject to state-specific
governmental regulation. State regulatory authorities generally have broad discretion to grant, renew and revoke licenses
and approvals, to promulgate, interpret and implement regulations, and to evaluate compliance with regulations through
periodic examinations, audits and investigations of the affairs of insurance industry participants. Although these
arrangements are managed by our property management platform and/or certain of our PROs who have developed
marketing programs and management procedures to navigate the regulatory environment, as a result of regulatory or
private action in any jurisdiction in which we operate, we may be temporarily or permanently suspended from continuing
some or all of our tenant insurance- and/or tenant protection plan-related activities, or otherwise fined or penalized or
suffer an adverse judgment, which could adversely affect our business and results of operations.
Privacy concerns could result in regulatory changes that may harm our business.
Personal privacy has become a significant issue in the jurisdictions in which we operate. Many jurisdictions in
which we operate have imposed or in the future may impose restrictions and requirements on the use of personal
information by those collecting such information. For example, the California Consumer Privacy Act of 2018 was
recently passed and will become effective as of January 1, 2020, which provides consumers with expansive rights and
control over personal information obtained by or shared with certain covered businesses. Changes to law or regulations
or the passage of new laws affecting privacy, if applicable to our business, could impose additional costs and liability
on us and could limit our use and disclosure of such information.
Uninsured losses or losses in excess of our insurance coverage could adversely affect our financial condition,
operating results and cash flow.
We maintain comprehensive liability, fire, flood, earthquake, wind (as deemed necessary or as required by our
lenders), extended coverage and rental loss insurance with respect to our properties. Certain types of losses, however,
may be either uninsurable or not economically insurable, such as losses due to earthquakes, hurricanes, tornadoes, riots,
acts of war or terrorism. Should an uninsured loss occur, we could lose both our investment in and anticipated profits
and cash flow from a property. In addition, if any such loss is insured, we may be required to pay significant amounts
on any claim for recovery of such a loss prior to our insurer being obligated to reimburse us for the loss, or the amount
of the loss may exceed our coverage for the loss. We currently self-insure a portion of our commercial insurance
deductible risk through our captive insurance company. To the extent that our captive insurance company is unable to
bear that risk, we may be required to fund additional capital to our captive insurance company or we may be required
to bear that loss. As a result, our operating results may be adversely affected.
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Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the
performance of our properties.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our
portfolio in response to changing economic, financial and investment conditions is limited. The real estate market is
affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors,
including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property
for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be
acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of
a property. In addition, we may be required to expend funds to correct defects or to make improvements before a
property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those
improvements.
In acquiring a property, we may agree to transfer restrictions that materially restrict us from selling that property
for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid
on that property. For example, we are party to certain agreements with our PROs that provide that, until March 31,
2023, our operating partnership shall not, and shall cause its subsidiaries not to, sell, dispose or otherwise transfer any
property that is a part of the applicable self storage property portfolio relating to a series of subordinated performance
units without the consent of the partners (including us) holding at least 50% of the then outstanding OP units and the
partners holding at least 50% of the then outstanding series of subordinated performance units that relate to the applicable
property, except for sales, dispositions or other transfers of a property to wholly owned subsidiaries of our operating
partnership. These restrictions may require us to keep certain properties that we would otherwise sell, which could have
an adverse effect on our results of operations, financial condition, cash flow and ability to execute our business plan.
Our business could be harmed if key personnel terminate their employment with us.
Our success depends, to a significant extent, on the continued services of Arlen D. Nordhagen and Tamara D.
Fischer and the other members of our senior management team. At the time of our initial public offering, Mr. Nordhagen
and Ms. Fischer entered into new employment agreements with us. These employment agreements provide for an initial
three-year term of employment for these executives and automatic one-year extensions thereafter unless either party
provides at least 90 days' notice of non-renewal. Notwithstanding these agreements, there can be no assurance that any
of them will remain employed by us. The loss of services of one or more members of our senior management team
could harm our business and our prospects.
We invest in strategic joint ventures that subject us to additional risks.
Some of our investments are. and in the future may be, structured as strategic joint ventures. Part of our strategy
is to opportunistically partner with institutional funds and other institutional investors to acquire attractive portfolios
through a promoted return structure. These arrangements are driven by the magnitude of capital required to complete
the acquisitions and maintain the acquired portfolios. Such arrangements involve risks not present where a third party
is not involved, including the possibility that partners or co-venturers might become bankrupt or otherwise fail to fund
their share of required capital contributions. Additionally, partners or co-venturers might at any time have economic
or other business interests or goals different from us and or in competition with us.
Joint ventures generally provide for a reduced level of control over an acquired project because governance rights
are shared with others. Accordingly, certain major decisions relating to joint ventures, including decisions relating to,
among other things, the approval of annual budgets, sales and acquisitions of properties, financings, and certain actions
relating to bankruptcy, are often made by a majority vote of the investors or by separate agreements that are reached
with respect to individual decisions. In addition, such decisions may be subject to the risk that the partners or co-
venturers may make business, financial or management decisions with which we do not agree or take risks or otherwise
act in a manner that does not serve our best interests. Because we may not have the ability to exercise control over such
operations, we may not be able to realize some or all of the benefits that we believe will be created from our involvement.
At times, we and our partners or co-venturers may also each have the right to trigger a buy-sell arrangement, which
could cause us to sell our interest, or acquire our partners' or co-venturers' interest, at a time when we otherwise would
not have initiated such a transaction. If any of the foregoing were to occur, our business, financial condition and results
of operations could suffer as a result.
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Risks Related to Our Structure and Our Relationships with Our PROs
Some of our PROs have limited experience operating under the Company's capital structure, and we may not be
able to achieve the desired outcomes that the structure is intended to produce.
Some of our PROs have limited experience operating under our capital structure. As a means of incentivizing our
PROs to drive operating performance and support the sustainability of the operating cash flow from the properties they
manage on our behalf, we issued each PRO subordinated performance units aimed at aligning the interests of our PROs
with our interests and those of our shareholders. The subordinated performance units are entitled to distributions
exclusively tied to the performance of each PRO's managed portfolios but only after minimum performance thresholds
are satisfied. Our issuance of such units, however, may have been and could be based on inaccurate valuations and thus
misallocated, which would limit or eliminate the effectiveness of our intended incentive-based program. Moreover,
difficulties in aligning incentives and implementing our structure could allow a PRO to underperform without triggering
our right to terminate the applicable facilities portfolio and asset management agreements and transfer management
rights of the PRO to us (or a designee) or cause our management to be distracted from other aspects of our business,
which could adversely affect our operating results and business.
We are restricted in making certain property sales on account of agreements with our PROs that may require us to
keep certain properties that we would otherwise sell.
The partnership unit designations related to our subordinated performance units provide that, until March 31, 2023,
our operating partnership may not sell, dispose or otherwise transfer any property that is a part of the applicable self
storage property portfolio relating to a series of subordinated performance units without the consent of the partners
(including us) holding at least 50% of the then outstanding OP units and the consent of partners holding at least 50%
of the then outstanding series of subordinated performance units that relate to the applicable property, except for sales,
dispositions or other transfers of a property to wholly owned subsidiaries of our operating partnership. This restriction
may require us to keep certain properties that we would otherwise sell, which could have an adverse effect on our
results of operations, financial condition, cash flow and ability to execute our business plan. In addition, we may enter
into agreements with future PROs that contain the same or similar restrictions or that impose such restrictions for
different periods.
Our ability to terminate our facilities portfolio management agreements and asset management agreements with a
PRO is limited, which may adversely affect our ability to execute our business plan.
We may elect to terminate our facilities portfolio management agreements and asset management agreements with
a PRO and transfer property management responsibilities over the properties managed by such PRO to us (or our
designee), (i) upon certain defaults by a PRO as set forth in these agreements, or (ii) if the PRO's properties, on a
portfolio basis, fail to meet certain pre-determined performance thresholds for more than two consecutive calendar
years or if the operating cash flow generated by the properties of the PRO for any calendar year falls below a level that
will enable us to fund minimum levels of distributions, debt service payments attributable to the properties, and fund
the properties' allocable operating expenses. Consequently, to the extent a PRO complies with these covenants, standards,
and minimum requirements, we may not be able to terminate the applicable facilities portfolio management agreements
and asset management agreements and transfer property management responsibilities over such properties even if our
board of trustees believes that such PRO is not properly executing our business plan and/or is failing to operate its
properties to their full potential. Moreover, transferring the management responsibilities over the properties managed
by a PRO may be costly or difficult to implement or may be delayed, even if we are able to and believe that such a
change in portfolio and property management would be beneficial to us and our shareholders.
We may less vigorously pursue enforcement of terms of agreements entered into with our PROs because of conflicts
of interest with our PROs.
Our PROs are entities that have contributed or will contribute through contribution agreements, self storage
properties, or legal entities owning self storage properties, to our operating partnership or DownREIT partnerships in
exchange for ownership interests in our operating partnership or DownREIT partnerships. As part of each transaction,
our PROs make and have made limited representations and warranties to our operating partnership regarding the entities,
properties and other assets to be acquired by our operating partnership or DownREIT partnerships in the contribution
and generally agree to indemnify our operating partnership for 12 months after the closing of the contribution for
breaches of such representations. Such indemnification is limited, however, and our operating partnership is not entitled
to any other indemnification in connection with the contributions. In addition, following each contribution from a PRO,
the day-to-day operations of each of the managed properties will be managed by the PRO who was the principal of the
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applicable self storage property portfolios prior to the contribution. In addition, certain of our PROs are members of
our board of trustees, members of our PRO advisory committee, or are executive officers of the Company. Consequently,
we may choose not to enforce, or to enforce less vigorously, our rights under these agreements and any other agreements
with our PROs due to our desire to maintain our ongoing relationship with our PROs, which could adversely affect our
operating results and business.
We own self storage properties in some of the same geographic regions as our PROs and may compete for tenants
with other properties managed by our PROs.
Pursuant to the facilities portfolio management agreements with our PROs, each PRO has agreed that, without our
consent, the PRO will not, and it will cause its affiliates not to, enter into any new agreements or arrangements for the
management of additional self storage properties, other than the properties we are not acquiring and the properties each
PRO contributes to our operating partnership. However, we have not and will not acquire all of the self storage properties
of our PROs. We will therefore own self storage properties in some of the same geographic regions as our PROs, and,
as a result, we may compete for tenants with our PROs. This competition may affect our ability to attract and retain
tenants and may reduce the rental rates we are able to charge, which could adversely affect our operating results and
business.
Our PROs may engage in other activities, diverting their attention from the management of our properties, which
could adversely affect the execution of our business plan and our operating results.
Our PROs and their employees and personnel are in the business of managing self storage properties. We have
agreed that our PROs may continue to manage properties not included in our portfolio, and our PROs are not obligated
to dedicate any specific employees or personnel exclusively to the management of our properties. As a result, their time
and efforts may be diverted from the management of our properties, which could adversely affect the execution of our
business plan and our operating results.
When a PRO elects or is required to "retire" we may become exposed to new and additional costs and risks.
Under the facilities portfolio management agreements, after a two year period following the later of completion
of our initial public offering or the initial contribution of their properties to us, a PRO may elect, or be required, to
"retire" from the self storage business. Upon a retirement event, management of the properties will be transferred to
us (or our designee) in exchange for OP units with a value equal to four times the average of the normalized annual
EBITDA from the management contracts related to such PRO's managed portfolio over the immediately preceding 24-
month period. As a result of this transfer, we may become exposed to new and additional costs and risks. Accordingly,
the retirement of a PRO may adversely affect our financial condition and operating results.
Our formation transactions and subsequent contribution transactions were generally not negotiated on an arm's-
length basis and may not be as favorable to us as if they had been negotiated with unaffiliated third parties.
We did not conduct arm's-length negotiations with certain of the parties involved regarding the terms of the formation
transactions and subsequent contribution transactions, including the contribution agreements, facilities portfolio
management agreements, sales commission agreements, asset management agreements and registration rights
agreements. In the course of structuring the formation transactions and subsequent contribution transactions, certain
members of our senior management team and other contributors had the ability to influence the type and level of benefits
that they received from us. Accordingly, the terms of the formation transactions and subsequent contribution transactions
may not solely reflect the best interests of us or our shareholders and may be overly favorable to the other party to such
transactions and agreements.
Conflicts of interest could arise with respect to certain transactions between the holders of OP units (including
subordinated performance units), which include our PROs, on the one hand, and us and our shareholders, on the
other.
Conflicts of interest could arise with respect to the interests of holders of OP units (including subordinated
performance units), on the one hand, which include members of our senior management team, PROs, and trustees
(including Arlen D. Nordhagen, our chief executive officer and chairman of the board of trustees) and us and our
shareholders, on the other. In particular, the consummation of certain business combinations, the sale, disposition or
transfer of certain of our assets or the repayment of certain indebtedness that may be desirable to us and our shareholders
could have adverse tax consequences to such unit holders. In addition, our trustees and officers have duties to the
Company under applicable Maryland law in connection with their management of the Company. At the same time, we
have fiduciary duties, as a general partner, to our operating partnership and to the limited partners under Delaware law
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in connection with the management of our operating partnership. Our duties as a general partner to our operating
partnership and its partners may come into conflict with the duties of our trustees and officers to the Company and our
shareholders. The partnership agreement of our operating partnership does not require us to resolve such conflicts in
favor of either the Company or the limited partners in our operating partnership. Further, there can be no assurance that
any procedural protections we implement to address these or other conflicts of interest will result in optimal outcomes
for us and our shareholders.
The partnership agreement of our operating partnership contains provisions that may delay, defer or prevent a
change in control.
The partnership agreement of our operating partnership provides that subordinated performance unit holders holding
more than 50% of the voting power of the subordinated performance units must approve certain change of control
transactions involving us unless, as a result of such transactions, the holders of subordinated performance units are
offered a choice (1) to allow their subordinated performance units to remain outstanding without the terms thereof
being materially and adversely changed or the subordinated performance units are converted into or exchanged for
equity securities of the surviving entity having terms and conditions that are substantially similar to those of the
subordinated performance units (it being understood that we may not be the surviving entity and that the parent of the
surviving entity or the surviving entity may not be publicly traded) or (2) to receive for each subordinated performance
unit an amount of cash, securities or other property payable to a holder of OP units had such holder exercised its right
to exchange its subordinated performance units for OP units without taking into consideration a specified conversion
penalty associated with such an exchange. In addition, in the case of any such change of control transactions in which
we have not received the consent of OP unit holders holding more than 50% of the OP units (other than those held by
the Company or its subsidiaries) and of subordinated performance unit holders holding more than 50% of the voting
power of the subordinated performance units (other than those held by the Company or its subsidiaries), such transaction
is required to be approved by a companywide vote of limited partners holding more than 50% of our outstanding OP
units in which OP units (including for this purpose OP units held by us and our subsidiaries) are voted and subordinated
performance units (not held by us and our subsidiaries) are voted on an applicable as converted basis and in which we
will be deemed to vote the OP units held by us and our subsidiaries in proportion to the manner in which all of our
outstanding common shares were voted at a shareholders meeting relating to such transaction. These approval rights
could delay, deter, or prevent a transaction or a change in control that might involve a premium price for our common
shares or otherwise be in the best interests of our shareholders.
We may change our investment and financing strategies and enter into new lines of business without shareholder
consent, which may subject us to different risks.
We may change our business and financing strategies and enter into new lines of business at any time without the
consent of our shareholders, which could result in our making investments and engaging in business activities that are
different from, and possibly riskier than, the investments and businesses described in this document. A change in our
strategy or our entry into new lines of business may increase our exposure to other risks or real estate market fluctuations.
Certain provisions of Maryland law could inhibit a change in our control.
Certain provisions of the Maryland General Corporation Law (the "MGCL") applicable to a Maryland real estate
investment trust may have the effect of inhibiting a third-party from making a proposal to acquire us or of impeding a
change in our control under circumstances that otherwise could provide the holders of our common shares with the
opportunity to realize a premium over the then prevailing market price of such shares. The "business combination"
provisions of the MGCL, subject to limitations, prohibit certain business combinations between a REIT and an
"interested shareholder" (defined generally as any person who beneficially owns 10% or more of the voting power of
our then outstanding voting shares or an affiliate or associate of ours who, at any time within the two-year period prior
to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of our then outstanding voting
shares) or an affiliate thereof for five years after the most recent date on which the shareholder becomes an interested
shareholder and, thereafter, imposes special appraisal rights and special shareholder voting requirements on these
combinations. These provisions of the MGCL do not apply, however, to business combinations that are approved or
exempted by the board of trustees of a REIT prior to the time that the interested shareholder becomes an interested
shareholder. Pursuant to the statute, our board of trustees has by resolution exempted business combinations between
us and (1) any other person, provided that the business combination is first approved by our board of trustees (including
a majority of trustees who are not affiliates or associates of such person), (2) Arlen D. Nordhagen and any of his affiliates
and associates and (3) any person acting in concert with the foregoing, from these provisions of the MGCL. As a result,
such persons may be able to enter into business combinations with us that may not be in the best interests of our
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shareholders without compliance by us with the supermajority vote requirements and other provisions of the statute.
This resolution, however, may be altered or repealed in whole or in part at any time. If this resolution is repealed, or
our board of trustees does not otherwise approve a business combination, this statute may discourage others from trying
to acquire control of us and increase the difficulty of consummating any offer.
The "control share" provisions of the MGCL provide that holders of "control shares" of a Maryland real estate
investment trust (defined as voting shares which, when aggregated with all other shares controlled by the shareholder,
entitle the shareholder to exercise one of three increasing ranges of voting power in the election of trustees) acquired
in a "control share acquisition" (defined as the direct or indirect acquisition of ownership or control of issued and
outstanding "control shares," subject to certain exceptions) have no voting rights with respect to such shares except to
the extent approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast
on the matter, excluding votes entitled to be cast by the acquirer of control shares, our officers and our trustees who
are also our employees. Our bylaws contain a provision exempting from the control share acquisition statute any and
all acquisitions by any person of our shares. There can be no assurance that this provision will not be amended or
eliminated at any time in the future.
Our authorized but unissued common and preferred shares may prevent a change in our control.
Our declaration of trust authorizes us to issue additional authorized but unissued common shares and preferred
shares. In addition, our board of trustees may, without common shareholder approval, increase the aggregate number
of our authorized shares or the number of shares of any class or series that we have authority to issue and classify or
reclassify any unissued common shares or preferred shares, and may set or change the preferences, rights and other
terms of any unissued classified or reclassified shares. As a result, among other things, our board may establish a class
or series of common shares or preferred shares that could delay or prevent a transaction or a change in our control that
might involve a premium price for our common shares or otherwise be in the best interests of our shareholders.
Our rights and the rights of our shareholders to take action against our trustees and officers are limited, which
could limit your recourse in the event of actions not in your best interest.
Our declaration of trust limits the liability of our present and former trustees and officers to us and our shareholders
for money damages to the maximum extent permitted under Maryland law. Under current Maryland law, our present
and former trustees and officers will not have any liability to us or our shareholders for money damages other than
liability resulting from:
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actual receipt of an improper benefit or profit in money, property or services; or
active and deliberate dishonesty by the trustee or officer that was established by a final judgment and is material
to the cause of action.
Our declaration of trust authorizes us to indemnify our present and former trustees and officers for actions taken
by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify
each present and former trustee or officer, to the maximum extent permitted by Maryland law, in connection with any
proceeding to which he or she is made, or threatened to be made, a party to or witness in by reason of his or her service
to us as a trustee or officer or in certain other capacities. In addition, we may be obligated to pay or reimburse the
expenses incurred by our present and former trustees and officers without requiring a preliminary determination of
their ultimate entitlement to indemnification. As a result, we and our shareholders may have more limited rights against
our present and former trustees and officers than might otherwise exist absent the current provisions in our declaration
of trust and bylaws or that might exist with other companies, which could limit your recourse in the event of actions
not in your best interest.
Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult
for our shareholders to effect changes to our management.
Our declaration of trust provides that, subject to the rights of holders of one or more classes or series of preferred
shares, a trustee may be removed with or without cause, by the affirmative vote of at least two-thirds of the votes entitled
to be cast generally in the election of trustees. Vacancies on our board of trustees generally may be filled only by a
majority of the remaining trustees in office, even if less than a quorum. These requirements make it more difficult to
change our management by removing and replacing trustees and may prevent a change in our control that is in the best
interests of our shareholders.
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Restrictions on ownership and transfer of our shares may restrict change of control or business combination
opportunities in which our shareholders might receive a premium for their shares.
In order for us to qualify as a REIT for each taxable year, no more than 50% in value of our outstanding shares
may be owned, directly or constructively, by five or fewer individuals during the last half of any calendar year, and at
least 100 persons must beneficially own our shares during at least 335 days of a taxable year of 12 months, or during
a proportionate portion of a shorter taxable year. "Individuals" for this purpose include natural persons, private
foundations, some employee benefit plans and trusts, and some charitable trusts. To assist us in preserving our REIT
qualification, among other purposes, our declaration of trust generally prohibits, among other limitations, any person
from beneficially or constructively owning more than 9.8% in value or in number of shares, whichever is more restrictive,
of our aggregate outstanding shares of all classes and series, the outstanding shares of any class or series of our preferred
shares or our outstanding common shares. These ownership limits and the other restrictions on ownership and transfer
of our shares contained in our declaration of trust could have the effect of discouraging a takeover or other transaction
in which holders of our common shares might receive a premium for their shares over the then prevailing market price
or which holders might believe to be otherwise in their best interests. Our board of trustees has established exemptions
from these ownership limits which permits certain of our institutional investors to hold up to 20% of our common
shares and up to 25% of our preferred shares.
Risks Related to Our Debt Financings
There are risks associated with our indebtedness.
There is no assurance that we will succeed in securing expansions of our credit facility, 2023 Term Loan Facility
or 2028 Term Loan Facility, if we desire to do so.
Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse
consequences, including the following:
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our cash flow may be insufficient to meet our required principal and interest payments;
we may be unable to borrow additional funds as needed or on favorable terms, including to make acquisitions
or to continue to make distributions required to maintain our qualification as a REIT;
we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable
than the terms of our original indebtedness;
because a portion of our debt that bears interest at variable rates is not hedged, a material increase in interest
rates could materially increase our interest expense;
we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;
our debt level could place us at a competitive disadvantage compared to our competitors with less debt;
we may experience increased vulnerability to economic and industry downturns, reducing our ability to respond
to changing business and economic conditions;
we may default on our obligations and the lenders or mortgagees may foreclose on our properties that secure
their loans and receive an assignment of rents and leases;
we may default on our obligations and the lenders or mortgagees may enforce our guarantees;
we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our
debt obligations; and
our default under any one of our mortgage loans with cross-default or cross-collateralization provisions could
result in a default on other indebtedness or result in the foreclosures of other properties.
Disruptions in the financial markets could affect our ability to obtain debt financing on reasonable terms or at all
and have other adverse effects on us.
Uncertainty in the credit markets may negatively impact our ability to access additional debt financing or to
refinance existing debt maturities on favorable terms (or at all), which may negatively affect our ability to make
acquisitions. A downturn in the credit markets may cause us to seek alternative sources of potentially less attractive
financing, and may require us to adjust our business plans accordingly. In addition, these factors may make it more
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difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective
buyers may experience increased costs of debt financing or difficulties in obtaining debt financing.
We depend on external sources of capital that are outside of our control, which could adversely affect our ability to
acquire or develop properties, satisfy our debt obligations and/or make distributions to shareholders.
We depend on external sources of capital to acquire properties, to satisfy our debt obligations and to make
distributions to our shareholders required to maintain our qualification as a REIT, and these sources of capital may not
be available on favorable terms, or at all. Our access to external sources of capital depends on a number of factors,
including the market's perception of our growth potential and our current and potential future earnings and our ability
to continue to qualify as a REIT for U.S. federal income tax purposes. If we are unable to obtain external sources of
capital, we may not be able to acquire properties when strategic opportunities exist, satisfy our debt obligations or make
cash distributions to our shareholders that would permit us to qualify as a REIT or avoid paying tax on all of our net
taxable income.
Increases in interest rates may increase our interest expense and adversely affect our cash flow and our ability to
service our indebtedness and make cash distributions to our shareholders, and our decision to hedge against interest
rate risk might not be effective.
As of December 31, 2018, we had approximately $1.3 billion of debt outstanding, of which approximately $214.5
million, or 16.7%, is subject to variable interest rates (excluding variable-rate debt subject to interest rate swaps).
Although the credit markets have recently experienced historic lows in interest rates, if interest rates continue to rise,
the interest rates on our variable-rate debt could be higher than current levels, which could increase our financing costs
and decrease our cash flow and our ability to pay cash distributions to our shareholders. For example, if market rates
of interest on this variable-rate debt increased by 100 basis points (excluding variable-rate debt with interest rate swaps),
the increase in interest expense would decrease future earnings and cash flows by approximately $2.1 million annually.
Although we have historically sought, and may in the future seek, to manage our exposure to interest rate volatility
by using interest rate hedging arrangements, these arrangements may not be effective. Developing an effective interest
rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate
fluctuations. Failure to hedge effectively against interest rate changes may adversely affect our financial condition,
results of operations and ability to make cash distributions to our shareholders.
The terms and covenants relating to our indebtedness could adversely impact our economic performance.
Our credit facility, 2023 Term Loan Facility and 2028 Term Loan Facility contain (and any new or amended facility
we may enter into from time to time will likely contain) customary affirmative and negative covenants, including
financial covenants that, among other things, cap our total leverage at 60% of our gross asset value (as defined in our
credit facility, 2023 Term Loan Facility and 2028 Term Loan Facility), require us to have a minimum fixed charge
coverage ratio of 1.5 to 1, and require us to have a minimum net worth (as defined in our credit facility) of at least
$682.6 million plus 75% of the net proceeds of equity issuances. In the event that we fail to satisfy our covenants, we
would be in default under our credit agreements and may be required to repay such debt with capital from other sources.
Under such circumstances, other sources of debt or equity capital may not be available to us, or may be available only
on unattractive terms. Moreover, the presence of such covenants could cause us to operate our business with a view
toward compliance with such covenants, which might not produce optimal returns for shareholders.
Risks Related to Our Qualification as a REIT
Our failure to remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local
taxes, which would reduce the amount of operating cash flow to our shareholders.
We have elected and we believe that we have qualified to be taxed as a REIT commencing with our taxable year
ended December 31, 2015. We have not requested, and do not intend to request a ruling from the Internal Revenue
Service ("IRS"), that we qualify as a REIT. Qualification as a REIT involves the application of highly technical and
complex Code provisions and Treasury Regulations promulgated thereunder for which there are limited judicial and
administrative interpretations. The complexity of these provisions and of applicable Treasury Regulations is greater in
the case of a REIT that, like us, holds its assets through partnerships, and judicial and administrative interpretations of
the U.S. federal income tax laws governing REIT qualification are limited. To qualify as a REIT, we must meet, on an
ongoing basis through actual operating results, various tests regarding the nature and diversification of our assets and
our income, the ownership of our outstanding shares and the amount of our distributions. Our compliance with the
REIT income and quarterly asset requirements also depends upon our ability to manage successfully the composition
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of our income and assets on an ongoing basis. Our ability to satisfy these asset tests depends upon our analysis of the
characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and
for which we will not obtain independent appraisals. Moreover, new legislation, court decisions or administrative
guidance may, in each case possibly with retroactive effect, make it more difficult or impossible for us to qualify as a
REIT. Thus, while we believe that we have been organized and operated and we intend to operate so that we will
continue to qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance
of factual determinations and the possibility of future changes in our circumstances, no assurance can be given that we
have qualified or will so qualify for any particular year. These considerations also might restrict the types of assets that
we can acquire or services that we can provide in the future.
If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we
would be required to pay U.S. federal income tax on our taxable income at regular corporate rates, and distributions to
our shareholders would not be deductible by us in determining our taxable income. In such a case, we might need to
borrow money, sell assets, or reduce or even cease making distributions in order to pay our taxes. Our payment of
income tax would reduce significantly the amount of operating cash flow to our shareholders. Furthermore, if we fail
to maintain our qualification as a REIT, we no longer would be required to make distributions to our shareholders. In
addition, unless we were eligible for certain statutory relief provisions, we could not re-elect to be taxed as a REIT
until the fifth calendar year following the year in which we failed to qualify.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our
income and assets, including taxes on any undistributed income, state or local income and property and transfer taxes,
including real property transfer taxes. In addition, we could, in certain circumstances, be required to pay an excise or
penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to
maintain our qualification as a REIT. Any of these taxes would decrease operating cash flow to our shareholders. In
addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to
certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets or provide certain
services to our tenants through one or more TRSs, or other subsidiary corporations that will be subject to corporate-
level income tax at regular corporate rates. Any TRSs or other taxable corporations in which we invest will be subject
to U.S. federal, state and local corporate taxes. Furthermore, if we acquire appreciated assets from a corporation that
is or has been a subchapter C corporation in a transaction in which the adjusted tax basis of such assets in our hands is
less than the fair market value of the assets, determined at the time we acquired such assets, and if we subsequently
dispose of any such assets during the 5-year period following the acquisition of the assets from the C corporation, we
will be subject to tax at the highest corporate tax rates on any gain from the disposition of such assets to the extent of
the excess of the fair market value of the assets on the date that we acquired such assets over the basis of such assets
on such date, which we refer to as built-in gains. Payment of these taxes generally could materially and adversely affect
our income, cash flow, results of operations, financial condition, liquidity and prospects, and could adversely affect the
value of our common shares and our ability to make distributions to our shareholders.
Failure to make required distributions would subject us to tax, which would reduce the operating cash flow to our
shareholders.
In order to qualify as a REIT, we must distribute to our shareholders each calendar year at least 90% of our net
taxable income (excluding net capital gain). To the extent that we satisfy the 90% distribution requirement, but distribute
less than 100% of our net taxable income (including net capital gain), we would be subject to U.S. federal corporate
income tax on our undistributed net taxable income. In addition, we will incur a 4% non-deductible excise tax on the
amount, if any, by which our distributions in any calendar year are less than a minimum amount specified under U.S.
federal income tax laws. Although we intend to distribute our net taxable income to our shareholders in a manner
intended to satisfy the REIT 90% distribution requirement and to avoid the 4% non-deductible excise tax, it is possible
that we, from time to time, may not have sufficient cash to distribute 100% of our net taxable income. There may be
timing differences between our actual receipt of cash and the inclusion of items in our income for U.S. federal income
tax purposes. Accordingly, there can be no assurance that we will be able to distribute net taxable income to shareholders
in a manner that satisfies the REIT distribution requirements and avoids the 4% non-deductible excise tax.
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To maintain our REIT qualification, we may be forced to borrow funds during unfavorable market conditions.
In order to maintain our REIT qualification and avoid the payment of income and excise taxes, we may need to
borrow funds to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable
for these borrowings. These borrowing needs could result from, among other things, timing differences between the
actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of non-deductible capital
expenditures, the creation of reserves or required debt or amortization payments. These sources, however, may not be
available on favorable terms or at all. Our access to third-party sources of capital depends on a number of factors,
including the market's perception of our growth potential, our current debt levels, the per share trading price of our
common shares, and our current and potential future earnings. We cannot assure you that we will have access to such
capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or
to dispose of assets at inopportune times, and could adversely affect our financial condition, results of operations, cash
flows and our ability to pay distributions on, and the per share trading price of, our common shares.
Complying with the REIT requirements may cause us to forgo and/or liquidate otherwise attractive investments.
To qualify as a REIT, we must ensure that at least 75% of our gross income for each taxable year, excluding certain
amounts, is derived from certain real property-related sources, and at least 95% of our gross income for each taxable
year, excluding certain amounts, is derived from certain real property-related sources and passive income such as
dividends and interest. In addition, we must ensure that, at the end of each calendar quarter, at least 75% of the value
of our total assets consists of cash, cash items, U.S. government securities and qualified real estate assets. The remainder
of our investment in securities generally cannot include more than 10% of the outstanding voting securities of any one
issuer (other than U.S. government securities, securities of corporations that are treated as TRSs and qualified real
estate assets) or more than 10% of the total value of the outstanding securities of any one issuer (other than government
securities, securities of corporations that are treated as TRSs and qualified real estate assets). In addition, in general,
no more than 5% of the value of our assets can consist of the securities of any one issuer (other than U.S. government
securities, securities of corporations that are treated as TRSs and qualified real estate assets), no more than 20% (25%
for taxable years beginning prior to January 1, 2018) of the value of our total assets can be represented by securities
of one or more TRSs and no more than 25% of the value of our assets can consist of debt instruments issued by publicly
offered REITs that are not otherwise secured by real property. If we fail to comply with these asset requirements at the
end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify
for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences.
To meet these tests, we may be required to take or forgo taking actions that we would otherwise consider
advantageous. For instance, in order to satisfy the gross income or asset tests applicable to REITs under the Code, we
may be required to forgo investments that we otherwise would make. Furthermore, we may be required to liquidate
from our portfolio otherwise attractive investments. In addition, we may be required to make distributions to shareholders
at disadvantageous times or when we do not have funds readily available for distribution. These actions could reduce
our income and amounts available for distribution to our shareholders. Thus, compliance with the REIT requirements
may hinder our investment performance.
We may be subject to a 100% tax on income from "prohibited transactions," and this tax may limit our ability to
sell assets or require us to restructure certain of our activities in order to avoid being subject to the tax.
We will be subject to a 100% tax on any income from a prohibited transaction. "Prohibited transactions" generally
include sales or other dispositions of property (other than property treated as foreclosure property under the Code) that
is held as inventory or primarily for sale to customers in the ordinary course of a trade or business by a REIT, either
directly or indirectly through certain pass-through subsidiaries. The characterization of an asset sale as a prohibited
transaction depends on the particular facts and circumstances.
The 100% tax will not apply to gains from the sale of inventory that is held through a TRS or other taxable
corporation, although such income will be subject to tax in the hands of the corporation at regular corporate income
tax rates.
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Our TRSs will be subject to U.S. federal income tax and will be required to pay a 100% penalty tax on certain income
or deductions if our transactions with our TRSs are not conducted on arm's length terms.
We may conduct certain activities (such as facilitating sales by our PROs of tenant insurance, of which we receive
a portion of the proceeds, selling packing supplies and locks and renting trucks or other moving equipment) through
one or more TRSs.
A TRS is a corporation other than a REIT in which a REIT directly or indirectly holds stock, and that has made a
joint election with such REIT to be treated as a TRS. If a TRS owns more than 35% of the total voting power or value
of the outstanding securities of another corporation, such other corporation will also be treated as a TRS. Other than
some activities relating to lodging and health care properties, a TRS may generally engage in any business, including
the provision of customary or non-customary services to tenants of its parent REIT. A TRS is subject to U.S. federal
income tax as a regular C corporation.
No more than 20% (25% for taxable years beginning prior to January 1, 2018) of the value of a REIT's total assets
may consist of stock or securities of one or more TRSs. This requirement limits the extent to which we can conduct
our activities through TRSs. The values of some of our assets, including assets that we hold through TRSs, may not be
subject to precise determination, and values are subject to change in the future. Furthermore, if a REIT lends money
to a TRS, the TRS may be unable to deduct all or a portion of the interest paid to the REIT, which could increase the
tax liability of the TRS. In addition, the Code imposes a 100% tax on certain transactions between a TRS and its parent
REIT that are not conducted on an arm's length basis. We intend to structure transactions with any TRS on terms that
we believe are arm's length to avoid incurring the 100% excise tax described above. There can be no assurances,
however, that we will be able to avoid application of the 100% tax.
If our operating partnership is treated as a corporation for U.S. federal income tax purposes, we will cease to qualify
as a REIT.
We believe our operating partnership qualifies as a partnership for U.S. federal income tax purposes. As a partnership
for U.S. federal income tax purposes, our operating partnership will not be subject to U.S. federal income tax on its
income. Instead, each of its partners, including us, will be required to pay tax on its allocable share of our operating
partnership's income. No assurance can be provided, however, that the IRS will not challenge our operating partnership's
status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the
IRS were successful in treating our operating partnership as a corporation for U.S. federal income tax purposes, we
would fail to meet the gross income tests and certain of the asset tests applicable to REITs. As a result, we would cease
to qualify as a REIT and both we and our operating partnership would become subject to U.S. federal, state and local
income tax. The payment by our operating partnership of income tax would reduce significantly the amount of cash
available to our operating partnership to satisfy obligations to make principal and interest payments on its debt and to
make distribution to its partners, including us.
Dividends payable by REITs generally do not qualify for the reduced tax rates on dividend income from regular
corporations, which could adversely affect the value of our shares.
The maximum U.S. federal income tax rate for certain qualified dividends payable to domestic shareholders that
are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for these
reduced qualified dividend rates. However, for taxable years beginning after December 31, 2017 and before January
1, 2026, under the recently enacted Tax Cuts and Jobs Act ("TCJA"), noncorporate taxpayers may deduct up to 20%
of certain qualified business income, including "qualified REIT dividends" (generally, REIT dividends received by a
shareholder that are not designated as capital gain dividends or qualified dividend income), subject to certain limitations,
resulting in an effective maximum U.S. federal income tax rate of 29.6% on such income. Although the reduced U.S.
federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the
taxation of REITs or dividends paid by REITs, the more favorable rates applicable to qualified dividends from C
corporations could cause investors who are individuals, trusts and estates to perceive investments in REITs to be
relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could
adversely affect the value of the shares of REITs, including our shares.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our assets and operations. Under these provisions,
any income that we generate from transactions intended to hedge our interest rate risk will be excluded from gross
income for purposes of the REIT 75% and 95% gross income tests if (i) the instrument (a) hedges interest rate risk on
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liabilities used to carry or acquire real estate assets or (b) hedges an instrument described in clause (a) for a period
following the extinguishment of the liability or the disposition of the asset that was previously hedged by the hedged
instrument, and (ii) the relevant instrument is properly identified under applicable Treasury regulations. Income from
hedging transactions that does not meet these requirements will generally constitute non-qualifying income for purposes
of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of hedging
techniques that might otherwise be advantageous or implement those hedges through a TRS. This could increase the
cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated
with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will generally not
provide any tax benefit, although, subject to limitation, such losses may be carried back or forward against past or
future taxable income in the TRS. Under the TCJA, net operating losses generated beginning in 2018 may not be used
to offset more than 80% of our TRS's taxable income. Net operating losses generated beginning in 2018 can be carried
forward indefinitely but can no longer be carried back.
The ability of our board of trustees to revoke our REIT election without shareholder approval may cause adverse
consequences to our shareholders.
Our declaration of trust provides that the board of trustees may revoke or otherwise terminate our REIT election,
without the approval of our shareholders, if the board determines that it is no longer in our best interest to attempt to,
or continue to, qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income
tax on our net taxable income and we generally would no longer be required to distribute any of our net taxable income
to our shareholders, which may have adverse consequences on our total return to our shareholders.
Legislative or regulatory tax changes related to REITs could materially and adversely affect our business.
At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations
of those laws or regulations may be changed, possibly with retroactive effect. We cannot predict if or when any new
U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal
income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective or whether
any such law, regulation or interpretation may take effect retroactively. We and our shareholders could be adversely
affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.
The TCJA, which was signed into law on December 22, 2017, significantly changes U.S. federal income tax laws
applicable to businesses and their owners, including REITs and their shareholders, and may lessen the relative
competitive advantage of operating as a REIT rather than as a C corporation. For additional discussion, see "Recent
U.S. Federal Income Tax Legislation".
Risks Related to Our Common Shares and Preferred Shares
Common shares and preferred shares eligible for future sale may have adverse effects on our share price.
Subject to applicable law and the rules of any stock exchange on which our shares may be listed or traded, our
board of trustees, without common shareholder approval, may authorize us to issue additional authorized and unissued
common shares and preferred shares on the terms and for the consideration it deems appropriate and may amend our
declaration of trust to increase the total number of shares, or the number of shares of any class or series, that we are
authorized to issue. In addition, our operating partnership may issue OP units, which are redeemable for cash or, at our
option exchangeable on a one-for-one basis into common shares after an agreed period of time and certain other
conditions, preferred units of limited partnership interest, which are redeemable for cash or, at our option exchangeable
on a one-for-one basis into our 6.000% Series A cumulative redeemable preferred shares of beneficial interest ("Series
A Preferred Shares") and subordinated performance units, which are only convertible into OP units beginning two years
following the initial issuance of the applicable series and then (i) at the holder's election only upon the achievement of
certain performance thresholds relating to the properties to which such subordinated performance units relate or (ii) at
our election upon a retirement event of a PRO that holds such subordinated performance units or upon certain qualifying
terminations. Notwithstanding the two-year lock out period on conversions of subordinated performance units into OP
units, if all such subordinated performance units were convertible into OP units as of December 31, 2018, each
subordinated performance unit would on average hypothetically convert into 1.32 OP units, or into an aggregate of
approximately 20.0 million OP units. These amounts are based on historical financial information for the trailing twelve
months ended December 31, 2018. The hypothetical conversion is calculated by dividing the average cash available
for distribution, or CAD, per subordinated performance unit by 110% of the CAD per OP unit over the same period.
We anticipate that as our CAD grows over time, the conversion ratio will also grow, including to levels that may exceed
this amount. The actual number of OP units into which such subordinated performance units will become convertible
30
may vary significantly and will depend upon the applicable conversion penalty and the actual CAD to the OP units and
the actual CAD to the converted subordinated performance units in the one-year period ending prior to conversion. We
have also granted registration rights to those persons who will be eligible to receive common shares issuable upon
exchange of OP units issued in our formation transactions and certain contribution transactions.
Pursuant to the registration rights agreements, we have filed a shelf registration statement on Form S-3 to register
the offer and resale of the common shares issuable upon exchange of OP units (or securities convertible into or
exchangeable for OP units and we expect to file a shelf registration statement on Form S-3 to register the offer and
resale of the Series A Preferred Shares issuable upon the exchange of our 6.000% Series A-1 cumulative redeemable
preferred units of limiting partnership interest ("Series A-1 preferred units") in the Company's operating partnership).
We have the right to include common shares to be sold for our own account or other holders in the shelf registration
statement. We are required to use all commercially reasonable efforts to keep such shelf registration statement
continuously effective for a period ending when all common shares covered by the shelf registration statement are no
longer Registrable Shares, as defined in the shelf registration statement.
We intend to bear the expenses incident to these registration requirements except that we will not bear the costs
of (i) any underwriting fees, discounts or commissions, (ii) out-of-pocket expenses of the persons exercising the
registration rights or (iii) transfer taxes.
We cannot predict the effect, if any, of future sales of our common or preferred shares or the availability of shares
for future sales, on the market price of our common or preferred shares. The market price of our common shares may
decline significantly when the restrictions on resale by certain of our shareholders lapse. Sales of substantial amounts
of common or preferred shares or the perception that such sales could occur may adversely affect the prevailing market
price for our common shares.
We cannot assure our ability to pay dividends in the future.
Historically, we have paid quarterly common share dividends to our shareholders and quarterly distributions to
our operating partnership unitholders, and we intend to continue to pay quarterly dividends to our shareholders and to
make quarterly distributions to our operating partnership unitholders in amounts such that all or substantially all of our
net taxable income in each year is distributed, which, along with other factors, should enable us to continue to qualify
for the tax benefits accorded to a REIT under the Code. We have not established a minimum dividends payment level,
and all future distributions will be made at the discretion of our board of trustees. Our ability to pay dividends will
depend upon, among other factors:
•
•
•
the operational and financial performance of our properties;
capital expenditures with respect to existing and newly acquired properties;
general and administrative expenses associated with our operation as a publicly-held REIT;
• maintenance of our REIT qualification;
•
•
•
the amount of, and the interest rates on, our debt and the ability to refinance our debt;
the absence of significant expenditures relating to environmental and other regulatory matters; and
other risk factors described in this Annual Report on Form 10-K.
Certain of these matters are beyond our control and any significant difference between our expectations and actual
results could have a material adverse effect on our cash flow and our ability to make distributions to shareholders.
Future offerings of debt or equity securities, which may rank senior to our common shares, may adversely affect
the market price of our common shares.
If we decide to issue debt securities in the future, which would rank senior to our common shares, it is likely that
they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility.
Additionally, any equity securities or convertible or exchangeable securities that we issue in the future may have rights,
preferences and privileges more favorable than those of our common shares and may result in dilution to owners of
our common shares. We and, indirectly, our shareholders will bear the cost of issuing and servicing such securities.
Because our decision to issue debt or equity securities in any future offering will depend on market conditions and
other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.
31
Thus, holders of our common shares will bear the risk of our future offerings reducing the market price of our common
shares and diluting the value of their share holdings in us.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2018, we held ownership interests in and operated a geographically diversified portfolio of
675 self storage properties, located in 34 states and Puerto Rico, comprising approximately 43.0 million rentable square
feet, configured in approximately 345,000 storage units. Of these properties, we consolidated 499 self storage properties
that contain approximately 30.4 million rentable square feet and we held a 25% ownership interest in 176 unconsolidated
real estate venture properties that contain approximately 12.6 million rentable square feet.
The following table sets forth summary information regarding our consolidated properties by state as of
December 31, 2018.
State/Territory
California(1)
Texas
Oregon
Georgia
Florida
North Carolina
Oklahoma
Arizona
Indiana
Kansas
Washington
Louisiana(1)
Nevada
Colorado
New Hampshire
Ohio
Missouri
Puerto Rico
Illinois
South Carolina
Maryland
Mississippi
New Mexico
Alabama
Massachusetts
Virginia
Kentucky
Total/Weighted Average
Number of
Properties
Number of
Units
Rentable
Square Feet
% of Rentable
Square Feet
Period-end
Occupancy
83
60
60
34
34
33
30
29
16
16
15
14
13
11
10
8
7
6
4
4
3
3
2
1
1
1
1
499
49,569
24,150
24,298
14,062
23,490
15,394
13,875
16,062
8,790
5,737
4,950
6,323
6,606
5,054
4,186
3,572
3,008
4,459
1,991
1,212
1,659
864
1,154
762
284
598
380
242,489
6,226,522
3,417,208
3,076,899
1,897,977
2,355,949
1,885,559
1,902,947
1,825,563
1,135,080
762,949
623,996
858,719
836,616
615,463
509,720
454,168
386,991
431,612
270,936
147,580
176,962
114,311
155,125
110,616
42,650
82,495
60,950
30,365,563
20.4 %
11.3 %
10.0 %
6.3 %
7.8 %
6.2 %
6.3 %
6.0 %
3.7 %
2.5 %
2.1 %
2.8 %
2.8 %
2.0 %
1.7 %
1.5 %
1.3 %
1.4 %
0.9 %
0.5 %
0.6 %
0.4 %
0.5 %
0.4 %
0.1 %
0.3 %
0.2 %
100.0%
89.2 %
88.0 %
82.5 %
87.0 %
86.1 %
91.8 %
85.1 %
85.9 %
88.8 %
82.8 %
83.9 %
83.0 %
91.8 %
86.8 %
92.7 %
88.9 %
74.5 %
88.8 %
86.6 %
91.6 %
93.1 %
87.1 %
88.5 %
85.2 %
95.1 %
82.0 %
90.7 %
87.1%
(1) Five of the California properties and one of the Louisiana properties are subject to non-cancelable leasehold interest agreements that are classified as operating leases. See
"Note 12. Commitments and Contingencies" in Item 8. "Financial Statements and Supplementary Data."
32
The following table sets forth summary information regarding our unconsolidated real estate venture properties
by state as of December 31, 2018.
State
Florida
Michigan
New Jersey
Alabama
Ohio
Georgia
California
Other(1)
Total
Number of
Properties
Number of
Units
Rentable
Square Feet
% of Rentable
Square Feet
Period-end
Occupancy
27
24
15
14
14
11
10
61
176
15,096
15,483
10,519
5,573
8,778
6,149
6,201
35,175
102,974
1,715,596
1,963,048
1,225,270
830,036
1,064,246
872,308
754,000
4,190,622
12,615,126
13.6 %
15.6 %
9.7 %
6.6 %
8.4 %
6.9 %
6.0 %
33.2 %
100.0%
84.8 %
87.5 %
89.8 %
88.7 %
87.6 %
89.1 %
89.3 %
84.4 %
86.7%
(1) Other states in the unconsolidated real estate ventures include Arizona, Delaware, Illinois, Massachusetts, Minnesota, Mississippi, Nevada,
New Mexico, New York, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Texas and Virginia.
Our portfolio consists of self storage properties that are designed to offer customers convenient, affordable, and
secure storage units. Generally, our properties are in highly visible locations clustered in states or markets with strong
population and job growth and are specifically designed to accommodate residential and commercial tenants with
features such as security systems, electronic gate entry, easy access, climate control, and pest control. Our units typically
range from 25 square feet to 300 square feet, and some of our properties also offer outside storage for vehicles, boats,
and equipment. We provide 24-hour access to many storage units through computer controlled access systems, as well
as alarm and sprinkler systems on many of our individual storage units. Almost all of the storage units in our portfolio
are leased on a month-to-month basis providing us the flexibility to increase rental rates over time as market conditions
permit. Additional information on our consolidated self storage properties is contained in "Schedule III - Real Estate
and Accumulated Depreciation" in this Annual Report on Form 10-K.
Item 3. Legal Proceedings
We are not currently subject to any legal proceedings that we consider to be material.
Item 4. Mine Safety Disclosures
Not applicable.
33
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
PART II
Equity Securities
Market Information
Our common shares have been listed and traded on the NYSE under the symbol "NSA" since April 22, 2015. Prior
to that time there was no public market for our common shares.
Holders
As of February 25, 2019, the Company had 66 record holders of its common shares. The 66 holders of record do
not include the beneficial owners of common shares whose shares are held by a broker or bank. Such information was
obtained from our transfer agent and registrar.
Dividends
Since our initial quarter as a publicly-traded REIT, we have made regular quarterly distributions to our
shareholders. Holders of common shares are entitled to receive distributions when declared by our board of trustees
out of any assets legally available for that purpose. In order to maintain our status as a REIT, we are required to distribute
at least 90% of our "REIT taxable income," which is generally equivalent to our net taxable ordinary income, determined
without regard to the deduction for dividends paid and excluding net capital gains to our shareholders annually in order
to maintain our REIT qualification for U.S. federal income tax purposes.
Common share dividends are characterized for U.S. federal income tax purposes as ordinary income, capital gains,
return of capital or a combination thereof. Each year we communicate to shareholders the tax characterization of the
common share dividends paid during the preceding year. Our tax return for the year ended December 31, 2018 has not
yet been filed and consequently, the taxability information presented for our dividends paid in 2018 is based upon
management's estimate. The following table summarizes the taxability of our dividends per common share for the year
ended December 31, 2018:
Ordinary Income
Return of Capital
Total
Equity Compensation Plan Information
Year Ended
December 31, 2018
$
$
$
0.799267
0.360733
1.160000
68.9%
31.1%
100.0%
Information about our equity compensation plans is incorporated by reference to Item 12 of Part III of this Annual
Report on Form 10-K.
Unregistered Sales of Equity Securities
During the three months ended December 31, 2018, the Company, in its capacity as general partner of its operating
partnership, caused the operating partnership to issue 98,430 common shares to satisfy redemption requests from certain
limited partners.
As of February 25, 2019, other than those OP units held by the Company, 32,560,314 OP units were outstanding
(including 945,770 outstanding Long-Term Incentive Plan Units ("LTIP units") and 1,848,261 outstanding OP units in
certain consolidated subsidiaries of the operating partnership ("DownREIT OP units"), which are convertible into, or
exchangeable for, OP units on a one-for-one basis, subject to certain conditions).
These issuances were exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.
34
Performance Graph
The following chart compares the yearly cumulative total shareholder return for our common shares with the
cumulative shareholder return of companies on (i) the S&P 500 Index, (ii) the Russell 2000 and (iii) the Nareit All
Equity REIT Index as provided by Nareit for the period beginning April 23, 2015 and ending December 31, 2018.
Index
4/23/2015
12/31/2015
Period Ending
12/31/2016
12/31/2017
12/31/2018
National Storage Affiliates Trust
$
S&P 500
Russell 2000
Nareit All Equity REIT Index
100
100
100
100
$
137
$
98
91
101
$
184
110
109
109
$
238
134
126
119
240
128
112
114
The foregoing item assumes $100.00 invested on April 23, 2015, with dividends reinvested. The Performance
Graph will not be deemed to be incorporated by reference into any filing by NSA under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, except to the extent that NSA specifically incorporates
the same by reference.
35
Item 6. Selected Financial Data
The following table sets forth our selected historical financial and operating data as of and for the periods indicated.
You should read the information below in conjunction with the financial statements and notes thereto included in Item 8.
"Financial Statements and Supplementary Data" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this Annual Report on Form 10-K or in previous filings with the SEC. Dollars
in the following table are in thousands, except per share amounts.
$
$
$
$
—
—
—
1
1
—
799,327
832,746
597,691
OPERATING DATA:
Total revenue
Total operating expenses
Income from operations
Net income (loss)
Net (income) loss attributable to
noncontrolling interests(1)
Net income (loss) attributable to the
Company
Earnings (loss) per share—basic
Earnings (loss) per share—diluted
Weighted average shares outstanding
—basic (in thousands)
Weighted average shares outstanding
—diluted (in thousands)
Dividends declared per common
$
$
$
2018
330,896
229,242
101,654
56,326
Year Ended December 31,
2016
2015
2017
$
268,130
189,630
78,500
45,998
$
199,046
141,390
57,656
24,866
$
133,919
102,328
31,591
4,796
$
2014
76,970
59,887
17,083
(16,357)
(42,217)
(43,037)
(6,901)
7,644
16,357
14,109
0.07
0.07
$
$
2,961
0.01
0.01
17,965
12,440
$
$
0.60
0.31
$
$
0.80
0.17
53,293
44,423
29,887
15,463
53,293
44,423
78,747
45,409
share
$
1.16
$
1.04
$
0.88
$
0.54
BALANCE SHEET DATA (at end of period)
Self storage properties, net
$ 2,391,462
$ 2,104,875
$ 1,733,533
$ 1,079,101
Total assets
Debt financing
2,729,263
1,278,102
2,266,730
1,892,092
1,099,049
958,097
878,954
567,795
Total equity (deficit)
OTHER DATA (at end of period)
Number of properties(2)
Rentable square feet (in thousands)(3)
Occupancy percentage(4)
$ 1,402,299
$ 1,271,487
$
979,068
$
516,047
$
214,104
499
30,366
444
27,182
382
23,077
277
15,770
219
12,067
87%
87%
88%
89%
85%
(1) While we control our operating partnership, we did not have an ownership interest or share in our operating partnership's profits and losses
prior to the completion of our initial public offering. As a result, all of our operating partnership's profits and losses for the year ended December
31, 2014 were allocated to owners other than us.
(2) For a discussion of our acquisition and disposition activity during the years ended December 31, 2018 and 2017, see "Note 6. Self Storage
Property Acquisitions and Dispositions" in Item 8. "Financial Statements and Supplementary Data."
(3) Rentable square feet includes all enclosed self storage units but excludes commercial, residential, and covered parking space.
(4) Represents total occupied rentable square feet divided by total rentable square feet as of the end of the period.
36
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in
conjunction with the financial statements and notes thereto included in Item 8. "Financial Statements and Supplementary
Data" as well as Item 1. "Business," Item 1A. "Risk Factors," and Item 2. "Properties," respectively, in this Annual
Report on Form 10-K.
Overview
National Storage Affiliates Trust is a fully integrated, self-administered and self-managed real estate investment
trust organized in the state of Maryland on May 16, 2013. We have elected and we believe that we have qualified to
be taxed as a REIT commencing with our taxable year ended December 31, 2015. We serve as the sole general partner
of our operating partnership, a Delaware limited partnership formed on February 13, 2013 to conduct our business,
which is focused on the ownership, operation, and acquisition of self storage properties located within the top 100 MSAs
throughout the United States.
Our Structure
Our structure promotes operator accountability as subordinated performance units issued to our PROs in exchange
for the contribution of their properties are entitled to distributions only after those properties satisfy minimum
performance thresholds. In the event of a material reduction in operating cash flow, distributions on our subordinated
performance units will be reduced before or disproportionately to distributions on our common shares held by our
common shareholders. In addition, we expect our PROs will generally co-invest subordinated equity in the form of
subordinated performance units in each acquisition that they source, and the value of these subordinated performance
units will fluctuate with the performance of their managed portfolios. Therefore, our PROs are incentivized to select
acquisitions that are expected to exceed minimum performance thresholds, thereby increasing the value of their
subordinated equity stake. We expect that our shareholders will benefit from the higher levels of property performance
that our PROs are incentivized to deliver.
Our PROs
We had eight PROs as of December 31, 2018: SecurCare, Northwest, Optivest, Guardian, Move It, Storage
Solutions, Hide Away and Personal Mini. In January 2019, we completed the initial contribution transaction with
Southern to add Southern as our ninth PRO. In addition, in February 2019, we entered into definitive agreements to
add Moove In as our tenth PRO. We expect the initial contribution transaction and related closing documentation with
Moove In, including the entry into a facilities portfolio management agreement, to close during the first quarter of
2019, subject to customary closing conditions.
We seek to further expand our platform by continuing to recruit additional established self storage operators, while
integrating our operations through the implementation of centralized initiatives, including management information
systems, revenue enhancement, and cost optimization programs. Our national platform allows us to capture cost savings
by eliminating redundancies and utilizing economies of scale across the property management platforms of our PROs
while also providing greater access to lower-cost capital.
Our Consolidated Properties
We seek to own properties that are well located in high quality sub-markets with highly accessible street access
and attractive supply and demand characteristics, providing our properties with strong and stable cash flows that are
less sensitive to the fluctuations of the general economy. Many of these markets have multiple barriers to entry against
increased supply, including zoning restrictions against new construction and new construction costs that we believe
are higher than our properties' fair market value.
As of December 31, 2018, we owned a geographically diversified portfolio of 499 self storage properties, located
in 26 states and Puerto Rico, comprising approximately 30.4 million rentable square feet, configured in approximately
242,000 storage units. Of these properties, 247 were acquired by us from our PROs and 252 were acquired by us from
third-party sellers.
Our Unconsolidated Real Estate Ventures
We seek to opportunistically partner with institutional funds and other institutional investors to acquire attractive
portfolios utilizing a promoted return structure. We believe there is significant opportunity for continued external growth
by partnering with institutional investors seeking to deploy capital in the self storage industry.
37
2018 Joint Venture
During the year ended December 31, 2018, we formed the 2018 Joint Venture, in which we have a 25% ownership
interest, with an affiliate of Heitman America Real Estate REIT LLC. In September 2018, the 2018 Joint Venture
completed the acquisition of a Portfolio of 112 self storage properties located across 17 states and Puerto Rico, consisting
of approximately 8.2 million rentable square feet configured in over 68,000 storage units for an aggregate purchase
price of approximately $1.325 billion.
Immediately following the closing of the acquisition, the 2018 Joint Venture distributed the six self storage
properties located in Puerto Rico and a single self storage property located in Ohio included in the Portfolio to us in
exchange for a $64.2 million cash contribution from us. In addition, two of the properties acquired in the Portfolio were
combined with other properties for operational efficiency. As of December 31, 2018, our 2018 Joint Venture owned
and operated a portfolio of 103 properties containing approximately 7.6 million rentable square feet, configured in
approximately 63,000 storage units and located across 17 states.
2016 Joint Venture
As of December 31, 2018, our 2016 Joint Venture, in which we have a 25% ownership interest, owned and operated
a portfolio of 73 properties containing approximately 4.9 million rentable square feet, configured in approximately
40,000 storage units and located across 14 states.
During the year ended December 31, 2018, our 2016 Joint Venture acquired three self storage properties and an
expansion project at an existing property for $28.5 million, comprising approximately 0.2 million rentable square feet,
configured in approximately 1,300 storage units. During the year ended December 31, 2018, our 2016 Joint Venture
sold to an unrelated third party one self storage property for $9.3 million, comprising approximately 0.2 million rentable
square feet, configured in approximately 800 storage units.
Our Property Management Platform
Through our property management platform, we direct, manage and control the day-to-day operations and affairs
of certain consolidated properties and our unconsolidated real estate ventures. We earn certain customary fees for
managing and operating the properties in the unconsolidated real estate ventures and we facilitate tenant insurance and/
or tenant warranty protection programs for tenants at these properties in exchange for half of all proceeds from such
programs.
As of December 31, 2018, our property management platform managed and controlled 39 of our consolidated
properties in select markets in California, Illinois, Kansas, Maryland, Missouri, Ohio, Virginia and Puerto Rico. In
January 2019, Southern began managing our six properties located in Puerto Rico.
Results of Operations
When reviewing our results of operations it is important to consider the timing of acquisition activity. We acquired
57 self storage properties during the year ended December 31, 2018 and 65 self storage properties during the year ended
December 31, 2017. As a result of these and other factors, we do not believe that our historical results of operations
discussed and analyzed below are comparable or necessarily indicative of our future results of operations or cash flows.
To help analyze the operating performance of our self storage properties, we also discuss and analyze operating
results relating to our same store portfolio. Our same store portfolio is defined as those properties owned and operated
since the first day of the earliest year presented, excluding any properties sold, expected to be sold or subject to significant
changes such as expansions or casualty events which cause the portfolio's year-over-year operating results to no longer
be comparable.
The following discussion and analysis of the results of our operations and financial condition should be read in
conjunction with the accompanying consolidated financial statements in Item 8. Certain figures, such as interest rates
and other percentages, included in this section have been rounded for ease of presentation. Percentage figures included
in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts
prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing
the same calculations using the figures in our consolidated financial statements or in the associated text. Certain other
amounts that appear in this section may similarly not sum due to rounding.
38
Year Ended December 31, 2018 compared to the Year Ended December 31, 2017
Net income was $56.3 million for the year ended December 31, 2018, compared to $46.0 million for the year ended
December 31, 2017, an increase of $10.3 million. The increase was primarily due to an increase in net operating income
("NOI") resulting from self storage properties acquired during 2017 and 2018, increases in management fees and other
revenue, partially offset by increases in depreciation and amortization, interest expense and general and administrative
expenses. For a description of NOI, see "Non-GAAP Financial measures – NOI".
Overview
As of December 31, 2018, our same store portfolio consisted of 376 self storage properties. See "---Results of
Operations" above for the definition of our same store portfolio. The following table illustrates the changes in rental
revenue, other property-related revenue, management fees and other revenue, property operating expenses, and other
expenses for the year ended December 31, 2018 compared to the year ended December 31, 2017 (dollars in thousands):
Year Ended December 31,
2017
2018
Change
Rental revenue
Same store portfolio
Non-same store portfolio
Total rental revenue
Other property-related revenue
Same store portfolio
Non-same store portfolio
Total other property-related revenue
Property operating expenses
Same store portfolio
Non-same store portfolio
Total property operating expenses
Net operating income
Same store portfolio
Non-same store portfolio
Total net operating income
Management fees and other revenue
General and administrative expenses
Depreciation and amortization
Income from operations
Other (expense) income
Interest expense
Equity in losses of unconsolidated real estate ventures
Acquisition costs
Non-operating expense
Gain on sale of self storage properties
Other expense
Income before income taxes
Income tax expense
Net income
Net income attributable to noncontrolling interests
Net income attributable to National Storage
Affiliates Trust
Distributions to preferred shareholders
39
$
$
243,781
64,622
308,403
$
234,321
17,493
251,814
8,030
2,153
10,183
79,591
24,284
103,875
172,220
42,491
214,711
12,310
(36,220)
(89,147)
101,654
(42,724)
(1,423)
(663)
(91)
391
(44,510)
57,144
(818)
56,326
(42,217)
14,109
(10,350)
7,753
502
8,255
77,576
6,879
84,455
164,498
11,116
175,614
8,061
(30,060)
(75,115)
78,500
(34,068)
(2,339)
(593)
(58)
5,715
(31,343)
47,157
(1,159)
45,998
(43,037)
2,961
(2,300)
9,460
47,129
56,589
277
1,651
1,928
2,015
17,405
19,420
7,722
31,375
39,097
4,249
(6,160)
(14,032)
23,154
(8,656)
916
(70)
(33)
(5,324)
(13,167)
9,987
341
10,328
820
11,148
(8,050)
Year Ended December 31,
2017
2018
Change
Net income attributable common shareholders
$
3,759
$
661
$
3,098
Total Revenue
Our total revenue increased by $62.8 million, or 23.4%, for the year ended December 31, 2018, as compared to
the year ended December 31, 2017. This increase was primarily attributable to incremental rental revenue from self
storage properties acquired during 2017 and 2018, regular rental increases for in-place tenants, and management fees
and other revenue earned from our unconsolidated real estate ventures, partially offset by a decrease in average total
portfolio occupancy from 88.9% to 88.3%. Average occupancy is calculated based on the average of the month-end
occupancy immediately preceding the period presented and the month-end occupancies included in the respective
period presented.
Rental Revenue
Rental revenue increased by $56.6 million, or 22.5%, for the year ended December 31, 2018, as compared to the
year ended December 31, 2017. The increase in rental revenue was due to a $47.1 million increase in non-same store
rental revenue which was primarily attributable to incremental rental revenue of $21.3 million from 57 self storage
properties acquired during 2018, and $26.9 million from 65 self storage properties acquired during 2017. Same store
portfolio rental revenues increased $9.5 million, or 4.0%, due to a 4.1% increase, from $11.55 to $12.02, in same store
rental revenue divided by average occupied square feet ("rental revenue per occupied square foot"), driven primarily
by increased contractual lease rates for in-place tenants and fees.
Other Property-Related Revenue
Other property-related revenue represents ancillary income from our self storage properties, such as tenant
insurance-related access fees and sales of storage supplies. Other property-related revenue increased by $1.9 million,
or 23.4%, for the year ended December 31, 2018, as compared to the year ended December 31, 2017. This increase
primarily resulted from a $1.7 million increase in non-same store other property-related revenue which was attributable
to incremental other property-related revenue of $0.6 million from 57 self storage properties acquired during 2018, and
$1.1 million from 65 self storage properties acquired during 2017.
Management Fees and Other Revenue
Management and other fees, which are primarily related to managing and operating our unconsolidated real estate
ventures, were $12.3 million for the year ended December 31, 2018, compared to $8.1 million for the year ended
December 31, 2017, an increase of $4.2 million, or 52.7%. This increase was primarily attributable to incremental fees
earned from the 2018 Joint Venture following the acquisition of the 2018 Joint Venture portfolio in September 2018.
Total Operating Expenses
Total operating expenses increased $39.6 million, or 20.9%, for the year ended December 31, 2018, compared to
the year ended December 31, 2017. As discussed below, this change was primarily due to an increase of $19.4 million
in property operating expenses, $6.2 million in general and administrative expenses, and $14.0 million in depreciation
and amortization.
Property Operating Expenses
Property operating expenses increased $19.4 million, or 23.0%, for the year ended December 31, 2018 compared
to the year ended December 31, 2017. This increase resulted from a $17.4 million increase in non-same store property
operating expenses primarily attributable to incremental property operating expenses of $7.4 million from 57 self
storage properties acquired during 2018, and $10.6 million from 65 self storage properties acquired during 2017. In
addition, same store portfolio property operating expenses increased $2.0 million, or 2.6%, due to increases in property
taxes, personnel expenses and repairs and maintenance expenses.
General and Administrative Expenses
General and administrative expenses increased $6.2 million, or 20.5%, for the year ended December 31, 2018,
compared to the year ended December 31, 2017. This increase was attributable to increases in supervisory and
administrative fees charged by our PROs of $2.5 million primarily as a result of incremental fees related to the self
40
storage properties we acquired in 2018 and 2017, payroll and related costs of $2.3 million, of which $1.0 million is
directly related to our property management platform and other general and administrative expenses of $1.4 million.
Depreciation and Amortization
Depreciation and amortization increased $14.0 million, or 18.7%, for the year ended December 31, 2018, compared
to the year ended December 31, 2017. The increase was primarily attributable to incremental depreciation expense
related to the self storage properties we acquired in 2018 and 2017. This increase was partially offset by a $1.9 million
decrease in amortization of customer in-place leases from $13.5 million for the year ended December 31, 2017 to
$11.6 million for the year ended December 31, 2018.
Interest Expense
Interest expense increased $8.7 million, or 25.4%, for the year ended December 31, 2018, compared to the year
ended December 31, 2017. The increase in interest expense was primarily due to higher outstanding borrowings under
the Revolver, higher interest rates on variable-rate debt, $275.0 million of additional term loan borrowings during
the year ended December 31, 2018 and an $84.9 million secured debt financing we entered into during August 2017.
Equity In Losses Of Unconsolidated Real Estate Venture
Equity in losses of unconsolidated real estate venture represents our share of earnings and losses earned through
our 25% ownership interests in the 2018 Joint Venture and the 2016 Joint Venture. During the year ended December
31, 2018, we recorded $1.4 million of equity in losses from our unconsolidated real estate ventures compared to $2.3
million of equity in losses for the year ended December 31, 2017. This was primarily the result of decreases in
amortization of customer in-place leases recorded by our 2016 Joint Venture during the year ended December 31,
2018 compared to the year ended December 31, 2017, offset by incremental losses from our 2018 Joint Venture following
its formation in September 2018.
Gain On Sale of Self Storage Properties
Gain on sale of self storage properties was $0.4 million for the year ended December 31, 2018, compared to $5.7
million for the year ended December 31, 2017. During the year ended December 31, 2018, we sold two self storage
properties to unrelated third parties for gross proceeds of $5.5 million and during the year ended December 31, 2017,
we sold three self storage properties and improved land adjacent to self storage properties for gross proceeds of $17.8
million.
Income Tax Expense
Income tax expense decreased $0.3 million, or 29.4%, for the year ended December 31, 2018, compared to the
year ended December 31, 2017. The decrease in income tax expense was primarily due to decreases in our tax provision
for our TRS, partially offset by increases in certain state and local taxes related to growth in our portfolio.
Net Income Attributable to Noncontrolling Interests
As discussed in Note 2 to the consolidated financial statements in Item 8, we allocate U.S. generally accepted
accounting principles ("GAAP") income (loss) utilizing the hypothetical liquidation at book value ("HLBV") method,
in which we allocate income or loss based on the change in each unitholders' claim on the net assets of our operating
partnership at period end after adjusting for any distributions or contributions made during such period.
Due to the stated liquidation priorities and because the HLBV method incorporates non-cash items such as
depreciation expense, in any given period, income or loss may be allocated disproportionately to noncontrolling interests.
Net income attributable to noncontrolling interests was $14.1 million for the year ended December 31, 2018, compared
to $3.0 million for the year ended December 31, 2017.
Distributions to Preferred Shareholders
During the year ended December 31, 2018, we paid $10.4 million of distributions to our preferred shareholders,
compared to $2.3 million during the year ended December 31, 2017. These amounts represent quarterly distributions
paid to the holders of our Series A Preferred Shares, which we issued in October 2017.
41
Year Ended December 31, 2017 compared to the Year Ended December 31, 2016
Net income was $46.0 million for the year ended December 31, 2017, compared to $24.9 million for the year
ended December 31, 2016, an increase of $21.1 million. The increase was primarily due to an increase in NOI resulting
from self storage properties acquired during 2016 and 2017, increases in management fees and other revenue, gains
from the sale of self storage properties and decreases in acquisition costs, partially offset by increases in depreciation
and amortization, interest expense and general and administrative expenses.
Overview
As of December 31, 2017, our same store portfolio consisted of 277 self storage properties which consists of only those
properties that were included in our consolidated financial statements since January 1, 2016. See "---Results of
Operations" above for the definition of our same store portfolio. The following table illustrates the changes in rental
revenue, other property-related revenue, management fees and other revenue, property operating expenses, and other
expenses for the year ended December 31, 2017 compared to the year ended December 31, 2016 (dollars in thousands):
Year Ended December 31,
2016
2017
Change
Rental revenue
Same store portfolio
Non-same store portfolio
Total rental revenue
Other property-related revenue
Same store portfolio
Non-same store portfolio
Total other property-related revenue
Property operating expenses
Same store portfolio
Non-same store portfolio
Total property operating expenses
Net operating income
Same store portfolio
Non-same store portfolio
Total net operating income
Management fees and other revenues
General and administrative expenses
Depreciation and amortization
Income from operations
Other (expense) income
Interest expense
Loss on early extinguishment of debt
Equity in losses of unconsolidated real estate venture
Acquisition costs
Non-operating expense
Gain on sale of self storage properties
Other expense
Income before income taxes
Income tax expense
Net income
Net income attributable to noncontrolling interests
Net income attributable to National Storage
Affiliates Trust
$
$
165,858
85,956
251,814
$
157,097
34,081
191,178
5,468
2,787
8,255
53,045
31,410
84,455
118,281
57,333
175,614
8,061
(30,060)
(75,115)
78,500
(34,068)
—
(2,339)
(593)
(58)
5,715
(31,343)
47,157
(1,159)
45,998
(43,037)
5,012
1,047
6,059
52,034
12,764
64,798
110,075
22,364
132,439
1,809
(21,528)
(55,064)
57,656
(24,109)
(136)
(1,484)
(6,546)
(147)
—
(32,422)
25,234
(368)
24,866
(6,901)
8,761
51,875
60,636
456
1,740
2,196
1,011
18,646
19,657
8,206
34,969
43,175
6,252
(8,532)
(20,051)
20,844
(9,959)
136
(855)
5,953
89
5,715
1,079
21,923
(791)
21,132
(36,136)
$
2,961
$
17,965
(15,004)
42
Distributions to preferred shareholders
Net income attributable to common shareholders
$
$
(2,300) $
$
661
— $
$
17,965
(2,300)
(17,304)
Total Revenue
Our total revenue increased by $69.1 million, or 34.7%, for the year ended December 31, 2017, as compared to
the year ended December 31, 2016. This increase was primarily attributable to incremental rental revenue from self
storage properties acquired during 2016 and 2017, regular rental increases for in-place tenants, and management fees
and other revenue earned from our Joint Venture, partially offset by a decrease in average total portfolio occupancy
from 89.7% to 88.9%. Average occupancy is calculated based on the average of the month-end occupancy immediately
preceding the period presented and the month-end occupancies included in the respective period presented.
Rental Revenue
Rental revenue increased by $60.6 million, or 31.7%, for the year ended December 31, 2017, as compared to
the year ended December 31, 2016. The increase in rental revenue was due to a $51.9 million increase in non-same
store rental revenue which was primarily attributable to incremental rental revenue of $15.1 million from 65 self storage
properties acquired during 2017, and $36.7 million from 107 self storage properties acquired during 2016. Same store
portfolio rental revenues increased $8.8 million, or 5.6%, due to a 5.8% increase, from $11.02 to $11.66, in same store
rental revenue per occupied square foot, driven primarily by increased contractual lease rates and fees.
Other Property-Related Revenue
Other property-related revenue represents ancillary income from our self storage properties, such as tenant
insurance-related access fees and sales of storage supplies. Other property-related revenue increased by $2.2 million,
or 36.2%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016.
This increase resulted from a $1.7 million increase in non-same store other property-related revenue which was
primarily attributable to incremental other property-related revenue of $0.4 million from 65 self storage properties
acquired during 2017, and $1.3 million from 107 self storage properties acquired during 2016.
Management Fees and Other Revenue
Management fees and other revenue increased by $6.3 million, for the year ended December 31, 2017, as compared
to the year ended December 31, 2016. The increase primarily resulted from a full year's worth of management and
other fees for managing and operating the 2016 Joint Venture, which began its operations on October 4, 2016. The 2016
Joint Venture pays certain customary fees to us for managing and operating the 2016 Joint Venture properties, including
property management fees, call center fees, platform fees and acquisition fees.
Total Operating Expenses
Total operating expenses increased $48.2 million, or 34.1%, for the year ended December 31, 2017, compared to
the year ended December 31, 2016. As discussed below, this change was primarily due to an increase of $19.7 million in
property operating expenses (which included $0.2 million of clean-up costs from hurricanes Harvey and Irma), $8.5
million in general and administrative expenses, and $20.1 million in depreciation and amortization.
Property Operating Expenses
Property operating expenses increased $19.7 million, or 30.3%, for the year ended December 31, 2017 compared
to the year ended December 31, 2016. This increase resulted from a $18.6 million increase in non-same store property
operating expenses primarily attributable to incremental property operating expenses of $5.7 million from 65 self
storage properties acquired during 2017, and $12.9 million from 107 self storage properties acquired during 2016. In
addition, same store portfolio property operating expenses increased $1.0 million, or 1.9%, due to increases in property
taxes and repairs and maintenance expenses.
General and Administrative Expenses
General and administrative expenses increased $8.5 million, or 39.6%, for the year ended December 31, 2017,
compared to the year ended December 31, 2016. This increase was attributable to increases in supervisory and
administrative fees charged by our PROs of $3.4 million primarily as a result of incremental fees related to the self
storage properties we acquired in 2016 and 2017, costs related to our property management platform of $2.7 million,
salaries and benefits of $1.2 million and equity-based compensation expense of $1.2 million.
43
Depreciation and Amortization
Depreciation and amortization increased $20.1 million, or 36.4%, for the year ended December 31, 2017, compared
to the year ended December 31, 2016. This increase was attributable to incremental depreciation expense related to the
self storage properties we acquired in 2016 and 2017. In addition, amortization of customer in-place leases increased
$1.5 million from $12.0 million for the year ended December 31, 2016 to $13.5 million for the year ended December
31, 2017.
Interest Expense
Interest expense increased $10.0 million, or 41.3%, for the year ended December 31, 2017, compared to the year
ended December 31, 2016. The increase in interest expense was primarily due to higher interest rates on the Revolver,
the new Term Loan C borrowing during February 2017, a new $84.9 million secured debt financing we entered into
during August 2017 and a $0.5 million decrease in amortization of debt premiums.
Loss On Early Extinguishment of Debt
Loss on early extinguishment of debt decreased $0.1 million for the year ended December 31, 2017, compared to
the year ended December 31, 2016. During the year ended December 31, 2016, in connection with an amendment to
our credit facility, one of the lenders that was included in the syndicated group of lenders prior to the amendment is no
longer a participating lender following the amendment, which constitutes an extinguishment of debt for accounting
purposes. As a result, we wrote off $0.1 million of unamortized debt issuance costs, which is the amount attributed to
the lender no longer included in the lending syndicate.
Equity In Losses Of Unconsolidated Real Estate Ventures
During the year ended December 31, 2017, we recorded $2.3 million of equity in losses from our 2016 Joint Venture
compared to $1.5 million for the year ended December 31, 2016. The increase of $0.9 million of equity in losses can
be attributed to a full year's worth of operations at the 2016 Joint Venture. Equity in losses of unconsolidated real estate
venture represents our share of earnings and losses earned through our 25% ownership interest in the 2016 Joint Venture.
The 2016 Joint Venture recorded net losses of $9.4 million during the year ended December 31, 2017, primarily due
to NOI of $36.3 million, offset by $29.2 million of depreciation and amortization, $11.4 million of interest expense
and $5.1 million of supervisory, administrative, acquisition and other expenses. The 2016 Joint Venture recorded net
losses of $5.9 million during the year ended year ended December 31, 2016, primarily due to NOI of $8.3 million,
offset by $6.2 million of depreciation and amortization, $4.3 million of other expenses, primarily consisting of
acquisition costs associated with the acquisition of the 2016 Joint Venture portfolio, $2.8 million of interest expense
and $0.9 million of supervisory, administrative and other expenses.
Acquisition Costs
Acquisition costs decreased $6.0 million, or 90.9%, for the year ended December 31, 2017, compared to the year
ended December 31, 2016. This decrease was due to a reduction in the number of properties acquired and the adoption
of ASU 2017-01 during the year ended December 31, 2017. As a result of the adoption of ASU 2017-01, the self storage
properties acquired during the year ended December 31, 2017 were accounted for as asset acquisitions, and
accordingly, $3.6 million of acquisition costs related to the self storage property acquisitions during the year ended
December 31, 2017 were capitalized as part of the basis of the acquired properties.
Gain On Sale of Self Storage Properties
Gain on sale of self storage properties increased $5.7 million for the year ended December 31, 2017, compared to
the year ended December 31, 2016. This increase resulted from the sale of three self storage properties and improved
land adjacent to self storage properties during the year ended December 31, 2017 for gross proceeds of $17.8 million.
Income Tax Expense
Income tax expense increased $0.8 million, or 214.9%, for the year ended December 31, 2017, compared to the year
ended December 31, 2016. The increase in income tax expense was primarily related to growth in the Company's
portfolio contributing to increases in certain state and local taxes that are considered income-based taxes and increases
in the Company's tax provision for its TRS, through which the Company provides management and other services to
the 2016 Joint Venture as well as other activities.
44
Net Income Attributable to Noncontrolling Interests
As discussed in Note 2 to the consolidated financial statements in Item 8, we allocate GAAP income (loss)
utilizing the HLBV method, in which we allocate income or loss based on the change in each unitholders' claim on
the net assets of our operating partnership at period end after adjusting for any distributions or contributions made
during such period.
Due to the stated liquidation priorities and because the HLBV method incorporates non-cash items such as
depreciation expense, in any given period, income or loss may be allocated disproportionately to noncontrolling
interests. Net income attributable to noncontrolling interests was $43.0 million for the year ended December 31,
2017, compared to $6.9 million for the year ended December 31, 2016.
Distributions to Preferred Shareholders
During the year ended December 31, 2017, we paid $2.3 million of distributions to our preferred shareholders,
which represents a prorated quarterly distribution resulting from the issuance of our Series A Preferred Shares on
October 11, 2017.
Critical Accounting Policies and Use of Estimates
Our financial statements have been prepared on the accrual basis of accounting in accordance with GAAP. The
preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates
and assumptions, including those that impact our most critical accounting policies. We base our estimates and
assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances.
Actual results may differ from these estimates. We believe the following are our most critical accounting policies.
Principles of Consolidation and Presentation of Noncontrolling Interests
Our consolidated financial statements include the accounts of our operating partnership and its controlled
subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidation of entities.
The limited partner ownership interests in our operating partnership that are held by owners other than us are
referred to as noncontrolling interests. Noncontrolling interests also include ownership interests in DownREIT
partnerships held by entities other than our operating partnership. Noncontrolling interests in a subsidiary are generally
reported as a separate component of equity in our consolidated balance sheets. In our statements of operations, the
revenues, expenses and net income or loss related to noncontrolling interests in our operating partnership are included
in the consolidated amounts, with net income or loss attributable to the noncontrolling interests deducted separately to
arrive at the net income or loss solely attributable to us.
When we obtain an economic interest in an entity, we evaluate the entity to determine if the entity is deemed a
variable interest entity ("VIE"), and if we are deemed to be the primary beneficiary, in accordance with authoritative
guidance issued on the consolidation of VIEs. When an entity is not deemed to be a VIE, we consider the provisions
of additional guidance to determine whether the general partner controls a limited partnership or similar entity when
the limited partners have certain rights. We consolidate all entities that are VIEs and of which the Company is deemed
to be the primary beneficiary.
Self Storage Properties and Customer In-Place Leases
Self storage properties are carried at historical cost less accumulated depreciation and any impairment losses. When
self storage properties are acquired, the purchase price is allocated to the tangible and intangible assets acquired and
liabilities assumed based on estimated fair values. The purchase price is allocated to the individual properties based on
the fair value determined using an income approach or a cash flow analysis using appropriate risk adjusted capitalization
rates, which take into account the relative size, age, and location of the individual properties along with current and
projected occupancy and relative rental rates or appraised values, if available. Tangible assets are allocated to land,
buildings and related improvements, and furniture and equipment.
In allocating the purchase price for a self storage property acquisition, we determine whether the acquisition includes
intangible assets. We allocate a portion of the purchase price to an intangible asset attributed to the value of customer
in-place leases. Because the majority of tenant leases are on a month-to-month basis, this intangible asset represents
45
the estimated value of the leases in effect on the acquisition date. This intangible asset is amortized to expense using
the straight-line method over 12 months, the estimated average remaining rental period for the leases.
Non-GAAP Financial Measures
FFO and Core FFO
Funds from operations, or FFO, is a widely used performance measure for real estate companies and is provided
here as a supplemental measure of our operating performance. The April 2002 National Policy Bulletin of Nareit, which
we refer to as the White Paper, as amended, defines FFO as net income (loss) (as determined under GAAP), excluding
gains (or losses) from sales of real estate and related impairment charges, plus real estate depreciation and amortization,
and after adjustments for unconsolidated partnerships and joint ventures. We include amortization of customer in-place
leases in real estate depreciation and amortization in the calculation of FFO because we believe the amortization of
customer in-place leases is analogous to real estate depreciation, as the value of such intangibles is inextricably connected
to the real estate acquired. Distributions declared on subordinated performance units and DownREIT subordinated
performance units represent our allocation of FFO to noncontrolling interests held by subordinated performance
unitholders and DownREIT subordinated performance unitholders. For purposes of calculating FFO attributable to
common shareholders, OP unitholders and LTIP unitholders, we exclude distributions declared on subordinated
performance units, DownREIT subordinated performance units, preferred shares and preferred units. We define Core
FFO as FFO, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our core
operating performance. These further adjustments consist of acquisition costs, organizational and offering costs, gains
on debt forgiveness, gains (losses) on early extinguishment of debt and after adjustments for unconsolidated partnerships
and joint ventures.
Management uses FFO and Core FFO as key performance indicators in evaluating the operations of our properties.
Given the nature of our business as a real estate owner and operator, we consider FFO and Core FFO as key supplemental
measures of our operating performance that are not specifically defined by GAAP. We believe that FFO and Core FFO
are useful to management and investors as a starting point in measuring our operational performance because FFO and
Core FFO exclude various items included in net income (loss) that do not relate to or are not indicative of our operating
performance such as gains (or losses) from sales of self storage properties and depreciation, which can make periodic
and peer analyses of operating performance more difficult. Our computation of FFO and Core FFO may not be
comparable to FFO reported by other REITs or real estate companies.
FFO and Core FFO should be considered in addition to, but not as a substitute for, other measures of financial
performance reported in accordance with GAAP, such as total revenues, operating income and net income (loss). FFO
and Core FFO do not represent cash generated from operating activities determined in accordance with GAAP and are
not a measure of liquidity or an indicator of our ability to make cash distributions. We believe that to further understand
our performance, FFO and Core FFO should be compared with our reported net income (loss) and considered in addition
to cash flows computed in accordance with GAAP, as presented in our consolidated financial statements.
46
The following table presents a reconciliation of net income (loss) to FFO and Core FFO for the periods presented
(in thousands, except per share and unit amounts):
Net income
Add (subtract):
Real estate depreciation and amortization
Company's share of unconsolidated real estate venture real
estate depreciation and amortization
Gain on sale of self storage properties
Company's share of unconsolidated real estate venture loss
on sale of properties
Distributions to preferred shareholders and unitholders
FFO attributable to subordinated performance unitholders(1)
FFO attributable to common shareholders, OP
unitholders, and LTIP unitholders
Add:
Acquisition costs
Company's share of unconsolidated real estate venture
acquisition costs
Loss on early extinguishment of debt
Core FFO attributable to common shareholders, OP
unitholders, and LTIP unitholders
Weighted average shares and units outstanding - FFO and
Core FFO:(2)
Weighted average shares outstanding - basic
Weighted average restricted common shares outstanding
Weighted average OP units outstanding
Weighted average DownREIT OP unit equivalents outstanding
Weighted average LTIP units outstanding
Total weighted average shares and units outstanding -
FFO and Core FFO
Year Ended December 31,
2017
2016
2018
$
56,326
$
45,998
$
24,866
87,938
73,669
54,193
10,233
(391)
205
(10,822)
(27,111)
7,296
(5,715)
—
(2,300)
(28,364)
1,559
—
—
—
(22,842)
116,378
90,584
57,776
663
—
—
593
22
—
6,546
1,006
136
$
117,041
$
91,199
$
65,464
53,293
29
28,977
1,835
694
84,828
44,423
25
26,126
1,835
957
73,366
29,887
18
24,262
1,835
2,212
58,214
0.99
1.12
FFO per share and unit
Core FFO per share and unit
$
$
1.37
1.38
$
$
1.23
1.24
$
$
(1) Amounts represent distributions declared for subordinated performance unitholders and DownREIT subordinated performance unitholders for
the periods presented.
(2) NSA combines OP units and DownREIT OP units with common shares because, after the applicable lock-out periods, OP units in the Company's
operating partnership are redeemable for cash or, at NSA's option, exchangeable for common shares on a one-for-one basis and DownREIT
OP units are also redeemable for cash or, at NSA's option, exchangeable for OP units in our operating partnership on a one-for-one basis,
subject to certain adjustments in each case. Subordinated performance units, DownREIT subordinated performance units, and LTIP units may
also, under certain circumstances, be convertible into or exchangeable for common shares (or other units that are convertible into or exchangeable
for common shares). See footnote(1) to the following table for additional discussion of subordinated performance units, DownREIT subordinated
performance units, and LTIP units in the calculation of FFO and Core FFO per share and unit.
47
The following table presents a reconciliation of earnings (loss) per share - diluted to FFO and Core FFO per share
and unit for the periods presented:
Year Ended December 31,
2017
2016
2018
Earnings (loss) per share - diluted
$
0.07
$
0.01
$
Impact of the difference in weighted average number of
shares(1)
Impact of GAAP accounting for noncontrolling interests,
two-class method and treasury stock method(2)
Add real estate depreciation and amortization
Add Company's share unconsolidated venture real estate
depreciation and amortization
Subtract gain on sale of self storage properties
FFO attributable to subordinated performance unitholders
FFO per share and unit
Add acquisition costs, Company's share of unconsolidated
real estate venture acquisition costs and loss on early
extinguishment of debt
Core FFO per share and unit
(0.03)
0.49
1.04
0.12
—
(0.32)
1.37
—
0.59
1.00
0.10
(0.08)
(0.39)
1.23
$
0.01
1.38
$
0.01
1.24
$
0.31
0.11
—
0.93
0.03
—
(0.39)
0.99
0.13
1.12
(1) Adjustment accounts for the difference between the weighted average number of shares used to calculate diluted earnings per share and the
weighted average number of shares used to calculate FFO and Core FFO per share and unit. Diluted earnings per share is calculated using the
two-class method for the company's restricted common shares, the treasury stock method for certain unvested LTIP units, and includes the
assumption of a hypothetical conversion of subordinated performance units and DownREIT subordinated performance units into OP units,
even though such units may only be convertible into OP units (i) after a lock-out period and (ii) upon certain events or conditions. For additional
information about the conversion of subordinated performance units, DownREIT subordinated performance units and LTIP units into OP units,
see Note 10 to the consolidated financial statements in Item 8. The computation of weighted average shares and units for FFO and Core FFO
per share and unit includes all restricted common shares and LTIP units that participate in distributions and excludes all subordinated performance
units and DownREIT subordinated performance units because their effect has been accounted for through the allocation of FFO to the related
unitholders based on distributions declared.
(2) Represents the effect of adjusting the numerator to consolidated net income (loss) prior to GAAP allocations for noncontrolling interests, after
deducting preferred share and unit distributions, and before the application of the two-class method and treasury stock method, as described
in footnote (1).
NOI
We define NOI as net income (loss), as determined under GAAP, plus general and administrative expenses,
depreciation and amortization, interest expense, loss on early extinguishment of debt, equity in earnings (losses) of
unconsolidated real estate ventures, acquisition costs, organizational and offering expenses, income tax expense,
impairment of long-lived assets, losses on the sale of properties and non-operating expense and by subtracting
management fees and other revenue, gains on sale of properties, debt forgiveness, and non-operating income. NOI is
not a measure of performance calculated in accordance with GAAP.
We believe NOI is useful to investors in evaluating our operating performance because:
•
•
NOI is one of the primary measures used by our management and our PROs to evaluate the economic
productivity of our properties, including our ability to lease our properties, increase pricing and occupancy
and control our property operating expenses;
NOI is widely used in the real estate industry and the self storage industry to measure the performance and
value of real estate assets without regard to various items included in net income that do not relate to or are
not indicative of operating performance, such as depreciation and amortization, which can vary depending
upon accounting methods, the book value of assets, and the impact of our capital structure; and
• We believe NOI helps our investors to meaningfully compare the results of our operating performance from
period to period by removing the impact of our capital structure (primarily interest expense on our outstanding
indebtedness) and depreciation of the cost basis of our assets from our operating results.
48
There are material limitations to using a non-GAAP measure such as NOI, including the difficulty associated with
comparing results among more than one company and the inability to analyze certain significant items, including
depreciation and interest expense, that directly affect our net income (loss). We compensate for these limitations by
considering the economic effect of the excluded expense items independently as well as in connection with our analysis
of net income (loss). NOI should be considered in addition to, but not as a substitute for, other measures of financial
performance reported in accordance with GAAP, such as total revenues, income from operations and net loss.
The following table presents a reconciliation of net income (loss) to NOI for the periods presented (dollars in
thousands):
Net income
(Subtract) add:
Management fees and other revenue
General and administrative expenses
Depreciation and amortization
Interest expense
Equity in losses of unconsolidated real estate venture
Loss on early extinguishment of debt
Acquisition costs
Income tax expense
Gain on sale of self storage properties
Non-operating expense
Net Operating Income
Year Ended December 31,
2017
2016
2018
$
56,326
$
45,998
$
24,866
(12,310)
36,220
89,147
42,724
1,423
—
663
818
(391)
91
214,711
$
(8,061)
30,060
75,115
34,068
2,339
—
593
1,159
(5,715)
58
175,614
$
(1,809)
21,528
55,064
24,109
1,484
136
6,546
368
—
147
132,439
$
Our consolidated NOI shown in the table above does not include our proportionate share of NOI for our
unconsolidated real estate ventures. For additional information about our 2018 Joint Venture and 2016 Joint Venture
see Note 5 to the consolidated financial statements in Item 8.
EBITDA and Adjusted EBITDA
We define EBITDA as net income (loss), as determined under GAAP, plus interest expense, loss on early
extinguishment of debt, income taxes, depreciation and amortization expense and the Company's share of unconsolidated
real estate venture depreciation and amortization. We define Adjusted EBITDA as EBITDA plus acquisition costs,
organizational and offering expenses, equity-based compensation expense, losses on sale of properties and impairment
of long-lived assets, minus gains on sale of properties and debt forgiveness, and after adjustments for unconsolidated
partnerships and joint ventures. These further adjustments eliminate the impact of items that we do not consider indicative
of our core operating performance. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the
future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our
presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be
unaffected by unusual or non-recurring items.
We present EBITDA and Adjusted EBITDA because we believe they assist investors and analysts in comparing
our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative
of our core operating performance. EBITDA and Adjusted EBITDA have limitations as an analytical tool. Some of
these limitations are:
•
•
•
EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital
expenditures, contractual commitments or working capital needs;
EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements
necessary to service interest or principal payments, on our debts;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will
often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements
for such replacements;
49
•
•
•
Adjusted EBITDA excludes equity-based compensation expense, which is and will remain a key element of
our overall long-term incentive compensation package, although we exclude it as an expense when evaluating
our ongoing operating performance for a particular period;
EBITDA and Adjusted EBITDA do not reflect the impact of certain cash charges resulting from matters we
consider not to be indicative of our ongoing operations; and
other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting
their usefulness as comparative measures.
We compensate for these limitations by considering the economic effect of the excluded expense items
independently as well as in connection with our analysis of net income (loss). EBITDA and Adjusted EBITDA should
be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance
with GAAP, such as total revenues, income from operations, and net income (loss).
The following table presents a reconciliation of net loss to EBITDA and Adjusted EBITDA for the periods presented
(dollars in thousands):
Net income
Add:
Depreciation and amortization
Company's share of unconsolidated real estate venture
depreciation and amortization
Income tax expense
Interest expense
Loss on early extinguishment of debt
EBITDA
Add:
Acquisition costs
Company's share of unconsolidated real estate venture
acquisition costs
Gain on sale of self storage properties
Company's share of unconsolidated real estate venture loss
on sale of properties
Equity-based compensation expense
Adjusted EBITDA
Liquidity and Capital Resources
Liquidity Overview
Year Ended December 31,
2017
2016
2018
$
56,326
$
45,998
$
24,866
89,147
75,115
55,064
10,233
818
42,724
—
199,248
663
—
(391)
7,296
1,159
34,068
—
163,636
593
22
(5,715)
1,559
368
24,109
136
106,102
6,546
1,006
—
205
3,837
203,562
$
—
3,764
162,300
$
—
2,597
116,251
$
Liquidity is the ability to meet present and future financial obligations. Our primary source of liquidity is cash
flow from our operations. Additional sources are proceeds from equity and debt offerings, and debt financings including
borrowings under the credit facility, 2023 Term Loan Facility and 2028 Term Loan Facility.
Our short-term liquidity requirements consist primarily of property operating expenses, property acquisitions,
capital expenditures, general and administrative expenses and principal and interest on our outstanding indebtedness.
A further short-term liquidity requirement relates to distributions to our common and preferred shareholders and holders
of preferred units, OP units, subordinated performance units, DownREIT OP units and DownREIT subordinated
performance units. We expect to fund short-term liquidity requirements from our operating cash flow, cash on hand
and borrowings under our credit facility.
Our long-term liquidity needs consist primarily of the repayment of debt, property acquisitions, and capital
expenditures. We acquire properties through the use of cash, preferred units, OP units and subordinated performance
units in our operating partnership or DownREIT partnerships. We expect to meet our long-term liquidity requirements
50
with operating cash flow, cash on hand, secured and unsecured indebtedness, and the issuance of equity and debt
securities.
The availability of credit and its related effect on the overall economy may affect our liquidity and future financing
activities, both through changes in interest rates and access to financing. Currently, interest rates are low compared to
historical levels and many lenders are active in the market. We believe that, as a publicly-traded REIT, we will have
access to multiple sources of capital to fund our long-term liquidity requirements, including the incurrence of additional
debt and the issuance of debt and additional equity securities. However, we cannot assure you that this will be the case.
Cash Flows
At December 31, 2018, we had $13.2 million in cash and cash equivalents and $3.2 million of restricted cash, a
decrease in cash and cash equivalents of $0.2 million and an increase in restricted cash of $0.1 million from December 31,
2017. Restricted cash primarily consists of escrowed funds deposited with financial institutions for real estate taxes,
insurance, and other reserves for capital improvements in accordance with our loan agreements. The following discussion
relates to changes in cash due to operating, investing, and financing activities, which are presented in our consolidated
statements of cash flows included in Item 8 of this report.
Operating Activities
Cash provided by our operating activities was $161.8 million for the year ended December 31, 2018 compared to
$124.3 million for the year ended December 31, 2017, an increase of $37.5 million. Our operating cash flow increased
primarily due to 65 self storage properties acquired during the year ended December 31, 2017 that generated cash flow
for the entire year ended December 31, 2018 and 57 self storage properties that were acquired during the year ended
December 31, 2018. In addition, operating distributions from our unconsolidated real estate ventures increased by $3.1
million for the year ended December 31, 2018 compared to the year ended December 31, 2017. These increases were
partially offset by higher cash payments for general and administrative expenses and interest expense.
Cash provided by our operating activities was $124.3 million for the year ended December 31, 2017 compared
to $94.6 million for the year ended December 31, 2016, an increase of $29.7 million. Our operating cash
flow increased primarily due to 107 self storage properties acquired during the year ended December 31, 2016 that
generated cash flow for the entire year ended December 31, 2017 and 65 self storage properties that were acquired
during the year ended December 31, 2017. In addition, operating distributions from our 2016 Joint Venture increased
by $4.4 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. These increases
were partially offset by higher cash payments for general and administrative expenses and interest expense.
Investing Activities
Cash used in investing activities was $514.5 million for the year ended December 31, 2018 compared to $409.3
million for the year ended December 31, 2017. The primary uses of cash for the year ended December 31, 2018 were
for our acquisition of 57 self storage properties and an expansion project for cash consideration of $313.7 million,
investments in our unconsolidated real estate ventures of $165.6 million, deposits for potential acquisitions of $21.0
million and capital expenditures of $19.0 million, partially offset by $5.3 million of proceeds from the sale of two self
storage properties. The primary uses of cash for the year ended December 31, 2017 were for our acquisition of 65 self
storage properties for cash consideration of $391.6 million, investment in our 2016 Joint Venture of $15.3 million,
capital expenditures of $14.7 million and deposits for potential acquisitions of $4.9 million, partially offset by $17.5
million of proceeds from the sale of three self storage properties and land parcels.
Cash used in investing activities was $409.3 million for the year ended December 31, 2017 compared to $642.4
million for the year ended December 31, 2016. The primary uses of cash for the year ended December 31, 2017 were
for our acquisition of 65 self storage properties for cash consideration of $391.6 million, investments in our
unconsolidated real estate venture of $15.3 million, capital expenditures of $14.7 million and deposits for potential
acquisitions of $4.9 million, partially offset by $17.5 million of proceeds from the sale of three self storage properties
and land parcels. The primary uses of cash for the year ended December 31, 2016 were for our acquisition of 107 self
storage properties for cash consideration of $532.0 million, investment in our 2016 Joint Venture of $83.0 million,
acquisition of our property management platform for $19.9 million, and capital expenditures of $11.4 million.
Capital expenditures totaled $19.0 million, $14.7 million and $11.4 million during the years ended December 31,
2018, 2017 and 2016 respectively, We generally fund post-acquisition capital additions from cash provided by operating
activities.
51
We categorize our capital expenditures broadly into three primary categories:
•
•
•
recurring capital expenditures, which represent the portion of capital expenditures that are deemed to replace
the consumed portion of acquired capital assets and extend their useful life;
value enhancing capital expenditures, which represent the portion of capital expenditures that are made to
enhance the revenue and value of an asset from its original purchase condition; and
acquisitions capital expenditures, which represent the portion of capital expenditures capitalized during the
current period that were identified and underwritten prior to a property's acquisition.
The following table presents a summary of the capital expenditures for these categories, along with a reconciliation
of the total for these categories to the capital expenditures reported in the accompanying consolidated statements of
cash flows for the periods presented (dollars in thousands):
Year Ended December 31,
2017
2016
2018
Recurring capital expenditures
Value enhancing capital expenditures
Acquisitions capital expenditures
Total capital expenditures
Increase in accrued capital spending
$
6,001
$
3,495
$
3,563
9,356
18,920
94
2,755
8,953
15,203
(547)
14,656
$
2,917
2,641
6,114
11,672
(254)
11,418
Capital expenditures per statement of cash flows
$
19,014
$
Financing Activities
Cash provided by our financing activities was $352.6 million for the year ended December 31, 2018 compared to
$286.1 million for the year ended December 31, 2017. Our sources of financing cash flows for the year ended
December 31, 2018 primarily consisted of $175.6 million of proceeds from the issuance of common shares, $672.5
million of borrowings under our credit facility, $75.0 million of borrowings under our 2023 Term Loan Facility and
$75.0 million of borrowings under our 2028 Term Loan Facility. Our primary uses of financing cash flows for the year
ended December 31, 2018 were for principal payments on existing debt of $507.2 million (which included $496.5
million of principal repayments under the Revolver, $5.8 million of fixed rate mortgage principal payoffs and $4.9
million of scheduled fixed rate mortgage principal payments), distributions to noncontrolling interests of $63.4 million,
distributions to common shareholders of $62.2 million and distributions to preferred shareholders of $10.4 million.
Our sources of financing cash flows for the year ended December 31, 2017 primarily consisted of $166.6 million of
proceeds from the issuance of preferred shares, $140.3 million of proceeds from the issuance of common shares, $676.0
million of borrowings under our credit facility, an $84.9 million secured debt financing and $7.0 million of proceeds
from the issuance of 300,043 subordinated performance units to an affiliate of Personal Mini. Our primary uses of
financing cash flows for the year ended December 31, 2017 were for principal payments on existing debt of $679.1
million (which included $664.0 million of principal repayments under the Revolver, $10.4 million of fixed rate mortgage
principal payoffs and $4.7 million of scheduled fixed rate mortgage principal payments), distributions to noncontrolling
interests of $57.3 million, distributions to common shareholders of $47.7 million and distributions to preferred
shareholders of $2.3 million.
sources of
the year ended December 31, 2016. Our
Cash provided by our financing activities was $286.1 million for the year ended December 31, 2017 compared
to $553.7 million for
for
the year ended December 31, 2017 primarily consisted of $166.6 million of proceeds from the issuance of preferred
shares, $140.3 million of proceeds from the issuance of common shares, $676.0 million of borrowings under our credit
facility, an $84.9 million secured debt financing and $7.0 million of proceeds from the issuance of 300,043 subordinated
performance units
to an affiliate of Personal Mini. Our primary uses of financing cash flows for
the year ended December 31, 2017 were for principal payments on existing debt of $679.1 million (which included
$664.0 million of principal repayments under the Revolver, $10.4 million of fixed rate mortgage principal payoffs and
$4.7 million of scheduled fixed rate mortgage principal payments), distributions to noncontrolling interests of $57.3
million, distributions to common shareholders of $47.7 million and distributions to preferred shareholders of $2.3
million. Our sources of financing cash flows for the year ended December 31, 2016 primarily consisted of $378.3
million of proceeds from the issuance of common shares, $712.5 million of borrowings under our credit facility and
financing cash
flows
52
$100.0 million of borrowings under our 2023 Term Loan Facility. Our primary uses of financing cash flows for the
year ended December 31, 2016 were for principal payments on existing debt of $558.6 million (which included $529.0
million of principal repayments under the Revolver, $25.2 million of fixed rate mortgage principal payoffs and $4.4
million of scheduled fixed rate mortgage principal payments), distributions to noncontrolling interests of $47.0 million,
and distributions to common shareholders of $26.7 million.
Credit Facility and Term Loan Facilities
As of December 31, 2018, our credit facility provided for total borrowings of $1.0 billion, consisting of five
components: (i) a Revolver which provides for a total borrowing commitment up to $400.0 million, whereby we may
borrow, repay and re-borrow amounts under the Revolver, (ii) a $235.0 million Term Loan A, (iii) a $155.0 million
Term Loan B, (iv) a $105.0 million Term Loan C and (v) a $125.0 million Term Loan D. The Revolver matures in May
2020; provided that we may elect to extend the maturity to May 2021 by paying an extension fee of 0.15% of the total
borrowing commitment thereunder at the time of extension and meeting other customary conditions with respect to
compliance. The Term Loan A matures in May 2021, the Term Loan B matures in May 2022, the Term Loan C matures
in February 2024 and the Term Loan D matures in January 2023. The Revolver, Term Loan A, Term Loan B, Term
Loan C and Term Loan D are not subject to any scheduled reduction or amortization payments prior to maturity. As of
December 31, 2018, we have an expansion option under the credit facility, which, if exercised in full, would provide
for a total credit facility of $1.3 billion.
As of December 31, 2018, $235.0 million was outstanding under the Term Loan A with an effective interest rate
of 2.91%, $155.0 million was outstanding under the Term Loan B with an effective interest rate of 2.94%, $105.0
million was outstanding under the Term Loan C with an effective interest rate of 3.71%, $125.0 million was outstanding
under the Term Loan D with an effective interest rate of 3.79% and $139.5 million was outstanding under the Revolver
with an effective interest rate of 3.90%. As of December 31, 2018, we would have had the capacity to borrow remaining
Revolver commitments of $254.8 million while remaining in compliance with the credit facility's financial covenants.
We also have the 2023 Term Loan Facility that matures in June 2023 and is separate from the credit facility in an
aggregate amount of $175.0 million. As of December 31, 2018 the entire amount was outstanding under the 2023 Term
Loan Facility with an effective interest rate of 3.13%. We have an expansion option under the 2023 Term Loan Facility,
which, if exercised in full, would provide for total borrowings in an aggregate amount of $400.0 million.
During the year ended December 31, 2018, we entered into a credit agreement with a lender for the 2028 Term
Loan Facility that matures in December 2028 and is separate from the credit facility and 2023 Term Loan Facility in
an aggregate amount of $75.0 million. As of December 31, 2018 the entire amount was outstanding under the 2028
Term Loan Facility with an effective interest rate of 4.62%. We have an expansion option under the 2028 Term Loan
Facility, which, if exercised in full, would provide for total borrowings in an aggregate amount up to $125.0 million.
For a summary of our financial covenants and additional detail regarding our credit facility, 2023 Term Loan
Facility and 2028 Term Loan Facility, please see Note 8 to the consolidated financial statements in Item 8.
Contractual Obligations
The following table summarizes information contained elsewhere in this Annual Report on Form 10-K regarding
payments due under contractual obligations and commitments on an undiscounted basis as of December 31,
2018 (dollars in thousands):
2019
Year Ending December 31,
2022
2021
2020
2023
Thereafter
Total
Debt financings:
Principal(1)
Interest(2)
Real estate leasehold
interests
Office lease
Total
$
5,128
$ 178,897
$ 242,603
$ 159,205
$ 377,049
$ 314,756
$1,277,638
39,731
38,902
33,294
27,542
17,131
32,179
188,779
1,334
345
$ 46,538
1,379
398
$ 219,576
1,404
387
$ 277,688
1,419
381
$ 188,547
1,424
346
$ 395,950
36,074
1,073
$ 384,082
43,034
2,930
$1,512,381
(1) Includes scheduled principal and maturity payments related to our debt financings.
53
(2) Interest is calculated until the maturity date (without regard to any extension that may be elected by the Company) based on the outstanding
principal balance and the effective interest rate as of December 31, 2018.
Equity Transactions
Issuance of Common Shares
During the year ended December 31, 2018, we closed a follow-on public offering of 5,900,000 of our common
shares at an offering price of $29.86 per share. We received aggregate net proceeds from the offering of
approximately $175.6 million after deducting expenses associated with the offering. We used the net proceeds from
the offering to repay borrowings outstanding under our Revolver and to make capital contributions to the 2018 Joint
Venture.
During the year ended December 31, 2018, after receiving notices of redemption from certain OP unitholders, we
elected to issue 462,778 common shares to such holders in exchange for 462,778 OP units in satisfaction of the operating
partnership's redemption obligations.
Issuance of OP Equity
In connection with the 57 properties acquired during the year ended December 31, 2018, $28.1 million of OP
equity was issued (consisting of 584,004 OP units, 343,719 Series A-1 preferred units and 141,811 subordinated
performance units).
During the year ended December 31, 2018, the Company issued 2,024,170 OP units upon conversion
of 997,074 subordinated performance units as further described under "Subordinated Performance Units and
DownREIT Subordinated Performance Units" in Note 3 to the consolidated financial statements in Item 8.
Dividends and Distributions
During the year ended December 31, 2018, the Company paid $62.2 million of distributions to common
shareholders, $10.4 million of distributions to preferred shareholders and distributed $63.4 million to noncontrolling
interests.
On February 21, 2019, our board of trustees declared a cash dividend and distribution, respectively, of $0.30 per
common share and OP unit to shareholders and OP unitholders of record as of March 15, 2019. On February 21, 2019,
our board of trustees also declared cash distributions of $0.375 per Series A Preferred Share and Series A-1 preferred
unit to shareholders and unitholders of record as of March 15, 2019. In addition, we expect to declare a cash distribution
in the first quarter of 2019 to our subordinated performance unitholders of record as of March 15, 2019. Such dividends
and distributions are expected to be paid on March 29, 2019.
Cash Distributions from our Operating Partnership
Under the LP Agreement of our operating partnership, to the extent that we, as the general partner of our operating
partnership, determine to make distributions to the partners of our operating partnership out of the operating cash flow
or capital transaction proceeds generated by a real property portfolio managed by one of our PROs, the holders of the
series of subordinated performance units that relate to such portfolio are entitled to share in such distributions. Under
the LP Agreement of our operating partnership, operating cash flow with respect to a portfolio of properties managed
by one of our PROs is generally an amount determined by us, as general partner, of our operating partnership equal to
the excess of property revenues over property related expenses from that portfolio. In general, property revenue from
the portfolio includes:
(i) all receipts, including rents and other operating revenues;
(ii) any incentive, financing, break-up and other fees paid to us by third parties;
(iii) amounts released from previously set aside reserves; and
(iv) any other amounts received by us, which we allocate to the particular portfolio of properties.
In general, property-related expenses include all direct expenses related to the operation of the properties in that
portfolio, including real property taxes, insurance, property-level general and administrative expenses, employee costs,
utilities, property marketing expense, property maintenance and property reserves and other expenses incurred at the
property level. In addition, other expenses incurred by our operating partnership will also be allocated by us, as general
partner, to the property portfolio and will be included in the property-related expenses of that portfolio. Examples of
such other expenses include:
54
(i) corporate-level general and administrative expenses;
(ii) out-of-pocket costs, expenses and fees of our operating partnership, whether or not capitalized;
(iii) the costs and expenses of organizing and operating our operating partnership;
(iv) amounts paid or due in respect of any loan or other indebtedness of our operating partnership during such
period;
(v) extraordinary expenses of our operating partnership not previously or otherwise deducted under item (ii) above;
(vi) any third-party costs and expenses associated with identifying, analyzing, and presenting a proposed property
to us and/or our operating partnership; and
(vii) reserves to meet anticipated operating expenditures debt service or other liabilities, as determined by us.
To the extent that we, as the general partner of our operating partnership, determine to make distributions to the
partners of our operating partnership out of the operating cash flow of a real property portfolio managed by one of our
PROs, operating cash flow from a property portfolio is required to be allocated to OP unitholders and to the holders of
series of subordinated performance units that relate to such property portfolio as follows:
First, an amount is allocated to OP unitholders in order to provide OP unitholders (together with any prior allocations
of capital transaction proceeds) with a cumulative preferred allocation on the unreturned capital contributions attributed
to the OP units in respect of such property portfolio. The preferred allocation for all of our existing portfolios is 6%.
As of December 31, 2018, our operating partnership had an aggregate of $1,500.9 million of unreturned capital
contributions with respect to common shareholders and OP unitholders, with respect to the various property portfolios.
Second, an amount is allocated to the holders of the series of subordinated performance units relating to such
property portfolio in order to provide such holders with an allocation (together with prior distributions of capital
transaction proceeds) on their unreturned capital contributions. Although the subordinated allocation for the
subordinated performance units is non-cumulative from period to period, if the operating cash flow from a property
portfolio related to a series of subordinated performance units is sufficient, in the judgment of the general partner (with
the approval of a majority of our independent trustees), to fund distributions to the holders of such series of subordinated
performance units, but we, as the general partner of our operating partnership, decline to make distributions to such
holders, the amount available but not paid as distributions will be added to the subordinated allocation corresponding
to such series of subordinated performance units. The subordinated allocation for the outstanding subordinated
performance units is 6%. As of December 31, 2018, an aggregate of $143.0 million of unreturned capital contributions
has been allocated to the various series of subordinated performance units.
Thereafter, any additional operating cash flow is allocated to OP unitholders and the applicable series of
subordinated performance units equally.
Following the allocation described above, we as the general partner of our operating partnership, will generally
cause our operating partnership to distribute the amounts allocated to the relevant series of subordinated performance
units to the holders of such series of subordinated performance units. We, as the general partner, may cause our operating
partnership to distribute the amounts allocated to OP unitholders or may cause our operating partnership to retain such
amounts to be used by our operating partnership for any purpose. Any operating cash flow that is attributable to amounts
retained by our operating partnership pursuant to the preceding sentence will generally be available to be allocated as
an additional capital contribution to the various property portfolios.
The foregoing description of the allocation of operating cash flow between the OP unitholders and subordinated
performance unitholders is used for purposes of determining distributions to holders of subordinated performance units
but does not necessarily represent the operating cash flow that will be distributed to OP unitholders (or paid as dividends
to holders of our common shares). Any distribution of operating cash flow allocated to the OP unitholders will be made
at our discretion (and paid as dividends to holders of our common shares at the discretion of our board of trustees).
Under the LP Agreement of our operating partnership, capital transactions are transactions that are outside the
ordinary course of our operating partnership's business, involve the sale, exchange, other disposition, or refinancing
of any property, and are designated as capital transactions by us, as the general partner. To the extent the general partner
determines to distribute capital transaction proceeds, the proceeds from capital transactions involving a particular
property portfolio are required to be allocated to OP unitholders and to the series of subordinated performance units
that relate to such property portfolio as follows:
55
First, an amount determined by us, as the general partner, of such capital transaction proceeds is allocated to OP
unitholders in order to provide OP unitholders (together with any prior allocations of operating cash flow) with a
cumulative preferred allocation on the unreturned capital contributions attributed to the OP unitholders in respect of
such property portfolio that relate to such capital transaction plus an additional amount equal to such unreturned capital
contributions.
Second, an amount determined by us, as the general partner, is allocated to the holders of the series of subordinated
performance units relating to such property portfolio in order to provide such holders with a non-cumulative subordinated
allocation on the unreturned capital contributions made by such holders in respect of such property portfolio that relate
to such capital transaction plus an additional amount equal to such unreturned capital contributions.
The preferred allocation and subordinated allocation with respect to capital transaction proceeds for each portfolio
is equal to the preferred allocation and subordinated allocation for distributions of operating cash flow with respect to
that portfolio.
Thereafter, any additional capital transaction proceeds are allocated to OP unitholders and the applicable series of
subordinated performance units equally.
Following the allocation described above, we, as the general partner of our operating partnership, will generally
cause our operating partnership to distribute the amounts allocated to the relevant series of subordinated performance
units to the holders of such series of subordinated performance units. We, as general partner of our operating partnership,
may cause our operating partnership to distribute the amounts allocated to the OP unitholders or may cause our operating
partnership to retain such amounts to be used by our operating partnership for any purpose. Any capital transaction
proceeds that are attributable to amounts retained by our operating partnership pursuant to the preceding sentence will
generally be available to be allocated as an additional capital contribution to the various property portfolios.
The foregoing allocation of capital transaction proceeds between the OP unitholders and subordinated performance
unitholders is used for purposes of determining distributions to holders of subordinated performance units but does not
necessarily represent the capital transaction proceeds that will be distributed to OP unitholders (or paid as dividends
to holders of our common shares). Any distribution of capital transaction proceeds allocated to the OP unitholders will
be made at our discretion (and paid as dividends to holders of our common shares at the discretion of our board of
trustees).
Our OP units are redeemable for cash or, at our option exchangeable on a one-for-one basis into common shares
after an agreed period of time and certain other conditions. Our subordinated performance units are only convertible
into OP units following a two year lock-out period and then (i) at the holder's election only upon the achievement of
certain performance thresholds relating to the properties to which such subordinated performance units relate or (ii) at
our election upon a retirement event of a PRO that holds such subordinated performance units or upon certain qualifying
terminations.
Notwithstanding the two-year lock out period on conversions of subordinated performance units into OP units, if
such subordinated performance units were convertible into OP units as of December 31, 2018, each subordinated
performance unit would on average hypothetically convert into 1.32 OP units, or into an aggregate of approximately
20.0 million OP units. These amounts are based on historical financial information for the trailing twelve months ended
December 31, 2018. The hypothetical conversion is calculated by dividing the average cash available for distribution,
or CAD, per subordinated performance unit by 110% of the CAD per OP unit over the same period. We anticipate that
as our CAD grows over time, the conversion ratio will also grow, including to levels that may exceed this amount. The
actual number of OP units into which such subordinated performance units will become convertible may vary
significantly and will depend upon the applicable conversion penalty and the actual CAD to the OP units and the actual
CAD to the converted subordinated performance units in the one-year period ending prior to conversion. We have also
granted registration rights to those persons who will be eligible to receive common shares issuable upon exchange of
OP units issued in our formation transactions and certain contribution transactions.
56
Allocation of Capital Contributions
We, as the general partner of our operating partnership, in our discretion, have the right to increase or decrease,
as appropriate, the amount of capital contributions allocated to our operating partnership in general and to each series
of subordinated performance units to reflect capital expenditures made by our operating partnership in respect of each
portfolio, the sale or refinancing of all or a portion of the properties comprising the portfolio, the distribution of capital
transaction proceeds by our operating partnership, the retention by our operating partnership of cash for working capital
purposes and other events impacting the amount of capital contributions allocated to the holders. In addition, to avoid
conflicts of interests, any decision by us to increase or decrease allocations of capital contributions must also be approved
by a majority of our independent trustees.
Off-Balance Sheet Arrangements
Except as disclosed in the notes to our financial statements, as of December 31, 2018, we did not have any
relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance
or special purposes entities, which typically are established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. Further, except as disclosed in the notes to our financial statements,
as of December 31, 2018, we have not guaranteed any obligations of unconsolidated entities nor made any commitments
to provide funding to any such entities that creates any material exposure to any financing, liquidity, market or credit
risk.
Segment
We manage our business as one reportable segment consisting of investments in self storage properties located in
the United States. Although we operate in several markets, these operations have been aggregated into one reportable
segment based on the similar economic characteristics among all markets.
Seasonality
The self storage business is subject to minor seasonal fluctuations. A greater portion of revenues and profits are
realized from May through September. Historically, our highest level of occupancy has typically been in July, while
our lowest level of occupancy has typically been in February. Results for any quarter may not be indicative of the results
that may be achieved for the full fiscal year.
Inflation
Inflation in the United States has been relatively low in recent years and did not have a material impact on our
results of operations for the years ended December 31, 2018, 2017 and 2016. Although the impact of inflation has been
relatively insignificant in recent years, it remains a factor in the U.S. economy and may increase the cost of acquiring
or replacing self storage properties and related improvements, as well as real estate property taxes, employee salaries,
wages and benefits, utilities, and other expenses. Because our tenant leases are month-to-month, we may be able to
rapidly adjust our rental rates to minimize the adverse impact of any inflation which could mitigate our exposure to
increases in costs and expenses resulting from inflation.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Our future income,
cash flows, and fair values of financial instruments are dependent upon prevailing market interest rates. The primary
market risk to which we believe we are exposed is interest rate risk. Interest rate risk is highly sensitive to many factors,
including governmental monetary and tax policies, domestic and international economic and political considerations,
and other factors beyond our control. We use interest rate swaps to moderate our exposure to interest rate risk by
effectively converting the interest on variable rate debt to a fixed rate. We make limited use of other derivative financial
instruments and we do not use them for trading or other speculative purposes.
As of December 31, 2018, we had $214.5 million of debt subject to variable interest rates (excluding variable-rate
debt subject to interest rate swaps). If the one-month London Interbank Offered Rate ("LIBOR") were to increase or
decrease by 100 basis points, the increase or decrease in interest expense on the variable-rate debt (excluding variable-
rate debt subject to interest rate swaps) would increase or decrease future earnings and cash flows by approximately
$2.1 million annually.
Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial
instruments. These analyses do not consider the effect of any change in overall economic activity that could occur.
57
Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change.
However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses
assume no changes in our financial structure.
Item 8. Financial Statements and Supplementary Data
The independent registered public accounting firm's reports, consolidated financial statements and schedule listed
in the accompanying index are filed as part of this report and incorporated herein by this reference. See "Index to
Financial Statements" on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
A review and evaluation was performed by our management, including our Chief Executive Officer (the "CEO")
and Chief Financial Officer (the "CFO"), of the effectiveness of the design and operation of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of
the period covered by this Annual Report on Form 10-K. Based on that review and evaluation, the CEO and CFO have
concluded that our current disclosure controls and procedures, as designed and implemented, were effective.
Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material
information otherwise required to be set forth in our periodic reports.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange
Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and
effected by our board of trustees, audit committee, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with U.S. GAAP and includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and trustees; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become
inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may
deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31,
2018. In making this assessment, our management used criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework).
Based on this assessment, our management believes that, as of December 31, 2018, our internal control over
financial reporting was effective based on those criteria.
The Company’s independent registered public accounting firm has issued an attestation report on the Company’s
internal control over financial reporting.
58
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended
December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information regarding our trustees, executive officers and certain other matters required by Item 401 of
Regulation S-K is incorporated herein by reference to our definitive proxy statement relating to our annual meeting of
shareholders (the "Proxy Statement"), to be filed with the SEC within 120 days after December 31, 2018.
The information regarding compliance with Section 16(a) of the Exchange Act required by Item 405 of
Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days
after December 31, 2018.
The information regarding our Code of Business Conduct and Ethics required by Item 406 of Regulation S-K is
incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31,
2018.
The information regarding certain matters pertaining to our corporate governance required by Item 407(c)(3), (d)
(4) and (d)(5) of Regulation S-K is incorporated by reference to the Proxy Statement to be filed with the SEC within
120 days after December 31, 2018.
Item 11. Executive Compensation
The information regarding executive compensation and other compensation related matters required by Items 402
and 407(e)(4) and (e)(5) of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with
the SEC within 120 days after December 31, 2018.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The tables on equity compensation plan information and beneficial ownership of the Company required by Items
201(d) and 403 of Regulation S-K are incorporated herein by reference to the Proxy Statement to be filed with the SEC
within 120 days after December 31, 2018.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information regarding transactions with related persons, promoters and certain control persons and trustee
independence required by Items 404 and 407(a) of Regulation S-K is incorporated herein by reference to the Proxy
Statement to be filed with the SEC within 120 days after December 31, 2018.
Item 14. Principal Accounting Fees and Services
The information concerning principal accounting fees and services and the Audit Committee's pre-approval policies
and procedures required by Item 14 is incorporated herein by reference to the Proxy Statement to be filed with the SEC
within 120 days after December 31, 2018.
Item 15. Exhibits, Financial Statement Schedules
PART IV
(a)(1) The financial statements listed in the Index to Financial Statements on Page F-1 of this report are filed
as part of this report and incorporated herein by reference.
(a)(2) The financial statement schedule listed in the Index to Financial Statements on Page F-1 of this report
is filed as part of this report and incorporated herein by reference.
(a)(3) The Exhibit Index is incorporated herein by reference.
59
Exhibit
Number
INDEX TO EXHIBITS (1) (2)
Exhibit Description
3.1 Articles of Amendment and Restatement of National Storage Affiliates Trust (Exhibit 3.1 to the Quarterly
Report on Form 10-Q, filed with the SEC on June 5, 2015, is incorporated herein by this reference)
3.2 Amended and Restated Bylaws of National Storage Affiliates Trust (Exhibit 3.2 to the Quarterly Report on
Form 10-Q, filed with the SEC on June 5, 2015, is incorporated herein by this reference)
3.3 Articles Supplementary designating the Series A Preferred Shares of National Storage Affiliates Trust
(Exhibit 3.3 to the Form 8-A filed with the SEC on October 10, 2017, is incorporated herein by this reference)
3.4 Articles Supplementary designating the Series A Preferred Shares of National Storage Affiliates Trust
(Exhibit 3.4 to the Form S-3ASR, filed with the SEC on March 14, 2018, is incorporated herein by this
reference)
4.1 Specimen Common Share Certificate of National Storage Affiliates Trust (Exhibit 4.1 to the Registration
Statement on Form S-11/A filed with the SEC on April 20, 2015, is incorporated herein by this reference)
4.2 Form of Specimen Certificate of Series A Preferred Shares of National Storage Affiliates Trust (Exhibit 4.1
to the Registration Statement on Form 8-A filed with the SEC on October 10, 2017, is incorporated herein
by this reference)
10.1 Third Amended and Restated Agreement of Limited Partnership of NSA OP, LP (Exhibit 3.3 to the Quarterly
Report on Form 10-Q, filed with the SEC on June 5, 2015, is incorporated herein by this reference)
10.2 Amended and Restated Partnership Unit Designation of Series GN Class B OP Units of NSA OP, LP (Exhibit
3.4 to the Quarterly Report on Form 10-Q, filed with the SEC on June 5, 2015, is incorporated herein by
this reference)
10.3 Third Amended and Restated Partnership Unit Designation of Series NW Class B OP Units of NSA OP,
LP (Exhibit 3.5 to the Quarterly Report on Form 10-Q, filed with the SEC on June 5, 2015, is incorporated
herein by this reference)
10.4 Third Amended and Restated Partnership Unit Designation of Series OV Class B OP Units of NSA OP, LP
(Exhibit 3.6 to the Quarterly Report on Form 10-Q, filed with the SEC on June 5, 2015, is incorporated
herein by this reference)
10.5 Second Amended and Restated Partnership Unit Designation of Series SC Class B OP Units of NSA OP,
LP (Exhibit 3.7 to the Quarterly Report on Form 10-Q, filed with the SEC on June 5, 2015, is incorporated
herein by this reference)
10.6 Partnership Unit Designation of Series SS Class B OP Units of NSA OP, LP (Exhibit 3.8 to the Quarterly
Report on Form 10-Q, filed with the SEC on June 5, 2015, is incorporated herein by this reference)
10.7 Partnership Unit Designation of Series HA Class B OP Units of NSA OP, LP (Exhibit 10.1 to the Quarterly
Report on Form 10-Q, filed with SEC on August 9, 2016, is incorporated herein by this reference)
10.8 First Amendment to Partnership Unit Designation of Series HA Class B OP Units of NSA OP, LP (Exhibit
10.8 to the Annual Report on Form 10-K, filed with SEC on February 28, 2017, is incorporated herein by
this reference)
10.9 Partnership Unit Designation of Series PM Class B OP Units of NSA OP, LP (Exhibit 10.2 to the Quarterly
Report on Form 10-Q, filed with the SEC on May 4, 2017, is incorporated herein by this reference)
10.10 Partnership Unit Designation of Series MI Class B OP Units of NSA OP, LP (Exhibit 10.1 to the Quarterly
Report on Form 10-Q, filed with the SEC on November 7, 2017, is incorporated herein by this reference)
10.11 Partnership Unit Designation of Series A-1 Preferred Units of NSA OP, LP dated as of January 5, 2018
(Exhibit 10.12 to the Annual Report on Form 10-K, filed with the SEC on February 27, 2018, is incorporated
herein by this reference)
10.12 Sixty-First Amendment to the Third Amended and Restated Agreement of Limited Partnership of NSA OP,
LP (Exhibit 10.1 to the Form 8-K filed with the SEC on October 11, 2017, is incorporated herein by this
reference)
10.13 Form of Second Amended and Restated DownREIT Partnership Agreement (including a schedule of existing
DownREIT limited partnership agreements and limited liability company agreements) (Exhibit 10.7 to the
Quarterly Report on Form 10-Q, filed with the SEC on November 10, 2015, is incorporated herein by this
reference)
60
10.14 Amended and Restated Credit Agreement dated as of May 6, 2016 by and among NSA OP, LP, as Borrower,
certain of its subsidiaries party thereto as Subsidiary Guarantors, National Storage Affiliates Trust as
Guarantor, the lenders from time to time party hereto, KeyBank National Association, as Administrative
Agent, with Keybanc Capital Markets Inc. and PNC Capital Markets LLC, as Co-Bookrunners and Co-
Lead Arrangers, and PNC Bank, National Association, as Syndication Agent and Wells Fargo Bank, National
Association, and U.S. Bank National Association, as Co-Documentation Agents (Exhibit 10.3 to the
Quarterly Report on Form 10-Q, filed with the SEC on August 9, 2016, is incorporated herein by this
reference)
10.15 Increase Agreement, dated as of December 1, 2016, by and among NSA OP, LP, as Borrower, certain of its
subsidiaries party thereto as Subsidiary Guarantors, National Storage Affiliates Trust as Guarantor, the
lenders from time to time party hereto, and KeyBank National Association, as Administrative Agent (Exhibit
10.11 to the Annual Report on Form 10-K, filed with SEC on February 28, 2017, is incorporated herein by
this reference)
10.16 Second Increase Agreement and Amendment, dated as of February 08, 2017, by and among NSA OP, LP,
as Borrower, certain of its subsidiaries party thereto as Subsidiary Guarantors, National Storage Affiliates
Trust as Guarantor, the lenders from time to time party hereto, and KeyBank National Association, as
Administrative Agent (Exhibit 10.12 to the Annual Report on Form 10-K, filed with SEC on February 28,
2017, is incorporated herein by this reference)
10.17 Third Increase Agreement and Amendment, dated as of January 29, 2018, by and among NSA OP, LP, as
Borrower, certain of its subsidiaries party thereto as Subsidiary Guarantors, National Storage Affiliates
Trust as Guarantor, the lenders from time to time party hereto, and KeyBank National Association, as
Administrative Agent (Exhibit 10.17 to the Annual Report on Form 10-K, filed with the SEC on February
27, 2018, is incorporated herein by this reference)
10.18 Third Amendment to Credit Agreement and Release of Parent Guaranty, dated as of April 16, 2018, by and
among NSA OP, LP, as Borrower, certain of its subsidiaries party thereto as Subsidiary Guarantors, certain
existing lenders party thereto from time to time, National Storage Affiliates Trust, and KeyBank National
Association, as the Administrative Agent, and the financial institutions which are party to the Credit
Agreement, as lenders (Exhibit 10.1 to the Quarterly Report on Form 10-Q, filed with the SEC on August
7, 2018, is incorporated herein by this reference)
10.19 Fourth Amendment to Credit Agreement, dated as of May 31, 2018, by and among NSA OP, LP, as Borrower,
certain of its subsidiaries party thereto as Subsidiary Guarantors, certain existing lenders party thereto from
time to time, National Storage Affiliates Trust, and KeyBank National Association, as the Administrative
Agent, and the financial institutions which are a party to the Credit Agreement, as lenders (Exhibit 10.2 to
the Quarterly Report on Form 10-Q, filed with the SEC on August 7, 2018, is incorporated herein by this
reference)
10.20 Credit Agreement, dated as of June 30, 2016, by and among NSA OP, LP, as Borrower, the lenders from
time to time party hereto, and Capital One, National Association, as Administrative Agent, and joined in
for certain purposes by certain Subsidiaries of the Borrower and National Storage Affiliates Trust, with
Capital One, National Association, Regions Bank and U.S. Bank National Association, as Co-Bookrunners
and Co-Lead Arrangers, and Regions Bank and U.S. Bank National Association, as Syndication Agents
(Exhibit 10.3 to the Quarterly Report on Form 10-Q, filed with the SEC on August 7, 2018, is incorporated
herein by this reference)
10.21 First Amendment to Credit Agreement and Release of Parent Guaranty, dated as of April 16, 2018, by and
among NSA OP, LP, as Borrower, certain Subsidiaries of the Borrower party as Guarantors, National Storage
Affiliates Trust, certain existing lenders party thereto, and Capital One, National Association, as
Administrative Agent for the Lenders (Exhibit 10.4 to the Quarterly Report on Form 10-Q, filed with the
SEC on August 7, 2018, is incorporated herein by this reference)
10.22 Second Amendment to Credit Agreement, dated as of June 5, 2018, by and among NSA OP, LP, as Borrower,
certain Subsidiaries of the Borrower party as Guarantors, National Storage Affiliates Trust, certain existing
lenders party thereto, the additional lender parties thereto providing a new commitment pursuant to the
terms thereof, and Capital One, National Association, as Administrative Agent for the Lenders (Exhibit
10.5 to the Quarterly Report on Form 10-Q, filed with the SEC on August 7, 2018, is incorporated herein
by this reference)
10.23 National Storage Affiliates Trust Equity Incentive Plan (Exhibit 10.1 to the Quarterly Report on Form 10-
Q, filed with the SEC on June 5, 2015, is incorporated herein by this reference)
10.24 NSA OP, LP, 2013 Long-Term Incentive Plan (Exhibit 10.2 to the Registration Statement on Form S-11/
A, filed with SEC on April 1, 2015, is incorporated herein by this reference).
10.25 Amended and Restated Registration Rights Agreement, by and among National Storage Affiliates Trust
and the parties listed on Schedule I thereto (Exhibit 10.2 to the Quarterly Report on Form 10-Q, filed with
the SEC on June 5, 2015, is incorporated herein by reference)
61
10.26 Registration Rights Agreement, by and among National Storage Affiliates Trust and the parties listed on
Schedule 1 thereto (Exhibit 10.2 to the Quarterly Report on Form 10-Q, filed with the SEC on May 4, 2018,
is incorporated by this reference)
10.27 Employment Agreement, dated April 28, 2015, by and between National Storage Affiliates Trust and Arlen
D. Nordhagen (Exhibit 10.3 to the Quarterly Report on Form 10-Q, filed with the SEC on June 5, 2015, is
incorporated herein by this reference)
10.28 Employment Agreement, dated April 28, 2015, by and between National Storage Affiliates Trust and Tamara
D. Fischer (Exhibit 10.4 to the Quarterly Report on Form 10-Q, filed with the SEC on June 5, 2015, is
incorporated herein by this reference)
10.29 Employment Agreement, dated April 28, 2015, by and between National Storage Affiliates Trust and Steven
B. Treadwell (Exhibit 10.5 to the Quarterly Report on Form 10-Q, filed with the SEC on June 5, 2015, is
incorporated herein by this reference)
10.30 Employment Agreement, dated January 1, 2017, by and between National Storage Affiliates Trust and
Brandon Togashi (Exhibit 10.19 to the Annual Report on Form 10-K, filed with SEC on February 28, 2017,
is incorporated by this reference)
10.31 First Amendment to Employment Agreement, dated March 29, 2018, by and between National Storage
Affiliates Trust and Arlen D. Nordhagen (Exhibit 10.3 to the Quarterly Report on Form 10-Q, filed with
the SEC on May 4, 2018, is incorporated herein by this reference)
10.32 First Amendment to Employment Agreement, dated March 29, 2018, by and between National Storage
Affiliates Trust and Tamara D. Fischer (Exhibit 10.4 to the Quarterly Report on Form 10-Q, filed with the
SEC on May 4, 2018, is incorporated herein by this reference)
10.33 First Amendment to Employment Agreement, dated March 29, 2018, by and between National Storage
Affiliates Trust and Steven B. Treadwell (Exhibit 10.5 to the Quarterly Report on Form 10-Q, filed with
the SEC on May 4, 2018, is incorporated herein by this reference)
10.34 First Amendment to Employment Agreement, dated March 29, 2018, by and between National Storage
Affiliates Trust and Brandon Togashi (Exhibit 10.6 to the Quarterly Report on Form 10-Q, filed with the
SEC on May 4, 2018, is incorporated herein by this reference)
10.35 Form of Amended and Restated Restricted Share Unit Award Agreement (Exhibit 10.17 to the Annual
Report on Form 10-K, filed with the SEC on March 10, 2016, is incorporated herein by this reference)
10.36 Form of Amended and Restated Restricted Share Award Agreement (Exhibit 10.18 to the Annual Report
on Form 10-K, filed with the SEC on March 10, 2016, is incorporated herein by this reference)
10.37 Form of LTIP Unit Award Agreement to Trustees under the NSA OP, LP, 2013 Long-Term Incentive Plan
(Exhibit 10.5 to the Registration Statement on Form S-11/A, filed with the SEC on April 1, 2015, is
incorporated herein by this reference)
10.38 Form of LTIP Unit Award Agreement for Executive Officers (Exhibit 10.28 to the Annual Report on Form
10-K, filed with the SEC on February 27, 2018, is incorporated herein by this reference)
10.39 Form of Contribution Agreement among each contributor named therein, NSA OP, LP and any indirectly
wholly owned subsidiary of NSA OP, LP named therein (Exhibit 10.13 to the Registration Statement on
Form S-11/A, filed with the SEC on April 1, 2015, is incorporated herein by this reference)
10.40 Form of Purchase and Sale Agreement among each seller named therein, National Storage Affiliates Trust
and NSA OP, LP (Exhibit 10.14 to the Registration Statement on Form S-11/A, filed with the SEC on April
1, 2015, is incorporated herein by this reference)
10.41 Form of Indemnification Agreement (Exhibit 10.7 to the Registration Statement on Form S-11/A, filed with
the SEC on April 1, 2015, is incorporated herein by this reference)
10.42 Facilities Portfolio Management Agreement, dated April 28, 2015, by and among (i) NSA OP, LP, (ii) the
property owners listed therein, (iii) Guardian Storage Centers, LLC, a California limited liability company
d/b/a StorAmerica Management, and (iv) John Minar and David Lamb, each an individual (Exhibit 10.6
to the Quarterly Report on Form 10-Q, filed with the SEC on June 5, 2015, is incorporated herein by this
reference)
10.43 Facilities Portfolio Management Agreement, dated April 28, 2015, by and among (i) NSA OP, LP, (ii) the
property owners listed therein, (iii) Kevin Howard Real Estate, Inc., an Oregon corporation, and (iv) Kevin
Howard, an individual (Exhibit 10.7 to the Quarterly Report on Form 10-Q, filed with the SEC on June 5,
2015, is incorporated herein by this reference)
10.44 Facilities Portfolio Management Agreement, dated April 28, 2015, by and among (i) NSA OP, LP, (ii) the
property owners listed therein, (iv) Optivest Properties, LLC, a California limited liability company, and
(iv) Warren Allen, an individual (Exhibit 10.8 to the Quarterly Report on Form 10-Q, filed with the SEC
on June 5, 2015, is incorporated herein by this reference)
62
10.45 Facilities Portfolio Management Agreement, dated April 28, 2015, by and among (i) NSA OP, LP, (ii) the
property owners listed therein, (iii) SecurCare Self Storage, Inc. a Colorado corporation, and (iv) David
Cramer, Justin Hlibichuk and Arlen Nordhagen, each an individual (Exhibit 10.9 to the Quarterly Report
on Form 10-Q, filed with the SEC on June 5, 2015, is incorporated herein by this reference)
10.46 Facilities Portfolio Management Agreement, dated April 28, 2015, by and among (i) NSA OP, LP, (ii) the
property owners listed therein (iii) Arizona Mini Storage Management Company, an Arizona corporation,
and (iv) William F. Bohannan, Jr. and Raymond McRae, each an individual (Exhibit 10.10 to the Quarterly
Report on Form 10-Q, filed with the SEC on June 5, 2015, is incorporated herein by this reference)
10.47 Facilities Portfolio Management Agreement, dated April 1, 2016, by and among (i) NSA OP, LP, (ii) the
property owners listed therein (iii) the property owners listed as "Deferred Management Property Owners"
therein (iv) Hide-Away Storage Services, Inc., a Florida Corporation and, (v) Stephen A. Wilson, Paul
Feikema, and Meisha Wilson, each an individual (Exhibit 10.2 to the Quarterly Report on Form 10-Q, filed
with the SEC on August 9, 2016, is incorporated herein by this reference)
10.48 Facilities Portfolio Management Agreement, dated February 24, 2017, by and among (i) NSA OP, LP, (ii)
the property owners listed therein (iii) Shader Brothers Corporation, and (iv) Marc M. Smith and Laurie
Shader Smith, each an individual (Exhibit 10.3 to the Quarterly Report on Form 10-Q, filed with the SEC
on May 4, 2017, is incorporated herein by this reference)
10.49 Facilities Portfolio Management Agreement, dated July 1, 2017, by and among (i) NSA OP, LP, (ii) the
property owners listed therein, (iii) Move It Self Storage, LP, a Texas limited partnership, and (iv) Austin
Starke Taylor III, an individual (Exhibit 10.2 to the Quarterly Report on Form 10-Q, filed with the SEC on
November 7, 2017, is incorporated herein by this reference)
21.1* List of subsidiaries of National Storage Affiliates Trust
23.1* Consent of KPMG LLP for National Storage Affiliates Trust
24.1* Power of Attorney (included on signature page)
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1* Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101* XBRL (Extensible Business Reporting Language). The following materials from NSA's Annual Report on
Form 10-K for the year ended December 31, 2018, tagged in XBRL: ((i) consolidated balance sheets; (ii)
consolidated statements of operations; (iii) consolidated statements of comprehensive income (loss); (iv)
consolidated statement of changes in equity; (v) consolidated statements of cash flows; (vi) notes to
consolidated financial statements; and (vii) financial statement schedule (3).
* Filed herewith.
Item 16. Form 10-K Summary
None.
63
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
National Storage Affiliates Trust
By:
/s/ ARLEN D. NORDHAGEN
Arlen D. Nordhagen
chairman of the board of trustees and
chief executive officer
(principal executive officer)
Date: February 26, 2019
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Arlen D. Nordhagen and Tamara D. Fischer, and each of them, with full power to act without the other, such
person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her
and in his or her name, place and stead, in any and all capacities, to sign this Form 10-K and any and all amendments
thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises,
as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
64
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned and in the capacities and on the dates indicated.
Signature
National Storage Affiliates Trust
/s/ ARLEN D. NORDHAGEN
Arlen D. Nordhagen
Title
Date
chairman of the board of trustees and
chief executive officer
(principal executive officer)
February 26, 2019
/s/ TAMARA D. FISCHER
Tamara D. Fischer
president and chief financial officer
(principal financial officer)
February 26, 2019
/s/ BRANDON S. TOGASHI
Brandon S. Togashi
chief accounting officer
(principal accounting officer)
February 26, 2019
/s/ GEORGE L. CHAPMAN
trustee
February 26, 2019
George L. Chapman
/s/ KEVIN M. HOWARD
Kevin M. Howard
trustee
February 26, 2019
/s/ PAUL W. HYLBERT, JR.
trustee
February 26, 2019
Paul W. Hylbert, Jr.
/s/ CHAD L. MEISINGER
Chad L. Meisinger
/s/ STEVEN G. OSGOOD
Steven G. Osgood
trustee
trustee
February 26, 2019
February 26, 2019
/s/ DOMINIC M. PALAZZO
trustee
February 26, 2019
Dominic M. Palazzo
/s/ REBECCA L. STEINFORT
trustee
February 26, 2019
Rebecca L. Steinfort
/s/ MARK VAN MOURICK
trustee
February 26, 2019
Mark Van Mourick
65
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NATIONAL STORAGE AFFILIATES TRUST
INDEX TO FINANCIAL STATEMENTS
Financial Statements:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2018,
2017 and 2016
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2018, 2017 and
2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
Notes to the Consolidated Financial Statements
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation
Page
F-2
F-4
F-5
F-6
F-7
F-10
F-12
F-37
All other schedules are omitted because they are not applicable or the required information is shown in the
financial statements or notes thereto.
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees
National Storage Affiliates Trust:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of National Storage Affiliates Trust and subsidiaries
(the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive
income (loss), changes in equity, and cash flows for each of the years in the three year period ended December 31,
2018, and the related notes, and the financial statement schedule, Schedule III - Real Estate and Accumulated
Depreciation (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and
the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2018,
in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission, and our report dated February 26, 2019 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2013.
Denver, Colorado
February 26, 2019
F-2
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees
National Storage Affiliates Trust:
Opinion on Internal Control Over Financial Reporting
We have audited National Storage Affiliates Trust and subsidiaries’ (the Company) internal control over financial
reporting as of December 31, 2018 based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related
consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the
years in the three-year period ended December 31, 2018, and the related notes, and the financial statement schedule,
Schedule III - Real Estate and Accumulated Depreciation (collectively, the consolidated financial statements), and our
report dated February 26, 2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Denver, Colorado
February 26, 2019
/s/ KPMG LLP
F-3
NATIONAL STORAGE AFFILIATES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
ASSETS
Real estate
Self storage properties
Less accumulated depreciation
Self storage properties, net
Cash and cash equivalents
Restricted cash
Debt issuance costs, net
Investment in unconsolidated real estate ventures
Other assets, net
Assets held for sale
Total assets
LIABILITIES AND EQUITY
Liabilities
Debt financing
Accounts payable and accrued liabilities
Deferred revenue
Total liabilities
Commitments and contingencies (Note 12)
Equity
Preferred shares of beneficial interest, par value $0.01 per share.
50,000,000 authorized, 6,900,000 issued and outstanding at December
31, 2018 and 2017, at liquidation preference
Common shares of beneficial interest, par value $0.01 per share.
250,000,000 authorized, 56,654,009 and 50,284,934 shares issued and
outstanding at December 31, 2018 and 2017, respectively
Additional paid-in capital
Distributions in excess of earnings
Accumulated other comprehensive income
Total shareholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity
December 31,
2018
2017
$
$
$
$
2,637,723
(246,261)
2,391,462
13,181
3,182
1,260
245,125
75,053
—
2,275,233
(170,358)
2,104,875
13,366
3,041
2,185
89,093
52,615
1,555
2,729,263
$
2,266,730
1,278,102
$
958,097
33,130
15,732
1,326,964
24,459
12,687
995,243
172,500
172,500
567
844,276
(114,122)
13,618
916,839
485,460
503
711,467
(55,729)
12,282
841,023
430,464
1,402,299
1,271,487
$
2,729,263
$
2,266,730
See notes to consolidated financial statements.
F-4
NATIONAL STORAGE AFFILIATES TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
REVENUE
Rental revenue
Other property-related revenue
Management fees and other revenue
Total revenue
OPERATING EXPENSES
Property operating expenses
General and administrative expenses
Depreciation and amortization
Total operating expenses
Income from operations
OTHER (EXPENSE) INCOME
Interest expense
Loss on early extinguishment of debt
Equity in losses of unconsolidated real estate ventures
Acquisition costs
Non-operating expense
Gain on sale of self storage properties
Other expense
Income before income taxes
Income tax expense
Net income
Net income attributable to noncontrolling interests
Net income attributable to National Storage
Affiliates Trust
Distributions to preferred shareholders
Net income attributable to common shareholders
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
Weighted average shares outstanding - basic
Weighted average shares outstanding - diluted
$
$
$
$
Year Ended December 31,
2017
2016
2018
$
$
$
$
308,403
10,183
12,310
330,896
103,875
36,220
89,147
229,242
101,654
(42,724)
—
(1,423)
(663)
(91)
391
(44,510)
57,144
(818)
56,326
(42,217)
14,109
(10,350)
3,759
0.07
0.07
53,293
53,293
$
$
$
$
251,814
8,255
8,061
268,130
84,455
30,060
75,115
189,630
78,500
(34,068)
—
(2,339)
(593)
(58)
5,715
(31,343)
47,157
(1,159)
45,998
(43,037)
2,961
(2,300)
661
0.01
0.01
44,423
44,423
191,178
6,059
1,809
199,046
64,798
21,528
55,064
141,390
57,656
(24,109)
(136)
(1,484)
(6,546)
(147)
—
(32,422)
25,234
(368)
24,866
(6,901)
17,965
—
17,965
0.60
0.31
29,887
78,747
See notes to consolidated financial statements.
F-5
NATIONAL STORAGE AFFILIATES TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
Net income
Other comprehensive income (loss)
Unrealized gain on derivative contracts
Reclassification of other comprehensive (income) loss to
interest expense
Other comprehensive income
Comprehensive income
Comprehensive income attributable to noncontrolling
interests
Comprehensive income attributable to National Storage
Affiliates Trust
Year Ended December 31,
2017
2016
2018
$
56,326
$
45,998
$
24,866
3,598
(1,817)
1,781
58,107
1,935
2,308
4,243
50,241
6,434
2,678
9,112
33,978
(43,244)
(44,697)
(7,272)
$
14,863
$
5,544
$
26,706
See notes to consolidated financial statements.
F-6
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-
F
NATIONAL STORAGE AFFILIATES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year Ended December 31,
2017
2016
2018
56,326
$
45,998
$
24,866
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided
$
by operating activities:
Depreciation and amortization
Amortization of debt issuance costs
Amortization of debt discount and premium, net
Loss on debt extinguishment
Gain on sale of self storage properties
LTIP units issued for acquisition expenses
Equity-based compensation expense
Equity in losses of unconsolidated real estate ventures
Distributions from unconsolidated real estate ventures
Change in assets and liabilities, net of effects of self
storage property acquisitions:
Other assets
Accounts payable and accrued liabilities
Deferred revenue
89,147
2,569
(1,469)
—
(391)
—
3,837
1,423
8,187
(5,713)
6,597
1,283
Net Cash Provided by Operating Activities
161,796
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of self storage properties
Capital expenditures
Investments in and advances to unconsolidated real estate
ventures
Distributions from unconsolidated real estate ventures
Acquisition of property management platform
Deposits and advances for self storage property and other
acquisitions
Expenditures for corporate furniture, equipment and other
Net proceeds from sale of self storage properties
Net Cash Used In Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common shares
Proceeds from issuance of preferred shares
Proceeds from issuance of subordinated performance
units
Borrowings under debt financings
Receipts for OP unit subscriptions
Collection of receivables from issuance of OP equity
Principal payments under debt financings
Payment of dividends to common shareholders
Payment of dividends to preferred shareholders
Distributions to noncontrolling interests
Debt issuance costs
(313,712)
(19,014)
(165,642)
—
—
(20,977)
(403)
5,259
(514,489)
175,616
—
—
822,500
1,211
—
(507,239)
(62,152)
(10,350)
(63,350)
(2,860)
See notes to consolidated financial statements.
F-10
75,115
2,175
(1,570)
—
(5,715)
—
3,764
2,339
5,093
(2,398)
1,200
(1,713)
124,288
(391,619)
(14,656)
(15,289)
250
—
(4,923)
(588)
17,534
(409,291)
140,261
166,566
7,000
760,900
1,150
—
(679,104)
(47,671)
(2,300)
(57,314)
(2,381)
55,064
1,955
(2,051)
136
—
56
2,597
1,484
730
(1,994)
8,386
3,417
94,646
(532,030)
(11,418)
(82,950)
—
(19,933)
(345)
(527)
4,823
(642,380)
378,281
—
—
812,500
1,344
930
(558,597)
(26,695)
—
(47,005)
(5,665)
NATIONAL STORAGE AFFILIATES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
Equity offering costs
Net Cash Provided by Financing Activities
(Decrease) Increase in Cash, Cash Equivalents and
Restricted Cash
CASH, CASH EQUIVALENTS AND RESTRICTED
CASH
Beginning of year
End of year
Supplemental Cash Flow Information
Cash paid for interest
Supplemental Disclosure of Non-Cash Investing and
Financing Activities
Consideration exchanged in property acquisitions:
Issuance of OP units and subordinated performance
$
$
Year Ended December 31,
2017
2016
2018
(727)
352,649
(1,034)
286,073
(1,399)
553,694
(44)
1,070
5,960
16,407
16,363
$
15,337
16,407
$
9,377
15,337
40,475
$
32,951
$
23,313
units
$
28,063
$
30,327
$
120,952
Deposits on acquisitions applied to purchase price
LTIP units vesting upon acquisition of properties
Assumption of mortgages payable
Other net liabilities assumed
Issuance of OP unit subscription liability through reduced
distributions
Settlement of acquisition receivables through reduced
distributions
Increase in OP unit subscription liability through reduced
distributions
Increase in payables for offering costs
Settlement of offering expenses from equity issuance
proceeds
5,050
—
7,581
2,167
1,236
642
19
626
575
350
854
—
3,616
1,262
812
108
600
631
814
61,628
4,817
1,441
445
310
593
12,299
11,673
See notes to consolidated financial statements.
F-11
NATIONAL STORAGE AFFILIATES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
National Storage Affiliates Trust was organized in the state of Maryland on May 16, 2013 and is a fully integrated,
self-administered and self-managed real estate investment trust focused on the self storage sector. As used herein,
"NSA," the "Company," "we," "our," and "us" refers to National Storage Affiliates Trust and its consolidated subsidiaries,
except where the context indicates otherwise. The Company has elected and believes that it has qualified to be taxed
as a real estate investment trust for U.S. federal income tax purposes ("REIT") commencing with its taxable year ended
December 31, 2015.
Through its controlling interest as the sole general partner of NSA OP, LP (its "operating partnership"), a Delaware
limited partnership formed on February 13, 2013, the Company is focused on the ownership, operation, and acquisition
of self storage properties located within the top 100 MSAs in the United States. Pursuant to the Agreement of Limited
Partnership (as amended, the "LP Agreement") of its operating partnership, the Company's operating partnership is
authorized to issue preferred units, Class A Units ("OP units"), different series of Class B Units ("subordinated
performance units"), and Long-Term Incentive Plan Units ("LTIP units"). The Company also owns certain of its self
storage properties through other consolidated limited partnership subsidiaries of its operating partnership, which the
Company refers to as "DownREIT partnerships." The DownREIT partnerships issue equity ownership interests that
are intended to be economically equivalent to the Company's OP units ("DownREIT OP units") and subordinated
performance units ("DownREIT subordinated performance units").
The Company owned 499 self storage properties in 26 states and Puerto Rico with approximately 30.4 million
rentable square feet (unaudited) in approximately 242,000 storage units as of December 31, 2018. These properties are
managed with local operational focus and expertise by the Company and its participating regional operators ("PROs").
These PROs are SecurCare Self Storage, Inc. and its controlled affiliates ("SecurCare"), Kevin Howard Real Estate
Inc., d/b/a Northwest Self Storage and its controlled affiliates ("Northwest"), Optivest Properties LLC and its controlled
affiliates ("Optivest"), Guardian Storage Centers LLC and its controlled affiliates ("Guardian"), Move It Self Storage
and its controlled affiliates ("Move It"), Arizona Mini Storage Management Company d/b/a Storage Solutions and its
controlled affiliates ("Storage Solutions"), Hide-Away Storage Services, Inc. and its controlled affiliates ("Hide-Away")
and an affiliate of Shader Brothers Corporation d/b/a Personal Mini Storage ("Personal Mini").
In October 2018, the Company entered into definitive agreements with affiliates of Southern Self Storage, LLC
d/b/a Southern Self Storage of Palm Beach Gardens, Florida, to add Southern Self Storage ("Southern") as the Company's
ninth PRO. In January 2019, the Company completed the initial contribution transaction with Southern. As discussed
in Note 15, in February 2019, the Company entered into definitive agreements with affiliates of Investment Real Estate
Management, LLC d/b/a Moove In Self Storage of York, Pennsylvania to add Moove In Self Storage ("Moove In") as
the Company's tenth PRO.
As of December 31, 2018, the Company also managed through its property management platform an additional
portfolio of 176 properties owned by the Company's unconsolidated real estate ventures. These properties contain
approximately 12.6 million rentable square feet, configured in approximately 103,000 storage units and located across
22 states. The Company owns a 25% equity interest in each of its unconsolidated real estate ventures.
As of December 31, 2018, in total, the Company operated and held ownership interests in 675 self storage properties
located across 34 states and Puerto Rico with approximately 43.0 million rentable square feet in approximately 345,000
storage units.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements are presented on the accrual basis of accounting in accordance
with U.S. generally accepted accounting principles ("GAAP").
F-12
Principles of Consolidation
The Company's consolidated financial statements include the accounts of its operating partnership and its controlled
subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidation of entities.
When the Company obtains an economic interest in an entity, the Company evaluates the entity to determine if
the entity is deemed a variable interest entity ("VIE"), and if the Company is deemed to be the primary beneficiary, in
accordance with authoritative guidance issued on the consolidation of VIEs. When an entity is not deemed to be a VIE,
the Company considers the provisions of additional guidance to determine whether the general partner controls a limited
partnership or similar entity when the limited partners have certain rights. The Company consolidates all entities that
are VIEs and of which the Company is deemed to be the primary beneficiary. The Company has determined that its
operating partnership is a VIE. The sole significant asset of National Storage Affiliates Trust is its investment in its
operating partnership, and consequently, substantially all of the Company's assets and liabilities represent those assets
and liabilities of its operating partnership.
As of December 31, 2018, the Company's operating partnership was the primary beneficiary of, and therefore
consolidated, 21 DownREIT partnerships that are considered VIEs, which owned 34 self storage properties. The net
book value of the real estate owned by these VIEs was $240.4 million and $248.0 million as of December 31, 2018
and December 31, 2017, respectively. For certain DownREIT partnerships which are subject to fixed rate mortgages
payable, the carrying value of such fixed rate mortgages payable held by these VIEs was $138.4 million and $140.3
million as of December 31, 2018 and December 31, 2017, respectively. The creditors of the consolidated VIEs do not
have recourse to the Company's general credit.
Noncontrolling Interests
All of the limited partner equity interests ("OP equity") in its operating partnership not held by the Company are
reflected as noncontrolling interests. Noncontrolling interests also include ownership interests in DownREIT
partnerships held by entities other than the Company's operating partnership. In the consolidated statements of
operations, the Company allocates net income (loss) attributable to noncontrolling interests to arrive at net income
(loss) attributable to National Storage Affiliates Trust.
For transactions that result in changes to the Company's ownership interest in its operating partnership, the carrying
amount of noncontrolling interests is adjusted to reflect such changes. The difference between the fair value of the
consideration received or paid and the amount by which the noncontrolling interests is adjusted is reflected as an
adjustment to additional paid-in capital on the consolidated balance sheets.
Self Storage Properties
Self storage properties are carried at historical cost less accumulated depreciation and any impairment losses. Major
replacements and betterments, which improve or extend the life of an asset, are capitalized. Expenditures for ordinary
repairs and maintenance are expensed as incurred and are included in property operating expenses. Estimated depreciable
lives of self storage properties are determined by considering the age and other indicators about the condition of the
assets at the respective dates of acquisition, resulting in a range of estimated useful lives for assets within each category.
All self storage property assets are depreciated using the straight-line method. Buildings and improvements are
depreciated over estimated useful lives primarily between seven and 40 years; furniture and equipment are depreciated
over estimated useful lives primarily between three and 10 years.
When a self storage property is acquired, the purchase price of the acquired self storage property is allocated to
land, buildings and improvements, furniture and equipment, customer in-place leases, assumed real estate leasehold
interests, other assets acquired and liabilities assumed, based on the estimated fair value of each component. When a
portfolio of self storage properties is acquired, the purchase price is allocated to the individual self storage properties
based on the fair value determined using an income approach with appropriate risk-adjusted capitalization rates, which
take into account the relative size, age and location of the individual self storage properties.
Cash and Cash Equivalents
The Company considers all highly-liquid investments purchased with original maturities of three months or less
to be cash equivalents. From time to time, the Company maintains cash balances in financial institutions in excess of
federally insured limits. The Company has never experienced a loss that resulted from exceeding federally insured
limits.
F-13
Restricted Cash
The Company's restricted cash consists of escrowed funds deposited with financial institutions for real estate taxes,
insurance and other reserves for capital improvements in accordance with the Company's loan agreements.
Customer In-place Leases
In allocating the purchase price for a self storage property acquisition, the Company determines whether the
acquisition includes intangible assets. The Company allocates a portion of the purchase price to an intangible asset
attributed to the value of customer in-place leases. This intangible asset is amortized to expense using the straight-line
method over 12 months, the estimated average rental period for the leases. Substantially all of the leases in place at
acquired properties are at market rates, as the leases are month-to-month contracts.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for impairment when events and circumstances indicate that there may
be impairment. When events or changes in circumstances indicate that the Company's long-lived assets may not be
recoverable, the carrying value of these long-lived assets is compared to the undiscounted future net operating cash
flows, plus a terminal value attributable to the assets. If an asset's carrying value is not considered recoverable, an
impairment loss is recorded to the extent the net carrying value of the asset exceeds the fair value. For the periods
presented, no assets were determined to be impaired under this policy.
Costs of Raising Capital
Commissions, legal fees and other costs that are directly associated with equity offerings are capitalized as deferred
offering costs, pending a determination of the success of the offering. Deferred offering costs related to successful
offerings are charged to additional paid-in capital within equity in the period it is determined that the offering was
successful.
Debt issuance costs are amortized over the estimated life of the related debt using the straight-line method, which
approximates the effective interest rate method. Amortization of debt issuance costs is included in interest expense in
the accompanying statements of operations.
Revenue Recognition
Rental revenue
Rental revenue consists of space rentals and related fees. Management has determined that all of the Company's
leases are operating leases. Substantially all leases may be terminated on a month-to-month basis and rental income is
recognized ratably over the lease term using the straight-line method. Rents received in advance are deferred and
recognized on a straight-line basis over the related lease term associated with the prepayment. Promotional discounts
and other incentives are recognized as a reduction to rental income over the applicable lease term.
Other property-related revenue
Other property-related revenue consists of ancillary revenues such as tenant insurance and/or tenant warranty
protection-related access fees and sales of storage supplies which are recognized in the period earned.
The Company and certain of the Company’s PROs have tenant insurance- and/or tenant warranty protection plan-
related arrangements with insurance companies and the Company’s tenants. During the years ended December 31,
2018, 2017 and 2016, the Company recognized $7.5 million, $6.0 million and $4.2 million, respectively, of tenant
insurance and tenant warranty protection plan revenues.
The Company sells boxes, packing supplies, locks and other retail merchandise at its properties. During the years
ended December 31, 2018, 2017 and 2016, the Company recognized retail sales of $1.5 million, $1.3 million and $1.0
million, respectively.
Management fees and other revenue
Management fees and other revenue consist of property management fees, platform fees, call center fees, acquisition
fees, and a portion of tenant warranty protection or tenant insurance proceeds that the Company earns for managing
and operating its unconsolidated real estate ventures.
With respect to both the 2018 Joint Venture and the 2016 Joint Venture, the Company provides supervisory and
administrative property management services, centralized call center services, and technology platform and revenue
F-14
management services to the properties in the unconsolidated real estate ventures. The property management fees are
equal to 6% of monthly gross revenues and net sales revenues from the assets of the unconsolidated real estate ventures,
and the platform fees are equal to $1,250 per month per unconsolidated real estate venture property. With respect to
the 2016 Joint Venture only, the call center fees are equal to 1% of each of monthly gross revenues and net sales revenues
from the 2016 Joint Venture properties. During the years ended December 31, 2018, 2017 and 2016, the Company
recognized property management fees, call center fees and platform fees of $7.8 million, $4.8 million and $1.1 million,
respectively.
For acquisition fees, the Company provides sourcing, underwriting and administration services to the
unconsolidated real estate ventures. The 2016 Joint Venture paid the Company a $4.1 million acquisition fee equal
to 0.65% of the gross capitalization (including debt and equity) of the original 66-property 2016 Joint Venture portfolio
(the "Initial 2016 JV Portfolio") in 2016, at the time of the Initial 2016 JV Portfolio acquisition. The 2018 Joint Venture
paid the Company a $4.0 million acquisition fee related to the initial acquisition of properties by the 2018 Joint Venture
(the "Initial 2018 JV Portfolio") during the year ended December 31, 2018, at the time of the Initial 2018 JV Portfolio
acquisition. These fees are refundable to the unconsolidated real estate ventures, on a prorated basis, if the Company
is removed as the managing member during the initial four year life of the unconsolidated real estate ventures and as
such, the Company's performance obligation for these acquisition fees are satisfied over a four year period. As of
December 31, 2018 and 2017, the Company had deferred revenue related to the acquisition fees of $4.6 million and
$2.8 million, respectively.
The Company also earns acquisition fees for properties acquired by the unconsolidated real estate ventures
subsequent to the Initial 2016 JV Portfolio and the Initial 2018 JV Portfolio. These fees are based on a percentage of
the gross capitalization of the acquired assets determined by the members of the 2016 Joint Venture and the 2018 Joint
Venture, and are generally earned when the unconsolidated real estate ventures obtain title and control of an acquired
property. During the years ended December 31, 2018, 2017 and 2016, the Company recognized acquisition fees of $1.6
million, $1.5 million and $0.3 million, respectively.
An affiliate of the Company facilitates tenant warranty protection or tenant insurance programs for tenants of the
properties in the unconsolidated real estate ventures in exchange for 50% of all proceeds from such programs at each
unconsolidated real estate venture property. During the years ended December 31, 2018, 2017 and 2016, the Company
recognized $2.4 million, $1.9 million and $0.5 million, respectively, of revenue related to these activities.
Advertising Costs
The Company incurs advertising costs primarily attributable to internet, directory and other advertising. Advertising
costs are included in property operating expenses in the accompanying statements of operations. These costs are
expensed in the period in which the cost is incurred. The Company incurred advertising costs of $4.1 million, $3.7
million and $3.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Acquisition Costs
The Company incurs title, legal and consulting fees, and other costs associated with the completion of acquisitions.
During the year ended December 31, 2017, the Company adopted Accounting Standards Update ("ASU") 2017-01 and
as a result, the Company's self storage property acquisitions during the years ended December 31, 2018 and 2017 were
accounted for as asset acquisitions, and accordingly, acquisition costs directly related to the self storage property
acquisitions were capitalized as part of the basis of the acquired properties. Indirect acquisition costs remain included
in acquisition costs in the accompanying statements of operations in the period in which they were incurred. Prior to
the Company's adoption of ASU 2017-01, direct and indirect costs were included in acquisition costs in the
accompanying statements of operations in the period in which they were incurred.
Income Taxes
Through December 31, 2014, the Company did not have a profit and loss sharing interest in its operating partnership
and did not have any other operations that were subject to taxation. Accordingly, the Company did not generate a federal
income tax benefit or expense for the period from its inception through December 31, 2014.
The Company has elected and believes it has qualified to be taxed as a REIT under sections 856 through 860 of
the U.S. Internal Revenue Code (the "Code") commencing with the taxable year ended December 31, 2015. To qualify
as a REIT, among other things, the Company is required to distribute at least 90% of its REIT taxable income to its
shareholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Company is not subject
to federal income tax on the earnings distributed currently to its shareholders that it derives from its REIT qualifying
F-15
activities. If the Company fails to qualify as a REIT in any taxable year, and is unable to avail itself of certain provisions
set forth in the Code, all of the Company's taxable income would be subject to federal and state income taxes at regular
corporate rates.
The Company will not be required to make distributions with respect to income derived from the activities conducted
through subsidiaries that the Company elects to treat as taxable REIT subsidiaries ("TRS") for federal income tax
purposes. Certain activities that the Company undertakes must be conducted by a TRS, such as performing non-
customary services for its customers, facilitating sales by PROs of tenant insurance and holding assets that the Company
is not permitted to hold directly. A TRS is subject to federal and state income taxes.
On June 25, 2014, the Company formed NSA TRS, LLC ("NSA TRS"), a Delaware limited liability company. The
Company has elected to treat NSA TRS as a TRS, and consequently, NSA TRS is subject to U.S. federal and state
corporate income taxes. Deferred tax assets and liabilities are recognized to the extent of any differences between the
financial reporting and tax bases of assets and liabilities. No material deferred tax assets and liabilities were recorded
as of December 31, 2018 and 2017.
The Company did not have any unrecognized tax benefits related to uncertain tax positions as of December 31,
2018 and 2017. Future amounts of accrued interest and penalties, if any, related to uncertain tax positions will be
recorded as a component of income tax expense. The Company does not expect that the amount of unrecognized tax
benefits will change significantly in the next 12 months.
The Company's material taxing jurisdiction is the U.S. federal jurisdiction; the 2015 tax year is the earliest period
that remains open to examination by these taxing jurisdictions.
Earnings per Share
Basic earnings per share is calculated based on the weighted average number of the Company's common shares
of beneficial interest, $0.01 par value per share ("common shares"), outstanding during the period. Diluted earnings
per share is calculated by further adjusting for the dilutive impact using the treasury stock method for any share options
and unvested share equivalents outstanding during the period and the if-converted method for any convertible securities
outstanding during the period.
As more fully described below under "–Allocation of Net Income (Loss)", the Company allocates GAAP income
(loss) utilizing the hypothetical liquidation at book value ("HLBV") method, which could result in net income (or net
loss) attributable to National Storage Affiliates Trust during a period when the Company reports consolidated net loss
(or net income), or net income (or net loss) attributable to National Storage Affiliates Trust in excess of the Company's
consolidated net income (or net loss). The computations of basic and diluted earnings (loss) per share may be materially
affected by these disproportionate income (loss) allocations, resulting in volatile fluctuations of basic and diluted
earnings (loss) per share.
Equity-Based Awards
The measurement and recognition of compensation cost for all equity-based awards granted to officers, employees
and consultants is based on estimated fair values. Compensation cost is recognized on a straight-line basis over the
requisite service periods of each award with non-graded vesting. For awards granted which contain a graded vesting
schedule and the only condition for vesting is a service condition, compensation cost is recognized as an expense on a
straight-line basis over the requisite service period as if the award was, in substance, a single award. For awards granted
for which vesting is subject to a performance condition, compensation cost is recognized over the requisite service
period if and when the Company concludes it is probable that the performance condition will be achieved.
The estimated fair value of all equity-based awards issued to PROs and their affiliates in connection with self
storage property acquisitions is included in the cost of the respective acquisitions. The estimated fair value of such
awards is measured at the date the self storage properties are acquired, as this date represents satisfaction of the
performance condition and coincides with the award vesting.
F-16
Derivative Financial Instruments
The Company carries all derivative financial instruments on the balance sheet at fair value. Fair value of derivatives
is determined by reference to observable prices that are based on inputs not quoted on active markets, but corroborated
by market data. The accounting for changes in the fair value of a derivative instrument depends on whether the derivative
has been designated and qualifies as part of a hedging relationship. The Company's use of derivative instruments has
been limited to interest rate swap and cap agreements. The fair values of derivative instruments are included in other
assets and accounts payable and accrued liabilities in the accompanying balance sheets. For derivative instruments not
designated as cash flow hedges, the unrealized gains and losses are included in interest expense in the accompanying
statements of operations. For derivatives designated as cash flow hedges, the effective portion of the changes in the
fair value of the derivatives is initially reported in accumulated other comprehensive income (loss) in the Company's
balance sheets and subsequently reclassified into earnings when the hedged transaction affects earnings.
The valuation of interest rate swap and cap agreements is determined using widely accepted valuation techniques
including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the
contractual terms of derivatives, including the period to maturity, and uses observable market-based inputs, including
interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of
netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash
receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest
rate forward curves. The Company may enter into derivative contracts that are intended to economically hedge certain
of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
Fair Value Measurements
When measuring fair value of financial instruments that are required to be recorded or disclosed at fair value, the
Company uses a three-tier measurement hierarchy which prioritizes the inputs used to calculate fair value. These tiers
include Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other
than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable
inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Investments in Unconsolidated Real Estate Ventures
The Company’s investments in its unconsolidated real estate ventures are recorded under the equity method of
accounting in the accompanying consolidated financial statements. Under the equity method, the Company’s
investments in unconsolidated real estate ventures are stated at cost and adjusted for the Company’s share of net earnings
or losses and reduced by distributions. Equity in earnings (losses) is recognized based on the Company’s ownership
interest in the earnings (losses) of the unconsolidated real estate ventures. The Company follows the "nature of the
distribution approach" for classification of distributions from its unconsolidated real estate ventures in its consolidated
statements of cash flows. Under this approach, distributions are reported on the basis of the nature of the activity or
activities that generated the distributions as either a return on investment, which are classified as operating cash flows,
or a return of investment (e.g., proceeds from the unconsolidated real estate ventures' sale of assets) which are reported
as investing cash flows.
Segment Reporting
The Company manages its business as one reportable segment consisting of investments in self storage properties
located in the United States. Although the Company operates in several markets, these operations have been aggregated
into one reportable segment based on the similar economic characteristics among all markets.
Reclassifications
Certain amounts in the consolidated financial statements and related notes have been reclassified to conform to
the current year presentation. Such reclassifications do not impact the Company's previously reported financial position
or net income (loss).
F-17
Allocation of Net Income (Loss)
The distribution rights and priorities set forth in the operating partnership's LP Agreement differ from what is
reflected by the underlying percentage ownership interests of the unitholders. Accordingly, the Company allocates
GAAP income (loss) utilizing the hypothetical liquidation at book value ("HLBV") method, in which the Company
allocates income or loss based on the change in each unitholders’ claim on the net assets of its operating partnership
at period end after adjusting for any distributions or contributions made during such period. The HLBV method is
commonly applied to equity investments where cash distribution percentages vary at different points in time and are
not directly linked to an equity holder’s ownership percentage.
The HLBV method is a balance sheet-focused approach to income (loss) allocation. A calculation is prepared at
each balance sheet date to determine the amount that unitholders would receive if the operating partnership were to
liquidate all of its assets (at GAAP net book value) and distribute the resulting proceeds to its creditors and unitholders
based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution
amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions,
is used to derive each unitholder's share of the income (loss) for the period. Due to the stated liquidation priorities and
because the HLBV method incorporates non-cash items such as depreciation expense, in any given period, income or
loss may be allocated disproportionately to unitholders as compared to their respective ownership percentage in the
operating partnership, and net income (loss) attributable to National Storage Affiliates Trust could be more or less net
income than actual cash distributions received and more or less income or loss than what may be received in the event
of an actual liquidation. Additionally, the HLBV method could result in net income (or net loss) attributable to National
Storage Affiliates Trust during a period when the Company reports consolidated net loss (or net income), or net income
(or net loss) attributable to National Storage Affiliates Trust in excess of the Company's consolidated net income (or
net loss). The computations of basic and diluted earnings (loss) per share may be materially affected by these
disproportionate income (loss) allocations, resulting in volatile fluctuations of basic and diluted earnings (loss) per
share.
Other Comprehensive Income (Loss)
The Company has cash flow hedge derivative instruments that are measured at fair value with unrealized gains or
losses recognized in other comprehensive income (loss) with a corresponding adjustment to accumulated other
comprehensive income (loss) within equity, as discussed further in Note 13. Under the HLBV method of allocating
income (loss) discussed above, a calculation is prepared at each balance sheet date by applying the HLBV method
including, and excluding, the assets and liabilities resulting from the Company's cash flow hedge derivative instruments
to determine comprehensive income (loss) attributable to National Storage Affiliates Trust. As a result of the distribution
rights and priorities set forth in the operating partnership's LP Agreement, in any given period, other comprehensive
income (loss) may be allocated disproportionately to unitholders as compared to their respective ownership percentage
in the operating partnership and as compared to their respective allocation of net income (loss).
Assets Held For Sale
The Company classifies properties as held for sale when certain criteria are met. At such time, the properties,
including significant assets and liabilities that are expected to be transferred as part of a sale transaction, are presented
separately on the consolidated balance sheet at the lower of carrying value or estimated fair value less costs to sell and
depreciation is no longer recognized. As of December 31, 2017, the Company had one self storage property classified
as held for sale. The results of operations for the self storage properties classified as held for sale are reflected within
income from operations in the Company's consolidated statements of operations.
Goodwill
Goodwill represents the costs of business acquisitions in excess of the fair value of identifiable net assets acquired.
The Company evaluates goodwill for potential impairment annually, or whenever impairment indicators are present.
The Company determined that there was no impairment to goodwill during the years ended December 31, 2018 and
2017.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-18
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts
with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the
transfer of promised goods or services to customers. The Company adopted ASU 2014-09 effective January 1, 2018,
and concluded that its adoption of ASU 2014-09 had no material effect on its consolidated financial statements as most
of the Company's revenue is derived from lease contracts, which are excluded from the scope of the new guidance. For
the Company’s other property-related revenue and management fees and other revenue subject to the new guidance,
the Company performed an evaluation which included identifying its performance obligations and when such
performance obligations are satisfied. Based on this evaluation, the Company determined that there was no material
change in the timing or pattern of recognition of revenue for these activities as compared to the application of previous
revenue recognition guidance.
In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing guidance for accounting for
leases, including requiring lessors to account for leases using an approach that is substantially equivalent to existing
guidance for sales-type leases, direct financing leases and operating leases and lessees to recognize most leases on-
balance sheet as lease liabilities with corresponding right-of-use assets. ASU 2016-02 initially required a modified
retrospective approach, with entities applying the new guidance at the beginning of the earliest period presented in the
financial statements in which they first apply the new standard, with certain elective transition relief. In July 2018, the
FASB issued ASU 2018-11, Leases - Targeted Improvements, which allows entities the option to apply the new standard
at adoption date with a cumulative-effect adjustment in the period of adoption.
The Company adopted ASU 2016-02 and ASU 2018-11 effective January 1, 2019. The Company elected the
package of practical expedients which permits the Company to not reassess (i) whether any expired or existing contracts
are or contain leases, (ii) the lease classification for any expired or existing leases, and (iii) any initial direct costs for
any existing leases as of the effective date. As a lessor, the Company's recognition of rental revenue remained consistent
with previous guidance, and the adoption of the lease standard did not change the Company's consolidated statements
of operations and did not result in a cumulative catch-up adjustment to opening equity. Adoption of the lease standard
will have a material impact on the Company's consolidated balance sheets for its non-cancelable leasehold interest
agreements in which it is the lessee. As a lessee, the Company expects to record lease liabilities of approximately $24
million with corresponding right-of-use assets of approximately $23 million. See Note 12 for additional detail about
the Company's non-cancelable leasehold interest agreements.
3. SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS
Shareholders' Equity
Common Share Offerings
On July 13, 2018, the Company closed a follow-on offering of 5,900,000 of its common shares at an offering price
of $29.86 per share. The Company received aggregate net proceeds from the offering of approximately $175.6
million after deducting expenses associated with the offering.
On December 11, 2017, the Company closed a follow-on public offering of 5,750,000 of its common shares, which
included 750,000 common shares sold upon the exercise in full by the underwriters of their option to purchase additional
common shares, at a public offering price of $25.50 per share. The Company received aggregate net proceeds from the
offering of approximately $140.3 million after deducting the underwriting discount and additional expenses associated
with the offering.
On July 6, 2016, the Company closed a follow-on public offering of 12,046,250 of its common shares, which
included 1,571,250 common shares sold upon the exercise in full by the underwriters of their option to purchase
additional common shares, at a public offering price of $20.75 per share. The Company received aggregate net proceeds
from the offering of approximately $237.5 million after deducting the underwriting discount and additional expenses
associated with the offering.
On December 16, 2016, the Company closed a follow-on offering of 5,175,000 of its common shares, which
included 675,000 common shares sold upon the exercise in full by the underwriters of their option to purchase additional
common shares, at an offering price of $20.48 per share. The Company received aggregate net proceeds from the
offering of approximately $105.5 million after deducting the underwriting discount and additional expenses associated
with the offering.
F-19
Series A Preferred Share Offering
On October 11, 2017, the Company completed an underwritten public offering of 6,900,000 of its 6.000% Series
A Preferred Shares, which included 900,000 Series A Preferred Shares sold upon the exercise in full by the underwriters
of their option to purchase additional Series A Preferred Shares, resulting in net proceeds to the Company of
approximately $166.6 million, after deducting the underwriting discount and the Company's other offering expenses.
Dividends on the Series A Preferred Shares, which are payable quarterly in arrears, are cumulative from the date of
original issuance in the amount of $1.50 per share each year. The Series A Preferred Shares rank senior to the Company's
common shares with respect to dividend rights and rights upon our liquidation, dissolution or winding up. Generally,
the Series A Preferred Shares become redeemable by the Company beginning in October 2022 for a cash redemption
price of $25.00 per share, plus accrued but unpaid dividends.
Noncontrolling Interests
All of the OP equity in the Company's operating partnership not held by the Company is reflected as noncontrolling
interests. Noncontrolling interests also include ownership interests in DownREIT partnerships held by entities other
than the Company's operating partnership. NSA is the general partner of its operating partnership and is authorized to
cause its operating partnership to issue additional partner interests, including OP units and subordinated performance
units, at such prices and on such other terms as it determines in its sole discretion.
As of December 31, 2018 and 2017, units reflecting noncontrolling interests consisted of the following:
Series A-1 preferred units
OP units
Subordinated performance units
LTIP units
DownREIT units
DownREIT OP units
DownREIT subordinated performance units
Total
Series A-1 Preferred Units
December 31,
2018
343,719
28,874,103
10,749,475
931,671
2017
—
26,719,607
11,604,738
771,396
1,834,786
4,386,999
1,834,786
4,386,999
47,120,753
45,317,526
The 6.000% Series A-1 Cumulative Redeemable Preferred Units ("Series A-1 preferred units") rank senior to OP
units and subordinated performance units in the Company's operating partnership with respect to distributions and
liquidation. The Series A-1 preferred units have a stated value of $25.00 per unit and receive distributions at an annual
rate of 6.000%. These distributions are cumulative. The Series A-1 preferred units are redeemable at the option of the
holder after the first anniversary of the date of issuance, which redemption obligations may be satisfied at the Company’s
option in cash in an amount equal to the market value of an equivalent number of the Company's 6.000% Series A
Preferred Shares or the issuance of 6.000% Series A Preferred Shares on a one-for-one basis, subject to adjustments.
The increase in Series A-1 preferred units outstanding from December 31, 2017 to December 31, 2018 was due to the
issuance of Series A-1 preferred units in connection with the acquisition of self storage properties.
OP Units and DownREIT OP units
OP units in the Company's operating partnership are redeemable for cash or, at the Company's option, exchangeable
for common shares on a one-for-one basis, and DownREIT OP units are redeemable for cash or, at the Company's
option, exchangeable for OP units in its operating partnership on a one-for-one basis, subject to certain adjustments in
each case. The holders of OP units are generally not entitled to elect redemption until one year after the issuance of the
OP units. The holders of DownREIT OP units are generally not entitled to elect redemption until five years after the
date of the contributor's initial contribution.
The increase in OP Units outstanding from December 31, 2017 to December 31, 2018 was due to the issuance of
2,024,170 OP units related to the voluntary conversions of 997,074 subordinated performance units (as discussed further
below), the issuance of 584,004 OP units in connection with the acquisition of self storage properties and 9,100 LTIP
units which were converted into OP units, partially offset by the redemption of 462,778 OP units for common shares.
F-20
Subordinated Performance Units and DownREIT Subordinated Performance Units
Subordinated performance units may also, under certain circumstances, be convertible into OP units which are
exchangeable for common shares as described above, and DownREIT subordinated performance units may, under
certain circumstances, be exchangeable for subordinated performance units on a one-for-one basis. Subordinated
performance units are only convertible into OP units after a two year lock-out period and then generally (i) at the
holder’s election only upon the achievement of certain performance thresholds relating to the properties to which such
subordinated performance units relate or (ii) at the Company's election upon a retirement event of a PRO that holds
such subordinated performance units or upon certain qualifying terminations. The holders of DownREIT subordinated
performance units are generally not entitled to elect redemption until at least five years after the date of the contributor's
initial contribution.
The decrease in subordinated performance units outstanding from December 31, 2017 to December 31, 2018 was
due to the voluntary conversion of 997,074 subordinated performance units into 2,024,170 OP units partially offset by
the issuance of 141,811 subordinated performance units for co-investment by certain of the Company's PROs in
connection with the acquisition of self storage properties.
LTIP Units
LTIP units are a special class of partnership interest in the Company's operating partnership that allow the holder
to participate in the ordinary and liquidating distributions received by holders of the OP units (subject to the achievement
of specified levels of profitability by the Company's operating partnership or the achievement of certain events). LTIP
units may also, under certain circumstances, be convertible into OP units on a one-for-one basis, which are then
exchangeable for common shares as described above. LTIP units do not have full parity with OP units with respect to
liquidating distributions and may not receive ordinary distributions until such parity is reached pursuant to the terms
of the LP Agreement. If such parity is reached under the LP Agreement, upon vesting, vested LTIP units may be converted
into an equal number of OP units, and thereafter have all the rights of OP units, including redemption rights. See Note
9 for additional information about the Company's LTIP Units.
The increase in LTIP units outstanding from December 31, 2017 to December 31, 2018 was due to the issuance
of compensatory LTIP units to employees, trustees and consultants net of forfeitures partially offset by the conversion
of 9,100 LTIP units into OP units.
4. SELF STORAGE PROPERTIES
Self storage properties are summarized as follows (dollars in thousands):
Land
Buildings and improvements
Furniture and equipment
Total self storage properties
Less accumulated depreciation
Self storage properties, net
December 31,
2018
583,455
2,048,281
5,987
2,637,723
(246,261)
2,391,462
$
$
2017
528,304
1,741,459
5,470
2,275,233
(170,358)
2,104,875
$
$
Depreciation expense related to self storage properties amounted to $76.3 million, $60.5 million and $42.7 million
for the years ended December 31, 2018, 2017 and 2016, respectively.
5. INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURES
2018 Joint Venture
During the year ended December 31, 2018, a wholly owned subsidiary of the Company (the "NSA Member")
entered into a limited liability company agreement (the "JV Agreement") of NSA HHF JV, LLC (the "2018 Joint
Venture") with an affiliate of Heitman America Real Estate REIT LLC (the "JV Investor" and, together with the NSA
Member, the "Members") and the 2018 Joint Venture acquired from Simply Self Storage, which is a portfolio company
of a private real estate fund managed by Brookfield Asset Management, two REITs that own a portfolio of self storage
properties (the "Portfolio") for an aggregate purchase price of approximately $1.325 billion in cash consisting of 112
F-21
self storage properties containing approximately 8.2 million rentable square feet, configured in over 68,000 storage
units and located across 17 states and Puerto Rico.
In September 2018, the 2018 Joint Venture completed its acquisition of the Portfolio. Immediately following the
acquisition, the 2018 Joint Venture distributed the six self storage properties in the Portfolio located in Puerto Rico and
a single self storage property in the Portfolio located in Ohio to the Company in exchange for a $64.2 million cash
contribution from the Company. The 103 properties from the Portfolio that remain in the 2018 Joint Venture post-
closing (two of the properties acquired in the Portfolio were combined with other properties in the Portfolio for
operational efficiency) contain approximately 7.6 million rentable square feet configured in approximately 63,000
storage units.
The 2018 Joint Venture was capitalized with approximately $639.7 million in equity (approximately $159.9
million from the NSA Member in exchange for a 25% ownership interest in the 2018 Joint Venture and
approximately $479.8 million from the JV Investor in exchange for a 75% ownership interest in the 2018 Joint Venture)
and proceeds from a $643.0 million interest-only debt financing with an interest rate of 4.34% per annum and a maturity
of 10 years secured by a first mortgage lien on substantially all of the properties currently held by the 2018 Joint Venture.
A subsidiary of the Company is acting as the non-member manager of the 2018 Joint Venture (the "NSA Manager").
The NSA Manager directs, manages and controls the day-to-day operations and affairs of the 2018 Joint Venture but
may not cause the 2018 Joint Venture to make certain major decisions involving the business of the 2018 Joint Venture
without the consent of both Members, including the approval of annual budgets, sales and acquisitions of properties,
financings, and certain actions relating to bankruptcy.
The Company's investment in the 2018 Joint Venture is accounted for using the equity method of accounting and
is included in investment in unconsolidated real estate ventures in the Company’s consolidated balance sheets. The
Company’s earnings from its investment in the 2018 Joint Venture are presented in equity in earnings (losses) of
unconsolidated real estate ventures on the Company’s consolidated statements of operations.
2016 Joint Venture
As of December 31, 2018, the Company's unconsolidated real estate venture, formed in September 2016 with a
state pension fund advised by Heitman Capital Management LLC (the "2016 Joint Venture"), in which the Company
has a 25% ownership interest, owned and operated a portfolio of 73 properties containing approximately 4.9 million
rentable square feet, configured in approximately 40,000 storage units and located across 14 states.
The 2016 Joint Venture acquired three self storage properties and an expansion project at an existing property for
$28.5 million during the year ended December 31, 2018. The 2016 Joint Venture financed these acquisitions with capital
contributions from the 2016 Joint Venture members, of which the Company contributed $7.3 million for its 25%
proportionate share. During the year ended December 31, 2018, the 2016 Joint Venture also sold to an unrelated third
party one self storage property for a gross sales price of $9.3 million.
The following table presents the combined condensed financial position of the Company's unconsolidated real
estate ventures as of December 31, 2018 and December 31, 2017 (in thousands):
ASSETS
Self storage properties, net
Other assets
Total assets
LIABILITIES AND EQUITY
Debt financing
Other liabilities
Equity
Total liabilities and equity
December 31, 2018
December 31, 2017
$
$
$
$
1,894,412
50,915
1,945,327
956,357
16,516
972,454
1,945,327
$
$
$
$
655,973
8,397
664,370
317,359
4,855
342,156
664,370
F-22
The following table presents the combined condensed operating information of the Company's unconsolidated real
estate ventures for the years ended December 31, 2018 and 2017 and the period ended December 31, 2016 (in thousands):
Year Ended December 31,
2018
2017
Period Ended
December 31, 2016
Total revenue
Property operating expenses
Net operating income
Supervisory, administrative and other
expenses
Depreciation and amortization
Interest expense
Loss on sale of self storage properties
Acquisition and other expenses
Net loss
$
$
$
94,507
30,229
64,278
(6,397)
(40,930)
(20,718)
(820)
(1,188)
(5,775) $
$
54,747
18,463
36,284
(3,921)
(29,192)
(11,389)
—
(1,146)
(9,364) $
12,197
3,850
8,347
(949)
(6,235)
(2,823)
—
(4,277)
(5,937)
The combined condensed operating information in the table above only includes information for the 2018 Joint
Venture following the acquisition of the Portfolio in September 2018.
6. SELF STORAGE PROPERTY ACQUISITIONS AND DISPOSITIONS
Acquisitions
The Company acquired 57 self storage properties and an expansion project adjacent to an existing property with
an estimated fair value of $356.6 million during the year ended December 31, 2018 and 65 self storage properties with
an estimated fair value of $426.8 million during the year ended December 31, 2017. Of these acquisitions, during the
year ended December 31, 2018, four self storage properties and the expansion project adjacent to an existing property
with an estimated fair value of $23.1 million were acquired by the Company from its PROs and during the year ended
December 31, 2017, 10 self storage properties with an estimated fair value of $73.2 million were acquired by the
Company from its PROs.
The self storage property acquisitions were accounted for as asset acquisitions and accordingly, during the years
ended December 31, 2018 and 2017, $1.9 million and $3.6 million, respectively, of transaction costs related to the
acquisitions were capitalized as part of the basis of the acquired properties. The Company recognized the estimated
fair value of the acquired assets and assumed liabilities on the respective dates of such acquisitions. The Company
allocated a portion of the purchase price to identifiable intangible assets consisting of customer in-place leases which
were recorded at estimated fair values of $9.1 million and $10.5 million during the years ended December 31, 2018
and 2017, respectively, resulting in a total fair value of $347.5 million and $416.3 million allocated to real estate during
the years ended December 31, 2018 and 2017, respectively.
F-23
The following table summarizes, by calendar quarter, the investments in self storage property acquisitions
completed by the Company during the years ended December 31, 2018 and 2017 (dollars in thousands):
Summary of Investment
Acquisitions closed
during the Three
Months Ended:
March 31, 2018
June 30, 2018
September 30, 2018
December 31, 2018
Total
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
Total
Number of
Properties
Cash and
Acquisition
Costs
Value of OP
Equity(1)
Liabilities Assumed
Mortgages(2)
7,581
$
$
Other
Total
$
135,789
25
12
13
7
57
5
10
19
31
65
$
105,135
$
22,403
$
$
62,470
102,012
49,221
318,838
26,780
60,672
122,742
181,809
$
$
—
3,660
2,000
28,063
4,964
8,931
267
17,019
$
$
—
—
—
670
467
856
174
$
$
7,581
$
2,167
— $
—
—
—
183
387
826
2,220
$
392,003
$
31,181
$
— $
3,616
$
62,937
106,528
51,395
356,649
31,927
69,990
123,835
201,048
426,800
(1) Value of OP equity represents the fair value of Series A-1 preferred units, OP units, subordinated performance units, and LTIP units.
(2) Includes fair value of debt adjustment for assumed mortgages of approximately $0.2 million during the year ended December 31, 2018.
The results of operations for these self storage acquisitions are included in the Company's statements of operations
beginning on the respective closing date for each acquisition. The accompanying statements of operations includes
aggregate revenue of $21.9 million and operating income of $2.5 million related to the 57 self storage properties acquired
during the year ended December 31, 2018. For the year ended December 31, 2017, the accompanying statements of
operations includes aggregate revenue of $15.5 million and operating income of $0.5 million related to the 65 self
storage properties acquired during such period.
Dispositions
During the year ended December 31, 2018, the Company sold to unrelated third parties two self storage properties,
one of which was classified as held for sale as of December 31, 2017. The gross sales price was $5.5 million and the
Company recognized $0.4 million of gains on the sale.
In December 2017, the Company sold to an unrelated third party three self storage properties and excess land
parcels adjacent to its self storage properties. The gross sales price was $17.8 million and the Company recognized
$5.7 million of gain on sales.
F-24
7. OTHER ASSETS
Other assets consist of the following (dollars in thousands):
Customer in-place leases, net of accumulated amortization of $5,090 and
$3,914, respectively
Receivables:
Trade, net
PROs and other affiliates
Receivable from unconsolidated real estate venture
Property acquisition deposits
Interest rate swaps
Prepaid expenses and other
Corporate furniture, equipment and other, net
Trade name
Management contract, net of accumulated amortization of $1,564 and $856,
respectively
Goodwill
Total
December 31,
2018
2017
$
4,063
$
6,590
3,402
2,027
4,573
20,977
16,164
4,266
1,574
3,200
9,057
5,750
$
75,053
$
2,274
979
1,200
5,050
12,414
3,949
1,444
3,200
9,765
5,750
52,615
Amortization expense related to customer in-place leases amounted to $11.6 million, $13.5 million and $12.0
million for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company measured the fair value of the trade name, which has an indefinite life and is not amortized, using
the relief from royalty method at acquisition.
The management contract asset is charged to amortization expense on a straight-line basis over 15 years, which
represents the time period over which the majority of value was attributed in the Company’s discounted cash flow
model. Amortization expense related to the management contract amounted to $0.7 million, $0.7 million and $0.1
million for the years ended December 31, 2018, 2017 and 2016 respectively.
8. DEBT FINANCING
The Company's outstanding debt as of December 31, 2018 and 2017 is summarized as follows (dollars in thousands):
Credit Facility:
Revolving line of credit
Term loan A
Term loan B
Term loan C
Term loan D
2023 Term loan facility
2028 Term loan facility
Fixed rate mortgages payable
Total principal
Unamortized debt issuance costs and
debt premium, net
Total debt
Interest Rate(1)
2018
2017
December 31,
3.90%
2.91%
2.94%
3.71%
3.79%
3.13%
4.62%
4.18%
$
139,500
$
235,000
155,000
105,000
125,000
175,000
75,000
268,138
1,277,638
$
464
1,278,102
$
F-25
88,500
235,000
155,000
105,000
—
100,000
—
271,491
954,991
3,106
958,097
(1) Represents the effective interest rate as of December 31, 2018. Effective interest rate incorporates the stated rate plus the impact of interest rate
cash flow hedges and discount and premium amortization, if applicable. For the revolving line of credit, the effective interest rate excludes fees
for unused borrowings.
Credit Facility
The Company has an unsecured credit facility with a syndicated group of lenders, which, as of December 31, 2018,
provided for total borrowings of $1.0 billion consisting of five components: (i) a Revolver which provides for a total
borrowing commitment up to $400.0 million, whereby the Company may borrow, repay and re-borrow amounts under
the Revolver, (ii) a $235.0 million Term Loan A, (iii) a $155.0 million Term Loan B, (iv) a $105.0 million Term Loan
C, and (v) a $125.0 million Term Loan D.
The Revolver matures in May 2020; provided that the Company may elect to extend the maturity to May 2021
by paying an extension fee of 0.15% of the total borrowing commitment thereunder at the time of extension and meeting
other customary conditions with respect to compliance. The Term Loan A matures in May 2021, the Term Loan B
matures in May 2022, the Term Loan C matures in February 2024 and the Term Loan D matures in January 2023. The
Revolver, Term Loan A, Term Loan B, Term Loan C and Term Loan D are not subject to any scheduled reduction or
amortization payments prior to maturity.
Interest rates applicable to loans under the credit facility are determined based on a 1, 2, 3 or 6 month LIBOR
period (as elected by the Company at the beginning of any applicable interest period) plus an applicable margin or a
base rate, determined by the greatest of the Key Bank prime rate, the federal funds rate plus 0.50% or one month LIBOR
plus 1.00%, plus an applicable margin. The applicable margins for the credit facility are leverage based and range from
1.30% to 2.25% for LIBOR loans and 0.30% to 1.25% for base rate loans; provided that after such time as the Company
achieves an investment grade rating from at least two rating agencies, the Company may elect (but is not required to
elect) that the credit facility is subject to the rating based on applicable margins ranging from 0.85% to 2.45% for
LIBOR Loans and 0.00% to 1.45% for base rate loans. The Company is also required to pay the following usage based
fees ranging from 0.15% to 0.25% with respect to the unused portion of the Revolver; provided that if the Company
makes an investment grade pricing election as described in the preceding sentence, the Company will be required to
pay rating based fees ranging from 0.125% to 0.300% with respect to the entire Revolver in lieu of any usage based
fees. The Company has an expansion option under the credit facility, which if exercised in full, would provide for a
total borrowing capacity under the credit facility of $1.3 billion.
As of December 31, 2018, the Company had outstanding letters of credit totaling $5.7 million and would have had
the capacity to borrow remaining Revolver commitments of $254.8 million while remaining in compliance with the
credit facility's financial covenants described in the following paragraph.
The Company is required to comply with the following financial covenants under the credit facility:
• Maximum total leverage ratio not to exceed 60%
• Minimum fixed charge coverage ratio of at least 1.5x
• Minimum net worth of at least $682.6 million plus 75% of future equity issuances
• Maximum unsecured debt to unencumbered asset value ratio not to exceed 60%
•
Unencumbered adjusted net operating income to unsecured interest expense of at least 2.0x
In addition, the terms of the credit facility contain customary affirmative and negative covenants that, among other
things, limit the Company's ability to make distributions or certain investments, incur debt, incur liens and enter into
certain transactions. At December 31, 2018, the Company was in compliance with all such covenants.
2023 Term Loan Facility
On June 30, 2016, the Company entered into a credit agreement with a syndicated group of lenders to make available
a term loan facility that matures in June 2023 (the "2023 Term Loan Facility") in an aggregate amount of $100.0 million.
On June 5, 2018, the Company's operating partnership and the Company entered into the Second Amendment (the
"Second Amendment") to the Credit Agreement, whereby the Company's operating partnership, among other things,
partially exercised its existing $100.0 million expansion option in an aggregate amount equal to $75.0 million, increasing
the aggregate amount outstanding under the 2023 Term Loan Facility to $175.0 million. The Company also increased
the remaining expansion option by $200.0 million, for a total expansion option of $225.0 million. If the remaining
F-26
expansion option is exercised in full, the total expansion option would provide for a total borrowing capacity under the
2023 Term Loan Facility in an aggregate amount of $400.0 million.
The entire outstanding principal amount of, and all accrued but unpaid interest, is due on the maturity date. Interest
rates applicable to loans under the 2023 Term Loan Facility are payable during such periods as such loans are LIBOR
loans, at the applicable LIBOR based on a 1, 2, 3 or 6 month LIBOR period (as elected by the Company at the beginning
of any applicable interest period) plus an applicable margin, and during the period that such loans are base rate loans,
at the base rate under the 2023 Term Loan Facility in effect from time to time plus an applicable margin. The base rate
under the 2023 Term Loan Facility is equal to the greatest of the Capital One prime rate, the federal funds rate plus
0.50% or one month LIBOR plus 1.00%. The applicable margin for the 2023 Term Loan Facility is leverage-based and
ranges from 1.30% to 1.70% for LIBOR loans and 0.30% to 0.70% for base rate loans; provided that after such time
as the Company achieves an investment grade rating from at least two rating agencies, the Company may elect (but is
not required to elect) that the 2023 Term Loan Facility is subject to the rating based on applicable margins ranging
from 0.90% to 1.75% for LIBOR Loans and 0.00% to 0.75% for base rate loans.
The Company is required to comply with the same financial covenants under the 2023 Term Loan Facility as it is
with the credit facility. In addition, the terms of the 2023 Term Loan Facility contain customary affirmative and negative
covenants that, among other things, limit the Company's ability to make distributions or certain investments, incur debt,
incur liens and enter into certain transactions.
2028 Term Loan Facility
On December 21, 2018, the Company entered into a credit agreement with Huntington National Bank to make
available a term loan facility that matures in December 2028 (the "2028 Term Loan Facility") in an aggregate amount
of $75.0 million. The entire outstanding principal amount of, and all accrued but unpaid interest, is due on the maturity
date. The Company has an expansion option under the 2028 Term Loan Facility, which, if exercised in full, would
provide for a total 2028 Term Loan Facility in an aggregate amount of $125.0 million.
Interest rates applicable to loans under the 2028 Term Loan Facility are payable during such periods as such loans
are LIBOR loans, at the applicable LIBOR based on a 1, 2, 3 or 6 month LIBOR period (as elected by the Company
at the beginning of any applicable interest period) plus an applicable margin, and during the period that such loans are
base rate loans, at the base rate under the 2028 Term Loan Facility in effect from time to time plus an applicable margin.
The base rate under the 2028 Term Loan Facility is equal to the greatest of the Huntington National Bank prime rate,
the federal funds rate plus 0.50% or one month LIBOR plus 1.00%. The applicable margin for the 2028 Term Loan
Facility is leverage-based and ranges from 1.80% to 2.35% for LIBOR loans and 0.80% to 1.35% for base rate loans;
provided that after such time as the Company achieves an investment grade rating from at least two rating agencies,
the Company may elect (but is not required to elect) that the 2028 Term Loan Facility is subject to the rating based on
applicable margins ranging from 1.40% to 2.25% for LIBOR Loans and 0.40% to 1.25% for base rate loans.
The Company is required to comply with the same financial covenants under the 2028 Term Loan Facility as it is
with the credit facility and the 2023 Term Loan Facility. In addition, the terms of the 2028 Term Loan Facility contain
customary affirmative and negative covenants that, among other things, limit the Company's ability to make distributions
or certain investments, incur debt, incur liens and enter into certain transactions.
Fixed Rate Mortgages Payable
Fixed rate mortgages have scheduled maturities at various dates through October 2031, and have effective interest
rates that range from 3.63% to 5.00%. Principal and interest are generally payable monthly or in monthly interest-only
payments with balloon payments due at maturity.
The Company assumed fixed rate mortgages of $7.6 million in connection with four of the properties acquired
during the year ended December 31, 2018.
In August 2017, the Company entered into an agreement with a single lender for an $84.9 million debt financing
secured by 22 of the Company's self storage properties. This interest-only loan matures in August 2027 and has a fixed
interest rate of 4.14%.
F-27
Future Debt Maturities
Based on existing debt agreements in effect as of December 31, 2018, the scheduled principal and maturity payments
thousands):
the Company's outstanding borrowings are presented
table below
the
(in
in
for
Year Ending December 31,
2019
2020
2021
2022
2023
After 2024
9. EQUITY-BASED AWARDS
Scheduled
Principal and
Maturity
Payments
Premium
Amortization and
Unamortized Debt
Issuance Costs
$
$
5,128
178,897
242,603
159,205
377,049
314,756
1,277,638
$
$
(361) $
(699)
(779)
(441)
(42)
2,786
464
$
Total
4,767
178,198
241,824
158,764
377,007
317,542
1,278,102
The Company grants awards in the form of LTIP units and restricted common shares to provide equity based
incentive compensation to members of its senior management team, independent trustees, advisers, consultants, other
personnel, and as consideration for self storage property acquisitions.
LTIP units were first granted under the 2013 Long-Term Incentive Plan (the "2013 Plan"), which authorized up to
2.5 million LTIP units for issuance. In connection with the Company's initial public offering, the Company terminated
the 2013 Plan but the awards granted thereunder remained outstanding after its termination. Restricted common shares
were first granted under the 2015 National Storage Affiliates Trust Equity Incentive Plan (the "2015 Plan"), which
authorizes the Company's compensation, nominating, and corporate governance committee to grant share options,
restricted common shares, phantom shares, dividend equivalent rights, LTIP units and other restricted limited partnership
units issued by its operating partnership and other equity-based awards up to an aggregate of 5% of the common shares
issued and outstanding from time to time on a fully diluted basis (assuming, if applicable, the exercise of all outstanding
options and the conversion of all warrants and convertible securities, including OP units and LTIP units, into common
shares).
As of December 31, 2018, the Company did not have outstanding under its equity compensation plan, any options,
warrants or rights to purchase the Company's common shares.
LTIP Units
Through December 31, 2018, an aggregate of 2,474,710 LTIP units have been issued under the 2013 Plan, 565,672
LTIP units have been issued under the 2015 Plan, and 313,759 LTIP units have been issued under the LP Agreement.
Some of the granted LTIP units vested immediately or upon completion of the Company's initial public offering. Others
vest upon the contribution of self storage properties or along a schedule at certain times through May 15, 2022.
Compensatory Grants
The Company grants two types of compensatory LTIP units, time-based LTIP unit awards that are subject to time-
based vesting typically over a period of one to three years from the grant date, so long as such person remains an
employee or trustee, and performance-based LTIP unit awards, which are designed to align the interests of the Company's
executive officers with those of the Company's shareholders in a pay-for-performance structure. The performance-
based LTIP unit awards vest contingent upon the achievement of performance criteria measured over a period of three
years from the grant date, which is based on the Company's total shareholder return ("TSR") relative to the TSR of the
companies in the Morgan Stanley Capital International US REIT Index and the Company's TSR relative to the TSR of
its peers in the self storage industry. The value of the performance-based LTIP unit awards take into consideration the
probability that the awards will ultimately vest; therefore previously recorded compensation expense is not adjusted
in the event that the performance criteria is not achieved.
Compensation expense related to compensatory LTIP units granted to members of the Company's senior
management team, the Company's independent trustees, advisers, consultants and other personnel is included in general
F-28
and administrative expense in the accompanying statements of operations. Total compensation cost recognized for the
compensatory LTIP unit awards was $3.6 million, $3.5 million and $2.5 million for the years ended December 31,
2018, 2017 and 2016, respectively. At December 31, 2018, total unvested compensation cost not yet recognized was $3.7
million. The Company expects to recognize this compensation cost over a period of approximately 3.4 years.
Time-based LTIP unit awards are granted with a fair value equal to the closing market price of the Company's
common shares on the date of grant. The following table summarizes activity for the time-based LTIP unit awards
for the years ended December 31, 2018, 2017 and 2016:
2018
Time-Based LTIP Unit Awards
2017
2016
Weighted
Average
Grant-Date
Fair Value
Weighted
Average
Grant-Date
Fair Value
Weighted
Average
Grant-Date
Fair Value
Number of
LTIP units
Number of
LTIP units
Number of
LTIP units
Outstanding unvested at
beginning of year
Granted
Vested
227,766
$
100,176
(104,130)
Unvested at end of year
223,812
$
20.37
27.08
20.18
23.54
294,529
$
128,051
(194,814)
227,766
$
14.74
22.89
13.43
20.37
236,265
$
177,546
(119,282)
294,529
$
10.41
17.59
10.41
14.74
The aggregate fair value of the time-based LTIP unit awards that vested during the years ended December 31,
2018, 2017 and 2016 was $2.1 million, $2.6 million and $1.2 million, respectively.
The following table summarizes activity for the performance-based LTIP unit awards granted during the year ended
December 31, 2018 and 2017, including the minimum, target and maximum number of LTIP units that may be earned
upon the achievement of the performance criteria measured over the period of three years from the grant date.
Outstanding unvested at December 31, 2016
Granted
Outstanding unvested at December 31, 2017
Granted
Outstanding unvested at December 31, 2018
Performance-Based LTIP Unit Awards
Minimum
Target
Maximum
Weighted
Average
Grant-Date
Fair Value
—
—
—
—
—
—
40,390
40,390
46,017
86,407
— $
90,874
90,874
69,025
159,899
$
$
—
27.63
27.63
24.67
26.35
The fair value of the performance-based LTIP unit awards, which have a market condition, is estimated on the date
of grant using a Monte Carlo simulation. The simulation requires assumptions for expected volatility, risk-free rate of
return, and dividend yield. The following table summarizes the assumptions used to value the performance-based LTIP
unit awards granted during the years ended December 31, 2018 and 2017:
Risk-free interest rate
Dividend yield
Expected volatility
Acquisition Consideration Grants
2018
2017
2.04%
4.11%
24.44%
1.58%
4.35%
29.96%
On December 31, 2013, the Company granted 1,683,560 LTIP units under the 2013 Plan to PROs as part of the
consideration for their respective self storage property acquisitions and contributions. The following table presents the
number of units vested and forfeited for acquisition grants during the years ended December 31, 2018, 2017 and 2016:
F-29
Total unvested units, December 31, 2015
Units vested in 2016 related to properties contributed or sourced by PROs
Units forfeited
Total unvested units, December 31, 2016
Units vested in 2017 related to properties contributed or sourced by PROs
Total unvested units, December 31, 2017
Units vested in 2018 related to properties contributed or sourced by PROs
Total unvested units, December 31, 2018
Total LTIP units
423,800
(45,100)
(118,300)
260,400
(36,400)
224,000
—
224,000
The aggregate fair value of purchase consideration recognized during the years ended December 31, 2017 and
2016 was $0.9 million and $0.8 million, respectively. As of December 31, 2018, the remaining unvested LTIP units
will vest as additional self storage properties are contributed or sourced by the PROs. The fair value of such LTIP units
will be recorded as additional acquisition consideration based on the fair value in the period such acquisitions are
completed.
LP Agreement Grants to Consultants
Pursuant to the LP Agreement, during the years ended December 31, 2018, 2017 and 2016, the Company issued
174, 776 and 2,758 LTIP units, respectively, that were immediately vested to consultants that provided acquisition
services. During the years ended December 31, 2018 and 2017, the self storage properties acquired were accounted for
as asset acquisitions and accordingly, the acquisition costs related to the LTIP units granted to consultants were
capitalized as part of the basis of the acquired properties. Prior to January 1, 2017, the Company's self storage property
acquisitions were accounted for as business combinations and accordingly, the acquisition costs related to the LTIP
units granted to consultants during the year ended December 31, 2016 are included in acquisition costs in the
accompanying statements of operations. The aggregate fair value of the LTIP units was less than $0.1 million, less than
$0.1 million and $0.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Restricted Common Shares
Through December 31, 2018, an aggregate of 54,136 restricted common shares have been issued under the 2015
Plan. These restricted common shares vest over a weighted average period of approximately 3.0 years. Restricted
common shares are granted with a fair value equal to the closing market price of the Company's common shares on the
date of grant.
The following table summarizes activity for restricted common shares for the years ended December 31, 2018,
2017 and 2016:
2018
Number of
Restricted
Common
Shares
Weighted
Average
Grant-Date
Fair Value
Year Ended December 31,
2017
Number of
Restricted
Common
Shares
Weighted
Average
Grant-Date
Fair Value
2016
Number of
Restricted
Common
Shares
Weighted
Average
Grant-Date
Fair Value
Outstanding at
beginning of year
Granted
Vested
Forfeited
Unvested at end of year
21,585
$
12,311
(8,041)
(3,266)
22,589
$
22.43
27.26
21.88
25.35
24.83
13,590
$
16,525
(8,530)
—
21,585
$
12.40
24.04
14.11
—
22.43
11,000
$
8,090
(5,500)
—
13,590
$
12.40
17.19
12.40
—
12.40
The aggregate fair value of restricted common shares that vested during the years ended December 31, 2018, 2017
and 2016 was $0.2 million, $0.1 million and $0.1 million respectively. Total compensation cost recognized for restricted
common shares during the years ended December 31, 2018, 2017 and 2016 was $0.3 million, $0.2 million and $0.1
million, respectively. At December 31, 2018, total unvested compensation cost not yet recognized was $0.3 million.
F-30
The Company expects to recognize this compensation cost over a period of approximately 2.0 years. If the grantee has
a termination of service for any reason during the vesting period, the unvested restricted common shares will be forfeited.
Compensation expense related to restricted common shares is included in general and administrative expense in the
accompanying statements of operations.
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per common share for the years
ended December 31, 2018, 2017 and 2016 (in thousands, except per share amounts):
Year Ended December 31,
2017
2016
2018
Earnings (loss) per common share - basic and diluted
Numerator
Net income
Net income attributable to noncontrolling interests
Net income attributable to National Storage Affiliates Trust
Distributions to preferred shareholders
Distributed and undistributed earnings allocated to participating
securities
Net income attributable to common shareholders - basic
Effect of assumed conversion of dilutive securities
$
$
56,326
(42,217)
14,109
(10,350)
$
45,998
(43,037)
2,961
(2,300)
(27)
3,732
—
(28)
633
—
Net income attributable to common shareholders - diluted
$
3,732
$
633
$
24,866
(6,901)
17,965
—
(18)
17,947
6,783
24,730
Denominator
Weighted average shares outstanding - basic
53,293
44,423
29,887
Effect of dilutive securities:
Weighted average OP units outstanding
Weighted average DownREIT OP unit equivalents outstanding
Weighted average LTIP units outstanding
Weighted average subordinated performance units and
DownREIT subordinated performance unit equivalents
—
—
—
—
—
—
—
—
Weighted average shares outstanding - diluted
53,293
44,423
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
Dividends declared per common share
$
$
$
0.07
0.07
1.16
$
$
$
0.01
0.01
1.04
$
$
$
24,262
1,835
1,846
20,917
78,747
0.60
0.31
0.88
As discussed in Note 2, the Company allocates GAAP income (loss) utilizing the HLBV method, in which the
Company allocates income or loss based on the change in each unitholders' claim on the net assets of its operating
partnership at period end after adjusting for any distributions or contributions made during such period. Due to the
stated liquidation priorities and because the HLBV method incorporates non-cash items such as depreciation expense,
in any given period, income or loss may be allocated disproportionately to National Storage Affiliates Trust and
noncontrolling interests, resulting in volatile fluctuations of basic and diluted earnings (loss) per share.
Outstanding equity interests of the Company's operating partnership and DownREIT partnerships are considered
potential common shares for purposes of calculating diluted earnings (loss) per share as the unitholders may, through
the exercise of redemption rights, obtain common shares, subject to various restrictions. Basic earnings per share is
calculated based on the weighted average number of common shares outstanding during the period. Diluted earnings
per share is calculated by further adjusting for the dilutive impact using the treasury stock method for unvested LTIP
units subject to a service condition outstanding during the period and the if-converted method for any convertible
securities outstanding during the period.
F-31
Generally, following certain lock-out periods, OP units in the Company's operating partnership are redeemable for
cash or, at the Company's option, exchangeable for common shares on a one-for-one basis, subject to certain adjustments
and DownREIT OP units are redeemable for cash or, at the Company's option, exchangeable for OP units in its operating
partnership on a one-for-one basis, subject to certain adjustments in each case.
LTIP units may also, under certain circumstances, be convertible into OP units on a one-for-one basis, which are
then exchangeable for common shares as described above. Vested LTIP units and unvested LTIP units that vest based
on a service condition are allocated income or loss in a similar manner as OP units. Unvested LTIP units subject to a
service condition are evaluated for dilution using the treasury stock method. For the year ended December 31, 2018,
383,712 unvested LTIP units that vest based on a service condition are excluded from the calculation of diluted earnings
(loss) per share as they are not dilutive to earnings (loss) per share. For the year ended December 31, 2018, 224,000
unvested LTIP units that vest upon the future acquisition of properties are excluded from the calculation of diluted
earnings (loss) per share because the contingency for the units to vest has not been attained as of the end of the reported
periods.
Subordinated performance units may also, under certain circumstances, be convertible into OP units which are
exchangeable for common shares as described above, and DownREIT subordinated performance units may, under
certain circumstances, be exchangeable for subordinated performance units on a one-for-one basis. Subordinated
performance units are only convertible into OP units, after a two year lock-out period and then generally (i) at the
holder’s election only upon the achievement of certain performance thresholds relating to the properties to which such
subordinated performance units relate or (ii) at the Company's election upon a retirement event of a PRO that holds
such subordinated performance units or upon certain qualifying terminations. Although subordinated performance units
may only be convertible after a two year lock-out period, the Company assumes a hypothetical conversion of each
subordinated performance unit (including each DownREIT subordinated performance unit) into OP units (with
subsequently assumed redemption into common shares) for the purposes of calculating diluted weighted average
common shares. This hypothetical conversion is calculated using historical financial information, and as a result, is not
necessarily indicative of the results of operations, cash flows or financial position of the Company upon expiration of
the two-year lock out period on conversions.
For the years ended December 31, 2018 and 2017, potential common shares totaling 50.6 million and 50.6 million,
respectively, related to OP units, DownREIT OP units, subordinated performance units and DownREIT subordinated
performance units have been excluded from the calculation of diluted earnings (loss) per share as they are not dilutive
to earnings (loss) per share.
Participating securities, which consist of unvested restricted common shares, receive dividends equal to those
received by common shares. The effect of participating securities for the periods presented above is calculated using
the two-class method of allocating distributed and undistributed earnings.
11. RELATED PARTY TRANSACTIONS
Supervisory and Administrative Fees
For the self storage properties that are managed by the PROs, the Company has entered into asset management
agreements with the PROs to provide leasing, operating, supervisory and administrative services. The asset management
agreements generally provide for fees ranging from 5% to 6% of gross revenue for the managed self storage properties.
During the years ended December 31, 2018, 2017 and 2016, the Company incurred $16.9 million, $14.4 million and
$11.0 million, respectively, for supervisory and administrative fees to the PROs. Such fees are included in general and
administrative expenses in the accompanying statements of operations.
Payroll Services
For the self storage properties that are managed by the PROs, the employees responsible for operation of the self
storage properties are generally employees of the PROs who charge the Company for the costs associated with the
respective employees. For the years ended December 31, 2018, 2017 and 2016, the Company incurred $29.5 million,
$24.6 million and $19.4 million, respectively, for payroll and related costs reimbursable to these PROs. Such costs are
included in property operating expenses in the accompanying statements of operations.
F-32
Due Diligence Costs
During the years ended December 31, 2018, 2017 and 2016, the Company incurred $0.4 million, $0.7 million and
$1.1 million, respectively, of expenses payable to certain PROs related to self storage property acquisitions sourced by
the PROs. These expenses, which are based on the volume of transactions sourced by the PROs, are intended to reimburse
the PROs for due diligence costs incurred in the sourcing and underwriting process. For the years ended December 31,
2018 and 2017 these due diligence costs are capitalized as part of the basis of the acquired self storage properties and
for the year ended December 31, 2016, these due diligence costs are included in acquisition costs in the accompanying
statements of operations.
Notes Receivable
In connection with the acquisition of 16 self storage properties from PROs during the year ended December 31,
2014, the Company assumed certain mortgages that provided for interest at above-market rates. The sellers of the self
storage properties agreed to reimburse the Company for the difference between the fair value and the contractual value
of the assumed mortgages which amounted to $5.2 million. Due to the structure of the transaction, the amount owed
to the Company was considered a receivable for the issuance of equity and was recorded as an offset against equity.
During the years ended December 31, 2018 and 2017, the Company received above-market interest reimbursements
from the sellers totaling $1.2 million and $1.3 million, respectively.
In addition, in exchange for $1.2 million and $1.3 million of principal payment reimbursements received related
to these assumed mortgages during the years ended December 31, 2018 and 2017, the Company issued 44,502 and
47,339 OP units to the sellers during the year ended December 31, 2018 and 2017.
Self Storage Property Acquisitions
During the year ended December 31, 2018, the Company issued 11,490 subordinated performance units to an
affiliate of Personal Mini (the Company's chairman and chief executive officer, Arlen D. Nordhagen, has a noncontrolling
minority ownership interest in this affiliate of Personal Mini), for $0.3 million of co-investment related to the acquisition
of a self storage property from an unrelated third party.
During the year ended December 31, 2018, the Company issued 19,047 OP units and 5,824 subordinated
performance units as partial consideration for the acquisition of self storage properties to an affiliate of Northwest and
an affiliate of Kevin Howard, a member of the Company's board of trustees.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has six properties that are subject to non-cancelable leasehold interest agreements that are classified
as operating leases. These lease agreements expire between 2034 and 2092, inclusive of extension options that the
Company anticipates exercising. To the extent that the leasehold interest agreements provide for fixed increases
throughout the term of the lease, the Company recognizes lease expense on a straight-line basis over the expected lease
terms. Rent expense under these leasehold interest agreements is included in property operating expenses in the
accompanying statements of operations and amounted to $1.6 million, $1.2 million and $1.1 million for the years ended
December 31, 2018, 2017 and 2016, respectively.
The Company has entered into non-cancelable operating leases that expire between August 2020 and November
2026 for its corporate office space. Rent expense related to these office leases are included in general and administrative
expenses in the accompanying statements of operations and amounted to $0.2 million, $0.2 million and $0.1 million
for the years ended December 31, 2018, 2017 and 2016, respectively.
F-33
As of December 31, 2018, future minimum cash payments under the Company's operating leases are as follows
(in thousands):
Year Ending December 31,
Real Estate
Leasehold Interests
Office Leases
Total
2019
2020
2021
2022
2023
2024 through 2092
Legal Proceedings
$
$
1,334
1,379
1,404
1,419
1,424
36,074
43,034
$
$
345
398
387
381
346
1,073
2,930
$
$
1,679
1,777
1,791
1,800
1,770
37,147
45,964
The Company is subject to litigation, claims, and assessments that may arise in the ordinary course of its business
activities. Such matters include contractual matters, employment related issues, and regulatory proceedings. Although
occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters
will not have a material adverse effect on the Company's financial position, results of operations, or liquidity.
13. FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The Company sometimes limits its exposure to interest rate fluctuations by entering into interest rate swap
agreements. The interest rate swap agreements moderate the Company's exposure to interest rate risk by effectively
converting the interest on variable rate debt to a fixed rate. The Company measures its interest rate swap derivatives
at fair value on a recurring basis. The effective portion of changes in the fair value of derivatives designated and that
qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss) and are subsequently
reclassified into earnings in the period that the hedged transaction affects earnings. The ineffective portion of the change
in fair value of the derivatives is recognized directly into earnings.
Information regarding the Company's interest rate swaps measured at fair value, which are classified within Level
2 of the GAAP fair value hierarchy, is presented below (dollars in thousands):
Interest Rate Swaps
Designated as Cash
Flow Hedges
Fair value at December 31, 2016
Cash flow hedge ineffectiveness
Losses on interest rate swaps reclassified into interest expense from accumulated other
comprehensive income
Unrealized gains included in accumulated other comprehensive income
Fair value at December 31, 2017
Gains on interest rate swaps reclassified into interest expense from accumulated other
comprehensive income
Unrealized gains included in accumulated other comprehensive income
Fair value at December 31, 2018
$
$
$
8,159
12
2,308
1,935
12,414
(1,817)
3,598
14,195
As of December 31, 2018 and 2017, the Company had outstanding interest rate swaps designated as cash flow
hedges with aggregate notional amounts of $795.0 million and $595.0 million, respectively. As of December 31, 2018,
the Company's swaps had a weighted average remaining term of 4.5 years. The fair value of these swaps are presented
within other assets and accounts payable and accrued liabilities in the accompanying balance sheets, and the Company
recognizes any changes in the fair value as an adjustment of accumulated other comprehensive income (loss) within
equity to the extent of their effectiveness. If the forward rates at December 31, 2018 remain constant, the Company
F-34
estimates that during the next 12 months, the Company would reclassify into earnings approximately $5.4 million of
the unrealized gains included in accumulated other comprehensive income (loss). If market interest rates increase above
the 1.87% weighted average fixed rate under these interest rate swaps the Company will benefit from net cash payments
due to it from its counterparty to the interest rate swaps.
There were no transfers between levels during the years ended December 31, 2018 and 2017. For financial assets
and liabilities that utilize Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including
LIBOR yield curves. The Company uses valuation techniques for Level 2 financial assets and liabilities which include
LIBOR yield curves at the reporting date as well as assessing counterparty credit risk. Counterparties to these contracts
are highly rated financial institutions. Although the Company has determined that the majority of the inputs used to
value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the
Company's derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of
default by the Company and the counterparties. As of December 31, 2018 and 2017, the Company determined that the
effect of credit valuation adjustments on the overall valuation of its derivative positions are not significant to the overall
valuation of its derivatives. Therefore, the Company has determined that its derivative valuations are appropriately
classified in Level 2 of the fair value hierarchy.
Fair Value Disclosures
The carrying values of cash and cash equivalents, restricted cash, trade receivables, and accounts payable and
accrued liabilities reflected in the balance sheets at December 31, 2018 and 2017, approximate fair value due to the
short term nature of these financial assets and liabilities. The carrying value of variable rate debt financing reflected in
the balance sheets at December 31, 2018 and 2017 approximates fair value as the changes in their associated interest
rates reflect the current market and credit risk is similar to when the loans were originally obtained.
The fair values of fixed rate mortgages were estimated using the discounted estimated future cash payments to be
made on such debt; the discount rates used approximated current market rates for loans, or groups of loans, with similar
maturities and credit quality (categorized within Level 2 of the fair value hierarchy). The combined principal balance
of the Company's fixed rate mortgages payable was approximately $268.1 million as of December 31, 2018 with a fair
value of approximately $276.5 million. In determining the fair value, the Company estimated a weighted average market
interest rate of approximately 4.17%, compared to the weighted average contractual interest rate of 4.85%. The combined
principal balance of the Company's fixed rate mortgages was approximately $271.5 million as of December 31, 2017
with a fair value of approximately $282.6 million. In determining the fair value as of December 31, 2017, the Company
estimated a weighted average market interest rate of approximately 4.04%, compared to the weighted average contractual
interest rate of 4.87%.
14. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The following is a summary of quarterly financial information for the years ended December 31, 2018 and 2017
(in thousands, except per share data):
March 31,
2018
For the three months ended
June 30,
2018
September 30,
2018
December 31,
2018
Total revenues
Total operating expenses
Income from operations
Gain (loss) on sale of self storage
properties
Net income
$
76,493
$
79,723
$
85,382
$
54,900
21,593
474
11,973
56,033
23,690
(83)
13,041
57,869
27,513
—
16,829
Net income (loss) attributable to
common shareholders
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
$
$
$
7,872
0.16
0.09
$
$
$
3,304
0.07
0.07
$
$
$
1,806
0.03
0.03
$
$
$
89,298
60,440
28,858
—
14,483
(9,223)
(0.16)
(0.16)
F-35
March 31,
2017
For the three months ended
June 30,
2017
September 30,
2017
December 31,
2017
$
61,563
45,613
15,950
—
7,181
555
0.01
0.01
$
$
$
$
64,341
45,008
19,333
5,637
15,576
2,367
0.05
0.05
$
$
$
$
68,858
47,561
21,297
106
11,226
1,271
0.03
0.03
$
$
$
73,368
51,448
21,920
(28)
12,015
(3,532)
(0.08)
(0.08)
Total revenues
Total operating expenses
Income from operations
Gain (loss) on sale of self storage
properties
Net income
Net income (loss) attributable to
common shareholders
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
15. SUBSEQUENT EVENTS
Self Storage Property Acquisitions
$
$
$
$
In January and February 2019, the Company acquired 23 self storage properties for approximately $147.0 million.
Consideration for these acquisitions included approximately $122.9 million of net cash, the assumption of $0.4 million
of other working capital liabilities and OP equity of approximately $23.7 million (consisting of the issuance of 58,942
OP Units, 158,199 Series A-1 preferred units and 692,075 subordinated performance units). In connection with these
acquisitions, the Company reimbursed the PROs for $0.1 million of due diligence costs related to the self storage
properties sourced by the PROs.
New PRO
In February 2019, the Company entered into definitive agreements with affiliates of Investment Real Estate
Management, LLC d/b/a Moove In Self Storage of York, Pennsylvania to add Moove In Self Storage ("Moove In") as
the Company's tenth PRO. Moove In currently owns 19 self storage properties in Pennsylvania, Maryland, New Jersey,
and New York. Upon closing, Moove In intends to contribute six self storage properties to NSA as part of the initial
contribution transaction, and its remaining properties will be added to the Company's captive pipeline. The Company
expects the initial contribution transaction and related closing documentation, including the entry into a facilities
portfolio management agreement, to close during the first quarter of 2019, subject to customary closing conditions.
Subordinated Performance Unit To OP Unit Conversions
Subordinated performance units are convertible into OP units after a two year lock-out period and then generally
(i) at the holder’s election only upon the achievement of certain performance thresholds relating to the properties to
which such subordinated performance units relate (a "voluntary conversion") or (ii) at the Company's election upon a
retirement event of a PRO that holds such subordinated performance units or upon certain qualifying terminations.
Following such lock-out period, a holder of subordinated performance units in the Company's operating partnership
may elect a voluntary conversion one time each year prior to December 1st to convert a pre-determined portion of such
subordinated performance units into OP units in the Company's operating partnership, with such conversion effective
January 1st of the following year with each subordinated performance unit being converted into the number of OP units
determined by dividing the average cash available for distribution, or CAD, per unit on the series of specific subordinated
performance units over the one-year period prior to conversion by 110% of the CAD per unit on the OP units determined
over the same period. CAD per unit on the series of specific subordinated performance units and OP units is determined
by the Company based generally upon the application of the provisions of the operating partnership agreement applicable
to the distributions of operating cash flow and capital transactions proceeds.
During the year ended December 31, 2018, the Company received notices requesting the conversion of 929,057
subordinated performance units (including 15,377 subordinated performance units in the Company's DownREIT
partnerships). Effective January 1, 2019, the Company issued 876,623 OP units (including 13,475 OP units in the
Company's DownREIT partnerships) in satisfaction of such conversion requests.
F-36
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N
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1
(
NATIONAL STORAGE AFFILIATES TRUST
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
For the Years Ended December 31, 2018, 2017 and 2016
(in thousands)
2018
2017
2016
1,844,336
431,542
8,607
(50)
(7,336)
(1,866)
2,275,233
$
$
$
110,803
60,522
(10)
(646)
(311) $
$
170,358
1,147,201
715,509
—
—
(4,820)
(13,554)
1,844,336
68,100
42,703
—
—
—
110,803
Self Storage properties:
Balance at beginning of year
Acquisitions and improvements
Reclassification from assets held for sale
Write-off of fully depreciated assets and other
Dispositions
Reclassification to assets held for sale
Balance at end of year
Accumulated depreciation:
Balance at beginning of year
Depreciation expense
Write-off of fully depreciated assets and other
Dispositions
Assets held for sale
Balance at end of year
$
$
$
$
$
$
$
$
2,275,233
366,522
—
(323)
(3,709)
—
2,637,723
170,358
76,299
—
(396)
— $
246,261
$
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(cid:29)(cid:6)(cid:8)(cid:5)(cid:17)(cid:5)(cid:23)(cid:8)(cid:30)(cid:9)!(cid:16)(cid:17)(cid:9)"(cid:16)(cid:28)#(cid:5)(cid:9)(cid:31) (cid:12) (cid:13)(cid:9)!(cid:5)(cid:17)(cid:9)(cid:23)(cid:22)(cid:16)(cid:17)(cid:5)
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(cid:10)(cid:5)$(cid:9)%(cid:11)(cid:17)(cid:18)(cid:9)(cid:21)(cid:8)(cid:11)(cid:27)(cid:18)(cid:9)&’(cid:27)(cid:22)(cid:16)(cid:6)((cid:5)
(cid:10)(cid:5)$(cid:9)%(cid:11)(cid:17)(cid:18)(cid:9)(cid:21)(cid:8)(cid:11)(cid:27)(cid:18)(cid:9)&’(cid:27)(cid:22)(cid:16)(cid:6)((cid:5)
(cid:29)(cid:6)(cid:7)(cid:26)(cid:27)(cid:16)(cid:8)(cid:5)(cid:9)*,(cid:9)(cid:27)(cid:22)(cid:5)(cid:27)(cid:18)(cid:9)(cid:4)(cid:16)(cid:17)(cid:18)(cid:9)$(cid:22)(cid:5)(cid:8)(cid:22)(cid:5)(cid:17)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)(cid:17)(cid:5)((cid:26)(cid:23)(cid:8)(cid:17)(cid:16)(cid:6)(cid:8)(cid:9)(cid:26)(cid:23)(cid:9)(cid:16)(cid:9)$(cid:5)(cid:28)(cid:28)-(cid:18)(cid:6)(cid:11)$(cid:6)(cid:9)(cid:23)(cid:5)(cid:16)(cid:23)(cid:11)(cid:6)(cid:5)(cid:7)(cid:9)(cid:26)(cid:23)(cid:23)#(cid:5)(cid:17)(cid:30)(cid:9)(cid:16)(cid:23)(cid:9)(cid:7)(cid:5)(cid:24)(cid:26)(cid:6)(cid:5)(cid:7)(cid:9)*,(cid:9))#(cid:28)(cid:5)(cid:9). /(cid:9)(cid:11)(cid:24)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)(cid:21)(cid:5)(cid:27)#(cid:17)(cid:26)(cid:8)(cid:26)(cid:5)(cid:23)
(cid:3)(cid:27)(cid:8)(cid:12)(cid:9)(cid:9)(cid:9)(cid:9)%(cid:5)(cid:23)(cid:9)(cid:9)(cid:2)(cid:9)(cid:9)(cid:9)(cid:10)(cid:11)(cid:9)(cid:9)(cid:3)
(cid:29)(cid:6)(cid:7)(cid:26)(cid:27)(cid:16)(cid:8)(cid:5)(cid:9)*,(cid:9)(cid:27)(cid:22)(cid:5)(cid:27)(cid:18)(cid:9)(cid:4)(cid:16)(cid:17)(cid:18)(cid:9)$(cid:22)(cid:5)(cid:8)(cid:22)(cid:5)(cid:17)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)(cid:17)(cid:5)((cid:26)(cid:23)(cid:8)(cid:17)(cid:16)(cid:6)(cid:8)(cid:9)(cid:26)(cid:23)(cid:9)(cid:6)(cid:11)(cid:8)(cid:9)(cid:17)(cid:5)0#(cid:26)(cid:17)(cid:5)(cid:7)(cid:9)(cid:8)(cid:11)(cid:9)(cid:24)(cid:26)(cid:28)(cid:5)(cid:9)(cid:17)(cid:5)!(cid:11)(cid:17)(cid:8)(cid:23)(cid:9)!#(cid:17)(cid:23)#(cid:16)(cid:6)(cid:8)(cid:9)(cid:8)(cid:11)(cid:9)(cid:21)(cid:5)(cid:27)(cid:8)(cid:26)(cid:11)(cid:6)(cid:9)(cid:13)1(cid:9)(cid:11)(cid:17)(cid:9)(cid:21)(cid:5)(cid:27)(cid:8)(cid:26)(cid:11)(cid:6)(cid:9)(cid:13)/(cid:2)(cid:7)(cid:14)(cid:9)(cid:11)(cid:24)
(cid:8)(cid:22)(cid:5)(cid:9)(cid:3)(cid:27)(cid:8)(cid:12)(cid:9)(cid:9)(cid:9)(cid:9)%(cid:5)(cid:23)(cid:9)(cid:9)(cid:3)(cid:9)(cid:9)(cid:9)(cid:10)(cid:11)(cid:9)(cid:9)(cid:2)
(cid:29)(cid:6)(cid:7)(cid:26)(cid:27)(cid:16)(cid:8)(cid:5)(cid:9)*,(cid:9)(cid:27)(cid:22)(cid:5)(cid:27)(cid:18)(cid:9)(cid:4)(cid:16)(cid:17)(cid:18)(cid:9)$(cid:22)(cid:5)(cid:8)(cid:22)(cid:5)(cid:17)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)(cid:17)(cid:5)((cid:26)(cid:23)(cid:8)(cid:17)(cid:16)(cid:6)(cid:8)(cid:9)(cid:2)(cid:13)(cid:14)(cid:9)(cid:22)(cid:16)(cid:23)(cid:9)(cid:24)(cid:26)(cid:28)(cid:5)(cid:7)(cid:9)(cid:16)(cid:28)(cid:28)(cid:9)(cid:17)(cid:5)!(cid:11)(cid:17)(cid:8)(cid:23)(cid:9)(cid:17)(cid:5)0#(cid:26)(cid:17)(cid:5)(cid:7)(cid:9)(cid:8)(cid:11)(cid:9)*(cid:5)(cid:9)(cid:24)(cid:26)(cid:28)(cid:5)(cid:7)(cid:9)*,(cid:9)(cid:21)(cid:5)(cid:27)(cid:8)(cid:26)(cid:11)(cid:6)(cid:9)(cid:13)1(cid:9)(cid:11)(cid:17)(cid:9)(cid:13)/(cid:2)(cid:7)(cid:14)(cid:9)(cid:11)(cid:24)(cid:9)(cid:8)(cid:22)(cid:5)
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(cid:17)(cid:5)0#(cid:26)(cid:17)(cid:5)(cid:7)(cid:9)(cid:8)(cid:11)(cid:9)(cid:24)(cid:26)(cid:28)(cid:5)(cid:9)(cid:23)#(cid:27)(cid:22)(cid:9)(cid:17)(cid:5)!(cid:11)(cid:17)(cid:8)(cid:23)(cid:14)(cid:30)(cid:9)(cid:16)(cid:6)(cid:7)(cid:9)(cid:2)3(cid:14)(cid:9)(cid:22)(cid:16)(cid:23)(cid:9)*(cid:5)(cid:5)(cid:6)(cid:9)(cid:23)#*4(cid:5)(cid:27)(cid:8)(cid:9)(cid:8)(cid:11)(cid:9)(cid:23)#(cid:27)(cid:22)(cid:9)(cid:24)(cid:26)(cid:28)(cid:26)(cid:6)((cid:9)(cid:17)(cid:5)0#(cid:26)(cid:17)(cid:5)(cid:4)(cid:5)(cid:6)(cid:8)(cid:23)(cid:9)(cid:24)(cid:11)(cid:17)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)!(cid:16)(cid:23)(cid:8)(cid:9)2 (cid:9)(cid:7)(cid:16),(cid:23)(cid:12)(cid:9)(cid:9)(cid:9)(cid:9)%(cid:5)(cid:23)(cid:9)(cid:9)(cid:2)(cid:9)(cid:9)(cid:9)(cid:9)(cid:10)(cid:11)(cid:9)(cid:9)(cid:3)
(cid:29)(cid:6)(cid:7)(cid:26)(cid:27)(cid:16)(cid:8)(cid:5)(cid:9)*,(cid:9)(cid:27)(cid:22)(cid:5)(cid:27)(cid:18)(cid:9)(cid:4)(cid:16)(cid:17)(cid:18)(cid:9)$(cid:22)(cid:5)(cid:8)(cid:22)(cid:5)(cid:17)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)(cid:17)(cid:5)((cid:26)(cid:23)(cid:8)(cid:17)(cid:16)(cid:6)(cid:8)(cid:9)(cid:22)(cid:16)(cid:23)(cid:9)(cid:23)#*(cid:4)(cid:26)(cid:8)(cid:8)(cid:5)(cid:7)(cid:9)(cid:5)(cid:28)(cid:5)(cid:27)(cid:8)(cid:17)(cid:11)(cid:6)(cid:26)(cid:27)(cid:16)(cid:28)(cid:28),(cid:9)(cid:5)"(cid:5)(cid:17),(cid:9)(cid:29)(cid:6)(cid:8)(cid:5)(cid:17)(cid:16)(cid:27)(cid:8)(cid:26)"(cid:5)(cid:9)5(cid:16)(cid:8)(cid:16)(cid:9)6(cid:26)(cid:28)(cid:5)(cid:9)(cid:17)(cid:5)0#(cid:26)(cid:17)(cid:5)(cid:7)(cid:9)(cid:8)(cid:11)(cid:9)*(cid:5)
(cid:23)#*(cid:4)(cid:26)(cid:8)(cid:8)(cid:5)(cid:7)(cid:9)!#(cid:17)(cid:23)#(cid:16)(cid:6)(cid:8)(cid:9)(cid:8)(cid:11)(cid:9))#(cid:28)(cid:5)(cid:9). /(cid:9)(cid:11)(cid:24)(cid:9))(cid:5)(#(cid:28)(cid:16)(cid:8)(cid:26)(cid:11)(cid:6)(cid:9)(cid:21)-7(cid:9)(cid:2)8313(cid:12). /(cid:9)(cid:11)(cid:24)(cid:9)(cid:8)(cid:22)(cid:26)(cid:23)(cid:9)(cid:27)(cid:22)(cid:16)!(cid:8)(cid:5)(cid:17)(cid:14)(cid:9)(cid:7)#(cid:17)(cid:26)(cid:6)((cid:9)(cid:8)(cid:22)(cid:5)(cid:9)!(cid:17)(cid:5)(cid:27)(cid:5)(cid:7)(cid:26)(cid:6)((cid:9)(cid:13)3(cid:9)(cid:4)(cid:11)(cid:6)(cid:8)(cid:22)(cid:23)(cid:12)
%(cid:5)(cid:23)(cid:9)(cid:9)(cid:2)(cid:9)(cid:9)(cid:9)(cid:9)(cid:10)(cid:11)(cid:9)(cid:9)(cid:3)
(cid:29)(cid:6)(cid:7)(cid:26)(cid:27)(cid:16)(cid:8)(cid:5)(cid:9)*,(cid:9)(cid:27)(cid:22)(cid:5)(cid:27)(cid:18)(cid:9)(cid:4)(cid:16)(cid:17)(cid:18)(cid:9)(cid:26)(cid:24)(cid:9)(cid:7)(cid:26)(cid:23)(cid:27)(cid:28)(cid:11)(cid:23)#(cid:17)(cid:5)(cid:9)(cid:11)(cid:24)(cid:9)(cid:7)(cid:5)(cid:28)(cid:26)(cid:6)0#(cid:5)(cid:6)(cid:8)(cid:9)(cid:24)(cid:26)(cid:28)(cid:5)(cid:17)(cid:23)(cid:9)!#(cid:17)(cid:23)#(cid:16)(cid:6)(cid:8)(cid:9)(cid:8)(cid:11)(cid:9)(cid:29)(cid:8)(cid:5)(cid:4)(cid:9). /(cid:9)(cid:11)(cid:24)(cid:9))(cid:5)(#(cid:28)(cid:16)(cid:8)(cid:26)(cid:11)(cid:6)(cid:9)(cid:21)-9(cid:9)(cid:26)(cid:23)(cid:9)(cid:6)(cid:11)(cid:8)(cid:9)(cid:27)(cid:11)(cid:6)(cid:8)(cid:16)(cid:26)(cid:6)(cid:5)(cid:7)
(cid:22)(cid:5)(cid:17)(cid:5)(cid:26)(cid:6)(cid:30)(cid:9)(cid:16)(cid:6)(cid:7)(cid:9)$(cid:26)(cid:28)(cid:28)(cid:9)(cid:6)(cid:11)(cid:8)(cid:9)*(cid:5)(cid:9)(cid:27)(cid:11)(cid:6)(cid:8)(cid:16)(cid:26)(cid:6)(cid:5)(cid:7)(cid:30)(cid:9)(cid:8)(cid:11)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)*(cid:5)(cid:23)(cid:8)(cid:9)(cid:11)(cid:24)(cid:9)(cid:17)(cid:5)((cid:26)(cid:23)(cid:8)(cid:17)(cid:16)(cid:6)(cid:8):(cid:23)(cid:9)(cid:18)(cid:6)(cid:11)$(cid:28)(cid:5)(cid:7)((cid:5)(cid:30)(cid:9)(cid:26)(cid:6)(cid:9)(cid:7)(cid:5)(cid:24)(cid:26)(cid:6)(cid:26)(cid:8)(cid:26)"(cid:5)(cid:9)!(cid:17)(cid:11)’,(cid:9)(cid:11)(cid:17)(cid:9)(cid:26)(cid:6)(cid:24)(cid:11)(cid:17)(cid:4)(cid:16)(cid:8)(cid:26)(cid:11)(cid:6)(cid:9)(cid:23)(cid:8)(cid:16)(cid:8)(cid:5)(cid:4)(cid:5)(cid:6)(cid:8)(cid:23)
(cid:26)(cid:6)(cid:27)(cid:11)(cid:17)!(cid:11)(cid:17)(cid:16)(cid:8)(cid:5)(cid:7)(cid:9)*,(cid:9)(cid:17)(cid:5)(cid:24)(cid:5)(cid:17)(cid:5)(cid:6)(cid:27)(cid:5)(cid:9)(cid:26)(cid:6)(cid:9)+(cid:16)(cid:17)(cid:8)(cid:9)(cid:29)(cid:29)(cid:29)(cid:9)(cid:11)(cid:24)(cid:9)(cid:8)(cid:22)(cid:26)(cid:23)(cid:9)6(cid:11)(cid:17)(cid:4)(cid:9)(cid:13) -9(cid:9)(cid:11)(cid:17)(cid:9)(cid:16)(cid:6),(cid:9)(cid:16)(cid:4)(cid:5)(cid:6)(cid:7)(cid:4)(cid:5)(cid:6)(cid:8)(cid:9)(cid:8)(cid:11)(cid:9)(cid:8)(cid:22)(cid:26)(cid:23)(cid:9)6(cid:11)(cid:17)(cid:4)(cid:9)(cid:13) -9(cid:12)(cid:9)(cid:9)(cid:9)(cid:9)%(cid:5)(cid:23)(cid:9)(cid:9)(cid:2)(cid:9)(cid:9)(cid:9)(cid:9)(cid:10)(cid:11)(cid:9)(cid:9)(cid:3)
(cid:29)(cid:6)(cid:7)(cid:26)(cid:27)(cid:16)(cid:8)(cid:5)(cid:9)*,(cid:9)(cid:27)(cid:22)(cid:5)(cid:27)(cid:18)(cid:9)(cid:4)(cid:16)(cid:17)(cid:18)(cid:9)$(cid:22)(cid:5)(cid:8)(cid:22)(cid:5)(cid:17)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)(cid:17)(cid:5)((cid:26)(cid:23)(cid:8)(cid:17)(cid:16)(cid:6)(cid:8)(cid:9)(cid:26)(cid:23)(cid:9)(cid:16)(cid:9)(cid:28)(cid:16)(cid:17)((cid:5)(cid:9)(cid:16)(cid:27)(cid:27)(cid:5)(cid:28)(cid:5)(cid:17)(cid:16)(cid:8)(cid:5)(cid:7)(cid:9)(cid:24)(cid:26)(cid:28)(cid:5)(cid:17)(cid:30)(cid:9)(cid:16)(cid:6)(cid:9)(cid:16)(cid:27)(cid:27)(cid:5)(cid:28)(cid:5)(cid:17)(cid:16)(cid:8)(cid:5)(cid:7)(cid:9)(cid:24)(cid:26)(cid:28)(cid:5)(cid:17)(cid:30)(cid:9)(cid:16)(cid:9)(cid:6)(cid:11)(cid:6)-(cid:16)(cid:27)(cid:27)(cid:5)(cid:28)(cid:5)(cid:17)(cid:16)(cid:8)(cid:5)(cid:7)(cid:9)(cid:24)(cid:26)(cid:28)(cid:5)(cid:17)°
(cid:16)(cid:9) (cid:23)(cid:4)(cid:16)(cid:28)(cid:28)(cid:5)(cid:17)(cid:9) (cid:17)(cid:5)!(cid:11)(cid:17)(cid:8)(cid:26)(cid:6)((cid:9) (cid:27)(cid:11)(cid:4)!(cid:16)(cid:6),(cid:30)(cid:9) (cid:11)(cid:17)(cid:9) (cid:16)(cid:6)(cid:9) (cid:5)(cid:4)(cid:5)(cid:17)((cid:26)(cid:6)((cid:9) ((cid:17)(cid:11)$(cid:8)(cid:22)(cid:9) (cid:27)(cid:11)(cid:4)!(cid:16)(cid:6),(cid:12)(cid:9) (cid:21)(cid:5)(cid:5)(cid:9) (cid:8)(cid:22)(cid:5)(cid:9) (cid:7)(cid:5)(cid:24)(cid:26)(cid:6)(cid:26)(cid:8)(cid:26)(cid:11)(cid:6)(cid:23)(cid:9) (cid:11)(cid:24)(cid:9) ;(cid:28)(cid:16)(cid:17)((cid:5)(cid:9) (cid:16)(cid:27)(cid:27)(cid:5)(cid:28)(cid:5)(cid:17)(cid:16)(cid:8)(cid:5)(cid:7)(cid:9) (cid:24)(cid:26)(cid:28)(cid:5)(cid:17)°<
;(cid:16)(cid:27)(cid:27)(cid:5)(cid:28)(cid:5)(cid:17)(cid:16)(cid:8)(cid:5)(cid:7)(cid:9)(cid:24)(cid:26)(cid:28)(cid:5)(cid:17)(cid:30)<(cid:9);(cid:23)(cid:4)(cid:16)(cid:28)(cid:28)(cid:5)(cid:17)(cid:9)(cid:17)(cid:5)!(cid:11)(cid:17)(cid:8)(cid:26)(cid:6)((cid:9)(cid:27)(cid:11)(cid:4)!(cid:16)(cid:6),(cid:30)<(cid:9)(cid:16)(cid:6)(cid:7)(cid:9);(cid:5)(cid:4)(cid:5)(cid:17)((cid:26)(cid:6)((cid:9)((cid:17)(cid:11)$(cid:8)(cid:22)(cid:9)(cid:27)(cid:11)(cid:4)!(cid:16)(cid:6),<(cid:9)(cid:26)(cid:6)(cid:9))#(cid:28)(cid:5)(cid:9)(cid:13)3*-3(cid:9)(cid:11)(cid:24)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)&’(cid:27)(cid:22)(cid:16)(cid:6)((cid:5)
(cid:3)(cid:27)(cid:8)(cid:12)(cid:9)
=(cid:16)(cid:17)((cid:5)(cid:9)(cid:3)(cid:27)(cid:27)(cid:5)(cid:28)(cid:5)(cid:17)(cid:16)(cid:8)(cid:5)(cid:7)(cid:9)6(cid:26)(cid:28)(cid:5)(cid:17)
(cid:10)(cid:11)(cid:6)-(cid:16)(cid:27)(cid:27)(cid:5)(cid:28)(cid:5)(cid:17)(cid:16)(cid:8)(cid:5)(cid:7)(cid:9)6(cid:26)(cid:28)(cid:5)(cid:17)
(cid:2)
(cid:3)
(cid:3)
(cid:3)(cid:27)(cid:27)(cid:5)(cid:28)(cid:5)(cid:17)(cid:16)(cid:8)(cid:5)(cid:7)(cid:9)6(cid:26)(cid:28)(cid:5)(cid:17)
(cid:21)(cid:4)(cid:16)(cid:28)(cid:28)(cid:5)(cid:17)(cid:9))(cid:5)!(cid:11)(cid:17)(cid:8)(cid:26)(cid:6)((cid:9)(cid:20)(cid:11)(cid:4)!(cid:16)(cid:6), (cid:3)
&(cid:4)(cid:5)(cid:17)((cid:26)(cid:6)((cid:9)>(cid:17)(cid:11)$(cid:8)(cid:22)(cid:9)(cid:20)(cid:11)(cid:4)!(cid:16)(cid:6), (cid:3)
(cid:29)(cid:24)(cid:9)(cid:16)(cid:6)(cid:9)(cid:5)(cid:4)(cid:5)(cid:17)((cid:26)(cid:6)((cid:9)((cid:17)(cid:11)$(cid:8)(cid:22)(cid:9)(cid:27)(cid:11)(cid:4)!(cid:16)(cid:6),(cid:30)(cid:9)(cid:26)(cid:6)(cid:7)(cid:26)(cid:27)(cid:16)(cid:8)(cid:5)(cid:9)*,(cid:9)(cid:27)(cid:22)(cid:5)(cid:27)(cid:18)(cid:9)(cid:4)(cid:16)(cid:17)(cid:18)(cid:9)(cid:26)(cid:24)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)(cid:17)(cid:5)((cid:26)(cid:23)(cid:8)(cid:17)(cid:16)(cid:6)(cid:8)(cid:9)(cid:22)(cid:16)(cid:23)(cid:9)(cid:5)(cid:28)(cid:5)(cid:27)(cid:8)(cid:5)(cid:7)(cid:9)(cid:6)(cid:11)(cid:8)(cid:9)(cid:8)(cid:11)(cid:9)#(cid:23)(cid:5)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)(cid:5)’(cid:8)(cid:5)(cid:6)(cid:7)(cid:5)(cid:7)
(cid:8)(cid:17)(cid:16)(cid:6)(cid:23)(cid:26)(cid:8)(cid:26)(cid:11)(cid:6)(cid:9)!(cid:5)(cid:17)(cid:26)(cid:11)(cid:7)(cid:9)(cid:24)(cid:11)(cid:17)(cid:9)(cid:27)(cid:11)(cid:4)!(cid:28),(cid:26)(cid:6)((cid:9)$(cid:26)(cid:8)(cid:22)(cid:9)(cid:16)(cid:6),(cid:9)(cid:6)(cid:5)$(cid:9)(cid:11)(cid:17)(cid:9)(cid:17)(cid:5)"(cid:26)(cid:23)(cid:5)(cid:7)(cid:9)(cid:24)(cid:26)(cid:6)(cid:16)(cid:6)(cid:27)(cid:26)(cid:16)(cid:28)(cid:9)(cid:16)(cid:27)(cid:27)(cid:11)#(cid:6)(cid:8)(cid:26)(cid:6)((cid:9)(cid:23)(cid:8)(cid:16)(cid:6)(cid:7)(cid:16)(cid:17)(cid:7)(cid:23)(cid:9)!(cid:17)(cid:11)"(cid:26)(cid:7)(cid:5)(cid:7)(cid:9)!#(cid:17)(cid:23)#(cid:16)(cid:6)(cid:8)(cid:9)(cid:8)(cid:11)(cid:9)(cid:21)(cid:5)(cid:27)(cid:8)(cid:26)(cid:11)(cid:6)
(cid:13)1(cid:2)(cid:16)(cid:14)(cid:9)(cid:11)(cid:24)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)&’(cid:27)(cid:22)(cid:16)(cid:6)((cid:5)(cid:9)(cid:3)(cid:27)(cid:8)(cid:12)(cid:9)(cid:3)
(cid:29)(cid:6)(cid:7)(cid:26)(cid:27)(cid:16)(cid:8)(cid:5)(cid:9) *,(cid:9) (cid:27)(cid:22)(cid:5)(cid:27)(cid:18)(cid:9) (cid:4)(cid:16)(cid:17)(cid:18)(cid:9) $(cid:22)(cid:5)(cid:8)(cid:22)(cid:5)(cid:17)(cid:9) (cid:8)(cid:22)(cid:5)(cid:9) (cid:17)(cid:5)((cid:26)(cid:23)(cid:8)(cid:17)(cid:16)(cid:6)(cid:8)(cid:9) (cid:26)(cid:23)(cid:9) (cid:16)(cid:9) (cid:23)(cid:22)(cid:5)(cid:28)(cid:28)(cid:9) (cid:27)(cid:11)(cid:4)!(cid:16)(cid:6),(cid:9) (cid:2)(cid:16)(cid:23)(cid:9) (cid:7)(cid:5)(cid:24)(cid:26)(cid:6)(cid:5)(cid:7)(cid:9) (cid:26)(cid:6)(cid:9) )#(cid:28)(cid:5)(cid:9) (cid:13)3*-3(cid:9) (cid:11)(cid:24)(cid:9) (cid:8)(cid:22)(cid:5)(cid:9) &’(cid:27)(cid:22)(cid:16)(cid:6)((cid:5)
(cid:3)(cid:27)(cid:8)(cid:14)(cid:12)(cid:9)(cid:9)(cid:9)(cid:9)%(cid:5)(cid:23)(cid:9)(cid:9)(cid:3)(cid:9)(cid:9)(cid:9)(cid:9)(cid:10)(cid:11)(cid:9)(cid:9)(cid:2)
7(cid:22)(cid:5)(cid:9)(cid:16)(((cid:17)(cid:5)((cid:16)(cid:8)(cid:5)(cid:9)(cid:4)(cid:16)(cid:17)(cid:18)(cid:5)(cid:8)(cid:9)"(cid:16)(cid:28)#(cid:5)(cid:9)(cid:11)(cid:24)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)"(cid:11)(cid:8)(cid:26)(cid:6)((cid:9)(cid:16)(cid:6)(cid:7)(cid:9)(cid:6)(cid:11)(cid:6)-"(cid:11)(cid:8)(cid:26)(cid:6)((cid:9)(cid:27)(cid:11)(cid:4)(cid:4)(cid:11)(cid:6)(cid:9)(cid:23)(cid:22)(cid:16)(cid:17)(cid:5)(cid:23)(cid:9)(cid:11)(cid:24)(cid:9)*(cid:5)(cid:6)(cid:5)(cid:24)(cid:26)(cid:27)(cid:26)(cid:16)(cid:28)(cid:9)(cid:26)(cid:6)(cid:8)(cid:5)(cid:17)(cid:5)(cid:23)(cid:8)(cid:9)(cid:11)(cid:24)(cid:9)(cid:10)(cid:16)(cid:8)(cid:26)(cid:11)(cid:6)(cid:16)(cid:28)(cid:9)(cid:21)(cid:8)(cid:11)(cid:17)(cid:16)((cid:5)
(cid:3)(cid:24)(cid:24)(cid:26)(cid:28)(cid:26)(cid:16)(cid:8)(cid:5)(cid:23)(cid:9)7(cid:17)#(cid:23)(cid:8)(cid:9)(cid:22)(cid:5)(cid:28)(cid:7)(cid:9)*,(cid:9)(cid:6)(cid:11)(cid:6)-(cid:16)(cid:24)(cid:24)(cid:26)(cid:28)(cid:26)(cid:16)(cid:8)(cid:5)(cid:23)(cid:9)(cid:11)(cid:24)(cid:9)(cid:10)(cid:16)(cid:8)(cid:26)(cid:11)(cid:6)(cid:16)(cid:28)(cid:9)(cid:21)(cid:8)(cid:11)(cid:17)(cid:16)((cid:5)(cid:9)(cid:3)(cid:24)(cid:24)(cid:26)(cid:28)(cid:26)(cid:16)(cid:8)(cid:5)(cid:23)(cid:9)7(cid:17)#(cid:23)(cid:8)(cid:9)$(cid:16)(cid:23)(cid:9)(cid:16)!!(cid:17)(cid:11)’(cid:26)(cid:4)(cid:16)(cid:8)(cid:5)(cid:28),(cid:9)(cid:31)(cid:13)(cid:12)?(cid:9)*(cid:26)(cid:28)(cid:28)(cid:26)(cid:11)(cid:6)(cid:9)(cid:16)(cid:23)(cid:9)(cid:11)(cid:24)(cid:9)@#(cid:6)(cid:5)(cid:9)1 °
3 (cid:13)A(cid:12)(cid:9)(cid:3)(cid:23)(cid:9)(cid:11)(cid:24)(cid:9)(cid:3)!(cid:17)(cid:26)(cid:28)(cid:9)1(cid:30)(cid:9)3 (cid:13)2(cid:30)(cid:9)/?(cid:30)B (cid:13)(cid:30)?B.(cid:9)(cid:27)(cid:11)(cid:4)(cid:4)(cid:11)(cid:6)(cid:9)(cid:23)(cid:22)(cid:16)(cid:17)(cid:5)(cid:23)(cid:9)(cid:11)(cid:24)(cid:9)*(cid:5)(cid:6)(cid:5)(cid:24)(cid:26)(cid:27)(cid:26)(cid:16)(cid:28)(cid:9)(cid:26)(cid:6)(cid:8)(cid:5)(cid:17)(cid:5)(cid:23)(cid:8)(cid:30)(cid:9)(cid:31) (cid:12) (cid:13)(cid:9)!(cid:16)(cid:17)(cid:9)"(cid:16)(cid:28)#(cid:5)(cid:9)!(cid:5)(cid:17)(cid:9)(cid:23)(cid:22)(cid:16)(cid:17)(cid:5)(cid:30)(cid:9)$(cid:5)(cid:17)(cid:5)(cid:9)(cid:11)#(cid:8)(cid:23)(cid:8)(cid:16)(cid:6)(cid:7)(cid:26)(cid:6)((cid:12)
(cid:10)(cid:11)(cid:6)(cid:5)(cid:12)
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(cid:2)(cid:16)(cid:14)(cid:2)1(cid:14)
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(cid:11)(cid:6)(cid:9)6(cid:11)(cid:17)(cid:4)(cid:9)(cid:13) -9(cid:12)
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1(cid:12)3(cid:9)(cid:24)(cid:17)(cid:11)(cid:4)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)(cid:19)(cid:17)(cid:26)((cid:26)(cid:6)(cid:16)(cid:28)(cid:9)(cid:13) -9(cid:9)(cid:26)(cid:23)(cid:9)(cid:22)(cid:5)(cid:17)(cid:5)*,(cid:9)(cid:17)(cid:5)!(cid:28)(cid:16)(cid:27)(cid:5)(cid:7)(cid:9)$(cid:26)(cid:8)(cid:22)(cid:9)&’(cid:22)(cid:26)*(cid:26)(cid:8)(cid:9)1(cid:12)3(cid:9)(cid:11)(cid:24)(cid:9)(cid:8)(cid:22)(cid:26)(cid:23)(cid:9)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:4)(cid:5)(cid:6)(cid:8)(cid:9)(cid:10)(cid:11)(cid:12)(cid:9)(cid:13)(cid:9)(cid:8)(cid:11)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)(cid:20)(cid:11)(cid:4)!(cid:16)(cid:6),E(cid:23)
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7(cid:22)(cid:5)(cid:9)(cid:24)(cid:11)(cid:28)(cid:28)(cid:11)$(cid:26)(cid:6)((cid:9)(cid:5)’(cid:22)(cid:26)*(cid:26)(cid:8)(cid:23)(cid:9)(cid:16)(cid:17)(cid:5)(cid:9)(cid:24)(cid:26)(cid:28)(cid:5)(cid:7)(cid:9)$(cid:26)(cid:8)(cid:22)(cid:9)(cid:8)(cid:22)(cid:26)(cid:23)(cid:9)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:4)(cid:5)(cid:6)(cid:8)(cid:9)(cid:10)(cid:11)(cid:12)(cid:9)(cid:13)(cid:9)(cid:8)(cid:11)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)(cid:20)(cid:11)(cid:4)!(cid:16)(cid:6),E(cid:23)(cid:9)(cid:3)(cid:6)(cid:6)#(cid:16)(cid:28)(cid:9))(cid:5)!(cid:11)(cid:17)(cid:8)(cid:9)(cid:11)(cid:6)(cid:9)6(cid:11)(cid:17)(cid:4)(cid:9) -
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1(cid:13)(cid:12)(cid:13)(cid:9) (cid:9) (cid:20)(cid:5)(cid:17)(cid:8)(cid:26)(cid:24)(cid:26)(cid:27)(cid:16)(cid:8)(cid:26)(cid:11)(cid:6)(cid:9) (cid:11)(cid:24)(cid:9) (cid:20)(cid:22)(cid:26)(cid:5)(cid:24)(cid:9) &’(cid:5)(cid:27)#(cid:8)(cid:26)"(cid:5)(cid:9) (cid:19)(cid:24)(cid:24)(cid:26)(cid:27)(cid:5)(cid:17)(cid:9) !#(cid:17)(cid:23)#(cid:16)(cid:6)(cid:8)(cid:9) (cid:8)(cid:11)(cid:9) )#(cid:28)(cid:5)(cid:9) (cid:13)1(cid:16)-(cid:13).(cid:2)(cid:16)(cid:14)C(cid:13)/(cid:7)-(cid:13).(cid:2)(cid:16)(cid:14)(cid:9) (cid:11)(cid:24)(cid:9) (cid:8)(cid:22)(cid:5)(cid:9) (cid:21)(cid:5)(cid:27)#(cid:17)(cid:26)(cid:8)(cid:26)(cid:5)(cid:23)
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1(cid:13)(cid:12)3(cid:9) (cid:9) (cid:20)(cid:5)(cid:17)(cid:8)(cid:26)(cid:24)(cid:26)(cid:27)(cid:16)(cid:8)(cid:26)(cid:11)(cid:6)(cid:9) (cid:11)(cid:24)(cid:9) (cid:20)(cid:22)(cid:26)(cid:5)(cid:24)(cid:9) 6(cid:26)(cid:6)(cid:16)(cid:6)(cid:27)(cid:26)(cid:16)(cid:28)(cid:9) (cid:19)(cid:24)(cid:24)(cid:26)(cid:27)(cid:5)(cid:17)(cid:9) !#(cid:17)(cid:23)#(cid:16)(cid:6)(cid:8)(cid:9) (cid:8)(cid:11)(cid:9) )#(cid:28)(cid:5)(cid:9) (cid:13)1(cid:16)-(cid:13).(cid:2)(cid:16)(cid:14)C(cid:13)/(cid:7)-(cid:13).(cid:2)(cid:16)(cid:14)(cid:9) (cid:11)(cid:24)(cid:9) (cid:8)(cid:22)(cid:5)(cid:9) (cid:21)(cid:5)(cid:27)#(cid:17)(cid:26)(cid:8)(cid:26)(cid:5)(cid:23)
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1(cid:13)(cid:12)3G (cid:20)(cid:5)(cid:17)(cid:8)(cid:26)(cid:24)(cid:26)(cid:27)(cid:16)(cid:8)(cid:26)(cid:11)(cid:6)(cid:9)(cid:11)(cid:24)(cid:9)(cid:20)(cid:22)(cid:26)(cid:5)(cid:24)(cid:9)6(cid:26)(cid:6)(cid:16)(cid:6)(cid:27)(cid:26)(cid:16)(cid:28)(cid:9)(cid:19)(cid:24)(cid:24)(cid:26)(cid:27)(cid:5)(cid:17)(cid:9)!#(cid:17)(cid:23)#(cid:16)(cid:6)(cid:8)(cid:9)(cid:8)(cid:11)(cid:9))#(cid:28)(cid:5)(cid:9)(cid:13)1(cid:16)-(cid:13).(cid:2)(cid:16)(cid:14)C(cid:13)/(cid:7)-(cid:13).(cid:2)(cid:16)(cid:14)(cid:9)(cid:11)(cid:24)(cid:9)(cid:8)(cid:22)(cid:5)(cid:9)(cid:21)(cid:5)(cid:27)#(cid:17)(cid:26)(cid:8)(cid:26)(cid:5)(cid:23)(cid:9)&’(cid:27)(cid:22)(cid:16)(cid:6)((cid:5)
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CORPORATE INFORMATION
BOARD OF TRUSTEES
ARLEN D. NORDHAGEN
Chairman of the Board and Chief Executive Officer
PAUL W. HYLBERT
Lead Independent Trustee
GEORGE L. CHAPMAN
DOMINIC M. PALAZZO
KEVIN M. HOWARD
REBECCA L. STEINFORT
CHAD L. MEISINGER
MARK VAN MOURICK
STEVE G. OSGOOD
EXECUTIVE OFFICERS
TAMARA D. FISCHER
President and Chief Financial Officer
STEVEN B. TREADWELL
Executive Vice President and Chief Operating
Officer; President – National Storage Affiliates
Management Company
BRANDON S. TOGASHI
Senior Vice President and Chief Accounting Officer
CORPORATE HEADQUARTERS
NATIONAL STORAGE AFFILIATES TRUST
8400 East Prentice Avenue, 9th Floor
Greenwood Village, Colorado 80111
720.630.2600
www.nationalstorageaffiliates.com
SHAREHOLDER/OP
UNITHOLDER SERVICES
BROADRIDGE CORPORATE
ISSUER SOLUTIONS, INC.
P.O. Box 1342
Brentwood, New York 11717
Toll-free: 855.449.0975
International: 720.378.5970
Email: shareholder@broadridge.com
STOCK EXCHANGE LISTING
NYSE: NSA
INDEPENDENT AUDITORS
KPMG LLP
Denver, Colorado
ADDITIONAL COPIES OF THE NATIONAL STORAGE
AFFILIATES TRUST (THE “COMPANY”) ANNUAL REPORT
on Form 10-K for the year ended December 31, 2018,
as filed with the U.S. Securities and Exchange Commission, may
be obtained by writing to the Company’s corporate headquarters,
Attention: Investor Relations Department.
Electronic copies are also available on the Company’s website at
www.nationalstorageaffiliates.com.
THE ANNUAL MEETING OF SHAREHOLDERS
will be held May 23, 2019, beginning at 8:00 a.m. local time.
The meeting will be held at the Company’s corporate offices,
8400 East Prentice Avenue
2nd Floor Conference Room
Greenwood Village, Colorado 80111
THE CODE OF BUSINESS CONDUCT AND ETHICS
OF NATIONAL STORAGE AFFILIATES TRUST
is available on its website at
www.nationalstorageaffiliates.com.
A printed copy may be obtained by writing to the Company’s
corporate headquarters, Attention: Investor Relations Department.
FORWARD LOOKING STATEMENTS
Certain statements contained in this 2018 Annual Report constitute
forward-looking statements as such term is defined in Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and such statements
are intended to be covered by the safe harbor provided by the
same. Forward-looking statements are subject to substantial risks
and uncertainties, many of which are difficult to predict and are
generally beyond the Company’s control. These forward-looking
statements include information about possible or assumed future
results of the Company’s business, financial condition, liquidity, results
of operations, plans and objectives. Changes in any circumstances may
cause the Company’s actual results to differ significantly from those
expressed in any forward-looking statement. When used in this release,
the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,”
“intend,” “should,” “may” or similar expressions are intended to identify
forward-looking statements. Statements regarding the following subjects,
among others, may be forward-looking: market trends in the Company’s
industry, interest rates, the debt and lending markets or the general
economy; the Company’s business and investment strategy; and the
acquisition of properties, including the timing of acquisitions. For a
further list and description of such risks and uncertainties, see the
Company’s Annual Report on Form 10-K filed with the Securities and
Exchange Commission on February 26, 2019 and the other reports
filed by the Company with the Securities and Exchange Commission.
The forward-looking statements, and other risks, uncertainties and factors
are based on the Company’s beliefs, assumptions and expectations of its
future performance, taking into account all information currently available
to the Company. Forward-looking statements are not predictions of future
events. The Company disclaims any intention or obligation to update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.
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DEAR FELLOW
SHAREHOLDERS
2018 was a major growth year for National Storage Affiliates
as we continued to deliver industry leading internal and external
growth. Although the self storage sector is facing challenges from
elevated new supply, the economy continues to expand and
household formation and job growth continue. Further, we
believe the combination of our diversified portfolio, our proven
PRO platform, and our focused strategy of acquiring stabilized
properties will be a differentiator as we continue to drive strong
shareholder returns.
In 2018, we completed a record $1.7 billion of acquisitions,
including the fourth largest acquisition in the history of the self
storage industry by acquiring the Simply Self Storage portfolio.
The $1.325 billion transaction was completed in a joint venture
with an affiliate of Heitman Real Estate. We also completed
approximately $357 million of wholly-owned acquisitions and
announced the addition of our ninth PRO, Southern Self Storage.
Subsequent to year end, we added our tenth PRO, Moove In Self
Storage, led by a former chairman of the national Self Storage
Association, which further deepens our relationships with smaller
owner/operators. It is these local relationships that help fuel our
robust acquisition growth.
This robust external growth, combined with peer-leading same-
store NOI growth of 4.7% in 2018, has resulted in total return to
our shareholders of over 140% since our IPO in 2015.
Supporting this strong growth is our low levered balance sheet
and our access to multiple capital sources. In July, we raised
$176 million of equity in a follow on offering to help fund our
Simply Self Storage acquisition. We ended the year with net debt
to EBITDA of 5.6 times (at the low end of our target range), with
no debt maturities in 2019. As such, we remain well-positioned to
fund our growth in 2019 and beyond.
We are off to a strong start in 2019 with nearly $200 million of
acquisitions completed or under contract year-to-date. Here is
what you should expect from us going forward:
• Robust internal and external growth facilitated by our
PRO structure.
“ In 2018, we completed a record
$1.7 billion of acquisitions, including
the fourth largest acquisition in the
history of the self storage industry…”
• Continued evolution of our technology platform as we
continue to invest in honing our revenue management and
internet marketing capabilities to further maximize revenues
while improving cost efficiencies.
• Commitment to a conservative balance sheet strategy
including adding more arrows in the “capital quiver.”
• A commitment to investing in and developing our
team members.
• An increased focus on environmental, social and governance
(“ESG”) issues as we build off the recent enhancements to
our board and recent energy saving initiatives.
As ESG initiatives garner increased focus, we note that 2018
marked an important year as we improved the diversity of our
board, adding our first female trustee, and we also enacted energy
saving initiatives across our portfolio. We will explore additional
ESG enhancements going forward and expect to demonstrate
the depth of our management team in 2019. We look forward to
continuing our service as prudent stewards of your capital, aiming
to deliver robust returns for the foreseeable future, while keeping
a watchful eye on risk.
We thank our shareholders for their continued support, our NSA
team members nationwide for their dedication and our PROs for
their continued leadership. Finally, we greatly appreciate our Board
of Trustees for their advice and counsel.
ARLEN D. NORDHAGEN
Chairman of the Board of Trustees
and Chief Executive Officer
TAMARA D. FISCHER
President and Chief Financial Officer
ARLEN D. NORDHAGEN
TAMARA D. FISCHER
NSA’S GROWTH PROFORMANCE
TOTAL RETURN PERFORMANCE †
140.4% Total Return
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$300
$250
$200
$150
$100
$50
$0
4/23/15
12/31/15
12/31/16
12/31/17
12/31/18
National Storage
Affiliates Trust
S&P 500 Index
NAREIT All Equity
REIT Index
Russell 2000 Index
† Assumes $100.00 invested on April 23, 2015, with dividends reinvested. The Performance Graph will not be deemed
to be incorporated by reference into any filing by NSA under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except to the extent that NSA specifically incorporates the same by reference.
NSA DELIVERS ROBUST
PORTFOLIO GROWTH
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800
700
600
500
400
300
200
100
0
675
698(1)
)
1
F o r m a t i o n (
448
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S i n c
515
277
0 % G r o w t h
0
6
219
100
137
At Formation
2013
2014
2015
2016
2017
2018
2019
Captive Pipeline
3rd Party Acquisitions
New PROs
Strategic Joint Ventures
(1)As of February 6, 2019, NSA’s por tfolio consisted of 522 wholly-owned proper ties and 176 JV-owned proper ties.
(2) The financial highlights in the table above summarize cer tain items that we believe are impor tant for investors to
understand our company and our operations, including Core FFO and NOI, which are non-GAAP financial measures.
For additional information regarding these financial highlights, including cer tain footnote disclosure related to cer tain of
these highlights and reconciliation of non-GAAP Core FFO and NOI to GAAP net income (loss), see Item 6, “Selected
Financial Data,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and
Item 8, “Financial Statements and Supplementary Data in our Annual Repor ts on Form 10-K filed with the Securities
and Exchange Commission (“SEC”) on March 10, 2016, February 28, 2017, February 27, 2018, and February 26, 2019.
(3) Total Enterprise Value is defined as the sum of the Company’s debt principal outstanding plus the perpetual preferred
and common equity (on a fully diluted basis) valued at the closing price per share, respectively, as of each quar ter end.
SP equity is assumed conver ted using the hypothetical conversion ratio for the trailing twelve months ended at each
respective quar ter end, which we publicly disclose each quar ter. See Supplemental Schedule 4 to each of our earnings
releases which are furnished with the SEC.
GROWTH IN TOTAL PROPERTIES
AND RENTABLE SQUARE FEET
800
700
600
500
400
300
200
100
0
5
1
-
2
Q
5
1
-
3
Q
5
1
-
4
Q
6
1
-
1
Q
6
1
-
2
Q
6
1
-
3
Q
6
1
-
4
Q
7
1
-
1
Q
7
1
-
2
Q
7
1
-
3
Q
7
1
-
4
Q
8
1
-
1
Q
8
1
-
2
Q
8
1
-
3
Q
8
1
-
4
Q
# Properties
RSF (MM)
GROWTH IN CORE FFO/
SHARE AND DIVIDEND/SHARE
$0.40
$0.35
$0.30
$0.25
$0.20
$0.15
$0.10
$0.05
$-
5
1
-
2
Q
5
1
-
3
Q
5
1
-
4
Q
6
1
-
1
Q
6
1
-
2
Q
6
1
-
3
Q
6
1
-
4
Q
7
1
-
1
Q
7
1
-
2
Q
7
1
-
3
Q
7
1
-
4
Q
8
1
-
1
Q
8
1
-
2
Q
8
1
-
3
Q
8
1
-
4
Q
Core FFO/Share(2)
Dividend/Share
GROWTH IN SHARE PRICE
AND TOTAL ENTERPRISE VALUE
$5.00
$4.00
$3.00
$2.00
$1.00
$-
5
1
-
2
Q
5
1
-
3
Q
5
1
-
4
Q
6
1
-
1
Q
6
1
-
2
Q
6
1
-
3
Q
6
1
-
4
Q
7
1
-
1
Q
7
1
-
2
Q
7
1
-
3
Q
7
1
-
4
Q
8
1
-
1
Q
8
1
-
2
Q
8
1
-
3
Q
8
1
-
4
Q
Total Enterprise
Value ($BN)(3)
Share Price
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
-
$0.40
$0.35
$0.30
$0.25
$0.20
$0.15
$0.10
$0.05
$-
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$-
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PROGRESS
Seventh
Dividend Increase
Since IPO
NOVEMBER 15, 2018
Energy Efficiency
Leadership with
LED Lighting
Initiative Across
its Portfolio
OCTOBER 23, 2018
Opening Bell Ceremony at the New York Stock Exchange
MAY 24, 2018
NSA formed with
Three Founding
PROs: SecurCare,
Northwest and Optivest
4th PRO:
Guardian
5th PRO:
Move It
6th PRO:
Storage Solutions
Successful IPO
2016 Joint Venture:
iStorage Management
Platform Acquisition
7th PRO:
Hide-Away
8th PRO:
Personal
Mini Storage
2018 Joint
Venture
9th PRO:
Southern
10th PRO:
Moove In
N AT I O N A L S TO R AG E A F F I L I AT E S .C O M
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