Since its founding just five years ago, National Storage Affiliates (NSA) has grown aggressively, quickly amassing a portfolio of more than 550 self-storage facilities. The company is now among the industry’s largest U.S. owner/operators. Although it became a publicly traded real estate investment trust (REIT) in 2015, it has remained true to its goal: providing a quality investment vehicle for investors and operating partners.
In a recent interview with Inside Self-Storage, NSA Founder and CEO Arlen D. Nordhagen discussed the company’s recent portfolio acquisition and what it looks for when buying properties. He also provided insight to NSA’s unique structure, how that structure has been integral to its growth strategy, and the company’s long-term plans.
Tell us a bit about NSA and your role in the company.
I’m chairman and CEO of NSA, which I co-founded in 2013. I’ve been in the self-storage business for 30 years, and about five years ago, I realized I wasn’t getting any younger. I wanted to figure out a good way to come together with other private operators and make an opportunity for continued growth, keep our management teams involved and challenged, use the scale of more assets, help us implement platform tools that could make us better operators, and really be able to compete with the public REITs. Ultimately, our goal was to grow large enough to do our own public offering and become a public REIT.
When we started, we originally committed 100 properties to the company, which we grew to about 250 by 2015. At that point, we were large enough to do an initial public offering on the New York Stock Exchange. Today, we’re at over 550 properties. We’ll be over 660 once we close the Brookfield Asset Management Inc. transaction on the Simply Self Storage portfolio.
We have eight private operators that are part of the NSA team. We call them our PROs, participating regional operators. They manage and contribute properties into NSA, plus we have our internal PRO, the iStorage brand and platform that’s our internally owned management company. Right now, it manages about 100 properties.
NSA is acquiring 112 Simply Self Storage facilities. How did this deal come about? What were the factors that made it attractive?
We knew several months ago that Brookfield was looking at the opportunity to recapitalize that deal. They were happy with their Simply portfolio, but they were looking at a recapitalization. We talked to them about it, and it didn’t make a lot of sense for us to participate in a recap. But we mentioned at the time that if they were interested in selling some or all of its properties, we would be very interested.
After they thought about it and considered the options, they came back to us and said they were willing to look at a sale if it made economic sense. I know they offered the deal to some other bidders as well, so we were very happy we were able to win that transaction.
The portfolio is attractive to us because it broadens our geographic scope. Through this transaction, we’ll be adding five new states and six new major markets to our geographic diversification. It also increases the scale of our iStorage management company, because almost all these properties will be managed under that brand.
Plus, the joint-venture relationship we have with Heitman Capital Management LLC allows us to manage 100 percent of the properties while we only need to invest 25 percent of the capital. This makes it very accretive to us and very financially beneficial for our shareholders. It also gives us future growth potential when Heitman or our other JV co-investor partners want to exit that investment. They usually do after a certain hold period, and we have the option to buy them out at that time. It’s a win-win scenario for everybody involved—for Brookfield, for us, for Heitman and the JV partners—so we’re very pleased.
It’s been two years since NSA acquired the iStorage portfolio. How has that purchase impacted the company?
It’s been very successful. That acquisition is also a joint venture with Heitman and the Florida Retirement System Pension Plan. Before that transaction, all our properties were managed only by the PROs. The addition of our own internal PRO through that transaction, along with the iStorage division, gives us more flexibility.
Financially, it’s done very well. It’s added to our operating scale from the standpoint of having funds to do more sophisticated things on the technology and marketing side. And, as I said, it’s been very accretive to NSA from a standpoint of helping our shareholder value and funds for operations (FFO) per share.
What are the primary factors you look for when pursuing a portfolio acquisition? Are they different based on portfolio size?
I’d say there are two major things we look at. The first is a strategic synergy, and that relates to the geographic location and benefits we would get from scale through that acquisition. That might be increasing our geographic diversification, or in a lot of cases, it’s increasing our market share in areas we’re already in.
Second, we look at the economic benefits the acquisition can deliver for us and our shareholders. We consider both the short term—how it will do in the first year or two of our ownership—but also the long term, which is ultimately most important. We look at how this acquisition will add value to our shareholders in terms of accretion, improving our long-term FFO per share and dividends per share we can pay as a result.
We also consider our ultimate stock price. We know in the long run that stock price will grow as FFO per share grows. Although there can be a lot of noise in the short run where stock price goes up and down a lot, we know over the long term that growth in FFO per share is what delivers value to our shareholders.
The size of the acquisition doesn’t really change the factors, but it’s true that larger deals often have more scale and strategic advantages. It’s also true that larger deals tend to have slightly fewer economic advantages. You generally need to pay a portfolio premium for a large deal vs. individual assets. Obviously, our focus is to try to do both. In an ideal world, we’d love to be able to buy 100 properties at one time at a lower price. The reality is it’s very difficult to do that, so we try to do a mixture of one-off deals and portfolios when they become available and can benefit us long-term.
How do the dynamics change when considering or pursuing a deal to integrate a new PRO?
When we’re thinking about adding a new PRO to our group, we look at all the factors, but also consider whether this is a good fit from a personality and teamwork standpoint, because this is really a partnership. Will the PRO be a real team player? Does it fit with the management team? It’s critical that the prospective PRO’s management team be high-quality and its reputation will enhance NSA rather than detract from it. Then we look at geography to make sure there isn’t too much overlap or competition with our existing PROs.
The one thing I would say that’s different when we’re looking at adding a PRO vs. acquiring properties from a third-party seller is the integration of the operations is usually quite a bit easier. The PRO has already been managing these properties. It knows them really well, and it just continues to manage them. Now, it does have to add in some of the public-company procedures in terms of our reporting and accounting and things. Those add some complexity. But other than that, the integration is easier than if we’re buying a bunch of properties from an unknown third party.
How has the unusual operating structure of NSA contributed to its growth and performance?
Our structure and uniqueness has been a key driver in terms of our ability to grow rapidly and succeed without major integration issues. We’ve been the fastest growing of all the self-storage REITs since we came onto the scene. That’s because we have nine acquisition teams out there, not just one. Every PRO has its own team focused on finding acquisitions within its market. Our PROs have allocated territories where they look to add properties to the NSA portfolio. Then we have the internal acquisition team that’s part of the iStorage platform as well.
It’s also true that we have nine property-integration teams and not just one, so we can do a lot of acquisitions in a year and not have the kind of stress you might expect if you had one team trying to add all these properties at once from a single headquarters. Every PRO is involved in the integration of new properties in its territories. It makes acquisitions go much smoother. Those have been key parts of our ability to grow so quickly.
It’s certainly true that having such a unique structure created challenges for us at the beginning, especially as it related to Wall Street. We had to explain a whole new approach to management, and a whole new approach to growth and delivering shareholder value. Initially, we were penalized for that in terms of our stock price. But as we continued to deliver results, not just on growth but on actual profitability, that kind of performance has come back to the market. They’ve seen it and, ultimately, we now trade pretty much at the same kind of multiples as all our peers. In fact, because of our high growth rate, we trade even in the higher part of that range, so that penalty we suffered initially as a new stock is gone. That’s been very rewarding for us.
What’s the company’s long-term strategy? What will it look like in three to five years?
Our long-term strategy is to continue to grow our platform and size in ways that are beneficial to shareholders. We’re not just interested in growth just for growth’s sake. It needs to be growth that delivers value. By that I mean, will this growth allow us to continually increase our dividends per share? Will it allow us to ultimately improve our FFO per share in such a way that the stock price will continue to appreciate? That’s really the focus of our strategy.
We’ve stated publicly that we want to increase our FFO per share by an average of 10 percent or more per year for several years. We think we can do that in two ways: by continually improving management and performance of our existing stores through continual new improvements in technology and platform tools for marketing, plus growing the portfolio through acquisitions. Our target is to grow the number of stores we have under our ownership by about 10 percent per year as well. Right now, we’re at 550 stores, soon to go to 660. Three years from now, we would anticipate being around 800 stores. Five years from now, we’ll probably be in the range of 950 to 1,000 stores.
Most important to us is that the growth is beneficial to our shareholders. We won’t just grow to grow. We’ll grow to create value for our shareholders and do a better job in managing our properties for our owners and customers.