For the quarterly period ended March 31, 2015

 

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  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of June 4, 2015, 23,000,000 common shares of beneficial interest, $.01 par value per share, were outstanding.

1. ORGANIZATION AND NATURE OF OPERATIONS

As of March 31, 2015, the Company was 100% owned by National Storage Affiliates Holdings, LLC ("Holdings"), an entity formed on February 13, 2013. The only assets of Holdings, as of March 31, 2015, were 126,400 OP units and 1,000 shares of the Company's common shares of beneficial interest, $0.01 par value per share ("common shares"). Immediately prior to the completion of our initial public offering on April 28, 2015, we redeemed the 1,000 common shares held by Holdings for no consideration.

Subsequent to March 31, 2015, the Company completed an initial public offering of 23,000,000 common shares, which included common shares issued pursuant to the exercise of the underwriters' option to purchase additional shares, and received net proceeds of approximately $273 million after deducting the underwriting discount and expenses of the initial public offering. In connection with the completion of the initial public offering, the Company also completed the formation transactions. These transactions are discussed further in Note 12.

The Company owned 225 self storage properties in 13 states with approximately 12.4 million rentable square feet in approximately 100,000 storage units as of March 31, 2015. These properties are managed with local operational focus and expertise by five 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"), and Move It Self Storage and its controlled affiliates ("Move It").

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3. NONCONTROLLING INTERESTS

All of the limited partner equity interests in our operating partnership are reflected as noncontrolling interests. Noncontrolling interests also include ownership interests in DownREIT partnerships held by entities other than our operating partnership. While the Company controls our operating partnership and manages the daily operations of our operating partnership's business, the Company did not have an ownership interest or share in our operating partnership's profits and losses prior to the completion of the Company's initial public offering. NSA's parent, Holdings, owned 126,400 OP units, which represented a less than 1% limited partner ownership interest in our operating partnership as of March 31, 2015 and December 31, 2014.

As of March 31, 2015 and December 31, 2014, outstanding equity interests of our operating partnership and DownREIT partnerships consisted of the following:

4. SELF STORAGE PROPERTIES

5. SELF STORAGE PROPERTY ACQUISITIONS

The Company acquired six self storage properties from our PROs with an estimated fair value of $41.0 million during the three months ended March 31, 2015. These self storage property acquisitions were accounted for as business combinations whereby the Company recognized the estimated fair value of the acquired assets and assumed liabilities on the respective dates of such acquisitions. The Company allocated the total purchase price to the estimated fair value of tangible and intangible assets acquired, and liabilities assumed. A portion of the purchase price was allocated to identifiable intangible assets consisting of customer in-place leases which were recorded at estimated fair value of $1.2 million.

The following table summarizes the consideration for the business combinations completed by the Company during the three months ended March 31, 2015 (dollars in thousands):

Three of the six self storage properties acquired during the three months ended March 31, 2015 are subject to non-cancelable leasehold interest agreements that are classified as operating leases. These lease agreements expire between 2034 and 2051, inclusive of extension options that we anticipate exercising.

The results of operations for these business combinations are included in our statements of operations beginning on the respective closing date for each acquisition. For the three months ended March 31, 2015, the accompanying statement of operations includes aggregate revenue of $1.2 million and operating income of $0.7 million related to the six self storage properties acquired. Acquisition costs in the accompanying statements of operations include consulting fees, transaction expenses, and other costs to complete the business combinations shown above, which amounted to $0.6 million for the three months ended March 31, 2015.

As of March 31, 2015, the Company was under contract to acquire an additional 21 self storage properties, as discussed further in Note 12.

The pro forma financial information set forth below reflects adjustments to the historical data of the Company to give effect to the acquisitions and related financing activities for (i) each of the 21 self storage properties discussed in Note 12 that were acquired in April and May 2015, as if each had occurred on January 1, 2014, and (ii) each of the six self storage properties discussed above that were acquired in January 2015, as if each had occurred on January 1, 2014 (five of the six properties acquired during the three months ended March 31, 2015 were acquired on January 1, 2015 and are therefore included in the historical results for the entirety of the three months ended March 31, 2015). The pro forma information presented below does not purport to represent what the actual results of operations would have been for the periods indicated, nor does it purport to represent the Company's future results of operations. The following table summarizes on a pro forma basis the results of operations for the three months ended March 31, 2015 and 2014 (dollars in thousands, except per share amounts):

6. OTHER ASSETS

7. DEBT FINANCING

On April 1, 2014 (as amended in July 2014), the Company entered into a $425.0 million senior secured credit facility (the "credit facility") with a syndicated group of lenders consisting of seven financial institutions. Borrowings under the credit facility are collateralized by first priority security interests in certain self storage properties. The credit facility consists of two components:

of the maturity date until March 2018 by paying an extension fee equal to 0.20% of the total borrowing commitment at the time of the extension.

As discussed in Note 12, upon completion of our initial public offering, our secured credit facility became unsecured. In addition, we used a portion of the proceeds received from our initial public offering to pay down $96.3 million of the outstanding balance of the revolving line of credit.

On April 1, 2014, the Company entered into a senior unsecured term loan (the "unsecured term loan") with a syndicated group of lenders consisting of three financial institutions. The unsecured term loan provides for maximum borrowings of $50.0 million. Under the unsecured term loan, the Company must comply with restrictions on its tangible net worth, as defined in the loan agreement. Amounts borrowed may be repaid but not re-borrowed. The loan originally matured on April 1, 2015 but was extended until October 1, 2015 in exchange for a prescribed fee of $250,000. Payments are limited to interest only, to be paid on a monthly basis. The outstanding principal balance bears interest at one-month LIBOR plus 5.00% or the base rate plus 4.00%. As of March 31, 2015, the Company had borrowed $50.0 million and elected the alternative of an interest rate of one-month LIBOR plus 5.00%. Financial covenants under the unsecured term loan match those contained in the credit facility. There is a mandatory repayment of this loan upon the occurrence of a capital event (such as completion of the Company's initial public offering) as defined in the loan agreement, and following the completion of our initial public offering, we used a portion of the proceeds received to repay the $50.0 million unsecured term loan, as discussed in Note 12.

During the three months ended March 31, 2015, in connection with the acquisition of a self storage property owned in a DownREIT partnership, the Company entered into a bridge loan agreement for $4.1 million payable to principals of the PRO that contributed the property. The note bears interest at a fixed rate of 3.30%, and matures 30 days following the completion of certain administrative matters that will permit the inclusion of the property in the Company's credit facility borrowing base calculation.

Fixed rate mortgages mature at various dates through November 2024, and have effective interest rates that range from 2.20% to 5.15%. Principal and interest are generally payable monthly or in monthly interest-only payments with balloon payments due at maturity. As discussed in Note 12, we assumed fixed rate mortgages with $28.6 million of outstanding principal balances at the time of acquisition in connection with 11 of the properties acquired as part of the formation transactions.

Variable rate mortgages mature at various dates through October 2015, and have effective interest rates that range from 2.43% to 9.65%. Principal and interest on this debt is generally payable in monthly interest-only payments with balloon payments due at maturity. As discussed in Note 12, following the completion of our initial public offering, we used a portion of the net proceeds from our initial public offering to repay all $83.5 million of the variable rate mortgages outstanding as of March 31, 2015.

8. EARNINGS PER SHARE

The following is a summary of the elements used in calculating basic and diluted earnings or loss per common share for the three months ended March 31, 2015 and 2014, respectively (dollars in thousands):

As discussed in Note 3, the Company did not have an ownership interest or share in our operating partnership's profits and losses prior to the completion of the Company's initial public offering. As a result, all of our operating partnership's profits and losses for the three months ended March 31, 2015 and 2014 were allocated to noncontrolling interests.

The following table summarizes the weighted average outstanding equity interests of our operating partnership and DownREIT partnerships for the periods ended March 31, 2015 and 2014. These equity interests are considered potential common shares for purposes of calculating earnings or loss per share as the unitholders may, through the exercise of redemption rights, obtain common shares, subject to various restrictions. After a minimum of one year from the completion of the initial public offering, OP units in our operating partnership are redeemable for cash or, at our option, exchangeable for common shares on a one-for-one basis, subject to certain adjustments. DownREIT OP units are redeemable for cash or, at our option, exchangeable for OP units in our operating partnership on a one-for-one basis, subject to certain adjustments. LTIP units, subordinated performance units, and DownREIT subordinated performance 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). Subordinated performance units are only convertible into OP units, beginning two years following the completion of the initial public offering 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. Certain LTIP units vested upon the completion of the Company's initial public offering and certain LTIP units will vest upon the future acquisition of properties sourced by PROs.

All potential common shares have been excluded from the earnings or loss per share calculations for the periods ended March 31, 2015 and 2014.

9. RELATED PARTY TRANSACTIONS

The Company has entered into asset management agreements with the PROs to continue providing leasing, operating, supervisory and administrative services related to the self storage properties contributed by and acquired from the PROs. The PROs are the same entities that provided similar services prior to the respective dates that the self storage properties were contributed to or acquired by the Company. The asset management agreements generally provide for fees ranging from 5% to 6% of gross revenue for the managed self storage properties. During the three months ended March 31, 2015 and 2014, the Company incurred $1.6 million and $0.8 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.

The employees responsible for operation of the self storage properties are employees of the PROs who charge the Company for the costs associated with the respective employees. For the three months ended March 31, 2015 and 2014, the Company incurred $2.9 million and $1.5 million for payroll and related costs reimbursable to these affiliates, respectively. Such costs are included in property operating expenses in the accompanying statements of operations.

SecurCare, an affiliate of NSA Predecessor, provides centralized call center services to support self storage property operations. For the three months ended March 31, 2015 and 2014, the Company incurred call center charges of $0.2 million and $0.1 million, respectively. Such call center costs are included in property operating expenses in the accompanying statements of operations. The call center utilizes approximately 1,500 square feet in one of the Company's self storage properties acquired from NSA Predecessor for annual rent of approximately $25,000. As discussed in Note 12, on April 1, 2015, the Company acquired the centralized call center from SecurCare for 50,000 OP units.

In connection with the planned acquisition of certain self storage properties, the Company made a bridge loan of approximately $8.0 million to a PRO on July 1, 2014. This loan did not bear interest and was repaid as the related self storage properties were acquired. Through December 31, 2014, 13 of the self storage properties had been acquired and bridge loan advances totaling $6.2 million were applied to offset the acquisition consideration otherwise payable by the Company. As of December 31, 2014, the bridge loan balance of $1.8 million is included in other assets in the accompanying balance sheet. In January 2015, the remaining balance of the bridge loan was applied to offset the acquisition consideration otherwise payable by the Company related to two self storage property acquisitions.

10. COMMITMENTS AND CONTINGENCIES

11. FAIR VALUE MEASUREMENTS

As of March 31, 2015 and December 31, 2014, we had outstanding interest rate swaps with aggregate notional amounts of $125.0 million designated as cash flow hedges. As of March 31, 2015, these swaps had a weighted average remaining term of 3.0 years. The fair value of these swaps designated as hedges are presented within accounts payable and accrued liabilities in our balance sheets, and we recognize any changes in the fair value as an adjustment of accumulated other comprehensive loss within equity to the extent of their effectiveness. If the forward rates at March 31, 2015 remain constant, we estimate that during the next 12 months, we would reclassify into earnings approximately $1.3 million of the unrealized losses in accumulated other comprehensive loss. If market interest rates increase above the 1.42% weighted average fixed rate under these interest rate swaps we will benefit from net cash payments due to us from our counterparty to the interest rate swaps.

As of March 31, 2015 and December 31, 2014, we had an interest rate swap with a notional amount of approximately $7.6 million that was not designated as a cash flow hedge. As of March 31, 2015, this swap had a remaining term of 6.9 years. The fair value of this swap is presented within accounts payable and accrued liabilities in our balance sheets, and we recognize any changes in the fair value as an adjustment of interest expense. If market interest rates increase above the 2.28% fixed rate under this interest rate swap we will benefit from net cash payments due to us from our counterparty to the interest rate swap.

There were no transfers between levels during the three months ended March 31, 2015 and 2014. 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 March 31, 2015, 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.

The carrying values of cash and cash equivalents, restricted cash, trade receivables, and accounts payable and accrued liabilities reflected in the balance sheets at March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014 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 carrying value of our fixed rate mortgages and related party note payable was approximately $158.0 million as of March 31, 2015 with a fair value of approximately $165.7 million. In determining the fair value, the Company estimated weighted average market interest rate of approximately 3.35%, compared to the weighted average contractual interest rate of 5.06%. The combined carrying value of our fixed rate mortgages was approximately $153.4 million as of December 31, 2014 with a fair value of approximately $158.3 million. In determining the fair value as of December 31, 2014, the Company estimated weighted average market interest rate of approximately 3.59%, compared to the weighted average contractual interest rate of 5.11%.

12. SUBSEQUENT EVENTS

The Company completed its initial public offering on April 28, 2015, pursuant to which it sold 20,000,000 common shares, at a price of $13.00 per share, with net proceeds to the Company of approximately $236.4 million, after deducting the underwriting discount and expenses of the initial public offering. As part of the offering, the Company granted the underwriters an option to purchase up to 3,000,000 additional common shares within thirty days after the offering. The underwriters exercised their option and, on May 18, 2015, purchased an additional 3,000,000 common shares with net proceeds to the Company of approximately $36.3 million, after deducting the additional underwriting discount and expenses associated with the exercise of this option by the underwriters.

The Company contributed the net proceeds from its initial public offering to our operating partnership in exchange for 23,000,000 OP units. Immediately prior to the completion of the initial public offering, the Company redeemed the 1,000 common shares held by Holdings for no consideration. In addition, upon the completion of our initial public offering and formation transactions, we were joined by our sixth PRO, Arizona Mini Storage Management Company d/b/a Storage Solutions and its controlled affiliates ("Storage Solutions").

In April and May 2015, following the completion of our initial public offering, the Company acquired 21 self storage properties for an aggregate purchase price of $93.1 million. Consideration for these acquisitions included $41.3 million of cash (which is net of $0.6 million of acquisition deposits applied and cash we expect to deploy in the future as capital expenditures in connection with these acquisitions) and issuance of OP equity of $23.0 million (consisting of 1,420,098 OP units and 345,970 subordinated performance units), and included the assumption of outstanding mortgages with aggregate principal balances of $28.6 million and other liabilities. Of these acquisitions, four were acquired by us from our PROs and 17 were acquired by us from third-party sellers.

Upon completion of our initial public offering, our secured credit facility became unsecured. In addition, as a result of the overall reduction in the Company's outstanding indebtedness from debt repayments, the pricing grids for the revolving line of credit and term loan were reduced by 100 basis points to interest rates equal to one-month LIBOR plus 1.60% and one-month LIBOR plus 1.50%, respectively.

Following the completion of our initial public offering, the availability of the loans extended under our credit facility is based on the hypothetical value of a borrowing base of our real property and is equal to the lesser of (i) 60% of the aggregate value of such real property less the aggregate outstanding principal amount of all unsecured indebtedness, other than the balance of the credit facility and (ii) the aggregate implied unsecured interest coverage value. Our credit facility contains customary affirmative and negative covenants, including financial covenants that, among other things, cap our total leverage at 60% of our gross asset value, and requires us to have a minimum fixed charge coverage ratio of 1.5 to 1, and requires us to have a minimum net worth (as defined in our credit facility) of approximately $133.3 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 facility and may be required to repay such debt with capital from other sources.

Upon the completion of our initial public offering, 43,350 compensatory LTIP units granted under our 2013 Equity Incentive Plan automatically vested resulting in $0.4 million of compensation expense.

Effective on April 1, 2015, in exchange for 50,000 OP units, the Company acquired a centralized call center from SecurCare, a related party. The call center, which provides services to certain self storage properties owned by the Company, was established by SecurCare and will continue to be managed by SecurCare under a business services agreement. Because the Company and Securcare are under common control, the assets acquired and liabilities assumed will be recorded at SecurCare's historical carrying value, which was a nominal amount as of the acquisition date.

On April 11, 2015, the Company declared ordinary distributions for the three months ended March 31, 2015 totaling $7.4 million to OP and subordinated performance unitholders of record on March 31, 2015, and ordinary distributions for the period from April 1, 2015 through April 20, 2015 totaling $1.6 million to OP and subordinated performance unitholders of record on April 20, 2015. Such distributions were paid on April 30, 2015.

On June 3, 2015, our board of trustees declared a cash dividend of $0.15 per common share and OP unit to shareholders and operating partnership unitholders of record as of June 30, 2015. Such distributions will be paid on July 15, 2015.

The Company had five PROs as of March 31, 2015: SecurCare, Northwest, Optivest, Guardian, and Move It. We seek to expand our platform by recruiting 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. Upon the completion of our initial public offering and formation transactions, we were joined by our sixth PRO, Storage Solutions.

We owned a geographically diversified portfolio of 225 self storage properties, located in 13 states, comprising approximately 12.4 million rentable square feet, configured in approximately 100,000 storage units, as of March 31, 2015. Of these properties, 195 were acquired by us from our PROs and 30 were acquired by us from third-party sellers.

We acquired six properties with an estimated fair value of $41.0 million, comprising approximately 0.4 million rentable square feet, configured in over 3,400 storage units during the three months ended March 31, 2015. All six of these acquisitions were acquired by us from our PROs. In addition, following the completion of our initial public offering, we acquired 21 self storage properties located in seven states for an aggregate purchase price of $93.1 million, comprising approximately 1.3 million rentable square feet, configured in approximately 9,300 storage units. Of these acquisitions, four were acquired by us from our PROs and 17 were acquired by us from third-party sellers.

When reviewing our results of operations it is important to consider the timing of acquisition activity. We acquired six self storage properties during the three months ended March 31, 2015 and 83 self storage properties during the year ended December 31, 2014, including one self storage property during the three months ended March 31, 2014.

Net loss decreased by less than $0.1 million during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014. The decrease in net loss was primarily due to an increase in net operating income ("NOI") resulting from an additional 89 self storage properties we acquired during 2014 and 2015, 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".

As of March 31, 2015, our same store portfolio consisted of 136 self storage properties. From January 1, 2014 to March 31, 2015, we acquired 89 self storage properties that do not yet meet the same store portfolio criteria. The following table illustrates the changes in rental revenue, other property-related revenue, property operating expenses, and other expenses for the three months ended March 31, 2015 compared to the three months ended March 31, 2014(dollars in thousands):