Section 2 • Industry Ownership
square feet. In 3Q 2015, same-store NOI increased 9.3 percent year over year, driven by 7.4 percent revenue growth and a 3.2 percent increase in property operating expenses. FFO, as ad- justed, was $58.5 million for the third quarter of 2015, compared with $42.8 million for the third quarter of 2014.
In terms of portfolio growth, CubeSmart acquired five prop-
erties for $75.2 million during Q3 2015, which includes two fa- cilities in Maryland and one facility each in Texas, New York and New Jersey, with four additional properties under contract for an aggregate purchase price of $60.2 million. It also has agree- ments with developers for the construction of Class A self- storage facilities in high barrier-to-entry locations that are struc- tured either as a purchase at the completion of construction or a joint-venture development.
Sovran Self Storage (Uncle Bob’s Self Storage) is the fifth
largest operator with 531 facilities, which equates to 36,428,500 rentable square feet. During 3Q 2015, Sovran continued to ex- pand its portfolio with the acquisition of 11 facilities at an ap- proximate cost of $66 million. In addition, it was contracted to acquire an additional nine facilities for $67 million.
Third quarter results reported an adjusted FFO per share
of $1.32—an increase of 12.8 percent over 3Q 2014. It also in- creased same store revenue by 6.5 percent and NOI by 8.4 per- cent compared with 3Q 2014. On November 27, 2015, Sovran stock reached an all-time high of $100.97 with a target price of $138.41.
The new REIT on the block is National Storage Affiliates Trust
(NSA). Ranked as the sixth largest operator on the 2015 Mini- Storage Messenger Top Operators List with 275 facilities and 15.7 million rentable square feet, the company is unique from the other self-storage REITs in several ways. NSA was founded in 2013 to create a different type of REIT—with a win-win part- nership that would “think globally and act locally,” benefitting operators and REIT investors alike. The business model is simple as well as unique.
According to Arlen Nordhagen, CEO, National Storage Affili-
ates Trust, “We depend on our Participating Regional Operators (PROs) to continue managing their self-storage properties after they join NSA, unlike traditional REITs. After all, they know the lay of the land at the local level better than we do. They’ve become successful by serving their customers well in the competitive environment of their own markets.”
So, why contribute their properties and join NSA in the first
place? Because they believe NSA provides them with better ac- cess to growth capital, as well as tools and resources—such as sophisticated data analytics, call centers, digital marketing sup- port, revenue management expertise, and best practices—that might otherwise be unaffordable to a standalone operator. They gain economies of scale and technological innovation to add to
30 Self-Storage Almanac 2016
their experience and business savvy. Plus, there are very signifi- cant estate planning benefits. It’s a combination intended to en- hance their profitability and ROI, while positioning themselves strategically for the long-term.
How does this public investor and PRO partnership actually
work? First, to qualify as a PRO with NSA, an operator must have a proven, high-quality management team, and typically own and operate 20 or more self-storage properties in the top 100 MSAs valued at $100 million-plus. When they join NSA, PROs contribute their properties at current market value, exchanging their property equity for Operating Partnership (OP) units (eq- uity) in the REIT. In most cases, this transaction is accomplished in a tax deferred manner.
To protect the investor, common stock and OP unit dividends take priority in respect to dividends, which is
why SP units are called “subordinated.” They take second place. OP units are economically equivalent to REIT common shares.
While OP units are commonly used by traditional REITs, NSA
has created a unique feature by adding a second class of OP units called Subordinated Performance (SP) units. As Nordha- gen explains, “SP units are issued to our PROs for part of their equity value to motivate and reward them for strong financial performance on the properties they manage within NSA. The more profitably a PRO manages its portfolio of properties, the more the PRO can earn in both dividends and long term value from their SP units. That’s the upside incentive. By contrast, SP units will pay a lesser dividend for poor financial performance. That’s the downside penalty.”
To protect the investor, common stock and OP unit dividends
take priority in respect to dividends, which is why SP units are called “subordinated.” They take second place. OP units are economically equivalent to REIT common shares. Their value is based on the value of the entire REIT, which is the same as the price of the common shares, and they receive the same divi- dends as REIT common shares.
Because PROs are vested in the REIT by virtue of owning both
OP units and SP units, they are motivated to see both the com- pany as a whole do well (impacting OP unit value), and to profit- ably grow their portfolio of managed properties to increase the distributions and value of their SP units.
Since its formation, NSA has grown its portfolio by approxi- mately 175 percent and is looking to add six to nine additional
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