UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
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
 
46-5053858
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

5200 DTC Parkway
Suite 200
Greenwood Village, Colorado 80111
(Address of principal executive offices) (Zip code)
(720) 630-2600
(Registrant's telephone number including area code)
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  x    No  ¨
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 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. (Check one):
Large Accelerated Filer
¨
 
Accelerated Filer
¨
Non-accelerated Filer
x
 
Smaller Reporting Company
¨
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 August 8, 2016, 35,757,870 common shares of beneficial interest, $0.01 par value per share, were outstanding.



 
 
 
 
 
EXPLANATORY NOTE
This quarterly report of National Storage Affiliates Trust includes the results of operations and financial condition of National Storage Affiliates Trust and its consolidated subsidiaries (the "Company") prior to the completion of the Company's initial public offering on April 28, 2015 and certain of its formation transactions, which occurred on or subsequent to April 28, 2015. As a result, the condensed consolidated financial statements included in this report are not necessarily indicative of subsequent results of operations, cash flows or financial position of the Company.
 
 
 
 
 


1


NATIONAL STORAGE AFFILIATES TRUST
 
 
 
TABLE OF CONTENTS
FORM 10-Q
 
 
Page
PART I. FINANCIAL INFORMATION
ITEM 1.
Financial Statements
 
Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 (Unaudited)
 
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)
 
Condensed Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2016 (Unaudited)
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (Unaudited)
 
Notes to the Condensed Consolidated Financial Statements
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
ITEM 4.
Controls and Procedures
PART II. OTHER INFORMATION
ITEM 1.
Legal Proceedings
ITEM 1A.
Risk Factors
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 3.
Defaults Upon Senior Securities
ITEM 4.
Mine Safety Disclosures
ITEM 5.
Other Information
ITEM 6.
Exhibits
Signatures
 



2


PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements

NATIONAL STORAGE AFFILIATES TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
(Unaudited)

 
June 30,
 
December 31,
 
2016
 
2015
ASSETS
 
 
 
Real estate
 
 
 
Self storage properties
$
1,432,118

 
$
1,147,201

Less accumulated depreciation
(86,891
)
 
(68,100
)
Self storage properties, net
1,345,227

 
1,079,101

Cash and cash equivalents
9,939

 
6,665

Restricted cash
3,916

 
2,712

Debt issuance costs, net
3,103

 
1,923

Other assets, net
14,141

 
8,648

Total assets
$
1,376,326

 
$
1,099,049

LIABILITIES AND EQUITY
 
 
 
Liabilities
 
 
 
Debt financing
$
754,661

 
$
567,795

Accounts payable and accrued liabilities
24,755

 
9,694

Deferred revenue
7,390

 
5,513

Total liabilities
786,806

 
583,002

Commitments and contingencies (Note 10)

 

Equity
 
 
 
Common shares of beneficial interest, par value $0.01 per share. 250,000,000 shares authorized, 23,230,243 and 23,015,751 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
232

 
230

Additional paid-in capital
252,741

 
236,392

Retained (deficit) earnings
(120
)
 
11

Accumulated other comprehensive loss
(662
)
 

Total shareholders' equity
252,191

 
236,633

Noncontrolling interests
337,329

 
279,414

Total equity
589,520

 
516,047

Total liabilities and equity
$
1,376,326

 
$
1,099,049



See notes to condensed consolidated financial statements.

3


NATIONAL STORAGE AFFILIATES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
REVENUE
 
 
 
 
 
 
 
Rental revenue
$
45,784

 
$
30,632

 
$
84,285

 
$
58,050

Other property-related revenue
1,500

 
1,018

 
2,648

 
1,891

Total revenue
47,284

 
31,650

 
86,933

 
59,941

OPERATING EXPENSES
 
 
 
 
 
 
 
Property operating expenses
15,457

 
10,826

 
28,734

 
20,668

General and administrative expenses
4,837

 
4,187

 
9,172

 
7,800

Depreciation and amortization
13,088

 
9,974

 
23,980

 
19,851

Total operating expenses
33,382

 
24,987

 
61,886

 
48,319

Income from operations
13,902

 
6,663

 
25,047

 
11,622

OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest expense
(5,844
)
 
(4,824
)
 
(10,785
)
 
(11,806
)
Loss on early extinguishment of debt
(136
)
 
(914
)
 
(136
)
 
(914
)
Acquisition costs
(1,708
)
 
(719
)
 
(2,996
)
 
(1,318
)
Organizational and offering expenses

 

 

 
(58
)
Non-operating expense
(169
)
 
(113
)
 
(283
)
 
(204
)
Other income (expense)
(7,857
)
 
(6,570
)
 
(14,200
)
 
(14,300
)
Net income (loss)
6,045

 
93

 
10,847

 
(2,678
)
Net loss (income) attributable to noncontrolling interests
1,325

 
3,371

 
(1,267
)
 
6,142

Net income attributable to National Storage Affiliates Trust
$
7,370

 
$
3,464

 
$
9,580

 
$
3,464

 
 
 
 
 
 
 
 
Earnings (loss) per share - basic
$
0.32

 
$
0.22

 
$
0.42

 
$
0.44

Earnings (loss) per share - diluted
$
0.08

 
$

 
$
0.15

 
$

 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
23,078

 
15,517

 
23,041

 
7,802

Weighted average shares outstanding - diluted
73,531

 
52,565

 
70,763

 
26,327

Dividends declared per common share
$
0.22

 
$
0.15

 
$
0.42

 
$
0.15



See notes to condensed consolidated financial statements.

4


NATIONAL STORAGE AFFILIATES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
(Unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
6,045

 
$
93

 
$
10,847

 
$
(2,678
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized loss on derivative contracts
(6,542
)
 
(104
)
 
(8,437
)
 
(1,270
)
Reclassification of other comprehensive loss to interest expense
506

 
390

 
909

 
775

Other comprehensive (loss) income
(6,036
)
 
286

 
(7,528
)
 
(495
)
Comprehensive income (loss)
9

 
379

 
3,319

 
(3,173
)
Comprehensive loss attributable to noncontrolling interests
7,361

 
3,085

 
5,568

 
6,637

Comprehensive income attributable to National Storage Affiliates Trust
$
7,370

 
$
3,464

 
$
8,887

 
$
3,464


See notes to condensed consolidated financial statements.

5


NATIONAL STORAGE AFFILIATES TRUST
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(dollars in thousands, except share amounts)
(Unaudited)

 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
Additional
 
Retained
 
Other
 
 
 
 
 
Common Shares
 
Paid-in
 
(Deficit)
 
Comprehensive
 
Noncontrolling
 
Total
 
Number
 
Amount
 
Capital
 
Earnings
 
Loss
 
Interests
 
Equity
Balances, December 31, 2015
23,015,751

 
$
230

 
$
236,392

 
$
11

 
$

 
$
279,414

 
$
516,047

OP equity recorded in business combinations:
 
 
 
 
 
 
 
 
 
 
 
 
 
OP units and subordinated performance units, net of offering costs

 

 

 

 

 
99,491

 
99,491

LTIP units

 

 

 

 

 
438

 
438

Redemptions of OP units
206,402

 
2

 
2,258

 

 
(6
)
 
(2,254
)
 

Effect of changes in ownership for consolidated entities

 

 
14,031

 

 
37

 
(14,068
)
 

Equity-based compensation expense

 

 
60

 

 

 
1,167

 
1,227

Issuance of LTIP units for acquisition expenses

 

 

 

 

 
56

 
56

Issuance of restricted common shares
8,090

 

 

 

 

 

 

Reduction in receivables from partners of OP

 

 

 

 

 
854

 
854

Other comprehensive loss

 

 

 

 
(693
)
 
(6,835
)
 
(7,528
)
Common share dividends

 

 

 
(9,711
)
 

 

 
(9,711
)
Distributions to limited partners of OP

 

 

 

 

 
(22,201
)
 
(22,201
)
Net income

 

 

 
9,580

 

 
1,267

 
10,847

Balances, June 30, 2016
23,230,243

 
$
232

 
$
252,741

 
$
(120
)
 
$
(662
)
 
$
337,329

 
$
589,520


See notes to condensed consolidated financial statements.

6


NATIONAL STORAGE AFFILIATES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)

 
Six Months Ended
June 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
10,847

 
$
(2,678
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
23,980

 
19,851

Amortization of debt issuance costs
1,040

 
1,610

Amortization of debt discount and premium, net
(1,026
)
 
(780
)
Loss on debt extinguishment
136

 
414

Unrealized gain on fair value of derivatives

 
(3
)
LTIP units issued for acquisition expenses
56

 
366

Equity-based compensation expense
1,227

 
1,721

Change in assets and liabilities, net of effects of business combinations:
 
 
 
Restricted cash
(709
)
 
(221
)
Other assets
(779
)
 
(865
)
Accounts payable and accrued liabilities
4,594

 
1,363

Deferred revenue
304

 
249

Net Cash Provided by Operating Activities
39,670

 
21,027

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Acquisition of self storage properties
(123,932
)
 
(47,523
)
Capital expenditures
(3,972
)
 
(2,000
)
Deposits and advances for self storage property acquisitions
(1,933
)
 
(145
)
Expenditures for corporate furniture, equipment and other
(336
)
 
(58
)
Change in restricted cash designated for capital expenditures
(137
)
 
188

Net Cash Used In Investing Activities
(130,310
)
 
(49,538
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of common shares in IPO

 
278,070

Borrowings under debt financings
381,500

 
21,000

Receipts for OP unit subscriptions
789

 
746

Collection of receivables from issuance of OP equity
570

 
575

Principal payments under debt financings
(252,586
)
 
(257,084
)
Payment of dividends to common shareholders
(9,711
)
 

Distributions to noncontrolling interests
(21,725
)
 
(14,681
)
Change in restricted cash for financing activity

 
(167
)
Debt issuance costs
(4,612
)
 
(553
)
Equity offering costs
(311
)
 
(2,349
)
Net Cash Provided by Financing Activities
93,914

 
25,557

Increase (Decrease) in Cash and Cash Equivalents
3,274

 
(2,954
)
CASH AND CASH EQUIVALENTS
 
 
 
Beginning of period
6,665

 
9,009

End of period
$
9,939

 
$
6,055


See notes to condensed consolidated financial statements.

7


NATIONAL STORAGE AFFILIATES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
(Unaudited)


 
Six Months Ended
June 30,
 
2016
 
2015
Supplemental Cash Flow Information
 
 
 
Cash paid for interest
$
10,354

 
$
11,739

Supplemental Disclosure of Non-Cash Investing and Financing Activities
 
 
 
Consideration exchanged in business combinations:
 
 
 
Issuance of OP units and subordinated performance units
$
99,616

 
$
31,925

Deposits on acquisitions applied to purchase price
631

 
745

LTIP units vesting upon acquisition of properties
438

 

Assumption of mortgages payable
61,628

 
46,989

Note payable to related party to settle assumed mortgages

 
5,342

Other net liabilities assumed
1,796

 
358

Notes receivable settled upon acquisition of properties

 
1,778

Fair value of noncontrolling interests in acquired subsidiaries

 
6,770

Increase in OP unit subscription liability through reduced distributions
192

 
194

Settlement of acquisition receivables through reduced distributions
284

 
867

Increase in payables for deferred offering costs
790

 
1,625

Settlement of offering costs from IPO proceeds

 
20,930


See notes to condensed consolidated financial statements.

8


NATIONAL STORAGE AFFILIATES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)






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 intends to elect and qualify as a real estate investment trust ("REIT") for U.S. federal income tax purposes commencing with its taxable year ending 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 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 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 we refer 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 completed its initial public offering on April 28, 2015, pursuant to which it sold 23,000,000 of the Company's common shares of beneficial interest, $0.01 par value per share ("common shares"), at a price of $13.00 per share, which included 3,000,000 common shares sold upon the exercise in full by the underwriters of their option to purchase additional shares. These transactions resulted in net proceeds to the Company of approximately $278.1 million, after deducting the underwriting discount and before additional expenses associated with the offering.
As discussed in Note 12, 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 $237.7 million after deducting the underwriting discount and estimated offering expenses. 
The Company owned 318 self storage properties in 18 states with approximately 18.7 million rentable square feet in approximately 149,000 storage units as of June 30, 2016. These properties are managed with local operational focus and expertise by the Company's 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"), and Arizona Mini Storage Management Company d/b/a Storage Solutions and its controlled affiliates ("Storage Solutions"). On April 1, 2016, the Company completed its acquisition of a portfolio of self storage properties from parties related to Hide-Away Storage Services, Inc. ("Hide-Away") of Sarasota, Florida, and added Hide-Away as the Company's seventh PRO.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements are presented on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles ("GAAP") and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements have been included.


9


Principles of Consolidation
The Company's 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.
During the six months ended June 30, 2016, the Company adopted Accounting Standards Update ("ASU") 2015-02 and concluded that although its operating partnership and all DownREIT partnerships now meet the criteria as a VIE, no change was required to the Company's accounting for any of its interests in less than wholly owned DownREIT partnerships or its operating partnership. 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. Accordingly, there has been no change to the recognized amounts in the Company's consolidated balance sheets and statements of operations or amounts reported in the Company's consolidated statements of cash flows.
As of June 30, 2016, 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 $258.7 million and $262.6 million as of June 30, 2016 and December 31, 2015, respectively. The carrying value of fixed rate mortgages payable held by these VIEs was $42.2 million and $43.2 million as of June 30, 2016 and December 31, 2015, 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 in the 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 operating partnership or its subsidiaries. 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 interest is adjusted is reflected as an adjustment to additional paid-in capital on the consolidated balance sheets.
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. 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.


10


Additionally, the HLBV method could result in net income attributable to National Storage Affiliates Trust during a period when the Company reports a consolidated net loss, or net income attributable to National Storage Affiliates Trust in excess of the Company's consolidated net income.
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 loss within equity, as discussed further in Note 11. 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).
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.
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. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09 is effective for the Company on January 1, 2018, with early application permitted for the Company on January 1, 2017. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which modifies the current consolidation guidance. Under this guidance, limited partnerships may no longer be viewed as VIEs if the limited partners hold certain rights over the general partner. Alternatively, limited partnerships not previously viewed as VIEs may now be considered VIEs in the absence of such rights. The Company adopted ASU 2015-02 during the six months ended June 30, 2016, as more fully described above, see "–Principles of Consolidation".
In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest, which requires the presentation of debt issuance costs as a direct deduction from the carrying amount of the related debt liabilities. In August 2015, the FASB issued ASU 2015-15 that permits debt issuance costs related to line-of-credit arrangements to be presented as an asset and amortized over the term of the line-of-credit arrangement regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted ASUs 2015-03 and 2015-15 as of January 1, 2016. The adoption resulted in the reclassification of certain debt issuance costs from assets to a reduction in the carrying amount of the Company's debt financings applied retrospectively to all periods. These reclassifications totaled $5.5 million and $2.8 million as of June 30, 2016 and December 31, 2015, respectively. Debt issuance costs related to the Company's revolving credit facility (the "Revolver") remain classified within "Debt issuance costs, net" in the Company's consolidated balance sheets.
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 is effective for the Company on January 1, 2019, with early application permitted. ASU 2016-02 requires 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. The Company is evaluating the effect that ASU 2016-02 will have on its operating leases, consolidated financial statements and related disclosures.


11


3. NONCONTROLLING INTERESTS
As of June 30, 2016 and December 31, 2015, units reflecting noncontrolling interests consisted of the following:
 
June 30,
 
December 31,
 
2016
 
2015
OP units
24,722,135

 
21,556,006

Subordinated performance units
10,909,094

 
9,302,989

LTIP units
2,965,065

 
2,784,761

DownREIT units
 
 
 
DownREIT OP units
1,834,786

 
1,834,786

DownREIT subordinated performance units
4,386,999

 
4,386,999

Total
44,818,079

 
39,865,541

While the Company controls its operating partnership and manages the daily operations of its operating partnership's business, the Company did not have an ownership interest or share in its operating partnership's profits and losses prior to the completion of the Company's initial public offering.
The increase in OP Units units outstanding from December 31, 2015 to June 30, 2016 was due to 3,372,531 OP units issued in connection with the acquisition of self storage properties partially offset by 206,402 OP units redeemed for common shares. The increase in subordinated performance units outstanding from December 31, 2015 to June 30, 2016 was related to the acquisition of self storage properties. The increase in LTIP units outstanding from December 31, 2015 to June 30, 2016 was due to the issuance of 180,304 compensatory LTIP units to employees, consultants and trustees during the six months ended June 30, 2016.
4. SELF STORAGE PROPERTIES
Self storage properties are summarized as follows (dollars in thousands):
 
June 30,
 
December 31,
 
2016
 
2015
Land
$
382,484

 
$
315,867

Buildings and improvements
1,046,269

 
829,093

Furniture and equipment
3,365

 
2,241

Total self storage properties
1,432,118

 
1,147,201

Less accumulated depreciation
(86,891
)
 
(68,100
)
Self storage properties, net
$
1,345,227

 
$
1,079,101

Depreciation expense related to self storage properties amounted to $10.1 million and $6.5 million during the three months ended June 30, 2016 and 2015, respectively, and $18.8 million and $12.8 million during the six months ended June 30, 2016 and 2015, respectively.
5. SELF STORAGE PROPERTY ACQUISITIONS
The Company acquired 42 self storage properties with an estimated fair value of $288.0 million during the six months ended June 30, 2016. Of these acquisitions, 19 self storage properties with an estimated fair value of $150.8 million were acquired by the Company from its PROs. 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 preliminarily allocated the total purchase price to the estimated fair value of tangible and intangible assets acquired, and liabilities assumed. 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 value of $7.2 million, resulting in a total fair value of $280.8 million allocated to real estate.


12


The following table summarizes the consideration for the business combinations completed by the Company during the six months ended June 30, 2016 (dollars in thousands):
Acquisitions Closed During the Three Months Ended:
 
 
 
Summary of Consideration
 
 
 
Number of Properties
 
 
 
Value of OP Equity(1)
 
Liabilities Assumed (Assets Acquired)
 
Total Fair Value
 
Cash
 
 
Mortgages(2)
 
Other
 
March 31, 2016
 
17
 
$
63,300

 
$
19,068

 
$
5,861

 
$
584

 
$
88,813

June 30, 2016
 
25
 
61,263

 
80,986

 
55,767

 
1,212

 
199,228

Total
 
42
 
$
124,563

 
$
100,054

 
$
61,628

 
$
1,796

 
$
288,041

(1) 
Value of OP equity represents the fair value of OP units, subordinated performance units and LTIP units. 
(2) 
$12.2 million of the mortgages assumed in connection with self storage property acquisitions were subsequently repaid during the six months ended June 30, 2016. 
The results of operations for these business combinations are included in the Company's statements of operations beginning on the respective closing date for each acquisition. For the three and six months ended June 30, 2016, the accompanying statements of operations includes aggregate total revenue of $7.1 million and $8.2 million, respectively, and operating income of $0.8 million and $0.8 million, respectively, related to the 42 self storage properties acquired. Acquisition costs in the accompanying statements of operations include consulting fees, transaction expenses, and other costs related to business combinations, which amounted to $1.7 million and $3.0 million for the three and six months ended June 30, 2016, respectively.
Pro Forma Financial Information
The pro forma financial information set forth below reflects incremental adjustments to the historical data of the Company to give effect to the acquisitions and related financing activities for (i) the 26 self storage properties discussed in Note 12 that were acquired subsequent to June 30, 2016, as if each acquisition had occurred on January 1, 2015, (ii) the 25 self storage properties acquired during the three months ended June 30, 2016, as if the acquisitions had occurred on January 1, 2015, (iii) 15 of the 17 self storage properties acquired during the three months ended March 31, 2016, as if the acquisitions had occurred on January 1, 2015 (pro forma financial information is not presented for two of the self storage properties acquired during the three months ended March 31, 2016 since the information required is not available to the Company), (iv) the 21 self storage properties that were acquired during the three months ended June 30, 2015, as if each acquisition had occurred on January 1, 2014, and (v) the six self storage properties that were acquired during the three months ended March 31, 2015, as if each had occurred on January 1, 2014.
As described in greater detail above, given that certain information with respect to the self storage properties the Company acquired during the six months ended June 30, 2016 and subsequent to June 30, 2016 is not available to the Company, readers of this Form 10-Q and investors are cautioned not to place undue reliance on the Company's pro forma financial information. 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 and six months ended June 30, 2016 and 2015 (dollars in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Pro forma revenue:
 
 
 
 
 
 
 
Historical results
$
47,284

 
$
31,650

 
$
86,933

 
$
59,941

Acquisitions subsequent to June 30, 2016
4,193

 
3,762

 
8,239

 
7,514

Acquisitions during the three months ended June 30, 2016
578

 
4,939

 
5,894

 
9,738

Acquisitions during the three months ended March 31, 2016(1)

 
1,831

 
842

 
3,590

Acquisitions during the three months ended June 30, 2015

 
961

 

 
3,782



13


 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Acquisitions during the three months ended March 31, 2015

 

 

 
86

Total
$
52,055

 
$
43,143

 
$
101,908

 
$
84,651

Pro forma net income (loss):(2)
 
 
 
 
 
 
 
Historical results
$
6,045

 
$
93

 
$
10,847

 
$
(2,678
)
Acquisitions subsequent to June 30, 2016
414

 
(1,118
)
 
747

 
(2,250
)
Acquisitions during the three months ended June 30, 2016
1,363

 
(695
)
 
3,497

 
(1,567
)
Acquisitions during the three months ended March 31, 2016(1)

 
(384
)
 
1,592

 
(2,092
)
Acquisitions during the three months ended June 30, 2015

 
1,404

 

 
2,292

Acquisitions during the three months ended March 31, 2015

 
317

 

 
1,208

Total
$
7,822

 
$
(383
)
 
$
16,683

 
$
(5,087
)
 
 
 
 
 
 
 
 
(1) 
Reflects 15 of the 17 self storage properties acquired during this period because the information required with respect to the two remaining acquisitions during this period is not available to the Company. 
(2) 
Significant assumptions and adjustments in preparation of the pro forma information include the following: (i) for the cash portion of the purchase price, the Company assumed borrowings under the Company's revolving line of credit with interest computed based on the effective interest rate of 1.87% as of June 30, 2016; (ii) for assumed debt financing directly associated with the acquisition of specific self storage properties, interest was computed for the entirety of the periods presented using the effective interest rates under such financings; and (iii) for acquisition costs of $3.0 million incurred during the six months ended June 30, 2016, pro forma adjustments give effect to these costs as if they were incurred on January 1, 2015. 
6. OTHER ASSETS
Other assets consist of the following (dollars in thousands):
 
June 30,
 
December 31,
 
2016
 
2015
Customer in-place leases, net of accumulated amortization of $5,315 and $4,312, respectively
$
6,328

 
$
4,209

Receivables:
 
 
 
Trade, net
1,282

 
1,093

PROs and other affiliates
372

 
232

Property acquisition deposits
2,065

 
763

Interest rate derivative assets

 
331

Prepaid expenses and other
2,367

 
1,486

Corporate furniture, equipment and other, net
752

 
534

Deferred offering costs
975

 

Total
$
14,141

 
$
8,648



14


7. DEBT FINANCING
The Company's outstanding debt as of June 30, 2016 and December 31, 2015 is summarized as follows (dollars in thousands):
 
Interest
 
June 30,
 
December 31,
 
Rate (1)
 
2016
 
2015
Credit Facility:
 
 
 
 
 
Revolving line of credit
1.87%
 
$
109,922

 
$
187,975

Term loan A
2.61%
 
225,000

 
200,000

     Term loan B
3.15%
 
100,000

 

Term loan facility
3.08%
 
100,000

 

Fixed rate mortgages payable
4.00%
 
213,283

 
176,911

Total principal
 
 
748,205

 
564,886

Unamortized debt issuance costs and debt premium, net
 
 
6,456

 
2,909

Total debt
 
 
$
754,661

 
$
567,795


(1) 
Represents the effective interest rate as of June 30, 2016. 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
On May 6, 2016, the Company entered into an amended and restated agreement with a syndicated group of lenders with respect to its unsecured credit facility (the "credit facility"), which was originally entered into on April 1, 2014. The amendment increased the borrowing capacity of the credit facility by $125.0 million for a total credit facility of $675.0 million, consisting of three components: (i) a Revolver which provides for a total borrowing commitment up to $350.0 million, whereby the Company may borrow, repay and re-borrow amounts under the revolving line of credit, (ii) a $225.0 million tranche A term loan facility (the "Term Loan A"), and (iii) a $100.0 million tranche B term loan facility (the "Term Loan B" and together with the Revolver and the Term Loan A, the "Facilities").
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 and the Term Loan B matures in May 2022. None of the Facilities is subject to any scheduled reduction or amortization payments prior to maturity.
Interest rates applicable to loans under the Facilities 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 Facilities are leverage based and range from 1.35% to 2.15% for LIBOR loans and 0.35% to 1.15% 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 Facilities are subject to the rating based on applicable margins ranging from 0.85% to 2.30% for LIBOR Loans and 0.00% to 1.30% 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.
As of June 30, 2016, the Company would have had the capacity to borrow the full remaining Revolver commitments of $240.1 million while remaining in compliance with the Facilities' financial covenants described in the following paragraph.
The Company is required to comply with the following financial covenants under the Facilities:
Maximum total leverage ratio not to exceed 60%


15


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 Facilities 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 June 30, 2016, the Company was in compliance with all such covenants.
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 (the "Term Loan Facility") in an aggregate amount of $100.0 million. The Term Loan Facility matures in June 2023. 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 Term Loan Facility, which, if exercised in full, would provide for a total Term Loan Facility in an aggregate amount of $200.0 million.
Interest rates applicable to loans under the 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 Term Loan Facility in effect from time to time plus an applicable margin. The base rate under the 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 Term Loan Facility is leverage-based and ranges from 1.75% to 2.35% for LIBOR loans and 0.75% 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 Term Loan Facility is subject to the rating based on applicable margins ranging from 1.50% to 2.45% for LIBOR Loans and 0.50% to 1.45% for base rate loans.
The Company is required to comply with the same financial covenants under the Term Loan Facility as it is with the Facilities. In addition, the terms of the 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 2.43% to 5.00%. Principal and interest are generally payable monthly or in monthly interest-only payments with balloon payments due at maturity.
Future Debt Obligations
Based on existing debt agreements in effect as of June 30, 2016, the scheduled principal and maturity payments for outstanding borrowings under the Company's credit facility and fixed rate mortgages are presented in the table below (in thousands):
Year Ending December 31,
 
Scheduled Principal and Maturity Payments
 
Premium Amortization and Unamortized Debt Issuance Costs
 
Total
Remainder of 2016
 
$
9,197

 
$
544

 
$
9,741

2017
 
17,495

 
630

 
18,125

2018
 
10,617

 
534

 
11,151

2019
 
4,983

 
466

 
5,449

2020
 
149,167

 
115

 
149,282

2021
 
232,509

 
10

 
232,519

Thereafter
 
324,237

 
4,157

 
328,394

 
 
$
748,205

 
$
6,456

 
$
754,661



16


8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per common share for the three and six months ended June 30, 2016 and 2015, respectively (in thousands, except per share amounts):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Earnings (loss) per common share - basic and diluted
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
Net income (loss)
$
6,045

 
$
93

 
$
10,847

 
$
(2,678
)
Net loss (income) attributable to noncontrolling interests
1,325

 
3,371

 
(1,267
)
 
6,142

Net income attributable to National Storage Affiliates Trust
7,370

 
3,464

 
9,580

 
3,464

Distributed and undistributed earnings allocated to participating securities
(5
)
 
(3
)
 
(9
)
 
(3
)
Net income attributable to common shareholders - basic
7,365

 
3,461

 
9,571

 
3,461

Effect of assumed conversion of dilutive securities
(1,356
)
 
(3,371
)
 
1,215

 
(3,371
)
Net income attributable to common shareholders - diluted
$
6,009

 
$
90

 
$
10,786

 
$
90

 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
23,078

 
15,517

 
23,041

 
7,802

Effect of dilutive securities:
 
 
 
 
 
 
 
Weighted average OP units outstanding
24,733

 
20,208

 
23,484

 
10,104

Weighted average DownREIT OP unit equivalents outstanding
1,835

 
1,415

 
1,835

 
708

Weighted average LTIP units outstanding
2,164

 
1,247

 
2,158

 
624

Weighted average subordinated performance units and DownREIT subordinated performance unit equivalents
21,721

 
14,178

 
20,245

 
7,089

Weighted average shares outstanding - diluted
73,531

 
52,565

 
70,763

 
26,327

 
 
 
 
 
 
 
 
Earnings (loss) per share - basic
$
0.32

 
$
0.22

 
$
0.42

 
$
0.44

Earnings (loss) per share - diluted
$
0.08

 
$

 
$
0.15

 
$

 
 
 
 
 
 
 
 
As discussed in Note 3, the Company did not have an ownership interest or share in its operating partnership's profits and losses prior to the completion of the Company's initial public offering. As a result, all of the operating partnership's profits and losses for the period from January 1, 2015 to April 28, 2015 were allocated to noncontrolling interests.
Outstanding equity interests of the 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.


17


Generally, following certain lock-out periods, OP units in the 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 the 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, which are exchangeable for common shares as described above. Certain LTIP units vested prior to or upon the completion of the Company's initial public offering and certain LTIP units will vest upon the satisfaction of a future service condition. 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 three and six months ended June 30, 2016, 386,713 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. In addition, certain LTIP units vest upon the future acquisition of properties sourced by PROs. For the three and six months ended June 30, 2016, 397,600 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, prior to and since the completion of the Company's initial public offering on April 28, 2015, and as a result, is not necessarily indicative of the subsequent results of operations, cash flows or financial position of the Company following the initial public offering or upon expiration of the two-year lock out period on conversions.
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.
9. RELATED PARTY TRANSACTIONS
Supervisory and Administrative Fees
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 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 June 30, 2016 and 2015, the Company incurred $2.7 million and $1.8 million, respectively, for supervisory and administrative fees to the PROs and during the six months ended June 30, 2016 and 2015, the Company incurred $4.9 million and $3.4 million, respectively, for supervisory and administrative fees to the PROs. Such fees are included in general and administrative expenses in the accompanying consolidated statements of operations.
Affiliate Payroll Services
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 June 30, 2016 and 2015, the Company incurred $4.7 million and $3.2 million, respectively, for payroll and related costs reimbursable to these affiliates, and for the six months ended June 30, 2016 and 2015, the Company incurred $8.7 million and $6.1 million, respectively, for payroll and related costs reimbursable to these affiliates. Such costs are included in property operating expenses in the accompanying consolidated statements of operations.


18


Due Diligence Costs
During the three months ended June 30, 2016 and 2015, the Company incurred $0.2 million and $0.1 million, respectively, of expenses payable to certain PROs related to self storage property acquisitions sourced by the PROs, and during the six months ended June 30, 2016 and 2015, the Company incurred $0.3 million and $0.1 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. These expenses are included in acquisition costs in the accompanying statements of operations.
10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
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.
11. 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 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
 
Non-hedge Accounting Interest Rate Swaps
 
Total
Fair value at December 31, 2014
$
(865
)
 
$
(207
)
 
$
(1,072
)
Unrealized losses included in interest expense

 
8

 
8

Losses on interest rate swaps reclassified into interest expense from accumulated other comprehensive loss
775

 

 
775

Unrealized losses included in accumulated other comprehensive loss
(1,270
)
 

 
(1,270
)
Fair value at June 30, 2015
$
(1,360
)
 
$
(199
)
 
$
(1,559
)
 
 
 
 
 
 
Fair value at December 31, 2015
$
(972
)
 
$

 
$
(972
)
Swap ineffectiveness
7

 

 
7

Losses on interest rate swaps reclassified into interest expense from accumulated other comprehensive loss
909

 

 
909

Unrealized losses included in accumulated other comprehensive loss
(8,437
)
 

 
(8,437
)
Fair value at June 30, 2016
$
(8,493
)
 
$

 
$
(8,493
)


19


As of June 30, 2016 and December 31, 2015, the Company had outstanding interest rate swaps with aggregate notional amounts of $425.0 million and $199.4 million, respectively, designated as cash flow hedges. As of June 30, 2016, the Company's swaps had a weighted average remaining term of approximately 4.3 years. The fair value of these swaps are presented within accounts payable and accrued liabilities and other assets in the Company's balance sheets, and the Company recognizes 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 June 30, 2016 remain constant, the Company estimates that during the next 12 months, the Company would reclassify into earnings approximately $3.6 million of the unrealized losses included in accumulated other comprehensive loss. If market interest rates increase above the 1.34% weighted average fixed rate under these interest rate swaps the Company will benefit from net cash payments due to it from the counterparty to the interest rate swaps.
There were no transfers between levels during the six months ended June 30, 2016 and 2015. 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 June 30, 2016, 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 June 30, 2016 and December 31, 2015, 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 June 30, 2016 and December 31, 2015 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 $213.3 million as of June 30, 2016 with a fair value of approximately $238.5 million. In determining the fair value, the Company estimated a weighted average market interest rate of approximately 2.96%, compared to the weighted average contractual interest rate of 5.28%. The combined principal balance of the Company's fixed rate mortgages was approximately $176.9 million as of December 31, 2015 with a fair value of approximately $189.3 million. In determining the fair value as of December 31, 2015, the Company estimated a weighted average market interest rate of approximately 3.41%, compared to the weighted average contractual interest rate of 5.10%.
12. SUBSEQUENT EVENTS
Self Storage Property Acquisitions
In July and August 2016, the Company acquired 26 self storage properties for approximately $167.6 million. Consideration for these acquisitions included approximately $165.8 million of cash, OP equity of approximately $1.1 million (consisting of the issuance of 49,230 OP Units) and the assumption of $0.7 million of other working capital liabilities. Of these acquisitions, one was acquired by the Company from a PRO and 25 were acquired by the Company from third-party sellers. In connection with these acquisitions, the Company incurred $0.3 million of expenses, payable to certain PROs, for due diligence costs related to the self storage properties sourced by the PROs.
Common Share 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 shares, at a public offering price of $20.75 per share. The Company received aggregate net proceeds from the offering of approximately $237.7 million after deducting the underwriting discount and estimated offering expenses. 


20


The Company contributed the net proceeds from this follow-on offering to its operating partnership which used the proceeds to repay outstanding borrowings under the Revolver and to fund the acquisition of self storage properties.



21


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
We 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 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, PROs;
our ability to effectively align the interests of our PROs with us and our shareholders;
the integration of our PROs and their contributed 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 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 qualify, and maintain our qualification, as a REIT for U.S. federal income tax purposes;
availability of qualified personnel;
the timing of conversions of subordinated performance units in our operating partnership and subsidiaries of our operating partnership into 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;


22


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 the Company's Annual Report on Form 10-K filed with the SEC on March 10, 2016 (the "Annual Report"), 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.
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 intend to elect 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 metropolitan statistical areas throughout the United States.
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' contributed portfolios. This structure offers our PROs a unique opportunity to serve as regional property managers for their contributed properties and directly participate in the potential upside of those properties while simultaneously diversifying their investment to include a broader portfolio of self storage properties.
Our PROs
The Company had seven PROs as of June 30, 2016: SecurCare, Northwest, Optivest, Guardian, Move It, Storage Solutions, and Hide Away. 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 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 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 properties. 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.


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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 June 30, 2016, we owned a geographically diversified portfolio of 318 self storage properties, located in 18 states, comprising approximately 18.7 million rentable square feet, configured in approximately 149,000 storage units. Of these properties, 233 were acquired by us from our PROs and 85 were acquired by us from third-party sellers.
During the six months ended June 30, 2016, we acquired 42 self storage properties with an aggregate fair value of $288.0 million, comprising approximately 3.0 million rentable square feet, configured in approximately 27,000 storage units. Of these acquisitions, 19 were acquired by us from our PROs and 23 were acquired by us from third-party sellers.
In July and August 2016, we acquired 26 self storage properties for approximately $167.6 million, comprising approximately 1.8 million rentable square feet, configured in approximately 15,000 storage units. Of these acquisitions, one was acquired by us from a PRO and 25 were acquired by us from third-party sellers.
Results of Operations
When reviewing our results of operations it is important to consider the timing of acquisition activity. We acquired 42 self storage properties during the six months ended June 30, 2016 and 58 self storage properties during the year ended December 31, 2015. 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 for the entirety of the applicable periods presented, excluding any properties we sold or where we completed a storage space expansion which caused the property's year-over-year operating results to no longer be comparable. As of June 30, 2016, our same store portfolio consisted of 222 self storage properties. We owned 96 self storage properties that did not yet meet the same store portfolio criteria as of June 30, 2016, which included 95 self storage properties that we acquired subsequent to January 1, 2015 and a property we expanded during 2015 which caused the property'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 1. 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.
Three Months Ended June 30, 2016 compared to the Three Months Ended June 30, 2015
Net income was $6.0 million for the three months ended June 30, 2016, compared to $0.1 million for the three months ended June 30, 2015, an increase of $5.9 million. The increase was primarily due to an increase in net operating income ("NOI") resulting from an additional 73 self storage properties acquired between July 1, 2015 and June 30, 2016 and same store NOI growth, partially offset by increases in depreciation and amortization, interest expense, and acquisition costs. For a description of NOI, see "Non-GAAP Financial measures – NOI".



24


The following table illustrates the changes in rental revenue, other property-related revenue, property operating expenses, and other expenses for the three months ended June 30, 2016 compared to the three months ended June 30, 2015 (dollars in thousands):
 
Three Months Ended June 30,
 
2016
 
2015
 
Change
Rental revenue
 
 
 
 
 
Same store portfolio
$
30,815

 
$
28,358

 
$
2,457

Non-Same store portfolio
14,969

 
2,274

 
12,695

Total rental revenue
45,784

 
30,632

 
15,152

Other property-related revenue
 
 
 
 
 
Same store portfolio
972

 
948

 
24

Non-Same store portfolio
528

 
70

 
458

Total other property-related revenue
1,500

 
1,018

 
482

Total revenue
47,284

 
31,650

 
15,634

Property operating expenses
 
 
 
 
 
Same store portfolio
10,219

 
9,834

 
385

Non-Same store portfolio
5,238

 
992

 
4,246

Total property operating expenses
15,457

 
10,826

 
4,631

General and administrative expenses
4,837

 
4,187

 
650

Depreciation and amortization
13,088

 
9,974

 
3,114

Total operating expenses
33,382

 
24,987

 
8,395

Income from operations
13,902

 
6,663

 
7,239

Other (income) expense
 
 
 
 
 
Interest expense
5,844

 
4,824

 
1,020

Loss on early extinguishment of debt
136

 
914

 
(778
)
Acquisition costs
1,708

 
719

 
989

Non-operating expense
169

 
113

 
56

Other (income) expense
7,857

 
6,570

 
1,287

Net income
6,045

 
93

 
5,952

Net loss attributable to noncontrolling interests
1,325

 
3,371

 
(2,046
)
Net income attributable to National Storage Affiliates Trust
$
7,370

 
$
3,464

 
$
3,906

 
 
 
 
 
 
Total Revenue
Our total revenue increased by $15.6 million, or 49.4%, for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015. This increase was primarily attributable to incremental revenue from 73 self storage properties we acquired between July 1, 2015 and June 30, 2016, increased market rates and fees, regular rental increases for in-place tenants, and an increase in total portfolio average occupancy from 87.7% to 90.4%. 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 $15.2 million, or 49.5%, for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015. The increase in rental revenue was due to a $12.7 million increase in non-same store revenue which was primarily attributable to incremental rental revenue of $6.9 million from 48 self storage properties acquired between July 1, 2015 and March 31, 2016, and $4.7 million from 25 self storage properties acquired during the three months ended June 30, 2016. Same store portfolio rental revenues increased $2.5 million, or 8.7%, due to a 4.5% increase, from $10.55 to $11.03, in same store rental revenue divided by average occupied square feet


25


("rental revenue per occupied square foot"), driven primarily by a combination of increased contractual lease rates and fees, and a 3.4% increase in same store average occupancy from 87.5% to 90.9%.
Other Property-Related Revenue
Other property-related revenue represents ancillary income from our self storage properties, such as tenant insurance-related access fees and commissions and sales of storage supplies. Other property-related revenue increased by $0.5 million, or 47.3%, for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015. This increase resulted from a $0.5 million increase in non-same store other property-related revenue which was primarily attributable to incremental other property-related revenue of $0.3 million from 48 self storage properties acquired between July 1, 2015 and March 31, 2016.
Total Operating Expenses
Total operating expenses for the three months ended June 30, 2016 were $33.4 million compared to $25.0 million for the three months ended June 30, 2015, an increase of $8.4 million, or 33.6%. As discussed below, this change was primarily due to an increase of $4.6 million in property operating expenses, $0.7 million in general and administrative expenses, and $3.1 million in depreciation and amortization.
Property Operating Expenses
Property operating expenses were $15.5 million for the three months ended June 30, 2016 compared to $10.8 million for the three months ended June 30, 2015, an increase of $4.6 million, or 42.8%. This increase resulted from a $4.2 million increase in non-same store property operating expenses that was primarily attributable to incremental property operating expenses of $2.4 million from 48 self storage properties acquired between July 1, 2015 and March 31, 2016 and $1.7 million from 25 self storage properties acquired during the three months ended June 30, 2016. In addition, same store portfolio property operating expenses increased $0.4 million, or 3.9%, due to increases in personnel and related costs, bad debt expense, property taxes and advertising costs, partially offset by decreases in maintenance expenses.
General and Administrative Expenses
General and administrative expenses increased $0.7 million, or 15.5%, for the three months ended June 30, 2016, compared to the three months ended June 30, 2015. This increase was attributable to an increase in administrative fees charged by our PROs of $0.9 million primarily as a result of incremental fees related to the 73 properties we acquired from July 1, 2015 to June 30, 2016, and $0.1 million of professional fees. These increases were partially offset by a $0.5 million decrease in equity-based compensation expense.
Depreciation and Amortization
Depreciation and amortization increased $3.1 million, or 31.2%, for the three months ended June 30, 2016, compared to the three months ended June 30, 2015. This increase was primarily attributable to incremental depreciation expense of $2.0 million from 48 self storage properties acquired between July 1, 2015 and March 31, 2016, and $1.0 million from 25 self storage properties acquired during the three months ended June 30, 2016. In addition, amortization of customer in-place leases decreased $0.4 million from $3.3 million for the three months ended June 30, 2015 to $2.9 million for the three months ended June 30, 2016. Customer in-place leases are amortized over the 12-month period following the respective acquisition dates of our self storage properties. As of June 30, 2016, the unamortized balance of customer in-place leases totaled $6.3 million.
Interest Expense
Interest expense increased $1.0 million, or 21.1%, for the three months ended June 30, 2016, compared to the three months ended June 30, 2015. The increase in interest expense was primarily attributable to the assumption of fixed-rate mortgages in connection with self storage property acquisitions and increases in outstanding borrowings, partially offset by a $0.2 million decrease in amortization of debt issuance costs and lower interest rates.


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Loss On Early Extinguishment of Debt
Loss on early extinguishment of debt decreased $0.8 million, or 85.1%, for the three months ended June 30, 2016, compared to the three months ended June 30, 2015. During the three months ended June 30, 2016, in connection with the 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 entity no longer included in the lender syndicate. Loss on early extinguishment of debt during the three months ended June 30, 2015 relates to the payoff of several debt instruments in connection with the Company's initial public offering.
Acquisition Costs
Acquisition costs increased $1.0 million, or 137.6%, for the three months ended June 30, 2016, compared to the three months ended June 30, 2015. This increase was primarily due to an increase in legal and consulting fees and other costs incurred to identify, qualify, and close on the acquisition of a large volume of properties with our PROs and other parties.
Net Loss Attributable to Noncontrolling Interests
We allocate 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 loss attributable to noncontrolling interests was $1.3 million for the three months ended June 30, 2016, compared to $3.4 million for the three months ended June 30, 2015.
Six Months Ended June 30, 2016 compared to the Six Months Ended June 30, 2015
Net income was $10.8 million for the six months ended June 30, 2016, compared to net loss of $2.7 million for the six months ended June 30, 2015, an increase of $13.5 million. The increase was primarily due to an increase in NOI resulting from an additional 73 self storage properties acquired between July 1, 2015 and June 30, 2016, same store NOI growth and reductions in interest expense, partially offset by increases in depreciation and amortization, acquisition costs and general and administrative expenses.
The following table illustrates the changes in rental revenue, other property-related revenue, property operating expenses, and other expenses for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 (dollars in thousands):
 
Six Months Ended June 30,
 
2016
 
2015
 
Change
Rental revenue
 
 
 
 
 
Same store portfolio
$
60,425

 
$
55,461

 
$
4,964

Non-Same store portfolio
23,860

 
2,589

 
21,271

Total rental revenue
84,285

 
58,050

 
26,235

Other property-related revenue
 
 
 
 
 
Same store portfolio
1,862

 
1,811

 
51

Non-Same store portfolio
786

 
80

 
706

Total other property-related revenue
2,648

 
1,891

 
757

Total revenue
86,933

 
59,941

 
26,992

Property operating expenses
 
 
 
 
 
Same store portfolio
20,360

 
19,510

 
850

Non-Same store portfolio
8,374

 
1,158

 
7,216

Total property operating expenses
28,734

 
20,668

 
8,066

General and administrative expenses
9,172

 
7,800

 
1,372



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Six Months Ended June 30,
 
2016
 
2015
 
Change
Depreciation and amortization
23,980

 
19,851

 
4,129

Total operating expenses
61,886

 
48,319

 
13,567

Income from operations
25,047

 
11,622

 
13,425

Other (income) expense
 
 
 
 
 
Interest expense
10,785

 
11,806

 
(1,021
)
Loss on early extinguishment of debt
136

 
914

 
(778
)
Acquisition costs
2,996

 
1,318

 
1,678

Organizational and offering expenses

 
58

 
(58
)
Non-operating expense
283

 
204

 
79

Other (income) expense
14,200

 
14,300

 
(100
)
Net income (loss)
10,847

 
(2,678
)
 
13,525

Net (income) loss attributable to noncontrolling interests
(1,267
)
 
6,142

 
(7,409
)
Net income attributable to National Storage Affiliates Trust
$
9,580

 
$
3,464

 
$
6,116

 
 
 
 
 
 
Total Revenue
Our total revenue increased by $27.0 million, or 45.0%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015. This increase was primarily attributable to incremental rental revenue from 73 self storage properties we acquired between July 1, 2015 and June 30, 2016, an increase in average total portfolio occupancy from 86.4% to 89.6%, increased market rates and fees, and regular rental increases for in-place tenants.
Rental Revenue
Rental revenue increased by $26.2 million, or 45.2%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015. The increase in rental revenue was primarily due to a $21.3 million increase in non-same store rental revenue which was attributable to incremental rental revenue of $9.3 million from 31 self storage properties acquired between July 1, 2015 and December 31, 2015, and $8.0 million from 42 self storage properties acquired during the six months ended June 30, 2016. Same store portfolio rental revenues increased $5.0 million, or 9.0%, due to a 4.3% increase in same store rental rental revenue per occupied square foot from $10.46 to $10.91, driven primarily by a combination of increased contractual lease rates and fees, and an increase in average occupancy from 86.3% to 90.1%.
Other Property-Related Revenue
Other property-related revenue increased by $0.8 million, or 40.0%, for the six months ended June 30, 2016, as compared to the six months ended June 30, 2015. This increase primarily resulted from a $0.7 million increase in non-same store other property-related revenue which was attributable to incremental other property-related revenue of $0.3 million from 31 self storage properties acquired between July 1, 2015 and December 31, 2015, and $0.2 million from 42 self storage properties acquired during the six months ended June 30, 2016.
Total Operating Expenses
Total operating expenses increased $13.6 million, or 28.1% for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. As discussed below, this change was primarily due to an increase of $8.1 million in property operating expenses, $1.4 million in general and administrative expenses, and $4.1 million in depreciation and amortization.
Property Operating Expenses
Property operating expenses increased $8.1 million, or 39.0%, for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. This increase resulted from a $7.2 million increase in non-same store property operating expenses attributable to incremental property operating expenses of $3.0 million from 31 self storage properties acquired between July 1, 2015 and December 31, 2015, and $3.0 million from 42 self storage properties acquired during the six months ended June 30, 2016. In addition, same store portfolio property operating expenses


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increased $0.9 million, or 4.4%, due to increases in personnel and related costs, bad debt expense and property taxes, partially offset by decreases in maintenance expenses and utilities.
General and Administrative Expenses
General and administrative expenses increased $1.4 million, or 17.6%, for the six months ended June 30, 2016, compared to the six months ended June 30, 2015. This increase was attributable to increases in administrative fees charged by our PROs of $1.5 million,  $0.3 million in salaries and benefits and $0.1 million in costs associated with periodic SEC reporting and other compliance matters. These increases were partially offset by a $0.5 million decrease in equity-based compensation expense.
Supervisory and administrative fees charged by our PROs totaled $4.9 million and $3.4 million for the six months ended June 30, 2016 and 2015, respectively, an increase of $1.5 million. The increase was primarily attributable to incremental fees related to the 73 properties we acquired from July 1, 2015 to June 30, 2016.
Depreciation and Amortization
Depreciation and amortization increased $4.1 million, or 20.8%, for the six months ended June 30, 2016, compared to the six months ended June 30, 2015. This increase was attributable to incremental depreciation expense of $2.7 million from 31 self storage properties acquired between July 1, 2015 and December 31, 2015, and $2.1 million from 42 self storage properties acquired during the six months ended June 30, 2016. In addition, amortization of customer in-place leases decreased $1.8 million from $6.9 million for the six months ended June 30, 2015 to $5.1 million for the six months ended June 30, 2016. Customer in-place leases are amortized over the 12-month period following the respective acquisition dates of our self storage properties. As of June 30, 2016, the unamortized balance of customer in-place leases totaled $6.3 million.
Interest Expense
Interest expense decreased $1.0 million, or 8.6%, for the six months ended June 30, 2016, compared to the six months ended June 30, 2015. The decrease in interest expense was primarily due to a $0.6 million decrease in amortization of debt issue costs, a $0.2 million increase in amortization of debt premiums and lower rates.
Loss On Early Extinguishment of Debt
Loss on early extinguishment of debt decreased $0.8 million, or 85.1%, for the six months ended June 30, 2016, compared to the six months ended June 30, 2015. During the six months ended June 30, 2016, in connection with the 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 entity no longer included in the lender syndicate. Loss on early extinguishment of debt during the six months ended June 30, 2015 relates to the payoff of several debt instruments in connection with the Company's initial public offering.
Acquisition Costs
Acquisition costs increased $1.7 million, or 127.3%, for the six months ended June 30, 2016, compared to the six months ended June 30, 2015. This increase was primarily due to an increase in consulting fees and other costs incurred to identify, qualify, and close acquisition properties with our PROs and other parties.
Net Loss Attributable to Noncontrolling Interests
We allocate 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 $1.3 million for the six months ended June 30, 2016, compared to a net loss of $6.1 million for the six months ended June 30, 2015. 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 the operating partnership's profits and losses for the period from January 1, 2015 to April 28, 2015 were allocated to noncontrolling interests.


29


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 the purpose of calculating FFO attributable to common shareholders, OP unitholders, and LTIP unitholders. 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 and gains (losses) on early extinguishment of debt.
Management uses FFO and Core FFO as a key performance indicator 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.


30


The following table presents a reconciliation of net income (loss) to FFO and Core FFO for the three and six months ended June 30, 2016 and 2015 (in thousands, except per share and unit amounts):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
6,045

 
$
93

 
$
10,847

 
$
(2,678
)
Add (subtract):
 
 
 
 
 
 
 
Real estate depreciation and amortization
12,935

 
9,889

 
23,714

 
19,695

FFO attributable to subordinated performance unitholders (1)
(6,150
)
 
(3,144
)
 
(10,493
)
 
(6,419
)
FFO attributable to common shareholders, OP unitholders, and LTIP unitholders
12,830

 
6,838

 
24,068

 
10,598

Add:
 
 
 
 
 
 
 
Acquisition costs
1,708

 
719

 
2,996

 
1,318

Organizational and offering expenses

 

 

 
58

Loss on early extinguishment of debt
136

 
914

 
136

 
914

Core FFO attributable to common shareholders, OP unitholders, and LTIP unitholders
$
14,674

 
$
8,471

 
$
27,200

 
$
12,888

 
 
 
 
 
 
 
 
Weighted average shares and units outstanding - FFO and Core FFO: (2)
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
23,078

 
15,517

 
23,041

 
7,802

Weighted average restricted common shares outstanding
19

 

 
18

 

Weighted average OP units outstanding
24,733

 
20,208

 
23,484

 
19,710

Weighted average DownREIT OP unit equivalents outstanding
1,835

 
1,415

 
1,835

 
1,401

Weighted average LTIP units outstanding (3)
2,558

 
1,553

 
2,507

 
781

Total weighted average shares and units outstanding - FFO and Core FFO
52,223

 
38,693

 
50,885

 
29,694

 
 
 
 
 
 
 
 
FFO per share and unit
$
0.25

 
$
0.18

 
$
0.47

 
$
0.36

Core FFO per share and unit
$
0.28

 
$
0.22

 
$
0.53

 
$
0.43

(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 (2) in 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.
(3) LTIP units have been excluded from the calculations of weighted average shares and units outstanding prior to April 28, 2015 because such units did not participate in distributions prior to the Company’s initial public offering.


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The following table presents a reconciliation of earnings (loss) per share - diluted to FFO and Core FFO per share and unit for the three and six months ended June 30, 2016 and 2015:
 
 
 
 
 
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Earnings (loss) per share - diluted
$
0.08

 
$

 
$
0.15

 
$

Impact of the difference in weighted average number of shares(1)
0.04

 

 
0.06

 

Impact of GAAP accounting for noncontrolling interests, two-class method and treasury stock method(2)

 

 

 
(0.08
)
Add real estate depreciation and amortization
0.25

 
0.26

 
0.47

 
0.66

FFO attributable to subordinated performance unitholders
(0.12
)
 
(0.08
)
 
(0.21
)
 
(0.22
)
FFO per share and unit
0.25

 
0.18

 
0.47

 
0.36

Add acquisition costs, organizational and offering expenses, and loss on early extinguishment of debt
0.03

 
0.04

 
0.06

 
0.07

Core FFO per share and unit
$
0.28

 
$
0.22

 
$
0.53

 
$
0.43

 
 
 
 
 
 
 
 
(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 around the conversion of subordinated performance units and DownREIT subordinated performance units into OP units, see Note 8 in Item 1. 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 and 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 expense, depreciation and amortization, interest expense, loss on early extinguishment of debt, acquisition costs, organizational and offering expenses, impairment of long-lived assets, losses on the sale of properties and non-operating expense and by subtracting 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.
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 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


32


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 three and six months ended June 30, 2016 and 2015 (dollars in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
6,045

 
$
93

 
$
10,847

 
$
(2,678
)
Add:
 
 
 
 
 
 
 
General and administrative expenses
4,837

 
4,187

 
9,172

 
7,800

Depreciation and amortization
13,088

 
9,974

 
23,980

 
19,851

Interest expense
5,844

 
4,824

 
10,785

 
11,806

Loss on early extinguishment of debt
136

 
914

 
136

 
914

Acquisition costs
1,708