Greetings, and welcome to the National Storage Affiliates Fourth Quarter and 2019 Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, George Hoglund, Vice President of Investor Relations for National Storage Affiliates. Thank you, Mr. Hoglund. You may begin.
Good morning. Since this is our first earnings call of the year, I would like to remind everyone that it's a good time to get started on those New Year's resolutions and clean out your garages and basements and put those items into storage. Remember, garages are for cars and basements are for man caves and rosé rooms. We'd like to thank you for joining us today for the fourth quarter 2019 earnings conference call of National Storage Affiliates Trust. In addition to the press release distributed yesterday, we filed an 8-K with the SEC containing our supplemental package with additional detail on our results, and an 8-K with additional detail on the internalization of our largest PRO, which may be found in the investor relations section on our website at nationalstorageaffiliates.com.
On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties. The company cautions that actual results may differ materially from those projected in any forward-looking statement. For additional detail concerning our forward-looking statements, please refer to our public filings with the SEC. We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures such as FFO, Core FFO, and net operating income contained in the supplemental information package available in the investor relations section on our website and in our SEC filings. Today's conference call is hosted by National Storage Affiliates Executive Chairman, Arlen Nordhagen, President and CEO, Tamara Fischer, and Chief Financial Officer, Brandon Togashi. Following prepared remarks, management will accept questions from registered financial analysts. I will now turn the call over to Arlen.
Thanks, George, and thank you all for joining our call. Today's call will wrap up my final reporting year as NSA CEO. I'd like to start out by congratulating Tammy on officially taking over as CEO, and Brandon as CFO, effective January 1. I look forward to Tammy leading NSA through its next growth phase and continuing the stellar track record that we've put together. With my transition into the Executive Chairman role, you can expect my participation on earnings calls and at investor conferences will be reduced going forward. However, I remain actively engaged and focused on overall company strategy, key investments, and PRO recruitment. We wrapped up 2019 with another stellar quarter and full-year performance, with results ahead of our expectations and same-store revenue, NOI, and Core FFO per share growth, that we're confident will once again be at the top of our peer group.
We also grew our total portfolio by 10% on both a property count and dollar value basis. I'll let Tammy and Brandon go into the details on our year, while I address the announcement made in conjunction with our earnings release, the internalization of SecurCare Self Storage, our largest PRO. This is a significant milestone, representing a major step in the evolution of NSA. Since our IPO, we've consistently told investors and analysts to keep a few things in mind. One, by 2025, we expected that approximately half of our PROs, which currently stands at 10, would likely retire. As part of the process, NSA would internalize the management of those properties.
Two, we noted that the first retirement of a PRO wouldn't happen until 2020 at the earliest, which is five years after our IPO, when the conversion penalty on Subordinated Performance Units, or SP units, reached its minimum for any PROs present at the time of our IPO. Three, the retirement of a PRO would always be an accretive event for NSA's common shareholders. I'm pleased to announce that SecurCare is the first PRO to internalize the management of their branded portfolio and retire their SP units, which will be accretive to common shareholders by approximately $0.03 per share in 2020 and about $0.04-$0.05 per share on an ongoing annual basis. I'm sure this begs the question: why SecurCare and why now?
As many of you know, I'm a Co-Founder of SecurCare, which was NSA's predecessor company and one of the three founding PROs of NSA. It makes sense that SecurCare, as company predecessor and a founding PRO, should provide leadership and be the first to internalize, setting the example and demonstrating to our other PROs and to the investment community just how the process of PRO internalization will play out over time. Second, why now? To begin, SecurCare is largely finished contributing its captive pipeline assets into NSA and has exhausted a great number of its relationship-based acquisition opportunities within the local markets where it operates. Additionally, January 1st, 2020, was the first opportunity for any PRO to internalize at the minimum conversion penalty. Combination of these factors culminated in the decision for SecurCare to internalize now.
I'd like to also address the favorable timing that allows Dave Cramer, SecurCare CEO, to join NSA as our COO, given Steve Treadwell's departure from NSA. I first want to note that Steve's departure to pursue an entrepreneurial opportunity is in no way connected with the internalization of SecurCare. However, the timing does fortuitously coincide, and we're fortunate that Dave, who I've worked with for over 20 years, will step in as our COO, ensuring a seamless transition. I speak for all of NSA in saying that we're sad to see Steve move on, but we thank him for his significant contributions to NSA, and we wish him well as he pursues his entrepreneurial passion. I'm excited for this new phase of NSA's growth, and I'd like to welcome Dave Cramer and the rest of the SecurCare staff to the corporate NSA team.
Dave brings over 20 years of self-storage operating experience and is well-known and highly regarded in the industry. He's intimately familiar with NSA's operations and structure, having served as CEO of SecurCare since NSA's formation, being a member of NSA's PRO advisory committee since inception, and consistently providing leadership in NSA's technology and best practices group. I'm confident NSA won't miss a step in this management transition. I'll now turn the call over to Tammy.
Thank you, Arlen. I'll spend a few minutes on fundamentals and then address the mechanics of the SecurCare internalization. The economy continues to chug along at a Goldilocks pace while interest rates remain very low, providing a favorable backdrop for real estate. With increased economic uncertainty due to global events and an upcoming presidential election, combined with challenges faced by a few other property types, the self-storage sector, both properties and stocks, has been in high demand by investors, and I don't see that changing anytime soon. On average, fundamentals in our portfolio remain healthy, but are clearly moderating given the cumulative effect of new supply that is weighing on street rates and has driven intense competition on the internet marketing front. Approximately 45% of our stores are now being impacted by a new competitor within a 5-mi radius, up from the 41% we reported last quarter.
Portland, which is our second-largest market and happens to be the poster child for oversupply, continues to battle through the elevated number of properties in lease-up. Despite this, it's worth noting that street rates in Portland are finally improving, and we saw positive growth in the fourth quarter compared to the prior year. Occupancy remains under pressure, and we expect revenue growth in Portland will remain muted. Phoenix and the west coast of Florida will also continue to face increased pressure from new supply in 2020. Competition from new supply is driving the increase in our marketing spend, which was up 9% in the fourth quarter for our same-store pool compared to the prior year period. Same-store average occupancy during the fourth quarter was flat year-over-year at 88.2% and up 30 basis points for the full year compared to 2018.
Street rates are finally moving in the right direction, albeit very slowly. We started 2019 with street rates 3%-4% lower year-over-year, but saw steady improvement throughout the year to end 2019 relatively flat on a year-over-year basis. During the quarter, move-in and move-out volumes were roughly flat. Rental rates on move-ins remain below rates on move-outs because of our ability to increase rates on in-place tenants. This negative churn tends to fluctuate between low single digits in the summer months to high single digits in the winter months on a percentage basis. Importantly, we're seeing no softening in our ability to increase rents in the mid to high single digits on existing customers, which continues to be a key driver of overall revenue growth. Meanwhile, discounting is approximately flat year-over-year. Next, let me comment on some specific markets.
Similar to last quarter, our leading MSAs in terms of same-store revenue growth include Riverside, San Bernardino, Atlanta, and Las Vegas, where recent demand growth has exceeded supply growth. Keep in mind, storage is a local game, so despite seeing new supply on an MSA level, often our assets may be concentrated in areas that are less impacted by this supply. Lagging markets in our portfolio included Portland, Phoenix, and Tulsa, which continue to feel the headwinds from elevated new supply. Each of our top 10 MSAs generated positive same-store revenue growth for the fourth quarter and full year. One of our top markets, L.A., did realize negative same-store NOI growth in the fourth quarter, where same-store revenue came in roughly flat at 20 basis points, reflecting the impact of new supply in a number of our sub-markets.
For the full year 2019, same-store NOI growth was positive in all our top 10 MSAs. I'll shift to the mechanics of the SecurCare internalization and the expected accretion from those transactions. The internalization is expected to become effective on April 1st, and the SecurCare platform and employees will remain in place. Although they will then become employees of NSA. Based on current store count, the number of properties internally managed by NSA rather than by our PROs, will then increase to over 440, which represents almost 60% of NSA's total portfolio. The corporate managed stores will represent about 40% of our budgeted same-store NOI in 2020. Regarding the financial statement impact, there are a few key items that you should be aware of. First, the management fees paid to SecurCare will be eliminated.
These management fees flow through G&A and are broken out in our supplemental in Schedule 10, labeled supervisory and administrative expense. Those expenses were approximately $20 million in 2019, about $7.3 million of which was paid to SecurCare. The elimination of these fees, net of what we expect to spend to operate these assets internally, is expected to generate between $2.5 million-$3 million of annualized G&A savings. Second, SecurCare will receive about 348,000 OP units as consideration for our acquisition of the management company, which is based on a prescribed formula of 4x the EBITDA. Third, the SecurCare series of SP units, roughly two million units, will be converted into common shares of NSA at their applicable conversion ratio.
Although the average conversion ratio for all outstanding SP units was 1.48 x at the end of 2019, SecurCare's series of SP units has a conversion ratio of over 3x , reflective of its outstanding historical performance. In total, approximately two million SP units and one million OP units will be retired in this transaction, with the total issuance of approximately eight million new common shares. You can also expect the average conversion ratio for the remaining SP units in NSA's portfolio to decline over the next few quarters due to this conversion. Fourth, the distributions to all SP units, which is included in FFO attributable to Subordinated Performance Unit holders, noted in the FFO reconciliation in Schedule one of the supplemental packages, will be reduced by over $12 million annually due to the retirement of SecurCare's series of SP units.
We anticipate the net result of this transaction will be approximately $0.03 per share of accretion to Core FFO in 2020, or approximately $0.04-$0.05 per share on an annualized basis. I'll now turn the call over to Brandon to address fourth quarter and full year 2019 results, recent balance sheet activity, and guidance.
Thank you, Tammy. Yesterday afternoon, we reported solid results for the fourth quarter, with Core FFO per share of $0.40, which represents an increase of 8.1% over the prior year period. This growth was fueled by a combination of healthy same-store NOI performance, strong full-year acquisition volume, and growing fees from our JV platform. For the fourth quarter, same-store NOI increased by 3.8% over prior year, driven by 2.8% growth in same-store revenues, with 0.3% growth in property operating expenses. The same-store OPEX growth for the quarter benefited from unexpected favorable property tax assessments during the fourth quarter of 2019, which drove an unusual 4.9% decline in property taxes versus the prior year period. Personnel expenses grew just 1.5% year-over-year, and repairs and maintenance costs decreased 70 basis points over the prior year.
These favorable expense items were partially offset by marketing expenses that grew 9% over the prior year period. For the full year 2019, same-store revenue growth was 4%, property OPEX growth was just 1.6%, and NOI growth was 5%. Notably, our same-store revenue and NOI growth were in line with historical sector averages, despite the challenges currently facing the sector. The favorable property tax assessments in the fourth quarter, and really the full year, will create a challenging year-over-year comp, which contributes to our elevated operating expense growth assumption for 2020. On the acquisition front, we acquired seven wholly owned properties during the fourth quarter for a total of $32 million. For full year 2019, we acquired 69 wholly owned properties located across 14 states for a total of $448 million.
Subsequent to quarter end, the acquisition pace has accelerated, and we've acquired a total of 36 properties totaling $218 million, which includes 34 wholly owned and two JV properties. Now turning to the balance sheet. It was a quiet quarter as far as the balance sheet is concerned. We issued just $2 million of OP equity in conjunction with acquisitions and did not complete any debt issuances during the quarter. For the full year, we made significant progress, further strengthening the balance sheet by completing our inaugural private placement transaction, extending our weighted average maturity, opportunistically capping our ATM, and recasting our credit facility, which included increases to our revolver and term loans while reducing the cost. Our balance sheet is very well positioned with a weighted average cost of debt at quarter end of 3.5%, with all borrowings except our revolver, fixed rate or swap to fixed.
Our weighted average maturity is 5.9 years, and our net debt to EBITDA ratio was 5.7 x at the end of the fourth quarter, toward the lower end of our target range of 5.5x-6.5 x. We have just $40 million of debt maturing over the next three years, and we are committed to maintaining a conservative balance sheet. Now, moving on to guidance. We expect that the cumulative impact of elevated new supply will further weigh on revenue growth in 2020. Additionally, we expect the net 61 store increase to the same-store portfolio, which brings the pool to an even 500 assets, will have only a slightly positive impact to same-store revenues in 2020. This contrasts with the 70-basis point positive impact that the additions to the pool had in 2019.
Lastly, we've incorporated the impact of the SecurCare internalization into our guidance, assuming an April 1 transaction date. Taking all of this into consideration, we introduce full-year 2020 guidance as follows: Core FFO per share of $1.64-$1.68, which implies 7.8% growth at the midpoint. Same-store revenue growth of 2.25%-3.25%, OpEx growth of 3%-4%, and NOI growth of 2%-3%, as well as wholly-owned acquisition volume of $400 million-$600 million. Additional guidance assumptions are outlined in our earnings release. Thanks again for joining our call today. We'll now turn the call back to the operator to take your questions. Operator?
Thank you. Ladies and gentlemen, at this time, we will be conducting our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Jon Peterson with Jefferies. Please state your question.
Thanks. I just want to start with a question on SecurCare. Arlen's the chairman and CEO of SecurCare, or was. I'm just curious if SecurCare was given any preferential treatment with this internalization, or is it structured the same as any other internalization would be?
Thanks for that question, Jon. Good question. This is Tammy, by the way. As soon as Arlen advised our Board of Trustees that SecurCare was considering a retirement event under the terms of our existing agreements, the Board of Trustees immediately appointed a special committee that was comprised of all independent trustees. We set out to complete this transaction with the highest corporate governance standards in place. As a result, Arlen recused himself from discussions on the transaction and the special committee actually led the way. They appointed an independent financial advisor. They worked with legal counsel. They negotiated the terms of the merger agreement to the extent that it was not formulaically prescribed and really saw the transaction through from beginning to end.
When it was all said and done, the committee approved the transaction and recommended to our board of trustees that they go forward with it, and the board then approved the transaction.
Okay. All right. That's helpful. Maybe just one more. I know you guys have talked in the past about how you have capacity to maybe add a few more PROs to the platform. I'm curious if, as you internalize one PRO and potentially internalize more through, you talked about a goal of 50% by 2025 or a possibility of 50%. Does that make it easier to add more externally managed PROs to the platform as you internalize some of the existing ones?
Yeah. Jon, this is Arlen. It actually does make it somewhat easier because of the fact that obviously there's a limited room at the table as you think about people around the table managing together and making decisions. It's definitely easier. As I talk about PROs retiring, I mentioned maybe 1/2 of the PROs from the original might be retired. Well, that might be replaced by new PROs over time. It just becomes a practical matter of how many you can have working together at the same time. It does make it easier. It also makes it a little easier for opening up some territories and things like that. We're very pleased with some prospects we have for potential new PROs, obviously the timing on that we never control. It's always a personal decision by those potential PROs.
Okay. All right.
Just to follow on, we've always said that the right number of PROs is probably in the range of 12 - 15 PROs, and I think we still believe that. We probably have room for another one to three.
Okay. All right. Good quarter. Thanks, guys.
Thanks, Jon.
Our next question comes from Neil Malkin with Capital One Securities. Please state your question.
Hey, guys. Good morning.
Morning.
Just out of curiosity, what have cap rates been doing? Where have they been trending? I know obviously they've been coming down, like for the transactions you closed in the first quarter, what were those yields at that you acquired your current asset at?
Hi, Neil. This is Tammy. You're right. We are seeing, basically for us at least, continued compression in cap rates. Our fourth quarter cap rates were in the range of 5.5%-6%. I'm pretty sure heading into 2020 that they probably will not go up from there. We're looking at the transactional activity we're seeing is in the 5.25%-6% range.
Okay. I guess just regarding that, the tenor's very low again. A lot of capital out there. Do you guys have a conversation internally or a level that you may need to start if you take on new PROs or raise incremental capital, that you lower the sort of 6% cap subordinated payment you make to the SP unitholders, so the transactions are able to pencil if cap rates continue to trend lower?
Well, this is Arlen again. The way that our documents are set up, it is allowed for us to change the priority return on new acquisitions that would be both paid to the OP first and then the SP. If the market continues to trend down like that, we are allowed to do that. Fortunately, we've been able to maintain that 6% rate so far because the debt costs have continued to come down, making it possible for us to still achieve that 6% base return on equity. It is possible for the board to approve to change that. Now, one thing I would point out, if that is ever changed, either upward or downward, it only applies to future acquisitions made after the date of that change.
For example, if the board said, "Let's move it down to 5.5%," that would be for any new acquisitions occurring until the next change. Let's say rates go back up and they move it up to 7%, that would be only applying to future acquisitions after that change again. It's always based on future acquisitions for what that priority return is set at.
Great. Appreciate that. Last one from me. Your portfolio's obviously benefiting from less concentrated supply. I'm just wondering if you can kind of break out, or you do look at the differences in terms of street rate or overall revenue growth in properties that are closer to the urban centers versus more suburban outside the major sort of beltway or ring areas?
We do look at that from a general standpoint. Interestingly, historically, we've seen rate increases on average just as good in the smaller and suburban markets as in inner urban core markets. Of course, it is a timing issue. They're particularly better in a down cycle and in a flat cycle. In a really aggressive upcycle, the urban core can move quicker, we see that. On an average basis, we've seen that the suburban and secondary markets have been able to move, on a percentage basis, rates just as fast or faster than the urban core markets. Remember, you are at lower absolute dollars of rate per square foot. It's just on a percentage basis that they can easily keep up.
Arlen, the one thing I would add to that is what we're seeing with street rates across the board, even in places like Portland which is relatively encouraging the street rates have recovered and year-over-year are basically now flat as they were negative towards the beginning of 2019.
Great. Thanks, guys. Good quarter.
Thanks, Neil.
Our next question comes from RJ Milligan with Robert W. Baird. Please state your question.
Hey, good morning, guys. Just on the SecurCare, given some of the, I guess, weakness in SecurCare's markets, given the new supply. Arlen, was there any risk to the subordinated allocation to the SP equity there? I'm assuming NOI growth has been so strong over the past couple of years that there wasn't any risk there, but I just wanted to confirm there was no risk to that subordinated allocation.
Yeah, there's not RJ In fact, SecurCare, even throughout this more oversupplied time, has been long-term our strongest performing PRO, and continues to perform really well. From quarter to quarter, sometimes other PROs are better, but over the long run, they have done the best and continue to do really well. In general, they are a little bit less suspect to new supply than a lot of our PROs. The most difficult one being in the Northwest with the Oregon oversupply. In general, SecurCare has been in less risky markets from that standpoint.
Okay. For the external growth of $500 million projected at the midpoint this year, can you just sort of bucket where those acquisitions are coming from?
Hey, RJ, this is Brandon. Yeah, we've closed so far, you saw in the release, over $200 million on balance sheet. That's largely been third-party acquisitions. In our captive pipeline, which we report close to 140 properties at well over $1 billion. For 2020, the properties that'll come in from that avenue is, I would say, probably somewhere in the range of $50 million-$100 million. That puts you pretty quickly close to the bottom end of our range. We always talk about hitting the high end of the range if we land a larger portfolio deal or if we have a new PRO come in. That's gonna make up the rest of that mix.
Great. Thanks, guys. That's it for me.
Thanks, RJ.
Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please state your question.
Hi, good morning. Back to the SecurCare transaction. Arlen, I appreciate the comments you provided around the timing of the transaction, with SecurCare providing leadership as the first PRO to demonstrate how the process works a little bit, and that also the captive pipeline and some local relationships were largely exhausted. Given the 3x conversion ratio you mentioned and the promoted economics, I'm just curious if you can provide a little more insight there on the timing. Why effectuate the transaction now if the cash flow splits are so attractive?
Well, Todd, it comes down to obviously the leadership was a big factor. The other factors came down to some personal issues as it related to giving liquidity opportunities for other SecurCare shareholders. I think that's an important one. Some personal objectives as you relate to some of the other management members. You saw that David Cramer, CEO of SecurCare, is now joining NSA. That's proven to be a favorable timing issue on that. Frankly, as you look at the opportunities that we see for NSA at the core level to continue its really strong growth, I just believe that we're going to see very good appreciation in NSA's core stock.
It made a lot of sense for us to convert now, get those shares effectively now when we're in the $37 a share range, and we believe we'll see significant appreciation over the next few years above that $37.
Okay. Got it. Just given we're in the fifth year since the IPO and that conversion penalty is minimized now, are you expecting any additional PRO internalization transactions in 2020?
I don't think we'll see any in 2020. The general process is that a PRO is supposed to notify the board of their consideration for that, before the end of the year, which SecurCare did that before the end of 2019, and then that's when the special committee of the board was formed. Of course, it was a fairly complex transaction and took until now to get that wrapped up. Some of the other PROs wouldn't be quite as difficult because they don't have the independence issues with me being Chairman of the Board that they might have. We might have another PRO that might notify us at the end of this year. That's always tied to personal issues, and I just say that over the next four or five more years, probably we'll see another four or so PROs retire. Again, I can't control that.
That's up to them, and it depends on their personal objectives.
Okay. Then just thinking about the accretion and, again, sort of the 3x conversion ratio that you mentioned for SecurCare on the SP units, would that imply that future PRO transactions would be less accretive at the margin? Is that the right way to think about it?
No. They would be less accretive only because of the size. SecurCare is our largest PRO, the relative percentage accretion in all cases is going to be basically the same. Obviously, a large transaction adds more dollars of accretion and therefore more cents per share. The percentage accretion would be the same because it's a formulaic approach to that accretion model.
Okay. Just one more on the transaction, I guess. Can you just talk about the transition of management and oversight of the iStorage platform, in light of Steven Treadwell's departure?
Sure, Todd, I'm happy to do that. Although we're really sad to see Steve take his leave, as Arlen mentioned, it's completely disconnected from this transaction. We feel very fortunate to have David Cramer join us. Dave, I think maybe you've met Dave. Many of you have, anyway, is an industry vet with what? Over 20+ years of experience in self-storage. He's very highly regarded in the industry and certainly by our PROs. Our goal here is to effect this transaction in the least possible disruptive way to our team members, both the SecurCare and the NSA team members. Our thought is that, certainly in the beginning, we will run operations for iStorage and for SecurCare as two verticals. All of the employees will stay in place for both entities, and the objective here is really for this to be seamless.
Over time, I think we'll see opportunities to consolidate some functions, but that is not a short-term objective of ours.
Even though Steve will be leaving, all of the team that's worked on iStorage will all be here, will continue overseeing all the properties, doing all the marketing, doing all the revenue management, all of that. It's really just Steve moving out and Dave stepping in, and really, I don't think we'll see, on the ground level really, much difference whatsoever.
No, I think that's right. The other thing is, if we have, call it 440, 450 stores that are now being basically corporate managed in two brands, SecurCare and iStorage, Dave has a unique perspective on both of those sets of portfolios. He knows the entire team, and he's been involved with the evolution of our best practices platform. Honestly, although change is hard, I think that this couldn't be better for us.
All right. That's helpful. Just one last one, back to the acquisition activity. It sounded like last quarter that acquisition activity was going to moderate and you lowered the high end of the range last quarter as 2019 was winding down. I think the $400 million-$600 million was a little surprising, and having more than $200 million closed year to date was also a little unexpected. I guess, what changed and what gives you confidence that you'll be able to achieve the forecast?
I'll just start by saying, when we adjusted guidance last year, we had pretty good line of sight as to what was happening in the fourth quarter. We started off with a busy first six months of 2019 and then closed $30 million, $35 million in Q3, another $35 million in Q4. Yet, a transaction the size of what Brandon mentioned, we also have line of sight on that. We felt good heading into 2020, and I think that our range is reasonable. I don't think it's a slam dunk by any means. The other thing that we have talked about frequently is that acquisition activity is lumpy. We'll have a good first quarter because we already know what's kind of done and to be closed. Q2 could be slow.
As Brandon mentioned, I don't think there frankly is much of any way to hit the high end of our guidance without either adding a new PRO who can make significant contributions at the time of joining NSA or landing another good-sized portfolio.
Okay. Thank you.
Thanks, Todd.
Our next question comes from Smedes Rose with Citi. Please state your question.
Hey, it's Michael Bilerman here with Smedes. Tammy, I was wondering if you can just first just walk through sort of the net cash impact from doing the SecurCare transaction. You sort of laid out the almost $3 million of net G&A savings. You talked about the $12 million of distributions going away, but then you will have the annual dividend on the 7.7 million shares, call it $10 million. I just wasn't sure, when you net everything out, what is really the true cash differential from the transaction?
Hey, Michael, this is Brandon. Let me take that one. The $2.5 million-$3 million that Tammy talked about on the G&A savings, that one's pretty clean and easy. The SP units going away adds to our denominator for the Class A shares, the distributions that we're no longer paying on those SP units, it kind of makes up for the dividend you're going to have to pay on those new As. That's kind of a wash. The other dollar cash flow-
Even with the exchange, the 3.5 exchange, I would have thought there would have been some leakage there.
No, that's really a neutral effect. It's actually slightly accretive, but it's so de minimis, it's not really going into that $0.04-$0.05 number. That's the way that the model is set up on the conversion penalty to always assure that there's a cash flow accretion. It's minor. You have the $2.5 million-$3 million on the G&A, and then really what it is, it's the organic growth and the potential for growth through external acquisitions under the SecurCare properties that is no longer sharing in that SP participation. The way to quantify that is SecurCare currently makes up a little over 1/3 of our same store portfolio.
If you take the same store NOI of $208 million for the year, you have a number that is approaching $80 million for SecurCare, and you could take an organic growth NOI number to that. If you just say 3% NOI growth on that $80 million, you're at $2.5 million. My quick math is I take 50% of that as being shared by the PRO or the SP, and that will no longer be there, and that's how you get to somewhere between $0.01, $0.015. You add that to, say, the $2.5 million to $3 million, which equates to $0.025, $0.03 on the G&A, and that's how you get to that $0.04-$0.05 range.
Your guidance is really a forward look as if this had stayed as a PRO. The growth in NOI would have been shared or would have been offset by bringing it in today, you now have 100% of that growth. From a real accretion perspective, it's all predicated on those assets producing the returns that you're talking about. On a straight current basis, the accretion is much less. It would only essentially be those G&A savings that effectively you're paying for years upfront by giving them the equity, right?
No, that's not quite true, Michael. Even on a current basis, on a cash basis, there's about $4 million a year of additional cash that's going to NSA. This is on a look-back basis versus what NSA is getting now. You have an extra 7.7 million shares. You have $4 million of extra FFO effectively divided by 7.7 million additional shares. Well, for that component, really now you're going to divide by 100 million shares or fully diluted share, which is where you get to the effectively $0.04 on a look-back basis, and then on a look-forward basis, that's how you get to the $0.05.
Where is that $4 million? You talked about the $2.5 million - $3 million of G&A. Where is that other $1.5 million additional FFO coming from?
From the penalty on the SP equity versus the OP equity. The conversion of the SP to the OP.
Is there a lockup on the 7.7 million shares at all?
Yes, there is. There's a five-year lockup.
That only relates to the insiders.
Yes.
Not the small private shareholders of SecurCare.
The five-year lockup, and what percentage of the shares would that be? I assume it's you and David are the primary holders of the company anyways.
Yeah. Dave and I are about 80% of the company.
Okay. Then just remind me, the retirement event option, because it is kind of odd, right? Because you're not retiring, nor is David. What were the other formulas or options for the internalization, and how did those compare to what is called the retirement event option, where no one's really retiring?
The formulas are the exact same. The formulas are 4x EBITDA on the retirement of the management company. That's running right now at over $3 million, but just say $3 million a year. Then the haircut, the 10% haircut on the SP to OP conversion. Then because this transaction needed to be structured as a corporate merger rather than a regular just conversion of SP to OP, that's because SecurCare is an S corp, we had to do this as a merger structure. There's an extra 1% discount on top of that benefits NSA. All of those formulas are literally the same as a retirement event. One thing to remember that we call it a retirement event, but it doesn't imply that the actual people are retiring.
It really means that we're retiring the SP equity for that PRO. In this case, both Dave and I will continue to be involved in the company. We're not physically retiring, but that SP equity is retired.
Right. Just off of just the G&A savings, while it's a benefit to FFO, what you're giving is consideration for that, effectively $13 million of value, right? Yes, you're getting the bump in FFO, you are paying four years of those savings upfront in the form of OP units.
That's correct. Yeah.
I'm not sure that it's great that it's accretive, but you're effectively paying for that accretion upfront and outside of the growth in EBITDA of those assets. I'm not sure it's as beneficial as you're trying to make it out to be.
The management fee profitability grows with the revenues effectively. That savings or that benefit will continue to grow as those revenues grow.
I will also say, just if you think about it from a corporate governance standpoint, one of the things that we've spent a lot of time speaking with our investors and analysts about is our differentiated structure. We certainly have benefited from that differentiated structure. I think we'll continue to benefit from it. This is also a first step in looking a little bit more like a traditional UPREIT, if you will. We see it as net positive.
Okay. Thank you.
Thanks, Michael.
Just a reminder, to ask a question at this time, press star one on your telephone keypad. To remove yourself from the question queue, you can press star two. Our next question comes from Ronald Kamdem with Morgan Stanley. Please state your question.
Hey, guys. Just sticking on the SecurCare, I just want to make sure I understood this part correctly. You mentioned the conversion ratio was 3x . Also, this was sort of the minimum period for conversion. I guess my question is, when I think about the conversion ratio and the stock price, does that have any impact on the future conversions that you're expecting potentially by 2025? Meaning is the lower conversion ratio more accretive? Is a higher stock price more or less accretive? Just how should I be thinking about that?
Well, in terms of the conversion ratio itself, that doesn't have really a bearing on the accretion at all. The accretion calculus is based upon the cash flow effectively that's going to those SP units. Just in simple math, if you look at the SecurCare SP units this year, we're going to be paid over $12 million of SP distributions. They were also receiving over $3 million of management fee profitability. That's $15 million that would have gone to SecurCare in 2020. That's now basically going to NSA. NSA now has 7.7 million more shares outstanding. It's true that the conversion ratio will drop once SecurCare is out of there, but that's just the math because its conversion ratio is higher than other PROs and future conversion ratios will depend on how well PROs do.
If a PRO does really well, their conversion ratio can keep going up and be very high. If they do average, it might just stay around one. It really varies by PRO.
Got it. What about does the NSA stock price play anything into the accretion at all or not so much?
It doesn't actually have any bearing on the issue except for the management fee acquisition part of it, because that 4x EBITDA, then you divide by the stock price to get the number of shares issued. Remember, the SP equity is already in NSA equity, and it's just this conversion ratio where it converts from one form of NSA equity to another. We always put that in the fully diluted share count in table four.
Yeah, schedule four. Yeah.
In our schedule four of our supplemental.
Got it. That's helpful. I think you guys touched on sort of the net G&A benefit. Is there just above and beyond sort of what you had mentioned, is there any other sort of either revenue or expense synergies that could potentially be had down the line from internalizing this transaction? Maybe branding, marketing costs, whatever. Is there anything else above and beyond that we haven't thought of?
I do anticipate that there will be as we go long-term, by basically looking at combination of some of the marketing activities in certain markets, common branding in markets where we have overlap. We have not put that in any of our forecasts. Those are more just additional possibilities in the future. I will say, though, that SecurCare has been very active in using the vast majority of our PRO best practices, and so those are largely implemented. As we continue to add more and improve those PRO best practices, that's additional accretion that can come about from that.
Great. That's helpful. If I could switch gears over on expenses a little bit. The first is just on the property taxes. I think you talked about sort of a tough comp this year for 2020 driving all of same-store expenses up. How should we think about that in the out years, though, in terms of what sort of a normalized rate that we should think about for the property tax growth going forward?
Yeah, Ronald, this is Brandon. Yeah, my remarks earlier were about both the fourth quarter, which had some tax expense benefit that really related to the 2019 year, where maybe we had budgeted higher and then got final bills or assessments in fourth quarter, it was an adjustment to the 2019 numbers. Throughout the entirety of 2019, we also had benefits of close to $500,000 that really related to the 2018 calendar year, that has to do with jurisdictions where you're getting the final assessments or maybe the results of your appeals in the first part of the year for the year prior. That's the number that relates to our 2020 same-store pool that's going to have this $500,000 kind of artificially low 2019 number comp. That affects the 3%-4% OpEx growth range that we gave for 2020.
That affects that total OpEx number by about 50 basis points. The property tax expense growth assumption in our numbers for 2020 is 5.5%-6.5%, that is affected by this $500,000 to the tune of 150 basis points. Like a normalized growth, in other words, would be closer to 4%-5%. That helps.
Yeah. No, that's very helpful. If I could switch over to just marketing spend. I think I heard 13% year-over-year in the quarter and so forth. How are you guys thinking about that in 2020 and sort of what are you seeing out there? Is there any sort of alleviation in terms of the pressure, or is it still sort of upward pressures on those numbers?
Yeah, Ronald. It was 9% for the quarter. That compares to 12% in third quarter, which were both elevated from the first half of the year. We have seen an uptick in that spend. For 2020, we're projecting in the 10%-12% growth range. There's pressure, and you're seeing that across the sector, we've been successful in trying to keep that to a manageable level. That's currently what's baked into our expectations.
We think some of that has to do with the markets in which we operate. We don't see the same competition for keywords in some of the smaller and secondary, tertiary markets. We're also getting some benefit from the ongoing evolution of our marketing platform.
Got it. Okay. That's all I had. Thank you so much.
Thank you.
Thank you. Our next question comes from Ki Bin Kim with SunTrust. Please state your question.
Thanks. Arlen, how much of the internalization of SecurCare was more of a case study to show your other PROs versus something that is more kind of driven by your own personal or the Co-Founder's personal reasons?
There's no doubt that the internalization, an important part of that was to be a leader and demonstrate that to the other PROs. I think I'd say you could probably call it maybe 50/50 in terms of the way that broke out, Ki Bin.
What kind of feedback are you getting from your other PROs about the prospects of internalization? I would imagine that, I can't remember exactly, it's 3x the management contract EBITDA or 4x , but it's a pretty accretive part of that business, staying a PRO.
You're right. The general feedback varies a lot by PRO. I think fundamentally it comes down to two things. One is their personal situation in terms of, if they might have a family member in the business that wants us to continue to manage that PRO for quite a few more years versus if they don't. Obviously, that has a bearing on it, on the timing. The other thing is just looking at where we see the opportunities for SecurCare stock, I mean, for NSA stock going forward, versus remaining as an independent PRO. When you convert, you give up that disproportionate upside, but you also get the benefit of performing at the rate that the entire company performs. Frankly, I'm very bullish on the opportunities for the entire company for NSA stock.
I like having those SP units converted to OP units and being following the entire performance of the company. That would be part of the analysis of the individual PRO as well, thinking about, do I have better opportunity upside looking at how the whole company will do? Am I better to just focus my upside, a lot of it is on my specific markets? I think that will come into play as PROs evaluate that.
Okay. In terms of your same-store revenue guidance, you're not really guiding to any type of deceleration in trends. Maybe can you just provide a little more color, what were the kind of various line items that you were thinking about that led you to that pretty good guidance number?
Hey, Ki Bin, this is Brandon. You're talking revenue specifically? Sorry, I might have missed it.
Yeah.
Okay. Yeah. You're right. Relative to the number we put up for Q4 of 2.8% growth, yeah, the midpoint for full year 2020 is right there. What went into that was frankly the buildup of our individual PRO property budgets and what they were seeing in their markets, and obviously our top-down kind of macro view as we went through the budgeting process. You hit it on the head. It's not much more complicated than that. We're kind of expecting the entirety of 2020 to look more like fourth quarter 2019, which you can read through that to say, for our portfolio, that's kind of bottoming out, but then bumping along that bottom for the next year.
I don't want to put words in your mouth, but if the PROs lead up to a budget, same-store revenue budget of X%, is it correct to assume that you guys take like a conservative haircut approach at the high-level macro, top-down, like you said, to haircut that number? Is that the way it would work?
No, I wouldn't say haircut, Ki Bin. I would say we have the benefit of looking at our whole portfolio at a macro level. We have the benefit of looking at our iStorage portfolio that our PROs aren't focused on. If we see any discrepancies in a market where our PROs operate and we operate, or obviously the numbers we see from our public peers, that's where the dialogue happens with our PROs. There's not really like a top-side haircut. It's really just a continuous dialogue before we finalize on a final number.
An example of that, Ki Bin, would be, Tammy talked about at the beginning of 2019, we were seeing street rates on average 3%-4% below the year before. At the end of 2019, we're seeing street rates flat to the year before. We are seeing that now we're looking at, we've hit the bottom, in our opinion. We're not going to get off the bottom for a while, but we see based on the trends in the overall big picture, we have hit the bottom. We believe we're going to stay at the bottom for pretty much this whole year and then start to come out of it as we go into 2021.
I think when it's all said and done, we'd like to be positively surprised on the upside, but we think that our guidance is very realistic.
Okay. That's helpful. Thank you. Congratulations, all of you.
Thanks, Ki Bin.
Our next question comes from Stephen Mead with Anchor Capital Advisors. Please state your question.
Yeah. Good morning. Could we go back to the statement that you basically kind of estimate that 45% of your facilities face sort of competition or new competition within 5 mi. I was wondering how the mix of that 45% is between, say, smaller operators versus the national chains. Does that sort of impact your thinking about things?
Yeah. Hi, Steve. I think that we definitely have less competition from the national chains than most of our peers, and it does impact us because we do know, for example, there are some of the large chains that if they're a new competitor, are extremely aggressive on pricing to fill those properties up. We have some of that. My guess is, I don't have an exact number, but my guess.
Right.
Is of that 45%, it's probably more like 15%-20% of that is where we're competing with a large national chain, and more than 1/2 of it is really more of a local, a smaller operator that might have 5-15 properties.
What do you see in terms of the actual kind of crossover point in terms of new supply, and a little bit more relief, from the standpoint of new construction?
Yeah.
I was sort of wondering what the returns on new construction are at this point.
Well, the returns on new construction are definitely a lot lower than they were a few years ago, and it's because of a couple things. It's taking a lot longer for them to fill up. Remember, when we say that 45%, we're looking at if the store's been open in the last three years. Any store opened in 2017, 2018, and 2019 is included in that pool for us because that's the normal fill-up curve. We do think that this year will be the worst, 2020. I don't know if 45% will be the worst or if it goes to 46%, but we should hit the worst sometime this year and then start going down.
Whatever that peak is, let's say it comes out to 46%, and then it starts going down, and maybe the next quarter it might be 42%, and slowly go down like that. The returns that guys are getting on new development today, in most cases, in my opinion, do not justify the risk. Obviously, everyone has their own opinion on it, but I personally am not doing any new development. We have none going on in NSA. We have a few PROs that still have a few new development projects underway, but recognizing that the risk on that, it's not a good risk-return profile right now to be building new self-storage.
And then, post your transaction in terms of the internalization, you were talking about the conversion factor being 1.48.
Yep.
After the transaction, what does that 1.48 go to, roughly?
Yeah. Roughly it'll go down to around 1.25 .
Okay.
It does depend on how each PRO does, but as we just mathematically pull those units out and say the others do the same, it comes down to around 1.25 .
Okay. Thanks.
Thanks, Steve.
Ladies and gentlemen, this concludes today's question and answer session. I will turn it back to Tamara Fischer for closing remarks. Thank you.
Okay, this wraps it up for the fourth quarter and for the year 2019, and we're looking forward to 2020, which promises to be a year of growth and transformation for NSA. Just as a reminder, there are additional details around the internalization of SecurCare in the 8-K we filed yesterday, and we encourage you to reach out if you have any questions about that. Thanks for participating in our call today. We appreciate your continued support of NSA, and we look forward to seeing many of you in the coming weeks. Thank you.
Thank you. This concludes today's conference. All parties may disconnect. Have a great day.