Q4 2019 Earnings Call
Greetings and welcome to the National storage affiliates.
Fourth quarter, and 2019 conference call.
Simon participants are in listen only mode.
A brief question answer session will follow the formal presentation.
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It is on my pleasure to introduce your host George Hoglund, Vice President of Investor Relations for National Starch affiliates. Thank you Mr. Hogan you may begin.
Good morning. Since this is our first earnings call have a year I would like to remind everyone that it's a good time to get started on those new year's resolutions.
You know your garage isn't basement.
Items into storage.
Number the Rogers our for cars.
Since our Furman caves in real say rooms.
That we'd like to thank you for joining us today for the fourth quarter 2019 earnings Conference call National stored affiliates Trust. In addition to the press release distributed yesterday, we filed an 8-K with the FCC companion, our supplemental package, but 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 web site at National storage affiliates Dot com.
On today's call management's prepared remarks, and the answers 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 details concerning our forward looking statements. Please refer to our public filings with the FCC.
We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures such as that that FFO core FFO and net operating income contained in the supplemental information package available on the Investor Relations section on our website and in our FCC filings today.
This conference call. This hosted by National soared to affiliates executive Chairman Arland, North <unk>, President and CEO, Jim or Fisher, and Chief Financial Officer brands into Gosh <unk>.
Well, we prepared remarks management well accepted questions from registered financial analysts I will now turn the call over to Arlon.
Thanks, George and thank you all for joining our call.
Today's call will wrap up my final reporting year, as Denis say CEO I'd like to start out by congratulating Tammy artificially taking over as CEO and Brandon as CFO effective January onest.
I look forward to Tami, leading and I say threats next growth phase and continue the stellar track record that we've put together.
With my transition into the executive Chairman role you can expect like participation on earnings calls sounds at Investor conferences, we'll be reduced going forward. However, I remain actively engaged and focused on overall company strategy he investments.
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We wrapped up 2019 with another stellar quarter and full year performance with results ahead of our expectations and same store revenue and Hawaii and core AFFO per share growth that we're confident well once again you have to top of our peer group.
We also grew our total portfolio by 10% on both a property count M. dollar value basis.
Well, let Tammy a brand and go into the details on our year.
Well I address the announcement made in conjunction with our earnings release.
The internalization of secure care self storage our largest pro.
This is a significant milestone representing a major step in the evolution of and I say.
Since our IPO, we've consistently told investors and analyst to keep a few things in mind.
On slide 2025, we expected that approximately half of our pros, which currently stands at 10 would likely retire and that's part of the process and I say would internalize the management of those properties.
Do we noted that the first retirement of a pro wouldn't happen until 2020 of the earliest would just five years after our IPO.
When the conversion penalty on subordinated performance units or S. P 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 and assays common shareholders.
I'm pleased to announce that secure cares the first approach to internalize the management.
They are branded portfolio and retired their S. P units, which will be accretive to common shareholders I approximately three cents per share and 2020.
Four to five cents per share on an ongoing annual basis.
I'm sure. This begs the question why secure care and why now.
As many of you know I'm a co founder of secure care, which was then assays predecessor company and one of the three founding pros event I say.
It makes sense that secure care, that's 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.
So the process of pro internalization will play out over time.
Second why now.
To begin secure as largely finished contributing gets captive pipeline assets into and I say 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.
The combination of these factors culminated in the decision for secure care to internalize now.
I'd like to also addressed the favorable timing that allows Dave Kramer secure care CEO, the joint and I say as our COO you haven't Steve Fred Wells departure from when I say.
I first want to know the Steve's departure to pursue an entrepreneurial opportunity is in no way connected with the internalization of secure care.
However, the timing does fortuitously coincide.
And we're fortunate that Dave who I've worked with for over 20 years, well stepped in as our COO, ensuring a seamless transition.
I speak for all of into say in saying that we're sad to see Steve move on but we thank him for his significant contributions to and I say and we wish him well as he pursues his entrepreneurial passion.
I'm excited for this new phase of NFC is growth and I'd like to welcome Dave framework and the rest of the secure staff to the corporate Dennis 18.
He brings over 20 years of self storage operating experience and is well known in highly regarded than the industry.
He's intimately familiar with NFC is operations on structure, having served as CEO of a secure care since and assays formation being a member of in assays Pro Advisory Committee since inception.
And consistently providing leadership in NFC technology and best practices group.
I'm confident that does say won't Miss a step in this management transition.
I'll now turn the call over the Tammy.
Thank you Arlon I'll spend a few minutes on fundamental and then address the mechanics of the secure care internalization.
The economy continues to chug along at a goldilocks piece, but interest rates remained very low providing a favorable backdrop for real estate further with increased economic uncertainty due to global events and then upcoming a presidential election combined with challenges faced by a few other property type.
Storage sector properties and stock has been in high demand by investors and I don't see that changing anytime soon.
On average fundamentals in our portfolio remain healthy.
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 five mile radius.
From the 41% we reported last quarter <unk>.
Portland, which is our second largest market and happens to be the poster child for oversupply continues to battle through the elevated number season Lisa.
Despite this it's worth noting that street rates important lender finally, improving and we saw positive growth in the fourth quarter compared to the prior year.
But occupancy remains under pressure and we expect revenue growth in Portland will remain muted.
Phoenix and the West Coast to Florida, well 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% to 4% lower year over year, but saw steady improvement throughout the year end 2019 relatively flat on a year over year basis.
During the quarter move in and move out volumes were roughly flat rental rates and move ins remain below rate I move out because of our ability to increase rate on in place tenet.
It's negative churn tends to fluctuate between low single digits in the summer months, the high single digits in the winter month on a percentage basis.
Importantly, we're seeing no softening and our ability to increase ran 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.
Now, let me comment on some specific market.
Similar to last quarter, our leading m. assays in terms of same store revenue growth include Riverside, San Bernardino Atlanta in Las Vegas, where recent demand growth has exceeded supply growth.
Keep in mind storage is the local game.
So displacing new supply on them as they level often our assets maybe concentrated in areas that are less impacted by the supply.
Lagging markets in our portfolio included part Portland, Phoenix, and Tulsa, which continue to feel the headwinds from elevated new supply.
Each of our top 10, M. assays generated positive same store revenue growth for the fourth quarter and full year.
However, 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 submarket.
For the full year 2019 same store NOI growth with positive at all our top 10 M. essay.
Now I'll shift to the mechanics of the secure care internalization and the expected accretion from those transaction.
The internalization is expected to become effective on April 1st and most secure care platform and employees will remain in place. Although they will then become employees about I'd say.
Based on current store count the number of properties internally managed by an essay rather than by our pros well then increased to over 440, which represents almost 60% of NFC total portfolio.
Also the corporate man stores will represent about 40% of our budgeted same store NOI in 2020.
Regarding the financial statement impact or a few key items that you should be aware first management fees paid to secure care will be eliminated he's management fees flow through DNA 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 secure care.
The elimination of these fees net of what we expect to spend to operate these assets internally is expected to generate between two and a half and $3 million of annualized DNA saving.
Second secure care will receive about 348000 LP units as consideration for our acquisition of the management company, which is based on a prescribed formula of four times EBITDA.
Third the secure care series the best P units, roughly 2 million units will be converted into common shares have been essay at their applicable conversion ratio.
Although the average conversion ratio for all outstanding S. P units was 1.48 times at the end of 2019 secure carrier series of SP units has a conversion ratio of over three times, reflecting reflective of its outstanding historical performance.
In total approximately 2 million S. P units and 1 million OTI units will be retired in this transaction with the total issuance of approximately 8 million new common shares.
You can also expects the average conversion ratio for the remaining S. P units in NFC based portfolio declined over the next few quarters due to this conversion.
For the distributions to all SB units, which is included in S. EFO attributable to subordinated performance unit holders noted in the F. O reconciliation schedule one of the supplemental package will be reduced by over $12 million annually due to the retirement of secure care Sears.
He is the best P units.
We anticipate the net result of this transaction will be approximately three cents per share of accretion to core FFO in 2020 for approximately four to five cents per share on an annualized basis.
I'll now turn the call over to brands into addressed fourth quarter and full year 2019 result, recent balance sheet activity and guy.
Thank you Sami yesterday afternoon, we reported solid results for the fourth quarter with core AFFO per share a 40 cents, which represents an increase of 8.1% over the prior year period.
This growth was fueled by a combination healthy same store NOI performance strong for your 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.
We drove an unusual 4.9% decline in property taxes versus the prior year period.
Personnel expenses grew just 1.5% year over year.
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.
The full year 2019 same store revenue growth was 4% property Opex growth was just 1.6% and anyone growth was 5%.
Notably our same store revenue in anyway growth were in line with historical sector averages. Despite the challenge is 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 29 team. We acquired 69 wholly owned properties located across 14 states referral of $448 million.
Subsequent to quarter end the acquisition piece has accelerated and we've acquired a total of 36 properties totaling $218 million, which includes 34 wholly own into JV properties.
Now turning to the balance sheet.
It was a quiet quarter as far as the balance sheet is concerned we issue just $2 million of Opie equity in conjunction with acquisition.
Not complete any debt issuances during the quarter.
For the full year, we made significant progress further shrink the balance sheet by completing our inaugural private placement transaction, extending our weighted average maturity opportunistically tapping our ATM and recasting our credit facility, which included increases to our revolver in term loans, while reducing the cost.
Our balance sheet is very well positioned with a weighted average cost of that order in the 3.5%.
With all borrowings, except our revolver fixed rate were swapped to fixed.
Our weighted average maturity is 5.9 years and our net debt to EBITDA ratio was 5.7 times at the end of the fourth quarter toward the lower end of our target range of five and a half the six and a half times.
We have just $40 million of debt maturing over the next three years and we're committed to maintaining a conservative balance sheet.
Now moving on to guidance.
We expect that the cumulative impact of elevated new supply will further away 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.
Only a slightly positive impact the same store revenues in 2020.
This contrasts with the 70 basis point positive impact at the additions to the pool had in 2019.
Lastly, we've incorporated the impact of the secure internalization into our guidance assuming an April one transaction date.
Taking all of this into consideration we introduced full year 2020 guidance as follows.
Core AFFO per share of $1.64 to $1.68, which implies 7.8% growth at the midpoint.
Same store revenue growth of 2.25% to 3.25% opex growth of 3% to 4% NOI growth of 2% to 3%.
Well as wholly owned acquisition volume or 400, the $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 will be conducting our question and answer session.
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Our first question comes from Jon Petersen with Jefferies. Please state your question.
Thanks.
Question on to care care, so arlington's, the chairman and CEO of secure care or wise.
Just curious if secure care was given any preferential treatment with us internalization.
Or is it structured the same as any other internalization would be.
Oh, Thanks to that question John Good question Hi, This is damaged by the way I. So so as soon as Arlon advised our board of trustees that that secure care 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 a independent trustee.
And.
We set out to complete this transaction with with the highest corporate governance standards in place and as a result, arlo reuse Houston So from a discussions on the transaction and the special Committee actually led the way they appointed eye and independent financial advisor.
We 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 that they go forward with it and weren't done approved the transaction.
Okay. All right that's helpful and just one where I know you guys have talked in the past about here. How do you have capacity to maybe add a few more pros to the platform I'm curious if you as an as you internalize one probably potentially internalized more through.
You talked about a goal a 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, John this is our one.
Actually does make it somewhat easier because of the fact that I'm, obviously, there's a limited room at the table as you think about people around the table managing together and making decisions. So it's definitely easier and that was I talk about pros retiring a you know I mentioned, maybe half of the pros from.
The original might be retired will that might be replaced by new pros overtime. It just becomes or a practical matter of how many you can have working together at the same time. So it does make it easier. It also makes a little easier for opening up some territories and things like that.
And we're very pleased with those some prospects we have for potential new pros, but obviously the timing on that we never control, it's always a personal decision by those potential pros.
Just a follow on right. We've always said that the right number of pros is probably in the range of 12 to 15 pros and I think we still believe that when we probably have room for another one to three.
Okay, all right good quarter, thanks, guys.
Thanks, John.
Our next question comes from Neil Malkin with capital One Securities. Please state your question.
Hey, guys good morning.
Morning.
Just had a curiosity or.
What have a cap rates have been doing where they've been trending I know, obviously been coming down but like for the transactions you closed in the first quarter what were those yields that you acquired your your.
The current asset that.
Hi, Neal this is tammy so so you're right. We are seeing I think basically for us at least continued compression in cap rates, our fourth quarter cap rates word in the range of 5.5% to 6%.
And then.
You know 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 and.
I have in a quarter to 6% range.
Okay, and I guess, just regarding that I mean, the tenures very low again.
A lot of capital out there do you guys. You know have a conversation internally or a level that you may need to start you know it would take on new pros raise incremental capital that you lower the sort of 6% <unk> percent.
Subordinated payment you make it a a unit holders.
To you know so the transactions are able to pencil.
If cap rates continue to trend lower.
Well. This is arlon again, the way that are documents are set up it is allowed for us to change the priority return.
On new acquisitions that would be both paid to the old Pete first and then the ASP.
And so if if the market continues to trend down like job.
We are allowed to do that Fortunately, we've been able to maintain a 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.
But it is possible for the board to approve the 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. So 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 and let's say a at rates go back up when they move it up to 7% that would be only applying the future acquisitions. After that change again, so it's always based on future acquisitions for what that priority return is set up.
Great appreciate that and then last one for me your portfolio is obviously benefiting from less concentrated supply I'm. Just wondering if you can kind of breakout or you do look at the differences in terms of street rate or overall revenue growth and in properties that are closer.
To the urban centers versus a more suburban outside the major sort of beltway or ring area.
We do look at that from a general standpoint and interestingly.
Historically, we've seen Oh.
Rate increases ER on average just as good and the smaller and suburban markets as the an inner urban core markets, but of course, it as a timing issue Oh, there, particularly better entered in a down cycle.
And in a flat cycle in a really aggressive up cycle. The urban core can move quicker, we see that but on an average basis, we've seen that the suburban and secondary markets have been able to move on a percentage basis.
It's just just as fast or faster than the urban core markets, but remember you are at lower absolute dollars of rate per square foot. So just on a percentage basis that they can easily keep up.
Ireland. 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.
Street rates have recovered and 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 secure care given some of the I guess weakness and secure cares markets given the new supply well then was there any risks to the subordinated allocation to the S.P. equity there I'm just I'm assuming it in a wide growth has been so strong over the past couple of years that there wasn't any risks there, but just wanted to confirm there was no.
Risks to that subordinated allocation.
Yeah, there's not RJ in fact secure care even throughout this more oversupplied time has been a long term our strongest performing pro and continues to perform really well, obviously from quarter to quarter or sometimes other pros are better but over the long.
And they have done the best and continue to do really well. So in general they are a little bit less a source that's two new supply than a lot of our pros obviously, the most difficult one being in the northwest with the Oregon oversupply.
But in general secure curse is.
In the less risky markets from that standpoint.
Okay, and then for the external growth of 500 million projected at the midpoint. This year can you just sort of bucket, you know where where those acquisitions are coming from.
Hey, our Jay this is Brandon so.
Yeah. We've closed so far you saw in the release or 200 million on balance sheet, that's largely been third party acquisitions.
Our captive pipeline, which.
We report full stop 140 properties well over a billion dollars for 2020, the properties that will come in from that avenues is I would say probably somewhere in the range of 50 to 100 million.
Then you know that puts you pretty quickly close to the bottom end of our range, we always talked about hitting the high end arrange if we landed a larger portfolio deal or if we have a new pro come and so that's that's kind of make kind of 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, so back to the secure care transaction Arlon I. Appreciate the comments you provided around the timing of the transaction.
Secure care, providing leadership as the first try to demonstrate how the process works a little bit and that also the captive pipeline in some.
Local relationships were largely exhausted, but.
Given the three times conversion ratio you mentioned in the promoted economics I'm. Just curious if you can provide a little more insight there on on the timing why effectuate the transaction now if the if the cash flow splits or so attractive.
Well I taught it comes down to obviously the leadership was a big a big factor.
The other factors came down to some personal issues that was that related to.
Giving liquidity opportunities for other secure care shareholders.
I think that's that's an important one oh, some personal objectives as your relate to some of the other management members you saw that Dave Kramer CEO of secure carriers now joining and say Oh, you know that's proven to be a favorable timing issue on that and then frankly as you know.
Look out the opportunities that we see for analysts say at the core level to continue its really strong growth.
I just believe that we're going to see very good appreciation and then essays course stock.
And so it made a lot of sense for us to convert now I'll get those shares effectively now when we're in the $37 share range and we believe we'll see significant appreciation over the next few years above that $37.
Okay got it and then.
You know just given where we're in the fifth year since the IPO and that conversion penalty is 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 processes that are pro was supposed to notify the board of their consideration for that so before the end of the year, which secure care did that before the end of 2019 and then that's when the special Committee of the board was formed but of course it was.
Fairly complex transaction and so until now to get thought wrapped up some of the other pros or wouldn't be quite as difficult because they don't have the independents issues with me being chairman of the board of the that they might have so we might have another pro that might notify us at the end of this year.
But that's always tied the personal issues and I'd, just say that over the next four or five more years, probably we'll see another four so pros retire, but again I can't control that that's up to them in it and it depends on their personal objectives.
Okay.
And then just thinking about the accretion and again sort of the.
The three times conversion ratio that you mentioned for secure care on the S. P units would that imply that future pro transactions.
It would be would be less accretive at the margin is that the right way to think about it.
No the.
They they would be less accretive only because of the size secure care is our largest pro but relative percentage accretion in all cases is going to be basically the same but obviously a large transaction adds more dollars of accretion and therefore a more.
Centsper share, but the percentage accretion would be the same because it's a formulaic approach to that accretion model.
Okay and ends and just one more on the transaction I guess can you can you just talk about the transition of management and and oversight of of the I storage platform.
In light of Steve Tread Wells departure.
Sure Todd I'm happy to do that in.
We're really although we're really sad to see Steve I'd take it leaves.
As Irwin mentioned that completely.
Disconnected from this transaction, we feel very fortunate to on two has they've Kramer join US based I think maybe you've met Dave many of you have any way.
As an industry that was made over 20 plus years of experience in self storage is very highly regarded in the industry and certainly by our pros are our goal here is to.
Two effects this transaction in the least.
Possible disruptive way to our team members also secured here in the sales team members. So our thought is that Ed and certainly in the beginning we will run operations for I stories and for secure here as two verticals on all of that employees will stay in place for both entities and I in.
This year is too.
It is really for this to be seamless.
Hey, overtime, I think we'll see opportunities to consolidate some functions but.
But that's not that is not a short term objective of ours.
And you know, even though Steve will be leaving all of the team. That's worked on ice storage will all be here well continue overseeing all the properties doing all the marketing doing all the revenue management all of that so.
It's really just as Steve moving out and Dave stepping in and really I don't think we'll see on the ground level really much difference whatsoever, I think that's right and the other thing is if we call. It 440 50 stores.
That are now being basically corporate manage it managed into brand secured here and I storage Dave.
As a unique perspective and both of those sets of portfolios. He knows the entire team and he's been involved with.
The evolution of our best practices platform.
So honestly.
Although changes hard I think that we just couldn't be better for us.
Alright Thats helpful. In 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 was winding down so.
I think the four to 600 million was a little surprising and having more than 200 million close year to date was also a little unexpected I guess, what changed and what gives you confidence that you'll be able to.
The the forecast.
So I'll just start by saying you know when when we adjusted guidance last year, we had pretty good line of sight as to what was happening in the fourth quarter and you know we started off with a busy for six months of 2019, and then closed 30 $35 million in Q3, another 35 million.
In Q4 and.
And yet we transaction size, what Brandon mentioned I is you know we also have why insight on that so we feel good heading into 2020, and I think that 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 and so but a good first quarter be because we already know whats kind of done and to be close.
Q2 could be slow.
As Brendan mentioned I don't think there frankly as 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, the joining an essay or landing another good size portfolio.
Okay. Thank you.
Thanks Todd.
Our next question comes from Smedes Rose with Citi. Please state your question.
Hey, it's Michael Bilerman Hijras needs.
I just wondered if you can just persist walk through sort of the net cash impact from doing the secured <unk> term care transaction.
And you sort of laid out the.
Of $3 million.
Net gene a savings you talked about the $12 million a 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 a differential from the transaction.
Yes, Hey, Michael This is brand and let me take that one so the two and a half the 3 million to Tami talked about on the Genie savings that ones that was pretty clean and easy the the SP units going away adds to our denominator for the class a shares but be the distributions that we're no longer paying those sp units.
Kind of makes up for the dividend you're going after paying on those new ways. So that's kind of a wash so.
So the other Donovan cash even with the even with the exchange the three and a half exchange I would've thought there would have been some leakage there.
No. That's that's really a neutral effect, it's not it's actually slightly accretive, but it's so the minimis, it's not really going into that that 4% to 5% number.
So it's really hitting that thats like thats. The way that model is set up on the conversion kind of leave the always assure that theres a cash flow accretion.
But it but it's minor so you have the two and a half the 3 million on the Gionee and then really what it is it's the the organic growth and the potential for growth through external acquisitions under the secure care properties that has no longer sharing in that that espeed participation and so the way to quantify that.
That is secure chair currently makes up a little over a third of our same store portfolio. So if you take the same store NOI to only 208 million for the year.
You have a number that is approaching $80 million for secure care and you could take inorganic growth and Hawaii number to that.
And so if you just say say, 3% and why growth on that 80 million Euro two and a half million and my quick math as I think 50% of that as as being shared by the the pro or the SP and that will no longer be there and thats, how you get to somewhere between a penny pending in house.
Add that to say the two and half a three.
Million, which equates to two and half Sthree pennies on the DNA and that's how you get to that at four to five Penny range.
So your guidance is really a forward look as if this had stayed as a pro the growth in Hawaii would have been shared ever would have been offset by bringing getting today you now have 100% of that growth so from a.
The 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 especially be that those gionee 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 is about $4 million a year of additional cash that's going to Ns say.
All.
This was founded on a look back basis.
Oh versus what NSS is getting now now you have an extra 7.7 million shares.
Shares. So you have $4 million of extra EFO affectively divided by 7.7 million additional shares well before that component, but really now you're going to divide by 100 million shares our fully diluted share, which is where you get to the effectively four cents on a look back basis.
Then on a look forward basis Thats, how you get those five cents.
You bet, you're for Where's that Formula and you talked about the two and a half the three gionee, whereas that other million million a half of additional FFO coming from.
From the penalty on the S.P. equity.
Versus the old P. equity.
The conversion of the ASP to the Ob.
Yes.
Is there a lock up on the 7.7 million shares at all.
He yes, there as to the there's a five year lockup, Matt only relates to the in siders not the small.
Private shareholders of secure.
The five year lock up and what percentage of the shares would that be I assume that's you and David are the primary holders of of the company anyways.
Yes, Dave and I are about 80% of the company.
Okay, and then just remind me the retirement of that option because it is kind of odd right because you're not retiring nor as David.
What were.
The other formulas or options for the internalization.
How did those compare to what is called the retirement of then option where no one's really retiring.
Formulas are the exact same the only so the formulas are three or four times EBITDA on the retirement of the management company. So thats running right now and over $3 million, but just say $3 million a year and then the hair cut the 10% hair.
On the SP to Opie conversion and then because this transaction are needed to be structured as a corporate merger rather than a regular just conversion of opie.
Espeed, Oh, P. and that's because secure care as a as S Corp.
So we had to do this as a merger structure. There is an extra 1% discount on top of that.
The benefits and essay.
And that so all of those formulas are literally the same as a retirement event and one thing.
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 S.P. equity for that pro and so in this case, both Dave and I will continue to be involved in the company.
We're not physically retiring.
But that ESP equity is retired.
Right.
Then just safi, just the gene a savings while its benefit.
So.
The.
What you're giving as consideration for that.
Effectively $13 million a value right. So yes, you're getting the bump in FFO, but you are paying four years of those savings upfront in the form of Oh P units.
That's correct yeah.
So I'm not sure of that.
Great that's accretive.
But you're effectively paying for that accretion.
Front and outside of the growth in EBITDA of those assets.
I'm not sure it says.
Beneficial as you're trying to make it up to be.
Well the management fee profitability grows with the revenues effectively so.
You know that not savings or that benefit will continue to grow as those revenues grow.
I will say just if you think about it from a corporate governance standpoint, one of the things that we spend a lot of time speaking with our investors and analysts about is our differentiated structure and we certainly have benefited from that them differentiated structure I think we'll continue to benefit from it but.
This is also a first step in looking a little bit more like a traditional appreciate if you will.
So so we see it as net 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 Q you can press star too.
Our next question comes from Ronald Camden with Morgan Stanley. Please state your question.
Hey, guys just thinking on the secure care I just want to make sure I understood. This part correctly so.
You mentioned the conversion ratio.
Three times.
So this is 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.
And.
Ah that you're expecting potentially by 2025, meaning is a lower conversion ratio or accretive is that higher stock price more or less accretive just 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.
Because the accretion.
Calculus is based upon the cash flow effectively that's going to those SP units.
So I mean, just in simple math.
If you look at.
The secure care SP units. This year, we're going to be paid over $12 million of SP distributions.
They are also receiving over $3 million of management fee profitability. So that's $15 million that would have gone to secure care in 2020, that's now basically going to and I say, but and I say now has 7.7 million more shares outstanding so so.
So and so it's true that the conversion ratio will drop once secure care is out of there, but that's just the math because.
Its conversion ratio was higher than other frozen and future conversion ratios will will depend on how well pros do if a pro does really really well their conversion ratio can keep following up and be very high and if they do average it it might just stay around one so it really Uh huh.
Really varies by pro.
Got it and what about the the NFC stock price play anything into the accretion Oh.
Right now.
Oh, it doesn't actually have any bearing on the issue except for the management fee.
Acquisition part of it because [noise] not four times EBITDA, then you'd divided by the stock price to get the the number of shares issued but remember the S.P. equity is already in in and I say equity and it's just this conversion ratio where it converts from one form of Anna say equity to another.
We always put out in the fully diluted share count and.
Table.
For.
A schedule four of our supplemental.
Got it.
Helpful. And then you know I think we you guys touched on sort of a net janney.
A benefit but is there just above above and beyond sort of what you've mentioned is there a nice other sort of either revenue or expense synergies that could potentially be had down the line from internalizing This transaction.
Maybe branding marketing costs.
Or is there anything else above and beyond that.
Uh huh.
[noise] I do anticipate that there will be as we go long term I basically looking at combination of some of the marketing activities in certain markets common branding in markets, where we have overlap, but we have not put that in any of our forecasts. Those are more just additional possibilities in the future.
I will say, though that secure care has been very active and using the vast majority of our pro best practices and so those are largely implemented but 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.
Yes, what scares over to a little on expenses a little bit so.
The first is just on the property taxes, I think you talked about.
Sort of a tough comp.
This year.
2020, driving.
It.
Well as same store expenses.
<unk>, how should we think about that in the out years, though.
In terms of what sort of.
Normalized.
That we should think about for for the property tax growth going forward.
Yeah Ronald this was Brandon so.
My remarks earlier, we're of helpful fourth quarter, which had some.
Tax expense benefit that really related to the 19 year, where maybe we had budgeted higher and then got final bills are assessments in fourth quarter and so he was an adjustment to the 19 members, but throughout the entirety of 19, we also had benefits.
As close to $500000 that really related to the 18 calendar year and that has to do with.
Jurisdictions, where you know you're getting the final assessments or maybe the results of your appeals in the first part of the year for the year prior and that's that's the number that relates to our 2020 same store pool, that's kind of beat have this 500000 dollar kind of artificially low 19 number comp.
So that that affects the 3% to 4% Opex growth range that we gave for 2020 that affects that total opex number by about 50 basis points.
The the property tax expense growth assumption in our numbers for 2020 is 5.5% to 6.5% and that that is affected by this $500000 to the tune of 150 basis points, so like a normalized growth.
In other words would be closer to 4% to 5%.
That helps add.
That's very helpful and then if I could switch over to.
Just marketing spend.
I think I heard 13% year over year, and the corridor and so forth.
How are you guys thinking about that it and 2020 and sort of what do you see out there is there any sort of alleviation in terms of the pressure or is it still in Florida.
You know upward pressures on those on those numbers.
Yes, Ronald so it was 9% for the quarter that compares to 12% in third quarter, which were both elevated from from the first half of the year. So we have seen an up tick in that spend for 2020 were projecting in the 12, sorry, 10% to 12% growth range.
So there there's pressure and you're seeing that across the sector, but we've we've been successful on trying to keep that to a manageable level.
Thats currently what's baked into our expectations and we think some of that has to do with the markets in which we operate we don't see the same competition for key words in some of that smaller and.
Secondary tertiary markets.
And we were 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, So arland how much of the internalization of secure <unk> secured care was.
More of a.
A case studies show your other pros versus.
It is something that is more kind of different by your own personal or the co founders personal reasons.
There's no doubt that the.
But the internalization an important part of that was to be leader, a b, a leader and demonstrate that to the other pros.
I think I'd say you you could probably call. It maybe 50 50 in terms of the way that broke out even.
And what kind of feedback or you're getting from your other pros about prospects of internalization, because I would imagine that I kinda exactly three to three times, a management contract EBITDA or four times.
But it's a pretty accretive part of that business thing a pro.
You're right and so the general feedback varies a lot by by pro I think fundamentally it comes down to two things one is their personal situation in terms of you know if they might have a family member in the business at wants us continue to manage that profile.
For quite a few more years versus if they don't.
Obviously that has a bearing on it on the timing and then the other thing is just looking at where we see the opportunities for secure care stock I mean, I mean for NFC stock going forward versus remaining as an independent pro because you know as a when you convert you.
Give up that disproportionate upside, but you also get the benefit of performing at the rate that the entire company performance.
And you know frankly, I'm very bullish on the off the opportunities for the entire company for NSS stock So I'd like having.
Those SP units converted to older units and being followed following the entire performance or the company and so that would be part of the analysis of the individual pro as well thinking about you know do why have better opportunity up side looking at how the whole company will do or am I better to just focus my upside a lot of it is on me.
Hi specific markets.
And and so I think that will come into into play as as pros evaluate that.
Okay, and and turn to your same store revenue guidance I'd, you're not really guiding to where any type of deceleration and trends.
So maybe can provide a little more color. What you know what were to kind of various line items that you're thinking about that let just at a pretty good guidance number.
Hey, so keeping this is this is brand and you are talking revenue, specifically, sorry I'm optimistic.
Yeah.
Okay, Yeah, so 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 so.
You know what went into that was frankly, the buildup of our individual pro property budgets and what they were seen in their markets and obviously our.
Top down kind of macro view as we went through the budgeting process, but were you I mean, you hit it on the head. It's it's not much more complicated than that we're kind of expecting the the entirety of 2020 to look more like fourth quarter 19, which you can read through that the say for our portfolio, that's kind of bottoming out, but then bumping along that bottom.
For the next year.
So I don't want put words in your mouth, but if the pros lead up to a budget santyl revenue budget of.
X percent is that correct to assume that you guys take like a conservative hair cut approach at the high level macro.
Down like you said two hair cut that number is that the way would work.
No I wouldn't say here. Thank you Ben 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 I storage portfolio. The pros aren't focused on so if we see any discrepancies in a market, where our pros operating and we operator, we're obviously the numbers, we see from our from our public peers.
That's where the dialogue happens whether pros, but there's not really like a top side hair cut its really just a continuous dialogue before we finalize on a on a final number. An example of that he then would be Tommy talked about at the beginning of 2019, we were seeing street rates on average, 3% to 4% below the year before.
At the end of 2019, we're seeing street rates flat through the year before so we're seeing that now we're looking at we've hit the bottom in our opinion now we're not going to get off the bottom for awhile, 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 the.
This whole year, and then start to come out of it as we go into 2021. So I think when it's all said and done I mean, we'd like to be positive positively surprised on the upside we think that our guidance is very realistic.
Okay. That's helpful. Thank you.
And congratulate you Farley.
Thanks, Kevin.
Our next question comes from Stephen meet with anchor capital Advisors. Please state your question.
Yeah. Good morning could we go back to the the statement that you basically kind of estimate that 45%.
Of your facilities face sort of competition or new competition within five miles I.
I was wondering how the mix of that 45% is between say smaller operators versus the national chains.
And does that sort of impact.
You are thinking about things.
Yeah, Hi, Steve I think that Oh, we definitely have less competition from the National change then most of our peers and it does impact us because we do know for example, there are some of the large a large chains that if.
There are a new competitor are extremely aggressive on pricing to fill those properties up and we have some of that but my guess is I don't have an exact number but my guess that 45%, it's probably more like 15% to 20% of that is where we're competing with a large now.
Additional chain and more than half of it is really more.
More of a local us a smaller operator that might have you know five to 15 properties.
So what do you see in terms of the actual kind of a crossover point in terms of new supply.
And a little bit more relief from the standpoint of a new 'cause yeah sort of wondering what the returns on new construction or at this point it.
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.
Oh, it's taking a lot longer for them to fill up.
And remember when we say that 45% we're looking at if the stores been open in the last three years. So any store opened in 2017 18 and 19 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, 45% will be the worst or if it goes to 46, but were you should hit the worst sometime this year and then start going down so whatever that peak, let's say it comes out the 46% and then it goes starts going down and maybe the next quarter it might before.
42, and slowly go down like that.
It turns that values are getting on new development today in most cases.
In my opinion do not justify the risk now obviously, everyone has their own opinion on it but but I personally am not doing any new development and.
We have nothing going on and then I say Oh, we have a few pros are still have a few new development projects are 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.
What yeah. After after the transaction what does that 1.48 go to roughly.
Yes, yes, roughly it will go down to around one in a quarter. It does depend on how each pro does but as we just mathematically pull those units out and say the others do the same comes down to around one in a quarter.
Okay. Okay. Thanks.
Thanks, Steve.
Ladies and gentlemen. This concludes today's question and answer session I'll turn it back Tomorrow Fischer for closing remarks. Thank you.
Okay. So 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 essay and just as a reminder, if there are additional details around the internalization of secured here in the 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 event essay and we look forward to seeing many of you in coming weeks. Thank you.
Thank you. This concludes today's conference all parties may disconnect have a great day.