National Storage Affiliates Trust

NYSE:NSA

Earnings Call Transcript 2018-Q1

[Operator]

Greetings, and welcome to the National Storage Affiliates First Quarter 2018 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Marti Dowling, Director of Investor Relations for National Storage Affiliates. Thank you. Ms. Dowling, you may now begin.

[Marti Dowling, executive]

Hello, everyone. We would like to thank you for joining us today for the first quarter 2018 earnings conference call of National Storage Affiliates Trust. In addition to the press release distributed yesterday, we have filed an 8-K with the SEC containing our supplemental package with additional detail on our results, which may also 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 the company's website and in filings made with the SEC.

Today's conference call is hosted by National Storage Affiliates' Chief Executive Officer, Arlen Nordhagen; Chief Financial Officer, Tamara Fischer; and Senior Vice President of Operations, Steve Treadwell. Following prepared remarks, management will accept questions from registered financial analysts. I will now turn the call over to Arlen.

[Arlen Nordhagen, executive]

Thanks, Marti, and thanks, everyone, for joining our call today. I'd like to begin by noting that April 2018 marked the 3-year anniversary of our initial public offering, 3 years during which we achieved transformative growth. We came to the market to offer investors a differentiated strategy in the self-storage space, providing investors the benefits of a national operating platform and a strong balance sheet, while at the same time offering the advantages of a local market presence and expertise from our PROs. Our thesis was that this strategy would result in better long-term results, and we believe we have delivered on that promise.

A few of our accomplishments include. We've generated an industry-leading same-store year-over-year NOI growth, averaging 9.3% for the past 12 quarters. In addition, our year-over-year core FFO per share growth has averaged 15.7% during these same 12 quarters. We've almost tripled our portfolio footprint over the past 3 years to approximately 34 million square feet across 541 stores in 29 states, and we've expanded our platform to 8 high-quality PROs with deep industry experience to execute our strategy. Plus, we've added a joint venture portfolio of almost $700 million as an additional source for growth. And finally, we've consistently raised our cash dividends to our shareholders, having raised our quarterly dividend rate by almost 50% over these 3 years.

While we are proud of these accomplishments, we're not content to rest on our laurels. Our strong results are only a starting point for NSA, and we believe our platform is uniquely designed to continue to deliver outsized growth and value creation over the long term. The first quarter of 2018 was really no different. Our first quarter core FFO per share once again grew at a double-digit pace, up 10.3% from the first quarter last year, taking advantage of both the strength of our operating platform and our unique acquisition strategy.

Turning to acquisitions. We've had success in finding external growth opportunities and are pleased to report we closed on 25 wholly owned properties and 1 joint venture property in the first quarter of this year, making this our strongest first quarter of acquisitions on record. Total consideration for these acquisitions, which added 1.4 million square feet to our portfolio, was approximately $145 million, funded through cash, the assumption of mortgage debt and the issuance of OP equity. Notably, this included our first issuance of perpetual preferred OP units, which provide another source of equity for us to offer sellers to achieve a tax-efficient transaction. All new acquisitions in the first quarter were primarily within our existing markets, including Phoenix, Texas, Florida and Kansas.

Now I'd like to take a moment to update you on our view of market conditions. First, fundamentals on the demand side remained solid. Economic growth has accelerated, and we see resilience in the labor market as tax cuts are fueling job creation and increased consumer spending. This has resulted in steady growth in demand for self-storage space in almost all of our markets and a significant increase in move-in activity over last year. On the other hand, while demand remains good, we expect that we'll continue to see our pricing power impacted by new supply in several markets, where supply growth is exceeding demand growth. In particular, we're seeing this in Portland, Oklahoma City, Raleigh and Dallas. Fortunately, it looks like we're starting to see a slowdown in the planned construction of new facilities, which we believe will result in deliveries peaking late this year and supply and demand approaching equilibrium in most of our markets in 2019. At this point, the percentage of our stores exposed to new supply is less than 20%, roughly in line with last quarter.

As we've discussed, self-storage is a local business, and our partnership with our PROs enables us to utilize their on-the-ground knowledge and expertise to manage our business amidst increasing competition.

With this backdrop, I'd like to remind you of several key differentiators for NSA. Our portfolio is focused in markets with strong job growth and population drivers, which have historically generated sufficient demand to absorb new supply. In addition, we've been in this business for decades. Our belief is that maintaining street rates and passing along reasonable rate increases to existing customers while accepting modest declines in occupancy is a better approach to dealing with the short-term impact of new supply. We believe this approach positions us better for long-term NOI growth.

Let's talk for a few minutes about our external growth prospects. As most of you know, the self-storage sector is extremely fragmented, with nearly 80% of self-storage properties under private ownership in the U.S. At this time, we believe current market conditions have created opportunities on the acquisition side as seller expectations have rationalized. Having started the year with a strong pace of acquisitions, we continue to maintain an attractive pipeline of opportunities. Specifically, our captive pipeline stands at over 100 properties valued at over $900 million. In addition, our pipeline of third-party acquisitions remains strong. We are also constantly evaluating potential new PROs and have ongoing discussions with several high-quality private operators. And finally, our joint venture strategy allows us to leverage our platform and our balance sheet while growing our portfolio's scale and fee income.

Before I turn the call over to Tammy, I'd be remiss if I didn't mention the promotions we recently announced here at NSA. Effective July 1, Tammy will be promoted to President while retaining her CFO role. In addition, Steve Treadwell will be promoted to Executive Vice President and Chief Operating Officer, along with continuing in his role as President of NSA's property management company. And Brandon Togashi will be promoted to Senior Vice President and continue as the company's Chief Accounting Officer and Controller. These promotions are much deserved and reflect the outstanding contributions of each of these individuals to NSA's success.

In closing, the first quarter of the year was directly in line with our expectations, and we believe our diversified portfolio and differentiated strategy as well as our excellent leadership team position us well for ongoing success in 2018 and beyond. With that, I'll now turn the call over to Tammy.

[Tamara Fischer, executive]

Thanks, Arlen. As we mentioned last quarter, we've expanded our same-store pool to include 376 stores across 20 states for 2018, which represents nearly 80% of our wholly owned portfolio. For the first quarter, our same-store revenue increased by 4.2% driven by a 4.4% increase in average rent, and NOI grew by 4.4% year-over-year. Both metrics were in line with our expectations with revenue slightly above budget and NOI right on budget as a result of slightly higher-than-forecasted expenses.

Same-store operating expenses increased 3.9% over the prior year driven by a number of factors. Property tax increases continue across the portfolio with increases even greater than anticipated in Georgia, Washington state and in Colorado. Personnel costs were impacted again across the portfolio by higher minimum wage laws and very low unemployment levels around the country. We are spending more on marketing and advertising, particularly in markets where we're challenged by excess new supply. And finally, utility expenses were higher in several markets for weather-related reasons.

With respect to individual markets in our same-store portfolio, our stores in both Northern and Southern California remain strong, delivering outsized revenue and NOI growth. In the South, our Florida stores also had a good quarter, as did our stores in Shreveport and most of North Carolina. In the Northwest, our Washington stores turned in another strong performance, as did our stores in Bend, Oregon. We felt the impact of new supply in Portland, but we continue to achieve rate growth while absorbing modest decreases in occupancy. Certain submarkets in Texas, especially around Dallas, were impacted by new supply, which resulted in higher advertising and marketing spend. Our stores in Oklahoma City and Tulsa both remain challenged by new supply as well as relatively lower economic growth.

Lastly, the challenges from new supply in the Raleigh-Durham market are impacting our stores there and weighing down an otherwise strong performance from our North Carolina portfolio. We'll continue to benefit from both our geographic diversity as well as the depth of our PRO networks in their respective markets, enabling us to focus on meaningful growth over the long term rather than short-term quarterly movement.

With respect to our balance sheet, we continue to work on expanding our sources of capital to maintain ample capacity and liquidity to fund our growth in our portfolio. For example, during the first quarter, we completed our first preferred OP unit issuance, closed a new $125 million term loan and simultaneously expanded our credit facility borrowing capacity, including an accordion option to $1.3 billion. At the end of the first quarter, our net-debt-to-EBITDA ratio was 5.8x, which is well within our stated target range of 5.5x to 6.5x. At the end of the quarter, we had just $73 million outstanding on our $400 million revolving line of credit and only $3 million of debt maturities through 2019, leaving us with the flexibility and dry powder to achieve our growth objectives.

Finally, we are reaffirming our guidance for 2018, notably, core FFO in the range of $1.33 to $1.37 per share, same-store NOI growth of 4% to 5.5% based on revenue growth of 4% to 5% and expense growth of 3% to 4%. We anticipate our acquisition activity will range between $250 million and $400 million for balance sheet acquisitions with an additional $50 million to $100 million of acquisitions in our joint venture, where NSA is a 25% equity owner.

Thanks again for joining us today, and we'll now turn the call back to the operator to take your questions. Operator?

[Operator]

[Operator Instructions] Our first question today comes from the line of Todd Thomas with KeyBanc Capital Markets.

[Todd Thomas, analyst]

First question just regarding guidance. So you affirmed guidance, and I think if I heard at the end, you just -- you maintained the same-store forecast. I was just curious -- you're turning toward the low end of the ranges for both revenue and NOI, and I was just curious if there are any updates to that forecast or if you're expecting growth to rebound later in the year.

[Arlen Nordhagen, executive]

Todd, thanks for the question. We do -- our budget did show that we would expect to see higher results especially in the last half of the year. If you go back to 2017, you'll notice that Q1 and Q2 were very difficult comps. Both of those quarters, we had 8% to 9% same-store NOI growth, and that wasn't nearly as high in the last half of the year. So our budget and forecast does show slower growth in the first half of the year and higher in the second half, but it's primarily because of the comps.

[Todd Thomas, analyst]

Okay. And then on the operating expense side, with regards to the web and marketing expense increases, do you expect that to stabilize? Or should we expect to see further increases as the year progresses?

[Steven Treadwell, executive]

Todd, it's Steve. Yes, with respect to marketing expenses, we planned on spending more this year. It's a tougher environment out there with a lot of new supply, and we're certainly fighting the occupancy game. So we knew we would spend more on marketing this year than last year, and that was built into our budgets and built into our guidance. So everything is really to plan with respect to those expenditures.

[Todd Thomas, analyst]

Okay. And then just in terms of operations here. So that year-over-year spread -- as you mentioned, in terms of occupancy, that year-over-year spread did get a little bit wider in the quarter. You lost a little bit more occupancy. I know it'll pick up seasonally now for several months, but I just wanted to get an update with the peak leasing season getting started here, whether or not you're changing how you think about maximizing revenue in the context of managing rate and occupancy.

[Steven Treadwell, executive]

Yes, sure. So we were down 40 bps on average occupancy for Q1. But the good news story is that as we ended the quarter, we were even with last year, March-versus-March, so that was good news. We saw the same thing at the end of April, basically even with last year. So really, I think occupancy is going to be flat probably for Q2 and maybe beyond. I would expect occupancy to be neither a tailwind or a headwind for 2018.

[Arlen Nordhagen, executive]

And that would be flat compared to last year. Of course, we are seeing good seasonality, very strong move-ins, fortunately, but occupancy is pretty much right around last year's numbers.

[Todd Thomas, analyst]

Got it. And in some of the markets, in some of your larger markets that you mentioned where you're seeing some of the impact from new supply, around Portland, it looks like maybe in Atlanta, around Atlanta, there might be some coming, what's your forecast for over the next few quarters there in terms of how you're managing those stores? Are you managing them any differently than you are elsewhere across the portfolio?

[Steven Treadwell, executive]

With Portland, we've seen it for a while on occupancy, the new supply challenges there and we continue to work through that. The good news in Portland and Oregon as a whole, frankly, is that we're able to do this at pretty steady rates. So we've been able to hold firm on rates and push current customers up as needed to drive the revenue, even though we're still working through the new supply in Portland and beyond. Atlanta and Georgia, in general, that's really a question of 3 stores. 2 of them had some road construction right out front that interfered with operations and 1 of them, as I think we've mentioned, had a fire that we're still fighting to recover from. If you take those 3 stores out, frankly, Atlanta and Georgia as a whole is very healthy. So I'd expect to see that market improve through the year.

[Operator]

Our next question comes from the line of Todd Stender with Wells Fargo.

[Todd Stender, analyst]

Just on the acquisitions acquired in Q1 and then so far in Q2. Are you taking on any more risk and reward, I guess, on specializing more on the newly built properties versus stabilized stuff? Maybe any mix there that you can provide.

[Arlen Nordhagen, executive]

Yes, Todd, we have not moved into buying [ CFO ] deals or unstabilized deals with a couple of very minor exceptions in some markets where we're trying to build some market share. But it's really minimal, like 1 or 2 properties. So pretty much, we're buying stabilized stores, and that has been our MO, really, since we've gone public.

[Todd Stender, analyst]

Okay. And then any changes to your maintenance CapEx assumptions, I guess, on a square foot basis for both your existing portfolio to stay competitive, and then any assumptions that you're putting into your underwriting for the new acquisitions?

[Arlen Nordhagen, executive]

We do slightly increase our maintenance CapEx budgets every year pretty much with inflationary items related to construction cost and then also any additional items that we identify specifically related to something that might be coming up in a specific year. But it's nothing material. We are finding that generally, our maintenance CapEx budgets, we've actually been very, very fortunate that those numbers have been very consistent.

[Todd Stender, analyst]

And what do you assume right now, what's a good number for us to think of?

[Arlen Nordhagen, executive]

I think our blended average right now is about $0.18, something like that, a square foot for just maintenance. And then we also categorized into different categories. We have things like -- we have revenue- or NOI-enhancing CapEx, but those would be itemized separately in our supplemental.

[Todd Stender, analyst]

Just finally, when you look at Oregon and Georgia, for example, and you see the occupancy slippage, but then revenues are positive, so you can see some pretty good rate improvement. Can you just talk about how the revenue management system is helping you better optimize the portfolio now that it's spread across the entire footprint?

[Steven Treadwell, executive]

Yes, sure. This is Steve. Certainly, Oregon and Portland in particular are great examples of how revenue management has helped us weather a pretty tough challenge with respect to new supply. We think we're being very smart about starting rates for new customers in that market even though we are competing against some tough new supply. And we are definitely able to send out the rent increase letters to help drive revenue in that market. And so even though Oregon has been challenged, we have been able to successfully increase revenues consistently through this period, and we'll keep pushing in that direction. Georgia, same thing. Like I said, that's a healthy market. We will see that improve and it's just a story of a couple of outlier stores that will change materially here as we move through the year. But in general, I'd say we're very proud of our revenue; management has accomplished the objectives we were looking for in terms of setting our street rates in accordance with the current market and being more effective with that and being more disciplined and more consistent with our rent increases to current customers, which I think, as you know, is really how we're driving revenue growth this year and largely how we grew it last year as well.

[Operator]

Our next question is coming from the line of Jeremy Metz with BMO Capital Markets.

[Robert Metz, analyst]

Arlen, in your opening remarks, you noted seeing a slowdown in plan development. Any more color you can share on exactly what you're seeing, what's driving the slowing in that pipeline just given that fundamentals and development margins are still healthy today?

[Arlen Nordhagen, executive]

Well, Jeremy, I'd say a couple of things. One is that I would say definitely, development margins have tightened. They're nowhere near where they were certainly 2 years ago and even last year, and we're starting to see the more sophisticated developers, particularly who are predominantly the ones building in this cycle. These are developers that have come out of other sectors, have capital, great construction expertise, but they may not know much about self-storage. And so they are finding areas where the supply-demand are not in equilibrium. We've seen a lot of those planned properties being canceled off the list. We've also seen some shifting of where new development has gone into the markets where they haven't had it, and that's where you need it. So the irony is that last year, if you look at the total stores built nationwide, it wasn't that far off of what you needed if they were all in the exact right location. But of course, they weren't. There was way too many in a few markets and not enough in others. We think the peak will probably be this year, late 2018. 2019 won't be a big slowdown but should be a little bit slower. And then I would anticipate beyond that, hopefully, numbers that are in line where you have a better balance of supply and demand in the right markets.

[Robert Metz, analyst]

I appreciate that color. And then just wondering in terms of your conversations with potential PROs. Are you finding any shift in mindset today as occupancies start to peak out here? Supply's obviously increasing? Revenue growth is still good, but it's coming down a little bit. So I just wonder if this is creating some added conversations as some of these local and regional operators start to reevaluate the benefits of being on a larger platform as some of that low-hanging fruit kind of moves to -- behind them?

[Arlen Nordhagen, executive]

I don't know if it's increasing the conversations. We've had a lot of conversations for a long time. It may be moving people a little closer toward making decisions. Our goal has been to add 1 or 2 PROs each year. We've been able to add a new PRO each year since our IPO. I'm hopeful, again, that we would have another PRO added this year. But we can never control the timing on that because it really is, I'd say, predominantly driven by personal considerations that each PRO has relative to where they are in their career, in their estate planning, in their management team planning, all of those kinds of things. It is definitely true that the benefits of scale in terms of the operating platform have really proven out, and so we can demonstrate that to prospective PROs. We can just show them the numbers. And that certainly has a bearing on their decisions as it's harder to continue to grow revenues. But I think it's more important the personal issues, frankly, on timing of when people decide to do something.

[Robert Metz, analyst]

All right, that makes sense. And then just one last one here for me. You started the call talking about the 3-year anniversary since the IPO. You obviously posted strong growth both internally and externally, but can you just maybe comment on what's gone better than your initial expectations over that time? What's lagged and then just what do you see for NSA over the next few years?

[Arlen Nordhagen, executive]

Yes. I would say, for sure, the one thing that I would say has gone better than we anticipated is the volume of third-party acquisitions that our PROs have been able to generate through their relationships. I would have never expected to see anywhere near that level. I thought our acquisition would have been driven really by the new PROs coming in themselves. And certainly, they drive it, but it's not their stores. It's been -- about half of our growth has been from stores of other owners that they just know in their markets and a ton of that has been off-market stuff. So that's been the biggest surprise to me. I'd say the thing that's been maybe lagging would probably be the speed of decision on PROs deciding. It really takes a PRO a long time to decide to join, and it really comes down to all these personal issues that I referenced a minute ago. I'd say, as we look forward, I'm very encouraged. I would like to ultimately see us get up to about a dozen PROs, so that would be to add 3 or 4 more PROs. Cover the country better geographically. We still have large sections of the country that we're not covering yet. I'm really encouraged by the way that the combination of our same-store NOI growth delivers good FFO growth. And then you add on top of that the FFO growth that we get from our accretive acquisitions, and it makes it very powerful in terms of -- I mentioned the double-digit FFO per share growth, and I feel like that is something that's really powerful, the combination of those 2 features, and I think we'll be able to continue to do that as we go forward in the future.

[Operator]

Our next question is from the line of George Hoglund with Jefferies.

[George Hoglund, analyst]

So looking at third-party acquisitions. Are you seeing any change in the buyer pools? Like, are you seeing more larger private or public players?

[Arlen Nordhagen, executive]

Yes, we definitely see, George, a lot, lot more, I would call them, institutionally backed private buyers in our competitive situation. Now the good news, I mean, like, for example, in the first quarter, almost all of our acquisitions were off-market in the first quarter of this year. Now obviously in those cases, we're not seeing this competition. But when we're in a market where there's a marketed deal out there, there's a lot of money interested in the sector. Because regardless of the fact that we are slowing down as an industry, and it wasn't realistic to think we would stay in the 9%, 10% same-store NOI numbers that we've seen in the past few years, but we're coming down now to the long-term historical averages, which are like 4% a year revenue growth, almost 5% a year NOI growth. Once you get into those numbers, that's still some powerful returns that can be generated. The structure of our industry is still very favorable and it's attracting a lot of capital. And that capital, a lot of it is private capital, and so we do run into a lot of those as buyers, which has meant we can't really push cap rates up. Now fortunately, they have stabilized. They've turned up a little bit, so at least we're paying a little better cap rates this year than last year. But it's not like, oh, cap rates are up 50 basis points or something. We're talking maybe 10 basis points better cap rates than a year ago.

[George Hoglund, analyst]

And does that increase demand for assets in your markets? Does that also sort of impact the pace of adding the next PRO or...

[Arlen Nordhagen, executive]

It definitely increases demand in our markets, but I think, overall, that actually helps us in adding PROs because the PROs recognize the benefit we can offer them as they want to grow in their territories and the difficulty that they might have in growing on their own without a good source of capital partner like NSA. Now the exception to that would be that, certainly, any of the PRO candidates can find lots of private equity to back them on a joint venture-type basis, but they don't get the benefits of the platform tools, the liquidity and estate planning benefits and all of those things that they get through NSA when they do a joint venture. So they can get just as good as a returns from a financial, pure financial standpoint in terms of the joint venture structure, but they can't get the other benefits that they would get through NSA.

[Operator]

[Operator Instructions] The next question is from the line of Smedes Rose with Citi.

[Bennett Rose, analyst]

I'm on with Michael Bilerman as well. I just wanted to ask, you talked a little bit about the seller expectation just slightly more rational. That's definitely different from what we've heard on other calls and where apparently pricing is still very steep, despite accelerating fundamentals in the business. And I'm just wondering if you -- do you think it's just a reflection of the markets that you're looking at? Does it have something to do with conversations with the PROs where you have a captive pipeline and maybe they're more willing to be flexible on pricing? And then just as you look at your total acquisition outlook for the year, like what percent would you expect to come from the 100 properties that you mentioned are in the captive pipeline, which I assume means being developed by the PROs, right?

[Arlen Nordhagen, executive]

Yes, the captive pipeline are the ones that our PROs manage. So Smedes, I would say that -- a couple of things. One is it's certainly not a buyer's market out there. It's still a seller's market. I mean -- and I referenced that our cap rates are maybe 10 basis points better than they were a year ago. Well, if you go theoretically just by looking at what's happened to the 10-year treasury, they should have gone up quite a bit more than 10 basis points, and that's reflective of the competitive market. It's still a tight market and a difficult one, but we're -- still been successful, I'd say, largely because of so many off-market deals that we get. And then your comment about the PRO captive pipeline is certainly there as well. Those really end up being triggered more by either when their debt maturity is or when they're stabilizing occupancy. So this year, we don't have a lot of properties from the captive pipeline. I think this year, it's probably only 10 or so, maybe even less of the 100 that are scheduled to come in for the rest of this year from the captive pipeline. But the off-market deals are significantly beneficial to us. And then the markets do matter, too, because we do focus more on what we call the Tier 2 markets, the MSAs 21 and up. And we don't have as much competition there, although we certainly have competition, but at least the cap rates are better in those markets on average than, say, the top 20 markets.

[Bennett Rose, analyst]

And then here's Mike Bilerman.

[Michael Bilerman, analyst]

Yes, so I was wondering on Page 14 of the supp, the breakdown of all the units and shares, can you talk through which one of your PROs converted during the first quarter their subordinated performance units and how that played out?

[Tamara Fischer, executive]

So on January 1, '18, was the first time any of our PROs could convert SP units to OP units after the 2-year lock-up period after our IPO. So the way that process works is that the individual who wants to make the conversion needs to make an election by December 1 and then the conversion becomes effective on January 1 the following year. So we had a few PROs actually who elected to convert what we'd call -- internally, we refer to it as excess SP equity, and so we went through the process to review that with our Audit Committee and our Board and applied it -- and I don't know if we've ever walked through it with you, but there's a mathematical conversion process that we walk through with, as I say, with our board and then triggered the conversion effective 1/1.

[Michael Bilerman, analyst]

And so that -- at least it looks based on the proxy, that, that was partially Arlen, [ Kevin ] and then [ Tim Warren ] with the bulk of it? I mean, I guess, why not put out...

[Arlen Nordhagen, executive]

Yes, none of it was from me, but Kevin and Tim were there, a couple of other PROs were there as well. We only disclosed any PROs that are on the Board of Directors, of course. But the aggregate total was about 1 million, a little less than 1 million shares of SP units that were converted into OP units. And when a PRO converts an SP unit into an OP unit, they take a haircut. Basically, their cash flow, their dividends go down and they move from a subordinated position on that piece of equity into the same position as our common shareholders, which is the priority cash flow position. Whenever that happens, it's always slightly accretive to our common shareholders. The amount of accretion depends upon how much of the conversion is there or not. It's a 10% haircut, so there's a 10% accretion benefit there, but it only applies to the shares being converted. So this is only on 1 million shares out of roughly 100 million shares that have the 10% benefit.

[Michael Bilerman, analyst]

And then how much more is in the conversion window? And I would say that having more details about all of the subordinated partnership units would be extraordinarily helpful because I think it would provide significant clarity to your common shareholders who own the firm in terms of accretion, dilution, ownership, who the PROs are, what ownership they have, what stores are in the platform, how those stores are performing. There is substantial amount of detail that is missing from your disclosure that I think investors certainly need and want.

[Arlen Nordhagen, executive]

Well, if you look on the Page 14 that you referenced, Michael, that really gives you all the detail that you need. The only exception to that comment is that this is a "worst-case scenario" because this assumes that all shares are convertible at the minimum penalty, and that's not quite true. But that's the way that our auditors preferred that we disclose it, and our lawyers, that we disclose it on a worst-case scenario from a dilution standpoint. So basically, all the PROs that were there at the time of the IPO have now met the minimum 2-year hold period, and only the newest PROs would not be eligible. So really, this, from a shareholder standpoint, shows the worst-case scenario.

[Michael Bilerman, analyst]

There's still a lot of details that are missing in terms of individuals, PROs, terms, when they came on, when they came off, how it ties out to ultimately the waterfall and cash flow. I mean, I don't -- you know the aggregate numbers, but I think having the details behind it and how it all plays out ultimately to your income statement and ultimately shares is extraordinarily important to avoid any things down the road that may surprise investors.

[Arlen Nordhagen, executive]

Well, we would not disclose that information as that would be both private and a detriment from a confidentiality and a competitive standpoint. We disclosed what we believe is necessary for investors to understand any impact that could be going to the investor.

[Operator]

Our next question comes from the line of Ki Bin Kim, SunTrust.

[Ki Bin Kim, analyst]

Can you talk about some of the reasons why the PROs converted SP to OP?

[Arlen Nordhagen, executive]

Well, the main reason that anyone -- you can't do it until you have number one, either excess SP equity; or number two, you're retiring. Those are the only really 2 events when a PRO can decide to convert. And to the extent that a PRO has excess SP equity, they're able to do that at any time they want to after that 2-year window is there. And so reasons are primarily personal. They might have to do with estate planning issues. They might have to do with some -- wanting some liquidity issues. They're really -- but we -- as you know, Ki Bin, we have a very complicated formula that make sure that all of our PROs have a very sizable amount of equity subordinated, and that's what we call the required SP equity. But let's say a PRO has a required SP equity of $50 million for their portfolio. If their actual SP equity value is $100 million, that $50 million of excess, they don't need to keep it as SP. They can turn it into OP and that would give them differences in their liquidity and estate planning issues because SP equity, by itself, is never liquid. It cannot be liquidated in any way. It only can be converted into OP equity.

[Ki Bin Kim, analyst]

But the payout ratios were different, right? The returns...

[Tamara Fischer, executive]

Conversion ratio.

[Arlen Nordhagen, executive]

Well, the returns are always lower if they convert from SP to OP because they have to take a 10% haircut at least. In a retirement, it could be even higher than that. So they would only convert to OP -- they would never convert to OP for purposes of getting a higher return, but they might convert to OP for liquidity types of reasons.

[Ki Bin Kim, analyst]

Okay. And so it's been 3 years, and congratulations on your 3-year anniversary. Any chance that you're going to internalize any of these PRO management contracts in the near term?

[Arlen Nordhagen, executive]

As you know, the way that, that works is upon a retirement event. And so we do -- for a retirement event, we have the first 2-year lock-out, that's now over. Then in year 3, the retirement event penalty is a 20% haircut instead of the 10% minimum. Year 4, it's a 15% haircut. And then in year 5, it goes to the 10% minimum. So I definitely don't anticipate any PROs wanting to retire before year 5. And that would be the earliest, I would expect, any possible internalization of the management contracts from those PROs. And I have no indication that anyone is expecting to even do that in year 5, but that would be the first likely year that someone might consider it. As I said at the time of the IPO, my guess is by year 10, half of the PROs will be retired, and we might have half the properties internalized under management. But I don't control that and I don't have a crystal ball to know exactly. But realistically, Ki Bin, nothing's going to happen until year 5.

[Ki Bin Kim, analyst]

Okay. And can you give us an update on where your system buildout is, your platform, the way your processes of advertising or rate management has evolved in the past couple of years to where you are today? And I know in the beginning, some PROs did it on their own. Some used your platform. Some kind of used a combination of both. Where does that stand today?

[Steven Treadwell, executive]

Ki Bin, this is Steve. So we do have revenue management rolled out throughout the portfolio, but you're right, there's a small diversity in practice. Most of the PROs are on our NSA platform, but we have a couple that are using different methodologies. But we're all following the same general concept and philosophy when it comes to rate management and in sending out the rent increases. So while there's a little diversity in practice, we don't necessarily see a diversity in results because of that. And when it comes to advertising and marketing, each PRO manages the marketing dollars for their particular portfolio that they're managing, and we do give them autonomy on that. But we do also provide a common platform for the PROs to take advantage of. And to a certain of our smaller PROs, we also extend additional marketing services that they might otherwise not be able to do in-house. So it's -- once again, we allow the PROs to manage their portfolios appropriately, and we just watch performance and make sure that everything is on track.

[Ki Bin Kim, analyst]

Okay. And I don't know if I missed this or not, but did you guys give any color on street rates in the quarter and April and promotion?

[Steven Treadwell, executive]

Not particularly, so let me update you on that. For the quarter, we saw street rates basically flat, maybe down up to 1% but a little bit less than 1%. So far in April, we're seeing something very similar, maybe a touch better. And so as with occupancy, I think street rates will be flattish for the time being. But the good news is that I've seen a little more acceleration here over the last couple of months than we saw last year this time. Of course, we're accelerating rates because of the season, but I think we're accelerating them a little bit faster than we did last year. So there are some positive things going on out there. But overall, I think the message should be that street rates are basically flat.

[Ki Bin Kim, analyst]

So are you getting a majority of your growth from, I guess, the rollover of good news from last year? And the combination of existing customer rent increase revenue?

[Steven Treadwell, executive]

Yes, that's exactly right. On the margin, we're benefiting from a little bit less discounting, but that's not material enough to drive things. So really at the end of the day, it's about rent increases to our current customers.

[Operator]

We've reached the end of our question-and-answer session. I'll turn the floor back to Arlen Nordhagen for closing remarks.

[Arlen Nordhagen, executive]

Thank you, operator, and thank you, everyone, for joining today's 2018 first quarter earnings call. Our second quarter is looking to be solid as well, and we're very positioned to have a good quarter once again. We look forward to the year and plan to visit with everyone next month at the REITweek conference. Finally, as always, thank you for your continued support of National Storage Affiliates. Bye-bye.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.