National Storage Affiliates Trust

NYSE:NSA

Earnings Call Transcript 2018-Q2

[Operator]

Greetings, and welcome to the National Storage Affiliates Second 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 begin.

[Marti Dowling, executive]

Hello, everyone. We would like to thank you for joining us today for the Second 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 be found in the Investor Relations section on our website at nationalstorageaffiliates.com.

Please note that an overview of the new joint venture transaction we announced on July 10, 2018, may be found on the corporate presentation page of our website. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties. The company cautions that actual results may differ materially from those projected in any forward-looking statement. For additional detail concerning our forward-looking statements, please refer to our public filings with the SEC. We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures, such as FFO, core FFO and net operating income contained in the supplemental information package available in the Investor Relations section on our website and in our SEC filings.

Today's conference call is hosted by National Storage Affiliates' Chief Executive Officer, Arlen Nordhagen; President and Chief Financial Officer, Tamara Fischer; and Chief Operating Officer, 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, Marty, and thanks to everyone for joining our call today. With industry-leading growth in core FFO per share of almost 10%, our second quarter results were obviously very good, but the subsequent announcement of the planned acquisition of the portfolio of assets from Brookfield was clearly much larger in scale. So let me begin by providing an overview of that transaction. We were very excited to announce our second major joint venture with Heitman, a high-quality institutional partner to acquire a 112-store portfolio from Simply Self Storage, a subsidiary of Brookfield for just over $1.3 billion. The 8.7 million square foot portfolio spans 17 states plus Puerto Rico, overlapping 12 of NSA's existing states and adding 5 new states to our geographical diversification. This transaction is transformational for NSA's internal property management operations. And upon closing, will represent one of the largest M&A transactions in the history of the self-storage sector.

Let me touch on a few key points of the transaction. First, as of June 30, this diverse portfolio was 92% occupied and delivered average rent of $13.26 per occupied square foot. The asset locations both complement our existing portfolio and broaden our geographic footprint with significant concentrations in Michigan, Ohio, Minnesota, Tennessee and across 5 states in the Northeast.

The transaction includes 6 stores in Puerto Rico and 1 in Ohio, which will be immediately spun off by the JV as wholly-owned stores to NSA upon closing. We continue to evaluate our long-term plans and strategy for Puerto Rico. If we decide to exit that market, we will consider disposition of those assets after closing.

In addition, besides our pro rata share of earnings from the JV, we have an opportunity to earn a promoted interest above targeted return thresholds and will also earn fee income for the management platform services we provide to the JV. We expect these fees will allow us to leverage our G&A expenses to deliver an FFO benefit of approximately $4 million per year to NSA, net of related expenses.

Finally, the majority of the 105 properties in the JV portfolio will be rebranded as iStorage, and we expect to benefit from added scale in that existing platform as well.

We anticipate the transaction will close late in the third quarter of 2018, and Tammy will discuss the financing of this acquisition later in this call. In addition to this transaction, our other avenues for external growth remain active, as we continue to capitalize on our position as a strategic consolidator within the highly fragmented self-storage business.

Specifically, our captive pipeline still has about a 120 properties that we've not yet acquired, valued at approximately $1 billion. Also, our pipeline of third-party PRO-driven acquisitions remained strong. And finally, we remain in ongoing discussions with several high-quality potential new PROs.

Turning to our second quarter performance. We're pleased to report another quarter of good financial results. For the most part, our performance was in line with our expectations, including year-over-year growth in core FFO per share of 9.7% and same-store NOI growth of 4.2%.

In addition, we continued a good acquisition pace by closing on 12 more properties in our wholly-owned portfolio for approximately $63 million, at an average cap rate of 6.2%. Regarding overall conditions for self storage, we remain optimistic about fundamentals supporting continued growth and demand. Across our geographically diverse markets, economic growth is solid and job growth and household formation are fueling incremental demand for self storage. Against that backdrop and as we've discussed over the past several quarters, there are certain markets where new supply exceeds demand growth, and we're being impacted in terms of market street rates. While the diversity of our portfolio provides a level of protection against the short-term impact for supply imbalances in any one market, this quarter we were significantly impacted by new supply in Portland, Oregon, one of our largest markets, which had an outsized impact on our results.

Overall, we estimate about 20% of our portfolio is currently exposed to new supply, approximately the same as last quarter. Consistent with past practice, we're avoiding price wars and allowing for some degradation in occupancy in markets with excess new supply. We believe this is the best approach to optimize NOI growth over the long term.

Looking ahead, we expect new supply growth overall will peak in our markets by the end of the year. Data provided to us by Yardi shows a significant decline in the number of new construction loans in the top 100 MSAs for self-storage, which is a good leading indicator for declining number of new construction starts in the sector.

However, even with the decline in additional new construction starts, the new supply that has been built in the industry over the past 2 years must be absorbed by the markets. So we expect industry results for the next several quarters to be similar to what we've seen in the past few quarters.

With that, I'll now turn the call over to Tammy.

[Tamara Fischer, executive]

Thanks, Arlen, and thanks, everyone for joining us today. Yesterday, we reported year-over-year same-store NOI growth of 4.2% for the quarter and 4.3% year-to-date. Our results for the quarter were consistent with our expectations of slower growth due to a very tough comp from the second quarter of 2017, when our same-store NOI was up more than 8%. Same-store revenue increased by 3.6% this quarter, driven by a 3.1% increase in average rents and a 20 basis point increase in average occupancy.

Again, these results are consistent with our expectations both for the quarter and year-to-date. We expect same-store revenue growth will pick up somewhat in the last half of the year, given slightly easier comps in 2017. For that reason, we expect to end the year nearer to the low-end of our guidance range of 4% of 5% same-store revenue growth.

Our same-store property operating expenses increased just 2.4% for the quarter and 3.2% year-to-date over last year, despite continued pressure on property taxes, personnel costs and increased marketing spend in markets where we are up against new supply. We remain comfortable with our previously provided guidance for increased operating expenses this year, and we expect to end the year towards the lower end of our range of 3% to 4%. We believe the combined results of these expectations for same-store revenue and expense growth will deliver annual same-store NOI growth consistent with our guidance of 4% to 5.5% for the year.

With respect to market-by-market performance, our stores in states with good economies and without excessive new supply, such as California and Florida continue to outperform. Our stores in Indiana and Louisiana delivered strong same-store NOI growth benefiting primarily from low expense growth, driven by favorable property tax adjustments, a rare occurrence in our world. The one geographic area, which deserves attention this quarter is our second largest state, Oregon. Our 55 stores in Oregon represent nearly 15% of our same-store pool this year and 3/4 of those stores are in Portland, a market that is very challenged by new supply, frankly impacting us beyond our expectation.

This quarter, our Oregon same-store NOI growth was slightly negative overall, which was below our expectations, because sluggish revenue growth was further penalized by higher-than-expected spending on personnel costs and marketing. We're also competing with excess new supply in markets such as Dallas, Austin, Raleigh, Oklahoma and Phoenix. We expected those markets to deliver below average performance and that's proven true. In these markets with excessive new supply, our internal focus remains on avoiding price wars by sacrificing some occupancy to maintain rate discipline and utilizing the deep market knowledge of our PROs to determine the best path for a long-term growth strategy in each respective markets.

With respect to our balance sheet, our access to well-priced capital allows us to take advantage of external growth opportunities, and this remains a key pillar of our growth strategy. We had great execution on several recent moves to enhance our balance sheet.

During May and June, we amended 2 of our term loans to reduce the applicable margin spreads, resulting in approximately a 30 basis points interest rate reduction for these 2 loans. We also exercised the accordion feature on one of the term loans, increasing that borrowing by $75 million. On the equity side after quarter end, we issued 5.9 million shares in a common equity offering at $30 per share, raising net proceeds of $176 million. Short term, we used just over $100 million of the proceeds from this offering to pay down the balance on our revolver. We'll use the remaining proceeds plus borrowings on our revolver to fund our share of the equity in our 2018 JV and the 7 assets we'll bring on balance sheet as part of the Brookfield Simply portfolio acquisition.

At quarter end, our net debt-to-EBITDA ratio was 5.8x and today our $400 million revolver is completely available to us. After closing the JV and related acquisition transaction, we expect to have about $280 million available to us on a revolver. As we discussed, our plan is to finance the JV with 50% debt, and the JV has executed a term sheet with 2 life insurance company co-lenders to provide approximately $643 million in 10-year interest-only secured debt financing that we rate locked at 4.34%.

We expect to close this financing concurrently with the JV and acquisition transactions in September. Given the continued execution of our strategy and strong growth in FFO per share year-to-date, our Board elected to increase our second quarter dividend by 3.6% to $0.29 a share. It's worth noting this is our sixth dividend increase since our IPO 3 years ago. We're very pleased to continue to deliver a compelling combination of strong growth and income for our shareholders.

Finally, wrapping up with guidance. We acknowledge certain assumptions included in our previously provided full year 2018 guidance will be affected by our recent equity offering, the formation of our 2018 JV and the related acquisition. But importantly, incorporating all of these changes, we're pleased to reaffirm our previously provided guidance of $1.33 to $1.37 per core FFO per share for the full year 2018.

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 comes from the line of Todd Thomas from KeyBanc Capital Markets.

[Todd Thomas, analyst]

First question. So on the Simply deal, I was just wondering, can you just talk about the decision to acquire those 112 assets from Brookfield? And I guess, the question is just about the larger self-storage portfolio that Brookfield owns there with Simply. So what happened to the remaining assets, are they staying with Brookfield? Were they available for sale? Maybe you can shed some light there?

[Arlen Nordhagen, executive]

Todd, this is Arlen. We were very pleased to have the opportunity to buy those assets, fundamentally Brookfield and Simply are remaining in the business with about half of their assets, but the half that we're buying, roughly half, are all tied to certain debt maturities. And so these were properties that they were looking at as possibilities to either recapitalize or potentially sell. Obviously, in our case, we weren't interested in a recapitalization, but told them we'd be very interested if they wanted to sell those. And with the timing of the debt maturities we were able to negotiate a deal that we believe is very good for them and very favorable for us and our investors as well.

[Todd Thomas, analyst]

Okay. And then can you provide some detail around the timing and expectation for your partner, for Heitman, to commit the full 75% in the venture? I guess, when will you have certainty around your funding requirement as it pertains to the joint venture?

[Arlen Nordhagen, executive]

Yes. So that is now confirmed and finalized. Heitman will be at 75% with their co-investor partners, and we will be as a 25% equity partner. Those numbers are hard now, that's all been signed off on by all the parties involved. So -- and we're looking for closing in the first half of September. So obviously a lot of work going on this end between now and then, but we're very happy and looking forward to it.

[Todd Thomas, analyst]

Okay. And then just shifting over to the Portland market, Arlen, you talked in prior calls about their exposure being in that -- in slightly different sort of footprint relative to where the supply is hitting, but you commented this quarter now new supply had a significant impact on the portfolio. We see occupancy here is lowered by 300 basis points and revenue decelerated a little further. What happened in Portland sort of relative to your expectations?

[Arlen Nordhagen, executive]

Well, this is really a good example of what I call the overlapping circles impact on a whole market, when you have really significant excess new supply coming in. Generally, we look at the competition that affects us is being anything that would be built within a 3- to 5-mile radius. And the truth is, most of the stores in Portland are not within a 3- to 5-mile radius of our existing stores. But when you get so many new stores coming into a market, those 3- to 5-mile circles keep overlapping each other. So something even on the other side of town can end up impacting us completely the other side of town because of those overlapping circles of the new supply and that's really what happened in Portland, in particular, that has impacted us more than we expected. We certainly knew there was new supply coming in there, but we had it forecast that we'd be able to keep our NOI basically flat to maybe up 1%. And as you can see that we didn't achieve that for Q2.

[Todd Thomas, analyst]

Where are we in the cycle for development in Portland? And when would you expect to see performance stabilize?

[Arlen Nordhagen, executive]

We still see some more new stores coming on in Portland. We think it's going to be a difficult market, probably similar results to what we've been seeing for the next several quarters, I would say, in Portland in particular, with the amount of new supply coming in at significantly more than the demand growth. Even though demand growth is very strong there, it's nowhere near the supply growth.

[Operator]

Our next question comes from the line of Smedes Rose from Citi.

[Bennett Rose, analyst]

Can you discuss the cap rate on the Simply portfolio what you acquired it at and -- on a sort of a trailing basis? And what do you think it is on a forward basis?

[Arlen Nordhagen, executive]

Yes. We typically look at it on a forward basis, but in this case, it's fairly close on a trailing basis because when we look at our forward, we also adjust property taxes, et cetera. So in our first year, we were looking at 5.6% cap rate on that acquisition, which is obviously a very good price for the seller. But for that large of portfolio, we also feel it's a very good price for us. We certainly -- we've been buying properties, and our partner Heitman has been buying portfolios of properties, in the industry for a long time. And we're very comfortable with our underwriting and believe that it will be a very good investment for us and all of our coinvestors.

[Bennett Rose, analyst]

Okay. I wanted to understand just on your guidance. So the unchanged guidance does fully incorporate this transaction or it does not and you're acknowledging that once -- that you'll update your guidance accordingly.

[Tamara Fischer, executive]

It does.

[Bennett Rose, analyst]

It does?

[Tamara Fischer, executive]

Yes.

[Arlen Nordhagen, executive]

Yes, means it doesn't have much impact this year because the dilutive impact of the equity is offset -- that offsets the accretive nature of the acquisition for just the few months that we have at this year. So the net of those is almost a wash. It's maybe a penny positive or so at the most.

[Operator]

Our next question comes from the line of Ronald Kamdem from Morgan Stanley.

[Ronald Kamdem, analyst]

Just going back to the -- maybe the same-store guidance, looks like you guys maintained it, sort of implies a 5 handle in the second half of the year. Just trying to bear that with some of the comments on the supply, maybe if you can provide maybe a little bit of color what sort of gives you confidence in that? And what could lead you to outperform or underperform in that second half of the year?

[Tamara Fischer, executive]

Ron, this is Tammy Fischer. I think the way we're looking at it is that really everything that's happened in the first 6 months of this year is pretty consistent with our expectations. We expected the second half of the year to come out a little bit better than the first half, if for no other reason we're -- we have little bit easier comps heading into the last half of the year. And I would say, we probably guide on revenues to the low end of the range, [ on OpEx ] to the low end of the range and probably somewhere in the middle of the range or maybe even lower end of the range for same-store NOI growth, but still in the range, I guess, is my point.

[Ronald Kamdem, analyst]

Yes, now I got it. And then can you just touch on concessions? Just how they are trending this quarter? How are they trending versus maybe last year or any kind of detail there?

[Steven Treadwell, executive]

Yes, this is Steve. Honestly we've been very flat when it comes to discounting and concessions when you normalize it for revenue. And you look at it year-over-year for several quarters now we've been essentially flat. So we see that as a good sign. We still use discounting as a tactic to try to maintain rate discipline and to try to hold occupancy where we might be facing some new supply threats. And it's been effective and we continue to discount consistently with our peers and like I said flat, so it's really not a tailwind or headwind going forward.

[Ronald Kamdem, analyst]

Got it. And then my last question was that, I know you mentioned Georgia in the opening comments. And I'm just looking at occupancy down here 6.5% and change. Is that all supply or is there anything else going there worth highlighting?

[Steven Treadwell, executive]

Yes. So there's couple of things to mention there. The 6-plus percent decrease that you're looking at is really on the full portfolio. So there is an effect from a large transaction with several Georgia properties that pulled that number down. We bought the portfolio at a lower occupancy level and certainly see the upside in that portfolio and that's what's driving that number as opposed to performance per se. Within the same-store pool we've got a couple of stores in Atlanta that have struggled, one coming back from a fire, one that has some poor access due to some construction -- road construction and we've got a small expansion that's in play as well. So on same-store side, we're actually doing really well in Atlanta and Georgia with the exception of those handful of stores.

[Operator]

Our next question comes from the line of George Hoglund from Jefferies.

[George Hoglund, analyst]

I was wondering if you could comment on performance in July in terms of where was ending occupancy and what was the discounting looking like year-over-year?

[Steven Treadwell, executive]

It's Steve. So July was very consistent with the seasonal trends that we saw through Q2 and definitely consistent with our expectations. The discounting remains, like I said, flat year-over-year. Rates continue to be sort of flat with sort of an upward bias, and we continue to execute on same strategy, which is rely less on occupancy and work on those inflationary changes to drive revenue growth. And July was no different than Q2 in that respect.

[George Hoglund, analyst]

Okay. And then just one more from me. In terms of the Simply portfolio transaction, when you go back and look at the cap rate of 5.6%. Once you layer in all the fees, what kind of return does that bring you up to?

[Steven Treadwell, executive]

George, for us, because of the fact that we have the fee income related to it and we get to leverage somewhere our G&A platform, it ends up the equivalent to us as if we're buying it in the mid-6s. So obviously that's a significant benefit for us and that's what results in it being so accretive for our shareholders.

[Operator]

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

[Ki Bin Kim, analyst]

Can you talk a little bit more about your same-store revenue guidance, Tammy or Arlen, and talk about where you actually see the uplift, because as someone pointed out the second half implied acceleration is to a 5% average in same-store revenue?

[Arlen Nordhagen, executive]

Ki Bin, this is Arlen. We are not expecting a 5% uplift in second half revenue, but we're definitely expecting to come up from the 3.9% that we averaged in the first half of the year. And that's based on the trends that we're seeing, certainly some of that's been because of the fact that we are seeing some or actually several markets that are having slightly less impact from new supply as opposed to markets like Portland, which are worse. But on average, we're seeing that somewhat getting better. We also have a slight uptick in occupancy. And so that's why when you take the 3.9% we average in the first 6 months and look at what we're seeing in the last 6 months versus those comps from last year, we feel like we're definitely going to end up within our 4% to 5% range, but we're going to be towards the lower end of that range, as Tammy commented in her opening comments.

[Ki Bin Kim, analyst]

And going back to supply, where are the new markets where supply has yet to open, but you see the pipeline building that might make an impact to the sector later in the year?

[Arlen Nordhagen, executive]

We see -- the good news is that, in general, not every market, but across the U.S., new supply growth is slowing down. In fact, as I commented about the leading indicator, which is the best leading indicator we've seen out there to try to predict out 12 to 18 months, is the drop off in new construction loan originations for self storage. And Yardi Matrix has done a great job of compiling that data across the country. If you look at what's happened from Q2 of '17 to today, those new construction loan initiations are less than half what they were a little over a year ago. So obviously that's going to feed -- roll through in the market, and we are seeing less new starts. The problem is we've got 2 years' worth of existing starts and the stuff that's finishing up now that's got to be absorbed. So I'd have to say probably the only market we see that's not getting better is probably Portland, but we still have challenges in a lot of markets, as Tammy mentioned several of them, and it will take us a couple of years to absorb those.

[Ki Bin Kim, analyst]

And I know your same-store pool only represents a fraction of your total portfolio today, do you guys have back data for the things that you bought, where you have a more holistic look at the same-store revenue for the total portfolio year-over-year?

[Arlen Nordhagen, executive]

Well, we could go back, we don't keep that typically on a -- looking at it regularly, but we obviously we have data that we could go back and look at it. One thing I do know because we have gone back and looked at it in general, and what we found is that the performance -- whether it's a new property in the same-store or an old property in the same-store, if it's in the same market the performance is very similar. But where we see significant differences, is if the markets change. So if the new pool that's added to the same-store pool increases and let's say, all of those stores would have been in Oregon, well then our same-store would have done much worse the new pool than the old pool. Whereas, if they were all in California, it would be the opposite. The new pool would be way better. So it's really more geographical and not so much based on when we put it in the pool.

[Ki Bin Kim, analyst]

Okay. And just one follow-up here. As the pool changes as we head into next year, should that, so similar question, but you're going to probably have an increased presence from Georgia and Florida. Do those things help or hurt the same-store metrics next year?

[Arlen Nordhagen, executive]

Well I know in the past some years, they've hurt, some years they've helped. We don't...

[Tamara Fischer, executive]

It might be almost in equilibrium based on the markets that we entered into in 2017. I'm guessing that we're not going to see a huge uplift...

[Arlen Nordhagen, executive]

Or hit.

[Steven Treadwell, executive]

Property basis, honestly when we take on a property, the first 6 months are sort of slower growth as we're taking over management and applying our tools, putting on the platforms. But then from month 6 to month 18 is probably when we see the biggest jump from our institutional management of that property. And then after that, it starts to mimic what's happening in the rest of its market or the rest of the portfolio. So when you think about how things come to our same-store pool, you really don't see it in the pool until it hits kind of that month 15 to month 20 based on the timing of the acquisition. So honestly, I don't think it's going to be a big driver in general and all we're doing is we're giving you a better and broader look at our portfolio when we update the same-store pool.

[Operator]

[Operator Instructions] Our next question comes from the line of Jeremy Metz from BMO Capital Markets.

[Robert Metz, analyst]

Just going back to the revenues, you're now pointing to the low end of your 4% to 5% guidance. You mentioned Portland obviously a number of times here. So just trying to understand is that the main driver of the reduced sort of outlook from the midpoint? Or what drove sort of those lower expectations? Is it more than Portland? Is it bigger impact more broadly from supply? Is it just softer demand into the system? Anything more -- color you can give us?

[Arlen Nordhagen, executive]

Well, I would say, Jeremy that it's definitely not demand. We're definitely seeing the demand growth that we expected. And the only market that's really materially different than we thought is Portland. Now we've got a few things that are maybe a little bit different here and there, but frankly Portland because it is 15% of our portfolio. It's enough to move us down from a 4.5% midpoint down to something like 4.1%, that kind of lower end of the range.

[Tamara Fischer, executive]

I think our same-store NOI without Portland was 5%.

[Arlen Nordhagen, executive]

Yes, if we took Portland out just for example, our same-store NOI this past quarter would have been up 5%.

[Robert Metz, analyst]

Okay. And then I did want to go to back to the Simply deal, one of the attractive aspects you noted in your opening remarks was gaining access to a number of new markets in Midwest, in particular. So can you just give a little more color on the opportunity and the attractiveness you see in those markets, just given that there are some lower barriers to entry from a supply standpoint?

[Steven Treadwell, executive]

Well, I would say, that there is a couple of factors there. One is these are, as you mentioned, more Midwestern and Northeastern markets as opposed to our historical focus on the West and South. And they are, by definition, those are slower-growing economies, slower population growth markets, but the other side of the coin there is that they all have good healthy economies. And we're seeing significantly less new supply in most of those markets. So when you balance the 2 off, we believe that there'll be -- they'll deliver good strong results for us going forward. We really like the geographical diversification that, that gives us, because as our comments about Portland highlight, it was one of our strongest performing markets 2 years ago. And now, it's our weakest performing market. 3 or 4 years ago, Oklahoma was one of our stronger markets, now it's one of our weaker markets. The key to really having stable long-term success in self-storage is having great geographic diversification to take away those ups and downs of just individual markets, because from time-to-time any market could be great or could be poor. And we like increasing our diversification through this joint venture. We think that's a big benefit to our shareholders.

[Robert Metz, analyst]

And as part of that, I mean, you did pick up some Puerto Rico assets, can you just talk about the competitive positioning of the 6 assets you got in Puerto Rico from a rent and occupancy perspective relative to that market? And then obviously you did mention that you may consider selling those assets. So if you have already started that process at all, talking to potentially interested parties in acquiring that set? Or realistically what sort of timing should we expect there, maybe see you kind of move away from that market?

[Steven Treadwell, executive]

I'll start off with rents and occupancy and the stores there, and the 6 stores in Puerto Rico have been really stable for the last 4 to 5 months. If you think about the hurricane effect, we're sort of through an underwriting process, trying to figure out how much is increase of performance and how much is driven by the hurricane, we really see a consistent occupancy level for several months now. So we think that is largely sustainable. The rates are in a very nice position. They have obviously boosted over the last 8 to 9 months, but we also see those as being sustainable. So we acknowledge there are pricing challenges in Puerto Rico in the long term, but for now we think the performance is solid and sustainable.

[Arlen Nordhagen, executive]

And I'll add to that, Jeremy, that Puerto Rico is a market we are just still trying to understand. The properties are very nice, they have good rates, good occupancy, and it's a good market right now. But we do know that the population there has been on the decline. There are some challenges as it relates to that. And the counter to that is the fact that the square foot supply per capita in Puerto Rico is so low. So you've got a really low supplied market that has declining population and good rates and good occupancy, which is why it makes it complicated for us to analyze and figure out, is this a good market we should stay in long-term. And that's what we're really going to evaluate over the next 12 months-or-so.

[Operator]

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

[Todd Stender, analyst]

And just to stay on that last theme, Arlen, what is the square foot per capita for Puerto Rico? And maybe how that compares to Portland, for example?

[Steven Treadwell, executive]

Yes. It's probably around 2 square foot per capita. So it starts to mimic some of your super urban area.

[Arlen Nordhagen, executive]

And may even be less than 2, I think. I think It might be 1, because there's only like 20 properties or something like that. In the whole market there are large properties, but there is 3 million people in Puerto Rico, even after a bunch of them have moved out. So if you figure 100,000 square foot per property, that's 2 million square feet with 3 million people. So it's pretty obvious it's a very low ratio.

[Todd Stender, analyst]

Any Portland number by chance?

[Arlen Nordhagen, executive]

Yes. Portland is right around 4.5 to 5 square foot per capita.

[Todd Stender, analyst]

Okay. Thanks for that. Just shifting gears back to the Simply deal, you talked about your fees, but can you tell us what the management fee percentage is? And then what the tenant insurance breakout is? What -- if you're sharing that, or?

[Steven Treadwell, executive]

So we published some numbers around this in our slide deck that accompanied the release yesterday, so I encourage you to look at that. But in general, the property management fees are sort of market standard at 6% revenue. We are sharing that tenant insurance revenues with the joint venture such that as manager we get half of those revenues and absorb all the costs and then the joint venture gets the other half of the revenues. There will be acquisition fees associated with the initial portfolio as well as future acquisitions. And we also collect a platform fee for the licensing of our brands and use of our marketing platform. So all in all, we think it's worth about $4 million upside impact core FFO on an annualized basis.

[Todd Stender, analyst]

Okay. And also, Arlen, you mentioned a promoted interest that you can earn. What's the targeted return threshold? Any details on that?

[Arlen Nordhagen, executive]

Yes. We have incentive promotes above 2 different thresholds. We get an incentive promote above 9% internal rate of return and above 12% internal rate of return. And those really are would be paid upon some sort of an exit for our partners. So that's certainly not a short-term benefit, but we believe based on our pro forma and underwriting, that will be a long-term benefit to us and certainly, if we achieve and exceed those thresholds, it will be long-term benefit for our partners as well.

[Operator]

Our next question comes from the line of Smedes Rose from Citi.

[Michael Bilerman, analyst]

It's Michael Bilerman here with Smedes. Arlen, I think you just mentioned acquisition fees. I wasn't sure if there was anything in the third or fourth quarter from a one-time perspective that we should be aware of that's flowing into FFO?

[Arlen Nordhagen, executive]

Yes. We do get paid acquisition fees both on the initial transaction and on future acquisitions into the JV. But what we do is we amortize those fees over a 48-month period. So the impact that we get in Q4 -- mostly Q4, but a little 1 month, I guess, in Q3 is very small, it's about -- not even 1/10 of our fee. Even though the fee is paid up front, we actually accrue that as we earn it.

[Michael Bilerman, analyst]

So it will be a relatively clean -- that there shouldn't be anything -- there's obviously the dilution from the earlier equity raised relative to close but there shouldn't be anything that's positively, or for that matter negatively if there is any debt cost too, affecting the numbers? There shouldn't be any surprises with 3Q and 4Q results is effectively what I'm saying?

[Arlen Nordhagen, executive]

That's right. It will be very smoothed out by the way we amortize that.

[Michael Bilerman, analyst]

And how much time -- and I don't know if you've used consultants, but we've obviously seen brand changes within the storage business on a larger scale, clearly with CubeSmart and then clearly with U-Store-It going and then also...

[Arlen Nordhagen, executive]

And with Life Storage as well.

[Michael Bilerman, analyst]

Correct, and in the case of Uncle Bob's going to Life. And I would say in both of those cases, I think both companies underestimated 2 things. One was the cost of doing the brand change, but the second really is the time it takes for consumers to get on to that new brand and clearly, I would say, Life probably had a little bit more difficulties than Cube YSI did and while you already have the iStorage brand out there, I'm wondering how much time you spent in thinking about that aspect? And how that may depress the initial yield that you're getting?

[Steven Treadwell, executive]

Yes. We certainly have underwritten the hard costs associated with all the signage changes at the stores and the rebranding in the stores. Really we've been focused on the Internet marketing side in making sure that we can get a clean move from the Simply platform to the iStorage platform with all the associated redirects, and we don't expect to lose much traffic. These are well-stabilized properties. They got plenty of good momentum going into Q3, Q4, and we actually think it's going to be pretty seamless when it comes to the marketing side. We think we will be very effective and continue to drive performance with these properties on the marketing side.

And then on the operational side, we are working closely with seller to make it as smooth a transition as possible. And that means that we are trying to hire as many of the current people, who are operating this portfolio as possible, and we think that's going to make things run much more smoothly here as we move through September and take control of these properties.

[Arlen Nordhagen, executive]

I think rightly you've identified, certainly, the key risk issue that we have with this, and I'm very happy that the Brookfield and Simply people have been really cooperative. I think we have a really good relationship to make this transition as seamless as possible, and we have put a lot of time and effort into planning the rollover on the branding and all of that. And as everyone knows, things will come up that you don't anticipate, but we've done everything possible and we'll continue to do that between now and closing.

[Michael Bilerman, analyst]

Right. I guess, I'm just trying to put into perspective 5.6%, forward yield, clearly you're starting out of the gate with some potential from a seasonal -- fourth quarter is typically not the strongest of the quarters, in addition to the loaded cost of doing the brand, in addition to the potential that there may be some weaker traffic. And so I'm just trying to understand sort of the ramp to that 5.6%, so that Street estimates don't sort of get ahead of themselves in terms of the accretion?

[Steven Treadwell, executive]

So that's a great point. I surely wouldn't take the 5.6% and ratably spread it over the first 12 months. That's not how we've underwritten it, that's not how we're budgeting for those properties. We expect all the normal seasonal trends to be in play, and we expect obviously Q2 and Q3 of next year to be much stronger than the first 2 quarters that we'll have these properties in Q4 and Q1. So I agree with your point entirely. And we think about the risk of making a brand change on a property or portfolio properties, and if I'm going to do it, I'm going to try to do it in the low season. And so our timing is pretty well aligned with that. So we'd much rather do this in Q4 rather than, say, coming out of Q1 and into Q2.

[Michael Bilerman, analyst]

Right, so If we think about the accretion, $4 million that you talked about from the net fees that you're generating the $0.05 there. And then just based on the 5.6% and how you funded it with debt and the equity that you closed, that probably annualizes out to about $0.04 as well? So, call it $0.09 of annualized accretion. It sounds like at least on the acquisition front that $0.04 is probably more minimal in 4Q, 1Q and then maybe even to 2Q, where you start getting that annualized accretion later. So out of $0.09 of annualized accretion, you're probably running $0.06 or $0.07 to start and then ramping up to that $0.09 hereafter?

[Arlen Nordhagen, executive]

That's probably a pretty good guess.

[Michael Bilerman, analyst]

And then just thinking about where the Street was, the Street was at $1.47 for '19 before you announced the deal. Is that -- if you sort of add $0.06 or $0.07 to that number, is that a good benchmark for the street to be at post-earnings?

[Arlen Nordhagen, executive]

Well, we certainly aren't in a position to give guidance for 2019 yet at this point. We will give those obviously later this year. But clearly, the kinds of impacts that we have seen all of those things are consistent with our past practices. So that's all I can comment on that.

[Operator]

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

[Ki Bin Kim, analyst]

Just a follow-up on that last question, I remember when Life bought, well, when Sovran bought Life, one of the things they faced was they had, I guess, tenants in that place that weren't paying rent and maybe the occupancy was just a little bit inflated because of that. So have you guys done that part of due diligence or walked the properties to get comfortable around that factor?

[Steven Treadwell, executive]

We have. We've actually conducted an on-site audit of every property so far here prior to close. We know exactly what challenges we're looking at as we integrate these properties. And we found frankly very good results. There are pockets where you wish things were a little bit better but we've also found some markets and submarkets, where they've done a fantastic job. And everything is clean as far as they are in auction. So on balance, I would say it probably looks a lot like the rest of our portfolio. I will not expect to see anything material come out of that transition with respect to tenants that aren't paying or auctions that are delayed. I think it's going to be a very smooth transition.

[Tamara Fischer, executive]

I think the only thing I would add to that, Steve, is that we got a little bit more time to get through this transaction. And so I'm not saying it's been luxurious, but we've had the benefit of a few months to actually work through all that and so that gives a little bit more confidence too.

[Arlen Nordhagen, executive]

And I think it also helps that in the case of Simply really Brookfield wasn't intending to sell the properties and they've continued to run them this way. And when they were looking at recapitalization, it wasn't like, oh we're going to run these numbers up and just to get rid of them and that hasn't been their intention and they've continued to run them very professionally throughout this whole process as we keep monitoring it. So I do think it will be -- certainly, there's always issues that it's not easy, it's a lot of work. But I feel very good with the way the seller has gone through this process, and I think it will be a smooth transition.

[Ki Bin Kim, analyst]

Okay. And did you guys comment on the street rates that you saw during the quarter and in July?

[Steven Treadwell, executive]

Really, we're seeing street rates mostly flat, with sort of an upward bias, which gives us a very small tailwind. I don't want to overcommit, but that's what we saw in Q2 and through July as well. So we think that's a positive particularly when you put in light of the fact that we picked up some occupancy during Q2 as well both of those things are a little bit better than what we had planned or underwritten for this year. So I think we will continue to see flattish rates probably for the balance of the year.

[Ki Bin Kim, analyst]

And can you talk about the mark-to-market that you saw from tenant rolls during the quarter? So the basically move-in rate versus the move-out rate?

[Arlen Nordhagen, executive]

Move-ins versus move-out, we have a very slight downtick on move-ins versus move-outs, but it's 1% or 2%. It's really a small number. And I know several of our peers have commented, they have a much higher difference than that. We don't have that in our particular markets. So I think part of its because of the markets we're in, part of it might be because of the maturity of our rate revenue management program, it's not nearly as old. All of those, but generally it's fairly very small impact and our in-place rate changes continue to be implemented really effectively. So we're bullish. Certainly, this is a slower time period than the heyday everybody was experiencing in 2014 to 2016, but still we're feeling good about where we are and the trends that we're seeing for the last half of the year.

[Operator]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Arlen Nordhagen for closing comments.

[Arlen Nordhagen, executive]

Thank you, operator, and thanks everyone for joining today's second quarter earnings call. We're really pleased with the steps that we've taken this year, which strengthens our ability to continue providing solid returns to our shareholders, and we look forward to a strong and positive 2019 as we execute on these new initiatives. So thank you all for your continued support for National Storage Affiliates. Bye-bye.

[Operator]

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