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Edited Transcript of NSA earnings conference call or presentation 25-Feb-19 6:00pm GMT

Q4 2018 National Storage Affiliates Trust Earnings Call

Greenwood Village Mar 15, 2019 (Thomson StreetEvents) -- Edited Transcript of National Storage Affiliates Trust earnings conference call or presentation Monday, February 25, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arlen Dale Nordhagen

National Storage Affiliates Trust - Chairman & CEO

* Marti Dowling

National Storage Affiliates Trust - Director of IR

* Steven B. Treadwell

National Storage Affiliates Trust - Executive VP & COO

* Tamara D. Fischer

National Storage Affiliates Trust - President, CFO, Treasurer & Secretary

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Conference Call Participants

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* Bennett Smedes Rose

Citigroup Inc, Research Division - Director & Analyst

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Omotayo Tejamude Okusanya

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Richard Jon Milligan

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Robert Jeremy Metz

BMO Capital Markets Equity Research - Director & Analyst

* Ronald Kamdem

Morgan Stanley, Research Division - Research Associate

* Todd Michael Thomas

KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the National Storage Affiliates' 2018 Fourth Quarter and Year-End Analyst 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, Mrs. Dowling. You may begin.

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Marti Dowling, National Storage Affiliates Trust - Director of IR [2]

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Hello, everyone. We would like to thank you for joining us today for the fourth quarter 2018 earnings conference call of National Storage Affiliates Trust.

In addition to the press release distributed this morning, 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.

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 statements. 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' Chairman and Chief Executive Officer, Arlen Nordhagen; President and Chief Financial Officer, Tamara Fischer; Chief Operating Officer, Steve Treadwell; and George Hoglund, our new Vice President of Investor Relations. Following prepared remarks, management will accept questions from registered financial analysts.

I will now turn the call over to Arlen.

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [3]

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Thanks, Marti, and good morning, everyone. Our strong fourth quarter and year -- full year 2018 results reflect the ongoing execution of our differentiated strategy, which has resulted in the industry-leading growth of our portfolio. While new supply continues to be felt across our industry impacting multiple markets and submarkets, we believe the combination of our national operating platform, healthy balance sheet and local market expertise of our PROs provides us with a competitive advantage throughout market cycles.

From an operational perspective, despite more challenging fundamentals, our results remained strong. For the full year 2018, same-store revenues grew by 4% and same-store NOI grew by 4.7%. As expected, our NOI growth accelerated through the back half of the year, with a solid finish as we grew same-store NOI by 5.3% in the fourth quarter.

From an external growth perspective, 2018 was a record year. We acquired 7 properties in the fourth quarter for just over $50 million, which brought our 2018 total portfolio investment to about $1.7 billion. This consisted of over $350 million for 57 properties in our wholly owned portfolio and over $1.3 billion for 106 properties for our joint venture portfolios, the majority of which we acquired through our Simply Self Storage transaction. In addition to our 25% ownership stake in the joint venture, we earned management and platform fees, which makes the transaction highly accretive to NSA.

We are very pleased with our continued ability to source and close these accretive acquisitions, which allows us to grow our footprint and realize scale benefits and fee income from our joint venture strategy. We ended 2018 with 675 properties in 34 states and Puerto Rico, which represents more than 30% growth over 2017 and almost 175% growth since our IPO in 2015.

To support this ongoing growth, we continue to maintain access to multiple capital sources. During the year, we expanded our credit facility to over $1 billion. And during the fourth quarter, we rolled $75 million from our revolver onto a 10-year term loan. We also raised $175 million through a well-timed follow-on equity offering and secured $643 million of joint venture-level debt to fund our new 2018 joint venture. As a result, we entered 2019 well positioned for additional growth from a capital perspective.

Our full year core FFO per share grew by 11.3% above the prior year, particularly impressive given the 15% increase in our weighted average share and unit count during the year. We're very pleased with these results and very appreciative of our team for their hard work and dedication.

Now let me take a few moments to discuss our view of 2019 and beyond. Overall, demand drivers remain healthy and supportive of the self storage industry. And the extremely fragmented nature of our industry supports our continued long-term growth strategy. Despite volatility in the stock market and the government shutdown, the greater economy has been relatively stable, with steady employment growth and new household formation, 2 peak demand drivers for self storage.

From a supply perspective, however, challenges remain. After an extended period of outsized same-store growth, construction activity has increased significantly in the last few years. While we believe 2018 represented the high watermark for new store deliveries, deliveries of new supply will certainly continue in 2019, and there are 3 years of excess supply still to be absorbed in several of our markets. We're expecting that it will take 2 to 3 more years before the supply demand dynamics are in balance for the industry.

Further, while we've previously commented that new supply deliveries have been concentrated in the top 20 MSAs, we've been seeing new supply impacting several of the secondary markets as well. At this time, we estimate that 16% of our stores are affected by new supply within their 3-mile trade area and 30% by new supply in the 5-mile trade area. But as I've mentioned before, we have and will continue to benefit from the significant geographic diversity of our portfolio.

For our part, we remain focused on continuing to grow portfolio-wide rent levels as we pass along standard rate increases to our existing customers and maintaining competitive street rates to generate adequate move-in activity. Given that self storage is an extremely localized business, we also expect to leverage the deep market insight of our PROs as well as our revenue management platform to ensure that we are maximizing our NOI growth potential. Although the elevated amount of new supply is pressuring fundamentals industry wide, we believe our industry consolidation strategy will allow us to continue to drive outsized external growth in 2019.

We have growth levers inherent in our differentiated platform, including a deep pipeline of acquisitions that we source through our PROs and their network of industry relationships as well as an active joint venture program. Further, our OP equity currency provides a competitive advantage as we seek to be a consolidator in this highly fragmented industry. As such, we're confident these levers will drive FFO per share growth above our peers in 2019.

Now let me update you on our current pipeline, which consists of our captive pipeline of over 100 properties managed by our PROs but not yet owned by NSA, valued at over $900 million as well as an active pipeline of third-party acquisitions sourced by our PROs. In addition, our joint venture strategy allows us the flexibility to complete larger portfolio acquisitions in an opportunistic fashion. And finally, we continue to add new PROs as appropriate. In addition to our previously announced addition of Southern Self Storage, who joined us as our ninth PRO on January 1, we recently entered into agreements with our 10th PRO, Moove In Self Storage. Moove In is located in the Mid-Atlantic region and is led by founder John Gilliland, a former Chairman of the national Self Storage Association.

We remain in discussions with additional PRO prospects and expect to add another 1 to 3 more PROs over time, at which point we believe we'll have most of our target geographies covered. We continue to be extremely pleased with the team of PROs that we've assembled. Their insights, best practices, local knowledge and relationships have proven -- been proven differentiators for NSA's growth and success.

As we look ahead into 2019, despite the near-term moderation in fundamentals, we're especially optimistic about the long-term strength and resilience of the sector as a whole. Against that backdrop, we're especially positive about NSA and our capacity to continue to drive sector-leading FFO per share growth, fueled by our differentiated growth strategy and improving same-store performance.

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

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Tamara D. Fischer, National Storage Affiliates Trust - President, CFO, Treasurer & Secretary [4]

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Thanks, Arlen, and thanks, everyone, for joining us on our call today. For the fourth quarter, we reported core FFO per share of $0.37, a 15.6% increase over the prior year fourth quarter. As many of you know, Q4 reflected the first full quarter impact from our Simply Self Storage acquisition. The integration of that transaction has been even more efficient than we hoped. And as a result, the FFO per share benefit from the acquisition during the quarter was slightly better than expected.

For the full year 2018, we reported core FFO per share of $1.38, an 11.3% increase over the prior year and $0.01 over the high end of our guidance range for the year. This growth in core FFO was driven by our acquisition volume, same-store NOI growth and growth in income from our joint ventures. Our strong top line growth was partially offset by natural growth in G&A expense, increased interest expense and the diluted impact from our equity issuance early in the third quarter.

Regarding our operations. Our fourth quarter same-store NOI increased by 5.3%, driven by growth in same-store revenue of 4.2%. In the face of challenges from the absorption of new supply across the industry, we will continue to focus on our rate increase strategy to drive revenue growth and offset small declines in occupancy. For Q4, our same-store expense growth was low at only 2%. While pleased with this result, we acknowledge ongoing pressure from property taxes and personnel costs, driven by the tight labor market, which we are factoring into our 2019 guidance.

For the full year 2018, same-store NOI grew by 4.7%, driven by a 4% growth in same-store revenue and 2.6% growth in property operating expenses. Our average annual rent per square foot grew 4.1%, offset by a slight decline in average occupancy of 20 basis points. As we mentioned on last quarter's earnings call, we expected to come in at the low end of full year same-store revenue and expense guidance. We ended up at the low end of revenue guidance as expected and below the low end of expense guidance, which was better than expected.

Regarding specific markets. Our stores in California show continued strength. Georgia and Indiana performed quite well after struggles earlier in the year. And South Texas and West Texas delivered strong results. Our stores in Oregon, Oklahoma, West Florida, Raleigh-Durham and Phoenix continue to work through significant headwinds due to new supply.

Now to our balance sheet, which remains very healthy and continues to provide the flexibility needed to support our growth strategy. Our weighted average cost of debt at year-end was 3.6%, with 83% of it fixed rate. At the end of the fourth quarter, our net debt-to-EBITDA ratio was 5.6x, at the low end of our target range of 5.5 to 6.5x. We have no debt maturities in 2019.

As Arlen mentioned, we entered into a $75 million 10-year term loan during the fourth quarter and used the proceeds to repay outstanding amounts on our revolver. At quarter-end, we had approximately $255 million of availability on our $400 million revolver.

Now let me reintroduce guidance for 2019. We do expect headwinds from new supply across a number of our markets in 2019, and we've taken this into account as we contemplated our guidance for the year. We anticipate 2019 core FFO to be in a range of $1.48 to $1.52 per share. The midpoint of $1.50 implies 8.7% year-over-year growth. We expect continued positive same-store NOI growth in the range of 2.5% to 3.5%, driven by growth in same-store revenue and expense of 2.5% to 3.5%. Our revenue growth strategy will remain focused on rate increases, which we anticipate will offset a slight decline in occupancy. Our 2019 same-store portfolio will include 439 stores, which represents over 85% of our wholly owned portfolio at year-end.

We'll have increased presence in Georgia, Florida, Texas, St. Louis and Las Vegas. We expect the change of same-store pool will be slightly positive to our same-store growth in 2019.

On the acquisition front, we expect our investment activity will range from $300 million to $500 million for wholly owned stores and another $20 million to $100 million for our joint venture portfolio. We're starting off 2019 strong with approximately $190 million closed or expected to close in the first quarter.

Finally, our guidance once again assumes cash G&A expense in the range of 10% to 10.5% of consolidated revenues with noncash equity comp reaching between 1% to 1.5% of revenues. We've been able to maintain this competitive level of G&A expense despite significant growth in operations as we assume corporate management for all our JV activity. If we factored in our total revenues from our JV activity rather than just NSA's consolidated revenues, our cash G&A only ranges from 7% to 7.5% of all the revenues NSA produces. In closing, we are very pleased with our accomplishments in 2018 and believe we're entering 2019 well positioned to continue creating long-term shareholder value.

We'll now turn the call back to the operator to take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of R.J. Milligan with Robert W. Baird.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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Arlen, I wanted to go back to your comments on new supply. You mentioned that 2018 you expect to be the peak for new deliveries, yet there's probably a 2- to 3-year supply-demand imbalance or it's going to be 2 to 3 years before that supply and demand balances out. Would you expect same-store revenue to decelerate until we hit that 2- to 3-year supply-demand balance?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [3]

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R.J., in general, I would expect to see at least lower-than-normal performance, and we've reflected that in our 2019 guidance. Certainly, the peak year of deliveries of 2018 is going to carry into 2019 and 2020. We're pretty fortunate in the fact that with our diversified portfolio being not so heavily focused on the top 20 MSAs, at least we only have about 30% of our stores with a new competitor within 5 miles. And that is a big help for us, but certainly, those are pressures. So I think, we're probably going to see 2019 and 2020 being in a fairly similar range based on all this built-up new supply. I don't -- definitely don't see an uptick, but I don't think it will be a big downturn.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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So obviously short of providing guidance for 2020, you wouldn't expect an acceleration given the fact that 2018 is the projected peak for new supply deliveries?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [5]

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That's right. Because certainly, 2018 deliveries are going to impact the 2020 ability to move revenues.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Okay, that's helpful. I was wondering if you could provide some more color on the fourth quarter and year-to-date acquisitions or properties that are under contract. We've been seeing a lot more transactions for nonstabilized properties. I'm just curious if you could give some details on what the average occupancy of these properties are? Are they all stabilized, going in cap rate? And whether or not they are accretive day 1? Or is there any associated dilution early on with the acquisition of these properties?

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Tamara D. Fischer, National Storage Affiliates Trust - President, CFO, Treasurer & Secretary [7]

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R.J., it's Tammy. So we either have closed or expect to close on about 30 properties in the first quarter 2019, and we're still committed to the acquisition of state-wide properties. A whole bunch of those assets are coming in, in connection with the addition of Southern as our ninth new PRO and then Moove In as our 10th new PRO. And average occupancy is maybe a little bit below our existing portfolio, so there's probably a little bit of upside with those assets at just under 90%. But at this point, we certainly don't see any dilution coming from the acquisitions that we're making.

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [8]

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But you're right, R.J., that we definitely see a lot of properties on the market that are not stabilized, either CLO properties or very well occupancy, and we're not buying those properties. We still believe that's where the high risk is in this industry, and we're staying away from that.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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And then any color on cap rates for the fourth quarter and year-to-date acquisitions?

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Tamara D. Fischer, National Storage Affiliates Trust - President, CFO, Treasurer & Secretary [10]

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We're not seeing much movement in cap rates either. It's still on that 6% to 6.5% range for us.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [11]

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Okay, and one last question. We've seen some of your peers provide higher expense guidance for 2019. Just curious if you could break out any of the components of your expense growth guidance? Maybe separating out what the assumption is you have for property taxes, expense growth or any other buckets you could breakout?

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Tamara D. Fischer, National Storage Affiliates Trust - President, CFO, Treasurer & Secretary [12]

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So R.J., we're expecting property taxes to grow by just over 5% in 2019. And that's what our guidance assumes. And personnel costs, well, in this tight labor market, we do expect them to go up a little bit. We expect that will be just a little bit over inflation.

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Operator [13]

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

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [14]

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The first one was, I think you mentioned in your opening comments the focus is still on price increases over occupancy. Just curious, with your existing tenants, have you seen any change in behavior in terms of taking in these pricing increases? And if so, to the extent that you do, does that cause you to change your strategy? Or how should we think about that?

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Steven B. Treadwell, National Storage Affiliates Trust - Executive VP & COO [15]

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Ron, it's Steve. We really have not seen a change in behavior among our customer base. We continue to send out rent increases on a regular monthly and quarterly basis, probably expect to see 2/3 to 3/4 of our customers receive an increase over the course of the next 12 months. And we're still able to get mid- to high single digits in terms of those increases. So really no change in strategy there.

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [16]

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And I would also add that our average length of stay just keeps slowly increasing. It's not huge, but we're definitely not seeing that dropping down.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [17]

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Great, that's helpful. Maybe moving on to Oregon, maybe just provide a little bit more color there. Obviously, it was a little bit challenged in 2018. I see occupancy down over 300 basis points. Well, how do you guys feel about the market today? Do you see signs of improvement, green shoots maybe?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [18]

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Yes, so Portland continues to be a struggle for us, and it is a supply question as we've mentioned for the last few quarters now. We don't see that market turning the corner at this point. Occupancy has been tough and probably will continue to be challenged but may not deteriorate quite as fast in '19 as what we saw in '18. And the good news is that we continue to be disciplined on our rate increases to existing customers, and that has allowed us to keep the revenue growth within control within Portland. So even though we're suffering in occupancy, we're able to make it up little bit on rates and try to keep at break-even levels for what is a very challenging market today.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [19]

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That's helpful. And then my last one, I think, kind of related to, you talked about seeing maybe a little bit more properties on the market that aren't stabilized above occupancy. Just asking that a different way, when you think about the developers out there maybe versus 3, call it 6 months ago, have you seen any changes in whether it's longer lease-up times, people aren't hitting their pro formas, any kind of incremental signs that may give you some idea that that supply is really starting to turn even further?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [20]

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Well, of course, we don't do their pro formas or see those. But from anecdotal comments, there's no doubt that a lot of developers are missing their pro formas. And they're definitely looking at longer fill-up times in -- than what they had underwritten originally. And certainly, if they're continuing to look at new developments, they've expanded those fill-up times to longer. And that has resulted in a number of developers either scaling back their -- number of developments, doing less than they had originally thought, or delaying developments. So that's one of the things we definitely see as the number of stores we thought might open in '18, several of them have moved into '19. Some of the ones in '19, people are already talking about either delaying it into '20 or just completely forgetting about it, selling that land for some other use.

I mean, building a store does not create new demand. So the bottom line is, you have to have demand to fill the stores up. And when too many stores get built in the same market, that obviously has a bearing on developers' actions for the future. We sometimes wish it would be quicker that that actions will change, but we deal with that. And we also believe that and have started to see there will be some buying opportunities in the future as developers run out of their loan time periods and they are not stabilized or even close to stabilized. So we are looking at that as a future opportunity for value add. But right now, it's not -- because we think it's too early, we're not looking at buying nonstabilized stores right now.

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Operator [21]

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

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [22]

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Arlen, I just wanted to follow up on that. You mentioned that at some point, you might be interested in buying properties that are still in lease-up. So if it's too risky now, I guess, kind of what sort of things would change in your mind either from a pricing perspective or supply perspective to make that a more interesting opportunity?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [23]

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Yes, so the 2 things that we would look at and we keep looking at is number one, the price that we can buy the properties at. So far, developers for the most part are still trying to make a reasonable, although, a lot lower profit than they were looking at prior to this. And so we're looking at waiting until the time when developers are looking at selling the properties at breakeven or at a very small profit. So that would be one factor.

And then the other is how many new stores are still going to come into those markets. So we kind of look at those in total. Because as I said, the development of new stores doesn't create demand. So what we want to look at is, will the supply demand balance -- hit balance within some reasonable period of time, then we'd look at that to be within a 1 to maybe at the most 2 years after we buy that store where we see that we can get this to a true stabilized occupancy in the mid-80s and be at market type of supply-demand balance. So those are the things that we'd be looking at before we would pull the trigger.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [24]

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Okay. And then I just wanted to ask you, the sequential decline in occupancy from 3Q to 4Q, at least on our expectations was a little steeper than what we had expected, I'm just looking back over the past few years. And are you seeing any change? I mean, you mentioned no change in consumer behavior. But I was wondering if there's anything you can point to there, maybe more move-outs? Or is it just more a function of revenue management or-?

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Steven B. Treadwell, National Storage Affiliates Trust - Executive VP & COO [25]

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I think it's really just a function of supply out there. And when we look at comps, sometimes it's a timing issue. Nothing has really materially changed when it comes to the occupancy dynamics out there or the demand dynamics. We think everything is consistent. And what we're seeing so far in Q1 suggests that we're going to get consistent performance in 2019 compared to what we saw in 2018 with respect to occupancy.

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [26]

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And our move-in velocities are good. We keep tracking that, and we're happy with that. We do know, and we know we're going to slowly go down a little bit in occupancy because we want to maximize revenues. And if we wanted to, we could certainly make our occupancy go up, but our revenues would go down. So there's no point in doing that. And so that's kind of what we try to optimize. And it's not an exact science. But so far, it's certainly worked well for us as we've been leading the industry in those kinds of performance by allowing that very small decline in occupancy.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [27]

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Okay. And then just a last one from me. It's -- you have this -- had this portfolio of properties in Puerto Rico now. Are you -- is it your intent to hold those longer term? Or are you guys thinking of maybe disposing of those? Or how are you thinking about that market?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [28]

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We have completed the analysis of that market, and we're happy with the market. It's been a very strong performer. We have seen a lot of progress on the recovery of the island. And it's not going to be a big population growth island in the future, but the economy is stabilizing. That's a positive, and it's a very low supply market. So there's a lot of room for potential increases in absorption rates that should, we believe, make up for any continued declines in population. And between those 2, we've concluded that we're happy with staying in that market long term.

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Operator [29]

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

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [30]

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Just a question on Moove In, the 10th PRO there you added. You're getting 6 assets there at closing. Wondering what the value attributable to those is? And then how many fall into the captive pipeline? And what's the sort of ballpark value on those? And any more color on that pipeline and potential timing to get at some of those?

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Tamara D. Fischer, National Storage Affiliates Trust - President, CFO, Treasurer & Secretary [31]

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So the assets there coming in with Moove In this quarter are valued at, I would say, roughly in the mid-$30 million range, call it $35 million, $36 million. The remainder of the assets, call it, 13, 14, maybe 15 assets, will go into the captive pipeline. They're nonstabilized assets and will come in over time over the next couple -- 3 years is our expectation. Those are valued right now at, call it, somewhere north of $60 million.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [32]

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Okay.

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [33]

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I'd say probably total of those is probably closer to maybe $100 million, but the timing of them, like I'd say this year we might only pick up another maybe 3 -- 2 or 3 and then next year quite a few more. But there will be relatively short-term coming in over the next certainly 3 years or less.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [34]

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Got it. And you mentioned adding -- looking at over time another 1 to 3 PROs here. Do you feel like you can get 1 or 2 of those to hit here in 2019 or any discussions you're having much further along here?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [35]

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Well, we have had ongoing discussions with some of those guys for a quite a long period of time. But we really don't control the timing. It's a very personal decision on when they want to pull the trigger. And it's often related to things such as their management situations, sometimes their tax situations, personal, family or other issues like that. And so I would say, in general, it's unlikely that we would have another one join us this year or if so would be very late in the year. So normally, our pace has historically been around 1 a year. So the fact that we've actually had these 2 join us within this very short period of time is really just reflective of the timing on their personal decisions.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [36]

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And I guess just sticking with that, was there anything in particular that you can comment on that drove Moove In to finally come onboard?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [37]

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I think one of the things that is helpful and it could create an acceleration from some other decision makers as well, is the fact that as we've been an existing company, public company for longer now, which we now are approaching our 4-year anniversary within the next couple of months as a public company, I think that the track record of performance for our PROs, in particular, is starting to really carry a lot of weight as other prospective PROs are looking at it and they see how successful our existing PROs have been. And so that cumulative track record of 4 years probably has had a bearing on getting some of the PROs to pull the trigger a little bit quicker than maybe others in the past have done.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [38]

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Appreciate that. And then just switching gears, one last one. Can you just comment on how your net effective rents for move-ins trended in the fourth quarter? How that compared to last quarter? And if you're seeing any change from that already here in 2019?

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Steven B. Treadwell, National Storage Affiliates Trust - Executive VP & COO [39]

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Jeremy, Steve here. So we're seeing move-in rates for new move-ins dropping in the low- to mid-single digits year-over-year, and it deteriorate a little bit over the course of 2018, but nothing significant. So Q4 was not that dissimilar from Q3, and likewise, Q1 this year is not that dissimilar from Q4. So all in all I'd say just low to mid-single digit in terms of loss of street rate power.

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Operator [40]

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

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [41]

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Can you talk a little bit about where are we in the kind of lifetime of improving your kind of marketing dollars, how you spend it, the science behind like pricing and revenue management? How much has it come from since your IPO? And what more do you have to do?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [42]

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Yes, so just to start with our revenue management, I'd say that we have definitely seen a lot of benefit from that program over the last few years, and we've squeezed a lot of juice out of that lemon. There's still more room to grow. We continue to get better every quarter, and we continue to develop some proprietary technology in addition to the more traditional platforms that we're plugged into. So there is upside there, but not as significant as what we've already seen.

When you look at marketing, I think, there's considerable upside, lot of things that we could be better at, a lot of things that we're improving upon. We're definitely seeing good trends in our cost per lead and our cost per move-in and our effectiveness with respect to both the SEO and search engine marketing. So there's still plenty of upside there. And when it comes to business analytics and machine learning, we continue to find new ways to add value to our platform and provide better tools for both our internal managers and our PROs to manage the platform. So there's still upside with our platform.

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Steven B. Treadwell, National Storage Affiliates Trust - Executive VP & COO [43]

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I'd say if you talked about it in, like in the terms of like a baseball game or something like that, we're probably only in the fourth or fifth inning of opportunities that we can take advantage of as it relates to technology applications in our platforms. We certainly made a lot of progress, but there's still a lot of upside opportunity for us.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [44]

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And I know it's probably hard to estimate, but as you get to the ninth inning, how much more uplift in the same-store NOI margin do think is possible?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [45]

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I'd say we should be able to get margins that are pretty comparable to our peers with the exception -- Public Storage's margins are obviously pretty amazing. But I mean, we still have another couple or 3% that we like be able to get out over time.

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Steven B. Treadwell, National Storage Affiliates Trust - Executive VP & COO [46]

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And eventually, rate is going to be the big driver of margins rather than the platform itself.

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [47]

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The good thing is that, where we have lower rates, which is totally market specific, at least in most of those, property taxes are also lower. But it's hard to make, for example, labor costs, they're not going to be that much proportionally lower than a higher rate market, and so you're going to end up with the higher expense level on labor in those markets. And you're not going to get as high a margins there as you could in a high-rate market.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [48]

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Okay. And in terms of your balance sheet, at least as of third quarter, your pro rata look through leverage was about 6.8x. You've been buying a lot of assets and then you've been funding it with SP and OP, but not enough to keep leverage neutral. So do you have any kind of larger thoughts on just balance sheet? And if you have to -- or if you see a need to reload the equity base in the company?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [49]

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Well, in general, we do not believe it makes sense to do a look-through on the joint venture debt because of the fact that's completely nonrecourse debt to anyone, much less to us. And so we look at our leverage without the JV debt because the JV debt is frankly more of a choice based on our JV partners and the level that they would like to run.

I think that on the other standpoint, if you take that out, we're at about 5.6x EBITDA, which is really towards the lower end of our target range, which is 5.5 to 6.5x. If you go through the math on that, we're very comfortable being able to do $300 million or so of acquisitions without having to raise equity just because of the SP and OP equity that we get coming in all the time anyway. But we certainly are always looking at our pricing of our equity and always try to stay ahead of that with the market when the pricing is attractive to us. And so we always look at continuing to keep our balance sheet in good shape. I don't know if Tammy has any additional comments but certainly we're not under pressure to do it, but we will always be looking for opportunities when the price is good.

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Tamara D. Fischer, National Storage Affiliates Trust - President, CFO, Treasurer & Secretary [50]

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I think that's really well said, Arlen. And our objective is to maintain multiple sources of capital, and we are continuously working on that. I think that we've been reasonable successful at it up to now.

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Operator [51]

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(Operator Instructions) Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [52]

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Just a couple of follow-ups on the addition of Moove In. First, where will Moove In have exclusive rights? I think Arlen you mentioned the Mid-Atlantic, but I was just curious where those exclusives will be specifically?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [53]

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Yes. So their strong presence is really in the York, Lancaster, Harrisburg type area of Pennsylvania, and they will be having exclusive in that area. And then in addition to that, they have presence in Maryland and in some parts of New York and parts of New Jersey. And so that's kind of the areas that they will be focusing on growing. And we have really very limited presence in those markets. So it's a great geographic addition to our team, and they have a tremendous number of relationships within those markets. And we think they will be very successful at continuing to grow the platform in their areas there.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [54]

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Okay. And then you talked about the sort of implied valuation on that portfolio. Can you talk about the capital contributions, the splits between SP and OP equity for that? And maybe Tammy, for that portfolio specifically, can you talk a little bit or maybe characterize that in terms of sort of the implied cap rate, what the contributions look like?

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Tamara D. Fischer, National Storage Affiliates Trust - President, CFO, Treasurer & Secretary [55]

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So the -- start with the cap, the last question first. The cap rate is in that same general range that we've been acquiring assets in, which is at 6%, 6.5% range in this case, a little bit toward the higher end of that range. In terms of the amount of equity, it's not completely nailed down today. So I don't want to get too carried away with it. But I'd say maybe up to about $10 million of equity on $36 million, $37 million of value.

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [56]

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And most of that would be SP equity, almost all. I mean a good rule of thumb is that on property contributions a PRO needs to contribute around 12% to 15% of the total value of that SP equity at a minimum. And then a lot of PROs decide they want more than that because it gives them a lot of buying power for future acquisitions as well. But that's a good number to use as kind of a minimum number.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [57]

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Okay. And then just a couple follow-ups on the guidance. So the fee income that you're projecting, $20 million to $21 million, does that include any acquisition fees or anything related to sort of what's already closed activity subsequent to the end of the year, anything nonrecurring in nature?

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Tamara D. Fischer, National Storage Affiliates Trust - President, CFO, Treasurer & Secretary [58]

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So it does assume acquisitions by the joint venture and in the ranges that we disclosed in our guidance, so at $20 million to $100 million. But in Q1, we actually haven't closed anything in the joint ventures yet.

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [59]

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But we also accrue acquisition fees that we've already received. We don't book those acquisition fees on day 1 when we receive them because of the way the contracts were set up, we accrue those over time as they're technically earned.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [60]

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Okay. So of that $20 million to $21 million in guidance, how much is related to acquisition fees in '19?

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Steven B. Treadwell, National Storage Affiliates Trust - Executive VP & COO [61]

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Tom, it's Steve. It's probably around 15% at the top level. We've got 2 rounds of acquisition fees still rolling through from 2016 and 2018 joint ventures. And then we do have some projections for new acquisitions within those joint ventures.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [62]

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Okay, got it. So little over $3 million. Okay. And just lastly from me then. Tammy, you mentioned the 15% increase in the same-store pool would be accretive to growth in '19. Can you quantify that?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [63]

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What was the question, again?

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [64]

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The increase in the same-store pool in '19 relative to '18, right?

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Tamara D. Fischer, National Storage Affiliates Trust - President, CFO, Treasurer & Secretary [65]

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Yes. So Todd, we expect it will be slightly accretive. It might be, say, up to 10 basis points and thereabouts.

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [66]

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Yes, the results for the nonsame-store pool and the same-store pool when we roll it in, it's a little bit better, because there's a little more upside on some opportunity on occupancy in there, but when we blend it in, it's pretty close to neutral. It affects our numbers by about 10 basis points. So if our midpoint on our guidance is 3% same-store NOI, it might have been 2.9% if we didn't have the new stores in there. So it's not a whole big impact, but some.

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Operator [67]

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Our next question comes from the line of Tayo Okusanya with Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [68]

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Wanted to talk about same-store NOI a little bit. The slowdown in '19 relative to '18, is there a way you could -- that's not to be an exact quantification, but how much of that slowdown really is all kind of new supply impacting the portfolio? How much of it is more kind of tougher year-over-year comps as you've kind of picked up the "low-hanging fruit" in the portfolio over the past year or 2?

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [69]

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Of course, it's hard to say but I could -- I would say 80% of it is related to supply differences. There's certainly less low-hanging fruit but we end up getting most of the low-hanging fruit before it even goes into the same-store pool, to be honest. So there is some of that that's left, but it's mostly supply. I mean, we're in a lot of markets where we have new supply, not -- I mentioned that 30% of our stores have a new supply within 5 miles. But some of those stores have 5 new competitors within that 5-mile radius. And especially when you look at markets like Portland, that kind of thing is common. So that has some significant impact. If all you had in that is 1 new store, it wouldn't be as big a deal, but some of these markets have a lot more impact. And that's really what's causing the slowdown in our guidance.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [70]

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Okay, that's helpful. And then just following up on Jeremy's earlier question about move-ins and move-outs. Could you just give us a sense in 4Q what the mark-to-market on the portfolio was in regards to the rate people are moving in at -- moving in at versus moving out at, and a sense of how that transpired through 2018?

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Steven B. Treadwell, National Storage Affiliates Trust - Executive VP & COO [71]

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So for all of 2018, we were sort of in the low to mid-single digit in terms of the negative churn or the roll down, whatever term you like. It was certainly higher during Q4, and we expect to see that in Q4 and Q1 and then we see that gap close in Q2 and Q3. So I think we'll see the same thing in 2019 is what we saw in 2018 where we have a stronger summer and then a weaker winter. But like I say, low to mid-single digits in terms of the negative churn.

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [72]

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That would be the blended average for the year, you know, it might be double in the winter, but it is the average or something like that.

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Operator [73]

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

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Arlen Dale Nordhagen, National Storage Affiliates Trust - Chairman & CEO [74]

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Well, thank you, again, everyone, for joining NSA's Fourth Quarter 2018 Earnings Call. As we've discussed, we're very pleased that the growth we experienced in 2018 really positions us for a very strong year of increased FFO per share growth in 2019. And combining last year's growth with the new additions of our ninth and 10th PROs with Southern Self Storage and Moove In Self Storage joining NSA, will create substantial value for our shareholders in 2019. As always, we very much appreciate your continued interest in and support of National Storage Affiliates, and we look forward to seeing many of you later this week at the Wells Fargo conference in New York. Thank you, operator.

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Operator [75]

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