National Storage Affiliates Trust (NSA) 2017 Q4 法說會逐字稿

Greetings, and welcome to the National Storage Affiliates Fourth Quarter and Year-end 2017 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, Mrs. Dowling, you may begin.

Hello, everyone. We would like to thank you for joining us today for the fourth quarter and year-end 2017 earnings conference call of National Storage Affiliates Trust. In addition to the press release distributed this morning, we have furnished an 8-K with the SEC containing our supplemental package with additional detail on our results, which may also be found in the Investor Relations section on our website at nationalstorageaffiliates.com.

On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties. The company cautions that actual results may differ materially from those projected in any forward-looking 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 the company's website and in its filings made with the SEC.

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

I will now turn the call over to Arlen.

Thanks, Marti, and thank you, everyone, for joining today's earnings conference call.

We're very pleased with our fourth quarter and full year 2017 results, which represent industry-leading growth by nearly every metric. We believe this continued outperformance is proof that our differentiated strategy, which combines our national operating platform and strong balance sheet with local market presence and expertise from our pros, provides tremendous advantages that drive superior results.

From an operational perspective, we continue to drive strong organic growth. For the full year 2017, our same-store revenue grew by 5.7%, and same-store NOI grew by 7.5%. We did feel the impact of new supply coming online in several markets. So our fourth quarter numbers were below the yearly averages, but same-store NOI growth in the fourth quarter was still close to 6%.

From an acquisitions perspective, we expanded our portfolio at an industry-leading pace in 2017, with 65 wholly owned acquisitions and 5 joint venture acquisitions across 20 states.

We added nearly 5 million square feet to our combined portfolio, which represents approximately 16% growth for the year. As a result of this strong acquisition pace, we ended the year with a portfolio of 515 self-storage properties, diversified across 29 states. To fund our external growth, we leveraged and enhanced our access to multiple sources of well-priced capital. During the fourth quarter, we opportunistically accessed the common and preferred equity markets, raising $147 million of common equity and $173 million of preferred equity.

Our credit facility's total capacity now stands at $1.3 billion, with almost all of our $400 million revolver undrawn and available, and our balance sheet is well positioned for continued growth in 2018.

Our strong organic results and disciplined portfolio expansion combine to drive double-digit core FFO growth. Our full year core FFO per share increased by 10.7% despite the impact of nearly $350 million of total equity issuances during the year. We're extremely proud of these results. And I would like to thank our world-class team for their continued hard work and dedication to making NSA a success.

Next, I'd like to talk about what we're seeing moving forward into 2018. First, I'd like to outline changes to our same-store pool. For 2018, our same-store pool will increase by 99 stores to a total of 376 stores. These newly added properties are comparable to our 2017 same-store pool in terms of both occupancy and growth potential. And they are geographically diversified across 16 states. Because of a particular geographic diversification of these new stores added, we expect that 2018 same-store performance of these new stores to be similar to this year's performance of our 2017 same-store pool.

Second, I'd like to take a moment to update you on our view of market supply-demand dynamics, which will impact our growth in 2018 and beyond. The fundamentals that drive demand for self-storage remain intact. The economy continues to deliver healthy growth, with economic momentum and tax cuts supporting job growth and benefiting consumers in the form of higher discretionary income.

We continue to see good growth and demand across all our markets, but particularly, in areas with strong job and household growth. From a supply perspective, strong results for self-storage over the last several years have brought new supply to the market. And we expect that the industry will continue to feel the impact of new construction deliveries in 2018 and into 2019, as markets absorb these new properties.

We continue to emphasize that self-storage is a local business. And the impact of new supply on any one market is very specific to the locations of our stores. Overall, we expect approximately 20% of our stores to be directly impacted by new supply within a 3-mile radius this year. Specifically, our stores in Portland, Raleigh-Durham, West Florida, Atlanta and Dallas have meaningful exposure to new supply.

Looking at not just our stores submarkets, but including a complete MSA supply-demand perspective, approximately 30% of our NOI is being generated in MSAs where we forecast the 5-year 2016 to 2020 supply growth to materially exceed demand growth. But fortunately, that is offset by the fact that approximately 30% of our NOI is being generated in MSAs wherein we anticipate the 5-year supply growth to be substantially below demand growth. And the remaining 40% of our NOI is coming from markets where we expect 5-year supply and demand to be in good balance.

The industry has enjoyed several years of outsized growth, and we are prepared to compete with this new supply. We'll work to hold street rates and continue reasonable ongoing increases to existing customers in order to limit the long-term impact to NOI growth.

We'll also continue to rely on our PROs' local market expertise and our revenue management platform to remain nimble and optimize our financial results.

From an external growth perspective, we're well positioned for another solid year in 2018. Our PROs continue to source good opportunities at reasonable values. And market pricing has held steady, with some marginal decreases in seller expectations. Our goal is to externally grow our asset base by approximately 10% per year. And year-to-date, we've acquired 18 stores valued at approximately $100 million already.

Finally, let me remind you of the 4 pillars of our external growth strategy.

First, our captive pipeline, which consists of properties that our PROs already manage but which NSA does not yet own currently stands at more than 100 properties valued at over $900 million.

Second, our PROs continue to source a significant volume of third-party acquisitions for us. In 2017, approximately 2/3 of our acquisitions were sourced by our PRO network. Additionally, we continue to evaluate potential new PROs and have ongoing discussions with several high-quality private operators. Ultimately, we would like to add another 3 to 5 PROs over the next few years.

And lastly, we continue to utilize our joint venture strategy to leverage our platform and our balance sheet while growing fee income.

In 2017, we acquired 5 stores valued at about $60 million through our joint venture.

Overall, we are very pleased with our 2017 results, and we believe we're well positioned to outperform once again in 2018, with a diverse portfolio of high-quality assets as we continue to execute on our differentiated and now well-proven growth strategy.

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

Thanks, Arlen. For the fourth quarter, we reported core FFO of $23.6 million and core FFO per share of $0.32, a 6.7% increase over the prior year. For the full year, we reported core FFO of $91.2 million and core FFO per share of $1.24, representing a 10.7% increase over last year.

Our core FFO growth is driven by our robust acquisition activity as well as continued organic growth in our same-store portfolio and increased joint venture platform fees. Our strong top line growth was partially offset by the dilutive impact of our fourth quarter common and preferred equity offerings.

Turning now to operations. For the fourth quarter, our same-store NOI increased 5.8%. Same-store total revenue grew by 5%, driven by a 5.2% increase in average rent per square foot, which was offset by a 30 basis point decrease in average occupancy to 89%. We continue to focus on rate growth as our key driver of long-term revenue growth, even in the face of mild occupancy decreases, which are typically due to new supply. We have demonstrated the ability to increase average rental rates to our existing customer base while largely holding the line on street rates. And we expect this strategy to remain effective through the current cycle in new supply.

From an expense perspective, our controllable expense growth remains in line with our expectations, with increased property taxes, personnel costs and advertising driving our 3.3% growth in property operating expenses during the fourth quarter. For the full year 2017, our same-store NOI increased to 7.5%, driven by 5.7% growth in total revenues and a 1.9% increase in property operating expenses.

Similar to our fourth quarter results, we achieved 5.8% annual growth in average rent per square foot, offset slightly by a 30 basis point decrease in average occupancy for the year. Within our same-store portfolio, our strongest-performing markets in the fourth quarter were in Southern California, Washington State and our secondary markets in North Carolina, where supply-demand dynamics remained healthy. Our primary challenges were in Portland, Oklahoma City, Atlanta and Phoenix. New supply in each of these markets has impacted our occupancy rates, yet we continue to capture offsetting gains in average rent per square foot to keep driving positive same-store revenue growth.

Overall, we believe our well-diversified portfolio is positioned for strong long-term performance despite current supply challenges in certain markets. The economy continues to be healthy, with employment growth and population growth remaining steady in most of our top markets.

Turning to our balance sheet. Our flexible balance sheet remains a competitive advantage for NSA, as we have continued to diversify and expand our capital sources. In October of 2017, we completed an

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offering of 6% Series A preferred shares, raising $173 million. And then, recognizing favorable market conditions in December, we completed a follow-on common equity offering of 5.8 million shares, raising $147 million. We used the proceeds from these offerings to repay borrowings on our revolver and position ourselves for portfolio growth in 2018.

Our weighted average cost of debt at year-end was 3.4%, with only 10% of our debt subject to variable rates. At the end of the fourth quarter, our net debt-to-EBITDA ratio was 5.3x, which is slightly below the low end of our target range of 5.5 to 6.5x. Our debt maturities are well laddered, providing plenty of near-term flexibility. We have just under $6 million in debt maturities in 2018 and 2019, and our weighted average maturity is approximately 5.2 years.

In January, we amended our credit facility to add $125 million, 5-year term loan. Our total capacity is now $1.3 billion, inclusive of our accordion options, and our $400 million revolver is largely available to finance new acquisitions.

Now let me introduce our guidance for 2018. As Arlen discussed in his opening remarks, we expect new supply and expense growth to meaningfully impact the industry in the coming year. And we have taken these factors into account when establishing our 2018 guidance to investors. We anticipate 2018 core FFO to be in the range of $1.33 to $1.37 per share. And due to normal seasonality, we expect about 23% of that to be realized in the first quarter.

We expect same-store NOI growth of 4% to 5.5%, which is based on revenue growth of 4% to 5% and expense growth of 3% to 4%.

Our same-store portfolio will grow to 376 stores, which represents 85% of our wholly owned portfolio at year-end. The largest additions are in California, Florida, Indiana and Ohio. We anticipate our acquisition activity will range between $250 million and $400 million for wholly owned acquisitions, with an additional $50 million to $100 million of joint venture acquisitions, where NSA is a 25% equity owner.

Finally, our guidance assumes that our cash G&A expense will range between 9% and 10% of revenues with noncash equity-based compensation ranging between 1% and 1.5% of revenues. We're confident our team, our portfolio and our balance sheet are well positioned to continue to create long-term value for our shareholders in 2018.

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

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

Just first question on the guidance. So 100 basis point deceleration in revenue growth from '17. So it seems like you're expecting another above-average year. And Arlen, you noted that there's good demand growth. We've heard from most others that demand was generally steady. And I was just curious if you could comment on that growth in demand that you're seeing that's sort of behind that 4% to 5% revenue growth forecast.

Todd, I think, well, I would agree with the comment that demand growth is steady, which we see on average running about 2% per year demand growth right now. And so if you think about that from a standpoint of long-term averages, that's below the kind of growth in demand we saw in the early 2000s but similar to what we've seen in the last couple of years. Supply growth is running a little above 2% nationwide, particularly in the top 50 MSAs. It's probably running more in the 3% to 4% in supply growth. So we factored that into our expectations on revenue. And so if you think about the 25-year average revenue growth in the sector being 4% a year, our average that we're projecting for this year is a little above -- about 10% above that. Midpoint would be 4.5%. That would compare to the industry average of all the peers slightly below the 4% historical average. But that's a reflection of the fact that we have less exposure to markets where there's new outsized supply growth.

Okay. So the demand growth, though, is primarily related to population growth. There is no other sort of driver that's impacting that specifically that you're thinking about.

Well, there is a little bit of, I'd call it, increased absorption, if you will. Just -- but it's -- that's fairly small. That's maybe 1% a year. So if you were in a market that had absolutely no population growth, my estimate is, in most cases, your demand will probably grow at about 1% in that market.

Okay. And then in the same store. So you touched on this a little bit, average occupancy in a few markets primarily, I guess, Atlanta, and New Hampshire, Phoenix was down year-over-year. And then, it looks like it slipped a little bit further at year-end. Tammy, you talked about the ability to push rate at the expense of some modest occupancy loss. Can you just discuss sort of the strategy in those markets? What the strategy is there to stabilize occupancy. How are you thinking about maximizing revenue in some of those markets where you did see a little bit more outsized occupancy loss. And whether that strategy is consistent overall with your comments.

Todd, it's Steve. Yes. With respect to occupancy and the strategy going forward, certainly, we're cognizant of the supply pressures out there. And we're certainly setting our rates appropriately, but as we mentioned before, we really are trying to hold the line on street rate. Keep those relatively constant where we can, and use the discounting to get that marginal new rental. Overall, across the entire portfolio, we think that we're going to be probably flat to mildly down, but acknowledging that there are certain markets where we will be a little bit further down on occupancy. So Tammy highlighted Phoenix, Atlanta, Portland, Oklahoma City. All those have been more difficult markets recently, and we expect that to continue somewhat in the new year.

Todd, this is Arlen. The other thing to note is, we really do have to look at each submarket around the specific stores. So we do look at that in terms of -- it's one thing, if there's new supply in Atlanta, but if it's on the other side of Atlanta, it wouldn't have any impact on us. Whereas if it's a block down the street, it's going to have a big impact on us. So our budgets reflect that specifically.

Sure. Understood. So -- but in Atlanta, for example, where occupancy ended the year down a little over 600 basis points year-over-year. I mean, would it be safe to assume that you're increasing discounts and offering more promotions in a market like that?

Yes. Yes. We would do that. And it's also very competitor-specific. But our key focus is to try and keep our street rates from going down and use more discounting and promotions to keep our occupancy from being hit as much.

Okay. And just lastly, Arlen, Public Storage this quarter was out discussing their intent to be more aggressive in terms of third-party management. I'm just curious where you stand on bringing the NSA PROs under one operating platform to potentially benefit from increased scale and maybe rebranding the portfolio. I realize it's not the same thing. It's a different objective, but sort of arguably, accomplishes or lines itself to the same end objective. So just curious to get your updated thoughts there.

Well, we continue to get the vast majority of the scale benefits by providing the common platform that our PROs can operate under. And there's a small amount of the benefits that you probably can't get without going under a totally unified operating system. But we think that that's more than made up for by the additional expertise, local market expertise and the acquisition emphasis that we get through having so many PROs. I mean, we literally have 9 acquisition teams out in the market finding deals, which is why our external growth is so much more than any of our peers. And as it relates to the brand side of things, unfortunately, we can't get the brand public storage. That's a generic search term. But other than that, basically people don't search for brands. They search for stores near them, self-storage near them. And we're very good at using our web marketing platforms to get high rankings, whether that be organically or through a pay-per-click-type approach.

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

I just wanted to ask you on the -- just first of all, on your same-store growth outlook at 4% to 5%. Did you say that the 99 that you're adding from last year's pool would grow at the same pace as what you were seeing in '17?

No. It would grow at the same pace as the remaining 277. So often, Smedes, we get the question, does this change in the same-store pool really give you a big pickup. And we wanted to address that, that fundamentally, those 99 are going to perform at almost the exact same numbers as the other 277.

Okay. That's what I wanted to get clarity on. And then the other question we had was just looked like your acquisition activity really picked up in the fourth quarter, and it's pretty strong thus far in the first quarter. So is that coming from -- I guess, I just wanted to understand the source a little bit better. Is that the developments coming online from the PROs? Or acquisitions that they're procuring for you? Or is this your stand-alone portfolio -- platform?

It's somewhat of a mix, but it's almost all sourced by the PROs. There are a few developments that the PROs had stabilized that they contributed, so that'll be part of our captive pipeline between those 2 quarters. The PROs have sourced a lot of third-party acquisitions. We had a few stabilized other nondevelopment stores from PROs. But it's a total mix. As I mentioned, we also had some JV acquisitions in there as well. So it's all 4 of those avenues of external growth that I mentioned were coming to play, basically in the combination of Q4 and Q1 so far.

Okay. And then just -- I just wanted to ask you your range on the acquisitions outlook. It's quite large. What are kind of the puts and takes around being at the high end or the low end?

Bottom line is that with already closing $100 million in the first couple of months of this year and with what we see, we'll hit the low end with -- between our captive pipeline and with what's already very identifiable. And then we should hit the midpoint with just normal acquisitions. And to hit the highest end, we'll probably have to have at least either a new PRO or a small portfolio that comes in sometime during the year. But we feel really, really positive that at this point that we should at least achieve the midpoint of that range.

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

Can you give more detail, I guess, just back to the Q4 and maybe the already Q1 acquisitions? Sounds like some of these acquisitions are newly built, so maybe you don't have a cap rate on those, but maybe the range of cap rates you're buying at just for the stabilized assets.

Yes. Todd. If we take away the new developments, which, as you say, you can't really have a cap rate on those. The other ones range from about 5.9 to 6.5, and the average or weighted average is right around 6.25 on a year 1 forward cap rate range. So that's been consistent with our past experience, but may be a little bit better. I think, last year, we might have averaged 6.15 or something like that. So it's very comparable. And we definitely are seeing sellers with a lot more realistic expectations, where they're at least not seeing or expecting the cap rates to go down again.

And what do you attribute that to? Is that a reflection maybe of what the public market is saying to the stock prices of the REITs, so they don't have the currency they once had? What's impacting that, you think?

I think there's several things. One is clearly the interest rates moving up. Another, I think, as what you identified that the public stocks are trading frankly, at nowhere near as good of multiples right now. And then, I think the third is just the general supply-demand situation. We still have good demand with a lot of buyers out there. But the buyers are, for the most part, being pretty disciplined.

Okay. And for the JV acquisition guidance. How were those generally sourced? And do you have a set dollar amount that you've committed to fund these JVs? What would need a property to go into a JV versus to be wholly owned?

Yes. This is Steve. We do have an internal team that works on those JV acquisitions, works on sourcing and underwriting. And the JV really is focused as far as acquisitions on 4 exclusive market territories. So those are basically the East Coast of Florida, Northern Alabama, the Philly metro area and Northern California. And that's where we look to acquire. We have a commitment with our JV partner in terms of the total volume of acquisitions that we would like to do. But that is by no means a restriction. We can go beyond that commitment. That commitment was $100 million at the time of the joint venture inception.

Our next question comes from the line of David Corak with B. Riley FBR.

Within the captive pipeline, what are some of the assumptions and probabilities assigned to acquiring assets within that in terms of the debt maturities and stabilizations within the pipelines? What should be available to acquire in 2018?

Yes. So every year, we go through the list of the captive pipeline properties. And then we assign both timing based on debt maturity or stabilization and the probability. If the PRO totally controls it, the probability is obviously much higher that we'll be able to acquire it upon debt maturity versus if the PRO is either a minority partner or just a third-party manager. So as we looked at that for 2018 specifically, with the combination of the probability weighting and the debt maturities schedule, this year, we have between $50 million and $100 million of assets that we project from the captive pipeline that should come in into NSA.

Okay. That's helpful. And then going back to the idea of rate integrity in some of the higher-supply markets. Has that been effective thus far? Have competitors being acting in a similar manner? Is it kind of all over the board? But the real question though is, if we fast forward to a year from now or 18 months from now, if you've got a competitor kind of slashing rate right next toward to you, how does that set you up once they stop if your rates are significantly above market or at least their kind of rate?

Yes, David. So we play that on a store-by-store basis, and all the way down to the price-tag basis in terms of how we compete. We've made it a strategic goal to not take the hit in the street rates or asking rates, but to try to do with discounting and compete with higher discounts where we need to. And so far, that's held. We've been very successful with that. And even in stores that are threatened by new supply, we're also successful on raising rates on in-place customers. So it's not that as draconian as you might think out there. We are able to compete with new stores that are filling up, and we can compete effectively without slashing rates. And when we come out of this and everybody has filled up to some extent, the demand has been absorbed by the new supply, I think we'll be positioned just like everybody else and be ready to compete. So I don't see that as a problem going forward.

Okay. And then, Tammy, you touched on this a little bit in your prepared remarks, but can you walk us through the primary drivers of expense growth guidance this year, and where there might be some wiggle room on either side?

Sure, I think the biggest driver of same-store OpEx this year will be our property tax expenses. So that is something that we saw in 2017, and we fully expect to see it again in 2018. We fully believe that property taxes could go up in the range of 5% to 6%, but we also believe that our controllable expenses will come in, in the range of 2% to 3%, David.

Our next question comes from George Hoglund with Jefferies.

So just one question here on development within the PROs. Can you give a sense of what's the level of development going on within the PROs, whether it's them agreeing to acquire CFO properties or stuff they have going on?

Yes, George. I would say that the PROs are being more cautious on new development in light of the increasing supply, which is actually consistent with what we're seeing with the more sophisticated developers out there as well. We're seeing a lot of deals that are getting canceled, people are delaying new developments and our PROs are doing a similar thing. But right now, I think in combined total, our PROs probably have around maybe 12 to 15 properties that they're looking at either at various stages of development. Some of them might be under construction, some of them might be just finishing permitting. Some of them may be delayed. We generally don't do a lot of CFO acquisition, unless we find it to be a really good investment. And we look at those in NSA. And anything that the PRO would do, if he's looking at a CFO, he has to offer everything to us first as an opportunity, and we might do it directly in NSA. But if it's too dilutive, or we think there's too much risk on filling it up, we would not want to take on that kind of risk. And then, we would decline it and let the PRO have the opportunity to do it himself.

Okay. And then just on the JV side. Would you anticipate doing any new JVs in 2018?

I can't say anticipate is a good word, but we're always -- we always look at it. Now, we're going to grow our existing JV for sure. We already know we've got some properties under contract for that. But also, if the right opportunity comes along, we're always open to it. And as you know, in general, for like a new JV, it has to be pretty sizable, something like $0.5 billion, to make it worthwhile for us to do it in a JV-type format. And I certainly don't have anything like that right now. But those things come up really quickly, and we just can't predict them. So we just have to react and keep our powder dry and have relationships with potential JV partners that could move quickly.

Okay. And actually, if I can just squeeze one more in there to tag on to that. Some of your peers have commented on some portfolios out there in the market that may not be geographically or quality-wise portfolios they'd be interested in, which means that they might be more in line for your geographic markets. Are there larger portfolios that you're currently looking at in the market?

Well, if any come up, we always look at them. So there are some things that are out there right now that we're taking a look at. They're not particularly big. But -- and I wouldn't call them, I mean, I think some of these, there's a pretty sizable development portfolio that's on the market right now that's very high-quality property. So I will say that anything that's out there we'll look at. Primarily though, we want to continue to increase our market share and our presence in the markets that we're already in. So if a portfolio came up in Manhattan, we wouldn't be interested in that. We're not in that market. But if something comes in markets that we overlap with, we'll look at anything there.

Your next question comes from the line of R.J. Milligan with Robert W. Baird & Co.

This is Will Harman on for R.J. Appreciate the color on new supply, but can you just remind us what percentage of our portfolio is outside of the top 50 MSAs? And then, can you just provide some commentary on what you're seeing in terms of new development activity outside of these top 50 markets?

So we break it down, Will, into our top 20 MSAs, where we have about 35% of our portfolio. So that would mean 65% of it is in MSAs 21 through -- on up. So if we go to the top 50 MSAs, my guess is -- I don't -- my guess is that would probably put us at around 65% of our stores in the top 50 MSAs. But I don't have that exact number right off the top of my head. But I can tell you that based on some external reports we've read, and they appear correct based on our independent looking, in the top 50 MSAs last year, supply grew at about 3.8%. And demand only grew at about 2%. So obviously, the top 50 MSAs are where you have a lot more pressure on occupancy and rates. And, whereas, the MSAs from 51 and up, the growth and supply was way less, and we're continuing to see a lot less in those markets. It's really mostly in the top 50 MSAs where you see the new supply.

Got you. And then just looking at your guidance for SP unit distributions. It looks like they're going to be flat in 2018 at the midpoint. Does this guidance include the addition of any new PROs? Or could you just provide a little more color on why it's flat year-over-year?

Yes. It does not include the addition of new PROs. What it really reflects is that with our model, every time we raise new equity, which we raised a lot of new equity in the fourth quarter of '17, every time we do that, we increase the priority return that goes to the common shareholders and the OP pool. And so that makes it much harder for the PROs to increase the amount going to the SP activity. And so that's largely a reflection of the fact that because of the way our waterfall works, we always give a real priority to the common shareholders and the regular OP unitholders. And that's really more of a reflection of that for the guidance in 2018.

Got you. And then last question is just on the balance sheet. You guys had previously talked about targeting 6 to 7x leverage. Is that still what you're targeting? And if so does that now include the preferred you offered in Q4?

So I think we've rethought our stated range. Our target range is now 5.5 to 6.5x, sort of how we're thinking about it over the long term.

But that doesn't include the preferred.

And -- but that doesn't include preferred. Right.

Our next question comes from Barry Oxford with D.A. Davidson.

Arlen, can you give us a little more color on the PROs opportunity and maybe how far you are down the line with maybe 1 or 2 of them, just as far as what we might expect maybe this year?

Well, Barry, I would say that...

I know it's a tough question to answer. I get it.

It is, but I can tell you as far as, we've got about 10-or-so people that we've been talking to for like 2 years or more. And I'd say, of that, there's maybe 5 that are pretty serious, but when they ultimately pull the trigger and if they do I can never predict that. I honestly thought we would end up with 2 last year, and we ended up with 1. And we only have slots for basically another 3 to 5 more PROs total, and then we'll shut that off totally. And of course, whether it's 3 or 5 depends partly on how big each PRO is. A larger -- if they're larger, it would cut off at 3 and if they're smaller, it might go to 5. But the timing of when that happens is really hard to predict. So the best guess is still to say maybe 1 to 2 a year as a rough estimate, but unfortunately, I'm not very good at guessing exactly when that happens.

Right. I get it. It's definitely hard. My last question, when I'm looking at your same-store forward guidance, is part of the slowdown from '18 -- or from '17 obviously related to some of the supply that's happening but also, the fact that your systems now have been kind of up and running, and it's just going to be harder to squeeze any efficiencies out of the current portfolio, or not necessarily?

Barry, it's Steve. Yes, we agree with that. Certainly supply is a big driver of that deceleration. But I think it's also we're at the point in our life cycle where we have matured, our portfolios matured, our platforms matured, and even same-store pool, as we add the 99 stores this year, they're going to have a similar growth profile to the remaining 276 stores. So that portfolio maturity is an impact or a factor in some of that deceleration.

(Operator Instructions) Our next question comes from the line of Vikram Malhotra with Morgan Stanley.

Vikram, are you there? We can't hear you.

Our next question comes from the line of Juan Sanabria with Bank of America.

Just hoping you could expand a little bit on supply. I think you said that maybe 21% of your stores are exposed to supply this year for '18. I was hoping you could help us contextualize that if you have the number for '17, just to see the delta year-over-year.

It's a little bit higher than it was in '17, Juan. It's a little less actually than 20%. I think the actual number is like 18.6% of our stores have new supply that's either opened up in 2016 or 2017 within a 3-mile radius. And so we look very closely at those because those will very directly impact our stores. That number, I don't have the exact number in 2017, when we looked at it for the previous 2 years. We look at the 2 years prior new openings, because that's kind of how long the real impact carries, but it was around 17%. So it hasn't changed a lot. I can't say if it was 16.8% or -- but it was right around 17%. And now, we're at 18.6%. So really there won't be a lot of change, but a little bit more.

Okay. And then just on street rate growth. Can you remind us what street rates grew by on a net effective basis in '17? And I don't know if you can provide it, but what you're forecasting in guidance for '18.

Yes. Just a comment on Q4. For Q4, we saw street rates were basically flat to mildly positive, we expect for this year, consistent with our guidance, we expect street rates to be -- continue to be flat and potentially mildly down. But when you think about effective rate or contract rate that we have with our customers, we're up 5.2% in average rent per approximate square foot in Q4. We expect to see similar behavior this year. And that's really going to be driven by rent increases to existing customers. So less headroom from the street rates moving around. But we still have been successful and continue to be successful in raising rents on existing customers, and that will drive revenues for this year.

And just one quick one for me. Do you have the sense of what cash-on-cash yields, the PROs, or the guys kind of in your network as a whole are underwriting for new development starts today, and how that's changed over time, if at all?

Yes, Juan. I would say that it has gone up on cash-on-cash yields for new developments on what they would look at probably by about 50 to 100 basis points compared to what they were thinking before because of the risk. There's a lot more risk now for new developments versus when there was almost no new supply coming on. So I think right now, they'll look -- anyone that's in the development business is looking more that they need to see 8% to 9% or at least 8.5% cash -- stabilized cash-on-cash yields for new development. It's -- because frankly, I certainly wouldn't take the risk of a new development if I can't get at least that kind of return.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Nordhagen for any closing remarks.

Thank you, and thank you all for joining us for today's fourth quarter and year-end earnings call. As always, we appreciate your continued interest in and support of National Storage Affiliates, and we look forward to seeing many of you at the upcoming Wells Fargo and Citi conferences over the next month. Thank you again. Bye-bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.