CubeSmart (CUBE) 2009 Q4 法說會逐字稿

Good morning and welcome to the U-Store-It Trust fourth quarter 2009 earnings release. Our participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to answer questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Dean Jernigan, Chief Executive Officer. Please go ahead.

Good morning. Today's remarks will include certain forward-looking statements regarding earnings and strategies that involve risk, uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements. The risk and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the Company files with the SEC, specifically the Form 8-K together with our earnings release filed with Form 8-K in the business risk factors section of the Company's annual report on Form 10-K.

In addition the Company's remarks include reference to nonGAAP measures. A reconciliation between GAAP and nonGAAP can be found on our Company's website.

Good morning, again, to everyone. As usual with me today are Chris Marr, our President and Chief Information-- Chief Investment Officer, and Tim Martin, our CFO. The order today, Tim's going to start off and try to put a nail in the coffin of 2009 and see if we can bury that year. And then I'm going to come back and talk about what I see happening in 2010. And then Chris is going to talk about the consolidation opportunities we see in our sector going forward. Tim, it's all yours.

Thanks, Dean, and thanks to everyone joining us for today's call for your continued interest and support of U-Store-It Trust. As we all know 2009 was a challenging year for consumers, businesses and the global economy. We certainly had big challenges ahead of us here at U-Store-It as we entered 2009. A continuing recession put pressure on the demand for our product, capital markets were all but shut down and we needed to address upcoming debt maturities and reduce leverage levels.

It was a challenging year and we met the challenges head on. Our combination of capital raising activities generated over $875 million and transformed our balance sheet. We entered 2010 with cash on hand to address our 2010 maturities. We have a fully undrawn $250 million revolving credit facility providing us the ability to fund all of our maturities through late 2012 without raising any additional capital. We are well positioned and energized as we enter 2010.

I'll discuss our financial outlook for 2010 in a few minutes, but first a quick review of our fourth quarter and full year 2009 results. Last evening we reported full year 2009 FFO per share of $0.73, which was at the high end of Company guidance. We also reported fourth quarter FFO per share of $0.13 also at the high end of our guidance range. Revenue from our same-store portfolio of 360 facilities was in line with our expectations for both the fourth quarter and full year 2009. The magnitude of our fourth quarter decline is partially as a result of a tough comp as our fourth quarter 2008 revenue was quite strong relative to our public self-storage peers.

As I mentioned last quarter declines in rental income have been offset by increases throughout 2009 in tenant insurance income. The fourth quarter marked the second consecutive quarter we've been able to provide tenant insurance to more than 91% of our new renters. Overall tenant insurance penetration has steadily increased from 21% at year end 2007 to 36% in year end 2008 up to 45% at year end 2009.

Property level expenses have been a major focus for the Company dating back to the latter half of 2008. That focus resulted in same-store property expenses declining 5.1% comparing fourth quarter 2009 to fourth quarter 2008 and a decline of 1.3% comparing full year 2009 to full year 2008.

For the year, property taxes, property level personnel cost and marketing expense all increased between 2% and 3% in 2009 over 2008. But our focused efforts to control expenses resulted in year-over-year declines in several areas. Utility cost decreased as we focused on energy efficiency at the property level. Postage costs decreased as we refined our communications with our customers. Repair and maintenance expenses declined as we focused on preventative maintenance and utilized in-house personnel more and outside providers less. Telecommunication costs at the property declined as we consolidated lines and negotiated better terms. We controlled the costs of supplies at the store level and found more cost effective solutions on landscaping while keeping our properties looking great. Simple said, we focused on finding opportunities on every line item and our team met the challenge to do more with less.

We closed on the sale of three facilities during the fourth quarter. The properties had a total sale price of $9.9 million and we recognized gains totaling $0.6 million. The final three sales completed a very active and successful disposition program for 2009. For the year we sold 19 properties totaling 1.2 million square feet for a total sale price of $88.9 million and recognized gains on those sales totaling $14.1 million. The weighted average cap rate on our 2009 dispositions was 8.2% on trailing 12-month NOI and the sales average $76 per square foot.

We closed on six mortgage loans during the fourth quarter that generated $43.4 million in proceeds. And for the year we closed our mortgage loans with 17 different lenders that generated $116.1 million at a weighted average term of 6.6 years and a weighted average coupon of 7%.

Additionally during the fourth quarter we closed on our previously announced s$450 million secured credit facility which has a $200 million secured term loan and a $250 million secured revolving credit facility. The $250 million revolver had no outstanding balance at year end and continues to have no balance drawn through today. Interest on the facility is based on a borrowing spread over LIBOR. The borrowing spread ranges from 3.25% to 4%, depending on our leverage level, and the loan has a LIBOR floor of 1.5%. At year end we were borrowing at 5%, reflecting a 3.5% spread over the 1.5% LIBOR floor. For additional information on all of our 2009 capital raising activities, please refer to the investor presentation dated January 20th, which is available under our website under the financial information section of the investor relations tab.

One item of note has occurred subsequent to year end. Earlier in February, we repaid an $83.3 million CMBS loan, we refer to internally as YSI1, with cash. We also anticipate addressing the remaining $23.5 million of 2010 maturities with cash.

Now I'll switch gears looking forward to our expectations for 2010. We've provided full year 2010 FFO guidance of $0.43 to $0.49 per share and first quarter 2010 FFO guidance of $0.10 to $0.11 per share. This guidance reflects the full impact of our 2009 capital raising activities, including interest expense and amortization of loan procurement costs associated with the $116 million of mortgage loans. It includes the impact of our new secured credit facility including the amortization of upfront cost and the 50 basis point unused fee. Includes the impact of our 2009 property disposition, the impact of our joint venture with Heitman and the full year impact of the additional shares outstanding from our equity raised in 2009.

Our expectation for 2010 is that our same-store revenues declined 1% to 3%. We believe the storage sector will return to historical seasonal trends, but we started 2010 with reduced asking rental rates and decreased occupancy levels. We expect negative quarterly revenue comparisons during the first half of 2010 with a flip to positive comparisons later in the year. We anticipate same-store expenses to grow 2.5% to 3.5%, primarily due to normal inflationary pressures on our property level expenses. As I mentioned earlier, our team did a solid job of reducing costs across the board in late 2008 into early 2009, making our year-over-year comparisons perhaps more difficult than others who may not have focused on cost control efforts until later in the year in 2009.

Chris will detail in a few minutes our plans for 2010 related to acquisition and disposition opportunities. Our 2010 guidance assumes no net impact to FFO from acquisitions and/or dispositions. Our guidance for general administrative expenses is for a range of $23.2 million to $24 million ,and this range reflects our 2010 investment to broaden our marketing revenue management and operations teams.

Finally, we recently announced that our U-Store-It network has surpassed 700 member facilities nationwide. We're pleased with our progress and believe our network provides us and our network affiliates a competitive advantage as we leverage our marketing budget and internet presence. During 2010 we expect to invest every dollar of revenue we generate from selling lead store network affiliates back into additional marketing efforts. We believe this incremental marketing spend will benefit our properties by attracting additional customers and driving top line growth. Thanks again to everybody for taking the time to join us today. And at this point, Dean, I'll turn the call back to you.

Okay. Thanks, Tim. I would just like to start off this morning with a simple statement but I hope it is meaningful. It goes like this, self-storage fundamentals will improve this year even if the economy does not. That is my opinion and our opinion here at our Company. We're experiencing sequential occupancy gains already in 2010 that are extremely encouraging. These occupancy gains will result, as Tim has said, in year-over-year revenue gains in the second half of 2010.

So what is giving us this confidence? If you look back to Q4 2008, let's call it post Lehman, we suffered occupancy loss of 2.6% in that quarter. Those losses continued on into the first two months of 2009, when we lost another 2.1%, that of course was the exodus of our discretionary customers at that time. I stop at the first two months of the year because that's all we have in comparison for for this year. But if you compare Q4 2008, where we were down 2.6% to Q4 2009 when we were down only 0.5%, that of course is an improvement of 210 basis points over those two quarters. And if you look at the first two months of this year, versus the first two months of last year, we have another 210 basis points in improvement. Between the 2.1 occupancy loss that we had in the first two months of Q1 2009, versus what we're experiencing right now, that's very encouraging and that is flat occupancy for the first two months of 2010.

We actually gain a little square footage in January, which is the first time in my experience of seeing that. In February, of course we have a weekend to go, but February looks like it is going to come in with just a little bit of a loss, and I would characterize the first two months as being flat. That is extremely unusual and again something that I've never seen in all of my years. So with those numbers, we have closed the year-over-year occupancy gap significantly as we're now down, as of this morning, only 176 basis points in year-over-year occupancy. And that should flip into positive territory in the second quarter of this year. With these occupancy gains and with the rent increases we continue to pass along to our existing customers, revenue should turn positive in the second half of this year and we are modeling with that flat asking rents. In other words, street rates remaining where they are today.

However, a little bit more good news there is today's street rates are actually up 1.14% over the average for Q4 of 2009. Though the asking rates, or the street rates, that we experienced in 2009, which were down 5.2%, we see no repeat of that in 2010. Very encouraging fundamentals for the worse five months of the year historically. And as we go into 2010, I go back to my earlier statement, that I feel certain that fundamentals will improve this year even if the economy does not. And of course in our forecasting we are looking at an L-shaped economy in 2010. With that, we'll get off the fundamentals for a few minutes and listen to Chris tell us about what the external growth opportunities are in 2010. Chris.

Thanks, Dean. Success always comes when preparation meets opportunity. We have prepared our Company extremely well. We have put in place leading edge scalable systems that permit us to process transactions in the most cost efficient manner. We capture data about our customers and their behavior that allows us to maximize the revenue potential from each rental. We have a seasoned team of people who are very capable of expanding their scope and accepting greater challenges. We have a strong balance sheet with existing cash in borrowing capacity to meet maturities through the end of 2012. We have proven in 2009 that even in the worst economic crisis of modern times, we could access multiple different forms of capital. We have a seasoned and dedicated Management team that realizes that success is the result of hard work, being in the right place at the right time and then doing something about it.

With the systems, people and balance sheet prepared for growth, we are planning to generate that growth from two main areas. First and foremost is maximizing the potential of our existing portfolio, taking more than our share of customers in our markets and thereby growing our revenues through occupancy gains and a return of pricing power. Dean has elaborated on our internal growth opportunity during his remarks.

Our second area of growth will come from consolidation opportunities in the sector. As financing and refinancing opportunities continue to be challenging, and assets find themselves in the hands of lenders, opportunities will present themselves to us and we are prepared to act. As consumers of self-storage continue to evolve away from the historic means in which they found a location at which to rent, which was primarily reaching for the Yellow Pages, and move to using search engines and other forms of web-based social media, the smaller owners of self-storage will find that they are capturing a smaller and smaller slice of the available consumer demand. They will turn to the large owners to affiliate with them or to sell their assets. We are prepared to act on this opportunity through both our network partners program as well as through acquisitions.

The reality is that there is very little product on the market today that represents an attractive opportunity for us to commit capital to. Based on our discussions with institutional owners and owner operators, as well as with the investment brokers, we see the opportunities beginning to develop. I believe that the upcoming rental season will need to play itself out and that coming out of the back end of the season, late summer into early fall, we will experience an upturn in investment opportunity.

What has shaken loose first are the assets that were developed in the last few years and are not leasing up according to pro forma and the construction lender would like to have their debt repaid. Late last year and into early this year we are being asked to underwrite a number of these type opportunities and the brokers are being asked to provide opinions of value. Not surprisingly the valuations are less than the debt in place on the assets. As a result, the owners and their lenders are going back to the table and discussing means to push that problem out into the future.

We're beginning to see distressed opportunities where the assets were once operated at stabilized levels, however they have trailed off during the difficult market in the last 14 to 18 months. However pricing to a yield that is acceptable to us and to the seller remains a challenge. We see the consolidation opportunity clearly out in front of us. We can feel momentum being created and believe once we get through this rental season, the product will begin to shake loose and come to market. We know we have the platform in place to take advantage of the opportunities.

Given the time of the year and the ongoing Olympics, I'll end by paraphrasing a quote from Wayne Gretzky when asked for the reasons for his success. "We are skating to where the puck is going to be, not where the puck currently is." With that I think we will turn the call back over to you, Operator, Amy and we can start to take questions.

Thank you. (Operator Instructions) Our first question comes from Todd Thomas at Keybanc Capital Markets.

Hi, good morning. I'm on with Jordan Sadler as well. Dean, thanks for the commentary on January and February. But I was wondering would you characterize the narrowing of the year-over-year occupancy gap that you've seen further this year so far largely as move-in demand or is it mostly on the move-outside of the equation?

It's a little of both Todd, but mostly on the move-out. It's really an interesting phenomenon that we are experiencing now. Again, a lot of firsts in my career through this economy is that we're going through, that our customers are staying longer. Our length of stay now has extended over 400 days. It's extended about 20 days more from the previous quarter, our last quarterly call, and that is bringing our vacates down. Our rentals are solid and steady, there are people who need storage, so clearly we do not have the discretionary customer coming back to us but we are starting to see trickles of our commercial customers coming back. And of course we still have people moving, taking advantage of the low interest rate environment with homes, even though home sales are down, we're still experiencing good move-ins. But a long-winded answer, but I think I got it in there someplace for you, Todd.

Okay. And then I guess going back historically last year was a little bit of an anomaly. But when does your-- when would you say your stronger leasing season really does pick up? I know April was still a weak month last year. So I just wanted to try to see maybe historically where the trends would be on a more normalized basis.

Yes, let's talk about normalized basis and then let's talk about what we're seeing for this year. Normally we would see decreased occupancy in January, February and March with April being a flat month, and then our rental season picks up in May and June is our strongest month. June will -- July will continue to have net gains and we'll start to see move-outs starting again in August and it trends down toward the end of the year. What we're experiencing this year with flat occupancy in the first two months, I'm hopeful that we'll continue to see some flat occupancy in March. And I do not see rentals picking up in April but I do see us maintaining a flat occupancy in April. So I see the line fairly flat from here to May, which if not seasonal, but I think is unique to this year as a result of last year.

Okay. And then on the-- on your affiliate network, can you just provide some context around the amount of revenue that you expect this to generate just so we can get a sense of how much will be reinvested into marketing? Just so we can kind of think about the magnitude of the impact it might have.

How about if we do that for you, Todd, on a retrospective basis. We will start to tell you, as we move on out through the year, how it has impacted our marketing spend. But for comparative reasons, I'd rather not get into that, if you do not mind.

Okay. All right and then just lastly on expenses. The growth that you're forecasting, is that mostly for real estate taxes or are there some additional declines in some of the control book expense categories that there's still room to improve upon?

Todd, this is Tim. There really aren't. I was trying to allude to in my commentary to say that all of the heavy lifting from an expense control standpoint, we really did start aggressively in late 2008. So our opportunities to find any remaining low-hanging or medium-hanging fruit are all but done. So our expectations of 2.5% to 3.5% are really based on inflationary pressures, on the personnel line, on real estate taxes, between those two that makes up the lion share, or at least the majority of our operating expenses. And then across the board we're really trying to maintain a lot of the hard work that was done over the past 18 months.

Okay. All right. Thank you.

The next question comes from [Andrew Yu] at Banc of America.

Good morning. Thank you. First question I had was looking at your same-store portfolio, it looks like California, one of your bigger markets, has an occupancy rate of, I don't know like 67.5. You can comment what's going on in that market? Is there something particular to California?

No. I mean California actually is a market that we're seeing a little bit of improvement in. We have a lot of large facilities in San Bernardino area that is challenging to lease 150,000 square feet in San Bernardino right now. But if you look back in California at 9/30, that portfolio was 67.2% occupied. It takes it up to 67.5% at 12/31, 67.9% as of three days ago here in February. So we're encouraged with a little bit of progress we're seeing in California.

Great. Thanks for that color. And then also in terms of concessions, what are you guys offering today and how does that compare to what your competition is offering?

Well we like our friends up in Buffalo but we're not doing the name your price whatever you want to pay us we'll take promotion. But we do have multiple types of promotions according to what level the particular unit is occupied. So if it is -- if we have a lot of vacancy in a particular unit size, we'll go as high as two months free with that being the first month free and the last month free. But most of it falls in there between a half month off and a first month free for most of our promotions on unit sizes.

So from fourth quarter 2009 to let's say today in February, the concessions increase or are they pretty much flat from fourth quarter? I'm just trying to get a sense of where concessions may be trending.

Year-over-year concessions are down about 20%.

Okay.

We are being very careful with concessions and trying to hold our rates. So-- but very, very-- we're very pleased with where we are in concessions. We're-- 22% of our rentals are full price rentals also.

Great. And last question I had was can you comment on bad debt? What was it for 4Q 2009, how does that compare to your historical average?

Yes, it's totally counter intuitive, but it's not without a lot of effort. Our bad debt write-offs are down substantially, I think about 40% year-over-year. What makes that work for us is that we are spending a lot of time with our customers, letting them know when their rent is due. We give them e-mail advice as to when their rent is due before it's due, before they get a late payment. Also our quality of our customer is much, much better than what it has been in the past with nets that indicated what their length of stay growing. They have something of value to store with us. When they do get in trouble and we have to auction their unit, we're actually collecting more rent out of those sales. We're up to about 35% of what is owed to us, we actually collect at auction now. But auctions are down as well year-over-year. So the customer is-- has pushed power payment toward the top of our stack, if you will.

And what's interesting, to put some numbers around that, is our receivables at the end of December of 2009 are down about 30% from where they would have been at the end of 2007 and down about 20% from where they were at the end of 2008. So it is counter intuitive, but we have a customer base who is a much more reliable credit today than we would have had over the past two years.

That's interesting. Thank you so much for the comments.

The next question comes from Michael Knott at Green Street Advisors.

Hey, guys. Just curious if you can comment on your rate versus occupancy strategy in the context of the comments you proffered on the call, Dean?

I like our position, Michael. I like having the vacancy. I like having the inventory. I like the fact that we are holding our own, have held our own throughout a most difficult year with fundamentals getting stronger and getting better for us. I like our position.

Okay. And then with respect to your occupancy comments, can you just clarify, you were talking mostly year-over-year, right, but then I thought maybe you were talking about sequential as well. Can you just maybe clarify that specific point for me? In terms of the first two months of 2010.

Yes, I am talking sequential. In Q1 2010 we are flat to Q4. In other words, January we were up a little bit and February we're going to be down just a little bit, so flat. So when we end February we're going to be very close to what our occupancy was at the end of Q4 2009.

Okay. And that's-- and that also -- so you're sayings that's obviously not the typical seasonal pattern, but also from a year-over-year standpoint, how does that shake out?

Well up 210 basis points in the first two months of this year and up another 210 basis points when you compare to Q4 2009 to Q4 2008, so that's the 420 basis points that's really giving me the encouragement that we-- our fundamentals are looking much stronger for 2010 and we should be able to accomplish some of the things that we've talked about.

Okay and then question for Chris. I didn't see any mention about further expected sales. Should we infer that you're now happy with the composition of the portfolio from a quality standpoint?

We're very satisfied with the composition of the portfolio. But there's always that-- there's always those few assets that have to fall out of the bottom of the ranking that we evaluate for disposition on a regular basis. So I think opportunistically as we move through the year with the free up of some of the assets as a result of paying off YSI1, as Tim said, we will exit or sell a few facilities as we move throughout the year. But it will be much more of a kind of strategic pruning and a lot less volume than you would have seen clearly in 2008 and 2009.

Okay. Thank you.

The next question comes from RJ Milligan at Raymond James.

Good morning, guys.

Good morning.

Good morning.

Have you guys seen any changes in the trends with in-place customers as you guys increase rents? Are they becoming stickier, less move-outs for most guys?

Yes I would say it's really no different from the overall portfolio. The people who are storing with us today have a very definite need. And we're still able to pass along some rate increases to those folks. We do have to negotiate with them from time-to-time and we will to save a customer as we are, they're sensitive to the environment and to the situations they find themselves in. But we are still able to pass along some rate increases to our existing customers.

And now has the frequency or magnitude of those increases changed?

We're always testing that and we're in the middle of doing some testing right now. But it's generally what the other companies are doing I think.

Thanks, Dean. And Chris, looking at external growth, I guess in light of your economic and fundamental outlook, so would you guys rather make acquisitions of distressed properties or vacant properties?

Well what-- ideally what we expect to find are opportunities to acquire where you're not paying for that vacancy. So to the extent that your underwriting the in-place tenant at the current asking rents, and then having that upside in the facility both on pricing power over time, but also on that occupancy gap that you're not buying. So it's really a function of applying that methodology to what the opportunities are out there. And as I said we'll-- we have been spending and will continue to spend a lot of time looking at the opportunities across the spectrum.

And Chris, do you think that pace of opportunities will pick up once we get into the third and fourth quarter after the peak selling season?

We do. We really feel like there is a backlog of opportunity that will start to shake loose and present itself as we move through -- as we move through the rental season. I think also-- and that's from the owner perspective. I think from the financial institution perspective as they continue to get their arms around what they have and are more prepared to take action with the assets that they have-- that they have in their portfolio.

Great. Thank you, guys.

The next question comes from Lindsey Yao at Robert W. Baird.

Hi. Last year I think the estimated recurring CapEx spend came down a little bit from 2008 to about $7 million to $9 million, is that going to continue for the coming year?

Hi, Lindsey, it's Tim. The-- our expectations for CapEx in 2010 are really in two different buckets. You have the bucket of recurring things like roofing replacements and paving the parking lots and painting the facilities, normal yearly stuff. And that type of expenditure continues in the-- our expectations for 2010 that that is in the $0.25 to $0.26 range so call it between $6 million and $7 million. And then there's the balance of other things that we evaluate more from a revenue generating standpoint and those expenditures for 2010 could range anywhere from $0.10 to $0.15 a foot. So our overall expectation is for capital-- CapEx spend between $0.35 and $0.45 a foot in 2010.

Okay. That's helpful. And then just on the snow expense that was earlier this year, do you have any sort of breakdown how that will be between operating expense and call it G&A over time, et cetera?

For snow removal costs?

Yes. Is that a breakdown that you can provide?

All snow removal costs other than me having to buy Chris lunch because he hurt his back shoveling, would flow through our property level expenses.

Okay. Great. Thank you.

(Operator Instructions) At this time, we show no further questions. I would like to turn the conference back over to Mr. Jernigan for any closing remarks.

Okay. Thank you very much. Thanks for joining us today. I look forward to seeing some of you next week in Florida and otherwise talk to the rest of you next quarter. Have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.