Extra Space Storage Inc (EXR) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2005 Extra Space Storage earnings conference call. My name is Michelle and I'll be your coordinator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's conference, Mr. James Overturf, Vice President of Marketing. Please proceed, sir.

Thank you, Michelle. Good afternoon and welcome to Extra Space Storage's first quarter 2005 conference call. With us today at Extra Space Storage is CEO and Chairman of the Board, Ken Woolley; Senior Vice President and CFO, Kent Christensen; and Scott Stubbs, our Senior Vice President of Accounting.

Before I turn the call over to them, please remember that management's prepared remarks and answers to your questions contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters which are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today.

Examples of forward-looking statements include statements related to Extra Space Storage's development and acquisition program, revenues and net operating income. We encourage all of our listeners to review a more detailed discussion of the risks and uncertainties related to these forward-looking statements that is contained in the company's filings with the Securities and Exchange Commission, and in particular, on the 10-Q for the quarter ended March 31, 2005.

These forward-looking statements represent management's estimates as of May 10, 2005. Extra Space Storage assumes no obligation to update these forward-looking statements in the future because of changing market conditions or other circumstances.

With that, it's my pleasure to turn the call over to Extra Space Storage's CEO, Kenneth M. Woolley.

Thank you, James. Welcome to our conference call, the second in just 4 or 5 days. We had hoped to have been able to give you the first quarter results when we announced the Storage USA transaction last Thursday, but we didn't have them quite ready and through our audit committee, so I really couldn't talk about them.

But they're now finished and we'd sort of like to discuss them in some detail. I guess it would be an understatement to say that we've been very busy during the last quarter. As you know, not only did we acquire 8 new properties and run our own business, but we also were in a heavy negotiation and finishing up all the due diligence to purchase the Storage USA portfolio and company.

We finished the quarter with 130 wholly owned properties and 18 joint venture properties located in 20 states. We purchased 8 new properties during the quarter for $62 million and the 8 properties we added were in our existing core markets, to bring our total number of properties to 148. And by the way, we are managing 172 properties at this point.

During the quarter, we also opened 3 new developments. The first quarter of 2005 is our second full quarter we've been able to report as a reporting company. Most of our previous comparisons have not been very relevant because they do not compare like portfolios.

As we did in the March earnings call, we will attempt to set more light on the same store performance of our portfolio, and also give you some insight (inaudible). As many of you know, the first quarter is typically the slowest time of the year for storage. Our internal data shows that we usually bottom out some time in late February or March.

We're clearly on an upswing now beginning in April, and May is the busiest month of the year. I'd also say that the storage business can be a little depressing during the first quarter, but it comes right before our busy rental season. The occupancy of our 123 stabilized properties was 85% at the end - at the quarter end, slightly lower than the December 31 pro forma occupancy of 85.3%.

The occupancy of our 25 properties in lease-up was 66.3%, as compared to 66.2% at the end of December. Usually lease-up properties don't do too well during the winter and start their occupancy growth during the spring and summer. Since our portfolio is made up of sometimes a confusing combination of wholly owned, joint venture, stabilized and lease-up properties, I'd like to talk about our portfolio in a more understandable format.

The first group of properties is what is shown in the press release and our financial statements as 38 stabilized same store properties. These are properties that are not in joint venture and that we owned a year ago as wholly owned properties.

The number in our year-end call was 31, so we've added 7 to the count. In this portfolio, revenues were up 3.2% quarter on quarter; expenses were up 7.4%, primarily due to snow removal costs in New England. If you adjusted for the snow removal cost, the expenses would have been up only 3.28%, and that's just normalizing snow removal at the previous year's level.

Our NOI was up 1.2% as a result. If you adjusted again the NOI for the unusual snowfall, it was the heaviest winter I think in 100 years in New England, the NOI would have been up 3.24%. A better snapshot of our performance we believe is a group of 75 stabilized properties. This group includes what is now 62 of our wholly owned properties and 13 of our joint venture properties.

We owned these properties a year ago, but 24 of the wholly owned properties were in joint ventures then, so we can't - we weren't able to compare them in the GAAP financial statements as like kind comparisons. But for operating purposes, it's more useful than the smaller number. These are all the properties that we owned 2 years ago that were stabilized 2 years ago, so it's a full comparison.

Revenues in that group were up 3.8% on a year-on-year basis; expenses were up 7.7%; and NOI was up 1.9%. Again, the expenses were up because of snow plowing. If you got rid of the increased snow plow, the expenses would have been 3.4%, which is right on our budget and NOI would have been up 4.0%.

Just as a note to kind of get you to understand that we're now in an accelerating trend of revenue growth, these properties' revenues were up 4.6% for the month of April. Regionally, if you want to look at how it was doing regionally, in April, Massachusetts occupancy was up 2% versus a year ago; revenues were up 3.5%, which is the first real turnaround for Massachusetts we've had in some time.

In Florida, occupancy was up only .8%, but revenues were up 7.3%. In California, occupancy was down .1%; revenues were up 6.5%. In New Jersey, occupancy was down 1.9% and revenues up 1.9%. And in Pennsylvania, occupancy was up .9% and revenues up 1.9%. The other smaller markets are basically flat.

So the whole thing was up 4.6%, so it's a combination of occupancy growth, but it's mostly increases in rent on existing tenants. The third group of properties is our lease-up properties. We have 25 of them, of which the CCS, CCU properties are considered a subset. These properties will provide a significant amount of growth in revenues and net operating income in the future.

Right now, the lease-up portfolio averages 66% occupancy as of March 31, 2005. A year ago, these properties were 52% occupied. As you can see, these properties have experienced significant occupancy growth in the past year. NOI from the 25 properties was 1.56 million for the quarter ended March 31, as compared to 830,000 for the quarter ended a year ago March 31, an increase of 102%.

The subset of these properties, which is our CCS, CCU earn out properties, had portfolio occupancy of 58% at March, 2005, versus 38% in 2004. The NOI for these properties was 544,000 for the quarter, as compared to 100,000 the same quarter a year ago, an increase of 444%. Our acquisitions pipeline resulted in the acquisition (ph) of 8 more properties in the first quarter of 2005 for an addition of $62.4 million.

We bought one in California, 5 in Florida, one in Georgia and one in New Jersey. All these properties compliment our existing portfolio in terms of quality and location and they're all fairly new properties. Also, I might want to mention that the large portfolio acquired just after our IPO, which we call the Storage (inaudible) portfolio, continues to perform better than forecasted and we're very happy with it.

These were properties in the Southeast including Texas and New Orleans and Georgia and Florida and South Carolina. On the development front, we opened three new properties which are owned by our sister company, Extra Space Development, during the quarter, and plan on opening an additional 5 this year as well as 3 expansions.

The total value of the remaining property expansion that will open in 2005 is approximately $45.5 million. Two of the properties in the expansions will be owned by the REIT, not by the sister development company. The 3 expansions will be wholly owned and 2 development properties will be held in joint venture format.

Our 2006 development pipeline has increased, and now includes 21 properties for a total development cost of $140 million. 18 of these development properties with the total value of 117 million will be owned by the REIT in a joint venture format. The construction of many of these properties has already begun.

Before I turn the call over to Kent, I'd like to comment further on the news we shared with you last week about Storage USA. I just want to reiterate how excited we are about joining the Storage USA team and getting together and bringing this large acquisition to fruition.

I was just in Memphis yesterday with the Storage USA team beginning the process to implement - to create and implement a smooth integration plan and we're very much looking forward to the opportunity to close this transaction. We're expecting it to close on July 5. That's the target date. We don't see any reason why it won't close on that date.

What that means is for the second quarter, we won't have any acquisitions and will have no significant impact on this - from Storage USA. Beginning in the third and fourth quarters, however, we will have the Storage USA expansion fully integrated and part of our financial statements.

With that, I'll turn over the call to Kent Christensen, our Chief Financial Officer, who will comment further on our financial conditions.

Thanks, Ken. Our financial statements covered in this report include the quarter ended March 31, 2005, and are compared with the quarter ended March 31, 2004. Results for these 3 months ended March 31, 2005 include the operations of our 148 properties. 130 of these were consolidated and 18 were in joint ventures, accounted for under the equity method.

This number compares with 108 properties in 2004, 70 of which were consolidated, and 38 which were accounted for in joint venture using the equity method. The results for the quarter ended March 31, 2004 included 6 properties in which the company did not own an interest, and 1 where the company sold this joint venture interest in 2004.

The properties were consolidated as a result of guarantees and/or puts that the company was liable for. 5 of these properties were de-consolidated on August 16, 2004, and the final property was de-consolidated on December 31. Some of the information about our first quarter, 2005, numbers; our revenues for the quarter were 22.9 million compared to 10.9 million in the first quarter of 2004.

Our net loss was $640,000 for the first quarter of this year compared to $6 million for the same quarter last year. The increases in revenue were due to the acquisition of 52 stabilized properties and the purchase of our partner's joint venture interest in 66 properties during 2004, and in the first quarter of 2005.

In addition to the acquisitions, there were increases in revenues to new and existing customers as well as substantial progress on our lease-up properties. During the quarter, the company saw continued quarter-over-quarter growth and consistent levels of occupancy in the 123 stabilized properties, which were stabilized at an average occupancy of 85%.

California and Florida remained our top performing markets, while Pennsylvania and New Jersey continued to lag. Our discounts on our properties were decreased 16% in this quarter compared to the first quarter of last year. Our G&A expenses for the first quarter, after netting of development fees, were 2.7 million.

This amount, when annualized, is higher than our projected annual G&A expenses after netting development fees. This is due to the timing of the recognition of our development fees. We generally have lower amount of development fees recognized in the first quarter and the fourth quarter, with the second quarter and third quarter having the higher amount.

We still are - expect our G&A expenses to come in at an annualized amount of $10 million, which is what the guidance was we have previously given. Our same store properties had increases in expenses due to snow removal and property taxes. The property tax amount was what we had expected; the snow removal amount was unusual.

These increases, primarily the snow removal, caused our first quarter same store expenses to be up 7.4%. We expect an increase in our same store 2005 expenses to be in the range of 3 to 4%. As to our balance sheet as of March 31, 2005, our outstanding debt, including 48.5 million drawn on our line of credit, was 529 million.

Currently, the fixed rate debt to total debt is approximately 62% and the weighted average interest rate on our debt is 4.2 for fixed rate loans and 4.6 for the variable rate loans, or a total weighted average interest rate of 4.76%. As of March 31, we had $68 million available under our line of credit, of which 48 million was drawn.

Our debt-to-market cap ratio at quarter's end was 55.7 and our debt service coverage ratio was 1.8 times EBITDA. We are continuing through our process of documenting our internal controls as required by Sarbanes-Oxley and expect to have the testing and documentation completed by the end of the third quarter. As reported in our press release and our 10-Q, our quarterly FFO per share was 15 cents.

This amount was 2 cents below our internal estimate of 17 cents. 17 cents was the amount we expected to achieve in giving our guidance previously of 87 to 91 cents. Historically, our second and third quarters will produce better amounts of FFO per share. We missed our 17 cent number due to 2 items.

The first was snow removal costs in excess of our anticipated amount of 1 cent and acquisitions which had been anticipated to occur in the first quarter, which did not occur, of 1 cent. As we previously stated on our call last week, we are expecting - we gave guidance last week as to what our FFO per share is expected to be.

Along those lines, we're expecting our second quarter FFO per share to be 19 cents, which eliminates all acquisitions in the second quarter from previously anticipated amounts.

With that, let me turn it back to Ken for a few more comments.

Thanks Kent. As I stated at the beginning of the call, this has been a very busy quarter for us. We made progress on several fronts and we're positioned to capitalize on the progress we made. We also continue to face challenges.

Of course, the record snow plow in New England put a damper on what was going to be a good (inaudible) quarter for us, but we believe that's behind us and by and large, we don't see any major expense changes in the future. Let me give you our take on Extra Space for the rest of 2005. We do continue to be bullish about the self-storage business.

Our acquisition of Storage USA is a testament to that. In fact, Storage USA is going to be a big challenge and we don't underestimate it in the slightest degree. The Storage USA numbers for the first quarter were, in fact, better than our numbers.

However, they're coming off a low occupancy level after having quite an occupancy turndown, but we certainly applaud their increases in operations, particularly, and in revenues and keeping their expenses in line. As we merge the 2 companies beginning in July, we will be benefited by the low occupancy and upward momentum that Storage USA is currently experiencing, as well as the opportunities which that (inaudible) substantially increase our income.

Self-storage continues to be a great business. It is positioned to take advantage of our material and consumer-oriented society. Right now, between 6 and 8% of all people in the U.S. are using storage units and we expect this level to continue to grow into the future, especially in the stronger economic regions of our country, the exact places that we have a majority of our properties located.

We continue to see the ability for us to raise prices in certain markets, particularly in Southern California and Florida. I think you've heard from our peers, and will continue to hear, that we're not the only public company that is able to raise prices. We've been very pleased with the results on the revenue side. Our expenses are in line with our budget except for snow plow.

Our larger expense increases have been property taxes, besides snow plow. We believe that a consistent pipeline of development properties is important to the growth and profitability of our company in the future. This pipeline has been increased during the last quarter; however, these properties will not have a significant FFO impact probably until the year 2007 and beyond.

But in terms of long-term shareholder value, it will come. I really appreciate the support that our shareholders have given us, and we are expecting to have some exciting few quarters in the future as we take on the opportunities and merger with Storage USA.

Kent and I are now ready to answer any questions that you might have.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Bret Johnson of RBC Capital Markets. Please proceed.

Hi. Good morning. I'm here with Jay Leupp. A couple of quick questions. First, can you comment a bit on the performance of your lease-up portfolio and why you believe the CCS and CCU properties have performed worse than you expected and why you expect them to continue to do so?

First of all, the poor performance of the CCU and CCS properties is primarily due to 3 properties. One is in - actually 3 or 4 properties. I can tell you our problem properties and they are Mount Vernon, New York, which has got a strong competitive across the street that we happen to be buying.

It's Storage USA, who's dropped their rates and are very aggressive. We had one in Ashland, Massachusetts that's been slower than we had anticipated, one in (inaudible), Massachusetts, Detta (ph), Massachusetts, and Weatherfield (ph) Connecticut. These properties in New England have been slower because frankly of the New England economy.

Now with respect to this recent quarter, we're actually on budget to what we budgeted for last October and November, when we did this year's budgets. I think that the expectation with respect to the CCS, CCU properties is really underperforming where it was over a year ago when we prepared our S-11 and recently went public.

One of the most difficult things to do in the self-storage industry, frankly, is to project the exact lease-up trend of new properties. They usually all get there, but sometimes they take longer than you think in the beginning.

Great. And then given that you - well, it sounds like your development pipeline continues to grow. Can you comment a bit on - have your expectations changed at all and the length of lease-up time to stabilization on the properties that you're currently underwriting in that portfolio?

Yes, they have, except that I would say that we shifted our development emphasis away from New England and into the Mid-Atlantic States and California. In our development pipeline right now, a greater percent, a large percent of our development is in the West Coast, where we've always experienced just faster lease-ups.

Great. And then last question, I know you talked about this a bit on last week's call, but can you comment on your expectations for accretion to FFO per share from the Storage USA acquisition? And can you just reiterate your overall guidance?

Well, our overall guidance was that it would be 8 to 10 cents accretive this year and that is - the accretion of that is dependent upon the timing of when we do an equity offering, and frankly, the price of that equity offering. It assumes that our stock is not going to go up or down and it assumes that an equity offering would be done sometime in the autumn, sometime around the September timeframe.

Obviously, if we do an equity offering earlier, it would change that. Or if we do it later, it would change that, or if the price of the stock went up or down. We expect to be raising somewhere in the range of 150 to $160 million of equity.

There is the possibility, with respect to equity raise, that our OP shareholders, they're not our OP shareholders, the limited partners who used to be OP shareholders of Storage USA when Storage USA was public, who will be approached as part of this transaction, could in fact take on as much as $41 million of new equity as we do the transaction.

We won't know that until we hear from them and get their opinion on whether they want to take equity or cash in the transaction. So it's possible we'll issue 40 million of equity at the time the transaction closes and then the balance would be done in an equity offering.

Great. Thank you.

And as a reminder, ladies and gentlemen, that is star, one, if you wish to ask a question.

And sir, I'm currently showing we have no questions at this time. I'd like to turn the presentation back over to yourself for closing remarks.

Okay. Well, it looks like we got all the questions last Thursday when we did our call with - regarding Storage USA, so I think you for all listening today and I look forward to giving you more news as the Storage USA transaction continues.

Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude your presentation. You may now disconnect.