Extra Space Storage Inc (EXR) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter Extra Space Storage, Incorporated, Earnings Conference Call. My name is James. And I will be your operator for today.

[OPERATOR INSTRUCTIONS]

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. James Overturf with Extra Space Storage. Please proceed.

Thank you, James. Good morning, and welcome to Extra Space Storage's third quarter 2006 conference call. With us today are Extra Space Storage's CEO and Chairman of the Board Kenneth M. Woolley, Executive Vice President and CFO Kent Christensen; Executive Vice President and COO Karl Haas.

A couple of items for me to mention to you before management begins their remarks. In addition to our third quarter press release, we have also furnished additional unaudited financial information about the operating results for the company's property portfolio on our website at www.extraspace.com. Click on the Investor Info. section, and then on Financial Reports, and a document entitled Q3 2006 Supplemental Financial Information.

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 from those discussed today. Examples of forward-looking statements include statements relating to Extra Space Storage's development acquisition programs, revenues, net operating income, FFO and future guidance.

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 SEC, and in particular, our 10-K for the year ended December 31, 2005. These forward-looking statements represent management's estimates as of today, November 2, 2006. Extra Space Storage assumes no obligation to update these forward-looking statements in the future because of changing market conditions or other circumstances.

I would now like to turn the call over to Extra Space Storage's CEO and Chairman, Kenneth M. Woolley.

Thanks, James. I appreciate it. Welcome to our conference call. We had another great quarter. We're very pleased with our performance. I hope you are, as our shareholders. Fully diluted FFO per share for the quarter was $0.26, a 44% increase over the third quarter of 2005. And for the year, our FFO was $0.69, up from $0.47 the year before.

Same-store performance was good. This is a portfolio of 103 properties. And since same-store includes only properties that we've owned all of last year and all of this year, it really is the legacy Extra Space Storage stabilized properties. The revenues were up 7.1%. And NOI was up 6.7%. We did have larger than normal increases in expenses, which will be talked about by operations and -- and our CFO a little later in the call.

We've made continued progress in acquisitions. In the quarter, we closed five properties, for a total of $37.4 million. They are located in California, Colorado, Georgia, Maryland and Texas. And for the year, we've purchased $136 million worth of properties. That's 20 properties. We have a number of properties under contract in LOI, which will close by the end of the year and bring our totals to about $180 million for the end of the year.

Now, all of you know that we raised $205 million in gross, and $195 million net, in a public offering in September of this year, by selling 12.1 million shares. This has strengthened our balance sheet considerably, and gives us quite a bit more firepower to do acquisitions during the coming year. We're optimistic that we can deploy that capital in the first six months of the next calendar year.

This offering has -- one of the benefits is it has expanded our shareholder base and brought in a number of new shareholders, which we are happy to have part of our -- group. On the development front, we completed nine projects for a total of $73 million so far this year. And we're scheduled to complete a total of [15] projects by the end of the year, or $133 million.

During the year, our senior management team has been doing a lot of traveling. We have now visited over 540 of our 640 properties. This is every major market. We've held town meetings in more than 20 cities. And we've met most of our employees. We've observed the progress that's been going on to put new signage on the properties and to considerably upgrade many of the Storage USA properties. I can report that 329 of the Storage USA properties have now got Extra Space signs on them. And we expect the balance to be finished by the end of the year.

The rebranding and signage should help us to -- and not just the rebranding, but also the redoing of the stores and all the capital expenses and repainting, should help brighten up our stores and make them more attractive to our customers. And hopefully, that will give us the ability, during the coming year, to continue good growth in revenues.

Also, this -- in a board meeting we had yesterday, we approved changes in our executive management structure. We have promoted Karl Haas, who came to us from Storage USA, to be our Executive Vice President and Chief Operating Officer of the company. And we're very happy to have Karl take this new role. And I'm really looking forward to working with Karl in this new role. Also, Kent Christensen has been promoted to Executive Vice President and Chief Financial Officer.

And part of his duties will now be to oversee both acquisitions and development as direct reports. In addition, Charles Allen has been promoted to be Executive Vice President and Chief Legal Officer of the company.

With that, I would like to turn our -- the call over the Karl Haas, our new Executive Vice President and Chief Operating Officer. Karl?

Thanks, Ken. I very much appreciate the vote of confidence.

As Ken said, we had another very good quarter of operational performance. As we have done in previous calls, what we will do is slice and dice our portfolios in a few different ways to give you some further insights into that performance. Our same-store group of 103 wholly-owned stabilized properties, once again, had an excellent quarter, realizing a revenue increase of 7.1% over the third quarter of 2005. Expenses were up 7.9%, up a little bit primarily because of the property tax reassessments in Florida, Georgia and Texas, which amounted to over a $350,000 impact on NOI this quarter.

Despite this, net operating income growth was still good, up 6.7%. And if we spread the taxes reassessments evenly throughout the year, our NOI for the quarter would have been up over 8%. As many of you know, the self-storage properties we acquire are always subject to potential property tax reassessments. A large number of the current reassessments are on properties we acquired in late 2004 and early 2005. We are getting a better grasp on the timing and the potential size of these reassessments. And we are tracking this issue diligently.

Our occupancy remains above where it was last year. We ended the quarter with an average occupancy of 88.9% versus 87.4% last year. For the nine months, revenues are up 6.8%, and net operating income is up 7.3% on the 103 owned stabilized properties. Expenses are up 5.9%, mostly due to higher than normal increases in property taxes and higher utility costs. The weighted average revenue per square foot -- per available square foot, for our same-store pool for Q3 was $12.19, which is a 7.1% increase year-to-year. Mostly, increases come from increased rental rates.

Performance remains good for our entire portfolio of 188 stabilized properties. Those are the wholly-owned properties included in this -- in a pool that includes 57 stabilized properties from Storage USA acquired in July of last year. Revenues were up 6.2% for the quarter. Expenses were up 4.7%. And net operating income for the quarter was up 7.1%, compared to the same period last year. For the nine months, revenues are up 6.6% and net operating income is up 7.6%.

Our entire stabilized group of 564 properties, operated by Extra Space Storage, which we refer to as the stabilized owned and managed properties, which is made up of 188 wholly-owned properties, 339 joint-venture and 37 managed properties. This is the last group of properties we would like to discuss. For the quarter, revenue increased 3.9%. Expenses were up 4.2%. And net operating income increased 3.7%. For the year, revenue has increased 5.2%. And net operating income is up 5.7%.

Our top performing regions, for the first nine months of the year, have been Florida, Northern California, the Southeast and the Southwest regions. Regions performing below our portfolio average have been the Central, Southern California, New York and New Jersey regions. At an MSA level, Atlanta, Chicago, Dallas, Northern California, Southern Florida and Phoenix were the top performers with stabilized increases in revenue between 7% and 11% -- very healthy increases. MSAs performing below the company average were Detroit, Indianapolis, New York City and Philadelphia.

As Ken already mentioned, the work on the capital improvements campaign for the Storage USA assets is continuing on target. Sign conversions were running slightly behind schedule. We have completed the work on nearly 70% of the former Storage USA sites. Our goal was to complete the entire signage change by October 31. But that has been stretched out to November 30. Repainting and other capital improvement projects, such as roofing, asphalt work and office remodels, will be completed by the end of the first quarter next year. Once these efforts are complete, we anticipate an annualized run-rate for CapEx, going forward, to be about $0.25 per square foot, although, this number will need to grow with inflation.

The capital improvements have really had a positive impact on our sites in terms of curb appeal and marketability. The improvements also have a positive impact on the morale of our managers. There's a greater sense of ownership and buy-in, when the site managers see positive changes in the appearance of their store. And we also see this as the final step of the integration of the two companies.

Our captive insurance business has been performing below our internal estimates. All of the sites have been converted to our program as of October 1. During the integration of the two companies, we let the focus in this program slip. And we had issues with what we could and couldn't do relating to our store managers' offering insurance, and with promotions we could offer to our customers to help increase penetration. We have now worked through all this, and have rolled out a new program called Peace of Mind Tenant Insurance Program. And we are already seeing improved performance.

On the personnel front, we recently promoted two people with the new organization to the position of Divisional Vice President. One is a veteran District Manger who will be taking over the Baltimore-D.C.-Virginia Division for us. The other is from our Revenue Management Team who will bring us a different perspective on operations. This person will be taking over the Florida Division. Previously, these two areas, the Baltimore- D.C.- Virginia and Florida areas, were managed together. We think, by separating our largest division, we will be able to operate more effectively.

With that, I would like to turn the call over to Kent Christensen, our new Executive Vice President and Chief Financial Officer, who will comment on financial results.

Thanks, Karl. Our financial statements covered in this report are for the three and nine months ended September 30, 2006, compared with the three and nine months ended September 30, 2005. We finished the quarter with 213 wholly-owned properties, 348 joint-venture properties, and 77 managed properties.

Total revenues for the three and nine months ended September 30, 2006, were 51.2 million and 145.9 million, respectively, compared to 42.3 million and 89.8 million for the same period in 2005. Net income for the three and nine months ended September 30, was 4.3 million and 8.1 million, compared to net losses in the same period last year of 2.9 million and 4.7 million.

G&A and the third quarter was 8.6 million. This is net of our development fees. Total G&A for the year is 26.6 million. And we are in line for achieving our stated -- originally stated goal of 36 million for the calendar year. Interest expense for the quarter was $13.4 million, and was in line with our budget for the quarter.

Our financial position became even more solid and flexible, as Ken has stated, about our successful stock offering, which we completed in September, where we raised approximately 205 million with net proceeds of 195 million. Approximately, 45 million of these proceeds was used to pay down debt. The remaining amount is in a bank account earning interest, and will be used for acquisitions and development. As of September 30, 2006, our outstanding debt was approximately 945 million, which includes the 120 million of notes payable to trusts.

Approximately, 864 million of the total debt is long-term debt that has an average maturity of five years, and an average interest rate of 5.4%. Our total debt, as a percentage to total market cap, including our OP units, was 40.2% as of the end of the quarter. Our level of fixed-rate debt to total debt is approximately 91.4%. Our total debt structure is predominantly fixed-rate and shields us from potential rises in interest rates.

Our weighted average interest rate is 5.4% for the fixed-rate loans, and 6.4% for the variable-rate loans. So the total average interest rate of all of our debt is 5.5%. Our fixed-charge coverage ratio is now 2.2 times. As of September 30, we had 81 million of capacity on our line of credit, none of which was drawn at the end of the quarter. We have unmortgaged properties that, if mortgaged, would increase our borrowing capacity by 86 million. Including our available cash of 150 million from the recent stock offering, we now have over $300 million of capacity for growth.

Property insurance has been a big issue in the industry recently. Two weeks ago, we renewed our property insurance and will have an increase of approximately 40%, or $200,000, per quarter. We think we were able to do quite well considering that our initial proposal from our insurance company was a 100% increase in our premiums.

Now, to the fourth quarter guidance -- at this time, we estimate our fourth quarter fully diluted FFO per share to be in the range of $0.23 to $0.25. Taking into account in these -- in this number is our September equity raise, our increase in our property insurance and the current level of property performance.

With that, I would like to turn the call back to Kenneth Woolley.

Thank you, Kent. Once again, I think we had a positive operating performance. We believe the integration of Storage USA properties has been very successful. And it's pretty well completed. We probably won't be talking about integration much in the future.

We've learned a lot about our business this year. I, particularly, have learned a lot as I've traveled extensively and met managers and looked at properties. The more I see our business, the more excited about it I am. And storage is just a great business. It's amazing how -- from when I first started in it, really in the late '60s, and first saw it, how it has grown, and how there continues to be more and more demand as our country becomes more and more affluent, and we have more material goods.

Of course, the result of that is that a lot of it overflows. And people want to protect their goods in very nice storage facilities. So we're very optimistic about the future. We have seen the potential pipeline of acquisitions increase a little bit. We're happy to see more opportunities in that area. And we hope that, during the coming year, we will be able to continue our growth and continue our increases in FFO.

With that, I'd like to turn the call back to the monitor. And then, we'll ask for questions.

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of Christy McElroy with Bank of America Securities. Please proceed.

Good morning. I'm here with Ross Nussbaum as well. Regarding the tick-up in your cash balance from the equity raised, I know you said you expect to redeploy the proceeds over the next six months. But can you provide a bit more color on the specific timing? I'm just trying to gage the impact on interest income.

Christy, we are in negotiations with two or three parties that have substantial portfolios of properties. But we have nothing definitive to report. I'm just optimistic that we can get it done. So I don't -- I can't -- I can't even budget it myself, yet, because I don't -- we don't have a deal made. Until we have a specific deal in hand, I can budget. I'm just optimistic we'll get it done.

So it's possible that -- that we don't. But we're -- because we want to be fairly disciplined in our approach to acquisitions. But just based upon our negotiations right now and things we are looking at, we are pretty confident we will be able to do it.

Can you give a better --?

It's sort of a non-answer answer, I know.

Maybe you can give a little bit more color on the portfolios that you're looking at, the size and yield production?

Well, we do have -- we do -- first of all, by the end of the year, we know we're going to be closing on another close to $50 million worth. So there's 50 million there. And we do have letters of intent that will close in 2007 on another 40 million. So that's 90 million.

You're looking at the first quarter.

In the first quarter. So that -- so that leaves 70 million left. And so, we feel that, if we're able to -- the pace at which we're at, we should be able to, during the rest of the next six months, hit another 70 million. Properties that are located in New Jersey; Jacksonville, Florida; Arizona -- Phoenix -- and another in New York and a couple in the D.C. area.

Okay. That's helpful. And then, can you update us on your plans for emergent development program? And looking at your '07 and '08 development schedules, how many are slated for sale versus develop and hold?

We will not be -- we will not be selling more than two properties next year. That would be our expectation.

And will that number --?

That will be one and two properties.

One to two?

Yes.

And then, maybe looking out into '08?

And as to the following year, would be no more than one to two as well.

Okay. And then, lastly, of the four CCS/CCU properties in your stabilized portfolio, it looks like occupancy declined about 340 bps year-over-year, and at about 120 bps quarter-over-quarter. It looks like occupancy was up in your other stabilized properties. I'm just trying -- wondering what the driver was there?

We -- the occupancy had gotten very high. And we pushed rental rates. Kent -- Kent...

This is Kent. We had one property that's driving the majority of that occupancy drop. It's in New York. It's property called Plainview. The occupancy has dropped there. However, we've raised the street rents on that property, and the rents of the tenants by over 40%. So the income on that property is up dramatically, even though the occupancy is down.

Okay, thank you.

That property was -- had been substantially under the market. And we brought that property up to market. That's what's caused a little bit of a current drop in occupancy.

Got it. Thanks, guys.

[OPERATOR INSTRUCTIONS]

Our next question comes from the line of Paul Adornato with BMO Capital Markets. Please proceed.

Hi, good morning. I was wondering if you could comment on the state of Florida and what you are seeing there in terms of traffic, rental rates and occupancy?

This is Karl. Florida remains very, very healthy. It's starting to slide a little bit from the extraordinary levels of revenue gains that it was -- experienced in the last two years. Part of that is that we had the hurricanes. And this year, good news for insurance and expenses, but the lack of hurricanes hasn't -- has resulted in -- there hasn't been the big push that happened the last two years. But it's still a very healthy market, doing very well, and still at healthy -- healthy levels of revenue growth.

Okay. And finally, you did mention, with respect to the Prudential JVs, that there were some -- it sounded like separational glitches in terms of being able to offer discounts, et cetera. Could you just expand upon those comments please?

We're not sure -- we're all kind of puzzled about what you're talking about, Paul. Would you -- would you --?

Where you talked about --?

Are you talking about what Karl was talking about?

It might have been the insurance.

Could you comment on the Prudential JV's operating performance? Why it seems to lag the --?

The rest of the portfolio or as -- the portfolio that Extra Space has?

Right, exactly.

There -- I think, as we talked about on other conference calls, the process for taking the Storage USA properties, when we acquired them, and splitting them into six individual portfolios was, at best, kind of a -- we tried to do our best job of assembling portfolios that we thought were going to be comparable.

What's actually happened, as we now look back, is that, in the Prudential portfolio, there are 14 properties of their 259 that are underperforming what we had expected. And unfortunately -- or fortunately, I guess, as how you'd look at it -- those 14 are all in the Prudential joint-venture properties. Extra Space didn't get any of those.

When we've looked at those 14 properties, to look at why there is a problem with performance, there's about 14 different reasons as to what's happened. On each one of them, there is a unique set of circumstances. For example, a new competitor's opened up. We might have managed it poorly. There's been a street closure. There's been a hurricane that hit one of the properties.

In each one of them, there are unique circumstances that have caused the problem. And we're actively working on each of those properties to bring them back up. But it's those 14. If you were to take those 14 out, then the portfolio performs very similar to what Extra Space's portfolio has performed.

Okay. And going forward, what would be the expectation for getting them up to kind of normalized operating performance?

We feel very optimistic that those properties will -- they are getting a lot of focus, and that we see those come up to the levels of the rest of the portfolio.

Okay, thank you.

Your next question comes from the line of Jeff Donnelly with Wachovia Securities. Please proceed.

Good morning, gentleman. Just one question, with the combination of Public Storage and Shurgard, have you guys seen any noticeable changes in pricing strategies in local markets where there was a significant overlap between not only PSI and Shurgard, but also PSI and Extra Space? I guess one could argue that a reduction in local competition could actually increase pricing power for those who remain?

Yes. Well, and we have seen that Shurgard has -- or their prices -- at the Shurgard price at the Shurgard properties, have been pushed as Public Storage integrated those properties. So from what we've seen, it should be good news for the overall market because it's going to result in a competitor with increased rates, which allows us to push our rates as well.

Like I say, in most of those situations, do you guys believe that you are the -- sort of the price leader in that market or neck-and-neck or -- how does that work?

No. I think -- this is Ken. I -- a couple of things we've observed traveling around the country in the last couple of months. First of all, every -- nearly every Shurgard that we saw had been reflagged Public Storage very rapidly. They covered all the signs and re-imaged them immediately, which is something very different than we did when we acquired Storage USA.

We sort of went through it over a whole year process. And many of them had even had facelifts of painting being done within the first month. So that was very impressive that Public Storage was able to do that. But one thing we have seen in all of our pricing surveys is that Public Storage has been very aggressive in raising street rates, particularly in this last rental season.

And now, I think, as a whole, Public Storage's prices are above ours in comparable markets. Even though our rent per square foot, as a company, is higher than Public Storage, that's really more of a factor of where we are in the United States, where our portfolio is. But right now, on average, Public Storage is ahead of us in higher rents.

Okay, thanks. That's helpful.

Your next question comes from the line of Rick Murray with Raymond James. Please proceed.

Hey, good morning, everyone. Just curious if you could give us any commentary on general levels of discounting or incentives being offered throughout the industry right now? And has that changed any over the last two, three months?

We're continuing to see aggressive discounting throughout the whole industry. And we don't see it changing. It's become an expectation of the customers. And we see it working well for us. It's helping us get rentals and stay competitive. We're going to continue to monitor it and look for opportunities where we might -- and we do think that there are some opportunities, where we might be able to reduce some discounting. But the industry standard has really continued to become stronger and stronger that first month free.

Rick Murray. Okay, great. Thanks. The other question I had was, looking at the performance, the portfolio, really only a handful of markets or regions standout in terms of those that have lost maybe a little bit of occupancy versus the prior year. And it also kind of looks like there's a bit of a coincidence that some of those markets seem to be the focus of housing markets that have begun to perform pretty poorly. Have you noticed any correlation along those lines?

Not really. Southern California a little bit, but Boston is actually doing a little bit better. And that's probably one of the markets that's been most strongly hit with housing prices. And Vegas, we also have seen some negative impact. But all in all, no, it really -- we haven't see a dramatic impact from the change in housing.

Okay, thanks.

[OPERATOR INSTRUCTIONS]

As there are no further questions at this time, I would like to turn the call over to Mr. Ken Woolley. Please proceed.

Well, thank you, everybody, for attending our conference call. And we hope that -- that you'll take the time now to read our supplemental schedules. There's a lot of information in there. We're trying to be very open with all of you as to what's good and what's not good. Most of it is good. And we appreciate all the support that our shareholders have given us. And we hope to do a good job in the coming months and the coming year. Thank you, very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.