Extra Space Storage Inc (EXR) 2021 Q1 法說會逐字稿

Thank you for standing by, and welcome to Extra Space Storage's First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

I would now like to hand the conference over to your host, Vice President, Capital Markets, Jeff Norman. Please go ahead.

Thank you, Latif. Welcome to Extra Space Storage's First Quarter 2021 Earnings Call. In addition to our press release, we have furnished unaudited supplemental financial information on our website.

Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business.

These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review. Forward-looking statements represent management's estimates as of today, April 29, 2021. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call.

I would now like to turn the call over to Joe Margolis, Chief Executive Officer.

Thanks, Jeff, and thank you, everyone, for joining today's call. We are off to a great start in 2021. The strong fundamentals we discussed on our fourth quarter call not only continued, but actually accelerated as we moved through the first 3 months of the year. Same-store occupancy remained at all-time highs for Extra Space, with sequential growth in January and February at a time of the year where occupancy normally declines. Occupancy increased further in March, ending the quarter with a year-over-year positive delta of 480 basis points.

Our elevated occupancy has given us significant pricing power, which has also accelerated during the quarter with achieved rates increasing from 10% in January to well into the teens by the end of March. These trends fueled same-store revenue growth of 4.6% despite a 110 basis point drag on revenue growth from lower year-over-year late fees.

We had excellent expense control with a 0.2% decrease in same-store expenses. The result was same-store NOI growth of 6.5%, a sequential acceleration of 310 basis points from Q4, and year-over-year core FFO growth of 21%. With fundamentals holding and performance comps becoming much easier in the upcoming months, we expect continued acceleration in revenue growth through the second quarter.

Our concern of a dramatic increase in vacates has not materialized, and now we are into our busy leasing season when demand is typically strongest. We believe that vacate risk to our elevated occupancy has likely been postponed until the end of the summer or even into the fall.

Turning to external growth. The acquisition market continues to be expensive, and we remain disciplined but opportunistic. Year-to-date, we've been able to close or put under contract a little over $300 million in acquisitions. These are primarily lease-up properties, and several of the properties came from our bridge lending program.

Looking forward, we anticipate the majority of additional acquisitions to be completed in joint ventures, and we have plenty of capital to invest if we find additional opportunities that create long-term value for our shareholders.

We were very active in Q1 on the third-party management front adding 61 stores in the quarter, which include the previously announced JCAP stores. Our growth was partially offset by dispositions, where owners sold to other operators at prices we viewed as unattractive to the REIT. While this trend presents a headwind, we still expect solid growth in our third-party management platform for the year.

As I said on our last call, we are mindful of the risks we face. These include difficult fourth quarter operational comps, a tight labor market and new supply and state of emergency orders in certain markets. That said, current fundamentals are the strongest we have seen in some time, and our team is prepared to use all our available tools to optimize performance.

Our first quarter outperformance coupled with steady external growth, the improving 2021 outlook allow us to increase our industry-leading annual guidance $0.075 at the midpoint.

I would now like to turn the time over to Scott.

Thanks, Joe, and hello, everyone. As Joe mentioned, we had a good first quarter with accelerating same-store revenue growth, driven by all-time high occupancy and strong rental rate growth to new customers. Late fees and other income continue to be down and partially offset rental income, but we will lap this comp in the second quarter, which will enhance same-store revenue growth.

Existing customer rate increases will also provide a tailwind in the second quarter since they were paused during much of Q2 2020. We delivered a reduction in same-store expenses despite property tax increases of 6.9% and repairs and maintenance increases of 20% due to higher year-over-year snow removal costs. These increases were offset primarily by savings in payroll and marketing. We believe payroll savings will continue throughout the year, albeit perhaps at lower levels due to wage pressure in certain markets. Marketing spend will depend on our use of this lever to drive top line revenue growth, but it should also remain down for the year.

Core FFO for the quarter was $1.50 per share, a year-over-year increase of 21%. Same-store property performance was the primary driver of the outperformance, with additional contribution from growth in tenant insurance income and management fees.

As we announced during the quarter, Moody's issued Extra Space a BAA2 credit rating, our second investment-grade credit rating, now providing us access to the public bond market. We continued to strengthen our balance sheet during the quarter through ATM activity and an overnight offering, which combined for net proceeds of $274 million.

We sold 16 stores into a joint venture and obtained debt for that venture, resulting in cash proceeds to Extra Space of $132 million and an ownership interest of 55%. We plan to add a third partner to this venture in the second quarter, which will reduce our ownership interest to 16%. Our equity and disposition proceeds reduced revolving balances, and we ended the quarter with net debt-to-EBITDA of 5.1x, lower than our long-term debt target of 5.5x to 6x.

Last night, we revised our 2021 guidance and annual assumptions. We raised our same-store revenue range to 5% to 6%. Same-store expense growth was reduced to 2% to 3% resulting in same-store NOI growth range of 6% to 8%, a 175 basis point increase at the midpoint.

These improvements in our same-store expectations are due to better-than-expected first quarter performance, relaxed legislative restrictions in certain markets and better-than-expected resilience and storage fundamentals as the vaccine rolls out.

We raised our full year core FFO range to be $5.95 to $6.10 per share, a $0.075 increase at the midpoint. We anticipate $0.14 of dilution from value-add acquisitions and C of O stores, $0.02 less than previously reported due to improved property performance. We are excited by the strong performance year-to-date as well as the acceleration we see heading into the second quarter.

With that, let's turn it over to Latif to start our Q&A.

(Operator Instructions) Our first question comes from the line of Jeff Spector of Bank of America.

My first question is just a follow-up on Joe's initial comments on accelerating trends. That's exceeded, I think, everyone's expectations. Can you comment a little bit more, Joe, on that? Like what are you seeing into the quarter? And is this something we should expect going forward?

So I think the most exciting accelerating trend we see is in rental rate growth, which has increased every month this year. Certainly, in the second quarter, we're going to have very easy comps, and we're going to see some numbers that are eye popping. But with very high occupancies, muted vacates, we've been allowed -- where we're allowed to, we've been allowed to be aggressive on rate.

And then can you comment a little bit more on the third-party management business and the opportunities that you're seeing?

Sure. We have a very full pipeline in that area of our business, and we are onboarding an awful lot of stores. We are very confident that we'll achieve our original projections for growth in that business. What we're seeing that a challenge is where pricing is in the market, a certain number of our owners want to sell, want to take advantage of where pricing is.

And we can't always -- as we look at the pricing that's achieved, we choose not to match it and not to acquire the store. We always get that opportunity. But at some pricing levels, we just don't feel it's appropriate for the REIT to buy those stores. So I think you're going to see in 2021, a lot more onboards, also a lot more dispositions, but a very positive net increase in stores in our management platform.

Our next question comes from Juan Sanabria of BMO Capital Markets.

Just hoping if you could help us get a sense of what it means to be able to turn on the ECRI lever here in '21 relative to the easy comp you mentioned in '20, like any contextualization for what that could mean to same-store revenue having that back on versus not last year?

Yes. So Juan, last year, we paused existing customer rate increases for the months of April -- part of March, April, May. We turned some of them back on in May, which meant the rent increase became effective in June, and most of them were on by September. So between June and September, we basically started our existing customer rate increases. So easy comp for the months of April, May; June gets a little harder; and by the time you get to August, it becomes much more difficult in terms of a comp because you -- some of those were catching up for multiple months. So you had multiple waves of rate -- existing customer rate increases happening in August.

I would add, Juan, that our guidance anticipates that the restrictions that are in place currently remain in place for the remainder of the year. So to the extent any of those are lifted earlier, that could provide some uplift to us.

Okay. And just maybe a bit of an unusual question, but just with the tenant reinsurance business, we've had a lot of REIT's comment about insurance premiums going up pretty dramatically, given higher casualty events and other issues. Is the profitability at all changing for that business, given weather events seem to becoming more common to some extent? Or how are you guys thinking about that risk and underwriting?

Yes. So we have not seen significant increases in claims. Now that's partly due to how we've handled certain things. Obviously, you can't control the weather, but some of our claims come from things like broken pipes that -- various things in tenant reinsurance. So we have tried to be proactive in terms of more video monitoring at our stores, more proactive in terms of pest control, more proactive in terms of doing things so that our pipes don't freeze. So while claims may be higher due to natural disasters, we're able to offset some of that by being proactive on managing our claims.

Our next question comes from Todd Thomas of KeyBanc.

The first question, in terms of the updated guidance, Joe, Scott, you both commented that the quarter outperformed relative to expectations. Does the revised guidance include any changes to the outlook and your assumptions for the balance of the year? Or was it predominantly related to the first quarter outperformance? Any color there would be appreciated.

So it's a little bit of both. So occupancy was better in the first quarter. Rate played out similar to what we expected. And then moving forward, we're assuming some of that occupancy benefit moves forward and then that we have a little bit more rate power. So it's a little bit of both.

Okay. And what are you anticipating in terms of occupancy in the back half of the year? Can you share sort of your forecast for sort of third quarter, fourth quarter year-over-year comps, what's embedded in the guidance?

Yes. So we're assuming that occupancy peaks in the summer at levels higher than they've been in the past, higher than historical norms. And then we're assuming that occupancy starts to move down in a more seasonal way in September. So you peak higher and then you end higher than a normal historical year.

Okay. So your year-over-year occupancy spread would still be higher, would still be positive towards the end of the year? Is that the right way to read into that?

Yes, higher than a normal year, but lower than last year. So last year was exceptionally high.

Okay. Got it. And then I just had a question with regards to the new joint venture that you formed with the asset sales this quarter. Is there a growth mandate at all for that venture? Or will this be it?

So there's not a growth mandate for that venture. These are partners that we've formed previous ventures for. They have a growth mandate. So to the extent there's another portfolio, we would form a third venture with these partners and grow that way. We don't grow -- we typically do it that way with a number of our partners because we want to segregate the promotes and the performance of the stores and where you add additional stores to a venture, I guess you could account for them separately, but it's separate ventures. Did that answer the question?

Yes, it did.

Our next question comes from Smedes Rose of Citi.

I was wondering if you could just maybe give some updated commentary around what you're seeing on the supply front. It just seems -- I mean, obviously, operating metrics are really strong, but then we keep hearing that construction costs are going up. And I'm not sure what you're seeing on the bank lending side. So just kind of any sort of thoughts you have there would be of interest.

Sure, Smedes. So the supply environment doesn't change that much quarter-to-quarter. So we can give you some observations, but I caution that it's just 1 quarter. I do see some indications of increased supply. So last quarter on the call, I related that in our management plus pipeline, we had switched to a majority existing stores and a minority of the pipeline was development, which has been the first time in a long time, but we've now switched back this quarter. So more development. So it's 1 quarter, but it is a data point.

Also as we update stores that new developments that compete with our stores, we saw a slight tick up of a couple of percentage points this quarter. Now maybe that, that's stuff that was delayed or postponed from last year because there was a bunch of that now being into the pipeline. But overall, I think we're going to see continued development, right?

Self-storage is performing very well. If you're a developer and you're trying to calculate your development yields, you can probably use a 3.6 exit cap and see if someone is going to accept that. So there's a lot of reasons people would want to get into this business. As you point out, costs are going up, lending is still challenging. But I think we're going to see development. I don't think the faucet is going to get shut off all the way.

Okay. And I just wanted to ask you what your -- as you form these joint ventures, and you mentioned probably doing more going forward, are you changing the structure of them at all in terms of your ability to exit or to buy up? Or is it kind of the same terms that you typically had in the past?

I think we've had very sophisticated terms in the past in terms of our ability to exit our ability to crystallize promote periodically on these ventures that are forever, which is very important. I think we had really state-of-the-art terms. So we don't need a lot of improvement. To the extent the market changes and the level of fees you can get differs or other things will certainly be at the front end of the market. But there's no significant changes in the terms of our ventures.

Our next question comes from Ki Bin Kim of Truist.

So when you looked at your move-in activity and move-out activity, I mean, the move-outs are down 10%, but there's still a decent level of move out. Is there any discernible trends and types of customers using self-storage or types of customers deciding to move out, albeit at a lower rate?

I don't think there's any very meaningful trends in that area. We really -- we don't see a lot of differences in move-outs and customers in different markets, which might be an indication to us, open versus closed markets. So we really don't see significant changes in that regard.

Got it. And in terms of your new joint venture, I'm curious, what's the higher level thought process there because EXR doing joint ventures 10 years ago, had a smaller company base and trying to optimize return on equity, like I get that math. EXR today, much bigger cost of debt, cost of equity is all there for you, bright green light. It just feels like maybe there's something more thinking behind it or more rationale behind it?

So our use of joint ventures serves a number of purposes. A primary one is it enhances our returns. So in an environment where we think our view is that the market is expensive, it allows us to continue to grow and make good returns to our investors. So let me give you an example. We've approved so far this year 12 wholly owned acquisitions, and they're all lease-up stores, the first year yield is in the mid-3s and the stabilized yield is about 6, 16-month average stabilization.

We've also approved 5 joint venture deals, also will lease-up 12 months to stabilization, but the first year yield is 6.9% and stabilized yield is 9.9%. So there's a meaningful difference when -- to our returns when you transact in a joint venture.

Now you get less money out the door. So there's constantly the discussion about do we invest more money at a lower return or less money at a higher return. But the impact to the returns to our investors is meaningful. We also, on top of that, get the opportunity to turn a promote. None of those numbers include the promotes. And right now, we're in the cash flow promote on a number of our ventures. And we've also realized back end promotes a number of times.

The other thing it helps us do is derisk transactions, right, to the extent that we invest less money in a transaction. We are balancing our portfolio in an interesting way. And then lastly, I'll say, we have really good smart partners. And they -- having another set of eyes on a deal or a market or an opportunity is never a bad thing.

Our next question comes from Mike Mueller of JPMorgan.

I guess when you're thinking about rate increases that you see heading out to customers over the next couple of quarters, how do you think those increases will compare prior to pre-pandemic increases?

So we're going to have a period of time where we have customers, who came in during kind of the height of the pandemic at very, very discounted rates. And I would expect to see their rate increases be substantially higher than kind of our normal pre-pandemic rates. Once you get to a more normalized operating environment, we're going to do what we always do, which is we're going to optimize revenue by giving different customers different rate increases depending on where they compare to market rate, how the property is performing, various other factors. So I don't think we're going to change our approach at all in trying to balance not raising them so high that you're pushing customers out the door, but also optimizing revenue.

Got it. Okay. And in terms of thinking about customer length of stay, I know it's only been a year or so ago, but how has the average length of stay changed even in that short period of time?

So early on, we actually saw a decreased length of stay and throughout the pandemic. It's continued to increase, and it is still slightly below our historical average of where it was, call it, a year ago, but it is continuing to increase.

Next question comes from Todd Stender of Wells Fargo.

Just on the bridge loan, it looks like you sold some or 1. We don't usually see that, it's usually the borrower refis out of it at a lower rate, but maybe just some context around the sale.

So when we started the bridge loan program, we would simultaneously close the loans in -- where we would keep the mezz position and the first mortgage would, at closing, go to a debt partner. We found that a better execution was for us to close the loan, close both pieces of the loans on our balance sheet, package up a bunch of the firsts, and then sell them to 1 of our debt partners. We now have 2 debt partners who buy first from us. So in the first quarter, we sold $82 million of first loans that we had previously closed and kept the mezz position.

Okay. Got it. Just switching gears, maybe could we hear some comments on the state of the third-party management platform. Certainly, developers and new owners would need you guys on the front end to lease-up properties. Should we expect that pace to slow at all as new supply maybe comes in a little bit? Maybe just kind of comment on the competitive environment.

I think this is a business that has a lot of runway to grow through all market environments, through periods when things are going very well, when periods are going down, development cycles. I think that the advantage professional management brings to the store is so compelling that there will be continued consolidation, and we should continue to grow this business year after year.

(Operator Instructions) Next question comes from the line of Ronald Kamdem of Morgan Stanley.

Back to the joint -- the JV, the 16 assets. Any color on where those assets are located? Did they come to you? How do you select the assets that were picked? And any cap rate color would also be helpful.

Sure. So we are constantly looking at our portfolio and trying to optimize it. And that would include outright sales of assets that we feel will not contribute to the portfolio long-term and where we can reinvest the money in better performing assets. And then also reducing our exposure to certain assets and markets by selling to a JV.

So these were assets that we selected where we wanted to reduce our exposure and we felt we could reinvest the money and produce a better overall portfolio. I can't really -- given our agreements with our partners, I can't give you specifics on cap rate other than to say, no, it's a market deal.

Got it. Just switching gears, just on the expenses, really nice controls this quarter. Just trying to get a sense of how much of the expense savings are a function of just the COVID, the post-COVID operating environment and opportunity to save? And how much of the cost savings are sort of things that would have happened anyway.

I don't know if that makes sense. But asked another way, when you're thinking about sort of this post-COVID operating environment, how much more sort of expense saving opportunities are there above and beyond just what normally you would have done?

Yes. So if you look at our COVID savings, I would tell you it's more G&A related. So for instance, travels way down, you do have some benefit in the store. If you look at our savings at the property, we did have an easier comp in the first quarter of last year when payroll was maybe a little higher as we started going into the COVID lockdown. Second quarter, same thing, it will be an easier comp, but we're also being proactive on hours.

And so we are looking to make sure that we have the right number of hours at our stores. Our store managers are one of our biggest assets. And so we want to make sure we maximize their time in front of the customers. But with that easy comp, we're expecting it to be a savings. And then we're also adjusting up slightly for the fact that we are having a bit of a -- it's a tight labor market right now. So we wanted to make sure that we recognize the fact that it might cost us a little more for new people coming in the door or we may have to be a little more competitive on our labor there.

The third area is really marketing. And marketing we view as one of the levers we use. As we have opportunities to use it to maximize rate, we'll spend marketing dollars. We have had an opportunity so far this year to spend -- we've actually increased our marketing spend year-over-year. And we hope that trend continues, but it's something that we'll look at on a quarter-by-quarter basis.

Thank you. At this time, I'd like to turn the call back over to CEO, Joe Margolis, for closing remarks. Sir?

Great. Thanks, everyone, for spending your time and your interest in Extra Space. We're obviously off to a great start this year. Occupancy is at an all-time high. We have exceptional new customer rate growth. We continue smart, careful external growth, and all of this leads to exceptional, both same-store and double-digit core FFO growth. And all of this is due to extraordinarily hard work, dedication and focus of over 4,000 employees at Extra Space. And I want to acknowledge their work and thank them for what they produce for our shareholders. I hope everyone has a great day. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.