Life Storage Inc (LSI) 2002 Q1 法說會逐字稿

Good morning. My name is Jeff and I will be your conference facilitator today, at this time I would like to welcome everyone to the Sovran Self Storage, Inc.,first quarter earnings conference call. All lines have placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period. If you would like to ask a question during that time simply press star then the number 1 on your telephone keypad. If you want to withdraw the question, press the pound key, thank you. Mr. Myszka you may begin with your conference.

Thank you. Good morning, and welcome to our first quarter conference call, before we begin our prepared remarks, I need to read the safe harbor statement. The statements made in the course of this conference call that state the companies or managements intentions hopes, beliefs, expectations or predictions of the future are forward-looking statements. It's important to note the company's actual results could differ materially from those projected to such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those of the forward-looking statements may be obtained from the company's SEC filings. Copies of these filings may be obtained by contacting the company or the SEC. Let's begin. Despite the lingering effects of our nation's soft economy, fortunately Sovran once again, experienced solid operating results during the first quarter. Funds from operation per share increased by over 9%, from 66 cents per share for the first quarter of 2001 to 72 cents per share in the first quarter of this year. Dave Rogers, Chief Financial officer will provide more detailed financial information in a minute. From a business standpoint, our busy season is underway. And we expect to see some of the benefits from our many initiatives coming through. So let me give you an update on some of these programs. The most far-reaching development currently underway is the implementation of our call center. At this time, essentially all of our stores are connected to the center. What this means is that every call placed to an Uncle Bob's store throughout the country will be directed to a customer care representative here in Buffalo. By utilizing specially selected and specially trained personnel, we expect to achieve higher close rates through the consistent application of our position pricing strategy. On another front, the mobilization of the Uncle Bob's truck fleet continues. By the end of this month we expect to have trucks at 63 of our stores. Now, these in addition to serving as an excellent mobile advertising venue, the program is designed to offer yet another incentive for prospective customers to rent with Uncle Bob's. Our plan, as we mentioned last conference call, is to have a truck at each stores by the end of next year. During the first quarter, we completed the conversion of three more stores to Dry Guard. This brings the total to 30 stores outfitted with our exclusive humidity control system. As we mentioned before, and it continues, rates on converted units have consecutively averaged between 25 and 30% higher than regular non-treated units. In this endeavor we will expect to install the process in another 11 or 12 stores by the end of this year. In addition to our Dry Guard conversions we completed three expansions last quarter, and have seven other projects in process. We expect them to be completed before the end of this year. Regarding internet sales, we continue to experience excellent results from this initiative. Revenues for the first quarter were literally about three times that of last year's first quarter, and last year's first quarter was substantially higher than the first quarter before. So, we are very pleased at the results from this endeavor. During the quarter we also acquired 12 stores into our second joint venture formed in the fourth quarter of 2001. Eleven of the stores are located in Texas, seven in Houston, three in Dallas and one in San Antonio, with the other located in Syracuse, New York; all markets where we already have a presence. The total purchase price was just over $26 million, which after including extensive renovation costs allocatable to the Texas stores, equates to a cap rate just under 10. These properties are representative of the types of stores we look for to include in our joint ventures. Mainly mature, proven properties having stabilized occupancies with solid year-to-year performance. So, you can see we remain very proactive in managing and growing our business. Now, what I would like to do is ask Dave Rogers to offer details on our financial performance and position.

Thanks Kevin, and Good morning. Hopefully you all have received a copy of the press release and the accompanying charts showing the first quarter operating results as well as certain supplemental information. If not let us know we will get you one. Regarding operations, total revenues increased almost $2 million, or 9% over 2001's first quarter. This was primarily due to the addition of eight stores in late 2001, and twelve stores midway through this quarter. As well as a 2% increase in same store sales. Operating expenses increased by $700,000, primarily as a result of adding the new stores, total net operating income increased by just over $1.3 million. Overall our occupancy was 82% at March 31, our average rent per square foot for the quarter was $8.63. Same store revenues increased by 2% over the first quarter of 2001, reflecting a 2% decrease in occupancy and a 4.1 increase in rates. Operating expenses on a same store basis increased 3% resulting in same store NOI growth of 1.4%. Personnel costs especially health care and utilities showed significant increases over last year's levels. As we have mentioned in prior quarters we see continuing pressure on margins resulting from higher personnel costs and the expense of implementing technology. G & A costs for the first quarter were slightly more than projected at 1.9 million. Virtually all the increases are tributed to call center configuration and start-up costs. Our run rate is expected to be somewhat less than this in subsequent quarters. Interest costs were $580,000 lower than for the comparable period last year. Our average increase -- average interest rate for 1Q 2002 was about 5.7%. In addition to $50 million of 10-year fixed rate mortgages we presently have swap agreements in effect fixing $130 million of our line debt. We have elected to leave the remaining $97 million of our line debt on a floating rate basis. It is important to note these [ALL IN] rates associated with our credit line are effective only for the life of those agreements, which expire near the end of 2003. While we protected against [INAUDIBLE] fluctuations, we still have a certain degree of exposure on the credit spread negotiated at renewal or upon extension of those credit lines. Overall we have 277 million of total debt on our consolidated balance sheet. Of this, two thirds are either fixed or hedged for periods ranging from three to ten years. We continue to evaluate market conditions concerning our capital structure, and when appropriate will move the fixed rates on some the remaining [INAUDIBLE] rate debt and/or replace it with equity instruments or longer term debt. Our capital structure remains strong. Presently we have a debt-to-market cap ratio of 35% and debt-to-net asset value of 37%. Our fixed charge coverage for Q1 of 2002 was a very healthy 3.4 times. As of today we have $28 million of capacity remaining on our lines of credit and are generating on an annualized basis about $10 million of free cash flow. We also plan to produce additional capital from the sale of more mature properties to future joint venture partnerships, if applicable. Regarding joint ventures Lock Sovran 1, the joint venture reform in the end of 2000 and in which we have a 45% interest, contributed $131,000 to FFO this quarter on a gross investment of 5.2 million. During the quarter, Lock Sovran 2 completed its formation adding twelve properties to its portfolio, bringing to a total of twenty-seven that partnership now owns, and we secured mortgage financing in the amount of $48 million via a 10-year fixed rate note with PNC Bank. The company has a $15 million investment in Lock Sovran 2. As noted previously we elected to consolidate the assets, liabilities and operating results of this JV in our financial statements. As is the case with Lock Sovran 1, Sovran will manage all the properties in the Lock Sovran 2 venture under the Uncle Bob's banner and will incorporate Flexa-space truck rentals, dry guard, corporate alliance, customer care center and other Sovran advantages into these ventures. Just a word on dilution. We had some diluted pressure continued on our earnings calculation this quarter. As our share price climbed from under $24 at the end of Q1 of last year to an average of almost $31 per share this quarter. The diluted effect of FFO on options going from an out of the money position to one significantly in the money was a little over a penny per share this quarter. As I said before, this is a good problem to have. It adds another variable to forecasting per share FFO results. In building our 2002 guidance model, we can see that the diluted effect of outstanding options at the January 1st, 2002 share price of $30.15. It averaged almost a dollar more per share than that per quarter in the first quarter. Once again I have encourage all who are interested to visit our website at www.sovranss.com and at this point I will turn the discussion back to Ken.

Okay, thanks, Dave. That concludes our prepared remarks, and we would be pleased to answer any questions you might have.

At this time I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad. We will pause for a moment to compile the Q&A Roster. Your first question comes from Brett Johnson with Robertson Stephens.

Good morning, guys.

Good morning, Brett.

Couple of quick questions here I guess first on Dry Guard Corporate Alliance and Flexa-space. You guys are capitalizing 3 to 4 million in planned expenditures,-- I guess you are not currently capitalizing but you will capitalize 3 to 4 million.

Primarily that is with Dry Guard only. Flexa-space is pretty well done. There is very little left to build out on that, and that is pretty much incorporated in our overall operations. Dry guard as we put in the actual -- the buildings and the equipment necessary, that capitalized, corporate alliance, is all, whatever expense we have there is expense. But yes, this year we plan to add about $3 million of new Dry Guard space.

How does that flow through the P&L?-- I guess how and when?

Well, we have most of it scheduled for the first half of this year. So, you'll see it on our fixed assets and basically the charge on that will be interest carry. The costs associated with corporate alliance go through our corporate G & A, it doesn't affect the stores, but it's on G & A, it's not very significant, and the Flexa-space costs, which are primarily training software and advertising at this point flow through the store expense at the NOI level.

Okay. Great. And then a question about your guidance, it looks like you lowered the range that you provided, the high and low end by 2 cents each from where you gave last quarter?

A little bit. And for the primary reason for that is we were a little lighter in top line growth in Q1. So we are -- we tightened it up a bit is what I would say.

Then the lowered top line growth, it looks like your NOI expectation is unchanged for the year. Are you guys seeing lower occupancy or expecting fewer acquisitions?

Let's talk about the occupancy, Brett. We are very aggressive in our rates in most markets we are at the top generally as far as rates are concerned. Perhaps we have become a little too aggressive, So, what we are doing is implementing various markets specials to bring people in. What we are looking to do is increase our occupancy, Brett, In some areas reduce rates, it's more difficult we are finding now to implement rate increases than it was before. And I think kind of maybe on a macro level, you know, the country has been going through a couple of years of pretty duldrummy economic activity and historically self-storage has weathered well through recessions. Generally we begin to feel the effects of them later and we begin to recover sooner. We are not immune from them. So we think there is some impact of the economy on most -- on many markets actually, the good thing is we are still making money. And we would like to be making more. That is why we are aggressively doing the various marketing specials that we have in the markets. So I guess that kind of explains what our position is with respect to guidance.

I know your business is seasonal, but do you expect occupancy to be picking up from levels that it is now? I know now, adjusting for seasonality, are you expecting slower rent growth and picking up occupancies?

Yeah, What we are looking to do we can do it two ways, rates our occupancy or both. We expect in the next quarter or two is that most of our revenue increases to come from occupancy increases as opposed to rates.

Great, then -- two more quick questions, sorry. Wondering if you could also comment on the kind of global supply and demand trends? Are you seeing pretty aggressive new supply out there given the -- I guess recession resilience of the storage model?

We are not seeing an inordinate amount of new competition coming in. In most markets you have your normal pockets where you are going to see it, but we don't see -- in fact, I think the two quarters or three quarters before, we saw kind of a stabilization leveling off of new competition. So we do track that on a quarterly basis at every one of our markets. And we'll be able to know if it turns the other way. But we don't see a big increase in new competition. New developments.

Great. And then the last question is on the start-up expenses associated with the Uncle Bob truck rental and the call center initiatives, are those going to be fully expensed in 2002 or are they going to carry over into '03?

The call center will virtually be expensed in -- the start of costs will be expensed this year probably by the end of the current quarter we are in. The trucks we plan to do as we do many things on a modular type basis. We put in 15 last year, we currently are rolling out forty eight, by the end of the year we should probably do another fifty. So, we have one hundred and fifteen of our stores done this year, and then likewise we hope to finish in 2003 with another one hundred and twenty-five or so. So the truck rollout will take two years, the call center rollout should be done by the end of this quarter, Now there will be costs associated with the call center that will keep the G&A high over last year but those are recurring costs primarily associated with technology and payroll, the training and start-up and software will all be absorbed by the end of Q2 this year.

Great, Thanks very much..

Your next question is from Rich Anderson with Salomon Smith Barney.

Thank you. Good morning. Just a quick question on the Lock 1,-- Lock Sovran 1 - 2 Can you give me what the total capitalization is both and how much they are levered? I missed that.

Lock Sovran 1 has a total capitalization of $40 million, $6 million from the JV partner, $5.2 million from us, and $30 million in debt. Lock Sovran 2, which is fully consolidated on our books was capitalized at $80 million, $17 million from the joint venture partner, $15 million from Sovran, and $48 million mortgage loan.

Got it. Okay. I guess I am curious to know why this is not a good time to fix rates. You know, I mean, do you anticipate rates getting lower? What is stopping you from, you know, doing something with that sort of lingering $97 million?

Primarily, Rich, we feel that the short-term rates are great, the long term rates are not so great. Were we to forefit our good exposure to the longer -- to the low rates, we think we would be paying an artificially high mid- to long-term rate. We think a actual take, a bump off in short-term rates to bring down longer term rates. There are allot of various conflicting theories on that. Our point is -- or our posture is the yield curve that is at a point right now that we would essentially be cashing in some good debt to buy debt that is not so good and at a point where any given time if the short-term rates go up it should force down the long-term rates. We are also looking to see what to do with our balance sheet, that $97 million we like to keep floating because it gives us flexibility in the event of an equity issuance or something like that. We are not ready to lock in our line debt right now. We are looking at perhaps replacing it with some form of equity or long term debt. We are not uncomfortable where it is now. conversely, we are almost hoping for short-term rate increases because we do believe that will bring down the 7 to 10-year money.

Just another comment on the question before about guidance. Did you already have the -- it didn't seem like you had the option related dilution in the numbers at the beginning of the year, is that correct?

Actually we did. But it fooled us by more, our price this quarter was higher. We had it baked in at a $30.15 share price. We are a little over 31 this quarter on average. So it -- so we actually did have it baked into the quarter. I just explaining year-over-year, where some it went.

Okay, but for the minor reduction in the 2002 number has nothing to do with the dilution from options?

That's correct.

Okay. Regarding Dry Guard, you mentioned 25 to 30% increase in rents for those units that have been -- they have Dry Guard in them now. Can you give us a sense of how much it cost to, you know, build in the Dry Guard system on say a per-unit basis, just so we can see what the incremental return is?

Well, I will give it to you on a square-foot basis. It is generally in the range of 10 to 12, $12 a square foot. Each facility that we put it in we might put it in at perhaps 15% of the total square footage. We are not converting -- I don't want to mislead anyone to think if we have a 50,000 square foot facility that we are converting it all to Dry Guard. It is 10 to 20% of the facility will be converted. And we have the luxury of being able to convert whatever building we choose, whether it's occupied or not, because the beauty to some extent of the system we have is we can install it even when the units are occupied without vacating the customers.

What is that $10 to $12 per square foot represent in the increase in rents, a 10 to 15% incremental return on those costs or something like that?

We look for about a 15% return. Well actually get in the range of 20 -- almost 25% increase in revenues. This is the one area of our business, though, where the margin is not great, because the utility costs associated with Dry Guard nick into the 25% rental increase pretty significantly. We look for a good solid 15 immediate return on the investment, so the $3 million that we are hoping to invest this year in Dry Guard should provide a net 15%.

Just to expand on that a bit, part of it is marketing as well. If you have got someone who is going to be storing and, you know, a whole houseful of goods, he or she doesn't need all of his storage space to be equipped with Dry Guard. So what we are trying to do is get people in, they will come in for the Dry Guard with their bedding and electronic things and whatever it is that is sensitive to humidity. The other things they can put into the less expensive regular space. So, you know, it is kind of tied in together with the marketing plan.

The same-store growth rate, does it benefit by the increase in rents with the understanding that your capitalizing the costs on the cost side for Dry Guard? In other words, are you sort of same-store growth falsely inflated by the inclusion of Dry Guard?

Not yet. There hasn't been that much invested, and the stores we put it in are now just coming out of the same store. We haven't really figured out how we will address that yet. That is sort of a criticism of our industry in that the improvement dollars are not that significant. It hardly warrants breaking out. Yet you add $3 million to your same-store portfolio, it can mean a half a point or 50 bases points in same store growth. It hasn't affected us yet. It will starting in Q3. We have not worked out how we will report that but we will keep it on the square.

Understood, and my last question, if you could give some color on the internet sales. You said three times more. Can you quantify how much that is as a percentage of your total sales dollars?

It's still a pretty small amount compared to our overall. I mean I think we said at the beginning of this year we expected to generate sales a little over about a million two million five from internet sales for this year, so it is still a very small portion of it. But as far as percentage growth in this one area, it is substantial, and it really is to some extent counterintuitive because when we started this thing three years ago we didn't think there was much market for it but it has grown substantially since then. A million two on a net basis, it might be perhaps half that, or a third of that. So it adds a lot to our growth. As far as a percentage of sales it is not significant.

Okay, thank you very much.

Your next question comes from Rich Moore with McDonald Investments.

Hi guys, Good morning. I apologize missed a little bit at the beginning, so if some of this is redient, sorry about that. Did you talk at all about what you are seeing out there in terms of acquisitions, what the environment is like, what the cap rate environment is and if there's anything to buy out there?

No. We didn't talk about it so you didn't miss that part, Rich.. There is -- we are not finding a lot that we like. You know, we have a number of properties that we are looking at in the South, Southeast and Southwest and some in New England, but it is still pricey. We -- you know, as we mentioned last time, prior to say in the last six months or so, the last three quarters, we consistently found properties at north of ten. Now, we are finding things south of ten and you know, getting close to the nine area, and that is very pricey. So it is very difficult for us to find things that work.

Okay. Would you -- will there be more -- not necessarily Lock Sovran, will there be more joint ventures of that nature coming up or not so much?

I think so, we are always looking. We need to find stabilized properties and a joint venture partner who has significantly equity and willing to essentially give up control and contribute his properties for the long term. So, you know, -- you want quality properties and you want the right owner. We are not killing ourselves to make deals. They have got to work economically. So -- we are hoping to find -- we are hoping actually to work on a couple this year. We don't have any that close right now.

Okay. As far as Lock Sovran 2 goes, does that stay consolidated, do you think?

I think so. The big issue there, we talked about it on the last call is essentially we have more control than our accountants want us to have to call it independent. We are fine with it. We fought it for a while, we look the at it and said, so what? It is more transparent this way. We will take the benefits of control, and let the chips fall where they may. And they really aren't that bad. I don't foresee us unconsolidating Lock Sovran 2.

Okay, and did you talk at all about some way to quantify the benefits of the customer call center? Obviously strategically, it is terrific, there is no doubt about that. Is there any way to quantify how that is doing?

At this point the only thing we can really point to is the volume of calls, it is incredible. One of our challenges is going to be able to staff properly, learning -- this is a large undertaking for any company. We are not immune from that. But the difficult thing is determining peak times and staffing for that, so we are still kind of feeling our way through that. But we are -- we feel gratified that we are generating a large number of sales through it, and I do believe, almost weekly we can see improved processing systems, results, and I am looking forward to not only sales results, but also giving more accurate and more reliable information about our customers and how we can attract them, what brings them in, what doesn't work. So we have good control here, we have good people, well-trained people. We are very excited about the future of this. I think you are right, Rich.

Thank you. The last thing which I am certain you did talk about and I missed, could you give me the one minute synopsis of the truck rental program and how you feel about that?

Okay, likewise, we have the 15 trucks out there for the last two, three quarters, by the end of this month we will have 48 more trucks out in various markets. The first quarter was a slow quarter for self-storage. We had approximately 200 -- it is difficult to verify but 200 people who moved in, who the customer care reps or the managers felt would not have, if we didn't have the trucks. Plus the fact that we outfitted two stores here in Buffalo with the trucks, and we are hearing people come to us saying, Hey, I saw your Uncle Bob's truck over there and there -- Uncle Bob's truck over there. The -- if we don't make a dime on this, just break even, I think the marketing impact that we will have from these trucks being driven by our customers is going to pay for it. We are very, very excited about that. Which is -- it is not a monetary thing, you can't quantify it, you know it is out there with these people driving your trucks and moving billboards.

Yeah, exactly, great, thanks, I appreciate it.

At this time, there are no further questions. Mr. Myszka Are there any closing remarks?

Thank you, Jeff. I would just like to thank everybody for tuning in to our call. We appreciate your interest and your confidence, and we look forward to speaking to you in the next three months if not sooner. Have a great day.

Thank you.

Thank you for joining today's Sovran Self Storage, Inc., first quarter conference call.