Life Storage Inc (LSI) 2002 Q4 法說會逐字稿

Good morning. My name is Amanda and I will be your conference facilitator today. At this time I would like to welcome everyone to the Sovran Self Storage fourth quarter earning release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If would you like to ask a question during this time simply press star then the number one on your telephone key pad. If would you like to withdraw your question press the pound key. Thank you, Mr. Myszka, you may begin your conference.

Thank you, Amanda. Good morning and welcome to our fourth quarter conference call. As a reminder, the following discussion will include forward-looking statements. Sovran's actual results may differ materially from the projected results. Additional information concerning the factors that may cause such differences is included in our company's SEC filings. Copies of these filings may be obtained by contacting the company or the SEC.

Now, as we stated in our press release we had another quarter of stable performance in our core business. Despite the challenging economic environment, we are encouraged about how last year ended and how the new year has begun. Our same store revenue increased for the quarter of 3% reverses the downward trend we had experienced since Q4 2001, and our physical occupancy which usually declines appreciably from Q3 to Q4 was essentially the same at the end of the year as it was at September 30, '02, at about 84%. We attribute this improvement to the effects of our initiatives started or continued last year and it's these items which we expect will fuel our growth in the future.

Our Customer Care Center continues to yield positive results fielding approximately 79,000 calls in the fourth quarter, down a little as expected from approximately 85,000 calls answered in Q3. We expect the Customer Care Center this year to enable us to respond to the greatest percentage of calls in our company's history. We have a busy season under our belts, so to speak, so we expect to be quite efficient and most importantly, quite effective. Similarly, our truck program continues to roll along. We ended the year with trucks at 93 stores and we expect to increase that number to 158 in time for the busy season this year. Our most recent survey once again revealed that upwards of 40% of the customers who moved in by means of free use of the truck indicated that the truck's availability was the determining factor in choosing Uncle Bob's. We also added our proprietary humidity control system, Dri-Gard, to another store last quarter bringing the total of 15 for the year. The rates we collect on Dri-Gard treated units continue to run about 31% higher than non-treated spaces.

Our balance sheet remains strong, thanks in part to the $70m preferred stock offering we consummated last year. However, there's no free lunch. Maintaining a strong financial foundation can be expensive and in this case it cost us 12 cents in FFO per share last year. However, it positioned us to take advantage of future growth opportunities. One such opportunity was the acquisition at the end of December of four property portfolio in the Hamptons, New York. The $26,800,000 acquisition gives us immediate market dominance in that area of Long Island as the properties comprise nearly 75% of the storage supply in the Hamptons region.

Now, given the current economic malaise our industry is certainly facing a challenging environment. Taken in this light the improvement in Sovran same store sales and occupancy figures experienced in Q4 2002 which continued into Q1 2003 are encouraging developments. Let me assure you that the basic business is solid. It's slower than it has been in the past few years but it remains very sounds.

Now at this time I would like to ask Dave Rogers, our Chief Financial Officer, to offer some detail on our financial performance and position.

Thanks, Ken. Regarding operations for the quarter, total revenues increased $3.7m, or 16% over 2001's fourth quarter. This was primarily due to the addition of eight stores in late '01 and 19 stores by midway through the second quarter of this year. Our operating expenses increased by $2m as a result of adding the new stores, so total net operating income increased by $1.7m. Our overall occupancy was 84% at December 31 and our average rent per square foot for the quarter was $8.61. This is almost exactly where we were at the end of each of the past two quarters but given all the hard work and effort expended over that time fighting for market share it seems kind of anticlimactic to say that we merely held steady through the past six months. In the present climate, though, we are actually encouraged by this. Same store revenues increased by 3% over those of the fourth quarter of 2001. Our net rental rate barely budged, actually, but occupancy improved by 1.3% and due to truck rentals and cell tower leases kicking in our store level other income grew by over $250,000. Operating expenses on a same store basis increased by almost 11% this quarter, in large part because the truck rental expense kicked in full force and our personnel cost and insurance premiums increased pretty significantly. As a result, our NOI growth on a quarter over quarter basis was negligible. Q4 actually in effect was a microcosm of the full year of 2002. Modest top line growth, increased expenses and a pretty flat NOI.

G&A cost for the fourth quarter came in at 2.2m, which is what our run rate has grown to. Much of this increase is attributed to the call center configuration start-up costs but we did add 37 stores since this time last year which increased the supervisory, accounting, IT and training personnel and the related overhead and travel costs associated with that kind of staffing.

Interest costs were $400,000 higher than for the comparable period last year. Our average interest rate for 4Q of '02 was 5.7%. Now, our debt level at quarter end was only about $12m higher this year over last. We paid off a $30m term note two-thirds of the way through the period. So we had considerably more outstanding on a weighted basis in Q4 of '02 than in '01. Further, the debt that our consolidated joint venture carried in 2001 was a floating rate debt. We converted that to a fixed rate mortgage at the beginning of ’02 with a 400 basis point unfavorable swing. At year end we had a total of $253m in outstanding debt 48m of which is mortgage debt, fixed for 10 years at 7.2% and 203m of [inaudible] term debt. Of this 203m, we presently have swap agreements in place fixing $130m for remaining periods of two to six years. We elected to leave the remaining balance of 73m on a floating rate basis. I want to make sure you know that these all end rates are associated with our credit line and are effective only for the life of the agreements which are expiring near the end of this year. So while we protected ourselves against LIBOR fluctuation we have a certainty agree of exposure on a credit spread that we are going to negotiate at the end of this year. So to sum up our debt picture, we have at the end of year, December 31, $253m of total debt on our consolidated balance sheet of which a little over 70% is either fixed or hedged for periods of two to nine years.

Further on our capital structure, as most of you know in early July we entered into an agreement with a group of investors led by Prudential Real Estate to issue $70m of preferred stock through a private placement. We immediately issued $40m of those shares and paid down our line debt. We drew the balance down late in November to pay off a $30m term note. The shares were issued with a coupon rate of eight and three eighths and they are convertible to common shares within five years at a price of $32.60. In lieu of a syndication fee we also issued warrants to the investors to purchase shares at the same $32.60 price. As a result, our capital structure is now much more solid. Debt to net asset value is about 36%. Our debt service coverage is 4.2 times and our fixed charge coverage is about 2.8 times. Our liquidity situation has improved considerably. We have about $25m of capacity on our line and we are expected to generate between six and $7m in free cash flow from operations this year.

During the quarter we issued 117,000 shares through our DRIP and direct purchase plan at an average price of $27.50 cents per share. This quarter we also bought back 187,000 share at an average price of $27.80. With our share price at its current level we are limiting the issuance of shares through the direct purchase plan and we plan to judiciously acquire shares on the open market subject to our bank loan covenants and investment alternatives.

With regard to guidance for this year, it's been more difficult of late to forecast top line results with any real degree of accuracy. Probably more so than any time since we've been public. We experience, just to keep it in perspective, an annual lease turnover rate of about 92% on 130,000 some storage units. So if we fluctuate by even 1% of that, if we miss by 1%, it has an impact on our FFO of about eight cents per share. So with that as a background and given the competitive climate and the continued need for incentive and discounts, we are forecasting a pretty modest one to 2% top line growth this year.

Our operating expenses are expected to rise in the 3% to 4% range, primarily in areas concerning marketing and property taxes. So as a result we expect same store NOI growth of between 0 and 2% for 2003. We are not building in any property acquisitions into our forecast. And these assumptions combined with the dilution caused by paying down low rate debt with the proceeds of the Series-C Preferred result in a 2003 FFO estimate of between $2.86 and $2.88 per share. This is 0% FFO growth from '02 to '03 which is not what anybody really wants to hear. However, by playing defense we've solidified our balance sheet, we've added some capacity, we are poised to catch a lot of upside and, in the meantime, we are turning out a strong and secure dividend. So with that I will turn the discussion back to Ken.

Thanks, Dave. That concludes our prepared remarks and we'd be pleased to answer any questions that you might have.

At this time I would like to remind everyone, in order to ask a question please press star then the number one on your telephone key pad. We will pause for just a moment to compile the Q&A roster.

The first question comes from Paul Adornato with Mercury Partners.

Hi, good morning. On the share buy-back program, did you say that the program is limited by certain covenants? What are the some of the restrictions?

The big ones, Paul, is we are limited to $4m per quarter, or $10m per year of share buy-back under the present line of credit agreements.

Okay. And that goes by calendar year?

Calendar quarter and year, right.

Okay. And I was wondering if you could describe the incentives that you've been offering, could you just walk us through the progression of the size of incentives through 2002?

Sure, Paul. In the summer, later summer of last year, we instituted, we reviewed every one of our stores and looked at the occupancy of each of the unit sizes. And those units that had occupancy of less than 85%, we offered specials here through the Customer Care Center. And those people who came in, let's say, in July, would get, move in essentially for $1 and pay the administrative fee and the following month would be free. So they would get essentially one month free rent. We did that for two months. It was unadvertised specials so we didn't run the risk of people calling and trying to store their junk with us for $1 and then give us a phony name and move away. We stopped doing that in September, or July and August were the two months, and just to give you a little feedback on that, as of the end of this month, we will begin, we will have covered the upfront cost that we incurred in July and August for that special. So we have between 40% and 45% of all those customers who moved in with us in July and August are still with us. So we expect that to be a success for us.

What our current specials are, are basically they are pretty much based on occupancy. It's not unusual for a store to have specials running let's say on five by tens and giving a premium for ten by fifteens or ten by twenties. So I hope that gives you a little bit of a flavor of where we are. We ran that move-in special for two months running when the phone was still ringing. We are pleased with that. We think that's part of the reason why our occupancy was as high as it was at the end of the year whereas usually in the fourth quarter it takes a dip of maybe 100 to 200 basis points from the third quarter.

And if you were to characterize current level of incentives, would you say it's normal for this time of the year, or perhaps a little bit greater than normal in order to kind of boost overall occupancy up to a more typical occupancy level?

I think it's pretty normal except one thing I can say, I think on our part, anyways, a little more scientific because of the customer care center, we have the ability to really direct specials at stores on a more consistent basis and track the effectiveness of it. So I don't think it's an appreciable difference but I think it's better than we have in the past.

Great. Thank you.

You're welcome.

Next question comes from John Sheehan with A.G. Edwards.

Good morning, guys. A couple of quick questions. Given the location of a number of your assets in the East Coast do you expect any material negative impact from all the snow you had, either snow removal cost or lower traffic levels?

I think the traffic levels will come back pretty quick but our regional team leaders are really complaining about the cost of removing the snow. We are going to get hit in the Boston area, certainly, the Virginia area where it's pretty unique, it's the first time we've had to push snow in some of those stores ever. So we are going to take a little bit of a hit but it used to mean a big thing to us when we had 100 stores or 150 stores, you could see it, I don't expect it to impact first quarter numbers that much. There are certain managers that are going to be upset and certain regional team leaders that are going to take a pretty big hit for their NOI growth. But on a portfolio basis it's not significant enough to worry about. As far as losing customers, I think it's fortunate it's mid month, believe it or not in our business it makes a difference I would hate to see this on the 27th or 28th or the 2nd or the 3rd. But it works out good, if there had to be one, this was the right time of month for it.

Could you kind of walk us through the acquisition in Long Island, sort of the genesis of that transaction, how you were able to tie it up and finally close on it, given that you're not really forecasting any acquisitions for '03, it sounds like this might be a bit of a unique story.

Yeah, this is a portfolio that we have been looking at for, gees, probably about a year I think it was, three or four quarters, and it originally came on the market in the range of around $36m, $38m, in that range. We wound up acquiring it, as I mentioned, for $26.8m. And the cap was based on a relatively soft revenue year. We determined it with all in cost plus the soft revenue year, it was still north of nine. We are real pleased with the opportunity there because the occupancy was still, it's in around 74% 75%, 76% range. We have some opportunity there, too, to add in Dri-Gard because it is pretty humid area, the demographics of our tenant base shows a lot of discretionary income and the buildings are constructed to be very suitable to convert for Dri-Gard. So we are real pleased with getting that in and we are expecting some good things to from that over the course of the next few years.

One nice thing about the way the negotiations went, we were able to lock in near the end after going back, we had a pretty big difference between the bid and ask price on this portfolio, more than usual but in the end of seller was in a position to wind down or crawl through a window of his mortgage and escape a punitive prepayment penalty if we could commit and close within a very tight range. And we beat out the other bidders because of the ability to have cash and not put in a mortgage contingency. So that was a little different than we usually see but it worked out nicely.

Given the fact that the occupancy of these properties is so low where do you think you could push that sort of initial nine-ish number in a year if you could get the occupancy up 200, 300 basis points?

I think what our goal would be within a year, year and a half maybe 150,200 basis point increase over where it is, but it remains to be seen. As Dave said, it's probably the most difficult time for us to be able to predict what's going do to happen with the occupancy. And I have to admit, it's close to where we have some other stores but it is a unique market. So we are going to learn a little bit as we go along as well.

Okay. Thanks, guys.

Your next question comes from Ross Nussbaum with Solomon Smith Barney.

Good morning, guys. First, a couple questions, looking at your CAPEX schedule the $10.1m that you spent on roofing, painting, paving and equipment, can you walk me through in terms of where you think that number goes in the next year?

Well, some of this was discretionary. I think over the last three years we put quite a bit into our portfolios, on average much more than the 15 cents that we typically use as a benchmark. I don't think the benchmark has risen that much. We've just had opportunities when we were in markets to take advantage of some good prices on our overall construction basics. So I think what we are looking for this year is we are setting aside that 15 cents a foot, we are looking about 2.25m, 2.5m on that kind of repair. But we are in real good shape portfolio-wise. I don't know that we will spend that but we will set that aside.

On revenue enhancing programs, we are looking at $3 to $4m, maybe a little bit more in Dri-Gard, perhaps $2m to $3m in expansions and other climate control, but some of that is on the boards now, some of it has to go in later in the year. So I guess if I want to bring -- we are looking at between $6m and $7m right now that we've got hard on the board including the roofing, painting and paving stuff.

Okay. From a fundamental perspective, can you talk about the impact of new supply and what effects that's really having on your ability to push occupancy higher?

Well, Ross, we are not really seeing, actually in the last two to four quarters there's been, at least in our markets, less new construction than we have seen say for the four to eight quarters before that. Now, there are some where that's not true but generally speaking, we are not seeing that as a big impediment to occupancy or rental rates. I think part of it is over the past number of years we've pushed rates pretty hard and I think it's time we are taking a little bit of a breather and it also happens to coincide with a pretty tough economic environment and it's been touted that self storage is immune from recessions. We've said all along we are not immune from them but we are insulated to some extent and that we begin to feel the effects of them later on and we begin to feel the positive effects of a recovery sooner because of the fact that we have relatively short term leases and lower cost per lease. So I think it's a combination of things. I wouldn't point at new competition as being the primary culprit.

Great. That's all I have. Thank you.

Okay. Thanks.

Your next question comes from Richard Moore with McDonald Investments.

Hi, guys.

Hi, Rich.

A couple things, occupancy for the first quarter, usually that is something that gives after the fourth quarter. What are you thinking for this quarter? It sounded encouraging like maybe we wouldn't see much of a dip or would we see the usual seasonal dip, do you think?

Well, if the first month is any indication we will hold pretty steady with where we were and we are not experiencing a big move-out at this point. It's, we can't prognosticate as to where we are going to be but as of now we are encouraged.

And you've alluded a couple times, Ken, to the idea that rental rates maybe got a bit ahead of themselves over the past year or so. How do you feel about that? Are we still going to see softness, do you think, in terms of quarter over quarter rental rate increases?

Well, I think it's a combination, occupancy as well as rental rates. And we do have some room. Our occupancy is 84% and we've generally when years were a little bit better we were in the mid to high 80s, so we have some room as far as occupancy is concerned but with our revenue management system we will be aggressive where we know there is seasonality as far as units that are vacant now but we know in April, May and June there's a big demand for them. We are going to hold out and try to jack those rates up as much as we can. So it really is a situation where particular stores and markets will have discounts going on in particular unit sizes and rental rate increases on others. The final analysis that I would expect there will be some rental rate increases but I think move of our revenue top line will be generated from occupancy growth.

Thank you. And looking geographically, you cited a couple markets that were weak in the press release and couple others that were strong. What are you seeing exactly geographically why the differences and what do you expect as you look forward?

I think we are very encouraged by Florida. That's a positive market that heretofore if we had one region of Florida going good, the other two were going bad. But for the first time we've seen a couple quarters back to back where the third quarter was decent and the fourth quarter was actually strong. I think part of that goes to our stores are not experiencing a lot of new supply coming on line. Florida has always been a pretty heavy market for new supply. So that's working the way storage should work. Atlanta has come back nicely but it's been battered for the last couple years and I think that's more of just the pendulum has to swing after you have two, three years of down, down, down, even a little bit of a push helps you. Dallas is probably the market that we've seen that had some over-building or at least I think actually the latest numbers have come out to show something in the range of 2.25% new supply either being built or ready to be built. But we really do watch our markets. Our managers and our regional team leaders are out looking at the zoning boards, looking at the planning board activity. That's our thing, and we have competition reports that circle us. We watch those and we are not seeing it in many markets save for Dallas and that's one that's gotten pretty hot again. Other than that, it's been, as Ken says, not absolutely new competitive free but not anything that we are overall concerned about at this point.

Okay. Good. When you guys look at acquisitions for the year, I know you mentioned in the press release that you don't see much until maybe later in the year, what kind of environment are you seeing? Is there much attractive out there or really nothing on the radar screen at this point?

Well, the prices are just way out line at least in most of the situations that we are encountering. We are looking at a lot of properties. We looked at a lot last year and disregarded quite a number. And the cap rates are lower than they ever have been since we've been public, perhaps since we've been in this business since the early '80s. And I'm sure it's attributable to a great extent to the low interest rate environment that local entrepreneurs can tap into if they are willing to put in some equity of their own. So we are going to be looking at different opportunities maybe where the occupancy levels are a little low, perhaps the management is not as aggressive as it needs to be and if there's an opportunity for to us buy it and put in our Dri-Gard, our trucks and use the call center and maybe manage it a little bit better, perhaps generate a good return. But I think as we've indicated we are not optimistic about the potential for getting a lot of acquisitions this year, at least at this point.

Then on the flip side, Ken, would you say that there's any interest on your side in dispositions, if cap rates have moved down somewhat?

We are always looking to prune our portfolio and we have identified a number of properties that for various reasons may not fit into our overall scheme and that may be on the horizon for us later this year.

Nothing we should model at this point, you think?

I think it's too -- we do have definite plans, we do have definite stores, but I would hate to model at this point.

Okay. Last question, Dave, do you see any additional floating to fixed opportunities? I know you mentioned in your press release that you didn't model that in your guidance but are you looking at that at all?

We love the riding, the 73m that we have floating, we love riding it but we do have some stuff, most of it or all of it coming due at the end of November. So we'll be negotiating pretty soon, I would think something along the the lines of, I would like to do something in the range of a seven to ten-year unsecured $100m instrument plus or minus years plus or minus dollars but given the current climate that would be where we're headed for right now, and then take a smaller line going forward. But, yeah, we do plan to fix even this much going forward. So there would be a little bit of a nick, I think at the end of the year to ramp up, we are paying about 3% right now on our floating rate debt, it's terrific. We bit the bullet on most of it but we are going to have a little bit more to do but hopefully that will be by the end of the year and then we will be in a good picture for several years to come.

Great. Thanks a lot, guys.

Thank you.

At this time, sir, there are no further questions.

Okay. Thank you, Amanda. And thank you all for participating in our conference call. We appreciate your confidence. We hope that you have a great three months and we look forward to speaking to you again in May. Thank you.