Life Storage Inc (LSI) 2003 Q1 法說會逐字稿

Good morning everyone My name is [Inaudible] and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Sovran Self Storage first quarter results conference call. All lines have been 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 this time, simply press star then the number one on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Myszka you may begin the conference.

Thank you. Good morning and welcome to our first quarter conference call. As a reminder the following discussion will include forward looking statements, Sovran's actual results may differ from 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. I'd like to announce Sovran's delivery of another quarter of solid operating performance and what remains a challenging economic environment. A healthy, same-store revenue gain of 5.1% was somewhat overshadowed by a 10.9% increase in same store operating expenses.

The result was same store net operating income growth of 2.2% over Q1 2002. And I might mention relative to a number of other REITs that we've been monitoring over the last several quarters and more importantly to the broader economy, sovereign's performance continues to be impressive. A major contributor to our performance has been our customer care call center. The center is fully staffed, well trained and ready for the always hectic spring and summer months that lie ahead of us. Similarly, our truck program continues to roll along. We outfitted 65 more stores with our Uncle Bob's trucks since the beginning of this year. And that brings the number of stores with trucks to 158. Last quarter, nearly 2000 new customers used the truck to assist their move into an Uncle Bob's store.

We also expect to add our proprietary humidity control system, [Dri-guard], to over 20 stores this year. The rates we collect on Dri-guard treated units are running almost 27% higher than non-treated units. We anticipate having Dri-guard operational at over 60 stores before the end of the year. In addition, our plan is to otherwise expand or enhance 11 other stores throughout the year. Our balance sheet remains strong. And positions us to take advantage of future growth opportunities. Unfortunately, the acquisition climate remains challenging. We reviewed a large number of opportunities over the preceding months, however, we're unable to come to terms on any of the transactions. Under administrative note, we are pleased to announce the relocation of our training center to our headquarters here in buffalo, New York. Every new manager, as well as current managers and auditors going through a refresher course will be trained at our state of the art facility.

In summary, despite a continuing difficult economic environment, Sovran's performance, particularly in same-store revenue growth, is encouraging. And as we have stated before, our basic business is solid. It's a little bit slower than it has been in the past, but it remains very sound and solid. And now at this time I'd like to ask Dave Rogers to offer us some details on our financial performance and position.

Thanks. Operationally total revenues increased $2.9 million or 12% over '02's first quarter and our operating expenses increased by $1.5 million. This is primarily due to the addition of 23 stores in 2002 and improved occupancy and operating results throughout the portfolio. Our total net operating income increased 8.4% to $17.6 million. Our overall occupancy was 83% at March 31, which is an improvement of 1% over last month and our average rent per square foot for the quarter was $8.81 an increase of 2% over last year's portfolio average. On same store basis, our revenues increased by 5.1% over those of the first quarter of '02.

Broking down that came in to show rental rates increase by 2.1%. Occupancy improved by 1.7% and other income, which is primarily truck and cell tower income increased by a 53%. Operating expenses on same store basis increased by almost 11% in large part because a truck rental expensed kicked in full force. Snow removal costs hit us real hard. Personnel and property insurance premiums continue to pressure us a bit. Our same store NOI grew 2.2% to $16.6 million. March 31, the occupancy for 241 same store group was 83.7%, which was up 1.7% from last year's 82. And our rental rates grew to $8.74 per square foot.

Discounts and free rent were slightly hire than last year's first quarter but still not a significant factor in the revenue component. G&A costs for the first quarter came in at 2.3 million which is right on target. Interest costs were negligibly higher than for the comparable period last year which really isn’t surprising because our overall debt increased by only $8 million. We had almost $72 million in acquisitions and capital improvements since the end of last year's first quarter but we funded that with the proceeds of our Series C preferred stock and operating cash flow. At quarter's end we had a total of $258 million in outstanding debt 47 million of which is mortgaged debt fixed for 9 more years at 7.2% and $211 million which is bank line and term debt.

Of this bank line, we have presently swap agreements in place fixes $130 million for periods remaining of two to six years. The remaining balance of $81 million is on a floating rate basis. And as I'd like to point out, it's important to note these rates associated with our credit line are effective only for the life of our bank agreements which expire near the end of this year. So while we protected against LIBOR fluctuations we still have a certain degree of exposure on a credit spread negotiated at renewable or product extension of our credit line in term debt. To sum up our debt picture, we have at March 31, $258 million of total debt on our consolidated balance sheet, of which almost 70% is either fixed or hedged for periods ranging from two to nine years. Our capital structure is solid. Debt to net asset value is about 35%.

Debt service coverage is 4.3 times EBITDA and six charge coverage is 2.7 times EBITDA. We have about 15 millions dollars of capacity on our line and expect to generate $6-7 million in free cash flow from operations this year. During the quarter, we issued 117,000 shares through our drip and direct purchase plans at an average price of $25.79 per share. We also bought back 146,000 shares as an average price of $27.09. We have been in discussions with our bank syndicate regarding moving some of our term and line debt into [Inaudible] instruments and also increasing our total dollar capacity by another 50 million. We expect discussions to continue and moves to be made by the end of the third quarter of this year.

With regard to guidance we're encourage by our ability to attract customers, improve occupancy and increase rate. We think the top line component of our business is showing strong signs of stabilizing but with exception of snow removal costs we don't see operating costs relaxes in the next couple of quarters so as a result we're holding to our earlier expectation of approximately 2% of same store NOI growth for 2003. We have not built any property acquisitions into our model or guidance. These assumptions combine with the dilution cause 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.

We expect 2Q of this year to come in between 72 and 74 cents per share. I will hand it over to Ken. Thank you.

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

At this time I would like to remind everyone in order to ask a question, press star one on your telephone key pad. We will pause for just a moment to compile the Q and A roster. Your first question comes from John Sheehan of A.G. Edwards.

Good morning guys.

Good morning, John.

I have a couple quick questions for you. Can you maybe comment little bit on what the level of call [Inaudible] machine at the call center has been over the last quarter? And maybe how that compares to what you've seen over the last few quarters?

Sure, John. We had about an 8.5% increase in the number of calls to our call center over the fourth quarter of last year. Unfortunately, we were still on the roll-over situation in the first quarter of last year so we don't have any comparables but starting with this current quarter we will have some comps. Head of our department indicated to knee that on Monday we had the highest number of calls answered by our customer care reps that we've ever had. So the volume seems to be picking up nicely. We've got a good group of people. We're fully staffed now for the busy season. They are all well trained. We're encouraged that we'll be capturing -- we'll be getting more calls than we have in the past and capturing more of them with better trained people. So we're encouraged with what we're seeing so far there.

Ken, can you remind us roughly how many calls you answered in the fourth quarter? If I remember it was somewhere around 79 or 80,000.

It was just under 79. This first quarter was 85, 5.

Another question you mentioned the snow removal costs were somewhat higher than you expected. Can you quantify what impact they had on first quarter result was it a half a cent, a penny?

We were doing actually, pretty well, John, in January and February it was the March and April accruals that got us. We had an increase over budget which we thought was pretty heavy of about $110,000 which was just about a penny a share.

Okay.

Over and above what we expected.

Finally, you mentioned some markets in the press release that were both positive and negative. Is there anything specific about those markets outside a new supplier, increased competition that has you concerned for the next couple of quarters?

I think not out of the ordinary, we're very encouraged by north Florida. That for a couple of years was a tough market for us. That turned around nicely. Primarily on the demand size. There is a little bit of new supply. But the [Inaudible] is growing very well. Atlanta, both stabilization of supply and some pick-up in activity. New England we are seeing some new supply. That's been kind of a quiet market as far as development goes. It's not as quiet now and I think that's what is dragging us a bit there. But overall, if you look to a normal range of what you might expect in supply, we're not concerned and really I don't think any of our markets right now.

Okay. Great, thanks.

Your next question comes from Ross Nussbaum (ph) from Smith Barney.

Good morning guys.

Good morning.

Two questions first the footing rate that you have. Do you have any plans to fix that in conjunctions with the bank groups?

That is the idea all along is to take as much as a $100 million of our total debt and put that into a hopefully a seven to ten-year instrument and then take some of the remaining line debt which is floating and put that into maybe a five-year term note, but some of it will be fixed.

Okay.

Over and above the hedge we expect to have some of it fixed.

I'm trying to figure out what the potential rate increase is going to be if you're talking about a five-year term on the line debt. We're going to see a late increase there.

Right now our floating rate is a shade under 3%. So that $81 million is at about -- it's sub-3. I would expect if we go into a five-year term note we'll be at six somewhere. For some part of the floating rate Debt that later on the year. We'll see a 300 basis point increase. I'm not sure how much that will be at this point.

Sure. And what about the other portion of the line debt? What are you expecting rates to come in there?

Well; most of it is hedged right now at about 5.5-6%. So I don't see -- it will be -- if we bring something in at a 10-year, you know, we see right now pricing today is somewhere around 6, 6.1%, so there's not a material difference between the hedged portion and the term rate that we would expect to get.

Okay. Ken, can you talk about traffic at the stores in the first quarter? What did it look like maybe sequentially and year over year?

Yeah. We found it somewhat encouraging frankly. We track ins and outs, move-ins and move-outs. First quarter of that year saw more than 2,000 more net move-ins than last year's first quarter. As Dave mentioned, we did pay a little bit of a price as far as discounts are concerned. More than we did in the first quarter. But we've -- with the length of stay that we realize from these people which seems to be growing as we go along, we're encouraged with what we saw in the first quarter, especially compared to the first couple of quartz of last year.

Is there any difference in the percentage of consumers that you're closing on once they walk in the store?

Well, you know, with the call center that we have, we're learning -- it's a very difficult thing. We're closing right now about 34 35% of the people who call here turn out to be customers. That we can verify. We know it's higher because what that as a number we're finding that upwards of 40-50% of the people who rent with us would be walk-ins and we know that can't be accurate. So we're finding that -- we're in the process right now of putting together something that's more verifiable where somebody calls here, where we give them a number or we give them something to identify when they get to the store. And that's a process that we have to go through because what happens many times is that a person calls here, they get information from us, they don't give us the information we need to give to the manager to track them. They show up, the reason they are there because the call center. But we don't have the ability to track how they got to be with us. So we're working on the tracking ability that we have which at this point we're not pleased with but that's -- it's an evolutionary process for us here.

Okay. And, Dave, I think you mentioned that there was a slight increase in discounts and free rents during the quarter. Can you quantify that a little better for us?

I think this year we gave about 280,000 more in the quarter, in discounts than we did last year, but last year it was very low. This year 280,000 on a quarter of 25 million is not very significant. It's nothing like what we and what the industry did during the summer. This is more along the lines of somebody calls in on the 14th or the 15th of the month. We'll give the balance of the month, free, perhaps to close the sale. Certain unit sizes we'll price on a discounted basis. So while it was there, $280,000 worth, it wasn't very significant compared to the third quarter, say, of last year.

Are there any particular markets where that kind of activity is higher than others?

Dallas, New England was a little bit. But it was more based, I think, on the unit type and where we've gotten a little more sophisticated or considerably more sophisticated in the way we're pricing our unit. We have a model built into every store so that if, for example, we have 90% or greater occupancy in particular unit size we're offering not only no discounts but actually a premium price. If we have normal occupancy in the unit size we'll charge the street rate. If we seem to have an excess in a certain type of unit we're offer a discount. That's what we're offering now in a more consistent basis and tracking better. So as we go on quarter to quarter with the technology we've got into the company we'll be able to answer your question and probably create questions that were never there before because we never had the data to talk about it.

Great. Final question, on the truck program, remind me how are you accounting for this? How can we determine what the level of profitability from this business is?

That's a difficult question. This is probably the one component of our business that we sat back and did the cost benefit analysis on and actually had to back into it some assumptions that we're never going to be able to verify all the way. That's because we're bringing the trucks in. We're giving it away free to customers who are moving in. We're charging it down on the operating expense line as the maintenance cost come in, as the insurance costs come in, and miscellaneous costs those are all going into operating costs. We capitalized the leases so we're taking a big chunk of interest. Keep in mind the whole thing has only cost us so far about $3 million. It's not -- with $750 million of assets it's not a real huge thing but we've put $3 million of capitalized assets on the books and a good chunk of that expense is coming out as interest expense. But as far as knowing, we've gotten paid rentals real quickly this quarter, of $122,000 were the paid rentals on the trucks but the significant component of the whole idea is bringing in rental that we otherwise wouldn't have gotten. So for us to say here’s what we brought in on trucks, here the expanse on trucks, isn't going to be a meaningful number because we can't point to each and every one of the rental incomes that we got on our units as directly from the trucks.

Understood. Let me clarify one thing.

You said you got 3 million of capitalized assets. You're amortizing that over the life of the vehicle or the life of the lease?

That is correct.

What is typically the lease term?

Four years, four-year lease.

That's -- that wouldn't be getting -- is that in FFO or it's not, that actual amortization of that?

Just barely in the fourth quarter, yes, in the first quarter, yes.

So it is. That amortization of that lease expense is running through FFO?

Correct.

Thank you.

Your next question comes from David Copp of RBC Capital Market.

Good morning. Jay Leupp here for David Copp. A couple questions on your internal guidance and operations with the guidance on 2% same store NOI growth. Where do you believe occupancy rates have to move in to your portfolio in the next couple of quarters so you can get some real pricing power and perhaps exceed that level of guidance?

Well, if we hit last year's occupancy without the discounts, we'll be at the top end. Certainly. And based into this is some dilution on debt later on in the fourth quarter, for example. But I think if we hit 86, 87% without discounts, we'll exceed 2% NOI. We're not real comfortable saying that at this point because we don't know first of all what's going to happen later this week with our peers and more, importantly, with the whole of the mom and pop sector, how they will follow that. So I think if we get to 87% occupancy without discounting we'll be ahead of this 2% NOI.

Okay. And then just on the subject of external growth, last question. I know you're not really projecting the -- so far, where do you believe cap rates have to move so that acquisitions start to look accretive. Do you see any product unlocking any time either early or later this year?

It's been tough Jay. We're not afraid to buy at a 9 cap if we can see some upside, we did that in the Hamptons, say in the fourth quarter we bought at a 9.2 cap but we see some significant upside. We're not comfortable buying 85% occupied well-run property at appear 8.8 or something like that. It's been dead still as far as what we can see. Biggest thing has been the mortgage rates and the ability to leverage this type of asset to higher levels than it had been before by the private guys. But, you know, it's very property dependent. If there's some opportunity we'll pay the low cap rate. If -- but right now at a 9 cap for mature property we're definitely not there.

Great, thank you.

Your next question comes from Rich Moore from MacDonald Investment.

This is Richard Sweigard for Rich Moore. You had a roofing and pawing cost over presently $2.1 million in the quarter does it say the good run rate going forward?

Actually, we had a pretty hefty load paid in the fourth quarter of last year. We got a lot more done last year. We'll probably see as much or more this quarter and then it will taper off considerably the balance of the year.

Looking at a million dollars in the third and fourth quarter each.

Probably another 3.5 million for the balance of the year.

Okay. You mentioned that cap rates are pretty low. Have you looked at dispositions at all? Is that a possibility?

Yes, we have. We are. We have identified some properties. We haven't shopped them in a very broad base yet, but I think if -- you make a good point. With cap rate this is low and you're not buying, why aren't you selling, I guess? That is high in our list. We're not really prepared to talk much about it. I wouldn't want anybody to make any dispositions in their models at this point but certainly it's got a lot of our attention right now.

All right. Thank you, good quarter.

Thank you.

At this time there are no further questions.

Well, thank you very much for participating in our call. We appreciate your confidence and your interest. And we look forward to speaking with you again next quarter. Thank you, have a good day.

This concludes today's conference call. You may all disconnect.