Life Storage Inc (LSI) 2003 Q2 法說會逐字稿

My name is Latengi and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Sovran Self Storage second quarter earnings 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 keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Myszka, you may begin your conference.

Thank you, Latengi. Good morning and welcome to our second quarter conference call. As a reminder, the following discussion will include forward-looking statements. Sovran's actual results may differ materially 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.

OK. Well, Sovran, once again, has experienced solid operating results during the second quarter. A strong same store revenue gain of 4.1% were somewhat overshadowed by a 9.8% increase in same store operating expenses. The net result was a same store net operating income growth of 1.4% over the second quarter of 2002. Dave Rogers, our Chief Financial Officer, will provide details in a moment. A major contributor to our performance has been our customer care call center. We have dramatically increased our staff over the last year to improve our service level and we have made a commitment to training and coaching our customer care reps on selling our products and services. This combination of better staffing and training enabled us to answer 25% more calls in the second quarter of this year compared to last second quarter.

The last quarter also marked the first time that we have been able to compare the number of calls received with those received of the prior year. And we saw an increase of 11% in the number of calls received in May and June of this year compared to the number of calls received for those months last year. Since less than 100% of our stores were connected for all of April of last year, a comparison for the full quarter would be misleading. For your information, though, for all of the second quarter of this year, we received nearly 110,000 calls at our call center.

In another area, the mobilization of the Uncle Bob's truck fleet continues. We now have trucks at 158 of our stores. In addition to serving as an excellent mobile advertising venue, the program is designing to offer another incentive for prospective customers to rent with Uncle Bob's. With those 158 trucks on line, we had over 5,500 customers move in to the use of our trucks during the second quarter of this year. This is compares with less than about 1,000 move-ins for second quarter of last year, during which we had 53 trucks in service. Now, the number of move-ins per available truck more than doubled from last second quarter to this second quarter. And we attribute much of the per truck move-in improvement to increase customer awareness of the availability of these trucks at select Uncle Bob's stores. So we're very encouraged with that.

In addition, we added our proprietary humidity control system, Dri-guard, to eight additional stores during the last quarter, just in time for our hot and humid season, which brings the total of 50 stores outfitted with Dri-guard. The rates we collect on Dri-guard treated units are still running about 25% higher than non-treated units. And we do expect to install the process in another seven to 10 stores before the end of this year. We also otherwise expanded or enhanced 10 stores during the second quarter of this year and expect to modify another nine to 12 stores before the end of the year. Our Internet sales program continues to generate excellent results. The number of rentals for this quarter was approximately 30% greater than last year's second quarter. And year to date, the revenues generated through these efforts has increased by nearly two-thirds, from less than a half a million dollars last year to over $800,000 for the first six months of this year.

As far as our balance sheet, it remains strong and positions us to take advantage of future external growth opportunities. Unfortunately, as we've stated before, the acquisition climate remains challenging. We continue to review a large number of opportunities, however we've been unable to close on any deals so far this year. We remain confident from the of our industry and despite the nation's economic weakness, we expect the self-stores industry, in general, and Sovran in particular, to continue to outperform most forms of real estate. Now I'd like to ask Dave Rogers to offer details on our financial performance and position.

Thanks, Ken. Total revenues for the quarter increased $2.7 million or 11% percent over 2002 second quarter and total operating expenses increased by one-and-a-half million dollars. These increases, resulting in an overall NOI increase of 7.4%, but primarily due to the addition of 11 stores in last half of 2002 and the same store results I'll talk about in just a minute. Overall occupancy was 85-and-a-half percent at June 30, which was an improvement of 1% over last June. And average rent per square foot for the quarter was $8.83, an increase of 2.2% over last year's second quarter average. Same store revenues, as Ken mentioned, increased by 4.1% over those of the second quarter of 2002. Broken down, rental rates increased 2%, our occupancy improved by 1.2% and other income, which was primarily truck and income increased by almost $200,000 or 43%.

Operating expenses on a same store basis increased by 9.8% this quarter, in large part because the truck rental expenses kicked in full force and also because personnel costs and operating - and property insurance premiums continue to pressure us. Same store net operating income grew by 1.4% to 18.3 million. At July 30, occupancy for the 253 same store group was 85.4%, which was up from 84.2% last June and rental rates grew to $8.80 per square foot from $8.63. Discounts and free rent were up slightly from last year's second quarter, but were still a relatively insignificant factor at $455,000 or about one-and-a-half percent of revenues.

G&A costs for the quarter came in at 2.4 million, which is pretty much right on target. Our interest costs were eight-and-a-half percent less this year than for the comparable period last year. While our effective interest rate is essentially the same this year, total debt is $37 million less than it was at the end of the second in two - 002. That came about after applying the proceeds of our first $40 million installment on the Series C preferred stock that we issued last July 3. During the quarter, we issued 134,000 shares via our and 123,000 shares through employees that were exercising stock options. A total of $6.7 million was raised via these issuances. And the proceeds were used to fund about four-and-a-half million dollars worth of revenue enhancing projects at our site and to pay down some line debt. We did not purchase any shares of our own stock this quarter.

At quarter's end, we have a total of 253 million in outstanding debt, 47 million of which is mortgage debt fixed for nine more years at 7.2% and 206 million of bank line and term debt. Of this, we presently have agreements in place, fixing $130 million for remaining periods of two to six years. We elected to leave a remaining balance of $76 million on a floating rate basis. Our capital structure is solid. Debt to net asset value is 35%. EBITDA is four-and-a-half times debt service and our fixed charge ratio is 2.8 times. We expect to generate seven to $8 million of free cash flow this year after meeting our recurring maintenance and dividend obligations.

Having said that, we've got work to do regarding the capital structure. Our $150 million line of credit expires in November and the present agreement affords us only $19 million of available capacity. While a $75 million term loan can be extended for two more years, it carries a fairly stiff rate and there are fees associated with the renewals. Accordingly, as we mentioned on previous calls, we've been in discussion with institutional lenders and our bank syndicate regarding moving some of the short-term and line debt into longer-term instruments. We're also seeking to increase our total borrowing capacity by another 50 to $100 million. We expect discussions to continue and moves to be made in advance of the expiration dates of the existing loan. On finance - when we finalize this, we'll naturally announce the terms of the agreement and provide information regarding the effects of the transaction on our earnings projections.

And speaking of guidance, we're encouraged by our ability to attract customers, improve occupancy and increase rents. We think the top line of our component - top-line component of our business is very strong. However, we don't see operating cost pressures relaxing much in the next couple of quarters. So, as a result, we holding to our earlier expectations of approximately one to 2% same store NOI growth for the balance of 2003. We have not built any property acquisitions into our forecast or our models. And if that were all we had to consider, we'd be comfortable in reiterating previous guidance of $2.86 to $2.88 FFO per share for this year. As mentioned, however, we have over $200 million of debt to refinance between now and November, 76 million of which is floating rate. As we're likely to take advantage of the long-term rate situation and to the extent we do it before the November due date, we can expect some increase in overall effective interest rate on this portion of our debt and a corresponding reduction in earnings and funds from operations. So we'll keep you posted on that.

And at this point, I'll turn the discussion back to Ken.

Thank you, Dave. Well, that concludes our prepared remarks. 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 star, one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jay Leupp with RBC Capital Markets.

Hi. Jay Leupp here with . A couple of things, just following up. Can you talk a little bit more about what role concessions and promotions have played in gaining occupancy? You talked about one-and-a-half of revenues. Do you plan on expanding that in the next couple of quarters as me move into a seasonally peak occupancy period? And then, secondly, can you talk about what the cap rates are in acquisitions that you've been currently looking at and what you think the hurdle rate is before you actually get back into the acquisition market?

OK. Well, I'll talk first about the concessions. This past quarter, we has about $450,000 of concessions that we gave out to encourage people to move in, which is down a little bit from the first quarter. And it's encouraging because our occupancy, as Dave mentioned, went up for us. So we see some solidifying of our markets there and also, as far as our call center is concerned, we're seeing more calls coming in. As I mentioned, we didn't have - we don't have good comparisons from April this year to April last year, but May and June we do and we say about an 11% increase in the number of calls that were coming in.

So we were watching it very carefully. We're using our revenue management techniques to make sure we're getting the maximum return from our inventory. We do see that the third quarter probably will be much less in the way of concessions than we had last year when we offered some pretty good concessions in response to market pressures.

So, I think the good news is that we see some solidification in our markets.

OK.

With regard to cap rates, Jay, simple answer is they're certainly down.

Right.

We're looking at not too much in the low nine's anymore. And it's actually the cap rates are down but a lot of properties are just off the market and not for sale. We would love to enter - we're actively looking at a lot of properties. It's taking a little more finesse, I think, in the structure of the acquisitions to help the potential sellers defer taxes, you know, a little bit. To have a place for them to put their equity in a yield generating type return. For us to get back in, I think we'd be looking at something, a mature, stabilized property. Certainly, I don't think we're going to be jumping in at the low nine's.

We like to look at a lot of properties like we did last year where there is some room to grow occupancy, perhaps turn around some inefficient or under-performing management and that case we'd be in the eights, I'm sure. But it's a lot tougher and we've, kind of, sharpened our pencil a lot more and worked more with sellers to help them come to grips with the idea that not only will they wind up with a significant change in their investment but where to put it to get a decent return.

OK. And then, David, just one follow up question. On your guidance for this year with respect to the renegotiating your credit agreements which expire in November, does your guidance, at this point, include any projected increases in costs? I know it's just for basically a half a quarter but, at this point, do you have anything built into the guidance for a potential bump up in the rates on that debt?

No. Only as - if we did it on November 15th, on the expiration date, we had bumped in a 200 basis point jump on the 76 million floating but that was it. So, basically to the extent we move quicker or the rate gap is bigger, that would affect guidance and we're just, kind of, leaving it alone right now because there's just a lot to do and it doesn't take much to swing quite few pennies.

OK. Thank you.

OK.

Your next question comes from the line of Ross Nussbaum with Smith Barney.

Hey, Dave.

Hello.

Follow up question. Did I hear you correctly that your guidance does include a 200 bit jump as of November 15th?

Yes. On that portion of the floating debt.

OK. Now, can you give us some idea of how far out on the yield curve you're looking to go in terms of fixing the debt that's on the line?

I don't want to talk about it, Ross. I'm sorry but I think we've got enough going on and it's still pretty fluid. So I don't think - you know, we're talking 10 year, we're talking five year, we're talking seven year, we're talking some six. We're talking - we've got a lot of hedge considerations. So there's just too many options open and I'd rather keep it close to the vest until we actually do something and then we'll be very quick to get out with the releases and the guidance.

OK. And is there any discussions with your - with your line lenders in terms of changing the term, the size of that as well?

Yes. It's the whole package. We're looking to redo the whole - the whole thing and pick a mix of term and line and debt versus institutional and so forth.

OK. Switching gears a little bit, can you break out for me what percentage of your rental revenues are derived from walk-in customers versus your call center versus Internet?

oh boy. That's - in fact we're doing surveys right now to get a determination on that. The best I can tell you right now would be our estimate is our call center is generating about two-thirds of all of our rentals and the Internet probably - certainly less than 10 percent and the balance would be - would be walk-ins. We're - we'll have better information for you, certainly I think by the end of this year. We're doing a survey calling current customers asking them how they heard about us and checking our own tracking capabilities. But that's - that's a pretty educated guess right now.

And the reason it's a little fluid, Ross, is because you get a call into your call center and the customer will leave limited or perhaps no information, just inquiring about rates and so forth. And then three days later walk into the site and rent. We know exactly how many we can attribute to - to the call center on a firm basis when we get the leads generated and so forth. But we're trying to take into account that gray area where the customer contacts our call center, doesn't leave any information and then three, four days later is in the store. Do you count that as a walk-in customer or do you count that as a call center customer? That's the reason for the vagueness.

OK. Thanks guys.

Your next question comes from the line of John Sheehan with A.G. Edwards.

Morning, guys. Just had a couple of quick questions for you.

You mentioned that you saw a pretty good ramp in in call volume received to the call center in the - in the last two months of the quarter compared to last year, can you talk a little bit about conversion ratios now that you've had the call center in for a while? I would imagine that your operators are getting better at converting calls into the call center?

Yeah, it's true. And yet our close ratio went down a little bit this second quarter from the first quarter and we looked into it and we're a little bit shocked but when we delved into it, we found that it's really not counter-intuitive.

As we get into the busy season there - many times people are calling for a unit size at a particular store and it's not available. 10 x 10 or a 10 x 15 or whatever it may be and our customer care reps are instructed to try to sell them to acquire either a larger unit sometimes or maybe a couple of smaller ones. Sometimes they're successful but not all the time. So I think last quarter we had about 34 percent. This quarter was just about 32 percent. We we're in that range right now. And that's also, as Dave said, it's an evolving situation for us with the group that sometimes calls the call center and shows up without information.

So that's the number though that we have; about 32 percent for the second quarter.

OK. How does that compare to Q2 of last year?

Q2 of last year - last year was about, let me see, about 30 percent I think was last year. 30, 30.2 percent. We have the information right here.

One other question. You mentioned that you've got a fair number of acquisitions you're, kind of, looking at. Without giving away too much competitive information can you give us just some idea what the size of your, kind of, I don't know if you want to call it a pipeline, but acquisitions perhaps in process might be?

Well, we are not in contract of any save one which is a small deal, $5 million acquisition, in Texas. So that we're in contract on. Other than that, we're at various stages of negotiating, looking. There is less out there, I think, than has ever been before. Typically, if we were to give a global, let's catch everything that we're looking at and talking about, it's often in excess of $100 million. It's substantially less than that right now.

OK. Great. Thanks guys.

Your next question comes from the line of Rich Moore with McDonald Investments.

Hi. Good morning, guys.

Hi, Rich.

Morning.

You know when you look at the occupancy; do you have any thoughts on why the big increase? I mean, are you stealing share, you think, from other operators? Is it the better conversion ratio? Is it just that more people are renting? I mean, what do you think about that?

Well, I think a big part of it has to do with our customer care call center. We are getting more calls. We're answering more calls. We're converting a number of those calls and we're also seeing some very positive results from our truck usage. We - you know, we ramped up. We have 158 stores with trucks now and as I mentioned on the opening remarks, we're seeing better utilization of those trucks. Last year we had about 15 move-in customers per available truck. This year, so far, we have nearly, almost about two and a half times that.

So I think it's a combination of the things that we've been working on over the past several years and we'd be on these calls saying we're - you know, we have this initiative and therefore we're making investment. Our was down a little bit. We think we're starting to see some positive results from all the things we've been doing.

OK, Ken, do you think there's any evidence that the demand for self-storage in general has increased across the industry?

Boy. I can't - I can't really comment on that. All I know from the, you know, standpoint of talking with our people in the various areas, we checked our - the competition in our various markets. We are generally speaking the leaders, or right up there, as far as prices are concerned and we see our occupancy at least equal to most of our competition in the various markets we're in.

So, we're encouraged with the fundamentals. We're - you know, we're still cautiously optimistic but we're encouraged with what we see.

OK. OK. Thanks. As you get higher in terms of occupancy toward the, you know, the higher end of the range, your historical range, do you think you'll see some pricing power in here?

Well, we do. In fact, we see it sporadically now. I mean, it's not unusual for us to be in a market or a particular store where we're charging premium prices for some of our units while offering a discount on other types of units. And that's our challenge, the revenue management side of things. You know, we mentioned earlier this year, our first goal was to get occupancy up. We've been fairly successful with that. We still have a little ways to go to get where we'd like to be. But, yeah, I do see some potential pricing power.

But, once again, we're a small, you know, spoke in this wheel and inflation is still hovering less than 2 percent, 1 to 2 percent. It's going to be difficult to, on a consistent basis, try to get rental rate increases that are much above inflation.

OK. OK. Good. Thank you. When you look at operating expenses, are some of these things that you mentioned that were issues for you in the quarter, like benefits for employees and insurance and truck expenses, have those stabilized at this point? As we look forward should we model, you know, basically a stabilized situation on those?

I think, Rich, after the third quarter the benefits will be pretty close same over same. The insurance, I think everybody is struggling with a little bit. The trucks, we've now got, as Ken mentioned, 158 stores with trucks. I think last third quarter was where the last significant ramp up was. We had another 50 in April.

So that's going to be a moving target, the truck part. We'll be, at least, at 200 by the busy season next year so that, as we bring those on, is a pretty significant . That's probably the one wild card is the trucks. The other stuff, I think at the end of the third quarter will have matured and I'm hoping that we have knocked all the on the head and got them all down with regard to the different things that pop up on us. .

OK. And then looking at capital expenditures as well, you know, that go into those were down pretty significantly from the first quarter; how do you see that, Dave, going forward?

Yeah. They are down a little bit. The capital expenditures for the revenue enhancing program that drive our expansions and so forth are right on target. We're rolling those off the way we had planned. Some of the recurring maintenance items on the stores that we bought in 2002, primarily in Texas, we had expected to expend more on paving and painting on those. Weather conditions and the like held us off to the tune of about $2 million.

So I think we'll - there's going to be a little more of that in the third quarter than we expected because there was less in the second quarter. For the year we're on target but, you know, overall our number of 15 cents a foot on a stabilized portfolio with all the deferred maintenance on the new properties caught up is still a good one and we're almost there pretty much on the portfolio.

OK. Great. And last question from more. On the Series C, remind me again why that isn't included in the diluted calculation?

The way we account for it, Rich, is it's an 8 and three-eighths coupon. It's callable after five years. It's convertible within five years at a price of $32.60. If we hit 32.60 on average for the quarter we'll make that adjustment. But until we get there, we don't consider it a factor.

OK. Great. Thanks guys.

OK.

At this time, there are no further questions.

OK. Well, we'd like to thank everyone for participating in our call and the confidence you've placed in us. We look forward to speaking to you three months from now and hope you all enjoy the rest of your Summer. Take care.

This concludes today's teleconference. You may now disconnect.