Life Storage Inc (LSI) 2003 Q3 法說會逐字稿

Good morning, at this time, I would like to welcome everyone to the Sovran Self Storage third quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the speakers remarks there will be a question and answer period. If you'd like to ask a question during this time, simply press star and 1 on your telephone keypad, and if you'd like to withdraw your question, press the pound key.

Thank you. Mr. Myszka, you may begin.

Good morning and welcome to our 3rd quarter conference call. As a reminder, the following discussion will include forward-looking statements. Sovran's actual results may differ material Friday from projected results. Additional information concerning the factors that may cause such differences is included in our S.E.C. filings, copies of these filings may be obtained by contacting the company or the S.E.C.

Sovran experienced strong operating results in the 3rd quarter with same store revenues and net operating income increasing by 7.7% and 3.9% respectively over the 3rd quarter last year. Dave Rogers, our Chief Financial Officer will provide some details in a moment.

A major contributor to our performance continues to be our customer care call center. All calls to the 266 Uncle Bob stores are routed to the customer care center, we're operator service leasing agents. Our efforts to train and coach our customer care reps and improving their skills in assessing the caller's needs and converting him or her to an Uncle Bob's customer are producing good results. Our reps received a service level last quarter that was substantially higher than they achieved for the 3rd quarter last year.

Commenting generally on overall demand, from our corner of the world, it seems to be improving in that we received 6% more calls in the 3rd quarter of this year compared to 3rd quarter of last year, which makes two consecutive quarters where our call level has increased year-over-year, so that is good news.

Of the approximately 27,000 move-ins we had in the 3rd quarter, nearly 6,700 customers moved in through the use of one of our Uncle Bob's trucks, about 1,200 more customers moving in with our trucks than we had during the last quarter, and we expect to add trucks to 42 more stores by the end of the 1st quarter of next year, bringing the total to approximately 200 stores with an Uncle Bob's truck.

In addition, we added our proprietary humidity control system dry guard to four stores in the last quarter. This brings a total of 54 stores outfitted with dry guard. The rates we collect on dry guard treated units are still running approximately 25% higher than nontreated units. We expect to install the process in five more stores by year-end.

We also otherwise expanded or enhanced three stores during the 3rd quarter and expect to modify another five stores before the end of this year.

Our internet sales program continues to generate excellent results. The number of rentals for this quarter was 28% greater than last year's 3rd quarter, and year to date, the revenue generated has increased by 48% from just $1 million last year to nearly $1.5 million for the first nine months of 2003.

As previously announced, we further solidified and expanded our financing arrangements. These transactions, which Dave will discuss in some detail in a moment, lends long-term certainty to our borrowing costs and provides additional capital for acquisitions and other revenue enhancing opportunities.

Speaking of acquisitions, we recently acquired two stores in the Dallas, Texas area, one during the 3rd quarter and the other subsequent to it. The combined cost was just under $10 million. Basically we remain very confident in the fundamentals of our industry and we do expect the self storage industry in general and Sovran in particular to continue to outperform most forms of real estate.

At this time, I'd like to ask Dave to offer some details on our financial performance.

Thank you Ken.

Total revenues increased by $2.9 million or 11% over 2002's 3rd quarter and our total operating expenses increased by $1.6 million. These increase resulting in an overall NOI increase of 7.3% were primarily due to improvements in the sometime store results I'll talk about in a second and the addition of the 4 Long Island stores we acquired in 4Q of last year. Overall occupancy was 85.8% at September 30th, which was an improvement of 1.6% over last September, and our average rent per square foot for the quarter was $8.91.

Same store revenues increased by 7.8% over those of the 3rd quarter of 2002. Broken down, rental rates increased 2%, occupancy improved 1.6%, discounts decreased by almost $400,000, and other income primarily truck and cell towers increased by $165,000.

Operating expenses on same store basis increased 15.7% this quarter in large part because the truck rental expenses kicked in full force, and also because personnel costs and property insurance premiums continue to pressure us. Same store NOI grew 3.9% to $18.8 million.

At September 30, occupancy for the 253 same store group was 86.2%, up from 84.6% last September, and rental rates grew to $8.70s per square foot from $8.53. Discounts in pre-rent were down significantly in the same stores as well as the overall portfolio.

G&A costs for the quarter came in at $2.4 million, which is about $100,000 higher than budget. This was due primarily to the summer busy season. We expect Q4 to be back on plan at about 2.25 to 2.3 million.

Interest costs were less this quarter than last year's comparable quarter, but our preferred dividend charge increased by $653,000. Our debt level is virtually the same as of September 30 of last year, but we added $30 million of preferred stock last November which funded the acquisition of our Long Island properties at the end of the year.

Regarding the capital structure, during the quarter we issued 403,000 shares via our shareholder purchase plan and 50,000 shares to employees exercising stock options.

A total of $13.5 million was raised via these issuances. We used the proceeds to fund the purchase of two Dallas stores and pay for revenue enhancing project for a few stores and we put the rest in the bank. We did not purchase any of our own shares this quarter.

As we previously announced, we refinanced all of our outstanding short-term debt this quarter, along the lines we had been talking about in the last two conference calls. What we have in place now is $100 million of 10-year financing broken into and it $80 million fixed rate note at 6.26% and a $20 million [Indiscernible ] plus 150 basis point note, which has been fixed for at least the first five years at a rate of 6.3%.

We issued $100 million of five year notes, and LIBOR plus 150, and then have swaps in place at an all end cost of 6.37%. We also entered into a new credit line arrangement providing us with an initial $75 million facility that is expandable to $100 million at a rate of 137.5 over LIBOR.

At September 30, we had drawn $9 million on this line. We're pleased with the package. I think it addresses our balance sheet issues assertively and allows us to take advantage of a strong borrower's market to dramatically strengthen our position.

Debt service now is at four times and fix is at 3.45 times. Our debt to enterprise value is at 30% and unused credit capacity is $91 million.

Overall with regard to looking forward a little bit, we're encouraged by our ability to attract customers, improve occupancy and increase our rents. We think the top line component of our business is strong and we expect between 3 and 4% revenue growth on a same store basis this quarter. However, we don't see profits relaxing too much, so as a result we're holding to our earlier expectations of approximately 1 to 2% same store NOI growth for the balance of 2003.

We haven't built any property acquisitions into the model for this year. The financing component of the models cleared up nicely with 100% of our debt on a fixed basis, we don't see to much that can go awry here. So we are reiterating our previously announced guidance of $2.80 a share for 2003, and we plan to provide 2004 guidance in our 4Q earnings release in the February conference call.

At this point I'll turn the discussion back to Ken.

Thanks. That concludes our prepared remarks. If there are any questions, we'd be pleased to answer them.

At this time I would like to remind everyone, in order to ask a question, please press star, then the number one on your touch-tone phone. Your first question comes from Ross Nussbaum with Smith Barney.

Good morning.

Good morning.

A couple questions. First is on your same store rental rate growth, is there any way that you can quantify how much of that was driven by the roll-out of dry guard?

Yeah, there is. It's not that significant at this point. Some of the stores, we really started putting money into dry guard as of Q4 of last year and even that is in the range of about $3 to $4 million a year, so I can do it. I don't have it ready. I can get back to you. I don't have it at my finger tips

you don't think it's that significant, most is from raising rental rates?

Correct, uh-huh.

The next question is really the acquisition front, you guys clearly have more financial flexibility today than you did three or six months ago. What are you thinking in terms of the acquisition environment right now in your ability to buy some more properties over the next 12 months?

Well, I guess the good news is that our pipeline is -- has more properties in it than it's had in recent quarters. Unfortunately it's not saying much because we haven't done a heck of a lot from an acquisition standpoint in the last several quarters, but we are looking at a lot, that the prices are a bit higher than what we're accustomed too. We think we'll be more active, more active than we have been, but right now it's still too tenuous to give you anything more concrete than that.

Where are you seeing pricing now?

It's all over the board. Some people are asking in the low 8s, high 7s, all the way up to north of 9, 9-1/4,9 -1/2. So what we're looking to is we're willing to pay a little more if we find properties with a little more upside.

Final question, in your same store numbers, are you including the additional income that's coming from expansion?

Yes, we do. It's not that significant. It's been the industry standard, but yes, it's in their.

Thank you.

Okay.

Your next question comes from Paul DORNADO, cobblestone research.

Good morning. I was wondering if you could talk about tenant retention and average length of stay. Are those numbers in line with historical averages?

What we've found in the past, I'd say 12 months or so, is that our average has gone up substantially from when we went public about eight years ago, in the range of around eight to nine months. We're seeing it upwards to around 11 to 13 months is what the average is that we're seeing at this point.

Why do you think that has occurred?

Well, part of it I think is we have a greater percentage of our customers are commercial tenants who stay much longer. We made a concerted effort over the years to get that. I'm not sure if you --

Part of it is I think the bar has been raised with a lot of storage operators. There's a bit more advertising, the amenities are better, awareness is better, and people are on the residential side using it more as a spare room.

You're always going to have the short termers, students, military guys, people moving from one house to another, those will be a two to four month stay, but a lot of customers over the last couple years seem to be buying into the overall marketing push in the industry and the better amenity.

Just in terms of during the last two years during the price war that affected the industry, have you recovered in terms of tenant retention from those periods

I'm not sure I understand what --

During the price wars, was there materially greater turnover and has that disappeared at this point?

Well, what we found -- I'm not sure if I would characterize it as a severe price war, but there was more discounting going on. What we have found is that the first -- after you give the incentive to get people in, in the first three months you did see a falloff of people who utilized for a short time. But we're finding that we have a lot more long-term customers still with us who we brought in during July and August, when we offered those specials last year, so we feel encouraged that if we happen to come into a similar situation in the future, we know how to combat it now.

Okay. And could you just review the strategy on the trucks? Do you charge for them at this point?

What we do, Paul, is if a customer -- if a person wants to rent a truck and not become a customer, they pay the going rate. If a person is willing to sign a lease to become a move-in customer, they get free use of the truck for a period of time on the day that they move in.

It's easy to calculate what the expenses are. It's much more difficult to calculate the earnings from that, but we do know since we've had the trucks and we've been tracking this, the deomographics of the customers that use the truck for free is similar to our normal rank and file, by that I mean how long they stay and the money they spend on the units. So if we get even as low as 15% of people who are moving and use the trucks as a determining factor, free use of the truck is widely why the move in with us, we're at basically a break even cash flow basis.

Our surveys have indicated that 30% of people using the truck for free have indicated that was a determining factor. So it's -- that part is not scientific, but we believe on a cash flow basis as far as attracting new customers, we're at least break even there, but just as importantly, what we have, and I want to make sure people don't lose sight, this is directed advertising and marketing. These trucks have our name on them, they're driving in a market area, generally a three to five mile radius and serve as a stationary sign at our store when they're not being used so we feel comfortable with the dollars being spent in employing these trucks.

In terms of the utilization of the trucks, has it increased to the point that you might be able to charge all the time to use the trucks?

We're going to keep an eye on it certainly. If our surveys reveal that a smaller and smaller percentage of the people deem it a determining factor in selecting Uncle Bob's, we may get to that point. At this point we believe we'll continue with this at least for the foreseeable future.

Thank you.

You're welcome.

Your next question comes from John Sheehan, A.G. Edwards.

Good morning, guys. Just had a couple quick questions for you.

Kind of building on the last question. Since you're planning to -- you're planning to install about 42 more trucks or 42 more locations, what are your thoughts with respect to growing the other income line in 2004?

Well, it will grow, certainly. We'll also have the burden of carrying 42 trucks. Our hope is to get the fees, the excess mileage, insurance waiver fees, actual rentals of the truck to match the outflow, which is somewhere in the range of about $800 a truck a month. So, if we can get there by the end of a six month period, we are pretty happy.

We're there at about 120 of the 158 stores right now, so I think yes, other income will grow because we're putting those trucks on in April. Operating expenses will grow like says, so I think this is part of the thing that's crunched our margin a little bit is that we might have somewhere in the range of $600,000 or $700,000 in top line growth and $600,000 or $700,000 in matching expenses so we have basically 100% cost to that, but yes, we'll be growing the top line, but not much faster than the expense load goes.

The only other question I had for you guys today was Dave, with respect to recurring cap ex per square foot, is that a range of .17 or .18 a square foot for the recurring portion of your capital expenditures, is that still a good number?

It is, but I think it's on the low end of the range. .17 to .19 I think -- we're looking at our capital budgets for 2004, and we're seeing a couple years where we put some big money in, we caught up a lot of properties we bought and we got a bigger base to work on. I would say .17 to .19 is a better number.

Thanks.

Your next question is from Richard Moore, McDonald Investments.

Good morning, guys.

Good morning.

Is it save to say that you're starting to see some pricing power at this point?

Yeah, I would say so. The concessions that we needed -- that we have to use in the 3rd quarter were down considerably from last year, our occupancy is up. So even when we were giving the discounting, we weren't knocking down street rates, we were just giving more discounts, so I do think we're getting a little more pricing power than we saw in the last three or four quarters ago.

And maybe that pushes into next year?

Yeah. We feel pretty comfortable right now looking forward. Demand seems to be at least stable and perhaps increasing, as I mentioned in our opening remarks, the number of calls that we're getting second quarter in a row is higher than what we feel that last year's quarters, so I think we're through the tougher time that we saw last year.

Thanks. As far as occupancy right now at this point in the quarter, do you still feel comparable that that's on track?

Yes. We haven't seen any exodus, the call volume is down, but that's a somebody seasonal factor. I'm sure we'll be ahead of last year's Q4 occupancy as well.

And then do you have any thoughts, I'm just kind of curious, especially in the areas where you guys are operating on new supply, I mean I realize globally maybe there's a couple percent or in the U.S. there's a couple percent, but in your operating areas, what to you think of new supplies?

A couple percent is probably right. I think it's somewhere in the range of 300 to 400 requality stores being built this year, and probably on the board for next year as best we can tell on a national basis.

Markets where we've seen some pressure is a little bit in New England. Florida seems to have curtailed. That was going gang busters the first couple years of this century, spots of Texas, San Antonio and Austin have seen some. Houston and Dallas are so big it almost doesn't matter. Phoenix has tapered off, Atlanta certainly has tapered off, I don't know -- I guess those would be the markets I'm familiar with. There's nothing that really bothers us greatly. Every once in a while, sometimes somebody comes up with one right down the block from us that drives us nuts six or seven quarters. But I would say demand is at least that and perhaps a touch growing faster than supply right now in the markets we're in.

Great, thanks. And the last thing, I meant to ask you this before actually, when you talk about concessions and you say they're down, I mean, how do you describe that, how do you quantify that? Is it just fewer people getting concessions or less offered?

Basically dollars that we gave away, the month free rent, the half month free rent. We don't put it in our financial statements that way, but essentially, you have a $100 unit that you're giving away for that month, you got $100 gross income, $100 discount, net zero, that discount is the line we're adding up and saying here's how much we gave away this quarter, and last quarter and the difference is some were close to $400,000 this quarter.

Wonderful. Thanks, guys.

You're welcome.

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

Thank you.

I just would like to thank everybody for tuning in and for their interest and confidence in our company and management and we look forward to speaking to you again next year. Hopefully you all have a safe and prosperous holiday season.

Have a good day.