Life Storage Inc (LSI) 2003 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Sovran Self Storage fourth quarter earnings 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. (OPERATOR INSTRUCTIONS). Thank you. Mr. Myszka, you may begin your conference.

Thank you, Stephanie. Good morning, everyone, 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 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.

Sovran experienced another period of strong operating results in the fourth quarter last year, with same store revenues and net operating income increasing by 5.3 and 4.2 percent, respectively, over the fourth quarter last year. Dave Rogers, our Chief Financial Officer, will provide details in a moment.

Overall, I am pleased with our company's performance last year. We had a good year. However, more importantly, we continued to lay the foundation for consistently solid future performances. Among the building blocks we installed last year were the connection of all of our stores to the customer care center for the entire year, enabling us to capture more calls than ever in our history. The locking in of interest rates on our long-term debt for 5 to 10 years, enabling us to add stores to our portfolio while maintaining a conservative capital structure. We continued the rollout of Uncle Bob's truck's and Dri-guard humidity control system at select stores. And through the employment of our revenue management system, we were able to generate annual same-store revenue gains of nearly 6 percent, a noteworthy accomplishment in this tough economy. In addition, we increased our dividend for the eighth consecutive year, and achieved a total return to our shareholders of 39.5 percent. So we're proud of our achievements, and we are excited about our company's future.

Now let me provide a brief update and review on our fourth quarter. A major contributor to our performance continues to be our customer care center. Our customer care reps improved their closing rate last quarter to just over 30 percent, compared to approximately 25 percent in Q4 2002. In addition, we were pleased to see the number of call coming in increase by nearly 10 percent over the fourth quarter of 2002. Similarly, our truck program continues to roll long. The free use of our truck makes it easier for customers to select Uncle Bob's and then move into their spaces. We expect to add trucks to 42 more stores in time for this year's busy season, which will bring the total to 200 stores with an Uncle Bob's truck.

We also added our humidity control system, Dri-guard, to 4 stores during the last quarter. This brings the total to 58 stores outfitted with Dri-guard. The rates we collect on Dri-guard treated units are still running nearly 25 percent higher than non-treated units. And we expect to continue this conversion process at select stores throughout 2004.

Our Internet sales program continues to generate excellent results as well. The number of rentals for this quarter was 13 percent greater than 2002's fourth quarter. For the year, the revenues generated through these efforts increased by 43 percent, from just over $1.4 million in 2002 to more than $2 million last year. On the acquisition front, we acquired a store in Dallas, Texas early in the fourth quarter. Cost was $4.5 million for the 66,000 square foot facility, and brings to 16 the number of stores we have in the Dallas area.

Just in conclusion, we remain very confident in the fundamentals of our business, of our industry, and in spite of (indiscernible) continuing challenging economic environment, Sovran's performance, particularly in the same-store revenue growth area, is encouraging.

What I would like to do now is ask Dave to offer some details on our financial performance and position.

Thanks, Ken. Total revenues increased $2.4 million, or 9.2 percent over 2002's fourth quarter, and total operating expenses increased by 1.1 million. These increases, resulting in an overall NOI increase of 8.1 percent, were primarily due to improvements in the same-store results I will get to in a minute, and the addition of the four Long Island stores we acquired in late 4Q of last year.

Overall occupancy was 84 percent at December 31st, and our average rent per square foot for the quarter was $8.94. Same store revenues increased by 5.3 percent over those of the fourth quarter of 2002. Broken down, rental rates increased 3.2 percent, average occupancy improved by 1.5 percent, and other income -- which is primarily for this quarter, truck and cell tower income -- increased by 15 percent.

At December 31st, occupancy for the 260 stores, same-store group was 84.2 percent which is up from 84 percent last December, and rental rates grew to $8.85 per foot from $8.55. I would just like to put in a word about our occupancy numbers. Since our IPO, we have always reported occupancies as of the quarter end date. For the most part, these point in time results have given a good measure of what happened in the quarter. This quarter, however, October came in unusually strong at over 86 percent, and November likewise was pretty solid. So our average occupancy for our same-store pool was 85.7 percent for the quarter, compared to the December 31st snapshot of 84.2 percent. Henceforth, we will be reporting weighted average occupancies for the quarter, as well as the quarter end point and time number.

Operating expenses on a same-store basis increased 7.5 percent 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 outpace inflation. Property tax expense decreased 1 percent. This is because we budgeted about 5.5 percent increase for the year and our actual hit was 4.6 percent. What happens is many of our actual tax bills don't come in until December, so we are estimating and accruing all year long, and then we finally reconcile it late in the fourth quarter when the bills come in. And this year we came out ahead a little bit. So overall, our same-store net operating income grew 4.2 percent to $19.1 million.

G&A cost for the quarter came in at 2.4 million, which is pretty much our run rate at the current levels of operation. Our interest costs were 350,000 more for this year's fourth quarter, even though total debt remained virtually the same at about 250 million. This is the price we're paying to have all of our debt set at fixed or hedged rates, and it includes a non-usage fee on our recently expanded credit facility.

With regard to our capital structure, during the quarter we issued 502,000 shares via our (indiscernible) and shareholder purchase plan, and we issued 91,000 shares to employees exercising stock options. A net total of about $17 million was raised via these issuances. The proceeds were used to fund some property improvements, pay down accrued taxes, acquire the truck company, and a balance of $8 million was added to our bank account, which is now in excess of $20 million. We did not purchase any shares of our own stock this quarter.

We decided to acquire the holding company that owned our Uncle Bob's truck fleet. The cost was just over $3 million to acquire the 158 trucks that we had previously leased, and the Company is now a wholly owned subsidiary of Sovran. There was no gain or FFO impact resulting from the transaction. Essentially what we have done is we have eliminated the capitalized lease accounting treatment in favor of straight ownership of the trucks.

As we previously announced, we refinanced all of our outstanding short-term debt, and what we have in place now is $100 million 10-year financing, broken into an $80 million fixed rate note at 6.26 percent and a $20 million LIBOR rate note at LIBOR plus 150, which is now in at 6.3 percent. (indiscernible) because we've hedged it. We issued $100 million of 5 year notes at LIBOR plus 150, and have slots in place fixing those at an all-in cost of 6.37 percent. We 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 over LIBOR. At December 31st, we had 9 million drawn on this line.

We are pleased with the whole package; I think it addressed our balance sheet issues very aggressively, and it has allowed us to take advantage of a strong borrowers market to strengthen our position. Debt service coverage is now at 3.7 times and our fixed charge coverage is at 2.5 times. Our debt to enterprise value is 32 percent, and our unused credit capacity is at 91 million, which, when you add it to our cash balance of 20 million, gives us the strongest liquidity position that we have ever had.

With regard to guidance for 2004, I think we are all pretty encouraged by our ability to attract customers and improve occupancy and increase rents. So we think the topline component of our business is pretty strong, but we're still concerned about pricing and discount pressures. And so we're projecting about a 3 percent topline growth rate in 2004. Operating cost pressures should be somewhat alleviated this year in that we don't at this time plan any new initiatives over and above those imposed in 2003. So our same-store expense growth is targeted at about 4 percent in 2004, and as a result, we are expecting same-store NOI growth of approximately 2.5 to 3 percent for the year.

We are modeling a net of $40 million of acquisitions in 2004, which takes into account some $10 million of stores we expect to sell. Three stores are expected to be sold in Q1 for approximately $7 million. We don't expect to be adding any acquisitions in Q1. The financing component of our model is cleared up pretty nicely. We are 100 percent fixed rate or hedged on our debt, so there's not too much that can go off track here.

So given the above, and some continued issuance of equity through our (indiscernible) and direct share purchase program, we are estimating funds from operations to come in at between 274 and 278 per share for 2004, and between 62 and 64 cents per share for the first quarter of 2004.

So, Ken, I will turn the discussion back to you.

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

(OPERATOR INSTRUCTIONS). John Sheehan, A.G. Edwards.

I was wondering if you could address the, what you are seeing in terms of concessions in your various markets, not only by your larger peers but some of the smaller operators as well? If you could just give us a flavor for what you're seeing across the markets?

As Dave alluded to, we're not seeing too much softening there, it's not what it was back in the summer of 2002. But we are seeing some pressures as far as discounting is concerned. In fact, we track ours -- the number of times we give specials or discounts and the amounts, and ours increased his past quarter over the preceding quarter, as well as the fourth quarter from the year before. But one thing we are seeing is the dollar amount that we are giving per concession is going down. (indiscernible) evidences our revenue management ability. So we don't see too much lessening from what we have experienced over the past 12 months, but we are dealing with it pretty good. Our occupancies seem to be holding pretty well. And we are pleased with the efforts that we have at the store level. And with the call center we have here, we can react pretty quickly if we see a recurrence of what we saw a couple of years ago.

Can you talk maybe about the absolute dollar amounts of concessions you’re giving? It sounds like you're giving more concessions, but they are of a smaller magnitude. What has that done to the absolute dollar amounts of concessions you have had to offer over the past two or three quarters?

Well, let's see. I can give you pretty accurate numbers. This past quarter was about $450,000 of concessions, which was down from the third quarter of about 600,000. But it has been averaging for this year about, in the range of about 400,000, which is more than what we had experienced, other than that one third quarter of 2002, for the preceding, I would say eight quarters or so. So we see that being pretty consistent in the range of 4 to $500,000 per quarter.

Some of the higher numbers, though, Ken, may be a reflection of higher levels of call volumes. As you said, your call volume was up about 10 percent. Do you think that that's -- because you are taking more calls and maybe renting more space, you're just naturally giving away more concessions?

Possibly, but one thing we have done is -- the experience we gain -- we have been in this business 20-some years, and we are always learning. But the experience we gained from that, the concessions we had to give in that summer of 2002, showed us that a lot of people do stay. We are not going to indiscriminately give away concessions or dollar movements or things of that nature, what we try to do is we're sticking to our guns as far as revenue management. We did increase to 90 percent occupancy where we would still be willing to give concessions to people. But our closing rate does increase substantially. Even if you give a 10 or $20 concession for somebody, that improves our ability to close these people, literally by 20 or 25 percent, we have found. So we are always experimenting and testing as to how far up we have to go and then start coming down. So part of it is the number of calls coming in, but a lot of it is this revenue management system that we have been working with for the past six quarters.

Switching topics a little bit, you mentioned the trucks and that you have had them in place for a while. I was wondering if you might be able to give us some metrics on how that's impacted you financially. Are the trucks covering -- the income from the trucks covering the cost? If you could give us a little flavor on that topic?

Sure. We are pleased with the performance of the trucks. Just to take you back a little bit, what motivated us to implement this program was our surveys that revealed to us that upwards of 2/3 of our residential customers told us that they were using trucks to move into our stores. So that is how we started this. And we have continued to survey our customers who move in using the trucks, and what we've found is that upwards of 40 percent of those people who move in using the truck have indicated to us that the free use of the truck was a significant factor in them deciding whether to store with Uncle Bob's or not. So this past year, we had nearly 19,000 new customers move in utilizing the trucks at our stores. So we know that the trucks are attracting new customers.

From a dollars and cents standpoint, what I can tell you is that including depreciation costs, the trucks run about $800 per truck per month. And direct revenues that we're generating from leases to non-customers, sale of insurance, mileage and things of that nature, generally we have about a $350 per truck per month revenue. So you can see about a shortfall of maybe 400, $450. If only 10 percent of those 19,000 people moved in with the truck selected Uncle Bob's because of the availability of the truck, that would generate another 1000 to $1100 per truck per month revenue. We know it is more than 10 percent; it's somewhere, we think, between 15 and 40 percent. So we look at it as a very positive standpoint as far as revenues versus expenses. And that's even before you take into consideration the advertising benefit that we get from the trucks. When they're not being used they're parked in front of the store, and when they are being used they're generally being driven within a 4 to 5 mile radius of our store, which is where we get most of our business. So almost any way you look at it, we are very, very pleased with the results of this.

One last question if I might, and this is kind of looking forward into the first quarter here. You've had some real difficult weather in many parts of the country where your portfolio operates. Is that baked into your guidance in terms of extraordinary high operating expenses from snow removal or just lower levels of rentals, just because the weather has been so bad and people literally can't get out of their house in some cases?

We haven't done too poorly with rentals. The activity has been there, so that part, we didn't have to adjust guidance. And I would like to say that we adjusted guidance because we've having abnormal snow removal costs, but unfortunately last year was high, too. So we're just at a high-level period. So the answer is yes, we have taken it into consideration, and yes, it did have an impact. But we are okay with it.

Charles Fitzgerald, High Rise Capital.

I was wondering if you could elaborate on your expectations for topline growth of 3 percent, and what might be coming from occupancy gains and what might be coming from rental growth?

We have not really -- given the nature of the business the last couple of years, with the discounting pressures that came in and looking at different new construction and so forth, we're looking for 3 percent topline growth. We are using, basically, our pricing module which we have developed over the last couple of years to push and pull as we go. So if we see occupancy growing, we're going to be pushing rates as well, because we have got the room. If we see occupancy falling, we will be dropping rates a little bit and offering some discounting. But that's on a per store basis, and it's actually on a unit-type basis per store. So it's hard in our business, I think, to project it. We see right now in February of '04, I think we're feeling somewhat comfortable about the business. I would expect us -- if I had to pick it right now, I would expect us to get about a 1 percent occupancy gain and 2 percent of that from rates. But it's always in a state of flux and we are always looking, literally daily, even hourly, as to what happens at each store with each unit type. But if you need a broad brush, I would say 1 percent occupancy, 2 percent rate increase.

Is there a wide divergence within your portfolio that some regions are going to perform much better in '04 versus others? And if so, could you just sort of highlight what might be the top sort of markets for you?

I would say there is a difference. I don't think we have any that we're expecting to slip backwards. I think all 266 stores in our markets are forecasting positive NOI growth, ranging from anywhere from 1.5 percent to about 8 percent. As of right now, Florida is very strong, North Florida, especially in the Panhandle. We have good markets in Alabama. Stores that are doing better -- not necessarily the hottest markets we have, but certainly doing better than they have in the past couple of years -- are Phoenix, Atlanta, and parts of Texas. I think the ones that are giving us some trouble are those in Ohio and New England right now, just to give you a big picture view, I guess.

Is there any discernible trends on assets that you have recently upgraded with putting in the Dri-guard stuff, or newer properties are performing better than older ones? Is there any other trends inside the portfolio?

The Dri-guard certainly has helped. That's given us a new way to sell to customers, it's given us a higher margin product. So that's certainly -- we're very happy with that, and that's done well. Actually, though, we have stores that are older stores, even in slower markets, that continue to do well. I think it's still much more location than type of store, although if you have got a good store in a good location and an older store in a good location, the newer store is going to win out. But I think market is more a determinant, at least in our portfolio, because we try to keep our stores up to a certain standard. I think market is more important than the quality of the store.

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

Yes. I guess all I would like to do is say thank you to everybody for tuning in. We appreciate your interest and your confidence, and we look forward to speaking to you next quarter.

This concludes today's Sovran Self Storage fourth quarter earnings release conference call. You may now disconnect.