Life Storage Inc (LSI) 2004 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the first-quarter earnings conference call for Sovran Self Storage. (OPERATOR INSTRUCTIONS) Mr. Myszka, You may begin your conference.

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 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 delivered another quarter of strong operating results, with same-store revenues and net operating income increasing by 5.4 percent and 4.6 percent, respectively, over the first quarter last year. David Rogers, our Chief Financial officer, will provide details in a moment.

A major contributor to our performance has been our customer care call center. The center is fully staffed and well-trained for the always hectic spring and summer months.

For the first quarter of this year, we achieved a closing rate of 31 percent, the same as last year's first quarter, and 1 percent higher than Q4 2003. We are also encouraged to see the number of calls received by the center increase by 6.5 percent compared to last year's first quarter.

Similarly, our truck program continues to roll along. We outfitted 42 more stores with our Uncle Bob's Trucks since the beginning of the year. And this brings the number of stores with trucks to 200. Last quarter, over 4,000 new customers used the truck to assist their move into an Uncle Bob's store.

We added our humidity control systems, Dri-guard, to three stores in the first quarter. The rates we collect on Dri-guard-treated units are running almost 27 percent higher than nontreated units. We now have Dri-guard operational at 61 stores. In addition, our plan is to otherwise expand or enhance as many as 15 other stores throughout the year.

Our balance sheet remains strong and positions us to take advantage of future growth opportunities. Along those lines, we did acquire one store in Stamford, Connecticut for $13.7 million. This 110,000-square-foot facility is our initial entry into this particular market; however, we currently operates several stores within 25 to 30 miles of this store, so we do expect to realize some management synergies from this acquisition. We are reviewing many other candidates, and hope to add a number of additional stores over the next three quarters. Included among these are contracts to acquire over $30 million of stores, and if all goes well, we expect to close on many of these before the end of the second quarter.

Finally, we sold three stores during the first quarter of this year, and a fourth just after the end of the quarter for a total sell price of $10.2 million. These were mature facilities consider to be non-core operating assets by our management team.

Generally speaking, we remain confident in the fundamentals of our industry, and despite the challenging economic environment, Sovran's performance particularly in this core same-store growth is encouraging. At this time, I would like to ask David Rogers to offer some details on our financial performance and positioning.

Regarding operations, total revenues increased $1.9 million dollars or 7 percent over 2003's first quarter, and total operating expenses increased by $838,000. These increases, resulting in an overall NOI increase of 6 percent, were primarily due to improvements in the same-store results that I'll talk about in a second and the addition of the two Texas stores we acquired in 3Q of last year.

Overall occupancy was 83.6 percent at March 31 and average rent per square foot for the quarter was $9.11. Same-store revenues increased by 5.4 percent over those in the first quarter of 2003. Broken down, rental rates increased 2.9 percent; average weighted occupancy improved by 1.1 percent; and other income, which is primarily truck and self-powered (ph) income, increased by about $170,000. At March 31, occupancy for the 256 same-store group was 83.7 percent, which is up from 83.0 percent last March.

Now you might recall that on our last conference call, we promised to release weighted average occupancies on a quarterly basis. This can sometimes give a fuller picture of what goes on during a period of fluctuating occupancy. So for the three months ended March 31, 2004, we achieved an 84.0 weighted average occupancy. For the same period in 2003, it was 82.9. Rental rates for the same periods grew to $8.95 per square foot, which is up from $8.70.

Operating expenses on a same-store basis increased 6.9 percent this quarter, in large part because the truck rental expenses on a quarter-over-quarter basis are still rolling in, and also because personnel expenses, property insurance premiums, and utility costs continued to outpace inflation.

Same-store net operating income grew 4.6 percent to $18.5 million. The same-store pool shrunk by four stores, as Ken mentioned, this quarter. We have been working to prune our portfolio a bit, and have sold stores in Akron and Elyria, Ohio; Allentown, Pennsylvania; and Nashville, Tennessee. Our goal is to have sufficient stores in a given metro area to at least accomplish some significant economies of scale and to attain a strong market presence. We have been unable to acquire any additional stores to our liking in Akron and Nashville, and we were not encouraged by the Elyria and Allentown market situations. We're negotiating other sales, but don't expect to sell more than an additional $10 million of assets in the near future.

G&A costs for the quarter came in at $2.5 million, which is our run rate at the current levels of operation. Our interest costs were $580,000 more for this year's first quarter compared to 2003, even though total debt remained virtually the same at $256 million. This equates to an increase of about 90 basis points, and that's essentially the price we're paying to have all of our debt sit at fixed or hedge rates, and it also includes the nonusage fees on our recently expanded credit facility.

During the quarter, we issued 392,000 shares via our DRIP and shareholder purchase plan, and another 110,000 shares to employees exercising options. A net total of 16.6 million was raised via these issuances. The proceeds were used to fund some improvements to our properties and pay for the Stamford, Connecticut facility. Additionally, $5 million more was added to our bank account, which at quarter-end had an excess of $25 million. We did not purchase any shares of our own stock this quarter.

As we previously announced, in late 2003, we refinanced all of our outstanding short-term debt. 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-based note at 150 basis points over the 10-year. We issued $100 million of five-year notes at LIBOR plus 150, and have swaps in place fixing those at an all-in cost of 6.37 percent. We entered into a new credit line agreement providing us with a $75 million facility that is expandable to $100 million all at a rate of 1.375 over LIBOR. At March 31 of this year, we had drawn $10 million on that line.

Debt service coverage for the quarter was 3.8 times. Fixed charge coverage was 2.5 times. Debt to enterprise value was 32 percent. Our unused credit capacity was $90 million. And when you add that to our cash balance of 25 million, it gives us the strongest liquidity position that we have ever had.

With regard to guidance for the rest of the year and for the coming quarter, we are still encouraged by our ability to attract customers, to improve occupancy, and to increase rents. So we think the topline component of our business is strong, but still subject to some pricing and discount pressures. We are continuing to project a 3 to 4 percent topline growth rate for the balance of '04. Operating costs should be somewhat alleviated this year in that we don't have any really new initiatives over and above those that we started to implement in 2003. So we're targeting same-store expense at about 4 to 5 percent for the balance of 2004. As a result of these factors, we are looking for NOI growth of approximately 3 to 3.5 percent for the balance of 2004.

We're modeling a net $40 million of acquisitions in 2004. We announced in the press release one acquisition and four dispositions which put us at a net $3 million to the good in terms of acquisitions. We do expect to close, as Ken mentioned, some properties later on in this quarter.

The financing component of the model is pretty easy -- it's 100 percent fixed-rate debt. We have not factored in any cost or benefits resulting from an expected redemption of our Series B preferred stock, which we expect to do in August.

So given the above, we are estimating funds from operations to come in at between 2.74 and 2.78 per share for the whole year, and between 69 and 71 cents per share for the coming quarter ending June 2004. At this point, I will turn things back to Ken.

Thanks, Dave. That call includes our prepared remarks. We would be pleased to answer any questions that may be out there.

(OPERATOR INSTRUCTIONS). Paul Adornato, Maxcor Financial.

You said that the same-store average rent was about 889, if I heard the number correctly?

895 was the rent per occupied square foot.

(multiple speakers) Rent per occupied square foot. But the overall of rent was in the $9 range?

$9.11; that's correct.

That's the asking rent it, is that?

That's also rent per occupied square foot.

Okay, so the same-store portfolio is a little bit less than the newly added properties?

Yes, we did not include in the same store pool the Long Island stores, which we really brought on right at the beginning of '03. And we closed at the end of '02, but we really did not bring them in. So those four stores are quite large, and have quite high rates. And that's enough -- because they're not in the same-store pool, enough to skew us by as much as 16 or so cents on the whole portfolio.

Got it.

They are an unusual four stores for our portfolio, and they have enough of an impact to do that.

Do you like perhaps the higher-rent districts for your business, or do you think you'll -- that that was very much an aberration?

We are always looking to maximize our revenues. One nice thing about the higher-rent district, if you will, is we can add to many times, depending upon the climate, Dri-guard to it. And people in those markets are more ready and willing and able to pay the premium -- as I mentioned, it's like 25 to 30 percent. So we're not going out of our way necessarily to look for those. But if we can find them and the price is right we can add some value to them.

On the ancillary services, the trucks and the Dri-guard -- now that you have a little bit more operating history with both of those items, are you able to quantify a difference in occupancy at those stores that have it versus don't? I guess particularly with the trucks, where you would not necessarily capture the benefit right away in a higher rent.

I would say we are not so concerned with the occupancy as we are with the revenues that they generate. And our studies have been showing us that in particular areas, we are enjoying higher revenues from those stores with trucks versus not. But it is so peculiar to the market that I'd hesitate to make an overall statement, a generalization.

We do know that the revenues that we are generating on a direct cost versus direct cash revenues is about $400 negative per month per truck. But based on our permutation that we show here, of all the people who move in, it's less than 15 percent of them moved in only because of the free use of the truck -- were at a breakeven or marginal positive cash flow. And our surveys indicate to us that between 30 and 40 percent of the people who move in using the truck say to us that the primary reason they moved in was because of the free use of the truck. So we feel very, very good about the overall results of what we are getting with the truck rental program.

Just one more question on new construction that you are seeing in your markets. How would you characterize the level of development out there?

I think it's moderate. I don't think we are seeing anything different, perhaps even a bit of a downturn from this time in '03. It slacked off a bit from the studies we have seen nationally. Our research, which I think we've mentioned before -- we pay pretty close attention to anything five to seven miles and in from our stores. And I think if you amalgamate all of our stores, we're looking at something in the range of a little over 1 percent new supply targeted to come on.

Two things that are actually working in our favor -- one is higher interest rates. We have not seen any direct indicators that that's stopped any project in place right now, but I think long-term, it may help a little bit. But in our industry in particular, the cost of steel has -- just ran away. It's affected some of these expansions we're doing, and that is just to put on 5,000 or 10,000 feet to a store. To build a whole new store with the price increases that steel has seen over even the past six months may serve to be a deterrent. But even without those two, I don't think we're looking at much more than, say, a very moderate new supply coming on.

John Sheehan, A.G. Edwards.

I was wondering if you could discuss within your guidance, how much additional equity issuance you have built in there? You raised a fair amount of equity in the first quarter. I am just curious what your projections are for not only issuances due to DRIP, but through exercise of employee options and other various equity issuances for the balance of '04?

This is a little sensitive to us right now. I think we've issued the bulk of the DRIP, or at least the direct purchased plan stuff that we were going to issue. We were tempted pretty mightily with share prices of 37, 38 and $39. So we kind of left the gates open a little on that.

Employee options are -- I think the total for the balance of the year will probably not exceed what we did in this quarter. We did 110,000 or so shares this quarter. I don't see even that much on the board for the remaining three quarters of the year.

The DRIP plan we'll always have in place. That's good for a couple million a quarter. So I am thinking perhaps -- depending on our needs, but I wouldn't see much more than $10 million total from the DRIP and purchase plan, and probably not much more than 2.25 million from the employees. So probably half of what we did this quarter is what we may do for the rest of the year -- 8 to 10 million.

Okay, and that's spread over the remaining three quarters of the year?

Correct. We have a considerable number of employees who have a vesting period later on this month. So the bulk of the employee options would be, I would have to guess, this month -- and then not too much in Q3 and Q4.

Okay, that is definitely helpful. Were there any sort of extraordinary expense items in this quarter? I am thinking more specifically about weather impacts that may have pushed the growth in expenses up a bit. You were nearly 7 percent on a same-store basis.

No, it was not weather. Where we came into a little bit of difficulty was we started with expanded hours last summer. So we still have 1.5 quarters to burn off on personnel where we were not opened Sundays in the first quarter and half of the second quarter last year. So those personnel costs are in. Health care is -- I think we had our worst quarter in two and three last year, so we have batted against that a little bit. Utilities -- it's a little bit seasonal. I think whatever we pay for heat, we're going to more than pay for air-conditioning, so I can't say that.

But no, there were no weather-related. There were no real outrageous things, other than we had to bat the Q1 extra hours against each other (ph), and we have -- the trucks are still rolling out a bit. We are going to see that for two more quarters. But that will be the biggest factor going forward, I think, unless something unusual comes up.

It sounds like then that -- at least the Sunday personnel cost should -- you will be on an apples-to-apples basis starting in Q3, so that should maybe moderate a little of the growth then on that particular item?

That is what we are expecting, right.

The final question I had was regarding concessionary activity. I am just curious as to what you guys are seeing in your markets from competitors, who is offering concessions, what are the level of concessions, and are they relatively static from what you have seen over the last few quarters?

From our standpoint, the concessions that we granted during the first quarter of this year were pretty consistent with what we had done in Q1 2003, both in terms of dollar amounts and the number of times we gave it. We feel pretty good about how it worked out, because our occupancy is up a little bit this quarter over last year. We are not seeing a substantial amount of it, not much of a change in what we have seen from the competition. I understand Public is pretty aggressive with their dollar moving special, and that's always going to have an impact on the local owners who follow their lead to a great extent. So it's pretty much the same story as we have seen for about the last three or four quarters, John.

Ross Nussbaum, Smith Barney.

A couple of questions -- first what was the cap rate on the Stamford acquisition?

The cap rate was a little north of 9. It's pretty new -- it's a good building for us -- about 80,000 square feet of the space is air-conditioned, climate-controlled. There is some expansion land available for us. And as I mentioned earlier, we liked the idea of our ability to put Dri-guard in there, which should generate some additional revenues for us. The occupancy was -- I think it was in the low 70s or so, so we have some upside potential there, as well.

Sounds like a pretty reasonable price for a property with low 70 percent occupancy.

Yes.

Was this kind of off the market that you found it, or was this a heavily marketed transaction?

It was out there. People were at least aware of it. I don't know if it fit other people's plans as well. We were able to offer a quick close and help the owner out with a couple of other things. But it's a pretty nice facility.

And the 30-plus million that you have under contract -- what do the cap rates look like there?

Well, many of those are in lease-up. So the cap rate will be kind of low. Maybe a better way to look at it is on a square foot cost basis, which is pretty consistent with what we have been paying for newer properties, in the range of 55 to $62 a square foot. So those are lower occupancy facilities -- all the bells and whistles in markets that we know and have a good sense of, like the demographics -- we're looking to generate the nets (ph) -- a lot of value over the next four to six or eight quarters.

But in terms of modeling, I have got to throw it on at some initial yield. Are we talking that these things may be yielding just kind of 5 percent today, or --?

I think for this quarter, there won't be much of an impact because they are going to happen so late in the quarter. And we are looking at caps ranging -- and this is why Ken is talking square footage -- we are looking at caps ranging from 4 to 9, depending on the facility and the location. So we don't want to get too much into it on the call, because we are negotiating some other properties, as well. But for the first time ever, I guess I've got to say we are all over the board on cap rates. And it won't affect your current quarter. And we will try to be as quick about giving the -- once we do a couple of sizable ones, we will get announcements out ahead of quarter-end or quarterly results.

Russ, I guess the other thing, too -- this is probably as close to development as we've ever come. A number of these properties are very new, so it's not strict development from our standpoint. But they're as close to new development as we have ever come.

Are they in existing markets?

Yes.

Dave, on the Series B preferred, what is the charge that you are going to have to take in the third quarter to write off the original issuance costs?

We are carrying it on our balance sheet now at about 28.6 million. So it will be a $1.4 million charge when we redeem the 30 million.

And at what rate -- if you were to re-issue preferred -- what is your plan in taking it out? Are you going to re-issue, or are you just going to pay it off with cash?

Right now, unless we see an awful lot of increased activity on the acquisition front from where we are right now, part of our strategy has been to issue pretty liberally through the share purchase plan, with the anticipation that we would redeem the preferred with those proceeds. So right now, we would use cash in our line to pay it off, unless we have need -- which would be a good thing -- for more cash on the acquisition front. But if things are the way they are today in August, we will be using cash from our line to pay it off.

And final question -- and I think this is following up on something that Paul may have asked -- can you give us some color on where your asking rents are year-over-year? Obviously, your rent per occupied square foot is up. But where is your asking rents trending?

I think we are up about what we have achieved, which is somewhere in the range of -- perhaps maybe just a hair less in the 4 percent range. Some of it -- we're gaining a little bit because of discounts, while we offer them almost everywhere, are along the range of a partial month or a few day thing (ph) or a free lock or waive an admin charge or something like that. So I think our asking rates are probably in the 4 percent range, higher than where they were a year ago. And we are making up just a little bit more on marginally less discounting.

Rich Sweegard (ph), T. Bank McDonald (ph).

Could you give us an update on the Internet sales program?

Yes, just to give you a little bit of flavor for it, we were -- actually, this quarter was a little bit less than what we realized as far as rentals last first quarter -- about 5 percent less. We are finding, though, that the number of leads that we are getting is pretty stable with the historical numbers.

What we do find, though, is in the second and third quarter, we get a big spike. Part of it is because a lot of college students -- they use the Internet, and they come in in the second quarter and sometimes in the third quarter. But we expect to generate on a quarterly basis in the range of 700,000 to maybe $750,000 per quarter. It's something that four years ago generated zero, and it's become a pretty substantial part of our business.

All right. And what does the acquisition market look like aside from the 30 to $35 million that you have already kind of mentioned?

Well, as I mentioned, there is a lot of candidates that we are looking at. Unfortunately what happens is for every 10 that you look at, you maybe enter into contract on five and you close on one or two.

It is loosening a little bit. I will give you one experience that we had at one of the properties that we are looking to possibly sell. We were talking with the potential buyer, and he backed away when he saw interest rates beginning to creep up. So our hope is that we will have a number of people who were in the same situation as this potential purchaser was. And if interest rates rise, there will be fewer buyers, and cap rates may begin to rise a little bit as we go forward. But generally what we experience is it takes a while, several quarters, before owners of properties begin to realize that their property is not worth what they thought it was two quarters ago. It's loosening a little bit, but it's still a tough market.

Have you given any thoughts to expanding your geographic footprint at all?

We would, if we saw a package of five or more properties that would give us instant synergy and some efficiencies. So we are not against it, but we are not going to go into a new market unless we have some substance with the initial transaction.

All right. And on CAPEX, it looked like it increased a little bit versus fourth quarter, and it was above our estimate. Can you give us a good run rate for that going forward?

We are still actually putting some money into the portfolio that we bought in 2002. In Houston (ph), we bought some rough stores that we put several million dollars worth into them and just ramping that up. I think the run rates to use is -- we are pretty comfortable with 20 cents a foot, and we have a little over 15 million square feet. So we think a little over $3 million a year for just basic groups, painting, and paving would pretty much do it.

All right. And last question -- where is your occupancy today?

A little bit ahead of where we were at the end of the quarter. Somewhere in the range of 60 to 65 basis points higher as of the end of April.

Brett Johnson (ph), RBC Capital Markets.

Just a couple of quick follow-up questions for you guys. In terms of acquisitions -- I know you commented that cap rates are kind of all over the place, and that you have not seen a rise yet, but you may. Are you seeing any difference between regions at all? Are you guys focusing acquisition efforts in any specific regions?

No, well, what we are looking to do is if we -- historically, we have acquired many of our properties on a one-off basis. And that lends itself well to going into existing markets for us. So we are not limiting ourselves to any one particular market. If there's, as I mentioned before, a package, we will go someplace new. But we are not seeing really a substantial difference in pricing as far as cap rates are concerned. Certainly, if there is a newer facility with all the bells and whistles, the price per square foot is going to be greater than one that may be somewhat dated. But we are not seeing a substantial difference, regionally speaking.

And are you guys looking at any portfolios of properties right now?

We always are. We always do. And there's probably more available now than there were at this point last year. But it's competitive. And a lot of times they get pulled off the market just as easily as they come on. But some are being bandied about out there that would be nice to get. But it's too early in the game to talk about any of those.

And what would you estimate the cost of construction -- or, I guess, the replacement cost of a lot of these properties has gone up with the cost of steel?

Tremendously. If you're just talking about -- leaving the land and the land development and the soft costs out of it, if you are building buildings the way most of ours are, which are steel walls, steel roofs, and steel doors, you could be looking at as much as a 40 percent increase from maybe 35, $40 a foot to as much as 55 or $57 a foot just for the shelf (ph).

And is there another material you can use besides steel?

People do use cement block. We own some like that. We prefer the steel. You can have it made out of tilt wall (ph). Again, we prefer steel to that. The inside partitions are optimally steel so that you can move those walls whenever you want to change your unit mix. So when we're buying a property, we always look to -- we give high marks to those that are made out of steel. Whenever we expand or put new facilities up, we always put them up in steel.

Terrific. And one more last question -- in terms of the pricing and discount pressures that you mentioned for topline, the concessions -- do you see those as kind of an ongoing thing throughout the year?

Yes. There will be some peaks and valleys. You will see more concessions during the second and third quarters, because that is our busy season. But the per dollar concession will probably be less during that time period. And in fact, at the same store, you might see one unit size going at a discount, another unit size is going at a premium simply through revenue management depending upon occupancy.

And this might be a difficult question to answer, but I know occupancies vary quite a bit quarter to quarter just with seasonality. But is there any kind of an occupancy for your portfolio where you see pricing power coming in? Or you feel like concessions go down, you can push rents a lot easier?

You're right, it is a difficult question to answer. The only thing we would say is that we believe (ph) -- every store and every unit size, we have a set target that when the certain occupancy level is achieved, we begin bumping up the rates for the next person coming in. Likewise, if we see occupancy go down on each particular unit and every particular store that we have, we will then have a lower price for the next person coming in. So that's as probably as good an answer as I can give you.

And on a portfolio-wide basis, are you guys close to an (ph) occupancy?

I would say at this point, no. Check with us in the second and third quarter, and maybe we will be able to give you a different answer.

At this time, there are no further questions. Do you have any closing remarks?

Yes, thank you. I just would like to thank everybody for participating in our call and for your interest and confidence in our company. And we look forward to speaking to you again in three months.

This concludes today's Sovran Self Storage conference. You may now disconnect.