Life Storage Inc (LSI) 2004 Q3 法說會逐字稿

Good morning. My name is Debra, and I will be your conference facilitator today. 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 any background noise. After the speakers' remarks there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then number 1, 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, Debra. Good morning, and welcome to our third 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. well, Sovran delivered another quarter of strong operating results. With same store revenues coming in at 5.4 percent greater than Q3 2003, this marks the fifth consecutive quarter of top line growth in excess of 5 percent . We attribute this consistently high performance to some of the initiatives we've introduced over the past few years. Our same store net operating income growth would have been 5.6 percent but for the hurricane damage we suffered in Florida and Alabama. The estimated costs associated with the hurricanes and the costs of redeeming our series B preferred stock, masked an otherwise excellent quarter. Taking these damages into account and these other costs, our same store and allied grew by 2.5 percent . Dave Rogers, our Chief Financial Officer, will provide details on this and FFO data in a moment.

A major contributor to our performance continues to be our customer care call center. Our representatives fielded nearly 130,000 calls last quarter, a record number for our Company. Unfortunately, a disproportionate number of calls emanated from hurricane-ravaged Florida. So instead of serving primarily as sales agents, our customer care reps became counselors and advisors to many current customers. A large amount of customer service calls, coupled with historically high occupancies in Florida drove our closing rate down to 10.3 percent, compared to 11.3 percent for the 3rd quarter of 2003. Our truck program continues to move forward. For the year, we have outfitted 50 stores with Uncle Bob's Trucks, bringing the number of stores with trucks to 208. In addition to encouraging customers to move into our stores, and nearly 5,400 new customers use our trucks to move into Uncle Bob's stores last quarter, our fleet served as moving billboards, as new Uncle Bob's customers drive our trucks in the areas surrounding our stores. On another front, we added our humidity control system, Dri-guard, to 6 stores in the third quarter. The rates we collect on Dri-guard treated units continued to run between 25 and 28 percent higher than nontreated units. We now have Dri-guard operational at 69 stores.

From an acquisition standpoint, we acquired 2 stores during the quarter. One in Chattanooga, Tennessee, and another in Austin, Texas. We already have a presence in both markets, so these acquisitions will offer further efficiencies, in addition to being solid properties in their own right. We close on our fourth Chattanooga store in September. This 6-year-old property has 128,000 square feet and was purchased for $6.7 million. It is well located on a major retail artery, and has extensive climate control storage and some extra acreage of developable land. Our fifth Austin area store was also acquired in September for $7.7 million. At 187,000 square feet, it is among our largest stores. The 4-year-old property in the high growth suburb of Round Rock has a massive presence as it sprawls over 20 acres, including approximately 5 acres of excess land which we're looking at various options, how we'll handle that. So for the year, we have acquired 10 store. The total purchase price of approximately $65 million. On the other side of the coin, we continued our program of pruning our portfolio, and sold our loan store in Spartanburg, South Carolina, in September for $1.9 million. This brings to a total of 5 stores sold in 2004. But overall, we're very, very pleased with our Company's performance last year, and year-to-date. And we look forward with confidence, to continued positive results. At this time, what I'd like to do is ask Dave Rogers, our Chief Financial Officer, to offer some details on our financial performance and position.

Thanks, Ken. Good morning. With regard to our operations for the quarter, our total revenues increased $3.6 million, or almost 13 percent over 2003's third quarter, and total operating expenses increased by $1.8 million. These increases, which resulted in an overall NOI increase of 9.7 percent, were primarily due to the improvements in the same store results I'll get to in a second, the addition of 2 Texas stores we acquired in 3Q of last year, and the 10 stores we purchased so far this year. Our overall average occupancy was 86 percent for the quarter. And our average rent per square foot was $9.60. Same store revenues increased by 5.4 percent over those of the third quarter of 2003. Broken down, our rental rates increased 4.1 percent, our average weighted occupancy improved by about 50 basis points, and other income which is primarily truck rentals, and cell tower income, increased by $186,000. For the 3 months ended September 30th, 2004, weighted average occupancy for the 259 same-store group was 86.6 percent. For the same period last year it was 86.1 percent. At the quarter end date, same store occupancy was 86 percent , which is up just a little bit from last year's September 30th, 85.8 percent. Our rental rates grew in the quarter to $9.40 a square foot, which is up from $9.03 last year. Our ordinary operating expenses on a same store basis increased 5.2 percent this quarter. This is down about 200 basis points from the past 2 quarters, primarily due to the fact that year-over-year truck expenses have abated now. The usual suspects are still nicking us, personnel costs, property insurance premiums, and utilities.

The reported numbers also include the uninsured damages from the 4 Florida hurricanes suffered this quarter. You might have caught the special press release we issued on September 24th. Unfortunately, the season still had 1 more storm left. Our press release put out a $450,000 estimate. That grew to 600,000 after Jeanne passed through. I should caution, that while this number has been arrived at after a lot of careful inspection, we're still subject to some surprises on a store-by-store basis as the work is actually done. We accrued the whole charge in Q3, even though we've disbursed very few of the dollars, at least at September 30th. So to sum up, same store operating expenses grew 5.2 percent on a normal basis, and 10.9 percent factoring hurricane damage. Same store NOI grew 2.5 percent. It would have been a pretty healthy 5.6 percent if not for Charley, Frances, Ivan and Jeanne. G&A costs for the quarter came in at a little over 2.7 million, which is our run-rate at current levels of operation. Actually, our usual overhead -- our typical overhead hasn't increased that much over last year. The jump is primarily due to higher D&O insurance costs, and accounting, legal, and other costs associated with the Sarbanes-Oxley compliance.

Interest costs were $900,000 more for this year's third quarter as compared to last year's. Our debt level now at September 30th is about $40 million higher, compared to the same time last year. That accounts for 300,000 of this $900,000 increase. The additional $600,000 equates to an increase in rate of about 90 basis points, which is the price we're paying to have most of our debt set at 6 per hedged rates. September 4th was the first anniversary of the debt refinancing. From that date on, interest rates in place are essentially the same as they were last year, and will be on a year-over-year basis going forward. Ken gave the details on the 2 stores we acquired this quarter at a total cost of 14.8 million. The price paid according to about an 8.3 cap. And we see upside, both on the top line and in expense savings at both these stores. This fits in with our model of buying existing stores in markets where we already play, and using our call center and our scale in those markets to improve NOI right out of the blocks. Ken also mentioned the store we sold in Spartanburg. To summarize, this is the fifth store we've sold this year. Totalled 12.3 million in proceeds, and we averaged about an 8.4 cap on the sale of those 5 stores.

With regard to our capital structure. During the quarter we issued 268,000 shares via our DRIP plan, and 22,000 shares to employees exercising stock options. A total of $11 million was raised via these issuances. We did not purchase any of our own shares this quarter. As previously announced, our refinancing took place a year ago. What we now have in place is $100 million in 10-year notes, and $100 million of 5-year notes, all at fixed or hedged rates. In addition, our credit line arrangement provides us with an initial $75 million facility, that is expandable to $100 million. This is at a rate of 1.375 over LIBOR. On August 2nd, we redeemed our series B preferred shares, which had a dividend rate of 9.85 percent . As you know, we've been issuing common stock via the DRIP and shareholder purchase plan with this in mind. And although we raised over $50 million pursuant to this plan over the past year, we applied it to acquisitions and debt pay down as we received it. As a result, when we redeemed the series B shares in August. we drew down $30 million on our line of credit. The $1.4 million charge associated with the redemption distorts our FFO for the quarter, but it is accretive in the short run to the tune of about 12 cents per year. On August 4th we converted 400,000 shares of our series C preferred stock to approximately 306,000 shares of common. The dividend on that $10 million worth of series C was payable at 8.375 percent. We now have 2.4 million shares of series C preferred outstanding. At September 30th, as a result of the redemption of the series B and the acquisition of the 2 properties, we had increased our borrowings on the line of credit to $52 million. And at the end of September, our debt service coverage works out to be 3.9 times EBITDA, and our fixed charge coverage is 2.9 times EBITDA. Total debt-to-market cap is about 30 percent , and our unused capacity on the credit facility is $48 million.

With regard to guidance, we're pretty encouraged by the operating part of our business. Occupancies are stable. We think rents could be budged up, and this timing is pretty much in line. Our year-over-year expense growth is moderating. It's still a little higher than we'd like, even without the hurricanes. But all in all, we hope to see a 4 to 4.5 percent NOI growth for the balance of this year and into next year. We're not as optimistic about the acquisition climate. Cap rates have not been to our liking, and while we've been very active in bidding on dozens of properties and portfolios, our hit ratio is pretty low. We had modeled in some $65 million of net 2004 acquisitions. While we've acquired 66 million through September, we also sold $12 million worth this year. And we don't expect any of the transactions we're working on, in either direction, to close before the end of this year. The financing component of our model is pretty simple. Our debt for the most part, except for 42 million, is fixed. And it's fairly easy to predict our interest costs. We do expect to continue to issue some shares through DRIP and shareholder purchase program, with the expectation that we will have places to put these proceeds in the first quarter of 2005. So, given all the above, we're estimating funds from operations per share to come in between 71 and 73 cents for Q4, and between 264 and 267 for the full year 2004. At this point, I'll turn the discussion back to Ken.

Thanks, Dave. That concludes our prepared remarks. If there are any questions, we would be pleased to field them.

(OPERATOR INSTRUCTIONS) Jordan Sadler, Smith Barney.

It seems your revenues are coming in pretty strong on a same-store basis year-over-year. Are they coming in a bit stronger than your original expectations? What did you see during the quarter, in terms of concession activity and real demand for space?

Jordan, I think a little bit of that -- yes, we're pleased with the top line growth that we've had. As I mentioned, we've had 5 consecutive quarters of -- in excess of 5 percent growth. This past quarter in particular, we saw somewhat of a lessening in the discounting activity that we've had. We had several thousand fewer instances where we've had to give discounts and probably 120, $140,000 less in dollar amount discounting. so, part of that I think we attribute to our portfolio down in Florida, which comprises about 20 percent of our total stores, where we have extremely high occupancies right now. Unfortunately, you know, the hurricanes are devastating. In the aftermath of that, people have a need to store their goods and we're a good location for them. So that explains, I think, a part of the reason for the increases and the decrease in -- conversely, the decrease in our discounting.

Well, then what would you -- so Florida's strong. What were you seeing in Ohio, Texas, and New England? I know in the release you mentioned they were weaker.

First of all, all the markets are in positive territory for the year. But New England and Ohio are in about the 2 to 2.25 percent NOI growth range. Primarily sales driven. Our expenses are about where we thought they would be. We just have not had the demand and we haven't been able to push the rates. I don't think it's competition, as much, at least in Ohio, as much as it is just a soft demand there. The first part of your question, Jordan, had to do with what we expect and what we're doing. We are about 100 basis points higher on our top line growth, primarily rate driven. We expected between 4 and 4.5 percent same store revenue growth this year. We're actually going at about a 5.5 percent clip. We also expected between 6 and 6.5 percent expense growth. We've been as high as 10. Even without the hurricane in the first 2 quarters, it sort of normalized to 7. I think overall we're about 100 basis points ahead of where we thought we would be on same store growth this year. We've lost a little bit in terms of, we haven't had as much in acquisition volume as we thought we would have. And then, of course, the charge for the hurricanes set us back.

Could you give us a little bit of color on the Houston assets you acquired last quarter, those 5 assets. I know occupancies I think when you bought them were around 64 percent? Where are those shaping up to?

They're growing. We're happy with the third quarter that we delivered in Houston. I don't know exactly what the trailing cap is right now, but we've improved occupancy by about 6 to 7 percent . The expense reductions haven't taken hold yet, but they're in process with the -- as the yellow pages come our way and the insurance policies get put in force. But there is revenue growth of about 5 to 6 percent top line.

Okay.

And as we said, I think we're saying we're looking for -- by the end of '05 to have a look back at -- and be at about a 9 to 9.5 cap at that point.

Okay. And then just on the DRIP, what's the discount you guys are offering right now? And has it changed at all?

It hasn't changed. It's at 2 percent on the DRIP, and we're looking to move it down on the shareholder purchase plan, so 1.5 percent.

Okay. And would that happen by year end or -- ?

Yes.

Brett Johnson, RBC Capital Markets.

Here with Jay Leupp, as well. I have a few questions on your acquisitions, and the broader acquisition market. Can you comment a bit on the Chattanooga and Austin markets, and given the age of the properties since they're both, I assume mature and stabilized, what were their occupancies at the end of the quarter ? And can you comment on what you paid relative to their replacement costs?

Brett, the Chattanooga market, we've got 4 stores in that market. It's a typical market that we're seeing. Reasonable growth, not a lot of new competition coming in there. It's 6 years old, I believe, and we bought it with an occupancy in the range of 80, 85 percent . We have -- on trailing (ph) 12 is about 8.5 percent cap rate on that. We bought some additional land there which is included in the purchase price that we can develop for additional storage. So we're pretty pleased with that acquisition.

Down in Austin, this is our fifth store in that market. And where this property's located is in a northern suburb of Austin, very, very high growth area. Our facility is about a mile down the road from the Dell Computers headquarters. So it's a pretty high growth area as I mentioned, and we've got about 5 acres of land there that we're currently evaluating as to what our options might be for possible resale or subdivision. That was -- it's a 4-year-old property with occupancy in the range of around 75 percent . So we have some upside potential there to generate some good revenues there. If we're able to sell that property, that additional 5 acres for somewhere, maybe 6, $700,000, the cap rate on that would be just under 9, I think, on trailing 12. So we're pleased with those 2 acquisitions, and that's really been our trademark since we've been public, is buying one up acquisitions in markets that we already have a presence, at pretty solid cap rates and some growth potential. So that's our activity there. We have a number of properties that we're currently -- a number of portfolios we're looking at. But as Dave mentioned, cap rates are pretty low. And we're -- you know, we're going to be very cautious before we leap into any of those acquisitions.

And you mentioned that the acquisition market was not quite to your liking yet since cap rates are so low. Can you talk about how you found these 2 deals at cap rates where you were willing to pay? I mean, these are pretty solid cap rates. And in general, if you're seeing any change in the broader market, and if you're seeing more sellers coming to the market?

Well, there are a lot of people that we're talking to. You know, we have a network of brokers throughout the country that we're constantly getting information from, and looking at a lot of deals. As Dave alluded to in his comments, our hit rate is pretty low. But it's a lot of hard work, it's not for the faint of heart. And what was your other question that you had?

With regard to sellers and buyers entering the market.

Yes.

I do think the price of properties has brought a lot of sellers in. I mentioned on a couple of these calls that in February and May of 2003, we virtually had nothing on the board. There weren't even calls we could make. There was just nothing surfacing. And since the end of the second quarter of '03, there's been a lot of activity with properties coming on the market, at what we think many times are crazy prices. But there is certainly a lot of activity this year, you can see it with some of the other companies, there's still a lot of private to private going on. There's also a lot of new buyers, not necessarily the 2 new public companies, but there are quite a number of institutional players who previously had bought 2 joint ventures with established companies or in shares of public companies. They're now outcoming and bidding. I don't know how many have been successful, but they're out bidding as principals in the deal. So, there is a lot of activity in the self-storage sector in the last 15, 16 months. Albeit, at pretty high prices, but generates a lot of activity.

Great. And last question. Following up on one of Jordan's questions on your strong revenue growth and rental rate growth for the quarter. With your portfolio occupancy at 86 percent, can you talk a bit about your pricing strategy? I would have expected to see, perhaps more occupancy gains and lower rental rate growth. But it seems you still think you have upside in the rental rates?

Yes. Well, we are pretty aggressive. What we find when we do our surveys of our competition, we generally are the price leaders. Our revenue management program will look at every unit at every store, and as we've mentioned before, it would not be unusual to see at one store, one unit size going at a premium, and another unit size going at a discount. So we're wringing out whatever we can. The other thing that we're in the process of doing is evaluating each of our stores, and looking to possibly convert various unit sizes that don't seem to have high demand, and convert them to higher demand unit sizes. And hopefully over the course of the next couple of years, generate some additional revenues from that conversion project.

Rich Sweigard, Keybanc Capital.

You mentioned that the hurricanes positively impacted Florida. Do you think that we'll any see slippage there in revenues here over the next quarter or two, or will you be able to hold on to most of that positive impact you've seen over the last month or two?

Well, if experience teaches us anything, we will see -- experience some slippage. We had Andrew down in Florida a few years ago, and Hugo up in the Carolinas, we experienced the same thing, where we had a lot of high occupancy for a period of time. But one thing that we have been able to do over those years, is we provide as much service as we can to our customers. It's not unusual for our managers to help these people out, knowing that many times they put their goods in there and they're pretty damp. Our managers will go through and open up the doors for them during the day and close them at night, so that they get some ventilation going through them. So what we've been able to do over the course of those prior disasters, is build up an awful lot of goodwill. So people don't have a need after maybe 3 or 4 months, but they have memories. And we found that they come back to us next time they need storage.

Okay. Can you give us an update on how the Internet sales program is doing?

Yes. Actually, I can. The -- for the third quarter of this year, I can give you some specifics. We're finding that our leads and our rentals are almost double what they were in the third quarter of last year. Our closing rate is a little bit higher, about maybe 2 percentage points higher than it was before. But we're very, very aggressive in that area. And we're very pleased with the results. But it's almost double where we were last year at this time for the third quarter.

Thank you. Good quarter.

Paul Adornato, Maxcor Financial.

Do you have an occupancy number for the end of October?

Yes, we do. It has not changed very much from where we were at the end of September. It's been, I think sort of pushed up by busy Florida, and a little bit of seasonality. But we have it at 85.85.

Okay. And given the tougher acquisition environment, what do you expect dispositions to be next year?

We don't know. We sold 5 of the 8 that we really thought were not in markets that we were going to grow. There might be 3 more that we're looking at, but we're at 8.5 cap, we're almost neutral. (indiscernible) We don't have any offers on the 3, but I don't expect that there would be more than 3 next year, if that.

Okay. And I guess a related question, do you have the ability to increase convergence at Dri-guard? Or store some additional investment opportunities if there are no properties to buy?

Yes, in fact we're looking at that very carefully, not only with Dri-guard, with conversions, with the possibility of adjacent land parcels that we might be able to acquire to expand our existing facilities. In fact we just had a meeting last month, where our regional team leaders were in town, and that was one of the focus points. So that's a good, good point. Good question you raise, and we're on it. We expect next year will be a pretty busy year for us on that front, if not on the acquisition front.

Ross Nussbaum, Banc of America Securities.

Hi, it's Christine McElroy here with Ross. Just a follow-up on that last question. Can you provide a little bit more detail? You mentioned that you have some acquisitions in the pipeline for 2005. Can you go into a little bit more detail on that and how it relates to your expected acquisition pace for '05?

We typically don't talk about the acquisitions until we're closer. We are not in contract -- we're in contract on a couple but not done with due diligence. But most of the work we're doing is still pre-contract. So we will have more color on the acquisition expectations for '05, as well as same store growth, as well as Ken mentioned about the initiative of expansions and enhancements to our stores on the February conference. So we're just pulling all that together right now, and we typically haven't commented on '05 -- or next year numbers until the first call of the year.

Okay. And can you comment on the likelihood for a common and preferred equity raise in the near future and what the timing would be on that?

Pretty much our strategy right now, because of the success of the DRIP program, we initially talked about, perhaps after we retired the series B, to go out near the end of the year and do an equity raise of a larger amount of preferred stock. But right now, we're looking to, perhaps continue the flow of the DRIP proceeds and the direct share plan proceeds. Combine that with some debt, and just go straight common debt going-forward, at least for the foreseeable future. We're able then to mask kind of a paced acquisition program that way. And not go diluted with a say $100 million preferred offering to retire our existing debt and suffer that dilution. So I think for the foreseeable future, we're going to be working on slowly dripping out some common, and mixing it with debt.

What would you say the pace of that DRIP would be?

Probably to the tune of 8 to $10 million per quarter. If we're in the 38 to $40 range, we would DRIP off 8 to $10 million per quarter. We've actually turned a lot away. We did $50 million in the 12 months ended September 30th. We think that we could have done as much as 120 to 140 million, had we had the need. The demand is incredible on the share purchase program, so we're sort of just sitting tight with that now and monitoring it. We don't turn away any DRIP participants, but we very rarely issue waivers to the big direct shareholder purchasers. We would open that right up if we had some need for it.

There are no further questions at this time.

Thank you, Debra. And I'd like to thank, on behalf of Dave, all of the people who participated in our call. We appreciate your confidence. And we look forward to speaking to you, I guess it will be next year. I hope everybody has a great holiday season. Thank you.

Thank you.

Thank you for joining on today's Sovran Self Storage conference call. At this time you may disconnect.