Life Storage Inc (LSI) 2005 Q1 法說會逐字稿

Good morning. My name is [Takisha] and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Sovran First Quarter Earnings Release Conference Call.

(OPERATOR INSTRUCTIONS.)

Thank you. Mr. Myszka, you may begin your conference.

Thank you. 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.

Okay. Sovran delivered another quarter of strong operating results, with same store revenues and net operating income increasing by 5.3% and 5.2%, respectively, over the first quarter of last year. 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 on rental inquiries of 28%, which is just under last year’s first quarter, and 4 percentage points higher than fourth quarter of last year. We were also encouraged to see the improvement in our center’s efficiency. For instance, we were able to answer just under 94% of all calls received last quarter, compared to 91% in Q1 of 2004. So, we’re pleased with the performance of the call center.

Similarly, our truck program continues to move along. We outfitted 11 more stores with our Uncle Bob’s trucks since the beginning of the year. This brings the number of stores with trucks to 219. Last quarter, over 5,800 new customers used a truck to assist their move into an Uncle Bob’s store.

Our humidity control system, DryGuard, continues to attract new customers. The rates we collect on DryGuard treated units are continuing to run approximately 27% to 28% higher than non-treated units. We now have DryGuard operational at 73 stores.

Earlier this year, we announced an aggressive initiative to expand and/or enhance our portfolio. The plan, which is expected to span three to four years, and will probably be somewhat of a moving target, calls for adding between 450 to 600,000 square feet of storage space and converting approximately 250,000 square feet of existing traditional storage to climate or humidity-controlled space. We currently have 8 stores undergoing expansions, totally approximately 120,000 square feet, which are projected to be completed this year, along with 14 stores experiencing conversions of 95,000 square feet to climate control or humidity control.

On the acquisitions front, although we were pleased with our purchases, even though we are only a couple hundred stores short of what Extra Space is going to be announcing later on today, I guess. But still, we’re pleased. We did acquire 3 stores in the first quarter at a total cost of $15.8 million. In February, we closed on an 80,000 square foot store in Cape Cod, Massachusetts. At a cost of $7.2 million, this marks our third store on the Cape.

We also acquired our fourth Syracuse, New York store in March, for $2.75 million. The property also comes with additional acreage and vacant frontage on a well-traveled road in one of the growing suburbs of Syracuse.

Finally, we acquired a relatively new store, less than two years old, on Long Island, New York for $5.7 million. This brings the number of stores we have in this area to 5.

Since the end of the first quarter, we have acquired two additional stores in existing markets in New England at a total price of $11.3 million. We purchased our second store in Springfield, Mass. in April for $3 million. It’s been open for just over a year and is already over 50% occupied.

Our other acquisition was a store in Stanford, Connecticut. It’s a mature property with high occupancy, and will undergo immediate modification to increase the size by approximately 4,000 square feet. And of course, we are reviewing other candidates and hope and expect to acquire several more stores over the next three quarters.

Overall, we’re pleased with our performance, particularly in the core same store growth. And at this time, I’d like to ask Dave Rogers, our CFO, to offer details on our financial performance.

Thanks, Ken.

Regarding operations, total revenues increased $3.6 million, or almost 13% over 2004's first quarter, and total operating expenses increased by $1.4 million. These increases, resulting in an overall NOI increase of 12.5% were primarily due to improvements in the same store results I'll talk about in a second, the addition of the 10 stores we purchased in 2004 and, to a slight degree, the 3 that we acquired in first Q of this year. Our overall average occupancy was 83.6% for the quarter ended, and average rent per square foot was $9.53.

Same store revenues increased by 5.3% over those of the first quarter of 2004. To break those down, rental rates were increased by 4%, average weighted occupancy improved by 60 basis points, and other income, which is primarily truck rental and cell tower income, increased by $150,000.

For the three months ended March 31st, weighted average occupancy for the 261 same store group was 84.4%. For the same period in 2004, it was 83.8%. At the quarter-end date, our same store occupancy was 84.6%, which is 100 basis points higher than the same date March 31st of last year.

Our rental rates grew on a same store basis to $9.47 per square foot, up from $9.11 last year.

Our operating expenses on a same store basis increased 5.6%. Most of the categories were in line at about 4% or so. The notable exceptions were snow-plowing, which came in at $140,000 over last year, and that worked out to be an increase of 54%. Insurance, which is about 12% over last year, and employee bonuses and benefits, which were up 13% over 2004 levels. We’ve got -- the insurance and benefits are over that amount, but they’re budgeted for the balance of the year at these levels. And I’m hoping that we’re done with the snow plowing variance, at least for the balance of this year.

So overall, with the strong revenue growth and the effect of the expense increases, we enjoyed a 5.2% increase in our same store property level NOI.

G&A for the quarter came in at $2.9 million, which is pretty much on track. We’re estimating total 2005 G&A to be just under $12 million.

Interest expense was about $350,000 more for this year's first quarter as compared to 2004’s. This is essentially the cost of carrying an additional $49 million in debt over the same level last year.

As a result of our retiring the whole of our $30 million Series B preferred issue, and $10 million of our Series C issue, the preferred stock dividends for the quarter were $950,000 less this year than last.

With regard to our capital transactions, during the quarter we issued 74,000 shares via our DRIP and Shareholder Purchase Plan, and 26,000 shares to employees who exercised stock options. A net total of $3.6 million was raised via these issuances. That’s quite a bit less than we’ve done in the past, so significantly curtailed from that of recent quarters, especially. So, while we’ve kept the DRIP plan in place, we’ve curtailed the shares we release through our share purchase plan. And given our current present capital position, we don’t plan to sell as many shares via the Share Purchase Program in the immediate future. We did not purchase any shares of our own stock this quarter.

As Ken mentioned, we acquired three stores at a total cost of $15.8 million. This was funded partly by the just mentioned DRIP issuance and borrowings on our line of credit. The acquisition of the two that we acquired subsequent to quarter end were also acquired via the lines of borrowings.

As we previously announced in December, we renegotiated our line of credit and bank term notes to provide for lower rates and longer terms on both instruments. We also increased our capacity on the lines. So, we now have in place $100 million line of credit at LIBOR plus 90 as an accordion feature that allows us to expand the capacity up to $200 million. The line expires in 2007, and we have an option to extend the line to September of 2008.

The $100 million term note has been extended to mature in September of 2009, and the rate has been reduced to LIBOR plus 120. And we have rate swap agreements in place to effectively fix the rate of interest on those notes at 6.07%.

So, at the end of December -- I’m sorry, at the end of March, our debt service coverage was 4 times EBITDA, and our fixed charge coverage was 3.1 times EBITDA. Our debt to enterprise value was about 28%, and our unused credit capacity is $141 million.

With regard to guidance going forward for the balance of 2005, we remain encouraged by the operating aspects of the business. Our occupancies are stable. We’re able to bump the rents. Discounting is pretty much in line, and our year-over-year expense growth is moderating. So, we’re forecasting an approximate 4%, maybe a little bit better NOI growth for the balance of the year.

The acquisition climate remains challenging. Cap rates certainly haven’t been to our liking. And so, we've been active in bidding on dozens of properties and some portfolios, but our hit ratio has been pretty low. So, we’re going to continue to project $50 million of acquisitions in 2005, and we’re not factoring in any dispositions.

As Ken mentioned, we’re embarking on a pretty expensive expansion program over the next three-plus years. We expect expenditures of about $40 million to enhance and enlarge revenue capabilities at the existing stores, in addition to the $3 or $4 million that we typically spend on recurring maintenance charges.

The financing component of our model is pretty simple. All but $49 million of our debt is on a fixed basis at the end of the quarter, so it’s fairly easy to predict. We don’t expect to issue shares through our dividend -- I’m sorry, we do expect to issue shares through our DRIP program, but we plan to significant curtail the Stock Purchase Plan. We’re projecting $12 to $15 million in equity issuance this year via these programs, as compared to about $50 million last year.

Financing of property acquisitions and the revenue enhancement projects will be with these DRIP proceeds and borrowings on the line of credit. Our low debt to equity and strong coverage ratios provide us with the room to leverage our balance sheet considerable, and we expect to utilize this strength accordingly.

So, given the above, we're estimating funds from operations to come in at between 2.94 and 2.98 for the full year, and between $0.74 and $0.76 for Q2.

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

Thanks, Dave. Well, that completes our prepared remarks. If there are any questions that people have, we’d be pleased to field them.

(OPERATOR INSTRUCTIONS.) [Jonathan Litt] with Smith Barney.

Good morning, everybody. It’s Jordan Sadler here with Jon. My first question, just on the NOI raise, is any of that attributable to the redevelopment? Is that helping out a little bit?

No, we’re not there yet, Jordan. We’re doing some acquisitions of land. We’ve got a lot of stuff that’s put -- permitting and so forth. But first of all, it’s not there. We haven’t yet decided how we’re going to report that, but we will make it clear. I think -- we typically haven’t made much of a deal about the small expansions and enhancements we’ve done over the years. But, because this is a pretty significant program, we’ll be showing how that affects NOI. But that won’t be happening until probably maybe a part of the 3Q at the soonest of the year.

Okay. So you haven’t really started work -- you identified the 8 stores and then about 200--something, thousand square feet for climate control additions and expansions, but you haven’t really started working on those yet?

We’re working on it, but they’re certainly not on line yet.

Okay. So, are you seeing, in terms of just fundamentals, are you just getting traction on rent bumps these days? And what’s happening in terms of concessions?

We’re pleased. As you know, looking throughout our portfolio, it’s a nice feeling to see most markets, as you say, with good traction as far as rental rate increases are concerned. From a concession standpoint, we’ve reduced the amount that we offer people in many instances. We’ve increased the number of times we do it, but less dollars up front. We’re testing it out there. It seems that most people, if they feel and perceive that they’re getting some sort of a deal, they’re more likely to show up and rent. So, we’ve reduced the amount that we offer in each concession, but we’ve increased the number of times we’ve done it. The amount, as far as concessions for the first quarter compared to Q1 last year, is a little bit more. But, we’ve gotten favorable results so far.

Okay. You guys -- it seems you’ve been making some progress on the acquisition front with almost half your full-year goal in the bag already. And it seems like you guys are more prone to doing ones and twos types of transactions. Did you guys happen to take a look at the [GE] portfolio, Storage USA?

Well, we never really got into any sort of serious discussions with people over there. The opportunity didn’t really present itself. So, I guess the answer would be no.

It wasn’t marketed to you, or it was too expensive?

I don’t think we really should -- would be appropriate for us to comment on that right now.

[Brett Johnson] with RBC Capital Markets.

Good morning, guys. Here with Jay Leupp. A couple of quick questions. Can you comment a bit on -- well, I know you guys have already commented and bit on the acquisition environment, but are you seeing more stabilized properties or properties in lease-ups that are available?

Actually, a good mix of both. I think the last 12 months has brought out many -- I mean, prices are rich, but there’s quite a number of properties that I think are being put on the block that maybe in the past wouldn’t have been, where developers have built them and have gone 2, 2.5 years and have not seen their construction loans coming to term. They have to do something. In the past, what they’ve done is either sold them or put permanent financing on.

But, I think because lease-up times have taken longer now, they’re stretching out to 48 to 60 months, we’re seeing these guys not able to take their construction projects and put permanent loans on them, because the occupancies aren’t nearly high enough. So, they’re stuck kind of betwixt and between construction financing and some other options. And so, some of those properties are certainly coming to the market. But, I think also the low cap rate environment has brought out a lot of mature properties as well.

What do you believe has been the driver of the, I guess, extension and lease-up times?

I think for the most part, a lot of the properties that are being constructed are outside of the sweet spot. You know, to get zoning, to get land at reasonable prices, you have to build kind of on the fringes as to where the population growth is. I think through the ‘80s and ‘90s, a lot of facilities were built in in-fill areas and it took a lot of time for the population to get to them. Now, facilities are being built well in many cases, but they’re just outside the growth ring and waiting for the population to catch up to it.

And most of the acquisitions that you guys have made recently, would you describe those as in-fill or kind of on the fringes?

Well, some of each. We had a pretty big transaction done last summer in Houston, which was about $25 million net. We were pretty clear about saying these are young, they’re going to take a little while. Ken mentioned the one property that we bought just -- in April in Springfield. It’s just outside a little bit. But, the others that we bought this quarter were all pretty stabilized mature properties in population cores.

Great. And then last question. I guess more kind of big picture is the capital allocator. Can you talk a bit about how you’re currently viewing the returns or the yields that you’re seeing on acquisitions that you’re making, versus the returns that you expect to recognize on your invested capital through your various revenue-enhancing programs, especially the larger one that you announced today?

Yes, Brett. The cap rates, the going in cap rates that we’re finding are lower than what we expect to get from the expansions and enhancements that we’re -- you know, we embarked on earlier this year. Our expectation is that we should generate somewhere in the range of 11, 12, maybe 13% return on these expansions and enhancements. And you compare that with the cap rates, many of which are in the 7s and 8s, there’s no comparison.

The one thing I will say, though, as Dave mentioned, we are buying some properties that are on the come. And if we’re buying something at a, say, a 7.5 cap at 50% to 60% occupancy, we’ve got a lot of upside potential there. So, we certainly aren’t turning our back on those opportunities, but we are looking forward to the results we can get from the internal expansions and enhancements.

Ross Nussbaum with Banc of America.

Couple of questions. The acquisitions that you did in the first quarter and subsequent to the quarter-end, I don’t know if I missed this when Brett asked, but what were the cap rates on those deals?

They would range -- as far as the maturer properties, in the high 7s and the mid-8s is where they would be. The one in Springfield that Dave alluded to, that was about a 50% occupancy property. Probably up around low 7 there. We expect that when it gets to the 70% occupancy, it’ll be about 8, 8.2.

Okay. I’m glad to see that your equity issuances is going to be down year-over-year but, Ken, I’m just curious. What kind of signal do you think it sends to the market that you’re continuing to issue stock quarter after quarter as opposed to buying back stock? I mean, do you think that your stock’s expensive here, which is why you keep issuing?

Actually, right now, what we’re basically doing, Ross, is just issuing through the DRIP. And we don’t want to shut that off because we have a pretty healthy basis. You know, of the 3.6 that was issued this quarter, about 2.4 of that was DRIP and about 800,000 -- or 1.2 million was employees exercising options. So, it’s not that significant. I actually think it’ll be a little bit less in the coming quarters, but it’s something that we’ve decided to keep with our existing shareholders. And at 40-plus a share, we’re okay with that.

Okay. What kind of yields do you expect to get on your expansions? And do you anticipate the same kind of lease-up process that you’d get on a new development there, or do you ramp up on the occupancy on those expansions more quickly?

Well, as far as the return, we’re expecting somewhere in the range of 11% to 13%, you know, once they’re operational. As far as lease-up is concerned, we would expect them to be a little bit quicker than new builds, primarily because we’re selecting stores that we think there is demand for them. Now, certainly over a period or two it can change, but I would expect it to be a little bit quicker in a lease-up than a new build.

So, do you think that, for a short period of time, these expansions actually are slightly dilutive?

Yes, they would be a little bit, for up to a year. But again, we’re putting up 8 to 12,0000 square feet maybe per property. It’s not -- they’re not a significant amount of areas to lease. But yes, we’ve factored that in a little bit in our guidance, but it’s not -- they’re not going to be accretive certainly right away. They’ll be very mildly dilutive in ’05 and ’06.

And can you give us a sense of dollars that are going to be completed this year versus next year in terms of the dollars on the openings?

Yes. I think this year it’ll be kind of a drop. We’re thinking probably in the range of maybe $6 million for this year total, I think.

And $6 million turned on. Probably expend about $10 to $12 million in -- at the end of the year, for the first time, we’ll probably have construction in process, which you’ve never seen on our balance sheet.

And then next year in terms of what comes on line?

Most of the balance by the end of the year.

Final question, Dave. Can you just refresh me. The accounting treatment on your convertible preferred, you’re not converting that for purposes of diluted FFO?

Yes, we are.

You are?

Yes, we are. Very modest [inaudible] it deducted about four-tenths of a cent this quarter.

So in your 16.2 million diluted shares, the convert is in there?

Yes.

Rich Moore with KeyBanc Capital.

Good morning, guys. I’m here with Mike [Solinski]. On Ross’s last question on that preferred C, I know this has gone down a little bit. Is there some reason it should go down further, you think, over the next several quarters?

I’m sorry, what goes down, Rich?

The number of shares, Dave.

Oh, no. We redeemed $10 million worth at the end of 3Q last year. So, it’s up to the two holders of the preferred to do what they want to do. But, we may wind up redeeming it all if they -- it’s their option. But, we redeemed $10 million of the $70 million in 3Q last year, so that’s up to them. I can’t answer that right now.

Okay, so you haven’t had any indication that they’re looking to trim those positions or anything?

Right.

Okay. Then a couple of questions on the revenue, guys. The trucking business, what kind of revenue did that generate, if any, in the quarter?

Well, about $250,000, in that range, for the -- on a cash basis, it was marginally negative but, for the quarter, we expect the second quarter to probably be on the positive side, excluding any depreciation expenses.

Okay, and then kind of run it that way going forward, Ken?

Yes. Last year was the first year where we generated a cash -- a positive cash flow from the truck operations, once again excluding depreciation. We expect that trend to continue maybe a little bit more positive this year. But, it’s not a significant number when you compare it to our overall revenues. Last year, I think it was about $1 million, $1.2 million or so total revenues out of a hundred and some million. So, it’s still not a significant number, but it’s a positive trend we see.

Okay. And then I know you guys have had pretty strong results in Florida. And I was curious if you saw that continuing, or if that might back off a bit you think?

Well, we would expect probably sometime maybe in the third quarter that we would begin to see some people vacating. You just don’t know. History has shown us that they do leave after a period of time. And part of what we’re doing, we understand there’s -- we had a board meeting the other day and one of our board members indicated they’re expecting several severe storms there again. We don’t want that to happen, but if it does, we’re prepared for it. We’ve expanded some of the stores. We would expect that probably sometime in the third quarter, barring any other natural disasters, we would begin to see some people vacating those Florida stores.

Okay. And when you think about your guidance, Ken, you’re thinking that you’re taking kind of a conservative approach and thinking that there’s some move-outs in the third quarter?

That’s right.

Okay. Good. And then on the balance sheet, you guys don’t have much variable rate debt. I mean, is that kind of where you want to leave it, at the -- I think it’s $49 million, or would you take some more of that?

Depending on how much more we borrow, Rich, I think this is certainly not -- we’re not worried about this at all. And we like long-term rates. We like where they are. If we are able to put out a bunch more debt over the next few quarters, I think we would take a chunk of it and fix it again, assuming long-term stays where it is. But, right now, $59 million, 49 of that is floating on line. We could double that and not be uncomfortable.

Okay, great. And then you kind of anticipated my next question, Dave. I think you have a near-term swap, or a swap that expires near term, if I’m not mistaken. And I’m curious what you’ll do with that and possibly including the -- you know, fixing some of that debt permanently.

Actually, I didn’t put it in the press release. You’ll see it in the Q. We did fix both parts of that so that we’d have -- on both our $50 million swaps connected with that 5-year rate, we swapped out to the end of the 5-year -- to the end of 2009 on both those notes. And we got a little better rate than we presently have on the existing swaps. So, I didn’t put that in the press release, but in the Q there’s a footnote that talks about that.

Okay, good. Thanks. And then last question from us. Your commercial business, I mean, how would you characterize that at this point?

The percentage of our total business?

And where you see that going, Ken.

Well, we’re always looking for it. As you know, Rich, covering our estimates as long as you have, commercial business is -- we like that. They stay longer. They absorb rents -- the rent increases. They pay better. We’re probably in the range of around 30% to 31% of our total business being commercial. It was a little bit higher prior to last year with Florida, so many residential users. But, we’ve been generally in the low 30s, trying to get up to 35%, but that’s where we are at this point.

Ross Nussbaum with Banc of America

Hey, Dave, just a follow-up on the convert again. In your FFO reconciliation, you’re showing FFO available to common of 11.327 million.

Right.

That number to me looks like the basic FFO number, because you’re subtracting out the per dividend.

Correct.

Correct?

Right.

So, I need to add that for dividends. What are these convertible into in terms of number of shares?

$60 million is convertible at $32.60 a share, so that’s how many shares they would get.

Okay. So, the 16.2 million share count that’s shown in the EPS diluted calculation, that’s not the right share count to use for the diluted FFO calculation.

I think it is. Let me work through that and I’ll give you a call off line.

Yes, I’ll circle back and be off line.

Okay.

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

Yes. Thanks, [Takisha]. I just want to thank everybody for participating and your interest in our company. We appreciate it. We’ll look forward to speaking to you in another three months. Have a great summer.

Bye.