Life Storage Inc (LSI) 2005 Q4 法說會逐字稿

Good morning, my name is Constance and I'll be your conference operator today. At this time we would like to welcome everyone to the Sovran's Self Storage fourth quarter earnings conference call. [OPERATOR INSTRUCTIONS] Mr. Myszka, president, you may begin your conference call.

Thank you, Constance. Good morning, and welcome to our fourth quarter conference call. Just as a reminder of the following discussions will include forward looking statements. Our actual results may differ materially from projected results. Addition information concerning the factors that may cause these differences is included in our company's SEC filings and copies of these filings maybe be obtained by contacting us or the SEC.

Well, Sovran experienced another period of strong operating results in the fourth quarter last year with same-store revenues and net operating incomes increasing by 6.6% and 4.9% respectively over the fourth quarter last year. This marks the tenth straight quarter we have achieved top line growth in excess of 5%. Dave Rogers will provide some details in a minute.

Overall, I'm pleased with our company's performance last year. We had a good year, both operationally and strategically. I would like to mention some of our accomplishments just for a moment.

We generated annual same-store revenue and net operating income gains of 5.7% and 6.4% respectively. In a difficult acquisition environment we purchased 14 stores in existing markets for $65 million at relatively attractive cap rates. We feel particularly gratified with this achievement because many of these stores are in poor markets like Boston, Houston, Atlanta, and Long Island.

We initiated an ambitious multi-year expansion and enhancement program. Expected to generate up to 600,000 square feet of additional storage space and conversion of as much as 250,000 square feet of climate or humidity control space.

We continue to roll out of Uncle Bob's trucks and Dri-guard humidity control systems at various stores. In addition, we increased our dividends for the tenth consecutive year and achieved a total return to our shareholders of over 17%. Over the last five years, just for your information, we have delivered a total return to our shareholders of over 241%. So, we're proud of our achievements and excited about our company's future.

Now, let me provide just a brief update and review of our fourth quarter. A major contributor to our performance continues to be our Customer Call Center. Last quarter we generated nearly 10% more rentals through the Call Center than in Q4 2004. And in the Center in addition to serving as our primary contact to potential customers, it serves and has proven itself to be indispensable to our revenue management program.

Similiarly, our truck program continues to move along. The free use of a truck makes it much easier for our customers to select Uncle Bob's and then move into their spaces. We currently have trucks operating at 219 of our stores.

Our humidity control system, Dri-guard has been installed in 76 Uncle Bob's stores and the rate we collect on Dri-guard treated units are running approximately 28% higher than non treated units. We expect to continue this conversion process at select throughout the 2006. Our internet sales program continues to generate excellent sales for us.

The number of rentals and revenue respectively generated for the fourth quarter last year was more than double that achieved in Q4 2004. We completed climate control conversions at three stores in the fourth quarter last year and just under $6 million of total expansions and enhancements of 20 stores during 2005. We expect to complete between 15 and $20 million of additional expansions and enhancements during this year.

In November, we acquired our third store in Baton Rouge, Louisiana. This mature property cost $3.5 million. It comes with basic land available to accommodate up to 20,000 square feet of additional storage space.

Since the first of the year, we have purchased five stores in existing Uncle Bob's markets for a total purchase price of $18.4 million. Three are in Houston, one in San Antonio and the fifth in Rochester, New York.

Overall we're very very pleased with Bob's performance last quarter and 2005 as whole and look forward with a lot of confidence to continue positive results. Now, I would like to ask Dave Rogers to offer details in the financial performance and position.

Thanks, Ken.

For the fourth quarter total revenues increased $4 million which was 12% over 2004's fourth quarter. And total operating expenses increased by $1.7 million. These increases resulting in an overall NOI increase of 11% were primarily due to improvements in the same-store results I'll get to in a moment and addition of the 14 stores we purchased this year.

Average overall occupancy was 86.2% for the quarter ended December 31st and average rent per square foot was $9.82. Same-store revenues increased by 6.6% over those in the fourth quarter of 2004.

Broken down, rental rates increased 3.4%, average weighted occupancy improved by 260 basis point and other income, which is primarily truck and self tower income increased by $125,000. For the three months ended December 31.2005, weighted average occupancy for the 266 same-store groups was 87.5%. For the same period in 2004, it was 84.9%.

At quarter end date, same-store occupancy was 87% which is up 260 basis points from last December 31st and rental rates grew to $9.78 per square foot from the same-store rate of 9-$40 last year.

Tote operating expenses on a same-store basis increased 10.2% this quarter primarily because property taxes showed an 18% increase over 2004's fourth quarter. In large part, this is due to the fact that last year's Q4 had favorable adjustment to real estate tax expense which was the result of overestimating tax cost of the first nine months of 2004 and then trueing up to the actual amounts when it became known to us in November and December.

2005's tax costs were more in line with our expectations and no such beneficial adjustment was required in 4Q of this year. Maybe to look at a little bit bigger picture for the 12 months property tax comparison expense for the 12 months on a same-store basis showed an increase of 3.5% in 2005 over 2004.

Most other operating costs came in as expected a little under 6%. We expensed a net $170,000 in uninsured hurricane damage this quarter as compared to 0 in Q4 of 2004. During our last conference call we estimated that the impact from Hurricane Wilma would be greater and while we did indeed suffer significant damage to a lot of our stores we subsequently determined that much of it was insured.

Same-store results for the entire year showed top line growth of 5.7% an increase in operating expenses of 4.3% and improvement in NOI of 6.4%.

G&A costs for the quarter came in at $4 million which is higher than usual and about $700,000 more than '04's fourth quarter. Bonuses paid to our home office supervisory and executive management teams accounted for the increase. For the year, G&A costs were $12.9 million, about 15% higher than those of 2004.

Interest expense was $600,000 more for this year's fourth quarter as compared to 2004's which was essentially the cost of an increase in debt outstanding of $50 million.

Regarding our capital structure, during the quarter we issued 66,000 common shares, almost all of it DR drip and shareholder purchase plan. A net total of $2.8 million was raised via these issuances.

And as Ken mentioned we bought one store at a cost of $3.6 million this was funded partly by the drip issuances and borrowings on our lines of credit.

Considering the debt structure, we have in place $100.000000 of credited at LIBOR plus 90 basis points. We have an according feature that allows us to expand this capacity to $200 million. The line expires in 2007 and we have an option to extend the agreement to September of 2008.

We have a $100 million term note that matures in September of 2009 and interest rate of LIBOR plus 120 and we put rate swap agreements in place to fix the rate of interest on those notes at 6.07%. We have another $100 million term note that matures in 2013 with an effective rate of 6.7%. And we mortgages totaling $53 million that mature in 2012.

During the quarter, we had holders - some of holders on the Series C convertible preferred stock elect to convert 670,000 of those shares into 520,000 common shares pursuant to the formula we established at the issuance in 2001. As of the quarter end, there remain 1.2 million preferred shares outstanding which can be converted to common stock at 0.76 common shares for each preferred.

Our debt service coverage in the fourth quarter was 3.7 times EBITDA virtually the same for the whole year 2005. Our fixed charge coverage for the quarter was 3.3 times EBITDA. Debt to enterprise value was 27% and our unused credit capacity was $110 million at December 31st. So the Company can be seen to be conservatively capitalized and we have plenty of capacity to fund our growth plans.

Concerning guidance for the coming year. We remain encouraged by the operating aspects of our business. Occupancies are strong, rates are being bumped and discounting is still modest. Our year-over-year expense growth this year was contained pretty well and is expected to remain in line.

We're forecasting an approximate 4.5 to 5% same-store NOI growth for 2006. The acquisition climate appears to be improving with more individual properties and portfolios up for sale. Cap rate still remains challenging and we have been and will be prudent. At December 31st, we did have $33 million under contract and have closed on a little more than half of that through today. We're forecasting $100 million in acquisitions of this like this year. And expected going in cap in the mid 7's.

We also project $20 million of opportunistic acquisitions which our younger properties with 20 to 30% occupancy growth less to attain before maturity. We expect cap rate on this $20 million [inaudible] to be below 6.

As Ken mentioned, we're undertaking a pretty expensive expansion program over the next two years. We expect expenditures of up to $40 million to enhance and enlarge revenue capabilities at our existing properties. In addition, we decided to accelerate painting, paving, and fencing projects at 60 or so of our stores in an effort to improve curb appeal sooner. Accordingly, we'll be expending as much as $15 million this year on non revenue enhancing projects as opposed to the usual 4 to $5 million.

With all but 60 million of our debt on a fixed rate basis, the financings component of our model remains fairly easy to predict. We do expect to issue shares to our drip program but we've significantly curtailed the stock purchase plan sales. We're projecting 10 to $12 million in equity issuance this year via these programs as compared to about $50 million in 2004 and $13 million in 2005. Financing of property acquisitions and the revenue enhancement project will be with these drip proceeds and borrowings on the line of credit.

Assuming all of the above, we'll meet somewhere in the range of $150 million in funding over and above our net cash flow in 2006. As discussed previously we plan to use leverage to fuel our near term growth plans. We expect to issue unsecured long-term notes in the second quarter of this year to replenish our line of credit. We then plan to use the line to fund acquisition and property improvement and then sell an issue of preferred stock probably later in the year to reload the line again. Specifics will be determined by market conditions at the time.

So given all of the above, we're estimating funds from operations to come in at between $3.20 and $3.25 per share for the full year of 2006. And between $0.73 and $0.75 per share for the first quarter.

This point I'll turn the discussion back to Ken.

Thanks, Dave. Well that concludes our prepared remarks. We will be pleased to field any questions that you may have.

[OPERATOR INSTRUCTIONS] Your first question comes from Ross Nussbaum of Banc of America.

Hi, it's Christina [inaudible] right here with Ross. The $18.4 million that you purchased since the beginning of the year, what were the average cap rates on those?

In the mid 7's. 7.4. 7.3 to 7.6, I say.

Okay. And you had $33 million in the pipeline at year-end what would you say that level is right now since you've completed over half of it?

Well, we've got -

Have you put more in the pipeline?

Yes, we have. And there's one that is fairly large we're in due diligence on it. I would prefer not to really talk much about it because it's still in tenuous situation from the due diligence standpoint. But we do have more than what we've -- since January 1st, we've entered into one fairly large contract.

Okay. And then on the expense side, what impact from snow removal expenses does your Q1 guidance assume relative to the year ago level?

For the first time in a couple years I haven't really thought about that, Christy, I think we're pretty okay. I think we've had some properties affected by the storm but it sort of rolling now every year. We have a bunch of storms in one market and not in other. So we budgeted pretty consistently. The January numbers came in a tad under budget for snow removal surprisedly December's came in a little bit higher but it's not big enough to worry about.

Okay. Can you provide a little more guidance or color on your expectations for G&A in '06. It looks like your growth rate in '05 was about 16% overall. Are you expecting a similar level of growth this year?

Not similar. We haven't often paid cash bonuses to the whole staff, the management team and home office team and so forth. That had a big bump in 4Q. I think we will probably ramp up. We're budgeting about $13.6 million for 2006 so that's about $700,000 more than the total of this year.

And then just some maintenance question. What was your total square footage at year-end?

17.4 million square feet.

Great, thank you.

Okay.

Your next question comes from Paul Adornato of Harris Nesbitt.

Thanks, good morning,.

Good morning, Paul.

Was wondering, you mentioned that your pleased with the performance of internet sales as well as the Customer Call Center. Was wondering if you could compare the incentives and concessions offered through both of those channels. What would the customer experience be like in one versus the other?

Very similar, actually because when the person contacts us through the internet. They're essentially going to be speaking either ultimately by phone or on the computer with the same people who field our calls in the Call Center. So the training will be the same. The concessions if there are any will be very similar. We don't -- at this point, we're not offering prices on the internet and we feel pretty good about how that's performing for us. So they're really shouldn't be too much difference between the two experiences.

We're very very pleased with performance of our Call Center reps. We have initiated in the past 12 months what we call a sales lab. They're continuing education for them. Listening to their calls. Listening to the mistakes they've made, learn from those and showing in fact, as I mentioned there, a closing rate went up substantially from last year to this year, both the internet as well as the Call Center.

Okay. And related to that what has been the discounting incentives offered in the fourth quarter and so far in the first quarter?

Well, if you're looking for an amount it's very similar on a same-store basis to what we've done in the past. The total amount of concessions are about the same, but there's been more of them. So in other words what we're doing is ideally we're not offering any, but when an individual store, individual unit basis it may vary. Say store (A) might have 90% occupancy but 70% occupancy in a particular unit size. So on those 70% occupied units it might be a hefty discount but on the rest of the units there maybe nothing. So it just depends on which store they're calling, what units they're looking for, will depend on the size of the concession they are given or if they'll get any concession at all.

Okay. And looking at the truck program, you said you have them now at 219 stores. Any additional rollout plans for this year?

Probably for the existing portfolio I don't see any. We have a number of stores that are in close proximity to sister store so they can share. But I would expect as acquisitions come on that we'll be adding some to those. But at this point I really couldn't say. I don't think it will be a substantial number though.

Okay. And finally looking at the same-store occupancy at period end it was down just about 50 basis points from the average for the fourth quarter. Anything there or is it just seasonality or a blip in the numbers.

Definitely seasonality. It's actually the whole curve shifted up a bit but December 31st to March 31st is typically our [nateer] but all of it's higher than it ways 12 months prior. So I think we're in pretty good shape.

Okay. Thank you,.

Thank you, Paul.

Your next question comes from Michael [Holinski] of Key Bank Capital Markets.

Good morning, guys congratulations on a good quarter. Just a couple quick questions here. What are you guys seeing with respect to occupancy in your Florida portfolio. I know you said occupancy levels were well above expectations and you expected them to decline in the fourth quarter. Did you see that?

No, actually we were pleasantly surprised. The hurricanes that have hit for the last couple of years. Still people are still there. Part of the reason why we're forecasting 4.5 to 5% NOI as we do expect that to - maybe an end to this - we just don't know what is going happen with the hurricane season this coming year. But the Florida market is still quite strong for us.

Kind of along the same lines there, with respect to like insurance costs, I know the Florida area has been hit very hard the last couple of years. Are you seeing any forward movement in that or are those holding pretty well?

We have a good fortune. Our insurance year is July 1 to June 30th and June 30th of '05 we were able to get a good policy at good rates. Didn't see much of an impact from the '04 season. Our carriers and our - folks that we work with worked real hard with us and real well with us and they're telling us starting July 1, they expect an increase in premiums across the board both for us and for our industry and for everybody doing business in Florida. So we budgeted what we know for the first six months of the year and a pretty significant increase from July to December of '06.

Okay. Makes sense. And with that $15 million of additional curb appeal and office improvements are you expecting any immediate yield on that or is it just kind of normal CapEx. How should I look at the that?

Typically we've expensed a 20 to $0.25 or reserved 20 to $0.25 per foot per year. What we wanted to do is basically accelerate a bunch of that stuff. We had our repair - our construction folks with our regional team leaders look at the stores, okay, if we're going do it in the next two to three years, why don't we do it now and get a leg up on it. So it's basically not going to have the impact that our expansion and enhancement programs have where we look for a return away and increased revenues. These are basically maintaining the image and improving it.

With regard to the on going renovation and basically build out the used facilities -- the 32 to $40 million [inaudible] are yields still holding pretty well in the 12 to 13% range?

Well, it's still relatively early in the curve for us because last year was the first year we put it in. We're seeing the desired results at this point and we're hoping that they'll be in the range that you said 11 to 13%. I think the first ones we completed were probably second to third quarter of last year. So as this year goes on, we'll be able to give you a little bit better color on that.

Okay. Great, thanks, guys.

Question comes from Jordan Sadler, Citigroup.

Hi, it's Craig Meltzer here with Jordan. What is the revenue growth assumption embedded in your guidance for '06.

5.25 to 5.5.

And the expense growth?

5.

And on the the revenue, what portion of that is due to the rental regrowth versus the higher occupancy?

We often get this question, Craig and basically, we don't put it that way. We adjust our rates according to market conditions. If we see some good occupancy gains we'll bump rates. So we're kind of reluctant to say we'll get two points from occupancy and a point and a half from rate, so it's an overall.

So basically we leave it in the hands of our regional team leaders and the market surveys and the pricing power of the Call Center and so forth. So it's a push/shove and we had a really good gain in occupancy in 4Q. Earlier in 2004 and first part of '05 the rates carried up. So we actually don;t break it out that way. We just manage our rates to get us top line growth.

Well - since we're getting part of most of the way through the first quarter at this point. Is it moderating beyond that 260 basis point increase you had in the fourth quarter. Year-over-year increase?

I don't think we'll have a 260 basis point increase '06 over '05 if that's what you mean.

Yeah, in the first quarter I'm saying.

In the first quarter, no, I don't know exactly. We only have January numbers and it wasn't that high of an increase - it was some. And the rate growth is good, but I don't think it was all occupancy. It was a little less occupancy than we had in the fourth quarter.

And just had a quick question on the acquisition environment. You spoke that you're seeing more deals out there. Is it really -- is there more deals out there or any reduced competition you're seeing?

Well. There maybe reduced competition from some of these, the other companies, the larger companies that are occupied with other things at this point. There is a number of deals that are out there that are still pricey. We're seeing a little bit where the owners are becoming a little bit more circumspect of what the valuation of their properties is. We're holding our breaths that cap rates will begin to moderate up a little bit. But it's still very very difficult. Market rate ratios is very low. We spend a lot of time going through a lot of properties. It's not easy buying at the higher cap rates when other people are buying at and making announcement that's they're buying at high sixes or so on mature properties and we're buying at mid 7's. Very very difficult. And we're buying in good markets. So, I can't say it's loosening up, but we're looking to find whatever we can in good markets with good properties.

And what was the average cap rate on your '05 acquisitions?

For the entire year, little under 7.5 -- throw out two opportunistic acquisitions and it was a little under 7.5 and when we bought a couple that were sub 5. But they were only about 50% occupied.

Jordan Stadler has one question as well.

I just wanted to - what is your flexibility in terms of availability on a line and just overall try bettering cash right about now.

As I mentioned we have $100 million according feature, if we wish to pull it. It cost us for a couple of years going on a fixed rate basis to do that. So we are hesitant to do that. We did borrow $25 million on a short term line with one of the members of our lending syndicates in anticipation of reloading the line with the term note deal early in the second quarter.

As far as capacity goes, that's in place. We have the ability, obviously, given our capital structure and our coverage ratios to add significantly to the debt. As a mentioned in the prepared remarks I'm not sure we're going to do that. We're looking at a good slug in the second quarter to reload the line and then perhaps replace the line in the third or fourth quarter with preferred stock.

What kind of term are you thinking, Dave?

Right now, if I had to pull the trigger today, it would be ten years.

Okay. And so if you were to -- and Ken, I think you mentioned in your comments that there's a fairly large type of deal that you're looking to do right now. Would you be able to do that would you be able to do that under the accordion on the line or would you to reload to do something like that?

We would be able to handle it on the line after we reloaded it.

After you reloaded it?

Or if we pulled the accordion.

Okay. Other question I may have missed this is was just on the fairly large deal. Would that be a stabilized-type transaction or more of a lease up opportunistic type transaction?

More unstabilized.

Okay. And then just on the maintenance question, I'm sorry if I missed this. Was your spending -- I think you said $15 million on non revenue enhancing projects this year as opposed to 5 to 6 million usually. What is the typical maintenance CapEx per square foot that you - is that like 25 to $0.30 you usually spend.

About $0.25 is what our history -- both pre-public and for the last ten years as a public company. On properties that we've brought up to a good deferred maintenance state we've allocated about 20 to $0.25. It's grown to about $0.25 a foot over the last couple of years. That's been sufficient to cover those painting, paving and roofing needs.

So, but if you have to spend an extra $0.50 this year to kind of catch up, it sounds like, so all in your spending sounds like $0.75 to almost $1 this year. Does that mean that kind of on a run rate basis going forward that you guys are probably closer to 30, $0.35.

It maybe now but basically what we're doing , Jordan, is looking at '07 and '08 expenses and because we want to keep up with some new construction and newly renovated facilities we're rushing. So I would expect '07 and '08 to have a decrease on that quarter of play.

Okay.

But there is upward pressure certainly somewhat ast it has been over the ten year history,

Okay. Thanks.

There are no further questions at this time.

Okay. Well, thank you very much, everyone, for your participation and interest in our company and progress and we look forward to speaking with you in the future. Have a great three months from now. See you.

This concludes today's Sovran Self Storage fourth quarter earnings conference call.