Life Storage Inc (LSI) 2006 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Sovran Self Storage first-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 session. (OPERATOR INSTRUCTIONS)

Thank you, I would now like to turn the call over to Mr. Ken Myszka, President of Sovran Self Storage. Please go ahead.

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 excellent operating results, with same-store revenues and net operating income increasing by 6.8% and 7.6%, respectively, over the first quarter last year. These numbers are even more impressive considering that 2004 and 2005 first quarters were very strong in themselves. As a matter of fact, this marks the 11th consecutive quarter with topline growth greater than 5%. Dave Rogers, our Chief Financial Officer, will provide more details in a moment.

But just generally speaking, 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 28% on rental inquiries, just over 1% greater than Q1 2005. We were also encouraged to see the improvement in the center's efficiency. We were able to answer nearly 97% of all calls received last year -- last quarter, compared to 94% in Q1 2005.

Similarly, our truck program continues to roll along. Last quarter, nearly 5900 new customers used the truck to assist their move into an Uncle Bob's store. We currently have trucks at 219 Uncle Bob's stores.

Our humidity control system, Dri-guard, continues to attract many new customers for us. The rates we collect on Dri-guard-treated units are running approximately 28% higher than non-treated units. We now have Dri-guard operational at 76 stores.

Our Internet sales program also produced excellent results. The number of rentals and revenues, respectively, generated for last quarter was nearly double that achieved in Q1 2005. We completed six climate control conversions and three expansions during the first quarter. The total cost of this work was approximately $4.4 million, and we expect to complete between 10 and $15 million of additional expansions and/or enhancements during the rest of this year.

We acquired six stores last quarter for a total purchase price of $22.5 million. All the stores are in existing Uncle Bob's markets. Four are in Houston, Texas, and one each in San Antonio, Texas, and Rochester, New York.

Since the end of the first quarter, we have closed on five additional stores; four in Lafayette, Louisiana, and one in Manchester, New Hampshire, both existing markets for Uncle Bob's. The purchase price of these stores was approximately $13 million.

So overall, we remain very confident in the fundamentals of our industry, and we are pleased with Sovran's performance in particular, especially our core same-store growth.

Now what I would like to do is ask Dave Rogers to offer some details on our financial performance and position.

Thanks, Ken. Okay, for the quarter, total revenues increased $4.5 million, or 14% over 2005's first quarter, and total operating expenses increased by $1.6 million. These increases, resulting in an overall NOI increase of 14%, were primarily due to improvements in the same-store results I'll get to in a second, the addition of 14 stores we purchased last year, and the six we acquired in Q1.

Average overall occupancy was 85.3% for the quarter ended March 31, and average rent per square foot was $10 even. Same-store revenues increased by 6.8% over those of the first quarter of 2005. Broken down, rental rates increased 3.4%, average weighted occupancy improved by 250 basis points, and other income, which is in our case primarily truck and cell tower income, increased by $190,000.

For the three months ended March 31, 2006, weighted average occupancy for the 266 same-store pool was 86.5%. For the same period in 2005, it was 84% even. At the quarter-end date, same-store occupancy was 86.6%, which is up 230 basis points from last March 31, and rental rates grew to $9.86 per square foot from the same-store rate of $9.54 last year.

Our total operating expenses on a same-store basis increased 5.3% this quarter, which was pretty much as we expected. Property taxes were up almost 7%. Maintenance cost came in at about 6% higher. Growth in most other categories was well under 5%.

Looking ahead, the expense category we are most concerned about is property insurance. Our policy year ends June 30, and our premiums are locked until then, so we won't have an issue until the third quarter. But we are apprehensive, and I think most property owners who have any degree of property in coastal areas were worried about coverage availability to begin with, as well as the rising costs. And we are working right now with our agent and the carriers to adapt to these market conditions.

Taking same-store operating cost increases of 5.3% away from the 6.8% topline growth, we achieved a real healthy 7.6% same-store NOI improvement for the first quarter. Our G&A costs for the period came in at 3.4 million, which is about $500,000 more than last year's comparable period. This reflects the increased staffing and the facility growth that we put in place to handle our recent, and especially our expected future increase in acquisition volume.

Interest expense was slightly over $1 million more for this year's first quarter as compared to 2005's. Pretty much, this resulted from additional debt outstanding of $45 million, and was more of an impact -- 185 basis point increase in rate on the $85 million of floating debt that we had this quarter.

Our capital structure -- during the quarter we issued 69,000 common shares via the DRIP plan, and is the result of some employees exercising options. A net of $3 million was raised via these issuances.

This quarter's $23 million worth of acquisitions and the 4.5 million in expansions and enhancements were funded partly by the use of the small equity issuance and borrowings pursuant to a $25 million short-term note. Effective April 1, we acquired at a cost of a $8.5 million additional interest in Locke Sovran I and Locke Sovran II, which are the joint ventures we formed back in 2000. The additional equity contributions that we put in give us a majority control in both entities, and it provides us with the opportunity to invest in the properties owned by these ventures, and have all the resultant benefit from those investments accrue back to the Company. So, starting in Q2 of this year, the results of Locke Sovran I will be consolidated with our company results. Locke Sovran II's results already have been consolidated.

On April 27, we completed an offering in which we sold $150 million of ten-year unsecured notes bearing interest at 6.38%. We used the proceeds to pay down our bank line, repay the short-term notes, we bought five properties in April, and we acquired the aforementioned interest in the Locke Sovran ventures. So now our total outstanding debt is $400 million, all of it is long-term, all of it is fixed or hedged to maturity, and less than $50 million of that 400 million is secured.

Regarding liquidity, we have in place a $100 million line of credit which is at LIBOR plus 90. It has an accordion feature that allows us to grow it to 200 million. As of today's date, nothing is drawn on the line. It expires in 2007. We have an option to extend it until September of 2008. And as a side note, we have an extra 10 or 12 million left over from the note issuance that we have in the bank right now waiting for our next acquisition.

Debt service coverage in the first quarter was 3.5 times EBITDA. Fixed charge coverage was 3.2 times EBITDA. Our debt-to-enterprise value was 28%, and we remain conservatively capitalized and plenty of dry powder to go forward.

With respect to guidance, business is still pretty strong. We see competition in a lot of markets, but not to the extent that it should hurt us. And demand remains good. The expenses have moderated from the tough years of 2003 and 2004 and the beginning of 2005. Overall, we are forecasting an approximate 4.5 to 5.5% same-store NOI growth for the balance of 2006.

Acquisition environment is steady. We see more and more individual properties in the specialty portfolios up for sale. Cap rates are still challenging, but we have been, and we will be prudent, but we are forecasting a total of $100 million in accretive acquisitions for the year at an expected cap rate of about 7.5. We are also projecting $20 million of opportunistic acquisitions, which we classify as younger properties with 20 or 30% occupancy growth still left to go. And we expect cap rates on these type of properties to be below six.

As Ken mentioned, we are in the middle of a pretty extensive expansion program over the next couple of years. We expect expenditures of up to $20 million in 2006 to enhance and enlarge revenue capabilities at our existing properties. As mentioned last quarter, we have decided to accelerate painting, paving, and fencing projects at 60 or so stores in an effort to improve curb appeal sooner. Accordingly, we will be expending as much as 15 million this year on non-revenue-enhancing projects, as opposed to the usual 4 or 5 million.

We put 150 million of fixed-rate debt on our balance sheet in the second quarter here, and it carried the couple hundred extra basis points in rate over the line debt we were paying last year. We expect to issue a few shares through the DRIP program, but we are continuing to restrict our stock purchase plan. And as a result, we are expecting about 10 to 12 million in equity issuance via these programs, as compared to 50 million in 2004 and a little over $13 million last year.

Financing of future property acquisitions and the revenue enhancement projects in the second and third quarter will be with the DRIP proceeds and borrowings on the newly cleared line of credit.

So, given all of the above, we are estimating funds from operations to come in at between 3.20 and 3.25 per share for the full year 2006, and between $0.79 and $0.81 per share for Q2.

At this point, I will turn it back to Ken.

Thanks, Dave. That concludes our prepared remarks. We would be pleased to field any questions you might have.

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

Ken, in the past, you have given us the increase in rents or rentals completed by your customer care center. I think this quarter you simply gave us the closing ratios. I was wondering if you had that data in terms of how many more rentals are actually being completed by your customer care center.

The actual rentals -- I'm trying to take a look here at some information. It was just -- about 2% more was from -- last year was [10,200], this year about [10,500]. So, a little bit of an increase over Q1 '05.

It sounds like you're, obviously, being more efficient there with the higher closing ratio. What do you attribute that to?

A lot of training. We recruit good people. And frankly, we are very pleased with the fact that we have retained people for some time. Our turnover here has been relatively low compared to what we have seen in other call centers, and we have consistent training. I think I mentioned last quarter or to that we established a sales lab, where there is constant and consistent feedback as to how people can -- the operators can improve, what things they're doing well, what things they need to improve on. So, I think it is a combination of people being here longer and them being trained a little bit better as they go along.

Would you characterize the acquisitions done in the first quarter and subsequent to the first quarter as more of the stabilized or more the opportunistic? In other words, what are you guys projecting in terms of cap rates on those deals?

Those were the vanilla type, John. I think the average cap rate for the 24 million that we closed in the first quarter was about 7.65. We see pretty good room for upside, but not in an opportunistic sense. They're about in the low to mid-80s occupancy.

The second quarter stuff we brought in, primarily in Lafayette, Louisiana, was likewise, mid-7 caps. Fortunately, we priced that deal pre-Katrina. And Lafayette has turned into quite a boomtown. And we would expect to see some pretty good growth there. Actually, we didn't expect it when we were in negotiations and bought the properties, but those are very busy stores now. So, they've kind of turned into opportunistic, even though we paid the regular-type price for it.

Ross Nussbaum, Banc of America Securities.

It's Christine McElroy here with Ross. What was the cap rate on the additional $8.5 million interest in the two JVs that you bought?

7.75.

Okay. And then, what does your guidance assume in terms of share repurchases this year, if any?

We haven't factored it in. We haven't factored much issuance or share repurchase; zero share repurchase.

And then issuance, you said 10 to 12 million?

Correct.

Okay. Can you provide some color on how discounting has been, both in the market, and if you have changed your discounting policies at all over the last quarter or so?

Frankly, discounting has -- the number of times that we do it is -- it almost seems in opposite as to what you would think we do, because we have relatively high occupancy. But what is happening is when people come in, if they are looking for a 10 by 15 (technical difficulty) we are trying to get them into maybe two 5 by 10s. So, to entice them to get into something that is maybe not exactly what [they are looking] for, we are offering discounts more frequently. But the amount that we are offering is generally less. And it really is an art as to what you're going to do to entice people in.

For the most part, what we will do is offer, say, a $20 discount or maybe throw in a lock to get people to move in. But it's -- we are pleased with how the managers are working. Just to give you a little feedback, I have been visiting stores for the past six months. I visited about 70 stores. And I have witnessed at the same store a manager working with a customer -- with different customers. And in one situation, we had only one unit available and there was no discount allowed. But when the next person came in, and there were a number of units that they had at that unit size, the manager was a little bit more aggressive. So, it's a constant battle to try to get the good occupancy. I don't see much change in the amount, but the number of times that we are giving concessions has increased a little bit over the last quarter.

Okay. And then lastly, what was your total square footage at year end?

Year end it was 17.3 million.

Citigroup.

Jon Litt, Citigroup

It's Craig Melcher here with Jon Litt. Can you update us on -- last quarter you mentioned that there was a fairly large transaction out there that you're looking on the acquisition side. Can you update us on that deal?

We are still finalizing due diligence, and it is still premature for us to give you any more details on it at this point. We promise that when and if it comes through, we will announce it immediately. But at this point, we really can't (technical difficulty)

So, when do you plan to put the 10 to 20 million of excess proceeds from the issuance to work?

In the next 30 to 40 days.

And David, I believe you mentioned that same sort NOI guidance was 4.5 to 5.5?

Correct.

Was that up from last quarter? It looked like in the release it was 4.5 to 5.

I guess we are cheating toward the top-end a little bit, maybe a little over. It's hard -- we are doing really well in some markets, and we have been holding our breath in the Panhandle and South Florida and Louisiana markets, just because they have been very, very good, in the mid to high 90s. And if that goes back to normal, we are going to be on the low-end of the range. And if -- we don't mean to sandbag. We had a great NOI this quarter, and last quarter, too. And we are happy for every quarter that we get like that. But to say that that's sustainable would be, I think, doing a disservice. But yes, we are cheating up a little bit.

Would it be safe to say that -- because you mentioned that on the expense side there were some pressures. Would it be safe to say that both your expense and revenue assumptions are a little bit higher than what they were last quarter?

Yes. Just a little bit.

Was there anything that's particularly going on in the real estate taxes during the quarter? Was there any true-up or adjustment, or is that the new run rate?

You know, we had a thing a year ago where we had a terrific benefit in the fourth quarter, because as people who have been on a lot of these calls know, a big part of our taxes, Florida in Texas, which is almost a heavy third of our properties, don't bill us until November and December. So, we are doing the past we can estimating throughout. This little bit of an increase is on the stores that were actually billed January through March. So, it's a little bit of a trend upward. But we could be surprised, I don't think unfavorably, perhaps, in the fourth quarter. That's really where we find out for sure. We are estimating a 6% property tax increase across the board. Those stores that were billed in the first quarter pushed the expense up to 7. But really, Florida and Texas tell the story for us, and we don't know for sure until Q4.

Just going back to the acquisitions that you have closed so far this year, how would you characterize the quality of these assets compared to your existing portfolio?

Many of them, probably 80% of the ones we've acquired this year, are relatively new, probably in the range of two to four years old. And one of them that is a little bit older has about a 40,000-some square foot addition to it that's in lease up. So, they are in markets that we're already in. We know them. They have most of the bells and whistles that we're currently adding to some of our current portfolio with our expansion and enhancement program.

At this time there are no further questions.

Thank you very much, everyone, for participating and for your interest. We look forward to speaking with you next quarter after the Buffalo Sabres win the Stanley Cup. Have a good day.

Thank you.

This concludes today's conference call. You may now disconnect.