Life Storage Inc (LSI) 2006 Q3 法說會逐字稿

Good morning. My name is Heather, and I will be your Conference operator today.

At this time, I would like to welcome everyone to the Third Quarter Earnings Release Conference Call. [Operator Instructions]

Mr. Myszka, you may begin your Conference.

Thanks, Heather. 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.

Okay. Well, Sovran delivered another quarter of strong operating results, with same-store revenues and net operating income increasing by 5.8% and 4.2% respectively over the third quarter last year. This marks the 13th consecutive quarter of same-store revenues exceeding 5%.

The comparables are challenging, but our management team continues to respond and is doing an excellent job. Same-store NOI was adversely affected by the substantial increase in property insurance costs we discussed last quarter. Dave Rogers, our Chief Financial Officer, will provide details in a moment.

A major contributor to our performance continues to be our Customer Care Call Center. For the third quarter of this year, we improved our overall closing rate on all calls] answered by 9% over [the] Q3 2005. We're also encouraged to see improvement in the Center's efficiency in several other areas.

Similarly, our truck program continues to add to our rent rolls. We added trucks at 27 additional stores in Q3. This brings the number of stores utilizing an Uncle Bob's truck to 249. Last quarter, over 7,300 new customers used one of our trucks to assist their moving from an Uncle Bob's store.

Our humidity-control system, Dri-guard, also continues to attract new customers. The rates we collected on Dri-guard-treated units continue to earn approximately 27, 28% higher than non-treated units. With the installation of the system at three more stores last quarter, we now have Dri-guard operational at 79 stores.

Also during the quarter, we completed three expansions and three climate-control conversions. The total cost of this work was just under $3 million. And year-to-date, we have completed 23 projects, at a total cost of just under $12 million.

On the acquisition front, we closed on nine stores in the third quarter, for total consideration of $33.8 million. Five of the stores are in markets where we already have a presence; one in Chattanooga, Tennessee, which gives us five; one in Lafayette, Louisiana, which gives us 10 in that area; and three in Montgomery, Alabama, bringing our total to seven in that market. We also acquired four stores in Columbus, Georgia, which is a new market for us.

At this point, like to turn it over to Dave to comment on our financial performance and activities.

Thanks, Ken.

Regarding operations, total revenues increased $8.8 million, or 24%, over 2005's third quarter; and property operating expenses increased by $3.8 million. These increases, resulting in an overall NOI increase of almost 21%, were primarily due to strong growth in the same-store pool, the addition of 47 stores we purchased since this time last year, and the effect of consolidating our Locke Sovran I joint venture into the financial statements.

Average overall occupancy was 86.7% for the quarter ended September 30th. And average rent per square foot was $10.25. Same-store revenues increased by 5.8% over those of the third quarter of 2005. Most of this was rate-driven, as our same-store weighted occupancy for the quarter was virtually the same as 2005's third quarter -- 87.8%. Other income, primarily truck and [cell tower] income, increased by $145,000.

At the quarter-end date, same-store occupancy was 86.8%, which is down 90 basis points from last September 30th. But rental rates were higher, at $10.22 per square foot, compared to the same-store rate of $9.75 last year.

Total operating expenses on a same-store basis increased 8.9% this quarter, a higher jump than we've experienced in quite some time, but not unexpected. The culprits were utility costs, which grew by almost 15%; and of course property insurance, which jumped 175%, or $500,000 this third quarter over last. Other operating costs were pretty much in line. Our increases were 3 to 5% across most of the categories.

So taking our same-store operating cost increases of 8.9% away from the 5.8% top-line growth, we achieved a 4.2% same-store NOI for the third quarter.

G&A costs for the period came in at $3.4 million. This is about $500,000 more than last year's comparable period. And that basically reflects the increased staffing and the facilities that we've had to add to put in place to handle the 47 stores we've acquired since mid '05.

Also you should know that included in this is the effect of consolidating the G&A component of Locke Sovran I, and also some due diligence costs relating to the higher acquisition volume we've had this 2Q and 3Q of '06. I would expect the ongoing G&A costs to be at about this level at our current store level.

With regard to our capital structure, we issued 293,000 common shares via the DRIP plan and the share purchase plan, and as a result of employees exercising options. We netted a total of $14.4 million via these issuances. As Ken mentioned, we acquired $34 million worth of property. This was funded by $26 million of borrowings on our line and proceeds from the DRIP.

And as we mentioned last quarter, effective April 1st we acquired, at a cost of $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 contribution gives us a majority control in both entities, and it provides us with the opportunity to invest in the properties owned by these ventures. In that way, we're able to have all the resultant benefits accrued to Sovran.

As mentioned, the results of Locke Sovran I have been consolidated with those of the Company this quarter and last quarter. Locke Sovran II has been consolidated from its inception.

Our total outstanding debt is now $528 million. And with the exception of just the line, the $66 million on the line, it's all long term and fixed-rate, or hedged to the maturity. A little over 20% of our borrowings are secured.

We have in place $100 million line of credit facility at LIBOR plus 90 basis points. We also have an accordion feature that allows it to expand that capacity to $200 million. $66 million is drawn on the line as of September 30th, and the line expires in '07. But we do have an option to extend it through September of 2008.

Our debt service coverage in the third quarter was just a little over three times EBITDA. Our fixed-charge coverage was 2.8 times EBITDA. Debt to [amortized] value is about 33% at the end of the quarter. So as is typical, we remain conservatively capitalized, and we've got quite a bit of firepower to fund our growth plan.

With regard to guidance -- we continue to see strong fundamentals. I think the self-storage business is continuing to show strength. We see competition in many markets, but nothing really crazy. Demand has been good and growing. So we're still forecasting top-line growth between 4.5 and 5.5% overall for the coming quarter.

For the most part, expenses have not moderated. But as we've been talking about, we're absorbing a pretty good hit to provide proper insurance coverage. The additional charge that we were taking this year of almost $2 million has shrunk our margins, and it deducts about 175 basis points per quarter from same-store NOI growth. We also are experiencing, and expect to continue to experience, some pressure on our margins as a result of increasing utility costs, especially in Florida and Texas.

So putting all this together, we're forecasting an approximately 4 to 5% same-store NOI growth for the balance of '06 and likely into '07.

The acquisition environment's been pretty good; it's been steady. We're seeing more and more properties and portfolios coming up for sale. We like what we've bought, certainly. But the challenge remains that cap rates are still, in many cases, lower than we like. We may close this year up to $30 million of acquisitions, but there will be little impact on 4Q results. And it's also just as likely that this transaction or these transactions get deferred until after the first of the year.

And as Ken mentioned, we're making a pretty -- we've undertaken a pretty extensive expansion program over the next two years. We expect expenditures of $15 million, maybe a little more, in 2006, to enhance and enlarge revenue capabilities at our existing properties. And we've also moved, as mentioned in prior calls, to accelerate our painting, paving and fencing projects at 60 or so stores in an effort to improve curb appeal sooner. So accordingly, we'll be expending as much as $10 million to $12 million by the end of the year on non-revenue-enhancing projects, as opposed to our usual $4 million or $5 million.

To give you a better handle on our interest costs, we're now obligated on $462 million of long-term fixed-rate debt. Our annual cost to carry this debt is $29.5 million, and we don't see this changing until late 2008. The only [variable] component in our debt structure is related to the line of credit, on which there is $66 million outstanding at a floating rate of LIBOR plus 90.

We expect to issue shares through our DRIP program and share purchase plan, but modest compared to prior years. It's projecting about $17 million in equity issuance this year via the program, as compared to about $50 million in 2004 and a pretty high number in '05.

Financing and property acquisitions [in] the revenue-enhancement projects in the fourth quarter and into next year will be with good proceeds, borrowings on the line, and a possible equity offering once our line balance nears or exceeds $100 million.

So given all of the above, and offsetting some of our tougher news with some of the good news, we're fine-tuning our estimate of funds from operations to come in at between $3.22 and $3.24 per share for the full year of '06, and between $0.80 and $0.82 per share for the fourth quarter.

At this point, Ken, I'll turn it back to you.

Okay, thanks, Dave.

That concludes our prepared remarks. We'd be pleased to answer any questions you might have.

[Operator Instructions] Christine McElroy, with Banc of America.

Good morning. I'm here with Ross Nussbaum as well.

Morning.

Morning.

What was the timing of your acquisitions in Q3?

We did the -- there were a group of them. Let's see, we had -- primarily, was a little bit later in the quarter. We had -- actually sprinkled throughout the quarter -- we had mid-August on a couple, mid-September on a couple. So it's basically $32 million sprinkled throughout -- between August 15th and September 28th.

Okay. And then you said you expect another $30 million later this year, but more weighted towards the back end?

Certainly weighted toward the back end of the year, and might even -- some of them might even flip over into the first of the next year.

Okay.

And then can you give us the cap rates on your acquisitions in Q3?

Yes, I will say -- the average cap rate would be in the mid-7s -- between 7.5, 7.7; in that range.

Is that higher than what you've done recently?

I think it is. The big -- the cornerstone portfolio, I think, was low 7, like maybe 7.2, 7.3. So this is a little bit higher. Yes.

Okay.

And then what drove the 90-bip decline in your year-over-year same-store occupancy level at September 30th? Was it specific to any geographical areas?

Yes. As we've been kind of mentioning over the last couple of quarters, we've been anticipating Florida to have a little bit of a decrease in occupancy. They've been averaging 95, 96% occupancy. And it's down to like 92; still very healthy. That's the primary reason for it. And there hasn't been the recurrence of the natural disasters that they've had. People's homes are being repaired, and they're moving out. So we're getting a little bit more normalcy in the occupancy levels down there.

Okay.

And then, can you -- lastly, can you give us a sense going forward -- you said you expect further compression in your NOI margin. Do you expect to eventually be able to pass off some of those higher expenses to tenants in the form of rent increases, in which case your NOI margin would eventually come back up over time? And can you kind of give us a sense for how much further compression you expect?

I think the big culprits, as I mentioned, are insurance and utilities. We are working to contain utility costs. It's not a big part of our expense load. But nonetheless, it's growing pretty rapidly.

I think some of that, especially with our Dri-guard -- and the reason we do have utility costs of any significance at our stores is because of the Dri-guard program and those units that are climate-controlled. So I think we are seeing some ability to move that over.

We're hopeful that given the year we've had, with natural disasters and so forth, that the insurance deal is a one-time shot. And I think this might be the year for the insurance companies to make some hay. But we're very -- I won't say confident, but we certainly expect to see a pretty considerable decrease come June 30th, July 1st of next year in our premium. So hopefully, that compression caused by this mega-blast of insurance premiums is a temporary, one-year thing.

So I guess, it might be a little too strong to say "continuing compression." We do think we can pass security costs off. We're going to eat the insurance, of course. And hopefully, that's just a one-time shot.

Thank you very much.

Okay, Christine.

[Jonathan Litt, with Citigroup].

Hi, it's Craig Melcher here with John.

I just wanted to go back to Florida. Can you talk about what you're seeing in terms of your rental rates there? Have you had to modify your rents at all, related to the occupancy [inaudible]?

So far, no. We're not offering much in the way of specials that we haven't offered in the past. What we -- actually, what we are anticipating seeing is getting back to more normalcy in the Florida market, let's say, as far as occupancy. But what we're looking to do is to hopefully make up for that in other areas -- the Northeast and the Midwest, where some of the returns haven't been what we wanted them to be. We mentioned in the last call we made some personnel changes. We're doing a little bit more lightening and brightening in those areas.

So our expectation is that what we lose in Florida we'll more than make up for in other parts of the country.

Do you think your experience in Florida is similar to others you're seeing?

I would expect so.

And in Florida, do you think the cooling housing market is having any impact there? Or do you think it's strictly the hurricanes?

I think it's primarily the hurricanes.

Are there any areas in Florida that are being impacted a bit more in terms of the occupancy, or is it pretty spread out?

I think it's pretty much spread out. And the coastal areas, I guess, is where we see a little bit more of it than the central -- than in Orlando, or up in Tallahassee and Jacksonville. I think the coastal areas is where we're seeing a little bit more softening.

But as I said, going from 95-plus to 92-plus, it's still pretty healthy. And it's a natural occurrence, I think.

Thank you.

You're welcome.

[Paul Adornato, with BMO Capital Markets].

Good morning.

[inaudible]

-- [Paul].

Was wondering if you could talk a little bit about the rate and occupancy tradeoff within the same-store portfolio, and also overlay your Dri-guard activity to then the same-store. Have you added a lot of Dri-guard space to the same-store portfolio year-over-year?

Well, as we often talk about with regard to rate and occupancy, we have our revenue management program that -- once we hit 90% occupancy at any particular unit class at any particular store, we start bumping rates. And really, whatever minor concessions we might be offering, we pretty much wean off.

So the fact that we're at 92, and previously 95% occupancy in Florida, was a bit of an anomaly. Because at most of our stores, we're almost pressing to be at 90 tops, and move rates then to keep hitting as much rate as we can.

With regard to Dri-guard, the program's moving along, certainly. And it's helped a bit, although a lot of it is just coming on-line second quarter, third quarter. So we haven't had a full year's experience at much of this program that we put in place so far. To date, we have programs launched for just Dri-guard on the order of about $2.2 million, about 109,000 square feet. So it's not that significant yet. We expect that by the end of '07, we have pretty good results for those that we put in in '06, and pretty good expectations for the big [slows] that we'll put in in '07.

So I can't really say that it's had that big of an impact, this program, on our operating results through '06.

And how is Dri-guard sold? Do the customers kind of ask for it when they come in? Or do most of them hear about it when they make an inquiry?

I would say people who have used and stored with us before -- many of them are familiar with Dri-guard. But new customers coming in -- the managers are trained to ask what people are going to be storing, and how long they're going to be storing it. And depending upon the answers to those two questions, then the education process comes in. And it kind of sells itself. If people have some things that are pretty valuable or sentimental, or either of those, they're pretty much interested in using the Dri-guard.

And many times, what happens is they might rent a 5-by-10, let's say, with Dri-guard, for things that need to have the Dri-guard system, and rent a maybe a -- perhaps a larger unit or a same-size unit without the Dri-guard for things that don't need it.

So as people become more educated about storage, and the things that can go wrong or go right with the process that's in the unit, I think there will be more and more people asking for it.

And right now, if you were to estimate, would you say maybe two thirds don't know about it when they walk in?

That's tough to say. It might even be a little bit higher than that. In the population in its entirety, I would say it's a lot higher than that. As far as Uncle Bob's is concerned, it may be 66%, maybe 75%, would not be aware of it.

Okay. Thank you.

You're welcome.

[Michael Salinsky, with RBC Capital Markets].

Good morning, guys. I know you provided a lot of commentary there on the Florida market. But could you touch a little bit about what you're seeing specifically in the Texas market, as well as the Northeast, both with regards to occupancy and rental rates?

Yes.

Well, Texas -- for the most part, we're very pleased with what's -- our markets down there. Most of Houston has done -- doing well for us. And we've seen some pretty good improvement in the Dallas and Forth Worth areas. And in the southern part of Texas, in the Houston area, a lot of it was due to the hurricane. But also, prior to that, we did some enhancements in that area, which I think also -- prior to the hurricane coming in last year, we saw some increase before that. So I'm not going to attribute the entire improvements to the hurricane disaster down there. We haven't seen any slackening in occupancies in that area.

Up in the Northeast, it's been kind of the poor stepchild compared to the spouse, with respect to returns on those occupancies in those areas. And we made some changes in some of the things that -- some of the people in those areas. We're spending a few more dollars, as Dave had alluded to, with respect to lightening and brightening, giving a little bit better curb appeal.

So we're anticipating next year that we should see some dramatic improvements in the Northeast compared to what we've had in the last two years.

Second question, then -- I know Dave touched about what he's kind of seen in acquisition markets in his commentary there. But could you talk about specifically, in terms of like portfolios, or one-off assets, and kind of where you're seeing cap rates, moving either up or down?

I guess, in terms of portfolios, there was pretty wide knowledge that there were a few big ones that were floated out early this year that really never went anywhere. And I guess maybe some of the pricing just -- in '04, and certainly '05 -- got people excited. And then, pretty much the industry -- at least the public players in our industry have been retrenched a little bit more.

So there are a couple medium-size portfolios being put out and about. By that, I mean in the $50 million to $80 million range. I don't know how excited we're going to get about it. Our hit rate on portfolios has been pretty low. We just can't get excited about somebody bringing something to us that they've already dressed up for sale and have ready to go, and looking for a premium price on something that has very little upside, at least in our mind, to it.

What we've really done a lot better job with is smaller transactions; one, two, three, four properties. For example, like the one that we just bought in Columbus at the end of August -- that was a portfolio that had been run for a few years by a guy who did a pretty good job. I think we paid him a pretty fair price for it. But we're really looking to put some synergies to work there, and grow those.

And that sort of -- I guess, we might not be the best person to ask this question of, Mike, because we don't allow big game hunting for the big portfolios. Certainly, we look at all of them; certainly we get into all of them. But I think we've done a better job adding value by going after the smaller deals and putting some real significant synergies and some marketing expertise to it.

I think we're seeing an adequate number of those. We were pretty excited at the beginning of '05 that all of a sudden things had opened up. I don't think the pipeline is quite as full as it was 12 months ago, but I think it's adequate.

That's fair.

Then, I guess, a final question -- with the fourth quarter -- [basically], us being already midway through the fourth quarter -- have you put any kind of preliminary outlook into '07 at this point, or are you just in the initial budgeting process?

Actually, we don't know -- and it's November 2nd -- we don't know a thing yet about the fourth quarter. So we'll be pulling our numbers down [through] October early next week. But we typically put out our '07 -- our full-year numbers on the February call. And I don't see any reason to be -- we're pretty -- we think the industry is pretty strong. We expect, I think, good rate -- or at least good top-line growth. The expenses, with a couple exceptions, we've got a good handle on. And hopefully, we can correct those.

So I think we're -- what you guys have done, I think we're comfortable with. But we haven't put out our own and won't until February.

Okay. Great. Thanks, guys.

You're welcome.

[John Sheehan, with AG Edwards].

[Lost a law] question here. As I recall, your shareholder rights plan is scheduled to expire at the end of the month. I don't know if you're in a position to share your Board's thoughts about what you're going to do with that plan. But if so, would be interested to hear what your Board's thinking is on the shareholder rights plan.

Okay, John, yes. That's been a topic that our Board has bounced around at the last two meetings we've had. We've had some input from the legal side, from the bankers. And at this point, it's our intention that when the rights plan expires at the end of this month that we will let it lapse at that point. That's what our Board's intention is at this point.

We're sensitive to what the shareholder activist groups and good-governance people are looking for. And we're leaning towards having it lapse at the end of this month.

Okay. Thanks for the update.

One other question -- Ken, you typically give an update on leasing activity, and just general client or customers inquiries through your website. I wonder if you could give us an update on that activity in the third quarter.

With respect to the Internet?

Yes.

Yes, we're pleased. I've got some information here. We're very pleased with what's been happening there. The percent increase that we had enjoyed this third quarter over the quarter before was an increase of 690% revenues from the third quarter of last year to this year. The number -- and we've ramped up from a personnel standpoint. In our call center, we have -- I think it's like 4.5 people dedicated entirely to fielding any calls regarding the Internet. Because as you know, we don't sell directly online.

But what one of our goals is is that when somebody makes an inquiry online, that within a five-minute period -- even less than that -- perhaps even -- I'll have to get the information directly from the guys down there -- but within a minute or two, somebody from our office is contacting those people to try to convert them to a customer.

So we're making good progress in that area; I'm glad you asked that question.

Are you still -- before, you were reporting some pretty significant jumps in rentals, and just inquiries in general -- are you still seeing large gains there? Or is it -- or are you running into tougher comparisons? So the growth in the number of inquiries has maybe slowed down a little bit?

It's actually -- if I look at the rentals, third quarter of '05, third quarter this year, it's still very good -- about 41% increase this quarter. So although the comps are more difficult, we're still enjoying some really good improvement quarter-over-quarter.

I would expect that next year you ask me that question, I'd be surprised if we're the same percentage. But we're pleased as far as the progress we've been making on that.

Great. Thanks, guys.

Okay, John.

John.

There are no further questions at this time, sir.

Okay. Thanks, Heather.

And we'd just like to thank you all for your participation, your interest in our Company. We're continuing to make real good strides, we think, in a very, very strong industry.

So we'll talk to you next year. Have a great holiday season. And take care.

Thank you.

This concludes today's Sovran Self Storage Third Quarter Earnings Release Conference Call. You may now disconnect.