Life Storage Inc (LSI) 2007 Q1 法說會逐字稿

Good morning. My name is [Jamie] and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter earnings release conference call. [OPERATOR INSTRUCTIONS]

I will now turn the conference over to Mr. Ken Myszka, President of Sovran Self Storage.

Thanks, Jamie. 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 has been included in our Company's SEC filings. Copies of these filings may be obtained by contacting the Company or the SEC.

We experienced an up and down quarter. Maybe I should more accurately say a down and up quarter, because we started slowly with move ins down a little from the quarter before, and move outs up quite a bit. However, our revenue management system kicked in and move ins increased substantially in March, and the trend continued in April. So we are cautiously optimistic about our second quarter's results that we are going through right now. Our same store revenues and net operating income increased by 3.5% and 1.2% respectively over the first quarter last year. Dave Rogers, our Chief Financial Officer will provide details in a moment.

I would like to give you a little flavor for the quarter. A major contributor to our performance has been our customer care call center. It's fully staffed and well trained for the hectic spring and summer months that we're going through or beginning to go through right now.

For the first quarter of this year, we achieved a closing rate of a little over 17% on rental inquiries, which is more than a 10% improvement over the Q1 in 2006. We're also encouraged in seeing the improvement in the center's efficiency. We were able to answer over 97% of all calls received last quarter compared to 96% of last year.

Our humidity control system, Dri-guard, continued to attract new customers. The rates we're getting on these treated units are approximately 27, 28% higher than non-treated units. And after installing the [process] at three additional stores this quarter, we now have Dri-guard operational at 82 stores.

Our internet sales program produced some excellent results this quarter. The number of rentals and revenues respectively generated for last quarter was about double that achieved in the first quarter of last year. We completed five climate control conversions last [inaudible] during the first quarter. Total cost of this work was just under $5 million, and we expect to complete between 20 to $25 million of additional [inaudible] during the rest of this year.

We also acquired 12 stores last quarter for a total purchase price of $42.6 million. We closed on a 9-property portfolio in Western New York. 8 stores are in the Buffalo area with the 9th in Rochester, New York. The acquisition of this portfolio makes Sovran the dominant self-storage provider in our hometown. [Sole] consideration for the 537 thousand square feet portfolio was a little over $25 million. Of the 9 stores, 5 have expansion capabilities. We also purchased 2 stores near Houston, Texas for approximately $12 million and 1 near Jackson, Mississippi for $5.4 million. That gives you a little bit of a rundown of our activities last quarter, and now, I would like to ask Dave to offer some details on our financial performance.

Thanks, Ken. With regard to operations, our total revenues increased $7.9 million which was 22% over 2006's first quarter; property operating expenses increased by 3.7 million. These increases, which resulted in an overall analyzed increase of 18%, but primarily due to improvements in the same store results I'll get to in a minute. The addition of 42 stores we purchased since this time last year and the effect of consolidating our [lock] Sovran [one] joint venture into the financial statements.

Average overall occupancy was 83% for the quarter ending March 31. Our average rent per square foot of $10.23. Same store revenues increased by 3.5% over those in the first quarter of '06. This was purely rate driven as our same store weighted average occupancy declined for the quarter from that of 2006's first quarter by about 210 basis points to 83.2%. Our other income, which for the most part, truck and cell tower income, increased by 6%. At the quarter end date, our same store occupancy was 83.4%, which is down 200 basis points from last March 31. Our rental rates where higher at $10.32 per square foot compared to the same store rate last year of $9.87.

Our total operating expenses, on a same store basis, increased by 7.5% this quarter. Property insurance costs increased by a 177%. Snow removal costs were higher by 36% and utility costs were about 10% higher.

This year, we're accruing a 6% increase in property taxes. The actual increase last year was 5.4%. So we're giving ourselves a little bit of a cushion there.

Other operating costs for the most part were pretty much in line. Increases up 2 to 4% were pretty much the norm across all the categories except for those I just mentioned.

So taking same store operating cost increases of 7.5% away from the 3.5% top line growth, we achieved same store and [a line] improvement of 1.2% for the first quarter.

G&A costs for the period came in at 3.6 million, which is about $200,000 below the run rate we expect for the balance of 2007. Essentially, we staffed up people and room here at our home office to operate the 42 stores we acquired in 2006, the 12 so far this year, and the balance that we expect in 2007.

Regarding our capital structure during the quarter, actually right at the quarter end date, we expended the $42 million we had left over from our November equity [unintelligible] on the acquisition of the properties that Ken described. We did not use our line of credit during the period, but since April 1 we borrowed about $15 million to fund capital improvements, prepaid expenses, and property deposits. So this leaves about -- this leaves $85 million undrawn on the facility, which is priced at LIBOR plus 90 basis points. The line has an accordion feature that allows us to expand the capacity up to 200 million and while the facility expires in September of '07, we have an option to extend the agreement for an additional year.

Our outstanding debt now totals 462 million, all of which is long term and fixed rate or hedged to maturity and approximately 24% of our borrowings are secured. Our debt service coverage in the first quarter was 3.2 times EBITDA and our fixed charge coverage was 2.9 times. Debt to enterprise value is 29% at March 31, so we remain conservatively capitalized with plenty of room to fund our growth plan.

With regard to guidance, visibility is a bit fuzzier in our industry than it has been, and issuing guidance is a little tougher these days. Further, there's two factors that impact our Company specifically. The first is something we've been expecting and talking about for several quarters and that is a fall off in occupancy at many or our Florida and some our Louisiana stores. We achieved record occupancies in 2005 and the first 8 or 9 months of 2006 as a result of serving customers with hurricane related needs. But starting late last year, many of the folks have been able to regain a sense of normalcy, and they're taking their stuff back to their new or their repaired homes.

This past quarter, the last--well actually starting in the fourth quarter of '06, this past quarter, and the next two are going to prove to be pretty tough comps, because even though we expect Florida to show 90% or so occupancy across our portfolio, we had been at 95, 98% or better in the prior two years. Along those same lines, we're battling tough comps all across the board. 2006 was our fourth consecutive year of showing same store sales growth in excess of 5%. And while we are happy with our stores and our markets, what has been the forecast [inaudible] fifth year, and so we're guiding them at between 4 and 4.5% top line growth for the balance of 2007.

For the most part expense increases are moderate, but as described earlier, we're absorbing a considerable hit to provide proper insurance coverage. The additional annual charge of almost 2 million will shrink and deduct about 175 basis points from same store NOI growth throughout now the second quarter. We expect some further pressure on margins as a result of increase in utility costs, especially in Texas. So putting all this together and factoring in our rather tough first quarter, we're forecasting approximately 4 to 4.5% same store NOI growth for 2007.

The acquisition environment is steady with more individual properties and portfolios up for sale. We're very pleased with the stores we've acquired so far this year. Cap rates do remain challenging. We will remain prudent. We're looking at a number of properties in portfolio and are hopeful of closing on some 100 to $120 million worth the rest of the way. We expect some of these, perhaps as much as 30 to $50 million worth, to be opportunistic purchases, which we define as early in the [lease up] cycle, not accretive and perhaps even mildly dilutive.

As Ken mentioned, we're undertaking a pretty extensive expansion program. We expect expenditures of up to 25 million in 2007 to enhance revenue capability at our existing stores. In 2006, we spent almost 20 million on such improvements and in the first quarter of this year, we put a little over $5 million to work this way. We've continued our program of accelerating painting, paving and fencing projects at many of our stores in an effort to improve curb appeal sooner. And accordingly, we'll be expending as much as 10 to $12 million this year on non-revenue enhancing projects.

To give you a little better handle on our interest costs, we're, as I mentioned, obligated on $462 million of long term fixed rate loans. Our annual interest cost to carry this debt, including amortization of financing costs, is 30.4 million and this will not change until late 2008. The only variable component in our debt structure is related to the line of credit. As I mentioned, there's a nominal balance on it right now which carries a floating rate of LIBOR plus 90.

We expect to issue shares through our [grip] program, but we've continued to restrict the stock purchase plan. So we're forecasting about 12 to 15 million in equity issuance this year [REIT] program. Financing of property acquisitions and revenue enhancement projects will be with these [REIT] proceeds, proceeds of borrowing on the line of credit, and or perhaps a preferred or common offering if needed.

So given all of the above, and anticipating what we expect to be an improving spring, we estimate funds from operations to come in at between $3.40 and $3.44 per share for the full year 2007, and between $0.83 and $0.85 per share for the second quarter.

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

Thank, Dave. That concludes our prepared remarks. We'd be pleased to answer any questions that you folks might have, Jamie.

[OPERATOR INSTRUCTIONS] Your first question comes from Jonathan Litt with Citigroup.

It's Craig Melcher here with Jon.

Morning.

What's up Craig.

Could you elaborate a little on the move out activity for January and February that was up? Is that just for Florida and Louisiana, or is there any market that was focused in?

Well, the primary emphasis was in those markets. We did see some additional move outs in some other areas, but nothing that really was a big concern, but when we saw the--coupled with the increase in move outs, the decrease in the move ins, that certainly got our attention. So we acted upon that, implemented a few more specials, made sure that the people who were calling weren't going to be turned away, weren't going to be dissuaded from renting with us, and that's what we think helped us regain some more occupancy in March, and as I mentioned it's continued into April.

So what are your specials that you're offering?

Well, generally and almost any situation, we'll offer $20 off of the first month. But what we did this time is any unit sizes that a particular store that had occupancy of less than 80%, we'll give instead of a half of month, we'll give a full month. And we did some analysis of--we studied about 60 to 70 of our stores in particularly hard hit areas where we had some unit sizes, many times, they're the smaller unit sizes and had difficulty in reconfiguring those. And those that had been vacant for an extended period of time 10, 12 months, we would be willing to offer those at anywhere from half to two-thirds off a month on a continuing basis, which is unusual for us. But we thought that was almost like found money, because those unit sizes hadn't been rented for upwards of a year. So that's basically what--the specials that we ran.

And the reduced move ins, do you think it's because you've been pushing the rents in the last couple of years or think the housing market's slow down's impacting it at all?

I think it may be a combination of those. In a couple of markets, we got ahead of ourselves with the rental rate increases, but in the parts of Houston and parts of Florida where there has been a slow down in the housing construction, we've noticed a little bit of an impact there. So I think it's a combination of those two things.

The last question is just on the--Dave, you mentioned on the opportunistic acquisitions, I think you said 30 to 50 million, but it looked like in the release they were down a little bit from last quarter. I think it said 20 million, is that--is there a change in philosophy there on the opportunistic fields?

Not really a change in philosophy. If we see something we like -- we put these targets out just to help with guidance and what we expect we can reasonably do. But there is a fair amount of it out there in terms of, as I said before, some developers were sort of nearing the end of their rope, as far as construction loans or their project loans. So we're looking at more, and I mean it could be zero. I mean, we really are looking at a bunch and to that range particularly on the opportunistic acquisitions is the toughest one to pin down.

So right now I guess if I had to pick a number, I would say between 20 and 35 million, but it could be as high as 50 and it might not be 20. So it's just a number we're throwing out. But I'm a little more careful of these because they could be diluted. We could be picking up -- if we were to do $50 million worth of property at a [fore cap] we're going to sit on some pressure for a few quarters. But right now we did have some of these Western New York acquisitions did come in as opportunistic, but fortunately the blended cap rate was high enough to more than be accretive and with that opportunity there plus the deal. So we're real happy on a deal like that.

Okay, thank you.

Your next question comes form Christy McElroy with Banc of America.

Hi, good morning. Just to follow up on Craig's questions. I just want to make sure that I understand. So the change in trends in March and April was purely driven by your tactics in terms of offering lower rent or higher concessions, not any improvement in market conditions?

Well, there was an increase, I have to say, or somewhat of an increase in the number of calls that we received, but not appreciably over let's say March of last year. We do think that most of it was attributable to our aggressive revenue enhancement.

Okay, I guess, I mean that goes into my next question. I'm just trying to get a sense here for what's kind of the overall trend here. I mean I am trying to figure out is it seasonal in Q1, is it geographic, is it more secular changes like lower job growth or energy prices impacting discretionary spending, or is it fewer housing transactions as a result of the weaker market? And then kind of the resulting impact on the rest of the year.

Christy, you probably hit every one of the things that's having an impact on everybody's business. We think it's too soon for us to say that the sky is falling at this point. The first two months were challenging. The third month got a little bit better as far as number of calls and inquires and a lot better as far as our success at selling and continuing into April.

We see no reason for us to wave a yellow flag that things are really a problem. At this point, we're still very confident in our ability to rent to a lot of people. There's still a big demand for self storage out there. And our industry's been resilient. Through recessionary times we've been able to come through because it's generally the cheapest alternative -- and when times are good with a lot of homebuilding activity going on, we get a lot of people coming in. So I think we're going to do fine. It's just we have to react to the market situation that we see out there..

So based on some of the trends that have been--that you've been seeing in April, I mean how should we expect the Q2 to turn out in terms of--like should we see a small, like a narrower increase or a narrower decrease in occupancy and maybe slower year-over-year rent growth?

I don't think you need to look at it that way. I think we're going to be fine this year. I think we're going to do--we told you what our guidance is for this year. We're pleased with what happened in April and what's happening so far at the beginning of this month. So I think you can stand still with the guidance we've given you.

And I think we had 3.5% growth was a little less than we expected in the first quarter. As Ken mentioned, the January and February call volumes were down year-over-year. March not only picked up absolutely, but it picked up year-over-year from '06. So, but I feel--so we were--I think and as Ken said, we lost the usual amount of customers that can expect to move out in a given period. What was hurting us was the fact that our move ins were down and partly because the phone wasn't ringing and -- you could almost pick from a menu of all the things you listed as to why. That's the difficult part, is what exactly is it.

But where we do have opportunities, we price accordingly, but it's not by any--certainly in all the stores where the units are 90% or better occupied, we're not playing too much. The typical 83 to 90% range, it's a little bit more, as Ken said, discounting. And really, the percentage of units that we're giving a half to two-thirds off on is not that significant but it's an opportunity we see in a softer market to do more.

To sum all that up, we didn't do as much as we thought with 3.5% in the first quarter, but I think the 4 to 4.5% is pretty reasonable to expect the coming two or three quarters.

Okay, and then just lastly. With regard to your acquisitions, you've raised your accretive acquisitions in addition to lowering the opportunistic, raised the accretive to 125 from 75 million. Given that you'll be acquiring more assets that are accretive to earnings than acquiring fewer assets that could present a drag, why haven't you raised your guidance, I mean is that offset by some of the fundamental stuff?

Not too much by the --I mean, we did loose $0.01 or $0.02 this quarter. So we lost $0.01 primarily just on investments. We had $42 million that we had expected to put to work in late January, early February; that didn't get placed until the end of March. So that cost us $0.01 that we're not going to get back. Another $0.015 or-- $0.005 to full $0.01 was on operations in the first quarter. We're not going to get that back so--. And the stuff that buying at accretive -- we're paying a 7 cap and our cost of debt is in the 6 range -- and given who knows when we're going close it. It might be September, it might be November. They're just--really, acquisitions don't have the impact on us in the first year that we do them that you might expect now. Going into next year it [gets us off and feeds it] pretty well. But [inaudible] from acquisitions especially as we move on into August, September, October, it really doesn't mean much to us.

Okay, thanks guys.

Your next question comes from Paul Adornato with BMO Capital.

Hi, good morning.

Morning, Paul.

First, a quick balance sheet question. What was construction in progress at March 31?

About 7.5 million.

Okay. And given that you'll be doing more acquisitions, maybe you could review your acquisition integration procedures, particularly, how quickly do the acquired properties get onto the call center?

Oh, well they're on potentially the first 24 hours that we--the property is in our possession of ownership, they're on. We have--plus maybe--we have the acquisition here in Buffalo, we had 9 stores. We had the operations specialists come in from different parts of the country to assist in the move-in and in advance of the takeover; we get a lot of things done so that it's pretty seamless. It's easier if you have the managers who were there before managing the properties their staying, but even if that's not the case, we'll take that into consideration. So they're integrated to our system very, very quickly and painlessly. Many times the longest thing is getting new signage put in and the change in the Yellow Pages, but we deal with that. So that kind of gives you a little review of what we do.

Okay. And what about on the personnel side. What about the property level employees, how many of them do you retain, and what sort of training do you provide?

That's a--that's all over the board. There are situations, say, if it's a 5 portfolio we may keep all of them, we may retain none of them. And it's--whether they are existing managers or new managers that we hire, they all go through the same training program here at our home office. We bring people in whether they're from Buffalo or from Texas, we bring them in for a full week's training. The area managers then spend a fair amount of time with them making sure they understand things. We have refresher courses on the internet -- intranet, to make sure that they understand what's expected of them.

So it's the same for whether it's a person who has been with the acquired company or a new person. And percentage wise I would say percentage, probably about 50 to 60% of the managers who are there will stay with us. But it has been as low as zero and it's been as high as about 90%.

And finally, how would you rate your compensation compared to local competitors, the same, higher, lower?

I think overall we compensate our mangers better than the local mom-and-pop operation. We do offer more as far as healthcare and those sorts of things, as well as bonus situations. So I think our people are a little bit better compensated and certainly much better trained, which [inaudible] provides them for a more satisfied group of people.

Okay, thank you.

You're welcome.

Your next question from Michael Salinsky with RBC Capital Markets.

Good morning, guys.

Morning.

Dave, on your comments you mentioned the acquisitions you closed on in the first quarter, I didn't particularly hear what the cap rate on that transaction was. And secondly, if you could kind of touch upon what your acquisition pipeline looks like at this point, you know how pricing's doing and what the size and how generally the market is performing right now.

Sure, the Buffalo acquisition, the Western New York acquisition was a little over $25 million, that came in a shade over a 7 cap. That as I mentioned was sort of a blend of yield and opportunistic because there's quite a bit of brand new square footage that had just been built that we took on at cost, essentially. So it was about, at the end of the day, I think it was about 72, 73% occupied that we acquired for a 7 cap on private income stream.

The two Texas properties were about $12 million total costs. They're relatively mature, and they were just over a 7 cap also. And the Mississippi property near Jackson was a little better than that. It was about, I'll say an 8 to 8.25 on in-place income when we took it over, and that was for $5.4 million.

Okay.

Going forward, we have an awful lot that we're looking at. We have a bunch of due diligence. We don't typically comment on anything that we're in contract with, and we--unless it's a very large portfolio acquisition, we'll tell you about it at our next earnings press release. But the stuff that we're looking at now is, you know, the bigger portfolios, for the most part, I would say yield oriented, and we're talking high 6's, low 7's is pretty much the range that we're in for the property that we're talking about.

Okay. Second, question, as far as your insurance expires at the end of June there. You got any kind of call you can shed on how that renewal is going?

Actually, yes, we did negotiate with our carrier to starting July 1 we will be on a different program. Same coverage, same risk, I guess, capacity. We should be looking at about a 25 to 30% reduction starting July 1 per quarter from what we're paying now which works out to be about a 30% increase over two years ago, but quarter-over-quarter we'll be looking at a little bit better than we have for the last three-quarters and the existing quarter.

What we also did was we moved our date forward to February 1 renewal. We are in the absolute worst part of the cycle for negotiating insurance, because it seems the last three years all the carriers that we've dealt with have been in a tizzy as to storm predictions, and when you're negotiating your insurance in May and June and hurricane season is starting in July, everybody's nervous. So we moved our date back to March 1 -- I'm sorry, February 1.

It's particularly important to us because we do have a lot of coastal property. We're from Boston all the way down to Beaumont, Texas. We are in a lot of coastal areas, and it's important that we be covered. It's important that we be in those markets, because we think they're good storage markets, but we're probably exposed maybe a little bit more than some of the companies being covered. I think it would be--we're certainly in better shape going forward both on our risk basis and on a cost basis. So we'll be seeing some improvement starting July 1.

And my final question is with the softness you saw in January and it started to pick up throughout the year, I mean are you seeing softness in any particular segment and with that I mean, are you seeing a softness in the consumer, I mean is business growth--is business demand still pretty strong, and where are you seeing the pockets of weakness, essentially?

Well as far as, if you're asking the types of customers whether it's a residential or a commercial, it's more of a decline in the residential than the commercial, which I think is good. It kind of goes well for a pick up in hopefully, in the commercial activity and then falling into the residential people.

As far as geographically, the areas that we saw the biggest drop was Florida and into Louisiana, but they did respond even though there [inaudible] to the price sensitivities that we put into place in March. So that's why we're encouraged that people were still looking for storage, they just were a little bit more of a shopper.

Okay, thanks guys.

Sure.

There are no further questions at this time.

Okay. I would just like to thank everybody for their interest in our company and the participation in the call, and we look forward to speaking to you in a couple months. Hope you enjoy your spring. Take care.

Bye.