Life Storage Inc (LSI) 2007 Q3 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the third quarter earnings release for Sovran Self Storage. 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).

Mr. Myszka, you may begin your conference.

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. A copy of these filings may be obtained by contacting the Company or the SEC.

Well, our Company delivered another quarter of strong operating results with same-store revenues and net operating income increasing by 3.5% and 5.7%, respectively, over the third quarter last year. With over four years of same-store revenue growth greater than 5%, the comparables are challenging but our management team continues to respond and is doing an excellent job.

Our same-store net operating income was positively affected by a decrease in property insurance costs which kicked in July 1st. Dave Rogers, our Chief Financial Officer, will provide additional financial details in a moment.

But a major contributor to our performance continues to be our customer care call center. For the third quarter of this year with we improved our closing rate on calls answered by nearly 5% over Q3 2006. We were also encouraged to see improvement in the center's efficiency in several other areas. Similarly, our truck program continues to add to our rent growth.

Last quarter nearly 9,000 new customers used one of our trucks to assist their move in to an Uncle Bob's Store. And our humidity controlled system Dri-Guard also continues to attract new customers. The rates we collect on Dri-guard treated units continued to run approximately 27, 28% higher than nontreated units. With the installation of this system at five more stores in the last quarter we now have Dri-guard operational in 87 stores.

We also completed 11 expansions and/or climate control conversions during the third quarter. The total cost of this work was about $8.5 million. Year-to-date we have completed 19 projects at a total cost of just under $16 million.

Finally although the Company acquired no new stores during this last quarter, we did enter into contracts to purchase three additional stores at a total cost of $10.6 million.

With that I would like to ask Dave Rogers to comment on our financial performance.

Thanks Ken.

With regards to operations, our total revenues increased $6.2 million or 13.8% over 2006's third quarter and property operating expenses increased by $1.9 million. These increases resulting in an overall NOI increase of 15% were primarily due to improvements in the same-store results and the addition of the 58 stores since -- we purchased since late 2Q of last year.

Average overall occupancy was 85.1% for the quarter ended September 30th and average rent per square foot was $10.39.

Same-store revenues increased by 3.5% over those of the third quarter of 2006. This was purely rate driven as our same-store weighted average occupancy for the quarter declined from that of 2006's third quarter by 140 basis points to 85.4%. Other income, which is primarily truck and cell tower revenues, increased by 3.5%.

At the quarter end date, same-store occupancy was 84.4% which is down 150 basis points from last September 30th. But our rental rates were higher at $10.63 per square foot, compared to the same-store rate of $10.26 $10.26 last year.

Total operating expenses on a same-store basis actually decreased by 30 basis points this quarter. As we discussed on the last call property insurance costs declined by almost $300,000 this quarter.

Again we want to emphasize that the risk profile has remained consistent with that of 2005. Last year we paid up. This year we will enjoy a premium reduction of about 30%.

Landscaping and property maintenance costs are the only large categories in which costs have increased by a significant amount growing by not quite 6% over last year's third quarter. Property taxes increased by 3.5% but personnel, advertising, and almost every other cost category either remained flat or decreased from that of last year's third quarter.

So growing our top line by 3.5% and pushing the 30 basis point expense reduction resulted in same-store NOI growth of 5.7%.

G&A costs for the period came in at $4 million which is free but as we expected. This was 16% higher than last year's third quarter but we are operating 20% more stores and we knew to budget accordingly.

As mentioned last quarter a new item on our P&L is an amortization charged for in-place customer leases. As we said, given the number of stores we purchased in the past year we thought it was proper to allocate a portion of the property purchase price to the income stream generated by the tenants renting as valued at the closing date.

So this quarter's charge is $606,000. 4Q is expected to be a little bit less than that and as you can see from the supplement we add that back to our FFO computation.

With regard to capital events, in as much as we didn't acquire any stores this period and had pretty strong cash flow, we drew only $2 million on our line of credit to fund our expansion and enhance that program and our property renovation. We have $9 million capacity left on the line. We put in place a short-term note program to borrow another $25 million and we've extended our existing credit line for an additional year. It now matures in September of 2008.

Our outstanding debt is $552 million and except for the line debt of $91 million, all of it is long-term and fixed rate or hedged to maturity. Approximately 20% of our borrowings are secured.

On July 7, the last holder of our Series C convertible preferred converted their shares to 920,000 shares of common stock. At the end of the quarter we had 21.6 million shares of common outstanding, 425,000 (inaudible) in it and no preferred shares remained.

That service coverage in the third quarter was 3.2 times EBITDA as was naturally our fixed charge ratio. Debt to enterprise value was 34% at June 30th. So we remained capitalized conservatively with room enough to grow our -- to fund our growth plans.

With regard to guidance, as we have mentioned in tje previous couple of calls our recent comps have provided us with a bit of a challenge. And overall the storage sector has become a little bit tighter. Fortunately supply growth -- in our markets anyway -- remains quite constrained so we continue to have opportunities to increased rent. We expect to see fourth quarter top line growth to come in at 3 and 4% above last year's fourth quarter.

While we don't expect another decline in same-store expenses, even noninsurance costs appear to be in check. As always in the fourth quarter the wild-card is property taxes. We will receive the 2006 invoices later this month for our Texas and Florida stores; so we will know then how good our overall estimates were for the year. Preliminary indications are that there should be no surprises either plus or minus.

So given that, we expect same-store expense growth of about 3% in Q4 which would result in NOI improvement of 4.5 to 5%. G&A costs are targeted at $4 million for the quarter.

With regard to the acquisition environment it is pretty much unchanged from last couple of quarters. There's a lot of portfolios and properties out on the market we are looking at. Unfortunately, despite recent jolts to the debt and capital markets, seller expectations have not been appreciably reduced. We acquired about 60 stores in the past 15 months, and while we had expectations of continuing that pace, we are now forced to look at maybe different ways to grow the portfolio. We are emphasizing upside potential more than ever in our underwriting and our total 2007 expectations regarding acquisition volume started out at about $135 million. With $125 million already booked, we are not forecasting a very busy fourth quarter, concerning the acquisition of properties.

We have accelerated an expansion program and expect expenditures of more than $25 million in 2007 to enhance our revenue capability at the existing stores. In 2006 we spent almost $20 million on these improvements. So far this year we've put almost $16 million to work and we've got another $20 million on the board for now and into the first quarter.

We have continued our program of accelerating the painting, paving, and fencing projects and many of our stores and that is basically in an effort to improve curb appeal sooner. Accordingly we have expanded $14 million this year on nonrevenue enhancing projects with a little bit more to go.

To give you a little bit better handle on our interest costs, we are obligated on $462 million of long-term fixed rate loans. Our annual cost to carry this debt included amortization of financing costs is $30.4 million and this should not change until late 2008. The only variable component in our debt structure is related to the $91 million outstanding on our line of credit which carries a floating rate of LIBOR plus 90.

Given all of the above, we estimate funds from operations to come in at between $0.88 and $0.90 per share for the fourth quarter. At that point I will turn things back to Ken.

All right, Dave. Thanks. Well that concludes our prepared remarks so we would be pleased to answer any questions anybody might have.

(OPERATOR INSTRUCTIONS) Christeen Kim.

Could you talk about the share repurchase and what the average price was on that?

Yes. There's two components. We put through about $3.2 million or so this quarter. Part of it was issuance of restricted shares to some of our senior management people and the rest was drift purchases which came in at about $47, right? Plus or minus the shares that we usually (inaudible) about $47.

I know it's lower than our last issuance. I know it's lower than NAV. It's a program we put in place, though, with our existing shareholders. We monitor it pretty carefully to make sure that if it comes in in dribs and drabs and these same people were consistent buyers right up to $62 a share.

So given the goodwill I think we generate and so forth, it is a program we are probably going to be reluctant to curve back. So but it was about $3 million of drift shares at about $47 and change for the quarter.

Perfect. And in terms of the guidance it looks like your outlook for same-store NOI for the year has improved about 50 basis points. Yet the top end of guidance has come down a couple of pennies. Could you just talk about what's going on there?

Yes. I guess the top end was -- should have probably been adjusted after the first quarter. We sort of got out of the chutes a little slow and we are just refining a little bit. I don't think we are looking at the fourth quarter any differently than we did a couple quarters ago but the year itself came down.

So I think we've all been headed at 339, 340 for the year and we just tightened it a little bit, but I think we got behind it and never adjusted the top range.

Perfect. And do you have what the sequential occupancy change in Florida was?

Well this time last year, I think we were up around 92, 93%. Currently we are, I think it's about 86%. But I could give you a breakdown off-line or -- I don't have that information handy right here but that's down about 6 -- 6 points from 92 to 86 down in Florida from this time last year.

Okay and I am just trying I can follow up with you off-line trying to get a sense of whether that market is really kind of sinking down to base levels at this point.

Yes. We -- one thing, we are tracking obviously move ins move outs. The good news is that during the third quarter we sensed that the exodus of people leaving because they had used our facilities due to the hurricanes has ended because towards the end of the third quarter moveouts this quarter actually were lower than the moveouts in the third quarter of last year. So we think that part is over.

Jonathan Litt.

It's Craig Melcher here with John. Can you just talk what your plans are, too, on the credit facility with $91 million outstanding? What we should suspect the next deal to be and when that could be? Typically I think it's (inaudible) get around $100 million, you pay it down.

Yes. Correct. That's -- we are probably going to do something along the lives of what we've done before and that is basically put it into a ten-year unsecured fixed rate note. Just bundle it up, take it off the line and park it with the long-term stuff. (multiple speakers)

What type of rate could you get on that?

I'm looking -- we're thinking probably 10-year plus 200. So we would be looking at probably about in the 6.5 range.

And what is the rate on the line right now?

LIBOR plus 90 which is not that far off. I don't think it will be very dilutive right at this point in time. I think it would be about an interest neutral play.

How was traffic in the third quarter year-over-year across the whole portfolio?

Across the whole portfolio was a little bit positive over what we experienced in the third quarter of last year. Frankly, as I mentioned earlier, Florida's moveouts actually turned positive compared to last quarter. What we are looking at though is we have got to now build up our move ins in the Florida market. That's the biggest issue we have right now and we are doing a number of localized marketing programs down in the Florida areas to build that up. Spending the traditional dollars as well as manpower to increase that occupancy.

Although 86% this time of the year is not bad, our goal though is to increase that over the next couple of quarters by, hopefully, from 86 to 88%.

From the comments, prepared remarks seemed like cap rate or from the transaction activity really hasn't changed much. Is that true both on volumes and cap rates or if there has been any movement, could you comment on it?

There is an awful lot of product out being bandied about for sale. A lot of portfolios -- I guess there's a considerable number of one offs but certainly the large portfolios in the $125 million plus range are floating about. There will be some -- I think there will be some transactions priced between now and, say, the end of the first quarter and that will probably give us a feel for datapoint a little better.

But certainly asking prices have not shown any downward movement in cap rates; and I guess we're sort of almost waiting it out a little bit. I think it will come. Fortunately it seems from a buyer's standpoint somewhat tougher to get financing. The loan to asset value or the loan to -- loan equity part has come down quite a bit. The sellers are not or people owning store facilities are not able to get as high a payout as they used to. Underwriting has become a bit tougher.

Rates aren't so bad that the fact that people can almost do a pseudo sale by refinancing I think will help anybody is to is an acquirer of these assets. So we haven't been that aggressive in acquisitions only because we think we are almost certain cap rates are going to come down a little bit in the coming quarters and I'm sorry go up in the coming quarters but we just haven't seen it yet.

Last question is just on the same-store revenue growth in the quarter. There so, seems revenue growth was up 3.5 but it looks like components the rental rates were up 3.6 and the occupancy was down 140 basis points? I realize other income was up a bit but it just seems -- can you bridge the gap in those numbers?

Actually, it seems strange but when you do the math on the base it comes out that way. I guess I would be better off doing that off-line but if you work through our rent in place and you go through it and you saw what the rate schedule has been across the board a little bit of it had to do with incentives and so forth but -- and that's probably where the big component is you're missing but the in-place rate of 3.5% applied across the portfolio with that occupancy -- it doesn't seem intuitively right. But that is how the math works out.

[Michael Salinsky].

Dave, could you discuss the performance of the three regions -- the North East, Midlantic and Florida? Kind of break that out with regard to same-store performance?

I could but Ken will be better at it, so I will let him do it.

The North East, we enjoyed pretty good performance in many of the stores there in Connecticut and Maine, New Hampshire, in particular, we had some good same-store growth there. And New York in particular the Buffalo market here has been very good for us. The acquisition we made earlier this year helped us out quite a bit.

In the South, Texas has been a very strong performer for us all year. This past year or this past quarter, revenues went up there by a same-store basis about 10% and NOI up by upwards of almost 19% in Texas. On the negative side, if you will, we talked ad nauseaum regarding Florida. We can talk more if you like, but that is still trading downward as far as comparisons on the same-store basis.

We had the Carolinas. We had a great North Carolina quarter and actually the whole year has been good and South Carolina has been just about the reverse of that. We are down about 12% in North and South Carolina for the year but we are about break even on same-store basis in the third quarter. So it seems in South Carolina, things are starting to turn for us there.

Florida is the area that we are spending an awful lot of time and a lot of effort in building up our move ins there. And I think we started seen some positive things with some of the marketing and advertising initiatives that we put into place earlier this year starting with (inaudible). I hope that gives you a little bit of a flavor for it.

No. That helps a lot actually. Also can you discuss the concessionary activity? How that compares to at this time versus last year and what kind of -- you know, what markets you are basically being most aggressive with concessions?

Well, predictably where we've had some issues, that's where we have the most number of concessions and dollar amounts. Florida, it's very competitive there now. A lot of the mom-and-pop sitting in that area, they've gone through the same thing we have and unfortunately many times they're interested in increasing occupancy as opposed to revenues.

So we have to be more aggressive to bring people in there early on, but on a Companywide basis we had probably about -- oh, I would say 25% more occurrences with respect to concessions this year in the third quarter than we did last year. And that's not on a same-store basis, so I don't have that breakdown for you.

But the other thing is we also increased dollar amount that we have had to offer in a number of situations as well.

You have no further questions at this time.

Well, we'd just like to thank everybody for their interest and staying with us through this call. We look forward to speaking to you, I guess, it will be next year. So hopefully have a great holiday season.

Thank you.

This concludes today's teleconference. You may now disconnect.