Life Storage Inc (LSI) 2011 Q1 法說會逐字稿

Greetings and welcome to the Sovran Self Storage First Quarter 2011 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kenneth Myszka, President of Sovran Self Storage. Thank you. Mr. Myszka, you may begin.

Thanks, Melissa. 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 and copies of these filings may be obtained by contacting the Company or the SEC.

Once again, Sovran delivered strong operating results in a quarter, which proved to be very active and productive. Same-store revenues were up by 3% over Q1 2010. Expenses rose by 0.6%, resulting in an increase of 4.4% in same-store NOI. Further, FFO of $0.62 per share exceeded consensus estimate of $0.61.

On the heels of our $35 million acquisition last year, we are pleased to announce that Sovran is in negotiations and/or contract to acquire approximately $200 million of self storage properties. In addition, with an improving business environment we have resumed our expansion and enhancement program with plans to begin construction on nearly 700,000 square feet at existing storage this year.

Regarding operations, we continue to be encouraged by the performance of most of our markets, especially including Florida. We have been able to increase occupancy year-over-year with the use of less aggressive specials and discounts. In addition, despite assessing substantial rate increases on a number of current customers, our move-outs were down considerably year-over-year.

So overall we're cautiously optimistic about our ability to continue to grow our business, both internally and externally. And one note I'd like to make is, I'm pleased to announce that our marketing and IT departments have developed an Uncle Bob's app for Android mobile phone users.

We believe we're the first storage Company to offer an app for our our customers. It currently enables one to find and reserve a space, give directions, pay their bill, sign up for alerts and manage account information. About 11% of our website traffic is now mobile traffic and it's growing. And I mentioned this as a reflection of how fast technology is advancing and how Sovran personnel are leading the storage industry in this area.

So with that, I'd just like to turn it over now to Dave Rogers, our Chief Financial Officer who will provide some details for our quarter's activities.

Thanks, Ken. With regard to operations, total revenues increased $2.3 million, a 4.8% increase over 2010's first quarter and property operating expenses increased by about $400,000 resulting in an overall NOI increase of 6.3%. These total Company results reflect the impact of the store we opened in [Richmond] last fall, the seven North Carolina stores we acquired during the last week of 2010 and the increase in same store NOI I'll get to in a minute.

Our overall weighted average occupancy was 79.2% for the quarter ended March 31, and the average rent per-square-foot was $10.48. The overall occupancy rate at the end of the quarter was also 79.2%, about 40 basis points higher than that of last March was at. Same-store results now include 344 of our 352 Company owned stores. As Ken mentioned, same store revenues increased by 3% over those in the first quarter of 2010. This was primarily the result of numerous little victories. An increase in the same store rent and occupied space from $10.42 to $10.49, an increase in average weighted occupancy of 60 basis points and an increase in other income especially commissions on tenant insurance of about $400,000.

The quarter end occupancy rate for the same store pool was 79.7%, 80 basis points higher than that of last year's March 31 level. Again, we bought occupancy to a bit of a lesser extent this quarter. 87% of our first quarter move-in were given incentive this year as opposed to over 94% of move-ins last Q1.

The average incentive per customer each year increased by $4 to $108 per instance, but because 2,700 fewer tenants were covered by the program, about $150,000 was retained.

Property operating cost on a same store basis increased by 2.75% with modest increases in personnel costs and snow removal expenses leading the way. These were mostly offset by a decrease in property tax expense. This year we're accruing property taxes at a projected 4% and adjusting as we go for successful assessment challenges and actual invoices received.

Overall then with same store revenues coming in at a plus 3% and same store expenses increasing by 60 basis point, same store net operating improved 4.4% over that of 2010's first quarter.

G&A cost for the period came in at $5.8 million about $675,000 higher than last year. The main reasons for this being the anticipated ramp up of Internet advertising cost and the training and take over expenses associated with the acquisition of the seven Carolina stores.

With regard to capital matters, except for a couple of million dollars expended on the expansion and enhancement program, we had virtually no change to our balance sheet in the first quarter of this year. At March 31 we had $400 million of unsecured term note debt, $16 million of line debt and $78 million of mortgage debt outstanding.

The next significant maturities aren't due until 2012, and except for the draw on the line, all of our debt is either fixed rate or hedged to maturity. At present we have $5 million cash on hand and up to $110 million of credit available on the line. We've got some opportunities coming up with which to deploy some of this capacity and I'll talk about those shortly, but I'll just take a moment now to quickly review a summary of some of our key debt ratios at March 31.

Debt-to-enterprise value using $39.55 a share, which was the quarter end price, is 30.8%; debt-to-book cost is 34.7%; debt-to-EBITDA ratio 4.9 times; and debt service coverage 3.2 times. As you can see our balance sheet is strong, it's flexible and we are ready to put it to work. So, with regard to that it's not our usual policy to comment or announce acquisitions until we close down them and we only like to count them after they are hatched. However, we are talking about a pretty significant group of assets under contract and we want to give some color to you as to how we've won the purchases.

Concerning our joint venture batch of stores, we placed the portfolio of stabilized East Coast properties under contract for $160 million, plus about $10 million in closing cost and reserves. Although we are pretty far along in the acquisition process, this transaction will take longer than usual to complete, because there are CMBS mortgages to assume and some bureaucracies just can't be rushed. We don't want to name either the properties or our partner until such time that we'll have the rest of our due diligence finished and the assumption commitments in hand. We [will] say that upon completion we expect the venture to have mortgage funding of about 55% of the total price, our partner will provide 85% of the equity portion and we will put up approximately $14 million for our 15% stake.

We also have five properties under contract with four different sellers totaling about $40 million. Three of these are in markets where we already have a presence; Atlanta, Newport News and St. Louis and two [other] markets where the JV will have its stores. All the properties are less than five years old, quite large and have achieved stabilized occupancy. We expect to acquire these properties on a wholly-owned basis and to use our line of credit to fund the $40 million purchase prices.

All of us here at Sovran are just thrilled at the prospect of adding these properties to our portfolio. They're Class A stores in great markets. And although they are averaging 80% plus occupancy, we see a real opportunity to use our scale in our systems to add significant upside. These are what we've been keeping our powder dry for and we are ready to go.

Concerning guidance, we are becoming more optimistic concerning demand and pricing potential in most of our markets. While we anticipate the continued use of leasing incentives as well as significant advertising and aggressive marketing to improve occupancy, we expect an increase in same-store revenue of about 2% to 4% over that of 2010.

Property operating costs are projected to increase by 2% to 3% including a budgeted 4% increase in property taxes. Accordingly, we anticipate an increase of 2% to 4% in same-store net operating income for the full-year 2011. We are putting some $32 million to work this year, expanding and enhancing our existing portfolio and we've also set aside $11 million to provide for recurring CapEx including roofing, painting and office renovations. We continue to selectively evaluate acquisition opportunities and have as I just mentioned quite a bit in the works, but we've not incorporated these potential acquisitions or JV investments into 2011 guidance.

Core G&A costs are expected to remain at about $21 million total for this year, but could increase significantly if we are successful in acquiring properties and if that occurs we'll have to expense the associated third-party closing costs.

At March 31, all of our debt with the exception of $16 million on the line is either fixed rate or covered by swap contracts that essentially fix the rate. Subsequent borrowings that may occur will be pursuant to our line of credit agreement at a floating rate of LIBOR plus 1.375%.

At the end of March, we had 27.7 million shares of common outstanding and 342,000 OP units. So as a result of the above, we are forecasting funds from operations for the full-year 2011 of approximately $2.61 to $2.65 per share and between $0.64 and $0.66 for the second quarter of 2011.

So, okay, at this point I will turn things back to Ken.

Thanks, Dave. That concludes our prepared remarks and we'll be pleased to field any questions you might have.

(Operator Instructions). Todd Thomas, KeyBanc Capital Markets.

Hi, good morning.

Good morning, Todd.

Good morning. With regard to the joint venture given that the $160 million of properties that they're are stabilized. I was wondering what kind of initial yield you're looking at? Then I was also wondering if you expect to collect management fees and reinsurance income.

We do expect -- yes, we will -- the deal will be structured along the lines of our previous joint ventures. The insurance income is part it belongs to the owner. So the owner, we will collect a fee on what we collect, but the insurance is third party and part of the, a good part of the commissions go to the owner of the -- or the partner of the JV. They go to the JV directly and then we get our share after that.

With regard to the initial yield, on our company owned stores, the $40 million we're a little bit north of seven, we're in the 7.2 to 7.4 range, as in place with regard to the JV properties. So a little less than seven, they're big, they're stable, they're in big markets. So the initial or the in place yield is probably around 6.75 as of right now.

Okay. And then I was just wondering if you could talk about your decision to acquire those properties in a joint venture as opposed to going at it alone.

Well, as I mentioned they're big. The pricing -- it's a solid core investment for the folks we took it to. It would be, given our version to mortgage financing and the mortgage of course that we got in this has been terrific. We're looking at something in the 5.25% range or less. But given our version of mortgage financing and the size of the property, the concentration of assets, we just thought it would be a better bet taken off balance sheet and put our flag on it and earn the fee income and so forth. But it fits the partner's needs, it fits our needs in terms of wanting to get into those markets and put our brand on. But it's a pretty rich deal, they're class AAA assets, but it's at 6.75 initial yield and putting it on our balance sheet we have to issue equity we think going forward and we thought the JV equity slice was more favorable.

Okay. And then given the recovery that you've seen in Florida and also in Texas in the quarter, top line improved pretty nicely. I was just wondering if you can talk about what's driving those improvements in both markets and whether you think these trends are sustainable throughout the year?

Yes. Well, we are pleased with what's happened in those markets. Very candidly there has been a number of years in particular in Florida where things have been so bad, it's about time that they -- pretty easy comps were one thing. We're not out of the woods totally in Florida, but we're encouraged with what we're seeing. I think we mentioned also that our [vacator] are way down, despite the fact that we're pretty aggressive with increases on in-place customers.

So, it just seems the economy seems to be inching along upwards and we're following along with that, as people get more and more confidence that this is going to continue, we think our industry has been and us -- we in particular are going to benefit from it. So, we're pretty optimistic about where we're going over the next couple of quarters.

Okay. And then just lastly, can you talk about what your top line and NOI growth forecast is, what you have baked in the revised guidance for Florida?

It's in the -- it's a little bit lower than what our -- we have for the Company overall. I think it's like 1% to 3% top line expenses similar to maybe 3% to 4% from that standpoint, with NOI maybe a little bit lower than what our -- for the Company, just being very cautious. I think we're going to be able to exceed that, but we're being cautious with that.

Okay. Thank you.

You're welcome.

David Toti, FBR Capital Market.

Hey, good morning guys.

Hi, David.

I just want to ask one question on JV, on following up Todd's questions, is there a infinite life to this joint venture? Are there any sort of time constrains or maybe you can elaborate a little bit on any buy/sell triggers within the relationship or is that not established yet?

Like our other joint ventures, we [expected to be no-outs] before three years and then put it up to a [jump-all] appraisal after that with a set process of appointing an appraiser and a first shot or either side to get at a slightly reduced face value. So we expect the life to go at least seven, probably more than 10 years. There is no flat termination of it. We expect the financing to come in for 10 years and it's usually difficult (inaudible) one of these if you are in a CMBS or a secured financing vehicle. It's not difficult but expensive to get out before that, so we would expect 10 years and then don't have any reason to think otherwise.

Okay. That's helpful. And then relative to some of the expansion that you are planning, is this still largely expansion of existing facilities or is any of this starting to creep into greenfield development classification?

Now it's all existing stores that we have. If you recall, beginning of 2009 we put the breaks on our expansion enhancement program. And now that things are getting better we had a lot of stores that we were going to do in 2009, 2010 that we held off on. We see the demand there. It's not, I'm not going to say slam dunk, but we know what types of the sizes, unit sizes they are looking for, we know how much climate control we need to add to it. And we don't have to -- in many cases we don't have to buy additional land. But in every case, even if we do that, we have the footprint there, we have the people in place. So, the going in yield that we are looking for in those is in the range of 10% to 12%.

Okay. And then my last question just has to do with concession and I am hearing sort of mixed signals from you in the press release and so forth. You expect concessions to remain relatively heavy, but you are seeing some receding of concession levels at least in the first quarter. How should we sort of read the message around concessions there?

Concessions, we are much less aggressive in concessions to new customers than we have been in the past couple of years. What -- just about everybody who moves in with us is paying something now. Now, in the past many times people wouldn't get, we wouldn't start receiving rent from them, full rent till maybe the third month. It's much sooner now that we are getting the money, we are getting admin fees from just about everybody. Many times the first month may have a discount, but by the second month we're receiving full rent from them. So we are still going to be with the concessions, but on a much less aggressive basis than we have.

Did you disclose the amount of concessions in the first quarter in total?

No, I think it was just under -- right around $3 million, which is about $0.25 million less than last year's first quarter.

Okay, great. Thank you, guys.

Jana Galan, Bank of America Merrill Lynch.

Hi, good morning.

Good morning.

I was wondering, can you talk a little bit about what trends you were seeing in April and early May in terms of occupancy and rents per square foot?

Yes. It's too soon for anything in May, but April was pretty much very similar to what we saw in the first quarter. Move-ins were flat, maybe even just a little bit negative to April of last year, and that's primarily because of less aggressive specials. But move-outs were down substantially again for April over last year, about a little over 4%. So the people who we have in there, they're staying, they need storage. During the recession last couple of years, [there's question that] people were moving out, they weren't staying long. Now people who we have in there need storage, they are staying. We expect the average length of stay to start going higher again. It went down during the recession from about 13 months to probably 11.5. We see that starting to creep up again.

Great. And in terms of the rent increases, you are putting on in-place customers, can you kind of give a range as to what they are and about after how many months do you start to kind of send those out?

General rule is, if somebody won't get a net rent increase if they've been with us for less than seven or eight months unless there's some strange circumstances where they got in really at a low price and street rates have gone up. But generally for the first quarter we raised rates on about 15% of our in-place customers. The average rate increase was around 16% and we see that continuing in the succeeding quarters.

Thank you very much.

You're welcome.

Ki Bin Kim, Macquarie.

Thank you. I just want to clarify the last point you made. You said you've sent out rent increase letters to 15% of your customers and also 16% increase?

15% [Is rent] increases and the average increase was 16%.

So does that 15% of customers where does that grow to throughout I guess peak leasing season?

What was the question?

So, I mean 15% of your customers got increases, right?

Correct.

So what -- how does that percentage grow, did that grow to 50% by middle of summer?

We say to them Ki, on the anniversary date, no sooner than a one-year anniversary date for the first round. We expected to hit about 45% of our customers by the end of August, 30% more. So, the rate might not always be 16%, but it will be based on each stores and each unit mix pricing. So we expect another 30% to 33% of our customers will get the increases between now and probably the time we talk again in August.

Okay. And what is the acceptance rate so far? So I guess how many do you have to move out because of that?

There are very few. Very few. See, if you do it rationally and that's what we have our revenue management system for. About half of our customers, current customers are at or below street rate. And so, those are your candidates if you will. And then you drill down to those people at the various stores that they're located at and you look at their unit size that they're in. And if they're in a unit size that has say, 85% to 90% occupancy and there is some pretty good demand, you're going to be aggressive in raising those rates.

If they stay, that's great. If they move out, you've got somebody to take their place. If it's a lower occupied space, you're going to be a little bit more judicious in what you're going to do, what you're going to raise it at all, or if you do, you're not going to raise it as much. So that's basically how we raise the rates.

Okay. And going back to your purchases that you announced, are the yields that you just mentioned, are those -- is there a upside to that and what revenue management systems were in place for those properties before you bought them?

In all cases both the JV portfolio and the individual properties, they were pretty stabilized stores in the low 80% range. Very well run properties all of them in terms of having good managers, having efficient cost control and so forth. What all of them lacked was the sort of the benefit of a call center and the benefit of web based advertising. So, that's where we think -- in a lot of cases where we take over stores, we can usually even by just cutting costs and putting in more efficient systems, raised our yield by 100 to 120 basis points a year out.

We're not going to get that so much from operations on these stores because they have been so well run. But we do think there is a pretty good opportunity for upside just because of the fact that they'll be exposed in a whole different way with web based advertising. And none of them had call centers. So we've got next seven or eight hours a day answering the phone and putting good people on.

So, we expect the growth to come from the top line. It's not going to come right away. But we do expect over a period of a couple of years for these to improve. We're hoping to get 100 to 150 basis points, 18, 24 months out across-the-board, both the JV and the Company owned stores.

And [what is kind of your] mom and pop sellers or larger owners?

Sophisticated smaller ownership groups, I would say.

Okay. And can you remind us what are the typical fee that you'll earn on in your JV manager?

The management fees are typically 6%. There is a refund or a shared cost, of the Internet advertising and a call center fee of 1% of revenues.

Okay. And last question (inaudible). So you guys mentioned that you incorporated a JV partner because it would have been a big five acquisition and you would have to raise equity. But if you look at your coverage ratios and your debt levels, they seem solid and it seems like you could buy [200 million] on your own without having to issue any equity, so I was wondering if you could kind of clarify that comment?

We could. Yes, that would be about it. I think we would be stretched out and so we are always looking ahead. We've got other stuff down the road and it's pretty exciting as well. So, this one has attracted incredible interest I would say. We are not that well versed in the mortgage markets, but we play enough so that we can see what goes on and we just thought the combination of partner funding and excellent mortgage financing, mortgage terms (inaudible) that slice of the pie a better vehicle to go in.

Okay, thank you.

You are welcome.

Eric Wolfe, Citi.

Thanks. Just a couple more questions on the JV. For the one that you currently have with Heitman, it looks like it's only about 50% invested right now. So, I guess why buy the $160 million through your new JV when you still have capacity on the old one?

The old one, I think it was a -- we gave them an exclusive or nine months, at all properties we bought from I think it was July of '08 through March of '09. [That one should have] attracted any properties we bought and obviously with conditions at the time that rolled off and that was done. And that was a fund that Heitman had and I am not sure if it was closed or what the deal is, but essentially that fund isn't buying assets at this time. So it's, I'm not sure what -- it's just a different joint venture, that's all.

All right. And then are you going to receive any acquisition fees for the $160 million? I think you are getting like [0.5%] on some of the old ones.

Yes, we are. I just neglected that. It's essentially a reimbursement of cost, but yes it is a fee for an acquisition. Good memory on that.

And then assuming that you'll, I guess be drawing on the line to make this equity investment and to make the other $40 million acquisitions and also it sounds like you have some another acquisitions teed up later on down the road, what's your eventual plan to turn out the line?

I think we talked about this on the last call, and I certainly talked about it in the past is, we've got better than a year to go before our line expires and our 2012 obligation comes due to the bank group and we've got some mortgage in between to clean up. So, we are actively looking in the debt markets to refinance a whole bunch of stuff. The mortgage is coming due at the end of this year. The [stuff] coming due in mid-2012 and as a result [recaps] our line. So, I am not sure where we are going to go on that. Yes, we are exploring a lot of options, but I think the thing I said last time was sooner rather than later we're probably going to address these next 15 months worth of maturities and put it all of that in one or two related packages.

Okay. And I guess where do you think you could issue, call it, seven to 10 year unsecured right now?

Looks like it's somewhere in the like [2.75 over] average and depending on some of the terms, and actually depending on whether it is seven or 10 there is a quite a jump between the two. But I am -- we are looking at something in the high-fives right now.

Okay. All right. Thank you.

Welcome.

Michael Salinsky, RBC Capital Markets.

Good morning, Dave, Ken.

Good morning.

First question, I think you mentioned that move-outs for the quarter were down significantly. Can you give us a sense of what move-ins was for the quarter?

Move-ins were pretty flat with what they were first quarter of last year. And we attribute that to the fact that we weren't as aggressive with the specials this quarter as we were last year.

Okay. That's helpful. You also talked about renewals. Just curious as to what you are seeing on street rates [most likely] on a year-over-year basis, how much those have moved to this point?

On average about 1% to 1.5% higher this quarter, first quarter this year than last year's first quarter. We've been judicious in where we've been doing it, where we have been increasing it. And you can't be too aggressive when you are not offering as much in the way of specials. So, it's about 1%, 1.5% over last year's first quarter.

Okay. That's helpful. Second, you guys had a nice tax reversal there in the first quarter, it didn't really lower your tax guidance for the year. I'm just curious as to what -- how much you are appealing at this point? Just trying to understand, because it basically implies a very sharp jump in taxes throughout the balance of the year.

Actually Mike what's happening is, we are going to have a sharp jump I bet in Q4, just because we had such a steep reduction. So we're basically trying to level out the year a little bit by doing this. But it won't be a huge benefit next fourth quarter. So that's part of the reason for doing it this way.

We are appealing a lot of the properties and then in 2007, 2008 we had a hard time doing that because we were buying stores and then turning around, trying to say that there were only 70% of what we paid for them. That's not -- we're a little more successful now, but it has been limited. I think we have seven win so far between 2010 and 2011. So, I wouldn't expect a loss from that, but we are very aggressive, we are very active with it. But actually there is a lot of push back.

But it is a little, I guess, it doesn't -- it's not as clear as we would like it to be with our tax situation because three quarters of last year we had increases and we had a massive adjustment in Q4. That Q4 massive adjustment won't be there and probably as opposed to negative it will be a little bit positive, but it's included in overall guidance.

Okay. Fair enough. And on the JV portfolio you guys are buying. It doesn't sound like there is a lot of lease up opportunity. You talked about two new markets as well, just curious if you could give the two new -- plus the two new markets for Sovran and also I don't believe you indicated that's not contemplated in the current guidance [should be correct or not]?

It is not contemplated in current guidance, correct. And hopefully when we talk next in August we'll have closed it, but I'm almost positive given the maze of the CMBS assumption process that we won't close it in Q2. So hopefully it will be a July close, probably late July and there will be some gain from both the wholly owned stores and the JV to guidance, but it's going to be kind of de minimis given there is only going to be probably four or five months worth of it. And I'm going to have to beg off and we'll tip it if we tell you the market. So we just want to lay back on that until we do announce.

Fair enough guys. Thanks.

David Toti, FBR Capital Markets.

Hi, thanks. I just had a quick follow-up. Did you talk about third-party prospects. I know you guys mentioned that last time as being sort of a growing interest area, but I think I might have missed any update.

I'm sorry, could you repeat that?

Did you talk at all about any updates to your third party interests and prospects?

No, we didn't. We did sign our first contract just not too long ago, last couple of weeks for several stores. We've got a lot in the hopper. We just started it last quarter of 2010, but we've got a lot of activity with this and as the quarters go on, I'm sure we're going to be announcing a lot more stores that we'll be managing on a third party basis. But we're very encouraged with the reception we're getting.

Okay. Thank you.

You're welcome.

Thank you. Mr. Myszka, there are no further questions at this time. I would like to turn the call back over to you for closing comments.

Okay. Thank you very much. And we appreciate your interest and participation in our call. We look forward to speaking to you in about three months and hope you have a great summer.

Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.