Life Storage Inc (LSI) 2013 Q1 法說會逐字稿

Greetings and welcome to the Sovran Self Storage First Quarter 2013 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, Diane Piegza, Vice President of Corporate Communications for Sovran Self Storage. Thank you, Ms. Piegza, you may begin.

Thank you, Melissa. And good morning. Welcome to our first quarter 2013 conference call. Leading today's call will be David Rogers, our Chief Executive Officer. Also participating are Andy Gregory, Chief Financial Officer, Ed Killeen, Executive Vice President of Real Estate Management, and Paul Powell, Executive Vice President of Real Estate Investment.

As a reminder, the following discussion and answers to your questions contain forward-looking statements and 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.

At this time, I'll turn the call over to Dave Rogers.

Thanks, Diane. And good morning, everyone.

Q1 started our year in fine fashion. For the third straight quarter we achieved same store revenue growth in excess of 8% and same store NOI in excess of 10%. Occupancy grew again from December to March, surprising us this year. Last year was the first time that happened in our 29 year history and we thought it was a one-time anomaly. Our internet marketing team, revenue management group, customer care reps, and store personnel are all doing a terrific job and their efforts are reflected in our results.

I'll let Andy provide the details on the quarter in a minute. But it was another good one and it sets an optimistic tone for the balance of 2013.

We've bought three stores so far this year, all in markets where we have a significant presence. In mid-February we acquired our 14th store in San Antonio and in late March we acquired our sixth store on Long Island and our 4th facility in the Boston market. The first two are fairly stabilized properties with occupancies in the low 80% while the Boston is considerably more opportunistic. It was only 68% full when we took it over. The properties totaled 131,000 square feet and cost us $22 million.

We've been digging pretty deep to acquire more properties of this type and we do see some opportunities but it's more of a seller's market and the competition for quality assets is pretty fierce. We did bring seven more properties to the Uncle Bob's brand via third-party management contracts this quarter and we're working that segment of our business pretty hard as well. Our balance sheet and liquidity position are solid. Debt to EBITDA and debt service coverage ratios are strong, and our maturities are for the most part far out and well strategized. We also have plenty of dry powder available. So, we're well positioned to capitalize on opportunities as they arrive.

With that I'm going to turn the call over to Andy Gregory.

Thanks, Dave. Regarding operations, same store revenues were store again, increasing 8.1% over those of the first quarter of 2012. This was our third consecutive quarter of 8% or greater same store revenue growth. This was primarily the result of a 530 basis point increase in average occupancy and a modest increase in rates. Same store occupancy at March 31 was 87.6%, a record for our Company for the month of March. We also continued to see continual increasing in tenant insurance commissions on a year over year basis.

Total property operating expenses on a same store basis increased by 3.3% as a result of some expected increase in snow removal costs, credit card fees, and real estate taxes. Partially offsetting these increases was the continued decrease in Yellow Page spending.

As a result of the continued strong revenue gains and more normal expense growth, same store net operating income increased a very nice 10.6%. This was our third consecutive quarter with over 10% same store NOI growth. G&A costs were $1.2 million higher this quarter over that of the previous year. Aside from the $200,000 increase in internet advertising, the main reason for the increase is the fact that we operated 21 more stores at the end of this quarter as compared to January 1, 2012 and our continued investment in revenue management and training programs. Offsetting a portion of the overhead costs is an increase of almost $170,000 in third-party management fees earned this quarter.

Regarding property, Dave mentioned the three stores we purchased during the quarter for approximately $22 million. These purchases were funded by our ATM issuances. During the quarter we also sold one storage facility that was part of a consolidated joint venture for net proceeds of approximately $4 million, resulting in a gain of $400,000.

We made acquire additional mature properties although none are under contract for sale at this time.

From a balance sheet perspective, as was anticipated, we issued 822,000 common shares under our ATM program resulting in net proceeds of approximately $50 million. We used the proceeds to purchase the three properties in the quarter and to reduce the outstanding balance on our line of credit. This is part of our strategy to continue our conservative and flexible balance sheet by limiting floating interest rate exposure, staggering our debt maturities, and keeping our assets almost entirely unencumbered. At March 31 we had $6.9 million of cash on hand and $174 million available on our line of credit including an accordion feature.

With regard to guidance we have included in our release our expected ranges of revenues and expenses for the second quarter and the entire year. Same store revenue for Q2 should be in the 6.5% to 7.5% range and NOI growth around 8% to 9% for the quarter. For the year we have increased our same store revenue as mentioned to between 5.25% and 6.25% and increased our NOI growth to the 6% to 7% range. Core G&A expenses are projected at $34 million including $4.4 million of net internet advertising. We have not assumed any additional purchases or sales of properties in our guidance. Nor have we included the related acquisition costs incurred to date or that could incur in the future.

Our guidance assumes a weighted average diluted share count of 31.4 million shares for the remainder of 2013 which includes the 822,000 common shares issues during Q1 through the ATM. As a result of the above assumptions, we are increasing guidance and are forecasting funds from operations for the full year 2013 at between $3.54 and $3.58 per share and between $0.88 and $0.90 per share for the second quarter of 2013.

With that, Melissa, we will open the call for questions.

Thank you. (Operator Instructions) Our first question comes from the line of Nick Joseph with Citi.

Thanks, guys. What were the cap rates on the two stabilized assets required in the first quarter?

Hi, Nick. This is Paul. The two stabilized was 6.5 in place cap rate on the San Antonio property and it was 5.1 for the property on Long Island.

You mentioned there's fierce competition for acquisitions and you might accrue additional properties in 2013. Can you give us a sense of maybe the size of potential disposition?

We've got six properties now that we are in the market for about $30 million.

I guess last question, for the $100 million of debt coming due in September, do you still plan to turn that out? What sort of rates are you seeing in the market today?

Yes, Nick. This is Andy. We do plan to turn that out. We're looking at a few different options right now. It's not prepayable until September so we can't do it early but we have a lot of options to turn that out and rates are 200 plus lower than it's currently at.

Alright. Thanks.

Thank you. Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Hi. Good morning. I'm on with Jordan Sadler as well. First, in terms of acquisitions, only the $22 million are currently in the guidance, it sounds like the competition is sort of intensifying. But there were also a couple of conferences I guess early in April and I was wondering what you think might be a reasonable assumption to assume for this year based on what you're seeing, whether the pipeline is starting to build a bit?

Yes. Hi, Todd. During the conferences we did hear of some other portfolios that will probably be coming to market. Again, there's a lot of money in those deals. We feel that we'll certainly be in the game but we do better with off market deals that we are starting to see a little more activity there. So, hopefully going into the second half of the year our activity should pick up. Our guys are still about $100 million so far this year, maybe $150 million but it's going to be fierce. We're looking at off market deals.

The $100 million or $150 million though that you think is reasonable, that's not included in the guidance, that's just what you think would be a reasonable assumption for the year?

That's correct.

Then I was wondering if you could share with us where occupancy was at the end of April and what that spread looked like year over year?

Hi, Todd. It's Andy. At the end of April we were at 88.2. The spread over the prior April was 430 basis points. It's still increasing nicely. Our revenue management team probably says it's a little bit too high at this time of the year but we're happy with it.

Does that mean that you might get a little more aggressive with rate or maybe your use of concessions at this point given that you're a little bit ahead in terms of occupancy to where your revenue management system would be telling you?

Hi, Todd, this is Ed. Yes. That's exactly what it means. This quarter and looking at Q2 we certainly have to see what the selling season brings to us but we can see concessions or incentives being suppressed a bit and our asking rates continue to decline.

Just lastly, I was just looking at the two New Jersey properties that you have listed in the consolidated portfolio. I was just wondering what the decline in occupancy and also revenue and NOI was at those two properties and I was wondering if that performance was also consistent with the properties that are own in the joint venture, I think the Lackland properties that were acquired several quarters ago.

Yes, Todd, that's unusual. One of those two stores had a fire and that's what caused the decline. We had to close the store for a few days and get some negative press. Everything's back up and running but that hurt that store for the quarter. The Lackland portfolio is performing very well.

Great. Thank you.

Our next question comes from the line of Christy McElroy with UBS.

Hi. Good morning, guys. Just to follow-up on Todd's question, in the guidance discussion in your release you talked about increasing rental rates. Just with regard to the same store realized rent growth which is up slightly at about 4% I think in Q1, can you quantify some of those drivers behind that number? What was your year over year growth in asking rents and discounts and by what degree are you raising existing customer rents?

Hi, Christy, it's Ed. Right now our asking rates are up 5.9%. We'll see what happens as we head into the selling season and by end of Q2 we see that gap declining a little bit but we'll see what happens. They're still very down. The incentives also are down significantly. The number of incentives offering to our customers are down from 82% to 73% this year and the value of those incentives are also down 16% to just over $65 a month. We see the ability to continue to suppress our incentives a bit.

And then existing customer rents? I think in the fourth quarter you were up 3% to 5% if I'm recalling correctly? Is that about how much you're raising rents on existing customers?

The value of those in place, actually it's up quite a bit. For those customers that are receiving incentives we're at over 7% so the value of those incentives, the rate increases, up 7.5% right now for those folks that are receiving incentives -- excuse me, rate increases.

You said that asking rents were up 5.9% in Q1 but you expect that gap to decline in Q2? Is there a reason for that?

I think what you have, Christy, is the 5.9% was at the end of March as -- with our occupancy where it is, I think that will hold. At some point we're going to be pushing up against some tougher comps during the year. That will decline. Just the delta in occupancy will decline but some of it will be made up in rate. That rate delta will also decrease later in the year.

Okay. And if I just think about sort of by year end, if I think about your occupancy delta declining and your rents hopefully rising and your realized rents hopefully rising, where do you think logically by year end do you think you will be? I know you don't guide to this specifically but in terms of year over year rent spread and where you hope to be with realized rent growth by year end?

We're maximizing revenue. So, there's a couple triggers there. Last year it was mostly occupancy. This year that occupancy delta is a little shrunk. Rates will come back if the hold the second half of the year, we'll be sitting pretty. But right now we're assuming they potentially won't hold the second half of this year. Right now we're at 5.9 at the end of April, we're 5.9 at the end of March, 6.8% increase in rents at the end of April as compared to last April. So, it's going in the right direction. If it keeps going in that direction our guidance will be a little conservative.

And then really one last question if I could. In the release you also commented about marketing initiatives helping to reduce some of the seasonality. Can you talk about how your web marketing has evolved over the last year or two?

It's evolved quite a bit. Web marketing as a whole, it's very dynamic. Things change very quickly. There's a plethora of analytics to review throughout the quarter and throughout the year and Google dictates quite a bit of that because their algorithms are continually changing. And we have to keep up with exactly what Google is doing. And as we've adjusted over the last year or so, it's one of those items that really separates the REITs and the larger operations from the rest of the field out there, the technology, the people, and the resources to manage all the web initiatives, whether it be the organic search or the sponsored search or the target mobile marketing.

I can tell you this, in regards to mobile alone that is becoming the real drive. Mobile traffic alone unique business is up 138% versus overall traffic at 40% some and desktop is virtually flat at really under 1% growth. Things are beginning to shift. The mobile application is also expensive to advertise right now. We'll see what happens over the next year. Every quarter, every year is a different picture when it comes to web initiative.

Thanks so much.

Our next question comes from the line of Jana Galan with Bank of America-Merrill Lynch.

Thank you. Good morning. I just had a quick question on the credit card fees. I think last year you and your peers saw a little bit of benefit from the credit card companies. Is that now reversed?

It's Andy. Yes. That has reversed. The Visas and MasterCards of the world have found new fees to put in place to recoup some of that. It won't go up to the level it was before but they are recouping that. That's going to look odd. It's going to look high until a few quarters this year and then it should level out.

Thank you.

Our next question comes from the line of Todd Stender with Wells Fargo Securities.

Hi. Thanks, guys. Any further details on the Boston asset you acquired? It sounds like it had the biggest lease up opportunity. Just wanted to see how old the property was and what the in place rents are and how they compare with the market rent?

Good morning, Todd. The Boston property was developed about 3.5 years ago. It's a conversion. It was kind of a mom and pop operation. It had very poor results on the internet as far as search results. Its in place rents were I think $13 to $14. Their asking rates were quite a bit higher. They were giving a lot of discounts. We expect to do a lot better. The signage was poor on the building. With our sign -- it's a great location, very visible. We just felt it was under-managed. We're going to be placing -- its occupancy was around 68% when we bought it. We're expecting a growth of 150 basis points to 200 basis points year one and we'll be pushing in place rents or trying to get in place rents closer to our ask rents.

That's helpful. And you also added seven properties to your third-party management platform. What's that number up to now and can you describe in general what you're doing differently to land more of these opportunities than when you really first entered the space?

From a number point of view, Todd, we have 55 in joint ventures and 21 straight managed stores at the end of the quarter. We're up to 21 strictly managed third-party stores.

We've been at this for a year and a quarter now, Todd, and it's as we've said before, we really want to make sure that we bring the right stores into the mix, the stores that we want to put our Uncle Bob's brand on, presumably to own them down the road. We want to make sure that the owners we team up with and we provide the services to have the necessary I guess financial depth if nothing else to make sure we can bring the deferred maintenance up to speed, that they can be there to support the stores. We're aggressive in our search. We're aggressive in meeting with people. We're probably not as aggressive in taking it right to the closing table and signing up. I don't know exactly what the ratio is but I've got to believe it's something on the order of four or five to one opportunities that we look at and have interest in and actually close.

Any geographical area that you're focusing on or just in general where you have the scale with your existing portfolio?

Certainly for both acquisitions and third-party management, everywhere we are has a priority, the markets we're in. We are exploring new markets all the time. If there's any scale at all to be had in that first y right, that really entices us. So, I'm not going to say we would do a one or two off management contract in a market where we don't exist but we would look at the acquisition opportunities combined with the management opportunities in new markets and if we can get to a reasonable base in a year or 18 months, say four to ten properties, we would go there.

Great. Thank you.

Thank you. Our next question comes from the line of Jeremy Metz with Deutsche Bank.

Good morning, guys. I was just wondering. You were talking about occupancy bucking some of that typically seasonal trend this quarter being stronger maybe that you'd expected. Looking at the rest of the year I think on the last call you said there was about 250 to 300 basis points of upside baked into guidance. Has that changed at all given they shrunk first quarter and what you're seeing so far in Q2?

Hi, Jeremy. No. We're still looking at in the peak in the July, probably the 250 to 300. So, we'll be pushing a high 90, maybe 91 that time. It's really going to be a mix though. It's maximizing that revenue. The mix of that occupancy growth is -- but the rate push now is going to be more of a factor this year.

Okay. And just given some of this strong growth in occupancy, have you seen any noticeable increase in your length of stay of the customers you have and along that same line, where are you sending out renewals on existing customers?

Well, our length of stay actually is quite long for those customers who stay with us over a year, we're up about I believe 2%.

52.3% of our customers are with us for more than a year.

And as Andy suggested, what revenue management is coming up now as opposed to last year is that we should be looking at in place and asking rates and we will certainly be pushing in place rents up quite a bit as I suggested earlier. They're pretty fine at 7.5% and while we didn't put many rent increases in place for the quarter, the number of increases that we put in in April doubled what we did for the quarter and we see that trend continuing throughout the second and part of the third quarter.

How does that, the 55.3%, how does that compare to the year ago period?

It's almost 2% higher.

Just one last one. You talked about some benefits from reducing Yellow Page spend and I think one of your peers is completely moving away from it. Have you given any thought to doing away with Yellow Page spend and focusing on internet and mobile advertising?

Jeremy, we have done that with the exception of line listings. The benefit of reduced Yellow Page spending is pretty much burned off. There will be I believe 100 -- I'm not sure exactly what the number is but you've got to spend just a little bit to maintain listings and in a few of the weaker markets where we see the internet use is extremely low we have a very few ads out there with the larger whole page, half page, quarter page ads. That might equal $10 at the end of the day. Yellow Pages is pretty much that.

We think, Jeremy, we'll level off at about $600,000 or $650,000 a year, down from $4.5 million four years ago.

Okay. Great. I appreciate it guys. Thanks, Ed.

(Operator Instructions) Our next question comes from the line of Paula Poskon with Robert W. Baird.

Good morning. You talked in the press release that some of the revenue growth was driven by strong growth in insurance commissions. What's your insurance penetration rate right now?

It's up slightly at 52% and our capture rate is also up just a bit. Current capture rate is 79.6%.

Thank you. And then, Dave, just a big picture question for you. There's obviously been a lot of discussion in the investment world about the valuations of the storage space and being at historically low implied cap rates, do you think there's been a permanent repricing of the assets broadly in the sector or do you think that's just true for the REITs given the power of the technology platform? How are you thinking about that going forward?

I do think it's across the board pretty much, Paula. We put a lot of emphasis on technology on the platforms and I think a lot of investors see that value can be had. To the extent now that we're hearing about development talk and there's been more certainly at the trade shows than there was last year, a lot of those developers have seen the light so to speak and are talking to I imagine the other bigger players just to see what's involved in laying out the store the way we might want, laying out a marketing plan, before there's even a permit filed or approval and entitlement granted to see if we're interested in managing those stores. So, I think the idea of these stores being managed professional and with a pretty good degree of technology involved has brought to the people in the business the fact that these stores can be valued higher with the platforms in place. I think you can certainly see it in the valuation of our Company and you can measure it every day but I think it's penetrated into the smarter operators at every level. It's a pretty big shift. It's not as big as crossing the dot-com bubble where everything we did from the late '80s through the late '90s into 2000, these assets were priced at 9.5 cap. It was a seismic shift through the 2000s to the present, let's call it 6, 6.5 cap. It's a little wordy but I think it's across the industry. It's not just the big guys.

Thanks very much.

Our next question is a follow-up from Todd Thomas with KeyBanc Capital Markets.

Hi, guys. It's Jordan Sadler here with Todd. I just wanted to sort of focus in on that cost of capital question a little bit. What's embedded in the guidance in terms of taking out the term debt that matures in September and maybe even cleaning up the line balance? What are you thinking given that interest rates are falling to these levels?

Jordan, the September renewal, the debt due in September, we have a lot of options. What's baked into the guidance is a 200 basis points decrease in that rate on that. We want to push that out numerous years. That's our plan, to push it out long-term. We don't intend to take that down with equity.

Could a bond offering be in the cards? It seems like you're closing in on 250 if you potentially line up a few more of these acquisitions.

That could be. The idea of a 250, 300 million being the indexed eligible level, I'm sure we wouldn't do a bond offering if we didn't have that. We would not go out in that level. We're looking at that -- I've got to say given our acquisition volume prior to September 4, we're not counting on it. We're not looking at term notes. We're looking at bank lines. We have the advantage that we have a lot of options right now. We have positioned our balance sheet really well by accelerating our ATM offering and put a few dollars more equity into the mix and a little less debt. So, we've got a couple months I guess to really work it through. We would love to do a public deal. We're just not sure that we're going to have the mass at September to do it.

Yeah. I think, Jordan, it's more likely that 2016 note, when that comes due, will be our initial public debt offering. But it depends on acquisition volume.

Okay. Don't be too hasty. The other question is regarding the equity. The ATM issuance, during the quarter was a bigger than we had. Plug in your number. It brings our numbers down a couple pennies. I would imagine your guidance reflects at least the $50 million you did in the quarter. So, that's dragging the guidance down by a couple pennies or so at the midpoint. Is there anything else? Are you expecting you'll continue to tap the ATM incrementally either in guidance or conceptually?

It really depends on acquisition volume. Right now we don't see tapping the ATM unless acquisition volume is significant. We think for the year we have significant acquisitions in September. We caught up on some of that by paying down with the ATM. We don't -- there's nothing in guidance right now that we would issue more under the ATM. Pretty much the share count is what it is today with some slight upticks from dividend reinvestment and that type of thing.

What's left on the ATM at this point?

It was $175 million. So, $125 million remains.

Okay. Thank you.

Thank you. Our next question comes from the line of Josh Patinkin with BMO Capital Markets.

Hi. Good morning. Thinking more long-term in terms of Yellow Book advertising spend, does it make sense to hone in on one operational aspect, that is the internet, and cycle capital out of the lower internet penetration markets that you're in?

We pretty much are out of all the Yellow Page books with the exception of listings and just a 10, 12 books out there among our whole portfolio. The lion's share of our ad spending is in web. I'm not sure if that answers your questions but that's where we're sending the money.

And in the markets where there really isn't that much internet penetration for your customer base, is it then -- how do you square the advertising spend on Yellow Book versus internet or -- ?

That is a good question. It's not as if in those markets we reduce our web spend. You have to be there no matter what. It's just we augment that with a little bit of Yellow Page spending for those customers who just have not yet migrated over to web. But it's not as if in those markets, those very few markets, primarily down low in the Gulf area, that people are not using the web and we really have not reduced spending there. We just do a bit of Yellow Page spend.

Okay. On the third-party business, generally speaking, where does occupancy come in at when you get control of the assets?

Oh, it ranges from zero on a new development to -- we've taken over some decently run properties that are receding a little bit maybe or have some rate issues. I would say zero to 90 and all points in between.

So, suffice to say that when you do get control of them there's significant -- you succeed in restoring occupancy?

Most of the time. Sometimes it's a question of the ownership is concerned that there's new hits, their move-ins are decelerating significantly and they're looking to us to basically prop them up on the web and in some cases they're sold under new management. I would say probably two-thirds or three-quarters of what we bring in is an occupancy issue but not to leave the other stuff off.

Do you operate any off of the Uncle Bob's brand?

No. That's a requirement. We brand them Uncle Bob's right away.

Okay. And lastly, in terms of scalability I think last time we spoke you said you need 100 stores or more to really scale this business today. Where do you fall on that question now?

I think -- I'm not sure how that got interpreted that way. -- scale, I think what we were talking about with regard to scalability was the margins on managed stores are significantly less. The fee income that we bring in, we're probably only making somewhere on the range of 15% to 20% margin on that versus 65% margin on wholly owned stores. So, I'm not sure where the 100 stores came from.

I'm sorry. Not for your third-party business but for the storage business in general, about how many stores do you need and how much AUM?

Oh, okay. I think it's a lot more than 100 then. To do what we do, even if you're willing to spend an average of $10,000 or $12,000 per store on the web and you can then spend -- at 250 stores you're spending $2.5 million, that's only part of the puzzle and on the scale game certainly the fact that we actively manage the process of knowing where to buy on the web, when to buy, time of day -- there's a lot that goes on here that in addition to the media buy and web buy you're doing, you have to have people to manage it. Likewise with revenue management.

We've got a team of four pretty sharp guys that are running the concept of revenue management throughout the whole system. So, we pay for the basic process, the software and the way to do it but we also have an ongoing cost. I'm thinking if you're talking scale now, you're easily in the 250 to 300 store range to make it work in terms of the technology. And it used to be 225 for a call center. That's probably the one piece of technology that the number of units have come down with, the advances that have been made in the 15 years that we've had our call center, 13 years, have been pretty significant. That -- just doing a call center deal like we did over a decade ago, that's come down. But the other two platforms are I'm sure somewhere in the range of 250 plus.

Okay. Thank you very much.

Thank you. Mr. Rogers, there are no further questions at this time. I'd like to turn the call back to you for closing comments.

We thank everyone for their interest and look forward to seeing you on our next call. Have a good spring.

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