Life Storage Inc (LSI) 2014 Q1 法說會逐字稿

Greetings. Welcome to the Sovran Self Storage First-Quarter 2014 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.

I would now like to turn the conference over to your host, Diane Piegza, Vice President, Corporate Communications. Thank you, Ms. Piegza. You may begin.

Thank you, Rob, and good morning, everyone. Welcome to our First-Quarter 2014 Conference Call.

Leading today's call will be David Rogers, our Chief Executive Officer. Also participating are Andy Gregoire, Chief Financial Officer; and Paul Powell, our Executive Vice President of Real Estate Investment.

Each of you should have received a copy of our earnings release last evening. If you did not and you wish to be added to our distribution list, please email invest@sovranss.com.

As a reminder, the following discussion and answers to your questions contain forward-looking statements. Sovran's actual results may differ materially from projected results. Additional information concerning 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 will turn the call over to Dave Rogers, Chief Executive Officer.

Thank you, Diane. Good morning, everyone. Our first quarter was a good one. We were a little surprised by the topline growth, pleasantly, and it was primarily due to the fact that our move outs abated pretty significantly.

We thought that maybe the harsh winter deterred our customers from vacating, but the properties in the good weather states like Florida and Texas did no worse than our storage in the harsher climates. So we're going to credit the slowdown in move outs to the pricing strategy we implemented in 2012 where we put less emphasis on move-in incentives and more focus on the regular monthly rate.

It paid off big this winter, because in a traditionally weak leasing period, we increased occupancy by over 300 basis points. Not because of higher traffic and new tenants, but because of greater retention of existing tenants. Andy will give the rest of the details, but Q1 gives us a great jump out of the paddock to start 2014.

Most of the acquisitions we did in the quarter had already been completed as of our last call, so as happy as we are with the new storage, I won't go bragging about them all over again. We did add one to our Chicago portfolio at the end of March for $8.7 million, so that put us at almost $100 million invested for the quarter.

We have quite a bit in the hopper right now with some $120 million+ under contract and much more under consideration. It's a very competitive market, though, with a lot of folks willing to pay up for anything resembling a decent store in a decent market.

Before I step aside, I'll reiterate what we've been saying over our past 7 or 8 earnings calls concerning the storage sector. Demand is picking up. Customer awareness continues to grow. There is noise about new supply coming on in some markets, but we expect the impact to be de minimis for at least the next couple of years.

The bigger operators, with the scale to develop and staff an integrated set of marketing, RMS, and customer service platforms should continue to win an outside share of the market. Times are good, and we expect that to continue.

Okay, Andy, go.

Thank you, Dave. Regarding the operation, same store revenues increased 8.3% over those of the first quarter of 2013. The growth was the result of a 310 basis point increase in average occupancy and a 3.4% increase in rate. Same store occupancy held up well during the slow season, and was 88.9% at March 31.

Tenant insurance income continued to show strong growth, increasing 37.3% for the first quarter of 2014 as compared to the same period in 2013.

Total operating -- total property operating expenses on a same store basis increased by 6.4%, primarily as a result of the increased utilities, snow removal cost, and the expected increase from property taxes.

Expenses benefit from the lower than expected payroll and benefits expense.

Same store operating income increased 9.3% for the quarter.

We have included in our release some additional data on previous same store pools to give our investors more color as to the excellent performance of our more mature stores. In addition, the data highlights how the implementation of our technology platforms on the 2012 acquisitions was able to further drive our growth.

G&A costs were $1.2 million higher this quarter over that of the previous year. Aside from a $366,000 increase in internet advertising, the main reasons for the increase were the fact that we operated 22 more stores at the end of this quarter as compared to January 1, 2013; our continued investment in revenue management; and incentive compensation.

Offsetting, of course, of the overhead costs was an increase of approximately $125,000 in third party management fees earned this quarter.

Regarding properties, Dave mentioned the 7 stores we purchased during the quarter for $95.4 million, and the 17 stores we have under contract for over $120 million.

Our acquisition for 2014 has started strong. We have a lot in the pipeline, and we're expecting to acquire a good number of quality properties.

From a balance sheet perspective, we finished the quarter in a very solid position. During the quarter, we issued 359,000 common shares through our ATM program, resulting in net proceeds of $26.3 million, and borrowed $66 million on our line of credit to fund the acquisition of the 7 stores.

Subsequent to the end of the quarter, we issued $175 million 10-year term note, earning interest at 4.533%. The proceeds were used to repay the entire $115 million outstanding on our line of credit.

Subsequent to the issuance of the term note, we have approximately $60 million of cash on hand and $250 million available on our line of credit, including its accordion feature.

With regards to guidance, we have included in our release the 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 also around 6.5% to 7.5% for the quarter.

Expenses outside of property taxes should be in the 4.5% to 5.5% range. And property taxes for the quarter are expected to increase very similar to Q1 at between 10% and 11%.

Core G&A expenses are projected at $39 million for 2014, including over $5.1 million of internet advertising.

Our guidance assumes an additional $100 million of acquisitions weighted equally over the next 9 months. We have also included the dilutive impact of the $60 million in cash resulting from our April term note until such time that those proceeds are deployed for acquisitions. We have not included in guidance the related acquisition cost incurred to date or that could occur in the future. Our guidance assumes a weighted average diluted share count of 32.9 million common shares for 2014.

As a result of the above assumptions, we are increasing guidance and are forecasting funds from operations for the full year 2014 at between $4.25 and $4.29 per share, and between $1.03 and $1.05 per share for the second quarter of 2014.

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

Thank you. (Operator Instructions) Christy McElroy, Citigroup.

First, I just wanted to say thank you so much for the new same store disclosure. It's great and much appreciated.

Dave, you talked in your opening remarks about less of a focus on move-in incentives. Can you sort of talk about what was the year-over-year decline in discounts? And what do you think the impact of that decline was on your 3.4% growth in realized rents for the quarter?

Hi, Christy. It's Andy. The concessions on a same store basis went from $1.9 million to $1.57 million for the quarter. So there was about $320,000 decrease in incentives during the quarter. So it's about 50 basis points of revenue growth.

Okay. And then in terms of occupancy, you were at a 340 basis point delta as of quarter end. Where are you today year over year, so at the end of April? And how do you see that spread trending through the year?

At the end of April, we were at 330 basis points above last April. So we're at 90%. We're at 86.7% at the end of last April. We would expect that to shrink as we go through the year, but we're going to -- for the whole year, we expect probably a 300 basis points on average for the whole year.

So you're talking about sort of 93%, maybe 94% occupancy during the peak quarters. What changes in terms of your pricing strategy? And if you're at sort of the 3.5% realized rent growth today, where do you see that going this year and next?

You know, it is -- the revenue management system's going to dictate that, how we maximize revenue. But right now, if we said we would expect some 3% increase in revenue from occupancy growth and probably 3.5% from rate growth.

Okay. And then just lastly on acquisitions. I'm wondering if you could talk about the extent to which you're looking at certificate of occupancy deals. What makes them attractive, how do you think about valuation? And how much of the $200 million or so of acquisitions do you expect this year could these deals comprise?

Hi, Christy. This is Paul. Yes. We are talking with quite a few developers in some of our markets, some of our larger markets; we're doing some C of O deals. We've got a few in the pipeline.

We feel this is a good way to continue to grow in some of the bigger MSAs that we want to be in. We know the markets. We can do a decent job projecting a 5 year lease-up period.

We're working with developers and different models and how to value based on today's -- based on the cap rates at stabilization, and then doing a discounted cash flow for today.

So, we�re -- we hope to do a few. I don't think we're going to do too many this year. We have a couple that we would probably close this year, maybe $5 million or $10 million worth. But going into 2015, we hope to do maybe another $10 million or $15 million more.

It's a big platform, Christy, for our 3PM, our third party management group. We have a lot of people who are interested in developing. They would like us to manage their stores. And we found that if we're going to put that kind of effort in, we would like to have the opportunity, maybe even the right, to buy them first.

So it�s -- it takes the right developer, certainly. There's a lot of people who think they can do it, and we've discarded a lot of that already. But if it's a market that we know, it's a market that we like and a developer that we trust and think understands the market, I think it will be something we'll do, and if it hasn't been anything we have done. So this is a new way for us to go.

Thank you, guys.

Ross Nussbaum, UBS.

Can you talk about the greater retention of existing tenants that you referenced was helpful in the quarter? Specifically, can you talk about the average, or maybe it's more impactful to talk about the median length of stay and how that's been trending.

Hi, Ross. It's Andy. What we look at is the number of customers that have been with us more than one year and more than two years. And that the customers with us more than one year at the end of March were 57.4%, which compares to last March of 55.3% on the same store group.

So, that's the number we're growing. That's what we want to see. Those are the numbers. The longer-stay customers that we can push rates on, put rate increases on. So that's the number we look at and it's been growing.

And that was for the customer staying more than one year. Did you have those numbers for the more than two year group?

Yes, the more than two years, last -- in 2013 March it was 37.6% and now it's 39.45%.

Okay, that's helpful. Second question on the acquisitions. For the $120 million that are under contract, what will be the going in, initial cash-on-cash return? And what are you modeling for a stabilized yield, and when do you expect to achieve that stabilized yield?

Hey, Ross, this is Paul. The $120 million we have under contract now, overall, we expect the first year going in cap rate to be a little bit north of about 6.75 -- or excuse me, 6.5 to 6.75 as a cap rate.

And then subsequent to the end of the first quarter, we did -- we do have under contract another $21 million. Those cap rates, one of those is a C of O deal. None of these are -- we're still in our due diligence, so some of these could fall out, but one of them is a C of O deal, so that will have a zero cap rate near 1. But those should be about a 6.5.

So, what we have under contract now, year one cap rates should be around 6.5 for those 10 properties. Or excuse me, 20 properties.

Okay, that's helpful. And in terms of geography, I assume are these existing markets?

All of them are existing markets. Some in New Jersey, San Antonio, Atlanta, north of New York City, north of New York City, and then another one in Chicago.

And the last question I would have is clearly the occupancy numbers have been stronger than I think anybody would have expected, but the rate growth has been stable. I don't think anybody's complaining about that. But when we roll forward 12 months from now, and you're -- I assume you're not going to be able to push occupancy to 97%. That might be theoretically impossible for the sector.

What does your experience tell you the pricing elasticity is for your customer base to accelerate that 3.5% rate growth?

I wish you were asking us in June. I think we would have the benefit of a lot of call volume and a lot of tests over the next couple months.

We've had some decent success the last, this past quarter, but on a limited call volume. We say it's the slow season, and you don't see it anymore because our rents have sort of flattened out pretty much. But certainly in terms of our call center and our internet queries, the volume is down December, January, February, March. Starting now, it's picked up. We think it's a couple weeks later than last year, but it has started to pick up. Now is when we really get to play and test and probe.

We feel pretty good. We're probably, I would hope we're going to be light on our revenue growth, because all the models show that we should be able to push higher. But as we've talked about before, when you're at 92%, 93%, that means you've got a lot of your popular units pretty close to full, if not absolutely full. And you're -- if it was a streamlined matching unit size perfectly to what the market wanted, we could have a better exercise in terms of how this modeling works out.

But you're right; we're not going to get to 95%, or certainly 97%. It's just, it can't be done on a practical basis in our sector. We'll be pushing harder than we have in the past few months because we've got the opportunity to catch a call, lose that potential customer, but have another one ring right behind them.

I think it's going to be better, Ross. I just -- we've got to see. We think a lot of the supply has been sopped up in the mom and pop parts of most of our markets. So I think for pricing, this will be a good test. May and June will be a good test as to what pricing power really is all about. I think it's going to go the right way, but we don't have the confidence quite yet to forecast it.

Appreciate it.

Todd Thomas, KeyBanc

I echo Christy's comments. Appreciate the new disclosure on the same store.

So by my back of the envelope math, it looks like for the 28 properties that were acquired in 2012 that entered the same store pool that the occupancy lift on average was around 15%, maybe 16%. So, you took occupancy from around 70% to 85%, which is a real strong pop. And I was just wondering if you can talk about the opportunity you see to continue buying property and realize this kind of operating upside.

Hey, Todd. This is Paul. Yes, we -- some of those deals we did in 2012 were some lease-up opportunities. And it did take -- we did well over the last two years leasing those up. That's why we got that pop.

We are still looking at some lease-up opportunities, but mainly it's more stabilized assets. So, we're really looking at more topline growth on some of our acquisitions.

Of course, we do like to see some physical occupancy growth potential as well, but it's -- we're not seeing some of those -- those were a couple of larger portfolios that we had purchased that did have a lot of run rate left as far as occupancy growth.

Todd also, this is in large part the reason we're feeling comfortable about going after CO deals. We think the average length of a lease-up for most operators might be in excess of 4 years, but with our platforms and what we see we can do with stores that have sort of lagged -- languished for 3 or 4 years at 60% or 70% occupancy, we come in and in a year's time with our platforms, bump them by 1500 basis points. We feel that taking over a CO deal with the right platforms in the right market can get us there a lot quicker than 4 years and make it work for us.

So that's -- in an answer to the first part of your question, we do have a lot more confidence in our abilities to grow occupancy over the norm.

Okay. And then just in terms of the potential for Sovran to assign its interest in the 4 properties through the HHF joint venture, I was just wondering why not look to buy these for Sovran 100% wholly owned basis? Maybe you could just kind of elaborate on the thinking.

And then is this, in terms of the joint venture, it sounds like this is something that Sovran may look to use going forward a little bit. How much appetite does your partner have here?

Okay. Yes, we've had a real good relationship with Heitman. They're our joint venture partner on two big deals. And we got in on the first program with them right before the downturn in 2008. And despite the ensuing adversarial results in the storage sector, they proved to be great partners.

The second deal we did in 2011 was formed a purchase, a block of stores in New Jersey from one entity. And that, too, went well right from the start.

So we like to work with them. And although now we've got the capital and the resources to take down most deals, and we've said pretty much that we would like to JV deals that had a lot of mortgage debt that had to be assumed -- or were, in our minds, very mature and didn't have a lot of room for upside -- that's not really the case in this package. This package is essentially a second group of New Jersey properties that's owned by the same group; that it sold to us and the JV, the first package, 3 years ago.

So it seemed like a good fit. And we've got, as I said, a good relationship with Heitman. We like to keep them side by side with us for opportunities that might come along. This wasn't maybe the traditional deal for Sovran to do in a JV, but the history was there, the property was there, the legacy's there.

The question is, do they have a right of first refusal on our opportunities? No. We don't have an obligation to feed them deals. But it just seemed like a natural continuation of a good relationship. And they were interested, we were interested. They have need to play some money; we -- just an ongoing relationship type of thing.

Okay. And can you just remind us what the fee structure is for that joint venture in terms of property and asset management, and if there are any other call center insurance commissions that Sovran collects?

Yes, it's standard 6% management fee, a 1% call center fee. They pay a proportionate share of internet advertising, as whatever our store average is, pretty much.

The sharing of the profits is pari passu. There's no hurdle on this batch. And I think there's a 50 basis point upfront due diligence and acquisition reimbursement. So it's very much a side-by-side, pari passu relationship, except for the 6%, those 1% standard management and call center fees.

Okay, great. Thank you.

David Toti, Cantor Fitzgerald.

Good morning. This is actually Gaurav Mehta in for David Toti. A couple of questions. First question I have is on third party management. In your press release, you talk about your plans to expand 3P management platform in 2014. Can you elaborate a little bit more on that? What are you targeting and how many properties do you currently have?

We have right now about 24+ to 55 that we man -- so it's about 70, almost 80 properties on the 3PM platform. We turned away quite a few [gloves]. There's still a lot of people who are hurting that would like us to take over their headaches, and we're just not that kind of company.

Where we have made quite a bit of progress, and I'd say we're probably going to focus pretty intently on, is newly built stores or to-be-built stores. Advise on both a construction almost basis, as well as a management basis. We turned one into a C of O acquisition, the one that Paul that talked about just a bit ago.

So I don't think you're going to see a lot of numbers. It's not something that we find particularly attractive in a lot of markets. We've stuck to our mantra of, if we're going to manage them, we want to own them. So they're going to be in a market that we are either strong in or want to be in, and the properties have to be as good or better than anything we have in those markets.

So we're quite selective. You're not going to see a lot of growth there, but it's giving us a great insight to the industry, great insight to a lot of opportunity. And that's really all along been the focus of what we wanted to do with this platform.

Okay, great. And second question I have is on acquisition. So if I look at what you already acquired and what kind of contract, it seems like you will reach your 2014 guidance in second quarter. So does that mean that you're expecting a slowdown in transactions in the second half?

Not necessarily, Gaurav. We -- some of these deals we have under contract currently, there's no guarantee that we'll close on those. We are seeing some one-off deals, or some deals with one or two properties here and there. We're not seeing a great activity there. We are hearing there could be some large portfolios coming to market. We'll certainly look at those.

So, right now we feel pretty comfortable with the guidance we've given on acquisitions. We hope we do a lot better than the $200 million that we were saying. And so we'll have to see.

It's just that it's an unknown at this time. We're continuing to work with our owners and operators that we've networked with, and we hope to get some more opportunities, but right now, we're comfortable with our guidance.

Okay, great. That's all I have.

Paula Poskon, Robert W. Baird.

Just a follow up on the acquisition discussion. So what will -- what are the determining factors in whether or not you assign the purchase of the 4 facilities under contract to the joint venture?

They're side-by-side with us, Paula, right now on due diligence. And it's theirs for the taking. We've offered it to them. I'm pretty sure that it will work. But they're really -- on this one, just because of, like I was mentioning, the history of the same branded Jersey properties, both the [Lachlan], New Jersey properties that we bought, this is a same -- some of the ones we didn't buy. So they're in the same general market, same basic construction, same basic deal. So, nothing -- they haven't signed off completely, we haven't signed off completely, but I would assume that once due diligence has passed, we'll go ahead with it.

Okay, thanks very much.

(Operator Instructions) Philip DeFelice, Wells Fargo.

Most of my questions have been asked and answer, but following up on Ross's question. Given the stickiness of the tenants recently, could you offer your plans for the rate increases you'll be passing along to existing tenants, how that compares to the last couple of years?

Yes, so if you look at Q1, we were a little more aggressive than they were last Q1. We put on rate increases to about 2.7% of our customers. And that average increase was 11%. So, we're pushing pretty hard on those customers.

We do have that pool of over 50% that could be eligible. The revenue management system and our team of analysts assure me that we will not push on all 50% of them and we will be selective. We will try to keep that move out rate -- because it does cause move outs when you push on that rate -- we'll try to keep that to a reasonable level. And we want to make sure we can backfill if that person moves out.

So we'll be more aggressive than we were last year, but you won't see us push on everybody who's eligible.

How often in the past have you gone back to that 50% that you kind of haven't touched in the past?

We review them every month once they get past the tenth month with us. So, if at the tenth month we decide they meet the criteria that our algorithms say they should get a rent increase letter, we send it out. If they don't get it that month, they'll be put back in the pool and reassessed the next month.

Okay, great. Thanks a lot, guys. Good quarter.

RJ Milligan, Raymond James.

I just wanted to follow up on guidance, a couple questions. With the second quarter guidance, it would imply you guys are going to do 225 in the back half of the year at the midpoint of guidance, and I'm just wondering what's contributing to that big jump sequentially?

I don't know if I'm following you on the 225, RJ.

So it was I think 98 in the first quarter -- or 104 in the second quarter, which would imply you guys are going to have a pretty good ramp. (multiple speakers)

(multiple speakers) 2014 -- for the second half, okay. That�s talking quarters. So we don�t do (multiple speakers) -- we can�t add that one. And it's really driven by -- the revenue obviously gets stronger in the back half. We -- the expenses, if you look at early in the year, that 4.5 to 5.5 expense growth, it's pretty high. And we still -- I mean, obviously utilities and snow removal were poor in the first quarter. We expect them to be high in the second quarter. Things will get back to normal, we expect, the third and fourth quarter. So expenses will be more in line. They will be below the first -- the second half will be below the first half. The revenue will remain strong. So I think a lot of that goes right to the bottom line.

Okay. And just a sort of specific question, you guys add back operating leases, straight line rent adjustment to get to your recurring $0.98. Is that included in the guidance of the $4.25 to $4.29, that add back?

Correct. The add back is included in the guidance. That is really a non-cash add back. For GAAP purposes, you have to straight-line the rent payments on those 4 Westy properties. So the actual cash that goes out for quarter is $1.5 million.

Okay, great. And I may have missed this. Did you, or can you comment on what the same store NOI growth would have been if not for the increased snow removal cost?

If we had normalized utilities and snow removal let's say 5% or so, expenses would have been up 4.6% or so and NOI over 10%.

Okay, great. Thanks, guys.

Thank you. At this time, I'll return the floor back over to Mr. Dave Rogers for closing comments.

All right, we appreciate your interest in our call, everyone. Thank you for joining us, and we look forward to see you at NAREIT or on our next call. Take care.

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