Life Storage Inc (LSI) 2014 Q2 法說會逐字稿

Greetings, and welcome to the Sovran Self Storage second-quarter 2014 earnings release conference call. At this time, all participants are in a listen-only mode. A 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, Ms. Diane Piegza, Vice President, Corporate Communications for Sovran Self Storage. Thank you. You may begin.

Thank you, Melissa, and good morning, everyone. Thank you for coming to our second-quarter 2014 conference call. Leading today's call will be Dave Rogers, Sovran's Chief Financial and Chief Executive Officer. Also participating are Andy Gregoire, Chief Financial Officer; Paul Powell, Executive Vice President of Real Estate Investment; and Ed Killeen, Executive Vice President of Real Estate Management.

Our earnings release was issued yesterday aftermarket. If you did not receive a copy, please visit our website, UncleBobs.com. As a reminder the following discussion and answers to your questions contain forward-looking statements. Sovereign's actual results may differ substantially from those projected due to risks and uncertainties with the Company's business. Additional information concerning these factors is included in the Company's latest SEC filings.

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

Thank you, Diane, and good morning, everyone. Q2 was another really strong quarter, surprising us a bit again to the upside, which is always kind of nice. And as we said over and over, we really never know for sure how the year is going to go until we get a feel for call volume and rate push at the start of the busy season.

Well, this year's busy season is for real, and has provided us with the opportunity to deliver higher occupancies and increasing rental rates. Andy will give the details, but this second quarter has positioned us to have far and away our best year ever.

We are happy with our acquisition performance as well. Through June, we've acquired 23 stores for our own portfolio at a cost of $190 million, and three for one of our joint ventures totaling $34 million. All of the stores are in markets we already play in. And while they weren't inexpensive, we love the fact that they all have great upside potential.

We acquired one additional store after quarter's end for about $12 million, and are in negotiations for quite a few more as we speak. It's a remarkably competitive environment with a lot of players willing and able to pay big for quality properties and quality markets.

At the risk of being a bit redundant, I'll update our thoughts on the industry. Demand continues to trend up. New supply will be coming to some markets, but most of it appears to be demand-driven and pretty sensibly thought-out. We expect the impact on us and the industry to be de minimis, at least for the next couple of years. More than ever, we believe the bigger operators with the scale to afford and run an integrated set of marketing, RMS, and customer service platforms, should win an outsized share of the market.

I'll say it again: times are good and we expect that to continue. And with that, I'll let Andy take over the details of the quarter.

Thanks, Dave. Last night, we reported same-store revenues increased 8.6% over those of the second quarter of 2013. The growth was the result of a 270 basis point increase in average occupancy, and a 4.4% increase in rental rates. Same-store occupancy increased as expected and was 91.8% at June 30. Tenant insurance income for the same-store pool continued to show strong growth, increasing almost $500,000 in the second quarter of 2014 as compared to the same period in 2013.

Total property operating expenses on a same-store basis increased by 5.7%, primarily as a result of increased repairs and maintenance expenses that were delayed from Q1's harsh weather. Also, as expected, property taxes showed a double-digit increase for the quarter. In regards to property taxes, we expect same-store growth in 3Q and 4Q of 2014 to be in the 5% to 6% range, lower than the 11% to 12% experienced in the first half of 2014. This is due to the fact that in 3Q and 4Q of 2013, we began to experience property tax increases. And therefore, the comparable results are a lower percentage increase, although dollars in Q3 and Q4 should be similar to what we saw in Q2.

Same-store net operating income increased 10% for the quarter. We again have included in our release some additional data on previous same-store pools to give our investors more color as to the performance of our maturing stores. G&A costs were $1.4 million higher this quarter over that of the previous year. Aside from an increase of $161,000 in Internet advertising, the main reasons for the increase were the fact that we operated 40 more stores at the end of this quarter as compared to January 1, 2013; our continued investment in revenue management; and incentive compensation. Offsetting a portion of the overhead cost was an increase of approximately $230,000 in third-party management and acquisition fees from this quarter.

From a balance sheet perspective, we finished the quarter in a solid position. During the quarter, we issued 250,000 common shares through our ATM program, resulting in net proceeds of $19 million, and issued $175 million 10-year fixed rate term note to fund the acquisition of our 16 stores, and to pay down the balance on our line of credit. At June 30, we had approximately $7 million of cash on-hand; $241 million available on our line of credit, including its accordion feature; and approximately $206 million available on our ATM program.

With regard to guidance, we have included in our release the expected ranges of revenues and expenses for the third quarter and the entire year. Same-store revenue growth for Q3 should be in the 6.5% to 7.5% range, and NOI around 8.5% to 9.5% for the quarter. Expenses outside of property taxes should increase between 2.5% and 3.5%, and property taxes for the quarter are expected to increase 5% to 6%.

Our guidance assumes an additional $50 million of acquisitions weighted equally over the next six months. We have not included in guidance the related acquisition costs incurred to date or that could occur in the future. As a result of the above assumptions, we are increasing guidance and are forecasting funds from operations for the full year 2014 at between $4.32 and $4.36 per share, and between $1.14 and $1.16 per share for the third quarter of 2014.

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

(Operator Instructions). Christy McElroy, Citigroup.

In looking at your realized rent per occupied square foot growth here at of 4.4% year-over-year today on a same-store basis, between existing customer rent growth, Street rent growth, and changes in discounting, can you sort of break down that number in terms of what had been the biggest drivers behind the 4.4%? And maybe in each of those factors, can you talk a little bit about what happened with them during the quarter?

Yes, the Street rates, Christy, were the biggest driver of that growth. Probably 0.5% of that comes from in-place customer increases. We're still very strategic in how we do that, when we approach that kind of customer. We think what we do works very well. The system that was built that our analysts work with to push those customers -- or those current customer increases, is producing the results we expected to produce.

Probably a little more conservative than some others in the industry, but it's a topline -- it's all about maximizing revenue and we believe what we do does maximize revenue. But the Street rate is really the story. At June 30, our Street rates are up 9.3% over last June 30, so that's where most of the growth is coming from. Yes, we would expect that to come down as occupancy comes down in the slower season of the year, but the Street rate is really where it's coming from.

When you're pushing Street by that much, you are not seeing a consequential impact on move-ins at this point?

Well, at this occupancy level? Yes, it does. There's -- we turned away more people this quarter than we did last year for a couple of reasons. We didn't have the space available for them, and sometimes they said our price was too high. But that's okay. When you have one left, we want to get that next call that's going to pay us that extra 9% that the call that we turned away. So we are comfortable. It does cause some people to turn away because the price is too high, but that's by design. And to maximize revenue, we think it's the right thing to do.

Got you. And then looking at occupancy, you're at 91.8% at quarter-end, a record high for your Company. Given that you probably have some visibility here for the rest of the summer, where do you think you could peak out in Q3? And in your sort of own philosophy on revenue management, where do you see that optimal level of occupancy for your portfolio as it stands today?

You know, Christy, I don't know if we really ever look at an optimal occupancy level. It just -- it all depends on what the revenue management system will give to us. And all the other metrics are probably the more important pieces, whether it's the in-place rents, the discounting, the asking rates. Our guess is right now we'll probably land somewhere around -- well, in July, we are 92.3%. I don't think we are going to grow that much more. And that will taper down. That -- the gap from last year is going to shrink a bit, but we don't see it shrinking too much. But I can't see pushing 93%. I don't think we are going to grow for the next three, four weeks. And it will just taper down a little bit.

Okay. And then just lastly, Andy, I think you talked a little bit about expense comps in the second half. You've been able to hold same-store revenue growth fairly steady in the mid-8% range over the last two quarters, but your guidance suggests a decline in that growth rate. Is it effectively just that decline in the year-over-year occupancy delta where realized rent growth is expected to hold steady?

Yes, you know, and that's all -- if rates can stick as high as they are now, that maybe conservative. But yes, we are expecting that the Delta Gets very tough on the occupancy side.

Plus, Christy, we've had last year's Q3 over 2012's Q3 was pretty remarkable. And it makes for a tougher comp each time. And the Q3 seems to be a real bellwether.

Thank you, guys.

You're welcome.

Todd Thomas, KeyBanc Capital Markets.

A question about discounting in the quarter. I was wondering if you could share with us the amount of free rent that was given during the quarter? And then how much more do you think you can dial back on free rent going forward? Maybe if you can give us that on a year-over-year basis, that would be helpful.

Well, we are down about $580,000, about 40% in discounts year-over-year. And 46% from the previous year. You know, I don't know -- as we said at our last meeting, I don't know if we're going to -- I don't know if we can burn off much more than that. It might shrink just a touch more, but being down 40%, $580,000, and I think we are at what our discount was $850,000, it's not going to shrink much more than that, Todd.

Okay. And then as -- you talked about occupancy here being sort of at a peak-ish level during the peak leasing season. As the strong leasing season winds down, I was just curious if you could share with us how you're thinking about pricing and occupancy into the back-half of the year? What's the Company strategy like with regard to pricing and rent increases, given where occupancy is today?

I think it really comes down to maximizing revenue. And I think the delta in occupancy will shrink some, probably in the 150% to 200% range for the rest of the year. So, rates are the driver and we expect that they will remain strong for the rest of the year.

Okay. And then just last question. On acquisitions, I know that you mentioned there's $50 million of additional acquisitions sort of embedded in guidance. And if you do that additional $50 million, $250 million for the year, that's a solid number, obviously, if you get those deals done. But the pipeline appears to sort of be thinning a bit. Is that a fair assessment? And maybe you can just talk a little bit about what you're seeing out there today?

Yes. Right now, yes, our guidance is showing $50 million for the second half of the year. Currently under consideration is about $63 million that we are looking at right now. The pipeline has thinned somewhat, mainly due to the quality of properties we are seeing out there. I expect, at the end of the summer, we will see some better quality, even maybe some bigger portfolios coming into market.

But we -- I expect we'll do about $100 million more in the second quarter, if these, that we are looking at now, come to fruition. So -- but it should pick up later, at least in the fourth quarter going into 2015, I would think.

It's always hard to give guidance, Todd. We've always shied away from it. Certainly, as we get deeper into the year and stuff that we don't even have under contract yet, if we do pull it in, it's going to have a de minimis effect on the -- certainly the FFO for the year and so forth. But just to say we are guiding a $50 million doesn't mean we are not looking at a whole bunch of stuff. It's just -- that's the number we picked for the balance of the year.

Okay. So $63 million is what you're sort of evaluating today. But -- and you've assumed $50 million of that closes. And then, obviously, there's like a pipeline behind that, that you're looking at. Is that right?

That's correct.

Okay. All right, great. Thank you.

Ki Bin Kim, SunTrust.

Just want to clarify one quick comment. When you said Street rates are up 9.3%, was that a 2Q average number or end of 2Q or a July number?

That was end of June, that 9.3%, our asking rate at the end of June were that 9.3% over last year and June.

Okay. And I know someone already asked this kind of question, but I mean, your guidance does seem to imply some sort of deceleration. Is that -- how much of that is just a pure occupancy number that mathematically is hard to get again, versus you -- maybe you guys being a little conservative on Street rate growth for the second-half?

You know, I think part of it is the occupancy, Ki Bin. The 150 basis points, I think what we -- the average delta we can maintain for the rest of the year. So it's just tough comps on the occupancy side. Rates are a wild card. And it's surprises for the first half; we'll see what happens in the second half.

I see. And it seems like -- I'm not sure if you guys have looked at some of the CMBS-related self-storage deals are coming to maturity in 2015 or 2016. It seems like there's quite a bit ,maybe close to $5 billion. And it doesn't necessarily prompt sales, but have you guys proactively approached some of these service stores or owners of these properties?

Yes, there was a similar bubble, Ki Bin, about five years ago, and we all thought it was going to be a great opportunity. And some of it went down the pretend and extend route, and some of them just were able to -- the quality properties were able to refi.

So, certainly, we know a lot of them. We keep in touch, both we and our folks over at Locke Group, keep in touch with a lot of sellers of the properties that we are interested in. So, yes. I mean, certainly you don't want to have those guys lock up another 7 to 10 years if you're interested in a property. But it's -- I don't think it's going to be a great boon to the acquisitions. We thought it would be five years ago; it wasn't. And it's seller by seller.

Okay. And I heard in Texas there seems to be a lot of deals that people are talking about, and maybe some are closer to actually breaking ground on new supply, in Houston especially. I was wondering if you guys have a kind of updated view that you can share with us?

Yes, Ki Bin. In our second quarter survey that we do by our area managers, we are showing about 55 either recently opened, or in construction or in some form of entitlement process; going on -- and actually the majority of our -- excuse me -- the most in any one state is in Texas, and it is Houston.

Houston, it's easy to build; there's still a lot of land, a lot of growth going out there, a lot of net migration, positive net migration to that state. So yes, we are seeing a little bit of an uptick in development out there. We are still not that concerned at this point. We think going into 2016 second-half, we may see some of these deals that we are hearing about actually open. But at this point, we are not too concerned.

And was that 55 under development, what was that number like last year, just as a point of reference?

I don't have it in front of me. I believe it was between 35 and 40, if I remember correctly.

Okay. That's good enough. (multiple speakers) Yes.

(multiple speakers) This is all about markets, Ki Bin, within the trade area of our stores nationally. Do you have Houston's number (multiple speakers) --?

I don't have it broken out. We just show 11 in Texas.

11 in Texas? Okay.

Okay, thank you.

Gaurav Mehta, Cantor Fitzgerald.

A couple of questions on the expenses. I think in your prepared remarks, you said that part of the uptick in G&A is driven by Internet advertising and [RMA]. Could you provide me more details on the techs pending and what kind of impact are you seeing on your operations as a result of that?

Gaurav, this is Andy. Yes, the Internet spend was up. Mostly the first half of 2Q, we could pull back as occupancies grew. So we could pull back some of that spend, and you'll see that spend become more in line in 3Q compared to last year. But it's really -- it's just strategic where we place our ads.

Gaurav, most of that spend is in pay search. And we are spending a lot more time and effort in optimizing that pay search. So that's where you see the biggest difference.

Great. And then on the operating expense growth side, as you think about your expenses over the next few years, when do you expect that to level off from the current run rate of 5% to 6%?

Yes, I think really when property taxes come back in line, which we think this year is probably going to be the worst year for us from a same-store point of view. And once those come back in line, say a longer-term range, maybe somewhere on a 5%, then you will see our overall growth in total expenses being at 3.5% to 4.5%.

Okay. And last question I have is on transactions. Are you currently seeing any deals in the market that are currently under construction, sort of occupancy deals? And out of the 19 assets that you acquired in 2Q, were there any assets with potential lease-ups?

Yes, Gaurav. We did purchase in the second quarter one CO deal with Chicago. The $63 million that we are looking at right now, three of those are potential CO deals. One of them -- actually two of them actually would probably not open until 2015.

Thanks. That's all I had.

(Operator Instructions). Jeremy Metz, UBS.

Hey, guys, it's actually Ross Nussbaum here with Jeremy. Following up on that last question, what stabilized yields are you underwriting to on these CO development acquisitions?

Ross, we look at it that these -- we are looking at lease-up here as anywhere from three to four years. Stabilizations, we look for around a 9 cap, depending on which market we're looking in. We kind of base it on a -- if we were going to buy a property in that market today, I'd say a 6 cap or a 6.5 cap. At stabilization, we'd like to have a 3% spread there. So we -- and our models are showing a 9 to a 9.5 cap at stabilization.

And same question on stabilized properties. Where do you think the market -- let's talk about what is the market, in your view, underwriting to on stabilized acquisitions of institutional quality properties? And what are you guys targeting on the deals that you are winning?

Well, as an overall cap rate average for the 16 we bought in the second quarter, trailing cap rate was around 5.7. And we are expecting year-one growth another 40 or 50 basis points to about a 6.3 or 6.4 cap. And then we expect the second year to be another 50 basis points. So, for core deals in core markets, that cap rate is going to be at 6 and possibly a bit below 6. But we do hope to grow those things 40, 50 basis points in the first year, and then another 40 or 50 in the second year.

Are those stabilized from an occupancy perspective? Or are these deals like somewhere in the [80s]?

Excluding the CO deal, the occupancy of the 16 we bought was -- what was it -- about [maybe 2%]. So there was some upside. But that's kind of skewed by a portfolio that we bought that had low occupancy.

Okay. So you are really still shooting for, call it, a stabilized yield that's -- hopefully, as close to 7% as you can get. Is that a reasonable way to think about it?

That's correct.

Okay. The other question I had is a little more of a clarification on the asking rents. I believe you guys said you did 9.3% is where Street rents were on June 30th. I just want to make sure we are not getting perhaps a little overly optimistic on that number. Because if I go back to the second quarter of last year -- and correct me if these numbers aren't right -- but I am showing that your Street rents were running up about 7.5% as of the end of the second-quarter 2013. And then by the end of the third-quarter 2013, your Street rents were only up 1.7%.

So I just want to sort of dive in to say, is that 9.3% number you were doing at June 30th, I mean, is that a very sort of key-cover season peak occupancy kind of ambitious rent growth number, and we should expect that asking Street rent growth will diminish as we get into the back-half of the year?

Yes, Ross, we will see that diminish in the back-half of the year, and that is certainly peak. And we climbed there from April, when we are at 6.2% in asking; and May, it was 8%. And then in June, it was 9.3%. So, yes, that is certainly a peak number. You're going to see that delta shrink as we climb into that middle of third quarter and fourth quarter.

And based on -- I know June is ending today; have you already backed that number down in June -- sorry, in July?

It's backed down just a touch, Ross. Just a touch.

Okay. So it's really after the summer swing that you start backing off on it?

Absolutely. Yes.

Okay. I think Jeremy Metz had a question as well.

I was just wondering, can you just talk a little bit about your penetration rate on tenant insurance, and just how much more room to go -- how much more room there is to go there, as you're obviously -- it's been benefiting your results?

Well, you know, Jeremy, we were up a point in penetration rate for this quarter year-over-year. And we don't know if there's that much more room. I mean, you've got to take into account the churn and delinquents and students. And I think it's a pretty good number where we are at right now, 58.8%. And we don't see it going much higher than that at this point.

All right. Thanks.

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

Thank you, everyone, for participating in our call. We look forward to talking to you again early November, and then perhaps meeting many of you at NAREIT. In the meantime, have a great summer. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.