Life Storage Inc (LSI) 2014 Q3 法說會逐字稿

Greetings, and welcome to the Sovran Self Storage third 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 our host, Ms. Diane Piegza, Vice President Corporate Communications for Sovran Self Storage. Thank you. You may begin.

Thank you, Melissa, and good morning, everyone. Welcome to our third quarter 2014 conference call. Leading today's call will be David Rogers, Sovran's 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 after market. If you did not receive a copy, please visit our website at unclebobs.com.

As a reminder, the following discussion and answers to your questions contain forward-looking statements. Our 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 will turn the call over to Dave Rogers.

Thank you, Diane. Good morning, everyone. Our third quarter was a good one, as occupancy remained high, rental rates grew, and operating costs were pretty well contained. Andy will provide the details. But 3Q on an absolute and on a per-share basis was our most profitable ever.

We acquired some high-quality stores in markets where we already have a presence. Five were purchased during the quarter at a cost of $46 million. We bought three more in October for $41 million. So during the first 10 months of 2014, we bought a total of 31 stores for $278 million. These are in addition to the three we acquired early in the year on behalf of one of our joint ventures, at a cost of $34 million.

So we've been fortunate to add this group of really good stores to our portfolio this year. But it's a competitive arena, and we've got to stay nimble and keep our pencil sharp to make it work.

This is the 75th quarterly earnings call that we've held over the 19 years we've operated as a public company. I've got to say, the last dozen or so have been the most enjoyable, as we've been able to report some pretty great news in all of them.

We have every expectation that this will continue in the upcoming quarters. Overall, the self-storage sector is strong, as the major themes remain in place, which our growth of new supply is minimal, demand continues to tick up, and customer awareness has been strong. So it's good.

And with that, I'll let Andy give the specifics.

Thanks, Dave. Last night, we reported same-store revenues increased 7% over those of the third quarter of 2013. The growth was the result of 140 basis points increase in average occupancy and a 4.4% increase in rental rate. Same-store occupancy increased over the prior year, as expected, and was 90.5% at September 30th.

Tenant insurance income for the same-store pool continued to show strong, increasing $442,000 in the third quarter of 2014, as compared to the same period in 2013.

Total property operating expenses on a same-store basis increased by 2.4%, primarily as a result of increased repairs and maintenance expenses, a portion of which related to the Arizona floods.

The property tax expense percentage increased lower in 3Q than it was in the first half of 2014, because in the third quarter of 2013, we had experienced an increase in property taxes, making for an easier comparable. Same-store net operating income increased 9.2% for the quarter.

We again have included in our releases some additional data on previous same-store pool to give our investors more color as to the performance of our maturing stores.

G&A costs were $1.1 million higher this quarter over that of the previous year. Aside from an increase in Internet advertising, the main reasons for the increase were the fact that we operated 42 more stores at the end of this quarter as compared to January 1st, 2013, our continued investment in revenue management and incentive compensation. Offsetting a portion of the overhead cost was an increase in third-party management fees earned.

From a balance sheet perspective, we finished the quarter in a solid position. During the quarter, we issued 424,000 common shares through your ATM program, at an average price of $78.46, resulting in net proceeds of $32.9 million. The proceeds were used to fund the majority of the five stores acquired during the quarter.

At September 30th, we had approximately $7 million of cash on, $249 million available on our line of credit, including its accordion feature, and approximately $172 million available under our ATM program.

With regard to guidance, we have included in our release the expected ranges of revenues and expenses for the fourth quarter and the entire year. Same-store revenue growth for Q4 should be in the 6% to 7% range, and NOI around 7.5% to 8% for the quarter.

Expenses outside of property taxes should increase between 2% and 3%, and property taxes for the quarter expected to increase 5% to 6%. We expect full-year revenues to come in at a very strong 7% to 8% over 2013, and NOI to increase 8% to 9%.

Our guidance assumes an additional $10 million of acquisition on top of the $41 million we completed in October. 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 $4.33 and $4.37 per share, and between $1.10 and $1.14 per share for the fourth quarter 2014.

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

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Todd Thomas with KeyBanc Capital Markets.

I was just wondering if you could elaborate a bit on the comment in the press release that pricing adjustments were made in anticipation of the off-peak leasing season. I was just wondering, what does that entail? Did you increase discounting to maintain higher occupancy levels? Or did you reduce your rent increases to existing customers? What adjustments were made during the quarter exactly?

Hi, Todd. It's Andy. You hit on it. By design, we made a strategic decision to increase our free rents during the quarter. Now it was -- we are probably the lowest free rent out there of the bigger providers. We really have reduced free rent. We thought, [while] the activity was high, our model was showing that it made sense to increase free rent earlier in the quarter than we had done in the past.

So [it] increased our free rent during the quarter, sacrifice a little in the quarter, we think is going to set us up very nicely Q4 and Q1. So it was mostly a decision on the free rent side while the activity was high.

And if you look back to what we've been doing with free rent, 2 Q, we were very aggressive reducing free rent. When the activity's there, our system tells us to push hard, reduce rents -- reduce free rent and increase rent. So that 8.6% we saw in Q2 is just part of our model. How it works, it's very aggressive when the activity is there. When the activity falls off like it traditionally does in the fourth quarter, the model this year said, makes more sense to give free rent earlier on.

So we're a little ahead. It looks like we were a little ahead of the industry, and we like that decision.

Okay. And then what's the plan over the next several months until the peak leasing season picks up? Is it pretty much the same, where you'll keep discounting slightly higher? And what is the plan with rent increases to existing customers?

Hey, Todd. This is Ed. As far as in place rent increase goes, we were very selective this quarter in how we segmented [and placed] customers. And I think we'll take that same approach in the fourth quarter and into the first quarter of next year.

We'll choose a smaller population of customers, but those that do receive a rate increase, it'll be in the double digits where we've [done] the last few quarters.

As far as discounting goes, we have to see what happens with our activity over the next couple months. But we think that they'll be a -- at this point, it's difficult to say. But we think we'll be able to narrow the gap a little bit when it comes to discounting.

Okay. And then just a question on new supply. It seems like developers are pretty eager to get back in the game in a meaningful way. And I was just wondering, is there enough capital and operating expertise available out there to facilitate a meaningful ramp in development? I was wondering maybe you could give us an update on what you're seeing today as you look out over the next one to two years from an overall industry perspective in terms of what you're seeing in new supply today.

Yes. Hi, Todd. This is Paul. I mean, we're still seeing a lot of potential development in the pipeline, a lot of talk in our markets. We've seen an uptick in projects either in the development stage or in the entitlement process. In our recent review by our area managers, we saw about 100 within our market, and about 70 of those would be in our immediate trade area, which is in an uptick from this time last year. And we expect to continue to see that.

But we're still not that concerned. We still think it's a year and a half, two years out, before we'll see a significant supply that we'd have some concern about.

But right now, I think there's a lot of talk. And we are working with some preferred developers and possibly doing some CO deals. But time will tell. But we're not too concerned at this point.

Okay. Great. Thank you.

Christy McElroy with Citi Group.

This is actually John here with Christy. My first question is with regard to guidance. So in Q3, you beat the midpoint of your guidance range by $0.02. But you only raised 2014 guidance by a penny. So from what I understand, your guidance excludes the impact of acquisition costs. So just trying to understand why guidance wasn't up more.

Sure. This is Andy. There's a couple of things that play there. Number one, we're in the guidance range. So we're talking tight numbers here. The other thing was, we issued a little more equity in 3Q than we had expected. We saw we were trading at a reasonable level compared to cap rates we were paying. We thought it made sense to take advantage of that. We're also preparing for that (inaudible) transaction next year. There's a $120 million deal, potential deal that would happen early next year.

So we're just getting ahead of that game, and we are comfortable with it during the quarter. But really, the guidance is, it's such a tight range that it didn't make sense to move it any more than that.

Okay. And I guess going on those same lines as equity, so gives another $10 million of assumed acquisitions in 2014. Is there anything additional assumed in your guidance for further ATM throughout the year?

Yes. We look to match [fund] and look at a 70% equity issuance.

Okay. Thank you.

Thank you. Jana Galan with Bank of America.

I was wondering if you can speak to some of the October trends that you're seeing, maybe give us an idea of where street rates are now compared to last year.

Sure. Couple of things can talk to street rates. I'll talk to occupancy, today is 110 basis points above last October. We've got two normal move-in days left in the month. So somewhere between 110 and 120 is where we figure we'll end October rate. I don't know if you have the rate there.

Our street rates ending September were 8.8% year-over-year, and we're trending right about there, Jana.

Great. Thank you. And then I was just wondering if maybe you could talk to any geographic differences that you're seeing, any potential weakness in markets potentially due to supply increases.

I think we're pretty early on to be worried about supply in any of our markets. All of our states, on a revenue, same-store revenue and same-store NOI basis were improved, didn't have any real weak spot.

We had some particular store weak spots where we had a flood at one. And a couple stores, we took a lot of units out of service to rebuild. But those were -- so I think we were really happy with all the regions and all the markets. Yes, I think it's very widespread.

Thank you.

Jeremy Metz with UBS.

It's Ross Nussbaum here with Jeremy. So I want to go back to the increased free rent/discounting you guys have put in place here. I guess what I'm wondering is, if I recall, you didn't view that into 4Q of last year, did you?

We did. We did, late in 4Q, we were [having] discounts last year.

So you have done it earlier?

We did it much later. Correct.

(Inaudible - multiple speakers)

Right. So that's where I'm going is, I guess what are you -- something, I guess has changed seasonally for you to do it earlier, despite the fact that you're more occupied, you've got better realized rent growth. Are you seeing, is it the move-in activity, kind of being down on a year-over-year basis, that you think you need to start driving more traffic?

Well, Ross, I don't know if it's anything different in what we saw. But as we build our predictive modeling, what we did last year, what we learned last year is that this year we needed to do it earlier. It wasn't so much that we were incorrect in what we were doing last year. It's just that we had more data to forecast better for what we're doing this year, and that all suggested that we go and do a little bit earlier, as Andy said, when activity is high, when the phones are ringing, when you have strong rates, you want to lock in more of those customers at those more favorable rates going into the low season. And given last year's activity, we learned that we should do it a little bit earlier this year.

Got it. Okay. And then, on the realized rent growth, you guys were at, I think 4.4% this quarter, which was the same as the second quarter. So I'm trying to think about that, what I'll call sequential flat line. But you had the same trend a year ago, right? In 2Q and 3Q of last year, you were at 3.6% realized rent growth, and then that trailed off a little bit into the weaker seasonal period.

So I guess, are you expecting the 4.4% realized rent growth to also trail off for the next two quarters? Let me start with that.

No. Ross, this is Andy. We would knot expect it to trend off. I think that free rent really, because it's in that number, drove that number down a little bit this quarter. We would expect that to hold pretty strong. We think we still have 100 basis points in occupancy, and we think 4- plus, 4.5-plus in rates, that we should carry right through the storage season.

Okay. Then that was going to be my next question, which is, have you seen any correlation, or maybe it's elasticity when you're thinking about when you tried to push realized rate 5%, 6%, 7%, did you see occupancy come in when you were more aggressive on the rates pushes? What did the data kind of tell you this summer?

Well, the data tells us we're still turning customers away, even at these occupancy levels. We had more room to run in occupancy, but we're turning customers away. We can be very aggressive at certain times of the year. And we're going to continue to do that.

And the data told us that, be aggressive when the phone's ringing hard, because we are still turning customers away because there's many product types that we're full at. So we're aggressive when that phone's ringing for those [products].

Just to be clear, when we say we're turning customers away, it's because we don't have room for them, not because they're turned off by the price.

Correct. Yes.

Or you didn't like the way they looked. I got that, okay. Thank you. Appreciate it.

Thank you. David Toti with Cantor Fitzgerald.

And I have been turned away, so I can vouch for that.

(Inaudible), David.

I appreciate that. Couple questions on acquisitions. Have you guys been looking at the Four Seasons' portfolio?

Hi, David. This is Paul. Yes, we did look at it. We may do a deal with one of our institutional partners on that. But at this point, I really can't say a whole lot more about it.

Okay. Cap rates of the latest acquisition pool, can you disclose those?

Yes. The cap rate on the five that we purchased in the third quarter, one of them was a -- actually, two of the properties were Uncle Bob's managed properties. One of them was still in lease-up. It had opened in May. We bought it in the end of the third quarter. So we're projecting a low three cap in the first year of operations. Should stabilize to 8.5 in about 3.5 years. The other four were around 6%, or the low 6% range.

Okay. Great. And then just to follow up on one of the earlier questions about development. Some of your peers are involved in sort of increasing volumes of [CFO] deals. Have you guys considered that at all or seen those opportunities come across the desk?

Yes, we're looking at a few now. We're negotiating contracts on three, as we speak. Whether they turn into deals, we'll see. We're also working with about three or four other developers in specific markets, where we would hopefully do some CO deals.

So, yes, we're seeing that spread, through, the cap rate spread, decrease some from the beginning of the year. Beginning of the year, I was looking at a 3% spread, now I'm looking at a 1.5% to 2.5% spread, depending on which market. So even those cap rates are starting to compress even more so than we anticipated.

So we're going to be very selective in dealing with markets where we know there'll be homeruns. So, but, yes, hopefully we'll have some under contract going into 2015, that would either open up in that year or maybe go into 2016.

I'm not sure if it came across, Dave. By spread, what Paul's talking about is, we're willing to pay a, say a six cap in Chicago for a mature deal that has the normal upside. Let's say if we're doing a CO deal, we would like to see a nine cap 3, 3.5 years out at maturity. That's our risk for lease up, I guess.

The CO deals, I think are pretty commonly structured across the people who are doing them. But we basically married ourself or are looking to connect with people who have the entitlement process done, have the expertise and the fact that we can rely on them to do a good job for the construction, deliver us the key to that CO, and then we take a lease-up risk.

That's what Paul is talking about when looking for -- formerly, maybe 300 basis points seems to be squeezing in considerably over the past few months into something in the 180, 200, 220 basis point range.

Okay. Great. Thanks for the detail today.

Thank you. (Operator Instructions) George Hoglund with Jefferies.

I don't know if this was asked already. But can you address the insurance participation rate and sort of what's the trend there. And then also, sort of what's the overall increase in rate charged on tenant reinsurance?

As far as penetration rate and the capture rate, which is new enrollment, they're both trending upward, [are kind of tracing rate at], and September was 58.9 versus 56.9, and capture rate is up as well to 82.8%, nearly 83%, and is --

The rate we charge the customer hasn't changed, George. We have the ability to change that at any time, but we haven't changed it yet this year.

Okay. All right. Thanks, guys.

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

Thank you, Melissa. We appreciate everyone's interest in our company and will probably see most of you next week at NAREIT. So in the meantime, have a good weekend. Thanks.

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