Life Storage Inc (LSI) 2015 Q1 法說會逐字稿

Greetings and welcome to the Sovran Self Storage First Quarter 2015 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 of Investor Relations for Sovran Self Storage. Thank you, you may begin.

Thank you, Melissa and good morning everyone. Welcome to our first quarter 2015 conference call. Participating in today's call will be Dave Rogers, Chief Executive Officer; Andy Gregoire, Chief Financial Officer; Paul Powell, Chief Investment Officer; and Ed Killeen, our Chief Operating Officer. 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. 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.

Thanks, Diane and good morning everyone. Well once the snow finally melted and our people and properties bought out things pretty much went the way we expected this quarter. February was the slowest month we've had in quite a few years in terms of call volume and traffic, but March and now April have rebounded nicely. Our same store occupancy level of 19.5% at March 31 is the best we've ever achieved in the first quarter and we hope to set a few more record highs before the year is over.

But the real driver this year is going to be increased rental rates for both existing and new tenants. We think there is room to grow them and the busy season starts now and our folks are on it. Andy will give the details concerning Q1, but the takeaway is that's up for a good year to come. We got off to a bit of slow start on the acquisition front acquiring only two stores in Q1. But we closed a few more in April and the deal closing increased considerably in recent weeks. Still like the Randy Newman's song says it's a jungle out there. High quality stores in primary markets are trading at historically low cap rates, good stores in secondary markets are priced rich, stabilized yields projected for C of O deals are getting squeezed tighter and tighter and there's lots of good bidders for all of these properties. So we're aware of what's going on in all the domestic markets and we continue to seek and structure value add acquisitions for our portfolio, but we're being pretty prudent about it.

Overall, the self storage landscape is much the same as it's been for the past many quarters. Growth of new supply is picking up. But for the most part, the new stores are needed and well placed. Demand continues to increase; customer awareness continues to grow; we large operators continue to press our advantage of scale, technology and brand. So we remain very bullish on the sector and on our Company. Self storage is definitely a fun space to be in and we're looking forward to a good 2015. Andy, I'll let you talk about the quarter.

Thanks, Dave. Last night we reported same store revenues increased 5.7% over those of the first quarter of 2014. The growth was the result of the 100 basis point increase in average occupancy, and a 3.4% increase in rental rates. Same store occupancy increased over the prior year as expected and was 90.5% at March 31, 2015.

Tenant insurance income for the same store pool continued to show solid growth, increasing $332,000 in the first quarter of 2015, as compared to the same period of 2014. Total operating expenses on a same store basis increased by 2.5%, primarily as a result of increased repairs and maintenance expenses, which include higher snow removal costs.

As noted in our release, we have reclassified the Internet marketing expense from general and administrative expense to property operating expense for all periods presented to be consistent with industry trends. Same store net operating income increased 7.5% for the quarter. We have included summary information for our same store pool by both market and by state to provide our investors additional color on not only our largest market Houston, but all of our major markets.

In regard to Houston, we have stated over the past few quarters -- as we've stated over the past few quarters, we believe our scale and platforms will reduce any adverse impact of lower oil prices on our properties there and so far results have borne that out with same store sales increasing 6.5% and NOI up 10.2% for the quarter compared to the same period in 2014. G&A costs were $870,000 higher this quarter over that of the previous year. The main reason for the increase was the fact that we operated 35 more stores at the end of this quarter as compared to January 1, 2014.

Increased sales taxes on our -- increased income taxes on our taxable REIT subsidiaries and additional legal fees. Offsetting the impact of the increased overhead was $266,000 increase in third party management fees earned this quarter.

Regarding properties, Dave mentioned the two stores we purchased during the quarter for $15 million in addition to the purchase of the four stores in New York and Connecticut that had been leased since November 2013. Of the two properties acquired, one was purchased at C of O and the other was a mature property, both are located in the Chicago market. This month we purchased three mature properties for approximately $23.9 million, which were funded by draws on our line of credit.

Our balance sheet remains strong. During the quarter, we issued 1,380,000 common shares through an overnight offering at a price of $90.40 per share, resulting in net proceeds of $119.5 million, which were used to fund the purchase of the four stores in New York and Connecticut. We did not issue any shares through our ATM plan during the quarter.

At March 31, we had approximately $10.3 million of cash on hand, $237 million available on our line of credit and approximately $151 million available under the ATM program.

With regard to guidance, same store revenue growth for Q2 should be in the 5% to 6% range and NOI around 6.5% to 7.5% for the quarter. Expenses outside of property taxes should increase 3% to 4%, property taxes for the quarter are expected to be between 2% and 3%. We expect full year revenues to grow between 5% and 6% over 2014 and NOI to increase 6% to 7%. Our guidance assumes an additional $100 million of accretive acquisitions in 2015, of which approximately $31 million has been completed as of today. 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 our forecasted funds from operations for the full year 2015 to be between $4.79 per share and $4.85 per share and between $1.21 per share and $1.23 per share for the second quarter of 2015.

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

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

First question on occupancy. I was just wondering if you could share with us where occupancy is today, how that compares year-over-year? And then also, I guess in the year maybe got off to a little bit of a slow start, things rebounded in March and April, where are you projecting occupancy might peak out in sort of late July, early August, are you still expecting to be able to get to the same levels that you were previously projecting?

Good morning, Todd. This is Ed. We're -- right now, we're at 91.3%, 160 basis points over last year same time. And as far as what that spread is going to look like toward the end of the peak leasing season. It's hard to say, we might see a gap of 200 basis points over last year. But right now we're at 91.3%.

Okay. And then last quarter, it sounded like you are -- part of this year's plan was to be more aggressive on rent increases to existing customers. Did the weather prevent you from starting to send out those rent increases on time at all, so just maybe a little bit of a late start there I guess, and sort of how has pricing power been relative to your expectations at this point in the year here?

Well that's exactly why we hand in-place rates, we did plan to get to a good place by second quarter which we will. You'll see a lot of in-place rents go in for second quarter, but we were pretty gentle in the first quarter and that was weather related. We had a very low moveout rate versus last year, obviously that's weather related. But what you'll see in the next quarter and through third quarter, you'll see us get very aggressive with in-place rates. And regards to asking rates, right now we're at 4.8% over last year, that gap has actually increased a bit, so you're going to see a lot of our strength come out of current rates going into the peak season.

Okay, that's helpful. And then just last question. I appreciate the MSA breakout and some of that detail on Houston. Do you have a sense for what's happening in Houston more broadly within the self storage industry outside of your portfolio's performance in the market?

Well as Andy said, things are rolling along quite smoothly in Houston right now. We have very high occupancies. We're not seeing any negative impact from the energy sector right now. Our eyes and ears are certainly on the market. We're watching how things progress and we're cautiously optimistic, but we are not seeing anything yet.

What about outside of your properties specifically though, are you hearing that there is a little bit of a slowdown or anything being felt, some of your competitors in the market outside of the REITs even perhaps?

Todd, I think everybody will probably share the same feeling that nobody is really seeing that yet. We're not hearing that from anybody.

Smedes Rose, Citi.

Great. Thanks. This is John here with Smedes. On guidance, look at 2015 as the full guidance increased $0.03 at the midpoint, while you kept the same store guidance the same. So just trying to get an idea of the driver of that increase, is it related to the timing of acquisitions or what exactly is driving that increase?

Hi, John. It really is probably moving towards the higher end in those guidance ranges. So, we're still in the range but probably pushing a little bit towards the higher end. It was the Q1 [b] and probably a push a little bit towards the higher end of those ranges is what caused the change in the FFO guidance.

And then on the acquisitions, I know you just mentioned here the two in the quarter [aside] from $120 million and then you had three subsequent quarter end. Can you talk about cap rates you're seeing and what type of seller those were?

Yes, John. Hi, this is Paul. The three that we bought subsequent to the end of the first quarter on a weighted average, it was about 5.8% cap and that was brought down to somewhat by the Jacksonville property we bought, it was -- it's been a little over a year and a half and was at 77% occupancy. So, that's why the cap rate is about 5.8%.

Okay. And then, sorry did I miss this one, the two facilities in Chicago?

The two we closed were, one was the Cof O opportunity and (multiple speakers) I'm sorry?

Yes. Right. One was a C of O, the other one was mature, right?

Right. The other one was mature. That mature one was about 6.8% cap.

Okay. And then, last question on supply. I know there's talks and it varies across markets, but are there any particular markets where you're seeing any new supply or any supply competing with your product?

Yes. We do a quarterly review. Our area managers check with municipalities and they' found in the first quarter review -- we found about 86 projects that were either in construction or in the final stage that were within our immediate markets of significant and 56 of those were in four states, 25 of them being in Texas, 12 in North Carolina, 13 in Phoenix and 6 in Denver.

Jana Galan, Bank of America Merrill Lynch.

Thank you. Good morning. Going back to the acquisition market, you had a good pace but do you still feel good about the additional $70 million you expect to complete inside your guidance?

Yes, Jana. We do think we'll certainly hit that guidance. Currently, we have under contract four properties at $32.5 million and another three field opportunities at $26 million and then we are in contract negotiations for another 11 operating properties for about $67 million and another four or so C of O deals right in that $43 million. So we'll hit that $100 million and hopefully do better.

Great. And then just quickly on the -- thank you for the market color. I was curious just on the Pensacola, it seemed like that had a large occupancy dip year-over-year?

Yes, that's -- we had a flood that was -- if you remember the significant rains last year in Pensacola, drove down the occupancy in that area. We had one store that was heavily affected, but it's coming back strongly now. So we should be fine. It really was just that lots of customers from water damaging, I think something like - crazy like 20 inches of rain in the day.

Yes. Nearly shut down a whole property for quite a bit of time.

And then rather than taking it out of the pool, we -- that's the price of doing business, right. So we -- that we vacated 400 plus units, we had -- those customers don't have anything in the store anymore, so we're almost starting like a lease-up property all over again except that we are sort of taking the pain of losing all those customers in one quick flood.

George Hoglund, Jefferies.

Hi guys. Can you just comment on how the reclassifying the Internet expenses, what impact that had on overall same-store NOI growth?

Yes, George. This is Andy. It actually increased the NOI growth by 20 basis points if you look at it. You can actually pull that number out of the Internet marketing shown on the same store basis for the three months ended 2015 was $1.425 million; for 2014, it was $1.394 million. If you pull that out, net operating income would have been [7.3%].

Okay, and just overall like going back historically, on average how much has been impacted [what you have] historically?

You know when it ramped up significantly three years ago, it would've had an impact on the pool, but now it's the growth on the same store basis is not that significant. [I'm saying, yes], stores you spend more money, but the actual per store spend over the last few has not grown significantly.

Okay, thanks. And then also just on the C of O deals, I mean the one you did in the first quarter and the ones you're looking at now, in terms of underwriting, how long are you guys assuming until stabilization and what types of stabilized yields are you guys underwriting?

Hi, George. This is Paul again. The C of O deal that we closed in the first quarter in Chicago, we targeted about 8% cap. We figured it would lease up in 3, 3.5 years. The ones that we have under contract currently again we are targeting about an 8% cap overall in 2.5, 3, 3.5 year, depending on which market stabilization.

Okay, thanks. And then just one last question, on the third-party managed assets. How much of a difference do you think it makes rebranding assets to your Uncle Bob's versus if you had left an asset with its original branding?

I think it's critical. You can't get the power of scale. You can't get your folks to answer the phone with the scale of work that we do. You're not exposed on the web the right way and it's -- we don't do it unless we can brand it Uncle Bob's, we don't do it. It doesn't make any sense at all, not to bring it into the pool.

Ross Nussbaumm, UBS.

Couple of different questions here. You talked about February being, I think, you used the word bad, how much of that was sort of Boston, Buffalo, Connecticut snow, or was it more widespread across the portfolio than that?

Ross, that was indeed the badness, if you will. And our [ins] were down 5.9% in February. Yes, for the quarter, they were flat and that almost all is attributed to the Northeast and the snow. And the weather-related issues in the Northeast, they very trade area specific as you can imagine. On one side of town, it might be clear as day; on the other side of town, we in particular got hammered. So not only did you have a more static customer base; you have a lot of costs associated with the extra snow removal and a lot of damage. So that really drove up the R&M cost. And so, yes, that bad February was due, by and large, to the Northeast.

Okay. You've realized or I guess you rent growth per squarefoot for the quarter, looks like it is up 3.4% year-over-year for the same store pool. For the fourth quarter that number looks like it was 5.2%, couple of quarters before that 4.4%. So I guess I'm trying to figure out, did you guys back off on the rent growth, because of what was going on in February? Why was the rent growth in this quarter weaker than it was in the prior three?

Hi, Ross. There was a couple of things going on here. First of all was the in-place, we were hesitant. Really, when you see that weakness that we saw in February, we did pull back a little bit. But the other thing was we increased free rent this quarter, which we hadn't really -- you haven't seen us do much. We think we are the best and where we are at in free rent [rent line], I mean we gave away a $1.8 million during the quarter, $1.67 million last year. So the increase, it was like $142,000 of free rent and that's unusual for us. But we think we're the best at reducing that, that's probably where we have the least room to improve. So we do a great job in revenue management giving away the lease, we just -- we wish the whole industry would follow that process. So, sometimes it's tough when there's others out there giving it way to compete against that and so you saw a little bit of that, and that hurts the rent growth.

So I'm just kind of reconcile, sort of what I'll call a little bit of a slowdown in realized rent growth in Q1 against your comments that you are going to be aggressive on rate growth as we get here into the peak season. Do you guys think that you'll be able to achieve better than call it the 4.5% to low 5% rate growth that you were able to see last sort of what I'll call summer-ish?

Yes, I really do think, I mean March and April were very strong. The increase letters, that went out, the second quarter had done significantly more than we've done in a long time. So we're feeling comfortable, the phones are ringing as we come into the busy season. Occupancy up 160 basis points at this time in April, is a surprise to us. We didn't think we could have that gap and that's looking at 200 basis points at the peak of the [leasing] season, that's stronger than we had expected. We really thought a 100 is where we're going to run occupancy wise this year. So I think the spread in rates will be similar to last year. So I think we're comfortable with it.

And Ross in regards to the asking rates, the in-place rates that we're speaking of getting a little bit more aggressive at or with over the next quarter into the peak selling season. The value of those increases are by far the greatest that they've been in any quarter that we've really been recording them. So while we were a little bit gentle in the in-place for the first quarter, the value of those that we put in were greatest ever and we think that we'll continue to be able to do that through the peak selling season, so that will make a difference.

Okay. Final question from me. Where are asking rates today versus in-place? Had a roll up or roll down?

This is a -- our people below the current rate than we do.

What are the current rates and (inaudible) you got an embedded roll up.

We have 34% of our customers above the current rate and 57% below the current rate.

(Operator Instructions) Todd Stender, Wells Fargo.

Dave, you mentioned that you're going to push rates on new and existing customers this year (inaudible) the fact that you are at a very high occupancy in the Q1 going into peak season. Is it the lack of new supply, is it net occupancy level? What gives you that confidence right now? That's part one.

And then two, what markets do you think you're going to be focusing on primarily and then on counter to that what markets maybe you can't push as much?

Well, yes certainly it's all of those. The metrics of the sector are just great. There is some new supply coming on that we've been talking about but not enough to really make a difference, because as we've talked about our occupancy jumped pretty good going back 10 quarters or 11 quarters ago and we've been on a nice upward trend hitting historic highs over the last few quarters. What's happened also though is that a lot of the independent operators and the smaller operators have enjoyed this overflow. And we've talked about how we turned away thousands of customers a quarter away, they got to go somewhere, they are going to the smaller operators, their occupancies are coming up. It enables us then to have a lot more pricing power in the industry and as a company. So lack in supply helps, uptick in demand helps and just the overall strength of being able to know where you can push and where you have to pull back a little bit helps, but it's -- and in terms of the overall Todd, I think you've heard it from us and others over the last -- at least two and half years, it's the right time to push rates and get some pricing power.

As far as individual markets, I'll let Ed talk about few of that --

Todd, looking at it from a market specific standpoint, it looks like we're going to be able to push pretty hard -- hardly enough in the Northeast for no other reason, pent up demand that we are ready to start pushing in Northeast. You'll see us push pretty hard in Florida and still Texas, San Antonio is the market that really is undersupplied and we'll be pushing pretty hard there. Phoenix, we'll be doing the same there. So there is quite a few markets where we'll be pushing, I would say again, Texas, Florida, New England and we'll push hard in quite a few different markets.

That's helpful, thanks guys. And then on the property -- on the stabilized property in Chicago, what was the occupancy, what are the in-place rents and what are the market rents around that specific sub market?

Todd. Hi, this is Paul. On the stabilized asset we bought in the first quarter, in-place rents were around $10. This was a true modern top run property, it was a full property, we expect to be pushing rates 15%, 20% in the first year and the occupancy was 94% [acquisition]. Again it was a full store, zero rate management. So as of today, I think we've already pushed rates to some degree. I don't have that number in front of me right now.

John Pawlowski, Green Street Advisors.

You mentioned Houston and Texas operations largely impacted. Any sense of the transaction market is shifting pricing or properties coming in that are now available for sale at all?

Excuse me. Yes, in Texas, we're not seeing the deals that we're looking at. The pricing is certainly not coming down. We're also seeing a big increase in development opportunities at least coming through my office. So we are not seeing any opportunities really impacts us that we are going to take advantage of just because of our current that we -- what we own in Texas. So we're looking at those opportunities but we are not seeing any price relief.

Okay. And so the sense is, for example the Four Seasons portfolio trading in the similar cap rate range or little bit higher?

Yes, I think, even if a portfolio of the quality of the Four Seasons came on the market, you will be paying -- you'd pay a sub, certainly sub 6%, maybe even a 5% cap for that portfolio all of that size and quality.

Anthony (inaudible) SunTrust.

This is actually Ki Bin. You'd already answered, but David could you talk a little bit about where you think your properties REIT rates are versus maybe some very nearby surrounding private operator and how that differential looks like today maybe compared to a couple of years ago? And maybe as a follow up, how far can that roadmap stretch before things change?

I think we're having the gap close down a little bit. Now that the independent guys are not seeing 70s, 70 handles in their occupancy and they are more in the 80s, higher 80s. I think that we still suffer in most markets, more discounting than we'd like to see. But on a rate picture, I think the gap is closed. It's dependant on a lot of places certainly, but -- and the same goes with other REITs that we are competing. So, I think the rate gap, we have -- now this is before, we're ready to go again. We have held back a little bit on rate increase, I think -- you're asking me now right as we're getting started, if we had the same question in September, I think our gap would be up considerably higher because we'll be using our pricing power a little bit more.

I think the gap can go pretty great Ki Bin. I think the idea that we've been (inaudible) for the last couple of years on the fact that we get seen and with not just us but the other big guys. We have the power to get on the web and be on the first page and have some real presence with that C of O. I think that makes a big difference and you got a guy across the street that's not seen and it may not be until the customer drives up to our store, that even though that guy is there, he's already been pre-approved with us, has rate set, has his contact information that is locked and lease ready for him to go. So, I expect that gap to grow considerably through the busy season. They may catch up a little bit in the fall, but right now I think the gap is not too great, I think it's going to get greater and I think we can sustain the [effort] as long as the web is giving us the power that it gives us.

Okay, thanks. And I'm not sure if I want ask this or not, but did you comment on your willingness to look for or to pursue some -- picking up occupancy deals as one of your peers has been doing?

We've been doing. And as Paul mentioned, we closed a couple last year, we closed couple last quarter. We've got quite a few in the pipeline. It's -- I'll tell you -- a lot of (inaudible) has been taken out of the game just in the last year or so. The spreads have gotten quite tight. The whole idea is, we're not taking on the idea of entitlement risk and spending that year or two years or three years preparing the guidance to get approval and zoning for it, so that we are letting the -- and we are willing to pay for that. And we are not taking the construction risk. We want to have people who know what they are doing, who have done it before, preferably who have built properties that we've bought, so we lay off the construction risk. And the only risk we're taking on here is the lease-up risk, which we think we're very capable of doing with the platforms we have. They are not leaving much room for us to get paid for that part of it. It is, as Paul has talked about over the last couple of quarters it's getting down quite a bit from a -- we had a couple of deals that we're looking north of 10% on a stabilized basis and had them for a deal or two and then it came down to 8% and 7% and if some guys want -- they want to get paid a 6% cap rate on the projected NOI four years out. That's -- it's really gotten to being like I said, a lot of fund has been taken out of it just in the last nine or ten months.

Thank you. Ladies and gentleman, thank you. At this time, we've come to the end of our time for questions. I'll now turn the floor back to Mr. Rogers for any final concluding remarks.

Thanks everyone for your interest and intention to us. We are looking forward to a good rest of the year and we look forward to seeing a lot of you at NAREIT. Have a good weekend.

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