Life Storage Inc (LSI) 2020 Q2 法說會逐字稿

Good day, and welcome to the Life Storage, Inc. Second Quarter 2020 Earnings Call. (Operator Instructions)

I'd now like to turn the conference over to David Dodman, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to our second quarter 2020 earnings conference call. Leading today's discussion will be Joe Saffire, Chief Executive Officer of Life Storage; and Andy Gregoire, Chief Financial Officer.

As a reminder, the following discussion and answers to your questions contain forward-looking statements. Our actual results may differ from those projected due to the risks and uncertainties with the company's business. Additional information regarding these factors can be found in the company's SEC filings. A copy of our press release and quarterly supplement may be found on the Investor Relations page at lifestorage.com.

(Operator Instructions) At this time, I'll turn the call over to Joe.

Good morning, and thank you for joining us. I hope that you and your families are all safe and healthy. Although the second quarter's results were not as we planned earlier this year, I can say that I feel more confident today as compared to late March and early April.

As an essential business, we were extremely proactive ensuring our stores remained open and our employees and customers felt safe conducting business during these difficult times. Our strategic focus on enabling customers to self-serve with Rent Now has been a key differentiator for us during the past couple of years, and I believe that is evident in our results.

Move-ins during April, the height of the stay-at-home orders across the country, were only down 15% year-over-year, which compared favorably across our sector. And from a financial perspective, same-store payroll and benefits were down 7.3% for the quarter, our seventh straight quarter of year-over-year decline.

Rent Now hasn't been the only reason for that trend as we have had several efficiency initiatives underway to improve our store operating margin, but it has clearly been an important contributor. Rent Now seems to have settled in at around 30% to 35% of rentals after spiking to 50% in April. It is clear to us that customers continue to embrace this new platform and will continue to do so at a much higher rate than pre-COVID days.

I am also pleased that self-storage is once again proving to be resilient in a very difficult macroeconomic environment. We have remained hopeful that there would be pent-up demand, and July activity was indeed strong with same-store move-ins up 16.5% for the month. Furthermore, in June, we resumed both our auction processes and our ECRI program after pausing both early in the second quarter. And both of those initiatives have accelerated through July with only limited exceptions in certain states.

Since asking rate pressures remain, occupancy is an important lever for us, and we grew same-store occupancy 170 basis points year-over-year to 93% as of the end of July. Even after adjusting for auctions that could not be performed, we estimate occupancy as of July 31 to be at 92.3%, which is 100 basis points over July 2019. Considering we were 50 basis points lower in year-over-year occupancy as of March 31 of this year, we have many more customers on our platform relative to both the start of the pandemic and also this time last year, which will serve us well going forward. This is an outstanding accomplishment by our team.

And lastly, although much more is clearer today as compared to spring when we pulled our 2020 guidance, uncertainties remain and continue to make it difficult to restore reliable and precise guidance. With that said, based on what we know today with regards to the recent momentum, current market trends and demonstrated cost control, we anticipate that the second half of 2020 will be stronger than the same period last year as it relates to adjusted funds from operations per share.

And now I'll turn it over to Andy to walk through the details of the quarter.

Thanks, Jeff. Last night, we reported adjusted quarterly funds from operations of $1.42 per share for the second quarter, equal to the same period last year despite the challenging macroeconomic environment and COVID-related disruption. Same-store revenue declined 2%, while same-store NOI was lower by 2.5%. Revenue was impacted by lower move-ins, lower street rate, higher free rent and significant curtailment of our rent increases to existing customers. We believe the resiliency of our platforms is evident in the fact that same-store movements were only lower by 3.4% for the quarter, despite broad stay-at-home orders across the country for much of that time.

Partially offsetting that lower same-store revenue was our third straight comparative quarter of declining same-store operating expenses, which were down 1.2% overall, and lower by 5.3%, excluding property taxes. Once again, every expense line item was lower except for property taxes and digital marketing.

As Joe mentioned, our efficiency initiatives remain firmly on track despite the COVID-related market disruption. Same-store property taxes were up 5.8%, and same-store total marketing increased 27.6% for the quarter compared to the same period last year. Importantly, our balance sheet and liquidity remain strong. At quarter end, we had cash on hand of $9.5 million and $341.9 million available on our line of credit. We also have an accordion feature available on our line that would add an additional $300 million of available credit should we exercise that option.

Our net debt to recurring EBITDA ratio was 6x, and our debt service coverage was a healthy 4.4x at June 30. We have no debt maturities until August of 2021 with $100 million due and then not again until 2023 with roughly $165 million due. Our average debt maturity was 6.3 years, and the percent of our total debt at fixed rate was 92% at June 30.

We continue to monitor receivables very closely. And although our accounts receivables over 90 days remain elevated since the onset of the pandemic, we collected 99% of rental income in the second quarter of 2020 as compared to pre-COVID-19 levels. We have resumed auction activity in the vast majority of our markets and believe that we have adequately reserved for elevated accounts receivable. As a result, bad debt expense for the quarter was approximately $1 million higher than historical levels, which has reduced net revenues as presented in our quarterly financial statements.

We remain extremely diligent managing our liquidity. Our capital commitments are almost completely discretionary, and we only made such commitments when we are comfortable with funding availability and our ability to maintain a strong balance sheet. We believe we have adequate liquidity to manage through a sustained period of disruption.

And with that, operator, we will now open the call for questions.

(Operator Instructions) And our first question today will come from Alua Askarbek with Bank of America.

So I just had a few quick questions about the new tier pricing system. Do you guys have more data around now what the preference from customers is for the certain tiers? And then is there a certain like rule of thumb for the pricing, like in terms of maybe standard is more in line with street rates and premium is 20% to 30% more, something like that?

Yes. Alua, it's Joe. Thanks for the question.

It's still too early to really provide any sort of details as to customer behavior. But I think the real goal of it was to provide a better offering to our customers. We saw that Rent Now was picking up, and this really takes it to the next level. We ultimately believe this is what customers want. They want more choice. They want to be able to choose, have a little bit more control over the type of space they're getting. So we don't yet have that detail, but we watch it closely, and we're pretty much adjusting some of the pricing differentials between the 3 options as we learn more about customer behavior and what their preferences are.

But you're right, the standard rate is pretty much a street rate, and we'll give a slight discount, 5-plus percent for a value spot, if it's a spot we're trying to move that's been hard to rent. And then obviously, there's the premium spot, which we believe is great because there's a lot of customers who will just take the convenience spot, those who are getting the space because of their business, pharmaceutical rep and so forth, and they're not as price conscious and they want that great location. So thanks for the question. But right now, it's still a little early to kind of give you any sort of idea as to the customer behaviors.

Got it. Okay. And then just quickly on the units up for auction. Are there certain markets that those are concentrated in?

Yes. There are, Alua. There's New York, California.

Nevada.

Nevada; Austin, Texas. There's some certain areas where we -- the auction process could not begin. So those are the ones that are driving it.

And we have started the process for some of those, I think, New York and California. We've gotten the okay to go ahead and start the process, which can be quite lengthy, but at least it's a good sign that we're able to start moving on those markets as well.

The next question will come from Smedes Rose with Citi.

Hearing no response, moving to the next question, and that will come from Todd Thomas with KeyBanc Capital Markets.

Andy, thanks for the detail on the bad debt expense in the quarter. Are you expecting any additional reserves in the third quarter? Or should that normalize going forward?

Todd, there will be additional reserves. If you think about those customers that should have been auctioned, right, they should have been auctioned at the end of June or July. They're still with us in August, so another month's rent post. So we'll reserve for that, but no additional pre-current month reserves. So we've reserved everything through June 30 that we thought was uncollectible. Most of it did relate to those greater than 90 days. The under 60 days have been pretty typical -- gone back to typical levels. But the above 90 days, those spaces that should have been auctioned, that will continue to grow. So we'll have to continue to grow the reserve. So in effect, we're not recording that revenue each month that person -- each additional month they're with us that they're not paying us. We just reserve that additional month.

Okay. So just so I understand, the $1 million of above-average reserves that you recorded in the second quarter, will that -- that will continue to increase into the third quarter? Or it will actually begin to normalize more in the third quarter?

It should normalize as we go through all the auctions process. Like we had normal auctions in June. We started those -- we did a great job and our team did getting those done. July, we did auctions typical. So we've got to get through some of these states go all the way through October. So California and New York will go through October. Most of the other states should be done by September 30. So if the auctions are completed, that customer should be gone and the reserve related to that customer should go away as well.

Okay. Got it. And then I was wondering if you can comment at all on August. We're a full week in here. Has the pent-up demand that you saw that you described in July -- has that continued into August? And can you comment on August activity at all?

Yes. It's -- July actually, obviously, was a great month. It started to slow a little bit towards the end of July, but actually, the early part of August, we've seen the calls come in, the volume. So yes, it's been -- I still believe there's some demand out there, pent-up demand better than last year, maybe not yet to the extent of July. Early July was incredible, the July 4 weekend. But it's still up. We're very pleased. The call volumes -- the call center has been very busy, the web traffic. So yes, we're seeing some nice continued momentum, pent-up demand.

I think -- Todd, I think there's just a lot of new demand because of COVID, new reasons to use storage. There's a lot -- people doing remodeling of their home's kitchens because everyone's cooking; or home offices, they're trying to make room. So there's a lot of interesting things going on, and that might be a longer customer as well. It will be interesting to see how long this new demand sticks.

Okay. And August has typically been, I think, a net move-out month. Are you under the impression that this peak leasing season could be a little bit more elongated and that we might see a little bit of a stronger, I guess, like seasonal leasing environment for an extended period of time?

Yes. It's interesting, Todd. That's why it's making it so difficult to try to provide -- reinstate guidance, just so many unknowns. Things happening this time of year are so unusual, uncharted waters. We're doing rate increases more so in August than we had in previous years. So it's really hard to gauge. Look at the college students, are they going back to school? Are they not going back to school? Are they vacating? So there's a lot of moving parts, which is making it hard to gauge what will happen. But I think just given the last few months that move-outs will probably be better than last year. And move-ins, hopefully, will also be better. So, net-net positive.

But again, it's hard to predict. But we're not complaining. We're in a good spot with demand coming back. And all of the ones who reported, the occupancy looks good. So it's a good sign for our sector.

And the next question will come from Spenser Allaway with Green Street Advisors.

You mentioned in your prepared remarks, you've been able to accelerate rate increases in July. Can you just comment on how the magnitude of these increases compares to rates you would have sent out pre-COVID?

Yes. So it's -- we -- like I said in an earlier question to Todd, it is uncharted waters. We're doing these rate increases at an unusual time of year. You typically want to do these when it's the beginning of the peak season, and you're not so worried about move-outs because the phones are ringing more. But the demand has been strong. And obviously, we're doing our best to catch up on that lost revenue. I think we've -- in terms of volume, I have it here.

You got it, Andy?

Yes, I do. So Spenser, in July, we did 1.5x what we did last July for rent increases to existing customers. So volume-wise, we did 1.5. Rate, it's about the same rate, high 8s, just about 9% rate increase to that customer, but we did send out 1.5x the letters this July versus last July.

And I think -- and for August as well, August, we did more volume in this year in August, more than 2x the amount of volume in August as well. And we've already put in letters for September increases. So all 3 months is much higher than last year. And I think, hopefully, we can achieve at least 85% of the volume that we did last year by the end of the third quarter.

And the next question will come from Smedes Rose with Citi.

Sorry about that earlier. Technical difficulty there. I was just hoping maybe you could comment a little bit about what, if anything, you've seen on supply in your portfolio, if it's moved at all in terms of prior -- pre-COVID expectations? And sort of on that front as well, if you're seeing anything -- any sort of changes on the potential acquisition side in terms of pricing, things becoming more interesting or are people pretty -- holding pretty fast.

Yes. Thanks, Smedes. So yes, supply, we felt last year was the peak for our markets and our stores. Obviously, our 2 largest markets, Chicago and Houston, had probably the -- I think, they were #29 and #30 in the top 30 markets of new supply coming on. And that's what we've experienced. I think in the last 12 months from June 2019 to June 2020, we had about 65 stores opened within a 3-mile radius. That compares to about 140 for from -- sorry, 2018 to 2019. So that's encouraging.

And in fact, for the first part of this year, we were just talking about it, what's opened this year probably because of COVID, et cetera, we only have in our top 10 markets maybe a dozen or so stores. So that bodes well for new supply. So we're encouraged by that. We felt coming into 2020 that we are in a good spot with new supply. Obviously, we're still dealing with all the supply that's been built up over the last several years, but it is a good sign for us. And you're starting to see some of the occupancy improve. And hopefully, rates will now follow. So we're encouraged by that.

In terms of acquisitions. Obviously, things kind of quieted down during the -- especially April and May, with uncertainty on the markets, uncertainty on how you're even going to do due diligence. So some deals that were being marketed were pulled. Sellers were not willing to sell. It was quite difficult to -- what's the new norm? And how do you do your pro forma? I think it's going to start picking up again. I think there's a little bit more -- clearly, there's a little bit more visibility into the sector on what's going on.

Street rates may not be where they've been, but I think the activity should pick up. We haven't seen any sort of distress sets -- distressed assets on the lease-up side. But we're in a great position to take advantage of any opportunities. So we'll see what happens. But I would expect, the second half of the year, things to pick up.

(Operator Instructions) We have a follow-up question from Todd Thomas with KeyBanc Capital Markets.

You mentioned the -- we've talked about the increase in leasing that you saw from students back in March. And you mentioned some of the uncertainty around schools. Would it be good or bad if -- for self-storage, for your customer stays if the schools don't open? Do you start to see move-out activity from that? Or does that just lengthen their stay?

Yes. It's -- like it's already a longer stay than normal, Todd. It's a positive. Clearly, when COVID was hitting, it was nice to get that supply. It's not that significant, and they're smaller spaces typically for us. But to have that customer a little bit longer than normal, maybe even be eligible for a price increase, not that that's something that we would focus on, but they could stay an extra month or 2, it wouldn't hurt. Again, they're smaller spaces, which typically harder to rent, anyway.

Okay. And then I don't know if you've mentioned this at all, but can you talk about where move-in rates were throughout the quarter and in July? And then with where rates are today, what the spread is between move-out and move-in rates for customers?

So Todd, our street rates in this quarter were down 18% on average. They started the quarter down like 19.5%, ended the quarter down 16.5% or so. July was down 13%. So it's moving in the right direction. We like the trend we're seeing, even a little bit better in August, actually moved into single digits but still down. So we're in good shape, which way rates are going.

And what about the spread relative to move-out -- to customers moving out?

During the quarter, our rent roll-down was 8.1%, meaning our move-ins were paying 8.1% less than our move-outs. That improved to 5.5-or-so percent in July, meaning down 5.5% in July. So not significant, but more roll-down than we've seen historically.

Okay. And then -- and just one last question. Joe, I just -- the language that was put in the press release and you talked about the second half where you're expecting adjusted FFO growth to be above that of the second half of '19. We're seeing trends improve, but there's still a lot of uncertainty around the virus but also stimulus and fundamentals, which you've noted sort of the elevated uncertainty, right? So I'm just curious if you can walk through that decision and how confident you are in the outlook and whether there's something that you think that the investment community or the market's missing a little bit with LSI?

Yes. Obviously, Todd, we're making that statement based on how the economy is doing today. It doesn't take into account if there's a major second shelter-in-place or a pullback. I don't think that -- that could happen, but I think we'll see. But it really takes a look at where we are today and what we know today. We know a lot more today than we did on our last earnings call. Last earnings call, we didn't know where collections were going to be. Were they going to get continually worse? We didn't know if there's going to be any demand. There was a lot of uncertainty. We didn't know if we could do auctions. We didn't know if we could do rate increases. So a lot of that, we do know it today. So we're trying to give some sort of goalpost in a way, even if it's just a floor, as to what we should expect in the second half of the year. We finished July, we've got 5 more months to go. The start of August looks pretty good. So we feel pretty confident to at least put that in there.

We're putting rate increases in. We started those in June. We've done July. We've started August. So we have a view on where move-outs are going. Again, there's some risk. We don't know how move-outs will react this time of year. It's a different year. It's uncharted water. So it's difficult to give full guidance because we could see move-outs pick up. And again, we're typically going into a slower part of the season. So there's a little risk there. But we are doing our best to try to recapture some of that lost revenue.

And then there's expense controls. We feel very comfortable with what we have budgeted for expenses. And we've gotten through the second quarter and through July, and we've done a very good job with expense control. And so that's a big part of where we feel we can end the year.

So taking that all into consideration, we are trying to provide a little transparency to our investors. It's not full guidance, but it's a little something, which we hope is appreciated. And obviously, if things continue to improve and at the end of the quarter we're in a different position, we would try to reinstate. We just -- we don't know. But clearly, things are a little -- obviously, a lot better in terms of what we see compared to late March.

The next question will come from Jon Petersen with Jefferies.

Great. Just a couple of questions for me. So on the Rent Now business, I think you mentioned that it made up 50% of your leases in April. It looked like it kind of pulled back a little bit as the quarter went on. But I guess I'm just trying to -- you guys have obviously been at the forefront of this contactless leasing before contactless was a thing. Can you give us any more quantitative, I guess, understanding of how much of a differentiator that was for you in the second quarter, whether it was higher rents or up-selling or anything like that you've been able to do with that product?

Well, listen, we're very proud of it, and thanks for the question. We've been -- we've had it launched for almost 2 years. And Jon, it's -- the team was comfortable with it. We weren't scrambling at the last minute to try to figure out how to promote contactless rentals. The team was trained. So -- and many other storage providers did a great job of providing that sort of option for customers, but we weren't rushed to do it. We had our processes in place. We figured out our areas to improve over the last 18 months or so.

And then obviously, we fast-forwarded and rolled out quicker than we expected the Rent Now 2.0, the value option -- various spaces options. So we did a great job with that. Did it help us? Maybe. I think our -- obviously, our move-ins in May, I think we're leading in the sector. We did a great job. So maybe we've got more than our fair share of move-ins. And our occupancy has really improved. And I think that's been a part of it, the Rent Now. Our close rate is improving. So there's a number of factors. It's not all Rent Now. But clearly, I think it put us in a great position as the phones were ringing and starting to re-ring to get more customers.

And you saw our occupancy has improved through the end of July even without -- even if we discount the auction piece of it, where we can't do the auctions, our occupancy is still much better today than we had anticipated pre-COVID for this year. So we're very pleased with that. And I'm very proud of the team and very proud of what we've done with Rent Now. And we continue to look for ways to make it a better platform for our customers. So thanks for the question.

That's great. If I understand Rent Now 2.0 correctly, I think it's about allowing customers to kind of choose their facility. And I mean there's obviously an up-sell component there, right? Be closer to the elevator, be wherever they want to be. I mean can you give us a sense of what percent of customers ended up choosing a higher-priced unit after initially signing up?

Yes. John, the question was asked earlier. It's still a little early to try to provide sort of customer behaviors. It's an unusual period of time, even with COVID. But no, we don't have it. We -- I can tell you, though, that customers are choosing all 3 options. And it's -- obviously, it's going to be what's available because you may not have -- we may not have a value spot available. It's really going to depend on inventory. That's how fluid the offering is. So if there is -- there are no premium spaces, that option doesn't show up for the customers. But it's something we're monitoring. And we'll continue to monitor it and we'll adjust pricing if needed to see how it goes. But it's still early to say. But at least we're providing our customers options. They're not just stuck with 1 particular unit where they don't know where it is. And like I said earlier, in particular, for those who want a premium space and they're not price sensitive, they'll have that option.

Okay. All right. That's helpful. And then just one last question. I think you guys mentioned kind of third-party management a little bit. But I guess how do you anticipate over the next few quarters that business changing? Are there more opportunities? Are there less opportunities given the COVID environment and the recession?

Yes. We're very bullish on third-party management. Obviously, the REITs do a great job of managing. It's becoming more difficult for smaller operators to compete given things like Rent Now and our revenue management platforms, our SEO experience -- expertise and so forth. So it is getting harder. I think that will mean that more stabilized stores may turn to third-party management. Typically, it's been a lot of the new construction. Typically, that's 80% -- 70%, 80% of your new contracts. And that may shift.

Our pipeline has never been better. Very excited about the rest of the year. We clearly have some visibility as to which stores will be coming online, the new construction piece. So we're very optimistic about 2020. We'll, for sure, hit our goal. And then obviously, we're -- our name is getting out there.

Our performance has been stellar in terms of -- that's what owners look at, how do you perform in the market. So we have that behind us. And Rent Now has been a great marketing tool for us. So we feel very good about our platform and the prospects for the rest of the year and beyond.

The next question will come from Steve Sakwa with Evercore.

Just 2 questions. And if you answered them, I apologize. On just Warehouse Anywhere, any kind of updates on that or any kind of new trends that you're seeing in that business as a result of the pandemic?

Yes. Steve, yes, thanks for asking. We're -- we love this business. Obviously, it's an important tool for us to capture that business customer. No one else has it. And we think with COVID, more and more businesses are going to be looking for more storage. So we're excited to have this tool. We did buy out our -- as you may know, we had a minority -- 2 partners in that business. We bought them out during the quarter, which we're very excited about. We own 100% of the technology now. We're excited about that. So every dollar of investment that we put into it is for us. The pipeline is very good. COVID kind of had some hiccups and trying to get the pilot programs conducted. So we're kind of delayed a couple of months to what we expected this year. But we're very excited about it. And again, I think storage is going to continue to play a role in last-mile delivery and logistics. And with COVID, I think it's even more so. So we're very excited that we own 100% of the business now and look forward to growing it.

Could you just tell us what that buyout cost was of your partners? I assume it's not material, but any sense for dollar amounts?

Yes. It was not material. $2 million is what the agreement was, and it was very amicable. There was an opportunity at the end of this year to have a formal process to buy them out. And we have a very great relationship with our partners. One is continuing on as an employee and the contributor to the business. And the other one who retired earlier this year is looking for ways to do more work with us in accessing the network. So we've got a very good relationship with both the partners, and there was an opportunity for them to liquidate. And for us, it's an opportunity to put it into third gear.

Okay. And then with, I guess, with the Rent Now 2.0 and I think you said about 1/3 or so of the rentals are now kind of online, which is probably freeing up your managers and on-site folks to do other things. I know that payroll and benefits were down in the quarter. How do you just sort of think about sort of on-site personnel and just what you need to spend in the amount of people at the sites. What sort of efficiencies do you get by moving 1/3 and possibly higher over time?

Yes. I think that's -- it's one of the silver linings of COVID, Steve, is where Rent Now has ended up. It was kind of slowly creeping up from 8% to 9%, 10%, maybe 11%, 12% by the end of the year. And to jump to 30%, 35%, and we think that's going to be the new norm, is incredible. And it definitely is helping our payroll. We're going to continue to look for ways to leverage that. Obviously, we have store team spending now 1/3 less time at the counter. That's a lot of time. If you think about how much time 1 rental takes at the counter to be -- 30, 45 minutes to 1 hour by the time they're showing where the space is, et cetera. So it's a lot of time. We've already found ways to reduce costs early on, and we'll continue to do so. So we're constantly looking at ways to make the stores more efficient to reduce costs, and this is a big part of it. So obviously, we're not looking to go 100% without any person at the stores. There's a lot that needs to be done. But we're excited about it, and we'll continue to look at ways to leverage that.

And this will conclude the question-and-answer session. I'd like to turn the conference back over to Joe for any closing remarks.

Well, I want to thank you so much for joining the call this morning. I continue to wish everyone safekeeping, and be well. Enjoy the rest of the summer, and we look forward to talking again soon. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.