Life Storage Inc (LSI) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Life Storage Fourth Quarter Earnings Release. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Alex Gress, Vice President of Life Storage. Sir, the floor is yours.

Good morning and thank you for joining us today for the Fourth Quarter 2021 Earnings Conference Call of Life Storage. Leading today's discussion will be Joe Saffire, Chief Executive Officer of Life Storage; and Andy Gregoire, Chief Financial Officer. We are also joined in the room here today with David Dodman, Chief Operating Officer. Following prepared remarks, management that will accept questions from registered financial analysts.

As a reminder, the following discussion and answers to your questions contain forward-looking statements that are subject to risks and uncertainties and represent management's estimates as of today, February 25, 2022. The company assumes no obligation to revise or update any forward-looking statements because of the changing market conditions or other circumstances after the date of this conference call.

Additional information regarding these factors can be found in the company's public SEC filings. In addition to the press release distributed yesterday, we furnished our supplemental package with additional detail on our results, which may be found on the Investor Relations section on our website at lifestorage.com.

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

Thanks, Alex, and good morning, everyone. I am pleased to report an outstanding fourth quarter, during which we averaged 94.2% occupancy, which is 110 basis points higher than last year. Average asking rates for the quarter were 26% higher than the same period from last year, and we continue to see strong demand and pricing power through most of our markets.

For the year, in addition to an outstanding operating performance, we also achieved record acquisition volume, closing on $2.3 billion in wholly owned and joint venture acquisitions, which added 144 properties to our platform. Of this amount, $1.7 billion and 112 stores were wholly owned acquisitions, representing nearly a 20% growth in our wholly owned portfolio. These acquisitions represent a nice mix of both markets and maturity with about 25% still in lease-up and approximately 75% in the Sunbelt markets.

We continue to expand in key markets such as Austin, Atlanta, Tampa, Miami, Phoenix, San Diego and New York City. Despite 25% still in lease-up, we expect to achieve a blended year 1 cap rate in the mid-4% range. Today, we own and operate just under 1,100 storage facilities across 35 states.

With regards to third-party management, on a gross basis, we added 29 stores in the fourth quarter and 103 stores for the year with a total of 367 stores at the end of 2021. This portfolio of managed stores continues to provide a strong pipeline of acquisitions as we acquired 31 managed stores during the year, representing nearly 1/3 of our wholly owned acquisition volume.

We are off to a strong start in 2022 with January month end occupancy of 93.6%, which is 80 basis points higher than January 2021. Asking rates for January are up 26% year-over-year. And similar to last year, we are also starting off the year with a very strong acquisition pipeline with $483 million already closed or under contract. With regards to guidance for 2022, we estimate our adjusted funds from operations per share to be at the midpoint of $5.98 for the year, which would be 18% growth over 2021.

Before I hand the call over to Andy, I am proud to announce that Forbes Magazine has recently named Life Storage as one of the best midsized employers for 2022. We have also been recognized by Sustainalytics for our environmental, social and governance efforts as an ESG regional top-rated company. And lastly, just last week, I recently joined over 2,000 other CEOs in signing the CEO Action pledge for diversity and inclusion.

And with that, I will hand the call over to Andy, who will give -- who will go into more details on our performance for the quarter and the year and also our 2022 financial guidance.

Thanks, Joe. Last night, we reported adjusted quarterly funds from operations of $1.41 per share for the fourth quarter, an increase of 31.8% over the same quarter last year and well above the high end of our guidance. The sequential increase in FFO from Q3 to Q4 was a result of excellent same-store performance and acquisitions performing above our expectations.

Fourth quarter same-store revenue increased 16.9% year-over-year, driven by rental rates and occupancy gains. Though we did see the return to normal seasonal trends in the past couple of months, we remain highly occupied with average same-store occupancy up 110 basis points compared to the same quarter last year. This elevated occupancy has allowed us to continue to be more aggressive with rates on new and existing customers, leading to a significant increase in our in-place rates per square foot.

Same-store achieved rates were up 15.2% year-over-year in the fourth quarter, representing the continuation of substantial acceleration in achieved rates from 1% in the first quarter to 8% in the second quarter and 14% in the third quarter. Same-store operating expenses grew only 1.9% for the quarter versus last year's same quarter.

The largest negative variances occurred in marketing cost, office and repair and maintenance expenses. These increases were partially offset by a 3.2% decrease in real estate taxes and a 2.2% decrease in payroll and benefits. We were able to successfully challenge property tax assessments and also received over $1 million in refunds on previously paid property taxes.

The net effect of the same-store revenue and expense performance was a 410 basis point expansion in quarterly net operating income margin to 72.4%, resulting in 23.9% year-over-year growth in same-store NOI for the fourth quarter. With this improved performance, we again increased our dividend 16% in January as we continue to share growth in FFO with our shareholders. This increase follows our 16% dividend bump this past October.

Turning to the balance sheet. We supported our acquisition activity and liquidity position by issuing equity securities and closing a bond offering during the fourth quarter. Specifically, we issued an additional $212 million of common stock via our ATM program during the quarter and closed on $600 million of 10-year 2.4% senior unsecured notes that priced in late September.

Our net debt to recurring EBITDA ratio was 4.5x at quarter end, down from 5.4x at the same quarter end last year. Our debt service coverage increased to a healthy 5.5x at December 31, up from 4.7x from the same quarter and a year ago. We had $500 million available on our line of credit at year-end. And we have no significant debt maturities until April of 2024 when $175 million becomes due, and our average debt maturity is 6.8 years. In addition, at December 31, 100% of our debt was fixed rate.

Regarding 2022 guidance, we expect same-store revenue to grow between 9.5% and 10.5%, a majority of which will be driven by improved rental rates. Excluding property taxes, we expect other expenses to increase between 4.5% and 5.5%, while property taxes are expected to increase 6.25% to 7.25%. The cumulative effect of these assumptions should result in 11.5% to 12.5% growth in same-store NOI. We expect our wholly owned acquisitions to be between $550 million and $650 million.

Based on this outlook, we anticipate adjusted FFO per share for 2022 to be between $5.93 and $6.03 or 17.9% growth over the prior year at the midpoint.

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

(Operator Instructions) Our first question today is coming from Todd Thomas at KeyBanc.

Question first about the first quarter FFO guidance. I'm just trying to get a handle on the run rate coming off of the fourth quarter a bit. So first quarter guidance $1.36 to $1.40 relative to $1.41 in the quarter. I know there's some seasonality but you have the full benefit of the fourth quarter acquisitions, the third-party management platform was steady. It actually grew a little bit overall sequentially. Just curious maybe if you can talk about where we might expect to see the run rate pull back?

Sure. Todd, it's Andy. The first quarter, a couple of things. We had such a benefit in the fourth quarter from property taxes, some $3 million benefit in the fourth quarter. So obviously, that goes away in the first quarter. So that's probably the biggest issue in the first quarter compared to the fourth quarter.

Other -- besides that, we have our normal property tax increases year-over-year payroll and benefits, and it's a big time of year for snow removal, obviously. And that's normally the big difference between Q4 and Q1 as those few items.

Okay. And then are you able to share where occupancy is today in the portfolio and what that looks like year-over-year? And then Andy, can you provide a little bit of context around the occupancy assumptions that the guidance assumes throughout the year? Maybe talk about what you're anticipating for occupancy peak -- during the peak rental season and maybe peak to trough back half of the year?

Sure. Yes. Today, we're at 93.7%. It's about 50 basis points above last February at this time last year, a slight decrease from January. January, we had an 80 basis point gap. So that's where we are today. Our guidance assumes, our occupancy matches up with last year in the summertime. So we peaked out at just below 96% last year, and that's what our guidance assumes we do.

We do expect in our guidance that the peak to trough is a little bit steeper in the guidance versus 2021. So July was our peak last year through December was 210 basis points, and we're slightly more than that decreasing in the guidance.

Okay. That's helpful. And then just one last question or maybe a clarification. If we look in the supplement at the 4.5x leverage on a net debt to recurring EBITDA basis, does that take into account and adjust for the acquisitions completed in the quarter?

Yes, it does, Todd.

Our next question today is coming from Elvis Rodriguez at Bank of America.

Congrats on the quarter and year, guys. Quick question on the external growth. So Joe, perhaps you can share the strategy around guiding to $600 million, yet you're almost at $500 million in deals through February. Can you talk about what you're seeing? Are deals drying up? Or what are you seeing on the external market? Is it pricing that's given you pause on coming out with a larger acquisition guidance?

Sure. Elvis, it's always something that's really difficult to predict despite coming off a record year and obviously, some real large portfolios that came to market. And right now we're not seeing really any of those large deals come to market. It has been a little quiet from a broker perspective. We're fortunate that we've been working on a number of deals that we've been able to get under contract for the first quarter and have a nice pipeline, but it's getting a little bit more -- it's always difficult to predict.

And I think just with the uncertainties of cost of capital and rising interest rates and some uncertainty out there it's just a little bit more difficult. I think we'd probably be a little bit more comfortable if we saw some more portfolios come to market, not that we would necessarily win them. But it has been a little bit of quiet. We've seen a little bit of quietness from that perspective. So we feel comfortable with the guidance. And obviously, we'll adjust it as we did last year, if things pick up, but we'll focus on what we have under contract and try to get those closed by the end of the quarter.

And then just, if I may, on the micro fulfillment business, are you able to share sort of your outlook for store openings there this year? And then any potential for Life Storage to share more disclosure on that business in the future?

Yes. The micro fulfillment, obviously, that's the newer piece that we've been working on for the last 12, 18 months, the -- what we call the light speed product, and that is the e-commerce solution for smaller and medium-sized companies.

Last year was really building out the national presence. So we've got Atlanta, Vegas, Chicago, Columbus. We just opened up L.A. this month. And we really, at this point, want to see how we do with acquiring customers and attracting customers in that space before we really start building these out a little bit further. It's still in a beta phase, in my view. It's a great feature.

Obviously, demand is out there. There's a lot of competition for it. We're fully occupied, which we're not in a hurry to build out 7,000, 8,000 square feet of spaces when we're fully occupied in most of our stores. But we feel pretty good about what we're doing. I think this first 6 months of the year, we'll see how we do in attracting customers. We've been successful at it. We had over, I think, nearly 30,000 shipments in December and obviously a Christmas peak. And in January this year, we're up about 35% in shipment. So the business is growing, but we're not yet there yet to do a full ramp-up of the micro fulfillments just yet. We want to see what 2022 turns out in terms of attracting customers.

Our next question today is coming from Samir Khanal at Evercore.

Andy, so just curious on some of the breakdown for expenses for next year. I know you provided a little bit of color on property operating expenses, but just trying to get a little bit of understanding on some of the other line items.

Sure. Samir, payroll is -- we're seeing some pressures on that line item in the same-store group. So your probably 4% to 5% is a good run rate there year-over-year. Marketing of 8% increase is what we're looking at. I think we detailed the -- what we're looking for property taxes, 6.25% to 7.25%, and utilities probably in 5% is in the budget. Otherwise, everything is pretty much in the 2% to 3% range.

Got it. And then Joe, just shifting to the acquisition pipeline. I know you talked a little bit earlier, but just in terms of -- maybe give us an idea of sort of the markets you're focused on. I know you've been sort of active on the West Coast as well, but certainly more in the Sunbelt markets now. So trying to understand where the focus is and sort of what the pipeline looks like for you.

Yes. Well, I just touched upon the pipeline. Obviously, a pretty decent one that we're working through right now, Samir. Obviously, our strategy for the last few years is to find deals in markets with strong demographics and strong street rates. And that really has been the focus. The Sunbelt obviously is an area we like. We're really successful last year with 70% of our properties in the Sunbelt, especially Florida markets have been -- we found some really nice deals there.

But for the year so far, California, we were a little bit light last year. But for the -- our pipeline right now, we closed on 6 in California, and we have another 300 contracts, so a real good start for us in those markets, which are always areas that we want to add scale to.

Other than that, Samir, it's the usual markets that we'll be opportunistic if there's good opportunities, and especially with our managed portfolio, if an owner is ready to sell. And we're in that market, we'll gladly bolt on to any of the markets we're currently in.

Yes. Just as a follow-up, do you get the sense that there's less portfolio deals today. I know there was a few last year, but kind of what's the sense and portfolio deals versus one-off this year?

Yes. I mean it's still early, right? It's still early in the year. I think last year, the industry saw the Big Easy Storage deal come out and then took some time and then some of the large ones came up. So I think in general, we haven't seen in the $100 million, $200 million range portfolios. We haven't seen a ton of those. For us, it's really been blocking and tackling and doing a lot of one-offs for 25 or so we have currently in our pipeline.

Our next question today is coming from Juan Sanabria at BMO Capital Markets.

Maybe just with the clarification, I think you said that for the acquisitions, I wasn't sure if it was fourth quarter or for 2021 as a whole that a quarter before a lease-up with a mix for blended yield. And if that was for the year, if you could provide us both that similar number in terms of lease-up and year 1 yield expectations for the fourth quarter deal as well as kind of what you have executed on so far to start 2022?

Sure, Juan. Yes, the 4.5% was the blended cap rate for the full year. I don't believe that fourth quarter was really anything different from that. In the first quarter, it's more about a forecast, the blended yield so a little bit tighter. But again, 9 of those were in California. So you typically expect a lower cap rate in those markets.

The mix is still roughly about 25% of what we have for the first quarter of lease-up versus stabilized. So they -- at a 4% cap, it still should be accretive in year 1 for us.

Okay. And then I was just hoping maybe you could talk a little bit about supply and how your markets are trending if you think about your expectations in '22 versus what you saw in '21. In the kind of the intro, you talked about most markets seeing strong demand. So I'm just curious if there's some markets where you're starting to see maybe a quick normalization if there's any commonalities with those, maybe not as quite robust markets given that everything is still strong, but maybe some not quite as strong as others.

Yes. I mean, we've -- I think for the last couple of quarters, we've anticipated that 2022 would be pretty flat to 2021, and our view on that hasn't changed. We still see about 150 or 160 stores in our markets being delivered. That was kind of the number in 2021, and we are still expecting that similar amount in 2022.

You probably heard on some other calls, it's just -- for a developer perspective, it's not easy, right? There might be demand, but things are taking longer to get entitled. The cost of construction is much higher. So I think some of that is holding off a wave of too much new supply.

So really, the markets that -- of our -- markets that we kind of watch with 10 or more stores, it's the usual suspects currently of Vegas, Phoenix, Orlando that we're watching more closely New York City a little bit, but that's a bigger geographic footprint for us. So we're not too concerned. So really 2022, we've been consistent that we feel it should be a pretty good year in terms of supply. Nothing that we're too concerned about.

Our next question today is coming from Smedes Rose at Citi.

I just wanted to ask a little bit about the financing of acquisitions going forward, just with the year-to-date pullback in shares, just assume that you would maybe use more debt at this point versus equity.

Yes, Smedes, it's actually -- if you look at how we funded 2021 acquisitions, with the combination of the ATM, a bot deal we did and the OP units we issued, we had some 70% of our funding in 2021 was through equity. So we're in a great spot. We're starting the year with $170 million or so of cash. So yes, it would be a year of more leverage, but we do expect a mix. And I would -- and model it out probably 35% to 40% equity, and the rest would be debt.

Okay. I wanted to ask you too on the property tax expectations, it was just a little higher than what we were looking for. They really were just slow. But I was just wondering if there are any particular markets where you're seeing more pressure on property tax versus others?

Yes. Obviously, the benefit we received in the fourth quarter, we had some great wins on some of the assessments and some refunds makes it for a tougher comp. So yes, I would think probably the midpoint is higher than people would expect. But we're seeing some pressure in North Dallas, Collin County, Cayuga County in Ohio, the Atlanta area and Cook County is constant on our radar and Virginia also. So those are the ones we're seeing more pressure on the property tax line in 2022.

Okay. And then just my last question. Are you seeing any changes in the way that customers are renting? Are they coming back more in person? Are they still using the touchless I guess that you guys introduced?

It's really held steady at around 30%, 35% for a while now. That's a good thing. It hasn't gone down. Prior to COVID, it was more like 10%, 12%. So it really has leveled out. We're still working on some projects internally to try to get that number up. I think we will probably achieve some momentum to get more customers to do it online. It may be just a little bit more of kind of getting them more to use right now.

Obviously, with our stores open and people more comfortable, the tendency to go in and talk to someone at the counter is still there. But we still think there's opportunity to improve that.

Our next question today is coming from Keegan Carl at Berenberg Capital Markets.

First just on the business customer side of things, can you maybe give us some comparison on how the demand levels would compare relative to the start of 2021?

Obviously, it's -- business customers have always been using self storage. Again, obviously, we have a strategy to attract more of them. We like them. There's a lot of reasons we have been doing warehouse anywhere to attract more businesses. The demand has been growing. It's hard to put a number on it, but just with the increase in getting goods for the last mile build-up of inventory because of COVID. We have seen a tick up in business customers, which is a good thing.

What we're trying to do is make it a little bit more easier for a business to choose self storage. So we're giving them the tools that they need, whether it's a forklift, inventory tracking, pick pack and shippers, that sort of thing. That's really what's behind warehouse anyway, providing the tools to attract more businesses to use our stores and our partner stores in the long run.

And it's a walk before you run. Obviously, we're building out the micro fulfillment centers. We got the regional distribution that I talked about a few minutes ago. And we'll see how we do with that. But in terms of our enterprise product, attracting larger companies in the medical device field or in the field service industry, that's really what they need. They need connections to ERP systems. They need inventory tracking and so forth. And those are the tools that we've been working on for the last few years. And obviously, that will help us attract more businesses in the future.

Got it. And just kind of on the top of the conversation on Lightspeed. I know it's kind of tough to answer this, but can you just maybe give us an update on how it's trending relative to your initial expectations as far as lease-up and demand, would you say it's above, in line or below?

I would say it's what we expected. We knew we had a -- to get into this business, you have to first build out the foundation, and that's what we've really focused on in 2021. And really now is spending a little bit of money in marketing to attract those customers to your proposition. And there's a lot of competition in that space. If you take a look at it.

We think we have a very good solution. We don't need to win too much market share. Obviously, we want to fill out the micro fulfillment centers, and we're doing that slowly, but there's still capacity and there's still opportunity. So we want to, again, walk before we run this year, attract some more customers. And then it's quite easy for us to start rolling these things out. If we need a second one in Chicago or if we need a new one in Dallas, we can do that relatively quickly. But I like where we are with this business, let's see how we do, let's and see if we can compete, and then we'll go from there.

(Operator Instructions) Our next question is coming from Michael Mueller at JPMorgan.

Just a quick one. What's the typical occupancy profile of the lease-up assets that you're buying? And when you look at the product that you're under contract for in 1Q. What's the rough average occupancy there for those assets?

Sure. Typically, we like to buy. When we say lease-up, it's typically later in lease-up. So I would say between 50% and 80% occupancy is the typical range. We don't -- we might do an occasional [CFO] where it might make sense, but we don't want to take too much dilution early on. I think the first quarter is roughly about that. So of the lease-up to 25% or so that are in lease-up, it's in that range.

Our next question is coming from Kevin Stein at Stifel.

I was just wondering if you had how many percent -- or what percentage of customers are below street rate right now? And how that compares to last year?

Yes, Kevin, about 50% of our customers are below the street rate, and that's about 10% more than were a year ago at this time.

We have no further questions in the queue at this time. I will now turn the floor back over to management for any closing remarks.

Well, thank you, everybody. I appreciate you taking the time to dial in this morning. And for those who asked questions, we appreciate it. We look really forward to heading down to the conference in Miami in a few weeks and finally seeing some of you face-to-face. Thank you.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. We thank you for your participation.