Life Storage, Inc.
Q1 2015 Earnings Call Transcript

Published: 30 Apr 2015

[Operator:]

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.

[Diane Piegza:]

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 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.

[Dave Rogers:]

Thanks, Diane and good morning everyone. Well once the snow finally melted and our people and properties got out, things pretty much went away we expected this quarter. February was the slowest month we’ve had in quite few years in terms of call volume and traffic, but March now April have rebounded nicely. Our same-store occupancy level of 90.5% at March 31 is the best we’ve ever achieved in the first and we hope to set a few more record high before the years over, but the real driver this year is going to be increased run rates for both existing and new tenants. We think there is room to grow them and the busy season starts now our folks are on it. Andy will give the details concerning Q1, but the takeaway is that, it set us up for a good year to come. We got off to a bit of a slow side on the acquisition front, acquiring only 2 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 song says it’s a jungle out there, high quality stores and primary markets are trading at historically low cap rates. Good stores and secondary markets are price rich, stabilized yields projected foresee of old deals like getting squeezed tighter [ph] and higher and there’s a lots of [Indiscernible] these properties. So we are aware what’s going on in all the domestic markets and we continue to see construction value add acquisitions for our portfolio, but we are 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 ticking up, but for the most part the new stores are needed and well placed. Demand continues to increase, customer awareness continues to grow, the 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 at and we’re looking forward to a good 2015. Andy and now let’s you talk about the quarter.

[Andy Gregoire:]

Thanks Dave. Last night we reported same-store revenues increased 9.7% over those of the first quarter of 2014. The growth was a result of the 100 basis points increase in average occupancy and 3.4% increase in record rates. Same-store occupancy increased over the prior years as expected and it was 90.5% at March 31st 2015. Tenant insurance income for the same-store pool continued to show sold growth, increasing $332,000 in the first quarter of 2015 as compared to the same period of 2014. Total operating expenses on the same-store basis increased by 2.5%, primarily as a result of increased repairs and maintenance expenses which includes higher snow removal costs. As noted in our release we have reclassified internet marketing expense from general and administrative expense to 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 say to provide our investors additional collar and 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 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 2014. G&A cost were $870,000 higher this quarter over that of the previous year. The main reason for the increase was the fact that we operate 35 more stores at the end of this quarter as compared to January 1, 2014. Increased income taxes on our taxable re-subsidiary and additional legal fees offsetting the impact of the increase overhead was $266,000 increased in third-party management fees earned this quarter. Regarding properties, Dave mentioned the two stores we purchased during the quarter for $50 million. In addition to the purchase of the four stores in New York and Connecticut that even leased since November 2013. Of the two properties acquired, one was purchased with CFO and other was 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 and our line of credit. Our balance sheet remains strong and during the quarter we issued 1,380,000 common shares through an overnight offering at price of $90.40 per share resulting in net proceeds of a 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 ATM plan during the quarter. At March 31st, we had approximately $10.3 million in cash on hand and $237 million available on our line of credit and approximately $151 million available under the ATM program. With regard to guidance, things program [Indiscernible] for Q2 should be in the 5% to 6% range and then lie around 6.5% and a 0.5% for the quarter. Expenses out there, the property taxes have increased 3% to 4%. Property taxes for the quarter expected to be between 2% and 3%. We expect full-year revenues to growth between 5% and 6% over 2014 and then lie to increase 6% to 7%. Our guidance has still done addition of $100 million of accretive acquisitions in 2015 of which approximately $31 million has been completed as of today. We have not included in guidance to relate in acquisition cost incurred today 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 and $4.85 per share and between a $1.21 and a $1.23 per share for the second quarter of 2015. With that Melissa, we will open the call up for questions.

[Operator:]

Thank you. At this time we will be conducting a Question-and-Answer session. [Operator Instructions]. Our first question comes from the line of Todd Thomas for the KeyBanc Capital Markets. Please proceed with your question.

[Todd Thomas:]

Hi, thanks, good morning. So first question on occupancy, I was just wondering if you could share with us what your occupancy is today? How that compares year-over-year? And then also, I guess the year may be got off to a little bit of a slow start that our things rebounded in March and April. Where are you projecting occupancy might peak out in sort of late July, early August or you still expecting to be able to get to the same levels that you were previously projecting?

[Ed Killeen:]

Good morning, Todd. This is Ed. Right now we are at 91.3, 160 basis points over last year same time, and as far as what that [Indiscernible] look like for the end of the peak leasing season. It is hard to say, we might see a gap of 200 basis points over last year, but right now we are 91.3.

[Todd Thomas:]

Okay. And then last quarter it sounded like your - 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 way start there, I guess and sort of how has pricing power been relative to your expectations as point that you are here.

[Dave Rogers:]

Well that’s exactly in regards in place. Great we did plan to get to a good place by second quarter which we will. You will see a lot of in-place rents go in for second quarter, but we work pretty gentle in the first quarter and that was weather related. We had very low move out rate versus last year obviously that’s weather related, but what you will see in the next quarter and through third quarter you will see us got very aggressive with in-place rates. In regards to asking rates, right now we’re at 4.8% over last year that gap is actually increased a bit. So you’re going to see a lot of our strength come out of current rates joining at the end of the peak season.

[Todd Thomas:]

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 portfolios performance in the market?

[Dave Rogers:]

Well as Andy said. Things are rolling along quite smoothly in Houston right now. We have very light occupancies. We’re not seeing any negative impact from the energy sector right now. Our eyes in the years are certainly on the market, we’re wharfing our things progress. And we’re cautiously optimistic, but we’re not seeing anything yet.

[Todd Thomas:]

What about outside of your property specifically though. Are you hearing that there is a little bit of a slow down or anything being felt some of your competitors in the market outside that you see even perhaps?

[Dave Rogers:]

Scott I think everybody will probably serve the same feeling that nobody is really seeing that yet. We’re not hearing that from anybody.

[Todd Thomas:]

Okay, got it. Thanks.

[Operator:]

Thank you. Our next question comes from the line of Smedes Rose from Citi. Please proceed with your question.

[Unidentified Analyst:]

Great. Thanks. This is John here for Smedes. On guidance it looks like 2015 has the full guidance increase $0.03 at an end point, but you kept the same-store guidance the same. So just trying to get an idea of the driver of that increase that are related to the timing of acquisitions or what exactly is throughout in that increase?

[Dave Rogers:]

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 21 B [ph] and probably a push little bit towards the higher end of those ranges is what caused the change in the FFO guidance.

[Unidentified Analyst:]

Okay, and then on the acquisitions, I know you just mentioned here the two in the quarter side from the $120 million and then you have three subsequent quarter end, can you talk about the cap rates you are seeing and what type of seller those were?

[Paul Powell:]

Yes, hi, this is Paul. The three to be bought subsequent to the end of the first quarter on a weighted average they was about 5.8 cap and that was brought down somewhat by the [Indiscernible] we bought it was, that was a little over a year and a half, it was 77% occupancy so that’s why the cap rate is about 5.8.

[Unidentified Analyst:]

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

[Paul Powell:]

The two we close were one was the [Indiscernible] opportunity…

[Unidentified Analyst:]

Yeah, right one of [Indiscernible] the other one is matured, right?

[Paul Powell:]

Right, the other one is matured that matured one was about 6.8 cap.

[Unidentified Analyst:]

Okay, and then my last question on supply, I know there is talks various across the markets, but are there any particular markets where you are seeing any new supply or any supply concealing with your product?

[Paul Powell:]

Yeah, as we do a quarterly review, our area managers check with municipalities and based on the first quarter review we started about 86 projects that were either infrastructure and or in the finding stage that are within our median markets up significance of 56 of those are in 4 states, 25 of them being in Texas, 12 in North Carolina, 13 in Phoenix and 6 in Denver.

[Unidentified Analyst:]

Okay, perfect. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jana Galan with Bank of America Merrill Lynch. Please proceed with your question.

[Jana Galan:]

Thank you. Good morning.

[Dave Rogers:]

Good morning.

[Paul Powell:]

Good morning.

[Jana Galan:]

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

[Paul Powell:]

Yes Jana, we do think we’ll certainly hit that guidance currently we have under contract 4 properties at $32.5 million and another 3 field opportunities at $26 million and then we’re in contract negotiations for another 11 operating properties for about $67 million and another 4 or so CO deals provided in that $43 million. So we’ll hit that $100 million and hopefully do better.

[Jana Galan:]

Okay. And then just quickly on the – thank you for the market color, I was curious just on the sense [ph] color it seems I have had a large occupancy year-over-year?

[Andy Gregoire:]

Yes, we had a flood – remember the significant rains last year in Pensacola drove down the occupancy in that area, we had [indiscernible] really effective but it’s coming back strongly now, so we should be buying there was a – maybe really just lots of customers from the water damage and I think they had something crazy like 20 inches of rain in a day and…

[Dave Rogers:]

Yes, nearly shutdown a whole property for a quite a bit of time.

[Andy Gregoire:]

[Indiscernible] that’s the price to do a business right, so that we vacated 400 plus units, we have – those customers don’t have anything to store anymore so we’re almost starting like a lease of property all over again except that we sort of pick thing of losing all those customers in one quick flood.

[Operator:]

Thank you. Our next question comes from the line of George Hoglund with Jefferies, please proceed with your question.

[George Hoglund:]

Yes, hi guys. Can you comment on how the reclassifying internet expenses what impact that have on overall same store NOI growth.

[Andy Gregoire:]

Yes, George this is Andy. It actually increase the NOI growth by 20 basis points, if you look at – you can actually pull that number out the internet marketing [Audio Gap] shown on the same store bases for the three month 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.

[George Hoglund:]

Okay. And just overall and going back historically the unified average how much been impacting to get out historically?

[Andy Gregoire:]

When we ramped up significantly three years ago and it impacted it had impact on the pool, but now it’s the growth on the same store bases is not that significant update. Yes, stores you spend more money, but the actual per store spend over the last few years is that growing significantly.

[George Hoglund:]

Okay, thanks. And then also just on the CFO deals, I mean the one you did in the first quarter and the ones you are 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?

[Paul Powell:]

Yes, hi George, this is Paul again. The CFO deal that we closed in the first quarter in Chicago we had targeted about an [indiscernible] we figured lease up been three and three and a half years, did once that we have under contract currently again we are targeting about an [indiscernible] overall and a two and a half, three, three and a half year it’s may not which market a stabilization.

[George Hoglund:]

Okay, thank and then just one last question. On the third party managed assets, how much the difference do you think it makes for rebranding assets to Uncle Bobs versus if you had to left [Indiscernible] asset with its original branding?

[Dave Rogers:]

I think it’s critical, you can’t hit the power of scale, you can’t get your folks to answer the phone, the sales work that we do, you are exposed on the weather right, we don’t do it unless we can branded on capacity, we don’t it, it doesn’t make any sense at all, that bring into the both.

[George Hoglund:]

Okay, thanks guys.

[Dave Rogers:]

Welcome.

[Operator:]

Thank you, our next question comes from the line of Ross Nussbaum with UBS. Please proceed with your questions.

[Ross Nussbaum:]

Hey guys, good morning.

[Dave Rogers:]

Good morning Ross.

[Ross Nussbaum:]

Couple of different questions here, you’ve talked about February being I think you used to work that, how much of that was sort of Boston Buffalo, Connecticut snow or was it more wide spread across the portfolio than that?

[Dave Rogers:]

Ross, that was indeed the badness if you will, our ends were down 5.9% in February and for the quarter they were flat and that almost all distributed to the Northeast and the snow and the weather related issues in the Northeast, they are very trade areas specific as you can imagine on one side of pound it might be clearest day, on the other side of pound we in particular got hammered, so not only did you have ecstatic customer base you had a cost associated with the access now removable and a lot of damage so that really throw up the earn in cost and so yes that bad February was due by and large to the Northeast.

[Ross Nussbaum:]

Okay, you realized or I guess your rent cost per square foot for the quarter it looks like it was up 3.4% year-over-year for the same-store pool, for the fourth quarter the number was slightly with 5.2%, a quarters before that 4.4%, so I guess I’m trying to figure out, if 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?

[Andy Gregoire:]

Hi, Ross, there was a couple of things going on here, first of all with the in place we were hesitant about it, really when you see that weakness let me saw in February we did pull back a little bit, but the other thing was we increased free rent this quarter which we haven’t really, you haven’t seen us do much we think we are the best in where we are at free rent [Indiscernible] I mean we gave away a $1.8 million during the quarter, $1.6 million, $1.67 last year, so the increase was like a $142,000 of free rent that’s unusual for us, but we think we’re the best that reducing that’s probably where we have the lease room to improve. Though we do a great job in revenue management given a way to lease, we just wish the whole industry to follow their process. So sometimes it’s top when there is others out there given the way to compete against that and so you saw a little bit of an efforts the rate growth.

[Ross Nussbaum:]

All right. So I’m just try to reconcile sort of the – what I’ll call little bit of a slowdown and realize in curve Q1 against your comments you’re going to be aggressive on rate growth as we get here into the peak season. Do you guys think that you will be able to achieve better than the 4.5% to low 5% rate growth that you are able to see last sort of what I’ll call summarish [ph].

[Paul Powell:]

Yeah, I really do think we are having March and April we’re very strong the increase letters that went out, but the second quarter have been significantly more than we’ve done in a long time. So we’re feeling comfortable the phones are ringing it’s becoming in the busy season. Occupancy up a 160 basis points at this time in April it’s a surprise for us. We didn’t think we could have that gap and that’s looking at 200 basis points at the peak of the busy season. That’s stronger than we had expected. We really thought a 100 basis point was 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.

[Dave Rogers:]

And Ross in regards to the asking rates the in-place rates that were speaking of getting a little bit of more aggressive of that or over the next quarter into the peaks on season, the value of those increases are by far the greatest of the event in any quarter that we really done recording them. So while we are a little bit gentle in the in-place for the first quarter, the value of those that we put in were the greatest ever and we think that will continue to be able to do that through the peaks on season, so that will make a difference.

[Ross Nussbaum:]

Okay, final question from me. Where are asking rates today versus in-place kind of roll-up or roll down?

[Paul Powell:]

[Indiscernible] a lot of people below the current rate than we do about.

[Ross Nussbaum:]

What are the current rates [Indiscernible] that you have done and that as roll-up?

[Ed Killeen:]

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

[Ross Nussbaum:]

Thanks, Ed.

[Ed Killeen:]

Thanks.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from the line of Todd Stender with Wells Fargo. Please proceed with your question.

[Todd Stender:]

Hi, good morning guys.

[Dave Rogers:]

Good morning.

[Paul Powell:]

Good morning, Todd.

[Todd Stender:]

Dave, you mentioned that you’re going to push rates on new and existing customers this year, I imagine it is the fact that you are in a very high occupancy in the Q1 going into peak season. Is it the lack of new supply, is it that occupancy level, I want to [Indiscernible] give you that confidence right now, that’s part one? And then two, what market do you think you’re going to be focusing on primarily and then on counter to that with markets may be you can’t push as much?

[Dave Rogers:]

Yeah, certainly if all of those had the metrics of the sector I just rate, there is some new supply coming on that we have been talking about, but not enough to really make a difference because as we have talked about, our occupancy jumps pretty good, going back 10 or 11 quarters ago and we have been on a nice upward trend hitting [Indiscernible] over the last few quarters. What’s happened also that we went a lot of these independent operators and smaller operators have enjoyed this overflow and we talked about how we turned away thousands of customers a quarter away, they got to go somewhere, they are going to let the smaller operators, their occupancies are coming up and enables us than they have a lot more pricing power in the industry and as a company. So [Indiscernible] uptick in demand house and just the overall strength of being able to know where you can push or where you have to pullback a little bit, but it is and in terms of the overall Todd, I think you’ve heard it from us than the others over the last at least 2.5 years, it’s a right time to push rates in and get some pricing power. As far as individual markets, I’ll let Ed just talk about few of those.

[Ed Killeen:]

Todd, looking at it from a market specific standpoint, it looks like we are going to be able to push pretty hard enough in the Northeast for now there’s some pent up demand were really start pushing in the Northeast, you will see it push pretty hard in Florida and still Texas, San Antonio is the market that really is undersupply and where we pushing pretty hard there, Phoenix will be doing the same there, so there is quite a few markets we’ll pushing, I would say again Texas, Florida, New England and we’ll push hard and quite a few of the markets.

[Todd Stender:]

Thanks helpful, thank Ed. And then on the property, on the stabilized property in Chicago what was the occupancy what is the in-placement and what is the market rents around that specific to that market?

[Paul Powell:]

On the Todd, this is Paul, on the stabilized asset we bought in the first quarter in place rents were around $10, this was a true mom and pop run property, it was a full property we expect to be pushing rates 15% to 20% in the first year, the occupancy was 94% acquisition again the full store zero rate management so as of today I think we’ve already push rates to some degree, I don’t have that number in front of me right now.

[Todd Stender:]

Okay, great, thank you.

[Operator:]

Thank you. Our next question comes from the line of John Pawlowski with Green Street Advisors. Please proceed with your question.

[John Pawlowski:]

Thanks good morning. You’ve mentioned Houston and Texas operations largely impact, any sense to the transaction market is shifting pricing or property is coming available to the sale alone?

[Paul Powell:]

In Texas, we are not seeing the deals that we are looking at the pricing is currently not coming down, we’re also seeing a big increase in development opportunities, we’ve come through my office, we’re not seeing any opportunity to really impact to say, that we’re going to take advantage of just because of our current of what we owned in Texas, so we’re looking at those opportunities but we’re not seeing any price relief.

[John Pawlowski:]

Okay, and so the sense is for example the four season portfolio trade in a similar cap rate range or little bit higher?

[Paul Powell:]

Yeah, I think it’s another portfolio of the quality of the four seasons came on the market would pay certainly sub 6 may be year and a five cap for portfolio of that size and quality.

[John Pawlowski:]

Okay, great. That’s it from me. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Anthony Ha with SunTrust. Please proceed with your question.

[Ki Bin:]

Hi, this is actually Ki Bin. David could you talk a little bit about where do you think your properties [Indiscernible] versus some maybe very nearby surrounding private operator and how does their friends were look like today maybe compared to a couple of years ago and maybe as a follow-up, how far can that road ramps starched before things change?

[Paul Powell:]

I think we are having the gap closed on its a little bit now that the independent guys are not seeing 70s handles on their occupancy and they are more of 80s, higher 80s. I think that still suffer in most markets, more discounting than we would like to see, but on a rate picture I think the gap is closer it depends on lot of places certainly, but and the thing goes with the other rigs and then we compete again. So I think the rate gap we have – this is before. We are ready to go again. We have held back a little bit on rate increase. So I think, you are asking me now, why does we getting started? If we have the same question in September, I think our GAAP will be up considerably higher because we will be using our pricing power a little bit more. I think the gap can go pretty great key. I think the idea that we’ve been establishing for the last couple of years on a fact that get seen and not just us, but the other big heights we have the power to get out the well and beyond that first stage and have some real presence with the field. I think that that makes a big difference. You got a guy across the street that that’s seen and it may not be on further customer guides up our store that even though that guy is there, he is already went preapproval [Indiscernible] and can’t get information. It is locked and leased writing for to go. So I expect that gap to grow considerably. They may catch up a little bit in the fall, but right now I think the gap is not too great. I think it is going to get greater and I think we can sustain the effort as long as the web is getting the power that it gives us.

[Ki Bin:]

Okay, thanks. And [Indiscernible], but if you just comment on your willingness to look for or to pursue some to take and CPO that’s what’s your peers have been doing?

[Paul Powell:]

We’ve been doing and as Paul mentioned, we closed a couple last year, we closed a couple last quarter, we got a pretty few in the pipeline. I will tell a lot of funds taken out again in the last year or so, this price has got quite. The whole idea is we are not getting the idea of environmental risk and then standing that year or two years or three years preparing the guidance [ph] to get approval and zoning for it, so that we are – and we’re going to pay for that and we are not taking the construction there. We want to have people who know what they are doing, who done it before, property who have built properties that we bought, so we lay off the construction risk, and the only risk we are taking on here is the lease up risk which we think we are very capable of doing with the platforms we have, but man there are not leaving much rooms for us to get paid for that part of it, as Paul has talked about over the last couple quarters it’s getting down quite a bit from – we had couple deals that we are looking more than ten on a stabilized bases and that haven’t for a deal or two and then getting down to eight and seven and some guys want, they want to get paid to [indiscernible] we projected NOI four years out, that’s really gotten to be – as I said, but lot of the funds been taken out of it, just in the last nine or ten months.

[Ki Bin:]

Thanks for the color.

[Operator:]

Thank you. Ladies and gentlemen thank you at this time we have come to the end of our time for question. I will now turn the floor back to Mr. Rogers for any final concluding remarks.

[Dave Rogers:]

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 [indiscernible]. Have good weekend.

[Operator:]

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