Life Storage, Inc.
Q2 2015 Earnings Call Transcript

Published: 2 Aug 2015

[Operator:]

Greetings and welcome to the Sovran Self Storage Second Quarter 2015 Earnings-Release. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to Diane Piegza, Vice President of Investor Relations. Thank you, please go ahead.

[Diane Piegza:]

Thank you, Brenda and good morning everyone. Welcome to our second quarter 2015 conference call. Leading today’s call will be Dave Rogers, Sovran’s Chief Executive Officer. Also participating are Andy Gregoire, Chief Financial Officer; Paul Powell, Chief Investment Officer; and Ed Killeen, our Chief Operating 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 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. It seems incredible to be saying this but our company’s results and those of the self-storage sector are, for the umpteenth quarter, setting new highs; highest ever occupancies, highest rate per square foot, highest NOI and the forecast calls for more. The usual suspects are at work here. Unit supply in most markets, the scale and brand new power of the larger operators, the use of technology to optimize revenue and garner efficiencies. It’s like Natalie Merchant used the saying, “these are days”. Regarding our performance, as we mentioned on our last call, we came out of the shoes a little slow in January, partly due to weather, partly due to a little tentativeness regarding pricing. But we had a better May than our first quarter run rate. Our June was better than May and July is stronger than June. So we are poised to hit it pretty good in Q3. The transaction market is open for business as might be expected with cap rates at the levels they are at. We were able to add 9 quality stores to our existing markets in Q2 and we have another 13 under contract for $85 million as it stands right now. As shown on one of the exhibits to the press release, 6 of the stores we have acquired for the past few quarters were purchased upon issuance of a certificate of occupancy and are leasing up quite nicely. We have two more of these under contract and quite few more on the works. We view this process as a great way to add value to our company and as a way of keeping an eye on and partaking in the growth of new supply in the industry. So fundamentals are strong, our company is in a good spot and I think the rest of 2015 is going to be great. Andy is going to talk about the quarter.

[Andy Gregoire:]

Thanks Dave. Last night we reported same-store revenues increased 5.8% over those of the second quarter of 2014. The drivers behind the revenue growth were a 130 basis point increase in average occupancy and a 3.9% increase in rental rates. Same store occupancy increased to 92.7% at June 30; that was a record level for our second quarter. Tenant insurance income for the same-store pool continued to show double digit growth, increasing 15.1% in the second quarter of 2015 as compared to the same period in 2014. Total property operating expenses on a same-store basis increased by 1.8%, primarily as a result of increased repairs and maintenance expenses, payroll and property taxes. The increases were partially offset by lower internet marketing costs and utility costs. Same-store net operating income increased 7.8% for the quarter which was an acceleration from the 7.5% experienced in Q1. We have again included summary information for our same-store pool for 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 regards to Houston, 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. In fact, results have borne that out with same-store revenue and NOI experiencing increases of 5.5% and 9.2% respectively for the quarter compared to the same period in 2014. G&A costs were $822,000 higher this quarter over that of the previous year. The main reasons for the increase were the fact that we operated 30 more stores at the end of this quarter as compared to last year’s second quarter, increased taxes on our taxable REIT subsidiary and additional legal fees related to a lawsuit in New Jersey. Offsetting the impact of the increased overhead costs was a $300,000 increase in third party management fees earned. Our strong performance in the first six months of 2015 led to the decision in July to increase our dividend by 13% which brings our annualized dividend to $3.40 per share. Regarding properties, Dave mentioned the nine stores we purchased during the quarter for approximately $75 million. Of the properties acquired, two were purchased at CFO [ph] for $18 million and the others were mature properties. Our balance sheet remains rock solid. During the quarter we issued approximately 200,000 common shares through our ATM at an average price of $91.53 per share resulting in net proceeds of $18 million which were used to fund a portion of the nine stores purchased. At June 30, we had approximately $6.6 million of cash on hand, $204 million available on our line of credit and approximately $133 million available under the ATM program. With regard to guidance, same store revenue growth for Q3 should be in the 5.5% to 6.5% range and NOI around 7% to 8% for the quarter. Expenses outside of property taxes should increase between 3% and 4%. Property taxes for the quarter are expected to increase between 2.5% and 3.5%. We expect full-year revenues to grow between 5.5% and 6.5% over 2014 and NOI to increase between 6.5% and 7.5%. Our guidance assumes an additional $85 million of accretive acquisitions in 2015. We have not included in guidance the related acquisition costs incurred to date or that will incur in the future. As a result of the above assumptions, we are increasing our forecasted adjusted funds from operations for full year 2015 to between $4.83 and $4.89 per share and between the $1.29 and $1.31 per share for the third quarter of 2015. And with that, Brenda, we will open the call for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Gaurav Mehta with Cantor Fitzgerald.

[Gaurav Mehta:]

A couple of quick questions. First, on the guidance for acquisitions, so just to be clear, the $85 million that you have for the remainder of 2015 that assets that you have under contract?

[Dave Rogers:]

Yes, we have levered those properties to stabilize the assets on another two CFO opportunities or that are under contract. Those CFO opportunities, one will probably open this year, one probably will be in 2016.

[Gaurav Mehta:]

And can you touch upon the cap rates that you are seeing for stabilized assets, new markets?

[Dave Rogers:]

For the second quarter, the average cap rate for our stabilized assets, the seven we bought, was about 6.2%. The other two were CFO opportunities, so there is no cap rate on that. So we are seeing in a market today roughly those – that range 6% to 6.5% for stabilized assets, for portfolio you will probably see a little bit below sub-6 cap.

[Gaurav Mehta:]

And then, lastly, can you update us on the occupancy for the month of July?

[Andy Gregoire:]

Yes, where we stand in July today is 93.1% which is 120 basis points over last July.

[Operator:]

Our next question comes from the line of RJ Milligan with Robert W. Baird.

[RJ Milligan:]

Dave, you mentioned that you started off the year a little tentative in terms of pushing pricing, can you talk about how that changed in the second quarter, what leverage you're pulling, and how far do you think you can push that through the back half of the year?

[Dave Rogers:]

Hey, RJ, what did happen was that at the end of last year, that’s when we sort of took a look at the data that drives our rate signals, and given the strong performance over the last three, four years, we decided to sort of pull back a little bit on both asking in-place and even discounts. So we did kind of recalibrate and when we did see that the in-place rates were being absorbed and asking rates were being accepted at higher levels at some specific markets, that’s when we started to readjust and go back and become a bit more aggressive. Our asking rates, for instance, are at 8.2% over last year and they’ve grown steadily every month 5.5%, 7.8% and now 8.2% and that’s 9.3% over the previous quarter, and the thing with in-place rates, of our 217,000 same store customers, 15,000 of those customers in Q2 received an increase which was 6.8% versus 8000 last year and 4200 the previous quarter. So we sort of again look at things, we wanted to pull back a little bit again given the strong results that we’ve had the last few years, but we decided, hey, you know what, all these rates are being accepted and we’re going to start pushing hard again. And that’s what we did and – on 1Q, and 2Q, and we will start to see those results in Q3.

[RJ Milligan:]

Do you think it's a possibility to continue to push those further, maybe get into double-digit year-over-year increases on Street rates and maybe something higher than the 6% to 7% for in-place in the back half of the year?

[Dave Rogers:]

Well, asking rates, I doubt, we will see double digits, that’s a pretty tall order. We’re going to let our rate signals play out and tell us what to do when we might indeed see that but on average we don’t think we will see that in asking rates. And in place, that’s about the same picture, 6.8% receiving increases, I mean I can’t tell you this but in Q3 the same amount of people that received increases in Q1 and Q2 combined will receive increases in Q3. So we will be very aggressive with in place but that certainly won’t reach double digits as a population of our overall customer base.

[RJ Milligan:]

And moving over to the CFO deals, can you talk about how they are leasing up or at least the prospects of lease-up and sort of where rents were underwritten at the time, deals were signed and now sort of forecast for where you think rents are going to play out given the strength in the fundamentals across the sector?

[Paul Powell:]

Yes, hi RJ, this is Paul. Yes, the CFO deals we’ve done to date, the six that we have done, we are projecting cap rate stabilization which is basically after three years of operations averaging around 8.5% to 8.8%. Some of these are going to be a little bit higher because we bought initially – the first few we bought we were able to negotiate at better price. But on average they are about – again about 8.5%, 8.6% as stabilization.

[RJ Milligan:]

And how has that improved over say the past year? Was it originally 7.5% and now it's 8.5%?

[Paul Powell:]

Well, these – I guess this is an average, so I mean right now we are underwriting deals, CFO deals at about a 7.5% cap at stabilization, and some of the ones we did earlier last year and into early this year, we were probably closer to 8%, or 8.5% on our underwriting.

[Operator:]

Our next question comes from the line of Todd Thomas with KeyBanc.

[Todd Thomas:]

Hi, just following up on the rent growth question, in terms of the conservative start to the year in terms of raising rents, what was it that caused you to ease up and seems like move-outs were still lower year-over-year. So just curious if in hindsight, you feel like you could have increased rents more to maximize revenue a bit more earlier in the year.

[Dave Rogers:]

You know what, Todd, it really had nothing to do with the move-outs. What it had most to do with was again looking at the past three years of driving rates quarter in, quarter out, the asking rates – when we look at those rate signals on our system, the only data that was driving those signals and suggesting that we raise rents were all positive, quarter over quarter, year over year because it was about three years ago that we really fully implemented our revenue management system. So there was never a downturn, and we just thought that there was eventually going to be a little bit of a correction required, if you will, and we thought if we’re going to try that correction and sort of depend in a lot of the human element to impact rates, it will be during the off-season. We did that, we did it quickly, we recalibrated and then we saw that indeed we could continue to drive rates. So it was really just the data that was driving the rate signals and then not saying maybe we should see what happens, let’s just back off a little bit and as it turns out it was unnecessary.

[Andy Gregoire:]

In other words, all the data coming in was – that the signal that we were reading was a history and all the history was hot history, we didn’t know anything else to get over the last three years. And so I guess we doubted the system and so in hindsight yes, we would have done it different but the beauty of our business is you get to recover pretty quick and even though you take a little bit of pain, you don’t get to recover that one month or maybe even a month after. It’s not a real long thing. So we recovered and I think we should be in pretty good shape going forward.

[Todd Thomas:]

And then, on the acquisitions, the seven stabilized properties that you acquired at a 6.2 cap rate, what was the occupancy for those properties?

[Paul Powell:]

Todd, the average – the lowest was the one in Jacksonville, opened up in December 2013, that was a 77%, and then it ranged up to the mid 80s to upper 80% range.

[Todd Thomas:]

And Andy, so you mentioned that cap rates for stabilized property I think were generally in the 6% to 6.5% range. Are those yields consistent with those occupancy rates for the properties that you acquired in the quarter, for example?

[Andy Gregoire:]

I think what Paul was talking about, those are forward cap rates. So, yes, that was consistent with – that was first year cap rates is what Paul is quoting there.

[Todd Thomas:]

On the seven stabilized properties that were acquired this quarter?

[Paul Powell:]

Correct, that’s correct.

[Todd Thomas:]

What was the -- are you able to share what the initial yield was at closing?

[Paul Powell:]

They were probably upper 5, I don’t have that in front of me but I’d say 5, 5.74.

[Andy Gregoire:]

Jacksonville certainly – Jacksonville was from about – went from almost 0 to 77%. So the other stabilized probably are 5.8 –

[Todd Thomas:]

And then just a quick one on the certificate of occupancy deals that you are acquiring, are all of these wholly-owned deals? Are there any joint ventures or situations where the developer is staying in the deal at all?

[Dave Rogers:]

These are wholly owned by Sovran. No participation by the developers.

[Operator:]

Your next question comes from the line of George Hoglund with Jefferies.

[George Hoglund:]

Hey guys, just a couple questions here. One on some of the markets where there is weak same-store NOI performance, for example, in New Orleans and Virginia Beach. Can you just comment on sort of what was going on there?

[Dave Rogers:]

Sure, George. Well in New Orleans, that CBSA actually includes the storage in Latvia [ph]. And Latvia, there is a storage that really impacted that, I guess, you can say poor performance, and there were really just – there are two locations specifically where we had pretty – I would say substantially large buildings shut down for major repair and rehab projects. The New Orleans store actually fared pretty well. And Virginia Beach, again, that was the same story from really first quarter, the heavy forgiveness of rents of the military forces coming home, and then we had one pretty strong comp that opened other new store and the rates were extremely low and we just had to compete with that for bid but that will start to unwind a little bit, and we will be able to raise our rates.

[George Hoglund:]

And then, just two more markets in I guess Beaumont, Port Arthur, Texas and Youngstown, Ohio?

[Andy Gregoire:]

Yes, George, those were – the NOI reduction was because of property taxes, those had significant – Beaumont, Jefferson county was very aggressive with property taxes which you see the expense growth was high, same thing in Ohio, we had some property tax growth.

[George Hoglund:]

And then, just one thing on the third-party management businesses, do you guys view changing at all given a lot of just somewhat of an increase in new supply coming and more development? Are you guys looking to possibly increase management of third-party assets?

[Andy Gregoire:]

George, I think that’s probably the way we are playing the third party game as with new development. A lot of the existing storage, especially in these times, the prospects we see to manage existing storage are pretty much the ones that are in pretty rough shape. So a lot of our effort has focused on working with developers of new stores. With that, we think our quality builders in markets that we know and those are the contracts that we are going after on the 3PM [ph] basis, and that’s I think pretty – you won’t see us doing a lot of 3PM but the management that you do see will be along those lines.

[Operator:]

Thank you. And our next question comes from the line of Stan Fediuk with SunTrust Robinson Humphrey.

[Stan Fediuk:]

Just a quick question. What markets are the pending acquisition then?

[Andy Gregoire:]

We are looking to close on properties in South Carolina, Florida and North Carolina and New York.

[Stan Fediuk:]

And regarding the Houston flooding, did you see any significant destructions?

[Dave Rogers:]

I was on a road show with -- I'm sorry just with the topics. No, Houston flooding, we were not impacted at all.

[Operator:]

Our next question comes from the line of Jeremy Metz with UBS.

[Jeremy Metz:]

Just I guess sticking with Houston, then, I was going to ask the same thing about any impacts from flooding, just as I look at the same-store growth, it was obviously pretty solid this quarter. Expenses played a role. But occupancy was down about 170 basis points. So it seemed to wind a little bit from 1Q. So I'm just wondering if you can kind of update us on what's going on there, if it's just high upon [ph] leverage to drive that revenue growth?

[Dave Rogers:]

Jeremy, we are keeping a real close eye on that market as I am sure you well know. We were down a few basis points in occupancy and I think last year we were up against a quarter where we realized that we could be pushing rates a little bit harder now than we were same time last period. So that really isn’t a strong indicator for us, 92% is certainly a healthy occupancy but in that market again looking at it closely, measuring foot traffic, all the fundamentals remain real strong in Houston. Again the foot traffic is brisk, the online traffic in Houston is real strong for those Houston specific landing pages online, calls were up, reservations continue to be strong. So really we are not seeing any weakness in demand. I mean there are some macro indicators that are impacting some of the other segments but with a close eye on Houston right now and in storage, we are just not seeing it yet.

[Andy Gregoire:]

Jeremy, even quarter over quarter, March to June we increased by 110 basis points. So it was a high barrier last year at 94 in that market and as I said 92.3 isn’t too bad especially because we are getting some rate push --

[Dave Rogers:]

Yes, we are pushing rates pretty hard in Houston.

[Jeremy Metz:]

And we talked a lot about the rent side, but can you just give us an update on discounting, where it trended in 2Q versus last year and I guess how it's trending today?

[Andy Gregoire:]

Sure, Jeremy, it is Andy. Q2 of ’14, we gave away $940,000 of free rent. We reduced that this Q2, we gave away about 780,000. So we’ve reduced by about $160,000, the free rent we gave away during the quarter, the number of customers getting the free rent has been reduced on the average that they are receiving has been reduced. So it was a tough comp but we still may have reduced free rent.

[Jeremy Metz:]

And so you're lower today versus last year as well?

[Andy Gregoire:]

Yes, we are.

[Jeremy Metz:]

And then, just one for Paul on the CO deals, I appreciate the added disclosure you guys have. Sounds like you are still talking about three leasing cycles here. So as I look at some of these occupancies, it looks like you could probably get there in two. So I am just wondering if there is -- the success you are seeing, does it give you more comfort or comfort to do more CO deals than maybe prior expectations and does it make you think about doing development again at all?

[Paul Powell:]

Yes, Jeremy, there is a lot of opportunity for CO deals, we are being very selective. Sovran will not do development ourselves. We will continue to align ourselves with preferred developers in target markets. But yes, we are seeing opportunity and we are very active in discussions. So yes, you should see some more CO deals signed up by Sovran over the next six months or so.

[Jeremy Metz:]

And I'm on with Ross, I think he has a question.

[Ross Nussbaum:]

Yes, hey guys, I just want to step back on the same store revenue growth question. I am sorry it hasn’t escaped your attention of the three Self-Storage – this quarter you guys had the lowest same store revenue growth and yours was only up 10 bps from Q1 while the other two guys were up 70 bps and it was like 110 bps. So I guess, maybe to frame it a different way, what do you think it was that you guys saw earlier this year that your peers didn’t see, right, because your peers kept their foot on the gas pedal while you didn’t. And I am just wondering what we all should take from that that you saw something that your competitors didn’t.

[Dave Rogers:]

Well, Ross, a couple – this is Dave. As I’d said we came in with reading only hot signals and you come off of three year period, that those are the only signals you are getting, you’re going to change – and I want to say those guys behind the Orange storage and the guys in Salt Lake, and they know what they are doing. They’ve got operations and we give them all the [crops] in the world. But we have been in that position ourselves a few times over the past few years. We have been in the whole position and we hit it pretty – we are certainly working and fighting real hard to get back to one and two in the ranking with revenue, and I think as the pendulum swings we will get there. I will tell you what, I wish we could have taken a horse really to buy some and gone west a few years. We don’t have any assets in California, and there is a real party going on out there, and that has a lot to do with – unfortunately we are just watching through the window on, on that one but if you take apart that market by market and you look at the West Coast, it is just – it’s blast out there. So that’s a bigger picture, the idea of us – part of it was us taking our foot off the gas a little bit but that’s hardly the whole story. On an apples to apples, market to market basis, it diminishes quite a bit.

[Ross Nussbaum:]

Yes, I think that’s probably a fair answer and actually when I go back and look at 2Q ’14 you guys were in full position from revenue growth, you guys had the toughest comps this quarter as well, right?

[Dave Rogers:]

Thank you, good. And just to be clear, we did kind of notice that we are in the shallow [ph] --

[Operator:]

Our next question comes from the line of Jonathan Hughes with Raymond James.

[Jonathan Hughes:]

Yes, at the NAREIT Conference last month, you mentioned you like being moved to California and you just stressed on it briefly right there. Just wondering if you've been looking at opportunities there underwriting. I was hoping if you could give us an update on that front and then maybe also to Denver, some other Midwest MSAs that you also talked about at NAREIT –

[Dave Rogers:]

Yes, I guess, this is Dave, Jonathan. We do always look at all the deals that come up, we’ve got people on the ground that are exploring opportunities. California has been, as we mentioned before, a tough goal for us. We like to get clusters of properties, we like to get scale when we hit the ground and we’ve had a tough time buying the quality assets in a group that we wanted to do this. So – and I am going pedal without the gas. With regard to other markets, and the markets we like to go to, first and foremost, markets we are in, we always want to add to our base in those markets. Denver is one we happen to be in and we are looking to grow more there. So just an overall strategy I guess is adding where we are, looking to get scale in places where we aren’t and get that scale in a hurry like we did in Chicago couple of years ago, when we went from zero to 14 stores in just a 18 month period or so. So part of it is where you can get the deals and California is that place where we have not had much success on the acquisition front.

[Jonathan Hughes:]

And then, last question I have is what can I call volume growth are you seeing at the call center and maybe some any color into closing rates from the call center, it would be helpful.

[Dave Rogers:]

Our call volume right now for the quarter is up 5% and even slightly higher occupancies that we are experiencing, our close rate is actually up 6.3%. So things remain real strong in customer care.

[Operator:]

Our next question is from the line of Stan Fediuk with SunTrust Robinson Humphrey.

[Ki Bin:]

Actually this is Ki Bin. Sorry if I missed it, but do you guys give a stat on the street rates year-over-year and maybe the number of customers over that promotional dollars year over year?

[Dave Rogers:]

Ki Bin, the street rates were up 8.2% year over year, and our free rents is down 17.2%.

[Andy Gregoire:]

The free rent in 2Q of ’14 was 940,000 and in 2Q of ’15 was 780,000.

[Ki Bin:]

And if you look across your markets, and you obviously have diverging same store NOI performance across every market, any notable trends on what here is a couple of variables that make a market really good versus some other variables that things were -- this is the reason why these markets probably didn't do as well.

[Dave Rogers:]

In a lot of cases, it’s almost – as Andy and Ed mentioned when we were talking about Latvia and New Orleans and Virginia Beach, it’s almost self-storage specific, in cases like that. But most markets are good, California and it appears that Washington and the West Coast are ridiculously good. But a lot of it is supply driven, I think and we’ve been talking to over the last three years that through it all demand continues to grow. Population grows, so you are going to get at least demand increases to match population and it seems like our sector gets a little bit more than that. So you get this creeping demand of – somewhere in the order of 1% to 2.5% year over year, quarter after quarter and the supply is static. It’s just more macro I think at this point than anything. Now you get hotspots certainly like Brooklyn and Long Island City and parts of Florida and really trendy spots in the neighborhoods. But I think that it’s macro at this point in the cycle than anything else.

[Ki Bin:]

And where there has been new supply within your -- I guess what you call your competitive radius, have you noticed any very material deceleration in your existing properties within that radius or not really?

[Paul Powell:]

I think the biggest punch you take, Ki Bin is the ability to raise rates. I think other than that --

[Dave Rogers:]

And it just – Ki Bin, usually just happens early on while the new comp comes in, and they need to compete early on and their rates are, to begin with, below market rates. So you have to adjust, so that remains competitive. But eventually that burns off and then we are going to compete better than the next guy.

[Ki Bin:]

Has there been like growth actually turned negative though?

[Dave Rogers:]

Pardon me.

[Ki Bin:]

Did the same-store NOI growth at that property actually turn negative?

[Dave Rogers:]

We have never experienced that for that reason with the new comp coming in, no. End of Q&A

[Operator:]

Thank you. This concludes our question and answer session. I’d like to turn the floor back to Dave Rogers for closing remarks.

[Dave Rogers:]

Thank you everyone for the time. I know you’ve got a couple other calls to listen to today. We look forward to seeing you throughout the summer and then especially at NAREIT. Take care.