Q4 2019 Earnings Call

And Welcome to our fourth quarter 2019 earnings conference call leading. Today's discussion will be Joe Sapphire Chief Executive Officer of Life Storage in Andy Gregory Chief Financial Officer off as a reminder the following discussion and answers to your questions contain forward-looking statements are actual results. May differ from those projected due to 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.

Good morning.

During today's question-and-answer session. We ask that you please limit yourself to two questions to allow time for everyone who wishes to participate please Riku with any follow-up questions thereafter at this time. I'll take the call over to Joe. Thanks, David. Good morning, everybody. We had another solid quarter and a strong finish to the year. I couldn't be more pleased with my team's execution on our strategic initiatives. I'll start by touching on a few of the many accomplishments. We achieved over the past year. We expanded our footprint to new strategic markets such as Seattle Baltimore and Toronto. We completely almost four hundred and thirty million of Acquisitions which included in an important mix of both lease up and stabilize stores all of which have higher revenue and growth prospects than the two hundred million of birth as we divested.

We have started this year.

Well with six additional California properties currently under contract.

We successfully grew our third party manager portfolio, which reached almost 300 stores a year end with a net addition of 84 stores in 2019. This portfolio has tripled in just a three years as more owners are drawn to our Innovative platforms such as rent now and Warehouse anywhere.

We capitalize that growth opportunities within our existing portfolio with the completion of sixty million of expansions and enhancements in 2019. And this compares to just twenty-five to thirty-five million each of the previous three years.

We finalized the rollout of rent now are fully digital rental platform that allows customers to self serve and skip the counter this achievement now now allows us to interact with customers in any manner they so they so choose in person over the phone or online. Our focus on new technologies has helped with our efforts to improve our operations and our efficiency initiatives, which we discussed on our third quarter call have played out earlier than we expected with fourth-quarter same-store property operating expenses down more than 5% and that excludes property taxes. And lastly we continue to expand our portfolio of joint venture partners with $25 million of minority Investments made in both the US and Canada in 2019.

Demarcus we continue to see positive Trends in some of our largest including Chicago Buffalo Las Vegas and Los Angeles and we are seen two countries to control Improvement in several Houston Texas markets that have experienced significant new Supply including Miami Tampa, Austin and San Antonio as a result of our performance and our optimism that we are past the peak of New Jersey and some of our larger markets. We're slightly going to increase our 2020 guidance. Oh now hand it over to Andy to walk you through these details as well as our quarterly results. Thanks Joe last night. We reported adjusted quarterly funds from operations of a dollar forty four per share for the fourth quarter a 4.3% increase over the same period last year driven by better-than-expected same-store performance.

Our same-store performance was highlighted by noi growth of 4.2% achieved by a combination of Revenue growth and extremely well controlled expenses specifically with same-store Revenue increased 2.6% over the same period last year driven by realized rates per square foot that increased 2.6% over the fourth quarter of 2018.

this Revenue

Both was an acceleration from our third quarter same-store Revenue growth of 1.8%

Fourth-quarter same-store expenses outside of property taxes decrease 510 basis points over the fourth quarter of 2018 excluding property taxes and internet marketing wage and operating expenses decreased in every major line item.

Our investments in technology and our focus on efficiencies are producing great results and are evident in the hundred basis point improvement in our year-over-year same store noi margin.

Partially offsetting these expense efficiencies was an 8.4% increase in property taxes over the fourth quarter of 2018 or fourth quarter property tax expense have a tough, but our year-to-date property tax expense came in as expected with an annual increase of 5.9%

We do anticipate continued pressure from property tax expense and forecasts five to six percent increase in 2020.

We are very pleased with the continued benefit of our transition to a captive program for ten insurance is net operating income associated with this program increased more than 20% over the last year's fourth-quarter month since that program transitioned on April of 2019. We expect one more quarter of outside year-over-year performance.

Overall fourth-quarter Revenue increase also reflected a 38.7% increase in third-party management fees due to the significant traction. We have gained and growing that portfolio of stores.

our balance sheet remains solid and we continue to have significant flexibility to capitalize on attractive investment opportunities when they meet our return requirements

a quarter and we had cash-on-hand of Seventeen point five million dollars and $435 available on our line of credit.

Arnett to recurring ebitda ratio was 5.6 times and our debt service coverage was a healthy 44.3 times.

We have no debt maturities until August of 2021. Our average debt maturity was seven years and the percentage of our total debt that is fixed rate was 97% at December 31st.

Regarding 2020 guidance. We raised the midpoint a full year Guidance the $6.01 with a range of $5.94 to $6.08 a month. Specifically, we expect same-store revenues to grow between one and half percent and two and half percent for the 2020 fiscal year up twenty five basis points from our expectation and late October excluding property taxes. We expect other expenses to decrease between one and half percent and two and half percent as a result of continued discipline on the operating costs and the impact of savings related to rent now,

The cumulative effect of these assumptions should result in two and a quarter to three and a quarter percent growth and same store and Ally up 25 basis points from our expectations in October.

Consistent with our past practices. We are not including in our same-store group any stores acquired in the early stages of Lisa that were less than 80% occupied at Market rates as of the beginning of 2019.

A 2020 same store pool is expected to increase by 13 stores from 504 to 517 stores. And we do not expect this change to have a material impact on our store growth rates based on these assumptions. We anticipate adjusted ffo per share for the first quarter of 2020 to be between a dollar thirty-six per share and a dollar a month for sure and what that operator we will now open the call for questions.

Thank you. We will now begin the question-and-answer session to ask you a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then to our first question today will come from keep in Kim with SunTrust, please go ahead thanks on just a second question first, so we're still not in the spring lease and season. So I'm just curious what you're seeing in your business that gives you confidence to raise him. So Revenue guidance at this point of the year.

Yeah, hi.

You've been it's Joe, you know, we feel more comfortable obviously with the strong quarter. We just finished the fourth quarter was pleasantly to us a bit of a nice surprise. I think I took a look at our three markets where we've had some of the most concerned Houston, Miami and Dallas and I think all three of them were feeling a little bit better about them as we as we head into the quarter and as we walk through the budgets again for for each of our markets, it just felt like it was the right thing to do. You see a little bit of an acceleration from third to fourth quarter. We haven't seen it really changed much for the projector in January was a good good month as well. So I think it felt you know a little bit more comfortable bumper that up just twenty five basis points and you had some pretty outsized expense declines and off some of your major markets like New York and Dallas. I can't imagine that still rent now or a couple of things. So I was wondering you provide a little more color on that and maybe the longevity of those authors

It's not the clients.

This is Andy. That was that was property tax related. So when you look at we had Chicago go the wrong way, right? We had 18% increase in expenses for the quarter and that was all driven by property taxes in Chicago. We had the opposite happen in New York where and in Dallas where we want some appeals and you know just had a better resolution to what we expected and property taxes. So wage then in Dallas accruing a quite an increase for the first three quarters and then came in better-than-expected. So the big swings and property taxes were property bear in expenses were property tax related things and if it goes if I can squeeze you in one more your repair the maintenance line item was down. So how what drove that and how do you differentiate which is in the same operating expenses versus capital expenditure line item which grew four million dollars in 19 vs. 18. Yeah and keeping into the second part of the question, but you know, really it's been you know, you probably saw that in, New Jersey.

quarter as well, you know the reduction in Arnhem is

Is really related to more discipline and also a different software that we've been implementing over twenty nineteen providing us more controls over over what's being spent and who authorizes us back and say a lot more focused on that area too similar to other costs throughout the company. We've been focused on on many different things and r&m is is no exception, you know, so we're just pleased with the way the team has been focused on that in terms of the you know, how we decide between r&m and capex and he can chat about that. Yeah, a couple of things to point out keep in there was a big increase we did buy some 3 million dollars worth of trucks. So that was some of the pump in capex that you're seeing those trucks get capitalized. Otherwise, it's we just follow the Gap accounting a big Shaq man's significant Improvement that extends the useful life of the building the real estate it gets capitalized. Otherwise it gets expensed. All right. Thank you guys.

Okay.

Our next question will come from Todd Thomas with keybanc capital markets, please. Go ahead.

Hi, thanks just in terms of the The 20/20 guidance and I guess occupancy specifically, I think you previously mentioned that you know, the year would start off negative year-over-year wage, but you'd expect to build occupancy throughout the year implying that you know, you'd see some occupancy growth in the second half of 20, but you're almost there. Now, I guess in current trends suggest you might start the year off with higher year-over-year occupancy. Can you just talk about trends for occupancy a little bit further help us understand what's embedded in the in the guidance? Yeah. Hi Todd. This is Joe. Thanks for that question. It's a good one. Yeah, it's actually part of the reason why we we bumped up, you know, the revenue guidance as well. You know, we we have been focused on occupancy. As you know, we think we have some room to improve their especially with some of them do tactics we have in in Redmond and and also a marketing, you know, we we did, you know, some of the fourth quarter top-line results were because of that Improvement in occupancy, but yep.

so it's it we gave something to the back in June

For the twenty basis points back in Jan but it is going to be a focus for us. Um, you know, depending on how successful we are, you know, we'll see how we get on in the leasing. You know that that that will obviously affect the top life. So it's a focus for us. You know what I think we have some room to you know, you know further improve our activity and I think we'll we'll achieve what we put on the guidance. Hopefully we can do better when you say you gave back twenty basis points in January. Is that is that on the the 2019 same-store pool or is that on the news same-store pool?

That was on the 2019 same story pool. So it went from I think at the end of the year, we ended down 30 basis points Todd and and the January were down fifty basis points. It's really it's it's that combination of rate and special occupancy that we're trying to maximize revenue and and you'll see some of that but we expect over the year that that Gap will continue to decrease and then turn. Okay great. And then just the second question on the third party router in the the pipeline there. Just wanted to dig in a little bit. I think you also last quarter mentioned that you had sort of an expectation of adding $50 for the year. You had a 20 this quarter and it sounds like you know, there's there's some some good momentum in that business, you know, was there a revision at all to your outlook for you know additions to third-party management and you know, what are your expectations? They're dead, you know, I mean that you know, there is a pipeline. We have some visibility and some of the stores we signed up last, you know last couple of years that were under construction that should open this year. I think we're doing wage.

job of of winning some

Sableye stores and uh, you know, I think fifty that's a net fifty. So, you know, you you know, some of the stores were buying in California that you know, that will come out of the third-party management pool and those will be wholly owned so long. I still think we should be able to get at least a net fifty growth in third-party management. We'll see how we get on throughout the year and and adjusted accordingly.

Okay. All right. Thank you for next question will come from

Good morning. Can you talk a little bit more about some of your major markets? I know in the past, you know, you've talked about sort of a reversal in Houston in the second half is it related to the revenue growth along the same topic just kind of luck us through some of your major markets and what's embedded in guide to yeah. I mean I kind of go a little deeper but you know, as I said at the beginning of my end of the month, hey, you know, the three biggest markets used to Miami and Dallas, you know where we've had the most concern, you know, we're we're feeling better about it. You know, we we still think that you know Houston, you know, we like to Trends, you know, the the wrong cell is is gotten less over the last few quarters, you know, we still have it projected to be you know, slightly negative for the balance of the year, but I think you know towards the second half of of the year. We'll see how may we go but not because he's been nice in Houston and then obviously street race, you know, they they've been negative as well throughout 2019, but it's getting less negative as as we move on to work a little bit better wage.

dad, and then obviously Houston is

Is one of the MSA top 20 msa's, uh with with the lowest new Supply coming on and you know, we seen that from a a number of the companies out there that that manage that and we also look at it internally so I know we don't see a ton of new Supply coming on in Houston Miami. I think you've heard, you know from you know, a few of us that you know, it's it seems to be getting a little better. It's starting to stabilize, you know, a largest markets and not a huge impact on us, but you know, we we think it will, you know, probably stay flat, you know through through 2020 and then Dallas Dallas is kind of been interesting, you know, one for us obviously has been a new Supply on there and they're still getting used to fly more so than than Houston but you saw a fourth-quarter, you know revenue is up, you know over two hundred basis points. So, you know, we're we're feeling pretty good about Dallas occupancy has been strong. So in those terms, you know, we we feel pretty good about our our most concerning markets and then some of our strongest markets job.

you know have been Chicago Vegas and buffalo, you know, those are you know important markets to us, you know, not a ton of new Supply or there's some coming on Vegas, but we feel pretty pretty good about those as well and then some of the other

In Austin and Atlanta, I think you know there's there's some new Supply obviously Austin's been pleasantly a good surprise given some of the new Supply but it's held up. Well, so overall, you know, I went through market-by-market for our for our budget, you know, taking all these things into consideration. But like I said, I think we're feeling we're feeling pretty good in terms of the delivery and our major markets are behind us, you know, you know taking the you know, the last few years has been tough in Houston and and we think it's turning and it's it's built into our guidance.

Yeah, no thanks to that. I guess my second question is Joe. Look I mean you've been proactive on the utility management side that's generated savings for you. You reduce payroll expense, you know through Rent Now how long can you talk broadly about, you know to the extent you can about what other initiatives there are out there, I guess. How big is that opportunity set for you to sort of further improve margins here. Well, you know, you've seen a big Improvement. I mean, obviously we've been focused on a lot of things, you know right now is definitely something that's new and something that differentiates us from our peers and we've been able to capitalize on that payroll savings, you know, we'll see what right now goes. I mean it's it's, you know, each quarter. It's gotten a little bit more in terms of our you know, how many of our customers are using it was around 9 10% off 11% in in the fourth quarter, you know, we'll see how that goes in terms of, you know, how many more of our customers use it, you know, if we ever get up to fifty percent, that would be great, but

Not built into our guidance. So I think that's

For the biggest unknown at the moment, but we're going to continue to embrace new technologies to Mere. We've been we've been doing it across the board ESG as is increasingly a huge Focus for us, you know, obviously that's off and you'll you'll see more about throughout twenty-twenty, but, you know, we're finding ways to, you know, put arms around ESG and and also, you know, save some money and that's that's utility management got rid of older less efficient trucks. So we're doing a number of things Samir. We're going to keep looking. Um, but, you know, we we have, you know, you know pretty strong guidance in terms of our ability to control costs twenty twenty, and we feel pretty good that will be able to deliver on that. Thanks you guys. Thanks.

Our next question will come from see with City, please go ahead. Hi. Thanks. I just wanted to ask you the right now program you mentioned it was about eleven percent. So it continues to pick up a little bit in terms of incoming customers. Can you just talk a little bit about what kind of a I think maybe with the margin implications are for someone that chooses to come through that program versus, you know, just click on the counter strikes me as well. I mean, you know, I think from a marketing perspective, you know, maybe Andy is something there but you know, obviously it's it's it's definitely more efficient for the company, you know, you have or less people spend in 30 40 minutes at the counter taking up our store managers time. So more people who self-serve the more efficient you're going to be as an organization, you know, they're not calling the call center, you know, so it's it's it's a great tool and you know, we're going to look at ways to see if we can get more customers to use right now going forward. So, you know, that's their job.

already built into

You know our payroll savings, you know majority of that is is right now and you know, there's obviously other things that we're doing with other Technologies such as Online Auctions and other things that we can do to make them more efficient so that again we can have you know, Less hours at the stores. So we're going to continue to embrace right now and new technologies, you know to obviously improve our overall marja company in Smith those those customers that are using right now are pretty length of stay. We're not seeing any different there's taking the insurance and they're paying the admin fee. So it's very simple customer.

Okay. I also just wanted to ask you bigger picture you mentioned. I mean you bought some stabilized properties through the management platform. Can you just talk about any changes being in in pricing or or cap rates? Um, you know by market if you can I still you know, you're still seeing a lot of competition out there for good deals Thursday. It's going to be market-by-market, you know, California and New York. Those are going to be low low caps, you know, but there's still some low-hanging. I mean, you know fruit when you're looking at your third-party management, you know portfolio. I think there's opportunities to get deals off Market. You're not competing, you know, it's not going out to bid. It's not usually there's no broker involved, you know, obviously, you know how those stores are operating whether you know, you feel pretty good about them, you know the budgets when you're pencilling out, you know, your one year to year three, but you know, there's there's definitely compression. You know, I think it's harder to find good deals. Yep.

The cost of capital slow, you know cost of debt slow. So, you know, we we don't think that's going to change.

But there's still a very good opportunities out there.

Okay. Thank you.

Our next question will come from Shirley Booth with Bank of America, please go ahead.

Hey guys. Thanks for taking the questions. So my first question I just kind of expand on burn out a little bit more. Assuming you guys had the payroll savings over the last year in terms of let's say had a lot of people the counter and just those efficiencies. So how what are you thinking about in terms of incremental efficiencies going at the 20/20 from right now? If you're already operating at a thousand Personnel costs, so in terms of how much you put into your guidance. How where where is that can really calling from and which bucket

Well part of it is the the payroll we didn't have those savings for the whole year. So obviously it's it's an easier top in the first half of the Year from a payroll point of view. It's tougher comp as we go through here, but we knew that going in when we issued guidance back in October. But again, we expected in this guidance that the take rate would be, you know, ten ten per-cent or so. It's up to 11% is Joe said in the fourth quarter, but no significant change yet in the number of customers using that it's not an overnight where you can flick the switch. If it does all of a sudden shoot the 20% that we could click the Switch off and change payroll that quickly it does take time to to to work that into the system and sometimes not replacing those those associate hours. You still need your manager on site to take care of that customer. Yep.

Got it.

And my second question you're on your Revenue management system. You guys have talked about the improvements and how you do see this as an improvement your strategy moving forward. So could you talk a little bit more about some of the things that you've been doing on that end?

Yeah, I mean we're we're still you know working on some things. We don't want to talk too much about it. And I found a conference call a lot of its proprietary. But you know, we as we have a New Jersey had a revenue management got a a very deep knowledge in data science and machine learning and Ai and we're implementing many of those tools out there just like many other companies and many different Industries are embracing a new technologies. And and how do you use data better? And you know, we've been you know really focused on how to embrace those things out there that will help us make smarter decisions and not necessarily Give em away with free rent and and rate Cuts, so I think it's still early in the game shortly. But you know, we like some of the things we've been seeing over the last few months and we think it'll continue but we're very excited about what we're doing there. I think we are going to see some benefits throughout twenty-twenty in terms of you know, rate and occupancy and a lot of that it's built into our guidance already.

Got it. Thank you.

Our next question will come from Ryan with a green Street advisors, please go ahead good morning. Just circling back to the margin Improvement. Just curious if there's any specific targets that you guys can share in terms of sort of the magnitude of what you guys are anticipating to achieve or the timing of what you're looking to achieve that.

It was for sorry targets for which one, you know, the margin Improvement that you guys have been representing. Oh, okay.

Yeah, I mean our our program looks to fifty basis points of margin Improvement in 2020 / 2019 and beyond that we don't want to talk about birth think they'll probably more potential but it's really looking under every stone in in seeing what we can do differently and and challenging how we've done things and you can see that showing up and off like say every line item just about you're seeing Improvement and that's just it's blocking and tackling and and you know, it happens every day here and we'll keep doing that and we expect it to show up in the marriage, you know, and it's not just on the expense side Ryan. I mean, obviously we've been we've been focused on margins through our asset recycling the selling off some older stores that are not as you know, Margie's friendly, you know, they're they're smaller. They're lower rates and pretty much everything we've been buying has been bigger stores better rates, you know more Revenue per store and that's helping as well. So we're going at it and many different angles.

You know, you can't.

You can't do much about property tax in certain markets like Chicago. I mean Chicago is is a tough one for margins, but it's been, you know, very good for us in terms of Revenue growth and a lot of new Supply. So it's it's a mix of things and like Andy said it's fifty basis points, you know Target for twenty twenty, but you know, it doesn't mean we're not going to keep looking for ways to improve it and will continue to expand it some of the newer markets that we think are better margins some of the ones that we just entered, you know, California has always been a target for us. It's hard to find properties and we're excited about the six pack. All of these things will will you know, how bout us to continue to work on our margins and obviously, you know technology has been a big one for us. And right now clearly has helped but we're going to be looking for other Technologies as well.

Okay, great. And then just curious, you know, you dip your toe in with some International growth in Toronto last year. Just curious what your appetite for international growth is in the year ahead. Yeah. I mean, you know, it's interesting. I have a big International experience. You know, I think it's great. You know, I think a lot we need to do in the US and still a lot of opportunities. I think Canada was a no-brainer for us and we're doing well there we'll see where that goes this year, you know aside from that wage. We're really not looking too far across the borders, but I think there are opportunities internationally and and you saw that last year when we entered Canada and what will focus on the birth of Canada for now.

Sure. Thanks guys.

Thanks, Ryan. This will conclude today's question-and-answer session. I would now like to turn the conference back over to Joe Sapphire for any closing remarks what to say. Thank you all for joining your call and have a great rest of the week. The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.

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