Q1 2020 Earnings Call

[music].

Good morning, and welcome to the White storage first quarter 2020 earnings conference call, all participants will be and listen only mouth should you need assistance. Please ignore conflict specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to.

Question.

To ask a question you may pressed Star then one on your telephone keypad.

Withdraw from the question Q.. Please press Star then to.

Please note. This is that may be recorded I would now like to turn the conference over to Dave Dodman Senior Vice President of strategic planning and Investor Relations. Please go ahead.

Good morning, and welcome to our first quarter 2020 earnings Conference call.

Bleeding today's discussion will be Joe Sapphire, Chief Executive officer of life storage and Andy Gregory Chief Financial Officer.

As a reminder, the falling discussion answers to your questions contain forward looking statements for actual results may differ from those projected data risks in uncertainties with the company's business.

Additional information regarding these factors can be found in the company's F.T.C. filings.

A copy of our press release in quarterly supplement maybe found on the Investor Relations page at Lake storage Dot Com.

As a reminder, during today's question and answer session. We I think you. Please limit yourself to two questions to allow time for everyone who wishes to participate.

Please ricky with any follow up questions thereafter.

At this time trying to call over to Joe.

Thanks, Dave.

I hope that you and your families are all safe and healthy.

Before touching on the results of a first say a few words regarding covert 19.

Our top priority over the past several weeks, it's bad to protect our employees our customers and of course I liquidity.

As of a central business, we have been extremely proactive ensuring our stores remain open and staffed and that our employees feel safe and secure working at.

Our home office, including our 24 seven call Centre has operated remotely for eight weeks now without any significant challenges.

A testament to our teams ability to quickly mobilized our business continuity plans.

I've also made accommodations for customers biker, telling are in place rent increases and our auction process.

With regard to liquidity, we've pause totally on acquisitions and slowed our expansion and enhances program.

Now with regards to the first quarter.

A result for a very strong.

Serve as another reminder of the merits of our strategic initiatives to drive revenue growth and improve operating margins.

We grew core F.F., all by 6.9% for the quarter, putting as well on pace to achieve our previous annual guidance of core F. old growth of sub upper side, which obviously, they're not consider the impact of covert 19 and abroad stayed home orders.

Same store expenses, excluding property taxes decline for the fourth street quarter, and the pasted decline continued to accelerate to negative 5.3% in the first quarter.

On the revenue side the growth of our third party management portfolio continued to fuel management fees up more than 40%.

And are more pay your strategy to diverse our portfolio has served as well.

For example of Houston today accounts for roughly 70% of our same store revenue.

Whereas it was 12% when oil prices fell dramatically back and 2015.

And right now our on line rental platform to allow customers to self serve.

What a game changer it is bad for us over the past two months.

As a reminder, we piloted this program almost two years ago, and we've been operating it across our portfolio for over a year.

I saw the associated operating procedures for store teams to support this asked channel or well established that contributed significantly to our ability to create a safer environment to our teammates add customers to conduct business.

Right now accounted for roughly 50 per cent of rentals in April up from a letter per cent in the fourth quarter of 2019.

The second generation of this platform, which we call right now to Plano is in place at almost 750 stores today.

And we will complete this roll out and just a couple more weeks.

With right now to point out customers can select premium standard or value pricing for a unit type based on their personal preference.

Dynamic pricing is normally done at the store level, but we've integrated this functionality directly into our on line platform.

And then closing.

We are in unprecedented times and and although we are slightly encouraged by some recent trends, including the first week of May we do not have sufficient visibility into customer behaviors in the coming months to cabelly provide reliable annual guidance and therefore have withdrawn the guidance. We provided this past February.

I went I'll pass over to Addy to walk us through the quarter in more detail.

Thanks, Yeah.

Last night, we reported adjusted quarterly funds from operations of $1.40 per share for the first quarter, a 6.9% increase over the same period last year.

Driven once again by outstanding expense controls in solid revenue performance.

Our same star performance was highlighted by <unk> a 4.8%.

Driven by revenue growth of 2.6%.

And margin improvement of 140 basis points over the same period last year.

First quarter same star expenses outside of property taxes decreased 530 basis points over the first quarter of 2019.

Excluding property taxes and Internet marketing spent.

Operating expenses decrease in every major line item.

Partially offsetting these expensive <unk> well, they 5.8% increase in property taxes.

<unk>, 38% increase in total marketing spend over the first quarter of 2019.

Importantly, our balance sheet liquidity remain salad.

Quarter N., we had cash on hand of $20.7 million and approximation that approximately $317 million available on our line of credit.

We also have an according feature available on outline that would add an additional $300 million available credit should we exercise that option.

Well you should on our H.T.M. for the first time in years and sell $21.5 million in the days just prior to the market destruction created by the cold in 19 pandemic.

<unk>, yeah, but that ratio, what six times and our debt service coverage was that healthy 4.3 times at March 31st.

We have no debt maturities until August of 2021, when $100 million is due.

And then not again until 2023.

Roughly $190 million is due.

I rabbits average that maturity with 6.5 years and the per cent of our total that that is fixed rate was 91% at March 31st.

We are also monitoring our receivable very closely and although our accounts receivables are slightly elevated.

We collect at 94% of customer revenue in April it 2% decrease versus April 2019.

We are actively engaging our past to customers to drive that was collections.

[noise], we remain extremely <unk> managing of equality and they have scaled back planned acquisitions expansions.

Have additional capital expenditure and operating expense letters to pull if necessary.

Our capital commitments are almost completely discretionary and we only make such commitments somewhere comfortable with the funding availability and the ability to maintain our balance sheet in good standing.

We believe we have adequate liquidity the managed through a sustained period of disruption.

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

Yeah now begin the question and answer session to ask a question you may parts are then one on your touched on so if you are using a speaker phone. Please pick up your handset before pressing the keys to withdraw from the question Q. Please press Star then to please limit yourself to to question. If you have additional question you may be entered the question.

Yeah.

The first question is from Todd comments Keybank. Please go ahead.

Mhm.

Hi, Thanks. The morning first question, Joe I think in your prepared remarks, you commented that trends in May so far has been encouraging I realize it's it's a little early but can you just elaborate on those comments was that specific to collections or rentals or or or something else.

Yeah, Hi, Hi, Todd.

Well a couple of those things actually you know I think since the the last couple of weeks of April we we have seen kind of a slight improvement eye movements, although negative it was less negative through the last couple of weeks of April and then the first week of May it's actually been a positive slightly positive compared to last year.

So activity is.

You know maybe following what's going on in a in certain areas in certain states that are opening for business. So that's good news, mostly it's coming from Texas, So Houston Dallas, San Antonio are all up nicely compared to last year. So it is quite encouraging.

I've seen a call volume on the <unk> pick up a little bit.

So yeah. It is very encouraging considering you know April I think you know was obviously hopefully the worst of it so yeah. It's a good thing so far.

Okay, and then you had been seeing you know rent roll ups across the portfolio you had a a positive mark to Mark Mark the market for for some time now I think and you know we've heard that asking rates and achieved rates are down in the last few weeks P.S.A. said that.

They had reduced rates by 20% across their portfolio can you can you comment on where the the companies in place rents are versus market. After this change in in market rents how that mark to market looks today.

Sure I that Sandy she do you want our rent, Rhode Island, or 4.7%, which is very similar to last Q1.

In April that did pick up to nine and a half per cent roll down a moving is paying less that move out in the street that rates are down significantly in April they were down about 19 that have per cent.

Okay.

Thank you.

The next question is some need throws a city. Please go ahead.

Morning, guys. This is actually <unk> can you just touch on marketing spend for the corner you know, it's it's relatively high last versus last year. Even you know looking at peak leasing season. Yeah did you guys just pull up some of this that need to March you know given what you stopped towards the back happened the button and you just help us sort of understand button right now how we should.

Except for the balance of the year. Thanks.

[noise] sure the the marketing spend was elevated during the quarter, we didn't expect it to be higher at the beginning of year. We do have easier cops. If you look at the rolling same store, you'll see that kind of gets much easier and <unk>. We had a very tough common Q1, we do expect elevated span.

Cost are up her click, but we like the activity. We're seeing internet activity has maintained a high level Costa are increasing less activity overall from customers needs, where I'm betting a little bit higher for those customers. So we do expect it to be elevated although at the <unk>.

Level, showing internet marketing spend up over 50%, we wouldn't expect that that the whole Oh yeah.

Yep, Okay. Okay.

The next question is from Jack's factor a bank of America. Please go ahead.

Good morning. Thank you. My first question is on markets I noticed that markets like L.A., where we've seen a lot of a high unemployment or claims you know was listed as one of your stronger markets against can you just talk a little bit bit about the demand you're seeing and in some of these.

Stronger markets first let's say you're weaker markets.

Hi, Jeff It's Joe.

You know it it it really depends I mean, it's you know we're trying to get some sort of you know answer whether it's a you know the secondary or tertiary markets are doing better than the primary markets. We've heard that in some of the seminars over the last few weeks and we really haven't seen it I mean in in certain places.

You know where there has strong shelters in place like New York City, and so forth more Chicago you know, we we did see move in in April you know less than the average of the portfolio, but the same time you know L.A.

Was actually better performer terms and move in but yeah L.A. was on the higher side for you know collections, you know higher than normal. So it is pretty sporadic over you know over the regions, but in general you know you know 15 per cent down for April is it might be a pretty incredible considering what.

What really happened in April.

And if that is the worst of it we're pretty pleased but there's really no sort of concrete you know.

Yeah conclusion, we can come out in terms of the regions. It it does seem to.

Him in flow across various large markets a smaller markets.

Okay. Thank you and I'm, sorry, if you've already said this but you're pricing strategy going forward.

Let's see cities or or region states reopened what is the plan for you know rentals rent rent increases.

Yeah, you know, we do watch that carefully we we did hold off on the May increases you you typically have to project that out a a month in advance because you got to get you know pre advice, if you're going to raise someone's right.

You know we did about we'd get a portion of them for April we started to slow down you know has this as Kobe started happening. So we set up your letters in March.

So you know.

If things keep going the way they they look in terms of the first week may I feel pretty confident we could.

Get back to some normal.

Rent increases in the second half of the year or we will test them out in June or nothing close to what we typically would do for a month, but we will test it out.

See how it goes and you know it's encouraging to see.

No more and more states opening which is a good sign an activity picking up and we'll see how it goes you know, but it's it's very hard to predict anything out hopefully there's no second wave of this I mean that could happen.

But you know we'll tickets slow.

We think you good luck.

Thank you.

The next question is from key been Kim I've done try. Please go ahead.

Good morning. This is even on with keeping maybe first could you touch on customer behavior in the rent now to Plano program.

Our customers more price sensitive on that then then walk in and maybe how are you able to to up so the customers on 2.0 versus versus walking.

Hi, and you know it's relatively early to take it really give you any sort of explanation and I think for you know to protect our what technology, we don't want to give way too much.

But you know there are people out there, who who will pay for convenience. So when you select on a premium spot you can see how close it is to an elevator in terms of steps.

And there will be a price differential for that maybe 10% and we have customers choosing that option and then of course, you always have the bargain hunters and those who might want a a lower price because they don't really care. So much. If it's you know in the in the back far corner of of of the facility. So it isn't.

Six it's early to say, but we love the idea that we can up cell and the customers have a choice and you know the feedback we're getting from our customers is they love it yeah, it's working well.

You know as it becomes harder and harder to conduct business at the counter I think something like this is is really differentiator for us.

Okay. That's that's helpful and then last one for me.

Just on on payroll some of your peers mentioned increasing employee.

Okay. <unk> have you guys had to do that if so could you maybe quantify what you think payroll expenses will be up in into too.

Well, let Andy talked about the second part of the question, but in general you know, we typically higher a a very strong manager and we pay wages that are typically higher than others.

So we have not had to do that we have you know the first thing. We've obviously done is made sure that our employees are safe.

And that they weren't safe or if they had concerns they were allowed to stay home and we provided enhance leave pay.

We've done a lot for our employees in the feedback has been tremendous.

You know to be able to work alone in a store.

Reduced double coverage, we've allowed them to keep the doors locked if they felt they wanted to so we've been very flexible.

And and that's what really what is important so no. We have not had to increase wages. We don't expect to have to do that.

And I would think that you will see the continue trend that you've seen in the first quarter in terms of payroll expenses coming down now and if it can add to that yeah. I think it that that the cop gets a little tougher about our star teams continued to find deficiencies and we would expect that payroll would continue as a a similar trend we sunk you want.

Okay I appreciate that color. Thank you guys.

Okay. Thanks.

The next question <unk>, Steve <unk> I.S.I. Please go ahead.

Oh. Thanks. Good morning, I guess first question can you just remind US you know what percentage of your customers on our on auto pay today.

[noise] 50 per cent run out of pasty.

Okay, and I assume that when you talked about the the collections and started to see a slight elevation is very kind of major difference between knows on auto k. and those on cash pay.

[noise] actually you know in in April you know, we did see the cash actually pay M- more regularly then those on auto pay some of the auto pays actually were rejected.

For one reason or another not significantly but that was interesting to us so those who typically pay by A.C.H. or cash or check we didn't see an incredible and incremental increase.

And then this time in May you know you know, we're we're anniversary date.

Although we we were on first what amounts. So we we do still have a bulk of.

Due dates on the the the first of the month. So we have seen it in a better spot that it was compared to April. So that's good too yeah. It's encouraging we at this time in April we were at 63.1% of April collections, and and it may read 64.5 per cent of total revenue collected so it's a better.

And we're seeing in May so it's encouraging encouraging.

Okay, Great and then I guess the second question.

Just anything on a on the you know warehouse anywhere me seeing any kind of up left in the business customer and just how was that I know the the yeah. The right now is certainly helping with your pen a retail customers, but you know anything on the warehouse anywhere.

Thanks, Dave you know, we actually had probably the most pilot programs in place of typically you know a corporate customer will want a pilot the solution for 30 to 90 days in some of that has been delayed a little bit.

But you know they they are you know we're just looking at a a promising June all goes well in terms of the number of new installations for enterprise solutions. So that's positive probably one of the better months, we've had since the since you're really started role this out.

In General I think you don't very optimistic about the storage industry for businesses, a particular post cove. It I think you've seen a lot of reaction to having not enough inventory not being prepared hospitals companies even <unk>.

Personal residents and I do think you know if we continue to see this trend of slowly opening and we and we don't take any step back. So we continue to move forward I think you'll see a a a bigger demand for storage for central's and.

P. and so forth. It's so we're kind of gearing up for that with our warehouse anywhere team, we're targeting certain industries that we know we have a solution for that we can help them with the inventory tracking of Osama this extra equipment and supplies that the lead to store. So I'm encouraged by what maybe in the next 18 months.

Storage in terms of businesses, but also for a residential so we'll see.

But I am quite pleased with a warehouse anywhere this year, despite kind of a little bit of of destruction. You know we are pilot even if you knew names and in June June looks like it could be a a good month for us in that regard.

Right, Thanks very much.

[noise]. My next question is from time to tender Wells Fargo. Please go ahead.

Hi, Thanks.

Details on the California assets, you acquired from your G.D. partner, maybe what markets they're in and.

And there was this unexpected exit.

And maybe how the stores been performing thanks.

Yeah. It was it with a we we've managed to stores for quite some time, we you know a bit of joint venture partner.

No I think they're they're great assets, we know them. There's a few expansions that are underway.

You know, it's a high for kept going in but year, one should be you know closer to five and a half cap, which is which is quite encouraging you know so it it's a great deal for us.

You know we expect when we go into a J.V. early on that will be the ultimate buyer it to be able to pull off something like this in a very desirable market of California is is exciting to be able to do it off market with a a reliable partner. So we're we're excited about it.

If you had specifics on or anything else, Yeah, I mean, it's southern Keller, California, one is in San Jose the rest are in the Palmdale area.

You've already branded life storage.

Yeah. So we've been we've been we've owned and operated on so there's no destruction.

You know, we we know these assets very well, where we are the ones who have been doing the expansions for our partner.

So yeah, it's a great deal for US we're excited that we were able to to get it done in the first quarter, you know and yeah. That's why we do Davies.

And then just to stick on that thing with the Seattle asset that you're entering.

Bench or did you have an opportunity to buy this wholly owned or maybe just kinda speak to the risk reward or this one.

Yeah, you know we as you know, we just recently got into the Seattle market.

So once you're in what three or four assets you do like to build your presence in your scalp.

Whether it's through third party management or J.V., you know our strategy for this year was really to find that wholly owned acquisitions to be on on more more on the stabilize assets. We did more lease up in 2019 and this is a C.O. deal. It's a great asset it's what the new J.B. partner, who we've been wanting to do more C.O. deals with so this is.

You know the first the hopefully many the calm but for C.O. deals you know they are <unk>, we'd rather take a minority steak and and you know do it that way versus rate it to the <unk>, we could have done it right at the rate, but again, we're focused on you know more creative deals for 2020.

Thank you.

[noise] [noise] <unk>.

The next question you the follow up from key then Kim that's I'm trying to please go ahead.

This is then again I just one quick follow up Joe I think you had mentioned street rates were down 19 per cent in April what are those attractive rates in April taken into account promotions.

Yeah, I promotions were down in April so <unk> effective I, just double check it here was 15% down net effect.

Okay. Thank you.

[noise], it's complete that question and answer the question I would like to trying to accomplish.

You can't fire for closing remarks.

Okay, well, thank you everybody for calling in today and listening and again I wish you all to stay healthy and and and be safe and speak to again in a in a in a few months. Thank you.

They're comfortable now concluded. Thank you probably chronicles presentation, you may not be okay.

[noise].