Q2 2020 Life Storage Inc Earnings Call
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Senior Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to our second quarter 2020 earnings Conference call, leading todays discussion will be go Sapphire, Chief Executive Officer like story, maybe Gregory Chief Financial Officer.
A reminder, following discussion any answers to your questions contain forward looking statements. Our actual results may differ from those forgot that you did the risks and uncertainties with the company.
Additional information regarding these factors can be found in the company I T SEC filings.
A copy of our press release, a quarterly supplement maybe found on the Investor Relations page it like storage Dot com.
As a reminder, during today's question and answer session. We ask that you. Please limit yourself to questions to allow time for everyone to wishes to participate.
Please re queue with any follow up questions thereafter.
I'll turn the call ever could go.
Good morning, Thank you for joining us I hope that you and your families are all states unhealthy.
The second quarter's results were not as well as we plan earlier this year I can't say that I feel more confident today as compared to late March in early April.
Isn't a central business, we were extremely proactive in Shreedhar stores remain open and our employee and the customers helped save conducting business during these difficult times.
Our strategic focus on enabling customers to self serve but right now I spent a key differentiator for us during the past couple of years.
I believe that is evident in our result.
Moving during April the height of the stayed home orders across the country were only down 15% year over year, which compares favorably across our sector.
From a financial perspective, same store payroll and benefits were down 7.3% for the quarter, our seventh straight quarter of year over year decline.
Right now it hasn't been the only reason for that trend as we have had several efficiency initiatives underway to prove our store operating margin.
That's correct, Brian and important contributor.
Right now seems to have settled in at around 30% to 35% of rentals after spiky the 50% in April.
It is clear to watch the customers continue to embrace this new platform and we'll continue to do so at a much higher rate than pre covert days.
I'm also pleased to self storage is once again proving to be resilient at a very difficult macro economic environment.
We remain hopeful that there would be pent up demand and July activity wasn't these strong same store more ends up 16.5% for the month.
Furthermore, in June we resumed.
Auction processes and are you see ri program after pausing both early in the second quarter.
Those initiatives have accelerated through July with only limited exceptions in certain states.
Since asking rate pressures remain.
Occupancy as an important lever for us and we grew so same store occupancy 170 basis points year over year to 93% as of the end of July.
Even after adjusting for auctions that cannot be performed we estimate occupancy as of July 31 to be at 92.3%, which is 100 basis points over July 2019.
Considering where we were 50 basis points lower in year over year occupancy as of March 31 of this year, we have many more customers on our platform relative to both the star the pandemic and also this time last year, which will serve us well going forward. This is an outstanding accomplishment by our team.
And lastly, although much more clarity wants today as compared to spring when we pulled our 2020 guidance uncertainties remain and continued to make it difficult to restore reliable and precise guidance.
With that said based on what we know today with regard to the recent momentum current market trends and demonstrated cost control, we anticipate that the second half of 2020, well be stronger than the same period last year as it relates to adjusted funds from operations per share.
And I'll turn it over to add to walk through the details of the quarter.
Thanks, Joe.
Last night, we reported adjusted quarterly funds from operations of $1.42 per share for the second quarter equal to the same period last year, despite the challenging macroeconomic environment and cobot related disruption.
Same store revenue declined 2%.
Same store NOI was lower by 2.5%.
I don't know was impacted by lower move ins lower street rate.
Our free rent and significant curtailment of Iran rent increases to existing customers.
We believe the resiliency of our platforms is evident in the fact that same store move ins were only lower by 3.4% for the quarter.
Despite broad stay at home orders across the country for much of that.
Partially offsetting that lower same store revenue, whether third straight comparative quarter of declining same store operating expenses.
Which were down 1.2% overall and lower by by 5.3% excluding property taxes.
Once again every expense line item was lower separate property taxes and digital marketing.
Hi, Joe mentioned, our efficiency initiatives remain firmly on track despite the cobot related market disruption.
Same store property taxes were up 5.8%.
Same store total marketing increased 27.6% for the quarter compared to the same period last year.
Importantly, our balance sheet and liquidity remains strong.
At quarter end, we had cash on hand at $9.5 million and $341.9 million available on our line of credit.
We also have an accordion feature available on our line that would add an additional 300 million available credit it shouldn't be exercised that option.
Our net debt to recurring EBITDA ratio was six times and our debt service coverage with a healthy 4.4 times that can dirty.
We have no debt maturities until August 2021, with $100 million do.
I'm not again until 2023 with roughly $165 million good.
All right its debt maturity was 6.3 years.
And the percent of our told that the fixed rate was 92% at June Thirtyth.
We continue to monitor receivables very closely.
Although our accounts receivable over 90 days remains elevated since the onset of a pandemic, we collect at 99% of rental income in the second quarter of 2020 as compared to pre called it 19 levels.
We have resumed our connectivity in the vast majority of Biomarkers.
I believe that we have adequately reserved for elevating the accounts receivable.
As a result bad debt expense for the quarter was approximately $1 million higher than historical levels.
He has reduced net revenues as presented in our quarterly financial statements.
We remain extremely diligent managing our liquidity our capital commitments are almost completely discretionary and where we only makes that commitments when they're comfortable with funding availability.
And our ability to maintain the strong balance sheet.
We believe we have adequate liquidity to manage through a sustained period of disruption.
And with that operator, well now open the call for questions.
[music], everyone I'll begin the question and answer session.
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My first question today will come from.
That's there.
I go back with Bank of America.
Ahead.
Hi, Thanks for taking my questions today. So I just two quick questions about the new tiered pricing system.
The more data around now with the preference from customers, it's where the starting tears and then if there are certain like rules about pricing like in terms of me standard is more in line with street rates on premium is 28% more or something like that.
Yeah, Hi, all of its Joe.
Thanks for the question.
It's still too early to really.
Providing sort of details as to customer behavior.
But you know I think the real goal of it was to provide you know a better operate to our customers. We saw that right now with was picking up and this really takes it to the next level. We ultimately believe this is what customers want they want more choice they want to be able to choose.
Have a little bit more control over the type of space, they're getting.
So we don't yet have that detail, but we we watch it closely and you know work pretty much adjusting some of the pricing differentials between the three options.
As as we learn more about customer behavior and what their preferences are.
But you're right. The standard rate is pretty much the street rate Yeah, we'll give a slight discount you know five plus percent for a value spot. It was a spot we're trying to.
Move that's that but hard to right and then obviously, there's a premium spot, which which we believe is great because a lot of customers who will just take the convenient spot you know those who were getting a space because of its their business you know pharmaceutical rapid so forth and they're not as price conscious and they want that great location. So that's the question right.
Now, it's it's still a little early to kind of give you any sort of ideas to you know the customer behaviors.
Got it okay. Thank you and then just quickly on the units up for auction are there certain markets, but those are concentrated in.
Yeah. There there are Alba, there's a new York, California.
What about Nevada, Austin, Texas, Theres, some certain areas, where we the auction process cannot begin so those are the ones that are driving it.
And we have started the process for some of those I think New York in California, We've gotten the okay to go ahead and start the process, which can be.
Quite lengthy but at least it's a good sign that you know we're able to start moving on those markets as well.
Got it thank you guys.
Mhm.
The next question will come from Beijing threatens with Citi. Please go ahead.
Oh.
Space kept here yet.
Operator.
Pardon me they do you I might be muted.
Hearing no response moving to the next question and that will come from Todd Thomas with Keybanc capital markets.
Go ahead.
Hi, Thanks, Good morning, Andy Thanks for the detail on the bad debt expense in the quarter are you expecting any additional reserves in the third quarter or should that normalize going forward.
You know that there won't be additional reserves. If you think about those customers that should have been option right. They should have enough at the end of June or July there's still what's left in August. So another month rat post so we'll reserve for that but no additional pre no current market research. So we reserved everything through during the June 30.
With that we thought was uncollectible most of it didn't relate to those greater than 90 days or the I know the under 60 days has been pretty typical gone back to typical levels, but the above 90 day those spaces that should have been auction that well continue to grow. So we'll have to continue to grow the reserve. So in effect, we're not recording that revenue each month.
Person, each additional month or with us that they're not paying us we just reserve that additional money.
Okay. So just so I understand the million dollars of above average reserves that you recorded in the second quarter, well that that'll that'll continue to increase into the third quarter or at all actually begin to normalize more in the third quarter it shouldn't.
Normalize as we go through all the options process like we had normal Washington in June we start those a great job their teams that getting those done July we didnt options typical so we've got to get through some of these states of all the way through October So, California, New York will go through October and most of the other states should be done by September Thirtyth. So if the auction.
Our completed that a customer should be gone in the reserve related to that customer should go away as well.
Okay got it and then I was wondering if you can comment at all on August.
Our full weekend here as the pent up demand that you saw that you described in July has that continued into August and can you comment on August activity at all.
Yeah, It's George Lai actually obviously was a great month, it started to slow a little bit towards the end of July but actually you know the early part of August It always seen you know the calls come in the volume.
So yeah, it's Ben I still believe there's some some demand out there pent up demand or better than last year, maybe not yet extensive July early July was was incredible the July 4th we got but it's still up we're very pleased another call volumes.
Call Center, it's been very busy the web traffic. So yeah. We're seeing some nice up you know continued momentum pent up demand I think this is Todd I think there's a lot of new demand because of cobot, new reasons to you storage as a lot of people doing no remodeling of their homes, you know kitchens, because there was cooking or home offices are trying to make room. So.
So there's a lot of the interesting thing going on and that might be you know.
A longer customers well it'll be interested to see how long this because a new domestic.
Okay and on August has has typically been I think a net move out month.
Are you are you under the impression that you know this this peak leasing season could be a little bit more elongated and that you know we might see you know a little bit of a stronger I guess like seasonal.
You know leasing environment for an extended period of time.
Yeah. It's it's interesting times, that's why it makes it so difficult to try to provide reinstate guidance. There's so many unknowns.
Things happening this time of year or so unusual unchartered waters, you know we're doing rate increases more so in August and we had to previous years.
So you know, it's really hard to gauge look at the college students are they going back to school are they going back to school or they vacating. So there's a lot of moving parts, which is making it hard to gauge what what will happen. If I I think just given the last few months that move out so well probably be better than last.
This year and a little bit hopefully, we'll also be better so and that that positive, but again, it's hard to predict but you know we're not complaining we're in a good spot with with demand coming back and you know you know all of the all of the ones who reported occupancy looks good. So it's a it's a good sign for our sector.
Okay. Thank you.
Thank you Todd.
The next question will come from sensor out with Green Street Advisors. Please go ahead.
Thank you.
In your prepared remarks, you've been able to accelerate rate increases in July can you just comment on how the magnitude of these increases compares to rate.
Now recorded.
Yeah. So it you know we like I said it earlier question. The Todd you know it is unchartered waters for doing these rate increases of it unusual time of year, you typically want to duties when.
No. It's the beginning of the peak season, then you know you're not so worried about move outs because the phones are anymore, but the demand has been strong.
Obviously, we're doing our best to catch up on that loss revenue.
I think weve a in terms of volume.
And my haven't here you got it and again I know its Spencer in July we did one and a half time, what we did last July <unk> increased to existing customers up volume wise, we did one and that rate things about the same rate hi, eight or just about 9% rate increased to that customer like we did send out I wanted to have times. The letters This july versus last.
Yeah, I pick up in for August as well you know August.
We did.
More volume in this year in August more than two times the amount of volume in August as well and are already put in letters for September increases so.
All three months much higher than last year and.
I think hopefully we can we can achieve at least 85% or the volume that we did last year by the end to the third quarter.
Okay, great. Thanks for the color.
Thanks Spencer.
The next question will come from Spades raised with Citi. Please go ahead.
Hi, Thanks, sorry about that earlier.
Well difficulty there I'm, just hoping maybe you could comment a little bit about what if anything you've seen on supply in your portfolio. It's it.
Moved at all in terms of prior pre covered expectations and sort of on that front as well if you're seeing little thing any sort of changes on the.
Potential acquisition side in terms of pricing things, becoming more interesting or or people pretty holding pretty fast.
Yeah, Hi, Smedes.
So yes supply you know we felt last year was the peak for our markets in our stores you know obviously, our two largest markets Chicago in Houston.
Probably the so I think there were number 29 30, the top 30 markets up new supply coming on and that's what we've experienced.
Picking the last 12 months from June 2019 to June 2020.
We had about 65 stores opened within a three mile radius.
That compares to about 144 for 28, Oh, sorry, 2018 to 2019, so that's encouraging and in fact for the first part of this year, we're just talking about it.
What's opened this year, probably because of coal bid et cetera.
The only having our top 10 markets you know, maybe a dozen or so stores, so that bodes well for new supply.
So we're encouraged by that we felt coming into 2020 that we're in a good spot with new supply. Obviously, we're still you know dealing with all the supply that's been built up over the last several years, but it is it is a good sign for US you know and you're starting to see somebody occupancy improved and hopefully rates will now follow so we're encouraged by that.
In terms of.
Oh acquisitions, you know, obviously things caught up quite a down during the especially April and May.
With uncertainty on the markets uncertainty on hiring the due diligence. So some deals that were being marketed were pole sellers were not willing to sell it was quite difficult to you know, what's the new norm and how do you how do you up to your pro forma.
I think it's going to start picking up again, I think was a little bit more clearly, there's a little bit more visibility into into the sector and what's going on.
Street rates may not be where they're being but you know I think activity should pick up.
We haven't seen any sort of distressed assets distressed assets you don't have the lease up side.
But we're in a great position to take advantage of any opportunities.
So we'll see what happens, but I would expect the second after the year things to pick up.
Okay. Thank you.
Thanks Mitch.
And once again, if any and all this would like to ask your question. Please press Star then one.
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We have a follow up question from Todd Thomas with Keybanc capital markets. Please go okay.
Hi, Thanks.
You mentioned the yes, we've talked about the increase in leasing that you saw from from students back in March and you mentioned some of the uncertainty around schools. It would it be would it be good or bad if but for self storage for your customer stays if the schools.
Don't open you know do you start to see move out activity from that or does that just blends in their their stay.
Yes, it's like it's already a longer stay at a normal Todd you know, it's it's a positive clearly when when coated with Citi and it was nice to get that supply, but it's not that significant and are smaller spaces typically for us, but you know they have that that customer you know.
A little bit longer than normal, maybe maybe even be eligible for a price increase.
Not that Thats something that we would focus on but you know they could.
Stay an extra month or two it wouldn't hurt they again, they're smaller spaces, which typically harder to rent anyway.
Okay, and then I don't know if you mentioned this at all but can you talk about where you know move in rates were throughout the quarter and in July and then with where where rates are today, what the spread is between move out move in rates for customers.
So tied our street rates in Thats corridor, where were down 18% on average that they started the quarter down like 19, and a half ended the quarter down 16, and a half for so July was down 13, so it's moving into right direction, we like the trend, we're seeing even a little bit better in August so actually well again, the single digits, but still down somewhere.
We're in good shape, which way rates are going.
And what about the spread relative to up to move out to customers moving out.
During the quarter I rent roll down with 8.1% meeting or move ins were paying 8.1% less than I move outs that improved to five and a half or 7% in July and getting down five and a half in July so.
Significant but more rolled on than we've seen historically.
Okay and then just one last question Joe you know I just.
The language that was put in the press release and you talked about you know the the second half where you're expecting adjusted FFO growth to be above that of of the second half of 19. You know you you know we're seeing trends improve.
But there's still a lot of uncertainty around you know the virus, but also stimulus and and fundamentals, which you've noted.
Sort of the elevated uncertainty right. So I'm just curious if you can walk through that decision.
You know and how confident you are in the outlook and whether there is something that you think that you know the investment community or or you know the market's missing a little bit you know with al aside.
Yes, obviously, Todd you know, where we're making that statement based on you know how big economies doing today. It doesn't take into account if there's a major second shelter in place or a pullback I I don't think that it could happen, but I think we'll see but it really takes a look at where we are today and what we.
No today, we know a lot more today than we did you don't want her last earnings call. You know last earnings call. We didn't know what collections were going to be where they're going to get continually worse, we didn't know theres going to be any demand.
There was a lot of uncertain. We didn't know if we can do auctions. We didn't know if we could do a rate increases. So a lot of that you know we do know today. So we're trying to give some sort of you know goalpost and away even if it's just a floor as to what we should expect and the second half year. We finished July we've got five more wants to.
Go.
Let's start of August looks pretty good so we feel pretty confident to these you know put that in there you know we're putting rate increases and we started those in June we have done July. We've started August. So you know we have a view on where move outs are going again, there's some risk we don't know.
How a move outs will will react as time here, it's a different year its uncharted waters. So it's difficult to give full guidance because you know we could see.
You know move outs pick up and you know again, we're typically going into a slower part of the season. So it's a little risk there, but we are doing our best to try to recapture some of that lost revenue.
Then this expense controls you know we feel very comfortable with what we have budgeted for expenses and you know it's gotten through the second quarter and through July and you know we've done a very good job with expense control and so that's a big part of you know where we feel we condemn the year so taking that into can.
Generation you know we are trying to provide a little transparently transparency to our investors.
Not full guidance, but it's a little something which we hope is appreciated and obviously if things continue improving ended the quarter. We're in a different positions. We would try to reinstate you know we just we don't know, but clearly that things are a little obviously a lot a lot better in terms of what we see compared to you know late March.
Okay. That's helpful. Thank you.
Thanks Todd.
In the next question will come from Jon Petersen with Jefferies. Please go ahead.
Great just a couple of questions for me so I'm on the retinal business I think you mentioned that it made up 50, 50% of your leases in April the live ticket kind of pulled back a little bit as the quarter went on but I guess I'm just trying to you guys. Obviously been at the forefront of this contact lifts leasing before contact list was the thing I'm a.
Can you give us any you know more quantitative.
Hi, guys understanding of how much of a differentiator that was for you in the second quarter, whether it was higher rents are up selling or anything like that you've been able to do that product.
Well you know listen I, we're very proud of it and thanks for the question you know we've we've been we've had at launch for almost two years and John its you know the team was comfortable with it we weren't scrambling at the last minute to try to figure out how to how to promote contact glass.
Rentals you know the team was trained so <unk> and many other stores providers did a great job of providing that sort of option for customers, but but we weren't rush to do it we had our processes in place we figured out our areas to improve over the last 18 months or so and then obviously we.
Fast forwarded in it and rolled out quicker than we expected the right now to point out a value option of various spaces option. So.
We did a great job with that Didnt help us maybe you know I think are obviously our move ins in may.
I think we're leaning in the sector you know we did a great job. So maybe we got a more than our fair share of move ins and occupancy is really improved and I think thats been a a part of it. The right now are close rate is improving so the number of factors, it's not all right now, but clearly I think.
Could put it does put us in a great position you know as the phones ringing and starting to re rating to get more customers and you saw our occupancy has improved through the end of July I'm, even without you know even if we just discount the auction piece of it where we can do the auctions our occupancy is still much better today than we had that just.
Baited pre Kobe for this year. So we're very pleased with that and I am very very proud of the team and very proud of what we've done with rent, though and we continue to look for ways to make it a better platform for our customers. Thanks for the question.
That's great.
If I understand right now 2.0 correctly I think it's about you know, allowing customers to kind of choose their facility and I mean, there's obviously, an upsell component there I'd be closer to the elevator b b wherever they want to be I mean can you give us a sense of what percent of customers ended up choosing a higher priced unit.
After initially signing up.
Yeah John.
Question was asked earlier it is still little early to try to provide sort of you know customer behaviors that unusual period of time.
Even with co bid, but no. We don't we don't have a week I can't tell you, though that customers are choosing all three options and image you know it obviously, it's going to be what's available because you may not have a we may not have a value spot available, it's really going to depend on inventory that's how fluid. The they offer it is so if there are no premiums.
Phases that option doesn't show up for their customers.
But it's something we're monitoring and we'll continue to monitor it and we'll adjust pricing if needed.
To see how it goes but it's still or it is early to say, but at least we're providing our customers you know options there not just stuck with one particular unit, where they don't know where it is and like I said earlier in particular for those who want to premium space and are not price sensitive though have that option.
Okay. All right. That's helpful. And then there's just one last question I don't think you guys mentioned, a third party management, a little bit but I.
I guess, how do you anticipate over the next few quarters.
You know that business changing are there more opportunities are there are less opportunities given the cobot environment and the recession.
Yeah. We're we're very bullish on third party management, obviously, you know the reach to a great job managing its becoming more difficult for smaller operators to compete.
Given things like right now and Rep revenue management platforms are SCR experience expertise and so for so.
It is getting harder.
That will mean that more stabilized stores may turn to third party management typically have spent a lot of the new construction typically that's you know a 70 70, 80% of your new contracts and that May shift.
Our pipeline has never been better I'm very excited about you know the rest of year.
We clearly have some visibility as to what stores will be coming online to new construction piece. So we're very optimistic about 2020 will opt for sure hit our goal and and obviously were our neighbors getting out there you know where our performance has been stellar in terms of.
No that's what that's what owners look at how do you perform in the market. So we have that behind US right now it's been a great marketing tool for us. So we feel very good about our platform and the prospects for the rest of the year and beyond.
Okay, that's great alright. Thanks.
The next question will come from Steve Sakwa.
Evercore. Please go ahead.
Oh, Thank just two questions and if you answered them I apologize on just a warehouse anywhere any kind of updates on that or any kind of new trends that you're seeing in that business as a result of the pandemic.
Yes, Hi, Steve Yes. Thanks for asking you know were yeah. We love. This business you know obviously, it's a it's an important tool for us to capture that business customer no. One else have that and you know we think were covered you know more and more businesses are going to be looking for more storage. So we're excited to have this tool. We did buy out are you.
As you May know we had a.
Minority.
Two partners in that business, we bought them out during the quarter.
Which we're very excited about we own 100% of the technology now we're excited about that so every every dollar investment that we put into it is for us.
The pipeline is very good Colin you know kind of had some hiccups and trying to get the the pilot programs conducted so we're kind of delayed a couple of months to what we expected this year, but we're very excited about it and again I think I think storage is gonna, it's going to continue to play a role in last mile delivery and logistics.
And when coal, but I think it's even more so so we're very excited that we own 100% of the business now and look forward to growing.
Could you just tell us what that buyout cost was of your partners I assume it's not material, but any any sense dollar amounts it was not material $2 million as what the agreement was and it was very amicable. There was an opportunity agenda. This year to have a formal.
Process to buy them out and you know we have a very very relations about partners. One is continuing on as an employee a in a contributor to the business and the other one who retired earlier this year is looking for ways to do.
No more work with us in accessing the network. So we've got a very good relationship with both the partners and there was an opportunity for them to to liquidate and for US, it's an opportunity to put it into third year.
Okay, and then with Ah I guess, what the rent now 2.0, and I think you says about third or so of the rentals on now kind of online, which is probably freeing up your managers and onsite folks do other things I know that payroll and benefits were down.
In the quarter, how do you just sort of think about.
Sort of on site personnel and just what you need to spend in the amount of people at the sites you know what's sort of efficiencies.
Do you get by moving a third and possibly higher over time.
Yeah, I mean, that's.
It's one of the silver linings of Cobot, Steve is is where right. Now has ended up you know it was it was kind of slowly creeping up from 8% to 9% to 10% maybe to 11, 12% by the end of year and to jump to 30, 35% and we think thats going to be the new nor is incredible.
And you know it definitely is helping our payroll we're going to continue to look for ways to you know leverage that obviously you have store teams spending now a third last time at the counter that's that's a lot of time. If you think about how much time, you know one one rental takes it to counter to be 30.
45 minutes to an hour.
Hi, time, you, they're showing where the spaces et cetera. So it's a lot of time we've already.
Though found ways to reduce costs early on and we'll continue to do so so we're constantly looking at ways to make.
The stores more efficient to reduce costs and a this is a big part of it. So obviously, we you know we're not looking to go under said you know without any you know person at the stores, there's a lot that needs to be done, but we're excited about it and we'll continue to look at ways to leverage that.
Great. Thanks, that's it for me.
Thanks, Dave.
And this will conclude the question and answer session I'd like to turn the conference back over to Joe for any closing remarks.
Well I have one thank you so much for joining the call. This morning, I continue to wish everyone, a safe keeping it be well enjoy the rest of the summer and we look forward to I'm talking again, so thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Your lines. This time.