Q1 2021 Extra Space Storage Inc Earnings Call
Okay.
Thank you for standing by and welcome to extra space storage is first quarter 2021 earnings conference call. At this time, all participants on a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your Touchtone telephone.
Please be advised that today's conference maybe recorded should you require any further assistance. Please press star zero I would now like to hand, the conference over to your host Vice President capital markets, Jeff Norman. Please go ahead.
Thank you Latif.
From the extra space storage is first quarter 2021 earnings call. In addition to our press release, we have furnished unaudited supplemental financial information on our website.
Please remember that management's prepared remarks and answers to your questions may contain forward looking statements as defined in the private Securities Litigation Reform Act.
Actual results could differ materially from those stated or implied by our forward looking statements due to risks and uncertainties associated with the company's business.
These forward looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review.
Forward looking statements represent managements estimates as of today April 29th 2021.
The company assumes no obligation to revise or update any forward looking statements because of changing market conditions or other circumstances. After the date of this conference call on.
Now like to turn the call over to Joe Margolis, Chief Executive Officer.
Thanks, Jeff and thank you everyone for joining today's call.
We are off to a great start in 2021.
Strong fundamentals, we discussed on our fourth quarter call not only continued but actually accelerated as we moved through the first three months of a year.
Same store occupancy remained at all time highs for extra space with sequential growth in January and February at a time of the year when occupancy normally declines.
Occupancy increased further in March ending the quarter with a year over year positive delta of 480 basis points.
Our elevated occupancy has given us significant pricing power, which has also accelerated during the quarter, which achieved rates increasing from 10% in January to well into the teens by the end of March These trends fueled same store revenue gross of 4.6% despite.
110 basis point drag on revenue growth from lower year over year late fees.
Yes, excellent expense control with a 0.2% decrease in same store expenses. The result, with same store NOI growth of six 5%.
When shall acceleration of 310 basis points from Q4.
And year over year core <unk> growth of 21%.
With fundamentals holding and performance comps, becoming much easier in the upcoming months, we expect continued acceleration in revenue growth through the second quarter.
Our concern of a dramatic increase in Vacates has not materialized and now we are into our busy leasing season when demand is typically strongest.
We believe that vacate risk to our elevated occupancy has likely been postponed until the end of the summer or even into the fall.
Turning to external growth the acquisition market continues to be expensive and we remain disciplined but opportunistic year to date, we've been able to close or put under contract a little over $300 million and acquisitions.
These are primarily lease up properties and several of the properties came from our bridge lending program.
Looking forward, we anticipate the majority of additional acquisitions to be completed in joint ventures, and we have plenty of capital to invest if we find additional opportunities that create long term value for our shareholders.
We were very active in Q1 on net third party management from adding 61 stores in the corner, which include the previously announced J cap stores.
Our growth was partially offset by dispositions where owners sold to other operators at prices, we viewed as unattractive to the REIT.
While this trend presents a headwind we still expect solid growth in our third party management platform for the year.
As I said on our last call. We are mindful of the risks we face.
These include difficult fourth quarter operational comps.
Heightened labor market and new supply and state of emergency orders in certain markets.
That said current fundamentals are the strongest we have seen in some time and our team is prepared to use all our available tools to optimize performance.
Our first quarter outperformance, coupled with steady external growth improving 2021 outlook.
Now us to increase our industry, leading annual guidance seven and a half cents at the midpoint.
I would now like to turn the time over to Scott.
Thanks, Joe and Hello, everyone.
As Joe mentioned, we had a good first quarter with accelerating same store revenue growth driven by all time high occupancy and strong rental rate growth to new customers.
Late fees and other income continued to be down and partially offset rental income, but we will lap this comp in the second quarter, which will enhance same store revenue growth.
Existing customer rate increases will also provide a tailwind in the second quarter since they were paused during much of Q2 2020.
We delivered a reduction in same store expenses, despite property tax increases of six 9% and repairs and maintenance increases of 20% due to higher year over year snow removal cost.
These increases were on.
Were offset primarily by savings in payroll and marketing.
We believe payroll savings will continue throughout the year, albeit perhaps at lower levels due to wage pressure in certain markets.
Marketing spend will depend on our use of this lever to drive top line revenue growth, but it should also remain down for the year.
Core <unk> for the quarter was $1 50 per share a year over year increase from 21% same store property performance was the primary driver of the outperformance with additional contribution from growth in tenant insurance income and management fees.
As we announced during the quarter Moody's issued extra space, a <unk> credit rating, our second investment grade credit rating now providing us access to the public bond market.
We continued to strengthen our balance sheet during the quarter through ATM activity on an overnight offering which combined for net proceeds of $274 million.
We sold 16 stores into a joint venture and obtained debt for that venture, resulting in cash proceeds to extra space of 132 million and an ownership interest of 55% we plan to add a third partner to this venture in the second quarter, which will reduce our ownership interest to 16%.
Our equity and disposition proceeds reduced revolving balances and we ended the quarter with net debt to EBITDA of five one times lower than our long term debt target of five five to six times.
Last night, we revised our 2021 guidance on annual assumptions, we raised our same store revenue range to 5% to 6% same store expense growth was reduced to 2% to 3%, resulting in same store NOI growth range of 6% to 8% a 175.
Five basis point increase at the midpoint. These.
These improvements in our in our same store expectations are due to better than expected first quarter performance relax legislative restrictions in certain markets and better than expected resilience and storage funded fundamentals as the vaccine rolls out.
We raised our full year core wrap up on range to be $5 95 to $6 10 per share a 757 and a half cent increase at the midpoint, we anticipate 14 cents of dilution from value add acquisitions in C of O stores, two cents less than previously reported due to improve.
Property performance, we are excited by the strong performance year to date as well as the acceleration, we see heading into the second quarter with that let's turn it over to Latif to start our Q&A.
Thank you to ask a question as a reminder.
Press Star one on your Touchtone telephone again Thats star one on your touched on telephone to ask a question to withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Jeff Spector of Bank of America. Your question. Please.
Great. Thank you good afternoon.
My first question was just a follow up on Joe's initial comments on accelerating trends.
That's exceeded I think everyone's expectations can you comment a little bit more Joe on that line.
Now what are you what are you seeing into the quarter in.
Is this something we should expect going forward.
So I.
I think the most exciting accelerating trend we see is in.
Rental rate growth, which.
Has increased every month this year.
Certainly in the second quarter, we're going to have very easy comps and we're going to see some numbers that are.
Eye-popping, but with.
Very high Occupancies.
You did vacates.
Oh.
We've been a lot where we're allowed to we've been allowed to be aggressive on on rate.
Thank you and then can you comment a little bit more on the third party management business and the opportunities that youre seeing.
Sure we have a.
A very full pipeline.
That on.
Area of our business and we were on boarding an awful lot of stores. We are very confident that we'll achieve our.
Original projections for gross to net business, what we're seeing that a challenge is where pricing is in the market.
A certain number of our owners.
<unk> wanted to take advantage of where pricing is and we can't all lease.
Yes.
As we look at the price units achieved we choose not to match it and not to acquire the store, we always get that opportunity.
But at some pricing levels, we just don't feel it's appropriate from the re to to buy those stores. So I think you're going to see in 2021.
Lot more on boards on.
Also a lot more dispositions, but a very positive net increase in stores and our management platform.
Thank you.
Thanks, Jim.
Thank you. Our next question comes from Juan Sanabria of BMO capital markets. Your line is open.
Hi.
Just hoping you could help us get a sense.
Of what.
It means to be able to turn on the ECR I lever here in 'twenty, one relative to the easy comp you mentioned in 'twenty.
Any contextualize Asian from what that could mean to your same store revenue, having that back Congress did not last year.
So one last year, we paused the existing customer rate increases for the months of April.
Part of March April May we turned some of them back on in May and which meant the rent increase became effective in June and most of them are on by September. So between June and September we basically started our existing customer rate increases so easy.
Easy comps for the months of April May June gets a little harder and by the time you get to August it becomes much more difficult in terms of a comp because some of those were catching up for multiple months. So you had multiple waves of rate existing customer rate increases happening in August.
I would add one net our guidance anticipates that the restrictions that are in place currently remain in place for the remainder of the year. So to the extent any of those are lifted earlier.
That could provide.
Some uplift to us.
Okay.
And just.
Maybe a bit of a unusual question, but just with the tenant reinsurance business, we've had a lot of.
<unk> comment about insurance premiums going up pretty dramatically given.
Higher casualty events and other issues.
Is the profitability at all changing your for that business.
Given weather events seem to becoming more common to some extent are or how are you guys thinking about about that.
That risk and underwriting.
Yes, so we have not seen significant increases in claims now that's partly due to how we've handled certain things obviously, you can't control the weather, but some of our claims come from things like broken pipes that various things and tenant reinsurance. So we have tried to be proactive in terms of more video monitoring.
At our stores more proactive in terms of pest control more proactive in terms of doing things. So that our pipes don't freeze. So while claims may be higher due to natural disasters, we're able to offset some of that by being proactive on managing our claims.
Thank you.
Thanks Juan.
Yeah.
Thank you. Our next question comes from Todd Thomas of Keybanc. Please go ahead.
Hi, Thank you.
First question in terms of the updated guidance.
Scott you both commented that the quarter outperformed relative to expectations does the revised guidance include any changes to the outlook and your assumptions for the balance of the year or was it predominantly related to the first quarter outperformance in any color there would be appreciated.
So it's a little bit of both so occupancy was better in the first quarter rate played out similar to what we expected.
And then moving forward, we are assuming some of that occupancy benefit moves forward and then that we have a little bit more rate power. So it's a little bit of both.
Okay, and what are you anticipating in terms of occupancy in the back half of the year can you share.
You know sort of your forecast for sort of third quarter fourth quarter year over year comps, what's embedded in the guidance.
Yes, so we're assuming that occupancy peaks in the summer at levels higher than they've been in the past higher than historical norms and then we're assuming that on.
Occupancy starts to move down in a more seasonal way in September. So you peak higher and then you and higher than a normal historical year.
Okay. So so your your year over year occupancy spread would would would still be higher it would still be positive.
Towards the end of the year is that is that the right way to shire to feed into that.
Yeah higher than a normally normal year, but lower than last year. So last year was exceptionally high.
Okay got it.
And then I just had a question with regards to the new joint venture that you formed.
With with the asset sales this quarter is there a growth mandate at all for that venture or will this be.
Will this be yet.
So there's not a gross mandate for that venture. These are partners that we've formed previous ventures for they have a gross mandate so to the extent theres another portfolio, we would for me.
Third venture with these partners and grow that way, we don't grow.
We typically do it that way with the number of our partners because we want to segregate the promotes and the performance of the stores and where you add additional storage to an adventure I guess, you could account for them separately, but it's.
Separate ventures.
Okay got it. Thank you did that answer the question Okay. Great. Thank you, yes, thanks, Todd yes, it alright. Thank you.
Thank you on next question comes from Smedes Rose of Citi. Your line is open.
I was wondering if you could just maybe give some.
David commentary around what Youre seeing on the supply from niche things I mean, obviously.
Operating metrics are really strong with them, we keep hearing that from your construction costs are going up and I'm not sure what youre seeing on the bank lending side. So just kind of any sort of thoughts you have there would be of interest.
Sure Smedes.
So the supply.
Environment doesn't change that much quarter to quarter. So we can give you some observations, but I caution net.
It's just one quarter.
I do see some indications of.
Increased supply so last quarter on the call I related in our management plus pipeline.
We had switched to a majority existing stores and a minority of the pipeline was development, which has been that's been the first time on a long time, but we've now switched back this quarter. So more development, it's one quarter, but it is a data point.
Also as we update storage that new developments that compete with our stores we saw a slight.
Pickup on a couple percentage points.
This corner now it may be that that stuff that was delayed or postponed from last year, because there was a bunch of that now being into the pipeline.
But overall I think we're going to see continued development right self storage is performing very well if you're a developer in your China calculate your development yield you can probably use at three six.
Exit cap and see if someone's going to accept that.
So there's a lot of reasons people would want to get into this business as you point out costs are going up blending is still.
Challenging, but I think we're going to see development I don't think the D.
Force, it's going to get shut off all the way.
Okay. Thank you and then just wanted to ask you what your edgy form.
These joint ventures, and you mentioned probably doing more going forward are you are you changing the structure of them at all in terms of your ability to exit or to buy up.
It kind of the same terms that you typically had in the past.
I think we've had very sophisticated terms in the past in terms of on ability to exit on our ability to crystallize promote periodically on these ventures that are forever, which is very important.
I think we had really state of Dr.
Term, so we don't need a lot of improvement to the extent the market changes and you know the level of fees you can get differs or other things we will certainly be.
Uh huh.
At the front end of the market, but there's no significant changes in terms of our ventures.
Okay. Thank you.
Thanks, Matt.
Thank you. Our next question comes from keeping Kim.
Truest your line is open.
Thanks, Tom.
Good morning out there.
So when you look at your moving activity in move out activity I mean move outs are down 10%, but there's still a decent low about move out.
Is there any discernible trends and types of customers using self storage or type of customers deciding to move out.
Be it at a lower rate.
I don't think there's any very meaningful trends in that area.
We really.
We don't see a lot of differences in move outs from customers in different markets, which might be an indication to us open versus closed markets. So we really don't see significant changes in that regard.
Got it.
And in terms of your new joint venture.
I'm curious, what's the higher level of thought process there because.
Sorry to enjoying joint ventures 10 years ago.
At a smaller company base and trying to optimize return on equity like I did that math, yes, sorry today much bigger cost of debt cost of equity is all there for you.
Green light.
It just feels like maybe there's something more thinking behind it or more rationale behind it.
So our usage joint ventures serves a number of purposes.
Primary one is it enhances our returns so in an environment, where we think our view is that the market's expensive. It allows us to continue to grow.
And make good returns to our investors. So let me give you. An example, we've approved so far this year 12 wholly owned acquisitions and they're all lease up stores. The first year yield is in the mid threes and the stabilized yields about 616 month average stabilization. We've also pre.
<unk> five joint venture deals also on the sub 12 months to stabilization, but the first year yield of $6 nine stabilized yield is nine nine.
There is a meaningful difference to our returns when you transact in the joint venture now you get less money out the door. So there's constantly the.
Discussion about do invest more money at a lower return or less money at a higher return.
But the impact to the returns to our investors is meaningful.
We also on top of that get the opportunity to earn a promote none of those numbers include the promote and right now we're in the cash flow promote on a number of our ventures.
And we've also realized backend promotes a number of times.
The other thing it helps us to derisk transactions to extent that we invest less money in a transaction we are balancing our portfolio on an interesting way and then lastly, I'll say, we have really good smart partners and they having another set of eyes on a deal or a market or an opportunity.
Is never a bad thing.
Got it thank you.
Thanks, Kevin.
Thank you. Our next question comes from Mike Mueller of J P. Morgan Your line is open.
Yeah, Hi, I guess, when you're thinking about rate increases that you see.
Heading out to customers over the next couple of quarters. How do you think those increases will compare prior to pre pandemic increases.
So let me answer.
Sure.
So.
Okay.
We're going to have a period of time, where we have customers who came in.
During kind of the height of the pandemic at very very discounted rates and I would expect to see their rate increases be substantially higher than kind of our normal pre pandemic rates.
Once you get to a more normalized operating environment.
We're going to do what we always do which is.
We're going to optimize revenue by giving different customers different.
Rate increases, depending on where they compare to market range.
How the properties performing various other factors. So I don't think we're going to change on.
Approach at all in trying to balance.
Not raising them, so high that you're pushing customers out the door, but also optimizing revenue.
Yeah.
Got it.
Okay and.
In terms of thinking about customer length of stay I know, it's only been a year or so with COVID-19, but how how has the average length of stay changed even in that short period of time.
So early on we actually saw decrease length of stay and throughout the pandemic has continued to increase.
It is still slightly below our historical average from where it was.
A year ago, but it is continuing to increase.
Got it okay that was it thank.
Yes.
Thanks, Mike.
Thank you. Our next question comes from Todd Stender of Wells Fargo. Your line is open.
Thanks, just on the bridge loans looks like you sold some are one.
You don't usually see that it's usually the borrower refis out of it.
On a lower rate, but maybe just some context around the sale.
So when we started the bridge loan program, we would simultaneously close the loans in where we would keep.
The mezz position and the first mortgage would add closing go to with that partner.
We found that a better execution was for us to close the loan.
Close both pieces of the loans on our balance sheet package up a bunch of the first and then sell them to one of our debt partners. We now have two debt partners, who buy <unk> from us so in the in the first quarter, we sold $82 million of first loans.
We had previously closed and kept the mezz position.
Okay got it thank you Joe.
Sure switching gears, maybe some comments on the state of the third party.
Management platform, certainly developers and new owners would need you guys on the front end of lease up properties.
Should we expect that pace to slow it all as new supply maybe comes in a little bit maybe just kind of comment on that on the competitive environment.
I think this is a business that has a lot of runway to grow through all market environments through periods when things are going very well in periods of gone down development cycles.
Think that the advantage professional management brings to this store is so compelling.
There will be continued consolidation and we should continue to grow this business year after year.
Great. Thank you.
Youre welcome Thanks Todd.
Okay.
Again to ask a question. Please press star one on your Touchtone telephone.
Our next question comes from the line of Ronald Camden of Morgan Stanley. Your line is open.
So the JV 16 assets any any color on.
Where those assets are located they come to you how do you select the assets that we picked up.
Any cap rate color would also be helpful.
Sure so we.
We are constantly looking at our portfolio.
And trying to optimize it and that would include outright sales of assets that we feel will not contribute to the portfolio long term and where we can.
Reinvest the money in better performing assets, and then also reducing our exposure to certain assets or markets by selling into a JV. So these were assets that we selected when we wanted to reduce our exposure and we felt we could reinvest.
The money and produce a better overall portfolio.
I can't really given our agreements with our partners I can't give you specifics on cap rate I'll do to say no its a market deal.
Got it.
Switching gears just on the expense is really nice controls this quarter.
Just trying to get a sense.
How much of the expense savings are.
Function of just the COVID-19 the post COVID-19 operating environment, an opportunity to save and how much of the cost savings are sort of things that would have happened anyway. I don't know if that makes sense, but asked another way.
And when you're thinking about where this post COVID-19 operating environment.
Much more sort of expense saving opportunities are there.
And beyond just just what what normally would have done.
And so if you look at our COVID-19 savings I would tell you. It's more G&A related. So for instance, travel is way down you do have some benefit in the store. If you look at our savings at the property. We did have an easier comp in the first quarter of last year, when payroll with maybe a little higher as <unk>.
We started going into the COVID-19 Lockdown second quarter same thing it'll be an easier comp, but we're also being proactive on ours.
And so we.
Looking to make sure that we have the right number of hours that our stores. Our store managers are one of our biggest assets and so we want to make sure we maximize their their time in front on the customers, but with that easy comp we're expecting it to be a savings and then we're also adjusting up slight.
<unk> for the fact that we are having a bit of.
It's a tougher it's a tight labor market right now so we wanted to make sure that we recognize the fact that it might cost us a little more for new people coming in the door or we may have to be more a little more competitive on our labor there.
Third area is really marketing and marketing we view as one of the levers. We use is we have opportunities to use it to maximize rate will spend marketing dollars. We have had an opportunity. So far this year to spend that we've actually decreased our marketing spend year over year, and we hope that trend.
But its something that well look at on a quarter by quarter basis.
Output color. Thank you.
Thanks Raul.
Thank you at this time I'd like to turn the call back over to CEO, Joe Margolis for clothes closing remarks, Sir.
Great. Thanks, everyone for spending your time and your interest in extra space. We're obviously off to a great start this year occupancy is at an all time high with exceptional new customer rate growth. We continue smart careful external growth and all of this leads to accept.
<unk>, both same store and double digit core <unk> growth and all of this is due to the extraordinarily hard work dedication and focus over 4000 employees at extra space and I want to acknowledge their work and thank them for what they produce for our shareholders. I hope everyone has a great day. Thank you very much.
Sure.
This concludes today's conference call. Thank you for participating you may now disconnect.
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