Q1 2021 Life Storage Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to life storage first quarter earnings release at this time, all participants have been placed on a listen only mode and the floor.
Or will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host David Dodman Senior Vice President of Investor Relations and strategic planning, Sir the floor is yours.
Good morning, and welcome to our first quarter 2021 earnings Conference call, leading today's discussion will be Joe Sapphire, Chief Executive Officer of life storage and Andy Gregory Chief Financial Officer.
As a reminder, the following discussion and answers to your questions contain forward looking statements. Our actual results may differ from those projected due to risks and uncertainties with the Companys business.
Additional information regarding these factors can be found in the Companys SEC filings.
A copy of our press release from quarterly supplement may be found on the Investor Relations page at life storage Dot com.
As a reminder, 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 re queue with any follow up questions thereafter.
At this time I'll turn the call over to Joe.
Good morning, and thank you for joining this morning's call I am very pleased to report another solid quarter and of great start to this year.
With record occupancy of 94% at quarter end, we have managed to grow occupancy by 460 basis points year over year.
An incredible accomplishment and I'm very proud of the entire life storage team.
With this level of occupancy we have been aggressively pushing the asking rates, while also decreasing free rent, resulting in higher net effective rates, which were up roughly 20% for the quarter.
Further we have been very active on the acquisition front with 33 stores acquired or under contract since the beginning of the year.
These stores are a blend of lease up and stabilized and as a group will be immediately accretive and growing thereafter.
We also continue to see strong growth in our third party platform with 18, new additions during the quarter and a very robust pipeline as more and more owners consider life storage as the leading candidate to manage their stores.
And we continue to see further traction and warehouse anywhere with the significant contract for our enterprise product. This product is unmatched in the self storage industry and we continue to drive more corporate business to our unique solution.
These enterprise customers would unlikely be using self storage for their inventory needs.
We're not from what warehouse anywhere brings to the table.
Our door at Lightspeed product also continues to expand with now three fully operational micro fulfillment centers and three more in the works to open over the coming months.
Revenue for this business will continue to grow as we add more and more clients to our last mile fulfillment solution.
The solution is also unmatched in the self storage industry.
With all of the success and growth we exceeded our expectations for the for the quarter and as such are increasing our guidance for the remainder of the year. We are raising the midpoint of our estimated adjusted funds from operations per share by more than 3% to $4 37, this year, which would be 10, 1% growth.
Over 2020.
And with that I will hand, it over to Andy to provide further details on the quarter and revisions to our guidance.
Thanks, Joe.
Last night, we reported adjusted quarterly funds from operations of $1 eight per share from the first quarter, an increase of 16, 1% year over year.
First quarter same store revenue accelerated significantly significantly again to seven 3% year over year up 240 basis points from the four 9% growth produced in the fourth quarter.
Revenue performance was driven by a 410 basis point increase in average quarterly occupancy.
Net occupancy is augmented by positive rent roll up.
In the quarter, our move ins were paying almost 6% more than our move outs.
Which is of significant improvement from the rent roll downs that we experienced in the same quarter last year.
Our move ins have been paying more than our move outs for six straight months with March moving paying almost 8% more than move outs.
Same store operating expenses increased four 7% year over year for the quarter.
The largest negative variance during the quarter occurred in repairs and maintenance, which increased primarily due to higher snow plowing expense and miscellaneous repairs following record cold weather earlier this year.
Payroll and benefits again remained well controlled up only one 8% year over year.
While advertising and Internet marketing costs were down two 6%.
The net effect of the same store revenue and expense performance was an increase in net operating income of eight 6% for the quarter.
Our balance sheet remains strong.
We supported our acquisition activity and liquidity position by issuing approximately $180 million of common stock via our ATM program in the first quarter.
Our net debt to recurring EBITDA ratio decreased to five five times and our debt service coverage increased to a healthy four nine times at March 31.
At quarter end, we have $457 million available on our line of credit and then we have no significant debt maturities until April of 2024, when $175 million becomes due.
Our average debt maturity of six seven years.
Regarding the <unk> 2021 guidance, we've increased our same store for Kraft forecast driven by higher expected revenues and unchanged to the expense expectations.
Specifically, we expect same store revenue to grow between five five and six 5%.
Excluding property taxes, we continue to expect other expenses to increase between two 5% and three 5%.
While property taxes are expected to increase 675% to $7 75 per cent.
The cumulative effect of these assumptions should result in six five to seven 5% growth in same store NOI relative to our original guidance of between 375% and 475%.
We have also increased our anticipated acquisitions by $175 million to between $550 million and $600 million.
Based on these assumptions changes, we anticipate adjusted <unk> per share for the 2021 year to be between $4 33.
And $4 41.
And with that operator, we can now open the call for questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we do ask that while posing your question you. Please pickup your handset if listening on speaker phone to provide optimum sound quality.
Please hold the moment, while we poll for questions.
Our first question today is coming from Todd Thomas of Keybanc. Your line is life.
Hi, Thanks, good morning.
First question on acquisitions.
Joe I was hoping that you could provide some color.
On the investments completed in the quarter on what's under contract in terms of where we're at.
Are you finding these opportunities are they mostly single asset transactions or are there some portfolios in the mix and then given the increased competition out there for it investments are you confident.
In life ability to continue acquiring at this pace moving forward.
Hi, Todd.
Yes, I am confident to answer the second question first.
We've been at this game since our inception.
We've got a lot of relationships out there on the market we've been working these relationships for years.
And we feel very confident I think about 80% of the deals that we've closed or are under contract.
Our off market. So there is no broker involved for example, the.
The Florida portfolio as a family run business.
Business eight stores, we've been calling them for over three years.
And when they are ready to sell we were there with the phone call and that's a wonderful opportunity for us at the same time of lot of the deals that were on the lease upsides of about half of our product that we are under contract or of bot or about lease up and have stabilized a lot of the lease up of our stores that we know.
Sure.
They are out there are third party stores and we know the owners and we've been able to get the majority of those off market as well so yes, we feel pretty confident.
On that there'll be more opportunities like this.
This is.
Three years now we've had a lot of good good acquisitions and.
Im pretty confident there's going to be more and more to come.
Okay and in terms of pricing just given the mix of I guess lease up and stabilize yes.
In the acquisition.
You know Paul here can you comment on cap rates and provide a little detail on the yields there sure.
Sure.
What we've closed on in the quarter.
Year, one is about a four one cap.
Growing many of them you know north of five 6% depending on on where they are but if we combine that with what we have under contract.
Subsequent to the quarter the those are a little bit.
Better about 4.8 caps of the blended cap rate of all 33 is about a four five cap and again half of those of our lease up so pretty we're very pleased with that.
Yeah.
Okay. That's helpful.
Wanted to touch on warehouse anywhere I was wondering if you could provide a little color on the contract.
And provide an update I guess on on the outlook for fee income related to warehouse anywhere.
And maybe in that context, you could just talk a little bit about the pipeline and demand and.
And what Youre seeing there relative to the 300 unit agreement that you announced this quarter.
So Todd as you know the enterprise was really our initial product aside from our just the storage management piece, where there's no technology.
And we've been working on that business for a few years and it's really a longer sales cycle, because you're really focused on larger corporations, who need that product and we're now starting to talk about enterprise as being almost our mature product compared to lightspeed, because we are starting to see the traction with the word is getting out of this particular contract was on.
RFP.
Our team was able to bid on and it was an RFP the none of the other storage companies would would know about it or bid on it we're really competing with some other types of logistics companies and there was not a slam dunk debt, we would win it even though we had them as an industrial customer they were working with us for a while.
But this is a big jump 300 more spaces almost doubled the number of current spaces, we have entire entirely not totally double but close so a very significant win for us. We're very excited about it. This particular contract that will rollout over the course of this year.
It takes some time to work with the client and get it up all on running but when it's all when it's off.
Don and implemented the fee income should be of about $2 million of year.
The multiyear contract and on top of that we would get the premium rents as well.
Okay. The $2 million is just from this 300 unit agreement.
Yes.
Got it and just lastly.
The.
Can you talk a little bit it sounds like.
Mentioned it was a multiyear agreement can you share a little bit of detail around the length of lease and sort of how the rates stack up versus non.
Non warehouse anywhere customers for the storage units.
And maybe provide a little bit more detail on the the economics share.
What we like about our warehouse to any of our customers is typically we do have it's not a month to month. The leaves. This one in particular, the three year lease.
It had some escalators Inc.
Corporate it into it.
And typically we the rent is at a premium maybe 10% more than what we would typically get from a consumer who walks in the door. So it's a great product both for the fee income from the inventory technology, but also as a tenant.
Why are we love this business, we love commercial customers.
They tend to stay lager, the pay premium rents, we can hopefully upsell of the inventory tracking.
And it's a great use of our storage assets.
Thank you.
Okay.
Thank you. Our next question today is coming from Samir Khanal Evercore ISI. Your line is live.
Hey, Joe just getting back to warehouse anywhere and not really just focusing on this that this customer that you signed with just looking at sort of the big picture.
Just trying to understand how big is an opportunity set as the scrutineer.
As you think about sort of the financial impact of maybe just trying to put some numbers around it around the platform here.
Well it really has come down to two different types of businesses in our enterprise business, which is the one that is more mature, which I just spoke to that one is the growing.
At a nice clip I think over the last year, we increased the number of customers by 50% growth and we added nine new customers and Thats. The type of businesses. These are kind of bigger customers and.
Not going to bring in hundreds of new customers, but it's been growing what any 10 20 per cent or so the lightspeed is the one where we're building out the micro fulfillment centers.
Again, it's we wanted to see how these things do but early indications are.
Very exciting for US we have the three opened we started with the Atlanta, We opened up Vegas, we opened up Chicago and we're already expanding the Atlanta.
So it tells us that as these things are open and we get everything we need in there to properly function and operate as the <unk> that the volume will pick up and that's pretty much what's happening right now we started off a little bit slow in Chicago in Vegas.
We work out kind of the Kinks and now we're seeing the volume really starting to pick up.
And both of those new fulfillment centers and we're on track to open up another one on the West coast.
The other one in Texas, and hopefully one in Florida as well. So we're really excited about Sameer, but we don't want to put a number in terms of how big we think it can get.
This year is really about kind of building out sort of our our regional locations and at the same time, we are still building out our technology.
We are really excited about the technology, that's going to allow us to have a proper warehouse management system to connect to the likes of Shopify. So that we can attract more and more direct customers who were selling online and that's the idea.
Okay, and I guess.
My second question is around the revenue growth in sort of the cadence of revenue growth over the next several quarters as we think of that.
The second quarter and kind of the second half.
Especially in particular occupancy maybe you can provide some color on that.
Yes, the merits.
The second quarter, you will see very strong results in the industry. We had the we have an easier comp, but we're also going into it in a very strong place obviously.
Occupancy at all time highs.
Rates moving quicker than we had expected just a few months ago. When you saw January rents were up street rates up 9% and then we saw February.
Growth, 15% in March 27% April more than that so they are accelerating so we would expect very strong numbers Q2.
We have increased what we expect from the second half of the year, but we still expect the return to normal seasonality. So we would we're going to be a little bit higher in the mid summer than we expected, but we do expect that by the end of the year, we would be occupied on slightly lower than we were last year.
Again rates climbed from July to December last year, very unusual and so did occupancy held relatively flat, we do expect to return to normal seasonality in the second half of the year.
Thank you.
Okay.
Thank you. Our next question today is coming from Jeff Spector of Bank of America. Your line is life.
Good morning.
My first question is a follow up on the last discussion on the revenue.
Guidance bump given it was so significant what gives you the comfort to boosted so much right now.
You could tie that into the comments around true.
Traffic or.
Thank.
Youre seeing on the ground and maybe second part would be any regional breakouts you can discuss.
Sure, Jeff I think Theres, a few things we've seen over the last few months.
The gave us the confidence to bump guidance of number one was we.
<unk> seen no evidence of elevated move outs, we expect that at some point, we'd start to see those elevated move outs and obviously on move outs for the quarter down 5% year over year, which was pre pandemic, where comparable so it was a straight comparable and I move outs just remained lower than expected.
And our move ins are pretty much acting as they wouldn't the normal season. So we had thought potentially we had pulled some demand forward to the fourth quarter of last year, we're not seeing that we're seeing a very similar busy season start that we saw on any other year prior to 2020.
We're also seeing the length of stay of our customers.
Move our customers are still been with US about 16 months of the average for those of that move out but the customers that moved in for the first nine months of last year are staying mediant. The median length of stay as the month on the half longer than our typical median which is usually about six five months. They are now saying eight those state eight months. So that's the.
That's given us more comfort.
And then the faster acceleration in rates.
I said, we were up 9% in January.
By March were up 27% in April significantly higher than that rates are going on in the right direction.
Yeah, and I think Jeff It's Joe just on the regional comment again, we're seeing strong.
The demand coast to coast, but some of our biggest markets. We're excited about Miami for the first quarter top 10 market asking rates are up 40% Houston, they're up 25% Chicago of 22% New York up 20%, Texas.
Texas in general.
We're quite pleased about what we're seeing there occupancy is improving in places like Dallas, which was really one of our concerned market.
Occupancy was up 600 basis points to 96, 5% Houston was up 260 basis points to 93 in Austin is doing great with up 540 basis points to 95%. So obviously are our Texas markets are doing very well excited about that we're excited about being there.
And obviously, our Florida markets as well doing doing well as well as well.
Thank you my one follow up would be.
Are you seeing less than expected pressure from supply that was delivered.
Let's say last year or the prior year, even this year.
Yes.
Last year was was the quiet year with some of the delays I think of it.
From 40% of 46 stores that came on in.
So I think there was about 200 year before that and this year, we're seeing maybe of 100 stores come on so still less than 2019 volume in and when we look at what's out there I mean, it's not an exact science, but when we look out to 2022.
We think it might be just about another 100 or so still.
A couple of good years in terms of new supply coming on.
And in the foreseeable future and there's a lot of things for that I mean, obviously the cost of of <unk>.
Construction has gone through the roof.
The money that is required to.
Make some land acquisitions and get it properly zoned as is increasingly more difficult there might be other uses of that land. So it is multifamily is theres a shortage of housing.
So I think there's a lot of.
Good things to point out that might keep new supply.
Pay for for 18 months or two years.
Thank you.
Youre welcome.
Thank you. Our next question today is coming from Juan Sanabria at BMO. Your line is life.
Hi, Good morning, I was just hoping you could speak a little bit about the acquisition market.
Any interest in stuff debt.
Outside of the U S. Maybe Canada are you seeing any.
Opportunities there and if you could talk to maybe the valuation differences between the U S from Canada.
That's an interesting opportunity for you.
Hi, Juan.
We obviously operate up there.
Manage a few stores for a good partner of ours, who we.
We've known for many years in the U S.
COVID-19 has kind of put a little bit of a pause on our acquisition efforts up there.
But we are giving to the to the point, where we'd like to get our brand right now we manage the third party brand.
We would like to do a couple of deals up there get our brand up there by into the REIT or do some jbs.
It's just that the borders have been closed.
Canada is hurting right now.
The the strength of the self storage business in the U S. It's not comparable in Canada.
Had much more of a lockdown.
Especially the GTA.
And it's a bit of a.
Tale of two cities to be quite on it so but yes, we do like debt market, we think there will be opportunities.
We've basically learned how to operate under their up there. So if the right opportunity comes across we will be able to participate and hopefully get up there but for now we're very busy in the U S are extremely.
Extremely busy probably the most.
Acquisition deals that we're looking at in many years and the pipeline looks very good obviously, we're not going to win everything but we're in a very good position I think to continue to find good deals both lease up and stabilize and all of which will support our expectations to grow <unk>.
Thanks, and then just on the occupancy front.
Has have you continued to build the occupancy into April from kind of the period end in March.
At Staples.
I believe our occupancy.
As grow another 50 basis points. So it was $94 five at the end of the April which is 480 basis points more than last April. So we continue to see some nice traction on the occupancy front.
Okay and then just the last one from me just on Jeffs question about supply.
What kind of visibility do you have on 'twenty two at this point.
I guess, what's the earliest.
The new wave of supply do you think could start.
Given the situation today.
It is it is a little bit difficult, what we tried to do we have our own ways of managing new.
New supply we look at what's in construction and we keep an eye on that and there is a pretty good sources out there that we also leverage.
But in terms of what's coming up 18 months later, we look at what's in planning.
And we kind of take a ballpark percentage of what we think of them planning and we will take a percentage of that which actually goes into construction. So based on what we're seeing.
And based on kind of our construction pipeline and where it is we think right now 2022 of showing roughly 100 stores.
In our markets.
That would come on in 2022, and I think I Might've said 202019 was more of like a 170 stores in 2019, so still.
Far less of what we saw in 2019.
Thank you.
Okay.
Thank you. Our next question today is coming from David Bellinger at Green Street.
Your line is life.
Good morning, Thanks for taking my question, just flipping back to warehouse anywhere understanding it's a pretty small portion of the business right now, but just looking towards the future to what extent do you see that business line beneficial from sort of of customer diversification standpoint, perhaps in some markets that might be supplying moving forward and some of the out of.
Yes, David is of Great question, I mean, what we really like about warehouse anywhere.
It's allowing us to attract more commercial clients, we love commercial clients the industry is roughly 18% 20% of of.
Our storage business related and that can be landscapers and so forth.
We'd like to grow that we're probably around 25, given our focus on commercial we'd like to get that up north of 25, because commercial customers are as you point with new supply coming on there.
It's a great. New addition to restore the less seasonal right. So it could tick up some of the seasonality of your business.
They tend to rent more than one space in warehouse anywhere customers, writing more than one market.
Obviously, we have technology, we can upsell so we can have.
Attract.
Fee income.
So we're really excited about it but there.
We have a solution to attract commercial customers. We can't just say hey, we're going to get some more of these e-commerce customers to use our stores you really need to know how to attract them and that's what we're doing with the micro fulfillment centers, we're providing them the services they need to look at self storage as the actual partner for their inventory needs.
They need the technology for their product to be put into of storage unit to be controlled to pick pack and ship. It and we have all of that we have contracts with shipping companies to pick up packages and deliver them in an MSA and that's what really is differentiating us we are.
Competing with companies out there that are trying to do what we're doing.
Companies like ship monk and flexi.
And in our ship up all of these companies are out there. They don't have as real estate, which is what we have they have technology, which is what we're developing but they are raising a lot of money I think ship Mark just raised nearly $300 million flow space raise of about $50 million flexi raised about $140 million and thats. The we're competing with in <unk>.
Got a great solution.
We're making really good progress on that this is a really good year for us to build out that that technology our.
We're learning a lot with our partner deliver and were going to get better at it and we're going to of a nice business I believe.
Got it. Thank you and then maybe just shifting gears the back to cap rates just looking nationally as you look at deals have you seen more relative compression in primary or secondary markets over the last quarter or two and what do you where do you see that moving forward.
Yes, I mean for sure I mean, obviously, there's a lot of demand.
For storage assets of some new players private equity and it is getting more competitive out there, especially for our marketed deals.
But we are seeing we're seeing some new construction into the secondary markets being planned.
You'll see on the performance in some of those markets to do really well I mean, some of our secondary markets are doing extremely well.
The question is how long will they do well so if you're a developer you may not want to take.
Take that risk so that might keep some new supply of <unk> for a while but we are seeing the cap rates. So they are justified I mean, they are the <unk>.
Rates are up occupancy is up.
So some of the cap rate compression is not just in the primary markets. It's also in secondary markets.
Great. Thank you.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone at this time.
Our next question today is coming from Smedes Rose Citi. Your line is life.
Alright. Thanks.
I had one question around.
You've heard of anything from private owners of around <unk>.
The actions potential changes in the tax.
Tax structure with the doubling of the capital gains the elimination of the skip hop.
The elimination of 10 31 exchange of minutes that percolating at all with with owners and are you having conversations with the latter.
Kind of too soon.
I think it's still too soon smedes.
Sure it's on everybody's mind.
But I think.
Hopefully.
We feel confident that the $2 31.
Would remain with.
Our ability to offer upright units would be of nice vehicle to deferred tax, but it's still I think of little bit too soon but with that said we are seeing a lot more.
Product come to the market and that May just be a factor of where cap rates are today. So.
And I think we're also getting to the point of maybe some generational change.
With some stores that youre starting to see some some portfolios come up.
There was the big one on the market as you know.
The one we were able to acquire in Florida was family run.
So some of that is coming into play. So again, we think there's going to be more opportunities to grow and this is our expertise we're very good at acquiring.
We've never been busier and we think we're going to continue to get more than our fair share of deals.
Okay. Thank you that was it from me.
Okay. Thanks.
Thank you. Our next question today is coming from Keybanc Kim at true Securities. Your line is life.
Thanks, Good morning.
Just a couple of follow ups here on the warehouse anywhere now.
You've made of 300 300 locations are those 300 going into your portfolio or is that going into the network that you're managing.
So <unk>, yes, we have a 12000 store network.
It's still a little too early to say, we're plotting it out we think at least 30% will be in our stores.
And then the ones that are in our partner stores, we will get all of the income from the inventory manage of piece and then we get a premium or a piece of the rental income.
So it's really it's really fantastic Thats why the solution is so unique is not just our <unk>.
900, plus stores soon to be 1000 stores hopefully this year. It's our 12000 plus network that is really attractive for customers looking for solutions for their logistics and inventory needs in every single market, which is what we can provide.
And the.
The rent that you would get from those stores if the.
David in your network.
On your own portfolio.
Go into the same store revenue.
And because you said the grants are temporary on premium on discussing of the near term it might be additive to your growth as those come on line.
Yes, keeping the rent does go to the same store if the store is in the same store pool. Obviously some of those will go into some of the same store. Some will go into our managed stores, but the piece that is relative to same store pool would be in the same store rent just the rent that the fees the fees don't go through debt, but the rental income.
Those through the storm.
Gotcha.
And just last question.
The one of your bigger competitors committed to doing a lot more development on a long term basis.
And I would assume debt is not isolated to them I mean, the business has been fantastic and market rents are up a lot.
You March through two recessions pretty much unscathed the industry.
Do you think that might prompt more on developments come on line.
Where does the abatement of just maybe the short lift.
Well again.
I think we feel pretty good about the new supply that's going to come on this year and into 2022.
But obviously if this if this sector continues to.
Grow demand and if we're successful in attracting more commercial on ecommerce business, we're probably going to need more and more demand obviously, we're able to do.
Some nice expansions, which are doing very well for us, we do $60 million to $70 million of those.
If if.
Something came along we would have the capability to develop ourselves not that we have a program, but we do have the knowhow. So we will watch it keep it but I think for the next 18 months or so.
<unk>.
I don't fear, a new wave of it takes time, Brian and things kind of started the slowdown from 2018 2019.
It's going to take some developers.
A little bit of a little bit of time to find.
<unk> make those decisions what they should do given where.
The cost of construction is and then also if theyre going to do some budgets what rates do they use of the use rates, where <unk> seen today or is it going to come back to Earth. You know nobody really knows so I think thats. Good news for any concerns about the wave of new supply in the immediate.
18 months or so.
And.
To the extent you can talk about it when you underwrite deals frac ratio, how do you guys think about.
What type of rent of two model in.
2022, do you assume moderate growth in 2022, when you're doing underwriting on average or.
Or something more of a mean reverting.
Yes, I mean, it's of Great question, obviously, we take a lot of things into consideration we look at whats.
Whats being built in debt near that store.
We look at where rates are we have we are putting on we're not getting too aggressive here everything we actually underwrote.
It's actually doing better than what we underwrote. So these these cap rates that I mentioned I think they are pretty good because we're seeing some nice growth for obvious reasons. This year.
But we still have.
Conservative angle to it.
Being careful but again these storage.
The stores were finding the majority of them are off market and the which is great. I think what you have to be careful of is when you are.
You are bidding on a marketed deal and that's where it can get aggressive and you could probably.
It makes the mistakes if you're assuming that.
This occupancy or are these rates will remain for the next three years.
Got to be a little bit more reasonable when youre looking at those deals because it's getting price as you know some of these deals out there.
Okay. Thank you.
Thank you.
We have no further questions in the queue at this time Mr. Sapphire do you have any closing remarks, you'd like to finish with.
I would just say thank you all for dialing in this morning.
And the the world opening up hopefully will get to see each other face to face sometime this year.
Thank you.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect at this time.
And have a wonderful day. Thank you for your participation.