Q2 2021 Life Storage Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the life storage second quarter earnings release.
At this time, all participants have been placed on a listen only mode and the floor 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 Investor Relations and strategic planning, Sir the floor is yours.
Good morning, and welcome to our second quarter of 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 of 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 and.
Information regarding these factors can be found and the company's SEC filings.
A copy of our press release and quarterly supplement may be found on the Investor Relations page and life storage Dot com.
Also as a reminder, during today's question and answer session. We ask that you. Please limit yourself to 2 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 today's call.
I'm very pleased to report another outstanding quarter.
Demand continues to be strong across our footprint driving significant margin expansion as we maintain record occupancy strong pricing power and disciplined cost control.
With the strong demand, we achieved average quarterly occupancy that was 420 basis points higher than last year. We grew occupancy of 170 basis points during the second quarter.
This has allowed us to be more aggressive with rates, which has helped to drive an increase and net effective rates by more than 50 per cent through the end of June.
Our footprint continues to expand through both acquisitions and third party management as we leverage our deep relationships.
The vast majority of our acquisitions were off market, including 13 stores from our third party managed the portfolio through the first half of 'twenty 'twenty 1.
We closed out of record 534 million wholly owned acquisitions for the first half of this year already matching our total acquisition volume of last year the.
These acquisitions are expected to generate a blended year, 1 cap rate of 4.5 per cent and represent a nice mix of markets and maturity with almost 1 third and lease up and roughly 70% and the Sunbelt region.
In addition to $22 million of closed the acquisition subsequent to the quarter and as well as an additional $80 million currently under contract. We have a strong late stage pipeline of attractive opportunities that our team continues to work on.
Our third party management portfolio totaled 340 stores at quarter end and we added 19 more stores in July as the owners and developers are attracted to our operating performance and innovative technology platforms.
Our team has evaluated the record number of management opportunities this year and the pipeline continues to grow.
We also continued to show strong progress and warehouse anywhere and.
Including rental income associated with these business customers warehouse anywhere so year to date revenue is up almost 30% 2 of $14 million run rate, including $9 million of annualized fee income.
Our tech enabled enterprise and lightspeed products have growing pipelines of companies and search of inventory management and last mile logistics support.
Many of these businesses would unlikely be using self storage and if it were not for the solutions provided by warehouse anywhere.
With the strong demand and performance, we exceeded our expectations substantially for the quarter and are therefore, once again, increasing our guidance for the remainder of the year.
We have increased the midpoint of our estimated adjusted funds from operations per share 8.5 per cent to $4.74 this year, which would be 19.4% growth over 2020.
And with that I will hand, it over and 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 $1.20 per share for the second quarter and.
And increase of 27, 7% over the same period last year.
Second quarter same store revenue accelerated significantly to 14, 7% year over year.
More than double the 7.3% growth produced and the first quarter.
Revenue performance was driven by a 420 basis point increase in same store average quarterly occupancy.
That occupancy contributed to very positive rent roll up and substantially lower discounting and the new rentals.
And the quarter, our same store and move ins were paying almost 16% more than our move outs.
This pricing power, along with our ability and push rates on existing customers contributed to an 8.3% year over year growth of same store and place rates for the second quarter.
Up from just 1.3% growth and the first quarter of this year.
Discounts as a percentage of the same store rental revenue declined 60% year over year to 1.4% and in the quarter.
Same store operating expenses grew only 3.9% year over year for the quarter.
The largest negative variance during the quarter occurred and repaired and repairs and maintenance and real estate taxes.
The increases were partially offset by an 11% decrease and the internet marketing expenses.
The net effect of the same store revenue and expense performance was a 320 basis point expansion and our net operating income margin.
Resulting in 22% year over year growth and same store NOI for the second quarter.
Our balance sheet remained strong we supported our acquisition activity and liquidity position.
Approximately $148 million of common stock via our ATM program and the second quarter.
Our net debt to recurring EBITDA ratio decreased to 5 times and.
And our debt service coverage increased to a healthy 5.3 times at June 30th.
At quarter, and we had $360 million available on our line of credit and we have no significant debt maturities until April of 2020 for $175 million becomes due.
Our average debt maturity of 6.2 years.
We have substantial liquidity available to continue growing our asset base with investment opportunities that provide our shareholders with attractive risk adjusted returns.
Regarding 2000, and 'twenty 1 guidance.
We've substantially increased our same store forecast driven primarily by higher expected revenues and unchanged expenses expectations.
Specifically, we expect same store revenue to grow between 10, and a half and 11, 5%.
Excluding property taxes, we continue to expect other expenses to increase between 2.5% and 3.5%.
While the property taxes are expected to increase of 675% to $7.75 per cent.
The cumulative effect of these assumptions should result in 13, and a half of the 14 and 5% growth and same store NOI.
We have also increased our and anticipated acquisitions by $325 million.
To between $800 million and $1 billion.
Based on these assumption changes, we anticipate adjusted <unk> per share for 2021 year to be between $4.69.
And $4.79.
And with that operator, we will now open the call for questions.
Thank you, ladies and gentlemen, and the floor is now open for questions. If you have any questions or comments. Please press star 1 on your phone at this time, we ask that while posing your question you. Please pick up your handset if listening on speaker phone to provide the optimum sound quality.
Please hold them, all and like while we pull for questions.
Once again, if you have any questions or comments. Please press star 1 on your phone now.
Our first question today is coming from Juan Sanabria at.
M O capital your line is life and you May proceed.
Hi, good morning.
I was just hoping you could speak to.
Firstly, the the trends you're seeing in July.
For rate growth and occupancy if you could just give us some spot and members of our guests for an August now.
And what you're assuming for occupancy T cell if any in the back half of the year and if you could just give us a range of.
Of what your expectations are true.
Good morning, Juan Yeah. The July saw a slight uptick in occupancy so our move ins and the preliminary basis were higher than our move outs. So we saw a slight uptick in occupancy and July rates are still very strong at over 50% increase year over year. So no real changes there from the trends, we saw and the late the second quarter.
<unk>.
Regarding what is and guidance what's embedded in guidance for the second half of the year now and we're looking at about 250 basis points decline and occupancy. So we looked at historically what occupancy may do the second half went towards the higher end of what the client could be and that's what's embedded in occupancy. So we'd be we then the you're slightly above where we.
We ended last year and the same store, which is a little change from where we were 3 months ago.
Great and then just on supply I was just hoping you could give kind of your latest thoughts on kind of what youre seeing and XP.
Expectations for for 'twenty, 2 and and a true think that you will see a greater amount of new supply kind of migrate to some of the secondary markets given some of the migration transfer of seem as a result of Covid.
That's my 1.
And really new from what we said last time, obviously, we do our best to monitor supply and all of the markets. The you know we are based in.
2021we believe this year, we should have about 145 of 150 and need deliveries and that compares to about 50 last year and 170 in 2019, so still.
Having 2019 of the peak looking out to 2022.
You know, we we see a similar amount of deliveries as 2021.
Clearly, there's there's a lot of developers out there.
And you know I think everyone's taking note of what's going on and our sector.
But at this point with construction costs and the difficulty of getting entitlements et cetera, We think 2020.2 will be similar in 2020, 1 we arent necessarily seen a significant rise and some of the secondary markets but.
You know I would expect that to happen is as you know the.
This occupancy sticks and it's not just in and some of the larger markets and it's pretty much everywhere, but.
But right now we feel pretty pretty good about the new supply coming on the share of next year.
Thank you.
Yeah.
Thank you. Our next question today is coming from Jeff Spector Bank of America. Your line is life you May proceed.
Good morning. My first question is a follow up on your comment.
The second half guidance of estimating and the occupancy drop of I think you said 250 basis points.
Did you say that's in line with historical for this time of the year and now.
Are you do you view that as conservative is are there any signposts that.
You know right now the indicate we could see such a drop.
Yes, Jeff there's no signs and we haven't seen any signs we didn't see them in the July either when you haven't seen the move outs, which has just been the incredible that that you know the customer demand and the need for storage remain so we haven't seen the move outs that $2.50 that I mentioned, that's embedded in guidance is the highest we've ever saw from.
And this point to the end of the year so.
We believe it's conservative it's the only happened 1 year.
Okay, Great and then.
And just to confirm because I've been getting more questions on just and the last few weeks.
Have you seen and any of your markets, where let's say the Delta variant is rising and he changes and consumer behavior or it sounds like based on your previous answer.
And at leading into let's say this week last week.
The things remain strong.
Yeah, Jeff.
And we are not you know the demand is still strong.
We still have customers, who are looking for spaces that we can't serve because were full and we do our best to move them to other locations, but the demand demand remained strong and August there'll be of telling month typically August is of that move out months.
So we should know more towards the back half of this month and.
But you know clearly the industry is doing very well and and demand is.
And this continues.
Thanks, and then my last question just because we get the question so much as just.
And the why customers are staying longer and of course this is not something new.
This has been increasing for the last 10 years.
I don't know if you if you do any surveys or what is your response to that question.
Well I think Jeff I think you know this.
You're right over time customers have stayed longer and you know the consumer.
And it's feeling very good about the savings, but not thinking about their storage economies very strong, but you know COVID-19 has brought on.
Some new reasons to use to use storage for example, those who are not sure where they're going to be working the other moving into the office or are they gonna be hybrid and those decisions won't be answered anytime soon.
I think that's part of the reason why items are still and storage.
And there's many other examples of that clearly was a backlog and and the construction.
Construction and home renovations and.
Things are taking longer to get completed.
So I think that's another reason why items are and storage longer U of a lot more businesses using storage, obviously, we focus on businesses and.
And so important for for companies to get product close to the end user.
So I think theres, a number of elements as to why.
You know the customers are seeing them on the and not moving out.
Thank you.
Yeah.
Thank you. Our next question today is coming from my days Rose at Citi. Your line of life you May proceed.
Hi, Thanks, I wanted to ask you a little bit about your raised acquisition outlook and <unk>.
And of what it seems like Theres more properties available for sale and I guess I'm trying to square your ability to find deals that you like with the sort of theme that more money is coming into the space and cap rates are and sort of concurrently continuing to compress just sort of maybe your thoughts around that and your ability to continue.
And to find deals that you like and and raised your outlook pretty significantly.
The height types for me thanks.
And of the perfect Storm you know for many years you know the biggest issue and this and this industry was fighting sellers.
And we all know that there is a consolidation opportunity, it's a very fragmented industry and there's a lot of mom and Pops and.
And really this is the perfect storm for for Us to find deals I mean, we're really excited about it I think July was our busiest month ever and reviewing deals I mean, it's never been busier.
So there are great opportunities out there.
Loved the fact that we've got these deep relationships that go.
Decades in some cases and our team.
Those of great job of trying to secure deals off market.
And yes, there are more sellers you know, whether it's the capital gains uncertainty.
Whether it's the cap rates, we're seeing whether it's the change and generations and were seeing all of those things. So it's a perfect storm and.
And you know when you add and are probably our best cost of capital. We've had you know and forever.
We're really excited about the opportunities I'm more excited that we can actually can can find these off market and we can get some deals done.
And we expect the second half of the year to be very strong.
Okay, and then I just wanted to ask you I know, it's a relatively small piece, but and the path you've talked about.
The Toronto market and investing there and could you just provide an update on what your what Youre doing there I didn't see anything in your release, but I might be lifted.
No. It's of Great question, Smedes listen, we think the GTA and Canada is a great opportunity for us.
The problem. We had is the border has been closed you know we've been so busy and the U S and we really haven't focused on.
Acquisitions or getting a brand up there.
We were managing the we did and the.
The relationship for our partner up there they are of great partner and the U S.
But.
After 2 years, we decided if they're not going to change the brand.
They were going places that we werent really comfortable managing a day.
And are now self managing the good news is we know how to operate up there and you know I would expect that we would find some opportunities over the next year to get life storage brand and Canada, that's of great market to grow and market Toronto and particular as 1 of the fastest growing cities in North America, we know how to operate.
Up there and get it soon.
As soon as the border reopens.
We will be sending some teams up there to find some deals.
Okay, great. Thank you.
Thanks.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star 1 on your phone at this time.
Our next question today is coming from Samir Khanal Evercore. Your line of life you May proceed.
And good morning, everyone of them, Hey, Joe and it's been well documented that it's difficult to hire employees and staff right now and I think I guess what impact have you seen.
Maybe at the store level.
Whether it's pay or and number of hours et cetera.
Hi, Sameer.
It's challenging.
Across our industry and across many industries and unfortunately for our industry and it takes 1 or or less for free but you know well.
2 of people to 1 of our stores.
And the biggest issue we've had our industry is that part time associates.
Who tends to look for full time work and more pay and that's the high turnover position and it's a little higher this year and you know.
Things like technology and things like right now.
Other things that we're doing to reduce the number of FTE hours of the store has helped mitigate some of that turnover and I would expect you know.
For us to continue to find ways to reduce the sort of dependence on a on a per.
Part time worker or double coverage that sort of thing so it's been very manageable.
You know our operations team does a great job of.
Of having people move around and we're very comfortable and having some managers manage more than 1 property and so and we're experimenting with reduced hours and certain locations. It's it's not such a terrible thing at this time, when you're pretty full and there's not a lot of moving activity.
But you know it is and it's always been of a difficult task to find good people who want to.
That part time work, but the otherwise.
Otherwise, we feel okay, though and the operations are doing a great job and we all look of the number of stores, we have been unable to onboard in a timely for.
And the the.
The 17 store JV.
Acquisition that we did we had to hire for each 1 of those stores and R. R.
Our human resources team did a fantastic job of finding really good people too to work those stores as soon as the brand change so.
We're able to find very good people, we've got a great team and a lot of experience and recruiting and hiring.
Thanks for that and I guess my second question is around a little bit more broad based here, but I know in the past we've talked about sort of.
Since you've come onboard you've done a good job of improving the margins of the company.
Cost and I guess, how much more is there to do on that side as we kind of think about next year I mean, whether it's all of the utilities side.
And you can elaborate a little bit more of a man.
Sure you know obviously, we are focused on our margins cost control has been you know very important part of our strategy.
Obviously, we came out early on and talked about how technology can reduce the amount of payroll and you're seeing some of our peers do the same now that they've launched the online platform and we still believe theres more opportunities there as the utilization of right now increases over time. We're also looking at other technologies Inc.
Just mentioned to reduce.
Some of the hours and the stores, we do a lot of AB testing and so forth, so clearly payroll and something we keep an eye on.
And then obviously things like utilities, we're doing a lot more solar these days and.
Into 2020.2.
I see.
Still think there's opportunities for near but.
What we're doing strategically for the company as a whole.
CSR acquisition volume we've been very.
The buyers over the last few years and.
And they tend to be bigger stores with better rates and and <unk>.
Really strong markets newer stores with climate control and all the time that will continue to improve our margins as well as we generate more revenue per store.
So all of the all of the strategies that we have in place.
I really focus on how do we improve the profitability of this company. So it's not just 1 thing.
But you'll continue to see us focus on it and I think you should also you know look of what we're.
We're doing them on the AR and the technology side, and how do we generate more efficiencies and the company and then I'll.
And so even if you'd look to technology and warehouse anywhere, it's not adding anything to our margins today, but I'm very excited about it you know its helping us generate a lot more fee income and that as well will help our margin growth.
All of our third party management business, you've seen that grow nicely and lots of great way to improve our margin. So there's a lot of things that we're focused on some of their so for sure I think there's more opportunities for us to improve margins.
Thank you Jim.
Yeah.
Thank you. Our next question today is coming from key bin Kim at Truest. Your line is life you May proceed.
Thanks, and good morning.
Just wanted to go back to the acquisition of the topic can you just talk a little bit more and that's about the type of type of asset for targeting of the quality.
And the yields and ultimately how do you balance.
More activity and the market for more assets for sale of versus higher prices and you know I.
And I guess I'm, the asking how do you balanced and less deals.
You know versus like the.
Because of things are more expensive.
Sure Hi, keep and.
You know we every deal is so different and every deal can present different opportunities when you find deals off market. It's the.
It's fantastic you know, we've got a couple of opportunities portfolios family run.
And those are great because we know that we're going to add value and it's on our platform.
And obviously, we're we're excited when we find those deals we have of mix. We we we wanted to have accretion in year, 1 and we had the same strategy last year.
But I'll be honest you know the the cap.
Cap rates of compressed but.
You know the cost of capital has improved I believe even greater so really the opportunity is still there for us to find good deals you're 1 cap rate of a blended of lease up and stabilize deals at a 4 and a half cap is accretive and we.
We're still we're still underwriting things to north of a 5 cap of 5 and a half cap and some cases of 6 cap upon stabilization.
So as long as the opportunities there, where we can find deals and our cost of capital.
It makes it.
Possibly for us to to pencil them out to be accretive for the company. So it will still acquire.
So.
Got it that makes sense and sells it for me.
Thanks, David.
Thank you. Our next question today is coming from Todd Thomas at Keybanc capital markets.
Your line is life you May proceed.
Hi, Good morning first question I think you said the occupancy increased further and July can you quantify that I apologize if I missed it but I'm curious where where occupancy ended July and what the year over year spread is and then.
The 250 basis point occupancy decrease that's embedded in the guidance is that off of the June 30 occupancy on the seasonally adjusted basis, What's I guess, the starting point that you are referencing.
If you could provide that detail that'd be helpful as well.
Sure Todd and I was referring to the June 30 occupancy the Jr.
July occupancy bump was less than 10 basis points. So it wasn't even didn't round the change so its still at 95.7.
Okay got it.
And then.
Joe and in terms of the demand.
Customer demand, which is which has been pretty strong and we've heard you know obviously a lot of things about work from home and and sort of pandemic related demand but.
You know I'm curious I'm looking at the 2021 deliveries and your lease up schedule and those assets are.
Just a few months there 70% to 90%.
Physical occupancy I think the Dallas and delivery and June is the over 90% physical occupancy already and I'm. Just wondering you know as Youre looking at those assets you know if you have any better sense and.
Those assets and the fill up stage, where the customers' demands coming from you know you're seeing that and move in and.
You know at a pretty fast pace.
And then also how long do you think development lease up can remain accelerated at this at this pace.
Okay.
And.
Those are great questions Todd.
You know obviously if demand is strong and when you have when you have full occupancy pretty much across the board the lease up stores, even if they're a little bit farther away from the consumer they're going to get filled up quicker.
The real question is how long does this demand and going to remain and.
You know that that feeds into a lot of the questions about guidance about and of your occupancy.
So I think the challenge for a lot of developers.
As you know.
And when does it slow down and when does the pandemic demand slow down and you know because of the cost of construction is so much higher today and slower.
And if they get these things the shovel in the ground today and they can't open until the end of next year, what's it going to be like where of rates going to be so I think that helps curtail some of the new supply. Your normal deliveries are going to are going to continue the 2 you know come onboard and and they'll fill up.
And I don't really have an answer for you as to how how long this will and will remain at such an unusual period of time for the industry.
I wish I knew.
But I don't.
How much of the the demand the move in activity at some at these newer lease up facilities is outside of I guess the traditional.
Drive time or distance that you normally would see I guess, how much of that move and demand as you know the the.
The call center of the the <unk>.
That for them sort of steering customers away from for facilities to those facilities.
Do you have a sense of that.
And I really don't it's anecdotal at this point, but you know we have we have changed the procedures.
And all the operations team has done a great job of allowing store teams at the store to be able to find inventory.
In the region. So that they can they can put of customer into another store those are things that they never had to do before because they were never would fall.
We've done a lot of.
Work and and expansions and trying to get some damage spaces open quickly.
And the call Center does a great job of of working with customers we have waitlists.
Tried to understand customers' timeframes and so.
No. It's it's it's an issue right now because the stores are so full that you know.
So it's a it's probably more comments of b to B.
And be putting customers in the second or third choice store versus the 1 that's closer to their home.
But I don't have exact the.
Statistics on that again.
Okay.
Alright, Thank you for sure.
Sure.
Thank you we have no further questions and thank you at this time Mr. Sapphire do you have any closing comments you'd like to finish line.
Well I just want to thank everyone for dialing in today for for all of the questions and we hope everyone has a safe and enjoyable remainder of the summer and we look forward to seeing you in person.
And the fall.
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.
Okay.