Q3 2021 Life Storage Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the life storage third quarter earnings release Conference call.
At this time, all participants have been placed on a listen only mode.
Floor will be opened for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Dave Dodman, Sir the floor is yours.
Second milestone during the quarter when we crossed the 1000 store threshold.
Second I am proud to announce that for the fourth consecutive year Newsweek has recognized our team for best customer service amongst storage centers.
And third we continue to perform at record levels with record occupancy for this time of year and exceptionally strong pricing power with regards to external growth. We are on pace to achieve record acquisition volume with over $1 7 billion of wholly owned acquisitions either closed. This year are currently under contract.
<unk> and expected to close by year end.
This represents 115 additional stores and nearly 20% growth in our wholly owned portfolio.
These acquisitions represent a nice mix of both markets and maturity with roughly one third still in lease up and approximately 75% in the Sun belt States.
We continue to expand in key markets, such as Austin, Atlanta, Tampa, Miami, Phoenix, San Diego, Seattle, and Greater New York City.
Despite one third in lease up we still expect a blended year, one cap rate to be in the mid four range.
We remain focused on finding both strategic and <unk> accretive opportunities.
Our third party managed portfolio totaled 357 stores at quarter end and is proving to be the robust acquisition pipeline that we anticipated.
Specifically 27 stores acquired this year were managed by life storage, representing 30%, 36% of our closed acquisition volume so far this year.
And we continue to onboard additional managed stores at a rapid pace, including 30 in the third quarter alone as owners and developers are attracted to our operating performance and innovative technology platforms.
Our team has evaluated a record number of management opportunities this year and the pipeline continues to grow.
With this strong performance we are once again, increasing our guidance for 2021, we have raised the midpoint of our estimated adjusted funds from operations per share to $4.94. This year, which would be a 24% growth over 2020.
We are also nearly doubled the upper end of our acquisition guidance from $1 billion to nearly $2 billion.
And lastly, before handing over to Andy I am pleased to announce that we published our inaugural sustainability report. This morning. This report highlights our many ESG initiatives, including our expanded solar diversity and inclusion and community engagement programs the.
The report is available on our sustainability page of our Investor Relations website.
So 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 37 per share for the third quarter and.
An increase of 35, 6% over the same quarter last year.
Third quarter same store revenue accelerated significantly again to 17, 4% year over year up from 14, 7% in the second quarter.
So we've begun to see somewhat of a return to normal seasonal trends in the past couple of months we.
We remain highly occupied with average same store occupancy up 220 basis points compared to the same quarter last year.
This elevated occupancy has allowed us to continue to be more aggressive with rates on new and existing customers, which has driven a significant increase in our in place rates per square foot, which were up 14% year over year in the third quarter, representing substantial acceleration from the 8% in the second quarter and the 1%.
In the first quarter.
Same store operating expenses grew only three 5% for the quarter versus last year's third quarter.
The largest negative variances occurred in repairs and maintenance and real estate taxes.
The increases were partially offset by a 5% decrease in internet marketing expenses and slightly lower payroll and benefits.
The net effect of the same store revenue and expense performance was a 390 basis point expansion in net operating income margin to 77%.
Again, 24, 3% year over year growth in same store NOI for the third quarter.
Additionally, we increased our dividend 16% in October as we continued to share growth in <unk> with our shareholders.
This increase follows our 4% dividend bump this past January and the 7% growth in our dividend last year.
Our balance sheet remains strong.
We supported our acquisition activity and liquidity position by issuing equity securities and pricing a bond offering during the third quarter, specifically, we completed an underwritten public offering of common stock generating approximately $350 million.
And issued an additional $130 million of common stock via our ATM program.
The company also issued roughly $90 million of preferred operating partnership units as part of the consideration for our portfolio acquisition during the quarter.
Finally, we issued $600 million of 10 year, two 4% senior unsecured notes that priced in late September and closed in early October.
Our net debt to recurring EBITDA ratio was three nine times at quarter end and five one times following the completion of the notes offering in October.
Our debt service coverage increased to a healthy six three times at September 30.
And we had $500 million available on our line of credit at quarter end.
We have no significant debt maturities until April of 2024, when $175 million becomes due.
And our average debt maturity is six three 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 2021 guidance.
We increased our same store forecast again, driven primarily by higher expected revenues and slightly reduced expense expectations.
Specifically, we expect same store revenue to grow between 12, five and 13, 5%.
Excluding property taxes, we expect other expenses to increase between 175% and 275%.
While property taxes are expected to increase 675% to 775%.
The cumulative effect of these assumptions should result in 17% to 18% growth in same store NOI.
We have also increased our anticipated acquisitions by $900 million to between $1 7 billion and $1 9 billion.
Based on these assumption changes, we anticipate that adjusted <unk> per share for 2021 to be between $4 92.
And $4 96.
And with that operator, we will now open the call for questions.
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 ask that what posing your question you. Please pickup your handset is listening on speaker phone to provide optimum sound quality. Please.
Please hold while we poll for questions.
Your first question for today is coming from Juan Sanabria. Please announce your affiliation then pose your question.
Hi, Juan Sanabria from BMO.
<unk>.
Just hoping you could speak a little bit more about the acquisitions, you've completed and what's under contract.
I think Joe you mentioned, the mid pork going in yield or year one yield.
Just curious on.
The expectation for for what we should think of that from a stabilized perspective, the assumptions behind that and then as part of that the funding you guys have been active on the equity and the debt right.
How we should think about this finding for what's left to come in.
Our pro forma leverage goes.
Sure Taiwan.
Funding, obviously, we did our capital raise and also issued some debt. So we're all set for the current pipeline of deals.
Closed.
And in terms of the underwriting of the deals yes, we the blended cap rate. There is so many stories to talk about but we feel comfortable that the year. One cap rate is around four 5% and stabilized cap rate, depending on the locations and so forth probably an average of five 5% but.
Definitely there was some in the six range and some of the lower five range really depends on the geography, and so forth, but we feel very good about it I think.
With the deals that we closed in the first half of the year are all meeting or exceeding our underwriting so that gives us a real good sense as to what we should expect in year one for all of its stores under contract. So we feel very good about it.
Great and then just curious on.
On the margin story, you kind of highlighted that in the interim you seem to be buying more and maybe higher growth Sunbelt markets. Just curious on how we should think about margins going forward as you guided pretty significantly here to the portfolio and maybe the uplift on rate per square foot and how do you think that.
Maybe evolve to your portfolio.
Sure I mean, that's definitely been one of our strategic pillars for the last few years one.
If you look back for the last three years of the deals we've been buying they've been newer stores bigger stores more revenue per stores, we've been entering markets with better rates per square foot and obviously it takes time to move the needle, but you can kind of see where our average rate per square foot has been going it's been going it's been going up.
So we're not always going to have stores in those situations, but I would say the vast majority of everything that we acquire has tended to be better than our portfolio average so.
This has been a great year for us and we expect that trend to continue.
I spoke about in our remarks some of the highlights cities that we are.
Expanding in the Seattle San Diego's.
A lot of the Florida markets are all doing very well, we're very excited about the transformation of the portfolio that really began five or six years ago.
Thanks, Jeff.
Yes.
Your next question is coming from Todd Thomas Please announce your affiliation then pose your question.
Yeah, Hi, good morning, it's Todd Thomas with Keybanc.
Okay.
Hi.
First the first question I just wanted to see if you could talk about the fourth quarter implied guidance a bit Andy and maybe help us bridge to the $1 29 per share at the midpoint of the <unk> range relative to the $1 37.
You reported this quarter.
Sure Todd.
When we look at what we expect in the fourth quarter. Some normal returned to occupancy decline that we would normally see the seasonality. So we would probably peak from July to December looked at probably occupancy down 230, probably another 100 basis points down here from October October was very similar to September.
I think it was 20 basis points decline in Occupancies.
Still very good spread to last year.
October was up 120 basis points. So on the same store gets to be a tougher comp right. So we will have a tougher comp there versus last year, but when you bridge it to the <unk> Todd look at what we did with equity and debt, we raised a decent amount of equity during the quarter. The debt came in early fourth quarter.
Most of the fourth quarter acquisitions of delayed until December. So we have some drag from those reasons, but we're in good shape, we like where we're at.
Our capital stack is.
Our funding for our acquisitions and set in place and that is what really causes those additional shares and that $600 million bond offering.
Will cause the <unk> in the fourth quarter and the delay from the acquisitions to be at that 129 midpoint or something.
Okay. That's helpful. And then I think you said leverage ticked up from three nine times at the end of the third quarter to five one times. After the notes offering is that is that pro forma leverage for the notes offering and acquisitions that you expect to complete by year end and what's your.
Sort of you know near term leverage target.
Yes that does pro forma in the acquisitions, but our leverage target and we say it's between five and six in the quarters, where we like to keep it in that range. So I wouldn't expect any change from that.
Okay got it if I could just sneak one last one in here just around acquisitions.
Joe.
Previously there was an effort to add some California and west coast properties to the portfolio.
The company did expand in California, primarily I think in the years, leading up to the pandemic you talked about a lot of the sunbelt exposure and some of the higher growth markets that I guess youre, adding to with the acquisitions here, but what what's the position on California, and the West coast today.
Yes, Todd obviously, it's a it's not the easiest market to buy there's typically.
Not a lot of sellers I think if prop 13 ever changes that might open up the floodgates, but we are very opportunistic we managed to find a few in San Diego, which is which is terrific.
We've been adding to sacramental over over the years and will continue to look at opportunities as they come up but it's definitely a market that we would like to increase.
Our exposure to end.
We feel we feel very good about California in the long term.
Okay. Thank you.
Okay. Thanks Todd.
Yeah.
Your next.
Question is coming from Elvis Rodriguez. Please announce your affiliation then pose your question.
Good morning, Elvis Rodriguez from Bank of America, and thank you for taking the question and congrats on the quarter.
Joe perhaps you can update us on your micro fulfillment business number of stores today, where do you think this platform could go and what the first mover advantage. You think gives you long term with this business sure.
Sure Hi, Alice.
We're excited about it our warehouse anywhere business really consists of two product really too.
Different products, one is geared for the large corporates and Thats, our enterprise that doesn't involve micro fulfillment centers. The enterprise business is much more mature it targets large corporates.
It supports them and their desire to use self storage for their inventory needs. Because we can provide inventory tracking technology and we've seen that business grow nicely. We had a very large contract that we talked about over the summer and there's another RFP. We're working on so I think that's an untapped market and as more and more people work from home and service tax need to have.
Product closer to the homes, we think that's going to be continue to be a good opportunity for us.
And again, we differentiate ourselves.
Quite nicely in that space, the micro fulfillment center, the lightspeed product, obviously, that's a newer product for us there's a lot of investment in that space from a lot of startup companies and so forth, but we have the real estate and we're building. The Knowhow currently we have micro fulfillment centers in Atlanta Chicago.
Bagus, we opened up a larger one in Columbus, Ohio is kind of a hub for us and we are currently I think close to opening in Los Angeles, and Dallas, So really will have a nice spread across the country.
And we feel very good about the business I think our Columbus opened up a couple of months ago, and we already signed on 10 customers.
And we think the more we learn about the business the more we build out our infrastructure and continue to build on our technology.
We'll see how we do in terms of attracting more customers, but obviously it helps us leverage our real estate.
E Commerce is not going away supply chain issues are not going to go away anytime soon and I think we can be a real player in that business.
Thanks, and then just a follow up for Andy.
Repair and maintenance.
Spencer so they.
They went up 20% in <unk> close to 15% in <unk>.
Anything in particular, that's going on this year that you think could be a benefit next year from this line item.
I think there was a few unusual items in there I was just one of them was the.
And there were some storm damage from some of the storms that came through.
We also have one expansion that we had been pursuing.
We cannot get it through the municipality.
We had to write off those costs that we had committed to that expansion that was relatively minor, but it moved the needle on that number. So those were the two unusual items otherwise, it's just a tough comp to last year, where we couldnt find contractors to do some of the work.
So we had a reduction last year and this year. We're just it's a tougher comp, but a few unusual items, but outside of that I wouldn't expect much difference nextgen.
Thank you.
Your next question is coming from Samir Khanal. Please announce your affiliation then pose your question.
Yeah. Good morning, Samira <unk> from Evercore, ISI, Hey, Andy maybe expanding on the prior question. You know you haven't given guidance for 'twenty, two but just maybe walk us through the various line items for expenses I mean, I know you spoke a little bit about repairs and maintenance, which are kind of walking through.
Sort of payrolls and I made at property tax and maybe other line items, we need to think about for next year.
Yes, I think we're in an industry that's in a good place and that we have about one five FTE per store, but we do see hourly wage pressure at the store level.
Looking at some.
Different items that could help us through there are some technologies that could help us control that cost, but I think the hourly rate way.
<unk>, we will have pressure on.
So there I would expect a higher than normal pressure on the wage line property taxes, I think we're going to be in a little better shape next year than we are this year utilities with our ESG investments and much more solar investment.
We will be well controlled as they have been.
Over the years.
Repairs and maintenance I think will be.
It would be an easier comp.
Not expect much pressure on that line.
Still tough to find contractors and get it done timely, but I think we're controlling net costs through some changes internally in bringing on some more maintenance techs in house to help us control of that line.
Right now we don't see a lot of pressure on the insurance line that we use in March.
And we'll see how that flows as we go through Internet advertising.
We've been keeping that relatively controlled down 5% or so over last year.
Knows what next year holds right, we'll have to see Theres a couple of different levers, we pull if we see declines in occupancy or.
Other ways to improve our revenue and Internet marketing is one of those and we'll see how the.
Year pans out going into the year, we're going to be in good shape will be at higher occupancy than we started 2021.
In 2021 turned out pretty well, so well see how that goes and we'll see how control deadline can be.
Thanks for that and then I guess, Joe just shifting over to the supply at this point, maybe maybe provide us with.
Sort of what's your current view on supply in any market, we should be sort of tracking or you are seeing sort of a pickup in supply in recent months here.
Sure Hi, Samir yes.
Not a ton of different from what I explained last quarter, obviously, there's more supply.
Why this year then.
2020, but it's still lower than 2019.
There's a lot going on with supply obviously, there is demand and I am sure Theres a lot of developers looking to build but I think that the.
The increase in material costs can be quite significant and then obviously, there's a lot of delays going on with subcontract work so well.
We still think that 2020.
2022 is going to be similar to 2021 in terms of deliveries maybe around 150 or so.
That effect our stores.
And.
We try to monitor as best we can new planning to.
Give us an idea of maybe where 2023 will go.
We're not really seeing a big big increase in planning.
So we feel pretty good about the next 18 months or so.
No real markets.
That would stand out which is a good thing I guess I think we maybe we are seeing a little bit and in New York region.
And then in Las Vegas.
Other than that I think it's your usual suspects of the Nashville, Raleigh, and so forth still absorbing some of that new supply.
But in general.
In summary, I think we feel pretty good about 2022.
And we will see how it goes as we enter that year to try to get a better feeling for 2023.
Okay.
Okay.
Thanks, everybody.
Thanks Samir.
Your next question is coming from Smedes Rose. Please announce your affiliation then pose your question.
Hi, Good morning. This is Beth Garvey Orange Smedes rose with Citi can.
Can you just give us some spot numbers on October occupancy.
And then just as occupancy remains elevated I think you mentioned higher going into 2022, then you were going into 2021.
Even asking been able to increase rates can you just talk about updated thoughts around customer length of stay.
And when you would expect the rate increase that to have an impact on occupancy or had the pandemic had a permanent impact on.
Customer behavior.
Hi, Smedes.
Okay October occupancy was 94 four at the end of October that was up 120 basis points over last year's October occupancy. So from an occupancy point of view things are holding up well, we expect to end the year, probably 50 basis points over last year's occupancy in December.
And if it does start us off nicely.
For the new year.
Thank you this day length of stay.
We saw an uptick throughout the pandemic our median length of stay increased our average length of stay is only measured on move outs has been 16 months. So.
Those are both crept up a number of customers over one year and two year have also crept up so.
We're seeing good trends there.
When does it return to normal.
That's to be seen we've been aggressive with our rent increase letters are often we do them and how how high they are percentage wise and they've been sticky. So I think that continues until the data tells us otherwise.
Thanks, and then I guess just another one for you and your peers.
Your acquisition guidance you expect.
Acquisition volume to remain elevated.
In 2022.
Well, that's a great question.
Obviously, there were some very large portfolios.
This year.
And.
There is some debate whether that was.
Due to some of the potential changes in the tax laws.
But I would think that there will still be some.
Sellers next year, probably more than we've seen in previous years not sure. If it will be as much as 2021, though given the size of some of these large portfolios.
But again, we like to look at our.
Acquisition I'm, sorry, our third party managed portfolio, we do a good job of buying from our partners and the owners.
That we work with.
And again, we are more than happy to do the onesie twosies.
Singles and doubles work really hard and we typically don't go after.
Really marketed deals the pricing can get a little out of control.
So we're going to continue with our strategy.
We'll see how it goes obviously, we like what's been going on in the last couple of years, we've been able to add to our portfolio.
And we've been able to find very good deals and to <unk> question earlier on we're continue to try to get into larger markets with better demographics, and we will continue to have focus.
So we'll see how it goes but were more than ready to continue to.
Expand through expansions.
Thank you.
Okay.
Once again, if there are any questions or comments. Please press star one.
Your next question is coming from David Gallagher. Please announce your affiliation then pose your question.
Good morning, Steve Gallagher from Green Street I, just wanted to go back to warehouse anywhere and with a lot of the sort of supply chain disruption that we've seen this year is that lead to potentially more inbounds on the enterprise side.
Say that again.
The question about enterprise.
Yes, there's a lot of the national supply chain issues that we've heard in some of the just in case inventory needs nationally for.
Let's say retailers out there has that led to more enterprise inbound volume for that portion of the warehouse anywhere business sure enterprise, it's definitely more on the lightspeed side, the micro fulfillment we're seeing.
Smaller SME is trying to figure out their logistic needs. The enterprise really is a unique product not so much about supply chain, but really about getting product closer to employees. So you know for example medical device companies, we have a lot of service Tech industries like the ATM.
Providers.
Companies that manufactured cars, but don't have dealers they need to have product close to their service technicians, who are working remote so it's really getting equipment closer to service techs.
So that they can just in time do their repairs and so forth. So.
I haven't really seen a significant rise through the supply chain for that business, but we are seeing is a lot more inbound calls on the logistics and the.
For our lightspeed product and trying to get those.
E Commerce customers, who are buying <unk>.
Who are selling through the internet and the company that we're trying to get their product to compete with the likes of Amazon who are now same day delivery. So that's really that opportunity is growing because of supply chain concerns, but not so much our enterprise product.
Got it and then just on the revenue growth side.
Obviously rate trends have been extremely positive this year, but looking at the sort of existing rents out there.
Should we be expecting more existing rate increases throughout the year or are you roughly at parity with street rates in your portfolio.
So we've got some room there are current customers, 60% of our customers are still below the street rate David So we've got some some nice room. There. So I think it sets us up nicely to be aggressive again in 2022 from an in place customer rent increase side.
Great. Thank you.
Hello.
You do have a follow up question coming from Elvis Rodriguez Elvis Your line is live.
Just a couple quick ones guys on the JV and Brooklyn are you able to share more details on that asset and that investment.
Yes.
In investment outlets that we've had a partial or smaller.
Joint venture ownership in over the years, one of the partners want it out so.
We purchased that partners share we still have another partner in and then maybe down the road we buy the remaining part that time Mcdonald's Avenue, we have a pretty good partner, they're a developer that we've been managing for and this is our second store that we purchase from them off market in.
In the boroughs.
And it's a great relationship we don't typically do ground up development on our own we'd like to do it with a JV partner with the idea of buying it.
At some point in lease up.
And.
It's a great relationship and I would expect similar opportunities like that in the future.
Great. Thank you and then.
Joe or Andy one quick one on the third party management platform you commented on.
You know wanting to grow that platform aggressively and profitably, but you don't split out sort of the revenue and expenses for that platform as some of your peers do are you able to share is the platform profitable today and if not when do you believe youll achieve profitability.
And that platform is profitable we break out the revenue.
It is grouped in the supplement on a separate line item in the back the expenses or group of warehouse anywhere and some other items, but that's profitable that there's about a 40% margin on that business. So it is relatively profitable and we'll continue to.
To grow that platform and it becomes more profitable as you do grow and obviously there are some economies of scale there, but a lot of what you do with management is in your G&A right. So we don't break our G&A.
And allocate some of it to the managed stores it would be arbitrary some do that but.
It's not simple to take your G&A and split it between our managed store in our wholly owned store.
Got it that's very helpful. And then Joe just one quick one on that.
You mentioned, the third party platform being a pipeline for future deals and you did some some 30% of your deals this year from that platform do you foresee that.
Do you foresee as you onboard the clients that you have in the pipeline today, creating a bigger pipeline of acquisition deals in the future yes.
Yet without a doubt I think as we continue to grow that portfolio.
Developing terrific relationships with the owners and.
We are we have a very good reputation as buyers out there we have repeat sellers, who have come to us because we know we can get a deal done quickly and fairly.
We would expect to be able to continue to do that going forward. So that's one of the when you ask is third party management profitable, it's hard to quantify that intangible.
How do you measure being able to buy product off market. When there is so much competition for marketed deals. So there is definitely some intangible value there and we would expect that opportunity to continue to grow as we continue to build out that portfolio.
Great. Thank you.
Thanks.
Yes.
You have another follow up question coming from Todd Thomas Todd Your line is live.
Yeah. Thanks.
Quickly I had a couple of questions on the ECR is Andy you mentioned that 60% of customers are still below Street did you did you share where in.
In places relative to street, and then that 60%.
I'm, just curious how that sort of compares to.
Sort of historical levels, and you know how many customers in the portfolio. Overall today are eligible for rent increases as you turn towards 22.
Yes.
Every one of our customers is eligible for a rate increase right, but I mean, they have to be with us. So many months. So it's the first one uses about five months and that's when we see that first increase we've been more aggressive on that first one when it goes in place and the second one beyond that we have been more aggressive.
When I look at the overall portfolio and we've got 60% under we've got about 30% 30, some odd percent above street rate at the moment when you blend them all together, there's just slightly below street rates at this point.
Obviously street rates decline this time of year.
Will increase as we go through the summer next year, and we would expect to have a good pool too to increase next year. So I think it's going to be right.
Rates rates are going to be the story next year occupancy not so much but rates whether it's.
<unk> got some nice roll up going on and the ability to increase our current customers and watch that move out rate and we haven't seen any significant fluctuations in that.
We will continue to be aggressive next year.
And so the in the 30% that are above street today.
You've been you've continued to push rates rent increases through to that portion of the <unk>.
Customer base as well.
That is correct yes.
It doesn't matter how much they are above or below street and they are still in a pool. It may switch when we do those type of customers with time of year, but we will.
Street rate, whether they are above or below is just one of the factors, but it does not eliminate them from getting an increase.
Okay.
The revenue growth in the quarter 17, 4%, so a little over 200 basis points of that was related to occupancy.
If you look at the other sort of 15% plus.
What's the breakout look like in terms of the contribution between.
ECR eyes, and the higher move in rents.
That you achieved in the quarter.
It was not.
Relatively split pretty evenly when you look at our ECR is in your averages are in the mid teens.
When you look at our street rates, how they were.
Our move ins versus move outs for the upper teens or 20% I should say in third quarter. So it's relatively split.
Rent roll up versus our in place so it's pretty even.
Okay, Alright, great. Thank you.
Thanks Todd.
Ladies and gentlemen that is all the time, we have for questions. Today I would now like to turn the floor back over to Joe for any closing comments.
Well. Thank you everybody for dialing in today, we look forward to talking to many of you over the next couple of weeks and if we don't speak and have a happy Thanksgiving.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
Okay.