Q4 2021 Life Storage Inc Earnings Call
Ladies and gentlemen, thank you for holding the conference call will begin in approximately one minute. Please do not disconnect. Your lines. Once again the conference call will begin in approximately one minute. Thank you for continuing to hold.
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Good day, ladies and gentlemen, and welcome to the life storage fourth 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 Alexey <unk> Vice president of life storage.
<unk> the floor is yours.
Good morning, and thank you for joining us today for the fourth quarter 2021 earnings conference call flight storage.
Leading today's discussion will be Joe Sapphire, Chief Executive officer of lifestyle, and Andy Gregory Chief Financial Officer.
We're also joined the room here today with David Dobbin, Chief operating officer.
Following prepared remarks management will accept questions from registered financial analysts.
As a reminder, the following discussion and answers to your questions contain forward looking statements are subject to risks and uncertainties and represent management estimate as of today February 25 2022.
The company assumes no obligation to revise or update any forward looking statement because of the changing market conditions or other circumstances. After the date of this conference call.
Additional information regarding factors can be found in becoming public SEC filings.
The press release distributed yesterday, we first our supplemental package with additional detail on our results, which may be found on the Investor Relations section on our website 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.
Thanks, Alex and good morning to everyone.
I am pleased to report an outstanding fourth quarter during which we averaged 94, 2% occupancy, which is a 110 basis points higher than last year.
Average asking rates for the quarter were 26% higher than the same period from last year, and we continue to see strong demand and pricing power through most of our markets.
For the year. In addition to an outstanding operating performance. We also achieved record acquisition volume closing on $2 3 billion in wholly owned and joint venture acquisitions, which added 144 properties to our platform.
Of this amount $1 7 billion in 112 stores were wholly owned acquisitions, representing nearly a 20% growth in our wholly owned portfolio.
These acquisitions represent a nice mix of both markets and maturity with about 25% still in lease up and approximately 75% in the Sun belt markets.
We continue to expand in key markets, such as Austin, Atlanta, Tampa, Miami, Phoenix, San Diego, and New York City.
Despite 25% still in lease up we expect to achieve a blended year one cap rate in the mid four range.
Today, we own and operate just under 1100 storage facilities across 35 states.
With regards to third party management on a gross basis, we added 29 stores in the fourth quarter and 103 stores for the year with a total of 367 stores at the end of 2021.
Folio of managed stores continues to provide a strong pipeline of acquisitions as we acquired 31 managed stores during the year, representing nearly one third of our wholly owned acquisition volume.
We are off to a strong start in 2022 with January month end occupancy of 93, 6%, which is 80 basis points higher than January 2021.
Asking rates for January or up 26% year over year.
And similar to last year. We are also starting off the year with a very strong acquisition pipeline with $483 million already closed or under contract.
With regards to guidance for 2022, we estimate our adjusted funds from operations per share to be at the midpoint of $5 98 for the year, which would be 18% growth over 2021.
Before I hand, the call over to Andy <unk>.
I'm proud to announce that Forbes magazine has recently named life storage is one of the best midsize employers for 2022.
We have also been recognized by sustained Olympics for our environmental social and governance efforts as an ESG regional top rated company.
And lastly, just last week I recently joined over 2000, other Ceos and signing the CEO action pledge for diversity and inclusion.
And with that I will hand, the call over to Andy who will give who will go into more details on our performance for the quarter and the year and also our 2022 financial guidance.
Thanks, Joe.
Last night, we reported adjusted quarterly funds from operations of $1 41 per share for the fourth quarter.
An increase of 31, 8% over the same quarter last year and well above the high end of our guidance.
The sequential increase in <unk> from Q3 to Q4 was the result of excellent same store performance and acquisitions performing above our expectations.
Fourth quarter same store revenue increased 16, 9% year over year, driven by rental rates and occupancy gains.
But we did see the return to normal seasonal trends in the past couple of months.
Main highly occupied with average same store occupancy up 110 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.
Leading to a significant increase in our in place rates per square foot.
Same store achieved rates were up 15, 2% year over year in the fourth quarter Rep.
Representing the continuation of substantial acceleration in achieved rates.
From 1% in the first quarter to.
8% in the second quarter and 14% in the third quarter.
Same store operating expenses grew only one 9% for the quarter versus last year's same quarter.
The largest negative variances occurred in marketing cost.
Office and repairs and maintenance expenses.
These increases were partially offset by a three 2% decrease in real estate taxes, and a two 2% decrease in payroll and benefits.
We were able to successfully challenge property tax assessments and also received over $1 million in refunds I previously pay property taxes.
The net effect of the same store revenue and expense performance was a 410 basis points expansion in quarterly net operating income margin.
To 72, 4%.
Resulting in 23, 9% year over year growth in same store NOI for the fourth quarter.
With this improved performance, we again increased our dividend 16% in January as we continued to share growth in <unk> with our shareholders.
This increase follows our 16% dividend bump this past October .
Turning to the balance sheet.
We supported our acquisition activity and liquidity position.
Issuing equity securities and closing a bond offering during the fourth quarter.
Specifically, we issued an additional $212 million of common stock via our ATM program during the quarter.
And closed on $600 million of 10 year, two 4% senior unsecured notes that priced in late September .
Our net debt to recurring EBITDA ratio was four five times at quarter end down.
Down from five four times at the same quarter last year.
Our debt service coverage increased to a healthy five five times at December 31.
Up from four seven times from the same quarter and a year ago.
We had $500 million available on our line of credit at year end.
And we have no significant debt maturities until April of 2020 for $175 million becomes due.
And our average debt maturity of six eight years.
In addition at December 31.
100% of our debt was fixed rate.
Regarding 2022 guidance.
We expect same store revenue to grow between 95 and 10, 5%.
A majority of which will be driven by improved rental rates.
Excluding property taxes, we expect other expenses to increase between four five and five 5%.
While property taxes are expected to increase six 5% to seven 5%.
The cumulative effect of these assumptions should result in 11 five to 12, 5% growth in same store NOI.
We expect our wholly owned acquisitions to be between $550 million and $650 million.
Based on this outlook, we anticipate adjusted <unk> per share for 2022 to be between $5 93.
And $6 three.
Our 17, 9% growth over the prior year at the midpoint.
And with that operator, we will now open the call for questions.
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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 now.
We do ask that if you are listening by speaker phone that you. Please pickup your handset for optimum sound quality, if you will.
Wish to leave the queue you May press star two.
Once again, if you have any questions or comments. Please press star one on your phone now.
Our first question today is coming from Todd Thomas at Keybanc. Your line is live you may begin.
Hi, Thanks, good morning.
Question first about the first quarter.
<unk> guidance I'm, just trying to get a handle on the run rate coming off of the fourth quarter a bit so first quarter guidance of $1 36 to $1 40 relative to a $1 41 in the quarter I know theres some seasonality.
But you have the full benefit of the fourth quarter acquisitions.
Third party management platform was with steady it actually grew a little bit overall sequentially. Just curious maybe if you can talk about where we might expect to see the run rate pull back.
Sure Good morning, Todd Sandy.
The first quarter, a couple of things, we had such a benefit in the fourth quarter from property taxes, some $3 million.
In the fourth quarter. So obviously that goes away in the first quarter. So that's probably the biggest.
Issue in the first quarter compared to the fourth quarter otherwise other besides that we have our normal property tax increases year over year.
Payroll and benefits and it's a big time of year for Snowing mobile, obviously and Thats normally the big difference between Q4 and Q1 as those few items.
Okay, and then are you able to share where occupancy is today in the portfolio and what that looks like year over year and then Andy can you provide.
A little bit of context around the occupancy assumptions.
That the guidance.
You know assumes throughout the year, maybe talk about what you are anticipating.
For occupancy peak.
During the peak rental season, and maybe peak to trough back.
Back half of the year.
Sure. Yes today were at 93, 7% Thats about 50 basis points above last February at this time last year.
<unk> decreased from January January we had an 80 basis point gap so.
That's where we are today, our guidance assumes our occupancy matches up with last year in the summertime. So we peaked out at just below 96% last year and that's what our guidance assumes we do we do expect in our guidance that the peak to trough is a little bit.
Deeper in the guidance versus 2021 so.
July was our peak last year through December was 210 basis points, and we're slightly more than that decreasing in the guidance.
Okay. That's helpful. And then just one last question or maybe a clarification.
If we look in the supplement.
The four five times leverage on a net debt to recurring EBITDA basis does that take into account and adjust for the acquisitions completed in the quarter.
Yes, it does.
Okay.
Alright, great. Thank you.
Okay.
Thank you. Our next question today is coming from Elvis Rodriguez at Bank of America. Your line is live you may begin.
Congrats on the quarter and year guys quick question on the external growth. So Joe perhaps you can share the strategy around guiding to $600 million, yet youre almost at $500 million in deals through February can you talk about what youre seeing is our deals drying up or what are you seeing on the external market.
Is it pricing, that's giving you pause on coming out with a larger acquisition guidance. Thanks, sure Hi harvest.
It's always something that's really difficult to predict despite coming off a record year and obviously some real large.
Portfolios that came to market and right now we're not seeing really any of those large deals come to market.
It has been a little quiet from a broker perspective.
We're fortunate that we've been working on a number of deals that we've been able to get under contract for the first quarter and have a nice pipeline, but it's getting a little bit more it's always difficult to predict and I think just with the uncertainties of cost of capital and rising interest rates.
Some uncertainty out there is a little bit more difficult I think we'd probably be a little bit more comfortable if we saw some more portfolios come to market not that we would necessarily win them.
But it has been a little bit of quiet, we've seen a little bit of.
Quietness from from that perspective, so we feel comfortable with the guidance.
And obviously, we will adjust it as we did last year, if things pick up.
But we're focused on what we have under contract and try to get those.
Close by the end of the quarter.
And then just.
If I may on the micro fulfillment business are you able to share.
Sort of your outlook for store openings there this year.
And then any potential for.
Life storage to share more disclosure on that business in the future.
Yes.
The micro fulfillment, obviously, that's the newer piece that we've been working on for the last 12 to 18 months.
What we call the lightspeed product and that is the e-commerce solution for smaller and medium sized companies.
Last year was really build it out.
The national presence, so we've got Atlanta Vegas, Chicago Columbus.
We just opened up this.
Of this month and we really at this point want to see how we do with acquiring customers and attracting customers in that space before we really start building. These out a little bit further it's still in the beta phase in my in my view.
It's a great feature obviously demand is out there theres a lot of competition for it.
We're fully occupied which we're not in a hurry to.
Build out 700000 square feet of spaces, where were fully occupied in most of our stores, but we feel pretty good about what we're doing I think this first six months of the year, we will see how we do in attracting customers. We've we've been successful at it we had.
Over I think nearly 30000 shipments in December .
Obviously, our Christmas peak.
And in January .
This year, we're up about 35% and shipments so the business is growing but we're not yet there yet to do full ramp up of the micro fulfillment just yet we want to see what 2022 turns out in terms of attracting customers.
Great. Thanks for the update.
<unk>.
Right.
Thank you. Our next question today is coming from Samir Khanal Evercore. Your line is live you may begin.
Hey, Andy just curious on some of the breakdowns for expenses for Nexgen and you provided a little bit of color on property operated.
Fences, but just trying to get a little bit of understanding on some of the other line items.
Sure.
Samir payroll, it's we're seeing some pressures on that line item in the same store group, So youll, probably 4% to 5% is a good run rate there year over year.
Marketing, an 8% increase is what we're looking at I think we detailed the what we're looking for for property taxes.
In the quarter to 7% quarter percent.
Utilities, probably 5% is in the budget otherwise everything is pretty much in the in the two to three range.
Got it and then Joe just shifting to the acquisition pipeline I know you know.
You talked a little bit earlier, but just in terms of maybe give us an idea of sort of the markets you're focused on I know you.
You've been sort of active on the west coast as well, but certainly more in the sunbelt markets now so trying to understand where the focus is and sort of what the pipeline looks like for you.
Yeah, well I just touched upon the pipeline, obviously, a pretty decent one that we're working through right now Sameer.
Obviously, our strategy for the last few years is to beget to find deals in markets with strong demographics.
Strong street rates.
And that really has been the focus of Sunbelt, obviously is an area we like.
We're really successful last year with 70% of our properties in the sunbelt.
Especially Florida markets have been we found some really nice deals there.
But for the year, so far in California, we were a little bit light last year.
But for.
Our pipeline right now we closed on six in California, and we have another 300 contracts. So real good start for us in those markets, which are always are.
Areas that we wanted to add scale too.
Although that's the merit is the usual markets that will we'll be opportunistic if there is good opportunities.
Especially with our managed portfolio with an owner is ready to sell and we are in that market will gladly bolt onto any of the markets. We're currently in.
Just as a follow up do you get the sense that there is less portfolio deals today I know there was a few last year, but kind of what's the sense and portfolio deals versus one off this year.
Yes, I mean, it's still early you're right. It's still early in the year I think last year.
The industry saw the big easy storage deal come out.
And it took some time, but then some of the large ones came up so.
I think in general.
We haven't seen on.
100, $200 million range portfolios, we haven't seen a ton of those for us, it's really about blocking and tackling and doing a lot of one offs for 25 or so we have currently in our pipeline.
Got it thanks, so much.
Yes.
Thank you. Our next question today is coming from Juan Sanabria at BMO capital markets. Your line is live you may begin.
Yes.
Hey, guys.
Maybe just with a clarification I think you said that for the acquisitions that I wasn't sure. If it was fourth quarter for 2021 as a whole.
Quarter before it can be stopped with the mix for blended yield and if that was for the year. If you could provide us both.
That's similar number in terms of lease up and Youll year, one yield expectations for the fourth quarter deals as well as kind of what you have executed on so far to start 2022.
Sure one yes, the four and a half was the blended cap rate for the full year.
I don't believe the fourth quarter was really anything different from that.
In the first quarter, it's more about a forecast the blended yield so a little bit tighter, but again nine of those are in California. So you typically expect a lower cap rate in those markets. The mix is still roughly about 25% of what we have for the first quarter of lease up versus stabilized so.
At a four cap it still should be accretive in year one for us.
Okay, and then I was just hoping maybe you could talk a little bit about supply in and.
And how your markets are trending if you think about your expectations in 'twenty two versus what you saw in 'twenty one.
In the kind of the insurer you talked about most market seeing strong demand. So I'm just curious.
If there are some markets, where youre starting to see maybe a quicker normalization if theres any commonalities with dose.
Not as quite robust markets given that everything is still strong, but maybe maybe some not quite as strong as others.
Yes.
I think for the last couple of quarters, we've anticipated that 2022 would be pretty flat to 2021 or our view on that hasn't changed we still see about 150 or 60 stores in our markets.
Deliver that was kind of the number in 2021, and we are still expecting that similar amount in 2022.
We've heard on some other calls it just for a developer perspective.
It's not easy right there might be demand.
Things are taking longer to get entitled the cost of construction is much higher.
So I think some of that is holding off a wave of.
Too much new supply.
So really the markets up.
Our <unk>.
Markets that we kind of watch with 10 10 or more stores.
The usual suspects currently a Vegas Phoenix Orlando.
That we're watching more closely.
The New York City, a little bit.
A bigger geographic footprint for us, we're not too concerned.
So really 2022.
<unk> been consistent that we feel it should be.
A pretty good year in terms of supply.
Nothing that were too concerned about.
Thank you guys.
Mhm.
Thank you.
Our next question today is coming from Smedes rose.
Citi. Your line is live you may begin.
Hi, Thanks.
I just wanted to ask a little bit about.
Financing of acquisitions going forward, just with the year to date.
Pull back in shares let's assume that its.
It's used more got it.
Claim versus equity.
Yes, Smedes is that if you look at how we funded 2021 acquisitions with a combination of the ATM a bought deal we did and.
The op units, we issued we had some 70% of our funding in 2021 was through equity. So we're in a great spot, we're starting the year with $170 million or so of cash. So yes, it would be a year of more more leverage, but we do expect the mix.
And model it out probably 35% to 40% equity and the rest would be done.
Okay. Thanks.
Want to ask you too.
Property tax expectations.
It was just a little higher than what we were looking for and we were just slow but I was just wondering if there any particular markets, where you're seeing more pressure on property tax versus others.
Yes.
The benefit we received in the fourth quarter, we had some great wins.
Some of the assessments and some refunds makes it a tougher comp. So you have I think probably the $6 eight midpoint is higher than people would expect but we're seeing.
Some pressure in North Dallas, Collin County, Cayuga County in Ohio in the Atlanta area and Cook County is a constant on our radar and Virginia also so those are the ones, where we're seeing more pressure.
On the property tax line in 2022.
Okay and then just my last question are you seeing any changes in.
The way that customers are renting or are they coming back or in person or are they still coupons.
The touchless.
Wow I guess you guys introduced.
It's really help steady at around 30% 35%.
For a while now.
That's a good thing and it Hasnt gone down prior to Covid. It was more like 10% to 12%. So it really has leveled out we're still working on some projects internally to try to get that number up.
I think we will probably achieve.
Some momentum to get more customers to do it online in.
It may be just a little bit more of kind of.
Getting them more to use rent now.
Obviously with our stores open and people more comfortable the tendency to go in and talk to some of the counter is still there, but we still think there's opportunity to improve that.
Okay. Thank you guys.
Okay.
Thank you. Our next question today is coming from Keegan Carl at Bahrenburg Capital markets. Your line is live you may begin.
Hey, guys. Thanks for taking the questions first just on the business customer side of things can you maybe give us some comparison on how the demand levels would compare relative to the start of 2021.
Obviously its business customers have always been using self storage. If you again, obviously, we have the strategy to attract more of them, we like them there.
There's a lot of reasons.
We.
We have been doing warehouse anywhere to attract more businesses.
<unk> has been growing its hard to put a number on it but just with.
The increase in getting goods for the last mile buildup of inventory because of Covid, we have seen a tick up in business customers, which is a good thing what we're trying to do is make it a little bit more easier for a business to choose self storage. So we're giving them the tools that they need whether it's a forklift.
Inventory tracking pick pack and shippers that sort of thing that's really what's behind warehouse anywhere providing the tools to attract more businesses.
To use our stores and our partner stores in the long run and it's walk before you run obviously, we're building out the microfilament centers.
We've got the regional.
Distribution that I talked about a few minutes ago.
We'll see how we do with that but in terms of our enterprise product attracting larger companies in the medical device.
Field or in the field service industry.
That's really what they need they need connections to ERP systems they need.
Inventory tracking and so forth and those are the tools that we've been working on for the last few years, and obviously that will help us attract more businesses in the future.
Got it and just kind of on the topic of conversation on light speed.
I know, it's kind of tough to answers you just maybe give us an update on how it's trending relative to your initial expectations as far as lease up and demand would you say it.
Above and minor below.
I would say, it's what we expected we knew we had to get into this business you have to first build out the foundation and that's what we really focused on in 2021 and really now is spending a little bit of money on marketing to attract those customers to your proposition and Theres a lot of there's a lot of competition in that space. If you take a look at it.
We think we have a very good solution, we don't need to win too much market share.
Obviously, we want to fill out the micro fulfillment centers and we're doing that slowly, but there's still capacity and there's still opportunity. So we wanted to again walk before we run this year.
Attract some more customers and then it's quite easy for us to start rolling These things out if we need a second one in Chicago or if we need to.
A new one in Dallas, we can do that relatively quickly, but I like where we are with this business, let's see how we do let's see if we can compete.
And then we'll go from there.
Got it thanks for the time guys.
Sure.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone now.
Our next question is coming from Mike Mueller at Jpmorgan. Your line is live you may begin.
Thanks, Hi, just a quick one what's the typical occupancy profile of the lease up assets that you are buying and when you look at the <unk>.
Product that you are under contract for the <unk>.
The rough average occupancy there for those assets.
Sure typically we like to buy when we say lease up its typically later in lease up so I would say between 50 and 80% occupancy is the typical range. We don't we might do an occasional CFO , where it might make sense, but we don't want to take too much dilution early on.
I think the first quarter.
Is roughly about that so at the lease up to 25% or so that are in lease up it's in that range.
Got it okay that was it thank you.
Okay.
Thank you. Our next question is coming from Kevin Stein at Stifel. Your line is live you may begin.
Good morning.
Just wondering if you had how many percent or what percentage of customers are below street wear now and how that compares to last year.
Yes, Kevin about 50% of our customers are below the street rate and that's about 10% more than were a year ago at this time.
Okay. Thanks.
Okay.
Thank you.
No further questions in the queue at this time I will now turn the floor back over to management for any closing remarks.
Well, thank you everybody.
You've taken the time to dial in this morning and for those who asked questions. We appreciate it we look really forward to.
Heading down to the conference in.
In Miami and a few weeks and finally seeing some of you face to face. Thank you.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect at this time and have a wonderful day, we thank you for your participation.