Q1 2022 Life Storage Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the life storage first quarter earnings release at this time, all participants have been placed on a listen only mode and we will open the floor for your 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, Sir the floor is yours.
Good morning, and thank you for joining us today for the first quarter 2022 earnings conference call of life storage, leading today's discussion will be Joe Sapphire, Chief Executive officer of lifestyle, and Andy Gregory Chief Financial 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 that are subject to risks and uncertainties.
Represent managements estimates as of today may five 2022 to.
The company assumes no obligation to revise or update any forward looking statement because of changing market conditions or other circumstances. After the date of this conference call additional information regarding these factors can be found in the company's public SEC filings.
In addition to 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.
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 will turn the call over to Jeff.
Thanks, Alex and good morning, everyone I am pleased to report another outstanding quarter, and a solid start for the year.
Consumer and business self storage demand remained strong supporting positive rental trends across our portfolio.
We averaged 93, 6% occupancy for the first quarter, which was up 20 basis points over last year.
These high occupancy levels continued to enable pricing power with asking rates for the first quarter up 20% over the same period from last year.
As a result of the strong fundamentals, we achieved funds from operations of $1 44 per share for the quarter, which is a 33% increase over the same quarter from last year.
I wanted to acknowledge and thank each and every life storage team member that execute every day to help us achieve these outstanding results.
In regards to external growth, we continue to add more scale to our existing markets through acquisitions and further growth through our third party management platform.
In the first quarter, we acquired 18 wholly owned stores for $351 million, while also adding 25 stores to our third party management platform.
As of quarter end, we now own and operate over 1100 storage facilities across 36 states.
Including five additional properties acquired after the quarter end, our wholly owned portfolio has grown close to 20% from one year ago.
These acquisitions represent properties in top markets and mostly in the sunbelt, such as California, Texas, Florida, Georgia and the Carolinas.
Over 80% of what we closed year to date, our stabilized properties with cap rates averaging above 4%.
The remaining acquisitions, our lease up properties that will provide strong upside in future years.
Looking forward our current acquisition pipeline remained strong with an additional $245 million under.
Tract.
Our third party managed portfolio totaled 378 stores at the end of the first quarter and continues to be a source of off market acquisition opportunities.
Year to date four of our wholly owned acquisitions came from our third party management platform.
The strength of our balance sheet operating capabilities and acquisition team enables us to continue to identify and invest into markets with sustainable growth.
The current rising interest rate environment is likely another factor that will help keep new supply at manageable levels.
As we look towards the full year, we now estimate our adjusted funds from operations per share to increase to a midpoint of $6 nine for.
For the year, which would be 20% growth over 2021 and.
In terms of wholly owned acquisition guidance for 2022, we now see that range somewhere between 700 million to $900 million.
And with that I will hand, it over to Andy to provide further details on the quarter and our guidance.
Thanks, Joe.
Last night, we reported quarterly funds from operations of $1 44 per share for the first quarter.
An increase of 33, 3% over the same quarter last year and well above the high end of our guidance.
The sequential increase in <unk> was the result of excellent same store performance and acquisitions performing as expected.
First quarter same store revenue increased 15, 6% year over year, primarily driven by increased rental rates and slightly higher average occupancy.
But we did see normal seasonality trends in the past couple of months, we remain highly occupied with average same store occupancy up 20 basis points compared to the same quarter last year.
We continue to be aggressive with rates on new and existing customers leading to a significant increase in our in place rates per foot.
Same store realized rent per occupied square foot were up 14, 9% year over year in the first quarter, representing the continuation of double digit rate growth for the last three quarters.
We also experienced another quarter of rent rollout with move ins paying on average over 8% more than move outs.
Same store operating expenses grew only two 9% for the quarter versus last year's same quarter.
And were primarily driven by increased marketing utilities and office costs.
These increases were partially offset by two 2% decrease in payroll and benefits.
The net effect of that same store revenue and expense performance was the 360 basis point expansion in quarterly net operating income margin to 73%.
Resulting in year over year growth in same store NOI of 21, 9% for the first quarter.
Turning to the balance sheet, we supported our acquisition activity by issuing equity securities and utilizing our credit facility during the quarter.
Specifically, we issued an additional $93 million of common stock via our ATM program during the quarter.
Andrew $135 million from our credit facility.
With $365 million available.
Our net debt to recurring EBITDA ratio was four nine times at quarter end.
Down from five five times, one year ago.
Our debt service coverage increased to a healthy five eight times at March 31.
From four nine times from the same quarter a year ago.
We have no significant debt maturities until April of 2020 for $175 million becomes due.
And our average debt maturity is six three years.
In addition at March 31, 95% of our debt was fixed rate.
We are updating our 2022 guidance.
We now expect same store revenue to grow between 10, five and 11, 5% a majority of which will be driven by improved rental rates.
This increase should result in 13% to 14% growth in same store NOI.
The improved same store performance is expected to be partially offset with increased cost of capital.
As Joe mentioned, we also increased our wholly owned acquisition guidance to between $700 million and $900 million.
Based on this outlook, we now anticipate <unk> per share for 2022 to be between $6 <unk>.
$6 14.
Our 20% growth over the prior year at the midpoint.
With that operator, we will now open the call for questions.
Certainly 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. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Please hold while we poll for questions.
Your first question is coming from Jeff Spector from Bank of America. Your line is live.
Great Good morning, and congratulations on the quarter.
I guess, you talked about acquisitions and some of the top markets in one.
The top incoming questions we get on the LSI is just demographics that came up on another call last week I guess.
From your experience during the pandemic than maybe prior experience.
Can you talk a little bit more about demographics are you seeing some markets outperform others or.
We've heard on several of the calls really all markets are doing well.
Hi, Jeff It's Joe Thanks.
Sure.
Comments and question.
Yes, I mean again all markets are doing well.
Obviously with.
Migration shifts to the Sunbelt we have.
<unk> seen some outperformance in Florida for example, and Thats really where we have been focusing our acquisition activity. The majority of our deals over the last couple of years.
Beyond has really been the Sun belt states and it's proving.
To be the right strategy for us, we haven't really seen anything significant that certain markets may.
Underperform four or else in most markets are doing well as you can see for most of the results from from our peer group.
Thank you I guess, one follow up on that.
Besides of course revenues higher than expected.
Acquisitions remain stronger than I think.
The street expected so far this year and I saw you bumped guidance, what's happening on the acquisition front to give you comfort to bump that guidance.
Sure.
So we did start the year, Jeff as you know with a strong pipeline and we felt comfortable in February given pretty decent guidance for the year, we have gotten through much of that pipeline during the quarter. We found some other opportunities.
As you can see probably the second half of the year is a little bit unclear given the rising interest rates, we haven't seen cap rates move up yet on potential deals.
We're hopeful that that may happen, there's some deals out there in the market right now and it will be interesting how they play out, but we're pretty comfortable with what we have in guidance that we will be able to accomplish before year end.
Thanks, and then if I could ask just one more you commented on the consumer and business customer remained strong provide.
Provide any more details on the business customer.
Yes, I mean as you know.
Jeff we do like business customers, we have tools in place to attract more customers to storage that typically wouldn't use self storage.
And we're just seeing the demand across all of our stores both from consumers and business growing we do try to monitor its not an exact science the percentage of those move ins business versus consumer.
<unk>.
It's not exact but we have some sampling out there over the last couple of years, we have seen that percentage slightly tick towards business not significant but it just shows us that there is a growing momentum of business customers being attracted to self storage and that could be small businesses using self storage.
For E Commerce.
<unk> smile delivery.
<unk>.
Obviously our.
It's been a very good business environment, especially in the home construction. So a lot of homebuilders plumbers things like that leading to store inventory. So.
So we feel that demand in general has been very strong, but it's not just consumer demand. It's also a business demand, which is a big part of the industry.
Great. Thank you.
Thank you. Your next question is coming from Smedes Rose from Citi. Your line is right.
Alright, good morning. Thanks.
I was wondering first off if you maybe could provide.
Some data points for what you saw in April thus far in terms of.
Occupancy.
Sure Good morning Smedes.
April started out strong move ins were up over 8% higher than last April we have to be careful there was a five month five Saturday month.
Compared to last year's April which was the four Saturday, but we're liking what we see at start of the quarter for move ins move outs were also up occupancy stayed flat to what we saw at the end of March over $93 seven is where we ended <unk>.
Full occupancy.
Okay. Okay.
And then just in terms of price increases to existing customers.
What sort of.
Branches are you pushing through now I guess you said.
The annualized kind of higher rates that you were able to put through.
A year ago.
Our average is in the mid to high teens as the average that started we started doing that last Q2. So yes last Q1, we weren't at that level, but since last Q2.
Last Q2 is when we started that those levels and they continue and they they ranked again the averages in the high teens.
Customers that were pushing well over 20% increases on.
Okay, Okay, and I guess just last question could you just maybe talk about what you're seeing on the micro fulfillment warehouse anywhere.
Inside of the business.
Sure Hi.
Hi, Smedes, Joe again, that's a newer business for us to lightspeed product that microfilament centers. We spent the last 18 months kind of building out that model opened up our sites in Vegas, and Chicago, Atlanta, Columbus, and we May do one in Texas. This year at some point I think right now the folk.
<unk> is also now trying to attract more customers to that.
It's walk before you run, but we're very excited about it it's like I said earlier on the last.
Our last question.
<unk> are using self storage in that business is that demand is going to continue to grow if we want to see more businesses use self storage you need to kind of give them some of the tools and that's what we're doing with the microfilm them. We had a pretty good first quarter, we got a handful of new customers and we're onboarding them.
And we'll see how it goes for the rest of the year. That's the focus for US right now is to build out the customer base.
Base for those particular micro fulfillment centers that we already have established before we kind of go into our next layer of adding more micro fulfillment centers.
Great. Thank.
Thank you.
Thank you. Your next question is coming from Todd Thomas from Keybanc. Your line is live.
Hi, Thanks, good morning.
You mentioned that move in rates were 8% above move out rates in the first quarter is that spread.
Improving.
Through April as you move further into the peak rental season, and can you talk about how that trended throughout the quarter. If you have a breakout maybe by month end.
Yes, if you could give us an update as to where that stands today that'd be great.
Sure Todd.
As of the end of April rose over 7% rent roll up so move ins pain.
Some 7% higher than move outs.
We've had six quarters of rent roll up. So this is very unusual we normally would not go through the slow slow months of the year.
Rent rollout, but to see that gives us great comfort it was pretty steady during the first quarter little higher it started the quarter at 10%.
<unk> ended the quarter on average a little over 8% higher so relatively steady slightly diesel during the quarter.
Does do you feel that.
Being in a rent roll up position, where as I think most of your peers. Most of the competition. It seems like as either flattish or in a rent roll down position does that make you think differently from a pricing standpoint strategically as you kind of move further into the peak rental season further throughout the year.
In terms of either in place customer rent increases or.
Cost associated with acquiring customers et cetera.
Yes, Hi, Todd definitely this is Joe.
I'll take that into consideration we do feel.
<unk> and confident with our rate increases that we put out we put out more volume for this time of year than we have in the past and it gives us we know that that drives move outs, but we do feel that those move outs potentially will be replaced by customers paying a higher hires asking our higher street rates. So.
Definitely it plays into our in place conversations and strategies.
So we feel we're in a real good spot.
This is coming.
Peak season.
Okay, Great and then one last one if I could just start on the internet spend in the quarter. It was it was up almost almost 10%.
Are you starting to lean a little bit more on.
Wed spend here.
Has anything changed at all I guess.
To the broader demand funnel.
Around your customer acquisition efforts.
I think when we look at that spend the time for the first quarter. We spent on average $79 per move in.
That's just a great use of funds and we think we have the ability.
To ramp up occupancy and we think those dollars are well spent when you look at the the average length of stay of a customer.
The minutes on average $79, we think that's a good spend and we'll continue that we do fluctuate as we go through different times of the year end and that spend but we felt with.
Some of the move outs, we were driving with our in place strategy that was a good time to spend those dollars in Q1.
Okay, great. Thank you.
Thanks Todd.
Thank you. Your next question is coming from one Santa <unk> from BMO capital markets. Your line is live.
Alright. Thanks.
A couple of follow ups on the April data points, you've provided thus far.
If you could touch on what the increase in April .
For new customers that street rate increase I think you said it was.
15% for the first quarter correct me, if I'm wrong, I'm, sorry, Im traveling I might be obviously is about 20% sorry about that one year Street rates were up 20% in the first quarter that affected a little bit lower than that we had a slight uptick in free rent I think on average we are about 2.8% of revenue what's driven.
April I think street rates were up about little over 10%.
To start ramping up as we go into the busy season, which started this month.
Okay, and then can you just provide.
The year over year spread for that occupancy data point you provided 90.
$93 seven.
For April yet.
Correct last April was 94, five so 80 bps.
Okay and then.
Just curious on price sensitivity it doesn't sound like there's any pushback on ECR eyes.
And you guys are more willing to be aggressive given that positive spread for new customers coming in but just curious if the data that youre seeing.
It's showing customers any less willing to.
Two.
To upgrade if you will or be super sized.
For that that box if may be at a better location closer to the elevator or if youre seeing signs of maybe more price conscious shopping.
When customers have a choice.
Yes.
I wouldn't say there hasn't been any pushback clearly with the in place strategy, we have seen move outs in the first quarter they were up.
7%, so we expected that and obviously as I said earlier street rates are higher so and we have rent roll up so its a strategy were willing to focus on.
It's a good question one I think with our right now proposition, we have tiered pricing and typically we can see we have value spaces standard and premium spaces that.
A customer can choose from.
It's really difficult to make.
The assessment on that right now given the high occupancy we have in many cases, if a highly desirable space like a 10 by 2000.
We probably won't have three options at this point for most stores.
So it's almost like there's one left they take it so that's what's driving really.
The business right now it's the street rates are up because of vacancies.
Our low so.
In normal times, and when we're a little bit lower in occupancy that's a.
Good question I would think in a downturn if there is a downturn.
We may see more consumers go towards that value space, but right now we're not we don't have any evidence of it.
Okay, and then just one last one for me any updates on supply sounded like you were trying to say it might be pushed off given higher rates.
Im curious if theres any change in the expectation of 'twenty, two or 'twenty three deliveries. If you have any sense there what percentage of your portfolio is exposed.
Relative to prior year.
No really no change from the last quarter, we do feel we're in a good spot.
A lot of challenges to force for developers given not only interest rates, but.
Cost of materials.
Cost of construction and then just the process of entitlement is delayed as well. So we are not seeing anything meaningful change.
If you look back at 2018 at the peak of of new supply for US in particular, I think over 50 close to 60% of our stores were being faced with.
But potential new construction and that number is more in the 20% today despite our portfolio.
Being much bigger so I think thats, a good sign for us and we feel 2022 and even 2023.
New supply will be at manageable levels.
Thanks, Joe.
Thanks Juan.
Thank you. Your next question is coming from Spencer alloy from Green Street. Your line is live.
Just going back to the acquisitions completed <unk> under contract can you give us an idea of whether these are stabilized properties are lease up potential and then just any idea on the stabilized cap rates for these.
Sure Hi, Spencer so of.
Of the deals we closed in the first quarter, 80% of those are stabilized.
At the end of year, one cap rate is north of a four forecast and those typically will grow for us stabilized stores. It depends if it's.
REIT managed or locally managed we.
We did have some kind of locally managed stores and those that stabilized pool and those typically will grow 50 to 100 basis points over over a couple of years' time.
The lease up properties, we bought about 20% of our acquisitions were lease up and typically they are their class eight stores or an early lease up and we expect.
We would expect those to lease up and stable at a stabilized cap rate.
Five and a half close to 6% by the time they are stabilized so really some really nice upside ranges from two to three years out but I.
I think thats going to be.
Some some good opportunities on the lease upside given where interest rates are today will make stabilized acquisitions, a little bit more difficult.
But we've got a nice mix in there. So we feel very good about what we've achieved so far.
Okay, Great and then maybe just on the demand side mortgage rates climbing is there any concern that moving demand is going to be impacted in the coming quarters.
We're still very optimistic that the spring season will be a strong one housing market. Despite mortgage rates is still very strong.
It might take some time for that to filter through the housing market. So the spring leasing season should be a good one we're already seeing some early activity on the college students, which looks pretty promising so we feel pretty good about demand in the next few months.
Okay, great. Thank you.
Okay, well thank you.
Thank you. Your next question is coming from Keegan Karl <unk> from <unk> capital markets. Your line is live.
Hey, guys. Thanks for taking the questions maybe first just a little bit more color on decades. I know you mentioned move outs were up but was there any particular points that customers are identifying was price kind of the biggest pushback.
Not necessarily.
We try to get that information and typically you might get not the correct answer but.
On a percentage wise I think the majority is they've just done with storage they don't need it and then theres going to be a batch that yes that rate hike.
Was the factor.
But it's not like they're moving to another storage facility.
Street rates are what they are so.
So I don't believe they're out there shopping they're moving their goods.
Figure out a way that they didn't need to pay that bill anymore.
Got it and then shifting gears a little bit here, maybe could you give us any updates on your plans to reenter Canada borders reopen. So you guys can look at any assets at all and how does pricing compare to the U S.
Yes, we focus on the GTA and Thats, where we were operating with our partners up there.
We have seen a couple of smaller portfolios that.
Look promising we'd like to get up there with a smaller portfolio. So it's not just a one store and get our brand up there, but we do look we've been so busy in the U S. It's not easy to kind of do that but we think of the timing is right and there's a good opportunity we would we would definitely enter Canada.
The pricing is pretty competitive in the GTA. There has been so some new development up there and pricing is youre not going to get a bargain up there, but we do think there are some smaller run portfolios that we put on our platform we could drive some probably outsized growth in future years. So we'll keep looking.
If the timing is right and the stores are right. We will we will get back up to Canada.
Great. Thanks for your time guys.
Thank you. Your next question is coming from keeping Kim from Truest. Your line is live.
Thank you.
Just going back to a couple of topics.
If I heard you say you were pushing in the high teens.
If you think about the vintage of customers that you've already applied eight rent increase too versus what's left and how should we think about the pace of that EPRI push as we progressed through the year.
Thank you Ben Q1 actually through May we've been aggressive more aggressive with a number of letters that have gone out. So we're about two months ahead of last year.
Average rate increase is higher than last year.
<unk>.
And accelerated them about two months earlier than we did a year ago otherwise it should be very similar.
Okay and.
And your payroll costs were once again very manageable and negative year over year can you just talk about what you've done so far.
Been like that for a few quarters and.
Is there a point where that should actually input to inflect back to the kind of inflationary type of rate.
Well keep it you know we've been focused on a number of initiatives in our company for a while now and being more efficient.
As one of them, we do look for ways to lower payroll hours in the stores.
So that is part of it for sure. The hiring is also a challenge for the industry and finding replacement. So some of them may have baked in some open vacancies, but continuously we feel we can still find ways to drive down the number of FTE per store, which could help offset some of the inflation going forward.
Okay. Thank you.
Thanks, Kevin.
Thank you. Your next question is coming from Jonathan Hughes from Raymond James Your line is live.
Hey, good morning.
<unk>.
Stick with the <unk>.
Was there any common trend among the move outs were the all longer length of stay.
I think.
It would be great to have color on what was that threshold that rate increase where you did see a noticeable increase in move outs, but.
I think you might have mentioned earlier that.
That you might not have that data I don't know if I heard that correctly.
No we do have the data on the move outs.
What's causing that move outs is it because they got the rate increase that is hard to determine obviously.
The attrition rate, we're seeing in those move outs is back to expectations right. It's back to what we had expected we had for just over a year saw below expectations move outs.
So I think it went up from 15, 1% to 2020% moved out during a 90 day window that we measure, though so it did pick up a little bit, but there's a few things some of that was by design. If you put an increase letter on someone who has been with <unk> for five months. The attrition rate naturally is going to be higher because just.
Our median length of stay those customers some of those customers, we're going to move out anywhere to say, hey, and went from 15% to 20 months sounds like a big change, but some of that was expected just because of how quickly we were putting in that first rate increase in some of those customers were expected to move out anyway. So no shocks there and we like what we see.
We will continue to be aggressive on those in place increases.
Okay.
That's helpful color and yes, I realize we're kind of get back to maybe normal which is.
Just a good thing I think we all want normal weather.
Were there any differences maybe in price sensitivity to this increases by by region, where Sun belt markets less price sensitive due to the strong population inflows, there where the Midwest markets, maybe a little more sensitive or was it pretty consistent across the country.
Don't have the data by market, Jonathan that revenue management team Hasnt mentioned any unusual pockets. Some my expectation months. It wasn't any are they would've mentioned notes.
So I really I didn't see it.
I wouldn't expect to have seen it.
Okay.
Right.
Thank you for the time.
Thanks, Jonathan.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press Star then one on your phone at this time.
Your next question is coming from Michael Mueller from Jpmorgan. Your line is live.
Yes, hi.
So you talked about asking rents being up 20% year over year in the first quarter and I guess, regardless of what last year's comp was in knowing that rates can be different at different times. During the year are you still seeing asking rents more like on an absolute basis still rising throughout the year here from this point.
Yes, as we go into the busy season, we would normally see those rates have been rising for the last few months, but that's typical they normally rise right through July and.
And that's what we would expect this year.
Okay.
And then.
Is there anything notably changed on the acquisition front over the past two months, just given the macro turbulence, whether it's pricing expectations or product coming to market.
Okay.
I would say.
We've seen more product come on it was actually a pretty quiet.
January coming through the holidays.
And things sort of picked up in March.
And this month, we've seen more listings and more marketed deals.
The question is where will those trade.
As interest rates continue to climb in the tenure continues decline so.
That may be something we watch over the next couple of months.
Other than that there is definitely still product to review.
Obviously, we're not seeing the large billion dollar deals like we did last year.
But it's still going to be active just depends on where cap rates and.
Hopeful that creep up a little bit we havent seen it yet.
But I think it's still a little too early to make that judgment.
Got it okay that was it thank you.
Thank you Michael.
Thank you that concludes our Q&A session I will now hand, the conference back to Joe Sapphire, Chief Executive Officer for closing remarks. Please go ahead.
Thank you everybody for calling in today for your questions happy Cinco de Mayo and enjoy the rest of the day.
Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.