Q1 2023 Life Storage Inc. Earnings Call
Good morning, everyone and welcome to the lifestyle Rach first quarter earnings release.
This time, all participants are in a listen only mode.
A question answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your phone keypad. Please note. This call is being recorded.
I will now turn the conference over to your host Mister Brent NATO Brent.
You may begin.
Good morning, and thank you for joining us today for the first quarter 2023 earnings conference call of life storage.
Leading today's discussion will be gel Sapphire, Chief Executive officer of life storage, and Alex Gruss, Chief Financial Officer.
Following prepared remarks management will accept questions from registered financial analyst regarding like storage is operational and financial results.
As a reminder, the following discussion and answers to your questions contained forward looking statements that are subject to risks and uncertainties and represent management estimates as of today may 3rd 2023, the company as soon as no obligation to revise or update any forward looking statement because of the changing market conditions or other circumstances that for the day.
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 furnished our supplemental package with additional detail on our financial results, which may be found on the Investor Relations section on our web site at life storage dotcom.
As a reminder, during today's question and answer session. We ask that you. Please let me yourself to two questions to allow time for everyone who wishes to participate please.
Please requeue with any follow up questions thereafter.
At this time I'll turn the call over to jail.
Thanks, Brent and good morning, everyone. I am pleased to report we delivered another strong quarterly performance across all segments of our business.
While we continue to see the operating environment normalized as compared to the height of the pandemic.
Timothy and asking rates remain above pre pandemic levels.
I'd like to highlight a few notable results and trends we achieved the same store revenue in net operating income growth of 10.5% and 12.8% respectively. Despite challenging year over year comparison.
This marks the eighth straight quarter of double digit same store revenue and net operating income growth.
As the environment Normalizes are solid performance has remained broadbased with 25 of our top 2040 markets, achieving 9% or greater revenue growth.
These results highlight the value of our portfolio strategy over the past few years, which has allowed us to capitalize on strong regional trends.
<unk> for the quarter finished up 1.1% with April accelerating nearly 3% over March.
Our customer base continues to show Brazilians with 49% of our customers, having stayed with us two years or more.
Recent trends in a resilient customer base keep us cautiously optimistic as we head into the peak leasing season.
For the quarter, we've completed one joint venture acquisition in New Jersey, and which we invested $4.1 million subs.
Subsequent to the quarter, and we invested $15.1 million and four additional stores and the New York City area with a joint venture partner.
These acquisitions are highly complimentary with our current portfolio and our future upside with moderate capital investment.
Before I hand, the call over to Alex I wanted to provide a brief perspective on the merger with extra space storage, which was announced on April 3rd and which we expect to close in the second half of the year.
First I would like to express my gratitude and appreciation to the entire life storage team.
I am very proud of what we have all achieved together and I'm incredibly excited about the opportunities ahead.
We are focused on working with extra space team to complete the merger and capitalize on the significant potential of our combined platform.
And with that I will hand, the call over to Alex who will provide additional color on our performance for the quarter.
Thanks, Joe.
Last night, we reported quarterly adjusted funds from operations of one dollar and 63 cents per share for the first quarter, an increase of 13.2% over the same quarter last year and above the high end of our guidance.
Strong adjusted Ethics outperformance was a result of robust Same-store result, and acquisition performance.
First quarter Same-store revenue increased 10.5 per cent over the first quarter of 2022.
As no surprise.
[noise] environment continues to normalize and level off from a ties with the same store occupancy averaging 90.7% during the quarter, but remaining 80 basis points above pre pandemic levels.
We remain cautiously optimistic as you enter peak leasing season, with asking rate and movement heading in the right direction.
Our Same-store operating expenses grew only 5.2% for the quarter versus the prior year, primarily driven by real estate taxes credit card fees and payroll and benefits.
The net effect.
That same store revenue inexpensive performance.
140 basis point expansion and quarterly Same-store net operating income margin to 71.5%.
Resulting in year over year growth and Same-store NOI of 12.8% for the first quarter.
As Joe noted this marks or eighth consecutive quarter of double digit Same-store NOI growth.
Turning to the balance sheet.
Our net debt to recurring EBITDA ratio is a comfortable 4.9 times at quarter end, which is up very slightly from 4.8 times at the previous quarter and.
Our debt service coverage is at a very healthy 5.2 times as of March 31st.
We continue to have no significant debt maturities until April 2024, when $175 million becomes do with our average debt maturity of 5.3 years and Ah.
[noise] weighted average rate is 3.7% a quarter and.
In addition, as of March 31st.
A two per cent of our that was fixed rate.
Details of 2023 earnings guidance and related assumptions were included in our relief last night.
Or forward guidance for the year remains consistent with a guidance we provided late February .
Or return to the Q&A portion of the call.
I'd ask that you. Please keep your questions focused on our first quarter results.
As we will not be providing additional commentary regarding the pending transaction with extra space.
With that operator please.
Please open the call for questions.
Thank you very much.
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Peace close a moment, while C palsa any questions.
He'll first question is coming from.
Clean Street.
Thank you I have noted in your opening remarks, you hadn't really impressive rental rate crossing the corner can you just help us understand how moving right M. E. T. R. I's trend data in one key to arrive at that 13.6%.
And then any color you can provide on how the two matrix trend it through April it'd be helpful. Thank you.
[noise] sure Hi, Spencer good morning. It it's Alex you know consider with Joe's opening comments, you know just to give a macro view on on the quarter. You know, it's kind of what we said you know in the operating environment, you know continue to normalize.
And as you get into you know March April we're definitely seeing early indications of increasing and stronger seasonal trends, but to talk about some specifics you know Q1 from the move inside was.
Certainly an interesting quarter overall, you know we were up on record moving.
1.1% for the quarter, but it was almost a tale of two worlds I mean, very strong January and they're consistent with what you heard from the other reach you know it certainly move in volume you know slowed down in February and March that we still had a record quarter, but we saw that slowdown in February March.
Now that's shifted and changed and moving as expected you know certainly began to accelerate and we saw that in April that trend. You know continues insects. We're only a couple of days in the May but you know that that that what I said that early strength of seasonal trends continues to move in.
You know accelerating from March to April accelerated up you know three per cent. So that that's that's the trend. There you know move outs overall for the first quarter pretty much what what we what we expect it I mean, they they were up in totality.
For the quarter about 7% a little higher.
Very similar theme a little higher in January and February and March for everybody just seemed to be very quiet and you know the backdrop being you know theoretical crisis in the banking world and Marsh is being a challenging month from economic besides a suburb.
Marcia seem flat Ah as we look at you know move outs going from March to April and what we saw in April move out actually going down there, they're down 4.5% month over a month cause very March to April so that that's that's exactly what we would expect.
So.
Or at least signs are strong.
Spencer Jones I would just add you you asked about the Sierra is as well and we obviously work.
Pretty much on target with what we expect you to do for the year, we typically try to get most of them done and you know.
The first half of the year and we're on track with that.
And feel good about the results and obviously the move outs were pleasantly surprised and pleased with what we're seeing so far despite the ECR on program.
Okay. That's very helpful. Thank you guys.
Sure.
Next question is coming from.
Thanks, Good morning.
So Joe I, just want to clarify the comments you made about achieved rates.
Where you're saying that the moving refer up 13 plus percent year over year in the first quarter.
Mmm no keeping let me let me clarify what was what was.
Up.
<unk> what was up 13.6% in the first quarter of this year 23, where are achieved rates. That's what you know our.
Rumors are paying and that was that was up 13.6% now what what drives that obviously, that's a lot of the the right growth from our Easter I program.
You know the the <unk> the actual basking Ridge street rates keeping were down for the quarter about 14%.
And how did that trend into April please.
April .
Actually slightly up 2% for March.
But year over year still down about 14 15 per cent range, Yeah, and I've just add to that you know, we expect that right because I think about the path of street rates for all of US last year, that's a really tough tough comparison on a year over year basis. So while we're down in that mid mid teens I asked.
Being Rader R Street, right perspective, even in April but what.
What Joe commented on to add on as we're seeing that what we expect street rates are increasing you know as we can.
Get into the get into peak leasing see them, yeah, and we're seeing some nice indications. It's early in may, but we're seeing some nice.
Month to month to.
The new growth in the street ready to pick up another 2% or so so that's what we expect you know for the for the peak losing.
Losing season.
Okay that that that makes a lot more time, thanks for clarifying and my second question you guys have obviously you know it seems seems to be bucking the trend here compared to some of your peers that showed more deceleration. So I was just curious high level any kind of incremental changes you guys me too your pricing.
[noise] philosophies or did you see a bigger.
Contribution from easier I in this quarter than previous quarters, and I'm, just trying to get a sense of like what makes you know will contribute to your differences.
No I I think to be honest since last year, we decided maximize revenue in and not necessarily occupancy in pretty much. The same strategy you know for the first start for the first.
Started this year as well, but no real changes similar levels of V. C. R. I's as last year similar percentages.
And pretty much as we had planned.
Okay. Thank you.
Excuse me.
Thank you very much. Your next question is coming from Michael Goldsmith.
Michael.
Good morning, Thank you for that particular questions.
Did you see any price sensitivity of the customer during the quarter clearly right. There there was a bit of a slowdown in March do you think that was a result of of price sensitivity and did you adjust your prices kind of your your street right through the quarter and then similarly on the <unk>.
You know.
And trying to get a sense of is the self storage customer more price sensitive now than it than they have been in the past.
Hi, Michael you know, obviously, we we do a lot of testing, especially with D. C. R. I's. We've we've continued look to improve that strategy.
As I said in my opening remove the first question you know pleasantly surprised with move out it's been down.
Year over year in April .
Which is you know.
A nice thing to see it shows our customers are sticky.
They can take the rate increases and you know I think again, we're just kind of getting back to some normalization seasonality.
Obviously for you know the the demand looks it looks like it's holding up pretty well like what we see coming into my and obviously, we adjust our street rates accordingly.
Promotions and so forth, but nothing unusual right now we're we're pretty please what we're seeing yeah and I'll I'll, just really briefly add to Joe's comments, Michael Yeah, I mean for us.
Our customer retention continues to be really positive. So we're currently.
39.7 months for customer retention, and that's certainly higher than what we saw in 2019 or earlier levels, where it was you know about 37 and a half months you know as as we've talked about in the past and we certainly did not see an impact in the quarter to add more data to you.
Question 64 per cent of our customers stay one year or more and that's that's up from you know the past and.
49% are saying two years or more so you know we think those are really good indications of the resilience and stickiness of the self storage customer for for us and and Luckily the entire space.
That's helpful and my second question.
It has to do with this slowdown in February and March what.
What'd you think caused that and then also you know.
Did you take any actions as a result of that or or or adjust your strategy in order to to kind of invigorate demand back in April did you cut Street Ray did you hold the hold back on ECL arise at all just given that the demand wasn't there just trying to get a sense of of.
Using your thought process around it around what happened and then also what actions you took which may have rectified kind of this this lower demand.
Obviously, you know February January February March slow part of the year.
But nothing unusual Michael where you're.
Please what we're seeing so far and kind of expected given what's going on in the economy and housing that.
Maybe up and down a little bit, but nothing that's worrying us right now yeah.
This is <unk>.
Kind of sad earlier, Michael I mean, we know March was.
Challenging months for the environment, given the backdrop of what was happening outside the storage space. So you know I.
I think a lotta people saw it just general slowness in March but to be specific we stuck to our Easter I program.
We continued on that program and you certainly saw that in our same store rep growth that we put up for the first quarter we expected.
Is it.
You know move out to to accelerate in Q1, as we pushed on rates and we did it was interesting to see that it was flat in March and I, just think that shows that everything kind of slowed down a little bit in March and move in and move out.
Thanks for all the collar guys.
Next question is coming from.
Okay.
Good morning, Robin handle have sitting at her forlorn.
Alright on geography.
On geography are you seeing in its softness across any markets that had previously hot housing market and then I'm not cooling a bit.
Well actually you know we've been pretty bullish on on the Sun belt markets and I think we're seeing some separation from those markets compared to some of the other markets as in the northeast. So you know the the Phoenix Florida's West Coast again doing very very well for us kind of separate.
Themselves a bit from some of the other marks markets such as the northeast, but nothing too significant.
Got it thank you.
I was supposed to follow up extra space tends to run occupancy about 300 basis points higher and higher rates.
Influence your operating strategy, any and and what's the path to bridge the gap.
You know again, we focus on maximising revenue and it's been our strategy for awhile and we don't we don't focus on you know purely occupancy don't expect that to change.
Okay. Thank you.
Thank you.
Just as a reminder.
Questions or comments please.
Yeah.
Your next question is coming from.
Thank you.
Sure Alex I'm, just curious when I look at some of your markets right Atlanta Vegas.
Phoenix, I mean occupancy drops where where I think it was like 400 bps are so you're over here is there a common theme you're seeing cross these markets I know things are normalizing I'd get that.
What is it is it is it is it housing is it does it supply I just wanted to see if there's anything that we can pick up from those.
Those are the occupancy drops.
Extra merits, Alex you know obviously, we we.
Really liked the sunbelt marketing that's onto where we've invested in and I think they're there.
We continue to expect relative outperformance there, but yeah, you know a little a little softening in the quarter in Vegas, and Phoenix to call them out you know, obviously, we know pardon some parts of the northeast whether that expects to happen, but you know we did see maybe it has to touch more as expected sauce and supply maybe specifically coming into Tibet.
<unk> and Phoenix that that may be maybe part of that there, but nothing nothing unusual and we liked that market.
Got it and anything on the I guess, there's a fall or anything on the expense side that that's that's there to call out that's maybe.
Are there any line items or components that are maybe coming in a little bit higher than than you sorta budgeted for the year as we think about the balance of the year any pressures to the upside you're saying.
No I mean first of all you can see that all of our expenses came in very much in line you know with our guidance. So absolutely nothing unusual you know obviously, we're facing transaction related expenses that are not impacting our core ethics law, which are taken below the line is everyone would expect us too so but outside of that now.
Much in line with our guidance that we set out in February and reaffirmed last night.
Got it thanks, guys. Thanks.
<unk>.
Thank you very much. Your next question is coming from Hot Thomas F.
So market.
Hi, Thanks, I guess two questions first I just wanted to see if you could comment on occupancy sorry, if I missed this but corner and was down about 30 basis points from the corner average and I was just curious if you know that was anticipated and if you could comment on <unk>.
April and how occupancies trend it a little bit more recently through the the early part of the peak rental season.
Hey, Todd Yeah, Alex.
Very much yeah, we we expect to that of course of Q1 that occupancy you know it was going to come down on a level of S. S. As he pushed on rates and you know expect it does move out and then March happened to be to be flat, yeah. So not surprised there in Joe's comments earlier, that's really not our prime pre.
<unk> focus as we think about more optimizing revenue, but as as we got an end to April and the environment continues to to normalize and more specifically, we see that that strengthening seasonal trends start to pick up and we know that may and June will be strong months. We expect you know there'll be a continued.
Continued.
Upward slope and Occupancies that will go up through Q, too and that's kind of consistent with where we've cetera guidance and but we'll see we'll see how how may and June kind of play out.
Okay, and then I wanted to to ask about guidance I I realize you're under a merger agreement with with extra space. It.
Depending here so I don't know if that at an impact but you you guided originally for the first quarter to 155 to 159.
So you came in you know a few few pennies four cents above the high end of that range.
Despite sort of a slowdown in February and March that that you discussed and I was just curious if you could comment about the.
The quarter itself relative to budget and sort of you know provide a little bit of additional commentary around the balance of the the full year as it pertains to you know your outlook or original guidance.
Yeah, Yeah. Thank God, Yeah, obviously, we're very pleased with the quarter results. Please with what we're seeing an early I haven't seen the last week or so in terms of right and move and vile you make activity you know I was.
Should we want we want to see what's going on with with the the peaks you know leasing season over the next few months and then make a judgement with regard to guidance after that but right now I think we feel comfortable stick with what we have out there. So good about what we have and feel we should be able to achieve that but obviously would make some adjustments as the year progresses into the summer.
Okay.
Relative to the first quarter guidance, whether same store or otherwise you know I I guess, what we're sort of the the main positive variances that drove you.
Five six cents above the the mid point of the the range that you you guided too.
Yeah, I'll I'll get all of our specific relative to budget. In Q1, you know obviously it is it is clearly a beat in Q1, and you know, but but not again, a couple of pennies I'm not far outside of our guidance and yeah. I think on the expense side as I said earlier very much in line with with a budget I think we were very pleased even though March.
Was flat, we said move in and move out going back to the comments. We said a few minutes ago, you know the self storage consumer remains very resilient and sticky and the ability to absorb E. C. R. I you know those rate increases very much remains and so a little bit higher than what we had certainly thought but but in a good way.
Was that 13.6, you know a year over year growth and achieve racers with gave us a little bit more of a beat to the upside cutting out of you know our our Same-store pool, and then I would say secondly, you know the the the acquisitions that are not our same store bull can change to perform consistent with if not slightly above you know our our underwriting.
Assumptions, so a combination of those factors.
Probably gave us a little bit more of a beat relative to the the Q1 budget.
Alright, great alright, thank you.
Thank God.
Thank you very much. Your next question is coming from.
Keagan.
Hey, guys six at a time apologies if I missed this but I mean, how should we used to be thinking about getting spend going forward just kind of given what you're seeing in in your demand funnel.
Mhm.
Yeah, maybe I'll go I'll go first and joking comment you know obviously it for US when you look at our marketing spend our our Same-store Bowl you know it it came in on the advertising very much you know in line with with what we expect you know just just north of that 4%.
And I I think we're continuing to see you know pretty good you know website traffic rose and.
The challenge continues to remain for us and everybody that conversion of that traffic growth into true reservations, but you know if I look at just doing simple math, which is kind of way one of the ways. We look at it you know the cost per per move in for US was only up year over year.
1.7 per cent of sub sub two per cent for every move and that we achieved in the first quarter. So I like that so we we liked that trade cause we've commented earlier on the sticky this the resilience of our of our customer base and so I I think that's that's the path and we expect that to continue to be.
<unk> those.
Those levels as we think about the rest of the year.
Okay, and then I guess from a transaction side of things. He gets first where do you sort of seeing volume.
You know where you're at and then on the G. B G B X.
So.
What are you expected stabilized yields on those.
Yeah can you can you know obviously, the the market's bit of of pencils down right now the <unk> spread is pretty wide.
So we see some more stability in the debt markets.
Specifically, the 10 year <unk>, you're not gonna see somebody transactions are guidance kind of anticipated the bulk of any deals would be in the second half of the year and we still feel that's the case the the <unk> you know.
I'm trying to think exactly the the New York City portfolio, you know those are mature.
Assets with some you know I think some decent upside in terms of management, but probably about a six 6.5% stabilize yield.
Great. Thanks for the time, yes.
Thanksgiving.
Much.
Okay.
Thanks, everybody for joining today's call I Hope you have a good day and we'll talk soon thank you.
Thank you everybody. This does complete today's conference calls you may disconnect.
And have a wonderful day.
Yeah.