Life Storage Q2 2022 Earnings Call Transcript

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August 3, 2022

There are 11 speakers on the call.

Operator

Ladies and gentlemen, and welcome to the Life Storage Second Quarter Earnings Release Conference Call. Time, it is now my pleasure to turn the floor over to your host, Alex Gress. Sir, the floor is yours.

Speaker 1

Good morning and thank you for joining us today for the Q2 2022 earnings conference call of Life Storage. Leading today's discussion will be Joe Saffire, Chief Executive Officer of Life Storage 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 call, contain forward looking statements that are subject to risks and uncertainties and represent management's estimates as of today, August 4, 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.

Speaker 1

Additional information regarding these factors can be found in the company's public SEC filings. In addition to the press release distributed yesterday, conference call, we furnished our supplemental package with additional detail on our results, which may be found on the Investor Relations section on our website at lifestorage.com. As a reminder, during today's question and answer session, we ask that you please limit yourself to 2 questions to allow time for everyone who wishes to participate.

Speaker 2

Thanks, Alex, and good morning, everyone. I am pleased to report another outstanding quarter. I would like to acknowledge and thank each and every Life Storage team member that Every day to help us achieve these outstanding results. Demand for self storage has remained strong, time, we are pleased to announce that we are in

Speaker 3

the Q2, allowing for

Speaker 2

the continuation of strong pricing power. Asking rates remained at record levels through the quarter, helping us maintain 21 straight months A positive rent roll up. Additionally, our focus on revenue optimization resulted in same store achieved rate growth of 20% over last year With occupancy accelerating through the 2nd quarter to end with an average of 94%. As a result of these strong operating fundamentals, We achieved core funds from operations of $1.65 per share for the quarter, which is a 37.5% increase over last year. With this strong performance, we increased our recently paid quarterly dividend by 8%, which is now 46% higher from 1 year ago.

Speaker 2

In regard to external growth, we continue to add more scale to our existing markets through acquisitions and further growth through our 3rd party management platform. In the Q2, we acquired 13 wholly owned stores for $262,600,000 while also adding 17 stores to our 3rd party management platform, we have remained focused on strategic growth, enabling us to grow our wholly owned portfolio close to 18% from 1 year ago. These acquisitions represent properties in top markets, including Sunbelt markets such as Florida, California, Texas and Georgia. Slightly over 75% of what we closed year to date are stabilized properties, while the remaining 25% are lease up properties that will provide strong upside in future years. Looking forward, our current acquisition pipeline remains strong with an additional $258,000,000 under contract.

Speaker 2

Including joint ventures, our 3rd party management portfolio totaled 385 stores at the end of the 2nd quarter, growing 13% over last year and it continues to be a source of off market acquisition opportunities. Year to date through July, 6 of our wholly owned acquisitions came from our 3rd party management platform. As we look towards the full year, we now estimate our adjusted funds from operations per share to increase to a midpoint of $6.30 for the year, which would be over 24% growth from 2021. Additionally, we also raised our wholly owned acquisition guidance to between $800,000,000 to $1,000,000,000 And with that, I will hand it over to Andy to provide further details on the quarter and our guidance.

Speaker 4

Thanks, Joe. Last night, we reported quarterly core funds from operations of $1.65 per share for the 2nd quarter, An increase of 37.5% over the same quarter last year and well above the high end of our guidance. The continued sequential increase in FFO was a result of excellent same store and acquisition performance. 2nd quarter same store revenue increased 18.9% over the Q2 of 2021, primarily driven by increased rental rates. We remain highly occupied with occupancy averaging 94% during the quarter, a 40 basis point increase over the 1st quarter's average occupancy.

Speaker 4

The occupancy growth was partially held back by our continuing to be aggressive with rates on new and existing customers, Leading to a significant increase in our Achieve rates per square foot. Same store realized rents per square foot We're up 20% year over year in the 2nd quarter, representing the continuation of double digit rate growth for the last four quarters. Our existing customer rate increase strategies continue to be effective with weighted average increases Above historical norms. We also experienced another quarter of positive rent roll up with same store move ins paying on average Over 7% more per square foot than move outs. As Joe noted, this represents 21 straight months of positive rent roll up With asking rates remaining at record levels during the Q2.

Speaker 4

Same store operating expenses grew only 4.3% for the quarter versus last year same quarter and were primarily driven by credit card fees, repairs and maintenance and utilities expense. Payroll and benefits remained flat on a same store basis. The net effect of that same store revenue and expense performance was a 370 basis point expansion in quarterly same store net operating income margin to 73%, This marks our 5th consecutive quarter of same store NOI growth over 20%. Turning to the balance sheet. We supported our acquisition activity by utilizing our credit facility and issuing equity securities during the quarter.

Speaker 4

Specifically, we drew $168,000,000 from our credit facility and issued an additional $7,800,000 of common stock via our ATM program Subsequent to quarter end, we closed on the refinancing of our existing credit facility that was scheduled to mature in March of 2023. With the refinancing, we increased the facility from $500,000,000 to $1,250,000,000 through a syndicate of 10 banks that included 2 new banks. This new facility provides committed liquidity to Life Storage through January of 2027 with terms comparable to or improved from the terms of our existing facility. On a pro form a basis, accounting for the new credit facility at quarter end, We had significant capital available with $947,000,000 available on our credit facility. Our balance sheet remains strong with our net debt to recurring EBITDA ratio at 4.6 times atquarterend, Down from 5.0x 1 year ago.

Speaker 4

Our debt service coverage increased to a healthy 5.7x at June 30. We have no significant debt maturities until April of 2024 when $175,000,000 becomes due And our pro form a average debt maturity is 6.2 years. In addition, at June 30, Just over 90% of our debt was fixed rate. We are updating our 2022 guidance. We now expect same store revenue to grow between 13.25% 14.25%, which will be driven by improved rental rates.

Speaker 4

This increase should result in a 16.5% to 17.5% growth in same store NOI. The improved same store performance is expected to be partially offset with the increased cost of capital. Based on this outlook, we now anticipate core FFO per share for 2022 to be between $6.27 and $6.33 or 24.3% growth over the prior year at the midpoint. And with that, operator, we can now open the call for questions.

Operator

Ladies and gentlemen, the floor is now open for Your first question for today is coming from Smedes Rose. Please announce your affiliation, then pose your question.

Speaker 3

Hi, it's Smedes with Citi. I wanted to ask you just a couple of questions. It's no surprise that the guidance would look Some slowdown in the back half of the year, given the more difficult comps, but I'm just wondering how you're thinking sort of specifically about how that might play out, kind of the balance between rate And occupancy as we move through the year.

Speaker 4

Good morning, Smedes. On the occupancy front, what we've built into the guidance is A normal cyclical trend in occupancy. So last year, we saw occupancy drop about 190 bps From July to the end of the year, this year we've in guidance we've shown that at 250 basis points. So, 250 basis points is Typically what we would see prior to the pandemic, so that's what we built in the guidance. Rate wise, we could see rates we've got some tough comps here That would put rates street rates below where they were last year, anywhere from 0% to 5% below where they were last year.

Speaker 3

Okay. And then I just wanted to ask you, you mentioned drawing down on the credit facility. Would you look to term that out at some point, is that included in your guidance at all or?

Speaker 4

We did not include terming that out in the guidance. That would be our plan to term that out, but the markets are a little disjointed at the moment. When we feel Better about those markets, we expect to go back to the public markets with a 10 year is typically what we do.

Operator

Your next question for today is coming from Keegan Karl at Berenberg Capital Markets.

Speaker 5

Hey, guys. Thanks for taking the questions. Maybe just one more on occupancy. Obviously, it was strong in the quarter. Are you guys seeing any changes customer behavior relative to your expectations at this time of the year?

Speaker 2

Not really, Keegan. I think it's just a little bit of Kind of back to a little bit of normalization. We had elevated auction is kind of catching up still from last year, so that was part of the reduction in occupancy and that really is not a regional thing. It's pretty much in all our markets. Other than that, no, we're not seeing anything unusual.

Speaker 5

Got it. And then you guys raised acquisition guidance again. Just kind of curious how much competition are you guys seeing, Maybe particularly in the Sunbelt relative to last quarter. And then are you seeing any change in cap rates at all?

Speaker 2

Yes, it's an interesting time. I think, there's a bit of a pause over the last few months terms of sellers coming out with product given that Zandi suggested the difficulty in the debt markets. So we actually had a pretty strong pipeline headed into the year and been focused on closing a lot of that. We have seen some portfolios out there that have actually re traded. We're still active.

Speaker 2

We're doing mostly onesie twosies. We're not seeing anything close to last year in terms of the scale of portfolios coming out. Again, it really is probably a result of what's going on In the macro environment, but things are I think getting a little bit better. I think maybe we'll see a little surprise in the second half of the year If markets cooperate, but we're really pleased with what we've been able to get under contract and we still have a lot of work to do to close on what's in the pipeline. I think in terms of competition, yes, I think there is probably a little bit less than a year ago, just because of the cost of doing deals now and the cost of debt It's obviously a lot higher than last year.

Speaker 5

And just on cap rates, are you seeing any material movement?

Speaker 2

I wouldn't say material, but I think you can read into it that there's less deal flow because it's the spread between About buyers and the sellers is widening. So sellers in this sector, they don't need to sell. It's a great business. It's Got great cash flow. It's we all know the positives of it.

Speaker 2

So sellers are really never needing to sell, but if the price is there, they will. Right now, I think it's just a bit of kind of what we saw 2 or 3 years ago when there wasn't a lot going on in terms of sellers. So I think if things improve, we could see some more activity later this year or into next. But I would suspect the deals that are closing today maybe 25, 30, 40 basis points higher than maybe 6 months ago.

Speaker 5

Perfect. Thanks for the time guys. Really appreciate it.

Speaker 2

Thanks, Kegan.

Operator

Your next question for today is coming from Juan Sanbria at BMO Capital Markets.

Speaker 3

Good morning. Just wanted to go back to the guidance question and just get a sense of what the exit is assumed for the Q4 for same store revenue and if you have any thoughts about 'twenty three as it relates time, I'd like to turn the call back to where you're ending the year up and how you're thinking about kind of the maybe a range of outcomes for next year Given the strength that we have seen to date.

Speaker 4

Good morning, Juan. The second half, we're still looking at if you look at the second half of the year, double digit revenue growth, we do see deceleration as we go through the year that those are tough comps that we're looking at. As you've seen from The activity in the last few years, what our revenue growth had been for the last 5 quarters at over 14%. So we would see some deceleration. Again, second half in total will be still double digit revenue growth, But we see that decel.

Speaker 4

It would set us up nicely, probably very close ending the year to double digits. Our guidance is slightly below, But I think it sets up nicely for next year. I don't think we're prepared to talk about the rest of next year other than it starts out very strong.

Speaker 3

Okay. And then just on the expense side, you guys had a fantastic quarter, particularly relative to some of the other prints you've seen in storage and elsewhere. Just on the payroll side, you guys have had very modest growth there. Is that do you think that continues? Or is there something The numbers that maybe gets normalized out as man hours maybe increase or have you taken FTEs out and that's not as much of a pressure Maybe for you as others.

Speaker 2

Yes. No, thanks, Juan. We for Some time now, we've been really focused on payroll and FTE per store, embracing technologies and new technologies and just generally finding ways to do more With Les. So there's really nothing unusual in there except that we've been continuing with our strategy for further efficiencies. And Dave has now been the Head of Operations for this year and he knows the strategy behind it.

Speaker 2

He's been doing a great job of Keeping control over payroll, I know it's quite tough in this environment. But yes, we're really pleased with the result and We continue to look for ways to reduce hours at the store level. And fortunately, we've been successful at it.

Speaker 3

Thanks, guys.

Speaker 4

You're welcome.

Operator

Your next question for today is coming from Samir Khanal at Evercore ISI.

Speaker 6

Hey, Joe. Good morning. I guess just wanted to get your view on kind of the potential slowdown in the housing market with mortgage rates being higher here. Clearly, that had been sort of a big driver with sort of housing mobility in the storage industry. How do you think about that Impact potentially maybe in the back half or even in the 23?

Speaker 2

Yes. Hi, Sameer. Obviously, storage is used for a number of reasons and people who there's definitely been a slowdown in In the sale of homes, but that sometimes is a good thing for storage. People decide not to buy house with a second bedroom or a third bedroom or a 4th bedroom and We'll turn to storage instead, same with apartments. With inflation, people may have to deal with being in In a place that maybe isn't the perfect size for them and again turn to storage.

Speaker 2

Also what's interesting is just what we haven't seen in a number of years is the staging in the sale process where homeowners will have to stage their house because it's not selling. We haven't seen that in a while because obviously things would sell pretty quickly. So we're seeing some of that come back where people are having to make a little bit more effort to sell their house. So right now, we're not too concerned. Obviously, we'll see how the rest of the year plays out, but we had a very good demand Throughout the peak season, it's still we're still seeing some nice move in volumes.

Speaker 2

So demand is very strong and pre COVID, Maybe wouldn't see as much demand, but today there's so many more uses and needs for self storage that we are benefiting from and we don't see that slowing down.

Speaker 6

And I guess my second question is around 2023 because that's where sort of the investor focus is today. And I know you haven't provided guidance, but maybe walk us through how to think about sort of the puts and takes to come up with a growth number for next year. I mean, do you feel Where you stand today, do you feel better about growth for 23 maybe versus 3 months ago? Just trying to kind of get your sense of how to think about 23 at this point.

Speaker 4

I think if when you look at where we're going to end the year, it's stronger than we thought 3 months ago. So I think we're going to start the year stronger. How does the consumer react next year to rate increases versus this year? It's all we'll have to determine that as we go through. We'll see if there's any change as we go through the remainder of the year.

Speaker 4

But right now, I would say we're feeling a little better than we were 3 months ago on

Operator

Your next question is coming from Jeff Spector at Bank of America. Great.

Speaker 7

Good morning and congratulations on the quarter. My first question and I'm sorry if you discussed this already, but I didn't hear anything. Just to confirm, Are there any signposts of weakness, let's say, by customer income levels across the markets or any signposts of weakness

Speaker 2

No, I wouldn't say, Jeff, that there's any real regional difference. Obviously, consumers are feeling it in our walks of life with inflation and it's nice to see gas coming down. We have seen some of our late fees go up, which is kind of getting back to normal. I think Pre COVID, that's kind of where we are now with late fees. But other than that, I think we're still in a good spot.

Speaker 2

Again, this is a needed product. It's not something that can easily be canceled like a Netflix subscription, this is something especially for those who are working from home. They need to keep those items in storage. So I think we're in a good spot. And again, it's on average $160 a month, is an affordable option For many folks, so we feel very good about the consumer and obviously the employment is still very strong.

Speaker 2

People have jobs And they're able to make their payments. So other than little late fees rising to kind of getting closer to pre COVID levels, we don't really see anything else.

Speaker 7

Thank you. And then just one question on kind of on the transition from 2022 into 2023. I remember 21 into 2022, the key point was higher occupancy levels. Is that the assumption now at this point? And how does that compare, let's say, versus historically?

Speaker 7

Your guidance, let's say, ending 'twenty two into 'twenty three versus historically, I assume that occupancy in particular is looking to be stronger than historically, but please confirm.

Speaker 4

Yes, Jeff. We would think that occupancy in our guidance would end the year above historical norms to be in the 91 the 92% range in that range there, would be below last year's record, but still above our historical typically at the end of the year would be about 90%. So We're still above historical levels and expect to be at the end of the year. So it does help us out compared to historical levels Where that occupancy will start 2023.

Speaker 6

Great. Thank you.

Speaker 2

Thanks,

Operator

Your next question for today is coming from Ki Bin Kim at Truist.

Speaker 8

Thanks, good morning. Just want to go back to your comments about street rates. Did you Give color on what it was during the quarter and how that progressed into July year over year?

Speaker 4

We did not give the color yet Ki Bin, but street rates during the quarter on average were 7 point almost 8% higher than they were a year ago. Subsequent to the quarter end, slightly negative in July compared to last July, but very high from historical levels. I think July is still 1 in the top 4 months of rates highest rates. So still very strong, slightly below last year, which was incredible.

Speaker 8

So slightly negative in July and I think earlier you mentioned for the remainder of the year, you think it's going to be 0 to negative 5. Was that right?

Speaker 4

Yes. That's what we embedded in guidance, correct.

Speaker 8

Yes. And on ECRIs, can you just describe what that program looks like today And how that might have changed. I remember at least pre COVID, you guys used to concentrate your ECRI More so in the summer than just programmatically, pro ratably throughout the year. I'm not sure if that's changed at all. Just trying to get a sense of What drove that much better than expected sequential increase in same store NOI?

Speaker 2

Yes. Hi Ki Bin. Obviously, our revenue management team does a great job. Our ECRI strategy continues to evolve. It's Compared to 3 years ago, it would be black and white, completely different.

Speaker 2

We do a lot of testing. We have more data today and we have a data science team, so we're trying to be smarter about the decisions we make, and that continues to change. So it's different from what was the way we did it last year. I think typically we like to do more of our rate increases during the peak season because that's when your phones are ringing the most. So That really has not changed.

Speaker 2

I think most of the sector does something similar to that. You don't want to do a lot of your rate increases In the slow demand months of October, November, December. So we are trying to do things a little bit different. We use data to make So we'll continue to work to do better. And we're really proud of what our revenue management team has been doing.

Speaker 2

They've been Embracing different technologies and algorithms and data and I think the results show that they're doing a really good job.

Speaker 8

And is it fair to say that there was a more pronounced contribution from EPRI Then even last year?

Speaker 4

Yes. Our average customer increase was higher than it was last year. So we've been aggressive And continue to be aggressive.

Speaker 5

Okay. Thank you.

Speaker 2

Thanks Ki Bin.

Operator

Your next question for today is coming from Michael Mueller at JPMorgan.

Speaker 9

Yes. Hi. Kind of have a follow-up to Ki Bin's question here. Have you seen over the past few months any Changes in the level of ECRI that you're passing through just because of the evolving macro backdrop or have you Seeing any changes in terms of the level of customer pushback to those increases?

Speaker 2

Well, you always get pushbacks whenever you do a rate increase. It's we know that the more you do, the more move outs you're going to get. And I think you've seen the sector, given The strong pricing power and demand and high occupancy that the sector is able to push through more rate increases and you're seeing Move outs start to pick up and that's across the sector and we had enjoyed several quarters of very unusual low move outs And that's kind of what we're seeing. So some changes there. Obviously, the more you push, the more move outs you're going to get and more pushback you're going to get.

Speaker 2

But when there's still strong demand, it's a risk you're willing to take. And for us, we have we continue to have rent roll ups. So it's a very good trade for us. And again, it's all about revenue optimization, not necessarily occupancy. It's all things combined and that's kind of been our strategy and we'll continue to be so.

Speaker 9

Got it. So it sounds like if we're thinking about with the backdrop of the economic picture Getting a little more challenging, a little more unclear over the past few months, you haven't seen a direct change in your any of the attributes in your business really tied to that thus far?

Speaker 2

No. Other than the rise of move outs, which is a combination of increased auctions, which kind of still playing catch up there. And then obviously, the level of in place rate increases will drive more move outs. So nothing that's not That wasn't expected at the beginning of the year with where we plan to be.

Speaker 9

Got it. Okay. Thank you.

Operator

Your next question is coming from Spenser Allaway at Green Street.

Speaker 10

Thank you. Just wondering if you guys could provide a little bit of color on development starts or just some color on supply in your markets?

Speaker 2

Yes. Hi, Spencer. Again, really nothing new from last quarter's call. We still Our feeling okay about the new supply that's coming We haven't seen a significant rise in construction or planning. I think there's still some headwinds time, we're pleased with the development sector and the price of materials and the timing to get entitlements and obviously interest rates are now going up.

Speaker 2

I mean, definitely there is new development. We're always dealing with that in most markets, but no single market stands out. So we still feel pretty good about the situation. Obviously, we'll monitor it and we monitor it every month. But right now, nothing unusual.

Speaker 10

Okay, great. And then maybe if I could just go back to that last question, but maybe just task, it's slightly different. So if you guys still have positive rent roll and your peers don't, moving in obviously to the Q3, do you feel like you have outsized pricing power moving forward in the back half of the year?

Speaker 4

I think we like the position, we're in Spencer with the rent roll up. I think we are unusual in the sector. But so does it give us more pricing power? I think it gives us the ability to be aggressive with our in place customers. Street rates are very competitive out there and we track the industry closely.

Speaker 4

So I would think pricing power from a street rate, maybe not so from an in place customer increase. I think we do have a little bit more room to run there.

Operator

There are no further questions in queue. I would like to turn the floor back over to Joe for closing remarks.

Speaker 2

Thank you everyone for joining us this morning. I hope everyone has a terrific August and the remainder of the summer and we'll talk to everyone in a few months. Thank you.

Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect

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