Life Storage, Inc. (NYSE:LSI) Q4 2019 Earnings Conference Call February 20, 2020 9:00 AM ET
David Dodman – VP of IR & Strategic Planning
Joseph Saffire – CEO & Director
Andrew Gregoire – Chief Financial Officer
Conference Call Participants
Ki Bin Kim – SunTrust
Todd Thomas – KeyBanc Capital Markets
Samir Khanal – Evercore
Smedes Rose – Citi
Shirley Wu – Bank of America
Ryan Lumb – Green Street Advisors
Good day, and welcome to the Life Storage Fourth Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]
I would now like to turn the conference over to David Dodman, Senior Vice President, Investor Relations & Strategic Planning. Please go ahead.
Good morning and welcome to our fourth quarter 2019 earnings conference call. Leading today’s discussion will be Joe Saffire, Chief Executive Officer of Life Storage; and Andy Gregoire, Chief Financial Officer.
As a reminder, the following discussion and answers to your questions contain forward-looking statements. Our actual results may differ from those projected due to risks and uncertainties with the company’s business.
Additional information regarding these factors can be found in the company’s SEC filings. A copy of our press release and quarterly supplement may be found on the Investor Relations page at lifestorage.com.
At this time, I’ll turn the call over to Joe.
Thanks, Dave and good morning, everybody. We had another solid quarter and the strong finish to the year. I couldn’t be more pleased with my team’s execution on our strategic initiatives.
I will start by touching on a few of the many accomplishments we achieved over the past year. We expanded our footprint to new strategic markets such as Seattle, Baltimore and Toronto. We completed almost $430 million of acquisitions, which included an important mix of both lease-up and stabilized stores, all of which have higher revenue and growth prospects than a $200 million of stores we’ve divested. We’ve started this year off well with six additional California properties currently under contract.
We successfully grew our third-party management portfolio, which reached almost 300 stores at year-end, with the net addition of 84 stores in 2019. This portfolio has tripled in just three years, as more owners are drawn to our innovative platforms such as Rent Now and Warehouse Anywhere.
We capitalized on growth opportunities within our existing portfolio, with the completion of $60 million of expansions and enhancements in 2019. And this compares to just $25 million to $35 million in each of the previous three years.
We finalized the rollout of Rent Now, our fully digital rental platform, that allows customers to self-serve and skip the counter. This achievement now allows us to interact with customers in any manner they so choose in person over the phone or online.
Our focused on new technologies has helped with our efforts to improve our operating margins. And our efficiency initiatives, which we discussed on our third quarter call, have played out earlier than we expected with fourth quarter. Same-store property operating expenses down more than 5% and that excludes property taxes.
And lastly, we continue to expand our portfolio of joint venture partners with $25 million of minority investments made in both the U.S. and Canada in 2019. As relates to markets, we continue to see positive trends in some of our largest, including Chicago, Buffalo, Las Vegas and Los Angeles. And we are seeing sequential improvement in several Southeast and Texas markets that have experienced significant new supply, including Miami, Tampa, Austin and San Antonio.
As a result of our performance and our optimism that we are past the peak of new deliveries in some of our larger markets, we’re slightly going to increase our 2020 guidance.
I will now hand it over to Andy to walk you through these details, as well as our quarterly results.
Thanks, Joe. Last night, we reported adjusted quarterly funds from operations of $1.44 per share for the fourth quarter, a 4.3% increase over the same period last year, driven by better than expected same-store performance. Our same-store performance was highlighted by NOI growth of 4.2%, achieved by a combination of revenue growth and extremely well controlled expenses.
Specifically, same-store revenue increased 2.6% over the same period last year, driven by realized rates per square foot that increased 2.6% over the fourth quarter of 2018. This revenue growth was an acceleration from our third quarter same-store revenue growth of 1.8%.
Fourth quarter same-store expenses, outside of property taxes, decreased 510 basis points over the fourth quarter of 2018. Excluding property taxes and internet marketing spend, operating expenses decreased in every major line item.
Our investments in technology and our focus on efficiencies are producing great results and are evident in the 100 basis point improvement in our year-over-year same-store NOI margin. Partially offsetting these expense efficiencies was an 8.4% increase in property taxes over the fourth quarter of 2018.
Our fourth quarter property tax expense had a tough comp. But our year-to-date property tax expense came in as expected with an annual increase of 5.9%. We do anticipate continued pressure from property tax expense and forecast 5% to 6% increase in 2020.
We are very pleased with the continued benefit of our transition to a captive program for tenant insurance as net operating income associated with this program increased more than 20% over the last year’s fourth quarter. Since that program transitioned on April 1 of 2019, we expect one more quarter of outside year-over-year performance
Our overall fourth quarter revenue increase also reflected the 38.7% increase in third-party management fees, due to the significant traction we have gained in growing that portfolio of stores.
Our balance sheet remained solid, and we continue to have significant flexibility to capitalize on attractive investment opportunities when they meet our return requirements. At quarter-end, we had cash on hand of $17.5 million and $435 million available on our line of credit.
Our net debt to recurring EBITDA ratio was 5.6 times, and our debt service coverage was a healthy 4.3 times. We have no debt maturity until August of 2021. Our average debt maturity with seven years and the percentage of our total debt, that is fixed rate, was 97% at December 31.
Regarding 2020 guidance, we raised the midpoint of full year guidance to $6.01 with a range of $5.94 to $6.08. Specifically, we expect same-store revenues to grow between 1.5% and 2.5% for the 2020 fiscal year, up 25 basis points from our expectation in late October.
Excluding property taxes, we expect other expenses to decrease between 1.5% and 2.5% as a result of continued discipline on the operating costs and the impacts of savings related to Rent Now. The cumulative effect of these assumptions should result in 2.25% to 3.25% growth in same-store NOI, up 25 basis points from our expectations in October.
Consistent with our past practices, we are not including in our same-store group any stores acquired in the early stages of lease-up that were less than 80% occupied at market rates as of the beginning of 2019. Our 2020 same-store pool is expected to increase by 13 stores from 504 to 517 stores, and we do not expect this change to have a material impact on the same-store growth rates. Based on these assumptions, we anticipate adjusted FFO per share for the first quarter of 2020 to be between $1.36 per share and $1.40 per share.
And with that operator, we will now open the call for questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions]
Our first question today will come from Ki Bin Kim with SunTrust. Please go ahead.
Ki Bin Kim
Thanks. Just a broader question first. So, we’re still not in the spring decent season, so I’m just curious what you’re seeing in your business that gives you confidence to raise same-store revenue guidance at this point in the year.
Yeah. Hi, Ki Bin, it’s Joe. We felt more comfortable obviously with the strong quarter we just finished. The fourth quarter was pleasantly — to us a bit of a nice surprise. I think, you look at our three markets where we’ve had some of the most concerns Houston, Miami and Dallas, and I think all three of them were feeling a little bit better about them as we head into the quarter. And as we went through the budgets again for each of our markets, it just felt like it was the right thing to do.
You see a little bit of an acceleration from third to fourth quarter. We haven’t seen it really changed much for January, because January was a good month as well. So, I think yeah, we’re a little bit more comfortable bumping that up just 25 basis points.
Ki Bin Kim
And you had some pretty outsized expense declines in some of your major markets, like New York and Dallas. I can’t imagine that just Rent Now or a couple of things. So, I was wondering if you can provide a little more color on that, and maybe the longevity of those operating expense declines.
Sure, Ki Bin. This is Andy. That was property tax related. So, when you look at — we in had Chicago go the wrong way, right, we had 18% increase in expenses for the quarter and that was all driven by property taxes in Chicago. We had the opposite happened in New York where — and in Dallas, where we want some appeals and just had a better resolution to what we expected in property taxes, so we had been in Dallas accruing quite an increase for the first three quarters and then came in better than expected. So, the big swings in property taxes were property — expenseswere property tax related.
Ki Bin Kim
Thanks. And if I could squeeze in one more. Your repair and maintenance line item was down. So how — what drove that? And how do you differentiate R&M, which isn’t the same property expenses versus capital expenditure line item, which grew $4 million in 2019 versus 2018?
Yeah. Thank you, Ki Bin. I’ll let Andy answer the second part of that question. But really it’s been — you probably saw that in the third quarter as well — the reduction in R&M. It’s really related to more discipline and also different software that we’ve been implementing over 2019, providing us more controls over what’s been spent and who authorizes to spend, I’d say a lot more focused on that area just similar to other costs. Throughout the company, we’ve been focused on many different things and R&M is no exception. So, we’re pleased with the way the team has been focused on that.
In terms of how we decide R&M CapEx, Andy can chat about that.
Yeah. And then — a couple of things to point out, Ki Bin. There was a big increase. We did buy some $3 million worth of trucks. So that was some of the bump in CapEx that you’re seeing, those trucks get capitalized. Otherwise, it’s — we just follow the GAAP accounting extends, significant improvement that extends the useful life of the building of the real estate. It gets capitalized, otherwise it gets expense.
Ki Bin Kim
All right. Thank you, guys.
Our next question will come from Todd Thomas with KeyBanc Capital Markets. Please go ahead.
Hi, thanks. Just in terms of the 2020 guidance and I guess occupancy specifically. I think you previously mentioned that the year would start off negative year-over-year, but you’d expect to build occupancy throughout the year implying that — you’d see some occupancy growth in the second half of 2020. But you’re almost there now, I guess. And current trends suggestion might start the year off with higher year-over-year occupancy. Can you just talk about trends for occupancy a little bit further, help us understand what’s embedded in the guidance?
Yeah. Hi, Todd. It’s Joe. Thanks for that question. It’s a good one. It’s actually part of the reason why we bumped up, the revenue guidance as well. We haven’t focused on occupancy, as you know. We think we have some room to improve there, especially with some of the new tactics we have and RevMan and also marketing. We did — some of the fourth quarter top line results were because of that improvement in occupancy, but it’s — we gave some of it back in January, the 20 basis points back in Jan, but it is going to be a focus for us. Depending on how successful we are, we’ll see how we get on in the leasing period, that will obviously affect the top line. So, it’s a focus for us.
I think we have some room further improve our occupancy and I think we will achieve what we put on the guidance. Hopefully, we can do better.
But when you say you gave back 20 basis points in January, is that on the 2019 same-store pool or is that on the new same-store pool?
That was on the 2019 same-store pool. So went from — I think at the end of the year, we ended down 30 basis points, Todd and the January we’re down 50 basis points. It’s really — it’s that combination of rate in special and occupancy that we’re trying to maximize revenue. And you’ll see some of that, but we expect over the year that that gap will continue to decrease, and then turn.
Okay. Great. And then just a second question on the third-party management, the pipeline there. Just want to dig in a little bit. I think you also last quarter mentioned that you had sort of an expectation of adding 50 for the year. You added 20 this quarter and sounds like there’s some good momentum in that business. Was there a revision at all to your outlook for additions to third-party management and what are your expectations there?
No, Todd, I mean, that — there is a pipeline. We have some visibility in some of the stores we signed up last couple years that were under construction, that should open this year. I think, we’re doing a good job of winning some stabilized stores. And I think 50 — that’s a net 50. So, some of the stores we’re buying in California that will come out of the third-party management pool, and those will be holy all. And so, I still think we should be able to get at least a net 50 growth in third-party management. We’ll see how we get on throughout the year and adjusted accordingly.
Okay. All right. Thank you.
Our next question will come from Samir Khanal with Evercore. Please go ahead.
Hey, Joe. Good morning. Can you talk a little bit more about some of your major markets? I know in the past, you’ve talked about sort of a reversal in Houston in the second half as it relates to revenue growth, and maybe along the same topics just kind of walk us through some of your major markets. What’s embedded inside too?
Yeah. I mean, I’ll let Andy kind of dig a little deeper. But as I said at the beginning of my Q&A, the three biggest markets, Houston, Miami and Dallas, where we’ve had the most concern, we’re feeling better about it. We still think that — in Houston, we like the trends, the revenue decel is gotten less over the last few quarters. We still have it — projected to be slightly negative for the balance of the year, but I think, towards the second half of the year, we’ll see how we go, but occupancy has been nice in Houston.
And then obviously, street rates, they’ve been negative as well throughout 2019, but it’s getting less negative as we move on. So we feel a little bit better about that. And then obviously, Houston is one of the MSA — top 20 MSAs — with the lowest new supply coming on and we’ve seen that from a number of companies out there that manage that and we also look at it internally. So, we don’t see a ton of new supply coming on in Houston.
Miami, I think you’ve heard from a few of us that, it seems to be getting a little better. It’s starting to stabilize. Miami is our 10th largest market, so not a huge impact on us. But we think it will probably stay flat through 2020. And then Dallas, Dallas has kind of been interesting one for us, obviously been a new supply on there, and they’re still getting a new supply, more so than Houston. But you saw fourth quarter, revenue was up over 200 basis points. So, we’re feeling pretty good about Dallas.
Occupancy has been strong. So, in those terms, we feel pretty good about our most concerning markets. And some of our strongest markets have been Chicago, Vegas and buffalo. Those are important markets to us. Not a ton of new supply, there’s some coming on Vegas, but we feel pretty, pretty good about those as well.
And then some of the other ones we’re watching, Austin and Atlanta, I think, there’s some new supply. Obviously, Austin’s been pleasantly a good surprise, given some of the new supply, but it’s held up well. So, overall, we obviously went through market-by-market for our budget to take in all these things into consideration.
But like I said, I think, we’re feeling pretty good in terms of the peak deliveries and our major markets are behind us. It kicked in — the last few years has been tough in Houston and we think it’s turning. And it’s built into our guidance.
Yeah, no, thanks for that. And I guess, my second question is, Joe, look, I mean, you’ve been proactive on the utility management side, that’s generated savings for you. You reduced payroll expense through Rent Now. Can you talk broadly about — to the extent you can about what other initiatives there are out there? I guess, how big is that opportunity set for you to sort of further improve margins here?
Well, you see the big improvement. I mean, obviously, we’ve focused on a lot of things, right now is definitely something that’s new and something that differentiates us from our peers. And we’ve been able to capitalize on that payroll savings. We’ll see where Rent Now goes. I mean, it’s — each quarter, it’s gotten a little bit more in terms of our — how many of our customers are using it. It’s around 9%, 10% and we saw 11% in the fourth quarter. We’ll see how that goes in terms of how many more of our customers use it. If we ever get up to 50%, that would be great. But that’s not built into our guidance. So, I think that’s probably the biggest unknown at the moment, but we’re going to continue to embrace new technology, Samir. We’ve been doing it across the board.
ESG is increasingly a huge focus for us. Obviously, that’s something you’ll see more about throughout 2020. But we’re finding ways to put our arms around ESG and also save some money and that’s utility management. Got rid of some older, less efficient trucks. So, we’re doing a number of things Samir. We’re going to keep looking. But we have pretty strong guidance in terms of our ability to control costs in 2020. And we feel pretty good that we’ll be able to deliver on that.
Okay. Thanks, guys.
Our next question will come from Smedes Rose with Citi. Please go ahead.
Hi, thanks. I just wanted to ask you on the Rent Now program. You mentioned it was about 11%. So, it continues to pick up a little bit in terms of incoming customers. Can you just talk a little bit about what kind of the — I think maybe what the margin implications are for someone that chooses to come through that program versus — just coming to the counter?
Thanks, Smedes. Well, I mean, I think from a margin perspective, I mean, Andy has something there. But obviously, it’s definitely more efficient for the company. You have less people spending 30, 40 minutes at the counter, taking up our store manager’s time. So more people who self-serve, the more efficient you’re going to be as an organization. They’re not calling the call center. So, it’s a great tool. And we’re going to look a way to see if we can get more customers to use Rent Now going forward. So, that’s already built into our payroll savings, majority of that is Right Now.
And there’s obviously other things that we’re doing with other technologies, such as online auctions, and other things that we can do to make our store teams more efficient. So that again we can have less hours at the stores. So, we’re going to continue to embrace Rent Now and new technologies to obviously improve our overall margins for the company.
And Smedes, those customers that are using Rent Now are pretty — like to stay. We’re not seeing any difference. They’re taking the insurance, and they’re paying the admin fee. So, it’s a very similar margin customer.
Okay. I also just wanted to ask you bigger picture. You mentioned — I mean, you bought some stabilized properties through the management platform. Can you just talk about any changes you’re seeing in pricing or cap rates by market, if you can?
Yeah. You’re still seeing a lot of competition out there for good deals. It’s going to be market-by-market, California, New York those — they’re going to be low caps. But there’s still some low hanging fruit when you’re looking at third-party management portfolio and I think there’s opportunities to get deals off market. You’re not competing, you are not going out to bid — no broker involved. Obviously, you know how those stores are operating whether — you feel pretty good about the budgets when you’re penciling out, one-year, two-year, three, but there’s definitely compression. I think it’s harder to find good deals. Obviously, cost to capital is low cost. Cost to debt low. So, we don’t think that’s going to change, but there’s still very good opportunities out there.
Okay. Thank you.
Our next question will come from Shirley Wu with Bank of America. Please go ahead.
Hey, guys. Thanks for taking the questions. So, my first question, I — just kind of expand on burnout [ph] a little bit more, assuming you guys had the payroll savings over the last year in terms of, let’s say, having less people at counter and just those efficiencies. So how — what are you thinking about in terms of incremental efficiencies going into 2020 from right now, if you’re already operating at a lower personnel costs. So, in terms of how much you put into your guidance, how — where’s that can really coming from and which pocket?
Well, part of it is the payroll and we didn’t have those savings for the whole year. So, obviously, it’s an easier comp in the first half of the year from the payroll point of view. Tougher comp as we go through the year. But we knew that going in when we issued guidance back in October. But again, we expected in this guidance that the take rate would be 10% or so. It’s up to 11%, as Joe said in the fourth quarter, but no significant change yet in the number of customers using that. It’s not an overnight where you can flick the switch, if it does all of a sudden shoot that 20% that we can flip the switch and change payroll that quickly, it does take time to work that into the system and sometimes not replacing those associates hours. You still need your manager on site to take care of the customer.
Got it. And my second question, on your revenue management system you guys have talked about improvements and how you see this as an improvement, your strategy moving forward. So could you talk a little bit more about some of the things that you’ve been doing on that?
Yeah, I mean, we’re still working on some things. We don’t want to talk too much about it on a conference call, a lot of its proprietary. But we have a new head of revenue management, he has got a very deep knowledge in data science and machine learning and AI. And we’re implementing many of those tools out there, just like many other companies, and many different industries are embracing new technologies and how do you use data better. And we’ve been really focused on how to embrace those things out there, that will help us make smarter decisions and not necessarily give everything away with free rent and rate cuts.
So, I think it’s still early in the game, surely, but we like some of the things we’ve been seeing over the last few months, and we think it’ll continue. But we’re very excited about what we’re doing there. I think we’re going to see some benefits throughout 2020 in terms of rate and occupancy and a lot of that’s built into our guidance already.
Got it. Thank you.
Our next question will come from Ryan Lumb with Green Street Advisors. Please go ahead.
Hi, good morning. Just circling back to the margin improvement. Just curious if you have any specific targets that you guys can share in terms of sort of the magnitude of what you guys are anticipating to achieve, or the timing of what you’re looking to achieve that.
And Ryan …
Ryan, what was for — sorry — targets for which one?
The margin improvement that you guys have been referencing?
Okay. Yeah, I mean, our program looks to 50 basis points of margin improvement in 2020, over 2019. And beyond that, we don’t want to talk about, but we think there’s probably more potential. But it’s really looking under every stone and seeing what we can do differently and challenging how we’ve done things. And you can see that showing up. And like every line item just about, you’re seeing improvements. And that’s just — it’s blocking and tackling. And it happens every day here. And we’ll keep doing that. And we expect it to show up in the margin.
Yeah. And it’s not just on the expense side, Ryan. I mean, obviously, we’ve been focused on margins through our asset recycling, selling off some older stores that are not as margin friendly, they’re smaller or lower rates, and pretty much everything we’ve been buying has been bigger stores, better rates, more revenue per store, and that’s helping as well. So, we’re going at it in many different angles. You can’t do much about property tax in certain markets, like Chicago. I mean, Chicago is a tough one for margins, but it’s been very good for us in terms of revenue growth and a lot of new supply.
So, it’s a mix of things. And like Andy said, it’s the 50 basis points target for 2020. But it doesn’t mean we’re not going to keep looking for ways to improve it. And we will continue to expand in some of the newer markets that we think are better margins, some of the ones that we just entered. California has always been a target for us, it’s hard to find properties. And we’re excited about the six pack. All of these things will help us to continue to work on our margins. And obviously, technology has been a big one for us. And right now, clearly, it’s helped. But we’re going to be looking for other technologies as well.
Okay. Great. And then just curious, you dipped your toe in with some international growth in Toronto last year. Just curious what your appetite for international growth is in the year ahead.
Yeah. I mean, it’s interesting. I have a big international experience. I think it’s great. I think there’s a lot we need to do in the U.S. and still a lot of opportunities. I think Canada was a no-brainer for us and we’re doing well there. We’ll see where that goes this year. Aside from that, we’re really not looking too far across the borders. But I think there are opportunities internationally, and you saw that last year when we enter Canada. And we’ll focus on the U.S. and Canada for now.
Sure. Thanks, guys.
This will conclude today’s question-and-answer session. I would now like to turn the conference over to Joe Saffire for any closing remarks.
I’ll just say thank you all for joining our call and have a great rest of the week.
The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.