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Good morning ladies and gentlemen, and welcome to Life Storage First Quarter Earnings Release. At this time all participants have been placed on a listen-only mode. [Operator Instructions]
It is now my pleasure to turn the floor over to your host David Dodman, Senior Vice President of Investor Relations and Strategic Planning. Sir, the floor is yours.
Good morning, and welcome to our first quarter 2021 earnings conference call. Leading today’s discussion will be Joe Sapphire, 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. As a reminder, during today’s question-and-answer session, we ask that you please limit yourself to two questions to allow time for everyone who wishes to participate. Please requeue with any follow-up questions thereafter.
At this time, I’ll turn the call over to Joe.
Good morning and thank you for joining this morning’s call. I am very pleased to report another solid quarter and a great start to this year with record occupancy of 94% at quarter end, we have managed to grow occupancy by 460 basis points year-over-year and incredible accomplishment. And I’m very proud of the entire Life Storage team. With this level of occupancy, we have been aggressively pushing asking rates while also decreasing free rent, resulting in higher net effective rates, which were up roughly 20% for the quarter.
Further, we have been very active on the acquisition front with 33 stores acquired or under contracts since the beginning of the year. These stores are a blend of lease up and stabilized and as a group will be immediately accretive and growing thereafter. We also continue to see strong growth in our third party platform with 18 new additions during the quarter, and a very robust pipeline as more and more owners consider Life Storage as a leading candidate to manage their stores. And we continue to see further traction and Warehouse Anywhere with a significant contract for our Enterprise product. This product is unmatched in a self-storage industry and we continue to drive more corporate business to our unique solution.
These enterprise customers would unlikely be using self-storage for their inventory needs. If it were not for what Warehouse Anywhere brings to the table. Our newer Lightspeed product also continues to expand with now three fully operational micro fulfillment centers, and three more in the works to open over the coming months. Revenue for this business will continue to grow as we add more and more clients to our last mile fulfillment solution. This solution is also unmatched in the self-storage industry.
With all of this success and growth, we exceeded our expectations for the quarter and as such our increase in our guidance for the remainder of the year. We are raising the midpoint of our estimated adjusted funds from operations per share by more than 3% to $4.37 this year, which would be 10.1% growth over 2020.
And with that, I will hand it over to Andy to provide further details on the quarter and revisions to our guidance.
Thanks Joe. Last night we’ve reported adjusted quarterly funds from operations of a $1.8 per share for the first quarter and increase of 16.1% year-over-year. First quarter, same-store revenue accelerated significantly again to 7.3% year-over-year up 240 basis points from the 4.9% growth produced in the fourth quarter.
Revenue performance was driven by a 410 basis point increase in average, quarterly occupancy. That occupancy is augmented by positive rent roll-up. In the quarter, our move-ins were paying almost 6% more than our move-outs, which is a significant improvement from the rent roll-down that we experienced in the same quarter last year. Our move-ins has been paying more than our move-outs for six straight months with March move-ins paying almost 8% more than move-outs.
Same-store operating expenses increased 4.7% year-over-year for the quarter. The largest negative variance during the quarter occurred in repairs and maintenance, which increased primarily due to higher snow falling expense and miscellaneous repairs following record cold weather earlier this year.
Payroll and benefits again remained well controlled up only 1.8% year-over-year while advertising and internet marketing costs were down 2.6%. The net effect of the same-store revenue and expense performance was an increase in net operating income of 8.6% for the quarter.
Our balance sheet remains strong. We supported our acquisition activity and liquidity position by issuing approximately $180 million of common stock via our ATM program in the first quarter. Our net debt to recurring EBITDA ratio decreased to 5.5 times. And our debt service coverage increased to a healthy 4.9 times at March 31. At quarter end, we have $457 million available on our line of credit and then we have no significant debt maturities until April of 2024 when a $175 million becomes due. Our average debt maturity is 6.7 years.
Regarding 2021 guidance, we’ve increased our same-store forecast driven by higher expected revenues and unchanged expense expectations. Specifically, we expect same-store revenue to grow between 5.5% and 6.5%. Excluding property taxes, we continue to expect other expenses to increase between 2.25% and 3.25%. While property taxes are expected to increase 6.75% to 7.75%.
The cumulative effect of these assumptions should result in 6.5% to 7.5% growth in same-store NOI relative to our original guidance of between 3.75% and 4.75%. We have also increased our anticipated acquisitions by $175 million to between $550 million and $600 million. Based on these assumptions changes, we anticipate adjusted FFO per share for the 2021 year to be between $4.33 and $4.41.
And with that operator, we can now open the call for questions.
Thank you. [Operator Instructions] Our first question today is coming from Todd Thomas at KeyBanc. Your line is live.
Hi, thanks. Good morning. First question on acquisitions, Joe, I was hoping that you could provide some color on the investments completed in the quarter and what’s under contract in terms of where you’re finding these opportunities? Are they mostly single asset transactions or are there some portfolios in the mix? And then given the increased competition out there for investments, are you confident in Life’s ability to continue acquiring at this pace moving forward?
Hi, Todd. Yes, I am confident to answer the second question first. We’ve been at this game since our inception. We’ve got a lot of relationships out there in the market. We’ve been working these relationships for years and we feel very confident. And I think about 80% of the deals that we’ve closed are under contract are off market. So there’s no broker involved. For example, the Florida portfolio is a family run business eight stores we’ve been calling them for over three years and when they’re ready to sell, we were there with the phone call. And that’s a – it’s a wonderful opportunity for us.
At the same time a lot of the deals that were – are in the lease subside. So about half of our product that we were under contract or have bought or about lease up and half are stabilized, a lot of the lease up are stories that we know we’re – there are third party stores and we know the owners and we’ve been able to get the majority of those off market as well. So, yes, we feel pretty confident that there’ll be more opportunities like this. This is – three years now, we’ve had a lot of good acquisitions and I’m pretty confident there’s going to be more to come.
Okay. And in terms of pricing, just given the mix of, I guess, lease up and stabilize in the acquisition pool here, can you comment on cap rates and provide a little detail on the yields there?
Sure. Sure. What we’ve closed on in the quarter, year one is about a 4.1% cap growing many of them, north of 5% to 6%, depending on where they are. But if we combine that with what we have under contract subsequent to the quarter, those are a little bit better, about 4.8 cap. So the blended cap rate of all 33 is about a 4.5 cap. And again, half of those are lease up so pretty we’re very pleased with that.
Okay. That’s helpful. And then I just wanted to touch on Warehouse Anywhere. I was wondering if you could provide a little color on the contract, and provide an update, I guess, on the outlook for fee income related to Warehouse Anywhere. And maybe in that context, you could just talk a little bit about the pipeline and demand and what you’re seeing there, relative to the 300 unit agreement that you announced this quarter?
Sure. So Todd, as, Enterprise is really our initial product, aside from our, just the storage management piece, where there’s no technology. And we’ve been working on that business for a few years and it’s really a longer sales cycle, because you’re really focused on larger corporations who need that product. And we’re now starting to talk about Enterprise as being almost our mature product compared to Lightspeed because we are starting to see the traction, we – the word is getting out. This particular contract was an RFP that, our team was able to bid on and it was an RFP that, none of the other storage companies would know about it or bid on it. We’re really, competing with some other types of logistics companies. And it was not a slam dunk that we would win it, even though we had them as an additional customer, they were working with us for a while.
But this was a big jump, 300 more spaces, almost doubled the number of current spaces we have entirely, not totally double, but close. So a very significant win for us. We’re very excited about it. This particular contract will roll out over the course of this year. It takes some time to work with the client and get it up all in running. But when it’s all done and implemented, the fee income should be about $2 million a year. It’s a multi-year contract. And on top of that, we would get the premium rent as well.
Okay. The $2 million is just from this 300 unit agreement?
Yes.
Got it. And, and just lastly, can you talk a little bit, it sounds like you, mentioned it was a multi-year agreement. Can you share a little bit of detail around the length of lease and sort of how the rates stack up versus a non-Warehouse Anywhere customers for the storage units and maybe provide a little bit more detail on the economics?
Sure. What we like about, our Warehouse Anywhere customers is typically we do have, it’s not a month-to-month lease. This one in particular is a three-year lease. It has some escalators incorporated into it. And typically we – the rent is at a premium, maybe 10% more than what we would typically get from a consumer who walks in the door. So it’s a great product, both for the fee income from the inventory technology, but also as a tenant. I mean, that’s just why we love this business. We love commercial customers. They tend to stay longer. They pay premium rents. We can hopefully up sell the inventory tracking and it’s a great use of our storage assets.
Thank you.
Okay.
Thank you. Our next question today is coming from Samir Khanal at Evercore ISI. Your line is live.
Hey, Joe. Just getting back to Warehouse Anywhere and not really just focusing on this, that this customer that you signed with, we’re just looking at sort of the big picture. I’m just trying to understand how big there’s an opportunity set is this for you, as you think about sort of the financial impact and maybe just trying to put some numbers around the platform here?
Well, they really is come down to two different types of businesses, our Enterprise business, which is the one that is more mature, which I just spoke to. That one has been growing at a nice clip, I think over the last year, we increased the number of customers by 50% growth and we added nine new customers. And that’s the type of businesses is these are kind of bigger customers and it’s – you’re not going to bring in, hundreds of new customers, but it’s been growing what any 10%, 20% or so. The Lightspeed is the one, where we’re building out the micro fulfillment centers, and again, it’s, we want to see how these things do, but, early indications are, very exciting for us. We have the three opened, we started with Atlanta, we opened up Vegas, we opened up Chicago and we’re already expanding Atlanta.
So it tells us that as these things are opened and we get everything we need in there to properly function and operate as a 3PL that the volume will pick up and that’s pretty much what’s happening right now. We started off a little bit slow in Chicago and Vegas, as we work out kind of the kinks, and now we’re seeing the volume really starting to pick up in both of those new fulfillment centers and we’re on track to open up another one in the West Coast, another one in Texas and hopefully one in Florida as well. So, we’re really excited about Samir, but we don’t want to put up a number in terms of how big we think it can get. This year is really about kind of building out sort of our regional locations. And at the same time, we’re still building out our technology. We are really excited about the technology. That’s going to allow us to have a proper warehouse management system to connect to the likes of Shopify so that we can attract more and more direct customers who are selling online. And that’s the idea.
Okay. And I guess my second question is around revenue growth and sort of the cadence of revenue growth over the next several quarters. If we think about, the second quarter and kind of the second half especially in particular occupancy, maybe you can provide some color on that.
Yes. Samir, the second quarter, you will see very strong results in the industry, right? We had – we have an easier comp, but we’re also going into it, in a very strong place. Obviously occupancy at all time highs, rates moving quicker than we had expected just a few months ago, when you saw January rents were up, Street rates up 9%. And then we saw February grow 15%, and March 27%, April more than that. So they’re accelerating. So, we would expect very strong numbers Q2. We have increased what we expect in the second half of the year, but we still expect to return to normal seasonality. So we would, we’re going to be a little bit higher in the mid summer than we expected, but we do expect that by the end of the year, we would be occupied on slightly lower than we were last year. Again, rates climbed from July to December last year, very unusual. And so did occupancy are held relatively flat. We do expect to return to normal seasonality in the second half of the year.
Thank you.
Thank you. Our next question today is coming from Jeff Spector at Bank of America. Your line is live.
Good morning. My first question is a follow-up on the last discussion on the revenue guidance bump given. It was so significant, what gave you the comfort to boost it so much right now, maybe you could tie that into comments around traffic or, things you’re seeing on the ground. And maybe second part would be any regional breakouts you can discuss.
Sure. Jeff, I think there’s a few things we’ve seen over the last few months that gave us the confidence to bump guidance. Number one was we have seen no evidence of elevated move-outs. We expected at some point, we’d start to see those elevated move outs. And obviously our move outs for the quarter down 5% year-over-year, which was pre pandemic were comparable. So it was a straight comparable and I move out to just remain lower than expected. And our move-ins are pretty much acting as they wouldn’t have normal season. So we had thought potentially, we had pulled some demand forward to the fourth quarter of last year. We’re not seeing that we’re seeing a very similar busy season start that we saw in any other year prior to 2020. We’re also seeing the length of stay of our customers.
Move-out customers have still been with us about 16 months, the average for those that have move-out. But the customers that moved in for the first nine months of last year are staying median length of stay is a month and a half longer than our typical median, which is usually about six and a half months. They’re now staying – those that stayed eight months. So that’s given us more comfort. And then the faster acceleration in rates, like I said, we were up 9% in January by March, we’re up 27% in April, significantly higher than that rates are going in the right direction.
Yes. And I think Jeff it’s Joe, just on the regional comment, again, we’re seeing strong demand coast-to-coast, but, some of our biggest markets we’re excited about, Miami for the first quarter top 10 market asking rates are up 40%, Houston they’re up 25%, Chicago up 22%, New York up 20%, Texas in general. We’re quite pleased about what we’re seeing there. Occupancy is improving in places like Dallas, which was really one of our, concerned market. Occupancy was up 600 basis points to 96.5%. Houston was up 260 basis points to 93% and Austin doing great with up 540 basis points to 95%. So obviously our Texas markets are doing very well excited about that. We’re excited about being there and obviously our Florida markets as well, doing as well.
Thank you. My one follow-up would be is – are you seeing less than expected pressure from supply that was delivered, let’s say last year or the prior year or even this year?
Yes. Last year was a quiet year with of the delays. I think it was 46 stores that came on. And that’s, I think there was about 200 a year before that, and this year we’re seeing maybe a 100 stores come out, so still less than 2019 volume. And when we look at what’s out there, I mean, it’s not an exact science, but when we look out to 2022, we think it might be just about another a 100 or so, so still a couple of good years in terms of new supply coming on in the foreseeable future, there’s a lot of things for that. I mean, obviously the cost of construction has gone through the roof. The money that is required to make some land acquisitions and get it properly zoned is increasingly more difficult. There might be other uses of that land, such as multifamily as there’s a shortage of housing. So, I think there’s a lot of good things to point at that might keep new supply, at bay for 18 months or two years.
Thank you.
You’re welcome.
Thank you. Our next question today is coming from Juan Sanabria at BMO. Your line is live.
Hi. Good morning. I was just hoping you could speak a little bit about the acquisition market and any interest in stuff that’s outside of the U.S. maybe Canada. Are you seeing any opportunities there? And if you could talk to maybe valuation differences between the U.S. and Canada, if that’s an interesting opportunity for you?
Hey, Juan. Well, we obviously operate up there. We manage a few stores for a good partner of ours, who we’ve known for many years in the U.S. COVID, is kind of put a little bit of a pause on our acquisition efforts up there. But we are getting to the point where we’d like to get our brand. Right now, we manage a third party brand. We would like to do a couple of deals up there and get our brand up there buy into the read or do some JVs. It’s just that the board has been closed. Canada’s hurting right now. The strength of the self-storage business in the U.S., it’s not comparable in Canada. They’ve had much more of a lockdown, especially the GTA. And it’s a bit of a tale of two cities to be quite honest.
So, but yes, we do like that market. We think there will be opportunities. We’ve basically learned how to operate under there – up there. So if the right opportunity comes across, we will be able to participate and hopefully get up there. But for now we’re very busy in the U.S. extremely busy, probably the most acquisition deals that we’re looking at in many years. And the pipeline looks very good. Obviously we’re not going to win everything, but we’re in a very good position, I think, to continue to find good deals, both lease up and stabilize and, all of which will support our expectations to grow FFO.
Thanks. And then just on the occupancy front, have you continued to build occupancy into April from kind of the period ended in March? Or has – is it stapled?
I believe our occupancy. Go ahead.
It’s grown another 50 basis points, so it was 94.5 at the end of April, which is 480 basis points more than last April. So, we continue to see some nice traction on the occupancy front.
Okay. And then just the last one for me, just on Jeff’s question about supply, what kind of visibility do you have on 2022 at this point? I guess what’s the earliest that a new wave of supply do you think could start given the situation today?
It is a little bit difficult, what we try to do, we have our own ways of managing new supply. We look at what’s in construction and we keep an eye on that, and it’s a pretty good sources out there that we also leverage. But in terms of what’s coming up, 18 months later, we look at what’s in planning and we kind of take a ballpark percentage of what we think is in planning. And we’ll take a percentage of that, which actually goes into construction. So based on what we’re seeing and based on kind of our construction pipeline and where it is, we think, right now, 2022 is showing roughly a 100 stores in our markets that would come on in 2022. And I think I might’ve said 2020, it was more like 170 stores in 2019. So still, far less than what we saw in 2019.
Thank you.
Thank you. Our next question today is coming from David Bolliger [ph] at Green Street. Your line is live.
Good morning. Thanks for taking my question. Just flipping back to Warehouse Anywhere, understanding it’s a pretty small portion of the business right now, but just looking towards the future. To what extent do you see that business line beneficial from sort of a customer diversification standpoint, perhaps in some markets that might face some supply moving forward in some of the out years?
Yes. David it’s a great question. I mean, what we really like about Warehouse Anywhere is allowing us to attract more commercial clients. We love commercial clients. The industry is roughly 18%, 20% of a stores is business-related, that could be landscapers and so forth. We’d like to grow that. We’re probably around 25% and given our focus on commercial, we’d like to get that up, north of 25%, because, commercial customers are, as you point with new supply coming on there. It’s a great new addition to a store they’re less seasonal, right? So it could take out some of the seasonality of your business. They tend to rent more than one space and Warehouse Anywhere customers rent more than one market. Obviously we have technology we can upsell, so we can attract fee income.
So, we’re really excited about it, but we have a solution, to attract commercial customers. We can’t just say, hey, we’re going to get some more of these e-commerce customers to use our stores. You really need to know how to attract them. And that’s what we’re doing with the micro fulfillment centers. We’re providing them the services. They need to look at self storage as an actual partner for their inventory needs. They need, the technology for their product to be put into a storage unit to be controlled, to pick, pack and ship it, and we have all of that. We have contracts with shipping companies to pick up packages and deliver them in an MSA. And that’s what really is differentiating us. We are competing with companies out there that are trying to do what we’re doing.
Companies like ShipMonk and Flexi and Shipup, all of these companies are out there. They don’t have is real estate, which is what we have. They have technology, which is what we’re developing, but they’re raising a lot of money. I think ShipMonk has raised nearly $300 million, Flowspace raised about $50 million, Flexi raised about $140 million. And that’s a we’re competing with, and we’ve got a great solution. And I think we’re making really good progress on that. This is a really good year for us to build out that technology, we’re learning a lot with our partner deliver and we’re going to get better at it. And we’re going to have a nice business, I believe.
Got it. Thank you. And then maybe just shifting gears back to cap rates, just looking nationally, as you look at deals, have you seen more relative compression in primary or secondary markets over the last quarter or two? And where do you see that moving forward?
Yes, I mean, for sure. I mean, obviously there’s a lot of demand for storage assets as some new players, private equity, and it’s getting more competitive out there, especially for marketed deals. But we are seeing, we’re seeing some new construction in the secondary markets being planned. You’ll see in the performance in some of those markets do really well. I mean, some of our secondary markets are doing extremely well. The question is how long will they do well? So, if you’re a developer, you may not want to take that risk. So that might keep some new supply at bay for a while, but we are seeing the cap rates and they’re justified. I mean, they’re – the rates are up, occupancy is up. So some of the cap rate compression is not just in the primary markets, it’s also in secondary markets.
Great. Thank you.
Thank you. [Operator Instructions] Our next question today is coming from Smedes Rose at Citi. Your line is live.
Hi, thanks. I just had one question around, if you’ve heard anything from private owners around any reactions to potential changes in the tax structure with the doubling of capital gains, the elimination at the step up, potential elimination of 1031 exchange. I mean, is that percolating at all with owners? And are you having conversations around that or is it kind of too soon?
I think it’s still too soon Smedes. I’m sure it’s on everybody’s mind. But I think, if hopefully, we feel confident that the 1031 would remain with our ability to offer upgrade units would be a nice vehicle to defer tax. But it’s still, I think a little bit too soon. But with that said, we are seeing a lot more product come to the market and that may just be a factor of where cap rates are today. So, and I think we’re also getting to the point of maybe some generational change with some stores that you’re starting to see some portfolios come up, it was a big one on the market as you know, the one we were able to acquire in Florida, it was family run. So, some of that is coming into play. So again, we think there’s going to be more opportunities to grow and this is our expertise. We’re very good at acquiring. We’ve never been busier and we think we’re going to continue to get more than our fair share of deals.
Okay. Thank you. That was it for me. Appreciate it.
Thanks, Smedes.
Thank you. Our next question today is coming from Ki Bin Kim at Truist Securities. Your line is live.
Hey, thanks. Good morning. Just a couple of follow-ups here. On the Warehouse Anywhere now been at 300 locations. Are those 300 going into your portfolio or is that going into the network that you’re managing?
So – hi, Ki Bin. Yes, we have a 12,000 store network. It’s still little too early to say, we’re plotting it out. We think at least 30% will be in our stores. And then the ones that are in our partner stores, we would get all the income from the inventory manager piece. And then we get a premium or a piece of the rental income. And so it’s really fantastic. That’s why the solution is so unique. It’s not just our 900 plus store as soon to be 1000 stores hopefully this year. It’s our 12,000 plus network that is really attractive for customers looking for solutions for their logistics and inventory needs in every single market, which is what we can provide.
Okay. And the rent that you would get from those stores, if they stayed in your network, your own portfolio that would go into the same-store revenue. And because you said the rents are at 10% premium and I’m discussing the near term it might be additive to your growth as those come online?
Yes. Ki Bin, the rents does go to the same-store if that store is in the same-store pool, obviously some of those will go into some of the same-store some will go into our managed stores. But the piece that is relative to same-store pool would be in same-store rent, just the rent, not the fees, the fees don’t go through that but the rental income goes to the store.
Gotcha. And the last question so one of your bigger competitors committed to doing a lot more development on a long-term basis. And I would assume that’s not isolated to them. I mean, the business has been fantastic and market rents are up a lot. You marched through two recessions, pretty much unscathed the industry. Do you think that might prompt more development to come online? Where does abatement and it’s just maybe short-lived?
Well, again, I think we feel pretty good about the new supply that that’s going to come on this year and into 2022. But obviously if the sector continues to grow demand, and if we’re successful in tracking more commercial and e-commerce business, we’re probably going to need more demand. Obviously we’re able to do some nice expansions which are doing very well for us. We do $60 million to $70 million of those. If something came along, we would have the capability to develop ourselves. Not that we have a program, but we do have the know-how, so we will watch it, Ki Bin, but I think for the next 18 months or so I don’t fear a new wave that takes time right and things kind of started to slow down in 2018, 2019. It’s going to take some developers a little bit of time to find what decide – make those decisions, what they should do given where the cost of construction is. And then also if they’re going to do some budgets, what rates do they use? Are they use rates where it’s you seen today, or is it going to come back to earth? Nobody really knows. So, I think that’s good news for any concerns about a wave of new supply in the immediate 18 months or so.
And to the extent you can talk about it, when you underwrite deals for acquisitions, how do you guys mentally think about what type of rent to model in especially 2022, do you assume, like moderate growth in 2022 when you’re doing underwriting on average or something more mean reverting?
Yes. I mean, it’s a great question. Obviously, we take a lot of things into consideration. We look at what’s – what’s being built in that near that store. We look at where rates are. We are putting up – we’re not getting too aggressive here. Everything we actually underwrote it’s actually doing better than what we underwrote. So these cap rates that I mentioned, I think they’re pretty good because, we’re seeing some nice growth for obvious reasons this year. But we still have a you know, conservative angle to it and we’re being careful, but again, these stores we’re finding, the majority of them are off market and which is great.
I think what you have to be careful of is when you’re bidding on a marketed deal and that’s where it can get aggressive, and you could probably make some mistakes. If you’re assuming that this occupancy or these rates will remain for the next three years, you got to be a little bit more reasonable when you’re looking at those deals, because it’s getting place as you know, some of these deals out there.
Okay. Thank you.
Thank you. We have no further questions in the queue at this time. Mr. Saffire, do you have any closing remarks you’d like to finish with?
I just say thank you all for dialing in this morning. And the world opening up, hopefully we’ll get to see each other face to face sometime this year. Thank you.
Thank you, ladies and gentlemen. This does conclude today’s event. You may disconnect at this time. And have a wonderful day. Thank you for your participation.