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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Life Storage, Inc. Second Quarter 2020 Earnings 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 of Investor Relations. Please go ahead.
Good morning, and welcome to our Second Quarter 2020 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. [Operator Instructions]
At this time, I'll turn the call over to Joe.
Good morning. And thank you for joining us. I hope that you and your families are all safe and healthy. Although the second quarter’s results were not as we planned earlier this year, I can't say that I feel more confident today as compared to late March and early April. As an essential business, we were extremely proactive ensuring our stores remained open and our employees and customers felt safe conducting business during these difficult times.
Our strategic focus on enabling customers to self-serve with Rent Now has been a key differentiator for us during the past couple of years. And I believe that is evident in our results.
Move-ins during April, the height of the stay-at-home orders across the country, were only down 15% year-over-year, which compares favorably across our sector. And from a financial perspective, same-store payroll and benefits were down 7.3% for the quarter, our seventh straight quarter of year-over-year decline. Rent Now hasn't been the only reason for that trend, as we have had several efficiency initiatives underway to improve our store operating margin, but it has clearly been an important contributor. Rent Now, seems to have settled in at around 30% to 35% of rentals after spiking to 50% in April.
It is clear to us that customers continue to embrace this new platform and will continue to do so at a much higher rate than pre-COVID days. I am also pleased that self-storage is once again proving to be resilient in a very difficult macroeconomic environment. We have remained hopeful that there would be pent-up demand and July activity was indeed strong, with same-store move-ins up 16.5% for the month.
Furthermore, in June, we resumed both our auction processes and our ECRI program, after pausing both early in the second quarter. And both of those initiatives have accelerated through July with only limited exceptions in certain states. Since asking rate pressures remains, occupancy is an important lever for us and we grew same-store occupancy 170 basis points year-over-year to 93% as of the end of July. Even after adjusting for auctions that could not be performed, we estimate occupancy as of July 31, to be at 92.3% which is 100 basis points over July 2019.
Considering we were 50 basis points lower in year-over-year occupancy as of March 31 of this year, we have many more customers on our platform relative to both the start of the pandemic and also this time last year, which will serve us well going forward. This is an outstanding accomplishment by our team.
And lastly, although much more is clearer today as compared to spring when we pulled our 2020 guidance, uncertainties remain and continue to make it difficult to restore reliable and precise guidance. With that said, based on what we know today with regards to the recent momentum, current market trends, and demonstrated cost control, we anticipate that the second half of 2020 will be stronger than the same period last year as it relates to adjusted funds from operations per share.
And now I'll turn it over to Andy to walk through the details of the quarter.
Thanks, Joe. Last night, we reported adjusted quarterly funds from operations of $1.42 per share for the second quarter, equal to the same period last year, despite the challenging macroeconomic environment and COVID related disruption. Same-store revenue declined 2% while same-store NOI was lower by 2.5%. Revenue was impacted by lower move-ins, lower street rates, higher free rent, and significant curtailment of a rent increases to existing customers.
We believe the resiliency of our platforms is evidenced in the fact that same-store move-ins were only lower by 3.4% for the quarter, despite broad stay-at-home orders across the country for much of that time. Partially offsetting that lower same-store revenue, was our third straight comparative quarter of declining same-store operating expenses, which were down 1.2% overall, and lower about by 5.3%, excluding property taxes. Once again, every expense line item was lower except for property taxes and digital marketing.
As Joe mentioned, our efficiency initiatives remained firmly on track, despite the COVID related market disruption. Same-store property taxes were up 5.8% and same-store total marketing increased 27.6% for the quarter compared to the same period last year.
Importantly, our balance sheet and liquidity remained strong. At quarter end, we had cash on hand of $9.5 million and $341.9 million available on our line of credit. We also have an accordion feature available on our line that would add an additional $300 million of available credit, should we exercise that option.
Our net debt-to-recurring EBITDA ratio was six times and our debt service coverage was a healthy 4.4 times at June 30. We have no debt maturities until August of 2021 with $100 million due and then not again until 2023 with roughly $165 million due. Our average debt maturity was 6.3 years and the percent of our total debt that is fixed rate was 92% at June 30.
We continue to monitor receivables very closely. And although our accounts receivable over 90 days remains elevated since the onset of the pandemic, we collected 99% of rental income in the second quarter of 2020 as compared to pre-COVID-19 levels. We have resumed auction activity in the vast majority of our markets, and believe that we have adequately reserved for elevating accounts receivable. As a result, bad debt expense for the quarter was approximately $1 million higher than historical levels, which has reduced net revenues as presented in our quarterly financial statements.
We remain extremely diligent managing our liquidity. Our capital commitments are almost completely discretionary. And we only make such commitments when we are comfortable with funding availability and our ability to maintain a strong balance sheet. We believe we have adequate liquidity to manage through a sustained period of disruption.
And with that operator, we will now open the call for questions.
And we will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from [inaudible] with Bank of America. Please go ahead.
Hi, everyone. Thanks for taking the questions today. So I just have a few quick questions about the new tiered pricing system. Do you guys have more data around now what the preference from customers is for the certain tiers? And then is there certain like, rule of thumb, for the pricing? Like in terms of maybe standard is more in line with street rates and premium is 20% to 30% more, something like that?
Yeah. Hi, [El], it’s Joe. Thanks for the question. It's still too early to really provide any sort of details as to customer behavior. But I think the real goal of it was to provide a better offering to our customers, we saw that Rent Now was picking up. And this really takes it to the next level. We ultimately believe this is what customers want, they want more choice, they want to be able to choose and have a little bit more control over the type of space they're getting. So we don't yet have that detail. But we watch it closely and we’re pretty much adjusting some of the pricing differentials between the three options, as we learn more about customer behavior and what their preferences are.
But you're right, the standard rate is pretty much the street rate, and we'll give a slight discount, five plus percent for a value spot, if it's a spot we're trying to move, that's been hard to rent. And then obviously, there's a premium spot which, which we believe is great, because there's a lot of customers who will just take the convenient spot. You know, those who were getting a space because of their business, pharmaceutical rep and so forth, and they're not as price conscious and they want that great location.
So thanks for the question. But right now, it's still a little early to kind of give you any sort of idea as to the customer behaviors.
Got it. Okay, thank you. And then just quickly on the units up for auction, are there certain markets that those are concentrated in?
Yeah, there are. There's New York, California, --
Nevada.
Nevada, Austin, Texas, there's some certain areas where we, the auction process could not begin. So those are the ones that are driving it.
Yeah. And we have started the process for some of those, I think New York and California, we've gotten the okay, to go ahead and start the process which can be quite lengthy. But at least it's a good sign that you know, we're able to start moving on those markets as well.
Got it. Thank you, guys.
And the next question will come from Smedes Rose with Citi. Please go ahead.
Smedes, can hear you? Operator?
Sorry, Smedes, your line might be muted. Hearing no response, moving to the next question, and that will come from Todd Thomas with Key Bank capital markets. Please go ahead.
Hi, thanks. Good morning, Andy. Thanks for the detail on the bad debt expense in the quarter. Are you expecting any additional reserves in the third quarter or should that normalize going forward?
You know Todd; there will be additional reserves, if you think about those customers that should have been auctioned, right? They should have been auctioned at the end of June or July. They're still with us in August. So another month's rent post, so we'll reserve for that but no additional pre-current month reserve. So we reserved everything through June 30 that we thought was uncollectible. Most of it did relate to those greater than in 90 days. The under 60 days, has been pretty typical, gone back to typical levels. But the above 90 days, those spaces that should have been auctioned, that will continue to grow, so we'll have to continue to grow the reserve. So in effect, we're not recording that revenue each month, that person each additional month they're with us that they're not paying us, we just reserve that additional month.
Okay, so just so I understand the $1 million of above average reserves that you recorded in the second quarter, will that -- that'll continue to increase in the third quarter or it'll actually begin to normalize more in the third quarter?
It should normalize as we go through all the auctions process. Like we had normal auctions in June, we start those, we did a great job. Our teams did get those done. July, we did auctions, typical. So we've got to get through some of these states all the way through October. So California and New York will go through October, most of the other states should be done by September 30. So if the auctions are completed, then that customer should be gone and the reserving needed for that customer should go away as well.
Okay, got it. And then I was wondering if you can comment at all on August. You know, we're a full weekend here, as the pent-up demand that you saw that you described in July. Has that continued in the August and can you comment on August activity at all?
Yeah, it's, July actually, obviously was a great month, it started to slow a little bit towards the end of July but actually, early part of August, we're seeing the calls come in, the volume. So, yeah, it’s been -- I still believe there's some -- some demand out there, pent up demand, better than last year, maybe not the extent of July. Early July was incredible, the July 4 weekend but it's still up. We're very pleased, the call volume, the call centers been very busy, the web traffic. So yeah, we're seeing some nice continued momentum, pent up demand. I think there’s, Todd, I think there's just a lot of new demand because of COVID, new reasons to use storages a lot. People doing remodeling of their homes, kitchens because there was cooking in our home offices, you try to make room. So, there's a lot of interesting things going on. And that might be a longer customer as well. It’ll be interesting to see how long this new demand sticks.
Okay, and August has typically been, I think a net move-out, month.
Yeah.
You know, are you under the impression that this -- this peak leasing season could be a little bit more elongated and that we might see a little bit of a stronger, I guess, like seasonal leasing environment for an extended period of time?
Yeah. It’s interesting, Todd. You know, and that’s why it’s making it so difficult to try to provide -- reinstate guidance. There is so many unknowns, things happening this time of year are so unusual, unchartered waters, you know? We're doing rate increases more so in August than we had in previous years. So, it's really hard to gauge. Like, the college students, are they going back to school, are they not going back to school, are they vacating? So there's a lot of moving parts, which is making it hard to gauge what will happen.
But I think, just given the last few months, the move-outs will probably be better than last year and move-ins hopefully will also be better. So, net-net, positive but again, it's hard to predict. But we're not complaining, we're in a good spot with demand coming back and in all of the -- the all of the ones who've reported, the occupancy looks good. So it's a -- it's a good sign for our sector.
Okay, thank you.
Thank you, Todd.
And the next question will come from Spenser Allaway with Green Street Advisors. Please go ahead.
Thank you. You mentioned in your prepared remarks, you've been able to accelerate rate increases in July. Can you just comment on how the magnitude of these increases compares to rates you would have been out, pre-COVID?
Yeah, so it's, we -- like I said in earlier question to Todd, it is unchartered waters. We are doing this rate increases at an unusual time of year. You typically want to do these when it's the beginning of the peak season and you're not so worried about the move-outs because the phones are ringing more but the demand has been strong. And obviously, we're doing our best to catch up on that lost revenue. I think we've, in terms of volume, I haven’t, you got it, Andy?
Yeah, I do. So Spenser in July, we did one and a half times what we did last July, for rent increase to existing customers. So volume wise, we did one and a half. Rate say, about the same rate, high 8%, just about 9% rate increase to that customer. But we did send out one and a half times the letters this July versus last July.
And I think, and for August as well, August, we did more volume in this year in August, more than two times the amount of volume in August as well and are already putting letters for September increases. So all three months, much higher than the last year. And so, I think hopefully we can we can achieve at least 85% of the volume that we did last year by the end of the third quarter.
Okay, great. Thanks for the color.
Thanks, Spenser.
And the next question will come from Smedes Rose with Citi. Please go ahead.
Hi, Smedes.
Hi, okay, sorry about that earlier, technical difficulty there.
Okay.
I was just hoping, maybe you could comment a little bit about what, if anything, you've seen on supply in your portfolio, if it's moved at all in terms of prior pre-COVID expectations? And sort of on that front as well, if you're seeing anything, any sort of changes on the potential acquisition side in terms of pricing, things becoming more interesting, or are people pretty -- holding pretty fast?
Yeah, thanks Smedes. So yeah, supply, we felt last year was the peak for our markets and our stores. Obviously our two largest markets, Chicago and Houston had probably the -- I think they were number 29 and 30, in the top 30 markets of new supply coming on, and that's what we've experienced. Taking the last 12 months from June 2019 to June 2020, we had about 65 stores open within a three-mile radius. That compares about 144 from 2018 to 2019. So that's encouraging.
And in fact, for the first part of this year, we were just talking about it, what’s open this year, probably because of COVID etc. We only have in our top 10 markets, maybe a dozen or so stores. So that bodes well for new supply. So we're encouraged by that, we felt coming into 2020 that we were in a good spot with new supply. Obviously, we're still, dealing with all the supply that's been built up over the last several years, but it is -- it is a good sign for us and you're starting to see some of the occupancy improve, and hopefully rates will now follow. So we're encouraged by that.
In terms of acquisitions, obviously things kind of quieted down during the, especially April and May, with uncertainty in the markets, uncertainty on how you are going to due diligence or so some deals that were being marketed were pulled. Sellers were not willing to sell or it’s quite difficult to, what's the new norm? And how do you -- how do you do your pro forma? I think it's going to start picking up again, I think there's a little bit more -- clearly there's a little bit more visibility into the sector and what's going on. Street rates may not be where they've being but I think activity should pick up.
We haven't seen any sort of distress sets, but distressed assets, the rate subside but we're in a great position to take advantage of any opportunities. So we'll see what happens but I would expect the second half of the year things to pick up.
Okay, thank you.
Thanks, Smedes.
[Operator Instructions] And this will -- we have a follow up question Todd Thomas KeyBanc Capital Markets. Please go ahead.
Okay.
Yeah, thanks. You mentioned the -- you've -- we've talked about the increase in leasing that you saw from students back in March. And you mentioned, you some of the uncertainty around schools. Would it be would it be, good or bad for self-storage for your customer space if the schools don't open? Do you start to see move-out activity from that or does that just lengthen their stay?
Yeah, it's like, it's already a longer stay than normal Todd. You know, it's a positive clearly when COVID was hitting, it was basic at that supply. It's not that significant, and they're smaller spaces. Typically for us, but to have that customer a little bit longer than normal, maybe even be eligible for a price increase. Not that that's something that we would focus on. But they could stay an extra month or two, it wouldn't hurt. Then again, they're smaller spaces which typically harder to rent anyway.
Okay, and then I don't know if you mentioned this at all, but can you talk about where move-in rates where throughout the quarter and in July and then with where rates are today what the spread is between move-out move-in rates for customers?
So Todd, our street rates in this quarter were down 18% on average. They started the quarter down like 19.5%, ended the quarter down 16.5% or so? July was down 13%, so it's moving in the right direction. We like the trend we’re seeing, even a little bit better in August, actually it moved into single digits but we’re still down. So we're in good shape which way rates are going.
And what about the spread relative to move-outs -- to customers moving out?
During the quarter, our rent roll down with 8.1%, meaning move-ins were paying 8.1% less than our move-outs, that improved to 5.5 or so percent in July, meaning down 5.5% in July. So, not significant but more roll down than we've seen historically.
Okay. And then, just one last question. Joe, I just -- the language that was put in the press release, and you talked about, the second half where you're expecting adjusted FFO growth to be above that of the second half of ’19. We're seeing trends improve but there's still a lot of uncertainty around the virus but also stimulus and fundamentals, which you've noted, sort of the elevated uncertainty, right. So I'm just curious if you can walk through that decision, and how confident you are in the outlook and whether there's something that you think that the investment community or the markets are missing a little bit, with LSI?
Yeah, obviously, Todd, we're making that statement based on how the economy is doing today. It doesn't take an account if there's a major second shelter in place or a pullback. I don't think that that could happen. But I think we'll see but it really takes a look at where we are today and what we know today. We know a lot more today than we did in our last earnings call. In our last earnings call, we didn't know where collections were going to be? Were they going to get continually worse? We didn't know if there's going to be any demand. There was a lot of uncertainty. We didn't know if we could do auctions. We didn't know if we could do rate increase.
So a lot of that we do know today, so we're trying to give some sort of goalposts in a way, even if it's just a floor as to what we should expect in the second half of the year. We finished July; we've got five more months to go. The start of August looks pretty good. So, we feel pretty confident to at least put that in there. We're putting rate increases in, we started those in June, we've done July, we've started August. So we have a view on where move-outs are going, again, there's some risk. We don't know, how move-outs will react this time of year, it's a different year, its uncharted waters. So it's difficult to give full guidance, because, we could see move-outs pick up.
And again, we're typically going into a slower part of the season. So it's a low risk there but we are doing our best to try to recapture some of that lost revenue. And then there is expense controls, we felt very comfortable with what we have budgeted for expenses. And it's gotten through the second quarter and through July, and we've done a very good job with expense control. And so that's a big part of where we feel we could end the year. So taking that all into consideration, we are trying to provide a little transparency to our investors. It's not full guidance, but it's a little something which we hope is appreciated.
And obviously if things continue to improve and at the end of the quarter, we're in a different position, we would try to reinstate. We just, we don't know, clearly the things are a little -- obviously a lot -- a lot better in terms of what we see compared to late March.
Okay, that's helpful. Thank you.
Thanks, Todd.
And the next question will come from Jon Petersen with Jefferies. Please go ahead.
Great, just a couple questions from me. So on the Rent Now business, I think you mentioned that it made up 50% of your leases in April, looks like it kind of pulled back a little bit as the quarter went on. But I guess I'm just trying to -- you guys have obviously been at the forefront of this contact list leasing before contact lease was a thing. Can you give us any more quantitative, I guess, understanding of how much of a differentiator that was for you in the second quarter? Whether it was higher rents or upselling or anything like that you've been able to do with that product?
Well listen, we are very proud of it. And thanks for the question. We’ve been -- we've had it launched for almost two years. And Jon and some, the team was comfortable with it. We weren't scrambling at the last minute to try to figure out how to promote contactless rentals, team restraints. So and many other storage providers did a great job of providing that sort of option for customers. But we wouldn’t rush to do it. We had our processes in place, we figured out our areas to improve over the last 18 months or so.
And then obviously, we fast forwarded and rolled out quicker than we expected the Rent Now 2.0, the value option of various spaces options. So we did a great job with that. Did it help us? Maybe, I think our -- obviously our move-ins in May, I think were leading in the sector. We did a great job. So maybe we got more than our fair share of move-ins. And our occupancy has really improved.
But I think that's been a part of it, the Rent Now, our close rate is improving. So there is a number of factors. It's not all Rent Now but clearly, I think it put us in a great position, as the phones are ringing and starting to re-ring to get more customers. And you saw our occupancy has improved through the end of July. Even without, even if we discount the auction piece of it where we can't do the auctions, our occupancy is so much better today than we had anticipated pre-COVID, for this year. So we're very pleased with that.
And I am very, very proud of the team and very proud of what we've done with Rent Now and we continue to look for ways to make it a better platform for our customers. So thanks for the question.
That's great. If I understand Rent Now 2.0 correctly, I think it's about, allowing customers to kind of choose their facility. And I mean, there's obviously an upsell component there, right? Be closer to the elevator?
Yeah.
Be wherever they want to be. I mean, can you give us a sense of what percent of customers, ended up choosing a higher price unit after initially signing up?
Yeah, Jon, the question was asked earlier, it is still early to try to provide sort of customer behaviors. It’s an unusual period of time even with COVID but no, we don't have it. I can't tell you that our customers are choosing all three options. And it's, obviously, it's going to be what's available because you may not have -- we may not have a value spot available; it's really going to depend on inventory. That's all fluid, the offering is.
So if there are no premium spaces, that option doesn't show up for the customers. But it's something we're monitoring and we'll continue to monitor it. And we'll adjust pricing, if needed, to see how it goes. But it's still early to say. But at least we're providing our customers, options. They're not just stuck with one particular unit where they don't know where it is. And like I said earlier, in particular, for those who want a premium space and are not price sensitive, they'll have that option.
Okay, all right. That's helpful and then just one last question. I think you guys mentioned kind of third-party management a little bit, but I guess how do you anticipate over the next few quarters that business changing, are there more opportunities? Are there less opportunities, given the COVID environment, the recession?
Yeah, we're -- we're very bullish on third party management. Obviously, the REITs do a great job of managing. It’s becoming more difficult for smaller operators to compete. Even things like right Rent Now and revenue management platforms or SEO experience, expertise and so forth. So it is getting harder and I think that will mean that more stabilized stores may turn to third party management, typically spend a lot of the new construction. Typically that's, 80-70, 70% to 80% of your new contracts, and that may shift.
Our pipeline has never been better, very excited about the rest of the year. We clearly have the visibility as to which stores will be coming online, the new construction piece. So, we're very optimistic about 2020. We’ll, for sure, hit our goal. And obviously, we’re -- our name is getting out there. Our performance has been stellar in terms of, that's what owners look at, how do you perform in the market? So we have that behind us and Rent Now has been a great marketing tool for us. So we feel very good about our platform and the prospects for the rest of the year and beyond.
Okay, that's great. All right, thanks.
Then the next question will come from Steve Sakwa with Evercore. Please go ahead.
Thanks, just two questions. And if you answered them, I apologize. On just Warehouse Anywhere, any kind of updates on that or any kind of new trends that you're seeing in that business as a result of the pandemic?
Yeah. Hi, Steve. Yeah, thanks for asking. We're -- we love getting business, obviously it's an important tool for us to capture that business customer. No one else has that. And we think with COVID, more and more businesses are going to be looking for more storage. So we're excited to have this tool. We did buy out our, as you may know, we had a minority, two partners in that business. We bought them out during the quarter, which we're very excited about. We own a 100% of the technology now, we're excited about that. So every dollar of investment that we put into it is for us. The pipeline is very good. COVID, kind of had some hiccups in trying to get the pilot programs conducted. So we're kind of delayed a couple months to what we expected this year, but we're very excited about it. And again, I think I think storage is going to continue to play a role in the last mile delivery and logistics. And with COVID I think it's even more so. So we're very excited that we own 100% of the business now, and look forward to growing it.
Could you just tell us what that buyout cost was of your partners? I assume it's not material, but any sense of dollar amounts?
Yeah, it was not material. $2 million is what the agreement was, and it was very amicable. There was an opportunity at the end of this year to have a formal process to buy them out. And we have a very great relationship with our partners. One is continuing on as an employee and a contributor to the business. And the other one who retired earlier this year is looking for ways to do, more work with us in accessing the network. So, I -- we’ve got a very good relationship with both the partners, and there was an opportunity for them to liquidate and for us, it's an opportunity to put it into third gear.
Okay, and then with, I guess, with the Rent Now 2.0. And I think you said about a third or so of the rentals are now kind of online, which is probably freeing up your managers and onsite folks to do other things. I know that payroll and benefits were down in the quarter, how do you just sort of think about, sort of onsite personnel and just what you need to spend and the amount of people at the sites. What sort of efficiencies do you get by moving a third and possibly higher, over time?
Yeah, I think that's one of the silver linings of COVID, Steve is -- is we right now has ended up, it was it was kind of slowly creeping up from 8% to 9% to 10%, maybe to 11%, 12% by the end of the year, and to jump to 30%, 35% and we think that's going to be the new nor. It is incredible. And, it definitely is helping our payroll. We're going to continue to look for ways to leverage that. Obviously, you have store team's spending now a third less time at the counter. That's a lot of time. If you think about how much time one rental takes at the counter, could be 30-45 minutes to an hour, by the time you're there showing where the space is, etc. So it's a lot of time. We've already found ways to reduce costs early on and we'll continue to do so. So we're constantly looking at ways to make the stores more efficient to reduce costs. And this is a big part of it. So obviously we're not looking to go 100% without any person at the stores. There's a lot that needs to be done but we're excited about it. And we'll continue to look at ways to leverage that.
Right, thanks. That's it for me.
Thanks, Steve.
And this will conclude the question-and-answer session. I'd like to turn the conference back over to Joe for any closing remarks.
Well, everyone, thank you so much for joining the call this morning. I continue to wish everyone safe keeping and be well, enjoy the rest of the summer. And we look forward to talking again soon. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.