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Good day, ladies and gentlemen, and welcome to the Life Storage Second Quarter Earnings Release Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host, Alex Gress. Sir, the floor is yours.
Good morning, and thank you for joining us today for the second quarter 2022 earnings conference call of Life Storage. Leading today's discussion will be Joe Saffire; Chief Executive Officer of Life Storage; and Andy Gregoire, 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 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 statements because of the changing market conditions or other circumstances after the date of this conference call.
Additional information regarding these factors can be found in the company's public SEC filings.
In addition to the press release distributed yesterday, we furnished our supplemental package with additional detail on our 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 two questions to allow time for everyone who wishes to participate. Please re-queue with any follow-up questions thereafter.
At this time, I'll turn the call over to Joe.
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 executes every day to help us achieve these outstanding results. Demand for self-storage has remained strong, allowing for the continuation of strong pricing power. Asking rates remained at record levels through the quarter, helping us maintain 21 straight months of 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 second 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 one year ago.
In regards to external growth, we continue to add more scale to our existing markets through acquisitions and further growth to our third-party management platform.
In the second quarter, we acquired 13 wholly owned stores for $262.6 million, while also adding 17 stores to our third-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 remained strong with an additional $258 million under contract.
Including joint ventures, our third-party management portfolio totaled 385 stores at the end of the second quarter, growing 13% over last year, and it continues to be a source of off-market acquisition opportunities.
Year-to-date through July, six of our wholly owned acquisitions came from our third-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 million to $1 billion.
And with that, I will hand it over to Andy to provide further details on the quarter and our guidance.
Thanks, Joe. Last night, we reported quarterly core funds from operations of $1.65 per share for the second 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.
Second quarter same store revenue increased 18.9% over the second quarter 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 first quarter's average occupancy. 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 achieved rates per square foot.
Same store realized rents per square foot were up 20% year-over-year in the second 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 8 weighted average increases above historical norms.
We also experienced another quarter of positive rent roll out 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 second quarter.
Same store operating expenses grew only 4.3% for the quarter versus last year's 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%, resulting in year-over-year growth in same store NOI of 25.4% for the second quarter.
This marks our fifth 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. Specifically, we drew $168 million from our credit facility and issued an additional $7.8 million of common stock via our ATM program during the quarter.
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 million to $1.25 billion through a syndicate of 10 banks that included two 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 forma basis, accounting for the new credit facility at quarter end, we had significant capital available with $947 million available on our credit facility.
Our balance sheet remains strong with our net-debt-to-recurring EBITDA ratio at 4.6x at quarter end, down from 5.0x one year ago.
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 million becomes due, and our pro forma 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% and 14.25%, which will be driven by improved rental rates. 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 Instructions] Your first question for today is coming from Smedes Rose. Please announce your affiliation, then pose your questions.
It's Smedes from Citi. I wanted to ask you just a couple of questions. It's no surprise that the guidance would look for 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?
On an 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. So 250 basis points is typically what we would see prior to the pandemic, so that's what we've 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.
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? And is that included in your guidance at all or?
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 they -- when we feel better about those markets, we expect to go back to the public markets with a tenurs, it's typically what we do.
Your next question for today is coming from Keegan Carl at Berenberg Capital Markets.
Maybe just one more on occupancy. Obviously, it was strong in the quarter. Are you guys seeing any changes in customer behavior relative to your expectations this time of the year?
Not really, Keegan. I think it's just a little bit of kind of back to a little bit of normalization. We had elevated auctions 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.
Got it. And then you guys raised the acquisition guidance again. Just kind of curious how much competition are you guys seeing maybe, particularly, in the SunBelt built at the last quarter? And then are you seeing any change in cap rates at all?
Yes, it's an interesting time. I think there's a bit of a pause over the last few months in terms of sellers coming out with product given that, as Andy 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 retraded. We're still active. 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 is obviously a lot higher than last year.
And just on cap rates, are you seeing any material movement?
I wouldn't say material, but I think you can read into it that there's less deal flow because of the spread between the bulk 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. So sellers are really never needing to sell, but if the price is there, they will. And right now, I think it's just a bit of what we saw two or three 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 may be 25, 30, 40 basis points higher than maybe six months ago?
Your next question for today is coming from Juan Sanabria at BMO Capital Markets.
Just wanted to go back to the guidance question and just get a sense of what the exit is assumed for the fourth quarter for same store revenue? And if you have any thoughts about '23 as it relates 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?
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 has 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 -- 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.
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 in 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.
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 less. 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 and 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.
Your next question for today is coming from Samir Khanal at Evercore ISI.
I guess I just wanted to get your view on kind of the potential slowdown in the housing market with mortgage rates being higher here. And 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 into '23?
Samir, obviously, storage is used for a number of reasons and people who -- there has definitely been a slowdown in the sale of homes, but that's sometimes a good thing for storage and people decide not to buy a house with the second bedroom or a third bedroom or fourth bedroom and will turn to storage instead, same with apartments, with inflation, people may have to deal with being in a place that maybe isn't the perfect size for them and, again, turn to storage.
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. So demand is very strong. And pre-COVID, maybe we wouldn't see as much demand. But today, there are so many more uses and needs for self-storage that we are benefiting from, and we don't see that slowing down.
And I guess my second question is around on 2023 because that's where sort of the investor focus is today. And I know you haven't provided guidance, but maybe you 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 three months ago? Just trying to kind of get your sense of how to think about '23 at this point?
I think if -- when you look at where we're going to end the year, it's stronger than we thought three 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. But right now, I would say we're feeling a little better than we were 3 months ago on how 2023 was up.
Your next question is coming from Jeff Spector at Bank of America.
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 signpost of weakness based on regions?
No, I wouldn't say, Jeff, that there's any real regional difference. Obviously, consumers are feeling it in all 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. 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. People have jobs and they're able to make their payments. So other than a little late fees rising to kind of getting closer to pre-COVID levels, we don't really see anything else.
And then just 1 question on kind of on the transition from '22 into '23. I remember '21 into '22, 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. Your guidance, let's say, ending '22 into '23 versus historically? I assume that occupancy in particular is looking to be stronger than historically, but please confirm.
Yes, Jeff. We would think that occupancy in our guidance would end the year above historical norms to be in the 91% to 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, 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.
[Operator Instructions] Your next question for today is coming from Ki Bin Kim at Truist.
Just wanted to go back to your comments about street rate. Did you give color on what it was during the quarter and how that progressed into July year-over-year?
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 a historical level.
So I think July is still one in the top 4 months of rates -- highest rates. So still very strong, slightly below last year, which was incredible.
So slightly negative in July. And I think earlier you mentioned, for the remainder of the year, do you think it can be zero to negative 5%. Did I look at that right?
Yes, that's what we embedded in guidance, correct.
Yes. And on ECRI, 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, proratably 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.
Yes, Ki Bin, obviously, our revenue management team does a great job, our ECRI strategy continue to evolve. It's -- compared to three years ago, it would be black and white, completely different. 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 it was the way we did it last year.
I think typically, we'd 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. 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 smarter decisions. And I think this time next year, we probably are going to be doing something even more different than today. So we'll continue to work to do better, and we're really proud of what our revenue management team has been doing. They've been embracing different technologies and algorithms and data. And I think the results show that they're doing a really good job.
And is it fair to say that there was a more pronounced contribution through ECRI than even last year?
Yes. Our average customer increase was higher than it was last year. So we've been aggressive and continue to be aggressive.
Your next question for today is coming from Michael Mueller at JPMorgan.
I 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 seen any changes in terms of the level of customer pushbacks to those increases?
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, the more pushback you're going to get. And 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 up. 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 will continue to be so.
Got it. So it sounds like you were 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.
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.
Your next question is coming from Spenser Allaway at Green Street.
Just wondering if you could provide a little bit of color on development starts or just some color on supply in your markets?
Spenser, again, really nothing new from last quarter's call. We still are feeling okay about the new supply that's coming on. We haven't seen a significant rise in construction or planning. And I think there's still some headwinds with the development sector and the price of materials and the timing to get entitlements and obviously, interest rates are now going up. I mean definitely, there is new development. There's -- 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.
Okay. Great. And then maybe if we just go back to the last question, but maybe just ask it slightly different. So if you guys still have positive rent roll and your peers don't, moving in, obviously, to the third quarter, do you feel like you have outsized pricing power moving forward in the back half of the year?
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. 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.
There are no further questions in queue. I would like to turn the floor back over to Joe for closing remarks.
Well, 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.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.