© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to the Life Storage Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, David Dodman, Vice President of Investor Relations and Strategic Planning. Please proceed.
Good morning, and welcome to our third quarter 2018 earnings conference call. Leading today’s discussion will be David Rogers, 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 re-queue with any follow-up questions thereafter.
At this time, I'll turn the call over to Dave.
Thanks David, and welcome everyone to our call.
Last night, we reported adjusted FFO of $1.45 per share for the third quarter driven by strong same-store topline growth and well-controlled operating expense especially Internet Advertising. While we admittedly benefitted from a somewhat easy comp over last year's 3Q, we are seeing some headwinds in Houston as we pass the anniversary of Hurricane Harvey. All in all but we are pleased with our results.
Touching on few macro industry topics, additional supplies continue to dominate the discussion. Life Storage markets that are most impacted with new deliveries are San Antonio, Dallas, Charlotte, Miami, Raleigh, Phoenix and Austin. Markets with less of a new construction issue but still managing through a substantial absorption process are the Chicago and Houston markets. In evaluating the dynamics of Chicago and Houston, the supply impact was maybe not so severe as we anticipated given the quantity of space that has come online since 2015.
We believe this to could be a function of the strength of our brand, the quality of our stores and great customer service. For the most part, demand remains pretty solid across most markets and while attracting new customers is a competitive game, really competitive in some markets, existing customers continue to absorb rate increases. We've been able to keep our operating expenses well under control so far this year, but we expect advertising and property maintenance costs to exert pressure on margins in 2019.
Property taxes of course continue to relentless march on. Construction cost of oil price, concrete, steel, labor have risen considerably in the past 18 months, and while not overly impactful to us
these do print the ROI on our expansions and enhancements program. I’ll list just a few of our company’s highlights this quarter aside from the strong property operating results.
We announced the rollout of our Rent Now initiative in early August, it’s in place at almost 300 stores as of today and we just had our 1,000 customer take advantage of the program. Rent Now is expected to be in place in all 750 of our stores by mid-2019.
We announced major enhancements to our Warehouse Anywhere storage and inventory management solution by expanding our product suite and offering added optionality for our B2B and B2C customers.
We picked two stores during the quarter and another in early October for a total of $27 million. As of today we’re in contract to purchase five more properties at a further cost of about 50 million. All eight of these are in our key core markets Atlanta, Boston Metro, the Greater New York Metro area, Orlando and Sacramento. We’re still in a due diligence process on some of these and can’t guarantee we will be able to finalize them all, but these are the type of properties we like to put the Life Storage flag on. They’re larger, they’re newer and they’re in higher growth markets.
We also brought on three properties via joint venture investments one each in Phoenix, Miami and Brooklyn again adding Class A third-generation stores to markets we like. On the third-party management front, we’ve experienced strong momentum and we’re realizing some significant wins. This morning we’re putting Life Storage signs on 42 high-quality stabilized stores in the Southeast primarily in Louisiana as we take over management for a significant new client. We’re very excited about this transaction and it puts our [3 PM] count at over 200 properties a 110% increase since just year-end 2016.
Andy will speak more on this, but yesterday we entered into an agreement with our commercial bank group to extend the duration and improve the terms of our corporate line of credit facility. Our asset recycling program is underway with the sale of some of our non-core properties expected by year-end to do a joint venture in which we expect to own a majority interest and then manage the properties going forward. We have a second group of assets that will be put on the market soon.
Obtaining ever higher level of operating scale, customer satisfaction and the application of data and technology, our key drivers to profitable growth an NAV accretion. These occupy much of our focus and the targets we’re hitting this year bear this out. We don't plan on letting up.
Andy, you may please go ahead.
Thanks Dave.
As Dave mentioned, last night we reported adjusted quarterly funds from operations of $1.45 per share, a 4.3% increase compared to adjusted FFO of $1.39 per share for the same period in 2017. These results were above the high-end of our forecast driven by better than expected same-store performance, as well as better than expected growth at our recent facilities.
As a result of this strong performance, we have again increased our annual guidance which I’ll review shortly. Our same-store performance is highlighted by NOI growth of 4.2% achieved by both improved revenue growth and controlled expenses.
Specifically same-store revenue rose 3.6% over the same period last year driven by improvements in rental rates. Same-store realized rates per square foot increased 3.9% over the third quarter of 2017.
Third quarter same-store expenses outside the property taxes were well controlled increasing only 4/10 of 1%. The strengthening of the Life Storage brand on the web over the last year allowed us to again reduce quarterly Internet - versus the third quarter of 2017.
In addition, our store and construction teams are doing a great job improving efficiencies at stores and this is showing up on the expense side. As we anticipated, the only significant expense pressure we are seeing is from property taxes which increased 6.2% in the third quarter.
In addition to the improved performance of our same-store portfolio, we continue to see consistent growth trends as the properties that we purchased and certificate of occupancy are very early in lease of stage. With quarterly occupancy of 85.7%, these leases stores still have significant room to grow.
Our overall third quarter revenue increase also reflected a 10.6% increase in other operating income driven by an increase in Warehouse Anywhere sales. Our balance sheet remains solid and we continue to have significant flexibility to capitalize on attractive investment opportunities when they meet our return requirements.
At quarter end we get cash on hand of $13.3 million and $371 million available on our line of credit. Earlier this week we closed on refinancing of our bank credit facility, which included extending the maturity and the revolver to March of 2023 and reducing the credit spreads by 15 basis points and our current investment grade rating. Subsequent to this opportunistic refinancing, we have no debt maturities until June of 2020.
Our debt service coverage ratio was a healthy 4.9x and our net debt to recurring EBITDA ratio improved to 5.2x. Regarding guidance, we are encouraged by the better than expected results in Q3 and have raised our guidance on annual same-store revenue ranges, as well as our annual FFO guidance. Specifically, we significantly increased the midpoint of both our 2018 same-store revenue and NOI growth guidance and the midpoint of 2018 FFO per share by $0.04.
As we discussed last quarter, we had a tougher comp in Q4 as a result of new supply and the return to normal trends in Houston and certain Florida markets that benefited from hurricane driven demand in late 2017.
In addition, our Q4 2017 Internet marketing spend was reduced substantially as the Life Storage brand relevancy improved, eliminating much of the comparative benefit we have seen year-to-date.
Same-store revenue growth for Q4 is expected to be in the 2.5% to 3% range and for the year revenue growth is now expected at 3% to 3.5%. Our expense guidance was also reduced slightly.
As a result of these changes to our same-store guidance, we are forecasting adjusted funds from operations for the full year 2018 to be between $5.46 and $5.52 per share and between $1.35 and $1.39 per share for the fourth quarter of 2018.
With that operator, we can open the call for questions.
[Operator Instructions] Our first question comes from the line of Juan Sanabria with Bank of America/Merrill Lynch. Please proceed with your question.
I was just hoping you guys could give us a little bit of color on same-store revenues on a go-forward basis and how we should think about occupancy particularly with the comps from the hurricanes which you mentioned maybe if you could give us how results are trending to date on a year-over-year basis, as well as the benefit of expansion, it seems like it's been 40 basis points at or about for last couple of quarters, if that should continue into the foreseeable future?
Revenue, I think if you look at our guidance we are looking at tougher comp Q4 with the Houston and Florida markets in 2017, Q4 were very strong from the hurricane driven demand. Now this year obviously worked as a tough comp so we would expect some deceleration that really showed up in the occupancy at the end of the quarter, we were down 110 basis points. 70 basis points of that was just related to the hurricane affected store.
So other stores were down 40 basis points, we expect that to continue, the easier comp from an occupancy point of view should come late in Q1 when those people moved out. But occupancy wise, I would expect more than 1% - more than 110% in the fourth quarter just because of tough comp revenue as we have shown 2.5% to 3% in Q4. No, we're not giving any guidance for next year but I would expect Q1 to be a tough comp just from the hurricane zone.
And then the benefit that you're getting from the renovations and expansion, should that continue that roughly 40 basis points or how sustainable is that or when does that comp become an issue if at all?
Yes, it's not a perfect calculation but 30 to 40 basis points is probably a reasonable estimate of how it's affecting the revenue. I wouldn't expect any changes. We have a great team down there working on those expansion, they're keeping the flow of them pretty consistent.
So in total point where we stop doing those, I would think the effect would be very similar because as we take stores we take buildings out of services, we knock those down, we lose the revenue on them and then it's usually six months to a year later before we replace that revenue with something new. So the net effect by taking some out of service put some on been about 30 to 40 basis points and I would expect it to continue.
And then just one more from me on the supply side, can you give us any sense on a three year rolling basis how the store exposure percentage of total stores changes as you go from 2018 into 2019 if there's any increase/decrease if it stays the same and by what amount?
I think for the most part and balance across the portfolio it doesn't change very much. As we mentioned in the prepared remarks, Chicago and Houston are absorbing now, they don't seem at least as far as we could tell they have a lot of new supply coming out of the base, Dallas and some of the other markets we mentioned are still getting deliveries but by the end of 2019 they'll be pretty much having any absorption phase.
We probably expect some to go to other markets for secondarily a suburban, so I think on balance it's pretty consistent 2018, 2019 into 2020, it's just market specific roles as far as what's coming, what's being absorbed with past.
Our next question comes from the line of Jeremy Metz with BMO Capital Markets. Please proceed with your question.
Andy, I just wanted to go back, you talked about Houston and Florida impacts on the Q4 revenue, you mentioned that they'll carry into the first quarter next year. But just as we look past that should we almost think about that as sort of a trough here for revenue?
It's tough to say right now but definitely in those markets I would think that would be the trough.
And then switching gears you mentioned the joint venture sale progress. Sounds like that first slug will be done by year end. Just wondering if you can give a little more color on that in terms of the number of assets that's in there that first pocket there what sort of proceeds that you guys were talking about? Are you going to use those requisitions and then any sort of goal posts on the yield would be helpful?
Yes, I think we're in the plus or minus tight range around $100 million expected by year end. The proceeds are already spoken for by our properties we have on the contract. I think in terms of accretive dilution, I think we're in a good spot. I think the assets we're selling were hopefully we were expecting the key as third party managed in a joint venture.
So part of that joint venture and the fee income should basically take away the dilution you would ordinarily expect by selling stabilized properties and core versus the road type properties we get.
So, I think just in terms of what you're asking, $100 million we expect by year end to be slightly accretive on that pool. It's a fairly large second pool that will be taken to market very soon. We hope to have the same end results to get them into a joint venture or at least third party management basis, take the proceeds into core plus stores in markets that we already have our presence or maybe even after a new one. So, I think for 2019 we would expect again that much or more with the same accretive effect.
Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.
I just wanted to follow-up on the comments around occupancy. You mentioned that it's down on a seasonal basis also year-over-year given the hurricane comps, and I suppose some new capacity entering the system, some new supply growth. Any indication where you might see occupancy portfolio wide sort of bottom out during the off peak season, and then when does occupancy typically trough in your portfolio?
Yes, the trough and occupancy Todd, is normally at the end of January to mid-February is the low point. So we don't see any changes in that. That's what we would expect. The new supply obviously is a piece of that drop in occupancy but majority of it right now is occurring because of the hurricane driven demand from the prior year.
Okay. Any thoughts around where you might see that bottom out in late January?
I would hope would it be already bit down now, I would hope that would not increase much. This time of the year we sort of pay for occupancy so the pressurized street rates comes back a little bit, the incentives go up little bit. So I think at this level we're willing to play for occupancy and we will. So I would not expect much of a dip from through the prior year through the upcoming solar season.
And then switching over to existing customer rent increases and sort of the program there. You've mentioned previously that the company wasn't really increasing rents and place customers above street rates in the portfolio. And I think now you've changed that policy and strategy. It seems like there would be some upside there just based on sort of the stickiness of the customer. And I was just curious given the churn and seasoning of the portfolio if you have a sense of how upside that can present and if you can sort of quantify and help us understand what that opportunity looks like over the next year or two?
Todd we do believe there's more upside so this year we did grow above street rate. We did have a limit on how much above street rate we would go. So we have the ability to push more above street rates and maybe a little bit higher above that. We're also this year we did a lot of testing of wearing the curve meaning how late after they move in do we given their first increase. We like some of the results we see. So we have more potential there next year.
Impact on revenue, it's difficult to point to that. It's anywhere from 1% to 2% right now. I would expect probably very similar next year.
So when you say 1% to 2%, what exactly does that mean so the current yield on an average asset you think that there is a 100 or 200 basis points upside as you thought of change the strategy and the rent mix for some of these customers?
To be clear Todd, 1% to 2% is what I mean the impact we think and it's not a perfect science remember because there is move out and how you replace those customers and what free rents offer. There is no exact way to calculate the impact of rent increases, but of our rent growth we believe 1% to 2% this year came from that and we think we can get a similar number from that next year.
Our next question comes from the line of Smedes Rose with Citi. Please proceed with your question.
I wanted to ask you first thought just as you look at acquisition opportunities if you're seeing any change in pricing or cap rates. If you would expect to see which is it seems like with an upward bias in interest rates now maybe that should be playing out in the private market and just kind of how you're thinking about external growth now?
Yes, we wish these - but overall the sight the rises and rates have really eventually trickled through but it takes several quarters. There is also - so we haven't seen any change at all in asking prices and what owners expect sort of exacerbating that is the fact that there's a lot of private capital winding in the space that they just did it’s a remarkable the pressure on prices.
So from last quarter to the quarter before to last summer there has been almost no perceptible change in cap rates for the property especially stabilize. That's probably the best parameter because a lot of the variables have taken on the equation when you're valuing them.
But we have seen as is evidenced by some of the purchases we made this quarter by the pipeline that we have. We Joe Saffire pretty much realigned our team and house here over the past year. So we got sort of a coordinative effort with our third-party management solicitation team and our acquisitions team finding properties we had good relationships with a lot of people over 25 plus years. We were able to bring in one of our third-party manage source, we have another one on the contract that we’re bringing in.
So they are there but the pencil has to be sharp, it has to fit I think that’s really where it make sense as we get some synergy by buying properties and markets where we already have a presence. We're doing a lot of one-off now which our history has shown that pretty much when we take a property that hasn't been exposed the platforms. We can get the return up there but it’s not and no there has been short answer is no acceptable move.
We don’t really expect one for the next few quarters even if interest rates were to grow by 30 to 60, 70 basis points I don't think you're going to see that much of a change in pricing in the near future.
And I guess I just wanted to ask you, could you maybe just talk about what you saw in the third quarter on street rates versus insight rates and maybe what you're seeing thus far in the fourth quarter?
Sure Smedes. Street rates in 3Q were up about 1.6% increase over the prior year. Free rent was up as well so it was up from 2.8% of revenue in 2017 Q3 to 2.9% in this quarter down from last quarter's 3% but 2.9 this quarter so the net effect is we’re about 50 basis about 0.5% up effective rent very similar so far in the fourth quarter.
Our next question comes from the line of Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed with your question.
Can we go back to the existing customer rate increase program? It seems like to me that change in the philosophy of that program to increase the number of tenants getting it and the level of increase as well contributing 100 to 200 basis points of same-store revenue growth is pretty important. Because my question is basically can you recap how many more customers are getting this increase, what the level of increase is versus what it has been. And when does that benefit actually starts to wind down, I know it can take awhile because if the season customer enter that program, but when should we expect that to tail off.
The number of customers year-to-date have - the increase we put out were 149,000 versus last year 63,000 so obviously we done a lot more. We’ve moved in the curve where we do them, pushing customers above street rate has changed how many we do so that has changed. The actual percentage increase we’re receiving has not changed much. Last Q3 was 9.8%, this Q3 9.6% so still pretty significant increases going to those current customers.
Move out rates been relatively consistent other than the ones we do earlier in the curve which we would it to be higher because how most of customers are I can say half of customers was done by six and half months. So when we put them earlier in the curve you’re hitting customers that were moved out anyway. So the move-out rate did tickup year-over-year but we attribute that to where did those in curve.
So when should this benefit tailoff?
No, I think we’ve got some more strategic items we can do on that side of the ledger next year. So we’re comfortable that we've got some good tailwinds pushing us into next year.
And just last question, how much money are you making in absolute dollar terms roughly in the warehouse anywhere program in the third quarter. Just want to get a sense of where that is and where it can grow to?
I have the annualized numbers in front of me so when you look at warehouse anywhere there is two pieces right it’s the rental of the space and it’s about 4 million a year the rental of the space that those customers are in. And then on top of that, the fees we receive from our customers whether they be in the retail side or on the equipment side those that service the ATM those fees that we get are about 7.5 million on an annualized basis. So, about 11.5 million total revenue coming from all assets of that program including the rent part.
And how do you balance that versus taking some inventory out from just regular retail customer?
Well I think what it does keep it add pressure to the system in terms of we got more occupancy, we got good customers that we know we can raise rates. So we like commercial customers first and the less things we have, the more we can charge for those who want to get in.
So it’s not a justification of taking it away from retailers basically filling our spaces and making the incremental rates or no spaces more valuable.
[Operator Instructions] Our next question comes from the line of Jonathan Hughes with Raymond James. Please proceed with your question.
So growth in the third-party management platform has been very strong. Can you just talk about why the owner of the 42 properties platform left one of your competitors whether strictly pricing related maybe performance related? Just trying to understand the switch which is great for you and a vote of confidence in your platform.
We've known the owner for a long time. Our acquisition guys kept in touch with him. So we know the markets, we've been down there since probably 1996. So, I think we have - when we put it up for bid, we were happy to go down Joe, took a team down there and we sort of meshed culturally in a very good way.
So I think this is one way we were happy to get a pool of 42 established and stabilized stores and because we know the market, because we like the properties, because we got on the same page with the owner knowing what his objectives are, I think it was a good fit. He's a quality operator, he's got good stores, he's going to be demanding - all of our third party clients are demanding and we we’ll stick around the same page, and we've got a good cultural fit.
I think you're going to Jonathan, more of this. And these assets are big dollar value, they're a big part of most of our clients network. Given the fact now that are options for them to go to, they're going to say dude, I've had it here for four or five years and not so much on this type but a lot of times on the development deals you see a fair amount of impatience.
And when these things were penciled out and put paper and then put into the ground, you don't have very high expectations. We tried and I heard the other guys on their call say the same thing, we try to temper the expectations, a lot of the low hanging fruits been taken. But yes, these guys are anxious to see their stores do very well and playing a football coach or a hockey coach.
You do so much for so long and they say you know what it's not going to wait like the way I thought, times change. I got to say I don't know that we're all that different but nonetheless the owners are wanting to see responses there, they want to see results and they want to see a culture fit.
So we were able to go in with some of the things that we've done right now our B2B, those kinds of things, I think that's how we won this particular deal and our experience in the market. But it's a competitive game and it's going to be that way I think going forward more and more.
And are you scheduled to operate the eight properties that are under construction that are going to open over the next year-and-half or so?
Yes, that's part of the - I think the overall plan. It would be crazy not to, but yes.
And then just one more but looking at the 22 stores that are in leased up and outside of the same store bucket, I know your threshold for adding is the second year after reaching 80% occupancy and when I look at that I only see three that are not there. So, fair to assume that 19 of those 22 are going to be added to the pool next year?
No, I don't think you would see that many. You'd probably see half. We have - not only do they have to be in stable occupancy above 80 but they got to be at stable rates, Jonathan. So we haven't made that decision yet but we'll look back at the date and see what was stable. But we'll be clear with you on which ones we're going to add come February when we give our guidance for next year.
And then actually just one more, can you just stalk about the sequential revenue growth acceleration in Atlanta? As a market that's seen a lot of new supply. Just curious if there's strength there maybe that new supply is not in your sub markets but the acceleration from last quarter just caught my eye. Thank you.
Atlanta was - it's a strong market for us. It had a tough comp last quarter and it had an unusual benefit of some cell tower income. So there was an unusual item in the cell tower income in 2017, so Q2 2018 actually was negative in Atlanta. But Atlanta has been strong for us, we've got good stores in Atlanta. Yes, there's a lot of competition but our stores are not as effective as others in that market. I think we're over 4% revenue growth there with strong market and we like that market.
Our next question comes from the line of Eric Frankel with Green Street Advisors. Please proceed with your question.
Just one quick question. In your guidance can you just explain why your fourth quarter NOI growth range is a little bit tighter than your annual NOI growth range - wider rather?
Yes, I think the wideness happens because of the property taxes. In one quarter when you can have the swing in property taxes which lot of our Florida and Texas markets solidify in the fourth quarter, and we adjust those estimates, that's what swings and could swing the NOI wide. So it's really - you can really easily go from high end to low end of that property tax range.
Right, I'm sorry. I was just - I got my terminology mixed up. I mean your annual guidance is wider than your fourth quarter guidance? I would think it would be the opposite.
No, I think it's the same explanation. It's the way of property taxes can come in and we try to put a range out there to give people an idea where the midpoint would be, it's tough to always keep that guidance tight. You want to give yourself some flexibility.
Right. But if it's three quarters of your full year guidance really baked in, I'm not sure why that number is little bit more predictable?
I think it's just again looking at the midpoint and under range round there. I think that will size to it.
Our next question comes from the line of Samir Khanal with Evercore. Please proceed with your question.
I'm sorry if I missed this but on the noncore properties that I think you're putting into the JV with the two pools, did you say anything about sort of pricing or maybe where pricing is coming in versus maybe your expectations?
It is good or better than we expected. We had some pretty good data points with couple of the big deal that came out of what we actually - I think our buyer considers perhaps lesser quality than we even put out. So we got a little bit of a portfolio premium, we had - so they're definitely market priced and the core properties but they're market price. So they came in where we had hoped.
Our next question comes from the line of Omotayo Okusanya with Jeffries. Please proceed with your question.
Just had a quick question around [COD] deals. Just given all the concern about rise in supply constructions in these things of that sort, are you underwriting COD deals any differently now versus say 6 to 12 months ago?
Well, we're hardly underwriting any. And note that we have been up and running of it. So we kind of got out of the COD game a couple years ago just because the spreads were unattractive to us. It seemed like they came in and they pay - we were getting the value we were able to create was less than the valuation put on the lease up part of the equation, just on tenable amount.
So some of them stuff we're buying though that we have under contract is in 30% to 60% lease up stage. One of those is one that we're managing but I do think it's tougher, and know you're seeing construction costs go up, you're seeing lease up times go up, you're seeing rents being more competitive.
So, basically very crystal and obviously of all deals out there obviously but we have not been too enticed by any of them. We'll take them out as management of course but as far as buying them given the risk-reward ratio and the amount that is all we just really want to keep to themselves it's gotten away from us a bit.
This is our final question. Ladies and gentlemen we have reached the end. And I would like to turn the call back over to Mr. David Rogers for closing remarks.
All right. Well thank you everyone for your call. We look forward to seeing you in San Francisco next week. I honestly don't think we're going to have much different story to tell but we will look forward to seeing you next week. And safe travel, see you there. Thank you.
This does concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.