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Good morning. And welcome to the Life Storage, Inc. Third Quarter 2020 Earnings Call. [Operator Instructions]
I would now like to turn the conference over to Dave Dodman, Senior Vice President, Investor Relations and Strategic Planning. Please go ahead.
Good morning, and welcome to our third 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 our call. I hope that you and your families are all safe and healthy.
I am pleased to report third quarter results that are very strong. You may recall that I was cautiously optimistic on our last earnings call, based upon what we were experiencing in June and July customer trends compared to March and April. Demand remained strong throughout the quarter, as once again, our sector has proven to be resilient during challenging economic times. I remain optimistic as we look to close out 2020.
With regards to some specifics from the quarter. First, customer demand has been very strong in recent months, which has led to record third quarter same-store occupancy for Life Storage. Move-ins were up 11% in the quarter, while move-outs were down 7.7%. Quarter end occupancy of 93.2% was 290 basis points higher year-over-year, considering our occupancy was 50 basis points below -- sorry, lower year-over-year as of March 31. We have done an incredible job adding customers to our platform during these unprecedented times. I believe our industry-leading online rental platform, Rent Now, has been a key contributor to this performance.
Secondly, street rates continue to trend in the positive direction. In fact, move-in rates in October were almost 3% higher than move-out rates, a significant improvement from the 9.5% rent roll down we saw in April.
Thirdly, we continue to aggressively work our acquisition pipeline and quickly put to use the proceeds from our $400 million bond deal. We already invested roughly $420 million of net cash in store acquisitions for the second year in a row. And that does not include another almost $85 million that we are currently -- that we currently have under contract but yet to close.
Fourth, our third-party portfolio, similarly, has shown great momentum and growth. Owners continue to be drawn to our brand, our sector-leading performance and our innovative tech platforms, Warehouse Anywhere and Rent Now. We onboarded 30 more stores this quarter, almost half of which were already opened and at various stages of lease-up upon transition to Life Storage.
And lastly, Warehouse Anywhere had one of its best quarters. Despite the pandemic, we completed several successful pilots in the quarter, leading to 5 new enterprise customers. Also, we have partnered with Deliverr to expand our e-commerce product solution into 2 new markets. We remain excited by our differentiated business and last mile strategy.
I'll now 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 $1.52 per share for the third quarter, a 4.1% year-over-year increase. Same-store revenue turned positive compared to the second quarter results, having increased 1.2% year-over-year, while same-store NOI was 40 basis points higher.
Revenue performance was driven by a 230 basis point increase in average occupancy, partially offset by a 2.4% decline in realized rental rates. Once again -- and we once again had another great quarter of expense control. Excluding property taxes, same-store property operating expenses were up only 60 basis points, our 11th straight quarter of less than 1% growth year-over-year. Other than property taxes and digital marketing, every major property expense line item was again lower this quarter than the same period last year, led by our eighth straight quarter of lower same-store payroll and benefits growth. These same-store efficiencies were offset by a 6.4% increase in property taxes and 27.7% growth in Internet marketing.
Importantly, our balance sheet remains strong. We supported our acquisition activity and liquidity position with a highly oversubscribed $400 million 10-year senior unsecured note offering at 2.2%. And issued $134 million of common stock via our continuous equity offering program. We used a portion of the proceeds to pay off $100 million term note that was due in August 2021, and to repay the balance outstanding on our line of credit. We will take a $4 million charge in the fourth quarter related to the early repayment of the August 2021 note.
At quarter end, our $500 million line of credit was fully available, and we have an accordion feature that would add an additional $300 million of available credit, should we exercise that option. Our net debt to recurring EBITDA ratio was 5.8x, and our debt service coverage was a healthy 4.3x at September 30. We have no significant debt maturities until April of 2024, with $175 million due. Our average debt maturity is now over 7 years.
We continue to monitor customer collections and are pleased with the return to pre-COVID levels. We have resumed auctions in almost all markets and would expect minimal impact on occupancy in future quarters.
With that, operator, we will now open the call for questions.
[Operator Instructions] Our first question from Juan Sanabria with BMO Capital Market.
Hopefully, my kids won't be screaming in the background in a couple of minutes here. Just on the payroll, you guys have done a fantastic job for several quarters now. Where do you expect that to go? And how much further can you squeeze that lemon to continue to maintain those costs? And what's the most recent driver of kind of negative declines that you've been able to post?
Juan, we're having a tough time hearing you.
Yes. We think that there is something going on with our conference speaker, Juan. If you can just give us a minute?
Sure.
You might have to call in from another phone. Give us two seconds. You can hear us okay, though?
I can hear you perfectly.
Juan, it's somewhat getting a little better. Maybe just if you can just shorten the question a little bit, we can try to understand what it was, at least you can hear us.
Sure. Confidence in the ability to continue to control payroll expenses. And what's driving the negative post you've had that's super impressive.
Yes. I think Juan, we've obviously done a great job in controlling that payroll line. It has to do with right now, that technology investment we made. We still think we have room to run there. Obviously, with Rent Now over 30% of our move-ins, that's higher than we had expected during the year. So there's additional changes we can make going forward to continue to control that line, but it does get tougher. We knew it would in the second half of this year, and you saw that down -- it's over -- down over 2% for the quarter, but that's actually not down as much as it's been in previous quarters. So it's a traffic buffer, but we still believe there's room in that line item.
Great. And then just on the vacates, can you give us any sense of how October has trended relative to history? Is it still kind of high single digits down? And any thoughts or expectations in how that could trend going forward? Or what's been the driver for below average vacates to date?
Yes. The lack of vacates, I think, when we look at October, they were up a little bit. They were up, I think, actually in the same stores, but over 700 more move-outs than last year same store. So it was up a little bit in October in the move-outs, but our move-ins were up over 7% for the month of October. So October still looks good. Obviously, the auction process does drive some of those move-outs. And our in-place strategy in place -- increasing our current customers' rate does drive some move outs. So we do expect that to return to normal, but it's been very surprising for the whole pandemic that the move-outs have not been there. Our customers are paying. They're paying timely. So it has been a surprise, but we do expect it will return to normal probably in the next few quarters.
And our next question will come from Todd Thomas with KeyBanc Capital Markets.
Hopefully, you can hear me a little bit better.
Yes. We just switched phones. Go ahead.
All right. Great. So Joe, in terms of acquisitions, there's been a flurry of activity here in the last few weeks. Some of it's, I guess, been in the works for months, maybe pre-COVID. You said you have $85 million under contract. Should we expect the pace of investments to remain elevated? Is there more activity to come? Or do you think that we were sort of clearing the backlog a bit and maybe the pace slows down heading into '21?
Well, it's a great question, Todd, because obviously, you're right. Things did kind of shut down in the second quarter. We had a pretty good pipeline coming into the year. We obviously gave some early forecast when we did the annual guidance. We felt it was going to be a good year. We're really pleased that we've been able to get through our pipeline. Obviously, the debt markets help better than pre-COVID. So things worked out in our favor. I do believe, I think it's going to continue. I think there's a lot of appetite for our space and from new players as well.
And I also think from a standpoint of smaller privately owned stores, as you know, it's getting harder for them to compete. We're starting to see that with our third-party managed portfolio. We're seeing more existing stores than in prior years. So there may be more interest to sell. So we're -- we've got a great team. We make a lot of phone calls. We are very proactive. We try to do most of our deals off-market, if possible. But I do not -- I think it's going to continue. I think you'll see more opportunities for acquisitions in 2021.
Okay. And then in terms of funding, for these acquisitions, you have obviously the undrawn revolver. But do you need to come back to the equity markets to fund investments? How should we think about your funding for these? And also where -- how you're maintaining leverage with this pace of acquisitions?
Yes. I mean we typically like to fund our acquisitions 50-50. We have had our ATM, been able to use that this year. And obviously, we had a great response to our bond offering. So right now, we're in a good spot with what we got to do in our pipeline. I think we'll be okay with the rest of the year. And we'll have to look at the pipeline next year and if there's any larger transactions, it just depends. But we do keep our leverage in mind, and we'll have to raise equity as needed. But I think -- I don't know if you have anything to add?
Yes. I think we have some good capacities both, Todd, on the ATM. So we will continue to use that to fund a portion of the acquisitions. And like Joe said, the debt markets are very wide open for us. So I think we're in good shape. And even the preferred may be something we look at -- or might be something we look at the fund portion.
Okay. Andy, can you just remind us what your sort of long-term leverage target is?
So when we look at debt-to-recurring EBITDA, we like to keep it under 6%. So we'll keep in the mid-5s to low 6s is usually we play in that range.
And our next question will come from Alua Askarbek with Bank of America.
So can you guys talk a little bit more about the Warehouse Anywhere program and talk about the pilot results? And why you chose Las Vegas and Chicago as your preliminary sites for this new program with Deliverr?
Sure. Alua, if you take a step back, our Warehouse Anywhere has different products, right? We have the 11,000 store network. We provide just storage management for customers who just need storage and they don't need technology. That's probably been our more mature business. In that case, we provide convenience for larger companies like pharmaceuticals, who need spaces all over the country, and they can come to us and we can provide them 1 invoice. Even if we don't have a store in a certain location, we have a partner in our network who may have it.
And then we'll add our enterprise solution, which is the inventory tracking piece where we charge customers for our RFID chandelier that we put into the unit. And that's really done well, very well. That's really supports like medical device companies, field service technicians, companies that need to service ATMs, they need to have parts nearby the ATMs and get access to them within an hour or so. That business has been growing as well. Actually, we had a very good quarter for that. I think one of the best ever in terms of new customers. We had 4 or 5 new customers that finish their pilot.
So that's very encouraging because that, again, is premium rent and then we get the fee income because they're using our chandelier technology to manage their inventory. And then we also provide courier services. And actually, we had a record year -- a record quarter for courier services, where the medical parts need to be delivered to the hospitals. We can provide that. So that business has been going very well for us.
In fact, I think we're creating demand in all of this business for the storage business. We're creating new demand for businesses who probably never would have thought of using a self-storage unit to support their last mile and field service needs.
The Deliverr piece is the newer piece. That's our Lightspeed product. It's still somewhat in development. And that really is playing into the growing e-commerce on demand delivery. That is very exciting. That's where I feel e-commerce, last mile and self-storage are really in the right spot to be -- to play a part in this growing business. There's a lot of companies that are focused on it, tech-enabled fulfillment companies and Deliverr is one of the leaders in that space. And in fact, they called us. We've been thinking about doing micro fulfillment. We actually have one in Atlanta, that's been up and running for a while now. We process about 300, 350 packages a day, and they're delivered in the Atlanta area and elsewhere. And it's helped us learn a lot about that business.
With Deliverr, we're going -- we started discussions in the summer, and we'll have Vegas and Chicago up and running for the holiday season. In fact, I think Vegas is getting stocked next week, and it's exciting. There's rent being paid, and then we get fees for the pick, pack and ship. And in some cases, if we have customers like in our Atlanta cases, we actually make some part of the delivery, the mailing and shipping.
So we're excited about it. Again, it's taking our stores, renting down to businesses and generating more fees and more income off it. Those 2 stores with Deliverr will probably be a pilot. And we'll see how it goes. And really the locations depends on Deliverr and where they need to optimize for their clients. So we're excited about it. We're obviously differentiated from probably every other storage company here. And we're excited about it.
I think next year, we'll see how it goes with how many micro fulfillment centers we can build-out, but we can do them quickly. It's 5,000, 8,000 square feet. And we'll see where it goes with Deliverr. But I would expect it would go up. I'm feeling really confident about how we're going to do in the next month or 2.
Great. And just kind of looking at the retail side and the customers who come just for the self storage. Has that been an impact for them? Like those fulfillment centers, are they separate from the other storage units? Is it noticeable for the customers who come just for the storage?
No. Right now, if you go to any storage facility, you're going to see UPS trucks, you're going to see pharmaceutical reps, you're going to see landscapers. There's a lot of commerce that goes on at any storage facility at any company. So it's nothing unusual. What we do here is it's a great way to use up some space. We just knocked down some walls and put together some units to come up with 5,000 square feet. In these 2 cases, they were recently expanded, and we had the space available. So obviously, it leased up right away. So there was no inconvenience for any customers. And that's kind of how we want to look at it.
Again, if you fill up 5% of your store with this type of company, and we can generate fees off of it, kind of gives a little bit more pricing power for the rest of the store. So again, I think we're creating demand for the industry. There's been a lot of supply that's come on. We're focused on business. We've always been focused on business. And this Deliverr partnership is just 1 piece of our warehouse offering. It's the e-commerce last mile delivery and we still have a little bit more work to do in development, but we're excited about it, and we're a player in this space. I want investors to realize that if they invest in Life Storage, some of that is in the tech-enabled fulfillment space.
Our next question comes from Ki Bin Kim with Truist.
Just sticking with that previous topic on micro fulfillment centers, are these latch ons to existing properties? Or are you building a ground up? And any kind of parameters you can provide on what that economics look like?
No. These are existing facilities, Ki Bin, it would be great to kind of plan these out. If we have more time where we're doing expansions and enhancements where we're building up space. And we can -- it's just simply taking some space and knocking down some walls and making a little bit more room, 5,000 square feet, 5,000, 6,000 square feet, is really all you need, maybe 8,000 square feet in some areas. So it's working with our existing portfolio.
So far, we haven't had need to move customers. I don't think we will. We do a lot of expansion enhancements. A lot of our third-party owners have vacant space. So it's kind of a perfect fit. If we had to scale up quickly, it might be a little bit different story. But if we can go slow, I think it's going to be not a problem at all. Probably a little bit too soon for economics. But if you know that area, there are some industry standard pricing per product delivered per product packed. And it's a different way we calculate the rents by cubic square feet. And we monitor that throughout the 30-day average, and there's an average price.
But net-net, Ki Bin, it's generating more fees and if we did nothing in there. And I think as we look at this model and look at these pilots, we'll have more information probably in the next quarter. But again, it's generating more revenue from our stores. If you look at our merchandise, you look at tenant insurance, you look at third-party management, you look at our inventory tracking, these are all ways to generate more revenue fromour stores. And this is a pretty -- another way to do it. We've been already collecting courier fees for our enterprise solution when product is delivered to hospitals and so forth. And the same is probably going to happen with Lightspeed.
Okay. And do you have a sense of where your street rates are versus the private competitors across your portfolio, against private competitors?
Yes. Ki Bin, we track the bigger players when we're looking at street rates, and we're right in line. I mean we -- some people talk about the change from year-to-year. But if you look at our street rates compared to the big players, you'll see that we're all pretty tight. Once in a while, you'll see 1 player move this way or that way. But we're pretty tight when you look at the pool of different spaces at each store.
Okay. And I'm not sure if I missed it, but did you guys give a quick update on street rates in the quarter and October?
Street rates for October, Ki Bin, I don't think we talked about it, but I think Joe might have mentioned in his prepared remarks. The street rates were up 2% in October, net effective up 3%. Free rent has been coming down. So net effective is moving in the right direction for street rate, but sheet rates turned positive in October, net effective a little better than street rates.
[Operator Instructions] Our next question will come from Steve Sakwa with Evercore ISI.
Joe, I was wondering if you could talk a little bit about supply. I know it's a very micro specific question on your assets. But what are you seeing from projects that were maybe in the pipeline from yourself or third parties? And do you see a higher cancellation rate or perhaps slower pace to put those new projects into the pipeline?
Steve, we aren't seeing cancellations. Obviously, things were delayed during the tough months in the summer and the spring. But we've grown our third-party managed platform, probably one of our best quarters. If you look at it from a standpoint of -- we had a large win about 18 months ago, 2 years ago around this time. So all -- half of those were construction. So they've opened. We haven't had any cancellations. So I don't believe anyone's canceling, especially given what's going on with the demand for storage right now, which is incredible, and I think it's going to stick around for a while.
So no, we haven't seen that. Again, we came into the year feeling pretty good about our markets and new supply obviously Chicago and Houston. I've said this before, we're on the bottom of the list of new supply in terms of the top 29, 30 MSAs, and it's still there. We do monitor what has opened in our stores, nothing unexpected, 2 or 3 per Chicago, Houston. So we feel pretty good about it.
I think we'll wait and see what happens with this demand. I think it's not as easy to build today, given cost of construction, zoning, financing for construction and so forth. So we're not too concerned about the big change in 2021. So we'll wait and see how it goes. But we feel pretty good about heading into next year. And again, we're still driving new customers to self-storage. So I think that will help offset some of the new supply as well.
Great. And then I guess, just maybe sticking on the demand, I guess how comfortable or confident are you that this new incremental demand is sort of sticky coming out of the pandemic. I realize people are using it for different reasons today. And sort of when there's a vaccine and the world gets back to normal, I guess, how worried are you about some of the demand that's been created today going away?
Well, we're fortunate as a sector to have it right now. You can kind of compare it to hurricanes. When hurricanes may happen or disasters, we got a rush of new demand. This is different. This is not here for 30 days and gone or 60 days. I think we've seen it stay around for a while now. We're in November, and the sector is still feeling pretty good about demand. So there's a lot of different reasons for it. We've talked about them before, the home renovation for home offices for whatever reason, COVID related, there's also the urban to suburban migration. That may stick around for a while as companies are more lenient about working in the office, and people don't need to be in places like Manhattan, so that will stick around probably for a while.
And then there's just the business demand, I mean, just the exponential growth of e-commerce. I think we are a side benefit to that, we, as an industry, that could be around for a while. I mean these companies we're signing up for enterprise and Lightspeed, that's going to be around for a while. So the business part of it will continue to grow. It's been growing for years. But I think this e-commerce and on-demand, same-day delivery is huge. And they're going to need to get product closer into smaller micro fulfillment places, and we have a strategy to take that demand. So I'llput that all together, Steve, I think it's good for the sector. It should be here for a while.
Our next question comes from Spenser Allaway with Green Street.
Maybe just going back to your Rent Now platform, can you just remind us on how move-in rates and existing customer rate increases compared to those rates charged to walk-ins? I'm just wondering if they're comparable or if 1 segment is slightly more price sensitive.
Sure. Well, the Rent Now, Spenser, has been around for a while for us, as you know. And during COVID, we launched our second version of that, which provided tier pricing, which is what you try to do with a walk-in. You try to upsell and get them a premium unit that might be closer to an elevator. So in fact, we can do that now with Rent Now. I think we're the only ones that have the tiered pricing. We have a value space, a premium space and a scanter space. So it really is similar to prior to Rent Now when customers would call the call center, they would get the web rate. Walk-in rates in general for the industry are few and far between. Even if somebody walks in, they may have seen the rate on the website.
So it's very hard to get somebody who's come in blind and get a walk-in rate, which could be 10% higher. But the real advantage of having the walk-in was trying to upsell, which we had done prior to Rent Now. And now we can do it across the platform more consistently, and we can monitor it. We can -- we do see that there are customers who are not price sensitive, and they're typically businesses, and they want that premium location and they will pay for it.
Right now, the issue is we don't have a lot of space available. So you may not have free options, given the high levels of occupancy, but we have been able to upsell. And I think net-net, we are seeing that we are getting a little bit more price when you combine the standard and the value pricing than before when we just had 1 price on our Rent Now.
So it's a great feature. Obviously, we were early on with this new platform. We saw it spike to 50% of our move-ins. The closing rate went up during COVID. It's come back down, and it's settled around 30%. And we think that's the new norm for us. So we feel good about it. We've obviously been able to leverage the new technology to keep control of our payroll. And I think that's how it will remain for 2021.
[Operator Instructions] Our next question comes from Smedes Rose with Citi.
It's Mike Bilerman here with Smedes. So Joe, just coming back to the fulfillment, the mini fulfillment centers. You talked a little bit about how by putting them into your facility and finding and creating the 5,000 square feet, you're effectively pulling supply out of the market where it's making that asset perform better because you've pulled out the self-storage square footage.
Secondarily, you're tapping into a trend of last mile to try to generate additional income. I guess if you're in a market where you don't have the supply issue and occupancies are high, how do you make the decision? Like at what point does the curve work where the benefit of the e-fulfillment is greater than the impact of the existing assets of the storage facility?
Yes. It's a great question, Michael. And I think the 1 thing that it does do, it provides some pricing power for our stores, right? I mean with the abundance of new supply that's come on, you've seen street rates come down for the industry. And I think this is 1 way to offset that. Again, it's early on. We're still looking at the economics. We are going to be generating more fee income, more revenue from each store that has this. And we'll have to do the math. We'll have to compare the rent we're getting. Again, they charge differently when you're looking at micro fulfillment. So we've got to play that game.
But net-net, what we expect from Atlanta -- I'm sorry, from Vegas and Chicago is that it will be positive for the store. We will generate more revenue from that store, more profitable revenue from that store. So we'll see, and we'll have to do that math. Obviously, if we -- if it doesn't make sense, we don't need to do it. But there are many markets where we have a lot of stores. Houston, for example, Chicago. And I think it's just another way to generate more demand because I don't think new supply will ever stop.
So we do need to keep creating new demand. And the industry has done a great job of creating new demand. I think the fact that these Class A facilities, and we've been doing a great effort of transforming our portfolio where we have a wonderful supply of Class A facilities. These are clean, they're multi-story, they're climate controlled, and they're a great place for businesses to store their inventory.
Yes. But do you -- I guess, the question is the rent that you get from fulfillment, including all the fees, what is that on a per square foot basis relative to the imputed rent you're effectively getting in storage? I mean how far is that variance that you're finding in the test stores that you're doing?
Yes. Michael, the rent per square foot is much higher. Obviously, there's a lot more cost when you're doing the fulfillment. But the rent per square foot is much higher than it would be if it was just rented to a traditional customer.
Yes. I was talking about net to you?
Yes. Yes. And then that, obviously, Joe was talking about the net to us, the net profit coming out of those stores is modeled right now, and we're early stages, but the net profit is higher than we would get with the traditional storage.
And then just coming back to the overall transaction market, which has certainly been bolstered, I would say, over the last few months with a number of deals. I guess for the deals that you've looked at everything, was it price? Was it market? Was it quality? Where did you sort of feel that you fell within those bidding processes?
And to the other side of it, if you're not winning these types of transactions, does that lead you to perhaps want to continue to sell more, right? Joe, you've done a phenomenal job of changing the scope of Life Storage's portfolio. I guess is there an opportunity to go even deeper if the transaction market is pricing assets at the prices that they're trading at?
Yes. We're not looking at selling, Michael. I think there's still opportunities out there. Again, we have a great portfolio of JV partners and third-party managed stores, and we are -- we've shown to be pretty successful in coming up with a fair price off market. We have things like upright units that we can offer owners, which some of the private equity can't do. So there's a number of things that we can do where we don't have to go to a marketed deal and just pay on price.
There's a lot of relationship in this industry. There's a lot of companies that -- owners who build stores and lease them up and they want to sell them to the operator. So I think there will continue to be opportunities to get good deals, accretive deals for stabilized. And then obviously, there's opportunities for some lease-up stores, which we did last year, mostly. This year, we wanted to focus more on stabilize.
I think the deals we did this year, looking back, I probably couldn't have forecasted the way they came out. We did a great job. We got great value. These are stores we know, that we've, in some cases, managed for several years. And I think it's because we have great relationships, and we negotiated these a little bit earlier on coming out of COVID. Still a lot of uncertainty, and we needed to commit, and we were ready to buy. We took a bet that this industry was going to do well for many years and that the COVID was just a short-term pause.
So we feel really good about it. We had a very successful year so far, and we should finish out the year strong with what's in the pipeline, which I already talked about. And we'll see how next year goes. But again, it's all about building your third-party platform, trying to do some JVs with developers and being ready in terms of cost of capital to buy when they're ready to sell.
This concludes our question-and-answer session. I would like to turn the call back over to Joe Saffire for any closing remarks.
All right. I just want to say thanks to everybody, and hope everyone continues to be safe and healthy. And have a wonderful holiday season. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.