Life Storage, Inc.

Good morning and welcome to the Life Storage first quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw from the question queue, please press star then two. Please note this event may be recorded. I would now like to turn the conference over to Dave Dodman, Senior Vice President of Strategic Planning and Investor Relations. Please go ahead.

Good morning, and welcome to our first quarter 2020 earnings conference call. Leading today's discussion will be Joe Sapphire, Chief Executive Officer of Life Storage, and Andy Gregory, 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 recue with any follow-up questions thereafter. At this time, I'll turn the call over to Joe.

Thanks, Dave. Good morning. I hope that you and your families are all safe and healthy. Before touching on our results, I will first say a few words regarding COVID-19. Our top priority over the past several weeks has been to protect our employees, our customers, and, of course, our liquidity. As an essential business, we have been extremely proactive ensuring our stores remain open and staffed and that our employees feel safe and secure working at them. Our home office, including our 24-7 call center, has operated remotely for eight weeks now without any significant challenges, a testament to our team's ability to quickly mobilize our business continuity plans. We have also made accommodations for customers by curtailing our in-place rent increases and our auction process. With regards to liquidity, we've paused wholly owned acquisitions and slowed our expansion and enhancements program. Now, with regards to the first quarter, our results were very strong and serve as another reminder of the merits of our strategic initiatives to drive revenue growth and improve operating margins. We grew core FFO by 6.9% for the quarter, putting us well on pace to achieve our previous annual guidance of core FFO growth of 7%, which obviously did not consider the impact of COVID-19 and the broad stay-at-home orders. Same-store expenses, excluding property taxes, declined for the fourth straight quarter, and the pace of decline continued to accelerate to negative 5.3% in the first quarter. On the revenue side, the growth of our third-party management portfolio continued to fuel management fees up more than 40%. And our multi-year strategy to diverse our portfolio has served us well. For example, Houston today accounts for roughly 7% of our same-store revenue, whereas it was 12% when oil prices fell dramatically back in 2015. And RentNow, our online rental platform to allow customers to self-serve, what a game-changer it has been for us over the past two months. As a reminder, we piloted this program almost two years ago, and we've been operating it across our portfolio for over a year. As such, the associated operating procedures for store teams to support this sales channel are well established and contributed significantly to our ability to create a safer environment to our teammates and customers to conduct business. Rent now accounted for roughly 50% of rentals in April, up from 11% in the fourth quarter of 2019. The second generation of this platform, which we call RentNow 2.0, is in place at almost 750 stores today, and we will complete this rollout in just a couple more weeks. With RentNow 2.0, customers can select premium, standard, or value pricing for a unit type based on their personal preference. This dynamic pricing is normally done at the store level, but we've integrated this functionality directly into our online platform. And in closing, we are in unprecedented times, and although we are slightly encouraged by some recent trends, including the first week of May, we do not have sufficient visibility into customer behaviors in the coming months to confidently provide reliable annual guidance and therefore have withdrawn the guidance we provided this past February. I will now pass over to Andy to walk us through the quarter in more detail.

Thanks, Joe. Last night, we reported adjusted quarterly funds from operations of $1.40 per share for the first quarter, a 6.9% increase over the same period last year, driven once again by outstanding expense controls and solid revenue performance. Our same-store performance was highlighted by NOI growth of 4.8%, driven by revenue growth of 2.6%, and margin improvement of 140 basis points over the same period last year. First quarter same-store expenses outside of property taxes decreased 530 basis points over the first quarter of 2019. Excluding property taxes and internet marketing spend, operating expenses decreased in every major line item. Partially offsetting these expense efficiencies was a 5.8% increase in property taxes and a 38% increase in total marketing spend over the first quarter of 2019. Importantly, our balance sheet and liquidity remained solid. At quarter end, we had cash on hand of $20.7 million and approximately $317 million available on our line of credit. We also have an according feature available on our line that would add an additional $300 million of available credit should we exercise that option. We issued on our ATM for the first time in years, and sold $21.5 million in the days just prior to the market disruption created by the COVID-19 pandemic. Our net debt to recurring EBITDA ratio was six times, and our debt service coverage was a healthy 4.3 times at March 31st. We have no debt maturities until August of 2021, when $100 million is due, and then not again until 2023, when roughly $190 million is due. Our average debt maturity was 6.5 years, and the percent of our total debt that is fixed rate was 91% at March 31st. We are also monitoring our receivables very closely. And although our accounts receivables are slightly elevated, we collected 94% of customer revenue in April, a 2% decrease versus April 2019. We are actively engaging our past due customers to drive those collections. We remain extremely diligent managing our liquidity and have scaled back planned acquisitions, expansions, and have additional capital expenditure and operating expense levers to pull if necessary. Our capital commitments are almost completely discretionary, and we only make such commitments when we are comfortable with the funding availability and our ability to maintain our balance sheet in good standing. We believe we have adequate liquidity to manage through a sustained period of disruption. And with that, operator, we will now open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. Please limit yourself to two questions. If you have additional questions, you may reenter the question queue. The first question is from Todd Thomas of KeyBank. Please go ahead.

Hi, thanks. Good morning. First question, Joe, I think in your prepared remarks you commented that trends in May so far have been encouraging. I realize it's a little early, but can you just elaborate on those comments? Was that specific to collections or rentals or something else?

Yeah, hi, Todd. Well, A couple of those things, actually. You know, I think since the last couple weeks of April, we have seen kind of a slight improvement in movements, although negative. It was less negative through the last couple weeks of April. And then the first week of May, it's actually been positive, slightly positive compared to last year. So activity is, you know, maybe following what's going on in certain areas and certain states that are opening for business, so that's good news. Mostly it's coming from Texas, so Houston, Dallas, San Antonio are all up nicely compared to last year, so it is quite encouraging. We have seen call volume on the sales front pick up a little bit. So, yeah, it is very encouraging considering, you know, April I think, you know, was obviously hopefully the worst of it. So, yeah, it's a good thing so far.

Okay. And then you had been seeing rent roll-ups across the portfolio. You had a positive mark-to-market for some time now, I think. And we've heard that asking rates and achieved rates are down in the last few weeks. PSA said that they had reduced rates by 20% across their portfolio. Can you comment on where – the companies in place rents are versus market after this change in market rents, how that mark-to-market looks today?

Sure. Hi, Todd. It's Andy. Q1, our rent roll-down was 4.7%, which was very similar to last Q1. In April, that did pick up to 9.5% roll-down. Move-ins paying less than move-outs. And street rates are down significantly in April. They were down about 19.5%.

Okay. Thank you.

The next question is from Smead Throes of Citi. Please go ahead.

Good morning, guys. This is actually Parker Dekranian for Smead. Can you just touch on marketing spend for the quarter? You know, it's relatively high versus last year, even, you know, looking at peak leasing season. Did you guys just pull up some of the spend into March, given what you saw towards the back half of the month? And can you just help us sort of understand run rate, how we should expect for the balance of the year? Thanks.

Sure. The marketing spend was elevated during the quarter. We did expect it to be higher at the beginning of the year. We do have easier comps. If you look at the rolling same store, you'll see that comp gets much easier in Q2, Q3, and Q4 versus we had a very tough comp in Q1. We do expect elevated spends. Costs are up per click, but we like the activity we're seeing. Internet activity has maintained a high level. Costs are increasing. Less activity overall from customers means we're all bidding a little bit higher for those customers. So we do expect it to be elevated, although at the Q1 level, showing Internet marketing spend up over 50%, we wouldn't expect that to hold for the whole year.

Yep. Okay. Thanks, guys.

The next question is from Jeff Spector of Bank of America. Please go ahead.

Good morning. Thank you. My first question is on markets. I noticed that markets like L.A., where we've seen a lot of high unemployment or claims, was listed as one of your stronger markets. I guess, can you just talk a little bit about the demand you're seeing in in some of these stronger markets versus, let's say, your weaker markets?

Yeah, hi, Jeff. It's Joe. You know, it really depends. I mean, we're trying to get some sort of answer, whether it's the secondary or tertiary markets are doing better than the primary markets. We've heard that in some of the seminars over the last few weeks. And we really haven't seen it. I mean, in certain places, you know, where there are strong shelters in place like New York City and so forth or Chicago, you know, we did see move-ins in April, you know, less than the average of the portfolio. But at the same time, you know, L.A. was actually a better performer in terms of move-ins, but yet L.A. was on the higher side for, you know, collections, you know, higher than normal. So it is pretty sporadic over time. you know, over the regions. But in general, you know, 15% down for April is, in my view, pretty incredible considering what really happened in April. And if that is the worst of it, we're pretty pleased. But there's really no sort of concrete, you know, conclusion we can come out in terms of the regions. It does seem to hem and flow across various large markets and smaller markets.

Okay, thank you. And I'm sorry if you've already said this, but your pricing strategy going forward, as, let's say, cities or region states reopen, what is the plan for rent increases?

Yeah. You know, we do watch that carefully. We did hold off on the May increases. You typically have to project that out a month in advance because you've got to give pre-advice if you're going to raise someone's rent. We did a portion of them for April. We started to slow down as COVID started happening, so we sent out fewer letters in March. If things keep going the way they look in terms of the first week of May, I feel pretty confident we could get back to some normal rent increases in the second half of the year. We will test them out in June. Nothing close to what we typically would do for a month, but we will test it out, see how it goes. And, you know, it's encouraging to see, you know, more and more states opening, which is a good sign, and activity picking up. And we'll see how it goes, you know, but it's very hard to predict anything out. Hopefully there's no second wave of this. I mean, that could happen. But, you know, we'll take it slow.

Great. Thank you. Good luck.

Thank you.

The next question is from Keevin Kim of SunTrust. Please go ahead.

Good morning. This is Ian on with Keevin. First, could you touch on customer behavior in the Rent Now 2.0 program? Are customers more price sensitive on that than walk-ins and Maybe how are you able to upsell the customers on 2.0 versus walk-in?

Yeah, hi, Ian. You know, it's relatively early to really give you any sort of explanation. And I think for, you know, to protect our own technology, we don't want to give away too much. But, you know, there are people out there who will pay for convenience. So when you select on a premium spot, you can see how close it is to an elevator in terms of steps. And there will be a price differential for that, maybe 10%. And we have customers choosing that option. And then, of course, you always have the bargain hunters and those who might want a lower price because they don't really care so much if it's in the back far corner of the facility. So it is a mix. It's early to say, but we love the idea that we can upsell and the customers have a choice. And, you know, the feedback we're getting from our customers is they love it and it's working well. And, you know, as it becomes harder and harder to conduct business at the counter, I think something like this is really a differentiator for us.

Okay, that's helpful. And then last one for me. Just on payroll, some of your peers have mentioned increasing employee numbers pay per hour. Have you guys had to do that? If so, could you maybe quantify what you think payroll expenses will be up in Q2?

Well, I'll let Andy talk about the second part of the question. But in general, you know, we typically hire a very strong manager and we pay wages that are typically higher than others. So we have not had to do that. We have You know, the first thing we've obviously done is made sure that our employees are safe, and if they weren't safe or if they had concerns, they were allowed to stay home, and we provided enhanced leave pay. We've done a lot for our employees, and the feedback has been tremendous. You know, to be able to work alone in a store, you know, we've reduced double coverage. We've allowed them to keep the doors locked if they felt they wanted to. So we've been very flexible with And that's really what is important. So, no, we have not had to increase wages. We don't expect to have to do that. And I would think that you will see the continued trend that you've seen in the first quarter in terms of payroll expenses coming down. Andy, if you can add to that.

Yeah, I think that the comp gets a little tougher, but our store teams continue to find efficiencies, and we would expect that payroll would continue as a similar trend we saw in Q1.

Okay, I appreciate that, Collin. Thank you, guys. Okay, thanks.

The next question is from Steve Sakwa of Evercore ISI. Please go ahead.

Thanks. Good morning. I guess the first question, can you just remind us, you know, what percentage of your customers are on auto pay today?

Fifty percent are on auto pay, Steve.

Okay. And I assume that when you talked about the collections and started to see a slight elevation, is there a kind of major difference between those on auto pay and those on cash pay?

Actually, you know, in April, you know, we did see the cash actually pay more regularly than those on auto pay. Some of the auto pays actually were rejected for one reason or another. Not significantly, but that was interesting to us. those who typically pay by ACH or cash or check, we didn't see an incredible, an incremental increase. And then this time in May, you know, we're anniversary date, although we were on first of the month, so we do still have a bulk of due dates on the first of the month. So We have seen it in a better spot than it was compared to April, so that's good, too.

Yeah, it's encouraging. At this time in April, we were at 63.1% of April collections, and in May we're at 64.5% of total revenue collected. So it's a better trend we're seeing in May, so it's encouraging.

Okay, great. And then I guess the second question is, Just anything on the, you know, Warehouse Anywhere. I mean, are you seeing any kind of uplift in the business customer and just how is that? I know the rent now is certainly helping with your kind of retail customer. But, you know, anything on the Warehouse Anywhere?

Yeah, thanks, Steve. You know, we actually had probably the most pilot programs in place. So typically, you know, a corporate customer will want to pilot this solution and for 30 to 90 days, and some of that has been delayed a little bit. But, you know, they are, you know, we're just looking at a promising June, if all goes well, in terms of the number of new installations for our enterprise solution. So that's positive. It'll probably be one of the better months we've had since we really started to roll this out. In general, I think, you know, I'm very optimistic about the storage industry for businesses, in particular post-COVID, I think you've seen a lot of reaction to having not enough inventory, not being prepared, hospitals, companies, even personal residents. And I do think, you know, if we continue to see this trend of slowly opening and we don't take any step back and we continue to move forward, I think you'll see a bigger demand for storage, for essentials and PPE and so forth. And so we're kind of gearing up for that with our Warehouse Anywhere team. We're targeting certain industries that we know we have a solution for, that we can help them with the inventory tracking of some of this extra equipment and supplies that they'll need to store. So I'm encouraged by what may be in the next 18 months for storage in terms of businesses, but also for residential. So we'll see. But I am quite pleased with Warehouse Anywhere this year despite the kind of a little bit of a disruption. You know, we are piloting a few new names, and June looks like it could be a good month for us in that regard.

Great. Thanks very much.

The next question is from Todd Sender of Wells Fargo. Please go ahead.

Hi. Thanks. Can we just hear more details on the California assets you acquired from your JV partner, maybe what markets they're in, and was this an expected exit? and maybe how the stores have been performing?

Yeah, we've managed these stores for quite some time. We've been a joint venture partner. I think they're great assets. We know them. There's a few expansions that are underway. It's a high four cap going in, but year one should be closer to five and a half cap, which is quite encouraging. So it's a great deal for us. You know, we expect when we go into a JV early on that we'll be the ultimate buyer. And to be able to pull off something like this in a very desirable market at California is exciting, to be able to do it off market with a reliable partner. So we're excited about it. Andy, if you have specifics on anything else.

Yeah, I mean, it's Southern California. One is in San Jose. The rest are in the Palmdale area.

They were already branded Life Storage.

Yeah, so we've owned and operated them, so there's no disruption. You know, we know these assets very well. We are the ones who have been doing the expansions for our partner. So, yeah, it's a great deal for us. We're excited that we were able to get it done in the first quarter. You know, and, yeah, that's why we do JVs.

And then just to stick on that theme with the Seattle asset that you're entering in this venture, did you have an opportunity to buy this wholly owned or maybe just kind of speak to the risk and reward of this one?

Yeah, you know, as you know, we just recently got into the Seattle market. So once you're in with three or four assets, you do like to build your presence and your scale, you know, whether it's through third-party management or JV. You know, our strategy for this year was really to fund the wholly owned acquisitions to be on more on the stabilized assets. We did more lease up in 2019. And this is a CO deal. It's a great asset. It's with a new JV partner who we've been wanting to do more CO deals with. So this is, you know, the first of hopefully many to come. But for CO deals, you know, they are dilutive and we'd rather take a minority stake and, you know, do it that way versus, you know, We could have done it right into the REIT, but again, we're focused on more creative deals for 2020.

Thank you.

Thanks, Todd. The next question is a follow-up from Kevin Kim of SunTrust. Please go ahead.

This is Ian again. Just one quick follow-up. Joe, I think you had mentioned street rates were down 19% in April. What are those effective rates in April, taking into account promotions?

Our promotions were down in April. So the net effective, let me just double-check it here, was 15% down net effective.

Okay. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Joe Safar for closing remarks.

Okay, well, thank you, everybody, for calling in today and listening. And, again, I wish you all to stay healthy and be safe and speak to you again in a few months. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.