Life Storage, Inc.

and our debt service coverage was a healthy 4.3 times at September 30th. We have no significant debt maturities until April of 2024 with $175 million due. Our average debt maturity is now over seven 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.

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're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then 2. Our first question from Juan Sanabria with BMO Capital Markets.

Good morning. Thanks. Hopefully my kids won't be screaming in the background in a couple 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 or decline that you've been able to post.

Juan, we're having a tough time hearing you.

Yeah, we think there's something going on with our conference speaker, Juan. If you could just give us a minute.

Sure.

Might have to call in from another phone. Give us two seconds. You can hear us okay, though?

I can hear you perfectly.

Okay. All right, Dave, why don't you do it out there? 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 posts you've had that are super impressive. Okay.

Yeah, I think while we've obviously done a great job in controlling that payroll line, you know, it has to do with right now, that technology investment we made. We still think we have room to run there. Obviously, with right 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, you know, 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, you know, it's down over 2%. not as down as much as it's been in the previous quarter. So it's a path that's tougher, 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 five single digits down? And any thoughts or expectations on how that could trend going forward or what's been the driver for below average vacates to date?

The lack of vacates, I think, you know, 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, increasing our current customers' rates, 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.

Thank you, guys.

Thanks.

And our next question will come from Todd Thomas with KeyBank Capital Market.

Hi, thanks. Good morning. 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, you know, 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, you know, 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're 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 for the second quarter. We had a pretty good pipeline coming into the year. We obviously gave some early updates. 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 helped 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, you know, from new players as well. And I also think from standpoints 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'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, Todd, I think it's gonna continue. I think you'll see, 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... you know, your funding for these and also, you know, how you're maintaining leverage, you know, with this pace of acquisitions?

Yeah, I mean, you know, we typically like to fund our acquisitions 50-50. You know, we have had our ATM, been able to use that this year, and obviously we had a great response to our bond offerings. So right now we're in a good spot with what we got through 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, you know, I think I don't have anything to add.

Yeah, I think we have some good capacity still, Tom, on the ATMs. 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. Preferred market might be something we look at to fund portions.

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 six. So we'll keep it in the mid-fives to low-sixes, usually we plan that range.

All right, thank you.

And our next question will come from Alua Escarbeck with Bank of America.

Hi, everyone. Thank you for taking the questions. 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. Hi, 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 one 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 really supports medical device companies, field service technicians, You know, 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 four or five new customers that finished 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 have 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 deliver piece is the newer piece. That's our light speed product. It's still somewhat in development, and that really is playing into the, you know, growing e-commerce on-demand delivery. That is very exciting. That's where I feel, you know, e-commerce, last mile, and self-storage are really in the right spot to play a part in this growing business. There's a lot of companies that are focused on it, tech-enabled fulfillment companies, and Deliver is one of the leaders in that space. 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 350 packages a day, and they're delivered in the Atlanta area and elsewhere. It's helped us learn a lot about that business. With Deliver, 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 them to businesses, and generating more fees and more income off it. Those two stores with deliver will probably be a pilot. We'll see how it goes, and really the location depends on deliver 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. You know, it's 5,000, 8,000 square feet. And we'll see where it goes with deliver. 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 two.

Great. Thank you. 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 units?

No, right now, you know, 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, you know, it's a great way to use up some space. We just knock down some walls and put together some units to come up with 5,000 square feet in these two cases. They were recently expanded and we had the space available. So obviously at least 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, you know, 5% of your store with this type of company and we can generate fees off of it, kind of gives it 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 deliver partnership is just one 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. You know, I want investors to realize that they invest in light storage. Some of that is in the tech-enabled fulfillment space.

Great. Thank you. Our next question comes from Keben Kim with Truist.

Just sticking with that previous topic on micro-fulfillment centers, are these latch-ons to existing properties or are you building it ground up? And any kind of parameters you can provide on what the economics look like?

No, these are existing facilities, Keben. It would be great to, you know, kind of Plan these out if you have more time where we're doing expansions and enhancements, where we're building up space. 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. It's working with our existing portfolio. So far, we haven't had a 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. You know, if we had to scale up quickly, you know, it might be a little bit different story, but if we can go slow, I think it's going to be, you know, 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, you know, per product delivered, per product packed, and it's a different way we calculate the rent. It's by cubic square feet. And we monitor that throughout the 30-day average, and there's an average price. But net-net, it's generating more fees than 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 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 from our stores. And this is 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? Yes, private competitors.

You know, KBEN, we track the bigger players when we're looking at street rates, and we're right in line. I mean, You know, some people talk about the change from year to year, but if you look at our street rates, you know, compared to the big players, you'll see that we're all pretty tight. Once in a while, you'll see one 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? Sure.

For street rates for October, Kevin, I don't think we talked about it. I think Joe might have mentioned it in 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 rates. But street rates turned positive in October, net effective a little better than street rates.

Okay, thank you.

And again, if you do have a question, please press star and then one to join our queue. Our next question will come from Steve Sokwa with Evercore ISI.

Thanks. Good morning. Joe, I was wondering if you could talk a little bit about supply. I know it's a very, you know, micro-specific question on your assets. But, you know, what are you seeing from projects that were maybe in the pipeline from yourself or, you know, third parties? And do you see a higher cancellation rate or perhaps slower, you know, pace to put those new projects into the pipeline?

Hi, Steve. You know, we aren't seeing cancellations. Obviously, things were delayed during the tough months in the summer and spring. But, you know, we've grown our third-party managed platform, probably one of our best quarters if you look at it from the standpoint of, you know, we had a large win about 18 months ago, two years ago around this time. So 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, two or three 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. you know, zoning, financing for construction and so forth. So, you know, we're not too concerned about a big change in 2021. So, you know, we'll wait and see how it goes. But we feel pretty good about heading into the next year. And again, you know, we're still driving new customers to self-storage. So, you know, I think that will help offset some of the new supply as well.

Great. And then I guess just maybe sticking on the demand, you know, 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, you know, 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. You know, we get a rush of new demand. This is different. This is, you know, 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, you know, the sector's still feeling pretty good about demand. So there's a lot of different reasons for it. You know, we've talked about it before, the home renovation issue. Um, for home offices or, you know, whatever reason COVID related. There's also the urban to suburban migration, you know, that may, that may stick around for a while as companies are more lenient about working in the office and, you know, people don't need to be in, you know, places like Manhattan. So that'll stick around probably for a while. And then there's just the business demand. I mean, just the, the, 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. These companies were signing up for enterprise and light speed. 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'll put that all together, Steve. I think it's good for the sector. It should be here for a while.

Okay, great. Thanks. That's it for me. Thanks, Steve.

Our next question comes from Spencer Allaway with Green Street.

Thank you. Maybe just going back to your RentNow 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 one segment is slightly more price sensitive.

Sure. Well, you know, the RentNow Spencer has been around for a while for us, as you know, and during COVID, you know, we launched our second version of that, which provided tier pricing for which is what you try to do with a walk-in. You try to, you know, upsell and get them a premium unit that might be closer to an elevator. So, in fact, you know, we can do that now with RentNow. I think we're the only ones that have the tiered pricing. We have a value space, a premium space, and a standard space. So it really is similar to prior to RentNow when customers would call the call center. They would get the web rates. 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 RentNow. And now we can do it across the platform more consistently, and we can monitor it. 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 base available, so you may not have three 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 one price on our rent now. So it's a great feature. You know, 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, you know, I think that's how it will remain for 2021. Okay.

That's very helpful. Thank you.

Thank you.

If you have any further questions, please press star and then one at this time. Our next question comes from Smedes Rose with Citi.

Hey, it's Micah Bellerman here with Smedes. So Joe, just coming back to the fulfillment, the mini fulfillment centers, you talked a little bit about how, you know, 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 a 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 to the existing assets and storage facility?

Yeah, it's a great question, Michael. And I think the one 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 one 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 rent differently when you're looking at micro-fulfillment, so we've got to play that game. But net-net, what we expect from Vegas and Chicago is 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 it doesn't make sense, you know, we don't need to do it. But there are many markets where we have a lot of stores, you know, Houston, for example, you know, Chicago. And, you know, 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.

Yeah. I guess the 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?

Yeah, 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.

Yeah, I was thinking about net to you.

Yes, yes, and the net. Obviously, Joe was talking about the net to us, the net profit coming out of those stores. It's 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 feel that you fell within those bidding processes? 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? Joe, you've done a phenomenal job at 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?

Yeah, 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've shown to be pretty successful in coming up with a fair price off markets. You know, 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. You know, there's a lot of relationship in this industry. There's a lot of companies that are, you know, 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 stabilized. You know, I think the deals we did this year, you know, 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, you know, I think it's because we have great relationships and we negotiated these a little bit earlier on coming out of COVID. There's still a lot of uncertainty and, you know, 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. It's 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.

Good. Thank you. Yep.

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

All right. Well, 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.