Life Storage, Inc.

Good morning, ladies and gentlemen, and welcome to Life Storage First Quarter Earnings Release. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, David Dodman, Senior Vice President of Investor Relations and Strategic Planning. Sir, the floor is yours.

Good morning, and welcome to our first quarter 2021 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 re-queue with any follow-up questions thereafter. At this time, I'll turn the call over to Joe.

Good morning, and thank you for joining this morning's call. I am very pleased to report another solid quarter and a great start to this year. With record occupancy of 94% at quarter end, we have managed to grow occupancy by 460 basis points year over year, an incredible accomplishment, and I'm very proud of the entire Life Storage team. With this level of occupancy, we have been aggressively pushing asking rates while also decreasing free rent, resulting in higher net effective rates, which were up roughly 20% for the quarter. Further, we have been very active on the acquisition front with 33 stores acquired or under contract since the beginning of the year. These stores are a blend of lease up and stabilized and as a group will be immediately accretive and growing thereafter. We also continue to see strong growth in our third party platform with 18 new additions during the quarter and a very robust pipeline as more and more owners consider Life Storage as a leading candidate to manage their stores. And we continue to see further traction in Warehouse Anywhere with a significant contract for our enterprise product. This product is unmatched in the self-storage industry, and we continue to drive more corporate business to our unique solution. These enterprise customers would unlikely be using self-storage for their inventory needs if it were not for what Warehouse Anywhere brings to the table. Our newer Lightspeed product also continues to expand with now three fully operational micro-fulfillment centers and three more in the works to open over the coming months. Revenue for this business will continue to grow as we add more and more clients to our last mile fulfillment solution. This solution is also unmatched in the self-storage industry. With all of this success and growth, we exceeded our expectations for the quarter and as such are increasing our guidance for the remainder of the year. We are raising the midpoint of our estimated adjusted funds from operations per share by more than 3% to $4.37 this year, which would be 10.1% growth over 2020. And with that, I will hand it over to Andy to provide further details on the quarter and revisions to our guidance.

Thanks, Joe. Last night, we reported adjusted quarterly funds from operations of $1.08 per share for the first quarter, an increase of 16.1% year over year. First quarter same-store revenue accelerated significantly again to 7.3 percent year-over-year, up 240 basis points from the 4.9 percent growth produced in the fourth quarter. Revenue performance was driven by a 410 basis point increase in average quarterly occupancy. That occupancy is augmented by positive rent roll-up. In the quarter, our move-ins were paying almost 6 percent more than our move-outs. which is a significant improvement from the rent roll-down that we experienced in the same quarter last year. Our move-ins have been paying more than our move-outs for six straight months, with March move-ins paying almost 8% more than move-outs. Same-store operating expenses increased 4.7% year over year for the quarter. The largest negative variance during the quarter occurred in repairs and maintenance, which increased primarily due to a higher snow plowing expense and miscellaneous repairs following record cold weather earlier this year. Payroll and benefits again remained well controlled, up only 1.8% year over year, while advertising and internet marketing costs were down 2.6%. The net effect of the same store revenue and expense performance was an increase in net operating income of 8.6% for the quarter. Our balance sheet remained strong, We supported our acquisition activity and liquidity position by issuing approximately $180 million of common stock via our ATM program in the first quarter. Our net debt to recurring EBITDA ratio decreased to 5.5 times, and our debt service coverage increased to a healthy 4.9 times at March 31st. At quarter end, we have $457 million available on our line of credit, and we have no significant debt maturities until April of 2024, when $175 million becomes due. Our average debt maturity is 6.7 years. Regarding 2021 guidance, we've increased our same-store forecast, driven by higher expected revenues and unchanged expense expectations. Specifically, we expect same-store revenue to grow between 5.5% and 6.5%. Excluding property taxes, we continue to expect other expenses to increase between 2.25 percent and 3.25 percent, while property taxes are expected to increase 6.75 percent to 7.75 percent. The cumulative effect of these assumptions should result in 6.5 to 7.5 percent growth in same-store NOI relative to our original guidance of between 3.75 percent and 4.75 percent. We have also increased our anticipated acquisitions by $175 million to between $550 million and $600 million. Based on these assumptions changes, we anticipate adjusted FFO per share for the 2021 year to be between $4.33 and $4.41. And with that, operator, we can now open the call for questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold a moment while we poll for questions. Our first question today is coming from Todd Thomas at KeyBank. Your line is live.

Hi, thanks. Good morning. First question on acquisitions. Joe, I was hoping that you could provide some color on the investments completed in the quarter and what's under contract in terms of where you're finding these opportunities. Are they mostly single asset transactions or are there some portfolios in the mix? And then given the increased competition out there for investments, are you confident in life's ability to continue acquiring at this pace moving forward?

Hi, Todd. Yeah, I am confident to answer the second question first. We've been at this game since our inception. We've got a lot of relationships out there in the market. We've been working these relationships for years, and we feel very confident. I think about 80% of the deals that we've closed or are under contract are off-market, so there's no broker involved. For example, the Florida portfolio is a family-run business, eight stores. We've been calling them for over three years, and when they're ready to sell, we were there with the phone call, and that's a wonderful opportunity for us. At the same time, a lot of the deals that are in the lease-up side, so about half of our product that we're under contract or have bought are about lease up and half are stabilized. A lot of the lease up are stores that we know. They're our third party stores and we know the owners and we've been able to get the majority of those off market as well. So yeah, we feel pretty confident that there'll be more opportunities like this. This is three years now. We've had a lot of good acquisitions and I'm pretty confident there's going to be more to come.

Okay, in terms of pricing, just given the mix of, I guess, lease up and stabilize in the acquisition pool here, can you comment on cap rates and provide a little detail on the yields there?

Sure. What we've closed on in the quarter, year one is about a 4-1 cap, growing many of them north of 5%, 6%, depending on where they are. But if we combine that with what we have under contract, you know, subsequent to the quarter, those are a little bit better, about 4.8 cap. So the blended cap rate of all 33 is about a 4.5 cap. And, again, half of those are lease-ups. So we're very pleased with that.

Okay, that's helpful. And then I just wanted to touch on Warehouse Anywhere. I was wondering if you could provide a little color on the contract and provide an update, I guess, on the outlook for fee income related to Warehouse Anywhere. And maybe in that context, you could just talk a little bit about the pipeline and demand and what you're seeing there relative to the 300-unit agreement that you announced this quarter.

Sure. So, Todd, as you know, Enterprise was really our initial product, aside from just the storage management piece where there's no technology involved. And we've been working on that business for a few years, and it's really a longer sales cycle because you're really focused on larger corporations who need that product. And we're now starting to talk about enterprises being almost our mature product compared to Lightspeed because we are starting to see the traction. The word is getting out. This particular contract was an RFP that our team was able to bid on, and it was an RFP that none of the other storage companies would know about it or bid on it. We're really competing with some other types of logistics companies. And it was not a slam dunk that we would win it. Even though we had them as an initial customer, they were working with us for a while. But this is a big jump, 300 more spaces, almost doubles the number of current spaces we have entirely. Not totally double, but close. So a very significant win for us. We're very excited about it. This particular contract will roll out over the course of this year. It takes some time to work with the client and get it up all and running. But when it's all done and implemented, the fee income should be about $2 million a year. It's a multi-year contract. And on top of that, we would get the premium rent as well.

Okay. The $2 million is just from this 300-unit agreement?

Yes. Okay.

Got it. And just lastly, can you talk a little bit? It sounds like you mentioned it was a multi-year agreement. Can you share a little bit of detail around the length of lease and sort of how the rates stack up versus non-warehouse anywhere customers for the storage units and maybe provide a little bit more detail on the economics?

Sure. You know, what we like about, you know, our warehouse anywhere customers is typically we do have, it's not a month to month lease. This one in particular is a three year lease. It has some escalators incorporated into it. And typically we, you know, the rent is at a premium, maybe 10% more than what we would typically get from a consumer who walks in the door. So it's a great product, both for the fee income from the inventory technology, but also as a tenant. I mean, that's just why we love this business. We love commercial customers. They tend to stay longer. They pay premium rents. We can hopefully upsell the inventory tracking, and it's a great use of our storage assets.

Thank you.

Okay.

Thank you. Our next question today is coming from Samir Kanal at Evercore ISI. Your line is live.

Hey, Joe, just getting back to Warehouse Anywhere and not really just focusing on this customer that you signed with, but just looking at sort of the big picture, just trying to understand how big of an opportunity set is this for you as you think about sort of the financial impact and maybe just trying to put some numbers around the platform here?

Well, it really has come down to two different types of businesses. Our enterprise business, which is the one that is more mature, which I just spoke to, You know, that one has been growing, you know, at a nice clip. I think over the last year, you know, we increased the number of customers by 50% growth, and we added nine new customers. And that's the type of business it is. These are, you know, kind of bigger customers, and, you know, you're not going to bring in, you know, hundreds of new customers. But it's been growing, what, Andy, 10%, 20% or so. The light speed is the one, you know, where we're building out the micro-fulfillment centers, you know. And, again, we want to see how these things do. But, you know, early... indications are very exciting for us. We have the three opened. We started with Atlanta. We opened up Vegas. We opened up Chicago. And we're already expanding Atlanta. So it tells us that as these things are open and we get everything we need in there to properly function and operate as a 3PL, that the volume will pick up. And that's pretty much what's happening right now. We started off a little bit slow in Chicago and Vegas as we work out kind of the kinks And now we're seeing the volume really starting to pick up in both of those new fulfillment centers. And we're on track to open up another one on the West Coast, another one in Texas, and hopefully one in Florida as well. So we're really excited about it, Samir, but we don't want to put a number in terms of how big we think it can get. This year is really about kind of building out sort of our regional locations. And at the same time, we're still building out our technology. We are really excited about the technology that's going to allow us to have a proper warehouse management system to connect to the likes of Shopify so that we can attract more and more direct customers who are selling online, and that's the idea.

Okay, and I guess my second question is around revenue growth and sort of the cadence of revenue growth over the next several quarters as we think about you know, second quarter and kind of the second half, especially in particular occupancy, maybe you can provide some color on that.

Yes, Samir. You know, the second quarter, you will see very strong results in the industry, right? We have an easier comp, but we're also going into it in a very strong place. Obviously, occupancy at all-time highs, rates moving quicker than we had expected just a few months ago. When you saw January rents were up, street rates up 9%, and then we saw February rents grow 15% and March 27%, April more than that. So they're accelerating. So we would expect very strong numbers Q2. We have increased what we expect in the second half of the year, but we still expect the return to normal seasonality. So we're going to be a little bit higher in mid-summer than we expected, but we do expect that by the end of the year we would be occupied slightly lower than we were last year. Again, rates climbed from July to December last year, very unusual, and so did occupancy. It held relatively flat. We do expect a return to normal seasonality in the second half of the year. Thank you.

Thank you. Our next question today is coming from Jeff Spector at Bank of America. Your line is live.

Good morning. My first question is a follow-up on the last discussion on the revenue guidance bump. Given it was so significant, what gave you the comfort to, you know, boost it so much right now? Maybe, you know, you could tie that into comments around traffic or, you know, things you're seeing on the ground, and maybe second part would be any regional breakouts you can discuss.

Sure. Jeff, I think there's a few things we've seen over the last few months that gave us the confidence to bump guidance. Number one was we have seen no evidence of elevated move-outs. We expected at some point we'd start to see those elevated move-outs, and obviously our move-outs for the quarter down 5% year over year, which was pre-pandemic, were comparable. So it was a straight comparable, and our move-outs just remained lower than expected. And our move-ins are pretty much acting as they would in a normal season. So we had thought, potentially, we had pulled some demand forward to the fourth quarter of last year. We're not seeing that. We're seeing a very similar busy season start that we saw in any other year prior to 2020. We're also seeing the length of stay of our customers. Move-out customers have still been with us about 16 months, the average for those that have moved out. But the customers that moved in for the first nine months of last year are staying, the median length of stay is a month and a half longer than our typical median, which is usually about six and a half months. They're now staying, those have stayed eight months. So that's given us more comfort. And then the faster acceleration in rates. Like I said, we were up 9% in January. By March, we're up 27%. And April, significantly higher than that. Rates are going in the right direction.

Yeah, and I think, Jeff, it's Joe. Just on the regional comment, again, we're seeing strong demand coast to coast, but some of our biggest markets we're excited about, Miami for the first quarter, top 10 market, asking rates are up 40%. Houston, they're up 25%. Chicago, up 22%. New York, up 20%. Texas in general, we're quite pleased about what we're seeing there. Occupancy is improving in places like Dallas. which was really one of our concerned markets. Occupancy was up 600 basis points to 96.5%. Houston was up 260 basis points to 93. And Austin's doing great with up 540 basis points to 95%. So obviously our Texas markets are doing very well. Excited about that. We're excited about being there. And obviously our Florida markets as well doing well as well.

Thank you. My one follow-up would be, Are you seeing less than expected pressure from supply that was delivered, let's say, last year or the prior year or even this year?

Yes. You know, last year was a quiet year with some of the delays. I think it was 46 stores that came on, and I think there was about 200 a year before that, and this year we're seeing maybe 100 stores come on, so still less than 2019 volume, and And when we look at what's out there, I mean, it's not an exact science, but when we look out to 2022, we think it might be just about another 100 or so. So still a couple good years in terms of new supply coming on in the foreseeable future. And there's a lot of things for that. I mean, obviously, the cost of construction has gone through the roof. The money that is required to make some land acquisitions and get it properly zoned, is increasingly more difficult. There might be other uses of that land, such as multifamily, as there's a shortage of housing. So I think there's a lot of good things to point at that might keep new supply at bay for 18 months or two years.

Thank you. You're welcome.

Thank you. Our next question today is coming from Juan Sanabria at BMO. Your line is live.

Hi. Good morning. I was just hoping you could speak a little bit about the acquisition market and any interest in stuff that's outside of the U.S. Maybe in Canada, are you seeing any opportunities there? And if you could talk to maybe valuation differences between the U.S. and Canada, if that's an interesting opportunity for you.

Hey, Juan. Well, you know, we obviously operate up there. We manage a few stores for a good partner of ours who we've known for many years in the U.S. You know, COVID has kind of put a little bit of a pause on our acquisition efforts up there. But we are getting to the point where we'd like to get our brand. Right now we manage a third-party brand. We would like to do a couple deals up there, get our brand up there, buy into the REIT or do some JVs. It's just that the border's been closed. Canada's hurting right now. The strength of the self-storage business in the U.S., it's not comparable in Canada. They've had much more of a lockdown, especially the GTA, and it's a bit of a tale of two cities, to be quite honest. But yes, we do like that market. We think there will be opportunities. We've basically learned how to operate under there, up there. So if the right opportunity comes across, we will be able to participate and hopefully get up there. But for now, we're very busy in the U.S., extremely busy, probably the most acquisition deals that we're looking at in many years. And the pipeline looks very good. Obviously, we're not going to win everything, but we're in a very good position, I think, to continue to find good deals, both lease up and stabilize, and, you know, all of which will, you know, support our expectations to grow FFO.

Thanks. And then just on the occupancy front, have you continued to build occupancy into April from kind of the period end in March, or is it stabilized?

Yeah, no, I... I believe our occupancy... Yeah, go ahead. Yeah, it grew another 50 basis points, so it's 94.5 at the end of April, which is 480 basis points more than last April. So we continue to see some nice traction on the occupancy front.

Wow. Okay, and then just the last one for me, just on Jeff's question about supply. What kind of visibility do you have on 22 at this point? You know, I guess what's the earliest... that a new wave of supply do you think could start given the situation today?

You know, it is a little bit difficult. What we try to do, you know, we have our own ways of managing new supply. We look at what's in construction and we keep an eye on that. And there's some pretty good sources out there that we also leverage. But in terms of what's coming up, you know, 18 months later, we look at what's in planning and we kind of take a ballpark percentage of what we think is in planning and And we'll take a percentage of that which actually goes into construction. So based on what we're seeing and based on kind of our construction pipeline and where it is, we think right now 2022 is showing roughly 100 stores in our markets that would come on in 2022. And I think I might have said 200 in 2019. It was more like 170 stores in 2019. So still far less than what we saw in 2019.

Thank you.

Thank you. Our next question today is coming from David Belliger at Green Street. Your line is live.

Good morning. Thanks for taking my question. Just flipping back to warehouse anywhere, understanding it's a pretty small portion of the business right now, but just looking towards the future, to what extent do you see that business line beneficial from sort of a customer diversification standpoint? perhaps in some markets that might face some supply moving forward in some of the out years?

Yeah, Dave, it's a great question. I mean, what we really like about Warehouse Anywhere is it's allowing us to attract more commercial clients. We love commercial clients. The industry is roughly 18%, 20% of stores is business-related. That could be landscapers and so forth. We'd like to grow that. We're probably around 25% given our focus on commercial We'd like to get that up north of 25 because commercial customers are, as you point with new supply coming on, it's a great new addition to a store. They're less seasonal, so it could take out some of the seasonality of your business. They tend to rent more than one space and warehouse anywhere customers rent in more than one market. Obviously, we have technology we can upsell, so we can attract fee income. So we're really excited about it. But we have a solution to attract commercial customers. We can't just say, hey, we're going to get some more of these e-commerce customers to use our stores. You really need to know how to attract them. And that's what we're doing with the micro-fulfillment centers. We're providing them the services they need to look at self-storage as an actual partner for their inventory needs. They need the technology to for their product to be put into a storage unit, to be controlled, to pick, pack, and ship it. And we have all of that. We have contracts with shipping companies to pick up packages and deliver them in an MSA. And that's what really is differentiating us. We are competing with companies out there that are trying to do what we're doing. Companies like Shipmunk and Flexi and ShipBob, all of these companies are are out there. What they don't have is real estate, which is what we have. They have technology, which is what we're developing. But they're raising a lot of money. I think Shipmunk just raised nearly $300 million. Flowspace raised about $50 million. Flexi raised about $140 million. And that's who we're competing with. And we've got a great solution. And I think we're making really good progress on that. This is a really good year for us to build out that technology. We're learning a lot with our partner, Deliverer. And we're going to get better at it. And we're going to have a nice business, I believe.

Got it. Thank you. And then maybe just shifting gears back to cap rates, just looking nationally, as you look at deals, have you seen more relative compression in primary or secondary markets over the last quarter or two? And where do you see that moving forward?

Yeah, I mean, for sure. I mean, obviously, there's a lot of demand there. for storage assets. Some new players, private equity, and it is getting more competitive out there, especially for marketed deals. But we are seeing, we're seeing some new construction in some secondary markets being planned. You're seeing the performance in some of those markets do really well. I mean, some of our secondary markets are doing extremely well. The question is, how long will they do well? So if you're a developer, you may not want to take that risk. So that might keep some new supply at bay for a while. But we are seeing the cap rates, and they're justified. I mean, the rates are up, occupancy is up. So some of the cap rate compression is not just in the primary markets, it's also in secondary markets. Great.

Thank you.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone at this time. Our next question today is coming from Smetis Rose at Citi. Your line is live.

Hi, thanks. I just had one question around if you've heard anything from private owners around any reaction to potential changes in the tax structure with the doubling of capital gains, the elimination of the step-up. potential elimination of 1031 exchange. I mean, is that percolating at all with owners, and are you having conversations about that, or is it kind of too soon?

I think it's still too soon, Smeeds. I'm sure it's on everybody's mind. But, you know, I think, you know, hopefully, you know, we feel confident that, you know, the 1031 would remain with, you know, our ability to offer upright units. would be a nice vehicle to defer tax. But it's still, I think, a little bit too soon. But with that said, we are seeing a lot more product come to the market. And that may just be a factor of where cap rates are today. And I think we're also getting to the point of maybe some generational change with some stores that you're starting to see some portfolios come up. There was a big one on the market, as you know, You know, the one we were able to acquire in Florida was family-run. So some of that is coming into play. So, again, we think there's going to be more opportunities to grow. And, you know, this is our expertise. We're very good at acquiring. We've never been busier. And we think we're going to continue to get, you know, more than our fair share of deals.

Okay. Thank you. That was it for me. Appreciate it.

Thanks, Mies.

Thank you. Our next question today is coming from Keebin Kim at Truist Securities. Your line is live.

Thanks. Good morning. Just a couple of follow-ups here. On the warehouse anywhere now, with the 300 locations, are those 300 going into your portfolio, or is that going into the network that you're managing?

So, hi, Keebin. Yeah, we have a 12,000-store network here. It's still a little too early to say. We're plotting it out. We think at least 30% will be in our stores. And then the ones that are in our partner stores, we will get all the income from the inventory manager piece, and then we get a premium or a piece of the rental income. So it's really fantastic. That's why the solution is so unique. It's not just our 900-plus stores, soon to be 1,000 stores hopefully this year. It's our 12,000-plus network that is really attractive for customers looking for, you know, solutions for their logistics and inventory needs in every single market, which is what we can provide.

Okay. And the rent that you would get from those stores if they stayed in your network, your own portfolio, that would go into same-store revenue, right? And because you said rents are a 10% premium, I'm just guessing in the near term it might be additive to your growth as those come online?

Yes, Keeban. The rent does go to the same store if that store is in the same store pool. Obviously, some of those will go into some of the same store. Some will go into our managed stores. But the piece that is relative to same store pool would be in the same store rent. Just the rent, not the fees. The fees don't go through that. But the rental income goes through the store pool.

Gotcha. And the last question, so one of your bigger competitors committed to doing a lot more development on a long-term basis. And I would assume that's not isolated to them. I mean, the business has been fantastic and market rents are up a lot. You marched through two recessions pretty much unscathed, the industry. Do you think that might prompt more development to come online where this abatement is just maybe short-lived?

Well, again, I think we feel pretty good about the new supply that's going to come on this year and into 2022. But obviously, if this sector continues to grow demand and if we're successful in attracting more commercial and e-commerce business, we're probably going to need more demand. Obviously, we're able to do some nice expansions, which are doing very well for us. We do 60 to 70 million of those. You know, if something came along, we would have the capability to develop ourselves. Not that we have a program, but we do have the know-how. So we will watch it keep in, but I think for the next 18 months or so, you know, I don't fear a new wave. It takes time, right? And things kind of started to slow down in 2018, 2019. You know, it's going to take some developers time. you know, a little bit of time to find what, you know, decide, make those decisions what they should do, given where, you know, the cost of construction is, and then also if they're going to do some budgets, what rates do they use? Do they use rates which you've seen today, or is it going to come back to earth? You know, nobody really knows, so I think that's good news for any concerns about a wave of due supply in the immediate, you know, 18 months or so.

And To the extent you can talk about it, when you underwrite deals for acquisition, how do you guys mentally think about what type of rent to model in, especially for 2022? Do you assume moderate growth in 2022 when you're doing underwriting on average or something more mean reverting?

Yeah, it's a great question. Obviously, we take a lot of things into consideration. We look at what's being built near that store We look at where rates are. We're not getting too aggressive here. Everything we actually underwrote is actually doing better than what we underwrote. So these cap rates that I mentioned, I think they're pretty good because we're seeing some nice growth for obvious reasons this year. But we still have a conservative angle to it, and we're being careful. But again, these stores we're finding, the majority of them are off-market. which is great. I think what you have to be careful of is when you're bidding on a marketed deal, and that's where it can get aggressive, and you can probably make some mistakes if you're assuming that this occupancy or these rates will remain for the next three years. You've got to be a little bit more reasonable when you're looking at those deals because it's getting pricey, as you know, some of these deals out there. Okay, thank you.

Thank you. We have no further questions in the queue at this time. Mr. Sapphire, do you have any closing remarks you'd like to finish with?

I'd just say thank you all for dialing in this morning and the world opening up. Hopefully we'll get to see each other face-to-face sometime this year. Thank you.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time. And have a wonderful day. Thank you for your participation.