Life Storage, Inc.

Good morning, ladies and gentlemen, and welcome to the Life Storage Second Quarter Earnings Release. At this time, all participants have been placed on a listen-only mode, and the floor will be opened 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, Investor Relations and Strategic Planning. Sir, the floor is yours.

Good morning, and welcome to our Second 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. Also, 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 today's call. I'm very pleased to report another outstanding quarter. Demand continues to be strong across our footprint, driving significant margin expansion as we maintain record occupancy, strong pricing power, and disciplined cost control. With this strong demand, we achieved average quarterly occupancy that was 420 basis points higher than last year. We grew occupancy 170 basis points during the second quarter. This has allowed us to be more aggressive with rates, which has helped to drive an increase in net effective rates by more than 50% through the end of June. Our footprint continues to expand through both acquisitions and third-party management as we leverage our deep relationships. The vast majority of our acquisitions were off-market, including 13 stores from our third-party management portfolio through the first half of 2021. We closed on a record $534 million of wholly owned acquisitions through the first half of this year already matching our total acquisition volume of last year. These acquisitions are expected to generate a blended year one cap rate of 4.5% and represent a nice mix of markets and maturity with almost one-third in lease-up and roughly 70% in the Sunbelt region. In addition to $22 million of closed acquisition subsequent to the quarter end, as well as an additional $80 million currently under contract, We have a strong late stage pipeline of attractive opportunities that our team continues to work on. Our third party management portfolio totaled 340 stores at quarter end and we added 19 more stores in July as owners and developers are attracted to our operating performance and innovative technology platforms. Our team has evaluated a record number of management opportunities this year and the pipeline continues to grow. We also continue to show strong progress in Warehouse Anywhere, including rental income associated with these business customers. Warehouse Anywhere's year-to-date revenue is up almost 30% to a $14 million run rate, including $9 million of annualized fee income. Our tech-enabled Enterprise and Lightspeed products have growing pipelines of companies in search of inventory management and last-mile logistics support. Many of these businesses would unlikely be using self-storage if it were not for the solutions provided by Warehouse Anywhere. With this strong demand and performance, we exceeded our expectations substantially for the quarter and are therefore once again increasing our guidance for the remainder of the year. We have increased the midpoint of our estimated adjusted funds from operations per share 8.5% to $4.74 this year, which would be 19.4% 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 $1.20 per share for the second quarter, an increase of 27.7% over the same period last year. Second quarter same-store revenue accelerated significantly to 14.7% year-over-year, more than double the 7.3% growth produced in the first quarter. Revenue performance was driven by a 420 basis point increase in same-store average quarterly occupancy. That occupancy contributed to very positive rent roll-up and substantially lower discounting on the new rentals. In the quarter, our same-store move-ins were paying almost 16% more than our move-outs. This pricing power, along with our ability to push rates on existing customers, contributed to an 8.3% year-over-year growth of same-store in-place rates for the second quarter, up from just 1.3% growth in the first quarter of this year. Discounts as a percentage of same-store rental revenue declined 60% year-over-year to 1.4% in the quarter. Same store operating expenses grew only 3.9% year over year for the quarter. The largest negative variance during the quarter occurred in repairs and maintenance and real estate taxes. The increases were partially offset by an 11% decrease in internet marketing expenses. The net effect of the same store revenue and expense performance was a 320 basis point expansion in our net operating income margin. resulting in 20.2% year-over-year growth in same-store NOI for the second quarter. Our balance sheet remained strong. We supported our acquisition activity and liquidity position by issuing approximately $148 million of common stock via our ATM program in the second quarter. Our net debt-to-recurring EBITDA ratio decreased to five times, and our debt service coverage increased to a healthy 5.3 times at June 30th. At quarter end, we had $360 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 6.2 years. We have substantial liquidity available to continue growing our asset base with investment opportunities that provide our shareholders with attractive risk-adjusted returns. Regarding 2021 guidance, we substantially increased our same-store forecast, driven primarily by higher expected revenues and unchanged expense expectations. Specifically, we expect same-store revenue to grow between 10.5% and 11.5%. Excluding property taxes, we continue to expect other expenses to increase between 2.25% and 3.25%. while property taxes are expected to increase 6.75% to 7.75%. The cumulative effect of these assumptions should result in 13.5% to 14.5% growth in same-store NOI. We have also increased our anticipated acquisitions by $325 million to between $800 million and $1 billion. Based on these assumption changes, We anticipate adjusted FFO per share for 2021 year to be between $4.69 and $4.79. And with that operator, we will 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 one on your phone at this time. We 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. Once again, if you have any questions or comments, please press star 1 on your phone now. Our first question today is coming from Juan Sanabria at BMO Capital. Your line is live. You may proceed.

Hi, good morning. I was just hoping you could speak to... firstly, the trends you're seeing in July for rate growth and occupancy, if you could just give us some spot numbers. I guess we're in August now. And what you're assuming for occupancy decel, if any, in the back half of the year, if you could just give us a range of what your expectations are.

Sure. Good morning, Juan. Yeah, July saw a slight uptick in occupancy, so our move-ins on a preliminary basis were higher than our move-outs, so we saw a slight uptick in occupancy in July. Rates are still very strong at over 50% increase year over year, so no real changes there from the trends we saw in the late second quarter. Regarding what is in guidance, what's embedded in guidance for the second half of the year, No, we're looking at about 250 basis points decline in occupancy. So we looked at historically what occupancy may do the second half, went towards the higher end of what that decline could be, and that's what's embedded in occupancy. So we'd end the year slightly above where we ended last year on the same store, which is a little change from where we were three months ago.

Great. And then just on supply, I was just hoping you could give kind of your latest thoughts on what you're seeing and expectations for 2022. And if you think that you will see a greater amount of new supply kind of migrate to some of the secondary markets, given some of the migration trends we've seen as a result of COVID.

Hi, Juan. You know, nothing really new from what we said last time. Obviously, we do our best to monitor supply in all of the markets that we are based in. 2021, we believe this year we should have about 145, 150 new deliveries. That compares to about 50 last year and 170 in 2019. So still having 2019 the peak. Looking out to 2022, we see a similar amount of deliveries as 2021. Clearly, there's a lot of developers out there, and I think everyone's taking note of what's going on in our sector. But at this point, with construction costs, the difficulty of getting entitlements, et cetera, we think 2022 will be similar to 2021. We aren't necessarily seeing a significant rise in some of the secondary markets, but I would expect that to happen as this occupancy increases. and it's not just in some of the larger markets. It's pretty much everywhere. But right now, we feel pretty good about the new supply coming on this year and next year.

Thank you.

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

Good morning. My first question is a follow-up on your comment, second half guidance, estimating an occupancy drop of, I think you said, 250 basis points. Did you say that's in line with historical for this time of the year? And, you know, do you view that as conservative? Are there any signposts that, you know, right now that indicate we could see such a drop?

Yeah, Jeff, there's no signs. We haven't seen any signs. We didn't see them in July either. You know, we haven't seen the move-outs, which has just been incredible that, you know, the customer demand and the need for storage remains. So we haven't seen the move-outs. That 250 that I mentioned that's embedded in guidance is the highest we've ever saw from this point to the end of the year. So we believe it's conservative. It's only happened one year.

Okay, great. And then just to confirm, because I've been getting more questions on just in the last few weeks, you know, have you seen in any of your markets where let's say the, you know, Delta variant is rising, any changes in consumer behavior, or it sounds like based on your previous answer leading into, let's say this week, last week that, you know, things remain strong.

Yeah. Yeah. Jeff, we are not, you know, the demand still is strong. You know, we still have customers who are looking for spaces that we can't serve because we're full. We do our best to move them to other locations. But, yeah, demand remains strong. I mean, August will be a telling month. Typically August is a net move out month. So we should know more towards the back half of this month. But, you know, clearly the industry is doing very well and demand continues.

Thanks. And then my last question, just cause we get the question so much is just why customers are staying longer. And of course this is not something new that this has been increasing for the last 10 years. I don't know if you, if you do any surveys or, you know, what, what is your response to that question?

Well, I think Jeff, I think, you know, this, um, you're right over time, customers have stayed longer, you know, consumer, um, is feeling very good about, um, their savings. Um, they're not thinking about their storage, um, economy is very strong, but you know, COVID has brought on some new reasons to use, to use storage. Um, for example, those who are not sure where they're going to be working, are they moving into the office? Are they going to be hybrid? And those decisions won't be answered anytime soon. And I think that's part of the reason why items are still in storage. Um, And there's many other examples of that. Clearly, there's a backlog in construction and home renovations, and things are taking longer to get completed. So I think that's another reason why items are in storage longer. You have a lot more businesses using storage. Obviously, we focus on businesses, and it's so important for companies to get product close to the end user. So I think there's a number of elements as to why you know, the customers are staying longer and not moving out.

Thank you.

Thank you. Our next question today is coming from Smedes Rose at Citi. Your line is live. You may proceed.

Hi, thanks. I wanted to ask you a little bit about your raised acquisition outlook and kind of what it seems like there's more properties available for sale? And I guess I'm trying to square your ability to find deals that you like with this sort of theme that more money is coming into the space and cap rates are sort of concurrently continuing to compress. Just sort of maybe your thoughts around that and your ability to continue to find deals that you like and raised your outlook pretty significantly.

Yeah. Hi, Smeet. Thanks. You know, kind of a perfect storm you know for many years you know the biggest issue in this in this industry was finding sellers and you know we all know that there's a consolidation opportunity it's a very fragmented industry there's a lot of mom-and-pops and really this is the perfect storm for for us to find deals I mean we're really excited about it in July was our busiest month ever in reviewing deals I mean it's never been busier so there are great opportunities out there and We love the fact that we've got these deep relationships that go decades in some cases, and our team does a great job of trying to secure deals off market. And yes, there are more sellers, whether it's the capital gains uncertainty, whether it's the cap rates they're seeing, whether it's a change in generations, and you're seeing all of those things. So it's a perfect storm. And when you add in probably our best cost of capital we've had in forever, You know, we are really excited about the opportunities, more excited that we actually can find these off-market and we can get some deals done. And, you know, we expect the second half of the year to be very strong.

Okay, and then I just wanted to ask you, I know it's a relatively small piece, but in the past you've talked about the Toronto market and investing there. Could you just provide an update on what you're doing there? I didn't see anything in your release, but I might have missed it.

Yeah, no, it's a great question, Steve. Listen, we think the GTA in Canada is a great opportunity for us. The problem we had is the border has been closed. You know, we've been so busy in the U.S. We really haven't focused on acquisitions or getting our brand up there. We were managing. We did end that relationship with our partner up there. They're a great partner in the U.S., but at after two years we decided if they're not going to change the brand, um, they were going places that we weren't really comfortable managing. They are now self managing. The good news is we know how to operate up there and you know, I would expect that we would find some opportunities over the next year to get life storage brand in Canada. It's a great market. It's a growing market. Toronto in particular is one of the fastest growing cities in North America. We know how to operate up there, and as soon as the border reopens, we'll be sending some teams up there to find some deals.

Okay. Thank you. Thanks.

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 Samir Canal at Evercore. Your line is live. You may proceed.

good morning everyone um hi joe it's been well documented that it's difficult to hire employees or staff right now i guess what impact have you seen maybe at the store level um whether it's pay or number of hours etc hi samir uh yeah it's challenging um across our industry and across many industries you know fortunately for our industry you know it only takes one or or less or even you know two people to run our stores The biggest issue we've had in our industry is that part-time associate who tends to look for full-time work and more pay, and that's the high turnover position, and it's a little higher this year. And things like technology, things like RentNow, other things that we're doing to reduce the number of FTE hours at a store has helped mitigate some of that turnover, and I would expect for us to continue to find ways to to reduce the sort of dependence on a part-time worker or double coverage, that sort of thing. So it's been very manageable. Our operations team does a great job of having people move around. And we're very comfortable in having some managers manage more than one property. And we're experimenting with reduced hours in certain locations. It's not such a terrible thing. at this time when you're pretty full and there's not a lot of moving activity. Um, but you know, it is, it's always been a, a difficult task to find good people who want to, you know, just that part-time work. But, uh, otherwise we're, we feel okay though. I mean, operations are, are, are doing a great job. You know, look at the number of stores we've been able to onboard in a timely, uh, fashion. Um, you know, the, the 17 store JV, um, acquisition that we did. We had to hire for each one of those stores, and our human resources team did a fantastic job of finding really good people to work those stores as soon as the brand changed. So we're able to find very good people. We've got a great team, a lot of experience in recruiting and hiring.

Thanks for that. And I guess my second question is around a little bit more broad-based here, but I know in the past we've talked about sort of Since you've come aboard, you've done a good job in improving the margins of the company, cutting costs. How much more is there to do on that side as we think about next year, whether it's on the utility side? Maybe you can elaborate a little bit more on that.

Sure. Obviously, we are focused on our margins. Cost control has been a very important part of our strategy. Obviously, we came out early on and talked about how technology can reduce the amount of payroll. You're seeing some of our peers do the same now that they've launched the online platform. And we still believe there's more opportunities there as the utilization of rent now increases over time. We're also looking at other technologies, as I just mentioned, to reduce some of the hours in the stores. We do a lot of A-B testing and so forth. So clearly payroll is something we keep an eye on. Um, and then obviously things like utilities, we're doing a lot more solar these days, uh, into 2022. Um, you know, I, I, I still think there's opportunities Samir, but what we're doing strategically for the company as a whole, we see us through our acquisition volume. We've been very, um, aggressive buyers over the last few years, and they tend to be bigger stores with better rates. in really strong markets, newer stores with climate control. And over time, that will continue to improve our margins as well as we generate more revenue per store. So all of the strategies that we have in place are really focused on how do we improve the profitability of this company. So it's not just one thing, but you'll continue to see us focus on it. And I think you should also look at what we're doing on the technology side And how do we generate, you know, more efficiencies in the company. And then also, even if you look at technology on warehouse anywhere, it's not any adding anything to our margins today, but I'm very excited about it. You know, it's helping us generate a lot more fee income. And that as well will help our margin growth as well. Our third party management business, you've seen that grow nicely, and that's a great way to improve our margins. So there's a lot of things that we're focused on. So for sure, I think there's more opportunities for us to improve margins.

Thank you, Jim. Yep.

Thank you. Our next question today is coming from Ki Bin Kim at Truist. Your line is live. You may proceed.

Thanks, Dawn. Good morning. Just wanted to go back to the acquisition topic. Can you just talk a little bit more in depth about the type of assets you're targeting, the quality, the yields, and ultimately, how do you balance more activity in the markets and more assets for sale versus higher prices. And, you know, I guess I'm asking, how do you balance doing less deals, you know, versus like, because things are more expensive.

Sure. Hi, Keeban. Um, you know, we, every deal is so different and every deal can present different opportunities. When you find deals off market, it's fantastic. You know, we've had a couple opportunities, you know, portfolios, family run. And, you know, those are great because we know that we're going to add value when it's on our platform. And, you know, obviously we're excited when we find those deals. We have a mix. You know, we want to have accretion in year one. We had the same strategy last year. But I'll be honest, you know, the cap rates have compressed, but You know, the cost of capital has improved, I believe, even greater. So really, the opportunity is still there for us to find good deals. Year one cap rate of a blended of lease up and stabilized deals at a four and a half cap is accretive. And we're still underwriting things to north of a five cap, five and a half cap, in some cases six cap upon stabilization. So as long as that opportunity is there where we can find deals and our cost of capital you know, makes it possible for us to pencil them out to be accretive for the company, you know, we'll still acquire.

So I hope that makes sense. That was it for me. Okay. Thank you.

Thank you. Our next question today is coming from Todd Thomas at KeyBank Capital Markets. Your line is live. You may proceed.

Hi, good morning. First question, I think you said occupancy increased further in July. Can you quantify that? Apologize if I missed it, but I'm curious where occupancy ended July and what the year-over-year spread is. And then the 250 basis point occupancy decrease that's embedded in the guidance, is that off of the June 30 occupancy on a seasonally adjusted basis? What's, I guess, the starting point that you're referencing? If you could provide that detail, that'd be helpful as well.

Sure, Todd. I was referring to the June 30 occupancy. The July occupancy bump was less than 10 basis points, so it didn't round to change, so it's still at 95.7. Okay, got it.

And then, Joe, in terms of the demand, customer demand, which has been pretty strong, we've heard obviously a lot of things about work from home and sort of pandemic-related demand, but You know, I'm curious. I'm looking at the 2021 deliveries in your lease-up schedule, and those assets are, you know, just a few months. They're 70% to 90%, you know, physical occupancy. I think the Dallas delivery in June is over 90% physical occupancy already. And I'm just wondering, you know, as you're looking at those assets, you know, if you have any better sense and, you know, those assets in the fill-up stage, you know, where the customer demand is coming from. You know, you're seeing them move in.

you know at a pretty fast pace and then also how long do you think development lease up can remain accelerated at this at this pace those are great questions Todd you know obviously demand is strong and when you have when you have full occupancy pretty much across the board you know the lease up stores you know even if they're a little bit farther away from the consumer they're going to get filled up quicker so the real question is how long is this demand going to remain? And, you know, that, that feeds into a lot of the questions about guidance, about end of year occupancy. So, you know, I think the challenge for a lot of developers is, you know, when, when does it slow down? When does the pandemic demand slow down? And, you know, because the cost of construction is so much higher today and slower, you know, if they get these things, you know, the shovel in the ground today and they can't open until the end of next year, What's it going to be like? Where are rates going to be? So I think that helps curtail some of the new supply. Your normal deliveries are going to continue to, you know, come on board and they'll fill up. But, you know, I don't really have an answer for you as to how long this will remain. It's such an unusual period of time for the industry, which I knew, but I don't.

How much of the demand, the move-in activity at these newer lease-up facilities is outside of, I guess, the traditional drive time or distance that you normally would see? I guess, how much of that move-in demand is the call center, the platform sort of steering customers away from full facilities to those facilities? Do you have a sense of that?

Um, you know, I, I really don't, it's anecdotal at this point, but you know, we have, we have changed the procedures. Um, you know, operations teams done a great job of allowing store teams at the store to be able to find inventory, you know, in their region so that they can, they can put a customer into another store. Those are things that they never had to do before because they were never were full. Um, you know, we've done a lot of, um, uh, work in, in expansions and trying to get some damage spaces open quickly. The call center does a great job of working with customers. We have wait lists. We try to understand customers' timeframes. And so, you know, it's an issue right now because, you know, the stores are so full that, you know, it's probably more common to be putting customers in a second or third choice store versus the one that's closer to their home. But I don't have exact, you know, statistics on that at hand.

Okay. All right. Thank you. Thank you.

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

Well, I just want to thank everyone for dialing in today for all the questions. We hope everyone has a safe and enjoyable remainder of the summer, and we look forward to seeing you in person in the fall.

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.