Life Storage Inc

F:SOV

Earnings Call Analysis

Steady Performance with Focus Beyond Occupancy Rates

Despite a year-over-year dip in occupancy of about 400 basis points in some markets such as Atlanta, Vegas, and Phoenix, the company remains committed to its strategy of optimizing revenue over mere occupancy rates, a stance reinforced by expected strength in the Sun Belt market. Q1 results pleasantly surpassed guidance with a few pennies above the high end, signaling a robust quarter amidst a February and March slowdown. Management highlighted a notable 13.6% year-over-year increase in achieved rates and indicated an anticipation of an upward occupancy trend through Q2, aligning with current guidance. The first quarter success was attributed to expenses in line with expectations, robust consumer resilience in the face of rate hikes, and solid performance from acquisitions, albeit the company awaits the peak leasing season to consider any guidance adjustments.

Continued Growth Shines in First Quarter Performance

In the first quarter of 2023, Life Storage reported a robust performance across its business segments. Despite a market that is finding its footing post-pandemic, the company has maintained occupancy and asking rates above pre-pandemic levels. Notably, Life Storage experienced a growth in same-store revenue of 10.5% and net operating income (NOI) of 12.8%. This marks an impressive streak of eight consecutive quarters with double-digit growth in these areas.

Strategic Acquisitions and Customer Resilience Build a Cautious Optimism

Life Storage's strategic acquisitions demonstrate a focused expansion with a $4.1 million investment in New Jersey and subsequent $15.1 million investment in four New York City stores. Customer loyalty also appears robust, with 49% of customers staying over two years, an increase of 2.1% from the previous year. A slight uptick in move-ins, up 1.1% for the quarter and accelerating in April, signals cautious optimism as the peak leasing season approaches.

Solid Financial Foundation with Prudent Debt Management

On the financial front, Life Storage presented a stable balance sheet, indicating a net debt to recurring EBITDA ratio of 4.9 times, a minimal increase from 4.8 times the previous quarter. The company faces no significant debt maturities until April 2024, with a healthy debt service coverage of 5.2 times. As of March 31st, the vast majority, 82%, of the company’s debt was held at a fixed rate, enhancing stability amidst variable market interest rates.

Impressive Achieved Rate Growth Bolsters Financials

A notable factor in the company's financial success is the 13.6% increase in achieved rates in the first quarter of 2023 compared to the same period last year. This metric, reflecting the rates paid by customers, is largely attributed to the growth from Life Storage's rate management program, indicating strategic success in pricing.

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, everyone, and welcome to the Life Storage First Quarter Earnings Release. [Operator Instructions] Please note, this call is being recorded.

I will now turn the conference over to your host, Mr. Brent Maedl. Brent, you may begin.

[Brent Maedl, Manager of Investor Relations]

Good morning, and thank you for joining us today for the First Quarter 2023 Earnings Conference Call of Life Storage. Leading today's discussion will be Joe Saffire, Chief Executive Officer of Life Storage; and Alex Gress, Chief Financial Officer. Following prepared remarks, management will accept questions from registered financial analysts regarding Life Storage's operational and financial results.

As a reminder, the following discussion and answers to your questions contain forward-looking statements that are subject to risks and uncertainties and represent management estimates as of today, May 3, 2023. The company assumes no obligation to revise or update any forward-looking statements because of the changing market conditions or other circumstances after the date of this conference call.

Additional information regarding these factors can be found in the company's public SEC filings. In addition to the press release distributed yesterday, we furnished our supplemental package with additional detail on our financial results, which may be found on the Investor Relations section on our website at lifestorage.com. [Operator Instructions]

At this time, I'll turn the call over to Joe.

[Joe Saffire, Chief Executive Officer]

Thanks, Brent, and good morning, everyone. I am pleased to report we delivered another strong quarterly performance across all segments of our business. While we continue to see the operating environment normalize as compared to the height of the pandemic, occupancy and asking rates remain above pre-pandemic levels.

I'd like to highlight a few notable results and trends. We achieved same-store revenue and net operating income growth of 10.5% and 12.8%, respectively, despite challenging year-over-year comparison. This marks the eighth straight quarter of double-digit same-store revenue and net operating income growth.

As the environment normalizes, our solid performance has remained broad-based with 25 of our top 2040 markets achieving 9% or greater revenue growth. These results highlight the value of our portfolio strategy over the past few years, which has allowed us to capitalize on strong regional trends.

Move-ins for the quarter finished up 1.1%, with April accelerating nearly 3% over March. Our customer base continues to show resilience with 49% of our customers having stayed with us 2 years or more. That is up 210 basis points from this time last year. Recent trends and a resilient customer base keep us cautiously optimistic as we head into the peak leasing season.

For the quarter, we completed one joint venture acquisition in New Jersey, in which we invested $4.1 million. Subsequent to the quarter end, we invested $15.1 million in 4 additional stores in the New York City area with a joint venture partner. These acquisitions are highly complementary with our current portfolio and our future upside with moderate capital investment.

Before I hand the call over to Alex, I want to provide a brief perspective on the merger with Extra Space Storage which was announced on April 3 and which we expect to close in the second half of the year.

First, I would like to express my gratitude and appreciation to the entire Life Storage team. I am very proud of what we have all achieved together and I'm incredibly excited about the opportunities ahead. We are focused on working with Extra Space team to complete the merger and capitalize on the significant potential of our combined platform.

And with that, I will hand the call over to Alex, who will provide additional color on our performance for the quarter.

[Alex Gress, Chief Financial Officer]

Thanks, Joe. Last night, we reported quarterly adjusted funds from operations of $1.63 per share for the first quarter, an increase of 13.2% over the same quarter last year, and above the high end of our guidance. The strong adjusted FFO performance was a result of robust same-store results and acquisition performance.

First quarter same-store revenue increased 10.5% over the first quarter of 2022, primarily driven by a 13.6% growth and achieved rates over last year. As no surprise, the operating environment continues to normalize and level off from its highs with same-store occupancy averaging 90.7% during the quarter but remaining 80 basis points above pre-pandemic levels. We remain cautiously optimistic as we enter peak leasing season with asking rates and move-ins heading in the right direction.

Our same-store operating expenses grew only 5.2% for the quarter versus the prior year primarily driven by real estate taxes, credit card fees and payroll and benefits. The net effect of that same-store revenue and expense performance was a 140 basis point expansion and quarterly same-store net operating income margin to 71.5%, resulting in year-over-year growth in same-store NOI of 12.8% for the first quarter. As Joe noted, this marks our eighth consecutive quarter of double-digit same-store NOI growth.

Turning to the balance sheet. Our net debt to recurring EBITDA ratio is a comfortable 4.9x at quarter end, which is up very slightly from 4.8x at the previous quarter end. Our debt service coverage is at a very healthy 5.2x as of March 31. We continue to have no significant debt maturities until April 2024, when $175 million becomes due, with our average debt maturity of 5.3 years and our weighted average rate is 3.7% at quarter end. In addition, as of March 31, 82% of our debt was fixed rate.

Details of our 2023 earnings guidance and related assumptions were included in our release last night. Our forward guidance for the year remains consistent with the guidance we provided late February.

[Operator Instructions] We will not be providing additional commentary regarding the pending transaction with Extra Space.

With that, operator, please open the call for questions.

[Operator]

[Operator Instructions] Your first question is coming from Spenser Allaway of Green Street.

[Spenser Allaway, Green Street]

As noted in your opening remarks, you had really impressive rental rate growth in the quarter. Can you just help us understand how move-in rates and ECRIs trended in 1Q to arrive at that 13.6%? And then any color you can provide on how those 2 metrics trended through April would be helpful?

[Alex Gress, Chief Financial Officer]

Sure, Spenser. It's Alex. Consistent with Joe's opening comments, just to give a macro view on the quarter. It's kind of what we said, the operating environment continue to normalize. And as we get into March, April, we're definitely seeing early indications of increasing and stronger seasonal trends.

But to talk about some specifics. Q1 from the move-in side was -- it's certainly an interesting quarter. Overall, we were up on record move-ins 1.1% for the quarter, but it was almost a tale of 2 worlds. I mean, very strong January. And then consistent with what you heard from the other REITs, it's certainly move-in volume slowed down in February and March.

Now we still had a record quarter, but we saw that slowdown in February, March. Now that shifted and changed and move-ins as expected, certainly began to accelerate and we saw that in April, and that trend continues into -- we're only a couple of days into May, but that -- what I said that early strength of seasonal trends continues. So move-ins accelerating from March to April accelerated up 3%. So that's the trend there.

Move-outs overall for the first quarter pretty much what we expected. I mean they were up in totality for the quarter, about 7%, a little higher. Very similar theme. A little higher in January and February, then March for everybody just seemed to be very quiet. The backdrop being theoretical crisis in the banking world and March just being a challenging month from an economic perspective. So March just seemed flat.

As we look at move-outs going from March to April and what we saw in April, move-outs are actually going down. They're down 4.5% month-over-month, comparing March to April. So that's exactly what we expected. So early signs are strong.

[Joe Saffire, Chief Executive Officer]

Yes. Spenser, it’s Joe. I would just add, you asked about the ECRIs as well, and we obviously were pretty much on target with what we expected to do for the year. We typically try to get most of them done in the first half of the year, and we’re on track with that and feel good about the results. And obviously, the move-outs, we’re pleasantly surprised and pleased with what we’re seeing so far despite the ECRI program.

[Operator]

Your next question is coming from Ki Bin Kim from Truist Securities.

[Ki Bin Kim, Truist Securities]

So Joe, I just wanted to clarify the comments you made about achieved rates. Were you saying that the move-in rates were up 13-plus percent year-over-year in the first quarter?

[Alex Gress, Chief Financial Officer]

No, Ki Bin, let me clarify. What was up 13.6% in the first quarter of this year '23 were our achieved rates. That's what our customers are paying, and that was up 13.6%. Now what drives that? Obviously, that's a lot of the rate growth from our ECRI program.

[Joe Saffire, Chief Executive Officer]

Yes, the actual asking rate, street rates, Ki Bin, were down for the quarter, about 14%.

[Ki Bin Kim, Truist Securities]

And how did that trend into April, please?

[Joe Saffire, Chief Executive Officer]

April, actually slightly up 2% from March. But year-over-year, still down about 14%, 15% range.

[Alex Gress, Chief Financial Officer]

Yes. And I'd just add to that. We expect that, right? Because think about the path of street rates for all of us last year. That's a really tough, tough comparison on a year-over-year basis. So while we're down in that mid-teens on an asking rate or street rate perspective, even in April, what Joe commented on to add on is we're seeing that, what we expect. Street rates are increasing as we get into peak leasing season.

[Joe Saffire, Chief Executive Officer]

Yes. And we're seeing some nice indications. It's early in May, but we're seeing some nice month-to-month continued growth in street rates to pick up another 2% or so. So that's what we expect for the peak leasing season.

[Ki Bin Kim, Truist Securities]

Okay. That makes a lot more sense. And my second question, you guys have obviously, seems to be bucking the trend here compared to some of your peers that showed more deceleration. So I was just curious, high level, any kind of incremental changes you guys made to your pricing philosophies? Or do you see a bigger contribution from ECRI in this quarter than previous quarters? I'm just trying to get a sense of like what makes -- what contributed to your differences?

[Joe Saffire, Chief Executive Officer]

No. I think, to be honest, since last year, we decided to maximize revenue and not necessarily occupancy, and pretty much the same strategy for the first – for the first start of this year as well. But no real changes. Similar levels of ECRIs as last year, similar percentages and pretty much as we had planned.

[Operator]

Your next question is coming from Michael Goldsmith of UBS.

[Michael Goldsmith, UBS]

Guys, did you see any price sensitivity of the customer during the quarter? Clearly, right, there was a bit of a slowdown in March. Do you think that was a result of price sensitivity? And did you adjust your prices kind of -- your street rates through the quarter. And then similarly on the ECRI side, you clearly do some testing. So is the -- in trying to get a sense of, is the self-storage customer more price-sensitive now than they have been in the past?

[Joe Saffire, Chief Executive Officer]

Michael, obviously, we do a lot of testing, especially with ECRIs. We've continued to improve that strategy. As I said in my opening -- looking at the first question, pleasantly surprised with move-outs being down year-over-year in April, which is a nice thing to see. It shows our customers are sticky. They can take the rate increases. And I think, again, we're just kind of getting back to some normalization and seasonality.

Obviously, for the demand, looks like it's holding up pretty well, like what we see coming into May. And obviously, we adjust our street rates accordingly, promotions and so forth. But nothing unusual right now. We're pretty pleased with what we're seeing.

[Alex Gress, Chief Financial Officer]

Yes. And I'll just really briefly add to Joe's comments, Michael. Yes, I mean, for us, our customer retention continues to be really positive. So we're currently at 39.7 months for customer retention, and that's certainly higher than what we saw in 2019 or earlier levels, where it was about 37.5 months.

As we've talked about in the past, and we certainly did not see an impact in the quarter. To add more data to your question, 64% of our customers stay 1 year or more, and that's up from the past. And 49% are staying 2 years or more. So we think those are really good indications of the resilience and stickiness of the self-storage customer for us and likely the entire space.

[Michael Goldsmith, UBS]

That's helpful. And my second question has to do with the slowdown in February and March. What do you think caused that? And then also, did you take any actions as a result of that or adjust your strategy in order to kind of invigorate demand back in April? Did you cut street rate? Did you hold back on ECRIs at all, just given that the demand wasn't there? Just trying to get a sense of your thought process around it, around what happened. And then also what actions you took which may have rectified kind of the slower demand?

[Joe Saffire, Chief Executive Officer]

Yes. I mean, obviously, February -- January, February, March, slow part of the year. No knee-jerk reactions. Obviously, we're -- we've got to stay competitive in pricing, follow street rates, look at competition. We do a lot of scraping. But obviously, no, we didn't go crazy on promotions. Again, kind of gearing up for the peak lease -- peak leasing season, which I think is upon us.

But nothing unusual, Michael. I think we are kind of pleased with what we're seeing so far. And kind of expected, given what's going on in the economy and housing that may be up and down a little bit, but nothing that's worrying us right now.

[Alex Gress, Chief Financial Officer]

Yes. As we kind of said earlier, Michael, I mean, we know March was kind of a challenging month for the environment, given the backdrop of what was happening outside the storage space. So I think a lot of people saw just general slowness in March.

But to be specific, we stuck to our ECRI program. We continued on that program, and you certainly saw that in our same-store rev growth that we put up for the first quarter. We expected move-outs to accelerate in Q1 as we pushed on rates, and we did. It was interesting to see that it was flat in March, and I just think that shows that everything kind of slowed down a little bit in March, move-ins and move-outs.

[Operator]

Your next question is coming from Juan Sanabria from BMO Capital Markets.

[Unidentified Analyst]

[Robin Hanlon] sitting in for Juan. On geography, are you seeing any softness across any markets that had previously had housing markets and that are not cooling a bit?

[Joe Saffire, Chief Executive Officer]

Well, actually, we've been pretty bullish on the Sunbelt markets. And I think we're seeing some separation from those markets compared to some of the other markets, such as the Northeast. So the Phoenix, Florida's West Coast, again, doing very, very well for us, kind of separate themselves a bit from some of the other markets such as the Northeast. But nothing too significant.

[Unidentified Analyst]

Got it. Also as a follow-up, Extra Space tends to run occupancy above 300 basis points higher with higher rates. Has this influenced your operating strategy any? And what's the path to bridge the gap?

[Joe Saffire, Chief Executive Officer]

Again, we focus on maximizing revenue, and it’s been our strategy for a while, and we don’t focus on purely occupancy. We don’t expect that to change.

[Operator]

[Operator Instructions] Your next question is coming from Samir Khanal from Evercore ISI.

[Samir Khanal, Evercore ISI]

Joe or Alex, just curious. When I look at some of your markets, right, Atlanta, Vegas, Phoenix, I mean, occupancy drops were -- I think it was like 400 bps or so year-over-year. Is there a common theme you're seeing across these markets? I know things are normalizing, I get that. But is it housing? Is it supply? I just wanted to see if there's anything that we can pick up from those sort of occupancy drops?

[Alex Gress, Chief Financial Officer]

Yes. Samir, it's Alex. Obviously, we really like the Sun Belt market, I mean that's obviously where we've invested in. And I think the we continue to expect relative outperformance there. But yes, a little softening in the quarter in Vegas and Phoenix, to call them out. Obviously, we know parts -- some parts of Northeast where that expects to happen. But we did see maybe just a touch more -- as expected, saw some supply maybe specifically coming into Vegas and Phoenix that may be part of that there. But nothing unusual, and we like that market.

[Samir Khanal, Evercore ISI]

Got it. And anything on the -- I guess, as a follow-up, anything on the expense side that's there to call out that's maybe -- are there any line items or components that are maybe coming in a little bit higher than you sort of budgeted for the year as we think about the balance of the year? Any pressures to the upside you're seeing?

[Alex Gress, Chief Financial Officer]

No. I mean, first of all, you could see that our expenses came in very much in line with our guidance. So absolutely nothing unusual. Obviously, we’re facing transaction-related expenses that are not impacting our core FFO, which are taken below the line as everyone would expect us to. So – but outside of that, no, very much in line with our guidance that we set out in February, and reaffirmed last night.

[Operator]

Your next question is coming from Todd Thomas of KeyBanc Capital Markets.

[Todd Thomas, KeyBanc Capital Markets]

I guess 2 questions. First, I just wanted to see if you could comment on occupancy. Sorry if I missed this, but quarter end was down about 30 basis points from the quarter average, and I was just curious if that was anticipated. And if you could comment on April and how occupancies trended a little bit more recently through the early part of the peak rental season?

[Alex Gress, Chief Financial Officer]

Todd. Yes, it's Alex. No, I mean very much -- yes, we expect through the course of Q1 that occupancy was going to come down a little bit as we pushed on rates and expected those move-outs and then March happened to be flat. So not surprised there, and Joe's comments earlier, that's really not our prime, prime focus as we think about more optimizing revenue.

But as we get into April and the environment continues to normalize, and more specifically, we see that strengthening seasonal trends start to pick up, and we know that May and June will be strong months, we expect there would be a continued upward slope in occupancy that will go up through Q2. And that's kind of consistent with where we've set our guidance. And -- but we'll see how May and June kind of play out.

[Todd Thomas, KeyBanc Capital Markets]

Okay. And then I wanted to ask about guidance. I realize you're under a merger agreement with Extra Space that's pending here. So I don't know if that had an impact, but you guided originally for the first quarter to $155 million to $159 million. So you came in a few pennies, $0.04 above the high end of that range despite sort of the slowdown in February and March that you discussed.

And I was just curious if you could comment about the quarter itself relative to budget and sort of provide a little bit of additional commentary around the balance of the full year as it pertains to your outlook or original guidance?

[Joe Saffire, Chief Executive Officer]

Yes. Thanks, Todd. Yes, obviously, we're very pleased with the quarter results. Pleased with what we're seeing in early, I would say, last week or so in terms of rate and move-in volume activity.

I would say we want to see what's going on with the peak leasing season over the next few months and then make a judgment with regard to guidance after that. But right now, I think we felt comfortable sticking with what we have out there, feel good about what we have and feel we should be able to achieve that. But obviously, would make some adjustments as the year progresses into the summer.

[Todd Thomas, KeyBanc Capital Markets]

Okay. But relative to the first quarter guidance, whether same-store or otherwise, I guess, what were sort of the main positive variances that drove you $0.05, $0.06 above the midpoint of the range that you guided to?

[Alex Gress, Chief Financial Officer]

Yes. I’ll get a little more specific relative to budget in Q1. Obviously, it is – it’s clearly a beat in Q1. And – but not, again, a couple of pennies, so not far outside of our guidance. And I think on the expense side, as I said earlier, very much in line with budget. I think we were very pleased. Even though March was flat, we said move in and move out. Going back to the comments we said a few minutes ago, the self-storage consumer remains very resilient and sticky, and the ability to absorb ECRI, those rate increases, very much remains.

And so a little bit higher than what we had certainly thought, but in a good way, was that 13.6% year-over-year growth and achieved rates which gave us a little bit more of a beat to the upside coming out of our same-store pool.

And then I would say, secondly, the acquisitions that are not in our same-store pool continuing to perform consistent with, if not slightly above, our underwriting assumptions. So a combination of those factors probably give us a little bit more of a beat relative to the Q1 budget.

[Operator]

Your next question is coming from Keegan Carl of Wolfe Research.

[Keegan Carl, Wolfe Research]

Apologies if I missed this, but I mean how should we be thinking about your marketing spend going forward, just kind of given what you're seeing in your demand funnel?

[Alex Gress, Chief Financial Officer]

Yes. Maybe I'll go first, and Joe can comment. Obviously, for us, when you look at our marketing spend on our same-store pool, it came in, on the advertising, very much in line with what we expect, just north of that 4%. And I think we're continuing to see pretty good website traffic growth. And the challenge continues to remain for us and everybody, the conversion of that traffic growth into true reservations.

But if I look at just doing simple math, which is kind of the way -- one of the ways we look at it, the cost per move-in for us was only up year-over-year 1.7%, so sub-2% for every move-in that we achieved in the first quarter. So I like that -- so we like that trade because we've commented earlier on the stickiness, the resilience of our customer base. And so I think that's the path, and we expect that to continue to be on those levels as we think about the rest of the year.

[Keegan Carl, Wolfe Research]

Okay. And then I guess from a transaction side of things, I guess, first, what are you sort of seeing volume-wise in the market and where you're seeing cap rates at? And then on the JV acquisitions you did in the quarter and subsequent to quarter end, what are your expected stabilized yields on those?

[Joe Saffire, Chief Executive Officer]

Yes, Keegan, obviously, the market is a bit of a penciled down right now. The bid-ask spread is pretty wide. So we see some more stability in the debt markets and specifically the 10-year, I think you’re not going to see so many transactions. Our guidance kind of anticipated the bulk of any deals would be in the second half of the year, and we still feel that’s the case. The JVs – trying to think exactly, the New York City portfolio, those are mature assets with some – I think, some decent upside in terms of management, but probably about a 6%, 6.5% stabilized yield.

[Operator]

Thank you very much. At this time, there are no more questions. I'm now going to turn it over to Joe for any closing remarks.

[Joe Saffire, Chief Executive Officer]

So thanks, everybody, for joining today’s call. I hope you have a good day, and we’ll talk soon. Thank you.

[Operator]

Thank you, everybody. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.