Life Storage, Inc. Price & Performance (LSI)

Good morning, and thank you for joining us today for the Q1 2023 earnings conference call of Life Storage. Leading today's discussion will be Joe Saphyr, 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 statement 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. As a reminder, during today's question and answer session, we ask that you please limit yourself to 2 questions to allow time for everyone At this time, I'll turn the call over to Joe.

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 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 8th 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 2,040 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 2 10 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 1 joint venture acquisition in New Jersey, in which we invested $4,100,000 Subsequent to the quarter end, we invested $15,100,000 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.

Thanks, Joe. Last night, we reported quarterly adjusted funds from operations of $1.63 per share for the Q1, An increase of 13.2% over the same quarter last year and above the high end of our guidance. Strong adjusted FFO performance was a result of robust same store results and acquisition performance. 1st quarter same store revenue increased 10.5% over the Q1 of 2022, Primarily driven by 13.6% growth in achieved rates over last year. As no surprise, the operating environment continues to normalize and level off from a ties 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 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, it was 140 basis point expansion and quarterly same store net operating income margin to 71.5 percent, resulting in year over year growth in same store NOI of 12.8 percent for the Q1. As Joe noted, this marks our 8th consecutive quarter of double digit Same store NOI growth.

Turning to the balance sheet. Our net debt to recurring EBITDA ratio It's a comfortable 4.9 times at quarter end, which is up very slightly from 4.8 times at the previous quarter end. Our debt service coverage is at a very healthy 5.2 times as of March 31. We continue to have no significant debt maturities until April 2024 when $175,000,000 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. Before we turn to the Q and A portion of the call, I'd ask that you please keep your questions focused on our Q1 results as we will not be providing additional commentary regarding the pending transaction with Extra Space. With that, operator, Please open the call for questions.

Thank you very much. At this time, the floor is open for questions. Your first question is coming from Spenser Allaway of Green Street. Spenser, your line is live. Thank you.

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 ECRI's Trended in 1Q to arrive at that 13.6 percent? And then any color you can provide on how those two metrics Trended through April would be helpful. Thank you.

Sure. Hi, Spencer. Good morning. 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 continued 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 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 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 It continues into it's only a couple of days into May, but that what I said at early strength of seasonal trends continues. So move ins accelerating from March to April, they accelerate up 3%. So That's the trend there. Move outs overall for the Q1, Pretty much what we expected.

I mean, they were up in totality for the quarter, about 7%, A little higher yes, very similar theme, a little higher in January February than March for everybody just Seem to be very quiet, the backdrop being theoretical crisis in the banking world and Marsh 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.

Yes. Spencer, it's Joe. I would just add you asked about the ECRI 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.

Okay. That's very helpful. Thank you, guys.

Sure.

Thank you very much. Your next question is coming from Ki Bin Tim from Truist Securities. Key, your line is live.

Thanks. Good morning. So Joe, I just want to clarify The comments you made about achieved rates, were you saying that move in rates were up 13% -plus year over year in the Q1?

No, Ki Bin, let me clarify. What was up 13 0.6% in the Q1 of this year of 2023 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.

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

And how did that trend into April, please?

April, actually slightly Up 2% from March, but year over year still down about 14%, 15% range.

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 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 the Get into peak leasing season.

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, I think, up another 2% or so. So that's what we expect for the peak leasing season.

Okay. That makes a lot more sense. Thanks for clarifying. 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 did 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?

No. I think, to be honest, since last year, we decided to maximize revenue and And not necessarily occupancy and pretty much the same strategy 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.

Okay. Thank you.

Thanks, Ki Bin.

Thank you very much. Your next question is coming from Michael Goldsmith of UBS. Michael, your line is live.

Good morning. Thanks a lot for taking my questions. Guys, did you see any price sensitivity of the customer during the quarter? Clearly, there was a bit of Slow down 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?

Hi, Michael. Obviously, we do a lot of testing, especially with ECRI. We've continually look to improve that strategy. As I said in my opening, when we hear 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. We 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.

Yes. 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 0.7 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 David, to your question, 64% of our customers stay 1 year or more and that's up from The past 49% are saying 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.

That's helpful. And my second question has to do with the slowdown in February March. All right. What do you think caused that? And then also, did you take any 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 Your thought process around it, around what happened and then also what actions you took, which may have Rectified kind of the slower demand.

Yes. I mean, obviously, February January, February, March, slow part of the year. No knee jerk reactions. Obviously, we're we got to stay competitive in the 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 maybe up and down a little bit, but nothing that's Worrying us right now.

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 Q1. 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 Slow down a little bit in March, move ins and move outs.

Thanks for all the color guys.

Your next question is coming from Juan Sanabria from BMO Capital Markets. Juan, your line is live.

Good morning. Robin Haynall here sitting in for Juan. On geography, are you seeing any Just across any markets that had previously hot housing markets and then are cooling a bit.

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 separating themselves a bit from some of the other markets such as the Northeast, But nothing too significant.

Got it. Thank you. Also as a follow-up, extra space tends to run occupancy About 300 basis points higher with higher rates, has this influenced your operating strategy any and what's the path to bridge the gap?

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. Okay.

Thank you, guys.

Thank you.

Thank you very much. Your next question is coming from Samir Khanal from Evercore ISI. Samir, your line is live.

Thank you. 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? Just wanted to see if So there's anything that we can pick up from those sort of occupancy drops?

Yes. Samir, it's Alex. Obviously, we Really like the Sunbelt market. I mean, that's awesome. We've invested in and I think there we continue to expect relative But yes, a little softening in the quarter in Vegas and Phoenix to call them out. Obviously, we know some parts of the Northeast weather 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.

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 balance of the year? Any Pressures to the upside you're seeing?

No. I mean, first of all, you can 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.

Got it. Thanks guys.

Thanks Sameer.

Your next question is coming from Todd Thomas of KeyBanc Capital Markets. Todd, your line is live.

Hi, thanks. I guess, two 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 Comment on April and how occupancies trended a little bit more recently through the early part of the peak rental season?

Hey, 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. It should Pushed on rates and expected those move outs and then March happened to be flat. So not surprised there in 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 June will be strong months. We expect there'd 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 June kind of play out.

Okay. And then I wanted to ask about guidance. I realize you're under a merger agreement with Extra Space It's pending here. So I don't know if that had an impact, but you guided originally for the Q1 to 1.55 to 1.59 So you came in a few pennies, dollars 0.04 above the high end of that range, despite Sort of the slowdown in February 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?

Yes. Thanks, Todd. Yes, obviously, we're very pleased with the quarter results, Pleased with what we're seeing in early, I would say, the last week or so in terms of rate and move in volume activity. Obviously, 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 feel 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, we'd make some adjustments as the year progresses into the summer.

Okay. But relative to the Q1 guidance, whether same store or Or otherwise, I guess, what were sort of the main positive variances that drove you 0 point 0 $5, 0.6 That's above the midpoint of the range that you guided to.

Yes. I'll get a little more specific relative to Budget in Q1. Obviously, it's clearly a beat in Q1. 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 ins and move outs. 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 ECR, 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 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 continue to perform consistent with, if not slightly above, our underwriting So a combination of those factors probably gave us a little bit more of a beat relative to the Q1 budget.

Is coming from Kegan Gull of Wolfe Research. Kegan, your line is live.

Hey, guys. Thanks for the time. 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?

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% is sub-two percent for every move in that we achieved in the Q1. So I like that so we like that trade because we've I 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.

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 are you seeing cap rates at? And then on the JV the JV acquisitions you did in the quarter and subsequent to quarter end, what are your expected stabilized yields on those?

Yes. Keegan, obviously, the market's a bit of a pencil 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, 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.

Great. Thanks for the time guys.

Thanks, Kieran.

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.

Thanks everybody for joining today's call. Hope you have a good day and we'll talk soon. Thank you.

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.