Life Storage Inc (LSI) Q1 2020 Earnings Call Transcript

Life Storage Inc (LSI)
Q1 2020 Earnings Call
May 08, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Life Storage first-quarter 2020 earnings conference call. [Operator instructions] Please note, this event may be recorded. I would now like to turn the conference over to Dave Dodman, senior vice president of strategic planning and investor relations. Please go ahead.

Dave Dodman -- Senior Vice President of Strategic Planning and Investor Relations

Good morning and welcome to our first-quarter 2020 earnings conference call. Leading today's discussion will be Joe Sapphire, executive officer of Life Storage; and Andy Gregoire, 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 requeue with any follow up questions thereafter.

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

Joe Sapphire -- Executive Officer of Life Storage

Thanks Dave. Good morning. I hope that you and your families are all safe and healthy. Before touching on our results, I will first say a few words regarding COVID-19.

Our top priority over the past several weeks has been to protect our employees, our customers and of course our liquidity. As an essential business, we have been extremely proactive, ensuring our stores remain open and staffed and that our employees feel safe and secure working at them. Our home office including our 24/7 call center, has operated remotely for eight weeks now without any significant challenges, a testament to our team's ability to quickly mobilize our business continuity plans. We have also made accommodations for customers by curtailing our in-place rent increases and our auction process.

With regards to liquidity, we've paused wholly owned acquisitions and slowed our expansion and enhancements program. Now with regards to the first quarter, our results were very strong and serve as another reminder of the merits of our strategic initiatives to drive revenue growth and improve operating margins. We grew core FFO by 6.9% for the quarter, putting us well on pace to achieve our previous annual guidance of core FFO growth of 7% which obviously did not consider the impact of COVID-19 and the broad stay-at-home orders. Same store expenses excluding property taxes, declined for the fourth straight quarter and the pace of decline continued to accelerate to negative 5.3% in the first quarter.

On the revenue side, the growth of our third-party management portfolio continued to fuel management fees, up more than 40%. And our multiyear strategy to diverse our portfolio has served us well. For example, Houston today accounts for roughly 7% of our same-store revenue, whereas it was 12% when oil prices fell dramatically back in 2015. And right now, our online rental platform to allow customers to self-serve, what a game changer it has been for us over the past two months.

As a reminder, we piloted this program almost two years ago, and we've been operating it across our portfolio for over a year. As such, the associated operating procedures for store teams to support this sales channel are well-established and contributed significantly to our ability to create a safer environment to our teammates and customers to conduct business. Rent now accounted for roughly 50% of rentals in April, up from 11% in the fourth quarter of 2019. The second generation of this platform which we call rent now 2.0, is in place at almost 750 stores today, and we will complete this rollout in just a couple more weeks.

With rent now 2.0, customers can select premium, standard or value pricing for unit type based on their personal preference. This dynamic pricing is normally done at the store level, but we've integrated this functionality directly into our online platform. And in closing, we are in unprecedented times, and although we are slightly encouraged by some recent trends including the first week of May, we do not have sufficient visibility into customer behaviors in the coming months to confidently provide reliable annual guidance and, therefore, have withdrawn the guidance we provided this past February. I will now pass over to Andy to walk us through the quarter in more detail.

Andy Gregoire -- Chief Financial Officer

Thanks Joe. Last night, we reported adjusted quarterly funds from operations of $1.40 per share for the first quarter, a 6.9% increase over the same period last year driven once again by outstanding expense controls and solid revenue performance. Our same-store performance was highlighted by NOI growth of 4.8% driven by revenue growth of 2.6% and margin improvement of 140 basis points over the same period last year. First-quarter same-store expenses outside of property taxes decreased 530 basis points over the first quarter of 2019.

Excluding property taxes and Internet marketing spend, operating expenses decreased in every major line item. Partially offsetting these expense deficiencies was a 5.8% increase in property taxes and a 38% increase in total marketing spend over the first quarter of 2019. Importantly, our balance sheet and liquidity remained solid. At quarter end, we had cash on hand of $20.7 million and approximately $317 million available on our line of credit.

We also have an accordion feature available on our line that would add an additional $300 million of available credit should we exercise that option. We issued on our ATM for the first time in years, and sold $21.5 million in the days just prior to the market disruption created by the COVID-19 pandemic. Our net debt to recurring EBITDA ratio was 6x, and our debt service coverage was a healthy 4.3 times at March 31. We have no debt maturities until August of 2021 when $100 million is due, and then not again until 2023 when roughly $190 million is due.

Our average debt maturity was 6.5 years, and the percent of our total debt that is fixed rate was 91% at March 31. We are also monitoring our receivables very closely. And although our accounts receivables are slightly elevated, we collected 94% of customer revenue in April, a 2% decrease versus April 2019. We are actively engaging our past due customers to drive those collections.

We remain extremely diligent managing our liquidity and have scaled back planned acquisitions, expansions and have additional capital expenditure and operating expense levers to pull, if necessary. Our capital commitments are almost completely discretionary, and we only make such commitments when we are comfortable with the funding availability and our ability to maintain our balance sheet in good standing. We believe we have adequate liquidity to manage through a sustained period of disruption. And with that, operator, we will now open the call for questions.

Questions & Answers:

Operator

[Operator instructions] The first question is from Todd Thomas of KeyBanc. Please go ahead.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi. Thanks. Good morning. First question.

Joe, I think in your prepared remarks, you commented that trends in May so far have been encouraging. I realize it's a little early, but can you just elaborate on those comments? Was that specific to collections or rentals or something else?

Joe Sapphire -- Executive Officer of Life Storage

Yeah. Hi Todd. Well, a couple of those things, actually. I think since the last couple of weeks of April, we have seen kind of a slight improvement in move-ins, although negative.

It was less negative through the last couple of weeks of April. And then the first week of May, it's actually been positive, slightly positive, up compared to last year. So activity is maybe following what's going on in certain areas in certain states that are opening for business. So that's good news.

Mostly, it's coming from Texas. So Houston, Dallas, San Antonio are all up nicely compared to last year. So it is quite encouraging. We have seen call volume on the sales front pick up a little bit.

So yes, it is very encouraging considering April I think was obviously, hopefully, the worst of it. So yeah, it's a good thing so far.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. And then you had been seeing rent roll-ups across the portfolio. You had a positive mark-to-market for some time now, I think. And we've heard that asking rates and achieved rates are down in the last few weeks.

PSA said that they had reduced rates by 20% across their portfolio. Can you comment on where the company's in-place rents are versus market? After this change in market rents, how that mark-to-market looks today?

Andy Gregoire -- Chief Financial Officer

Sure. Hi Todd. It's Andy. See, Q1, our rent roll down was 4.7% which was very similar to last Q1.

In April, that did tick up to nine and a half percent roll down, move-in was paying less than move-outs. In street, rates are down significantly in April. They were down about 19 and a half percent.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

OK. Thank you.

Operator

The next question is from Smedes Rose of Citi. Please go ahead.

Unknown speaker

Good morning guys. This is actually Parker DeCreanne on for Smedes. Can you just touch on marketing spend for the quarter? It's relatively high versus last year, even looking at peak leasing season. Did you guys just pull up some of the spend into March given what you saw toward the back half of the month? And can you just help us sort of understand run rate, how we should expect for the balance of the year? Thanks.

Andy Gregoire -- Chief Financial Officer

Sure. The marketing spend was elevated during the quarter. We did expect it to be higher at the beginning of the year. We do have easier comps.

If you look at the rolling same-store, you'll see that comp gets much easier in Q2, Q3 and Q4 versus we had a very tough comp in Q1. We do expect elevated spends. Costs are up per click, but we like the activity we're seeing. Internet activity has maintained a high level.

Costs are increasing less activity overall from customers means we're all bidding a little bit higher for those customers. So we do expect it to be elevated, although at the Q1 level, showing Internet marketing spend up over 50%, we wouldn't expect that to hold for the whole year.

Unknown speaker

Yup. OK. Thank you guys.

Operator

The next question is from Jeff Spector of Bank of America. Please go ahead.

Jeff Spector -- Bank of America Merrill Lynch -- Analyst

Good morning. Thank you. My first question is on markets. I noticed that markets like L.A., where we've seen a lot of high unemployment or claims was listed as one of your stronger markets.

I guess, can you just talk a little bit about the demand you're seeing in some of these stronger markets versus let's say your weaker markets?

Joe Sapphire -- Executive Officer of Life Storage

Yeah. Hi Jeff. It's Joe. It really depends.

I mean, it's -- we're trying to get some sort of answer whether it's the secondary or tertiary markets are doing better than the primary markets. We've heard that in some of the seminars over the last few weeks, and we really haven't seen it. I mean, in certain places, where there are strong shelters in place like New York City and so forth or Chicago, we did see move-ins in April less than the average of the portfolio. But at the same time, L.A.

was actually a better performer in terms of move-ins. But yet, L.A. was on the higher side for collections, higher than normal. So it is pretty sporadic over the regions.

But in general, 15% down for April is in my view pretty incredible considering what's -- what really happened in April. And if that is the worst of it, we're pretty pleased. But there's really no sort of concrete conclusion that can come out in terms of the regions. It does seem to ebb and flow across various large markets and smaller markets.

Jeff Spector -- Bank of America Merrill Lynch -- Analyst

OK. Thank you. And I'm sorry if you've already said this, but your pricing strategy going forward as let's say cities or region states reopen, what is the plan for rentals, rent increases?

Joe Sapphire -- Executive Officer of Life Storage

Yeah. We do watch that carefully. We did hold off on the May increases. You typically have to project that out a month in advance because you got to give pre-advice if you're going to raise someone's rent.

We did about -- we did a portion of them for April. We started to slow down as COVID started happening, so we sent out fewer letters in March. So if things keep going the way they look in terms of the first week of May, I feel pretty confident we could get back to some normal rent increases in the second half of the year. We will test them out in June, nothing close to what we typically would do for a month, but we will test it out, see how it goes.

And it's encouraging to see more and more states opening which is a good sign and activity picking up. And we'll see how it goes. But it's very hard to predict anything out. Hopefully, there's no second wave of this.

I mean, that could happen. But we'll take it slow.

Jeff Spector -- Bank of America Merrill Lynch -- Analyst

Great. Thank you. Good luck.

Joe Sapphire -- Executive Officer of Life Storage

Thank you.

Operator

The next question is from Ki Bin Kim of SunTrust. Please go ahead.

Unknown speaker

Good morning. This is Ian on for Ki Bin. Maybe, first, could you touch on customer behavior and the rent now 2.0 program? Are customers more price-sensitive on that than walk-ins? And maybe how are you able to upsell the customers on 2.0 versus walk-in?

Joe Sapphire -- Executive Officer of Life Storage

Yeah. Hi Ian. It's relatively early to really give you any sort of explanation. And I think for -- to protect our own technology, we don't want to give away too much.

But there are people out there who will pay for convenience. So when you select on a premium spot, you can see how close it is to an elevator in terms of steps. And there will be a price differential for that, maybe 10%. And we have customers choosing that option.

And then of course you always have the bargain hunters and those who might want a lower price because they don't really care so much if it's in the back far corner of the facility. So it is a mix. It's early to say, but we love the idea that we can up-sell, and the customers have a choice. And the feedback we're getting from our customers is they love it, and it's working well.

And as it becomes harder and harder to conduct business at the counter, I think something like this is really a differentiator for us.

Unknown speaker

OK. That's helpful. And then last one for me. Just on payroll, some of your peers have mentioned increasing employee pay per hour.

Have you guys had to do that? And if so, could you maybe quantify what you think payroll expenses will be up in 2Q?

Joe Sapphire -- Executive Officer of Life Storage

Well, I'll let Andy talk about the second part of the question. But in general, we typically hire a very strong manager and we pay wages that are typically higher than others. So we have not had to do that. We have -- the first thing we've obviously done is make sure that our employees are safe.

And if they weren't safe or if they had concerns, they were allowed to stay home, and we provided enhanced leave pay. We've done a lot for our employees, and the feedback has been tremendous. To be able to work alone in a store, we reduced double coverage. We've allowed them to keep the doors locked, if they felt they wanted to.

So we've been very flexible, and that's really what is important. So no, we have not had to increase wages. We don't expect to have to do that. And I would think that you will see the continued trend that you've seen in the first quarter in terms of payroll expenses coming down.

Andy, if you can add to that.

Andy Gregoire -- Chief Financial Officer

Yes. The comp gets a little tougher, but our store teams continue to find efficiencies, and we would expect that payroll would continue as a similar trend we saw in Q1.

Unknown speaker

OK. I appreciate that color. Thank you guys.

Andy Gregoire -- Chief Financial Officer

OK. Thanks.

Operator

The next question is from Steve Sakwa of Evercore ISI. Please go ahead.

Steve Sakwa -- Evercore ISI -- Analyst

Thanks. Good morning. I guess first question, can you just remind us what percentage of your customers are on auto pay today?

Andy Gregoire -- Chief Financial Officer

50% are on auto pay, Steve.

Steve Sakwa -- Evercore ISI -- Analyst

OK. And I assume that when you talked about the collections and starting to see a slight elevation, is there a kind of major difference between those on auto pay and those on cash pay?

Joe Sapphire -- Executive Officer of Life Storage

Actually, in April, we did see the cash actually pay more regularly than those on Autopay. Some of the auto pays actually were rejected. For one reason or another, not significantly, but that was interesting to us. So those who typically pay by ACH or cash or check.

We didn't see an incredible -- an incremental increase. And then this time in May, we're anniversary date, although we were on first of the month, so we do still have a bulk of due dates on the first of the month. So we have seen it in a better spot than it was compared to April. So that's good too.

Andy Gregoire -- Chief Financial Officer

Yeah it's encouraging. We -- at this time in April, we were at 63.1% at April collections. And in May, we're at 64.5% of total revenue collected. So it's a better trend we're seeing in May.

So it's encouraging, encouraging.

Steve Sakwa -- Evercore ISI -- Analyst

OK. Great. And then I guess the second question, just anything on the warehouse anywhere. I mean, are you seeing any kind of uplift in the business customer? And just how is that? I know the rent now is certainly helping with your kind of retail customer, but anything on the warehouse anywhere?

Joe Sapphire -- Executive Officer of Life Storage

Yeah. Thanks, Steve. We actually had probably the most pilot programs in place. So typically, a corporate customer will want to pilot this solution for 30 to 90 days, and some of that has been delayed a little bit.

But they are -- we're just looking at a promising June, if all goes well in terms of the number of new installations for our enterprise solutions. So that's positive. It will probably be one of the better months we've had since we really started to roll this out. In general, I think I'm very optimistic about the storage industry for businesses, in particular post-COVID.

I think you're seeing a lot of reaction to having not enough inventory, not being prepared, hospitals, companies, even personal residents. And I do think if we continue to see this trend of slowly opening and we don't take any step back and we continue to move forward, I think you'll see a bigger demand for storage for essentials and PPE and so forth. And so we're kind of gearing up for that with our warehouse anywhere team. We're targeting certain industries that we know we have a solution for that we can help them with the inventory tracking of some of this extra equipment and supplies that they'll lead to store.

So I'm encouraged by what may be in the next 18 months for storage in terms of businesses, but also for residential. So we'll see. But I am quite pleased with the warehouse anywhere this year despite kind of a little bit of a disruption. We are piloting a few new names, and June looks like it could be a good month for us in that regard.

Steve Sakwa -- Evercore ISI -- Analyst

Great. Thanks very much.

Operator

The next question is from Todd Stender of Wells Fargo. Please go ahead.

Todd Stender -- Wells Fargo Securities -- Analyst

Hey. Thanks. Could we just hear more details on the California assets you acquired from your JV partner, maybe what markets they're in? And was this an expected exit? And maybe how the stores have been performing?

Joe Sapphire -- Executive Officer of Life Storage

Yes. It's -- we've managed these stores for quite some time. We've been a joint venture partner. I think they're great assets.

We know them. There's a few expansions that are under way. It's a high four cap going in, but year 1 should be closer to five and a half cap which is quite encouraging. So it's a great deal for us.

We expect when we go into a JV early on that we'll be the ultimate buyer and to be able to pull off something like this in a very desirable market in California is exciting to be able to do it off-market with a reliable partner. So we're excited about it. Andy, if you have specifics on anything else?

Andy Gregoire -- Chief Financial Officer

Yeah. I mean, in Southern California, one is in San Jose. The rest are in the Palmdale area.

Todd Stender -- Wells Fargo Securities -- Analyst

They've already branded Life Storage?

Joe Sapphire -- Executive Officer of Life Storage

Yeah. So we've been -- we've owned and operated them. So there's no disruption. We know these assets very well.

We are the ones who have been doing the expansions for our partner. So yes, it's a great deal for us. We're excited that we're able to get it done in the first quarter. And yes, that's why we do JVs.

Todd Stender -- Wells Fargo Securities -- Analyst

And then just to stick on that theme with the Seattle asset that you're entering in venture, did you have an opportunity to buy this wholly owned or maybe just kind of speak to the risk and reward of this one.

Joe Sapphire -- Executive Officer of Life Storage

Yeah. We -- as you know, we just recently got into the Seattle market. So once you're in with three or four assets, you do like to build your presence and your scale whether it's through third-party management or JV. Our strategy for this year was really to -- from the wholly owned acquisitions to be more on the stabilized assets.

We did more lease-up in 2019. And this is a CO deal. It's a great asset. It's with a new JV partner who we've been wanting to do more CO deals with.

So this is the first of hopefully many to come. But for CO deals, they are dilutive, and we'd rather take a minority stake and do it that way versus right into the REIT. We could have done it right into REIT. But again, we're focused on more accretive deals for 2020.

Todd Stender -- Wells Fargo Securities -- Analyst

Thank you.

Joe Sapphire -- Executive Officer of Life Storage

Thanks Todd.

Operator

The next question is a follow up from Ki Bin Kim of SunTrust. Please go ahead.

Unknown speaker

This is Ian again. Just one quick follow-up, Joe. I think you had mentioned Street rates were down 19% in April. What are those attractive rates in April taking into account promotions?

Andy Gregoire -- Chief Financial Officer

Yeah. Our promotions were down in April. So I think the net effective, I just double-checked it here, was 15% down, net effective.

Unknown speaker

OK. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Joe Saffire for closing remarks.

Joe Sapphire -- Executive Officer of Life Storage

OK. Well, thank you everybody for calling in today and listening. And again, I wish you all to stay healthy and be safe and speak to you again in a few months. Thank you.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Dave Dodman -- Senior Vice President of Strategic Planning and Investor Relations

Joe Sapphire -- Executive Officer of Life Storage

Andy Gregoire -- Chief Financial Officer

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Unknown speaker

Jeff Spector -- Bank of America Merrill Lynch -- Analyst

Steve Sakwa -- Evercore ISI -- Analyst

Todd Stender -- Wells Fargo Securities -- Analyst

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