U-Store-It Trust Q2 2008 Earnings Call Transcript

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U-Store-It Trust (YSI) Q2 2008 Earnings Call August 8, 2008 11:00 AM ET


Dean Jernigan - President and Chief Executive Officer

Christopher Marr - Chief Financial Officer


David Toti - Citigroup

Paul Adornato - BMO Capital Markets

Jordan Sandler - KeyBanc Capital Markets


Welcome to the U-Store-It Trust second quarter 2008 earnings conference call. (Operator Instructions) Now, I would like to turn the conference over to Chief Executive Officer, Dean Jernigan.

Dean Jernigan

Good morning to all, it’s my pleasure to read this cautionary statement for you. The company's remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements.

The risk and factors have cause our actual results to differ materially from forward-looking statements are provided in the documents that the company files with the SEC, specifically, the 8-K along with our earnings release in the Business Risk Factor section of the company's annual report. In addition, the company's remarks include reference to non-GAAP measures, reconciliation between GAAP and non-GAAP can be found on the company's website.

Chris is going to start of this morning with few comments and then I will make my comments and will open it up for Q-and-A.

Christopher Marr

Second quarter was a good one for U-Store-It both compare to our internal goals and expectations as well as compare to the self storage industry. We remain very encouraged with consumer demand, our rentals were up over the second quarter of last year on a same-store basis and new supply remains firmly in check.

We have read reports of folks discussing a disappointing June, obviously we are not sure of what the basis of the comparison is, but we want to make sure as we assumed. Everyone realizes that there were five Saturdays in May of 2008 and the month ended on a Saturday which is very positive for our business, as compared to four Saturdays in May of last year. June of this year only had four Saturdays and the month ended on a Monday as compare to June of 2007 when there were five Saturdays including the last day of the month.

So, if you take the quarter as a whole, to factor out the monthly differences in the number of Saturdays.

We’ve increased our rentals for the quarter at 2.2% over the second quarter of last year. May and June were very positive for us and that momentum continued into July with a 55 basis point increase in same-store occupancy sequentially.

Our same-store growth and rental income for the quarter of 5.6% was driven by a 50 basis point increase in average physical occupancy. The positive impacts of our technology in the revenue management area passing along rate increases to existing tenants and increasing street rents in markets such as Austin, Chicago, Huston and Nashville where we have experienced strong gains in physical occupancy and all of that combined with our receivables remaining well below prior year levels, which result in the lower credit write-offs than we had a year ago allowed us to put up the strong 5.6% same-store rental income growth.

Our discounts continued to be higher than we would like them to be as we must meet the market to remain competitive. Our FFO per share for the quarter was impacted by a penny a share from the write-off of some third-party due diligence costs related to a transaction we were working on.

As I’m sure you can all appreciate when we entered into negotiation we exchanged mutual confidentiality agreements and so we are not able to comment with anymore specificity and so obviously we will not be taking questions on this during the call.

Our $0.25 per share of FFO excluding this charge was at the midpoint of our $0.24 to $0.26 per share expectations. Our payout of ratio of FFO was 75% thus far in 2008 permits us to meet our property level, capital investments without additional borrowing.

We are maintaining our full year FFO guidance of $0.93 to $0.97 per share and we are maintaining our full year net operating growth expectation of 4.5% to 5.5% on a same-store basis. We are very fortunate to have no debt maturities of note in 2008 and we have been using assets sales to reduce the balance on our credit facility, you will note on the balance sheet we have 11% improvement in our liquidity, our cash, restricted cash and availability on our credit facility shows 11% improvement over where we ended 2007.

At the end of the second quarter, we’ve reduced our floating rate exposure to 17% of our total debt, down from 33% at the end of the first quarter. Our interest coverage is now at 2.6 times and our debt to gross assets ratio is at 52.4% at quarter end. As an update to our disposition program, we have closed on the sale of six assets in Florida, New York and Louisiana and a Business Park in New Jersey thus far in 2008 for proceeds of approximately $17.1 million.

The self storage sales representing 6.81 Cap on trailing 12 month NOI and other frame referenced $49 per foot. We currently have 14 properties under contract for estimated proceeds of $40 million and closing expected during the third and fourth quarter. Those on a trailing NOI basis 6.98 Cap $53 of foot. All of the eight properties under contract at the end of the first quarter have either closed or remain under contract with closings pending.

The financing market is difficult and while the markets that we’ve explored have not proven to be deep, we are encouraged by our execution. We currently have in total between asset sales closed and those under contract approximately $57 million of proceeds. As we discussed on our first quarter call we continue our efforts to raise institutional capital through our joint venture program. We are pleased with our progress and if our discussions continue as positively as they have thus far, we believe we have a strong possibility of closing our venture during the fourth quarter of this year.

There are details to hiring our and due diligences in very early stages, so specifics will be fore coming during our third quarter conference call. The concept remains consistent, our contributions of assets and existing CMBS debt. Clearly we remain in an unusual period in the real estate capital markets and there is always risk between the stage we are currently at and to closing.

Moving along to our operating results, again we generated a 5.6% increase in same-store rental income, 27% of that gain through occupancy, 29% through street rate increases and the balance spread among rent increases to existing tenants, lower write-offs offset by slightly higher discounting.

The same-store data services national average shows rental rates down by comparison 2% and physical occupancy down 1% over their survey of the same properties in the second quarter of ’07.

We are making great progress on our focus on improving our other income. We have increased by 85%, our tenant insurance penetration rates to new renters from our January 2008 results to our June 2008 results. However, the other side of our very low AR and write-offs are lower late charges being assessed to our customers, which is the primary cost of the 5% decline in other property income on a quarter-over-quarter basis.

Revenue per occupied square foot grew 5% on the same-store pool, this compares to the same-store data service national average of negative 4.5% in comparing the second quarter of ’08 to the same quarter of ’07.

Same-store operating expense growth of 9% in the second quarter of ’08 was inline with our expectations and our budgets. During our comments on the first quarter earnings call we discussed our plan to significantly ramp up marketing in the second quarter and that our same-store expense growth would reflect net investment. We’re also spoke to many of you at (Inaudible) and discussed the fact we are determined to have our advertising investments in the Internet and focus direct marketing in certain markets, complete it and advanced in the prime rental season. We completed that objectives and believe we bear fruit as our results illustrate.

Same-store NOI for the quarter was up to 2.3% over the same quarter of last year. Moving to more of a market look, same-store revenue grew in all of our same-store markets with the exception of Fort Lauderdale, West Palm Beach, Tampa and Naples Florida. In those four markets we saw a 4.5% decline in our same-store revenue growth.

Florida as a whole was down 2.4% as we had positive results in Jacksonville and Miami. Removing the Florida assets from the same-store pool resulted in our revenue growth moving from 4.8 to 6.4 and our NOI growth moving from 2.3 to 4.7. We have made changes to four of our five district managers in Florida, with changes being made last fall and early this spring.

We have seen positive revenue and occupancy growth trends from April through July of this year with occupancy up a 150 basis points and revenues up 1.3% from April to July. We believe our changes are having their desired effect and Florida has stabilized and is showing signs of beginning to move in a positive direction for the balance of the year.

Our best performing states were Texas with 9.5% revenue and 8.9% NOI growth, Ohio with 9.1% revenue and 12.1% NOI growth and Illinois with 10.3% growth in revenue and 9.4% growth in NOI and Illinois was also the leader in occupancy gains with a 540 basis point improvement over the last year.

The GAAP between physical and economic occupancy on the same-store pool improved 310 basis points from Q2, ‘07 to Q2, ‘08 this reflects the reduction in write-offs, the reduction in nonstandard rents as we pass along rate increases to existing tenants offset by an increase in promotional discounting.

G&A adjusted for the one-time items was $5.8 million, inline with our previously issued guidance for the run rate for the full-year. We are affirming our full-year 2008 guidance of 93 to 97, as well as affirming our NOI growth of 4.5% to 5.5%.

We have tweaked down our full-year same-store average occupancy, revenue and also reduced our expense expectations. These adjustments on revenue and occupancy reflect our actual results through June, particularly in Florida which impacted our, obviously our occupancy and revenue growth expectations for the balance of the year.

Our focus on operating expenses continues to bear fruit and our second half of the year will show relatively flat to negative expense growth over the second half of 2007. Our third quarter FFO per share, we are forecasting in a range of $0.23 to $0.25 and continues to be appropriately cautious and conservative.

As I mentioned earlier, we are focused on improving our liquidity and we continue our focus on disposing of non-core assets and our guidance reflects asset sales for the year at $60 million to $65 million.

In summary, a good quarter, we are making good progress on all of our initiatives. We are working extremely focused and are excited about the opportunities we see for the balance of the year.

Dean, I’ll turn it back over to you.

Dean Jernigan

I’d like to take a little time today and discuss in somewhat more detail than I normally get into some of our results because, I’ve seen the reports, the earnings reports from all three other public companies now and I’ve heard two conference calls and at least two of the companies have different perspectives than us. I haven’t heard of yesterdays call yet, but our perspective is very different from the other two calls and so, I’d like to run through all of our markets where we have 500,000 square feet or more in storage facilities and give you our year-over-year revenue gains.

Now, we break this up by state in the material that we file, but we managed by market actually and we have about 40 markets around the country and that we have storage facilities in, and the ones that we have 500,000 square feet or more only run through them.

Houston, year-over-year up 13.3% in revenue, Chicago up 10%, Sacramento 9.5%, Atlanta plus 9.1%, Maryland DC that the capital area of the country 9.0%, Denver 8.5% Indianapolis plus 8.2% all these applies of course. Phoenix 8.1%, Cleveland 7.8%, Dallas 7.0%. North Carolina, which includes Greensburg, Riley, Charlotte, Farield 6.3%, Memphis 4.4, Connecticut 4.3, New Jersey 3.3

Now, we get to the loser San Bernardino 2.5, plus 2.5 not negative, but still plus 2.5, Southern California plus 1.8, Tucson plus 1.6, Orlando plus 0.3, now the real losers Fort Lauderdale minus 2.9, West Palm Beach minus 3.3 and Tampa minus 6.2.

It was all the same to me. I’ll tell you, if you strike the line under New Jersey and look at the properties, look at the markets below that starting with San Bernardino, through Southern California, Tucson, Orlando, Fort Lauderdale, West Palm Beach and Tampa, our fault not to market, our fault management issues.

We’ve made many, many changes in those markets both at the DM level, District Manager level and at the property level with our General Managers and Managers and we really didn’t get all the right people in the right places prior to this rental seasoning, so we’re not blaming anything on the market right now, so as Florida is more of a malaise now than before 2005 and before the hurricanes hit yes, for sure.

The migration patterns have changed it’s still a balanced state. People aren’t moving out more rapidly than they are moving in, but we don’t have the great in migration in Florida back yet that we had prior 2005, but still yet we should be able to do much better than what we did in Q2 at our Florida districts and in Florida market and we are always seeing as Chris said a turnaround. We think we have bottomed out there and we are looking forward to greater opportunities in the Florida market. So, we have suffered for two or three quarters there and the question is why have we suffered?

I mentioned kind of what we, somewhat why we suffered but the word comes to mind is narkalepsy, it’s an unusual reflection. The definition is an extreme tendency to fall sleep whenever in relaxed surroundings and I really think that’s what Katrina and her sister hurricanes did in 2005 to us down there. It filled everything up; virtually all of Florida was full, people raising rents 15%, 20%, 25% and it allowed us into a sense of false security I think. When those people started moving out, it uncovered what was underneath and that is perhaps management teams that had grown to accept something less than perfect, they weren’t as energized as before. I think another alt term is bad, dumb and happy.

So, I look at our management team that came in here in the summer of 2006 and we had not suffered from that unusual reflection, we have focus, we have extreme focus at this company based on results and so, does that mean in this quarter we maybe outperformed the rest of the market a little bit, perhaps but you know what? I think we really should. We get paid to out perform as a public company and I think we should outperform. So as Chris said, the SSDs reports Q2 average occupancy down 1% we were up 50 Bips. Their report had asking rents down 2%, we were up 1%, pretty good in my opinion still not quite good enough, pleased but not satisfied I guess you could say.

So I’d like to go back and discuss one point that Chris made also because we really had some great confusion in this quarter. I think we actually had some people writing on quite a miserable June, the industry suffered, but I would tell you at U-Store-It, we have great technology and we budget on a daily basis; meaning that we know when a month has five Saturdays and we budget accordingly. So, words I’ve heard to describe June, dreadful, awful, pathetic none of those were appropriate.

One company reported rentals down 10% in June, caught them by surprise. So, they’re pleased with July, but suspect June was weak because people moving have declined, as the downturn occurred throughout the country; in other words, they were down 10% across the whole country, of course they were; they had one less Saturday to make units and that of course did a big, big swing day. So, they describe June as a blip on the screen, it was a blip on the screen, but we can't manage these assets and manage these companies and manage these properties on a month-by-month basis and budget accordingly, we must manage on a day-by-day basis.

So, we were pleased with the June. June came in right on budget for us. We were pleased with May, we were not carried away with May because it did what we expected it to do with the five Saturdays. So again, the quarter, it was a good quarter and we were pleased as it came in basically on budget for us.

I’ve also seen somebody writing that maybe storage is not a great fancy business and I still contend that it is. Again rent was up year-over-year, occupancy up for us year-over-year, revenues up year-over-year. The picture looks pretty clear to me. I don’t agree with the concept that the right-size is collecting, low hanging fruit. This team was in place a year ago, we were renting a lot of units a year ago and is there still some low hanging fruit out there, maybe just a little bit, but not much. This management team has been doing a great job for far more than a year now and so our year-over-year comparisons I think are fair.

The other comment I would like to speak to is appears that we are a consumer discretionary purchase. I admit that we have a few customers, but they are very few, less than 10%. They go out and buy their Harley-Davidson motorcycle and rent a storage unit from us to put in. That business has gone for the time being, but that is well less than 10% in my opinion.

We have people that are using us because they need us. I would encourage whomever who wants to go with me on my next road trip, to listen to these people, meet these customers and listen to why they are storing with us. We’re providing a product and service for these people in transition; they’re in transition that is our business; that is the bulk of our business. So, I think it’s a lot of things. I’ve been everywhere, that’s been me the last 12 months and I’ve seen almost all our properties now across the country.

I am very pleased with what I’ve seen and the money that we’ve invested in our properties, that we have upgraded our properties to the point that we compare with any as far as I’m concerned now, but another thing that I do while I’m out, seeing our people and seeing our properties, is I’m always looking around for new supply because that is the one thing that can cause us more grief than we care to think about and I’m happy to say again here today that we have virtually no new supply taking place out there across this country in self storage.

We are starting to do a survey, a quarterly survey through all of our district managers. Of course they are suppose to keep up with their markets and their suppose to keep up with any kind of new supply coming on and believe me they do because it’s going to impact them, they want to know about it. So, they can tell us maybe why our property is not performing as well as it should because of the new competitor.

This last quarter we could only find five new storage facilities that opened around the country. One in Cleveland of all places, one in Chicago, a small one in Denver 275 units, one down in the Black Sea area in the Gulf Coast and one in Fredericksburg Virginia that is a trickling a very, very small growth and supply, almost noting. It feels like 1993, ‘94 and ‘95 to me when we were coming out of the SNL to bark on. Nothing had been build, the financial markets had collapsed and of course we have something similar today and plus today we have steel prices that have grown to an acceptable level.

So, where are we going forward, no new supply? I think we’re all outperforming in some and I hope this company will outperform more. We do have our house in order and we are focused. We’re focused on growing our net operating income and growing our FFO. For us to reduce expectations on occupancy it means nothing to me. I’m only concerned about us increasing our NOI, consequently our FFO and as you see we kept our expectations and our guidance both consistent with previous guidance. So, as Chris said it was good quarter. I think I’m looking forward to the rest of the year as being a good year.

With that we will start with questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from David Toti - Citigroup.

David Toti – Citigroup

Could you talk a little bit about the tolerance of new customers to your existing prices; are you seeing sort of more pushback from the new customers or more pushback from the existing customers?

Dean Jernigan

David, we’re not really seeing our pushback on either side. Again from the revenue management perspective, where you’re pushing street rents for us at least it’s within those markets, where we’re seeing strong demand, occupancies are up and as a result we have a few units of that type available and in those markets we are pushing street rents. We try to avoid reducing street rents whenever possible, because once you go backwards it’s awful hard to climb backup that hill again.

From a passing along rate increases to the existing customers and we tracked every single customer who get their rate increase letter and then what happens to them over the days and months their out until they ultimately leave the portfolio and our data would indicate that the rate increases being passed along, actually seem to be having humorously a positive impact on the length of stay. So on a percentage basis the tenants who are getting rate increase letters have been progressively staying longer than they were when we first got here and began the program of passing along monthly rate increases.

So, we have not we have not seen a change there at all. In fact when you look at length of stays, for example the 180 day category, we’ve actually seen a sequential drop of about 105 basis points in terms of the amount of people who are moving out after 180 days now, than they were a year-ago this quarter.

David Toti – Citigroup

Great and then just moving over to corporate, are you pretty comfortable with where you are in terms of staffing and internal systems at this point?

Dean Jernigan

Yes, we are fully staffed, we have a great team and both from a systems perspective and a staffing perspective we are completely where we’d like to be. Now obviously on systems, it’s never ending, so systems create an awful lot of data for us, data creates an awful lot of demand for analysis and interpretation. So, I still believe from a data mining perspective we’ve got and awful lot we can do which will benefit us in many, many ways, but the core foundation is there and we push out an awful lot of data on a daily basis to help the folks run the business.

David Toti – Citigroup

Did you address your strategy around your ’09 maturities?

Dean Jernigan

So, the ’09 maturities we’ve got two buckets and the substantial one is the term loans and the unsecured credit facility. They have a one year extension option assuming that we continue to be in good covenant condition as we are with a 15 basis point fee. So, arguably if the markets continue where they are, that would be the strategy as to push that to November 2010. YSI III is one of the CMBS pools. It matures in November of 2009 and we are looking at a variety of options on that one right now, but haven’t settled on any specific strategy.

David Toti – Citigroup

Could you just talk a little about the acquisition environment relative to, are you seeing increasing or decreasing volume, are you seeing changes in sort of average prices, are you seeing any distressed sellers in the market, any color would be great?

Dean Jernigan

I think they’re continues to be a spread on the bid as between what people are interested in selling for and what buyers are interested in paying, which as a result has not created an awful lot of transaction volume, which is why we’re also pleased with our ability to execute where we have. You’ve obviously seen the transaction in the JV that Sovran did as a good data-point really for our portfolio. I’m not sure there’s been much else moving around and you just don’t see that stress yet to your other point.

For the most part folks refinanced in the last few years with relatively long-term low cost interest only debt they’re cash flowing and happy. We do believe at some point, if the markets continue to be seized up as they are today, some of that opportunity will present itself, but I doubt that’s an ’08 event.


Your next question comes from Paul Adornato - BMO Capital Markets.

Paul Adornato - BMO Capital Markets

What actually is the absolute level of customer retention after 90 and 180 days?

Dean Jernigan

We tend to lose. If you are a new customer and you came in today and rented unit, you’re move out between 120 and 180 days would be about 6.8% of the customers who would come in today and rent and then that drops to about 4.2% for the folks after a 180 days.

Paul Adornato - BMO Capital Markets

What has been the nature of the discounts that you’ve been offering especially in this last quarter. Has it been a months free rent, have you offered more than a month in some cases?

Dean Jernigan

We generally do the month free, now that gets stopped at unit takes above 90% occupancy and/or if we only have two or three of a particular unit type available. We don’t offer that discount, but generally we offer it below that and we have experimented with 50% of the first three months and we’re also looking at some other programs designed to attempt as we’ve been fighting this battle for over a year now to move away from that first month free being offered on the front end and try to find a way to create a longer length of stay in order to get that discount, but obviously we’re fighting that battle against the other public players who are being more aggressive on the discounting, but there are a awful lot we haven’t really changed.

Paul Adornato - BMO Capital Markets

And do you notice the difference in retention among those that you’re offer the free month upfront versus the 50% off of three months?

Dean Jernigan

Again I think we’ve been fairly new on the 50% off for three months, so I don’t have as much data as I would as I told you before on the trend there.

Paul Adornato - BMO Capital Markets

And finally, just on advertising you said you obviously spent a lot this quarter; did you turn it off completely in the second quarter?

Dean Jernigan

No, we didn’t turn it off at all, so the advertising will continue. I think part of the 75% really relates to the fact that we did not turn it on in the second quarter of ’07. So sequentially, we’re continuing to use our investment particularly on the internet to drive customers and that’s something we can track, so it’s a highly valuable tool for us and there’s some ground we can gain on some of the other folks in that area.

Paul Adornato - BMO Capital Markets

And can you comment on July activity?

Dean Jernigan

Yes, July was nice. As I said we were up 55 basis points sequentially, saw good customer rental activity and continue to be optimistic on the first eight days of August.

Paul Adornato - BMO Capital Markets

And just one more, how is bad debt been in the quarter?

Dean Jernigan

Yes, that problem is gone, it’s 40% reduction in Q2 same store over Q2 of last year, receivables are over 31-days or below 2.5% and again I think hammering back on Dean’s comments, nothing here has been easy since we got here; which means everyday folks were focusing on blocking and tackling and I think AR is one of those areas, where that focus has created a best-in-class performance.


Your next question comes from Jordan Sandler - KeyBanc Capital Markets

Jordan Sandler – KeyBanc Capital Markets

I’m here with Todd Thomas as well. Just wanted to touch base on sort of the provisions and I know this is maybe a little nitpicky, but on the same store revenue and expense provisions I was just curious to get a little bit more detail on what was driving those changes?

Dean Jernigan

The drop on revenue and occupancy really relates to where we ended at June 30, particularly in Florida and how that’s going to translate into the last half of the year. As Dean said, we believe Florida is stabilized and things are starting to move in a positive direction, but we have what we have for the first six months. So that’s really the driver to tweaking the top-line.

The bottom, the expenses we’ve had some programs in place since the end of last year on taking cost out of the system. We’ve had a keen focus on how we can reduce operating expenses and control them, where they can be reduced and it is bearing fruits. So, we had some aggressive internal objectives, which we are starting to and have been delivering on and as a result, I think the expenses will remain very much in control for the balance of the year.

To be fare, the expenses last year in the second half of the year, were also fairly high. So, when we talk about flat to negative expense growth on a same store basis over the prior period, the sequential changes in operating expenses are not nearly going to show that magnitude, the change over the prior year will in fact be flat to negative for the second half of the year.

Jordan Sandler – KeyBanc Capital Markets

Will your sequential expenses comedown? Is anything particularly seasonal 2Q to 3Q?

Dean Jernigan

Not on a seasonality, but from say a property insurance perspective our renewal was at the end of May, so we’ll see lower insurance costs in the second half of the year than we did in the first half. Repair and maintenance, we’re working through the backend of all of the differed maintenance we wanted to get accomplished, we’ll see that move sequentially, slightly lower. Your utilities tend to peak in July within August to some extend with the cost for the climate-controlled units and then that comes down. Last year that was offset by really high snow removal in the fourth quarter in particular. We’ll see how that weather place out this year.

Jordan Sandler – KeyBanc Capital Markets

And advertising you said, what’s going happen sequentially?

Dean Jernigan

I think it will be relatively consistent with the second quarter.

Jordan Sandler – KeyBanc Capital Markets

Okay, so that would probably be up a little bit from last year.

Dean Jernigan

It will. Not nearly to the magnitude you saw in the second quarter, because we had the folks in place as we went into the third and we began ramping up especially on the internet and direct advertising in Q3 and Q4 of last year.

Jordan Sandler – KeyBanc Capital Markets

The joint venture activity you’re talking about here a little bit. What’s the sort of order of magnitude and then which CMBS junks would probably?

Dean Jernigan

Yes, we’re not identifying the specific pools at this point. I think in terms of order of magnitude total deal size we’re thinking somewhere between, these are a big range, somewhere between 180 and….

[Audio Ends]

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