Market Overview

Life Storage, Inc. Reports First Quarter 2018 Results; Raises Same Store Outlook for 2018

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Life Storage, Inc. (NYSE:LSI) a leading national owner and operator of
self storage facilities, reported operating results for the quarter
ended March 31, 2018.

The Company achieved net income attributable to common shareholders in
the first quarter of 2018 of $33.9 million or $0.73 per fully diluted
common share. This compares to net income attributable to common
shareholders of $20.4 million in the first quarter of 2017, or $0.44 per
fully diluted common share.

Funds from operations ("FFO")(1) for the quarter were $1.27
per fully diluted common share compared to $1.26 for the same period
last year. Absent $1.1 million of costs related to changes to the
Company's Board of Directors and other proxy matters in the first
quarter of 2018, adjusted FFO per fully diluted common share was $1.30
and $1.26 for the quarters ended March 31, 2018 and 2017, respectively.

"We're pleased with the first quarter in that we achieved better than
expected results in most of our markets, and, with record high
occupancies and solid demand, are well positioned as we enter the
upcoming busy season," commented CEO David Rogers. "We're also
encouraged with the continued ramp up of Life Storage Solutions, our
third-party management division, as we grow our client base and expand
our brand."

Highlights for the 1st
Quarter Included
:

  • Increased same store revenue by 2.5% and same store net operating
    income ("NOI")(2) by 2.5% as compared to the
    first quarter of 2017.
  • Grew same store average occupancy for the quarter by 150 basis points
    to 91.1% compared to the same period in 2017. The Company ended the
    quarter at 91.2% occupied, an all-time high for the first quarter, and
    110 basis points higher than the same period in 2017.
  • Reduced internet marketing expense 18% by leveraging improved search
    engine visibility.
  • Added 105 mature stores owned since December 31, 2016 to its same
    store pool, including all stabilized facilities acquired during the
    2016 LifeStorage acquisition.
  • Added 10 stores to its third-party management platform; the Company
    now manages a total of 145 properties through its joint venture and
    third-party management agreements.
  • Achieved adjusted funds from operations per fully diluted common share
    of $1.30, a 3.2% increase over the same period last year.
  • Increased management fee income by 31.7% over that of the first
    quarter of 2017.
  • Paid a quarterly dividend of $1.00 per share of common stock.

OPERATIONS:

Total revenues increased 3.7% over first quarter 2017 while operating
costs increased 3.7%, resulting in an NOI increase of 3.7%.

Revenues for the 535 stabilized stores wholly owned by the Company since
December 31, 2016 increased 2.5% from those of the first quarter of
2017, the result of a 150 basis point increase in average occupancy and
a 6% increase in revenues related to tenant insurance.

Same store operating expenses increased 2.6% for the first quarter of
2018 compared to the prior year period. Increased real estate taxes,
payroll and benefits, and utilities were partially offset by an 18%
decrease in internet marketing costs. Consequently, same store NOI for
the period increased 2.5% over the first quarter of 2017.

General and administrative expenses increased by approximately $0.6
million over the same period in 2017. Absent $1.1 million of expenses
associated with changes to the Company's Board of Directors and other
proxy-related matters in 2018, and $0.7 million incurred for the
Company's change of name in 2017, general and administrative costs would
have been essentially flat year over year.

The Company achieved same store revenue growth in 25 of the 33 major
markets in its same store pool, with 27 markets maintaining an average
quarterly occupancy greater than 90%. Markets with the strongest
positive revenue impact included Las Vegas, NV; Houston/Beaumont, TX;
California (Northern and Southern); Buffalo-Upstate New York; and
Boston, MA.

PROPERTIES:

During the quarter, the Company added 10 properties to its third-party
management platform. It now manages a total of 145 properties through
its joint venture and third-party management agreements. It has an
additional 26 properties under contract to manage commencing in 2018 and
2019, three of which opened subsequent to quarter end. Twenty-one of the
remaining 23 contracts are new developments.

As of March 31, 2018, the Company had no properties under contract to
purchase for its own portfolio or that of its joint ventures but expects
to contribute up to $50 million to new or existing joint ventures during
2018.

CAPITAL STRUCTURE AND LIQUIDITY:

Illustrated below are key financial ratios at March 31, 2018:

  • Debt to Enterprise Value (at $83.52/share) 31.2%
  • Debt to Book Cost of Storage Facilities 40.8%
  • Debt to Recurring Annualized EBITDA 5.7x
  • Debt Service Coverage 4.6x

At March 31, 2018, the Company had approximately $7.8 million of cash on
hand, and $370 million available on its line of credit.

COMMON STOCK DIVIDEND:

Subsequent to quarter-end, the Company's Board of Directors approved a
quarterly dividend of $1.00 per share or $4.00 annualized.

YEAR 2018 EARNINGS GUIDANCE:

The following assumptions covering operations have been utilized in
formulating guidance for the second quarter and full year 2018:

         

Same Store

Projected Increases Over 2017

2Q 2018

   

FY 2018

Revenue 2.25 – 3.25% 1.75 – 2.75%
Operating Costs (excluding property taxes) 1.25 – 2.25% 1.00 – 2.00%
Property Taxes

5.50 – 6.50%

5.50 – 6.50%

Total Operating Expenses 2.75 – 3.75% 2.50 – 3.50%
Net Operating Income 2.00 – 3.00% 1.25 – 2.25%
 

The Company's 2018 same store pool consists of the 535 stabilized stores
owned since December 31, 2016, which includes the stabilized legacy
LifeStorage locations. The stores purchased between 2015 and 2017 at
certificate of occupancy or that were in the early stages of lease-up
are not included, regardless of their current occupancies. The Company
believes that occupancy levels achieved during the lease-up period,
using discounted rates, are not truly indicative of a new store's
performance, and therefore do not result in a meaningful year-over-year
comparison in future years. The Company will include such stores in its
same store pool in the first year after the stores achieve 80% sustained
occupancy using market rates and incentives. Accordingly, three
certificate of occupancy facilities constructed in 2014 that have
achieved stabilized occupancy and rates have been added to the 2018 same
store pool.

The Company plans to complete $50 – $55 million of expansions in 2018.
It also has budgeted $20 - $23 million to provide for recurring
capitalized expenditures including roofing, paving, and office
renovations.

The Company has not included any acquisition activity for 2018. Should
any acquisitions or joint venture investments occur, they are expected
to be funded by free cash flow and draws on its line of credit which
carries an interest rate of LIBOR plus 1.10%.

In 2018, the Company anticipates entering into additional joint
ventures, or adding to its existing agreements, contributing up to $50
million.

As of March 31, 2018, the Company operated 22 self storage facilities
that it acquired between 2015 - 2017 upon issuance of certificate of
occupancy or in the early stages of lease-up. These properties are
expected to contribute above average revenue growth in 2018.

Annual general and administrative expenses are expected to be
approximately $44 – $45 million.

As a result of the above assumptions, management expects adjusted funds
from operations for the full year 2018 to be approximately $5.36 to
$5.43 per share, and between $1.32 and $1.36 per share for the second
quarter of 2018.

             
Reconciliation of Guidance

2Q 2018

Range or Value

FY 2018

Range or Value

Earnings per share attributable to
 common shareholders -
diluted

$ 0.77 - $ 0.81

$ 3.12 - $ 3.19

Plus: real estate depreciation and
 amortization

0.55 - 0.55

2.24 - 2.24

FFO per share $ 1.32 - $ 1.36

$ 5.36 - $ 5.43

 

FORWARD LOOKING STATEMENTS:

When used within this news release, the words "intends," "believes,"
"expects," "anticipates," and similar expressions are intended to
identify "forward looking statements" within the meaning of that term in
Section 27A of the Securities Act of 1933, and in Section 21E of the
Securities Exchange Act of 1934. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors, which may
cause the actual results, performance or achievements of the Company to
be materially different from those expressed or implied by such forward
looking statements. Such factors include, but are not limited to, the
effect of competition from new self storage facilities, which could
cause rents and occupancy rates to decline; the Company's ability to
evaluate, finance and integrate acquired businesses into the Company's
existing business and operations; the Company's ability to enter new
markets where it has little or no operational experience; the Company's
existing indebtedness may mature in an unfavorable credit environment,
preventing refinancing or forcing refinancing of the indebtedness on
terms that are not as favorable as the existing terms; interest rates
may fluctuate, impacting costs associated with the Company's outstanding
floating rate debt; the Company's ability to comply with debt covenants;
the future ratings on the Company's debt instruments; the regional
concentration of the Company's business may subject it to economic
downturns in the states of Florida and Texas; the Company's ability to
effectively compete in the industries in which it does business; the
Company's reliance on its call center; the Company's cash flow may be
insufficient to meet required payments of principal, interest and
dividends; and tax law changes which may change the taxability of future
income.

CONFERENCE CALL:

Life Storage will hold its First Quarter Earnings Release Conference
Call at 9:00 a.m. Eastern Time on Thursday, May 3, 2018. To help avoid
connection delays, participants are encouraged to pre-register using this
link
. Anyone unable to pre-register may access the conference call
at 877.737.7051 (domestic), or 201.689.8878 (international). Management
will accept questions from registered financial analysts after prepared
remarks; all others are encouraged to listen to the call via webcast by
accessing the investor relations tab at lifestorage.com/.

The webcast will be archived for 90 days; a telephone replay will also
be available for 72 hours by calling 877.481.4010 and entering
conference ID 27725.

ABOUT LIFE STORAGE, INC:

Life
Storage, Inc.
is a self-administered and self-managed equity REIT
that is in the business of acquiring and managing self storage
facilities. Located in Buffalo, New York, the Company operates more than
700 storage facilities in 28 states. The Company serves both residential
and commercial storage customers with storage units rented by month.
Life Storage consistently provides responsive service to its
390,000-plus customers, making it a leader in the industry. For more
information visit http://invest.lifestorage.com/.

       
Life Storage, Inc.
Balance Sheet Data
(unaudited)
 

March 31,

December 31,
(dollars in thousands)       2018         2017  
Assets
Investment in storage facilities:
Land $ 786,628 $ 786,628
Building, equipment and construction in progress   3,541,631     3,534,782  
4,328,259 4,321,410
Less: accumulated depreciation   (647,130 )   (624,314 )
Investment in storage facilities, net 3,681,129 3,697,096
Cash and cash equivalents 7,778 9,167
Accounts receivable 7,286 7,331
Receivable from joint ventures 900 1,397
Investment in joint ventures 133,106 133,458
Prepaid expenses 17,335 6,757
Trade name 16,500 16,500
Fair value of interest rate swap agreements 277 205
Other assets   4,603     4,863  
Total Assets $ 3,868,914   $ 3,876,774  
 
Liabilities
Line of credit $ 130,000 $ 105,000
Term notes, net 1,609,576 1,609,089
Accounts payable and accrued liabilities 69,227 92,941
Deferred revenue 10,347 9,374
Mortgages payable   12,581     12,674  
Total Liabilities 1,831,731 1,829,078
 
Noncontrolling redeemable Operating Partnership Units at redemption
value
17,846 19,373
 
Equity
Common stock 465 466
Additional paid-in capital 2,364,671 2,363,171
Accumulated deficit (338,489 ) (327,727 )
Accumulated other comprehensive loss   (7,310 )   (7,587 )
Total Shareholders' Equity   2,019,337     2,028,323  
Total Liabilities and Shareholders' Equity $ 3,868,914   $ 3,876,774  
 

Life Storage, Inc.
Consolidated Statements of Operations
(unaudited)
    January 1, 2018     January 1, 2017
to to
(dollars in thousands, except share data) March 31, 2018     March 31, 2017
 
Revenues
Rental income $ 121,624 $ 118,594
Other operating income 9,075 7,908
Management and acquisition fee income   2,395     1,818  
Total operating revenues 133,094 128,320
 
Expenses
Property operations and maintenance 30,449 29,796
Real estate taxes 15,419 14,435
General and administrative 12,044 11,436
Operating leases of storage facilities 141 -
Depreciation and amortization 24,764 24,864
Amortization of in-place customer leases   -     12,778  
Total operating expenses   82,817     93,309  
 
Income from operations 50,277 35,011
 
Other income (expense)
Interest expense (A) (17,204 ) (15,210 )
Interest income 4 3
Equity in income of joint ventures   972     721  
 
Net income 34,049 20,525
Noncontrolling interests in the Operating Partnership   (160 )   (96 )
Net income attributable to common shareholders $ 33,889   $ 20,429  
 
Earnings per common share attributable to common shareholders -
basic
$ 0.73   $ 0.44  
 
Earnings per common share attributable to common shareholders -
diluted
$ 0.73   $ 0.44  
 
Common shares used in basic
earnings per share calculation 46,452,492 46,304,568
 
Common shares used in diluted
earnings per share calculation 46,536,672 46,418,891
 
Dividends declared per common share $ 1.00   $ 0.95  
 
 
(A) Interest expense for the period ending March 31 consists of
the following
Interest expense $ 16,679 $ 14,690
Amortization of debt issuance costs   525     520  
Total interest expense $ 17,204   $ 15,210  
 

       
Life Storage, Inc.
Computation of Funds From Operations (FFO) (1)
(unaudited)
January 1, 2018 January 1, 2017
to to
(dollars in thousands, except share data)     March 31, 2018     March 31, 2017
 
Net income attributable to common shareholders $ 33,889 $ 20,429
Noncontrolling interests in the Operating Partnership 160 96
Depreciation of real estate and amortization of intangible
assets exclusive of debt issuance costs 24,256 37,265
Depreciation and amortization from unconsolidated joint ventures 1,197 768
Funds from operations allocable to noncontrolling
interest in Operating Partnership   (280 )   (273 )
Funds from operations available to common shareholders   59,222     58,285  
FFO per share - diluted $ 1.27 $ 1.26
 
Adjustments to FFO
Board changes and other proxy related expenses 1,128 -
Funds from operations resulting from non-recurring items
allocable to noncontrolling interest in Operating Partnership   (5 )   -  
Adjusted funds from operations available to common shareholders   60,345     58,285  
Adjusted FFO per share - diluted $ 1.30 $ 1.26
 
Common shares - diluted 46,536,672 46,418,891
 

               
Life Storage, Inc.

Quarterly Same Store Data (3) 535
mature stores owned since 12/31/16

(unaudited)
January 1, 2018 January 1, 2017
to to Percentage
(dollars in thousands)     March 31, 2018     March 31, 2017     Change     Change
 
Revenues:
Rental income $ 116,194 $ 113,466 $ 2,728 2.4 %
Revenues related to tenant insurance 4,653 4,388 265 6.0 %
Other operating income   1,685   1,694   (9 ) -0.5 %
Total operating revenues 122,532 119,548 2,984 2.5 %
 
Expenses:
Payroll and benefits 10,544 10,228 316 3.1 %
Real estate taxes 14,378 13,540 838 6.2 %
Utilities 4,075 3,777 298 7.9 %
Repairs and maintenance 4,703 4,940 (237 ) -4.8 %
Office and other operating expense 4,182 4,016 166 4.1 %
Insurance 1,444 1,365 79 5.8 %
Advertising 331 338 (7 ) -2.1 %
Internet marketing   1,936   2,353   (417 ) -17.7 %
Total operating expenses   41,593   40,557   1,036   2.6 %
 
Net operating income (2) $ 80,939 $ 78,991 $ 1,948   2.5 %
 
 
QTD Same store move ins 48,440 50,428 (1,988 )
 
QTD Same store move outs 46,703 46,882 (179 )
 
 

Other Comparable Quarterly Same Store Data

(unaudited)
    January 1, 2018     January 1, 2017        
to to Percentage
March 31, 2018     March 31, 2017 Change     Change
Stores owned since 12/31/15 (430 stores)
Revenues $ 94,161 $ 92,489 $ 1,672 1.8 %
Expenses   31,539   30,825   714 2.3 %
Net operating income $ 62,622 $ 61,664 $ 958 1.6 %
 
 
Stores owned since 12/31/14 (412 stores)
Revenues $ 90,110 $ 88,475 $ 1,635 1.8 %
Expenses   30,012   29,387   625 2.1 %
Net operating income $ 60,098 $ 59,088 $ 1,010 1.7 %

 

 
Life Storage, Inc.
Other Data - unaudited     Same Store (3)     All Stores (4)

2018

   

2017

2018

   

2017

 
Weighted average quarterly occupancy 91.1 % 89.6 % 90.5 % 88.9 %
 
Occupancy at March 31 91.2 % 90.1 % 90.6 % 89.3 %
 
Rent per occupied square foot $ 13.53 $ 13.51 $ 13.51 $ 13.48
 

 
Life Storage, Inc.
Other Data - unaudited (continued)
       

Investment in Storage Facilities: (unaudited)

The following summarizes activity in storage facilities during the
three months ended March 31, 2018:
 
Beginning balance $ 4,321,410
Property acquisitions -
Improvements and equipment additions:
Expansions 83
Roofing, paving, and equipment:
Stabilized stores 3,414
Change in construction in progress (Total CIP $19.7 million) 5,336
Dispositions and Impairments (1,984)
Storage facilities at cost at period end $ 4,328,259
 
 

Comparison of Selected G&A Costs (unaudited)

Quarter Ended

March 31, 2018

March 31, 2017

 
Management and administrative salaries and benefits 6,465 6,409
Training 227 258
Call center 715 688
Life Storage Solutions costs 204 166
Income taxes 450 300
Legal, accounting and professional 941 1,134
Board changes and other proxy related expenses 1,128 -
Name change - 726
Other administrative expenses (5) 1,914 1,755
$ 12,044 $ 11,436
 

Net rentable square feet

March 31, 2018

Wholly owned properties 39,811,273
Joint venture properties 7,406,977
Third party managed properties 2,834,845
50,053,095
 

March 31, 2018

March 31, 2017

 
Common shares outstanding 46,514,198 46,496,065
Operating Partnership Units outstanding 217,481 217,481
 
(1) We believe that Funds from Operations ("FFO") provides relevant
and meaningful information about our operating performance that is
necessary, along with net earnings and cash flows, for an
understanding of our operating results. FFO adds back historical
cost depreciation, which assumes the value of real estate assets
diminishes predictably in the future. In fact, real estate asset
values increase or decrease with market conditions. Consequently, we
believe FFO is a useful supplemental measure in evaluating our
operating performance by disregarding (or adding back) historical
cost depreciation.
 
Funds from operations is defined by the National Association of Real
Estate Investment Trusts, Inc. ("NAREIT") as net income available to
common shareholders computed in accordance with generally accepted
accounting principles ("GAAP"), excluding gains or losses on sales
of properties, plus impairment of real estate assets, plus
depreciation and amortization and after adjustments to record
unconsolidated partnerships and joint ventures on the same basis. We
believe that to further understand our performance, FFO should be
compared with our reported net income and cash flows in accordance
with GAAP, as presented in our consolidated financial statements.
 
Our computation of FFO may not be comparable to FFO reported by
other REITs or real estate companies that do not define the term in
accordance with the current NAREIT definition or that interpret the
current NAREIT definition differently. FFO does not represent cash
generated from operating activities determined in accordance with
GAAP, and should not be considered as an alternative to net income
(determined in accordance with GAAP) as an indication of our
performance, as an alternative to net cash flows from operating
activities (determined in accordance with GAAP) as a measure of our
liquidity, or as an indicator of our ability to make cash
distributions.
 
(2) Net operating income or "NOI" is a non-GAAP (generally accepted
accounting principles) financial measure that we define as total
continuing revenues less continuing property operating expenses. NOI
also can be calculated by adding back to net income: interest
expense, impairment and casualty losses, depreciation and
amortization expense, acquisition related costs, general and
administrative expense, and deducting from net income: income from
discontinued operations, interest income, gain on sale of real
estate, and equity in income of joint ventures. We believe that NOI
is a meaningful measure to investors in evaluating our operating
performance, because we utilize NOI in making decisions with respect
to capital allocations, in determining current property values, and
comparing period-to-period and market-to-market property operating
results. Additionally, NOI is widely used in the real estate
industry and the self storage industry to measure the performance
and value of real estate assets without regard to various items
included in net income that do not relate to or are not indicative
of operating performance, such as depreciation and amortization,
which can vary depending on accounting methods and book value of
assets. NOI should be considered in addition to, but not as a
substitute for, other measures of financial performance reported in
accordance with GAAP, such as total revenues, operating income and
net income.
 
(3) Includes the stores owned and/or managed by the Company for the
entire periods presented that are consolidated in our financial
statements. Does not include unconsolidated joint ventures or other
stores managed by the Company.
 
(4) Does not include unconsolidated joint venture stores or other
stores managed by the Company.
 
(5) Other administrative expenses include office rent, travel
expense, investor relations and miscellaneous other expenses.

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