Life Storage, Inc. Reports Second Quarter 2018 Results; Raises 2018 Full Year Guidance

Life Storage, Inc. (NYSE:LSI), a leading national owner and operator of self storage facilities, reported operating results for the quarter ended June 30, 2018.

The Company achieved net income attributable to common shareholders in the second quarter of 2018 of $39.3 million or $0.84 per fully diluted common share. This compares to net income attributable to common shareholders of $19.4 million in the second quarter of 2017, or $0.42 per fully diluted common share.

Funds from operations ("FFO”)⁽¹⁾ for the quarter were $1.39 per fully diluted common share compared to $1.24 for the same period last year. Absent acquisition fee income and legal costs incurred in the second quarter of 2017, adjusted FFO per fully diluted common share was $1.39 and $1.33 for the quarters ended June 30, 2018 and 2017, respectively.

"The solid contribution of the legacy Life Storage stores to the same store pool, the resilience of the fundamentals in a number of our key markets, and our growing joint venture and third-party management initiatives is very encouraging,” commented CEO David Rogers. "We’re also excited about the successful launch of Rent Now and further penetration into our commercial customer base. Our focus on consistently strengthening our platforms, supported by our strong balance sheet, provides us with the ability to grow long-term shareholder value,” concluded Mr. Rogers.

Highlights for the 2^nd Quarter Included:

• Increased same store revenue by 4.0% and same store net operating income ("NOI")⁽²⁾ by 5.2% as compared to the second quarter of 2017.
• Grew same store average occupancy for the quarter by 20 basis points to 91.9%.
• Improved organic search engine visibility for the Life Storage brand, thus reducing internet marketing expense by 12.1%.
• Achieved adjusted funds from operations per fully diluted common share of $1.39, a 4.5% increase over the same period last year.
• Added seven stores to its third-party management platform; the Company now manages a total of 152 properties through its joint venture and third-party management agreements.
• Increased management fee income by 31.1% over that of the second quarter of 2017.
• Launched the Company’s "Rent Now” initiative, where customers are able to ‘skip the counter’ and complete the rental process online.
• Paid a quarterly dividend of $1.00 per share of common stock.

OPERATIONS:

Total revenues increased 3.9% over second quarter 2017 while operating costs increased 2.7%, resulting in an NOI increase of 4.5%.

Revenues for the 535 stabilized stores wholly owned by the Company since December 31, 2016 increased 4.0% from those of the second quarter of 2017, the result of a 20 basis point increase in average occupancy and a 3.4% increase in rental rates.

The Company achieved same store revenue growth in 29 of the 33 major markets in its same store pool, with all 33 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); New York/New Jersey; and Buffalo-Upstate New York.

Same store operating expenses increased 1.5% for the second quarter of 2018 compared to the prior year period. Increased real estate taxes and payroll and benefits were partially offset by a 12.1% decrease in internet marketing costs. Consequently, same store NOI for the period increased 5.2% over the second quarter of 2017.

General and administrative expenses decreased by approximately $4.2 million over the same period in 2017. Absent expenses associated with the Company’s name change and legal proceedings in 2017, general and administrative costs would have increased approximately $0.9 million driven primarily by increased incentive compensation.

PROPERTIES:

During the quarter, the Company added seven properties to its third-party management platform. It now manages a total of 152 properties through its joint venture and third-party management agreements. It has an additional 24 properties under contract to manage commencing in 2018 and 2019, two of which opened subsequent to quarter end. Twenty of the remaining 22 contracts are new developments.

In July, the Company sold one property in Austin, TX for $10.0 million; the property remains under Life Storage management.

Also subsequent to the end of the quarter, the Company entered into contracts to acquire three stores for its own portfolio for a total consideration of approximately $28 million. The facilities are located in markets where the Company already has a presence: Boston, MA; Atlanta, GA; and Greater NYC. The Company currently manages the Boston, MA and Atlanta, GA locations. These pending acquisitions are subject to further due diligence and closing conditions; therefore no assurance can be given that these properties will be purchased according to the terms described.

CAPITAL STRUCTURE AND LIQUIDITY:

Illustrated below are key financial ratios at June 30, 2018:

• Debt to Enterprise Value (at $97.31/share) 27.8%
• Debt to Book Cost of Storage Facilities 40.3%
• Debt to Recurring Annualized EBITDA 5.4x
• Debt Service Coverage 4.8x

At June 30, 2018, the Company had approximately $7.3 million of cash on hand, and $386 million available on its line of credit.

During the quarter, the Company filed a prospectus supplement with the Securities and Exchange Commission under which it may sell shares of its common stock having an aggregate gross sales price of up to $300 million through an "at-the-market" (ATM) offering program. No shares were issued under the ATM during the quarter.

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 third quarter and full year 2018:

The Company’s 2018 same store pool consists of the 535 stabilized stores owned since December 31, 2016, which includes the stabilized legacy Life Storage 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 second year after the stores achieve 80% sustained occupancy using market rates and incentives.

The Company plans to complete $45 – $50 million of expansions in 2018. It also has budgeted $21 - $24 million to provide for recurring capitalized expenditures including roofing, paving, and office renovations.

The Company has not yet closed any acquisitions in 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%.

As of June 30, 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 $45 – $46 million.

The Company experienced two unique situations in the second half of 2017 that impacted same store performance: (i) Houston and Beaumont, TX benefited from elevated occupancy levels after Hurricane Harvey, and to a lesser extent, parts of Florida also experienced occupancy gains due to Hurricane Irma; and (ii) higher internet marketing spend associated with the brand conversion to Life Storage. Guidance has been adjusted to account for the Company’s solid performance in the first half of 2018, and the estimates continue to include normalized seasonal occupancy in the 2017 hurricane-affected markets, and reduced marketing spend.

As a result of the above assumptions, management expects adjusted funds from operations for the full year 2018 to be approximately $5.42 to $5.48 per share, and between $1.40 and $1.44 per share for the third quarter of 2018.

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 Second Quarter Earnings Release Conference Call at 9:00 a.m. Eastern Time on Thursday, August 2, 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 or at http://www.investorcalendar.com/event/33708.

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 33708.

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 400,000-plus customers, making it a leader in the industry. For more information visit https://invest.lifestorage.com/.

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