Extra Space Storage Inc

Good day, and thank you for standing by. Welcome to the Q2 2022 Extra Space Storage, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 1 on your phone. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to your speaker today, Mr. Jeff Norman. Mr. Norman, please go ahead.

Thank you, Chris. Welcome to Extra Space Storage's second quarter 2022 earnings call. In addition to our press release, we have furnished unaudited supplemental financial information on our website. Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review. Forward-looking statements represent management's estimates as of today, August 3, 2022. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call. With that, I'd now like to turn the time over to Joe Margolis, Chief Executive Officer.

Thanks, Jeff, and thank you, everyone, for joining today's call. Before I report on our performance, I am happy to announce that we recently published our annual sustainability report. We are proud to be a sector leader, not only operationally, but also in sustainability. I encourage you to review our report, which is posted on our investor relations website. Turning to results, the strong trends we experienced in the first quarter continued into the leasing season. Year over year, same store revenue growth in the quarter was 21.7%, matching our first quarter growth rate. This is an all-time high for extra space storage. Despite expense pressure on several line items, NOI growth remained very strong at 26%. This was achieved primarily through year-over-year rental rate growth, partially offset by a modest decrease in year-over-year occupancy due to elevated vacate activity. With manageable new supply and durable customer demand, we continue to operate at high occupancy with strong rates. Despite inflation and the potential effects of recession, we believe we are well positioned to continue to produce strong results due to our resilient, need-based asset class, diversified portfolio, strong balance sheet, and best-in-class team and platform. We were active in each of our external growth channels. During the quarter, we invested $289 million in property acquisitions, and we invested an additional $92 million in July, bringing year-to-date totals to $610 million. We have continued to focus on acquiring non-stabilized properties, and as we outlined last quarter, have started closing more transactions in joint venture structures. We started to see the market shift late in the quarter, with increasing interest rates, reducing the number of bidders at the table, and the bid-ask spread widening between buyers and sellers. We are being selective with our acquisitions, and we are focused on transactions and structures that will be accretive for our shareholders. In the quarter, we closed $70 million in bridge loans, and we added 40 additional stores gross to our management platform. We also made a creative storage investment purchasing an existing storage company named Bargold Storage Solutions. This company has a different model than traditional storage. It is focused on leasing space in apartment buildings, primarily in New York, and subleasing storage spaces to residential tenants. The acquisition of Bargold added over 17,000 units to our portfolio with an occupancy rate over 97%. Due to the unique nature of its operations, we have retained their team and are keeping the entity running as a separate organization. We view this transaction as another creative investment in the storage sector, which came to us through deep industry relationships. Our strong property NOI plus our external growth efforts resulted in core FFO growth of 29.9%. Our growth allowed us to raise our annual FFO guidance for the second time this year. It has been another great quarter, and we are well on our way to another strong year. Storage fundamentals remain solid. While we expect our rate of growth to moderate in the back half of the year due to very difficult comps, we expect it to remain well over historical averages with modeled year-over-year revenue growth remaining in the double digits through 2022. I would now like to turn the time over to Scott.

Thanks, Joe, and hello, everyone. We had a strong second quarter ahead of our own internal projections. Our outperformance was driven primarily by strong property performance, which benefited the same store pool joint ventures, and management fees. As Joe mentioned, we were active on the external growth front. Our investments were capitalized primarily by draws on our revolving lines of credit. We issued 22 million in operating partnership units as part of the Bar Gold transaction, bringing year-to-date issuance of equity to approximately 60 million. In the second quarter, we repurchased approximately 63 million of shares in shares at an average price of $165 per share. Due to the wide spreads in the investment grade bond market, we've been active with our banking relationships. Last week, we completed an accordion transaction in our credit facility, adding 600 million of unsecured debt within the facility across two tranches. Our plan to term out debt using the investment grade bond market has not changed, and we expect to utilize this market again once conditions normalize. Our leverage remains low with net debt to EBITDA 4.4 times and our unencumbered pool is over 13 billion. We continue to have access to many types of capital and we have significant debt capacity to support future growth and maturities, albeit at higher interest rates. Due to our year-to-date outperformance and improved outlook for the second half of the year, we updated our 2022 full year guidance. We've increased our same store revenue guidance to 16 to 18% driven primarily by rental rate growth. We strive to be efficient with expenses and we believe our continued investment in our people and our properties are contributing to our top line growth. Consequently, we experienced same store expense increases across several line items we have increased our expense guidance to seven and a half to nine percent for the full year our increased revenue far outweighs our increased expenses given our high margin business as a result our same store noi growth range increased to 18 and a half to 21 and a half percent the highest noi growth guidance in our history given our total investment activity year to date of 790 million we have increased our acquisition investment guidance to 1.2 billion, only 250 million of which is unidentified. Our preferred investment in NextPoint remains in place and bridge loan volume and interest rates are higher than anticipated. As a result, we have increased our interest income guidance by approximately 3 million. Due to the increase in interest rates, as well as our higher acquisition volume, we have increased our interest expense guidance by 13 million at the midpoint. The sum of these adjustments result in an increase in core FFO, which is now estimated to be between $8.30 and $8.50 per share. We anticipate 20 cents of dilution from value-add acquisitions and CFO stores in line with last quarter's estimate. We're having a great year, and we are positioned for continued steady growth. And with that, operator, let's open it up for questions.

Thank you, sir. As a reminder, to ask a question, you'll need to press star 1 1 on your phone. Please stand by as we compile the Q&A roster. One moment. Our first question will come from Todd Thomas of KeyBank Capital Markets. So your line is open.

Hi, thanks. Good morning. The first question, I had a couple questions, I guess, on the Bargold acquisition. I was wondering if you were able to share, you know, sort of the initial yield on that $180 million investment or put some parameters around the anticipated return that you're expecting on your investment.

Sure, Todd. And thanks for your clever title to your note. We all got a chuckle out of that. So we underwrote the existing business. We didn't underwrite any extraordinary growth. We didn't underwrite any synergies. We threw our G&A on top of it. And just underwriting what exists today, the first year yields in the low fours and it grows to the mid topper fives. So kind of similar to, you know, urban property investments, I would say. And then our hope is, of course, we're going to first try to institutionalize the business, introduce things that they haven't done in terms of technology. They don't charge administration fees. They don't offer insurance. And that's kind of the first step of the plan is to institutionalize it and bring some of Extra Space's expertise and procedures, processes to it. And then we'll see about growing it. We'll try to grow it in New York City, and if that works, then we'll take it outside of New York City. But it's kind of one step at a time for us.

Okay. And can you speak to, you know, some of the – I mean, you characterized it as a creative investment, but can you speak to some of the fundamental differences in that business maybe compared to the traditional storage business, whether – you know, price increases and maybe restrictions around raising rents to customers and the magnitude and frequency of increases and, you know, things of that nature as you, you know, have, you know, continue to, you know, potentially roll this out and look to grow the platform?

Sure. Great question. So the business is leasing space in apartment buildings, and it's primarily basements and garages. building those spaces out so if you walked into them, they would look exactly like the interior of one of our modern self-storage facilities, and then leasing that only to tenants in the apartment buildings. So because of that, your customer acquisition and marketing costs are almost nothing. It's your incremental cost to grow the business is very, very small because you're not buying any real estate. It's all leases. So we bought the business, we bought the platform, and now it's Capital Light going forward. And the tenants are different. They stay for a long time. The average length of stay of in-place customers in this portfolio is eight years. The churn is less than 0.5% a month compared to our churn of 6% to 7%. So it's incredibly stable. They operate at occupancy of over 97%, and they have over 1,000 people on the waiting list. So that's a good example of synergies that we're going to experiment with is, can we get those people on the waiting list into an extra space store until a unit opens up for them? It also tells me their pricing might not have been as sophisticated as ours is. But you are right. The rate increases are limited in some instances and coordinated with the landlord because the landlord doesn't want a tenant to be unhappy or be using money he could for increased apartment rent, for increased storage rent. So there is a difference there as well.

Okay, that's helpful. And then one last question, if I can just switch over to the leasing environment and rental activity. Occupancy is at a very healthy level, but rentals were up pretty big year over year. And we've seen the housing market cool off a bit, and I wouldn't have thought that there'd be significant incremental demand, I guess, from some of the pandemic drivers that we saw. earlier during, you know, the latter part of 20 and 2021, you know, any sense where the demand is coming from today? And it seems to be fairly strong, you know, perhaps stronger than expected. So just curious if you have any, you know, sort of information around, you know, where the customers are coming from and where the demand is really coming from.

Yeah, Todd, if you look at kind of our surveys and the questionnaires we give our customers, it's gone back to pre-COVID, you know, answers. It's largely coming from people moving. Lack of space obviously is needed, but not what it was in COVID. Our rentals and vacates have moved much more to pre-COVID numbers. Our vacates are elevated slightly now, partly due to, you know, the existing customer rate increases that have gone through over the last year. as we move people quickly to street rates because these state of emergencies have been removed. So while vacates have been elevated slightly, rental activity has been really good. It's been strong. So we've been able to backfill those. We have moved people quickly to street rates. Okay.

All right. Great. Thank you. Thanks, Todd.

Thanks, Todd.

Thank you. One moment, please, for our next question. Our next question will come from Spencer Alloway of Green Street Advisors.

Your line is open.

Thank you. Maybe just one or two more just on the embargo topic. I know you mentioned the 97% occupancy. Just curious, is this, you know, kind of in line with historic norms for this company, or is this kind of like a peak occupancy level? And then also, are there other operators doing the same thing that you're aware of? And if so, are they potential consolidation targets down the line?

This company is historically operated at what we would consider very, very high occupancy levels. So over 97% would be a normal occupancy level for Bargold. I do not know of any other company that does this on the scale that Bargold does And it's one reason that is exciting to us is the potential growth without a lot of competitors.

Okay, great. And then maybe just one more just on the leasing front. We've recently heard from market participants that there's been a pull forward of peak leasing season. Just curious if that was consistent with what you've seen in the portfolio.

I'm not sure I fully understand the question. A pull forward?

So I'm not sure you know that until the future, right? I mean, yeah, leasing has been strong and demand has been strong, but we haven't seen it diminished to the extent we could say it's leasing from a future period that's been pulled forward. So that seems very theoretical to me.

Yeah, no, that kind of answers the question, right? Exactly. If you guys aren't seeing a deceleration of you know, that's material, then that kind of answers the question. We've recently attended a conference in which, you know, there was anecdotes in which some market participants had been seeing such deceleration. So the fact that you guys have not answers my question, like you said. So thank you. That's all for me.

Thank you, Spencer.

Thank you. One moment, please, for the next question. Our next question will come from Juan Tenebrea of BMO Capital Markets. Your line is open. Hi, good morning.

Just hoping we could delve a little into the expectations built into occupancy. What's assumed in the second half in terms of occupancy declines with seasonality eventually waning and how's that compared to history? And Joe, maybe what's the exit run rate we should be thinking about with an eye towards the starting point for 2023. And do you see any changes in the consumer behavior to make you think differently about how you're feeling about 23 relative to where you were maybe at Nayreader a couple months ago?

Yeah. Well, this is Scott. Our occupancy has been pretty consistent over the last four months where we've run 1% to 1.2% below prior year. And we would expect that to continue throughout the remainder of the year and maybe fall off slightly more than that as we get towards the end of the year. So we expect to be below where we finished 2021 by 1% to 1.5%.

I think your second question was on growth pattern. And we do anticipate moderation, as Scott said in his remarks. But if you look at our guidance, we'll end the year in low-teens positive revenue growth, which is just a fantastic number. It sets us up really, really well to head into 2023.

And then just the second question on expenses, normally the point of contention or the point of stress is taxes, but that's actually a bright spot relative to some of the other increases. But Just curious how you're thinking about various kind of more meaningful expense line items and how sticky those could be into 23. And are you seeing any changes or differences across the regions, maybe more cost pressure in the Sunbelt versus the coastal markets? Just curious on a little more color on expenses.

So first on taxes, I mean, taxes, we are seeing things get reassessed in that 5% to 7% higher. We have been the beneficiary of some appeals, which has offset some of that increase. So Overall, we're seeing increases but the op the appeals are clearly benefiting us. Those are more one-time In terms of payroll, we continue to see wage pressure You know our payroll wages are up as much as 10% and our hours are up this year year-over-year So that is somewhat a comp from last year. So last year we had negative expense growth in the first half of the year so as we resume more to normal hours as more normal staffing and That is an increase year over year that we would not expect to go into next year. We would expect some wage pressure, but not the hour adjustment. In terms of other things, we also continue to see inflationary pressure on utilities, on repairs and maintenance. And as your revenues grow, your credit card fees grow. But, you know, this is the beauty of being in self-storage. It's such a high margin business. So while inflation does impact your expenses, you also have some opportunities on the revenue front with month-to-month leases. And, you know, that shorter-term lease really is a benefit to us.

And if maybe I could sneak in a super quick one. What's the average lease duration that Bargold has with the multifamily landlords to actually get the space?

So the initial lease terms are between 10 and 15 years.

Thanks, Joe.

Sure. Thank you.

Thank you. And one moment for our next question. And next we have Jeff Spector of Bank of America. Your line is open.

Great. Thank you. And congratulations on the quarter. Joe, I think I heard you comment quickly on what looks like a good setup for 23. And interestingly, that's kind of been a key debate I've had today with some incoming calls. Again, strong results, lots of skeptics out there, concerns still about weakening demand coming. I think it's interesting that I hear you. The guidance, if you achieve the second half, I guess, can you talk about then that setup into 23, which I think I heard you maybe comment on?

Sure.

So if we end the year at low teens revenue growth and knowing how increases and decreases take time to roll through the rent roll and storage, it takes a while for any weakness if we see that. if you're looking for a downside scenario, to roll into results. So pick an ending point, right? I mean, storage has only gone negative in revenues during the great financial crisis and barely 0.1% during 2020. So pick whatever ending point you want for revenue, and I think we'll end up in 2023. I'm not giving guidance. I'm just doing math. above long-term historical averages in revenue growth. And expenses, you know, we'll continue to try to manage as well as we can. But we're going to have, you know, we have really hard comps this year. We're going to have fairly easy comps next year. And, you know, moving out of the store arena, everything else is growing really rapidly. Our bridge loan program is growing rapidly. Our management business is growing rapidly. As the transaction market gets tougher, people tend to seek other solutions than sale, which could be bridge loans. We're seeing less exits from our management business due to sales. Some of our other things that we do are... you know, seem to be shaping up. And, you know, hopefully we'll talk more about that later. So I'm pretty excited about 2023.

Great. Thank you. Very helpful. And is it fair to say that the trends you've seen in the first half of the year are continued through July into August?

the amount of august yeah you know july continued from june rates were reasonably flat june to july last year like i mentioned the the rates really peaked in june july of last year so as last year's rate comp becomes easier you know we hope that august continues to go well but two days into august it's all looking good still great and then my last question just to confirm you know again

Are there any signposts of issues? It seems like you're very comfortable continuing to push rate on the customer. The customer is taking it. But any signposts of any issues and maybe in any markets?

Yeah. So when we talk about the health of the customer, we get a lot of questions about this. We look at things like bad debt. You look at your accounts receivable. You look at rates where they are today versus where they were. In terms of accounts receivable, they're pretty consistent with where they were last year with the historical norms. FAD debt is very close to the historical average. Haven't seen those elevated over the past quarter. In terms of rate, compared to 2019, our in-place rents are up 26%, 27%. So, you know, while year over year looks really big, like a really big jump, when you go back a few years, it's more affordable and maybe not as extreme as people would think on the surface.

You know, Jeff, I would add we have stronger markets and we have markets that are less strong. And we're always looking where performance isn't as good as elsewhere and seeing what tools we can use to try to help those markets. And it may be submarkets or individual stores where we have to do certain things with marketing spend or different things. And we are always trying to maximize performance. So, you know, not everything is as strong as the best performing assets in the company. But everything is good, and we have the tools to address individual areas or stores or markets of weakness, and we feel lucky to have a really broadly diversified portfolio.

Great. Thank you.

Thank you.

One moment for our next question. Okay. And next we have Keegan Call of Berenberg Capital Markets.

Your line is open.

Hey, guys. Thanks for the time. I know this is addressed a bit early on in the call, but, you know, acquisition guidance is obviously raised again. Just curious if you could give us a little bit more color on how much competition you're truly seeing for these assets held at the last quarter and kind of any sort of color on cap rates would be really helpful.

So I think we're seeing less competition. I think there are fewer bidders, folks who rely on leverage really heavily. Many of them have gone to the sidelines, but they're still bidders and still transactions are getting done. So it's not an open playing field by any means. And cap rates is always a hard thing to tell, right? Because it's the data lags and you know, each transaction is kind of unique and on its own. But I would say we have seen an expansion in cap rates.

Got it. You know, as we think about, you know, what's left of the year, right, what percentage of the portfolio do you anticipate sending another rate increase to? And how does that compare to years prior?

So we haven't made any change in what percent of the portfolio we send a rate increase to. Every customer is eligible for a rate increase after a certain amount of time. I'm not sure if I understood your question correctly.

Yeah, just as far as the cadence of increases, right? You tend to increase that. I'm just kind of curious. At this point last year, what percentage of your portfolio was due another increase, and how does that compare to this year?

Okay, yeah, sorry, I misunderstood the question. So I don't think we can make good year-over-year comparisons because last year we were so constricted by government regulations where we couldn't, even if we wanted to, we couldn't send rate increase notices. What I would say is that, you know, pre-COVID, we had a pretty formulaic approach in terms of cadence and amount of rate increase we sent to customers. And during COVID, during a period of time, we voluntarily didn't send out rate increase notices. And then when the governments of the various states told us we couldn't, we kind of were kicked off of that formulaic approach. And we have not gone back to it. We are much more tailored now and designed in terms of both cadence and amount of rate increase that we'll send.

Yeah, Keegan, about 63% of our tenants today are below street rate. So, you know, obviously they're eligible. We actually push people above street rates. So, you know, it's a large percentage. That 63% is actually higher than it's been in the past. Got it. Very helpful. Thanks for the time, guys.

Sure. Thank you. Thank you.

And one moment for our next question. Okay. And next we have Smeeds Rose of Citi. Your line is open.

Hi, thanks. I just wanted to come back onto the acquisition activity for a moment. You mentioned in your opening remarks a continued focus on non-stabilized assets and also working with joint ventures. Are you working kind of consistently with the same joint venture partners? Are you finding new capital that wants to come into the space so you can forge new relationships or just kind of interested in how that's going?

Sure, Smeet. Thanks for the question. So we have two new joint venture partners this year in 2022. We also are working with some of our older joint venture partners. And the phone rings a lot. There's lots and lots of people who would like to be our partners and invest in self-storage.

On non-stabilized assets, I'm just wondering, Are more folks coming to market because they're, you know, just like where the pricing is now? Or are you seeing deals where they're sort of unable maybe to get permanent financing or kind of they're underwater relative to their initial underwriting? Kind of what's bringing those assets to market in this environment?

It's certainly asset specific, but I would say, you know, before the interest rate increases happen, you know, pricing was so strong. Well, first, let's back up a little bit. 2021, you had strong pricing, you had fear of capital gains tax increase, and you had fear of 1031 going away. Getting into 2022, you had strong pricing and low interest rates. Now, I think you have some people fearing increased interest rates and further cap rate compression in the future. So time to get out. And then you always have the asset-specific thing. It's a fund that's coming to the end of the life. It's a family where there's been an issue or a death in the family. But I think those reasons probably wrap up most of the situations.

Okay, great. Thank you.

Sure.

Thank you. And one moment for our next question. Our next question comes from Samir Canal of Evercore ISI. Your line is open.

Hey, Scott. I'm just curious on the New York MSA. I mean, the region is holding up quite well. I'm looking at the numbers. I think revenue growth even accelerated meaningfully kind of in the second quarter. Maybe talk around sort of the drivers of that. I'm trying to figure out if it's sort of, you know, because the New York MSA will include New Jersey. Maybe there's some restrictions being lifted on the rent side. And maybe if there's a way to even sort of look at New York boroughs, you know, Brooklyn and Bronx, kind of what are you seeing in that sort of areas as well?

Yeah. So when we break it out between the boroughs in New Jersey, our Northern New Jersey stores are performing better than our boroughs. Now we don't have a huge number of stores in the boroughs, so it might not be a great comparable, but both markets are performing below the average of the portfolio. But New Jersey is definitely performing better than New York. We did see rate increases. The state of emergency is lifted late last year. And so that has benefited us throughout this year. I think November, December is when most of those went out. So that's when you'll have a tougher comp. But we did implement many rate increases late last year that have benefited us this year in New Jersey.

And I guess at this point, there's no more rent restrictions sort of in the portfolio that remains to be lifted, correct? Or is there any more sort of opportunities there as well?

Not material state of emergencies in effect anywhere.

Okay. And I guess, Joe, just maybe as a second question, just provide maybe an updated view on kind of the supply picture, kind of what your most recent thoughts are.

Sure. Pretty similar, very similar to what we talked about last quarter. We continue to see and expect a moderation of new supply. There's certainly headwinds in terms of interest rates, costs, entitlements. But it's not going to zero. There still is new supply being delivered, and there's still an awful lot of interest in people wanting to build new self-storage i'll give you a stat that is interesting our management plus team underwrites about 215 deals a quarter for potential management contracts 75 of those this year have been development so there's still a lot of people out there interested in building self-storage and you can understand why the results of the asset class have been phenomenal

Got it. Thanks so much. Sure.

Thank you. One moment for our next question. Our next question will come from Hongliang Zhang of Citi. Your line is open.

JP Morgan, bud. Hey, guys. First, I just have to say, as a current Bargo consumer, I'm pretty excited for the opportunity to present you all, but I'm also a little apprehensive about what my monthly rent's going to look like going forward. But I guess on the topic of rent increases, would you be able to share what the average magnitude of rent increases you're currently pushing in your portfolio and how that's changed compared to the first quarter?

So as I said earlier,

tried to reference earlier, it's all over the board, right? Because we have this weird situation or unique situation, excuse me, of folks whose rent was artificially suppressed by government regulation at a time when street rate was increasing. So we had some larger than normal gaps between what people were paying in street rates and we were trying to catch up. So there's a wide range variation in the amount of rent increase customers are getting, and I'm not sure an average is meaningful because of that.

Got it. But it sounds like there's no significant areas where the MSAs, the rent in the MSAs, maturely lower than kind of the average?

No. No, I think you saw some that were larger than the average as rate restrictions.

Rent in the MSAs. material lower than kind of the average?

No, I think you saw some that were larger than the average as rate restrictions were lifted and we moved them quickly to the current market rates. And that benefit as you move throughout this year, obviously decreases because you were doing many of those late last year and early this year.

Got it. And then on the expense side, How should we think about, I guess, expense growth and personnel and property operating year and early this year? Got it. And then on the expense side, how should we think about, I guess, expense growth and personnel and property operating on a sequential basis? Is kind of the level of spend in the second quarter representative of what's going to look like for us a year? Or is there a little bit more further to go from here?

so the wage pressure has obviously will be consistent throughout the year so you're probably around 10 wage inflation year over year hours should get better as we move throughout the year so towards the end of last year we were more appropriately staffed and uh second quarter was and into the third quarter was kind of the low point in terms of staffing hours and being understaffed due to turn this due to turnover thanks if i could sneak one last question in

I think in your prior remarks, you talked a little about potentially cross-selling between Bargold users and your current extra space units. Should we take that as a sign that you'd be looking to expand further into Manhattan and the New York MSA?

So, we have lots of ideas for Bargold, but the first thing we're going to do is absorb the existing business. One of the ideas, you're right, is they have such a long waiting list, is could we provide some option for the bar gold tenants on the waiting lifts to store their stuff in extra space units and then maybe give them a priority to get into a bar gold unit? Would that help extra space? We have not instituted that yet. That's just one of many ideas that we're excited to get to. And yeah, we, you know, once, once we digest bar gold and we feel we have it running the way we want, absolutely are going to try to expand it first in Manhattan and other parts of New York and, you know, possibly then afterwards, other major cities in the country.

Got it. Thank you. And great quarter.

Oh, thanks very much.

Appreciate it.

Thank you.

One moment for the next question. Our next question will come from Ronald Camden of Morgan Stanley. Your line is open.

Hey, a couple quick ones for me. Just going back to some of the breadcrumbs on the same store growth, talking about the exit rate for 2023 or for 2022 and thinking about that as a starting point for 2023. I think the earlier comment was suggested that it could be sort of the double digits for second half of this year, therefore 2023 double digits is on the table. I just want to make sure I understood that correctly, or is there anything about the comp that we should be thinking about?

So, I apologize if I implied that because we're going to end the year in double digits in revenue growth, that means it's going to be double digits revenue growth throughout 2023. I think it means we're going to start 2023 with double digits, and then everyone can have their own view of the market and how that will moderate or not moderate throughout the balance of the year.

Got it. That's pretty clear. My second question was just on the marking some of the jurisdictions that have been under state of emergencies, like L.A. and so forth. you think about sort of the same store revenue growth year to date, is there any way to quantify how much contribution came from marking those jurisdictions to market just from a high level?

So I think last quarter we said we expected lifting of the California state emergencies to have 50 basis points to the same store portfolio. We now think that's more like 70 basis points. And the reason for the difference is we were overly conservative in our length of stay assumptions. We thought that when we increased rates to street rates, that we would push more people out the door. But in fact, we've been conservative in that assumption. So 70 basis points is the answer to your question.

Great. And then my last one is just from Bargold, if I could sneak it in. Just you talked about a little bit of the business and the potential growth opportunity. Maybe How much more, when you're thinking of the growth opportunity, how much more capital over time could you provide to the company, or is the capital commitment pretty much done from this standpoint?

So the capital to grow the business, and I don't want to get in front of ourselves, right? I don't want to promise huge growth. We're taking this one step at a time, and, you know, the first thing is to absorb what we have. but we did buy this with the expectation that we will get to a growth phase the because these are leases and the rent is just a percentage of revenue there's no fixed rent in these leases it's very capital light you just have to build out the space that's your capital now there also may be capital expended in terms of systems we blew Our systems are better than theirs, and I'm not saying anything negative about the company. It's a very successful, well-run family company, or was, but we have more capabilities than them. We have better systems, and so we may also put some capital in there, but it's not a lot. This should be generally capital-like going forward.

Great. That's it for me. Thank you so much.

Sure. Thank you. Thank you.

One moment for our next question. And next we have Yoav Dempsey of Truist. Your line is open.

Thanks. It's actually Kevin. Just a couple follow-ups here. On the bar gold, can you talk a little bit more about how that business is actually run in terms of how many units per apartment building is the average? you know, what happens when a tenant doesn't pay or just move out? Like, does the building manager handle it or do you have to handle it? Just some more of a kind of practical element of running this type of business.

Sure. So the average number of units in a building is 25, but there's a pretty wide range of that. I think the largest building is 800 units, which is kind of similar to a store, but there's also buildings that just have a handful of units. The reason condo boards or co-op boards or building owners would do this so they don't have to handle it. So Bargold, now Extra Space, handles getting the customer in the unit, dealing with payments, dealing with non-payments, and auctioning the units. Out of their 17,000, over 17,000 units, they auctioned about 20 a month last year. So the rate is very, very small. And it's storage. It works just – the laws are the same. It works just like storage.

And what was the cadence of their revenue growth over the past year? I'm just trying to get a sense of if this was a hyper-growth type of company or more static that you're trying to improve, any kind of color you can provide around that.

Yeah, I would say it was neither static nor hyper growth that they were a steady growth company growing in the single digits every year.

Okay. And just last question on moving rate. I think you mentioned it was flat in July year over year. It does get tricky looking at these kind of statistics because you have such a tough comp from last year and it's not like everyone moves in. You reprice everything off of a single month. Just curious, given your commentary about move-in rates, where is your in-place versus move-in today? And as we get past these tough comp periods, is your expectation that market-length growth, as we get into the second half, still goes back to positive for you over the year?

Yeah, let me clarify one thing first, Keevan. So the month of July, we were about 5% to 7% negative in our achieved rate growth, and That's year over year. So if you compare to where tenants were moving in last year versus this year, we were slightly negative. Now, we forecast all of that. We expected that. And so we're not surprised. In terms of the roll down, our in-place leases today, our achieved rates are about 7% below where our achieved rate is today. I'm sorry, they're above. Our in-place rents are higher by about 7%. 7% than our achieved rents. And normally at this time of the year, they're flat. Now, in terms of cadence of where we expect our rates to go, last year they peaked in June and July and they came down in August. So, you know, depending on what happens in August with our current rates, those could be flat again at the end of August. Okay. Thank you.

Thank you.

Thank you. One moment. And we have a follow-up question from Juan Sanabria of BMO Capital Markets. Your line is open.

Hi, just a couple of follow-ups, just on Kevin's question on the in-place, or sorry, the achieved rates, I apologize. Could you just give us a sense of how that trended throughout the quarter? I know you gave the July figures, but just a sense of how that trended and would be helpful.

Yeah, so April, May, they were slightly positive. June, down about 6%. Average about negative 3 for the quarter. July, you were down that 5% to 7% range again. So that's year over year. And again, last year, you were pushing rates in June and July pretty hard.

Great. And then just a quick follow-up on the seat relative to your expectations. Any Any markets you call out as the largest source of upside this quarter versus expectations?

So things have performed pretty close to our expectations. I mean, the list of properties and what markets are outperforming Atlanta continues to be a standout market for us. Most of the Sunbelt continues to be really strong with South Florida, Miami being exceptionally strong in the Sunbelt, Miami and Atlanta.

It's a small market, but Charleston is one that has kind of jumped up and was, you know, had a bunch of supply and wasn't on our list earlier.

And then one last quick one, an incoming question. Can you estimate the impact to same-store revenue, I guess, year-to-date, like you did for California? You said the rent restrictions coming off were 70 bps to given a higher length of stay for California. estimate for what the impact or benefit was from New Jersey restrictions rolling off?

I don't have that number, Scott. No, we don't have that. Can we get that back to you, Juan?

Of course. Thank you.

Thanks, Juan. Thank you. And one moment, please. We also have a follow-up from Smedes Roads of City. Your line is open.

Hey, it's Michael Dorman here with Smedes. Joe said two topics. The first was just on length of stay. And you had a really nice slide at which broke out length of stay between those greater than 12 months and those greater than 24 months. And that showed, you know the data, but showed that you're up to 66% greater than 12 months and up to 48% for greater than 24, up from about 60% and 40% respectively pre-COVID. As you dive into those numbers, is there anything that's changed over the last couple of months with those length of stays? And is there anything on a regional basis from a market perspective that's telling you anything or a customer perspective, just as you sort of disaggregate that aggregate data?

So we've had elevated vacates. in response to our increased rent increases to existing customers. And we track that really carefully with every month control group so we know exactly what percent increase in vacates is being caused by our ECRI rent increase program. And that has caused a very slight moderation or dip in those numbers that you referenced in terms of long-term stay, but they're still very high and elevated from any historical period.

Does it reflect, Joe, do you think, you know, all those entries where you had a significant number of new customers that came to storage? I think over COVID, it was like 50% of the customers were new. Is that potentially driving the higher length of stay? And is there anything on a regional basis That would be different.

So I guess in reverse order, we don't see anything on a regional basis. It's pretty consistent across all markets. And, you know, our theory, which I think you're referencing your theory, that the, you know, customers who came to us in COVID for lack of space, you know, because they were doing the home office or whatever, those are the longer stay customers. And we do lose some percentage of those. They don't all stay forever, but many of them are sticky.

And then are you seeing at all with, you know, obviously where rents, apartment rents have gone, but also, you know, threats of a recession where typically you'd see people start to double up or move back home, which would then increase your storage needs, right? So recession is not necessarily totally bad for your business. Have you started to see that in any of the markets where you're starting to see some of that demand at all?

So I don't know if we can say yes or no to that yet. You know, some of that data is hard to collect, and you need a good period of time before you can be confident with it.

Right. I just didn't know if there was any early read that your excellent property managers are seeing from those that are walking in the door and the type of uses that they're bringing in, if anything has changed more recently.

I mean, there's always anecdotes, but I don't think I would be comfortable saying that we see a trend or a movement or anything like that.

And just wrapping up on Bargold, You said the average lease length that Bargold has, it was 10 to 15 years. How much remaining lease term on average do they have with those 17,000 units? And I would assume there's some extension options, or I guess if the co-op or condo or rental board decides, then Bargold just removes all the equipment that they installed, just to better understand sort of what happens upon lease ends.

So on lease end, there's several options. Very, very rare does the building owner ask for the steel to be removed. They can purchase it or more frequently lease it. So there's a revenue, kind of a residual revenue stream at the end of the lease term for the leasing of the steel. At the end of the lease term, they automatically convert to month-to-month leases. And we have a portion of the leases that are in that month-to-month category. And in looking at the portfolio, we look real hard at what is the churn rate and how long do those last and when do they get.

know how often do they get terminated and took that into account in our in our underwriting and do you sort of see joe this business as being hard to perfectly compare but do you want to put this into more own like co-op condo buildings or you sort of see this more as a rental building product um and Do you see it cannibalizing if you're able to do exactly what you want to do and grow this business nationally and leverage all the tools and skill sets with extra space? Does it become a competitive storage product? And I can understand at the same time with the waiting list that this company has, it could also provide you lower customer acquisition costs too. But what is your sort of mindset about where this product potentially could go?

So I think we have a lot to learn. And one of the things we need to learn is exactly what's the optimal building. And what are the differences between putting it in an own building or a rental building? They have both. It works well in both. And how many units per apartment unit is optimal? And what's the best unit mix? We will tend to take a very data-oriented approach to that, probably more so than the prior So a lot of the questions that you have are questions that we have, and we're going to learn about it. You know, on the best case where we can grow this thing to gigantic scale and it's in lots of apartment buildings, you know, then that does become a competitor for traditional urban self-storage. But if that's the case, I want to be the one to be the first mover in that.

Yep. Yep. All right. I appreciate all the time, Joe. Thank you. Thank you. Thank you.

One more for our next question. And we have a follow-up. Next we have Jeff Spector of Bank of America. Your line is open.

Hi, thanks. Just one follow-up. Can you just confirm in place versus achieved difference and how you reconcile that with, you know, earlier, I believe you commented 60 plus percent of the leases are below street rate, please.

Yeah, so our average in-place rent is about 7% above where our achieved rents are today. Now, that's on average, that's just comparing your average versus what the move-in is today. Well, you could still have slightly negative rents and you push tenants up. Now, the one thing that, you know, we always look to is you're churning 5% of your customers every month. So a portion of them may move in at slightly lower rents. We then move our existing customers up fairly quickly. So, you know, we're probably one of the more consistent in our rate increases and how we do that more programmatic than others.

Okay, great. Thank you.

Thanks, Jim.

Thank you. One moment, please, for the next question. And we have a follow-up from Todd Thomas of KeyBank Capital Markets. Your line is open.

Hi, thanks. Appreciate taking the follow-up, hopefully quick here also. In terms of street rates, Can you talk about those trends during the quarter by month, perhaps, and into July, Scott, like you provided on the achieved rates?

Yes. Street rates are not that different in terms of year-over-year growth or where they were than our achieved rates. Achieved, your difference there is which channel they came from and that type of thing, or discounts offered. So, fairly similar trend to our achieved rates.

Okay. And then on that 63% of customers, though, that are currently paying a rate below street rate today, you said that that is higher than it has been historically. What's more typical for that metric?

Incrementally higher. I think it was low 60s earlier this year.

Okay. If you look back, though, over the last, you know, say 10 years, where's that been generally?

I actually don't have this right. We don't have it in front of us, Todd. Just more recent numbers. Okay. All right. That's fine. All right. Thank you. Thanks, Todd.

Thank you. And this ends the Q&A session for today. I would now like to turn the conference back to the CEO, Joe Margolis, for closing remarks.

Great. Thank you. Thank you, everyone, for your time and interest in Extra Space. You know, if I take a big step back and kind of look at how the company is going. It's really a good time here at Extra Space. Everything is clicking on all cylinders. The growth front, as we talked about, is really strong. We have a number of technological innovations underway that we're excited about. We just got back engagement surveys. Our scores are up very, very much this year. We are in great shape with our employee support. Thank you. from the operations. My kids would say they're stupid good. So it's just a great time for us at Extra Space, and we appreciate everyone's support. Thank you.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.