Extra Space Storage Inc

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter 2024 Extra Space Storage 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 the session, you would need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Jarrett Conley, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Michelle. Welcome to Extra Space Storage's third quarter 2024 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 guidelines and 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, October 30th, 2024. 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. I would now like to turn the call over to Joe Margolis, Chief Executive Officer.

Thanks, Jared, and thank you everyone for joining today's call. To begin the call today, I would first like to address the impact of Hurricane Milton on our people. I am happy to report that all our teammates are safe, although a small number of individuals and their families were displaced, and we have provided shelter assistance for them. Scott will address the financial impacts of the hurricane. To address the myriad of data points and moving pieces from the quarter, I want to make some overall big picture comments on our performance. We had a good quarter. Optimizing performance in the current market environment and our efforts allow us to increase the midpoint of our full-year FFO guidance. Let me start with the biggest contributor to FFO growth, which is store performance. The extra space same store pool performed consistently with our expectations, with quarter ending and October occupancy of 94.3%. This solid performance allows us to increase the bottom end of 2024 same store guidance. Revenue for the life storage same pool came in slightly below our expectations, but this was generally offset by meaningful outperformance with respect to expenses. Having completed the move to a single brand in the latter part of the quarter, we are just starting to see the benefits of a single brand. We fully expect this group of stores to follow the same pattern of improvement into and during 2025 as the 143 life storage stores that we converted to the extra space brand at closing in 2023. Our non-same store properties are also outperforming our expectations and contributed to our FFO beat. Outside of store performance, our external growth initiatives are exceeding projections. In the third quarter, we added 63 third-party managed stores gross, netting 38 stores. Year to date, we've added 124 net stores to the platform and we anticipate adding approximately 100 additional properties by year end. This would make 2024 our best year for net additions to our management program outside of the life storage merger. Our bridge loan program expanded with $158 million in new loans originated in this quarter and we have increased our expected average hold of such loans to $925 million for the year. On the acquisition front, we have deployed $334 million in wholly owned and joint venture to the company. We have increased our acquisition to the company's level of acquisition year to date and are seeing an encouraging increase in accretive opportunities. Lastly, we continue to find efficiencies in the business and have again lowered our G&A guidance for the year. Overall, I am very pleased with our performance and trajectory this year. We continue to leverage our scale to find efficiencies in all areas of the business, optimize store performance, and grow our ancillary businesses to drive FFO growth. Our higher portfolio occupancy positions us well to capitalize on an improving new customer rate environment when fundamentals recover. I will now turn the time over to Scott.

Scott Fowler Thanks, Joe, and hello everyone. As Joe mentioned, we had a good quarter driven by occupancy gains, G&A savings, and external growth. October to date, same store occupancy is .3% and 80 basis point improvement over last year. In the third quarter, the average new customer move-in rate was negative 9% year over year. Due to strong occupancy and performance to date, we are raising the bottom end of the extra space same store revenue guidance by 75 basis points, bringing the midpoint to a positive 0.125%. Despite meaningful savings in controllable expense categories, increases in property taxes have made it necessary for us to raise our expense guidance by 25 basis points. We have also raised the bottom end of our NOI guidance by 75 basis points, bringing the midpoint to negative 1.375%. The life storage same store revenue improved by .4% year over year, and we saw seasonal declines in occupancy for the life storage same store pool, finishing the quarter at 92.9%. This represents an increase of 200 basis points year over year. October occupancy has increased to 93.2%, 210 basis points over last year. For the life storage same store pool, the sequential change in average move-in rate from the second quarter to the third quarter was negative 1%, much better than normal seasonal declines. Lower than expected pricing power to new customers in the life storage same store pool has led to the reduction in our revenue expectations for the year. We have reduced our annual same store revenue guidance by 50 basis points at the midpoint. This is partially offset by lower controllable expenses for these properties. As a result, we are revising our expense guidance downward by 100 basis points at the midpoint, and consequently, we have adjusted life storage same store NOI guidance to a range of negative .5% to positive .5% for the year. Given the steady volume of bridge loans, we have raised the 2024 average outstanding loan guidance and increased our expected interest income. We have also lowered our estimates for G&A and increased our tenant reinsurance guidance. Interest expense has been updated to account for higher bridge loan volume and an increase in our acquisition guidance. As a result of these revisions, we have raised the lower end of our FFO guidance by 5 cents per share from $7.95 per share to $8 per share, a modest increase at the midpoint. Our revisions to guidance exclude the impact of Hurricane Milton as we are still assessing the full extent of property damage and tenant insurance claims. We have sustained damage at several REIT and managed properties, and three REIT stores remain closed. As of today, we are currently estimating total property damage and tenant insurance claims to be $10 million or more. Major hurricane costs have historically been added back to our core FFO. Therefore, these amounts have not been contemplated in our guidance. We have also seen an increase in rental activity and have paused existing customer rate increases in certain markets. We will report full details related to Hurricane Milton with our fourth quarter earnings. And with that, Michelle, let's open things up for questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw the question, please press star 1-1 again. And our first question will come from Michael Goldsmith with UBS. Your line is open.

Good afternoon. Thanks a lot for taking my question. I think in the opening remarks, you said that you're just starting to see the evidence of the benefit of being of a single brand. Can you provide a little bit more detail in terms of what you're seeing, what have you accomplished so far, what you're seeing, and what gives you confidence that you'll be able to continue to drive the benefit from this brand consolidation?

Sure. Happy to, Michael. Thank you for the question. So just to be clear, we're in very early stages here, right? We did change to the Extra Space brand late in the third quarter. So we're weeks in. But that being said, we see slightly better SEO performance from what was once the Life Storage stores. Some improvement in the local or map section, but lesser than the SEO. The former LSI store conversion rate is better on the Extra Space website than it was on the LSI website. And we're starting to see some modest savings in paid marketing spent. Now, what gives us confidence is when we closed the merger in 2023 and decided to test two brands, we took a pool of 143 Life stores and converted them to Extra Space. And we watched the pattern of improvement of those stores over time. And we know that it doesn't happen immediately, but over a period of a number of months, up to six months, we will see those converted stores perform as well as stores that have always been branded Extra Space. So we see no reason why the stores we just converted won't act just like those stores and follow the same pattern of improvement. And we're encouraged that we're starting to see the green shoots.

Thanks for that. And my follow-up question is, there's still a pretty wide range for the core FFO guidance and what's implied for the fourth quarter. But what is implied at the midpoint does suggest a material deceleration from the third to the fourth quarter? Now, some of that I assume is related to seasonality, but is there any other factors or dynamics at play which would weigh on the results in the fourth quarter relative to the third quarter?

No, Michael, the biggest difference is just property performance in the fourth quarter. And then it'll obviously depend on where you are in that range.

Thank you very much. Good luck in the fourth quarter. Thanks,

Michael.

And our next question will come from Todd Thomas with KeyBank Capital Markets. Your line is open.

Hi, thanks. Good afternoon. I just wanted to stick with that line of questioning a little bit, but move to the same store pool. Just curious there, the guidance implies continued deceleration in the fourth quarter for both the EXR and LSI portfolios. Can you just talk a little bit about whether you have line of sight toward stabilization, just given the ability to drive customer traffic to the portfolio and the higher occupancy rates that you've been able to maintain across both portfolios?

Yeah, Todd, it's Scott. So it depends a bit on where you are in that range of guidance. Start with the extra space pool. It does imply that it is slightly negative at the midpoint. If you're at the high end, it's obviously slightly positive. At the low end, it's slightly negative, but there is some stabilization in there. It's fairly flat in the fourth quarter. The life storage pool, again, depending on where you are in the range, at the midpoint, slightly negative to slightly positive at the high end and more negative at the low end. But it does not show significant deceleration either. It's not dropping way down. It's also not an IT solution on its way up. Some of the life storage has a little noise in it month by month because it's a difficult comp with October being our strongest month. That's when many of the ECRIs hit last year.

Okay, that's helpful. And then I just wanted to ask about the hurricanes. Just given the comments that you made, I realize it's early and you're still sorting through what's happened and the aftermath a little bit. Can you just talk about the uptick in rental activity that you mentioned that you're seeing in some of the impacted areas and how that plays out with the pause in ECRIs in some of these markets or states given the state of emergencies? Perhaps you can share some occupancy statistics to help provide some color around some of the changes in rental activity that you're seeing in some of those impacted MSAs.

We have seen an uptick in rentals, particularly in the life storage pool. The occupancies, for instance, have jumped from 92, 93 to 96% at some of those stores. It's store by store. It's obviously going to be better on the west coast. You see more of a benefit there than in Miami. Typical hurricane customer is going to stay on average, I think, about 10 months. So we would expect a benefit from that. State of emergencies, obviously we're following them. We are implementing those on a store by store level. So it's not on a market level. So we would expect to see some benefit from hurricane occupancy, but that typically offsets the damage or partially offsets what we spend in hurricane damage.

Okay, understood. Thank you.

We start.

And our next question comes from Caitlin Burrows with Goldman Sachs. Your line is open.

Hi, everyone. Maybe on the acquisition side, it sounds like you're active and expecting to stay active. I was wondering if you could give some more color on kind of who's selling. And I know in the past, a hurdle had been on the pricing expectations. So just kind of the volume that you're seeing and to the extent that the pricing is now being better agreed upon on the buyer and seller side.

Sure, it's a good question, but I'm not sure I have a market wide answer. We see a lot more activity, but until transactions get actually closed and reported, it's hard to to tell what's true and what's actually activity. I know from extra space side, we have a number of discussions underway, some on market, some off market that we're very confident will end up as transactions.

Okay. And then maybe as we think about move in rents, we know about the headwinds that the sector has been facing. But I guess if you consider properties where the move in rate trends have been relatively stronger, is there anything that you could point out that's different there? Is it less supply, easier comps? I know we've talked about that in the past, like an urban versus not urban, some indication of like housing impacts or regional, but anything else you can mention on the stronger move in properties versus not as strong?

I think the two factors you've mentioned are the most important factors. One is new supply in markets where there's been heavy supply deliveries. It's just harder. And then secondly is the comps. If a market like Atlanta or Phoenix has had several years of very, very strong revenue growth, it's hard to have additional years of very strong revenue growth. And particularly the markets that have both of those factors are probably the toughest markets. But it's cyclical, right? Real estate cyclical, markets are cyclical, and that's why we believe in a highly diversified portfolio. So we have exposure to some markets that are on different ends of the cycle.

Got it. Thank

you.

Sure.

And our next question comes from Joshua Dennerline with Bank of America Securities. Your line is open.

Joshua, your line is now open. Can you please pick up your handset on your phone?

Okay, our next question comes from Spencer Allaway with Green Street. Your line is open.

Thank you. Maybe just piggybacking off Caitlin's question, did you guys happen to provide the cap rates on the transactions you guys closed in the quarter? And sorry if you did.

I don't think we did provide cap rates on the transactions we closed. I could tell you for all of the deals that we've approved this year, we've had 10 wholly owned operating deals with first year yield in the low fives, about 13 months to stabilization, and a six and a half average stabilized yield. Same thing with remote stores. We've done nine wholly owned remote stores, very similar returns. And then our JV deals, we had eight JV deals, five operating stores, first year yields at 10, stabilized yields at 12. And that's because of the economic benefit of the joint venture. And then we approved three developments in an 8.6 development yield.

Great, thanks. And then as it relates to the rebranding of the legacy LSI assets, can you just remind us what the costs have been to date for that endeavor?

Gosh, I don't have cost to date numbers. It's probably pretty modest because what we've done to date is put banners up at the stores, and then the rest has been digital. We expect total costs about $117 million, but that includes $20 million of non-branding capital costs that were delayed pending the test and the decision which store to go. So the store needed to be repainted, and we decided not to repaint it until we knew which color to

repaint it. Okay, good.

Thank you. It's our underwriting for the deal. We assumed $75,000 of property or $90 million, though it was obviously in our returns when we announced the deal.

Okay, excellent. Okay, thank you, guys.

Thank

you.

And our next question will come from Juan Sandovria with BMO Capital Market. Your line is open.

Hi, good morning. Just a quick one to start. I know you gave the October occupancy, but can you give us a sense of where the new customers came in the door at relative to last year? Sure.

So our average rate to new customers for the quarter was negative 9% year over year, and our average new customer rate in October was negative 8%. So I think some people have wondered, you know, are rates getting stronger? Are they significantly better? We would tell you that October feels a lot like September and August, and any kind of difference on a -by-month basis is caused more by a comp than seeing significant changes so far. And that's on the EXR pool.

Okay. And then just on the guidance for LSI, I was a little bit confused about the commentary and the preparatory remarks. You said that seasonality, correct me if I'm wrong, I thought was better than expected, but yet guidance was cut with lower pricing powers. Just hoping you could help square those two kind of different comments that you made previously.

Yeah, so LSI, I mean, has not performed as expected this year, right? We've cut revenue guidance now twice for those stores. And really three things have contributed to that. One is that markets in 2024 is weaker than we projected in the beginning of the year. That just is. And then secondly, the markets that LSI has disproportionate concentration have performed, you know, disproportionately weaker. So think of Florida, where, you know, LSI has a larger concentration than extra space proportionately. And then the third thing is we didn't get the benefit of the dual brand that we expected. And that's why we made the decision this summer to move to the single brand and get the, you know, hope to get the expected benefit from that. So to me, those are the three largest factors that led to, you know, us having to reduce revenue guidance for LSI.

Okay, so it sounds like maybe some of the overweight, i.e. Florida markets deteriorated a bit more than you expected in the back half of the summer, early fall. Is that, would that be fair to say?

That's very fair to say, yes.

Thanks, Joe. Sure.

Thank you. Our next question comes from the line of Nick Uliko with Scotiabank.

Thanks. Just, I guess, first question is going back to the, you know, the fourth quarter and what's assumed in guidance. Can you just give us a feel for occupancy, you know, how to think about that in the fourth quarter?

Sorry, who's this? This is Nick

Uliko, Scotiabank.

So Nick, we had technical difficulties and we couldn't hear anything, so, but we're back now and if you wouldn't mind repeating the question, we can jump right back into it. Sorry about that. Yeah,

sure. Sure, thanks. So just the question is going back to the fourth quarter and what's assumed in guidance. Can you give us a feel for how occupancy is expected to trend?

Yeah, Nick, so it's Scott. We typically don't model occupancy and rate. It's more modeling revenue and so we would tell you that there's not extreme revenue drop-off and not extreme revenue growth is all that we can really say there.

I would expect we're going to continue to operate at higher than historical occupancy

levels. Okay, all right, thanks. And then the other question is just going back to LSI and the synergies. I know you changed, you've changed the revenue outlook, but I guess going back to those, you know, the June non-revenue pieces on the synergies, can you just give us a feel for, you know, latest thoughts on how you're trending versus those expectations?

Sure, happy to. So we were targeting a hundred million dollars in synergies in three categories, G&A, tenant insurance, and properties, and we're doing very, very well in the ones that we control. So G&A, we're now looking at about 53 million dollars worth of synergies, well, well in excess of our initial estimate. Tenant insurance, we're looking at about 27 million dollars of synergies. And then from the properties, it depends on where you are in the range of guidance, anywhere from zero to ten. So overall, about 80 to 90 million of the hundred, and we believe, we originally targeted 65 million dollars in the property synergies. We do believe we can eventually get there. We just need some market improvement, move to the single brand, and some time, and we'll get there. And of course, these hundred million dollars of synergies doesn't include all the other benefits of the merger. The increase in our management business, in our bridge loan business, the many procurement and IT contracts we've renegotiated due to our new scale and got savings there, value add projects that we've identified and started to execute at the life storage properties. So the hundred million relates to just those three categories, not the total benefit of the merger.

Got it. Thanks. Appreciate you.

Sure. Thank you. And our next question comes from the line of Eric Wolf with Citi.

Hey, thanks. Maybe just to follow up on LSI, I think last quarter you mentioned that you expected your life storage portfolio to outperform your legacy EXR portfolio in 2025. I was just curious if that's still the case or if some of the recent weakness in the Sunbelt markets has changed that too.

No, life storage portfolio is outperforming the EXR portfolio this year and I would expect it to do the same next year.

And that's not just across the same markets, right? That's across, that's comparing one directly versus the other, meaning LSI like the same store pool versus the other same store pool. Am I right about that? Yes, correct. And then you mentioned in your release and just a moment ago about occupancy being stronger than it normally is through the rest of the year. So I guess what are you looking for to try to dial up moving rates? Like what would it take over the next, say, three to six months to have strong occupancy? So like what else are you looking for to try to get more aggressive on moving rates?

So,

and

I'm sorry if I'm going to be obvious. You know, we talk about aggregate data here, but every night the algorithms look at every unit type in every building and adjust rates. So as we speak today, there are rates in certain unit sizes in certain buildings in certain markets that are moving up. And the algorithm looks at many, many variables, you know, historical data, number of move-in, number of vacates, and a bunch of projected performance to make those decisions. And the aggregate of all of those decisions is what we report. But it's not like any group of us sit here in Salt Lake City and look for a few macro things and decide we're going to increase rates 5% or decrease rates 2%.

Right. Yeah, I completely understand that. I guess, you know, from our perspective, you're just looking at occupancy and see that it's relatively full and better than it normally is. And so I don't know if there's some kind of demand. I'm just trying to understand the algorithm, like what demand indicators, I don't know if you can list a couple that are maybe lower than normal or otherwise suggesting that you need to be cautious on moving rates. And I get that there's many factors you're looking at in their projections in the future. I'm just trying to understand

generally what the main ones are. Okay. Sure. Let me give you a better answer then. Hopefully a better answer. So one thing that we're constantly doing is the algorithms will produce a price for a unit type in a building. And we will always have a test running where a certain number of stores will add 5% to that algorithm number and a certain number of stores will subtract 5% from that algorithm number. So we'll be able to tell at these different price bands, right? The algorithm produced price bands 5% higher, 5% lower. And you look at number of rentals, rate, cost to acquire that customer, ECRI and length of stay and come up with a customer value. And that will tell us that, you know, the algorithm produce number produces the best long-term revenue or if we intervened and went 5% lower or 5% higher, where we would do better. And that's kind of an ongoing test we run to help us understand if the algorithmic produced prices is in fact producing the best result for us. Is that helpful?

Yes, that's helpful. Thank you.

Sure.

Thank you. And our next question comes from the line of Joshua Dennerle with Bank of America.

Hi, this is Jeff Spector for Josh. Sorry, we had technical difficulty before. And I apologize if you already discussed this, Joe. You know, you talked about, you know, occupancy and the strength and occupancy trajectory. And just given the time of the year, I know we typically like to ask, you know, how are you feeling right now as we're entering November? You know, and how does that, how does, I guess, how do you feel the year will end? And how does it bode in heading into 25 compared to, let's say, you know, prior years? I know we had a number of years where there wasn't seasonality. But, you know, if you go back pre-COVID, right, how does this compare in terms of now, you know, this high occupancy level, then, you know, thoughts into 25? Thank you.

So I feel good that our people and processes and systems are optimizing performance in a difficult market. I feel better if it wasn't a difficult market, but I can't control that. But I feel really good that everything we're doing, the strategies we're implementing, the tests that we're undertaking is, you know, squeezing as much juice out of the fruit as we possibly can. I also feel very good that at a high level of occupancy, when the market turns, and the market will turn, we are in a really good position to benefit from that quickly. I feel good that everything we see confirms moderation in new supply. So that, you know, makes me feel good as well. So I certainly feel better if we're having 6% revenue growth, but we're not going to have that and all we can do is make the best of it and position ourselves well for the future.

Okay, thanks. That's fair. And then my second question, you know, is again on LSI. You talked about the lack of pricing power there, and I, you know, keep thinking about, you know, your, you want to, you know, again, use the EXR systems fully into the LSI portfolio. And you're saying it's outperforming, but again, there seems to be some weakness there, right? It feels like at least, tell me if I'm wrong, between that LSI customer possibly versus the EXR customer. So, you know, what gives confidence that you can really push on that LSI customer as we enter 25? So again, I think of those markets as more, you know, tertiary, secondary markets. That consumer is more squeezed today than ever.

So we don't see that difference in consumer. We think the storage consumer is the storage consumer, whether, you know, regardless of what product they go to, the, their behavior is very similar. We don't see significant difference in bad debt or reaction to DCRI or other behavior, you know, between markets. So I don't, I'm not sure I agree with the thesis there.

And Jeff, I'd maybe point to a couple of other things. One is, you know, we went into this with a 400 basis point delta in occupancy that we had to make up. So we went in with softer rates partly to gain occupancy there. Recently, we switched our algorithm over time that'll even things out. In addition, you had a brand and a thesis going in where we thought the dual brand was going to compensate and we would actually have higher growth as a result of the dual brand. We haven't found that. And we now believe that it's going to do better on a single brand. That change just happened. So we're still optimistic and, you know, feel like it's been tough timing. And we think that there's still a lot of good growth in that portfolio. Okay, thank you. Thanks,

Jeff.

Thank you. Our next question comes from the line of Eric Luco with Wells Fargo.

I appreciate you taking the question. Maybe could you comment a little bit on kind of the move in to move out spread? I think it had been kind of the negative 30% range, maybe a little bit north of that. And then as you kind of look out over the next, you know, one to two years, I mean, where do you think that spread has to go to get back to what would be kind of a more typical same store growth rate based on your current patient of ECRIs? Is it, you know, negative 20, negative 15? Maybe any color there would be helpful.

Yeah, so for the quarter we average just over 30%. Moving into October, your mid to upper 30s, which is, you know, the growth from the second to the third quarter is common at this time of year. You typically, that spread usually does get larger. I think it will depend a little bit on how strong the market comes back and what we do with kind of pricing strategy. Today we found the most effective way to attract new customers is with the lowest rate. It's possible that changes as the market strengthens. So it's hard to comment on that until we kind of see it and have confidence on which pricing strategy is going to work best.

Gotcha.

I

appreciate that. And just to follow up on rate is between

the LSI and EXR properties, I guess more for like for like markets, how much of a spread you still have remaining there and kind of as you work through this this new branding strategy, you know, when you think that can continue to close or hit parity.

So on like for like properties, our spread is about 6% today and it was close to the 16-day closing. And there's no reason that that shouldn't be zero at one point. When you look at like for like markets, we haven't made as much progress. We've only closed about 2% of the rate gap, although we have closed the occupancy gap meaningfully for those stores. And I don't think we'll ever get to parity there, but we will close some more of the rate gap.

Great. Thank you.

Sure. Thank you. One moment, please, for our next question. Our next question comes from the line of Hongling Zhang with JP Morgan.

Yeah. Hey guys, I guess my first question is as you look toward next year, how do you think your pricing power and top of phone demand would compare to, I guess, this year and pre-COVID levels?

Well, that's the crystal ball question, right? Yeah. I think we, you know, we need to understand interest rates. We need to understand the housing market. We need to understand the health of the economy and the consumer. And all of those things will drive into storage demand and our ability to push pricing. So I wish I had a crystal ball, but I don't. I do know that, and sorry to repeat myself, whatever environment we're faced with, we will be able to maximize performance and do well. And also that we have all of these other ancillary businesses and tools that can help support company performance in periods when perhaps the stores aren't doing as well.

Got it. And my second question is with the EXR, LSI, with LSI working on the same brand as EXR, are there any quantifiable cost savings you'll realize over the near term, say, in marketing?

So the easiest cost saving to quantify is we were spending on an annual run rate basis, $10 million more in paid search for the LSI stores to make up for the relative weakness in organic sections of the search. So, you know, once we, you know, not immediately on day one, once we get the LSI stores to parity with the extra space stores, you know, we shouldn't have to spend that extra $10 million. And then the second savings, which is more difficult to quantify is with more stores on the extra space brand, the extra space brand should be stronger, leading to additional marketing savings.

Got it. Thank you.

Thank you. And our next question comes from the line of Ronald Camden with Morgan Stanley.

Hey, you have Jenny on for Ron. I just have two quick questions. The first is, can you please comment on the magnitude of ECRI for LSI and EXR pool? Like, do you push ECRI at a similar, like pace for both pools or you do like EXR harder than the other one? Thank you.

So they're both on the same ECRI program now. So there's no difference in a bite by original brand of the store in pace or amount of ECRI.

Nice. I think the second one, actually, I'm really curious about your views or commentary on the moving rates, because we know like moving rates is continued to be weak. And do you think it's actually overcorrected by your model? Like going forward, do you, like you give us a feeling that you prioritize occupancy over pricing, but that's going to be continued to be your focus going forward in Q4 and 25? So

we prioritize long-term revenue and whatever mix of occupancy and rate and the other various factors produce the long-term revenue. That's what will follow. Right now, the data is showing us to lean a little heavier into occupancy than we did. But if the data ever tells us something differently across the board or for a particular store or market, then we'll follow that.

Thanks, Dan. Thank you.

Thank you. Our next question comes from the line of Samir Kana with Evercore ISI.

Hey, Joe. On your comments about ECRI, I know you kind of talked about the magnitude being similar for both I was signing EXR now, but I mean, has there been any sort of pushback at all that you're seeing from the customers at this point?

So there's always, you know, what you would call pushback from the customers, right? Some customers move out because the space got too expensive for them or some customers move out because when we notify them, their rate went up, it reminds them they have storage and they don't need it anymore. But, you know, we track that very carefully. What percentage of customers are moving out because they got an ECRI notice and we do that because every month we keep a control group and track different behavior. So we know the excess move outs were causing by our ECRI program and it's in an acceptable range today. And if it ever changes, then we can adjust our program accordingly.

Okay, got it. And I guess my second question is around your bridge loan program and you've been pretty active on that front this year as well, right? It's led to higher interest income in the financials. So help us think through kind of how to think about the volume or the program next year and kind of what does that opportunity set look

like? Thanks. So we've had a very strong year in bridge loan originations. I think one of the reasons of that was we had a whole new group of LSI partners that we got to know and made a lot of bridge loans to them. So that was helpful. Another reason was the acquisition market was difficult. There was bid spread we talked about. So some owners decided instead of trying to sell in the current market, they'll get a bridge loan and try again in three years. So volumes were good. Next year we have some meaningful maturities. Some of those will extend, some will pay off, and some will buy. So that will have some downward pressure on our book of business. But we continue to remain, I expect we'll continue to remain active and make new loans. It all depends on opportunities. We're not going to make bad loans just to keep our book of business large and we're not going to pass by opportunities because we think we've made too many bridge loans because we can always sell A notes which we've done to manage our exposure.

Okay, thank you.

You're

welcome,

Samir.

Thank you. And our next question comes from the line of Ometeo Okusanya with Deutsche Bank.

Hi, yes, good afternoon everyone. I just wanted to stay on the credit lending platform and the again the loan that was sold this quarter, could you just talk a little bit about the characteristics of those loans, why you decided it made sense to sell it, and if we just kind of confirm where you're doing this is you're kind of selling A pieces but you're still holding on to

a that are easy to sell. So for example, if we have a 20 million dollar loan and four or five million dollar loans, it may make more sense to sell the A on the 20 million because it's one transaction as opposed to four separate transactions. Also our buyers have preferences for certain markets or where they have exposure, where they don't. So clearly the buyers have input into this as well. So there's no formula lookup table, it's more business judgment on which loans to sell. And I'm sorry, what was the second part of the question?

For the loans you actually sell. Do you sell the whole loan or are you holding on to a residual?

Yeah, I'm sorry. Yeah, we sell the A piece and we keep the Mez. So we do keep a residual. So if the whole capital stack is 100%, we're selling 55 or 60 and keeping the balance up to 75 or 80.

Gotcha, that's helpful. And then just to talk a little bit about one of your other growth drivers, which is the third party asset management. Again, you continue to grow in that space and I know that each management agreement is kind of different and unique to each operator, but just kind of curious. Yeah, and if you just kind of talk thematically about anything that may be happening to kind of improve profitability of that business as you continue to grow it.

So we're continuing to grow the business for a couple reasons. One is there's one less competitor out there, right? LSI was a business and they're us now. We have developed relationships with all the owners who LSI used to manage for and for many of them were growing that relationship. Also, the operating environment is harder and when the operating environment is harder, more non-institutional owners seek professional management. If you look at our occupancies compared to the occupancies and performance of the small operators in general, we're significantly outperforming them. And I also think we'll grow in the business because we do an excellent job in running the properties, communicating with our owners and providing great customer service. And because of that, we have a great reputation. So even though we are the most expensive in the business, more expensive and have very healthy margins, we're also growing the business faster than anyone else. Thank you so much.

Thank you. And our next question comes from the line of Key Ben Kim with Truist.

Thanks, Todd. Good afternoon. Just a couple of quick follow-ups here. Could you comment on LSI's free rate trends in the quarter and into October?

So on a -over-year basis, Key Ben, we have a difficult time partly because on a -over-year basis, we didn't manage them for the whole quarter. So we don't have perfect data on that. For the quarter, -over-quarter, their rates are down 1%. So just on a -over-quarter basis, you didn't see as much of a seasonal decline as you saw in the extra space for Polio.

Okay. And you mentioned that there's a 6% spread on a -for-like basis. In order for that to close, do you ultimately need kind of top-out of funnel demand to be better or do you think on a single grant strategy and whatever else you guys are working on, do you think you can close that gap holding everything else constant?

I think the latter. I think on the stores that are -for-like, same quality store in the exact same trade area, same type of store, once we're on a single brand and have some time, we'll close that gap.

Okay. And the last question on the bridge loans of the 300 plus or minus maturity of next year, roughly, do you know what percent would extend?

So half of those loans aren't maturing until November and December last year. So we have, you know, quite some time before we fully understand, you know, are they going to satisfy all the tests to extend or not? So it's hard to give an accurate percentage at this time.

Okay. Thank you. But they also have additional leasing season, Keebin, to meet any of those requirements. So they still have a fair amount of time before maturity.

Okay. Thank you. Thanks, Keebin.

Thank you. Now I'm sure no further questions. So with that, I'll hand the call back over to management for closing remarks.

Great. Thank you, everyone, for your interest and extra space and your time. I apologize for the difficulties we had today. We look forward to seeing everyone at the upcoming meetings. Have a great day.

Ladies and gentlemen, thank you for participating. This does conclude today's program and you may now disconnect.