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spk01: 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.
spk09: Thank you, Michelle. Welcome to Extra Space Storage's third quarter 2024 Earnings call. In addition to our press release, we have furnished un-audited 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, 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.
spk02: Thanks, Jarrett, 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 in his comments. Before we address the myriad of data points and moving pieces from the quarter, I wanna 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 LifeStore Same Store 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 LifeStore 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 LifeStorage 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 acquisitions 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 and environment when fundamentals recover. I will now turn the time over to Scott.
spk04: 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 moving 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 decline 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, this sequential change in average move in rate from the second quarter to the third quarter was negative 1%, much better than normal seasonal decline. 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've 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've raised the lower end of our FFO guidance by five 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've 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've 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.
spk01: Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw the question, please press star one one again. And our first question will come from Michael Goldsmith with UBS, your line is open.
spk12: 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?
spk02: Sure, happy to, Michael. Thank you for the question. So just to be clear, we're in very early stages here, right? We did the change to the Extra Space brand late in the third quarter, so we're several 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 close 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.
spk12: 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?
spk04: 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.
spk12: Got it, thank you very much. Good luck in the fourth quarter. Thanks, Michael.
spk01: And our next question will come from Todd Thomas with KeyBank Capital Markets. Your line is open.
spk08: Hi, thanks. Good afternoon. I just wanted to stick with that line of questioning a little bit, but move to the same store, Paul. 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?
spk04: Yeah, you taught it, 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 as that's when many of the ECRIs hit last year.
spk08: 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 sort of sorting through what's happened and sort of 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 sort of how that plays out with the pause in ECRIs in some of these markets or states given the state of emergencies. And 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.
spk04: Yeah, so 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 gonna be better on the West Coast. You see more of a benefit there than in Miami. Typical hurricane customer is gonna 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 the hurricane damage.
spk08: Okay, understood, thank you.
spk03: You're
spk01: done. And our next question comes from Caitlin Burrows with Goldman Sachs, your line is open.
spk05: 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.
spk02: Sure, it's a good question, but I'm not sure I have a market wide answer, right? We see a lot more activity, but until transactions get actually closed and reported, it's hard 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 a creative transaction.
spk05: 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.
spk02: I think the two factors you mentioned that 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.
spk01: Got it, thank you.
spk02: Sure.
spk01: And our next question comes from Joshua Dinnerline with Bank of America Securities. Your line is open.
spk06: Joshua, your line is now open. Can you please pick up your handset on your phone?
spk01: Okay, our next question comes from Spencer Allaway with Green Street, your line is open.
spk11: 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.
spk02: I don't think we did provide cap rates on the transactions we closed. I 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 have 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've approved three developments in a 8.6 development yield.
spk10: 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?
spk02: 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 of 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
spk04: repaint it.
spk02: Okay,
spk04: Chris, thank you. 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.
spk11: Okay, excellent, okay, thank you guys.
spk02: Thank
spk07: you.
spk01: And our next question will come from Juan Sanabria with BMO Capital Markets. Your line is open.
spk03: 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?
spk04: Street rates? Yeah, Juan. 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, 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 seen significant changes so far. And that's on the EXR pool. Okay.
spk03: 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. I was just hoping you could help square those two kind of different comments that you made previously.
spk02: 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 the 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 disproportionately weaker. So think of Florida where 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, hope to get the expected benefit from that. So to me, those are the three largest factors that led to us having to reduce revenue guidance for LSI.
spk03: Okay, so it sounds like maybe some of the overweight, IE Florida markets deteriorated a bit more than you expected in the back half of the summer, early fall. Would that be fair to say?
spk02: That's very fair to say,
spk07: yes. Thanks, Joe. Sure. Great, great question. Michelle, do we have new additional questions, sir? So we're not sure if anyone can hear us. We're having some technical difficulties.
spk02: Please be patient. We're going to get to the host and see what we can do.
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