Extra Space Storage Inc

Good afternoon, ladies and gentlemen, and welcome to the Extra Space Storage, Inc. Q2 2025 Earnings Conference Call. At this time, all lines are in a listen-only mode. While we're in the presentation, we will conduct a question-and-answer session. If at any time during this call, you require immediate assistance, please press star-zero for the operator. This call is being recorded on Thursday, July 31, 2025. I would now like to turn the conference over to Jared Conley, Vice President of Investor Relations. Please go ahead.

Thank you, Joelle, and welcome to Extra Space Storage's second quarter 2025 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 that's defined in the private securities litigation reformat.

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 businesses.

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, July 31, 2025.

The company assumes no obligation to revise or update any forward-looking statements because of the 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.

Thank you for joining us today. We have a solid second quarter. Our operational momentum continued with same-store occupancy reaching 94.6%, up 60 basis points year-over-year, and 120 basis points sequentially from the first quarter. We were also able to achieve positive year-over-year rate growth to new customers for the first time since March 2022. We are encouraged by these positive rate trends, even though the progress is developing more gradually than we initially expected, resulting in flat same-store revenue growth in the quarter. While incoming customer price sensitivity is still apparent, rate growth is now positive and we are trending in the right direction. As we look forward, our measured progress, elevated occupancy, and the easing of new supply pressure positions us well to capitalize on improving market fundamentals as our team continues to execute efficiently across all operational areas. During the second quarter, we executed on strategic opportunities across our diversified platform. We completed only one acquisition for $12 million, demonstrating our commitment to prudent and disciplined capital allocation in a high-priced market. We also brought out two joint venture partners' interests in 27 properties for $326 million, at attractive valuations, driven by our partners' liquidity needs and favorable partnership terms. Our bridge loan program continued gaining market traction, generating $158 million in new originations. Simultaneously, our third-party management program added 93 stores, with net growth of 74 properties, expanding our managed portfolio to 1,749 stores, providing more scale and efficiency to our sector-leading platform. Our multi-channel approach combining opportunistic acquisitions and capital-light activities demonstrates our ability to create value and grow accretively regardless of market conditions, positioning us to capitalize on opportunities as they emerge. The self-storage sector continues to demonstrate its resilience, and our business model remains strong. Our portfolio's geographic diversification continues to serve us well, with growth markets helping to offset softer conditions in regions impacted by new supply or state of emergency restrictions. This balanced market exposure provides protection against localized economic fluctuations. Operationally, our key metrics remain solid. Our same-store occupancy of 94.6% reflects the effectiveness of our customer acquisition systems. New customer rates are showing encouraging trends, though these improvements will take time to fully materialize in our revenue growth. Move-out activity and delinquency rates continue to track at normal levels. demonstrating the stability of our customer base during this period of economic uncertainty. Based on these trends and our first half performance, we are maintaining the midpoint of our full year core FFO guidance of $8.15 per share. While near-term revenue growth remains muted, our revenue management system, operational discipline, and investment strategy position us well to navigate current conditions and capitalize on emerging opportunities. We remain focused on balancing pricing and occupancy to maximize revenue while pursuing strategic growth that enhances long-term shareholder value. I will now turn the time over to our Chief Financial Officer. For the last 34 earnings calls, I've turned this over to Scott Stump, who has always provided balanced, accurate, transparent, and helpful commentary. Scott has been a great asset to Extra Straight Storage and instrumental in reshaping our balance sheet, and most importantly, a great partner to me, and I appreciate all of Scott's contributions. Our new CFO, Jeff Norman, is joining us for the first time as our newly promoted CFO. Jeff Edson was the company for 13 years and most recently was serving as a senior vice president responsible for our capital markets, treasury, and risk management teams. I look forward to having him as a part of our executive team and his continued contributions leading our accounting and financing functions.

Thanks, Joe, and hello, everyone. Our performance through the first half of the year is in line with our full-year estimates. Second quarter same-store revenue came in modestly below our internal expectations due to new customer rate growth improving more gradually from Q1 to Q2 than in the previous three quarters. However, our flat same-store revenue was augmented by stronger-than-expected head insurance income and management fee income. Interest income and interest expense were both greater due to a higher-than-forecasted silver curve. So, as Joe mentioned, while the progress in new customer rates is a little slower than expected, our operating model continues to generate stable cash flows and maintain consistent performance metrics, and our ancillary income streams are making meaningful contributions to FFO. Turning to expenses, we experienced higher-than-normal year-over-year increases. Same-store expenses increased by 8.6%, driven by outsized increases in property taxes, specifically in the legacy life storage properties located in California, Georgia, Illinois, and Texas. Although higher than normal, property taxes were generally in line with internal estimates through the first two quarters, and our full-year outlook anticipates total expense growth, including property tax growth, to normalize the back half of the year. Our balance sheet continues to demonstrate strength and flexibility, with 89% of our debt maintained at fixed rates after including the hedging impact of our variable rate receivables. We've maintained our weighted average interest rate at 4.4% with an average maturity of 4.3 years. Our measured approach to leverage, complemented by our well-structured debt maturities and diverse funding sources, provides us with the stability pursue strategic opportunities while effectively managing our position in the current interest rate environment. Given our in-line performance in the first half of the year and gradually improving fundamentals, we are tightening our full-year core FFO and same-store guidance ranges and maintaining our existing midpoints. This results in core FFO guidance of $8.05 to $8.25 per share. For our same-store portfolio, we anticipate revenue growth between negative half a percent and positive 1% for the full year. Our same-store guidance includes potential acceleration in the second half, particularly in the fourth quarter, as improving new customer rates begin to take effect. Operating expenses are projected to grow between 4% and 5%, which, as I mentioned, implies expense growth moderation in the back half of the year, especially with property taxes. We've updated our interest income and expense projections to account for the current interest rate environment and recent debt activities. Our diversified portfolio, sophisticated operating platform, and strong balance sheet continue to provide a solid foundation as we execute on our strategy through current market conditions, maintaining our focus on long-term value creation. With that, operators, let's open it up for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Michael Goldsmith with UBS. Your line is now open.

Good morning. Thanks for taking my question.

Can you provide an update on how street racing occupancy has trended into July and how that compares to June and the second quarter? Thank you.

Sure, Michael. From an occupancy perspective, sequentially, occupancy remains flat. So continuing July at 94.6%, which year over year is at odds with Delta of about 50 basis points. New customer rate improved on a year-over-year basis. It was up a little more than 2%. So seeing positive trends there. And our move-in, move-out gap also compressed with those rates picking up. So positive indicators on all fronts in July.

Thanks for that. And then just to build on that, right, like three rates have now turned positive. You know, in the commentary before, you talked about trends accelerating through the year and feeling that in particular in the fourth quarter. Is that just a function of, you know, it takes a little bit of, you know, there's only a few percentage points of customers that turn over every quarter, and so it just takes a little bit of time to start to feel that benefit of the street rate, the positive street rate growth, or if there's something else that makes kind of the fourth quarter when you start to really feel the benefit. I just feel things are correct.

Thanks. You're exactly right, Michael. That's spot on. All other things equal is we're seeing those positive new customer rates begin to roll through. It just takes time for the snowball to build. If you keep adding more and more sequential quarters of positive rate growth, it begins to flow through to revenue. So it does take time, but it starts to compound and improve as you get into

Fourth quarter. Thank you very much. Good luck in the next round. Thanks, Michael.

Your next question comes from Salou Mecha with Green Street Advisors. Your line is now open.

Hi, guys. Good morning, and thanks for taking my question.

So just looking at the net rental rate growth, you know, seeing a, I believe, like close to a percent decrease in the overall rental rate, But with movement rates roughly flat to positive, you know, would I be correct in asserting that net decrease to ECRIs, or could this perhaps be attributed from the rent restrictions in L.A.?

You know, any caller here would be super helpful.

Yeah, you are seeing a minor headwind in L.A., but I think more than ECRIs, it's just a function of move-out. You still have a roll-down net roll-down with move-out. which drags on your overall in-place rent per square foot. So I would say that's a more significant driver than any change from an ECRI perspective.

Really, that's been pretty constant on a year-over-year basis. Thank you. You bet. Thank you.

Your next question comes from Samir Canal with Bank of America Securities. Your line is now open.

Yes, good afternoon, everybody. I guess, Joe or Jeff, you said in the opening comments you talked about the progress that's being made, but you also said it's sort of gradual and maybe, you know, I don't want to use the word softness, but it feels like maybe it's a bit lighter than you expected. Maybe Josh, just talk or expand around that, I guess.

What do you think is sort of driving that gradual sort of movement here? Well, I think there's several things.

You know, one is mentioned at the previous question. We earn 5% or 6% of our customers a month. So it takes time for improvement in rate to, you know, build up in the rent role and show it. You know, we also have a rollout, and that, you know, again, takes time to – work against that. But this isn't a month-to-month business, right? This is a long-term business. The trends we're seeing are positive. Being positive in e-customer rates for the first time since March 2022 is a meaningful inflection point. And we're looking, you know, we've rode down the hill and we're looking forward to riding up the hill now.

Okay, got it.

And I guess just some comments that you can make on LSI, the impact that portfolio is having on same-store. Is it in line with your expectation? Has it been below your expectation sort of year-to-date? Because I know that portfolio also had, you know, explorers of Florida, right? And maybe that's taking a bit longer to come back to normalization. Maybe talk around kind of the LSI portfolio and the impact it's having. Thanks.

No, so the LSI portfolio is performing as expected. Rates are improving faster than the extra space rates, but that's what we expected. We believe the additions to the same store pool, which is over 95% LSI, will add 50 basis points to the same store performance this year. So, on track in all respects.

Samir, I'll just add, not specific to LSI, but your comment about the Sunbelt in general, I think is It is correct that those have been the markets that have been disproportionately impacted by new supply. They're also a little bit of victims of tough comps after multiple years of really strong NOI growth. And now they're taking a little bit of a breather in those tougher markets. But long term, we're very bullish on the Sun Belt. And in general, on having a highly diversified portfolio with exposure to all of the growth markets throughout the country. So, Today, a little more of a headwind for us than some of our mid-Atlantic markets, Chicago, the Northwest. We're all doing a little better. But over longer periods of time, as you alluded to, we have a lot of confidence in our portfolio construct.

Thanks for that, guys. Thanks, man. Thanks, man.

Your next question comes from Todd Thomas with KeyBank Capital Markets. Your line is now open.

Hi, thanks.

First question, I just wanted to follow up. Maybe you can sort of help flesh this out a little bit. You know, moving rent trends inflected positive in the quarter for the first time in a few years. You mentioned that they improved a little further to 2% in July. I understand it takes a little time to flow through, but you also gained occupancy through June. You're still at 94.6% in July. So it sort of sounds like, you know, stable to slightly lower. you know, improving conditions a little bit through the balance of the summer here. Can you just sort of help, you know, flesh that out a little bit and maybe, you know, comment on what you're seeing that, you know, pointed you to sort of the comments around conditions being a little bit slower here?

Yeah, I think, I mean, we give a range for same-store revenue growth, and there's assumptions all throughout that range. So, you know, speaking to the midpoint, based where you finished the first half, and if you were to solve to midpoint, it suggests or implies relative flat performance year over year in the back half of the year versus slightly positive, you know, a modest acceleration in the back half of the year. And then at the high end, that would imply more acceleration, bottom end a little bit of deceleration. And all of those factors, we believe, are on the table. But all the trends we're seeing right now are looking positive. One thing that's probably worth mentioning, Todd, in terms of trying to square up the numbers, our actual net rental income was positive 20 basis points in the quarter. And then that was partially offset by our other income line items, which include bad debt and administrative fees. Administrative fees are a little lower year over year because rental volume is a little lower year over year because our occupancy is so high. and late fees are a little lower because bad debt is lower, which indicates a healthy in-place customer. So while a headwind year over year from a same-store revenue standpoint, again, these are actually times we think are positive for the industry.

Okay, that's helpful.

And then, Joe, you commented on being prudent with regards to acquisitions you know, sounds like you're on the sidelines a little bit until pricing adjusts. I'm just curious if you can elaborate a little bit on pricing and that comment, you know, sort of what kind of pricing adjustments you would like to see before growing a bit more acquisitive here.

Yeah, thanks, Todd. I don't want to give the impression we're on the sidelines at all. We have a an investment team that looks at every deal that's in the market, looks at all the deals that we manage that end up on the market. We almost always get a first shot at those. We underwrite them all. We look real hard at it. But we're not going to execute on deals that are sub-five caps stabilizing in the fives. It just doesn't do any good for our shareholders for us to do that. So we're going to look at everything. We're going to wait for pricing, get to the level that we feel is accretive. And in the meantime, we're going to use all of our other tools, be it bridge loans, restructuring, buying out JV, doing other activities, making new preferred investments, which we did one this year, to make accretive investments while being prudent allocators of capital.

Okay, thank you. Thanks, Todd. Your next question comes from Ronald Camden.

Your line is now open.

Hey, just starting with the expenses, I know we talked about property taxes last quarter. You know, obviously continue to be pretty high over here now.

Maybe just a little bit more color on your expectation there, and is this just a 2025 thing, and how should we think about that going forward? Thanks. Yeah, thanks for the question, Ron. You're exactly right. Certainly high year over year. The positive news is we've latched the comp. So we took that pain and that markup, you know, primarily driven by some of our life storage properties. And in the second half of the year, we anticipate that coming down significantly. And in terms of all of our other expense line items, also expect to see, on average, as indicated by our range relative to our first half performance, deceleration and expense growth in the back half of the year.

Great. Helpful.

And then my second question was just going back to the comments about maybe the same core revenue being a little bit lighter than expected. I guess I just love some context in terms of just the top of the funnel demand and your expectations.

Like, is it Does it mean that the market is maybe performing below sort of average for this environment, or maybe your expectation was that you'd have a faster recovery that didn't happen?

Just trying to get a sense of, you know, what happened versus your expectations, and what does that mean in terms of the health of that, the customer, the market, and everything? Thanks.

Sure. I would say, as Joe alluded to in one of his previous answers, you know, it's not perfectly sequential month by month. We're not managing this month to month. But for the quarter, it did come in a little lighter than we would have expected relative to the rate progress we had seen in the previous three quarters. So a little lighter on the same-store revenue side than we expected, a little better in some of the ancillary income streams, which net-net put us right on target. As far as... how we then view that as it pertains to the health of the industry. I think we're more focused on forward indicators such as rental volume, new customer rates, as well as our existing customer behavior, which all look positive.

Yeah, I wouldn't, you know, the question around demand, I think demand is a little harder to measure using our historic tools because of the interest. introduction of AI to search, which makes it harder to measure, you know, Google search terms and things like that. So our belief and experience is that demand is steady, that there is demand in the market, that our systems are able to capture a disproportionate share of that, as indicated by our occupancy levels. and that the market is not weakening, but it's actually incrementally improving.

And, Ron, I think then when you layer on a gradually improving new supply outlook, that also gives us confidence that we'll continue to pick up price and power. And you see that at the market level. You can see the improvement and the rebound happening in the markets less impacted by new supplies. and then in some of the markets where use flies more prevalent, it can take a little more time.

That's really helpful. Thanks so much. Thanks, Ron.

Your next question comes from Juan Sanabria with DMO Capital Markets. Your line is now open.

Hi, thanks for the time. Just kind of thinking a little bit about the press and the loan book and what you're seeing there. Is there the expectation that you get any repayments. I know there's the next point process out there. Just curious on any known repayments or how you think that business evolves in the second half of 2026.

So we're still seeing good demand for our bridge loan product. We slightly increased our guide as to how many loans we're going to keep on the balance sheet. Part of that is to offset the smart stop preferred we were prepaid in the early part of this quarter. You know, we have great flexibility to allocate capital to that program by holding or selling A notes, which allows us to react to other opportunities and, you know, redirect capital in that way. I think the balances will be about what they are now, plus or minus, going forward, perhaps with a different mix of A's and B's inside that balance. But it's a good, healthy program that is a very helpful tool for us, particularly in this market environment. We have not been notified by any of our other preferred holders of an imminent payback.

And then I'm curious how you guys are thinking about dispositions, if there's any pruning being considered with regards to maybe some bond explosion with life and just your strategy there.

Yeah, so you might be asking because you saw we just put a 22-store portfolio on the market for sale. These are all former LSI properties. When we merged with LSI, we said we were going to spend a couple years improving the NOI of the properties, getting to know the portfolio, and then after two years, we would qualify for 1031 test, 1031 exchange treatment. And these are the properties we've selected to dispose of to

to reshape and optimize the portfolio. Take any sense of what the dollar side of the proceeds could be? We'll have the market tell us what the sales price will be. Fair enough. Thanks, Joe. Sure. Your next question comes from Michael Griffiths with Evercore.

Your line is now open.

Great, thanks. Maybe just starting on market performance, just looking at some of your top markets, I noticed that NYC and Chicago were maybe a little bit lighter, at least, or else it's maybe my expectations. I know one quarter doesn't make a trend, but anything to read into here? I mean, I imagine that these kind of markets would be expected to be better performers, obviously, relative to the Sun Belt, but still maybe a little surprised to see them down year over year.

So, thanks, Grant, for the question.

From a same-store revenue standpoint, the Boston negative same-store rev and the New York MSA, more of that impact is northern New Jersey and Long Island, more so than the core boroughs, have been impacted more by new supplies than New York itself. And on Chicago, on the other hand, we actually saw some acceleration, Q1 to Q2, in terms of the same score revenue progress. So we're actually happy with Chicago. Certainly would like to be better and more in line with your forecast if they were higher, but you see positive trends in Chicago.

Thanks, Jeff. That's helpful context. And then maybe just a more broad-based question around demand and future fundamental performance. I know we're still in this period of, higher mortgage rates, lower housing velocity. I mean, Joe, it seems like to you it's more a supply question of when fundamentals inflect. But do you really need that housing market to come back for people to kind of sound the all clear and get kind of performance and fundamentals accelerating to maybe historical trends? Or just how are you thinking about the housing market in the context of storage demand?

So I don't think we need the housing market to come back to experience a recovery. I think it would be helpful. I think the slope will be better if we have a strong housing market. But, you know, there is plenty of demand out there. We're starting to require pricing power. I think we're on the other side of the trough. But clearly a strong housing market is better than a weak housing market, but not necessary.

Great. That's it for me, and Jeff, congrats on the promotion. I appreciate it. Your next question comes from Caitlin Burroughs with Goldman Sachs.

Your line is now open.

Hi, this is Jeremy Kuehl on for Caitlin. I guess now that we're in peak leasing season, I guess how is seasonality expectations for last year, and what do you think about for the second half of the year?

Thanks. So I would stay in line with our expectations. Last year we had a more muted rental season, and we called for in our guidance something similar. We expected it to look pretty similar in 2025 as it did to 2024. We maintain higher occupancy throughout the shoulder seasons than we typically do. And our hope was that with that higher occupancy, we'd see outside pricing power, especially with new customers. We saw it to some extent. I think we hope to see a little bit more, but continue to see it marching in the right direction in July. So overall, Jeremy, I'd say in line with our expectations.

Got it, thanks. And I guess just for, like, the existing customer, how are you seeing their activity given that there's less, you know, housing turnover? Are they staying longer? Is that being able to push easier eyes more? Yeah, anything on that, yeah, thanks.

Yeah, great question. So one of the strengths of this business is the strength of the existing customer. We are seeing fewer vacates, increasing length of stay. As Jeff mentioned earlier, bad debt is below 2%, very healthy. Customers are accepting ECRI at the same rate that they have previously. So there's really no sign of weakness or danger with existing customer behavior.

Thank you. Thank you.

Your next question comes from Nicholas. Your line is now open.

Hello, this is Victor Fedeon with NICULICOM. And you mentioned the disposition of these 22 LSI assets. Just trying to understand, excluding these assets, what would be the spread between LSI and legacy EXR rents? I think in early June you mentioned around 5% to 6% for the whole portfolio. Did you look at the portfolio excluding these dispositions?

So I have not done that. I've not done that analysis excluding these assets. So we could probably do that and get back to you, but I don't have that number.

And then broadly, is it still around 5% to 6% or it's contracted since June?

It's still about 5% to 6%.

Got it. And then second question would be more like a broad on macro assumptions embedded in second half 25 guidance. And from your point of view, what are the major catalysts to follow that might lead to EXR hitting lower or higher end of festival guidance?

Sure.

So given our high occupancy, it's hard to imagine that becoming an incremental driver from here to contribute to additional revenue growth acceleration. So I think your key driver at the high end would be stronger new customer rates. and that's going through more quickly to our revenue growth. And at the bottom end, probably a deterioration in occupancy, a greater than normal seasonal crop up in occupancy.

Great. Thank you. Your next question comes from Eric Wolf with Citi. Your line is now open.

Very nice.

There's been a good amount of volatility in the stock recently. Can you just remind us how you look at buybacks, especially with your pocket capital and other uses of capital today? I think you bought a small amount of stock around 126 earlier this year, but the opportunity went away quickly.

Yeah, that was an interesting day where we had about a two-hour window before the president announced the plaza on tariffs, and we got out of our price band. So the board of directors... you know, accrues a certain band of pricing in which we'll use capital to repurchase our stock. And as you point out, it's a capital allocation decision, and we've done it in the past, and we're certainly not afraid to do it in the future.

Okay. And then you mentioned the impact of AI on search and how maybe that's not going to make sort of these Google search terms is a good proxy for demand. I guess, do you have a sense for what percentage of your customers are using Shad CPG or AI to find the best storage solution? Persons like to say this time last year or a couple years ago. And do you think that makes customers a bit more sensitive on the front end to pricing just because they can sort of quickly analyze, you know, the cheapest option within a certain area?

Yeah.

Yeah, I'm going to apologize. I don't have a lot of good answers about this. This is changing so quickly, and we have a lot of people who are a lot smarter than me spending a lot of time trying to figure it out. In the beginning of the year, 15% of searches came up with an AIO at the beginning of it, and now that's over 65%, I think, in six or seven months. So we're trying to understand and take advantage of the changes that are going on in the search landscape. But I do have confidence in our team and our ability to be out in front in this.

Eric, one piece of card that I would add is while it does definitely create some noise in the data in terms of searches, one thing that we've noticed is that a lot of the types of inquiries customers are putting into and other AI models are more informational in nature. So if they were wondering what size of a unit to rent or the benefits of climate controlled versus not, et cetera, that's a good place to get those common answers. But customers have the intent to transact, still are tending to click through and are going to websites. So we've seen while it, maybe gets a little murkier on just a total traffic. From a traffic standpoint, the conversion rate for those customers that are taking to the website has improved and increased. So, again, evolving very quickly, like Joe mentioned, but something that we're tracking very closely.

Got it. That's helpful. Thank you. Your next question comes from Ravi Vedia with Missoula.

Your line is now open.

Hi, guys. It appears that you guys are largely done for the year with acquisitions.

And you mentioned earlier that pricing is getting tighter. I wanted to ask a bit more about the competitive dynamics.

Are there more players coming to markets and maybe the debt spread narrowing?

I would have thought that it would have maybe been more buyers in the sidelines given kind of the uncertainty in fundamentals. So I just want to hear your thoughts on that.

So I'm sorry if I gave the impression that we're done with acquisitions. Maybe you're referencing our guidance versus what we have under contract. We're still very active at looking at everything, underwriting everything. We have capital. We have joint venture partners. If opportunities arise, we will execute on them. So we're not sending the investment team home for a vacation for the rest of the year. That being said... I would have thought cap rates would have moved more than they have given interest rates and other factors. And they haven't. And there still are buyers out there transacting at what we consider to be high prices. And as long as that continues, we'll continue to remain disciplined. But in no way are we not in a position or not willing to execute on good opportunities.

and Rob, you had said, as we think of guidance, some of the reasons for not necessarily plugging in a lot of additional volume that hasn't been identified at this point of the year is it does take some time between negotiating a contracting deal and closing. And then also the contribution to FFO for the remainder of the year, if it's a late Q3 or Q4 close, it is going to be largely immaterial on your overall FFO for the year. So, from our perspective, it doesn't make sense to speculate too much on volume.

We'd rather plug it in once we have something specific identified. Got it. That's helpful. Right. I was just comparing what was, you know, done or in your context the other day versus the giant provider, but that just helps color. It's helpful here. Just one more. All right. All right. Thanks. Can you please identify some markets where you're starting to see supply headwinds ease and thus expect pricing and financial revenues to improve on out?

I apologize, Robbie. Our phone cut out just a little bit there. Can you say that again? I caught a part about markets, but... Sure.

Fair enough. Maybe just some markets where you're starting to see supply headwinds ease a bit and maybe where you expect to see a greater acceleration in financial revenues as a result of that?

Yes, thanks for repeating the question, Ravi. It's, in general, the markets that were earlier to the new supply cycle. So a few examples I would give are Portland, Seattle, Chicago, Denver, and seeing pressures from new supply ease. And generally speaking, those are also the markets where you'd see revenue pick up earlier. You also have certain markets that I think we would classify as having been pretty steady throughout the cycle that didn't see as much new supply and it's just been a little more stable in Boston and Washington, D.C.

that squarely in that category. Got it. Thanks so much, Greg. Thank you.

Your next question comes from Eric Lachow with Wells Fargo. Your line is now open.

I appreciate it. Maybe you could touch on the 3PM program.

It looks like you added 174 in that. Talk about, you know, where you're seeing strength from, and are you seeing any new opportunities from partners of the LSI portfolio that maybe give you the ability to keep growing there?

Yeah, thank you for the question. So, we've had two fantastic quarters. growing our management plus business, our third-party management business. As you mentioned, we've added 174 stores net this year. And some of that is from new partners that we were introduced to through the LSI merger. It's been one of the benefits of the merger, as well as grid runs, making grid runs to those partnerships as well. So it's been a great six months of the year. I think it's largely due... to a difficult operating environment where private operators come to the realization, or their equity partners do or their lenders do, that they need professional management. They need the best operator in the business managing their source. I would not be surprised if the second half of the year we continue to grow, but grow at a slower pace as the transaction market is picking up. and we probably will see some exits from the portfolio, but I think this is a great growth area for the company, and not only adds directly management fees and tenant insurance, but also provides these ancillary benefits of opportunities to purchase and opportunities to make loans. Appreciate that, Joe.

I guess just one follow-up. I apologize if I missed it, but I think you had talked about HAPA funnel demand measured by search on your last call being up year over year. So just wondering how it's trended, you know, the last couple months given some of the macro uncertainty that's out in the market, you know, for the second half of the year. Thank you.

Yeah, so if you look at HAPA funnel by generic Google search terms, it remains elevated compared to prior years. But we believe some of this elevation, and we don't know how much, is due to AI search, people doing multiple searches, and it's not an increase in customers. So we see an increase in generic search terms. We don't see a proportional increase of people coming to our websites. But as Jeff mentioned, you see a higher conversion rate of folks when they do get to the website, which tells us, which suggests to us that those customers are better educated. They've asked more questions through AI. They know more what they want. And then when they get to our website, they convert at a higher level. That's kind of our early observations in a changing environment.

Okay, great. Thank you. Sure.

Your next question comes from Michael Mueller with J.P. Morgan. Your line is now open.

Yeah, hi. I know it's not black and white in terms of what's a consumer versus a business user, but do you have a sense if one of those categories is clearly ahead of the others in terms of seeing better demand? And for a follow-up, when it comes to ECRI pushback, are you getting more pushback from one of those categories versus the other as well?

So it's a hard question to answer because the business consumer is not a monolithic entity, right? There's national pharmaceutical chains with big balances too, and there's the local landscaper who's much more akin to a retail customer. I think you're kind of what's behind your question. I think it's correct. It's the big national businesses, stay longer, react better to ECRI and are better overall customers, while maybe some of the small local businesses are not as different as the retail customer.

Got it. Okay. That was a thank you. Thanks, Mike. Your next question comes from Alex Murphy with Truro Securities.

Your line is now open.

Hi. Thanks for taking my question.

Given that SAMHSA revenue was flat and NOI declined by around 3%, are there any specific levers management is considering to improve property level margins going into the back half of 2025?

You know, I think the main one will be on the expense side. Margins were suppressed in the first half of the year because of higher than normal expenses. And as we continue to push on the revenue side, It also gives us an opportunity for additional margin expansion. One example would be our marketing spend. We get a higher return on that spend. It's something that we can measure and see the returns on it. And as we can deploy those marketing dollars, if we're seeing a higher return, we'll keep doing it. So there are different levers you can pull in terms of marketing, discounting, pricing, and we're always evaluating

all of the levers to try to maximize revenue. Thank you.

Ladies and gentlemen, as a reminder, if you have a question, please press star 1. Your next question comes from Salil Mehta with Green Street Advisors. Your line is now open.

Hi, guys, and thanks for taking my second question here. I'd like to just touch a bit more on market and region performance.

You know, it looks like Sunbelt areas, which have been kind of beaten up, they look to finally be turning the corner and achieving some sort of stabilization.

Does this ring true, and what are you guys expecting from markets in this region in the future?

In terms of absolute performance, as you're indicating, those are our tougher markets. From a sequential improvement standpoint, I think it's going to be a market-by-market situation. And I think it's highly tied to new supply and the rate at which supply has been delivered is important, as well as how quickly or how much additional supply is still to be delivered in those markets. So apologies for the more theoretical answer, but I think it depends on the market and the individual dynamics of each market and While this may be obvious for us, these markets are micro-markets, you know, much smaller than MSAs. So it can even vary where new supply is being delivered relative to our specific properties.

Thanks for the call, Eric. Your next question comes from Brendan Lynch with Barclays. Your line is now open.

Great. Thanks for taking my question, and just congrats on the new role. Thanks, Eric. It's a follow-up about AI. You may have come up with a few times on the call. In the past, obviously, Google took the majority of your marketing spending. You can talk about how you might be distributing some of that marketing spending between JetGBT and Grok and any other AI models that might be out there.

That's an easy answer today, but maybe not tomorrow. So far, the companies have not tried to monetize their AI platforms. So we spend zero on it. But I know it wasn't free to build that CPT, so I'm sure that will come in the future. But right now, it's almost all our dollars go to Google.

Okay, great. Thanks for the call. And then, Jeff, you had mentioned that the shoulder season in the spring was a bit better in terms of occupancy. Should we extrapolate anything from that in terms of how the shoulder season might play out in the fall on the other side of the equation? Thanks.

I think we were more aggressive with new customer rates to maintain that higher occupancy. Our model found that to be a better solution for maximizing revenue, and so that's what we did. And I think we'll continue to monitor it as we go into the fall. Right now, rental volume continues to be healthy. We've been able to maintain our occupancy in July, and I would anticipate that we'll still have high occupancy relative to any historical levels, but the question will be what the balance is in terms of taking rate versus holding occupancy, which we'll continue to evaluate as we go. And that's really one of the significant advantages of having such a large portfolio. We can test these things in relatively short periods of time and get real-time feedback as far as what the customer is willing to accept.

Great. Thanks for the call. You bet. Thanks, Graham.

Your next question comes from Omotayo Akusanya with Deutsche Bank. Your line is now open.

Hi. Yes. Good morning. Just from that, Scott, you will be missed.

My question is around, you guys, you talked about kind of fundamental stabilizing, even, you know, some operating metrics are inflecting positively, but it takes some time to actually hit the bottom line.

And so I guess when we kind of think about when we kind of start to see maybe some better earnings growth going forward, I mean, does that have to boil down to sheet rates just moving up even more aggressively to, you know, 10% increases?

Is it more of a case of somehow, you know, move out volume kind of slows down given the negative market associated with it right now? Just trying to get a sense of when some other stabilization and inflection, we can really kind of start seeing it in the bottom line.

I mean, I think there's a lot of factors that could help us, you know, including improvement in rate, which we're starting to see, moderation of vacates, improving length of stay, expiration of states, some states of emergencies. Those things will all help us improve the slope of the recovery.

With timing kind of being TDD? I think timing is TDD. Fair enough.

I think a good example of that is the question earlier about housing. Is it necessary to continue marching in the right direction? No. Would it accelerate our pace? Absolutely. So I think there's a number of examples like that where the cadence was dictated by the conditions and environments.

Thank you. You bet. Thanks, Matt. There are no further questions at this time.

I will now turn the call over to Joe Margocas, CEO, for closing remarks.

Thank you. Thank you, everyone, for your time and interest in extra space storage. I was surprised by the reaction to our release and want to make sure that I emphasize the strength of the company. We have very high occupancy. We have turned to positive year-over-year revenue growth. Our ancillary businesses are growing at a very fast pace. We have a platform that is poised and able to take advantage of any opportunity that goes forward. We've maintained our guidance, and we're looking forward to the rest of the year and 2026 for better things to come. Thank you again for your time.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.