Life Storage, Inc.

to normalize and level off from a tithe with same-store occupancy averaging 90.7% during the quarter, but remaining 80 basis points above pre-pandemic levels. We remain cautiously optimistic as we enter peak leasing season with asking rates and move-ins heading in the right direction. Our same-store operating expenses grew only 5.2% for the quarter versus the prior year, primarily driven by real estate taxes credit card fees, and payroll and benefits. The net effect of that same-store revenue and expense performance was 140 basis point expansion in quarterly same-store net operating income margin to 71.5%, resulting in year-over-year growth in same-store NOI of 12.8% for the first quarter. As Joe noted, this marks our eighth consecutive quarter of double-digit same-store NOI growth. Turning to the balance sheet, our net debt to recurring EBITDA ratio is a comfortable 4.9 times at quarter end, which is up very slightly from 4.8 times at the previous quarter end. Our debt service coverage is at a very healthy 5.2 times as of March 31st. We continue to have no significant debt maturities until April 2024 when $175 million becomes due with our average debt maturity of 5.3 years and our weighted average rate is 3.7% at quarter end. In addition, as of March 31st, 82% of our debt was fixed rate. Details of our 2023 earnings guidance and related assumptions were included in our release last night. Our forward guidance for the year remains consistent with the guidance we provided late February. Before we turn to the Q&A portion of the call, I'd ask that you please keep your questions focused on our first quarter results, as we will not be providing additional commentary regarding the pending transaction with extra space. With that, operator, please open the call for questions.

Thank you very much. At this time, the floor is open for questions. If you would like to ask a question, please press star one on your phone keypad. Confirmation tone will indicate your line is in the queue. You may press star two if you would like to remove your question from the queue. For anyone using speaker equipment, it may be necessary to pick up your handset before you press the keys. Please pause a moment whilst we poll for any questions. Thank you. Your first question is coming from Spencer Alloway of Green Street. Spencer, your line is live.

Thank you. As noted in your opening remarks, you had really impressive rental rate growth in the quarter. Can you just help us understand how move-in rates and ECRIs trended in one queue to arrive at that 13.6%? And then any color you can provide on how those two metrics trended through April would be helpful. Thank you.

Sure. Hi, Spencer. Good morning. It's Alex. Consistent with Joe's opening comments, just to give a macro view on the quarter, you know, it's kind of what we said, you know, the operating environment, you know, continue to normalize. And as we get into, you know, March, April, we're definitely seeing early indications of increasing and stronger seasonal trends. But to talk about some specifics, you know, Q1 from the move-in side was certainly an interesting quarter. Overall, you know, we were up on record move-ins, 1.1% for the quarter, but it was almost a tale of two worlds. I mean, very strong January, and then consistent with what you heard from the other REITs, you know, it certainly move-in volume, you know, slowed down in February and March. Now, we still had a record quarter, but we saw that slow down in February and March. Now, that shifted and changed, and move-ins, as expected, you know, certainly began to accelerate, and we saw that in April, and that trend, you know, continues into only a couple of days into May, but You know, what I said, that early strength of seasonal trends continues. So move-ins, you know, accelerating from March to April, they accelerated up, you know, 3%. So that's the trend there. You know, move-outs overall for the first quarter, pretty much what we expected. I mean, they were up in totality for the quarter, about 7%. A little higher, very similar theme, a little higher in January and February. Then March for everybody just seemed to be very quiet. The backdrop being theoretical crisis in the banking world and March just being a challenging month from an economic perspective. March just seemed flat. As we look at move outs going from March to April and what we saw in April, move outs are actually going down. They're down 4.5% month over month from March to April. So that's exactly what we expected. So early signs are strong.

Spencer, it's Joe. I would just add, you asked about the ECRIs as well, and we obviously were pretty much on target with what we expected to do for the year. We typically try to get most of them done the first half of the year, and we're on track with that. and feel good about the results and obviously the move outs were pleasantly surprised and pleased with what we're seeing so far despite the ECRI program.

Okay, that's very helpful. Thank you guys.

Sure.

Thank you very much. Your next question is coming from Ki Bin Kim from Truist Securities. Ki, your line is live.

Thanks. Good morning. So Joe, I just want to clarify the comments you made about achieved rates, were you saying that move-in rates were up 13 plus percent year-over-year in the first quarter? No.

Let me clarify. What was up 13.6 percent in the first quarter of this year of 23 were our achieved rates. That's what our customers are paying And that was up 13.6%. Now, what drives that? Obviously, that's a lot of the rate growth from our ECRI program.

The actual asking rate, street rates, were down for the quarter about 14%.

And how did that trend into April, please?

April, actually, slightly up 2% from March. But year-over-year, still down about 14%, 15% range.

Yeah, and I'd just add to that, you know, we expect that, right? Because think about the path of street rates for all of us last year. That's a really tough, tough comparison on a year-over-year basis. So while we're down in that mid-teens on an asking rate or street rate perspective, even in April, what Joe commented on to add on is we're seeing that, what we expect. Street rates are increasing, you know, as we get into peak leasing season.

Yeah, and we're seeing some nice indications. You know, it's early in May, but we're seeing some nice month-to-month continued growth in street rates. I think up another 2% or so. So, you know, that's what we expect, you know, for the peak leasing season.

Okay, that makes a lot more sense. Thanks for clarifying. And my second question is, You guys have obviously, you know, seems to be bucking the trend here compared to some of your peers that showed more deceleration. So I was just curious, high level, any kind of incremental changes you guys made to your pricing philosophies or did you see a bigger contribution from ECRI in this quarter than previous quarters? I'm just trying to get a sense of like what makes, you know, what contributed to your differences?

No, I think, to be honest, since last year we decided to maximize revenue and not necessarily occupancy and pretty much the same strategy, you know, for the first start of this year as well. But no real changes, similar levels of ECRIs as last year, similar percentages, and pretty much as we had planned. Okay, thank you. Thanks, Keevan.

Thank you very much. Your next question is coming from Michael Goldsmith of UBS. Michael, your line is live.

Good morning. Thanks a lot for taking my questions. Guys, did you see any price sensitivity of the customer during the quarter? Clearly, there was a bit of a slowdown in March. Do you think that was a result of price sensitivity? And did you adjust your prices, kind of your street rates through the quarter? And then similarly on the ECRI side, you clearly do some testing. So in trying to get a sense of Is the self-storage customer more price sensitive now than they have been in the past?

Hey, hi, Michael. You know, obviously we do a lot of testing, especially with ECRIs. We've, you know, continually looked to improve that strategy. As I said in my opening, when we had the first question, you know, pleasantly surprised with move-outs being down year over year in April, which is, you know, a nice thing to see. It shows our customers are sticky. They can take the rate increases. And, you know, I think, again, we're just kind of getting back to some normalization and seasonality. Obviously, for, you know, the demand looks like it's holding up pretty well, like what we see coming into May. And obviously, we adjust our street rates accordingly, promotions and so forth. But nothing unusual right now. We're We're pretty pleased with what we're seeing.

Yeah, and I'll just really briefly add to Joe's comments, Michael. Yeah, I mean, for us, our customer retention continues to be really positive. So we're currently, you know, at 39.7 months for customer retention, and that's certainly higher than what we saw in 2019 or earlier levels where it was, you know, about 37 and a half months. You know, as we've talked about in the past and We certainly did not see an impact in the quarter. To add more data to your question, 64% of our customers stay one year or more. And that's up from the past. And 49% are staying two years or more. So we think those are really good indications of the resilience and stickiness of the self-storage customer for us and likely the entire space.

That's helpful. And my second question has to do with the slowdown in February and March. What do you think caused that? And then also, did you take any actions as a result of that or adjust your strategy in order to... to kind of invigorate demand back in April? Did you cut street rate? Did you hold back on ECRIs at all, just given that the demand wasn't there? Just trying to get a sense of, you know, your thought process around it, around what happened, and then also what actions you took, which may have rectified kind of the slower demand.

Yeah, I mean, obviously, you know, February, January, February, March, slow part of the year. No knee-jerk reactions. Obviously, we've got to stay competitive with pricing, follow street rates, look at competition. We do a lot of scraping. But obviously, no, we didn't go crazy on promotions. Again, kind of gearing up for the peak leasing season, which I think is upon us. But nothing unusual, Michael. I think we are kind of pleased with what we're seeing so far and Kind of expected, given what's going on in the economy and housing, that maybe up and down a little bit, but nothing that's worrying us right now. Yeah.

No, and as we kind of said earlier, Michael, I mean, we know March was kind of a challenging month for the environment, given the backdrop of what was happening outside the storage space. So, you know, I think a lot of people saw just general slowness in March. But to be specific, we stuck to our ECRI program We continued on that program, and you certainly saw that in our same-store REV growth that we put up for the first quarter. We expected move-outs to accelerate in Q1 as we pushed on rates, and we did. It was interesting to see that it was flat in March, and I just think that shows that everything kind of slowed down a little bit in March on move-ins and move-outs.

Thanks for all the color, guys.

Thank you very much. Your next question is coming from Juan Sanabria from BMO Capital Markets. Juan, your line is live.

Good morning. Robin Hanlon here, sitting in for Juan. Hi. On geography, are you seeing any softness across any markets that had previously had healthy markets and then are cooling a bit?

Well, you know, actually, you know, we've been pretty bullish on the Sunbelt markets, and I think we're seeing some separation from those markets compared to some of the other markets such as the Northeast. So, you know, the Phoenix, the Floridas, West Coast, again, doing very, very well for us, kind of separating themselves a bit from some of the other markets such as the Northeast, but nothing too significant.

Got it. Thank you. Thank you. Also as a follow-up, Extra Space tends to run occupancy about 300 business points higher with higher rates. Has this influenced your operating strategy any, and what's the path to bridge the gap?

You know, again, we focus on maximizing revenue, and it's been our strategy for a while. And we don't focus on, you know, purely occupancy. We don't expect that to change.

Okay. Thank you, guys.

Thank you.

Thank you very much. Just as a reminder, if anyone does have any questions or comments, please press star 1 on your phone keypad now. Your next question is coming from Samir Kanel from Evercore ISI. Samir, your line is live.

Thank you. Hey, Joe or Alex, I'm just curious. When I look at some of your markets, right, Atlanta, Vegas, Phoenix, I mean, occupancy drops were – I think it was like 400 bits or so year over year. Is there a common theme you're seeing across these markets? I know things are normalizing. I get that. But is it, is it, is it, is it housing? Is it, is it supply? I just want to see if there's anything that we can pick up from those, those sort of occupancy drops.

Yeah. Samir, it's Alex. You know, obviously we, we really like the Sunbelt market. I mean, that's obviously where we've invested in. And I think there's, there's, We continue to expect relative outperformance there. But yeah, a little softening in the quarter in Vegas and Phoenix to call them out. Obviously, we know some parts of the Northeast weather that expects to happen. But we did see maybe just a touch more as expected, saw some supply maybe specifically coming into Vegas and Phoenix that may be part of that there. But nothing unusual, and we like that market.

Got it. And anything on the, I guess as a follow-up, anything on the expense side that's there to call out that's maybe, are there any line items or components that are maybe coming in a little bit higher than you sort of budgeted for the year as we think about balance of the year? Any pressures to the upside you're seeing?

No, I mean, first of all, you can see that our expenses came in very much in line with our guidance, so absolutely nothing unusual there. Obviously, we're facing transaction-related expenses that are not impacting our core FFO, which are taken below the line, as everyone would expect us to. But outside of that, no, very much in line with our guidance that we set out in February and reaffirmed last night.

Got it. Thanks, guys.

Thanks, Samir.

Thank you very much. Your next question is coming from Todd Thomas of KeyBank Capital Markets. Todd, your line is live.

Hi, thanks. I guess two questions. First, I just wanted to see if you could comment on occupancy. Sorry if I missed this, but quarter end was down about 30 basis points from the quarter average, and I was just curious if that was anticipated, and if you could comment on April and how occupancy has trended a little bit more recently through the early part of the peak rental season. Hey, Todd.

Yeah, Alex. No, I mean, very much, yeah, we expect through the course of Q1 that occupancy, you know, was going to come down a little bit, such as we pushed on rates and, you know, expected those move-outs, and then March happened to be flat. You know, so not a surprise there in Joe's comments earlier. That's really not our prime, prime focus as we think about more optimizing revenue. But as we get into April and June, the environment continues to normalize, and more specifically, we see that strengthening seasonal trends start to pick up, and we know that May and June will be strong months. We expect, you know, there will be a continued, you know, upward slope in occupancy that will go up through Q2. And that's kind of consistent with where we set our guidance. But we'll see. We'll see how May and June kind of play out.

Okay. And then I wanted to ask about guidance. I realize you're under a merger agreement with Extra Space that's pending here. So I don't know if that had an impact, but you guided originally for the first quarter to 155 to 159. So you came in a few pennies, four cents above the high end of that range. Despite sort of the slowdown in February and March that you discussed, And I was just curious if you could comment about the quarter itself relative to budget and sort of provide a little bit of additional commentary around the balance of the full year as it pertains to your outlook or original guidance.

Yeah, thanks, Todd. Yeah, obviously we're very pleased with the quarter results, pleased with what we're seeing in early, I would say the last week or so in terms of rate. and move in volume activity. You know, obviously, we want to see what's going on with the peak leasing season over the next few months and then make a judgment with regard to guidance after that. But right now, I think we feel comfortable sticking with what we have out there, feel good about what we have, and feel we should be able to achieve that. But obviously, we'd make some adjustments as the year progresses into the summer.

Okay, but relative to the first quarter guidance, you know, whether same store or otherwise, you know, I guess what were, you know, sort of the main, you know, positive variances that drove you, you know, five, six cents above the midpoint of the range that you guided to?

Yeah, I'll get a little more specific relative to budget and Q1. You know, obviously it's clearly a beat in Q1 and, you know, but not, again, a couple of pennies, so not far outside of our guidance. And, you know, I think on the expense side, as I said earlier, very much in line with budget. I think we were very pleased, even though March was flat, we said move-ins and move-outs. Going back to the comments we said a few minutes ago, you know, the self-storage consumer remains very resilient and sticky, and the ability to absorb ECRI, you know, those rate increases, very much remains. And so a little bit higher than what we had certainly thought, but in a good way, was that 13.6, you know, year-over-year growth and achieved rates, which gave us a little bit more of a beat to the upside coming out of, you know, our same store pool. And then I would say, secondly, you know, the acquisitions that are not our same store pool continue to perform consistent with, if not slightly above, you know, our underwriting assumptions. So a combination of those factors probably gave us a little bit more of a beat relative to the Q1 budget.

All right, great. All right, thank you. Thanks, Todd.

Thank you very much. Your next question is coming from Keegan Kyle of Wolf Research. Keegan, your line is live.

Hey, guys, thanks for the time. Apologies if I missed this, but, I mean, how should we be thinking about your marketing spend going forward, just kind of given what you're seeing in your demand funnel?

Mm-hmm. Yeah, maybe I'll go first and joke and comment. Obviously, for us, when you look at our marketing spend on our same store pool, it came in on the advertising very much in line with what we expect just north of that 4%. And I think we're continuing to see pretty good website traffic growth and The challenge continues to remain for us and everybody, the conversion of that traffic growth into true reservations. But if I look at just doing simple math, which is kind of one of the ways we look at it, the cost per move-in for us was only up year over year 1.7% to sub 2% for every move-in that we achieved in the first quarter. So we like that trade because we've commented earlier on the stickiness, the resilience of our customer base. And so I think that's the path, and we expect that to continue to be on those levels as we think about the rest of the year.

Okay. And then I guess from a transaction side of things, I guess first, what are you sort of seeing volume-wise in the market and you know, where you're seeing cap rates at. And then on the JV, you know, the JV acquisitions you did in the quarter and subsequent to quarter end, what are your expected stabilized yields on those?

Yeah, Keegan, you know, obviously the market's a bit of a pencil's down right now. The bid-ask spread is pretty wide. So we see some more stability in the debt markets and specifically the 10-year. You're not going to see so many transactions. Our guidance kind of anticipated, you know, the bulk of any deals would be in the second half of the year, and we still feel that's the case. The JVs, you know, trying to think exactly, the New York City portfolio, you know, those are mature assets with some, you know, I think some decent upside in terms of management, but probably about a 6, 6.5% stabilized yield. Great.

Thanks for the time, guys.

Thanks, Keegan.

Thank you very much. At this time, there are no more questions. I'm now going to turn it over to Joe for any closing remarks.

Thanks, everybody, for joining today's call. I hope you have a good day, and we'll talk soon. Thank you.

Thank you, everybody. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.