Extra Space Storage Inc. Q2 FY2025 earnings call

• Operational momentum: Same-store occupancy was 94.6%, up 60 basis points year-over-year and 120 basis points sequentially. Achieved positive year-over-year rate growth to new customers for the first time since March 2022, though same-store revenue was flat. - Strategic activities: Completed 1 acquisition for $12 million, bought out 2 joint venture partners' interests for $326 million, bridge loan program had $158 million in new originations, third-party management added 93 stores with net growth of 74 properties. - Portfolio diversification: Geographic diversification helps offset softer conditions in regions impacted by new supply or state of emergency restrictions. - Key metrics: Same-store occupancy solid, new customer rates showing encouraging trends, move-out activity and delinquency rates at normal levels.

The self-storage segment was the key. Same-store occupancy reached 94.6%, up 60 basis points year-over-year. Revenue was flat due to gradual rate growth. In terms of acquisitions, they completed 1 acquisition for $12 million, bought out 2 joint venture partners' interests in 27 properties for $326 million, the bridge loan program generated $158 million in new originations, and the third-party management program added 93 stores with net growth of 74 properties, expanding the managed portfolio to 1,749 stores.

• Core FFO guidance revised to $8.05 to $8.25 per share. - Same-store revenue guidance: negative 0.5% to positive 1% for full year, with potential acceleration in Q4. - Operating expenses projected to grow 4%-5%, with moderation in back half, especially property taxes. - Interest income and expense projections updated to account for current interest rate environment and recent debt activities.

• Incoming customer price sensitivity. - New supply pressure in some regions. - Economic fluctuations in localized markets.

Q: Michael Goldsmith with UBS asked about how street rates and occupancy have trended into July and compared to June and the second quarter.

A: Jeffrey Norman responded that occupancy remained flat in July at 94.6%, year-over-year up about 50 basis points, new customer rate improved over 2% year-over-year, and move-in, move-out gap compressed.

Q: Salil Mehta with Green Street Advisors asked about net rental rate growth.

A: Jeffrey Norman said there was a minor headwind in L.A., but more due to move-outs than ECRI changes.

Q: Samir Khanal with Bank of America Securities asked about the gradual movement of progress.

A: Joseph Daniel Margolis responded that it takes time for rate improvement to flow through to revenue as only a few percentage points of customers turn over each quarter.

Q: Todd Thomas with KeyBanc Capital Markets asked about acquisitions and pricing.

A: Joseph Daniel Margolis said they are waiting for pricing to be accretive before being more acquisitive, looking for deals with caps stabilizing in the 5s or lower.

Q: Ronald Kamdem asked about expenses, especially property taxes.

A: Jeffrey Norman said property taxes were high but lapped the comp, and expense growth is expected to decelerate in the back half.

Q: Juan Sanabria with BMO Capital Markets asked about prefs in the loan book and dispositions.

A: Joseph Daniel Margolis said the bridge loan product has good demand, and they disposed of 22 LSI assets to reshape the portfolio.

Q: Michael Griffin with Evercore asked about market performance in certain markets.

A: Jeffrey Norman said NYC had modestly negative same-store rev, while Chicago had some acceleration in same-store revenue progress.

Q: Caitlin Burrows with Goldman Sachs (Jeremy Che on) asked about seasonality expectations and existing customer activity.

A: Jeffrey Norman said seasonality expectations were in line, and existing customers had fewer vacates, increasing length of stay, with healthy bad debt.

Q: Nicholas Yulico with Scotiabank asked about disposition spread and macro assumptions.

A: Joseph Daniel Margolis said the spread between LSI and legacy EXR rents was still about 5%-6%, and key drivers for FFO guidance were stronger new customer rates and occupancy deterioration.

Q: Eric Wolfe with Citi asked about buybacks and AI impact.

A: Joseph Daniel Margolis said buybacks are a capital allocation decision, and AI search was changing quickly with high search percentages but conversion rates for transacting customers still good.

Q: Ravi Vaidya with Mizuho asked about competitive dynamics and markets with easing supply headwinds.

A: Joseph Daniel Margolis said they are active in acquisitions, and markets like Portland, Seattle, Chicago, Denver were seeing easing supply headwinds, while Boston and D.C. were more stable.

Q: Eric Luebchow with Wells Fargo asked about the 3PM program and AI marketing.

A: Joseph Daniel Margolis said the 3PM program had strong growth from LSI merger partners, and AI marketing spending was mostly on Google for now.

Q: Alex Murphy with Truist Securities asked about improving property level margins.

A: Jeffrey Norman said expense side levers like marketing spend would be used to improve margins.

Q: Salil Mehta with Green Street Advisors asked about Sun Belt market stabilization.

A: Jeffrey Norman said Sun Belt market performance was market-by-market, tied to new supply absorption and additional supply delivery.

Q: Brendan Lynch with Barclays asked about AI marketing spending and shoulder season extrapolation.

A: Joseph Daniel Margolis said AI marketing spending was mostly on Google for now, and shoulder season extrapolation would depend on monitoring rental volume and occupancy balance.

Q: Omotayo Okusanya with Deutsche Bank asked about earnings growth timing.

A: Joseph Daniel Margolis said factors like rate improvement, moderation of vacates, and expiration of states of emergencies would help, with timing TBD.