Extra Space Storage Inc. Q3 FY2025 earnings call

Joe Margolis noted Extra Space had solid Q3 results with Core FFO meeting internal expectations. Joseph Margolis highlighted active external growth, including a $244 million purchase of a 24-property portfolio in Utah, Arizona, and Nevada, increasing acquisition guidance to $900 million. The Bridge Loan Program had $123 million in originations and $71 million in mortgage loans sold. The third-party management platform expanded by 95 stores during the quarter. Jeff Norman mentioned same-store revenue was slightly below forecast, other income streams outperformed, property taxes normalized, but same-store expenses were above estimates due to marketing and repairs, while the balance sheet remained strong with credit facility recast and bond offering.

Extra Space delivered Core FFO of $2.08 per share in the third quarter. Same-store occupancy at quarter end was 93.7% and averaged 94.1% during the quarter, showing a 30 basis point improvement year-over-year. New customer rate growth was over 3% year-over-year net of discounts. Same-store revenue prior to other income was flat and slightly below internal projections due to strategic discounts, but excluding discounts, same-store new customer rate growth was approximately 6%.

Full year Core FFO guidance is raised to a range of $8.12 to $8.20 per share. Same-store revenue guidance is adjusted to a range of negative 25 basis points to positive 25 basis points growth. Same-store expense growth guidance is raised to 4.5% to 5% due to marketing investment, with other expense categories expected to normalize. The guidance also incorporates higher interest income projections from the Bridge Loan Program, higher tenant insurance and management fees, and lower G&A.

Uncertainty exists regarding the impact of discounting strategies on short-term revenue. Market conditions can affect acquisition opportunities and cap rates. There are potential challenges in translating new customer rate growth into sustained same-store revenue growth.

Q: You're starting to see new customer rate growth, and it's well up above over last year. But I guess, like how long does that take to flow through the whole algorithm to start to benefit same-store revenue growth?

A: In terms of specific timing, it depends on churn and other factors. It's an encouraging trend with rates increasing from slightly positive in May to over 5% net of promotions in October, but specific timing to revenue growth isn't pinpointed yet.

Q: It sounds like you've been using discounts and promotions to drive customers to the channel. Has that continued into October? And is the plan to continue to lean on that in the fourth quarter?

A: In past years, discounts weren't used much. Tried discounting strategies in states with emergencies for long-term revenue optimization, which is a short-term headwind, and will depend on testing results.

Q: Can you discuss a little bit more on your comment regarding the short-term headwind. Was there anything specific you can cite, whether it was a particular region, EXR legacy versus LSI?

A: Discounting efforts were focused on states with states of emergency and randomized stores, viewed as a short-term headwind for long-term value creation.

Q: Talked about the $244 million portfolio acquisition. Wondering if you could give any detail on the initial and stabilized yields and how long you expect it will take to reach the stabilized yield and kind of what that upside is driven by?

A: The portfolio is a mix of stabilized and lease-up stores. The leverage yield is about 4.5% in year 1 and reaches the mid-7s by the end of or into year 3, driven by a blend of different types of stores.

Q: What's the strategy behind using discounts more aggressively in some of the rent restriction areas like L.A.? And in October, you mentioned the gross versus net delta shrunk. So does that mean you're not discounting as much as you did in the third quarter? Or just why is that discount narrowing in October?

A: The strategy is to maximize long-term revenue while complying with law. The use of the tool evolves as more is learned, leading to a narrower discount delta in October.

Q: If I look at the last couple of years, you've had move-in rents down double digits at times, obviously improved a lot lately. But if I look at the times when move-in rents were down the most, your revenue per occupied foot wasn't down nearly as much, right? I think it was generally kind of just been flattish, right, over the last couple of years. So I guess I'm trying to understand, as move-in rents recover, why wouldn't the contribution from ECRIs come down, right? If the contribution went up over the last couple of years as you discounted more, as you discount less, why wouldn't that contribution from the ECRIs just come down?

A: It's a gradual process. After 3 years of negative rates, it takes time to inflect on the other end. Specific to ECRI, it's generally similar on a year-over-year basis with modestly less contribution in some states due to state of emergency restrictions.

Q: Maybe to follow up on Wolfe's question there. I'm curious, Joe, if you can give us a sense of -- and I realize you're not going to give '26 guidance, but where those move-in rates need to go before you start to adjust your ECRI program, right? I understand that you all solve to maximize revenue, but it seems to me that as these move-in rents remain lower, you're going to have to make up for it on the ECRI upside. So at what point, not to say that we reach an equilibrium, but that this regime of higher ECRIs to solve for revenue comes down somewhat?

A: Street rates going up provides more headroom to increase ECRIs to existing customers. In the past, as street rates declined, more customers were ineligible for ECRIs; now the pattern is changing as street rates increase.

Q: If I look at the acquisition opportunity set. I mean it seems like there are more transactions coming back into the market. You seem pretty constructive on this deal that the part of it is closed and part you're expecting to close by year-end. But maybe give us a sense of the opportunity set within the transaction market? Are buyers and sellers more willing to come together on price? Is it interest rate stability? Like I guess, what's the catalyst for maybe an incrementally positive outlook as it relates to acquisitions?

A: Not overly positive on open market cap rates. Encouraged by the ability to create accretive deals through relationships, joint ventures, and industry relationships. The Bridge Loan Program provides a proprietary acquisition pipeline.

Q: Jeez, if I'm beating a dead horse here, but on the discounting, I guess a 2-part question. What's the strategy behind using it more aggressively in some of the rent restriction areas like L.A.? And then in October, you mentioned the gross versus net delta shrunk. So does that mean you're not discounting as much as you did in the third quarter? Or just why is that discount narrowing in October?

A: The strategy is to maximize long-term revenue while complying with law, and the use of the tool evolves, leading to a narrower delta in October.

Q: I'm trying to just piece together this quarter versus last quarter, some of the comments on occupancy and pricing. Last quarter, you guys felt good about occupancy, you felt good about pricing. You hit an ending occupancy number, which was the highest you had in several years. And then for whatever reason, then this quarter, I felt like you were pushing pricing and then you didn't get what you wanted. You had some discounts you offered. And so I guess, you did that in relation to -- I don't know, some worries about occupancy or move-in volume coming in through the front door. Is that the right way to look at this?

A: We don't solve for occupancy or rate. We solve for long-term revenue. The discounting strategy isn't a reaction to occupancy, but about maximizing revenue in state of emergencies.

Q: Just going back to the dispositions. Is there anything you can share on the 24 assets being sold just in terms of geography or rent levels just relative to the portfolio average? And as you continue to call the portfolio, as you mentioned, are there many more Life assets that you would say fit the disposition criteria, just not being as efficient to operate?

A: The existing portfolio is concentrated in Florida and the Gulf Coast. There are more Life assets, but this is a big chunk. The rents of those assets are lower.

Q: Just a general question here on acquisitions. Just curious, when you buy something that's not stabilized or actually something that has stabilized even, how much can you typically raise the going-in yield just from taking the assets, putting them on the platform and kind of getting the expense efficiencies? And I'm just thinking about that, like what's the low-hanging fruit in terms of going from an initial yield up to a stabilized yield that obviously has some additional revenue impact in it?

A: It varies widely. If on our platform already, it's more of a core purchase. For third-party managed assets, can see a 150 basis points or more increase in NOI once on our platform.

Q: The repairs and maintenance during the quarter and the elevation in that number, was that -- is that like a broad-based R&M across the entire portfolio? Was it more concentrated on the LSI portfolio because there was kind of maybe some deferred maintenance still associated with that portfolio? And how do you just kind of think about kind of going forward, the outlook for R&M?

A: Some outsized growth is driven by legacy LSI properties, which is expected to normalize. We want to take care of properties, so will do what's needed to protect assets.