Q4 2024 Extra Space Storage Inc Earnings Call
Speaker Change: Good afternoon ladies and gentlemen and welcome to the Extra Space Storage Inc. Q4 in 2024 earnings conference call.
At this time, all lines are in listen-only mode.
Speaker Change: Following the presentation, we will conduct a question and answer session.
Speaker Change: If at any time during this call you require immediate assistance, please press star zero for the operator.
Speaker Change: This call is being recorded on Wednesday, February 26, 2025. I would now like to turn the conference over to Mr. Jared Conley. Thank you. Please go ahead.
Jared Conley: Thank you, Ina. Welcome to Extra Space Storage's fourth quarter 2024 earnings call. In addition to our press release, we have furnished and audited supplemental financial information on our website.
Please remember that management prepared remarks.
Speaker Change: and answers to your questions may contain forward-looking statements as defined in the Private Security Litigation Reform Act.
Speaker Change: Actual results could differ materially from those stated or implied by our forward-looking statements due to risk and uncertainties associated with the company's business.
Speaker Change: These four looking statements are qualified by the cautionary statement contained in the company's latest filings with the SDC.
which we encourage our listeners to review.
Speaker Change: Forward-looking statements represent management's estimates as of today, February 26, 2025. 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.
Speaker Change: I would now like to turn the call over to Joe Margolis, Chief Executive Officer.
Joe Margolis: Thank you, Jared. And thank you everyone for joining today's call.
Joe Margolis: To begin the call, I would first like to address the impact the recent California wildfires have had on our people and properties.
Joe Margolis: I am happy to report that all of our teammates are safe and that none of our properties suffered physical damage from these fires.
Joe Margolis: I recognize that some of our peers in the industry were directly and personally impacted by the fires, and everyone at Extra Space wishes them and their families the best.
Joe Margolis: Turning to the fourth quarter, results were slightly ahead of our internal expectations.
Joe Margolis: Core FFO in the quarter was $2.03 per share and full year core FFO was $8.12 per share.
Joe Margolis: Operationally, demand was steady, allowing us to maintain near-record occupancy and to compress the year-over-year rate gap to new customers.
Joe Margolis: from negative 9% in the third quarter to negative 6% at year end.
Joe Margolis: while we are still experiencing a headwind from lower new customer rates.
We are seeing an improvement on a year-over-year basis.
a trend that has continued into the first quarter.
Joe Margolis: The net effect of occupancy growth, less the headwind from lower rates, resulted in a same store revenue decrease of 0.4% in the quarter, which was in line with our expectations.
Expenses exceeded our expectations, driven by higher-than-estimated property taxes.
resulting in same-store NOI of negative 3.5 percent.
Joe Margolis: Revenues for the LSI same-store pool midpoint of our guidance, and like the extra space same-store pool, benefited from strong occupancy growth, partially offset by lower rates.
Joe Margolis: As previously announced, we have concluded our dual brand test and have moved all of our stores to the Extra Space brand.
Joe Margolis: We are starting to see the positive and still developing benefits of this move, including savings in marketing and increased rental activity.
Joe Margolis: We expect the former life storage stores to continue to outperform the legacy extra space properties in 2025.
Joe Margolis: Turning to external growth, our diverse growth strategies and channels are firing on all cylinders.
Joe Margolis: In 2024, we invested $950 million in various joint venture, structured, and wholly owned investments at attractive yields, with more than $610 million occurring in the fourth quarter.
Joe Margolis: Nearly all these investments were generated off-market through our existing industry relationships.
Joe Margolis: We also originated $224 million in bridge loans in the fourth quarter.
Joe Margolis: bringing total bridge loan origination to $980 million for the year.
Joe Margolis: Our industry-leading third-party management program grew by a hundred and fourteen net new stores in the fourth quarter.
Joe Margolis: Overall, it was another solid year for Extra Space Storage, and I would summarize our performance in 2024 as follows.
Joe Margolis: We were able to maintain industry-leading occupancy and generate modest same-store revenue growth.
Despite an environment marked by new customer price sensitivity.
Joe Margolis: Outsized, non-controllable expenses, particularly real estate taxes, were a headwind, leading to modestly negative same-store NOI.
Joe Margolis: Yet, we were able to offset this through strong growth in our other storage-focused business lines of tenant insurance, bridge lending, and third-party management.
allowing us to generate positive year-over-year FFO growth.
This reinforces our strategy of growing diverse ancillary revenue streams.
Joe Margolis: as well as prudent expense control and capital allocation to supplement investors' returns during all cycles in the market.
Joe Margolis: We expect these additional revenue streams to continue to supplement property returns in the future as the market recovers.
Joe Margolis: We are confident that our higher portfolio occupancy positions us well to capitalize on the demand that is in the market, and we are looking forward to improving core business fundamentals as we progress through 2025.
Joe Margolis: We will continue to leverage our scale to find efficiencies in other areas of the business to drive outsized FFO growth relative to our sector.
I will now turn the time over to Scott.
Thanks, Joe. And hello, everyone.
Joe Margolis: Our fourth quarter results were slightly ahead of our expectations with one uncontrollable exception.
Joe Margolis: We had outsized increases in property taxes in Illinois, Georgia, and Indiana, causing extra space same store expenses to come in at nine and a half percent for the quarter.
Joe Margolis: These increases were partially offset by lower GNA, higher tenant insurance, and interest income.
Joe Margolis: Turning to the balance sheet, we completed a $300 million reopening of an existing bond in the fourth quarter and another $350 million reopening in the first quarter of 2025.
Joe Margolis: We have used the proceeds from these offerings to repay maturing loans and to fuel recent growth.
Joe Margolis: We also initiated a $1 billion commercial paper program in the fourth quarter, which enables us to borrow at interest rates that are 30 to 50 basis points less than our lines of credit.
Joe Margolis: In last night's earnings release, we provided our 2025 outlook for the extra space same store pool. The pool is now 1829 properties and includes the life storage same store properties from 2024 plus additional properties that now meet our same store definition.
Joe Margolis: Our same store revenue guidance assumes a 50 basis point benefit from the change in pool.
Joe Margolis: Our guidance does not assume a material improvement in the housing market during the summer leasing season and includes a 20 basis point headwind due to state of emergency restrictions in Los Angeles County.
Joe Margolis: We are encouraged by our strong occupancy levels and the potential benefits of moderating new supply.
Joe Margolis: We are confident that we can hold occupancy, but we believe it would be difficult to drive a meaningful reacceleration of revenue growth until we regain pricing power with new customers.
Joe Margolis: We are seeing some positive signs with new customer rates that indicate we are getting closer, but we are still we still have not seen enough progress to date to feel confident.
Joe Margolis: that a forthcoming inflection point will have a significant impact on the 2025 leasing season. Therefore, we have not included a meaningful acceleration in pricing power in our guidance.
Joe Margolis: For the same store pool, our revenue guidance is negative 0.75 to a positive 1.25 percent.
Our expense growth range is positive 3.75% to 5.25%.
Driven by expected increases in property taxes
Joe Margolis: and property insurance increases expected in the latter half of the year resulting in an NOI range of negative 3% to positive 0.25%.
Joe Margolis: Our core FFO range for 2025 is $8 to $8.30 per share, which implies a 2% growth rate at the top end and a 0.4% growth at the midpoint.
Joe Margolis: We continue to find ways to expand our other lines of business and grow FFO per share. With our occupancy levels at near record highs, we are confident that we are very well positioned to push rates quickly when pricing power returns.
With that, let's open it up for questions.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star 4 or the 1 on your telephone keypad.
Speaker Change: Your first question comes from the line of Kevin Kim from Truist. Please go ahead.
Speaker Change: Thank you. Good morning. Just going back to your comments around guidance and not assuming much pricing power acceleration, maybe you can just flush that out for us a little bit more. For example, like what were the rates year-to-date so far? And what are you seeing for the rest of the year? Thank you.
Speaker Change: Yeah, so maybe just to give you a little more color on that, our rates in the second, in the third quarter of last year
We're down about 9% average for the
Speaker Change: And we ended the year closer to being down about 6% and as of today our rates are essentially flat
Speaker Change: So we have seen a sequential improvement in terms of assumptions for the remainder of the year.
Speaker Change: We would assume that rates continue to improve moderately as we move through the year, and we would assume a slight benefit from occupancy through the year.
Speaker Change: But, you know, again, we don't assume a big improvement from the housing market or, you know, big recovery there. So kind of just more of the slow growth as we move through the year.
Speaker Change: Okay, great. And on the LA wildfire impact on guidance, can you just provide some more details around how you got to that 20 bases moist headwind?
Speaker Change: Sure, so we have 73 stores in our same store pool in LA County. It accounts for about 7% of our new pool same store revenue, so that's less than the old pool.
Speaker Change: and we believe we're modeling about a 20 basis point decrease in the same store pool revenue from the state of emergencies which we are assuming are in place for the entire year.
Speaker Change: Okay, and is that, I know it's not your job to look at other people's, other companies' conference calls, but it's different than your other peer. I'm just curious like what the difference is besides just marketing exposure.
Speaker Change: Yeah, it's hard for me to comment on others' calculations, so I'm not sure I can give you an answer for that.
Okay. Thank you.
Please keep in.
Speaker Change: Thank you. And your next question comes from the line of Jeff Spector from Bofell. Please go ahead.
Speaker Change: Great, thank you. Jill, I thought it was interesting, I think in your opening remarks you talked about, you said you still expect LSI to outperform EXR in 2025.
Speaker Change: And again, you know, and tell me if I'm wrong. When I think about the LSI portfolio, I think of maybe weaker demographics than the EXR portfolio. And we are starting to see, you know, some continued weakness, let's say on the, you know, lower demographics.
Speaker Change: So it's interesting your comment. What are you seeing? What gives you confidence that the LSI will continue to outperform? Maybe what lessons are you learning there? Thank you
Hello, everyone.
So,
Improvement is relative.
Speaker Change: So we're not saying that the LSI stores in a $15 market are going to get to $30.
Speaker Change: We're just going to say they are going to improve in the market. So when we look at those markets and look at the performance of the LSI stores and the extra space stores in those markets, we still have some gap that we feel we can close.
Speaker Change: Okay, that's fair. And then I guess just to summarize, you know, listening to both you and Scott's comments,
Speaker Change: It sounds like 25 right now the setup into peak leasing is very similar to last year
Speaker Change: Is it fair to say laser focus still on housing as a key driver of demand? Anything you would add to that or is that wrong, you know incorrect summary. Thank you
So,
Speaker Change: I would say we're laser focused on a lot of things. Housing is certainly an important component. You know, our customers who tell us they're in the process of moving, which is all moves, not just housing moves, apartment moves, move back home.
Speaker Change: is at around 48%. That peaked out at 63% in the third quarter of 21. So there certainly is some decline in housing demand, but
Speaker Change: Our systems are able to capture more than our share of the demand.
Speaker Change: as evidenced by our very high occupancy, industry leading occupancy, at very similar rates to our competitors. We're not capturing that demand by undercutting rates. We're doing it through our customer acquisition and pricing system.
Speaker Change: So housing is important. Supply is certainly something we're keeping an eye on. We're continuing to see
Speaker Change: A reduction in new deliveries, not to zero, but continuing year over year reduction. And we're also laser focused on the consumer.
Speaker Change: and we see that the existing customer remains very strong, increasing lengths of stay, acceptance of rate increases, very low default rates.
Speaker Change: and we see price sensitivity in the new customer, but as Scott mentioned in our trends of year-over-year rates that seems to be improving somewhat too. Sorry for the long answer.
Thank you.
Speaker Change: Thank you. And your next question comes from the line of Michael Goldsmith from UBS. Please go ahead.
Good afternoon. Thanks a lot for taking my question.
Speaker Change: First question is on the dual brand strategy, dual to the single brand strategy. Can you talk a little bit about sort of like the uplift that you're seeing from stores that have been converted? Is that tracking in line with your expectations? And is that kind of on track for the expected results as you head into the peak leasing season?
Speaker Change: Yeah, so the first result we saw was a reduction in paid search spending. We had a reduction of $2 million in the fourth quarter in paid search spending for the LSI stores. That should continue throughout 2025.
We're seeing an increase in conversions in those stores.
Speaker Change: better SEO rankings, somewhat better local rankings, not as good as the SEO, but also improving. And all of that is leading to a five and a half percent increase in rentals in the LSI stores that are in the same markets as the extra space.
So we've
Speaker Change: We're encouraged by what we've seen. We have not included in our forecast, in our guidance, any additional improvement other than what we've experienced to date. And hopefully, if these trends can continue, we'll have some upside.
Thanks for that, Joe. And as a follow-up.
Speaker Change: I'd like to talk about the the bridge loan book It's gotten a little bit larger and you're guiding for that to continue to increase So can you just talk a little bit about?
Speaker Change: You know how you envision how big you can envision that debt getting and maybe the interplay between bridge loans and acquisitions and How that can support your earnings growth algorithm this year and in the future. Thanks
Speaker Change: Yeah, thank you for that question and recognizing that the bridge loan program.
Speaker Change: has interplay with both the acquisitions and the management business, right? We manage all of these stores.
that we make loans on.
So it helps increase that business.
Speaker Change: We've bought almost $600 million worth of deals out of the bridge loans.
Speaker Change: and frankly, this is a little softer benefit, but just the relationships, industry relationships we form with these new parties helps us do more business, right? The more people you've done successful business with, the more future business you get.
Speaker Change: So, that being said, you know, the bridge loan business is a capital allocation play. And in 2024, you know, frankly, up until the fourth quarter.
Speaker Change: Given our cost of capital and what we saw in the market, we thought a good place to put our capital was into the bridge loan program. And we did increase our balances, we've given guidance that we're going to continue to increase our balance.
This is in 2025.
Speaker Change: But that's somewhat subject to properties being sold and we may buy them or.
Speaker Change: get a prepayment penalty. It's also subject to, you know, we have the flexibility to sell A-notes, so we can control the amount of capital we have allocated to this program, and if we have other or better uses of capital, we can certainly shift directions.
Thank you very much.
Sure.
Speaker Change: Thank you. And your next question comes from the line of Brendan Lynch from Barclays. Please go ahead.
Brendan Lynch: Great, thanks for taking my questions. It looks like vacates were down about 4.4% year-over-year. Maybe you could talk a little bit about what you're doing differently to improve that retention.
So it's.
It's
Brendan Lynch: mainly about trying to identify the customer, the type of customer, not the individual, who is more likely to be a long-term customer and make efforts to attract those customers and get them in the door.
So our pricing and customer acquisition strategies.
Brendan Lynch: are focused on attracting those customers, even if we have to sacrifice a little revenue up front to do so, because over the long-term, that will produce higher customer value, higher long-term revenue.
Maybe related to that, you know,
Brendan Lynch: When we look at the ECRI opportunity for the coming year, perhaps you have some fertile ground just because of the increase in new customers that you've brought in over the past couple months or couple quarters. Can you talk about the opportunity that you see there?
Brendan Lynch: I'm not sure. I think the opportunity is the same that we see in
Okay, very good. Thank you for the call.
Ronald Camden: Thank you and your next question comes from the line of Ronald Camden from Morgan Stanley. Please go ahead.
Hey, just two quick ones from me.
Speaker Change: Surprise but can you sort of say a little bit more what what sort of happened clearly that's not being baked into the guidance for this year just a little bit more color there and would love some thoughts on insurance as well for this year
Speaker Change: Yeah, so property taxes in the fourth quarter were higher, partly, you know, for at a state level, the one state that was consistently higher across the board was Georgia. We saw more aggressive reassessments there. We also saw individual properties in the states of Illinois, Indiana, New Jersey, where you saw very large increases on specific properties that cause a large variance.
Speaker Change: Our assumption going into 2025 is that some of the property tax
Unknown Speaker Increased pressure.
Unknown Speaker 0
Speaker Change: still there in 2025. We budgeted between 6 and 8% increase for 2025.
Speaker Change: For property taxes that we have not budgeted a lot of successful appeals, but that's to be seen, you know, we're going to appeal many of these and hopefully we win and hopefully we're able to keep that lower than that. But I think, based on the current environment, we think that it's the proper thing to do to budget at 68%.
Speaker Change: In terms of property and casualty insurance, you've seen a pretty heavy year in terms of natural disasters this past year. You saw the hurricanes in Florida. You saw the wildfires in California. And I think it's really a to be determined type item here. And so we felt like it was prudent to budget a higher number there. We budgeted close to 20% increase in our
when we re-op our insurance in June.
Speaker Change: Great, that's helpful. Then my second one, obviously it's early to talk about AI, but you guys have always been sort of front footed on the technology front.
Speaker Change: not necessarily be a pioneer. There's certainly some applications around the office and with data analytics that are pretty straightforward and easy. With respect to customer facing applications, you know, we are,
Speaker Change: testing and walking into those to make sure that they are, you know, in fact beneficial and do not hurt our overall operations.
That's it for me. Thank you.
Thanks, Ron.
Speaker Change: Thank you. And your next question comes from the line of Todd Thomas from KeyBank Capital Markets. Please go ahead.
Todd Thomas: Hi, thanks. First, I just wanted to go back to the topic of property tax increases you cited in
Todd Thomas: in Georgia, Illinois, Indiana. Sounds like that's recurring, at least for the first three quarters. Is this a trend that you see becoming more widespread in other markets? And is there anything else?
Todd Thomas: In that 6 to 8% property tax budget outside of what you've mentioned and already experienced.
Todd Thomas: So, we've seen states be aggressive over the past several years. You know, you've seen Florida, Texas reassess. When we go back and compare revenue growth over the last five years to property tax growth, you know, the values of the properties have gone up.
Todd Thomas: So states typically lag in terms of how they reassess. And so we're hoping this is the back half of that. But it's still somewhat what we're seeing as a result of the revenue growth that we saw in these states and across the board for the last five years.
Speaker Change: Okay, but it sounded like you commented that it was specific to individual properties.
So it wasn't necessarily...
Speaker Change: specific to certain counties or municipalities, it was it was just on an individual property basis, is that right?
Speaker Change: It is, and then it also has to do with some of the LSI property reassessments. So if you look at growth in the two pools, which we're no longer going to talk about in the upcoming year, we won't break them out separately. We have seen larger property tax increases in the LSI pool as some of those stores were reassessed.
Speaker Change: occupancy throughout the year. The EXR portfolio ended the year about 120 base points higher.
Speaker Change: Unknown Speaker ...year over year LSI, the LSI segment was a little over 200 base points higher year over year. Can you just flash that comment out a bit in terms of ...
what the revenue growth forecast is, including.
Speaker Change: You know, maybe at the high and low end of the range in terms of occupancy.
Speaker Change: gains during the year and how we should think about the occupancy bill during the height of the rental season, you know, whether you expect it to be similar to 2024, or do you expect a little bit more seasonality, you know, similar to, you know, longer sort of historical averages?
Speaker Change: Yeah, let me talk maybe a little bit on how we model and then come back a little bit to occupancy. You know, maybe we're a little different in that we're not giving
Speaker Change: assumptions on rates and exact assumptions on occupancy, partly because those variables really, you know, you push one and the other one moves. And so I think it's difficult to do. So we typically model revenue, and then increase on a month over month basis.
Speaker Change: based on the current economic conditions and what we're seeing at the property level. Now, that being said, we do recognize that the front half of this year is going to have an occupancy delta. So, you're starting the year 120 basis points ahead. We are 120 basis points ahead on the new same store pool as of the end of February. So, we would expect that occupancy delta to burn off somewhat as you move throughout the year and become less important in the back half of the year.
Okay. All right. Thank you. Thanks, Todd.
Speaker Change: Thank you. And your next question comes from the line of Juan Sanabria from BMO Capital Markets. Please go ahead.
Juan Sanabria: Hi, good morning. Just hoping you could talk a little bit about the pricing dynamic. You noted some early signs of an uptick, but nothing sustained quite as of yet. But at the same time, if I look at the move-in versus move-out spread, that hasn't necessarily compressed. So, hoping you could
Speaker Change: I'm going to flush out why you think that's the case, that although the year-over-year move-in rates, that year-over-year decline is compressed, the move-in versus move-out hasn't necessarily moved. If anything, it's gone slightly the other way.
Speaker Change: Yes, some of that's the seasonality in the business one. So third quarter to fourth quarter, you're typically worse in the fourth quarter than you are in the third quarter. I think you've seen that with some of our peers. So that's not unexpected.
Speaker Change: You know, we would expect that roll down to be less in the summer months than it is right now. So we would, over time, that should tighten up some as rates get better.
And any incremental tidbits on the
Speaker Change: You said early signs of improving pricing power. Like, I was hoping you could flesh that out a little bit.
Speaker Change: That is based on our comment from, you know, you went from negative 9% in the third quarter to negative 6 at the end of the year to now being flat year over year.
Speaker Change: You know, you're seeing those as incremental increases, you know, just month over month, it is getting better. And, you know, we would expect to see that as you know, this is the time of year when rates start ramping up as you move into your leasing season, you know, you when you go from January to
Speaker Change: July, you always see rate increases during that time period. And we would expect it based on our occupancy and where it is today to be in a position to move rates up again.
Okay, and me just with my second question.
Speaker Change: You noted a 50 basis point benefit, the same store assumptions this year from the inclusion of a white portfolio.
Speaker Change: I'm just curious if you can give some context around that versus comments you've made historically that in a normal year you add 100 to 120 and it's not too dissimilar of a benefit. Is it just the product of the kind of a flattish at best market that's
Speaker Change: causing that that doubt that benefit from the life inclusion to the pool or
Speaker Change: Any incremental thoughts would be appreciated. So historically, we have seen improvement as we've changed the same store pool, you know, typically it's not all the way up to 50 basis points.
And then also the fact that you're moving a large.
Speaker Change: portion of properties in, we do see incremental increase but it is weighted a bit to that group of properties in terms of the increase.
Thank you.
Thanks Juan.
Speaker Change: Thank you. And your next question comes from the line of Eric Wolfe from Citi. Please go ahead.
Hey, thanks.
Eric Wolfe: For the L.A. rent cap of 10%, I guess, what does that cap pertain to? Like, what's the initial rate from which you can only grow at 10%? Is that the existing rate that your customers are already paying? Is that the discounted rate that you offer on a move-in? I'm just trying to understand, you know, what that sort of rate is within a dynamic pricing model and how you determine that.
Yeah, it's an excellent question and it is not.
Eric Wolfe: I'm not sure it's a hundred percent clear in the state of emergency, but we are not increasing rates over existing rates.
Eric Wolfe: that are paid by the customers. So whether that's a street rate, web rate or whatever, that those are the base rates we're using.
Eric Wolfe: Okay, I think so. So it's not I can't just look at what's in the stuff and say, Okay, this is what the average customer is paying right now. And it will never be 10% above that. It's a, a different process of looking at, you know, what the street rate web rate is and other things. And it's a bit more dynamic than just taking, you know, that average of what your customers are paying right now.
Eric Wolfe: I think that's true, but I also think that will get you pretty close.
Eric Wolfe: You know, you said that I appreciate that you don't guide the rate and the occupancy and the dynamic, you know, one goes up It's inversely correlated the other goes down
Eric Wolfe: But I thought I heard you say that moving rent growth was sort of, you know, flattish year over year. It's expected to turn positive, you know, get a little bit better as the year goes on.
Speaker Change: Unknown Speaker And then occupancy, to your point is up year over year and probably should be a positive contributor. So I was just curious how you're getting the kind of flattish revenue growth within that is there like an offset that I'm missing whether it's higher churn, lower ECRIs, like what
Speaker Change: I guess, why wouldn't it be more positive if you're already flat on moving rents and it's going to get better and then your occupancy is a positive contributor?
Speaker Change: So obviously it depends on where you are in the range, so you're making those assumptions on the midpoint there.
Speaker Change: As you move through the year, you get more benefit in the back half of the year than the front half. So, you know, we're, we ended the, you know, in the fourth quarter, you were down 4%, but life storage stores were also down. So, moving forward, you're starting on a lower number, and then it obviously gets better as you move through the year. So, a lot of your assumptions are somewhat based on where you are in that range.
Got it. All right. Thank you.
Speaker Change: Thank you. And your next question comes from the line of Kegan Carl from Wolf Research. Please go ahead.
Kegan Carl: Yeah, thanks for the time guys. I guess before I get into my questions, just a clarification. When you say street rate delta year over year, is that commentary for both the extra space and LSI pools together or would that hold true for both individual pools?
Speaker Change: So, I'm not sure I'm following where you're saying street rate Delta. When we're giving rates here, giving assumptions, it's the average rate to our new customer. So, it's the move in rate.
Kegan Carl: Yeah, but you're saying like it was flat year over year, right? Like, does that hold true for the combined same store pool? Was that only for the extra space pool? Was that like, I guess I'm trying to figure out how the extra space and life storage pools fit in that.
That is the new same store pool. Okay.
Kegan Carl: Not super helpful. Um, so I guess getting the questions first, just how should we think about, like the curve of moving rates versus versus typical seasonality? Like, are you expecting anything different 2025 relative to what you normally would expected or what you experienced last year?
Kegan Carl: I think that's to be determined kind of at the strength of what demand looks like as you move through the season here.
Kegan Carl: You know, you would expect it to move up. It always does during the summer months. Those are kind of that June timeframe is really our peak revenue, our peak rate.
Kegan Carl: timeframe, and then you start moving them back down as rentals start slowing as you move through the summer. So we would expect that again this summer and then the degree of those increases is going to depend on how rentals vacate, turnout, and how your occupancy stands.
Speaker Change: Got it. And then maybe one for Joe, just how should we think about capital recycling this year, just given your LSI portfolio becomes 1031 eligible?
Speaker Change: So, you know, we sold a handful of properties last year. The majority of them were LSI.
Speaker Change: properties, we have a modest list of properties that we're looking.
Speaker Change: Some to bring to the market, which would be 1031 eligible.
some we may.
Speaker Change: offer to joint venture partners, but we constantly want to improve the overall quality and market exposure, market diversification of the portfolio through dispositions and this year will be no different.
Great. Thanks for the time, guys. Sure. Thanks, Keegan.
Speaker Change: Thank you and your next question comes from the line of Nick Yuleko from Scotiabank. Please go ahead.
Nick Yuleko: Thanks. First question I guess for Scott, can you just talk about why the G&A and guidance is up about 10% this year?
Yeah
Nick Yuleko: So we've experienced a lot of growth over the past couple of years. You know, we had a very strong fourth quarters, we added properties, we're forecasting growth this year in terms of
Nick Yuleko: acquisitions, as well as the third party management. So our biggest increase really comes from the headcount that's required to manage those properties, both in the field, as well as back office. If you think about the properties, they're managed by regional managers.
Nick Yuleko: It's not completely linear. This is one of those years when we have to take one of those stair steps up as we add additional
Nick Yuleko: support level that's supporting the regional managers. So that's the largest one. And then to a lesser degree, we've also gone back, we've increased our technology spend.
Nick Yuleko: as we have focused the last couple of years on integrating the LSI properties and put a few things on hold. So we've really tried to move those items back up. So it's really to support the properties and support the technology spend.
Nick Yuleko: Okay, thanks. And then second question is just, you know, as you think about, you know, the pricing strategy, which has been in place for, you know, while now of, you know, some discounting on the front end. And then, you know, get getting ECRI benefit, you know, for the for the customer to get up to a street rate.
Nick Yuleko: Well, you know, can you talk a little bit about whether you're seeing
Nick Yuleko: you know, any differences in regions, or maybe in testing on pricing strategies about, you know, where you feel you have ability to kind of get remove some of that.
Discounting on on the front end and
Nick Yuleko: I guess, you know, the second question on that is, you know, at what point...
Nick Yuleko: Does, you know, is there maybe a risk here that, you know, the entire industry is moving to this, you know, heavily discounted front-end pricing and it becomes hard to get the consumer, you know, to be untrained from that type of pricing?
Nick Yuleko: Yeah, good question. So to answer the first one, we really don't look at it by region or market. Our algorithms, our systems will reprice every unit type in every store every night.
Nick Yuleko: and to the extent that conditions in the market, rentals, vacates, whatever, dictate a change.
Nick Yuleko: one way or another, that will automatically happen on a very, very granular basis.
So.
Nick Yuleko: different behavior in different buildings, not necessarily markets or regions or demographics, different behavior in different buildings is addressed on a nightly basis.
Unknown Speaker ...
Speaker Change: So I'm not overly concerned about what others do in the market.
for a couple of reasons. One is
Speaker Change: You know customers shop very very few alternatives when they're looking for storage
Speaker Change: It's not that important of a purchase, they're not buying a house or a car. So almost 85% of our customers shop two, one or zero alternatives before they rent with us.
Speaker Change: So what's most important is to be visible to that customer when they look, and most of them look online.
Speaker Change: to be in one of those top positions on the search page, on the first page of the search page.
Speaker Change: So what others are doing who are not that visible to customers is not that much of a threat to us.
Speaker Change: but again we're going to we're going to try to lead the industry in our pricing and customer acquisition strategies and to the extent we need to change and adapt and innovate we will.
Okay, thanks, Jim.
Welcome.
Speaker Change: Thank you. And your next question comes from the line of Michael Muller from J.P. Morgan. Please go ahead.
Speaker Change: Yeah, hi. I guess first talk a little bit about acquisition pricing and where you think returns need to be to see, you know, a lot more on balance sheet activity compared to JV activity.
Sure. So, we.
Speaker Change: try to be and are very faithful to our cost of capital.
Speaker Change: analysis and given where interest rates are and our stock price we have you know what we see as a cost of capital that is not too different than what things are trading for in the market.
And therefore.
Speaker Change: on market opportunities or few and far between to put on balance sheet. The heavy transaction load that we did in the fourth quarter was, you know, structured, off market,
Speaker Change: opportunities. We took advantage of a $74 million embedded promote in one deal that made it accretive.
So, I think.
and not do a lot of unbalanced sheet acquisitions.
Speaker Change: Going back to the comment about seeing a pickup in rental activity in the LSI portfolio post moving back to one brand.
Speaker Change: I mean, what's driving that, do you think? I mean, what was the drag from operating under the LSI banner or are you doing something different on the rate side again? I mean, what's driving that pickup?
Speaker Change: Sure, good question. So, the theory of having two brands was that we could get, you know, hopefully double the digital real estate. We could get two entries in the paid search section, two entries in the local or map section, and two entries in the organic or
or
SEO section.
Speaker Change: And when we went to two brands, it was easy to get to entries in the paid section because we bought it. We were spending on an annual run rate $10 million more in paid search to have those two entries.
And we had.
Speaker Change: Some improvement in the maps, but not as much as we anticipated. And we had significant improvement in the SEO, where we went from LSI, maybe had an average spot at seven or eight, and we moved them up to closer to four or five.
but 70% of the clicks are in the first three.
Speaker Change: entries, you know, you got to be on the first page of the organic section.
So, although
Speaker Change: Theoretically, we were right. We were improving our position. We weren't improving it enough.
Speaker Change: to pay for the cost of the second brand and move the needle.
So now everything is branded Extra Space, digitally at least.
Speaker Change: and we are seeing the customers come to the Extra Space brand and Extra Space almost always ranks in the top spots in all of those three categories.
Speaker Change: So we're seeing getting more clicks, more views, higher conversion rate, leading to more rentals. And we're saving money because we don't have that extra page search spend.
Speaker Change: Got it. Okay, that that's super helpful. Appreciate it. Thank you.
Speaker Change: Thank you and your next question comes from the line of Saddle Neta from Green Street. Please go ahead.
Saddle Neta: Hi guys, thanks for taking my question and congratulations on the quarter.
Saddle Neta: Just got a quick one here kind of on the ECRI front, but can you guys provide some color on, you know, how have ECRIs trended and, you know, where do you guys see them going into the future? You know, as move-in rates, as you said, look to improve in 2025, you know, can we expect to see maybe slightly less?
Saddle Neta: aggressive rent increases than what we saw in 24 and, you know, has there been any increased sensitivity as well that you've seen as of the fourth quarter?
Speaker Change: So I'll take those in reverse order. We haven't seen any change in customer behavior. Our NPS scores for departing customers are extraordinarily high.
Saddle Neta: We do have some customers that will call the store manager or the call center and complain about a rent increase or wanna know, want more information. And we give those.
Saddle Neta: Those teammates, the authority within a range to address that customer concern. We don't want to lose that customer. We think it's
Good customer experience to have those concerns addressed right away.
Saddle Neta: The number of customers who are getting that relief has not changed at all. It's a very small number and it hasn't increased at all.
Saddle Neta: The number of customers who are vacating stores based on getting an ECRI notice, you know, we keep a control group.
Saddle Neta: folks who don't get an ECRA notice who are supposed to and compare their move out rates to those who did get an ECRA notice is very steady. That hasn't increased at all.
Saddle Neta: So, we monitor this very closely and there's nothing in what we see that would suggest a need for a change in the program.
Speaker Change: Thank you. And could you just touch on, you know, you know, if you see rents improve in 25, you know, ECRIs look to be pretty aggressive in 24, you know, do we expect to see maybe see slightly less aggressive ECRIs because of that?
Speaker Change: I'm not sure I know what the word aggressive means, what an aggressive is, you know, the.
Speaker Change: The ECRI amount is going to be driven by what the market rate of the unit is and what the rate of that customer is, and whether it's because they came in at a discount or whatever. And if
Speaker Change: Street rate spike that will give us the opportunity to send out, you know,
Speaker Change: Incrementally larger or if our strategy is to offer even greater discounts on introductory rates, the same thing, but it's.
Jared Conley, Unknown Executive, Joseph Margolis, Unknown
Speaker Change: The aggression, as you put it, is just to get the customer to what the current market rate is.
All right, thanks for that. That was all from me.
Speaker Change: Thank you. And your next question comes from the line of Caitlin Burroughs from Goldman Sachs. Please go ahead.
Speaker Change: Hi, this is Jeremy Culon for Katelyn. You guys touched on it briefly earlier in the call, but for incoming supply reduction, can that really help dramatically improve moving rates while housing turnover remains low? I guess can less competition be a catalyst for pricing while demand remains low is kind of what I'm getting at.
Speaker Change: So, it's a factor. I don't think it's the sole factor, but it's certainly a positive factor that helps. And I also would.
Speaker Change: I would also maybe disagree a little bit that demand is low, right? Everything that we're seeing in terms of top of the funnel activity
Speaker Change: indicates that maybe demand is low compared to COVID, but compared to historical periods, demand is healthy, demand is steady. And if you look at our occupancy, we ended the year at extra space pool at 93.7%.
Speaker Change: You know, we're keeping our stores very full. There is price sensitivity in the customers that is leading that demand not to price at levels we want, but there's enough customers out there to keep the stores full.
Got it. Thanks for the clarification. That's all from me.
Speaker Change: Thank you. And your next question comes from the line of Omatayo Okusanya from Deutsche Bank. Please go ahead.
Omatayo Okusanya: Yes, good morning out there. Quick question on interest expense. Again, understand you have the new CP line, you did some debt refinancing.
Omatayo Okusanya: but just your 25 guidance relative to our expectations seemed a little bit high.
Omatayo Okusanya: So curious if there's anything going on in regards to like swap maturities or any other kind of, you know, less capitalized interest or anything else that might be in that interest expense line that maybe we're not fully accounting for.
Omatayo Okusanya: Not in terms of swaps, we do have some loans coming due. And so some of the and so I guess it is indirectly related to swaps where some of those loans are swaps. For instance, we had a 245 million dollar loan come due in January that was swapped and now you're refinancing it at market rates today.
Omatayo Okusanya: Those rates should be reflected in our SOPS, in the debt detail, you should be able to see those, but otherwise, what we've done to model interest is we've modeled the forward curve, and then we also have increased our debt to account for any investment activity, including the bridge loans.
Speaker Change: That's helpful. And then in regards to the insurance program, just kind of given a lot of what we're seeing, whether it's
Speaker Change: Again, hurricanes, the hurricanes in Florida, the unfortunate wildfires in L.A. Just kind of show us, one, how you're underwriting that program. Two, whether it changes your appetite to take some of that property risk on through your insurance program.
Speaker Change: So we continue to shop it as much as possible. So spent time in London, you know, in the exchanges there in Bermuda.
Speaker Change: tried to make sure we have a lot of competition. With the addition of the LSI stores, we actually added some additional vendors there. So we'll continue to do that. We will potentially take some risk. It's possible the vendors require you to take some of that risk. So I think that's to be seen. But we always have them price it multiple ways to see the price of that incremental risk that we're taking. Unknown Speaker
and so it is something we're open to.
Thank you.
So
Speaker Change: Thank you. And your next question comes from the line of John Peterson from Jeffries. Please go ahead.
John Peterson: Okay, thank you. So, on the year-over-year change in move-in rates, I have two questions on that. One, are you able to give us what that is on the LSI portfolio, isolated out? And I'm just curious about the cadence of that change, because you said it was down 6% at the end of the year and we're flat today.
Speaker Change: It has closing that gap been something that's happened in the last like two or three weeks or something that's gradually happened given that we're already two-thirds of the way through the quarter.
Speaker Change: Yeah, so, you know, we're, you know, we've combined the pools will continue to report on the one pool. I can tell you they're not that different in terms of cadence. It actually took place in January. And part of that is just a comparable for last year. So rates did go down last January.
So it was an easier comp compared to December.
Speaker Change: Okay, all right, that's helpful. And then maybe shifting gears, another question. So there's obviously been some job losses in the DC market, just curious if you guys are seeing anything in that portfolio. And then maybe bigger picture, because it's, you know, it's been more than a decade since we'd have have had a quote, unquote, normal recession, I guess, putting COVID aside.
Speaker Change: maybe talk about what a job loss driven recession might look like for the storage business since we haven't seen that in a while.
Speaker Change: Yes, so way too soon to see anything in D.C. We haven't seen any.
Speaker Change: you know, vacate, increasing vacates or move out anything significant there. DC is one of those markets historically that's been incredibly steady, both doesn't have the ups and doesn't have the downs in other markets. But maybe we're in a new world. I don't know.
Unknown Speaker. Okay.
Speaker Change: Job loss driven recession is a scary thing, right? The number one kind of correlative factor for storage success is job growth, not housing market, job growth.
And, you know, we would have to manage through that.
Speaker Change: That being said, storage is an asset class that has demand generators through all economic cycles, not only good economic cycles. People need to move home, people need to move across the country, you know, people need to get roommates.
Speaker Change: People need to run their businesses out of a storage facility not out of a flex space so we
Speaker Change: do better than other property types during downturns, but we're certainly not immune.
Got it. Appreciate the color. Thank you.
Speaker Change: Thank you. There are no further questions at this time. I will now hand the call back to Mr. Joel Margolis for any closing remarks.
Speaker Change: Thank you everyone for your interest in Extra Space. The team looks forward to continuing our conversations in the near future and the team is also very excited to take advantage of improving market and some of the tailwinds that we anticipate in 2025.
Thank you very much. Have a good day.
Speaker Change: Thank you and this concludes today's call. Thank you for participating. You may all disconnect.