Extra Space Storage Q4 2023 Earnings Call Transcript

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Extra Space Storage Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Jeff Norman, Senior Vice President, Capital Markets. Please go ahead.

[Jeff Norman, Vice President of Investor Relations & Corporate Communications at Extra Space Storage]

Thank you, Liz. Welcome to Extra Space Storage's fourth quarter 2023 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 as defined in the Private Securities Litigation Reform Act. 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 business. 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, February 28, 2024. 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.

I'd now like to turn the call over to Joe Margolis, Chief Executive Officer.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thanks, Jeff, and thank you, everyone, for joining today's call. We had a solid fourth quarter where we focused on optimizing the performance of the recently added Life Storage assets while maximizing the performance of the legacy Extra Space locations. We were also very productive on the external growth front, adding another 74 third-party managed stores, eight stores through acquisition and $129 million in bridge loans. Operationally, the Extra Space same-store pool maintained high occupancy and solid in place rents, driving same-store revenue growth of 0.8% for the quarter. Core FFO in the quarter was $2.02 a share and full year core FFO was $8.10 per share.

On our last call, we outlined that in order to reach the high end of our guidance range, we would need achieved rates to new customers to improve on a year-over-year basis. While demand was steady and allowed us to maintain strong occupancy, it was not strong enough to eliminate negative new customer rates, which remained at approximately negative 10% during the quarter. As a result, we faced the headwind of higher negative churn and our full year performance was near the midpoints of our same store and FFO ranges.

Turning to Life Storage. One of the factors in our merger decision was our belief that we could enhance Life Storage property performance through our more sophisticated platform. Seven months removed from closing, we are happy to report that our assumptions have proved true. Customer acceptance of rent increases has been in line with our expectations, and we are seeing the net rent per square foot for legacy Life Storage customers move closer to that of nearby Extra Space locations. Occupancy is also responding positively, and we saw the occupancy gap between the LSI and Extra Space Storage same-store pools tightened through the quarter, improving from a gap of 350 basis points at the beginning of the fourth quarter to a gap of 250 basis points at year end. Today, that gap has tightened further and is approximately 200 basis points.

The occupancy improvement, together with the benefit of existing customer rent increases resulted in legacy LSI same-store revenue growth of 1.8%, an acceleration of 80 basis points over the third quarter growth rate. However, similar to the Extra Space properties, we continue to see new customer price sensitivity at the Life Storage locations, resulting in lower-than-anticipated new customer rates. So while we are achieving the anticipated incremental outperformance we expected for the Life Storage assets, reaching full property level synergies is taking longer than anticipated due to current market conditions, which we know will eventually normalize.

The current level of demand also influences our outlook for 2024. We are encouraged by our rental velocity, occupancy levels, existing customer health, length of stay, and the potential benefits of moderating new supply. However, these factors have not yet led to material improvement in new customer rates. We are confident we can hold strong occupancy and generally maintain current revenue levels, but we believe it will be difficult to drive a reacceleration in revenue growth until we regain pricing power with new customers.

We are seeing some positive signs that we are getting closer. And given our strong occupancy levels when pricing power returns, we are very well positioned to push rates quickly. We just have not seen enough progress to date to feel confident this inflection will be in time for the 2024 leasing season, or to include this scenario in our guidance.

So, while the industry as a whole will likely face headwinds from lower new customer rates in the near term, the long-term outlook for our sector and for Extra Space specifically remain bright. Storage has consistently proven to be a remarkably durable asset class and Extra Space Storage has the largest and most diverse portfolio in the industry. New supply continues to moderate and the headwinds to future new development are substantial and increasing.

We have very strong third-party management and bridge loan pipelines and a robust joint venture program, and I am confident in our ability to further scale our capital-light growth activities. We expect outsized relative growth from our LSI assets in 2024, with additional synergies to be unlocked as the rental environment improves. And as I mentioned, our occupancy today is over 93% at what is normally our low point for the year. Once demand improves, we are very well positioned to capture it.

I will now turn the time over to Scott.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Joe, and hello, everyone. Our results were generally in line with our expectations with a few exceptions. As Joe already covered, lower new customer rates caused revenue growth to come in modestly below our internal estimate. The revenue miss was partially offset by lower-than-expected property taxes. We also had a beat from G&A savings, partially offset by lower than modeled tenant insurance. All of our other income and expense line items were generally in line with our forecast.

As of January 1st, we have completed the migration of the Life Storage customers to our tenant insurance program, and we believe we will achieve $16 million in synergies from tenant insurance, exceeding our original estimate by $4 million in 2024. Our G&A run rate from Q4 is lower than our expected 2024 full year run rate as we continued hiring during the fourth quarter and we have some G&A seasonality. We now expect to realize 2024 G&A synergies of $39 million, an increase of $16 million over our original forecast of $23 million.

Turning to the balance sheet, we completed a $600 million bond offering in the fourth quarter and another $600 million bond offering in the first quarter of 2024. We have used the proceeds from these offerings to pay off the $1 billion variable rate bridge loan we obtained in conjunction with the closing of Life Storage. Our only remaining 2024 loan maturities can be extended at our option and we have plenty of dry powder if opportunities arise in the market.

In last night's earnings release, we provided our 2024 outlook for both the Extra Space and legacy Life Storage same-store pools. We have provided wider same-store revenue and NOI ranges to capture the different scenarios we believe are possible, given the unusual 2023 comparables and uncertainty around new customer pricing. With interest rates potentially remaining higher for longer, our guidance does not assume a material improvement in the housing market during the summer leasing season.

For the EXR same-store pool, our same-store revenue guidance is negative 2% to positive 0.5%. Our expense growth range is 4% to 5.5%, driven by marketing, insurance and property taxes, resulting in an NOI range of negative 4.25% to negative 0.5%. For the legacy LSI same-store pool, we expect stronger property level growth with same-store revenue ranging from 2% to 4.5%. We expect outsized expense growth at the LSI stores in 2024, especially in the first half of the year. This will be driven by higher payroll as we have brought the LSI stores back to full staffing levels.

We expect additional expense pressure on repairs and maintenance, property taxes and property insurance, resulting in a range of 6.25% to 7.75%, yielding a Life Storage same-store NOI range of negative 0.25% to positive 4%. Our core FFO range for 2024 is $7.85 to $8.15 per share and assumes the full year impact of the shares and debt added through the Life Storage merger.

And with that, Liz, let's open it up for questions.

Questions and Answers

[Operator]

[Operator Instructions] Our first question will come from the line of Jeff Spector with Bank of America.

[Lizzy Doykan, Analyst at Bank of America]

Hi, this is Lizzy on for Jeff. Just I guess going back to Joe's opening comments on not really having the confidence right now to include a scenario on pushing new rate more quickly and not assuming a rebound in housing. So I guess if you could provide color on what your assumptions are for new move-in rate and how that should trend, that's leading to the lower end versus the higher end of the same-store rev guide? That would be helpful.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, our guidance is really revenue based and new move-in rates to customers are one component. We are a little agnostic between occupancy and new move-in rate and ECRI program and promotions and all the various components that go into the revenue assumptions that produce our guidance.

As I said and you indicated, we don't see enough now to guide to a strong rebound in the housing market in time for the leasing season. We still see price sensitivity from new customers, although rental demand is good and we've had a really good start to this year. We don't think interest rates are going to go down in time to have a material impact on the leasing season. So while we don't have a crystal ball, we thought a reasonably prudent guidance would be not to assume that rebound.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Yeah. Lizzy, maybe to add a little bit more color to Joe's comments. Our guidance, the base case assumes that we do have sequential rate growth on a month-over-month basis from now into our leasing season, but just not enough to necessarily close that negative gap that we are experiencing today.

[Lizzy Doykan, Analyst at Bank of America]

Okay. That's helpful. Thank you. And as my follow-up question, we just noticed that the assumption on the SOFR curve driving interest expense within guidance, it seems a bit aggressive just based on where SOFR sits today. So could you just walk through kind of your outlook on rates and what's embedded in guidance in terms of debt and refi activity? Thanks.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Yeah. So as we were preparing our guidance and preparing our annual budgets, the SOFR curve was moving around pretty -- quite a bit. We saw it moving almost every day. So we picked a point in time that had an average of 4.75 that was approved probably a week and a half ago is when we finalized it. And we figured it'll move throughout the year. But that's the assumption we made in our guidance.

[Lizzy Doykan, Analyst at Bank of America]

Thank you.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thanks, Lizzy.

[Operator]

Our next question will come from the line of Michael Goldsmith with UBS.

[Michael Goldsmith, Analyst at UBS Group]

Good afternoon. Thanks a lot for taking my questions. My first question is just on the strategy of increasing occupancy and cutting street rate and then using ECRI as a lever to drive rent growth. Has that held up? Has that strategy been effective through the quarter? And then along with that, can you talk a bit about just the customer's reception to ECRIs, has that changed at all?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Sure, Michael. So our strategies are designed to maximize long-term revenue, not to maximize incoming rate or any other metric. And all the testing we do -- that we constantly do shows that to lean into occupancy a little more, lean into acquiring web customers at lower rates because they tend to be the longer-term customers and rely on ECRI produces the best long-term revenue growth. Customers' acceptance of ECRI has not changed at all. We monitor that every month as we send out ECRI notices, and we have not seen any increase in customers vacating the stores because of ECRI. So we believe the strategy is both valid and working.

[Michael Goldsmith, Analyst at UBS Group]

Thank you for that. And my follow-up is just on the Life Storage portfolio. It sounds like the stuff that you can control within the integration and the environment has been working well. It's kind of some of the stuff that is plaguing the industry, which is kind of the slower demand -- the slower demand and also just the pressure on rates is kind of weighing on the ability to generate synergies. Is that right? And then does that kind of change the path to generate the synergies that you expect? Whereas like it will not necessarily be generating them all in '24, but it may require kind of a multi year process to reach that kind of synergy number that you had initially thought of. Thanks.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yeah. It's a great question and I think it's accurate assessment of what's going on. The things we control, like G&A and tenant insurance, we are not only be working, but working better, as Scott pointed out in his comments than underwritten. And we are not done there. We are going to continue to look for further savings in those areas. We are outbidding contracts to get savings from the greater scale that we have now. We are going to continue to work real hard to improve on those numbers.

What's also working is that the Life Storage properties do perform better and are trending better on our systems. But the headwind that we face that we don't control is the market conditions, and that is slowing down the achievement of the full underwritten property synergies. So two things are going to happen. The mix of what contributes to the targeted synergies is going to change, and there's going to be less near-term contribution from the properties and more near-term contribution from the other aspects. And depending on where you are in our guidance, it potentially could not occur until after this year. At the high end of our guidance, we'll get real close and at the lower end of our guidance, we'll fall somewhat short.

[Operator]

Our next question will come from the line of Todd Thomas with KeyBanc Capital Markets.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Hi. Thanks. First, I just wanted to see if you can talk a little bit more about the differences that you're forecasting for same-store revenue growth between the EXR and LSI portfolios, if you can expand a little bit on the primary drivers behind those differences and discuss trends that you are seeing in occupancy and any differences in move-in rates for those two portfolios?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Yeah. Hey, Todd. It's Scott. So a couple of things. One is the occupancy delta. So mid summer last year you were 400 basis points difference between the two pools. When we ended the year, we are 250 basis points different. Today, we are about 200 basis points different through February. We've continued to increase occupancy at the Life Storage properties at a time when we were clearing up some auctions. So, during the fourth quarter we had quite a few auctions there, and so you had more churn than is normally happening. On the positive side, at those stores, we have seen customers accept the ECRIs, and they have actually moved out at a slightly lower rate than the Extra Space customers receiving ECRI. So that's the good news.

The thing that has been a bit of a headwind has been the current market conditions. And so we do expect the occupancy gap to close here in this rental season, and we expect to start closing the rate gap also. Today, their stores are priced as much as 10% lower than the Extra Space stores. And as that occupancy gap closes, we would expect to close that gap also.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Okay. And then it sounded like, I think, Joe, you said that you're encouraged by the rental activity and what you're seeing so far early in the year. Are you able to provide an update on January and February occupancy and move-in rate trends?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yeah. The occupancy as of today is 93.1% on the Extra Space same-store pool. And so good news. Occupancy delta at the end of the year was a negative delta of 110 basis points. Today, it's a positive 40 basis point delta. So, strong rentals in the month of January. Now, maybe the downside of that is it has come a bit at the expense of rate, our new customer rate. We've still found some pushback on rate. Rates in the fourth quarter were down 10% as mentioned in the prepared remarks. During January/February, they're down about 17%.

But to add some context to that, we pushed rates really hard last year. And so we have actually increased rates again this year, December through the end of February, but just not as much as we pushed them last year. So, good news is, the occupancy is moving in the right direction or at a time of year when you're usually losing occupancy, but it is coming at the expense of new customer rate.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Okay. And that's for the EXR legacy same-store that you're referring to?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yeah. I'm referring to, actually the new same-store pool, which is slightly different, but the old same-store pool occupancy moved almost the exact same. And that's the Extra Space same-store pool. The Life Storage legacy pool, the occupancy delta, as I mentioned, as of today is about 200 basis points as opposed to at the end of December it was 250 basis points.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Okay. Does the change in the same store pool for either EXR or LSI have any expected meaningful impact?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

So there's not going to be any change in the LSI pool. We're keeping it the exact same. The extra space pool, the benefit in revenues this year is going to be about 40 basis points to 50 basis points, similar to what we've seen in the past. And the occupancy delta as of today, some -- about 30 basis points of that delta is being generated by the change in pool. So it's moved between December and today about 140 basis points, 150 basis points, and 30 basis points of that is due to the change in pool.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Okay. Great. Thank you.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Todd.

[Operator]

Our next question will come from the line of Samir Khanal with Evercore ISI.

[Samir Khanal, Analyst at Evercore ISI]

Hi. Good morning, everyone. I guess, Scott, can I ask you to comment on expenses? The midpoint is 4.75%, but help us through -- think through the various line items.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Yeah. So the Extra Space pool, the midpoint 4.75% includes an increase of payroll that is inflationary to slightly plus, but call it 3%. Our biggest line item in terms of dollar increase is marketing, which includes its upper teens in terms of increase year-over-year, and we're expecting to continue to have to spend on the marketing. We saw that increase as we moved through 2023. Property taxes are between 2% and 3%. And then tenant insurance is the biggest line item with closer to 20% -- I'm sorry, property and casualty insurance is closer to 20%.

[Samir Khanal, Analyst at Evercore ISI]

Okay. Got it. And just switching gears here, maybe on revenue growth. Maybe comment on kind of what you're seeing maybe in the New York region? I looked at your sort of top three markets, LA and Atlanta holding up versus maybe New York, down about 150 bps sequentially. So maybe give a bit more color on kind of the New York, New Jersey market? Thanks.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Sure. So the New York, New Jersey MSA market is -- I think it's being driven down or negatively impacted by Northern New Jersey. So if you look at the borough, the borough continues to outperform our portfolio as it has for the last three or four quarters. New York was a laggard for a while and now New York markets rotate and now New York is performing very well. But Northern New Jersey, in particular, is dragging down the overall MSA performance.

[Samir Khanal, Analyst at Evercore ISI]

Okay. Thank you.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Samir.

[Operator]

Our next question will come from the line of Nick Yulico with Scotiabank.

[Nick Yulico, Analyst at Scotiabank]

Thanks. Hi, everyone. In terms of the move-in, move-out rates, that's very helpful in the disclosure. Can you just give us a feel for how you're thinking about that sequential benefit which you did cite? Some sequential benefit expected in the move-in rates this year? Is it going to be a similar shape to last year how it played out in terms of looking at, say, mid-year moving rates versus the ending fourth quarter rates in 2022?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

We would expect it to be somewhat of a bell curve with less negative churn in the summer months than today. This is kind of the depths of that negative churn. End of the year till end of February. And that's that negative 35% that you saw in our subs. But we would expect it to go more similar and we hope to get rate power. We hope to flatten that out somewhat.

[Nick Yulico, Analyst at Scotiabank]

Okay, great. Thanks, Scott. Just one other question on $0.20 of dilution from acquisitions and such, is that relating to something more than the $250 million of acquisitions in the guidance? Is there some impact from last year? Just seems a lot for, like a, about a $44 million overall number. So I just wanted to make sure I understood what that related to.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

This is the impact of last year's lease-up assets, including certificate of occupancy and this year. So it's things that aren't in the same store pool basically.

[Nick Yulico, Analyst at Scotiabank]

Okay, perfect. Appreciate it. Thanks.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Nick.

[Operator]

Our next question will come from the line of Spenser Allaway with Green Street.

[Spenser Allaway, Analyst at Green Street]

Hi, can you guys hear me?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yes, we can, Spenser.

[Spenser Allaway, Analyst at Green Street]

I'm sorry. Yeah, my audio cut out. Thank you. Maybe we could just circle back to expense management again, just given the environment and there being minimal new customer demand. How important do you view marketing aggressively right now when customers are presumably making storage decisions based on proximity and price?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, I just want to clarify, there's not minimal new customer demand. We're still renting an awful lot of units every month. It's just that the price sensitivity of those customers is such that we're not successful in pushing prices. Marketing spend -- I'm sorry.

[Spenser Allaway, Analyst at Green Street]

No, no, no. That I was going to say that's a fair point. So thank you for the clarification.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Sure. So marketing spend, which is only about 2% of revenue, we really look at as an investment. We are happy to spend or willing to spend the marketing dollars as long as we can get an ROI in those dollars. And we have a metric that we use to make sure we are getting a good return on every marketing dollar we spend.

[Spenser Allaway, Analyst at Green Street]

Okay. Thank you. And then can you comment on how the cost of marketing, like in terms of Google Clicks and Ad Space today compares with historical norms? Just trying to understand how that fares relative to historic norms and trying to understand if some of the increase in marketing is just due to higher absolute cost of advertising versus maybe the amount you're advertising versus last year?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

It is slightly higher. That's certainly a factor. We also are using spare foot more than we have in the past. It was a lesson we learned from the LSI merger and that has a slightly higher cost.

[Spenser Allaway, Analyst at Green Street]

Okay. Thanks. And then maybe just one last one, if I can. Just looking at your marketing performance, can you just -- market performance, excuse me. Can you just comment on what was driving the expense cut in your Chicago market?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

It's property tax appeals. So it's successful appeals. And so you had negative expense effectively in some of those stores.

[Spenser Allaway, Analyst at Green Street]

Okay. Great. Thank you.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Spencer.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thanks, Spencer.

[Operator]

Our next question will come from the line of Eric Wolf with Citi.

[Eric Wolf, Analyst at Smith Barney Citigroup]

Hey. Thanks. You mentioned that LSI rates were getting a bit closer to legacy EXR in the same submarkets, but still 10% below. Just curious, if you achieve your guidance for this year, it sounds like maybe you'd still have another call at eight or 9% on rate to get to a similar level. Is that the right way to think about it?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

So depending on where you are in the range of that, rates do go up and we do assume that they'll move in the right direction. And we are seeing that as you move throughout the year, the fourth quarter compared to the third quarter is a normal time when you do see rent per square foot tick down, that's not odd. You saw that in the portfolio. It was also impacted a bit by some of the churn from auctions. But as we move into January, February, we are seeing that rent gap continue to close and move in the right direction.

[Eric Wolf, Analyst at Smith Barney Citigroup]

Okay. And then in your January slide deck, you shared that 62% of customers stay longer than 12 months, 45% longer than two years. I was just curious what type of ECRI these customers are getting versus shorter duration customers? Obviously, as moving rates have gone down, the cost replace goes up. So trying to understand if the magnitude of difference between those longer duration versus short duration customers is changing.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So the shorter duration customers will typically get a larger ECRI if they came in on some type of promotional or introductory rate. And after that, the longer term customers typically will get a smaller percentage increase because we're just trying to get them to street rate.

[Eric Wolf, Analyst at Smith Barney Citigroup]

Got it. And then maybe just one last clarification. Did you say in response to the prior question that $0.20 of dilution from CFO value acquisitions was really just from the prior year? Because if you kind of just take your share count times that $0.20, it's sort of like $45 million. So trying to understand how you'd get to that level of dilution based on the amount of acquisitions that you just referenced.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yeah. So that actually comes from multiple years. So some of those CFOs are from 2022 CFOs, 2023 CFOs, 2024 CFOs, certificate of occupancy deals. It's basically as they get up to the run rate of a stabilized property. And so it's not just 2024 dilution and 2024 ads, it's multiple year. All we're trying to show there is the potential upside if we were to stop adding to that portfolio or to that pool of properties.

[Eric Wolf, Analyst at Smith Barney Citigroup]

Okay, got it. Thank you.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thanks, Eric.

[Operator]

Our next question will come from the line of Keegan Carl with Wolf Research.

[Keegan Carl, Analyst at Wolfe Research]

Yeah, thanks for the time, guys. Maybe first, just what are you guys currently seeing in the transaction market that gives you confidence in your target? And where are you seeing stabilized cap rates as today?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, most of our guidance towards acquisition is already identified and under contract. I think we only have about $50 million in unidentified. And I think between now and the end of the year, we'll find $50 million. And if it makes sense, we'll find more. And if it doesn't make sense, we won't do it, right? We have plenty of capital, but we're only going to do things that are accretive to our shareholders.

Market cap rate, I think is a very difficult discussion. Transaction volume is very low. Transactions that we see close seem to have a story to them. The last property in a closed end fund or a family where something happened to the patriarch or matriarch owned the property, there doesn't seem to be enough transactions where you can really say this is a market cap rate. So it's a very difficult thing and I wouldn't want to put a number on it.

[Keegan Carl, Analyst at Wolfe Research]

Got it. That's fair. And I'm going to sound like a broken record here on this one, but I'm going to ask another question about the Storage Express deal. So I know when you guys initially mentioned you're going to swap some stores between that platform and your Extra Space platform. I'm just curious what you've learned so far and if we can expect some more assets, especially from the LSI portfolio to be added to this platform in 2024?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yeah, I think we will see more changes in Extra Space storage Express and Life Storage stores. As we learn how best to optimize revenue and optimize NOI at these stores. And we're really trying to learn what is the mix of size of the store, rent per square foot, population saturation, distance from another one of our branded stores, crime rates in the area, lots and lot driving distances, lots of factors that we can optimize NOI with a store that is fully staffed, that is partially staffed, or that is managerless, if you will. And as we learn those lessons, we'll apply it not only to our existing portfolio, but to our acquisition strategy.

[Keegan Carl, Analyst at Wolfe Research]

Are you willing to share any sort of quantification of performance on stores you would have shifted from one platform to another, or is it too early to sell?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

I mean, the only thing I'm really willing to share, because some of this I think is secret sauce, is Storage Express had some stores that were fairly large, right? Their average store size was 36,000 square feet, half of our average store size. They had some stores that were 80,000 square feet. Those stores don't make any sense to work on a manager list basis.

[Keegan Carl, Analyst at Wolfe Research]

Got it. Fair enough. Thanks. guys.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Sure.

[Operator]

Our next question will come from the line of Ronald Kamden with Morgan Stanley. Ronald, your line is now open.

[Ronald Kamdem, Analyst at Morgan Stanley]

Great. Two quick ones for me. So the first is just want to understand the comments on the ECRIs. So it sounds like there's been sort of no change in magnitude or sort of frequency. Just want to make sure I understand that correctly. And then how should we think about the first half versus second half of the year cadence as you're going through the same store?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So, in general there is no -- we haven't made any change in frequency for ECRI. That being said, we're always testing things so there are outliers. And what was the second question?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

The cadence. And Ron, I think the best way to look at that is it depends a little bit on where you are on the guidance. So if you are at the bottom end of the guidance, it obviously is going to imply that you're negative for longer midpoint. You're negative even at the top end of guidance it does imply that you do tick slightly negative for a period of time. But I think in none of those scenarios do we have kind of the Nike swoosh, so to speak, where you see rapid acceleration. And the concept there is we have so many customers moving in each month at lower rates that it does take some time to move those rates up and to really start seeing that accelerate. So even if you did get pricing power this summer, the benefit of those customers wouldn't necessarily impact you until later in the year as they got rate increases and into next year.

[Ronald Kamdem, Analyst at Morgan Stanley]

Great. And then my second one, if I may. I think one of your competitors made an interesting comment that they'd actually already seen some of their markets start to accelerate and that maybe that the markets that went up higher during COVID were taking a little bit sort of longer. And I guess I'm curious as you're thinking about your portfolio, you guys have been much more successful than peers pushing pricing. Can you comment around, is there a sort of -- are different markets in different stages? And have you seen some already, maybe start to turn around and pick up? Thanks.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So I think different markets are always in different stages, right? I commented earlier on New York being above portfolio performer in 2023, and it was below in 2021 and '20. Florida was a great market for prior years, and Florida is having more difficulty now. And it's one reason that we believe in a highly diversified portfolio, because we want to have exposure to all sorts of markets. Markets that are accelerating, decelerating, more flat markets that have no exposure to new development, have more exposure to new development, are coming out of the development cycle. And by having a highly diversified portfolio and our portfolio got more diversified with this merger, we think we'll smooth out our returns. So I don't know if I can identify a major market that's accelerating. We certainly have markets like Los Angeles that are still doing very well, but I don't know of a major market that's accelerating.

[Ronald Kamdem, Analyst at Morgan Stanley]

Great. That's it for me. And we appreciate the new move-in disclosures. That was helpful.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Ron.

[Operator]

Our next question will come from the line of Michael Mueller with J.P. Morgan.

[Michael Mueller, Analyst at JPMorgan Chase & Co.]

Yeah, hi. So, hopefully two quick ones here. First, how far through the planned LSI, ECRIs are you? And then on the investment front for the COs and lease up acquisitions, are you seeing more opportunities on, I guess, maybe somewhat busted developments or on just new brand, new ground up Investments?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So we've completed the ECRI program for all LSI customers who were customers at closing. So they're now on the normal site. As new customers come in, they'll be on the normal program. I don't think we've seen many busted developments or developments that aren't leasing up as well. They're disappointed developments that look like really attractive opportunities to us yet, I don't think that's meaningful.

[Michael Mueller, Analyst at JPMorgan Chase & Co.]

Got it. Okay. Thank you.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Mike.

[Operator]

Our next question will come from the line of Eric Luebchow with Wells Fargo.

[Eric Luebchow, Analyst at Wells Fargo & Company]

Great. Thanks for taking the question. Could you comment a little bit on the dual brand strategy if you're seeing any top of funnel benefits from operating LSI and EXR separately in some of your markets, or if extra operating expenses make that too complicated or costly in terms of operations?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yeah, sure. Thank you for the question. So the premise of the dual brand strategy was that by having more digital real estate we would get more clicks and therefore more rentals, and that would pay for the incremental cost of running two brands. So if you think of the Google landscape in three pieces, there's the paid section, and we absolutely are having more digital real estate and more clicks there. And that's because we pay for it. So that's easy. We knew that would happen.

And then the local section in the map, where the map appears, we are seeing more presence there, and that's continuing to improve over time. So that seems to be working as planned. And then the last section, the SEO section or the organic section takes time, right? When we buy an individual property, it takes time for us to get that property up to the extra space, organic standards. So that's moving in the right direction. But we really need more time to see where we'll end up. And if that trade off of more clicks, more rentals is revenue positive.

[Eric Luebchow, Analyst at Wells Fargo & Company]

Okay, I appreciate that. And just one follow up on the guide, and I know Scott touched on this. So the G&A guide of $180 million plus, I know you had some seasonality in your Q4, but you were at a run rate of around $160 million annualized. And maybe you could just kind of help us bridge those two numbers when we'll see kind of more of the G&A cost synergies that you touched on really flow into the P&L from the G&A side. Thank you.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Yeah. So the synergies are assuming that the $180 million and not the lower number, the number that you saw in the fourth quarter, they would have been even greater than the $39 million that we referred to if we were able to achieve the fourth quarter run rate. Now, that doesn't mean we're done there. I think that we're going to continue to look for opportunities. That number in the fourth quarter was just a fair amount under due to some transition of employees and hiring and timing and when we brought things on, as well as there is some seasonality to our G&A with the fourth quarter not being the highest quarter.

[Eric Luebchow, Analyst at Wells Fargo & Company]

All right, thank you both.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thank you.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Eric

[Operator]

Our next question will come from the line of Ki Bin Kim with Truist.

[Ki Bin Kim, Analyst at Truist Financial]

Thank you. Good morning.

Just going back to a street rates, I know this is just one variable to the whole equation, but I was curious at the midpoint of your guidance what you're implying for street rates for the year in 2024?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

So it's difficult to break it out exactly. I think that we are saying we don't expect to get significant growth in street rates. They will be at the midpoint. We do expect occupancy to be relatively flat, but we don't feel like it's helpful to necessarily break those out, since there's one component of the total model. But we are not expecting significant street rate power this year.

[Ki Bin Kim, Analyst at Truist Financial]

But I'm guessing you probably expect it to reach flat year-over-year at some point in the second half. Is that fair to assume?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Sequentially, we do expect them to go up month over month. I think it'll depend a little bit on how this leasing season goes. I think that we were disappointed last year. We were at a point last year where we raised rates significantly January through March, and then the leasing season came and the housing -- lack of home sales I think impacted last year. And so I think that we're a little gun shy and don't want to make that mistake again.

[Ki Bin Kim, Analyst at Truist Financial]

Okay. And the second question on your bridge loans, you guys are guiding for a pretty substantial increase in activity. I was just curious if you can provide some color around kind of implied valuation cap rates for LTVs, just to get a better sense of what those deals look like?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Yeah. So part of the increase in bridge loan balances is our plan to hold more of the whole notes and not sell as many A notes. Now that can change as the year unfolds. But the whole bridge loan now is 8.5% to 9%. So we don't feel that's a bad use of capital at this point. The fundamentals of the loans are unchanged. We still will lend up to 80% of our underwritten value. We'll take operating reserve, an interest reserve. That's a recourse obligation to a credit worthy entity. So we know that there's capital to pay the debt service and operate the property. We require that we manage the property. We require an interest rate cap, which is less important now than when we started the program. So the fundamentals of the loan program haven't changed.

[Ki Bin Kim, Analyst at Truist Financial]

And you do have a pretty sizable maturity in the bridge loan program in 2025. What's the base case scenario? Is that those become kind of rolled over and extended, or do they truly mature and we should just model in some decreases in interest income?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

I'm not sure there is a base case. I mean, we're going to handle every loan as it comes up, and I think some will extend, some will get paid off, and some will buy the collateral. And I think the attractiveness of the product will remain, and we should continue to be able to make new loans to backfill ones that are maturing in some way or another.

[Ki Bin Kim, Analyst at Truist Financial]

Okay, thank you guys.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Sure.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Ki Bin.

[Operator]

Our next question will come from the line of Caitlin Borrows with Goldman Sachs.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Hi everyone. Maybe could you give some more color on new supply expectations for deliveries this year, but also what are you seeing on starts, timing of construction, and how that impacts your longer term view?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So our data, which we look at for our properties, not for the overall development landscape, is pretty encouraging. We see about a 30% drop in Extra Space same-store pools that will be affected by new development in 2024. And when you look at all our wholly owned stores, it's even a larger drop, almost 40%. So new development isn't going away. The market still has to lease up the ones that were delivered in prior years, but the environment is certainly getting better.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Got it. Okay. And then maybe just one more to follow up on the move in rate topics, which has been talked about a lot. I'm wondering if you could just comment on how you expect other EXR and/or the industry to regain pricing power with new customers? Is it housing market related and you need that to pick up? I know you mentioned marketing spend will be up, but what makes this new customer pricing power improve? And is there anything you can do to help it?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So the housing market certainly will help, but it's not the sole driver of demand for self storage. I think just people moving more, whether -- right now almost half of the people who tell us they're storing because they're moving or moving apartment to apartment. So more transition is just good. The single family home rental business, the more that grows, I think that's great. That helps people move in and out of homes without having to buy them, without having to worry about a mortgage. So a strong economy is always better than a weak economy. And all indications are now that we're going to have more of a soft landing than a recession. So I think all of those things can help improve customer demand.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Got it. Thank you.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Caitlin.

[Operator]

Our next question will come from the line of Juan Sanabria with BMO Capital Markets.

[Robin Haneland, Analyst at BMO Capital Markets]

This is Robin Haneland fitting in for Juan. I just wanted to follow up on how you expect move-out and move-in spreads to trend throughout the year? And what is the spread for Life Storage, and how do you expect that spread to trend?

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Yeah, so we focus as much on occupancy as we do move-ins and move-outs. And I'll give you an example. I mean, Life Storage in the quarter -- in the fourth quarter had elevated move-outs due to the auctions, but they also had elevated move-ins. So we're managing probably more to occupancy than we are move-ins and move-outs. And we are assuming that occupancy is fairly flat throughout this year. On the Extra Space, same-store pool, the Life Storage pool, we would expect to close that gap, so we would expect move-ins to be higher than move-outs.

[Robin Haneland, Analyst at BMO Capital Markets]

And do you feel like you're ready to reengage in sort of larger external growth at this point, or are you still focused internally on executing a Life Storage?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So we're absolutely focused on achieving our goals with the Life Storage portfolio. We are also very focused on the testing and efforts we're making with respect to remote management. I think that will be another big point. We will grow our management business significantly this year. We added, not including the LSI assets, we added 225 new managed stores last year. That's the most we've ever added in a year. And we have a very significant and robust pipeline there.

We've talked about the bridge loan program. We'll continue to grow that. And I think our joint venture partners were somewhat quiet in 2023, but there's indications that that will turn around, and that's great capital light, accretive growth for us, and we'll certainly get back into that business. So we're in a position to take advantage of whatever growth that is both strategic and accretive, and we're not afraid to do so.

[Robin Haneland, Analyst at BMO Capital Markets]

Thank you.

[P. Scott Stubbs, Executive Vice President & Chief Financial Officer at Extra Space Storage]

Thanks, Robin.

[Operator]

That concludes today's question-and-answer session. I'd like to turn the call back to Joe Margolis for closing.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Great. Thank you. Lots of questions about the overall environment and what our assumptions were for them. And I can't tell you whether our assumptions are right or wrong, but I do have an extraordinary amount of confidence that no matter what the market conditions, our platform and our people are in a position to maximize our performance and take advantage of whatever occurs in the market. So thank you all for your time today, and thank you for your interest in Extra Space.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Jeff Norman, Vice President of Investor Relations & Corporate Communications
• Joseph D. Margolis, Chief Executive Officer
• P. Scott Stubbs, Executive Vice President & Chief Financial Officer

Analysts

• Lizzy Doykan, Bank of America Co.
• Michael Goldsmith, UBS Group AG
• Todd Thomas, KeyBanc Capital Markets
• Samir Khanal, Evercore ISI
• Nick Yulico, Scotiabank
• Spenser Allaway, Green Street
• Eric Wolf, Smith Barney Citigroup
• Keegan Carl, Wolfe Research
• Ronald Kamdem, Morgan Stanley
• Michael Mueller, JPMorgan Chase & Co.
• Eric Luebchow, Wells Fargo & Company
• Ki Bin Kim, Truist Financial Co.
• Caitlin Burrows, The Goldman Sachs Group, Inc.
• Robin Haneland, BMO Capital Markets