Extra Space Storage Q3 2024 Earnings Call Transcript

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 2024 Extra Space Storage Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would like now to turn the conference over to Jared Conley, Vice President of Investor Relations. Sir, please go ahead.

[Jared Conley, Vice President, Investor Relations at Extra Space Storage]

Thank you, Michelle. Welcome to Extra Space Storage's Third Quarter 2024 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, October 30, 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 would now like to turn the call over to Joe Margolis, Chief Executive Officer.

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

Thanks, Jared, and thank you, everyone, for joining today's call.

To begin the call today, I would first like to address the impact of Hurricane Milton on our people. I am happy to report that all our teammates are safe although a small number of individuals and their families were displaced and we have provided shelter assistance for them. Scott will address the financial impacts of the hurricane in his comments.

Before we address the myriad of data points and move-in pieces from the quarter, I want to make some overall big picture comments on our performance. We had a good quarter optimizing performance in the current market environment and our efforts allow us to increase the midpoint of our full year FFO guidance. Let me start with the biggest contributor to FFO growth which is store performance. The Extra Space same-store pool performed consistently with our expectations with quarter ending and October occupancy of 94.3%. This solid performance allows us to increase the bottom end of 2024 same store guidance. Revenue for the Life Storage same-store pool came in slightly below our expectations, but this was generally offset by meaningful outperformance with respect to expenses.

Having completed the move to a single brand in the latter part of the quarter, we are just starting to see the benefits of a single brand. We fully expect this group of stores to follow the same pattern of improvement into and during 2025 as the 143 Life Storage stores that we converted to the Extra Space brand at closing in 2023. Our non same store properties are also outperforming our expectations and contributed to our FFO beat. Outside of store performance, our external growth initiatives are exceeding projections. In the third quarter, we added 63 third-party managed stores gross netting 38 stores.

Year-to-date, we have added 124 net stores to the platform and we anticipate adding approximately 100 additional properties by year end. This would make 2024 our best year for net additions to our management program outside of the Life Storage merger. Our bridge loan program expanded with $158 million in new loans originated in this quarter and we have increased our expected average hold of such loans to $925 million for the year. On the acquisition front, we have deployed $334 million in wholly owned and joint venture acquisitions year-to-date and are seeing an encouraging increase in accretive opportunities.

Lastly, we continue to find efficiencies in the business and have again lowered our G&A guidance for the year. Overall, I am very pleased with our performance and trajectory this year. We continue to leverage our scale to find efficiencies in all areas of the business, optimize store performance and grow our ancillary businesses to drive FFO growth. Our higher portfolio occupancy positions us well to capitalize on an improving new customer rate environment when fundamentals recover.

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.

As Joe mentioned, we had a good quarter, driven by occupancy gains, G&A savings, and external growth. October-to-date same-store occupancy is 94.3%, an 80-basis-point improvement over last year. In the third quarter, the average new customer move-in rate was negative 9% year-over-year. Due to strong occupancy and performance to date, we are raising the bottom end of the Extra Space same-store revenue guidance by 75 basis points, bringing the midpoint to a positive 0.125%. Despite meaningful savings in controllable expense categories, increases in property taxes have made it necessary for us to raise our expense guidance by 25 basis points. We have also raised the bottom end of our NOI guidance by 75 basis points, bringing the midpoint to negative 1.375%.

The Life Storage same-store revenue improved by 0.4% year-over-year and we saw seasonal declines in occupancy for the Life Storage same-store pool, finishing the quarter at 92.9%. This represents an increase of 200 basis points year-over-year. October occupancy has increased to 93.2%, 210 basis points over last year. For the Life Storage same-store pool, this sequential change in average move-in rate from the second quarter to the third quarter was negative 1%, much better than normal seasonal declines. Lower-than-expected pricing power to new customers in the Life Storage same-store pool has led to the reduction in our revenue expectations for the year.

We have reduced our annual same-store revenue guidance by 50 basis points at the midpoint. This is partially offset by lower controllable expenses for these properties. As a result, we are revising our expense guidance downward by 100 basis points at the midpoint and consequently, we have adjusted Life Storage same-store NOI guidance to a range of negative 1.5% to positive 0.5% for the year. Given the steady volume of bridge loans, we have raised the 2024 average outstanding loan guidance and increased our expected interest income.

We've also lowered our estimates for G&A and increased our tenant reinsurance guidance. Interest expense has been updated to account for higher bridge loan volume and an increase in our acquisition guidance. As a result of these revisions, we've raised the lower end of our FFO guidance by $0.05 per share from $7.95 per share to $8 per share, a modest increase at the midpoint. Our revisions to guidance exclude the impact of Hurricane Milton as we are still assessing the full extent of property damage and tenant insurance claims. We've sustained damage at several REIT and managed properties and three REIT stores remain closed.

As of today, we are currently estimating total property damage and tenant insurance claims to be $10 million or more. Major hurricane costs have historically been added back to our core FFO, therefore, these amounts have not been contemplated in our guidance. We've also seen an increase in rental activity and have paused existing customer rate increases in certain markets. We will report full details related to Hurricane Milton with our fourth quarter earnings.

And with that, Michelle, let's open things up for questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] And our first question will come from Michael Goldsmith with UBS. Your line is open.

[Michael Goldsmith, Analyst at UBS Group]

Good afternoon. Thanks a lot for taking my question. I think in the opening remarks, you said that you're just starting to see the evidence of the benefit of being of a single brand. Can you provide a little bit more detail in terms of what you're seeing -- what have you accomplished so far, what you're seeing, and what gives you confidence that you'll be able to continue to drive the benefit from this brand consolidation?

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

Sure. Happy to, Michael. Thank you for the question. So just to be clear, we're in very early stages here, right? We did the change to the Extra Space brand late in the third quarter. So we're several weeks in. But that being said, we see a slightly better SEO performance from what was once the Life Storage stores, some improvement in the local or MAP section, but lesser than the SEO. The former LSI store conversion rate is better on the Extra Space website than it was on the LSI website. And we're starting to see some modest savings in paid marketing spend.

Now what gives us confidence is when we closed the merger in 2023 and decided to test two brands, we took a pool of 143 life stores and converted them to Extra Space and we watched the pattern of improvement of those stores over time. And we know that it doesn't happen immediately, but over a period of a number of months, up to six months, we will see those converted stores perform as well as stores that have always been branded Extra Space. So we see no reason why the stores we just converted won't act just like those stores and follow the same pattern of improvement and we're encouraged that we're starting to see the green shoots.

[Michael Goldsmith, Analyst at UBS Group]

Thanks for that. And my follow-up question is, there's still a pretty wide range for the core FFO guidance and what's implied for the fourth quarter. But what is implied at the midpoint does suggest a material deceleration from the third to the fourth quarter. Now some of that I assume is related to seasonality, but is there any other factors or dynamics at play, which would weigh on the results in the fourth quarter relative to the third quarter?

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

No, Michael, the biggest difference is just property performance in the fourth quarter and then it will obviously depend on where you are in that range.

[Michael Goldsmith, Analyst at UBS Group]

Got it. Thank you very much. Good luck in the fourth quarter.

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

Thanks, Michael.

[Operator]

And our next question will come from Todd Thomas with KeyBanc Capital Markets. Your line is open.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Hi, thanks. Good afternoon. I just wanted to stick with that line of questioning a little bit, but move to the same-store pool. I'm just curious there, the guidance implies continued deceleration in the fourth quarter for both the EXR and LSI portfolios. Can you just talk a little bit about whether you have line-of-sight towards stabilization just given the ability to drive customer traffic to the portfolio and the higher occupancy rates that you've been able to maintain across both portfolios?

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

Todd, it's Scott. So it depends a bit on where you are in that range of guidance. I'll start with the Extra Space pool. It does imply that it is slightly negative at the midpoint. If you're at the high end, it's obviously slightly positive. At the low end, it's slightly negative, but there is some stabilization in there. It's fairly flat in the fourth quarter. The Life Storage pool, again, depending on where you are in the range, at the midpoint, slightly negative to slightly positive at the high end and more negative at the low end, but it does not show significant deceleration either. It's not dropping its way down. It's also not an IT solution on its way up. Some of the Life Storage has a little noise in it month-by-month because it's a difficult comp with October being our strongest month is that when many of the ECRIs hit last year.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Okay. That's helpful. And then I just wanted to ask, about the hurricanes, just given the comments that you made. I realize it's early and you're still sort of sorting through what's happened and sort of the aftermath a little bit. Can you just talk about the uptick in rental activity that you mentioned that you're seeing in some of the impacted areas and sort of how that plays out with the pause in ECRIs in some of these markets or states given the state of emergencies and perhaps you can share some occupancy statistics to help provide some color around some of the changes in rental activity that you're seeing in some of those impacted MSAs.

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

Yeah. So we have seen an uptick in rentals, particularly in the Life Storage pool. The occupancies for instance have jumped from 92%, 93% to 96% at some of those stores. It's store-by-store. It's obviously going to be better on the West Coast. You see more of a benefit there than in Miami. Typical hurricane customer is going to stay on average, I think, about 10 months. So we would expect to benefit from that. State of emergencies, obviously, we're following them. We are implementing those on a store-by-store level. So it's not on a market level. So we would expect to see some benefit from hurricane occupancy, but that typically offsets the damage or partially offsets what we spend in hurricane damage.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Okay, understood. Thank you.

[Operator]

And our next question comes from Caitlin Borrows with Goldman Sachs. Your line is open.

[Caitlin Borrows, Analyst at The Goldman Sachs Group]

Hi, everyone. Maybe on the acquisition side, it sounds like you're active and expecting to stay active. I was wondering if you could give some more color on kind of who's selling. And I know in the past a hurdle had been on the pricing expectations. So just kind of the volume that you're seeing and to the extent that the pricing is now being better agreed upon on the buyer and seller side.

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

Sure. It's a good question, but I'm not sure I have a market-wide answer, right? We see a lot more activity, but until transactions get actually closed and reported, it's hard to tell what's true and what's actually activity. I know from Extra Space side, we have a number of discussions underway, some non-market, some off-market that we're very confident will end up as accretive transactions.

[Caitlin Borrows, Analyst at The Goldman Sachs Group]

Okay. And then maybe as we think about move-in rents, we know about the headwinds that the sector has been facing. But I guess if you consider properties where the move-in rate trends have been relatively stronger, is there anything that you could point out that's different there? Is it less supply, easier comps? I know we've talked about that in the past, like an urban versus non-urban, some indication of like housing impacts or regional, but anything else you can mention on the stronger move-in properties versus not as strong?

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

I think the two factors you mentioned are the most important factors. One is new supply in markets where there's been heavy supply deliveries. It's just harder. And then secondly is the comps. If a market like Atlanta or Phoenix has had several years of very, very strong revenue growth, it's hard to have additional years of very strong revenue growth. And particularly the markets that have both of those factors are probably the toughest markets. But it's cyclical, right? Real estate cyclical, markets are cyclical and that's why we believe in a highly diversified portfolio. So we have exposure to some markets that are on different ends of the cycle.

[Caitlin Borrows, Analyst at The Goldman Sachs Group]

Got it. Thank you.

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

Sure.

[Operator]

And our next question comes from Joshua Dennerlein with Bank of America Securities. Your line is open. Joshua, your line is now open. Can you please pick up your handset on your phone? Okay, our next question comes from Spenser Allaway with Green Street. Your line is open.

[Spenser Allaway, Analyst at Green Street]

Thank you. Maybe just piggybacking off Caitlin's question, did you guys happen to provide the cap rates on the transactions you guys closed in the quarter? And sorry, if you did.

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

I don't think we did provide cap rates on the transactions we closed. I could tell you for all of the deals that we've approved this year, the up, we've had 10 wholly owned operating deals with first year yield in the low 5s, about 13 months to stabilization and a 6.5 average stabilized yield, the same thing with remote stores. We've done nine wholly owned remote stores, very similar returns. And then our JV deals, we had eight JV deals, five operating stores, first year yields at 10, stabilized yields at 12% and that's because of the economic benefit of the joint venture and then we approved three developments at 8.6 development yield.

[Spenser Allaway, Analyst at Green Street]

Great. Thanks. And then as it relates to the rebranding of the legacy LSI assets, can you just remind us what the costs have been to date for that endeavor?

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

Gosh, I don't have cost to date numbers. It's probably pretty modest because what we've done to date is put banners up at the stores and then the rest has been digital. We expect total costs of about $117 million but that includes $20 million of non-branding capital costs that were delayed pending the test and the decision which store to go. So the store needed to be repainted and we decided not to repaint it until we knew which color to repaint it.

[Spenser Allaway, Analyst at Green Street]

Okay. Thank you.

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

The other thing I would add Spenser is our underwriting for the deal, we assumed $75,000 of property or $90 million, though it was obviously in our returns when we announced the deal.

[Spenser Allaway, Analyst at Green Street]

Okay, excellent. Okay. Thank you guys.

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

Thank you.

[Operator]

And our next question will come from Juan Sanabria with BMO Capital Markets. Your line is open.

[Juan Sanabria, Analyst at BMO Capital Markets]

Hi, good morning. Just a quick one to start. I know you gave the October occupancies, but can you give us a sense of where the new customers came in the door at relative to last year?

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

So our average rate to new customers for the quarter was negative 9% year-over-year and our average new customer rate in October was negative 8%. So I think some people have wondered, are rates getting stronger, are they significantly better? We would tell you that October feels a lot like September and August and any kind of difference on a month-by-month basis is caused more by a comp than seeing significant changes so far. And that's on the EXR pool.

[Juan Sanabria, Analyst at BMO Capital Markets]

Okay. And then just on the guidance for LSI, I was a little bit confused about the commentary in the prepared remarks, you said that seasonality, correct me if I'm wrong, I thought was better than expected, but yet guidance was cut with lower pricing power. So just hoping you could help square those two kind of different comments that you've made previously.

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

Yeah. So LSI, I mean, has not performed as expected this year, right? We've cut revenue guidance now twice for those stores. And really three things have contributed to that. One is that the markets in 2024 is weaker than we projected in the beginning of the year. It just is. And then secondly, the markets that LSI has disproportionate concentration have performed disproportionately weaker. So think of Florida, where LSI has a larger concentration than Extra Space proportionately. And then the third thing is we didn't get the benefit of the dual brand that we expected. And that's why we made the decision this summer to move to the single brand and get the -- expect, hope to get the expected benefit from that. So to me, those are the three largest factors that led to us having to reduce revenue guidance for LSI.

[Juan Sanabria, Analyst at BMO Capital Markets]

Okay. So it sounds like maybe some of the overweight, i.e. Florida markets deteriorated a bit more than you expected in the back half of the summer, early fall. Would that be fair to say?

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

That's very fair to say, yes.

[Juan Sanabria, Analyst at BMO Capital Markets]

Thanks, Joe.

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

Do we have new additional questions or -- Michelle? [Technical Issues]

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

So we're not sure if anyone can hear us. We're having some technical difficulties, please be patient. We're going to get to the host and see what we can do. So again, I apologize to everyone. We are still trying to reconnect with the operator, and we will try to resume this call as soon as possible. Please be patient. We'll be right back with you as quickly as we can.

[Operator]

Thank you. Our next question comes from the line of Nick Yulico with Scotiabank.

[Nick Yulico, Analyst at Scotiabank]

Thanks. Just, I guess, first question is going back to the fourth quarter and what's assumed in guidance. Can you just give us a feel for occupancy, how to think about that in the fourth quarter?

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

Sorry, who's this?

[Nick Yulico, Analyst at Scotiabank]

This is Nick Yulico, Scotiabank.

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

So Nick, we had technical difficulties and we couldn't hear anything so -- but we're back now and if you wouldn't mind repeating the question, we can jump right back into it. Sorry about that.

[Nick Yulico, Analyst at Scotiabank]

Yeah. Sure thing. Thanks. So just the question is going back to the fourth quarter and what's assumed in guidance. Can you give us a feel for how occupancy is expected to trend?

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

Yeah, Nick, so it's Scott. We typically don't model occupancy and rate, it's more modeling revenue. And so we would tell you that there's not extreme revenue drop-off and not extreme revenue growth is all that we can really say there.

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

I would expect we're going to continue to operate at higher than historical occupancy levels.

[Nick Yulico, Analyst at Scotiabank]

Okay. All right. Thanks. And then the other question is just going back to LSI and the synergies. I know you've changed the revenue outlook. But I guess going back to those, the June non-revenue pieces on the synergies. Can you just give us a feel for latest thoughts on how you're trending versus those expectations?

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

Sure. Happy to. So we were targeting $100 million in synergies in three categories, G&A, tenant insurance, and properties. And we're doing very, very well in the ones that we control. So G&A, we're now looking at about $53 million worth of synergies, well, well in excess of our initial estimate. Tenant insurance, we're looking at about $27 million of synergies. And then from the properties, it depends on where you are in the range of guidance anywhere from 0 to 10. So overall, about $80 million to $90 million of the $100 million. And we believe we originally targeted $65 million in the property synergies.

We do believe we can eventually get there. We just need some market improvement, move to the single brand, and some time, and we'll get there. And of course, these $100 million of synergies doesn't include all the other benefits of the merger. The increase in our management business, in our bridge loan business, the many procurement and IT contracts we've renegotiated due to our new scale, and got savings there. Value-add projects that we've identified and started to execute it for Life Storage properties. So the $100 million relates to just those three categories, not the total benefit of the merger.

[Nick Yulico, Analyst at Scotiabank]

Got it. Thanks. Appreciate it, Joe.

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

Sure.

[Operator]

Thank you. And our next question comes from the line of Eric Wolfe with Citi.

[Eric Wolfe, Analyst at Smith Barney Citigroup]

Hey, thanks. Maybe just a follow-up on the LSI. I think last quarter you mentioned that you expected your Life Storage portfolio to outperform your legacy EXR portfolio in 2025. I was just curious if that's still the case or if some of the recent weakness in the Sunbelt markets has changed that view.

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

No, our Life Storage portfolio is outperforming the Extra Space portfolio this year, and I would expect it to do the same next year.

[Eric Wolfe, Analyst at Smith Barney Citigroup]

And that's not just across the same markets, right? That's comparing one directly versus the other, meaning LSI like the same-store pool versus the other same-store pool. So am I right about that?

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

Yes, correct.

[Eric Wolfe, Analyst at Smith Barney Citigroup]

And then you mentioned in your release and just a moment ago about occupancy being stronger than it normally is through the rest of the year. So I guess, what are you looking for to try to dial-up move-in rates, like what would it take over the next, say, three to six months, you have strong occupancy. So like what else are you looking for to try to get more aggressive on move-in rates?

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

So and I'm sorry, if I'm going to state the obvious. We talk about aggregate data here, but every night, the algorithms look at every unit type in every building and adjust rates. So as we speak today, there are rates in certain unit sizes in certain buildings in certain markets that are moving up. And the algorithm looks at many, many variables, historical data, number of move-in, number of vacates and a bunch of projected performance to make those decisions. And the aggregate of all of those decisions is what we report. But it's not like any group of us sit here in Salt Lake City and look for a few macro things and decide we're going to increase rates 5% or decrease rates 2%.

[Eric Wolfe, Analyst at Smith Barney Citigroup]

Right. Yeah, I completely understand that. I guess from our perspective, you're just looking at occupancy and see that it's relatively full and better than it normally is. And so I don't know if there's some kind of demand. I'm just trying to understand the algorithm, like what demand indicators -- I don't know if you can list a couple that are maybe lower-than-normal or otherwise suggesting that you need to be cautious on move-in rates. And I get that there's many factors you're looking at in your projections in the future. I'm just trying to understand generally what the main ones are.

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

Okay. Sure, let me give you a better answer to that. Hopefully a better answer. So one thing that we're constantly doing is the algorithms will produce a price for a unit type in a building. And we will always have a test running where a certain number of stores will add 5% to that algorithm number and a certain number of stores will subtract 5% from that algorithm number. So we'll be able to tell at these different price bands, right? The algorithm produced price bands, 5% higher, 5% lower.

And you look at number of rentals, rate, cost to acquire that customer, ECRI and length of stay and come up with a customer value. And that will tell us that the algorithm produced number produces the best long-term revenue or if we intervened and went 5% lower or 5% higher, where we would do better. And that's kind of an ongoing test we run to help us understand if the algorithmic produced prices is in fact producing the best result for us. Is that helpful?

[Eric Wolfe, Analyst at Smith Barney Citigroup]

Yes. That's helpful. Thank you.

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

Sure.

[Operator]

Thank you. And our next question comes from the line of Joshua Dennerlein with Bank of America.

[Jeff Spector, Analyst at Bank of America]

Hi, this is Jeff Spector for Josh. Sorry, we had technical difficulty before. And I apologize if you already discussed this, Joe. You talked about occupancy and the strength in occupancy trajectory. And just given the time of the year, I know we typically like to ask how are you feeling right now as we're entering November and how does that -- I guess, how do you feel the year will end and how does it bode heading into '25 compared to, let's say prior years? I know we had a number of years where there wasn't seasonality, but if you go back pre-COVID, right, how does this compare in terms of now this high occupancy level and then thoughts into '25? Thank you.

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

So I feel good that our people and processes and systems are optimizing performance in a difficult market. I feel better if it wasn't a difficult market, but I can't control that. But I feel really good that everything we're doing, the strategies we're implementing, the tests that we're undertaking is squeezing as much juice out of the fruit as we possibly can. I also feel very good that at a high level of occupancy, when the market turns and the market will turn, we are in a really good position to benefit from that quickly. I feel good that everything we see confirms moderation in new supply. So that makes me feel good as well. So I certainly feel better if we're having 6% revenue growth, but we're not going to have that this year and all we can do is make the best of it and position ourselves well for the future.

[Jeff Spector, Analyst at Bank of America]

Okay. Thanks. That's fair. And then my second question is again on LSI. You talked about the lack of pricing power there and I keep thinking about your -- you want to again use the EXR systems fully into the LSI portfolio and you're saying it's outperforming. But again, there seems to be some weakness there, right? It feels like at least tell me if I'm wrong between that LSI customer possibly versus the EXR customer. So what gives confidence that you can really push on that LSI customer as we enter '25? So again, I think of those markets as more tertiary, secondary markets, that consumer is more squeezed today than ever.

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

So we don't see that difference in consumer. We think the storage consumer is the storage consumer, whether regardless of what product they go to. Their behavior is very similar. We don't see significant difference in bad debt or reaction to ECRI or other behavior between markets. So I'm not sure I agree with the thesis there.

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

And Jeff, I'd maybe point to a couple of other things. One is, we went into this with a 400 basis point delta in occupancy that we had to make up. So we went in with softer rates partly to gain occupancy there. Yeah, recently, we switched our algorithm over time that will even things out. In addition, you had a brand and a thesis going in where we thought the dual brand was going to compensate and we would actually have higher growth as a result of the dual brand. We haven't found that and we now believe that it's going to do better on a single brand. That change just happened. So we're still optimistic and feel like it's been tough timing and we think that there's still a lot of good growth in that portfolio.

[Jeff Spector, Analyst at Bank of America]

Okay. Thank you.

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

Thanks, Jeff.

[Operator]

Thank you. And our next question comes from the line of Eric Luebchow with Wells Fargo.

[Eric Luebchow, Analyst at Wells Fargo & Company]

I appreciate you taking the question. Maybe could you comment a little bit on kind of the move-in to move-out spread? I think it had been kind of the negative 30% range, maybe a little bit north of that. And then as you kind of look out over the next one to two years, I mean, where do you think that spread has to go to get back to what would be kind of a more typical same-store growth rate based on your current pacing of ECRIs? Is it negative 20%, negative 15%? Maybe any color there would be helpful.

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

Yeah, so for the quarter, we averaged just over 30% moving into October, your mid to upper 30s, which is the growth from the second to the third quarter is common at this time of year. You typically -- that spread usually does get larger. I think it will depend a little bit on how strong the market comes back and what we do with kind of pricing strategy. Today, we found the most effective way to attract new customers is with the lowest rate. It's possible that changes as the market strengthens. So it's hard to comment on that until we kind of see it and have confidence on which pricing strategy is going to work best.

[Eric Luebchow, Analyst at Wells Fargo & Company]

Got you. I appreciate that. And just a follow-up. [Technical Issues] on rate is between the LSI and EXR properties, I guess, more for like-for-like markets. How much of a spread you still have remaining there? And kind of as you work through this new branding strategy, when you think that can continue to close or hit parity?

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

So on like-for-like properties, our spread is about 6% today and it was close to the 16% at closing. And there is no reason that shouldn't be zero at one point. When you look at like-for-like markets, we haven't made as much progress. We've only closed about 2% of the rate gap, although we have closed the occupancy gap meaningfully for those stores. And I don't think we'll ever get to parity there, but we will close some more of the rate gap.

[Eric Luebchow, Analyst at Wells Fargo & Company]

Okay. Great. Thank you.

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

Sure.

[Operator]

Thank you. One moment please for our next question. And our next question comes from the line of Hongliang Zhang with JPMorgan.

[Hongliang Zhang, Analyst at JPMorgan Chase & Co.]

Yeah. Hey guys. I guess my first question is, as you look toward next year, how do you think your pricing power and top performer demand would compare to, I guess, this year and pre-COVID levels?

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

Well that's the crystal ball question, right? I think we need to understand interest rates, we need to understand the housing market. We need to understand the health of the economy and the consumer. And all of those things will drive into storage demand and our ability to push pricing. So I wish, I had a crystal ball, but I don't. I do know that, and sorry to repeat myself, whatever environment we're faced with, we will be able to maximize performance and do well. And also that we have all of these other ancillary businesses and tools that can help support company performance in periods when perhaps the stores aren't doing as well.

[Hongliang Zhang, Analyst at JPMorgan Chase & Co.]

Got it. And my second question is with the EXR LSI, with LSI working on our same brand as EXR, are there any quantifiable cost savings you'll realize over the near-term, say in marketing?

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

So the easiest cost saving to quantify is we were spending on an annual run-rate basis, $10 million more in paid search for the LSI stores to make up for the relative weakness in organic sections of the search. So once we, not immediately on day one, but once we get the LSI stores to parity with the Extra Space stores, we shouldn't have to spend that extra $10 million. And then the second savings, which is more difficult to quantify is with more stores on the Extra Space brand, the Extra Space brand should be stronger, leading to additional marketing savings.

[Hongliang Zhang, Analyst at JPMorgan Chase & Co.]

Got it. Okay. Thank you.

[Operator]

Thank you. And our next question comes from the line of Ronald Kamdem with Morgan Stanley.

[Jenny, Analyst at Morgan Stanley]

Hey, you have Jenny on for Ron. I just have two quick questions. The first is, can you please comment on the magnitude of ECRI for LSR and the EXR pool? Like do you post ECRI at a similar like pace for both pools or you do like EXR harder than the other one? Thank you.

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

So they're both on the same ECRI program now. So there is no difference in by original brand of the store in pace or amount of ECRI?

[Jenny, Analyst at Morgan Stanley]

Nice. I think the second one, actually I'm really curious about your views or commentary on the move-in rates because we know like move-in rates is continue to be weak. And do you think it's actually overcorrected by your model? Like going forward, do you, like you gave us a feeling that you prioritize occupancy over pricing, but that's going to be continued your focus going forward in Q4 and '25?

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

So we prioritize long term revenue and whatever mix of occupancy and rate and the other various factors produce the long term revenue, that's what we'll follow. Right now, the data is showing us to lean a little heavier into occupancy than we did. But if the data ever tells us something differently across the board or for a particular store or market, then we'll follow that.

[Jenny, Analyst at Morgan Stanley]

Makes sense. Thank you.

[Operator]

Thank you. And our next question comes from the line of Samir Khanal with Evercore ISI.

[Samir Khanal, Analyst at Evercore ISI]

Hey Joe, on your comments about ECRI, I know you kind of talked about the magnitude being similar for both LSI and EXR now, but I mean, has there been any sort of pushback at all that you're seeing from the customers at this point?

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

So there's always what you would call pushback from the customers, right? Some customers move out because the space got too expensive for them or some customers move out because when we notify them, their rate went up, it reminds them they have storage and they don't need it anymore. But we track that very carefully what percentage of customers are moving out because they got an ECRI notice, and we do that because every month we keep a control group and track different behavior. So we know the excess move-outs were causing by our ECRI program and it's within an acceptable range today. And if it ever changes, then we can adjust our program accordingly.

[Samir Khanal, Analyst at Evercore ISI]

Okay, got it. And I guess my second question is around your bridge loan program and you've been pretty active on that front this year as well, right? It's led to higher interest income in the financials. So help us think through kind of how to think about the volume or the program into next year and kind of what does that opportunity set look like. Thanks.

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

So we've had a very strong year in bridge loan originations. I think one of the reasons of that was we had a whole new group of LSI partners that we got to know and made a lot of bridge loans to them. So that was helpful. Another reason was the acquisition market was difficult. There was bid ask spread we talked about. So some owners decided instead of trying to sell-in the current market, they'll get a bridge loan and try again in three years. So volumes were good.

Next year, we have some meaningful maturities. Some of those will extend, some will pay off and some will buy. So that will have some downward pressure on our book of business. But we continue to remain -- I expect we'll continue to remain active and make new loans. It all depends on opportunities. We're not going to make bad loans just to keep our book of business large. And we're not going to pass by opportunities because we think we've made too many bridge loans because we can always sell A notes, which we've done to manage our exposure.

[Samir Khanal, Analyst at Evercore ISI]

Thank you.

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

You're welcome, Samir.

[Operator]

Thank you. And our next question comes from the line of Omotayo Okusanya with Deutsche Bank.

[Omotayo Okusanya, Analyst at Deutsche Bank Aktiengesellschaft]

Hi, good afternoon, everyone. I just wanted to stay on the credit lending platform and the line of questioning there. Again, the loans that were sold this quarter, could you just talk a little bit about the characteristics of those loans, why you decided it made sense to sell it? And if we just kind of confirmed where you're doing this is you're kind of selling A pieces, but you're still holding onto a residual.

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

So we make a calculation of loans that are easy to sell. So for example, if we have a $20 million loan and $4 million, $5 million loans, it may make more sense to sell the A on the $20 million because it's one transaction as opposed to four separate transactions. Also, our buyers have preferences for certain markets or where they have exposure, where they don't. So clearly, the buyers have input into this as well. So there's no formula look up table, it's more business judgment on which loans to sell. And I'm sorry, what was the second part of the question?

[Omotayo Okusanya, Analyst at Deutsche Bank Aktiengesellschaft]

For the loans you actually sell, do you sell the whole loan or are you holding onto a residual?

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

Yeah, I'm sorry. Yeah, we sell the A piece and we keep the mess. So we keep a residual. So if the whole capital stack is 100%, we're selling 55% or 60% and keeping the balance up to 75% or 80%.

[Omotayo Okusanya, Analyst at Deutsche Bank Aktiengesellschaft]

That's helpful. And then just to talk a little bit about one of your other growth drivers, which is the third-party asset management. Again, you continue to grow in that space and I know that each management agreement is kind of different and unique to each operator. But just kind of curious, again, if you could just kind of talk thematically about anything that may be happening to kind of improve the profitability of that business as you continue to grow it.

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

So we're continuing to grow the business for a couple of reasons. One is, there's one less competitor out there, right? LSI was a competitor for this business, and they don't -- they're us now. We have developed relationships with all the owners who LSI used to manage for. And for many of them, we're growing that relationship. Also, the operating environment is harder. And when the operating environment is harder, more non-institutional owners seek professional management, right?

If you look at our occupancies compared to the occupancies and performance of the small operators, in general, we're significantly outperforming them. And I also think we're growing the business because we do an excellent job in running the properties, communicating with our owners, and providing great customer service. And because of that, we have a great reputation. So even though we are the most expensive in the business, more expensive and have very healthy margins, we're also growing the business faster than anyone else.

[Omotayo Okusanya, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you so much.

[Operator]

Thank you. And our next question comes from the line of Ki Bin Kim with Truist.

[Ki Bin Kim, Analyst at Truist Financial]

Thanks. Good afternoon. Just a couple of quick follow-ups here. Could you comment on LFI street rate trends in the quarter and into October?

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

So on a year-over-year basis, Ki Bin, we have a difficult time partly because on a year-over-year basis, we didn't manage them for the whole quarter, so we don't have perfect data on that. For the quarter, quarter-over-quarter, their rates are down 1%. So just on a quarter-over-quarter basis, you didn't see as much of a seasonal decline as you saw in the Extra Space portfolio.

[Ki Bin Kim, Analyst at Truist Financial]

Okay. And you mentioned that there's a 6% spread on a like-for-like basis. In order for that to close, do you ultimately need kind of top of the funnel demand to be better or do you think on a single brand strategy and whatever else you guys are working on, do you think you can close that gap of holding everything else constant?

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

I think the latter. I think on the stores that are like-for-like same quality store in the exact same trade area, same type of store, once we're on a single brand and have some time, we'll close that gap.

[Ki Bin Kim, Analyst at Truist Financial]

Okay. And just last question on the bridge loans of the 300 plus or minus maturities next year, roughly, do you know what percent would extend?

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

So half of those loans aren't maturing until November and December last year. So we have quite some time before we fully understand are they going to satisfy all the tests to extend or not. So it's hard to give an accurate percentage at this time.

[Ki Bin Kim, Analyst at Truist Financial]

Okay, thank you.

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

But they also have additional leasing fees, Ki Bin, to meet any of those requirements. So they still have a fair amount of time before maturity.

[Ki Bin Kim, Analyst at Truist Financial]

Okay. Thank you.

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

Thanks, Ki Bin.

[Operator]

Thank you. And I'm showing no further questions. So with that, I'll hand the call back over to management for closing remarks.

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

Great. Thank you, everyone, for your interest in Extra Space and your time. I apologize for the technical difficulties we had today. We look forward to seeing everyone at the upcoming meetings. Have a great day.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Jared Conley, Vice President, Investor Relations
• Joseph D. Margolis, Director & Chief Executive Officer
• P. Scott Stubbs, Executive Vice President & Chief Financial Officer

Analysts

• Michael Goldsmith, UBS Group AG
• Todd Thomas, KeyBanc Capital Markets
• Caitlin Borrows, The Goldman Sachs Group, Inc.
• Spenser Allaway, Green Street
• Juan Sanabria, BMO Capital Markets
• Nick Yulico, Scotiabank
• Eric Wolfe, Smith Barney Citigroup
• Jeff Spector, Bank of America Co.
• Eric Luebchow, Wells Fargo & Company
• Hongliang Zhang, JPMorgan Chase & Co.
• Jenny, Morgan Stanley
• Samir Khanal, Evercore ISI
• Omotayo Okusanya, Deutsche Bank Aktiengesellschaft
• Ki Bin Kim, Truist Financial Co.