Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Extra Space Storage Inc (EXR, Financial) reported a 110 basis point sequential gain in same-store occupancy, ending the second quarter at 94.3%.
- The company experienced a 0.6% increase in same-store revenue year over year, driven by increased move-in rates and occupancy gains.
- Life Storage same-store pool saw a significant occupancy increase, finishing the quarter at 93.8%, a 400 basis point improvement year over year.
- The bridge loan program expanded with $433 million in new loans originated in the quarter.
- Extra Space Storage Inc (EXR) added 86 net stores to its platform year to date, marking one of the strongest first halves of the year ever.
Negative Points
- Same-store expenses increased by 6% for the quarter compared to the same period last year.
- Pricing improvement at Life Storage properties has been below internal projections, leading to a reduction in revenue expectations for the year.
- Achieved rates for new customers were down 8% during the quarter and 12% in July, indicating price sensitivity among new customers.
- Life Storage same-store revenue guidance was reduced by 200 basis points at the midpoint due to lower than expected pricing power.
- The company noted that the recent demand and volume of bridge loans have led to an increase in line of credit balance, which may need to be addressed through bond market activities.
Q & A Highlights
Q: Can you elaborate on the lack of pricing power for Life Storage and its geographical footprint's impact on results?
A: (Joseph Daniel Margolis, CEO) When we took over the Life Storage portfolio, we had a significant occupancy gap, which we addressed by discounting new customer rates. Although we made progress, we didn't gain as much pricing power as expected. Customers remain price-sensitive, and geographical factors also played a role. For instance, Extra Space has more exposure in outperforming markets like California, while Life Storage has more exposure in underperforming markets like Florida.
Q: What needs to change in the environment for pricing power to improve?
A: (Joseph Daniel Margolis, CEO) A pickup in demand, whether from the housing market or otherwise, would be positive. Continued moderation of new development will also help. We are confident that our systems will optimize performance given any market conditions. Our current occupancy rates are strong, indicating that our systems are capturing demand and maximizing revenue.
Q: Can you provide July trends on key metrics like occupancy and revenue growth?
A: (P. Scott Stubbs, CFO) As of the end of July, Extra Space's occupancy was 94.5%, up 20 basis points sequentially. Life Storage's occupancy was 93.9%, up 10 basis points sequentially. However, achieved rates for new customers were down 8% for the quarter and 12% in July.
Q: Are there structural differences between the Extra Space and Life Storage websites affecting performance?
A: (Joseph Daniel Margolis, CEO) We addressed physical differences, such as website speed, which is crucial for SEO rankings. However, Life Storage's SEO strength still lags behind Extra Space. We need to improve Life Storage's SEO rankings to get the desired results.
Q: What is the outlook for marketing spend and its impact on demand?
A: (P. Scott Stubbs, CFO) Marketing spend has increased by 20% year-over-year for Extra Space, now about 2% of revenues. Life Storage's marketing spend is slightly higher at 3% of revenues. Top-of-funnel demand, measured by generic Google search terms, is similar to 2019 levels but down from the elevated demand of the past two years.
Q: How do you expect occupancy trends to evolve in the second half of the year?
A: (P. Scott Stubbs, CFO) For Extra Space, we expect steady performance without drastic changes. For Life Storage, there will be more deceleration in year-over-year growth due to difficult comps from last year's rate increases.
Q: What drove the decision to internalize management for some third-party managed stores?
A: (Joseph Daniel Margolis, CEO) The internalization was driven by a capital partner who purchased a self-storage company and moved their stores to that operating platform. We lost 63 stores due to this internalization but continue to grow our third-party management platform at a healthy pace.
Q: How do you view the balance between bridge lending and acquisitions going forward?
A: (Joseph Daniel Margolis, CEO) Bridge loan activity has increased due to a quiet acquisition market. We made a capital allocation decision to hold more loans on our balance sheet. As the acquisition market becomes more active, we may sell more loans and hold fewer on our balance sheet. This business provides great economics and supports our management business and acquisition pipeline.
Q: What are the expectations for payroll and utility expenses going forward?
A: (P. Scott Stubbs, CFO) Payroll expenses were elevated in the first half of the year due to increased hours and wage increases. We expect this to be more inflationary in the second half. Utility expenses have benefited from aggressive solar initiatives, with 50% of our wholly-owned stores having solar installations. We continue to look for opportunities to install solar and improve HVAC and LED lighting efficiency.
Q: What is the outlook for the acquisition market and cap rates?
A: (Joseph Daniel Margolis, CEO) The acquisition market remains muted with a bid-ask spread. Leveraged buyers are still on the sidelines, and most storage owners are not in distress. We expect a few more transactions in the second half of the year but no material change in market dynamics. Our bridge loan activity has increased as an alternative for owners looking for options.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
