Extra Space Storage Inc (EXR) — Q2 2022 Earnings Call Transcript

Thanks, Jeff, and thank you, everyone, for joining today's call. Before I report on our performance, I am happy to announce that we recently published our Annual Sustainability Report. We are proud to be a sector leader, not only operationally, but also in sustainability. I encourage you to review our report, which is posted on our Investor Relations website. Turning to results. The strong trends we experienced in the first quarter continued into the leasing season. Year-over-year same-store revenue growth in the quarter was 21.7%, matching our first quarter growth rate. This is an all-time high for Extra Space Storage. Despite expense pressure on several line items, NOI growth remained very strong at 26%. This was achieved primarily through year-over-year rental rate growth, partially offset by a modest decrease in year-over-year occupancy due to elevated vacate activity. With manageable new supply and durable customer demand, we continue to operate at high occupancy with strong rates. Despite inflation and the potential effects of recession, we believe we are well-positioned to continue to produce strong results due to our resilient need-based asset class, diversified portfolio, strong balance sheet, and best-in-class team and platform. We were active in each of our external growth channels. During the quarter, we invested $289 million in property acquisitions, and we invested an additional $92 million in July, bringing year-to-date totals to $610 million. We have continued to focus on acquiring nonstabilized properties and, as we outlined last quarter, have started closing more transactions in joint venture structures. We started to see the market shift late in the quarter with increasing interest rates, reducing the number of bidders at the table and the bid-ask spread widening between buyers and sellers. We are being selective with our acquisitions, and we are focused on transactions and structures that will be accretive for our shareholders. In the quarter, we closed $70 million in bridge loans and we added 40 additional stores gross to our management platform. We also made a creative storage investment, purchasing an existing storage company named Bargold Storage Solutions. This company has a different model than traditional storage. It is focused on leasing space in apartment buildings, primarily in New York, and subleasing storage spaces to residential tenants. The acquisition of Bargold added over 17,000 units to our portfolio with an occupancy rate over 97%. Due to the unique nature of its operations, we have retained their team and are keeping the entity running as a separate organization. We view this transaction as another creative investment in the storage sector which came to us through deep industry relationships. Our strong property NOI, plus our external growth efforts, resulted in core FFO growth of 29.9%. Our growth allowed us to raise our annual FFO guidance for the second time this year. It has been another great quarter, and we are well on our way to another strong year. Storage fundamentals remain solid. While we expect our rate of growth to moderate in the back half of the year due to very difficult comps, we expect it to remain well over historical averages, with modeled year-over-year revenue growth remaining in the double digits through 2022.

Thanks, Joe, and hello, everyone. We had a strong second quarter, exceeding our internal projections. Our outperformance was primarily due to strong property performance, benefiting the same-store pool, joint ventures, and management fees. As Joe mentioned, we were active on the external growth front. Our investments were mainly funded by draws on our revolving lines of credit. We issued $22 million in operating partnership units as part of the Bargold transaction, bringing our year-to-date equity issuance to about $60 million. In the second quarter, we repurchased approximately $63 million of shares at an average price of $165 per share. Due to the wide spreads in the investment-grade bond market, we've been active with our banking relationships. Last week, we completed an accordion transaction in our credit facility, adding $600 million of unsecured debt within the facility across two tranches. Our plan to term out debt using the investment-grade bond market has not changed, and we expect to utilize this market again once conditions normalize. Our leverage remains low, with net debt to EBITDA of 4.4x, and our unencumbered pool is over $13 billion. We continue to have access to many types of capital, and we have significant debt capacity to support future growth and maturities, albeit at higher interest rates. Due to our year-to-date outperformance and improved outlook for the second half of the year, we updated our 2022 full-year guidance. We've increased our same-store revenue guidance to 16% to 18%, driven primarily by rental rate growth. We strive to be efficient with expenses, and we believe our continued investment in our people and our properties are contributing to our top line growth. Consequently, we experienced same-store expense increases across several line items, and we have increased our expense guidance to 7.5% to 9% for the full year. Our increased revenue far outweighs our increased expenses given our high-margin business. As a result, our same-store NOI growth range increased to 18.5% to 21.5%, the highest NOI growth guidance in our history. Given our total investment activity year-to-date of $790 million, we have increased our acquisition investment guidance to $1.2 billion, only $250 million of which is unidentified. Our preferred investment in NexPoint remains in place and Bridge Loan volume and interest rates are higher than anticipated. As a result, we have increased our interest income guidance by approximately $3 million. Due to the increase in interest rates as well as our higher acquisition volume, we've increased our interest expense guidance by $13 million at the midpoint. The sum of these adjustments results in an increase in core FFO, which is now estimated to be between $8.30 and $8.50 per share. We anticipate $0.20 of dilution from value-add acquisitions and C of O stores, in line with last quarter's estimate. We're having a great year, and we are positioned for continued steady growth.

I had a couple of questions about the Bargold acquisition. I was wondering if you could share the initial yield on that $180 million investment or provide some parameters around the expected return on your investment.

Sure, Todd, and thanks for your clever title to know, we all got a chuckle out of that. So we underwrote the existing business. We didn't underwrite any extraordinary growth. We didn't underwrite any synergies. We fill our G&A on top of it. And just underwriting what exists today, the first-year yields in the low 4s and it grows to the mid- to upper 5s. So kind of similar to urban property investments, I would say. And then our hope is, of course, we're going to first try to institutionalize the business, introduce things that they haven't done. In terms of technology, they don't charge administration fees, they don't offer insurance. And that's kind of the first step of the plan is to institutionalize it and bring some Extra Space's expertise and procedures, processes to it. And then we'll see Bar growing it. We'll try to grow it in New York City. And if that works, then we'll take it outside of New York City. But it's kind of one step at a time for us.

Okay. Can you talk about some of the fundamental differences in this business compared to traditional storage, such as price increases and any limitations on raising rents for customers, as well as the size and frequency of those increases, as you continue to expand and grow the platform?

Sure. Great question. The business involves leasing space in apartment buildings, mainly basements and garages, and constructing those spaces to resemble the interior of our modern self-storage facilities. These spaces are leased exclusively to tenants in the apartment buildings, which significantly reduces customer acquisition and marketing costs. The incremental cost to expand the business is minimal since we don't purchase real estate; everything is leased. We acquired the business and the platform, making it capital light moving forward. The tenants are distinct and tend to stay for a long duration, with an average length of stay for current customers in this portfolio being 8 years. The monthly churn is less than 0.5%, while our overall churn rate is 6% to 7%, indicating remarkable stability. They maintain an occupancy rate of over 97% and have more than 1,000 individuals on the waiting list. A potential synergy we might explore is transitioning those on the waiting list into an Extra Space store until a unit becomes available for them. This situation also suggests that their pricing strategy may not be as sophisticated as ours. However, you are correct that rate increases are sometimes limited and require coordination with the landlord, as they aim to keep tenants satisfied and avoid jeopardizing potential increases in apartment rent due to higher storage rent. There are notable differences in that regard as well.

Okay, that's helpful. I have one last question regarding the leasing environment and rental activity. Occupancy is at a healthy level, and rentals have significantly increased year-over-year. The housing market has cooled off a bit, and I didn't expect there to be significant additional demand from the pandemic drivers we saw in late 2020 and 2021. Do you have any insight into where the current demand is coming from? It appears to be quite strong, perhaps more robust than anticipated. I'm curious if you can share any information about the sources of this demand and where the customers are originating from.

Yes, Todd, if you look at kind of our surveys and the questionnaires we give our customers, it's come back to pre-COVID answers. It's largely coming from people moving, and lack of space obviously is needed, but not what it was in COVID. Our rentals and vacates have moved much more to pre-COVID numbers. Our vacates are elevated slightly now, partly due to the existing customer rate increases that have gone through over the last year as we move people quickly to street rates because these state of emergencies have been removed. So while vacates have been elevated slightly, rental activity has been really good. It's been strong. So we've been able to backfill those. So we have moved people quickly to street rate.

Maybe just 1 or 2 more just on the Bargold topic. I know you mentioned the 97% occupancy. Just curious, is this kind of in line with historic norms for this company? Or is this kind of like a peak occupancy level? And then also, are there other operators doing the same thing that you're aware of? And if so, are they potential consolidation targets down the line?

This company has historically operated at what we would consider very, very high occupancy levels. So over 97% would be a normal occupancy level for Bargold. I do not know of any other company that does this on the scale that Bargold does. And it's one reason that is exciting to us is the potential growth without a lot of competitors.

Okay. Great. And then maybe just one more, just on the leasing front. We've recently heard from market participants that there's been a pull forward of the peak leasing season. Just curious if that was consistent with what you've seen in the portfolio?

Yes, I'm not sure I fully understand the question, a pull-forward?

So I'm not sure you know that until the future, right? I mean, yes, leasing has been strong and demand has been strong, but we haven't seen it diminish to the extent we could say it's leasing from a future period that's been pulled forward. So that seems very theoretical.

Yes. No, that kind of answers the question, right, exactly. If you guys aren't seeing a deceleration that's material, then that kind of answers the question, like you said. We've recently attended a conference, in which there were anecdotes in which some market participants have been seeing such deceleration. So the fact that you guys have not answers my question, like you said.

Just hoping we could double up on the expectations built into occupancy. What's assumed in the second half in terms of occupancy declines with seasonality eventually waning and how is that compared to history? And Joe, maybe what's the exit run rate we should be thinking about with an eye towards the starting point for 2023? And do you see any changes in the consumer behavior to make you think differently about how you're feeling about '23 relative to where you were maybe NAREIT a couple of months ago?

Yes. Juan, this is Scott. Our occupancy has been pretty consistent over the last 4 months where we've run 1% to 1.2% below prior year. And we would expect that to continue throughout the remainder of the year and maybe fall off slightly more than that as we get towards the end of the year. So we expect to be below where we finished 2021 by 1% to 1.5%.

I think your second question was on revenue growth pattern. And we do anticipate moderation, as Scott said in his remarks. But if you look at our guidance, we'll end the year in low teens positive revenue growth, which is just a fantastic number. It sets us up really, really well ahead into 2023.

And then just the second question on expenses. Normally, the point of contention, and the point of stress is taxes, but that's actually a bright spot relative to some of the other increases. But just curious how you're thinking about various kind of more meaningful expense line items? And how sticky those could be into '23? And are you seeing any changes or differences across the regions, maybe more cost pressure in the Sunbelt versus the coastal market? Just curious on a little more color on expenses.

Yes. First, regarding taxes, we are noticing a reassessment resulting in a 5% to 7% increase. We've benefitted from some appeals that have alleviated part of that increase. Overall, while we are experiencing increases, the appeals are giving us some relief, although those benefits are mostly one-time. In terms of payroll, we are still facing wage pressure with payroll wages increasing up to 10% and hours rising year-over-year, which is partly a comparison to last year when we had negative expense growth in the first half. As we return to more normal hours and staffing, we are seeing an increase year-over-year that we do not anticipate continuing into next year. We expect some wage pressure but not the same adjustment in hours. Additionally, we are encountering inflationary pressure on utilities, repairs, and maintenance. As revenues increase, credit card fees also rise. However, being in self-storage is advantageous since it’s a high-margin business. While inflation affects expenses, we also see opportunities for revenue growth through month-to-month leases, and the ability to offer shorter-term leases is beneficial for us.

And if maybe I could sneak in a super quick one. What's the average lease duration that Bargold has with the multifamily landlords to actually get the space?

So the initial lease terms are between 10 and 15 years.

Congratulations on the quarter. Joe, I think I heard you mention briefly that it looks like a good setup for 2023. Interestingly, that's been a key topic of discussion I've had today with some incoming calls—strong results, but there are still skeptics concerned about potential weakening demand. I find it interesting to hear your guidance; if you achieve what you're aiming for in the second half, could you elaborate on that setup for 2023?

Sure. So if we end the year at low teens revenue growth and knowing how increases and decreases take time to roll through the rent roll in storage, it takes a while for any weakness if we see that, if you're looking for a downside scenario to roll into results. So pick an ending point, right? I mean storage has only gone negative in revenues during the Great Financial Crisis and barely 0.1% during 2020. So pick whatever ending point you want for revenue and I think you will end up in 2023. I'm not giving guidance. I'm just doing math, above long-term historical averages in revenue growth.

Great. Very helpful. And is it fair to say that the trends you've seen in the first half of the year continued through July into August?

The amount of August has passed? Yes. July continued from June rates were reasonably flat, June to July. Last year, like I mentioned, the rates really peaked in June, July of last year. So as last year's rate comp becomes easier, we hope that August continues to go well. But 2 days into August, it's all looking good still.

Great. And then my last question, just to confirm, again, are there any signposted issues? It seems like you're very comfortable continuing to push rate on the customer, the customer is taking it. But any signposts, any issues, and maybe in any markets?

Yes. When discussing customer health, we receive numerous inquiries about it. We examine factors such as bad debt and accounts receivable, comparing their current status to past levels. Currently, accounts receivable are similar to last year's historical norms, and bad debt is close to the historical average, with no significant increases over the past quarter. Regarding rates, when compared to 2019, our current rents are up 26% to 27%. Although year-over-year comparisons may seem dramatic, looking back a few years shows that the increase is more manageable and not as extreme as it might appear at first glance.

Jeff, I would add, we have stronger markets and we have markets that are less strong. And we're always looking where performance isn't as good as elsewhere and seeing what tools we can use to try to help those markets. And it may be submarkets or individual stores where we have to do certain things with marketing spend or different things. We're always trying to maximize performance. So not everything is as strong as the best-performing assets in the company. But everything is good. And we have the tools to address individual areas or stores or markets of weakness, and we feel lucky to have a really broadly diversified portfolio.

I know this is addressed a bit early on in the call, but acquisition guidance is obviously raised again. Just curious if you could give us a little bit more color on how much competition you're truly seeing for these assets, that's over the last quarter? And kind of any sort of color on cap rates is really helpful?

I believe we are witnessing reduced competition, as there are fewer bidders in the market. Many participants who heavily rely on leverage seem to have stepped back, but there are still some bidders, allowing transactions to occur. However, the environment is not fully open. Assessing cap rates can be challenging due to the lag in data, and each transaction tends to be unique. Nonetheless, we have observed an increase in cap rates.

Got it. And as we think about plus with the year, right, I mean, what percentage of the portfolio do you anticipate spending another rate increase to? And how does that compare to years prior?

So we haven't made any change in what percent of the portfolio we send a rate increase to. Every customer is eligible for a rate increase after a certain amount of time. I'm not sure if I understood your question correctly, but...

Yes, just before like the cadence of increases, right? Like you tended to increase that. I'm just kind of curious, like at this point last year, what percentage of your portfolio would do another increase? And how does that compare to this year?

I misunderstood the question. I don't think we can make effective year-over-year comparisons because last year, we were heavily restricted by government regulations that prevented us from sending rate increase notices. Before COVID, we had a consistent method regarding how often and by how much we raised rates for customers. During the COVID period, we voluntarily refrained from sending rate increase notices, and when regulators told us we couldn't, we moved away from our standard approach. We haven't returned to that method; instead, we are now more tailored in both the timing and amount of rate increases we implement.

Keegan, about 63% of our tenants today are below street rate. So obviously, they're eligible. We actually push people above street rates. So it's a large percentage. That 63% is actually higher than it's been in the past.

I just wanted to just come back on to the acquisition activity for a moment. You mentioned in your opening remarks a continued focus on nonstabilized assets and also working with joint ventures. Are you working kind of consistently with the same joint venture partners? Or are you finding new capital that wants to come into the space so you can forge new relationships or just kind of interested in how that's going?

Sure, Smedes. Thanks for the question. So we have 2 new joint venture partners this year in 2022. We also are working with some of our older joint venture partners and the phone rings a lot. There's lots and lots of people who would like to be our partners in self-storage.

On the nonstabilized assets, I'm just wondering, are more folks coming to market because they're just like where the pricing is now? Or are you seeing deals where they're sort of unable maybe to get permanent financing or kind of their underwater logic, their initial underwriting, kind of what's bringing those assets to market in this environment?

It's definitely specific to the assets. Before the interest rate hikes, pricing was very strong. In 2021, we saw robust pricing along with concerns about a potential capital gains tax increase and the possibility of 1031 exchanges disappearing. Moving into 2022, the pricing remained strong with low interest rates. Now, some people are worried about rising interest rates and further cap rate compression, leading them to sell. Additionally, there are always asset-specific reasons at play, such as funds nearing the end of their life cycle or personal issues within a family, like a death. I believe these factors account for most of the current situations.

Scott, I'm curious about the New York MSA. The region seems to be performing quite well. Looking at the numbers, it appears that revenue growth accelerated significantly in the second quarter. Could you discuss some of the factors contributing to that? I'm trying to understand if it's related to the New York MSA including New Jersey, where there might be some rent restrictions being lifted. Additionally, can you provide insights on the New York boroughs, particularly Brooklyn and Bronx? What are you observing in those areas?

Yes. In New Jersey, our Northern stores are outperforming those in the boroughs. While we have a limited number of stores in the boroughs, both markets are under the average for our portfolio, with New Jersey showing better performance than New York. We have noticed rate increases since the state of emergency was lifted late last year, which has positively impacted us this year. Most of these increases were implemented in November and December, so that’s when we’ll face tougher comparisons. Overall, the rate hikes introduced late last year are benefiting us this year in New Jersey.

And I guess, at this point, there's no more rent restrictions sort of in the portfolio, it remains to be lifted, correct? Or is there any more sort of opportunities there as well?

There are no state of emergencies in effect anywhere.

Sure. Pretty similar, very similar to what we talked about last quarter. We continue to see and expect a moderation of new supply. There are certainly headwinds in terms of interest rates, cost, entitlements but it's not going to 0. There's still new supply being delivered, and there's still an awful lot of interest in people wanting to build new self-storage. I'll give you a stat that is interesting. Our management plus team underwrites about 215 deals a quarter for potential management contracts. 75% of those this year have been development. So there's still a lot of people out there interested in building self-storage. And you can understand why. The results of the asset class have been phenomenal.

Of JPMorgan, but first just have to say, as a current Bargold consumer, I'm pretty excited for the opportunity presents you all, but I'm also a little apprehensive about what my monthly rent is going to look like going forward? But I guess on the topic of rent increases, would you be able to share what the average magnitude of rent increases you're currently pushing in your portfolio and how that's changed compared to the first quarter?

So as I said, tried to reference earlier, it's all over the board, right? Because we have this weird situation, a unique situation, excuse me, of folks whose rent was artificially suppressed by government regulation at a time when street rate was increasing. So we had some larger-than-normal gaps between what people are paying at street rates, and we were trying to catch up. So there's a wide variation in the amount of rent increase customers are getting, and I'm not sure an average is meaningful because of that.

Got it. But it sounds like there are no significant areas where the MSA and the rent are materially lower than the average.

No.

No. I think you saw some that were larger than the average as rate restrictions were lifted, and we moved them quickly to the current market rates. And that benefit as you move throughout this year, obviously, decreases because you were doing many of those late last year and early this year.

And then on the expense side, how should we think about, I guess, expense growth in personnel and property operating on a sequential basis? Is kind of the level of spend in the second quarter representative of what it's going to look like for us over the year? Or is there a little bit more further to go from here?

Wage pressure will be consistent throughout the year, with approximately 10% wage inflation year-over-year. Staffing hours should improve as the year progresses. Towards the end of last year, our staffing levels were more appropriate, but the second quarter and into the third quarter represented a low point in staffing hours, largely due to turnover.

If I could ask one last question, in your prepared remarks, you mentioned the possibility of cross-selling between Bargold users and your current Extra Space units. Should we interpret that as an indication that you might consider expanding further into Manhattan and the New York MSA?

We have lots of ideas for Bargold. The first step is to integrate the existing business. One idea we have is to provide an option for Bargold tenants on the waiting lists to store their belongings in Extra Space units, giving them a priority for moving into a Bargold unit. This could potentially benefit Extra Space, but we haven't implemented this yet. It's just one of many exciting ideas we plan to explore. Once we fully understand and manage Bargold, we intend to expand it first in Manhattan and other areas of New York, and possibly to other major cities in the country thereafter.

I have a couple of quick questions. Looking back at the same-store growth and considering the exit rate for 2022 as a base for 2023, earlier comments suggested it could be in the double digits for the second half of this year, so could we expect double digits for 2023 as well? I just want to confirm if I understood that correctly, or if there are any important aspects of the comparison that we should be aware of?

So I apologize if I implied that because we're going to end the year in double digits in revenue growth. That means it's going to be double-digit revenue growth throughout 2023. I think it means we're going to start 2023 with double digits. And then everyone can have their own view of the market and how that will moderate or not operate throughout the balance of the year.

Got it. That's pretty clear. My second question was about some of the areas that have been under state of emergency, like Los Angeles. Regarding year-to-date same-store revenue growth, is there a way to quantify the contribution from those areas being marked to market at a high level?

So I think last quarter we said we expected lifting of the California state emergencies to add 50 basis points to the same-store portfolio. We now think that's more like 70 basis points. And the reason for the difference is we were only conservative in our length of stay assumptions. We thought that when we increased rates to street rates, we would push more people out the door. But in fact, we've been conservative in that assumption. So 70 basis points is the answer to your question.

Great. And then my last one is just on Bargold, if I could sneak it in. You mentioned a bit about the business and the growth potential. How much more capital have you provided to the company over time when considering the growth opportunity? Or is your capital commitment mostly complete at this point?

We have the necessary capital to grow the business, but I want to emphasize a cautious approach without overpromising on growth. Our focus is on taking things step by step, starting with fully integrating what we currently possess. We acquired this with the hope of entering a growth phase. The leases are structured with rent based on a percentage of revenue, meaning there is no fixed rent involved. This makes it a capital-light venture, requiring primarily the build-out of the space. Additionally, there might be some investment in systems, as our systems outperform those of the previous company. While I hold that company in high regard as a successful family-run business, our capabilities and systems are superior. Therefore, any additional capital needed will not be substantial, and we anticipate a capital-light trajectory moving forward.

It's actually Ki Bin. I have a couple of follow-up questions about Bargold. Can you provide more details on how that business operates, specifically the average number of units per apartment building? What occurs when a tenant doesn't comply or if they lose a vow? Does the building manager take care of it, or is it your responsibility? I'm interested in the practical aspects of managing this type of business.

The average number of units in the building is 25, but there is quite a range. The largest building has 800 units, which is somewhat comparable to a store, while some buildings have only a few units. Building owners typically have call-up boards to avoid handling certain tasks themselves. Bargold, now Extra Space, takes care of unit access, payments, nonpayments, and unit auctions. Out of their over 17,000 units, they auctioned about 20 a month last year, which is a very small rate. Storage operates similarly, with the same laws and structure.

What was the revenue growth trend for them over the past year? I'm trying to understand whether this is a rapidly growing company or more stable that you're looking to enhance. Any insights you can share on that?

Yes. I would say it was neither static nor hyper growth that they were a steady growth company growing in the single digits every year.

Okay. Just one last question about moving rates. You mentioned it was flat year-over-year in July. Analyzing these statistics can get complicated due to a challenging comparison from last year, and not everyone moves in at once. I'm interested to know about your comments on moving rates; where do they stand for in-place versus move-in today? As we move past these tough comparison periods, do you expect market rent growth in the second half to return to positive year-over-year?

Yes, let me clarify one thing first, Ki Bin. In July, our achieved rate growth was about 5% to 7% lower year-over-year. When we compare tenant move-ins from last year to this year, we observed a slight decline. We anticipated this and are not surprised by the outcome. Regarding the roll down, our in-place leases currently have achieved rates approximately 7% higher than our current rates. Typically, at this point in the year, the rates are flat. Looking at the trend from last year, rates peaked in June and July before declining in August. Therefore, depending on how our rates perform in August, they may remain stable by the end of the month.

Could you provide some insight into how the achieved rates trended throughout the quarter? I know you have the figures for July, but it would be helpful to understand the overall trend for the quarter.

Yes. So April, May, they were slightly positive. June, down about 6%. Average about negative 3% for the quarter. July, you were down that 5% to 7% range again. So that's year-over-year. And again, last year, you were pushing rates in June and July pretty hard.

Great. And then just a quick follow-up on the relative to your expectations. Any markets you call out as the largest source of upside this quarter versus expectations?

So things have performed pretty close to our expectations. I mean, the list of properties in what markets are outperforming, Atlantic continues to be a standout market for us. Most of the Sunbelt continues to be strong with South Florida, Miami being exceptionally strong in the Sunbelt, Miami and Atlanta.

It's a small market, but Charleston has recently gained attention as it had a significant amount of supply and was not on our radar earlier.

It's Michael Bilerman here for Smedes. Joe, I have two topics. The first is regarding length of stay. You had a great slide at NAREIT that detailed length of stay for those over 12 months and those over 24 months. It indicated that you're reaching 66% for stays longer than 12 months and 48% for those longer than 24 months, an increase from about 60% and 40%, respectively, before COVID. As you analyze these figures, has there been anything that has changed recently in terms of length of stays? Additionally, are there any insights from a regional or market perspective that you can share, or any customer-related observations as you break down the overall data?

So we've had elevated vacates in response to our increased rent increases to existing customers. And we track that really carefully with every month control group. So we know exactly what percent increase in vacates being caused by our ECRI rent increase program. And that has caused a very slight moderation or dip in those numbers that you referenced in terms of long-term stay, but they're still very high and elevated from any historical period.

Does it reflect, Joe, do you think all those where you had a significant number of new customers that came to storage, I think over COVID, it was like 50% of the customers were new. Is that potential to driving the higher length of stay? And is there anything on a regional basis that would be different?

So I guess in reverse order, we don't see anything on a regional basis. It's pretty consistent across all markets. And our theory, which I think you're referencing here, theory, that the customers who came to us in COVID for lack of space because they were doing a home office or whatever. Those are the longer stay customers and we do lose some percentage of those. They don't all stay forever, but many of them are sticky.

Are you observing at all the impact of rising apartment rents and the potential recession, which typically leads to individuals doubling up or moving back home, potentially increasing your storage needs? A recession isn't necessarily detrimental to your business. Have you begun to witness any signs of this demand in your markets?

So I don't know if we can say yes or no to that yet. Some of that data is hard to collect and you need a good period of time before you can be confident with it.

Right. I just want to know if there was any early reads that your excellent property managers are seeing from those that are walking in the door, the type of uses that they're bringing in, if anything has changed more recently?

I mean there's always anecdotes, but I don't think I would be comfortable saying that we see a trend or a movement or anything like that.

And then just wrapping up on Bargold. You said the average lease length that Bargold has, it was 10 to 15 years. How much remaining lease term on average do they have with those 17,000 units? And I would assume there's some extension options? Or I guess if the co-op or condo, rental Board decides and Bargold just removes all the equipment that they installed just to better understand sort of what happens upon lease end?

At the end of the lease, there are several options available, and it's quite rare for the building owner to request the removal of the equipment. They can either purchase it or, more commonly, lease it again. This creates a residual revenue stream at the lease's end for the leasing of the steel. A portion of the leases automatically convert to month-to-month agreements at that time, and there are some leases that fall into that monthly category. As we evaluate the portfolio, we are carefully analyzing the churn rate, the duration of these agreements, and the timing of their terminations to inform our underwriting process.

Do you view this business more as an opportunity to focus on owned properties like co-op condos, or do you see it leaning towards rental buildings? Additionally, do you think it might cannibalize existing offerings if you succeed in expanding this business nationally and utilize the tools and expertise of Extra Space? I recognize that the company has a waiting list, which could help reduce customer acquisition costs. What are your thoughts on the potential direction for this product?

I think we have a lot to learn. One of the things we need to understand is what the optimal building looks like. We need to explore the differences between using an owned building versus a rental building, as both options can work effectively. We also need to determine the optimal number of units per apartment and the best unit mix. We are going to take a very data-driven approach to this, likely more so than in the previous quarter. Many of the questions you have are the same as ours, and we're committed to discovering the answers. In the best-case scenario, if we can expand significantly with many apartment buildings, this could become a competitor to traditional urban self-storage. If that happens, I want to be the first to move in that direction.

Promise, just one follow-up. Can you just confirm, in-place for us to achieve difference and how you reconcile that with earlier, I believe you commented 60-plus percent of the leases are below street rate, please?

Yes. So our average in-place rent is about 7% above where our achieved rents are today. Now that's on average. That's just comparing your average versus what the move-in is today. So while you could still have slightly negative rents and you push tenants up. Now the one thing that we always look to is you're churning 5% of your customers every month. So a portion of that may move in at slightly lower rents. We then move our existing customers up fairly quickly. So we're probably one of the more consistent in our rate increases and how we do that, more programmatic than others.

In terms of street rates, can you talk about those trends during the quarter by month, perhaps and into July, Scott, like you provided on the achieved rates?

Yes. Street rates are not that different in terms of year-over-year growth or where they were than our achieved rates. Achieved your difference that is which channel they came from and that type of thing or discounts offered. So fairly similar trend to our achieved rates.

Okay. And then on that 63% of customers, though, that are currently paying a rate below street rate today. You said that that is higher than it has been historically. What's more typical for that metric?

We went incrementally higher. I think it was low 60s earlier this year.

Okay. If you look back, though, over the last, say, 10 years, where has that been generally?

Thank you all for your time and interest in Extra Space. If I step back and look at the company’s progress, it's truly an exciting time for us at Extra Space. Everything is functioning smoothly. The growth we are experiencing is robust, and we have several technological innovations in the pipeline that we are eager to share. Our recent employee engagement surveys show significant improvements in our scores this year, and we feel confident about our employee performance. As my kids would say, it's really impressive. Overall, it's a great time for us at Extra Space, and we are grateful for everyone’s support. Thank you.