Extra Space Storage Inc (EXR) — Q1 2024 Earnings Call Transcript

Thank you, Michelle. Welcome to Extra Space Storage's First 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, May 1, 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.

Thanks, Jared, and thank you, everyone, for joining today's call. As many of you know, Jeff Norman has transitioned into another role within the organization as the Head of Treasury and Capital Markets. Many of you on this call have worked with Jeff and experienced his professionalism, responsiveness, knowledge, and good nature. I recognize and appreciate his efforts to make Extra Space a leader in the industry, and I look forward to his continued contribution to the company. I would also like to introduce Jared Conley, our new Vice President of Investor Relations. Jared has been with Extra Space since 2002 and has worked in various roles, most recently as our Head of Financial Planning and Analysis. We look forward to introducing him in person next month at NAREIT. Turning to this quarter's performance, we have seen sequential improvement in occupancy and rate since our fourth quarter earnings call in late February. Operationally, occupancy at the Extra Space same-store pool grew every month during a period normally recognized for seasonal declines, ending the quarter at 93.2%, a 50 basis point increase year-over-year. Our revenue strategy has allowed us to both improve occupancy and average move-in rates in the quarter, with the latter growing sequentially by approximately 8% from a seasonal low in January. The combination of improving move-in rates, higher occupancy, and steady existing customer rate increases have provided a 1% lift in Extra Space's same-store revenue performance, which is in line with our internal projections. Also, as expected, Extra Space same-store expense growth increased by 5.5% year-over-year. The legacy Life Storage same-store pool performance continues to improve, outpacing the Extra Space same-store properties. Revenue gained 1.7% year-over-year, which was in line with internal projections and against the backdrop of a difficult comp where prior management pushed hard on rates in 2023 at the expense of occupancy. Occupancy at our Life Storage improved to 92%, a 220 basis point improvement over last year, narrowing the gap between pools to 120 basis points at quarter end. At the end of April, this gap, which was over 400 basis points in closing, has further narrowed to 90 basis points on our platform. To do so, we have maintained lower rates throughout the quarter with the strategy of higher occupancy, leading to stronger new and existing customer rates through the remainder of the year. We believe improved rate performance will continue to lift these properties and ultimately bring them to parity with legacy Extra Space store rate and occupancy levels. Life Storage same-store expenses increased 6.7% year-over-year, also due to an exceptionally hard 2023 comparable, but below internal projections. Expenses increased particularly in the areas of payroll and repairs and maintenance, as we address areas that were underinvested at this time last year. On the external growth front, the transaction market continues to be muted. However, we expanded our capital-light external growth activities, adding $164 million in new bridge loans, meaningfully ahead of our projections. In addition, we added 97 third-party managed stores gross and 72 stores net. We continue to have the fastest-growing third-party management platform in the industry. Overall, the year is unfolding as expected with wins in capital-light growth and G&A and expense savings. We are working hard and I am confident our teams and infrastructure are well prepared to optimize performance during the important upcoming leasing season.

Thanks, Joe, and hello, everyone. As Joe mentioned, we had another good quarter, driven by steady revenue, G&A savings, and better-than-expected property operating expenses, specifically property taxes. The G&A savings have been from a broad range of categories as we continue to seek efficiencies and capitalize on our greater scale. As mentioned in our prior call, we closed a $600 million bond offering in the quarter at a time when interest rates were more favorable than the current environment. Proceeds were used to repay the bridge loan that we used to acquire Life Storage and the offering helps reduce our exposure to variable interest rate debt. Our balance sheet is in great shape, and we have plenty of dry powder to capitalize on an improving transactions market. Due to the in-line nature of same-store performance, we are not making any revisions related to property operations. We will update our property guidance after the second quarter once we see how the leasing season progresses and how much pricing power we gain. We do expect to see continued savings in G&A and have adjusted our annual assumptions accordingly. We have also adjusted our annual average SOFR assumption, increasing interest expense, which is partially offset by increases in interest income from our bridge loan program. We are encouraged by the outsized rental volume year-to-date and the high occupancy at our stores, and we should be in a great position to maximize the performance at our properties as we move into the rental season. With that, Michelle, let's open it up for questions.

Can you talk a little bit about what the trend was in April and how that kind of compares from the last couple of months of the end of the first quarter?

Yes, Michael. So we ended the month of April at 93.7% occupied, which is still a 50 basis point delta over last year, and our rates improved sequentially month-over-month from the month of January. So what's happened in the quarter is we averaged about 14% negative achieved rates in the quarter. And in the month of April, that has moved to about negative 9% year-over-year.

So that 92.7% is the Extra Space same-store pool. We're at 92.8% for the Life Storage same-store pool.

And my follow-up question is, to reach the midpoint of the guidance, it seems like you kind of hit your occupancy or have started to make some momentum there. I suspect that's going to translate to starting to push street rates. To meet the midpoint of your guidance, how much do the street rates need to increase from here in order to achieve that midpoint level?

So street rates is only one component, right? And we're kind of agnostic as to whether we can maximize our revenue through street rates, through occupancy, through discounts, through marketing spend, through ECRI. So there's no one number we're targeting for any one of those metrics. We're trying to mix and match them to maximize revenue.

So maybe if I ask that in a slightly different way. If ECRIs kind of remain steady and you get kind of the normal seasonality within occupancy, then how much street rate gains do you need in order to kind of meet your kind of internal expectations?

Michael, we actually have not broken out street rates. If you remember on the last call, we actually didn't break them out. We said when we did our budgets, when we did our estimates and forecasts, we did it based on revenue growth. And so street rate is a component of that, as is occupancy. And obviously, the better the street rates are, the better the occupancy, the higher we are going to be in that range.

I just want to confirm, thinking about your comments and where we stand here, May 1 versus, let's say, the last couple of years, where there was a bit less visibility, seasonality was a bit distorted or, I guess, can you just put the context of how you feel today versus the prior 2 years? Because it sounds like you're more comfortable, confident maybe with that seasonality. Normal seasonality trends are kicking in and we should expect that to continue for the remainder of the year.

So I think comfort is always greater as you get into and have some feeling as to how the leasing season is going to go. So at this time of year, before we're into the leasing season, in a period where we have reduced housing activity, where we have signs of consumer weakness, I'll say this, we have not enough comfort that we're going to change our guidance.

I understand that, Joe. I guess I'm just asking, though, again, part of the issue in the last couple of years was pinning down seasonality trends, right? And I feel like it's important to have a grasp on that seasonality trends are back to normal, so your operations and systems are running smoothly and you're confident in those systems. Is that not a fair way to think about it?

Yes. So I think if you look at, say, occupancy seasonality, and you look at the annual occupancy curve pre-COVID to what we've experienced last year and what we expect to experience this year, our system has taken a great deal of the seasonality in occupancy out of our performance. We will keep our stores at higher occupancy levels at all times of the year. And I think you see that in the first quarter this year, right? The bigger question is how much rate power do we have and can we push rates at those occupancy levels?

And do you think we'll have a better feel when we see you at NAREIT, or again, could it be later in the summer like last year?

No, I think we get data every day, and we'll have more data and a better feel at NAREIT, and we'll have even more and a better feel in our next conference call, and we'll certainly keep all of our shareholders and interested parties up to date with what we know.

If I look at the 165 stores added to the same-store pool this year, it looks like they're growing around 7%. And if you include the 2023 same-store pool, it looks like the 216 stores combined are going around 5%. So I was just wondering if the deceleration that you're predicting in your same-store revenue guidance is coming mainly from those stores just as occupancy comps get tougher through the year? Or is there something else that would be driving the deceleration? Or maybe you're just being conservative because it's early? But just trying to understand what would drive the deceleration to, call it, 1% same-store revenue to get you down to your midpoint?

Eric, the main factor here is not the 165 stores. In fact, those stores actually enhanced our performance this quarter, contributing about 40 basis points to our revenue growth. Our revenue growth over the summer is somewhat affected by last year's performance. Clearly, when coming off higher numbers, the comparisons do become easier as the year progresses. However, we currently do not anticipate a significant recovery in the housing market. We expect performance to remain steady as it is now, without a major rebound, which may differ from what some other projections suggest.

That's helpful. And then, I guess, conversely, on your LSI guidance, you're expecting looks like around 3.25% same-store revenue growth for the rest of the year. Can you just talk about the timing of that acceleration from your 1Q numbers? Obviously, your occupancy did increase, I think, 200 bps at quarter end, so that should drive over 200 bps same-store revenue growth, but just curious what gets you the rest of the way there to that 3.25%? I mean, when would you expect to see that?

Yes. So obviously, it's a range that we provided. So it will depend a little bit on where you are in that range. But the way we're viewing this is, as occupancy moves up to parity with the Extra Space stores, those rates will move up. So today, our Life Storage stores have rates that are 5% to 10% below our Extra Space stores, as they are growing faster. We saw very good rentals in the first quarter. We've continued to close that occupancy gap. We would expect that occupancy gap to be closed at some point during this rental season and then see the growth in the back half of the year.

First question is just can you give us a feel for how ECRI is trending year-to-date versus, let's say, the back half of last year? On a percentage basis?

So I would say, very similarly. I mean, we're constantly testing and trying new things. But overall, the program is very similar to the back half of last year. Customers are accepting ECRI at the same rates. And it's an effective tool for us to maximize revenue.

Could you elaborate on your pricing strategy, which seems to involve significant discounts and promotional rates at move-in? Are you facing any pushback from customers as you try to bring them back to a more standard rate quickly? What is the general sentiment? Also, is there a point at which you might shift away from this approach as occupancy improves, potentially enhancing move-in rates? How should we consider this moving forward?

Yes. So I mean, this strategy, you described it pretty well, right, for the web customer. They get a discounted rate, but no promotion, right, which is different than our peers, who offer many times promotions on the web. So the discounted rate, we do that because the data tells us these are the longer-term and better customers, and that is the pricing package they react best to. We use ECRI to get them to street rates within a reasonable period of time. We have a different structure for the customer who walks in the store. And our data tells us and our testing tells us this is a very effective strategy. And when the data tells us and the testing tells us we should evolve it to something else, then we will. But it's not in place for a fixed period of time or until we see something. One of the advantages of our scale is we can constantly have a few hundred stores here and there running different tests. And when we see something that tells us we need to evolve our strategy, we will.

Just hoping you could talk a little bit about the transaction market. You guys have done some deals in the first quarter and then expected to close over the balance of the year. So maybe you could give us a little flavor for the going in and stabilized yields that you're underwriting to?

Sure. So the transaction market is pretty muted. There's still a significant bid-ask spread. There's not a lot of distress in storage, so sellers don't need to sell in general. We see a lot of transactions get put on the market and get pulled, particularly larger transactions. It seems there's less capital for big portfolios than there are for one-offs. So the transaction market is pretty quiet. We did close 7 deals in the first quarter, but one of those was a joint venture development and one was a CO deal. So those were agreed to some time ago. We only approved. I think the better sense of the market is what's approved in a quarter because the ones that closed might have been baked many, many, many months before. And we only approved 3 transactions in the first quarter. One was a remotely managed store and the initial cap rate was in the mid-6s. And then 2 developments where the development yield at a property level was in the high 8s and about 100 basis points higher to us because of the joint venture structure. So I mean, we'll do good deals like that when we see them, but there's not a lot of them in the market right now.

Great. And then just a bigger picture question. Maybe a little bit to Jeff's question earlier that you guys sound fairly optimistic, but the guidance doesn't necessarily call for any necessary reacceleration in the second half. But I guess, are you seeing signs at the different markets that individual markets are starting to reaccelerate at all?

So an advantage of our scale is how diversified we are and the exposure we have to many, many, many markets. And that's a purposeful portfolio of construction because all of our data tells us that markets act differently. Not all markets move in the same direction. Even if you start to categorize markets by primary, secondary, tertiary, coastal, or whatever, they don't act with any correlation. And the reasons markets act differently is because of new supply situations, because of job growth and population, and because sometimes if the market does really well for a couple of years, as revenue growth over 20%, like we experienced in Atlanta, then the next year, it's not going to be so good. So because we have this wide exposure, we absolutely have markets that are reaccelerating, and we have markets that are flat, and we have markets that are not doing as well. And I think we'll always be in that position. But this broad diversification smooths our volatility, if you will. And we are big believers in having exposure to as many good growth markets as we possibly can.

Maybe sticking to the last question here on markets. One market that sort of is lagging here is Florida. You look at Tampa, you look at Orlando. And I know that, looking at the integration of LSI, LSI had a big exposure to Florida. So I mean that occupancy gap is still about, I think, 180 to 200 basis points. How do you think about your ability to sort of close that gap given some of the dynamics in sort of Florida?

Yes. So great question. So yes, Florida, some of the markets in Florida are some of our weaker markets today. That's a good observation. That's partially because they did so well during COVID, and that's partially because of supply issues in some of those markets. But we're in this, and we did this merger for the long term. And over the long term, the Sunbelt markets, the Florida markets, and the population growth and the businesses that are moving there, we believe those are really good long-term markets. So yes, this quarter, some of those markets and maybe this year, some of those markets might be on the weaker side. But long term, we're really happy to have exposure down there. A market like Houston and Chicago, which we also increased our exposure to the Life transaction, those markets are doing really well. They're kind of on the top of the sheet now. So again, it's great to have exposure to lots of different markets because they'll always be moving in different directions.

I guess my second question is around ECRIs. That's still holding up clearly. I guess what does it take for the consumer behavior to sort of shift? Is it job growth at this point? I mean, job growth with nonfarm payroll is still pretty strong month-to-month. I mean, is it really job growth that will sort of crack that? I mean, just kind of what your thoughts are?

So when we talk about the consumer, I think we have to separate the existing tenant consumer and the new tenant consumer. The existing tenant consumer is really strong and really price insensitive. We're not moving out in the face of ECRI, bad debt is very low, and lengths of stay are incrementally improving. The storage customer, once they become a storage customer, is really a strong, sticky customer. We see more weakness in the new customer, the customer looking for storage. And that's where we see more price sensitivity. There's enough demand out there for us to capture more than our share and keep our stores at optimal occupancy, but it's the pricing strength that is an issue now. And I think we're at a period of time where we've had several quarters where inflation outpaced wage growth. The extra money that was pumped into the economy isn't there anymore. Savings rates are down. You have some weakness in the consumer, and that's what we're experiencing.

This is AJ on for Todd. Appreciate you guys taking the question. But first, just to piggyback off that last question. So vacates were down. But one of your peers noted that they saw a slight uptick in vacate activity and noted that there might be a normalization in the length of stay. You just noted that length of stay is incrementally improving. I'm curious, though, if you expect that to continue? Or do you see potential for vacate activity and the length of stay trends to normalize a bit moving forward?

Yes. So I probably explained that incorrectly. Length of stay is incrementally better than pre-COVID. It's worse than during COVID. We had that period where people just weren't leaving the stores. So overall, I'm looking at a longer period of time we're saying length of stay is incrementally improving. But it is clearly normalizing from COVID levels. Sorry if I wasn't clear enough on that.

Yes, that clarification is helpful. And then transitioning just over to the structured finance book as that kind of continues to grow. So it seems like the demand for that product definitely seems strong today. How big are you comfortable with growing that to? And are you starting to see competition from others creating a more competitive environment for the bridge loan and mezz financing?

So we do see other people getting into the business. Some of our public peers have announced they want to get into this business. On the ground, we don't see competition yet. We're not losing loans. We don't hear people saying they're taking this to someone else to bid. But there's other lenders. There's competition for this business, just like there's competition for the management business or any other business we're in. And our job is to compete well, and that's what we're trying to do. How big this can get? We have the ability to sell off the A notes in this structure. And that's a really good tool for us to be able to control how much of the balance sheet, how many of these loans we keep on the balance sheet. So we've picked up our guidance a little bit through this year as to what we expect to keep on the balance sheet, but we certainly have flexibility to move that number one way or another.

Maybe first just on LSI. I'd love to hear how the performance of the portfolio is trending relative to your expectations at the start of the year? And do you think you fully realize revenue synergies in this yet?

So I think LSI performance in the first quarter was as expected and on target, so we were happy with that. And we still have, as of today, a 90 basis point occupancy gap. And depending on what metric you look at, what pool of stores you look at, anywhere from an 8% to 12% rate gap. So we still have work to do. I think the good news is the tools we need, the infrastructure we need in place to close those gaps is largely there, right? So the LSI store manager is now performing close to or at the level of an Extra Space store manager in terms of conversion rates and all the metrics we use. And that took some time to get there. We've largely caught up on R&M and capital, and the stores look like an Extra Space store now in terms of cleanliness and repair, things like that. The LSI website is actually now faster than the Extra Space website. It was much slower when we bought it. So a lot of the customer acquisition metrics are improving. I'd say they're not all the way there yet for LSI, but improving. So we've made a lot of progress. We still have some work to do, and we still have some opportunity to capture.

That's really helpful. And then I guess just shifting gears here a little bit. I know you guys don't necessarily break it out, but it would be helpful to maybe just understand how you expect your year-over-year occupancy delta to trend throughout the rest of this year? If anything might have changed from a few months ago?

Yes. So we don't expect a significant occupancy delta for the entire year. Obviously, it's a component of your revenue, but we would expect it to be flat for most of the year, although we have been ahead some in the first quarter.

You guys have been successful with your revenue management strategy. But just thinking about how you had to cut moving rents fairly aggressively like peers. I'm just curious if you have a sense of how long, on average, based on the current cadence and magnitude of ECRIs, it would take you to get your new customer rent up to market level rents?

Yes. So I think there's a little bit of a misunderstanding baked into that question that we've cut rents more aggressively than our peers. And I think that comes from the web scraping data that is published and people see. When you look at that data, that's not adjusted for promotions. And we offer promotions. It's under 10% of our web customers get a first month free or a promotion like that. Where at our peers, it's the vast majority of their customers. So to compare our web rates to our peers' web rates, you have to adjust for promotions. And I think once you do that, you'll see we have not cut rates significantly more than our competitors. It's just not true. And our goal is, once someone comes in at a discounted rate, to get them to street rate within a reasonable period of time. And that may vary based on different factors, but within a reasonable period of time, they need to get to the street rate.

And then you spoke about the progress you've made in closing the occupancy gap on the legacy LSI assets. But based on your growing knowledge of the LSI market, I'm just curious what you think is a sustainable long-term occupancy level for that portion of the portfolio?

Yes. So we had an 80% market overlap with LSI and Extra Space stores. So for 80% of the portfolio, it's the same. And we don't really target an occupancy level. Again, as we said earlier, it's just one factor that goes into the algorithm that is trying to maximize revenue. And it may be different in different types of markets based on customer behavior.

I don't think this has been talked about yet. I just wanted to touch on the marketing spend. So can you talk about how you measure maybe the return on marketing spend and how long you expect this kind of level to sustain for?

Yes, the first thing to look at here is really marketing spend as a percentage of your revenues. If you look at our marketing spend as a percentage of revenues, we're still about 2%, which is still a very small component. On a year-over-year perspective, we get at the 23%, looks like a big number, but there's still a very positive yield. We look at the return on that spend in several different ways. It depends on where you're spending money, whether it's paper click, whether it's search engine optimization, or other areas. But we continue to have a very high return on that marketing spend, and it's a very small component of our expenses.

Okay. And then maybe just thinking, I know you guys maximize revenue through both rate and occupancy. But as you think about maybe absolute rental rates, how much they've grown over the past few years, I guess, what kind of gives you confidence that there does continue to be upside to that rent per square foot number?

I think the earlier question was about what gives you confidence in your guidance compared to your overall tone and position. We’ve noticed some positive trends early this year with month-over-month rate increases, which is encouraging. However, we are still lagging behind last year, so there’s progress being made. The leasing season will ultimately determine whether this year will be characterized as great, good, or perhaps still a bit slow. I believe the period around June and July will give us more insight. So far, occupancy rates have remained steady, and we’ve seen improvements in rates, but it's too soon to definitively state that it has been a good year.

The first one is just on housing. Can you sort of remind us what percent of your customers are coming in because of sort of home sales or the home activity and how you're thinking the demand is changing as rates have moved up?

Sure. So right now, about half of our customers, a little more, 51% of our customers tell us that they're moving. Now it doesn't mean they're buying a home, right? 45% of those 51% are moving from apartment to apartment. The peak of that was 61% in the third quarter of 2021. So we don't have enough data, right? We can only ask so many questions and have the tenant answer the surveys. My gut tells me fewer people are moving because they're buying a house, but more people are moving because they're renting house or because they're moving apartment to apartment or for other home transition reasons. So down somewhat from the peak, but still a meaningful portion of our customers.

My second question is about the guidance. There have been many changes since the first quarter and the initial guidance compared to what you provided today. You mentioned that while interest costs are higher, interest income has also increased. Regarding the same-store NOI for both legacy EXR and LSI, it appears that the EXR portfolio needs to slow down to reach the middle of the NOI guidance, while LSI is projected to accelerate. My question is whether the decision not to raise guidance is due to the variability in the current situation and the numerous factors that are in flux, making it difficult to have confidence in making a raise.

So we have not seen anything that is significantly different than what we saw 60 days ago. So that's really the catalyst for us not changing the guidance. In terms of the items that we did change, they were interest rate based, which we changed our SOFR assumption from 4.75% to 5.2%. That's based on the forward curve and when you obviously lock into that or update your guidance. And then we updated it for volume of bridge loans and a small change in our management fees. All of those netted to a very small delta, which caused your FFO to stay the same. But we really don't have the information yet to be able to give strong conviction that things are better or worse than what we originally estimated for our properties.

I know you talked about the current gap between LSI and EXR for new customers, but any color you could provide on the gap between the in-place customers at those 2? How far apart they are? And how long you think it will take to get to kind of the target to hit your revenue synergies?

You're talking the gap on specifically the Life Storage tenants. The negative roll down or which gap are you talking about?

I was talking about the in-place rental rate per square foot gap.

When we evaluated this deal, we approached it from several angles. The most significant finding was the identification of 109 Life Storage locations that had a comparable competitor, which was Extra Space, featuring similar multistory climate-controlled facilities within the same trade area. We analyzed the rates of those locations, and presently, there is an approximate 8% difference between them. We examined this both at the portfolio level and the market level; however, I believe that comparing similar stores directly provides the clearest insight.

That's helpful. I know we touched on this in a few different questions. But as you look generally at the supply picture across many of your markets, do you think, based on construction starts, things will improve even more into 2025? And are there any markets that you'd highlight that still you think will continue to deal with elevated levels of supply, whether that's like a Phoenix, Atlanta, a few markets in Florida you touched on as well, that would be helpful.

Sure. So we look at supply by looking at our same-store pool and how many stores within our same-store pool will have new supply delivered. In the first quarter, 3% of our same-store pool stores had new supply delivered in their trade area. And that's kind of right on our estimate of 11%, 12%, 13% for the year. That's down 30% from 2023 deliveries. I think the headwinds to development, equity dollars, debt dollars, debt costs, construction costs, entitlement periods, all the things that are making the ability to put together a pro forma with rent growth in it, I think all of those items are going to continue to provide a headwind to self-storage development. There certainly are markets, Northern New Jersey, some of the Florida markets that do have new supply issues, and we'll have to work through those.

I have a follow-up question on LSI and kind of a sequencing. You talked about potentially closing the occupancy gap this summer, and then kind of moving, closing the rate gap maybe in the second half of the year. And I guess the question is, when you're talking about closing the rate gap, are you talking about resetting pricing and then starting the process of letting them flow through the system, or say by year-end, you could be at parity in-place portfolio to in-place portfolio?

Mike, it's really a combination of both. The first thing you had to move is the street rates or your achieved rate coming in. So it's at parity with the Extra Space. So the new customer would then be paying the same amount. Then the other differential in the achieved rate, or I mean in your rent per square foot that's at the store, that will come over time as we do existing customer rate increases.

Yes. First question is just around ECRI. I'm taking a look at your revenues per occupied square foot kind of in the 20s. Again, so that means for a typical 10 x 10 unit, someone is paying like $220 a month, which isn't an insignificant bill. I mean, probably outside of your mortgage and your card payments, it's probably one of the higher bills one would be paying. So when I look at that, I just kind of ask, what is that ability to keep pushing ECRIs kind of 10%, 12%, 15% without that becoming such a huge piece of someone's monthly payments that they start to push back?

Yes, I don't completely agree with your perspective. While it may cost $200 for that unit, what are the alternatives? Transitioning from a 2-bedroom to a 3-bedroom apartment likely incurs a higher cost. Additionally, it's crucial to acknowledge that our tenants often underestimate the length of their stay. They might pay $200 a month but typically stay for 6 or 7 months, which doesn't significantly impact their monthly budget. In many cases, they end up staying much longer, but that's a separate point. I believe this option remains flexible, convenient, important, and relatively affordable for people. I also don't think we're at a point where we've maxed out on pricing.

Fair enough. That's helpful. And then my second question, if you would allow me. Again, the past 10 years, technology has been such a big game changer in the industry. Could you help us think about the next 10 years, whether it's AI or kind of what are you seeing that drops that helps lower customer acquisition costs, that helps lower cost of operation? And how quickly can we kind of see some of that stuff get implemented and kind of hit your overall numbers?

Yes. So I mean I think we're seeing it now, and we'll continue to see it, because your thesis is right, like technology and AI are going to change things drastically. We used and tested AI in several parts of our business. Sometimes it worked well, sometimes it didn't. We'll continue to help us at the call center, on the web, in all sorts of data analytics. And we are striving to find the right combination of people and technology to run our stores. And we think over time, that will help us optimize that expense. So you're right, the last 10 years have shown a lot of change and a lot of efficiencies through technology, and I expect the next 10 years to be the same.

Just want to go back to your bridge loan program. You obviously announced a pretty major increase in the pipeline. Just curious if you can provide more color on where this demand is coming from? And just high level, I mean, the rates are a bit higher, 9%. So what is the kind of profile of the customer that would come to you guys for this type of loans?

So I think it's customers that have expensive equity partners that want to get cashed out, folks that don't think this is the greatest sales market where there's been value created. We talk about the benefits of the Life Storage transaction. One benefit we don't really talk about is we were introduced to a whole new group of partners we didn't have relationships with. So we've closed or have under term sheet $239 million worth of bridge loans. With LSI Partners, we had no relationship with before closing. And I'm off topic now, but we have signed 30 management contracts, new management contracts with LSI partners we have relationships with. So part of the increase in our bridge loan volume is we have all these new relationships now we got through the merger, and we're doing a lot of business with them.

And that was actually part of my second question. Do the vast majority of these come with management contracts? The management contracts can obviously be terminated, but is there a sense that the management contract lifetime can exceed the bridge loan maturities?

So 100% of our bridge loans, we manage the property. We will not make a loan on a property we don't manage for risk control and economic reasons. So yes, they all come with management contracts. And the management contracts can be canceled. That hardly ever happens. It hardly ever happens if someone cancels a public or a cube contract that comes to us. People don't move like that. If we're a good manager, we produce good results that we're going to have these relationships and manage these properties after the bridge loan is gone, unless we end up buying the property, which is also nice.

Ki Bin, our maintenance CapEx has typically been about $0.65 a square foot, and we would expect it to be pretty similar in 2024.

Great. Thank you. Thanks, everyone, for your time and your interest in Extra Space. I hope you could tell, we're off to a good start. We're really excited about the rest of the year. We can't control all the variables. We can't control the housing market and the customer. But what we can control, we do very well. We have the platform and the people to take advantage and optimize whatever the external situation is. So I hope everyone has a great day, and thank you for your time.