Extra Space Storage Inc (EXR) — Q3 2024 Earnings Call Transcript

Thank you, Michelle. Welcome to Extra Space Storage's Q3 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.

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 moving 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 our 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. 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've 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.

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, the 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 have 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 3 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.

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 a single brand. Can you provide a little bit more detail in terms of what you're seeing, what you have 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?

Sure. Happy to, Michael. Thank you for the question. So just to be clear, we're in very early stages here, right. We did change to the Extra Space brand late in the third quarter, so we're several weeks in. But that being said, we see 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 6 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.

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 can you clarify what is implied at the midpoint suggests a material deceleration from the third to the fourth quarter? Now some of that, I assume, is related to seasonality, but are there any other factors or dynamics at play, which would weigh on the results in the fourth quarter relative to the third quarter?

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.

Hi, thanks. Good afternoon. I just wanted to stick with that line of questioning a little bit, but move to the same-store pool. Just curious there, the guidance implies continued deceleration in the fourth quarter for both the Extra Space and Life Storage portfolios. Can you just talk a little bit about whether you have line of sight toward 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?

Yes. 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 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 as that's when many of the ECRIs hit last year.

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?

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 on market, some off market that we're very confident will end up as accretive transactions.

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 not 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?

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 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.

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.

I don't think we did provide cap rates on the transactions we closed. I can tell you for all of the deals that we've approved this year, 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. Same thing with remote stores, we've done 9 wholly-owned remote stores, very similar returns. And then our JV deals, we had 8 JV deals, 5 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 3 developments with an 8.6 development yield.

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

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 cost of about $117 million, but that includes $20 million of non-branding capital costs that were delayed pending the test and the decision on 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.

Our underwriting for the deal, we assumed $75,000 of property or $90 million. So it was obviously in our returns when we announced the deal.

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?

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? 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 Extra Space pool.

Okay. And then just on the guidance for Life Storage, 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 it was better than expected, but yet guidance was cut with lower pricing power. So just hoping you could help square those two different comments that you made previously.

Yes. So Life Storage, 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 are weaker than we projected at the beginning of the year; that just is. And then secondly, the markets that Life Storage has disproportionate concentration in have performed disproportionately weaker. So think of Florida, where Life Storage has a larger concentration than Extra Space proportionally. 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 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 Life Storage.

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 or early fall. Would that be fair to say?

That's very fair to say, yes.

Michelle, do we have additional questions? Michelle?

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.

Hi, 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?

Yes, Nick. So, it's Scott. We typically don't model occupancy 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.

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

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

Sure. Happy to. So we were targeting $100 million in synergies in 3 categories: G&A, tenant insurance, and properties. And we're doing very well in the ones that we control. So, G&A, we're now looking at about $53 million worth of synergies 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 do not include all the other benefits of the merger. The increase in our management business, our bridge loan business, and many procurement and IT contracts we've renegotiated due to our new scale and obtained savings there, value-add projects that we've identified and started to execute at the Life Storage properties. So the $100 million relates to just those three categories, not the total benefit of the merger.

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

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

And that's not just across the same markets, right, that's directly comparing one versus the other, meaning Life Storage like the same-store pool versus the other same-store pool. Am I right about that?

Correct. Yes, correct.

And then you mentioned in your release 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 forward to try to dial up move-in rates? Like what would it take over the next, say, 3 to 6 months, you have strong occupancy. So, like what else are you looking forward to try to get more aggressive on move-in rates?

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 variables, historical data, number of move-ins, 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%.

Right. Yes, 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 moving 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.

Okay. Sure, let me give you a better answer then, 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 algorithm rhythmic produce prices is, in fact, producing the best result for us. Is that helpful?

This is Jeff Spector for Josh. I apologize for the technical difficulties earlier. Joe, you mentioned occupancy and its strong trajectory. As we approach November, how are you feeling about the current situation? How do you anticipate the year will conclude, and what are your thoughts as we head into 2025 compared to previous years? Considering the lack of seasonality in some years, how does the current high occupancy level compare to the pre-COVID period, and what insights can you share for 2025?

So I feel good that our people, 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.

Okay. That's fair. My second question is about Life Storage. You mentioned the lack of pricing power, and I am considering your intention to fully integrate the Extra Space systems into the Life Storage portfolio. You mentioned that Life Storage is outperforming, but there appears to be some weakness. Please correct me if I’m wrong, but it seems like there’s a difference between the Life Storage customer and the Extra Space customer. What gives you confidence in pushing forward with the Life Storage customer as we approach 2025? I see these markets as more tertiary and secondary, and consumers seem to be under more pressure than ever.

We don't notice a difference in consumers. We believe that the storage consumer remains the same, regardless of the product they choose; their behavior is quite similar. There are no notable differences in bad debt or reactions to ECRIs or other behaviors between markets. Therefore, I'm not convinced by that perspective.

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. 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 happens. 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.

I appreciate you taking the question. Maybe could you comment a little bit on 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 1 to 2 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.

Yes. For the quarter, we averaged just over 30%. Moving into October, we were in the mid to upper-30s, which is typical as growth from the second to the third quarter tends to increase at this time of year. That spread usually widens. It will depend somewhat on how robust the market recovery is and how we approach our pricing strategy. Currently, our most effective way to attract new customers is by offering the lowest rate. However, that could change as the market improves, so it’s difficult to provide a clear comment on that until we have more visibility and confidence in which pricing strategy will be most effective.

Got you. I appreciate that. And just a follow-up on rate is between the Life Storage and Extra Space properties, I guess, more for like-for-like markets, how much of a spread do 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?

So on like-for-like properties, our spread is about 6% today, and it was closer to 16% at closing. And there's no reason that that should be 0 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.

I guess my first question is, as you look towards next year, how do you think your pricing power and top-of-phone demand would compare to, I guess, this year and pre-COVID levels?

That's the big question, isn't it? We need to consider interest rates, the housing market, the state of the economy, and consumer health. All of these factors will influence storage demand and our ability to increase pricing. I wish I had a clear answer, but I don't. However, I can assure you that regardless of the situation we face, we will work to maximize our performance and succeed. Additionally, we have various other businesses and resources that can support our company’s performance when the stores might not be performing as well.

Got it. And my second question is with the Extra Space and Life Storage working on our same brand as Extra Space, are there any quantifiable cost savings you'll realize over the near term, say marketing?

The easiest cost saving to identify is that we were spending an additional $10 million annually on paid search for the Life Storage stores to compensate for the weaker organic search performance. Once we bring the Life Storage stores in line with the Extra Space stores, we won't need to incur that extra $10 million expense. Additionally, while it's harder to quantify, having more stores under the Extra Space brand should strengthen the brand overall, resulting in further marketing savings.

You have Jenny on for Ron. I just have 2 quick questions. The first is, can you please comment on the magnitude of ECRI for Life Storage and Extra Space pools? Like do you put there at a similar pace for both pools? Or do you like the Extra Space harder than the other one?

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

I'm curious about your thoughts on the weak moving rates. Do you think your model has overcorrected for this? Additionally, you seem to prioritize occupancy over pricing. Will this continue to be your focus in Q4 and 2025?

So we prioritized long-term revenue, and whatever mix of occupancy and rate and the other various factors produced 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.

Joe, on your comments about ECRI, I know you kind of talked about the magnitude being similar for both Life Storage and Extra Space now. But I mean, has there been any sort of pushback at all that you're seeing from the customers at this point?

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, they remind 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 caused by our ECRI program, and it's within an acceptable range today, and if it ever changes, then we can adjust our program accordingly.

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?

We have had a very successful year in bridge loan originations, largely thanks to a new group of Life Storage partners with whom we established relationships and offered multiple bridge loans. Additionally, the challenging acquisition market, characterized by a significant bid-ask spread, led some owners to opt for bridge loans rather than selling in the current conditions, with plans to revisit selling in a few years. Therefore, our volumes have been strong. Looking ahead to next year, we anticipate some significant maturities; some loans will be extended, some will be paid off, and others will be bought, which may create some downward pressure on our portfolio. However, I believe we will continue to stay active and originate new loans as opportunities arise. We will not compromise by making poor-quality loans merely to maintain our portfolio size, nor will we forgo potential opportunities due to having issued a substantial number of bridge loans, as we can always sell A notes to manage our risk exposure.

I just wanted to stay on the credit lending platform and the line of questioning there. Again, the loan that was 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 can we just kind of confirm where you're doing this as you're kind of selling 8 pieces, but just so holding on to a residual?

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 or $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 lookup table. It's more business judgment on which loans to sell. And I'm sorry, what was the second part of the question?

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

Yes, we sell the A piece and retain the residual. The entire capital stack is 100%. We're selling 55 or 60 and keeping the balance, which is up to 75 or 80.

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

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.

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 holding everything else constant?

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

I guess, my first question is, as you look towards next year, how do you think your pricing power and top-of-phone demand would compare to, I guess, this year and pre-COVID levels?

That's the big question, right? We need to look at interest rates, the housing market, the state of the economy, and consumer behavior. All these factors will influence storage demand and our pricing capabilities. I wish I had a clear forecast, but I don't. I do know that, regardless of the circumstances we encounter, we will strive to maximize our performance and succeed. Additionally, we have various supportive businesses and tools that can enhance our company’s performance during times when the stores might not be thriving.

Got it. And my second question is regarding EXR and LSI. Since LSI is working under the same brand as EXR, are there any measurable cost savings you anticipate in the near term, particularly in marketing?

The most straightforward cost saving we can identify is that we were spending an additional $10 million annually on paid search for the LSI stores to compensate for the weaker performance in organic search. Once we align the LSI stores with the Extra Space stores, we should be able to eliminate that extra $10 million expense. Additionally, although it's harder to measure, having more stores under the Extra Space brand should strengthen that brand, which could lead to further savings in marketing.

You have Jenny on for Ron. I just have 2 quick questions. The first is, can you please comment on the magnitude of ECRI for LSI and EXR pool? Like do you put there at a similar like pace for both pools? Or you do like the EXR harder than the other one?

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

I'm interested in your thoughts about the moving rate, as we know it has been consistently weak. Do you believe it has been overcorrected by your model? Moving forward, you seem to suggest that you prioritize occupancy over pricing. Will that continue to be your focus in Q4 and 2025?

So we prioritized long-term revenue and whatever mix of occupancy and rate and the other various factors produced 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.

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?

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, they remind 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 caused by our ECRI program, and it's within an acceptable range today, and if it ever changes, then we can adjust our program accordingly.

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?

We've had a very strong year in bridge loan originations. One reason for that is we formed new partnerships with LSI and made several bridge loans to them. Additionally, the acquisition market has been challenging, with a noticeable bid-ask spread. As a result, some owners opted for bridge loans instead of selling in the current market, planning to revisit their options in three years. Consequently, our volumes were strong. Looking ahead to next year, we expect some significant maturities; some loans will be extended, some will be paid off, and some will be refinanced. This may exert some downward pressure on our business. However, we anticipate remaining active and making new loans, depending on opportunities. We will not make poor loans just to inflate our portfolio, nor will we avoid opportunities out of concern for having too many bridge loans, as we can always sell A notes to manage our risk exposure.

I just wanted to stay on the credit lending platform and the line of questioning there. Again, the loan that was 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 confirm where you're doing this as you're kind of selling 8 pieces, but just so holding on to a residual?

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 or $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 lookup table. It's more business judgment on which loans to sell. And I'm sorry, what was the second part of the question?

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

Yes, we sell the A piece and retain the residual. The entire capital stack is 100%, and we sell 55 or 60 while keeping the balance up to 75 or 80.

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

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.

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 holding everything else constant?

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

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.