Extra Space Storage Inc (EXR) — Q2 2025 Earnings Call Transcript

Thank you, Joelle, and welcome to Extra Space Storage's Second Quarter 2025 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 businesses. 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, July 31, 2025. The company assumes no obligation to revise or update any forward-looking statements because of the 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.

Thank you for joining us today. We had a solid second quarter. Our operational momentum continued with same-store occupancy reaching 94.6%, up 60 basis points year-over-year and 120 basis points sequentially from the first quarter. We were also able to achieve positive year-over-year rate growth to new customers for the first time since March 2022. We are encouraged by these positive rate trends, even though the progress is developing more gradually than we initially expected, resulting in flat same-store revenue growth in the quarter. While incoming customer price sensitivity is still apparent, rate growth is now positive, and we are trending in the right direction. As we look forward, our measured progress, elevated occupancy and the easing of new supply pressure position us well to capitalize on improving market fundamentals as our team continues to execute efficiently across all operational areas. During the second quarter, we executed on strategic opportunities across our diversified platform. We completed only 1 acquisition for $12 million, demonstrating our commitment to prudent and disciplined capital allocation in a high-priced market. We also bought out 2 joint venture partners' interests in 27 properties for $326 million at attractive valuations, driven by our partners' liquidity needs and favorable partnership terms. Our bridge loan program continued gaining market traction, generating $158 million in new originations. Simultaneously, our third-party management program added 93 stores with net growth of 74 properties, expanding our managed portfolio to 1,749 stores, providing more scale and efficiency to our sector-leading platform. Our multichannel approach combining opportunistic acquisitions and capital-light activities demonstrates our ability to create value and grow accretively regardless of market conditions, positioning us to capitalize on opportunities as they emerge. The self-storage sector continues to demonstrate its resilience and our business model remains strong. Our portfolio's geographic diversification continues to serve us well with growth markets helping to offset softer conditions in regions impacted by new supply or state of emergency restrictions. This balanced market exposure provides protection against localized economic fluctuations. Operationally, our key metrics remain solid. Our same-store occupancy of 94.6% reflects the effectiveness of our customer acquisition systems. New customer rates are showing encouraging trends, though these improvements will take time to fully materialize in our revenue growth. Move-out activity and delinquency rates continue to track at normal levels, demonstrating the stability of our customer base during this period of economic uncertainty. Based on these trends and our first half performance, we are maintaining the midpoint of our full year core FFO guidance of $8.15 per share. While near-term revenue growth remains muted, our revenue management system, operational discipline and investment strategy position us well to navigate current conditions and capitalize on emerging opportunities. We remain focused on balancing pricing and occupancy to maximize revenue while pursuing strategic growth that enhances long-term shareholder value. I will now turn the time over to our Chief Financial Officer. For the last 34 earnings calls, I've turned this over to Scott Stupp, who has always provided balanced, accurate, transparent and helpful commentary. Scott has been a great asset to Extra Space Storage and instrumental in reshaping our balance sheet and most importantly, a great partner to me, and I appreciate all of Scott's contributions. Our new CFO, Jeff Norman, is joining us for the first time as our newly promoted CFO. Jeff has been with the company for 13 years and most recently was serving as a Senior Vice President responsible for our capital markets, treasury and risk management teams. I look forward to having him as a part of our executive team and his continued contributions leading our accounting and financing functions.

Thanks, Joe, and hello, everyone. Our performance through the first half of the year is in line with our full year estimates. Second quarter same-store revenue came in modestly below our internal expectations due to new customer rate growth improving more gradually from Q1 to Q2 than in the previous 3 quarters. However, our flat same-store revenue was augmented by stronger-than-expected tenant insurance income and management fee income. Interest income and interest expense were both greater due to a higher-than-forecasted SOFR curve. So as Joe mentioned, while progress in new customer rate is a little slower than expected, our operating model continues to generate stable cash flows and maintain consistent performance metrics and our ancillary income streams are making meaningful contributions to FFO. Turning to expenses, we experienced higher-than-normal year-over-year increases. Same-store expenses increased by 8.6%, driven by outsized increases in property taxes, specifically in the legacy Life Storage properties located in California, Georgia, Illinois and Texas. Although higher than normal, property taxes were generally in line with internal estimates through the first 2 quarters, and our full year outlook anticipates total expense growth, including property tax growth to normalize in the back half of the year. Our balance sheet continues to demonstrate strength and flexibility with 89% of our debt maintained at fixed rates after including the hedging impact of our variable rate receivables. We've maintained our weighted average interest rate at 4.4% with an average maturity of 4.3 years. Our measured approach to leverage, complemented by our well-structured debt maturities and diverse funding sources provides us with the stability to pursue strategic opportunities while effectively managing our position in the current interest rate environment. Given our in-line performance in the first half of the year and gradually improving fundamentals, we are tightening our full year core FFO and same-store guidance ranges and maintaining our existing midpoint. This results in core FFO guidance of $8.05 to $8.25 per share. For our same-store portfolio, we anticipate revenue growth between negative 0.5% and positive 1% for the full year. Our same-store guidance includes potential acceleration in the second half, particularly in the fourth quarter as improving new customer rates begin to take effect. Operating expenses are projected to grow between 4% and 5%, which, as I mentioned, implies expense growth moderation in the back half of the year, especially with property taxes. We've updated our interest income and expense projections to account for the current interest rate environment and recent debt activities. Our diversified portfolio, sophisticated operating platform and strong balance sheet continue to provide a solid foundation as we execute on our strategy through current market conditions, maintaining our focus on long-term value creation. With that, operator, let's open it up for questions.

Can you provide an update on how street rates and occupancy have trended into July and how that compares to June and the second quarter?

Sure, Michael. From an occupancy perspective, sequentially, occupancy remained flat. So it continued in July at 94.6%, which year-over-year is a positive delta of about 50 basis points. New customer rate improved on a year-over-year basis, it was up a little more than 2%. So seeing positive trends there. And our move-in, move-out gap also compressed with those rates ticking up. So positive indicators on all fronts in July.

To elaborate on that, street rates have now become positive. You mentioned earlier that trends have been accelerating throughout the year, particularly in the fourth quarter. Is this primarily because only a small percentage of customers change every quarter, meaning it takes time to benefit from the positive street rate growth? Or is there another reason why the fourth quarter is when we start to notice the advantages and see a significant change?

You're exactly right, Michael. That's spot on. All other things equal, as we're seeing those positive new customer rates begin to roll through, it just takes time for the snowball to build as you keep adding more and more sequential quarters of positive rate growth, it begins to flow through to revenue. So it does take time, but it starts to compound and improve as you get into the fourth quarter.

So just looking at the net rental rate growth, seeing, I believe, like close to 1% decrease in overall rental rate. But with move-in rates roughly flat to positive, would I be correct in asserting that net decrease to ECRIs? Or could this perhaps be attributed from the rent restrictions in L.A.? Any color here would be super helpful.

Yes, there is a slight challenge in Los Angeles, but it's primarily due to move-outs rather than ECRI. The net roll down from these move-outs affects your overall in-place rent per square foot. Therefore, I would say that this factor is more significant than any changes related to ECRI. In fact, ECRI has remained fairly stable year-over-year.

I guess, Joe or Jeff, you mentioned in the opening comments that progress is being made, but you also indicated it's gradual and maybe it feels a bit lighter than expected. Joe, could you elaborate on that? What do you think is driving this gradual movement?

Well, this is Joe. I think there are several things. First, as mentioned earlier, we lose about 5% or 6% of our customers each month. It takes time for any improvements in retention rates to reflect in our rent roll. We also experience a decline, which further contributes to the time needed for recovery. However, this is not a month-to-month operation; it’s a long-term business. The trends we’re observing are encouraging. The increase in new customer acquisition for the first time since March 2022 marks a significant turning point. We have faced setbacks, but we are optimistic about our upward trajectory moving forward.

Okay. Got it. And then I guess just some comments if you can make on LSI, the impact that portfolio is having on same-store. Is it in line with your expectation? Has it been below your expectations sort of year-to-date? Because I know that portfolio also had exposure to Florida, right? And maybe that's taken a bit longer to come back to normalization. Maybe talk around kind of the LSI portfolio and the impact it's having.

No. So the LSI portfolio is performing as expected. Rates are improving faster than the Extra Space rates, but that's what we expected. We believe the additions to the same-store pool, which is over 95% LSI, will add 60 basis points to same-store performance this year. So on track in all respects.

And Samir, I would just add, not specific to LSI, but your comment about the Sun Belt in general, I think is correct that those have been the markets that have been disproportionately impacted by new supply. They're also a little bit of victims of tough comps after multiple years of really strong NOI growth, and now they're taking a little bit of a breather and those are some of our tougher markets. But long term, we're very bullish on the Sun Belt and in general, on having a highly diversified portfolio with exposure to all of the growth markets throughout the country. So today, a little more of a headwind for us than some of our Mid-Atlantic markets, Chicago, Pacific Northwest, they're all doing a little better. But over longer periods of time, as Joe alluded to, we have a lot of confidence in our portfolio construct.

First question, I just wanted to follow up. Maybe you can sort of help flesh this out a little bit. Move-in rent trends inflected positive in the quarter for the first time in a few years. You mentioned that they improved a little further to 2% in July. I understand it takes a little time to flow through, but you also gained occupancy through June, you're still at 94.6% in July. So it sort of sounds like stable to slightly improving conditions a little bit through the balance of the summer here. Can you just sort of help flesh that out a little bit and maybe comment on what you're seeing that pointed you to sort of the comments around conditions being a little bit slower here?

Yes. We provide a range for same-store revenue growth, which contains various assumptions. Looking at the midpoint based on our first half performance, it indicates flat to slightly positive growth year-over-year in the second half, with a modest acceleration. At the higher end of the range, we might expect more acceleration, while the lower end suggests slight deceleration. All these possibilities are on the table, but current trends appear positive. Additionally, our actual net rental income increased by 20 basis points in the quarter, although this was offset by other income factors, including bad debt and administrative fees. Year-over-year, administrative fees have decreased due to lower rental volume from our high occupancy levels. Late fees have also decreased because bad debt is down, which reflects a healthy customer base. So, while there are headwinds year-over-year regarding same-store revenue, we believe these trends are overall positive for the industry.

Okay. That's helpful. And then, Joe, you commented on being prudent with regards to acquisitions. It sounds like you're on the sidelines a little bit until pricing adjusts. I'm just curious if you can elaborate a little bit on pricing and that comment, sort of what kind of pricing adjustments you would like to see before growing a bit more acquisitive here?

Yes. Thanks, Todd. I don't want to give the impression we're on the sidelines at all. We have an investment team that looks at every deal that's in the market, looks at all the deals that we manage that end up on the market. We almost always get a first shot at those. We underwrite them all. we look real hard at it. But we're not going to execute on deals that are sub-5 caps stabilizing in the 5s. It just doesn't do any good for our shareholders for us to do that. So we're going to look at everything. We're going to wait for pricing to get to a level that we feel is accretive. And in the meantime, we're going to use all of our other tools, be it bridge loans, restructuring, buying out JVs, doing other activities, making new preferred investments, which we did one this year to make accretive investments while being prudent allocators of capital.

Just starting with the expenses. I know we talked about property taxes last quarter, obviously, continue to be pretty high year-over-year now. Maybe just a little bit more color on your expectation there. And is this just a 2025 thing? And how should we think about that going forward?

Yes. Thanks for the question, Ron. You're exactly right. Certainly high year-over-year. The positive news is we've lapped the comp. So we took that pain in that markup primarily driven by some of our Life Storage properties. And in the second half of the year, we anticipate that coming down significantly. And in terms of all of our other expense line items, also expect to see, on average, as indicated by our range relative to our first half performance, deceleration in expense growth in the back half of the year.

Great. That's helpful. My second question is about the same-store revenue being a bit lighter than expected. I would appreciate some context regarding the demand at the top of the funnel and your expectations. Does this indicate that the market might be performing below the average for this environment? Or did you expect a faster recovery that hasn't occurred? I'm trying to understand what happened compared to your expectations and what this indicates about the health of your customer base and the market overall.

Sure. I would say, as Joe alluded to in one of his previous answers, it's not perfectly sequential month by month. We're not managing this month-to-month. But for the quarter, it did come in a little lighter than we would have expected relative to the rate progress we had seen in the previous 3 quarters. So a little lighter on the same-store revenue side than we expected, a little better in some of the ancillary income streams, which net-net put us right on target. As far as how we then view that as it pertains to the health of the industry, I think we're more focused on forward indicators such as rental volume, new customer rates as well as our existing customer behavior, which all look positive.

Yes. I think it's a bit more challenging to gauge demand using our traditional methods due to the impact of AI on search, which complicates the analysis of Google search terms and similar metrics. However, we believe and have observed that demand remains consistent, with our systems capturing a significant share of that demand as reflected in our occupancy rates. We do not see the market weakening; if anything, it appears to be gradually improving.

And Ron, I think then when you layer on a gradually improving new supply outlook, that also gives us confidence that will continue to pick up pricing power. And you see that at the market level. You can see the improvement and the rebound happening in the markets less impacted by new supply. And then in some of the markets where new supply is more prevalent, it's going to take a little more time.

Can you discuss the preferred equity in the loan book and what trends you're observing? Is there any expectation for repayments? I'm aware of the next preferred equity reference point out there. I'm interested in knowing about any expected repayments or your thoughts on how this sector develops in the second half of the year and into 2026.

We are continuing to see strong demand for our bridge loan product. We have slightly adjusted our guidance on the number of loans we plan to retain on our balance sheet. This adjustment is partly to balance out the SmartStop preferred we prepaid at the beginning of this quarter. We have significant flexibility to allocate capital to this program by holding or selling A notes, which allows us to respond to other opportunities and redirect capital as needed. I anticipate the balances will remain roughly similar going forward, possibly with a different mix of A and B notes within that balance. Overall, this program is healthy and serves as a useful tool for us, especially in the current market conditions. Additionally, we have not received any notifications from our other preferred holders regarding any upcoming repayments.

And then curious how you guys are thinking about dispositions, if there's any pruning being considered with regards to maybe Sun Belt exposure with Life and just your strategy there.

Yes. You may be wondering about the 22-store portfolio we recently put up for sale. These are former LSI properties. After our merger with LSI, we committed to spending a few years enhancing the net operating income of these properties and familiarizing ourselves with the portfolio. Following this two-year period, we would qualify for 1031 exchange treatment. These are the properties we have chosen to sell in order to reshape and optimize our portfolio.

Is there any sense of what the dollar size and proceeds could be?

We'll have the market tell us what the sales price will be.

Maybe just starting on market performance. Just looking at some of your top markets, I noticed that NYC and Chicago were maybe a little bit lighter, at least relative to maybe my expectations. I know 1 quarter doesn't make a trend, but anything to read into here? I mean I imagine that these kind of markets would be expected to be better performers, obviously, relative to the Sun Belt, but still maybe a little surprised to see them down year-over-year.

So thanks, Grif, for the question. From a same-store revenue standpoint, we saw modestly negative same-store revenue in the New York MSA. More of that impact is Northern New Jersey and Long Island, more so than the core boroughs, have been impacted more by new supply than for New York itself. And on Chicago, on the other hand, we actually saw some acceleration Q1 to Q2 in terms of same-store revenue progress. So we're actually happy with Chicago. Certainly, would like it better and more in line with your forecast if they were higher, but we see positive trends in Chicago.

That's helpful context. And then maybe just more broad-based question around demand and future fundamental performance. I know we're still in this period of higher mortgage rates, lower housing velocity. I mean, Joe, it seems like to you, it's more a supply question of when fundamentals inflect. But do you really need that housing market to come back for people to kind of sound the all clear and get kind of performance and fundamentals accelerating to maybe historical trends? Or just how are you thinking about the housing market in the context of storage demand?

I don't believe we need the housing market to recover in order to see a recovery. While a strong housing market would certainly be beneficial and could improve our trajectory, there is already significant demand present. We're beginning to regain pricing power and I feel we've moved past the worst phase. A strong housing market is certainly preferable to a weak one, but it isn't essential for our progress.

Congrats on the promotion.

This is Jeremy Che on for Caitlin. Now that we are in peak leasing season, what are your expectations regarding seasonality compared to last year, and how do you view the second half of the year?

So I would say in line with our expectations. Last year, we had a more muted rental season, and we called for in our guidance something similar. We expect it to look pretty similar in '25 as it did to '24. We maintained higher occupancy throughout the shoulder seasons than we typically do. And our hope was that with that higher occupancy, we outsized pricing power, especially with new customers. We saw it to some extent. I think we had hoped to see a little bit more, but continue to see it marching in the right direction in July. So overall, Jeremy, I'd say, in line with our expectation.

And I guess just for like the existing customer, how are you seeing their activity given that there's less housing turnover? Are they staying longer? Is that being able to push ECRIs more? Yes, anything on that would be helpful.

Yes, great question. So one of the strengths of this business is the strength of the existing customer. We are seeing fewer vacates, increasing length of stay. As Jeff mentioned earlier, bad debt is below 2%, very healthy. Customers are accepting ECRI at the same rate that they have previously. So there's really no sign of weakness or danger with existing customer behavior.

This is Nicholas Yulico with Scotiabank. You mentioned the sale of the 22 LSI assets. Can you clarify the difference in rents between LSI and legacy EXR, excluding these assets? I believe you indicated in early June that it was around 5% to 6% for the overall portfolio. Do you analyze the portfolio without considering these sales?

So I have not done that analysis, excluding these assets. So we could probably do that and get back to you, but I don't have that number.

And then broadly, is it still around 5% to 6% or it's contracted since June?

It's still about 5% to 6%.

Got it. And then second question would be more like a broad on macro assumptions embedded in second half '25 guidance. And from your point of view, what are the major catalysts to follow that might lead to EXR hitting lower or higher end of FFO guidance?

Given our high occupancy, it's difficult to see that becoming a significant factor for additional revenue growth. The primary driver for the upper end would likely be stronger new customer rates leading to quicker revenue growth. On the lower end, we might see a more pronounced decline in occupancy beyond the usual seasonal drop.

There's been a good amount of volatility in the stock recently. Can you just remind us how you look at buybacks versus your cost of capital and other uses of capital today? I think you bought a small amount of stock around $1.26 earlier this year, but the opportunity went away quickly.

Yes. That was an interesting day where we had about a 2-hour window before the President announced the pause on tariffs, and we got out of our price band. So the Board of Directors approves a certain band of pricing in which we'll use capital to repurchase our stock. And as you point out, it's a capital allocation decision, and we've done it in the past, and we're certainly not afraid to do it in the future.

All right. And then you mentioned the impact of AI on search and how maybe that's not going to make sort of these Google search terms as a good proxy for demand. I guess do you have a sense for what percentage of your customers are using ChatGPT or AI to find the best storage solution versus like, say, this time last year or a couple of years ago? And do you think that makes customers a bit more sensitive on the front end to pricing just because they can sort of quickly analyze the cheapest option within a certain area?

Yes. I'm going to apologize. I don't have a lot of good answers around this. This is changing so quickly. And we have a lot of people who are a lot smarter than me spending a lot of time trying to figure it out. In the beginning of the year, 15% of searches came up with AIO at the beginning of it, and now that's over 65%, I think, in 6 or 7 months. So we're trying to understand and take advantage of the changes that are going on in the search landscape. But I do have confidence in our team and our ability to be out in front in this.

One piece of color that I would add is while it does definitely create some noise in the data in terms of searches, one thing that we've noticed is that a lot of the types of inquiries customers are putting into ChatGPT and other AI models are more informational in nature. So if they were wondering what size of a unit to rent or the benefits of climate controlled versus not, et cetera, that's a good place to get those common answers. But customers who have the intent to transact, still are tending to click through and are going to websites. So we've seen, while it maybe gets a little murkier on just a total traffic from a traffic standpoint, the conversion rates for those customers that are clicking to the website have improved and increased. So again, evolving very quickly, like Joe mentioned, but something that we're tracking very closely.

It appears that you guys are largely done for the year with acquisitions. And you mentioned earlier that pricing is getting tighter. I wanted to ask a bit more about the competitive dynamics. Are there more players coming to markets and maybe the bid-ask spread narrowing? I would have thought that it would have maybe been more buyers on the sidelines given kind of the uncertainty in fundamentals. So I just wanted to hear your thoughts on that.

I'm sorry if I gave the impression that we're done with acquisitions. Maybe you're referencing our guidance versus what we have under contract. We're still very active at looking at everything, underwriting everything. We have capital. We have joint venture partners. If opportunities arise, we will execute on them. So we're not sending the investment team home for vacation for the rest of the year. That being said, I would have thought cap rates would have moved more than they have given interest rates and other factors. And they haven't. And there still are buyers out there transacting at what we consider to be high prices. And as long as that continues, we'll continue to remain disciplined. But in no way are we not in a position or not willing to execute on good opportunities.

And Ravi, I'd just add, as we think of guidance, some of the reason for not necessarily plugging in a lot of additional volume that hasn't been identified at this point into the year is it does take some time between negotiating and contracting a deal and closing. And then also the contribution to FFO for the remainder of the year, if it's a late Q3 or Q4 close, it is going to be relatively immaterial on your overall FFO for the year. So from our perspective, it doesn't make sense to speculate too much on volume. We'd rather plug it in once we have something specific identified.

Can you please identify some markets where you're starting to see supply headwinds ease and thus expect pricing and same-store revenue to improve on out?

Yes. Thank you for repeating the question, Ravi. In general, the markets that were first to experience the new supply cycle, such as Portland, Seattle, Chicago, and Denver, have seen the pressures from new supply lessen. These are also the markets where revenue has started to improve earlier. Additionally, there are some markets that have remained relatively stable throughout the cycle due to less new supply, which has contributed to their steadiness. Boston and Washington, D.C. are good examples of this.

Could you discuss the 3PM program? It seems you added 174 net. Where are you noticing the strength? Are there new opportunities from partners in the LSI portfolio that might help you continue growing?

Thank you for the question. We have had two outstanding quarters of growth in our Management Plus business and our third-party management operations. This year, we’ve added a net total of 174 stores, partly due to new partners we were introduced to through the LSI merger. This has been one of the merger's advantages, along with providing bridge loans to those partners. It has been a fantastic first half of the year, and I believe this is largely driven by the challenging operating environment, prompting private operators and their equity partners or lenders to realize the need for professional management. They require the top operator in the business to manage their stores. I wouldn’t be surprised if we continue to grow in the second half of the year, but possibly at a slower pace as the transaction market improves, which may lead to some exits from the portfolio. Nonetheless, I see this as a promising growth area for the company, as it not only generates management fees and tenant insurance but also offers additional opportunities for purchases and loans.

Wells Fargo Securities, LLC, Research Division Appreciate that, Joe. And I guess just one follow-up. I apologize if I missed it, but I think you had talked about top of funnel demand measured by search on your last call being up year-over-year. So just wondering how it's trended the last couple of months given some of the macro uncertainty that's out in the market for the second half of the year.

Yes, certainly. The top of the funnel, when measured by generic Google search terms, is still higher than in previous years. However, we believe that some of this increase may be related to AI search, with people conducting multiple searches rather than a rise in actual customers. Although there are more generic search terms, we aren't seeing a corresponding increase in visitors to our website. Nevertheless, as Jeff mentioned, the conversion rate for those who do visit our site is higher, indicating that these customers are more informed, having asked more questions through AI, and know better what they want. When they arrive at our website, they're converting at a higher rate. These are our initial observations in this evolving landscape.

I know it's not black and white in terms of what's a consumer versus a business user. But do you have a sense if one of those categories is clearly ahead of the others in terms of seeing better demand? And for a follow-up, when it comes to ECRI pushback, are you getting more pushback from one of those categories versus the other as well?

It's a challenging question to address because the business consumer varies significantly. There are national pharmaceutical chains with substantial resources and then there are local landscapers who resemble retail customers more closely. I believe the essence of your question is on point: larger national businesses tend to have longer relationships, respond better to ECRI, and are overall more valuable customers, while smaller local businesses may not differ as much from retail customers.

Given that same-store revenue was flat and NOI declined by around 3%, are there any specific levers management is considering to improve property level margins going into the back half of 2025?

I think the main one will be on the expense side. Margins were suppressed in the first half of the year because of higher than normal expenses. And as we continue to push on the revenue side, it also gives us an opportunity for additional margin expansion. One example would be our marketing spend. We get a high return on that spend. It's something that we can measure and see the returns on it. And as we can deploy those marketing dollars, if we're seeing a positive return, we'll keep doing it. So there are different levers you can pull in terms of marketing, discounting, pricing, and we're always evaluating all of the levers to try to maximize revenue.

I'd like to just touch a bit more on market and region performance. It looks like Sun Belt areas, which have been kind of beaten up, they look to finally be turning the corner and achieving some sort of stabilization. Does this ring true? And what are you guys expecting from markets in this region in the future?

In terms of absolute performance, as you're indicating, those are our tougher markets. From a sequential improvement standpoint, I think it's going to be a market-by-market situation. And I think it's highly tied to new supply and the rate at which supply that's been delivered is absorbed as well as how quickly or how much additional supply is still to be delivered in those markets. So apologies for the more theoretical answer, but I think it just depends on the market and the individual dynamics of each market. And while this may be obvious for us, these markets are micro markets much smaller than MSAs. So it can even vary where new supply is being delivered relative to our specific properties.

Jeff, congrats on the new role. Just a follow-up about AI. It's come up a few times on the call. In the past, obviously, Google took the majority of your marketing spending. Can you just talk about how you might be distributing some of that marketing spending between ChatGPT and Grok and any other AI models that might be out there?

That's an easy answer today, but maybe not tomorrow. So far, the companies have not tried to monetize their AI platforms, so we spend nothing on it. However, I know it wasn't free to build ChatGPT, so I'm sure that will come in the future. But right now, almost all our dollars go to Google.

Okay. Great. And then, Jeff, you had mentioned that the shoulder season in the spring was a bit better in terms of occupancy. Should we extrapolate anything from that in terms of how the shoulder season might play out in the fall on the other side of the equation?

I think we were more aggressive with new customer rates to maintain that higher occupancy. Our models found that to be a better solution for maximizing revenue. And so that's what we did. And I think we'll continue to monitor as we go into the fall. Right now, rental volume continues to be healthy. We've been able to maintain our occupancy in July. And I would anticipate that we'll still have high occupancy relative to any historical levels. But the question will be what the balance is in terms of taking rate versus holding occupancy, which we'll continue to evaluate as we go. And that's really one of the significant advantages of having such a large portfolio. We can test these things in relatively short periods of time and get real-time feedback as far as what the customer is willing to accept.

Jeff, congratulations. Scott will be missed. My question is about the stabilization of fundamentals and the positive inflection in some operating metrics, though we know it takes time to impact the bottom line. When do you expect to see improved earnings growth moving forward? Does this hinge on street rates increasing more aggressively, like 10% hikes, or is it a situation where move-out volume decreases due to the current negative mark-to-market? I'm looking to understand when we can actually see some of this stabilization or inflection reflected in your financial results.

I believe there are various factors that could support our recovery, such as improvements in rates, which we are beginning to observe, a decrease in vacate rates, longer stays, and the end of some state emergencies. All of these elements will contribute to enhancing our recovery trajectory.

And with timing kind of being TBD?

I think timing is TBD.

I think a good example, Tayo, of that is the question earlier about housing. Is it necessary to continue marching in the right direction? No, would accelerate our pace? Absolutely. So I think there's a number of examples like that where the cadence will be dictated by the conditions in the environment.

Thank you. Thank you, everyone, for your time and interest in Extra Space Storage. I was surprised by the reaction to our release and want to make sure that I emphasize the strength of the company. We have very high occupancy. We have turned to positive year-over-year revenue growth. Our ancillary businesses are growing at a very fast pace. We have a platform that is poised and able to take advantage of any opportunity that goes forward. We've maintained our guidance, and we're looking forward to the rest of the year and 2026 for better things to come. Thank you again for your time.