Extra Space Storage Inc. (NYSE:EXR) Q1 2024 Earnings Call Transcript

Extra Space Storage Inc. (NYSE:EXR) Q1 2024 Earnings Call Transcript May 1, 2024

Extra Space Storage Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2024 Extra Space Storage Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Jared Conley, Vice President of Investor Relations. Please go ahead.

Jared Conley: 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.

Joe Margolis: 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, fast knowledge and good nature. I recognize and appreciate his efforts to make Extra Space, a leader in the industry and 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 rate in the quarter with the latter growing sequentially by approximately 8% from a seasonal low in January. The combination of improving move-in rate, higher occupancy and steady existing customer rate increases have provided a 1% lift in Extra Space 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 stores 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 through 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 of our teams and infrastructure are well prepared to optimize performance during the important upcoming leasing season. I will now turn the time over to Scott.

Scott Stubbs: 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.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Michael Goldsmith with UBS. Your line is open.

Michael Goldsmith: Good morning. Thanks all for taking my question. 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?

Scott Stubbs: 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.

Joe Margolis: So that 92.7% is the Extra Space same-store pool we’re at 92.8% for the Life Storage same-store pool.

Michael Goldsmith: Got it. And then my – thanks for that guys. And my follow-up question is to reach the midpoint of the guidance, it seems like you started to – 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 like Joe, to meet the midpoint of your guidance. How much the street rates need to increase from here in order to achieve that midpoint level? Thanks.

Joe Margolis: So street rates is only one component, right? And we don’t – 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 where trying to mix and match them to maximize revenue.

Michael Goldsmith: So maybe if I ask that 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?

Scott Stubbs: 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 forecast, 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.

Michael Goldsmith: Got it. Thank you very much. Good luck for the second quarter.

Scott Stubbs: Thanks, Mike.

Operator: Thank you. Our next question comes from Jeff Spector with Bank of America. Your line is open.

Jeff Spector: Good morning. Thank you. 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 and seasonality was a bit distorted or I guess can you just put the context of how you feel today versus the prior two 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.

Joe Margolis: 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 we have not — I’ll say this. we have not enough comfort that we’re going to change our guidance.

Jeff Spector : 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 so you — and I feel like it’s important to have a grasp on that seasonality trends are back 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?

Joe Margolis: 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?

Jeff Spector : 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?

Joe Margolis: 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 in a better field in our next conference call, and we’ll certainly keep all of our shareholders and interested parties up to-date with what we know.

Jeff Spector : Thank you.

Joe Margolis: Thank you.

Operator: Thank you. Our next question comes from Eric Wolfe with Citi. Your line is open.

Eric Wolfe: Hey, thanks for taking the questions. 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 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’s — what would drive the deceleration so call it 1% same-store revenue to get you down to your midpoint?