The operator introduces the Q3 2023 Extra Space Storage and Earnings Conference Call, and hands the call over to CEO Joseph Margolis. Margolis thanks everyone for joining and discusses the company's recent merger with Life Storage, which added over 1,200 stores and 2,300 employees to their portfolio. He praises the smooth transition and teamwork of employees during the merger.

The third quarter performance of our combined portfolio of 3,651 stores was in line with expectations, with a modest increase in same-store revenue driven by high occupancy and strong customer behavior. Expenses were higher than expected due to property tax increases, resulting in a slight miss in same-store NOI. The merger with LSI has achieved its target G&A synergy and has started implementing property level revenue synergies. These improvements may initially result in short-term dilution, but are expected to contribute significantly to FFO in the future. We remain confident in reaching our total expected synergy run rate by the first quarter of 2024.

Despite the slowdown in acquisitions due to the LSI merger, Extra Space Storage remains active in third-party management and has added 49 new stores in the third quarter and 151 stores year-to-date. Property performance is in line with expectations and the integration of Life Storage properties is on track. The company has tightened its annual core FFO guidance for 2023 and remains focused on maximizing performance and executing integration plans. While there are concerns about the economy, interest rates, and stock price, Extra Space Storage has a strong portfolio, healthy occupancy rates, and strong external growth drivers. The company also has confidence in its team and operating platform.

The third quarter results for Extra Space Storage were in line with expectations, with a slight miss in property NOI due to higher expenses. New customer rates were down year-over-year, but existing customer performance has helped offset this. As a result, the company has increased the bottom end of their same-store revenue guidance and updated their expense guidance. This has resulted in a tightening of the same-store NOI range.

In this paragraph, the speaker discusses the balance sheet and financial aspects of the merger between Extra Space and Life Storage. They mention using a line of credit and term loan to pay for closing costs and retire debt, as well as assuming $2.4 billion in Life Storage's bonds. They also mention an upgrade in credit rating and provide updated FFO guidance for the combined portfolio. The speaker reassures that the integration of Life Storage is on track and that storage is a resilient asset class.

The speaker believes that the merger with Life Storage has strengthened their operating platform and diversified their portfolio, setting them up for future growth. They are confident in meeting their updated same-store revenue outlook, which implies positive growth for the entire fourth quarter. They have seen success in rolling out the Extra Space rental growth algorithm to Life Storage customers, with them accepting ECRI notices at a similar or even better rate than Extra Space customers. They have also discounted rates on the web to protect occupancy while implementing changes in the Life Storage portfolio, resulting in a slight increase in occupancy.

The speaker is pleased with how their strategy is going and they are closely monitoring it. They are using rate to maintain occupancy while they integrate and operate the LSI assets. They do not expect significant gains in occupancy until next rental season. The effect on Extra Space stores is not significant. Pricing power for new and existing customers is strong and they are not seeing a higher number of vacates due to ECRI. The length of stay for existing customers remains strong and vacates are down.

The company has various ways to measure the length of stay for its customers, with the average customer staying for 34.4 months. The number of customers who have been in the store for 12 months has increased to 61%, but there has been a slight decrease in customers who have been there for 24 months. The company's same-store revenue and NOI deceleration improved in the quarter, but this is due to easier comps and not necessarily a sustainable trend. The company's variable rate debt increased slightly in the quarter due to the merger.

The company has used a $1 billion bridge loan to term out their variable rate debt over the next 1 to 2 years. The occupancy for October was 93.9% for Extra Space and 90.8% for Life Storage, with the gap narrowing compared to last year. The company has met the $23 million G&A synergy target and has the potential to exceed the $100 million guidance over the next several months. The original guidance for G&A was $140 million, but the current midpoint is $150 million.

The company's G&A expenses will be higher in the first quarter, but they will still be ahead of the projected $23 million run rate due to the merger. The tenant insurance synergies have not been fully realized yet, but they will increase starting in 2024. The sequential deceleration has moderated in the third quarter and is expected to continue into 2024, with the fourth quarter guidance suggesting a flat trend.

The company is confident about its performance in 2024 and will provide guidance in February. They hope to see an increase in new customer rates, but are satisfied with the performance of existing customers. The company expects to achieve synergies with the LSI portfolio by improving rates rather than occupancy. They do not mind having different occupancy levels between the two portfolios.

Joseph Margolis explains that the two portfolios, Extra Space and Life Storage, will be run on the same platform to maximize revenue. He also mentions that the best returns on capital are from redeveloping existing stores and their bridge loan program, which has an average rate of 10% and can potentially reach into the teens when selling the B notes. These initiatives are part of their focus on asset-light strategies.

During a conference call, Joseph Margolis, CEO of Extra Space Storage (ESR), and Scott Stubbs, CFO of ESR, discussed the recent acquisition of LSI assets and their impact on ESR's portfolio. Margolis mentioned that they identified 106 or 109 LSI stores that had competing Extra Space stores in close proximity, with a 15% difference in rental rates. A question was raised about catch-up options for nonpaying customers in the LSI portfolio, which Margolis explained is a standard practice when acquiring a store. This can lead to a temporary occupancy pressure but does not significantly impact bad debt. Margolis also mentioned higher property taxes in the quarter.

In the paragraph, Scott Stubbs, the speaker, is asked about the company's expenses for the next year. He mentions that they have seen a decrease in property taxes, but every year is different. He also mentions that wages and benefits have slowed down and they are not facing as much pressure to hire as in the past. The speaker does not give any specific guidance for next year, but states that the current quarter's estimate is a good run rate.

The speaker discusses the increase in expenses for Extra Space Storage, attributing it to higher personnel costs and the allocation of call center and technology charges. They also mention the moderation of new supply in the storage industry, with expected deliveries in 2023 to be similar to 2022 and further moderation in the following years.

The headwinds to new supply in the self-storage industry are significant, including high interest rates, limited availability of debt and equity capital, rising construction costs, lengthy entitlement periods, and uncertainty in projecting future revenue growth. This has resulted in a high dropout rate for projects, with some estimating it to be as high as 70-90%. Transactions in the market are also quiet, with few properties trading and a wide bid-ask spread.

Samir Khanal asks Joe Margolis about the performance of Sunbelt markets, which have seen strong revenue growth in recent years. Margolis explains that job growth is a key indicator of storage performance in these markets, but they may appear to be giving back due to tough comps. He also mentions the housing market as a wildcard that could affect performance in the future. Margolis clarifies that the gap between rents for the LSI and XR portfolios is currently at 7%, and that they underwrote 7% to achieve their underwritten synergies. He also discusses the pace of ECRIs and how it may moderate in 2024.

Joseph Margolis discusses how ECRI is affected by the gap between discounted web rates and the actual market rates for storage units. He also mentions that operating two brands, Extra Space and Life Storage, has increased their digital footprint. He notes that it is too early to draw conclusions, but they are seeing success in gaining more digital real estate. Michael Mueller asks about the growth in insurance expenses, and Scott Stubbs responds that it will depend on claims and the impact of wind-related incidents in Florida.

The speaker discusses the potential impact of interest rates on the company's financial performance and mentions the addition of Life Storage properties as a way to bring down costs. They also mention the occupancy gap between this year and last year and provide an update on the Bar Gold and Storage Express platforms, stating that they are outperforming on expenses but want to focus on increasing growth.

The integration of Storage Express was more difficult and took longer than expected due to different platforms and procedures. However, the company is doing well with the integration and has acquired several small stores in their traditional markets. They are also learning about managing remote stores and have a large pipeline for their management platform. The company expects growth to accelerate in the future. The call concluded with the company looking forward to seeing investors in Los Angeles next week.

This summary was generated with AI and may contain some inaccuracies.