Extra Space Storage - Q2 2024

Transcript

Operator (participant)

Hey, everyone, and thank you for standing by. Welcome to the second quarter 2024 Extra Space Storage Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To participate, you will need to press star one one on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star one one again. Please be advised that today's conference is being recorded. I will hand the call over to the Vice President of Investor Relations, Jared Conley. Please go ahead.

Jared Conley (VP of Investor Relations)

Thank you, Carmen. Welcome to Extra Space Storage's Second 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 represents management's estimates as of today, July 31, 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 time over to Joe Margolis, Chief Executive Officer.

Joe Margolis (CEO)

Thanks, Jared, and thank you everyone for joining today's call. We had a great quarter, exceeding our internal FFO per share projections due to outperformance in multiple areas of our business, allowing us to increase our 2024 FFO outlook. We experienced steady improvement in Extra Space same-store occupancy for the second quarter, ending at 94.3%, and continue to see occupancy gains in July. Our second quarter occupancy represents a 110 basis point sequential gain over our first quarter occupancy and a 30 basis point improvement year-over-year. In the same period, the average move-in rate improved by approximately 12%. However, it is still about 8%, below last year's average move-in rate. The combination of increased move-in rate and occupancy gain contributed to a 0.6%, increase in Extra Space same-store revenue year-over-year.

Same-store expenses increased by 6%, for the quarter compared to the same period last year, marginally better than internal projections. As expected, we saw significant gains in occupancy for the Life Storage same-store pool, finishing the quarter at 93.8%. This represents an increase of 400 basis points year-over-year and a 200 basis point improvement over first quarter levels. The occupancy gains drove revenue growth for the Life Storage same-store pool of 1.8% year-over-year. Given the occupancy gains, we expected to generate significant pricing power at the Life Storage properties. Midway through the quarter, we eliminated the move-in rate discounts and placed new customer pricing for the Life Storage properties on par with comparable Extra Space stores. However, the pricing improvement at the Life Storage stores has been below our internal projections.

We are confident our approach is maximizing revenue at these stores. However, progress has been slower than anticipated. We remain convinced that we will continue to close the rate gap between Life Storage and Extra Space stores over time. Life Storage same-store property expenses increased by 0.8% year-over-year, significantly better than our internal projections. The team has done a great job finding additional expense efficiencies, and we can now project lower expenses, particularly with respect to property taxes and in the controllable areas of R&M, utilities, and payroll for the second half of the year. Turning to growth, while the transaction environment remains muted, our capital-light external growth programs continue to make gains. In the quarter, we added 77 third-party managed stores, netting 14 stores after factoring in the expected departure of a large portfolio that internalized management.

Year to date, we have added 86 net stores to the platform, one of the strongest first halves of the year ever. Additionally, our bridge loan program expanded with $433 million in new loans originated in this quarter. Our greater scale and sophisticated operating platform have led to meaningful wins in other areas of the business, including G&A and tenant insurance. We are working hard to continue to find efficiencies in all areas of the business to drive FFO growth, despite the difficult operating environment at the stores. I will now turn the time over to Scott.

Scott Stubbs (CFO)

Thanks, Joe, and hello, everyone. As Joe mentioned, we had a good quarter, driven by occupancy and steady revenue growth. In addition to G&A savings, we have experienced better-than-expected property operating expenses, specifically property taxes, utilities, and repairs and maintenance.

... The G&A and property level savings have come from a broad range of categories as we continue to find efficiencies and capitalize on our greater scale. Due to the steady Extra Space same-store performance through the leasing season, we are raising the bottom end of our revenue guidance by 100 basis points, bringing the midpoint to -0.25%. We've also reduced our expense guidance, dropping the midpoint by 25 basis points to 4.5%. Accordingly, the bottom end of our net operating income guidance is being raised by 125 basis points to -1.75% at the midpoint. Regarding the Life Storage same-store pool, the lower than expected pricing power has led to a reduction in our revenue expectations for the year.

We have reduced our annual same-store revenue guidance by 200 basis points at the midpoint. Fortunately, this is partially offset by lower than expected expenses for these properties. As a result, we are also revising our expense guidance downward by 200 basis points at the midpoint, and consequently, we have adjusted Life Storage same-store NOI guidance to a range of -1.5% to +1% for the year. Given the recent demand and volume of bridge loans, we have raised the 2024 average outstanding loan guidance and increased our expected interest income. We've also lowered our estimates for G&A and increased our management fees and tenant reinsurance income. Additionally, we adjusted interest expense and income tax expense guidance to reflect the current business environment.

These revisions have contributed to a raise of the lower end of our FFO guidance from $7.85 per share to $7.95 per share, a $0.05 increase at the midpoint. With that, let's open it up for questions.

Operator (participant)

Thank you. As a reminder, that is star one one to get in the queue and wait for your name to be announced. To withdraw the question, simply press star one one again. Our first question is from Michael Goldsmith with UBS. Please proceed.

Michael Goldsmith (Analyst)

Good morning, guys. Thanks a lot for taking my question. My first question is on the adjustment of the Life Storage guidance. And you talked a little bit about the lack of pricing power in order to push rates. Is, you know, what are you seeing there? Like, what is weighing there? And then also, you know, can you talk a little bit about the geographical footprint of that portfolio and how that may be also influencing the results from that segment? Thanks.

Joe Margolis (CEO)

Sure, Michael. So when we took the portfolio over, we had a significant 420 basis point occupancy gap, and that was the first thing we worked on. And the main tool we used over the last year was discounting the new customer rate at the Life Storage stores below the Extra Space stores, and we made good progress. And by mid-quarter, you know, we were close enough to occupancy parity that we removed that extra discount at the Life Storage stores. We then thought we would gain pricing power, and we just didn't gain as much as we did. The customers, new customers remained price sensitive, and we haven't been able to move new customer rates at the Life Storage stores or the Extra Space stores as much as we would have hoped.

So that is certainly a factor in our projected revenue for the Life Storage stores for the rest of the year. Another factor is geography, as you pointed out. When we closed this merger, one thing we were excited about was the effect on our portfolio footprint. By merging with Life Storage, we reduced our proportional exposure to California and increased our proportional exposure to Sun Belt markets, including Florida, for example. And we still are happy about that. We think long term, we believe in the Sun Belt, we believe in Florida, we're happy to have greater exposure in those growth markets. But it worked against us this year. Extra Space has 23%, of its same-store revenue coming from California, Life Storage has 7%, and California is an outperforming market this year.

And conversely, Extra Space has 10%, of our same-store revenue coming from Florida, Life Storage has 16%, and Florida is an underperforming market this year. So I think it's timing. Long term, we, we like where we are, we think we'll close the rate gap, and we like our geographical footprint.

Michael Goldsmith (Analyst)

Sure. Thanks for that. And my, my follow-up, I think the natural follow-up question is, you know, what has to change in the environment in order for things to get better? You know, is it, is it demand needs to pick up from the housing market? Is it, competition needs to, to kind of, moderate from here? Like, what are the catalysts that you're looking for, that would be an indicator that, you know, the return of the pricing power and, and closing the gap on street rates? Thanks.

Joe Margolis (CEO)

Yeah, I mean, clearly a pickup in demand would be positive. You know, whether that's gonna come from the housing market or otherwise, I think it's probably a little of both, right? We'll probably have a slow and steady improvement in the housing market, not a hockey stick. I think continued moderation of new development is a positive that will help us as well. So, you know, we can't control market conditions, but we can control how we react to them. And I'm highly confident that our systems will optimize performance, given whatever market conditions we're presented with.

When I look at our, you know, occupancy, which is 94 in Extra Space inching to a full 94.5 in July and 93.9 for the Life Storage in July, I'm very confident our systems are capturing the demand that's out there and maximizing revenue.

Michael Goldsmith (Analyst)

Thank you very much.

Joe Margolis (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed.

Steve Sakwa (Senior Managing Director)

Yeah, thanks. I guess, good morning still out there. Maybe Joe or Scott, can you maybe—maybe I missed it, did you touch on the July trends at all? And if you haven't, could you just kind of provide where July trends are on some of the key, metrics like occupancy and, the revenue growth or kind of move-in rents? Thanks.

Scott Stubbs (CFO)

Yeah. So starting with the Extra Space pool, occupancy at the end of July, or as of yesterday, is 94.5%, so 94.5. So sequentially, we increased by 20 basis points. The Life Storage pool is now 93.9, sequentially up 10 basis points. Now, that came at a bit at the expense of rate. So during the second quarter, our achieved rate to new customers were down 8%, and during the month of July, they were down 12%. Pretty similar for the Life Storage pool also.

Steve Sakwa (Senior Managing Director)

Okay, great. Thanks. And then, Joe, maybe just going back to this, EXR LSI and, and the pricing and, you know, a little disappointing that you didn't get the rate. I'm just wondering, is it possible that, you know, the customer mix was different and, you know, before the merger, if LSI had lower, you know, street rates and charged less, that that attracted one type of customer, and the fact that you're trying to bring them up to parity with EXR, just kind of either pushes them out of the system or... You know, I, I guess I'm just trying to think, is everybody at the same pricing level, or, you know, do you have to fully turn that customer mix to, to get them back up to parity on the EXR rent side?

Joe Margolis (CEO)

Yeah, it's a good question, Steve, but I don't think so. The reason I don't think so is, you know, when we track move-outs as a result of ECRI, the Life Storage customers are actually moving out at a slightly lower level than the Extra Space customers. So they're, and it's very, very slightly. So they're basically behaving the same. So I think a storage customer is a storage customer, and they act the same whether they're behind yellow doors or green doors.

Scott Stubbs (CFO)

Yeah, Steve, we would point a little bit more to this being a new customer issue, meaning, you know, the existing customers are still behaving quite well. We're seeing strength with those customers, but the new customer has been price sensitive, and this came at a time when we were trying to increase occupancy.

Steve Sakwa (Senior Managing Director)

Great. Thanks, guys.

Joe Margolis (CEO)

Sure.

Operator (participant)

Thank you. Our next question comes from the line of Nick Joseph with Citi.

Eric Wolfe (Analyst)

Hey, it's Eric Wolfe here with Nick. Sorry if I missed this in the, in the last question, but did you say where LSI rates are compared to EXR? I was just curious whether you took it back down to that sort of 10% gap that was in place before.

Scott Stubbs (CFO)

So we have put them on parity with Extra Space where they compete with Extra Space stores, so we have not dropped them back down.

Eric Wolfe (Analyst)

Okay, so you haven't dropped them back down. And so the guidance reduction of 200 basis points isn't due to pricing, it's due to less move-in customers, less occupancy? Like, I'm trying to understand what sort of specifically drove that, that 200 basis point, the, the 200 basis point reduction.

Joe Margolis (CEO)

So there's, you know, each unit is priced, but then is adjusted every night. Every unit type in every store is adjusted based on the model's historic data of vacates and rentals, and then projected data and vacates and rentals. So while we set a price, it's not a fixed price for any period of time that's charged. That's the base price, if you will, and then the model will adjust that price going forward. And we produce projections based on how we think that's gonna work out and result in what type of revenue gain.

Scott Stubbs (CFO)

Eric, you've effectively brought more customers in at lower prices, so you're starting off a lower base, and that takes some time to work through. We expect those customers to accept rate increases similar to other customers, but it does take time to work through if they came in at lower rates.

Eric Wolfe (Analyst)

Got it. Okay. And then just second question. You know, if I look at your same-store net rental income was up 70 basis points, your occupancy was up 40 basis points, and your net rents were down 10. So it looks like there's a bit of a gap there, like 40 or 50 basis points. Is that extra gap just sort of, expansion or renovation activity? And would you say that's sustainable, that benefit would be sustainable through the rest of the year?

Scott Stubbs (CFO)

So some of that can be timing on, on the numbers you just gave and exactly where they are, and then some of that is expansion or, you know, a change in units. We are constantly modifying our units in terms of converting them large to small or small to large, but there is some degree of expansion in, in our portfolio.

Eric Wolfe (Analyst)

Okay. Thank you.

Scott Stubbs (CFO)

Thanks, Eric.

Operator (participant)

Thank you. Our next question comes from the line of Juan Sanabria with BMO Capital Markets.

Juan Sanabria (Real Estate Analyst)

Hi, just wanted to follow up on that prior question, but from the perspective of the new customer rates. So how have the new customer rates changed as a result of, I guess, still having a price-sensitive customer? I get it that it takes a while to move the in place, but how have you changed your thought process after reaching occupancy parity for that new customer, and how does that compare to Extra, I guess, relative to prior guidance? Still a little bit unclear there.

Joe Margolis (CEO)

So we had projected that once we achieved in the Life Storage pool this level of occupancy, we would be able to have higher new customer rates, and the behavior of the tenants is not allowing us to do that. We still need to be aggressive with rates to capture those tenants, particularly the web tenants.

Juan Sanabria (Real Estate Analyst)

Just to compare with versus the Extra Space, you haven't necessarily had to have stayed as aggressive for new customers on the Extra versus LSI?

Joe Margolis (CEO)

No, I'm sorry.

Juan Sanabria (Real Estate Analyst)

That's just due to geographies?

Joe Margolis (CEO)

No, I'm sorry if I gave that impression. The Extra Space customers, they're the same customers, right? There's the self-storage customer is sensitive, new self-storage customer is price sensitive, whether they end up, you know, on the LSI website or on the Extra Space website. So we also have been, had to be aggressive with the Extra Space customer, and frankly, that's why we have 0.6% revenue growth. I mean, we're still significantly outperforming Extra Space at the Life Storage pool. It's just not to the extent we expected.

Juan Sanabria (Real Estate Analyst)

Gotcha. Okay. And, and then just to... What should we think of as the exit run rate for both pools for, for same-store revenue, just in general? I mean, we could do the math on what's implied for the second half, but should we think of the, the growth rate for same-store revenue improving or being fairly steady between the third and fourth quarter for each of the two pools?

Scott Stubbs (CFO)

I'll talk about the two pools. The Extra Space pool is going to be fairly steady. I mean, it's, it's not a big swoosh. You're not seeing it drop drastically and then coming back really strong at the end of the year. It's pretty steady. Life Storage, on a year-over-year basis, there obviously is more of a deceleration in the back half in terms of a year-over-year, as we're coming up against much more difficult comps, as we did a large volume of rate increases as we took over that portfolio last August.

Juan Sanabria (Real Estate Analyst)

Thank you.

Scott Stubbs (CFO)

Thanks, Juan.

Operator (participant)

Thank you. Our next question comes from the line of Keegan Carl with Wolfe Research. Please proceed.

Keegan Carl (Senior VP)

Yeah, thanks for the time, guys. Maybe first, just two-parter. I, I guess, how are you thinking about your marketing spend trending the rest of the year? And ultimately, what's that translating to in your top-of-funnel demand?

Scott Stubbs (CFO)

So our marketing spend has been up on a year-over-year basis. If you just take the Extra Space portfolio, it is about 2% of revenues, but it is a 20%, increase year-over-year. So we had very, very low marketing spend during COVID in the periods following that. We would expect it to be pretty consistent through this year. The Life Storage spend has been slightly more elevated than that as a percentage of revenue. It's about 3% of revenue, and we would expect it to continue through the year.

Keegan Carl (Senior VP)

And then just on top-of-funnel demand, I guess, just more broadly, what are you guys seeing, and maybe how does that compare to your comments in Nareit?

Joe Margolis (CEO)

Very similar. I think demand is measured by kind of generic Google search terms, storage near me, things like that. It's very similar to 2019, so you know, kind of hit historical levels, but it is down from last year and the year before when we had elevated demand. No, no real change in that area.

Keegan Carl (Senior VP)

Got it. And then just maybe more broadly, within your embedded guide, I guess I'm just curious, on a year-over-year occupancy delta versus last year, just any more color on how you expect it to trend through the back half, and if you've changed any of those assumptions in your guidance range?

Scott Stubbs (CFO)

So on the Extra Space pool, we did not change. And again, we're guiding more for revenue than occupancy, because revenue is gonna be an output of rate, occupancy, all of those things. And so no significant changes in our assumptions on the Extra Space pool. On the Life Storage pool, obviously, occupancy continues to be at the higher levels, more similar to Extra Space, but again, not big changes in the back half in terms of an occupancy guide, just more of a revenue guide there.

Keegan Carl (Senior VP)

Great. Thanks for the time, guys.

Scott Stubbs (CFO)

Thanks, Keegan.

Joe Margolis (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Joshua Dennerlein with Bank of America. Please proceed.

Joshua Dennerlein (Senior Equity Research Analyst)

Yeah. Hey, guys. Thanks for the time. Joe, just wanted to follow up on one of your opening remarks. It sounded like the LSI property is just underperforming your internal projections. Do you. Is there anything in particular that you think is driving that underperformance?

Joe Margolis (CEO)

Well, I mentioned geographical differentiation between the pools. Certainly, that's one thing. I would also say that we have not gotten the improvement in the Life Storage organic strength, the SEO strength, that we expected. And we've made up for some of that through increased marketing spend, increased paid search. Scott just mentioned that. But our thought was, you know, a year or nine months, really, into running this second brand, second website, the Life Storage SEO would be closer to the Extra Space strength than it actually is.

Joshua Dennerlein (Senior Equity Research Analyst)

Okay. Does that maybe change how you're thinking about the SEO on a go-forward basis? Like, would you want to put the, make the brands one or still keep them separate?

Joe Margolis (CEO)

So the decision to test dual brand was based on the theory that if we have, you know, twice the digital real estate in the paid section, in the local section, and in the organic section, we would have more clicks and more rentals, and that benefit would outweigh the cost of running two brands. And we certainly see that in the paid. That's easy. You buy it. We've had progress and are seeing movement in the local section, where we've been most disappointed is in the organic section. And it's something we're looking at. We're looking at the data. We'll let the test run its course, and then we'll make the decision.

Joshua Dennerlein (Senior Equity Research Analyst)

Okay. Appreciate that. Thank you.

Joe Margolis (CEO)

Sure.

Operator (participant)

Thank you. Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed.

Ronald Kamdem (Managing Director)

Hey, just two quick ones. Staying on the, the different pools between Life Storage and EXR. I guess, if we, you know, sort of think about 3-5 years out, when should we expect sort of both pools to behave similarly? I mean, it sounds like the pricing is the same or the average prices are the same. Maybe one has higher occupancy, but at what point does this sort of converge, or will it always sort of be two separate pools, you know, 3, 4, 5 years down the road?

Scott Stubbs (CFO)

I would expect it to converge at some point. You know, the store. The pools are slightly different in terms of makeup, in terms of demographics, things like that, but overall, they should behave the same. But I would expect Life Storage to outperform in terms of year-over-year revenue growth in 2025.

Ronald Kamdem (Managing Director)

Got it. Okay, that's helpful. And then my second commentary, question, I should say, is just maybe can you talk about, you know, your you talked about there's a lot more sort of competition for pricing in the market. Maybe can you just contextualize that? What do you think specifically is driving that? Is that less activity in the housing markets? Is it the consumer is more price sensitive? Like, what do you think is maybe leading to a little bit more competition than you would have anticipated on the pricing?

Joe Margolis (CEO)

So I think it's several factors. I think the housing market is a factor. I think sometimes it can be overblown, right? Our peak percentage of customers who tell us they were in the moving process was in 2021, with 61% of our customers. Now it's about 51% of our customers. So clearly, that's a decline and an effect, but it doesn't explain everything. I think we need to remember that in 2020, we were in the peak of a three-year development cycle, three-year deliveries of development. Almost 80% of our same store pool had new supply delivered in the three years, 2018, 2019, and 2020, and that got masked by COVID.

The excess COVID demand kind of masked that new development supply, and now that excess demand is gone and in markets that have those new supply, we feel impact. I also think the consumer is weak, right? We've had several years of inflation outpacing wage growth. Inflation has slowed down, but we haven't had disinflation, right? Prices are still high. The extra money the government threw into the economy is largely gone, right? Savings rates are down from their historic highs. Credit card debt defaults, auto loan defaults are increasing. We have a weaker consumer, and we see that in their shopping behavior.

Ronald Kamdem (Managing Director)

... Great. That's it for me. Thanks so much.

Joe Margolis (CEO)

Sure. Ron.

Operator (participant)

Thank you. Our next question comes from the line of Ki Bin Kim with Truist.

Ki Bin Kim (Managing Director)

Thank you. Good morning. Just a couple quick ones here. When you talk about some of the additional pricing sensitivity with your customer base, how do you notice that on web traffic, whether it be customers jumping around from your page to a competitor page? I'm not sure if that's trackable, but any kind of metrics that you can share, where we are today versus maybe a year ago.

Joe Margolis (CEO)

You know, I think there's a number of ways to observe it, but the best way is we'll pretty continually run a test where we have a series of stores or units at stores that are priced 5% higher and 5% lower than we think they should—than the model thinks they should be. And we can see the consumer reaction to, you know, a 5% increase in prices or a 5% decrease in prices. And that really helps us kind of zero in on what the right price is and which combination of rate and rental volume and discount and marketing spend maximizes revenue.

Ki Bin Kim (Managing Director)

Got it. And the second question on your expenses for payroll and utilities, can you just give a broad sense, what we should expect for payroll going forward? Should it be more inflationary, or are there other things that you might reduce, like FTEs at the stores? And on the solar side—I mean, sorry, on the utility side, is that decrease being driven mostly by, like, solar initiatives? And just curious, like, how much more room may you have to add more solar, if that was the driver.

Scott Stubbs (CFO)

So on the payroll side, first half of this year, it is slightly elevated. Some of that's a comp issue. So last year, we ran fewer hours at the stores as we were basically just a little bit understaffed. So this year, it—not only do you have the wage increase, you also have the increase in hours. We would expect that to be less in the back half of the year to become more inflationary. In terms of utilities, we've actually been quite aggressive on the solar side for a lot of years. Prior to the Life Storage acquisition, we had about 50% of our wholly owned stores that had solar on them. So that is clearly benefiting us. We continue to look for opportunities that have a good yield, and we continue to install solar.

One of the opportunities with the Life Storage acquisition is more stores to install solar. We've also been focused on our HVAC and getting that to be more efficient. We've also done a lot of LED lighting. So solar is obviously a big component of that and probably the bigger driver, but also some opportunities on HVAC and LED lighting.

Joe Margolis (CEO)

Just as a follow-up comment on payroll, I think it could be a mistake to look at payroll expense in a vacuum, because we can reduce, anybody can reduce payroll expense, but it's important to also understand what are the impacts of that. Does that mean if you cut store hours, you have to have more call center agents? Does it mean that you have to have R&M?

We notice that the fewer number of bodies we have in the store, the more small fires we have, the more mattresses we have left in the hallway. And then, most importantly, what does it do to rentals? If you lose rentals in a high operating margin business, your efforts to reduce payroll can be counterproductive. So we wanna be as careful as we can and as efficient we can with payroll, but we don't wanna do it at the expense of hurting the store or hurting revenue.

Ki Bin Kim (Managing Director)

That all makes sense to me. Thank you.

Scott Stubbs (CFO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Brendan Lynch with Barclays.

Brendan Lynch (Director)

Great, thanks for taking my questions. There's an uptick in acquisition guidance for the year. I wondered if you could comment on the bid-ask spread that you're seeing in the market and where cap rates are trending?

Joe Margolis (CEO)

Sure. So our increase of guidance was really the function of us capturing three deals that we didn't expect to, and it's not a reflection that we see the market changing drastically. I think the market's still muted. There's still a bid-ask spread. You know, there'll likely be a few more transactions at the second half of the year, as there always are in any year. But I don't think there's a, you know, material change in market dynamics, right? Leverage buyers are still on the sidelines. Most storage owners aren't in distress. They don't need to sell, and if they can't get their price, they'll just hold. Or frankly, what we're seeing, they'll come to us for a bridge loan.

One of the reasons our bridge loan activity is up is because the acquisition market is quiet, and people are looking for other options.

Brendan Lynch (Director)

Great, that's helpful. On the third-party management, you mentioned the internalization of one of your prior customers. Can you just talk about what drove that decision and if you'd expect more of that to occur?

Joe Margolis (CEO)

This was an owner that we inherited from Life Storage. They were a capital partner. They purchased a self-storage company, an operating platform, and moved all of their stores to that operating platform. So we lost 63 stores in the quarter, 59 of them were because of this internalization of management. Other than that, we only lost four stores. So, you know, part of having over 1,400 stores on our third-party management platform is that every now and then you lose a portfolio, and we've lost portfolios in the past, but we continue to grow at a very healthy pace. We've added 174 stores gross throughout the year, and 86 net, and that's a very, very healthy year for us, and we see the demand continuing.

Brendan Lynch (Director)

Great. Thanks for the color.

Operator (participant)

Thank you. Our next question comes from the line of Hongliang Zhang with J.P. Morgan.

Hongliang Zhang (VP)

Yeah. Hey, guys. I guess you've talked about street rates being down 8% on a year-over-year basis in the second quarter. I was wondering how you expect that gap to trend throughout the rest of the year?

Scott Stubbs (CFO)

So we don't see a catalyst for, you know, a big for us to be able to have a lot of pricing power. I, I think that's the reality. I think with housing market down, with the consumer where they are, we don't see a strong catalyst. Our guidance doesn't imply that. That being said, we are going to... Street rates are somewhat an outcome of your occupancy, your rentals, the volume, what you're given, and we're gonna solve for occupancy. You know, the first thing we look at is occupancy. I'm sorry, not occupancy, but for revenue. Sorry. So, you know, you can use occupancy, you can use street rate, all to solve for occupancy. And as we've always said, we are solving for... I did it again, we are solving for revenue.

We wanna make sure that we use these other tools to solve for revenue.

Joe Margolis (CEO)

I'm gonna answer that question.

Scott Stubbs (CFO)

I know.

Hongliang Zhang (VP)

Thanks. And then, I guess on, just thinking about the magnitude of ECRIs, how do those compare i

n the EXL portfolio versus the LSI portfolio? Are you doing anything different in terms of rent increases for either one?

Joe Margolis (CEO)

No. Now that everything is priced at parity or on the same system, they're on the same ECRI system, so it's the same.

Hongliang Zhang (VP)

Got it. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed.

Todd Thomas (Managing Director and Equity Research Analyst)

Hi, thanks. First question, I just wanted to follow up, sorry to harp on the changes here to the EXR and LSI revenue growth guidance, but you know, you commented you moved LSI pricing to parity with EXR, did not see the improvement in achieved rents that you anticipated, which led to the decrease for LSI. But what caused the increase in the EXR revenue growth forecast?

Scott Stubbs (CFO)

So I think it was really more a function of us taking the bottom end of the guidance off the table. You know, based on where the stores are halfway through the year, we didn't feel like that was a likely scenario.

Todd Thomas (Managing Director and Equity Research Analyst)

Okay. And then just going back to, I think, Keegan's question a little bit around the web and web traffic, are there any structural differences at this point in the websites or anything related to running separate banners that you're starting to identify or see? I'm just not clear on how the sites and banners have been integrated on the back end, I guess, and I'm just curious if, you know, you're seeing differences there, you know, either in terms of levels of web demand or, you know, customers finding you or sort of the overall, you know, execution of leasing on the LSI versus EXR websites.

Joe Margolis (CEO)

No, so we addressed the differences in website, and I'll give you one example. When we closed the transaction, the LSI website was twice as slow, or the Extra Space website was twice as fast as the LSI website. And that's an important signal to Google. That's one of the factors Google looks in when they decide, you know, who's gonna be first in the SEO ranking. So all of those things that we could address, we addressed. So the websites, you know, physically, if you will, are now comparable. The challenge we're having is, you know, if Life Storage average 7 or 8, the 7th or 8th spot on the SEO, and we've improved it to 5-6, that's not enough to get the results we want.

We need to continue to see improvement, where we could get that up, you know, into the top three locations to get the benefit we're hoping for. There are dozens of factors that Google takes into account in determining when someone searches, you know, storage near me, who they're gonna put first in the organic rankings and who they're gonna put second and third, and those are the things that we need to work on and continue to see improvement in.

Todd Thomas (Managing Director and Equity Research Analyst)

Okay. And just lastly, the... You know, normally, I think you'd, you'd move the LSI portfolio or you'd move acquisitions into the same-store next year in 2025 from when you closed LSI. I think there was some uncertainty on what you would do there. Any sense whether you're gonna move them into the same-store in 2025 or continue to break out the two segments?

Scott Stubbs (CFO)

Our plan would be to move them in the same store, but we would still provide the previous year, so you should be able to see it kind of before and after.

Todd Thomas (Managing Director and Equity Research Analyst)

Hmm. Okay. All right, thank you.

Scott Stubbs (CFO)

Thanks, Todd.

Operator (participant)

Thank you. Our next question comes from the line of Omotayo Okusanya with Deutsche Bank.

Omotayo Okusanya (Managing Director)

... Hi, yes, good afternoon. I just wanted to, again, just keep focusing on LSI. Again, with, with the big increase in occupancy, it does sound like the lease-up you were trying to get in that portfolio has happened. And so when we just kind of think about going forward with ECRI, I think an average in-place rent in this portfolio is, like, 17 and change, reflecting kind of, like, all the lower move-in rates. But for your EXR portfolio, it's in the low 20s. I mean, is, is that, is that the pickup we should be looking for over time? And kind of what kind of time period get that average in-place rent from 17 and change to 22, 23 and change?

Scott Stubbs (CFO)

Yes. So when you look at the average rent per square foot between the two portfolios, they are structurally different somewhat. You know, they, some of them are there in different demographics, different markets. And when the markets where we compete is the markets we refer to closing the gap. So we would expect them to behave like the Extra Space properties in the markets they compete, and we would expect them to continue to perform better on the Extra Space platform, but not necessarily be on the, at the exact same rent per square foot.

Omotayo Okusanya (Managing Director)

Okay, that's helpful. And then on the credit lending side, again, nice pickup in activity. Again, just kind of curious how much more you can potentially expect that to grow on a going forward basis. And how does one kind of think about, you know, the ideal balance between the credit lending platform versus kind of classic acquisitions?

Joe Margolis (CEO)

Yeah, so we've grown that pretty significantly this year for a few reasons. One is we had very few maturities this year, and some of those maturities chose to extend. We, you know, I discussed earlier kind of the effect of a muted acquisition market on greater demand for that product. And then we made a capital allocation decision, right? We had, you know, a quiet year on the acquisition front, so we're holding, incrementally more of the loans on our balance sheet, because that's a good use of capital when we don't have as many acquisition opportunities. I would expect over time, you know, things will change, and maybe when the acquisition market gets more active, we'll, you know, sell more loans and hold less on our balance sheet.

We certainly have more maturities next year than we do this year, and we'll have to address that. But I think this is a viable business that serves a number of benefits to the company. It increases our management business, it gives us an acquisition pipeline, it increases the number of relationships we have across the business and provides great economics. So I think it's a business we can continue to grow.

Omotayo Okusanya (Managing Director)

Thank you.

Joe Margolis (CEO)

Sure.

Operator (participant)

Thank you. Our next question comes from the line of Nick Yulico with Scotiabank. Please proceed.

Nick Yulico (Managing Director)

Thanks. Yeah, I know you guys gave some of the move-in rate commentary for July. I just wanted to see if it was possible to get sort of the, like, the dollar rate. You know, you give it in the supp for the quarter ended 133. Is it possible to get what that number is for July?

Scott Stubbs (CFO)

It's 129 move in and a move out of 180.

Joe Margolis (CEO)

That's Extra Space.

Scott Stubbs (CFO)

Yeah, that's the Extra Space book.

Nick Yulico (Managing Director)

Okay, perfect. Thank you. And then I guess the other question is just on the balance sheet, you know, Scott, like, what is the line of credit balance going up, which I assume is related to all the bridge loan activity. What, how should we think about just, you know, debt? You know, how are you thinking about the debt component, you know, going forward? Because the balance has gotten higher. Thanks.

Scott Stubbs (CFO)

So we have a few bridge loan sales lined up here in the next month that'll bring it down some, and then we will look to term that out as that volume gets larger or as we have opportunities. So I think that you can see us in the bond market as soon as this quarter or as late as later in the year or early next year.

Nick Yulico (Managing Director)

All right, thanks.

Operator (participant)

Thank you. As I see no further questions in the queue, I will turn the call back to Joe Margolis for his closing remarks.

Joe Margolis (CEO)

Great. Thank you very much, and thanks everyone for your time and interest in Extra Space Storage. We had a lot of questions about Life Storage and how it's not performed as expected. I truly believe that's a timing factor. We will get to those rates and that improvement that we want. And when I look across all other areas of the business, whether it's our expense control, our G&A, our ancillary businesses like management and bridge lending, the company's really performing at a very high level, and I'm confident we can continue to do so in the future. Thank you very much.

Operator (participant)

Thank you all for participating in today's conference. You may now disconnect.