Extra Space Storage - Earnings Call - Q2 2025

Executive Summary

• Q2 delivered solid operations: GAAP diluted EPS $1.18 (+34% y/y), Core FFO/share $2.05 (-0.5% y/y), total revenue $841.6M (+3.8% y/y); same‑store revenue was flat and same‑store NOI declined 3.1% as property taxes rose 19.2% y/y.
• Versus S&P Global consensus, revenue materially beat ($841.6M vs $720.7M estimate; +16.8%), while GAAP EPS was essentially in line ($1.18 vs $1.183 estimate); management tightened FY25 guidance ranges while keeping midpoints unchanged, citing gradually improving fundamentals and high occupancy; key catalyst is the first positive y/y turn in new customer rates since March 2022 with occupancy at 94.6%.
• Balance sheet remains conservative: 89% effectively fixed-rate after netting variable-rate receivables; combined weighted average interest rate 4.4% and ~4.3 years maturity; repurchased ~$8.6M of stock in Q2; dividend $1.62 paid June 30.
• External growth levers active despite muted acquisitions: JV buyouts (27 assets; $326.4M), bridge loan originations ($157.8M), and third‑party management net adds (+74 in Q2; 2,163 managed stores total) support fee/interest income growth.

What Went Well and What Went Wrong

• What Went Well

  • New customer rates inflected positive y/y for the first time since March 2022; ending same‑store occupancy reached 94.6% (+60 bps y/y, +120 bps q/q). “Rate growth is now positive and we are trending in the right direction” (CEO).
  • Ancillary income streams (tenant insurance, management fees, interest income) supported FFO; management tightened FY guidance while keeping midpoints intact, reflecting confidence in 2H acceleration from rate trends.
  • External growth through JV buyouts and 3PM expansion: acquired partners’ interests in 27 properties ($326.4M); added 93 gross (74 net) managed stores in Q2 to 2,163 total.

• What Went Wrong

  • Same‑store NOI fell 3.1% on expense pressure; property taxes rose 19.2% y/y (largely from Life Storage reassessments in CA/GA/IL/TX), driving total same‑store expense growth of 8.6%.
  • Same‑store revenue was flat despite strong occupancy as move‑out roll‑down and lower “other income” (late/admin fees) offset +0.2% net rental income; management noted a lag before positive move‑in rates flow through revenue.
  • LA state‑of‑emergency restrictions remain a minor headwind to price actions; broader macro sensitivity persists (rates, housing turnover), though housing recovery is not required for continued improvement (CEO).

Transcript

Operator (participant)

Afternoon ladies and gentlemen and welcome to the Extra Space Storage Inc Q2 2025 Earnings Conference Call. At this time, all lines are in.

A listen-only mode.

Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star.

Zero for the operator.

This call is being recorded on Thursday, July 31st, 2025. I would now like to turn the conference over to Jared Conley, Vice President of Investor Relations. Please go ahead.

Jared Conley (VP of Investor Relations)

Thank you, Joelle, and welcome to Extra Space Storage.

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 31st, 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.

Joe Margolis (CEO)

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 one acquisition for $12 million, demonstrating our commitment to prudent and disciplined capital allocation in a high-priced market. We also bought out two 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 through 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 in 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 Stubbs 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.

Jeff Norman (CFO)

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 three 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. As Joe mentioned, while the progress in new customer rates 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 LSI properties located in California, Georgia, Illinois, and Texas. Although higher than normal, property taxes were generally in line with internal estimates through the first two 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-$8.25 per share. For our same store portfolio, we anticipate revenue growth between -0.5% and 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 strategies through current market conditions, maintaining our focus on long term value creation. With that, operator, let's open it up for questions.

Operator (participant)

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by one on your touch tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Michael Goldsmith with UBS.

Your.

Your line is now open.

Michael Goldsmith (US REIT Analyst)

Good morning. Thanks for taking my question. 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?

Thank you.

Jeff Norman (CFO)

Sure.

From an occupancy perspective, sequentially occupancy remained flat, it continued in July. 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, is up a little more than 2%. Seeing positive trends there and our move in move out gap also compressed with those rates picking up. Positive indicators on all fronts in July.

Michael Goldsmith (US REIT Analyst)

Thanks for that. Just to build on that, street rates have now turned positive. In the commentary before, you talked about trends accelerating through the year and feeling that in particular in the fourth quarter. Is that just a function of it takes a little bit of time? There's only a few percent of customers that turn over every quarter, so it just takes a little bit of time to start to feel that benefit of the positive street rate growth, or is there something else that makes kind?

Of the fourth quarter when you start to really feel the benefit and start to feel things in play. Thanks.

Jeff Norman (CFO)

You're exactly right, Michael. That's spot on. All other things equal, 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. It does take time, but it starts to compound and improve as you get into the fourth quarter.

Michael Goldsmith (US REIT Analyst)

Thank you very much. Good luck in the back half.

Jeff Norman (CFO)

Thanks Michael.

Operator (participant)

Your next question comes from Sail Mehta with Green Street Advisors. Your line is now open.

Salil Mehta (Equity Research Associate)

Hi guys. Good morning and thanks for taking my question. Just looking at the net rental rate growth, you know, seeing a, I believe like close to a percent decrease in overall rental rate, but with move in rates roughly flat to positive, you know, would I be correct in asserting that net decrease to ECRI or could this perhaps be attributed from the rent restrictions in LA? You know, any color here would be super helpful.

Jeff Norman (CFO)

Yeah, you are seeing a minor headwind in LA, but I think more than ECRI is just a function of move out. You still have a roll down, net roll down with move out, which drags on your overall in place rent per square foot. I would say that's a more significant driver than any change from an ECRI perspective. Really, that's been pretty constant on a year-over-year basis. Thank you.

Salil Mehta (Equity Research Associate)

You bet. Thank you.

Operator (participant)

Your next question comes from Samir Khanal with Bank of America Securities.

Your line is now open.

Samir Khanal (Director)

Yes, good afternoon everybody.

I guess Joe or Jeff, you said.

In the opening comments you talked about the progress that was being made, but you also said it's sort of gradual and maybe I don't want to use the word softness, but it feels like maybe it's a bit lighter than you expected. Maybe just talk or expand around that, I guess. What do you think is sort of driving that gradual sort of movement here?

Joe Margolis (CEO)

I think there's several things. One is mentioned at the previous question. We turn 5% or 6% of our customers a month. It takes time for improvement in rate to build up in the rent roll and show it. We also have a roll down and that again takes time to work against that. This isn't a month-to-month business.

Right.

This is a long-term business. The trends we're seeing are positive. To be positive in customer rate for the first time since March 2022 is a meaningful inflection point. We've rode down the hill and we're looking forward to riding up the hill now.

Samir Khanal (Director)

Okay, got it. 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? I know that portfolio also had exposure to Florida. Right. 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. Thanks.

No. The LSI portfolio is performing as expected. Rates are improving faster than the Extra Space Storage 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 the same store performance this year. On track in all respects.

Jeff Norman (CFO)

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. Now they're taking a little bit of a breather in those tougher markets. 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. 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. Over longer periods of time, as Joe alluded to, we have a lot of confidence in our portfolio construction.

Samir Khanal (Director)

Thanks a lot, guys.

Jeff Norman (CFO)

Thanks, Samir.

Operator (participant)

Your next question comes from Todd Thomas with KeyBanc Capital Markets. Your line is now open.

Todd Thomas (Managing Director and Equity Research Analyst)

Hi. Thanks. 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. You also gained occupancy through June. You're still at 94.6% in July. 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 to the comments around conditions being a little bit slower here?

Joe Margolis (CEO)

Yeah, I think we give a range.

Percentage for revenue growth and there's assumptions all throughout that range. Speaking to the midpoint based where you finished the first half, and if you were to solve the midpoint, it suggests or implies relative flat performance year-over-year in the back half of the year, just slightly positive, a modest acceleration in the back half of the year. At the high end, that would imply more acceleration, bottom end, a little bit of deceleration. All of those factors we believe are on the table. All the trends we're seeing right now are looking positive. One thing that's probably worth mentioning, Todd, in terms of just trying to square up the numbers, our actual net rental income was positive 20 basis points in the quarter. That was partially offset by our other income line items, which include bad debt and administrative fees.

Administrative fees are a little lower year-over-year because rental volume is a little lower year-over-year because our occupancy is so high. Late fees are a little lower because bad debt is lower, which indicates a healthy in place customer. While a headwind year-over-year from a same store revenue standpoint, these are actually trends we think are positive for the industry.

Todd Thomas (Managing Director and Equity Research Analyst)

Okay, that's helpful.

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.

Joe Margolis (CEO)

Yeah, 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. We're not going to execute on deals that are sub-5 cap, stabilizing in the fives. It just doesn't do any good for our shareholders for us to do that. 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 joint venture partners, doing other activities, making new preferred investments, which we did one this year, to make accretive investments while being prudent allocators of capital.

Todd Thomas (Managing Director and Equity Research Analyst)

Okay, thank you. Thanks, Todd.

Operator (participant)

Your next question comes from Ronald Kamden. Your line is now open.

Ronald Kamdem (Managing Director and Head of US REITs and CRE Research)

Hey, just starting with the expenses, I know we talked about property taxes last quarter. Obviously, they continue to be pretty high year-over-year. 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? Thanks.

Jeff Norman (CFO)

Yeah, thanks for the question, Ron. You're exactly right. Certainly high year-over-year. The positive news is we lapped the comp, so we took that pain and that markup, primarily driven by some of our LSI properties. In the second half of the year, we anticipate that coming down significantly. In terms of all of our other expense line items, we 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.

Ronald Kamdem (Managing Director and Head of US REITs and CRE Research)

Great, helpful.

My second question was just going back to the comments about maybe the same store revenue being a little bit lighter than expected. I guess I just love some context in terms of just the top of the funnel demand and your expectations. Does it mean that the market is maybe performing below sort of average for this environment, or maybe your expectation was that you'd have a faster recovery that didn't happen? Just trying to get a sense of what happened versus your expectations, and what does that mean in terms of the health of that, the customer, the market, and everything. Thanks.

Jeff Norman (CFO)

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 three quarters. 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.

Joe Margolis (CEO)

I think demand is a little harder to measure using our historic tools because of the introduction of AI to search, which makes it harder to measure Google search terms and things like that. Our belief and experience is that demand is steady, that there is demand in the market, that our systems are able to capture a disproportionate share of that as indicated by our occupancy levels, and that the market is not weakening but incrementally improving.

Jeff Norman (CFO)

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

Ronald Kamdem (Managing Director and Head of US REITs and CRE Research)

That's really helpful. Thanks so much.

Jeff Norman (CFO)

Thanks, Ron.

Operator (participant)

Your next question comes from Juan Sanabria with BMO Capital Markets. Your line is now open.

Juan Sanabria (Managing Director)

Hi, thanks for the time.

Just curious if you can talk.

Little bit about the prefs and the loan book and what you're seeing there, and is there the expectation that you get any repayments? I know there's the next point pref that's out there. Just curious on any known repayments or how you think that business evolves in second half 2026.

Joe Margolis (CEO)

We're still seeing good demand for our bridge loan product. We slightly increased our guide as to how many loans we're going to keep on the balance sheet. Part of that is to offset the SmartStop preferred. We were prepaid in the early part of this quarter. We have great flexibility to allocate capital to that program by holding or selling A notes, which allows us to react to other opportunities and redirect capital in that way.

I think the balances will be about what they are now, plus or minus going forward, perhaps with a different mix of A's and B's inside that balance. It's a good, healthy program that is a very helpful tool for us, particularly in this market environment. We have not been notified by any of our other preferred holders of imminent payback.

Juan Sanabria (Managing Director)

Thanks.

Curious how you guys are thinking about dispositions, if there's any pruning being considered with regards to maybe some exposure and just your strategy there.

Joe Margolis (CEO)

You might be asking because you saw we just put a 22-store portfolio on the market for sale. These are all former LSI properties. When we merged with LSI we said we were going to spend a couple years improving the NOI of the properties, getting to know the portfolio, and then after two years we would qualify for 1031 exchange treatment. These are the properties we've selected to dispose of to reshape and optimize the portfolio.

Juan Sanabria (Managing Director)

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

Joe Margolis (CEO)

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

Juan Sanabria (Managing Director)

Fair enough. Thanks, Joe.

Joe Margolis (CEO)

Sure.

Operator (participant)

Your next question comes from Michael Griffin with Evercore. Your line is now open. Great, thanks.

Michael Griffin (Director)

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 one quarter doesn't make a trend, but anything to read into here. 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.

Jeff Norman (CFO)

Thanks, Griff, for the question. From a same store revenue standpoint, the 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.

On Chicago, on the other hand, we actually saw some acceleration Q1 to Q2 in terms of same store revenue progress. We're actually happy with Chicago. Certainly would like to be better and more in line with your forecast if they were higher. We see positive trends in Chicago.

Michael Griffin (Director)

Thanks, Jeff. 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. 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?

Joe Margolis (CEO)

I don't think we need the housing market to come back to experience a recovery. I think it would be helpful. I think the slope will be better if we have a strong housing market. There's plenty of demand out there. We're starting to reacquire pricing power. I think we're on the other side of the trough. Clearly, a strong housing market is better than a weak housing market, but not necessary.

Michael Griffin (Director)

Great.

That's it for me and Jeff. Congrats on the promotion.

Jeff Norman (CFO)

I appreciate it.

Operator (participant)

Your next question comes from Caitlin Burrows with Goldman Sachs. Your line is now open.

Hi, this is [Jeremy Fuel] on for Caitlin. I guess now that we're in peak leasing season, how is seasonality expectations for last year and what do you think about for the second half of the year?

Thanks.

Jeff Norman (CFO)

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 expected it to look pretty similar in 2025 as it did to 2024. We maintained higher occupancy throughout the shoulder seasons than we typically do. Our hope was that with that higher occupancy we'd see outsized pricing power, especially with new customers. We saw it to some extent. I think we hope to see a little bit more but continue to see it marching in the right direction in July. Overall, Jeremy, I'd say in line with our expectations.

Got it, thanks. Just for 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 ECRI more? Anything on that would be helpful, thanks.

Joe Margolis (CEO)

Great question. One of the strengths of this business is the strength of the existing customer. We are seeing fewer vacate, 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. There's really no sign of weakness or danger with existing customer behavior.

Thank you.

Thank you, Irving.

Operator (participant)

Your next question comes from Nicholas Yulico with Scotiabank. Your line is now open.

Nicholas Yulico (Managing Director)

Hello, this is with [Professor Ferdyvon with Nikulicom]. You mentioned the disposition of these 22 LSI assets. Just trying to understand, excluding these assets, what would be the spread between LSI and legacy Extra rent? I think in early June you mentioned around 5%-6% for the whole portfolio. Did you look at the portfolio excluding these dispositions?

Joe Margolis (CEO)

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

Nicholas Yulico (Managing Director)

Is it still around. 5%-6%, or it's contracted since June?

Joe Margolis (CEO)

It's still about 5%-6%.

Nicholas Yulico (Managing Director)

Got it. Second question would be more like a broad on macro assumptions embedded in second half 2025 guidance. From your point of view, what are the major catalysts to follow that might lead to Extra hitting lower or higher end of ethical guidance.

Jeff Norman (CFO)

Sure.

Given our high occupancy, it's hard to imagine that becoming an incremental driver from here to contribute to additional revenue growth acceleration. I think your key driver at the high end would be stronger new customer rates and that's going through more quickly to our revenue growth. At the bottom end, probably a deterioration in occupancy greater than normal seasonal drop off in occupancy.

Nicholas Yulico (Managing Director)

Got it. Thank you.

Operator (participant)

Your next question comes from Eric Wolfe with Citi. Your line is now open.

Eric Wolfe (Director)

Hey, thanks. There's been a good amount of volatility in the stock recently. Can you just remind us how you look at buybacks, cost of capital, and other uses of capital today? I think you bought a small amount of stock around $126 earlier this year, but the opportunity went away quickly.

Joe Margolis (CEO)

That was an interesting day where we had about a two hour window before the President announced the pause on tariffs and we got out of our price band. The board of directors accused a certain band of pricing in which we'll use capital to repurchase our stock. 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.

Eric Wolfe (Director)

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 percent of your customers are using ChatGPT.

AI to find the best storage.

Solution versus, like, say, this time last year or a couple years ago? 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?

Joe Margolis (CEO)

Yeah. I apologize, I don't have a lot of good answers around this. This is changing so quickly. We have a lot of people who are a lot smarter than me spending a lot of time trying to figure it out. At the beginning of the year, 15% of searches came up with an AIO at the beginning of it, and now that's over 65%, I think in six or seven months. We are trying to understand.

Take.

Advantage of the changes that are going on in the search landscape. I do have confidence in our team and our ability to be out in front in this.

Jeff Norman (CFO)

Eric, 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. 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. Customers that have the intent to transact still are tending to click through and are going to websites. We've seen while it maybe gets a little murkier on just total traffic, from a traffic standpoint, the conversion rate for those customers that are clicking to the website have improved, increased. Again, evolving very quickly like Joe mentioned, but something that we're tracking very closely.

Eric Wolfe (Director)

Got it. That's helpful. Thank you.

Operator (participant)

Your next question comes from Ravi Vaidya with Mizuho. Your line is now open.

Ravi Vaidya (VP)

Hi guys. 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 than 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 and fundamentals. I just wanted to hear your thoughts on that.

Joe Margolis (CEO)

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. We're not sending the investment team home for a 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. There still are buyers out there transacting at what we consider to be high prices. As long as that continues, we'll continue to remain disciplined. In no way are we not in a position or not willing to execute on good opportunities.

Jeff Norman (CFO)

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 of the year is that 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. The late Q3, Q4 close is going to be largely immaterial on your overall FFO for the year. 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. Got it. That's helpful, right? I was just comparing what was done under contract year to date versus the guidance provided, but that additional color is helpful here.

Just one more, can you please identify some markets where you're starting to see supply headwinds ease and thus expect pricing and schemes for revenue to improve on out? I apologize, Ravi, our phone cut out just a little bit there. Can you say that again? I caught the part about markets.

Ravi Vaidya (VP)

Sure. Sorry about that. Maybe just the markets where we're starting to see supply headwinds ease a bit and maybe where you expect to see a greater acceleration in same store revenue as a result of that.

Jeff Norman (CFO)

Yes, thanks for repeating the question, Ravi. It's in general the markets that were earlier to the new supply cycle, so a few examples I would give are Portland, Seattle, Chicago, and Denver that have seen pressures from new supply ease, and generally speaking, those are also the markets where you've seen revenue pick up earlier.

You also have certain markets that I think we would classify as having been pretty steady throughout the cycle that didn't see as much new supply and it's just been a little more stable. I think Boston and Washington, D.C. fit squarely in that category.

Ravi Vaidya (VP)

Got it. Thanks so much, guys.

Joe Margolis (CEO)

Thank you.

Operator (participant)

Your next question comes from Eric Luebchow with Wells Fargo. Your line is now open.

Eric Luebchow (Director and Senior Analyst)

I appreciate it. Maybe you touch on the 3PM program.

It looks like you added 174 net. Talk about where you're seeing strength from, and are you seeing any new opportunities from partners of the LSI portfolio that maybe give you the ability to keep growing there?

Joe Margolis (CEO)

Yeah, thank you for the question. We've had two fantastic quarters growing our management plus business, our third-party management business. As you mentioned, we've added 174 stores net this year and some of that is from new partners that we were introduced to through the LSI merger. It's been one of the benefits of the merger as well as bridge loans, making bridge loans to those partners as well. It's been a great six months of the year. I think it's largely due to a difficult operating environment where private operators come to the realization or their equity partners do, or their lenders do, that they need professional management, they need the best operator in the business managing their stores.

I would not be surprised if the second half of the year we grow, we continue to grow, but grow at a slower pace as the transaction market is picking up. We probably will see some exits from the portfolio. I think this is a great growth area for the company and not only adds directly management fees and tenant insurance, but also provides the ancillary benefits of opportunities to purchase and opportunities to make loans.

Eric Luebchow (Director and Senior Analyst)

Appreciate that, Joe. I guess just one follow up, 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. Just wondering if and how it's trended the last couple months given some of the macro uncertainty that's out in the market for the second half of the year. Thank you.

Joe Margolis (CEO)

Yeah, sure. If you look at top of funnel by generic Google search terms, it remains elevated compared to prior years. We believe some of this elevation, and we don't know how much, is due to AI search, people doing multiple searches, and it's not an increase in customers. We see an increase in generic search terms. We don't see a proportional increase of people coming to our website. As Jeff mentioned, we see a higher conversion rate of folks when they do get to the website, which tells us, which suggests to us, that those customers are better educated, they've asked more questions through AI, they know more what they want, and then when they get to our website, they convert at a higher level. That's kind of our early observations in a changing environment.

Eric Luebchow (Director and Senior Analyst)

Okay, great.Thank you.

Operator (participant)

Your next question comes from Michael Mueller with JPMorgan. Your line is now open.

Michael Mueller (Analyst)

Yeah.

Hi.

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? 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?

Joe Margolis (CEO)

It's a hard question to answer because the business consumer is not a monolithic entity.

Right.

are national pharmaceutical chains with big balance sheets and there's the local landscaper who's much more akin to a retail customer. I think what's behind your question is correct. The big national businesses stay longer, react better to ECRI, and are better overall customers, while maybe some of the small local businesses are not as different as the retail customer. Got it.

Michael Mueller (Analyst)

Okay.

That was it. Thank you.

Jeff Norman (CFO)

Thanks, Mike.

Operator (participant)

Your next question comes from Alex Murphy with Truist Securities. Your line is now open.

Alex Murphy (REIT Equity Research Associate)

Hi. Thank you for taking my question. 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?

Jeff Norman (CFO)

I think the main one will be on the expense side. Margins were suppressed in the first half of the year because of higher normal expenses. 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. As we can deploy those marketing dollars, if we're seeing a positive return, we'll keep doing it.

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.

Alex Murphy (REIT Equity Research Associate)

Thank you.

Operator (participant)

Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Salil Mehta with Green Street Advisors. Your line is now open.

Salil Mehta (Equity Research Associate)

Hi guys, and thanks for taking my second question here. 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, 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.

Jeff Norman (CFO)

Apologies for the more theoretical answer, but I think it just depends on the market and the individual dynamics of each market. 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.

Salil Mehta (Equity Research Associate)

Thanks for the color.

Operator (participant)

Your next question comes from Brendan Lynch with Barclays. Your line is now open.

Brendan Lynch (Director)

Great. Thanks for taking my question. Jeff, congrats on the new role. Thanks. To 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?

Jeff Norman (CFO)

It's an easy answer today, but maybe not tomorrow. So far the companies have not tried to monetize their AI platforms, so we spent zero on it. I know it wasn't free to build ChatGPT, so I'm sure that will come in the future. Right now almost all our dollars go to Google.

Brendan Lynch (Director)

Okay, great. Thanks for the color. Jeff, you had mentioned that the shoulder season, 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? Thanks.

Jeff Norman (CFO)

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 that's what we did. I think we'll continue to monitor it 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. 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. 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.

Great. Thanks for the color.

You, bet. Thanks, Brend.

Operator (participant)

Your next question comes from Omotayo Okusanya with Deutsche Bank. Your line is now open.

Omotayo Okusanya (Managing Director)

Hi. Yes, good morning, Jeff. Congrats, Scott. You will be missed. My question is around you guys, you talked about kind of fundamentals stabilizing.

Even some operating metrics are inflecting positively, but it takes some time to actually hit the bottom line.

I guess when we kind.

Think about when we kind of.

Start to see maybe some better earnings growth going forward, does that have to boil down to heat rates just moving up even more aggressively to 10% increases?

Is it more of a case of?

Somehow, move-out volume kind of slows.

Given the negative month, the market escapes even with it right now, just trying to get a sense of when some other stabilization or inflection, we can really kind of start seeing it in the bottom line.

Jeff Norman (CFO)

I mean I think there's a lot of factors that could help us, including improvement in rate, which we're starting to see. Moderation of vacates, improving length of stay, expiration of some states of emergencies—those things will all help us improve the slope of the recovery with timing.

Kind of being TBD.

I think timing is TBD. Fair enough.

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

Omotayo Okusanya (Managing Director)

Thank you,

Thanks, Hannah.

Operator (participant)

There are no further questions at this time. I will now turn the call over to Joe Margolis, CEO, for closing remarks.

Joe Margolis (CEO)

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.

Operator (participant)

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Please.