Thank you for standing by. Welcome to the Extra Space Storage 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. To remove yourself from the queue, simply press star one one again. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Mr. Jeff Norman. Please go ahead, sir. Thank you, Jonathan. Welcome to Extra Space Storage's Q1 2023 earnings call. In addition to our press release, we have furnished unaudited supplemental financial information on our website. Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review. Forward-looking statements represent management's estimates as of today, May third, 2023. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call. I would now like to turn the call over to Joe Margolis, CEO. Thank you, Jeff, and thank you everyone for joining today's call. We have had an exciting couple of months, and a lot has happened since our Q4 earnings call in late February. Operationally, occupancy remained very strong through the first quarter, ending March at 93.5%, our highest Q1 result outside of the COVID years. Our strategy to maintain high occupancy through the winter allowed us to sequentially increase rates to new and existing customers through the Q1, driving same-store revenue growth of 7.4%. Same-store expenses were lower than expected due to normalizing payroll expense growth, as well as year-over-year savings from repairs and maintenance and property taxes. As expected, our same-store NOI growth rate moderated sequentially from the fourth quarter due to an exceptionally difficult 2022 comparable and was modestly ahead of our internal projections at 8.7%. We have also been busy on the external growth front. We continue to grow our third-party management platform with net additions of 44 stores. We acquired six stores, primarily in joint venture structures. We originated $53 million in bridge loans. We started our external growth phase of our remote storage strategy, approving three remote model acquisitions, two of which are in our primary markets. Subsequent to quarter end, we closed a second preferred investment with an affiliate of SmartStop in the amount of $150 million. Of course, on April 3rd, we announced a strategic merger with Life Storage through a leverage neutral all-stock deal. We believe this combination will produce an even more formidable portfolio, team, and platform with over 3,500 stores across 43 states. We anticipate that there are at least $100 million in annual run rate synergies with this transaction that neither company could have created on their own. So far, everything is on track to successfully complete the merger in the second half of the year. As we continue to refine our integration plan, we are even more confident that we can achieve at least our stated synergies. There are additional potential growth drivers and synergies not captured in the minimum target of $100 million. These include additional expense savings due to increased scale, a lower cost of capital, a 50% increase in data which could further improve property- performance, a larger pool of properties to evaluate opportunities such as expansion, re-development, and solar- installation. Finally, broader industry relationships, which will provide greater reach and scale to offer potential products and services and build our acquisition pipeline. We are working hard to complete the pending merger, and I appreciate the efforts of the teams from both companies and the way they have remained focused on driving the existing business as we enter the busy leasing season. I would now like to turn the time over to Scott. Thank you, Joe. Hello, everyone. As Joe mentioned, we had another good quarter, beating our internal FFO projections by $0.04. The beat was driven by better than expected property net operating income, lower G&A, and higher management fees and tenant insurance. Interest income and interest expense both came in modestly lower than modeled, generally off-setting each other. Achieved rates to new customers have been improving sequentially since bottoming out in November. In January, year-over-year rates improved to approximately negative 14%. In February, they were negative 11%. In March, they were negative 3%. We did see lower rental volume in March at those rates. In April, our pricing algorithms dropped rates modestly. With average achieved rates in April closer to negative 7% year-over-year, contributing to higher rental volumes in April. Turning to the balance sheet, we completed a $500 million bond offering of five-year notes with a coupon of 5.7%. We used the proceeds to reduce our revolver balances to less than $100 million at the end of the quarter, leaving over $1 billion in revolving capacity. We reduced our floating interest rate exposure to 22% of total debt, net of variable rate receivables. Shortly after the announcement of our proposed merger with Life Storage, S&P Global updated our rating to CreditWatch Positive, confirming its view that the proposed transaction is credit enhancing given the increase in scale and potential synergy opportunities. We reaffirmed our guidance ranges for same-store growth expectations and core FFO, which do not include the impact of the proposed merger with Life Storage. We made modifications to our 2023 outlook to capture the SmartStop preferred investment, delays in bridge loan closings, the impact of our bond deal on interest expense, and other adjustments to tenant insurance and G&A. Property net operating income in the Q1 was modestly ahead of our expectations. As we progress through the leasing season, we will monitor achieved rates to new customers, rental and vacate trends, web traffic, and top of funnel demand before revisiting these guidance ranges after the second quarter. As mentioned on our fourth quarter call, our guidance assumes positive same-store revenue growth for and throughout the full year. It assumes the growth rate moderates more quickly in the first half of the year due to exceptionally difficult first half comps, troughs in the summer, and modestly re-accelerates late in the year. Much of our NOI growth is offset by the first year headwind of our investment in non-stabilized properties, which carry approximately $0.23 of dilution, the modification of the NexPoint preferred investment, and higher interest rates. While each of these headwinds slows our 2023 growth, we believe they will result in stronger long-term growth rates over a multiyear period for our shareholders. We are off to a great start in 2023. We believe storage as an asset class is among the most resilient in the REIT space, and that the sector will continue to produce healthy, albeit moderating year-over-year growth. We believe our operating platform and highly diversified portfolio will become even stronger through the Life Storage merger and are well positioned for another solid year. With that, operator, let's open it up for questions. Certainly. As a reminder, if you have any question at this time, please press star one one on your telephone. 1 moment for our first question. Our first question comes from the line of Todd Thomas from Key Banc. Your question please. Yeah. Hi. Thanks. I just wanted first to ask about occupancy in April, if you could talk a little bit about, you know, any post-quarter updates there, where you stand year-over-year, and just talk about rental demand, coming out of March a little bit in greater detail? Our occupancy at the end of April increased about 30 basis points. At the end of April, we were 93.8, so we actually are in a good position moving into the rental season. We saw good rental activity during the month of April. Okay. Within the guidance framework, where would you expect to see occupancy kind of peak in June, July? Seems like the quarter end occupancy, which was about 10 bp s below the quarter average was a little unusual from a seasonal standpoint. You know, are you pleased with you know, the occupancy improvements that you're seeing? Is it a little bit you know, below what you were anticipating? Yeah, if you could just talk about what you expect in terms of the peak during the rental season. As we did our guidance, we focused obviously on revenue. In that number, we do assume that occupancy is a negative delta compared to last year, less than 1%. You're up against two of the toughest years, the last two years with the COVID peaks, there is a slight negative headwind with occupancy. Throughout the entire year, it's pretty consistent. Last question. In terms of the guidance, you updated the dilution that you expect from C ofO and value add acquisitions, was $0.25 initially, it's $0.23. Is that, you know, what's driving that? Is that related to the guidance going forward for the balance of the year? I mean, is that the full year dilution that's actually been increased or decreased and is an improvement relative to the initial guidance? It's actually an improvement of $0.02 compared to initial guidance, and it's from two things. Leased up properties are filling up faster, and then it assumes that the timing on a couple of the C of O properties and acquisitions is bumped back slightly. Okay. All right. Thank you. Thanks, Todd. Thank you. One moment for our next question. Our next question comes from the line of Michael Goldsmith from UBS. Your question, please. Michael, you might have your phone on mute. Oh, moving on. One moment. Our next question comes from the line of Juan Sanabria from BMO. Your question, please. Hi. Thanks for the time. Joe, I think you mentioned at the top, the remote storage acquisitions. Could you just talk a little bit about what you're seeing early days there and what the opportunity set could be going forward, and any thoughts about how that could tie in with Life Storage, recognizing it's early days there? I don't know if everyone's having this problem. We have a very bad connection. Could you repeat the question, please? We couldn't hear it here. Sure. Is that better? A little bit, yes. Just curious, Joe, you talked about the remote storage investments in the first quarter. We can't hear. We can't. Jeff, we need to dial in somehow. Juan, give us just one minute. We're just. Sure. Is this any better? Better. Give us one moment. Sure. Okay. Juan, go ahead and try that again. Sure. No problem. Just curious, Joe, you mentioned remote storage acquisitions in the Q1. Just curious on what early learnings are and what that opportunity set is, and if there's any tie-ins or expansion opportunities to that opportunity with the Life Storage pending transaction? Just curious on bigger picture thoughts on what that could represent for you guys? Sure. It's a great question. With respect to the opportunity set, I think it's massive, right? The number of small stores in our markets that we traditionally would not look at for acquisition because we could not efficiently manage them without permanent, you know, 100% on-site management is huge. You know, not only existing stores, but just vacant space we can turn into storage that is small. We will undertake an effort to go through the Life Storage portfolio and see which of their stores would be candidates for this type of different management model. It is an exciting opportunity set that we will look at. Is there a different margin that these remote storage spaces are capable of generating? I think the margin is not different, the efficiencies gained by managing them through the remote platform makes the margins acceptable, right? You can get to the right margin because you have the reduced expenses. Okay. If that makes sense. Yeah, it does. Just curious, you talked about and seemingly are very confident on the synergies from the pending LSI transaction. I was hoping maybe you could just unpack a little bit what's driving that increased enthusiasm post the transaction being announced. We're certainly learning more about the opportunities within the Life Storage portfolio and the synergies we could gain by combining that portfolio with ours. I'll give you just one simple example. In our under-writing, we assumed we would need to have six new regional offices. We've now gone through everything, and we're gonna end up with four new regional offices. That's just one example of many kind of incremental savings that we think we can achieve. We also have become more and more confident on the revenue synergies as we learn more and more. Appreciate the time. Thank Thank you, guys. Thanks, Juan. Thank you. One moment for our next question. Our next question comes from the line of Samir Khanal from Evercore ISI. Your question, please. You've implemented, you know, just trying to. Whether it's markets regionally, anything you've seen. You know, clearly we've had, you know, the headline risk out there with the banks, the regional banks. I just wondering, is there any signs that you're seeing at all at this point? Samir, we lost We only picked up about the H2 of your question. Could you repeat the full question? I was asking about, you know, whether you're seeing any pushback from existing customers on price increases. Whether it's, you know, we've seen a lot of headlines over the last few months, right? Regional banks having issues. I don't know if you can make some comments around markets where you've seen maybe occupancy drops or bad debt pick-up. Just trying to see any sort of things that may... On the negative side or pushback that you may have been getting from existing customers on the price increases. It's a good kind of health of the customer question. You know, to answer specifically your question, we have not. We, you know, peaked out at about 800 bps greater move out from customers who received ECRIs than those who didn't. That has trailed back down towards the more normal rate and has stabilized at a number that's a little higher than normal, but our ECRIs are a little higher than normal. Still a very manageable number, and justifies the program. We also see signs of health in the customer in our very low bad debt under 2%. You know, willingness of customers on the demand side, you know, the strength of demand, which, you know, frankly isn't as good as it was during the COVID years. If you look at, demand statistics compared to pre-COVID years, it's pretty comparable. You know, demand is still strong in this sector. Okay. Got it. I guess for Scott, just as a second question. I know in the last earnings call you spoke about expense pressures that you could face this year. I mean, you're doing about 3.5% growth in the Q1. Maybe talk us through kind of what you're expecting for expense pressures and maybe what are you seeing so far, sort of year to date. If you look at our expenses, payroll's progressing as expected. We expected it to go back to a more moderate pace than what we've seen in the past year. We saw that at 3.9% in the first quarter, and we would expect that to continue to moderate as we move throughout the year. Moving to the other big expense items, payroll. Property taxes were actually a benefit to us in the quarter. We were negative, and we would not expect that throughout the remainder of the year. We would expect that to be an inflationary plus. The other one that was a benefit in the quarter is snow removal, which living in Utah, we never would've guessed we had lower snow removal throughout the rest of the U.S., but it was actually a benefit for us in the quarter. In terms of other expense items that we expect some potential pressure moving forward, we renew our property and casualty insurance, first of June, we would expect that to see another sizable bump, similar to what I think everybody's experiencing. What's, just as a follow-up, what's the size of can you sort of quantify that as we think about from a modeling perspective? We're still in the early phases, but it's definitely double digits and, you know, could be significant. The other expense item that it, you know, ran at 11% in the quarter is marketing, and we'll use that as needed throughout the year if we find that we find positive returns on our marketing spend and we can spend that instead of cutting rates. Obviously, that's the first area we'll look. Got it. Thank you, everyone. Thank you very much. Thanks. Thank you. One moment for our next question. Our next question comes from the line of Keegan Carl from Wolfe Research. Your question please. Thanks for the time, guys. Maybe first, just on your same-store pool breakouts, could you help us better understand the outperformance of the 2023 pool relative to the 2022 pool, especially given that occupancy was higher in the 2022 pool? Yeah. Your benefit comes from adding properties that are finishing the final stages of lease up, and those properties either came from C of O properties or acquisitions. As they stabilize, rates typically continue to, you know, outperform the same-store pool. Our definition goes back to our IPO of our same-store pool, and that's 80% occupancy or we have to have owned them for a year. We do see some benefit if you look at the three pools in our steps, and each year it gets a little slower. Okay. No, that's helpful. I guess on the acquisition market, just kind of curious, you know, what are you guys seeing as far as volumes and cap rates and how should we be thinking about it the rest of the year? I guess as an adjacent one to that, I mean, how is it impacting your bridge lending program? Good question. volumes in the transaction market are significantly down. There's not a lot of distress in the self-storage market, so sellers don't have to sell, and if they don't get the price they want, they don't sell. There's a significant bid-ask spread. The deals we do see trade all seem to have some unique story. I'm not sure there's enough of a market to tell you what cap rates are because everything seems to be unique. Unfortunately, our bridge loan volumes were slower in the first quarter than we expected. That being said, there is some seasonality to this business. If you look back at the three or four years we've been doing this, we always end up closing the most loans or approving the most loans in the second half of the year. We hope we follow the same pattern, but we were a little slower than expected in the Q1. Great. Thanks for the time, guys. Sure. Thank you. One moment for our next question. Our next question comes from the line of Michael Goldsmith from UBS. Your question please. Maybe it's his phone. Can anyone hear me? We can hear you now. Okay, great. My first question is just about the cadence through the quarter. You talked about street rates moving from down 14% to down 3% January through March, and then kind of returning back down to 7% in April. It sounds like from a lot of your peers that March was a particularly challenging month. I was wondering what you were seeing that, you know... Are you able to kind of parse out what was going on between the demand side relative to where you set- rates and versus just kind of like the overall demand environment in March and how that translated into April? I don't wanna overstate the difficulties of March, right? I think we pushed a little harder with rates than maybe we should, which is fine, right? That's what the algorithm should do. They should try to find that point of resistance. You know, we went from -11 in February all the way to -3 in March, and we did see that there was some weakness at that level, and the systems brought things back and we're recovering. Yeah, March wasn't the best month in our last four months, but overall, the last four months have been strong. They've been good for us. You know, as Scott says, we're overperforming our expectations. Thanks for that, Joe. My follow-up is related to the bridge- lending program. Can you provide a little bit more color on just kind of the reasoning why deals may have been falling out? I would think this would be a good environment for bridge- lending. Sort of related to that, there was a nice pickup in the third party management, net stores that you added. Can you just talk a little bit about the appetite for kind of independent players looking for third party management in this environment? Thanks. Sure. With respect to bridge loans, you have a couple things going on. One, you have seasonality, which I mentioned. The second is we had a couple deals get dropped. You know, deals we had already signed a term sheet, collected a commitment fee, you know, was in our numbers for pipeline, and the borrower walked on the commitment fee. We had a couple that were delayed. You know, normal, I think, volatility in a business and, you know, we will hope to pick it up in the second half of the year. With respect to management, we had a great quarter. We picked up 11 stores from NexPoint as part of our strategic relationship with them and 37 other stores. The churn is much less in the management business. We only lost four stores in the quarter because the transaction market is so slow. One of those we bought into a JV. We had a great start to our management business. We expect to have a great second quarter as well. It's one of the advantages of having multiple growth drivers, is that, you know, when one might be growing a little more slowly, another one could be growing a little more quickly. It always allows us to grow the overall enterprise. Can you provide a little bit more specifics around why some of the bridge lending deals would be dropped? Are they, you know, is it a reflection of the self-storage environment, or is it reflect like the lending environment, the appetite for others to lend? I'm just trying to get a sense of kind of the factors surrounding that bridge loan program. Some of our bridge loans are commitments to issue the loan upon completion of construction, right? Because we won't lend until the property has its CO and is operational. When the project gets built and the CO is issued, if the owner has a different plan, maybe he sells the property instead of borrowing it or maybe he finances it some other way, they have the option to walk from their commitment fee and not take the loan. Very helpful. Thanks, Joe. Thank you. One moment for our next question. Our next question comes from the line of Ki Bin Kim from Truist. Your question please. Thanks. Good afternoon, everyone. First question, your New York City metro area same-store revenue, decelerated a little bit further than your portfolio average. I'm not sure what was the cause, if it's a comp issue or if you're seeing additional pressures in the new supply deliveries in Northern New Jersey, but any kind of color you can share would be helpful. I think those certainly are both important factors to that. I think you circled it, Ki Bin. Okay. In terms of the LSI merger and the synergy map that you've talked about, you know, a lot of the focus has been about getting the synergies from the LSI portfolio. I was wondering if you can maybe take a different perspective and look at it from a combined basis. What is the upside from the combined company in terms of improving the overall NOI picture, NOI margin picture, and maybe close the gap between you and your larger peer? Close the gap in terms of margin? Yeah. I think margin is a difficult thing to compare because it's not apples and apples, right? For example, if one company has a much larger deductible on their insurance program, they may have a lower insurance cost, but they're taking more risk. Neither one is right nor wrong, but they're just different strategies that will affect your margin. Secondly, margin is affected by what you include at a store level cost and what you include at a G&A level cost. I wouldn't compare our margin to our largest peers and assume that it's an apples to apples comparison. I really appreciate your question, which is, you know, do we think there are additional synergies in the overall portfolio that aren't in the underwritten number that we've given? It's absolutely true. I mean, just things like densification, right? If we now have a district manager, our district managers cover about 17 stores, and because of our portfolio footprint there have eight stores in one city and 10 stores in another, that's inefficient. It has travel costs and other negative impacts. As we get more and more stores and those footprints of the district managers get smaller, one, they can take on more stores, which reduces the number of district managers we need, and second of all, just become more efficient in their coverage of those stores. There's a lot of those types of synergies that we absolutely expect to achieve that are not in any of our numbers. The other thing is the testing with running a second brand and whether the revenue uplift from the second brand will, you know, more than cover the cost of maintaining a second brand. we were hopeful and optimistic that we are gonna figure that one out as well. Joe, you talked about the benefit of having more data, but there's obviously a diminishing return to that, 'cause it's 50% more data doesn't mean you're 50% more better. Can you just talk a little bit more about that and what the upside looks like from a more tangible standpoint? If you went and talked to our data scientists, I'm not sure they'd agree with that. They can't get enough data. But yeah, I mean, I think, you know, logically you're right. It's not, it's not 1 to 1, but there certainly is a benefit if from nothing else in just the speed in which you can get statistically significant results, right? We can run tests faster and then implement whatever the optimized solution is quicker because with more data in a bigger pool, you get statistical significance quicker. Okay, thank you. Sure. Thank you. One moment for our next question. Our next question comes from the line of Ronald Kamdem from Morgan Stanley. Your question, please. Hey, just two quick ones from me. One is on the Just going back to the tenants that are coming through, some of the online or the mobile, just, you know, after a couple years, couple quarters removed from COVID now, any sort of learnings in terms of how they're behaving versus sort of tenants that are coming into the store, is it the same? Is there sort of any noticeable difference? Thanks. We've always observed differences of tenant behavior depending on what channel they come through, both in terms of what's an effective tool to capture that tenant and what their behavior is in terms of unit size, length of stay, you know, other factors. We're, you know, constantly refining the differences in our different channels that is the results of those learnings. Great. The, just going back to the expenses, the property tax being negative, I know you touched on it, but can you give a little bit more color sort of what happened there, on the negative growth on the property taxes? Thanks. That's primarily appeals that were won during the quarter and then, revised numbers going forward. It really relates primarily to prior periods as you win those appeals from prior periods. Okay, great. That's it for me. Thanks so much. Thank you. One moment. As a reminder, ladies and gentlemen, if you have a question at this time, please press star one one on your telephone. Our next question comes from the line of Michael Mueller from JP Morgan. Your question, please. Hi. I guess a couple questions. First of all, going forward, should we think of the bridge loan program and balances as kind of going up and down based on acquisition opportunities, or should we really be thinking about that business as being, you know, completely independent regardless of what you're thinking about the acquisition markets? I think the latter. I think, you know, our capital position is such one that we can fund bridge loans that we feel are good deals and do so in a capital-light manner because we can sell the A notes and not restrict ourselves from good- acquisition opportunities because we're making bridge loans and vice versa. Got it. Okay. Second question, I apologize if it was discussed before, part of Scott's comments I think were a little garbled, at least on my end. Can you touch on the% of customers that have been in place over a year and over two years, and if you're seeing any degradation in that ratio? Yeah. If you look at our customers that have been with us for more than two years, that number is now in the upper 40s, about 47%. Customers that have been with us 12 to 18 months, that's in the low 60s. That number has actually come down some. Long-term customers beyond two years is increasing. That midterm customer has actually come down a little bit. Got it. Okay. Thank you. You're welcome. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Joe Margolis for any further remarks. Thank you. Thank you everyone for your time and your interest. I wanna thank the LSI team for their great cooperation, professionalism and efforts over the past many weeks. I've been very impressed with every individual we have interacted with, how they've handled themselves, and I'm very grateful. I also wanna assure our shareholders that while we're spending a lot of time preparing for this merger and it's time-consuming and a significant effort, everyone at Extra Space Storage remains focused on the fundamentals of our business, which is driving performance at our stores. Thank you very much. I hope everyone has a good day. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.