Extra Space Storage Inc. (NYSE:EXR) Q4 2023 Earnings Call Transcript
Extra Space Storage Inc. (NYSE:EXR) Q4 2023 Earnings Call Transcript February 28, 2024
Extra Space Storage Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Extra Space Storage Fourth Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Jeff Norman, Senior Vice President, Capital Markets. Please go ahead.
Jeffrey Norman: Thank you, Liz. Welcome to Extra Space Storage’s fourth quarter 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, February 28, 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’d now like to turn the call over to Joe Margolis, Chief Executive Officer.
Joe Margolis: Thanks, Jeff, and thank you, everyone, for joining today’s call. We had a solid fourth quarter where we focused on optimizing the performance of the recently added Life Storage assets while maximizing the performance of the legacy Extra Space locations. We were also very productive on the external growth front adding another 74 third-party managed stores, 8 stores through acquisition and $129 million in bridge loans. Operationally, the Extra Space same-store pool maintained high occupancy and solid in-place rents, driving same-store revenue growth of 0.8% for the quarter. Core FFO in the quarter was $2.02 a share and full year core FFO was $8.10 per share. On our last call, we outlined that in order to reach the high end of our guidance range we would need achieved rates to new customers to improve on a year-over-year basis.
While demand was steady and allowed us to maintain strong occupancy, it was not strong enough to eliminate negative new customer rates, which remained at approximately negative 10% during the quarter. As a result, we faced the headwind of higher negative churn, and our full year performance was near the midpoints of our same-store and FFO ranges. Turning to Life Storage. One of the factors in our merger decision was our belief that we could enhance Life Storage property performance through our more sophisticated platform. Seven months removed from closing, we are happy to report that our assumptions have proved true. Customer acceptance of rent increases has been in line with our expectations, and we are seeing the net rent per square foot for legacy Life Storage customers move closer to that of nearby Extra Space locations.
Occupancy is also responding positively and we saw the occupancy gap between the LSI and Extra Space Storage same-store pools tightened through the quarter, improving from a gap of 350 basis points at the beginning of the fourth quarter to a gap of 250 basis points at year-end. Today, that gap has tightened further and is approximately 200 basis points. The occupancy improvement together with the benefit of existing customer rent increases resulted in Legacy LSI same-store revenue growth of 1.8%, an acceleration of 80 basis points over the third quarter growth rate. However, similar to the Extra Space properties, we continue to see new customer price sensitivity at the Life Storage locations, resulting in lower-than-anticipated new customer rates.
So while we are achieving the anticipated incremental outperformance we expected for the Life Storage assets, reaching full property level synergies is taking longer than anticipated due to current market conditions, which we know will eventually normalize. The current level of demand also influences our outlook for 2024. We are encouraged by our rental velocity, occupancy levels, existing customer health, length of stay and the potential benefits of moderating new supply. However, these factors have not yet led to material improvement in new customer rates. We are confident we can hold strong occupancy and generally maintain current revenue levels, but we believe it will be difficult to drive a reacceleration in revenue growth until we regain pricing power with new customers.
We are seeing some positive signs that we are getting closer. And given our strong occupancy levels, when pricing power returns, we are very well positioned to push rates quickly. We just have not seen enough progress to date to feel confident this inflection will be in time for the 2024 leasing season or to include this scenario in our guidance. So, while the industry as a whole will likely face headwinds from lower new customer rates in the near term, the long-term outlook for our sector and for Extra Space specifically remain bright. Storage has consistently proven to be a remarkably durable asset class and Extra Space Storage has the largest and most diverse portfolio in the industry. New supply continues to moderate and the headwinds to future new development are substantial and increasing.
We have very strong third-party management and bridge loan pipelines and a robust joint venture program and I am confident in our ability to further scale our capital-light growth activities. We expect to outsize relative growth from our LSI assets in 2024 and with additional synergies to be unlocked as the rental environment improves. And as I mentioned, our occupancy today is over 93% at what is normally our low point for the year. Once demand improves, we are very well positioned to capture it. I will now turn the time over to Scott.
Scott Stubbs: Thanks, Joe. And hello, everyone. Our results were generally in line with our expectations with a few exceptions. As Joe already covered, lower new customer rates caused revenue growth to come in modestly below our internal estimate. The revenue mix was partially offset by lower-than-expected property taxes. We also had a beat from G&A savings, partially offset by lower than modeled tenant insurance. All of our other income and expense line items were generally in line with our forecast. As of January 1, we have completed the migration of the Life Storage customers to our tenant insurance program, and we believe we will achieve $16 million in synergies from tenant insurance, exceeding our original estimate by $4 million in 2024.
Our G&A run rate from Q4 and is lower than our expected 2024 full year run rate as we continued hiring during the fourth quarter, and we have some G&A seasonality. We now expect to realize 2024 G&A synergies of $39 million, an increase of $16 million over our original forecast of $23 million. Turning to the balance sheet, we completed a $600 million bond offering in the fourth quarter and another $600 million bond offering in the first quarter of 2024. We have used the proceeds from these offerings to pay off the $1 billion variable rate bridge loan we obtained in conjunction with the closing of Life Storage. Our only remaining 2024 loan maturities can be extended at our option, and we have plenty of dry powder if opportunities arise in the market.
In last night’s earnings release, we provided our 2024 outlook for both the Extra Space and legacy Life Storage same-store pools. We have provided wider same-store revenue and NOI ranges to capture the different scenarios we believe are possible given the unusual 2023 comparables and uncertainty around new customer pricing. With interest rates potentially remaining higher for longer, our guidance does not assume a material improvement in the housing market during the summer leasing season. For the EXR same-store pool, our same-store revenue guidance is negative 2% to positive 0.5%. Our expense growth range is 4% to 5.5% driven by marketing, insurance and property taxes resulting in an NOI range of negative 4.25% to negative 0.5%. For the legacy LSI same-store pool, we expect stronger property-level growth with same-store revenue ranging from 2% to 4.5%.
We expect outsized expense growth at the LSI stores in 2024, especially in the first half of the year. This will be driven by higher payroll as we have brought the LSI stores back to full staffing levels. We expect additional expense pressure on repairs and maintenance, property taxes and property insurance, resulting in a range of 6.25% to 7.75% yielding a life storage same-store NOI range of negative 0.25% to positive 4%. Our core FFO range for 2024 is $7.85 and to $8.15 per share and assumes the full year impact of the shares and debt added through the Life Storage merger. And with that, Liz, let’s open it up for questions.
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