Extra Space Storage Q1 2023 Earnings Call Transcript

Participants

Corporate Executives

• Jeff Norman, Vice President of Investor Relations and Corporate Communications
• Joseph Margolis, Chief Executive Officer
• Scott Stubbs, Executive Vice President and Chief Financial Officer

Analysts

• Todd Thomas, Key Banc
• Juan Sanabria, BMO Capital Markets
• Samir Khanal, Evercore ISI
• Keegan Carl, Wolfe Research
• Michael Goldsmith, UBS Group AG
• Ki Bin Kim, Truist Financial Co.
• Ronald Kamdem, Morgan Stanley
• Michael Mueller, JP Morgan Cazenove

Presentation

[Operator]

Thank you for standing by and welcome to the Extra Space Management First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, Mr. Jeff Norman. Please go ahead, sir.

[Jeff Norman, Vice President of Investor Relations and Corporate Communications at Extra Space Storage]

Thank you, Jonathan. Welcome to Extra Space Storage's First 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, May 3,, 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, Chief Executive Officer.

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

Thank you, Jeff, and thank you everyone for joining today's call. We've had an exciting couple of months and a lot has happened since our fourth quarter earnings call in late February. Operationally, occupancy remained very strong through the first quarter ending March at 93.5%, our highest first quarter 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 first quarter, 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 the second preferred investment with an affiliate of SmartStop in the amount of $150 million. And of course, on April third, we announced the 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 and as we continue to refine our integration plan, we are even more confident that we can achieve at least our stated synergies.

Further, 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, 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, redevelopment and solar installations, and 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 depending 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.

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Thank you, Joe, and 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 offsetting 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% and in March, they were negative 3%. We did see lower rental volume in March at those rates, and 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 in G&A. Property net operating income in the first quarter 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 reaccelerates 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.

Questions and Answers

[Operator]

Certainly. [Operator Instructions]. One moment for our first question. And our first question comes from the line of Todd Thomas from KeyBanc. Your question please.

[Todd Thomas, Analyst at Key Banc]

Yeah. Hi, thanks. I just wanted first to ask about occupancy in April, if you could talk a little bit about 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?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

Yeah, 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.

[Todd Thomas, Analyst at Key Banc]

Okay. And within the guidance framework, where would you expect to see occupancy kind of peak in June - July. It seems like the quarter-end occupancy, which was about 10 basis-points below the quarter average, it was a little unusual from a seasonal standpoint. Are you pleased with the occupancy improvements that you're seeing, is it a little bit below what you were anticipating? And yeah, if you could just talk about what you expect in terms of the peak during the rental season?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

So as we did our guidance we focused obviously on revenue, but 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, but there is a slight negative headwind with occupancy throughout the entire year, it's pretty consistent.

[Todd Thomas, Analyst at Key Banc]

Okay and last question. In terms of the guidance, so you updated the dilution that you expect from "C of O" and value-add acquisitions, it was $0.25 initially, it's $0.23. Is that -- what's driving that and is that related to the guidance going forward for the balance of the year? Or, I mean, is that the full year dilution that's actually been increased and -- or decreased and is an improvement relative to the initial guidance?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

It's actually an improvement of $0.02 compared to initial guidance and it's from two things, lease-up properties are filling up faster and then it assumes that the timing on a couple of the "C of O" and acquisitions has bumped back slightly.

[Todd Thomas, Analyst at Key Banc]

Okay. All right. Thank you.

[Operator]

Thank you. One moment for our next question. And our next question comes from the line of Michael Goldsmith from UBS. Your question please. Michael, you might have your phone on-mute. Moving on, one moment. Our next question then comes from the line of Juan Sanabria from BMO. Your question please.

[Juan Sanabria, Analyst at BMO Capital Markets]

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's the opportunity set could be going-forward? And any thoughts about how that could tie-in with the Life Storage recognizing it's early days there?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

I don't know if everyone is having this problem, we have a very bad connection. Could you repeat the question please. We couldn't hear it here.

[Juan Sanabria, Analyst at BMO Capital Markets]

Sure, is that better.

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

Little bit, yes.

[Juan Sanabria, Analyst at BMO Capital Markets]

Just curious, Joe, you talked about the Remote Storage investments in the first quarter..

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

We can't here -- we can't. Just we need to dial in somehow. Juan give us just one minute [Technical Issues]

[Juan Sanabria, Analyst at BMO Capital Markets]

Sure, is this any better.

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

Just one moment.

[Juan Sanabria, Analyst at BMO Capital Markets]

Okay,

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

Okay, Juan, go ahead and try that again.

[Juan Sanabria, Analyst at BMO Capital Markets]

Sure, no problem. Just curious, Joe, you mentioned Remote Storage acquisitions in the first quarter. 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 -- that opportunity with Life Storage pending transaction, just curious, on bigger-picture thoughts on what that could represent, for you guys?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

Juan, it's a great question. So 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 100% on-site management is huge, in not only existing stores, but just vacant space, we can turn it storage that is small.

And then we will undertake effort to go through the Life Storage portfolio and see which of their stores would be candidates for this type of of different, management model. So it is an exciting opportunity set that we will look at.

[Juan Sanabria, Analyst at BMO Capital Markets]

And is there a different margin that these Remote Storage spaces are capable of generating?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

I think the margin is not different, but the efficiencies gained by managed them through the remote platforms makes the margins acceptable, right, You can you can get to the right margin because you have the reduced expenses.

[Juan Sanabria, Analyst at BMO Capital Markets]

Okay.

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

If that makes sense.

[Juan Sanabria, Analyst at BMO Capital Markets]

Yeah, it does. And then just curious, you talked about -- you seemingly are very confident on the synergies from depending LSI transaction. I was hoping maybe you could just unpack a little bit, what's driving that increased enthusiasm post the transaction being announced?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

Well, we're certainly, learning more about the opportunities within the Life Storage portfolio and the synergies we can gain by combining that portfolio with ours. I'll give you just one simple example in our underwriting, we assumed we would need to have six new regional offices, we've now gone through everything and we're going to -- we're going to-end up with four regional offices. So that's just one example of many kind of incremental savings that we think we can achieve, and we also have become more-and-more confident on the revenue synergies as we learn more-and-more.

[Juan Sanabria, Analyst at BMO Capital Markets]

Appreciate the fact. Thank you, guys.

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

Thanks, Juan.

[Operator]

Thank you. One moment for our next question. And our next question comes from the line of Samir Khanal from Evercore ISI. Your question please.

[Samir Khanal, Analyst at Evercore ISI]

[Technical Issues] You have implemented. Just trying to, whether it's markets regionally, anything you've seen clearly, we've had the headline risk out there with the banks -- the regional banks. Just wondering, is there any signs that you're seeing at all at this point?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

So we only picked-up about the second-half of your question, could you repeat the full question?

[Samir Khanal, Analyst at Evercore ISI]

I was asking about whether you're seeing any push back from existing customers on price increases, whether it's -- 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 see 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 increase?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

So it's a good kind of health of the customer. question and to answer specifically your question, we have not. We peaked out at about 800 basis-points greater move out from customers who receive the ECRI's, then those who didn't and that has trailed back down towards the more normal rate and it has stabilized at a number that's a little higher-than-normal, but our ECRI's are little higher-than-normal. So still a very manageable number and justifies the program. But we also see, signs of health in the customer in our very low bad debt under 2% and willingness of customers on the demand side. The strength of demand, which frankly isn't as good as it was during the COVID years. But if you look at demand statistics comparative pre-COVID years it's pretty comparable. Demand is still strong in this sector.

[Samir Khanal, Analyst at Evercore ISI]

Okay, got it, and. 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 first quarter. Maybe talk 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?

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

So if you look at our expenses, our payroll is progressing as expected, we expected it to go back to a more moderate pace than what we've seen in the past year and 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 inflationary plus. The other one that was a benefit in the quarter is snow removal, which living in Utah we never would have 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 from potential pressure moving forward, we do our property -- we renew our property and casualty insurance 1st of June and we would expect that to see another sizable bump, similar to what I think everybody is experiencing.

[Samir Khanal, Analyst at Evercore ISI]

And what's -- this is a follow-up, what's the size of bump, can you sort of quantify that as we think about -- from a modeling perspective?

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

We are still in the early phases, but it's definitely double digits and could be significant. The other expense item that ran at 11% in the quarter is marketing and we'll use that as-needed throughout the year. If we find -- we find positive returns on our marketing spend and we can spend that instead of cutting rates, obviously that's the first area we will work.

[Samir Khanal, Analyst at Evercore ISI]

Got it. Thank you. Thank you very much.

[Operator]

Thank you. One moment for our next question. And our next question comes from the line of Keegan Carl from Wolfe Research. Your question please.

[Keegan Carl, Analyst at Wolfe Research]

Yeah. 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.

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

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. And so as they stabilize rates typically continue to outperformed 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 own them for a year. So we do see some benefit, if you look at the three pools in our stats and each year it gets a little slower.

[Keegan Carl, Analyst at Wolfe Research]

Okay. No that's helpful. And then. I guess on the acquisition market is just kind of curious, what do you guys seeing as far as volumes and cap rates and how should we think about it, the rest of the year. I mean. I guess the synergies and wonder that, I mean, how is that impacting your bridge lending program?

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Good question. So 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, so this is a significant bid-ask spread. The deals we do see trade all seem to have some unique story. I'm not sure there is enough of a market to tell you what cap rates are because everything seems to be unique. And unfortunately our bridge loan volumes were slower in the first quarter than we expected.

Now 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 proving the most loans in the second half of the year. So we hope, we follow the same pattern, but we were a little slower than expected in the first quarter.

[Keegan Carl, Analyst at Wolfe Research]

Great, thanks for the time guys.

[Operator]

Thank you. One moment for our next question. And our next question comes from the line of Michael Goldsmith from UBS. Your question please.

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Maybe it's his phone.

[Michael Goldsmith, Analyst at UBS Group]

If anyone hear me?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

We can hear you now

[Michael Goldsmith, Analyst at UBS Group]

Okay, great. My first question is just about the cadence through this quarter, you talked about street rates be 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 the particularly challenging month. So, I was wondering what you were seeing that -- are you able to kind of parse out what was going on between the demand side relative to where your set rates are and versus just kind of like the overall demand environment in March, and how that translated into April?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

Yeah. I don't want to 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 fine that point of resistance, and we went from minus 11 in February, all the way to minus three in March and we did see that there was some weakness at that level and the system is brought things back and we're recovering. So we have March wasn't the best month-in our last four months. But overall, the last four months have been strong. It's been good for us. As Scott says, we're over-performing our expectations.

[Michael Goldsmith, Analyst at UBS Group]

Thanks for that, Joe. And my follow-up is related to the bridge lending program, you mind a little bit more color and just kind of the reasoning why deals may have been falling out. I would think this would be a good environment for bridge lending and sort of related to that, there was a nice in pick up in the third-party management. net stores that you added. So can you just talk a little bit about the appetite for independent players looking for third-party management in this environment? Thanks.

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Sure, so with respect to bridge loans, you have a couple of things going on when you have seasonality which I mentioned. The second is, we had a couple of deals get dropped deals, we had already signed a term sheet, collected a commitment fee within our numbers for pipeline and [Indecipherable] locked on the commitment fee and then we had a couple that were delayed. So normal, normal. I think. Volatility in the business and we will hope to pick it up in the second-half of the year.

With respect to management, we had a we had a great quarter. We picked-up 11 stores from NexPoint as part of our strategic relationship with them and 37 other stores and the churn is much less in the management business. We only lost four stores in the quarter because the transaction market is so slow. And one of those we bought into a JV. So we had a great start to our management business, we expect to have a great second quarter as well and it's, it's one of the advantages of having multiple growth drivers is that when one might be growing a little more slowly another one could be growing a little more quickly and it always allows us to to grow the overall enterprise.

[Michael Goldsmith, Analyst at UBS Group]

Can you provide a little bit more specifics around why do -- why is the originating deals would be dropped -- are they -- is it reflection of the self-storage environment -- Is it reflects, like the lending environment, the appetite for others to lean, Just trying to get a sense of kind of newer factors surrounding that bridge loan program?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

So some of our bridge loans. Our commitments to issues alone upon completion of construction, right, because we won't lend until the property has a CO and is operational. And 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 finances it some other way, they have the option to walk from their commitment fee and not take the loan.

[Michael Goldsmith, Analyst at UBS Group]

Very helpful. Thanks Joe.

[Operator]

Thank you. And one moment for our next question. And our next question comes from the line of Ki Bin Kim from Truist. Your question please.

[Ki Bin Kim, Analyst at Truist Financial]

Thanks, good afternoon, everyone. So first question, your new York City metro area same-store revenue decelerated 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 by any kind of color you can share we helpful?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

I think those certainly are both important factors to that. I think you circle that Ki Bin.

[Ki Bin Kim, Analyst at Truist Financial]

Okay and. In terms of the LSI merger and the synergy math that you've talked about, a lot of focus has been about getting the synergies from the LSI portfolio, but 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?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

Close the gap in terms of margin/

[Ki Bin Kim, Analyst at Truist Financial]

Yeah,

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

Is that. So I think margin is a difficult thing to compare because it's not apples-and-apples, right. So for example if one company has a much larger deductible on their insurance program, they may have a lower insurance costs, but they taking more risks. Neither one is right or wrong, but they're just different strategies that will affect your margin.

Secondly, margin. It's affected by what you include at a store-level cost and what you include at a G&A level cost. So, I wouldn't look at compare our margin to our largest peers and assume that it's an apples-to-apples comparison. But, I really appreciate your question which is, do we think there are additional synergies in the overall portfolio that aren't in the underwritten number that we've given? And 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 in 10 stores and another that's inefficient and has travel costs and other negative impacts. While as we get more-and-more stores in 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. So there is 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 more than cover the cost of maintaining a second brand and we we're hopeful and optimistic that we're going to figure that one out as well. And Joe, you talked about. The benefit of having more data. But there's obviously a diminishing return to that because this 50% more data doesn't mean you're 50% more better

[Operator]

So can you just talk a little bit more about that and what the upside -- it looks like from a more tangible standpoint?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

So if you want to talk to our data scientists. I'm not sure they would agree with that, They can't get enough data. But yeah. I mean, I think logically you are right, it's not -- it's not one-for-one, but it's certainly -- there certainly is a benefit, if 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 this statistical significance quicker.

[Ki Bin Kim, Analyst at Truist Financial]

Okay. Thank you.

[Operator]

Thank you. One moment for our next question. And our next question comes from the line of Ronald Kamdem from Morgan Stanley. Your question please.

[Ronald Kamdem, Analyst at Morgan Stanley]

Hey, just two quick ones from me. So one is on the -- just going back of the tenants that are coming through, some of the online or the mobile. Just after a couple of years -- couple of quarters removed from COVID now, any sort of learnings in terms of how they're behaving versus for the tenants that are coming into the store, is it the same? Is there sort of any noticeable difference? Thanks.

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

So we've always observed differences of tenant behavior, depending on what channel they come through. Both in terms of what's in effective tool to capture that tenant and what their behavior is in terms of unit size length of stay, other factors. And we're constantly refining the differences in our different channels that is the results of those learnings.

[Ronald Kamdem, Analyst at Morgan Stanley]

Great. And then 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?

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Thanks. And that's primarily appeals that were won during the quarter and then revised numbers going-forward. So, it really relates primarily to prior periods as you win those appeals from prior periods.

[Ronald Kamdem, Analyst at Morgan Stanley]

Okay. Great. That's it from me. Thanks so much.

[Operator]

Thank you. One moment. [Operator Instructions] And our next question comes from the line of Michael Mueller from JPMorgan. Your question please.

[Michael Mueller, Analyst at JP Morgan Cazenove]

Yeah, hi. I guess a couple of 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 completely independent, regardless of what you're thinking about the acquisition markets?

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

I think the latter. I think, our capital position is such 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.

[Michael Mueller, Analyst at JP Morgan Cazenove]

Got it, okay. And the second question, I apologize. It was discussed before, but part of Scott comments. I think, were a little garbled at least on my end. But can you touch on the percentage of customers that have been replaced over a year and over two years. And if you're seeing any degradation in that ratio?

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Yeah. So 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 have been with us 12 to 18 months that in the low 60s, that number is actually come down some. So long-term customers beyond two years is increasing that mid term customer has actually come down a little bit.

[Michael Mueller, Analyst at JP Morgan Cazenove]

Got it, okay. Thank you.

[Operator]

Thank you. And 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.

[Joseph Margolis, Chief Executive Officer at Extra Space Storage]

Thank you. Thank you everyone for your time and your interest. I want to 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 want to assure our shareholders that while we are spending a lot of time preparing for this merger and it's time-consuming in a significant effort, every one 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.

[Operator]

[Operator Closing Remarks]