Extra Space Storage Q3 2023 Earnings Call Transcript

Participants

Corporate Executives

• Jeffrey Norman, Senior Vice President of Capital Markets
• Joe Margolis, Chief Executive Officer
• Scott Stubbs, Chief Financial Officer & Executive Vice President
• Unidentified Speaker

Analysts

• Michael Goldsmith, UBS Investment Bank
• Jeffrey Spector, Bank of America Co.
• Cassandra, Truist Securities
• Ajay Chohan, KeyBanc Capital Markets
• Juan Sanabria, BMO Capital Markets
• Spenser Allaway, Green Street
• Smedes Rose, Smith Barney Citigroup
• Ronald Kamdem, Morgan Stanley
• Caitlin Burrows, The Goldman Sachs Group, Inc.
• Samir Khanal, Evercore ISI
• Michael Mueller, JP Morgon
• Keegan Carl, Wolfe Research

Presentation

[Operator]

Good day and thank you for standing by, and welcome to Q3 2023 Extra Space Storage, Inc's Earnings Conference call Call. [Operator Instructions]. Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Norman, please go ahead.

[Jeffrey Norman, Senior Vice President of Capital Markets at Extra Space Storage]

Thank you, Kevin. Welcome to Extra Space Storage's Third 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, November 8th, 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. And I would now like to turn the call over to Joe Margolis, Chief Executive Officer.

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

Thanks, Jeff, and thank you everyone for joining today's call. We had a busy third-quarter. In July, we successfully completed our merger with Life Storage, adding over 1200 stores to our portfolio and over 2300 new members to the team Extra Space. The transition is going very smoothly and I'm proud of the teamwork and innovation our employees are demonstrating through the merger. Our combined portfolio of 3,651 stores provides greater diversification stability revenue opportunities and operational efficiencies that I believe will improve our property-level and external growth for years to come. From a performance standpoint, the third quarter was generally in-line with expectations.

Revenue growth moderation for the Extra Space same-store pool flattened meaningfully during the third-quarter and our 1.9% same-store revenue increase was modestly ahead of our expectations. Revenue growth was driven by high average occupancy in the quarter of 94.4%. Existing customer behavior continued to be strong with solid length of stay muted vacate and continued acceptance of rate increases. Rental volume was also steady Year-over-Year, albeit at lower new customer rates. Expenses came in higher than our estimates offsetting the revenue outperformance. This was driven by higher-than-expected property tax increases. The higher-than-projected expenses resulted in a modest miss in our same-store NOI, which was offset by a beat in G&A resulting in core FFO of $2.02, this was in-line with our internal forecast.

Short-term dilution from the merger with LSI was consistent with our estimates for the third-quarter. We have achieved our target G&A synergy run-rate of $23 million and we'll continue to gain additional synergies as we further integrate the team platform and portfolio. We have also started to realize property-level revenue synergies as we move existing LSI customers to rates more consistent with the Extra Space portfolio. The incremental FFO contribution from these improvements is partially offset initially by lower occupancy at the LSI properties due to catch-up auctions and lower new customer rates to drive rental demand. However, once we achieve stronger new customer rates and build occupancy the benefit to FFO will ramp-up and we remain confident we will reach our total expected synergy run-rate in the first-quarter of 2024. We have slowed our acquisition pace given the LSI merger, but we continue to be very active in third-party management adding 49 new stores, gross in the third quarter, not including the LSI managed stores.

Year-to-date, outside of the LSI merger, we have added 151 stores gross to the managed platform with only 17 departures. We have also continued to have steady bridge loan volume, despite the difficult interest-rate environment. In short, property-level performance is in-line with expectations. The integration of the Life Storage properties is on-track and we continue to be active in our capital-light external growth channels. As a result, we have tightened our annual core FFO guidance for 2023, maintaining the same midpoint. We will remain focused on maximizing performance at all of our stores and executing our integration plan in the fourth-quarter. As we have interacted with our shareholders throughout the quarter, it has been hard to miss the serious concerns people have about wars, the economy, interest rates, consumer health sector demand and our stock price. We absolutely share those concerns. That's said I think it is important to step-back and not lose sight of where we stand today.

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. Occupancy averaged over 94% in the quarter and it remains very healthy. New customer rates will not as strong as last year remained 20% higher than 2019 pre-pandemic levels and customer health remained strong. New supply continues to moderate and the headwinds to future new development are substantial and increasing.

Our external growth drivers continue to fire on all cylinders and I am confident in our ability to further scale our platform. And finally, I believe we have the strongest team and operating platform in the industry. It is still a great time to be in Storage and I believe the future of Extra Space remains very bright. I will now turn the time over to Scott.

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

Thanks, Joe, and hello everyone. As Joe mentioned, we would characterize the third-quarter as in-line meeting our internal FFO projections. The modest miss in property NOI due to higher non-controllable expenses was offset by beats in interest income and G&A. Achieved rates to new customers were down an average of 11.8% Year-over-Year in the third-quarter gapping widest in August and tightening modestly in September and further in October to a negative 10.8%. Given the easier, September and October comps, we would have liked to have seen that gap narrow more, but we continue to have a headwind from new customer rates.

Fortunately, lower Year-over-Year vacates and strong existing customer health continues to more than offset the headwind and revenue performance as a whole continues to hold-up. Weighing these factors as we forecast revenue for the fourth-quarter, new customer rate improvement hasn't been compelling enough for us to raise the high-end of our same-store revenue guidance range but existing customer performance has been steady enough to remove our most cautious scenarios from our full-year revenue guide. As a result, we increased the bottom-end of our same-store revenue by 25 basis-points to a range of 2.75% to 3.5% for the full-year. On the expense front, we felt greater-than-expected pressure from property taxes, primarily in Illinois, Georgia and Florida. We also had significant increases in property insurance premiums. We updated our annual same-store expense guidance to recognize actual Q3 expenses as well as a higher run-rate for property taxes resulting in a revised same-store expense range of 4% to 5% for the full-year. This results in a tightening of the same-store NOI range of 25 basis-points at both the high-end and the low-end of the range, maintaining a midpoint of 2.75%.

Turning to the balance sheet. We drew on our line-of-credit and an undrawn term-loan of $1 billion to pay closing costs and to retire, Life Storage is debt that we did not assume. With the merger, we assume $2.4 billion in Life Storage is publicly-traded bonds at the same coupons and maturities. With the assumption of these bonds, we marked to debt-to-market and we have broken out the noncash interest expense, which has been added back to Core FFO. Upon completion of the merger and the assumption of debt, S&P Global upgraded its credit rating on Extra Space to BBB+ which will drive future interest expense savings for the company. Details to our updated debt stack and revised interest-rate spreads on our credit facility are included in our supplemental.

Last quarter we provided freestanding guidance for Extra Space Storage and then provided separate details related to the anticipated dilution associated with the merger. In last night's earnings release, we updated our 2023 FFO guidance ranges for the combined portfolio. The same-store performance ranges, I previously referenced applied to the Extra Space same-store pool as we have not added the Life store properties to the pool -- Life Storage stores to the pool. Separate disclosures related to the performance of the Life Storage stores are included in our supplemental financials. Our core FFO range, which includes the short-term dilutive impact of the LSI merger as well as an add-back for transaction and transition expenses was tightened to $8.05 to $8.20 per share, maintaining the previous midpoint. We have also provided updates to key assumptions for the combined company.

As Joe mentioned, our performance was in-line with our expectations coming into the quarter and the integration of Life Storage remains on-track. We continue to believe storage as an asset class is among the most resilient in the REIT space. We believe our operating platform and highly-diversified portfolio has become even stronger through the Life Storage Merger and it is positioned -- and it is positioned for outsized future growth. And with that, Kevin, let's open it up for questions.

Questions and Answers

[Operator]

Thank you, ladies and gentlemen. [Operator Instructions] The first question comes from Michael Goldsmith with UBS. Your line is open.

[Michael Goldsmith, Analyst at UBS Investment Bank]

Good afternoon, and thanks a lot for taking my question. Your updated same-store revenue outlook implies positive fourth-quarter same-store revenue growth of 0.8% at the midpoint. And you took the low-end of the full-year guidance range up slightly. So should we interpret the increase in guidance as confidence that you will hit this range? And what have you seen from street rates in October and expect in November and December to meet this range.

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

Yeah, Michael, your assumptions are correct, it does imply at the midpoint, that it's positive for the entire quarter. And we obviously have October largely. We know what October was and so we're confident that we should if those numbers.

[Michael Goldsmith, Analyst at UBS Investment Bank]

Got it. And my next question is about. How the Life Storage. Portfolio is responding to the extra Space strategy around kind of the revenue synergies from the deal is based on the ability to roll-out the Extra Space rental growth algorithm. So, can you walk-through how the Life Storage customers responding to lower street rates and also how the Life Storage customer is responding to be elevated ECRIs?

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

Thanks. Yes, thank you. Great question. So the short answer is, everything is going as planned. We have begun sending out ECRIs notices to the Life Storage customers and they are accepting them at the same rate or maybe even slightly better rate than Extra Space customers. We have headwinds of catch-up auctions and the slightly elevated vacates from these ECRI notices to occupancy on the LSI portfolio. So we have discounted rates on the web, in particular to protect that occupancy. While we do that and that's been very successful and we've actually seen a slight uptick in occupancy in the LSI portfolio. So we're really happy with how.

The strategy is playing out and we continue to to monitor it and make sure there's no bumps in the road.

[Michael Goldsmith, Analyst at UBS Investment Bank]

Thank you very much. I will see you guys next week.

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

Thank you.

[Operator]

One moment for our next question. Our next question comes from Jeffrey Spector with Bank of America. Your line is open.

[Jeffrey Spector, Analyst at Bank of America]

Great, thank you. Joe, you mentioned that as you're integrating and now operating the LSI assets, you're using Street rate to build that occupancy. How should we think about that over the coming months? How long will that take place and given the existing overlap with EXR portfolio? Is that creating some of the drag, let's say on-street rate in your mark in-markets?

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

So I might describe it a little differently. We are using rate I think to protect occupancy more. We don't really expect to make significant gains in occupancy, until we're done correcting the rates. And getting through the auctions. So we gained some occupancy. But it's certainly not spiking and we probably don't expect that until next rental season.

With respect effect on Extra Space Storage that's very market-specific and.I don't think very significant.

[Jeffrey Spector, Analyst at Bank of America]

Okay, thank you. And then on the existing customer, you mentioned again the strength there. Can you characterize pricing power today versus, let's say, six months ago? And then can you quantify the length of stay versus the vacates? Thank you.

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

So I don't think pricing power to new customers is significantly different than six months ago. And I guess, I'd say the same thing about pricing power to existing customers, which is very strong. It's is also the same, right. We're not seeing a greater amount of ECRIs induced vacates. And I'm sorry, what was the second part of the question?

[Jeffrey Spector, Analyst at Bank of America]

If you you're able to quantify the vacates verse the length of stay?

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

Not sure I understand the question.

[Jeffrey Spector, Analyst at Bank of America]

Where is length of stay today, you had mentioned that the length of stay remained strong at vacates are down? Sorry.

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

So, no, I should understand with your respect. So lots of different ways to measure length of stay. Our average in-place customer is about 34.4 months, which is up a month Year-over-Year. Our existing customers who have been in the store for 12 months is 61%, that's down a little bit as we continue to normalize from those COVID highs that metric. We have also lost a little bit of our 24 month customers, that's about 45% now but still higher than pre COVID. Is that helpful?

[Jeffrey Spector, Analyst at Bank of America]

Yes, thank you.

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

Sure.

[Operator]

One moment for our next question. Your next question comes from Cassendra with True Securities, your line is open.

[Cassandra, Analyst at Truist Securities]

Hi, thanks for taking my question. So in the quarter you showed an improved pace of same-store revenue and same-store NOI deceleration. Is that because of easier comps or do you think rates have somewhat stabilized at current levels? I'm just trying to better understand if this improves deceleration is sustainable or if we should expect a steeper deceleration in 2024.

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

So comps throughout this year have gotten easier as we move through. In terms of how it came out versus what we were expecting, it was pretty similar to what we are expecting. As we mentioned earlier, we don't expect things to go negative in the fourth-quarter. And that sets us up for what we hope to be a good 2024. I think our occupancy is holding up well, and not going negative. I think is a positive thing.

[Cassandra, Analyst at Truist Securities]

Okay, got it. And then shifting gears a little bit. Can you talk about your -- can you give us your thoughts around your balance sheet and your variable-rate debt? Right now, approximately 30% of your debt is variable. Do you have any plans to decrease your exposure there? Are you planning on keeping the portion of that where it is?

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

Yeah, so our variable-rate debt actually ticked up slightly in the quarter as we completed the merger. With the merger, we had to pay-off some fixed-rate debt. You had private placement bonds on Life Storage that weren't allowed to be prepaid. To do that, we've used a bridge loan, $1 billion bridge that's a 2-year loan and we will be terming that out over the next one to two years. So we will be bringing that down. If you look at our variable-rate debt, net of the variable-rate borrowings, it's about 75%, but again we'll be bringing those down there -- variable receivables.

[Cassandra, Analyst at Truist Securities]

Okay, got it. Sorry. That's helpful. Thank you.

[Operator]

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

[Ajay Chohan, Analyst at KeyBanc Capital Markets]

Hi, this is Ajay on for Todd. I appreciate you taking my question. Real quick. Could you just provide an occupancy update for October and what that looks like Year-over-Year?

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

Yeah, for the two portfolios Extra Space the same-store portfolio ended October at 93.9%, it's a 1% gap from where we were last year. The Life Storage, occupancy is 90.8% compared to last year and that has actually narrowed the gap slightly. Our occupancy calculation is slightly different than the way Life Storage calculated. We are going with our occupancy calculation going-forward as they excluded or made adjustments that we don't make on an ongoing basis.

[Ajay Chohan, Analyst at KeyBanc Capital Markets]

And what is that Year-over-Year?

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

It's narrowing and that actually don't have last year's in front of me right now.

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

We haven't adjusted last year's Life Storage occupancy to reflect our methodology.

[Ajay Chohan, Analyst at KeyBanc Capital Markets]

Okay, good to know. And then my second question. So, you provided a little color around the $100 million synergies, you noted that you have met the $23 million in G&A synergies. We see some gains and tenant insurance, how should we think about the opportunity to meet or exceed the $100 million guidance over the next several months?

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

So I think we have a significant opportunity to exceed the G&A synergy of $23 million. Our original guidance for that was $140 million. Our original Extra Space guidance at the beginning of the year before this merger was contemplated. Our current midpoint guidance for G&A is $150 million. So It's not quite $10 million every six months of additional G&A because we closed the merger on July 20th, G&A is not smooth G&A is higher in the first-quarter, it's not perfectly spread-out two to four years and we still four quarters and we still have some hiring to do to fill-in some spots. But clearly, we're going to be ahead of our $23 million run-rate.

[Ajay Chohan, Analyst at KeyBanc Capital Markets]

Okay, and then I'on the tenant insurance synergies, how much more upside do you see there as you continue to transition the LSI customer to get fair policy and pricing?

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

Sure, thank you. So we've achieved very little of that synergy because the only Extra Space tenant insurance policies we're selling now are to new customers. Existing customers will not convert from the Life Storage insurance policy to the Extra Space insurance policy until starting January first of 2024. And now it was for both regulatory and contractual reasons. But that will be somewhat of a light switch will send-out the notice, people get beyond Extra Space policy which both more robust in terms of coverage, but also has a higher premium.

[Ajay Chohan, Analyst at KeyBanc Capital Markets]

Okay, perfect. Thank you.

[Operator]

One moment for our next question. Our next question comes from Juan Sanabria with BMO Capital Markets. Your line is open.

[Juan Sanabria, Analyst at BMO Capital Markets]

Hi, good morning, just wanted to kind of piggyback on a couple of questions that have already been asked. I guess on the two sequential deceleration that it moderated in the third-quarter is expected to moderate even further. Should we think that that continues into 2024 as you stand here today, based on what you know and I'm not asking you to give 24 guidance split? I guess what the market is really wondering is, have we past the worst? Particularly given where comps are as we look into 2004, just curious on your thoughts on where you could share there.

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

If you look at our deceleration through the year, I mean we've clearly moderated that deceleration our fourth-quarter guidance implies that it continues, fairly flat from where we are today. 2024, we'll be ready obviously to give the full-year guidance in February, but. I think we're set-up to be -- we're in a good spot. We'd like to see new customer rates get stronger, but existing customers are holding up very well.

2024 also as easier comps compared to what we had this year.

[Juan Sanabria, Analyst at BMO Capital Markets]

And then. Can I just ask on the LSI occupancy front. Is part of the synergies that you guys are assuming that you're able to make-up the difference in occupancy between the EXR and LSI portfolio? I guess if so, what does that entail doing to close that gap or are you happy keeping the portfolio is running a different occupancy levels? Just curious on how that should evolve.

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

So I will tell you how we underwrote the transaction to get to underwritten synergies and really how we get there, mix of occupancy and revenue. We don't really care, as much as long as we get the dollars. So we at underwriting, we observed on average at 2% gap in occupancy in about a 15% gap in rate. And to get to our $65 million of property synergies we underwrote zero improvement in occupancy and about a 7% improvement in rate. So our opportunity to do better, is to achieve better than those assumptions. Sorry for stating the obvious.

[Juan Sanabria, Analyst at BMO Capital Markets]

I guess this is a quick. So would you want to discount further at LSI to close that gap or are you happy kind of running two different occupancy across the different portfolios? Jeff, are you still there. Hello, Jeff? Ladies and gentlemen, please standby. Juan, are you still there? Yes, I'm still here.

[Operator]

It looks like we had issue on their end. So should be back on momentarily. Ladies and gentlemen, please standby.

Hello Jeff, are you back online?

[Jeffrey Norman, Senior Vice President of Capital Markets at Extra Space Storage]

We're back. You all just give us one thing, I mean, join also if you can see the login here.

[Operator]

Okay sure thing. After that I'll let Juan continue with this question, because he's still on the queue.

[Jeffrey Norman, Senior Vice President of Capital Markets at Extra Space Storage]

I'll mute my mic until lets me in.

[Unidentified Speaker, at Extra Space Storage]

Yeah, just as a heads-up, your live.

[Jeffrey Norman, Senior Vice President of Capital Markets at Extra Space Storage]

Perfect. All right, thank you everybody for your patience. Juan, I'm not sure where you loss of in the middle of Joe's response. Could you give us a re-prompt himself will answer the question?

[Juan Sanabria, Analyst at BMO Capital Markets]

Sure, my addendum was, is this the goal to close eventually then occupancy gap? Or are you happy, I guess, running different levels of occupancy across the two portfolios?

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

So the portfolios will be run on the same platform, right. Despite the two brands, it's going to be the same customer acquisition systems, the same pricing algorithms. The same sales process. So eventually, the two portfolio should should run very similarly. We don't have a strategy of running a higher occupancy extra Space store and a lower occupancy Life Storage store. Everything is going to be run on one platform to maximize revenue.

[Juan Sanabria, Analyst at BMO Capital Markets]

Understood. Thank you.

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

Sure.

[Operator]

One moment for our next question. Your next question comes from Spenser Allaway with Green Street. Your line is open.

[Spenser Allaway, Analyst at Green Street]

Thank you. I know you commented in your opening remarks, and that you're focused on your asset-light initiatives right now. But can you just walk-through where you're seeing specifically the best returns in terms of your use of capital right now.

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

Sure, so the best returns on capital continues to be a redevelopment of existing stores. Those returns are high single, low-double-digit returns. You can add units where you already own the land, you already have the office, you already have entitlements. And we are very excited to now have 1200 more stores to look at and try to find additional opportunities to put storage and parking lots or make single stories storage multistory Storage. The challenge with those are, they're relatively small in terms of dollar investments so you have to do a lot of them. But we have a team and a process, and a program and we expect to do a lot more of those in the future.

Another -- our bridge loan program also provides very-high return on capital. The whole note rate is 10% now. Average is 10% now. And when we sell the A-note the rate on the B-notes is into the teens. And that does not include the economic benefit of managing the property, which we lend on. So that also is a very good use of capital, particularly because we can control the capital by selling or not selling the A-note.

[Spenser Allaway, Analyst at Green Street]

Okay, thank you. And then you have a sense for EXR assets that are now in a competing radius of newly-acquired LSI assets, do you have a sense of what the average delta would be for the in-place rents for the EXR versus the legacy LSI assets?

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

So I think our best sense is one of the ways we underwrote this transaction is we identified 106 or 109 LSI stores that had one or more extra Space store that was in a very tight geographical radius, it was a similar type store in terms of single-story drive-up or multi-story. And we felt was a truly competitive store. And at the time of underwriting the delta in rate was about 15% for those stores.

[Spenser Allaway, Analyst at Green Street]

Yes. Thank you so much.

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

Thanks, Spencer.

[Operator]

One moment for our next question. Your next question comes from Smedes Rose with Citi. Your line is open.

[Smedes Rose, Analyst at Smith Barney Citigroup]

Hi, thanks. I just wanted to ask you on the LSI portfolio you mentioned a number of catch-up auctions. Just a little -- I guess, a little less familiar with that, I'm just wondering is that a significant part of the portfolio? Will that make a significant difference, I guess, as those customers are I guess cleared out who are non-paying and putting in new customers?

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

I mean it's a standard practice when we buy a store not to rely on the prior owner's auction process because we don't want to get caught up in a non noncompliant auction. So we start the auction process over again. And that leads to a several month lag. So we have several months of units non-paying units, we have to auction out recover those units and we we let them. It's temporary and in the overall scheme of things, I think not significant. Although it does provide some occupancy pressure in the short-run.

[Smedes Rose, Analyst at Smith Barney Citigroup]

[Multiple Speakers]. Its more of function of taking over.

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

Sorry. go ahead. This means it doesn't really impact your bad debt, either because you've already accrued the bad debt reserves. So there is no impact there, but it does impact occupancy.

[Smedes Rose, Analyst at Smith Barney Citigroup]

Okay. And then I just, you mentioned higher property taxes in the quarter and just as you, for your larger expense lines, just looking into next year because sort of a broad sense of how we might be thinking about wages and benefits, the pace of growth slowing at all, is it maybe what are you thinking about for kind of the pace taxes property tax increases, any sort of thoughts there you could share?

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

Yes, so we actually thought it had decreased some in the Six-Month numbers. Think we are looking pretty good. We'd want some appeals. We were a little bit surprised on how our actuals came in for Florida and Georgia and it would only versus the estimates we had made using property tax consultants. We hope that the worst of the property tax reassessments are behind us. But Every year is a new year, with the local municipalities.

[Smedes Rose, Analyst at Smith Barney Citigroup]

Okay and on wages and benefits, how does that pacing?

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

Wages and benefits, we've actually had it slows down, we don't see the wage pressure that we saw the last couple of years. Our -- we saw higher slightly earlier in the year as we had more hours compared to prior years when it was difficult to hire. Today it's much easier to hire our applicant flow is significantly better and we're not seeing the wage pressure we've seen over the last couple of years.

[Smedes Rose, Analyst at Smith Barney Citigroup]

Okay, thank you.

[Operator]

Thanks. One moment for our next question. Our next question comes from Ronald Kamdem with Morgan Stanley. Your line is open.

[Ronald Kamdem, Analyst at Morgan Stanley]

Hey, just two quick ones from me. Just going back to the same-store revenue number of close to 1% in 4Q, is the messaging that essentially unless you sort of see things take a turn to the downside, wouldn't expect that number to get sort of worse going into next year or is it sort of still wait-and-see? I'm just trying to figure out at 4Q sort of a good run-rate looking-forward from here without asking for guidance.

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

Yeah, so we think it's a good run-rate estimate we have given for the quarter. Obviously, October is done. It's too early to tell for next year.

[Ronald Kamdem, Analyst at Morgan Stanley]

Great. And then doubling back on the sort of the expense line items. Obviously, you took the same-store up for EXR IC sort of LSI at 4.5 as well. Maybe could you talk about just doubling down on, whether it's marketing expenses or insurance. Is there anything either one-time in nature this year that we should be mindful of? Are these sort of decent run-rate?

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

Yeah, Life Storage, the big increase Year-over-Year came from more personnel and the payroll line-item. Our managers on average, make more and we have more hours allocated to our stores and that's how we get the premium rates that we get. So we are operating them more like we operate our stores. The other thing that's different from their historical same-store numbers is we have allocated call-center and technology charged to the stores that they historically had in their G&A. So we went back to their historical numbers and added those into.

[Ronald Kamdem, Analyst at Morgan Stanley]

Right. That's it from me. Thanks so much.

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

Thanks Ron.

[Operator]

One moment for our next question. The next question comes from Caitlin Burrows with Goldman Sachs. Your line is open.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Hi, everyone. I was wondering, maybe. I don't think anybody's asked about supply yet. So we've seen a fall-off in other sectors, new start. So I was wondering if you could comment on what you're seeing now. Have you noticed any projects either taking longer, getting pushed out or any new ones getting started? Just kind of what you're seeing on the new supply-side.

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

Sure, great question. So we continue to see moderation in new supply. The peak was maybe 2018 and every year since then, it's moderated. We expect deliveries in 2023 to be kind of similar to 2022, but after that, likely to be more moderation. The headwinds to new supply in terms of interest rates and debt capital, equity capital availability, construction costs entitlement period underwriting forward revenue growth are pretty significant. And the dropout rates for projects that you can see on your R&D and all those other reports filed are really high. And a lot of projects we see in these reports end-up not getting built.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

And just to that last point, would you say that that dropout rate is more significant today than it has been like the past because of maybe those factors you mentioned?

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

Many of us were at a conference in New York a couple of weeks ago where one of the leading brokers in the industry said he thinks the dropout rate is 70% to 90% I don't have the statistics for that, but that's an observation from someone who is a very-very close to the industry.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Got it and then maybe just a quick one on the transaction side, you mentioned that EXR pulled out recently, especially to focus on the LSI merger, which makes sense. I guess could you comment more broadly on the transaction market kind of our properties trading have cap rates stabilize? Has the bid-ask spread close or is it still pretty quiet and then a Storage also. Thanks.

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

Yeah. I would characterize it is quiet. There are very few transactions that we see end-up making many transactions people bring our portfolios and they don't end-up transacting. That's an indication of a bid-ask spread. And the transactions we do see that happened. There's seems to be some story, either on the buyer side, why it was a special buy for them or on the seller side. But I don't think there is enough of a market where I could tell you what market cap rates are. It's just very quiet, very circumstantial.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Makes sense. Thanks.

[Operator]

One moment for our next question. Our next question comes from Samir Khanal with Evercore. Your line is open.

[Samir Khanal, Analyst at Evercore ISI]

Hi, Joe, when I look at some of your top markets, the Texas markets, Florida, they're holding up quite well this year. And from a revenue growth perspective. And I guess how are you thinking about those Sunbelt markets into next year? The markets which got a boost in the last few years, I mean do they give back-in 2024? How are you thinking about that?

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

So there is two things I think to think about. One is -- maybe three things. One is job growth, job growth is may be the number-one indicator of storage performance and those Sunbelt markets still still have job growth and that's an important factor. On the flip side, you know, when a market has a couple of years of 20%, 30% plus revenue growth, it's really difficult to keep up. So it may look like it's giving back because it's not growing as fast, but it's still a healthy market and it's just coming up against a tough comp.

And then lastly, which is a little bit of the wild card is the housing market. I firmly believe the housing market will come back, it's got two people can stay-in their houses forever life events happened just when and how quickly is it going to be a factor that will inform our performance next year.

[Samir Khanal, Analyst at Evercore ISI]

And then just as a follow-up from prior questions, you mentioned that the 15% gap I think between rents for the LSI and EXR portfolio and underwriting. And just want to clarify, did you say, the gap is about 7% today?

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

No, I said we underwrote 27% to achieve our underwritten synergies. So we underwrote not closing the occupancy gap at all. And only closing about

Half of the rate gap and that if we can do those two things that will give us our $65 million synergies from the properties.

[Samir Khanal, Analyst at Evercore ISI]

Okay, got it, thank you for that. And then finally on I'm just maybe ECRIs. I mean, how much has that pace of I guess increases moderated at this point? I mean I'm just trying to think, if you have macro conditions that sort of stayed similar as it is, do you think that moderates further in 2024? How are you thinking about that?

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

Well, maybe not as much as might be -- we might assume because one of the big drivers of ECRIs is the gap between the discounted web rate. The customer comes in and the actual market rate for that unit. So while we're in a period of time now, where we're offering significant discounts for customers to come into the web. That gives us the opportunity to catch them up to ECRI and get them to what the true market rate is.

[Samir Khanal, Analyst at Evercore ISI]

Thank you.

[Operator]

Your next question comes from Michael Mueller with JP Morgan. Your line is open.

[Michael Mueller, Analyst at JP Morgon]

Yeah, hi, I'm curious what are the early observations on operating two brands versus one brand so-far?

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

So it's very early, we don't have any firm conclusions. I think the most important thing that we see is, we have increased our digital footprint. So when you're in one of those saturated markets where we're operating two brands and you search for storage near me or whatever generic Storage search you use, you will find both Extra Space and Life Storage branded stores come up on the search, sometimes also Storage Express store. So we are getting more digital real-estate that's kind of the main assumption to the success of the program. But it's very early and we have quite a ways to go before we can draw definitive conclusions.

[Michael Mueller, Analyst at JP Morgon]

Got it, okay. And then maybe one other quick expense question. And I know this isn't a huge line-item in the grand scheme of things. But the growth in insurance expenses, how should we think about that over the next few years in terms of how outsize they could be or relative to the overall expense?

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

I think it will blend a little bit on claims. You had a really rough year in Florida this past year. Overall, if you had wind -- anything wind related in Florida, 100 plus percent increase in lots of areas. So I think it'll depend some on events that happened, but you've also seen a rising interest-rate caused those pools not to be as deep as they found other sources to put other places to put that money. So making sure that we have competitive bids, adding the Life Storage properties will help us because we have a new group of insurers that we haven't used in the past. And so, hopefully we should be able to bring that down and not see the kind of increases we've seen this year.

[Michael Mueller, Analyst at JP Morgon]

Got it, okay. Thank you.

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

Thanks, Mike.

[Operator]

One moment for our next question. Our next question comes from Keegan Carl with Wolfe Research. Your line is open.

[Keegan Carl, Analyst at Wolfe Research]

Yeah, thanks for the time guys. I guess first occupancy, what do you expect your Year-over-Year occupancy delta versus last year to trend for the balance of the year?

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

We're assuming about 100 basis-point gap through this year. And then obviously moving into 2024, I think that gap gets easier.

[Keegan Carl, Analyst at Wolfe Research]

Got it and then shifting gears here. I feel like these two platforms kind of gotten lost in the shuffle, just given the Life Storage. I'm just curious, you can provide any update on the bar Golden Storage Express platforms. Just what do you guys seeing as far as internal and external growth opportunities.

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

Sure, so bar gold I would say is glass is have full and half empty. The half-full is we've done a really really good job of institutionalizing and integrating the operations there and we are significantly outperforming budget on the expense side. Where I think we have more wood to chop is the growth side of that. We are growing bar gold at historical rates at the rates that bar gold group before we bought it. And we really want to turn some attention to that and try to grow it at a faster rate. Some of that I think is just us getting to know the business getting to know the people and understanding it and some of it is frankly attention on Storage Express and then Life Storage.

Storage Express is I think we've made a lot of progress. It was actually in some ways harder to integrate Storage Express because it was a different platform, a different way of doing business. When we got all of the 1,200 life stores on our operating platform in 2019 days, it took us six months with this 107 Storage Express stores because it's a different way of operating, it is just different software systems, procedures.

So we're doing very well on the integration front, we have bought several small remotely managed stores in our traditional markets, not in the more rural markets they operate in. Very trade at 7% yield. So we feel they're good purchases. And we're learning a lot. We're learning about exactly what should be a remote store partially-manned, what are the various attributes distance from an Extra Space store, population, rent per square-foot, saturation that makes it work and makes it doesn't work. We have opened up our third-party management platform. We've just signed-up a 16 property portfolio to be run remotely. We have a large, large pipeline of remotely managed stores for our management plus platform. So I think similar to bar gold, the growth of that platform was slowed by our attention to the Life Storage deal. We use that time to learn things which I think is good and as we move forward I expect that growth to accelerate.

[Keegan Carl, Analyst at Wolfe Research]

Great, thanks for the time guys.

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

Sure.

[Operator]

And I'm not showing any further questions at this time, I'd like to turn the call-back over to Joe Margolis, for any closing remarks.

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

Great, thank you everyone for your time today. I hope the message was clear that things are going as expected. Our integration and realization of synergies are proceeding very well. And we look-forward to seeing many-many of you in Los Angeles next week. Thank you very much.

[Operator]

[Operators Closing Remark]