Good afternoon, ladies and gentlemen, and welcome to the Extra Space Storage, Inc. Q2 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, July 31, 2025. I would now like to turn the conference over to Jared Conley, Vice President of Investor Relations. Please go ahead.

Thank you, Joelle, and welcome to Extra Space Storage's Second Quarter 2025 Earnings Call. In addition to our press release, we have furnished unaudited supplemental financial information on our website. Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's businesses. These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review. Forward-looking statements represent management's estimates as of today, July 31, 2025. The company assumes no obligation to revise or update any forward-looking statements because of the changing market conditions or other circumstances after the date of this conference call. I would now like to turn the call over to Joe Margolis, Chief Executive Officer.

Thank you for joining us today. We had a solid second quarter. Our operational momentum continued with same-store occupancy reaching 94.6%, up 60 basis points year-over-year and 120 basis points sequentially from the first quarter. We were also able to achieve positive year-over-year rate growth to new customers for the first time since March 2022. We are encouraged by these positive rate trends, even though the progress is developing more gradually than we initially expected, resulting in flat same-store revenue growth in the quarter. While incoming customer price sensitivity is still apparent, rate growth is now positive, and we are trending in the right direction. As we look forward, our measured progress, elevated occupancy and the easing of new supply pressure positions us well to capitalize on improving market fundamentals as our team continues to execute efficiently across all operational areas. During the second quarter, we executed on strategic opportunities across our diversified platform. We completed only 1 acquisition for $12 million, demonstrating our commitment to prudent and disciplined capital allocation in a high-priced market. We also bought out 2 joint venture partners' interests in 27 properties for $326 million at attractive valuations, driven by our partners' liquidity needs and favorable partnership terms. Our bridge loan program continued gaining market traction, generating $158 million in new originations. Simultaneously, our third- party management program added 93 stores with net growth of 74 properties, expanding our managed portfolio to 1,749 stores, providing more scale and efficiency to our sector-leading platform. Our multichannel approach combining opportunistic acquisitions and capital-light activities demonstrates our ability to create value and grow accretively regardless of market conditions, positioning us to capitalize on opportunities as they emerge. The self-storage sector continues to demonstrate its resilience and our business model remains strong. Our portfolio's geographic diversification continues to serve…

Thanks, Joe, and hello, everyone. Our performance through the first half of the year is in line with our full year estimates. Second quarter same-store revenue came in modestly below our internal expectations due to new customer rate growth improving more gradually from Q1 to Q2 than in the previous 3 quarters. However, our flat same-store revenue was augmented by stronger-than- expected tenant insurance income and management fee income. Interest income and interest expense were both greater due to a higher-than-forecasted SOFR curve. So as Joe mentioned, while the progress in new customer rate is a little slower than expected, our operating model continues to generate stable cash flows and maintain consistent performance metrics and our ancillary income streams are making meaningful contributions to FFO. Turning to expenses, we experienced higher-than-normal year-over-year increases. Same-store expenses increased by 8.6%, driven by outsized increases in property taxes, specifically in the legacy Life Storage properties located in California, Georgia, Illinois and Texas. Although higher than normal, property taxes were generally in line with internal estimates through the first 2 quarters, and our full year outlook anticipates total expense growth, including property tax growth to normalize in the back half of the year. Our balance sheet continues to demonstrate strength and flexibility with 89% of our debt maintained at fixed rates after including the hedging impact of our variable rate receivables. We've maintained our weighted average interest rate at 4.4% with an average maturity of 4.3 years. Our measured approach to leverage, complemented by our well-structured debt maturities and diverse funding sources provides us with the stability to pursue strategic opportunities while effectively managing our position in the current interest rate environment. Given our in-line performance in the first half of the year and gradually improving fundamentals, we are tightening our full year core FFO and same-store guidance ranges and maintaining our existing midpoint. This results in core FFO guidance of $8.05 to $8.25 per share. For our same-store portfolio, we anticipate revenue growth between negative 0.5% and positive 1% for the full year. Our same- store guidance includes potential acceleration in the second half, particularly in the fourth quarter as improving new customer rates begin to take effect. Operating expenses are projected to grow between 4% and 5%, which, as I mentioned, implies expense growth moderation in the back half of the year, especially with property taxes. We've updated our interest income and expense projections to account for the current interest rate environment and recent debt activities. Our diversified portfolio, sophisticated operating platform and strong balance sheet continue to provide a solid foundation as we execute on our strategy through current market conditions, maintaining our focus on long-term value creation. With that, operator, let's open it up for questions.

[Operator Instructions] Your first question comes from Michael Goldsmith with UBS.

UBS Investment Bank, Research Division Can you provide an update on how street rates and occupancy have trended into July and how that compares to June and the second quarter?

Sure, Michael. From an occupancy perspective, sequentially, occupancy remained flat. So it continued in July at 94.6%, which year- over-year is a positive delta of about 50 basis points. New customer rate improved on a year-over-year basis, it was up a little more than 2%. So seeing positive trends there. And our move-in, move-out gap also compressed with those rates ticking up. So positive indicators on all fronts in July.

UBS Investment Bank, Research Division And then just to build on that, right, like street rates have now turned positive. In the commentary before, you talked about trends accelerating through the year and feeling that in particular, in the fourth quarter. Is that just a function of -- it takes a little bit of -- there's only a few percentage points of customers that turn over every quarter. And so it just takes a little bit of time to start to feel that benefit of the street rate -- the positive street rate growth? Or is there something else that is -- that makes kind of the fourth quarter when you start to really feel the benefit and start to feel things inflect.

You're exactly right, Michael. That's spot on. All other things equal, as we're seeing those positive new customer rates begin to roll through, it just takes time for the snowball to build as you keep adding more and more sequential quarters of positive rate growth, it begins to flow through to revenue. So it does take time, but it starts to compound and improve as you get into the fourth quarter.

Your next question comes from Salil Mehta with Green Street Advisors.

So just looking at the net rental rate growth, seeing, I believe, like close to 1% decrease in overall rental rate. But with move-in rates roughly flat to positive, would I be correct in asserting that net decrease to ECRIs? Or could this perhaps be attributed from the rent restrictions in L.A.? Any color here would be super helpful.

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

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

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

Well, this is Joe. I think there are several things. One, as mentioned at the previous question, we turn 5% or 6% of our customers a month. So it takes time for improvement in rate to build up in the rent roll and show it. We also have a roll down and that, again, takes time to work against that. But this isn't a month-to-month business, right? This is a long-term business. The trends we're seeing are positive. The positive in new customer rate for the first time since March 2022 is a meaningful inflection point. And we're -- we've rolled down the hill, and we're looking forward to writing up the hill now.

Okay. Got it. And then I guess just some comments if you can make on LSI, the impact that portfolio is having on same-store. Is it in line with your expectation? Has it been below your expectations sort of year-to-date? Because I know that portfolio also had exposure to Florida, right? And maybe that's taken a bit longer to come back to normalization. Maybe talk around kind of the LSI portfolio and the impact it's having.

No. So the LSI portfolio is performing as expected. Rates are improving faster than the Extra Space rates, but that's what we expected. We believe the additions to the same-store pool, which is over 95% LSI, will add 60 basis points to same-store performance this year. So on track in all respects.

And Samir, I would just add, not specific to LSI, but your comment about the Sun Belt in general, I think is correct that those have been the markets that have been disproportionately impacted by new supply. They're also a little bit of victims of tough comps after multiple years of really strong NOI growth, and now they're taking a little bit of a breather and those are some of our tougher markets. But long term, we're very bullish on the Sun Belt and in general, on having a highly diversified portfolio with exposure to all of the growth markets throughout the country. So today, a little more of a headwind for us than some of our Mid-Atlantic markets, Chicago, Pacific Northwest, they're all doing a little better. But over longer periods of time, as Joe alluded to, we have a lot of confidence in our portfolio construct.

Your next question comes from Todd Thomas with KeyBanc Capital Markets.

First question, I just wanted to follow up. Maybe you can sort of help flesh this out a little bit. Move-in rent trends inflected positive in the quarter for the first time in a few years. You mentioned that they improved a little further to 2% in July. I understand it takes a little time to flow through, but you also gained occupancy through June, you're still at 94.6% in July. So it sort of sounds like stable to slightly improving conditions a little bit through the balance of the summer here. Can you just sort of help flesh that out a little bit and maybe comment on what you're seeing that pointed you to sort of the comments around conditions being a little bit slower here?

Yes. I think -- I mean, we give a range for same-store revenue growth, and there's assumptions all throughout that range. So speaking to the midpoint based where we finished the first half and if you were to solve the midpoint, it suggests or implies relative flat performance year-over-year in the back half of the year to slightly positive, a modest acceleration in the back half of the year. And then at the high end, that would imply more acceleration, bottom end, a little bit of deceleration. And all of those factors, we believe, are on the table, but all the trends we're seeing right now are looking positive. One thing that's probably worth mentioning, Todd, in terms of just trying to square up the numbers, our actual net rental income was positive 20 basis points in the quarter. And then that was partially offset by our other income line items, which include bad debt and administrative fees. Administrative fees are a little lower year-over-year because rental volume is a little lower year-over-year because our occupancy is so high. And bad debt is -- or excuse me, late fees are a little lower because bad debt is lower, which indicates a healthy in-place customer. So while a headwind year-over-year from a same-store revenue standpoint, again, these are actually trends we think are positive for the industry.

Okay. That's helpful. And then, Joe, you commented on being prudent with regards to acquisitions. It sounds like you're on the sidelines a little bit until pricing adjusts. I'm just curious if you can elaborate a little bit on pricing and that comment, sort of what kind of pricing adjustments you would like to see before growing a bit more acquisitive here?

Yes. Thanks, Todd. I don't want to give the impression we're on the sidelines at all. We have an investment team that looks at every deal that's in the market, looks at all the deals that we manage that end up on the market. We almost always get a first shot at those. We underwrite them all. we look real hard at it. But we're not going to execute on deals that are sub-5 caps stabilizing in the 5s. It just doesn't do any good for our shareholders for us to do that. So we're going to look at everything. We're going to wait for pricing gets to a level that we feel is accretive. And in the meantime, we're going to use all of our other tools, be it bridge loans, restructuring, buying out JVs, doing other activities, making new preferred investments, which we did one this year to make accretive investments while being prudent allocators of capital.

Your next question comes from Ronald Kamdem.

Just starting with the expenses. I know we talked about property taxes last quarter, obviously, continue to be pretty high year-over- year now. Maybe just a little bit more color on your expectation there. And is this just a 2025 thing? And how should we think about that going forward?

Yes. Thanks for the question, Ron. You're exactly right. Certainly high year-over-year. The positive news is we've lapped the comp. So we took that pain in that markup primarily driven by some of our Life Storage properties. And in the second half of the year, we anticipate that coming down significantly. And in terms of all of our other expense line items, also expect to see, on average, as indicated by our range relative to our first half performance, deceleration in expense growth in the back half of the year.

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

Sure. I would say, as Joe alluded to in one of his previous answers, it's not perfectly sequential month by month. We're not managing this month-to-month. But for the quarter, it did come in a little lighter than we would have expected relative to the rate progress we had seen in the previous 3 quarters. So a little lighter on the same-store revenue side than we expected, a little better in some of the ancillary income streams, which net-net put us right on target. As far as how we then view that as it pertains to the health of the industry, I think we're more focused on forward indicators such as rental volume, new customer rates as well as our existing customer behavior, which all look positive.

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

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

Your next question comes from Juan Sanabria with BMO Capital Markets.

Just curious if you can talk a little bit about the prefs in the loan book and what you're seeing there? And is there the expectation that you get any repayments? I know there's -- the next point pref that's out there. Just curious on any known repayments or how you think that business evolves in the second half and into '26.

So we're still seeing good demand for our bridge loan product. We slightly increased our guide as to how many loans we're going to keep on the balance sheet. Part of that is to offset the SmartStop preferred we were prepaid in the early part of this quarter. We have great flexibility to allocate capital to that program by holding or selling A notes, which allows us to react to other opportunities and redirect capital in that way. I think the balances will be about what they are now, plus or minus going forward, perhaps with a different mix of -- As and Bs inside that balance. But it's a good, healthy program that is a very helpful tool for us, particularly in this market environment. We have not been notified by any of our other preferred holders of an imminent payback.

And then curious how you guys are thinking about dispositions, if there's any pruning being considered with regards to maybe Sun Belt exposure with Life and just your strategy there.

Yes. So you might be asking because you saw we just put a 22-store portfolio on the market for sale. These are all former LSI properties. When we merged with LSI, we said we were going to spend a couple of years improving the NOI of the properties, getting to know the portfolio. And then after 2 years, we would qualify for 1031 tax -- 1031 exchange treatment. And these are the properties we've selected to dispose of to reshape and optimize the portfolio.

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

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

Your next question comes from Michael Griffin with Evercore.

Maybe just starting on market performance. Just looking at some of your top markets, I noticed that NYC and Chicago were maybe a little bit lighter, at least relative to maybe my expectations. I know 1 quarter doesn't make a trend, but anything to read into here? I mean I imagine that these kind of markets would be expected to be better performers, obviously, relative to the Sun Belt, but still maybe a little surprised to see them down year-over-year.

So thanks, Grif, for the question. From a same-store revenue standpoint, we saw modestly negative same-store rev in the New York MSA. More of that impact is Northern New Jersey and Long Island, more so than the core boroughs, have been impacted more by new supply than for New York itself. And on Chicago, on the other hand, we actually saw some acceleration Q1 to Q2 in terms of same-store revenue progress. So we're actually happy with Chicago. Certainly, would like it better and more in line with your forecast if they were higher, but we see positive trends in Chicago.

That's helpful context. And then maybe just more broad-based question around demand and future fundamental performance. I know we're still in this period of higher mortgage rates, lower housing velocity. I mean, Joe, it seems like to you, it's more a supply question of when fundamentals inflect. But do you really need that housing market to come back for people to kind of sound the all clear and get kind of performance and fundamentals accelerating to maybe historical trends? Or just how are you thinking about the housing market in the context of storage demand?

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

And Jeff, congrats on the promotion.

Your next question comes from Caitlin Burrows with Goldman Sachs.

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

So I would say in line with our expectations. Last year, we had a more muted rental season, and we called for in our guidance something similar. We expect it to look pretty similar in '25 as it did to '24. We maintained higher occupancy throughout the shoulder seasons than we typically do. And our hope was that with that higher occupancy, we outsized pricing power, especially with new customers. We saw it to some extent. I think we had hoped to see a little bit more, but continue to see it marching in the right direction in July. So overall, Jeremy, I'd say, in line with our expectation.

And I guess just for like the existing customer, how are you seeing their activity given that there's less housing turnover? Are they staying longer? Is that being able to push ECRIs more? Yes, anything on that would be helpful.

Yes, great question. So one of the strengths of this business is the strength of the existing customer. We are seeing fewer vacates, increasing length of stay. As Jeff mentioned earlier, bad debt is below 2%, very healthy. Customers are accepting ECRI at the same rate that they have previously. So there's really no sign of weakness or danger with existing customer behavior.

Your next question comes from Nicholas Yulico with Scotiabank.

This is [indiscernible] on with Nick Yulico. And so you mentioned the disposition of these 22 LSI assets. Just trying to understand, excluding these assets, what would be the spread between LSI and legacy EXR rents? I think in early June, you mentioned around 5% to 6% for the whole portfolio. Do you look at the portfolio, excluding these dispositions?

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

And then broadly, is it still around 5% to 6% or it's contracted since June?

It's still about 5% to 6%.

Got it. And then second question would be more like a broad on macro assumptions embedded in second half '25 guidance. And from your point of view, what are the major catalysts to follow that might lead to EXR hitting lower or higher end of FFO guidance?

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

Your next question comes from Eric Wolfe with Citi. Eric Wolfe There's been a good amount of volatility in the stock recently. Can you just remind us how you look at buybacks versus your cost of capital and other uses of capital today? I think you bought a small amount of stock around $1.26 earlier this year, but the opportunity went away quickly.

Yes. That was an interesting day where we had about a 2-hour window before the President announced the pause on tariffs, and we got out of our price band. So the Board of Directors approves a certain band of pricing in which we'll use capital to repurchase our stock. And as you point out, it's a capital allocation decision, and we've done it in the past, and we're certainly not afraid to do it in the future. Eric Wolfe All right. And then you mentioned the impact of AI on search and how maybe that's not going to make sort of these Google search terms as a good proxy for demand. I guess do you have a sense for what percentage of your customers are using ChatGPT or AI to find the best storage solution versus like, say, this time last year or a couple of years ago? And do you think that makes customers a bit more sensitive on the front end to pricing just because they can sort of quickly analyze the cheapest option within a certain area?

Yes. I'm going to apologize. I don't have a lot of good answers around this. This is changing so quickly. And we have a lot of people who are a lot smarter than me spending a lot of time trying to figure it out. In the beginning of the year, 15% of searches came up with AIO at the beginning of it, and now that's over 65%, I think, in 6 or 7 months. So we're trying to understand and take advantage of the changes that are going on in the search landscape. But I do have confidence in our team and our ability to be out in front in this.

Eric, one piece of color that I would add is while it does definitely create some noise in the data in terms of searches, one thing that we've noticed is that a lot of the types of inquiries customers are putting into ChatGPT and other AI models are more informational in nature. So if they were wondering what size of a unit to rent or the benefits of climate controlled versus not, et cetera, that's a good place to get those common answers. But customers who have the intent to transact, still are tending to click through and are going to websites. So we've seen, while it maybe gets a little murkier on just a total traffic from a traffic standpoint, the conversion rates for those customers that are clicking to the website have improved and increased. So again, evolving very quickly, like Joe mentioned, but something that we're tracking very closely.

Your next question comes from Ravi Vaidya with Mizuho.

Mizuho Securities USA LLC, Research Division It appears that you guys are largely done for the year with acquisitions. And you mentioned earlier that pricing is getting tighter. I wanted to ask a bit more about the competitive dynamics. Are there more players coming to markets and maybe the bid-ask spread narrowing? I would have thought that it would have maybe been more buyers on the sidelines given kind of the uncertainty in fundamentals. So I just wanted to hear your thoughts on that.

I'm sorry if I gave the impression that we're done with acquisitions. Maybe you're referencing our guidance versus what we have under contract. We're still very active at looking at everything, underwriting everything. We have capital. We have joint venture partners. If opportunities arise, we will execute on them. So we're not sending the investment team home for vacation for the rest of the year. That being said, I would have thought cap rates would have moved more than they have given interest rates and other factors. And they haven't. And there still are buyers out there transacting at what we consider to be high prices. And as long as that continues, we'll continue to remain disciplined. But in no way are we not in a position or not willing to execute on good opportunities.

And Ravi, I'd just add, as we think of guidance, some of the reason for not necessarily plugging in a lot of additional volume that hasn't been identified at this point into the year is it does take some time between negotiating and contracting deal and closing. And then also the contribution to FFO for the remainder of the year, if it's a late Q3 or Q4 close, it is going to be relatively immaterial on your overall FFO for the year. So from our perspective, it doesn't make sense to speculate too much on volume. We'd rather plug it in once we have something specific identified.

Mizuho Securities USA LLC, Research Division I was just comparing what was done under contract year-to-date versus the guidance provided, but that additional color is helpful here. And just one more...

I understand.

Mizuho Securities USA LLC, Research Division Can you please identify some markets where you're starting to see supply headwinds ease and thus expect pricing and same-store revenue to improve on out?

I apologize, Ravi. Our phone cut out just a little bit there. Can you say that again? I caught the part about markets, but...

Mizuho Securities USA LLC, Research Division Sure. Sorry about that. Maybe just some markets where you're starting to see supply headwinds ease a bit and maybe where you expect to see a greater acceleration in same-store revenue as a result of that?

Yes. Thanks for repeating the question, Ravi. It's -- in general, the markets that were earlier to the new supply cycle, so a few examples I would give are Portland, Seattle, Chicago, Denver that have seen pressures from new supply ease. And generally speaking, those are also the markets where you've seen revenue pick up earlier. You also have certain markets that I think we would classify as having been pretty steady throughout the cycle that didn't see as much new supply, and it's just been a little more stable. I think Boston and Washington, D.C. fits squarely in that category.

Your next question comes from Eric Luebchow with Wells Fargo.

Wells Fargo Securities, LLC, Research Division Maybe you could -- you touch on the 3PM program. It looks like you added 174 net. Talk about where you're seeing the strength from? And are you seeing any new opportunities from partners of the LSI portfolio that maybe gives you the ability to keep growing there?

Yes. Thank you for the question. So we've had 2 fantastic quarters growing our Management Plus business, our third-party management business. As you mentioned, we've added 174 stores net this year. And some of that is from new partners that we were introduced to through the LSI merger. It's been one of the benefits of the merger as well as bridge loans -- making bridge loans to those partners as well. So it's been a great 6 months of the year. I think it's largely due to a difficult operating environment where private operators come to the realization or their equity partners do or their lenders do that they need professional management. They need the best operator in the business managing their stores. I would not be surprised if the second half of the year, we grow -- we continue to grow but grow at a slower pace as the transaction market is picking up, and we probably will see some exits from the portfolio. But I think this is a great growth area from the company -- for the company and not only adds directly management fees and tenant insurance, but also provides these ancillary benefits of opportunities to purchase and opportunities to make loans.

Wells Fargo Securities, LLC, Research Division Appreciate that, Joe. And I guess just one follow-up. I apologize if I missed it, but I think you had talked about top of funnel demand measured by search on your last call being up year-over-year. So just wondering how it's trended the last couple of months given some of the macro uncertainty that's out in the market for the second half of the year.

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

Your next question comes from Michael Mueller with JPMorgan.

JPMorgan Chase & Co, Research Division I know it's not black and white in terms of what's a consumer versus a business user. But do you have a sense if one of those categories is clearly ahead of the others in terms of seeing better demand? And for a follow-up, when it comes to ECRI pushback, are you getting more pushback from one of those categories versus the other as well?

So it's a hard question to answer because the business consumer is not a monolithic entity, right? There's national pharmaceutical chains with big balance sheets and there's the local landscaper who's much more akin to a retail customer. I think your -- kind of what's behind your question, I think, is correct, is the big national businesses stay longer, react better to ECRI and are better overall customers, while maybe some of the small local businesses are not as different as the retail customer.

Your next question comes from Alex Murphy with Truist Securities.

Given that same-store revenue was flat and NOI declined by around 3%, are there any specific levers management is considering to improve property level margins going into the back half of 2025?

I think the main one will be on the expense side. Margins were suppressed in the first half of the year because of higher than normal expenses. And as we continue to push on the revenue side, it also gives us an opportunity for additional margin expansion. One example would be our marketing spend. We get a high return on that spend. It's something that we can measure and see the returns on it. And as we can deploy those marketing dollars, if we're seeing a positive return, we'll keep doing it. So there are different levers you can pull in terms of marketing, discounting, pricing, and we're always evaluating all of the levers to try to maximize revenue.

Your next question comes from Salil Mehta with Green Street Advisors.

I'd like to just touch a bit more on market and region performance. It looks like Sun Belt areas, which have been kind of beaten up, they look to finally be turning the corner and achieving some sort of stabilization. Does this ring true? And what are you guys expecting from markets in this region in the future?

In terms of absolute performance, as you're indicating, those are our tougher markets. From a sequential improvement standpoint, I think it's going to be a market-by-market situation. And I think it's highly tied to new supply and the rate at which supply that's been delivered is absorbed as well as how quickly or how much additional supply is still to be delivered in those markets. So apologies for the more theoretical answer, but I think it just depends on the market and the individual dynamics of each market. And while this may be obvious for us, these markets are micro markets much smaller than MSAs. So it can even vary where new supply is being delivered relative to our specific properties.

Your next question comes from Brendan Lynch with Barclays. Brendan James Lynch Jeff, congrats on the new role. Just a follow-up about AI. It's come up a few times on the call. In the past, obviously, Google took the majority of your marketing spending. Can you just talk about how you might be distributing some of that marketing spending between ChatGPT and Grok and any other AI models that might be out there?

That's an easy answer today, but maybe not tomorrow. So, so far, the companies have not tried to monetize their AI platforms. So we spend 0 on it. But I know it wasn't free to build ChatGPT. So I'm sure that will come in the future. But right now, it's -- almost all our dollars go to Google. Brendan James Lynch Okay. Great. And then, Jeff, you had mentioned that the shoulder season in the spring was a bit better in terms of occupancy. Should we extrapolate anything from that in terms of how the shoulder season might play out in the fall on the other side of the equation?

I think we were more aggressive with new customer rates to maintain that higher occupancy. Our models found that to be a better solution for maximizing revenue. And so that's what we did. And I think we'll continue to monitor as we go into the fall. Right now, rental volume continues to be healthy. We've been able to maintain our occupancy in July. And I would anticipate that we'll still have high occupancy relative to any historical levels. But the question will be what the balance is in terms of taking rate versus holding occupancy, which we'll continue to evaluate as we go. And that's really one of the significant advantages of having such a large portfolio. We can test these things in relatively short periods of time and get real-time feedback as far as what the customer is willing to accept.

Your next question comes from Omotayo Okusanya with Deutsche Bank.

Jeff, congrats. Scott will be missed. My question is around -- you guys -- you talked about kind of fundamentals stabilizing, even some operating metrics are inflecting positively, but it takes some time to actually hit the bottom line. And so I guess when we kind of think about when we kind of start to see maybe some better earnings growth going forward, I mean, does that have to boil down to street rates moving up even more aggressively to 10% increases? Or is it more of a case of somehow move-out volume kind of slows down given the negative mark-to-market associated with it right now? Just trying to get a sense of when some of the stabilization or inflection we can really kind of start seeing it in your bottom line.

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

And with timing kind of being TBD?

I think timing is TBD.

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

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

Thank you. Thank you, everyone, for your time and interest in Extra Space Storage. I was surprised by the reaction to our release and want to make sure that I emphasize the strength of the company. We have very high occupancy. We have turned to positive year- over-year revenue growth. Our ancillary businesses are growing at a very fast pace. We have a platform that is poised and able to take advantage of any opportunity that goes forward. We've maintained our guidance, and we're looking forward to the rest of the year and 2026 for better things to come. Thank you again for your time.

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