Shares of Extra Space Storage Inc. EXR have outperformed its industry in three months’ time. The company’s shares have gained 5.7%, while the industry has inched up 1.9% during this time frame.
Moreover, the trend in estimate revisions for 2019 funds from operations (FFO) per share indicates a favorable outlook for this self-storage REIT. In fact, this Zacks Rank #2 (Buy) stock is likely to gain further in the near term on a number of favorable factors, and the current price offers a good entry point.
Let’s explore what makes it a solid choice:
Extra Space Storage has earned a solid recognition in the self-storage industry. The company has been putting in efforts on expansion of its geographical footprint through accretive acquisitions and third-party management platforms. It enjoys solid presence in key cities and opts for strategic joint ventures to drive long-term profitability.
Expansion Efforts: Extra Space Storage has grown its branded store count from 766 in 2009 to 1,606 in third-quarter 2018. Also, total stores managed for third-party owners increased from 181 in 2011 to 507 in the reported quarter. Moreover, over the past five years, Extra Space Storage acquired $4.5 billion in properties, gaining an increased scale in several core markets, as well as fortified its presence in a number of new markets.
These efforts have helped this Salt Lake City, UT-based self-storage real estate investment trust (REIT) emerge as the second largest self-storage owner and/or operator and the largest self-storage management company in the United States. Majority of this REIT’s stores are situated around large population centers which enjoy above-average population and income demographics for stores.
Further, the industry is characterized by fragmented ownership and only around 20% of the total self-storage square footage is under the REIT’s ownership. This creates solid scope for consolidation at some level in the future and with a solid balance sheet, Extra Space Storage remains well poised to compete for acquisitions.
Healthy Asset Fundamentals: The self-storage asset category is basically need-based and recession-resilient in nature. This asset class has low capital expenditure requirements and generates high operating margins. Additionally, self-storage industry is likely to continue experiencing solid demand, backed by favorable demographic changes, improving economy, job-market gains and migration trends. Particularly, this asset category has been gaining from the increasing use of such facilities by the rising baby boomers and their preference for residential downsizing. In addition, self-storage assets are benefiting from adoption of technology and serving the millennial generation.
Cash Flow Growth: Extra Space Storage recorded historical cash flow growth (three to five years) of 27.9%, which comfortably exceeded 18.0% growth registered by the industry. Also, its current cash flow growth of 16.3% compares favorably with the 7.1% increase estimated for the industry.
Furthermore, in December, the company announced an increase in its balance-sheet strength by amending and restating the senior unsecured credit facility, increasing the total capacity by $200 million, to reach a total of $1.35 billion. Apart from enhancing the capacity, the move has enabled the company to lower its cost of debt.
Superior ROE: Extra Space Storage’s Return on Equity (ROE) is 20.1% compared with the industry’s average of 5.5%. This reflects that the company reinvests more efficiently compared to the industry. Furthermore, the company remains committed to boost shareholders’ wealth. It has achieved a five-year dividend increase of 115% in dividend. Such shareholder-friendly efforts are encouraging.
Other Stocks to Consider
Investors can also consider other top-ranked stocks in the REIT space like Terreno Realty Corporation TRNO, Equity Residential EQR and OUTFRONT Media Inc. OUT.
Terreno Realty sports a Zacks Rank of 1 (Strong Buy), at present. The company’s FFO per share estimates for 2019 remained unrevised at $1.39, over the past month. You can see the complete list of today’s Zacks #1 Rank stocks here.
Equity Residential carries a Zacks Rank of 2, currently. The company’s FFO per share estimates for 2019 marginally moved up to $3.41 in two months’ time.
OUTFRONT Media also carries a Zacks Rank of 2, currently. The company’s FFO per share estimates for 2019 of $2.22 climbed 0.9% in two months’ time.
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