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Factors to Impact Extra Space Storage (EXR) in Q2 Earnings

Zacks Equity Research

Extra Space Storage EXR is slated to report second-quarter 2019 results on Jul 30, after market close. The company’s quarterly results are expected to reflect year-over-year growth in revenues and funds from operations (FFO) per share.

In the last reported quarter, this Salt Lake City, UT-based self-storage real estate investment trust (REIT) delivered a positive surprise of 1.75% in terms of FFO per share.Results reflect growth in same-store net operating income (NOI) despite pressure from new supply in 2019. The company also witnessed higher rental rates for both new and existing customers.

Over the trailing four quarters, Extra Space Storage exceeded the Zacks Consensus Estimate in three quarters and came in line in the other, the average positive beat being 1.07%. This is depicted in the graph below:

Extra Space Storage Inc Price and EPS Surprise

Extra Space Storage Inc Price and EPS Surprise

Extra Space Storage Inc price-eps-surprise | Extra Space Storage Inc Quote

Let’s see how things are shaping up for this announcement.

Factors to Consider

With strategic presence in key cities, Extra Space Storage’s efforts to expand its geographical footprint through accretive acquisitions and third-party management platform will likely prove beneficial for its second-quarter results. 

In fact, in June, Extra Space Storage and W. P. Carey jointly announced signing net lease agreements for 36 self-storage properties owned by W. P. Carey. These properties will be triple-net leased by Extra Space Storage for a period of 25 years.

Additionally, the self-storage sector remains an attractive asset class as it is basically need-based and recession-resilient in nature. The asset class’s low capital-expenditure requirements and ability to generate high operating margins is anticipated to buoy second-quarter results.

Additionally, the self-storage industry continues to witness solid demand, backed by favorable demographic changes. Specifically, the downsizing trend, an encouraging labor market, increase in the number of people renting homes have escalated the needs of consumers to rent space at a storage facility to park their possessions. This is anticipated to have kept rents and occupancy at high levels — a boost for the company.

In fact, for the quarter, management and franchise fees are estimated to be around $11.1 million, indicating sequential growth of 3.2%. The Zacks Consensus Estimate of $279 million for property rental revenues implies an improvement of 8% from the prior-year quarter’s reported figure of $258 million.

These, in turn, will likely be conducive to the year-over-year revenue increase by 8.8%, with the top line pegged at $322.8 million for the quarter.

However, Extra Space Storage operates in a highly fragmented market in the United States, with intense competition from numerous private, regional and local operators. Further, with attractive opportunities in the industry, developers have flocked to this asset class, prompting a surge in development activity.As supply continues to outpace demand, it is expected to have affected industry fundamentals during the quarter.

Further, while self-storage landlords have the ability to raise rents on existing leases due to sticky demand, companies continue to witness unfavorable pricing power on new leases. Hence, intensifying competition and supply boom will likely have escalated pricing power concerns for the company.

Amid these, Extra Space Storage’s activities during the quarter were inadequate to gain analysts’ confidence. Consequently, the Zacks Consensus Estimate for the second-quarter FFO per share remained unchanged at $1.19 in a month’s time. However, it indicates improvement of 3.5% from the year-ago quarter’s reported figure.

Earnings Whispers

Our proven model does not show that Extra Space Storage is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. That is not the case here, as you will see below.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earning ESP: Extra Space Storage’s Earnings ESP is -0.66%.

Zacks Rank: The company currently carries a Zacks Rank of 3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of a positive surprise.

Stocks That Warrant a Look

CyrusOne Inc. CONE, scheduled to release earnings on Aug 1, has an Earnings ESP of +1.37% and carries a Zacks Rank #3, at present.

Corporate Office Properties Trust OFC, slated to report quarterly figures on Jul 29, has an Earnings ESP of +0.66% and carries a Zacks Rank of 3, currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

Healthcare Realty Trust Incorporated HR, set to release June-end quarter results on Jul 30, has an Earnings ESP of +0.72% and currently holds a Zacks Rank #3.

 Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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