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Factors to Impact Extra Space Storage (EXR) in Q4 Earnings

Zacks Equity Research

Extra Space Storage EXR is slated to report fourth-quarter and full-year 2019 results on Feb 18, 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 an in-line performance in terms of FFO per share. The company witnessed higher net rental rates for customers despite headwinds from new supply. However, though occupancy was near all-time highs, it remained flat with the same period in 2018. Also, the company witnessed rise in marketing expenses and property taxes.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate thrice and met in the other occasion, the average positive surprise being 1.49%. The graph below depicts this surprise history:

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 strong presence in key cities, Extra Space Storage’s efforts to expand its geographical footprint through accretive acquisitions and third-party management are anticipated to have been beneficial for its fourth-quarter results.

The self-storage asset category is need-based and recession-resilient in nature. The asset class’ low capital-expenditure requirements and ability to generate high operating margins is anticipated to have buoyed the company’s quarterly performance.

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. As such, demand for self-storage facilities is expected to have remained healthy in the quarter under consideration.

Particularly, management and franchise fees for the quarter are estimated to be around $13.05 million, indicating year-on-year growth of 19.6%. The Zacks Consensus Estimate of $289 million for property rental revenues suggests an improvement of 8.2% from the prior-year quarter’s reported figure of $267 million. These, in turn, are likely to have contributed to year-over-year revenue growth by 9.1%, with the top line pegged at $335.4 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. In addition, there is a development boom of self-storage units in many markets, as developers have flocked to this asset class thanks to the attractive opportunities in the industry. This high supply is likely to have fueled competition for the company during the quarter, curbing its pricing power. Additionally, escalation in property tax and marketing expense are resulting in elevated expense levels, which is a concern.

Amid these, Extra Space Storage’s activities during the quarter were inadequate to gain analysts’ confidence. The Zacks Consensus Estimate for the fourth-quarter FFO per share remained unchanged at $1.25 in a month’s time. However, it indicates a 2.5% improvement from the year-ago quarter’s reported figure.

For full-year 2019, Extra Space Storage anticipates core FFO per share of $4.84-$4.87. This is based on same-store revenue growth projection of 3-3.5% and same-store NOI growth of 2.25-3%. The Zacks Consensus Estimate for full-year FFO per share is pinned at $4.86, indicating 4.07% year-over-year growth on revenues of $1.3 billion.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a positive surprise in terms of FFO per share for Extra Space Storage this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a FFO beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although Extra Space Storage carries a Zacks Rank of 3, its Earnings ESP of -0.60% makes surprise prediction difficult.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Vornado Realty Trust VNO, scheduled to release earnings on Feb 18, has an Earnings ESP of +5.00% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ventas, Inc. VTR, slated to report fourth-quarter results on Feb 20, has an Earnings ESP of +0.81% and holds a Zacks Rank of 3.

Public Storage PSA, set to release quarterly numbers on Feb 25, has an Earnings ESP of +0.25% and carries a Zacks Rank of 3, currently.

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

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