Should You Hold on to Extra Space Storage (EXR) Stock Now?
Extra Space Storage EXR is the largest operator of self-storage properties in the United States and seems well-placed to benefit from its high brand value, geographically diversified portfolio and presence in the key cities of the United States.
Portfolio expansion efforts to capitalize on the favorable industry trend and a healthy balance sheet position bode well. However, a development boom in many markets, a rise in vacating volumes and a high interest rate environment pose key near-term concerns.
What’s Aiding it?
The self-storage asset category is need-based and recession-resilient by nature and generates high operating margins, given its low capital-expenditure requirements. Moreover, the industry continues to benefit from favorable demographic changes. Specifically, migration and downsizing trend, and an increase in the number of people renting homes have escalated consumers’ need to rent space at a storage facility to park their possessions. Further, amid a flexible working environment, the demand for self-storage space has risen.
Given Extra Space Storage’s significant market position and geographically diversified portfolio, it is well-positioned to capitalize on the positive industry trend.
The company is focused on expanding its asset base and achieving geographical diversity through accretive acquisitions, mutually beneficial joint-venture partnerships and third-party management services. The company has significantly expanded its business in recent years, growing its branded store count from 1,029 in 2013 to 3,651 as of Sep 30, 2023, in 42 states and Washington, DC.
Notably, In July 2023, EXR concluded the buyout of Life Storage, Inc. in an all-stock transaction, making the combined entity the largest self-storage operator in the United States (based on the number of self-storage locations). The transaction is expected to be accretive to core funds from operations (FFO) per share within the first year of closing and be leverage-neutral, making the move a strategic fit.
In addition to the buyouts, the self-storage real estate investment trust (REIT) is making strategic investments through other channels in the storage sector, including preferred equity investments and a bridge loan program. In the nine months ended Sep 30, 2023, Extra Space Storage originated $200.4 million in mortgage and mezzanine bridge loans and sold $137.1 million in mortgage bridge loans.
On the balance sheet front, Extra Space Storage exited the third quarter of 2023 with $216.1 million of cash and cash equivalents and a net debt to EBITDA of 5.0X. Its high percentage of unencumbered asset value to total asset value is encouraging. Also, investment-grade credit ratings BBB+/Stable from Standard and Poor's and a Baa2/Stable from Moody's render it access to the debt market at favorable rates. Hence, with a sound financial footing and ample financial flexibility, the company seems well-poised to capitalize on long-term growth opportunities.
EXR’s trailing 12-month return on equity is 11.64% compared with the industry’s average of 3.08%. This reflects that the company is more efficient in using shareholders’ funds than its peers.
Solid dividend payouts are arguably the biggest enticements for REIT investors, and Extra Space Storage remains committed to that. It has increased its dividend seven times in the past five years, and the five-year annualized dividend growth rate is 12.48%. Such efforts boost shareholders’ confidence in the stock. Check Extra Space Storage’s dividend history here.
The Zacks Rank #3 (Hold) stock has gained 29.3% over the past three months compared with the industry’s growth of 16.6%.
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What’s Hurting it?
Extra Space Storage operates in a highly fragmented market in the United States and faces intense competition from numerous private, regional and local operators. In addition, there is a development boom of self-storage units in many markets. This elevated supply is likely to fuel competition further, curbing the company’s ability to raise rents and turning on more discounting.
Also, the industry is witnessing a rise in vacating volume, hurting occupancy levels. In the third quarter of 2023, Extra Space Storage’s same-store square-foot occupancy was 94.1%, contracting 100 basis points (bps) year over year. Tenants are likely to revert to more normal move-out behavior, leading to adverse pressure on rental rate growth in many markets. We expect same-store occupancy to be 93.2% in 2023.
High interest rates are a key concern. Given the company’s substantial debt burden and high costs of borrowing, it may find it difficult to purchase or develop real estate with borrowed funds. Our estimate for interest expenses indicates a significant year-over-year increase in 2023.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Rexford Industrial Realty REXR, Stag Industrial STAG and Park Hotels & Resorts PK. While PK sports a Zacks Rank #1 (Strong Buy) at present, REXR and STAG carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Rexford Industrial Realty’s 2023 FFO per share is pegged at $2.18, indicating a year-over-year increase of 11.2%.
The Zacks Consensus Estimate for Stag Industrial’s 2023 FFO per share stands at $2.28, suggesting year-over-year growth of 3.2%.
The Zacks Consensus Estimate for Park Hotels & Resorts’ 2023 FFO per share is pegged at $2.03, implying a year-over-year rise of 31.8%.
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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Extra Space Storage Inc (EXR) : Free Stock Analysis Report
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