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Jim Simons' Firm Loaded Up on Extra Space Storage

GuruFocus.com
·7 min read

Extra Space Storage Inc. (NYSE:EXR) is the second-largest owner and operator of self-storage facilities in the U.S. With 1,852 stores in its portfolio as of March 31, it offers 1.3 million units and about 143 million square feet of rentable space.

From an investor's perspective, this real estate investment trust can be found in the Buffett-Munger Screener (wonderful companies at fair prices). It is also a $12.87 billion market cap member of the S&P 500.


It made its way through the first quarter of 2020 relatively unscathed:

  • Net income increased 12.2% over the same period in 2019.

  • FFO (funds from operations, a standard REIT metric) increased 6.9%.

  • Same-store occupancy dipped from 91.4% to 91.3%.

  • Added 48 stores (gross) to its third-party management platform.

  • Bought back 653,597 shares.

  • Paid the quarterly dividend of 90 cents per share.



Extra Space has been a very profitable company, stating in a June 1 presentation that its shareholders had received a 10-year total return of 1,179%. In part, that's because the self-storage industry works with favorable economics: facilities are relatively inexpensive and cheap to run once in operation.

As for the future, it promises disciplined growth through its four-pronged approach:

ESX growth strategy
ESX growth strategy

"Certificate of Occupancy" refers to the practice of buying newly developed properties, just after construction is completed. That allows Extra Space to avoid development and construction risks, carrying costs during development and a "higher stabilized return by accepting the lease-up risk."

So, Extra Space has grown profitably over the past decade. Will it continue to keep growing? Our best approach to finding out is to scrutinize its past fundamentals and dividends.

Financial strength

Extra Space financial strength
Extra Space financial strength

Extra Space receives a poor mark for financial strength, and one of the reasons for that is its long-term borrowing. The GuruFocus system provides a severe warning about it. This chart profiles its cash and long-term debt (and yes, the green bars for cash are hard to see):

EXR cash and debt chart
EXR cash and debt chart

However, with those leveraged funds, it has grown both its top and bottom lines, as shown in this 10-year chart:

EXR revenue and earnings per share chart
EXR revenue and earnings per share chart

In terms of stores, it increased the count from 820 in 2010 to 1,852 as of March 31.

Shareholders looking for capital gains have profited as well, with the share price rising from around $16 in 2010 to $98.67 on July 28, 2020. That's what Peter Lynch would call a multi-bagger.

Profitability

Extra Space profitability
Extra Space profitability

This is a company that knows how to make profits, which is not surprising given its revenue, earnings per share and share price growth.

Start with the operating margin and the net margin, both of which are very high--and in line with what the rest of the industry is doing. GuruFocus offers this competitive profile of the net margin:

EXR net margin, competitive comparison
EXR net margin, competitive comparison

The return on equity margin is well into double-digits, which is always welcome news for investors. Additionally, Extra Space has been growing its revenue, Ebitda and net earnings before non-recurring items.

Valuation

EXR valuation
EXR valuation

The company receives a mediocre rating for valuation, suggesting it is in the fair to overpriced range. In other words, it's no bargain for value investors.

With the price-earnings ratio just over 30, it would be considered expensive in relation to its earnings, but the green bar shows that it is more of a value now than it has been in the past, while the yellow bar indicates it is in the same price-earnings range as its competitors.

According to the discounted cash flow calculator, it is only slightly overvalued:

Extra Space discounted cash flow calculator
Extra Space discounted cash flow calculator

Finally, a review of the share price history shows the stock is down from previous highs:

Extra Space Storage 10-year share price chart
Extra Space Storage 10-year share price chart

The chart displays a stock that hit a high in August of 2019 before sliding back and then getting pulled down by the market-wide slump in March.

The evidence suggests that the stock is overvalued, but less so than in the past. This appears to be a case where there are few bargains among strong growth stocks.

Dividends

EXR dividend
EXR dividend

With a dividend yield above 3.5%, Extra Space offers investors a respectable return, especially one which is likely to keep growing (more on this later).

The second item on the dividends table may be a shocker: a payout ratio of more than 100%! But we must remember that Extra Space is a REIT and not a conventional stock. By American law, REITs must pay out at least 90% of their profits in dividends. If not, they're subject to corporate taxes.

And as this GuruFocus chart shows, the company's ratio is in the same ballpark as its competitors (the horizontal line next to "1" on the left side appears to indicate 100%):

EXR competitive payout ratios
EXR competitive payout ratios

The three-year dividend growth rate gives us a specific amount by which the dividend payments have increased. In this case, it is 6.7% per year, which is good. This chart shows Extra Space has been steadily growing the dividend for more than three years:

Extra Space Storage dividends per share chart
Extra Space Storage dividends per share chart

The forward yield, which estimates the yield over the next year based on the most recent quarter, is the same as the trailing 12-month yield, indicating no dividend increase in the first quarter.

The five-year yield-on-cost, at 7.06%, tells us how much we might expect to average per year, from dividends, over the next five years. That estimate is subject to two caveats: First, investors buy and hold the stock for the next five years. Second, the company continues to increase its dividends at the same rate as it has over the past five years.

Still, it would be an attractive yield if it became reality; that's 7.06% per year before capital gains and returns from share buybacks.

Speaking of share buybacks, a negative ratio, such as Extra Space's -1, tells us the company has been growing its share count rather than reducing it. As this chart shows, it has been expanding its share count for most of the past decade:

EXR shares outstanding chart
EXR shares outstanding chart

It appears the buybacks of the first quarter were an opportunistic move to take advantage of the suddenly lower prices.

Gurus

Only six of the investing gurus have stakes in Extra Space, but one of them is a high-conviction shareholder. Jim Simons (Trades, Portfolio)' Renaissance Technologies increased its holding by more than 1,000% (specifically, 1,096.32%) in the first quarter. That gave it a position of 443,836 shares and a 0.34% stake in the company.

Ken Heebner (Trades, Portfolio) of Capital Growth Management opened a new position in the quarter, buying 175,000 shares. Pioneer Investments (Trades, Portfolio), on the other hand, reduced its holding by 29.79% to 154,100 shares.

Conclusion

Extra Space Storage is an attractive company in an attractive industry. It may shrink slightly while the coronavirus and the economic contraction continue, but this is not really a stock for short-term trading.

It is a stock to buy and hold, especially for investors who can give their dividends time to grow and compound. Thus, it is worthy of closer attention by income investors who are willing to buy at a fair, rather than undervalued, price.

As with most Buffett-Munger Screener stocks, the idea is to buy a wonderful company at a fair price, as Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) have done so successfully for decades. For Simons' firm, buying after the company's share price came down with the rest of the market was no doubt an opportunity that it could not ignore.

Disclosure: I do not own shares in any companies named in this article.

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This article first appeared on GuruFocus.