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S&P Assigns BBB Issuer Credit Rating to Extra Space Storage

Zacks Equity Research

Extra Space Storage Inc. EXR recently announced that the company and Extra Space Storage LP, its operating partnership subsidiary, have been assigned a BBB issuer credit rating with a stable outlook by S&P Global Ratings ("S&P"). This move is expected to offer enhanced financial flexibility to the company.

Rating Rationale

In assigning this rating, S&P recognized Extra Space Storage’s stability as well as strategic balance-sheet transition over the past years. The company has not only staggered its maturities, but also increased the size of its unencumbered asset pool.

Moreover, the stable outlook indicates the rating agency’s expectation for Extra Space Storage to report a positive operating performance and register external growth, leading to a stable upsurge in EBITDA. Although currently there are headwinds in the storage industry in the form of new supply, the company is well poised to sail through on the back of its cost-containment efforts through economies of scale compared to its smaller peers. Also, the company is likely to gain further by leveraging its technology platform.

Conclusion

This investment grade rating affirms Extra Space Storage’s creditworthiness in the market and is likely to help retain investor confidence in the stock. In fact, such moves provide companies an opportunity to enjoy favorable costs on debts and solid access to capital, and are therefore encouraging.

Notably, Extra Space Storage has presence in key cities and opts for joint ventures to drive long-term profitability. Focus on expansion of geographical footprint through accretive acquisitions and third-party management platform bodes well. In second-quarter 2019, 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.

However, the company operates in a highly-fragmented market in the United States. Also, there is a development boom of self-storage units in many markets. This high supply is likely to intensify competition for the company, curb its power to raise rents and turn on discounting.

Shares of this Zacks Rank #3 (Hold) company have gained 23%, year to date, compared with the industry’s growth of 19.9%.



Stocks to Consider

Investors can also consider better-ranked stocks from the REIT industry like Duke Realty Corp. DRE, Lamar Advertising Company LAMR and PS Business Parks, Inc. PSB. While Lamar Advertising Company and PS Business Parks sport a Zacks Rank #1 (Strong Buy), Duke Realty carries a Zacks Rank of 2 (Buy), currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lamar’s FFO per share estimates for the current year inched up 0.3% to $5.83 over the past two months.

PS Business Parks’ Zacks Consensus Estimate for the ongoing year’s FFO per share moved up 1.5% to $6.71 in the past two months.

Duke Realty’s Zacks Consensus Estimate for 2019 funds from operations (FFO) per share moved marginally north to $1.42 in a month’s time.

Note: Funds from operations (FFO) is a widely used metric to gauge the performance of REITs rather than net income as it indicates cash flow from their operations. FFO is obtained after adding depreciation and amortization to earnings and subtracting the gains on sales.

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