Is It Wise to Retain Extra Space Storage (EXR) Stock for Now?
Extra Space Storage EXR is poised to gain from its high brand value and strong presence in major cities in the United States. Strategic acquisitions, a healthy balance sheet, opportunistic investments and a third-party management platform bode well for the company’s long-term growth. However, lower new customer rates, a development boom in many markets and a high interest rate environment pose key near-term concerns.
What’s Aiding EXR?
Extra Space Storage is the largest operator of self-storage properties in the United States. The company has significantly expanded its business in recent years, growing its branded store count from 1,029 in 2013 to 3,714 as of Dec 31, 2023 in 42 states and Washington, D.C.
EXR is focusing on growing its business and achieving geographical diversity through accretive acquisitions, mutually beneficial joint venture partnerships and third-party management services. In July 2023, it 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 majority of its stores are close to large population centers. Apart from having an above-average population, these markets enjoy favorable income demographics for stores. Therefore, with a geographically diversified portfolio and significant scale, the company is poised for long-term growth.
The self-storage asset category is need-based and recession-resilient in nature. This asset class has low capital expenditure requirements and generates high operating margins. Additionally, the self-storage industry continues to benefit from favorable demographic changes. Specifically, the migration and downsizing trend and an increase in the number of people renting homes have escalated the need of consumers to rent space at a storage facility to park their possessions. Further, demand for self-storage space has increased in the flexible working environment.
Extra Space Storage is focused on improving its balance sheet, reducing secured debt and increasing the size of its unencumbered pool. As of Dec 31, 2023, the company's percentage of fixed-rate debt to total debt was 73.4%, and the net debt to EBITDA was 4.8X. The combined weighted average interest rate was 4.6%, with a weighted average maturity of around 4.8 years. As of the same date, its percentage of unencumbered asset value to total asset value was 85%. With solid balance sheet strength, EXR is well-poised to capitalize on external growth opportunities, which are likely to increase.
Solid dividend payouts are arguably the biggest enticements for REIT investors, and Extra Space Storage remains committed to increasing shareholders’ wealth. In the past five years, the company has increased its dividend seven times, and the five-year annualized dividend growth rate is 12.48%. Such shareholder-friendly efforts are encouraging. Check Extra Space Storage’s dividend history here.
Shares of this Zacks Rank #3 (Hold) company have rallied 7.9% in the past month, outperforming its industry’s increase of 4.2%.
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What’s Hurting EXR?
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 has been a development boom of self-storage units in many markets in recent years. This high supply has fueled competition, affecting its power to raise rents and turn on more discounting.
Though new supply is moderating to some extent, any significant turnaround is unlikely in the near term. Particularly, the company continues to see new customer price sensitivity and, therefore, is likely to face headwinds from lower new customer rates in the near term. Moreover, with interest rates potentially remaining higher for longer, a considerable improvement in the housing market is likely to remain elusive during the summer leasing season, affecting the demand for storage units.
As such, the reacceleration in revenue growth is expected to be challenging until the company regains pricing power with new customers. Reflecting this environment, the company’s full-year 2024 guidance assumes negative 2% to 0.5% growth in same-store revenues and a 4-5.5% increase in same-store expenses. Consequently, same-store NOI is projected in the band of negative 4.25-0.50%.
A high interest rate environment is a concern for Extra Space Storage. With a total consolidated debt burden of $11.3 billion as of Dec 31, 2023, the company may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side. Further, with high interest rates still in place, the dividend payout might seem less attractive than the yields on fixed-income and money market accounts.
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are Iron Mountain IRM and SL Green Realty Corp. SLG, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for IRM’s 2024 funds from operations (FFO) per share is pegged at $4.38, which suggests year-over-year growth of 6.3%.
The Zacks Consensus Estimate for SLG’s 2024 FFO per share stands at $5.88, which indicates an increase of 19.03% from the year-ago period’s actual.
Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.
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Iron Mountain Incorporated (IRM) : Free Stock Analysis Report
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Extra Space Storage Inc (EXR) : Free Stock Analysis Report
