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, a development boom in many markets is likely to intensify competition, while an anticipated rise in vacating volumes could lead to pricing pressure. High interest rates add to its woes.
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 3,666 as of Jul 31, 2023 in 43 states. 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, EXR is poised for long-term growth.
The company has made concerted efforts to consistently grow its business and achieve 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 self-storage asset category is basically need-based and recession-resilient in nature. Moreover, the migration and downsizing trend and an increase in the number of people renting homes have escalated the need for consumers to rent space at a storage facility to park their possessions. Further, the demand for self-storage space has increased in the flexible working environment. For 2023, we estimate year-over-year growth of 6.9% in property rental revenues.
EXR is focused on improving its balance sheet, reducing secured debt and increasing the size of its unencumbered pool. As of Jun 30, 2023, the percentage of unencumbered asset value to total asset value was 77.2%. The combined weighted average interest rate was 4.5%, with a weighted average maturity of around 5.1 years. With solid balance sheet strength, the company 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. The company increased its dividend five times in the past five years, and its payout has grown 11.47% over the same period. Such shareholder-friendly efforts are encouraging. Check Extra Space Storage’s dividend history here.
Shares of this Zacks Rank #3 (Hold) company have declined 4.8% in the past month, narrower than its industry’s drop of 5.4%.
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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. This high supply is likely to fuel competition, curb its power to raise rents and turn on more discounting.
Also, the company noted that new customer rates did not improve meaningfully during the busy leasing months of June and July. Management expects year-over-year growth in the new customer rate to remain negative further into 2023. Against this backdrop, for 2023, the company lowered its expectation for same-store revenue growth to 2.5-3.5% from the prior guided range of 3.75-5.25%. We expect the metric to exhibit a rise of 3% year over year in the current year.
With the pandemic’s impact waning, tenants are likely to revert to more normal move-out behavior, leading to adverse pressure on occupancy and rate growth in many markets. We expect same-store occupancy to be 93.3% in 2023.
A high interest rate is a concern for Extra Space Storage. Elevated rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate.
Our estimate for interest expenses indicates an increase of 55.3% year over year in the current year. Further, with high interest rates 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 REIT sector are Welltower WELL and EastGroup Properties EGP, 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 Welltower’s 2023 FFO per share has been raised marginally over the past month to $3.56.
The Zacks Consensus Estimate for EastGroup Properties’ ongoing year’s FFO per share has been raised marginally over the past month to $7.64.
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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