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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 3,793 as of Mar 31, 2024, in 42 states and Washington, DC.

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. For 2024, we estimate year-over-year growth of 24.4% in property rental revenues.

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).

In the first quarter of 2024, the company acquired five operating stores and one store at completion of construction (Certificate of Occupancy stores) for a total cost of around $35.1 million. In association with the JV partner, it completed one development for a total cost of $20.4 million, of which the company invested $19.4 million.

Extra Space Storage is focused on improving its balance sheet, reducing secured debt and increasing the size of its unencumbered pool. As of Mar 31, 2024, the company's percentage of fixed-rate debt to total debt was 77.2% and the net debt to EBITDA was 4.9X. The combined weighted average interest rate was 4.5%, with a weighted average maturity of around 4.9 years. As of the same date, its percentage of unencumbered asset value to total asset value was 84.6%. 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 enticement for REIT investors, and Extra Space Storage remains committed to boosting shareholders’ wealth. In the past five years, the company has increased its dividend seven times, and the five-year annualized dividend growth rate is 13.07%. Such shareholder-friendly efforts are encouraging. Check Extra Space Storage’s dividend history here.

Shares of this Zacks Rank #3 (Hold) company have jumped 2.3% in the past three months against its industry’s fall of 4.9%.

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Zacks Investment Research

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What’s Hurting EXR?

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, a considerable improvement in the housing market is likely to remain elusive, 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 is of negative 2% to 0.5% growth in same-store revenues and a 4.0-5.5% increase in same-store expenses. Consequently, same-store net operating income (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 debt burden of $11.48 billion as of Mar 31, 2024, 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. Our estimate indicates a year-over-year rise of 28.7% for interest expenses in 2024. 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 American Tower AMT and Lamar Advertising LAMR, 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 American Tower’s 2024 FFO per share is pegged at $10.44, which suggests 5.8% year-over-year growth.

The Zacks Consensus Estimate for Lamar Advertising’s 2024 FFO per share of $8.03 indicates a 7.5% increase year over year.    

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.


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