Back to top

Image: Bigstock

Extra Space Storage (EXR) Hurt by Move-Out Activity, High Rates

Read MoreHide Full Article

Extra Space Storage (EXR - Free Report) is expected to witness a development boom in many markets, which will intensify competition. This, along with an anticipated rise in vacating volumes, could lead to pricing pressure. High interest rates add to its woes.

Extra Space Storage is operating in a highly competitive environment in the United States, with 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.

New customer rates did not improve meaningfully during the busy leasing months of June and July. Management expects growth in new customer rates to remain negative further into 2023 on a year-over-year basis. In light of this, 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 witness a rise of 3% in 2023 on a year-over-year basis.

Moreover, with the pandemic’s impact waning, tenants are likely to revert to more normal move-out behavior, leading to an adverse pressure on growth rate in many markets. Also, seasonality is anticipated to result in lower occupancy. We expect same-store occupancy to be 93.8% 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. Management expects higher interest rates to hamper its earnings growth in 2023. Our estimate for interest expenses indicates an increase of 55.5% in 2023 on a year-over-year basis. Moreover, the dividend payout might seem less attractive than the yields on fixed-income and money market accounts.

Analysts seem bearish regarding EXR’s FFO growth prospects. The Zacks Consensus Estimate for the company's 2023 FFO per share has been revised marginally downward over the past seven days. The company currently carries a Zacks Rank #5 (Strong Sell).

Over the past six months, shares of EXR have declined 20.1%, wider than its industry's fall of 1.5%.

Zacks Investment Research
Image Source: Zacks Investment Research

Despite the above-mentioned concerns, EXR is well poised to gain from its high brand value and strong presence in major cities of the United States. In July 2023, it closed the buyout of Life Storage Inc., making it the largest operator of self-storage properties in the country.

A solid balance sheet, strategic acquisitions, joint venture partnerships and third-party management services bode well for the company’s long-term growth. It also remains committed in increasing shareholders’ wealth through solid dividend payouts and share repurchases.

Stocks to Consider

Some better-ranked stocks from the REIT sector are Welltower (WELL - Free Report) , SBA Communications (SBAC - Free Report) and Alexander’s (ALX - Free Report) , each carrying a Zacks Rank #2 (Buy). 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 $3.54.

The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has moved marginally northward over the past week to $12.91.

The Zacks Consensus Estimate for Alexander’s ongoing year’s FFO per share has been raised 2.3% over the past month to $14.04.

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.

Published in