Extra Space Storage ( EXR Quick Quote EXR - Free Report) 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 3,651 as of Sep 30, 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 Sep 30, 2023, the company's percentage of fixed-rate debt to total debt was 70.3%, and the net debt to EBITDA was 5.0X. As of the same date, its percentage of unencumbered asset value to total asset value was 85%. As of Sep 30, 2023, the combined weighted average interest rate was 4.4%, with a weighted average maturity of around 4.7 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 seven 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 rallied 12.2% in the past month, outperforming its industry’s increase of 7.2%. Image Source: Zacks Investment Research
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. Further, the new customer rate is likely to remain subdued in the remainder of 2023.
With the pandemic’s impact waning, the self-storage industry is witnessing an elevation in vacating activity, resulting in falling occupancy levels. In the third quarter of 2023, Extra Space Storage’s same-store square-foot occupancy was 94.1%, contracting 100 basis points (bps) year over year. Tenants are likely to revert to more normal move-out behavior, leading to adverse pressure on rate growth in many markets. Also, seasonality is anticipated to result in lower occupancy. A high interest rate environment is a concern for Extra Space Storage. Also, with a total consolidated debt burden of $11.3 billion as of Sep 30, 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 in place, the dividend payout might seem less attractive than the yields on fixed-income and money-market accounts. Stocks to Consider
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Welltower ( WELL Quick Quote WELL - Free Report) and STAG Industrial, Inc. ( STAG Quick Quote STAG - 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 current-year funds from operations (FFO) per share has moved marginally northward over the past week to $3.58. The Zacks Consensus Estimate for STAG Industrial’s 2023 FFO per share has moved 1.3% upward in the past three months to $2.28. 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.