Is it Wise to Retain Extra Space Storage 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 3,812 as of June 30, 2024, in 42 states and Washington, D.C. 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. With a geographically diversified portfolio and significant scale, EXR is poised for long-term growth. We expect a year-over-year rise of 27.1% in the company’s total revenues in 2024.EXR has focused on consistently growing its business and achieving geographical diversity through accretive acquisitions, mutually beneficial joint venture partnerships and third-party management services. In the first half of 2024, the company acquired seven operating stores and two stores at completion of construction (“Certificate of Occupancy stores”) for a total cost of around $62.7 million. In association with the JV partner, Extra Space Storage completed three developments for a total cost of $49.1 million, of which the company invested $47.1 million. In addition to the buyouts, the company is making strategic investments through other channels in the storage sector, including preferred equity investments and a bridge loan program.Extra Space Storage is focused on improving its balance sheet, reducing secured debt and increasing the size of its unencumbered pool. As of June 30, 2024, the company's percentage of fixed-rate debt to total debt was 75%, 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 4.7 years. As of the same date, its unencumbered stores, as defined by its public bonds, totaled 1,680 stores. The percentage of unencumbered asset value to total asset value was 84.7%. 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 six times, and the five-year annualized dividend growth rate is 13.64%. Such shareholder-friendly efforts are encouraging. Check Extra Space Storage’s dividend history here.What’s Hurting EXR?Extra Space Storage, along with other self storage REIT like Public Stoage PSA, operates in a highly fragmented market in the United States, with intense competition from numerous private, regional and local operators. 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 is likely to face headwinds from lower new customer rates in the near term. 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 1% to 0.5% growth in same-store revenues and a 4.0-5.0% increase in same-store expenses. Same-store net operating income (NOI) is projected in the band of negative 3.0%- negative 0.50%.Although the Federal Reserve has announced a rate cut in recent times, the interest rate is still high and is a concern for Extra Space Storage. With a total debt burden of $11.8 billion as of June 30, 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 29.8% in interest expenses in 2024.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.Only $1 to See All Zacks' Buys and SellsWe're not kidding.Several years ago, we shocked our members by offering them 30-day access to all our picks for the total sum of only $1. No obligation to spend another cent.Thousands have taken advantage of this opportunity. Thousands did not - they thought there must be a catch. Yes, we do have a reason. We want you to get acquainted with our portfolio services like Surprise Trader, Stocks Under $10, Technology Innovators,and more, that closed 228 positions with double- and triple-digit gains in 2023 alone.See Stocks Now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. 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