Extra Space Storage is executing very well, with strong same-store revenue and NOI growth.
It continues to add stores to its 3rd party management platform, and has a long growth runway.
The dividend has been raised by 39% this year, and is well covered and supported by a strong balance sheet.
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ansonsaw/E+ via Getty Images The self-storage sector has been a big winner over the past year, as demand has been robust and concerns around oversupply have been held at bay. This includes Extra Space Storage ( EXR ), whose stock price has risen by an impressive 80% since the start of this year, far surpassing the 25% return of the S&P 500 ( SPY ) over the same timeframe. In this article, I highlight what makes EXR a worthy stock to own, and whether it’s worth buying today, so let’s get started. Create Space For Extra Space Storage
Extra Space Storage is an S&P 500 company that’s headquartered in Salt Lake City, Utah, and is the second largest self-storage REIT in the U.S. At present, it owned and/or operated 2,054 self-storage stores in 41 states, covering 1.5M units and 159M square feet. Beyond traditional self-storage, EXR also offers boat, RV, and business storage as well.
What I find impressive about EXR is its robust track record of top-line, and more importantly, bottom-line growth. This tells us that EXR is not just growing for growth’s sake, and is effective at creating shareholder value. As seen below, EXR has grown its FFO/share by 62% over the past 5 years, sitting above the 52% revenue growth over the same timeframe. (Source: YCharts)
A key reason for EXR’s fast growth is its 3 rd part management platform, in which it manages properties for other owners. This is reflected by the 21% YoY revenue growth in this platform in 2020, as compared to 2.4% rental revenue growth in owned properties over the same timeframe.
EXR continues to execute well in the current environment as demand for self-storage has surged. This is reflected by same-store revenue growing by 18.4% YoY in the third quarter, and occupancy ticked up by 90 bps YoY to 96.7%. I’m also encouraged to see improved operating efficiencies, as same-store NOI grew by a robust 27.8% YoY, sitting well ahead of the aforementioned same-store revenue growth.
Meanwhile, EXR’s 3 rd party management platform continues to see strong growth, with 96 stores added to the platform during Q3, bringing the total managed store count to 1,088. Not only that, EXR recently increased its dividend by an impressive 25% to $1.25 per share, after raising it by 11% earlier this year. This brings the total dividend growth this year to 38.9%. The new dividend rate comes with a safe payout ratio of 73%, 11 years of consecutive growth, and a 5-year CAGR of 8.7%.
Looking forward, EXR has plenty of growth runway, as the self-storage market is highly fragmented and comprised primarily of private owners. Management sees a favorable market and is choosing to grow the property base in a calculated and accretive manner, as noted during the recent conference call : Turning to external growth, the acquisition market remains very active but expensive in our view. Our investment team has never been busier and we have found the most success acquiring lease-up properties and/or acquiring stores with the joint venture partner. While most of our transactions have been in relatively small bites the total is adding up, allowing us to increase our investment guidance to $700 million for the year. Also, our approach has resulted in better than market average yields. But we are much more focused on FFO per share accretion than total acquisition volume. And we plan to continue to be selective in the current environment. We continue to look at all material transactions in the market, and we have plenty of capital to invest when we find opportunities that create long-term value for our shareholders. EXR’s forward growth is supported by its strong BBB rated balance sheet, with a safe net debt to EBITDA ratio of 5.5x. This sits comfortably below the 6.8x and 6.1x from the end of 2020 and 2019, respectively.
Of course, no investment is risk-free, and the following points should be considered: Increased supply in the self-storage market could pressure rental rates.
Higher interest rates would raise EXR’s cost of debt funding.
Macroeconomic concerns could slow demand for storage […]