Extra Space Storage EXR is expected to experience increased competition due to a development boom in many markets. This, combined with an anticipated rise in people leaving their units, could result in pricing pressure. Additionally, high interest rates are causing further difficulties for the company.
Extra Space Storage operates in a highly competitive environment in the United States, with many private, regional, and local operators. The supply of self-storage units is also increasing in many markets, leading to heightened competition and potential rent reductions.
New customer rates did not improve significantly during the busy leasing months of June and July. Management expects negative growth in new customer rates to continue into 2023 compared to the previous year. As a result, the company has lowered its expectation for same-store revenue growth in 2023 from the initial guidance. It is projected that same-store revenue will increase by 3% in 2023 compared to the previous year.
Furthermore, as the impact of the pandemic diminishes, tenants are likely to return to their normal behavior of vacating their units, which could put pressure on growth rates in many markets. Additionally, seasonal factors are expected to result in lower occupancy rates. It is estimated that same-store occupancy will be 93.8% in 2023.
The company is also concerned about high interest rates, as they lead to higher borrowing costs, making it more difficult for Extra Space Storage to purchase or develop real estate. Management expects that higher interest rates will negatively impact its earnings growth in 2023. Moreover, the company’s dividend payout may appear less attractive compared to the yields on fixed-income and money market accounts.
Analysts have a pessimistic outlook on EXR’s funds from operations (FFO) growth prospects. The Zacks Consensus Estimate for the company’s 2023 FFO per share has been slightly revised downwards in the past seven days. Currently, the company holds a Zacks Rank #5 (Strong Sell).
In the past six months, EXR’s shares have declined by 20.1%, a larger decline compared to its industry’s fall of 1.5%.
Image Source: Zacks Investment Research
Despite these concerns, EXR is well-positioned to benefit from its strong brand value and presence in major cities across the United States. In July 2023, the company completed the acquisition of Life Storage Inc., becoming the largest operator of self-storage properties in the country.
The company’s solid balance sheet, strategic acquisitions, joint venture partnerships, and third-party management services contribute to its long-term growth. It is also committed to increasing shareholders’ wealth through dividend payouts and share repurchases.
Stocks to Consider
Some better-ranked stocks in the REIT sector include Welltower WELL, SBA Communications SBAC, and Alexander’s ALX, each holding a Zacks Rank #2 (Buy). You can view 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 slightly increased over the past month to $3.54.
The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has slightly increased over the past week to $12.91.
The Zacks Consensus Estimate for Alexander’s ongoing year’s FFO per share has increased by 2.3% over the past month to $14.04.
Note: For the purpose of this article, earnings are referred to as funds from operations (FFO), which is a commonly used metric to evaluate the performance of REITs.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.