Extra Space Storage (EXR) is the second largest storage unit operator in the country, with an 8.0% market share by square footage, notes Doug Gerlach, editor of Small Cap Informer.
Approximately 67% of storage properties in the U.S. are not owned by the six major self-storage operators, leaving plenty of room for consolidation. The REIT currently owns, operates, or manages approximately 2,177 self-storage properties in 41 states, with more than 168 million net rentable square feet of storage space.
Given economic headwinds and the impact of rising interest rates, Extra Space has seen its price contract over the last twelve months, an especially since August — despite strong fundamentals.
This kind of mismatch between fundamental strength and valuation is what we look for when we recommend companies in the SmallCap Informer. We think this is an opportunity to buy an excellent company at a reasonable price, and reap the rewards over the long-term.
Over the past decade, revenues have grown an average 15.6% a year. The company’s revenues slowed in 2020 as a result of the pandemic, but resumed their upward path in 2021 and 2022.
With REITs, we do not focus on EPS since they include non-cash amortization and depreciation charges. Instead, we use Funds from Operations (FFO) as the primary metric to evaluate the company's profit growth. We project average annual FFO and revenue growth of 9% for the company over the next five years. With dividends and expansion of its multiple, our total return objective is attainable.
Based on FFO of $11.99 in five years, and a high P/F ratio of 25.6, we see the company’s shares reaching $307. On the downside, a low P/F ratio of 16.6. times low trailing 12-month FFO of $7.79 provides a low price of $129. From current prices , the stock could earn an annual total return from capital appreciation and yield of 17.4% with a 5.8-to-1 upside-to-downside ratio.
