Extra Space: Profits in Storage

12/16/2016 7:00 am EST

Focus: REITS

Douglas Gerlach

President, ICLUBcentral, Inc.

With a current yield of 3.2% and Funds from Operations (FFO) growth likely to exceed 15% over the next few years, this REIT — already a recommendation in our model portfolio — appears to be a company worth revisiting, suggests Doug Gerlach, editor of Small Cap Informer.

Extra Space Storage (EXR) is the second largest storage unit operator in the country, and is well-positioned to serve a growing demand for convenient and secure storage for both individuals and businesses.

It owns, operates, and manages 1,421 self-storage properties in 36 states, with more than 100 million net rentable square feet of storage space.

Of these, 810 are wholly-owned, 189 are owned in partnerships, and 422 are owned by third parties and managed by Extra Space in exchange for a management fee.

The bulk of Extra Space’s portfolio is located in Western U.S. markets, where affordable property and land use restrictions inhibit development of self-storage facilities.

According to KeyBanc, Extra Space Storage has the highest total return of all REITs over the ten year period ending November 2016. Over the past ten years, revenues have grown an average 15.6% a year.

As is typical with REITs, we do not focus on earnings per share; instead, we use Funds from Operations (FFO) as the primary metric to evaluate the company’s growth.

Extra Space Storage’s FFOS (FFO per share) grew an annualized 13.8% in the past decade, falling off from 2008-2010 but rebounding strongly since then. Since 2010, FFO grew 28.4% a year on average.

We maintain average FFO and revenue growth of 13% for the company over the next five years.

Extra Space Storage recognizes a number of consistently improving operational trends; occupancy rates have steadily increasing and average monthly rentals per store are strong.

Based on FFO of $6.80 in five years, and a high P/F ratio of 22.6, we see the company’s shares reaching $154. On the downside, a low P/F ratio of 14.9 times low trailing 12-month FFO of $3.69 provides a low price of $55.

We note that the current price of $71 is near its 52-week low and also is right at the floor provided by the price the dividend will support at its highest yield, 4.4%.

From current prices, the stock could earn an annual total return from capital appreciation and yield of 19.5% with a 5.2-to-1 upside/downside ratio.

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By Doug Gerlach, Editor of Small Cap Informer

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