Extra Space Storage (EXR -1.30%), a self-storage real estate investment trust (REIT), recently reported earnings that show the company can easily pay and raise its dividend. The self-storage business is highly stable and represents an excellent opportunity for investors looking to create passive income. And the company's growth strategy could increase its payout over time.
Fundamentals are key to passive income
The second-quarter earnings report showed that revenue grew 25% to $475 million, and same-store revenue (revenue growth from stores open more than 12 months) was up 22%.
As a REIT, Extra Space reports funds from operations (FFO), or net income minus noncash items like depreciation, amortization, and gains from real estate sales. For the quarter, FFO was up 32% to $4.13 per share, which supports its healthy quarterly dividend of $1.50, which was increased by 50% over last year.
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Over the past decade, Extra Space has been expanding its business through self-storage acquisitions and its third-party management platform. In 2012, the company had a portfolio of 729 self-storage stores and generated FFO of $169.4 million. By the end of 2021, it had increased its portfolio to 1,268 stores and its FFO to $974 million. The company continued expanding during the second quarter by adding another 16 stores.
One of the acquisitions during the quarter was Extra Space's purchase of Bargold Storage Systems, consisting of 17,000 units. Bargold has a unique business model: It leases space in New York City apartment buildings, then subleases the space as self-storage units to the buidlings' tenants.
Extra Space's third-party management platform is another source of growth. It contracts with other self-storage companies to run their businesses for them. By leveraging Extra Space's scale, third parties can increase the efficiency of their stores in a hands-off experience.
In turn, Extra Space collects a management fee and gains access to each third party's data. This information not only allows the company to keep its finger on the pulse of the industry but also allows it to identify ideal acquisition targets; for instance, in 2021, over half of the company's acquisitions were rooted in a third-party managed property.
Extra Space management was so encouraged by what it saw during the quarter that it increased its forecast for the remainder of the year. By the end of 2022, it expects core FFO to be between $8.30 and $8.50 per share, up from a range of $8.05 to $8.30. Management also expects same-store revenue growth of between 16% and 18%. Its previous comps growth was between 13% and 15%.
A history of growing passive income
Extra Space shows no signs of slowing down on its growth strategy. The company notes that the self-storage industry is fragmented and ripe for the picking. It estimates that about two-thirds of self-storage operations are quality non-REIT properties with the potential to be acquired.
The strategy has worked in the past and bodes well for continued growth in its dividend. Extra Space has increased its quarterly dividend by more than sixfold from $0.20 per share in 2012 to its current rate of $1.50.
Source: Extra Space Storage.
For retirees or dividend investors looking to create passive income, Extra Space should be on their radar. The company is in a steady business with ample FFO to support its dividend, which currently yields around 3%. Over time, its proven growth strategy could produce a growing stream of income.
