The storage industry is experiencing some growing pains. What was once a top-performing asset class in commercial real estate is now experiencing lackluster growth due to oversupply and slowing demand -- and that was before the COVID-19 crisis interrupted operations.
However, short-term interruptions aren't always an indicator for long-term success, which is why investors may turn to Extra Space Storage (NYSE: EXR), a leader among self-storage real estate investment trusts (REITs), as a potential buy.
Where the company stands
Extra Space Storage is the second-largest self-storage REIT, owning and operating 1,878 storage facilities in 40 different states. Prior to recent oversupply concerns, the company's growth was exceptional, providing a total 10-year return to shareholders of 1,167%, outperforming all other REITs during that same period. Their portfolio is made up of primarily fully owned and operated facilities in addition to 251 joint ventures and 700 third-party-owned stores using their management services. This allows for a diversified portfolio and increased avenues of income for the company.
It comes as no surprise that its second-quarter 2020 revenue results were down. Oversupply and COVID-19 challenges put pressure on the self-storage industry. Waiving late fees, inability to hold auctions on delinquent tenants, lower rental rates, and increased expenses for cleaning and safety protocols decreased income while increasing expenses. Net operating income (NOI) is down 4.6% from the same quarter of 2019. Delinquent units are also up, with accounts receivable greater than 60 days up approximately 3.25% when compared to historical levels.
Occupancy is up from the same quarter of the previous year, at 95.7% occupancy by July 31. In Q2 2020, the company added 31 stores to their management software and completed a development project at a cost of $24 million. It's likely the company will continue to have a tough few quarters at least until the market starts to level off. If market conditions worsen, though, the company is in a good financial position to ride out the storm. Currently their debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) is 5.89x, up slightly from the same quarter last year but still in line with the norm of REITs. With a very conservative payout ratio of 36%, the company has a lot of room to maintain payouts even if revenues continue to decline.
It's a buy, but don't expect much in the next few years
While the self-storage industry has seen better days, Extra Space Storage appears well positioned to ride out the turbulent times. Their creative structuring and management income allows them to compete with and in some ways outperform their competition until market supply starts to rebalance. I would consider this a worthwhile stock to add to your portfolio, but know that the market could have a rough year or two ahead.
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