There are very few commercial real estate sectors that can compete with the low overhead expenses and high operating margins of self-storage, which is one reason this sector went through a major growth spurt over the past decade. New construction of storage space reached a peak in 2019 then plateaued after supply outpaced demand in many markets.
2020 surely hasn't done any favors to this sector. Yet despite challenging circumstances, optimism is still high for the self-storage space, meaning solid players in the field, like Extra Space Storage (NYSE: EXR) real estate investment trust (REIT), may seem like a compelling buy. Let's take a look at where the company stands and whether Extra Space Storage is a buy right now.
Where the company stands today
Extra Space Storage is the second-largest publicly traded self-storage REIT, having interest in or owning 1,906 properties across 40 states. The company has one of the best track records in the industry, outpacing other self-storage REITs in revenues, net operating income (NOI), and funds from operations (FFOs) over the past five years. The company has produced a dividend increase of 52.5% in the past five years, and despite the impact of the coronavirus pandemic, it has maintained high occupancy and rental collections. Currently, occupancy is 95.9%, a 2.1% increase when compared to the same month last year.
Same-store revenues and net operating income are down for the quarter when compared to Q3 2019, but FFO increased 5.6%. Waived late fees, delinquencies, paused auctions, and reduced rental rates to offset oversupply and growing concern over the future of the marketplace were some of the initial challenges the company faced during the onset of the global pandemic. Seriously delinquent units and auctions have returned back to pre-crisis levels, but rental rates are still below optimal levels despite reinstating rate increases for new and existing tenants.
Continued growth and expansion is a huge part of Extra Space Storage's success over the past decade. Year to date, the company has added 10 operating stores, 5 certificate of occupancy (C of O) stores, and 121 stores to its third-party management platform, most of which were acquired in Q3 after recession concerns relaxed and a clearer vision of where the market is headed was gained. Its net debt-to-EBITDA of 5.69x and its dividend payout ratio of about 70% are well within REIT standards, which means it should be able to maintain dividend payouts and debt obligations comfortably.
Stable returns from a strong company
Considering the current economic climate, I think there is a lot to be said about Extra Space Storage's recent performance. I don't see huge growth potential for the company over the next few years, simply because of the supply and demand imbalance, but I do believe it will maintain slow and steady growth, particularly from its third-party management and joint-venture partnerships, which allow for revenue increases by capitalizing on existing facilities.
If 2021 brings a surge of foreclosures as experts are expecting, there could be a temporary windfall of demand as people relocate or downsize. These opportunities, in combination with the company's stellar track record and strong financial position, are why I believe Extra Space Storage is a buy right now. Just keep in mind that share prices are now above pre-pandemic levels, meaning investors buying shares in the company today are paying a premium to achieve those stable returns.