Morningstar | Extra Space Storage Reports Strong Quarter, and Our Long-Term Thesis Is Intact
Extra Space Storage had a strong third quarter that partially offset weakness from the previous quarter. We saw nothing that changed our long-term view of the company, and we intend to maintain our fair value estimate of $94 and no-moat rating.Rental revenue grew 7% from the third quarter of 2017, which beat our expectation of 6% growth and led to same-store net operating income growth of 3.9%. Occupancy grew 20 basis points to 93.7% from 2017 despite the company not being as exposed to areas with hurricane damage as it was last year, which is impressive because natural disasters tend to be good for self-storage operators. We were surprised to see that Extra Space Storage had lower nondepreciation operating expenses than we anticipated, largely due to lower property and general and administrative expenses, given that these expenses generally scale linearly with rental revenue. One worrying factor is that property taxes continue to grow, which limits expense savings. As a result of higher revenue and lower expenses than anticipated, Extra Space Storage’s funds from operations of $1.20 beat our estimates by $0.03 and management raised guidance for the full-year bottom line. As the stock is currently trading at a meager 4% discount to our fair value estimate, we think that much of the upside of this company is already priced in, and we would recommend investors wait for a larger margin of safety before investing in this no-moat name.
We were happy to see that the company is investing in marketing this quarter and intends to invest more during the winter. Management estimates that about a third of its portfolio will be exposed to new supply in 2018, and it expects additional supply to come on line in 2019. Since we see self-storage as a commoditized product, we think new supply is a risk to the company. Marketing should help convince customers to choose Extra Space Storage rather than competing operators.
Extra Space Storage is a self-administered and self-managed real estate investment trust, which is engaged in owning, operating, managing, acquiring, developing and redeveloping self-storage properties. Substantially all of the company's business is conducted through Extra Space Storage LP. The company operates in two segments: self-storage operations; and tenant reinsurance. Co's self-storage operations activities include rental operations of wholly-owned stores. Tenant reinsurance activities include the reinsurance of risks relating to the loss of goods stored by tenants in the company's stores.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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