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Morningstar | Extra Space Storage Succeeds in More Competitive Environment, Raising FVE to $101 Per Share. See Updated Analyst Note from 01 May 2019

No-moat rated Extra Space Storage reported a good first quarter as it continues to attract tenants in an increasingly competitive operating environment. Core funds from operations grew 6.4% year over year largely due to a strong 4.8% same-store net operating income growth. After updating our model to incorporate quarterly results, we are increasing our fair value estimate for the firm to $101 per share from $96.

Extra Space Storage’s revenue fundamentals remain sound. Though occupancy declined 20 basis points this quarter, we recognize that this number can be volatile due to the short-term nature of many self-storage leases and that there is some pressure from new self-storage supply. We will be closely watching occupancy trends to examine the extent to which new supply can draw tenants away from Extra Space Storage. Despite some headwinds on the occupancy front, same-store revenue grew 4.2% year over year due to price increases. We continue to think that slow, steady price increases on existing tenants is one of the best ways for management to generate shareholder value because we think that a tenant’s marginal cost of moving to a new self-storage unit is oftentimes higher than the additional burden of a small price increase.

Operating expenses were under control. Same-store expenses grew at an inflation-like pace year over year, as increased property tax and marketing expenses outweighed declines in payroll expense. We don’t think that the self-storage business is particularly human-capital intensive, so we appreciated management shifting the expense mix further into areas, particularly marketing, that we anticipate are more likely to drive shareholder value.

Extra Space Storage added 46 stores to its third-party management platform this quarter, bringing the total to 577 self-storage sites. We continue to think that this capital light platform will become an increasingly important source of external growth over the next three to five years.