EUR 850.00 For Business Accounts Only

Morningstar | Extra Storage Space Reports Worse Than Expected Results, FVE Unchanged

No-moat Extra Space Storage reported a quarter of slightly worse than expected growth, but the results were not material enough to change our fair value estimate of $92 per share for the firm. After adjusting for a noncash amortization expense, which we see as reasonable, core funds from operations grew 5.5% from the second quarter in 2017 to $1.15 per share, two cents below our quarterly estimate, and same store net operating income grew 3.8% from the same period in 2017. The small FFO miss is attributable to revenue growing 2% slower than expected and slightly higher than anticipated property taxes increasing operation expenses, but neither of these factors is large enough to challenge our long-term view of the firm's cash flow prospects. Although the lower than expected revenue growth is disappointing, we recognize that management is implementing a low-price strategy by discounting prices during the summer months with the intent to increase rents during the winter, which we think is reasonable given that customers are less likely to change storage providers and take on the manual task of moving their stuff in the inclement weather of winter. We were further disappointed because management increased the rent discount this year with the hopes of increasing occupancy, but occupancy has remained flat to date. For now, we are waiting to see if the planned price increases in the fourth quarter will bring revenue back to our annual expectations.

We believe Extra Space Storage's rapid acquisition strategy offers opportunities but are wary of potential costs. Extra Space Storage is growing faster than we anticipated by acquiring their joint venture partners in off market transactions, year to date the company has spent 70% of our full-year acquisition forecast to purchase 37 new stores. We are looking forward to seeing if Extra Storage can gain market share from their larger rival, Public Storage, but we are wary of the company potentially continuing to discount their storage space to develop these new markets.