Up 25% In The Last One Month, Does Extra Space Storage Stock Have More Room To Run?

EXR: Extra Space Storage logo
EXR
Extra Space Storage

Extra Space Storage stock (NYSE: EXR) currently trades at $130 per share, around 43% below (75% upside) its level of $227 on January 2, 2022 (pre-inflation shock high), and seems undervalued. Extra Space Storage saw its stock trading at around $170 at the end of June 2022, just before the Fed started increasing rates, and is trading 24% below that level now. In comparison, the S&P 500 gained about 20% during this period. The stock price has suffered over the recent quarters due to several reasons – a drop in self-storage facility rates, a significant jump in interest expense, and a cautiously optimistic outlook toward the recent acquisition of Life Storage Inc.

Amid the current financial backdrop, EXR stock has witnessed gains of 15% from levels of $115 in early January 2021 to around $130 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. However, the increase in EXR stock has been far from consistent. Returns for the stock were 96% in 2021, -35% in 2022, and -12% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that EXR underperformed the S&P in 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Real Estate sector including PLD, AMT, and EQIX, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could EXR face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

Returning to the pre-inflation shock level means that EXR stock will have to gain around 75% from the current levels. While we do not expect that to materialize in the short term, the growth potential seems attractive in the mid to long term. This is because the firm is a fully integrated real estate investment trust (REIT), which deals in self-storage properties. Further, it recently acquired Life Storage Inc., expanding its operational footprint. The strong organic demand for storage facilities, coupled with EXR’s presence near the major population centers, goes in its favor.

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Our detailed analysis of Extra Space Storage’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
  • April 2021: Inflation rates cross 4% and increase rapidly
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
  • October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
  • Since July 2023: Fed keeps interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.

In contrast, here’s how EXR stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

EXR and S&P 500 Performance During 2007-08 Crisis

Extra Space Storage stock declined from nearly $16 in September 2007 (pre-crisis peak) to below $6 in March 2009 (as the markets bottomed out), implying EXR  stock lost almost 60% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $12 in early 2010, rising 84% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

EXR Fundamentals Over Recent Years

Extra Space Storage revenues increased from $1.3 billion in 2019 to $1.4 billion in 2020. Further, it improved to $1.6 billion in 2021 and $1.9 billion in 2022. The growth was mainly driven by higher property rental and tenant reinsurance income.

On a similar note, earnings increased from $3.27 in 2019 to $6.41 in 2022.

Does Extra Space Storage Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Extra Space Storage’s debt increased from $5.7 billion in 2020 to $7.3 billion in 2022, while its cash decreased from $109 million to $93 million. Further, the company garnered $1.2 billion in cash flows from operations in 2022. Overall,  the company has a large debt obligation as compared to the cash cushion, which presents a near-term risk to the stock upside.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe Extra Space Storage (EXR) stock has the potential for strong gains once fears of a potential recession are allayed. That said, the pressure on the company’s balance sheet remains a risk factor to the realization of these gains.

 Returns Nov 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 EXR Return 25% -12% 68%
 S&P 500 Return 9% 19% 103%
 Trefis Reinforced Value Portfolio 8% 27% 553%

[1] Month-to-date and year-to-date as of 11/30/2023
[2] Cumulative total returns since the end of 2016

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