Extra Space Earnings: Solid Same-Store Net Operating Income Growth Offset by Higher Interest Expenses

No-moat-rated Extra Space Storage EXR achieved solid same-store net operating income growth in the first quarter that was offset by higher interest expenses due to rising interest rates. The firm reported core funds from operations, or FFO, of $2.02 per share, 0.5% higher than the $2.01 per share FFO during the first quarter of 2022. The company maintained its 2023 full-year core FFO guidance of $8.30 to $8.60 per share, representing flattish growth at the midpoint when compared with the 2022 core FFO of $8.44. We are maintaining our $177 fair value estimate for the company as we incorporate first-quarter results.

The same-store revenue in the fourth quarter increased by 7.4% on a year-over-year basis in the first quarter, which was markedly lower than the double-digit growth rates in the last seven quarters. We think that the slowdown in growth was largely expected and is reflected in the stock price of the company. Overall, we think that the growth in the self-storage sector will moderate even further in the upcoming quarters after two strong years of growth. The same-store expenses increased by 3.4% in the first quarter compared with the previous year driven by higher marketing, insurance, office, and property operating expenses. This resulted in same-store net operating income growth of 8.7% in the current quarter. Management maintained its previous guidance for same-store revenue growth of 3.75%-5.25%, same-store expense growth of 5.00%-6.00%, and same-store NOI growth of 3.00%-5.50% in 2023. The same-store occupancy rate declined 60 basis points sequentially and 80 basis points on a year-over-year basis as it was recorded at 93.5% for the first quarter.