Extra Space Storage Earnings: Management Lowers FFO Guidance as Demand for Self-Storage Cools

No-moat-rated Extra Space Storage EXR reported lackluster results as demand for self-storage starts to moderate. The firm reported core funds from operations, or FFO, of $2.06 per share, 3.3% lower than the $2.13 per share FFO during the second quarter of 2022. Management has revised the outlook for the back half of the year due to lower-than-expected new customer rates in recent months. The company’s updated 2023 full-year core FFO guidance is $8.15-$8.35 per share, representing a 2.4% decline at the midpoint when compared with previous guidance. We note that the results of the company are worse than its peer Public Storage. We are reducing our fair value estimate for Extra Space Storage to $165 per share from $177 as we slightly moderate our long-term expectations for the sector.

The same-store revenue in the second quarter increased by 2.7% on a year-over-year basis, which was markedly lower than the growth rates in the past few quarters. We think that growth in the self-storage sector will moderate further in the upcoming quarters after two exceptionally strong years of growth. The same-store expenses increased by 3.0% in the second quarter compared with the previous year driven by higher marketing, insurance, and office operating expenses. This resulted in same-store net operating income growth of 2.6% in the current quarter. Management’s updated 2023 guidance includes same-store revenue growth of 2.50%-3.50%, same-store expense growth of 3.50%-4.50%, and same-store NOI growth of 2.00%-3.50%. The average same-store occupancy rate decreased 50 basis points sequentially and 100 basis points on a year-over-year basis as it was recorded at 94.2% as of the end of the second quarter.