Analyst Note| Kevin Brown |
We are increasing our fair value estimate for no-moat Extra Space Storage to $130 per share from $95 after incorporating first-quarter results and making upward revisions to our short-term internal growth outlook for the company, having been previously worried that the unemployment caused by the coronavirus would be a negative for the self-storage sector. While rising unemployment often leads to increased demand for self-storage space as displaced renters must rent storage facilities while they find smaller, cheaper housing, we were concerned that there would be fewer people moving due to rent protections put into place during the pandemic. As we have not seen these trends play out, as occupancies and same-store rent growth remains robust, we now anticipate increased storage facility usage over the next several years as the millennial generation seeks to move from their urban apartments to suburban homes, which could create additional short-term demand as they look for a new home. That said, we are still worried about the long-term outlook for the sector. We don't believe the millennials moving to the suburbs will become long-term renters as they should have more space once they complete the move. Additionally, we worry that supply growth remains very high in many markets, which will pressure occupancy and rental rates. Even though we have increased our outlook for Extra Space Storage, we still believe the company is overvalued at current prices.