Additional Area Storage Inventory: Prime-Tier Dividends (NYSE:EXR)

Introduction

In June, I wrote an article titled “Additional Area Storage – Prime Tier Dividend Progress At A Nice Value”. Since then, the inventory has added 25%. That is incredible because it confirms my bull case. But, I am on the lookout for one other dip as I determined that I need Additional Area Storage (NYSE:EXR) in my portfolio. This firm goes nicely with my present place in Public Storage (PSA), the corporate’s a lot bigger peer. On this article, I’ll stroll you thru my ideas and clarify why EXR could be the best match to your portfolio, no matter whether or not you are an income-focused investor or a dividend-growth-focused investor like myself.

So, let us take a look at the small print!

EXR Is An Outperformer

I’ve lined EXR for a few years. Therefore, I assume that almost all of my readers know that I’ve usually made the case that EXR would make a lot sense in my portfolio. I truly owned the inventory in early 2020, however it did not make the reduce once I restructured my portfolio. I made a decision to go along with its bigger peer Public Storage.

Whereas I don’t remorse shopping for Public Storage, I do remorse that I didn’t purchase Additional Area Storage – or preserve it, relying on the way you take a look at it.

I do like self-storage. If I had to purchase bodily actual property myself, I’d most likely be in self-storage as nicely. I just like the simplicity of it and the long-term secular pattern fueled by individuals shifting into smaller properties, and the ever-increasing want for storage. Furthermore, storage services usually have prime places, which makes self-storage appropriate for mini-warehousing duties and associated final-mile logistics, which I consider might be an enormous bull case within the many years going ahead.

With that stated, Additional Area Storage has a market cap of $28.0 billion, which makes it the second-largest REIT operator within the trade.

The corporate is an S&P 500 member working 2,130 properties. 995 of those properties are wholly owned. 847 properties are third-party managed. 288 properties are a part of joint ventures.

Based in 1977, EXR has grown into an organization working in 41 states, renting 1.5 million items operated by greater than 4,000 staff.

Because the map above suggests, the corporate is well-diversified. Its largest markets are the higher Los Angeles space and NY/NJ. These two areas account for 12% of whole income every.

Furthermore, with 2,100 shops, no property is price greater than 1% of EXR’s portfolio whereas 60% of properties are positioned in main places.

Going again to the corporate’s IPO in 2004, EXR shares have returned 21.4% per yr together with dividends. This beats the S&P 500 by a mile. Furthermore, regardless of an ordinary deviation of 26.8% (versus 15.0% for the S&P 500), the volatility-adjusted efficiency (Sharpe/Sortino ratios) is far increased. Additionally, the market correlation is simply barely above 50% as high-quality yields have a tendency to guard traders in sure recessions – not all, because the Nice Monetary Disaster confirmed.

Furthermore, over the previous 10 years, EXR has constantly outperformed its friends on a complete return foundation.

On high of that, the corporate has a incredible dividend yield.

The EXR Inventory Dividend

Utilizing Searching for Alpha’s dividend scorecard for EXR, we see a really combined card exhibiting excessive scores for dividend progress and consistency. But, each security and dividend yield rating fairly low – relative to the true property sector.

With that stated, let me elaborate because the numbers are a lot better than the relative scores recommend.

Initially, dividend security is not unhealthy. The corporate has a money payout ratio of 66.0%, which is simply 200 foundation factors above the sector media, in line with Searching for Alpha knowledge. The AFFO (adjusted funds from operations) payout ratio is 73%. The peer median is simply 100 foundation factors decrease.

On high of that, dividend progress is constant and fairly aggressive because the chart beneath suggests.

As visualization is not sufficient, let me offer you some numbers.

Over the previous 10 years, the common annual dividend progress charge is 23.3%. This quantity has come right down to 16.5% over the previous three years.

These are essentially the most “latest” hikes:

February 2022: 20.0% August 2021: 25.0% February 2021: 11.1% Might 2019: 4.7%

The present yield is 3.0% primarily based on a $1.50 quarterly dividend per share and a $200 inventory worth. Please notice that the yield within the YCharts graph has NOT been up to date. Therefore, I calculated the yield myself. What we’re coping with here’s a yield that comes near the “high-yield” definition (at present 3.10%) and a yield that beats the weighted actual property common by roughly 60 foundation factors, utilizing the iShares U.S. Actual Property ETF (IYR) as a benchmark.

Crucial factor is that the EXR dividend is protected and backed by greater than only a “massive” enterprise. EXR is very environment friendly and backed by a stellar steadiness sheet. It additionally helps that trade fundamentals stay favorable, which we are going to talk about subsequent.

Favorable Business Fundamentals

Housing is weakening. Charges are rising, an rising variety of properties are being bought beneath the asking worth, and individuals are much less optimistic about their dwelling worth going ahead.

But, self-storage stays in a great spot in line with a report, I mentioned in a Public Storage article on the finish of August.

In keeping with the latest Yardi Matrix nationwide self-storage report, fundamentals stay robust, backed by excessive demand.

Primarily, whereas progress has moderated after a speedy pandemic-fueled enlargement, demand is sustaining regular progress in charges in line with the report:

As road charges have leveled at file highs, year-over-year progress has decelerated. The slowdown in progress was to be anticipated, as a lot of the trade’s anticipated positive factors in 2022 have been unlikely to match the above-trend will increase posted final yr. Nationwide, the general common road charge, which incorporates all unit sizes and kinds, grew 2.1% year-over-year in July, a 210-basis-point drop in comparison with June’s annual charge progress.

Including to that, new provide is without doubt one of the largest points. In spite of everything, self-storage has low entry boundaries. Everybody with entry to capital can purchase storage services.

As of July 2022, new provide beneath building and deliberate is at 10.1% of the nationwide present stock. Progress is very excessive in New York, Las Vegas, and Philadelphia.

As I wrote in my August article:

The excellent news for operators is that quickly rising building prices will probably stop any main surges in new provide over the approaching years.

In keeping with the most recent Yardi Matrix forecast, the quantity of latest provide delivered throughout the nation in 2022 might be equal to three.2% of present inventory and annual deliveries will reasonable to 2.5% of whole inventory by 2027.

That is terrific information for big operators who not solely have a big footprint already but additionally higher “value-adding” belongings that almost all no-name operators can’t compete with. In spite of everything, the long-term surge in storage demand additionally comes with a requirement for high-quality storage together with security, self-service assist, local weather management, and whatnot.

In gentle of those numbers, it is vital to say that EXR is ready to preserve reductions low. Reductions are an important indicator to trace how aggressive an organization is. In spite of everything, constructing storage is “straightforward”, however providing a great service whereas earning money is much from straightforward.

EXR’s Outcomes Are Nice, So Is Its Stability Sheet

As trade fundamentals stay favorable, EXR stays in an important spot to capitalize on this.

Initially, the corporate is sustaining a excessive occupancy charge regardless of declines within the trade. Similar-store occupancy was at 95.9% in 2Q22. That was down 100 foundation factors versus 2Q21.

In 2Q22, the corporate elevated same-store income by 21.7% with 26.0% progress in same-store internet working earnings. EXR benefited from underperforming same-store working bills of “simply” 9.3%, versus 21.7% same-store income progress.

In keeping with CEO Joseph Margolis:

With manageable new provide and sturdy buyer demand, we proceed to function at excessive occupancy with robust charges. Regardless of inflation and the potential results of recession, we consider we’re nicely positioned to proceed to supply robust outcomes as a result of our resilient need-based asset class, diversified portfolio, robust steadiness sheet and best-in-class staff and platform.

Furthermore, going into this yr, greater than 66% of consumers stayed longer than 12 months. That is an all-time excessive and nicely above the longer-term common near 60.0%. 47.6% of consumers stayed longer than 24 months. That is up from lower than 45.0% previous to the pandemic.

What’s fascinating is that the corporate has grown its internet working earnings by 7.5% per yr over the previous 5 years. This beats each single competitor by at the very least 70 foundation factors. Going again to 2011, the corporate has additionally outperformed utilizing funds from operations as a metric. This paved the best way for the aforementioned whole return outperformance.

These numbers aren’t simply nice on the whole, however they assist EXR to penetrate a extremely fragmented market the place the biggest REITs and storage suppliers personal simply roughly one-third of the market.

Furthermore, it helps that EXR has a wholesome steadiness sheet. Particularly in gentle of the present surge in charges.

Utilizing eurodollar futures, the three-month LIBOR charge is at 3.36%. The typical 30-year mortgage charge in the US is 5.7%.

As of June 30, 2022, EXR’s proportion of fixed-rate debt was 74.8%. The weighted common rates of interest of the Firm’s mounted and variable-rate debt have been 3.1% and a couple of.9%, respectively. The mixed weighted common rate of interest was 3.1% with a weighted common maturity of 5.5 years.

Furthermore, internet debt to EBITDA has come down considerably from 6.2x in 2020 to 4.5x in 2022. The curiosity protection ratio has risen to 7.9%.

This stellar steadiness sheet can be the explanation why widespread inventory dilution has solely been 1.1% per yr since 2017, which helps to create per-share worth.

So, what concerning the valuation?

EXR Inventory Valuation

The corporate expects to generate between $8.30 and $8.50 in core FFO this yr. That is primarily based on at the very least 16% same-store income progress, 7.5% same-store bills progress, and at the very least 18.5% same-store internet working earnings progress.

This FFO outlook places the valuation between 23.5 and 24.1x (Value/FFO).

The longer-term median is near 23x, which makes this valuation “truthful”.

The identical may be stated concerning the dividend yield of three.0%, which is near the longer-term median as nicely. Once more, notice that the yield within the chart beneath has not been up to date by YCharts but.

With that stated, actual charges have entered constructive territory, which is fairly unhealthy for danger belongings like shares.

In keeping with Bloomberg:

“It’s probably that any push to new multiyear highs in actual yields would probably correspond with a brand new leg down in shares,” stated Charlie McElligott, a cross-asset strategist at Nomura Holdings Inc.

Rising inflation-adjusted yields are placing strain on the likes of tech shares as a result of the latter’s long-term earnings prospects now must be discounted at increased charges. On the identical time belongings bereft of earnings streams like gold and cryptocurrencies look much less interesting given the higher alternative prices to carry them in comparison with a Treasury bond that pays out an actual return.

Provided that the Fed is raring to aggressively hike into financial weak point to hurt demand – as a way to struggle inflation – I would not guess towards some draw back in EXR and the market, on the whole.

It is also the explanation why the score for this text is “impartial”.

But, that is a great factor. If EXR declines, I’ll begin a place if I’ve the funds obtainable to take action – as I’ve different shares on my record that I’ve mentioned on Searching for Alpha that I wish to purchase as nicely.

Takeaway

Additional Area Storage is one in every of my all-time favourite REITs and dividend shares on the whole. The corporate has a incredible enterprise portfolio of high-quality self-storage belongings, the flexibility to broaden and stand up to increased charges because of a secure steadiness sheet in addition to the willingness to let shareholders profit by means of constant and excessive dividend hikes.

The corporate’s 3.0% yield could be very respectable, the valuation is truthful, and I’ve little doubt that the inventory can proceed long-term outperformance versus its friends, numerous actual property ETFs, and the market on the whole.

Whereas I like the present valuation, I’d not guess towards some short-term declines. The inventory has rallied greater than 25% since my most up-to-date article whereas actual charges have entered constructive territory.

So, lengthy story brief, if you’re an income-oriented investor or a dividend progress investor, put EXR in your watchlist. I consider it is the most effective dividend investments cash can purchase and I actually remorse not preserving my shares in 2020.

(Dis)agree? Let me know within the feedback!