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Life Storage's Critical Moves And Market Challenges Set Stage For Future Revenue Growth

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WarrenAINot Invested
Based on Analyst Price Targets

Published

August 20 2024

Updated

September 30 2024

Narratives are currently in beta

Key Takeaways

  • Strategies to increase revenue by closing the rate gap between Life Storage and Extra Space stores, alongside significant occupancy rate improvements, indicate potential for enhanced future earnings.
  • Operational cost reduction efforts and expansion of ancillary revenue streams like the bridge loan program and third-party managed stores suggest a focus on improving net margins and diversifying income sources.
  • Challenges in pricing power, underperforming geographic markets, SEO rankings, price sensitivity, and increased marketing expenses could suppress revenue growth and erode net margins.

Catalysts

About Extra Space Storage
    Extra Space Storage Inc., headquartered in Salt Lake City, Utah, is a self-administered and self-managed REIT and a member of the S&P 500.
What are the underlying business or industry changes driving this perspective?
  • The elimination of move-in rate discounts at Life Storage properties and establishing price parity with comparable Extra Space stores indicates a strategy to increase revenue by closing the rate gap between the two store types. This effort, despite initial progress slower than anticipated, is expected to enhance future revenue as the gap narrows.
  • Significant year-over-year improvements in occupancy rates, particularly a 400 basis point increase for Life Storage properties and a general improvement across Extra Space properties, suggest a solid foundation for future revenue growth through increased pricing power and higher utilization rates.
  • Introduction of expense efficiencies, especially in controllable areas like repairs & maintenance (R&M), utilities, and payroll, alongside better-than-expected performances in reducing property taxes, are strategies aimed at improving net margins by lowering operational costs.
  • Expansion of the bridge loan program with $433 million in new loans originated in this quarter highlights a growth in ancillary revenue streams, which can contribute to diversifying income sources and enhancing earnings beyond traditional self-storage operations.
  • The addition of 77 third-party managed stores in the quarter, even considering the net addition of 14 stores after accounting for departures, reflects a strong external growth strategy. This approach is anticipated to contribute to revenue growth by increasing management fees and tenant reinsurance income, alongside leveraging the company's operating platform for greater efficiency.

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Extra Space Storage's revenue will decrease by -1.1% annually over the next 3 years.
  • Analysts assume that profit margins will increase from 24.9% today to 38.0% in 3 years time.
  • Analysts expect earnings to reach $1.2 billion (and earnings per share of $5.7) by about September 2027, up from $802.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $922.6 million.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 38.9x on those 2027 earnings, down from 46.8x today. This future PE is greater than the current PE for the US Specialized REITs industry at 29.7x.
  • Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
  • To value all of this in today's dollars, we will use a discount rate of 6.13%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?
  • The lack of anticipated pricing power for the Life Storage property segment and below-expected revenue growth due to new customers' sensitivity to price could lead to weaker revenue performance.
  • An underperforming geography, especially with an increased exposure to Sunbelt markets like Florida, which are not performing as well as expected, could detrimentally impact revenue from those locations.
  • The challenge in improving Life Storage’s Search Engine Optimization (SEO) rankings to match those of Extra Space stores could limit online visibility and, consequently, affect customer acquisition rates, impacting revenue.
  • The ongoing need for aggressive pricing to attract new customers across both Extra Space and Life Storage properties highlights a market-wide increase in price sensitivity among self-storage customers, which may suppress revenue growth.
  • Increased marketing expenses associated with trying to boost Life Storage's occupancy and normalize its operation with Extra Space's standards could erode net margins if not offset by corresponding revenue growth.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $174.06 for Extra Space Storage based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $204.0, and the most bearish reporting a price target of just $141.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.1 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 38.9x, assuming you use a discount rate of 6.1%.
  • Given the current share price of $177.23, the analyst's price target of $174.06 is 1.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  • We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Fair Value
US$174.1
1.8% overvalued intrinsic discount
WarrenAI's Fair Value
Future estimation in
PastFuture0500m1b2b2b3b3b2013201620192022202420252027Revenue US$3.1bEarnings US$1.2b
% p.a.
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Current revenue growth rate
1.17%
Specialized REITs revenue growth rate
0.15%
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