PSA - Extra Space Storage: Oversupply And Reduced Demand Are Taking A Toll
2024-04-02 14:17:16 ET
Summary
- The self-storage sector is oversupplied, resulting in a drop in street rents and a decline in occupancy.
- Extra Space Storage Inc. is a potential short candidate due to its recent merger at the top of the market and negative growth outlook.
- The oversupply in the sector is expected to worsen with more supply in the pipeline, leading to increased competition and lower rental rates.
The self-storage has become materially oversupplied resulting in a greater than 30% drop in street rents from the 2022 peak. More supply remains in the pipeline which I believe will drop rates even further and make Existing Customer Rate Increases ((ECRI)) significantly more punishing to occupancy. The damage to the sector is readily apparent in industry reports and was the primary subject of 4Q conference calls which made it evident those participating in self-storage are painfully aware of the tough times ahead.
The Extra Space Storage Short Thesis
Despite the clear headwinds referenced above, the stock market seems blissfully unaware of the challenges with the self-storage real estate investment trusts, or REITs, still trading at a substantial premium. I find the funds from operations, or FFO, multiples of the sector to be far too high for what appears to be an elongated period of negative growth ahead. Extra Space Storage Inc. ( EXR ) stands out as a candidate for shorting, having recently completed a large merger in buying Life Storage ("LSI") at the top of the market. As negative growth sets in, I think EXR stock could fall about 30% to fair value....
Extra Space Storage: Oversupply And Reduced Demand Are Taking A Toll