No. 2 Player is My No. 1 Pick in This Breakout Sector
The Minnesota Real Estate Journal brought a striking fact to my attention: There are three times as many self-storage facilities in the United States as there are McDonald’s (NYSE: MCD).
It may seem like there is practically a Golden Arches on every street corner, with the fast food chain operating 14,350 restaurants in the country in 2014. But the number of storage facilities dwarfed that at 48,500.
Currently, about 10% of Americans rent a storage facility. And about 50% have used one at some point in their lives.
These numbers will grow as storage demand increases. According to the Self Storage Association, over the past 40 years, this has been one of the fastest growing segments of the commercial real estate sector.
Stephen Mutty, senior vice president of real estate service company Colliers International, said the industry is growing because people “simply can’t throw stuff away.” So, consumers pay to buy it, and then they pay to store it.
The U.S. self-storage industry generates more than $ 24 billion in annual revenue, and market research firm IBISWorld estimates that figure will grow to $ 31 billion in 2019.
The sector has been described by analysts as “recession resistant.” Will McKitterick of IBISWorld said, “The countercyclical nature of the self-storage industry helped it weather the recession better than most industries. Now that the economic recovery is in full swing, revenue growth over the next five years is expected to be even more robust.”
One of the best ways to profit from this trend is with Extra Space Storage (NYSE: EXR), a real estate investment trust (REIT) that owns, develops, acquires and operates self-storage properties across the United States.
Jefferies recently issued a bullish report on the self-storage REIT sector, noting positive earnings from major players, stronger-than-expected same-store net operating income, rent growth and improved occupancies.
Extra Space Storage is the nation’s second largest self-storage operator, as measured by revenue and storage space, trailing only Public Storage (NYSE: PSA).
But when it comes to share price performance, EXR is the clear leader, handily outperforming its competitor. Year to date, PSA has gained about 7% while EXR jumped nearly 20%.
Extra Space currently owns or operates about 1,100 self-storage properties with a total of 750,000 units and 80 million square feet of rentable space.
The company is growing. In the most recently reported first quarter, Extra Space acquired seven operating sites for around $ 73.6 million. And management has since purchased an additional 24 locations in the southern United States for roughly $ 193 million.
By the end of the third quarter, the company plans to complete the purchase of four more operating facilities, and by 2017, another 16 outlets are expected to open.
This expansion is coupled with growing occupancy rates, giving Extra Space improved pricing power. In Q1, the company hit record-high occupancy despite what are typically the slowest months of the year.
First-quarter earnings jumped 24% year over year to $ 0.68 per share on a 13.5% increase in revenue. For the upcoming second quarter, set to be reported in late July, analysts project a 16% increase in per-share profit from the year-ago period to $ 0.73 on a 4.5% rise in revenue to $ 676.8 million.
For the full year, analysts expect 4.6% growth in sales, to $ 676.8 million, to translate into 17% EPS growth to $ 2.96.
The company has been the subject of numerous upward earnings revisions lately. On Thursday, RBC Capital, which has an “outperform” rating on the stock, raised its price target on shares to $ 74 from $ 68.
The chart below shows strong buying interest in EXR.
The stock advanced in almost a straight line from a low near $ 38 in December 2013 to around $ 53 in June 2014. For the next few months, it consolidated in a narrow range between $ 49 and $ 53.
A test of the major uptrend line occurred in September. EXR passed that test and shares ran to $ 68 in early 2015. They again consolidated in a narrow range, this time between support at $ 63 and round number resistance at $ 70.
On Thursday, EXR rallied as much as 3.2%, hitting an all-time high of $ 70.71.
According to the measuring principle for a rectangle pattern, calculated by adding the height of the pattern to the breakout level, the stock could potentially reach a target of $ 76.50, which is 8% above recent prices.
The REIT offers an appealing 2.7% forward annual dividend yield. Since 2010, the quarterly payout has soared 370%, expanding from $ 0.10 per share to a current $ 0.47. This dividend should help put a floor under the share price.
The company’s next dividend payment won’t be for another month, but if you transfer the shares to a high-income brokerage account, you can collect an income payment immediately — as well as every month after that for as long as you hold the stock. Most investors can easily convert their existing brokerage account. If you’d like to learn how, click here.
Given the strong technical and fundamental outlook, I plan to go long on the nation’s second largest storage provider.
Recommended Trade Setup:
— Buy EXR at the market price
— Set stop-loss at $ 62.89
— Set price target at $ 76.50 for potential 8% gain by late 2015