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Extra Space Storage: What’s Driving the Dividend and Valuations?

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A look at EXR

Let’s look first at Extra Space Storage (EXR). The stock has beaten the S&P 500 (SPY), the Dow Jones Industrial Average (DIA), and the Nasdaq Composite (ONEQ) with its dividend yield and YTD (year-to-date) returns. It also trades at a reasonable PE ratio that’s closest to the broad-based indexes. 

What drove revenue and EPS in fiscal 2017?

EXR’s revenue grew 11% in fiscal 2017, driven by property rental and tenant reinsurance, partially offset by management fees and other income. Its same-store revenue grew 5%.

Its cost of revenue rose 10%, driven by property operations and tenant reinsurance. Its gross profit grew 12%, and its operating expenses rose 3%, excluding acquisition costs in fiscal 2016. All that led to an operating income growth of 17%.

Interest expenses rose 15%. It recorded substantial other income, and as a result, net income and EPS grew 29% and 27%, respectively. Its fund flow from operations (or FFO) grew 14%.

What drove revenue and EPS in the first quarter?

In the first quarter, EXR’s revenue grew 9%, driven by property rental, tenant reinsurance, management fees, and other income. Its same-store revenue grew 5%.

Cost of revenue rose 11%, driven by property operations and tenant reinsurance. Gross profit grew 8%, and operating expenses rose 7%. All that led to an operating income growth of 8%.

Interest expenses rose 14%. As a result, net income and EPS grew 7% and 9%, respectively. Its FFO grew 6%.

How did its dividend and valuation shape up?

EXR’s first-quarter results were followed by a 10% dividend increase for the second quarter. The dividend yield decreased slightly due to stock gains partially affecting the impact of dividend growth.

PE and PS (price-to-sales) ratios of 26.8x and 11.3x, respectively, compare to sector average PE and PS ratios of 446.7x and 9.1x, respectively.

We can see the valuation and dividend yield projections in the chart below.

What are the revenue and EPS projections?

EXR’s revenue has been projected to decline 7% in 2018 before gaining 10% and 7%, respectively, in the following two years. EPS has been projected to decline 23% in 2018 before gaining 8% and 5%, respectively, in the next two years.

Dividend ETFs

The Vanguard Dividend Appreciation ETF (VIG) offers a 2% dividend yield at a PE ratio of 23.5x. It has 28% and 9% exposure to industrials and financials, respectively. Its top five holdings include Microsoft (MSFT), Johnson & Johnson (JNJ), Walmart (WMT), PepsiCo (PEP), and McDonald’s (MCD).

The Vanguard High Dividend Yield ETF (VYM) offers a 3% dividend yield at a PE ratio of 21.6x. It has 16% exposure to financials. Its top five holdings are JPMorgan Chase (JPM), ExxonMobil (XOM), Johnson & Johnson (JNJ), Intel (INTC), and Chevron (CVX).

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