Higher Interest Rates and Slowing Demand for Self-Storage Will Affect Extra Space Storage in 2023

No-moat-rated Extra Space Storage EXR ended the year with modest results as the firm reported core funds from operations, or FFO, of $2.09 per share, 9.4% higher than the $1.91 per share FFO during the fourth quarter of 2022. As we have highlighted previously, the self-storage sector has started to moderate after two strong years of growth. The company gave 2023 full-year core FFO guidance of $8.30 to $8.60 per share, representing flattish growth at the midpoint when compared with 2022 core FFO of $8.44. We are maintaining our $173 fair value estimate for the company as we incorporate fourth-quarter results.

The same-store revenue in the fourth quarter increased by 11.8% on a year-over-year basis, due to higher rental rates that were partially offset by lower occupancy. The same-store expenses increased by 6.7% in the fourth quarter compared with the previous year, resulting in same-store net operating income growth of 13.4%. Management has guided for a same-store revenue growth of 3.75%-5.25%, same-store expense growth of 5.00% to 6.00%, and same-store NOI growth of 3.00% to 5.50% in 2023.

Higher interest rates are also having an adverse impact on the company due to a significant proportion of variable-rate debt. Approximately 35% of the company’s total debt is classified as variable rate debt, and the weighted average interest rate on this debt has increased from 1.3% in the fourth quarter of 2021 to 5.5% as of the end of 2022. This has resulted in the overall weighted average interest rate for the company to increase to 4.1%, up 150 basis points compared with the previous year. The overall interest expense of the company is expected to increase to approximately $335 million in 2023 compared with $220 million in 2022.