On Thursday, Extra Space Storage (NYSE:EXR) experienced a change in stock rating, as Raymond James adjusted its outlook from a Strong Buy to an Outperform status. Alongside the downgrade, the firm set a price target of $160.00 for the company's shares.
The adjustment in rating comes as the analyst at Raymond James maintains a positive outlook on the company, citing strong anticipated adjusted funds from operations (AFFO) growth through 2025. The expected compound annual growth rate (CAGR) for 2023-2025 is 2.5%, which could potentially be a conservative estimate if the synergies from the merger with LSI are realized ahead of schedule.
Extra Space Storage's higher exposure to variable rate debt, which stands at 21% compared to an average of 4% among its peers, is seen as advantageous in the event of declining inflation and interest rates. However, the firm acknowledges that the $100 million in expected synergies from the LSI merger will take longer to fully materialize due to a softer self-storage market.
Despite the positive aspects, there are noted risks. Extra Space Storage has become a heavy overweight name in its sector, which could pose a threat if the company's fundamentals fail to meet expectations. The $160 price target reflects the company's stock trading at 19.7 times the estimated 2025 AFFO per share and is 8% above the firm's net asset value (NAV) estimate.
Raymond James has based its price target on conservative multiples and NAV premiums, which are below historical averages. The scenarios outlined by the firm suggest potential total returns of (22%), 14%, and 25% in their risk, base, and reward projections, respectively.
InvestingPro Insights
Extra Space Storage (NYSE:EXR) recently saw a shift in stock rating, and to complement this new perspective, InvestingPro provides additional insights. The company has demonstrated a robust track record with its dividend, having raised it for 14 consecutive years, which signals a strong commitment to shareholder returns. Furthermore, Extra Space Storage is a prominent player in the Specialized REITs industry, which may offer investors a unique portfolio diversification opportunity.
InvestingPro data highlights a market capitalization of $30.97B, indicating the company's substantial presence in the market. With a P/E ratio of 30.72 and an adjusted P/E ratio for the last twelve months as of Q4 2023 standing at 35.96, the company is trading at a high earnings multiple, which may suggest investor confidence in its future growth prospects or potential overvaluation. Additionally, the company's revenue growth of 33.04% over the last twelve months underscores its financial momentum.
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