April 19, 2021

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Income from the Four Ds with Extra Space Storage

The storage business is said to thrive off the four Ds: Divorce, Downsizing, Dislocation, and Death. It’s looking like we will see plenty of those during the next few months, so it’s time to generate income with a put write on Extra Space Storage (NYSE:EXR).

We don’t want to minimize the problems in the current economic environment, but we also don’t want to miss a good opportunity to maximize our potential returns over the next few months.

Why is Storage so Appealing?

The average storage company is organized as a Real Estate Investment Trust (REIT), which is a special kind of stock that passes along most of its net-income to shareholders in the form of ordinary dividends. This makes these stocks attractive during a period of low interest rates like the one we are experiencing right now.

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However, unlike normal companies, a passthrough entity like a REIT requires a little more specialized analysis. For example, if you own a bunch of real estate assets, the way you recognize depreciation and amortization expenses for tax and reporting purposes doesn’t make much sense. Real estate tends to appreciate in value even if it is being “expensed” over time on the income statement.

Additionally, a REIT may sell real estate for a gain, which can distort net income with inconsistent bursts of cash flow that aren’t sustainable. However, while we can’t use normal measures like earnings, we can monitor funds from operations (FFO). FFO adds back in depreciation and amortization and removes income associated with property sales.

We like EXR for our trade because its FFO trends are consistently positive. Other measures we monitor, like same-site sales and operating margins, have been similarly positive.

Those numbers are lagging, so there will be some disruptions this summer, but we think the general trend will motivate buyers to continue moving in.

Where Should you get in EXR?

From a technical perspective, the $92-$96 range is right in the middle of a long-term inflection point, which is where we would expect buyers to move in again. That means a strike around $95 is at lower risk of exercise going forward.

Still, we don’t want to be in this trade longer than we have to. Early to mid-May expirations are probably best.

Daily Chart of Extra Space Storage (EXR) — Chart Source: TradingView

We have used a similar put write strategy on Life Storage, Inc. (NYSE:LSI) and Public Storage (NYSE:PSA), which are in the same sector, over the last two years. We’ve found that selling puts as storage stocks are rising works out well.

As long as interest rates remain low, which looks likely, we feel that investors will be attracted by EXR’s dividend yield of 3.6%, which should further strengthen these key support levels.

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.

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