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ML on Self StorageSelf Storage REITs Proprietary Street Rate Analysis Rating Change Equity | 19 July 2019 PSA: Upgrade to Buy; CUBE: Downgrade to Neutral We update our Proprietary Storage Street Rate analysis, noting that street rate trendshave declined in 2Q. We remain focused on the resiliency of demand compared to supply pressures but continue to expect the cumulative pressure from supply to impact ’19 REIT results. We remain equal weight Storage within REITs. CUBE. Street rates have continued to decline and pressure on NYC pricing (Chart 15) has also increased (11.5% of NOI). As such, we lower our rental rate growth - 20bp to 2.2% in ’20. We are modeling lower Y/Y growth in ’20 (previously flat). We are decreasing our PO to $35 from $36 and downgrading CUBE to Neutral. • Extra Space Storage (EXR): 2Q street rates have declined but continue to hold positive for EXR. We increase ’19 SS revenue by +10bp to 2.9%. We continue to model a reacceleration in SS NOI in 2020 for EXR – which is key to our Buy thesis. We continue to like EXR’s operational platform, culture and investment in technology and believe its revenue management will differentiate its performance in a supply environment. Based on this, we are increasing our premium to NAV to 10% (from 5%) and are increasing our PO to $121 from $115. We reiterate our Buy on EXR and are 30bp & 90bp above Street FFO for ’19E & ’20E, respectively. • Life Storage (LSI): LSI’s 2Q street rates have continued to decline as expected. We also note that 2Q weakness has shown pricing trends invert for peak leasing (Chart 12). We believe LSI will continue to work through new supply pressures through ’21 due to its exposure to more secondary markets. We reiterate our Underperform on LSI. • Public Storage (PSA): PSA’s 2Q street rates remain solid at -0.1% compared against peers, and slightly above our expectation. We have increased ’19 SS rev growth by 10bp to 1.2% in ’19. We are also increasing our premium to NAV to 10% (from 5%) given the strength of PSA’s balance sheet to fund business plans in case the US economy is impacted by macro risks and/or capital markets tighten. As a result, we are increasing our PO to $264 from $252 and upgrading PSA to Buy. |
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