BMO Upgrades Public Storage, Notes Shares Fairly Valued

In a report published Tuesday, BMO Capital Markets analyst Paul Adornato upgraded shares of

to Market Perform from Underperform with a price target raised to $192 from a previous $140. Adornato noted that Public Storage's recent first quarter results with same-store NOI growth of 8.4 percent was within the group's range of 7.5 percent to 11.4 percent. The company also demonstrated "healthy" underlying fundamentals (limited supply, strong demand, meaningful rent growth and occupancy gains), although these aren't company specific and enjoyed bay all of the publically traded storage REITs. Adornato continued that shares were trading at a 5.4 percent premium in December 2013 to estimated consensus NAV. Today, shares are trading at an 11.8 percent NAV premium which is 700 basis points below its peers' 18.9 percent premium. The valuation is now "reasonably valued" as Public Storage "is no longer a standout" in terms of operations or cost of capital. The analyst explained his reasons to suggest shares no longer deserve a premium valuation. First, the long term risk-on trade following the recession means that the "flight to quality" (the company's under-levered balance sheet) had ended. In addition, the company's cash "hoard" of $500 million perpetually on the balance sheet over long periods of time had "disappeared" due to acquisitions. Finally, Public Storage has previously enjoyed the benefits of scale, technology and improving cost of capital, but now the "playing field" for top operators has now leveled.