A Peek Through The Door Of Upcoming Self-Storage REITs' Q2 Earnings

On Wednesday, Morgan Stanley analyst Vikram Malhotra published a research note based on the firm's proprietary AlphaWise Quarterly Storage Rent Check for the two largest players in the space:

Notably, there are four years of AW quarterly sampling history for these self-storage REITs.

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Tale Of The Tape: Past Year

The Vanguard REIT Index Fund VNQ tracks the MSCI REIT Index (RMZ) and is a good proxy for broader REIT sector performance.

One of the aspects that differentiates self-storage from REIT sectors with long-term leases (e.g. Healthcare and Net-Lease), is the tenant monthly rentals. There is also the added benefit of flexibility to adjust pricing up or down daily based upon dozens of data points for each location in order to optimize revenues.

Morgan Stanley's Public Storage AW Rent Check

The AlphaWise team "is seeing strong new customer rent growth," (also referred to as "street rent") at PSA facilities, which is one component of the overall rental per square foot.

Tale Of The Tape

During the past 52 weeks, PSA shares have traded in a range of $158.45–$203.50 per share.

Morgan Stanley On PSA Risk/Reward

The Morgan Stanley analyst's $195 base case, compared with its bull/bear case, risk/reward shows a fairly even distribution, but 2 percent lower than the prior close of $198.75 per share.

However, the AW same-store pricing check indicates that there could be some very positive metrics shared by PSA when they report Q2 earnings.

Morgan Stanley's Extra Space AW Rent Check

The AlphaWise team "is seeing new customer rent growth decelerating versus recent quarters." However, the report also noted that the Extra Space asset base has been expanding at a fast rate (29 percent in 2014), so the same store rent comparisons Y/Y are based on significantly different pools of assets.

The Morgan Stanley 2Q15 estimate of rents for Extra Space is $14.97 per occupied square foot. According to the report, "EXR's same-store rent growth (measured using net rent per occupied square foot) has averaged 5.0 percent over the past four quarters with 4.7 percent reported in 1Q15."

Tale Of The Tape

During the past 52 weeks, EXR shares have traded in a range of $48.91–71.82 per share.

Morgan Stanley On EXR Risk/Reward

The Morgan Stanley analyst base case of a $61 target price represents a potential 12 percent downside to Extra Space shares, based upon the prior close of $69.57 per share.

The AlphaWise rent check data does not contain the seeds of an upside surprise regarding the assumptions used to create the Morgan Stanley analyst base case.

Investor Takeaway

Morgan's Malhotra believes Public Storage to be fully valued at current price levels and Extra Space to have a considerable downside from current price levels.