Ramond James On Storage REITs: Public Storage Upgraded, Sovran Self Storage Downgraded, CubesSmart Top Pick

In a report published Friday, Raymond James analyst Jonathan Hughes discussed the self-storage REIT sector, noting that operating results for the group set new records for occupancy and same-store NOI growth in the second quarter.

Hughes said year-to-date total returns for the storage sector outperformed all other property types with a 14.2 percent return versus a 7.9 percent decline for the broader REIT industry. The analyst is expecting continued momentum with sector-wide same-store NOI growth to surpass 8 percent for the year, while a favorable supply/demand imbalance will continue through at least 2016.

Hughes also added that while the sector is trading at a premium to the entire REIT sector, he suggested that valuations are "reasonable" and sectors with shorter lease durations should continue to outperform.

Public Storage Upgraded To Outperform

Hughes upgraded shares of Public Storage PSA to Outperform from Market Perform with a new $220 price target.

Related Link: Self-Storage REITs Might Be The Way To Play, Says BofA

Hughes noted that Public Storage's "unmatched" capital structure (11 percent senior cap ratio, 6.7x fixed charge coverage) will "attract" investors who are looking for "safety" related stocks. The analyst also added that shares are trading at a 17 percent premium to his $172.55 net asset value per share estimate which is short of its historical 20 premium over the past 10 years.

Downgrading Sovran Self Storage To Market Perform

Hughes downgraded shares of Sovran Self Storage Inc SSS to Market Perform from Outperform.

According to Hughes, Sovran's exposure to the Houston market has "weighed heavily" on the name versus its peers and that investors have "painted Sovran with the same brush" as other REITs with heavy-Houston exposure.

The analyst also added that while self-storage fundamentals remain "strong" in Houston, a shift in sentiment is as much, if not more important, than underlying fundamentals. As such, investors should take a "more prudent approach" with the stock.

CubeSmart: Top Pick

Finally, Hughes named CubeSmart CUBE his "top pick" in the space while reiterating a Strong Buy rating.

Hughes argued that shares of CubeSmart continue trading at a "meaningful" discount to its peers at 20.0x 2016 AFFO/share estimate versus peers that are trading as high as 22.9x. As such, the stock represents an "attractive opportunity" for investors to gain exposure to a "top-performing" real estate sector company that can "quickly" adjust to (potentially) rising rates.