KeyBanc Offers Self Storage REIT Outlook, Less Occupancy With More Rate Growth

• Self storage REITs have, on average, outperformed the MSCI US REIT index by 3,300 bps year-to-date.
• KeyBanc’s Todd M. Thomas upgraded the ratings on Extra Space Storage, Inc. EXR and Public Storage PSA, while reducing the rating on Sovran Self Storage Inc SSS.
• Industry demand is poised to remain healthy in 2016, and growth rate could be higher, despite lower occupancy, Thomas stated.

Analyst Todd Thomas mentioned that the self storage REITs are on track to outperform the MSCI US REIT Index, or RMZ, for a sixth consecutive year, with growth remaining robust due to steady demand and modest new supply.

From a fundamental standpoint, 2016 could be similar to 2015. There could be a little less occupancy, but the rate growth could be higher. “Most metrics we track are still on the rise,” Thomas noted. He added that occupancy continues to move higher, pushing vacancy rates to all-time lows. On a y/y basis, asking rents are higher and discounts are lower, while there is growth in the average length of stay.

“Current conditions have enabled the self storage REITs to gain occupancy, maximize revenue, and boost NOI margins to levels previously unforeseen. Occupancy growth in the year ahead may be less impactful to top-line growth, but we think the REITs may see rent growth accelerate in 2016 as market rents rise and discounts decrease further,” the KeyBanc report noted.

Extra Space Storage

Thomas upgraded the rating on Extra Space Storage from Sector Weight to Overweight, while establishing a price target of $94. He explained that the company is expected to generate 18 percent growth in 2016, versus expectations of 13 percent for the sector and 8 percent for the REITs.

Public Storage

KeyBanc upgraded the rating on Public Storage from Underweight to Sector Weight. Occupancy continues to be at record levels, and could become a slight headwind in 2016. Thomas added, however, that rent growth and property NOI margin expansion are expected to “provide a nice boost to same property operations.”

Sovran Self Storage

The analyst downgraded the rating on Sovran Self Storage from Overweight to Sector Weight. The company’s shares have gained 19 percent year-to-date, as compared to a 30 bps decline in the RMZ. The shared are now trading close to KeyBanc’s previous price target of $104.

“While we expect SSS's portfolio to continue to perform well, we have been admittedly disappointed with the Company's same store performance over the last several quarters,” Thomas commented.