UBS: Life Storage Has Disconnect Between Growth, Valuation

Too much optimism is priced into the shares of Life Storage Inc LSI, according to an analyst at UBS.

The Analyst

UBS analyst Nick Yulico downgraded shares of Life Storage from Neutral to Sell, while he maintained his $75 price target for the shares.

The Thesis

With new supply pressuring pricing power, Life Storage's growth is unlikely to improve relative to peers, Yulico said in a note. (See the analyst's track record here.) 

A disconnect exists between growth and the valuation of Life Storage stock, which reflected a 5-percent premium to net asset value, or NAV, the analyst said. 

The shares of the company have risen 30 percent since August, thanks to improving operations in Houston and a modest upward revision to the third quarter same-store net operating income guidance, Yulico said. 

The analyst estimates same-store revenue growth of 1.4 percent for 2018, flat with the midpoint of the 2017 guidance. But with same-store expense growth expected to outpace same-store revenue growth in 2018, Yulico projects limited growth in funds from operations.

UBS lowered its 2018 FFO per share estimate from $5.36 to $5.35 and its 2019 estimate from $5.40 to $5.39. The downward move reflects higher property tax growth and higher interest expense from the recent $450-million debt issuance, according to UBS. 

"We think current valuation reflects too much optimism and our FFO estimates are below consensus," Yulico said. 

The Price Action

Despite an extended period of midyear sell-off, Life Storage shares are up more than 5 percent since the beginning of 2017. 

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