Public Storage (NYSE: PSA) shares are trading at a premium to peers, although the company’s growth is likely to come under pressure. Goldman Sachs’ Andrew Rosivach downgraded the rating for the company from Neutral to Sell, while maintaining the price target at $244. The analyst commented that there is limited upside to the 2016 same store revenue growth.
Public Storage’s shares are currently trading at a 24 percent premium to Goldman Sachs’ short lease term REIT coverage and at a 56 percent premium to the REIT coverage average, analyst Andrew Rosivach noted. He added, however, that a key reason for this premium had “diminished over time.”
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Reasons for Downgrade
Rosivach enumerated 4 main reasons for the downgrade in rating. These are:
- Limited upside to consensus estimates: Goldman Sachs’ 2016 FFO estimate is merely 1 percent higher than the consensus expectations, as compared to 6 percent higher in 2015 and 3 percent higher at the beginning of 2016.
- Limited upside to revenue growth: “We believe PSA revenue growth estimates are limited as a result of both leverage and size. Due to PSA’s low leverage, outperformance in same-store growth should have a smaller impact to earnings vs. our coverage,” the analyst wrote.
- Lower leverage: The relative balance sheet advantage that Public Storage used to enjoy has diminished considerably.
- Valuation: While the company’s shares are trading at a premium to peers, their downside risk in a recessionary scenario would be “above other REITs in our coverage,” Rosivach commented.
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