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

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

Self-storage REITs continue to show resilience and have been one of the top performing REIT sub-sectors so far in 2015; however, is all of the good news already baked into the shares?

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:

  • Public Storage (NYSE: PSA): $34.4 billion cap, 3.42 percent yield
  • Extra Space Storage, Inc. (NYSE: EXR): $9 billion cap, 3.4 percent yield
  • Notably, there are four years of AW quarterly sampling history for these self-storage REITs.

    Related Link: Credit Suisse Follows The Money: June's Best/Worst U.S. Equity Sectors

    Tale Of The Tape: Past Year

    ms_-_ychart_psa_exr_july_16.jpg

    The Vanguard REIT Index Fund (NYSE: 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.

    ms_-_psa_rent_ck_2q15.jpg

    Tale Of The Tape

    psa_-_finviz_july_16_ms_rent_ck.jpg

    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.

    ms_-_psa_base_bull_bear_july_16.jpg

    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.

    ms_-_exr_rent_ck_2q15.jpg

    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

    exr_-_finviz_ms_rent_ck_july_16.jpg

    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.

    ms_-_exr_base_bull_bear_july_16.jpg

    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

    Given the recent upward bias regarding the direction of short-term interest rates, investor sentiment toward the broader REIT sector – as measured by net outflows to REIT funds and ETFs – has been negative overall.

    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.

    Image Credit: Public Domain

    Latest Ratings for EXR

    DateFirmActionFromTo
    Sep 2019DowngradesEqual-WeightUnderweight
    Sep 2019MaintainsNeutral
    Aug 2019MaintainsOutperform

    View More Analyst Ratings for EXR
    View the Latest Analyst Ratings

    Posted-In: Morgan Stanley Vikram MalhotraAnalyst Color REIT Analyst Ratings Trading Ideas Real Estate Best of Benzinga

     

    Related Articles (EXR + PSA)

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