Bank Of America Says It Underestimated REITs' Execution, Demand

Self-storage REITs Extra Space Storage, Inc. EXR, CubeSmart CUBE and Life Storage Inc LSI all lifted their guidance when they reported first-quarter earnings.

Bank of America Merrill Lynch revisited its model for the storage REITs in the wake of the guidance revisions. 

The Analyst

Analyst Juan Sanabria on May 8 upgraded Extra Space Storage from Neutral to Buy and upped the price target from $102 to $105.

Sanabria also upgraded CubeSmart from Sell to Neutral and lifted the price target from $29 to $32.

The Thesis

Storage REITs have managed to mitigate supply concerns with solid demand, strong platforms and advantages of scale, Sanabria said in the note.

"We've underestimated REITs' ability to execute [and their] demand," the analyst said.

BofA raised its 2018 average same-store revenue growth forecast by 10 basis points to 2.6 percent.

REITs are capturing market share, which is positive for their third-party management businesses, Sanabria said.

Slowing same store revenue growth due to supply issues is already baked into BofA Merrill Lynch's FFO estimates, the analyst said.

"Big picture, we believe in a healthy macro environment, storage should benefit given their short leases, strong operations and resilient demand."

Extra Space Storage: Expect Sector-Leading Growth

Extra Space Storage reported stand-out Q1 results that were helped by rate growth for new customers and occupancy, Sanabria said. The analyst sees the company's platform, along with a strong management team and diversified portfolio, as helping it to continue to record sector-leading growth into 2019.

CubeSmart's Operations Can Help Neutralize Supply

Despite having the highest relative exposure to supply, CubeSmart's strong platform has helped drive better-than-expected results, according to BofA. The company's strong portfolio demographics may have driven results, Sanabria said. 

"Although NYC supply remains a concern, regulation by Mayor Bill DeBlasio should limit new development."

BofA sees NYC as an underserved market that should support above-average core long-term growth.

Editor's note: This article originally mentioned Cubic Corporation CUB in the upgrade. We apologize for this error.

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