KeyBanc Upgrades 2 Storage Companies

Self-storage REITs are performing better than expected throughout 2019, and the group's outlook through 2020 is improving relative to prior expectations, according to KeyBanc Capital Markets. 

The Analyst

Todd Thomas upgraded Life Storage Inc LSI from Sector Weight to Overweight with a new $106 price target.

The analyst also upgraded Public Storage PSA from Underweight to Sector Weight.

Life Storage

Life Storage has underperformed the storage sector by nearly 1,000 basis points in 2019 despite reporting a better-than-expected revenue growth rate of 2.4 percent in the first quarter, Thomas said in the Monday upgrade note. (See his track record here.)

The occupancy comp is likely to remain favorable for at least one or two quarters, the analyst said.

The company increased rates for existing customers earlier than expected, with subsequent increases coming every 12 months, he said. These factors should have a notable impact on same-store revenue growth in 2019, and rival companies are unlikely to show a similar benefit, Thomas said. 

From a valuation perspective, Life Storage's implied cap rate of 5.6 percent is 70 basis points higher than peers, which is "attractive," the analyst said.

Shares are trading at a 12-percent 2019 AFFO multiple discount, which is likely to narrow to 11 percent next year, he said. 

Growth is likely to improve "more meaningfully" in 2020 after the impact from this year's capital recycling activity starts to ease, Thomas said. 

Life Storage's stock pays a dividend yield of 4.1 percent, which represents a 40-basis point premium to the storage group and a 30-basis point premium versus the weighted average of REIT companies, according to KeyBanc. 

Public Storage

Public Storage started to show a stabilization in its business in late 2018, while revenue growth moved higher sequentially in the first quarter of 2019, Thomas said in the upgrade note.

Even if same-store sales growth remains volatile moving forward — and even if it slows down — it is unlikely to reach negative territory this year or next, the analyst said. 

Move-out activity continues to trend lower, which implies customers are staying for longer periods of times, he said. This should support top-line growth, as rent increases for current customers represents the majority of revenue growth, Thomas said. 

Public Storage looks to be a "relatively safe haven" stock within the overall REIT sector based on an industry low 0.6 times debt/EBITDA ratio and just $1.4 million of debt outstanding, according to KeyBanc. 

Price Action

Life Storage shares were up 0.59 percent at the end of Tuesday's session, while Public Storage shares were down nearly 1 percent. 

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Photo by Ed Chambliss via Wikimedia.