Investing.com -- Analysts at RBC Capital Markets have initiated coverage on three major storage companies namely Public Storage (NYSE:PSA), Extra Space Storage Inc (NYSE:EXR), and CubeSmart (NYSE:CUBE).
Public Storage: Sector Perform, $358 price target
Public Storage has been a late entrant into third-party management (3PM), starting to focus on this segment only in 2019. With 260 managed stores and 115 more under contract, Public Storage is behind Extra Space Storage and CubeSmart in the 3PM scale.
Although the company has recently added stores at a comparable rate to its peers, it has done so with discounted offerings. Scaling this business to a significant growth driver will take time, given Public Storage’s size and competitive landscape.
Public Storage is noted for its substantial development efforts, having invested nearly $3 billion over the past decade. The company is unique among its peers for having an internal development team.
However, the level of investment, approximately 0.5% of enterprise value (EV) annually, is relatively modest. RBC suggests that increasing this investment could enhance Public Storage’s growth prospects.
The company boasts one of the strongest balance sheets in the REIT sector, with an A/A3 credit rating and a net debt-to-EBITDA ratio of 2.7x. Including preferred equity, the ratio increases to 3.9x.
Although Public Storage has increased its leverage in recent years, RBC believes there is room for further leverage to improve capital efficiency.
Public Storage’s stock trades at 20.6x and 20.0x estimated core FFO per share for 2024 and 2025, respectively. This valuation is in line with the average for the coverage universe, with a slight 1% premium to NAV. RBC considers the current valuation to be fair.
Extra Space Storage Inc.: Sector Perform, $180 price target
Extra Space Storage is the largest third-party storage manager, with a 60% higher managed store count than CubeSmart.
However, recent 3PM growth has been comparable across Extra Space Storage, CubeSmart, and Public Storage, and RBC does not expect the company gaining a competitive edge in securing new contracts.
Given the company’s large size and potential fee pressures, future incremental gains from 3PM are expected to be smaller.
Extra Space Storage has 15% of its debt stack ($2.9 billion) in variable rates, which could benefit from falling SOFR rates. However, the $1.1 billion bridge loan program, earning interest at 9.7%, partially offsets this advantage.
As market conditions improve, demand for the bridge loan program may decline, leading to potential headwinds for core FFO/sh estimates.
The stock trades at 21.4x and 20.8x estimated core FFO per share for 2024 and 2025, reflecting a 4% premium to peers. The implied cap rate is 4.6%. While Extra Space Storage’s valuation is consistent with its historical average, RBC views it as fair but not particularly compelling.
RBC’s estimates for Extra Space Storage’s core FFO per share are slightly below consensus for 2025 and 2026, primarily due to the impact of the bridge loan program. The 2025 estimate suggests a 2.8% growth rate, which is below the projections for CubeSmar and Public Storage.
CubeSmart: Outperform, $56 price target
CUBE’s exposure to the New York City market is flagged as a key strength. With 23% of NOI derived from NYC, CubeSmart’s position is unique compared to its peers.
Recent supply constraints in NYC and favorable demographic trends are expected to drive continued outperformance in this market.
CubeSmart’s third-party management platform is noted as one of the strongest in the sector. Managing 879 stores for third parties, CubeSmart has a high exposure to 3PM compared to Extra Space Storage and Public Storage. This platform is expected to drive increased management fees and insurance revenue.
The company’s net debt-to-EBITDA ratio stands at 4.3x, below its long-term target of 5.0-5.5x. Despite a BBB/Baa2 credit rating, CubeSmart’s leverage profile is seen as strong and provides substantial capacity for acquisitions, with potential leverage-only capacity of roughly $1 billion.
It trades at 19.6x and 19.0x estimated 2024 and 2025 FFO per share, respectively, representing a 5% discount to peers. Given the company’s unique NYC exposure and strong balance sheet, RBC considers the valuation attractive and supports an "outperform" rating.