RBC Capital Markets Analysis on Notable Storage Stocks
RBC Capital Markets Analysis on Notable Storage Stocks
Recently, analysts at RBC Capital Markets have shown interest in the performance of three key storage companies, including Public Storage, Extra Space Storage, and CubeSmart. This assessment will shed light on the strengths and valuations associated with these companies in an evolving market.
Public Storage: Sector Perform with a Price Target of $358
Public Storage recently entered the third-party management arena, focusing on it since 2019. Currently, they manage 260 stores and have 115 additional ones in the contract stage. Despite making headway, they trail behind Extra Space Storage and CubeSmart in this segment's scale.
The company has been increasing its store count at a similar pace to its competitors but is doing so with discounted offers. Establishing a robust growth trajectory in third-party management will require time and strategic efforts, particularly with the firm's substantial size and competitive nature of the market.
Public Storage has committed nearly $3 billion to development over the last decade, distinguishing itself by having an internal development team compared to peers. However, the company allocates approximately 0.5% of its enterprise value (EV) annually to investments, which RBC considers relatively modest. By increasing this investment, Public Storage could enhance its growth potential.
With an exemplary balance sheet reflecting an A/A3 credit rating, their net debt-to-EBITDA ratio stands at 2.7x, increasing to 3.9x when including preferred equity. While it has taken on more leverage in recent times, RBC notes that there remains potential for further leverage to optimize capital.
Regarding stock valuation, Public Storage is trading at 20.6x and 20.0x estimated core FFO per share for the years 2024 and 2025 respectively. This pricing aligns closely with the sector’s average with a slight 1% premium to net asset value (NAV), leading RBC to conclude that the current valuation appears fair.
Extra Space Storage Inc.: Sector Perform with a Price Target of $180
As the largest manager of third-party storage, Extra Space Storage boasts a managed store count that exceeds that of CubeSmart by 60%. Recent growth in third-party management has been largely parallel among Extra Space Storage, CubeSmart, and Public Storage, and RBC assesses that no significant competitive advantage is anticipated in securing new contracts.
Extra Space Storage appears to encounter challenges ahead from potential fee pressures due to its size, which may limit future gains from third-party management. Notably, about 15% of the company’s $2.9 billion debt is in variable rates, potentially providing a benefit from declining SOFR rates. However, some downside is illustrated by their $1.1 billion bridge loan program, which bears an interest rate of 9.7%.
As market conditions shift, demand for this bridge loan program could decline, posing obstacles for core FFO/share estimates. At present, Extra Space Storage’s stock is valued at 21.4x and 20.8x estimated core FFO per share for 2024 and 2025 respectively, which reflects a 4% premium to its peers. RBC indicates this valuation aligns with historical trends, positioning it as fair, though it lacks compelling characteristics.
RBC’s forecasts for Extra Space Storage’s core FFO per share fall slightly shy of consensus expectations for 2025 and 2026, primarily influenced by the bridge loan program's effects. Their estimates predict a modest growth rate of 2.8% for 2025, trailing behind forecasts for both CubeSmart and Public Storage.
CubeSmart: Outperform with a Price Target of $56
CubeSmart shines in its exposure to the New York City market, where about 23% of its Net Operating Income (NOI) is sourced. This unique positioning gives them an edge over competitors. Recent supply constraints in NYC, combined with favorable demographic trends, are projected to bolster continued outperformance for CubeSmart in this vibrant market.
This company's third-party management platform is recognized as one of the strongest in the industry. With a footprint of 879 stores under management for third parties, CubeSmart's substantial exposure to third-party management is a key differentiator from Extra Space Storage and Public Storage, promising increased management fees and insurance revenue as well.
CubeSmart's net debt-to-EBITDA ratio is advantageous at 4.3x, representing a healthy status below its long-term target range of 5.0-5.5x. Despite carrying a BBB/Baa2 credit rating, CubeSmart's leverage capacity is robust, allowing for considerable acquisition potential, with a leverage-only capacity estimated at around $1 billion.
The company’s historic valuations stand at 19.6x and 19.0x for estimated FFO per share in 2024 and 2025, showcasing a 5% discount when compared to peers. With its strategic advantages in NYC and a solid balance sheet, RBC rates CubeSmart’s valuations as attractive and supports its 'outperform' rating.
Frequently Asked Questions
What is RBC Capital Markets’ view on Public Storage?
RBC Capital Markets has classified Public Storage as a sector performer with a price target of $358, highlighting its recent growth efforts and investment strategies for longer-term prospects.
How does Extra Space Storage compare to its competitors?
Extra Space Storage is the largest third-party storage manager. However, RBC notes that its growth in this space is comparable to CubeSmart and Public Storage, indicating challenges in maintaining a competitive edge.
What are CubeSmart's key strengths according to RBC?
RBC identifies CubeSmart's notable exposure to the New York City market and its strong third-party management platform as significant strengths, supporting its outperform rating and price target of $56.
What challenges are anticipated for Extra Space Storage?
RBC anticipates that Extra Space Storage may face challenges primarily due to potential fee pressures linked to its size and the variable rates associated with its debt structure.
How is the overall storage sector performing?
The overall storage sector is observing varied growth among major players, with valuations reflecting competitive dynamics and challenges as they adjust to changing market conditions and consumer demand.
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