CS Upgrades Public Storage Real Estate Trust

With little new storage supply, earnings for Public Storage should increase and the market isn’t pricing that in, Credit Suisse says in an upgrade note today.

Shares of Public Storage (PSA), a real estate investment trust, rose 96 cents, or 0.71%, to $133.40. Credit Suisse analyst Andrew Rosivach raised his target price to $150 from $105, and raised his rating to Outperform from Neutral.

In his note, Rosivach says “the company has been miscast as being a low beta stock unable to capitalize in a recovery.” and the market may not be aware that:

Fundamentals in storage can be stronger than other real estate sub-sectors because the short storage lease term can react quickly to a stronger economy.

There is little new storage supply.

Earnings should benefit from rent growth due to a stabilizing acquisition pool (12% of net operating income), refinancing of preferred shares and easy G&A comparisons due to a front-ended incentive plan.

On valuation, he says Public Storage trades at 19.9 times his 2013 calculation for adjusted funds from operations (AFFO), a 9.7% discount to the sector. AFFO, the preferred REIT valuation metric, excludes depreciation – since real estate tends not to lose value in the same way other assets do – and adjusts for capital expenditures. The end game is the best measure of cash flow available to shareholders.

Public storage pays a yield of 3.3%. Rosivach puts the payout at 3.7% in 2013, 40 basis points above the sector.