Wells Fargo on Self Storage: Solid Fundamentals Reflected In Stocks - Maintain Market Weight; Upgrading CUBE As Lone Value Play

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2 Buy, 2 Hold, 2 Sell

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Up: 22 | Down: 8 | New: 36

Wells Fargo on Self Storage: Solid Fundamentals Reflected In Stocks--Maintain Market Weight Raising CUBE From Market Perform To Outperform As Lone Value Play

2011 Year In Review

"Self storage was the top-performing subsector of all REITs in 2011. The group generated a 35% total return last year, besting the overall REIT group’s 8.7% by 2,630bps and the S&P 500's 2.1% by 3,290bps. Within the self storage group, Extra Space Storage (NYSE: EXR) and Public Storage (NYSE: PSA) outperformed the peer set, posting 43% and 37% total returns, respectively. Sovran Self Storage (NYSE: SSS) and CubeSmart (Nasdaq: CUBE) followed generating 21% and 15% total returns, respectively. This theme of larger-cap outperformance was consistent with most REIT subsectors in 2011. The property type continues to benefit from a lack of new supply especially in more urban densely populated areas. Also the trend of rising rental demand versus home ownership and the overall downsizing of living space through increased rentals and the downsizing of owned homes helped drive additional need for storage space in 2011, in our view."

2012 Self Storage REIT Outlook

"Maintaining Sector Rating At Market Weight. The fundamental picture for the public self-storage players has been solid and H1 2012 should provide a close resemblance to 2011 performance. Group occupancies remain divergent for the four companies under coverage, though 2012 could move the lowertiered names towards the best-in-class managers. Rental rate growth will likely be the story for 2012, though operating expense inflation could edge higher, taking some of the luster off of cyclically-higher NOI growth. As a result, we believe the storage group can perform in line with the overall REIT group for both the near- and intermediate-terms due to: (1) accelerating revenue and NOI growth rates remain in place, (2) dividend growth could end 2012 at or near the high-end of the overall REIT group, and (3) consolidation among the industry remains in favor of the public players, which should fuel fairly visible external growth throughout 2012."

"We are maintaining our ratings for EXR, PSA, and SSS at Market Perform as valuations remain elevated though dividend growth should keep valuations in place. We are upgrading our rating on CUBE from Market Perform to Outperform due to better occupancy-growth expectations, improved investor sentiment, and favorable valuation."

Wells Fargo raises CUBE's valuation range from $9-10 to $11-13, EXR's from $22-24 to $24-26, PSA's from $122-126 to $132-136 and SSS's from $42-44 to $43-45.

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