PSA, EXR, TRNO nab Overweight rates as Barclays expands REIT coverage

Barclays Equity Research expanded its coverage of the REIT universe in a recent note, handing out Overweight ratings to Public Storage (NYSE:PSA), Extra Space Storage (NYSE:EXR) and Terreno Realty (NYSE:TRNO), while initiating Underweight rates on Vornado Realty (NYSE:VNO) and Rexford Industrial Realty (NYSE:REXR).

By subsector, analyst Brendan Lynch thinks the greatest opportunity for REIT investors is within self-storage. "Superior cash generation should resume after the industry navigates the post-Covid come-down that has temporarily weighed on occupancy and pricing, in our view," he wrote in a note.

• Public Storage (PSA) was started at Overweight as the analyst expects to continue generating leading returns, buoyed by "brand recognition, development capabilities, and technology initiatives."
• On Extra Space (EXR), Lynch said: "Narrowing the performance gap between LSI and the legacy EXR portfolio provides a near-term opportunity for outperformance."

His view on industrial REITs was more neutral. Strong returns are expected to continue and attract more capital, though "new supply is a persistent threat." In all, "we see the anticipated growth opportunity as priced-in and current valuations as fair."

• Terreno (TRNO), in particular, is expected to keep posting above-peer rent growth, thanks to "simple, disciplined infill strategy in markets with contracting supply."
• For underweight-rated Rexford (REXR), supply growth threatens its concentrated exposure to the Southern California submarket, the note said.

Lynch's outlook for the office segment, meantime, is more uncertain, as the current troubled market could still take years to normalize in the wake of low occupancies.

• He noted that Varnado's (VNO) outsized concentration of assets in the Penn District submarket is "delaying stabilization."