Keybanc is out downgrading Extra Space Storage (NYSE:EXR) to Underweight from Neutral ($6.50 tgt) after the co reported 1Q09 results that were weaker than expected and pointed to a sharper deterioration across the self storage sector, as full year guidance was meaningfully reduced.

In addition, the Company had little good news to announce on the capital raising front to act as a counterbalance to the weaker than anticipated core. This fundamental weakness has come on top of a recent runup in EXR's share price of 43% since the end of March vs. a 37% appreciation in the MSCI US REIT index over the same period. The downgrade reflects the downside surprise and likelihood of further deterioration, as well as the less attractive valuation.

- Citigroup maintains its Buy rating and $8 target (!?) on EXR asking a rhetorical question if the co is the canary in the coal mine?

Extra Space Storage (EXR) - the first storage REIT to report - materially changed its core same store operations guidance to reflect what would appear to be a rapidly declining operating environment. If not for the accretive capital structure changes, guidance would likely have dropped closer to ~10%.

BUT THIS IS THE MOST INTERESTING PART:

- Keybanc is downgrading EXR peer Public Storage (NYSE:PSA) to Underweight from Hold, while establishing a below the mkt price tgt of $56. According to the firm the stock remains the most expensive in the self storage sector and will likely see a similar erosion in core operating performance when it reports later this week.

EXR's Northern California and Southern California portfolios lost 430 bps and 210 bps of occupancy year-over-year, respectively, helping drive year-over-year declines in NOI of 12% and 10%, respectively. These markets comprise a total of ~30% of PSA's SSNOI (Northern California ~12%; Southern California ~18%).

PSA shares are down 12.7% YTD, outperforming the sector by 1,030 bps. The stock is expensive today; it trades at a 7.7% implied cap rate based on today's closing price of $68.75/share, which does not take into account any decline in net operating income. This is 230 bps below the sector's average implied cap rate of 10%, and 150 bps below the average implied cap rate for the REITs overall. The Company also trades at 15.1x our 2009 AFFO estimate of $4.55, a 62% premium to the sector's average AFFO multiple of 9.3x.

Notablecalls: PSA reports on May 7 (after mkt) - meaning there will be 2 days of possible downside action.

I guess it depends how bad EXR will get hit today but I think Keybanc's comments regarding a likely miss from PSA will keep the stock under pressure. After all, PSA looks to be trading at a premium to the sector.