Key Takeaways: We are basically at the midpoint of 2021, and wanted to take a breather to re-examine Best Idea Long PSA as well as the rest of our self-storage positioning heading into 2H21:
- While shares of PSA have appreciated ~21% since we named it to the Best Idea Long list on 4/2, to be fair the name has trailed the self-storage subsector by ~170bp on price performance (and Best Idea Short EXR by ~150bp) over the last 60 days despite the ongoing materialization of several catalysts. These include (1) initiation of first-ever company guidance for FY21 which blew away expectations to the upside, (2) accelerating external growth in the form of a $1.8 billion acquisition, (3) financing of that acquisition 100% with unsecured debt, (4) ongoing rationalization of the cap structure vis-a-vis a huge slug of preferred stock and (5) presence of a shareholder activist
- We see more juice left in the tank as PSA is likely to at least narrow the FY21 guidance range and move the midpoints up on stronger pricing/rental rate growth along with 2Q earnings: SSNOI growth currently in the range of +4.8% to +7.3% (Hedgeye at +6.7%) and Core FFO of $11.35 to $11.75 (Hedgeye at $11.74, which may prove conservative). We are +2% above the Street on FY22 Core FFO with bias to the upside, as we have made no assumptions on the refinancing of an additional $930 million of preferred stock, and we see potential upside to our assumed ~4% SSRevPAF growth next year. In short, numbers likely need to come up further post-2Q results
- Finally, PSA remains easily the "cheapest" stock in the group relative to growth as shown in Figure 1 below by the '22 PEG ratios. Growth is not a catalyst, but PSA is in the middle of a catalyst-driven upward earnings revision and re-rating cycle. The stock is coming off a base of investor apathy with virtually no expectations for outperformance. For context, a 1x narrowing of the multiple spread to best-in-class EXR (which itself is poised or a significant forward earnings growth deceleration) without any upward earnings revisions translates to a $320/sh stock price for PSA, or +5% of additional share price upside from here before dividends
- We are growing incrementally more bullish on LSI and incrementally more bearish on NSA - on NSA in particular, the company's elevated leverage could represent a significant factor exposure headwind as the macro transitions later in the year. Investors are also paying the highest price-per-pound for growth, which is not a problem for now while in Quad 2 but something to think about going forward
Figure 1: Self-Storage sector forward growth + valuation
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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