Key Takeaways: A lot to unpack here. In one of the most remarkable REIT quarters we have seen in nearly 15 years, Best Idea Short EXR reported a very high quality beat-and-raise. The quarter was a blowout, with Core FFO topping Hedgeye by +8.6% and Factset Consensus by +4.6% - SSRev/SSNOI grew +13.6%/+20.2% (!!!) versus Hedgeye at +8%/+10%. Perhaps more importantly for the stock, in just three months time EXR nearly doubled its expectations for FY21 SSRev growth (also !!!) to +10.5% at the midpoint versus +5.5% previously, with a similar change in SSNOI from +7% to +14.5%. Moves like this just don't happen in REITs, until they do, and it speaks to the pace at which rental rate growth is accelerating to the upside for short-duration lease sectors.
First the bad - we were either wrong or early (same as being wrong) on EXR, as occupancies are either (1) resetting at a higher level (up another +280bps y/y to 97% at quarter-end) or (2) going to self-correct more gradually over a longer duration. To be clear the revised FY21 outlook does not indicate that growth will decelerate in 2H21, as SSNOI increased +13.2% over the first six months of the year versus the above midpoint of +14.5% for the full year. We need to revisit this short call, but at this point it makes sense to listen to the earnings call tomorrow before pulling any triggers.
Now the good - the entire space should re-rate higher including Best Idea Long PSA, as self-storage is enjoying exceptional and accelerating pricing power and both sell-side and buy-side numbers are likely too low across the sector. We would be shocked if PSA, as well as CUBE/LSI/NSA, do not follow through with similar results and increases to their outlooks. So long as the positions were sized appropriately, for example a 50% short of EXR to partially fund the PSA long call back in April, there should not be too much blood.
Other notable items:
- FY21 Core FFO guidance up +8.3% at the midpoint, now expected in the range of $6.45 to $6.60 versus Hedgeye at $6.13 and Consensus at $6.20. Numbers are obviously coming up
- SSExp now expected flat to up +1% this year, a ~200bps reduction - this warrants monitoring beyond FY21. It will be interesting in coming quarters to see if the acceleration in rental rates, and by extension property values, translates into a corresponding acceleration in property tax growth (~40% of SSExp, grew +4.2% in the quarter). A future acceleration in property taxes could pressure SSNOI growth, and this holds true across the sector
- Acquisitions now expected at $500 million for the year versus $350 million previously; net bridge lending unchanged
Figure 1: EXR 2Q21 Earnings Variances
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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