Best Idea Long PSA handily beat numbers and delivered a nice raise to FY21 guidance, with Core FFO of $3.42/share +$0.15/share vs. Hedgeye and +$0.18/share vs. Consensus, and FY21 Core FFO guidance raised +4.6% at the midpoint. SSRev +14% and SSNOI +21.7% beat our numbers by +200bp and +510bp respectively, and underneath the top-line beat there was another positive roll-up at +1.3% in 3Q21 for rates to move-ins vs. move-outs + those move-in rates are rapidly approaching average in-place contract rents. We are going to be taking up our forward revenue growth assumptions heading into FY22. There is a lot to unpack here, but here are some of our focus areas:
- +$0.15/share variance was +$0.13/share from the same store pool, +$0.04/share from the non-same store pool, +$0.03/share from lower interest expense, +$0.01/share from lower interest/preferred expense, and +$0.06/share of higher contribution from UJVs; offset by -$0.03/share from higher G&A, -$0.01/share from lower interest income and the balance from higher other expenses/share count/rounding.
- We need to continue working on the numbers, but our first cut at the model is showing revenue growth for FY22 at +9-10%, which incorporates -100bp of average occupancy reduction and average realized rents +10.5%. It appears that the more intense deceleration in NOI and earnings growth is a 2H22 story, and it is not unreasonable to expect mid-teens Core FFO growth next year.
- More external growth via "value add" acquisition - acquiring Dallas-Forth Worth-focused All Storage for $1.5 billion at a 2.6% nominal cap rate on ~75% in-place occupancy, stabilizing at a 5.5-6% upon lease-up. Immediately accretive to FFO and financed 100% with unsecured debt (pro forma net debt + preferred ~4.3-4.5x at year end) which we think remains the right move. PSA has plenty of room to continue to flex its conservatively levered balance sheet and low cost of debt capital.
- This transaction continues to address two of the areas we thought were key to improving the story, namely (1) accelerating external growth and (2) increasing/changing the composition of balance sheet leverage to more rational levels.
- Portfolio includes 56 properties comprising 7.5 million NRSF, 52 of which are located in DFW; 31 are stabilized (~95% occupied) and 25 are in lease-up (~59% occupied).
- In-place rents at ~$11psf have +35% upside to PSA's blended ~$15psf for the market today.
- Post-close PSA will have 172 properties in DFW comprising 15.5 million NRSF.
- We mentioned HERE that we thought prior guidance for the non-same store pool NOI contribution of $225 to $240 million was too conservative and that we would like to see a revised number approaching our ~$260 million estimate. PSA eclipsed that by posting $270 to $280 million, which likely includes some contribution from All Storage but we view it as clean upside to a conservative number.
- On payroll expenses, PSA followed EXR and highlighted "very competitive labor conditions" and increased wages on 10/1 for all property employees by an average of +7.5%, bringing the average to $15/hr for non-resident employees. Similar to EXR payroll dollars were lower due to fewer hours worked, although in this case it appears it was attributable more to staff reductions/fewer hours worked versus difficulty filling positions, but we will seek more details on the call. Regardless, it is safe to say that payroll expenses will be growing above-trend in FY22. Again, we want to highlight the potential setup sector-wide for increasing wage pressures + property tax growth of +5% or higher to crimp margins in 2H22 at the point when the top-line deceleration really kicks in, which would obviously negatively impact the RoC on SSNOI and earnings. We remain bullish, but need to be cognizant and realistic that this could be on the horizon.
Figure 1: PSA 3Q21 Earnings Variances
Please e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
