11/10/21 06:52 AM EST

REITS DAILY BRIEF | 11.10.21 | (UHAL, CONE, COR, NSA, PSA)

Takeaway: Passing on notes following our first formal discussion with UHAL management

Ticker: Best Idea Long UHAL

Headline: We spoke with CFO Jason Berg

One question we get frequently from investors is "why the lack of sell side coverage for such a large company?" - our read is that (1) there just is not a lot of traditional banking business to be had from the name and (2) UHAL opts not to provide an outlook for competitive reasons, especially on the DIY rental side given their unique franchise (unlikely to change going forward). This creates an interesting informational asymmetry which we are happy to try to fill. We do not fully agree with management's choice to not provide guidance, as the introduction if performed well could only help re-rate the stock higher, but think it will just be a fact of life with the name.
Broadly speaking UHAL is emerging from a 5-year "Phase 1" where they converted ~100 former retail properties to self-storage assets with equipment rental services, many of which were former Kmart boxes out of Sears/Seritage Growth Properties. UHAL was able to acquire these assets at a very low cost basis, immediately begin selling equipment rental services + Ubox while the interiors were converted to storage, and then ultimately lease up the storage units over a typical 24-36 month timeframe. What resulted was a well-above average cash-on-cash yield stemming from the lower cost basis + "quicker" and more diversified revenue streams. Unlevered returns were likely in the low-double digit range pre-tax, well-above a typical self-storage return profile.
Interestingly, UHAL has not opened an "equipment only" location in over a decade, indicating that the rental and storage businesses are complimentary and that storage will continue to increase its share of the EBITDA pie.
They are now entering a "Phase 2" where the company just raised an additional $600 million through a private placement of unsecured debt, with the proceeds to be deployed towards ground up development of new self-storage/DIY facilities.

Underwriting a ~33-month period between closing/escrow to when they lease the first storage unit, followed by a 24-36 month lease up period, during which equipment rental services will be sold. The environment today is allowing for much quicker lease up of the storage, perhaps ~20 or fewer months.
We estimate 8-10% unlevered IRRs on each development, conservatively underwritten, so the returns are still trending above normal pre-tax (recall UHAL is not a REIT).

On the equipment rental side, which candidly we understand less well than storage, a majority of the growth in recent years has come from improvements in transaction count and equipment utilization versus pricing.

Historically over a longer duration transaction count contributed ~400 to 450bps of annual revenue growth, dropping to ~100 to 250bps in the 1-2 years immediately before COVID. The number is back above +500bps post-COVID, and UHAL is also seeing some pricing power on the one-way DIY business. The "in-town" business has very limited opportunity to increase price given the nature of local competition, so it is very dependent on transaction count.
UHAL is starting to see transaction counts normalize a bit off of COVID peaks, but this is being offset by base pricing on the one-way side and customers driving more miles per transaction = higher revenue per transaction.

With the increased equipment utilization comes higher repairs and maintenance costs, which could become a headwind if the company continues to have difficulties replenishing the fleet at the "normal" rate as part of the typical "fleet rotation." The repair and maintenance part of the cost structure, which had been a tailwind during COVID, probably becomes a headwind from here. Unfortunately that discreet line items is not broken out so it is a little difficult to model.
To be clear we like UHAL heading into year end and in Quad 2, but we are modeling a ~50% decline in total company earnings as the DIY rental business normalizes. So it is a shorter-duration call (with the strongest signal strength) versus some of our other longs. The RoC WILL turn lower.
Lastly on uses of capital, of the over ~$2.4 billion of cash on the balance sheet at least ~$1 billion likely goes to real estate acquisition and development. On the fleet side there is typically ~$1 to $1.2 billion of gross purchases per year financed 60-70%, which is obviously trending below normal now given supply chain issues but will eventually return to trend.

Tickers: NSA, PSA

Headline: Couple of Capital Raises in Self-Storage

Long Bench PSA announced it would be issuing ~$435 million (excl. green shoe exercise) of 4% Series R preferred shares to fund acquisitions + retire older series of preferred stock. The $350 million of 4.9% Series E preferreds came callable on 10/14, so that seems like a likely candidate for the bulk use of proceeds with the balance used to fund external growth. The absolute balance of preferred stock has stayed in the $3.8 to $4 billion range, but to the company's credit (1) they continue to average down the blended cost on that preferred and (2) the leverage stack is now more rationally weighted ~70% towards unsecured debt pro forma for the closing of the All Storage acquisition.

Also worth highlighting is NSA's announcement of a $450 million private placement debt offering at a blended 2.88% rate with an ~11.2 year term. Based on the release it appears that the primary use of proceeds will be to pay down the credit line which had been tapped to fund acquisition activity. To us this really punctuates the massive cost of capital advantage to the self-storage REITs in prudently using 2-3% yielding unsecured debt to fund storage acquisitions that ultimately stabilize above ~6% yields.

Tickers: CONE, COR

Headline: Data Center Operator CoreSite Fields Acquisition Interest

Reuters reported that CoreSite Realty Corp. (COR) had retained an investment bank to explore strategic alternatives, and apparently has already been approached by Digital Realty (DLR), American Tower (AMT), which recently acquired DataSite and expanded its data center portfolio by 2 assets to 7, as well as a few private equity firms. All parties declined to comment. This news follows CyrusOne (CONE) also pursuing a potential sale of the company and Blackstone acquiring QTS Realty earlier this year. Investors will recall that COR was a former portfolio company of Carlyle Group. We will begin following the data centers later this year, and it seems the list may narrow to just EQIX and DLR with deal activity picking up.

Prior Notes:

11.9.21 - REITS DAILY BRIEF | 11.9.21 | (U.S. OFFICE UTILIZATION, SFR)

11.7.21 - SUNDAY NIGHT REIT READ | 11.7.21 | (APARTMENT RENTAL RATE TRACKER, POSITION MONITOR UPDATE)

11.4.21 - REIT RECAP | 11.4.21 | AMH 3Q21 RESULTS

11.4.21 - REIT RECAP | 11.4.21 | CUBE 3Q21 RESULTS

11.4.21 - REITS DAILY BRIEF | 11.4.21 | (COLD, IRM, EARNINGS SURPRISE MONITOR)

11.3.21 - REITS DAILY BRIEF | 11.2.21 | (LSI, POSITION MONITOR UPDATE)

11.2.21 - REITS DAILY BRIEF | 11.2.21 | (PSA, U.S. OFFICE UTILIZATION)

11.1.21 - REIT RECAP | 11.1.21 | PSA 3Q21 RESULTS

10.31.21 - SUNDAY NIGHT REIT READ | 10.31.21 | (3Q21 EARNINGS SURPRISES, POSITION MONITOR)

10.28.21 - REIT RECAP | 10.28.21 | CPT 3Q21 RESULTS

10.28.21 - REITS DAILY BRIEF | 10.28.21 | (EXR)