11/02/22 06:55 AM EDT

PSA 3Q22 RESULTS | 11.2.22 (PSA)

Rob Simone, CFA

Takeaway: More occupancy loss than we expected + turnover/seasonality back to pre-COVID trend + increased discounting

Hedgeye Cartoon of the Day: Roller Cycle

It is 11.2.22, and Active Short MPW is overvalued by approximately ~$11.55/share.

Ticker: PSA

Company Name: Long Bench Public Storage

Subsector: Self Storage

Headline: All of the below translates to lower pricing power and a worsening 2nd derivative, which should not be surprising

3Q22 Core FFO at $4.13/share was +$0.09/share vs. FactSet and +$0.07/share vs. Hedgeye. Our variances:

SSRev: -$0.06/share on SSRev +14.7% vs. our +16.2%; driven by average occupancy down -230bps y/y to 94.5% which was -120bps lower than our estimate for the quarter; average realized rent up +17.2% was essentially right on target. Period-end occupancy levels point to more move-out activity and likely more than ~100bps of occupancy loss q/q heading into 4Q22.
SSExp: +$0.01/share
Non-Same Store Pool: +$0.01/share (we still think there may be some upside in here for FY23)
G&A Expenses: +$0.04/share (adjusted for property & casualty loss charge)
Rounding / noise on other below-NOI line items - will be cleaner going forward with the removal of PSB

Our Take:

The occupancy trends here are somewhat shocking optically, but should not be overly surprising given how above-trend this business was running through and coming out of COVID. The overall RoC profile looks bad nonetheless. Move-out volumes increased for tenants both receiving and not receiving rent increases, driving higher turnover (highest since 3Q19 based on available data as a % of SS square footage) and lower average occupancy levels than we expected. Quarter-end occupancy at 93.3% is -120bps below the weighted average for all of 3Q22, so the typical seasonality trend is snapping back but just at a much quicker pace than we thought.
On the rate side we are back to a double-digit negative "roll down" spread between rates to customers moving in versus rates to customers moving out, which to us means that all the pandemic-induced pricing power has been taken up and we are reverting to a more "normal" PSA/storage rate growth environment.
Finally, while discounts/promotions are well-below pre-pandemic and pre-activist involvement, they are heading higher. The company noted in the supplemental that it increased promotional activity, moderated the pace of rental rate increases to new customers and increased marketing expense.
As expected this translates into a rapid RoC deceleration on SSRev and SSNOI heading into FY23, but perhaps more pronounced than we thought so we have to take a look at our numbers again.
On the SSExp side property tax growth (+3.8% y/y and trending +5% y/y for the year) is under control for now (but we think FY23 will likely and logically accelerate), as was payroll (+4.8% y/y) which together comprise the bulk of opex. Like other shorter-duration sectors R&M (+11.3% y/y and +14% y/y per occupied SF) accelerated q/q. We think PSA is trending towards another +6% to +8% SSExp year next year, and possibly leaning toward the upper end of that range on a property tax growth acceleration.
As things stand today we are at FY23 SSNOI growth of +5%.

FY22 Guidance:

Core FFO up +1.3% at the midpoint to a range of $15.35 to $15.75 (Hedgeye at $15.90 as we write this and before adjusting numbers).
SSRev + 75bps at the midpoint, SSExp unchanged and SSNOI +100bps to +15.4% to +18% (Hedgeye at +16.7% currently).
Acquisition guidance lowered by ~$200 million to ~$800 million on the year, and we like the dialing in of external capital deployment under a very different cost of capital environment and deepening Quad 4. PSA's balance sheet is obviously sector-best.

Figure 1: PSA 3Q22 Earnings Variances