We are very excited to be launching the Hedgeye REITs research vertical, and hope you can join us on Monday, April 5th at 10am ET for the inaugural call and presentation. We will open the call by briefly reviewing our background and experience, research process and the REIT universe, and then spend the bulk of the call presenting two best ideas in the self storage subsector: New Best Idea Short Extra Space Storage (EXR) as a hedge / financing vehicle against a New Best Idea Long Public Storage (PSA). Specifically, we will discuss why the long and contrarian short can generate a ~30% IRR over the next 12-18 months, which is a homerun in the relatively low-octane REIT space.
In the coming weeks there will be a follow-up call to discuss forthcoming best ideas in the apartments and single-family rental REIT subsectors. The initial launch will focus on the shorter-duration REITs, with longer duration subsectors to be rolled out later in the 2Q / 3Q.
Please contact if you would like to join the call and be added to our distribution list.
SHORT EXTRA SPACE (EXR): ~15% DOWNSIDE
Self-storage has been a relative outperformer among REITs during the pandemic, with best-of-breed Extra Space (EXR) and other operators breaking the traditional seasonal pattern and maintaining high occupancy rates through the weaker fall and winter leasing seasons. This has set up extremely tough Y/Y occupancy comps in 2H21, the toughest comps EXR has seen in at least 10 years. A return to seasonal patterns in the back half of 2021 will likely result in several hundred basis points of occupancy loss, set against guidance calling for 4.25% to 5.50% same store revenue growth in 2021. Growth will likely decelerate for several quarters heading into 2022, and the second derivative on both NOI and FFO growth will be negative in 2022. Risk is skewed to the downside, and we will discuss how we view a short of EXR as a way to finance a long of PSA and enhance returns.
LONG PUBLIC STORAGE (PSA): ~15-20% UPSIDE
Public Storage (PSA) is the largest REIT in the self-storage space with what should be the most valuable brand and platform, yet PSA has been a persistent underperformer both operationally and from a total return perspective following several years of management missteps. In late-December, Elliott Management entered the name as an activist shareholder and has since won Board representation and achieved initial and necessary changes. Interestingly, there is a close “road map” for the situation within the same subsector that shows us “where the puck is going” versus “where the puck is right now.” We will demonstrate that changes to operations / revenue management and capital structure are both achievable and lead to upside in shares. Indeed, the upside case is likely now the more probable scenario versus the status quo. Improved shareholder engagement and PSA’s first Investor Day in memory scheduled for May are near-term catalysts.
TAKEN TOGETHER: >30% UPSIDE over a TAIL DURATION
KEY PRESENTATION TOPICS
- Introduction
- Analyst Background
- Research Process
- REIT Universe
- Considerations on REIT shorts and unique situations
- Short EXR
- Industry overview and trends
- COVID’s Impact on turnover and occupancy
- Framework for forecasting storage revenue
- Difficult same store comps in 2H21
- Rate-of-change (ROC) of growth to decelerate
- Finally, valuation stretched = multiple compression?
- Long PSA
- Background on the situation
- Activist involvement
- The LSI “Road Map”
- Quantifying operational upside
- Optimizing the cap structure
- LT earnings power
- Putting the trade together
