Public Storage $PSA Splits the Fairway With ezStorage Deal

04/13/21 12:25PM EDT

Editor's Note: Below is a complimentary research note from Hedgeye REIT analyst Rob Simone on his 'Best Idea Long' Public Storage (PSA). To learn more about Rob's research, contact sales@hedgeye.com.

Public Storage $PSA Splits the Fairway With ezStorage Deal - pbu

This morning Public Storage (PSA) formally announced the acquisition of ezStorage, a mid-Atlantic self-storage portfolio consisting of 48 assets comprising 4.2 million square feet across Washington, D.C., Maryland and Virginia. 

PSA had been the rumored buyer of the portfolio, which adds about +2.4% to PSA's consolidated square footage (+59% to these specific submarkets) and is expected to close in May 2021.  The headline initial cap rate of 3.6% appears low and will likely draw eyeballs upfront, but we are positive on the deal for several reasons. It essentially ticks all the key boxes and signals ongoing needed change at PSA.

The portfolio is accretive to PSA's existing assets given above-average exposure to higher-income demographics, premium realized rents prior to inclusion in the PSA platform and ancillary revenue opportunities. The overall portfolio quality improves. 
  
The 3.6% initial cap rate comes on 86% occupancy versus the mid-90% range for PSA's existing portfolio.  Basic acquisition math gets us to a mid-4% unlevered yield range (~6ppt growth in occupancy, low-70% NOI margin) upon stabilization and before any additional rate growth, which makes the 4-4.4% targeted unlevered yield (before value-add opportunities) appear conservative. 

We have PSA trading at an implied 4.2% implied cap rate excluding any G&A or Capex burdens, so the deal is immediately accretive to value without a very heavy lift.

PSA is leveraging its conservative balance sheet and funding the deal 100% with unsecured debt.  Recall that PSA's is under-levered at 3.2x Net Debt + Pfd. / EBITDA as of year-end 2020 versus an average of 6.0x for the sector, and this transaction moves consolidated leverage to just over 4.0x on a pro forma basis. 

Additionally, it shifts the mix of leverage away from higher-cost preferred stock, $1.5 billion of which comes callable through August 2022.  In other words, there are immediate cost of capital benefits. 

The deal is immediately accretive from an earnings perspective: PSA recently issued $500 million of unsecured bonds at 0.875%, so assuming a ~1% average interest cost on this deal = 3% accretion to Core FFO or ~$55-60 million / $0.31-$0.34 per share.

Again, this comes before any assumed rate growth as well as value-add / expansion opportunities.

All else the same, consensus numbers need to come up at least +3% in 2022 and beyond, but likely higher as PSA could be moving into a more aggressive and sustained period for external growth.  

Zooming out we notice three things:

1. Management has heard the message on using PSA's cost of capital to drive external growth through acquisitions
2. The capital structure is gradually being optimized which has major implications for value
3. A dedicated investor deck explaining the details and merits of the transaction further signals a new era of shareholder engagement       

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