Key Takeaways: PSA held its first ever investor day yesterday and rolled out management team members across the key functional areas of the company. Our biggest takeaway is that we were previously too conservative HERE, where we made the case for +2.5-3.0% long-term internal NOI growth in PSA's core self storage rental portfolio. Through a combination of more scientific revenue management which was developed in the background but not seen until now, where the focus has now clearly shifted away from occupancy and towards RevPAF growth, plus reinvestment in the store experience and lower on-site personnel costs, it is clear that the longer-term NOI growth is probably closer to +3.5-4.0% which makes a big impact across a portfolio of PSA's scale. Layering on top more aggressive external growth plus higher leverage potentially approaching ~5.0x net debt + pfd. / EBITDA over time translates into high-single digit to low-double digit compounded FFO growth (we had previously modeled roughly ~5.0-6.0% FFO CAGR). Numbers need to come up across the sell-side and there is plenty of room for the stock to re-rate higher.
- From a qualitative standpoint it was very telling / refreshing to see PSA roll out a formalized presentation along with a deeper management bench - we took it as another clear sign of Elliott Management's impact, and that shareholder engagement will continue to improve (along with guidance, quarterly supplementals, more engaging earnings calls, etc.). It doesn't just "feel" different now, it is different
- Capex will stay higher for longer than we expected through 2025, but that's ok! The "Store of Tomorrow" program is more than just a slogan - investing and earning ~15-20% ROIs on incremental capital is a solid capital allocation decision and will only raise PSA's long-term growth profile. The quantifiable ROIs come on LED light installation (~23% on average) and solar installation (~20% on average), while the less quantifiable but still important items include exterior store refurbishment, better signage, updating offices, smart property features, etc. PSA has some of the largest concentrations of older first- and second-generation stores in the sector, many of which were in desperate need of investment and just "being run for cash" while competitors upgraded aesthetics and technology. Thus far ~300 stores have received the "Store of Tomorrow" treatment, with another 450 coming in this year and half of the portfolio completed by the end of 2022. The program will be completed by 2025 with a total investment of ~$600 million.
- PSA is targeting a 25% reduction in on-site property payroll (!!!) over the next 5 years via fewer employee hours on site, with a corresponding ~200bp improvement in property operating margins. Presumably this will be achieved through lower customer turnover / higher average length of stay + smart property features reducing the amount of required time needed on site
- It was a big positive to see PSA ramp up its external growth expectations - they are targeting ~$800 million of acquisitions plus $700 million of new developments annually funded through internally generated funds and new issuance of unsecured debt. Developments have a long tail to stabilize (usually in excess of 3-5 years), but carry juicy 8.0% targeted unlevered yields. With the stock trading at close to a 4% cap rate, if the deals "pencil" then PSA should be making that trade all day. The one concern we have on the development front is on the land availability and cost side - we lobbed a question in on whether PSA would consider building a land bank to lock in inventory today given its balance sheet capacity, but it went unanswered. It could be something to consider, as it has become a long-term strategic advantage for PLD for example which is in a similar scale position within its own subsector
- Perhaps the most frustrating item in the presentation was on the balance sheet - shout it from the rooftops, HAVING PREFERRED STOCK IN THE CAPITAL STRUCTURE MAKES ABSOLUTELY NO SENSE AS PSA IS UNDER-LEVERED AND CAN ISSUE LONG-TERM UNSECURED DEBT AT ~2%. We would highlight, however, that the 10-Q referenced the possibility of refinancing callable preferred with debt, so perhaps management was just avoiding making a commitment. But again, shout it from the rooftops! Approximately $1.5 billion of higher-cost preferred comes callable through August 2022
While we do not publish price targets, we did update the Upside Case of our DCF model which was originally presented in the above launch deck. In short, we were too conservative and investors need to upgrade their growth expectations.
Figure 1: PSA DCF Model
