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Why we think NSR is an exceptional REIT

The real estate investment trust sector is not a traditional hunting ground for the Montgomery Small Companies Fund. REITs tend to be passive asset owners or rent collectors. So they’re not a natural fit for our philosophy of investing in talented managem

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The real estate investment trust sector is not a traditional hunting ground for the Montgomery Small Companies Fund. REITs tend to be passive asset owners or rent collectors. So they’re not a natural fit for our philosophy of investing in talented management teams that can generate compounding wealth for our investors. But National Storage REIT (ASX:NSR) is an exception.

What is NSR?

National Storage REIT owns and operates over 200 storage centres in Australia and New Zealand, under the National Storage brand; you will have seen their big yellow logo as you pass through the edge of your town or city as these premises tend to exist in industrial parks near significant population centres to provide handy amenity to those that want extra storage close to home. Note the word “operates” in the description, NSR is not a passive rent collector, management has greater value creation levers at their control than most REITs, and we will discuss those later.

NSR listed in December 2013 at 98 cents, with a market cap of $240 million on a dividend yield of 8 per cent, with a strategy to acquire and grow assets under management in the storage sector. NSR IPO’d with management of and partial ownership of 330,000 square metres (sqm) of lettable space over 62 centres with 71 per cent occupancy. Today NSR had ownership of 204 centres with over 1.06 million sqm of lettable space, that we calculate is 80 per cent occupied.

Growth in hard assets like storage centres is a capital-intensive business, so NSR has deployed capital in bucketloads during the pursuit of this strategy. Consequently, share count has quadrupled and NSR’s market cap today stands at $2.1 billion, at 1HF21 (31/12/20) NSR had $890 million of debt, and so has a look through EV of $3 billion, with an investment property portfolio (the storage centres) of $2.82 billion on its balance sheet. NSR has paid dividends every year of its listed life, and IPO shareholders have enjoyed a 15.5 per cent compound annual return to the $2.13 the share price today. Pretty good for the risk accepted over that period in our view. NSR’s strategy has created value.

That’s history; what about our reason to continue to own it today?

NSR is what we call a stable compounder in our portfolio, it delivers a high degree of certainty of steady value creation, but it’s also got what we look for – Latent optionality. Times 2.

Latent optionality 1: Profits driven by technology edge & cyclical tailwinds

Today NSR’s portfolio, using 1HF21 data, generated $97 million in revenue and $46 million in EBIT, or $194 million and $92 million respectively at an annualised run rate. NSR’s portfolio is 80 per cent occupied, with customers paying a rate on average of (we calculate) $220 per sqm. However, 1 in 5 storage units are empty. NSR regularly report on the occupancy and rate metrics of a subset of mature centres in its portfolio, these mature centres operate on “a steady state” at 90 per cent + occupied. NSR suggest that once all centres in the portfolio reach “maturity” an incremental 110,000 sqm of space would be occupied in its portfolio.  Doing the maths this is worth $24 million on that $220 rate. This is all incremental revenue with limited or no incremental cost, it drops straight through and would give rise to a 25 per cent or so rise in the run rate profits, should over time the portfolio fully “mature.” This is where the optionality is. The earnings are there, but what’s the catalyst the market needs to see to believe this outcome gets crystalised? REVPAM.

REVPAM growth is the catalyst

Rental income economics of storage units are easy to understand – revenue is maximised by having as many storage units occupied for as high a price as you can manage for as long possible. Rate x Occupancy is called REVPAM (Revenue per available metre) and is the critical metric the market follows when assessing NSR’s management’s ability to create value. NSR’s acquisition strategy has doubled the size of its portfolio in the past 3 years, but in doing so it has diluted the REVPAM of the portfolio as NSR have been acquiring less mature centres (on average) clouding the unit economics of its asset pool. We think the direction of REVPAM is changing driven by NSR’s use of technology and changes to demand for storage in our post-COVID world.

Blockbuster net lettable area or floor space growth on NSR’s acquisition growth strategy.

Source:  NSR 1H21 Results presentation

Technology

Whilst the economics of storage centres is easy to understand, optimising revenue outcomes from them it appears isn’t. At NSR the key REVPAM metric occurs across a portfolio of many thousands of individual units, of different shapes and sizes, in centres at various stages of their maturity cycle, in 200 plus different locations, all of which have their own specific market conditions to manage to, including local competition and supply and demand dynamics. So in 2020 NSR, now with sufficient scale in its portfolio, turned to technology to optimise revenue management. This involved resetting rates in the market for new customers (not existing ones) in to drive occupancy for each class of units, on a centre by centre basis to a desired level and then managing rates for the entire book, including price rises for those units on lower rates. Effectively trading price for occupancy and vice versa, to obtain an efficient REVPAM frontier by unit type, by centre in an automated way in real time. We think technology can make a difference here and this drives a permanent structural uplift in REVPAM, in a step shift way to that point of optimised REVPAM equilibrium for each market. And we think we have started to see this work, post a small short COVID induced bump REVPAM is now ripping.

REVPAM is coming back, and we think there is more to go.

Screen Shot 2021-04-22 at 9.52.15 am

Source: NSR 1H21 results presentation

Technology improvements have been made elsewhere too; we have also noted an improved user experience on the NSR website, you can now go through the whole process contactless; from search, obtain a real time quote, pay, receive access instructions and digital keys, and gain access to your new storage unit without interacting with another human.  No doubt handy in a post-COVID world.  But it’s also a tool for improving lead conversion and deepening the demand pool on a centre by centre basis, resonating the impact of the revenue management technology deployment outlined above.

Post-COVID tailwinds

Sometimes timing is everything. A technology tool resetting prices for NSR’s front book during a pandemic probably wasn’t plan A.  But it does position the portfolio well to deal with demand trends in the aftermath of one in our view.

Work from home (WFH) lifestyle shift started on the kitchen table alongside the kids’ homework, which was ok on a temporary basis. But there is now a desire to have the ability to WFH, if and when you want to. The spare room is being turned into the home office, the garage has become the home gym and the demand for incremental storage is up.  Economic activity generally, housing activity specifically are also historically correlated with rising demand for storage, and those are both strong right now. We think that revenue optimising technology will be lifting price strongly, driving REVPAM further. Maybe the market will start to consider that latent optionality we see?

Latent optionality 2: Valuation driven by resilient property asset performance

Storage assets hardly missed a beat during the COVID downturn.  At its COVID pain peak NSR’s rent collection dipped just 0.2 per cent. Management reported in May 20 that of its 70,000+ customers less than 100 had requested COVID hardship assistance. The other listed storage player, Abacus Property (ASX:ABP), reported similar experiences. Storage asset resilience and performance were in stark contrast to that seen in other REIT asset sectors, especially retail and office. We don’t think that this has gone un-noticed.  And certainly not by property valuers.

NSR, like other REITs, gets parts of its asset portfolio revalued each accounting period, valuers have continued to raise their valuation metrics for NSR’s portfolio, this is observed in a continued decline in NSR’s cap rate. We think the resilience of storage assets is going to continue to attract capital to the asset class in a post-COVID world, we think it’s likely that cap rates continue to fall and asset inflation continues.

Screen Shot 2021-04-22 at 9.52.42 am

Source: NSR & Montgomery

Asset valuations are important to NSR, and NSR’s equity holders. REVPAM is a key input into the valuation process, as REVPAM lifts, so does the income stream for the assets, which the valuers use to determine their value. Higher REVPAM and income, and falling cap rates, point to strong asset price, or NTA growth for NSR’s portfolio. NTA growth is a key input to how investors assess value in NSR’s share price. In addition, stronger asset revaluations allows more debt funding to be made available against the portfolio, which NSR have historically used to fund acquisitions to drive growth.

Is NSR an acquisition target?

The market structure and characteristics of the storage market is attractive to long term investors.  Today there are around 2000 storage assets in Australia and New Zealand, the top 3 players own around 20 per cent or so. NSR is the largest player at 10 per cent share, beyond those top 3 players it starts getting fragmented, beyond the top 10 you are starting to meet small family operators, with single digit numbers of centres under their control and limited means to acquire the capital needed to grow. The opportunity to consolidate this market and enjoy multi-years of growth in a resilient asset class is attractive. NSR is seen as a platform to enable that to happen by large financial and storage industry players from overseas.

In early 2020 NSR had three bids to acquire it from three separate parties. GAW Capital & Warburg Pincus kicked a process off that resulted in NYSE listed Public Storage (NYS:PSA) emerging with the highest bid. That was in February 2020, PSA pulled out when COVID struck in early March. Since then ASX listed competitor Abacus Property Group (ASX:ABP), which owns the Storage King brand here in Australia as part of a broader property portfolio, has taken a now 9.9 per cent stake in NSR, announcing it has lifted its holding as recently as 4/3/21.

Who own’s NSR for the long term remains to be seen, but in the meantime we look forward to seeing the impact of the recent technology deployments on key value drivers in NSR’s business.

The Montgomery Small Companies Fund owns shares in National Storage REIT. This article was prepared 22 April 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these National Storage REIT you should seek financial advice.

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The SNF Institute for Global Infectious Disease Research announces new advisory board

From identifying the influenza virus that caused the pandemic of 1918 to developing vaccines against pneumococcal pneumonia and bacterial meningitis in…

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From identifying the influenza virus that caused the pandemic of 1918 to developing vaccines against pneumococcal pneumonia and bacterial meningitis in the 1970s, combating infectious disease has a rich history at Rockefeller. That tradition continues as the Stavros Niarchos Foundation Institute for Global Infectious Disease Research at Rockefeller University (SNFiRU) caps a successful first year with the establishment of a new advisory board.

Credit: Lori Chertoff/The Rockefeller University

From identifying the influenza virus that caused the pandemic of 1918 to developing vaccines against pneumococcal pneumonia and bacterial meningitis in the 1970s, combating infectious disease has a rich history at Rockefeller. That tradition continues as the Stavros Niarchos Foundation Institute for Global Infectious Disease Research at Rockefeller University (SNFiRU) caps a successful first year with the establishment of a new advisory board.

This international advisory board was created in part to give guidance on how to best use SNFiRU’s resources, as well as bring forward innovative ideas concerning new avenues of research, public education, community engagement, and partnership projects.

SNFiRU was established to strengthen readiness for and response to future health crises, building on the scientific advances and international collaborations forged in the context of the COVID-19 pandemic. Launched with a $75 million grant from the Stavros Niarchos Foundation (SNF) as part of its Global Health Initiative (GHI), the institute provides a framework for international scientific collaboration to foster research innovations and turn them into practical health benefits.

SNFiRU’s mission is to better understand the agents that cause infectious disease and to lower barriers to treatment and prevention globally. To speed this work, the institute launched numerous initiatives in its inaugural year. For instance, SNFiRU awarded 31 research projects in 29 different Rockefeller laboratories for over $5 million to help get collaborative new research efforts off the ground. SNFiRU also supports the Rockefeller University Hospital, where clinical studies are conducted, and brought on board its first physician-scientist through Rockefeller’s Clinical Scholars program. “One of the surprises was the scope of interest from Rockefeller scientists in using their talents to tackle important infectious disease problems,” says Charles M. Rice, Maurice R. and Corinne P. Greenberg Professor in Virology at Rockefeller and director of SNFiRU. “The research topics range from the biology of infectious agents to the dynamics of the immune response to pathogens, and also include a number of infectious disease-adjacent studies.”

In the past 12 months, SNFiRU often brought together scientists studying different aspects of infectious disease as a way to spur new collaborations. In addition to hosting its first annual day-long symposium, SNFiRU initiated a Young Scientist Forum for students and post-doctoral fellows to meet regularly, facilitating cross-laboratory thinking. A bimonthly seminar series has also been established on campus.

Another aim of SNFiRU is to develop relationships with community-based organizations, as well as design and participate in community-engaged research, with a focus on low-income and minority communities. To that end, SNFiRU is helping develop a research project on Chagas disease, a tropical parasitic infection prevalent in Latin America that can cause congestive heart failure and gastrointestinal complications if left untreated. The project will bring together clinicians practicing at health centers in New York, Florida, Texas, and California and basic scientists from multiple institutions to help the communities that are most impacted.

“The SNFiRU international advisory board convenes globally recognized leaders with distinguished biomedical expertise, unrivalled experience in pandemic preparedness and response, and a shared commitment to translating scientific advancements into equitably distributed benefits in real-world settings,” says SNF Co-President Andreas Dracopoulos. “The advisory board will advance the institute’s indispensable mission, which SNF is proud to support as a key part of our Global Health Initiative, and we look forward to seeing breakthroughs in the lab drive better outcomes in lives around the globe.”

The new advisory board will hold its first meeting on April 11th, 2024, following the second annual SNF Institute for Global Infectious Disease Research Symposium at Rockefeller.

Its members are: Rafi Ahmed of Emory University School of Medicine, Cori Bargmann of The Rockefeller University, Yasmin Belkaid of the Pasteur Institute, Anthony S. Fauci, the former director of the National Institute of Allergy and Infectious Diseases, Peter Hotez of Baylor College of Medicine and Texas Children’s Hospital Center for Vaccine Development, Esper Kallas of of the Butantan Institute, Sharon Lewin of the University of Melbourne Doherty Institue, Carl Nathan of Weill Cornell Medicine, Rino Rappuoli of Fondazione Biotecnopolo di Siena and University of Siena, and Herbert “Skip” Virgin of Washington University School of Medicine and UT Southwestern Medical Center.


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Q4 Update: Delinquencies, Foreclosures and REO

Today, in the Calculated Risk Real Estate Newsletter: Q4 Update: Delinquencies, Foreclosures and REO
A brief excerpt: I’ve argued repeatedly that we would NOT see a surge in foreclosures that would significantly impact house prices (as happened followi…

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Today, in the Calculated Risk Real Estate Newsletter: Q4 Update: Delinquencies, Foreclosures and REO

A brief excerpt:
I’ve argued repeatedly that we would NOT see a surge in foreclosures that would significantly impact house prices (as happened following the housing bubble). The two key reasons are mortgage lending has been solid, and most homeowners have substantial equity in their homes..
...
And on mortgage rates, here is some data from the FHFA’s National Mortgage Database showing the distribution of interest rates on closed-end, fixed-rate 1-4 family mortgages outstanding at the end of each quarter since Q1 2013 through Q3 2023 (Q4 2023 data will be released in a two weeks).

This shows the surge in the percent of loans under 3%, and also under 4%, starting in early 2020 as mortgage rates declined sharply during the pandemic. Currently 22.6% of loans are under 3%, 59.4% are under 4%, and 78.7% are under 5%.

With substantial equity, and low mortgage rates (mostly at a fixed rates), few homeowners will have financial difficulties.
There is much more in the article. You can subscribe at https://calculatedrisk.substack.com/

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‘Bougie Broke’ – The Financial Reality Behind The Facade

‘Bougie Broke’ – The Financial Reality Behind The Facade

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Social media users claiming…

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'Bougie Broke' - The Financial Reality Behind The Facade

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Social media users claiming to be Bougie Broke share pictures of their fancy cars, high-fashion clothing, and selfies in exotic locations and expensive restaurants. Yet they complain about living paycheck to paycheck and lacking the means to support their lifestyle.

Bougie broke is like “keeping up with the Joneses,” spending beyond one’s means to impress others.

Bougie Broke gives us a glimpse into the financial condition of a growing number of consumers. Since personal consumption represents about two-thirds of economic activity, it’s worth diving into the Bougie Broke fad to appreciate if a large subset of the population can continue to consume at current rates.

The Wealth Divide Disclaimer

Forecasting personal consumption is always tricky, but it has become even more challenging in the post-pandemic era. To appreciate why we share a joke told by Mike Green.

Bill Gates and I walk into the bar…

Bartender: “Wow… a couple of billionaires on average!”

Bill Gates, Jeff Bezos, Elon Musk, Mark Zuckerberg, and other billionaires make us all much richer, on average. Unfortunately, we can’t use the average to pay our bills.

According to Wikipedia, Bill Gates is one of 756 billionaires living in the United States. Many of these billionaires became much wealthier due to the pandemic as their investment fortunes proliferated.

To appreciate the wealth divide, consider the graph below courtesy of Statista. 1% of the U.S. population holds 30% of the wealth. The wealthiest 10% of households have two-thirds of the wealth. The bottom half of the population accounts for less than 3% of the wealth.

The uber-wealthy grossly distorts consumption and savings data. And, with the sharp increase in their wealth over the past few years, the consumption and savings data are more distorted.

Furthermore, and critical to appreciate, the spending by the wealthy doesn’t fluctuate with the economy. Therefore, the spending of the lower wealth classes drives marginal changes in consumption. As such, the condition of the not-so-wealthy is most important for forecasting changes in consumption.

Revenge Spending

Deciphering personal data has also become more difficult because our spending habits have changed due to the pandemic.

A great example is revenge spending. Per the New York Times:

Ola Majekodunmi, the founder of All Things Money, a finance site for young adults, explained revenge spending as expenditures meant to make up for “lost time” after an event like the pandemic.

So, between the growing wealth divide and irregular spending habits, let’s quantify personal savings, debt usage, and real wages to appreciate better if Bougie Broke is a mass movement or a silly meme.

The Means To Consume 

Savings, debt, and wages are the three primary sources that give consumers the ability to consume.

Savings

The graph below shows the rollercoaster on which personal savings have been since the pandemic. The savings rate is hovering at the lowest rate since those seen before the 2008 recession. The total amount of personal savings is back to 2017 levels. But, on an inflation-adjusted basis, it’s at 10-year lows. On average, most consumers are drawing down their savings or less. Given that wages are increasing and unemployment is historically low, they must be consuming more.

Now, strip out the savings of the uber-wealthy, and it’s probable that the amount of personal savings for much of the population is negligible. A survey by Payroll.org estimates that 78% of Americans live paycheck to paycheck.

More on Insufficient Savings

The Fed’s latest, albeit old, Report on the Economic Well-Being of U.S. Households from June 2023 claims that over a third of households do not have enough savings to cover an unexpected $400 expense. We venture to guess that number has grown since then. To wit, the number of households with essentially no savings rose 5% from their prior report a year earlier.  

Relatively small, unexpected expenses, such as a car repair or a modest medical bill, can be a hardship for many families. When faced with a hypothetical expense of $400, 63 percent of all adults in 2022 said they would have covered it exclusively using cash, savings, or a credit card paid off at the next statement (referred to, altogether, as “cash or its equivalent”). The remainder said they would have paid by borrowing or selling something or said they would not have been able to cover the expense.

Debt

After periods where consumers drained their existing savings and/or devoted less of their paychecks to savings, they either slowed their consumption patterns or borrowed to keep them up. Currently, it seems like many are choosing the latter option. Consumer borrowing is accelerating at a quicker pace than it was before the pandemic. 

The first graph below shows outstanding credit card debt fell during the pandemic as the economy cratered. However, after multiple stimulus checks and broad-based economic recovery, consumer confidence rose, and with it, credit card balances surged.

The current trend is steeper than the pre-pandemic trend. Some may be a catch-up, but the current rate is unsustainable. Consequently, borrowing will likely slow down to its pre-pandemic trend or even below it as consumers deal with higher credit card balances and 20+% interest rates on the debt.

The second graph shows that since 2022, credit card balances have grown faster than our incomes. Like the first graph, the credit usage versus income trend is unsustainable, especially with current interest rates.

With many consumers maxing out their credit cards, is it any wonder buy-now-pay-later loans (BNPL) are increasing rapidly?

Insider Intelligence believes that 79 million Americans, or a quarter of those over 18 years old, use BNPL. Lending Tree claims that “nearly 1 in 3 consumers (31%) say they’re at least considering using a buy now, pay later (BNPL) loan this month.”More tellingaccording to their survey, only 52% of those asked are confident they can pay off their BNPL loan without missing a payment!

Wage Growth

Wages have been growing above trend since the pandemic. Since 2022, the average annual growth in compensation has been 6.28%. Higher incomes support more consumption, but higher prices reduce the amount of goods or services one can buy. Over the same period, real compensation has grown by less than half a percent annually. The average real compensation growth was 2.30% during the three years before the pandemic.

In other words, compensation is just keeping up with inflation instead of outpacing it and providing consumers with the ability to consume, save, or pay down debt.

It’s All About Employment

The unemployment rate is 3.9%, up slightly from recent lows but still among the lowest rates in the last seventy-five years.

The uptick in credit card usage, decline in savings, and the savings rate argue that consumers are slowly running out of room to keep consuming at their current pace.

However, the most significant means by which we consume is income. If the unemployment rate stays low, consumption may moderate. But, if the recent uptick in unemployment continues, a recession is extremely likely, as we have seen every time it turned higher.

It’s not just those losing jobs that consume less. Of greater impact is a loss of confidence by those employed when they see friends or neighbors being laid off.   

Accordingly, the labor market is probably the most important leading indicator of consumption and of the ability of the Bougie Broke to continue to be Bougie instead of flat-out broke!

Summary

There are always consumers living above their means. This is often harmless until their means decline or disappear. The Bougie Broke meme and the ability social media gives consumers to flaunt their “wealth” is a new medium for an age-old message.

Diving into the data, it argues that consumption will likely slow in the coming months. Such would allow some consumers to save and whittle down their debt. That situation would be healthy and unlikely to cause a recession.

The potential for the unemployment rate to continue higher is of much greater concern. The combination of a higher unemployment rate and strapped consumers could accentuate a recession.

Tyler Durden Wed, 03/13/2024 - 09:25

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