Stor-age REIT Investment Case

Investigating Stor-age from top to bottom

While busy with his first year of accounting articles, Gavin Lucas presented an idea to his family members - his father, a seasoned construction professional, and his brother, a Chartered Accountant in London. Together, they launched Stor-Age, turning Gavin's idea into a reality in just a few short years. Today, Gavin serves as the company's CEO and his brother, Steve, as the Financial Director.

About

Stor-Age is a highly specialized, niche self-storage property fund established in 2006 in Cape Town, South Africa. In November 2015, the company was listed on the Johannesburg Stock Exchange (JSE) and has since grown significantly, employing 394 people and managing over 43,400 tenants across 86 properties.

As a fully integrated and internally managed real estate investment trust (REIT), Stor-Age is the largest self-storage property fund in South Africa. Read our previous article to get up to date on what a REIT is! https://finmeup.app/post/6ce111cc-5580-4b49-acf4-784fafc7ab59

Geographically, the company specializes in acquiring and managing self-storage units in South Africa and the UK (under the brand Storage King) and is one of only 11 publicly traded self-storage REITs in the world, and the only one listed across emerging markets. Quite impressive!

Their product

• Flexible in unit sizes from 3  to 30 square meter
• Flexible in lease contract (can be as short as one month)

Their clients 

• Individuals/residential (60% of the time):
• Small and medium businesses (40% of the time):

Portfolio of 86 properties 

South Africa: 

• 56 Properties
• 390 600 square meter in Gross lettable Area (GLA)
• Property value: R5.1bn
• Number of tenants: 28 700
• Vacant Units: 12%
• Loan-to-value: 25% (The loan-to-value (LTV) ratio is a measure comparing the mortgage amount with the appraised value of the property. The higher the deposits and principal repayments, the lower the LTV ratio will be.)

UK:

• 30 Properties
• 129 600 square meter  in Gross lettable Area (GLA)
• Property value: R5.8bn
• Number of tenants: 14 700
• Vacant Units: 8.5%
• Loan-to-value: 35%

Key financials

• Ticker: JSE: SSS
• Share Price: 1388 ZAC
• Market cap: R6.59B
• Div Yield: 8.31%
• P/E: 5.50
• 52 Week Low: 1273 ZAC
• 52 Week High: 1548 ZAC

Latest results (as of Oct 22)

• Interim dividend: +6.1% to 60.5c
• Rental income: +18.6%
• FFO per share: +0.7% (similar to EPS for normal stocks)
• Net Property Operating Income (NPOI): +16.5%
• Loan To Value (LTV) ratio: 30.1% with 85%+ hedged for 3.5 years
• Effective interest rate: 5.53%
• Investment property value: + 23% to R9.823bn
• Tangible net asset value: +10.5% to R14.47

Revenue (Oct21-Oct22)

Stor-Age has experienced an 18.6% increase in rental income, leading to a 16.5% increase in Net Operating Income. The Funds From Operations (FFO) increased from R233.98m to R258.26m in this period, a 10.38% increase, resulting in a FFO per share of 54.05c on Oct21 and 54.42c on Oct22. FFO is similar to the EPS metric for normal stocks. The group also consist of a very favourable Debt to Equity ratio of 0.6 in Oct22.

Interest rate expenses have increased by 14.9% and higher interest rates in the future could impact the group in a negative way. The groups administration expense has also increased by 26.7% in just one year. This was the reason for the increase in their admin cost-to-income ratio from 12.5% to 13.5%. 

The SA REIT market

Stor-Age vs the Top 3 REITs by market cap on JSE.

Stor-Age (JSE:SSS)

• 1Y Share price change: -7.11%
• 5Y Share price change: +4.85%
• Div yield: 8.33%

NEPI Rockcastle (JSE:NRP)

• 1Y Share price change: -0.28%
• 5Y Share price change: -38.95%
• Div yield: 6.5%

Growtpoint Properties (JSE:GRT)

• 1Y Share price change: -0.67%
• 5Y Share price change: -44.68%
• Div Yield: 8.7%

 Redefine Properties (JSE:RDF)

• 1Y Share price change: -2.54%
• 5Y Share price change: -59.62%
• Div yield: 10.18%

As indicated by the figures above, the REIT market in South Africa has severely underperformed in the last 10 years. Store-age, however, has kept growing at a positive rate whilst paying out a very solid dividend of over 8% per year.

Stor-age outperformance

Why has Stor-age outperformed?

Self-storage and warehousing REITs, such as Stor-age, have outperformed in recent years due to the niche nature of these industries within the REIT market. Most REITs are diversified over office, residential en shopping centres which have evidently had a tough time in the market over the last 10 years.

REIT market cycles

REITs performed exceptionally well leading up to the underperformance of the past decade. Past performance in no way guarantees future performance. When investors analyse REITs (or any other asset class), it is important to consider all the variables as objectively as possible. For REITs, these include the macrocycle of the asset class (e.g., buyers market, sellers market, etc), the sum of parts of the underlying investments, valuation multiples, the value that management adds, and dividends paid out to investors.

Investment outlook 

Bull case

• Counter-cyclical business model, doing well through different economic cycles.
• 14 Additional development opportunities in pipeline (SA: 10, UK: 4)
• Established a strong brand
• Sole listed self-storage REIT on JSE.
• Outperforming SAPY (FTSE/JSE SA Listed Property Index) by 181% since listed on JSE
• 50% of asset exposure to UK, diversified between SA &UK

Bear case

• Unfavourable interest rate movements could result in cost of debt increasing.
• Significant increases in utility costs (property taxes, electricity & energy) and lack of electricity (loadshedding). Putting constraints on operating margins.
• Civil unrest in South Africa. Result in damaging property and decreasing property investment values.
• Weak/negative economic growth and risk of increasing inflation

Conclusion

Despite the global economic uncertainty caused by surging inflation and rising interest rates, coupled with a domestic power crisis, we still believe that Stor-Age presents a solid investment case for investors looking to diversify their holdings.  Overall, we believe that Stor-Age is a solid REIT investment, characterized by a relatively simple business model with a proven track record of resilience.

Disclaimer: This is not financial advice. Always do your own research before taking a position. Content is for informational and educational purposes only.