The JSE’s only self-storage real estate investment trust (Reit), Stor-Age, has inked a deal to buy four properties in the Leeds area of the UK for £37.5m. It’s using R550m raised from a JSE bookbuild to complete the purchase. The FM spoke to CEO Gavin Lucas about the group’s latest foray.
Are you doing everything you can to externalise Stor-Age and not rely on SA for growth?
GL: No, definitely not. Something that we’ve been very clear on over the past few years is that we come from the school of specialisation. We believe that true value is unlocked in property through being sector specialists.
Our job is to do it better than anybody in the world. So there’s no reason why we can’t deliver a product for the local market, market it, and manage the assets at a level which is right up there with First World markets.
The second point is that when we took an opportunity to strategically enter the UK market in 2017, we were very clear that we were not running away from SA or the rand. The UK is actually undersupplied from a self-storage perspective on a per capita basis, relative to the likes of the US.
We believe that there is a fantastic opportunity for the sector to still grow in the UK and saw that opportunity, and thought let’s take advantage of that. In the SA market we still see opportunity, despite the generally negative rhetoric.
Your Waterfall development in KwaZulu-Natal (KZN) was trashed in the July riots. Surely that must have had a profound psychological impact on you?
GL: I happened to be in KZN at the time on holiday with my family. Watching our property be totally destroyed — I’d be lying if I said it had no impact. This particular property got caught up in a couple of hundred years of SA complexity. We realised that to try to reconcile what had taken place there wasn’t possible, but where I have got to, is [to] accept the fact and to leave it at that.
That property has subsequently reopened, we have received insurance payouts and we do intend building it out again further. We’ve had significant demand in that area and we were looking at another property in KZN.
We made a call to proceed with that property. If we were not prepared to invest in one particular city in SA where we had chosen to focus our strategy, well then quite frankly we shouldn’t be prepared to invest in SA at all. I’m not negative on SA, we have our roots here and we’re proud of what this business has achieved here.
If you look at the data that comes back about the level of commercial usage from typically SMMEs, we’ve tracked how their own employment numbers have grown and how our product has supported [them]. On month-to-month leases you’re not locked in to a three-to five-year lease, you can upscale or downscale as required — it’s a wonderful product that supports small business formation.
But is it appropriate to raise equity in SA to fund these UK acquisitions?
GL: I’d say the market has given us a vote of confidence in terms of the manner in which we are deploying that capital. That transaction has been done at a forward yield of about 6% and taking into account the debt funding which we’ve put in place, blended with the cost of the equity, the deal is not dilutive.
We’re moving into a market where strategically we back the local management team; we integrate our SA operations with a low cost base sitting in rands and a hard currency revenue stream in sterling.
That being said, there’s no doubt that you can’t keep doing that forever. If we continue to be as competitive as we can be in the UK market, at some point we will need to either get a significant rerating in SA or we will need to look at a more creative funding strategy.
You say the properties you’ve bought should earn R33.65m by March 2023. How generous are your assumptions?
GL: I’d say those assumptions are conservative, and very achievable.
On a total return basis, Stor-Age shares are up 20% over two years. So your stock didn’t collapse in the great Reit rout of 2020, but it’s not a great performance either. Or is it reasonable for a Reit such as yours?
GL: I think the market underrates us significantly. At the time that we listed we were bringing a new asset class, a sub-sector of the commercial property market, to the JSE and we knew that there would be a lot of education required ... We are now 5½ years in and Stor-Age [has] continued to perform.
The other aspect is that about 45% of our asset base now sits in sterling, and our peers in the UK probably trade at multiples of 2.5 times what we trade on.
What it tells us — and even discounting our UK business for its lack of size relative to some of our larger listed peers — is that our SA business is ridiculously cheap.
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