The numbers posted by real estate investment trust Stor-Age last week underscore once more why there’s been hype around self-storage as an “alternative” asset class in recent years.
It’s one of the few subsectors of the broader real estate market in which demand and rentals continue to climb, come rain or shine.
It seems that neither the pandemic nor higher interest rates, surging inflation or weak economic growth have dented the company’s ability to deliver above-market dividend growth.
Stor-Age, which has maintained a 100% payout ratio, declared a 6.1% increase in dividends for the six months to September. In fact, Stor-Age’s interim dividend of 60.05c a share is now well ahead of the 54.89c a share declared for the six months to September 2019.
That makes it one of only a handful of JSE-listed Reits whose dividends have rebounded to pre-Covid levels in absolute terms.
Higher dividend payouts were supported by year-on-year rental growth of 6.8% for Stor-Age’s local portfolio and 8.4% for its UK portfolio. Improved occupancies lifted same-store rental income by a healthy 9% in South Africa and 11.4% in the UK.
Incidentally, Stor-Age’s property portfolio has recorded uninterrupted rental growth since listing on the JSE in November 2015.
That’s in contrast to other Reits with exposure to the retail and office markets, where rentals dipped 20%-30% on average during the pandemic. Most are still recording negative reversions on lease renewals.
Stor-Age has increased its rand-hedge exposure with the value of its UK assets now exceeding that of the local portfolio — R5.8bn vs R5.1bn — after the acquisition of Storagebase and McCarthy’s Storage World in the UK earlier this year.
Demand for self-storage facilities is typically linked to life-changing events — death, divorce, marriage, starting a new job or moving house. Pandemic-related trends such as remote working and semigration have further boosted uptake.
But despite the resilience of the self-storage niche, there are still mixed views on whether Stor-Age is a good buy at current levels. Its shares have, essentially, gone nowhere this year, although on a five-year basis, including dividends, the stock is up 72%.
Zaid Paruk, portfolio manager and analyst at Aeon Investment Management, believes there’s better value to be had elsewhere. At last week’s share price of R13.65, Stor-Age trades at a 6% discount to NAV, which Paruk notes is significantly less than the broader listed property sector.
Despite the 17% rally in this index since the end of September, the sector is still trading at an average discount to NAV of close to 30% — heavyweights such as Growthpoint and Redefine sit closer to 40%. That means several Reits are offering dividend yields as high as 12%-14%.
“In terms of valuation, we see other more compelling investments within the sector and the broader market’’, says Paruk. “Stor-Age trades at a 9% forward dividend yield, which is less than the 10.2% yield on the South African 10-year government bond.’’
However, Liliane Barnard, CEO and portfolio manager of Metope Investment Managers, believes Stor-Age is a stock worth buying. “The company is well managed, has a clear strategic plan to continue to deliver growth to shareholders and is invested in a market that has proven resilient in the most turbulent of times,’’ she says.
Stor-Age’s property portfolio has recorded uninterrupted rental growth since listing on the JSE in November 2015
Barnard adds that the self-storage market still offers plenty of growth capacity, which will support further income and capital growth over the longer term.
Naeem Tilly, portfolio manager and head of research at Sesfikile Capital, has a similar view. “Stor-age is a specialist operator in a sector which has, in the long term, exhibited defensive attributes through various economic cycles,’’ he says.
“Management increased its earnings growth guidance to 5%-6% for the full year, which places the stock firmly at the top end of the sector.’’
Ultimately, as Tilly points out, it depends on your risk appetite and investment criteria. Property stocks that trade at lower initial yields — such as Stor-Age — usually offer better earnings growth and therefore carry lower risk, he says.
Higher-yielding stocks, on the other hand, usually have lower growth prospects and usually come with more balance sheet risk.
Tilly notes: “While Stor-Age’s distributable earnings yield of about 9.7% is lower than the peer group, it offers top quartile growth with a strong balance sheet.’’
Though Stor-Age counts among the JSE’s top three local Reits in the five years to the end of October in terms of total returns (according to the South African Reit Association), the share price has moved largely sideways over the past 18 months or so.
Stor-Age CEO Gavin Lucas maintains that the share price doesn’t fully capture the “true economic value” of the business, its specialist strategy geared solely towards self-storage and extensive development pipeline.
Lucas tells the FM that from a listed-property asset allocation perspective, there appears to have been a rotation from quality and defensive counters to more opportunistic plays.
“Counters trading at significant discounts to NAV and high yields were all of a sudden more in vogue,’’ he says. “The economics of that rotation may well have been compelling in the short term but it was, in our opinion, somewhat short-sighted given that a high-yielding and deeply discounted counter does not necessarily translate into a quality long-term investment.’’
Lucas, who founded the company 17 years ago with fellow chartered accountants Stephen Lucas and Steven Horton, argues that Stor-Age is one of the few property stocks able to effectively manage a high inflationary environment given its short-term, month-to-month leasing model and the ability to adjust pricing quickly.
“Our interim results clearly demonstrate this,” he says.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.