Finding South African-based property stocks whose earnings haven’t been eroded by the country’s energy woes can be a tall order.
But Stor-Age seems to fit the bill. The company has emerged relatively unscathed to date from some of the nasty headwinds that have hit the local property sector.
It’s the JSE’s only real estate investment trust (Reit) that generates all its income from self-storage.
Last week, the company declared a 5.6% increase in dividends for the year to end-March.
It’s one of only a handful of Reits still paying out 100% of its net profits to shareholders — most have lowered payout ratios to 75%-85%, given the JSE’s minimum 75% requirement.
When it listed on the JSE in November 2015, Stor-Age owned 24 properties worth R1.3bn, located mainly in Cape Town, Joburg and Pretoria. Two years later the company entered the UK through an investment in Storage King.
The portfolio has been scaled up rapidly since. Today it spans 93 self-storage parks valued at R12.9bn, split roughly 50/50 by value across South Africa and the UK. A development pipeline of 13 properties will be added to the mix.
Management increased same-store rentals in the South African portfolio by nearly 10% while occupancies are at a record high of 92.2%. That’s impressive in an environment where retail and office landlords are typically still forced to drop rentals or risk losing tenants.
The company’s latest results underscore the resilience of the self-storage sector, which has again shown itself to be largely unaffected by whether the economy grows or shrinks.
As Ridwaan Loonat, senior property analyst at Nedbank CIB, says: “Demand is driven instead by life-changing events such as death, disaster, displacement and divorce.”
He notes self-storage is also an unintended beneficiary of the pandemic-induced shifts in the way people work and live.
Importantly, the sector is not a big user of electricity or water because these properties don’t have to house crowds of people.
The upshot is that Stor-Age, unlike most local commercial landlords, has not had to fork out huge amounts of money for diesel to keep high-intensity generators burning during load-shedding.
Besides lower operating costs, Loonat says self-storage requires a smaller capital outlay than traditional office and retail buildings.
“You also have the ability to earn ancillary income such as packing supplies, truck rentals or even insurance, which further support return on investment.’’
Though Stor-Age has historically outperformed the SA listed property index (see graph), the stock has delivered a lacklustre share price performance over the past 18 months.
Earlier this week, Stor-Age was trading at R12.70 a share, down about 16% from its early 2022 highs of R15. That places it at a discount to NAV of close to 15%.
Stor-Age CEO Gavin Lucas tells the FM the stock has struggled to decouple itself from the deteriorating outlook of the property index after Covid — despite a consistently strong operational performance and growing sterling underpin.
He says the share price doesn’t fully capture the true economic value of Stor-Age’s business model and digital marketing platform.
Lucas says that the stock also continues to trade at a significantly higher forward yield relative to its UK peers: 8.9% (end-May) against the average 2.9%-3.9% for self-storage counterparts listed on the London Stock Exchange.
“Though not immune to economic shocks and volatility, self-storage has its own unique set of demand drivers, which are very different to those experienced in traditional real estate subsectors,’’ he says.
So why isn’t the market buying more enthusiastically into the Stor-Age story?
Lucas says when he and fellow chartered accountants, brother Stephen Lucas and varsity friend Steven Horton, first floated the new offering, self-storage was a niche sector unknown to JSE investors.
“We knew it would take years to ‘sow the seeds’ for the broader investment community to fully understand the asset class. There were many naysayers back then,’’ he says.
“We believe we’ve made good progress in this regard but there is still some way to go.’’
Lucas maintains that Stor-Age still offers growth prospects despite consumers tightening their belts on the back of higher interest rates and living costs.
He cites the advent of hybrid working models, semigration, a move towards higher-density and micro-living and the increased adoption of online shopping as key factors creating fresh demand among people looking for space to store stuff.
“These trends are particularly prominent in high-density urban areas where most of our properties are located,’’ he says. “Our customers are also renting for longer these days.’’
The average length of stay for residential and commercial customers in SA increased by 12% and 22% respectively, and more than 20% for residential and commercial customers in the UK.
The average rental period is now just more than two years and two and a half years respectively for South Africa and the UK.
The average rental period is now just more than two years and two and a half years respectively for South Africa and the UK
But short-stay customers (less than six months) still make up 29% of the business.
Ross Reid, investment analyst at Metope, agrees that Stor-Age is a stock worth owning.
“The Stor-Age business model has unique demand drivers that are uncorrelated to those of traditional property sectors. This adds a diversification benefit from a business operations perspective,’’ he says.
“Stor-Age has a strong founder-led management team, who have cemented themselves as self-storage specialists, and an effective operational and digital platform, which makes it a company with a sustainable competitive advantage.”
Reid adds that Stor-Age has a healthy balance sheet with a conservative loan-to-value ratio of 30.8%, with more than 83% of net debt hedged.
However, Stor-Age is not risk-free. Reid refers to the Bank of England’s further rate increase of 50 basis points last week and the likelihood of the South African Reserve Bank following suit.
He says: “Higher rates will detract from Stor-Age’s resilient operational performance as the cost of debt grows from the unhedged portfolio.’’
Considering the strong earnings base already set in the 2023 financial year, Reid expects growth to be flat over the next 12 months.
That could place short-term pressure on the share price, he says. However, he believes patient investors with a buy-and-hold approach will be rewarded.
“The quality of Stor-Age’s assets in easily accessible locations, coupled with management’s operational prowess, will anchor cash flow and drive growth over the longer term.’’
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