Unpacking the boxes

The famed investor Peter Lynch was an advocate of “invest in what you know”, specifically in familiar industries or companies.

An investor should look to experiences in their daily lives to discover and deepen their knowledge of companies in which they can invest. So the offer of a guided tour of a Stor-Age facility presented an opportunity to learn more about the business.

The tour of a recently completed facility in Cape Town gave deeper insight into the big red boxes you see dotted all over South Africa. The facility visited is in lease-up mode, which, according to the management team, can take 18 to 36 months, depending on factors such as geographic location, tenant mix and local competitors. As a result, occupancy was below the 90% on average reported in the South African portfolio.

On the flip side, management noted that some more established properties are at full capacity, with a strategy in these sites to improve yields by increasing prices to reflect demand, a dynamic pricing model that Uber customers will be familiar with. However, the same applies during the lease-up phase, when management needs to be more flexible with pricing to drive initial occupancy, knowing that once lease-up is complete, these rental rates can be increased to reflect the specific market-related demand in the area.

Every property is different due to geographic location, local demand drivers and the tenant mix of commercial and residential customers, so this dynamic pricing needs to be carefully managed by the team to ensure optimal pricing and yield maximisation across the full portfolio.

Chatting to some small business owners on the tour, the model’s flexibility became apparent, making it an attractive proposition to small businesses and e-commerce brands in particular. Take, for example, a seasonal business that needs to ramp up stock for the busy summer season, whereas winter is a particularly slow season.

With the month-to-month lease model, a business owner can downscale from their 40m² unit to a 20m² unit with a month’s notice. For larger businesses that need to stock up for the season but can’t fit it all in, either on the floor at their retail space or in their current warehouse, they can take another 40m² to store the additional stock for three or four months until they sell through over the season and draw down stock as needed, then hand back the unit after four months.

A few surprises from the tour included a kitchen area on site, which I imagine is convenient if you are planning to be there most of the day, fulfilling orders for your e-commerce business. There is a co-working office-type space for those who need to work at a desk with a Wi-Fi connection while responding to customers’ queries and e-mails or processing orders.

Even the corridors are designed to be wide enough to haul a pallet down on a pallet jack and load it into your unit. The internal walls are modular, so if a customer wants more space and wishes to take over the unit next door or part of it, a bit of retrofitting can be done to accommodate the client.

It is no wonder, then, that looking at Stor-Age results, the average length of stay in the South Africa sites has increased from 22.7 months in financial 2022 to 27.1 months now. In the UK, a more mature self-storage market, the average Stor-Age tenancy is 33 months. This suggests there may still be room to grow the average length of stay in the South African market.

Additional technology improvements are being explored, to make the customer journey as seamless as possible

In the meantime, the margin is being honed. At the storage facilities all the lighting is motion-activated, with solar panels on the roof and backup generators if Eskom and the solar PV and battery set both fail, so you can expect lifts, lighting and security to be working 24/7. This has ESG benefits, but it also has a rands-and-cents impact, with Stor-Age able to reduce utility bills for select properties by up to 70%.

Solar power and rainwater harvesting are now standard design features of all new properties, with a programme to retrofit all existing properties in due course.

This was another interesting feature of the properties: the amount of technology used. The Stor-Age team is exploring additional technology improvements to make the customer journey as seamless as possible, which should translate into operational efficiencies and incremental improvements in property and group margins over time.

Stor-Age is in the first year of its 2030 strategy, according to which it plans to double its current number of properties over the next five years. That’s no mean feat and not without some risk of execution. A recent capital raising of R500m, which was three times oversubscribed, suggests that the market and investors are happy to back the management team in delivering on this strategy.

The R500m was raised notably at a slight premium to the last stated NAV, and the share is trading around NAV, yielding 6.5%. The previous discount to NAV has been closed over the past 12 to 18 months, driven by improving investor sentiment towards the local property sector in general and by solid operating results. It’s not cheap, but it’s not trading at a crazy premium to NAV.

With the discount to NAV extinguished, investors will need to be comfortable with the execution of the 2030 strategy and the flow-on effects on NAV per share, and future distribution growth alike, when assessing valuation.