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Self-storage: investors’ lock up and leave?

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A banking acquaintance — let’s call him George — inherited some bits and pieces from an uncle five years ago. He was working abroad so he put the assorted clutter, unseen, into a lock-up until he returned to the UK two years later.

“I should have got rid of the lot. Not worth the £500 I paid the self-storage company,” he grumbles. However, he realised he was a typical self-storage customer and it made him think.

George invested in Aim-quoted Lok’nStore, one of the UK’s three listed self-storage groups. He paid about £4 each for shares. They now trade at about 940p and he has banked about 50p a share in dividends. “My inertia paid off,” he jokes.

Self-storage bosses talk of the four ds that drive consumers to their roll-up doors: death, divorce, dislocation and downsizing. Add an i for inertia. The average customer rents a lock-up for less than 12 months, but some stow stuff for years. “There is a lot of inertia in self-storage,” observes Andrew Jacobs, executive chair of Lok’nStore. “People are very attached to their possessions.”

The self-storage sector has swelled in the 30 years since Lok’nStore set up the first of its 40 stores in Sussex. Today, more than 2,000 sites across the UK rent out storage space, according to the Self Storage Association.

It is an unregulated, diverse sector ranging from vacant warehouses to empty barns. Just a couple of hundred are what are deemed “investment-grade”, that is big purpose-built outlets close to shopping centres convenient for clients.

This is where the investment opportunity lies. The heavy construction costs and planning constraints are beyond many would-be operators despite the allure of strong demand, fat operating margins and a steady income. Lok’nStore, Brussels-listed Shurgard, Big Yellow and Safestore, both listed on the UK’s main market, own most of these so-called investment grade sites.

The biggest operators are Safestore, which has about 138 centres in the UK and 40 or so in the EU, and Big Yellow which has 100 stores, many in London. These groups have expanded fast, but the UK is far from saturation if other markets are to go by. In the US a tenth of households have lockups totalling about 2bn square feet. Self-storage accounts for just 52mn square feet in the UK.

Many Brits were unaware of self-storage until the pandemic when we were forced to turn box rooms into offices. There has been a step-change in the way we think of the sector, says analyst Max Nimmo of Numis.

Self-storage companies it seems are not like other real estate groups. During the pandemic, the bigger listed companies’ occupancy rates rose from 70-odd per cent to circa 85 per cent, pushing up rents and the compound annual rate of earnings growth above its recent pre-Covid average of about 10 per cent to 12-plus per cent. Stock prices jumped to 35 times expected earnings.

Shares have recently eased back on jitters about the economy, but the growth momentum persists. In the quarter to the end of October, Safestore’s revenues were up 11 per cent to £57mn. In the half year to September, Big Yellow’s rose 15 per cent; pre-tax profits before revaluations and disposals were up 16 per cent to £54.6mn. In the year to July Lok’nStore revenues increased 23 per cent to £27mn and earnings before interest, tax, depreciation and amortisation jumped 38 per cent to £16.4mn.

Self-storage is an “incremental business” says Jim Gibson, Big Yellow’s chief executive. It works as long as there are new customers and rents move up, with new openings adding a fillip to growth. It is a business designed to provide long-term earnings growth on a normalised basis of 7 to 8 per cent plus a dividend.

True, the sector is heavy on capital, with construction often taking many years. However, once built, sites become profitable fast, say operators. Unlike offices and hotels, self-storage containers don’t have to be constantly refurbished.

Funding expansion is a headache. That is especially true for listed companies such as Big Yellow and Safestore, which are structured as real estate investment trusts and constrained by requirements to distribute 90 per cent of taxable income to shareholders.

Safestore’s chief executive Frederic Vecchioli focuses on achieving economies of scale to lift earnings and tops the pot up with debt.

Vecchioli boasts that Safestore hasn’t raised cash from investors since 2014. Big Yellow, in contrast, has tapped investors regularly for expansion capital. Lok’nStore “manages its portfolio tightly,” says Guy Hewett, analyst at brokers FinnCap and juggles debt and asset sales to fund its pipeline.

Life may become harder. The market rightly has misgivings about inflation, rising interest rates and recession risks. Shares across the quoted trio have dropped to about 20 times next year’s earnings.

Industry bosses remain sanguine, arguing debt is low, demand is still growing and short leases mean they can pass on rising costs quickly.

Barclays analysts are more cautious. The sector is “resilient but not recession proof,” they warn, pointing out that operators suffered in the 2008-9 financial crisis.

We learned our lesson, says Gibson. Safestore’s and Big Yellow’s interest cover is five times what it was a decade ago.

I expect earnings growth will edge down as sites may fill up more slowly. But as long as occupancy levels stay above 80 per cent and companies carry on raking in rents and churning out dividends, the shares may be worth stashing away. Inertia should pay.

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