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a business model for keeps

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Richard Colburn

Equity Analyst

Stor-Age (JSE: SSS) is a highly specialised property fund focusing on the high-growth self-storage sector, a niche sphere within the broader commercial property market. Since opening its first facility in 2006, the group has grown substantially. After forming a joint venture with Acucap (absorbed by Growthpoint) and property developer Faircape in 2010, Stor-Age listed on the JSE in November 2015 and raised R1 billion through an oversubscribed share placement. We believe it will continue to grow its market share in the highly fragmented self-storage market.

Stor-Age seeks to develop, acquire and manage high-quality self-storage properties, aiming to achieve strong market penetration, benefit from economies of scale and deliver attractive operating margins. Management’s stated strategy is to continue acquiring prime locations in dense nodes, with high visibility and easy access.

The portfolio consists of 48 self-storage properties across South Africa, mainly in Gauteng and the Western Cape. Stor-Age owns and operates 30 of these properties (the ‘listed portfolio’) valued at R1.87 billion. Stor-Age also receives property and asset management fees from 12 properties (the ‘managed portfolio’). There are plans for a further six properties valued at R450 million to add another 12% to the lettable area.

Stor-Age has a healthy balance sheet with gearing of less than 15% (the sector average is between 30% and 40%). Its stated target gearing is 25% to 35%. The group has an effective interest rate of 9.4% with ~80% of the debt hedged and R460 million in undrawn facilities available as of December 2016. This provides the fund with flexibility to expand its operations. The strategy is to secure or acquire four to six new properties and develop three to five new stores a year. The group has said it has the capacity to manage around 70 properties within the current structure.

The self-storage business model is more speculative than traditional property as storage space operators cannot pre-let vacant space. Management usually regards five years as being a reasonable time frame to ramp up a storage facility to a 90% ‘stabilised occupancy’ rate for an average-sized facility (7 500m2 costing between R70 million and R100 million) – with around six months to negotiate the property acquisition. Stor-Age’s market dominance and brand are key in attracting potential tenants.

The self-storage market is highly fragmented, with many smaller market participants. With this in mind, Stor-Age has focused on developing a strong brand and is continuously capturing market share.

Another feature of the self-storage business is that it’s countercyclical. This is a needs-based industry – people always need space to store their goods – and self-storage ventures therefore continue to trade well through different economic cycles.

The self-storage business model requires active and dynamic operational management. This is due to high variance in leasing (from a month to two years) and the large number of tenants (Stor-Age houses around 14 000 tenants at any given time). Tenant churn can be up to 6% of the portfolio every month, with a concomitantly high administrative burden. Stor-Age management has developed a highly efficient system, enabling the group to function optimally in the current environment and maximise pricing strategies employed.

We believe a reduction of vacancies and increasing rates per square metre will continue to drive distribution growth for Stor-Age, while selective expansion of the portfolio’s national footprint will promote capital appreciation. The healthy balance sheet, brand strength and highly efficient operating and management system should allow the property group to continue growing its market share. We continue to see healthy upside in the countercyclical Stor-Age share price from current levels.

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