While the beleaguered listed property sector still faces multiple headwinds, the yields of some shares are starting to look interesting from a valuation perspective. We remain concerned about the deteriorating operating environment, over-indebted balance sheets and the supply glut across office, retail and industrial assets. However, we’ve held on to our existing positions and have started adding selectively in the sector – taking a rifle rather than a shotgun approach. One share we particularly like is Stor-Age.
Stor-Age is a highly specialised real estate investment trust (REIT) that listed on the JSE towards the end of 2015. It’s the only listed entity on the JSE to focus on the high-growth self-storage sector, a niche sphere within the broader commercial property market. Stor-Age is effectively a retailer of space – a needs-based product in a highly fragmented market.
The portfolio is underpinned by 65 self-storage properties across South Africa (49) and the UK (16), with just over 423 000m2 of gross leasable area and around 32 000 tenants. The SA portfolio is valued at R4 billion and the UK assets at R2 billion. Stor-Age entered the UK market in 2017, where it operates under the brand name Storage King.
We’ve been bullish on Stor-Age since participating in the 2015 listing, and have selectively added to the counter since then. The group’s most recent set of results in June saw healthy distribution growth of 9% compared to the previous year. Growth has been underpinned by both rental growth and acquisitions.
SOPHISTICATED OPERATIONAL PLATFORM
So what do we like about Stor-Age?
The self-storage business model requires active and dynamic operational management, due to variance in the length of leases and the need to interact with a large number of tenants at any one time. Stor-Age’s sophisticated operational platform sets it apart from its peers and provides a competitive advantage in sourcing and closing tenant leads at favourable pricing.
Stor-Age has dominant sites and has successfully branded itself in a highly fragmented market. This will allow it to continue to capture advantageous pricing relative to peers.
In the face of poor economic growth and activity, the group is in a better position than others to weather the deteriorating property fundamentals. In addition, the diversity and size of the tenant base has diversified rental income.
Stor-Age’s management team has delivered on its stated strategies and understands the allocation of capital. There’s also capacity on the balance sheet to implement plans to continue the growth trajectory. The management team is currently in the fourth year of its second five-year strategic plan, and is in the process of defining and detailing the group’s strategy to 2025.
IS THE GOOD NEWS PRICED IN?
The quality of assets in a fragmented market, diverse tenant base, conservative balance sheet and sophisticated operating system all enable Stor-Age to better withstand the current stagnation of the operating environment. As is the case with most positive news or results, however, the market is responding and Stor-Age is starting to price in the good news. It’s trading at a forward yield of 8.1% and a premium to net asset value per share. We still see some upside in the share relative to other opportunities, however, so we remain happy to hold it.
In general, we remain cautious on the listed property sector. The contractual nature of the business has shown us that landlords are slower to benefit from an upturn in the economy, just as they’re slower to respond to weakness – there’s effectively a lag to both the upside and the downside.
We’re of the view that the operating environment will still translate to lower earnings as landlords deal with negative rental reversions and pressure on vacancy. The poor results being reported in the sector, however, means we’re starting to see valuations open up, and we’ll make good use of these opportunities as they arise.
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