Stor-Age stands out thanks to the hoarders
In the parade of ugly that has been SA’s listed property sector, Stor-Age stands out. And no, you haven’t missed the boat
It took a while for real estate investors to warm to Stor-Age Property Reit when it made its debut on the JSE in November 2015. Back then, few regarded self-storage as a serious asset class — the general perception was that it was simply a collection of old, garage-like buildings scattered in dodgy, out-of-town areas. Stor-Age also came to the market in the midst of the 2015/2016 property listings boom, so it had to compete for investors’ money with at least a dozen other new offerings.
How times have changed. These days Stor-Age regularly tops fund managers’ stock-pick lists, and with good reason — it is one of less than a handful of property stocks still delivering inflation-beating dividend growth. Management, under the helm of CEO Gavin Lucas, last week declared a 9.05% rise in income payouts for the year to March 3 — well ahead of the sector’s average 3%-4%.
The latest set of results cemented the company’s uninterrupted track record of 9%-11% dividend growth since listing, and comes on the back of still-strong tenant demand and like-for-like rental growth of 7%.
To achieve the latter at a time when most other property funds are forced to drop rentals or risk losing their tenants is no easy feat.
But Stor-Age not only continues to deliver the goods on the income front, it is also one of the JSE’s best-performing property stocks in terms of capital growth this year. The share price is up 11% year to date compared with the SA property index’s meagre 1.5% rise over the same time.
The key question for investors who don’t yet own the stock is whether they have missed the boat.
It doesn’t appear so. Analysts are still bullish about Stor-Age’s prospects, given that the company operates in a niche market where demand is less affected by SA’s economic slump than other property sectors.
Keillen Ndlovu, head of listed property funds at Stanlib, says: "Stor-Age isn’t exposed to the current tough and unpredictable conditions in the office and retail sectors. It’s the JSE’s only self-storage operator and we believe it still offers potential to deliver reasonably good returns."
He expects Stor-Age to continue to outperform over the next 12 months in terms of dividend growth, forecasting 7%-9% for the 2020 financial year versus about 2% for the sector as a whole. Ndlovu also likes the company’s rand hedge proposition. Stor-Age entered Britain at the end of 2017 and has since built a R2bn (33% of total assets) self-storage portfolio in the UK.
Kelly Ward, investment analyst at Metope Investment Managers, is equally upbeat: "Stor-Age’s short lease covenants and dynamic pricing model allow the business to respond quickly to demand and supply imbalances and adjust prices accordingly, ensuring a good level of occupancy." This results in the business being somewhat defensive, and better able to withstand the tough economic climate, she says.
Stor-Age may appear expensive as it trades at a dividend yield of 8.3%, compared to the 9%-12% offered by sector heavyweights such as Growthpoint, Redefine and Hyprop Investments.
But Ward believes the premium is warranted, given that the company should continue to generate above-average dividend growth over the next few years.
Analysts also like the entrepreneurial flair Stor-Age’s management team brings to the table. The company was founded in Cape Town 13 years ago by Lucas, his brother Stephen Lucas and varsity friend Steven Horton, while they were still doing their articles. All three are chartered accountants. The trio spotted a gap in the SA market to build new, upmarket self-storage facilities in prime areas within easy reach of where people live and work. They believed that urban densification and increased numbers of households opting for apartment and cluster living with limited storage space would drive demand. And it certainly did. Stor-Age’s SA portfolio grew from one facility in Cape Town’s Edgemead in 2006 worth less than R20m to 49 sites worth R4bn today, spanning Cape Town, Durban, Johannesburg, Pretoria and Port Elizabeth.
Speaking to the FM following the release of last week’s results, Lucas ascribed Stor-Age’s success to its strategy of building purpose-designed, high-quality properties from scratch in prime locations. The company’s striking red branding is also key. "Ultimately, it’s all about location and visibility," he says.
No doubt, it helps that there hasn’t been a lot of competition from other large players in the self-storage market. Also, SA is still underdeveloped in terms of self-storage supply. "We are still about 10 years behind the UK and Australia, so there’s plenty of growth to come," says Lucas.
While the UK self-storage market is more developed than that of SA, it’s still fragmented, and Stor-Age sees opportunity to build its UK business to 40% of its total assets within the next three to five years. Stor-Age’s current portfolio of 16 properties is located mostly across the southeast and east of England.
Stor-Age bought its way into the UK, acquiring Storage King, the sixth-largest self-storage brand in the country, for R1.3bn in 2017.
"So we are not going it alone. We have a local management team with significant on-the-ground experience in the UK," says Lucas. Recent acquisitions, including Viking Self Storage in Bedford and The Storage Pod in Weybridge, will be incorporated under the Storage King brand.
Lucas says the investment case for UK self-storage is underscored by continued growth in occupancy and rentals, despite Brexit worries and near-zero inflation. For example, average occupancy levels across the UK self-storage market rose from 70.2% in 2014 to 77.2% last year. Average net rentals were up from £21 to £23.11 a square foot over the same period.
While most SA property companies are grappling with falling rentals, thanks to SA’s distressed economy, Stor-Age units are rented on a month-to-month basis.
That means there’s no built-in annual escalations or lease renewals. Sizes vary from as little as 3m² to 100m², while monthly rentals vary from R750 to R1,500 per unit. The typical lease length is 13 months. Lucas notes that about 80% of Stor-Age’s clients are domestic users whose storage needs are driven by life-changing events which are not affected by economic up or down cycles: marriage, divorce, having a baby or moving house. He adds: "People get attached to their stuff and they would rather store their belongings than part with them."