Trust vows it has lots in store for funders who take a risk on novel business model
Traditional real estate investment trusts (REITs) usually burst with retail, commercial and industrial properties occupied by a mix of tenants including big drawcards. Unusually, Stor-age Property REIT is in the self-storage business and its tenants are at the other end of the spectrum, sometimes arriving unannounced with a van full of possessions, asking for a spot storage quote.
Unable to present its capital providers with a prepopulated tenant base of reliable and trusted names, this model requires entrepreneurial and innovative management. Despite this unavoidable funding challenge and a languishing economy, CEO Gavin Lucas believes StorAge will exhibit a high degree of recession resistance.
NEW APPROACH
Convinced there had to be a better way to store belongings than in containers or their equivalent, trailblazer Lucas and cofounders established a model of light, bright, safe and secure self-storage lock-ups.
Units are accessible around the clock and can be terminated at a month’s notice. The average length of tenancy is 21 months, occupancy rates have hit 85% and bad debts are less than 0.5% of revenue.
There is no room for complacency, especially as funders are understandably wary of this business model.
Stor-Age listed on the Speciality REITs sector of the JSE in late 2015, having been established almost a decade ago. Today, its market capitalisation and property values are both about R2.1bn.
SUSTAINABLE GROWTH
Private investors are excited about this business, but small cap analyst Keith McLachlan has some words of caution.
“Recent numbers look really good, so you are going to hear lots of fantastic things about them,” says McLachlan of SmallCaps.co.za. “And while many of these are true, let me highlight that Stor-Age has aggressively positioned itself to capture the self-storage REIT market.
“It has done this predominantly acquisitively and, in some cases, quite expensively. This approach has ramped up StorAge’s scale quickly, but at the cost of real, sustainable growth, in my opinion.”
The profile of Stor-Age clients are business users accounting for about 17% of space, house-moving taking up 43%, “excess possessions” accounting for 19% and factors such as marriage and divorce, lifestyle choices and renovating taking up the rest. Lucas attributes this high degree of customer diversity based on tangible needs as the main reason for the group’s cyclical resilience.
Stor-Age seeks high population densities combined with high household income. Its owned-and-managed storage models have 18,500 tenants across 43 properties, with Western Cape and Gauteng accounting for most customers.
Rentals average about R86 per square metre, with prime Cape Town spots close to R200. The company is conservatively financed at 12% gearing and a R400m rights issue in 2017 gives it firepower for further acquisitions.
Commenting on the company’s long-term development strategy, McLachlan says: “The reality about this well-publi- cised pipeline is that it’s likely to be of lower quality than StorAge’s existing assets.
“If location and convenience are critical for a self-storage solution that services retail and light commercial markets, then logically, Stor-Age and the competitors it has recently acquired would have already built on the best-positioned land. So the longer the pipeline, the more marginal the storage space likely to be built.”
PRICING MODEL
Big positives are the company’s dynamic pricing model and commitment to state-of-the art communications technology. There are three different price points, with the best price online sourcing about half of new clients and the balance via telephone and walk-ins. The most expensive walk-in option is the easiest to convert to a sale.
“A guy who arrives with a bakkie-load of goods on a Friday afternoon will pay a higher rate than an online customer, with the telephone inquiry somewhere in between,” says Lucas.
Management believes distribution growth of 9% to 10% can be achieved in the 2018 financial year, depending on the severity of the economic downswing. On current share price, the historical yield sits at 7%.
THERE IS NO ROOM FOR COMPLACENCY, ESPECIALLY AS FUNDERS ARE UNDERSTANDABLY WARY OF THIS MODEL