Safestore: A Call Option On Self-Storage Momentum In Europe

seekingalpha10-24

Safestore Holdings shows robust financial performance with a 157M GBP net income, but EPRA earnings of 45M GBP offer a clearer profitability picture.The REIT anticipates significant EPS growth from ...

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While it is very popular in North America, the entire concept is only slowly gaining ground in Europe, likely due to cultural differences. As it has been a while since I last discussed Safestore Holdings (OTCPK:SFSHF), I wanted to follow up on this name to see if there perhaps is an investment opportunity. The stock is up about 60% since my 2019 article. A pretty decent result despite the turmoil in the REIT sector earlier this year.   Yahoo Finance As the average volumes in the UK are substantially higher than in the U.S., I would strongly recommend you to trade in Safestore's shares through the facilities of the London Stock Exchange. The ticker symbol in London is SAFE, and the average daily volume is just over 300,000 shares. A robust result for this self-storage operator The REIT’s financial year ends in October, and the most recent detailed financial results are related to the first semester. As the income statement below will show, the REIT generated a total revenue of approximately 109M GBP, but if you look at the breakdown of what the reported revenue actually consists of, you see the total revenue from self-storage activities was just 91.6M GBP while the protection-related revenue was approximately 12M GBP.   Safestore Investor Relations Going back to the full income statement (shown below), the REIT reported an underlying EBITDA of 67.1M GBP and although the reported net income was approximately 157M GBP (representing an EPS of almost 72 pence per share in the first semester), I’d like to emphasize that just like in North America, the reported net income is a pretty useless metric for a REIT.   Safestore Investor Relations As you can see above, approximately 2/3rd of the total net income came from a positive 121.7M GBP revaluation of investment properties during the first semester. That’s why it makes sense to focus on the so-called EPRA earnings, which is a metric that’s pretty similar to the FFO calculation in North America. As you can see below, the starting point of the EPRA earnings is the almost 157M GBP in net profit, but the impact of the revaluation of the properties is isolated. This results in an adjusted profit of almost 49M GBP and after also deducting the impact of the change in the fair value of the lease liabilities, the adjusted EPRA earnings were 45M GBP. An additional 1.4M GBP correction was applied to take the impact of share-based payment charges into consideration.   Safestore Investor Relations As the image above shows, this resulted in an adjusted diluted EPRA EPS of 21.2 pence. The basic EPS was approximately 20.7 pence. On an annualized basis, this represents an underlying EPS of approximately 41.5 pence per share, applying a 75% occupancy. That being said, Safestore is quite optimistic about its potential earnings growth. As you can see below, the REIT expects a negative earnings growth result in both 2024 and 2025, but anticipates lease renewals and the gradual completion of the development pipeline will start boosting the EPS from 2027 on. The Q3 trading update already showed a higher revenue and it will be interesting to see if Safestore will provide more color on its expectations for FY 2025 when it puts out a Q4 trading update in November.   Safestore Investor Relations As you can see above, the company anticipates a substantial EPS increase kicking off in 2027, and by 2030 the total impact should be north of 10 pence per share on an annualized basis. The starting point of the equation won’t be this year’s result, but is anticipated to be a 10.2 pence boost compared to the FY 2023 result of just under 47 pence. This means the implied EPRA earnings guidance for 2030 (or perhaps the subsequent year) comes in around 57 pence. And that includes the anticipated negative impact of the interest expenses going forward. The total required capex to achieve those growth numbers is approximately 170M GBP. As shown below, a substantial portion of the additional storage space will be created in the London and Paris areas. As shown below, approximately 1.15M square feet will be delivered in 2025 and 2026.   Safestore Investor Relations The focus on London and Paris isn’t a surprise as the average rent per square foot is for instance twice as high a sin in the Netherlands (highlighted below).   Safestore Investor Relations So the earnings are resilient and the REIT is still growing; those are positive factors. But I, of course, need to have a look at the balance sheet again. Fortunately, British REITs have the tradition of maintaining a low leverage ratio, and Safestore isn’t any different. As of the end of the first semester, the REIT had an LTV ratio of just under 26% at an average effective interest rate of 3.77%. The balance sheet contains 3.12B GBP in assets, with 2.84B GBP in investment properties and approximately 114M GBP in assets under construction. The cash position was almost 14M GBP. The current debt is 44M GBP with an additional 728M GBP in debt with staggered maturities, as you can see below.   Safestore Investor Relations As shown below, the properties were valued at an exit cap rate of approximately 5.4% and assuming a stabilized occupancy ratio of 89.4% (that’s higher than the current occupancy ratio).   Safestore Investor Relations Considering the risk-free interest rates are coming down, I’m moderately okay with using a 5.4% cap rate, but even if you’d use a 5.75% or 5.8% (self-storage facilities tend to have relatively low cap rates), the impact on the Net Tangible Assets per share would remain manageable. My bigger issue is with the assumption of an average occupancy ratio of close to 90% as Safestore is very far off that number with an average occupancy of around 75%. As you can see below, the total Net Tangible Assets per share (using the EPRA guidance) is 1003 pence, and excluding the deferred tax liabilities on the revaluation of the properties, the net assets are 935 pence per share.   Safestore Investor Relations At the current share price of 843 pence, the stock is currently trading at a discount of approximately 16% to the EPRA NTA per share. Investment thesis Safestore is an interesting REIT as, although I’m not 100% convinced of the demand for self-storage space in Europe and considering the REIT’s current occupancy ratio is substantially below the assumed stabilized occupancy, the growth profile of this self-storage REIT remains interesting. Given all these elements, Safestore may still be a ‘buy’ and a bet on the self-storage industry gaining ground in Europe. The dividend was 30.1 pence last year (subject to the 20% UK dividend withholding tax) and that’s an attractive yield for waiting for the earnings to increase.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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