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Safer than houses: Stor-Age Property Reit

Up 43% over five years, and ticking many boxes.
Hardly expensive, considering what an investor is gaining exposure to. Image: Supplied

About five years ago I pointed out that the local commercial property sector – that is, real estate investment trusts (Reits) – in South Africa was heading for trouble (see Part I and Part II).

I would have preferred to be wrong, but, and in no small part helped by the pandemic, this has played out as expected and almost every single Reit on the JSE has been a disaster of an investment.

Almost every single Reit….

Enter Stor-Age Property Reit, which is up 43% over five years while most other Reits have halved over this period.

With an internal management committee and tech-enabled platform, Stor-Age services 71 self-storage properties with 448 600m2 gross lettable area (split about two thirds in South Africa and one third in the UK). This portfolio offers thousands of individuals and small- and medium-sized enterprises (SMEs) flexible self-storage space, often conveniently located, and collectively handles enquiries, new leases, renewals, escalations and terminations.

In fact, the Reit’s internal platform is so good that the Reit also earns management fees for managing third-party self-storage properties and, indeed, has entered into a joint venture in the UK to do this for a large property fund.

Focus

Besides the impressiveness of Stor-Age itself, the group’s exclusive focus on self-storage property also means it has enjoyed the positive fundamentals in this niche market – most notably that self-storage the world over is highly defensive.

Most humans cherish their possessions, thus when life conspires to put these items at risk (due to, for example, downsizing, divorce, death, global pandemics and other such life-changing events), many people seek out temporary self-storage as a quick, easy place to store their possessions.

Similarly, SMEs rent self-storage space as a cheap, flexible extension of their space requirements.

Finally, Stor-Age is piloting a last-mile solution for e-commerce deliveries from its predominantly well-positioned urban properties.

Read:

Using Growthpoint Properties and Redefine Properties as stalwarts of the domestic Reit sector, Stor-Age looks pretty good against their recent operating performances with less debt, positive rental reversions and a relatively attractive yield.

Both Growthpoint and Redefine hold more traditional property portfolios (such as shopping centres, offices and industrial) than Stor-Age. Thus, while illustrative on JSE-listed property options, the above comparison to Stor-Age is not fair on these two larger, older Reits.

Global comparisons

Stepping further afield and outside of South Africa, how does Stor-Age compare against the major globally-listed pure self-storage Reits?

Stor-Age ranks quite nicely against these global peers. The Reit’s rental growth is best-in-class while its yield appears attractive.

In many instances, Stor-Age is also less geared than the peer group.

While an argument could be made that Stor-Age’s South African/emerging market exposure makes this higher growth rate and lower valuation justified, we must not forget that one third of its underlying property exposure lies in the UK.

If we assume that the market is valuing the Reit’s UK portfolio at the global average yield of 3.6%, this implies that the market is pricing the South African portfolio at a yield of around 10.3%.

This 10.3% yield is seriously attractive when considered against a South African 10-year government bond rate of 9.3% and the SA Property Index’s yield of 6.5%, particularly when, in Stor-Age’s case, the underlying cash flows are actually growing.

At first glance, Stor-Age appears fundamentally better than many (if not all) of the other JSE-listed Reits.

Furthermore, when viewed against the global and domestic alternatives, the Reit is hardly expensive considering what an investor is gaining exposure to.

Finally, while the last couple of years in property have revealed that houses may not be all that safe, Stor-Age Property Reit could be considered relatively safer.

Keith McLachlan – Investment Officer at Integral Asset Management

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10.3% yield? That’s probably close to the annual increase they charge on renting their units. Storage and life insurance increases make a mockery of the official inflation rate.

Absent from article is mention of share issue dilution effect upon last dividend, dividend down on previous year, and that was in spite of nice lift from a weak pound to rand exchange rate during pandemic. Since then the rand has strengthened from over R23 to the pound to circa R20 to the pound, so that’s gonna seriously knock those UK earnings – holders of the stock are in for a bit of a disappointment when next results are announced…

Unless if my Maths is upside down, but the share prices above are all dropping while RMH is going up and up until at least end of May

Best property share is Sirius always strong and paying a decent dividend.

As always, Keith has done an excellent analysis of the company, including a comparison with global peers. He purchased Storage in his small cap fund, which is highly focused and includes no more than 10-15 Holdings, well before the pandemic. His comments above are therefore very pertinent, since he has clearly got this one right!

End of comments.

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