A little over a year ago, I wrote about what a good real estate investment trust (Reit) Stor-Age Property Reit (code: SSS) is and spoke to Simon Brown on MoneywebNOW about how it may be the best Reit in the world.
My confidence remains largely unchanged, but now we have further evidence backing this view.
The only pure-play self-storage Reit on the JSE and one of only a handful of pure-plays listed in the entire world, Stor-Age has released a strong operational and trading update for the 12-month period ending 31 August 2022:
- In South Africa, overall occupancy rose by 2% year on year (y/y); strong (like-for-like) rental growth of +6.7% was enjoyed; and the Reit’s development pipeline is looking healthy; and
- In the UK, overall occupancy also rose, by 1.3% y/y; extremely strong (like-for-like) rental growth of 10.8% y/y was experienced (my best estimate is that the rand strengthened by around 5% against the pound over this period, thus there is still a real rand growth of around 5% y/y from this regional segment); and the development pipeline also looks good.
Mature self-storage properties have large collections of small short-term leases – typically monthly – that allow for quick upwards repricing in a high inflationary environment, as we are currently experiencing.
A top-class operator with a well-equipped internal management company such as Stor-Age, can extract significant economic value by real-time trading in lease churn – seeing lower-priced old leases leave and replacing them with higher-priced new leases – while pushing strong escalations into existing rentals.
Hence, the amazing like-for-like rental growth reported in its trading update.
‘Wonderfully’ defensive, high free cash flow portfolio
Combine the above inflationary hedge characteristics of self-storage rental income with its properties’ relatively low maintenance capex requirements and you get a wonderfully defensive, high free cash flow property portfolio.
Despite this great performance and almost flying in the face of the above super-defensive economics, Stor-Age remains quite lowly valued by the market.
As the following graphs show, Stor-Age’s share price isn’t just trading at a dividend yield that is one standard deviation above its five-year average (which is 7.9%x, while SSS is currently at 8.4%) – it is trading well below one standard deviation lower than its five-year average price-to-book ratio (1.1x vs. 0.9x).
Well, property as an entire asset class has been under pressure from lockdowns and, more recently, from rising interest rates depressing valuations.
Maybe Stor-Age Property is just tracking the sector?
If you look globally, Stor-Age Property’s five-year average growth in dividends implies that it should be trading at multiples of book value, as opposed the discount its share price is now …
Thus, I still think that Stor-Age Property has the best of both worlds on offer to investors: it is excellent quality being offered on a low valuation.
I stand by my view as discussed a year ago: this Reit is world class. If anything, it’s now just cheaper.
* Keith McLachlan and some of Integral Asset Management’s clients hold shares in Stor-Age Property Reit.