A Property Play With A Difference

Published in Company Comment on 18 January 2011

Storing boxes is a profitable business.

American-style self-storage facilities are a relatively recent arrival to the UK. But for both consumers and businesses, they offer a convenient way of storing possessions and documents, on either a temporary or long-term basis.

From a UK investor's perspective, the market leader is Safestore (LSE: SAFE), which has 118 stores throughout the UK, and 22 stores in and around Paris.

Describing itself as the UK's only national self-storage provider, it serves 41,000 domestic and business customers, employs 500 people, and has 5.2 million sq ft of lettable storage space. What's more, it continues to add new storage outlets, opening three more during 2010 -- two in the UK, and one in France. A further ten stores are reportedly in the pipeline.

Recovery

It's difficult to quibble with the company's annual results for the year ending 31 October 2010, published this morning. The contrast with the recession-hit results of 2009 couldn't be more stark.

  • Revenue up 5.7% to £89.2 million.

  • Pre-tax profit of £29.2 million, contrasting with a prior year pre-tax loss of £9.4 million.

  • Adjusted EPS up 8.9% to 8.19 pence.

  • Final dividend increased by 8.3% to 3.25 pence.

  • As at 31 October 2010, the property portfolio was valued at £687.2 million, up 6.1% since October 2009.

Additionally, rental rates were at a record £25.55 per square foot, while end-of-year occupancy was also at a record 2.94 million sq ft, up 168,000 sq ft -- and an increase of 195% over the growth experienced in 2009.

Given a fairly flat economy and a stagnant housing market, retiring chief executive Steve Williams seemed pleased, describing 2010 as "a year of considerable progress".

Property portfolio

That said, there's more to Safestore than meets the eye, and any investor will want to take a long hard look at several aspects of the business.

Most notably, Safestore is a property company, albeit one with a difference. So rental yields and occupancy rates come into consideration, in other words, as do property valuations and associated gains and losses. As fellow Fool Owain Bennallack points out, the commercial property sector is attractively unfashionable, but not without its risks and dangers.

That property portfolio valuation of £687 million is reassuring, for instance, but it's only an opinion. Likewise, talk of becoming a tax-efficient dividend-friendly REIT at some future point is just that: talk.

That said, Safestore's portfolio seems fairly solid. Roughly two-thirds of the UK portfolio is either freehold or long leasehold, with UK short leasehold properties ("short" being defined as 25 years or less) having an average remaining lease of just under 13 years. Less than half the French properties are freehold or long leasehold.

The business in France also complicates life -- both from a property valuation and management perspective, as well as exposing the company to currency fluctuations and hedging.

Debt is a factor, as well, although new (and larger) banking facilities have been negotiated until August 2013. Net borrowing (excluding finance leases) at 31 October 2010 stood at £294.0 million, little changed from the previous year, resulting in gearing of 109% -- high, but not ridiculously so.

Finally, although a well-established business, Safestore doesn't have a long stock market history -- at least, not this time round, anyway.

Taken private in a management buyout in 2003 that seemingly left some investors feeling unhappy, the business returned to the market in 2007. Trading above 250 pence at the time, the share price dipped to 40 pence in the depths of the recession, recovering to 135 pence today.

Is it a buy?

Analysts unanimously rate Safestore as a "strong buy". On balance, I think they're right.

The P/E of 11 isn't screamingly cheap, but the growing dividend provides a tasty forecast yield of over 4%. The PEG ratio of 0.2, meanwhile, places the business firmly in 'take a look' territory.

More to the point, while many property companies invest in office space or retail space -- and are thus subject to economic vagaries and the overhang of distressed properties held by the banks -- Safestore ploughs a different furrow: edge-of-town sites rented to people with a lot of cardboard boxes to store.

One for the watch list, I think.

More from Malcolm Wheatley:

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