introducing Stor-age

Chairman’s letter of welcome

A track record of delivery

Self storage is a real estate business with a significant operational overlay and therefore demands a highly specialised operations platform to successfully manage the business, particularly if the intention is to create meaningful scale and retain a position of market leadership.

Although new to the public arena, the seasoned executive team has established a track record of delivery since the founding of the business ten years ago. The business model is based on global best practice and strong networks with leading first world market peers, which is evidenced by a decade of successfully acquiring, developing, leasing and operating self storage assets.

Creating value

The remarkable growth of Stor-Age over the past decade has highlighted one of the notable features of the self storage business model, namely the low correlation between customer demand and the general economic cycle. Residential and commercial customers make use of the product due to a ‘need’ that arises in both strong and weak markets. Globally self storage has demonstrated resilience in economic downturns while also responding well to periods of strong GDP growth.

TIMELINE

Self storage benefits from higher gross rental margins and a lower operating cost structure than traditional REITs, with relatively modest ongoing capital requirements. Over the long-run and seen in the context of growing customer demand, this should translate into favourable risk-adjusted returns.

Global markets

Although self storage has a long track record in certain first world markets, particularly in the US (global leader), there are other developed countries where the industry is less mature. As management seeks to grow the fund, its opportunities are therefore not limited to South Africa or even to only emerging markets. The same social and built-environment trends that are propelling self storage in South Africa are also at play in the UK, Europe and Australia, and the board has encouraged management to continue deepening its networks in these markets where many of the self storage businesses are still privately owned.

There are around 60 000 self storage properties worldwide with over 80% of these situated in the US. Despite the 2008 financial crisis, the US industry continued to grow and last year saw $2.5 billion of acquisitions supported by around $1.15 billion in equity capital raisings and $1.1 billion of public debt issuance, with substantially more being accessed via existing credit lines, term loans and the CMBS market.

The US and other developed economies such as the UK and Australia all have their own well-established market leaders in self storage. National Storage was the first such listing on the Australian Stock Exchange in December 2013. Listed at an 8% premium to NAV, in its latest annual results to June 2015 it delivered a return of 39% to rank as the top Australian REIT on a total shareholder return basis (the A-REIT index averaged 20%). Similarly in the UK, Big Yellow delivered an average shareholder return of 15.2% per annum over the 15 years since listing in 2000. This compares favourably to the 7.8% per annum for the FTSE Real Estate Index and 4.8% per annum for the FTSE All Share index over the same period.

These results show the extent to which self storage has historically outperformed the broader property sector over a sustained period, trading at tighter implied yields and higher price-to-NAV premiums. According to the National Association of REITs, the US self storage REIT sector has only generated negative returns in three of the last 22 years to 2015, delivering shareholder returns of 20% or more in 11 of the years and 30% or more in seven. For the 15 years to 2014, self storage was the top performing REIT sector, having delivered average annual returns of 20%, 18% and 24% for the 15-year, 10-year and 5-year periods, respectively.

Financial performance

Against a background of a consistently strong performance by this asset class globally, Stor-Age has made a promising transition from a private to a public fund and outperformed expectations for the 4.5 month reporting period to March 2016. The distribution per share of 30.07 cents came in ahead of the listing forecast in the prospectus by 4.7%. Distributable earnings were R38.9 million, exceeding the listing forecast by R7.4 million (23%).

Bank debt of R129 million was in place at year end, with net debt of R119 million representing 8.7% of gross property assets of R1.37 billion. Of this debt, an average of 84% is fixed for a further period of just under three years and as debt levels grow with future acquisition activity, the company will maintain this conservative hedging profile.

Outlook and thanks

I’d like to congratulate the management team and senior staff on a successful result for the company’s first reporting period. Gavin Lucas, our CEO, has shown visionary and entrepreneurial leadership, and he has been well supported by Stephen Lucas and Steven Horton in building a business with an excellent portfolio, a robust and sophisticated operational platform and a pipeline of exciting acquisition opportunities.

Thanks also to my fellow non-executive directors who have brought their formidable experience to bear on the strategic direction and governance of the company.

Stor-Age has a clear vision and well-articulated strategy that aims to deliver attractive and sustainable returns to shareholders, to increase the scale of the business and to retain its position of market leadership. We look forward to realising these goals over the coming years and establishing Stor-Age as a valuable player in the South African listed property industry.

Paul Theodosiou

Chairman

13 June 2016