SELF - Global Self Storage: Overlooked Micro-Cap Self Storage Play

2023-09-15 17:53:55 ET

Summary

• Global Self Storage has seen a decline in price due to industry-wide challenges, but its portfolio of properties in secondary and tertiary cities with strict zoning laws offers potential for growth.
• The company has strong barriers to entry, unique spaces, and pricing power due to its focus on areas with limited self-storage space and strict zoning laws.
• The possibility of an acquisition, portfolio expansion, and continued dividends make Global Self Storage an attractive investment opportunity.

Thesis

Global Self Storage ( SELF ) is a niche self-storage REIT which has seen its price decline by over 20% since 2022 highs and has generally traded within a small window over the past few years, due to its nano-cap and stable nature. This decline over the past year is mainly a result of industry-wide woes due to the effects of higher interest rates, a worsening economic environment, and a housing shortage, affecting consumers' ability and need to rent self-storage in many parts of the country. However, Global Self Storage has a portfolio of only 12 properties (and 1 managed property) focused not on areas with overbuilding, but in secondary and tertiary cities in the northeast, Mid-Atlantic, and Midwest with strict zoning laws and less self-storage space per capita than demanded. At SELF’s current price, they are trading at a very conservative valuation less than its Net Asset Value, and have potential for both capital growth and income.

Strong Barriers to Entry, Unique Spaces, and Pricing Potential

As stated, the current portfolio of properties and future property acquisitions are focused on areas with strict zoning laws. This inherently means that the likeliness for new self-storage properties to be built is low, along with allowing for more pricing power due to the proximity of customers with limited self-storage space being likely. One differentiator that SELF has is that it offers auto/RV/boat storage space of 65k sq ft in total of 830k sq ft across its 12 properties.

SSG Bolingbrook Property Case Example

One example of all of these advantages can be seen in their largest property located in Bolingbrook, Illinois (a suburb of Chicago).

The Bolingbrook population is one of the wealthiest suburbs in the Midwest and has a population of roughly 74,000 with nearby Naperville around 140,000 and Romeoville with 40,000. Though they likely have small cuts of these other two markets, they have proximity to the wealthiest neighborhoods in Bolingbrook and have like 80% market dominance in the third section of this most wealthy residential area. This means they likely have a 25% - 30% market share with good opportunities for storage.

Besides the Zoning being in their favor, they are right north of a large amount of commercial area, meaning the land value is likely higher. They are the farthest commercial property from industrial areas and they are at a great intersection of Boughton Road and Naper Blvd, along with having traffic from Weber Road. Their proximity to wealthy neighborhoods with strict zoning has made the investment very successful with a significantly above-average occupancy rate of 92%.

Possible Acquisition, Portfolio Expansion and Continued Dividends

As of the last quarters, cap rates for self-storage properties have begun to rise due to the effect of interest rates. Cap rates currently range between 4% and 6% and due to the suburb positioning of SELF’s properties, they could likely get a 5% cap rate for their portfolio of properties considering the average occupancy as of June 30, 2023, is 90.50% and a stabilized rent of $16.31/sq ft. Along with this, there are many costs that can be eliminated by tucking in the 12 properties into a larger company’s portfolio.

In the case that an acquisition does not occur, the company has $24.5M in liquidity (borrowing capacity + cash/investments) that it can use to purchase 1-2 new properties once rates begin to move lower, or an attractive opportunity to stabilize and renovate a well-positioned property comes along.

In the case that neither of these happens in the near future, the current portfolio of properties is very attractive and the company pays out a 5.73% dividend yield with a TTM FFO coverage ratio of 80%, and with the ability to raise rent above costs and with currently reduced occupancy (temporary industry problem), SELF is an attractive income play, especially compared to other self-storage REITs.

Financials

Global Self Storage Q2 202 3 revenues were $3.09M, inclusive of $22.5k in management income, with property-level NOI of $1.97M and AFFO of $935.7K. Due to the seasonality of the self-storage business favoring summer months due to moving, when looking on a TTM basis , we see revenues were $12.3M, inclusive of $87.7k of management income, with property-level NOI of $7.84M and AFFO of $3.88M. During Q1 2023 , though, the company did see abnormally low occupancy of 87.90% due to a combination of seasonality, home sales, and a small property expansion. These factors are not likely to be as significant in the next twelve-month period and as such, AFFO will likely be roughly $4M and property-level NOI should be at least $8M.

Shifting to the balance sheet , the company has $9.4M in cash and liquid investments and on the liability side, it has a $17.53M 20-year 4.192% mortgage due in 2036 for a $123,229 monthly payment as its only debt. Given its $15M in available borrowing capacity under a term loan agreement, once interest rates begin to lower to a sizable point, there is a good chance that SELF will buy 1-2 properties at a blended 60% LTV, likely with an interest rate swap/cap.

Peer Comparison & Multiple Valuation Scenario

As stated, the FFO for the next twelve months should be roughly $4M. At a current valuation of $56.4M, the current AFFO multiple is roughly 14x, forward-looking.

Here is how peer compares on the same multiple and also examine leverage:

Considering the leverage of its peers, SELF is clearly undervalued, but what is the right multiple considering the nano-cap nature of this company? The main disadvantage of small REITs versus large ones is fixed overhead: executives, corporate offices, & employees mainly, along with the higher cost of capital spreads. Given that these two disadvantages matter because of how they affect acquisitions assertiveness, I believe that there is still upside in that SELF should be trading in the 16x-18x P/AFFO range, or 15% to 30% of upside as of September 8th SELF price of $5.06 per share

Acquisition Valuation Scenario

In the case that we consider an acquisition of SELF by a larger public self-storage REIT or private REIT, we can simply use a conservative cap rate of 6.0% on the predicted NOI of $8M for the next twelve months. After this, we can add cash and liquid investments of $9.4M and subtract the remaining mortgage principal of $17.53M to get an acquisition valuation of $125.21M, or $11.24 per share. This represents an upside of 122% from the September 8th SELF price of $5.06 per share.

Risks

• Due to the illiquidity of the company’s shares ($115k Average Daily Volume), there is certainly the possibility that this valuation gap is not closed, though this risk is mitigated through the REIT structure requiring the distribution of income.

• In the case that higher interest rates continue over the long run, it is likely that cap rates will rise, hurting REIT valuations by increasing the long-term cost of capital

Conclusion

Though Global Self Storage at first glance may seem like just another nano cap REIT, it has upside potential, and in the likely case of an acquisition in the future, there will be significant upside as the company currently trades for significantly less than the value of its underlying properties.

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