On December sixth, I submitted an article, “Deep Value Hidden In The Shares Of Global Self Storage”. Therein, I identified that Global Self Storage (NASDAQ:SELF) has introduced an extended file of outperforming the business by way of identical-retailer income progress, identical-retailer NOI progress and AFFO progress, quarter after quarter. This has been largely attributable to 3 essential natural components:
- A splendid income price administration program which drives combination income progress in a disciplined and quantitative method.
- Avoidance of markets topic to oversupply challenges and focus upon these beneath-served secondary and tertiary markets with higher return prospects.
- Effective price administration.
Moreover, SELF’s expansions of present services (Merrillville and Bolingbrook) have been extremely rewarding by way of AFFO accretion. With a ratio of Total Liabilities to Total Capital at 36%, SELF stands properly beneath the business common of roughly 55% and will simply accommodate extra debt. In addition, the dividend protection ratio has reached the business common throughout Q3. It turns into evident that SELF’s administration has developed a platform that may be utilized over and over to boost worth inside a fragmentary market.
On January 24th, I submitted an article, “How Do Embedded Cap Rates Affect The Values Of Your Self-Storage REIT Holdings?, Part IV. In that (together with the three previous articles), I demonstrated the distinctive mathematical benefit for SELF in leveraging economies of scale inside the self-storage business. With the initially greater ratio of General and Administrative Costs to Total Assets already constructed into market’s discounting of the stock worth, there exists a pure path to FFO progress (and market worth accretion) that’s merely not accessible to the bigger members of the business. An incremental funding in an acquisition by SELF may have a disproportionately favorable end result, all else being equal, relative to the bigger entities within the business. This happens as a result of the market has already accounted for SELF’s preliminary economic system of scale drawback that resides in a “liquidation inhibition legal responsibility”. This is a part of the reason for the massive low cost to NAV that the stock trades at. As the ratio of G&A to Total Assets declines naturally with acquisitions, so will the proportion of the invisible legal responsibility to complete belongings. Examining the graphs within the articles, the reader will see how very delicate is the worth appreciation for increments of scale.
Hence, there are two components working to the good thing about SELF with favorable acquisitions:
- The properly-developed and confirmed administration mannequin that has routinely generated natural (identical-retailer) progress charges properly above the business.
- The inherent mathematical benefit it possesses as economies of scale start to be integrated.
Great Things Ahead for Global Self Storage Investors
See the announcement accessible on the firm’s web site: “Global Self Storage Establishes $10 Million Revolving Credit Facility”. CEO Winmill states:
“For the past two years, we have successfully grown the business organically, primarily through our revenue rate management program and the expansion of existing properties. Our focus remains to identify and acquire properties where we believe that our management techniques and innovations can strengthen our portfolio… we are now in a position to capitalize on the fragmented self storage industry… where we have established a strong track record of industry-leading revenue and net operating income growth.”
It is essential to grasp the proportions right here (in gentle of the December sixth article above). See the Q3 10-Q for SELF. There, SELF has complete belongings at $58.9M and complete debt at $21.30M. The addition of $10M to each debt and belongings produces a complete debt/complete asset ratio of 45.4%, nonetheless considerably beneath the business norm at round 55%. Next, adjusting for the $0.9M on account of Tuxis, there’s presently $2.52M of money. The extra $10M renders complete liquidity of $12.52M, or 21.3% of the entire present asset base. Hence, there now’s substantial useful resource for growth. This might symbolize solely two or three extremely selective acquisitions for SELF. Please assessment the primary desk of the December sixth article cited above. To attain the identical proportioned growth (21.3%), CubeSmart (NYSE:CUBE) would want to amass about 342 extra services. Furthermore, by advantage of the mathematical logic defined within the January 24th article, the web end result for the CUBE shareholder would pale as compared with what could be realized by the SELF shareholder as a result of inevitable relative acquire in economic system of scale profit, even IF the ponderous acquisition could possibly be virtually applied by CUBE.
A portion of this $12.52M will doubtless go to the 16,500 sq. ft. Millbrook growth. As was explicitly calculated within the December sixth article, this growth alone might finally increase AFFO by 16.9%!
However, most uplifting for the SELF shareholder is the irrational market pricing. In spite of all the knowledge asserted above, SELF’s market worth is discounted as follows (see the December sixth article):
- Discount of 41%, primarily based on yield
- Discount of 36%, primarily based on Price/FFO
- Discount of 53%, primarily based on Price to NAV
(Note that these had been computed when the market worth was greater. There has been additional decline since then.)
Disclosure: I’m/we’re lengthy SELF. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Seeking Alpha). I’ve no enterprise relationship with any firm whose stock is talked about on this article.