Shurgard Self Storage Ltd (SHUR) Earnings Call Transcript & Summary

Good day. My name is Julian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Shurgard Year-End 2019 Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Caroline Thirifay, you may begin your conference.

Thank you, Julian. Good morning, everyone. Thank you for joining us for the year ending 31st December 2019 earnings call. I'm here with Marc Oursin and Jean Kreusch. Before we begin, we want to remind you that all statements other than statements of historical facts included on this call are forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected by the statements. These risks and other factors could adversely affect our business and future results that are described in our earnings release and in our publicly reported information. You can find our press release and an audio webcast replay of this conference call on shurgard.eu. With that, I will turn the call over to Marc.

Thank you, Caroline. So good morning to everybody. I'm very happy to share with you our great numbers for this first full year of being a public company, meaning the year '19. So I'm on Page 2 of the presentation. So if you look at globally, what happened in '19. First, we have been able to grow the revenue by 4 -- 5.4% all store, all company, which is a good achievement. This has been supported by a same-store growth of 2.2% at constant exchange rate and with a clear acceleration quarter after quarter. On the top of that, we -- and I would come back to that later with more details. The pipeline has been able to grow very significantly. And the earnings also to grow. In the end adjusted EPRA grew by more than 8%. Which means that globally, we are perfectly in line with our guidance. So if you go to Page 3 and detailing a bit with numbers, talking about the financial performance of the full year versus the guidance. As I mentioned to you, we grew the revenue by 5.4% total company. At the same time, what we call our NOI, so our net operating income grew by 6.6%, so a bit faster than the revenue. So again, the scalability of the platform. And the same store, at the same time, the same store grew by 2.2%. And if you look at the NOI margin, we have been able to raise it by 0.4 percentage points. Then the EBITDA grew by only 3.2% due to negative impact of a one-off, mainly tax in '19 and a base comparable in '18. But however, the delivery of our adjusted EPRA earnings has been able to be EUR 107.3 million, which is a growth of 8.7%. And there is -- of course, we are mentioning also our Q4 numbers on the top of the full year. Then you see that the property revenues all store, meaning the total company grew by 4.3%, which is lower than the year-to-date, which is normal. But if you recall, Q4 last year, in October, we acquired ABC, so a portfolio in London and also Kensington, meaning that the comparable base is now achieved in Q4, at least at the end of Q4. But what is also -- and the NOI has grown by 2.6%. That has been also impacted in Q4 by this one-off tax. Then if you look at the same store, what is interesting, the same store grew by 3.6% for CER, so constant exchange rate for this period of the year. But if you look at the pattern of the different quarters, same-store growth, Q1 was 1.2% growth of the revenue versus the previous year. Q2 was 1.4%. Q3 was 2.8%, and this quarter is 3.6%, so you clearly see a great acceleration of our performance, and Jean will come back in detail per market. Then if you look at the NOI of the same -- sorry, the all store NOI, we grew by 2.6%. This would have been 3.6%, excluding, as I mentioned, this real estate tax accrual that we did for France on Q4. And same thing for the EBITDA, the EBITDA has been negatively impacted by this one-off that are corresponding to the years 2016, '18, 2019. And the EBITDA, excluding this would have grown by 6.6%, which is a pretty good performance. If you flip the page to Page 4, talking about more the financing, so cash and debt. So we have invested EUR 73 million during this year '19. We still have EUR 250 million facility, I mean, this revolving credit facility on hand that has not been drawn at all. And we still have, of course, our long-term funding in place, and Jean will come back to that. If you look at then the level of debt, so LTV-wise at the end of the year, we are close to 17%. And this expressed as a net debt over EBITDA to the multiple, we are at 3.3x the EBITDA if you look at the net debt. The cash position is slightly below EUR 200 million. It was EUR 250 million in 2018. And so we have been able to consume a part of that cash. If you look at the dividend for the year '19 actually, this dividend is based on, first, on the half year of EUR 0.50 a share for the second part of the year. And in total, for the full year, we are around, so at EUR 0.95 per share, which is expressed as a dividend yield of the closing of '19 of 2.8%, which is close to the 3%. And if you take the average, actually, stock market price for the whole year, we are reaching a yield of 3.18%. So that's in a nutshell what happened in 2019, great numbers, great year. And I really am very happy with what the team has been able to deliver. So now, Jean, I'll let you go through the different tables and slides.

Thank you, Marc. I will now on Page 5, take you through our strong 2019 financial performance. Real estate operating revenue grew by 5% at actual exchange rate and by 5.4% at constant exchange rate to EUR 257.1 million. The bulk of the increase comes from the growth of our network, mainly coming from the acquisitions we did in 2018 and 2019 and an increase in storage rental rate in our same-store portfolio. Our net income from real estate operations margin increased by 0.6 percentage points to 63.5%. The improvement was driven by our operational efficiencies at store level, the impact of the IFRS 16 accounting change and the performance at least of our acquisitions. Our G&A went up for the quarter as a result of one-off real estate tax provision [Audio Gap], and a gain in 2018 in share-based compensation due to a change in accounting treatment. For the year, the increase is mainly due to costs relating to being public for a full year and increased net development cost following the expansion of the development team in 2018. After some one-offs relating to acquisition, the IPO and proceeds relating to insurance cases, our EBITDA improved by 7.7% at actual exchange rate and 8.3% at constant exchange rate. Finally, our adjusted EPRA earnings at EUR 107.3 million, grew by 8.1% at actual exchange rate and by 8.7% at constant exchange rate as a result of our improved operational performance and a favorable current tax income, which went down to 14.4% from 16.4% in 2018 as a percentage of our adjusted EPRA earnings before tax. Moving now on the next slide on Page 6. If we look at our country by country performance, for the same-store portfolio. In our 2 largest markets, the Netherlands and France, we had a very strong fourth quarter, driven by higher in-place rent and good occupancy performance. In Sweden, at constant exchange rate, we saw revenue growth accelerating in Q3 and Q4, driven by in-place rent growth and a stabilized occupancy. In the U.K., we continue to see an acceleration of our revenue growth at 6.4% for the quarter when compared to last year at constant exchange rate, which is driven by both occupancy and in-place rent. In Belgium, the unit mix change in 8 of our 21 stores is starting to deliver growth in Q4. Germany continues to show a very strong and stable performance, while Denmark saw stable revenue in Q4, improving its yearly trends. Overall, total same-store revenue increased by 2.2% at constant exchange rate for the year and by 3.6% for the quarter. Moving on to Slide 7. Let's take a look at our current operating results at constant exchange rate for -- all done. I'm on Page 8, so Page 7. It's our current operating result at constant exchange rate for all stores by segment. With our NOI margin for all stores improving by 0.7 percentage points year-on-year, we continue to demonstrate our capacity to grow the top line, while leveraging economies of scale as we acquire and develop stores using the standardized IT and branding platform to contain costs. Our same-store definition. It represents all the developed stores in operation for at least 3 full years and all acquired stores we owned for at least 1 full year as of 1st of January. So the same-store property operating revenue increased by 2.2% to EUR 154.6 million. We had a strong finish of the year with an occupancy as per year-end of 80.7%, up 0.6 percentage points over 2018. The average in-place rent increased by 2.5% over 2018. Our NOI for the same-store increased by 2.8% as a result of the top line growth and cost control. Our new store pool grew strongly as a result of our 2018 addition through developments and acquisitions and the performance uplift. Moving now on Page 8. Our year-on-year revenue evolution growth. The acquisition and the ramp-up of 10 stores in 2018 and '19 was the biggest contributor of our 5% overall revenue growth, followed by the same-store revenue increase of 2.2% at constant exchange rates. If we look at the operating expenses for stores. Again, here, we are demonstrating the scalability of our platform, with expenses growing at a slower speed than revenue. Payrolls went up following the increased number of properties and better staffing overall. The variance in real estate and other taxes can be explained by a one-off in Q4. Consisting of a release of accrual in Q4 2018 and an accrual for local tax in France in 2019. Marketing expenses went up versus 2018 as we had more stores, but also because we have seen a positive contribution of our customer acquisition performance of our land spending. Our cost of insurance went up as a result of our renewed insurance contracts with higher deductibles. Those increases were partially compensated by the impact of the IFRS 16 on lease accounting and lower other operating expenses. On Page 10, the NOI increased by 6.1% at actual exchange rate and 6.6% at constant exchange rate. This growth had same-store growth and our acquisitions and development ramp up. We have a slight negative foreign exchange impact, mostly linked to Swedish krona. Moving now to our cash flow. Our cash from operations was stable, reflecting differences of timing in tax payment year-on-year. We invested EUR 81.9 million and the cash outflow from financing of EUR 91.1 million (sic) [ EUR 91.9 million ], reflected our payments of dividend and interest. Finally, on Page 12, we continue to show a solid balance sheet, ready for growth. When compared to 2018, our investment property increased mainly due to fair value revaluation, the addition of new stores and the adoption of IFRS 16. Our cash went down as a result of our investment and our debt remained stable. We have a U.S. private placement euro-denominated fixed rate with maturity status between '21 and 2030. Finally, our EPRA NAV grew from EUR 2.1 billion to EUR 2.3 billion, a 5.3% increase year-on-year. I will now let Marc take you through our pipeline for the coming years.

Thank you, Jean. So again, great numbers. Thank you for the details. If you're on Page 13, what you need to remember is that we have EUR 200 million of pipeline which means 100,000 square meter, which is equivalent, also, we have 17 properties that we have opened or bought in '19 or that we'll open -- or we have already bought in 2020 plus 4 that are signed and subject to permit in '21. So to me, it's a fantastic achievement compared to where we were simply 12 months ago. So it has demonstrated also our capacity to do this. Knowing that the guidance that we had given is having 5 stores to be opened organically every year from 2020 and doing M&A on the M&A side, and having 3 properties acquired to the competition. So bringing to the portfolio, 8 properties every year. And globally, these numbers do represent 8% of our net rentable square meters at the end -- or early '19, sorry. And so we are pretty optimistic for the coming year in terms of growth of this pipeline. If you go to the outlook 2020, and I will conclude this presentation with this slide. Again, the key items are the growth of the revenue, we are still with a total company growth of between 4% and 6% based on a same-store growth that is between 1.5% and 2.5%. The dividend payout is 80% of the adjusted EPRA earnings and the cash position would be clearly below EUR 100 million at the end of 2020 with the current pipeline that we have. And the LTV that you've seen that is at 17% in '19 will be above that in 2020, but still far below 35%, which is our long-term commitment. So thank you for the patience and listening to us. So now I think Caroline will take the lead.

Yes. Okay. Thanks. Yes. Thank you, Marc and Jean. Now we open the line for your questions, if you have any questions.

[Operator Instructions]

Thank you, Julian.

First -- we have our first question from Andrew Gill from Jefferies.

Your weaker markets such as Sweden, Belgium and Denmark, they obviously saw improving results through 2019. Are the early indications that these markets could provide positive growth in 2020? And I've just got a second question. Obviously, the development pipeline is focused in Germany, U.K. and France. Is this where you see the best returns in the near term, the most supply constraints? Or could we see development assets coming online in your other markets as well?

Okay. So regarding the first part of your question, Andrew, the -- regarding, so Sweden and Belgium. Yes, the markets have been performing much better if you look at Q4, 3% for Sweden versus a year-to-date of 1.2%. And if you take Belgium, it's 1.5% versus negative 0.4% for the whole year. So for the time being, we are, let's say, reasonably optimistic with this country for the outcome. So business is, I would say, in line with our expectation. Then regarding the pipeline for 2020 mainly. So you've seen that we have a couple of properties subject to permit, so 4. And out of the 4, actually, you have a couple of those in the jurisdiction and countries that you have mentioned. So 2 in Germany, 1 in France and 1 in the U.K. I would say that we expect to have a return from Germany, which is in line with the other markets, which is, France and the U.K., there is -- as you have seen, we are between 8% and 10% at maturity. This is what we're expecting to get cash on cash. So we stick to this. And the team is working hard to get other lines in these countries. So around Paris, around London. I mean, within the M25 and also in Germany.