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

Thank you for standing by, and welcome to the Shurgard Interim Results H1 2020 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Caroline Thirifay. Thank you. Please go ahead, ma'am.

Thank you, Alissa. Good morning, everyone. Thank you for joining us for the H1 2020 results and update on COVID-19 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 fact 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 a press release and an audio webcast replay of this conference call on our shurgard.eu website. With that, I will turn the call over to Marc.

Thank you, Caroline. So good morning, everybody. Very happy to share with you our H1 results and Q2 update. So first, I would like to take this opportunity to thank our employees for their commitment and engagement during this part of the year; secondly, our shareholders for their support; and last but not least, for our customers, the way they have been so loyal to us. So if we jump into the numbers of H1, the first thing is, first, it's a great semester. If you look at -- and why is it the great semester due to the growth of the revenue total company, 5.2% for the half year, at the same time, we have been able to produce a growth of our operating profit, so-called NOI by 5.5%, and this has been supported by our same-store pool. The same-store pool grew by 3.8% in terms of revenue, and this revenue growth was actually based on the growth of the occupancy. The average growth was actually 0.9% versus the previous year for the first half of the year, and reaching an occupancy average of 88.1%. On the top of that, costs have been well controlled, and the NOI growth of the same-store have been able to grow the margin by 0.5 percentage points to reach 61.9%, almost 62%. If you back to the total company, of course, due to this operational growth of revenue and income, the EBITDA grew by 8.8%. Our earnings, so-called adjusted earnings, grew by 7.6% for the whole half of the year which is really great. And meanwhile, we have been able to increase and to enlarge our portfolio, so-called expansion portfolio, and now this portfolio is reaching 8% of our total footage, almost 100,000 square meter, for an asset value of EUR 200 million. If we go -- and here, I'm on Page 3, if we go to what we call internally the COVID quarter, which is Q2, performances have been great here, too, and in line with actually Q1. We have been able to grew the total -- to grow, sorry, the total company by 5% on that quarter. The NOI has been able to grow at the same time by 4.6%, and on the top of that, we have been able to complete an acquisition in Munich under the brand ZeitLager in mid-May 2020. So we are talking about 4 properties with more or less 12,000 square meter in total for a purchase price close to EUR 33 million. And knowing that this acquisition has been done really in extraordinary circumstances, we were really in the -- still in the COVID. So it was not easy to do that, but the teams have done a great job, and they have done it. And again, the same-store grew significantly with a growth of 3% for the revenue. And again, based on a volume effect of the occupancy, the average occupancy has been able to reach 88.3%, which is 0.9 percentage points higher than the quarter last year, which is very good. At the same time, we had a decrease and a deceleration of the growth, if you prefer, of the in-place rent. So we are on the quarter at 1.8%, while Q1 was 3% growth for the rental rates, and this is coming from 2 factors. The first one is that we have done some temporary additional discounts to push the business up. And secondly, we have postponed the regular increases that we are applying to our customers -- long-term customers, so people are -- that are with us for more than a year, and this has been postponed to Q3. At the same time, the payments have been actually always been under control. So it's -- for us, it's not an issue. Then if we go to -- and I will go to Page 4. And after these operational performances, let's have a look on the balance sheet KPIs. The first one is the cash. So to remind you, we ended Q1 with a cash position of close to EUR 200 million, EUR 192 million, especially -- specifically. And then this quarter at the end of Q2, we ended at EUR 136.6 million of cash due to, of course, the payment of the dividend of H2, plus the fact that we have acquired some companies, and that's why the cash has declined. But we still have a significant amount to be invested in order to develop our capital deployment. And we still have this EUR 250 million revolving credit facility available for acquisition. Our leverage is low. I will not go through the details. But globally, the net debt over EBITDA is 3.6x, so -- which is pretty low at the end of June. So based on these performances of the half year, the Board has decided to pay a dividend of EUR 0.49 a share, which is an increase of 8.9% versus the same period of last year, H1 '19, and this payment will be done early October. And after these great numbers, I turn the presentation to Jean.

Thank you. Thank you, Marc. Let's now have a look at our financial performance for the first half of the year. Our real estate operating revenue for the second quarter and the half year grew respectively by 5.2% and 5.4% at constant exchange rates. The increase is mainly driven by our same-store performance. Our net income from real estate operations in the first half of the year grew by 5.8% at constant exchange rate to EUR 81.2 million, and the margin improved by 0.2 percentage points to 61.3%. Our G&A went down as a result of lower development costs and less irrevocable [ VAT ] expenses. Our EBITDA improved by 8.8% at constant exchange rate and by 8.5% at actual exchange rates. Finally, our adjusted EPRA earnings at EUR 54.7 million, grew by 7.3% at actual exchange rate and by 7.6% at constant exchange rates. Our H1 results showed a strong performance in Q2, only delivered a slightly lower performance than Q1, demonstrating the resilience of the business. Moving now on the next slide, on Page 6. Our current operating results at constant exchange rate for all stores and by segment continue to demonstrate our ability to grow the top line while leveraging our platform to deliver economies of scale. As a result, our income from property grew by 5.5% to EUR 81 million for the first 6 months. Our same-store -- all developed stores in operation for at least 3 full years and at least 1 full year as of January for the stores we acquired. We report a strong revenue performance of our same stores, up 3.8% to EUR 127.8 million, driven by occupancy and average in-place rates. The average occupancy at 88.1% went up by 0.9 percentage points, while in-place rates grew by 2.2%. Same-store NOI margin improved by 0.5 percentage points to 61.9%. On Page 7. Our 3 levers of growth are contributing to the 5.2% revenue increase at constant exchange rate and a 4.9% increase at actual exchange rate with the same stores and the acquisition of 7 stores during the second half of 2019 and the first half of 2020 being the biggest contributors in this increase. Our operating expense for all stores on Page 8 went up by 4.8%. The main drivers were repairs and maintenance with some timing impact, our real estate taxes, as anticipated. Our [indiscernible] full expense went up mainly in our acquisition stores as we did some cleanup. Our collection rate was barely impacted with June collection rate at 96.9% versus 97.2% for the same period last year. Our cost of merchandise sales went down, reflecting the loss of revenue in Q2 relating to confinement measures in some of our markets. On Page 10, the NOI increased -- sorry, on Page 9, the NOI increased by 5.2% at actual exchange rate and by 5.5% at constant exchange rate. The incremental revenue growth of the same-store is dropping to the NOI, demonstrating once again the scalability of the platform. Moving now to our cash flow on Page 10. We invested EUR 93.8 million in acquisition and development of properties. The cash outflow from financing of EUR 56 million reflected our payments of dividends and interests. Finally, on Page 11, we continue to show a very solid balance sheet ready to support our growth. When compared to December '19, our investment property increased by EUR 187 million due to favorable fair value revaluation in new properties. Our cash went down to EUR 136.6 million as a result of our investments. Our debt is stable at EUR 600 million and consist of a U.S. private placement euro-denominated fixed rate with maturity status between 2021 and 2030. In addition, we also have EUR 250 million undrawn revolving credit facility maturing in 2023. Finally, our EPRA NAV grew by 5.6% to EUR 2.4 billion, and our LTV remains conservative at 18%. I will now let Marc take you through our development pipeline.

Thank you, Jean. So regarding the pipeline, the key elements to remember, despite the fact that it's pretty massive, as I said, 8% and EUR 200 million, we have 3 steel properties that were supposed to open in 2020, that will be postponed in '21. So the total opening of this year will be, for the time being, 3 new properties, 1 in Berlin, 1 in London and 1 in Paris, and the 3 others are postponed. Which means that '21 will face actually the development of 8 new properties, and of course we are starting already to work on '22. But we will come back about that in the coming quarters. Then if you go to Page 13, just a little update on what happened. I will not be very long on the details because we already expressed that during the different calls and the press release that we have done. I would say that the key elements looking forward due to this COVID impact are the following: the first one is that during the COVID period, we have experienced much less move-outs than the previous year. So this, let's say, backlog of move-outs should take place at a certain moment. So what we are experiencing for the time being is not at all a massive wave of additional move-outs. It's more the reverse. And -- but we're anticipating them to take place in the coming quarters. To give you an idea, this total number of move-outs to be at the same level than the previous year should be 1.5% of our global occupancy. Secondly, the other point to remember is that, as I explained previously, we have not increased our customers, long-term customers, if you prefer, so people that are with us for more than a year during Q2, and this has resumed actually from June until August for all the markets. So you should see a catch-up here during Q3. So then if you go to the conclusion, I would say that the first point is clearly a very strong performance of the company in H1, and it's not a very strong Q1 and a weaker Q2. It's both quarters doing very well on the top line and the bottom line. Secondly, showing that the company is extremely resilient during this very particular situation. Thirdly, we have been able to continue to develop our pipeline significantly. Meanwhile, we have done 2 acquisitions, 2 properties in Paris and 4 in Munich, so 6 additional properties. And meanwhile, we're expecting to see the same-store revenue growth for Q3 to be between 1.5% and to 2.5%. And up to now, the trajectory that we have for our revenues total company up to July are in line with our guidance, meaning 4% to 6% per year. So thank you very much for your attention, and I will turn to Caroline.

Thank you, Marc and Jean. Now we open the line for your questions.

[Operator Instructions] We have our first question from Max Nimmo with Kempen.

Just one, if you could give us a bit of an update on how you see the market in terms of any distressed operators that might be coming to the market. I mean everyone's talking about COVID accelerating trends. And I'm just wondering, is that pushing more operators into distressed positions that could be potential takeout targets for you guys.

Thank you, Max. So Marc speaking. So thank you for the question. Actually, I think it's a bit early. I think that what we are seeing is that there is clearly -- we are talking to more people that when that -- if I compare the discussions we had last year at the same time. So probably, some people are starting to think of maybe going for transaction, which was maybe proportionally not as important last year than this year. So this is probably the result of this COVID crisis. Is it already becoming transaction? No. So I think in the coming quarters, we might see that.

Your next question comes from Daniela Lungu with First State Investments.

I just wanted to pick up on your rate increases where you said from June, in Netherlands, that's in the presentation. July in the other markets. Are you able to give us a sense of how much rate increase you're putting through? And if there are significant differences by countries? Or at least a range, if you can't give us specific numbers? And then follow-up to that. Have you seen an immediate reaction or notices of customers wanting to leave as a result of this -- of these rate increases? I appreciate it's just only a few weeks of the rate increase. But if you see any impact?

Okay. Thank you, Daniela. Marc speaking again. So no -- regarding first, usually, the range of increase. So we don't give it specifically per country. But globally, we have met a couple of times. And globally, the impact of these increases are going from 3% to 5% on the total portfolio same store. And of course, resuming them by June, as you mentioned in the Netherlands and then in the other countries in July, we see, of course, quite quickly a take on our revenue. And so to catch up what we have not increased during Q2. That's, of course the, I would say, the first effect. The second one, we have not seen at all an acceleration of the move-out due to these increases in any country, and therefore, we are completely, for the time being, in line with what usually we call this the retention curve. We have not seen any acceleration, as I mentioned, or even per country, it is very stable and in line with what usually we have after this kind of increases.

Okay. Can I ask another one? On the delay for the projects that we're supposed to deliver this year, the 3 ones postponed. Can you give us more detail on that? Is it because of construction delays? When we're they supposed to deliver? Was it towards the end of the year? And how long are they going to be? 2 months? 3 months? 6 months into next year? So just a little bit of detail around that, if it's possible?

Yes, sure. So if there have been -- so I will start with a global view of the 3. Actually, it was clearly the constraints of having workers on-site to work. You know that certain countries, especially France and then the U.K. went for quite stringent lockdown with the phasing, which was not the same. And if I take France, for example, our project of Argenteuil was supposed to open actually in December, and we had here a postponing period of more or less 4 to 5 months. I think we will open on H1 -- at the end of H1. So that's the first one. The second one, if I take the U.K., Barking was supposed to open in December, and here, Barking will open also, I think, in May or June. So it's due to the fact that less workers and different conditions for working, the fact that people have to wear mask, the fact that they cannot be close. So obviously, it's slowing down the process of construction. And the third one in Germany that is Reinickendorf that it was supposed to open in December. This one should be able to open probably in January or February. The postponing is slightly different. And we might have a good surprise with this one. But for the time being, it's planned for Jan/Feb.

Your next question comes from [ Frederic Raynard ] with Kepler.

Do you hear me?

Very well.

Okay. I've got 2 questions, actually. One on the performance of the nonsame store. I was wondering if you see any slowdown in filling up, in fact, 2 nonsame-store pre -- post COVID, I would say. And if there is a significant discrepancy versus your initial budget pre-COVID? That's my first question. And I will come back after number one.

Yes, Frederic. Jean speaking. I'll take that question. We haven't seen any significant impact on the new stores. The ramp-up has been in line with our expectation. I mean as you saw as well on the same-store, our occupancy actually is better and has grown faster than last year. So we see the same trend on out new stores as well, and no significant impact on the new stores that have been opened.

Okay. And then another question on the valuation of the portfolio. I got the impression that some portfolio across some countries were negatively revalued while other rents were positively revalued. For instance, in Belgium, I think the total ramp-up more than 5%; and in the U.K., it was down more than 2%. Can you give more color on this? Is it due to the market?

Yes. In our case, we have been positively impacted by revaluation. So [ cash ] [indiscernible] decreased the cap rates overall. And that's pretty much across all countries where we operate.

Okay. So there is no negative revaluation in the U.K.?

No. The U.K. was pretty much stable.

[Operator Instructions] Your next question comes from Andrew Gill of Jefferies.

Just in the developments going forward in acquisitions. In your 3 levers for growth, you've adjusted your expected NOI yield for new openings and acquisitions from 8% to 10% to the low end at 8%. Could you describe the drivers for lowering this estimate, please?

Well, we don't see, to be frank, any change there. So we still target this level of yield.

The question was, like, are we moving more towards the 8% than the 10%?

Yes, yes, yes, exactly.

Well, here, clearly, it depends. If we look at the -- if I take the new openings, block 2, for example, on the presentation that you have. So new developments, properties that we are opening. If I look at some project that we have in different cities, we are in the middle of the range of 8% to 10%; and others, we are closer to 8%. So really, it depends on the, Andrew, on the site. And if I go to then acquisitions, same thing here. It depends on what we buy and what we're able to deliver. I don't see a global trend of all the acquisition going to 8% for example, and same thing for the development. It's still quite mixed between 8% and 10%.

Okay. So broadly, you haven't made any significant changes there in your [ expectation ]?

As of now, no. No, no.

[Operator Instructions] We have a follow-up question from Daniela Lungu with First State Investments.

Hello?

Can you hear me?

Very well.

I think I was talking to myself. Sorry, I was on mute. Just on EPRA's new definition of NTA, the net tangible assets, I think some companies are -- that we've seen reporting so far are adding the real estate transfer tax to that definition, to NTA, others are not. Just putting them onto the net replacement value, and I think there's still a little bit of a controversy whether it should be or not. So I was wondering if you can walk us through your rationale of adding it there. And apologies, I haven't been able to read the whole press release just yet. Maybe the explanation is there. But if you can give a bit of explanation, that would be great.

I think I'll need to get back to you on that one, Daniela, if you don't mind.

Okay. Yes, sure. No problem.

It's a bit technical.

I will come back to you, Daniela.

[Operator Instructions]

Thank you all for joining us today. We look forward to reconnecting with you soon.

Thank you.

Thank you for attention.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.