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

Good day, everyone, and welcome to today's Shurgard Full Year 2021 Earnings Conference Call. [Operator Instructions] Please note, this call may be recorded. [Operator Instructions] And it is now my pleasure to turn the conference over to Caroline Thirifay. Please go ahead.

Thank you, Ashley. Good morning, everyone. Thank you for joining us for the full year 2021 results. 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 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. We're really happy today to share with you our great results for the year '21. So I'm on Slide 2. And let's start with the numbers, specifically high level of this year '21. All of them are at constant exchange rate. For the top line, 9.5% growth versus last year, amazing number, we've been able to keep the cost under control. That's why our NOI grew faster at 11.3%, which is a great performance from, I would say, the operations in the whole company. And this has been said also by the same-store performance, which is, of course, the bulk of our company, with a 7% growth of the top line, which is 1 of the highest ever we had, and the 7% growth of the revenue was actually based on 2 things. First, a really high occupancy. We have been able to gain 1.9 points versus last year and reaching 90.4%, and at the same time, a major increase on the rates for our existing customers to 5.3% versus last year. And of course, all of that has brought up our NOI margin for the same-store by 1.6 percentage points, which is very significant. Bottom line, we have been able to deliver an adjusted EPRA earnings of EUR 131 million, which means a growth of more than 9% over the year. And we have proposed a dividend payout of EUR 1.17 per share, which is a growth of more than 10% versus the previous year. Let's go to the next slide. So then if you look at the specific elements on the top of these key financial metrics that I've shared with you, a couple of things. The first one, we started in 2020, at the end of 2020, a commercial tool that we call the e-rental, which is a simulate actually conversion for customers. Customers can use their mobile phone or desktop and then can do the whole process online and get their contract, and therefore, go to their unit. And we had, as of May '21, all our markets, proposing this to our customers. And for the whole year, we have been able to get 24,000 customers through that line of business, which is very significant due to the fact that it's already representing 1/4 of the total contracts that we have done during the year. Secondly, on the top of this, we are accelerating in what we call the digitalization of the company. A couple of examples is the roll-out of Bluetooth access to our stores. It means you have with you your mobile phone and you get to the gate and the gates are opening right away and same thing for the building and you can get to your unit very simply. And this will be rolled out during the course of the year '22. We have also started to implement what we call BMS, which means building management system. So I would say, simply and in a way setting up and putting sensors within the building and helping us to have a better anticipation of the maintenance and the control of the property. And Jean will come back to it later in the presentation with more details than me. And I would say in terms of the highlights, last but not least, on the ESG front, after just 3 years being rated by GRESB, we have been able to achieve 5-star, which is a fantastic achievement with a score of 87 out of 100, and we became the sector leader amongst our peers, which is, I repeat, a really astonishing result. And this is the result, I would say, of the team and the whole company regarding this performance. So fantastic performance. Then if we go to Slide 4. Let's talk about development. So the physical increase of the company, so square meters, if you prefer, the year '21 has been very active. Isabelle and her team have been able to bring the level of the pipeline to almost 10% of our total footage, so roughly 120,000 square meter. And this has been achieved by, in '21, a couple of things. First, we have done 5 redevelopments. So you remember that what we mean by redevelopment is extending existing buildings that we own and we operate. And this took place in Germany, in Munich, Holland, so Gouda, the city of the cheese in the Netherlands, in Randstad, and London and Amsterdam. On top of that, we have opened almost close to 40,000 square meters with 6 properties, invested EUR 80 million in London, Randstad, Paris, and Berlin. And we have acquired 6 properties through 2 transactions in London, very Central London, actually in the Camden area, and also around Belgrade for EUR 50 million with an expected yield of maturity of 8%. How is it doing for '22 and '23. Well, we are on track with what we have shared with you guys during the Investor Day. We have 2 redevelopments that will take place in Munich and London. We have 3 projects that are currently under construction in Paris and North Rhine-Westphalia in Germany, so Dusseldorf and Cologne. And then we have 9 projects signed, so more than 40,000 square meters, again, in Randstad in the Netherlands, Paris, London and Berlin. So let's have a quick highlight on the balance sheet. So we are pretty, I would say, healthy there; very strong position. You remember that we have done the refinancing in January last year '21, with USPP, and we have currently more than EUR 200 million of cash at the end of December. The EPRA NTA, so the net tangible assets grew by almost a quarter, 23.6%, over the previous year, and I'm sure you will have some questions and Jean will come back to you on that. And then if you look at specifically the debt globally, we still have some reserve there. I mean we have the capacity to use EUR 250 million from our revolving credit facility. And on the top, we still have EUR 250 million, what you call Shelf Note Facility that we could use. And I will then come back on the USPP, that was a great also achievement and the remaining debt. If you look at then the result of that, the LTV is still low, around 17% at the end of December, which is, in a way, positioning us well if the interest rates are going up. The impact on the P&L would be quite minor. And if you look at a more operational metric, net debt over EBITDA, we are below 4x at the end of '21, with 3.8x. Then just quick numbers regarding Q4 '21 million versus 2020. Well, here, very simply, it's a great acceleration. We have seen that in Q3 versus the beginning of the year in '21. Q4 was even better than Q3. And numbers are astonishing, 11.6% on the top line. The NOI 16.5%, and we have been able also to have really great numbers for the same-store. So if we go to the next slide, which is the outlook for '22. A couple of information to be shared with you here. The first one is that you remember that during the Investor Day, we have said that medium term, we will have a run rate of the growth of the company on the top line that will be 6%, and we have decided that based on what we have seen in Q3, Q4, and the start of the year '22, actually to raise the 6% to 7% specifically for the year '22. Second, we do confirm the fact that we will have 12 more properties, which is almost 50,000 square meters in '22 versus '21, spread with 6 new properties that we are developing under construction actually currently, and 20,000 square meters coming from M&A acquisitions. An important factor also here, because we are not a REIT, is our effective income tax rate. And it's forecasted to be below 20% for the year '22, based on the adjusted earnings before tax as the definition of this effective tax rate. Then I will not go through all the details of this medium-term guidance. I think it's pretty clear. I mentioned the 6%. We still have an ambition to grow the margin by 2 percentage points and reaching this by '24 and still continue to grow every year by 0.2%. Next year, we will open and buy in the end 13 properties. '24, we go for 90,000 square meters, which means 16 properties actually brought to the platform, 10 through organic development and 6, which is 20,000 square meters, through M&A. We maintain our target of LTV that is close to 25% and express as an operational metric that is the net debt over EBITDA to be at 4x to 5x. And short term we can reach 35% if it's necessary, but the target, the run rate is 25%. And regarding taxes, the effective rate that I was mentioning for 2022, that is at 20%. It's supposed to reach 22% by '25 and should grow nicely from 20% to that number of 22% in the coming 3 years. And then regarding the dividend, as we have shared with you during the Investor Day in September, so we are having a dividend for the year 2021 of EUR 1.17 per share, which is actually a payout of 80% of our adjusted EPRA earnings, and we will keep that amount of EUR 1.17 per share for the coming years, and we will keep also the structure of payment of that dividend, which is more or less 50-50, 50%, so EUR 0.58 in October and EUR 0.59 in May. So that's the situation for our medium-term guidance. And after that, I'm happy to turn to Jean the rest of the presentation, and I will come back to you for the conclusion and your questions.

Thank you very much, Marc. So looking back at our financial results in 2021, we delivered a very strong performance year-on-year, with Q4 showing an acceleration. Our revenue total company has grown by 11.5% at constant exchange rate for the last quarter of the year, while we grew by 9.5% for the year. NOI grew by 15.4% at constant exchange rates for the quarter and by 11.3% for the year, following the strong revenue growth and demonstrating once more the scalability and continuous digitalization of our operating platform. Our NOI margin is up by 1 percentage point year-on-year at 64.9%. Our G&A expenses increased due to higher development costs as we built up our team, costs relating to the new stock option plan, some one-off expenses relating to ESG certification, and VAT refunds received last year. Finally, our adjusted EPRA earnings grew by 9.4% at constant exchange rate to EUR 131 million in 2021. On Page 10, our income from property at constant exchange rate continued to show our ability to grow the top line through our same and new stores, while leveraging our standardized and digitalized platform to deliver economies of scale in keeping the cost basis low. We ended the year with an occupancy at 90.1%, up 0.8 percentage point over 2020, while the average occupancy for the year at 90.4% was up 1.9 percentage points for our same-stores. Our same-store average in-place rent increased by 5.3% over 2020 with an acceleration in Q4 with an 8% increase over Q4 2020. On Page 11, our 3 levers of growth are contributing to the 12.5% increase in NOI with the same-store NOI growing by 9.7% at constant exchange rates and contributing EUR 16.6 million to the growth, while the acquisitions and development added another EUR 3.1 million. Moving on to the cash flow on the next page. We improved operating cash flow and the issuance of a green bond offset investments we made in new properties, dividend and interest payments. On Page 13. We continue to show a very robust balance sheet with EUR 219 million of cash, leaving us plenty of funds for future developments and acquisitions. Our EPRA LTV grew by 23.6% from EUR 2.5 billion in 2020 to EUR 3.1 billion in 2021, following positive fair value revaluation of our investment property, mainly resulting from a positive impact of higher rates and the continued compression of cap rates. On the debt side, I mentioned earlier, the drawdown of the EUR 300 million green bonds with a 10-year maturity and a fixed rate in July. We also extended our EUR 250 million undrawn revolving credit facility by 2 years to 2025 and secured a EUR 250 million Shelf USPP facility. Slide 14 illustrates the strong growth of our EPRA NTA, 45% increase since 2018. While the LTV net debt-to-EBITDA and SCR ratios underpin our conservative and robust balance sheet. Finally, as Marc already elaborated earlier on, we have a very significant pipeline at the end of December 2021. 10% of our net rentable square meters, up 1% in Q3, has been acquired, developed, is under construction, or has been signed. On the coming slides, let's now look at our move towards more digitalization of our business and a more data-driven approach will help us to make better decisions faster. We are convinced that our investment in technology is enhancing the customer experience and addressing the prospects expectations. Currently, at least 70% of our customers are reaching us through digital platforms. This is why we built a talented team that ensures a sophisticated approach towards design optimization. Our e-rental solution is clearly a demonstration of our capacity to be ahead of the game. Going forward, we will be launching a customer app, allowing our customers to access the account, but also to access the properties via their phones as we are rolling out this year a fully automated and centralized gate system. We also continue to use the information we gather through our various customer phones on how and when they use our properties to gain unit insights, improved customer experience, enhance our operational process, and streamline costs. So our expertise and integrated systems allow us to take advantage of the scale of our platform, providing us with a unique opportunity to leverage technology and use data as an asset. Ultimately, this delivers exponential value to our customers, employees and shareholders. Slide 17 illustrates the success of our e-rental offer, which as Marc mentioned, we already have 24,000 customers at the end of December, which is 25% of all our move ins. On the next page, we highlight the importance of technology to improve the overall sustainability and security of our buildings, 2 elements that are on top of mind for our customers, but also employees and shareholders. I will now hand over to Marc for the conclusion.

Thank you, Jean. So you have seen really great numbers, great projects. So let's go now to the Slide 19, and Jean and myself, we thought it was good to share with you this slide, which is a kind of wrap-up of the situation. I take also the opportunity here to thank you for your trust since the IPO, and also for your investments for the ones who are shareholders. And also your positive comments that we had along the past 3 years. So just again, in a very, let's say, short slide, these are the key points of, let's say, differentiation and also assets of Shurgard. The first 1 on the left, yes, we are a unique platform and our leadership will continue to increase. Secondly, the quality of our assets, we are in real estate here. So the buildings, 2/3 of our buildings are purpose built dedicated to this industry, and they are young, and we are the owners of them. And the platform we have since now almost 8 to 10 years is fully integrated, scalable, as we have demonstrated with our capacity to increase the margin, and we continue as a project to invest in the IT infrastructure and the digitalization. The runway of the industry and Shurgard is fantastic. I mean, the density of population in the major cities of Europe continues to go up. And secondly, we have a clear and balanced market between supply and demand, and clearly the way on which we are surfing, it's pretty big and long and powerful. Performance, I will not come back. I mean the papers and the numbers are talking for themselves. Expansion, we have a great team and people are working hard to deliver this 10% pipeline. And by the way, we are the largest by the site. And by the way, we are the 1 who are growing the fastest relatively, but also in absolute numbers in square meters, which is a fantastic achievement. M&A, we are the most active player since 6, 7 years. Vincent and his team is doing a great thing, and here the know-how that we have been able to develop whatever the size of the deals and the skills we have for the integration are really unique, meaning the speed and the capacity to plug to our systems a newcomer into the Shurgard family. ESG-wise, while we continue our road map, here we have this operational net zero carbon objective by 2030. And we have down 100% of our EPC of all the platforms, so the 250 properties, and more than 80% of them have an A rating or A+, which is also, again, the proof back of the quality of the buildings. And Brigham, we use Brigham as a referential also for all our properties. Regarding the balance sheet, well, very strong and able to be leveraged and to be played if we have to do necessary actions from it. And therefore, in the end, again, more and more reasons to continue to be a shareholder or to invest even more within Shurgard. So thank you for your attention, and therefore, happy to answer to your questions.

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

[Operator Instructions] We will take our first question from [ Michael Gillespie ] with Bank of America.

Congratulations for the results. I have the first question on the dividend and your dividend fees. I don't know if it's other, but in my understanding, the wording has changed a bit in your reports. So you're not giving the number of years black and white anymore. And when I saw this sentence saying you will continue to review your dividend policy to ensure to remain competitive. So does it mean that the dividend fees is set in stone, but there is actually some flexibility, if results were better than you expect, for instance, for the dividend to change or to be increased?

Marcus, this is Marc. Thank you for the question. So no, the text has not really changed. So the point here is just to say that, yes, we have, as you said, frozen, the dividend per share. And we keep, of course, the freedom to change that decision depending on the situation we are facing. And we know also that we are looking at the total shareholder return, which is dividend plus the growth of the earnings, and we need to be competitive. So of course, it's not forever decision. And depending on the circumstances and situation, we are able to decide some changes there.

Okay. A question on your thought on potential REIT status in some of your countries? Is there anything you started, or what are the possibilities you have for instance in the U.K. to gain REIT status?

So here, clearly, all of you do know since the appeal that we are not a REIT. We have said that many times. So obviously, we pay taxes in the different jurisdictions where we are operating, which is very logical, because we know that, for example, the REIT status does not exist in the Nordics, that is Sweden and Denmark. And conditions to become a REIT in different countries are very different, actually. So we are looking at it, and we have not yet decided what we will do. We are still studying the situation country per country. But of course, it's a real point of attention, as Marc Mozzi mentioned in his last or pre-last release, yes.

We have a question from the webcast here. Wim Lewi from KBC Securities. Why is there an acceleration of 90,000 square meters only in 2024, not earlier? What will change?

Okay. Thank you, Wim, for the question. So again, I repeat, back to the Investor Day. More or less, if you take the 90,000, which is the sum of organic growth of 70,000 square meters plus 20,000 coming from M&A, and this is the target as of '24. Actually, it's mainly coming from the organic growth. Currently, we are doing 35,000 or less; 30,000 to 35,000 a year. And we said we need 2 years of ramp-up because more or less it takes 2 years to get first a deal with a seller of land, to get the building permit, to build the property, and that's why you have this ramp-up. So if you look at this a different way, which is with a number of properties, which is maybe a bit more simple, so in '22 and '21, we were supposed to open 5 properties organically, and to buy 6 properties to competition, so 5 and 6, 11. In '23, we should have 7 organic properties, so 5 to 7, plus still 6 coming from M&A, so 13. So total company going from 11 to 13 in '23, and then reaching 10 properties organically in '24 plus 6 M&A to 16, which does represent the 90,000. So that's the plan. And of course, if we can accelerate even more in '23 of the number of stores and to be closer to the 90,000 or to have more opportunities to do M&A in '23, of course, we'll do it. No worries on that. I mean, as I said, the balance sheet is there and the skills are also there. So if we can go faster, we will.

[Operator Instructions] And there are no further questions on the phone line at this time.

We have a question on the webcast from Marios Pastou, Societe Generale. Please could you provide details of rent growth and occupancy trends in the first 2 months of 2022.

Yes, Jean speaking, Marios. We see similar trends as what we have seen in Q4 for the beginning of the year. So occupancy is relatively stable and similar trends in terms of rent growth.

Okay. We have also a question from the webcast from Andrew Gill, Jefferies. If your energy pricing hedge in the near future, are there further ways you can mitigate any increases aside from passing on higher rental increases to customers?

Andrew, this is Marc speaking. So actually 2 questions. So the first 1 regarding the energy. So no worries guys there. We changed all our contracts as of January '21 for 3 years, meaning the prices we have are blocked for '21, '22, '23 full year for all the electricity, which is 2/3 of our consumption, and for natural gas, which is more or less 1/3. There is still a portion coming from central heating, especially in the Nordics, that you have to bear. You cannot negotiate with the City Hall. You just take the cost and that's it. Fortunately, for us this is only 0.3% of our revenue. It's 1/10 of the total megawatts that we are consuming. So the impact of the potential increase on natural gas is extremely minor in our P&L for the coming 2 years, same thing for electricity. And then the second part of your question is about the increases globally. So your question is inflation. You Shurgard, how are you able to put through your top line to mitigate, in a way, the impact of increases on the cost base through inflation. So here, actually, Andrew, I think we are relatively comfortable with that. Why? We have demonstrated that we're able to increase our customers every year around 8% to 10%. We have the capacity to do that quite simply. And therefore, if inflation is really picking up in the cost base, we will be able to pass it through, and therefore, to the top line and not having an impact which is too major in the P&L.

We have another question from [indiscernible], Kepler Cheuvreux. Could you elaborate on the NTA per share growth? And what you expect for the coming year? For you, Jean?

The growth is coming mainly from rental rate increase. We have seen our rental rates going up, as you saw, and that's driving the value. So that's 1 of the elements, the most important one. The second element driving the value is the cap rate compression. We have seen also over the years the compression of the cap rates and it continues to be the case. Indeed, those cap rate compressions are also supported by acquisitions that have been happening in the sector in the last few months. So we expect to continue to see similar trends going forward as always are continuing to grow. I mean we have a rating price increase and pricing power to continue to push the rates up. And we also expect continued compression of the cap rate based on transactions that are happening in the sector. So similar trends going forward, that's our expectation.

Another question from [ Albano Lobo ] [indiscernible]. On the acquisition side, how occult is the market and how do you see cap rates evolving?

Well, [ Albano ]. The market is active, clearly. And again, here, whatever the countries, you have some stuff that could be potentially [indiscernible] the market or in certain discussions. Secondly, the pressure on the price is, yes, it's there, no doubt. Jean just mentioned that the cap rates have been compressed in '21. So obviously, the sellers are looking at our valuation, at least for the ones who are publicly traded, and I'm sure that the brokers are doing their job well, which means that looking at these numbers from us and our peers and saying to their potential seller, "you know, guys, you should go for something of that kind," even if apples cannot be compared with bananas. And of course, that's the channel of the brokers. So in a nutshell, yes, the market is active. And secondly, yes, there is a pressure on the price.

And we do have a question over the phone line. We can go to [ Andrea Galone ] with PBC Securities.

Yes. My question was on yield compression, but I think it's been already addressed just now. So maybe perhaps just giving a bit of more sense on the actual figures, on the expected compression?

We don't know what the expected compression is. I mean the valuation is done by external buddies, and we don't know what our position will be going forward. But Jean, maybe what we can -- and I suppose, Andrea, that you know that. But if you compare different classes of assets among real estate in Europe, obviously, logistics, for example, if you look at the past 5 years and you compare self-storage, logistics, offices, retail, whatever, the trend on which we are is going down. That's true. And should it continue? Probably. By how much? We just don't know.

And there are no more questions on the phone lines at this time.

We have a question from [indiscernible] Berenberg. What percentage of revaluation upgrade is coming from tax rate compression?

That's not something we have disclosed, but we can give you an idea that about 25 basis points increase in our cap rate will have about 4% impact on our valuation.

[Operator Instructions]

Thank you all for joining us today. We look forward to reconnecting in this venue soon.

Thank you, Caroline. Have a good day. Bye-bye.

Good day. Bye-bye.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at this time.