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

I'm heading the equity research -- real estate equity research. Sorry, not yet the full equity research for Europe at Bank of America. I'm delighted that today we host this roundtable with Shurgard Self Storage. And we have with us Marc Oursin, who is the CEO of the company; and Caroline -- well, actually Caroline Thirifay, which is the Head of Investor Relations. The format I’m suggesting for today is, as usual, 5 to 10 minute introduction from Marc, telling us the latest update on the company, then opening Q&A, feel free to ask whatever question you have and we can end up this session with a free file question. We asked to all cooperates we hosting a roundtable with. Thank you, Marc.

Thank you, Marc. There is no echo. It's just both of us are called Marc so that's why. Don't be surprised. So we -- so first of all, the one who do know or who do not really know Shurgard. So we are the leading platform for self storage in Europe. We are present in 7 countries, mainly northern Europe, some France, Netherlands, Sweden, Denmark, Copenhagen Germany, Netherlands and Belgium. Secondly, we are more or less the double in terms of size and now, let's say, the #2 and the #3 players. We are operating and owning 1.3 million square meter across 260 properties. So -- and the company has been created in Europe a bit more than 25 years ago. So that's who we are. We're also a growth platform. So we are investing roughly trying EUR 150 million a year to grow physically the company square meter-wise, which is close to 6% of the platform. So every year, growing physically by 6% the platform. And on the top of that, then you have the what you call the same-store growth that is feeding the total growth of the company. So now let's talk a bit about the situation, I would say, in the current environment that we have. So last year -- well, the whole industry of self storage in Europe, and I think it has been the same in the U.S., has been able to go through the COVID pretty well in '20 and '21, which is the case for us, clearly. The comps that we're having to face for '22 versus '21, especially Q3, Q4 are pretty high. In '21, we had a same-store growth that went from 4% per quarter to up to 8%, 9% in the last quarter of Q4. And this year, till up to now, I would say, Q1, Q2, but also the first month of Q3, we are still on a level of more or less 8% to 9% on the same store, which is, from our point of view, a bit surprising for Q3, we're expecting to have a kind of deceleration, which is not the case. And then the big question, of course, is -- what will happen if we, as a company, face a recession or stagflation in Europe in the coming quarters. Well, so what is the impact on the demand, actually, that's the key question. And on the demand side, for the time being, we don't see any change than the beginning of the year. So I would say everything is fine and business is under control. So the key point will be in the coming quarters on the new customers, how the number of, let's say, interest of the click on the web is evolving. Is it going down or not? Secondly, how the -- what you call prospects of potential new customers going for smaller rooms because they cannot afford in cash value what they were able to do before. Thirdly, it's simply the volume going down, so we are not able to convert as before. And then we have to do more promotion to get the people in. So that's, I would say, the key criteria is to look at to understand if we are in a downturn or not for us. And on the existing customers, here, the question will be, do they stop -- they are [ constraints ] or what we call the move-out number, people leaving us in the move-out ratio versus the total customer base. Thirdly, a good sign is also what we call DCM. DCM means delinquent customer management. So when you start to face, let's say, harsh times, people are intending not to pay as they were paying. So you know they are not as accurate and on the top of it, so which is logical and normal. So do we see here something a kind of degradation of the rate of this DCM. And then last but not least, I would say the spread between the move-in rate and the move-out rate, how this spread is evolving in time. So that's globally what we have to look at in the coming quarters. But up to now, everything is okay.

Okay. Well then, thanks, Marc.

[indiscernible]

So thank you, so pretty good question. So I would say, unfortunately, we don't have playbook. What I mean by that? I mean if you're asking me, you Shurgard, are you able to see in the past something equivalent, which means starting to have a recurrent high inflation environment, first. Secondly, so-called recession, meaning you hurt really the P&L of households. So potentially, you have less incomes and much more costs. Unfortunately or fortunately, I would say that if you look at Europe, the last period where inflation was steadily high was late '70s, early '80s. At that time, I was a young teenager, I didn't think at all about working for storage to be frank. And self storage, they don’t exist in Europe. So unfortunately, we don't have any benchmark to apply and to say, you know what, this is what will happen because we experienced it. But having said that, at least what we can take is the GFC, which is a kind of indicator even if, of course, the reasons and the impact are quite different than what we start to face. But if I take the -- what happened to us in 2009 till 2014, which were the -- really the major part of that crisis. We started the -- to enter into the GFC at 90% occupancy, same store, more or less in all the markets between 88% and 90%. And the deepest loss was in 2012, early '13, where we went down up to 80%, 8-0. So we lost [indiscernible] 10% within 3 years of occupancy. But having said that, again, here, this is for the newcomers and the move-outs, but we are able to increase existing customers. So if you look at revenue-wise, we had only 1 year with negative growth. That was, I think, 2012 or '13 where we had on the same-store pool, which is stabilized in comparable parameter, a decline of roughly 1.5%, negative. So you see that this capacity to increase your existing customers also mitigates quite efficiently the volume that you could lose on your newcomers and the discounts that you also apply on the newcomers to get them in. So that's -- I'm sorry, but that's, as you call that, the playbook, the only one that could make sense because the COVID was different story. I mean the states have subsidized more or less all the households. And therefore, the good thing was that are people able to pay their bill? Yes, and you know what happened.

[indiscernible]

Yes. That's true that the supply in 10 years, more than 10 years ago was, of course, less developed than now. But in Europe, the level of supply compared to the U.S. is far below. So therefore, I don't think the supply would be -- I agree. To give you some numbers and some perspectives, I do recall that if you take a regular catchment area for a single property, let's take Shurgard in Europe, you will find it within 10 minutes or 20 minutes driving time, which is 50% to 80% of our customers or single property, roughly a total of 3 or 4 properties of self storage maximum, including Shurgard. And if you go to the U.S., we will be between 10% to 15%. So we are still in a situation where the market in Europe is really on balance between supply and demand in the favor of the supply, so the operators.

[indiscernible] So let's give you the story [indiscernible]

You mean versus our peers in Europe or the industry in the U.S.? In the U.S. Okay.

[indiscernible]

So the key -- well, 2 things, the supply and then the demand. Back to your point. On the supply side, of course, the key element is the penetration of the industry. That's obvious. You have this in the presentation. Europe is more or less more than 13x less developed than the U.S. So clearly, as I was explaining to you with this notion of number of properties per catchment. So here, good. Is it moving up? Yes, it's growing, but far less than what the U.S. still experience. So if I take the image of 2 planets, you have the sun, you have the moon and in that case, Europe self storage, is the moon, the volume of that's here. The sun still grows faster than the moon. So to give you an idea, the U.S., I think, developed the past 5 years, the equivalent of the whole industry in Europe, which is more than 5,000 properties. That's one thing. On the demand side, and here, that's pretty interesting. The fact that -- and you know that we are quite close to PSA, and we have been able to -- before the IPO and after the IPO, we’ve been able to benchmark numbers and patterns of newcomers, so prospects and existing customers. And actually, the behavior of customers and the fact that we're also in 7 countries in Europe is the same, meaning that when you look at metrics like length of stay, reaction to discounts, price increases to existing customers, this kind of stuff, within the 7 markets where we are, the 7 countries in Europe, it's exactly the same. It's very, very, very close. And by the way, if it's very close, that's why so we are very centralized because, therefore, you can leverage your efficiency this way. And versus the U.S., we are pretty close also when we'll benchmark this with PSA, it's very relevant to do it, and we don't see major differences.

There is maybe one element of difference as well, which is density of population in Europe, which is 3 to 4x higher than the U.S., i.e. this -- you benefit from more the urban area.

You said the penetration looks like significantly lower [indiscernible]

For Europe? I think it will -- I cannot say never, but I would be very surprised that within 20 years, the level of penetration of this industry in Europe will be at the same level of the U.S. for a couple of reasons. It will grow, but it will not catch up with the U.S., one, and get there because you have simply the constraints of the physical, let's say, organization of the cities in Europe. The fact that the cities are, as Marc said, the level of density is pretty high. And the big difference with the U.S. is that cities in Europe are usually where people live. All right? While in the U.S., it's more the suburbs, okay, and the downtowns are historically more offices and things like this are. So Europe is ready from that point of view. And by the way, this is also when you -- if there is a difference, is the unit size. On average, the average unit size that are rented by customers in Europe is between 6 and 7 square meters, so let's say, 60 to 70 square foot. While in the U.S., it's the same as 10 by 10, which is more a 100 square foot. So you see it's more or less 50% more than what we do rent on average in Europe. But having said that, the frequency and the reason of the need of storage is the same as simply we are plugged to the terminal of life for the people as soon as you do live in an urban area and the need is the same. You just face what we call life events. I mean on the west, on the east side of the Atlantic is the same thing. So it's -- these live events are divorces, passing away of parents, birth, could be also marriage, of course, could be professional mobility, what you say. So the mix of that might be a bit different. But in the end, when you look at the rate of divorce in western Europe with the U.S., it's pretty similar. The rate of death, life expectancy is pretty similar. Marriage, same thing. So maybe, yes, the mobility will be higher in the U.S., for sure, than in Europe. But globally, as soon as you have these life events within these high-dense areas, the need of storage is there.

[indiscernible]

Well, I think the best is to look at the annual report of both. And secondly, PSA is -- it's spread over, I think, more than 40 states. So I think it's very different. If you're in L.A. and New York, and then, for example, I don't know, Saint Louis, for example, I don't know if they are there, but for us, I think what would be interesting 60 -- yes, 2/3 of our portfolio is in the capital cities, for the Copenhagen, the Stockholm, the London. And by the way, in Europe, capital cities, which is very different than the U.S., are usually the city is the largest in population, the richest, which is not the case in the U.S., if you take Washington D.C., for example, versus other cities. So if you compare probably the rates we have in London, Paris, with the unit size and you do the math, will be very interesting if you compare this with Seattle, L.A., Miami, New York, maybe Boston, I don't know, but that would be, I don't know exactly how it is. I did it, I think, 5, 7 years ago, and we were pretty close, actually.

[indiscernible] are you feeling that [ on the expense side will also be seen on the tenant side, a big part or moving out ]? [ The portability of storage also ] [indiscernible]

Okay. So in your question, there is 2 aspect. As an operator, are we hurt in our P&L? And secondly, as a household, am I hurt and therefore, my behavior is changing, I have to leave. Okay. So regarding the first part, which is the -- as a corporate, am I hurt? To give you some ideas in our case, utility, energy, and so electricity and gas is 1% of our revenue in terms of cost. Say, well, so 3% of our total cost base, we have 35% of operations -- operational expenses. The good thing is that during the COVID, so it was in May, June 2020. When in Europe, we measure with liters, the gas you put in your car before all of us have beautiful Teslas. We actually were paying roughly EUR 1 per liter. And today, you pay EUR 3 a liter. So what we have done is that we have contracted with all our suppliers, electricity and gas, 3 years contract, fixed cost up to the end of '23, December '23. So we don't have any change in our utility supply cost from '21, '22, '23. So we're safe on that side. Then what we are doing because who knows what will happen in January '24 with this crazy war and the impact on the cost of energy. Roughly 2/3 of the bill is electricity. And from that, 80% is the lighting in the properties. For many years, we have sensors. So someone in the corridor, light, no people in the corridor, no lights. But this was with regular neon tubes. So what we have done is we have already 1/3 -- 35% of the portfolio with LED lighting technology, which help us to reduce by at least 50% the consumption, and you keep this even a better intensity of lighting, so what they call lumen or lux. And then so the plan is to have rolled out all the properties by the end of '23 or early '24, to be ready to face -- in case prices are still high. By reducing the consumption, the volume, you can absorb that. So to mitigate. So that's what for Shurgard. On the gas, we have something, we are also rolling out more heat pumps. We have 1/3 of the properties using natural gas, and we go to heat pumps, which is -- you consume more electricity, of course, but for the CO2 it's better because you go from Scope 1 to Scope 2, which is long term and much better in terms of CO2 approach. Then if you go to the households, our customers, 80% of our customers are from that. The -- I tried -- because we had a question, of course, during the conference, many times. So what's going on with the demand and all of this, how recession could impact you or impact the households, your customers and starting to push, them say, I cannot afford myself this room, and I need to stop renting. So what are we talking about? On average, people are renting 7 square meter, and the cost they are paying per month for that, let's say, EUR 200. Okay. So I said $200 a month. If you take -- you don't have multiple units rented by one household, usually one household -- one unit, one household. So when you start to look at the P&L, this household, what it is. So usually, the 2 are working -- the 2 parents are working or the 2 people are working. And the combined aggregate revenue of the household in Europe, if you take these countries where we are, will be depending to your job, but globally between EUR 5,000 to, let's say, EUR 10,000 a month for the household. Then from that amount of money, what do you start to pay? You start to pay -- you lease an apartment and therefore, how these apartment lease will increase due to CPI. And here, per country is not exactly the same rules. Or you have a mortgage because you have a boat where you live. And here's something. Most of the countries in Europe, people are borrowing money, fixed cost long term. 2%, 20 years, all in. While other countries like the U.K., Sweden, for example, it's more variable fixed interest rates and to be revised potentially after every year, after 3 years, after 5 years. So the exposure to interest rates is not the same at all per country for households in Europe. Then after that, you have the regular expenses. If you do some home working, which is the case in Europe, most of the companies are still offering 2 to 3 days a week on working. You don't use the public transportation. You don't use your car to travel, so you save some money. You have the -- also the food at home and this kind of stuff. So in the end, if you make this list, we, self storage are at the bottom of the list. The EUR 200 before you moved out from us, so boring to move your attic or basement. It's not an easy thing to do. It's not that nice. So we are usually always at the end, it's a pretty sticky business. It's my -- I would say, and back to the question we had at the beginning. I don't have any playbook, but it's my understanding when I'm looking at this P&L of households. We will see in the coming quarter exactly what will happen, but this is what I'm expecting. We should not be the first one, even if my bill of electricity is going from EUR 200 to EUR 400 before emptying my unit in Shurgard, there are other things that I can do. Sorry, I was a bit long, but I think it was important for you to grasp the whole thing.

[indiscernible]

So here 2 aspects. If you take first our debt, for example, and then I will talk about the development. If you take our debt, the debt we have is, we have -- it's through a low LTV, 17% expressed as a net debt over EBITDA 4x. The cost of -- and the interest we have have been related to debt that we have done all of them through USPPs. So long term, usually 10 years maturities was scattered actually and tranches of EUR 100 million. And the last refinancing we did, which was 18 months ago, we had 1.24%, all-in in euros for fixed, for 10 years and no securities. If we have to do it again now, it would be probably more than 4%. The next tranche to reimburse is in July, I think, mid-'24, EUR 100 million. And by the way, the interest that we are paying today and tomorrow, because a fixed amount, is 6% of our revenues. The next tranche, July '24, it's 12% of the debt. Even if the interest rates are 5%, this debt that we had 10 years ago, it was at 3%. So it's an additional incremental of 2%, applied on this 12%, applied on the 6% of the revenue. So I think, as you said, yes, it's a pretty robust balance sheet. So I'm -- we're not worried about that at all. So we're in a good position. Moreover, if you look at the evolution of the interest rates, if it's getting -- and therefore, inflation potentially, as a kind of higher stabilized inflation, let's say, 4% every year, obviously, we have been able to increase our existing customers by 8% to 10% in an environment without almost inflation for 10 years in Europe, very low inflation. Around 1% to 2% max. So I suppose that if the environment is becoming more inflation oriented, we'll be able to put through this incremental inflation into the price increases.

[indiscernible]

Well, you mean the increases. It's more or less a yearly. Yearly one. Once a year.

[indiscernible]

Sure.

First of all, you had some growth plans. It's that -- some of the markets you've obviously penetrated, there's some -- it’s penetrating markets seriously, both coming from the penetration in those less penetrated markets, adding new countries to the platform and then leaves the difference in [indiscernible].

Okay. So here, we have a discipline, which is the following. The fact that we're for now 25 years in the same geographies, we have certain experience. We know the value of the platform. We have operational business. We have nothing to do with logistic. We are B2C business. Our customers are close to our properties. I don't need to be in a cornfield, [ 100 kilometers ] from the cities and having many trucks all of that, not at all. So it's a very different story here. So in terms of -- back to the development policy. We know the value of being in the same countries and growing in the same country, so meaning creating leverage and economy of scales. So that's why we don't have the plan to open new properties outside these 7 countries, or to buy properties to competitors outside these 7 countries. So that's one. That's the first thing. So when we have a criteria, the first, let's say, decision, yes, no. The second one is the cities. As soon as we are in the 7 countries. Are we buying a competitor that is in the cities where we are or in new cities? So if it's in the countries where we are, it's the second, yes. If it's not in cities where we are, but cities that are really interesting for us, for example, ZeitLager in Munich, 3 years ago, Munich, second city of Germany, 2 million people, extremely rich. We are not there, say, great. There's a guy selling a portfolio, or let's buy Munich because we are in Germany, and we want to be in Munich. Third, after these 2 elements, countries, the cities. This is real estate. So what do you buy? So is it a building that is purposely built? Is it freehold? This is what we're looking for? 93% of our properties are freehold. What is the size of the building, where is the site of the building and all of that exposure, traffic, visibility? And then we arrive to, okay, personally, what do you buy? Low occupancy, high occupancy? So what kind of cash flows do you get there? So that's the discipline we applied on M&A and we do not -- we have done that now for 7 years, and we stick to that. Then -- and this is applied to the 7 countries. If we have a great opportunity to buy in Copenhagen, even if we do not develop actively what we call organically, meaning buying land and building in Copenhagen, if there is an opportunity in M&A, we do it.

Thank you.

So then regarding the organic development here. Developing -- Caroline, can you tell the guy to make less noise? Thank you. So if we already develop -- the organic development is the following. Developing is complex. You need a team of developers. You need architects. You need planning advisers. You need construction companies. So you need to create a community. And this community that you're creating, location takes time. And it's not easy. So we have decided to focus on 4 countries that are, let's say, countries and areas, London within the M25 in the U.K., Paris region, what we call Randstad in the Netherlands, which is this conurbation of Amsterdam, Utrecht, Rotterdam, Den Haag, where you have 7 million people living there. And where we are already very strong and which is 40% of the whole population of the Netherlands. And then Germany. And in Germany, we have 4 areas. We have Berlin, North Rhine-Westphalia, which is the west side Dusseldorf, Cologne, Frankfurt, Stuttgart and Munich, so it's 5 actually. So that's where we develop where we have teams, people looking for lands, making deals, getting for permits and then building. That's the way we have build up the growth plan of the company, which is more or less to bring and doing these 2 things, M&A and organic, roughly 6% to 7% of new square meters every year as of 2024.

[indiscernible]

So okay. So yes, big time. So we use red and white, if you can, with our signages, very quickly on that. And again, if we use the due diligence and even before period to assess what do we need to do in terms of CapEx to bring the property to the level of what we have as a standard. In terms of systems from day 1, they are on our pricing system, on our website. So it doesn't take a year or 6 months to do that. Boom, from day 1, we've done it. We put our people into their property because they are in the cities where we are. That's the benefit of it. We put the people from the acquired company to our properties so they can be trained. And that's what we do. Yes. So we try to bring very quickly what we have bought to the level of what we have as current operations.

[indiscernible]

Valuations? Yes. So private markets are still like the price of yesterday. Okay? And we talked about the price of today. So they need to end. Having said that, there's such -- and back to your point about the supply, the fact that the situation of the supply in Europe is, of course, less than the U.S., people -- the seller is always still in a better position to negotiate their price because there is still a lot of appetite for that, a bit, probably less. What we have seen recently, up to now, we have less private equities, starting to knock at the doors of these guys due to the cost of money, of course, but that's where they are still.

[indiscernible]

I don't know. Because it's very different from -- we -- it's -- first, we buy, it could be one property here, 2 here, it's very different.

[indiscernible]

Okay. If you want a number, yes, let's put 4. From the -- what we call the entry yield. So yes. Yes, would be a 4. And we bring this to 7% to 8% within 4 to 5 years due to efficiency, occupancy higher, rates better, cost management, of course.

Okay. So maybe ready for those file questions. There is no more question from the room.

Happy to answer, Marc.

Yes. Great. Just [ macro REITs ] -- my core challenges for a REIT today, interest rate recession, the rise of private equity money for you?

Globally recession?

Yes. Specific risk for your company and your sector, labor, supply, lack of liquidity of capital markets?

Labor.

And are you seeing any sign of weakening demand? Yes, or no?

Not at all.

Great and thank you.

Thank you, Marc. Thank you.

Thank you.