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

Good morning, everyone. Welcome to the 8:35 session at Citi's 2023 Global Property CEO Conference. I'm Aakanksha Anand joined with Aaron Guy from Citi Research and we are pleased to have with us today Shurgard and CEO, Marc Oursin. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can sign in on to liveqa.com and enter code Citi 2023 to submit any questions. For those in the room, just raise your hand, try to make it as interactive as we can. Marc, we will turn it over to you to introduce your company and members of management that are here with you today and then we will get into Q&A.

Thank you very much. So we have Caroline -- Caroline Thirifay, our IR Director, the lady in white. Jean -- Jean Kreusch, our CFO, and myself, Marc, the CEO. And all of us have a very long seniority. Caroline, how many years?

24 years.

24 years within the company, and Jean almost 20 years soon and myself more than 11 years. So I will just go on. I think you got the booklets so on Page 4 of the presentation, just a short introduction of who we are and then happy to answer to all your questions. So first, for us, if we have to define Shurgard, we think we are really a unique platform with a lot of runway. And by saying this, also, we have again another year of outperformance. I mean since we IPO-ed the company, which was 5 years ago, in 2018, the company did very well. Just to give some ideas, I think the IPO, the price of the share was EUR 23 and now we are between EUR 45 and EUR 50. Then secondly, I would say the strategy based on the proven benefits from our geographic spread, we are in 7 countries, mainly Northern Europe, meaning France, Netherlands, the U.K., actually London specifically, also Sweden, Belgium and Germany and lastly, Copenhagen. And also the fact that this is a platform, this is more than a portfolio. We are a very operational business. Self Storage has nothing to do with logistics. It's a B2C business. First, it's not B2B and secondly, it's an urban product. You need to be close to residential to make it work. And by these key elements and by having 2/3 of our portfolio in the capital cities of the 7 countries, we have been able in the past 20 years to rationalize our operations and through that to get some benefit -- benefits, sorry, for the economy of scale. If you look at the runway of the company, we have over delivered in '22 in terms of development and also M&A versus guidance. So we have mainly 3 levers of growth. I mean, by that, that we can extend but is, we own 94% of our portfolio, so it's mainly freehold. So like any owner, if you want to increase the size of the building, you can because you own them. So this is what we call redevelopment. We do a lot of also organic redevelopments simply buying a land and building a purpose-built knowing that 2/3 of our portfolio is also purpose-built with an average age of 15 years, so quite young. And then we do what we call conversion, which is buying a former property -- existing property, factory, warehouse, offices, and we transform this into self-storage. And last but not least, M&A, which is the third lever of growth for us, knowing that is 3 levers of growth times 7 countries. So potentially 21 options that we can maneuver, push or slow down. And that's why also we have been able to develop a very strong pipeline for the year '23, '24 and '25. All of that is framed within a pretty robust balance sheet. We have a low leverage, below 20% in terms of LTV or around 4x net debt over EBITDA with a cash position and also a strong capital allocation. We have raised up our hurdle rate by 1 point in our guidance '23. We were previously around 7%, 8% of return, I mean, yield on cost or investments. And due -- of course, due to the increase of cost of capital, now we are targeting 8% to 9% for the projects that will be approved in '23. We are becoming, I would say, we have become a U.K. REIT as of this month, March '23. What does it mean? You maybe not know or maybe you know, but in Europe, well, REIT means tax, tax are per countries. And therefore, there is no pan-European REIT status does not exist in Europe. So each country has its own tax regulation. And therefore, the only one we thought and was making sense was the U.K. And that's why also we became a U.K. REIT. And this is sheltering all our incomes in the U.K. We continue to pay taxes in the 6 other countries, France, Germany, et cetera. But with that, it helps us to mitigate our cost of tax at 18% of earnings before tax. While a year ago, the guidance was around 22%. So it is massive, 4% over the coming years. And last but not least, ESG, we are the sector leader in terms of sustainability in ESG, credentials through GRESB, for example. So we are very active in that field and with a lot of projects. So happy to answer to your questions.

And what would you say is the biggest misperception about your stock? Or what is the market missing versus the reality that the investors should actually focus on?

Well, I think that -- well, I think the market has -- like Shurgard, when you will get the performance the past 4 years, we cannot say that we are really behind the market. We have overperformed big time. I would say that probably being in the EPRA Index, meaning that, of course, if nothing against EPRA, but we are considered as a real estate business, so we have been, in a way, bashed like other real estate companies due to the raise of interest knowing that actually our leverage was very low, around, as I said, 18% LTV. And I think there's, I think, a perception, which is maybe at all tropism, which is too big regarding this real estate factor. We are still very operational with a very healthy balance sheet. And I would say, plus the perspective of growth, I think that we should deserve probably a higher price.

And let's move on to the occupier markets now. How would you characterize the current tenant markets and maybe touch upon the differences in each of the markets that you operate in?

Sure. Thank you. Yes. So you know that -- and most of you are probably from the U.S. So Self Storage is very developed in this country. It's more or less, I think, 20 -- more than 20x what we have in Europe. But it's a short-term lease. You people are able to leave the place within 2 weeks, a notice period of 2 weeks. And by the way, we also, as an owner, are able to keep customers out within 2 weeks' notice, it works both ways. But then if you look at the occupancy, we have a high occupancy from a European standard. Our same-store are around 90% and the bandwidth between the lowest country and the highest is quite narrow. Some countries are around 89% and others close to 92%. And if you look at the dynamics of the different markets, we can see that the Nordics are performing and decelerating and versus '22, if you look at quarter-to-quarter, the trend is still there. But on the other markets, the biggest one is, for example, France, Netherlands, London and Germany, even Belgium, we are still on a very high occupancy and high rental increase. So revenue, same-store are still on the same trend. If I look at January, February and the early days of March, we have the same kind of speed in what we had in the last quarter and also Q3 '22, which are good news, to be frank. We're not anticipating this. We're anticipating more, let's say, more stronger deceleration.

And what was your NOI growth, the like-for-like in 2022? And what do you expect for '23 and '24?

Okay. So '22, we had a nice growth on the NOI. I think then you will see it's more than 10% for the same stores. The revenue were around 8%. '23, '24, we have not given any guidance on the NOI specifically, but we have said that the margin as a percentage will increase which is, I believe, a great performance. Why? Because the industry, especially in the U.K. is under a very strong pressure on the cost side. You know that in the U.S. as in the U.K., the first line in the P&L of Self Storage is real estate taxes. Secondly, payroll, while on the continent is the other way around. I mean the continent in Europe. Payroll is the first line around 8% to 10%, and the real estate taxes are around 4% to 5% of the revenues. In the U.K., the British government has decided to increase by 50%, 5-0, for the coming 3 years. The real estate taxes, it will be 25% this year, 15% more or less next year, '24 and then other 10% in '25. So when it's 8% to 10% of your revenue, you can imagine the impact on your bottom line, if you don't have the sales at the same time proportionately growing. Then secondly, when you have on the labor cost that are 8% to 10% of your revenue and inflation, which is a negotiation or what you decide to give to your employees, that would be close to inflation. Again, it's significant. We're talking about 8% to 10% depending on the countries and the U.K. also is there. So to me -- for the industry, I think the U.K. will be under great pressure, and I don't see the NOI growing same store over there. It's more declining. On the other markets and for us, the fact that we have been able to offset all these increases by better efficiency in the network, and this is due to what we call e-rental that we have launched in 2020 during the COVID that we have rolled out in '21 and fully operational in all the properties as of January '22. This is already 30% of all our move-ins. It's simply a seamless experience between the need of storage and the contract in a way it's like a boarding pass, if you prefer. You want to buy a plane ticket while in video phone and you end with a boarding pass on your phone, it's the same concept if you prefer. And by doing that, we are able to absorb these cost increases and that's why this -- the margin I mentioned will increase by 20 basis points in '23 for us and onwards every year.

That's very clear. And how do you see the tenant mix changing? Do you see any changes into how your tenant mix is evolving?

Not really, actually. We have this notion of -- called resi customers and business customers. That's the way we describe these 2, let's say, types of businesses, knowing that in our case, the resi people are around 80% of our lettable area rented and the remaining 20% business customers. But we call them this way because the business customers per country usually have a tax treatment related to VAT, which is different. But commercially, we don't do anything special for them. I mean there is no special specific discounts. There is no payment terms that are longer this kind of stuff of services. We simply -- because of the VAT, we call them business customers, but commercially, they check their phone and they browse on the web and then they rent online. That's all. It's the same. Having said that, have we seen pre-COVID and COVID and let's call it maybe now post-COVID, hopefully. No, the mix is the same. It's still 80:20. There are no variances for countries. It's still the same. But as I repeat, we do not refuse business customers but we don't do anything proactively to get them on board, knowing that our occupancy is around 90%. So we believe that we don't need to do that. And on the top, the mix of the units that we have, we have remixes almost the past 10, 15 years a lot. We don't have any -- I mean, properties with units that are more than 20 square meters or 200 square foot. So mechanically, these kind of customers don't go to us, well, they can see that we don't have that product, so they probably go to other players.

Let's move on to the investment markets on the property values. How is -- how are the investment markets looking? And again, maybe just touch upon each of the geographies you're operating in? And where do you see values moving from here in each of the markets?

Well, you know that through -- and we are not the only one, we follow the IFRS norms, and therefore, we need to have 2 valuations a year, once per half year. And up to now, done by external valuers, people like we are working with Cushman, for example, in our case, and we have not seen, let's say, a stabilization or even an increase of these cap rates. It's even actually the either way around. If you look at the latest numbers that we have disclosed for the full year 2022, we still have more or less 50 basis points of reduction of the cap rate. So you would say, "Hey, Marc, what's going on there? It's not really -- what is happening in the other classes of assets in Europe?" True. And this is based on mainly 2 factors. First, the transactions, back to your question, that's why I wanted to mention, that are still done at a pretty high price or, let's say, low cap rate because assets on the market are quite scarce and therefore, there is competition to buy them. And I think this pressure between the demand and the supply and the M&A part of Self Storage is in a way up to now, protecting the valuations. And secondly, the fact that we have improved also our cash flows perspective, especially on the rental side as, I suppose, push Cushman to -- like this way.

And do you feel they might -- how would they go on from here? Do you think they might be moving aside this?

So let's wait for June. But more seriously, what is interesting, I think, for investors and also for us, obviously, to appreciate that, we have the luck that the 3 key operators in Europe that are listed, so ourselves, Big Yellow and Self Stores have different calendars. I mean accounting calendars. We showed out we are from Jan to December. Self Store is from November to October, and Big Yellow, April to March. And therefore, the first one we have to disclose a new valuation will be Self Store for their first half of their new year, then it will be us, a couple of months later and then Big Yellow a couple of months later, which means that investors and also operators will have a good flavor or taste of what's going on within 4, 5 months, which is, I think, a good sample.

And when you look at the next 6 to 12 months, what do you think is the best real estate decision for you? Is it buy, sell, build, hold?

Don't change strategy. It's not because interest rates are great mark that we have to change the strategy. It's the other way around. We continue to do what we are doing and opportunities will be there for us.

And when you think about M&A, do you think there might be fewer or more public companies in 2024?

Well, I will take the second part of the question, not the first one, which is, I think that globally the situation will be more or less the same for Europe in terms of publicly listed companies for Self Storage.

And is M&A a realistic possibility for your business to accelerate growth and returns? And what sort of assets might you look to buy?

Well, you know that we -- this is what we have, let's say, explained to the market 5 years ago and what we have done since the IPO, I mean and what we have done every year, sorry, it's that M&A is part of our, in a way, DNA now. And we consider this as a natural way of growing the company. We have done 20 deals in the past 5 years. We have invested more than EUR 500 million through these deals and acquiring 60 properties spread over the whole of the 7 countries where we are. So for us, it's just, as I repeat, the third arm or the second leg really significant of development. Organic on one side and M&A. We have committed to buy 20,000 square meters every year, and developing 70,000 square meters on the other side organically. So 90,000, so roughly 1 million square foot every year. And therefore, yes, for the timing, there has been mainly bolt-on acquisition. That's the way it has been. But we stick to the 7 countries where we are, that's the thing. And to the capital cities also and Tier 1 cities where we are. Density of properties is key in this business to create more, let's say, NOI, same-store wise and therefore more value for our shareholders.

And what would you need to move in the market for you to start considering the M&A side again?

Well, we have not stopped. I mean we continue. We have acquired last year. We invested, I think, more than EUR 30 million. I have acquired 3 properties in Sweden, 2 in the Netherlands. I forgot where was the -- and 1 in Paris. Thank you, Jean. So we continue. For us, as I said, I mean there's no reason not to continue.

Right. So now moving on to the macro side of things. Do you -- I mean, what are your views on the sovereign bond yields movement over the next 12 months and the probability of recession?

Wow. We are now what, in early March. 6 months ago, I was attending to a conference in Paris organized by EPRA. And one gentleman there, a famous person from Harvard and just was presenting us the world and it would be a complete catastrophe. It was pretty, I would say, yes, I'm not very optimistic. Let's put it this way. And 6 months later, I look at my numbers, our numbers of Shurgard and the markets. And I would say, well, it looks like it's taking another route and what was -- what has been anticipated or announced 6 months ago. And as I said, for the time being, the business is good, occupancy is there. It's not declining. Rental rates are continuing to grow, and that's good. So Self Storage, at least in Europe, there's a kind of seasonality during Q2. We call that the move-in season which is usually April to June. So I would say Q2 will be the moment of truth because if Q2 is more or less still aligned with what we see, we're anticipating a deceleration. That's the way we have done our budget. But if the deceleration is not as what we were thinking, then, okay, it's going to be another great year. But for the time being, there is no orange neither red lights.

Can you touch upon the business rates a little bit? I just wanted to understand how do the business rates impact your business and tenants, particularly? And clearly, the U.K. is there a difference between geographies?

So this real estate taxes, well, as I said, impacted our P&L quite clearly or the industry to make it simple, not only Shurgard obviously. So in the U.K., as I said, this has -- in the revenue, it's roughly 8% to 10% of the revenue, this line. And therefore, if you take an increase on that, well, mechanically, you have an impact on your NOI. And as I said on the continent, it's more less half of that. There are no increases there, except Paris Central, which is quite significant, too, but we have only 4 properties out of 266. So it's not a problem. So then for the customers, the big difference that you have, for example, with offices or even, let's say, maybe commercial, whether the tenant is contractually paying this line, okay? Now in our case, no. It's very simple. You are paying for a unit, all right? And that's it. But fortunately, we're able to change the prices the way we want and where we want and when we want. So it will be then our pure discretionary decision to increase the prices due to this increase on the tax rate.

Can I just ask a question? Just obviously, we're seeing the rates jump up significantly. Are you seeing more deals coming on to your desk of maybe people in the private market who may be, obviously, your balance sheet is well set up, but maybe others in the market aren't. Is there potentially an increase in deal flow that might come from people getting kind of squeezed a little bit? And then if there isn't necessarily an increase in deal flow at this stage, how do you think about development at the moment? I mean construction costs appear to be coming down a little bit. Your rates going up, your occupancy is strong. You're managing this sort of yield management on a live basis so you can see what's going on. Is there opportunity now to start sort of ramping up development a bit more than maybe you thought?

Yes, well. First, we -- on the M&A side, we have, I would say, quite often during the year files on our desks. And again, this has not changed the way we assess them. First is, is it in the countries where we are? First question. Yes? No? No, we don't look at it. Yes, we look at it. Secondly, is it in the cities where we are? Yes? No? Yes, we'll get it. No, if it's a fantastic city, winning a big one in that country where we're willing to be and we are not, then we look at it, for example, what happened in 2022 during the COVID with this portfolio we bought in Germany, in Munich and ZeitLager. And then the assets themselves, what are you potentially buying in terms of quality? Are they a leasehold, short-term leasehold, freehold? We are more looking freehold and not against a leasehold, but we prefer freehold. Is the leasehold are long term, why not? And then the quality of the assets, what kind of buildings? Are they big? Are they small? Are they in a good shape or not? So you see that's what we follow all the time. And in terms of volume, I would say that the last year from Q4, the volume in terms of prospects for M&A was higher. And for the time being, it's the same pace. We don't see any acceleration or deceleration, but there are opportunities definitely. Regarding organic development. Well, here something we did a Capital Market Day in September '21, so almost 1.5 year ago. And what have we said at that time, we will double the speed of organic. The market was very happy with what we are doing. But clearly, saying, okay, guys, you've been able to demonstrate your capacities. That's good. Can you do more? I'd say, happy to do it more, and this is what we have done and launched. So what we decided to do is more or less to make it simple to invest roughly EUR 100 million a year spread over organic and M&A. Let's double it, let's go to EUR 200 million. And from -- going from EUR 100 million to EUR 200 million, it takes 2 years so '21, '22, '23 and '24. And this is what is happening. We will open this year '23, 70,000 square meters while originally, we were more around 35,000 or less than 40,000 and in '24, we go to 90,000 organic and M&A. So you're right. A year ago, I was begging vendors to build things. Now it's the other way around, which is nice, which means the vendors are knocking at the door and saying, "All right, do you have any work for me? Here." On the lands, so that's good. It means that the peak of the cost of building is behind us by far, and we start to see a deceleration, clearly. But we didn't stop developing. We continued and on the lands, we started to see already 2 years ago, plateauing on the lands, and it's starting to, let's say, to decline in certain areas.

Do you think that sort of -- that growth ambition that you've had since IPO is one of the reasons the stock trades at a bit of a premium to some of the peers?

You're right. I think that when you are able to deliver growth, you have resilience during crisis and you have a good perspective on the cash flow deliveries. This has a high value.

Just on that rate impact, the part of the recession at the moment because obviously that discussion can go in any number of different directions. But just looking at the behavior from occupiers from rate moves at the moment, are you seeing anything through your live dynamic watching of the market through your systems in terms of residential markets, for example, people starting to get squeezed on mortgages, people therefore, clearing out of spare room? We've seen this in London a little bit to sort of help pay the mortgage. Is there any change in the underlying customer that you have noted since rates jumped in, what August back end?

So as I mentioned to you, we see a pattern in the Nordics, which is different than the rest of the continent or Europe, let's put it this way. And this is exactly related to what you are saying, Aaron, as if you look at Europe, the way -- so first, our customers are not all of them owners, right? The vast majority are people simply leasing an apartment or renting an apartment or house. But for the ones who have a mortgage, clearly, the situation is very different depending on the countries where you live and where you are. So for example, I would take the 2 extremes of the spectrum. I will simplify, but you have on one side, people with super high leverage on the mortgage exposed completely to variable interest rates, the Nordics, Sweden, Denmark. On the other side of the spectrum, markets where actually you borrow money for a very long period of time, 20, 30 years, fixed interest. Germany, France, Belgium and I would say, Netherlands, where you have zero risk versus what is happening currently now on the market. And in the middle, the U.K., which is, in a way, between, yes, what the Nordics are experiencing, which is viable interest, almost purely debt and no equity in your capital, let's say, structure. And the U.K., millions of people, I don't remember, I think 3 million or 5 million every year that have to renegotiate after 3 or 5 years, their terms. So this is how the way we look at it. And what we see, which is true, the Nordics are decelerating more or even actually distorting while the others are not due to this. We feel that and we believe that the fact that some people have to pay much more every month to be able to stay in the home that they have acquired is pushing them to be cost cutting in their cost structure. So that's why the occupancy is dropping in the Nordics and Sweden compared to what it was a year ago. But having said that, the level is still very high. We are at 91%, 92% occupied in Sweden and Copenhagen. But this will require more discounts to get the people on board. We believe, and that's why the move-in rate would be lower for these countries than proportionately the others.

Just a reminder, anyone in the room don't leave any questions on the table or we've got Marc here, anything that you've got, but yes, one right here.

[indiscernible]

So a couple of things here. Okay. So the -- so we created this Board in October '18 when we IPO-ed the company. And at that time, when we have done it, the purpose was to have, of course, representatives of PSA and New York Common, plus the CEO position in it. By -- but because we were willing to have an independent Board, mechanically, we had to do more independent directors than this group of nonindependent obviously. And when we started and we hired the different directors, the, let's say, experience in Self Storage was also very limited in Europe. So PSA and New York decided to have 2 representatives each, so 2 and 2, 4, myself, 5, so we hired 6 independent directors, of which -- of whom one of them, Ian Marcus was our lead independent or is still our lead independent director. He has a great experience of Self Storage and real estate and capital markets and is based in London. So that's the way it went 4, 5 years. Then 5 years later, what are we facing? We are facing the fact that we need to think about the succession of the directors because all of them have been hired the same time. So if you don't start to organize every year a certain level of rotation, you might face a cliff of succession at a certain time, which is not good. So that's one thing. Second thing, it's great to become a U.K. REIT, but you need to have British taxpayer in your Board to give some ground of all of that. That's the second constraint that was not anticipated 5 years ago. And three, New York Common and PSA, so that after 5 years, the Board had enough experience and knowledge to reduce their level of participants from 2:1. So which means that one for PSA, one for New York, still myself. So three, we keep 6 independent. So the Board is reducing from 11 to 9, and you have a proportion of independent, which is higher than what it was before. So all the changes that I was mentioning are coming from this.

What is your biggest ESG priority?

Solar panels.

So that is more energy efficiency?

Because if you think this way for ESG, if you do a little metrics of the E, the S and the G and the investment you have to put behind the 3 topics, actually, E is the one requiring the highest level of investment and the length of time. So look at the metrics in this way. Top right, then you have the S, which means so social, where it's not really a lot of investments, it's more time and the way you change and the way the things you do with the people. And thirdly, the one which is easiest and it requires almost no money, is governance. You decide what you want to do. How the Board is structured and thank you for the questions, it's exactly this. It doesn't require a lot of time and money to do that. It's pretty decisional. So when you look at these 3 things, governance, tick, easy. S, we are good on that, tick. On the E, we are good, but we're going to be even better. And the only topic that we have really to address and all the others that we have done already is solar panels, which is a bit complicated is to become self-sufficient and to have our objective of being operationally neutral by 2030, that's the key topic is to be able to offset all our carbon emission Scope 1 and 2 with or through the solar panels. But being 7 countries, doesn't help because each country has its own regulation and rules.

Can it create a revenue stream because Self Storage doesn't actually consume much energy, does it?

Yes, we don't consume to give you some ideas. You can be -- we have 3,000 of square meters of roofs per property. And by occupying half of that, we are becoming self-sufficient. So we have, I think, 5 kilos of CO2 emission per year per square meter. So yes, potentially it might be. But again, so related to the regulation and how the electricity, the utilities markets are regulated per country, but we need to be careful. But if there are some opportunities, of course, we'll look at it.

And what would be the biggest sector or business-specific risk that you think about or keeps you awake at night?

Well, something that happened, I think, in California during the COVID, which is restrictions on your capacity to increase customers -- existing customers. That's to me the major risk that Self Storage is facing potentially. But hopefully, it's not the case.

Thank you so much for your time, guys. And thanks for your time, Marc and thanks for the attention.

Have a good conference.