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

Good day, everyone, and welcome to today's Shurgard Self Storage Half Year 2023 Results Earnings Call. [Operator Instructions] Please note, this call is being recorded and that I will be standing by should you need any assistance. It is now my pleasure to turn today's program over to Caroline Thirifay. Ma'am, please begin.

Thank you, Jasey. Good morning, everyone. Thank you for joining us for the H1 2023 results. I'm here with Marc Oursin, Jean Kreusch and Thomas Oversberg. 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 our press release and an audio webcast replay of this conference call on shurgard.eu website. The line is a little bit unstable. So if we disconnect, we will -- it will take a few minutes to reconnect, but we will recollect in that case. With that, I will turn the call over to Marc.

Thank you, Caroline. So happy to share with you the -- this result, great results for H1 2023. Starting with our revenues. So the total company revenue grew by 10% from the period versus last year, with amazing countries of Germany, the Netherlands and the U.K., U.K., which is, for us, London. At the same time, this growth of the revenue triggered the growth of our NOI of 10.7%, which means that we have been able to increase our NOI margin total company by 0.4 percentage points versus last year. You know that the same stores are very important, and our same store is more than 90% of the total company. So all of these numbers are mainly coming from, of course, the same-store performance. And these same stores have been able to grow their revenue by almost 7%, 6.8% precisely, for the half year. And this is mainly due to 2 things. We have been able to increase slightly the occupancy. We have -- these are the 90%, with 90.4%, so a 2.2-percentage-point increase. And at the same time, of course, the main bulk of the growth of the revenue is coming from the in-place rent, with our continued pricing power with growth of 7.4%. At the same time, I would say that we have been able to start to get the benefits of our digitalization initiatives and being able to lead the growth of our OpEx or cost, if you prefer, and this growth has been only 4.4% over the period, so half year for the same store, which have been able to grow our margin for the same-store growth by almost 1%, or by exactly 0.8 percentage points versus last year. As a reminder, we became a U.K. REIT as of March 1, 2023, and this had some consequences in the acceleration of our earnings in Q2. And last but not least, we have been able to deliver almost EUR 72 million of earnings, adjusted EPRA earnings precisely, which is representing a growth of almost 14% for the half year versus 2023 (sic) [ 2022 ]. If we go to the other elements regarding the balance sheet. So of course, a very robust balance sheet. So first, we will pay a dividend of EUR 0.58 per share, and this will take place early October. Secondly, our net tangible assets, [indiscernible] on EPRA, the share is at EUR 42.2, which is actually an increase of almost 4% versus December '22, and this is mainly due to the fact that our exit cap rates have been stable over the period plus the growth of the cash flow of the network. If you look at the cash position, we are almost at EUR 60 million, EUR 57.2 million. Our LTV is low at 18%, with a net debt-to-EBITDA ratio of 4.1x, and the ICR increased at 10x. Let's talk about the future, pipeline. So the pipeline is confirmed. So we continue to grow at a pace which is very significant. We have shared with you the documents and that has been posted, the fact that for the period '23 to '26, up to now, we have already almost 10% of our total net rental square meters that should open in the coming years, representing more or less 136,000 square meters for a value of investment of almost EUR 300 million of direct project costs, with an expectation of return in terms of yield on cost between 8% and 9%. If you go to the next slide, actually, regarding the trend of this pipeline, I think it's interesting to look at that. Where you see the acceleration and especially since the Investor Day that we did now 2 years ago, it was September '21, and what did we say? We say that we're going to accelerate our growth based on our 3 levers growth, which means organic growth, meaning opening new properties and increasing the size of existing and doing M&A. And you see on this chart that the percentage, the red line expressed on the rentable number of square meters, has increased significantly. We were below 4%, and now we're at 6%. But of course, value-wise, it's much more. We are on track to deliver more than 70,000 square meters in '23, 75,000 precisely, and we confirm the guidance of 90,000 square meters for the year '24 and onwards. Then if I look at specifically Q2 numbers and a quick -- and a snapshot on that. So revenue-wise, we are still growing with a very high performance, 9.5%, with again, very strong markets in Germany, the Netherlands and the U.K., which is, by the way, quite different than our peers. Then our income in terms of NOI growth is also growing faster, 10.1%. The same store are decelerating as foreseen, and the deterioration is under control, 6.2%, which is still very high. And this acceleration or -- let's say, deceleration in the growth has been acquired with actually an increase on our occupancy, 0.2 percentage points. And again, the same logic at the half year which is a very significant increase on the in-place rent of 6.8%. And in the end, as mentioned previously, we got the benefit for Q2 that due to the fact that we are now a U.K. REIT, Q2, 3 months out of 3 of the quarter where we started U.K. REIT, and you see that the growth of the earning has been 15.2%, which is higher than the one of Q1. Then if you go to the outlook '23, it is confirmed -- we confirm that the revenue growth for the whole year total company will be at [ CR ] above 8% versus '22. The gain of the margin will be 0.2 percentage points total company. I will not come back on the property yield. I mean this was mentioned already, and this is the change, so 8% to 9% return for the investments. I think this tax rate below 8%, this is clearly due to the U.K. REIT and, of course, confirming the dividend payout of EUR 1.17 per share. So pretty confident for this rest of the year '23. And Jean, the floor is yours.

Thank you very much, Marc. We continue to show a robust performance in the first half of this year, in line with our expectations. Our revenue total company, as Marc said, has grown by 9.4% at constant exchange rate for the second quarter while we grew by 10% for the half year. Our NOI margin is at 68.5% for Q2, which is up 0.4 percentage points and also by the same percentage point for the first 6 months, demonstrated by small stability and continued digitization of operating platform, and that is leading to cost saves. Finally, our adjusted EPRA earnings at EUR 71.8 million grew by 13.9% for the past year at constant exchange rate and 11.3% at actual rate. We are pleased with the first half of the year, which continued to show resilience of the top line and confirm our ability to keep cost under control in a high-inflation environment. On the next page, our same-store property operating revenue continues to show a strong and consistent growth of 6.8% while with an average occupancy of 90.4% for the first 6 months, up 0.2 percentage points versus last year and an average in-place rent up by 7.4% at constant exchange rate versus 2022, reflecting our ability to raise both rates for new customers as demand remains good and to increase rates for existing customers. On the country level, Scandinavia is experiencing difficult macro instability. In addition, Sweden is also taking an extremely competitive environment. The Netherlands, the U.K. and Belgium are showing above 8% growth while Germany continues to deliver double-digit growth. On the following page, our 3 levers of growth are contributing to the 10.7% increase in our NOI at constant exchange rate. Our same-store NOI grew by 8.1% at constant exchange rate and contributed EUR 7.9 million to the growth while the development and acquisitions added another EUR 2.8 million, reflecting the ramp-up sales in our development activities, combined with our digitalization initiatives, which are now very much so [indiscernible] accelerated through natural accretions. We are increasingly able to operate our platform stores more efficiently and to have even less service, which makes up 30% of our Shurgard new contract. Moving on to the cash flow on the next page. We improved operating cash flow, and we are continuing to...

Ladies and gentlemen, please stand by. Your program will resume momentarily. [Technical Difficulty]

Okay, we're back. Sorry for that. I apologize. We had a fire alarm test in the building. So all apologies for the [indiscernible]. So moving back onto the cash flow. So I was about to say that we improved our operating cash flow, and we are continuing to expand our pipeline, reflected by a 14.7% increase in our cash spend on development and redevelopment, while we expect our acquisitions to fall in the second half of the year. In total, we invested EUR 60.3 million in the first 6 months of the year. We ended the year with a cash balance of EUR 57.2 million. We confirm the payment of a dividend of EUR 1.17 per share for the year, with a half year dividend of EUR 0.58 per share payable in October. On Page 12, we continue to show a very strong balance sheet, with a low and stable LTV at 18% and a net debt to EBITDA at 4.1x. Our debt as a weighted average interest rate of 2.36%. Our maturities are well spread, and 100% of our debt has a fixed rate. On our EPRA NTA per share increased by 3.8%, reflecting the growth of our NOI, while our exit cap rate basically remained flat at 5.2%. To finish on Page 13, we continue to show a strong growth of our net tangible assets combined with a stable and low leverage. I will now hand over to Marc for the conclusion.

Thank you, Jean. So we are on Slide 14 regarding the ESG strategy. So our priorities, if you look at the 3 major segments of ESG, are the following. So first, we are indeed -- we are rolling out completely our energy plan so by the end of this year -- or this year, sorry, all the properties will be truly covered with energy. And heat pumps also have started. It's a longer project, and we'll have replaced all our gas boilers by the heat pumps by 2030. And we have now a complete follow-up on the water consumption with interesting reduction. Regarding the governance, a couple of things here that [ applies ] during this year, actually on the first half. First, we have more independent directors. And by the way, our chairman is an independent director, our independent chairman, and we also reduced the size of the Board from 11 to 9 members. Regarding the -- actually also the reporting and the assessment of the physical climate rate, this was down fully, and we know precisely what is the situation per property. All of that actually delivered great ratings. [indiscernible] to have. But globally, we are, I would say, the leader of our industry, self-storage, in Europe regarding ESG. The commitments have not changed. We do confirm that we would like to be at net zero, I mean, by 2030, which for the operational side and material by 2040. So as a conclusion, Page 15, again, if you have to remember some takeaways. The first one is we believe we are the best performing platform with the runway in Europe that we have. Then these numbers are clearly driven by the benefits from our significant geographical spreads. Secondly, the acceleration of the setup of what we call the prop-tech platform and the stability of it. So clearly, how we are able to manage better and more efficiently our platform, so driving the margin up. And then the future, indeed, in terms of physical square meters, you've seen the acceleration and the significancy of that, so more than 10%. And of course, some M&A will fit this. And last but not least regarding the balance sheet. So I think Jean has explained very clearly that we have a very disciplined capital allocation, the average returns with a low leverage. The fact that we became a U.K. REIT is clearly a plus, and as I mentioned previously, we are the sector leader in terms of ESG credentials. So happy now to -- Caroline, to open up for questions.

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

[Operator Instructions] And our first question will come from Marios Pastou with Societe Generale.

A few questions from my side. So firstly, maybe if you could comment on customer behaviors as we are now moving through Q3. I know there was a mention that nothing has changed in the period. I just wanted to check if that's also been the case as we move on into the second half.

Okay. Thank you. Thank you, Marios. So regarding the customer behavior, actually, there are 2 aspects in your question, sorry. We have what we call the prospect, so someone who is willing to rent or spend somewhere and then our customers, meaning people who are already renting. So if you look at these 2 type of population, for the first one, the prospect, what we see is that the interest in self-storage. And how do we measure that? It's pretty simple. We simply check every day property in all the websites that we have in Europe, the number of clicks that we have from people browsing on a qualified page. What is a qualified page? It's someone who's going to the page of a property and looking at the prices. And what we see here is that Q1, Q2 have demonstrated a positive number of clicks for the same number of stores between the 2 periods. So the interest from people to rent units or to find space is the same. It's -- we don't see any drop there. Even the contrary, we see an increase. What has changed is that -- and this has changed since Q4 last year is that if the volume of interest is the same, the conversion requires more discount promotion, so in order to make the people becoming customers. And this is, by the way, what is explaining in the end is deceleration, [ but it's also ] the fact that you have customers getting in with a lower moving rate than before. That's the explanation. So that's probably for the prospect. On the customer side, so existing customers, which is, of course, something extremely important to look at, what we have shared with you already during the different road shows and the meetings we had since the beginning of the year or even last year, Q4, we said what could change would be people are looking at their personal P&L. It's under pressure due to inflation. And therefore, they decide to stop to rent and -- faster than what we have in the past. So there is a key KPI that we're looking at called the move-out ratio. It's simply the number of move-outs or people who are leaving us during a given period of time versus the number of customers we have. So if this move-out ratio is starting to go up, it means that, of course, people -- [ let's say, 4 ] people are starting to change their behavior. For the time being, we don't see any change. Even in market of Sweden where the macros and the competition is quite fierce, this ratio is going down. And the second thing for existing customers that was important to look at is the rental collection because, of course, if inflation is high and people are under pressure for the personal P&L, then are they're starting to have difficulties to pay. And here, not at all. We have this fully under control, and we don't see any jurisdiction or countries that changed in the rental collection that we have, which is a bit above 1%.

Very clear. And just secondly, maybe on to the expansion targets for the year. You've got 70,000 square meters targeted. You've achieved a fair portion of that through developments. There's been no acquisitions so far. So any comments on what you're looking at in your pipeline and whether you're confident in still achieving this in the second half?

Yes, Marios, we are pretty confident to reach what we have said.

And maybe just a follow-up on the acquisitions pipeline. Are you seeing transactions starting to come to the market? Any sellers emerging? And any comments on pricing you're seeing versus your own portfolio?

Yes, sure. Well, again, the -- what you see coming in, in this M&A pipeline, you can understand that we do not make public anything which is under discussion. We simply announced the M&A deals when they are signed and closed, but we have quite a, I would say, a number in the pipe. But it's very heterogeneous in terms of situation. You can have 1 property, and the owner is turning 65 years old, and he was the founder and is willing actually to cash in and to have, let's say, a different life. And then you have sometimes some also institutional owners who were invested now for, let's say, 5, 6, 7 years and willing to sell. And then the reason for these people is -- I'm talking about the institutional bodies. It's very, let's say, difficult to know because they want to say what they want to say. And for some of them, it may be offsetting some losses that they have in other parts of their portfolio. And for others, it's simply raising the cash because I think this is the right time to do to reinvest this money, this capital into other investments. So that's what we are facing. Regarding pricing, for the time being, we don't see a major decrease of pricing. It's more the other way around, which is more stabilization. The supply of deals is clearly, I think, below the demand level. And therefore, it's keeping a pretty good level of bargain on the side of the sellers.

[Operator Instructions] And our next question will come from Rob Jones with BNP.

I hope you can you hear me okay. Apologies to Marios, actually because I'm just following up on some of his questions that he asked. The first one, just on the occupier market. So obviously, you touched on the fact that you said kind of volume of interest is still the same, albeit in reality, obviously conversions are down. I wonder if you can give any numerical clarity as to what that means. Let's take an example where your average tenant duration might be next year. Then implicitly, you're kind of giving them a rent-free by the reduced that they get in the early months of their tenancy. And I guess what you're saying is that rent-free period, that discount has increased. I wonder what it means in terms of your expectation. Effectively, what the kind of net effect is impacted? That's my first question.

Okay. All right, Rob. So it's pretty simple. If I take the past 9 months of last year, so '22, globally, the average discount share was roughly below 10%, between 5% and 10% of our, let's say, revenues. When I mean discounts, I mean, all in, not simply the EUR 1, but price cuts and other things that we do. And it was below 10% the first 9 months of the year with, I would say, a spread from 5% to a bit above 10%, depending on the countries. Then in Q4 last year, we started to see the fact that, yes, people are still willing to rent and there's no problem with that, and that's great, by the way. It was also one main point from the many of your colleagues. But of course, we had, in order to convert them to keep the occupancy up, to make some -- to distribute more discounts. And this ratio that was below 10% since Q4 has reached more than 15%, so which is more or less more than 15% up. And what is interesting -- so that's why the deceleration you see on the in-place rent is simply the mechanism of every month 5%, 6% of new customers are getting in with the moving rate, which is actually lower than the moving rate we had last year due to this additional -- or this more intense level of promotions that took place since Q4. But the good news are, to me, is that we're going to make the look of that Q4 '23. And for the time being, what's also interesting to notice is that we don't see an increase of further cuts in the prices and discounts. I mean the level of discount is stable since, I would say, at the beginning of the year. And therefore, it's what we said also a couple of times, the way we have built up our budget and the anticipation of the way was that Q1 would be lower than Q4 in terms of growth of revenue for the same store, and then you have a deceleration in Q2 versus Q1, Q3 versus Q2. But Q4, we expect to see a certain stabilization in this growth of revenues due to the fact that we will be fully comparable with the level of discount that we [ stopped ] to do in Q4 '22.

Okay. That's very clear. And then my second question was just around acquisitions going forward. So obviously, you've given the guidance for kind of 90,000 square meters per annum after 2023, obviously -- or 2024. You -- obviously, part of that is reliance upon acquisitions clearly. But I wonder if you can give us some insights into the volume of deals that you are seeing relative to the volume of deals going forward that you will need to transact on an annual basis. A bad scenario would be you're transacting on 5 deals but you only see 10. A good example would be you transacting on 5, but you see [ 15 ]. Just some -- how many are going in the top of the hopper, I guess, is the question?

Yes. Okay, sure. So again, back to the, let's say, the numbers. What we have said is, if you recall, in '21, at the Investor Day, is more or less we double the pace of growth of this company. At that time, we were able to do when you look at the IPO, so which means '18, between '18 and '21, less than 40,000, 45,000 every year total, organic, so opening properties and M&A. And we said, yes, we're going to 90,000, so more than the double. In order to do that, we have, let's say, a ramp-up because you need the teams, you need to make the deal, it takes time to get the deals down, if you are talking about organic and getting the permits and then building these properties. And so we said, all right, we're going to ramp up this number. And in '23, we're going to do 70,000. And as of '24, we'll do 90,000 as a total, which is the 6% that you have seen on the chart. So if you look at '23, we are clearly -- with what we have disclosed, which is I think more than 55,000 and we said more than 70,000, so we're on target. The missing part will be simply coming from deals -- M&A deals that are in the pipe and that are, I would say, agreed with the sellers, but we're simply in final -- the diligence, and this will take place before the end of the year. So we will be above the 70,000 in '23. '24, what you see in the pipe is, I think, 35,000 for organic growth, and this 90,000 total company is a spread between 70,000 for organic and 20,000 for M&A. So I'm still very confident to be able to reach the 70,000 for 2024 because we put in our pipeline, for organic growth, meaning buildings that where we build the building or we convert an existing building, deals that we have signed with the CPA with the owners. And you should see, before the end of this year, quite a number of deals in terms of organic feeding this pipeline '24 and reaching the 70,000 for the year '24. Regarding then the additional 20,000 to reach the 90,000 coming from M&A, here, again, we have quite a number of discussions with potential sellers of assets. So that's why I'm confident to reach the 90,000 in '24.

Just to follow up on that. I am also very confident that you will reach the 90,000 in '24. But my question is to reach that 90,000, of which 20,000 is inorganic, how selective can you be when you're doing your deal screening? Do you see what I mean? That's the question I'm trying to get an answer for.

Yes, we -- Rob, Jean here. We remain very selective in our selection criteria. I mean, as you know, we only focus on the countries where we are -- in the cities where we are present. And we are not in a situation where in order to reach that 90,000, we're going to be less selective and start developing in secondary or tertiary or core levels. I mean that's really clearly not where we want to go into. We remain focused on the Tier 1 capital cities. I mean that's our focus.

Yes. All right. No problem at all. Understood.

We have questions from the webcast, a question from Vincent Koppmair, Degroof Petercam. Could you give more information on the situation in Sweden?

Sure, yes. So Sweden is pretty simple. So Sweden, you have the double paying in the sense that you have the worst macro situation in Europe, and you know that households are borrowing money to buy their homes, fully variable bullet loans, so you imagine the impact. So let's say, 2 years ago, let's say, I was paying EUR 500 for my mortgage in Stockholm for the apartment I bought, and now I'm paying EUR 2,000. So obviously, this does impact the situation in Sweden. And secondly, on the top of that, in Sweden, we have one competitor [ from Green ], which is very aggressive, which is actually in a rent-wise [ we mean ] aggressive is because this is the merger of [ Saripo Storage ] and Green, and they are in a ramp-up situation, knowing that their properties are half of our site on average. We have 5,000 square meter property in Sweden, where they have 2,005, and they are ramping up, which means they are very aggressive in order to fill up the property. And of course, in all the catchment areas that we shared with them, we do answer to our potential prospects and new customers on what we call [ board rate/fixed rates ] in order to get the customers in. So the perspective of Sweden from my point of view is that if the macros are not changing, something will change. It's the fact that at certain moment, it might take a year or maybe more, but Green will be close to their objectives of occupancy, and then the pricing will be smoother from that side.

Thank you, Marc. We have a question of [indiscernible], Kepler Cheuvreux. Considering the current economical context, do you see any decrease of occupancy for Q3 and further?

Well, no. No, why no? The question is, considering the current economical context, do you see any decrease of occupancy for Q3 and further? For Q3, we are already in mid-quarter. We are mid-August, which is we have 50% of the quarter. And we are on the same trend than what we had in Q2. So we don't see, for the time being, any decrease. Q4 will be too interesting. Is Germany continuing to be in recession? How are the markets going there? Obviously, they will have to fix their problems over there. But for the time being, I would say, if you take, for example, Denmark where the economy -- also the macros are quite difficult versus the rest of the continent, we are still doing pretty well there. So I would say, Q3 fine, then Q4, let's see.

Thank you, Marc. Question from an investor. Do you have any comment to make on the 2 very significant deals in the U.S. [indiscernible] self storage and Extra Space [ with dry ] storage?

It's great to consolidate. That's my only comment.

We will have another question from Celine Huynh with Barclays.

Marc, just one question from me, please. There was a large [ privately owned ] U.K. self-storage portfolio in the market at the start of the year. I think you looked at it. Do you know if it's transacted? And if so, what is your view?

Celine, which one are you referring to? Which country?

U.K.

What? Sorry, the line -- I don't hear you so loud. Which country?

U.K.

U.K., you said a large privately owned portfolio in the U.K.

Yes, correct.

Yes. No news.

[Operator Instructions] All right. And it appears that we have no further questions in the queue at this time.

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

Thank you, all of you. Have a good day.

Thank you, ladies and gentlemen. This does conclude today's program, and we appreciate your participation. You may disconnect at any time.