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

Good day, everyone, and welcome to today's cash acquisition of Lok'nStore Group plc. [Operator Instructions] Please note, this call may be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn today's call over to Caroline Thirifay, please go ahead.

Yes. Thank you, Ashley. Good morning, everyone. I'm here with Marc Oursin, Isabel Neumann and Jean Kreusch. We are very excited about the announcement made today. The Rule 2.7 announcement is a statement of Shurgard intention to make an offer for Lok'nStore. The transaction is going by the U.K. Takeover code. As such, during today's webcast, our of script and responses will be limited to the information contained in the announcement. With that, I will turn the call over to Marc.

Thank you, Caroline. So good morning, and welcome to our information call. The purpose of this call is to share with you information related to the proposed acquisition of Lok'nStore Self Storage by Shurgard Self Storage. So I propose that we go through the deck. So we are on Page 2, so -- which is a transaction summary. So let's first focus on the strategic portfolio rationalization. The acquisition of Lok'nStore actually doubles the size of Shurgard in the U.K. We'll go from 48 properties to 100 trading pipeline and is representing 2 years of total Shurgard growth, which is very significant. Increased exposure to London, Southeast region and Manchester, which have attractive underlying market dynamics and demographics with highly complementary with Shurgard London's-focused portfolio. Another aspect of it is the high-quality purpose-built stores with large growth potential through 2 things: First, existing store occupancy ramp-up, currently 67 today, up to 90% at fully stabilization; and the stabilization of the secure development pipeline, representing another 29% of the current Lok'nStore fully built-out MLA. This acquisition has a combination of existing assets and attractive development pipeline, which enhances our growth profile. If you look at this portfolio, 17 owned stores, 9 legal stores and 17 under management contract, secured development pipeline of 8 owned stores and 1 store under management contract further reinforce our U.K. future growth potential and leveraging Lok'nStore's strong track record in developing quality assets. Secondly, the key financial elements of the offer are 100% cash and a price of GBP 11.10 per Lok'nStore share, representing a total equity value of GBP 378 million and the total all-in cost of EUR 613 million. So Shurgard will acquire the entirety of Lok'nStore share capital with shares to be delisted upon closing. The transaction is expected to be executed by a scheme of arrangement. And currently, we have a 16% premium to spot as of yesterday closure of the market and 32%/37% premium if you look at the VWAP 1 month and 3 months. The Board recommended the deal. I mean, the Board of our Lok'nStore, of course, recommended the deal with a 19% hard irrevocables from key shareholders including Andrew Jacobs, who is the Founder, Chairman and CEO of Lok'nStore, who has 13% of the shares. Initially, financed also with 100% with a bridge facility and we expect to complete that deal by July 2024. So thirdly, looking at the operating and financial benefits for Shurgard and its shareholders. Future stabilization NOI yield at 8% -- circa 8% at maturity, 5 to 6 years, inclusive of ramp-up of existing sites and secured development pipeline. Secondly, total estimated operating G&A and tax synergies of EUR 4 million to EUR 5 million in the first full year with incremental tax savings as the business grows, knowing that Lok'nStore will be integrated into our Shurgard UK REIT structure. The pro forma capital structure post deal with Shurgard guidance levels. We remain committed to a robust balance sheet and our financial policy in the medium term. And last but not least, accretion on Shurgard adjusted EPRA earnings per share, mid-single-digit dilutive in '24, neutral for '25 and accretive as of '26. So to conclude this page, remember that this proposed transaction is nearly doubling our size in the U.K. and representing almost 2 years of footage expansion guidance for our company, Shurgard Group. I will let now Isabel, our CIO, presenting you more information and details regarding the strategic rationale.

Thank you, Marc. It's a very exciting day for Shurgard. The first point to note is how complementary Shurgard and Lok'nStore are geographically. Shurgard is purposed in London while Lok'nStore is a leader in the Southeast and has a very strong foothold in the Greater Manchester area. The acquisition of Lok'nStore allows us to add 2 additional and very attractive U.K. growth markets to our portfolio, the Southeast and Manchester. The Southeast has very attractive demographics with more than 9 million people and the highest income per inhabitant after London. And the Greater Manchester area has a 4 million population and is the second largest metropolis carrier after London. So we will have 3 core areas in the U.K., for which we will be able to continue our growth. London, Southeast and Greater Manchester. More importantly, the acquisition of Lok'nStore store will double the size of Shurgard U.K. from its current 48 to 100 stores when you include the pipeline. Before, we were already a leader in London. And with this transaction, as you can see on the graph in the top right, for the U.K. as a whole, it puts us right up there, more or less at par with the Big Yellow. As the European leader in self-storage space, Shurgard is spread within 7 countries. As you can see from the table, the U.K. currently represents 18% of the portfolio. The Lok'nStore transaction will allow us to increase the proportion of the U.K. in our total portfolio to about 25% of our total European store count, so further enhancing a very well-balanced geographic portfolio. Secondly, a key driver for us is the high quality of the portfolio. So in fact, the only portfolio consists of 171,000 square meters, including the secured development pipeline, 76% is purpose-built and very high quality and the Lok'nStore store team have really done a tremendous job over the past years with the portfolio. The portfolio is very young, with 43% built since 2022. Furthermore, we will generate income from 18 stores under management. If I can ask you to turn to Slide 4. A third point that underpins our strategic rationale is the additional growth potential this transaction generates. As Marc already mentioned, this transaction accelerates the growth in the U.K. and more importantly also, for Shurgard as a whole. To put this into perspective, we have committed to opening 90,000 square meters per year, as you all very well know. This transaction adds an owned M&A of 171,000 square meters, including the pipeline, which represents almost 2 years of the overall Shurgard European-wide development pipeline. It gives you an indication of the growth it generates. So let's look a little bit closer at that growth. First lever of growth, our current own portfolio at 121,000 square meters with 26 operating stores that has an overall occupancy of 67%. Remember, 43% of the portfolio opened after 2022. The second lever of growth is the development pipeline, which is 50,000 square meter with a further 8 stores. This is an additional 30% pipeline versus Lok'nStore's current MLA. And the third lever is we bring -- we aim to bring all these stores to Shurgard's standard target occupancy of 90%. We expect to reach this in 2026 for the current operating stores and within 2 years of opening for the pipeline stores. So putting this all together, the Lok'nStore pipeline of 50,000 square meters and 8 sites combined with Shurgard's own announced pipeline of 149,000 square meters and 25 stores brings the total pipeline for Shurgard to approximately 200,000 square meters and 33 stores or about 12% of the fully build-out MLA. So moving to Slide #5. So a recap on how this transaction fits within the Shurgard strategy and how it impacts our scale. Shurgard has 48 U.K. stores focused in London. This includes our 5 development stores due to open in 2025 and '26 and representing 252,000 square meter MLA; Lok'nStore has 62 U.K. stores, including 9 pipeline stores, 34 of these are owned leased stores and 18 are under management contracts. The owned store represents 171,000 square meter MLA. So on a combined basis, we will have 100 stores and 423,000 square meter MLA. On a total Shurgard basis, Europe-wide, this brings our store count from currently 301 stores to 353 stores and from a current MLA of 1.5 million square meters to 1.7 million square meters. So in summary, a, we will double our U.K. footprint; two, we will extend our reach from London to include the Southeast and Great Manchester; three, a very concentrated portfolio in 3 core and highly attractive areas; which, four, will make it a very efficient portfolio; and five, the transaction accelerates the overall Shurgard's growth. I will now hand it over to Jean.

Thanks, Isabel. As Marc mentioned, we have a bridge in place to finance the deal. At GBP 11.1 per share. The equity value is GBP 370 million. The total all-in cost of EUR 630 million includes EUR 83 million of CapEx to be spent to finalize the secure pipeline of 8 stores. Refurbishment CapEx of EUR 13 million and transaction costs estimated at EUR 32 million, with the remainder comprising the target's net debt and lease liabilities. Initially, before we take out the bridge, our pro forma leverage will increase to 25% LTV and 6.2x net debt to EBITDA. However, we are always focused on having a robust balance sheet and we reiterate our financial policy, which is a target LTV at circa 25% and 4 to 5x net debt to EBITDA and a short-term medium maximum of 35% loan-to-value and/or above 5x net debt to underlying EBITDA. We aim to finance Lok'nStore and Shurgard future development pipeline with a mix of debt and equity as appropriate. We remain committed to our robust balance sheet and to continue delivering attractive returns to our shareholders. We anticipate the transaction time line is the following: on Page 7, we expect the publication of the scheme document early May or within 28 days of today's announcement. The earliest date for Lok'nStore shareholder meeting is anticipated at the end of May. We then anticipate the court sanction hearing and closing in July.

Thank you, Jean, and thank you, Isabel. So for your information, this presentation is also available on our website. And so I would say, take the benefit of going through this document again. And now, Caroline, let's open to the Q&A session, please. Thank you.

Thank you, Marc, Jean and Isabel. Yes, we'll take your question.

[Operator Instructions] We'll take our first question from Marios Pastou with Bernstein.

Just 2 questions from my side to kick things off. So the existing portfolio has 17 stores under management contract, I believe. I think you had some under these arrangements in your Paris portfolio previously, 1 or 2 stores. So this is a limit, Shurgard, its [ performance and ] operation? Could you consider buying any of these stores back into the portfolio in the future? And how do these look in terms of how the yields versus the owned stores? And then secondly, you mentioned that it will take about 5 to 6 years to fully extract the upside. How does this compare versus, say, other acquisitions or developments across your existing expansion?

Okay. So regarding -- thank you, Marios. Marc speaking. Regarding the third-party management contract, we will first assess the situation, and we will come back to you after having done that. So it's too early to comment more than this. And I'm sorry, you might get some frustration about this exercise, which we cannot easily understand, but that's what we can say today. So that's for the first question. The second one, we have never -- we have always said in our annual report, press releases that when we do purely organic development, we are around 5 to 7 years. So we are perfectly in line with what usually we have.

And in terms of -- sorry, in terms of the first question, is that in terms of coming back to us in terms of what you could potentially do in the future in terms of buying them back? Or just more generally in terms of their operation?

Yes, yes. So we -- here, again, we need to clearly assess this business and the performance of the stores as we'll do for all the portfolio in detail.

We'll take our next question from Marc Mozzi with Bank of America.

I have only one question, which is regarding the different tax liabilities that Lok'nStore have, which is about GBP 66 million. Is that going to be -- remove the fact that you're U.K. REIT? And how does -- is that going to work? Are you going to have to pay something for it? I just wanted to understand how -- since -- on their move here. Because I guess it's part of your EUR 613 million of total cost, which means your enterprise value is higher than the GBP 378 million you've been indicating, if you include the GBP 66 million deferred tax liabilities, just wanted to understand how the math works here.

No, it's not part of our acquisition cost. We are planning to basically integrate Lok'nStore business into ours, and as a result, it will become a U.K REIT.

So the GBP 66 million will disappear?

Yes. Marc, our line is not that right. So what exactly did you say at the end regarding the EUR 66 million deferred tax liabilities?

What I'm trying to understand is you're paying for it right now because to get to EUR 600-plus million of total acquisition cost, including development pipeline, transaction costs and so on. Doesn't bridge exactly the GBP 378 million. I don't know it's pounds or euros. But the gap, to me, is GBP 66 million deferred tax liabilities. That's looking too high. And the fact that they're going to move from being a non-U.K. REIT to a U.K. REIT with you, how that's going to move things -- how things are going to move? Are you going to offset the GBP 66 million, so actually, you're paying for it now, but then you're going to recover it because, then it's going to be removed. But I'm just trying to understand.

Well, yes. I mean, we're clearly doing a standard move for a regular corporation moving into a REIT and we put out those loans, and the accounting treatment will be aligned to that.

Okay. Well, that's outside of this call, but I just want to understand how you get to EUR 613 million of the total cost.

We'll take our next question from Frederic Renard with Kepler Cheuvreux.

Just maybe 2, 3 questions on my side. So if I look at the share price of Lok'nStore, it's currently above your bid price, so it could lead to speculation and potentially a counteroffer or maybe a revised offer. Maybe 2 questions there. Do you have a firepower for paying more in your view? And in the case that the bid will be successful, what if you only own 40% of the company at the end? Or are you going to consider a different ownership scenario?

Sorry, what is the second question? I didn't hear you very well.

What could be the different -- have you considered any different ownership scenario, meaning if you own only 40%, only 50%, only 20% of the company?

Right. So for the first one, we cannot speculate on any other potential interest in Lok'nStore. That's the answer. And on the second one, we have presented a structure with -- which is we buy all the shares, and this is integrated, as Jean said, into our new carried scheme. That's what we are looking for.

So does that mean that if you don't have 100% of the share, you won't pursue the deal?

No, this is the scheme of arrangement in the U.K. You know that in the U.K., you have 2 ways when you go to public companies take over, you have what's called scheme of arrangement and the other one is offering. And the first one allows you, when you reach 75% of the votes at the shareholder meeting, to actually integrate. And I mean, you get the company and therefore, you can delist the company as soon as the reach 75% for sure.

All right. Okay. And then maybe last question. Can you comment on the mid-single-digit dilutive impact on EPRA earnings for 2024? I would like to know maybe what is the current interest rate of the bridge funding and the maturity attached to the bridge facility.

This is not disclosed yet so we cannot comment on the bridge, the details of the bridge. And the dilutive, I cannot say more than it will be, as we said, a mid-single-digit dilutive on the earnings '24 per share.

On consensus expectation, I guess, then?

Sorry?

On the consensus expectation, you expect the mid-single digit dilutive impact?

Right.

In 2024.

Yes, in '24. Which is -- which will be roughly 6 months up here.

We'll take our next question from Charles Boissier with UBS.

Just to understand on the strategic fit of Lok'nStore. So Shurgard, in general, my understanding, correct me if I'm wrong, is you really like capital cities and the larger cities. So here, it's slightly more spread out. Obviously, I take the point that it's around London, but you also have a part within many other cities in the Southeast. So how much is core of this portfolio? Would you say that 100% is core? Or would you expect that there is a portion that you would look to sell in the future?

Isabel?

So at this stage, we cannot comment more than what we've already been disclosed. But as we said, the Southeast and Manchester are 2 very attractive areas for us with attractive demographics. So those are -- that is essential in our transaction. And of course, as Marc already mentioned, we will evaluate all the stores, of course, as we add them into our portfolio. And the committee is just in place, but at this stage, there is no further commentary around that.

Okay, clear. And second question, you mentioned you will fund the pipeline with a mix of debt and equity. So obviously, the pipeline is over the next 2 years. So the white label, my understanding is this is new fresh equity as opposed to the equity raised last year. Is that a completely wrong understanding?

No. Not the wrong understanding.

So therefore, it's the right understanding. And Charles, just, if you look at Page 5 that is, however, presented back your point regarding out of these 2 core areas, that's what we call London, Southeast and Greater Manchester. Most of the properties are third-party management properties. So we will simply assess that as [ it will allow ].

We'll take our next question from Sam King with BNP Paribas.

Two from my side, please. The first is what gives you confidence that you can grow occupancy in the Lok'nStore portfolio materially higher than where it is now? And the second is just in relation to types of assets within the Lok'nStore portfolio. Now as Shurgard, you clearly pride yourselves on being majority freehold ownership. But the percentage freehold in Lok'nStore is lower, and there's obviously the managed portfolio as well. So if you can just add some color on how you're thinking about that. And when you initially looked at the transaction, was the managed portfolio a negative element in your view?

So regarding the -- I will answer to the first one and Isabel will take the second one. So regarding the first one, so about our capacity, it's understood well, to grow the business to the standards that we have, so this time, it was not a [ fight ]. We have, we think, a pretty good, and we have mentioned that many times in the public disclosures and meetings we had for Shurgard, our, let's say, pricing policy and mechanism related to that makes us pretty comfortable to get there within the timing that we have indicated. I would say that's the answer for the first question. And regarding the second one?

So if you look at the portfolio, out of the total stores that Lok'nStore has in terms of the operating stores, there are 26 stores which are -- they operate under their own stores and then 17, which are managed stores. Out of the 26 owned stores signed on leaseholds and 7 are freeholds or [ high-performance ]. And so this is very high, as we mentioned, it's a very high quality portfolio, whereby the majority is very much purpose-built. And 42% have been kind of built only in the last couple of years. And then towards the managed stores, there are 17 of them with 1 in the pipeline, and as Marc said, we are -- we will evaluate all of those as we are taking over the portfolio.

And the pipeline of 8 stores is also fully freehold.

Yes. So in total, there will be 25 freeholds and 9 leaseholds.

And again, just -- actually, sorry, just to comment. This exercise is a bit -- maybe a bit frustrating. I repeat that because we cannot really answer more than what is actually in the deck, in the 2.7 announcement that are publicly on our website. So again, excuse us for that, but more to come in the coming months and happy to be able to elaborate more on your questions. But again, it's as frustrating for you as for us. Ashley, yes, any other questions?

We'll have our next question from Kanad Mitra with Barclays.

Can you please comment on the 8% stabilized yield because it's kind of at the lower end of your guidance? The acquisition deal that you have reported for this transaction?

Stabilized yield at circa 8% is in our guidance. I mean, our guidance for yield is for organic development and M&A between 8% and 9%. That's stabilization and here, we're at 8%. We're in the guidance.

We'll take our next question from Kai Klose with Berenberg.

I've got 1 question on Page 4 of the offer document. You mentioned there is a condition that Lok'nStore need to somewhat amend their business model in order to make it consistent with Shurgard's suite model. Could you give more details on that.

It's just a normal process that we align terms and condition to ensure that we're in line, so it's not much.