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

Welcome to this investor presentation of Shurgard. The speakers are Marc Oursin, the CEO; followed by Jean Kreusch, the CFO; and Thomas Oversberg, the Finance Director.

So let's start with the company overview. Shurgard at a glance. The first important thing is that we are the largest platform. It's what you see on the left side of the screen. And the largest platform with an unrivaled presence and brand. By the number of stores, 281 stores within 7 different countries, mainly in Northern Europe or 1.4 million square meters of total rentable areas and more than 220,000 customers with a high occupancy, close to 90%. In addition to this, I would say, position of being the largest platform, we are a growth machine, as you can see in terms of revenues, margin and earnings with a EUR 4.5 billion EPRA net tangible asset. But this growth pattern is also secured with a couple of key elements of resilient as having a prime portfolio, which is strategically centered around capital and major cities with unencumbered assets. Resilient model, supported by the geography spread amongst the 7 countries, as mentioned previously. Our robust balance sheet, disciplined capital allocation and returns. From these investments, our scalable prop-tech platform. And then regarding our customer base, having 63% of our customers staying on average more than 5 years, which means that we have a pretty sticky base. And last but not least, supportive long-term shareholders that are Public Storage and the Pension Fund from the State of New York. Last but not least, too, we are the self-storage sustainability leader, and you have here a couple of metrics. And amongst MSCI, GRESB, we are a member of the BEL ESG Index and getting some awards from also EPRA for the way we are disclosing our ESG matters. So what to remember, #1 platform and brand with growth and resilience. Let's focus on our geographical spread. This maps are excluding actually the latest acquisition that we have done in the U.K. called Lok'nStore and also the latest one we have done in Germany called Prime. But I will come back to it later in the presentation. If you look at on the right side, the circle with the spread of countries, you can see that we are very well spread over the 7 countries with significant shares for each of them, knowing that Denmark for us is part of the Nordics with Sweden, which is so close to 18% share. On the top of this, if you look at then the different red dots on the maps and blue dots, red dots are capital cities and blue dots are Tier 1 cities. 94% of our platform is in these capital cities and Tier 1 cities from the 7 countries. And we are present in more or less 20 cities. So no one else has this characteristic, combining geographic spread and being in the right locations. This is why Shurgard is the unique prime self-storage portfolio in Europe. Let's talk a bit about the history of the company. You have here the time line from left to right, with the different major steps and milestones of Shurgard Europe. So the first step has been actually almost 30 years ago, the first store opened in Brussels in 1995. And from the period of 1995 until 2005, it has been, I would say, a game of starting and scaling up the company by opening properties in the different countries where we are today. Then in 2006 and '07, Public Storage took over Shurgard Inc., who was the mother company of Shurgard Europe and based in the U.S. And then later on, PSA sold 51% to the Pension Fund of the State of New York in 2008, and PSA remain as a managing partner with 49% of the holdings. Then GFC arrives. So we are during the period 2008 to '14. And we took the benefit of that period to do a couple of things to move, I would say, from a portfolio to a platform, which means creating efficiencies and scalability of this portfolio to be a platform and also deleveraging the balance sheet. Then starting to be out of the GFC, 2015 to 2018. And this period was for us, resuming development mainly through organic and partially with bolt-on acquisition. And in 2018, we became a public company. We did a successful IPO on Brussels Euronext. And since then, I would say, since 2018 till today, actually, we have been able to get strong financial performance with our conservative financial policy. We became a U.K. REIT in March '23. We did a successful equity raise of EUR 300 million in November 23. We got a BBB+ rating from S&P in August this year. And to finish this current year, we have been able actually to acquire a major operator in the U.K., Lok'nStore, this was in August. And actually a third acquisition in Germany called Prime. Based on that, you can see that our trajectory has been to grow from the portfolio to an efficient and profitable platform with, obviously, growth potential. Let's talk now about the scalability of our platform and its cycle or what we call the strategic circle. And I will start on the top from the focus on highly urban regions. So -- and we're going to go clockwise from that around the cycle in order to explain our strategy. So actually, the story starts with locations. Safestore is an urban B2C product, therefore, focusing on capital cities and Tier 1 cities, brings demographic growth and resilience. Based on that, the brand awareness. So being in a B2C asset class requires strong brand for awareness and recognition. So density of properties in a given area, call it a city or cities in the countries, density of properties helps for this. So and then Item 3, convenience, which is one of the 3 key USPs or unique selling position of self storage. Here, customers consider our services as their basement or attic in a remote location. And the consequence of this is short catchment areas where 80% of our customers do live within 20 minutes driving time. Therefore, talking about B2C. We are focusing on our sticky residential customers who do represent 80% of our customer base. And this is the way also our properties have been designed. We have unit sizes that are actually limited to 25 up to 30 square meter, and starting with 1 square meter. Then we go to occupancy. And our commercial policy starts with actually focusing on high occupancy. We want to be at 90%, which means also more customers to increase long term. Then the pricing itself. So we have dynamic and actually sophisticated pricing models for new customers, but also for existing ones, which brings revenue growth higher than inflation. And last but not least, the platform growth. So regarding the platform growth, we are able to deliver attractive returns because our capital allocation respects a strict discipline in terms of geographies, countries and cities. And in addition, actually, growing where we are is able to increase our margin due to the scalability of our platform. So as a conclusion, the way we operate, develop and deliver is really unique for the industry in Europe. If I start with the first key credit highlight, being the self-storage leader is the key topic. Secondly, we have very long-term tailwinds supporting the demand trends, as you can understand. Thirdly, with a strategically located and geographically diversified with unencumbered properties. As a reminder, 93% of our properties are freehold. Fourth, our track record of strong and resilient cash flow generation, plus a prudent financing policy commensurate with a very strong investment-grade rating. Fifth, our healthy growth is driven by organic investment, including digitalization, also bolt-on M&A with strong financial position and conservative leverage policy. Six, our multicultural and experienced management team. Seventh, very strong ESG standards and ambitions. And for eighth, at the end with the eighth highlights related to long-term vision and ability to support from our reference shareholder. Therefore, these 8 key credit highlights demonstrates our strong business model based on centralized and scalable platform, fueling healthy growth strategy. Regarding our clear leadership for the European self-storage industry. You can see on the left side by the number of stores, the red bar, that we have 281 and we are the #1. Knowing that, you can add on that, the 43 coming from Lok'nStore at the bottom of the graphic reinforcing our leadership. If you go to the middle and you look at this ranking in square meters, actually, our size, which is 1.4 million, is equivalent to the sum of the #2 and the #3 even before Lok'nStore. And three, being the #1 is one thing by the size. But being the #1 because you are also the #1 and the #2 in the different countries where you are operating is to us, also a clear sign of our leadership. And now we will talk about the demand and specifically what is driving the self storage need and how people do use it. So if we go from left to right, starting from the first box, so what is self storage for our customers? Here, pretty simply, it is for them, my attic or basement in a remote location. And that's why we have short distance catchment, low frequency of visits, exit barrier with sticky customers, meaning an average length of stay of more than 41 months. Then why do people need self storage? Well, when you are combining life events that are birth, death, divorce, mobility, hybrid working with density of population, meaning lack of space and the level of income, you arrive to the need of self storage. And that's clearly what is driving our industry. And then as mentioned previously, where do the people live? And the way they consider this service is bringing actually small catchment, with 50% of the customers for a given property within 10 minutes driving time and 80% within 20 minutes. And by the way, this is very important for our development policy and capital allocation because to develop properties, we need to be close to residential. And then who are they? What kind of profile? The profile here is quite logical. You are in the cycle of life. So actually, we have more than 70% of our customers that are millennials and Generation X. So Generation X up to, let's say, 60 years old. And we have, therefore, this major share of our customer base related to the number of life events and wealth that people have between the age of 25 to 60 years old. Then on average, what do they rent in our properties? Well, usually, in Europe, we are talking about 6 square meter. That's the average unit size. They pay EUR 140 per month, which means that also the frequency of visit is quite low. And then if you look at back to the frequency of the need, which is the last block on the right, the need is roughly 4 to 5 years. Every 2, 4, 5 years, people will need storage in Europe. Meaning that we have 20% of repeat customers in our customer base. And in this customer base, you have 2 different profile of customers. We have what we call the short stayer, people staying 5 months, which is 36%. And the remaining 63% that are long stayer with an average length of stay of 62 months. And what we call lifetime value, which means the -- how much money these people would have paid on average for the whole stay, is around EUR 5,000 during the contract period. So just to remind, as a simple reminder too, self storage is not logistics or warehousing. It's very different. It is a B2C need driven with a sticky business. Well, to make a long story short, we are in the right countries with the right size. It's what you see on the left. You see the market of self-storage spread per country in terms of number of stores. The red bars are where Shurgard is. If we are in Belgium, it's because we started the company there 30 years ago. And if we're in Copenhagen, it's because it's very close to Sweden, and we consider Copenhagen part of the Nordic market for us. Here, the 2 main points to know is -- to know and to remember actually is, first, what you see in the middle of the slide is the comparison of the penetration of the industry between Europe and the U.S. expressed in square foot per capita. Europe is at 0.5 square foot per capita of self storage, while the U.S. is 9.4. So clearly, Europe is par on the supply versus the U.S. Second, if you look at the left part of the slide, where you see actually this same penetration expressed in square foot per inhabitant for the different capital cities where we are. And you can see that if we are comparing Paris region with, for example, Stockholm, it's more or less 4x less. So which means that we have a lot of space to grow in all the cities where we are in Europe. And by the way, Stockholm, London and Copenhagen continue to grow. It's not a static situation. So clearly, the points to remember from this slide is relevant markets that are undersupplied, and we are well positioned in these relevant markets to seize growth with no oversupply risk at all. So on the left side, you see the breakdown per country where the properties are, no need to come back to this. But even more important now because we talk about real estate, what kind of buildings we have. So our portfolio is really a prime one for a couple of reasons. As I said, 94% in capital and major cities. Secondly, 93% of this portfolio is freehold or long-term leasehold. Three, 100% unencumbered assets. And last but not least, the average age of use of our building is 15 years, so pretty young. Then if you look at on the right side, this picture, so this gorgeous property of Shurgard. 63% of our portfolio are what we consider purpose-built, meaning that they have been designed and efficiently built in order to maximize the gross versus the net square meters. The fact that we are the owners also and the full control of these properties brings us some flexibility for remixing and redevelopments. The fact that the usage of this building by customers is low, it means low maintenance CapEx. The less you use an asset, the less you damage an asset. And also the quality of buildings with strong branding and consistent look. This is what you see. So with this red, white and big Shurgard words on it. We are very standard by the size. We have 5,100 square meters on average per property with roughly 750 units within it. And in terms of utilities, we have, of course, a very low consumption. And on the top of that, we have a building management system, so what we call BMS, that helps us to be even more efficient. So last but not least, also, our supporting center in Europe is based in Brussels, which means that within 2 hours car, train or plane, we're able to reach 100% of the portfolio. So -- and now I will turn to Jean for the rest of the presentation. Thank you.

Thank you, Marc. Now let's have an in-depth look at how attractive and resilient the business model is, our fourth credit highlight. Firstly, the economics of our typical Shurgard stores are characterized by a low breakeven bound at 33%, stabilized occupancy at around 90% and a low-cost basis, driving high NOI margins. Our cash flows over the years have been growing strongly and are quite predictable as we have demonstrated our ability to generate operational leverage. This track record of strong and resilient cash flows is underpinned by, first, resilient revenue driven by 4 elements: one, granular and diversified customer base with around 700 customers per store, but also sticky customers with 63% of our customers that have been with us for more than 12 months. Thirdly, a strong overall occupancy of around 90% throughout the cycle. We never went down below 80% since 2009. And finally, a high margin ancillary revenue, including insurance, retail and other revenue representing 13% of total revenue. Second, we have an optimized yield management, thanks to our centralized pricing system, allowing us to maximize occupancy and increase price to existing customers above inflation. And finally, our cash flow resilience is reinforced by the fact that 90% of the costs are fixed, combined with low maintenance CapEx. This proven track record of strong and resilient cash flow generation, combined with a prudent financing policy, which Thomas will elaborate on later, resulted in a BBB+ stable outlook credit rating by Standard & Poor's. Shurgard being the first and only European self-storage operator with a rating. The rating framework is well within our overall guidance, and our ratio are sitting quite comfortably within its boundaries. S&P rating clearly recognized our strong financial position and prudent financing strategy. Now moving to our credit metrics. Let's explore the 3 levers driving our growth targets, leading to increasing our footprint by 90,000 square meter per annum with an investment of EUR 200 million per annum with a targeted yield of 8% to 9% at maturity. Our first lever is the redevelopment of our existing stores. We obviously benefit from a high freehold ownership representing 93% of our portfolio. The developments generate immediate uplift in revenue and NOI with a yield of above 10%. Organic development is the key growth lever for us to maintain our market share. We are facing a very undersupplied situation in our core markets. To give you an idea, by applying the London penetration in Paris, we could add an additional 143 stores in Paris. Overall, there is capacity for more than 400 stores in our market, highlighting the undersupply in Europe. And finally, through bolt-on acquisitions, we have demonstrated over the years of positioning as the industry consolidator in Europe. We did 25 deals across 5 countries in 10 years and developed a true expertise in integration, scalability and standardization at speed. Our existing stores and our pipeline is supported by the digitalization of our processes through an optimized and centralized platform. We focus on continuously improving the customer proposition by offering a customer-centric digital experience, such as access control app, e-rental, which is reflected by our high Google review score of 4.8 stars out of 5. Through our e-rental solution, we currently have circa 50% of our customers who are renting with us without any interaction with our store staff. It is a clear example of how our digitalized platform is driving our margin expansion. Our investments in digitalization allow us to have better operating efficiencies through collection and analyzing data for predictive revenue management, as well as cost optimization through connected systems, for example. Our digitalized platform is a key competitive advantage, and it is also driving enhanced customer experience. It gives us greater brand visibility, increased security and lower environmental impact. Brand visibility through a unified image of our stores and strong presence on the web allowed us over the years to build a very strong brand and therefore, keep our marketing costs stable and under control. Our successful model is based on the best-in-class customer experience and long-term customer relationships. Our prospects can reach us through 3 channels: the stores, the phone or increasingly, our website. We define two types of customers, the short-term ones, representing 37% of our total customers and staying on average, 5 months. 63% of our customers have been with us for more than 12 months and have a 62 months average stay, demonstrating the stickiness of our customer base. Our revenue management tool is based on maximizing occupancy. In order to achieve this objective, we will drive price down and increase promotional intensity if we see occupancies going down in certain unique categories and stores to stimulate demand and increase customer conversion. Indeed, the higher store occupancy is, the more long-term customers we will have, if long-term customers are key to us as they are sticky and insensitive to price increase. On average, we push 10% to 15% increase to them on a yearly basis. So through our sophisticated and predictive yield management, we achieved an average of 42 months stay, resulting in EUR 5,000 spend per customer and a consistent revenue growth above inflation. Our sixth credit highlight is our experienced and stable management team with a long and proven track record to execute and deliver on the strategy. Our successful ESG strategy is also a key credit highlight. We committed to be operational net zero carbon by 2030 and material net zero carbon by 2040. Our ESG priorities are to continue to invest to reduce our carbon footprint through green certified building and by continuing our investments in LED, heat pumps and solar panels. We continue to commit to keep strong governance with an independent and diversified Board. And finally, we have a best-in-class reporting, including EU Taxonomy, a physical climate risk assessment and a double materiality matrix. I invite you to read our Sustainability Report for further insightful information. We are well on track to reach our commitments, and our ESG road map is underpinned by strong ratings. And finally, the last but not least element supporting our credit rating is the continuous strong support from Public Storage and New York State Common Retirement Fund. That both represent circa 70% of our shareholders. They have been our shareholders since 2006 and 2008, respectively, and both have a long-term vision. We also benefit from PSC sector know-how and best practice. Thomas will now take you through our financial highlights and policies.

Thank you, Jean. Let's first focus on the main KPIs, being loan to value and net debt to underlying EBITDA. At the end of June 2024, LTV stood at 15.4% and is expected to increase to approximately 23%, incorporating the Lok'nStore acquisition. At the same time, net debt to EBITDA moved from 3.8x to an estimated 6x. With that, we are neatly aligned with our publicly communicated financial policy, which aims at an LTV of 25% and a net debt to EBITDA between 4x to 5x, along for short to midterm deviation in case of M&A opportunities. As you will notice, this is also aligned with S&P's rating framework that Jean spoke about. Simultaneously, we have still significant funds available, with EUR 320 million remaining from our committed bank facility, EUR 250 million from our RCF and the mentioned EUR 210 million in cash. Finally, this bond issuance will ensure that our debt profile remains conservative. The above can be best summarized in our mantra when it comes to our financial strategy, which is that it ensures that we can execute our strategy independent of the capital markets conditions. While we are coming for the first time to the Eurobond market, our capital market strategy has been successful and diverse since our IPO in 2018. In 2021, we returned to USPP market, which welcomed us back with very high demand and allow us to issue a very attractive 10-year green notes. During 2023, we ensured our financial flexibility by entering into a committed bank facility, and in addition, placed EUR 300 million tranche of equity in an ABB. Our capital structure and financing strategy serve to support our operational strategy. And the scrip dividend, which we offered for the first time in August 2024, is, together with the rated debt, our latest weapon in this arsenal. Let me finish my part, which summarizes the points mentioned before. Together, these pillars of our financing strategy, the leverage targets and fully funding option availability, flexible dividend policy and disciplined growth investment provide a stable foundation for our continued expansion and value creation. With that, I will hand over to Marc.

Thank you, Thomas. And now let's talk about Lok'nStore, our major acquisition in the U.K., which took place on August 1, 2024. So the strategic rationale for this acquisition is the combination of geographical considerations and quality of assets, allowing Shurgard to double its U.K. portfolio in one acquisition, and represents 2 years of square meter growth for the total Shurgard Company. If you focus also on the spread per market post-acquisition, which is the circle in the middle of the slide with colors, it shows how this acquisition is also reinforcing the U.K., of course, as a significant part of our spread of markets. And secondly, on the right, it allows us to reach a number of properties which is very close to our 2 peers that are leading this market that are the U.K. Then if we focus on the geographical presence, this portfolio brings us a very significant number of stores in the Southeast and also in Manchester. And why these two areas are important to us? The Southeast is as big as London, 9 million people in terms of population, and the second highest level of income per inhabitant after London. And if you look at Manchester, the Greater Manchester population is actually 4 million people, which is the second one actually after London within the M25. And thirdly, in terms of real estate assets, as mentioned, we are talking about 171,000 square meter for the wholly-owned properties, including the pipeline. This portfolio is a young portfolio, 43% of this portfolio actually has been built since the past 2.5 years, January '22. And thirdly, almost 3/4 of the portfolio is purpose-built. So these big boxes, as you have seen, for Shurgard, which is great. And last but not least, there is also a line of business called third-party management. There are 18 stores that are actually in this category, representing EUR 1.7 million of fees per year. So this acquisition brings to Shurgard a high-quality portfolio concentrated in Southeast region with a large revenue potential. So the current portfolio, at least in January '24, was represented by 26 properties with an occupancy of 67%. And our target is to bring this 67% to 90% by the end of '26. Secondly, a significant pipeline of 8 properties, which is roughly 50,000 square meter, participating, of course, to the growth of the company and will be delivered actually between '24, '25 and '26. And our target is to bring the occupancy of each of these 8 properties to 90% 2 years post opening, which means that globally, the whole portfolio, including the pipeline, should bring and reach maturity within 5 to 6 years down the road in terms of revenue. So the significant pipeline for the coming 2 years is clearly reinforcing Shurgard growth potential. Then if we go to the next page, as mentioned previously, Shurgard took over Lok'nStore on August 1, 2024. And I must say that the operational integration is completed. And the teams here, our teams, but also our partners and also Lok'nStore store staff have done a tremendous job because on day 1, we have integrated all our commercial data in our CRM. Secondly, on day 1, everything was ready on the website, which means that prospect willing to rent, and we're able to find the different locations branded on the Shurgard and being able to rent. We have been able to integrate our pricing model. I mean, all the data, all the properties, all the inventory, if you prefer, with our promotions were in place as of day 1. What we call e-rental, which is actually being able from the need to the contract, was available as of day plus 2. And knowing this is important because in the U.K., 50% of all our new contracts are done this way. The integration also of all the sales calls -- so for prospects are on our own routing to stores and contact center. This was as of day 1. And last but not least, the training of the teams that has been provided to support the Lok'nStore's employees. So again, this fantastic achievement from our teams and partners is a clear demonstration of our expertise in integration, scalability and standardization at speed. Now let's talk about the financial impact of this acquisition. Q3 numbers, so from July till September, and the financial communication of that quarter, the disclosure will take place on November 5, will be the first quarter incorporating former Lok'nStore's portfolio, which means 2/3 of that quarter will consolidate Lok'nStore's number. Another important point, the accretion on Shurgard adjusted EPRA earnings per share will be neutral in '25 and accretive as of '26 onwards. And regarding the leverage, the pro forma leverage is actually 23% from a loan-to-value perspective and 6x net debt over underlying EBITDA acquisition including, of course, the bridge loan financing that we have, which is, by the way, comfortably within our BBB+ rating boundaries. Therefore, our conservative financial policy ensures sufficient headroom to execute a healthy growth strategy. Let's conclude with some closing remarks. So why investing in Shurgard? First, our operational excellence and scalable platform is really unique. Second, with a resilient business model and a robust balance sheet and long-term supportive reference shareholders. Thirdly, combined with a clear vision, strategy, with a disciplined execution of our capital allocation and supported by financial policy targets and latest results. And again, last but not least, a real and successful ESG focus. So therefore, those 5 key credit highlights allow a unique opportunity to invest in the European leader in self storage with the resilient credit profile. Thank you very much for your interest.