Following my previous writing on Stor-Age Property REIT (Stor-Age is Aging Well), the share price has done a glorious nothing since then. Which, I suppose is not a bad thing when compared to the pressure local markets have shown in the SA Inc and small cap space.
Despite this, last week, Stor-Age’s share price suddenly sank -5% in a day following a miserable update from Equites Property Fund. The latter notably reported a -21% drop in the valuation of its UK property portfolio (Equites hit by 21% UK portfolio devaluation) that sent its share price tanking too.
Given that c.54% of Stor-Age’s property portfolio lies in the UK, this is the likely trigger for the panic and sudden sell-off.
Logical and rational, but I believe it is wrong.
Firstly, Stor-Age’s model and self-storage properties are quite different to Equities’ expensively valued logistics properties. For one, self-storage properties have numerous quickly repricing rental clients (i.e. passing on inflation) which is more defensive than super long-term logistics leases signed in a different day and age to now. Secondly, Stor-Age’s ManCo platform allows it to manage other self-storage properties on behalf of others while earning capex-lite, property-valuation agnostic revenue streams (not a large part of their earnings but it is there). Finally, Stor-Age entered this period (much) more conservatively valued on its UK properties.
The final point is subtle but important. Let me try to break it down simply: Property valuations can be viewed as similar(ish) to bonds and their rental streams can be valued using an interest rate (often called a “discount rate” and/or “cap rate”). For the same stream of rentals, if a cap rate rises, then the valuation falls.
Once again, simplistically, Equites reported that “…the UK logistics property market experienced cap rate expansion, with prime logistics yields shifting outwards by 175bp from 3.25% to 5.00%.”
Doesn’t sound like much does it? But a 1.75% increase to a 3.25% starting rate is an effective collapse of -53% in the value of these rental streams (=175/325) and, thus, no real surprise that the Equites UK property valuations collapsed -21% (once a c.15~20% depreciation in our Rand is considered for Rand-based reporting).
In Stor-Age’s last reported period (ending September 2022, & confirmed with management), the REIT valued its UK properties at a weighted average cap rate of 6.02%. Already you can see how different this starting point is versus Equites 3.25% cap rate…
Still, there is likely to be an oncoming c.25bps rise in this cap rate, which is the equivalent of like-for-like rental streams being worth c.-4.2% y/y (=25/602). There are some other technicalities (like rising discounts rates), but all in all, we estimate that this downwards influence on like-for-like rental streams could actually be closer between -5% to -12%. World apart from a -53% collapse…
But here’s the thing, Stor-Age rentals have been growing. In the Group’s latest update till end February 2023, management reported that UK same-store average rental rates grew +8.3% y/y (in Pounds).
And, thus, the interest rate rises are also offset by the growth in rentals. In fact, assuming a full -12% expansion in yield, the +8.3% y/y rental growth therefore implies that only a -3.7% y/y change in actual GBP-based property value should be reported soon (=-12% + 8.3%).
But Stor-Age reports in Rands, and, over this period, the Rand has sunk between 15~20% versus the Pound.
Thus, we believe that the c.54% of Stor-Age’s property portfolio that lies in the UK should not have any dramatic effect on the REIT’s coming Net Asset Value. In fact, there is a reasonable argument that this NAV could rise a bit, despite the UK pressures.
Given that the REIT’s last reported Tangible NAV was 1447cps and its current share price is below 1300cps, this could well imply that the market has gotten this sell-off wrong.
ARTICLE ORIGINALLY APPEARED ON MONEYWEB.