Global self-service storage: Trade at a steep discount, but keep it for now (NASDAQ: SELF)

Seventy four

Today I return to Global Self Storage (NASDAQ: SELF) in an effort to update my latest company post. In that article, I had concluded that Global Self Storage is a small-cap storage REIT with relatively low leverage. and an attractive dividend. However, I also concluded that his performance was questionable, compared to his peers. So what does the business look like today?

An overview of Q2 2022 results

The company reported significant increases in all REIT-related metrics for the second quarter of 2022. Adjusted FFO rose 42% on a quarterly basis, reaching $0.11 per share. Total revenue increased by $3 million, representing a 15.7% increase on a quarterly basis. Based on these results, the company announced the increase of its quarterly dividend by 11.5%, reaching $0.0725 per common share. This figure corresponds to an annualized dividend yield of 5.1% and represents a safe dividend payout ratio of 66%. Finally, the overall occupancy rate landed at 93.1%, while at the end of 2021 it was 94.2% and at the end of Q1 2022 it was 95.7%.

Comparison QoQ Same Store, Global Self Storage

Same Store QoQ Comparison (Global Self Storage September 2022 Investor Presentation)

One of the company’s most impressive milestones is that it managed to increase its FY 2021 revenue by nearly 60%, far outperforming all of its peers. Given that the self-storage market is expected to grow at 2% per year in the coming years and also the fact that Global Self Storage is a small-cap growth REIT, it would be reasonable to say that this performance could be repeated in the future. coming.

However, if we look at the big picture, the company is underperforming compared to its peers. As we can see in the graph presented below, during the first half of 2022, the company’s revenue growth was in the lower half of the peer group, while it posted the rate of lowest occupation among his peers. In terms of NOI growth, things look better, but I would expect better performance from a smaller REIT. Finally, the company pays a higher dividend yield than all of its peers, which at the current share price is 5.1%.

Global Self Storage vs its peers

Global Self Storage vs its peers, 1H 2022 (Global Self Storage September 2022 Investor Presentation)

This is also reflected in the total peer group return, as shown in the chart below. We can see that Global Self Storage has significantly underperformed its peers over the past 5 years, providing its shareholders with a total return of nearly 58%, while Extra Space Storage (EXR) has achieved more than double that figure. .

Chart
Data by YCharts

Assessment Considerations

The company now trades just above 15 times its forward FFO, which is one of the lowest valuation multiples among its peers. On the contrary, Extra Space Storage, which as I wrote before has outperformed all of its peers, is trading at the highest valuation multiple, which shows investor confidence.

P/FFO (AV)
SELF 15.14
Message of public interest 6:38 p.m.
NSA 2:42 p.m.
CUBE 15.95
LSI 16.99
EXR 20.29

Source: Data from SA Premium, table created by the author

The average P/FFO [FWD] multiple within the peer group is 16.9x, so the question is: can Global Self Storage’s stock price rise to $6.37/share for the P/ FFO futures reach the average of peers? The answer is more likely yes. This is not one of the times when the market exaggerates in its valuations. The current valuation gap, again in my view, has its roots in the company’s historical underperformance relative to its peers.

However, at $5.71 per share, taking into account the number of common shares outstanding at the end of the second quarter of 2022 and an annualized NOI projection of $7.5 million, the company is valued at a rate capitalization of 12%. On the other hand, Extra Space Storage is currently valued at an optimistic cap rate of 4.8%. In other words, the company is trading at a very steep discount to its peers. This conclusion is further validated by the following graph.

REIT Implied Cap Rate Spread vs. 10-Year Treasury

REIT Implied Cap Rate Spread vs. 10-Year Treasury (Center Square Real Estate, REIT Cap Rate Perspective)

According to Center Square research, the historical average cap rate spread between storage REITs and 10-year Treasury bonds is around 3.1%, while the current spread (June 21, 2022) is 1.8%. The rate for 10-year Treasury bills was then 3.1%. So, now that that number is 3.9%, we expect an average storage REIT cap rate of 7%.

This implies two things: first, extremely low cap rates cannot satisfy investors’ return requirements at this stage. Second, it shows that Global Self Storage is trading at a 40% discount to its asset class.

conclusion

There is a reason for everything and usually such valuation discrepancies happen for a reason. While I’m inclined to accept the mismanagement factor, it doesn’t justify such a large discount. On top of that, the company offers the highest dividend yield among its peers, which is also pretty sure by its produced FFO numbers. Another point of skepticism would be the drop in occupancy rates. All of the same stores, except one, posted reduced occupancy rates at the end of Q2 2022, compared to the end of Q2 2021. That’s why I’m willing to stay at away for now and to see what will happen when the third quarter results are announced. People who currently own shares of this company are in a good position to benefit from the nice and safe dividend and potential price appreciation. But I would not open a new position in this company at this time.

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