Upcoming IP Investor Dialogues: JDG.L, BKNG, CACC, ASSA-B.ST, POOL, HWDN.L, FAST, VCP.L, STMN.SW, FEVR.L, COST, HLMA.L, ATCO-A.ST - Register your interest at help@inpractise.com 

Anonymous

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:20} Dave, can you share some context to how the UK market was structured for self-storage, in the early 2000s?

{audio:0:00:28} It was very different from how it is now. No one had heard of self-storage. Certainly, when I got the call and someone said to me, we’re moving into self-storage and I want you to go and have a look at this ailing business I thought, self-storage, what’s that? Frankly, I’d never even seen a self-storage site in my life and, at 40 years of age, that was quite a surprise, to be honest.

{audio:0:01:03} It was a very junior industry when I joined it and, I guess, the fulcrum of it was in London. The reason no one had seen it was because you bought the cheapest building that you could, and that was normally at the back of an industrial or trading estate, and it wasn’t visible to anybody. It was simply a building that nobody else wanted. The first time I went to Safestore’s head office, it was above a store, in Wood Green, in London. You could drive down the road and you would never notice it. It was a poor looking building, just sat back off the road.

{audio:0:01:52} It was a complete shock to me. I had come from retail, where I’d been all my life, with startup stuff. When we sold that business, I went on holiday and, when I came back, someone said, we’re going into self-storage. There were no stores. The biggest company had maybe 20 stores, if that, and no one had ever heard of them. A very different structure from how it is today.

{audio:0:02:23} Why is that density so low in the UK, compared to the US?

{audio:0:02:34} First of all, we’re 20 or 30 years behind the US. With the pioneers of the industry, a lot of the very first stores in the industry are based on US build and US style. It was just people travelling to the US, seeing self-storage, thinking it was a great idea and coming back. It’s an immature industry; the first building was maybe in the mid-80s. There are lots of factors as to why the US is different. The main one is that it is just 30 years ahead.

{audio:0:03:23} Is there any reason why the density can’t get to US levels, in the UK?

{audio:0:03:29} Loads. Mainly because we’re an island and we just don’t have the land. A few weeks ago, I read that to get to the density of the US, we would have to build 17,000 more stores in the UK. Given that, including container sites, there’s probably now only about 2,000 to 2,500, we’re never going to get to that density. Also, the availability and relatively cheap price of land in the US means that the prices that customers pay are maybe a third of what we charge a customer in the UK.

{audio:0:04:15} In the US, some would say that it’s a commodity. I think that one in three households in the US has a storage unit. There is no such number for the UK because it might be the other way round; one in 100. We’re never going to get to those densities.

{audio:0:04:38} If it’s 0.7 today, five years ago, we were talking about it being 0.5 or 0.6, so it’s growing every day. Obviously, the last couple of years have seen things slow down a little bit. I would expect to see it get to 1, maybe 1.2, in the next 10 years.

{audio:0:05:05} Which is still almost double the market size?

{audio:0:05:08} Yes; I think it’s gone up maybe 0.2 in the last five years or so; I think that’s feasible. Land is still tough; planning is tough. But I think we’re seeing lots of innovation and I’m comfortable that the market has got a long way to go.

{audio:0:05:33} What about in Europe? As you said, 0.7 square foot per head of population in the UK. I think Belgium is 0.2; Paris is 0.2.

{audio:0:05:45} Obviously, with Safestore, we have a French business, based entirely in Paris; 29 stores in Paris. I have worked in Italy and Spain. If you take Europe as a whole, it is 0.2.

{audio:0:06:10} For some of the main powerhouse countries, such as France, Germany, Italy and Spain, it’s not even 0.2. Some of the biggest and wealthiest countries in Europe are not even at the average. We’re 20 odd years behind the US and they are 20 years behind the UK.

{audio:0:06:35} Safestore has been in Paris for about 20 years. Why haven’t they moved out of Paris into other European cities?

{audio:0:06:52} Due to the population; there is so much in Paris, with so little competition. We took the business decision to stick in Paris. We bought a business called Une Pièce en Plus, which is a spare room, and there is so much growth just in Paris, even today. A couple of days ago, I read that Safestore had bought another store in Paris and are building another two or three. They’ve come from the center of Paris and now they’re working out into the suburbs. If you look around France, particularly, it’s still very much big city driven. You don’t find self-storage in small towns; it’s very much the biggest cities where people are concentrating.

{audio:0:07:48} That’s the same as it was 20 years ago here. It was London and Manchester and not much else, to be honest.

{audio:0:07:55} If you believe the UK can grow to 1.2, 1.3 square foot per person, in 10 years’ time, do you expect the store count to double or 3X over that time?

{audio:0:08:10} If you look at the fact that now it is about 0.7 and let’s say, for argument’s sake, there are about 2,500, I think the store count will have to double because stores are getting smaller. It’s not just a case of saying we’ve 2,000 stores and we’re at 0.7, so if we have 4,000, we’ll be at 1.4. In the market, store sizes are getting smaller and smaller every year. That is because the self-storage industry, in the UK, is moving to smaller market towns, smaller country towns, and even into micro-stores. The store count will more than double.

{audio:0:08:56} The square footage could double?

{audio:0:08:59} From memory, I think that 10 years ago, the average store size would have been about 40,000 square foot; today it’s going to be nearer 30,000 to 32,000 square foot.

{audio:0:09:12} What are the limitations of store supply entering the market in the UK?

{audio:0:09:19} Availability of land. That has always been an issue, even 20 years ago, in terms of finding the right building, in the right location and so on. It’s still the case now. There are prime buildings being built, right now, as we speak, in prime locations, in London, on major crossroads. But they are few and far between. It is down to the major operators and the REITs who have the deep pockets. A lot of the growth in store numbers, as opposed to square foot numbers, is coming from the smaller operators who are maybe in secondary positions and smaller towns.

{audio:0:10:09} The fact of the matter is, self-storage is, and always will be, a localized business. Personally, I have about 25 active clients and I reckon, on average, 65% of their customers will live in their postcode or in an adjoining postcode. It’s a very tight market.

{audio:0:10:34} How can you see the growth in container-based operations changing the industry?

{audio:0:10:40} Since I left Safestore, in my consultancy world, I’ve fallen into the container business. They work side by side; they’ve always been there. It’s not as if they haven’t been; it’s just that they haven’t been recognized. I believe the container storage industry has been treated as a second-rate industry. It is now a very big part of the UK self-storage industry. Roughly a third of the stores will be predominantly container-based; lots of people do both.

{audio:0:11:21} I think they work side by side; they offer the customer choice and I think that they attract different customers. Personally, I would not store all my household goods in a container.

{audio:0:11:41} Are these old shipping containers?

{audio:0:11:44} They are not old shipping containers; they are purpose-built storage containers. They get them from China, they get filled, so that means they ship them, free of charge, from China to the UK, and then once they’re emptied, they get sold to a self-storage operator. They are vented. A normal shipping container has very few vents; a modern-day container will have at least 14 vents. The floor is of a sealed variety so it holds no moisture. The quality of the containers is very good.

{audio:0:12:27} It would probably cost about £3,500 to buy a container today. Pre-Covid, you were talking £2,000. There is a massive world shortage of containers. I’m led to believe there are hundreds of thousands of containers in the wrong place. The whole disruption of world trade has led to a shortage of containers. The whole consumer boom has led to the shipping lines being really busy. They are ordering hundreds of thousands of containers, which makes getting containers very difficult.

{audio:0:13:11} £3,500 per container, they ship them over from China, then the storage companies take them. How many containers do you typically have in a container storage operation?

{audio:0:13:25} Obviously, it depends on the size but if you take an acre of land, you are going to get somewhere round about 150 to 170 containers on that land, on the ground floor, depending on the shape and so on. Then there are lots of operators who will double stack, which means that they put containers on top of containers.

{audio:0:13:50} It’s an interesting industry; it’s much cheaper to get into, but the returns are nowhere what you would get on a traditional self-storage store. The cost of renting that container is a lot cheaper to the customer.

{audio:0:14:10} What is the cost, roughly, per square foot?

{audio:0:14:13} £17 or £18 a square foot. Maybe as low as £13 or £14 in some places.

{audio:0:14:20} Are these typically in the second-tier cities or even towns, in the suburban areas?

{audio:0:14:26} Yes, because you need a plot of land. If you are in the city, that plot of land is much more valuable and someone will build on it. The further you get out into the country, people have land or there is land to lease, maybe on a brownfield site. Most container sites are not in the center of major cities.

{audio:0:14:54} Where are the container plots typically located?

{audio:0:15:02} I’ve got one client who has actually got a store that shares the same entrance with a container storage and I’m sure there are many more examples of that. In the self-storage world, just 13 miles from where I’m sat now, there is a crossroads with three operators on four of the corners; it’s not uncommon. The demand is high and there is room for everybody, in my opinion.

{audio:0:15:31} If I’ve got a Safestore and some guy builds a container store, for a fraction of the price, next door, won’t that affect my occupancy?

{audio:0:15:39} If someone opens a competitor, whatever trade you’re in, it’s going to affect you for a little while. But as long as there is demand for your product – and there is demand for self-storage – then you may go through a little bit of a price war, you may go through a little bit of competition but I think, over time, you will find that all those stores are very highly occupied. They are obviously doing different deals, different offers and different prices, to attract customers but, overall, they will be at a very good level.

{audio:0:16:13} What is the difference in the customer mix, between business and personal?

{audio:0:16:18} Business is 75% of customers and domestic about 25%, across the whole industry.

{audio:0:16:30} So there is no real difference between container and traditional?

{audio:0:16:33} No; not any great difference. That is an average figure so if you are in a very industrial area or near some docks, then you may have 35% or 40% of business but generally, in my experience, there is not much difference between most stores. It is normally around 70/30.

{audio:0:16:55} You mentioned that the returns are lower for containers. Why would that be, if the startup costs and the land is typically cheaper?

{audio:0:17:06} Because a container is a depreciating asset. It has a lifecycle and they are not normally in prime positions. The revenue that you drive and, therefore, the profits and EBITDA you make, are less. When you come to sell, the valuations are, typically, lower. If you are building a traditional self-storage store, you can spend millions.

{audio:0:17:38} For a container storage, if you have the land, you can probably get it up and running for £500,000?

{audio:0:17:46} Much less than that. Funnily enough, I’ve just done a presentation at the UK Self-Storage Association this week, and I think, for an acre of land – if you own the land – to set up a container site, you are looking at somewhere in the region of £90,000 to £100,000.

{audio:0:18:11} If you wanted to rent an acre, what would that cost in a suburban area?

{audio:0:18:17} Anything you like. The rent varies from £2.50 to £5 or £6 a square foot, for a piece of land, depending on where it is. If you want to rent a building, you are probably looking at anywhere between £4.50 and £8 or £9 a square foot.

{audio:0:18:43} How long does a container last?

{audio:0:18:47} 20 years. There will be containers that have been out there longer and I think that the newer containers will probably outlast them because they have more ventilation and so on. Again, unless you own the land, most container sites will only be on relatively short leases because, nine times out of 10, the owner of the land will want to move it on to residential or something more valuable to them. In the main, they are shorter term.

{audio:0:19:25} Generally speaking, if I rented a piece of land today, I would probably get a maximum of a 10-year lease. After 10 years, you sell your containers to someone else and you’d get some houses built on it.

{audio:0:19:45} How rational are competitors in this market? As you said, you can start next to a Safestore; you can use the same entrance.

{audio:0:19:58} Pretty rational. I think that, again, 10 or 20 years ago it was all about price. People have this thing that it’s all about price. The Self-Storage Association has got lots of members, it’s grown in size and stature and, over the years, we’ve begun to educate the owners. The end result is more revenue, more profit and so on. Most of them don’t take a lot of educating; it makes common sense.

{audio:0:20:35} Do you mean the owners of the single operation?

{audio:0:20:38} Yes; when they join the SSA, when we do conferences – and this week we’ve been on our first face-to-face conference for two years – we share information. It’s still a very small industry; everybody knows everybody. If you ask a question of me or even the managing director of Safestore or Shurgard, they will happily talk to you. It’s a very unique industry in that way. It is in everybody’s interests to educate people that it’s not all about price. Obviously, each market has a price but it’s also about customer service and maximizing your returns.

{audio:0:21:24} In your opinion, how have the returns changed over the last 10 or 20 years, given the growth in containers?

{audio:0:21:30} We can’t talk specifically about containers because there are very few transactions between container operators. As I said, a lot of them are short term or there are lots of people who own the land and it’s long term. There are very few container operators buying other container operators. In fact, even today, there is not a recognized valuation method for the asset base. Whereas in the self-storage business, there is a very, very comprehensive mechanism and structure as to how you would value the business, which has grown as the industry has developed. As businesses have consolidated, you start to set some benchmarks for the returns.

{audio:0:22:32} Really, it’s hard to value a container-based operation because of the asset base. Therefore, it’s really just a cashflow mechanism, for a short period of time, whilst you have the lease for the land?

{audio:0:22:48} Yes; it’s very difficult to do so and that’s part of the reason why there are not many transactions. It is probably cheaper, easier and more cashflow friendly, to open your own.

{audio:0:23:04} It seems as if the container-based operations have grown quickest in the industry because, as you said, they’re easier to start.

{audio:0:23:13} And they’re much smaller.

{audio:0:23:16} For argument’s sake, let’s say we have 2,000 container operations in the next five years.

{audio:0:23:28} How could that impact the returns of some of the plcs in the market?

{audio:0:23:35} Not at all. The thing that drives the opening of a container site is exactly the same as what is driving the opening of building of a self-storage store. Demand. If there is demand in the container sector, there is very high demand in the self-storage sector. The difference between now and 20 years ago is that the self-storage sector is highly visible. You can’t drive down any main road, into any city in this country, without seeing a self-storage building.

{audio:0:24:20} Container sites are a little bit more hidden away. They are at the back of industrial estates; they’re on a farm; they’re on a piece of land somewhere. Again, that is obviously a generalization but normally, they are in secondary or tertiary positions, where the self-storage business has grown into prime locations. You definitely can’t drive into Liverpool, Birmingham, Manchester or London without seeing probably three or four on that one stretch of road.

{audio:0:24:51} The growth of the industry will be driven by demand and, if the demand is there, everybody will be happy and everybody will continue to grow. I think there is a very bright future for the industry.

{audio:0:25:04} I assume the container-based businesses would be willing to take a lower cash return on their operation?

{audio:0:25:13} Their cashflow is much lower.

{audio:0:25:15} You are saying, because of the location differences and the demand, it won’t necessarily reduce the return or pricing for self-storage?

{audio:0:25:27} No; if anything, it’s driving up the cost because there are more people looking to buy that land. It’s a little bit like buying a house. Very rarely do prices and returns go down. Obviously, you get a bit of cyclical activity and it’s fair to say that the industry, both at container and self-storage level, is certainly riding the crest of a wave at the moment. But the growth has been steady over the last 20 years and even through the downturns and the recessions, it has proved itself to be recession resilient.

{audio:0:26:17} Through Covid, the self-storage industry has been a winner. It’s had its best year ever.

{audio:0:26:24} Would the plcs build a Safestore next to a Big Yellow?

{audio:0:26:38} Yes, they do; there are lots of examples of that. It probably happens more in the major cities. But in Guildford, a town just a few miles from me, there is Safestore, Big Yellow and Access, all on the same crossroads.

{audio:0:27:01} Do you think they are at different occupancies?

{audio:0:27:04} I think they are probably all full. It’s a demand driven business. You obviously wouldn’t choose to build next to a competitor. But many years ago, when I was in my first managerial job, I was a shoe shop manager. We would put our shoe shop with all the other shoe shops. It just focuses everybody in to one place.

{audio:0:27:38} But it’s a bit easier to differentiate a shoe as opposed to a box?

{audio:0:27:44} We’re only driven by, is this the right building, in the right position, in the right location, with the right population? If that building happens to be next to a store that is five years old, that store is going to be full so you’re going to create more demand in the market.

{audio:0:28:05} What do you think could reduce returns, going forward, for the big players?

{audio:0:28:10} I’m not sure about it reducing returns. I think, as in every other industry, the cost burdens going forward are higher. To get to the levels of green and the green credentials that the planners require, costs an awful lot of money. At the moment, that’s probably not recognized in the day one valuation.

{audio:0:28:42} How much does that process roughly cost?

{audio:0:28:45} It’s impossible to say, but if you put on a full set of solar and you build it out of special material, it is sizeable.

{audio:0:28:57} That’s not including the capex?

{audio:0:28:59} It’s a sizeable increase in your capex. Instead of using old material, you use that material; you’re putting solar on. Obviously, you are getting a cashflow saving through your use of electricity and such like but it all costs money. As these green credentials get more and more into the industry then, eventually, you will get your return on your money. I don’t think returns will change a lot, to be honest.

{audio:0:29:37} You mentioned a valuation mechanism earlier; there is obviously a formalized approach in the industry. Let’s say you are buying a freehold store, what process would you go through, in your mind, to value it and to ensure you get a required return?

{audio:0:29:57} Just like if you are buying a house, the industry has its brokers and the broker will come to you and say, X store or X portfolio are on the market; this is what they want. You have to look at the value of the land, the state and condition of the building and how much you are going to have to spend. Crucially, you have to look at how much potential there is for you. Someone like Safestore or Big Yellow have fantastic systems, fantastic processes and dynamic pricing, where they can go in, on day one, and put the price up and raise the revenues. They have great sales techniques and, of course, they get more enquiries that anybody else because they spend more money as they have more money.

{audio:0:31:04} You need to look at the cost of the land and how much it’s going to cost you to get the building up to what is required for your brand. But also, what is the potential? If you are buying a building that is at 100% and you’ve got no potential to increase it in size, it’s not so attractive. There are many factors that you need to take into account.

{audio:0:31:28} When you are buying a portfolio of maybe four, five or six stores, you get some that you want and some that you don’t but they come as a package. That adds to your numbers, it becomes another dot on the map for you, another town that you are in. Also, if you are already in that town, you start to own a town. You’ve got one on the east, one on the west and one in the south. That allows you certain scale opportunities and it’s much easier to set the prices because you are picking up a large percentage of the local population.

{audio:0:32:09} I saw, recently, that Safestore had acquired Fort Box. The occupancy was around 70% and they were looking to get that to above 80%.

{audio:0:32:27} They bought a business and, obviously, they believe that the price is the right price. Whatever the owners of that business have done to get that business to 70%, they know that, with their deep pockets and with their marketing expertise, they can grow that business, not only to 90% full, but that they can also grow the pounds per square foot, the rents they take off every customer and they can increase the value, exponentially. From the valuation they buy it at, the valuation two years later will be much, much higher.

{audio:0:33:12} What was your hurdle rate, internally, that you would have to reach for that kind of valuation?

{audio:0:33:18} It was a long time ago but, on a freehold building, we’d be looking at a yield of 10%. But we’re talking about a time where interest rates were 4%, 5%, 6% or 7%. Now, you are probably looking at a yield of middle fours, up to low sixes because the inflation aspect of it is much smaller; in fact, nil.

Former Operations Director at Safestore Holdings

Safestore Holdings & UK Self Storage

Big Yellow Group PLC

Safestore Holdings PLC

Safestore Holdings (SAFE) is the leading self storage business that operates 130 in the UK, 27 in Paris and 3 in Spain and competes with companies such as Big Yellow (BYG) and Lok’nStore (LOK). The UK has 0.7 square feet of self storage per capita compared to nearly 10 square foot in the US and only 0.2 throughout Europe. There are over 2,500 stores in the UK including ~500 which are cheaper, container stores.

Over the last 7 years, the average rate per square foot has consistently grown 2% per year and the occupancy is up from ~60% to 80% today. SAFE freehold properties earn a 6-7% exit cap rate relative to the 4% average cap rate in London.

SAFE has been a 10-bagger in the last 10 years and has over 60 stores in the pipeline to fuel future growth across Europe.