For investors requiring exposure to REITs, storage REITs have always been a good choice. Being less risky than their commercial counterparts but still quite attractive for their dividends, they could be classified as defensive holdings in the REIT universe. Today I’m going to take a look at a small cap REIT, namely Global Self Storage (NASDAQ: SELF).
With a total capitalization of $64 million, Global Self Storage is by far the smallest storage REIT in the market. As such, the company follows a differentiated approach to investing. They target secondary and tertiary markets without or with a fairly limited presence of their competitors. They currently own or manage 13 storage properties, with a total footprint of 968,000 square feet. According to the company, except for the limited presence of their rivals, the criteria for locating investments also include strict zoning regulations, which act as a barrier to entry, proximity to metropolitan areas, good accessibility and favorable demographics.
Looking at the company’s performance in the REIT-related criteria, we get quite an interesting picture. Through 2020, the company has consistently outperformed all of its peers in same-store revenue growth and NOI growth.
While such performance is generally expected of companies of this scale, it is not a hard-coded rule, so this achievement should be recognized. However, Global Self Storage had virtually the lowest Q3 2021 among its peers, in terms of occupancy as well as NOI and revenue growth. In the first 9 months of 2021, Global Self Storage saw a 13.6% increase in revenue and a staggering 59.9% increase in funds from operations. In fact, the increase in FFO was the largest on record among its peers. As shown in the graph presented below, the second highest increase in FFO for the 9-month period in 2021 was recorded by National Storage Affiliates Trust (NSA), while the worst performance was attributed to CubeSmart (CUBE) .
Valuation based on the FFO multiple
At first glance, the company seems undervalued, compared to its peers. Currently, Global Self Storage has a P/FFO multiple of 18.2x, while all of its peers are posting P/FFO multiples ranging from 23.8x to 28.3x, according to data from Seeking Alpha. It should also be noted that last January the company announced a secondary stock offering, with total proceeds of up to $15 million. This is a significant offer, given that the company’s market capitalization is $64 million. From a share count perspective, at the current market price of $6 per share, this offering is equivalent to 2.5 million shares. According to the company’s latest earnings report, the total number of common shares outstanding was 10.71 million. Assuming all shares are issued at $6 per share, the new number of shares outstanding will increase by 23%. However, still following the news of the offering, the shares are trading at a significant discount to their peers, as I also wrote above.
The company currently has $18 million in debt, of which $16 matures starting in 2026. Indeed, the majority of the company’s debt matures in 2036 and bears a fixed interest rate of 4.192% . At the end of the third quarter of 2021, the company had a total of $2.8 million in cash and cash equivalents as well as $15 million remaining on its revolving credit facility, which bears an interest rate 3% plus the greater of one-month US dollar LIBOR or 0.25%, and expires in 2024.
The company also has the lowest debt ratio among its peers, reaching 39%. This is particularly impressive because larger, more established companies such as Extra Space Storage (EXR) or CubeSmart have huge D/E ratios, at least compared to Global Self Storage, which reach 173% and 101% respectively.
Past performance does not dictate future performance, everyone knows that. However, it does give us some insight into the running of the business. In the chart above, we can see that SELF literally underperformed all of its competitors, in terms of total returns. An investor who pulled the trigger to buy shares in the company 5 years ago would have made a 76% total return today, while another who bought National Storage Affiliates would have tripled their money.
And with that, let’s move on to the dividend. Currently, SELF pays $0.26 per share, which represents a dividend yield of 4.3%. As we can see below, historically the company has paid higher dividend yields than its peers. Regarding dividend sustainability, Global Self Storage reported an FFO per share figure of $0.24, for the first 9 months of 2021. This means that the company has already covered almost all of its annual dividend ( $0.26) in just three quarters. Assuming an FFO/share figure of $0.10 for Q4 2021, we then get an FFO payout of 76%, which is pretty decent.
Here we have an interesting little REIT. In general, small cap stocks are associated with higher volatility caused by a multitude of reasons. However, this little guy here is different. The company operates in a relatively safe business and it is quite under-leveraged, for a REIT. In addition to the low indebtedness, we have the majority of the company’s debt which is at fixed interest rates. They follow a pleasant and clever investment approach: they differentiate themselves from the big players in the industry, in markets where competition is limited. This gives them fertile ground for expansion. Despite the growth in revenue and NOI, the company has struggled to keep up with the total returns provided by other companies in the storage space, despite its decent dividend. Speaking of the dividend, it is well covered by the FFO. In my opinion, the most important reason to own this REIT is the low leverage. I would say this is a “strong buy”, but there are two things that are holding me back: first, the underperformance against its peers and, second, the stock offering of 15 million that is currently active. However, the offer is something temporary, which will increase the company’s liquidity and help support its rapid expansion. As for historical underperformance, I would give management a second chance, as I like their differentiation-focused investment mentality.