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Return on investment
In developing markets, self-storage companies are typically producing double digit annual returns. With its robust stabilisation characteristic, good returns nearly always continue over the life of the investment. This is often why many self-storage owners/investors stay with their investment over the long term despite attractive third-party offers.
‘Asset uplift’ is one of the key principles of investing in self-storage. This is taking a relatively low-yielding real estate asset and upgrading it to a higher yielding, more stable asset via a simple, proven model. Taking an industrial property with industrial rates and introducing self-storage at what can be two to three times the rate clearly works well on a yield basis. But it will also be beneficial if and when the self-storage owner or investor sells the facility, as the new rates will form the basis for valuation.
With a well-built facility using quality construction, self-storage building components and security systems, an operator can enjoy relatively low operating costs and an on-going capex base. This provides the benefit of predictable outgoings with strong cash flow as the business stabilises.
In Asia brownfield investments are fairly common for self-storage. In this case, you can often purchase a tenanted building and then convert one area/floor at a time, leaving the rest of building tenanted with the original renters. As one area of your self-storage areas/floors fills up, you end the leases of a number of original tenants and turn the vacated space into self-storage units, and so on. The impact of vacancy through the conversion period is substantially mitigated.
Strong cash flow is vital to a successful operator, and often forms the source of funds for the next down payment as you continue to procure properties and expand your business.
Some real-life ROI snapshots
Public Storage - a US self-storage REIT
“Self-storage is unique. It is fairly stable and growing, has a relatively high return on asset (ROA) and nominal requirements for capital reinvestment… we generate about an annual 10.5% ROA, which is growing in excess of inflation and is funded approximately 30% with perpetual preferred stock yielding 6.4% (and trending lower). Our preferred stock does not adjust for inflation. Approximately 70% of our earnings, after preferred dividends, are distributed to owners. Over the long run, this business model should continue to produce good total returns to shareholders.”
Big Yellow Group - a UK self-storage REIT
"The Big Yellow Group is not a recycler of assets, but owns its property principally to give it an operational advantage and enjoy high operating margins. The Board and management’s principal financial aims centre around cash flow, earnings and dividend growth. As well as the quantum of those metrics the nature of the income is also important. We believe self-storage income is essentially evergreen income with highly defensive characteristics driven from buildings with very low obsolescence risk. The proposition for investors is therefore a defensive income flow, with long term earnings growth potential, from a branded, London-centric, high margin, asset backed, internet dominant business with a conservative capital structure. Over the last five years the Group has reported a 12% compound annual adjusted Earnings per Share (EPS) growth.”
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