Is buying shares in self storage companies a good investment?

Whilst this is in no way investment advice, there are a number of interesting facts which can be extracted from the quoted companies’ annual reports.  The first thing to notice is that several of the largest companies in the sector are not publicly quoted  but are privately owned, including Access Storage and Shurgard.

This in itself might be taken to suggest that the self storage business is profitable enough that some of those who could float all or part of their storage companies in fact prefer to retain 100% ownership.

The three UK quoted self storage companies are: Safestore, Big Yellow and the unusually-named Lok’nStore.  Of these, Safestore and Big Yellow are the large ones – Safestore has 117 outlets whilst Big Yellow has 65 with several more in the pipeline.  Lok’nStore is much smaller with only 23 stores of which 10 are leasehold.

The relative company sizes are also reflected in the turnovers and staff numbers – Safestore turns over £84 million per year with about 500 staff and Big Yellow turns over £58 million with about 240 staff.  Turnover per staff member is therefore high at between £168,000 and £242,000 per year.

The fact that Safestore is so much bigger may surprise some people as Big Yellow has a higher profile – this is a result of having a large presence in the South East, opening prominent sites on main roads (usually A-roads) and spending more than the others on marketing.   Last year it spent £2.6 million on marketing – almost 5% of its income.

The average rental charge in the industry is about £20 per square foot (PSF) according to the Self Storage Association.  Big Yellow is able to charge an average of £26.53 and for London it is even higher at £28.75 according to its own figures.   Safestore weighs in at £25 PSF and Lok’nStore is the cheapest at £18 PSF but that may be because they have more business storage customers (36%) and some quite large-sized units.

In view of these apparently high prices it is surprising that the profitability of these companies is quite low.  This could be because they are all growing their capacity and opening new stores or it could be because they have significant vacancies.  Both Safestore and Big Yellow claim occupancy levels of only about 55%, although Safestore’s Paris operation, where it has 22 stores, has 70% occupancy.

It could also be that their profitability will increase as the length of time for which people use storage increases – Big Yellow has seen average stays increase from less than 16 months to 18 months in the last year.  Safestore has an even longer average, with users staying 21 months according to their annual report.

The whole sector is quite dependent on the housing market with Big Yellow estimating that 54% of their sign-ups are housing market related while only 14% are business users.  Big Yellow has 28,500 users spread over 65 stores renting about 1.7 million square feet of space so one can see that the average unit let out is quite small at 60 square feet.

Although to the outside observer the companies may appear very similar the strategies that these three have adopted are quite different – Lok’nStore has gone for more business users, a lower average price and a focus on profitability.  Big Yellow has gone for very high brand recognition and focused on rapid and geared growth.  Safestore has targeted size and aggressive expansion in Paris.

As the industry has been in land-grab mode and may be still in a growth phase, investors might want to look at what they get for their money in terms of turnover and assets.  For every £100 invested at market prices in May 2010 here is what you get:

Safestore £33 of turnover

Big Yellow £14 of turnover

Lok’nStore £38 of turnover

In terms of net assets the figures are approximately:

Safestore £100 of net assets

Big Yellow £113 of net assets

Lok’nStore £142 of net assets

Other ways to measure the companies might be to see who ranks most highly in Google for search terms such as “storage” and “self storage” – which would currently be Big Yellow – or to see which company’s shares are most likely to go to a premium due to a takeover.  This may be Lok’nStore as they recently received a takeover approach, but in July 2009 it was announced that this was not being pursued.

Certainly the sector is an interesting one and these three companies each have a lot to offer.  If the sector stopped building new centres and growth continued, the reduction in vacancies would surely lead to a very profitable sector.

There are currently about 1,190 storage facilities in the UK, according to researches by www.storage.co.uk, and a lot will depend on how many more facilities open up in the next few years and how willing the British consumer is to pay for storage space.