Stor-Age Property (SSS) are the new-REIT-on-the-block in South Africa. During their listing in November 2015, I picked up some shares, as I was impressed with the business model of self-storage. In self storage, there is virtually no counter party risk from a tenant, as you can simply pawn his possessions to cover outstanding rent and the business is extremely resistant to economic cycles. I was also impressed with management’s rapid expansion plans and they have delivered both in terms of asset growth (organically and via acquisitions) and in dividend growth.
Since their initial growth in South Africa, they have made a fast and aggressive move into the UK, by acquiring Storage King a Self-Storage business operating there. The initial acquisition has resulted in a split of 28% of their assets being in the UK and over 40% of their profits coming from that country. The much lower cost of debt means that higher returns on assets can be achieved then in South Africa. Therefore, it is not surprising that the rate of expansion in the UK has accelerated significantly, with two further acquisitions announced within a week this month. They are buying the Storage Pod for R213m at a yield of 6.5% and Viking Self Storage for R224m at a yield of 6.7% (the latter’s yield was not provided and had to be back calculated).
After this second round of UK acquisition, the company will make close to 50% of its profits from the UK. This is a country that will struggle for years with the Brexit hangover, has stagnant economic growth, has burned many other South African companies fingers and – most importantly – will likely see a declining currency, declining property prices and rising interest rates. In my view, this is the worst place to be buying property at the moment.
Furthermore, in order to finance this acquisition they have already concluded a placement of shares in an accelerated bookbuild, raising R585m. The company issued equity yielding 8% dividend to finance acquisitions yielding 6.6%. Of course, the yield of the UK acquisition can be enhanced by using leverage, but if that is the case, why are they are raising more capital then what is required for these two deals?
Given this heavy focus on the UK and the suspicious issuing of high yielding equity for the purchase of lower yielding y, I have decided to divest my holding in SSS. This money is better invested in my favorite REIT, Grit Realty.