Monday, November 30

The Inconspicuous Shareholder Wealth Generated By Global Self Storage In Q3

The reader is referred to a previous article regarding Global Self Storage (SELF): “The Commendable Economic ROE Of Global Self Storage”. As of, 6/30/2020, the NAV for SELF was estimated to be $7.16.

The NAV on 9/30/2020

Following the same logic portrayed in the cited article above, please consider Exhibit One below.

Exhibit One

The first column provides the trailing four quarters for 6/30/2010, as registered in the article, while the increment column makes adjustments to arrive at the third column, the trailing four quarters as of 9/30/2020. The increment values are obtained from the latest Q3 report of SELF where we see a $141,000 increase in property-related revenues, along with a corresponding increase of $38,000 in operational costs. Of course, this implies an increase of $103,000 in trailing NOI during Q3.

From the same information, we arrive at relevant balance sheet information at the end of Q3, as given by Exhibit Two.

Exhibit Two

A review of prevailing market conditions at the end of Q3 indicates that neither the basic term structure of interest rates changed appreciably, nor did the apparent spreads for the cap rates applicable to self-storage facilities with similar quality REIT characteristics. This is borne out by examining comparable asking-price cap rates for a sample of properties listed as of the two dates. So, a consistent market cap rate of 6% is reasonable.

With the 6% cap rate, the implied intrinsic market value of the properties (as they are being operated) will be 5.41/0.06 = $90.17 million. Adding back both the cash and securities while subtracting out the debt produces a net market value for SELF (NAV) of $68.37 million. Given the 9.356 million shares outstanding, we see a NAV of $7.31 per share on 9/30/2020.

For conservatism, restricted cash, accounts receivable and prepaid expenses are excluded from the calculations. It is assumed here that they would simply cease to exist if SELF were to liquidate the properties and dissolve itself.

Implied Annualized Economic Return Provided to Shareholders of Global Self Storage

As presented in the Q3 earnings announcement, SELF posted AFFO of $637,000, or $0.068 per share. The simultaneous gain in NAV during Q3 was $7.31-$7.16 (see above cited article) = $0.15 per share. Hence, the total return for Q3 was $0.218 per share. A shareholder who bought SELF at the $3.85 close on 6/30/2020 would have realized a quarterly economic return ROE of 5.66%, or 22.6% annualized.

Of premier importance here is the observation that this performance is not just a one-time event. In fact, it is now becoming rather commonplace at Global Self Storage. Please see the preceding article referenced above, wherein a 23.8% annualized return was realized in Q2.

The Market-Value Balance Sheet on 9/30/2020

To create an economically driven balance sheet for SELF as a going concern on 9/30/2020, we now include the $0.991 million of prepaid expenses, accounts receivable and restricted cash. Intangibles (such as goodwill and line-of-credit issuance costs) are excluded. The market price of SELF at the close on 9/30/2020 was $4.01, which was used to determine market equity. The reader who is not familiar with the entry “Liquidation Inhibition” may review the previous article for insight. It represents the portion of the total economic value of SELF (Total Assets) that is not included in the sum of Market Value of Equity and Total Debt. As such, it portrays real net liquidating value of SELF that is currently not being recognized in the price of the stock. In that regard, any change in the value of the Total Assets – Total Debt that is not mirrored by a corresponding revaluation in Market Equity is accorded to Liquidation Inhibition.

Exhibit Three

Relevant Points of Discussion

  1. First and foremost, the increase of $103,000 in NOI during Q3 was tangible value creation. Perhaps the exactness of the applicable discount rate could be slightly debated, but the increase in real value (NAV) for SELF is most certainly close to $103,000/0.06 = $1,717,000.
  2. The change in NAV cited above is derived by making use of a trailing NOI for purposes of generating definitive comparisons with the previous quarter and simultaneously taking into account the implicit impacts of seasonal variation. Most assuredly, the attainment of an NOI increase during Q3 will drive future NOI growth in the forward sense. So, if we presume that the NOI increase will be sustainable and consider the forward NOI prospects for our valuation, then the annualized increase would be $103,000 x 4 = $412,000. At the 6% cap rate, this performance would translate into an asset market value increase of $6.87 million, or $0.73 per share, alone rendering a quarterly return of 19.1% or 76.3% annualized at the $3.85 price on 6/30/2020. Perhaps only a portion of the $103,000 quarterly NOI increase may actually be realized in the immediate future quarters due to seasonality adjustments (with no relevant data, I am unable to produce any rigorous projection); however, there will be some permanent enhancement of NOI going forward and a commensurately proportionate positive resultant impact upon the NAV, if computed in the forward sense.
  3. Value creation at the property level has always been the hallmark of Global Self Storage. Please see again the Q3 earnings announcement. Remarkably, the Millbrook Store saw a 47.8% occupancy shortly after the expansion was completed (on March 31st) but ended up at 96.3% by October 3! In the wake of presenting the Millbrook results, CEO Winmill states, “We see this positive performance as being driven by a number of factors. Much of it is due to meeting pent-up demand and increased migration to the suburbs. But it also shows how we have addressed this demand with effective internet and digital marketing, as well as attractive roadside signage and drive-by curb appeal. All this, combined with our traditional disciplined approach to controlling expenses, led to strong same-store NOI growth during the quarter.” The asset assessment discussion above clearly demonstrates that SELF’s value creation, as expressed in terms of NOI and implied NAV, far better portrays the company’s strengths and the associated source of consequential shareholder wealth generation than does a narrow focus upon AFFO growth. I do recall the derogation leveled at SELF at the decision to acquire both the Millbrook and the Clinton Stores. I believe that the $694,121 of goodwill residing on the balance sheet is a result of this transaction. It will be interesting to see how SELF deals with the goodwill balance, now that Millbrook appears to operating robustly. I sought to investigate prevailing rent offerings at Millbrook on the website but was surprised that all units of all types carried the designation of “limited availability” and to call for quotes.
  4. The true economic balance sheet renders leverage ratios for SELF that are far more conservative than the corresponding traditional book-value computations would show. From Exhibit Three, we see total debt to total assets at 26.6%. Total debt to total equity is 36.30%. Here total equity equates to the sum of Market Equity plus Liquidation Inhibition.
  5. The above unusual computed economic ROE and enhanced debt ratios are available to shareholders of SELF due to the market’s inordinate discounting of its shares relative to NAV. As discussed in the previous articles, these extraordinary advantages are not accessible to shareholders of the larger self-storage REITs, whose share prices approximate their respective NAV values.

Investor Implications

The above discussion strongly argues that SELF management is not taking full and fair credit for the entirety of value creation. There are some similarities between SELF and the typical closed-end bond ETF. For example, both manage portfolios of income producing assets (bonds versus self-storage properties). Both report either Total Investment Income (for the ETF) or NOI for SELF. Both report either Net Investment Income (for ETF after deductions for advisory fees, interest and miscellaneous expenses); or AFFO (roughly NOI less G&A less interest expense for SELF). However, the ETF typically takes the analysis a step further by accounting for “unrealized appreciation (or depreciation) of assets” and produces a “net increase or decrease in assets resulting from operations.” Such provides the investor a more comprehensive perspective of performance.

As a shareholder, I would like to see such an analysis. Because the SELF portfolio contains only eleven distinct wholly owned properties, it should not be an overly burdensome chore, relative to the subsequent prospective benefits in share price appreciation. By contrast, the typical bond ETF may hold scores of assets that are illiquid and whose pricing must include such things as estimates for credit spreads, liquidity spreads, prospective rate volatility and associated option-adjusted modeling. Granted, the inclusion of market valuation estimates for SELF’s portfolio of self-storage properties would be subject to some uncertainty. However, any type of financial analysis must always be presented with appropriate disclaimers. For example, please read the section “Non-GAAP Financial Measures” included with the Q3 earnings announcement. Therein, appropriate qualifications are cited for such common terms as “FFO”, “AFFO” and “NOI”. Everyone recognizes the limitations of human perception.

Until such time as more precise supplemental report could be produced by SELF, the investor must rely upon his own approximations. In that regard, I see persistent fundamental NAV value accrual quarter after quarter. I remain neutral in the short term, due to the market’s complete focus upon FFO and AFFO. Most recently, G&A inflation has siphoned away much of the benefits derived form improved NOI, limiting AFFO growth and keeping the share price artificially discounted. See the article, “Unlocking Shareholder Value at Global Self Storage.” However, I continue purchasing shares from time to time, and I believe the underlying fundamental values will eventually be understood and rewarded by the markets.

Disclosure: I am/we are long SELF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Credit: SeekingAlpha

Leave a Reply

Your email address will not be published. Required fields are marked *