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Shares Small Cap

Zip Shares Still Cheap After Walking Away from Sezzle, But Its Fundamentals Are Getting Murkier

Business Strategy & Outlook:
Zip’s focus is on maximizing its addressable market. Its business is more diversified than single-product buy now, pay later, or BNPL, players, with varieties in financing options, transaction limits, and repayment schedules. Customers enjoy simple sign-up and checkouts, high acceptance by retailers and flexible financing solutions to help better manage their cash flows. Merchant partners may benefit from increased conversion rates, basket sizes, and transaction frequencies. Zip has a revolving credit business in Australia. ZipPay finances up to AUD 1,000, and ZipMoney AUD 1,000 and above. It also boasts a broader merchant base including retail, home, electronics, health, auto, and travel. Around 70% of revenue is derived from customers, mainly from account fees and interest. Meanwhile, Zip Business provides unsecured loans of up to AUD 500,000 to small and midsize enterprises.

Zip adopts an installment financing model overseas, helping it scale up faster and keep up with competition in the underpenetrated global BNPL landscape. The acquisition of U.S. based Quad Pay materially boosts its growth prospects. It also operates in the U.K., Canada, Europe, Mexico, and the Middle East. Zip enhances customer stickiness via ongoing product add-ons. It has a Pay Anywhere function that lets users transact at a wide variety of avenues without being confined to merchant partners. Users also benefit from promotional offers, cash-back deals, or free credits. Newer features include crypto trading, credit reporting, and savings accounts. For merchant partners, Zip invests in co-marketing to help them acquire new customers. Zip has strong earnings prospects, but its margins will be increasingly under pressure and it will not achieve the same penetration and transaction frequency overseas as it had domestically. While it benefits from the growth of e-commerce and increasing preference for more convenient/cheaper forms of financing, anticipated heightened competition to its products. The capital-intensive domestic business cannot scale up as quickly, its fee structure potentially creates friction for customers, and its product offering in the U.S lacks clear differentiation.

Financial Strengths:
While credit stress is creeping up, Zip remains overall in reasonable financial health. As of March 2022, the net bad debt ratio for its core ANZ business sits at 3.40% of receivables, while arrears are at 2.29%. But as a reprieve, Zip’s current financial position would be bolstered by: 1) its March equity raise; and 2) avoiding absorbing Sezzle’s net losses. Its debt/capital ratio is 56%, while the ratio of equity/receivables has improved to 52% in fiscal 2021 from 8.1% in fiscal 2017. Zip’s bad debts should stay manageable in a major credit event. Unlike some peers, Zip conducts a greater degree of background check before onboarding customers, such as collecting bank statements and pulling in information from a credit bureau. Soft credit checks are similarly performed when onboarding new customers overseas. This helps compensate for the fact that its receivables are higher-risk due to them having longer repayment periods and higher transaction value (notably for Zip Money) or it having a Pay Anywhere model. Its installment businesses have shorter turnover periods and lower transaction values, meaning it can know much earlier (relative to credit cards) if customers have trouble making payments and can therefore amend its risk controls accordingly. Most its Australian receivables are funded by its asset-based securitization program, with undrawn facilities totaling AUD 401.9 million as of March 2022. It also has USD 168.1 million and AUD 119.5 million of undrawn facilities to fund U.S and Zip Business’ receivables, respectively.

Bulls Say:
Zip is well placed to continue growing its transaction volume, given its variety in financing options and retailer base, as well as its Pay Anywhere model which provides a greater avenue to spend using its products.
Zip benefits from an accelerated shift to e-commerce, increased adoption of cashless payments, and a growing need among merchants for effective marketing amid a challenging retail backdrop.
Zip faces lower regulatory risks than its BNPL rivals, as it already conducts a greater degree of background checks and ZipMoney is already regulated by the National Credit Act.

Company Description:
Zip is a diversified finance provider, offering consumer financing via a line of credit (via ZipPay and ZipMoney) and installment-based finance (via Quad Pay, Spotii, Twisto, and PayFlex); as well as lending to small to midsize enterprises (via Zip Business). Zip’s fortunes are largely tied to the buy now, pay later, or BNPL, industry. Most of its products–ZipPay, Quad Pay (Zip U.S.), and PayFlex–do not charge interest based on outstanding balances. Around 60%-70% of Zip Pay’s/Zip Money’s revenue is derived from customers, mainly via account fees and interest. Meanwhile, its installment businesses primarily generate revenue by receiving a margin from merchants, which compensates it for accepting all nonpayment risk and for encouraging consumers to transact more frequently.

(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Cohen & Steers Continues to Be Affected by Equity Market Selloff; FVE Lowered to $80 per Share

Business Strategy & Outlook

While the combination of rising interest rates and an equity market selloff has had an impact on Cohen & Steers’ levels of assets under management, they are cautiously optimistic about the firm over the near to medium term. Cohen & Steers came into 2022 with a record $106.6 billion in managed assets, split among its U.S. real estate (47% of total AUM), global/international real estate (18%), global listed infrastructure (8%), and preferred securities (25%) offerings. But market losses and meager flows during the first half of the year had left the company with $87.9 billion in managed assets at the end of June. So far, market losses are having a bigger impact on AUM than flows, with Cohen & Steers reporting a 12.3% (16.0%) market loss for its managed assets during the second quarter (first half) of 2022. This was better than the Morningstar Global Markets REIT TR Index, which was down 15.6% (20.0%) during the same time frame. Part of this is likely due to the firm garnering just two thirds of its total AUM from real estate investment funds, and some can also be attributed to active management.

While REITs have generally performed well during periods of rising long-term interest rates (based on studies done by NAREIT over the years), the current tightening cycle is a push by the Fed to fight inflation, which has been hitting levels not seen since the early 1980s. Rising rates and inflation can hinder external growth efforts for REITs (as acquisitions become less accretive) and pressure existing tenants, as well as provide investors with a less risky yield alternative in fixed-income securities (leading to outflows). It looks like most of Cohen & Steers’ investors are not running for the exits, though, as flows have been relatively flattish year to date. The firm’s institutional clients tend to be first to reallocate (and generally well in advance of Fed actions), so the fact they’ve not pulled out too aggressively is a positive. The Standard & Poor’s separation of real estate-related companies from the financial services sector has forced many institutional investors to maintain exposure to REITs, adding some stability to Cohen & Steers’ managed assets.

Financial Strengths

Cohen & Steers has not had any debt on its books since 2005. Based on what to be conservative long-term estimates for profitability and cash flows, the company is unlikely to need to tap the credit markets to fund its operations during the five-year projection period. Over the past 10 calendar years, Cohen & Steers has returned more than $1.1 billion to shareholders as dividends (utilizing both regular quarterly dividends and special one-time dividends to pay out capital) and around $130 million to shareholders via share repurchases (net of share issuances). Going forward, the firm will return just over half of its expected annual free cash flow (of around $270 million on average) to shareholders as dividends, with the rest spent on share repurchases or other investments (including seed capital for new products). At the end of March 2022, the firm had $115 million in cash and cash equivalents (including $30 million in U.S. Treasury securities) and $255 million in investments (including $63 million in seed capital) on its books.

Bulls Say

  • Cohen & Steers’ long record of successful REIT investing has allowed it to tap into demand for alternatives that offer diversification away from more traditional stock and bond offerings. 
  • The firm’s funds are entrenched in the broker/dealer market, and the company also garners close to half of its AUM from institutional clients, providing it with a relatively stable base of assets. 
  • At the end of March 2022, Cohen & Steers had $2.33 in cash and equivalents per share on hand, which could be used to fund a special dividend, a strategic acquisition, or to increase share repurchases.

Company Description

Cohen & Steers is a niche asset manager concentrating on real estate securities. The firm invests mainly in the equity shares of real estate investment trusts, with holdings in domestic and international real estate securities accounting for close to two thirds of its $87.9 billion in managed assets at the end of June 2022. Cohen & Steers also manages portfolios dedicated to preferred securities, utilities stocks, and other high-yield offerings. It expects to balance distribution among its closed-end mutual funds, open-end mutual funds, and institutional accounts over time. During the March quarter of 2022, the company garnered 40% (26%) of its managed assets (base management fees) from institutional clients, 47% (55%) from open-end funds, and 13% (19%) from closed-end funds.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Technology Stocks

Assa Abloy has significant growth potential as it benefits from structural changes

Business Strategy & Outlook

Assa Abloy has significant growth potential as it benefits from structural changes. There are two key drivers of future growth. An industrywide shift toward software-driven products, expanding functionality, and linking locking systems with other building systems. Second, emerging-market demand will move up the quality curve to more sophisticated locking solutions, in which Assa Abloy is a leader. If the spectrum of today’s locks were defined by a basic mechanical lock on one end and a software-controlled locking system on the other end, Assa Abloy’s product portfolio would be heavily weighted toward the latter. Advances in the past decade have expanded the functionality of lock systems to enable ever more precise access parameters, as well as enhanced identification of lock system users. For example, a building administrator would be able to provide a registered visitor with temporary access to a computer for a specified two-hour window on a particular day.

Technological improvements are shortening the upgrade cycle for locks, as customers are eager to implement new security-enhancing features. The shift toward software-driven locks will continue over the long term, with the company’s global technologies division forging the path. The division is experiencing good initial success in selling virtual keys, typically issued on a temporary basis to mobile phones. Asia and other emerging markets lag in locking solutions, with under penetration of electromechanical locks, such as those linked to a keycard reader. Pent-up demand in the region, combined with strategic acquisitions, fueled a fivefold increase in Assa Abloy’s Asia-Pacific revenue over the past decade, with organic revenue growth averaging 5% from 2005 to 2013 (before China’s property bust). For buildings with multiple daily users, there are obvious benefits from upgrading to more sophisticated systems that can track and limit building access. Asia and other emerging markets offer a long runway of demand for Assa Abloy’s products.

Financial Strengths

At the end of March 2022, the company’s net debt/EBITDA ratio was less than 2 times. Looking to the medium term, total debt maturities from 2023 to 2026 are around SEK 13 billion out of around SEK 25 billion in gross debt. Given the forecast for roughly SEK 16 billion in annual free cash flow, which would enable the company to pay down gross debt, in theory, in about two years.

Bulls Say

  • As the global leader in locking solutions, Assa Abloy is best positioned to capture the spoils from a secular shift toward integrated lock and other building systems.
  • The growing contribution of software-driven products should strengthen Assa Abloy’s margins and returns, as well as the stickiness of customer relationships, in the medium term. 
  • Accelerated adoption of electromechanical, digital, or smart locks should ease Assa Abloy’s path toward achieving its target of 5% organic growth over the business cycle.

Company Description

Assa Abloy has the world’s largest installed base of locks, protecting some of the most security-sensitive buildings, including the European Parliament in Brussels. Three fourths of its revenue come from government and commercial customers. The company’s product base is centered on electromechanical locks, which require identification to unlock with a keycard, biometric scan, or PIN. Assa Abloy’s products are sold directly to security systems integrators, locksmiths, hardware stores, and original equipment manufacturers

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Property

Strong Demand Should Drive Self-Storage Fundamentals in Near Term; Relaunching PSA with $326 FVE

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Business Strategy & Outlook

Public Storage acquires, develops, owns, and operates self-storage facilities, which offer storage spaces—of varying sizes and features—on a monthly lease for personal and business use. The company also has a lucrative insurance business that offers products to cover losses for the goods in self-storage facilities. The company’s strategy is to own and operate self-storage facilities within a 3-5-mile radius of densely populated urban centers and invest aggressively in enhancing its coverage, scale, brand, operating efficiency, and technology platform. Self-Storage is a highly fragmented industry with the five largest players owning 19% (including 9% by Public Storage) of US inventory, with the remaining 81% being owned by regional operators. Self-Storage outperformed all other real estate asset classes during the global financial crisis and is considered a recession-resilient sector as the demand for it is partially driven by transitions and difficult life events. 

The industry has experienced tremendous growth in the last several years, and the further societal shifts fueling that growth for years to come, albeit at a more modest pace. The traditional self-storage uses like downsizing, moving, adding space, change in household, etc. are being supplemented by additional demand drivers like growing adoption rate, urbanization, decluttering trend, increasing business demand, migration, population growth, and lower home affordability. Pandemic-related disruptions, the work-from-home dynamic, strong economic recovery, and a vibrant housing market have resulted in historically high occupancy rates and strong rental growth for the sector. The fundamentals like rental growth and occupancy levels to normalize in the medium term from the current elevated levels as additional supply hits the markets and pandemic-related demand fizzles. In the long run, the larger players in the industry keep gaining market share on the back of scale benefits and access to low-cost capital.

Financial Strengths

Public Storage’s balance sheet has long been the gold standard among real estate investment trusts—light on debt and heavy on progressively cheaper preferred stock, with a good portion of acquisitions and facility developments fueled directly with cash flow from operations. The company had $7.5 billion of debt, $4.3 billion in preferred equity and $0.9 billion of cash resulting in $10.9 billion in net debt and preferred equity as of the end of first quarter of 2022. The company had a trailing twelve-month EBITDA of $2.7 billion resulting in a Net Debt & Preferred Equity/EBITDA ratio of 4.0 times. Management has set the long-term target for Net Debt & Preferred Equity/EBITDA ratio at 4-5 times. Management has been prudent in utilizing the low interest rate environment to achieve savings through refinancing both debt and preferred shares over the years. The weighted average interest rate on the company’s debt was 1.70% and the weighted average rate for preferred equity was 4.5% resulting in the overall cost of debt and preferred equity of 2.7%. The maturity schedule of the company’s debt shows that the maturities are adequately spread. The fixed charge coverage ratio which is a ratio of EBITDA divided by all fixed expenses (including interest expenses & preferred dividends) was 9.1 times as of the end of Q1 2022. As a real estate investment trust, Public Storage is required to pay out at least 90% of its income as dividends to shareholders. The FFO payout ratio which is a ratio of dividends to funds from operations was reported at 62.0% for the year 2021. This gives the firm enough flexibility to fund its operations, pay dividends, pursue inorganic growth, and invest in organic development opportunities. The company can probably use slightly higher leverage to fund its capital structure given its relatively low leverage, high cash flow generation capacity, and the recession resilient characteristics of the industry

Bulls Say

  • Public Storage’s commanding lead in supply-restricted West Coast markets leads to consistent revenue growth. 
  • Public Storage’s industry-leading balance sheet leaves room for low-cost consolidation opportunities in a fragmented market. 
  • Pandemic-fueled changes like work from home, decluttering, migration, etc. have persisted and have created more demand for self-storage facilities leading to historically high occupancy rates and strong rental growth.

Company Description

Public Storage is the largest owner of self-storage facilities in the US with more than 2,800 self-storage facilities in 39 states and approximately 200 million square feet of rentable space. Through equity interests, it also has exposure to the European self-storage market through Shurgard Self Storage and to an additional 28 million net rentable square feet of industrial space in the United States through PS Business Parks.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Property

Extra Space Storage Inc has a lucrative insurance business and a strategically important third-party management business

Business Strategy & Outlook

Extra Space Storage acquires, owns, and operates self-storage facilities, which offer storage spaces of varying sizes and features on a monthly lease, for personal and business use. The company also has a lucrative insurance business and a strategically important third-party management business. The company’s strategy is to invest in enhancing the coverage, scale, brand, and operating efficiency of its self-storage facilities that are located within a 3-5-mile radius of densely populated, high-income urban centers. Extra Space’s owned portfolio is the second biggest in the U.S., and its third-party management business is the largest in the country which has enabled it to expand its geographic footprint, data sophistication, and scale with little capital investment.

Self-storage is a highly fragmented industry with the five largest players owning 19% (including 5% by Extra Space Storage) of U.S. inventory, with the remaining 81% being owned by regional operators. Self-Storage outperformed all other real estate asset classes during the global financial crisis and is considered a recession-resilient sector as the demand for it is partially driven by transitions and difficult life events. The industry has experienced tremendous growth in the past several years, and the further societal shifts fueling that growth for years to come, albeit at a more modest pace. The traditional self-storage uses like downsizing, moving, adding space, and so on are being supplemented by additional demand drivers like growing adoption rates, urbanization, decluttering trends, increasing business demand, migration, population growth, and lower home affordability. Pandemic-related disruptions, strong economic recovery, and a vibrant housing market have resulted in historically high occupancy rates and strong rental growth. The self-storage fundamentals normalize in the medium term from the current elevated levels as additional supply hits the markets and pandemic-related demand fizzles. In the long run, the larger players in the industry keep gaining market share on the back of scale benefits and access to low-cost capital.

Financial Strengths

After decreasing the fair value estimate for Extra Space Storage to $167 from $185 after taking a fresh look at the company. The updated fair value estimate implies a forward 2022 fund from operations multiple of 21 times. The estimate of Extra Space Storage’s long-term weighted average cost of capital is 7.3%, and an enterprise value/EBITDA multiple of 22.4. In base case, the company’s portfolio will continue to thrive off strong fundamentals in the short term as customer demand drives excellent occupancy statistics and strong rental rate growth. The tenant insurance and third-party management business continues to grow at a healthy rate. One cannot think that management can increase prices indefinitely at the current rate as the low cost of building and the largely undifferentiated nature of self-storage facilities allows supply to enter the market. The national delivery volume for self-storage facilities peaked in 2019, but the existing supply pipeline remains strong at an estimated 8.9% of existing inventory. In the long run, the self-storage market cools down, resulting in occupancy rates and rental growth normalizing.

Bulls Say

  • Extra Space’s third-party management business serves not only as a capital-light revenue stream, but also as an acquisition pipeline, ensuring future growth. 
  • Extra Space Storage’s strong balance sheet leaves room for low-cost consolidation opportunities in a fragmented market. 
  • Pandemic-fueled changes like work from home, decluttering, migration, and so on have persisted and have created more demand for self-storage facilities, leading to historically high occupancy rates and strong rental growth.

Company Description

Extra Space Storage is a fully integrated real estate investment trust that owns, operates, and manages almost 2,100 self-storage properties in 41 states, with over 160 million net rentable square feet of storage space. Of these properties, approximately one half is wholly owned, while some facilities are owned through joint ventures and others are owned by third parties and managed by Extra Space Storage in exchange for a management fee.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

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