In advance of the Shareholder Meeting on October 16th, Global Self Storage (NASDAQ:SELF) shareholders have been sent a Proxy (as available here). Propositions Three and Four will lead to the authorization of additional shares. It is in the shareholders' best interest to support these measures.
Reason One: Improved Adjusted Funds From Operations Resulting From Scale Alone
As the company grows in terms of numbers of properties and units, revenues and net operating income incease much faster than do General and Administrative Expenses, which are largely fixed and associated with the established corporate infrastructure. In that regard, please see Exhibit One below, depicting G&A as a percent of operating revenue for SELF and for five competitors in the self-storage space: Cube Smart(NYSE:CUBE), Extra Space Storage(NYSE:EXR), National Storage Affiliates(NYSE:NSA), Life Storage(NYSE:LSI) and Public Storage(NYSE:PSA). The data are taken directly from the respective Second Quarter Reports and are available here: SELF, CUBE, EXR, NSA, LSI and PSA.
General and Administrative Expenses as Percent of Operating Revenue
Second Quarter of 2017
SELF CUBE EXR NSA LSI PSA AVERAGE NON-SELF
23.7 6.4 7.9 11.5 12.0 2.2 8.0
It is commendable that, even in the face of the economy-of-scale disadvantage (including considerable liquid assets not fully deployed), SELF has now reached AFFO that covers 97% of its dividend.
In fact, if SELF’s G&A were at the very same percentage of operating revenue as the average for all others shown above, SELF’s AFFO would have been higher by 0.038 in the quarter, or an increase of roughly 60 % over the reported AFFO of 0.0629! Of course, this computation is entirely hypothetical and unrealistic for a variety of reasons. However, it does illustrate an underlying principle for this micro-cap. By simply scaling up operations (all else being equal), the adjusted funds from operations will naturally tend to accrue as the relative proportion of G&A declines. Within the context of the highly predictable nature of self-storage business operational outcomes and the well-established corporate infrastructure, this seems to be a rather direct way for SELF to grow its future AFFO per share.
Reason Two: The Proven Effectiveness of SELF’s Present Business Model
As all self-storage firms are continuously in a state of motion at any given time, probably the best perspective of comparison is what happens on a same-store basis. Please see the article “Splendid Growth Reported by Global Self Storage,” August 22. Certainly, the information provided demonstrates that the company has developed a proven marketing strategy at least as effective as any other REIT in the self storage industry. Hence, shareholders should be assured that future injections of equity capital will be well invested with the objective of enhancing AFFO.
Prior to casting my own proxy vote late last week, I called up Mark Winmill, CEO, to ask some relevant questions. I was impressed with his extensive detailed knowledge of each of the individual property operations. Not many CEOs can be so in touch. One of the topics that I covered with him was the astonishing rate of lease-up for the 304 new Bolingbrook units, which were completed in mid-November of last year and now have reached occupancy of 87 % as of June 30th! This was accomplished by applying an astutely devised strategy directly in the face of two large national competitors (mentioned above) who hold proximate operations.
Reason Three: Consolidation in the Industry
It is common knowledge that 83% of the U.S. self storage market is not owned by a REIT. Further, 76% of all self storage operators manage only a single unit. Generating returns now becomes a matter of acquiring properties from less sophisticated operators and integrating them into an established infrastructure. SELF certainly has a proven track record of excellence in doing this. To persist, it will need additional equity capital.
Reason Four: Enhanced Liquidity
As more shares are traded, the bid/ask spread declines, and associated liquidity risk decreases, further enhancing value.
Reason Five: Institutional Participation and Visibility
As liquidity improves, there will be more institutional holdings. This will inevitably lead to coverage by more analysts and consequently improved public awareness.
Authorizing the additional shares by approving Propositions Three and Four of the Global Self Storage Proxy will benefit existing shareholders in a number of ways. Shareholders should unequivocally support management’s proposals.
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.
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