FTSE 250 Self-storage operator Safestore (LSE:SAFE) continues to see its stock price shrink as the effects of rising interest rates hamper growth within the real estate sector. As a result, the stock is now trading close to a price-to-earnings (P/E) ratio of just six!
It seems that investor sentiment surrounding this business is weakening. And that’s despite the fact that Safestore shares have been among some of the top performers over the last decade. But is this concern justified? Or are investors looking at a screaming buying opportunity? Let’s take a closer look.
Why are investors concerned?
As a business, Safestore is pretty simple. It owns and operates storage facilities across the UK and Europe and then leases them out to individual consumers as well as small businesses. While it’s not the most exotic enterprise out there, demand for such services is on the rise, especially in markets like the Benelux region, where management has been busy expanding.
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Obviously, building up a property portfolio isn’t cheap. And the company has racked up a bit of debt over the years. However, the cash-generative nature of its business model provides ample financial flexibility to service its obligations as well as maintain shareholder dividends. So, where is the problem?
After years of spectacular performance, it seems Safestore is seeing its hot streak start to cool off. Trading updates throughout 2023 have been showing signs of weakness emerging across occupancy and profit margins.
Customers who cancel their storage contracts have to find somewhere else to store their belongings. That makes for a stickier relationship. But the current economic environment is seemingly applying enough pressure that customers are cancelling nonetheless.
Overall, Safestore’s short-term outlook seems to be rife with challenges. And should occupancy continue to drop, earnings may become compromised, taking dividends with them.
What about the long term?
The status of Safestore’s business over the next 12 months is a bit of a mystery. However, much like real estate, the firm’s business is cyclical. And when looking at the long-term trajectory for the self-storage market, things continue to look promising.
That seems to be the same conclusion management has drawn since it’s still busy expanding operations, despite weaker results. Over the last 12 months, the group has added another 500,000 sq ft of leasable storage space to its portfolio, with another 1.5 million sq ft in the development pipeline.
With the bulk of the firm’s liquidity tied up in new development projects, management is stretching the group’s balance sheet a bit. This undoubtedly increases the risk attached to any investment, especially if the group has inaccurately forecast how long its short-term woes will last. However, the group’s track record is pretty impressive. And that’s why it’s a risk I feel is worth taking. I’d buy if I had the cash to spare.
