Morning everyone. Welcome to the 8:35 AM session at Citi's 2023 Global Property CEO conference. I'm Akanksha Anand, joined with Aaron Guy from Citi Research, and we are pleased to have with us today Shurgard and CEO Marc Oursin. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can sign in onto liveqa . com and enter code CITI2023 to submit any questions. For those in the room, just raise your hand. Try to make it as interactive as we can. Marc, we will turn it over to you to introduce your company and members of management that are here with you today, and then we will get into Q&A.
Thank you very much. So we have Caroline, Caroline Thirifay, our director, the lady in white. Jean, Jean Kreusch, our CFO, and myself, Marc, the CEO. And all of us have a very long seniority. Caroline, how many years?
24 years.
24 years within the company, and Jean almost 20 years soon, and myself more than 11 years. So I will just go on. I think you got the booklets and so on page four of the presentation, just a short introduction of who we are, and then happy to answer to all your questions. So first, for us, if we have to define Shurgard, we think we are really a unique platform with a lot of runway. And by saying this, also, we have, again, another year of outperformance. I mean, since we IPOed the company, which was 5 years ago in 2018, the company did very well. Just to give some ideas, I think the IPO, the price of the share was EUR 23, and now we are between EUR 45-EUR 50.
Then secondly, I would say the strategy based on the proven benefits from our geographic spread; we are in seven countries, mainly Northern Europe, meaning France, Netherlands, the U.K., actually London specifically, also Sweden, Belgium, and Germany, and lastly Copenhagen. And also the fact that this is a platform; this is more than a portfolio. We are a very operational business. Self storage has nothing to do with logistics. It's a B2C business. First, it's not B2B. And secondly, it's an urban product. You need to be close to residential to make it work. And by these key elements and by having two-thirds of our portfolio in the capital cities of these seven countries, we have been able the past 20 years to rationalize our operations and through that to get some benefits, sorry, of economies of scale.
If you look at the runway of the company, we have overdelivered in 2022 in terms of development and also M&A versus guidance. So we have mainly three levers of growth. I mean by that, that we can extend properties. We own 94% of our portfolio, so it's mainly freehold. So like any owner, if you want to increase the size of the building, you can because you own them. So this is what we call redevelopments. We do a lot of also organic developments, simply buying a land and building a purpose-built, knowing that 2/3 of our portfolio is also purpose-built with an average age of 15 years, so quite young. And then we do what we call conversion, which is buying a former property, existing property, factory, warehouse, offices, and we transform this into self storage.
And last but not least, M&A, which is the third lever of growth for us, knowing that it's three levers of growth x7 countries, so potentially 21 options that we can maneuver, push, or slow down. And that's why also we have been able to develop a very strong pipeline for the year 2023, 2024, and 2025. All of that is framed within a pretty robust balance sheet. We have a low leverage, below 20% in terms of LTV, or around 4x net debt over EBITDA with a cash position, and also a strong capital allocation. We have raised up our hurdle rate by 1 point in our guidance 2023.
We were previously around 7%-8% of return, I mean yield on cost or investments, and due, of course, due to the increase of cost of capital, now we are targeting 8%-9% for the projects that will be approved in 2023. We are becoming, or I would say we have become, a U.K. REIT as of this month, March 2023. What does it mean? You maybe not know, or maybe you know, but in Europe, well, REIT means tax. Tax are per countries, and therefore there is no pan-European REIT status. It does not exist in Europe. So each country has its own tax regulation, and therefore the only one we thought and was making sense was the U.K., and that's why also we became a U.K. REIT. And this is sheltering all our incomes in the U.K..
We continue to pay taxes in the 6 other countries, France, Germany, etc. But with that, it helps us to mitigate our cost of tax at 18% of earnings before tax, while a year ago the guidance was around 22%. So it is massive, 4% over the coming years. And last but not least, ESG. We are the sector leader in terms of sustainability in ESG credentials through GRESB, for example. So we are very active on that field, and we have a lot of projects. So, happy to answer your questions.
Thanks for that, Marc. What would you say is the biggest misperception about your stock, or what is the market missing versus the reality that the investors should actually focus on?
Well, I think the market, as like Shurgard, you know, when we look at the performance the past four years, we cannot say that we are really behind the market. We have overperformed big time. I would say that probably being in the EPRA index, meaning that, of course, I have nothing against E`PRA, but we are considered as a real estate business. So we have been, in a way, bashed like other real estate companies due to the rise of interests, knowing that actually our leverage was very low, you know, around, as I said, 18% LTV. I think there's a perception which is maybe a tropism which is too big regarding this real estate factor.
We are still very operational with a very healthy balance sheet, and I would say, plus the perspective of growth, I think that we should deserve probably a higher price.
Let's move on to the occupier markets now. How would you characterize the current tenant markets and maybe touch upon the differences in each of the markets that you operate in?
Sure, thank you. Yeah. So you know that, and most of you are probably from the U.S., so self storage is very developed in this country. It's more or less, I think, 20 more than 20 times what we have in Europe. But it's a short-term lease, you know. People are able to leave the place within 2 weeks, a notice period of 2 weeks. And by the way, we also, as owners, are able to kick customers out within 2 weeks' notice. It works both ways. But then if you look at the occupancy, we have a high occupancy from a European standard. Our Same Store are around 90%, and the bandwidth between the lowest country and the highest is quite narrow. Some countries are around 89% and others close to 92%.
If you look at the dynamics of the different markets, we can see that the Nordics are performing and decelerating versus 2022. If you look at quarter per quarter, the trend is still there. But on the other markets, the biggest one, as for example, France, Netherlands, London, and Germany, even Belgium, we are still on a very high occupancy and high rental increase. So revenue, Same Store, are still on the same trend. If I look at January, February, and the early days of March, we have the same kind of speed and what we had in the last quarter and also Q3 2022, which are good news, to be frank. We're not anticipating this. We're anticipating more, let's say, more stronger deceleration.
What was your NOI growth, the like-for-like in 2022, and what do you expect for 2023 and 2024?
Okay. So 2022, we had a nice growth on the NOI. I think you will see it's more than 10% for the same-store. The revenue were around 8%. 2023, 2024, we have not given any guidance on the NOI specifically, but we have said that the margin as a percentage will increase, which is, I believe, a great performance. Why? Because the industry, especially in the U.K., is under very strong pressure on the cost side. You know that in the U.S. as in the U.K., the first line in the P&L of self-storage is real estate taxes, secondly payroll, while on the continent it's the other way around. I mean, the continent, in Europe. Payroll is the first line around 8%-10%, and the real estate taxes are around 4%-5% of the revenues.
In the U.K., the British government has decided to increase by 50%, 50%, for the coming 3 years, the real estate taxes. It would be 25% this year, 15% more or less next year, 24%, and another 10% in 2025. So when it's 8%-10% of your revenue, you can imagine the impact on your bottom line if you don't have the sales at the same time proportionally growing. Then secondly, when you have on the labor cost that are 8%-10% of your revenue and inflation, which isn't a negotiation or what you decide to give to your employees, that would be close to inflation, again, it's significant. We're talking about 8%-10% depending on the countries, and the U.K. also is there.
So to me, for the industry, I think the U.K. will be under great pressure, and I don't see the NOI growing same store over there. It's more declining. On the other markets, and for us, the fact that we have been able to offset all these increases by better efficiency in the network, and this is due to what we call eRental that we have launched in 2020 during the COVID, that we have rolled out in 2021 and fully operational in all the properties as of January 2022, this is already 30% of all our move-ins. It's simply a seamless experience between the need of storage and the contract. In a way, it's like a boarding pass, if you prefer. You want to buy a plane ticket, well, with your phone, and you end with a boarding pass on your phone. It's the same concept, if you prefer.
By doing that, we are able to absorb these cost increases, and that's why the margin I mentioned will increase by a 20 basis point in 2023 for us and onwards every year.
That's very clear. Thanks. How do you see the tenant mix changing? Do you see any changes into how your tenant mix is evolving?
Not really, actually. We have this notion called Resi customers and business customers. That's the way we describe these two, let's say, types of businesses, knowing that in our case, the Resi people are around 80% of our lettable area rented, and the remaining 20% business customers. But we call them this way because the business customers per country usually have a tax treatment related to VAT, which is different. But commercially, we don't do anything special for them. I mean, there are no specific discounts. There are no payment terms that are longer or this kind of stuff or services. We simply, because of the VAT, we call them business customers, but commercially, they check their phone and they browse on the web, and then they rent online, you know? So it's the same.
Having said that, have we seen pre-COVID and COVID, and let's call it maybe now post-COVID, hopefully? No, the mix is the same. It's still 80-20. There are no variances per countries. It's still the same. As I repeat, we do not refuse business customers, but we don't do anything proactively to get them on board, knowing that our occupancy is around 90%. So we believe that we don't need to do that. And on the top, the mix of the units that we have, we have remixes almost the past 10-15 years a lot. We don't have any, I mean, properties with units that are more than 20 square meters, so 200 sq ft. So mechanically, these kind of customers don't go to us. Well, they can see that we don't have that product, so they probably go to other players.
Let's move on to the investment markets and the property values. How are the investment markets looking? And again, maybe just touch upon each of the geographies you're operating in, and where do you see values moving from here in each of the markets?
Well, you know that through and we are not the only one. We follow the IFRS norms, and therefore we need to have two valuations a year, once per half year. Up to now, done by external valuers, people like we are working with Cushman, for example, in our case, and we have not seen, let's say, a stabilization or even an increase of these cap rates. It's even actually the other way around. If you look at the latest numbers that we have disclosed for the full year 2022, we still have more or less 50 basis points of reduction of the cap rate. So we say, "Hey, Marc, what's going on there? It's not really what is happening in the other classes of assets." In Europe, true. And this is based on mainly two factors.
First, the transactions, back to your question, that's why I wanted to mention that, are still done at a pretty high price or, let's say, low cap rate because assets on the market are quite scarce, and therefore there is competition to buy them. I think this pressure between the demand and the supply on the M&A part of self storage is, in a way, up to now, protecting the valuations. Secondly, the fact that we have improved also our cash flow perspectives, especially on the rental side, as I suppose push Cashman to act this way.
Do you feel they might, how would they go on from here? Do you think they might be moving sideways?
Let's wait for June.
All right.
But more seriously, what is interesting, I think, for investors and also for us, obviously, to appreciate that, we have the luck that the three key operators in Europe that are listed, so ourselves, Big Yellow, and Safe tores, have different calendars, I mean, accounting calendars. We, Shurgard, we are from Jan to December. Self Store is from November to October, and Big Yellow, April to March. And therefore, the first one who will have to disclose a new valuation will be Safes tore for their first half of their new year. Then it will be us a couple of months later, and then Big Yellow a couple of months later, which means that investors and also operators will have a good flavor or taste of what's going on within 4-5 months, which is, I think, a good sample.
When you look at the next 6 months-12 months, what do you think is the best real estate decision for you? Is it buy, sell, build, hold?
Don't change strategy. It's not because interest rates are high, Marc, that we have to change the strategy. It's the other way around. We continue to do what we are doing, and opportunities will be there for us.
When you think about M&A, do you think there might be fewer or more public companies in 2024?
Well, I will take the second part of the question, not the first one, which is, I think that globally the situation will be more or less the same for Europe in terms of publicly listed companies for self storage.
Is M&A a realistic possibility for your business to accelerate growth and returns? What sort of assets might you look to buy?
Well, you know that we, this is what we have, let's say, explained to the market five years ago and what we have done since the IPO, I mean, and what we have done every year, sorry. It's that M&A is part of our, in a way, DNA now, and we consider this as a natural way of growing the company. We have done 20 deals the past five years. We have invested more than EUR 500 million through these deals and acquiring 60 properties spread over the whole of the seven countries where we are. So for us, it's just, as I repeat, the third arm or the second leg, really significant, of development, organic on one side and M&A.
We have committed to buy 20,000 square meters every year and developing 70,000 square meters on the other side organically, so 90,000, so roughly 1 million sq ft every year. Therefore, yeah, for the timing, it has been mainly bolt-on acquisition. That's the way it has been. We stick to the seven countries where we are. That's the thing. To the capital cities also and Tier 1 cities where we are. Density of properties is key in this business to create more, let's say, NOI, same store-wise, and therefore more value for shareholders.
What would you need to move in the market for you to start considering the M&A side again?
Well, we have not stopped. I mean, we continue. You know, we have acquired last year. We invested, I think, more than EUR 30 million. I've acquired three properties in Sweden, two in the Netherlands. I forgot where was the and one in Paris. Thank you, Akanksha. So we continue. For us, as I said, I mean, there's no reason not to continue.
Right. So now moving on to the macro side of things. I mean, what are your views on the sovereign bond yields movement over the next 12 months and the probability of recession?
Wow, you know, we don't know what in early March. Six months ago, I was attending a conference in Paris organized by EPRA, and one gentleman there, a famous person from Harvard, and just was presenting us the world, and it would be a complete catastrophe. It was pretty, I would say, yeah, not very optimistic, let's put it this way. Six months later, I look at my numbers, our numbers of Shurgard and the markets, and I would say, "Well, looks like it's taking another route than what has been anticipated or unknown six months ago." As I said, for the time being, the business is good. Occupancy is there. It's not declining. Rental rates are continuing to grow, and that's good. So you know, self storage, at least in Europe, there's a kind of seasonality during Q2.
We call that the move-in season, which is usually April to June. So I would say Q2 will be the moment of truth because if Q2 is more or less still aligned with what we see, we're anticipating a deceleration. That's the way we have done our budgets. But if the deceleration is not as what we were thinking, then, okay, it's going to be another great year. But for the time being, there are no orange neither red lights.
You touched upon the business rates a little bit. I just wanted to understand, how do the business rates impact your business and tenants, particularly? Clearly, the U.K., there's a difference between geographies.
So these real estate taxes, well, as I said, impact our P&L quite clearly or the industry, to make it simple, not only Shurgard, obviously. So in the U.K., as I said, this in the revenue, it's roughly 8%-10% of the revenue, this line. And therefore, if you take any increase on that, well, mechanically, you have an impact on your NOI. And as I said, on the continent, it's more or less half of that. There are no increases there except Paris Central, which is quite significant too, but we have only four properties out of 266, so it's not a problem. So then for the customers, the big difference that you have, for example, with offices or even, let's say, maybe commercial, where the tenant is contractually paying this line, okay, in our case, no, it's very simple.
You are paying for a unit, all right, and that's it. But fortunately, we're able to change the prices the way we want and where we want and when we want. So it will be then our pure discretionary decision to increase the prices due to this increase on the tax rate.
I'm going to just ask a question. Just obviously, we're seeing the rates jump up significantly. Are you seeing more deals coming onto your desk of maybe people in the private market who maybe obviously, your balance sheet's well set up, but maybe others in the market aren't? Is there potentially an increase in deal flow that might come from people getting kind of squeezed a little bit? And then if there isn't necessarily an increase in deal flow at this stage, how do you think about development at the moment? I mean, construction costs appear to be coming down a little bit. Your rates going up. Your occupancy's strong. You're managing this sort of yield management on a live basis so you can see what's going on. Is there an opportunity now to start sort of ramping up development a bit more than maybe you thought?
Yeah. Well, first, on the M&A side, we have, I would say, quite often during the year, files on our desks. And again, this has not changed the way we assess them. First is, is it in the countries where we are? First question, yes, no. No, we don't look at it. Yes, we look at it. Secondly, is it in the cities where we are? Yes, no. Yes, we look at it. No, if it's a fantastic city, meaning a big one in that country where we're willing to be and we are not, then we look at it. For example, what happened in 2020 during the COVID with this portfolio we bought in Germany, in Munich, at Zeitlager. And then the assets themselves, what are you potentially buying in terms of quality? Are there leasehold, short-term leasehold, freehold? We are more looking freehold.
We're not against leasehold, but we prefer freehold. Either leasehold or long-term, why not? And then the quality of the assets, what kind of buildings? Are they big? Are they small? Are they in a good shape or not? So you see, that's what we follow all the time. And in terms of volume, I would say that last year, from Q4, the volume in terms of prospects for M&A was higher. And for the time being, it's the same pace. We don't see any acceleration or deceleration, but there are opportunities, definitely. Regarding organic development, well, here's something. We did a Capital Market Day in September 2021, so almost a year and a half ago. And what have we said at that time? We will double the speed of organic.
The market was very happy with what we were doing, but clearly saying, "Okay, guys, you've been able to demonstrate your capacities. That's good. Can you do more?" I said, "Happy to do it more, and this is what we have done and launched." So what we decided to do is more or less to make it simple. Instead of investing roughly EUR 100 million a year spread over organic and M&A, let's double it. Let's go to 200. And going from 100 to 200, it takes 2 years, so 2021, 2022, 2023, and 2024, and this is what is happening. We will open this year 23,700 square meters while originally we were more around 35, less than 40. And in 2024, we'll go to 90,000 organic and M&A. So you're right. A year ago, I was begging vendors to build things.
Now it's the other way around, which is nice, which means the vendors are knocking at the door and saying, "All right, do you have any work for me here?" On the lands, so that's good. It means that the peak of the cost of building is behind us by far, and we start to see a deceleration, clearly. But we didn't stop developing. We continued. And on the lands, we started to see already 2 years ago plateauing on the lands, and it's starting to, let's say, to decline in certain areas.
Do you think that sort of that growth ambition that you've had since IPO is one of the reasons the stock trades at a bit of a premium to some of the peers?
You're right. I think that when you are able to deliver growth, you have resilience during crisis, and you have a good perspective on the cash flow deliveries, this has a high value.
Just on that rate impact, let's park the recession thing for the moment because obviously that discussion could go any number of different directions. But just looking at the behavior from occupiers, from rate moves at the moment, are you seeing anything through your live dynamic watching of the market through your systems in terms of residential markets, for example, people starting to get squeezed on mortgages, people therefore clearing out a spare room? We've seen this in London a little bit to sort of help pay the mortgages. Is there any change in the underlying customer that you have noted since rates jumped in, what, August, back end of September?
So as I mentioned to you, we see a pattern in the Nordics, which is different than the rest of the continent or Europe, let's put it this way. And this is exactly related to what you are sharing, Aaron, is if you look at Europe, the way so first, our customers are not all of them owners, all right? The vast majority are people simply leasing an apartment or renting an apartment or a house. But for the ones who have a mortgage, clearly the situation is very different depending on the countries where you live and where you are. So for example, I would take the two extremes of the spectrum. I will simplify, but you have on one side people with super high leverage on the mortgage, exposed completely to variable interest rates, the Nordics, Sweden, Denmark.
On the other side of the spectrum, markets where actually you borrow money for a very long period of time, 20, 30 years, fixed interest, Germany, France, Belgium, and I would say Netherlands, where you have zero risk versus what is happening currently now on the markets. In the middle, the U.K., which is in a way between, yes, what the Nordics are experiencing, which is variable interest, almost purely debt and no equity in your capital, let's say, structure, and the U.K., millions of people, I don't remember it, I think 3 or 5 million every year that have to renegotiate after 3 or 5 years their terms. This is the way we look at it. What we see, which is true, the Nordics are decelerating more or even actually decelerating while the others are not due to this.
We feel that and we believe that the fact that some people have to pay much more every month to be able to stay in the home that they have acquired is pushing them to be cascading in their cost structure. So that's why the occupancy is dropping in the Nordics and Sweden compared to what it was a year ago. But having said that, the level is still very high. We are at 91%-92% occupied in Sweden and Copenhagen. But this will require more discounts to get the people on board, we believe. And that's why the moving rate will be lower for these countries than proportionally the others.
Just a reminder, anyone in the room, don't leave any questions on the table while we've got Mark here, anything that you've got. But yes, one right here.
I've got a few more changes. What do you guys think it means with what we're saying?
Sure. Yeah, thank you. So a couple of things here. Okay. So we created this board in October 2018 when we IPO'd the company. And at that time, when we have done it, the purpose was to have, of course, representatives of PSA and New York Common, plus the CEO position in it. But because we were willing to have an independent board, mechanically, we had to do more independent directors than this group of non-independent, obviously. And when we started and we hired the different directors, let's say, experience in self storage was also very limited in Europe. So PSA and New York decided to have two representatives each, so two and two, four, myself, five. So we hired six independent directors, of whom one of them, Ian Marcus, was our lead independent or is still our lead independent director.
He has a great experience of self storage and real estate and capital markets, and he's based in London. So that's the way it went for five years. Then five years later, what are we facing? We are facing the fact that we need to think about the succession of the directors because all of them have been hired the same time. So if you don't start to organize every year a certain level of rotation, you might face a cliff of succession at a certain time, which is not good. So that's one thing. Second thing, it's great to become a U.K. REIT, but you need to have a British taxpayer in your board to give some ground of all of that. That's the second constraint that was not anticipated five years ago.
And three, New York Common and PSA thought that after 5 years, the board had enough experience and knowledge to reduce their level of participants from two to one, which means that one for PSA, 1 for New York, still myself, so three. If we keep six independent, so the board is reducing from 11 to 9, and you have a proportion of independent, which is higher than what it was before. So all the changes that I was mentioning are coming from this.
What is your biggest ESG priority?
Solar panels.
That is more energy efficiency.
Because if you think this way for ESG, if you do a little matrix of the E, the S, and the G, and the investment you have to put behind the three topics, actually, E is the one requiring the highest level of investment and the length of time. So if you look at the matrix, it's this way, top right. Then you have the S, which means social, where it's not really a lot of investment. It's more time and the way you change and the way the things you do with the people. And thirdly, the one which is easiest and requires almost no money is governance. You decide what you want to do, how the board is structured. And thank you for the question. It's exactly this. It doesn't require a lot of time and money to do that. It's purely decisional.
So when you look at these three things, governance, tick, easy. S, we are good on that, tick. On the E, we are good, but we want to be even better. And the only topic that we have really to address on all the others that we have done already is solar panels, which is a bit complicated. It's to become self-sufficient and to have our objective of being operationally neutral by 2030. That's the key topic, is to be able to offset all our carbon emissions, Scope 1 and 2, with or through the solar panels. But being seven countries doesn't help because each country has its own regulation and rules.
Can it create a revenue stream? Because self storage doesn't actually consume much energy, does it, sir?
Yeah, we don't consume. To give you some ideas, we have 3,000 square meters of roofs per property. And by occupying half of that, we are becoming self-sufficient. So we have, I think, 5 kilos of CO2 emission per year per square meters. So yes, potentially, it might be. But again, so related to the regulation and how the electricity, the utilities markets are regulated per country, that we need to be careful. But if there are some opportunities, of course, we will look at it.
What would be the biggest sector or business-specific risk that you think about or keeps you awake at night?
Well, something that happened, I think, in California during the COVID, which is restrictions on your capacity to increase rents for existing customers. That's, to me, the major risk that self-storage is facing potentially. Hopefully, it's not the case.
Thank you so much for your time, guys. Thanks for your time, Marc.
Thank you.
Thanks for your attention.
Have a good conference.