Please recall the most recent article depicting Global Self Storage (SELF): “Unlocking Shareholder Value at Global Self Storage.” Therein, a NAV of $6.99 for SELF was calculated as of 3/31/2020.
Finding the NAV on 6/30/2020
Please see Exhibit One below. The first column represents the trailing four quarters’ operating results as of 3/31/2020, tabulated in the above article. The increment column subtracts out corresponding values for Q2 of 2019 and adds back the same for Q2 of 2020. The final column shows the adjusted trailing four quarters as of 6/30/2020. The increment column is easily derived from the latest Q2 Report of SELF. Therein is reported a $68,024 increase in property-related revenues over Q2 in 2019 with a simultaneous decrease of $48,320 in operating expenses.
Exhibit Two (taken from the same link as above) gives us selected balance sheet information as of 6/30/2020
Using the same market cap rate of 6 %, as in the previous article cited above, we compute the total market value of the properties to be: 5.307/0.06 = $88.45 million. Adding back liquid securities and subtracting out total debt renders a value of $66.964 million attributable to the 9.356 million shares, or $7.16 per share as of 6/30/2020.
The Annualized Economic Return for Global Self Storage Shareholders
Please see the Q2 Corporate Presentation. There we learn that the shareholders benefited from $545,000 in AFFO, or $0.058 per share. In addition, the shareholders enjoyed an implied market value appreciation of their underlying properties of $7.16 – $6.99 = $ 0.17. The total quarterly true underlying economic return is estimated as $0.228 per share. At the closing price of $3.83 on 8/7/2020, this represents a quarterly economic ROE of 5.95%, or a robust 23.8% annualized!
Note that this was computed by omitting restricted cash, accounts receivable and prepaid expenses from the analysis. While these are minor adjustments, it was assumed, for conservatism, that they would simply vanish if the properties were sold and SELF ceased to exist, but these accounts have no effect at all upon the $88.45 million market value of the properties.
The True Economic Balance Sheet for SELF
With the above in mind, we now create the economic balance sheet for Global Self Storage as a going concern on 6/30/2020 (including the $0.821 million of prepaid expenses, accounts receivable and restricted cash). The intangibles (such as goodwill and line-of-credit issuance costs) are omitted. Total debt includes current liabilities. The market value of the 9.356 million shares is determined by the $3.83 closing share price on 8/17/2020.
The entry “Liquidation Inhibition” is a plug number that renders parity between the present economic value of assets and liabilities on 6/30/2020. Although the entry is initially portrayed as a liability, it really becomes a secondary equity account within the context of the true economic balance sheet. It measures the difference between the net fair market value of all the company’s tangible assets on 6/30/2020 and the value that the stock market is recognizing on that day, assuming that everything was simultaneously liquidated.
As the above article indicates, the Liquidation Inhibition will be negative for self-storage REITs whose share prices exceed the NAV and positive for those whose share prices are less than the NAV. Within the article, computations were done for all members of the industry, including SELF. It was shown that for all members other than SELF, the absolute value of the Liquidation Inhibition is relatively small, meaning that the shares of self-storage companies trade close to their respective NAVs.
During a quarter when the NAV of the company increases (decreases), the sum total of the Mkt Equity and the Liquidation Inhibition must increase (or decrease) by a like amount. In essence, the Liquidation Inhibition is akin to the unrealized capital gain or loss that might be cited within an ETF’s quarterly report. Increases in NAV represent estimates of real economic accrual, even though they may not be directly reported or recognized in the quarterly reports of the company.
Leveraging Value Creation by Effective Operations
Management of Global Self Storage has distinguished itself over and over again in the several dimensions of value creation that contribute to the optimization of NOI. Among other factors, SELF possesses its own proprietary rate management system with cutting- edge technology. The relatively reliable resulting growth in NOI translates into implicit accrual in the market values of the company’s properties. Unlike the larger self-storage REITs whose shares trade close to NAV, the ratio of market equity to the sum of market equity plus Liquidation Inhibition substantially leverages the impact of the increases in NAV as accrual income for the shares outstanding.
For example, suppose that SELF were to produce $1,000,000 of total NAV accretion, given the balance sheet above. If the shares of SELF were to trade at a value equal to the NAV, then the total market equity would equal $67.79 million since the Liquidation Inhibition would be zero. The return to Mkt Equity would be 1.00/67.79 = 1.48%. However, with the shares priced as they are, the return to Mkt Equity would be 1.00/35.83 = 2.79%. Hence, the greater the discount of market price to NAV, trivially the greater will be the economic ROE to shareholders. This is an advantage not enjoyed by the larger REITs. Indeed, extending this logic would imply the necessity that the gap between the discounted market price and the NAV close naturally over time.
Including an estimate of NAV accrual could provide a better perspective than a simple focus upon AFFO. For example, suppose that AFFO were zero in Q2. With a $ 0.17 accrual in NAV, the annualized economic ROE for SELF would still be a splendid 17.8 %!
Recall the previous article, “Unlocking Shareholder Value at Global Self Storage” (linked above), wherein we computed a 9.23% embedded cap rate for the portfolio of SELF properties, based upon Q1. In this article, we give effect to leverage and obtain an implied economic ROE of 23.8%.
With internal returns of this magnitude, SELF should consider simply operating its present portfolio of properties while investing all available AFFO back into its own shares until such a time that the gap between the market price and the NAV narrows. There are several relevant factors that converge upon this complicated question, one of which is the psychology of the typical SELF shareholder. However, this approach does offer superior economic returns in the longer term.
Moreover, with the existing portfolio bearing an embedded cap rate of 9.23%, the bar for future acquisitions is quite high to achieve without the prospect of dilution.
SELF should consider selling out properties at the high NAV values and using the proceeds to purchase shares at the discounted prices.
Unlike industrial properties, shopping centers, malls and hotels, self storage properties are highly marketable assets bearing values that can be estimated using reported NOIs and available market cap rate information. The total quarterly economic return for a self storage REIT can be better assessed by including both the AFFO generated and the implied accrual in the value of the REIT’s portfolio (NAV). Due to the sizable discount of market price to NAV for SELF, the calculated accrual alone produced an annualized ROE of 17.8% for Q2.
Including the AFFO, the annualized ROE is estimated at 23.8%. Larger self storage REITs that trade close to their respective NAVs do not enjoy this benefit. As a result, the real economic returns to SELF are understated in the absence of including implicit property accretion. SELF’s proven operational abilities to enhance NOI and consequential NAV are thus magnified.
While this perception is certainly beneficial for the SELF shareholder, it does raise questions regarding the wisdom of paying out dividends and making future acquisitions and dispositions.
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.