The gap between UK self-storage

01 August 2016 view all posts

Safestore and Big Yellow are two UK companies that are extremely similar to each other. Both operate in the Real Estate market as self-storage companies (i.e. people leave their stuff there to store for one reason or another). Lately Safestore has largely outperformed its peer, for no apparent cause and this relative rally is likely to be closing in in the next 1-3 months in my view.

Below I will walk you through the similarities of the two companies, as well as their differences. Thus assessing why the likelihood of a reversal in the ratio is high and what the risk of this trade are. Finishing the whole article with the details of the trade execution.

Similarities

  • Loan-to-Value goes hand in hand (Net Debt / Investment Property)

  • Dvidend yield is almost the same

  • Debt strucutre is very close 

    (% from total)

  • Occupany rates are pretty much identical

  • GLA (Gross lettable area) is converging for both as BigYellow increases the number of its operating stores vs. Safestore.

  • Both betas are around 0.8 - 0.9 (1 year betas to FTSE EPRA)

Differences

  • Primary difference is that Safestore has exposure to France (24/119 stores), wheareas Big Yellow is 100% UK born and bread

  • Big Yellow is growing its number of stores from about 37 (2006) to 84 (2015 peak) compared to 95 (2006) to 119 (2015) for Safestore with a peak at 123 (2015)

  • Big Yellow is almost twice as big as Safestore: GBP 1.7 bl. vs. GBP 0.9 bl. market caps respectively

Potential reasons for current disconnect

  • GBP devaluation is one reason why Safestore may be overreacting here, however judging from past data, this has not been a factor in prior movements, where Safestore has had similar exposure in France

The trade

Simply short Safestore and go long Big Yellow.
Target: A rough target can be around 0.45 - 0.40 area, which delivers 12% - 20% return.
Exit: A stop slightly below 2% from the recent high at about 0.53 is reasonable. If this is not triggered, then a trailing stop that goes with the down-trend is a preferred play (as it varies from trader to trader).
Hedging: No beta hedging is needed as they have similar betas, so the same mark-to-market sizing is enough. Keep it hedged : )

P.S. As always, share your views and challenge this one. That's how we all learn.
P.S.2 Currently we have no position there as we couldn’t go short any Safestore shares.

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