Q1 2020 Self Storage Group ASA Earnings Call
Oslo Jun 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Self Storage Group ASA earnings conference call or presentation Tuesday, May 12, 2020 at 6:00:00am GMT
TEXT version of Transcript
* Cecilie Margrethe Brænd Hekneby
Self Storage Group ASA - CFO
* Fabian Emil Søbak
Self Storage Group ASA - CEO
Fabian Emil Søbak, Self Storage Group ASA - CEO 
Welcome to the Q1 2020 presentation for SSG. My name is Fabian Søbak. I serve as CEO of the company. And I will be presenting together with my colleague, Cecilie Hekneby, who is CFO. And Cecilie will start with walking you through the numbers.
Cecilie Margrethe Brænd Hekneby, Self Storage Group ASA - CFO 
Welcome to the presentation of the first quarter results. We are executing on our growth strategy and had at the end of the first quarter 113 facilities with 23,400 storage units in 3 countries. We had a total lettable area of 163,600 square meters, of which 140,300 was in operation and 23,300 under development. We experienced limited business impact from the COVID-19 situation in the first quarter of 2020 and has a solid platform for further profitable growth and expansion.
In the first quarter, we had revenues of NOK 70.8 million, an increase of NOK 9.2 million compared to first quarter '19. The growth in revenues is related to the acquisition of Eurobox in July '19 and to organic growth through opening of new facilities and expansions and higher demand for self-storage.
Adjusted EBITDA increased from NOK 34.4 million in first quarter '19 to NOK 41.5 million in first quarter '20. Operational costs are adjusted for nonrecurring costs related to transactions and severance packages.
The chart on the right-hand side shows the development from first quarter '19 to first quarter '20 for the underlying operation. The adjusted EBITDA increased with 20% in the period.
In the first quarter, we had change in fair value of freehold investment property of our P&L of NOK 5.7 million compared to NOK 0.4 million in the first quarter '19. Adjusted profit before tax in the first quarter was NOK 19.2 million, up from NOK 13.3 million in first quarter 2019. The like-for-like occupancy in the first quarter was 84%, an increase from 82% in the first quarter '19. And the average rent was NOK 2,371 per square meter per year, up from NOK 2,359 in the first quarter '19.
In the first quarter, we acquired 2 properties in Oslo and Trondheim with a total potential lettable area of 4,600 square meters. Total value of freehold investment property at the end of March '20 was NOK 1.2 billion, an increase of NOK 109 million since December.
We had a cash position of NOK 121 million at the end of March and loan-to-value of 35%.
So at the end of March, we had 140,300 lettable square meter to offer our customers, an increase of 22,800 since the end of March '19. And the number of facilities has increased by 11 since March '19 to 113.
The average rent per square meter per year for the first quarter was NOK 2,303 compared to NOK 2,353 for the first quarter '19. And occupancy in the first quarter was 82% compared to 84% in the first quarter of '19. Expansion of 4,500 square meters are included and impacts these numbers.
We also have experienced that the larger facilities need more than 12 months to reach full occupancy. And the chart on the lower-left -- right-hand side shows the increase -- on the lower left-hand side shows the increase in current lettable area, and the chart on the right-hand side shows the area -- the increase in the occupied area compared to first quarter '19.
The like-for-like performance, that is the facilities with no change in lettable area the last 12 months has an occupancy of 84% and average rent per square meter of NOK 2,371. And both indicators are showing positive development.
Revenue for the first quarter was NOK 70.8 million, an increase of NOK 9.2 million compared to first quarter '19. NOK 5.9 million of the increase is related to Eurobox, which was acquired in July 2019, while NOK 4.2 million of the increase is related to organic growth due to opening of new facilities and expansions. There is a decrease of NOK 0.9 million in other income. Other income includes revenues from office tenants and will fluctuate due to expiry of contracts and conversion to self-storage.
The operating costs are NOK 3.1 million higher than in the first quarter '19. There are increased costs related to operation in Eurobox and costs related to the operation of 11 more facilities than in the first quarter '19. There are also costs related to the larger properties we acquired during third quarter '19. NOK 1.5 million of the costs are nonrecurring costs related to property transactions and severance packages due to a restructuring of the organization.
EBITDA adjusted for nonrecurring costs was NOK 41.5 million, an increase of NOK 7.1 million compared to first quarter '19. The marginal cost for the new facilities are low, and we are continuously optimizing operation.
The chart on the right-hand side shows adjusted EBITDA for each quarter back to 2017. The IFRS 16 impact is visualized from first quarter '19. You can see there's a steady growth for all quarters. The EBITDA margin for the first quarter '20 was 58.6% compared to 55.8% in the first quarter '19. We expect the EBITDA margin to continue to increase going forward since the marginal cost for the new unmanned facilities are low.
The P&L shows adjusted EBITDA for the first quarter of NOK 45.1 million (sic) [NOK 41.5 million] and adjusted pretax profit of NOK 19.2 million. Change in fair value of investment property was NOK 5.7 million and is related to a higher external valuation than allocated value to the assets and liabilities at the date of the purchase of the 2 properties acquired this quarter. The negative effect in change in fair value of leased property of NOK 15.4 million is related to value adjustment due to the passage of time.
SSG has a strong cash flow and cash flow from operating activities in the first quarter was NOK 36.6 million. We invoice the customers in advance and have predictable and stable operating costs. Cash flow from investing activities include acquisition of new properties and additions to the existing properties. Cash flow from financing activities includes proceeds from a new loan and repayment of loan.
We had a cash balance at the end of March of NOK 121 million. The financial position shows that total assets have increased from NOK 2 billion as of December to NOK 2.2 billion as of March.
Freehold investment property has increased with NOK 109 million since December to NOK 1.2 million (sic) [NOK 1.2 billion] as of March 2020. The leasehold investment property amounts to NOK 497.1 million as of March '20. Cash has increased to NOK 121 million, and the change is mainly attributable to new borrowings drawn up under the existing loan facility amounting to NOK 80 million and net outflow on acquisitions of subsidiaries and freehold investment property. We have NOK 416 million of interest-bearing debt. We have a loan facility with Handelsbanken, which allows us to borrow up to 60% of property value. And loan-to-value is 35% as of March, an increase from 32% as of December.
We had net debt of NOK 295.6 million, and the equity ratio is 49%. So we have revenue growth, cost control, strong cash flow and a healthy balance sheet. We are in position to continue to execute on our growth strategy.
We have a defined strategy of growth within freehold property. During the first quarter, the share of freehold property in operation increased by 6%. At the end of March, 37% of the facilities in operation was freehold. And the chart on the upper right-hand side shows the split between CSS and OK Minilager. CSS has now 20% freehold facilities, while OK Minilager has 60% freehold facilities. Both concepts have an increasing share of freehold facilities. All the area under development is freehold.
So as of March, we have 100 -- of the 113 facilities, 54 were freehold. Freehold investment property has increased with 120% since first quarter '19 to NOK 1.2 billion at the end of March. The chart on the upper right-hand side shows the development in freehold property since 2017. Our freehold portfolio consists of 54 self-storage facilities and 5 land properties with containers. Two freehold properties have been acquired in the quarter. In addition, we have 2 greenfield development properties.
Investment properties are gathered in the 100%-owned company, OK Property, which has internal lease contracts with the operating companies. External valuations by real estate appraiser, Newsec, are conducted once a year with quarterly assessment of indication of change.
The chart on the lower left-hand side shows gross area and yield per region for the last 3 years. Change in fair value of our P&L back to 2017 is shown on the chart on the lower right-hand side.
Current lettable area, CLA, is an important growth indicator for us. There has been a stable growth in current lettable area since 2017, consisting of both organic growth and growth from acquisition. Current lettable area has increased with 2,800 square meters during this first quarter. We have 23,300 square meter under development, including 6,700 square meter rented to office tenants. In addition, there is a potential lettable area of 8,500 square meters from the greenfield development projects and 3,150 from the option to acquire a neighboring building at Billingstad.
We have a solid pipeline. As of March, we had 23,300 square meters under development, of which 18,900 is in the Oslo area. We have rental income from 6,700 square meters, mainly from expiring contracts with office tenants. And the chart shows the distribution of the current lettable area in operation with a larger portion in the Greater Oslo area.
In the first quarter, the occupancy for the group was 82%. And this slide shows the development in the occupancy and average rent per square meter per year from the first quarter '19 to first quarter '20, according to concept and country. The column to the left shows the development like-for-like for the facilities with no change in the current lettable area the last 12 months. Like-for-like shows an increase from 82% in the first quarter '19 to 84% in the first quarter '20. Occupancy is stable in Sweden at 87%, but has decreased slightly in OK Minilager, CSS Norway and CSS Denmark. Expansions in all these 3 countries and segments are included and impacts the numbers. But the target is 90% occupancy.
The average rent in the first quarter for the group was NOK 2,303 per square meter per year. CSS Norway achieved very high rent levels. CSS Sweden and Denmark on the European average, and OK Minilager has low rent levels. Focus has been on growth and increasing capacity, and low operational costs have made it possible to achieve high margins even at low rent levels. Like-for-like shows a small increase in rent level and is NOK 2,371 for the first quarter. The chart to the right shows the increase in current lettable area according to concept and country.
So our 3 most important KPIs are lettable area, occupancy and average rent per square meter. As of March, we had a current lettable area of 140,300 square meters, 7,700 of these had been in operation less than 12 months. We have 23,300 square meters, which are under development, and we are continuously working to increase lettable area further. The occupancy level for the first quarter was 82%. The target is 90%. The average rent level for the first quarter was NOK 2,303 per square meter. But focus will primarily be on growth and occupancy in this phase, but annual CPI adjustment and increasing share of CSS facilities will contribute to increasing rent levels for the group.
Reported revenue for the first quarter was NOK 70.8 million, including NOK 5.4 million in other revenue. By doing the math, you can see that there is a significant growth potential here in the years to come.
There is a significant growth potential for revenue growth going forward, but costs are expected to be stable. There will be operating cost related to new facilities, but the marginal cost is low since the growth is planned with freehold property and unmanned facilities. Leaseholds have annual CPI adjustments but are stable and predictable. And other costs can increase due to the growth of the group, but we work continuously on optimizing operation.
CapEx is, so to speaking, 0 as maintenance is posted at property cost. Investments is only used for establishment of new facilities and expansions. We invoice customers in advance, which reduces credit risk and provides stable working capital, and tax profile is normal. Thus, further growth in revenue will make a significant impact on the result development.
So now Fabian will talk about the company.
Fabian Emil Søbak, Self Storage Group ASA - CEO 
Yes. So SSG has 113 facilities with 23,400 storage rooms in 3 countries. We have 23,300 square meters of lettable area under development. The Norwegian market, self-storage market is the least developed in Scandinavia. SSG has a strong position in the Norwegian market, and this is a position we are focused on developing even further.
In Sweden and Denmark, we are a smaller operator, and there are multinational operators who dominate the market. City Self-Storage is our high-end brand, which is located in the major cities. We have locations in the Scandinavian capitals. We also are entering smaller second-tier cities of Norway. We have a location in Stavanger, and we plan to open in Trondheim this year. OK Minilager is our country-wide, low-cost offering. All the facilities are unmanned. We have 74 facilities throughout Norway. And just over 60% of the facilities are owned facilities.
SSG has roots back to 1993 when City Self-Storage was established in Norway. In 2009, OK Minilager was established. In 2016, OK Minilager was the second-largest operator behind City Self-Storage in Norway. And at that time, we invited external investors into the company and acquired City Self-Storage. In 2017, SSG raised capital in 2 rounds. We acquired Minilageret and we also went public the same year. In 2018, we acquired Minilager Norge with 4 facilities in Østfold.
In 2019, SSG acquired Eurobox. At that time, Eurobox was the second-largest operator in the Norwegian market. During this period, we had a strong focus on organic growth. And during the past 3 years, we have acquired 31 properties. In Q1, we acquired a property in Trondheim, with an estimated lettable area of 2,100 square meters. This is a property with an A class location located between the commercial district of Lade and the city center of Trondheim. The property has a great visibility and will be operated under the City Self-Storage brand. The property is expected to open during the Q3 of 2020.
In Q1, we also acquired a property at Ulven in Oslo with an estimated lettable area of 2,500 square meters. This is a property with great visibility in a larger development area. The property will be upgraded under the City Self-Storage brand, and we plan to open in 2021.
We also have some major properties in the pipeline. These are the greenfield projects. In Oslo, we have Alnabru, which we plan to open next year, which has an estimated lettable area of 4,900 square meters. In Trondheim, we also have a greenfield project, south of the city in Tiller. We acquired the site in 2018. We are still working on the planning, but we plan to open -- or build and open this facility next year. At Lørenskog, just north of Oslo, we have a potential of developing the property even further. Planning is granted to add a second floor. And we plan to open these square meters next year in 2021.
We also have some major conversion projects which we would like to mention. At Skøyen, we have constructed fit-out on 2 floors, and we plan the next phases of the fit-out for 2020 and 2021. The building is 6 floors, and only 2 of the floors are currently developed. At Østre Aker vei in Oslo, we are currently working on the first phase of the conversion project, and we plan to open in the second half of 2020. In Trondheim, the mentioned property at Lade is currently being developed, and we plan to open in Q3. And also this newly acquired property at Ulven in Oslo is currently in planning and zoning progress, and we plan to open next year. All of these properties will be in the City Self-Storage concept.
So SSG has a strong position for further growth. We focus on the Greater Oslo region and also the second-tier cities of Norway. We see that there is a potential to enter about 30 smaller markets where we still have no capacity. We also see a potential of developing new properties in smaller cities where we already have a presence. We are looking at potential M&As throughout Scandinavia. And we are also optimistic about growing in the Swedish and Danish markets.
When it comes to online marketing, we capitalize on our unique scale in the Norwegian market. The scale allows us to invest in search engine optimization. Driving sales through online channels is key to succeed. It's also important to have systems which can align marketing, sales and service. SSG is utilizing modern technology today, but there is still a potential to develop our systems even further. Our strategy is to build brand through highly visible properties and increased online presence. The group marketing spend was 3.4% (sic) [3.5%] of revenue in Q1 2020.
Our strategy remains unchanged. We continue to grow our freehold properties in selected urban markets. We focus on the larger urban areas of Norway. Our target occupancy is 90%. We continue to invest in CRM, automation and online platforms. We focus on customer experience, lean operation and self-service. We have an opportunistic approach towards expansion in Sweden and Denmark. And we look selectively at acquiring self-storage providers throughout Scandinavia.
At the end of January 2020, the Board decided to commence a strategic review. The review is currently being performed.
Norway went into partial lockdown in the mid of March 2020. SSG has adapted to the pandemic by implementing measures to safeguard customers and employees. Since our offering by nature is self-served and the customers order online, we are still able to help them, and we can invite new customers into the facilities, just as we did in -- prior to the pandemic. We updated the risk evaluation in the interim report for Q1 2020.
So that was our presentation. Thanks for your attention.