Lok’n Store still going strong after self-storage boom

Self-storage operators benefit from life’s big events: immigration, births, deaths, marriages, divorces and relocations all help keep things ticking over in the business of storing stuff. As such, it should come as no surprise that the last two years and everything they have brought with them have been a boon for Lok’n Store (LOK), which posted a healthy set of half-year results – with key comparators all up on its last interim results.

The self-storage company’s coffers are also flush with new cash following the sale of four sites for £39m during the reporting period. Lok’n Store has made similar “sale-and-manage-back” deals in the past and says they are different from sale-and-leaseback deals. Instead of selling the building and leasing it back from the new owner, the company sells the building to a new operator which it collects management and performance fees from – effectively franchising the business.

The company said it would look to reinvest the cash made from the sale in paying off its debt pile and expanding the business. It noted in its results that it could rely on further sale-and-manage-backs in future if it needed to reduce debt in response to rising interest rates.

As far as Lok’n Store is concerned, the potential for expansion is massive. Executive chairman Andrew Jacobs still describes the UK self-storage market as “structurally undersupplied” with “enormous untapped demand” pointing to the sheer amount of self-storage units in the US versus the UK. He says he sees no sign of the rise in demand created by the pandemic abating.

Rising construction costs and rising land costs are potential headwinds for the company, though. Lok’n Store typically develops its units from scratch on industrial or retail land, the former of which is highly sought after by the booming warehouse market. However, the company said it is moving away from buying industrial sites and towards buying retail sites because it believes the latter are more prominent and this could have the added benefit of making land acquisition cheaper.

Meanwhile, rising construction costs are affecting all stripes of property development. Data from Knight Frank and New London Architecture revealed this week that the number of planning applications for high-rise residential buildings in London dropped 13 per cent compared with 2020, while industrial developer Segro’s (SGRO) chief executive David Sleath complained last week about the impact of “construction supply chain and inflationary pressures” on its business in its most recent trading update.

Despite these potential issues Jacobs said the company is still making good rates of return from its current construction costs. It is also continuing to grow its profits, pay increased dividends and has a proven mitigation strategy for reducing debt in the face of inflationary pressures in the form of sale-and-manage-backs. The pandemic-fuelled boom in self-storage may be over, but this company is still looking like a good bet. Buy.

Last IC View: Buy, 870p, 1 Nov 2021