If you read my recent Alberta Market update (Alberta, the good the bad and the ugly) you’ll know that the overall storage market in Alberta is less than stellar. So why has Storage Vault (SVI) bet big on this western province? Full disclosure, I do personally have a small amount of Storage Vault Stock and in the past, although not since July of 2017, I have done Valuation work for the company.
Since 2016, Storage Vault has purchased no less than 38 facilities across Alberta. Some facilities were mature and stabilized while a vast majority of them were in some type of lease up with a few of them having just opened their doors. This in addition with their other existing assets in Alberta weights a larger portion of their portfolio to arguably the worst performing province from a storage point of view. Here is a Link to my Alberta Market Update – https://canadian-self-storage.ca/2019/04/12/alberta-the-good-the-bad-the-ugly/
Some people would be concerned with this weighting in a portfolio and I’m sure there have been many in depth conversations in board rooms and over coffee about this. Typically, any phone call I get asking about Storage Vault quickly leads to the question “what about their Alberta assets”.
This “problem” only got worse with the announcement of Storage Vaults purchase of Real storage, a company that had 11 facilities in Alberta including in the very troubled markets of Red Deer and Fort McMurry. I have fielded numerous inquiries about this transaction and the Cap rate paid and have explain numerous times about the Alberta segment not being near stabilized from an occupancy and rental rate perspective.
A quick look at Storage Vaults press releases surrounding quarterly and year end reports dating back to 2017 shows strong increases in both revenue and NOI growth with 2018 ending in an 8.8% increase in NOI. This is a result of growth in same store NOI as well as new acquisitions. Based on this, Alberta is no longer as big of a “Problem” as once thought. https://www.storagevaultcanada.com/en/investor-news/storagevault-reports-fiscal-2018-annual-results-highlighting-significant-growth-in-noi-and-ffo-172-million-in-acquisitions-provi
So how is this possible? Simply put its possible by running an efficient business, in good times and in bad. Storage Vault are masters at this and run their operations incredibly efficiently. The additions in Alberta have mostly been within areas that Storage Vault currently has operations and as they have been able to find large efficiencies even in difficult markets.
Why has Storage Vault bought so many properties in Alberta as of late? Very simply, it’s one of the few places where storage facilities aren’t the hottest real estate asset class. In most major markets across Canada, good quality self-storage facilities usually sell quickly for aggressive prices right now. I know of a few deals in BC that Storage Vault was actively working on only to not be willing to pay the price the eventual purchaser did. It should be noted that the companies who eventually purchased these assets were not current storage operators and paid prices that would be considered at the top or above the top of the market at the time of sale.
My take on the Alberta properties:
Storage Vault has a wide range of facilities including brand new Class “A” facilities in the Major Markets of Calgary and Edmonton to smaller aging Class “B” facilities in secondary and tertiary markets. As noted in my article on the Alberta storage market, the market for storage varies widely in Alberta and Storage Vault is subject to the same conditions in these markets as everyone else. Having said this, I would say the facilities in Fort McMurray and Red Deer will lag behind the rest of the facilities in their recovery moving forward. Reasons for this are detailed in the linked article.
I want to start off by saying that if I had a crystal ball, I wouldn’t be doing this for a living so this is my best guess but don’t go and bet the farm on this. My feeling is Alberta will start to become fruitful for Storage Vault by Q3 2019. The increases in revenue and NOI however may not show themselves in published results until Q4 2019 or Q1 2020. Below is what will be the factors in this timing and what you should look out for to begin the recovery in Alberta and thus the increase in Storage Vault results out of Alberta.
What to Watch for:
The first major change that will start the turnaround of the Alberta market will be the new UCP government that was elected in mid-April 2019. This new conservative government is pro economic development and has ambitions to help the Oil and Gas industry quickly. This will help with employment and prosperity in some of the hardest hit areas of Alberta. Lower unemployment and increased economic growth with help with the storage market recovery. The next thing to watch for is the expected approval of the Trans Mountain Pipeline expansion in May of 2019. This will further buoy the Oil and Gas sector in Alberta and more than likely spur some additional investment in the province.
If we look at the recent acquisitions, we see a fair number (At least 6) were in some stage of lease up at purchase. At present these lease up periods are stretching and may not arrive at stabilized occupancies until an economic recovery is well underway. When these stores do reach a stabilized occupancy, this will greatly add to both revenues and NOI growth. In addition, an economic recovery will also add to occupancy levels and rental rates at all the other Alberta properties further increasing revenues and NOI growth.
Anyone who has spent time in Alberta knows that the economy there moves in Cycles
Was it a Smart Bet?
I think so. Storage Vault is not in the Self-Storage industry for the short term. In addition, they have a wide variety of storage assets across Canada that can support one area being less prosperous than another for a while. Due to the economic downturn in Alberta, Storage Vault was able to acquire some prime assets at very attractive prices. Alberta will turn around and these facilities will greatly increase in value. There will also be increases in revenue and NOI that will help Storage Vaults growth an bottom line. Overall the Big bet on Alberta will pay off and I feel it will pay off more than expected.