Global Self Storage: An Unsolicited Takeover Offer Unveils The Company’s Potential (SELF)

imaginima In July 2023, we covered Global Self Storage (NASDAQ:SELF) stock, assigning a buy rating and a target price of $6.60. Unexpectedly, earlier this year, an unsolicited takeover offer came through at $6.15, very close to our expected fair price. Ultimately, the bid was rejected by the board and the stock is currently trading around 50% below the proposed offer. We reiterate our buy recommendation, which is now further supported by the recent M&A developments. An unsolicited attempted takeover: unfolding the story Etude Storage Partners is an investment firm focused on real estate, with a particular focus on self-storage. In early May the news came out that the private equity firm had made two distinct offers to Global Self Storage, one in February, valuing the company at $5.50 per share, and a second one in April, at $6.05. Eventually, both bids were rejected by the board, leading to a third unsolicited offer to be disclosed to the public. This time the offer was $6.15. At that price, the company would be worth $68 million, excluding debt. After adding the $8 million in net debt, that would amount to an EV/AFFO multiple of 17x, using AFFO as reported in the last 10-K. However, management decided not to engage in a transaction and refused the bid. In a press release, they stated that: Board unanimously determined that the proposal significantly undervalues Global Self Storage and its prospects for growth and value creation, and is not in the best interests of the Company and its stockholders. […] The board unanimously affirmed it is not contemplating a sale of Global Self Storage. This put an end to the bidding process, at least for now. Management seems determined to continue the execution of their plans to grow and expand the company, as stated in these communications. The valuation framework of the takeover: how good was the proposal We mentioned that the implied EV/AFFO multiple of the transaction was 17x. This is a measure of the adjusted “Funds From Operations” (“FFO”), a cash metric used by REITs. AFFO also includes adding back stock-based compensation (“SBC”) and other one-time non-cash expenses. AFFO Overtime (Seeking Alpha) This is a representation of AFFO over time. The company grew its cash flows significantly over the years, primarily by expanding the portfolio during the 2020-2021 period. Profits and cash flows are primarily driven by occupancy rates of the leased units. Properties Summary (10-K) In the case of SELF, the company has a strong portfolio of properties that shows a 90%+ average occupancy rate. In particular, the vacancy rate was around 7.9%, well below the U.S. average of 10%. What we want to understand is how good the multiple offered by the private equity buyers really was, and if the board made a sound decision when walking away. Valuation Framework (Seeking Alpha) Currently, the P/AFFO using TTM numbers stands at around 11. When including debt, this goes to 14. The median value is slightly above 13.5, which means the common equity of SELF is undervalued by industry comparison. However, we think that the demonstrated quality of its portfolio, plus the strong track record in growing AFFO, supports a premium over market multiples. We believe that 17 times AFFO was a reasonable valuation and was offering a fair price. So on one hand, we believe that management should have considered the bid more carefully, given a generous valuation starting point. On the other hand, however, it may be argued that management knows better the value of their expansion and execution plans, which may set the company on stronger grounds for a more valuable acquisition in the future. All in all, we reiterate our initial price target of $6.60 which was supported by a detailed DCF with estimates on their NOI margins, cost of capital, and topline rent growth. However, today, this target price is also supported by a takeover offer that came in at a multiple we believe values the business fairly. Risks: execution and macro environment There are two major risks that almost every REIT faces: (1) idiosyncratic risk related to their owned properties, and (2) systemic risk related to the entire economy and real estate sector. The first risk can also be unbundled into two segments: (1) buying the properties at reasonable valuations, and (2) safeguarding the properties by picking safe tenants and investing the right amount of capex. We think all these factors related to the idiosyncratic risk represent some sort of execution risk. After all, management is calling the shots on new acquisitions (and their cap rates), and is also responsible for making sure the value is stored. The second risk is related to the macroeconomic environment in general. If unemployment goes up, the vacancy rates might go up, destroying value in terms of lower rental revenues and lower renewal prices. However, we think that risk 1 is mitigated by the strong track record of the team at SELF. Risk 2 is non-diversifiable, so investors cannot really eliminate it. In terms of balance sheet strength, the company is also very well positioned. Balance Sheet (10-Q) They have close to $7 million of cash and $16 million of debt, which translates into a $10 million net cash position. Leverage is slightly above 2.0x and thus not significant at all. Management wisely financed their past acquisitions and did not inflate the balance sheet with expensive and risky debt. Conclusion After several months since our first coverage, we were surprised by an unsolicited takeover offer for Global Self Storage that came in with a price very close to our initial target. While rejected, we think this is a confirmation of our initial thesis based on this company in the self-storage space. For this reason, we feel confident reiterating the same target price of $6.60 that can be achieved by the strong execution of the management team. Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Buy cryptocurrency

Source link

Refer And Earn Demat Account – Get ₹300 | Referral Program

Open Demat Account In Angel One For FREE