Determining Self-Storage Value in Europe

Tim Edghill and Chris Stevens Comments
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This is for two reasons: First, the terminal value is predominately calculated on the final period’s revenue, which is potentially an inaccurate forecast depending on the length of the investment horizon (it could be 10 years away). Second is the use of a discount rate to derive the terminal value (commonly the discount rate less the anticipated long-term growth rate). The capitalization rate could be unduly reduced by a high growth rate, increasing the terminal value. The rule of thumb in calculating the long-term growth rate is it should not exceed the average of the final few years nor any individual year leading up to the end period of the investment.

EV/EBITDA

A simpler and sometimes more appropriate valuation method often overlooked by property professionals involves comparing a self-storage business to recently sold peer companies or existing businesses, based on the readily comparable public/private ratio of EV (enterprise value) as a multiple of EBITDA (earnings before interest, tax, depreciation and amortization). This is a standard methodology used to value businesses across industries. It measures the EBITDA produced relative to the adjudged EV. While more suitable at a corporate level, each property is essentially a satellite business producing its own revenue, so the multiple measure could be applied (with some adjustment) to individual properties.

Two issues must be considered with the EV/EBITDA method: the calculation of EBITDA and the ability to draw on good comparable evidence. Accounting practices standardize the calculation of EBITDA, but the actual principles employed by companies can differ. Therefore, to accurately evaluate the multiple, the accounting method used by each company should be clear.

In self-storage, market information is difficult to obtain, and comparable analysis can be limited to larger public operators. The accuracy of the data can also be a problem.

Practical Examples

Recent U.K. self-storage transactions, including the Safestore IPO (initial public offering) and the private sale of Space Maker, prove investors recognize the superior returns produced by quality self-storage businesses. Both transactions involved strong pricing, affirming the cash-generative ability, risk spread and growth potential of the industry.

As of August 2007, stock-market turmoil and credit-market difficulties had pushed Safestore’s share prices to approximately 25 percent below listing price. But both Safestore and Big Yellow, another significant U.K. operator, were given “buy” status by City analysts, demonstrating how robust and attractive their free cash flow should be to investors.

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