Description

Prior to 2012, SELF, formerly GIFD, had been a closed-end fund run by Tom Winmill focused

primarily on international investment grade debt. It traditionally traded at a pretty steep discount.

In 2012, SELF changed its mandate to become focused primarily on owning and operating self-

storage facilities thanks to Mark Winmill’s (Tom’s brother) ambition. Mark had purchased his first

facility through his company, Tuxis back in 2007, and has since built an investment strategy by

acquiring underperforming (~70% occupancy) storage facilities, mostly in secondary and tertiary

cities, turning them into higher-quality, market performing (currently low 90% occupancy)

properties. The large public REITs like PSA, EXR, CUBE and SSS tend to focus on densely populated

urban areas in primary cities. They typically don’t go after the smaller, single-owner facilities that

SELF targets. We believe there is still plenty of room for a roll-up to capture acquisition value in this

space as over 80% of the self-storage owners are still mom-and-pop type establishments. After a

long back and forth with the SEC, the company was finally deregistered as an investment company

and reclassified as a REIT with an up-listing to the Nasdaq back in January. This process took much

longer than expected (SELF acquired its first property in December 2012 and its last property in

August of 2013), which tested the patience of many long-term investors, as the company stayed

pretty stagnant at a 25-30% discount to book value. Although this is great for recognition and invest-

ablity, the primary benefit of reregistering as a REIT is the ability to take on leverage. Currently the

company has zero debt, but we believe they can substantially increase value by taking on a modest amount of property-level debt.

Balance Sheet

Since 2013, its holdings haven’t really changed much. It currently owns and operates 7 self-storage

facilities where it paid, by my estimates, an average cap rate around 7%, which is about where it

values them on its books (and compares to a 3.5-4.5% for the major public self-storage REITs). Those

facilities make up $4.67 of the company’s book value. The other $1.03 is made up of cash and liquid

equity positions in the major self-storage REITs. So backing out that portion of the current share

price of $4.61, with $0.36 in FFO in 2015, an investment in SELF implies a roughly current 10% FFO

yield, unlevered.

Operating Metrics

SELF has executed well on its plan for improving the operating metrics of its facilities. In 2014, the

company took the average occupancy rate on its acquired properties from below 80% to 88%.  In

2015, the same property FFO increased 22% yoy from $2.17 mil to $2.64 mil with just $0.45 mil in

capital additions. SELF has done this through a combination of increasing rental rates, making a new

website and easier online payment portal, and building upgrades (such as adding climate control).

Mark doesn’t seem to want to acquire properties for the sake of acquiring properties. We have been

impressed with his execution and patience in waiting for the right deal. The self-storage real estate

sector is relatively new had has fetched a premium valuation when compared with other industries

(office, industrial, retail, apartment) because of its recent outperformance. Total annual returns

from NAREIT show self-storage was down 25% in 2007 but rebounded to +5% in 2008 where

industries like office (-19%, -41%) and apartment (-25% -25%) were much slower to recover.

Occupancy rates are currently as high as they’ve ever been, with most of the larger public operators

tracking at over 90%. Though the space is hot right now, we believe a cyclical low in occupancy

wouldn’t drop much below 75%, and we think SELF’s FFO breakeven is below 60%.

Valuation

Because it’s a microcap, we don’t ever see SELF fetching an FFO yield on par with the major self-

storage players; however, we do think 10% is too far away from the industry’s current 4% FFO yield.

For the sake of argument, we will just stick with fair value of 7%, which is equivalent to book value

and it’s where deals in SELF’s market are currently being made. Our current, unlevered valuation,

would then just be the published NAV of the company at $5.70. But we think there is even more

upside from there if SELF were to employ a little leverage. Borrowing 25% of their current real

estate carrying value at 5% frees up about $8.5 mil, plus the additional $7.5 mil in cash and

equivalents which could be invested in 3 new properties for $5 mil a piece. Assuming SELF pays a 7%

cap rate and can increase it to 10% on cost after improvements, that’s an additional $1.5 mil in

FFO.$3.7mil in incremental FFO pretty quickly. Valued at a 7% FFO yield, the equity could get above

$7.00.

In the short term, we are looking for the dividend to be increased this year and for management to

be out acquiring shares (they had been restricted ever since beginning the deregistration process)

after the company has its first earnings report as a REIT in the next few months.  Currently company

pays a $.065 dividend quarterly for a 5.6% return.

It also should be noted that Self adopted a stockholder rights plan in January.

Catalyst

1.Newly listed self storage company in growing field.

2.No debt with ability to acquire "mom and pop" facilities at good rates.

3.Expanding several existing facilities as  occupancies approach to 90%.