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This FTSE 250 company looks like one of the most promising investments in the index to me. It’s also down nearly 50% in price, with a nice 4% dividend yield. The firm’s name is Safestore Holdings (LSE:SAFE).
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The UK’s largest self-storage group
The business has 181 stores spread over the UK, France, The Netherlands, Spain and Belgium. That makes it particularly appealing to me because it offers some risk protection in the form of geographic diversification.
Readers who know me will know I love real estate investment trusts (REITs) for generating passive income.
And what’s more? Storage is even better. That’s because while in an economic downturn housing markets can crash, storage units are more resilient. After all, when people are downsizing they often use storage units more.
I’m always looking for a touch of recession resistance in my portfolio because I want to sleep well at night. I can only do that if I know I’ve protected myself properly from the major risks.
Stable and undervalued
It’s unusual for a real estate company to have a balance sheet with much more equity than liabilities. But Safestore is the exception to the rule. With 65% of its total assets proportioned by equity, I’m more confident in the firm’s long-term future.
However, it doesn’t have much cash on hand. That means it might struggle to meet its short-term obligations without selling some of its assets.
In all, I think I’m getting really good value for money here.
One of the best measures of value in real estate is called price-to-funds from operations. This is much better than the usual price-to-earnings ratio because it does not include the depreciation of properties. So, it’s a better measure of actual cash flow generation.
Safestore has a price-to-funds from operations of just 15. While that’s slightly higher than normal for the industry, the company’s outperformance in growth and profitability means this is more than warranted. In fact, I think the market has undervalued it.
A closer look at the risks
I mentioned that the business is diversified around the world, offering some protection from regional risks. But 75% of its revenue still comes from the UK.
So, that’s still quite a lot of exposure to one country. It means if there’s a recession in Britain, Safestore would actually be hit quite badly, even if its operations in other countries protect it.
But also, there’s quite a bit of competition in the storage industry. You may have heard of Big Yellow, which is another firm I love. There’s a bit of rivalry here, but any mishaps in strategic choices for Safestore could see it losing market share to Big Yellow, or vice versa.
Am I going to buy it?
I’m considering buying Safestore at the moment, as I’m looking to flesh out the dividend portion of my holdings a bit more.
I really like the idea of having a stake in some storage companies, as the investment potential is uniquely stable compared to typical real estate, in my opinion.
Let’s see if I end up investing in Safestore later in the year.
