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The stock market operates in cycles, and that’s certainly the case for almost all FTSE 250 stocks. Businesses that have thrived for years can suddenly turn from massive winners into painful losers and vice versa. And that’s definitely been the case for Safestore Holdings (LSE:SAFE).
While running a network of self-storage facilities doesn’t sound like a particularly lucrative business model, it proved to be extremely cash-generative. So much so, that between 2012 and 2022, the capital gains and dividends combined generated a jaw-dropping 1,800% total return.
Just to put that into perspective, it’s the equivalent of earning 34.2% every year for a decade – enough to transform a £500 monthly investment into just shy of half a million!
But in the last three years, Safestore has gone from hero to zero with its share price tumbling by more than 50%. What happened? And is this secretly a buying opportunity?
Why higher interest rates hurt
Between 2012 and 2022, Safestore had a massive macroeconomic advantage – interest rates were almost 0%, and this had two major implications.
Firstly, with lower interest rates, mortgages were much more affordable, resulting in a lot more home-buying activity with younger families regularly moving homes after just a handful of years. And as such, demand for temporary storage solutions increased.
At the same time, Safestore was able to borrow large sums of money very cheaply to fund the expansion of its depot network. In other words, management was able to generate the supply needed to meet the rising demand.
Jump ahead to 2025, and the story has changed drastically. A homes affordability crisis, combined with elevated interest rates, has hampered demand while also making Safestore’s debt more expensive to service.
To make matters worse, with other self-storage operators building out their own networks over the last decade, there’s now oversupply in the market, resulting in fierce price competition.
The impact of all this can be seen in Safestore’s financials. Revenue growth has stalled, occupancy has fallen, and prices have slid. With that in mind, it’s not surprising to see investor sentiment sour and the share price tumble.
A secret buying opportunity?
Looking at Safestore’s latest results, growth continues to prove elusive. Nevertheless, early signs of recovery are starting to emerge.
With the Bank of England (BoE) starting to cut interest rates, mortgage lenders are following suit. In fact, Barclays has just recently dropped its rates to as low as 3.82% — the lowest on the market.
As such, demand for self-storage is similarly starting to ramp back up. And on a like-for-like basis, Safestore has already seen an uptick in both occupancy and average rental rates.
At the same time, management has been strategically restructuring its debt pile to consist more of European-originated loans. Why? Because the European Central Bank has been significantly faster in cutting rates than the BoE.
Consequently, Safestore’s weighted average cost of debt is actually down from 4% to 3.6%, which, on a £1bn net-debt position, has a massive positive impact on the group’s financials.
Put simply, the business appears well-positioned for a strong recovery as economic conditions steadily improve. The exact timeline remains unclear, and there are still challenges for Safestore to navigate around. But at a price-to-earnings ratio of just 5.3, these are risks I think are worth considering.
