SELF - Self Storage Group, Inc

[jckund]

Anyone still in this? Super small company (~$34m market cap), not much float, but seems greatly undervalued to NAV. They've selectively made a few acquisitions of mom & pop operators and upgraded/expanded/improved operations to improve occupancy and $/sf. $5.05m of NOI, using a conservative 7.0% cap rate gets us to $72m + $6m cash - $23.7m debt = $5.82 per share vs. $3.70 today. And that NOI is understated since they just made an acquisition in November for a 48,250 sq. ft. facility. Think it's 70% occupied, if they can lease it up to 90% and extract $12.25/sf (both metrics in line with the rest of their portfolio), they are looking at an additional $0.53m of NOI, which bumps the above value to $6.64 or so. Anyway, I get that there's a small company discount here for being subscale, and mgmt certainly pays themselves too much for a company this size, but still seems grossly undervalued. They focus on tertiary markets that the bigger players spend less time in, and I fully expect the wave of unemployment to depress occupancy for a bit, but as a long-term investor, you are looking past that. The biggest risk is management's ability to not squander value with bad acquisitions, which I think they have managed thus far.

[Gregmal]

Agree, and only thing further I'd add to what we've already discussed is that storage units typically hold up better than expected during downturns. Live's disrupted, people moving, etc. Non payment here isn't an issue. These guys specifically mentioned several steps they took to mitigate any of this. Incentivizing pay by credit card instead of debit/check. Non payment of unit fees is mitigated by ability to sell contents of unit. The figure quoted was that usually one can expect at least 4-5 months worth of value. IE a $200 a month unit should hold at least $800 worth of goods. So someone misses a couple payments, its no big deal. Downturns also kill new development. The business is very robust. Just needs to be managed properly. They've got a solid little business here. And generally speaking, Ive been pleased with Mark's discipline. Only ? was the Tuxis deal, but you also kind of have to be realistic with your expectations in respect to stuff like that. Same with the compensation.

[BG2008]

Why own this when you can buy Vornado in the mid $30s with a pre-Covid NAV of $90? 

[jckund]

Why own this when you can buy Vornado in the mid $30s with a pre-Covid NAV of $90?

 

I guess for the same reasons you posted asking if work from home will be a permanent trend? Some secular concerns about that reducing need for office space (plus declining retail), but admittedly I haven't spent much time evaluating VNO's NAV. I'm sure that's all first order thinking without doing much digging.

[Gregmal]

Simplicity is another one. SELF has vastly outperformed VNO during the plunge.

[BG2008]

Why own this when you can buy Vornado in the mid $30s with a pre-Covid NAV of $90?

 

I guess a better question is why buy SELF when you can buy Laaco which pays a 5.7% yield and is only paying out 50% of the FFO. 

[Gregmal]

Why own this when you can buy Vornado in the mid $30s with a pre-Covid NAV of $90?

 

I guess a better question is why buy SELF when you can buy Laaco which pays a 5.7% yield and is only paying out 50% of the FFO.

 

Thats where I would insert one of those emojis(if I knew how to) with the shoulder shrug lol. Really just preference is likely the answer. LAAco is a good one too and fits the same profile(with some variances of course). Smaller companies(think GRIF vs Prologis) also are somewhat restrained in their ability to access capital. Growing companies is like smoking crack, or so Ive been told. Highly addictive or deadly for most. Sometimes I take comfort in knowing that resources are a little more precious for the smaller guys and thus I'm not going to have to worrying about excessive buying binges at the wrong time. The flip side is, one or two bad purchases can really impair you. Fundamentally I like Laaco better, but I really just hate the OTC listing. Stupid reason, I know.

[Williams406]

From SELF's 2019 10-K:

 

"Late in the third quarter of 2017, our Dolton, IL property was reassessed by the municipality and separately, our Class 8 tax incentive renewal hearing was held. As a result of those two events, our Dolton, IL property was reassessed at approximately 52% higher and the Class 8 tax incentive was not renewed. These events were applied retroactively to take effect on January 1, 2017. The combined impact was an increase in property tax expenses from $105,000 during 2016 to $210,000 during 2017, $240,000 during 2018 and $344,000 during 2019. Due to the timing and retroactive effect of these events in 2017, we recorded the entire $105,000 increase, during the fourth quarter of calendar year 2017. The Class 8 tax incentive phases out over the years 2017, 2018, 2019 and 2020, and during such 2020 period we currently expect the property tax expenses at our Dolton, IL property to increase by approximately 20%. Both the property tax reassessment and our Class 8 tax incentive renewal status are currently under appeal. However, there is no guarantee that either the assessment will be reduced or our Class 8 tax incentive status will be reinstated."

 

This isn't a new disclosure but I'm circling back to it in my thought process. $105k to $344k in property tax for one facility for a company SELF's size is significant. If it's one municipality they can handle it, but if several cash-strapped cities spike commercial property taxes, it seems like a bigger risk that I hadn't factored in.

 

We'll see how robust the self-storage business is. The Millbrook expansion completion and the W. Henrietta acquisition (with 76% occupancy) should provide a little tailwind.

[Cevian]

Some interesting things came up when googling the CEO's name, in particular in 2018 lawsuit from Ravenswood Investment Company, albeit for a different entity altogether.

 

 

 

[SugarRE]

In my humble opinion, this management is so shareholder unfriendly its not funny. Based on some decent diligence, I don't believe there is a way to force their hand.  Their charter and org docs seem about as shareholder unfriendly as they get.

 

The Winmills seem equally dictatorial on other companies they run.  See Bexil conference calls on the website.  I'm shocked they keep these up (https://www.bexil.com/investor-conference-calls.html).  Theoretically Bexil is an interesting stock given its trading at below NAV and holds shares of a CEF it manages (DNI - basically large caps and also theoretically interesting based upon the discount to the underlying) that were trading at 20% below NAV before Bulldog started to take a run at them.  Double discount for Bexil!  Bulldog has been going after DNI, and the Winmills run at least one other fund with a similar discount to a relatively liquid underlying portfolio.  See below for amusing excerpts from SOFs letter and an SEC filing they did pointing out the DNI protections to the SEC. I'd be really curious how much Mark and his coworkers get paid in salary from their combined public companies.  I'm certain they allocate the appropriate amount of time to Bexil (which manages DNI) and SELF ?!?!?!?  Self dealing with the SELF Tuxis acquisition was also an interesting one. Love to see the fairness opinion on that one, but I couldn't find it (with not much diligence).

 

I agree that the SELF assets are likely undervalued.  For context, I'm a real estate investor on an institutional level by trade, and a decent small cap RE Equity Value investor by hobby (if I do say so myself).  However, I was thankfully taught a lesson early that you can't do much about crappy management (see JW Mays).  If this were a private deal I would have exercised any available rights (or at least a buy/sell) and forced them out via JV docs, and if I thought there were a way, I would love to push SELF to sell.  These seem too small for anyone to really go activist on them, and I've thought hard about if its worth the effort.

 

https://specialopportunitiesfundinc.com/wp-content/uploads/sites/40/2020/02/SOF-Annual-f.pdf

In the latter part of 2019, we increased our positions in some income oriented closed-end funds at a discount to their NAVs and that have a shareholder base we think would support measures to narrow the discount. We are currently involved in proxy campaigns for two such funds managed by subsidiaries of Legg Mason and have given advance notice of our intent to solicit proxies for another fund, Dividend and Income Fund (DNI). DNI is controlled by the notoriously shareholder unfriendly Winmill clan and has a trifecta of formidable anti-takeover provisions, including a share ownership limitation of 4.99%, a requirement that a nominee not approved by the incumbent trustees must obtain a vote of 75% of the outstanding shares to be elected as a trustee, and, just in case such a nominee is miraculously elected as a trustee, discriminatory restrictions on his or her powers and privileges. To paraphrase George Orwell, “On the DNI animal farm, all

trustees are equal, but some trustees are more equal than others.”

 

While Winmill entities have long represented the bottom of the corporate governance barrel, it is disheartening to see other fund managers adopt measures that impair the ability of shareholders to elect directors of their choice. For example, a number of closed-end funds have recently replaced a plurality vote standard for director elections with a requirement that a nominee must obtain a

majority of the votes entitled to be cast in order to be elected. Thus, even if a challenger were to receive more votes than an incumbent director, the result would likely be a so-called “failed election,” which would leave the incumbent director in his or her position as a “holdover” (or unelected) director indefinitely https://specialopportunitiesfundinc.com/wp-content/uploads/sites/40/2020/02/SOF-Annual-f.pdf

 

Except from the above link:

Mr. Paul Cellupica

Deputy Director and Chief Counsel Division of Investment Management

US Securities and Exchange Commission 100 F Street, NE

Washington, DC 20549 Dear Mr. Cellupica:

 

The Board of Directors of Special Opportunities Fund, Inc. (“SPE” or the “Fund”) is considering three anti-takeover bylaws. We are writing to determine whether the Staff of the Division of Investment Management (the “Staff”) believes any of these bylaws would contravene the Investment Company Act of 1940 (the “Act”), in particular Sections 16(a), 18(i) and 36(a). In addition, we request interpretive guidance regarding (a) the requirement in Sections 18(a)(1)©(i) and 18(a)(2)© that, in certain circumstances, the holders of senior securities issued by a registered investment company (a “RIC”) are entitled to elect directors, and (b) the board’s fiduciary duty in considering anti-takeover measures not expressly permitted by the Act.1

 

Background

 

SPE, a Maryland corporation, is a closed-end management investment company registered under the Act. SPE’s Board of Directors (the “Board”) is considering whether to adopt three bylaws that may impair the ability of shareholders to exercise their voting rights and may consider adopting one or more of these bylaw provisions. The first bylaw would prohibit a person from acquiring shares in excess of a specified percentage of the Fund’s outstanding shares (the “Share Ownership Limitation”) without the Board’s approval. The second bylaw would require the affirmative vote of the holders of at least a majority of the Fund’s outstanding Shares to elect a director (the “Majority Voting Requirement”). The third bylaw would (a) define a “Continuing Director,” and

(b) confer certain powers and privileges exclusively on the Continuing Directors.

........

 

The Share Ownership Limitation

The Share Ownership Limitation would restrict a person from becoming an owner of more than a specified percentage of the Fund’s outstanding shares (the “Share Ownership Limitation”) without the Board’s approval. The purpose of this provision is to prevent, impede or discourage a merger, tender offer, or proxy contest. Its deterrent effect on a merger or tender offer is direct and self- evident. It also indirectly discourages a proxy contest by preventing potential proxy contestants from minimizing their per share proxy solicitation expense. The Share Ownership Limitation would be modeled on that of Dividend and Income Fund (“DNI”)4, a Delaware statutory trust registered under the Act as a diversified, closed-end management investment company. DNI’s Share Ownership Limitation prohibits any person from voluntarily or involuntarily owning more than 4.99% of DNI’s outstanding shares without the Trustees’ prior approval5 and states that an acquisition of shares attempted to be made in violation of the Share Ownership Limitation “will be null and void ab initio to the fullest extent permitted by law.” While the MCSAA only nullifies the voting rights of an acquiring person with respect to shares owned in excess of a specified percentage of a company’s outstanding shares, it does not prohibit the acquisition of such shares or affect any other rights of that person. By contrast, DNI’s Share Ownership Limitation states that a person that acquires any shares in violation of its Share Ownership Limitation “shall not [with respect to such shares] be entitled to any rights of Shareholders, including, but not limited to, the rights to vote or to receive dividends….”

 

In view of the Staff’s position in Boulder that “[a]lthough discrimination between and among shareholders may be permitted for operating companies that use the MCSAA, such discrimination is not permitted for a CEF under Section 18(i),” we request that it advise us whether it believes that a Share Ownership Limitation that operates as described above is not inconsistent with Section 18(i).