Shurgard Self Storage Ltd (SHUR) Earnings Call Transcript

Ladies and gentlemen, welcome to Shurgard H1 2026 Results Earnings Call. [Operator Instructions] I will now hand over the conference to Caroline Thirifay at Shurgard. Please go ahead.

Good morning, everyone. Thank you for joining us for the Shurgard H1 2026 results. I'm here with Marc Oursin and Thomas Oversberg. Before we begin, we want to remind you that all statements other than statements of historical fact included in this call are forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected by the statements. These risks and other factors could adversely affect our business and future results that are described in our earnings release and in our publicly reported information. You can find our press release as well as a replay of this webcast on our website at shurgard.eu. With that, I will now turn the call over to Marc.

Thank you, Caroline, and good morning all. Thomas and I will present you the different section of the deck, and I propose to go to Page 4 to start with the key highlights of the first semester '26. So first, on the revenue side, we have seen an acceleration in Q2 with 3.6% versus last year additional, while Q1 delivered plus 3.1% versus last year, supported by stronger momentum in key markets as the U.K. and Germany. In addition, our like-for-like in Q2 grew by plus 2.5%, while Q1 was 2.2%, so a slight improvement. However, this acceleration has been slower than anticipated. Second, regarding the income from properties or NOI, we continue to focus on cost management and Q2 '26 achieved a growth of 1.6% versus last year, while Q1 was negative versus last year. Thirdly, our balance sheet is strong with a low leverage of 6.5x net debt over underlying EBITDA and LTV below 24% and EUR 70 million of cash plus our undrawn RCF of EUR 570 million. Fourth, our secured pipeline is a real growth engine for the future. We have 170,000 square meters that will be delivered by '28, and these new properties will fuel our NOI growth with an additional EUR 35 million at maturity. And fifth, regarding the outlook '26, the slower-than-anticipated revenue growth led us to revise downward our targets for the year. But looking ahead, we are focusing on filling up our new properties and leveraging our pricing power and customer retention for our same stores to drive the revenues up during H2 '26 and strengthening our position for 2027. So on that, let's go to Page 7 with our business update section. Talking about growth acceleration. Q2 has seen a good momentum for the U.K. and Germany, while the Nordics and the Netherlands continue to deliver very solid performances. France and Belgium are flat for different reasons. France is impacted by our more aggressive pricing, but occupancy start to increase, while for Belgium, a couple of stores are defending their market shares versus a competitor in a ramp-up phase. Interestingly, the U.K. is combining two positive levers, one related to the accelerated ramp-up of our non-same stores, in particular, the former Lok'nStore store and the revenue growth in June and July and also early August for our same stores. And I propose we go to the next page dedicated to an overview of our portfolio and importance of growth. As a reminder, so we are on Page 8. Thank you. So as a reminder, you will find on the right side of the page how our portfolio is well spread across Europe with prime cities. This is what you see on the map. In addition to this strong foundation, the left side of the page shows how the growth of our platform footprint has driven rented square meters over the years and in turn, revenue. Meaning Shurgard has a significant embedded growth potential based on our recent openings and current secured pipeline. I will not go to the details of Page 9, but what you need to understand and remember is the importance of the share of properties in ramp-up in our portfolio that will contribute to our future earnings growth with 21 -- 29, sorry, additional more stores just for the year '26. Let's go to Page 10. So Page 10 is showing some pictures of the new properties that we opened in H1 and 2 major redevelopments we did. Those are again demonstrating the benefit of being the owners of our buildings and creating density of properties in prime areas. H1 '26 has seen the delivery of 28,000 square meters, representing EUR 55 million of investment. And H2 will be very busy and will deliver another 75,000 square meter or close to 75% of the whole year '26 commitment. Let's go to Page 11 to have an overview on our portfolio expansion. So we have secured today another 95,000 square meter or EUR 240 million of project cost to be delivered in '27 and '28. Mainly 3 countries will benefit from this footprint growth, Germany, the U.K. and Netherlands. Globally, our current pipeline for the years '26, '27 and '28 will generate EUR 35 million of additional NOI at maturity. And I would say that in addition, I would like to mention that all projects approved since February '26 will deliver a return at maturity of 9% to 10% NOI yield, increased by 100 basis points versus previous federal rate, and will feed the NOI growth even further. So let's flip to Page 12. We have a couple of good news regarding the former Lok'nStore portfolio performance in Q2 and early Q3 '26. We have reached 110,000 square meter rented early August, which is our guided target. Meanwhile, the move-in rate continues to grow. And on this, I turn to Thomas.

Thank you, Marc, and good morning, everyone. Let me start with our all store performance for the first half of 2026 on Page 14. At constant exchange rate, property operating revenue increased by 3.3% to EUR 229.6 million. This was supported by a 3.4% increase in average rented square meters, while average in-place rent was stable. The impact of our larger ramp-up portfolio meant that average occupancy was 83.6% or 1.9 percentage points below the prior year. Net operating income increased by 0.5% to EUR 140.2 million with operating margin declining by 1.7 percentage points. This reflects the impact of operating a portfolio that is 6.1% larger in rentable square meters, together with inflationary pressure and deliberate investments to support revenue growth, which we will talk about on Slide 16. Underlying EBITDA was EUR 124 million, down 0.6% at constant exchange rate. Adjusted EPRA earnings were EUR 0.77, down 5.7%. I will come back to the per share bridge on Slide 18. Let us now look at the sources of the revenue growth. As noted, revenue at constant exchange rate increased from EUR 222.2 million in the first half of 2025 to EUR 229.6 million in the first half of 2026, an increase of EUR 7.4 million or 3.3%. The 251 stores already in the 2025 same-store pool contributed an additional revenue of EUR 1.9 million. The 24 stores entering the 2026 same-store pool added a further EUR 0.8 million. Taken together, same-store segment contributed EUR 2.7 million of incremental revenue growth. The 2026 non-same-store pool contributed EUR 4.7 million, demonstrating the significant earning contributions from properties that we have recently been developing or acquired and are now ramping up. The key point is, therefore, the growth is broad-based across the portfolio. Let us now break down the NOI development on Slide 16. At constant exchange rate, NOI increased from EUR 139.5 million to EUR 140.2 million or 0.5%. The bridge shows 2 dynamics. Within the same-store properties already included in the 2025 same-store pool reduced NOI by EUR 0.6 million, while stores entering the 2026 same-store pool added EUR 0.5 million. The combined impact of the 275 same stores was therefore broadly stable with a modest decline of EUR 100,000. The ramping up non-same-store portfolio contributed an additional EUR 0.8 million of net operating income and offset the same-store movement. This confirms that this part of the portfolio is already contributing to profitability, even though these stores are still below mature occupancy and margin level. Let's zoom in on various cost drivers compared to the same period of prior year. Payroll expenses increased by EUR 2.1 million as a result of both additions and properties as well as the reinforcement of our support center. Real estate and other taxes increased by EUR 1.7 million, mainly driven by the anticipated increase in U.K. business rate combined with the additional stores across the network. Marketing expenses increased by EUR 1.1 million, reflecting the generally higher cost of online advertising as well as our larger portfolio. In addition, it reflects the deliberate decision to increase our spending to support revenue growth. And finally, other operating expenses have increased by EUR 2.1 million, mainly due to 2 drivers. First, higher licensing and maintenance costs for our SaaS ERP tool, which replaced in H2 2025 via our on-premise solution, combined with the addition of the stores to the portfolio and the rollout of our European call center. The noted same-store margin pressure reflects the timing of these commercial and operating model-driven investments as they were incurred against lower-than-expected modest same-store revenue growth. While the Q2 direction was better, the improvement in revenue was not yet sufficient. Our focus on occupancy and rental rate growth should allow us to show a better sales leverage effect going forward. Slide 17 puts this split into a larger perspective and shows why the ramp-up portfolio matters so much to future earnings. As the chart shows, the non-same-store segment offsets the negative contribution from the same-store and has the highest contribution to NOI growth since 2021. This is our strategy at play. It shows the important growth the portfolio expansion delivered during the recent years. Looking at the H1 2026 performance, our immediate priority is twofold, continue maturing these newer stores while reinforcing growth and operating leverage in the same-store portfolio through occupancy, pricing, customer retention and cost discipline. Let me now bridge this operating performance to adjusted earnings per share on Slide 18. Adjusted EPRA earnings per share decreased from EUR 0.82 in the first half of 2025 to EUR 0.77 in the first half of 2026, a decline of 5.7% at constant exchange rates. NOI positively contributed approximately EUR 0.01 per share, which was offset by approximately EUR 0.01 from general administrative costs and here in particular, higher share-based compensation expenses and EUR 0.03 from the anticipated higher net interest expense. The tax movement contributed approximately EUR 0.01, while the other items were broadly neutral. The remaining approximately EUR 0.02 per share dilution came from the higher weighted average share count following the 2025 scrip dividend. The scrip option has now been discontinued. This residual comparison effect is a residual comparison and not an ongoing source of dilution, which is important when assessing the underlying earnings trajectory. Let me now turn to the balance sheet and financing position, turning to Slide 20. At June 30, the investment property, including properties under construction, was valued at EUR 7.27 billion compared with EUR 7.12 billion at the end of 2025. The increase reflects continued investment in the portfolio, while the overall valuation environment remained broadly stable as exit cap rates expanded modestly from 5.1% to 5.2%. EPRA NTA per share increased by 0.7% to EUR 53.64. Net debt was EUR 1.73 billion compared to EUR 1.66 billion at year-end, reflecting the continued investment in the portfolio and the move to a full cash dividend. Loan-to-value was 23.7% compared to 23.2% at year-end and net debt to underlying EBITDA was 6.5x compared to 6.2x. The increase is measured and remains fully within our rating framework. It also needs to be viewed against the substantial embedded earnings contributions from stores that are still ramping up. The financial structure behind this balance sheet remains strong and gives us significant flexibility, which is further detailed on Slide 21. We retain our strong BBB+ rating from S&P with a stable outlook and 100% of our assets remain unencumbered. On average, fixed cost debt is 3.33% with a weighted average maturity of 6.9 years. We currently have EUR 795 million committed liquidity sources consisting of our undrawn remaining term loan and the revolving credit facility. In addition, we have EUR 70 million of cash at hand. This liquidity, combined with a strong loan-to-value ratio provides the flexibility to execute our committed development program while maintaining capital discipline. Our financing position, therefore, does not change the priority, fund the secured pipeline, protect the rating and allocate capital only where returns meet our more demanding criteria. With that, I hand back to Marc to take you through the outlook and our execution priorities.

Thank you, Thomas, for these explanations. So regarding -- I'm on Page 23. Regarding the outlook '26, we have decided to revise the operational part downward due to the revenue trajectory we have at the end of H1 '26 versus the anticipated one. The impact is leading to a revised all store revenue growth of 3.5% to 4.5% versus full year '25 at constant exchange rate. And despite our cost management, less interest expenses and lower corporate income tax than anticipated, the negative difference of revenue growth is impacting the underlying EBITDA and our adjusted earnings versus previous guidance. On the square meter portfolio expansion side, we will deliver within the initial guidance, leverage and dividends stay as initially guided as well. For the medium-term guidance, considering the current operating environment, we are not reaffirming our targets, and we'll revisit when market conditions allow for more meaningful assessments. However, we maintain our leverage targets with an LTV below 25%, and net debt over EBITDA of 5 to 6x and our commitment to our BBB+ S&P rating. We will continue to pay a cash dividend of EUR 1.17 per share per year. So let's go to Page 24 to discover the key actions in motion to support our EPS growth. I think it is important to share with you and understand the actions that the management supported by our Board of Directors have already decided to put into motion. They are fourfold. The first one is the capital discipline. We stopped the optionality of the scrip dividend in January '26 and all dividends since then are 100% cash payments to avoid additional dilution and impacts on the EPS. The second decision has been to increase the hurdle rate by 100 basis points to 9% to 10% NOI yield at maturity for all organic projects as of February '26 with a positive medium-term impact on the earnings per share. The third decision has been to require an EPS accretion as of the first full year of operations for M&A deals. The second lever that is relating to financing of the company. Here, we have refinanced former debt and additional needs in March '26 with a term loan facility of EUR 570 million at a cost of 80 basis points above EURIBOR, which brings flexibility and avoids upfront loading interest costs. Our third lever is the revenue acceleration. We have applied a more aggressive pricing to accelerate the ramp-up of our non-same stores, which are a significant source of potential additional revenue and NOI since Q1 '26. At the same time, we pushed the occupancy of our same stores with additional advertising and continue to do so in Q3 '26. Last but not least, we have rolled out a European call center for sales calls in and outbound call to catch more leads and convert more. The complete rollout will end by October '26. And our fourth lever is the operating efficiency that you are familiar with. The clusterization of our store network has been completed with the U.K. in early Q3 '26, and France will be completed by Q4 '26. It will deliver labor cost savings for the full year '27 and partially in '26. In the end, these 8 key actions have and will support EPS growth for our company. So therefore, time to conclude now, and let's look at the final page, Page 26. Thank you. So the first half of the year has ended better than it started with the acceleration of the revenue growth and the significant contribution coming from our non-same stores, but not enough versus our anticipation. And therefore, we revised our operational outlook for 2026. However, we have strong levers and strengthenings to play with. One, our focus on revenue growth through the ramp-up of our non-same-stores plus customers retention and pricing dynamics for our same stores. Second, our cost optimization plans. Thirdly, our solid secured pipeline that will deliver significant additional NOI growth in the coming years. and fourth, a very strong balance sheet with low leverage and our BBB+ rating from S&P. All in all, '26 will be a transition year, positioning the company well for the future. And on this, I turn to Caroline to open the Q&A session.

Thank you, Marc and Thomas. We are now pleased to open the line for your questions.

[Operator Instructions] Our first question is from Marios Pastou from Bernstein.

Two from my side. I'll ask them one by one. So I think, firstly, really into your guidance, of course, with the first quarter results, I think you'd expect it to remain within that outlook range provided. What really has been the shift since then? I mean metrics at the time were also broadly unsupportive. So I suppose, can you walk us through what you'd anticipated would drive a recovery back then towards those targeted levels?

Sure. So thank you for the question, Marios. So the situation when we looked at the results in Q1 was that we saw the accelerating taking part. And we were looking at where occupancy pricing and the whole market were moving. And we, therefore, at that point in time, considered that the acceleration would still be sufficient to close the gap. So when we recently then looked at the past performance and plug that into our latest forecast, while we saw this good Q2 momentum, we eventually had to conclude that it was not sufficient the acceleration to close the gap until year-end.

Okay. And I suppose a bit of a follow-up to that one is that what is driving then your kind of view that this momentum you're seeing now will be supportive through the second half?

So the momentum which we are currently seeing is continuing. That's, I think, the very, very supportive message in all of our key markets and particularly in the U.K., we see that what we observed in the last month is continuing at the moment.

Absolutely, for our all stores, U.K. and also the same stores.

Okay. And then just secondly, of course, you've mentioned that you've stepped away from your prior medium-term guidance. So should we think about '26 as being a bit of a reset year before returning to growth and whether that revised all store revenue growth guidance for this year is a more realistic run rate going forward versus the prior 6% to 8% you had?

Well, I think that the new outlook or the revised outlook that we have given, obviously, is corresponding to what we think we will do in '26. And in '27, we have our disclosure for the year -- full year '26 in early March. And there will be also an outlook given for the year '27 at that moment.

Okay. So no pointing to towards -- I mean, because obviously, it's clear that you obviously aren't reaffirming that guidance, but I think the expectation for that 6% to 8% top line, I'm assuming people are going to be looking to see if that's still achievable. Is there -- like is that step down we're seeing this year, is that basically a function of what we're now going to be seeing in future years in light of what you're seeing in terms of the market progression?

I think, Marios, that to be let's completely transparent and clear, we need to wait for the end of the year to see where we are exactly and also the start of '27 to be able to come back with a realistic let's say, numbers and outlook.

The next question is from Ana Escalante from Morgan Stanley.

My first question is on guidance for 2026. So I think we all appreciate that it might be challenging forecasting revenues given it's difficult to predict consumer behavior accurately. However, when I look at the implied operating expense inside your EBITDA margin based on your revised revenue and EBITDA guidance, it looks like now you're guiding to operating expenses, including SG&A, around 2%, 3% higher than the previous guidance. So what has changed versus May? Why -- what has happened since May that you were not anticipating back then in terms of the expenses?

No. From the operating expenses perspective, we are not expecting that the costs are going higher than what we were guiding for before. So I think the -- it's important to note is that the expenses really developed in line with what we were expecting when it comes to -- from an operating perspective. The only exception is when we decided to invest more in our marketing to drive conversion and get the revenue in. That will likely continue for the rest of the year. And therefore, that's the only probably exception to what we were thinking before. But that's fully in line with our aim to get the revenue and the occupancy where it's supposed to be. All the other costs were behaving exactly in the way we were expecting them, and we expect them to end in line with our estimates before.

That was very clear. And then my second question is on capital allocation. You've mentioned in the release that there is a challenging macro environment, but you also quoted the challenging competitive environment. So why keep building new stores then, particularly in markets where are performing a bit weaker? Why do you think that's the best capital allocation?

Well, obviously, when the pipeline is secured, the pipeline has to be delivered. And that's why we are already in '26, '27 and '28 with projects where we have the building permits and therefore, those one will be delivered. Secondly, medium term, we believe that -- and we had the demonstration, for example, in Sweden when we faced a couple of years ago, if you remember, a very tough situation in terms of competition. So one competitor was aggressively developing and ramping up the properties. And in the end, today, when you look at the result of Sweden, we are very happy to be in Sweden and to do what we are doing there, more than plus 5% revenue for year-to-date, I think. So for us, medium term, we don't fear competition, and we still think that growing the platform where it makes sense, meaning the capital cities where we are with redevelopment and organic or even M&A is a good way to do. After that, monitoring the volume of investment year-on-year for pipeline, you have a lead time that you need to respect. So that's where we are.

Our next question is from Frederic Renard from Cheuvreux.

Just a few follow-ups. So you dropped the midterm guidance. As I understand that -- well, you have probably a lower confidence in the midterm outlook. But then the question would be, how do you expect the consensus to modelize Shurgard on a 2, 3 years basis, while it's difficult for you to give a proper guidance for the next year? How do you think about that?

Well, we think that analysts have talents, first. Secondly, we are a public company for now more than 8 years. We are in Europe, the one disclosing quarterly detailed numbers per market, which is very different than what our peers are doing. And I think you have plenty of information to be able to modelize the company for the future. And that's our belief.

But versus what you just said to the question of Marios in the sense that for me, my conclusion was to say, okay, maybe you don't have a visibility on your future revenue. Would that be correct to interpret that?

No, I said that the visibility will be obviously because we have given a revised guidance. And if we have given this revised guidance, obviously, it's -- we're going to make it. And by the end of '26 and especially early '27 when we'll have in April -- sorry, in March to give an outlook for the year, we'll have already 2 months more or less of trading for the year '27. So it will give us, I suppose, more comfort to give an outlook '27 than obviously now. That's the point really.

Okay. Because, for instance, if I look at the Q1 you published in mid-May, so basically, you had already 6 weeks in the Q2. So I'm just struggling to understand what happens over the last or the remaining 6 weeks that forced you to revise clearly don't know that guidance. I mean, was there really...

Sorry to interrupt. I think it's what Thomas explained previously in the answer to, I think, to Marios, we look -- we saw a pickup of the revenue in late Q1. And in Q2, it started to. But in the end, what we're expecting to see in May, June, even if there is an acceleration, the acceleration was not at the level that we're anticipating. That's simply what happened.

Okay. Then maybe on another topic, and that would be the last question. So you mentioned that the pipeline is actually the growth engine for the future growth. But actually, if you look back for the last 3, 4 years, the more you have been adding property, the lower you have been to have been able to grow on an EPS basis. And I appreciate you gave some elements to boost the EPS on Page 24 of the presentation, for instance. And among other, you mentioned that you were targeting a pricing, which was relatively -- or you quoted aggressive -- a more aggressive pricing across non-same store. But how can you increase pricing with limited occupancy at the moment?

No, I -- let's be clear. So if you take the 2 elements of this portfolio, so the segmentation with, on one side, the same-store and the other side, the non-same-store, so the ones that are in a ramp-up position. Now we start with this one, which is, I think, quite obvious is what we decided to do is simply to be more aggressive on pricing. When I mean more aggressive, I mean to discount more is what I meant when we say aggressive, it's not that we're going to increase to customers. Sorry. So maybe that's a misunderstanding, Frederic. So when we say more aggressive pricing, meaning that the public prices to new customers are lower than what initially we were planning to do. That's what I meant or what we meant.

And that's very important to keep that in mind. We indeed -- we are fighting for the occupancy. You know that is our strategy. And we are very happy to get the customers in at the right price, and we are very aggressive on that front. But we are not doing that in isolation to just burn money because what we also know is that we have an industry-leading churn, and we have the probably most sophisticated ECRI tool. So we can actually then once the customers are with us, we are able to retain them longer and increase them significantly. And that's why we are very, very happy to make those investments now.

And just to make it even clear, I would say that for the non-same-store the new stores, when you start, the occupancy is very, very low, so let's say, 5%, 10%. So the question is not at the price you make them in. It's simply get them in, fill out the property and at the same time, as said, Thomas, increase these customers when they are in. So it's always more than 0 when it's empty. So that's the basic principle, I would say, of the -- what we are doing on the non-same-stores. And we saw also a good pickup in different markets in the U.K., in Germany, where we have a lot of non-same-stores. And that's why, for example, ex Lok'nStore store portfolio have been able to reach 110,000 square meter rented guidance for the year, early August actually a couple of days ago, and it continues to be. So that's the way we do for the same stores. Back to your question. Here, it's a little bit different. The way we do is 2 things. First, yes, we are also giving potentially more discounts to new customers in order to be attractive with the pricing that they see publicly on our website. And secondly, we make, I would say, more noise. So we beat the drum by simply spending more money on Google, meaning advertising. And that's back to the question of Ana regarding the cost and the OpEx for the second half. We have factored in, in our guidance revised for 2026, the fact that we will spend more advertising during the second half.

Okay. And then if I just may to rebound on what you just said. So you mentioned more aggressive pricing, more aggressive also expenses on marketing. So you also announced that you are going to revise upward or a few quarters back the NOI yield target on new development. So can we conclude that this NOI yield target that you gave to the market is actually a function of time. So maybe before you were expecting to reach it at 4, 5 years, now maybe at 7, 8 years?

No, I don't think so because it's simply that the shape of the curve will be different, but the ending point and the time to get to that ending point doesn't change. If you think IRR-wise, we are still absolutely on this because the IRR over 10 years will be probably 100 basis points even above 9% to 10%. So it will be probably 10% to 11%. So it doesn't change.

Our next question is from [ Ashna ] from Deutsche Bank.

Two questions from me. The first one on your CapEx numbers for 2026, you've revised that down. Is that primarily just timing related? Or is that just you've sort of taken a more selective approach to development? And can you talk a bit more about the future pipeline and the CapEx related to that? And the second one is just on the cost management that you've got undergoing. You're doing some -- you talked about clusterization. Is there more meaningful opportunity to take costs out of the business from here? And maybe you can help quantify that, if possible or even when the timing of the benefits come in?

Sure. Sure, Ashan. So let's start with the first part of your questions. So the one related to the pipeline. Yes, we have been -- it's exactly as you said, it's more phasing approach. That's it. And some of the projects have been moved to '27. But 75%, as I said, of the '26 pipeline will be delivered in the second half. And if you look at the -- what we have disclosed, and I think we have disclosed with the different quarters for the year 2026, you see that there are a lot in the Q4 '26, and some also in '27. So we might have good surprises, some stores that were initially planned for early '27 that will jump in the end and being opened in '26 maybe will be postponed by a couple of weeks to '27. But to me, it's purely a phasing stuff. It's nothing more than that. And the second question was related to...

Clusterization in the future.

The clusterization, yes, what we call clusterization. Yes. So I would say that we have done a lot in the past 3 years. To give you an idea, 4 years ago, on average, we had 2.5 people per property, and we didn't have any clusters, didn't exist. Now at the end of this year, so when France will be completed, you will have 80% of all the properties of Shurgard in what we call clusters, meaning you have 2 properties and one is managing the other one. And instead of having 2.5x 2, there's 2 stores, so 5 people, you have 3 people, which is 2 people left -- less, sorry, and 2 people out of 5, it means 40%. And it's what happened. So meaning that what we have done in the past 3 years has fed the NOI growth by having reduced labor cost despite, by the way, increases related to the different spikes of inflation in the years '23 and also '24. For the future, you can do always more. Today, I don't want to commit to any numbers on that, but there is still some stuff to do. Then the magnitude of it, we will come back to you in early '27 with that.