Cityvarasto was listed on the stock exchange late last year at an initial share price of EUR 16, and the share is currently trading at around EUR 13. In this video, we'll discuss Cityvarasto as an investment. We have published a new extensive report, a 60-page report on Cityvarasto as an investment. We'll go through the company's business model, future drivers, and why Cityvarasto is a buy. Remember to leave a like on the video at this point. Also, comment below the video what you think about Cityvarasto as an investment? Hi, Frans.

Hi, hi. Lots of good pictures in there, even though it's a long report.

Yeah, extremely stylish pictures. I can put screenshots of that report here in the video. Definitely go and read it, it's freely available on Inderes.fi. Let's get down to business. So, what kind of company is Cityvarasto as an investment?

Well, you know. Cityvarasto is Finland's largest self-storage operator and has practically been a pioneer in this field. Measured by practically all metrics, the company has a market share of around 30 percent in Finland. The industry itself is still relatively new in Finland, and I would claim that quite few of your acquaintances, for example, use a self-storage unit, and it has been a clear growth sector for a very long time now, but I see that it will continue to be for Cityvarasto going forward as well. Well, if you look at the last ten years, when the company has been in a slightly larger size category, the company has grown by 20% a year. So at quite a wild pace. Through investments and also to some extent through acquisitions, the company's growth has been very, very profitable, perhaps just in every way. I would say that the performance has been really good, and when you see this revenue chart yourself and the fact that the CEO still owns 50 percent of the company in such a capital-intensive business, it definitely catches my attention right away.

And he is also the founder of the company.

He is. He is still the company. Or well yes, he is also the founder of the company. Exactly. And perhaps if you want to encapsulate the storage strategy, the idea is to buy properties that are at the end of their lifecycle. Then these. These have commercial tenants already in them, for example. Then these are rented out to those existing tenants as business premises, and then these are gradually converted into self-storage units according to demand. And then if you take a comparison, the rents in these business premises are around EUR 10 per square meter, and then in self-storage units they are over EUR 25. 4.

So it is significantly higher. The upside here in self-storage versus standard business premises.

Well, that's just it.

And then again, these can be bought quite affordably, and particularly in recent years during this weak real estate market cycle, there have certainly been really affordable properties on offer, and Cityvarasto's EBITDA yield. The margin yield for this investment has been 15 percent in these established properties, which is of course very good in the real estate sector.

Yeah, that's a good place to pour money then. One thing I'm interested to know is, is Cityvarasto a real estate company or is it a service company? Looking at Cityvarasto as a company, I can't quite figure this out. Does it belong to real estate or to the service company side, so how would you describe this business?

Well, if we start again from what has been mentioned, 30 percent of Cityvarasto's business revenue comes from this. It has these ancillary services, meaning van rental and moving services, which are of course at least service businesses. Maybe that in turn gives a better picture. If we look at the EBT margin level, real estate business brings 90 percent of the EBT and these ancillary services 10 percent. So these. The real estate business is of course like everything in Cityvarasto's investment case. But then again at the same time, that self-storage business is very much a consumer business too. And it is a service business. It is a real estate business, but you can almost equally well say that it is a consumer business, and that is precisely why the brand and consumer understanding are everything.

Would you like to unpack the business logic a bit? So they have Cityvarasto, which everyone or many know. Those are the self-storage units. But then there are these pakuovelle.com services and these moving services, so how do these other services actually flow together with Cityvarasto's main business?

Yeah, that's a good question, and actually the strategic role of these ancillary services, meaning vans and the moving business, is precisely to channel customers into these self-storage units.

So customers are fed into them in such a way that you rent a van and then you're like, hey, you're renting a van now, you're moving, so take a temporary Cityvarasto self-storage unit on the side.

Yes, exactly. And when you are moving, quite often you need just that. No. The storage company's largest customer group is private individuals moving. And then quite often when moving in the city, you need a self-storage unit or you need a van or a moving company. You need a self-storage unit or you need a van or a moving company. So these are very, very synergistic, and in 2024, according to Cityvarasto, over a quarter or a quarter of their customers used more than one of their group services. But then again, the difference maybe right in these is also that in ancillary services they are very transaction-based, but likewise in self-storage the contracts are of course short. But then again, there is also a large portion of customers who have a self-storage unit for a very long time, so that it becomes a natural part of their life. And often it doesn't make sense to move to a larger apartment just to get more storage space. Just in that case. A self-storage unit is very often a sensible option when moving in the city, and their average rental length is currently 20.7 months.

Oh okay, that long even.

Which means that there are many very, very long rental agreements. But then at the same time there are also a lot of these short rental agreements, like for example when moving you take your stuff there for a month or two and then take them to your new home.

Yeah, next we could perhaps go through general trends that affect this self-storage business. Certainly one of the clearest trends that surely comes to everyone's mind first is urbanization. Meaning people tend to move here to the growth triangle, when talking about the capital region, Tampere, Turku, where Cityvarasto also operates. My understanding is that most of the businesses are there, apartments are more expensive there, apartments are smaller, so not everyone necessarily has a detached house where they could store their old junk, so this is certainly one big trend here.

Yeah, yeah, this is one of the clearest ones and will likely continue. And just urbanization. Population aging is also related to it in its own way, so that older people move from detached houses to smaller apartments, apartment buildings, and then storage there is what it is. In those it is of course on a completely different level than in a detached house. Then I think there would also be the abundance of goods here, that people are ordering stuff upon stuff. Well now, I don't know.

And everyone surely knows people in their circle of acquaintances who just accumulate junk for themselves, and it is correspondingly never thrown away. The abundance of goods is enormous and it continues. You get to see these stories in the media that people are ordering goods more than ever. There is more of it in homes. There are things from floor to ceiling for many people. Many people watching these videos might know people in their circle of acquaintances who have a great deal of possessions. Cityvarasto certainly works for this type of customer.

Yes, so for these types, but perhaps generally in a trend-like manner, the volume of goods has rather increased than decreased, and people are hoarding more stuff. And nowadays, for instance, a great deal of circular economy has also emerged. Largely because everyone simply has so much stuff and they try to recycle it, but still, after all. On average, people are quite bad at letting go of things, and unfortunately. It just seems that the volume of goods keeps growing and growing, and household sizes have decreased, which also supports self-storage, and apparently people are also getting divorced more often. And there are very natural drivers like this, which will likely continue for quite a long time.

Indeed, these are the drivers for Cityvarasto. Then, if an investor is interested in Cityvarasto as an investment, what are the most important metrics an investor should look at? Is it this self-storage floor area, above all what they report per quarter, how much self-storage floor area they have per quarter. Is this the single most important key figure?

Well yes, I would say it is the most important key figure, which is important for investors, that the company can grow this profitably. And of course, it is not a good thing if this self-storage floor area is increased at the expense of occupancy rates or entirely at the expense of rents. These are of course also very important metrics, but these are indeed the three most important ones. Where does the investor's earnings ultimately come from? But perhaps it is good to note here just what. There are no such checking deficiencies at the moment. About half of Cityvarasto's real estate portfolio consists of these commercial spaces, which are intended to be gradually adapted and converted. And the majority of this into self-storage facilities over the next 5 to 10 years.

There is natural upside to this rent per square meter ratio. If this ratio is around 150 percent higher in self-storage facilities than in commercial spaces, there is significant upside in it.

The limit is two and a half times. Yes, exactly this rental ratio. That is it. It is this kind of internal potential right there. Of course, then the demand has to grow accordingly so that the conversion makes sense.

But, but. Now as we discussed just moments ago, that it is very natural for this demand to come through, considering this abundance of goods and single-person households are nowadays more common than before and moving into growth centers and so on. These are clear drivers here.

Well yes, there are very clear drivers here. And we can clearly see that the growth opportunities are good, and at least right now in Finland the competitive situation is not particularly tight, so for example Britain, which is Europe's most developed self-storage market, there the self-storage per capita is five times compared to Finland, and that is the highest at the European level. The US is then of course on a completely different level, there it is 15 times. Even though homes there are also much larger on average, there is plenty of stuff there. But precisely, that potential is there. But then again, the competitive situation. If some operator were to enter here to expand very aggressively, then it could alter this situation. But then again, nothing like that has been seen, at least for now. And perhaps not just anyone. Probably many think that just anyone can set up a self-storage facility like this, but at the same time there are quite clear ones indeed. And of course the capital requirements are clear. That is one differentiator that prevents new operators. But indeed scale and brand give the ability to modify pricing and, for example, also compete on price against new operators. And well, there are very clear advantages in that. Once you actually have a strong brand and a large portfolio, and then Cityvarasto has already staked out, for example, quite well these important areas of Finnish cities. Their competitiveness is really, really strong against anyone.

And location probably also has some impact, that Cityvarasto or self-storage is located at traffic hubs. At least when driving around by car, one has noticed that Cityvarasto has these warehouses in quite central locations.

Yes, that is a single factor. The most important factor is the location, so that if you have your belongings there that you actually also want to use, the closer it is, the better it is.

Yes, so this is a growing market. People are moving to growth centers. There are more households. And all these things affect the market growing. And compared to other countries, these self-storage facilities are much more common there than in Finland. I read somewhere that e.g. Sweden has about 50 percent more of these per capita across the Nordic countries.

Sweden has about 30 %. But yes, perhaps then again also noticed that in some of Europe's large countries there are fewer self-storage facilities per capita than in Finland.

There is less space utilized there.

Well, at least for now. Yes, but maybe not gone yet. Sweden is a pretty clear comparison point already. And then again, in these countries too, the market is expected to continue growing just as well. Britain is perhaps the only clear mature market in Europe. And there the industry has indeed been harder in recent years.

Yeah. Let's put on this speculation hat then, Cityvarasto operates in this self-storage business, at least to my understanding, solely in Finland, but this Pakuovi apparently had some things going on in Sweden.

Right now, the expansion into Sweden is actively being piloted. Yes.

How realistic do you see it that Cityvarasto would expand, for example, to Sweden regarding self-storage facilities? After all, they have quite a lot of firepower on their balance sheet that they could utilize.

Yes, yes. Cityvarasto is in a good position with its balance sheet, and their idea is to invest, just like in recent years. 10 million euros per year. And we can see that they have quite well, when their net debt level in relation to operating values is 20 percent. And when the target is that it is below 35 percent. And this in itself is a relatively low target in the real estate sector, and the company's business generates good cash flow, meaning that their scale strengthened by the IPO on top of this. We see that it is indeed a very financeable company at the moment, and there is certainly enough firepower for them.

Firepower is precisely what they have. Also Cityvarasto's market value is around one hundred million, if we include that. According to the comprehensive report, Cityvarasto could have around 100 million euros available for investment in the coming years, taking into account the debt leverage and the growth of the company.

Yes, that is open to interpretation.

In the longer term, but as a scale it is big.

That is right, that when you take these dynamic effects into account, if the company's business proceeds roughly along the same lines as so far, then the investment opportunity is indeed really huge. But in response to internationalization, currently the company sees for itself that there is so much room to grow in Finland that it is not a relevant matter at the moment, but perhaps then again in the 2030s it could be, if they see that they have value in being able to bring this concept to some other country. But then again, it is good to note here that precisely that expansion is not easy. That you cannot just replicate it from one country to another. Even though these effects or these network effects that the existing business and scale already have are quite clear, it is not going to be easy.

If we start expanding this storage business, but then again the van rental business, you can drive the vans to Sweden, and then if the business does not work, the vans are driven back to Finland. This is then again very, very easy. If we think about any business, it is piloted internationally, and actually that is by the way a good observation that perhaps often gets a little too little attention in this Cityvarasto business. There is of course this van rental business, so this has actually been really good business for them. And they are Finland's number one van rental operator. This pakuovelle.com, and actually since 2022 they have more than tripled their van capacity and along with this also more than tripled their sales and then earnings along with it. This has actually been really, really good business for them.

Yeah, you see these vans all the time in the city.

Yeah, yeah, and.

On the back it always said Cityvarasto.

Well yeah, exactly. And that is one of the most important of these synergies, is this free advertising space, and with a really good location indeed. I find it hard not to see at least one van during the day when you come to work and go on the way home.

You are so exposed to this Cityvarasto when you browse it.

That as well. Yeah, but there are definitely a lot of them.

And Cityvarasto certainly has opportunities to expand in Finland. As you said, they constantly issue announcements that they have converted some commercial space into self-storage space or expanded to a new city. Was Kokkola now for a little under a year? Kangasala was also one destination where they have expanded like this, so apparently there is plenty of room for expansion here, as the market is growing strongly, so you can put euros there. With an investment yielding 15 percent, then by all means just continue on the same track.

Yeah, yeah, that is indeed how it is, of course. Yes, or if you look at the early history, you could. You could almost say it was drawn with a ruler, that it is 10 years of 20 percent growth, which is of course quite a staggering achievement. And from here on it cannot be so easy that you could draw it with a ruler. This is going to be bumpier, but then again I see that this long-term revenue growth prospects is good, but then it will always fluctuate a bit, because after all, some new competitor might emerge, then Cityvarasto might aggressively expand in some region. And then these occupancy rates always rise gradually year by year. That is the interesting thing about these self-storage facilities, that the older the location practically is, the better the margin Cityvarasto on average has, and almost every time from facility to facility, but perhaps then in the short term it would also raise a few risks.

Perhaps particularly now regarding the short-term development of the share price, we see that there is a risk of a mild profit warning for Cityvarasto, our adjusted EBITDA estimate is at the very bottom end of the guicance, and in addition we see that the current sentiment in the real estate sector is. It is indeed really weak, and now there is a lot of fear about where interest rates are going, and then we see what has actually weighed on the Cityvarasto share price, which is nevertheless around 20 percent below the IPO price, namely the sales by the second major owner, the Norwegian investor Fastighets AB. They exited the company. Here a month ago at a price of 13.75 per share, so that remains here as well. Insider bought a lot of shares, and many institutional owners, of which there are around twenty on Cityvarasto's list, they also bought shares here. But there are also short-term negative share drivers like this.

We initiated coverage of Cityvarasto with a Buy-recommendation and a 17 EUR target price. The share is currently trading at around 13 EUR, so why buy Cityvarasto?

The most important reason is that Cityvarasto is in my view a good business in the long term. But then again we have looked at this current valuation level from many perspectives, and it is in my opinion cheap on an earnings basis and cheap relative to peers. It is cheap relative to the company's revenue growth prospects and earnings growth. The risk level is quite moderate overall in my opinion. Now the real estate sector is heavily depressed. Peer valuations are at 10-year lows, and then we see that here as well. If the share price were simply to continue sliding, the company is indeed ready to also make share buybacks of its own. Meaning for example it just started a small share buyback program, and we also see that the company is also a potential acquisition target.

Why is this a potential acquisition target?

Well, precisely things like these.

Has there been a lot of M&A activity in this sector, meaning listed companies are seen? Enough that there has been a lot of M&A activity. Have listed companies of this kind, larger entities, been moving recently?

Yes, there have. Actually yes, and precisely. There has been a lot of deal-making in the sector in Europe, and American players have also bought stakes in some of the larger European companies and also expanded into Europe. Just Self Storage Group, which was a Norwegian company previously also listed, was bought out of the stock exchange just a few years ago, and had there been three transactions taking place on the stock exchange in Europe, and currently Cityvarasto has three clear listed self-storage peers. And these are all really big, and they would almost certainly very gladly buy out Cityvarasto for example if they got it at a suitable price. But then there is of course that. The important question is whether the main owner wants to sell. CEO Ville Stenroos owns almost 50 percent of the company. So it is entirely his decision, and he is. In my view he is very committed to the company in the long term and still sees a tremendous amount of growth opportunities, and certainly does not want to sell this company cheaply.

But perhaps then if one thinks about this valuation overall, our valuation is based entirely on earnings-based multiples and cash-flow-based valuation. Then again, we do not use this net asset value based valuation. We have not applied it in Cityvarasto's case, since they currently have a NAV, meaning net asset value, that would be. It is over 23 EUR, which then again is already quite a high level, I would say. But that is also a very possible level if this good trend continues. But then if we see that it could be such a potential acquisition price that some player could be willing to pay. Willing to pay for the company, but then again the main owner might not be willing to sell even at that price right now. Right now.

Indeed. So we currently have a company whose business is good, it is growing, and the valuation is moderate. Is Cityvarasto the ultimate combo under the Helsinki Stock Exchange? Rapid-fire question. Quick answer.

Well, this is a very capital-intensive business. You do have to remember that this requires investments. Always growth, so there are risks involved in that too. That when you invest heavily, then if the returns do not materialize or you have to wait for them, this is still not something where you just put a little in and then get a return out all the time. This is very capital-intensive. But I certainly see Cityvarasto as a clear long-term value creator and I see that now is a very good entry point.

Great, this is a good place to wrap up. Thank you, Frans, for these comments. Thank you also for watching the video. If you didn't leave a like on the video, please remember to do so now. Read the research. Make good stock picks.