National Storage REIT Stands Out

This story features NATIONAL STORAGE REIT. For more info SHARE ANALYSIS: NSR

– Fragmented self-storage market
– Highly accretive acquisition potential
– Augmented by organic growth
– Attractive yield

By Greg Peel

National Storage REIT ((NSR)) operates or manages 82 self-storage centres across Australia, with customers split on a rough 70/30 basis between individual householders and businesses. Self-storage does not fit neatly in the general portfolio grouping of your common or garden real estate investment trusts, being retail, industrial or office.

Which sets National Storage aside from its typical REIT peer group. But that’s not all that is making this stock increasingly attractive to brokers.

Back in late March, National Storage placed $57.5m in new equity with institutions and used the proceeds to pay off existing debt. At that point the fund had reduced its gearing level to 23% while targeting a 25-35% gearing range and the option to take that to 40% were the right opportunity to come along. New debt costs the fund around 4% per annum, whereas the average initial yield on storage assets runs at around 8.5% per annum.

On that basis any additional storage centres the fund can acquire offer immediate, and material, earnings accretion. And that’s exactly NSR’s strategy – to use new debt to continue pursuing acquisitive growth. The recent placement means the fund can deploy around $90m of debt funding to take gearing to 35%, which on Macquarie’s calculations would offer around 17% earnings accretion. Currently the fund is reviewing property options to the value of $60m.

NSR has settled around $150m of acquisitions in FY15 to date and Morgans assumes a further $50m will be added in FY16. But acquisitions are not the fund’s only source of growth.

As is the case for other areas of the Australian economy, trading conditions have been subdued of late in the self-storage game. NSR’s occupancy is running at around 68% at present – a level that would bring your more common REIT to its knees. But for NSR, it means only upside potential. The fund is targeting 80% plus occupancy over time.

The pace of this improvement will depend on the pricing growth the fund can achieve, Macquarie suggests, which at a current $276/sqm is up 10.8% since IPO. The fund is not just an acquirer of assets but also a seller, thus brokers believe occupancy can indeed be lifted even as prices are increased as the portfolio is enhanced. The point here is that NSR offers both acquisitive growth and organic growth potential, and to date has an impressive track record.

Macquarie calculates that were the fund able to lift occupancy to 75% and increase prices by no more than the CPI, forecast FY16 earnings would rise by around 15%. Or the other way around, were prices to be lifted by 5% but occupancy to remain static, 5% earnings upside would be achieved.

Macquarie also notes a distinct acquisition opportunity may present itself in August 2016 when a management joint venture deal with real estate investment firm Heitman comes up for review. Currently NSR owns only 10% of the JV, known as Southern Cross, and both parties have reciprocal pre-emptive rights over the other 90% were the JV to be terminated.

Morgan Stanley assumes NSR will continue to replenish its balance sheet to fund what the broker forecasts will be a 10-11% compound annual growth rate over FY15-18. This forecast is static, not based on any expectation of improving trading conditions. While investors may view the expectation of further capital raisings as a negative, the fact the yield on new assets is at such a large premium to funding cost means any initial share price dilution is quickly swallowed up by earnings accretion.

Morgan Stanley maintains an Overweight rating on the stock.

Morgans (not to be confused with Morgan Stanley, or JP Morgan for that matter) suggests National Storage REIT offers the opportunity to invest in a leading brand in self-storage offering a portfolio diversified across the country. Given self-storage is a highly fragmented market, NSR’s highly scalable operating platform offers future growth potential via acquisitions, while the capacity to increase occupancy and pricing offers additional organic growth potential.

Morgans rate the stock an Add.

Macquarie now joins the party by initiating coverage on the stock. While acknowledging NSR’s attractive earnings profile in comparison to more familiar REITs, the broker has opened its account with a Neutral rating, given the stock is not trading far from an initial target price setting of $1.71.

The FNArena database consensus target, of the above three covering brokers, is $1.70.

Given NSR is a REIT, the critical factor for investors is dividend yield. Consensus forecasts suggest 4.9% in FY15 and 5.6% in FY16.
 

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