National Storage Primed For Acquisitions

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

-Growth from acquisitions most likely
-Highly scalable platform
-Div yield exceeds A-REIT average
 

By Eva Brocklehurst

National Storage REIT ((NSR)) is dressed up with cash and looking for acquisitions. The company intends to substantially reduce its debt levels, following a $57.5m capital raising via an institutional placement.

National Storage is one of the top three owner-operators of self-storage capacity in Australia with plans to move into new markets such as New Zealand. Brokers envisage attractive growth opportunities will emanate from this fragmented market. National Storage has a diversified portfolio with a highly scalable operating platform. It owns 43 centres, has around 13 under long-term lease arrangements and another 26 centres are managed for Southern Cross Storage. The company's income from non-storage activities includes rental from telecommunication towers as well as fee income from development.

The company has identified around $120m in acquisition opportunities and has an 18-month track record of execution, Morgan Stanley observes. The broker believes the stock is well positioned to show double digit earnings growth, despite the short term dilution in earnings per share from the capital raising. Gearing is reduced to 23% and, based on the company's 35% target, this suggest close to $90m in balance sheet capacity in the broker's estimates. A willingness to take gearing up to 40% for a short time could increase this capacity to over $130m.

The new shares will be dilutive to the tune of 8.0% to FY16 forecasts initially but, by using the balance sheet at an initial yield of 8.0%, Morgan Stanley calculates earnings per share accretion could end up being 10% or more. The broker assumes management will continue to replenish the balance sheet to fund growth but does not assume a major pick-up in operating conditions. Morgan Stanley retains an Overweight rating and $1.70 target. Combined with a 5.5-6.0% dividend yield, the target suggests 15% total return, which the broker notes is above the Australian Real Estate Investment Trust (A-REIT) average.

2014 revenues were softer than expected, largely because of rental income. Management attributed the weakness to a drop in demand at the time of the 2014 federal budget, which had a negative impact on sentiment. Morgan Stanley believes the market should really be looking at revenue per amount of available space, similar to the way hotel revenue is calculated. A drop in occupancy is no real issue if it is offset by higher rates, the broker maintains.

Morgan Stanley assumes management will seek to acquire some of the assets under long-term leases in the next few years. The Southern Cross Storage fund is likely to reach maturity around FY16/17 and National Storage has reciprocal pre-emptive rights over the assets plus a 10% stake in the fund itself. Hence, Morgan Stanley suspects it may look to acquire all or part of this portfolio. That said, the company has only highlighted its pre-emptive rights and not signalled a desire to acquire these assets.

National Storage sold an asset in its first half, in Brooklyn, Victoria, for $7.25m but retains operational management and will earn fees from the redevelopment of the site to incorporate self storage and mini-warehouse facilities. Morgans makes adjustments to its forecasts largely on the back of the capital raising, expecting occupancy will grow at 1.0% in FY16 and 1.5% in FY17. Occupancy was around 71% at the end of 2014. Rental rates are expected to grow at 4.0%, in line with historical trends. Morgans assumes no further acquisitions in the second half and $50m in acquisitions in FY16 and retains an Add rating and $1.69 target.
 

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