National Storage Continues To Size Up Acquisitions

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

-Attractive yield, earnings vs sector
-WA under pressure, east coast robust
-Catalyst in Southern Cross JV expiry
 

By Eva Brocklehurst

National Storage ((NSR)) is committed to growing its storage market share, given the fragmented nature of the industry, and flags several opportunities in the pipeline, with $100m in assets under review. The company reported solid earnings growth in the first half, reaffirming FY16 earnings guidance of $29.0-29.5m in FY16. This implies 6.0-7.5% growth over FY15.

Morgan Stanley is confident the company's planned expansion is on track and that this should drive significant earnings and valuation upside, retaining an Overweight rating. Meanwhile, Macquarie is attracted to the yield spread of the storage asset class, and the company's earnings growth profile versus the broader Australian real estate investment trust (A-REIT) sector.

The stock appears better value at current levels but Macquarie is conscious that the asset class has a much shorter weighted average lease expiry and storage a more discretionary asset. There is also some risk around execution of the company's current strategy so the broker prefers a Neutral rating.

The Western Australian business is easing, with a 10% decline in occupancy witnessed in some areas, and this market also suffers from elevated competing supply. As the resources boom diminishes Macquarie expects WA will remain under pressure. Countering this, the company intends to seek opportunities in the other regions of Australasia. Sydney, Melbourne and Hobart markets are considered to be performing well.

The company has signalled it may sell some assets to partly fund its acquisition target of $100-120m over the next few years and, given the initial dilution in selling an asset, Macquarie expects some equity will be used. The broker estimates there is $45m in capacity, if gearing moves to the top end of the targeted 25-35% range. Deployment of this capacity is expected to be 5.0% accretive to earnings on a full year basis.

Capitalisation rates for self-storage assets are high in Australia and Ord Minnett believes the asset class is undervalued by around 25%. National Storage is expected to continue exploiting the value gap through acquisition. Despite this view, the broker retains a Hold recommendation, as yield compression is considered to be already priced in to the stock amid a balanced set of risks from acquisitions and occupancy.

Morgans believes the potential acquisition of the Southern Cross portfolio of 29 centres could be a catalyst for the stock, with National Storage holding pre-emptive rights and the investment term expiring in August 2016. Having completed $57m in acquisitions in the first half, Morgans assumes National Storage completes a further $13m in acquisitions in the second half to take FY16's total to $70m, with a further $50m in FY17.

Currently National Storage has 94 centres under ownership, operation or management across Australasia. Total portfolio occupancy grew to 73% from 72% during the half. The broker believes the stock offers exposure to a leading brand in self storage with a scalable operating platform and further growth potential. All up, this elevates the stock to an Add rating for Morgans.

Moelis, not one of the eight stockbrokers monitored daily on the FNArena database, goes the other way, downgrading to Hold from Buy because of the strong share price performance. The broker's target is unchanged at $1.57.

Catalysts for Moelis include improved occupancy in the existing portfolio, acquisitions and development opportunities both in Australia and New Zealand. The expiry of the Southern Cross JV is also flagged as a potential opportunity. The decision rests with partner Heitman as to whether or not it wishes to extend for another term.

The company asserts its acquisition opportunities remain intact despite the storage centre vendors over the past few months seeking prices above what it considers attractive. National Storage has refrained from buying in these circumstances and Moelis believes this contributes to the company not achieving on its acquisition target stated back in April 2015.

Delays in the deployment of capital are expected to mean minimal earnings contributions from new acquisitions in the second half and this leads to a reduction in the broker's estimates.

Moreover, competition in the marketplace is intense, with Moelis observing a number of the company's peers engaging in discounting promotions. This typically involves one to three months free. National Storage does not usually engage in this practice, preferring to spread any incentive over a longer period to minimise the cash impact.

The broker also observes acquisitions of meaningful size are becoming harder to find. Given the challenges, Moelis continues to expect the company will invest in development funds where there is an attractive proposition. These are typically earnings neutral in the initial years but over the longer term provide potential for higher internal rates of return.

The FNArena database shows two Buy ratings and two Hold. The dividend yield on FY16 and FY17 forecasts is 5.8% and 6.5% respectively. The consensus target is $1.65, suggesting 9.1% upside to the last share price. Targets range from $1.45 (Ords) to $1.80 (Morgan Stanley).
 

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