##{"id":65104,"date":"2015-05-06T14:07:20","date_gmt":"2015-05-06T04:07:20","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2015\/05\/06\/national-storage-reit-stands-out\/"},"modified":"2015-05-06T14:07:20","modified_gmt":"2015-05-06T04:07:20","slug":"national-storage-reit-stands-out","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2015\/05\/06\/national-storage-reit-stands-out\/","title":{"rendered":"National Storage REIT Stands Out"},"content":{"rendered":"

– Fragmented self-storage market
\n– Highly accretive acquisition potential
\n– Augmented by organic growth
\n– Attractive yield<\/strong><\/p>\n

\nBy Greg Peel<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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<\/em> organic growth potential, and to date has an impressive track record.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

Morgan Stanley maintains an Overweight rating on the stock.<\/p>\n

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.<\/p>\n

Morgans rate the stock an Add.<\/p>\n

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.<\/p>\n

The FNArena database consensus target, of the above three covering brokers, is $1.70.<\/p>\n

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.
\n <\/p>\n

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"