Keep This REIT in Storage
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Established in 2000 and listed on the ASX in December 2013, NSR is the second-largest self-storage provider in the Australian market by number of owned centres: it owns and operates 43 self-storage assets (33 freehold and 10 leasehold) assets, worth $316.5 million in total.
An interesting trend in the real estate investment trust (REIT) market lately has been the emergence of specialist REITs that allow investors to target – in the REIT sector of their portfolios – investment “themes” outside the main property sectors.
Among these are retirement living REITs, childcare REITs, a REIT (Generation Healthcare) that invests solely in healthcare assets, and one REIT (APDC Group) that solely owns data centres assets.
National Storage REIT (NSR) is another example. A specialist self-storage REIT, NSR is a stapled security comprising a unit in the National Storage Property Trust (NSPT), which owns freehold self-storage properties, and a share in National Storage Group, which operates and manages self-storage centres.
Established in 2000 and listed on the Australian Securities Exchange (ASX) in December 2013, NSR is the second-largest self-storage provider in the Australian market by number of owned centres: it owns and operates 43 self-storage assets (33 freehold and 10 leasehold) assets, worth $316.5 million in total. NSR has also contracted to buy a further four freehold assets in the Australian Capital Territory for $46.5 million, bring the total portfolio of assets, upon settlement, to 47. Also in the pipeline are acquisition opportunities worth at least that again.
In addition, NSR manages an additional 24 freehold assets and two wine storage facilities on behalf of the Southern Cross joint venture (a joint venture with Chicago-based real estate investment manager Heitman LLC, with NSR owning a 10% share.) That makes it the third-largest self-storage provider by number of centres under operation and management.
NSR’s product offerings include self-storage, business storage, vehicle storage, wine storage (under the WineArk brand, which holds two million bottles of wine), vehicle hire, packaging and insurance. The group has 25,000 self-storage customers, split 70% residential, 30% commercial.
Broker Wilson HTM says the centres are generally located on main roads with visibility to passing traffic and in proximity to established drivers of self-storage usage, including major commercial and retail areas and residential housing.
The majority of the self-storage centres are modern facilities with convenient loading areas, security features, an on-site manager and provide additional value-added services (for example, sale of packaging materials, CCTV, door alarms, PIN-coded access, locks and insurance, etc.) NSR has a strict set of criteria for its centres, based on:
• Location: high visibility to passing traffic
• Proximity to the drivers of self-storage usage (commercial, retail and/or residential)
• Modern design – access and security
• Return – expected yield of 8%–10% (after integration into the National Storage
Wilson HTM says the portfolio normally operates at an occupancy percentage rate in the mid-80% range, but the addition of space – eight centres added between December 2013 and July 2014, bringing 6,400 storage units to the portfolio – has taken the occupancy rate down to about 71% (as of July 2014).
For the year ended 30 June 2013, revenue was slightly weaker (down 0.3%) at $45.67 million, while net profit was $15.56 million. The underlying profit was $8.8 million, or 3.6 cents a security: the group’s FY15 underlying profit guidance is for $20.7 million, or 8.5 cents a security.
NSR says the self-storage industry is highly fragmented, with the top three brands only having a combined market share of 25%. To become the dominant player, NSR’s strategy is to leverage its fully integrated operating platform to develop multiple revenue sources, mainly:
• Storage income (driven by increasing rate per square metre and occupancy);
• Ancillary income (the sale of merchandise and insurance plus value-added services);
• Third-party centre management fees – NSR’s new platform was released in August 2014;
• Project/development management fees (from Southern Cross and third-party vendors/developers);
• Portfolio recycling/redevelopment opportunities;
• Acquisition fees; and
• Telecommunications towers and outdoor advertising income.
Wilson HTM says the value in in NSR comes through its ability to grow distributions through acquisitions, improve occupancy in its existing centres – with an occupancy target of 83% seen as achievable – and further capital gains on the existing portfolio from cap rate compression (the cap rate is currently at 9.6%). The broker views NSR as more than a passive rent-collecting REIT, saying it is a “business secured by real assets.”
At a unit price of $1.315 and a forecast FY15 distribution per unit of 8.3 cents, NSR trades on an unfranked yield of 6.3%, rising to 7.8% in FY16. But Wilson HTM sees NSR as a growth prospect as well: it has a price target on the stock of $1.55 (even higher, at $1.62, on a discounted cash flow basis.) Given the company’s strong national brand and prospects of building market share in a fragmented but growing industry, and the unique investment exposure that industry provides, those numbers make a good case for buying NSR, and putting it in storage.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au