Small Caps | Mar 10 2017
Despite National Storage REIT's market dominance, brokers are concerned about the lower-than-expected initial yields on recent acquisitions and limited underlying growth.
-Questions over the sustainability of the high pay-out ratio
-Clear advantages lie in the scale of the business
-Difficulties assessing financial performance of acquisitions
By Eva Brocklehurst
Self-storage provider National Storage REIT ((NSR)) has manoeuvred well over the past year, with brokers noting the company is now the dominant player in its segment. Still, there are concerns about lower-than-expected initial yields on recent acquisitions and limited underlying growth.
Overall occupancies improved to 79% as of December last year, from 75.4% at June, although average rent per square metre declined to $261 from $272 over the same period.
Morgans notes a focus on driving occupancy levels through the first half came at the expense of rate/square metre, but prices have increased since October following lower promotional activity and active revenue management.
Shaw and Partners uses revenue per available metre as its key operating metric and this has increased to $207 from $202. This can be affected by the timing of acquisitions, especially in situations where a business is being turned around and initial occupancy is low.
The broker assumes an FY17 estimate for earnings per share of 9.3c, the mid point of guidance, and adopts a 100% pay-out ratio. The company's distribution policy is 90-100% of underlying earnings. The broker forecasts a three-year compound growth in earnings per share of 8%, which assumes around $50m per annum of, yet to be announced, net acquisitions in forecasts, funded by debt.
The only question around the outlook for Shaw and Partners is the sustainability of the relatively high pay-out ratio, in light of funding that is required to grow via acquisitions. The broker believes the organic upside opportunity for the company is through improving occupancy followed by annual rental growth.
Shaw and Partners initiates coverage on National Storage, with a Hold rating and $1.48 target. The broker, not one of the eight monitored daily on the FNArena database, believes that while the growth story is attractive, the upside is largely priced into the stock.
Growth Guidance Driven By Acquisitions
The company is guiding to FY17 earnings of $45.5-46.5m, or underlying earnings per share of 9.2-9.4c. This represents 5.8-8.0% growth over FY16. This growth is driven by the impact of acquisitions made in FY16, as well as the $285m Southern Cross portfolio that was formerly managed and fully acquired in the current financial year. Now that National Storage owns Southern Cross, fees from management services as a percentage of total revenue are expected to decline meaningfully in FY17.
Shaw and Partners believes this makes it a niche investment opportunity for those looking at alternative real estate sector exposure. The main advantage in the stock is its scale as there is only an small chance a new rival could replicate the product offering on a national scale.
Morgans expects acquisitions will continue to roll out, and also estimates around $50m of capacity on the balance sheet for further acquisitions. The broker believes upside risks relate to higher growth in yields and the underlying portfolio, as well as scale benefits. Downside risks involved increased competition/supply, low yields and general moves in the property market.
The company is not getting the returns expected from acquisitions, Macquarie asserts, despite some improvement in underlying organic growth. The broker has an Underperform rating on the stock because of its relative inability to assess the operating and financial performance of acquisitions, as well as an elevated risk in execution. Moreover, there is a limited track record of underlying organic growth.
Morgan Stanley, on the other hand, has an Overweight rating but believes the share price is unlikely to re-rate materially until the company delivers on its FY17 guidance. Given the many moving parts and lack of detail on the drivers of guidance, the broker suspects the market is unlikely to be comfortable with the stock.
Morgan Stanley acknowledges the market understands the acquisitive nature of the business, but the speed of the acquisitions means it needs new capital on a fairly constant basis and this creates risks around dilution from either equity raising, asset sales or a reduction in the dividend.
To the broker, each of these measures make sense if it drives better cash flow and returns, but the uncertainty creates unwanted share price volatility and National Storage would benefit from a clear strategy on how its growth is funded.
National Storage is one of Australia's largest providers of storage, owning or managing 110 centres across Australasia. Following the recent acquisition of the Southern Cross portfolio, the company only has four residual centres which it manages on behalf of third parties. It is the only pure Australian-listed self-storage real estate investment trust (A-REIT).
The portfolio is geographically diversify across Australia and New Zealand (8%). The three largest weightings within Australia are in Queensland (24%), Victoria (23%) and Western Australia (17%).
FNArena's database shows one Buy rating (Morgan Stanley), two Hold and one Sell (Macquarie). The consensus target is $1.48, signalling 1.9% upside to the last share price. The dividend yield on FY17 and FY18 forecasts is 6.4% and 6.6% respectively.
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