Storing success
National Storage REIT (NSR) delivered robust FY23 results that came in a smidgen ahead of expectations. NSR is the largest self-storage business in Australasia, although now has some company on the bourse, with Abacus Storage King recently becoming a separately traded entity. Still, beyond the top few players, the market remains fragmented, and a strong growth opportunity is ahead for a few reasons.
Some headwinds remain but we see them fading in intensity (i.e., we are likely either at, or near the peak interest rate this cycle). This, along with a blend of a moderate valuation, an attractive industry niche and company-specific factors underpin our positive stance on National Storage REIT. We rate NSR as a buy.
Demand is more resilient than in many other areas in the property market, with people and businesses needing storage space for various reasons including downsizing, temporary relocation, or keeping stock among others. We note elevated affordability challenges for housing can be a tailwind for NSR and its peers.
Source: National Storage REIT (ASX:NSR)
This is not to say there is no hit to demand from the macro headwinds, but group occupancy was only 3.5% lower year-on-year at 85.0% for FY23. NSR has a diversified portfolio across Australia and New Zealand and has been the subject of significant incoming M&A previously, albeit ultimately falling through. Currently, we are content to see the business continuing to grow organically and through small-scale acquisitions of its own. NSR has a good track record here, growing share and revenue as the portfolio of assets has grown.
Given the resilient demand profile, NSR has had no problem tapping the markets for growth funding, successfully completing a $300 million equity placement with institutional investors in March, followed by another $40 million from the share purchase plan (SPP) in April. Subsequently, NSR executed $600 million in new debt funding. That was comprised of a syndicated term loan of $400 million, split evenly across five and seven-year tranches, at competitive pricing. Another $200 million in credit approvals came from new and existing banks with durations of up to 5 years.
The strong balance sheet provides a platform for this leg of expansion. At 30 June 2023, gearing was a conservative 20% (June 2022: 23%) with a target gearing range of 25-40%. Accordingly, NSR had around $1 billion in investment capacity available while remaining within the gearing target range. An uplift in net tangible assets provides support, with this rising 6% year-on-year to $2.48 per stapled security at the close of FY23. This was as the primary cap rate proved resilient, softening just 5 bps to 5.91%.
Source: National Storage REIT (ASX:NSR)
As hedges expire (~$346 million, or 37% of debt) and earlier fixed-rate debt matures, we are expecting a modest tick-up in the average cost of debt, albeit not as dramatic as the difference between FY22 and FY23. Our view is that we are nearing a peak in the RBA rate hiking cycle, so this headwind will fade as we move through FY24.
The 14 “let-up” centres, in operation for the entire year, saw 13.8% growth in occupancy throughout FY23 (to 58.7%). As NSR modernizes its centres, the average size currently stands at over 5,500m2 of net lettable area (NLA). The push for technological integration, automation, and overall operational efficiency bore fruit, with the operating margin climbing from 64% to 66% in FY23. Scale helps the big players on this front.
In terms of acquisitions, developments, and expansions, NSR wrapped up 33 acquisitions in FY23, investing a total of $234 million. The active development pipeline of 45 projects is approximately 360,000m2 in NLA. We rate National Storage REIT (ASX:NSR) a buy.
On the technical picture, National Storage has been a consistent performer over the long term. While the correction in the past few years that has been in line with the broader REIT sector, National Storage has come back to test key support at the primary uptrend. Given the consistency of the past decade, there is a decent probability that NSR will reassert to the topside.
Snapshot
Storage revenue increased 20% to $302.5 million, bolstered by robust rate, REVPAM and portfolio NLA growth. Key here was that revenue per available metre (REVPAM) was up a decent 3.6% to $270/m2. While REVPAM growth has slowed, this was a robust result in the current environment. We note in New Zealand, which is further on in the interest rate cycle and has already been in technical recession, REVPAM dipped 1.1%.
Operating expenses rose 13% and operating profit was 22% higher at $211.3 million, as the operating margin expanded a couple of percentage points to 66%. Underlying earnings rose 12% to $141.8 million, with underlying EPS increasing 8.5% to 11.5 cents, slightly ahead of expectations. The final distribution is 5.5 cents, matching the interim figure, so the yield is around 4.7%. While handy, the main thrust for our recommendation on NSR is for its growth prospects.
 NSR has guided for underlying earnings of greater than $154 million in FY24, compared to the $141.8 million in FY23. Meanwhile, NSR’s total assets value rose roughly 14% to $4.48 billion in FY23, with NTA per security growing by 6% to $2.48. Thus, the stapled securities are trading at a small discount to NTA, for which we anticipate further growth.
In summary, we view National Storage REIT (ASX:NSR) as a well-run business operating in an attractive niche within the property sector. Headwinds are fading in intensity and the valuation moderate given the strong growth prospects over the medium term.
We rate National Storage REIT (ASX:NSR) as a buy. Â
