It would be fair to say that National Storage REIT (ASX: NSR) has been one of the most successful IPOs over the past two years. Since listing just over 18 months ago, the share price has climbed by more than 70% and significantly outperformed the broader market.
Investors can sometimes lump REITs into one homogeneous basket, but National Storage is different. For investors that might be unfamiliar with National Storage, here is a quick summary of its operations:
Background
National Storage is Australia's first listed self-storage REIT with a market capitalisation of $569 million. It provides services including self-storage, business storage, vehicle storage and hire, wine storage and packaging.
National Storage operates 82 centres across Australia and five soon to be acquired centres in New Zealand. Most of the centres are located in high population density areas that have a high demand for storage services. Around 70% of revenues are earned from residential customers with the other 30% from business customers.
Growth Strategy
The self-storage industry is highly fragmented with the top three brands accounting for only 25% of the market share. As the chart below shows, National Storage owns and operates the most number of centres with Kennards slightly behind. The remainder of operators own very few centres and this has presented an opportunity for National Storage to implement an aggressive acquisition strategy.
Source: Company Presentation (Pre New Zealand Acquisitions)
The company has been rapidly expanding the number of centres it operates primarily by consolidation of smaller operators. Since its IPO listing in December 2013, National Storage has increased the number of centres it owns by 37% to 87 centres. It also has identified over $120 million of possible investment opportunities with $60 million of these currently under review.
The company recently announced an expansion into the New Zealand market via the acquisition of five self-storage centres. The New Zealand market is similar to Australia's in that it is also highly fragmented with no dominant operator. The portfolio will cost around $20.5 million (AUD) and management has stated that the acquisition will be earnings accretive immediately with the potential for further upside.
Investors need to be aware that National Storage's acquisition strategy will be the major source of growth over the long term as the nature of the industry means organic growth will be limited. There will come a point where cost-cutting becomes insignificant and increasing prices might reduce occupancy rates as higher prices become less attractive to customers. Unless the physical amount of storage space is increased, additional revenue will be difficult to generate.
Debt and Capital Management
The majority of new acquisitions since the IPO have been funded by debt and gearing levels were becoming a concern. In March 2015, National Storage announced a $57.5 million dollar institutional only placement that it would use to reduce its existing debt and provide more flexibility to fund new acquisitions.
The company has been able to reduce its gearing from 35% to 23% post the capital raising and although this has resulted in around 10% dilution to retail shareholders, the broader market has seen this as a positive move with the share price maintaining its upward trend.
Valuation and Outlook
Management has provided underlying earnings guidance of 8.2 cents per security for FY15. At the current share price, National Storage is trading on a price-to-earnings ratio of around 20.7. Investors can also expect to receive an unfranked dividend of around 4.5%.
Interestingly for investors, the current net asset value (NAV) per security is around $1.10. With the share price currently around $1.70, the market is clearly pricing in a premium for strong growth and confidence in the brand.
Foolish takeaway
National Storage has proven it can grow successfully through careful acquisitions and the industry dynamics appear favourable for further consolidation.
Investors, however, also need to be aware of the risks of further capital raisings and increasing debt levels to fund further acquisitions.
With these points in mind, the shares appear fully valued at the moment and I would wait for the share price to fall below $1.30 before buying any shares in National Storage.
