Should you buy National Storage REIT for big dividends?

Long-term trends look to benefit this slightly different real estate investment trust.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published February 4, 2015 9:58 am AEDT

As a general rule I try to steer clear of real estate investment trusts as they generally lack competitive advantages and I don't have great faith in the non-residential property market over the medium term, but National Storage REIT (ASX: NSR) could be different.

National Storage, as many will know, is the owner and/or operator of over 60 self-storage facilities around Australia. National Storage is the third largest player in the highly fragmented market where the top three players command only 25% of the market.

Growth by acquisition

National Storage is taking a growth by acquisition strategy like many of the fastest growing companies on the ASX, including G8 Education Ltd (ASX: GEM), Capitol Health Ltd (ASX: CAJ), and Domino's Pizza Enterprises Ltd. (ASX: DMP). The local market has around 1,000 storage facilities and National Storage has nearly a 7% share, lower than the 10% controlled by Storage King and 8% by Kennards.

Long-term tailwinds

Over the longer term, National Storage will benefit from the trend of Australians opting for more city apartment living, which should see demand for self-storage spaces increase.

Rental rates at National Storage facilities have improved by 4% annually over the last 10 years and experts are forecasting that the rate will continue at or above 4% over the next 10. In addition, National Storage facilities are currently only around 70% full, meaning that there is substantial upside to come following capacity improvements over the last two years.

Big yield

Like many other REITs, National Storage offers a solid-if-not-spectacular forward-yield of 5.6% unfranked in the 2015 financial year. This is projected to rise to over 6% in 2016 and up to 8% in 2016 (assuming a constant share price and depending on the success of acquisitions), which is more than can be said of many of the top REITs.

The main risks to these forecasts are an unexpected decline in demand, aggressive pricing by National Storage, a similar strategy from a rival, or the entry of another player with significant cash reserves.

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