EUR 850.00 For Business Accounts Only

Morningstar | NSR Updated Star Rating from 24 Aug 2018

New strategic initiatives and a major capital raising dominated no-moat National Storage’s fiscal 2018 results. Our fair value estimate increases to AUD 1.63 per share from AUD 1.50, with the increase driven by expected acquisitions and development opportunities in fiscal 2019 and the AUD 155.3 million of acquisitions made in 2018. The company’s underlying net profit after tax, or NPAT, in fiscal 2018 of AUD 51.4 million was 12.5% higher than fiscal 2017, but slightly missed its own guidance and came in lower than our forecast of AUD 51.9 million. The final distribution of AUD 4.9 cents per share leads to a full-year distribution of AUD 9.6 cents, in line with our forecast. We expect underlying NPAT in fiscal 2019 of AUD 62.8 million, at the lower end of the company’s guidance, and a distribution of AUD 9.6 cents.

On balance, we do not recommend that securityholders participate in its equity raising, as it is priced moderately above our fair value estimate and about 10% above its net tangible asset value of AUD 1.51 as at June 30, 2018. The AUD 175 million equity raising comprises a AUD 50 million institutional placement and a 5-for-37 accelerated nonrenounceable entitlement offer to raise a further AUD 125 million, priced at AUD 1.66 per security. While a strong pipeline of acquisitions and initiatives underpins solid underlying NPAT growth in fiscal 2019, this only translates to flat EPS growth, owing to the additional 105.7 million new securities on issue following the equity raising.

We expect National Storage will not need to access equity markets over the near term following the capital raising. The raising is primarily designed to strengthen the firm’s balance sheet, with 65% of the money raised (AUD 114.8 million) earmarked to repay debt. After capital raising costs, the remainder of the raising (AUD 56.7 million) will be used to fund acquisitions that have been contracted or settled since July 1.

Management forecasts that the raising and new initiatives such as its capital partnership in New Zealand will enable it to fund a strong pipeline of acquisition and development opportunities over the next two to three years, with the REIT having over AUD 100 million in acquisitions currently under consideration. Its target gearing range remains 25%-40%, and following the raising, the REIT’s gearing should fall to 29.5% from 37.9% as at June 30, 2018. Its gearing level should fall further from the release of capital from its New Zealand portfolio pursuant to its new capital partnership initiative, and there is the potential for a further release of capital from its new agreement with Stockland.

Strong investor demand in New Zealand, underpinned by occupancy rates of over 90%, provides National Storage with the opportunity to generate about AUD 100 million in capital from its New Zealand portfolio valued at AUD 120 million. These assets are proposed to be housed into a new fund, with National Storage retaining about AUD 20 million equity in the fund. The capital released from this new structure will be used to expand its Australian portfolio, by continuing its rollup strategy in a fragmented Australian self-storage market.

The other new initiative is an agreement with large diversified property group Stockland, aimed at unlocking value in both its and Stockland’s portfolio of properties. The agreement allows National Storage and Stockland to review each other’s portfolio of properties to identify the best use for the assets. There is the potential to optimise returns by identifying better uses for properties due to things like planning changes and evolving local market conditions. However, this is no more than an agreement to review each other’s portfolio, with individual asset being considered separately and with National Storage continuing to focus in its core storage business. Nonetheless, this provides the potential for a further release of capital if some of its assets have a better use, and there is also the potential to add National Storage-operated facilities to Stockland’s assets.

National Storage also announced that it is proposing invest about AUD 15 million-AUD 20 million in fiscal 2019 to expand five of its storage centres with high occupancy. These investments are expected to add about 3,000 square metres of net lettable area and generate ongoing stable income of about AUD 750,000-AUD 1 million per centre, resulting in strong expected yield of greater than 20% on the investment. Additionally, the company has identified up to 25 centres with the potential for further development, given expected trading conditions. The REIT also continues to work with investment partners like Australian Prime Storage Fund, Parsons Group, and Leyshon Group on 10 other self-storage development projects.