National Storage REIT (ASX: NSR) reported a decent first half of 2015 performance, with the total consolidated revenues increasing to $28.8 million in 1H15, from $21.5 million in 1H14, on the back of its aggressive acquisitions. With regards to the segment’s performance, the revenue from storage rent rose by $24.3 million during the period from $18.4 in first half of 2014. NSR improved operating expenses to $16.7 million from over $19 million in the corresponding period of last year, as it benefitted from cost cutting initiatives, especially from employees expenses. The profit after tax surged to $15.1 million from $1.18million of prior corresponding period, while the underlying earnings reached $10.6 million during the period.

National Storage has 82 centers across Australia, with 43 centers owned by the firm, 13 centers under long term leasehold agreements, 26 centers for Southern Cross (Joint venture with Heitman) and 10% interest in Southern Cross. NSR added over 20 new centers till the first half of 2015, from 62 centers during its IPO. Moreover, the company spent over $183 million for NSR acquisitions at 17 centers since its IPO. The number of NSR centers and NLA saw an increase of 45% and 48% respectively since the group’s  IPO.
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Acquisitions track record and pipeline (Source: Company Reports)

The company has made more than $80 million transactions during the first half of 2015, while over $69 million of acquisitions were already transacted for the second half 2015 ( as of February). Meanwhile, National Storage achieved an occupancy of 70% for original IPO portfolio, as of December 2014. The group had also successfully increased the rate or sqm of IPO portfolio by 11% to $276 per sqm, against $249 per sqm. NSR is also making efforts to deliver better cost efficiencies and scalability


National Storage asset management (Source: Company Reports)

National Storage completed the institutional placement to raise a capital of $57.5 million at an issue price of $1.48 per stapled security. The company will be using these proceeds to cover its present debt, making its balance sheet more flexible to fund its upcoming acquisitions. Moreover, the gearing ratio also improved to 23% from 35%, after the capital raising. However, investors need to note that the gearing ratio was improved at the cost of dilution to retail shareholders.

The group has also entered the New Zealand market by acquiring a storage portfolio at Christchurch for over NZD$23 million. NSR estimates this acquisition to be accretive in one year. The New Zealand market is a highly fragmented market having no major players. Even the Australia’s self-storage industry in which the group operates is also a highly fragmented industry. National Storage, Kennards and Fort Knox QLD are the top three players who control over 25% of the market share.

Outlook

The shares of National Storage REIT (ASX: NSR) has delivered an outstanding growth of 73.5% since its IPO (till July 22^nd), as compared to the broader index S&P/ASX 200 returns of just 6.6% during the same period. National Storage also confirmed its underlying earnings guidance to be $24.2 million for the total fiscal year of 2015 (results due on August). The company has made over $145 million worth of new acquisitions. Moreover, the earnings accretion from the acquisition activity in FY14 might be reflected during FY15 earnings after integrations.
On the other hand, investors need to note that National Storage derives major growth through acquisitions while the organic growth is limited. If the acquisitions are not accretive as expected, the group might face challenges in delivering growth. Despite the group’s cost cutting initiatives, an increase of prices can also hamper the occupancy rates, further adding pressure to the company. Therefore, we recommend investors to be cautious at the moment, before taking any position in the company. Posting a year to date returns of over 17.2%, the stock is just 2.9% below its all-time high of $1.75 (as of July 22^nd closing price of $1.7). Moreover we believe that the valuation of the stock is relatively expensive, with the P/E at 20.8x, higher as compared to its industry peers.

Based on the foregoing, we give an “Expensive” rating to the stock, at the current levels of  $1.645, and would review the stock later. 

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