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.
