National Storage REIT Earnings: Strong 2023, Signs of Moderation in Demand for 2024

National Storage REIT NSR posted fiscal 2023 underlying earnings of AUD 11.5 cents per security, slightly ahead of our AUD 11.3 cps estimate. We forecast underlying earnings of AUD 11.4 cps in 2024, close to guidance of at least AUD 11.3 cps. The time value of money increases our fair value by 2% to AUD 2.25, with the REIT fairly valued after a 10% fall since June.

The key management assumptions for 2024 guidance include growth in revenue per available square metre, or REVPAM, of at least 4.2%; average floating rate debt costs of 4.4%; and AUD 150 million-AUD 200 million of acquisitions.

National Storage REIT spent AUD 234 million on acquisition in fiscal 2023, and a slowdown is reasonable given higher interest rates, and management’s comments that many of the easier deals have already been done. Though we do note that management often exceeds expectations on expansion from acquisition and developments.

The assumed cost of debt seems low given debt costs were 4.9% in fiscal 2023. We assume debt costs gradually rise toward our long-term estimated cost of debt of 6.5% as fixed-rate debt and hedges expire.

REVPAM growth of 4.2% may also be a stretch given it was flat in July 2023, and pressure on consumers is increasing. Management commented that REVPAM has been bouncing around, with a tougher March quarter, a rebound in June, then flat again in July, but pointed out that they have exceeded 4% for the past 20 years. Public Storage in the U.S. saw rates for new customers in the June quarter 2023 15% lower than a year earlier, and 27% lower than the average rate over the existing portfolio.

New Zealand is a more apt comparison given comparable storage industry maturity and demographics. It is slightly ahead in its interest rate cycle too, so could be a leading indicator for Australia. National Storage REIT’s New Zealand portfolio saw REVPAM fall 1.1% over the year, compared with Australia’s 4.2% growth. Occupancy also dipped in New Zealand to 83.9%, down from 86.5%.