National Storage Affiliates: Store Your Capital With This Fast-Growing REIT (NYSE:NSA)

The self-storage REIT sector has been fairly resilient throughout this pandemic, with stable occupancy rates. While the larger names, such as Public Storage (PSA) and Extra Space Storage (EXR) get most of the attention, I’m focused on the smaller name, National Storage Affiliates (NSA), which follows a somewhat differentiated strategy from that of its peers. In this article, I evaluate what makes NSA a continued sound investment for long-term investors, so let’s get started.

(Source: Company website)

A Look Into NSA

National Storage Affiliates is a fast-growing Self-Storage REIT that is focused on growing through the integration of strong regional operators. It is the sixth largest self-storage operator in the U.S. Its portfolio consists of 788 properties covering 49.5M rentable square feet in 35 states plus Puerto Rico. Of the 788 properties, 611 are wholly-owned, and 177 are 25% owned through a joint venture. Since Q2’15, the property count has more than tripled in size, from around 250 properties at that time.

What differentiates NSA from its peers is that it provides opportunities for private owners to retain their roles as property managers. This, in turn, allows NSA to maintain regional-focused branding on many of its properties while also being able to leverage local market expertise. The company’s strategy is to own properties in the top 100 MSAs, which have attractive growth dynamics and population densification.

NSA continues to demonstrate strength during this pandemic with 10% YoY FFO/share growth, to $0.44, in the latest quarter. Occupancy also remains strong, at 91.9%, which equates to a 260 basis points increase from September 30, 2019. What I find impressive is that occupancy continued to increase post-Q3, driven by move-in volume outpacing move-outs. As a result, occupancy at the end of October rose even further, to 92.4%, equating to a 420 bps increase compared to October of last year. This represents an all-time high occupancy for NSA’s same-store portfolio.

For the full-year 2020, management has guided for core FFO/share of $1.67 at the midpoint, which would represent 8.4% YoY growth compared to 2019. This represents a continuation of NSA’s strong track record of growth. As seen below, for the period Q2’15- Q3’20, NSA’s annual same-store NOI growth of 6.8% has outpaced its peers. This, combined with external growth, has resulted in 13.4% annual core FFO/share growth over the same period, and this also outpaces that of its peers.

(Source: November Investor Presentation)

NSA attributes this outperformance to its PRO structure, which covers 60% of its wholly-owned portfolio, gives it key advantages, as PROs are the first to absorb any downside. As seen below, PROs absorb 50% of NOI declines until the 6% preferred allocation to SP (subordinated performance) equity is reached, then 100% of the NOI declines until the 6% preferred allocation to SP equity is completely eroded. For reference, SP refers to subordinated performance units, which are linked to property-specific portfolios.

(Source: November Investor Presentation)

I see the PRO structure as being very beneficial for NSA’s shareholders, as it offers both downside protection and helps to align the interest of PROs. In addition, this structure acts as a buffer to protect the dividend from portfolio NOI declines, and has the same effect as reduced financial leverage.

Looking forward, I see no signs of NSA slowing down, as it currently has a pipeline of about $300M of properties under contract or letter of intent. Management expects to close nearly half of these by the end of the year. I see a long growth runway for NSA, as it continues to consolidate this fragmented sector of mostly mom-and-pop style businesses. The self-storage industries is comprised of 48K properties with over 30K operators, generating over $34B in annual revenue. Publicly-traded operators currently own just 28% of the market, with the remaining 72% being owned by mostly small private operators.

One of the risks to investing in the self-storage industry is oversupply, as this property type is relatively easy to build. Therefore, it’s hard for any one operator to establish a moat in order to fend off competition. While this remains a long-term risk, I see this risk as being mitigated, as management has signaled recent weakness on the supply front, as noted during the recent conference call:

On the supply front, we’ve seen completions trending down on a year-over-year basis, while an increase in abandoned project is reducing the forward pipeline. We already forecast that total deliveries will steadily decline through 2024. However, we think we’ll continue to face headwinds from new supplies in Portland, Phoenix, certain submarkets in Dallas and West Florida. Fortunately, though, the current boost in demand is alleviating some of that pressure, especially in Portland.”

Meanwhile, I’m encouraged to see that NSA has improved its debt profile on a QoQ sequential basis. Since Q2, NSA’s net debt-to-adjusted EBITDA has improved from 6.3x to 6.0x. Its interest coverage has also improved sequentially, from 4.4x to 4.7x. The effective interest rate is 3.5%, and NSA has no debt maturities until 2023.

(Source: November Investor Presentation)

Plus, NSA has a BBB credit rating, which helps it to obtain financing at attractive rates. This is supported by recent senior unsecured notes that were issued in October, at what I see as attractive interest rates between 2.99% and 3.09%, which sits below NSA’s average effective interest rate.

Lastly, dividend growth is one of the best ways for management to express confidence in the business. While the recent 2.9% dividend increase is not too impressive. This is far better than the dividend cuts and freezes that companies in other REIT sectors have done. The payout ratio is sound, at 80% (based on Q3 FFO/share of $0.44). NSA currently yields 4.0%, which I find to be attractive in this low-rate environment.

Investor Takeaway

National Storage Affiliates is a well-run enterprise, whose business continues to perform well in the current economic environment. Occupancy is currently at a record high, and the company saw strong FFO/share growth in the latest quarter. NSA has a strong track record of outperforming its peers, and I credit this to its differentiated strategy of utilizing the PRO structure. This strategy also has the benefit of de-risking NSA’s business, as it ensures that its partners have sufficient skin in the game.

Looking forward, I see no signs of NSA slowing down, as it continues to consolidate the fragmented self-storage sector. I’m also encouraged by the sequential improvement in NSA’s debt profile.

At the current price of $34.73, with a forward P/FFO of 20.9, I’ll be the first to admit that the shares aren’t cheap. However, I find it to be reasonable, given NSA’s strong track record, and its growth opportunities ahead. This is a case in which I’m reminded of the following Warren Buffett quote: “it’s far better to buy a wonderful company at a fair price than to buy a fair company at a wonderful price.” Buy for income and growth.

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Disclosure: I am/we are long NSA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

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