The self storage REIT, like many other stock sectors, has had a reckoning over the past year, with leading names down in the double digits. National Storage Affiliates (NYSE:NSA) is among them, and has seen the biggest drop, with a 46% decline in price over the past year. While the market is fearful, I see a buying opportunity in a beaten down name, and in this article, I show why that’s the case for NSA, so let’s get started.
National Storage Affiliates is a fast-growing Self-Storage REIT that has a core strategy around the integration of strong regional operators in the top 100 metropolitan statistical areas of the US At present, NSA holds an ownership interest in 1,100 properties spread across 42 states and Puerto Rico. It is the sixth largest self-storage operator in the US, covering 72 million rentable square feet.
NSA differentiates from its peers in that it co-invests with PROs (participating regional operators). This operating structure covers over half of NSA’s properties and is beneficial in that it enables NSA to leverage local market expertise and branding.
This structure also helps to shield NSA from losses, as PROs absorb half of NOI declines until the 6% preferred allocation to subordinated performance equity is reached, then 100% of the NOI declines until the 6% preferred allocation to SP equity is completed eroded. This structure helps to ensure that PROs hold up their end of their bargain in keeping properties in good operating condition, while also requiring less upfront capital from NSA.
NSA has successfully executed on this strategy over the years. This is reflected by its industry leading metrics. As shown below, NSA has led peers in same store revenue, NOI, and Core FFO per share growth over the trailing five years.
Meanwhile, NSA is demonstrating strong results, with same store revenues growing by 11% YoY during the third quarter. NSA is also demonstrating positive operating leverage at the property level, as same store property operating expenses rose at a lower rate of 7% over the same time frame. This led to faster net operating income (revenue less expenses) growth of 12%.
However, NSA’s same store occupancy did decline by 240 basis points compared to last year, to 94.1%. I wouldn’t be too concerned, however, as occupancy is returning to normalized levels after abnormally strong demand during 2021. Plus, NSA’s average length of tenant stay is improving, with tenants that have stayed with them for over 2 years improving from 45% to 50%.
Looking forward, I see plenty of growth runway for NSA, if it participates in growing regions. This was highlighted by management during the recent conference call:
Looking at geographic performance. The Sunbelt continues to outperform with states such as North Carolina, Georgia, Texas and Florida, all generating above portfolio average revenue growth. Several of our smaller markets such as Oklahoma City, New Orleans, Savannah and Wilmington, are outperforming the portfolio average as well. This reinforces our strategic market focus and continued emphasis on geographic diversity.
Meanwhile, NSA is well positioned from a balance sheet standpoint to take advantage of growth opportunities. This is reflected by safe net debt to EBITDA ratio of 6.0x and a strong 5.0x interest coverage ratio. It also has plenty of funding capacity, with $650 million in available capital on its unsecured revolving line of credit.
Notably, the material share price weakness has pushed NSA’s dividend yield up to 6%. The dividend is well covered by a 76% payout ratio, based on Q3 Core FFO per share of $0.72. NSA has also grown the dividend at an impressive pace with a 5-year CAGR of 15.6% and 7 years of consecutive growth.
Lastly, I find strong value in NSA at the current price of $36.51 with a forward P/FFO of 13.0, sitting well below its normal P/FFO of 20.4. Apparently, management also thinks the shares are undervalued, as it executed on $50 million worth of share repurchases during the third quarter.
Jeffries recently made NSA one of their two top picks in the self-storage space, due to its attractive valuation and lower exposure to supply growth this year and next. All in all, analysts have a consensus Buy rating on NSA with an average price target of $45, implying double-digit total return potential from now.
NSA is a well-run and differentiated self-storage REIT, with strong industry leading metrics and a balance sheet that puts it in a position to take advantage of growth opportunities. Market overreaction has pushed the shares to attractive levels, making NSA an attractive value investment at present. This, combined with NSA’s strong starting yield and dividend growth track record sets up investors for potentially strong total returns.