2023-04-15 04:17:59 ET
Summary
- NSA is a REIT that I covered late last year. My position is small, though I did add a small portion when the company troughed very early in January 2023.
- Since my last article, NSA has recovered, and the RoR is, at this time, positive. However, the REIT is still undervalued, and I believe you can make money here.
- While it isn't my highest-conviction "BUY" at this time, I believe the company is vastly undervalued to its typical premium and is unlikely to see any major pressure near term.
Author's Note: This article was originally published on iREIT on Alpha in early April of 2023.
Dear subscribers,
National Storage Affiliates Trust ( NSA ) is a REIT in the self-storage space. The sector means it competes with veritable giants such as Public Storage ( PSA ), which I also own shares in and which in itself is an excellent company.
In my last article, I made a case for why NSA, despite its size, is a very sound business with good enough fundamentals for us to consider. I'm going to add to this now, more than 3-4 months later.
Let's recap and look at what we have going for us here.
Re-reviewing NSA and the Self-storage upside
National Storage Affiliates are, as I said, a REIT in the self-storage space. This means that it owns facilities catering to the space across pretty much the entire USA under a mix of wholly-owned and JV properties - 1,100 of them to be exact, amounting to over 70M square feet of storage space. That's a lot of space.
NSA IR (NSA IR)
This is where the space is found, and some of the company's main clients. Its weighting towards the sunbelt is a positive, even if the west-coast exposure, given current macro trends in that specific area, is something to keep a close eye on.
NSA only has a 9-year history under its belt. This is both a positive and a negative. Usually, a company may not have had time to establish a massive premium during the time, or there's still a decent amount of beta/volatility to the name. Such is the case for NSA. During the last years since COVID and until now, the company troughed to $23/share back in '20, went up to nearly $70/share during the ZIRP/tech-craze, only to promptly crash back down to $36 a few months back, which is where I picked it up at an average P/FFO of 12.5x normalized, compared to a historical premium of 20x P/FFO.
Now, all of this movement happened without any real change in growth outside the norm. The company has averaged 10-12% FFO growth, and that did not change, drop or crash during these years. In fact, when it crashed, it grew 32% and grew another 24% in 2022FY.
This is a great example of how very disconnected or irrational the market can be - both on the upside and on the downside.
The company is a leading owner and operator of these sorts of facilities across the USA. The history is only around 9 years, but the company's track records since then are impressive enough. Nine years and the company's expertise means that they've also seen some ups and downs, and throughout them, have proven resilient to macro. This is also true for the self-storage space in general, which from a high level, has proven very resilient and been one of the best-performing REIT subsectors of them all over the longer term.
Dividends have increased 189% since its IPO, and NSA as a REIT has outperformed the broader space and index since its IPO back in April '15. It's also still growing faster for 2022 than its peers.
TSR isn't the biggest or highest in the space. That honor belongs to the aforementioned PSA, CubeSmart ( CUBE ), and others - but it's among the best performer in the top line, in NOI, and in core FFO growth on a 5-year basis, which is not to be underestimated.
Still, let me be clear here.
I don't believe historical growth will be anything close to indicative of growth over the coming couple of years. What was once 15-30% year-over-year is likely to be no more than a few percent per year. Still, this is not negative, nor is it even "bad." Remember, self-storage as an industry is an outperformer.
While economic compression and belt-tightening will affect everything, I believe that self-storage is unlikely to see a decline , or if so, a massive one in its FFO or top-line. Early investors in NSA have made 285% TSR.
The company's stated focus is sunbelt, secondary and suburban, and with the exception of California, the company is well-diversified and exposed exactly to growing markets across the nation.
What's more, NSA has a competitive edge over its peers in terms of the cost of a unit. A typical 10x10 unit annual rent is by far the lowest (if not by far) through NSA, compared to the market leaders PSA, EXR, CUBE, and LSI.
This provides a further argument for the upside for this company. Occupancy for the company's solutions also remains good, and while the company can't boast of 92-96% occupancy rates, as it once could during 2021-2022, the number still hasn't gone below 90%.
The company's M&A pipeline is solid, with 295+ properties valued at over $3B. It doesn't have S&P or Moody's rating - it's too small for that - but Kroll Bond Rating gives the company a BBB+, which is certainly better than not having a rating to refer to at all.
NSA is appealingly equity-heavy going into this rising interest rate environment. It's now the lowest leveraged at 6x net debt/adjusted EBITDA, but at only 39% principal debt, it's conservative, and that comes with a 4.3x interest coverage ratio. The company has access to nearly a billion in an unsecured revolver. Debt maturities are mostly under control. We don't see any major maturities until 2027 - until then, they're below $330M per year, and most of those are term loans.
I went through the bearish arguments in my last piece. The headwinds the company is facing, and the reason its share is currently, still compared to the last few years, in the dumpster seems to be that there is uncertainty about forward-facing growth.
One of the common bearish arguments in self-storage is that supply outpaces overall demand - but this is not something that's true for most of NSA's locations, and to claim oversupply for an entire industry is to oversimplify the situation greatly. Now, this is good news for us investors, because it means we can pick up NSA on the cheap.
Remember though, NSA was never worth 25-30x P/FFO, or more.
NSA Valuation (F.A.S.T graphs)
This valuation was an aberration, and there was only one choice that was the right one when it was overvalued as it was - to "SELL". It really didn't matter in the long term if you sold at $55, at $65, or at $70 - you would have walked away with excellent profit regardless, compared to what you would have gotten if you held onto it.
Me, I didn't own NSA at the time - I didn't start buying until it was "in the dumps", which means that I secured a 6%+ yield for my small position and a cost basis that's sent me into positive RoR, contrary to index direction for the past few months.
Let's look at what we can expect from NSA going forward.
National Storage Affiliates valuation
So, as I mentioned, the company traditionally trades at a premium to FFO, much like other businesses in this space. For NSA, that premium has traditionally been around 20.75x since its IPO date. That's no longer where we are, and this gives us a very decent cushion of safety. While the company may move up, I believe it is doubtful that we'll see a significant downturn in the near future unless something fundamentally changes.
From trading at a high of over 30x P/FFO, which I would view as an obvious case of exuberance, the company now trades at no more than less than half that.
A couple of issues to consider. The main issue here is that Public Storage, a peer with a lower yield but significantly higher safety, can be bought at an attractive valuation of 19x P/FFO. While this may not sound attractive, this is a REIT with an A rating and a yield of nearly 4% that is significantly covered. PSA also, obviously, has significant scale advantages. Even if the upside in PSA is "only" 11% annually to a 20-21x P/FFO, it's a safer upside without a doubt.
NSA, meanwhile, tries to attract us with a higher yield - not 6% any longer, but close to 5.2%, and almost twice the annualized RoR to a 2025E with a 20-21x P/FFO range.
So how realistic are these forecasts? Well, based on historical accuracy, which by the way now includes 2022, analysts do not miss when forecasting NSA.
NSA Forecast accuracy (F.A.S.T graphs)
I believe the only drawback to NSA as an investment from a perspective of valuation would be if the shares were trading above 17.5x P/FFO. I'll say that I don't know fully how we should expect the self-storage industry in the US to expand for the next 10 years.
This means I would be careful assigning too high of a premium to the business, and this is despite forecasting at 20x. However, the company has a lot going for it, and as a European investor that frequently invests in businesses without institutional credit, I'm not as put off as some are by the lack of it. It's a bonus if it exists, but not a deal-breaker, if the company can convince me that its underlying qualities are, in fact, solid. I'm especially picky, however, when the business doesn't have a "proper" credit rating and a history shorter than 10 years.
Is NSA the most qualitative self-storage REIT?
No, it is not - not even close. PSA is rated with an "A" by S&P. By comparison, NSA is the new kid on the block. However, PSA also only yields half the dividend that NSA has and still trades at 19x. NSA, no longer troughing, still trades at a materially lower valuation, while offering a better upside.
It does require you to work on your risk tolerance and accept that things might be going south somewhat, or at least more volatile. However, I also see that NSA despite the size differences, shares most of its valuation trends with its larger brothers, such as PSA. This gives some safety.
Analysts from S&P Global following NSA and giving the company a PT are in agreement here. The company is undervalued. The range for NSA starts at $36/share, and goes up to $50 with an average of $44.6, implying a current undervaluation of 5% from the analysts, with 5 of them at either a "BUY" or similar rating. This has shifted somewhat from my previous look at NSA, no doubt reflecting the analysts, including some of the more muted growth prospects for the next few years.
Let's be clear - I do not expect double-digit or even mid-range single-digit FFO growth from NSA 2023-2025. I expect a "slow growth", low-range single-digit FFO growth. However, with a YoC of over 6%, I am well-protected against even above-average mediocre performance.
Because I believe there to be a combination of upside from normalization as well as dividend payouts, I consider NSA to be a qualitative self-storage play, even if the size of the REIT at this time is relatively small.
At iREIT, we give the company a target of $59, essentially validating the company's premium to around 20x over time.
You can choose how exuberant you want to be on NSA here. A full normalization implies a potential RoR of 64% until 2025E, with an annual of nearly 20%.
Even if you cut into that premium severely, you can go all the way down to 12x P/FFO normalized, without really losing money if you include the dividend. I previously called for a 15-18x to be relevant from my expectations, and given the company's good performance and stability, I'm bumping that to 16-19x P/FFO here, which means that we're looking at a double-digit, 15%+ annualized upside potential.
We're in a market where there's no shortage of quality on sale - so you have to consider where to put your money - but I wouldn't call NSA to be a bad place to do so.
Here is my current thesis on the REIT.
Thesis
- NSA is the "smaller sibling" of market leaders like PSA. It operates in the same sector but has a better yield and more upside due to a more compressed overall valuation.
- NSA may be a higher-risk/reward play than PSA and similar REITs, but it also would be unfair to characterize the company as a somehow "excessively risky" investment. Its portfolio and sector have outperformed for years, and I forecast the self-storage industry to make money for decades to come - there is little to suggest this is going away, even if it's going down in growth.
- Based on this, I would call NSA a "BUY" with a PT of $50/share, but no more than that.
Remember, I'm all about : 1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them ( italicized ).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
I believe NSA fulfills every single investment criterion I hold, even without a CR, and that makes it a "BUY".
For further details see:
National Storage Affiliates: This Is Starting To Look Good