2023-05-28 02:23:56 ET
Summary
- I last reviewed National Storage affiliates, or NSA back in early 2023. While this REIT isn't the "best" self-storage REIT, it has qualities you want.
- Above all, it has the sort of undervaluation that should give you pause when you look at it. It's not as high as some people would like to think.
- But it's still very high. I'll dissect Q1 and give you my updated thesis for NSA.
Author's Note: This article was published on iREIT on Alpha back in late May of 2023.
Dear subscribers,
When last reviewing National Storage Affiliates ( NSA ), I made a point of not, at the time, having massive exposure to the self-storage space. Since that time, I've allowed myself increased exposure based on attractive valuations. I've taken advantage of companies, including NSA, dropping as the pressure on the market has increased. I'm not talking about the self-storage market specifically, but all markets.
The tricky thing since that time has been deciding what to invest in. That I invest isn't in question - there is so much quality on sale due to the fear/expectation of a looming recessionary period, that I've put money to work, even if I've combined this with a higher savings rate than I had during the depths of 2022 when I bought much that is still up significantly today.
Let's look at why I am slowly buying more NSA, and why you could do the same.
National Storage Affiliates - there's a lot to like in self-storage.
The self-storage space is both a consolidated and fragmented industry. You have absolute giants like Public Storage ( PSA ), which account for the bulk of my typical investments and also represent much of my exposure in the space. However, you also have smaller companies that while smaller, are perhaps more agile and represent better income potentials (with higher volatility and risk) than the bigger giants.
NSA's facilities and capacities exist pretty much across the entire USA under a mix of wholly-owned and JV properties - 1,100 of them to be exact, amounting to 71.5M square feet of storage space. The lion's share of that space is found in the west and east, with more in Texas and the states adjacent to Texas.
NSA IR (NSA IR)
1Q23 dispelled any notion investors might have about fundamental trouble for this company. While net income and FFO declined, the company also reported an increase in same-store NOI, by some viewed as a more important metric. This was driven by an increase in same-store total revenues - but the issue that's dragging NSA down, and what is causing the company to perhaps experience some increased share-related pressure, is an increase in same-store OPEX.
Still, NSA continued M&A'ing and buying new space, despite the macro. The company acquired 16 self-storage properties at about a $160M price tag during 1Q23 alone, 15 of which were one portfolio from one of the company's PROs.
The company also took advantage of the low valuation, repurchasing over 1.6M shares on the open market, increasing its credit limits and borrowing capacities, and restructuring its debt some of which matured in 2023.
While NSA still does not have what I would consider to be an IG rating on par with some rating houses, it uses Kroll Bond Ratings, which give the company's BBB+ stable. It's not as good as S&P, Moody's or Fitch, but it's better than nothing - especially for a REIT.
It's important to recall that 2022, especially some quarters, was record-setting and cannot be upheld in a slowing housing market and muted economy, which are putting pressure on self-storage demand levels. The company is ratcheting up rent levels as much as it can, but as of now, it's not outpacing operating expenses, which for NSA is heavily tilted towards utilities and marketing.
However, don't let it be said that this puts NSA in danger. The company recently announced a 10% increase in the dividend, and I would say that companies in deep trouble do not increase their dividends by double digits.
NSA continues to guide for an FFO on a per-share basis of up to $2.86, which would be above the FFO for 2022, with double-digit revenue growth and "only" a 4.8% increase in expenses, leading to a forecast of almost 15% NOI growth. These trends bear watching, of course, we're only in the first quarter of the year behind us.
NSA Guidance (NSA IR)
The foundation for what made the company an attractive investment is not only still present, it's increased from the last time around. We're starting to get an impact forecast accuracy for what the OpEx increases will end up in. The market is, as I mentioned, highly fragmented with 51,000 properties around the US. Even a market leader like PSA has only a part of that one. NSA is at around 2% currently as of March, and the top 100 operators which do not include public REITs or U-Haul, manage around 6,2000 of them.
The historical case for investing in qualitative self-storage players at a cheap price remains. Why?
Because they tend to outperform.
NSA IR (NSA IR)
My own REIT investment mix is tilted towards Apartments, industrial, Office, and Self-storage. I won't go much into Diversified or specialized, and I stay mostly out of lodging/hotel. By that chart alone we should invest more in Self-storage, but of course, the truth is a bit more complex than that.
However, it is a historical fact to say that even in the worst 5-year period, self-storage has been above 4.5% per year - and that's not something lightly said in the environment we're currently in. TSR since IPO is 285%, and the company now has an EV of closing in on $10B.
NSA is growing - and you can be part of that.
The company has an occupancy of close to 94%, which is some of the more attractive out there, and its geographical spread comes with diversification de-risking. The outlook for many of its markets is absolutely positive.
NSA IR (NSA IR)
The company even has arguments on a customer/pricing basis, with NSA being one of the cheaper alternatives around based on an annual rate in relation to household income. The company picks areas where it knows that it can compete not only on offering but on price as well. PSA is actually one of the more expensive ones when looking at this metric.
Occupancy trends are slowly normalizing toward a pre-pandemic level, which seems to be around 90-91% for this segment. As I said when I wrote my last article, my personal view of this amount of storage availability is that the supply seems high - but I don't represent NSA's typical customer, and it's very clear that the dynamics in the USA and other parts of the world are completely different to my own expectations.
The arguments for self-storage are strong, from things like reducing clutter, security, and business expansion, companies in the space don't have a hard time finding arguments for their customers - and while $90 may be a not-inconsiderable sum for a personal customer, it's, of course, different for a business/commercial customer - though prices, of course, differ as well.
The arguments for the self-storage market, and for National Storage Affiliates, are strong. And NSA, with the yield after a 4.5% decline since my last article, is now closing in on 6%. That makes the company the highest yielder in the self-storage space that we cover, and a fair company to consider if qualitative and cheap.
Let's look at valuation.
National Storage Space Valuation - It remains attractive
The company's historicals are somewhat distorted by a massive bout of overvaluation we saw after 2020 and going into the pandemic. At times, NSA traded at almost 30x P/FFO, which rivals PSA, and which I do not view as an acceptable or relevant investment level for this company.
However, that's not where we are now.
The current relevant P/FFO multiple comes to no more than 13.35x, which is less than half what it was back during its highs. It also means that there were people who bought the company who are now likely down more than 50% - and this is why valuation is incredibly crucial.
While I will give NSA some leeway in terms of premium, because its premium isn't just due to that time, it typically trades closer to 18-20x, I tend to want to look at the company, or other companies, from a more conservative valuation lens.
The fact is, you can forecast NSA at below a 15x P/FFO, and still come out on top with nearly 13% annually. Going into this sort of macro and recessionary environment, this is not bad. I also do not think it unlikely that NSA will manage 2-4% FFO growth for the next few years, which "locks" this forecast in somewhat.
NSA Upside (F.A.S.T Graphs)
However, this is what I would consider to be a bearish case. Due to the company's significant historical premium, I would consider it somewhat odd for the company not to recover, though perhaps slowly. The upside to a more realistic P/FFO multiple, say 15-18x P/FFO goes up from 13% per year to up to 22% per year - and we're still at below 20x P/FFO. So your upside here is realistic, and your downside is pretty well-protected, as I see it. These businesses are fairly unlikely to see drop-offs in earnings growth or non-payment. The services they provide are unlikely to simply be canceled, because customers are attached to, or need their various items in storage.
Therefore, the current levels are not only considered attractive by me, but by other analysts following the company as well. S&P Global averages come to around $38-$49, with an average of $44/share. Note that every target here is above the current share price, even the more bearish ones, and the comparative upside here expected is almost 16% to that average. This price also represents a substantial discount to the NAV, with a current 0.77x to NAV, compared to a more typical 1.1x or even higher.
Every indication is that NSA continues to show substantial discounts at this level. There isn't much to be said as to a continued bearish or negative case here, with a further downside. It could happen - valuations can disconnect, during times, completely from their historical levels. I don't see a reason for this, however. This doesn't mean it won't happen, but it means I consider it unlikely at this point.
We're now down to levels again that we saw during late 2022 - which is where I bought the company last time. So, I'm buying more NSA at this price, and based on a coupled valuation, stability, and fundamental upside, I am considering this to be a "BUY" here.
For that reason, this is my current thesis on National Storage Affiliates.
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. I'm not changing my PT as of this article.
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". I'm buying more NSA here, and slowly expanding my self-storage exposure.
For further details see:
National Storage: Looking Even Better With Undervaluation