National Storage Affiliates Trust: Checking In With This 4.4%-Yielding Storage REIT

Summary

• National Storage Affiliates Trust is a fast-growing self-storage REIT.
• The company spent hundreds of millions of dollars in 2018 in order to scale its real estate platform and grow FFO.
• Shares sell for an elevated 2019e FFO multiple due to high investor expectations with respect to above-average FFO and dividend/share growth.
• An investment in NSA yields 4.4 percent. There is strong chance that the yield on cost will rise going forward.

National Storage Affiliates Trust (NYSE:NSA) is a fast-growing real estate investment trust in the storage sub-sector. The REIT is acquiring new properties at a fast clip which has boosted its funds from operations per-share growth since its IPO. The REIT has a low FFO payout ratio and raises its dividend twice a year. The share price continues to reflect high FFO growth expectations going forward. An investment in NSA at today's price point yields 4.4 percent.

Who Is National Storage Affiliates Trust?

National Storage Affiliates Trust is a self-storage REIT with an equity value of $1.6 billion. The REIT competes against other storage REITs in the sector, including CubeSmart (CUBE), Life Storage, Inc. (LSI), Public Storage (PSA), and Extra Space Storage, Inc. (EXR). National Storage Affiliates Trust is a relatively young company that had its IPO in April 2015.

National Storage Affiliates Trust's real estate portfolio consists of 698 storage facilities, 522 of which are wholly-owned and 176 of which are part of the REIT's joint ventures. The company's properties can be found in 34 U.S. states and in Puerto Rico.

Source: National Storage Affiliates Trust Investor Presentation

The storage market is highly fragmented, meaning there are lots of REITs in the sector that all have relatively small market shares. Based on portfolio size, National Storage Affiliates Trust is the 5th largest storage REIT in the sector.

Source: National Storage Affiliates Trust

National Storage Affiliates Trust is growing aggressively through acquisitions as opposed to organic business development. In 2018, the real estate investment trust purchased 57 wholly-owned storage properties for $356.6 million and invested in another 106 joint venture facilities valued at were valued at $1.3 billion.

Management's aggressive stance on acquisition has resulted in explosive portfolio growth over the last couple of years. Since formation, National Storage Affiliate Trust's portfolio size has increased by the factor of seven.

Source: National Storage Affiliates Trust

Management is not slowing down when it comes to growing its real estate platform.

The REIT acquired even more storage facilities after the close of the 2018 fiscal year. National Storage Affiliates Trust purchased twenty-three wholly-owned storage properties, reflecting 1.3 million square feet and 11k storage units for $147 million. According to management, consideration for the acquisitions included:

...approximately $122.9 million of net cash, the issuance of approximately $23.7 million of OP units, subordinated performance units and Series A-1 preferred units and the assumption of approximately $0.4 million of other working capital liabilities.

On the back of the REIT's aggressive acquisition of new self-storage facilities, National Storage Affiliates Trust has seen strong core funds from operations growth. Since the company's IPO four years ago, National Storage Affiliates Trust has produced 14.8 percent annual core FFO/share growth, which was the second-highest FFO/share CAGR in its peer group.

Source: National Storage Affiliates Trust

Balance Sheet

National Storage Affiliates Trust has a solid balance sheet. The company carries ~$1.3 billion of debt on its balance sheet, which represents about 30 percent of the REIT's total capitalization. National Storage Affiliates Trust's interest coverage ratio, which measures the company's ability to make due on its debt obligations, stood at 4.7x at the end of the December quarter.

Source: National Storage Affiliates Trust

What About The Dividend?

National Storage Affiliates Trust raises its dividend twice annually and has been able to grow its dividend from $0.15/share in July 2015 to $0.30/share in March 2019, reflecting 100 percent dividend growth in just about four years.

Here's NSA's dividend growth history:

Data by YCharts

National Storage Affiliates Trust has a comfortable level of excess dividend coverage that allows the storage REIT to continue to grow its dividend payout. NSA earned an average of $0.34/share in core funds from operations in the last six quarters while paying out an average of just $0.28/share.

Here are National Storage Affiliates Trust's updated dividend coverage stats, including core FFO payout ratio (average 83 percent).

Source: Achilles Research

Valuation

The bad news: National Storage Affiliates Trust's 4.4 percent dividend is not really cheap.

The good news: The storage sector is where the growth is, which is why investors pay high FFO multiples in order to get a seat at the table.

National Storage Affiliates Trust expects to earn $1.48-1.52/share in core funds from operations this year. Since shares today change hands for $27.51, investors pay ~18.3x 2019e core FFO.

And, here's how NSA compares against its storage REIT peers in terms of P/FFO ratio.

Source: Achilles Research

And, here's how NSA compares against its storage REIT peers in terms of price-to-book ratio:

Data by YCharts

Risk Factors

Fast-growing storage REITs are hot right now, and their valuations reflect this. Hence, problems can occur when those REITs start to overpay for acquisitions or cash flow growth slows. Slowing core FFO/share growth could limit National Storage Affiliates Trust's dividend growth and trigger a reassessment of the REIT's value proposition which in turn could trigger a lower valuation multiple.

Your Takeaway

National Storage Affiliates Trust is a promising and fast-growing self-storage real estate investment trust. The company spent hundreds of millions of dollars just in 2018 in order to scale its business and grow its FFO quickly. National Storage Affiliates Trust has a strong balance sheet and easily outearns its dividend. The core FFO payout ratio is low and points to dividend upside. However, shares come with a high price tag, reflecting investor expectations of above-average FFO and dividend/share growth. NSA is on my "To-Buy List", and I am going to pull the buy trigger during the next market correction.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.