Even in this volatile market, it's hard to find high-yielding REITs that also offer compelling dividend growth at the same time. However, such opportunities exist so long as one is willing to do a bit of digging.
This brings me to National Storage Affiliates (NYSE:NSA) which appears to be one such opportunity that offers the best of both worlds. In this article, I highlight what makes NSA a compelling buy at the current valuation for potentially strong returns, 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 U.S. At present, NSA holds an ownership interest in 1,076 properties spread across 42 states and Puerto Rico. It is the sixth largest self-storage operator in the U.S., covering 70M rentable square feet.
What sets NSA apart from traditional self-storage REITs is its focus on co-investing with PROs (participating regional operators), which covers over half of NSA's properties. This structure benefits NSA in that it's able to tap into local market expertise and branding, and has helped NSA achieve industry leading growth over the past 5 years, as shown below.
It also helps to shield NSA from losses, as PROs absorb 50% 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 also incentivizes PROs to keep properties in good operating condition, while requiring less upfront capital from NSA, as illustrated by the following example.
NSA continues to demonstrate strong growth, with same-store net operating income soaring by 17.3% YoY during the second quarter. This was driven by a 14.6% increase in same store total revenues, while same store property expenses increased by only 7.6%, implying increased efficiencies and higher margins at the property level. Occupancy remained strong at 95.2%, although this represents a 140 basis points decrease over the prior-year period.
Also encouraging, NSA continues to grow, acquiring eight wholly-owned self-storage properties for $114.5 million during the second quarter, and NSA's joint real estate ventures acquired an additional seven properties for $208 million.
Looking forward, NSA is well-positioned to grow, as it maintains a strong BBB+ rated balance sheet from Kroll Bond Rating Agency (upgraded from BBB in April of this year) with a safe 5.7x net debt to adjusted EBITDA ratio and 5.7x interest coverage. It also maintains low cost of debt with a weighted average interest rate of just 3.0% and has $650 million in available capital on its unsecured revolving credit facilities.
NSA shouldn't have many problems identifying investment opportunities, as the self-storage sector remains highly fragmented with 51,000 properties spread across 30,000 operators. Moreover, NSA PRO growth primarily targets top private operators with 20 or more institutional quality properties in the top 100 MSAs in the U.S.
Meanwhile, NSA pays a 4.2% dividend yield that's well covered by a 77% payout ratio based on Core FFO per share of $0.71 during the second quarter. What's even more is that NSA has given investors a 5-year dividend CAGR of 14.8% and 6 years of consecutive growth.
I see value in NSA at the current price of $52.96 with a forward P/FFO of 19.1. This is supported by commentary from Hoya Capital, which had this to say in their recent report on the self-storage sector:
Storage REITs have delivered the strongest NOI growth of any property sector since the start of the pandemic and are well-positioned to deliver a second straight year of 20%+ FFO growth. REITweek updates and recent Producer Price Index data indicate that storage operators continue to yield significant pricing power with asking rents up around 15% year-over-year in Q2 while occupancy rates have trended only slightly lower from record-highs. Despite this strong fundamental performance, storage REITs trade near their lowest relative valuations in a decade compared to the REIT Index with a sub-20x P/FFO and trade at notable discounts to private market valuations as well.
Sell side analysts have a consensus Buy rating on NSA with an average price target of $60.32, implying a potential one-year 18% total return including dividends.
Overall, I believe that NSA is a well-positioned REIT that's trading at a discount to its intrinsic value. It also has unique competitive advantages and has a long runway to consolidate the highly fragmented self-storage market. I find NSA to be attractively valued at present for a respectable current yield and its fast-growing nature, which should appeal to both income and growth investors alike.
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This article was written by
I'm a U.S. based financial writer with a BSc in Economics and an MBA in Finance. I have over 12 years of investment experience, and generally focus on stocks that are more defensive in nature, with a medium to long-term horizon. My goal is to share useful and insightful knowledge and analysis with readers. Contributing author for Hoya Capital Income Builder.
Disclosure: I/we have a beneficial long position in the shares of NSA either through stock ownership, options, or other derivatives. 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: I am not an investment advisor. 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.