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I have yet to cover any REIT during my time writing on Seeking Alpha, primarily because they're already so well covered. Well, I have come across a little known one, without that much coverage at all, National Storage Affiliates (NYSE:NSA), and I quite like it.

Image: National Storage Affiliates logo

This business gets an A+ rating from my Hideaway model, which is how I came to find it. At the time of writing, it is trading up more than 5% on a pretty good day for the markets in general, but I don't think it's too late for investors with a long-term horizon to get in. Let's explore a little.

The name likely gives the business away, but I feel for these smaller, lesser-known companies that I should give a brief overview to my readers. National Storage Affiliates owns and operates regional self-storage facilities. You know, the garages that people rent for $100+ per month and fill with all the junk that won't fit in their regular garage.

If you've paid attention while driving around, you have likely seen storage units popping up all over the place in the last decade. They are an easy-to-operate, very boring business, which is really what we want to be looking for when it comes to investing.

One thing of note, however, is the lack of moat. I could buy a large plot of land today, build a storage unit, undercut on pricing, and begin building a cash flow while competing with the big players in the industry. That is what's happening, too. There are plenty of mom-and-pop storage units out there, making a relatively stable living from nothing more than garages on an empty plot of land.

As with most businesses, consolidation began to hit. Synergies began to form that allowed consolidated storage units to operate and reach customers more efficiently, and billion-dollar firms were created. That is what happened in National Storage Affiliates' case, and it continues to happen today.

Image: Map showing states with an NSA presence

National Storage Affiliates is comprised of 10 individual businesses, or Participating Regional Operators ("PROs"). These businesses have their operating regions, with their own presidents responsible for building out a storage portfolio. National Storage Affiliates as a whole then support each.

Image: NSA Brands

An individual PRO can buy a storage unit that meets their portfolio need, and it will be acquired using National Storage Affiliates' leverage, providing greater ease of operation for the PRO. Over the course of 2019, these PROs acquired 69 properties across the United States at a cost of $447.8M.

Public Storage (NYSE:PSA), a much larger storage REIT, recently warned that Q2 revenue would take a hit from the current economic crisis caused by COVID-19. The company stated there was a significant reduction in demand for self-storage space and a significant decline in move-in volumes since late March.

Image: Tweet from Aaron Edelheit

This tweet from Aaron Edelheit, CEO of Mindset Capital, quite correctly points to many of the reasons investors are becoming skeptical of storage. There's just so many of them. There is, however, one point that I'd strongly disagree with: "more of our lives moving to the digital realm," thus reducing the need for self-storage. We're not looking to store less, and we're not even buying less (yet). There's still ample demand for storage; look at this 2004-present Google Trends graph:

Image: Google Trends for "Self Storage" Topic

The interest peaked in July of 2017, but we were still above average interest in April 2020. The graph also shows that interest is heading back up in May.

My take here is that we are overbuilt, but the best locations will be snapped up by the large operators.

Turning now to the red meat, the financials. NSA is priced a little higher than its peers, but it is also growing almost every metric at significantly larger rates. Take, for instance, revenue growth:

As it's a REIT, we want the assets to be growing over time too, and NSA is growing its assets at a 17.69% CAGR over the last three years. Here are those same peers compared:

Profitability, on a comparable basis, is a little weak. Peers have much higher net income margins, returns on equity, and returns on assets than National Storage Affiliates. The explanation for this is quite simple; all those PROs we mentioned in the beginning, they receive distributions as minority interests.

For this reason, I decided to compare NSA to peers on an operating income level. Unfortunately, the firm still falls short there. This is due to a higher SG/A cost, as well as higher depreciation than peers. The following table shows those values as a percentage:

Depreciation isn't a bad thing, though; it allows NSA to have a lower taxable income and is done on a straight-line basis. With proper maintenance, the buildings are likely still worth something, and thankfully storage units do not require that much upkeep.

SG/A being so high is also a result of many different operating firms. Could this be better? Absolutely. If cost cuts are needed, this gives NSA a lot of "padding" to get it done.

Finally, FFO is at $1.53 per share over the trailing 12 months. This has NSA trading at ~18x FFO at the time of writing, an affordable price for a REIT that handily has its dividend covered.

As mentioned in the introduction to this article, I selected National Storage to research thanks to its "A+" Hideaway Score. The Hideaway Score combines momentum, quality, and value scores to create a composite score. A+ stocks, in early testing, are beating the market quite handedly, while C stocks perform in line with the S&P 500.

Here is how the five stocks discussed in this article rank:

Data by YCharts

Chart: FFO/S TTM for 5 years

I mentioned in the financials section that NSA has an ~18x P/FFO metric hanging over its head today.

Looking at the graph above, we can see that the firm continues to have success in driving its FFO number higher. This is mostly a factor of newer properties joining the mix, but it's good for investors nonetheless.

I think over the coming years, we will start to see more and more consolidation in the space. I have mentioned throughout the article that this is an easily entered space by almost anyone with land, and I think that slowly begins to consolidate over time.

If we do see a downswing in storage use, it will hit the mom-and-pop shops the hardest (less capital to handle a down period), thus allowing the larger firms to pick up new locations at a discount.

If NSA gave up some of its traditional revenue growth (24.8% 3Y CAGR) and fell more in line with the storage market's 6%, it could reasonably see FFO of $1.60-$1.65 in FY20, and that would, in my opinion, be a slow/down year for a firm of this size and growth capacity.

With $1.65 in FFO at an 18x multiple, the firm's 2020 fair value would be in the realm of $30/share, an 8% gain over today's prices. I should note that this is my low-end estimate. If NSA can come out strong during its next earnings call and show that it does not see the same big drops PSA is experiencing, a price multiple of 20-22x is much more reasonable given the company's higher rate of growth.

20-22x would carry a $33-36.30 price target at $1.65 FFO.

National Storage Affiliates is showing great value at these levels for investors with a long-term horizon. Storage isn't going away, and the larger firms are best equipped to withstand a near-term downswing in move-in rates.

I am a buyer of this stock under $30/share.

Disclosure: I am/we are long NSA. 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.

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National Storage Affiliates Is A Long-Term Buy At These Prices - Seeking Alpha