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GaryMuth

I have owned a bunch a different REITs over the last couple years, and near the end of 2022 I started buying shares of a couple different storage REITs. They were one of the REIT sectors that took a beating in 2022, and the improved valuations is why I started buying REITs in several different sectors, including industrial and cell tower REITs. A couple weeks ago I wrote an article on CubeSmart's (CUBE) annual results a couple weeks ago, and I wanted to write an update on National Storage Affiliates (NYSE:NSA) annual results. While I have been focused on energy for most of my new investments in the last couple months, Im still holding CubeSmart and National Storage Affiliates, and I plan to hold both for a long time.

National Storage Affiliates is one of the major self-storage REITs available to public market investors. It also happens to be on the cheaper side of the sector valuation wise, with a price/FFO of 14.6x. They also have a juicy 5.4% dividend that income investors will appreciate. Their acquisitions slowed down in 2022 (like many other REITs), but I think they can still grow for years to come, even if the acquisition volume doesnt look like it did in 2021. They do have a fair amount of total debt, with over $1B in maturities due by the end of 2024, but they also have plenty of liquidity with their newly expanded credit facility. Im not planning on adding to my position, but I think patient investors looking to buy National Storage Affiliates can consider a dip below $40 to be a buying opportunity.

A couple things from National Storage Affiliates 10-K are worth looking at for investors. I was focused primarily on the acquisition volume and their debt profile, but there are other insights investors can glean by reading the 10-K for themselves. NSA made 45 acquisitions for the year, which was slower than their 229 acquisitions in 2021 to be sure. Im curious to see what 2023 looks like, but 2022 was obviously a different strategy from CubeSmart, which only made 3 acquisitions in 2022.

NSA Debt Ladder (nationalstorageaffiliates.com)

They do have a fair amount of debt with a total of $3.6B. They have principal and maturities of $1.1B due by the end of 2024. I dont think there will be any issues dealing with that, and their maturities for 2025-2027 are not as significant (a bit over $500M). I know this doesnt line up exactly with the slide from their March update above, but my numbers are from the 10-K. It is possible that these changes in their debt ladder will show up in the Q1 10-Q, but if that is the case, their debt ladder is in better shape than it was at the end of the year.

Over 90% of their debt is unsecured, and over 80% of it is fixed rate debt. We will see what happens as their debt begins to roll over, but my guess is that their effective interest rate will probably rise a bit in coming years. Of course, this all depends on what happens with interest rates in coming years, but guessing which way rates will go is a fools errand in my opinion. After year end, they boosted their credit facility by $405M to $1.955B, so they should have plenty of liquidity with their line of credit, which was boosted by $300M. One of the reasons I made NSA my first pick in the storage sector was the valuation.

Shares of NSA are up slightly since my last article, but I think they are still buyable today. They are sitting just over $40, with a price/FFO of 14.6x. This is well below their average multiple of 20.4x. While Im not counting on multiple expansion, I do think it is a possibility given the defensive nature of their business. While the multiple to the mid-20s that we saw in 2021 and part of 2022 is probably unlikely, its not out of the realm of possibility. If we are lucky enough to see that, chances are that I would take my gains and head for the exit.

Price/FFO (fastgraphs.com)

NSA has average double-digit growth for years, but the forward estimates arent very appealing, with low single-digit growth projected through 2025. While the company might not grow as fast as it has in past years, I tend to think the growth estimates could turn out to be on the low end. If NSA can grow faster than projected, I think the returns could be pretty solid given the relatively low risk profile of the self-storage sector. Another reason to like NSA is their 5.4% dividend, which is the highest in the sector.

NSA hiked their dividend pretty aggressively until the middle of 2022. The quarterly payout has been stuck in neutral at $0.55 since then. Im curious to see what happens with the dividend over the next couple years, but I think we will probably see smaller dividend hikes resume at some point. I do think that a dividend cut is highly unlikely. NSA has also started buying back shares, something that is unusual for the REIT sector. They started using their buyback program in December, buying back just over 1M shares, leaving about $310M on their buyback authorization. While I think the buybacks are a decent option for the company at the current price, Im not counting on continued buybacks, especially if shares grind higher.

National Storage Affiliates is an interesting risk/reward proposition for income investors. One of the first things investors will notice is their yield over 5%, and while the dividend growth has stalled over the last year, I think the dividend hikes will resume at some point. Shares have tracked the average multiple of 20.4x pretty closely for years, only dipping into the mid-teens in 2020 and the last six months. While I dont want to base the bullish thesis on multiple expansion alone, I think it is possible, and I think shares are buyable today. Patient investors might want to wait for a dip below $40. Investors should keep an eye on their debt profile, but I think they have plenty of liquidity to deal with their upcoming maturities. I think the current growth estimates through 2025 might be a bit of a lowball. If growth is better than expected, I think the forward returns for National Storage Affiliates could be in the double-digits with a solid mix of income and share price appreciation.

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National Storage: Collect A 5% From Defensive Self Storage Sector ... - Seeking Alpha