Tuesday, November 17, 2020

A Small Cap Equity holding: National Storage Affiliates Trust (NSA, $35.74): “Store for the Long Haul” by: Christian Musbach, AIM Student at Marquette University

 National Storage Affiliates Trust (NSA, $35.74): “Store for the Long Haul”

By: Christian Musbach, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


       National Storage Affiliates Trust (NYSE: NSA) is a real estate investment trust (REIT) that owns, operates, and acquires self-storage properties located in the US and Puerto Rico. It is well-diversified across the US with exposure to 35 states with 784 properties. This makes NSA the 6th largest U.S. operator of self-storage facilities. Given the highly fragmented industry it is in with 48,000 self-storage properties and 30,000 operators, this gives NSA much room for growth. 

       The first driver for the pitch of NSA in October of 2019 was the growth in the self-storage industry paired with NSA’s quality properties would promote long-term growth. 

       The second driver was NSA’s business model of seeking partnerships with individuals (PROs) which drives growth compared to competitors who use a top-down approach. 

       The stock is currently slightly down from its high point in February, but the fundamentals have remained solid throughout the pandemic.

Key points:

The first driver in the original pitch for NSA was the industry growth numbers as well as NSA’s high-quality properties. The original estimate of the self-storage industry growing from 9.4% to 12.3% did not come to fruition as this number has only slightly risen to roughly 10%. However, the population has grown roughly 3 million since this was pitched which means the demand has grown. A critical reason for the limited growth is the pandemic and the decline in spending. Despite this, NSA has been able to sustain its occupancy rates in the high-80% range. The overall self-storage industry has also remained resilient throughout the pandemic and is the fifth-best performer YTD in the REIT sector. 

NSA was also pitched because of its unique business model of taking a bottom-up approach compared to its competitors’ top-down approach. This continues to be a focus of the firm giving the firm a tax-efficient way to acquire properties in exchange for OP units (equal to common stock) and SP units (distributions given based on performance). The structure continues to benefit NSA as PROs are invested in the process which motivates them to run the facility as efficiently as possible. This business model also thrived throughout the recent economic downturn with the reduction of downside risk. The PRO absorbs a portion of the NOI declines thus making the dividend coverage safer than other structures. 

The stock has remained resilient throughout the pandemic and this is due to its solid fundamentals. NSA has reported positive growth in sales and operating income in the past three quarters of 2020. Additionally, the capital structure remains strong. The portfolio’s interest is 100% fixed with a weighted average maturity of 6.3 years for its debt. Also, NSA does not have any significant debt due until 2023 when $380.7 million is due. It currently has around $500 million of liquidity thus allowing them to continue acquiring properties to stimulate growth. The total acquisition pipeline is currently $2.9 billion which contains over 300 properties. Despite the noise around the pandemic’s effect on the self-storage industry, this industry remains solid and NSA will continue to acquire to capture the growth. 

What has the stock done lately?

NSA reported strong third quarter of 2020 earnings on November 5, 2020. It experienced a net income increase of 29.7% year-over-year. It also increased core funds from operations by 10% from last year. However, the stock is still down roughly 6% since its February high. In the past month, it is up almost 5%. 

Past Year Performance: 

Over the past year, the stock is up almost 10% with a rise of almost 60% since its March low of $22.82. The stock trades at a 20.6x 2020E CFFO which is roughly a 5.9% discount from its peers. Despite the real estate market being hit hard by the pandemic (-25% YTD), self-storage is a solid industry to thrive in and NSA will benefit from this growth. 

1 Year Stock Chart vs. Benchmark

Source: FactSet

My Takeaway:

NSA should remain in the AIM small-cap portfolio. The current REITs in the portfolio cover the best markets within real estate. The stock is up almost 5% since it was pitched last October. However, before the pandemic hit, it was up over 11% until February 14, 2020. Self-storage is in the top five in terms of YTD performance in the REIT industry and thus shows its resiliency. NSA is well-positioned to continue to capture the growth trends in self-storage with its acquisitions and bottom-up business model. The drivers that were originally outlined for NSA are still in place and will continue to drive the stock in the future. With the combination of a strong capital structure, business model, and growth trends in self-storage, NSA will continue to steadily grow into the foreseeable future. 

1 Month Stock Chart 

Source: FactSet