Is Self-Storage REIT a Buy Again?

chart01Following the announcement of Sovran Self Storage’s US$1.3 billion acquisition, self-storage REITs hit the news again later last week. Extra Space Storage announced an increase of 32% in its dividends. With another big news, my question is, is self-storage a buy opportunity again?

As a matter of fact, due to its double digit growth rates, self-storage has always attracted investors. AFFO multiples have climbed up high and, consequently, the dividend yields have gone down. This made a number of potential investors to lose interest. The average dividend yield of self-storage REITs is 2.9%, making it the lowest as compared to other REIT sectors.

In general, real estate markets have kept supply under control even though it is predicted that there are higher chances of overbuilding. Spencer Kirk, the CEO of Extra Space Storage, said that new supply seemed to be appearing in pockets as no one is aware of them countrywide. Public Storage CEO noted the increase in supply in certain markets like the boroughs in New York and Denver.

Fast growing funds from operations have sustained the 32% increase Extra Space recorded, which pushed the yields from 2.6% to 3.4%. Even though this is still considered to be below average for equity REITs, the share price increased by 32% in the last 12 months.

Another self-storage REIT that recorded an increase in its dividends last week was National Storage Affiliates. Its dividend shot up by 10%, taking its yields to 4.1%. Even though the REIT began trading last year, its AFFO multiple has been at the top. This current year, its share price has already increased by 24%. Definitely, a perfect timing for the company to become public.

Generally, when the rate of optimism is higher, expectations fail to be real thus resulting to be painful. Even though Kirk commented that self-storage has been the best performing asset class year in and year out, investors never like oversupply, or an indication that there will be one. For instance, last year’s prolonged selloff of lodging REITs is a perfect example.

In conclusion, the increase in dividends is appetizing, but it does not lure me into making any purchase.

Source: Sovran Self Storage Inc.(NYSE:SSS), National Storage Affiliates(NYSE:NSA), Extra Space Storage Inc.(NYSE:EXR), Fast Graphs

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

What’s Special about National Storage? (Part 2/2)

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Click here if you have not read part 1.

The lack of a national identity may be an advantage.

One remarkable difference from its REIT peers is a lack of national identity. Each of the PRO’s preserves its own name brand, and continues to be associated with the region it operates within. For instance, the websites of SecurCare and Northwest are different from each other, thereby maintaining their own identity. In addition, each PRO manages their own contributed units promoting their own level of service, pricing, and customer policies, to name a few.

chart07There is a central website https://gostorageunits.com that encompasses National Storage operators and serves as a locating service for their nearest units. The National Storage website http://www.nationalstorageaffiliates.com/ has been built around attracting both investors and potential affiliates.

I am certainly not saying that a lack of a sole identity is a negative factor. When compared to their competitors, National Storage has more conditions to be in sync with their target region. This enables the company to be more flexible and quicker when it comes to making decisions that cater to their local customer base. This may be a competitive advantage.

Capital Structure

chart05In addition to the common shares and OP units, National Storage issues subordinated performance units, which change the way common share and OP unit holders are remunerated.

Once a property’s operating cash flow covers allocated corporate G&A costs, debt service and maintenance capital expenditures, the common share and OP unit holders will receive six percent on their unreturned capital. Once this condition is met, SP unit shareholders will also receive six percent. The excess operating cash flow will be split between the SP and OP unit holders.

When all is said and done, REIT shareholders (common) have a downside protection; however, they do not enjoy as much upside as PRO shareholders (OP and SP units).

The company’s debt to total capitalization of 36% is higher than its peers’, but in line with the REIT industry’s.

Operational Performance

Although National Storage must improve their occupancy metrics, the company has enjoyed a better same store revenue, and net operating income growth rate when compared to their industry peers. They also show a two-digit growth rate in FFO per share. This demonstrates the company’s capacity to make large distributions in the future. The company’s dividend yield of 5% is the highest in the self-storage sector.chart04

Conclusion

National Storage Affiliates most definitely stands out in the five factors that we have analyzed: industry fundamentals, valuation, profile, capital structure, and operational performance. The capital structure is by far the trickiest characteristic related to common shareholders due to the fact that it provides downside protection with a limited upside potential. That being said, this REIT is a potential buy.

Source: National Storage Affiliates Trust (NYSE:NSA), Fast Graphs.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

What’s Special about National Storage? (Part 1/2)

chart01The more I look at National Storage Affiliates the more excited I get about the company’s shares. In a recent post I indicated that the stock was a potential entry point for the self-storage segment. As you may have read self-storage valuations have skyrocketed making this segment one of the best performing REITs in during 2015.

In addition to the U.S. economy, there are a plethora of additional factors that have helped the self-storage sector. For example, zoning, demographics, trends, potential consolidation, an excellent operating performance, amongst other factors make it attractive to investors. We do not see any signs that this will change in 2016.

chart02Sometimes good attributes can become a curse. Many REIT investors have devoted piles of capital to purchase stocks in established self-storage companies. This cash infusion elevated their valuations to one of the highest plateaus in the entire REIT industry.

In April 2015, National Storage Affiliates (NYSE:NSA) presented itself as a rookie in the space. Although the management team has been involved in the self-storage sector since the last century, the lack of public history may have discouraged many investors. This caused the company’s FFO multiple at 19x, which is significantly lower than its peers at 26x.

This article is an attempt to further the knowledge regarding National Storage. Positive industry fundamentals, combined with a lower valuation relative to peers have led us to begin writing about the company. Next we will review National Storage from three additional aspects: Profile, Capital Structure, and Operating Performance.

What is National Storage?

What makes National Storage different from its larger peers is the Participating Regional Operators, or PROs for short. The company is comprised of a group of six affiliate operators that have contributed their properties in exchange for National Storage’s operating partnership and subordinated performance units called OP and SP units. The affiliates manage their contributed properties.

chart03Due to this structure, National Storage has quickly become the sixth largest self-storage operator in the United States with 16 million square feet of rentable space. Now that they are a public company it should be far easier to access funding. In turn, this will attract more PRO’s, enabling the REIT to grow larger than its current 277 locations in 16 states. In order to show you a comparison, the fifth largest self-storage operator is Uncle Bob’s. This company has reached 500 locations in 25 states. The largest operator, Public Storage, has over 2,200 locations in 37 states.

SecurCare, Northwest, and Optivest founded national Storage in 2013. The other three affiliates, Guardian, Move It, and Storage Solutions followed suit. SecurCare is by far the largest affiliate, accounting for more than 40% of the total available square footage. The founder of SecurCare is also the CEO of National Storage.

If National Storage recruits a significant number of affiliates within the next three years, the company will easily expand upon their current $1.4 billion equity market capitalization. The current PRO pipeline falls between 10-15 operators with typical portfolios of $100 million each.

To be continued…

Source: National Storage Affiliates Trust (NYSE:NSA), Fast Graphs.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.