National Storage Affiliates: A Distressed REIT With A Premium Valuation

Company Overview - National Storage Affiliates (NSA) is a storage REIT with interests in 1,050 properties across 42 states and Puerto Rico, primarily focused in the Sun Belt region, which accounts for 65% of its locations [3][15] - The largest exposure is in Texas, making up 18.5% of NSA properties [3] Operational Performance - As of June 2024, occupancy was reported at 86.7%, a slight increase from 85.9% at the end of Q1 2024, but down 3% year-over-year, indicating oversupply in the storage market [5][23] - Core FFO was $0.60 per share in Q1 2024, down 9.1% year-over-year, with revenues declining against rising costs, leading to a 3.7% decrease in net operating income (NOI) year-over-year [16] - The full-year NOI growth outlook for 2024 is bleak, with a projected 4% year-over-year decline, and Core FFO expected at about$ 2.48 per share, down 7.8% year-over-year [17] Financial Metrics - Total revenue growth is projected to decline by 4.0% in 2024, with property operating expenses expected to rise by 3.0% to 5.0% [9] - The company ended Q1 2024 with net debt of $3.2 billion, with 40% of enterprise value funded by debt and 5% by preferred shares [18] - The weighted average cost of debt is 4.1%, with 96% of the debt being fixed rate [10] Market Dynamics - The market-implied cap rate is approximately 7.2%, which is not attractive given the declining occupancy and NOI dynamics [19] - The company is internalizing its participating regional operating structure, which may save$ 0.03- $0.04 per share in general and administrative expenses, translating to$ 7.5- $9 million in cumulative savings [20] Strategic Initiatives - After disposals in Q4 2023 and Q1 2024, the company generated$ 540 million in liquidity, reducing its indebtedness [21] - The company continues to buy back shares, which may increase leverage in the future [21] Investment Considerations - Given the operational underperformance in 2024, the company is expected to face challenges in returning to growth, with the oversupply in the self-storage market likely to persist [23] - Preferred shares (NSA.PR.A) offer a 6.3% yield, well-covered by Core FFO and market capitalization, presenting an alternative investment option [22]