National Storage Affiliates Trust

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

National Storage Affiliates Trust is a fully integrated, self-administered and self-managed real estate investment trust (REIT) that invests in self-storage facilities primarily in the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

National Storage Affiliates Trust (NSA) operates as a real estate investment trust (REIT) focused on acquiring, developing, and managing self-storage properties. Its primary revenue source is rental income from these properties, though it also benefits from property management, tenant protection plans, and late fees and other charges to tenants. NSA’s business model is essentially that of a real estate company rather than an operator and therefore is very asset heavy. The company currently owns 1111 properties spanning over 40 US states and Puerto Rico.

  • Geographic Footprint: While present nationwide, their focus is on the Sun Belt and the Northeast.
  • Industry Trends: The self-storage industry has experienced steady growth, supported by demographic changes, urbanization, and the preference of people for extra storage space. These trends are expected to continue in coming years, with consistent demand that should continue to raise rental rates.
  • Competitive Landscape: The self-storage industry is quite competitive, with a mix of large public operators and local independent operators. There is a trend for more consolidation, which is being primarily led by large REITs like NSA. Competition comes down to location, pricing, management efficiency, and brand awareness.
  • What Makes NSA Different?
    • PRO Structure: NSA has a unique structure of operating partnerships (PROs) with regional self-storage operators that help it in its acquisition pipeline. By creating these unique partnerships, NSA is able to source assets it wouldn’t otherwise have access to while also leveraging the existing management’s experience of the operators.
    • Internal Management: Most of NSA’s core team have deep experience in the self-storage industry. They have a very large and integrated internal management team compared to other REITs.
    • Acquisition Model: NSA has been able to successfully source a lot of its assets through their PROs. That means the company has a unique acquisition model that is different than most other publicly traded companies and also leads to lower premiums being paid.

Financials Overview:

  • Revenue: For the nine months ending September 30, 2023, total revenues increased 14.8% compared to September 30, 2022 to $528.6 million, with same store revenue increasing by 11.9% for the same period. The revenue is mainly derived from the rental of self storage space which includes a smaller portion that is from property related services. Total operating expenses, meanwhile, have increased by 18.2% for the period, which implies a slightly lower margin for this year than previous. For the three months ending September 30, 2023, revenue also rose considerably to $195.2m.
  • Profitability: Net income for the nine months ending September 30, 2023, was $34.3 million and $15.6 million for the three months ending September 30, 2023, respectively. Core FFO increased by 14.6% to $288.7 million for the nine months ending September 30, 2023. On a per-share basis, the FFO was $1.53 per share for the nine months ending September 30, 2023 and 72 cents per share for the three months ending September 30, 2023.

  • Balance Sheet: As of September 30, 2023, the company held total assets worth $6.67B, liabilities worth $3.3B and total equity of $3.37 billion. The cash and cash equivalents are on the lower side with only $74m. The company has significant debt totaling $3.05 billion. The debt is spread out in terms of maturity, where the company is making attempts to reduce the average maturity of that debt by paying off some of their short term debt.

    • A concern of NSA in the financial reporting is the heavy usage of non-GAAP accounting measures, such as “Core FFO”, which makes analyzing the financials quite difficult for an average investor. These measures can have inconsistencies between quarters and do not provide a complete overview of the company’s performance.
  • Cash Flow: Cash flow from operations (CFO) has increased from $236M in the year to date ending 2022 to $282M in 2023. Net cash used for investing activities was $751 million. Net cash provided by financing activities is $558. The company has a significant outflow towards investment that is currently being funded through financing.

Recent Concerns/Controversies:

  • High interest rates may be a problem for companies in the sector. The company is using floating debt, which means debt rates will increase if interest rates increase, potentially creating a large pressure on profitability in future years.
  • NSA has a very complex ownership structure that may not always make sense to investors, especially with the large usage of OPs.
  • The company’s future growth in a highly fragmented market may be less than it has been in the past, and therefore, may cause the growth rate to decrease and lead to lower returns.

Moat Assessment:

  • Moat Rating: 3/5
  • Moat Explanation:
    • Brand Strength: The self storage market typically does not generate pricing power on the basis of brand names due to lack of brand awareness. Thus, there isn’t a meaningful moat created from brand names for NSA.
    • Switching Costs: Generally, switching costs in the industry are low. There is a moderate switching cost when a renter moves their storage unit into another provider. The cost to switch might mean the need to transport your belongings to another provider, which can be costly. However, it’s not large enough to give any real pricing power to companies like NSA.
    • Cost Advantages: The company has a fairly unique acquisition pipeline using their PROs that helps them get new properties while saving money on acquisition. The location of the self-storage properties in areas that have high demand for space as well as the operational efficiencies of the management team also helps NSA earn more money per sq ft. These cost advantages seem to produce above average margins and are beneficial for the company.
  • Network Effects: There are no meaningful network effects that the company can leverage.
  • Intangible Assets: There are very few intangible assets the company owns beyond the locations of the properties, and any of the intangible assets that the company does own are not particularly powerful. * Conclusion: Overall, NSA has a narrow moat, based on the somewhat unique business model. They have a decent cost advantage using their unique acquisition pipeline with PROs, but otherwise, there is not much that could help them push their revenue over the long term or have pricing power.

Risks to the Moat and Business Resilience

  • Rising Interest Rates: Since a decent proportion of their capital structure is based on floating rate loans, rising interest rates could cause an issue for the company’s profitability in coming years. A sudden rate hike could increase the amount that the company has to pay to service its debt and decrease their returns, a large portion of which might be passed on to shareholders.
  • Economic Slowdown An economic recession or slowdown would drastically decrease demand for self storage. This is because the business model depends on individuals and companies being able to afford the extra space to store their belongings. During an economic downturn, consumers might have fewer belongings or might be unable to afford this “extra” storage and the volume would see a major decline.
  • Competitive Intensity: Consolidation within the self storage industry could lead to more intense competition, which could affect NSA’s ability to keep returns on capital at an acceptable level.
    • Poor Performance in Ventures: NSA uses its existing management teams in the PRO to acquire new properties. A failure to find solid acquisitions that perform well enough for the company will have implications for performance.
  • Accounting Issues: The use of non-GAAP accounting measures, in addition to complex accounting for joint ventures, are things that can make analysis hard. These measures also leave a lot of room for creative accounting, which could potentially cause negative impacts on company value.

Understandability

  • Rating: 2/5
  • Justification: While at its core the business model is relatively simple, the accounting for joint ventures, preferred and common shares, and warrants creates complexities. Furthermore, due to the widespread use of non-GAAP measures, it becomes difficult to analyze the company’s true performance and it needs a lot more due diligence to understand the true financials of the company and how it compares with its competitors.

Balance Sheet Health

  • Rating: 3/5
  • Justification: The company has assets that are worth 2x their total liabilities, but a large percentage of it is derived from property, which is difficult to quantify. The company has low cash reserves and high debt, which is slightly concerning, but it’s not unexpected for a real estate business. The debt is spread over several maturities, which provides some level of downside protection, and not all the debt is on floating interest rate. The quick ratio of the company is very low but is partly explained by high levels of inventories on hand due to the nature of their business. Overall, I believe the company has a healthy balance sheet, but it is something to keep a close eye on.