National Storage: A Proven Plan
02/03/2016 7:00 am EST
From time to time, I’ve been tempted to use the word guaranteed when referring to an investment recommendation, but I know better, as even seemingly bulletproof companies can fail, cautions Timothy Lutts, editor of Cabot Stock of the Month.
So I will not use the word “guaranteed” to describe National Storage Affiliates (NSA). But I will explain that the temptation is there.
National Storage Affiliates is a REIT with a simple and proven business plan: increase its footprint in the fragmented self-storage industry by acquiring and consolidating the operations of smaller local and regional storage businesses.
The benefit to local operators—who typically continue to operate their businesses—is that they contribute assets to the trust on a tax-deferred basis.
As a result, they then enjoy the benefits of reduced cost of capital, increased marketing opportunities, and reduced administrative costs. Also, they get the carrot of an eventual exit strategy.
The advantage to the trust is that earnings from local and regional operators trickle into the trust and enable—in theory—steadily growing earnings and dividends.
Right now, the dividend is $0.20 per quarter (it was increased from $0.19 in November), or $0.80 per year, for a yield of 4.5%.
Now, this is not a new business model. In fact, the largest storage REIT in the country, Public Storage (PSA), has used this business model for years.
But Public Storage, now valued at $43 billion, is so large revenues are growing at single-digit rates. Meanwhile, over the past 4 quarters, the average growth rate at National Storage has been 99%.
Today National Storage Affiliates is the sixth largest self-storage company in the US, with 276 properties in 16 states and focused on the top 100 metropolitan properties in the US.
Ideally, this pattern continues for a very long time and earnings and dividends grow. But nothing is certain. The stock market brings surprises all the time and there are business risks, too.
National Storage Affiliates might develop management trouble. A price war might break out. Politicians might change the rules that favor REITs or rising interest rates might increase the cost of doing business.
For now, though, the chart says all is well. NSA came public last May at $13 to little fanfare and fell to $11.50 in late August. But since then, the trend has been steadily up.
The stock has been consolidating its gains and an ideal buy point might come if the stock can pull back to that 50-day moving average at $15.60.
Alternatively, a breakout to new highs on big volume would signal a good buying opportunity.
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