The real estate investment trust (REIT) sector has been hammered in 2022; the Real Estate Select Sector SPDR ETF (XLRE) was down 27.5% year-to-date as of early December, recalls Tim Plaehn, income specialist and editor of The Dividend Hunter.
When a sector as fundamentally solid as commercial real estate goes into bear market territory, it’s time to invest in the best companies out of the group.
National Storage Affiliates Trust (NSA) — my conservative Top Pick for 2023 — owns and operates 1,100 self-storage facilities located in 42 states and Puerto Rico. Self-storage, which has proven to be recession resistant, has historically been the best-performing REIT sub-sector.
National Storage employs what it calls its PRO (Participating Regional Operators) strategy to grow the business. PROs are self-storage owners that have contributed their properties in exchange for shares of NSA. The PROs continue to operate the self-storage businesses they have built.
Over the last year, the NSA share price dropped by 40%. Here is how the business fared for the 12 months through the 2022 third quarter:
* 10.7% same-store revenue growth
* 12.1% same-store net operating income growth
* 26.3% core FFO per share growth
* 34% growth of the dividend rate
There has been a severe dislocation between the National Storage’s free cash flow and dividend growth compared to the share price. As a result, the NSA yield has increased from 2.3% a year ago to a current 5.75%.
Historically, the investment yields around 4%, and National Storage grows its dividend by 10% to 15% annually. To get back to a 4% yield, the NSA share price needs to go to $55, before adding in for any dividend increases.