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Better Buy: National Storage Affiliates Trust vs. Public Storage

Aug 30, 2020 by Matthew DiLallo

Self-storage real estate investment trusts (REITs) have outperformed the S&P 500 and most other REITs over the long-term. While the subsector's recent performance hasn't been quite as good due to the industry's building boom, better days appear to be ahead. Because of that, it's an intriguing sector for REIT investors to get to know.

Here's a look at the buy thesis for leading self-storage REITs Public Storage (NYSE: PSA) and National Storage Affiliates (NYSE: NSA).

The case for buying Public Storage

Public Storage is the largest player in the self-storage industry. The company currently owns interest in 2,500 self-storage facilities across 38 states. At 171 million square feet of rentable space, it controls 9% of the U.S. self-storage market. The REIT also holds a 35% interest in European self-storage REIT Shurgard Self Storage, which owns 238 facilities consisting of 13 million square feet in seven Western European countries. In addition to that, it has a 42% stake in U.S. industrial REIT PS Business Parks (NYSE: PSB), which has more than 28 million square feet of commercial space. That size, scale, and diversification set this REIT apart from its peers.

Another factor that makes Public Storage stand out from its rivals is the strength of its balance sheet. The company has one of the highest credit ratings in the REIT sector, backed by an ultra-low leverage ratio of around 1.0 times debt-to-EBITDA and more than $1 billion in cash. That gives it an enormous amount of financial flexibility to develop and acquire additional self-storage facilities. It should have plenty of opportunities to do the latter since non-REIT third parties control 70% of the industry, meaning there's lots of room for consolidation in the sector.

The REIT complements its strong balance sheet with a relatively conservative dividend payout ratio (it has averaged 75% of its FFO over the past year). Because of those factors, its 3.9%-yielding dividend is on rock-solid ground.

The case for buying National Storage Affiliates

National Storage Affiliates is quite a bit smaller than Public Storage. The company currently owns interests in 784 self-storage properties across 35 states and Puerto Rico that have 49.2 million square feet of rentable space. That gives it a 2.6% share of the U.S. self-storage market, making it the sixth-largest player.

One thing that sets National Storage Affiliates apart from other self-storage REITs is its Participating Regional Operators (PROs) structure. Instead of selling part or full control, a private self-storage operator can contribute their portfolio to National Storage Affiliates through a tax-efficient UPREIT structure. That allows them to benefit from National Storage Affiliates' scale, reduced cost of capital, and lower operating costs, while enabling the REIT to grow its management revenue and participate in the upside as these regional operators continue growing.

Besides growing by adding more PROs to its portfolio, National Storage Affiliates also expands by making third-party acquisitions, forming new strategic joint ventures, and buying out PROs or joint venture partners when they're ready to sell. The company has a solid financial profile to pursue this expansion, including an investment-grade credit rating. While it does have an elevated leverage ratio at 6.5 times net debt-to-EBITDA, that's due in part to the PRO structure, which adds about a full point to that number.

The REIT also pays an attractive dividend (it currently yields 4.1%), which it backs with a reasonably low payout ratio (it has averaged 83% this year). It has routinely increased that dividend (giving its investors a 6.3% raise earlier this year). That sets it apart from Public Storage, which hasn't given its investors a raise since 2016 because of the impact the industry's overcapacity issues has had on its ability to grow its FFO.

Always go for the better balance sheet

There's a lot to like about Public Storage and National Storage Affiliates. Both pay an attractive dividend and have lots of room to grow given the fragmentation within the storage sector. While National Storage has a unique approach to consolidation with its PROs structure, Public Storage has a much stronger balance sheet. Because of that, it has the flexibility to make deals as well as plenty of financial cushion to get it through tough times. That reduces investor risk, making it a better buy right now given the current uncertainty due to COVID-19.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.