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Thinking of Buying Public Storage? Buy National Storage Affiliates Instead.

Oct 20, 2020 by Marc Rapport
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The self-storage industry has proven itself to be fairly recession proof and very popular among consumers and investors alike, the latter both in the form of private developers and public companies. Real estate investment trusts (REITs), in fact, have been attracting stock market dollars for decades, and they all have this in common: They own and manage storage facilities and collect rent from customers. But after that, there are some differences that merit discussing if you're considering jumping into this segment.

Specifically, below's a case for buying one of the smaller entries compared to the very largest, National Storage Affiliates (NYSE: NSA) and Public Storage (NYSE: PSA), respectively.

Comparing them by the numbers

With nearly 2,500 facilities across the United States, California-based Public Storage is the world's largest owner, operator, and developer of self-storage facilities. National Storage Affiliates (NSA) isn't. The Colorado-based company has 784 self-storage properties in 35 states. That makes it a significant player in the storage space space, of course, but its 2019 net income of $66.0 million is dwarfed by the $1.3 billion reported by Public Storage.

Public Storage and NSA are two of the seven self-storage REITs grouped together by Nareit. As of Sept. 30, that group posted year-to-date total return of 5.83% and a dividend yield of 3.66%.

Public Storage was yielding 3.40% on its Oct. 13 closing price of $235.39, giving it a market cap of about $41 billion, while NSA was yielding 3.95% on its closing price of $34.14, giving it a market cap of about $4 billion that day. Both also are again approaching their 52-week highs of $264 and $38.11, respectively.

Both also have been consistent in their dividend payouts: Public Storage has been paying $2.00 per share per quarter since the fourth quarter of 2016 while NSA bumped its dividend up a penny to $0.34 in the second quarter after three straight quarters at $0.33.

As for that critical measure of core funds from operations (FFO), NSA reported $41.3 million, or $0.41 per share in the second quarter, up 7.9% per share from 2Q19. For Public Storage, make that $2.46 per share, a decline of 6.8% from the year-ago quarter.

Public Storage is a strong player, but NSA has a twist

Make no mistake, Public Storage isn't chopped liver. It's been around a long time and making investors a lot of money since going public in 1995. And while its growth has slowed a bit, there are reasons to believe that could change soon.

But Public Storage's net income actually fell 19.68% year over year in the second quarter and by 14.52% from 2018 to 2019. For NSA, make that gains of 0.3% and 17.2%, respectively.

And while NSA only went public in 2015, it has a business model that differs from a lot of peers and I think makes it an attractive consideration for a buy and hold.

UPREIT structure and integrating independent owners

The company is growing by acquisition, adding four properties in the second quarter after growing by 69 properties in 2019. But behind that is its arrangements with participating regional operators (PROs).

These allow the facility owner -- the affiliate in National Storage Affiliates -- to remain in place by using a tax-advantaged UPREIT structure to give independently owned storage operators access to lower cost of capital and specific tax benefits while they keep their interest in the property through REIT shares.

Doing so allows NSA to add facilities more quickly in a market that many argue is nearing overbuilt, especially for new construction, while taking advantage of the local knowledge and experience of the operators who sign up for that arrangement.

The bottom line on National Storage Affiliates

Just a few weeks ago, NSA issued 4.5 million shares of new stock at $33.15 a share, adding a bit of momentum to the company's forward motion that makes it a compelling consideration for investing in the self-storage space and in a dividend stock in general.

And here's what Tamara Fischer, president and CEO, said when the company announced its latest dividend bump: "NSA's ability to continue to grow common share dividends and core funds from operations (core FFO) per share, despite the COVID-19 pandemic and current economic recession, attests to the benefits of our differentiated PRO structure as well as the resiliency of the self-storage sector."

Makes sense to me. That combination has proven to work in the five years since National Storage Affiliates has gone public and gives some credence to believing it could outperform its competition in this crowded segment going forward.

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Marc Rapport 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.