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Analysts Weigh In On Recent REIT IPO National Storage Affiliates

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Analysts Weigh In On Recent REIT IPO National Storage Affiliates

On May 18, Wall Street analysts weighed in on newly public self-storage REIT National Storage Affiliates Trust (NYSE: NSA) after an IPO which generated less equity cash than had been projected.

The original IPO price range for National Storage was publicized to be $15 to $17 per share; however, NSA shares have traded in a range of $12.70 to $13.65 since the REIT's debut.

This has resulted in the NSA balance sheet having a higher initial debt to total enterprise value than was anticipated at the time of the IPO.

Sell It, But Still Run It

NSA's "dual-currency" acquisition model, is designed to attract best-in-class private regional operators (PROs) to its National Storage platform; by allowing these PRO's a partial sale, plus an opportunity to continue to manage and receive returns based upon SP units which tracking their regional portfolio P&L moving forward.

No other public REIT has this complicated structure.

Self -Storage REITs - Traditional Model

The publicly traded REITs who have pioneered this sector, all utilize more traditional acquisition and third party management strategies to grow, including: Public Storage (NYSE: PSA), Extra Space Storage (NYSE: EXR), CubeSmart (NYSE: CUBE) and Sovran Self Storage (NYSE: SSS).

Tale Of The Tape - Past Year

nsa_-_ychart_peer_group_vs_rmz_may_18.jpg

The Vanguard REIT Index ETF (NYSE: VNQ) tracks the MSCI REIT Index, a good proxy for the broader equity REIT sector.

Related Link: The MSCI REIT Index Is Adding These 5 REITs - Should You?

NSA Scale - 6 Founding PRO Operators

After the IPO, National Storage in aggregate was the sixth-largest self-storage company, which consisted of self-storage operator in the U.S. with 246 properties containing 13.7 million square feet.

nsa_-_ms_exhibit_1_original_6-pros.jpg

One of the issues facing this roll-up strategy is a lack of consistent national branding.

Morgan Stanley - NSA: Overweight, $16 PT

The MS base case NSA price target is primarily derived from a 17.5x multiple of 2016E $0.95 FFO, (vs. 19x for SSS, which is the low end of the peer group).

Same-store NOI growth for the peer group is assumed at 8 percent; while base case for NSA assumes slower growth of 5 percent per year.

Notably, the MS base case conservatively does not include any other PRO's joining or additional acquisitions other than the existing pipeline.

Morgan Stanley - Base Case Pipeline

nsa_-_ms_30_growth_2_yrs_may_18.jpg

MS noted that the six founding PRO operators "bring a pipeline of over 110 properties, which we expect will allow NSA to grow its asset base by ~30% over the next two years in our Base Case."

Wells Fargo - Market Perform, $13 to $14 Price Target

The WFC model assumes 2015 FFO of $0.78 per share and $0.87 per share in 2016; with 2015 and 2016 AFFO estimates of $0.85 and $0.91 per share, respectively.

NSA shares trade at 17x WFC 2015 FFO estimate, which "compares to 22x for the other 4 self-storage REITs under coverage."

The high end of Wells valuation range "represents the result of [its] net asset value (NAV) estimate of $14.00 per share."

Notably, WFC feels that NSA management has sufficient self-storage and operational REIT experience to manage the anticipated "roll-up" growth and help develop more sophisticated branding and marketing initiatives to better leverage a national platform.

Related Link: Wunderlich Likes The JCAP mREIT IPO: Could It Be A Better Mousetrap?

NSA Initial Portfolio Concentration

nsa_-_wfc_portfolio_top_5_msas.jpg

With only six initial PROs, NSA has a more concentrated portfolio than its larger public peers.

Complicated Equity "Waterfall"

Investors who buy NSA shares are sharing ownership with similar PRO OP units (effectively 1:1); and with PRO SP (subordinated performance) units which skew the upside for PRO operators, while also acting to dampen potential downside risk for common shareholders.

nsa_-_ms_waterfall_exhibit.jpg

Investor Takeaway

Wells Fargo's thesis that investors will wait to see how things go prior to buying appears to be playing out initially; however, this appears to significantly discount NSA's upside potential.

SunTrust Robinson Humphrey has also initiated NSA shares at Neutral; while Jefferies has initiated NSA at a Buy rating, with the most optimistic price target of $17 per share.

Meanwhile, Morgan Stanley also noted that the projected NSA dividend of $0.76 per share would yield ~6 percent based upon NSA's current share price; so it appears that bullish investors can benefit from a premium yield while this story evolves.

Posted-In: Analyst Color REIT Small Cap Analysis Initiation IPOs Top Stories Trading Ideas Real Estate Best of Benzinga

 

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