U.S. Markets closed

You May Have Been Looking At National Storage Affiliates Trust (NYSE:NSA) All Wrong

Simply Wall St

National Storage Affiliates Trust is a US$3.0b mid-cap, real estate investment trust (REIT) based in Greenwood Village, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how NSA’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess NSA.

See our latest analysis for National Storage Affiliates Trust

A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT's main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much NSA actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For NSA, its FFO of US$162m makes up 71% of its gross profit, which means the majority of its earnings are high-quality and recurring.

NYSE:NSA Historical Debt, August 28th 2019

Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for NSA to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 13%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take NSA 8 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

I also look at NSA's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 3.79x, it’s safe to say NSA is generating an appropriate amount of cash from its borrowings.

In terms of valuing NSA, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In NSA’s case its P/FFO is 18.64x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.

Next Steps:

In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. National Storage Affiliates Trust can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:

  1. Future Outlook: What are well-informed industry analysts predicting for NSA’s future growth? Take a look at our free research report of analyst consensus for NSA’s outlook.
  2. Valuation: What is NSA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NSA is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.