Kroll Bond Rating Agency (KBRA) has affirmed the BBB ratings for issuer NSA OP, LP—the operating partnership subsidiary of National Storage Affiliates Trust (NYSE:NSA)—and the issuer’s $150 million outstanding privately placed senior unsecured notes. KBRA has also affirmed the BBB- rating for parent NSA’s $218 million outstanding Series A redeemable preferred shares. The affirmations follow our analysis of the issuer’s financial profile and operating characteristics, which remain consistent with its outstanding ratings.
National Storage Affiliates is an internally managed REIT with year-end 2019 ownership interests in 742 self-storage properties1 located in 35 states and Puerto Rico.
Key Credit Considerations
(+) Low Leverage Profile
Leverage represents a low 31.7% based on year-end consolidated debt and current $4.9 billion total market capitalization2, and 35.0% including NSA’s share of debt within off-balance sheet joint ventures. Leverage based on first quarter financial results is expected to be moderately higher based on debt-funded first quarter acquisitions, as discussed below. NSA’s $1.275 billion unsecured debt is well supported by a large and diversified unencumbered asset pool representing approximately 80% of net operating income (“NOI”) from consolidated properties. NSA has placed no new mortgages on consolidated properties in recent years.
(+) Portfolio Diversification
NSA’s portfolio is well diversified across US markets, with its largest MSA (Riverside) representing 14% of same store NOI. Over 75% of same store NOI was derived from the 100 largest MSAs, with NSA’s largest market exposures including Portland (11%), Los Angeles (7%) and Atlanta (5%).
(+) Staggered Debt Maturities and Liquidity
Debt maturities are well-staggered, with a weighted-average maturity of 5.9 years and no unsecured debt maturing until 2023. NSA’s unsecured revolving credit facility, expanded to $500 million during 2019, was undrawn at year-end 2019. Availability was subsequently reduced by approximately $200 million, as disclosed in NSA’s February 24th earnings announcement, to fund $218 million of year-to-date acquisitions.
(+) Operating Performance
NSA’s same-store revenue and NOI growth have consistently led the storage sector and ranked among the highest for any REIT, with same-store NOI growth averaging 5.0% in 2019 and an annualized 7.7% between 2015 and 2019. Same-store NOI growth versus prior-year levels trended lower in each quarter of 2019, from 6.7% in the first quarter to 3.8% in the fourth quarter.
(+) Minimal Operating Capital Requirements
KBRA considers storage properties to have lower capital expenditures and risk of obsolescence than most commercial property types. Recurring capex for seasoned properties represented 3.4% of 2019 consolidated property NOI, with capex related to recently acquired properties representing an additional 3.2%.
(+) Recession Resilience
During the Great Recession, same-property NOI declines were more moderate for storage than other REIT sectors, averaging -4.0% during 2009 and turning positive in the second quarter of 2010. Year-to-date, storage REIT share prices have declined by an average 12.0%3, compared to declines of 19.1% for all REITs and 20.4% for apartment REITs.
(+) Operating Platform
NSA benefits from the considerable local market expertise of the participating regional operators (“PROs”) who manage the majority of NSA’s consolidated properties (PROs managed nearly all consolidated properties prior to the SecurCare merger discussed below). Alignment of interests is considered among the most favorable of any REIT, owing to the high equity ownership by senior management and PROs, and the subordination of PROs’ performance-based profit allocations.
(+) Management Succession and PRO Internalization
In January 2020, Tamara Fischer transitioned from CFO to CEO, replacing co-founder Arlen Nordhagen who transitioned from Chairman to Executive Chairman and remains an active member of NSA’s senior management team. Brandon Togashi, previously Chief Accounting Officer, transitioned to the role of CFO. NSA recently announced the internalization of its largest PRO SecurCare and appointment of its President and CEO, Dave Cramer, to the role of COO. The organizational changes reduce uncertainties regarding succession of senior management and management for the remainder of NSA’s PRO-managed properties, which KBRA anticipates will be internalized by NSA as PROs retire.
(-) Oversupply Continues to Weigh on Growth in New Customer Rents
In many US markets, an excess of new supply continues to weigh on storage rent growth. The most recent National Self Storage Report by Yardi Matrix reported that March 2020 “street” rents were unchanged from prior-year levels for non-climate-controlled units, and 1.4% lower for climate-controlled units. NSA’s ability to generate positive same-store revenue growth has increasingly depended on its ability to increase rents for existing customers. With in-place rents for NSA’s existing customers now slightly higher than street rents for new customers, recession-related demand weakness could weigh on NSA’s near-term ability to sustain revenue and NOI growth.
(-) Covid-19 Related Recession Risks
The vast majority of NSA’s properties have remained open throughout 2020, mitigating direct impact of Covid-19 related closures. Much of NSA’s leasing activity has shifted to internet and call centers, resulting in a moderate increase in customer acquisition costs, but accelerating rollout of on-line leasing portals that are expected to create opportunities for longer term cost savings, more targeted marketing strategies, and higher capture rates. To a lesser degree than other property types, demand for storage is expected to be negatively impacted by the current recession, as higher unemployment weighs on discretionary spending and small businesses may be required to scale back their storage requirements.
Liquidity
Liquidity represented approximately $520 million at year-end, comprised of the undrawn revolving credit facility and $21 million cash. Liquidity at the end of February totaled approximately $300 million, net of year-to-date acquisition-related borrowings discussed above. NSA has consistently demonstrated access to the bank term loan market—including for maturities up to 10 years—as well as underwritten and ATM equity offerings (first ATM offering was December 2017). In 2019 NSA further expanded capital sources to include private placement of unsecured notes. Throughout NSA’s history, funding pressures associated with larger portfolio acquisitions have been partially mitigated by accompanying equity issuance via partnership units. NSA has minimal floating-rate debt exposure, and no unsecured debt maturing until 2023.
Rating Sensitivities
KBRA identifies factors that could influence credit rating’s propensity to be upgraded or downgraded.
Upgrade: Acceleration in same-store NOI growth; funding of external growth through a balanced mix of debt and equity (shares and/or partnership units); reduced leverage; additional portfolio diversification; continued diversification of debt funding sources; moderate use of bank credit facilities; successful internalization of PRO-managed properties and management succession at the regional level.
Downgrade: Increased leverage resulting from shift to debt-funded acquisitions or share repurchases; outlook for an extended downturn in company revenue or storage rents resulting from supply/demand imbalances; significant increase in leverage or mortgage debt as a result of joint venture partner buyouts.
ESG Considerations
KBRA’s ratings incorporate all material credit factors including those that relate to Environmental, Social, and Governance (ESG) factors. While ESG factors may influence ratings, it is important to underscore that KBRA’s ratings do not incorporate value-based judgments. Throughout our analysis, KBRA captures the impact of ESG factors in the same manner as all other credit relevant factors. More information on ESG can be found on KBRA’s website, click here.
Environmental Factors
Energy Efficiency
NSA’s storage portfolio is considered to have a lower environmental impact than other REITS and property types. Energy consumption is low and limited primarily to internal and external lighting that is typically managed by motion-sensor controls, with NSA continuing to upgrade to more efficient LED lighting.
Environmental Pollution
Environmental contamination can have a significant impact on the marketability, refinance ability, and value of a property. In addition, it can subject the trust to potential litigation from neighboring property owners should contamination migrate offsite.
Social
Socio-Economic Conditions
Demographic trends drive the overall direction in which an economy is moving, which in turn influences the underlying growth rate of the economy, consumption, and the demand for and performance of financial assets. These trends are mainly affected by the population growth, demographic change, rate of employment and its age, consumer behavior and other secular trends, as well as changes in regulation that influence these factors. KBRA recognizes that in adverse economic conditions, including those stemming from the current COVID-19 pandemic, NSA’s operating markets and the broader real estate industry could negatively affect occupancy levels and rental rates leading to degradation in operating results and the value of self-storage properties.
Governance
Management
KBRA evaluates the structures and processes that support a company’s ability to govern its business in ways that foster transparency, accountability, proactive decision-making, and adherence to rules and regulations. NSA relies on its PROs and individual site managers to secure and retain tenants as well as to maintain properties. If PROs are unable to staff sufficient on-site personnel, the quality of service and product is subject to degradation, which could lead to decreased occupancy levels and reduced operating performance.
To access ratings and relevant documents, click here.
Related Publications: (available at www.kbra.com)
- National Storage Affiliates Trust Rating Report May 2019
- Global Equity REIT and REOC Rating Methodology
Disclosures
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the U.S. Information Disclosure Form located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
1 Including 175 properties (total assets $1.9 billion, total mortgage debt $1.0 billion) owned by off-balance sheet joint ventures, in which NSA owns a 25% interest.
2 Based on $28.69 closing share price as of April 27, 2020.
3 As of April 27th, 2020.
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