In the current environment of increased uncertainty, many risk-averse investors have been turning their attention towards both physical real estate and REITs. Real estate is considered a safer asset class these days, as its income prospects provide investors with a wider margin of safety.
In this piece, we are looking at and comparing two companies in the space, particularly in the industrial-REITs sub-industries, which in addition to their pleasing yields, offer investors substantial dividend-growth prospects.
Extra Space Storage Inc. (EXR) and National Storage Affiliates Trust (NSA) are two self-storage REITs that have rewarded their shareholders with market-beating returns over the past several years.
EXR owns and operates 2,096 self-storage locations in 41 states, Washington, D.C., and Puerto Rico, comprising about 160.1 million square feet of rentable space. NSA’s operations are a bit humbler, with the company owning 873 self-storage properties in 39 states and Puerto Rico, amounting close to 55.1 million rentable square feet.
The Dividend Growth Stories
EXR had to suspend its dividend during the Great Financial Crisis. However, robust growth over the past decade driven by growing NOI (net operating income) in its properties and growing margins amid operating synergies as the company scales have allowed for robust dividend growth.
The company now features a remarkable dividend-per-share growth track record, including a 10-year DPS CAGR of 23.2%. The company’s latest sequential DPS hike of 20% (or 50% year-over-year) likely indicates an acceleration in DPS growth going forward as well.
Unlike EXR’s 13-year dividend growth track record, NSA counts seven years of consecutive annual dividend increases. However, note that the trust was founded in 2013.
Its financials have grown rather impressively during its rather brief history of operations, primarily through acquisitions. The company currently has an acquisition pipeline counting 300+ properties, which are also going to be accretive to earnings.
NSA’s five-year DPS CAGR currently stands at 13.6%, which compares to 9.9% in the case of EXR. That said, note that the latter’s DPS growth has been notably accelerating lately, as mentioned earlier.
Payout Ratios and Valuations
EXR’s management has guided for full-year 2022 FFO per share between $7.70 and $7.95, which implies year-over-year growth of 13.3% at the midpoint of $7.83. This amount also implies a payout ratio of 77% at its current dividend per share run rate and a forward P/FFO of 24.9 at the stock’s current price levels.
NSA outlook, on the other hand, includes core FFO/share to land between $2.68 and $2.74 in 2022, which implies year-over-year growth of 19.9% at the midpoint. Similarly, assuming the midpoint of $2.71, the payout ratio stands at 74% at its current dividend per share run-rate and a P/FFO of 22.3 at the stock’s current price levels.
EXR and NSA currently feature dividend yields of 2.55% and 3.29% as well.
Wall Street’s Take
Turning to Wall Street, EXR stock has a Moderate Buy consensus rating. That’s based on three Buys, two Holds, and one Sell assigned in the past three months. The average Extra Space Storage price target of $221 implies 13.4% upside potential.
Analyst price targets for EXR range from a low of $172 per share to a high of $246 per share.
NSA stock also has a Moderate Buy consensus rating, based on two Buys and one Sell rating assigned in the past three months. The average National Storage Affiliates price target of $63.50 implies 5.2% upside potential.
Analyst price targets for NSA range from a low of $60 per share to a high of $67 per share.
Takeaway
In my view, while both companies appear well-positioned to continue to increase their shareholders’ wealth, I believe that NSA would better fit the needs of dividend growth investors. The company has retained robust momentum following its relatively recent incorporation, with an acquisition pipeline that should translate into a somewhat predictable expansion plan.
Dividend growth should remain in the double-digits, with management’s guidance pointing towards growth close to 20% this year, even adjusted for dilution. Finally, the stock offers a notably heftier yield while trading at a slightly cheaper multiple than EXR based on this year’s FFO projections.
For these reasons, I would pick NSA over EXR for my dividend-growth portfolio if looking for exposure in the industrial REIT space.
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