Executive Summary / Key Takeaways

• Transformation Complete, Benefits Delayed: National Storage Affiliates finished its landmark PRO internalization in July 2024, consolidating 12 brands to 7 and centralizing 250+ properties onto a single operating platform. The strategic logic remains sound—eliminating profit-sharing with regional operators and capturing full economics—but macro headwinds and integration complexity have delayed the payoff, creating a classic "show me" story for investors.

• Sequential Improvement Signals Trough: After a brutal 2024, fundamentals are inflecting. Same-store revenue growth improved sequentially in 16 of 21 MSAs in Q3 2025, contract rates accelerated 160 basis points year-over-year in October, and management declared "the worst is behind us." These developments suggest the cyclical bottom may have passed, even if the recovery path remains gradual.

• Capital Recycling as Value Driver: NSA sold 49 properties for $270M+ in 2024 and repurchased $275M of stock, while continuing dispositions in 2025. This isn't mere portfolio pruning—it's a deliberate strategy to deleverage, fund technology investments, and exit non-core markets. The balance sheet, with net debt-to-EBITDA at 6.7x, provides flexibility but requires monitoring.

• Technology Differentiation Emerging: AI now handles 15% of call volume, the "My Storage Navigator" enables 100% self-service rentals, and digital marketing spend surged 29% year-over-year. These investments address the industry's commoditization risk by reducing cost-to-serve and improving customer acquisition, potentially widening NSA's competitive moat beyond the traditional PRO model.

• Dividend Sustainability Question: At 7.7% yield and 102% payout ratio, the dividend is a major risk factor. With core FFO per share at $0.57 in Q3 and full-year guidance implying ~$2.20, the payout consumes nearly all cash flow. A stumble in the recovery could force a cut, creating a binary outcome for income-focused investors.

Setting the Scene: The PRO Model's Final Evolution

National Storage Affiliates Trust, organized in Maryland on May 16, 2013, began with a simple but powerful insight: the self-storage industry was fragmented, with strong regional operators who understood local markets better than any national REIT could. Founder Arlen Nordhagen, who built SecurCare Self Storage from scratch, envisioned a public REIT that would partner with these operators rather than replace them. The Participating Regional Operator (PRO) structure was born—regional experts would manage properties, share in the upside, and gradually transition their portfolios into NSA's national platform.

For a decade, this model worked brilliantly. NSA scaled to over 1,000 properties across 35 states and Puerto Rico, tapping into local knowledge while building national systems. But the structure had an inherent limitation: NSA shared economics with PROs, creating a layer of cost and complexity. The solution was always part of the long-term vision: internalize the PROs, capture 100% of property-level cash flow, and centralize operations. That vision became reality on July 1, 2024.

The internalization was comprehensive. Twelve distinct brands consolidated to seven. Approximately 250 properties and 380 employees migrated onto NSA's corporate platform. The web domain unified under NSAstorage.com. Every store converted to a single property management system. On paper, this should have unlocked immediate value—eliminating $3.4 million in quarterly management fees (down to $1.2 million post-internalization) and capturing tenant insurance economics from day one.

But reality proved messier. The integration coincided with the worst self-storage cycle in years. New supply deliveries peaked at 3.5% of existing stock in 2024, pressuring occupancy and rental rates. Interest rates remained elevated, dampening housing turnover—the primary demand driver for storage. And the sheer complexity of merging disparate revenue management strategies, rebranding stores, and retraining staff created execution friction. Management candidly admitted it was "taking longer to realize the benefits from the PRO internalization."

This explains why NSA's stock trades at a discount to larger peers despite completing a transformational strategic shift. The market sees a REIT with declining same-store NOI (down 6.1% in Q2 2025) and occupancy below 85% and asks: where's the upside? The answer lies in understanding that NSA is a growth story temporarily disguised as a turnaround.

Technology, Products, and Strategic Differentiation

The PRO model, even internalized, remains NSA's core differentiator. While Public Storage (PSA) and Extra Space Storage (EXR) operate centralized, top-down systems, NSA's heritage of local expertise creates a hybrid advantage. The company can apply national pricing algorithms while adjusting for hyper-local market conditions—a capability that proved crucial during the supply glut. In Sunbelt markets where new development ran rampant, NSA's regional teams could offer targeted concessions without destroying market-wide rate structures.

This local agility is now being augmented with technology. In Q3 2025, marketing expenses jumped 29% year-over-year, but this wasn't indiscriminate spending. The investment targeted digital channels where NSA could measure ROI precisely. Web shopping sessions rose 23% in October, and conversion rates improved 7.1%. More importantly, AI now handles 15% of incoming call volume, deflecting routine inquiries and freeing staff for higher-value interactions. The "My Storage Navigator" tool allows customers to rent units via QR code without ever speaking to a manager—critical for capturing the 65% of rentals that now originate through digital touchpoints.

The new preferred investment program launched in Q3 2025 represents another strategic evolution. This structure allows NSA to invest in self-storage deals with a 10% preferred return, partnering with former PROs on acquisitions. It serves as both a capital-efficient growth vehicle and a captive pipeline—NSA has right of first offer on any properties the joint venture acquires. Management is underwriting conservatively, avoiding aggressive assumptions on exit cap rates or revenue growth. This demonstrates discipline: NSA is growing but not chasing yield in a still-challenged market.

Financial Performance & Segment Dynamics

NSA's financial results in 2025 tell a story of deliberate transition. Total revenue declined 2.5% in Q3 to $188.7 million, driven by two factors: occupancy fell from 86% to 84.5%, and the company sold 12 properties. Rental revenue dropped $4.6 million, while other property-related revenue fell 12.8% as concession activity normalized. Yet beneath these headline numbers, the inflection is visible.

Same-store portfolio rental revenue per occupied square foot, while down 0.4% year-over-year in Q3, has stabilized. More telling, move-in square footage rose 5.8% compared to a year ago, with PRO stores showing 10.1% growth versus 3% for the legacy core portfolio. This divergence proves the internalization is working where it matters most—customer acquisition. The rebranded PRO stores are leasing more space, even if average occupancy hasn't fully recovered.

Net operating income (NOI) margins remain under pressure. Same-store NOI fell 6.1% in Q2 and 5.7% in Q1, with expense growth (4.6% in Q2) outpacing revenue declines. Property taxes, marketing, and utilities drove the increase, partially offset by personnel savings from the internalization. General and administrative expenses fell 12.6% in Q3, evidence of the cost savings materializing. But the full benefit won't show until occupancy recovers and revenue growth turns positive.

The balance sheet reflects this transition period. Net debt-to-EBITDA stood at 6.7x at Q3 2025, above NSA's 5.5x-6.5x target range. The company has no significant maturities until late 2026 and maintains $550 million of revolver availability, but leverage is elevated due to negative NOI growth. Management expects to be a net seller of assets in 2025, using proceeds to pay down debt. This capital recycling—selling 12 properties for $73.1 million in the first nine months of 2025 while acquiring only $24.9 million—demonstrates discipline but also limits growth.

Outlook, Management Guidance, and Execution Risk

NSA's management has been refreshingly transparent about the path ahead. After revising guidance lower in Q2 2025—citing slower PRO benefits, elevated concessions, and persistent supply pressure—they maintained ranges in Q3, citing sequential improvement. The midpoint of full-year guidance implies same-store revenue and NOI growth will continue improving in Q4, building momentum into 2026.

The macro assumptions are conservative. Management assumes no meaningful housing market recovery, with existing home sales stable around 4 million units. They expect new supply to decline from 3.5% of stock in 2024 to 2% by 2027, well below the long-term average. If Fed rate cuts materialize, demand could accelerate faster than modeled. NSA's portfolio, concentrated in top-100 MSAs with above-average homeownership rates, stands to benefit from any recovery driving outsized occupancy gains.

The key execution risk remains the PRO integration. While the heavy lifting is done—systems consolidated, brands unified—the revenue management optimization is ongoing. Management noted that "elevated use of concessions during the quarter was a near-term drag on revenues," suggesting they're still fine-tuning pricing strategies. The 10.1% improvement in PRO store move-ins indicates progress, but until this translates to same-store revenue growth, skepticism is warranted.

Risks and Asymmetries

The dividend payout ratio of 102% is the most immediate risk. With core FFO guidance around $2.20 per share and the quarterly dividend at $0.56 ($2.24 annualized), NSA is paying out more than it earns. Management argues this is temporary, and that improving fundamentals will restore coverage. But if the recovery stalls or leverage rises further, a dividend cut becomes likely. For a REIT trading on yield, this is a binary outcome that could pressure the stock.

Leverage is another constraint. At 6.7x net debt-to-EBITDA, NSA has limited capacity for acquisitions or share buybacks. While the company has no near-term maturities and ample liquidity, any deterioration in NOI would push leverage higher, potentially triggering credit concerns. The capital recycling program mitigates this, but being a net seller in a recovering market means sacrificing growth for balance sheet stability.

New supply remains a wildcard. While deliveries are projected to decline, several markets still face pressure from 2024 completions. If supply moderates slower than expected, occupancy recovery could stall. Conversely, if demand accelerates with lower interest rates, NSA's operational improvements could drive faster-than-expected NOI growth, creating upside asymmetry.

Valuation Context

At $29.71 per share, NSA trades at 13.5x trailing core FFO—roughly in line with larger peers like Public Storage and Extra Space, despite being smaller and less profitable. The 7.7% dividend yield is attractive but reflects market skepticism about sustainability. Price-to-book of 3.6x is reasonable for a REIT with high-quality assets in top MSAs.

The key valuation driver is whether NSA can return to same-store NOI growth. If the company can achieve 2-3% NOI growth in 2026 while maintaining leverage below 6.5x, the stock should re-rate toward 15-16x FFO, implying 15-20% upside plus the dividend. If the recovery falters and leverage rises above 7x, multiple compression could drive the stock into the low $20s.

Conclusion

National Storage Affiliates has completed the most significant transformation in its history, internalizing a PRO structure that defined its growth story. The benefits are real—cost savings materializing, move-in volumes improving, technology investments bearing fruit—but they're masked by cyclical headwinds that are now abating. Management's confidence that "the worst is behind us" is supported by sequential improvement across key metrics.

The investment thesis hinges on two variables: the pace of occupancy recovery and management's ability to balance dividend policy with deleveraging. If NSA can grow same-store NOI by 2-3% in 2026 while maintaining the dividend, the stock offers compelling total return. If leverage constraints force a dividend cut, income investors will flee, creating a better entry point for those focused on the long-term PRO-driven growth story.

For now, NSA is a show-me story at an inflection point. The transformation is complete; the recovery is beginning. The question is whether investors will wait for the proof.