2023-03-13 09:00:00 ET
Summary
- CubeSmart is growing its presence within the self-storage REIT space.
- The self-storage sector is rather recession-proof in many ways and the business model is quite attractive.
- CubeSmart and their technological advances have made headway with younger customers.
Self-storage is a sector that has stood the test of time regardless of the economic backdrop. The sector also has plenty of tailwinds due to the decreasing size of the average home. Although home size may decrease, the amount of stuff Americans buy does not, that only grows and if we have learned one thing about Americans, the majority of them do not like to get rid of things all that often. More things plus less room equals continued demand for self-storage.
Self-storage is not a high barrier of entry sector, as there are a lot of private investors that own self-storage facilities. However, the major players in the space and the ones with the biggest reach happen to be the following:
Public Storage is by far the leader in the space with the most units and the largest market cap at $53 billion. Extra Space storage has a market cap of $23 billion, making them the second largest self-storage REIT. Life Storage and CubeSmart trade places for the third largest, as they have market caps of $11.0 billion and $10.7 billion, respectively.
Today we will take a closer look at CubeSmart.
CUBE Is A Smart Pick
As we just saw, CubeSmart is one of the largest public self-storage REITs on the market with 1,279 properties across the United States.
CUBE Q4 Investor Presentation
CUBE has been a public company for nearly 20 years. Over the past decade, shareholders have seen a total return of roughly 335%, far outpacing the broader REIT sector ( VNQ ) as well as the S&P 500 ( SPY ), which produced a total return of 82% and 210%, respectively, over the same period.
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When it comes to self-storage, the capital expenditure requirements are quite low and the leases are short-term in nature. You hear me discuss the consistency within the net lease retail sector, which has long-term leases with built in escalators, but self-storage is the complete opposite. Although the short-term leases bring in less predictability, in times of fast growing price appreciation, it allows the company to reprice quickly based on current market conditions.
CubeSmart tends to focus on high-quality, more mature markets. Nearly 80% of the company's NOI comes from the top 25 markets in the US. The company also focuses on dense areas in terms of population, with an average population of nearly 200K within a 3-mile radius, far outpacing their peers.
CUBE Q4 Investor Presentation
Not only is the focus on dense population areas, but the company also focuses on areas with higher household income. As you can see from the chart above, CUBE has the highest household income within a 3-mile radius of any of its peers.
CUBE has done a fantastic job integrating its digital platform to reach a much more technologically sound demographic customer, which helps replicate the in-person experience and reduce labor costs for the company.
Continued strong cash flows has allowed the company to expand. This expansion has been generated from organic growth, high-quality acquisitions, as well as joint venture deals and third-party management. All of this together provides a diversified set of income stream for CubeSmart.
As you can see below, the company has grown from 460 properties in 2010, to 1,279 at the end of 2022, increasing by 178%.
CUBE Q4 Investor Presentation
In 2022, CUBE saw same-store revenue growth of 12.7% and same-store NOI growth of 16.7%. The portfolio has also maintained an occupancy rate above 90%.
Not only has the growth in cash flows allowed the company to expand its business in terms of properties, but it has also allowed shareholders to take home a bigger dividend check for 13 consecutive years and counting. Annual dividends per share has increased nearly 400% over the past decade.
CUBE Q4 Investor Presentation
The company's board of directors increased the dividend again in Q4 2022, and the company now pays an annual dividend for $1.96 per share, which equates to a current dividend yield of 4.1%. The dividend has been growing at a near 10% clip on average over the past five years. The dividend is well covered with an FFO payout ratio of 74%.
Is CUBE A Buy, Hold, or Sell?
CubeSmart is a great company that continues to expand not only in terms of size, but also in terms of financial performance. The company has built a well-diversified portfolio in key markets that will continue to grow over a long period of time.
However, the Federal Reserve has indicated recently that interest rates will continue to increase, with the terminal rate being higher than last expected. The next Fed meeting commences this week in which we expect another 25 basis point rate hike with some looking for a 50 basis point hike.
Regardless, higher rates can be a drag on REITs, depending on the strength of the economy. Many investors tie REIT performance strictly to interest rates, but that is not accurate. Higher rates can sometimes take place when an economy is humming along nicely, which in turn would be a tailwind for REITs. However, the US economy looks to be slowing as well as the consumer.
As such, I believe we will see further declines in the overall market and real estate stocks in particular. CUBE is a great company with a solid balance sheet that should allow them to continue on their path even through a slow economic period, but I will wait for a better opportunity to add to my position.
Investor Takeaway
CubeSmart is one of the four largest self-storage REITs on the market today. They focus on key markets with dense populations and higher household income.
Analysts are looking for AFFO of $2.58 per share in 2023, which equates to a forward AFFO multiple of 18.4x. Over the past five years, shares of CUBE have traded at an average AFFO multiple of 19.8x, suggesting shares are overvalued in regards to its recent historical valuation. An AFFO valuation below 17x is an area I would look to add to my position in CUBE, as such, I currently rate the stock a HOLD.
Fast Graphs
For further details see:
CubeSmart: Income, Growth, And Technology Within Self-Storage