2023-12-06 08:17:12 ET
Summary
- CubeSmart is a REIT specializing in self-storage properties, known for its cost-effective and convenient storage solutions.
- The company has a solid track record of dividend growth, increasing distributions for 12 consecutive years.
- Despite a recent decline in stock price, CubeSmart presents an attractive buying opportunity as the REIT market transitions into a lower rate environment in 2024.
- CUBE currently trades at a FFO multiple that is below its historical average.
Overview
CubeSmart (CUBE) operates as a REIT (real estate investment trust), specializing in self-storage properties. The business model is boring without a doubt, but it's been highly efficient in returning shareholder value. Its storage facilities are strategically designed to provide cost-effective, conveniently accessible, and climate-controlled storage solutions for both residential and commercial clients. With this in mind, it comes as no surprise that CUBE has remained profitable and has a solid balance sheet.
CUBE has been a solid dividend grower over the last decade. They have managed to increase distributions for 12 consecutive years. The starting dividend yield is around 4.7% and the dividend growth has been excellent. The price reached a high of $57/share in December of 2021 and has since fallen to about $41/share. However, this drop isn't unique as most of the REIT market has taken a slide over the last year. As we head into 2024, I believe REITs like CUBE are an attractive buy and present a unique opportunity to capitalize on a changing market landscape as we transition into a lower rate environment
Compared to Vanguard's Real Estate ETF ( VNQ ), we can see that CUBE smokes the ETF in total return. The REIT is top tier and I will be initiating a position before 2024 comes.
Recent Earnings
CUBE recently reported Funds From Operations (FFO) of $0.68, surpassing estimates by $0.01. This positive outcome was complemented by revenue of $267.88 million, reflecting a 2.5% year-over-year increase. A key driver of CubeSmart's success was the impressive 2.0% year-over-year growth in same-store net operating income (NOI) for its 592 stores. This growth was fueled by a 2.3% increase in revenue and a well-managed 3.0% rise in property operating expenses.
CUBE has been making strides by diversifying its portfolio and leveraging its expertise in managing storage facilities. CUBE maintained a strong average same-store occupancy of 92.1% throughout the quarter. I think that if this continues, we will see continued strength in the balance sheet. For reference, CUBE has $610M in cash from operations which outshines the sector median of $245M.
CUBE also has a very good standing with their debt maturity. As stated in the recent earnings call :
Our average debt maturity is 5.6 years, 99.5% of our debt is fixed rate. We have no significant maturities until November 2025 and our leverage levels remains very low at 4.1 times debt to EBITDA. - Tim Martin - Chief Financial Officer
Looking ahead, CUBE provided a positive outlook for 2023. The company revised its fully diluted earnings per share estimate for the year to be in the range of $1.78 to $1.80. Lastly, CUBE anticipates its fully diluted FFO per share for 2023 to be between $2.65 and $2.67.
Portfolio Strategy
CUBE has a portfolio of managed and owned stores across the country. They operate in 177 markets across 41 different states in the US. The strategic placement of locations has helped CUBE thrive. The average median household income is approaching $95,000 a year within a 3-mile radius of locations. They are targeting the wealthier Americans. For context, the median household income in the US is $75,000.
In addition, CUBE's expansion efforts have helped fuel growth. They have completed $3B worth of acquisitions since 2018, while also allocating $683M toward new project developments. 100% of new developments take place within the top ten markets in the country. $1.5B worth of acquisitions come from third-party management which will help deliver increased profitability through management fees.
Additionally, CUBE expanded its footprint by adding 41 stores to its third-party management platform during the quarter. This strategic move increased the total count of stores under third-party management to 763.
CUBE happens to be a market leader in the New York City component of their business. The NYC market makes up the largest part of their portfolio of Class-A properties. They've seen very strong growth here and the expectation is for this positive trend to extend into the fourth quarter and throughout 2024. In the most recent earnings call, the CEO confirmed there is a higher percentage of renters and reduced vulnerability to fluctuations in the single-family home market in the New York market.
Dividend & Valuation
As of the latest declared quarterly dividend of $0.49/share, the current dividend yield is roughly 4.7%. The dividend growth story here is a good one with a total dividend increase of 391% from 2012 - 2022. The CAGR of the dividend over the last 5-year period is 10.31% .
CUBE has an AFFO payout ratio of 73% which is healthy and leaves plenty of room for coverage and continued dividend growth. Interest coverage is also extremely healthy at 4.88x compared to the sector median of 1.77x. The combination of healthy growth alongside a consistent track record is reassuring as an investor who values reliable income from my portfolio.
I anticipate that CUBE will sustain its current dividend and achieve a moderate 5-7% Adjusted Funds From Operations (FFO) growth in addition to that. Based on management's outlook as well as the current year's revenue growth performance, 5-7% growth is likely going forward. Some additional insights to consider is that the 5-year historical CAGR of the AFFO is 9.73%. Lastly, a big driver for CUBE's revenue is the demand for storage units.
There are lots of layers to it, but ultimately the demand relies on the affordability of homes and ease of mobility. Throughout 2021 and 2022, we saw an elevated level of sales activity in homes. As a result, more people were on the move, and storage units were in demand. Now, the story is much different, so we think a conservative growth outlook here is more necessary. We will discuss this more in-depth in the Risks section coming up.
CUBE Investor Presentation
In terms of potential upside, the stock is currently trading at a 15.7x P/FFO, which is notably below the historical average of 19.7x. This can be used to reinforce that CUBE is currently undervalued. For reference, the average price target sits at $43.64/share which indicates a slight upside of 4.4%.
If we were to compare the P/FFO to some peers, we'd see that CUBE trades at a slight discount. Public Storage ( PSA ) and Space Storage ( EXR ) are two of the closest competitors.
- PSA trades at a P/FFO of 18.57x
- EXR trades at a P/FFO of 18x
These figures are relevant because CUBE has a similar level of total returns over the past 5-year time frame.
Risks
According to Charles Byerly , the CEO of Westport Properties, the self-storage industry has experienced a decline in demand since July 2022. This trend aligns with the diminishing numbers in existing home sales, which have been consistently decreasing due to rising interest rates.
The primary catalyst for self-storage demand is ease of mobility. When individuals engage in buying or selling homes there is a notable surge in demand for self-storage services. However, given the current scenario with elevated interest rates, there is a likelihood that this pressure on demand may persist, leading some to speculate that high rates might endure.
We've already seen home sale activity plunge as much as 21% in some areas of the country. If home sale activity stays on the lower end of the range, there is a possibility that we see revenue growth slow for CUBE. As previously mentioned, this is why I choose to take a conservative growth estimate into account.
We may see the shape of the market change going into 2024 as it's expected that we will get 4 rate cuts. As rates get cut, my thoughts are that home buying volume will begin to rise again.
Takeaway
CubeSmart ( CUBE ) stands out in the self-storage sector despite the seemingly mundane nature of its business model. The strategic design of its storage facilities, offering cost-effective, accessible, and climate-controlled solutions, has contributed to its sustained profitability and solid balance sheet.
Over the past decade, CUBE has demonstrated its strength as a dividend grower, marking 12 consecutive years of increased distributions. While the stock witnessed a decline from its peak in December 2021, in line with broader trends in the REIT market, the current market conditions present an attractive buying opportunity, especially as we transition into a lower rate environment in 2024.
Examining the dividend and valuation aspects, CUBE's current dividend yield of approximately 4.7%, coupled with a consistent dividend growth story, reflects a sound financial position. With a healthy Adjusted Funds From Operations (AFFO) payout ratio and robust interest coverage, CUBE has ample room for sustained dividend growth.
For further details see:
CubeSmart: Strong Dividend Growth & Trading At A Discount