Summary
- CubeSmart reported earnings on Friday, which showed fewer acquisitions in 2022.
- The company is focused on areas with high population density and has a solid balance sheet.
- Shares currently trade for a price/FFO of 17.9x, which is slightly below the average multiple of 19x.
- The yield is at 4.4% and the company has a history of consistent dividend growth. However, investors shouldn't count on large dividend hikes like the company provided over the last two years.
- Patient investors could wait for a potential dip near $40. This would put the yield near 5% and create a solid risk/reward profile for long-term investors.
I have been diversifying my REIT holdings in the last six months, adding industrial REITs and storage REITs to my portfolio. Most REITs are more conservative investments that might not have massive upside, but many have a consistent history of dividend growth, and the valuations became more attractive after a rough 2022 for many sectors. In the self-storage sector, I went with National Storage Affiliates ( NSA ) and CubeSmart ( CUBE ). I plan to cover NSA’s annual results soon, but today I will be taking a look at CubeSmart. The company released its 10-K on Friday, and I figured it was time for an update.
Investment Thesis
Different sectors of REITs have different characteristics, and the self-storage sector is known for providing attractive long term returns without huge volatility. CubeSmart is one of those REITs, and they focus primarily on high density areas like New York. Shares of CubeSmart peaked in the mid-$50s range near the end of 2021 and shares now sit in the mid-$40s even after a nice little post-earnings pop on Friday. That puts the valuation at a price/FFO of 17.9x, which is a bit under the average multiple. The growth isn’t expected to be as good as 2021 and 2022, but I think the REIT can continue to grow for years to come. The dividend yield is 4.4% and CubeSmart has provided consistent dividend hikes since 2011. A better entry point could come in the next couple months and waiting to buy shares at a potential dip near $40 would provide investors with an attractive risk/reward profile.
A Couple Notes From The 10-K
At year end, CubeSmart’s portfolio had a 90% occupancy rate. Acquisitions slowed down in 2022, which isn’t much of a surprise given the economic environment. I will be watching to see if slowing growth becomes the norm, but I think we will see CubeSmart continue to grow its portfolio through prudent acquisitions. Keep in mind that they completed a large acquisition near the end of 2021, so it’s possible that a slowdown to digest that was in the plans.
CUBE Market Focus (cubesmart.com)
Like I mentioned in my previous article , CubeSmart has focused its portfolio on high density areas. A good chunk of the portfolio is in the New York / New Jersey area, which accounted for over 20% of Q3 NOI based on the most recent investor presentation. They also have significant exposure to Florida, Texas, and California, which isn’t a surprise given their focus on densely populated areas. The other thing worth noting from the 10-K is that the balance sheet is still solid.
They have a good debt ladder primarily made up of unsecured debt. The maturities range from 2025 to 2032 with interest rates ranging from 2% to 4.375%. I’m curious to see how they approach future borrowings, but they have a couple years to decide. The valuation isn’t as attractive as it was a couple months ago, near $40, but I’m still holding onto my shares.
Valuation
Shares of CubeSmart became richly valued near the end of 2020 and into 2021, but the selloff in 2022 has given investors a better entry point. Shares currently have a price/FFO 17.9x, which is slightly below the average multiple of 19x. I don’t think shares are dirt cheap, but I think shares have a decent risk/reward profile today.
Price/FFO (fastgraphs.com)
I wouldn’t be counting on multiple expansion from here, but shares have commanded a 25x multiple at times in the last decade, so it’s certainly a possibility. To be perfectly honest, I would probably be a seller if we do see that kind of multiple expansion. This would put shares above $60 in the next couple years, and I would have a hard time passing on locking in those returns to reinvest elsewhere. CubeSmart stock's valuation is still attractive enough to be long, but the dividend growth over the last couple years has been impressive.
Dividend Growth
CubeSmart has provided annual dividend increases for years, but the most recent hike was an impressive 14% increase from $0.43 to $0.49. The hike before that was a 27% increase from $0.34 to $0.43. In my last article I said that I wouldn’t count on dividend hikes at a similar rate moving forward, but I do think investors can expect continued hikes from here. The payout ratio gives them breathing room for further hikes, but I would be surprised if we get another 20% hike or more.
Conclusion
One of the things that could spell trouble for CubeSmart’s continued growth is the slowdown in acquisitions in 2022. If we see more years with low acquisition volume, I have a hard time believing CubeSmart would be able to grow much. A slowdown like this would lead to stagnating FFO/share growth and dividend growth, which would certainly be a drag on returns for investors. Shares currently trade at a price/FFO of 17.9x, which I think is a fair multiple today.
I think investors can buy shares of CubeSmart today and expect decent returns combined with some dividend growth going forward. Patient investors could hold out for a dip near $40, which would put the yield near 5%. I think this would limit the potential downside for long term investors, and I do think shares will trade above $50 at some point in the next couple years. I plan to hold onto my shares for now, but for investors looking to buy shares of CubeSmart, I would try to wait for a better short-term entry point.
For further details see:
CubeSmart: Wait For A Dip Near $40 To Add Shares