Wait For A Drop Before Buying This 3.7%-Yielding, Fast-Growing Storage REIT

Summary

• CubeSmart is a fast-growing REIT in the storage sector.
• The storage REIT has enjoyed very strong A/FFO and dividend growth in recent years.
• CubeSmart has a strong, investment-grade rated balance sheet.
• The dividend is covered with A/FFO, but CubeSmart's valuation is very rich.
• An investment in CUBE yields 3.7 percent.

CubeSmart (NYSE:CUBE) is a fast-growing REIT in the self-storage sector. The real estate investment trust has seen strong A/FFO growth in recent years, thanks to the company's aggressive stance on acquisitions. In lockstep with rising cash flow, CubeSmart has grown its dividend at a fast clip, too. However, CubeSmart's valuation today is very rich, which in turn exposes investors to considerable downside risks. An investment in CUBE comes with an entry yield of 3.7 percent.

CubeSmart - Portfolio Overview

CubeSmart's property portfolio consists of both owned and managed real estate. At the end of the March quarter, CubeSmart owned 485 stores and managed another 496 as part of its third-party management business. The REIT's properties are concentrated in the following top 12 metro markets.

Source: CubeSmart Investor Presentation

What makes CubeSmart particularly attractive as a growth play going forward is that the storage REIT has above-average exposure (relative to its peer group) to top 25 MSA markets.

Source: CubeSmart

CubeSmart's portfolio stats, especially its occupancy rates over time look very good as well. The REIT's occupancy rate has steadily improved in the last seven years, indicating that CubeSmart's storage facilities are met with high customer demand.

Source: Achilles Research

CubeSmart has grown into a national storage player thanks to its acquisition-centered growth strategy. It hasn't been all that uncommon for CubeSmart to spend hundreds of millions of dollars per year on buying new properties that helped the company scale its real estate business.

Source: Achilles Research

Thanks to its heavy focus on acquisitions, CubeSmart has seen exceptional AFFO per-share growth over the years. The REIT's AFFO surged from $0.51/share in 2010 to $1.59/share in 2017, reflecting a total growth rate of 212 percent.

Source: Achilles Research

Decreasing Leverage Stats

CubeSmart has an investment-grade rated balance sheet. Standard & Poor's rates CubeSmart BBB and Moody's rates the storage REIT Baa2. Further, CubeSmart's leverage ratio (net debt/EBITDA) has actually decreased in the last four years, even though the company grew FFO at a fast clip.

Source: CubeSmart

Dividend Stats

In terms of dividend coverage, shareholders can sleep well at night.

The self-storage REIT covered its dividend with both funds from operations and adjusted funds from operations in each of the last eight quarters. CubeSmart's AFFO-payout ratio averaged just 68 percent in the last two years, leaving heaps of room on the table for further dividend growth.

Source: Achilles Research

CubeSmart currently pays shareholders $0.30/share each quarter which implies a 3.72 percent dividend yield. In lockstep with rising A/FFO, the REIT has lifted its dividend at a fast clip.

Source: CubeSmart

Valuation

CubeSmart's shares sell for ~20.7x Q1-2018 run-rate AFFO. Investors continue to price in above-average FFO and dividend growth, which has made shares quite expensive.

In terms of price-to-book-value ratio, CubeSmart is not cheap either, ranking about midfield in its peer group of storage REITs.

CUBE Price to Book Value data by YCharts

Your Takeaway

CubeSmart is a fast-growing storage REIT with occupancy rates above 90 percent and a conservative AFFO-payout ratio. The company has grown A/FFO and its dividend at impressive growth rates in the past, but those growth rates will likely decrease over time as competition in the sector intensifies. The dividend is covered with A/FFO, but shares are very expensive today, which could imply an unfavorable risk-reward combination. I am not a buyer at these prices and will wait for a drop towards $25 before opening up a long position.

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