CubeSmart: Dividend Increases May Be In Store For This Fast Grower

Sep. 25, 2022 8:00 AM ETCubeSmart (CUBE)VNQ, NSA, EXR13 Comments

Summary

  • In February, I named CubeSmart as one of the 12 top REITs for the coming 12 months.
  • Despite stellar earnings and cash flow growth, CUBE's share price has languished, losing (-25.3)% thus far this year.
  • The selloff is not reflective of CubeSmart's performance, but rather of the broader market's stampede toward yield amid an environment of rising inflation and interest rates.
  • Further substantial increases in the company's dividend are likely.
  • This article examines growth, balance sheet, dividend, and valuation metrics for this bona fide FROG.
  • This idea was discussed in more depth with members of my private investing community, Hoya Capital Income Builder. Learn More »

Business concept growth success process.

oatawa/iStock via Getty Images

In February, I named CubeSmart (NYSE:CUBE) as one of the 12 top REITs for the coming 12 months. I also identified the Storage REIT (real estate investment trust) sector as one of 7 sectors likely to outperform in 2022.

According to Hoya Capital, the Equity REIT Index has returned (-26.33)% thus far this year, while the Storage REIT sector is indeed outperforming, albeit at a loss of (-21.52)%.

List of 18 REIT sectors, showing Storage REITs ranking 5th in YTD total return, trailing Casinos, Farmland, Net Lease, and Hotel REITs, with Office, Regional Mall, and Cannabis REITs lagging far behind in the last three places

Hoya Capital Income Builder

This is quite unusual. The Storage REIT industry's average return from 2011 through 2021 was 21.77%, for a total return of 717%.

Line chart showing data as described in text

CubeSmart investor presentation

Despite stellar earnings and cash flow growth, CUBE's share price has languished, losing (-25.3)% thus far this year.

Line chart, showing data as described in text

Seeking Alpha Premium

CUBE has underperformed most of its peers in the Storage REIT sector, bettering only National Storage Affiliates Trust's (NSA) disappointing (-33.45)% return. So CUBE cannot be said to be among the 12 best-performing REITs in 2022 thus far.

Line chart showing data as described in text. PSA has shown best return, at (-14.64)%, and NSA worst at (-33.45)%

Seeking Alpha Y-Charts

So what is going on with this perennial high-growth company?

Meet the company

Company logo

CubeSmart

Founded in 2004 and headquartered in Malvern, Pennsylvania, CubeSmart owns and/or operates 1,289 properties in 155 markets, across 39 U.S. states, valued at $7.27 billion.

map of U.S., showing 25 states in red, where CUBE owns at least one property, and 14 states in gray, where they operate but do not own a facility

Company investor presentation

The company leans toward large urban areas, and chooses locations characterized by dense population. As the chart below shows, the larger the MSA (metropolitan statistical area), the more concentrated CUBE's holding are, by NOI (net operating income). So the top 10 MSAs account for 59% of the company's NOI, while the bottom 115 markets account for just 11%.

pie chart, showing 59% of CUBE's NOI comes from the top 10 MSA's, 19% from MSAs 11-25, 11% from MSAs 26 - 40, and 11% from the rest

Company investor presentation

Within those urban areas, CUBE's locations are in more densely-populated areas than any of its Storage REIT peers. The average number of people living within 3 miles of a CUBE location is about 175,000, compared to about 125,000 for runner-up Extra Space Storage (EXR).

bar chart, showing data as described. NSA has lowest population within 3 miles of its locations, at about 50,000

Company investor presentation

Thus, CUBE's locations are more likely to be conveniently located for people living in multifamily housing. Same-store occupancy is currently 94%.

CUBE is a 21st-century company, using a fully integrated data platform to maximize service delivery and cash flows, provide scalability, and maximize demand capture and pricing. Thanks in large part to the company's digital branding, social media, and paid search investments, the company's website attracts 13.5 million visitors per year, and the sales center fields over a million calls. About 30% of customers sign up for rentals online.

Opportunities for growth abound. Publicly traded REITs own only about 25% of all the storage facilities in the U.S. CUBE pursues a 4-channel growth strategy:

  • Acquisitions of well-positioned properties in markets with strong demographics and demand drivers.
  • Development of new facilities in the most promising markets. (The company has about $78 million of new developments in the pipeline, all in Top 10 MSAs.)
  • Joint ventures that generate enhanced returns at lower risk. (CUBE is currently involved in 5 JVs, involving 89 properties and $1.0 billion.)
  • Third-party management to generate additional scale, branding power, and customer insight. (CUBE currently has over 200 third-party relationships, covering 680 properties, generating $31 million per annum in management fees.)

Since 2010, the number of properties owned or managed by CUBE has nearly tripled. There is a clear trend toward more third-party management, which now accounts for more than half of the total, while the number of joint ventures has been scaled back, particularly in the past couple of years.

Bar chart, showing 456 properties in 2010, with no joint ventures and only about 100 third-party managed properties, to 1289 properties in 2022, including about 650 third-party sites and about 90 joint ventures

CubeSmart Portfolio Growth (Company investor presentation)

Quarterly results

According to the company's latest 10-Q, filed August 5, here are some of the highlights from the Q2 and H1 results for CubeSmart.

Metric Q1 2022 Change YoY H1 2022 Change YoY
Total revenue (millions) $248.7 24.8% $487.2 25.5%
Operating expenses (millions) $166.2 28.4% $333.9 30.7%
Net Income (millions) $ 58.6 16.3% $ 96.9 3.4%
Cash from Operations (millions) NR NR $284.3 30.8%
Net Income per Share $0.26 8.3% $0.43 (-4.5)%
Same Store Revenue (millions) NR NR $192.0 14.0%
Core FFO (millions) $139.1 32.1% $261.6 16.0%
Core FFO per Share $0.62 24.0% $1.16 14.9%

NR = Not reported

The company has only increased its share count by 0.3% this calendar year.

As you can see from the table above, with funds from operations ("FFO") per share up 24.0% YoY for the quarter, and 14.9% for the first half, the company's performance has been stellar. Thus the share price is disconnected from CUBE's fundamentals, and appears to be a function primarily of the investor stampede to yield, caused by 40-year--high inflation and the Fed's tightening of the money supply.

CEO Chris Marr summed it up this way on the Q2 earnings call:

Looking across all of our markets, we saw consistent performance, up and down the coast and throughout the central part of the United States. So, self-storage continues to be performing quite well. Our consumer continues to be pretty healthy and we're very encouraged by the first half of 2022 and look forward to a very successful second half as well.

In Q2, CUBE acquired a property in San Antonio for a purchase price of $23 million, bringing total acquisitions for H1 2022 to $55 million. The company also invested $13.6 million in land underlying two of their existing properties, plus an additional $59.1 million of an anticipated $84.1 million total cost in a joint venture developing two new locations in New York.

CUBE has also completed construction on 5 new properties on the East Coast, at a total cost of $117.7 million. Two of these are owned outright by CUBE, and they own a majority interest of 70% - 90% on the other three. These 5 locations are all open for business.

The company raised guidance for same-store revenue growth for 2022 by 275 basis points, to 12.0% at the midpoint, and raised guidance for same-store NOI growth by 450 basis point, to 15.5% at the midpoint.

Growth metrics

Here are the 3-year growth figures for FFO (funds from operations), TCFO (total cash from operations), and market cap.

Metric 2019 2020 2021 2022* 3-year CAGR
FFO (millions) $326 $321 $410 $523 --
FFO Growth % -- (-1.5) 27.7 27.6 17.1%
FFO per share $1.69 $1.72 $2.11 $2.49 --
FFO per share growth % -- 1.8 22.7 18.0 13.8%
TCFO (millions) $332 $351 $449 $569 --
TCFO Growth % -- 5.6 27.9 26.7 19.7%

*Projected, based on H1 2022 results

Source: TD Ameritrade, CompaniesMarketCap.com, and author calculations

As you can see from the table above, despite a slow-down in pandemic-plagued 2020, this company is growing at a sizzling double-digit rate in revenue and cash flow, sustained over a 3-year period.

Meanwhile, here is how the stock price has done over the past 3 twelve-month periods, compared to the REIT average as represented by the Vanguard Real Estate ETF (VNQ).

Metric 2019 2020 2021 2022 3-yr CAGR
CUBE share price Sept. 22 $35.62 $31.93 $51.37 $41.12 --
CUBE share price Gain % -- (-10.4) 60.8 (-20.0) 4.9%
VNQ share price Sept. 22 $93.45 $78.68 $106.83 $85.48 --
VNQ share price Gain % -- (-15.8) 35.8 (-20.0) (-2.9)%

Source: MarketWatch.com and author calculations

As you can see, CUBE has matched or outperformed the VNQ in each of the past 3 years, returning an average share price Gain of 4.9%, compared to the VNQ's loss of (-2.9)%.

Meanwhile, CUBE's market cap sits right in the sweet spot, growing from $6.76 billion on September 29, 2019 to its current level of $9.28 billion. That's a 3-year CAGR of 11.2% in market cap.

Everything about this company says healthy and growing fast.

Balance sheet metrics

CubeSmart's bond-rated balance sheet is solid but not spectacular, with liquidity ratio, debt ratio, and debt/EBITDA all under the REIT average. The liquidity ratio is lower than the Storage sector average as well, but comfortably above the FROG cut-off of 1.66, qualifying CUBE as a bona fide FROG.

Company Liquidity Ratio Debt Ratio Debt/EBITDA Bond Rating
CUBE 1.82 20% 5.2 BBB

Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations

CUBE holds $2.77 billion in senior notes, at a weighted average interest rate of 3.67%. The debt maturity schedule is shown below. There are no payments due for the rest of 2022, and only $31.2 million due in 2023. Over the subsequent three years, the payment totals climb steadily to $337.0 million, then there are no payments due at all in 2027. The debts due in 2028 - 2032 carry a weighted average interest rate of only 2.79%.

debt maturity bar chart, depicting data as described in text

Company investor presentation

As of June 30, the company was holding $5 million in cash, and receivables minus payables equaled an additional $9 million.

Dividend metrics

This is another area where CUBE shines. The current Yield and dividend growth rate are above both the Storage and overall REIT averages, and probably will continue separating from the pack for the next 3 years. This is a fine little income investment, by REIT standards.

Company Div. Yield 3-yr Div. Growth Div. Score Payout Div. Safety
CUBE 4.18% 10.1% 5.58% 70% C+

Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium

Dividend Score projects the Yield three years from now, on shares bought today, assuming the Dividend Growth rate remains unchanged.

Valuation metrics

The kind of growth that CubeSmart has exhibited over the past several years usually comes at a premium price. Surprisingly however, this is not the case. CUBE sells below both the REIT average and the Storage sector average, at a whopping discount to NAV of 29.1%.

Company Div. Score Price/FFO '22 Premium to NAV
CUBE 5.58% 16.5 (-29.1)%

Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations

What could go wrong?

CUBE is more sensitive to inflation and interest rate increases than the average REIT. If a recession occurs, the blow to employment and discretionary spending would affect the company's revenues. CUBE's properties in New York, Florida, Texas and California together accounted for 51% of total 2021 revenues. As a result of this geographic concentration of their assets, CUBE would be particularly susceptible to adverse market conditions in these areas. New development is subject to increased costs from labor and material shortages. CUBE competes with other publicly traded REITs for acquisitions.

Investor's bottom line

CubeSmart is a bona fide FROG, selling for a surprising discount, yielding higher than the REIT average in a low-yielding sector, and growing its dividend faster than average. Flush with cash and unappreciated by the market, there is a high likelihood of more dividend increases in store. This is the rare company that is compelling, for both growth investors and value investors.

In the short run, nothing is a Buy until the market sorts itself out. However, if your investment horizon is at least two or three years out, this company is a definite Buy.

Factor grades for CubeSmart: Growth A-, Profitability B, Momentum B-, Revisions A, Valuation D+

Seeking Alpha Premium

This opinion puts me in company with 6 of the 10 Wall Street analysts covering CUBE, while the Seeking Alpha Quant ratings system also maintains a Strong Buy.

pie chart showing 5 analysts rate CUBE a strong buy, 1 a buy, and 4 a Hold

Seeking Alpha Premium

The Street and revisions-sensitive Zacks both maintain a Buy recommendation, while Ford Equity Research says Hold.

But in the final analysis, it is your opinion that really counts.

This article was written by

Philip Eric Jones profile picture
1.78K Followers
Build sustainable portfolio income with premium dividend yields up to 10%.
I am a teacher, writer, recording artist, and inspirational speaker, who never had much money to invest for most of my life. Then I inherited a sizable sum of money at age 62, and soon found myself on a fascinating journey of making the most of the opportunity my parents have given me. I write of things I have discovered, in the hopes that my thoughts and discoveries may be of help -- or at least amusement -- to others. Promoting Author for Hoya Capital Income Builder. 

Disclosure: I/we have a beneficial long position in the shares of CUBE, NSA, LSI, VNQ either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: A Buy, Sell, or Hold rating in this article does not constitute a Buy, Sell, or Hold recommendation. All investors should do their own due diligence, before investing in any stock.

Recommended For You

Comments (13)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.