Image Source: CubeSmart – June 2022 IR Presentation
By Callum Turcan
The self-storage industry is home to several of our favorite income generation ideas due to the ability for companies operating in this space to generate substantial free cash flows after covering their total dividend obligations. Due to the favorable tax regime, most of these firms tend to be structured as real estate investment trusts (‘REITs’).
CubeSmart (CUBE) is a self-storage REIT that is entirely focused on the U.S. market, and we include shares of CUBE as an idea in the High Yield Dividend Newsletter portfolio. As of this writing, shares of CUBE yield ~4.0%, and our fair value estimate for the firm stands at $56 per share, well above where shares of CUBE are trading at as of this writing.
Financial Update
CubeSmart reported that its same-store occupancy rate stood at 94.1% at the end of March 2022 when publishing its first quarter 2022 earnings update in late April. The firm noted that its same-store net operating income (‘NOI’) rose 21.4% year-over-year in the first quarter as 15.6% same-store revenue growth more than offset 2.9% same-store operating expense growth. CubeSmart’s GAAP revenues rose 26% year-over-year and its GAAP operating income rose 13% in the first quarter of 2022, though we caution that there is some noise as it concerns its operating expenses due to recent acquisition activity and other factors.
We appreciate CubeSmart’s ability to pass on meaningful pricing increases to new and existing customers, while keeping its cost structure contained in the face of meaningful inflationary headwinds. This outperformance led to CubeSmart’s funds from operations (‘FFO’) per share, a non-GAAP metric that provides a useful snapshot of a REIT’s financial performance (though one that has its flaws), reaching $0.58 in the first quarter (up 23% year-over-year).
In conjunction with its first quarter 2022 update, CubeSmart adjusted its full-year guidance in a favorable manner on a net basis. Its same-store revenue growth is now expected to come in at 8.75%-10.25% (up from 8.00%-10.00% previously), its same-store expense growth is now forecasted to come in at 5.50%-6.50% (down from 5.50%-7.00% previously), and its same-store NOI is now expected to grow by 10.25%-11.75% (up from 9.50%-11.50% previously).
CubeSmart raised its FFO per share guidance to $2.37-$2.42 versus $2.35-$2.42 previously in conjunction with its first quarter earnings report as the improving outlook at its underlying business was somewhat offset by expectations that its full-year weighted average share/unit count would come in a tad higher than previously expected. In 2021, CubeSmart posted $2.11 in adjusted FFO per share, and its current guidance for 2022 calls for 14% annual growth at the midpoint.
One of the reasons why we like CubeSmart is that the REIT operates a sizable management platform for third-party self-storage facilities. This provides CubeSmart a source of income via management and related fees, and most importantly, this part of its business effectively creates a vast potential acquisition pipeline for CubeSmart, one that the REIT often capitalizes on. At the end of March 2022, CubeSmart’s third-party management platform serviced 664 stores after adding 33 stores to its management platform during the first quarter of this year.
CubeSmart exited March 2022 with economic interests in 608 self-storage properties, which housed 43.6 million rentable square feet, with 523 of those properties housing 36.9 million rentable square feet being included in its same-store pool. Its third-party management platform offers the REIT needle-moving potential growth opportunities.
During the first quarter, CubeSmart generated $115 million in free cash flow (defined as net operating cash flow less ‘additions and improvements to storage properties’ and ‘development costs’), while spending $99 million covering its total payout obligations. That allowed for $16 million in “excess” free cash flow and highlights CubeSmart’s strong dividend coverage on a historical basis.
Image Shown: CubeSmart’s ability to generate “excess” free cash flows after covering its total payout obligations is impressive. Image Source: CubeSmart – 10-Q SEC filing covering the First Quarter of 2022
We view CubeSmart’s forward-looking dividend coverage quite favorably. Its adjusted Dividend Cushion ratio, which takes the REIT’s ability to tap capital markets into account, sits at 1.7, earning CubeSmart a “GOOD” Dividend Safety rating. We forecast that the REIT will push through meaningful per-share payout growth going forward (which is incorporated in our adjusted Dividend Cushion ratio) and assign the REIT a “GOOD” Dividend Growth rating as well.
Balance Sheet and Acquisition Update
CubeSmart exited March 2022 with a large total debt load of $3.2 billion (inclusive of short-term debt and finance lease liabilities), which was marginally offset by a negligible amount of cash and cash equivalents on hand. Given its strong cash flow generating abilities, favorable growth outlook, and ability to tap capital markets for funds as needed, we view that burden as manageable. The REIT has an investment-grade credit rating (Baa2/BBB) and has a $0.75 billion unsecured revolving credit line that matures in June 2024, which at the end of March 2022 had ~$0.55 billion in remaining borrowing capacity.
Image Shown: CubeSmart’s debt maturity schedule is well-staggered which should make future refinancing activities an easier task. In our view, CubeSmart should retain access to capital markets at attractive rates going forward. Image Source: CubeSmart – June 2022 IR Presentation
In December 2021, CubeSmart closed its $1.7 billion acquisition of the owner of Storage West, LAACO Ltd. The deal was funded by a combination of common stock and unsecured senior note issuances, along with its revolving credit facility and cash position on hand. By acquiring Storage West, CubeSmart added 59 self-storage properties to its portfolio including 22 in Southern California, 17 in Phoenix, 13 in Las Vegas, and seven in Houston. These are attractive markets for self-storage properties and CubeSmart should benefit from its ability to steadily push through meaningful pricing increases over the coming years.
Concluding Thoughts
We continue to be big fans of CubeSmart and the self-storage industry, particularly companies with substantial exposure to the domestic part of this space. CubeSmart is a rock-solid free cash flow generator with a bright growth outlook and resilient business model. Looking ahead, we view CubeSmart as well-positioned to navigate meaningful inflationary pressures given its ample pricing power and track-record of solid operational execution.
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Real Estate Investment Trusts (REITs) Industry – CONE, DLR, FRT, O, REG, SPG, WPC, PEAK, HR, LTC, OHI, UHT, VTR, WELL, PSA, EQIX, CUBE, EXR, IRM
Tickerized for CUBE, PSA, PSB, LSI, EXR, REZ, STSFF, NSA, XLRE, IYR, VNQ
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Callum Turcan owns shares in DIS, META, GOOG, VRTX, and XLE and is long call options on DIS and META. American Tower Corporation (AMT), CubeSmart (CUBE), Life Storage Inc (LSI), Digital Realty Trust Inc (DLR), Public Storage (PSA), and Vanguard Real Estate Index Fund ETF (VNQ) are all included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Digital Realty Trust and Realty Income Corporation (O) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.