Does CubeSmart suffer from middle child syndrome with reason? (Series 4 of 5)

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As a middle child, it can often be difficult to get attention, especially as the third in a family of four children. The first typically gets more attention as there were not any siblings around vying for attention and the last gets coddling.

Does it get better if it changes its name to a tricky one?

That’s how I feel about CubeSmart (NYSE:CUBE). As of March 31, 2015, the Company’s market capitalization is US$3.9 billion. This is slightly higher than Sovran Self Storage, but not as high as Extra Space’s and Public Storage’s. However, that doesn’t mean CubeSmart’s not a quality company. It is a solid company that has strategically grown, which is ideal for a dividend growth investor.

Previously known as U-Store-It Trust, it changed its name to CubeSmart in 2011 to enjoy the branding benefits of joining the “big names” club, especially in a highly fragmented industry where customer service is a big differentiator. Furthermore, it takes pride for having re-positioned the portfolio, moving away from slow growth and less population, into high growth and more populated core markets such as New York, Washington DC, and Philadelphia. The result is a high quality, urban-oriented portfolio, which tends towards millennials who live in tight blocks and boomers who downsize to smaller homes.

As the portfolio changed, average occupancy increased from mid-seventy to ninety percent. Currently it is at an all-time high. Additionally, it has positioned itself in the highest income household neighborhoods versus its peers.

Since 2011, CubeSmart has checked all the following boxes:

  • 2-digit total revenue growth
  • 2-digit FFO growth rate
  • 2-digit dividend growth
  • Conservative dividend payout ratio
  • 6 percent average same store revenue growth
  • 8 percent average net operating income growth

2015 Projected Growth Rates 

  • 7 percent net operating income growth
  • 6 percent same store revenue growth
  • 4 percent FFO growth
  • 6 percent dividend

CubeSmart’s debt profile has improved over time and is currently on par with its peers. Nonetheless, the average interest rate of 4.0 percent is relatively high; Sovran’s is 3.7 and Extra Storage’s is 3.4 percent. Public Storage’s debt is less than one percent of its total market capitalization. The average maturity is six years. Most debt is fixed-rate and unsecured. The Company has mid-tier, investment-grade credit ratings from both Standard & Poor’s and Moody’s.

Although CubeSmart has seen capitalization rates of quality acquisitions decrease to approximately five percent, it has kept a good pace of acquisitions. Over the last three years, it has added 3.9, 1.5, and 2.6 million square feet to existing properties (2014, 2013 and 2012 respectively). As of December 31, 2014, the 421 owned self-storage facilities encompassed an aggregate of approximately 28.6 million rentable square feet.

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Valuation wise, price-to-FFO is on par with the last four year’s year-end price-to-FFO mean, as well as the sector’s mean. The dividend yield is acceptable at 2.8 percent.

The Company will release Q1 2015 financials after the market close on Thursday, April 30, 2015.

Takeaway

Although I like the growth story, there doesn’t seem to be much appreciation upside and the dividend yield is just okay. The middle child will have to do more to excel.

Summary

2011 2012 2013 2014 2015P*
Dividends declared per common share, $ 0.29 0.35 0.46 0.55 0.64
Q4 Dividend, $ 0.08 0.11 0.13 0.16
Dividend payout ratio, in percent 45 47 51 51
Dividend yield, in percent 2.7 2.4 2.9 2.5
FFO per share, $ 0.56 0.71 0.87 1.03 1.17
FFO per share (Q4 only), $ 0.09 0.21 0.21 0.26
AFFO per share, $ 0.65 0.74 0.91 1.08
Debt to total capitalization, in percent 37.3 33.3 32.8 23.8
Revenues – Total, $ 000s 227,245 266,322 318,395 376,963
Revenues – Same Store, in percent 3.6 3.8 7.4 7.2 5.5
NOI – Same Store, in percent 5.7 6.0 9.3 9.6 6.5
Year End Occupancy – Same Store, in percent 79.1 85.1 88.8 90.0
Share Price on 31 December, $ 10.64 14.57 15.94 22.07 23.12
P/FFO on 31 December 19.0 20.5 18.3 21.4 19.8
 *2015P=2015 Projection

Written by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​