CubeSmart (NYSE:CUBE) is one of the largest self-storage REITs, with the total number of owned and managed properties standing at 1,274 as of its latest filings.
CubeSmart’s stock has a remarkable history of creating value for shareholders, evidenced by its impressive record of growing funds from operations (known as FFO, a cash-flow metric used by REITs) and dividends. What has drawn my attention to the stock lately, however, is that following its correction from its past highs, CubeSmart is now yielding 4.3%.
Along with its exciting growth prospects, CubeSmart’s dividend yield offers investors a notable margin of safety and a substantial tangible capital return. I am bullish on CubeSmart.
What Drives CubeSmart’s Growth?
CubeSmart has grown incredibly fast over the past decade, with its growth having been driven by very favorable industry dynamics, property optimization, and accretive acquisitions. To shed some light on some indicative metrics, over the past decade, CubeSmart has achieved the following:
- A compound annual revenue growth rate of 14.6%,
- A compound annual EBITDA growth rate of 18.7% (implying economies of scale),
- A compound annual FFO/share growth rate of 9.1% (indicating share issuance to fund property acquisitions are accretive acquisitions).
Regardless of the company managing its capital skilfully to achieve growing EBITDA margins and accretive acquisitions, ultimately, CubeSmart’s growth has been driven by robust demand dynamics for self-storage properties.
I have split them into three different categories for clarity:
People have been getting fatigued by big cities. Following the pandemic, remote and hybrid working conditions became increasingly acceptable. In the meantime, living in big cities became gradually more unaffordable. The result? Many have been moving to rural areas, seeking a better work/life balance and a better quality of living overall.
But, as more people move to rural areas, they could be faced with limited storage space in their homes. This has increased demand for self-storage solutions as people look for a convenient and secure place to store their belongings.
Another trend that is contributing to the growing demand for self-storage properties is people downsizing their homes. Regardless of urbanization, as mentioned above, minimalism is taking over. I call this the Pinterest (NASDAQ:PINS) effect. People want to get rid of that old grandma’s table, their child’s first bike, or any other belonging you can think of.
However, they also don’t really want to get rid of them. Many such items have sentimental value. Self-storage facilities offer a flexible and cost-effective solution for this need, and in the meantime, they collect recurring revenues.
3. Tenant Inactivity
This is a weird one, but hear me out. I know people who have some of their old items kept in self-storage properties for ages. They have paid an obnoxious amount of money over the years that obviously exceeds the value of said items. The funny thing is that many times, the only reason such items are kept there is that it’s too much of a hassle for the owner to go back and reclaim them.
And again, in the meantime, self-storage REITs like CubeSmart collect passive “rent,” which even grows substantially over time with periodic rate hikes.
Excellent Results to be Sustained in Fiscal 2022 and Beyond
One would think that CubeSmart’s excellent growth trajectory cannot be sustained, as one-off boosts to urbanization and downsizing as a result of the pandemic have now unwound. However, here’s where the “tenant inactivity” factor comes into play.
With more belongings accumulating in CubeSmart’s properties, it’s relatively straightforward for the company’s key metrics to remain potent and its growth to be sustained. This was evident in its most recent quarterly report, which points toward another year of record revenues and FFO/share.
In CubeSmart’s Fiscal Q3-2022 earnings, revenues rose by 23% year-over-year to reach $261.4 million. The rise in revenues was mainly due to higher rental rates on properties that were already in operation, as well as revenue generated from newly acquired properties and recently developed properties.
Specifically, the net operating income on properties that were already in operation increased by 15.4% compared to the previous year due to a 12.2% increase in revenue from these properties, offset by a 4.3% increase in operating expenses. As a result, its funds from operations grew by 25.3% to reach $148.4 million.
To my earlier point, even though the company issued shares to acquire these properties, they were accretive to earnings, as FFO/share growth came in at a lower but still great 16% to $0.65/share.
Management raised their expectations for the year due to CubeSmart’s strong operating momentum. They now predict that the company will achieve FFO/share of between $2.50 and $2.52 for Fiscal 2022, up from their previous estimate of $2.47 to $2.51.
At the midpoint, this implies a year-over-year increase of 18.9%, setting the company for a new FFO/share record. CUBE’s momentum suggests growth should be well-sustained into 2023 and likely beyond that.
Is CUBE Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, CubeSmart has a Moderate Buy consensus rating based on three Buys and two Holds assigned in the past three months. At $46.60, the average CUBE stock forecast suggests 3.2% upside potential.
CubeSmart has benefited from strong underlying industry trends over the past decade. The COVID-19 pandemic further boosted the demand dynamics for self-storage properties, positioning the company well to achieve another year of record earnings in Fiscal 2022 on top of its pandemic-inflated results. Given CubeSmart’s robust momentum and substantial 4.3% yield, the stock may offer a compelling opportunity for growth investors who demand a notable margin of safety.