Successful dividend company from the warehousing sector
The company we'll be discussing today is one of the leading self-storage providers in the United States, with a history dating back to 2004. In a relatively short period of time, it has become one of the biggest players in the storage services market, establishing a significant position in the industry. The company boasts a dividend yield of 3.94% and great growth potential in the coming years.
One of the key attractions with this company is its flexible approach to renting storage units, allowing customers to tailor its services to their current needs. In addition to basic storage space, it also offers a range of additional services such as the sale of packaging materials or the use of trucks. This comprehensive offering, coupled with a modern approach to storage, enables it to maintain its market-leading position and attract a wide range of customers.
Company introduction
CubeSmart
CUBECubeSmart $CUBE-1.5% is one of the leading providers of self-service storage in the United States. Founded in 2004, the company has since developed into one of the biggest players in the storage services market. CubeSmart focuses on providing a wide range of storage solutions for individual and corporate clients.
Company history and development
Founded as U-Store-It Trust, the company's early focus was on traditional warehousing services. With the growing demand for flexible and modern storage solutions, the company decided to switch to the CubeSmart brand in 2011. This rebranding reflected a broader focus on providing comprehensive services and moving closer to modern storage trends.
CubeSmart offers a wide range of storage units that vary in size and purpose. Customers can choose from small units that are ideal for storing seasonal items or smaller items, to large units that can be used to store furniture, vehicles or even company goods. Units are available in a variety of configurations, including climate-controlled spaces that are suitable for storing sensitive items.
In addition to basic storage services, CubeSmart also offers a variety of additional services that enhance customer comfort and convenience. These services include the sale of packaging materials such as boxes, bubble wrap or adhesive tapes. The company also provides the use of trucks and other tools to facilitate the transportation and storage of items.
One of CubeSmart's unique features is its rental flexibility. Customers can enter into both short-term and long-term contracts, allowing them to customize storage services to fit their exact needs. This flexibility is especially appreciated by customers who need short-term storage during a move or home renovation.
Sector view and outlook
CubeSmart
CUBEFrom 2020 to 2023, the self-storage sector has undergone many changes. The pandemic has led to a significant increase in users and a near tripling of sales between 2020 and 2021. This growth has been driven by relocation, telecommuting and increased online shopping. However, 2022 saw a decline with lower sales and slightly declining rental rates. The first three quarters of 2023 continued this trend with further declines driven by economic factors.
For 2024, the self-storage industry is expected to maintain stable occupancy and rental income, with the continued housing shortage driving demand. The U.S. self-storage market is estimated to reach nearly $50 billion by 2029, suggesting sustained growth.
In apartments, rental growth is expected to be moderate in 2024, while the total value of the US residential real estate market reached $2.5 trillion in 2023 and is set to continue to grow.
Dividend
CubeSmart is the third largest owner and operator of self-storage facilities in the United States with a portfolio of 1,406 properties in 178 markets in 41 states and the District of Columbia.
CubeSmart currently pays a quarterly dividend of $0.51 per share, which equates to an annual dividend of $2.04 per share, giving its stock a yield of approximately 3.94% at the time of this writing.
In addition to its high yield, CubeSmart is a dividend growth superstar. Its 4.1% increase in December marked the 14th straight year in which the company has raised its annual dividend payout.
How was the most recent quarter?
The company posted net income attributable to shareholders of $94 million, down from $97.9 million in the same period last year. Earnings per share (EPS) was $0.41, down from $0.43 in the second quarter of 2023. Adjusted funds from operations (FFO) was $146 million, down 3% from last year, and diluted FFO per share was $0.64, down from $0.66 in 2023.
Operating results
During the second quarter, same-store net operating income (NOI) decreased 1.2% year over year, driven by a 4.2% increase in expenses and only a 0.3% increase in revenue. Same store occupancy averaged 91.5% and stood at 91.9% at the end of the quarter. In addition, the company opened two new properties in New Jersey and New York at a total cost of $61.8 million and added 39 stores to its third management program, bringing the number of managed stores to 879.
Investment activity
The Company continues to invest in the development of new properties in areas with high barriers to entry. As of June 30, 2024, CubeSmart had two joint venture properties under development, with a projected total investment of $36.9 million.
2024 Outlook
CubeSmart expects full-year 2024 earnings per share to be in the range of $1.71 to $1.77 and adjusted FFO per share to be between $2.61 and $2.67. The company maintains the midpoint of its estimates for NOI and FFO per share growth, indicating stability in the company's performance despite the uncertain economic environment.
Highlights from the results
During the conference, it was noted that CubeSmart continues to see growth opportunity in the property management and new project investment space, which is reflected in their expansion of managed deals and new project launches. It was also noted that the company continues to optimize their operations through a data-driven approach that helps them adapt to changing macroeconomic conditions.
Valuation
P/E (29.12): By comparison, the average P/E in the REIT sector is typically lower, meaning CubeSmart trades at a higher premium. This high P/E could only be justified if the company continues to grow and improve its financial performance.
P/B (4.21)A: The price-to-book value ratio indicates that CubeSmart stock is trading at more than four times its book value, which is also high compared to many REITs. This could suggest that investors believe in the strong value of the company's assets, but it could also indicate a risk of overvaluation if asset growth does not continue.
P/S (10.96): The price to earnings ratio is well above the sector average. This ratio is particularly significant for REITs, as rental income and other income are key factors in evaluating performance.
Leverage and debt
D/E (1.04) and D/C (0.51): The debt-to-equity (D/E) and debt-to-total assets (D/C) ratios are both slightly above the sector average, where the average debt ratio is 33.8% (D/C). This suggests that CubeSmart uses more debt to finance its operations than the average REIT. While this is common for many REITs due to the capital-intensive nature of the business, higher debt also increases risk in the event of adverse market conditions.
Yield and return
ROA (6.53%), ROE (14.48%), ROIC (6.57%): CubeSmart has a solid return on assets (ROA) and return on equity (ROE), which is a positive signal of the company's efficiency in generating returns on its assets and capital. An ROE above 14% is a very strong indicator, especially when compared to the lower values typical of the REIT sector. This indicates that the company is using its capital very efficiently.
Margins and cash flow
Margin (Gross: 56.39%, Operating: 46.19%, Net: 38.07%) and FCF (5.17%)A: The high operating and net margins show that CubeSmart is able to manage its costs effectively and maintain high profitability. A net margin of over 38% is considered very solid in the REITs sector. Free cash flow (FCF) at 5.17% is relatively low, which may indicate high capital requirements or investment in development, which is common in this sector.
Analysts' views
Scotiabank initiated coverage on shares of CubeSmart with "Outperform" recommendation on the sector on August 22, 2024. The average one-year price target for CubeSmart stock is set at $48.50 per share. Meanwhile, forecasts range between USD 40.40 and USD 55.65.
The company's expected annual revenue is $1.163 billion, up 9.22%. The expected annual EPS (non-GAAP) is $1.34. In terms of fund sentiment, 963 funds are invested in CubeSmart, an increase of 1.80% compared to the previous quarter. Total institutional holdings increased 4.76% to 254.681 million shares. The put/call ratio for CubeSmart stock is 0.21, indicating an optimistic outlook.
Turning to specific funds, Norges Bank owns 9.735 million shares or 4.32% of the stock. The Vanguard Real Estate Index Fund holds 9.185 million shares, which corresponds to a 4.08% stake and a 1.13% increase. The Vanguard Total Stock Market Index Fund holds 7.063 million shares, which represents a 3.14% stake with a 0.25% increase. iShares Core S&P Mid-Cap ETF owns 7.001 million shares, which is a 3.11% stake and a 2.50% increase.
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