We're Up 47% On This "Weird" Real Estate Investment

Most self-storage renters intend their units to be a short-term solution. But more often than not, three months turns into six, and then six turns into twelve. Nationwide, the average lease term is approximately 15 months.

I'm getting close to that mark myself. When we put our home up for sale, the first move was to de-clutter. So, spare furniture, books, sporting goods and other seldom-used items were crammed into a nearby storage unit. A year later, there is still a "for sale" sign in the front yard – and I'm still writing a check to the storage company each month.

With 516 storage facilities containing 26 million square feet, CubeSmart (Nasdaq: CUBE) has tens of thousands of renters just like me. And all those rental checks add up. Net income last quarter jumped 28% to $49 million, although a good chunk of that increase came from gains on real estate sales. On an adjusted basis, funds from operation (FFO) climbed 7% to $81 million, or $0.42 per share.

CubeSmart opened several new properties during the period, and it usually doesn't take too long to find renters – occupancy rates continue to hover around 92%. And with monthly rental rates always inching higher, the company is squeezing out gradual increases in net operating income (NOI) from its portfolio.

CUBE logo
The solid economy helps the self-storage business: People have more "stuff," and they're willing to pay others to get it off their hands and away from their apartments and garages. CubeSmart has been smartly targeting markets with high barriers to entry (such as New York City), so it's somewhat insulated from the geographical areas where growth has been weaker. The company estimates that its share of facilities in markets with less supply than the national average is the highest among its peers. Plus, the nature of the self-storage business makes it easier for the REIT to raise rents (customers neither commit to nor require long-term leases), so its growth prospects remain strong.

The company is well-positioned for the second half of the year, particularly following several large transactions. The first involved the real estate sales mentioned above. CubeSmart has held a minority interest in 68 storage facilities through a joint venture. Fifty of those properties were just sold to a third-party, while the company bought the remaining 18 assets (all cherry-picked) for itself.

Meanwhile, it has added another 59 facilities to its management platform. CubeSmart now manages 648 properties for a fee on behalf of their respective owners. This side business will generate up to $24 million in property management income this year.

Action to Take
I love this business. But for valuation reasons (the stock is trading at more than 40 times forward earnings) I have CUBE rated as a "Hold," meaning new investors might be better off waiting for a better price.

Still, there's a lot to like... When it comes to real estate investing, most picture sleek high-rise office towers or massive retail developments anchored by national chains, not tiny 10-by-10 square-foot boxes. Believe it or not, though, the self-storage industry has consistently delivered the highest investment returns of all property groups over the long-haul.

Industry consolidation has concentrated the lion's share of the profit in this fragmented market among a small handful of large national players. CubeSmart is one of the strongest. The company is targeting funds from operations of $1.67 this year, supporting dividend distributions of $1.28. That dividend has doubled over the past five years, but you wouldn't know it by simply looking at the 3.5% yield based on today's prices. Meanwhile, my subscribers and I are sitting on a total return of 47.3% since adding this to our Daily Paycheck portfolio in January 2017 (while the S&P 500 has gained roughly 30%).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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