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Gleaming the CubeSmart: Preferred Shares Eyed

CubeSmart maintains a flexible balance sheet strategy consisting of secured debt (16%), unsecured debt (19%), preferred equity (3%) and equity (62%). With a broad array of capital sources, CubeSmart is able to execute peak performance on its diverse portfolio consisting of smaller individual assets (not conducive to collateralization).

Robust Revenue

By developing a scalable self-storage brand, CubeSmart is able to maximize operational efficiencies and provide a differentiated model of revenue and profitability. As a measure of performance, CubeSmart has improved its rent per square foot profile from around $11.00 psf (in January 2008) to $12.75 psf currently. This increased revenue is directly correlated to the improved population fundamentals and the repositioning of certain assets and focus on "core" densely populated markets.

In 2008 (January), CubeSmart operated facilities in trade areas with roughly 100,000 people in a 3-mile radius and currently CubeSmart owns facilities where the average 3-mile population is closer to 225,000 people. Roughly 60% of CubeSmart's portfolio NOI is generated from "core" markets -- up from 42% in early 2008. Here is a snapshot of CubeSmart's historical revenues from 2007-2011:

Analysts project CubeSmart revenue to top $275 million this year and, as noted above, the REIT's strategic asset repositioning initiatives and the company's increased third-party management platform should enhance funds from operations. Analysts suggest 2012 FFO estimates of between 70 cents to 73 cents per share.

The current dividend yield is 2.7% and the current price is $11.84 per share (52-week high was $12.93 on May 1, 2012). Analysts' NAV estimates range from $10.16 to $12.50 per share and BOA Merrill Lynch and KeyBanc Capital Markets both recommend buy ratings while analysts at BMO Capital Markets recommend outperform ratings. Robert Baird recommends a neutral rating.

According to NAREIT , the self-storage sector consists of four REITs with a combined market capitalization of $30.61 billion and an average dividend yield for the sector of 3.01% (compared with 3.29% for the entire equity REIT sector).

Preferred Shares Paying 7.75%

Oftentimes the preferred shares fly under the radar and in the case of CubeSmart, the preferred CUBE-A shares (CUBEPrA) are perhaps the smartest option. CubeSmart, 7.75% Series A Cumulative Redeemable shares are rated Ba2 and callable on Nov. 2, 2016. The current price is $26.20 and the current yield is 7.4% (yield to call 6.51%).

Comparable shares include Public Storage (Series U) or (PSAPrU) 5.625% rated Baa1/BBB+. Shares are callable on June 15, 2017 with a current price of $26.00 and a current yield of 5.4%.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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