Gleaming the CubeSmart: Preferred Shares Eyed

NEW YORK ( TheStreet) -- In an industry that remains widely fragmented, the self-storage sector consists of 46,500 U.S. facilities, says the Self Storage Association fact sheet . Four publicly owned REITs control around 10% of the sector. Those REITs are Public Storage ( PSA), Extra Space Storage ( EXR), CubeSmart ( CUBE) and Sovran Self Storage ( SSS).

In an age driven by Internet commerce, many of the leading storage REITs have developed sophisticated technologies to gain competitive advantages. The goal here is to foster consistent customer engagement. New technologies allow operators to capture customers from a variety of e-commerce points and sales centers.

The more sophisticated operators have created strategic operational platforms that enable consumers to choose a relevant brand that is based upon unique services or facilities. One such REIT that is gaining broad recognition as a differentiated storage brand, as well as a unique investment alternative, is CubeSmart.

Based in Wayne, PA and operating across the U.S., CubeSmart is the fourth-largest self-storage REIT. With around $1.94 billion in assets, CubeSmart owns about 376 facilities and manages (for third-parties) another 102 facilities. The portfolio is coast-to-coast, with the largest concentration of facilities in Florida (16.6%).

Repositioning Assets

Since 2008, CubeSmart has disposed of roughly $234 million in lower-growth (tertiary markets) assets and the proceeds have been strategically deployed into more attractive higher-growth "core" market facilities. Since 2008, CubeSmart has acquired around $265 million of "core" properties. In addition, CubeSmart closed (first pool closed on Nov. 3, 2011) on a large portfolio (Storage Deluxe Portfolio) of around 22 assets (1.6 million square feet) predominantly located in the Greater New York City area.

As of March 31, 2012, CubeSmart has closed on one asset in Houston and one in Atlanta for a total of $12 million. Acquisition guidance for 2012 is from $75 to $125 million and targeted dispositions range from $35 million to $50 million.

Conservative Capital Structure

CubeSmart was recently (December 20) rated BBB- (investment grade) by S&P and Baa3 by Moody's. CubeSmart has improved its balance sheet considerably as the company's debt/gross assets have gone from 51% in 2008 (Dec. 31) to 37% in 2012 (March 31).

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.