The Long and Short
A deleveraging opportunity in the self-storage REIT space
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
CubeSmart (CUBE) is a fundamentally sound mid-BBB credit within the broader REIT-other subgroup. They are the second largest self-storage operator nationally and boast a very solid operating profile. The CUBE 2032s were issued as part of an acquisition debt funding package and are attractively offered at a deep dollar discount in the low $80s, with a yield-to-worst of close to 5%. Management is committed to deleveraging the balance sheet throughout the remainder of 2022.
Exhibit 1. Self-Storage REITs – Intermediate maturities
Source: Amherst Pierpont, Bloomberg/TRACE Indications
CUBE 2.50% 02/15/2032 @ +191/10YR; ~G+190; 4.88%; $81.97
Issuer: CubeSmart LP (CUBE)
Amount outstanding: $500 million
CUBE is one of the largest self-storage REIT operators, peers include Extra Space Storage (EXR Baa2/BBB), Life Storage (LSI: Baa2/BBB), and Public Storage (PSA: A2/A), they are number two nationally behind EXR. These large public storage operators benefit from scale. The credits themselves are pretty straightforward. CUBE is based in Pennsylvania with 1,272 properties either owned or third party operated. The company boasts a large geographic footprint with owned properties in 24 states and third-party properties in 37 states. The portfolio has nearly tripled since 2010.
CUBE is the market leader in New York City with the largest portfolio of properties in the outer boroughs servicing the metropolitan and surrounding areas. The five boroughs, along with northern NJ, Westchester, and Long Island make up a little less than a quarter of CUBE’s entire portfolio composition.
The company launched this 10-year debt issue as part of a two-part deal late last year to fund a portion of an acquisition ($1.05 billion of $1.65 billion). The debt funding left CUBE with slightly higher leverage, but with good operating metrics and stable cash flows they should be able to pay down debt and get themselves back to more typical leverage levels in a relatively short period of time. According to S&P, CUBE exited 2021 with adjusted leverage of just over 7x, which they anticipate management will bring back down to their more typical run-rate in the high 5x to low 6x range.
CUBE has made some significant acquisitions over the past few years, including this most recent purchase of 59 properties from Storage West for $1.65 billion. CUBE will probably remain a buyer of assets but seem unlikely to chase anything so big that it would significantly impact the credit. Again, the company is likely to be paying down debt with larger cash flows as they grow, and management often pursues growth through joint venture activities and third-party management opportunities.
CUBE has demonstrated a consistent ability to raise capital through the public debt markets and maintains debt maturities that are well laddered. The company is currently operating well below its debt covenants, and particularly well below its threshold for secured debt (<4% vs 40% allowed), which provides a lot of capacity to raise capital in the case of an emergency funding need. CUBE also has $564 million available on its revolving credit facility versus the $185 million outstanding through 2024.
As far as industry risks, there is some concern that occupancy in self-storage peaked during the pandemic and that we might see demand come down resulting in overcapacity in some markets, but we think the business outlook overall remains sound, especially for the largest operators that benefit from incredible scale over the remainder of the industry. CUBE’s occupancy in the most recent quarter (2Q22) remained at a robust level of 92.6% down only slightly from the prior year period (93.0%) and only modestly from the 2021 peak of 94.5%.
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