When it comes to boring businesses, self-storage real estate investment trusts (REITs) rank pretty high. That, however, can make them pretty attractive businesses to own. CubeSmart (NYSE: CUBE) is one of the larger names in the space and offers a generous yield, historically speaking. Is it time to buy? Here are a few things to consider.
1. King of dull
CubeSmart owns or operates nearly 1,275 self-storage properties (around 725 properties are owned by others, but run by CubeSmart). This niche area of the REIT sector is pretty simple to understand. CubeSmart builds, buys, or operates a property that amounts to a bunch of empty storage rooms. It rents those individual rooms to people who need a place to put the "stuff" they own but don't have room for it in their homes or businesses. It's a fairly sticky business, since people don't usually want to move all of their belongings just to shave a few dollars off their monthly rent.
2. Resilient in the face of adversity
Conservative investors will probably appreciate that 2020 was actually a fairly good year for CubeSmart. Adjusted funds from operations (FFO), a REIT metric similar to earnings for an industrial company, rose to $1.72 per share in 2020 compared to $1.69 in 2019. Although that's a skinny 1.8% increase, it's a lot better than some other sectors, like malls and hotels, that were hit particularly hard by demand declines because of the coronavirus pandemic.
In other words, in a terrible year, CubeSmart did OK. That proves out the boring business model and is an important stress test for conservative investors.
3. Getting tougher
So, if you like dividends, boring can be good, since it provides a solid underpinning for the company's dividends. The payout ratio, for reference, was a reasonable 72% in the fourth quarter of 2020. That said, the low cost of operating self-storage operations, the sector's proven resiliency, and increasing demand for such storage options has increased competition and put pressure on the industry. So competition has been rising, including from outsiders like private equity, which suggests CubeSmart's future may not be quite as great as its past.
While you would expect 2020 to be a relatively weak year, given the pandemic backdrop, it's interesting to note the changing history here. For example, the average annual increase in the dividend over the past decade through year-end 2020 is incredible at nearly 30%! But the five-year annualized figure is roughly 15%, the three-year number is 7%, and the one-year increase was 3%. That's not a great trend and speaks to a maturing industry with increasing competition. In 2021, the REIT is looking for same-store net operating income growth to fall between 3.75% and 5%, so another year of relatively modest dividend growth is highly likely.
4. The price of slow and steady
So, when you step back here, it looks like rapid growth is in the past, and the best you can expect going forward is slow and steady. For some investors, that might be just fine, though for those with a dividend growth bent, well, it may not be good enough.
Which brings up CubeSmart's yield, which is 3.6% today. That's generous compared to the 1.5% or so you'll get from an S&P 500 Index fund but not particularly impressive on an absolute basis. So, if yield is what you're after, you'll likely find more appealing REIT options elsewhere.
That said, CubeSmart's yield is toward the high end of its historical range over the past decade or so. This suggests the shares may be reasonably priced. The yield is also higher than some of its major competitors, like industry giant Public Storage (NYSE: PSA), which has a 3.3% yield; Extra Space Storage (NYSE: EXR), at 3.1%; and Life Storage (NYSE: LSI), at 3.5%. There are obviously pros and cons to each of the names here, but if maximizing current income is the primary goal, CubeSmart has an edge.
A tough call
CubeSmart has a decade-long streak of annual dividend increases under its belt, backed by a slow and steady business. And yet competition is heating up, so the future is likely to feature less growth than the past. The yield, while toward the high end of its historical range and above some of its peers, isn't particularly high for a REIT at 3.6%.
All in, if you're specifically looking for a high-yield self-storage REIT, CubeSmart may be worth a close look. However, dividend growth types and those who are trying to maximize the income their portfolios generate might want to look for other options. CubeSmart isn't a bad REIT, and for the right person, it could be a good portfolio addition, but in order to find it attractive, you kind of need to be narrowly focused on the self-storage space.