CubeSmart

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3.5/5

CubeSmart is a self-administered and self-managed real estate investment trust (REIT) that acquires, develops, and manages self-storage facilities.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

CubeSmart (CUBE) is a self-administered and self-managed real estate investment trust (REIT) focused on the acquisition, development, and management of self-storage facilities in the United States. Their primary business model centers around providing storage space to individuals and businesses. They are structured as a partnership and are considered a non-traditional REIT, where the profits are made to their shareholders at a higher rate of tax. They have 808 properties, as of March 2024.

  • Revenue Distribution: The majority of CUBE’s revenues stem from rental income generated by the operation of their storage properties. This income is recurring and largely dependent on occupancy levels, pricing, and the management of their leases.
  • Industry Trends: The self-storage industry in the U.S. is quite large, currently estimated to be $40 billion market. Demand is influenced by factors such as mobility (people moving homes), and the need for storage solutions for both consumers and businesses. The industry has seen a growth trend, as people accumulate more goods and seek storage options. COVID-19 pushed some of the self-storage industry trends, like increased movement, and even a need for more personal storage. Supply in the self-storage industry has seen a significant increase over the last 10 years.
  • Margins: Margins for self-storage companies are generally considered high, because their operating costs tend to be lower than their revenues. Gross margins for CUBE in 2023 ranged from 70-75%, while operating margins ranged from 50-55%.
  • Competitive Landscape: The self-storage industry is moderately fragmented, with several publicly traded companies and many private operators. Competition exists on multiple levels: price, location, and the quality and convenience of facilities. Some firms compete in local regions, while others compete nationally. There has been ongoing consolidation in the industry, with the larger companies buying out smaller ones to leverage their business infrastructure. Some competitors of CUBE include Public Storage, Extra Space Storage, and Life Storage.
  • What Makes CUBE Different: CUBE operates with their own “brand” recognition and aims to provide high quality customer service. Furthermore, CUBE claims that they have better technology and more robust infrastructure and management. They believe this will help them generate better long-term results.

Financial Analysis

CUBE’s financial performance reflects the stability and growth potential of the self-storage industry. Revenue has risen from $671 million in 2019 to $883 million in 2023, which is an average growth of 7% each year. In the recent earnings call, it was stated that the increase in occupied square footage has led to revenue growth. The REIT generates large free cash flow, and they use a high percentage of their capital to repurchase shares and to grow inorganically.

  • Revenues: Revenue growth has been good, growing from $715 million in 2021 to $883 million in 2023.
  • Profitability: Operating profit has grown from $379 million in 2021 to $486 million in 2023. However, as mentioned previously, due to being a partnership, taxes take a bigger chunk of overall profit in CUBE than in other publicly traded companies. Net income was $112 million in 2021, before rising to $143 million in 2022, and then falling to $72 million in 2023. - Return on Invested Capital (ROIC): ROIC for the company has ranged from 10-12% over the last few years which shows an economic return above the cost of capital. There was an ROIC of 12.6% in 2021, 10.1% in 2022, and 11.9% in 2023. - Capital Expenditures (CapEx): Over the last 3 years (2021, 2022 and 2023), CUBE has an average of $300 million in CapEx, with a lot of those capital outlays going to expansion and acquisitions.
  • Debt: Debt-to-equity ratios for CUBE show the company takes on a fair amount of debt to leverage returns. CUBE’s leverage has continued to stay the same, or slightly decline, since 2021, which indicates a better financial outlook for the company.
  • Share Repurchases: The company has been on an active share repurchase program. The company bought 11 million shares during 2022, and almost 3 million shares in 2023.
  • Cash flows: In terms of cash flows, in 2023 CUBE generated $496 million of cash from its operations, while using $186 million in investing activities and $294 in financing activities. The cash position for the company remains relatively stable over the last couple of years.

Moat Analysis

CUBE’s moat is evaluated on its ability to sustain its market share and competitive advantage over other companies. In terms of moats, there’s nothing unique that CUBE brings to the table that competitors do not possess.

  • Intangible Assets: While they have the brand name of CUBE, it does not confer a very large pricing advantage. Consumers will not usually choose based on the brand, and so the competitive advantage created by brand recognition is minimal. There are no patents to consider.
  • Switching Costs: For consumers, there are extremely low switching costs. It is easy to move your items from one storage unit to another one of the same pricing, or to use a competitor storage unit. Thus, the moat from switching costs is non existent.
  • Network Effect: This is not a network effect business.
  • Cost Advantages: The company does not possess any significant cost advantages over its competitors. Although, the company claims its scale creates cost advantages, and as the fourth largest player in the self-storage industry, scale should provide some advantages, but it is difficult to determine just how much.

Thus, based on these factors, the moat has to be placed as weak. Moat Rating: 2/5

Risks and Resilience

The major risks to CUBE include:

  • Increased Competition: CUBE and its peers are in an environment where there is increasingly high competition, which will lower pricing power and returns. As supply increases, pricing power will decrease. This is happening in both the United States and the United Kingdom.
    • Business Resilience: The business has been shown to be a bit resilient, with the company returning back to profitable levels after the GFC and the COVID market declines. It remains to be seen if the company will be able to be equally resilient to an environment of strong competition.
  • Changes in consumer demand: Shifts in consumers’ demand can also affect the business; if fewer people move home, or fewer consumers want to rent storage, the demand for CUBE’s business could decrease.
  • Interest rate sensitivity: Given that they borrow money for acquisitions, increases in the interest rate, will create a headwind. Interest rate volatility could cause more difficulties for CUBE’s operations, and could cause a reduction in their credit rating, and an increase in their cost of capital.
  • Impact of large debt load: The debt position of CUBE is one that might lead to solvency risk if the company misses repayments. That would cause a loss of confidence from lenders and investors.
  • Geographical risks: CUBE might have a large concentration of its stores in one region or have high exposure to some natural disasters.
  • Changes in Tax Policy: As CUBE is a partnership, changes in tax policy can cause the company to have less retained earnings and reduce shareholder returns.

Understandability

Understanding CubeSmart as a business isn’t overly complex. Its primary revenue source, rental from storage units, is quite simple. However, their status as a publicly traded partnership and not a traditional corporation, makes it a little harder to follow their financial reports. Furthermore, assessing the risks involved in the debt and equity composition can prove to be a harder task. Also, the understanding of the various nonoperating assets, such as JVs, and nonconsolidated subs is more difficult to grasp. Hence, I am giving the company an understandability score of 2/5

Balance Sheet Health

CUBE has an adequate balance sheet, though it still has many concerns. A main point of concern is the large debt-to-equity ratio that is above normal levels of the industry. That does expose the company to significant risk. Furthermore, CUBE seems to be buying back shares using debt money, which makes the company more vulnerable to economic shocks. The company has a debt rating of BBB, which is investment grade. However, they are not very well rated in terms of Environmental, Social, and Governance (ESG). I am rating CUBE a 3.5/5

Recent Developments The latest earnings call of the company has focused on the improvement of the occupancy levels at the storage units, and revenue growth. The company has had better occupancy rates in the second quarter of 2024, compared to the first quarter of 2024, which is attributed to a better job of managing their portfolio. The company has a few more acquisitions that are planned. However, there is still some concern about the economic uncertainty and competition in the market.

  • The market environment of increasing competition, as well as declining housing markets, remain headwinds for the self-storage industry. But CUBE hopes to overcome this via improving operational margins and leveraging its position as a large player.
  • CUBE’s management has been confident that they can navigate the coming economic headwinds and continue to deliver strong results for the foreseeable future.
  • CUBE has started to offer ancillary services, like selling insurance to customers. It is hoping that such additions in its revenue will provide it further differentiation and economic moat.