A REIT Cubed
Board: Real Estate Investment Trusts
A new REIT preferred began trading today that merits a few words of discussion. On October 28, CubeSmart, a self-storage REIT (CUBE) announced the pricing of 2.8MM shares of a new series A preferred (CUBE.A) at $25 per share. The annual dividend rate is $1.9375, providing a yield of 7.75% for those buying at par value. There is the typical five years of call protection. The stock began trading today, and the range has been narrow, i.e., between $25 and $24.86. Volume is 38,900.
CubeSmart, formerly known as U-Store-It, has had a checkered history. It began its existence several years ago, but the management team and controlling shareholders were inept, and the stock went south. Realizing that the company needed a new and strong management team, the controlling shareholders swallowed their pride and brought in Dean Jernigan, a highly regarded self-storage executive who managed another public self-storage REIT (Storage USA) very effectively before selling it to GE Capital at the end of 2001. Jernigan soon brought in Chris Marr as CFO, who had been CFO at Storage USA alongside Jernigan.
To make a long story short, Messrs. Jernigan and Marr have turned CUBE around; it has taken them a while, as the company had been pretty fouled up. They have reduced debt leverage, improved operations, increased cash flow, and upgraded the quality of their portfolio. Two years ago, the stock was trading at below $6; it is now at $9.60. The balance sheet has been greatly strengthened, and leverage was cut to 38% before it agreed, in October, to buy a large property portfolio in New York City for $560MM. The new preferred A stock offering is part of CUBE’s financing of the deal.
Debt leverage estimates vary; after taking this large acquisition and related financing into account, leverage will be somewhere in the mid 40% range, which is about average for a REIT; debt/ebitda is about 6x, which is slightly more conservative than the typical REIT. Estimated free cash flow for next year varies with the analyst; if we can assume $68MM, only $6.2MM, or less than 10%, will be paid in dividends to the holders of new Pfd A (this also assumes that the underwriters will exercise their overallotment option).
Bottom Line: I like CUBE’s management team and like the prospects for the self-storage sector. I also think CUBE’s balance sheet, while not hugely conservative, is sufficiently strong so as to provide assurance that the new CUBEpA dividend is “money good.” I really like the fact that less than 10% of estimated free cash flow is promised to the preferred shareholders, providing a very substantial margin for error. I believe that CUBEpA should trade at a yield of about 7.4% under current market conditions. Buying the stock at $25 (it’s been trading slightly below that) provides a yield of 7.75%, along with 5 years of call protection.
I have been buying this today for my IRA. Reminder: Always be very careful in placing orders for ALL preferred stocks, as they are very illiquid. We may see the stock trade down over the next day or two, which often happens following a new preferred stock offering (some stock gets put into accounts that don’t like preferred stocks and they dump them as soon as they can). Or, it may not trade down at all. Who knows?