On Friday, UBS adjusted its stance on CubeSmart (NYSE: CUBE) stock, downgrading the self-storage real estate investment trust (REIT) from Buy to Neutral. While the price target was slightly raised to $54.00 from $53.00, the firm cited the stock's current valuation as more reflective of the market's expectations for the self-storage sector.
CubeSmart's shares have seen a significant increase, outperforming both the broader REIT market and the self-storage segment since July 1. The stock has gained over 21%, surpassing REITs by 590 basis points and the Storage subsector by 100 basis points.
Despite this strong performance, the firm believes there is limited room for additional valuation growth, as CubeSmart's price to next twelve months (NTM) price/funds from operations (P/FFO) ratio has expanded from 17 times to 20 times without a change in fundamentals.
UBS's initial investment thesis for CubeSmart was based on the expectation that the company's urban-centric portfolio would be less affected by a slowdown in housing turnover. Nevertheless, CubeSmart's same-store revenue (SSRev) has underperformed its peers by 70 basis points since 2022.
The firm suggests that CubeSmart may continue to lag behind its competitors, who could benefit more from an eventual improvement in housing turnover, particularly in suburban markets.
The report also notes that while mortgage rates have decreased from their peak and housing listings have increased year over year, there is no clear indication of when housing turnover will strengthen.
Additionally, CubeSmart lacks unique catalysts that are present in its peers, such as brand harmonization for Extra Space Storage (NYSE:EXR) and Life Storage (NYSE:LSI), Public Storage's (NYSE:PSA) non-same-store pool, and National Storage Affiliates Trust 's (NYSE:NSA) internalization of its PRO program.
Looking ahead, UBS forecasts CubeSmart's 2025 estimated SSRev growth at 0.6%, which is below the consensus estimate of 1.3%. The Storage subsector currently trades at a 32% premium to the broader REIT category, and CubeSmart's discount to the Storage average is narrower than its five-year average, further supporting the firm's position on the stock's valuation.
In other recent news, CubeSmart has been garnering attention with its Q2 2024 earnings and analyst coverage. The self-storage real estate investment trust reported a 1.8% year-over-year increase in same-store rentals, with occupancy rates rising to 91.9%, a growth of 150 basis points. The company also announced two new development projects in New York and expanded its third-party management platform with the addition of 39 stores.
RBC Capital initiated coverage on CubeSmart with an Outperform rating, citing the company's strong position in the New York City area and potential for sustained rent growth. The firm also praised CubeSmart's third-party management business and highlighted its potential for growth through acquisitions. Meanwhile, Citi reaffirmed a Neutral rating on CubeSmart shares, raising the price target to $50.00 from the previous $45.00, and revised its core Funds From Operations estimates for the years ahead.
Scotiabank also initiated coverage on CubeSmart, assigning a Sector Outperform rating and a price target of $53.00. The firm noted CubeSmart's strategic positioning in markets with high homeownership costs and a greater tendency for individuals to rent, viewing this as a favorable position for the company. These recent developments reflect CubeSmart's ongoing adaptation to market shifts and focus on growth and operational efficiency.
InvestingPro Insights
In light of UBS's downgrade of CubeSmart, real-time data from InvestingPro provides a broader perspective on the company's financial health and market performance. CubeSmart's market capitalization stands at $12.21 billion, and the company boasts a high P/E ratio of 30.07, which aligns with UBS's concerns about valuation. Despite a modest revenue growth of 2.04% over the last twelve months, the company has maintained a strong gross profit margin of 73.29%, indicating efficient cost management.
InvestingPro Tips highlight that CubeSmart has raised its dividend for 13 consecutive years, showcasing a commitment to returning value to shareholders. Moreover, the company's stock is trading near its 52-week high, reflecting a robust return of 40.72% over the past year. This performance is echoed by the company's strong three-month price total return of 22.5%. However, the high Price / Book multiple of 4.41 suggests that the stock may be priced optimistically in terms of its book value.
For investors seeking a deeper dive into CubeSmart's potential, InvestingPro offers additional tips that can provide more nuanced insights into the company's financials and market position. With a total of 12 additional InvestingPro Tips available, investors can better gauge the opportunities and risks associated with CubeSmart.
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