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Should You Invest In CubeSmart (NYSE:CUBE)?

Peter Morris

CubeSmart is a US$5.71b mid-cap, real estate investment trust (REIT) based in Malvern, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of CUBE is unique and it has to adhere to different requirements compared to other non-REIT stocks. Below, I’ll look at a few important metrics to keep in mind as part of your research on CUBE.

View our latest analysis for CubeSmart

REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of CUBE’s daily operations. For CUBE, its FFO of US$293.4m makes up 76.3% of its gross profit, which means the majority of its earnings are high-quality and recurring.

NYSE:CUBE Historical Debt September 12th 18

Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for CUBE to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 17.9%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take CUBE 5.57 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.

Next, interest coverage ratio shows how many times CUBE’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 4.92x, it’s safe to say CUBE is generating an appropriate amount of cash from its borrowings.

I also use FFO to look at CUBE’s valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. In CUBE’s case its P/FFO is 19.27x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.

Next Steps:

As a REIT, CubeSmart offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in CUBE, I highly recommend taking a look at other aspects of the stock to consider:

  1. Future Outlook: What are well-informed industry analysts predicting for CUBE’s future growth? Take a look at our free research report of analyst consensus for CUBE’s outlook.
  2. Valuation: What is CUBE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CUBE is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.