Ticker: Best Idea Long CUBE
Headline: Acquiring Storage West for ~$1.7 billion in a stabilized deal
- Deal is accretive on FY22 Core FFO by an estimated $0.03 to $0.04/share over our $2.41/share prior number (so ~1.5%), which assumes (1) a 12/31/21 close, (2) 13.5 million shares issued in December as part of the simultaneously announced secondary for net proceeds of just over $700 million, (3) ~$1 billion of unsecured debt issuance and (4) ~$61 million of year 1 NOI or a ~3.7% unlevered yield on cost.
- From a value perspective it is neutral-to-BARELY accretive - we had CUBE trading at a ~3.7% implied cap rate including G&A using an 11/15 close.
- We don't hate the deal, but we definitely prefer a value-add transaction such as the All Storage acquisition recently announced by PSA where there are opportunities to meaningfully increase in-place NOI by leasing up a ~75% occupied portfolio into the mid-90% range. In CUBE's case the Storage West portfolio, which is by the way of very high quality with relatively low capex requirements as best as we can tell, is already ~95% occupied with in-place rents comparable to CUBE's existing assets. It will almost definitionally be a slower burn to the hit the mid-single-digit cash-on-cash return range, acknowledging that we had a little more info from PSA on targeted stabilized yields. What we can clearly see is that market-by-market Storage West is running at higher average in-place rents than CUBE, so we struggle a bit to see where any added "juice" could come from. We would not be surprised to see the stock trade lower tomorrow on the pending dilution from the equity raise (indicating -2.2% lower at the time of this writing).
- On an illustrative basis, if Storage West was to track our broader model for CUBE's same store portfolio with average in-place rents heading towards $21psf, we estimate that NOI for the portfolio would indeed trend towards ~$61 million. That assumes ~94% average occupancy and a ~70% NOI margin. So at a high level the numbers presented check out.
- From a leverage standpoint this brings CUBE up by over a full 1x turn and more in-line with EXR and LSI, with pro forma leverage at over ~5x net debt/EBITDA. We still think there could be some balance sheet capacity from here but expect CUBE to take a pause and integrate Storage West.
- Some notes on the portfolio from CUBE's acquisition deck in the Figures below:
Figure 1: Overview of Storage West
Figure 2: CUBE's Pro Forma Portfolio Composition
Figure 3: Deal Capitalization
Please e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
