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S&P Revises Outlook on CubeSmart (CUBE) to Positive; Affirms Corp. Ratings

December 10, 2013 2:04 PM EST
Standard & Poor's Ratings Services said it assigned a 'BBB-' rating to CubeSmart's (NYSE: CUBE) proposed $250 million of senior unsecured notes. At the same time, we affirmed our 'BBB-' corporate credit rating on the company and revised the outlook to positive from stable.

"The positive outlook acknowledges the improvement in the overall quality of CubeSmart's portfolio and better-than-expected operating performance," said Standard & Poor's credit analyst Matthew Lynam. Same-store occupancy averaged 90.5% in the third quarter of 2013, up 500 basis points over the prior year and an all-time high for the company. EBITDA margin also rose to 56% in the quarter from 52% over the same period. Operating metrics which have historically lagged peers are now much more in line with the group. In addition, we acknowledge the strengthening of CubeSmart's capital structure through the reduction in floating rate debt exposure and extension of its weighted average debt maturity. We believe the relatively smaller capital structure and asset base will translate to some quarter-to-quarter variability in credit metrics given the company's growth plans.

Our assessment of CubeSmart's business risk profile incorporates our view of the REIT industry's "low" risk and "very low" country risk. We view CubeSmart's competitive position as "satisfactory," due to the company's geographically diverse portfolio of above-average properties in core markets. Since we assigned the initial corporate credit rating in December 2011, the company has continued to strengthen its asset base through a capital recycling program that has executed an additional $440 million of acquisitions (excluding the $560 million Storage Deluxe transaction) while disposing of $186 million of noncore properties. We also expect self-storage fundamentals to remain healthy through 2014, with limited new supply from development and consistent demand from a modestly improving economy. We believe that CubeSmart will continue to increase its market share in a highly fragmented self-storage market through modest acquisition activity and growth of its third-party management platform.

CubeSmart's credit metrics are consistent with our assessment of an "intermediate" financial risk profile. The proposed $250 million issuance of senior unsecured notes will effectively retire the company's debt obligations due in 2014 and eliminate almost all unhedged, variable-rate debt, while extending the weighted average debt maturity to over 6.5 years from 5.2 years. The additional funds from the issuance will be used to finance the recently announced joint venture acquisition of 29 self-storage assets. Secured debt is also very modest, at about 8% of undepreciated asset value.

The positive outlook recognizes the substantial improvement in CubeSmart portfolio over the past two years and the recent better-than-expected operating performance.

We would consider raising the rating by one notch if CubeSmart can maintain improved profitability and operating metrics, while sustaining credit metrics, such as debt-to-EBITDA, more solidly within the "intermediate" financial risk profile range. For example, debt-to-EBITDA would need to be consistently below 6.5x.

We could revise the rating back to stable if CubeSmart's profitably metrics meaningfully lagged those of peers or if leverage increased above our base-case projections, perhaps due to more aggressive acquisition activity than we currently expect.


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