Trade Alert: Income from Accumulation
What’s in It for You?
CubeSmart (NYSE: CUBE) is one of the largest self-storage real estate investment trusts (REITs) in the U.S.
The recession-resistant industry does well during downturns because people on the move need places to store their stuff until they get settled again. Now, these same folks may be on the move again, as a resurgent economy creates new opportunities. At the very least, they should be able to afford higher rents.
Until recently, the recovery since the downturn has been slow and halting, giving self-storage REITs a nice tailwind. Of course, that also led to an increase in supply, which the industry will continue to work through over the next year or two.
That means CubeSmart’s heady growth in funds from operations per unit (FFO) is expected to slow to the low- to mid-single digits over the next couple years as local markets absorb the additional capacity.
The good news is that CubeSmart’s management is pretty disciplined on the financial front. The REIT plans to fund its existing development pipeline over the next two years by using free cash flow instead of issuing more equity. And CubeSmart ended the year with net debt to EBITDA at 4.74 times, well below its average REIT peer.
Meanwhile, the shorter durations of self-storage leases allow owners to increase rents at a pace that should keep up with any rise in inflation.
This trade will generate immediate income of $35 per contract now, with the possibility of buying this REIT at a 9.7% discount to where it currently trades if the stock gets put to you. Investors should set aside $2,500 per contract sold to buy the stock in case the option expires in the money.
Regardless of how many contracts you sell, it’s absolutely critical that you follow the instructions below, particularly when it comes to setting the limit order.
How to Make the Trade:
- Trade: Sell to open the May 18, 2018, $25 Put on CUBE.
- Allocation: Sell one put for every 100 shares you would be pleased to buy at $25 per share.
- Current Stock Price: $27.70
- Limit Order Price: a credit of $0.35 or more.
- Tell your broker: “I want to sell a put on CubeSmart (NYSE: CUBE) stock. Specifically, I want to ‘sell to open’ one May $25 Put for a credit of $0.35 per share or more.”
- Further Instructions Regarding the Trade:
- If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least $0.35 per share or more.
- Place your limit order on a “good ‘til canceled” (GTC) basis and be patient.
The Win-Win Situation:
For every put contract you sell, you will collect $35 that’s yours to keep no matter what happens in the future.
If the put expires worthless, meaning the stock price is above $25 per share at expiration, then we’ll do another trade to create another instant payment.
If the stock is trading at or below the strike price upon the contract’s expiration, then you’ll be buying this REIT at a 9.7% discount to the current market price, while locking in a yield of 4.8%—plus the premium you pocketed when you sold the put.
Then we’ll collect the dividend while creating more instant payments by selling covered calls against the stock.