CubeSmart 2019 Q3 Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2019; comparisons are with the same 2018 periods. CubeSmart is a self-storage REIT operating through CubeSmart, L.P. At quarter-end, it owned 519 stores totaling 36.3 million rentable square feet and managed 652 third-party stores. Its owned portfolio spanned 24 states and the District of Columbia.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $166.5 million | $153.4 million | $478.4 million | $444.1 million |
| Net income | $42.6 million | $43.3 million | $128.3 million | $116.9 million |
| Net income attributable to common shareholders | $42.2 million | $42.9 million | $127.1 million | $115.7 million |
| Diluted EPS | $0.22 | $0.23 | $0.67 | $0.63 |
| Net cash from operating activities | Not stated for quarter | Not stated for quarter | $259.9 million | $234.6 million |
Q3 NOI, a non-GAAP measure, was $113.1 million, up 8.1%; NOI margin was approximately 67.9%, versus 68.2%. Nine-month NOI was $323.4 million, up 8.9%, with an approximately 67.6% margin versus 66.9%. Same-store revenue grew 1.5% in Q3 and 2.0% year to date; same-store NOI increased 0.1% and 1.3%, respectively. Same-store average occupancy was 93.1% in Q3 versus 93.2%; realized annual rent per occupied square foot rose 1.1% in Q3 and 1.9% year to date.
At September 30, cash and cash equivalents were $7.3 million, restricted cash $5.6 million, and total debt carrying value approximately $1.824 billion, compared with $1.747 billion at December 31, 2018. Debt included $1.489 billion of senior notes, $238.0 million drawn on the revolver and $96.8 million of mortgage debt; no unsecured term loans remained. The $750 million revolver had $511.3 million available. The company reported compliance with its debt covenants.
Material changes versus prior periods
- Q3 revenue rose 8.6%, but common-shareholder net income declined 1.7% and diluted EPS fell from $0.23 to $0.22. Higher property expenses, depreciation and interest partly offset revenue growth.
- Nine-month revenue increased 7.7% and common-shareholder net income increased 9.8%. Equity earnings from real estate ventures included the company’s share of gains from a venture’s property sale, contributing to the year-over-year improvement.
- Interest expense increased 19.9% in Q3 and 17.6% year to date. Management attributed the increase to higher average debt balances and higher weighted-average borrowing rates.
- Investing cash outflow rose to $305.3 million from $185.0 million, mainly reflecting acquisitions, the purchase of the remaining interest in HVP III and development spending. Operating cash flow increased by $25.3 million.
- The company acquired its partner’s 90% interest in HVP III for $128.3 million; the venture’s remaining 18 stores became wholly owned. It also acquired six individual stores and bought out interests in several development ventures.
Outlook, commentary, risks and unusual items
- No full-year earnings or revenue guidance is provided in the supplied filing text. For the remainder of 2019, management expected recurring capital expenditures of $4–8 million, capital improvements and upgrades of $1–3 million, development costs of $9–19 million, and scheduled principal payments of about $0.6 million.
- Management cited operating cash flow, equity-market access and revolver availability as expected sources to support its business plan, while noting that future debt and equity access is not assured. REIT status requires distribution of at least 90% of taxable income, excluding capital gains.
- HVP III’s sale of 50 properties generated venture-level gains of approximately $106.7 million; CubeSmart recognized $10.94 million of equity earnings from ventures for the nine months, versus a loss in the prior-year period. The filing also reports $1.7 million of Q3 property-transaction fees from venture activity.
- After quarter-end, CubeSmart issued $350 million of 3.000% senior notes due 2030; net proceeds of $346.4 million repaid revolver borrowings and funded general corporate purposes. It also acquired a Texas property for $7.3 million and sold a held-for-sale Texas store for $4.1 million.
- Key risks include competition affecting occupancy and rents, economic weakness and customer payment capacity, rising operating costs and interest rates, refinancing and capital-market access, acquisition and development execution, and joint-venture, cybersecurity, environmental and natural-disaster risks. The company identified ordinary-course legal claims; a class-action settlement received final court approval in August 2019, following a $1.8 million charge recorded in 2018.
Important facts for investors to verify
- Whether same-store rent growth and occupancy can sustain revenue growth as same-store NOI growth remained modest.
- How acquisition, development and operating costs affect returns and leverage, particularly given increased debt and interest expense.
- The recurring earnings contribution apart from HVP III sale-related gains and venture transaction fees.
- Revolver availability, debt maturities, covenant headroom and the use of proceeds from the October 2030-note issuance.
- Capital spending and development progress against management’s remainder-of-2019 estimates, and the execution of properties under contract.