CubeSmart — Q3 2016 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016; comparative periods are 2015. Amounts are in U.S. dollars. CubeSmart is a self-storage REIT operating through CubeSmart, L.P.; the combined filing reports them as one enterprise.
Business context and operating performance
At quarter-end, CubeSmart owned 471 facilities with approximately 32.5 million rentable square feet in 23 states and the District of Columbia, and managed 291 facilities for third parties. Its portfolio includes month-to-month rentals and is subject to seasonal occupancy patterns.
- Same-store facilities: 407. Q3 same-store average occupancy was 93.8%, up 0.4 percentage points year over year; nine-month average occupancy was 93.1%, up 0.9 points. Realized annual rent per occupied square foot rose 6.0% in Q3 and 6.6% for nine months.
- At September 30, total portfolio occupancy was 90.9% versus 91.9% a year earlier; non-same-store occupancy was 78.0% versus 80.6%.
- The company acquired 24 facilities during the first nine months for approximately $350.8 million and spent $134.1 million on development. Five joint-venture development projects were also underway; total expected construction costs for those projects were $312.4 million.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $132.1 million | $116.0 million | $377.5 million | $329.5 million |
| Operating income | $39.5 million | $29.7 million | $101.3 million | $76.1 million |
| Net income | $25.1 million | $18.6 million | $61.3 million | $41.0 million |
| Net income attributable to common shareholders | $23.4 million | $16.9 million | $56.6 million | $36.1 million |
| Diluted EPS | $0.13 | $0.10 | $0.32 | $0.21 |
| NOI (company-defined) | $90.3 million | $76.7 million | $253.9 million | $214.6 million |
| Cash from operating activities | — | — | $201.4 million | $162.5 million |
For Q3, revenue increased 13.9%, operating income 33.0%, and common-shareholder net income 38.1% year over year. For nine months, revenue rose 14.6%, operating income 33.1%, and common-shareholder net income 56.7%. Growth reflected same-store rent and occupancy gains, acquisitions, and higher management fees. Q3 operating margin was approximately 29.9% versus 25.6% a year earlier; nine-month operating margin was approximately 26.8% versus 23.1%.
Nine-month cash used in investing was $472.1 million, chiefly for acquisitions and development; cash provided by financing was $295.2 million. Cash and cash equivalents were $87.4 million at September 30, 2016, and unused revolving-credit availability was $499.3 million. The company reported approximately $1.6 billion of debt carrying value, up from $1.3 billion at December 31, 2015. Debt included $1.05 billion principal of senior notes, $400 million of unsecured term loans, and mortgage debt. A new $300 million issue of 3.125% notes due 2026 was completed in August. The company reported covenant compliance.
Material changes, outlook and risks
- Same-store rental growth was supported by higher asking rents, fewer promotional discounts, and stronger average occupancy. Acquisitions and managed-facility growth also contributed materially to revenue.
- Interest expense rose 23.0% in Q3 and 14.7% for nine months, mainly because average debt balances increased to fund acquisitions; Q3 average outstanding debt was approximately $1.5 billion.
- Management expected, for the remainder of 2016, $4–9 million of recurring capital expenditures, $2–5 million of capital improvements, and $18–23 million of development spending. It said operating cash flow, equity-market access, and credit-facility availability should support its current plan, while noting that capital access is not assured.
- CubeSmart announced redemption of all 3.1 million Series A preferred shares on November 2, 2016, at $25 per share plus accrued dividends, and expected a fourth-quarter charge of approximately $2.8 million. Subsequent to quarter-end, it acquired one Nevada facility for approximately $13.3 million.
- Risks highlighted include economic and local real-estate conditions, competition affecting rents and occupancy, availability and cost of financing, leverage and refinancing exposure, interest-rate changes, acquisition and development execution, joint-venture risks, natural disasters, and maintaining REIT qualification. A 100-basis-point increase in rates was estimated to raise annual interest expense on floating-rate debt by about $1.0 million.
- The company reported no impairment losses on facilities or unconsolidated real-estate investments in the first nine months of 2016. Its 10-Q also states that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether same-store rent and occupancy gains persist, and whether lower occupancy in the non-same-store portfolio improves as acquired and developed facilities stabilize.
- Acquisition and development returns relative to spending, debt added, and the $312.4 million estimated cost of joint-venture projects.
- Debt maturity schedule, refinancing needs, covenant headroom, floating-rate exposure, and continued access to credit and equity markets.
- Completion and funding of the preferred-share redemption and recognition of the expected $2.8 million charge.
- Drivers and duration of losses from unconsolidated real-estate ventures, including HVP, and the financial effect of joint-venture ownership put/call arrangements.