CubeSmart 10-Q Summary: Quarter Ended September 30, 2012
Business context: CubeSmart is a self-storage REIT operating through CubeSmart, L.P. At quarter-end, the company owned 387 facilities totaling approximately 25.8 million rentable square feet and managed 132 additional properties. Results below are consolidated and in U.S. dollars; financial amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $74.1 | $58.5 | $208.1 | $168.2 |
| Operating income | $8.3 | $13.3 | $23.0 | $32.7 |
| Net income (loss) attributable to common shareholders | $0.1 | $6.8 | $(4.2) | $7.6 |
| Basic and diluted EPS | $0.00 | $0.07 | $(0.03) | $0.08 |
| Operating cash flow | Not separately presented by quarter | $97.2 | $64.4 | |
| FFO | $22.8 | $18.8 | $65.1 | $49.6 |
| FFO, as adjusted | $24.4 | $19.2 | $67.5 | $50.4 |
Quarterly revenue increased 27%; nine-month revenue rose 24%. Same-store revenue grew 4% in Q3 and 3% for the nine-month period. Same-store NOI increased 4% and 6%, respectively. Same-store average occupancy improved to 84.9% in Q3 from 81.2%, and to 81.7% for the nine months from 79.0%. However, realized annual rent per occupied square foot declined year over year to $11.33 from $11.51 in Q3 and to $11.47 from $11.58 for the nine months.
Operating income fell despite higher revenue, principally as depreciation and amortization rose 91% in Q3 and 81% year to date, reflecting acquisitions and lease-intangible amortization. Interest expense also increased. Nine-month common-shareholder results included $7.5 million of discontinued-operation income, including $6.4 million of disposal gains, and a $7.0 million gain from remeasuring the HSRE venture. FFO and adjusted FFO are non-GAAP measures and should not be treated as cash flow or GAAP earnings.
At September 30, total assets were $2.17 billion, cash and cash equivalents were $2.7 million, and total equity was $950.0 million. Debt comprised $250.0 million of senior notes, $65.5 million drawn on the revolver, $500.0 million of term loans and $258.8 million of mortgage debt—approximately $1.07 billion in total. The $300 million revolver had $234.5 million available. Debt covenants were reported in compliance. The $250 million senior notes mature in 2022 and carry a 4.80% coupon; the weighted-average rate on term-loan and credit-facility borrowings was 3.11%.
For the nine months, operating cash flow was $97.2 million, investing cash outflow was $271.8 million and financing cash inflow was $168.2 million. Cash declined $6.4 million to $2.7 million. Investing included $220.8 million for acquisitions, additions and improvements and $81.2 million to acquire the remaining HSRE venture interest. Financing included $59.1 million in net share issuance proceeds and $61.1 million paid to acquire noncontrolling interests.
Material changes and unusual items
- The company acquired 32 facilities during the first nine months for reported aggregate purchase prices of approximately $406.7 million. This included the final six facilities of the Storage Deluxe transaction, acquired for approximately $201.9 million; the broader Storage Deluxe transaction covered 22 facilities and approximately $560 million.
- CubeSmart purchased the remaining 50% of HSRE Venture in September, obtaining nine wholly owned facilities. The transaction produced a $7.0 million remeasurement gain; the company also repaid $59.3 million of related mortgage loans.
- In August, the company acquired the remaining 50% of HART for $61.1 million, bringing its ownership to 100%.
- During the first nine months, the company sold 15 facilities and recorded $6.4 million in aggregate disposition gains. Three properties were classified as held for sale at quarter-end.
- Common shares outstanding increased to 127.4 million from 122.1 million at year-end 2011. The company sold 4.7 million shares through its at-the-market program for $59.1 million net proceeds.
- Interest-rate swap fair-value liabilities increased to $21.0 million from $12.4 million at year-end; nine-month unrealized swap losses were $8.8 million.
Outlook, risks and contingencies
Management said it intends to focus on internal growth and selectively pursue acquisitions and development. The filing gives no specific revenue, earnings or occupancy guidance. It estimates remaining 2012 recurring capital expenditures of $1–$2 million and scheduled debt principal payments of approximately $1.5 million. Management expects to fund liquidity needs through operating cash flow, debt, equity issuance, facility dispositions and joint-venture transactions, while noting that access to capital is not assured.
Key risks include local and national economic conditions, competition and the ability to maintain occupancy and rents, availability and cost of capital, refinancing and leverage risk, interest-rate movements, acquisition and development execution, operating costs, REIT qualification, counterparty performance on derivatives, and environmental, regulatory and natural-disaster exposures. The company reported no off-balance-sheet arrangements, no impairment losses in 2012 or 2011, and compliance with debt covenants. It had no material change in internal control over financial reporting.
After quarter-end, the company repaid approximately $6.3 million of mortgage loans and sold 11 facilities for a combined $24.4 million. The filing notes that results for interim periods are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether same-store occupancy gains can be sustained while realized rent per occupied square foot is declining.
- Acquisition contribution, integration costs and pro forma performance, particularly for Storage Deluxe and the other 2012 acquisitions.
- Debt maturities, interest-rate exposure, covenant headroom and the availability of the remaining revolving credit capacity.
- Cash needs for distributions, debt service and capital spending relative to operating cash flow and access to external financing.
- The impact of share issuance and noncontrolling-interest redemptions on per-share results and ownership.
- The quality and repeatability of reported earnings, including disposal gains and the HSRE remeasurement gain, versus operating performance and FFO.