CubeSmart 2012 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2012, filed by CubeSmart and its operating partnership. CubeSmart is a self-managed, self-administered REIT focused on owning, operating, acquiring, developing, and managing U.S. self-storage facilities. At year-end, it owned 381 facilities across 22 states and Washington, D.C., totaling 25.5 million rentable square feet, and managed 133 third-party properties. Owned-facility occupancy was 84.4%; the business served approximately 182,000 tenants, with no significant single-tenant revenue concentration.
Financial and operating metrics
- Revenue: $283.1 million in 2012, up 25% from $227.2 million in 2011. Rental income was $251.0 million, up 24%.
- Profitability: Operating income was $32.3 million, down 23%, while net income attributable to CubeSmart was $1.8 million versus a $0.4 million loss in 2011. After $6.0 million of preferred distributions, the common-shareholder net loss was $4.2 million, or $0.03 per share.
- Operating performance: Same-store NOI rose 6% to $139.4 million. Same-store average occupancy improved to 82.6% from 79.2%, while realized annual rent per occupied square foot decreased to $11.51 from $11.67. Total portfolio NOI was $172.3 million; the filing defines NOI as a non-GAAP measure.
- Cash flow: Operating cash flow was $118.4 million, compared with $84.3 million in 2011. Investing activities used $271.9 million and financing activities provided $148.9 million. Year-end cash and cash equivalents were $4.5 million.
- Debt and liquidity: Debt totaled approximately $1.024 billion, versus $758.4 million in 2011. The company reported $254.8 million available under its revolving credit facility. Debt to total capitalization, using market value for equity as defined by the company, was 34.2%, down from 36.0%; debt to depreciated real estate cost was 49.0%, up from 42.4%. Management reported compliance with debt covenants.
- Dividends: Common dividends declared were $0.35 per share for 2012, versus $0.29 in 2011. The fourth-quarter common dividend was $0.11 per share.
- Fourth-quarter data: Revenue was $77.4 million; operating expenses were $67.3 million; net income attributable to CubeSmart was $1.5 million. Reported quarterly EPS rounded to zero.
Material changes versus 2011
- Completed 37 facility acquisitions for approximately $432.3 million and sold 26 facilities for approximately $60.0 million. The acquisition total included six final Storage Deluxe properties for approximately $201.9 million.
- Acquired the remaining 50% of HSREV, taking full ownership of nine facilities; the transaction produced a $7.0 million remeasurement gain. Also purchased the remaining 50% of HART for $61.1 million, bringing ownership of its 22 properties to 100%.
- Revenue growth reflected acquisitions and stronger same-store occupancy. Property operating expenses rose 17% and depreciation and amortization rose 73%, including substantial amortization of acquired lease intangibles. Interest expense increased 23% with higher average debt.
- Issued $250 million of 4.80% unsecured senior notes due in 2022 and sold 7.9 million common shares through its at-the-market program for $103.8 million gross proceeds.
- FFO increased to $93.3 million from $60.8 million; adjusted FFO increased to $96.4 million from $70.9 million. Both are non-GAAP measures.
Outlook, commentary, risks, and unusual items
- Management planned selective acquisitions in targeted markets, dispositions of non-core facilities, and continued growth in third-party management. It anticipated $7 million to $10 million in 2013 capital improvements and approximately $30.1 million in scheduled 2013 debt principal payments.
- Management expected 2013 contractual obligations to be funded through operating cash flow and revolving-credit borrowings, and cited access to the ATM program and credit facility as liquidity sources. Future access to debt and equity capital is not assured.
- Key risks include local economic weakness and geographic concentration, self-storage competition affecting occupancy and rents, acquisition execution and integration, operating-cost and interest-rate increases, debt refinancing and covenant constraints, REIT qualification, environmental liabilities, and potentially inadequate insurance for certain disasters or losses.
- Unusual or period-sensitive items included $9.8 million of gains on property dispositions, the $7.0 million HSREV remeasurement gain, and $25.2 million of additional lease-intangible amortization associated with acquisitions. Acquired properties contributed to revenue growth but also generated a $27.6 million net loss since acquisition dates, as reported in the unaudited pro forma disclosure.
- Management stated that ordinary-course litigation provisions were adequate and that it was not aware of environmental liabilities expected to have a material adverse effect. The financial statements received unqualified audit opinions; auditors also gave an unqualified opinion on internal control over financial reporting. No subsequent events were reported.
Important facts for investors to verify
- Whether same-store rent trends and occupancy gains continued after 2012, and how much growth came from acquired properties versus existing facilities.
- The recurring earnings and cash-flow impact of acquisition-related depreciation, lease-intangible amortization, disposition gains, and remeasurement gains; reconcile GAAP results with FFO and adjusted FFO.
- Debt maturities, refinancing plans, floating-rate exposure, hedge terms, and covenant headroom. The filing estimates a $1.5 million annual cash-flow impact from a 100-basis-point change in rates on floating-rate debt.
- Whether cash, revolving capacity, planned asset sales, and equity issuance can fund acquisitions, debt service, capital spending, and distributions without excessive dilution or leverage.
- The sustainability of the dividend and the concentration of revenues in New York, Florida, California, and Texas, which together represented about 51% of 2012 revenue.