CubeSmart — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; comparisons are to the corresponding 2013 periods. Amounts below are in millions, except per-share data. The combined filing covers CubeSmart and its operating partnership, which are managed as one enterprise.
Business context
CubeSmart is a self-storage REIT operating in 21 states and the District of Columbia. At September 30, 2014, it owned 390 facilities with approximately 26.4 million rentable square feet and managed 172 additional facilities, including 35 held through an unconsolidated venture. Growth reflected acquisitions, development and improved performance at established properties.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $97.1 | $82.5 | $276.7 | $235.4 |
| Operating income | $23.1 | $16.2 | $63.7 | $37.3 |
| Net income | $8.6 | $16.6 | $21.2 | $18.7 |
| Net income attributable to common shareholders | $7.0 | $14.8 | $16.4 | $14.0 |
| Common diluted EPS | $0.05 | $0.11 | $0.11 | $0.10 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $118.9 | $103.9 |
| Cash used in investing | Not provided for quarter | Not provided for quarter | $(219.0) | $(130.3) |
| Cash provided by financing | Not provided for quarter | Not provided for quarter | $128.1 | $24.8 |
- Q3 total revenue rose 17.7%; operating income increased 42.5%. Operating margin, calculated from reported figures, was approximately 23.8%, compared with 19.7%.
- Nine-month revenue increased 17.5% and operating income rose 70.9%. Common-shareholder income increased despite lower total net income in Q3 versus 2013.
- Same-store Q3 revenue increased 7.7% and same-store NOI rose 10.8%; period-end occupancy was 91.7% versus 90.0%, and realized annual rent per occupied square foot was $14.05 versus $13.35. For the nine-month period, same-store revenue grew 7.4% and NOI 9.9%.
- Q3 common earnings were affected by the absence of 2013 discontinued-operation income and a $9.3 million disposition gain. Nine-month 2014 discontinued operations included $0.3 million, versus $14.1 million in 2013, including a $9.5 million gain.
- Nine-month FFO was $114.9 million versus $91.9 million; adjusted FFO was $118.6 million versus $94.1 million. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Debt, liquidity and capital
- At September 30, debt comprised $500 million of senior notes, $400 million of unsecured term loans and $215.8 million of mortgages and notes payable; no revolving-facility borrowings were outstanding. Total liabilities were $1.216 billion and cash was $31.3 million.
- The company reported approximately $300 million available under its revolving credit facility. It was in compliance with debt covenants. The effective weighted-average rate on term-loan and credit-facility borrowings, after swaps, was 3.21%; average total debt was $1.180 billion for the first nine months.
- Mortgage principal payments scheduled for 2015 were approximately $103.0 million. The filing cites $1.4 million of scheduled debt principal payments for the remainder of 2014.
- Nine-month operating cash flow increased to $118.9 million. Acquisitions drove investing outflows; the company acquired 22 facilities for approximately $269.6 million. It issued 13.2 million shares through its at-the-market program, receiving approximately $236.0 million net.
- Common-share distributions paid in the first nine months were $55.8 million; preferred distributions were $4.5 million.
Material changes, outlook and risks
- Portfolio growth: owned facilities increased to 390 from 366 at year-end 2013. The filing attributes revenue growth to acquisitions as well as higher same-store rents and occupancy. Property operating costs also increased, including from acquisitions, real estate taxes, utilities and snow removal.
- Management estimated remaining 2014 capital expenditures of $3–7 million and remaining development costs of $12–16 million. No earnings or revenue guidance is provided in the supplied filing text.
- On August 5, the company amended term-loan terms to extend Term Loan B maturity to January 2020 and reduce its spread. Moody’s upgraded the unsecured debt rating to Baa2 with a stable outlook on September 25; reduced loan spreads became effective October 1.
- Subsequent events: CubeSmart received approximately $143 million net from a 7.475 million-share public offering completed October 20. On November 3 it completed the first tranche of the HSRE acquisition—22 facilities for approximately $195.5 million; four additional facilities, part of a $223 million transaction, were expected to close by March 31, 2015. The filing also reports three Texas facility acquisitions after quarter-end for $23.9 million.
- The company recorded $5.0 million of its share of losses from the HHF unconsolidated venture over nine months. HHF obtained $100 million of non-recourse venture debt and distributed proceeds to its partners; CubeSmart’s investment balance declined to $98.3 million from $156.3 million.
- Key risks include local and national economic and real-estate conditions, competition and the ability to maintain occupancy and rental rates, availability and cost of capital, leverage and refinancing, interest rates, acquisition and development execution, operating costs, natural disasters, environmental liabilities and continued REIT qualification. Management cautions that actual results may differ materially from forward-looking statements.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no impairment losses in 2014 or 2013.
Most important facts for investors to verify
- Whether same-store rent, occupancy and NOI growth can be sustained as acquisition-related contributions and operating costs evolve.
- Funding and integration of the HSRE facilities and other acquisitions, including remaining purchase commitments and expected closings.
- Debt maturities and refinancing, particularly the $103.0 million of mortgage principal scheduled for 2015, and the effect of rates on future borrowing costs.
- Share issuance and distribution effects: the substantial 2014 equity issuance increased capital available for growth but also expanded the share base.
- HHF venture performance and the reasons for its reported losses, as well as the future effect of the investment on earnings and cash distributions.
- Distinguish GAAP net income and cash flow from NOI, FFO and adjusted FFO; the filing notes these supplemental measures have limitations and may not be comparable across companies.