Cubesmart annual report, FY2022

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CubeSmart (CUBE) — 2022 Form 10-K

Business context and reporting period

Annual report for the fiscal year ended December 31, 2022; the figures below are full-year results, not standalone fourth-quarter results. CubeSmart is a U.S. self-storage REIT operating through CubeSmart, L.P. It owned or partially owned 611 stores with 44.1 million rentable square feet and managed 668 additional third-party stores at year-end.

Financial and operating performance

  • Revenue: $1.010 billion, up 22.7% from $822.6 million in 2021. Rental income rose 24.2% to $879.3 million; property management fees were $34.2 million.
  • Profit: Net income was $292.5 million versus $230.8 million; net income attributable to common shareholders was $291.3 million, or $1.29 per diluted share, versus $223.5 million, or $1.09 per diluted share.
  • NOI and margins: Total-portfolio NOI was $716.4 million, up 25.6%; NOI margin was approximately 71.0% of revenue, versus 69.4% in 2021. Same-store NOI increased 16.7% to $569.9 million. Same-store revenue rose 12.7%, while property operating expenses increased 3.0%.
  • Occupancy and pricing: Year-end occupancy was 90.3%, down from 92.0%; same-store year-end occupancy was 92.1% versus 93.3%. Same-store realized annual rent per occupied square foot increased 13.2% to $21.49.
  • Cash flow: Operating cash flow was $591.5 million, compared with $449.2 million. Investing activities used $48.8 million, and financing activities used $547.1 million. Cash and restricted cash totaled $8.9 million at year-end.
  • FFO: FFO attributable to common shareholders and OP unitholders was $562.7 million; adjusted FFO was $574.5 million. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
  • Debt and liquidity: Debt carrying value was approximately $3.00 billion, down from $3.15 billion. Year-end cash was $6.1 million, with $788.5 million available on the $850 million revolving facility. Debt to total market capitalization was 24.8%, up from 19.7%; debt to undepreciated asset cost was 39.6%, down from 41.2%. The company reported covenant compliance.
  • Distributions: Annual common distributions increased to $1.78 per share from $1.45. 2022 distributions were characterized for tax purposes as 88.7377% ordinary income and 11.2623% capital gain.

Material changes versus 2021

  • Revenue growth reflected both higher same-store rents and the contribution of acquisitions, including the 2021 LAACO acquisition. Same-store rental income increased $82.1 million; new and recently acquired or opened stores added $89.4 million of rental income.
  • Year-end owned-store count rose to 611 from 607, while total rentable area increased to 44.1 million from 43.6 million square feet.
  • Property operating expenses rose 16.3% overall, mainly from acquired and developed stores; same-store expenses increased 3.0%, including higher property taxes.
  • Depreciation and amortization increased 33.9% to $310.6 million, primarily reflecting acquired and developed assets. Interest expense rose 18.9% to $93.3 million as average debt increased, although the weighted average effective debt rate declined to 2.94% from 3.36%.
  • Equity in earnings from unconsolidated ventures rose to $48.9 million, including CubeSmart’s $45.7 million share of gains from a venture’s sale of 14 stores. By contrast, 2021 included $32.7 million of gains on company property sales and a $20.3 million debt-extinguishment loss.
  • Operating cash flow increased, while investing cash use fell sharply from 2021, when the LAACO acquisition required $1.679 billion of cash. 2022 acquisition activity was three stores for $75.7 million, plus land purchases.

Outlook, risks, contingencies and unusual items

  • Management planned selective acquisitions in targeted markets, continued evaluation of asset sales, and further growth in third-party management. No quantified earnings or FFO guidance is provided in the supplied filing text.
  • 2023 expected spending: $15–20 million for recurring capital expenditures, $11–16 million for improvements and upgrades, and $20–30 million for new development. Scheduled 2023 mortgage principal payments were approximately $32.6 million.
  • Two joint-venture development projects were under construction, expected to finish by Q2 2024; total estimated construction costs were $64.0 million, with $27.6 million incurred by year-end. The filing separately reports $34.6 million of milestone payments due during 2023–2024.
  • The revolving facility was amended in October 2022 and matures February 15, 2027. Its year-end drawn rate was 5.33%; sensitivity analysis estimates a 100-basis-point increase would add about $0.6 million in annual interest expense on variable-rate debt.
  • Key risks include economic weakness and lower storage demand, competition and rent pressure, higher interest and operating costs, refinancing and capital-market access, development and acquisition execution, joint-venture exposure, REIT qualification, cyber incidents, and weather or other uninsured/underinsured losses. New York, Florida, California and Texas together contributed 51% of 2022 revenue.
  • Unusual items include the $45.7 million venture-sale gain in equity earnings and $10.5 million of transaction-related expenses, primarily LAACO-related severance. No impairment losses were recorded in 2020–2022; impairment valuation was identified by the auditor as a critical audit matter. The California Yacht Club was classified as held for sale at year-end; no loss was recorded.
  • Management reported no material pending legal proceedings beyond routine matters. KPMG issued unqualified audit opinions on the financial statements and internal controls; management also concluded controls were effective.

Important facts for investors to verify

  • Confirm full-year versus fourth-quarter comparisons and review the detailed same-store definitions and portfolio reconciliation.
  • Assess how much revenue and earnings growth came from recurring rent and occupancy versus acquisitions and the one-time venture-sale gains.
  • Review occupancy and rent trends by market, especially the largest revenue-contributing states, and monitor any easing in rental rates.
  • Check debt maturities, variable-rate exposure, refinancing needs, covenant headroom and the effect of higher borrowing costs.
  • Track 2023 capital spending, development funding and completion schedules, including joint-venture commitments.
  • Review the assumptions behind property impairment assessments and the planned disposition of the California Yacht Club.