CubeSmart Q1 2019 Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2019; comparisons are with Q1 2018 unless noted. CubeSmart is a self-storage REIT operating through CubeSmart, L.P. It owned 494 stores across 23 states and Washington, D.C., and managed 619 third-party stores, for 1,113 owned or managed locations. The company reports one operating segment.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 / prior date | Change |
|---|---|---|---|
| Revenue | $152.8 million | $142.9 million | +7.0% |
| Net income | $35.8 million | $34.8 million | +2.8% |
| Net income attributable to common shareholders | $35.5 million | $34.4 million | +3.1% |
| Diluted EPS | $0.19 | $0.19 | Flat |
| Net operating income (NOI; non-GAAP) | $101.4 million | $94.1 million | +7.8% |
| Cash from operating activities | $75.5 million | $66.1 million | +$9.3 million |
| Cash used in investing activities | $79.0 million | $57.2 million | Use increased $21.9 million |
| Cash and cash equivalents at March 31 | $3.5 million | $3.8 million at Dec. 31, 2018 | Down $0.2 million |
| Debt | Approximately $1.8 billion carrying value | Approximately $1.7 billion at Dec. 31, 2018 | Increased |
Overall portfolio period-end occupancy was 90.2%, versus 90.3% a year earlier; same-store occupancy was 92.1% at period end and averaged 91.5% in both periods. Same-store rental income rose 2.5%, and realized annual rent per occupied square foot increased 2.6%. The company reported no impairment losses in either comparative quarter.
Material changes versus the prior period
- Revenue growth reflected same-store pricing and additions to the portfolio and management business. Property management fee income rose 24.8%, with 619 managed stores versus 496 a year earlier.
- Property operating expenses increased 5.5%; depreciation and amortization rose 9.9%. Interest expense increased 15.6%, reflecting higher average debt and a higher weighted-average effective debt rate (4.10% versus 3.87%).
- Q1 investment outlays included a $22.0 million Maryland store acquisition and $49.7 million of development costs. The company owned 494 stores, compared with 485 at March 31, 2018.
- Operating cash flow increased, while investing cash use rose. Financing cash flow was positive $3.6 million, versus a $9.2 million outflow in Q1 2018.
- The common distribution was $0.32 per share, versus $0.30 per share in Q1 2018. The company issued about 0.8 million shares through its at-the-market program for gross proceeds of $24.9 million.
Debt, liquidity, outlook and risks
In January, CubeSmart issued $350 million of 4.375% senior notes due 2029, using proceeds to repay a $200 million term loan that matured in January and reduce revolver borrowings. At March 31, $96.1 million was drawn on the revolver and $403.2 million remained available; a separate $100 million term loan was outstanding. The company reported compliance with debt covenants and expected to remain compliant. A 100-basis-point increase in rates on variable-rate debt was estimated to raise annual interest expense by approximately $2.0 million.
For the remainder of 2019, management expected recurring capital expenditures of $8–13 million, planned improvements and upgrades of $4–9 million, development spending of $26–41 million, and scheduled debt principal payments of approximately $11 million. No full-year earnings or revenue guidance is provided in the filing text. Management cited operating cash flow, equity issuance and revolver availability as expected funding sources, while cautioning that future debt and equity market access is not assured.
Seven joint-venture development projects were underway, with $136.4 million incurred against estimated total construction costs of $188.6 million; completion was expected by Q1 2021. Three stores under contract had $2.7 million in deposits and an aggregate purchase price of $67.5 million. Potential risks include competition and pressure on occupancy or rents, economic weakness, higher interest and operating costs, constrained capital access, development and acquisition execution, REIT qualification, joint-venture risks, and environmental, cyber and disaster-related exposures.
A state consumer-practices class action settlement was entered into in January 2019; a $1.8 million charge had been recorded in 2018 and preliminary approval was granted April 3, 2019. Certain development ventures also have put/call arrangements for noncontrolling interests; related accrued amounts include $7.8 million, $10.7 million and $15.2 million for three projects. The 2019 adoption of the lease accounting standard had no cumulative retained-earnings effect; operating-lease right-of-use assets were $55.5 million and lease liabilities $60.7 million at quarter end.
Important facts for investors to verify
- Whether same-store rent growth can continue while occupancy and market competition remain under pressure.
- Debt maturities, floating-rate exposure, refinancing needs and covenant headroom, particularly given increased interest expense and low cash balances.
- Delivery timing and remaining costs for development projects, and exposure to the stated joint-venture put/call obligations.
- Capital spending, acquisition commitments and the availability of revolver capacity and equity-market funding.
- Final approval and financial resolution of the class action settlement, and any material changes in legal contingencies.