CubeSmart — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results cover CubeSmart and CubeSmart, L.P.; amounts below are in U.S. dollars. CubeSmart is a self-storage REIT operating in 23 states and the District of Columbia. At quarter-end, it owned 490 stores and managed 582 third-party stores.
Financial performance and operating metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $153.4 million | $143.9 million | $444.1 million | $415.5 million |
| Operating income | $59.6 million | $52.3 million | $164.9 million | $140.2 million |
| Net income | $43.3 million | $37.7 million | $116.9 million | $95.8 million |
| Net income attributable to common shareholders | $42.9 million | $37.3 million | $115.7 million | $94.7 million |
| Diluted earnings per share | $0.23 | $0.21 | $0.63 | $0.52 |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $234.6 million | $223.7 million |
- Q3 revenue grew 6.6% year over year; operating income rose 14.0% and net income attributable to common shareholders increased 15.0%. For the first nine months, revenue rose 6.9%, operating income 17.6%, and common-shareholder net income 22.2%.
- Q3 total-portfolio NOI was $104.6 million, up 8.2%; same-store NOI rose 3.9%. Nine-month NOI was $297.0 million, up 6.6%; same-store NOI rose 3.7%. NOI is a non-GAAP measure.
- Same-store realized annual rent per occupied square foot increased 3.4% in Q3 and 3.5% for the nine months. Same-store average occupancy was 93.3% in Q3 versus 93.8%; for the nine months it was 93.0% versus 93.1%. Quarter-end same-store occupancy was 92.7% versus 93.5%.
- FFO, as adjusted, attributable to common shareholders and OP unitholders was $80.7 million in Q3 versus $77.2 million, and $227.9 million for the nine months versus $215.2 million. This is a non-GAAP measure and is not cash flow or a measure of liquidity.
Debt, liquidity and investment
- At September 30, total debt carrying value was approximately $1.65 billion: $1.15 billion of senior notes, $94.3 million drawn on the revolver, $300.0 million of unsecured term loans, and $106.8 million of mortgage principal. Cash and cash equivalents were $3.4 million; restricted cash was $3.1 million.
- The $500 million revolving facility had $405.1 million available, net of a $0.7 million letter of credit. The company reported compliance with debt covenants and expected continued compliance.
- A $200 million unsecured term loan matures in January 2019; another $100 million term loan matures in January 2020. Senior notes mature from 2022 through 2026. The company cited refinancing and access-to-capital risks.
- Nine-month investing cash outflow was $185.0 million, including $83.4 million for property acquisitions, $69.7 million for development, $19.2 million invested in real estate ventures, and $19.2 million for property improvements. Financing cash outflow was $52.2 million, including $165.4 million of distributions to common shareholders.
- The company issued 3.6 million shares through its at-the-market program during the nine months, raising $109.7 million gross; 11.2 million shares remained available under the program.
Material changes, outlook and risks
- Five stores were acquired for an aggregate purchase price of approximately $90.8 million during the first nine months. At September 30, the company had deposits of $5.3 million on four contracted stores with an aggregate price of $132.6 million; completion remained subject to customary conditions. After quarter-end, it acquired two properties for $76.4 million.
- Management attributed same-store rental income growth mainly to higher rental rates. Third-party management fee income rose 37.6% in Q3 and 42.6% for the nine months, partly reflecting growth to 582 managed stores from 428 a year earlier.
- Interest expense increased 5.1% in Q3 and 9.0% for the nine months, reflecting higher average debt and higher interest rates. The weighted-average effective rate on outstanding debt was 3.95% in Q3 versus 3.83%, and 3.92% for the nine months versus 3.78%.
- For the remainder of 2018, management expected recurring capital expenditures of $4–$8 million, capital improvements and upgrades of $0.5–$2 million, development costs of $15–$25 million, and scheduled debt principal payments of about $0.7 million. These are estimates, not full-year earnings guidance.
- Key risks include local and national economic and competitive conditions, maintaining occupancy and rental rates, higher interest rates and operating costs, access to capital and refinancing, acquisition and development execution, REIT qualification, joint-venture exposure, natural disasters, environmental liabilities, and technology or cybersecurity disruptions.
- Potential put/call rights attached to certain development-joint-venture interests create accrued liabilities; the filing reports $37.8 million accrued for the Exterior Street venture and additional accrued amounts for other projects. The company also notes that litigation outcomes are inherently unpredictable. A New Jersey consumer class-action settlement received final approval in April 2018 and was not material to the reported financial position or results.
- The company adopted new revenue and cash-flow presentation standards in 2018 without material impact. It planned to adopt the new lease standard on January 1, 2019; the primary expected effect relates to ten ground leases for which it is the lessee.
Investor verification priorities
- Assess the January 2019 $200 million term-loan maturity, refinancing plans, and the cost and availability of debt capital.
- Track same-store occupancy, realized rents, and expense growth, particularly as quarter-end occupancy declined year over year.
- Verify execution, funding, and expected returns for contracted acquisitions, development projects, and the post-quarter acquisitions.
- Review distributions against operating cash generation, capital spending, and continued share issuance under the at-the-market program.
- Monitor development-joint-venture put/call obligations, litigation contingencies, and other commitments; the filing does not quantify a clear maximum exposure for all contingencies.