CubeSmart 2016 Form 10-K Summary
Business context and reporting period
CubeSmart, a self-managed and self-administered REIT, owns and operates self-storage properties through CubeSmart, L.P. This combined filing reports the fiscal year ended December 31, 2016; it is an annual report, not a standalone fourth-quarter filing. CubeSmart owned 475 stores in 23 states and Washington, D.C., with 32.9 million rentable square feet. It also managed 316 third-party stores, bringing the owned-and-managed total to 791. The Parent Company owned 98.9% of the Operating Partnership.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $510.0 million | $444.5 million |
| Operating income | $143.0 million | $107.9 million |
| Net income | $88.4 million | $78.8 million |
| Net income attributable to common shareholders | $79.9 million | $71.7 million |
| Diluted EPS | $0.45 | $0.42 |
| Net cash from operating activities | $263.5 million | $215.7 million |
| Net cash used in investing activities | $544.5 million | $374.6 million |
| Net cash from financing activities | $221.0 million | $218.9 million |
- Revenue increased 14.7%; operating income increased 32.5%, and net income attributable to common shareholders increased 11.5%. Operating margin was approximately 28.0%, versus 24.3% in 2015; net margin was approximately 17.3%, versus 17.7%.
- Rental income rose 14.6% to $449.6 million. Same-store revenue grew 7.0%; average same-store occupancy increased to 92.9% from 92.1%, and realized annual rent per occupied square foot increased 6.4% to $15.56.
- Period-end occupancy across the owned portfolio was 89.7%, down from 90.2%; the portfolio grew from 445 to 475 stores. Acquisitions and newly developed stores affect comparability.
- NOI, a company-defined non-GAAP measure, was $344.2 million, up 18.1%. FFO attributable to common shareholders and OP unitholders was $251.4 million; adjusted FFO was $261.2 million, up from $212.5 million and $216.0 million, respectively.
- At December 31, cash and cash equivalents were $3.0 million and restricted cash was $7.9 million. The company reported $456.0 million of available revolving-credit capacity.
- Debt carrying amounts totaled approximately $1.596 billion, compared with approximately $1.252 billion in 2015. Debt-to-total-capitalization was 24.7%, versus 18.5%; debt to undepreciated asset cost was 38.5%, versus 33.8%. Management reported compliance with debt covenants.
- Fourth-quarter 2016 revenue was $132.5 million and net income attributable to the Company was $26.8 million; basic and diluted EPS were each $0.13. The filing does not provide a clear comparable fourth-quarter 2015 revenue figure in the selected quarterly data beyond $115.0 million; fourth-quarter 2015 net income attributable to the Company was $37.1 million and diluted EPS was $0.20.
Material changes versus the prior comparable period
- Revenue and operating income benefited from same-store rent and occupancy gains, acquisitions, and growth in third-party management. Management fee income increased 48.5%, with 316 managed stores at year-end versus 227 a year earlier.
- Property operating expenses rose 8.3%, while depreciation and amortization rose 6.6%; G&A increased 15.7%, mainly from higher payroll and staffing to support growth. Acquisition-related costs nearly doubled to $6.6 million.
- Interest expense increased 15.2% to $50.4 million, primarily because average debt increased by $234.6 million to $1.4 billion. Equity in losses of real estate ventures increased to $2.7 million. The $17.6 million gain on real estate sales recorded in 2015 did not recur in 2016.
- Operating cash flow increased $47.8 million, while investing outflows increased $169.9 million, primarily reflecting acquisitions and development spending. Year-end cash declined from $62.9 million to $3.0 million.
- In 2016, CubeSmart acquired 28 properties for approximately $403.6 million and completed two New York development projects. It issued $300 million of 3.125% senior notes due 2026 and sold 4.4 million common shares through its at-the-market program for net proceeds of $136.1 million.
- The company redeemed all 3.1 million Series A preferred shares for $77.5 million plus accrued dividends and recorded a $2.9 million redemption charge.
Outlook, commentary, risks, contingencies, and unusual items
- Management intends to pursue selective acquisitions in targeted markets, evaluate dispositions in slower-growth or lower-barrier markets, and expand third-party management. It reported no specific earnings or revenue guidance.
- For 2017, management anticipated $15–$20 million of recurring capital expenditures, $5–$10 million of store improvements and upgrades, and $50–$65 million for development. Scheduled 2017 debt principal payments were approximately $8.6 million. Separate development contracts entail about $79.7 million of payments in 2017–2018; seven projects were expected to be completed by the fourth quarter of 2018.
- Management said operating cash flow, equity access, and revolving-credit availability were expected to support the current plan and covenant compliance, but cautioned that future capital availability and financing terms are not assured.
- Key risks include local economic conditions, self-storage competition and pressure on rents or occupancy, acquisition and construction execution, rising operating costs and interest rates, debt refinancing, access to capital, joint-venture risks, REIT qualification, and uninsured or underinsured disaster and environmental losses. Revenue is geographically concentrated: Florida, New York, Texas, and California contributed approximately 17%, 16%, 10%, and 8% of 2016 revenue.
- A putative New Jersey consumer class action remains pending; the company intends to defend it, and the potential outcome cannot be determined. Management reported no environmental cleanup liability expected to materially affect the company and no material impairment losses in 2014–2016.
- Interest-rate sensitivity: a 100-basis-point increase was estimated to reduce the fair value of fixed-rate debt by approximately $78.8 million; this valuation change would not itself affect interest incurred or cash flows. Floating-rate borrowings can affect interest expense and cash flows.
- The company’s financial statements received unqualified audit opinions from KPMG, and management and the auditor concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Whether same-store rent growth and occupancy can be sustained, particularly as overall period-end occupancy declined and the portfolio expanded.
- Acquisition and development returns, project costs and timelines, and the performance of recently acquired or newly opened stores.
- Debt maturities, refinancing requirements, variable-rate exposure, covenant headroom, and the reduction in cash balances alongside higher leverage.
- The extent to which FFO and adjusted FFO growth translates into recurring cash available for distributions after capital spending and financing needs.
- The status and potential financial impact of the New Jersey class action and any material developments in other legal, environmental, insurance, or tax matters.