CubeSmart Q2 2014 Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2014; comparisons are with Q2 and the six months ended June 30, 2013. CubeSmart is a self-storage REIT operating through CubeSmart, L.P. At quarter-end, it owned 387 facilities across 21 states and Washington, D.C., and managed 159 additional facilities. The Parent Company owned 98.5% of the Operating Partnership.
Financial and operating metrics
Dollar figures below are in millions except per-share data. Financial statements are unaudited.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $92.3 | $78.3 | $179.6 | $152.9 |
| Operating income | $22.7 | $13.9 | $43.0 | $22.8 |
| Net income | $8.0 | $2.6 | $12.6 | $2.1 |
| Net income attributable to common shareholders | $6.4 | $1.0 | $9.4 | $(0.8) |
| Basic and diluted EPS | $0.04 | $0.01 | $0.07 | $(0.01) |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $71.6 | $65.3 |
- Q2 revenue rose 17.9%; operating income rose 63.2%. Same-store NOI increased 9.7% to $55.6 million. Same-store period-end occupancy was 92.4%, versus 90.1%, and average occupancy was 91.3%, versus 88.2%. Realized annual rent per occupied square foot increased to $13.76 from $13.25.
- For the first half, revenue increased 17.4% and operating income increased 88.5%. Total portfolio NOI rose 20.9% to $115.2 million; same-store NOI increased 9.4%. Period-end portfolio occupancy was 92.0%, versus 89.9%.
- First-half operating cash flow was $71.6 million; investing cash outflow was $166.9 million, primarily reflecting acquisitions; financing cash inflow was $103.0 million. Cash and cash equivalents were $10.8 million at June 30.
- Total debt was approximately $1.181 billion: $500 million senior notes, $400 million term loans, $56.9 million revolver borrowings and $224.2 million mortgage loans and notes payable. The revolver had $243.1 million available. Debt carrying value increased from $1.139 billion at year-end 2013; estimated fair value at June 30 was $1.211 billion.
Material changes versus the prior comparable period
- Growth reflected both acquisitions and stronger same-store performance. The company acquired 19 facilities for approximately $230.7 million in the first half, compared with 10 facilities acquired for $94.4 million in the comparable 2013 period; the filing’s acquisition activity table also reports 2013 acquisition totals on a different period basis.
- Property operating expenses rose 12.7% in Q2 and 11.7% in the first half, including costs at newly acquired facilities and higher same-store utilities, snow removal and real estate taxes. G&A fell 6.1% in Q2 and 9.9% in the first half, chiefly due to lower share-based compensation and payroll expenses.
- Interest expense increased 13.6% in Q2 and 14.6% in the first half as average debt balances grew to fund expansion. Lower effective borrowing rates partly offset the increase: 3.99% in 2014 versus 4.17% for Q2 2013 and 4.10% for the first half of 2013.
- First-half common-share issuance under the at-the-market program generated $126.1 million net proceeds; the company sold 7.2 million shares at an average $17.79 per share. Weighted-average diluted shares in Q2 increased to 147.0 million from 133.7 million.
Outlook, management commentary, risks and unusual items
- Management reported covenant compliance and said it expected to remain compliant. It viewed operating cash flow, equity issuance and available revolver capacity as adequate to execute its current plan, while cautioning that access to capital markets is not assured.
- For the remainder of 2014, management estimated capital expenditures of $5–9 million, development costs of $23–27 million and scheduled principal payments of approximately $5.2 million. It expected to fund these needs through operating cash flow, new debt and/or revolver borrowings. The mortgage schedule also shows approximately $103.1 million of principal due in 2015.
- No specific earnings or revenue guidance was provided. Management noted seasonal occupancy tends to be higher in summer and that prolonged economic weakness could reduce customer demand and cash flows.
- Interest-rate swaps covered $400 million of variable-rate debt; $56.9 million of revolver borrowings remained floating-rate. A 100-basis-point rate increase was estimated to raise annual interest expense by approximately $0.6 million. The company identified refinancing, leverage, capital availability, competition, operating costs, acquisitions and development, and REIT qualification among its risks.
- The 50%-owned HHF venture recorded a $6.2 million first-half net loss; CubeSmart’s share was $3.1 million. HHF obtained $100 million of nonrecourse venture-level debt and distributed proceeds to its partners. CubeSmart recognized a $0.5 million gain on the sale of a London asset; first-half discontinued-operations income of $0.3 million mainly reflected tax refunds related to previously sold facilities.
- Subsequent to quarter-end, CubeSmart acquired two Florida facilities for $15.8 million. In August 2014, it amended a $100 million term loan, lowering its LIBOR spread from 2.00% to 1.40% and extending maturity from June 2018 to January 2020.
Important facts for investors to verify
- How much revenue and NOI growth came from same-store performance versus acquisitions, and whether occupancy and rental-rate gains persist.
- The timing and refinancing plan for the $103.1 million of mortgage principal scheduled for 2015, and the company’s ongoing covenant headroom.
- Expected returns and stabilization progress for acquired and development properties, alongside the HHF venture’s losses and debt structure.
- Future share issuance, resulting dilution, and reliance on equity and debt markets to fund acquisitions, development and distributions.
- Exposure to floating rates, interest-rate swap terms, and the assumptions underlying management’s liquidity and capital-spending estimates.