CubeSmart 10-Q Summary
Reporting period: Three months ended March 31, 2014. CubeSmart is a self-storage REIT operating through CubeSmart, L.P.; the combined filing reports one consolidated business. Financial amounts below are in U.S. dollars.
Business context and operating results
- Owned 378 facilities totaling approximately 25.5 million rentable square feet and managed 161 additional facilities at quarter-end. The portfolio covered 20 states and the District of Columbia.
- Same-store portfolio: 346 facilities. Average occupancy was 89.1%, up from 85.1%; quarter-end occupancy was 89.5%, up from 85.6%. Annualized realized rent per occupied square foot rose to $13.52 from $13.33.
- Acquired 10 facilities for approximately $103.3 million and opened two developed facilities during the quarter. Acquisitions contributed to growth but make period comparisons less like-for-like.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $87.3 million | $74.7 million |
| Operating income | $20.3 million | $8.9 million |
| Net income (loss) | $4.6 million | ($0.4 million) |
| Net income (loss) attributable to common shareholders | $3.0 million | ($1.9 million) |
| Diluted earnings (loss) per share | $0.02 | ($0.01) |
| Cash from operating activities | $30.6 million | $26.5 million |
| Cash used in investing activities | $88.4 million | Cash provided: $2.4 million |
| Cash from (used in) financing activities | $57.9 million | ($30.7 million) |
- Revenue grew 16.9%. Same-store revenue increased 7.0% and same-store NOI rose 9.0%, to $51.4 million. Total portfolio NOI was $55.0 million, up 20.8%. Total NOI was approximately 63.0% of revenue; GAAP operating margin was approximately 23.3%, compared with 11.9%.
- FFO was $34.0 million, or approximately $0.23 per diluted share and unit; adjusted FFO was $35.7 million, or approximately $0.25. These are non-GAAP measures and are not substitutes for net income or operating cash flow.
- At March 31, cash and cash equivalents were $3.2 million. Total debt carrying value was approximately $1.197 billion, up from $1.139 billion at year-end; debt consisted of $500 million in senior notes, $400 million in term loans, $70.6 million drawn on the revolver, and $226.0 million in mortgage debt. The filing reports $229.2 million of revolver availability. Debt was approximately 49% of total assets.
- Cash paid for interest was $12.8 million. The effective weighted-average rate on credit-facility and term-loan borrowings, after swaps, was 3.12%. The company had $400 million of interest-rate swaps; a 100-basis-point rise in rates on floating-rate debt was estimated to increase annual interest expense by approximately $0.7 million.
Material changes and management commentary
- Same-store rental income benefited from higher average occupancy. Other property-related income increased 39.8%, primarily on higher tenant-insurance commissions.
- Property operating expenses increased 10.7%, including acquisition-related costs and higher same-store snow-removal and utility costs following a colder winter. General and administrative expense declined 13.7%, principally due to lower share-based compensation and payroll costs.
- Interest expense increased 15.6%, mainly because average debt rose approximately $164 million year over year; a lower average effective interest rate partly offset the increase.
- Q1 investing outflows reflected acquisition and development spending. Financing included $46.2 million of net proceeds from common-share issuance through the at-the-market program and increased net revolver borrowing.
- Discontinued operations contributed $0.3 million in Q1 2014, relating to real-estate-tax refunds on previously sold facilities. The comparable 2013 amount was $1.6 million, mainly from facilities sold during 2013.
Outlook, risks and contingencies
- No specific earnings or FFO guidance was provided. Management expected remaining 2014 capital expenditures of approximately $6–$10 million, development costs of $31–$35 million, and scheduled debt principal payments of approximately $6.5 million.
- Management stated it was in compliance with debt covenants and anticipated continued compliance. It cited operating cash flow, equity-market access and available revolver capacity as sources of liquidity, while noting that future access to debt and equity capital is not assured.
- Key risks include economic and local-market conditions, competition affecting occupancy and rents, operating-cost and interest-rate increases, refinancing and leverage risk, availability and cost of capital, acquisition and development execution, natural disasters, environmental liabilities, and maintaining REIT status. Storage demand is seasonal, generally stronger in summer.
- Subsequent to quarter-end, the company acquired three facilities for $29.0 million, closed on two Brooklyn facilities for $55.0 million, and agreed to acquire two additional facilities under construction subject to completion and customary conditions. Its unconsolidated HHF venture obtained a $100 million, 3.59% loan on May 1, 2024; the filing states there is no recourse to CubeSmart.
- Other notable items: $1.7 million of acquisition-related costs and $1.4 million of equity-method losses from HHF. The filing reported no impairment losses and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue and NOI growth came from same-store operations versus acquired and newly opened facilities.
- Whether occupancy and realized rent gains persist through seasonal changes, and whether colder-weather operating costs normalize.
- Debt maturities, refinancing plans—particularly the disclosed 2015 mortgage principal schedule—and ongoing covenant headroom and revolver availability.
- The expected returns and funding needs of development projects and pending acquisitions, including the facilities under construction in New York.
- The sustainability of distributions and reliance on at-the-market equity issuance alongside borrowing to fund growth.