CubeSmart 2013 Form 10-K Summary
Business context and reporting period
CubeSmart is a self-managed, self-administered REIT focused on owning, operating, acquiring, developing and managing U.S. self-storage facilities. This combined filing covers CubeSmart and its operating partnership for the fiscal year ended December 31, 2013; the entities are managed as one enterprise. The company owned 366 facilities with 24.7 million rentable square feet and 88.3% year-end occupancy, and managed another 160 facilities for third parties. It also held a 50% interest in a joint venture owning 35 facilities.
Financial and operating metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $318.4 million | $266.3 million |
| Operating income | $58.3 million | $26.9 million |
| Net income attributable to CubeSmart common shareholders | $35.4 million | $(4.2) million |
| Diluted earnings per common share | $0.26 | $(0.03) |
| Cash from operating activities | $142.9 million | $118.4 million |
| Net cash used in investing activities | $(282.9) million | $(271.9) million |
| Net cash from financing activities | $138.7 million | $148.9 million |
- 2013 net operating income (NOI), a non-GAAP measure, was $200.2 million, up 23%. The same-store portfolio’s NOI rose 9%; same-store average occupancy increased to 88.4% from 83.1%, while realized annual rent per occupied square foot was essentially flat at $12.62 versus $12.61.
- At December 31, 2013, total debt was approximately $1.139 billion, compared with $1.024 billion a year earlier. Debt to total capitalization was 32.8% versus 33.4%; debt to undepreciated asset cost was 41.3% versus 40.9%.
- Cash and cash equivalents were $3.2 million; revolver availability was $261.2 million. The company reported compliance with its financial covenants.
- 2013 common dividends declared were $0.46 per share, up from $0.35 in 2012. Management said future distributions remain subject to Board discretion and operating results.
- 2013 FFO was $122.5 million and adjusted FFO was $127.1 million, compared with $93.3 million and $96.4 million, respectively, in 2012. These are non-GAAP measures and are not substitutes for net income or operating cash flow.
Material changes versus the prior comparable period
- Revenue increased 20%; rental income rose 19%, reflecting acquisitions and stronger same-store occupancy. Other property-related income increased 25%, including growth in insurance commissions and fees.
- Operating income more than doubled. Property operating expenses rose 14%, partly due to acquired facilities and higher same-store property taxes and payroll. General and administrative expenses increased 13%.
- Common-shareholder income improved from a loss to profit, but results included $27.4 million of gains on facility dispositions. Continuing operations attributable to common shareholders contributed $4.4 million; the filing’s reported $0.26 EPS also included discontinued operations.
- Cash from operations increased about $24.4 million. Investing outflows reflected acquisitions, development spending and a $157.5 million investment in the HHF joint venture; facility sales generated $123.8 million of net cash proceeds.
- The company acquired 20 facilities for approximately $189.8 million and sold 35 for approximately $126.4 million, recording disposition gains of $27.4 million. It issued $250 million of 4.375% senior notes due 2023, repaid a $100 million term loan, and amended bank facilities to extend certain maturities and reduce pricing.
Outlook, commentary, risks and unusual items
- For 2014, management planned selective acquisitions in targeted markets, continued sales of non-core facilities, and growth of third-party management. It expected $7–$11 million of capital improvements, $37–$41 million of new development costs and approximately $5.2 million of scheduled debt principal payments.
- Management cited improving same-store occupancy and operating cash flow, while noting that economic conditions, competition, local supply, rental rates, operating costs and customer payment behavior could affect results. The business is concentrated in self-storage and has geographic exposure, particularly to New York and Florida.
- Debt refinancing and access to capital, variable interest rates, covenant compliance, REIT qualification and the ability to sustain distributions are key risks. A 100-basis-point increase in rates on floating-rate debt was estimated to add about $0.4 million to annual interest expense.
- Other material exposures include acquisition and development execution, joint-venture partner risks, environmental and accessibility compliance, and potentially insufficient insurance for certain disasters or losses. Management reported no known environmental liability expected to have a material adverse effect. Ordinary-course litigation was disclosed; management did not expect pending suits to materially affect the financial statements.
- 2013 reported earnings were affected by disposition gains and discontinued operations; 2012 included a $7.0 million gain from remeasuring an investment in a real estate venture. Acquisition-related costs and depreciation also affect comparisons. The audited statements received unqualified opinions, and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of revenue, NOI, FFO and earnings growth came from same-store operations versus acquisitions, dispositions and other one-time items.
- The sustainability of occupancy and rental-rate gains, including performance of recently acquired or unstabilized facilities.
- Debt maturities, refinancing plans, interest-rate exposure, covenant headroom and liquidity after planned development and acquisition spending.
- The returns, financing and governance terms of the HHF joint venture and the company’s other development commitments.
- The coverage and sustainability of common and preferred distributions relative to recurring cash flow, capital needs and REIT requirements.