CubeSmart 10-Q Summary — Q1 2013
For the three months ended March 31, 2013; comparative figures are for Q1 2012 unless noted. Financial amounts are in millions of dollars unless stated otherwise. CubeSmart is a self-storage REIT operating through CubeSmart, L.P.; the combined filing reports them as one enterprise.
Business context and reporting period
The company owns, operates, develops, acquires and manages self-storage properties. At quarter-end it owned 377 facilities totaling about 25.2 million rentable square feet and managed 140 properties for others. Owned properties were in 21 states and the District of Columbia. Results are seasonal, with occupancy generally higher in summer.
Key financial metrics
- Revenue: $78.5, up 22.4% from $64.1. Rental income was $69.6, up 21.5%; other property-related income was $7.7, up 33.2%.
- Operating performance: Operating income was $10.2, up 53.4%. Property-level NOI, a non-GAAP measure, was $47.6, up 24.8%. Same-store revenue increased 6.8% and same-store NOI increased 7.6%.
- Occupancy and rent: Same-store period-end occupancy was 85.7%, versus 79.3%; average occupancy was 85.2%, versus 79.0%. Same-store realized annual rent per occupied square foot was $12.20, compared with $12.49.
- Profit: Net loss attributable to common shareholders was $1.9, or $0.01 per share, versus a $5.3 loss, or $0.04 per share. Continuing-operations loss attributable to common shareholders was $2.3, versus $6.4. FFO was $27.4 and adjusted FFO was $27.5, compared with $20.0 and $20.5, respectively; both are non-GAAP measures.
- Cash flow: Operating cash flow was $26.5, up from $20.8. Investing activities provided $2.4, versus using $52.8. Financing activities used $30.7, versus providing $30.4. Quarter-end cash was $2.6, down from $4.5 at year-end 2012.
- Debt and liquidity: Reported debt carrying value was approximately $1,006.5 at March 31, versus $1,023.8 at December 31. This included $250.0 of senior notes, $500.0 of term loans, $30.0 drawn on the revolver and $226.5 of mortgage loans and notes payable. Revolver availability was $269.8. Total liabilities were $1,087.6 and total equity was $989.3.
- Interest and distributions: Interest expense was $10.4, up 11.2%; average debt increased about $235 to $1,025, partly offset by a lower average effective rate. The company paid $14.6 in common-share distributions and $1.5 in preferred distributions.
Material changes versus Q1 2012
- Revenue growth reflected acquisitions and higher same-store occupancy. Same-store rental income increased $2.9; acquisitions contributed about $9.4 of additional rental income.
- Same-store operating expenses rose, partly due to colder winter weather, snow removal, utilities and higher real estate tax assessments. Consolidated property operating expenses increased 18.8% to $30.8.
- Depreciation and amortization increased 18.9% to $29.8, primarily due to acquired properties. Interest expense rose as average debt increased, although the effective average interest rate declined to 4.14% from 4.43%.
- Acquisition activity was lower: one facility was acquired for about $6.9, compared with six for $49.8 in Q1 2012. Five facilities were sold in Q1 2013, producing about $11.0 in net cash proceeds; the aggregate stated sales price was $11.4.
Outlook, risks and notable items
- Management said it intends to pursue internal growth and selectively target acquisitions and development. It expected $5–$9 of recurring capital expenditures and $12–$15 of development costs for full-year 2013; scheduled debt principal payments for the remainder of 2013 were about $27.8.
- Management stated that it was in compliance with debt covenants and expected to remain compliant. It cited operating cash flow, the credit facility and its at-the-market equity program as liquidity sources, while cautioning that future debt or equity capital may not be available on acceptable terms.
- Key stated risks include economic and local real estate conditions, competition and the ability to maintain occupancy and rental rates, financing and refinancing availability, interest rates and operating costs, acquisitions and development, natural disasters, environmental liabilities, and maintaining REIT status. A 100-basis-point increase in rates on floating-rate debt was estimated to raise annual interest expense by about $1.3.
- Interest-rate swaps had $400 of notional value and a reported fair-value liability of $18.4. The company disclosed counterparty non-performance risk but said it did not expect counterparties to fail to perform.
- Q1 discontinued operations included five properties sold and a $0.2 gain on disposition. No impairment losses were recorded in Q1 2013 or Q1 2012. No subsequent events were reported.
- On May 3, 2013, after quarter-end, the board waived the 5% ownership limit for Invesco Group, permitting ownership of up to 15% of common shares. The company also reported related-party office leases with former executives’ entity; Q1 payments were approximately $0.1, with some space subleased to unrelated tenants.
Important facts for investors to verify
- Whether same-store occupancy gains can be sustained and whether realized rent per occupied square foot stabilizes or recovers.
- How acquisition, disposition and development activity affects future revenue, NOI, capital needs and leverage.
- Debt maturities, refinancing plans, covenant headroom and the availability of the $269.8 revolver capacity.
- Whether operating cash flow can support distributions, scheduled debt payments and planned capital spending; reported cash was only $2.6 at quarter-end.
- The reconciliation and comparability of company-reported NOI, FFO and adjusted FFO, which are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.