CubeSmart — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative period is Q1 2011. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated. CubeSmart is a self-storage REIT operating through CubeSmart, L.P. The company owned 376 facilities in 26 states and the District of Columbia, and managed 102 additional third-party properties.
Financial performance and condition
- Revenue: $67.2 million, up 20.5% from $55.8 million. Rental income was $60.1 million, up 19.6%.
- Profitability: Operating income was $7.7 million, down from $9.8 million. Net loss was $3.3 million versus net income of $0.5 million; loss attributable to common shareholders was $5.3 million, or $0.04 per share, versus a $0.1 million loss in Q1 2011. The filing attributes higher depreciation and amortization in part to acquisitions and $6.8 million of acquired lease-intangible amortization.
- Property operations: Same-store revenue increased 2.7% and same-store NOI increased 7.4%. Same-store average occupancy rose to 78.4% from 76.6%; period-end occupancy rose to 78.7% from 76.8%. Realized annual rent per occupied square foot was $11.53 versus $11.57.
- FFO: $20.0 million, compared with $14.7 million. FFO is a non-GAAP measure and is not a substitute for net income or cash flow.
- Cash flow: Operating cash flow was $20.8 million, up from $15.2 million. Investing activities used $52.8 million, chiefly for acquisitions and property spending; financing activities provided $30.4 million. Cash declined $1.6 million to $7.5 million.
- Debt and liquidity: Debt totaled approximately $837.8 million at March 31: $50 million on the revolver, $400 million of unsecured term loans, and $387.8 million of mortgage loans and notes. The company had $350 million available under its credit facility. Total liabilities were $906.9 million. Scheduled 2012 mortgage principal payments were $167.7 million.
- Interest rates: The weighted-average rate on Credit Facility and Term Loan Facility borrowings was 3.37%. A 1% increase in rates on floating-rate debt was estimated to raise annual interest expense by about $0.5 million.
Material changes versus Q1 2011
- Revenue growth reflected acquisitions, which contributed $8.9 million of additional rental income, plus higher same-store occupancy and scheduled rents. Total owned facilities increased to 376 from 364 at March 31, 2011.
- Total NOI increased 28.7% to $39.9 million. Property operating expenses rose 10.3%, while same-store property expenses declined 4.3%, aided by lower snow-removal and utility costs.
- Depreciation and amortization increased 69.4% to $25.8 million; interest expense increased 14.9% to $9.3 million. The company also recorded $0.6 million of acquisition costs and $0.3 million of equity-method losses from a real estate venture.
- Investing cash use increased substantially, reflecting $86.4 million of acquisitions during the quarter, partly offset by assumed mortgage debt. Financing cash flow included increased revolver borrowing.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management said it intends to focus on internal growth and selectively pursue acquisitions and developments.
- Management estimated remaining 2012 recurring capital expenditures of $5–$7 million and approximately $5 million of store-upgrade and rebranding improvements. It expected to fund 2012 debt principal payments with operating cash flow, new debt and/or the available credit facility.
- Management reported compliance with financial covenants and expected continued compliance. The filing identifies risks including economic and local market conditions, competition and rental pricing, capital availability, refinancing and leverage, interest rates and operating costs, acquisitions and development, natural disasters, environmental liabilities, and maintaining REIT status.
- Acquisition activity included six facilities for approximately $86.4 million, including four Storage Deluxe properties. After quarter-end, the company repaid a $9.1 million mortgage, acquired another Storage Deluxe facility for $59.3 million, and borrowed an additional $100 million term loan to fund the acquisition and repay revolver borrowings. The remaining Storage Deluxe property was expected to close in Q2 2012.
- The company reported no impairment losses and no off-balance-sheet arrangements. It noted that actual results may vary and that quarterly results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- How much reported growth came from acquired properties versus underlying same-store performance, and how occupancy and realized rents developed after quarter-end.
- The funding plan and refinancing risk for the $167.7 million of scheduled 2012 mortgage principal payments, particularly given $7.5 million of cash and the maturity schedule.
- Whether acquisition contributions justify the higher depreciation, interest expense, and other costs, and how the remaining Storage Deluxe purchases were completed and financed.
- Current covenant headroom, debt balances and interest-rate exposure after the April transactions; the filing states compliance but does not give a clear numerical covenant cushion.
- Whether the projected capital spending, distributions, and acquisition strategy remain supported by operating cash flow and access to debt and equity markets.