CubeSmart — Q3 2022 Form 10-Q
Business and period. CubeSmart is a self-storage REIT operating through CubeSmart, L.P. This unaudited filing covers the quarter and nine months ended September 30, 2022, compared with the same 2021 periods. At quarter-end, it owned or partially owned and consolidated 611 stores across 24 states and the District of Columbia, and managed 663 third-party stores.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Total revenue | $261.4 million | $212.6 million | +23.0% |
| Net operating income (NOI, non-GAAP) | $184.7 million | $148.5 million | +24.4% |
| Net income | $113.4 million | $90.6 million | +25.3% |
| Net income attributable to common shareholders | $112.9 million | $87.7 million | +28.8% |
| Diluted EPS | $0.50 | $0.43 | +16.3% |
| Same-store revenue | $201.1 million | $179.2 million | +12.2% |
| Same-store NOI | $147.6 million | $127.9 million | +15.4% |
Q3 total NOI margin was approximately 70.7%, compared with 69.9% a year earlier; same-store NOI margin was approximately 73.4%, versus 71.4%. These margins are calculated from the filing’s revenue and NOI figures; NOI is a non-GAAP measure.
- Operating drivers: Same-store realized annual rent per occupied square foot rose 12.8% in Q3. Same-store period-end occupancy declined to 93.8% from 94.7%; portfolio-wide period-end occupancy was 92.1%, versus 93.6%.
- Nine-month results: Revenue was $748.6 million, up 24.6%; NOI was $527.9 million, up 28.2%; net income was $210.3 million, up 14.1%; attributable net income was $209.4 million, up 17.6%. Diluted EPS was $0.93 versus $0.88.
- Cash flow: For the first nine months, operating cash flow was $446.5 million (up from $342.9 million); investing activities used $31.2 million (versus $129.9 million); and financing activities used $420.4 million (versus $159.2 million). Cash, cash equivalents and restricted cash ended at $8.2 million, down from $13.3 million at year-end 2021.
- Balance sheet and liquidity: At September 30, total assets were $6.37 billion and total liabilities were $3.45 billion. Debt carrying value was approximately $3.02 billion, comprising $2.77 billion of unsecured senior notes, $86.0 million drawn on the revolver and $164.1 million of mortgage loans and notes payable. Cash and cash equivalents were $5.2 million; revolver availability was $663.4 million. The company reported compliance with its debt covenants.
- Distributions: The company declared dividends of $0.43 per common share for Q3, compared with $0.34 in Q3 2021. Nine-month declared dividends were $1.29 per share, versus $1.02.
Material changes and unusual items
- Q3 rental income rose 24.4%, reflecting $24.5 million from acquired and developed stores and $19.9 million of higher same-store rental income. For the nine-month period, acquired and developed stores contributed $69.2 million of incremental rental income.
- Q3 equity in earnings of real estate ventures was $46.6 million, versus $0.8 million a year earlier. The increase primarily reflected CubeSmart’s share of gains and distributions related to the sale of all 14 stores held by venture HVPSE. HVPSE sold the stores for $235 million in August 2022 and distributed $49.9 million to CubeSmart.
- Q3 operating expenses included $1.6 million of estimated Hurricane Ian damage costs, net of expected insurance proceeds. The storm affected 47 owned Florida stores; insurance recovery and final restoration costs remain uncertain.
- Nine-month other expense included $10.5 million of LAACO acquisition-related transaction costs, primarily severance. Depreciation and amortization increased materially, largely due to acquired and developed stores.
- CubeSmart acquired three stores in 2022 for an aggregate $75.7 million and sold the Los Angeles Athletic Club for $44.0 million, with no gain or loss recognized. The California Yacht Club, acquired with LAACO, was classified as held for sale at quarter-end; no loss was recorded.
Outlook, risks and subsequent events
- Management described a focus on internal growth and selective acquisitions and development. For the remainder of 2022, it expected recurring capital expenditures of $1–$6 million, planned improvements and upgrades of $1–$6 million, and new-store development costs below $5 million. Scheduled debt principal payments for the remainder of 2022 were approximately $0.6 million.
- The filing does not provide a clear numerical full-year earnings or revenue forecast. Management said operating cash flow, equity-market access and revolver capacity were expected to support its business plan, while cautioning that future access to capital is not assured.
- Key stated risks include economic weakness and inflation, competition affecting rents and occupancy, higher interest and operating costs, debt refinancing and capital availability, natural disasters, insurance recovery, and joint-venture or acquisition performance. A 100-basis-point increase in variable borrowing rates was estimated to increase annual interest expense by about $0.9 million.
- On October 26, 2022, after quarter-end, CubeSmart amended its revolving credit facility: capacity increased from $750 million to $850 million and maturity extended to February 15, 2027. Pricing at then-current ratings and leverage was SOFR plus 0.775%, a 0.10% SOFR adjustment and a 0.15% facility fee.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material pending legal proceedings beyond ordinary-course matters.
Important facts for investors to verify
- How much of reported earnings and NOI growth reflects ongoing self-storage operations versus the one-time HVPSE venture sale gain and distributions?
- Whether same-store rent growth can continue as occupancy declines, and how pricing and occupancy trends develop beyond the seasonal summer period.
- The ultimate Hurricane Ian repair costs, insurance proceeds and operational impact at affected Florida stores.
- Debt maturities, floating-rate exposure, revolver terms and covenant headroom, including the October 2022 facility amendment.
- Whether acquisition, development and planned capital spending generate returns sufficient to offset higher depreciation, operating expenses and interest costs.