CubeSmart 2018 Form 10-K Summary
Business context and reporting period
This annual filing covers the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter filing. CubeSmart is a self-storage REIT operating through CubeSmart, L.P. At year-end, it owned 493 stores across 23 states and Washington, D.C., with 34.6 million rentable square feet, and managed 593 additional third-party stores. The Parent Company held approximately 99% of the Operating Partnership.
Unaudited fourth-quarter results: revenue was $153.9 million, net income was $48.6 million, net income attributable to common shareholders was $48.2 million, and diluted EPS was $0.26.
Key financial and operating metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $597.9 million | $558.9 million |
| Net income | $165.5 million | $135.6 million |
| Net income attributable to common shareholders | $163.9 million | $134.3 million |
| Diluted EPS | $0.88 | $0.74 |
| Operating cash flow | $304.3 million | $291.9 million |
| Cash used in investing activities | $322.3 million | $150.3 million |
| Cash from (used in) financing activities | $15.2 million | $(143.3) million |
| Period-end occupancy | 89.0% | 89.2% |
| Same-store realized annual rent per occupied square foot | $16.60 | $16.03 |
| Common dividend declared per share | $1.22 | $1.11 |
Rental income rose 5.8%; total revenue increased 7.0%. Same-store revenue grew 3.3%, primarily from higher rents, while same-store average occupancy eased to 92.7% from 92.9%. Same-store NOI was $380.9 million; total portfolio NOI was $401.1 million, equivalent to approximately 67.1% of total revenue (calculated from reported figures; NOI is a non-GAAP measure). FFO attributable to common shareholders and OP unitholders was $306.0 million, or $307.8 million as adjusted.
At December 31, 2018, total assets were $3.75 billion and total liabilities were $1.98 billion. Debt was approximately $1.74 billion, comprising $1.15 billion of senior notes, $495.5 million of revolving and term borrowings, and $106.1 million of mortgage principal. The company reported a 24.4% debt-to-total-capitalization ratio and 37.9% debt-to-undepreciated-assets ratio. Cash and cash equivalents were $3.8 million; available revolving-credit capacity was $303.8 million. The weighted-average effective interest rate on outstanding debt was 3.93% for the year.
Material changes versus the prior comparable period
- Net income attributable to common shareholders increased 22.0%, while diluted EPS increased from $0.74 to $0.88.
- Same-store rental income increased primarily because of higher rates: realized rent per occupied square foot rose 3.6%. Period-end occupancy declined 0.2 percentage points.
- Property operating expenses increased 8.5% to $196.9 million, reflecting higher property taxes, payroll and snow removal, plus management-platform and acquired-store costs. Interest expense rose 9.1% to $62.1 million as average debt and interest rates increased.
- Third-party management fee income grew 35.9% to $20.3 million; stores under management increased to 593 from 452.
- The company acquired ten stores for approximately $227.5 million and sold two Arizona stores for $17.5 million, recording $10.6 million in gains. Common shares issued through its at-the-market program generated $131.8 million net proceeds.
Outlook, risks and unusual items
- Management intends to pursue selective acquisitions, evaluate dispositions of assets with unattractive risk-adjusted returns, and expand third-party management. No specific 2019 revenue or earnings guidance is provided.
- For 2019, management anticipated $10–15 million of recurring capital expenditures, $5–10 million of store improvements and upgrades, and $30–45 million for new development. Six joint-venture projects were under construction, with completion expected by the second quarter of 2020.
- In January 2019, the Operating Partnership issued $350 million of 4.375% notes due 2029; net proceeds repaid the $200 million term loan due that month and reduced revolving borrowings. The filing reported covenant compliance at year-end.
- Key risks include local competition and pressure on rents or occupancy, economic weakness, rising operating costs and interest rates, acquisition and construction execution, access to capital and debt refinancing, REIT qualification, joint-venture exposure, and uninsured or underinsured property losses. $495.5 million of debt was LIBOR-indexed at year-end; the filing identifies LIBOR transition as a financing risk.
- A $1.8 million charge was recorded in 2018 for a preliminary settlement of a class action alleging violations of a state deceptive-trade-practices law. The filing says no other pending legal proceedings were expected to have a material adverse effect. No real estate impairment losses were recorded in 2016–2018.
Important facts for investors to verify
- Review same-store rent growth and occupancy trends, particularly against local supply, competition and expense inflation.
- Confirm the post-year-end debt refinancing, remaining revolver balance and capacity, upcoming maturities, and exposure to floating rates and LIBOR transition.
- Assess the returns, commitments and partner risks associated with development projects and unconsolidated ventures.
- Review the settlement terms and final costs of the class action, and the adequacy of insurance for catastrophic property losses.
- Distinguish GAAP net income and cash flow from non-GAAP NOI, FFO and adjusted FFO; the filing cautions that these measures are not substitutes for GAAP results or liquidity.