CubeSmart (CUBE) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. CubeSmart is a self-storage REIT operating through CubeSmart, L.P. The company owned or partially owned 611 stores with approximately 44.1 million rentable square feet and managed 727 third-party stores.
Financial and operating performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $260.8 million | $248.7 million | $517.3 million | $487.2 million |
| Net income attributable to common shareholders | $97.9 million | $58.4 million | $195.4 million | $96.5 million |
| Diluted earnings per share | $0.43 | $0.26 | $0.86 | $0.43 |
| Net operating income (NOI) | $186.0 million | $175.2 million | $371.4 million | $343.2 million |
| Cash from operating activities | — | $296.8 million | $284.3 million |
- Q2 revenue rose 4.9%; six-month revenue rose 6.2%. Same-store rental income increased 4.1% in Q2 and 5.3% for the first half, primarily due to higher rents. Realized annual rent per occupied square foot in the same-store portfolio increased 5.8% and 7.0%, respectively.
- Same-store average occupancy was 92.7% in Q2 versus 94.2% a year earlier, and 92.1% for the first half versus 93.6%. Total portfolio period-end occupancy was 92.0%, compared with 93.6%.
- Total portfolio NOI increased 6.2% in Q2 and 8.2% for the first half. NOI as a share of revenue was approximately 71.3% in Q2 versus 70.4% a year earlier.
- Reported net income growth substantially exceeded revenue and NOI growth, in part because depreciation and amortization fell 36.3% in Q2 and 37.7% in the first half. Management attributed the decline primarily to lower amortization of in-place lease intangibles from stores acquired in 2021.
- FFO attributable to common shareholders and OP unitholders was $149.5 million in Q2 versus $139.1 million, and $297.0 million for the first half versus $261.6 million. Adjusted FFO was $149.5 million and $297.0 million, respectively.
Debt, liquidity and capital spending
- At June 30, borrowings totaled $2.97 billion: $2.77 billion of unsecured senior notes, $63.2 million drawn on the revolving facility, and $130.1 million of mortgage loans and notes payable. The revolver had an $850 million commitment, $786.2 million of availability, and a 6.12% borrowing rate. It matures February 2027.
- Cash and cash equivalents were $9.2 million; cash, cash equivalents and restricted cash totaled $11.1 million. The company reported compliance with its debt covenants.
- Operating cash flow was $296.8 million for the first half. Investing activities used $45.1 million, including $25.3 million for property improvements and $27.7 million for development. Financing activities used $249.4 million, including $221.0 million in distributions to common shareholders.
- The quarterly distribution was $0.49 per share/unit; distributions declared were $0.98 per share/unit for the first half.
- For the remainder of 2023, management estimated recurring capital expenditures of $6–11 million, planned improvements and upgrades of $4.5–9.5 million, and new-store development costs of $16–26 million. Scheduled debt principal payments were approximately $0.9 million.
Changes, outlook and risks
- Interest expense on loans increased 2.1% in Q2 and 3.0% for the first half as higher rates outweighed lower average debt balances. The average effective rate on outstanding debt was 3.05% in both 2023 comparison periods, versus 2.91% in Q2 2022 and 2.88% in the first half of 2022.
- No wholly owned stores were acquired or disposed of in the first half of 2023, and no stores were completed and opened. Three development projects in New Jersey and New York had $42.9 million of costs incurred against expected total construction costs of $82.5 million; completion was expected between Q1 and Q4 2024.
- The California Yacht Club asset was classified as held for sale. Estimated fair value less selling costs exceeded carrying value, so no loss was recorded. No impairment losses were recorded in the reported periods.
- Management said operating cash flow, equity-market access and available revolver capacity were expected to support the current business plan, but noted that future debt and equity capital may not be readily available. Risks include weaker economic conditions, competition affecting rents and occupancy, higher operating and interest costs, refinancing and leverage, and development or acquisition execution.
- The filing provides no specific full-year revenue, earnings or operating guidance. The company cited seasonal occupancy patterns, typically higher in summer. Routine claims and litigation were not expected to have a material adverse effect, according to management.
- After quarter-end, the board amended executive deferred compensation and severance plans, including enhanced change-in-control funding and vesting provisions. No material change in internal control was reported; disclosure controls were concluded effective.
Important facts for investors to verify
- Whether stronger rental rates can offset continued year-over-year declines in same-store occupancy.
- How much reported earnings growth reflects lower acquired-lease amortization versus recurring operating improvement; compare net income with NOI and FFO.
- Refinancing needs and exposure to higher floating rates, including the $63.2 million revolver balance and upcoming debt maturities.
- Progress, cost control and opening timelines for the three development projects, and any sale developments for the California Yacht Club.
- Whether operating cash generation can sustain distributions and planned investment while preserving liquidity.