CubeSmart (CUBE) — Q2 2022 Form 10-Q
Business context and period: Unaudited quarter and six months ended June 30, 2022, compared with the same 2021 periods. CubeSmart is a self-storage REIT operating in 24 states and Washington, D.C. At quarter-end it owned or partially owned 609 properties and managed 680 third-party properties. Unless stated otherwise, financial amounts below are in millions.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $248.7 | $199.2 | $487.2 | $388.1 |
| Net income | $58.6 | $50.4 | $96.9 | $93.7 |
| Net income attributable to common shareholders | $58.4 | $48.8 | $96.5 | $90.5 |
| Diluted earnings per share | $0.26 | $0.24 | $0.43 | $0.45 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $284.3 | $217.4 |
- Q2 revenue increased 24.8% year over year; rental income rose 26.9%. Same-store rental income grew 14.2%, primarily from higher rates; realized annual rent per occupied square foot rose 14.5%.
- Same-store NOI increased 19.0% in Q2. Total-portfolio NOI was $175.2 million, up 29.3%; implied NOI margin was approximately 70.4%, versus 68.0% a year earlier.
- Q2 net income increased 16.3% and shareholder-attributable income increased 19.7%. For the first half, attributable income rose 6.7%, while diluted EPS fell from $0.45 to $0.43 as weighted-average shares increased.
- Q2 period-end occupancy was 93.6%, down from 94.7%; same-store occupancy was 95.3%, versus 96.0%. Same-store average occupancy was 95.1% versus 95.4% in Q2 and 94.3% versus 94.5% for the first half.
- First-half operating cash flow was $284.3 million; investing cash outflow was $50.1 million and financing cash outflow was $239.4 million. Cash, cash equivalents and restricted cash ended at $8.1 million.
Debt, liquidity and capital
- At June 30, reported debt carrying value was $3.104 billion, comprising $2.770 billion of unsecured senior notes, $168.9 million drawn on the revolver and $165.3 million of mortgage loans and notes payable. Finance lease liabilities were separately reported at $65.8 million.
- The $750 million unsecured revolver matures in June 2024; $580.5 million remained available. Cash and cash equivalents were $5.1 million. The company reported compliance with applicable debt covenants.
- For the remainder of 2022, management expected recurring capital expenditures of $4–9 million, capital improvements and store upgrades of $3–8 million, development costs of $3–13 million, and scheduled debt principal payments of approximately $1.2 million.
- Declared distributions were $0.43 per share/unit for Q2 and $0.86 for the first half, compared with $0.34 and $0.68, respectively, in 2021.
Material changes, outlook and risks
- Revenue growth reflected both higher same-store rental rates and added contribution from acquired and developed properties. Operating costs also increased: Q2 property operating expenses rose 15.2%, depreciation and amortization 46.0%, and general and administrative expense 18.7%.
- Interest expense rose 20.6% in Q2 to $23.1 million, mainly due to higher average debt balances; the reported weighted-average effective debt rate was lower year over year, at 2.91% versus 3.41%.
- First-half other expense included $10.5 million of transaction-related costs, primarily severance associated with the December 2021 LAACO acquisition. LAACO-related acquired in-place lease amortization contributed to higher depreciation and amortization.
- The company sold the Los Angeles Athletic Club for $44 million with no gain or loss recognized. The California Yacht Club was classified as held for sale; no loss was recorded. No property or venture investment impairment losses were reported for the periods presented.
- After June 30, the company acquired a Georgia self-storage property for $20.7 million. Management described a strategy of pursuing internal growth and selective acquisitions and development; the filing provides no earnings or full-year operating guidance.
- Key risks include economic weakness and inflation, competition affecting occupancy and rents, rising interest rates and operating costs, capital availability and refinancing, acquisition and development execution, and exposure to floating-rate debt. A 100-basis-point increase in variable borrowing rates was estimated to add about $1.7 million of annual interest expense.
Important facts for investors to verify
- Whether strong rent growth can continue as same-store occupancy eased year over year.
- How much reported earnings growth reflects ongoing operations versus acquisition-related growth and LAACO-related costs and amortization.
- The company’s debt maturity and refinancing profile, interest-rate exposure, and covenant headroom; the filing states compliance but does not provide a clear leverage ratio here.
- The expected timing and proceeds from the California Yacht Club sale and the operating implications of recent acquisitions and development projects.
- Cash available for dividends and investment after capital spending, distributions and debt service; GAAP operating cash flow is not the same as funds available for distribution.