Cubesmart quarterly report, Q2 FY2019

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CubeSmart Q2 2019 Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2019. CubeSmart is a self-storage REIT operating through CubeSmart, L.P.; results below are consolidated and in U.S. dollars. The filing was signed July 26, 2019.

Business context and operating performance

  • Owned 516 stores with approximately 36.0 million rentable square feet in 24 states and the District of Columbia; managed 648 additional third-party stores.
  • Q2 total revenue rose 7.6% to $159.0 million. Rental income increased 6.4% to $136.0 million, other property income rose 12.5% to $16.9 million, and management-fee income increased 23.2% to $6.1 million.
  • Same-store revenue grew 2.0% in Q2; same-store rental income rose 1.8%, supported by a 2.1% increase in realized annual rent per occupied square foot. Same-store period-end occupancy was 93.7%, down from 94.1% a year earlier; average occupancy was 93.1% versus 93.3%.
  • Q2 net operating income (NOI), a non-GAAP measure, increased 10.8% to $108.9 million. Total-portfolio NOI was approximately 68.5% of revenue, versus 66.5% in Q2 2018; these ratios are calculated from reported figures.

Financial results, cash flow and liquidity

  • Q2 net income was $49.9 million, up 28.7%; net income attributable to common shareholders was $49.4 million, or $0.26 per diluted share, compared with $38.4 million, or $0.21, in Q2 2018. The increase included the Company’s share of gains from a real-estate venture’s property sale.
  • Q2 operating expenses rose 8.3% to $100.6 million. Depreciation and amortization increased 16.0% to $40.7 million, primarily reflecting acquisitions; property operating expense rose 1.2% to $50.1 million; general and administrative expense rose 17.5% to $9.8 million.
  • Interest expense increased 17.4% to $18.1 million. Management attributed the increase to higher average debt ($1.82 billion versus $1.69 billion) and a higher weighted-average effective debt rate (4.13% versus 3.91%).
  • For the first six months, operating cash flow was $177.3 million, compared with $155.7 million in 2018; investing cash outflow was $250.8 million, versus $100.7 million; financing cash inflow was $82.5 million, versus a $54.6 million outflow. Cash, cash equivalents and restricted cash ended at $15.4 million.
  • At June 30, total debt carrying value was approximately $1.85 billion, versus $1.75 billion at year-end 2018. This included $1.50 billion principal amount of senior notes, $257.2 million drawn on the revolver and $104.8 million of mortgage principal; unsecured term loans had been repaid. Cash and cash equivalents were $11.1 million, and $492.2 million remained available under the $750 million revolver.
  • Shareholders’ equity was $1.77 billion and total assets were $3.95 billion. The Company sold 4.1 million shares through its at-the-market program in the first half, generating $136.5 million gross proceeds.

Material changes and unusual items

  • On June 6, CubeSmart acquired its partner’s 90% interest in HVP III for $128.3 million, bringing its previously held 10% interest to 100%. HVP III had sold 50 properties shortly before the acquisition; CubeSmart’s share of the resulting gain contributed approximately $10.7 million to Q2 and first-half equity in earnings of real-estate ventures. The gain materially benefited reported earnings and is not a recurring store-level operating result.
  • CubeSmart issued $350 million of 4.375% senior notes due 2029 in January and repaid a $200 million term loan. In June it replaced its prior credit facility with a $750 million revolver maturing in 2024 and repaid another $100 million term loan.
  • Development spending and acquisitions increased: 22 stores were acquired during the first half for an aggregate stated purchase price of $170.8 million, including the HVP III interest. The Company also opened two developed stores in Q2.
  • The Company adopted the new lease accounting standard in January 2019 with no net cumulative adjustment to retained earnings. At quarter-end it reported $46.2 million of operating lease liabilities and $41.9 million of right-of-use assets.

Outlook, risks and contingencies

  • No full-year revenue, earnings or FFO guidance is provided in the supplied filing text. For the remainder of 2019, management expected recurring capital expenditures of $7–$12 million, planned improvements and upgrades of $2–$7 million, development costs of $16–$26 million, and scheduled debt principal payments of approximately $10.3 million.
  • Management said operating cash flow, equity-market access and revolver availability were expected to support the business plan and covenant compliance. The Company was in compliance with its debt covenants at June 30; access to future debt and equity capital is not assured.
  • Risks highlighted include economic and local-market changes, self-storage competition affecting occupancy and rents, higher interest rates and operating costs, refinancing and capital-market availability, acquisition and development execution, REIT qualification, joint-venture partner performance, property impairments, cyber incidents, environmental exposure and uninsured losses.
  • The Company cited ordinary-course claims and stated that it had made adequate provisions. A class-action settlement agreement was entered in January 2019; the related $1.8 million charge had been recorded in 2018. No other material legal proceeding was identified in the filing.

Important facts for investors to verify

  • How much of earnings growth came from recurring same-store performance versus the HVP III property-sale gain.
  • Whether same-store occupancy and rent growth persist, and how local competition affects pricing and customer retention.
  • Debt levels, interest-rate exposure, refinancing needs and continued compliance with covenants; variable-rate debt exposure was $257.2 million, with a stated annual earnings and cash-flow sensitivity of about $2.6 million per 100-basis-point rate change.
  • Delivery, cost and lease-up progress for development projects; five joint-venture projects were under development, with estimated total construction costs of $129.7 million and expected completion by Q1 2021.
  • Whether acquisition spending and equity issuance generate returns sufficient to offset higher depreciation, interest expense and dilution.