CubeSmart 10-Q Summary: Quarter Ended June 30, 2017
Business context and reporting period
CubeSmart is a self-storage REIT operating through CubeSmart, L.P. This combined filing reports second-quarter and first-half 2017 results, with comparisons to the corresponding 2016 periods. At June 30, 2017, the company owned 478 stores in 23 states and Washington, D.C., and managed 390 third-party stores. It reports one operating segment.
Financial and operating metrics
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Total revenue | $138.6 million | $126.5 million | +9.5% |
| Operating income | $47.5 million | $33.0 million | +44.0% |
| Net income | $32.8 million | $20.4 million | +61.1% |
| Net income attributable to common shareholders | $32.5 million | $18.9 million | +71.5% |
| Diluted earnings per share | $0.18 | $0.11 | Up $0.07 |
Calculated operating margin was approximately 34.3%, versus 26.1% a year earlier; calculated net margin was approximately 23.7%, versus 16.1%. Second-quarter FFO attributable to common shareholders and OP unitholders was $71.4 million, compared with $62.8 million; adjusted FFO was $72.3 million, compared with $65.4 million. These are non-GAAP measures.
- Same-store revenue rose 4.2% to $122.4 million and same-store NOI rose 5.0% to $87.3 million. Same-store average occupancy increased 20 basis points to 93.8%; realized annual rent per occupied square foot rose 3.9% to $15.97.
- At period-end, total portfolio occupancy was 93.0%, versus 91.8% in 2016. The 2017 portfolio included additional acquired and developed stores.
- For the six months ended June 30, revenue was $271.6 million, up 10.7%; operating income was $87.9 million, up 42.4%; and net income was $58.0 million, up 60.2%. Diluted EPS was $0.32, versus $0.19.
For the first half, operating cash flow was $147.5 million, versus $125.6 million. Investing activities used $46.4 million, versus $347.1 million, largely reflecting lower acquisition spending; financing activities used $96.0 million, versus providing $162.0 million. Cash and cash equivalents were $8.1 million at June 30.
Debt carrying value was approximately $1.614 billion: $1.142 billion in senior notes, $359.2 million in revolving-credit and term borrowings, and $113.0 million in mortgage loans and notes payable. The company had $60.0 million drawn on its revolver and $439.3 million available. First-half interest expense was $27.6 million, up 13.5%; the average outstanding debt balance increased, while the weighted-average effective interest rate declined to 3.75% from 3.91%. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Same-store rent growth, slightly higher occupancy, and added stores supported revenue growth. Third-party management fee income rose 47.3% in Q2, with 390 managed stores versus 277 a year earlier.
- Property operating expenses rose 7.7% in Q2, including higher costs at new stores and higher same-store property taxes. G&A increased 11.5%, principally from payroll and professional fees.
- Depreciation and amortization fell 11.4% in Q2, primarily because certain older assets were fully depreciated. Acquisition-related costs also declined, to $0.7 million from $2.6 million.
- In April, the company issued $100 million of senior notes due 2023 and 2025 and used the proceeds to repay a $100 million term loan due in 2018. It redeemed all 3.1 million Series A preferred shares in November 2016; there were no preferred distributions in the 2017 periods shown.
Outlook, risks, contingencies, and unusual items
- For the remainder of 2017, management expected recurring capital expenditures of $8–$13 million, planned improvements and upgrades of $3–$8 million, and new-store development costs of $42–$52 million. Scheduled debt principal payments for the remainder of 2017 were approximately $1.3 million. These are estimates, not full-year earnings guidance.
- The company was under contract for three stores under construction for a total purchase price of $49.9 million, with $1.8 million in deposits; closing was expected by Q1 2018, subject to due diligence and customary conditions.
- Development costs incurred on projects in progress were $214.4 million; total expected construction costs were $347.8 million, with completion expected by Q1 2019.
- Management cited risks from local and national economic conditions, competition and the ability to maintain occupancy and pricing, capital availability, interest rates, leverage and refinancing, operating costs, development and acquisition execution, joint ventures, natural disasters, and REIT qualification. A 100-basis-point rise in rates was estimated to increase annual interest expense on variable-rate debt by about $2.6 million.
- A putative New Jersey consumer class action alleging violations of state consumer-protection laws remained pending; the company said it was vigorously defending the case. Management stated that litigation provisions were adequate, while warning outcomes are uncertain and could be material.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing notes that new accounting standards were being evaluated; management did not expect the new revenue standard to have a material impact based on its initial assessment.
Important facts for investors to verify
- Whether same-store rent growth and occupancy trends persist, and how much reported growth depends on acquisitions and new stores.
- Whether property-tax, payroll, and other operating-cost increases continue to pressure same-store margins.
- Debt maturities, variable-rate exposure, covenant headroom, and continued access to the revolver and capital markets.
- Actual development spending, project completion timing, and whether the three contracted acquisitions close on the expected terms.
- Developments and potential financial exposure in the New Jersey litigation, along with any other material contingencies.