CubeSmart (CubeSmart and CubeSmart, L.P.) — Q1 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2016, compared with the same period in 2015; balance-sheet figures are compared with December 31, 2015. CubeSmart is a self-storage REIT operating through its partnership. At quarter-end it owned 456 facilities in 22 states and the District of Columbia, totaling approximately 31.4 million rentable square feet, and managed 252 additional facilities.
Financial performance and liquidity
- Revenue: $118.9 million, up 14.6%. Rental income was $105.0 million, up 14.7%; other property income was $11.8 million, and management fee income was $2.1 million.
- Same-store performance: Revenue increased 8.4% to $106.6 million and net operating income (NOI) increased 12.9% to $74.8 million across 407 facilities. Average occupancy rose 150 basis points to 91.9%; period-end occupancy was 92.3% versus 91.0%. Realized annual rent per occupied square foot increased 6.8% to $15.11.
- Profit: Operating income was $28.7 million versus $20.7 million; net income was $15.9 million versus $8.5 million. Net income attributable to common shareholders was $14.2 million, or $0.08 per diluted share, compared with $6.9 million, or $0.04.
- Costs and margins: Property operating expenses rose 7.4% to $40.2 million; depreciation and amortization rose 3.9% to $39.4 million; general and administrative expense rose 14.7% to $8.2 million. Acquisition-related costs increased to $2.3 million from $0.5 million. Total-portfolio NOI was $78.7 million, approximately 66% of revenue; operating margin was approximately 24%.
- Supplemental REIT measures: FFO attributable to common shareholders and OP unitholders was $55.7 million, up from $46.3 million; adjusted FFO was $58.2 million, up from $46.8 million. These non-GAAP measures are not substitutes for net income or operating cash flow.
- Cash flow and investment: Operating cash flow was $61.9 million, versus $43.4 million. Investing used $196.9 million, primarily for 10 facility acquisitions; financing provided $74.8 million. Cash and equivalents ended at $2.8 million, down from $62.9 million at year-end.
- Debt and liquidity: Total debt was approximately $1.30 billion. The company had $445.7 million available on its $500 million revolver and reported $2.8 million in cash. Debt included $742.2 million of senior notes, $398.3 million of term loans, $54.3 million drawn on the revolver, and $101.7 million of mortgage debt. The effective weighted-average rate on credit- and term-facility borrowings, after swaps, was 2.84%. The company reported covenant compliance.
Material changes, outlook, and risks
- Growth reflected stronger same-store occupancy and rental rates as well as acquisitions. The company acquired 10 facilities for approximately $184.4 million and opened one newly developed facility. The owned portfolio increased from 428 facilities at March 31, 2015 to 456.
- Management cited higher asking rents and fewer promotional discounts as drivers of same-store rent growth. Acquisition-related expenses and interest expense also rose; average debt increased by $116 million year over year to approximately $1.3 billion.
- No specific earnings or FFO guidance was provided. For the remainder of 2016, management estimated recurring capital expenditures of $12–$17 million, planned improvements of $4–$9 million, development costs of $38–$43 million, and scheduled debt principal payments of approximately $27.3 million.
- Management believed operating cash flow, equity issuance and revolver capacity would support its business plan and expected covenant compliance, while cautioning that access to capital is not assured. Risks include economic and local-market weakness, competition affecting occupancy and rents, higher interest rates and operating costs, refinancing and capital availability, acquisitions and development, joint ventures, and REIT qualification. Occupancy is seasonal, typically higher in summer.
- Subsequent to quarter-end, CubeSmart acquired two facilities for approximately $23.0 million; its HVP venture acquired five for $36.1 million. At March 31, the company also had deposits of $1.7 million on five facilities under construction, with a combined purchase price of $64.2 million, expected to close by Q1 2017 subject to customary conditions.
- Unusual and contingent items include joint-venture member put/call options at stated prices, with related liabilities accreted during development; these are not equivalent to immediately payable debt. The filing reported no impairment losses in either comparative quarter. Interest-rate swaps had a $5.8 million fair-value liability, and $3.8 million of accumulated swap losses were expected to be reclassified to interest expense over the next 12 months.
Important facts for investors to verify
- Whether same-store rent and occupancy gains persist, particularly as seasonal demand changes and new supply or competition affects local markets.
- Acquisition and development returns, including integration costs and the performance of newly acquired and non-same-store facilities.
- Debt maturities, refinancing needs, covenant headroom, floating-rate exposure and the effect of interest-rate changes.
- Cash needs for distributions, capital projects and acquisitions against low reported cash and reliance on revolver capacity and equity markets.
- Terms, timing and potential funding effects of pending acquisitions and joint-venture put/call options.
- Adjusted FFO and pro forma results alongside GAAP income and cash flow; pro forma figures are not reported results or a forecast.