CubeSmart 10-Q Summary — Third Quarter 2015
Business context and reporting period
Quarter ended September 30, 2015. CubeSmart is a self-storage REIT operating through CubeSmart, L.P.; the combined filing reports the entities as one enterprise. At quarter-end, the company owned 438 facilities with about 29.9 million rentable square feet across 22 states and Washington, D.C., and managed 191 additional facilities for third parties. Results are unaudited.
Financial and operating metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $116.0m | $97.1m | $329.5m | $276.7m |
| Operating income | $29.7m | $23.1m | $76.1m | $63.7m |
| Net income | $18.6m | $8.6m | $41.0m | $21.2m |
| Net income attributable to common shareholders | $16.9m | $7.0m | $36.1m | $16.4m |
| Basic EPS | $0.10 | $0.05 | $0.22 | $0.11 |
| Cash from operating activities | — | — | $162.5m | $118.9m |
Q3 total-portfolio NOI was $76.7m, up 20.8%; nine-month NOI was $214.6m, up 20.1%. Same-store NOI increased 9.3% in Q3 and 9.1% for the nine months. Same-store average occupancy reached 93.4% in Q3 versus 92.2%; nine-month average occupancy was 92.3% versus 90.8%. Realized annual rent per occupied square foot rose to $14.93 in Q3 from $14.04 and to $14.51 for the nine months from $13.75.
At September 30, total debt was approximately $1.188bn: $500m senior notes, $400m term loans, $167.8m revolver borrowings and $120.4m mortgage loans and notes payable. Cash was $3.0m, with $332.2m of revolver availability. Nine-month investing cash outflow was $237.9m; financing cash inflow was $75.5m. Total assets were $2.930bn and total liabilities $1.324bn.
Material changes versus prior comparable periods
- Q3 revenue increased 19.4%; common-shareholder income rose 142.7%. Nine-month revenue increased 19.1%, and common-shareholder income rose 120.2%.
- Management attributed same-store rental growth to improved occupancy, higher rates and fewer promotional discounts; acquisitions also contributed materially to revenue. Nine-month rental income rose 20.1%, including $32.0m of additional income from acquired facilities.
- Q3 interest expense declined to $10.4m from $11.8m; the effective average debt rate fell to 3.64% from 4.25%. Nine-month interest expense declined to $32.3m from $35.7m, with the effective rate down to 3.81% from 4.14%.
- Nine-month operating cash flow increased $43.6m. Acquisitions totaled 16 facilities for about $168.2m in the 2015 period, compared with 22 facilities for about $269.6m in the comparable 2014 period. Development spending increased to $58.4m from $17.0m.
Outlook, risks and unusual items
- The filing provides no earnings or revenue guidance. For the remainder of 2015, management estimated recurring capital expenditures of $4m–$9m, facility upgrades of $2m–$5m, development costs of $13m–$17m, and scheduled debt principal payments of about $8m.
- Management said cash from operations, equity-market access and available credit were expected to support the business plan and covenant compliance. The company reported compliance with debt covenants at quarter-end.
- On October 26, 2015, the Operating Partnership issued $250m of 4.00% senior notes due 2025; proceeds repaid all revolver borrowings, with remaining proceeds intended for general corporate purposes.
- Eight facilities classified as held for sale at quarter-end were subsequently sold: one London asset for about $9.3m on October 2 and eight U.S. assets for $37.8m on October 8. Four additional facilities under construction were under contract for a total purchase price of $90.2m, with expected closings by Q4 2016, subject to customary conditions.
- Key risks cited include local and national economic conditions, competition and ability to maintain occupancy and rents, access to capital, leverage and refinancing, interest rates and operating costs, acquisition/development execution, joint-venture exposure, natural disasters and environmental liabilities. Cash-flow sensitivity analysis indicated a 100-basis-point increase in floating rates would raise annual interest expense by about $1.7m.
- Unusual exposures include development joint-venture put/call arrangements with accrued liabilities and interest-rate swaps. The company estimated $5.1m of swap-related losses would be reclassified to interest expense within 12 months. No impairment losses were recorded in the nine-month periods presented.
Important facts for investors to verify
- Whether same-store occupancy and pricing gains continue, and how acquisition-driven growth compares with organic performance.
- Execution, costs and lease-up progress for the development pipeline and contracted acquisitions.
- Debt maturities, borrowing costs, covenant headroom and liquidity after the October note issuance and revolver repayment.
- Cash available for distributions after capital spending, development investment and debt service; reported FFO is a non-GAAP measure and is not cash flow.
- Completion and final proceeds from held-for-sale transactions, and the obligations associated with joint-venture put/call rights.