CubeSmart 10-Q Summary
Business context and reporting period. This combined filing covers CubeSmart and its operating partnership for the quarter ended September 30, 2013. CubeSmart is a REIT operating self-storage facilities through the partnership. At quarter-end, it owned 382 facilities with approximately 25.8 million rentable square feet and managed 136 additional facilities for third parties. Unless noted, financial amounts below are in millions.
Financial results and key metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $82.8 | $69.4 | $236.4 | $194.1 |
| Operating income | $16.9 | $6.7 | $40.1 | $18.8 |
| Net income | $16.6 | $2.1 | $18.7 | $2.1 |
| Net income attributable to common shareholders | $14.8 | $0.1 | $14.0 | $(4.2) |
| Basic and diluted EPS | $0.11 | $0.00 | $0.10 | $(0.03) |
| Net cash from operating activities | Not provided quarterly | Not provided quarterly | $103.9 | $86.1 |
| Net cash used in investing activities | Not provided quarterly | Not provided quarterly | $(130.3) | $(260.7) |
| Net cash from financing activities | Not provided quarterly | Not provided quarterly | $24.8 | $168.2 |
- Revenue increased 19.4% in Q3 and 21.8% year to date. Same-store Q3 revenue rose 7.2%, and same-store NOI rose 10.0%; same-store average occupancy was 90.5% versus 85.5% in Q3 2012. For the nine-month period, same-store average occupancy was 88.1% versus 82.4%, while realized annual rent per occupied square foot was $12.56 versus $12.60.
- Reported operating margin was approximately 20.4% for Q3 versus 9.7% a year earlier, and 17.0% for the nine-month period versus 9.7%. These improvements include portfolio and period effects; discontinued-operation gains materially boosted net income.
- Adjusted FFO was $35.1 million for Q3 versus $24.4 million, and $94.1 million for the nine months versus $67.5 million. FFO is a non-GAAP measure and is not a substitute for net income or operating cash flow.
- At September 30, total debt was approximately $1,044.4 million: $250.0 million of senior notes, $500.0 million of term loans, $88.3 million drawn on the revolver, and $206.1 million of mortgage loans and notes payable. Cash and cash equivalents were $2.9 million; revolver availability was $211.5 million. Debt was reported at a weighted average effective rate of 2.84% for the credit and term facilities.
Material changes versus prior comparable periods
- Q3 rental income increased $11.9 million, driven by $8.2 million from acquired facilities and $3.7 million from same-store occupancy gains. Nine-month rental income rose $36.6 million, including $26.3 million from acquisitions and $10.3 million from same-store growth.
- Q3 property operating expense rose 11.2%, primarily from acquisitions and higher same-store costs, including real estate taxes. Nine-month property operating expense increased 14.6%; management cited acquisitions, snow removal and utilities after a colder winter, and real estate tax assessments.
- Q3 interest expense declined 9.9% as the weighted average effective debt rate decreased to 3.75% from 4.28%, partly offset by higher average debt. Nine-month interest expense rose 4.6% because average debt increased, despite a lower effective rate.
- Q3 net income included a $9.3 million gain on facility dispositions, compared with $0.2 million in Q3 2012. Nine-month disposition gains were $9.5 million versus $6.4 million. The prior-year comparison also included a $7.0 million gain from remeasurement of a real estate venture, with no comparable 2013 gain.
- Operating cash flow increased $17.8 million year over year for the first nine months. Investing outflow fell by $130.4 million, primarily because acquisitions were lower; financing inflow fell by $143.4 million, mainly in line with reduced investment activity and increased distributions.
Outlook, commentary, risks, and unusual items
- Management said it intends to focus on internal growth and selectively pursue acquisitions and development. It expects remaining 2013 recurring capital expenditures of $7–$12 million, development costs of $3–$6 million, and scheduled debt principal payments of approximately $8 million.
- Management stated it was in compliance with debt covenants and expected to remain compliant. It cited operating cash flow, the at-the-market equity program, and the credit facility as sources supporting its current plan, while cautioning that future debt and equity market access is not assured.
- Interest-rate sensitivity: a 100-basis-point increase in rates on floating-rate debt was estimated to increase annual interest expense by approximately $1.9 million. The company had $193.2 million of floating-rate debt exposure and used swaps to fix rates on a portion of variable-rate borrowings.
- At September 30, 21 facilities were classified as held for sale. After quarter-end, the company sold 22 facilities, including 21 previously held for sale, for approximately $90 million; it also acquired one Maryland facility for $15.4 million, including assumed debt of $8.5 million. Two further acquisition agreements covering 36 facilities were signed October 28, with closings expected in Q4; $25 million was deposited in escrow.
- CEO Dean Jernigan’s previously announced departure was confirmed for December 31, 2013, along with his board resignation. Christopher P. Marr was designated to succeed him as CEO and join the board upon that date. Jernigan also entered an advisory agreement at $1,000 per hour, with anticipated service of no more than 20 hours per quarter.
- The filing disclosed an immaterial correction to 2012 cash-flow presentation: both operating cash inflow and investing cash outflow were reduced by $11.1 million due to the treatment of acquisition earnest-money deposits.
- Principal risks include economic conditions, competition and occupancy or rental-rate pressure, access to capital, leverage and refinancing, interest rates and operating costs, acquisition and development execution, REIT qualification, and environmental or natural-disaster liabilities. Management reported no material change in internal controls and no off-balance-sheet arrangements.
Important facts for investors to verify
- How much of reported earnings and EPS growth reflects recurring operations versus the $9.3 million Q3 disposition gain and other discontinued-operation results.
- Whether same-store occupancy and NOI growth can be sustained, particularly as realized year-to-date rent per occupied square foot edged lower.
- Debt maturities, covenant headroom, floating-rate exposure, and the availability and cost of refinancing or additional capital.
- Completion, pricing, and proceeds from the announced facility sales and acquisitions, including the two pending purchase agreements.
- Actual 2013 capital spending, development costs, distributions, and cash needs relative to management’s estimates.