CubeSmart Q3 2017 Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2017; the combined filing covers CubeSmart and its Operating Partnership. CubeSmart is a self-storage REIT operating in 23 states and Washington, D.C. At quarter-end it owned 480 stores with approximately 33.4 million rentable square feet and managed 428 stores for third parties. The filing’s cover text also contains an anomalous “December 30, 2016” date; the stated reporting period and signature dates indicate this is the quarter ended September 30, 2017.
Financial and operating highlights
| Metric | Q3 2017 | Comparable period / change |
|---|---|---|
| Total revenue | $143.9 million | $132.1 million; up 8.9% |
| Net income | $37.7 million | $25.1 million; up 50.3% |
| Net income attributable to common shareholders | $37.3 million; diluted EPS $0.21 | $23.4 million; diluted EPS $0.13 |
| Operating income | $52.3 million; 36.3% of revenue | $39.5 million; 29.9% of revenue |
| Same-store performance | Revenue up 4.1%; NOI up 4.1% | Average occupancy 93.9% vs. 93.8%; realized annual rent per occupied square foot up 4.1% to $16.42 |
For the nine months ended September 30, revenue was $415.5 million, up 10.1%; net income was $95.8 million, up 56.1%; and diluted EPS was $0.52 versus $0.32. Same-store revenue rose 4.6% and NOI rose 5.0%. FFO attributable to common shareholders and OP unitholders was $75.5 million for Q3 and $212.5 million for the nine months; adjusted FFO was $77.2 million and $215.2 million, respectively. FFO and adjusted FFO are non-GAAP measures.
Q3 revenue growth reflected same-store rent increases and additional stores, alongside a 46.8% increase in management fee income. Property operating expenses rose 12.8% to $47.2 million, including hurricane-related costs and higher expenses at new stores; same-store property expenses increased 4.2%, primarily from property taxes. Interest expense increased 13.0% to $14.5 million, with higher average debt and interest rates cited as drivers.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $224.3 million, compared with $203.1 million in 2016. Investing cash outflow was $81.1 million versus $472.1 million, mainly reflecting lower acquisition spending. Financing cash outflow was $140.0 million versus $293.6 million of inflow in 2016.
- Cash and cash equivalents were $6.2 million at September 30. The $500 million revolving facility had $432.6 million available, after accounting for a letter of credit.
- Debt carrying amounts totaled approximately $1.62 billion: $1.142 billion of senior notes, $66.7 million drawn on the revolver, $299.3 million of term loans and $112.2 million of mortgage debt. Total liabilities were $1.83 billion and total assets were $3.50 billion.
- During April, the company issued $100 million of senior notes and repaid a $100 million term loan scheduled to mature in June 2018. Management reported compliance with debt covenants and expected to remain compliant.
- Cash distributions paid to common shareholders were $146.1 million in the first nine months. The company reported no common shares sold under its at-the-market program during that period.
Material changes, outlook and risks
- The company acquired three stores in 2017 for an aggregate stated purchase price of approximately $33.1 million, including assumed debt and OP units. Subsequent to quarter-end, it acquired three more stores for approximately $28.0 million. Three additional stores under construction were under contract for $49.9 million, with closings expected by Q1 2018, subject to conditions.
- Development spending continued: seven joint-venture projects were in development, with expected total construction costs of $282.4 million. For the remainder of 2017, management expected $4–9 million of recurring capital expenditures, $2–5 million of capital improvements and upgrades, and $20–30 million of development costs. No earnings or FFO guidance is provided in the supplied filing text.
- Hurricanes Harvey and Irma affected 91 owned and 30 joint-venture stores in Texas and Florida. All stores were open by September 30. Estimated repair costs net of expected insurance proceeds were approximately $1.3 million; insurance coverage may not fully cover restoration costs.
- A New Jersey putative consumer class action remained pending, and the company said it was vigorously defending the case. Management stated that litigation outcomes are inherently uncertain and could adversely affect results.
- Principal risks include local economic and competitive conditions, occupancy and rental pricing, capital availability, leverage and refinancing, interest rates and operating costs, acquisition and development execution, natural disasters, joint-venture exposure and maintaining REIT status. The filing says disclosure controls were effective and no material change in internal control occurred during the quarter.
Important facts for investors to verify
- Whether same-store rent growth and occupancy can be sustained as rental pricing and local competition evolve.
- The final hurricane repair costs and insurance recoveries, including any business interruption effects.
- Debt maturity, interest-rate exposure and covenant headroom; a 100-basis-point increase in rates on variable-rate debt was estimated to add about $2.7 million of annual interest expense.
- Completion, timing and economics of the contracted acquisitions and development projects, and related funding requirements.
- Potential exposure and developments in the New Jersey consumer litigation and other contingencies.
- The anomalous “December 30, 2016” date in the source cover text; confirm against the filed SEC document, while noting the stated quarter-end is September 30, 2017.