CubeSmart 2017 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2017; it is not a standalone fourth-quarter filing. CubeSmart is a self-storage REIT operating through CubeSmart, L.P. At year-end, it owned 484 stores in 23 states and Washington, D.C., with 33.8 million rentable square feet and 89.2% occupancy, and managed 452 third-party stores, including 117 stores in unconsolidated ventures. Customer leases are generally month-to-month.
Financial and operating performance
- Revenue: $558.9 million, up 9.6% from $510.0 million in 2016. Rental income was $489.0 million; property management fees were $14.9 million.
- Profit: Operating income was $195.7 million, compared with $143.0 million; net income was $135.6 million, compared with $88.4 million. Net income attributable to common shareholders was $134.3 million, or $0.74 per diluted share, versus $79.9 million, or $0.45, in 2016. Operating margin, calculated as operating income divided by revenue, was approximately 35.0%.
- Store-level performance: Same-store revenue rose 4.4% and same-store NOI rose 5.1%. Same-store average occupancy increased 20 basis points to 93.1%; realized annual rent per occupied square foot increased 4.3%. Total portfolio year-end occupancy declined to 89.2% from 89.7%, reflecting the mix of newer properties.
- FFO: FFO attributable to common shareholders and OP unitholders was $289.1 million; adjusted FFO was $291.5 million, versus $251.4 million and $261.2 million, respectively, in 2016. FFO is a non-GAAP measure and is not cash flow or a liquidity measure.
- Cash flow: Operating cash flow was $293.4 million, up from $265.2 million. Investing activities used $147.8 million, versus $544.5 million used in 2016; financing activities used $143.3 million, versus $219.4 million provided in 2016.
- Debt and leverage: Total debt carrying value was approximately $1.6 billion; total liabilities were $1.86 billion. Debt to total capitalization was 23.5%, down from 24.7%; debt to undepreciated asset cost was 38.0%, down from 38.5%. Weighted-average effective interest on outstanding debt was 3.79% for 2017.
- Liquidity: Cash and cash equivalents were $5.3 million, with $417.6 million available under the revolving credit facility. The company reported compliance with its debt covenants.
- Distribution: Common dividends declared totaled $1.11 per share for 2017, versus $0.90 in 2016. The fourth-quarter dividend was $0.30 per share.
Material changes versus the prior comparable period
- Revenue growth reflected same-store rent and occupancy gains, acquisitions and increased third-party management activity. Property management fees increased 46.3%, with 452 stores under management at year-end versus 316 a year earlier.
- Operating income increased 36.9%. Lower depreciation and acquisition-related costs helped, while property operating expense increased 9.4% and interest expense rose 13.0% as average debt balances grew.
- CubeSmart acquired seven stores for approximately $80.7 million in 2017, compared with 28 stores for $403.6 million in 2016. Year-end owned store count rose from 475 to 484.
- During 2017, the company completed and opened two wholly owned and two joint-venture development properties. Development costs and acquisition activity contributed to higher storage property assets, which increased $82.0 million net.
- Debt financing included $100 million of senior notes issued in April 2017, with proceeds used to repay a $100 million term loan scheduled to mature in 2018. Senior notes, net, increased to $1.14 billion from $1.04 billion.
Outlook, risks, contingencies and unusual items
- 2018 plans and spending: Management intended to pursue selective acquisitions, dispose of assets with unattractive risk-adjusted returns and expand third-party management. Expected 2018 spending included $12–$16 million of recurring capital expenditures, $5–$8 million for capital improvements and store upgrades, and $60–$75 million for new development. Scheduled 2018 principal payments were approximately $2.7 million. The filing does not provide a specific earnings or revenue forecast.
- Development commitments: Six joint-venture developments were under construction, with completion expected by the third quarter of 2019. The filing estimates total construction costs of approximately $232.6 million and identifies $82.7 million of development commitments due in 2018 and 2019.
- Key risks: Competition and new supply may pressure occupancy and rental rates; results are exposed to local economic conditions, particularly in Florida, New York, Texas and California. Other risks include interest rates and refinancing, access to capital, development execution and costs, REIT qualification, environmental and accessibility requirements, natural disasters, insurance limits, cybersecurity and joint-venture partner performance.
- Hurricane damage: Damage at Florida and Texas stores led to $1.1 million of recorded charges, including deductibles and asset write-offs. After $0.3 million received, $1.0 million of anticipated insurance recoveries remained recorded as a receivable at year-end; final recovery was not assured.
- Legal matter: A New Jersey consumer class action received preliminary settlement approval in December 2017. The settlement and related expenses had been reserved and were reported as not materially affecting financial position or results.
- Tax and accounting: The Tax Cuts and Jobs Act was enacted in December 2017; management noted potential tax-rule effects and implementation uncertainty. The company expected adoption of the new revenue standard in 2018 to have no material impact. It was still assessing the impact of the new lease standard, effective in 2019, primarily for its ground leases.
Important facts for investors to verify
- Review same-store rent growth and occupancy trends alongside the lower total-portfolio occupancy and the lease-up progress of recently opened properties.
- Confirm debt maturities, variable-rate exposure, interest-rate hedges and covenant headroom; the filing reports $281.7 million of 2018–2019 revolver and term-loan maturities in the contractual-obligations schedule.
- Assess whether development spending, remaining commitments and joint-venture put/call rights could increase funding needs or liabilities.
- Track collection of the $1.0 million hurricane-related insurance receivable and any resulting final repair costs or recoveries.
- Compare reported GAAP earnings and cash flow with FFO and adjusted FFO, noting the non-GAAP definitions and exclusions.
- Confirm the effects of the 2017 share issuance, OP units and distributions on per-share results and future dilution.