CubeSmart — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. CubeSmart is a self-storage REIT operating through CubeSmart, L.P. At quarter-end it owned 428 facilities across 22 states and the District of Columbia, and managed 181 third-party facilities. The company reports one operating segment.
Financial performance and liquidity
- Revenue: $103.7 million, up 18.8% from $87.3 million. Rental income rose 20.9% to $91.6 million.
- Profit: Operating income was $20.7 million, up 11.1%; net income was $8.5 million versus $4.6 million. Net income attributable to common shareholders was $6.9 million versus $3.0 million. Basic and diluted EPS were $0.04 versus $0.02.
- Operating metrics: Same-store revenue increased 7.0% and same-store net operating income (NOI) increased 9.5%. Same-store period-average occupancy was 90.7%, versus 88.9%; realized annual rent per occupied square foot was $14.17, versus $13.50. Portfolio period-end occupancy was 90.3%, versus 88.6%.
- Margins: Operating margin was approximately 20.0%, compared with 21.3%. Portfolio NOI was $66.3 million, approximately 63.9% of revenue, versus $55.0 million and 63.0%. NOI is a non-GAAP measure.
- Cash flow: Operating activities provided $43.4 million, up from $30.6 million. Investing used $53.9 million, mainly for acquisitions, improvements and development; financing provided $10.6 million. Cash and cash equivalents ended at $3.0 million.
- Debt and liquidity: Total debt was approximately $1.177 billion: $500 million senior notes, $480 million term and revolver borrowings, and $196.9 million mortgage debt. The company reported $220 million available under its $300 million revolving facility and was in compliance with debt covenants. Debt was approximately $1.2 billion at fair value. Distributions payable were $28.5 million.
- REIT measures: FFO was $46.3 million versus $34.0 million; adjusted FFO was $46.8 million versus $35.7 million. These are non-GAAP measures and are not substitutes for GAAP income or cash flow.
Changes versus the prior-year quarter
- Revenue growth reflected $10.7 million of additional rental income from acquired facilities and $5.2 million from same-store rental growth. Same-store occupancy and realized rents both improved.
- Property operating expenses increased 15.9% to $37.4 million, including higher costs at acquired facilities and same-store real estate taxes. Depreciation and amortization increased 34.8% to $37.9 million, primarily due to acquisitions.
- Interest expense declined 6.9% to $11.1 million, attributed to lower borrowing rates after credit-rating upgrades and a lower average debt balance. Equity-method venture losses fell to $0.2 million from $1.4 million.
- Operating cash flow increased; investing outflows decreased as acquisition spending was lower than in Q1 2014. Common-share distributions paid rose along with the dividend per share and share count.
Outlook, risks and unusual items
- Spending expectations for the remainder of 2015: recurring capital expenditures of $7–13 million, planned improvements and upgrades of $5–10 million, and development costs of $33–38 million. Scheduled debt principal payments were approximately $83.6 million.
- Management said operating cash flow, equity issuance and available revolver capacity should fund its current plan, but noted that access to debt and equity capital is not assured. Risks include economic and local market conditions, competition and occupancy or rental-rate pressure, interest rates, refinancing and leverage, acquisition and development execution, REIT qualification, joint ventures, and natural-disaster or environmental exposure. Storage demand is seasonal, generally stronger in summer.
- No specific earnings or revenue guidance is provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- During the quarter, seven facilities were acquired for an aggregate purchase price of approximately $49.3 million, including the closing of four facilities in the second tranche of the HSRE acquisition. Four additional facilities under construction were under contract for $85.2 million, subject to customary conditions. Five joint-venture development projects were in progress.
- On April 22, 2015, after quarter-end, the revolver was amended: capacity increased from $300 million to $500 million, pricing decreased and maturity was extended to April 22, 2020.
- Interest-rate swaps had a $9.1 million fair-value liability at quarter-end; the company estimated $5.6 million would be reclassified to interest expense over the next 12 months. A 100-basis-point increase in rates was estimated to raise annual interest expense on floating-rate debt by about $0.8 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No impairment losses were recognized in the quarter.
Most important facts for investors to verify
- Reconcile the filing’s differing quarter-end weighted-average interest-rate disclosures: the debt note reports 2.74% for facility and term-loan borrowings after swaps, while MD&A reports 2.95%; MD&A separately gives a 3.76% average rate on total debt for the quarter.
- Review the $83.6 million of scheduled principal payments for the remainder of 2015, refinancing plans and the maturity profile of mortgage debt.
- Assess whether same-store rent and occupancy growth can continue, given seasonal fluctuations and competition, and whether cost growth—especially property taxes—will moderate.
- Track acquisition and development commitments, including the $85.2 million contracted purchases and projected 2015 development spending, against available liquidity and equity issuance.
- Confirm the impact of the post-quarter revolver amendment and the company’s continuing compliance with financial covenants.