CubeSmart 2014 Form 10-K Summary
Business context and reporting period. CubeSmart is a self-managed REIT focused on owning, operating, acquiring, developing and managing self-storage facilities. This filing covers the fiscal year ended December 31, 2014; it is an annual report, not a standalone fourth-quarter filing. CubeSmart conducts operations through CubeSmart, L.P., which it owned 98.6% of at year-end. The company owned 421 facilities across 22 states and Washington, D.C., with 28.6 million rentable square feet, and managed 174 additional facilities for third parties, including 35 held in an unconsolidated venture.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $377.0 million | $318.4 million |
| Operating income | $81.5 million | $54.4 million |
| Operating margin | 21.6% | 17.1% |
| Net income attributable to CubeSmart common shareholders | $20.4 million | $35.4 million |
| Basic and diluted EPS | $0.14 | $0.26 |
| Cash provided by operating activities | $166.0 million | $142.9 million |
| Cash used in investing activities | $522.7 million | $282.9 million |
| Cash provided by financing activities | $356.4 million | $138.7 million |
| Adjusted FFO, a non-GAAP measure | $165.4 million | $127.1 million |
Amounts are consolidated; revenue, income and cash flow figures are for the year ended December 31. Operating margin is operating income divided by total revenue. Adjusted FFO is a supplemental measure, not a substitute for GAAP income or cash flow.
- Revenue increased 18.4%. Rental income rose 17.7%, reflecting acquisitions and same-store growth; same-store rental income increased 6.8%. Same-store average occupancy improved to 90.8% from 88.2%, and realized annual rent per occupied square foot rose to $13.86 from $13.35.
- Total portfolio period-end occupancy increased to 89.1% from 88.3%. Same-store net operating income increased 9.6%; company-wide NOI rose 22.0% to $244.3 million, partly reflecting portfolio expansion.
- Net income attributable to common shareholders fell 42.5% despite higher operating income. The 2013 result included $27.4 million of gains on facility dispositions; 2014 had no comparable discontinued-operation disposal gain. Interest expense also rose to $46.8 million from $40.4 million, and equity-method losses from real estate ventures increased to $6.3 million from $1.2 million.
- Fourth-quarter 2014 revenue was $100.3 million and net income attributable to CubeSmart was $5.5 million, or $0.02 per share. Fourth-quarter 2013 figures were $83.0 million, $22.9 million and $0.15 per share, respectively; the comparison is affected by prior-year disposition gains.
- Year-end debt totaled approximately $1.174 billion, compared with approximately $1.139 billion a year earlier. Debt to total capitalization was 23.9% versus 32.8%, and debt to undepreciated asset cost was 35.8% versus 41.3%. The company reported $2.9 million of cash and cash equivalents and $222.0 million available under its revolving credit facility.
- Common-share dividends declared totaled $0.55 per share for 2014, up from $0.46 in 2013; the fourth-quarter 2014 dividend was $0.16 per share. Future distributions are not assured and remain subject to Board discretion and credit-facility restrictions.
Material changes, outlook and risks
- Expansion and financing: CubeSmart acquired 53 facilities for approximately $568.2 million, opened two developed facilities, and ended the year with 421 owned facilities versus 366 in 2013. It raised $273.0 million net through its at-the-market program and approximately $143.0 million net in a public common-share offering, creating dilution while funding investment activity. The company also amended a $100 million term loan, lowering its spread and extending maturity to January 2020. Credit ratings were upgraded by Moody’s and S&P, both with stable outlooks.
- 2015 plans and spending: Management said it intended to pursue selective acquisitions in targeted markets, opportunistically dispose of non-core facilities, and grow third-party management. Expected 2015 spending included $10–15 million of recurring capital expenditures, $7–11 million of planned improvements, and $40–45 million for new-facility development. Scheduled 2015 debt principal payments were approximately $84.9 million. These are plans and estimates, not earnings guidance.
- Commitments: Five joint-venture development projects had approximately $50.3 million of construction commitments payable in 2015 and 2016. Four facilities under purchase contract had an aggregate price of $85.2 million, subject to customary conditions; the filing gives no assurance they will close. Management anticipated the remaining four facilities in the HSRE acquisition would close by March 31, 2015.
- Liquidity and debt risks: Management considered operating cash flow, equity access and revolver availability adequate for its current plan, but noted reliance on external capital and uncertainty about future market access. Debt maturities, refinancing conditions, covenant compliance and higher interest rates could constrain investment, cash flow or distributions. A 100-basis-point increase in rates on variable-rate debt was estimated to increase annual interest expense by about $0.8 million.
- Business and other risks: Results depend on occupancy, rental rates, customer collections and local supply and competition. Florida and New York each represented about 17% of 2014 revenue; Texas represented 10% and California 8%. Other disclosed risks include acquisition and development execution, rising operating costs and taxes, joint-venture partner conflicts, uninsured property losses, environmental and accessibility compliance, cybersecurity, litigation and maintaining REIT status.
- Unusual items and accounting: The company recorded a $0.5 million gain on the sale of a London asset for approximately $7.0 million. It adopted revised discontinued-operations guidance in 2014; the adoption had no material impact, and the London sale did not qualify as discontinued operations. The 2013 comparison includes disposition gains that did not recur in 2014.
Important facts for investors to verify
- How much of revenue and NOI growth reflects same-store performance versus acquisitions, and whether occupancy and achieved rents remain sustainable.
- Whether acquired and newly developed facilities meet return expectations, including occupancy ramp-up and integration costs.
- Actual cash available after capital spending, debt service and distributions; reconcile GAAP cash flows with FFO and adjusted FFO.
- Debt maturities, refinancing needs, interest-rate exposure, covenant headroom and the availability and cost of future capital.
- Progress and final economics of joint-venture developments, construction commitments and pending facility purchases.
- Potential effects of common-share issuance and any changes to quarterly distributions; the filing provides no specific earnings or distribution guidance.