CubeSmart 10-Q Summary — Quarter Ended June 30, 2015
Business context and reporting period
CubeSmart, a REIT operating through CubeSmart, L.P., owns, operates, develops, acquires and manages self-storage facilities. This combined, unaudited filing covers the second quarter and first six months of 2015, with comparisons to 2014. At quarter-end, the company owned 433 facilities totaling 29.6 million rentable square feet and managed 182 third-party facilities. Its owned portfolio spanned 22 states and Washington, D.C.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Change |
|---|---|---|---|
| Total revenue | $109.9 million | $92.3 million | +19.0% |
| Operating income | $25.7 million | $22.0 million | +16.9% |
| Net income | $13.9 million | $8.0 million | +73.6% |
| Net income attributable to common shareholders | $12.2 million | $6.4 million | +91.4% |
| Basic and diluted EPS | $0.07 | $0.04 | Up $0.03 |
| Net operating income (NOI), total portfolio | $71.7 million | $60.3 million | +18.9% |
For the six months ended June 30, revenue was $213.6 million, up 18.9%; operating income was $46.4 million, up 14.2%; net income was $22.4 million, up 78.2%; and common-shareholder net income was $19.2 million, up 103.5%. Diluted EPS was $0.11 versus $0.07. First-half operating cash flow was $100.7 million, compared with $71.6 million in 2014.
- Same-store operations: Q2 revenue grew 6.8% and NOI grew 8.4%. Average occupancy was 93.0%, up 1.9 percentage points; period-end occupancy was 93.8%, up 1.4 points. Realized annual rent per occupied square foot increased 4.9% to $14.42.
- Cash flow and investment: First-half investing cash outflow was $135.7 million, including $85.6 million for acquisitions, $11.9 million for facility improvements and $37.0 million for development. Financing cash flow was $35.3 million. Cash and equivalents were $3.2 million at June 30.
- Debt and liquidity: Debt totaled approximately $1.204 billion at June 30: $500 million senior notes, $400 million term loans, $161.6 million drawn on the revolver and $142.3 million mortgage loans and notes payable. The $500 million revolver had $338.4 million available. Total liabilities were $1.332 billion. The filing reports covenant compliance.
- Distributions and equity: First-half common and preferred distributions paid were $52.9 million and $3.0 million, respectively. The company sold 2.3 million shares through its at-the-market program for $57.1 million gross proceeds; 6.8 million shares remained authorized for issuance under the program.
Material changes versus the prior comparable period
- Revenue growth reflected stronger same-store occupancy and rental rates, as well as acquired properties. The company attributed approximately $10.3 million of Q2 rental-income growth to facilities acquired in 2014 and 2015.
- Property operating expenses rose 19.0% in Q2, while depreciation and amortization increased 24.9%, mainly due to acquisitions. Despite this, total portfolio NOI rose 18.9%.
- Q2 interest expense fell to $10.9 million from $12.0 million. Management attributed the reduction to improved credit ratings, lower facility pricing and repayment of higher-rate secured debt. The average effective debt rate was 3.63% versus 3.99%.
- Mortgage loans and notes payable declined from $195.9 million at year-end 2014 to $142.3 million at June 30, 2015; revolver borrowings increased from $78.0 million to $161.6 million. The revolver was amended in April, increasing its size from $300 million to $500 million and extending maturity to April 2020.
- First-half acquisition activity was lower than in 2014: 11 facilities were acquired for approximately $93.0 million, versus 19 facilities for approximately $230.7 million in the comparable 2014 period. Development spending increased.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. For the remainder of 2015, management expected recurring capital expenditures of $5–12 million, planned improvements and upgrades of $3–8 million, development costs of $25–30 million and scheduled debt principal payments of approximately $29.5 million.
- Management said operating cash flow, equity-market access and revolver availability were expected to support the current business plan and covenant compliance. It cautioned that future capital access is not assured and depends on leverage, asset values, market conditions and investor perceptions.
- Four facilities under construction were under contract for an aggregate purchase price of $90.2 million, with closings expected by Q4 2016 after construction and occupancy approvals; completion is subject to customary conditions. Subsequent to quarter-end, the company acquired three facilities for $50.4 million.
- Development and joint-venture commitments include facilities expected to open in 2015 and 2016. Certain consolidated ventures include partner put/call options and accrued purchase obligations; the filing reports $7.3 million and $8.9 million accrued on two such obligations at June 30.
- Interest-rate swaps had a fair-value liability of $7.8 million. The company estimated $5.4 million of accumulated swap losses would be reclassified as higher interest expense over the next 12 months. A 100-basis-point increase in variable rates was estimated to increase annual interest expense by about $1.6 million.
- Key risks include local and national economic conditions, competition and the ability to maintain occupancy and rents, operating-cost and interest-rate increases, refinancing and capital availability, acquisition/development execution, joint-venture and counterparty risks, natural disasters, environmental liabilities and maintaining REIT qualification. The filing reports no impairment losses for the first half of 2015 and no discontinued operations in that period.
Important facts for investors to verify
- How much of reported growth reflects durable same-store performance versus acquisitions and other portfolio changes.
- Whether rent increases and occupancy gains can continue while controlling property expenses, especially real estate taxes.
- Debt maturities, variable-rate exposure, covenant headroom and the company’s continued access to revolver and equity financing.
- Whether development projects, contracted acquisitions and associated spending meet expected timing, costs and operating targets.
- The implications of ongoing share issuance and distributions for per-share results and liquidity, and the terms and potential cash impact of joint-venture and OP-unit redemption obligations.