CubeSmart 2020 Q2 Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2020; financial comparisons are with Q2 and the first six months of 2019. CubeSmart is a self-storage REIT operating through CubeSmart, L.P. At quarter-end, it owned 527 stores totaling approximately 37.0 million rentable square feet across 24 states and Washington, D.C., and managed 719 third-party stores.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $163.8 million | $159.0 million | $327.9 million | $311.9 million |
| Net income | $38.9 million | $49.9 million | $77.2 million | $85.7 million |
| Net income attributable to common shareholders | $38.5 million | $49.4 million | $76.4 million | $84.9 million |
| EPS, basic and diluted | $0.20 | $0.26 | $0.39 | $0.45 |
| Net operating income (NOI) | $108.5 million | $108.9 million | $216.8 million | $210.3 million |
| Cash provided by operating activities | Not provided by quarter in the filing text | $188.5 million | $177.3 million |
Revenue increased 3.0% in Q2 and 5.1% for the first half. Common-shareholder net income declined 22.1% and 10.0%, respectively. NOI margin, calculated as NOI divided by total revenue, was approximately 66.2% in Q2 and 66.1% for the first half, compared with 68.5% and 67.4%. NOI is a non-GAAP measure and excludes expenses including depreciation, interest and general and administrative costs.
Same-store Q2 rental income fell 1.2%; realized annual rent per occupied square foot declined 1.3% to $16.69. Same-store average occupancy was 93.0%, unchanged from Q2 2019. For the first half, same-store rental income increased 0.5%, average occupancy was 92.2% versus 92.1%, and realized rent per occupied square foot rose 0.3% to $16.92. Total portfolio period-end occupancy was 92.5%, up from 91.6%.
At June 30, cash and cash equivalents were $3.5 million, restricted cash was $2.9 million, and total assets were $4.02 billion. Debt carrying value was approximately $1.95 billion: $1.85 billion principal on unsecured senior notes, $15.4 million drawn on the revolver, and $93.2 million of mortgage principal. The $750 million revolver had $733.9 million available; its outstanding borrowings carried a 1.26% effective weighted-average rate. The company reported compliance with applicable debt covenants. The filing does not provide a current ratio or other conventional liquidity ratio.
Six-month investing cash outflow was $124.5 million, versus $250.8 million in 2019; financing cash outflow was $116.0 million, compared with $82.5 million of inflow in 2019. Cash, cash equivalents and restricted cash declined by $52.0 million to $6.4 million. Common-share distributions paid were $128.1 million for the six months; the quarterly distribution was $0.33 per share.
Material changes versus the prior comparable period
- Q2 same-store revenue and NOI weakened: same-store revenue declined 2.2% and same-store NOI declined 4.1%. Total revenue growth came largely from acquired and developed stores and increased management fee income.
- Q2 property operating expenses rose 10.4% overall, including higher property taxes and advertising in the same-store portfolio and costs from newer stores.
- Net income comparisons were affected by 2019 gains from an unconsolidated venture’s sale of 50 properties. CubeSmart’s share of venture earnings was $10.5 million in Q2 2019 versus a $0.2 million loss in Q2 2020; for the first half it was $10.8 million versus a $0.2 million loss.
- Interest expense increased 3.1% in Q2 and 4.9% for the first half, primarily because average debt balances were higher to support acquisition activity, partly offset by lower weighted-average borrowing rates.
- For the first half, operating cash flow increased $11.3 million. Investing outflows were lower chiefly because 2019 included a $118.0 million payment to acquire a venture partner’s interest. Financing cash flow shifted largely because 2019 included senior-note and equity proceeds.
Outlook, risks and unusual items
- COVID-19 reduced customer activity, rental volume and rental rates during Q2. CubeSmart kept stores open as an essential business and introduced contactless online rentals. It paused existing-customer rate increases and normal delinquency processes in late March, began resuming them by jurisdiction in May, and expected full resumption by the end of Q3.
- Management said it had not experienced material deterioration in rent collections or occupancy as of the filing, but cautioned that future customer activity and payment ability depend on the pandemic and economic conditions. A prolonged downturn could reduce customer activity, effective rents, collections and operating cash flow.
- For the remainder of 2020, management expected $6–11 million of recurring capital expenditures, $11–16 million of planned improvements and upgrades, and $21.5–36.5 million of new-store development costs. Scheduled debt principal payments were approximately $11.5 million.
- No full-year earnings or revenue guidance is provided in the supplied filing text. Management said operating cash flow, equity-market access and revolver availability were expected to support its plan, while noting that prolonged or intensified capital-market disruption could affect future access to capital.
- CubeSmart acquired three stores for an aggregate approximately $74.7 million during the first half and opened a Brooklyn store in Q2. Four joint-venture development projects were underway, with total expected construction costs of $94.6 million and completion expected by Q2 2021.
- Management reported no material impairment losses in the first half. Legal matters were described as ordinary-course claims, with provisions considered adequate; the filing did not identify a material pending proceeding.
- On August 5, 2020, after quarter-end, the board approved amended bylaws, including more detailed shareholder meeting and nomination requirements and an exclusive Maryland forum provision for specified disputes.
Important facts for investors to verify
- Whether rental rates, move-in volume and same-store NOI recover as rate increases and delinquency procedures resume.
- Whether rent collections and occupancy remain resilient if unemployment or pandemic-related restrictions persist.
- Cash availability and planned capital needs, particularly given the $3.5 million cash balance, distributions and development commitments.
- Debt maturities, refinancing plans and covenant headroom; mortgage principal payments include approximately $45.1 million due in 2021, and $250 million of senior notes mature in July 2022.
- How acquisition and development spending, rising operating costs and higher debt balances affect earnings and cash generation.
- The effects of the August 2020 bylaw changes on shareholder proposal and director nomination processes.