CubeSmart 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a filing limited to 2019 Q4; selected unaudited quarterly figures are noted below. CubeSmart is a self-managed REIT operating through CubeSmart, L.P.
Business context and portfolio
CubeSmart owns, operates, develops, acquires and manages self-storage properties. At year-end it owned 523 stores across 24 states and Washington, D.C., with 36.6 million rentable square feet and 89.5% period-end occupancy, compared with 493 stores, 34.6 million square feet and 89.0% occupancy in 2018. It also managed 649 third-party stores, bringing owned and managed locations to 1,172. Rental agreements are generally month-to-month. Florida and New York each contributed 16% of 2019 revenue; Texas contributed 10% and California 8%.
Financial and operating results
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $643.9 million | $597.9 million | +7.7% |
| Net income | $170.8 million | $165.5 million | +3.2% |
| Net income attributable to common shareholders | $169.1 million | $163.9 million | +3.2% |
| Diluted EPS | $0.88 | $0.88 | Unchanged |
| Operating cash flow | $331.8 million | $304.3 million | +$27.4 million |
| Adjusted FFO, attributable to common shareholders and OP unitholders | $326.3 million | $307.8 million | +6.0% |
Rental income rose 6.7% to $552.4 million, while property-management fees increased 18.3% to $24.0 million as the managed-store count grew. Same-store revenue increased 1.9%; same-store period-end occupancy was 91.2% versus 91.1%, and realized annual rent per occupied square foot rose to $17.01 from $16.70. Same-store property operating expenses increased 4.0%, mainly from higher property taxes and personnel costs.
Property operating expenses were $209.7 million, depreciation and amortization $163.5 million, and interest expense $72.5 million. Net operating income (NOI), a company-defined non-GAAP measure, was $434.2 million, up 8.3%; NOI was approximately 67.4% of revenue. Net income was approximately 26.5% of revenue. These margins are calculated from reported figures and are not company-reported GAAP margin measures.
For Q4 2019, revenue was $165.5 million, net income was $42.5 million and diluted EPS was $0.22, compared with $153.9 million, $48.6 million and $0.26, respectively, in Q4 2018.
Cash, debt and liquidity
Year-end cash and cash equivalents were $54.9 million, and available capacity under the $750 million revolving credit facility was $749.3 million. Net cash used in investing activities was $375.7 million, mainly reflecting acquisitions and development; financing activities provided $95.9 million.
Total debt carrying value was approximately $1.932 billion, versus $1.747 billion a year earlier. It included $1.850 billion principal amount of senior notes and $94.5 million of mortgage loans and notes payable; there were no year-end revolver or term-loan balances. The company reported debt to total market capitalization of 23.9% and debt to undepreciated asset cost of 39.0%. Its weighted-average effective interest rate on outstanding debt rose to 4.06% from 3.93%.
CubeSmart issued $350 million of 4.375% notes due 2029 and $350 million of 3.000% notes due 2030, using proceeds primarily to repay term and revolving borrowings. It also amended its credit facility to a $750 million revolver maturing in 2024. The company reported compliance with applicable debt covenants at year-end. Scheduled 2020 debt principal payments were approximately $12.8 million.
Material changes, outlook and risks
- Growth reflected both operating performance and portfolio expansion: the company acquired 11 individual stores and bought its partner’s 90% interest in HVP III, consolidating 18 remaining properties. It also bought out noncontrolling interests in six development ventures.
- HVP III sold 50 properties before CubeSmart acquired the partner’s interest. The venture recognized $106.7 million in gains, contributing to CubeSmart’s $11.1 million of equity earnings from real estate ventures in 2019, versus a loss in 2018. CubeSmart separately recorded a $1.5 million gain on its sale of one Texas store.
- Management said it would pursue selective acquisitions in targeted markets, evaluate sales of assets with unattractive risk-adjusted returns, and seek to grow third-party management. Five joint-venture development projects were under construction, expected to be completed by Q2 2021.
- 2020 spending estimates: $14–19 million for recurring capital expenditures, $24–29 million for planned improvements and upgrades, and $39–54 million for new-store development. These are expenditure expectations, not earnings guidance; the filing provides no clear numerical 2020 revenue or EPS guidance.
- The company declared $1.29 per common share in 2019 distributions and said it intended to continue quarterly distributions, but future amounts and timing are not assured and remain subject to Board discretion. The 2019 distribution tax characterization was 78.413% ordinary income, 5.207% capital gain and 16.380% return of capital.
- Key risks include competition affecting occupancy and rents, economic or local-market weakness, rising operating costs and interest rates, debt refinancing and capital-market access, acquisition/development execution, REIT qualification, environmental and insurance exposure, and cyber/privacy risks. Florida, New York, Texas and California together generated 50% of revenue.
- There were no real-estate impairment losses in 2017–2019. The company adopted lease accounting Topic 842 in 2019, recording operating-lease right-of-use assets of $41.7 million and lease liabilities of $46.4 million at year-end; prior periods were not restated. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of revenue and NOI growth came from the same-store portfolio versus acquisitions, new stores and third-party management.
- The sustainability of same-store rent growth given higher property taxes and personnel costs, and the difference between average and period-end occupancy measures.
- The effect of HVP III sale gains and other venture-related items on reported earnings, and the company’s recurring earnings and FFO trends excluding unusual items.
- Debt maturities, interest-rate exposure, covenant headroom and access to refinancing or equity capital; year-end availability is not the same as cash on hand.
- Whether planned development and capital spending, acquisition activity and distributions can be funded while maintaining the reported leverage profile.