CubeSmart 10-Q Summary — Quarter Ended June 30, 2018
Unaudited results for CubeSmart and its operating partnership. CubeSmart is a self-storage REIT; substantially all operations are conducted through the operating partnership. It owned 486 properties across 23 states and Washington, D.C., and managed 535 third-party properties at quarter-end.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Change |
|---|---|---|---|
| Revenue | $147.8 million | $138.6 million | +6.7% |
| Operating income | $54.9 million | $47.5 million | +15.5% |
| Net income | $38.8 million | $32.8 million | +18.0% |
| Net income attributable to common shareholders | $38.4 million | $32.5 million | +18.3% |
| Diluted earnings per share | $0.21 | $0.18 | +16.7% |
- Quarterly rental income rose 5.5%; same-store rental income increased 3.3%, mainly from higher rental rates. Same-store realized annual rent per occupied square foot was $16.33, up from $15.81.
- Same-store average occupancy was 93.6%, unchanged year over year; quarter-end same-store occupancy was 94.4% versus 94.5%. Total portfolio quarter-end occupancy was 92.5% versus 93.0%.
- Property management fee revenue grew 42.5% to $4.9 million, with managed stores increasing to 535 from 390 a year earlier. Higher property operating costs partly offset revenue growth.
- For the six months ended June 30, revenue was $290.7 million (+7.0%), net income was $73.6 million (+26.7%), and diluted EPS was $0.40 versus $0.32.
Cash flow, debt and liquidity
- Six-month operating cash flow was $155.7 million, up from $147.0 million. Investing cash outflow was $100.7 million, versus $49.6 million, reflecting greater development spending, venture investment and acquisitions. Financing cash outflow was $54.6 million, compared with $96.0 million.
- At June 30, cash and cash equivalents were $6.5 million, with $3.0 million of restricted cash. The company reported $451.6 million available under its $500 million revolving facility, after outstanding borrowings and a letter of credit.
- Debt carrying value was approximately $1.60 billion: $1.143 billion in senior notes, $347.3 million in revolving and term-loan borrowings, and $109.9 million in mortgage debt. The company reported compliance with applicable financial covenants.
- Average outstanding debt was $1.7 billion in Q2, up $47.8 million year over year. The weighted-average effective interest rate rose to 3.93% from 3.80%; quarterly interest expense increased 10.6% to $15.5 million.
- During the first half, CubeSmart sold 3.1 million shares through its at-the-market program for $96.5 million gross proceeds; 1.6 million shares remained available under the program at June 30.
Material changes, outlook and risks
- Management cited higher rental rates and growth in the third-party management business as key revenue drivers. Property operating expenses increased 10.5% in Q2, including higher management-program costs, property taxes and utilities. Interest expense also rose with higher debt balances and rates.
- The company acquired two Texas stores for $31.2 million in the first half. It had deposits of $6.8 million on four stores under contract for an aggregate $111.2 million; completion remained subject to customary conditions. A Washington, D.C. property was acquired for $34.2 million on July 10, after quarter-end.
- Seven joint-venture development projects were underway, with estimated total construction costs of $252.7 million and expected completion by Q4 2019. For the remainder of 2018, management expected $7–11 million of recurring capital expenditures, $3–6 million of capital improvements and upgrades, and $35–50 million of development costs. No earnings or EPS guidance is provided in the supplied filing text.
- Management said operating cash flow, equity-market access and revolving-credit availability should support its current business plan, while noting that future capital availability and cost are not assured. Risks include economic and market conditions, occupancy and rental-rate competition, interest rates, refinancing and leverage, acquisition/development execution, natural disasters, technology or security incidents, and REIT qualification.
- A New Jersey consumer class-action settlement received final approval in April 2018; previously reserved settlement costs were not material. Management stated that ordinary-course claims may still have adverse effects. No impairment losses were recognized in the first half.
- Accounting changes adopted in 2018, including revenue recognition and the revised definition of a business, had no material effect on reported financial position or results. Most future property acquisitions are treated as asset acquisitions, with related costs capitalized.
Most important facts for investors to verify
- Whether same-store rental-rate growth can persist while occupancy remains stable and property operating costs continue to rise.
- Execution, funding and lease-up performance of the development pipeline and pending acquisitions, including the four stores under contract.
- Debt maturities and refinancing plans, particularly the $200 million term loan due January 2019, alongside floating-rate exposure and interest costs.
- Actual full-year capital spending versus the stated remainder-of-2018 estimates, and continued access to equity and debt funding.
- Future obligations or disputes involving litigation, joint ventures, and redeemable partnership interests; the filing does not quantify a clear maximum exposure for these matters.