CubeSmart — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. CubeSmart is a self-storage REIT operating through CubeSmart, L.P. It owned 485 stores totaling approximately 33.8 million rentable square feet and managed 496 third-party stores at quarter-end. The filing presents their consolidated results as one enterprise.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $142.9 million | $133.0 million | +7.4% |
| Operating income | $50.4 million | $40.4 million | +24.8% |
| Net income | $34.8 million | $25.2 million | +38.1% |
| Net income attributable to common shareholders | $34.4 million | $25.0 million | +37.8% |
| Diluted EPS | $0.19 | $0.14 | +$0.05 |
| Net cash from operating activities | $66.1 million | $67.9 million | -$1.8 million |
| FFO attributable to common shareholders and OP unitholders | $71.5 million | $65.5 million | +9.1% |
- Rental income rose 6.1%; same-store rental income increased 3.7%, primarily from higher rents. Same-store realized annual rent per occupied square foot rose 3.6% to $16.19. Same-store average occupancy was 91.9%, versus 91.8%.
- Property-management fee income grew 49.1% to $4.5 million as managed stores increased to 496 from 356. Total property operating expenses increased 8.6%, including higher management-program costs, property taxes and snow removal.
- Operating margin was approximately 35.3%, versus 30.4%. Same-store NOI rose 4.0%; total portfolio NOI increased 6.8% to $94.1 million. NOI and FFO are non-GAAP measures.
- Debt carrying value was approximately $1.69 billion, up from approximately $1.64 billion at December 31, 2017. Interest expense increased 11.4% to $15.2 million; average debt was $1.7 billion and its weighted-average effective rate rose to 3.87% from 3.71%.
- Cash and cash equivalents were $6.0 million, with $2.9 million of restricted cash. Revolver availability was $362.9 million. The company reported covenant compliance. Operating cash flow covered $57.2 million of investing outflows, while financing outflows were $9.2 million.
Material changes and activity
- Development spending increased: Q1 investing cash outflows were $57.2 million, compared with $21.2 million in Q1 2017. Development costs included $20.4 million to acquire a partner’s interest in a development venture.
- The company acquired one Texas store for $12.2 million, funded partly with $4.8 million of OP units. It also contributed $10.3 million to an unconsolidated venture that acquired four stores.
- Three additional stores were under contract for an aggregate $74.2 million, with $4.8 million in deposits; completion remained subject to customary conditions. Two were expected to close after construction, by Q3 2018.
- Development ventures had invested $146.2 million toward expected total costs of $252.7 million for seven projects; completion was expected by Q4 2019.
- Q1 distributions paid to common shareholders were $54.7 million, versus $48.7 million in Q1 2017.
Outlook, risks and unusual items
- For the remainder of 2018, management expected recurring capital expenditures of $9–13 million, capital improvements and store upgrades of $4–7 million, and new-store development costs of $55–70 million. Scheduled debt principal payments were approximately $2.0 million. No specific earnings or revenue guidance was provided.
- Management said operating cash flow, equity-market access and revolver availability were expected to support the current business plan and covenant compliance, while cautioning that future access to debt and equity capital is not assured.
- Key risks include rental-rate and occupancy competition, economic conditions, interest rates and operating costs, refinancing and leverage, development and acquisition execution, natural disasters, environmental matters, REIT qualification, and joint-venture and technology risks. A 100-basis-point increase in rates on variable-rate debt was estimated to raise annual interest expense by approximately $3.4 million.
- A New Jersey consumer class action settlement received final court approval on April 19, 2018. Previously reserved settlement costs were not material. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- New revenue and other accounting standards adopted in January 2018 had no material reported effect. The company was evaluating the 2019 lease standard, with the primary expected impact relating to ten ground leases.
Important facts for investors to verify
- Whether same-store rent growth and occupancy trends persisted beyond the seasonally weaker first quarter, and whether higher rents affected customer retention.
- Whether planned 2018 development, improvement and acquisition spending stayed within expectations and was funded without materially increasing leverage.
- Debt maturities, floating-rate exposure, revolver use and covenant headroom, particularly given higher interest expense and rates.
- Closing status and economics of the three pending acquisitions and progress, costs and opening dates for development projects.
- Dividend sustainability against cash generation and REIT distribution requirements; FFO is not a substitute for cash flow or liquidity.