CubeSmart — Q1 2017 Form 10-Q
Business context and reporting period. The combined filing covers CubeSmart and its operating partnership for the three months ended March 31, 2017, compared with Q1 2016. CubeSmart is a self-storage REIT operating in 23 states and the District of Columbia. At quarter-end it owned 476 stores (about 32.9 million rentable square feet) and managed 356 third-party stores.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenue | $133.0 million | $118.9 million; up 11.9% |
| Operating income | $40.4 million | $28.7 million; up 40.6% |
| Net income | $25.2 million | $15.9 million; up 59.0% |
| Net income attributable to common shareholders | $25.0 million; diluted EPS $0.14 | $14.2 million; diluted EPS $0.08 |
| Operating cash flow | $67.9 million | $63.5 million |
| FFO attributable to common shareholders and OP unitholders | $65.5 million | $55.7 million |
| FFO, as adjusted | $65.7 million | $58.2 million |
Figures are in U.S. dollars; financial statement amounts are in millions unless noted. FFO and adjusted FFO are non-GAAP measures and should be read alongside GAAP results.
- Same-store performance: Revenue increased 5.4% and net operating income (NOI) increased 6.0% across 432 same-store properties. Average occupancy was 92.2%, up 40 basis points; period-end occupancy was 92.7%, versus 92.2%. Realized annual rent per occupied square foot rose 4.9%, to $15.78.
- Margins and costs: Operating income margin was approximately 30.4%, compared with 24.2% a year earlier. Property operating expenses rose 11.6%, including higher costs at acquired stores and a 4.1% increase in same-store expenses, primarily property taxes. General and administrative expense increased 15.4%; acquisition costs fell from $2.3 million to $0.2 million.
- Cash flow and investment: Investing activities used $19.9 million, versus $196.9 million in Q1 2016, mainly because there were no store acquisitions in Q1 2017 (ten stores were acquired in Q1 2016). Financing activities used $48.0 million, compared with $73.2 million provided in the prior-year quarter, reflecting lower net revolver borrowing and equity proceeds and higher distributions.
- Debt and liquidity: Debt carrying amounts comprised $1.039 billion of senior notes, $53.0 million on the revolver, $398.9 million of term loans, and $107.6 million of mortgage debt, or about $1.60 billion in total. Cash and cash equivalents were $3.1 million, with $446.3 million of revolver availability. Restricted cash was $6.6 million. The company reported compliance with applicable debt covenants.
Changes, outlook, and risks
- Revenue growth reflected higher same-store occupancy and rents, contributions from acquired and opened stores, and a 42% increase in management-fee income as managed stores rose to 356 from 252.
- Interest expense increased 12.5% to $13.6 million, principally because average debt rose to $1.6 billion from $1.3 billion following 2016 acquisitions; the weighted-average effective interest rate decreased to 3.71% from 3.98%.
- Management did not provide a clear full-year earnings or FFO forecast in the supplied filing text. For the remainder of 2017, it expected recurring capital expenditures of $12–$17 million, planned improvements and upgrades of $4–$9 million, and new-store development costs of $45–$55 million. Scheduled debt principal payments were approximately $1.8 million.
- At March 31, the company had no store acquisitions in the quarter, but had deposits of $1.8 million under contract for four stores under construction at a total purchase price of $61.1 million; closings were expected by Q4 2017, subject to customary conditions. Six joint-venture development projects were underway; total project costs were estimated at $321.1 million, with $195.1 million incurred, and completion expected by Q4 2018.
- Subsequent financing: On April 4, 2017, the operating partnership issued $100 million of senior notes and used $104 million of net proceeds to repay Term Loan A. On April 12, CubeSmart acquired an Illinois store for $11.2 million, funded with cash and newly issued Class C units.
- Risks and contingencies: The filing highlights competition and the ability to sustain occupancy and rents, economic and local-market conditions, operating-cost and interest-rate increases, refinancing and capital-market access, development and acquisition execution, REIT qualification, joint-venture exposure, and natural-disaster and environmental risks. A putative New Jersey consumer class action remained pending; management intends to defend it. The filing states litigation outcomes are uncertain and could adversely affect results.
- A 100-basis-point increase in rates on variable-rate debt was estimated to increase annual interest expense by about $3.5 million. The company also estimated a $76.2 million decrease in fair value of fixed-rate debt for a 100-basis-point rate increase; this fair-value sensitivity does not represent an equivalent cash-flow impact.
Important facts for investors to verify
- Whether same-store rent growth and occupancy gains persisted beyond the seasonally stronger summer leasing period.
- How much operating-expense inflation, especially property taxes, offsets revenue and NOI growth.
- Progress and total funding needs for the four contracted acquisitions and six development projects, including whether expected closing and completion dates are met.
- Debt maturities, variable-rate exposure, covenant headroom, and the use of the April 2017 note proceeds to refinance Term Loan A.
- The effect of distributions relative to operating cash flow and FFO, and the distinction between GAAP earnings, FFO, and adjusted FFO.
- Any material developments in the New Jersey class action or other contingencies.