CubeSmart Q2 2016 Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2016; the combined filing covers CubeSmart and its operating partnership. CubeSmart is a self-storage REIT operating in 22 states and the District of Columbia. At quarter-end it owned 464 facilities with approximately 32.0 million rentable square feet and managed 277 additional facilities for third parties.
Financial results and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $126.5 million | $109.9 million | $245.4 million | $213.6 million |
| Operating income | $33.0 million | $25.7 million | $61.7 million | $46.4 million |
| Net income | $20.4 million | $13.9 million | $36.2 million | $22.4 million |
| Common-shareholder net income | $18.9 million | $12.2 million | $33.2 million | $19.2 million |
| Diluted EPS | $0.11 | $0.07 | $0.19 | $0.11 |
| Operating cash flow | Not separately reported | Not separately reported | $124.0 million | $100.7 million |
Same-store revenue increased 7.8% in Q2 and 8.1% for the first six months. Same-store net operating income (NOI) rose 11.0% and 11.9%, respectively. Q2 same-store average occupancy was 93.6% versus 92.8%; realized annual rent per occupied square foot was $15.44 versus $14.40. Total portfolio NOI was $84.9 million in Q2, up 18.5%, and $163.6 million for the six-month period, up 18.6%.
At June 30, total assets were $3.36 billion and total liabilities were $1.59 billion. Debt carrying amounts totaled approximately $1.43 billion: $742.4 million of senior notes, $398.5 million of term loans, $150.0 million drawn on the revolver, and $138.7 million of mortgage loans and notes payable. Cash and cash equivalents were $3.4 million, with $350.0 million available under the revolving facility. The weighted-average effective rate on credit-facility and term-loan borrowings, after swaps, was 2.41%.
Material changes versus prior comparable period
- Q2 revenue rose 15.2%, operating income 28.4%, net income 46.9%, and common-shareholder net income 54.8% year over year. For the first six months, revenue increased 14.9% and common-shareholder net income 73.2%.
- Management attributed same-store revenue growth to improved occupancy, higher rental rates, and fewer promotional discounts. Acquisitions and third-party management growth also contributed.
- Interest expense increased 12.3% in Q2 and 10.8% for the six-month period, primarily reflecting higher average debt used to fund acquisitions. Acquisition-related costs rose to $2.6 million for Q2 and $4.9 million for the half year.
- Operating cash flow increased $23.3 million year over year. Investing outflows rose to $347.1 million, chiefly reflecting acquisitions and development. Financing cash flow was $163.6 million, including net revolver borrowing and common-share issuance.
Outlook, risks, contingencies, and unusual items
- For the rest of 2016, management estimated recurring capital expenditures of $8–13 million, planned improvements and upgrades of $3–8 million, development costs of $29–34 million, and scheduled debt principal payments of approximately $23.6 million.
- The company acquired 17 facilities for approximately $270.9 million during the first half. Three facilities under construction, with an aggregate purchase price of $43.3 million, were under contract and expected to close by Q1 2017, subject to due diligence and customary conditions. Subsequent to quarter-end, it acquired two Nevada facilities for approximately $23.2 million.
- Management said operating cash flow, equity-market access, and available revolver capacity were expected to support the business plan; however, future access to debt and equity capital is not assured. The company was in compliance with its debt covenants and anticipated continued compliance.
- Key risks include local and national economic conditions, competition and the ability to maintain occupancy and rental rates, interest rates and operating costs, capital availability and refinancing, acquisition and development execution, joint-venture exposure, and natural disasters or environmental liabilities. A 100-basis-point increase in rates on variable-rate debt was estimated to increase annual interest expense by approximately $2.5 million.
- No impairment losses were recorded in the first half. Acquisition-related costs and fees from the HVP joint venture affected reported results; HVP acquisition fees were $1.2 million in Q2 and $1.8 million year to date. Certain development joint ventures include partner put/call rights, and future facility acquisitions remain subject to closing conditions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing provides no specific full-year revenue, earnings, or FFO guidance.
Important facts for investors to verify
- Whether same-store rent and occupancy growth persists, and how performance in recently acquired or developed properties develops.
- Debt maturities, variable-rate exposure, covenant headroom, and the availability and cost of refinancing or additional capital.
- Funding and completion of planned development and contracted acquisitions, including potential joint-venture obligations and partner redemption rights.
- How much reported earnings growth reflects recurring operations versus acquisition effects, acquisition fees, and increased share count.
- Cash available for distributions relative to operating cash flow, capital requirements, and the company’s substantial investment program.