CubeSmart 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. The combined filing covers CubeSmart, a REIT, and CubeSmart, L.P., its operating partnership. Unless noted, amounts below are in U.S. dollars; financial statement amounts are in millions.
Business context
CubeSmart owns, operates, develops, manages and acquires self-storage facilities. At June 30, 2013, it owned 386 facilities totaling approximately 25.8 million rentable square feet and managed 133 facilities for third parties. The company operates in 21 states and the District of Columbia; rental leases are generally month-to-month.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $82.3 | $67.3 | $160.8 | $131.4 |
| Operating income | $15.6 | $7.2 | $25.8 | $13.8 |
| Net income (loss) attributable to common shareholders | $1.0 | $1.0 | $(0.8) | $(4.3) |
| Common-share EPS | $0.01 | $0.01 | $(0.01) | $(0.04) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $65.3 | $52.6 |
- Operating performance: Q2 total portfolio net operating income (NOI, a non-GAAP measure) was $52.3 million, up 29.1%. Same-store revenue increased 9.0% and same-store NOI increased 13.1%. Same-store period-end occupancy was 90.0%, versus 84.1%; average occupancy was 88.2%, versus 81.9%. Realized annual rent per occupied square foot was unchanged at $12.14.
- Margins and costs: Q2 operating margin was approximately 18.9% (operating income divided by revenue), versus approximately 10.7% a year earlier. Property operating expenses rose 12.2% for the quarter and 15.4% year to date; management cited acquired properties, real-estate taxes, and, for the first half, snow removal and utilities. These calculated margins are not company-reported measures.
- Cash flow and investment: First-half operating cash flow was $65.3 million. Investing activities used $104.0 million, including $93.7 million for acquisitions, $9.4 million for facility improvements and $17.6 million for development, partly offset by property-sale proceeds. Financing activities provided $38.3 million. Cash declined by $0.5 million to $4.0 million.
- Debt and liquidity: Total debt was approximately $1,074.5 million at June 30, versus $1,023.8 million at year-end 2012. Debt comprised $250 million of 4.80% senior notes, $610 million of term loans, $110 million drawn on the revolver, and $214.5 million of mortgage debt. Revolver availability was $189.8 million. Management reported compliance with debt covenants.
- Equity and distributions: The company paid $29.3 million in common distributions and $3.0 million in preferred distributions during the first half. It issued approximately 1.1 million shares under its new at-the-market program through June 30, generating $19.3 million in gross proceeds.
Changes versus prior comparable periods
- Q2 revenue rose 22.3%, primarily reflecting acquired facilities and improved same-store occupancy. First-half revenue rose 22.4%.
- Operating income more than doubled in Q2 and was 86.2% higher for the first half. However, first-half common-shareholders’ results remained a loss; prior-year results included larger gains on property dispositions.
- First-half common-shareholder loss narrowed from $4.3 million to $0.8 million. First-half continuing-operations loss attributable to common shareholders also narrowed, from $12.3 million to $1.2 million.
- Interest expense increased 15% in Q2 and 13% year to date as average debt balances rose to fund growth. June 2013 amendments extended several loan maturities and reduced certain borrowing spreads.
Outlook, risks and unusual items
- Outlook and spending plans: The filing does not provide earnings or revenue guidance. For the remainder of 2013, management estimated recurring capital expenditures of $4–$8 million, development costs of $10–$15 million, and scheduled debt principal payments of approximately $16.1 million. Management expected operating cash flow, the revolver and access to the equity market to support its current plan, while noting capital-market access is not assured.
- Growth activity: CubeSmart acquired 10 facilities for approximately $94.4 million in the first half. It was developing a Pennsylvania mixed-use project expected to be completed in Q4 2013 and a Bronx storage facility expected to be completed in Q1 2014. Subsequent to quarter-end, it sold eight Knoxville-area facilities for $25.0 million.
- Financing and market risks: Debt covenants include maximum leverage and minimum fixed-charge coverage requirements; the company stated it was in compliance. A 100-basis-point rise in rates on floating-rate debt was estimated to increase annual interest expense by approximately $2.1 million. The filing also identifies risks from economic conditions, occupancy and rental pricing, competition, operating costs, refinancing and capital availability, acquisitions and development, REIT qualification, and natural disasters.
- Unusual disclosures: The company revised 2012 cash-flow presentation for a $6.0 million classification error involving acquisition deposits, decreasing both operating cash provided and investing cash used by that amount; management deemed the prior-period impact immaterial. Q2 included $1.6 million of acquisition-related costs. A favorable $7.2 million of other comprehensive income in Q2 mainly reflected interest-rate-swap valuation changes and reclassifications, rather than operating earnings.
Important facts for investors to verify
- Whether same-store occupancy and NOI gains persist, and whether rental rates can improve given flat realized rent per occupied square foot in the first half.
- Debt maturities, floating-rate exposure, covenant headroom and continued access to the revolver and capital markets.
- Actual spending, completion timing and returns from the Pennsylvania and Bronx development projects, and the use of ATM proceeds.
- The effects of acquisitions, dispositions and acquisition costs on comparable operating results and reported earnings.
- The revised prior-year cash-flow presentation and the terms and closing status of the post-quarter Knoxville property sale.