CubeSmart — Q2 2012 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. CubeSmart is a self-storage REIT operating through CubeSmart, L.P.; at quarter-end it owned 370 facilities with approximately 24.4 million rentable square feet and managed 106 additional facilities.
Financial and operating performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $69.3 million | $56.5 million | $135.4 million | $111.2 million |
| Operating income | $7.9 million | $10.5 million | $15.2 million | $19.9 million |
| Net income (loss) attributable to common shareholders | $1.0 million | $0.9 million | $(4.3) million | $0.8 million |
| Basic and diluted EPS | $0.01 | $0.01 | $(0.04) | $0.01 |
| Funds from operations (FFO), non-GAAP | $22.3 million | $16.0 million | $42.3 million | $29.9 million |
- Q2 NOI was $41.7 million, up 28%; same-store NOI was $34.9 million, up 5.2%. Total revenue growth was 23%, with $9.8 million of Q2 rental-income growth attributed to 2011 and 2012 acquisitions. Same-store revenue increased 3.0%.
- Same-store average occupancy increased to 81.5% from 78.7% in Q2 and to 80.0% from 77.8% for the six-month period. Same-store realized annual rent per occupied square foot declined to $11.33 from $11.47 in Q2 and to $11.49 from $11.57 for the six months.
- Q2 net income included $6.2 million of gains on property dispositions; continuing operations attributable to common shareholders were a loss of $5.2 million. For the first half, continuing-operations loss attributable to common shareholders was $10.9 million. The six-month common-shareholder loss also reflected $3.0 million of preferred distributions.
- Six-month operating cash flow was $58.6 million, compared with $38.2 million. Investing used $76.9 million, including $102.0 million for storage-facility acquisitions, additions and improvements, partly offset by $22.7 million of property-sale proceeds. Financing provided $147.0 million. Cash and cash equivalents ended at $137.8 million, versus $9.1 million at year-end 2011.
- At June 30, total debt was approximately $994.8 million: $250.0 million of senior notes, $500.0 million of unsecured term loans and $244.8 million of mortgages and notes payable. The senior notes bear 4.80% interest and mature July 2022. The company reported $300 million available on its revolving facility and compliance with debt covenants.
- Total assets were $2.09 billion and total liabilities were $1.07 billion. The filing reports a $18.3 million fair-value liability on interest-rate swaps; the six-month unrealized swap loss was $6.1 million in other comprehensive loss.
Material changes versus prior period
- Revenue and NOI rose substantially, primarily from acquisitions, with additional improvement in same-store occupancy and operating performance.
- Operating income fell despite higher revenue: depreciation and amortization rose 79% in Q2 and 75% for the first half, mainly due to acquired properties and amortization of acquired lease intangibles. Interest expense also increased, reflecting higher debt balances.
- Q2 common-shareholder income was supported by disposition gains, while first-half common-shareholder results moved to a loss. The 2012 periods included preferred-share distributions; none were reported in 2011.
- The company issued $250 million of 4.80% senior notes in June, used $129 million of proceeds to repay revolving-credit borrowings, and held the remaining proceeds as cash for general corporate purposes. Mortgage debt declined from $358.4 million at year-end to $244.8 million at June 30.
- Capital investment in facilities increased compared with the first half of 2011. Eight facilities were sold during the first half, producing the $6.2 million recorded disposition gain.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said it intends to focus on internal growth and selectively pursue acquisitions and development. It expected the last property in the Storage Deluxe portfolio to close in Q3 2012, subject to due-diligence and regulatory conditions.
- Management estimated remaining 2012 recurring capital expenditures of $3 million to $5 million, plus approximately $3 million for store upgrades and rebranding. Scheduled debt principal payments for the remainder of 2012 were approximately $2.9 million. Management stated that operating cash flow, the credit facility and its at-the-market equity program were expected to support its current plan, while noting that capital-market access is not assured.
- Subsequent to quarter-end, CubeSmart reported acquisitions of eight facilities for $116.4 million, including $42.8 million of assumed debt, and repayments of mortgage loans totaling approximately $21.3 million. The filing also describes the Storage Deluxe portfolio transaction as a $560 million acquisition involving 22 facilities, with the final property expected to close in Q3.
- Principal risks cited include economic and local real-estate conditions, competition and the ability to sustain occupancy and rental rates, acquisition and development execution, access to capital and refinancing, interest rates and operating costs, counterparty performance, REIT qualification, taxes, regulation, and environmental or natural-disaster exposure. A 100-basis-point increase in rates on floating-rate debt was estimated to raise annual interest expense by about $1.0 million.
- The company reported no impairment losses, no off-balance-sheet arrangements, and effective disclosure controls. It also remained obligated on related-party office leases through 2014; future gross payments were $1.236 million, partly offset by $0.786 million due from a subtenant.
Important facts for investors to verify
- Whether the remaining Storage Deluxe acquisition closed as expected and how the acquired facilities contribute to revenue, NOI and cash flow.
- Whether same-store occupancy gains can be sustained while realized rents per occupied square foot have declined.
- Debt maturities, covenant headroom, refinancing needs and the use of the remaining senior-note proceeds; confirm reported cash and revolver availability against subsequent transactions.
- The extent to which GAAP earnings depend on property-sale gains and acquisition-related accounting, including lease-intangible amortization.
- Future cash requirements for distributions, acquisitions, recurring capital expenditures and store upgrades/rebranding, alongside access to debt and equity markets.