Self-storage REIT CubeSmart's (NYSE:CUBE) second-quarter 2019 earnings, released on July 26, indicated progress in the company's three-pronged revenue approach of owning and operating storage facilities, developing and selling new properties, and providing third-party management services to owners of competing properties. Midway through the year, the company also appears to be dealing effectively with an increase in self-storage supply in its most important markets. As we break down the details of the last three months, note that all comparative numbers below are presented against those of the prior-year quarter.
CubeSmart: The raw numbers
|Metric||Q2 2019||Q2 2018||Change|
|Revenue||$136.0 million||$127.8 million||6.4%|
|Net income||$49.4 million||$38.4 million||28.6%|
|Diluted earnings per share||$0.26||$0.21||23.8%|
What happened at CubeSmart this quarter?
- Adjusted funds from operations (FFO) increased 7% to $81.1 million. On a per-share basis, adjusted FFO grew 2.4% to $0.42.
- Same-store net operating income (NOI) edged up by 1.3%, while same-store occupancy averaged 93.1% during the quarter.
- CubeSmart acquired 21 stores located in Arizona, North Carolina, Georgia, Massachusetts, South Carolina, Tennessee, and Florida, for a total investment of $170.8 million.
- CubeSmart's HVP III joint venture disposed of 50 properties, generating total sale proceeds of $293.5 million. The joint venture recorded a gain of $106.7 million on the sale, of which 10%, or $10.6 million, was recognized by CubeSmart as equity earnings from real estate investments. The gain was responsible for $0.06 of the company's $0.26 in diluted earnings per share (EPS) during the quarter.
- Following the sale, CubeSmart purchased its partner's 90% interest in the 18 properties that remain in the HVP III joint venture for $128.3 million.
- At quarter-end, CubeSmart's owned portfolio of 516 stores comprised 36 million rentable square feet.
- The company added 59 stores to its third-party management program, bringing the total number of non-owned stores under CubeSmart management to 648. CubeSmart has expanded its third-party management base by 105 stores, or nearly 20%, since the beginning of 2019. Property management fee income rose 23% to $6.1 million. Although still a small portion of overall revenue, as I've recently discussed, management services is CubeSmart's fastest-growing business and an important tool in its efforts to absorb the effects of increasing capacity in major markets.
- The company raised development capital by selling 3.4 million common shares through its "at the market" (ATM) equity distribution program, for net proceeds of $110.5 million. CubeSmart also added to its development war chest by increasing average debt balances by $128 million to $1.82 billion.
What management had to say
In CubeSmart's earnings conference call, CEO Chris Marr discussed the increase in the supply of storage space in major metropolitan markets as competitors develop additional properties, often in advance of actual demand. Marr noted that about 50% of CubeSmart's properties are affected by proximal competitor expansion. The CEO provided detail on this phenomenon below as of the midpoint of the year:
The operators of many of these new developments are being very aggressive in rate and discounting, and our revenue management team is nimbly navigating the delicate balance between effective rate and physical occupancy with the objective always being to maximize revenue over the long term. Consistent with the commentary we provided when we introduced 2019 guidance, [the same-store base] being impacted by new supply, [is] experiencing revenue growth 200 to 300 basis points lower than [the same-store base] not impacted by new supply. This delta is almost entirely attributable to rate as occupancy growth is roughly the same in both poles. Slightly longer lengths of stay and continued acceptance of in-place customer rate increases continue to be positive performance factors.
In addition to top-line pressure on rate, new competition is putting pressure on customer acquisition costs as we see continued escalation in digital marketing costs. Our marketing team remains disciplined in allocating spend in a manner that generates a positive return relative to lifetime value of the customer.
Looking ahead to the third quarter, the company anticipates diluted EPS of $0.20 to $0.21. Adjusted FFO is pegged at roughly double this level, in a range of $0.43 to $0.44. For the full year, CubeSmart tightened its 2019 outlook and now expects diluted EPS to land between $0.85 and $0.88, against a previous range of $0.85 to $0.89. Adjusted FFO received a similarly mild tweak, with a new targeted band of $1.66 to $1.69 versus the prior expectation of $1.65 to $1.69. Despite the expansion of competing self-storage properties, CubeSmart's 2019 earnings picture remains largely intact.