Business Context and Reporting Period
Company: U-Store-It Trust (Cubesmart)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2009
Overview: The Company is a self-administered REIT owning and operating self-storage facilities in 26 states and the District of Columbia. As of June 30, 2009, the portfolio consisted of 384 facilities totaling approximately 24.7 million rentable square feet. The Company operates in a recessionary environment characterized by higher unemployment and tight credit markets, which has impacted occupancy levels and consumer spending.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|---|
| Total Revenues | $57,012 | $58,370 | $114,401 | $116,024 |
| Net Operating Income (NOI) | $31,010 | $33,593 | $64,031 | $66,856 |
| Operating Income | $6,684 | $7,307 | $15,564 | $15,603 |
| Net Income (Loss) Attributable to Company | $(2,844) | $263 | $(4,953) | $(3,719) |
| Cash Flow from Operating Activities | N/A | N/A | $27,162 | $28,890 |
| Total Debt Outstanding | $943,629 | N/A | $943,629 | N/A |
| Cash and Cash Equivalents | $1,657 | N/A | $1,657 | N/A |
Note: NOI is a non-GAAP measure calculated as Total Revenues less Property Operating Expenses. Total Debt includes revolving credit facility, term loans, and mortgage loans.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 2% year-over-year for the six months ended June 30, 2009. Rental income dropped 2% primarily due to decreased occupancy levels in the same-store portfolio, partially offset by a 12% increase in other property-related income (insurance commissions and merchandise sales).
- Operating Expenses: Property operating expenses increased 2% for the six-month period, driven by a $1.5 million increase in marketing expenses, partially offset by lower repairs and maintenance costs.
- Interest Expense: Interest expense decreased 15% for the six-month period (from $26.8 million to $22.8 million) due to lower interest rates on unsecured debt and reduced outstanding borrowings on the credit facility.
- Discontinued Operations: Net gains on disposition of discontinued operations decreased significantly (from $5.9 million to $2.6 million for the six months) due to fewer asset sales in 2009 compared to 2008.
- Portfolio Changes: The Company sold three facilities in the first half of 2009, reducing the total facility count from 387 to 384.
Guidance, Outlook, and Risks
Liquidity and Capital Resources: The Company faces significant debt maturities in late 2009. The existing $450 million unsecured credit facility and a $46.4 million secured term loan mature on November 20, 2009. Management intends to exercise extension options or refinance.
- New Credit Facility: Subsequent to the reporting period (August 6, 2009), the Company received commitments for a new $450 million senior secured credit facility ($200 million term loan, $250 million revolver) expected to close in Q4 2009.
- Joint Venture: On August 6, 2009, the Company signed an agreement to form a joint venture with an affiliate of Heitman, LLC, contributing properties valued at $102 million in exchange for a $51 million cash distribution and a 50% interest. This is expected to close by August 31, 2009.
- Equity Issuance: The Company sold 2.4 million common shares in April 2009 under a continuous offering program, raising net proceeds of $9.5 million.
Risks and Contingencies:
- Economic Conditions: Continued recessionary pressures may further reduce occupancy and rental rates.
- Refinancing Risk: Dislocation in credit markets may limit access to capital or increase borrowing costs. Failure to refinance the November 2009 maturities could lead to default.
- Regional Concentration: Approximately 49% of revenues are derived from facilities in California, Florida, Texas, and Illinois, exposing the Company to regional economic downturns.
- Derivatives: The Company utilizes interest rate swaps (notional amount $300 million) to hedge variable rate debt. Counterparty non-performance remains a risk.
Investor Verification Checklist
- Debt Maturity Wall: Verify the closing status of the new $450 million credit facility and the Heitman joint venture to ensure liquidity for the November 2009 debt maturities.
- Occupancy Trends: Monitor same-store occupancy rates and rental rate realizations to assess the impact of the recession on core operating performance.
- Capital Markets Access: Confirm the Company's ability to access equity markets for future distributions and capital expenditures given the current market environment.
- Discontinued Operations: Review the frequency and profitability of future asset dispositions, as gains from these sales currently offset operating losses.
- California Exposure: Assess potential impacts of California's budgetary issues on property taxes and operational costs for the 16% of facilities located in the state.