CUBE

Business Context and Reporting Period

Company: U-Store-It Trust (d/b/a CubeSmart)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Three and six months ended June 30, 2005

Overview: The Company is a self-storage Real Estate Investment Trust (REIT) that owns, acquires, develops, and operates self-storage facilities. As of June 30, 2005, the Company owned 236 facilities, a significant increase from 155 facilities owned by the Predecessor (Acquiport/Amsdell) at June 30, 2004. The Company completed its Initial Public Offering (IPO) in October 2004.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 59.4% for the three months ended June 30, 2005, compared to the same period in 2004. This was driven primarily by the acquisition of 46 facilities in late 2004 and 38 facilities in the first half of 2005, alongside a 6.8% increase in same-store revenues.
• Expense Structure: General and administrative expenses increased significantly (from $0 to $3.2 million for the quarter) due to the transition from a private predecessor to a public REIT, replacing related-party management fees with public company costs (audit, legal, investor relations).
• Depreciation: Depreciation expense increased 66.3% year-over-year for the quarter, largely due to the expanded asset base from acquisitions and a "step-up" in the carrying amount of fixed assets.
• Debt Levels: Total indebtedness increased from $380.5 million at December 31, 2004, to $489.4 million at June 30, 2005, reflecting new borrowings to fund acquisitions.
• Same-Store Performance: Same-store revenues increased 6.8% for the quarter and 6.5% for the six-month period, driven by higher occupancy and rental rates. Same-store operating expenses decreased 7.5% for the quarter.

Guidance, Outlook, and Risks

• Acquisition Strategy: Management intends to focus on internal growth and selective acquisitions. Significant post-period acquisitions include a $212 million portfolio from National Self Storage (66 facilities) and individual facilities in Arizona and New Jersey.
• Liquidity: The Company maintains a $150 million revolving credit facility with approximately $34.1 million available as of June 30, 2005. Post-period, the Company secured two additional $80 million fixed-rate mortgage loans.
• REIT Status: The Company must distribute at least 90% of its taxable income to maintain REIT status, creating substantial liquidity needs for distributions.
• Internal Control Weakness: The Company identified a material weakness in internal controls regarding the calculation of purchase prices for related-party option exercises, resulting in a $1.7 million overpayment in March 2005. This was remediated by May 2005 with new review procedures.
• Market Risks: Risks include interest rate fluctuations (20% of debt is variable), economic downturns affecting occupancy, and competition in the self-storage market.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of principal payments, noting significant maturities in 2006 ($109.4 million) and 2007 ($104.0 million).
• Related Party Transactions: Review the terms of the option agreements with Rising Tide Development and the recent remediation of the purchase price calculation error.
• Acquisition Integration: Assess the performance of the 38 facilities acquired in the first half of 2005 and the subsequent $212 million National Self Storage acquisition.
• Capital Expenditures: Confirm the $116.6 million in cash used for additions and improvements to storage facilities during the six-month period.
• Dividend Coverage: Analyze the relationship between Net Income ($3.8 million for six months) and Distributions Paid ($20.9 million for six months) to understand the reliance on debt or cash reserves to fund distributions.