Business Context and Reporting Period
Company: U-Store-It Trust (Cubesmart)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: The Company is a self-administered and self-managed Real Estate Investment Trust (REIT) specializing in acquiring, developing, managing, and operating self-storage facilities. As of September 30, 2010, the Company owned 370 facilities totaling approximately 23.9 million rentable square feet and managed an additional 122 third-party properties.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenues | $57.0 million | $164.7 million |
| Net Operating Income (NOI) | $32.4 million | $92.8 million |
| Operating Income | $10.3 million | $25.2 million |
| Net Loss (Continuing Ops) | $(1.2) million | $(8.8) million |
| Net Loss (Total) | $(1.1) million | $(8.7) million |
| Cash from Operating Activities | N/A | $50.9 million |
| Total Debt Outstanding | $656.2 million | $656.2 million |
| Cash and Equivalents | $23.2 million | $23.2 million |
Note: Net Loss figures exclude discontinued operations which contributed $0.05 million (Q3) and $0.14 million (YTD) in income.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 4% ($2.4 million) in Q3 2010 compared to Q3 2009, driven by a 1% increase in rental income and a 19% increase in other property-related income (primarily tenant insurance commissions). Property management fee income surged 8,633% due to the expansion of third-party management contracts from 6 to 122 facilities.
- Operating Expenses: Property operating expenses rose 7% ($1.5 million) in Q3, largely due to increased marketing spend and lease-up costs at non-same-store properties. General and administrative expenses increased 19% due to additional personnel costs.
- Interest Expense: Interest expense decreased 20% ($2.4 million) in Q3 and 16% ($5.5 million) YTD, resulting from a reduction in total outstanding debt from $728.1 million (Sep 2009) to $656.2 million (Sep 2010) following the payoff of several mortgage loans.
- Discontinued Operations: Net income from discontinued operations dropped significantly compared to 2009. The 2009 period included a $10.9 million gain on the disposition of 14 assets, whereas no asset sales occurred in the 2010 period.
- Same-Store Performance: Same-store revenues increased 1% in Q3 2010 due to higher occupancy and rent per square foot. However, for the nine-month period, same-store revenues decreased 1% due to a decline in realized rent per square foot offsetting occupancy gains.
Guidance, Outlook, and Risks
Management Commentary: Management expects to focus on internal growth and selective acquisitions. The Company believes self-storage facilities are less sensitive to economic downturns than other real estate types, though prolonged downturns could adversely affect cash flows. The Company recently amended its credit facility to an unsecured structure with a $200 million term loan and $250 million revolving capacity.
Liquidity and Capital Resources:
- Cash Position: $23.2 million in cash and cash equivalents as of September 30, 2010.
- Debt Maturities: Scheduled principal payments are approximately $5.8 million for the remainder of 2010 and $90.5 million in 2011. Subsequent to the reporting period, the Company repaid an $82.1 million mortgage loan.
- Capital Expenditures: Expected recurring capital expenditures for the remainder of fiscal 2010 are estimated between $2 million and $4 million.
Risks and Contingencies:
- Economic Conditions: Sensitivity to unemployment, consumer spending, and bad debts.
- Financing Risks: Risks of over-leverage, inability to refinance, and interest rate increases (a 1% increase in variable rates would increase annual interest expense by ~$2.0 million).
- REIT Status: Requirement to distribute at least 90% of taxable income annually.
- Competition: Potential for lower occupancy and rents due to competition from other storage facilities.
Investor Verification Checklist
- Debt Refinancing: Verify the Company's ability to refinance the $90.5 million in debt maturing in 2011, given the recent repayment of the $82.1 million YSI 2 loan.
- Same-Store Rent Trends: Monitor the decline in realized annual rent per square foot in the nine-month same-store portfolio to ensure it does not accelerate.
- Third-Party Management Growth: Assess the profitability and scalability of the rapidly expanding third-party management segment (122 facilities).
- Discontinued Operations: Confirm the final gain on the single property held-for-sale as of September 30, 2010, estimated at $1.1 million.
- Credit Facility Covenants: Review compliance with the amended credit facility covenants, specifically the 60% maximum leverage ratio and 1.50:1.00 fixed charge coverage ratio.