CUBE

Business Context and Reporting Period

Company: U-Store-It Trust (Cubesmart)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: A self-administered and self-managed Real Estate Investment Trust (REIT) focused on the ownership, operation, acquisition, and development of self-storage facilities in the United States. As of December 31, 2009, the Company owned 367 facilities across 26 states and the District of Columbia, comprising approximately 23.7 million rentable square feet with an occupancy rate of 75.2%.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Reduction: The Company reduced its portfolio from 387 facilities in 2008 to 367 facilities in 2009. This was driven by the sale of 20 facilities for approximately $90.9 million and no new acquisitions in 2009.
• Revenue Decline: Total revenues decreased by 3% ($6.9 million) primarily due to a 4% decrease in rental income from same-store properties, attributed to lower occupancy levels and a 5.2% decrease in realized rent per occupied square foot.
• Expense Management: Property operating expenses decreased by 1% ($1.2 million) due to reductions in repairs, maintenance, and utilities. General and administrative expenses dropped 10% ($2.4 million), largely due to the absence of $2.1 million in severance costs incurred in 2008.
• Interest Expense: Interest expense decreased by 13% ($6.7 million) to $45.3 million, driven by lower interest rates on unsecured debt and reduced outstanding borrowings on the credit facility.
• Discontinued Operations: Gains on disposition of discontinued operations decreased by 28% ($5.6 million) compared to 2008, reflecting fewer asset sales (20 in 2009 vs. 23 in 2008).

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Capital Expenditures: The Company anticipates spending approximately $7 million to $9 million in 2010 on capital improvements and renovations.
• Acquisition Strategy: While the business plan does not contemplate significant facility acquisitions in 2010, the Company expects to pursue selective acquisitions in markets with high barriers to entry and strong demographics.
• Dividends: The Company intends to continue declaring quarterly distributions. However, the credit facility restricts distributions to the greater of 95% of Funds From Operations (FFO) or the amount necessary to maintain REIT status.

Risks and Contingencies

• Debt Maturities: Approximately 15% ($115 million) of total debt is due on or before December 31, 2010. The Company faces refinancing risk in a volatile credit market.
• Economic Conditions: Ongoing economic downturns, higher unemployment, and tight credit markets pose risks to consumer spending and demand for self-storage space.
• Legal Proceedings: The Company is defending against a lawsuit filed by the "Amsdell Plaintiffs" seeking indemnification for losses related to a 2001 real estate agreement breach. The matter is in the discovery phase.
• Insurance Coverage: The Company does not carry insurance for riots, war, or acts of God, and some policies (e.g., terrorism, hurricanes) have large deductibles or limits that may not cover total losses.

Investor Verification Checklist

• Refinancing Capability: Verify the Company's ability to refinance the $115 million in debt maturing in 2010 given current market conditions.
• Occupancy Trends: Monitor same-store occupancy rates and rental rate trends to assess the impact of the economic downturn on core operations.
• Dividend Sustainability: Confirm that Funds From Operations (FFO) remain sufficient to support quarterly distributions under the new credit facility covenants.
• Legal Exposure: Track the status of the Amsdell Plaintiffs' lawsuit for potential indemnification liabilities.
• Joint Venture Performance: Review the performance of the HART joint venture (formed August 2009), which consolidates 22 facilities and represents a significant noncontrolling interest.