Business Context and Reporting Period
Company: U-Store-It Trust (Cubesmart)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: The Company is a self-administered and self-managed Real Estate Investment Trust (REIT) engaged in acquiring, developing, and operating self-storage facilities. As of September 30, 2008, the portfolio consisted of 394 facilities totaling approximately 25.4 million square feet across 26 states and the District of Columbia.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $60,720 | $177,946 |
| Operating Income | $9,681 | $25,850 |
| Net Income (Loss) | $4,020 | $302 |
| Net Income from Continuing Operations | $(3,224) | $(13,653) |
| Net Cash Provided by Operating Activities | N/A | $53,205 |
| Total Assets | $1,623,022 | N/A |
| Total Liabilities | $1,047,727 | N/A |
| Shareholders' Equity | $528,614 | N/A |
| Debt Obligations | $991,375 (Total) | N/A |
Note: Net Income for the three and nine months ended September 30, 2008, was significantly driven by gains from discontinued operations ($7.5 million and $13.4 million, respectively). Excluding these gains, the Company reported a loss from continuing operations.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 8% ($4.7 million) for the three months and 9% ($15.1 million) for the nine months ended September 30, 2008, compared to the prior year periods. This was driven by a 3.7% increase in effective rental rates on same-store properties and income from acquisitions.
- Operating Expenses: Property operating expenses increased 7% ($1.7 million) for the quarter and 11% ($7.7 million) for the nine months, primarily due to acquisitions and increased utility and tax expenses on same-store properties.
- Discontinued Operations: The Company sold 16 properties in 2008, resulting in a $7.5 million gain in Q3 and a $13.4 million gain for the nine-month period. In contrast, the prior year periods had minimal or no gains from dispositions.
- Interest Expense: Interest expense decreased 6% ($0.9 million) for the quarter due to lower rates on unsecured debt, despite higher debt balances from acquisitions. For the nine months, interest expense remained relatively flat.
- Portfolio Activity: The Company acquired one facility in 2008 (Washington, DC) for $13.3 million and disposed of 16 facilities for a total of $45.1 million.
Guidance, Outlook, and Risks
- Liquidity and Capital Resources: As of September 30, 2008, the Company held $2.5 million in cash and cash equivalents and had $67.3 million available under its $450 million unsecured credit facility. Management expects to meet short-term liquidity needs through operating cash flows, credit facility borrowings, and potential asset sales.
- Capital Expenditures: The Company expects to incur $8 million to $12 million annually for recurring capital expenditures for 2008, 2009, and 2010.
- Debt Maturities: Significant debt maturities are scheduled, including approximately $94 million in 2009 and $552 million in 2010 (assuming extensions of credit facilities).
- Market Risks: Management highlighted the impact of current credit market turmoil, which has reduced the availability and increased the cost of long-term debt capital. There is a risk that refinancing existing indebtedness may be difficult if market conditions deteriorate further.
- Interest Rate Risk: The Company has $300 million in notional principal interest rate swap agreements to hedge variable rate debt. A 1% increase in market rates on variable debt would increase annual interest expense by approximately $4.4 million.
- REIT Status: The Company must distribute at least 90% of its REIT taxable income annually to maintain tax status, creating substantial liquidity needs.
Investor Verification Checklist
- Continuing Operations Performance: Verify the sustainability of operations excluding the one-time gains from discontinued operations, as the Company reported a loss from continuing operations for both the quarter and the nine-month period.
- Debt Refinancing Risk: Assess the Company's ability to refinance approximately $552 million in debt maturing in 2010 given the current dislocation in credit markets.
- Liquidity Position: Monitor the $2.5 million cash balance against the $67.3 million available credit line to ensure sufficient coverage for upcoming debt service and distributions.
- Same-Store Metrics: Review the 3.7% increase in effective rental rates on same-store properties to gauge organic growth potential independent of acquisitions.
- Dividend Coverage: Confirm that cash flow from operations remains sufficient to cover the $0.54 per share distribution declared for the nine-month period, especially given the loss from continuing operations.