Business Context and Reporting Period
Company: U-Store-It Trust (Cubesmart)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
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, 2008, the Company owned 387 facilities aggregating approximately 25.0 million rentable square feet across 26 states and the District of Columbia. The portfolio was approximately 78.9% leased to approximately 170,000 tenants.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $236.4 million | $219.5 million |
| Net Income (Loss) | $2.8 million | $(13.1) million |
| Operating Income | $34.7 million | $34.6 million |
| Net Operating Income (NOI) | $137.2 million | $126.7 million |
| Interest Expense | $52.0 million | $54.1 million |
| Total Debt (Carrying Value) | $977.5 million | $1,027.5 million |
| Cash and Cash Equivalents | $3.7 million | $4.5 million |
| Available Borrowings (Credit Facility) | $78.0 million | $281.0 million |
| Dividends Declared Per Share | $0.565 | $1.05 |
Material Changes vs. Prior Period
- Portfolio Activity: The Company significantly reduced its portfolio size, selling 23 facilities for approximately $62.0 million in 2008 compared to acquiring 17 facilities for $140.5 million in 2007. Only one facility was acquired in 2008.
- Profitability: The Company reported a net income of $2.8 million in 2008, a significant improvement from a net loss of $13.1 million in 2007. This turnaround was driven by a $19.7 million gain on the disposition of discontinued operations (23 facilities sold) compared to a $2.5 million gain in 2007.
- Revenue Growth: Total revenues increased 8% to $236.4 million. Same-store rental income increased 4% due to a 3.9% increase in realized rent per occupied square foot.
- Dividend Reduction: Due to liquidity constraints and credit facility covenants, the quarterly dividend was reduced from $0.18 per share in the fourth quarter of 2007 to $0.025 per share in the fourth quarter of 2008.
- Debt Reduction: Total debt decreased by approximately $50 million, primarily due to paydowns using proceeds from facility dispositions.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management expects to focus on internal growth and selectively pursuing targeted acquisitions in 2009, though active acquisition is not expected. The Company anticipates spending $7 million to $9 million on capital improvements in 2009. Management intends to exercise options to extend its credit facility and secured term loans from November 2009 to November 2010 to manage liquidity.
Key Risks & Contingencies:
- Liquidity & Refinancing: Approximately 55% ($523.9 million) of total debt is payable on or before December 31, 2009. The Company relies on extending its credit facility and generating cash flow to meet these obligations. Tight credit markets pose a risk to refinancing on favorable terms.
- Economic Conditions: The Company notes the U.S. is in a deep recession, which may impact consumer spending and increase bad debts, though self-storage is considered less sensitive than other real estate sectors.
- Interest Rate Risk: A significant portion of the debt is variable rate. A 1% increase in interest rates would increase annual interest expense by approximately $3.8 million.
- REIT Status: The Company must distribute at least 90% of taxable income to maintain REIT status. Failure to do so would result in corporate income tax liability.
Investor Verification Checklist
- Debt Maturity Wall: Verify the Company's ability to extend its $429.4 million credit facility and secured term loans in November 2009, as this is critical for meeting 2009 principal payment obligations.
- Dividend Sustainability: Assess the impact of the reduced dividend ($0.025 in Q4 2008) on future cash flow requirements and REIT qualification.
- Same-Store Performance: Monitor the 3.9% increase in realized rent per square foot to ensure it can be sustained in a recessionary environment.
- Discontinued Operations: Note that the 2008 net income was heavily influenced by a one-time $19.7 million gain on asset sales; evaluate core operating performance (NOI) separately.
- Geographic Concentration: Review exposure to Florida (19% of revenue) and California (15% of revenue), which are susceptible to local economic downturns and natural disasters.