Business Context and Reporting Period
Company: U-Store-It Trust (Cubesmart)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
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 June 30, 2007, the Company owned 397 facilities totaling approximately 25.2 million square feet across 26 states. The Company operates through an Operating Partnership in which it holds a 91.8% interest.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $56.3 million | $111.4 million |
| Operating Income | $11.5 million | $20.8 million |
| Net Income (Loss) | $0.3 million | $(3.1) million |
| Net Income from Continuing Operations | $(1.7) million | $(5.1) million |
| Net Cash Provided by Operating Activities | N/A | $24.6 million |
| Net Cash Used in Investing Activities | N/A | $(16.1) million |
| Net Cash Used in Financing Activities | N/A | $(24.7) million |
| Cash and Cash Equivalents (End of Period) | $3.4 million | $3.4 million |
| Total Debt (Revolving + Term + Mortgage) | $907.5 million | $907.5 million |
| Available Credit Facility Capacity | $142.5 million | $142.5 million |
Note: Net Income for the three and six months ended June 30, 2007, includes a significant gain of $2.1 million from the disposition of discontinued operations.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 6% ($3.3 million) for the three months ended June 30, 2007, compared to the same period in 2006. This was driven by acquisitions in 2006 and 2007. Same-store revenues remained flat.
- Operating Expenses: Total operating expenses increased 10% ($3.9 million) for the three-month period. General and administrative expenses rose 32% primarily due to increased legal, professional, and medical costs, including costs related to financial restatements.
- Interest Expense: Interest expense increased 19% ($2.1 million) for the three-month period due to higher outstanding debt levels financing recent acquisitions.
- Net Loss from Continuing Operations: The Company reported a loss from continuing operations of $1.7 million for the quarter, compared to income of $0.6 million in the prior year quarter. This deterioration is largely due to increased interest and administrative costs.
- Discontinued Operations: The Company sold three properties in May 2007, resulting in a $2.1 million gain on disposition, which turned the overall Net Loss for the quarter into a Net Income of $0.3 million.
- Restatements: The Company restated prior period financial statements (2006) to correct errors regarding the classification of auction rate securities, cash equivalents, and revenue recognition. These restatements impacted the comparability of year-over-year data.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management intends to focus on maximizing internal growth, selectively pursuing acquisitions, and recycling capital through dispositions. The Company expects to incur recurring capital expenditures of approximately $7 to $10 million for 2007. Liquidity needs are expected to be met through operating cash flows and the $450 million unsecured credit facility (with $142.5 million available).
Subsequent Events and Settlement
On August 6, 2007, the Company announced a settlement of all pending litigation involving the Amsdell family (former executives) and Rising Tide Development. Key terms include:
- Acquisition: The Company agreed to purchase 14 self-storage facilities from Rising Tide for $121 million.
- Standstill Agreement: The Amsdell family agreed to a standstill regarding proxy solicitations and extraordinary corporate transactions through June 30, 2008.
- Termination of Agreements: Termination of the option agreement to acquire remaining Rising Tide properties and the property management agreement.
Risks and Contingencies
- Internal Controls: The Company previously identified material weaknesses in internal controls over financial reporting, leading to restatements. Remediation efforts are ongoing, including hiring new financial leadership and implementing new software systems.
- Interest Rate Risk: The Company has significant variable-rate debt ($307.5 million). A 1% increase in interest rates would increase annual interest expense by approximately $3.1 million.
- REIT Status: The Company must distribute at least 90% of taxable income to maintain REIT status, creating substantial liquidity needs.
Investor Verification Checklist
- Settlement Closing: Verify the consummation of the $121 million acquisition of 14 Rising Tide properties and the dismissal of related litigation.
- Internal Control Remediation: Confirm the completion of remediation efforts for material weaknesses in internal controls and the effectiveness of new financial reporting systems.
- Debt Covenants: Monitor compliance with financial covenants on the $450 million credit facility, specifically the maximum total indebtedness to total asset value (65%) and interest coverage ratios.
- Same-Store Performance: Analyze same-store facility results to distinguish organic growth from acquisition-driven revenue increases.
- Capital Expenditures: Track actual capital expenditures against the $7-$10 million guidance for 2007.