CUBE

Business Context and Reporting Period

Company: U-Store-It Trust (Cubesmart)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and nine months ended September 30, 2006
Business Overview: The Company is a self-storage Real Estate Investment Trust (REIT) owning, acquiring, developing, and operating facilities. As of September 30, 2006, the portfolio consisted of 399 facilities totaling approximately 25.4 million rentable square feet, an increase from 339 facilities at year-end 2005.

Key Financial Metrics

Note: Total debt includes $170.5 million on the revolving credit facility and $693.7 million in loans payable.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 51.0% to $158.0 million for the nine months ended September 30, 2006, compared to $104.8 million in the prior year period. This was driven primarily by the acquisition of 60 facilities in 2006 and 19 facilities in late 2005.
• Operating Expenses: Property operating expenses rose 64.1% to $61.8 million, and depreciation increased 69.4% to $46.8 million, largely due to the expanded asset base.
• Net Loss: The Company reported a net loss of $2.7 million for the nine months ended September 30, 2006, compared to net income of $5.5 million in the prior year. The decline is attributed to increased interest expense ($10.3 million increase) and higher operating costs associated with acquisitions.
• Same-Store Performance: Same-store revenues increased 4.2% to $89.5 million, driven by a $5.6 million increase in rents, partially offset by a $2.0 million decrease due to lower occupancy.
• Accounting Adjustments: The Company early adopted SAB 108, resulting in adjustments to opening accumulated deficit and prior quarter results related to loan procurement costs, rental income recognition, and workers' compensation expenses.

Guidance, Outlook, and Risks

• Capital Strategy: The Company intends to pursue internal growth and selective acquisitions, incurring additional debt as necessary. It expects to incur approximately $4.9 million in recurring capital expenditures and $3.9 million in renovations for 2006.
• Liquidity: The Company maintains a $250 million revolving credit facility (expandable to $350 million) with $79.5 million available as of September 30, 2006. Subsequent events in October and November 2006 involved repaying specific mortgages using credit facility proceeds and entering a $50 million bridge loan.
• Management Commentary: Management highlighted a restructuring of certain management positions, resulting in severance costs of approximately $2.1 million. The Company also completed a conversion to a new revenue management software system.
• Risks:
  • Insurance Compliance: Certain loan covenants require insurance levels that may be commercially unreasonable or unavailable, posing a risk of default.
  • Interest Rate Risk: Approximately 19.7% of debt is variable rate. A 100 basis point increase would increase annual interest expense by approximately $1.7 million.
  • Refinancing: Significant debt maturities are scheduled for 2006 and 2007, requiring successful refinancing or repayment.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with the maximum leverage ratio (65%) and interest coverage ratio (2.0:1.0) given the increased debt load.
• Insurance Coverage: Confirm the status of insurance compliance for properties securing mortgage-backed debt, as noted in the risk factors.
• Refinancing Progress: Monitor the execution of the anticipated $450 million credit facility closing mentioned in subsequent events to repay the bridge loan.
• Occupancy Trends: Review same-store occupancy data to ensure the revenue growth from rent increases is not being eroded by significant occupancy declines.
• Accounting Adjustments: Review the specific impact of the SAB 108 adoption on the comparability of current and prior period financial statements.