Business Context and Reporting Period
Company: U-Store-It Trust (Cubesmart)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Overview: The Company is 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, 2006, the Company owned 399 facilities in 27 states, aggregating approximately 25.4 million rentable square feet with an occupancy rate of 78.2%. The Company also manages 14 additional facilities owned by Rising Tide Development, LLC.
Restatement Notice: The financial statements for 2005, 2004, and interim periods in 2006 have been restated to correct errors related to the classification of marketable securities, cash, restricted cash, rental revenues, and other matters. These errors were attributed to a lack of sufficient personnel with requisite skills and inadequate monitoring controls.
Key Financial Metrics
| Metric | 2006 | 2005 (Restated) |
|---|---|---|
| Total Revenues | $213.1 million | $147.6 million |
| Net Income (Loss) | $(8.6) million | $1.6 million |
| Operating Income | $39.2 million | $33.6 million |
| Net Operating Income (NOI) | $126.5 million | $92.1 million |
| Depreciation & Amortization | $64.7 million | $39.9 million |
| Interest Expense | $46.1 million | $32.4 million |
| Total Assets | $1.62 billion | $1.48 billion |
| Total Liabilities | $930.9 million | $714.2 million |
| Shareholders' Equity | $627.5 million | $698.5 million |
| Debt to Total Capitalization | 40.6% | Filing text does not provide a clear value |
| Cash and Cash Equivalents | $19.7 million | $98.9 million |
| Available Borrowings (Credit Facility) | $160.0 million | Filing text does not provide a clear value |
Material Changes vs. Prior Period
- Acquisition Activity: The Company acquired 60 facilities in 2006 for approximately $362.4 million, compared to 146 facilities in 2005 for approximately $547.9 million. The portfolio grew from 339 to 399 facilities.
- Revenue Growth: Total revenues increased 44% to $213.1 million, driven by the 2006 acquisitions, a full year of contribution from 2005 acquisitions, and a $4.6 million increase in same-store rental income.
- Net Loss: The Company reported a net loss of $8.6 million in 2006 compared to net income of $1.6 million in 2005. The loss was primarily due to increased interest expense ($13.7 million increase), higher depreciation ($24.8 million increase), and $2.7 million in severance costs.
- Financing: In November 2006, the Company entered into a new $450 million unsecured credit facility (comprising a $200 million term loan and $250 million revolving credit facility), replacing a previous $250 million facility. Borrowings under the new facility totaled $290.5 million at year-end.
- Occupancy: Overall occupancy decreased from 81.2% in 2005 to 78.2% in 2006, largely due to the inclusion of newly acquired facilities that were not yet stabilized.
Guidance, Outlook, and Risks
Management Commentary & Outlook: The Company intends to focus on internal growth and selective acquisitions in targeted markets (Arizona, California, Florida, Northeast). For 2007, the Company anticipates spending approximately $7 to $10 million on recurring capital expenditures. Management expects to meet short-term liquidity needs through cash flow from operations and the revolving credit facility.
Material Risks & Contingencies:
- Internal Control Weaknesses: The Company identified material weaknesses in internal controls over financial reporting, leading to the restatement of prior periods. Remediation efforts included a complete turnover of senior management (CEO, CFO, CAO) and the implementation of new revenue management software.
- REIT Status: Failure to qualify as a REIT would subject the Company to corporate income tax, substantially reducing earnings. The Company must distribute at least 90% of taxable income annually.
- Interest Rate Risk: The Company has significant variable-rate debt. A 1% increase in interest rates would increase annual interest expense by approximately $2.9 million.
- Competition & Market Conditions: The self-storage industry is highly competitive. Economic downturns or oversupply in specific markets could reduce rental revenues and occupancy.
- Related Party Transactions: The Company has ongoing relationships with the Amsdell family (former owners) regarding option facilities and office leases, which present potential conflicts of interest.
Investor Verification Checklist
- Restatement Impact: Verify the specific adjustments made to 2005 and 2004 financials regarding the classification of auction rate securities and cash equivalents.
- Internal Control Remediation: Assess the progress of remediation efforts for the identified material weaknesses in internal controls, specifically regarding the new management team and software implementation.
- Debt Covenants: Review compliance with the financial covenants of the new $450 million credit facility (e.g., maximum leverage ratio of 65%, minimum interest coverage ratio of 2.0:1).
- Option Facilities: Monitor the status of the 15 option facilities owned by Rising Tide Development, LLC, and the criteria for their potential acquisition by the Company.
- Same-Store Performance: Analyze the 3% increase in same-store revenues versus the 10% increase in same-store operating expenses to understand margin pressure on the stabilized portfolio.