CUBE

Business Context and Reporting Period

Company: U-Store-It Trust (Cubesmart)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: The Company is a self-storage Real Estate Investment Trust (REIT) owning, operating, and developing facilities. As of September 30, 2005, the portfolio consisted of 323 facilities, a significant increase from 155 facilities owned by the Predecessor (Acquiport/Amsdell) at the end of 2004. The Company completed its IPO in October 2004 and has been aggressively acquiring properties since.

Key Financial Metrics

Margins: Operating income for the nine months ended September 30, 2005, was $29.8 million, representing an operating margin of approximately 28.4%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 81.2% for the three months and 60.0% for the nine months compared to the same periods in 2004. This growth is primarily driven by the acquisition of 127 facilities in the first nine months of 2005 and 46 facilities in late 2004.
• Expense Structure: Management fees paid to related parties in 2004 were eliminated following the IPO and replaced with internal General and Administrative (G&A) expenses. G&A expenses were $3.7 million for the quarter and $9.9 million for the nine months in 2005, compared to $0 in 2004.
• Depreciation: Depreciation expense increased 104.2% for the quarter and 80.5% for the nine months due to the expanded asset base from acquisitions.
• Debt Levels: Total indebtedness rose from $380.5 million at December 31, 2004, to $741.0 million at September 30, 2005, to fund acquisitions.
• Same-Store Performance: Excluding acquisitions, same-store revenues increased 1.8% for the quarter and 4.8% for the nine months, driven by rent increases and occupancy gains.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items (Hurricane Impact): The Company incurred a $2.3 million asset impairment charge related to damage at a facility in Waveland, Mississippi, due to Hurricane Katrina. An offsetting insurance receivable of $2.3 million was recorded. The Company expects insurance proceeds to cover the loss, though deductibles apply.
• Subsequent Events:
  • Secondary Offering: On October 7, 2005, the Company completed a secondary public offering of 19.7 million shares at $20.35 per share, generating gross proceeds of $400.2 million.
  • Debt Repayment: Proceeds from the offering were used to pay off the entire $108.3 million balance on the revolving credit facility and $39.8 million of mortgage loans.
  • Acquisitions: Post-period acquisitions included a Dallas portfolio ($17.6 million) and a Jacksonville facility ($7.2 million).
• Risks: Key risks include national economic conditions, competition, interest rate increases (14.6% of debt is variable), and the ability to maintain REIT status. The Company also faces risks related to natural disasters and environmental liabilities.
• Liquidity: The Company maintains a $150 million revolving credit facility (fully paid down as of October 2005). Long-term liquidity needs for acquisitions and development will be met through debt, equity issuances, and asset dispositions.

Investor Verification Checklist

• Acquisition Integration: Verify the operational performance and rent growth of the 127 facilities acquired in 2005, which drove the majority of revenue growth.
• Debt Maturity Profile: Review the schedule of debt maturities, noting significant principal payments due in 2006 ($110.8 million) and the impact of the recent refinancing activities.
• Insurance Recovery: Monitor the final settlement of the Hurricane Katrina insurance claim to ensure the $2.3 million receivable is fully realized and covers restoration costs.
• Related Party Transactions: Review ongoing transactions with the Amsdell family entities (e.g., Rising Tide Development, Amsdell Construction) regarding option exercises and service fees.
• FFO vs. Net Income: Analyze Funds From Operations (FFO) as the primary performance metric, given the high depreciation associated with real estate assets.