CUBE

Business Context and Reporting Period

Company: U-Store-It Trust (Cubesmart)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: A self-administered and self-managed Real Estate Investment Trust (REIT) specializing in acquiring, developing, and operating self-storage facilities. As of March 31, 2011, the Company owned 364 facilities totaling approximately 23.7 million rentable square feet across 26 U.S. states, D.C., and the UK. The Company also managed 87 third-party properties.

Key Financial Metrics

Note: Total Debt includes $40.5 million revolving credit facility, $200 million unsecured term loan, and $382.5 million mortgage loans.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 12% ($6.0 million) year-over-year. Rental income rose 9% ($4.2 million), driven by $2.7 million from acquisitions and a $1.4 million increase in same-store portfolio performance due to higher occupancy and rental rates.
• Profitability Improvement: The Company reported a net income of $0.5 million compared to a net loss of $3.2 million in Q1 2010. This turnaround was primarily due to a 19% reduction in interest expense ($2.0 million decrease) resulting from debt repayments and lower interest rates.
• Operating Expenses: Property operating expenses increased 15% ($3.3 million), largely due to costs associated with newly acquired properties and increased marketing expenses ($0.9 million) in the same-store portfolio.
• Acquisition Activity: The Company acquired one facility in Fairfax Station, VA, for $14.0 million in Q1 2011. In contrast, Q1 2010 had no acquisitions.

Guidance, Outlook, and Risks

Management Commentary: Management expects to focus on maximizing internal growth and selectively pursuing targeted acquisitions. Recurring capital expenditures for the remainder of fiscal year 2011 are estimated between $6 million and $8 million. The Company intends to fund remaining 2011 principal payment requirements ($7.4 million) from operating cash flows.

Liquidity: As of March 31, 2011, the Company had $4.1 million in cash and $209.5 million available under its unsecured revolving credit facility. The Company is in compliance with all debt covenants, including a maximum total indebtedness to total asset value of 60.0%.

Risks and Contingencies:

• Economic Sensitivity: Results depend on consumer spending and employment levels; prolonged economic downturns could reduce cash flows.
• Interest Rate Risk: A 1% increase in market rates on variable rate debt would increase annual interest expense by approximately $2.4 million.
• Refinancing Risk: Significant debt maturities are scheduled for 2012 ($160.1 million), requiring successful refinancing or repayment.
• REIT Status: The Company must distribute at least 90% of taxable income to maintain REIT status.

Investor Verification Checklist

• Debt Maturity Wall: Verify the Company's ability to refinance or repay the $160.1 million in mortgage principal due in 2012.
• Same-Store Performance: Confirm the sustainability of the 3% increase in same-store rental income and the impact of increased marketing spend on future occupancy.
• Interest Rate Exposure: Assess the impact of rising LIBOR rates on the $240.5 million of variable-rate debt, noting the existing interest rate cap on $100 million expires in January 2012.
• Noncontrolling Interests: Review the $5.0 million adjustment to noncontrolling interests in the Operating Partnership and its impact on shareholders' equity.
• Cash Flow Coverage: Validate that operating cash flows ($15.2 million) are sufficient to cover debt service, distributions ($7.3 million paid in Q1), and capital expenditures.