Business Context and Reporting Period
Company: U-Store-It Trust (Cubesmart)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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 March 31, 2007, the portfolio consisted of 402 facilities totaling approximately 25.5 million square feet across 27 states. The Company owns 91.7% of the Operating Partnership, with the remainder held by minority interests.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 (Restated) |
|---|---|---|
| Total Revenues | $55.5 million | $48.2 million |
| Operating Income | $9.5 million | $9.0 million |
| Net Loss | $(3.4) million | $(1.6) million |
| Loss Per Share (Basic/Diluted) | $(0.06) | $(0.03) |
| Net Cash Provided by Operating Activities | $12.9 million | $8.3 million |
| Net Cash Used in Investing Activities | $(23.7) million | $(123.1) million |
| Net Cash Used in Financing Activities | $(3.3) million | $26.1 million |
| Total Debt (Mortgage + Credit Facility) | $894.3 million | N/A |
| Cash and Cash Equivalents | $5.6 million | $13.0 million |
| Available Credit Facility Capacity | $142.5 million | N/A |
Debt Structure: Total indebtedness includes $586.8 million in mortgage loans and notes payable, $200.0 million in an unsecured term loan, and $107.5 million drawn on a $250.0 million revolving credit facility.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 15% ($7.3 million) year-over-year. Rental income rose 14% ($6.1 million), driven primarily by acquisitions completed in 2006 and 2007, with a smaller contribution ($0.5 million) from same-store facilities.
- Expense Increases: Property operating expenses increased 23% ($4.3 million), largely due to new acquisitions and higher insurance/tax costs in same-store facilities. General and administrative expenses rose 8% ($0.4 million), including approximately $1.0 million in legal and inquiry costs related to financial restatements.
- Interest Expense: Interest expense increased 28% ($2.8 million) due to higher outstanding debt levels financing recent acquisitions. Conversely, interest income dropped 87% as excess cash from the 2005 follow-on offering was deployed.
- Net Loss Expansion: Net loss widened to $3.4 million from $1.6 million. The increase is attributable to higher interest costs and operating expenses, partially offset by revenue growth. A $1.3 million write-off of loan procurement costs occurred in Q1 2006 but not in Q1 2007.
- Acquisition Activity: The Company acquired 3 facilities for $19.5 million in Q1 2007, compared to significant acquisition activity in Q1 2006 ($220.9 million in cash used for acquisitions).
Guidance, Outlook, and Risks
Management Commentary: Management intends to focus on internal growth and selective acquisitions. They expect to incur recurring capital expenditures of $7 to $10 million for 2007. The Company relies on cash flow from operations and its revolving credit facility to meet short-term liquidity needs.
Financial Restatements: The Company restated prior period financial statements (including Q1 2006) to correct errors regarding the classification of auction rate securities, restricted cash, and revenue recognition. These errors led to the identification of material weaknesses in internal controls.
Internal Controls: Material weaknesses were identified related to insufficient accounting personnel, inadequate monitoring controls, and lack of robust risk assessment. Remediation efforts include hiring new executive leadership (CEO, CFO, Chief Accounting Officer), implementing new revenue management software, and relocating finance departments.
Risks: Key risks include national and local economic conditions, competitive pressures, financing risks, interest rate increases (variable rate debt exposure), and the ability to maintain REIT status. A 1% increase in interest rates on variable debt would increase annual interest expense by approximately $3.1 million.
Investor Verification Checklist
- Restatement Impact: Verify the full scope of the financial restatements and the timeline for the remediation of material weaknesses in internal controls.
- Debt Covenants: Confirm compliance with credit facility covenants, specifically the maximum total indebtedness to total asset value (65%) and minimum interest coverage ratio (2.0:1.0).
- Related Party Transactions: Review ongoing transactions with former executives (Amsdell family) and current management (Jernigan), including office leases and facility acquisition options.
- Same-Store Performance: Analyze the 1% revenue increase in same-store facilities against the 7% increase in same-store operating expenses to assess core operational efficiency.
- Liquidity Position: Monitor the $5.6 million cash balance against the $142.5 million available credit line to ensure sufficient liquidity for debt service and distributions.