CubeSmart (U-Store-It Trust) — Q2 2011 Form 10-Q
Business context and period. The filing is by U-Store-It Trust, a self-storage REIT and the company identified in the request as CubeSmart. It covers the quarter and six months ended June 30, 2011; financial statements are unaudited. At quarter-end, the company owned 367 facilities totaling approximately 24.0 million rentable square feet and managed 85 third-party properties, for 452 owned or managed properties.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $59.4m | $53.2m | $116.9m | $104.7m |
| Operating income | $11.5m | $6.6m | $21.9m | $14.0m |
| Income (loss) from continuing operations | $(0.3)m | $(4.9)m | $0.2m | $(8.6)m |
| Net income (loss) attributable to company | $0.9m | $(4.5)m | $0.8m | $(8.0)m |
| Per-share earnings (loss), basic and diluted | $0.01 | $(0.05) | $0.01 | $(0.09) |
| NOI, non-GAAP | $34.3m | $29.4m | $66.3m | $58.6m |
Operating margin was approximately 19.4% in Q2 2011 versus 12.5% in Q2 2010, and 18.7% for the first half versus 13.4%. NOI is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
- Cash flow: First-half operating cash flow was $38.2m, compared with $27.4m. Investing activities used $56.5m, chiefly reflecting acquisitions; financing activities provided $14.2m. Cash and cash equivalents were $1.8m at June 30, down from $5.9m at year-end 2010.
- Debt and liquidity: Total reported debt was approximately $656.6m: $347.6m of mortgage debt, $300m of unsecured term loans and $9m drawn on the revolving facility. Revolver availability was $241m. The company reported covenant compliance and a 3.87% weighted-average rate on credit-facility and term-loan borrowings.
- Balance sheet: Total assets were $1.51bn and total liabilities $711.0m. Mortgage principal payments of $159.5m were scheduled for 2012; management expected to fund the remaining 2011 scheduled principal payments from operating cash flow.
Material changes versus comparable periods
- Q2 revenue rose 12% year over year; first-half revenue also rose 12%. Same-store revenue increased 3% in Q2 and 4% for the first half, with management citing higher occupancy and scheduled rent per square foot.
- First-half same-store NOI increased 5%; total-portfolio NOI increased 13%. Higher acquired-property revenue and other property income contributed to growth.
- Operating income increased 74% in Q2 and 56% in the first half. Lower interest expense helped: down 17% in Q2 and 18% for the first half, attributed to mortgage repayments and lower credit-facility rates.
- Five facilities were acquired in the first half for an aggregate purchase price of $58.7m. The company entered into $200m of new five- and seven-year unsecured term loans in June and repaid $100m of unsecured term loans during Q2.
- Distributions paid to shareholders were $13.9m in the first half, versus $4.7m in the prior-year period.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said it intends to focus on internal growth and selectively pursue acquisitions and development, potentially using additional debt.
- Management estimated $3m–$5m of recurring capital expenditures for the remainder of 2011 and stated it believed available credit, the at-the-market equity program and operating cash flow were sufficient for its current plan. It cautioned that future access to debt and equity capital is not assured.
- Key risks include economic and local-market conditions, competition and rental pricing, capital availability, leverage and refinancing, interest rates and operating costs, derivative-counterparty performance, REIT qualification, acquisition and development risks, taxes, regulation, disasters and environmental liabilities.
- Q2 and first-half discontinued-operations income included $1.9m from compensation related to 2009 eminent-domain proceedings involving the North H Street property. Q2 also included a $2.1m noncash write-off of unamortized loan costs following early repayment of $100m of term debt.
- The company reported no impairment losses for the periods and no off-balance-sheet arrangements. It said disclosure controls were effective and that there was no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether same-store occupancy and rent growth continued beyond the reported periods, and how much total growth reflects acquisitions or fee and insurance income.
- Funding and refinancing plans for the $159.5m of scheduled 2012 mortgage principal, alongside the company’s low reported cash balance.
- Debt-covenant headroom, variable-rate exposure and the operation and terms of interest-rate caps and swaps.
- The recurring versus nonrecurring contribution to earnings, especially the $1.9m eminent-domain proceeds and the debt-cost write-off.
- Distribution sustainability, considering REIT distribution requirements, debt restrictions and first-half cash distributions.