Business context and reporting period
Global Self Storage, Inc. is a self-managed REIT operating self-storage properties. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018. The company owned and operated 11 stores in seven states, including 10 same-store properties and one non-same-store property.
Financial performance and position
- Revenue: Third-quarter revenue was $2.06 million, up 6.5% year over year; nine-month revenue was $6.04 million, up 9.2%. Rental income growth reflected higher rental and occupancy rates and the Merrillville expansion.
- Profit: Third-quarter operating income was $472,000 versus $75,000; net income was $89,000 ($0.01 per diluted share), compared with a $129,000 loss. Nine-month operating income was $1.15 million versus $493,000; net income was $544,000 ($0.07 per diluted share), versus a $126,000 loss. Operating margins were approximately 22.9% for the quarter and 19.0% for the nine months; net margins were approximately 4.3% and 9.0%, respectively.
- Store performance: Same-store occupancy reached 93.0%, up from 91.3%. Same-store NOI increased 8.3% for the quarter and 6.8% for the nine months. Combined-store NOI rose 9.9% and 7.2%, respectively. Merrillville’s expansion was 94.7% leased at quarter-end.
- Cash flow and distributions: Nine-month operating cash flow was $1.47 million; investing outflows were $111,000 and dividends paid were $1.49 million. Cash, cash equivalents and restricted cash declined $211,000 to $2.05 million. Dividends were $0.065 per share for the quarter and $0.13 per share for the nine-month period.
- Liquidity and debt: Management reported approximately $3.5 million of capital resources, including $2.0 million of cash and $1.5 million of marketable securities. Net note payable was $19.37 million; principal outstanding was $19.92 million. The secured loan bears 4.192% interest and matures in 2036. Debt’s estimated fair value was approximately $18.3 million.
- Other measures: FFO per diluted share was $0.08 for the quarter and $0.21 for the nine months; AFFO per diluted share was $0.09 and $0.22. These are non-GAAP measures and are not substitutes for earnings or cash flow.
Material changes versus prior periods
Revenue growth accompanied higher occupancy and rates, while operating income improved substantially. Lower general and administrative expense and lower depreciation and amortization contributed to the improvement; property operating costs rose, particularly over the nine-month period. The Merrillville expansion added 13,300 leasable square feet. In the third quarter, a $180,000 unrealized loss on marketable equity securities reduced net income. Under ASU 2016-01, beginning in 2018 changes in fair value are recorded in earnings rather than other comprehensive income, affecting comparability with 2017.
Outlook, risks and unusual items
- No formal earnings guidance was provided. Management expected continued revenue growth, while noting that demand is seasonal and short-term move-in, move-out and pricing trends are volatile. Commentary on planned existing-tenant rent increases differed by portfolio: slightly below prior year for same-store properties and slightly above prior year for the combined portfolio.
- The completed Merrillville expansion was leasing rapidly. A proposed Millbrook, New York expansion would add about 16,500 gross square feet of climate-controlled units; construction had not started, and timing and completion were not assured.
- Management reported higher property taxes, including at Dolton, Illinois, where a reassessment and loss of a tax incentive increased costs. The assessment and incentive status were under appeal, without assurance of a favorable result; further tax increases were expected as the incentive phases out.
- A $900,000 contingent payment to Tuxis is associated with the Millbrook expansion and is expected upon commencement of construction, subject to the purchase-agreement conditions. It was included in accounts payable and accrued expenses.
- Monthly interest and amortization payments on the loan increased from $69,867 to $107,699 beginning in July 2018. Loan documents include covenants, and the lender may accelerate amounts upon specified defaults.
- Management identified real-estate, local economic, competitive, financing, REIT qualification, tax, regulatory and market risks. It reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether occupancy, rental-rate growth and the Merrillville lease-up sustain revenue and NOI growth.
- How property-tax appeals and the Dolton incentive phase-out affect expenses and cash flow.
- The Millbrook project’s construction decision, funding needs and potential $900,000 payment.
- Whether operating cash flow can support dividends, capital spending and loan payments, particularly after the payment increase.
- The market value and earnings impact of the remaining marketable securities, and the comparability of reported results following the accounting change.