Business context and reporting period
Filing identity: The supplied 10-K is for Strategic Storage Trust II, Inc., not an issuer named SmartStop Self Storage REIT, Inc. SmartStop is referenced as a former sponsor/affiliate. The filing covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing.
The company is an early-stage, non-traded self-storage REIT. At year-end it owned 33 facilities in 11 U.S. states, totaling approximately 18,540 units and 2.053 million rentable square feet. Physical occupancy was 84%. The portfolio expanded substantially through 28 acquisitions during 2015. On October 1, 2015, SmartStop Self Storage, Inc. was acquired by Extra Space Storage; the company’s sponsor and operating arrangements changed, and U.S. properties were rebranded under Extra Space.
Financial and operating highlights
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $17.91 million | $0.47 million |
| Operating loss | $5.08 million | $2.26 million |
| Net loss attributable to common stockholders | $15.29 million | $2.40 million |
| Net cash used in operating activities | $1.25 million | $0.33 million |
| Net cash used in investing activities | $140.87 million | $13.69 million |
| Net cash provided by financing activities | $163.69 million | $20.35 million |
- Revenue included $17.55 million of rental income and $0.36 million of ancillary revenue. Management attributed the increase primarily to 2015 acquisitions and a full year of operations at the five properties acquired in 2014.
- 2015 operating expenses were $22.98 million, including $9.11 million of depreciation and amortization, $2.78 million of acquisition expenses to affiliates, and $2.12 million of affiliate property operating expenses. Interest expense was $2.91 million; debt issuance costs were $1.01 million.
- Year-end total assets were $193.65 million, including $152.87 million of net real estate facilities and $28.10 million of cash and cash equivalents. Total liabilities were $26.58 million; total equity was $165.85 million. The accumulated deficit was $17.69 million.
- Consolidated debt was $23.24 million, including an approximately $0.80 million debt premium. The filing reports $10.0 million of variable-rate debt and $12.4 million of fixed-rate debt. A 100-basis-point change in variable rates was estimated to affect annual earnings and cash flow by approximately $0.1 million.
- The 2015 portfolio’s weighted-average estimated first-year capitalization rate was approximately 7.4%; management cautions that these estimates and historical results do not assure future performance.
- The board declared distributions of $0.60 per common share for 2015. The filing states that all distributions through year-end were funded from offering proceeds, not operating cash flow. All 2014 and 2015 distributions were characterized for tax purposes as returns of capital.
Material changes versus the prior comparable period
- Revenue, assets, debt, and cash flows grew markedly as the company acquired 28 properties in 2015; the filing says year-over-year operating comparisons are of limited value because 2014 included only partial-year operations at five facilities.
- Net loss attributable to common stockholders increased to $15.29 million from $2.40 million. The 2015 figure includes preferred-unit distributions and accretion, as well as acquisition-related and noncash depreciation and amortization expenses.
- The company redeemed all approximately 2.4 million preferred units during 2015 for approximately $59.5 million in total; none remained outstanding at year-end.
- The December 2015 amended KeyBank revolving facility raised stated borrowing capacity to $105 million, replacing a facility with approximately $71.3 million capacity. The company later reported increasing capacity to $145 million after year-end.
Outlook, commentary, and risks
- Management expects rental revenue and operating costs to rise as the 2015 acquisitions contribute for a full year and further acquisitions are made. No specific earnings, revenue, or cash-flow guidance is provided.
- The company reported negative operating cash flow and reliance on offering proceeds to fund distributions. It warns that distributions may continue to exceed operating cash flow, reducing funds available for investment or requiring borrowing or additional share issuance.
- There was no established public trading market for the shares. The share-redemption program is limited, capped, funded only from distribution-reinvestment proceeds, and may be amended, suspended, or terminated.
- Key risks include the company’s short operating history, acquisition and integration execution, reliance on affiliated management, conflicts of interest and affiliate fees, competition, debt covenants and variable interest rates, and maintaining REIT qualification. The filing also highlights real-estate, environmental, regulatory, cybersecurity, and potential Canadian foreign-currency risks.
- After year-end, the company acquired five Canadian facilities and two U.S. facilities and disclosed several additional proposed acquisitions, including a 27-property portfolio. These plans are subject to closing and financing; the filing provides no assurance they will be completed.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor issued an unqualified opinion on the financial statements, but did not audit or opine on internal control effectiveness.
Important facts for investors to verify
- Confirm the issuer’s legal identity and the relationship between Strategic Storage Trust II, SmartStop, its sponsor, and Extra Space.
- Review the full audited statements and notes, especially the drivers of the common-stockholder loss, acquisition expenses, affiliate charges, and preferred-unit redemption costs.
- Assess distribution sustainability: distributions were funded entirely from offering proceeds despite negative operating cash flow.
- Check current debt balances, borrowing capacity, variable-rate exposure, collateral, covenant compliance, and financing for post-year-end acquisitions.
- Review the share valuation and redemption restrictions; the filing states there was no public market and offering prices were not based on an independent valuation.