SmartStop Self Storage REIT, Inc. — 2015 Q3 Form 10-Q
Registrant clarification: The filing is for Strategic Storage Trust II, Inc., a self-storage REIT associated with the SmartStop platform. It covers the quarter and nine months ended September 30, 2015; financial statements are unaudited.
Business context and reporting period
The company invests in self-storage properties and began formal operations in May 2014. At September 30, 2015, it owned 32 facilities in 10 states, with approximately 18,030 units, 2.0 million rentable square feet and 87% physical occupancy. The portfolio had expanded substantially during 2015, including acquisition of a 26-property portfolio and one Alabama property.
After quarter-end, on October 1, 2015, SmartStop was acquired by Extra Space Storage. The company’s sponsor changed, its U.S. properties began rebranding as Extra Space, and Extra Space became the on-site sub-property manager under new agreements.
Financial results and key metrics
| Metric | Three months ended Sep. 30, 2015 | Nine months ended Sep. 30, 2015 | Comparable 2014 period |
|---|---|---|---|
| Total revenue | $5.05 million | $12.55 million | No property revenue |
| Operating loss | $0.94 million | $4.98 million | $0.50 million / $1.37 million |
| Net loss | $1.85 million | $7.43 million | $0.50 million / $1.37 million |
| Net loss attributable to common stockholders | $3.74 million | $12.76 million | $0.48 million / $1.27 million |
| Basic and diluted loss per share | $0.82 | $3.91 | $0.77 / $5.17 |
The 2014 comparison is not directly meaningful: the company owned no self-storage properties at September 30, 2014. Nine-month 2015 expenses included $7.38 million of depreciation and amortization, $3.15 million of acquisition expenses, and $2.13 million of interest expense. Acquisition-related expenses were unusually elevated as the portfolio grew.
- Cash flow, nine months: $1.44 million used in operations; $135.54 million used in investing, primarily for property purchases; and $137.00 million provided by financing. Cash and cash equivalents ended at $6.55 million.
- Balance sheet, September 30: Total assets were $165.71 million, total liabilities $89.25 million, and total equity $31.45 million. Accumulated deficit was $15.15 million.
- Debt: Secured debt was $84.60 million, including a $0.82 million fair-value premium; approximately $71.30 million was variable-rate debt and $12.48 million fixed-rate debt. The KeyBank facility’s stated maturity is January 2018; the filing lists $71.49 million of principal payments due in 2018.
- Preferred equity: Approximately $45 million remained outstanding at September 30. Subsequent to quarter-end, the company redeemed $25 million in October and all remaining preferred units in November, paying approximately $22 million for the remaining units and distributions.
Material changes, outlook and risks
- Revenue and operating costs rose with the acquisitions; the company expected both to increase further as it acquired properties. Management stated that operations would not be profitable in 2015. No specific earnings or acquisition guidance was provided.
- The board declared Class A distributions at an annualized 6.00% rate for Q4 2015, assuming a $10.00 share purchase price. Through September 30, all distributions since inception had been funded from offering proceeds, not operating cash flow. For the first nine months of 2015, $3.62 million of distributions were funded 86% by primary-offering proceeds and 14% by distribution-reinvestment proceeds.
- Management warned that funding distributions from offering proceeds, borrowing or asset sales can reduce capital available for investment, increase costs, and potentially make distributions a return of capital. Distribution rates may be changed or discontinued.
- The KeyBank facility is variable-rate and recourse, secured by cross-collateralized first mortgages. Management estimated that a 100-basis-point increase in the relevant index would add about $0.7 million to annual interest expense. A $50 million interest-rate cap limited the rate on that portion to 5.25% through June 1, 2016.
- Other notable risks include dependence on the sub-property manager, competition and occupancy/rent trends, REIT qualification, acquisition valuation estimates, and related-party fees. The Extra Space rebranding led to approximately $230,000 of accelerated sign depreciation in Q3. The filing reported no material legal proceedings and no recognized impairment losses.
- Subsequent-event pipeline: a Tampa property was acquired November 2 for approximately $3.3 million; proposed Boynton Beach and Lancaster acquisitions were subject to closing and financing uncertainty, with potential earnest-money forfeiture if not completed.
Important facts for investors to verify
- Whether operating cash flow improves enough to support distributions, which had been funded entirely from offering proceeds through September 30.
- The post-redemption preferred-equity balance and the cash, debt or equity sources used to complete the October and November redemptions.
- Variable-rate borrowing exposure, the 2018 KeyBank maturity, covenant compliance, and refinancing plans.
- Actual occupancy, rental-rate performance and property-level results as the acquired portfolio seasons, especially given the 87% portfolio occupancy and market concentration in California.
- The costs and operational effects of Extra Space management and rebranding, along with continuing related-party fees and agreements.
- Whether the pending acquisitions closed on expected terms and whether future distributions are supported by recurring property cash flow.