Business context and reporting period
This Form 10-Q is for the quarter ended September 30, 2014, filed by Strategic Storage Trust II, Inc.—not SmartStop Self Storage REIT, Inc. The company was an early-stage, externally managed self-storage REIT: it began formal operations in May 2014 and had acquired no properties by quarter-end. It had raised approximately $10.5 million in gross offering proceeds.
Financial results and position
| Metric | Result |
|---|---|
| Revenue | $0 for the quarter and nine months; no operating properties had been acquired by September 30. |
| Expenses and loss | Third-quarter operating expenses were $498,335 and net loss was $498,335. Nine-month operating expenses and net loss were $1,365,326; loss attributable to the company was $1,271,740. Basic and diluted loss per share was $0.77 for the quarter and $5.17 for the nine months. |
| Cash flow | Nine-month operating cash outflow was $19,731; investing outflow was $4.0 million, principally acquisition deposits; financing inflow was $9.405 million. Cash ended at $5.586 million. |
| Assets and liabilities | Total assets were $10.897 million, including $5.288 million of other assets. Total liabilities were $4.263 million, including $4.213 million due to affiliates. Total equity was $6.613 million. |
| Debt and liquidity | No third-party debt was outstanding at quarter-end. The filing reports no operating revenue or property cash flows at that date. |
Margins are not meaningful because the company had no revenue. Compared with the 2013 inception-period figures, which showed no revenue or expenses, 2014 results reflect offering, corporate and acquisition-related activity; the periods are not like-for-like operating comparisons.
Material changes, outlook and risks
- Capital raising and costs: By September 30, approximately 1.1 million shares had been issued for $10.5 million gross. The company reported approximately $1.0 million of selling commissions and dealer-manager fees and $1.6 million of organization and offering costs.
- Distributions: The board declared a fourth-quarter daily distribution equivalent to a 6% annualized rate based on a $10 share price. Management stated distributions since inception had been funded solely from offering proceeds, rather than operating cash flow; this reduces capital available for investment and may make distributions unsustainable. Nine-month distributions were approximately $109,000.
- Acquisitions: A $4.0 million deposit was made toward a potential 26-property portfolio priced at approximately $128.2 million, with closing expected in tranches in the first quarter of 2015. Completion was uncertain, and deposits could be forfeited. Subsequent to quarter-end, on November 3, the company acquired five properties for $22.1 million and assumed a $12.6 million mortgage bearing 5.73% fixed interest and maturing in 2023.
- Subsequent preferred financing: Also on November 3, an affiliated investor agreed to provide up to $65 million in preferred equity; the first tranche was approximately $6.5 million. Preferred units have cumulative distributions, seniority over common interests and specified repurchase rights. The acquired-property loan is supported by a guaranty requiring the company and Sponsor collectively to maintain at least $6 million net worth and $2 million liquidity, subject to the stated terms.
- Management and related parties: Effective August 31, the Sponsor acquired the prior sponsor’s advisory, asset-management, property-management and investment-management businesses. The company has no employees and depends on its Advisor; reported affiliate amounts payable were $4.2 million. The filing discloses related-party interests in the dealer manager and other service providers.
- Other risks and outlook: Management expects expenses and, after acquisitions, rental income, depreciation and interest expense to rise. Key risks include failure to acquire properties, reliance on future fundraising and financing, distributions exceeding operating cash flow, REIT qualification, and interest-rate exposure. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the filing issuer: this report is for Strategic Storage Trust II, Inc.; verify its relationship, if any, to the company named in the request.
- Track whether the 26-property acquisition closed, how the $4.0 million deposit was applied, and the final purchase price and financing.
- Review post-quarter acquisition performance, the assumed mortgage and guaranty requirements, and compliance with the minimum net-worth and liquidity covenants.
- Verify the preferred financing’s actual funding, cumulative distribution burden, seniority and repurchase provisions.
- Assess distribution coverage and the extent to which future distributions are funded from operations rather than offering proceeds or borrowing.
- Monitor offering costs, affiliate payables and related-party fees, as well as progress toward REIT qualification.