Business context and reporting period
This summary covers Strategic Storage Trust II, Inc.’s Form 10-K for the year ended December 31, 2014, filed March 31, 2015. The filing is by Strategic Storage Trust II, Inc., a non-traded self-storage REIT, not by SmartStop Self Storage, Inc.; SmartStop was its sponsor. The company began formal operations on May 23, 2014. Its 2013 comparison period runs only from its January 2013 inception and had no operating revenue, so year-over-year comparisons are limited.
At year-end, the company owned five facilities in North and South Carolina, with approximately 2,490 units, 354,200 rentable square feet, and 88.6% physical occupancy. It acquired the portfolio for approximately $22.1 million, including assumption of existing debt. The filing reports that 2014 operating results are not indicative of future periods, given the planned expansion.
Key financial metrics
| Metric | FY 2014 / December 31, 2014 |
|---|---|
| Revenue | $465,345: $450,963 self-storage rent and $14,382 ancillary revenue |
| Operating loss | $2,256,865 |
| Net loss attributable to common shareholders | $2,396,385; basic and diluted loss per share $4.59, based on 522,223 weighted-average shares |
| Cash flow | Operating activities used $334,442; investing activities used $13,688,652; financing activities provided $20,353,246 |
| Cash and liquidity | Cash and cash equivalents $6,531,152; restricted cash $382,792; total assets $35,050,649 |
| Debt | Consolidated secured debt carrying value $13,494,871, including approximately $890,000 debt fair-value premium; principal approximately $12,604,414. Fixed rate of 5.73%, with a September 2023 maturity. |
| Liabilities and equity | Total liabilities $18,568,923; total equity $11,380,097. The balance sheet separately reports $5,028,115 of preferred equity in the Operating Partnership and $73,514 of redeemable common stock. |
| Distributions | $272,189 paid in 2014, or $0.60 declared per common share. The filing says 100% came from offering proceeds, including reinvestment-plan proceeds; none came from operating cash flow. All 2014 common-stock distributions were classified as non-taxable returns of capital. |
Margins are not representative of stabilized operations: the company had only a short period of property operations and recorded substantial general and administrative and acquisition-related costs.
Material changes versus the prior comparable period
- Revenue, expenses, real estate assets, and secured debt arose in 2014; the 2013 inception-period financial statements reported no operating revenue or debt.
- The company raised approximately $17.5 million gross through common-share sales and received approximately $6.5 million from a related-party preferred investment. It had issued approximately 1.8 million common shares by year-end.
- In August 2014, SmartStop acquired the prior sponsor’s advisory, asset-management, property-management, and investment-management businesses, becoming the company’s sponsor.
- Acquisition expenses were significant: approximately $1.1 million charged to affiliates and approximately $199,000 of other property acquisition expenses.
Outlook, risks, contingencies, and unusual items
- Expansion after year-end: The company closed on 21 additional facilities from the 26-property portfolio in four phases during January and February 2015, for an aggregate purchase price of approximately $110.5 million. The remaining five properties were expected to close in the second quarter of 2015. These acquisitions are subsequent events, not part of the December 2014 year-end portfolio.
- New financing: In January 2015, the company entered a KeyBank-led facility with total commitments of approximately $71.3 million. It was fully recourse, secured by cross-collateralized first mortgages, and had a three-year initial term with two possible one-year extensions. The 21 subsequent acquisitions used approximately $61.3 million of facility draws and additional preferred investment proceeds. The facility required an interest-rate hedge by the earlier of April 30, 2015 or the final advance.
- Preferred financing burden: Preferred units rank senior to common equity and receive monthly current distributions at one-month LIBOR plus 6.5%, plus additional paid or deferred distributions under the agreement. The preferred investor has specified repurchase rights and consent protections. Management disclosed that distributions may continue to be funded from offering proceeds or debt rather than property cash flow.
- Distribution sustainability: The board authorized an annualized 6.0% common distribution rate, assuming a $10 share price, for the first quarter of 2015. The company cautioned that operating cash may not support distributions and that the board may change or stop them.
- Liquidity and share market: No established public trading market existed. Share redemptions are restricted, capped at 5% of prior-year weighted-average shares, and funded only from distribution-reinvestment-plan proceeds; the board may amend, suspend, or terminate the program. The company’s stated liquidity-event objective was within three to five years after completion of the public offering, but it made no assurance of a transaction or timeline.
- Related-party and operating risks: The sponsor and its affiliates provide advisory, property-management, dealer-manager, and other services and receive fees; management and investment-allocation conflicts are disclosed. The company also licenses the SmartStop brand from its sponsor and does not control that intellectual property.
- Other risks and contingencies: The filing highlights early-stage operating losses, acquisition and lease-up execution, competition, concentration in self-storage, debt covenants and refinancing exposure, REIT qualification, environmental and regulatory costs, and potential insurance or cyber-security events. It reported no known legal proceedings expected to have a material adverse effect.
- Management view: Management expects rental income, operating expenses, depreciation, amortization, and interest expense to rise as acquisitions are added. No quantified earnings or operating guidance is provided. Management reported effective disclosure controls and internal control over financial reporting at year-end.
Most important facts for investors to verify
- Whether the 21 post-year-end acquisitions and the remaining five properties closed as expected, and their subsequent occupancy, rental revenue, and operating performance.
- Current debt drawn under the KeyBank facility, compliance with its covenants and hedging requirement, and the company’s aggregate leverage after acquisitions.
- The preferred units’ full distribution and redemption economics, including the paid-versus-deferred distribution election and accrued amounts.
- Whether operating cash flow can cover common and preferred distributions; confirm distribution sources and tax characterization in later filings.
- Related-party fees, acquisition costs, offering expenses, and application of the sponsor’s allocation policy for investment opportunities.
- Any updated share valuation, redemption capacity, and credible liquidity-event plans, given the absence of a public market.