Business Context and Reporting Period
This Form 8-K, filed on June 7, 2016, reports events occurring on June 1, 2016, for Strategic Storage Trust II, Inc. (Registrant). The filing details the completion of the first phase of a major asset acquisition and the execution of new financing agreements to fund the transaction.
Key Financial Metrics and Transactions
Asset Acquisition
- Transaction: Closed on 11 self-storage facilities (First Phase of the 27 Property Portfolio) in Florida and Maryland.
- Total Purchase Price: Approximately $275 million (specifically $274,900,000), plus closing costs and acquisition fees.
- Acquisition Fees: Approximately $4.8 million.
- Asset Scale: 9,540 units totaling approximately 985,500 net rentable square feet.
- Funding Sources: Proceeds from a public offering, a $100 million drawdown on an existing credit facility, a new $105 million Property Loan, and a new $30 million Subordinate Loan.
Debt and Liquidity
- Property Loan: $105 million term loan with KeyBank. Maturity: December 31, 2016. Interest-only payments. Secured by first mortgage liens on the 11 acquired properties. Fully recourse to the Registrant.
- Subordinate Loan: $30 million term loan with KeyBank. Maturity: December 31, 2016. Interest-only payments. Non-recourse and unsecured.
- Interest Rates: Both loans elected Eurodollar Borrowings. Property Loan spread: 225 basis points. Subordinate Loan spread: 563 basis points.
Material Changes and Covenants
The Registrant has entered into significant new debt obligations totaling $135 million to facilitate the acquisition. The filing introduces strict financial covenants that the Registrant must maintain on a consolidated basis:
- Leverage Ratio: Total Leverage Ratio not to exceed 60%.
- Tangible Net Worth: Must not be less than approximately $260 million plus 85% of Net Equity Proceeds received after the effective date.
- Coverage Ratios: Interest Coverage Ratio of at least 1.85:1.00; Fixed Charge Ratio of at least 1.60:1.00.
- Loan-to-Value (Property Loan only): Not to exceed 55%.
- Debt Yield (Property Loan only): Pool Debt Yield of at least 10.5%.
- Variable Rate Debt: Indebtedness with varying interest rates cannot exceed 30% of total indebtedness.
Outlook, Management Commentary, and Risks
- Future Acquisitions: The Registrant expects to close on the remaining 16 properties of the 27 Property Portfolio in the third quarter of 2016. Funding is expected to come from public offering proceeds and assumptions of existing debt.
- Management Structure: Strategic Storage Property Management II, LLC will serve as the property manager, paying fees of the greater of $2,500/month or 6% of gross monthly revenues. A subsidiary of Extra Space Storage, Inc. will act as the sub-property manager.
- Financial Reporting: Audited or unaudited financial statements for the acquired properties are not currently available. The Registrant intends to file these statements by August 17, 2016.
- Risks: The Subordinate Loan contains a cross-default provision; an event of default under the Property Loan or the existing credit facility will trigger a default under the Subordinate Loan.
Investor Verification Checklist
- Verify the pro forma financial impact of the $275 million acquisition and $135 million new debt on the Registrant's leverage and coverage ratios.
- Confirm the status of the remaining 16 properties in the 27 Property Portfolio and the timeline for the Q3 2016 closing.
- Review the upcoming filing (due August 17, 2016) for the financial statements of the acquired real estate to assess historical performance.
- Monitor the Registrant's ability to maintain the 60% leverage cap and 1.85:1 interest coverage ratio given the new debt load.
- Assess the exposure to variable interest rates, noting the 30% cap on floating-rate debt within the total debt structure.