Global Self Storage, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company is a self-managed REIT owning and operating 11 self-storage stores across seven states. Comparisons with 2016 require caution: the company changed from investment-company to operating-company accounting on January 19, 2016, and its portfolio grew through 2016 acquisitions.
Financial results
| Metric | Q2 2017 | Comparable 2016 period | Six months 2017 | Comparable 2016 period |
|---|---|---|---|---|
| Total revenue | $1.846 million | $1.145 million | $3.596 million | $2.071 million |
| Operating income (loss) | $223,345 | $(42,170) | $417,865 | $(33,187) |
| Net income (loss) | $18,089 | $(12,306) | $3,822 | $36,815 |
| Operating cash flow | Not separately presented | Not separately presented | $1.089 million | $1.010 million |
| Capital expenditures | Not separately presented | Not separately presented | $196,713 | $24,433 |
Q2 GAAP operating margin was approximately 12.1% and net margin approximately 1.0%. Six-month net income was nearly break-even despite positive operating income, principally reflecting interest expense. Diluted EPS was reported as $0.00 for both 2017 periods. The company reported Q2 FFO of $470,774 ($0.06 per share) and AFFO of $479,132 ($0.06 per share); six-month FFO was $905,742 ($0.12 per share) and AFFO was $919,932 ($0.12 per share). FFO and AFFO are non-GAAP measures.
Property performance: Same-store revenue grew 11.6% in Q2 and 10.8% for six months; same-store NOI increased 14.8% and 16.2%, respectively. At June 30, same-store occupancy was 92.8%, versus 92.1% a year earlier. Across all stores, occupancy was 93.4%. Combined-store revenue and NOI rose 54.2% and 57.6% in Q2, largely reflecting 2016 acquisitions and the Bolingbrook expansion; annualized revenue per leased square foot declined 2.3% to $10.46.
Balance sheet, debt and liquidity
- At June 30, 2017, total assets were $60.663 million, total liabilities $21.192 million, and equity $39.471 million. Cash and cash equivalents were $2.813 million; restricted cash was $70,478; marketable securities were $1.381 million. Management described total capital resources as approximately $4.2 million, including cash and marketable securities.
- The loan had $20.0 million principal outstanding and a $19.396 million net carrying value after unamortized loan costs. It bears a 4.192% stated rate (4.40% effective), matures July 2036, and is secured by stores with approximately $34.3 million net book value. The loan is interest-only through June 2018; the filing estimates monthly interest and amortization payments of $69,867 until then, rising to $107,699 thereafter.
- Cash declined $98,244 during the six months. Operating cash flow of $1.089 million was less than dividends paid of $990,531 plus capital expenditures of $196,713. Dividends were $0.065 per share for Q2 and $0.13 per share for the six months.
Material changes and management outlook
- Revenue growth reflected acquisitions of stores in Lima, Fishers, Clinton and Millbrook, as well as improved same-store rental rates, occupancy and leased square footage. Management cited Illinois, Indiana, Pennsylvania, New York and South Carolina as strong markets.
- Costs also increased: Q2 property operating expense rose 47.8% and depreciation and amortization rose 139.5%, primarily due to acquired properties and expansion-related depreciation. General and administrative expense increased 23.8%, including higher legal, accounting, compliance, listing and investor-relations costs.
- Management expected continued revenue growth, but said existing-tenant rent increases for the remainder of 2017 were expected to be slightly below the prior year. It anticipated higher property taxes, compensation and utility costs, and moderate increases in other store expenses. Demand and pricing are seasonal and sensitive to local competition, occupancy and tenant turnover.
- The Bolingbrook expansion added approximately 43,750 leasable square feet; 87.6% of that expansion space was leased by June 30. Millbrook received local approvals for a planned 16,500-square-foot expansion; construction timing was not assured. Upon commencement of that project, a further $900,000 payment to affiliate Tuxis is expected. A Merrillville expansion was in planning, with an estimated $400,000 budget, but commencement was not assured.
- Key risks include real-estate and local economic conditions, competition, acquisition and development execution, financing availability and interest-rate exposure, REIT qualification and regulation, and potential environmental, legal or technology risks. The company disclosed no material pending legal proceedings and no material change in internal control over financial reporting; management considered disclosure controls effective.
Important facts for investors to verify
- Review the 2016-to-2017 comparability limitations arising from the accounting-status change and acquired-store portfolio growth.
- Assess same-store performance separately from acquisition-driven growth, including Bolingbrook lease-up and revenue per leased square foot.
- Confirm the debt’s payment step-up after June 2018, covenant compliance, and the capacity to meet distributions, capital spending and the potential Millbrook payment.
- Track the timing, cost and lease-up of planned expansions, and whether management’s expected revenue growth and cost assumptions materialize.
- Consider the sustainability of dividends relative to operating cash flow, capital expenditures and financing requirements; FFO and AFFO are not substitutes for GAAP cash flow.