Business context and reporting period
Unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The registrant is Strategic Storage Trust II, Inc.—a self-storage REIT sponsored by SmartStop Asset Management—not an entity named “Smartstop Self Storage REIT, Inc.” The company owned 83 facilities across 14 U.S. states and the Greater Toronto Area, with approximately 6.03 million rentable square feet and 89% physical occupancy at quarter-end.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $20.0 million | $19.1 million | $39.9 million | $36.8 million |
| Operating income | $3.4 million | $1.0 million | $7.3 million | $0.4 million |
| Net loss attributable to common stockholders | $(1.4) million | $(3.5) million | $(2.1) million | $(8.7) million |
| Net loss per share, Class A and T | $(0.02) | $(0.06) | $(0.04) | $(0.16) |
| Net cash provided by operating activities | Not provided for quarter | Not provided for quarter | $10.4 million | $9.0 million |
Q2 operating margin was approximately 17.2%, compared with 5.2% a year earlier. Same-store revenue rose 3.9% in Q2 and 5.7% for the six-month period; same-store occupancy declined to 88.7% from 93.7% in Q2 and to 88.6% from 93.0% for the six months. Higher revenue per occupied square foot and tenant-insurance income supported growth.
At June 30, total assets were $803.0 million, debt net of issuance costs was $394.2 million, and total liabilities were $408.2 million. Cash and cash equivalents were $5.2 million, with a further $5.1 million restricted. Debt carried a 4.56% weighted-average rate, comprising approximately $260.8 million fixed-rate and $134.1 million variable-rate debt. The company reported compliance with its debt covenants.
Material changes versus prior comparable periods
- Six-month revenue increased 8.5%, including same-store growth and additional contribution from properties acquired in 2017. Q2 revenue increased 5.1%.
- Operating income improved in both comparisons. Lower intangible amortization—following the amortization of acquired in-place leases—was a significant factor; general and administrative expense rose to $2.6 million for six months from $1.9 million.
- Six-month interest expense, including debt accretion, increased to approximately $8.6 million from $7.6 million, reflecting debt associated with prior acquisitions and higher variable rates.
- Operating cash flow increased by $1.4 million year over year. Investing cash use fell sharply because there were no real-estate acquisitions in the 2018 period; financing cash flow was a $10.4 million use, versus $40.3 million provided in 2017.
- Total debt declined from $396.8 million at December 31, 2017 to $394.2 million at June 30, 2018. Real-estate carrying value also declined, partly reflecting foreign-currency translation and depreciation.
Outlook, risks, contingencies and unusual items
- No formal earnings or operating guidance was provided. Management said it was exploring extensions and other financing for debt due within the next year; approximately $121.8 million of principal was scheduled for 2018, including $88.2 million on a revolving facility maturing December 22, 2018. That facility has two one-year extension options, subject to conditions.
- Management expects interest expense to vary with debt levels and rates. A 100-basis-point increase in rates on variable debt was estimated to reduce annual earnings and cash flow by approximately $0.3 million. A $90 million LIBOR cap at 1.25% runs through December 22, 2018.
- Cash distributions paid or reinvested in the first half totaled $16.8 million, compared with $10.4 million of operating cash flow. The filing reports that 62% of distributions came from operating cash flow and 38% from DRP proceeds. Since inception, distributions of approximately $79.8 million substantially exceeded cumulative FFO of approximately $15.7 million. Management cautions that distributions may be funded from sources other than operations and may reduce investment capital or require borrowing.
- The board declared a third-quarter 2018 distribution rate of approximately $0.001644 per share per day; Class T distributions are lower after servicing fees. Distributions remain at board discretion.
- The company invested approximately $3.8 million CAD for a 50% interest in a joint venture with SmartCentres to develop a self-storage facility in East York, Ontario. It also reported material related-party relationships, including affiliate advisory, property-management and transfer-agent services. The transfer agent is a recently formed affiliate with limited operating history, identified as a risk factor.
- Foreign-currency translation and hedging affected other comprehensive income. No impairment losses were recorded, and the company reported no material legal proceedings. Management stated that its disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
- The company describes a potential liquidity event, at the board’s discretion, generally targeted within three to five years after the Primary Offering ended in January 2017. This is not a commitment or forecast.
Important facts for investors to verify
- Refinancing or extension progress for the 2018 maturities, particularly the KeyBank facility, and the conditions attached to extension options.
- Whether operating cash flow can support distributions, given first-half distributions exceeded operating cash flow and the longer-term cumulative disparity with FFO.
- Occupancy and rent trends: same-store revenue per occupied square foot increased while average physical occupancy fell materially year over year.
- Variable-rate exposure, the expiration of the LIBOR cap, and Canadian-dollar exposure despite the company’s foreign-currency hedge.
- Costs, performance and governance of affiliate-provided services, especially the new transfer-agent arrangement and property-management relationship.
- The assumptions underlying the board’s $10.65 estimated value per share, calculated using December 31, 2017 net asset value, and the limited liquidity of the shares and redemption program.