Business context and reporting period
Strategic Storage Trust II, Inc. (the filing issuer; sponsored by SmartStop Asset Management) filed this unaudited Form 10-Q for the quarter ended September 30, 2016. It is a non-traded REIT focused on self-storage properties. At quarter-end it owned 66 properties, with 42,270 rentable units and 4.85 million rentable square feet; portfolio physical occupancy was 92%.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $14.46 million | $5.05 million | $30.49 million | $12.55 million |
| Operating loss | $(1.30) million | $(0.94) million | $(14.02) million | $(4.98) million |
| Net loss | $(6.34) million | $(1.85) million | $(21.58) million | $(7.43) million |
| Net loss attributable to common stockholders | $(6.34) million | $(3.74) million | $(21.57) million | $(12.76) million |
| Cash used in operating activities | — | — | $(2.06) million | $(1.44) million |
At September 30, 2016, total assets were $663.2 million, debt was $284.1 million, and equity was $359.9 million. Cash and cash equivalents were $12.0 million, with a further $2.3 million restricted. The filing reports approximately $137 million of fixed-rate and $148 million of variable-rate debt, before debt premium and issuance-cost adjustments. A 100-basis-point increase in variable rates was estimated to reduce annual earnings and cash flows by approximately $1.5 million.
Reported GAAP operating margins remained negative: operating loss was $1.30 million on $14.46 million of Q3 revenue and $14.02 million on $30.49 million for the nine-month period. Same-store results were stronger: Q3 same-store revenue rose 13.9% and operating income rose 17.3%; nine-month same-store revenue rose 10.6% and operating income rose 11.3%. Q3 same-store occupancy increased to 92.3% from 88.0%, and annualized rent per occupied square foot increased to $13.47 from $12.37.
Material changes versus comparable periods
- Revenue rose sharply year over year, primarily because of acquisitions and a larger operating portfolio—not solely same-property growth. Management cautioned that acquisitions make comparison with 2015 of limited value.
- For the nine months, real estate purchases used $466.2 million of cash, including $454.4 million for acquisitions. Financing provided $452.2 million, including $259.5 million of gross common-stock proceeds and $354.6 million of debt proceeds, offset by debt repayments and offering costs.
- Debt increased from $23.0 million at December 31, 2015 to $284.1 million at September 30, 2016. The company added a $95 million, 3.89% KeyBank CMBS loan with a 2026 maturity and incurred short-term acquisition financing due in 2016.
- The company reported $11.8 million of acquisition-related expenses for the first nine months of 2016, versus $3.1 million in 2015. These expenses contributed to GAAP losses; the company’s non-GAAP MFFO was $5.84 million for the 2016 nine-month period, versus negative $2.78 million in 2015. MFFO excludes acquisition expenses and is not cash flow or a substitute for GAAP results.
Outlook, commentary, and risks
- Management expected revenue and property-level expenses to increase with further acquisitions. It anticipated that operations might not be profitable in 2016; the filing provides no numerical earnings or revenue guidance.
- The company expected to close the remaining properties in a roughly $371 million, 27-property portfolio in Q4 2016, subject to completion and financing. A separate Aurora, Colorado acquisition of approximately $10.1 million was expected in Q1 2017. Neither transaction was assured; failure to close could result in forfeited deposits and incurred costs.
- Distributions for the first nine months totaled $15.1 million, while operating cash flow was negative. The filing states distributions were funded 51% from primary-offering proceeds and 49% from distribution-reinvestment proceeds, with none from operating cash flow. Management warned that distributions funded from sources other than operations reduce funds available for investment and may represent a return of capital.
- Near-term refinancing and repayment needs are significant: the debt schedule shows $125.1 million of principal payments in 2016. The $105 million KeyBank property loan and $20 million subordinate loan were both due December 31, 2016; the company said it intended to repay them using offering proceeds, credit-facility borrowings, or other financing. It repaid a further $5 million on the subordinate loan in October.
- Other risks include interest-rate and Canadian-dollar exposure, dependence on continued equity fundraising and acquisitions, related-party fees and arrangements, REIT qualification, and the limited liquidity and valuation uncertainty of non-traded shares. The estimated share value was $10.09, based principally on a December 31, 2015 property valuation; it may not equal realizable sale value. No material legal proceedings were reported, and management said disclosure controls were effective.
Important facts for investors to verify
- How the company refinanced or repaid the $105 million property loan and remaining subordinate loan at their December 2016 maturity, and whether it met all debt covenants.
- Whether the remaining 27-property portfolio and Aurora acquisition closed, their final purchase accounting, financing, and actual contribution to operating results.
- Subsequent distribution funding: whether distributions became supported by property cash flows or continued to rely on offering proceeds, reinvestment proceeds, borrowing, or asset sales.
- Same-store occupancy, rents, expenses, and cash generation versus acquisition-driven revenue growth; also reconcile GAAP losses and negative operating cash flow with non-GAAP MFFO.
- Related-party acquisition and management fees, offering costs, share issuance and dilution, redemption limitations, and the basis and update frequency of the estimated per-share value.