Business context and reporting period
Filing identity: The supplied filing is for Strategic Storage Trust II, Inc., not SmartStop Self Storage REIT, Inc. It is a Form 10-Q for the quarter ended March 31, 2019. The company is a non-traded self-storage REIT; its shares were not listed on an exchange.
On January 24, 2019, the company completed its merger with Strategic Storage Growth Trust (SSGT), adding 28 operating facilities and one facility under development in the Greater Toronto area. It also obtained the right to acquire a facility under development in Gilbert, Arizona. At quarter-end, it reported 111 operating facilities and one under development across 17 states and Ontario.
Financial performance and position
- Revenue: $23.9 million, up 20.2% from $19.9 million in Q1 2018. The merger contributed approximately $4.1 million of revenue; adoption of lease accounting guidance reduced reported rental revenue by approximately $360,000.
- Profitability: Operating income was $1.9 million, versus $3.9 million; operating margin was approximately 8.2%, down from 19.4%. Net loss was $8.95 million, compared with a $0.67 million loss. Net loss attributable to common stockholders was $8.89 million, or $0.15 per share, versus $0.66 million, or $0.01 per share.
- Cash flow: Operating cash flow was $0.88 million, down from $4.44 million. Investing activities used $339.2 million, principally for the SSGT merger; financing activities provided $344.5 million. Cash and restricted cash totaled $19.9 million at quarter-end.
- Property operations: Same-store revenue declined 0.8% as reported; management said it would have increased approximately 0.6% on a comparable basis after adjusting 2018 for the new lease-accounting presentation. Same-store property operating income fell 4.7%. Portfolio physical occupancy was 84.6%, or approximately 88% excluding properties not yet stabilized.
- Debt and liquidity: Debt, net, was $764.2 million, up from $406.1 million at year-end 2018; the weighted-average interest rate was approximately 5.1%. Approximately $477.0 million was variable-rate debt and $298.2 million fixed-rate debt, before net debt premium and issuance costs. Cash and restricted cash were $19.9 million. The filing does not provide a clear current ratio or other standard current-liquidity measure.
- Distributions: Q1 distributions totaled $8.43 million, including reinvested distributions. The filing attributes 10% to operating cash flow, 43% to financing activities, and 47% to DRP proceeds. The board declared a Q2 rate of approximately $0.001644 per share per day; Class T distributions are lower after servicing fees.
- Supplemental measures: FFO attributable to common stockholders was negative $0.42 million, versus positive $5.47 million. MFFO was $1.38 million, versus $5.32 million. Both are non-GAAP measures and should not be treated as substitutes for GAAP results or cash available for distributions.
Material changes versus the prior comparable period
The SSGT merger substantially expanded the portfolio and drove higher revenue, property expenses, depreciation and amortization, and debt. Interest expense and debt-issuance-cost expense increased; the company also recorded a $1.49 million loss on extinguishment of debt, primarily related to prepayment penalties and write-offs when refinancing. These items, together with weaker same-store property operating income, contributed to the larger net loss and lower operating cash flow.
The company reported that newly acquired SSGT properties were not yet physically or economically stabilized. Their 28 operating facilities were approximately 78% occupied at acquisition and 80% at March 31, 2019.
Outlook, risks, contingencies and unusual items
- Management outlook: Management expects SSGT properties to contribute accretive operating income and cash flow as they lease up over the next 24 to 36 months. It provided no numerical earnings or occupancy guidance and cautioned that Q1 results are not necessarily indicative of full-year results.
- Refinancing and interest-rate exposure: Management intends to address near-term maturities through extensions or other financing. A 100-basis-point increase in rates on variable-rate debt was estimated to reduce annual earnings and cash flow by approximately $1.9 million. Interest-rate caps and swaps mitigate some exposure.
- Distribution funding: Q1 distributions substantially exceeded operating cash flow. The filing warns that distributions may be funded with borrowing or DRP proceeds, which can reduce investment capital or increase interest expense; distributions may also represent a return of capital.
- Pending transactions: The company expected to acquire the Gilbert property for approximately $10 million after construction, with closing expected in Q2 2019; failure to acquire it could forfeit a $1.0 million deposit. A proposed sale of the San Antonio II property for approximately $16.1 million, less closing costs, remained subject to contingencies, with an estimated closing in the second half of 2019.
- Other risks and unusual matters: The filing identifies a $8.95 million quarterly net loss and $71.2 million accumulated deficit and says 2019 operations may not be profitable. The company depends on affiliated advisor and property-management entities and incurs related-party fees. Management reported compliance with debt covenants, effective disclosure controls, and no material legal proceedings.
Important facts for investors to verify
- Confirm the issuer: this filing is for Strategic Storage Trust II, Inc., not the company named in the request.
- Review merger financing terms, debt maturities, extension options, covenants, guarantees, and the large 2022 maturity concentration.
- Assess whether acquired properties achieve the occupancy and stabilization assumed in management’s 24-to-36-month outlook, and verify the status and funding of the Gilbert acquisition and San Antonio II sale.
- Compare distributions with recurring operating cash flow and determine the extent to which distributions rely on borrowing or DRP proceeds.
- Reconcile same-store performance using the company’s comparable lease-accounting presentation and distinguish non-GAAP FFO/MFFO from GAAP earnings and cash flow.