Business context and reporting period
Unaudited Form 10-Q for the three months ended March 31, 2018. The registrant is Strategic Storage Trust II, Inc., a self-storage REIT sponsored by SmartStop Asset Management; it is not identified in the filing as Smartstop Self Storage REIT, Inc. At quarter-end, the company owned 83 facilities in 14 U.S. states and the Greater Toronto Area, with 51,330 units and 6.03 million rentable square feet. Portfolio physical occupancy was 88%.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior period |
|---|---|---|
| Total revenue | $19.87 million | $17.71 million; up 12.2% |
| Operating income (loss) | $3.86 million | $(0.55) million |
| Operating margin | 19.4% | (3.1%) |
| Net loss attributable to common stockholders | $(0.66) million; $(0.01) per share | $(5.19) million; $(0.09) per share |
| Net cash provided by operating activities | $4.44 million | $2.77 million |
| Cash and cash equivalents | $5.12 million | $7.36 million at December 31, 2017 |
| Restricted cash | $4.93 million | $4.51 million at December 31, 2017 |
| Total debt, net | $392.05 million | $396.79 million at December 31, 2017 |
| Total assets | $807.41 million | $817.50 million at December 31, 2017 |
GAAP property operating expenses were $7.14 million, about 36% of revenue, versus $7.01 million, about 40%, in Q1 2017. Interest expense was $4.36 million, compared with $3.56 million. Debt carried a weighted-average rate of approximately 4.45%; approximately $262 million was fixed-rate and $131 million variable-rate. The filing reports $118.95 million of principal payments due during 2018, including maturities the company intended to address through extensions or other financing. Cash, cash equivalents and restricted cash combined were $10.06 million at quarter-end.
Changes versus the prior comparable period
- Revenue grew 12.2%, reflecting approximately $1.3 million of same-store growth and approximately $0.9 million from six facilities acquired in Q1 2017.
- Same-store revenue increased 7.9%; annualized rent per occupied square foot rose 12.8%, while average physical occupancy declined from 92.1% to 88.7%. Same-store property operating expenses decreased 2.0%.
- Lower intangible amortization and acquisition expenses contributed to the improvement in operating results. Net loss narrowed, but the company remained loss-making.
- Operating cash flow increased by $1.67 million. Investing cash flow was positive $1.78 million, versus negative $48.75 million in Q1 2017, when acquisitions required substantial cash. Financing cash flow was negative $7.96 million, compared with positive $43.37 million in Q1 2017, which included equity and debt proceeds.
Outlook, risks and unusual items
- No earnings or revenue guidance was provided. Management said it expected to address near-term loan maturities with extensions or other debt financing and noted that future interest expense will vary with debt levels and rates.
- The board declared second-quarter 2018 distributions of approximately $0.001644 per share per day. Q1 distributions totaled $8.30 million: 53% was sourced from operating cash flow and 47% from distribution-reinvestment-plan proceeds. Distributions exceeded reported FFO of $5.47 million. Cumulative distributions since inception were approximately $71.2 million, compared with cumulative FFO of approximately $11.1 million. The filing cautions that distributions may be funded from sources other than operations, including financing, and may reduce funds available for investment.
- Management described a potential liquidity event, such as a listing, merger or sale, as a possible objective within three to five years after completion of the primary offering; the board retains discretion and no transaction is assured.
- Interest-rate sensitivity: a 100-basis-point increase in the underlying rate on variable-rate debt was estimated to reduce annual earnings and cash flow by approximately $0.2 million. A $90 million LIBOR cap at 1.25% was in place through December 22, 2018. Canadian operations also create foreign-exchange exposure despite hedging.
- The company reported a $0.7 million quarterly net loss and a $59.3 million accumulated deficit, and stated that 2018 profitability was uncertain. It also cited competition, occupancy and rental-rate performance, refinancing needs, REIT qualification, and the estimated nature of its share value as risks.
- A proposed 50/50 joint venture to develop a self-storage facility in East York, Ontario was expected to close in Q3 2018, subject to zoning. The company could forfeit up to approximately C$0.3 million in earnest money if it failed to complete the acquisition.
- The board approved an estimated value of $10.65 per Class A and Class T share on April 19, 2018, based on a December 31, 2017 valuation; the filing warns that this estimate may differ from realizable sale value. Shares under the reinvestment plan began selling at that price in May 2018.
- No impairment losses or material legal proceedings were reported. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How the company plans to refinance or extend the $118.95 million of 2018 scheduled principal maturities, and whether covenant compliance is maintained.
- Whether same-store rent growth can continue while physical occupancy is lower, and how property-level performance develops across the U.S. and Canadian portfolios.
- Whether distributions become better supported by recurring operating cash flow and FFO rather than reinvestment proceeds or other funding sources.
- The assumptions, independent valuation basis and limits of the $10.65 estimated share value, including its age relative to current conditions.
- Progress and final terms of the East York development proposal, including zoning, closing and potential earnest-money exposure.
- Related-party fees and arrangements, including property and asset management, tenant-insurance revenue sharing, and the company’s reliance on its sponsor and affiliates.