Business context and reporting period
Strategic Storage Trust II, Inc. (the registrant; a self-storage REIT sponsored by SmartStop Asset Management) filed this unaudited Form 10-Q for the quarter ended September 30, 2018. It owned 83 facilities across 14 U.S. states and the Greater Toronto Area, totaling about 51,330 rentable units and 6.03 million square feet. The primary offering ended in January 2017; shares continued to be issued through the distribution reinvestment plan (DRP).
Financial results and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2018 | $20.31 million | $60.23 million |
| Revenue, 2017 | $19.94 million | $56.72 million |
| Operating income, 2018 / 2017 | $4.48 million / $0.74 million | $11.77 million / $1.18 million |
| Net loss attributable to common stockholders, 2018 / 2017 | $(0.45) million / $(3.84) million | $(2.54) million / $(12.53) million |
| Loss per share, 2018 / 2017 | $(0.01) / $(0.07) | $(0.04) / $(0.22) |
Operating margin was approximately 22.0% in Q3 2018 versus 3.7% in Q3 2017, and 19.6% for the first nine months versus 2.1%. The improvement in reported earnings chiefly reflects lower intangible amortization as acquired lease intangibles were substantially amortized; the company remained loss-making.
For the nine months, operating cash flow was $16.37 million (2017: $15.68 million); investing cash outflow was $2.15 million (2017: $56.30 million); and financing cash outflow was $16.98 million (2017: $39.92 million inflow). Cash, cash equivalents and restricted cash totaled $9.07 million at September 30, 2018. Total assets were $800.04 million; total liabilities were $414.52 million.
Net debt on the balance sheet was $395.91 million, versus $396.79 million at December 31, 2017. The weighted-average interest rate was about 4.62%; debt included approximately $261.0 million fixed-rate and $135.7 million variable-rate borrowings. Cash interest paid in the first nine months was $13.53 million. The filing reported compliance with KeyBank facility covenants at quarter-end.
Changes versus prior comparable periods
- Revenue rose 1.9% in Q3 and 6.2% for the first nine months. Management attributed the nine-month increase to same-store growth of about 4.1% and the contribution of six properties acquired in early 2017.
- Same-store revenue per occupied square foot increased, but average same-store physical occupancy fell: to 89.3% from 93.7% for Q3 and to 88.8% from 93.3% for the nine-month period. Total portfolio occupancy at September 30 was about 89%.
- Q3 general and administrative expense increased to $1.00 million from $0.76 million; nine-month expense increased to $3.63 million from $2.64 million. Nine-month interest expense and debt fair-value accretion increased to about $13.1 million from $11.7 million.
- No property acquisitions were completed in the first nine months of 2018. Investing outflows were consequently much lower than in 2017. No impairment losses were recorded in either comparative period.
Outlook, risks and unusual items
No quantitative operating guidance was provided. Management said operating results depend on occupancy, rental rates, tenant retention, expenses, financing costs and competition. It expects interest expense to vary with debt levels and rates, and notes minor seasonal occupancy improvement may occur in summer.
Distributions paid or reinvested totaled $25.38 million in the first nine months, while operating cash flow was $16.37 million; the filing attributes 65% of distributions to operating cash flow and 35% to DRP proceeds. Since inception, distributions of approximately $88.3 million substantially exceeded cumulative FFO of approximately $20.4 million. Management cautioned distributions may be funded from sources other than operations, including DRP proceeds or borrowing, and may reduce investment capital or increase interest expense. The board declared a Q4 2018 distribution rate of about $0.001644 per share per day; Class T distributions are lower after servicing fees.
After quarter-end, the company refinanced about $70.7 million of Canadian debt with a Citibank loan, initially borrowing C$99.3 million under a facility with a C$112 million maximum and an October 2020 maturity, subject to extension options. It also extended the $89.2 million KeyBank facility maturity from December 2018 to February 20, 2019 and reduced its maximum capacity from $145 million to $110 million. The filing identified near-term refinancing and liquidity needs.
On October 1, 2018, the company agreed to acquire Strategic Storage Growth Trust, Inc. (SSGT) for $12 per share in cash, with an indicated total purchase price of approximately $340 million including debt. The proposed transaction would add 28 facilities and is subject to SSGT stockholder approval and other conditions; financing was still being negotiated. The company disclosed potential termination fees, including a $9.6 million reverse termination fee in specified circumstances, and warned that failure to complete the transaction could incur costs and divert management attention.
Other notable exposures include variable interest rates, Canadian-dollar currency movements, restrictive debt covenants, REIT qualification requirements, and related-party arrangements for advisory, property management and transfer-agent services. Acquisition-related expenses associated primarily with the proposed SSGT transaction were about $0.87 million for the first nine months. Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material legal proceedings.
Most important facts for investors to verify
- Whether the SSGT transaction closed, its final financing, debt assumed or refinanced, and any fees or integration costs.
- Current maturities, available borrowing capacity, covenant compliance and the cost and terms of subsequent refinancing.
- Whether same-store rental-rate gains can offset declining occupancy and support sustainable operating cash flow.
- Distribution coverage and funding sources, given distributions exceeded operating cash flow and FFO during the nine-month period.
- Performance and governance of related-party service providers, and the impact of interest-rate and Canadian-dollar movements.