Global Self Storage, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results. The company is a self-managed REIT owning, operating or managing 13 self-storage properties across eight states, with rental operations as its primary business.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $2.234 million | $2.149 million | $4.474 million | $4.255 million |
| Operating income | $280,000 | $303,000 | $396,000 | $580,000 |
| Net income (loss) | $(22,000) | $137,000 | $(379,000) | $325,000 |
| Diluted EPS | $(0.00) | $0.02 | $(0.04) | $0.04 |
| FFO per diluted share | $0.05 | $0.05 | $0.09 | $0.10 |
| AFFO per diluted share | $0.06 | $0.06 | $0.10 | $0.12 |
Q2 operating margin was approximately 12.5%, versus 14.1% a year earlier; first-half operating margin was approximately 8.8%, versus 13.6%. Revenue growth reflected the West Henrietta acquisition, higher rents at existing stores, ancillary income and initial management fees. Higher depreciation and amortization, general and administrative costs, interest expense, and unfavorable investment-security valuation changes weighed on earnings. Unrealized securities losses were $28,000 in Q2 and $218,000 in the first half, versus gains of $73,000 and $227,000 in the comparable 2019 periods.
Property operations: Same-store occupancy was 92.9% at June 30, down from 94.0%. Same-store NOI rose 9.1% in Q2 and 9.7% for the first half, primarily because operating costs fell. Across same- and non-same-store properties, occupancy was 90.5%, versus 94.2%; combined NOI increased 9.5% in both periods. These NOI and FFO/AFFO measures are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Cash flow and liquidity: First-half operating cash flow was $1.034 million, compared with $1.104 million in 2019. Investing activities used $1.144 million, mainly for construction and improvements; financing activities used $1.456 million, including $1.213 million of dividends paid and $243,000 of term-loan principal payments. Cash, cash equivalents and restricted cash declined to $2.688 million from $4.254 million at year-end 2019. Management reported approximately $9.3 million of capital resources: $2.7 million of cash and restricted cash, $1.5 million of marketable securities and $5.1 million available under the revolving facility. Management expects current sources to meet liquidity needs for the next 12 months.
Debt and balance sheet: At June 30, the net carrying amount of the term note was $18.617 million and revolver borrowings were $4.914 million; total debt carrying value was approximately $23.531 million. The term note has a 4.192% rate and matures in 2036; the $10 million revolving facility matures in December 2021 and has a floating rate (6.46% effective rate as disclosed). The company also had a $7.5 million interest-rate cap through December 2021. Total assets were $65.952 million and equity was $40.537 million. The filing estimates combined debt fair value at approximately $24.236 million.
The quarterly dividend remained $0.065 per share, or $0.13 per share for the first half. The company reported 9,356,202 common shares outstanding as of July 31, 2020.
Material changes versus prior period
- Revenue increased 4.0% in Q2 and 5.1% in the first half, while operating income declined 7.5% and 31.8%, respectively.
- The company moved from net income to a net loss in both the quarter and first half. Higher depreciation, G&A and interest expense, together with investment-security losses versus prior-year gains, contributed to the deterioration.
- Same-store revenue fell 1.3% in Q2 but rose 0.4% for the first half; same-store occupancy decreased 1.1 percentage points year over year. Lower same-store operating costs supported higher NOI.
- First-half construction spending increased to $1.044 million from $245,000. The company completed a Millbrook, New York expansion and a McCordsville, Indiana conversion; the West Henrietta expansion was completed in August 2020.
- Cash and cash equivalents fell to $2.386 million from $3.990 million at December 31, 2019; restricted cash was $302,000.
Outlook, risks and unusual items
- COVID-19: Self-storage facilities remained open as essential businesses. Management reported no material degradation in rent collections as of June 30, but warned that economic stress, delayed tenant auctions, bad debt, move-outs, occupancy and access to capital could worsen. Move-in and move-out activity slowed from late March through May; management observed increased demand from June. Trends may be temporary.
- Pricing and leasing: The company temporarily paused existing-tenant rent increases in May and June and restarted them at all properties in July. For the remainder of 2020, any rent increases were expected to be consistent with or slightly below the prior year. Management cautioned that customer sensitivity and occupancy could affect revenue growth.
- Capital and growth: Management anticipated potentially lower acquisition activity near term but continued reviewing opportunities and marketing its third-party management platform. It expected to continue store expansions and development, subject to demand and successful lease-up. Millbrook occupancy rose to 75.9% by July 31 after its expansion; occupancy at newly converted McCordsville space and the completed West Henrietta expansion also requires lease-up.
- Contingencies: The Dolton, Illinois property-tax reassessment and loss of a tax incentive remain under appeal; no favorable outcome is assured. COVID-19 prompted interim impairment testing, with no impairment identified at June 30.
- Related-party PPP loan: An affiliate borrowed $486,602 under the Paycheck Protection Program on behalf of affiliated entities, including the company. The company expects to contribute its proportionate share of any unforgiven amount. Forgiveness is uncertain and may be subject to government review or audit.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors other than COVID-19 and PPP-related risks, and effective disclosure controls as of quarter-end. No specific numerical earnings guidance was provided.
Most important facts for investors to verify
- Subsequent rent collections, delinquency and bad-debt trends, tenant move-outs, occupancy and the effects of restarting rent increases.
- Lease-up progress and returns on the Millbrook, McCordsville and West Henrietta expansion or conversion projects.
- Cash generation after dividends and capital spending, and compliance with debt covenants and the revolving facility’s maturity and floating-rate exposure.
- The sustainability of the $0.065 quarterly dividend relative to GAAP cash flow and the company’s capital requirements.
- Resolution of the Dolton property-tax appeals and the affiliate PPP loan’s forgiveness, repayment allocation and any resulting audit or compliance exposure.