Global Self Storage, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Global Self Storage is a self-managed REIT operating 11 self-storage stores in the Northeast, Mid-Atlantic and Midwest.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | $2.020 million | $1.846 million | $3.982 million | $3.596 million |
| Operating income | $381,000 | $223,000 | $678,000 | $418,000 |
| Net income | $395,000 | $18,000 | $455,000 | $4,000 |
| Diluted EPS | $0.05 | $0.00 | $0.06 | $0.00 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $1.193 million | $1.105 million |
- Q2 revenue rose 9.4%; first-half revenue rose 10.7%. Management attributed growth mainly to rental-rate and occupancy improvements and the Bolingbrook and Merrillville expansions.
- Q2 operating expenses increased 1.0%, while first-half expenses rose 3.9%. Property operating costs rose 13.9% in Q2 and 18.4% in the first half, mainly from property taxes. Depreciation and amortization fell 22.9% and 22.6%, respectively, primarily as acquired in-place leases amortized.
- Reported net income includes unrealized gains on marketable equity securities of $217,000 in Q2 and $175,000 in the first half, recognized in earnings following adoption of ASU 2016-01. Excluding that gain, the reported earnings increase would be substantially smaller; the filing does not present this as a GAAP adjusted net income measure.
- Same-store NOI increased 5.7% in Q2 and 6.1% in the first half, while same-store occupancy at period-end declined to 92.7% from 93.5%. Same-store revenues rose 8.6% and 10.4%, respectively.
- Cash, cash equivalents and restricted cash totaled $2.354 million at June 30, versus $2.256 million at year-end. Cash and cash equivalents alone were $2.207 million; restricted cash was $147,000. Management reported approximately $3.9 million in capital resources, including $1.7 million of marketable securities.
- First-half investing cash outflow was $100,000, including $49,000 of construction and $51,000 of improvements and equipment. Dividends paid were $995,000; net cash increased $98,000.
- Debt principal was $20.0 million, presented net of unamortized loan costs as a $19.439 million note payable. The loan bears 4.192% stated interest, is secured by certain properties, and matures July 2036. Estimated fair value was $18.837 million. The company reported $440,000 of first-half interest expense.
- Total assets were $59.563 million and total liabilities $21.575 million at June 30, 2018. Quarterly dividends were $0.065 per share; the first-half distribution was $0.13 per share.
Material changes and operating developments
- Merrillville expansion was completed in January 2018, adding 13,300 leasable square feet. By June 30, 94% of the new space was leased; overall store occupancy recovered from 78.1% immediately after expansion to 96.2%.
- Bolingbrook’s 2016 expansion was 93% leased at June 30, 2018. The company was evaluating construction proposals for a planned Millbrook, New York expansion of approximately 16,500 gross square feet.
- Dolton, Illinois property taxes increased after reassessment and nonrenewal of a Class 8 tax incentive. Both matters were under appeal; management expected Dolton property taxes to rise approximately 20% annually in 2018 and 2019, with no assurance of a favorable appeal.
- At June 30, 2018, marketable securities had a $755,000 cost basis and $1.728 million fair value, including $972,000 of unrealized appreciation.
Outlook, risks and contingencies
- No quantified full-year earnings or revenue guidance was provided. Management expected continued revenue growth, citing existing-tenant rent increases, rates for new tenants, promotions and occupancy; demand is seasonal and market-dependent.
- Management expected certain operating costs to remain elevated or increase, including compensation, property taxes, utilities and other direct store costs. It anticipated slightly higher net utility costs for the remainder of 2018 and continuing energy-efficiency work.
- The filing gives inconsistent directional commentary on future existing-tenant rent increases: the same-store discussion says increases are expected to be slightly less than the prior year, while the combined-store discussion says slightly more.
- Cash payments on the $20 million loan were expected to increase from $69,867 monthly through June 2018 to $107,699 monthly beginning July 2018 and continue through June 2036.
- A $900,000 contingent payment to Tuxis is recorded in accounts payable and accrued expenses and is tied to commencement of the Millbrook expansion. Construction had not begun by June 30, 2018; timing and completion were not assured.
- The company disclosed no material pending legal proceedings and no material changes to previously reported risk factors. Key stated risks include local economic conditions, competition, property taxes and regulation, acquisition/development execution, financing availability, interest-rate movements, REIT qualification and potential weather or property damage.
- Management said disclosure controls were effective at period-end and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess how much of earnings growth reflects property operations versus the noncash marketable-securities gain and lower depreciation.
- Track same-store occupancy, rent growth and NOI against rising property taxes and other operating costs, particularly at Dolton.
- Confirm the timing, cost, funding and leasing assumptions for the proposed Millbrook expansion and the related $900,000 contingent payment.
- Review post-June loan payment requirements, covenant compliance, and liquidity available after dividends and planned capital spending.
- Clarify management’s conflicting comments on expected existing-tenant rent increases for the balance of 2018.