Global Self Storage, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The company is a self-managed REIT operating self-storage properties in the Northeast, Mid-Atlantic and Midwest. At year-end it owned 11 stores with 748,017 leasable square feet and 5,530 units. The 2016 GAAP comparison covers only January 19–December 31, following the company’s transition from an investment company to an operating company; it is not a full-year comparison.
Financial and operating performance
- Revenue: $7.47 million, up 50.2% from the comparable 2016 operating-company period. Rental income was $7.24 million. Growth primarily reflected four properties acquired in 2016, which contributed for more of 2017, along with higher rents and occupancy.
- Profitability: Operating income was $677,471, versus $65,702 in the comparable 2016 period. The company reported a net loss of $146,290, or $0.02 per share, compared with net income of $384,135, or $0.05 per share. Higher interest expense and the absence of 2016 investment-security gains contributed to the decline.
- Property operations: Full-year same-store revenue rose 8.2% to $4.49 million and same-store NOI rose 7.5% to $2.65 million. Same-store occupancy was 91.2%, compared with 90.8%. In Q4, same-store NOI fell 12.5%, primarily due to a retroactive property-tax increase at the Dolton, Illinois store. Across all stores, year-end occupancy was 92.1%, versus 86.2% in 2016; combined NOI increased 40.2% to $4.33 million, substantially reflecting acquired stores and the comparison-period difference.
- Cash flow and distributions: Operating cash flow was $1.87 million. Investing activities used $652,910, including $393,832 for construction and $259,078 for improvements and equipment. Dividends paid were $1.98 million, or $0.26 per share, exceeding operating cash flow. Cash and cash equivalents declined to $2.15 million from $2.91 million.
- Liquidity and debt: Management reported approximately $3.7 million in capital resources, comprising $2.1 million of cash and $1.6 million of marketable securities. The company had $20 million principal outstanding on a mortgage loan bearing 4.192% interest and maturing July 1, 2036; its balance-sheet carrying amount, net of loan costs, was $19.42 million. The loan is secured by certain properties. Interest-only payments continue through June 2018, after which required monthly interest and amortization payments increase. Loan covenants include minimum net-worth and liquidity requirements.
- Non-GAAP measures: FFO was $1.55 million and AFFO was $1.63 million in 2017. These measures are not substitutes for GAAP earnings or operating cash flow; the 2016 comparison is also affected by the differing presentation periods.
Material changes and unusual items
- No acquisitions were completed in 2017. Four stores acquired in 2016 were a major driver of year-over-year revenue growth. General and administrative expense rose 24.7% to $1.93 million, including legal, accounting, compliance, investor-relations and capital-market costs, as well as costs related to the company’s transition and governance changes.
- At Dolton, a reassessment increased the property’s assessed value by approximately 52%, and a Class 8 tax incentive was not renewed. The combined effect increased property taxes there from $105,000 in 2016 to $210,000 in 2017; the retroactive increase was recorded in Q4. The assessment and incentive status were under appeal at year-end.
- The Merrillville, Indiana expansion, adding 13,300 leasable square feet, was completed in January 2018. The company expected to begin a Millbrook, New York expansion in 2018, adding approximately 16,500 gross square feet; construction cost estimates were not yet finalized. A $900,000 contingent payment to Tuxis is due upon commencement of that project.
- The company declared $0.26 per share in 2017 dividends. It also reported an unrealized gain of $796,603 on available-for-sale securities; no investment securities were sold in 2017.
Outlook, risks and contingencies
- Management expected continued rental-income growth from tenant rent increases, new-tenant pricing, fewer promotional discounts and occupancy, while cautioning that short-term trends are volatile. Existing-tenant rent increases in 2018 were expected to be slightly below the prior year.
- Management expected 2018 property-tax expense to rise, citing the Dolton incentive phaseout and higher assessed values associated with the Merrillville expansion. It also anticipated higher marketing and compensation costs; utility costs were expected to be lower overall if reduced usage offset rate increases.
- Key risks include local economic weakness, competition and new supply, seasonal demand, tenant turnover under month-to-month leases, property-tax and operating-cost increases, acquisition and development execution, access to capital, interest rates, and maintaining REIT qualification. REIT status depends on complex income, asset, ownership and distribution tests.
- The December 2017 Tax Cuts and Jobs Act could affect the company and its stockholders, including through limits on interest deductions and changes to REIT-dividend taxation. The filing said the company expected to qualify to elect treatment that generally avoids the stated interest-deduction limitation.
- The company reported no material pending legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Compare operating trends using the filing’s comparable same-store data, recognizing that the GAAP 2016 period is shorter and the portfolio changed after acquisitions.
- Track cash generation against dividends, capital spending and the post-June 2018 increase in required loan payments; review compliance with debt covenants.
- Check the outcome of the Dolton tax appeal and the actual pace and amount of its expected tax increases, as well as the Merrillville assessment impact.
- Confirm the Millbrook expansion’s start date, final cost, financing and the trigger for the $900,000 contingent payment to Tuxis.
- Assess whether occupancy, rent growth and same-store NOI can offset rising property taxes and operating expenses, and review the sustainability of distributions and REIT qualification.