Global Self Storage, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Global Self Storage is a self-managed REIT operating 11 self-storage stores in the Northeast, Mid-Atlantic and Midwest. Comparisons with Q1 2016 require caution: the company changed from investment-company to operating-company accounting on January 19, 2016, and the reported operating-company comparison covers only January 19–March 31, 2016. The filing separately presents full-quarter comparisons for store operating metrics.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable information |
|---|---|---|
| Total revenue | $1.750 million | $0.925 million for January 19–March 31, 2016; periods differ in length |
| Operating income | $194,521 | $8,983 for January 19–March 31, 2016 |
| Net income (loss) | $(14,266); $(0.00) per share | $49,121; $0.01 per share for January 19–March 31, 2016 |
| Operating margin | 11.1% of revenue | Calculated from reported Q1 2017 figures |
| Operating cash flow | $607,564 | $503,222 for January 19–March 31, 2016; comparison is not like-for-like |
| Capital expenditures | $121,890 | Improvements and equipment additions |
| Cash dividends paid | $495,266; $0.065 per share | $482,090 for January 19–March 31, 2016 |
| Cash and cash equivalents | $2.902 million | $2.912 million at December 31, 2016 |
| Marketable securities | $1.428 million | $1.474 million at December 31, 2016 |
| Total assets / equity | $61.169 million / $39.995 million | Assets were $61.649 million and equity $40.550 million at December 31, 2016 |
| Debt | $20.0 million principal; $19.386 million net carrying value | Secured by certain stores; estimated fair value was $20.0 million |
Q1 cash decreased by $9,592. Operating cash flow less capital expenditures and dividends was also approximately $(9,592). Management reported capital resources of approximately $4.3 million, consisting of cash and marketable securities.
Store operations and changes versus prior period
- Reported rental income was $1.697 million, up 89.8% from the shorter 2016 operating-company comparison; the increase primarily reflected stores acquired in 2016.
- For the full-quarter same-store comparison, revenue rose 9.9% to $1.256 million, operating costs declined 0.4% to $494,816, and net operating income (NOI) increased 17.8% to $761,657. Same-store occupancy was 89.3%, versus 88.1% a year earlier.
- For the combined same-store and non-same-store portfolio, full-quarter revenue increased 53.0% to $1.749 million and NOI rose 64.4% to $1.063 million. Occupancy was 89.9%, versus 88.4%. Annualized revenue per leased square foot decreased 3.7% to $10.30, partly because some acquired space was lower-cost, non-climate-controlled space.
- Reported expenses increased, including depreciation and amortization to $449,234 and general and administrative costs to $410,555. Management attributed much of the increase to the full-quarter reporting period, acquired stores, the Bolingbrook expansion and growth-related corporate costs.
- Interest expense was $220,209, compared with none in the shorter 2016 comparison, reflecting the $20 million loan. Dividend and interest income declined to $11,422 from $40,138 as investment securities were sold.
- FFO was $434,968, or $0.06 per share; AFFO was $440,800, or $0.06 per share. These are non-GAAP measures and are not substitutes for net income or cash flow.
Debt, outlook, risks and notable items
- The June 2016 loan bears 4.192% stated interest (4.40% effective), matures July 1, 2036, and is secured by stores with approximately $34.3 million net book value. Interest-only terms run through June 30, 2018; scheduled principal payments begin thereafter. Loan covenants include a minimum net worth test, and defaults can permit acceleration.
- Management expected continued revenue growth, supported by tenant rent increases, new-tenant pricing, occupancy and lower promotions. It expected 2017 existing-tenant rent increases to be slightly below the prior year. Management cautioned that occupancy, pricing and demand can be affected by seasonality, local competition and economic conditions.
- Bolingbrook’s 2016 expansion added approximately 44,050 leasable square feet. By March 31, 2017, 47.1% of that expansion space was leased; total store occupancy was 73.3%. Management said lease-up was faster than expected. Sadsbury’s expansion building was 81% leased.
- Millbrook received local approval for an expansion on May 2, 2017. Upon construction commencement, a further $900,000 payment is expected to be due to affiliate Tuxis under the acquisition agreement. Management anticipated construction completion six to nine months after commencement, but gave no assurance it would proceed on schedule or at all.
- Management cited inflation in compensation and property-tax costs, and volatility in utilities and weather-related expenses. LED conversions had reduced electricity usage at converted stores; management expected lower usage to partly offset rate inflation.
- The company expects to continue divesting investment securities over time and use proceeds toward store acquisitions and operations. It was reviewing acquisition and expansion opportunities, including a possible Merrillville expansion; no specific earnings guidance was provided.
- Risks include local economic and competitive conditions, acquisition and development execution, financing availability and interest rates, property and environmental risks, REIT qualification and regulatory requirements. The filing reported no material pending legal proceedings. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
- A stockholder rights plan expires January 29, 2026; rights may become exercisable if a non-exempt person or group reaches or makes an offer for 9.8% or more of common stock, subject to the plan’s terms.
Important facts for investors to verify
- Review the accounting-basis and period differences before interpreting reported year-over-year revenue, earnings or cash-flow changes; the filing’s store-level full-quarter comparisons use a separate presentation.
- Confirm the status, cost, funding and lease-up of the Millbrook expansion and the contingent $900,000 affiliate payment, as well as the pace of Bolingbrook lease-up.
- Assess debt-service capacity after the interest-only period ends, covenant headroom and the effect of future principal payments.
- Track occupancy, rent per leased square foot, same-store NOI and expense trends, particularly whether rent increases and occupancy gains can offset cost inflation and competition.
- Consider dividend coverage alongside GAAP cash flow, capital needs and the company’s stated expectation that retained operating cash flow is negligible.
- Review related-party transaction terms, including the Tuxis acquisition, and the rights plan’s potential effect on a change-of-control transaction.