Business context and reporting period
This is Strategic Storage Trust II, Inc.’s Form 10-K for the fiscal year ended December 31, 2018 (filed March 22, 2019). The filing describes a non-traded REIT that owns and operates self-storage facilities; SmartStop is its brand and sponsor affiliation. At year-end, the company owned 83 properties in 14 U.S. states and Ontario, comprising approximately 51,330 units and 6.0 million rentable square feet. The primary offering ended in January 2017; shares continued to be issued through the distribution reinvestment plan (DRP).
Financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $80.4 million | $76.1 million |
| Operating income | $16.2 million | $3.6 million |
| Net loss attributable to common stockholders | $3.7 million; $0.06 per share | $14.9 million; $0.27 per share |
| Net cash from operating activities | $18.4 million | $19.9 million |
| Net cash used in investing activities | $3.2 million | $57.5 million |
| Net cash from (used in) financing activities | $(12.5) million | $31.3 million |
| Total assets | $796.4 million | $817.5 million |
| Debt, net | $406.1 million | $396.8 million |
- Revenue increased 5.7%; operating margin was approximately 20.1%, versus 4.7% in 2017. The company remained loss-making, with a net loss margin of approximately 4.6%.
- Same-store revenue rose 4.0%, while average physical occupancy declined to 88.5% from 92.7%. Revenue per occupied square foot increased approximately 9.5%. Year-end portfolio occupancy was 87%.
- Year-end cash and cash equivalents were $10.3 million, with an additional $3.7 million of restricted cash. The filing does not provide a current ratio or other single liquidity ratio.
- Debt included approximately $225.6 million of fixed-rate and $182.6 million of variable-rate debt; weighted-average interest rate was approximately 4.64%. A 100-basis-point increase in variable rates was estimated to reduce annual earnings and cash flow by approximately $0.8 million.
- Declared distributions were $0.60 per common share for 2018. Total distributions were approximately $33.9 million, funded 54% by operating cash flow and 46% by DRP proceeds. Approximately $31.4 million of 2018 distributions were classified for tax purposes as return of capital. FFO was $18.7 million and MFFO was $19.6 million; both are non-GAAP measures and are not substitutes for operating cash flow.
Material changes versus the prior comparable period
- Revenue grew by $4.3 million, supported by approximately $2.8 million of same-store growth and a full year of operations at six properties acquired in 2017.
- Net loss narrowed from $14.9 million to $3.7 million. Lower intangible amortization—$2.4 million versus $13.5 million—was a major contributor; interest expense increased by approximately $1.6 million, and general and administrative expense rose by approximately $1.4 million.
- Operating cash flow declined approximately $1.6 million. Investing outflows fell sharply because the company made no property acquisitions in 2018, compared with approximately $49.4 million of cash consideration for acquisitions in 2017.
- Same-store revenue gains occurred despite lower occupancy, reflecting higher revenue per occupied square foot and increased tenant-insurance revenue.
- Debt increased modestly at year-end, while its mix shifted toward variable-rate debt. The company refinanced its Canadian property debt in October 2018.
Outlook, commentary, risks, contingencies and unusual items
- Subsequent merger: On January 24, 2019, the company completed its merger with Strategic Storage Growth Trust, Inc. (SSGT), acquiring 28 operating self-storage properties and one development property, together approximately 19,800 units and 2.2 million square feet. Management expected a significant effect on 2019 results; integration, cost savings and synergies are not assured.
- Merger financing: The company obtained approximately $500.2 million of new financing and repaid approximately $141.1 million of existing debt. The post-transaction debt maturity schedule lists approximately $772.2 million of principal. Several facilities are interest-only with substantial principal due at maturity; covenants and refinancing capacity are material risks.
- Distributions and liquidity: Cumulative distributions since inception substantially exceeded cumulative FFO. Distributions may be funded from DRP proceeds, borrowing or other sources, and are not assured. Management has no quantified earnings or distribution guidance in the filing.
- Liquidity event: The company stated an intention to seek a liquidity event within three to five years after completion of its primary offering, but the board has discretion to continue operations and there is no assurance of a transaction or a public trading market. Shares are not publicly traded; redemptions are restricted and funded only from DRP proceeds.
- Other risks: The portfolio is concentrated by geography and sector; California and Florida represented 25.3% and 24.5% of December 2018 annualized rental income, respectively. Risks also include competition, interest rates, Canadian currency exposure, property expenses, environmental and regulatory requirements, and dependence on affiliated advisors and property managers. Related-party fees and potential conflicts are disclosed.
- The company reported no material legal proceedings and no recognized real-estate impairment losses in 2016–2018. The auditor gave an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective. The auditor did not express an opinion on internal control effectiveness.
Important facts for investors to verify
- Review the final SSGT merger accounting, acquired-property performance and integration costs in subsequent reports, along with the resulting debt balance, covenants and maturities.
- Assess whether operating cash flow can support distributions without continued reliance on DRP proceeds or other non-operating funding, and examine the return-of-capital tax characterization.
- Track same-store occupancy, rent growth, tenant-insurance contribution and property operating costs, particularly after the property-management transition.
- Evaluate the assumptions and limitations behind the $10.65 estimated share value, which was based on a December 31, 2017 valuation and is not a guaranteed resale or liquidation value.
- Review redemption limits, the lack of a public market, affiliate compensation and governance, and the company’s ability to manage interest-rate and Canadian-dollar exposure.