Smartstop Self Storage REIT, Inc. annual report, FY2017

SEC filing summary

Issuer note: The filing identifies the registrant as Strategic Storage Trust II, Inc., although the request names Smartstop Self Storage REIT, Inc. Verify the issuer and filing identity before relying on this summary.

Business context and reporting period

This is the audited Form 10-K for the fiscal year ended December 31, 2017, filed March 28, 2018. The company is a non-traded REIT focused on owning and operating self-storage facilities. At year-end it owned 83 properties in 14 U.S. states and Ontario, totaling approximately 51,330 units and 6.0 million rentable square feet; physical occupancy was approximately 90%.

The primary share offering ended January 9, 2017. The company continued its distribution reinvestment plan (DRP). It has no established public trading market and reported approximately 13,000 stockholders of record as of March 2018.

Financial and operating results

Metric	2017	2016
Total revenue	$76.1 million	$45.4 million
Operating income (loss)	$3.6 million	$(14.9) million
Net loss attributable to common stockholders	$(14.9) million	$(26.1) million
Net loss per common share	$(0.27)	$(0.65)
Cash from (used in) operating activities	$19.4 million	$(1.6) million
Distributions declared per common share	$0.60	$0.60

• Revenue increased 67.5%, principally because the portfolio was larger and more properties contributed a full year of operations. Six properties were acquired in 2017.
• For 33 same-store properties, revenue rose 10.6%; average physical occupancy increased from 89.8% to 93.3%, and annualized rent per occupied square foot rose from $12.80 to $13.61.
• Operating income as a share of revenue was approximately 4.7% in 2017, compared with an operating loss in 2016. Net losses persisted, reflecting substantial depreciation and amortization, interest and other expenses.
• FFO, a non-GAAP measure, was $18.2 million in 2017, versus negative $4.1 million in 2016. MFFO was $18.1 million and $9.2 million, respectively; these measures exclude certain items and are not substitutes for GAAP results or operating cash flow.
• Year-end total assets were $817.5 million, total liabilities $410.1 million, and total equity $382.9 million. Cash and cash equivalents were $7.4 million, with another $4.5 million restricted.
• Debt, net, was $396.8 million, up from $320.8 million. The filing reports approximately $263.4 million of fixed-rate and $134.1 million of variable-rate debt, with a weighted average interest rate of approximately 4.3%. Approximately $122.7 million of principal was scheduled for 2018.
• Total 2017 distributions were $32.9 million, exceeding operating cash flow of $19.4 million. The company reported funding 59% of distributions from operating cash flow and 41% from DRP proceeds. Approximately $27.9 million of 2017 distributions were characterized as return of capital for tax purposes.

Material changes versus the prior period

• Portfolio expansion drove much of the year-over-year increase in revenue, expenses and debt; the filing cautions that reported annual results are not directly comparable because of acquisition timing and scale.
• Beginning October 1, 2017, the company’s Property Manager took over direct management of U.S. properties from Extra Space. The transition included rebranding to SmartStop and approximately $0.8 million of costs. Management cautions that the new arrangement may not perform as effectively as the prior arrangement.
• The company acquired five Ontario properties through a merger with an affiliate and one Colorado property during 2017. The Toronto transaction included cash consideration, operating partnership units and assumed debt.
• The board-approved estimated value per share increased from $10.09 at December 31, 2015 to $10.22 based on a valuation as of December 31, 2016. The filing stresses that this estimate is not a market price, liquidation value or assurance of realizable value.

Outlook, risks and unusual items

• No specific earnings, revenue or occupancy guidance is provided. The company stated that it intended to seek a liquidity event within three to five years after completion of the primary offering, subject to market conditions and board discretion; it gave no assurance a transaction would occur. Shares are not listed, and a public market may never develop.
• The board declared distributions of $0.001644 per share per day for the first and second quarters of 2018. Distributions remain discretionary and may be changed or discontinued; the filing says distributions may be funded from sources other than operations.
• Liquidity and refinancing merit close attention: substantial debt principal was scheduled for 2018, including a $86.4 million KeyBank revolving facility due December 22, 2018, subject to extension options and conditions. The company reported compliance with that facility’s covenants at year-end.
• Interest-rate exposure includes variable-rate borrowing; management estimated that a 100-basis-point increase in the relevant index would reduce annual earnings and cash flows by approximately $0.3 million. A $90 million interest-rate cap covered LIBOR through December 22, 2018. Canadian holdings and operations also expose the company to currency risk, partly hedged with forward contracts.
• Principal risks include persistent net losses and distributions exceeding operating cash flow; limited share liquidity and redemption restrictions; debt and refinancing risk; self-storage competition and industry concentration; execution risk from the management transition; related-party conflicts and fees; Canadian currency exposure; and maintaining REIT status.
• The filing reports no material pending legal proceedings and no recognized impairment losses for 2017, 2016 or 2015. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not provide an opinion on internal control effectiveness.
• After year-end, the company disclosed a proposed 50/50 venture to develop a self-storage property on land in East York, Ontario, expected to close in the third quarter of 2018 subject to zoning. The company could forfeit up to approximately CAD $0.3 million in earnest money in certain circumstances.

Important facts for investors to verify

• Confirm that Strategic Storage Trust II, Inc. is the intended issuer, given the difference from the company name in the request.
• Review the debt maturity schedule, extension conditions, covenant headroom, and available refinancing or repayment sources for 2018 maturities.
• Assess whether operating cash flow can sustain distributions without continued DRP proceeds or other external funding, and distinguish distributions from investment returns.
• Evaluate same-store operating trends separately from acquisition-driven growth, including the performance of recently acquired and lease-up properties.
• Review the management-transition results, affiliate fees and transactions, and the assumptions and limitations underlying the $10.22 estimated share value.
• Check subsequent filings for the East York venture, Canadian currency hedging, liquidity-event plans, and any changes to distributions or share-redemption terms.