Strategic Storage Trust II, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The filing is for Strategic Storage Trust II, Inc., a self-storage REIT sponsored by SmartStop—not a 10-Q of SmartStop itself. Results are unaudited.
Business context
The company began property operations in May 2014 and substantially expanded its portfolio in 2015. At June 30, 2015, it owned 31 self-storage facilities in nine states, with approximately 16,980 units and 1.86 million rentable square feet. Portfolio physical occupancy was 87%; California represented 44% of rentable area and 52% of rental income.
Financial results and position
| Metric | Q2 2015 | Six months 2015 |
|---|---|---|
| Total revenue | $4.49 million | $7.49 million |
| Operating loss | $1.12 million | $4.04 million |
| Net loss | $1.99 million | $5.57 million |
| Net loss attributable to common stockholders | $4.04 million | $9.02 million |
| Basic and diluted loss per share | $1.36 | $3.46 |
- Q2 revenue comprised $4.37 million of self-storage rent and $123,000 of ancillary revenue. Q2 operating expenses were $5.61 million; the operating loss was approximately 25% of revenue and net loss approximately 44% of revenue.
- Six-month cash used in operations was $1.97 million. Investing activities used $125.57 million, primarily for property acquisitions. Financing activities provided $134.25 million. Cash and cash equivalents ended the period at $13.25 million, versus $6.53 million at year-end 2014; restricted cash was $472,000.
- Total assets were $165.70 million. Secured debt was reported at $84.67 million, including an $849,000 fair-value adjustment; scheduled principal payments totaled $83.82 million. Debt included approximately $71.3 million variable-rate and $12.5 million fixed-rate principal.
- The company acquired the 26-property portfolio in phases during the first half for approximately $129.4 million including allocated intangibles. Acquisition allocations were preliminary. The portfolio contributed $6.02 million of 2015 revenue and $3.54 million of property operating income from acquisition dates.
Changes versus comparable periods
There is limited year-over-year comparability: the company owned no self-storage properties at June 30, 2014, and reported no rental revenue in the 2014 periods. Q2 2015 revenue and property costs chiefly reflect acquisitions made since November 2014, including 21 facilities in Q1 2015 and five in Q2. Six-month acquisition expenses charged to operations rose to $2.42 million from $424,000 a year earlier; depreciation, intangible amortization, and interest expense also increased with the expanded portfolio. Common shares outstanding rose to 3.47 million from 1.77 million at year-end 2014.
Liquidity, distributions, outlook and risks
- Funding for first-half acquisitions included $71.3 million drawn under the KeyBank facility, approximately $53.0 million of preferred-unit proceeds, and common-stock offering proceeds. The KeyBank facility matures January 2018, is interest-only for its first 36 months, and bore approximately 3.4% at June 30. It is fully recourse and secured by cross-collateralized mortgages. A $50 million interest-rate cap limits the rate on that notional amount to 5.25% through June 1, 2016.
- Management said rental income and property expenses, depreciation, amortization, and interest expense would likely increase with acquisitions. No quantified earnings or acquisition guidance was provided. Results to date were expressly described as not indicative of full-year results.
- The approximately $59.5 million preferred investment carries current distributions at one-month LIBOR plus 6.5%, as well as an additional distribution or higher-cost deferral election. A 100-basis-point LIBOR increase was estimated to add about $0.6 million annually to preferred distributions; the same increase on variable-rate debt was estimated to reduce annual earnings and cash flow by about $0.7 million.
- The company paid approximately $2.06 million in distributions in the first half, funded entirely by offering proceeds: 87% from the primary offering and 13% from the reinvestment plan; none came from operating cash flow. Management cautioned that distributions may continue to be funded by offering proceeds, borrowing, or asset sales, reducing funds available for investment or increasing costs. The Q3 2015 declared rate was $0.00164383561 per share per day.
- On June 15, 2015, SmartStop agreed to be acquired by Extra Space Storage for $13.75 per SmartStop share in cash, subject to SmartStop stockholder approval; the filing expected a closing shortly after a September 29 meeting. SST II stockholders would not participate in the merger. The planned transaction involved a sale of the advisor/property-management business to an entity controlled by SST II’s chairman and CEO, Extra Space sub-management of properties, and rebranding of U.S. properties.
- Subsequent events: SST II agreed in July to acquire an Alabama facility for approximately $8 million, subject to closing; it also redeemed 240,000 preferred units for $6 million in July. The company warned the proposed acquisition might not close.
- Other risks include competitive pressure on occupancy and rents, reliance on offering proceeds and future capital raising, related-party fees and potential conflicts, REIT qualification requirements, preliminary acquisition valuations, and refinancing or interest-rate exposure. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether distributions become supported by property-level operating cash flow rather than new offering proceeds or debt.
- Portfolio-level operating performance, including occupancy, rental rates, same-property trends, and acquisition-related costs; year-over-year reported results are not directly comparable.
- Debt covenants, refinancing of the large 2018 maturity, variable-rate exposure, and the cost and terms of preferred units.
- Final purchase-price allocations and whether acquired properties achieve the expected operating contribution.
- Completion and terms of the SmartStop–Extra Space transaction and resulting advisor, property-management, and branding arrangements, as well as the Alabama acquisition.