Business context and reporting period
Strategic Storage Trust II, Inc. (the filing registrant; sponsored by SmartStop Asset Management) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. It owns and operates self-storage properties. At quarter-end, its portfolio comprised 83 properties, 51,330 units and approximately 6.03 million rentable square feet, with 92.7% physical occupancy. The primary offering ended January 9, 2017; the distribution reinvestment plan remained active.
Key financial metrics
| Metric | Q3 2017 | Nine months 2017 | Comparable 2016 |
|---|---|---|---|
| Revenue | $19.94 million | $56.72 million | $14.46 million and $30.49 million, respectively |
| Operating income (loss) | $0.74 million | $1.18 million | $(1.30) million and $(14.02) million, respectively |
| Net loss attributable to common stockholders | $(3.84) million; $(0.07) per share | $(12.53) million; $(0.22) per share | $(6.34) million and $(21.57) million; $(0.14) and $(0.58) per share |
- Same-store performance: Revenue increased 7.2% in Q3 and 12.7% year to date. Same-store physical occupancy was 94.1% in Q3 versus 93.4% a year earlier; year-to-date occupancy was 93.8% versus 89.0%. Management attributed revenue gains to improved occupancy and rent per occupied square foot.
- Cash flow: Nine-month cash from operations was $13.97 million, compared with cash used of $2.06 million in 2016. Investing activities used $57.04 million, including $49.43 million for real estate purchases. Financing provided $39.92 million. Cash and cash equivalents were $11.96 million at quarter-end; restricted cash was $5.59 million.
- Debt and liquidity: Debt, net, was $400.72 million, up from $320.82 million at December 31, 2016. The weighted-average debt rate was 4.26%; management reported approximately $264 million fixed-rate and $137 million variable-rate debt. Principal payments due in 2018 were approximately $117.80 million. The filing does not provide a clear amount of undrawn borrowing capacity.
- Distributions: Nine-month distributions totaled $24.59 million, including $12.43 million paid in cash to common stockholders and $11.99 million reinvested. The filing attributes 57% of distributions to operating cash flow and 43% to DRP proceeds. Cumulative distributions since inception were approximately $54.6 million, versus cumulative FFO of approximately $0.5 million. The board declared a Q4 2017 distribution rate of approximately $0.001644 per share per day.
Material changes versus the prior comparable period
Revenue grew 37.9% in Q3 and 86.0% for the nine-month period, while net losses narrowed. These comparisons are substantially affected by portfolio growth: the company owned 83 properties at September 30, 2017, compared with 66 a year earlier. Same-store results also improved. Year-to-date operating cash flow turned positive, while investing outflows fell sharply from 2016 as acquisition spending declined. Debt increased by approximately $79.9 million from year-end 2016.
During 2017, the company acquired five Toronto-area properties through a merger and one Colorado property. The Toronto transaction included cash consideration, Operating Partnership units and approximately $38.4 million of debt assumed. On October 1, 2017, the company ended Extra Space’s sub-management of its U.S. properties; its affiliated property manager took over direct management and U.S. locations began using the SmartStop brand.
Outlook, commentary, risks and unusual items
- Management stated that offering proceeds and potential borrowing capacity should support short-term capital needs, but gave no specific earnings or operating guidance. The primary offering has ended; the DRP continues.
- Management described a potential liquidity event within three to five years after completion of the primary offering, but any such event is at the board’s discretion and is not assured.
- Distributions may exceed operating cash flow and may be funded with DRP or other offering proceeds, borrowing or asset sales. The filing cautions that this can reduce funds available for investment, increase interest expense and potentially represent a return of capital.
- The company reported a net loss of $12.5 million for the nine months and an accumulated deficit of $56.3 million; it said operations might not be profitable in 2017. No impairment losses were recognized.
- The property-management transition generated approximately $0.8 million of costs in Q3. Under the amended arrangements, the affiliate receives a fee generally equal to the greater of $3,000 per property or 6% of property revenue, cost reimbursements, certain construction-management fees and a share of tenant-protection-plan net revenue.
- Interest-rate and Canadian-dollar exposure are principal market risks. Management estimated that a 100-basis-point increase in the index on variable-rate debt would increase annual interest costs by approximately $0.4 million. Canadian operations and debt also expose results and cash flows to currency movements.
- Other notable risks include restrictive debt covenants, substantial 2018 maturities, dependence on related-party service providers, and the uncertainty of the estimated share value. The $10.22 estimated value per share was based primarily on a December 31, 2016 valuation and is not a continuously updated market price. The company reported no material legal proceedings and effective disclosure controls.
Important facts for investors to verify
- Whether operating cash flow can sustainably support distributions, given the reported use of DRP proceeds and the gap between cumulative distributions and FFO.
- How the company plans to refinance or repay the approximately $117.8 million of principal scheduled for 2018, including the KeyBank credit facility maturity and extension conditions.
- Whether same-store rent, occupancy and expense trends continue, and how much reported growth reflects acquisitions rather than existing properties.
- The actual ongoing costs and operating results following the October 1 property-management transition, including related-party fees and shared tenant-plan revenue.
- Whether Canadian currency exposure and variable-rate debt are adequately hedged, and whether the reported estimated share value remains representative of realizable value.