Business Context and Reporting Period
This Form 8-K, filed on January 20, 2015, by Strategic Storage Trust II, Inc. (Registrant), reports the closing of the first phase of a multi-property acquisition and the establishment of a new credit facility. The Registrant operates through its operating partnership, Strategic Storage Operating Partnership II, L.P.
Key Financial Metrics and Transaction Details
Acquisition (First Phase)
- Assets Acquired: Seven self-storage facilities located in California, Colorado, Illinois, and Maryland.
- Total Purchase Price: Approximately $25.93 million (plus closing costs and fees).
- Property Characteristics: Approximately 3,280 units and 340,900 net rentable square feet.
- Occupancy: Average physical occupancy of approximately 87% as of September 30, 2014.
- Acquisition Fees: Approximately $450,000 incurred.
Financing and Liquidity
- Preferred Equity Investment: SSTI Preferred Investor, LLC invested approximately $24.1 million in the Operating Partnership in exchange for approximately 960,000 Series A Cumulative Redeemable Preferred Units. Approximately $10.6 million of these proceeds funded the First Phase acquisition.
- Debt Facility (KeyBank Facility): A credit facility with a total capacity of $71.295 million (KeyBank committed $46.295 million; Texas Capital committed $25 million).
- Initial Draw: Approximately $15.4 million drawn to fund the First Phase acquisition.
- Debt Terms: Initial term of three years (maturing January 20, 2018) with two one-year extension options. Interest-only payments for the first 36 months followed by a 30-year amortization schedule.
- Interest Rate: The initial draw was a Eurodollar Loan bearing interest at approximately 3.4% (LIBOR + 325 basis points).
Material Changes and Future Obligations
The Registrant has entered into a definitive agreement to acquire a total portfolio of 26 self-storage facilities for an aggregate purchase price of approximately $128.2 million. The First Phase represents only a portion of this portfolio. The remaining 19 properties are expected to close in additional phases over the coming weeks, funded by remaining preferred equity proceeds, additional preferred unit issuances, and further draws on the KeyBank Facility.
The KeyBank Facility must be fully funded through a maximum of four loan advances by March 31, 2015. The Borrower is required to enter into an interest rate hedging agreement by March 31, 2015, or upon the final loan advance, whichever occurs first.
Management Commentary, Risks, and Covenants
Financial Covenants
The KeyBank Credit Agreement imposes several financial tests to be calculated quarterly:
- Total Leverage Ratio: No greater than 60%.
- Loan to Value Ratio: No greater than 60%.
- Debt-Service Coverage Ratio: Not less than 1.35 to 1.0 (commencing March 31, 2015).
- Interest Coverage Ratio: Not less than 1.85 to 1.0 (commencing June 30, 2015 or after final acquisition).
- Fixed Charge Ratio: 1.6 to 1.0 (commencing June 30, 2015 or after final acquisition).
- Variable Rate Debt Limit: Indebtedness with varying rates not to exceed 30% of total indebtedness.
Risks and Contingencies
- Financial Statements: Audited or unaudited financial statements for the acquired properties are not currently available. The Registrant intends to file them by April 10, 2015.
- Collateral: The facility is fully recourse and secured by cross-collateralized first mortgage liens on the mortgaged properties.
- Management Fees: Strategic Storage Property Management II, LLC (an affiliate of the sponsor) will manage the properties for a one-time fee of $3,750 per property and an ongoing fee of 6% of gross monthly revenues.
Investor Verification Checklist
- Verify the final closing dates and purchase prices for the remaining 19 properties in the 26-property portfolio.
- Confirm the execution of the required interest rate hedging agreement by the March 31, 2015 deadline.
- Review the financial statements for the acquired properties once filed by April 10, 2015, to assess historical performance and pro forma impact.
- Monitor compliance with the KeyBank Facility covenants, specifically the Debt-Service Coverage Ratio and Loan to Value Ratio.
- Assess the impact of the 6% gross revenue management fee on net operating income.