Business Context and Reporting Period
This Form 8-K filing by Strategic Storage Trust II, Inc. (a non-listed REIT) dated April 19, 2018, discloses the Board of Directors' approval of an estimated Net Asset Value (NAV) per share for its Class A and Class T common stock. The valuation is calculated as of December 31, 2017, to assist broker-dealers with FINRA reporting and fiduciaries with ERISA obligations. The filing also announces a change in the share price for the Distribution Reinvestment Plan effective May 2018.
Key Financial Metrics
Based on the valuation report provided by Duff & Phelps, LLC, the following metrics were determined as of December 31, 2017:
- Estimated NAV Per Share: $10.65 for both Class A and Class T shares.
- Total Assets: $1,016,579,152 (Real Estate Properties: $999,660,000; Cash and other assets: $16,919,152).
- Total Liabilities: $407,059,402 (Debt: $397,507,764; Mark-to-market on debt: $(5,648,067); Other liabilities: $15,199,705).
- Net Asset Value: $609,519,750.
- Shares Outstanding: 57,239,431 (fully diluted basis, including OP Units).
- Debt Fair Value: Approximately $391.9 million (Principal balance: $397.5 million).
Material Changes Versus Prior Period
Comparing the December 31, 2017 valuation to the December 31, 2016 valuation:
- NAV Per Share Increase: Rose from $10.22 to $10.65.
- Real Estate Value Appreciation: The appraised value of properties increased from $850,675,567 to $999,660,000. This represents a 19.3% increase over the aggregate purchase price of approximately $838 million.
- Debt Growth: Total debt increased from $321,356,434 to $397,507,764.
- Cash Position: Cash and restricted cash decreased from $18,034,805 to $11,868,412.
- Incentive Distribution: A liability of $4,491,853 was recorded for the incentive distribution, compared to zero in the prior period.
Guidance, Outlook, and Risks
Valuation Methodology: The valuation utilized the income capitalization approach for stabilized properties and the discounted cash flow method for non-stabilized properties. Key assumptions included an overall capitalization rate range of 4.75% to 6.50% (weighted average 5.32%) and a terminal capitalization rate range of 4.75% to 6.00%.
Sensitivity Analysis: The filing notes that a 50 basis point decrease in capitalization and discount rates would increase property value to approximately $1.099 billion, while a 50 basis point increase would decrease value to approximately $917 million.
Risks and Limitations:
- The estimated NAV does not represent GAAP fair value, liquidation value, or the price at which shares would trade on a national exchange.
- There is no assurance that stockholders can resell shares at the estimated value.
- Valuation is subject to market fluctuations and the accuracy of assumptions regarding rent growth, expense growth, and interest rates.
Management Commentary: The Board unanimously adopted the mid-range value of $10.65 recommended by the Nominating and Corporate Governance Committee after reviewing the independent appraisal by Duff & Phelps.
Investor Verification Checklist
- Verify the independence and qualifications of Duff & Phelps, LLC, the third-party valuation firm.
- Review the specific capitalization rates and discount rates applied to individual properties to assess sensitivity to market changes.
- Confirm the impact of the 19.3% appreciation in real estate value relative to the original purchase price.
- Monitor the increase in debt levels and the associated mark-to-market adjustments.
- Understand that the $10.65 value is an estimate for reporting purposes and does not guarantee a secondary market price or liquidation proceeds.