Smartstop Self Storage REIT, Inc. quarterly report, Q2 FY2017

Full document

Business context and reporting period

This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. The filing is for Strategic Storage Trust II, Inc., a self-storage REIT sponsored by SmartStop Asset Management—not an entity named SmartStop Self Storage REIT, Inc. At quarter-end, the company owned 83 properties, with approximately 51,330 rentable units, 6.03 million rentable square feet, and 93.4% physical occupancy. Its portfolio included 10 properties in the Greater Toronto Area.

Financial performance and position

  • Second quarter: Revenue was $19.1 million, up 94.7% year over year, mainly reflecting portfolio growth. Operating income was $1.0 million versus an $8.9 million operating loss; net loss attributable to common stockholders was $3.5 million, or $0.06 per share, versus a $10.7 million loss, or $0.27 per share.
  • First half: Revenue was $36.8 million versus $16.0 million. Operating income was $0.4 million versus an operating loss of $12.7 million. Net loss attributable to common stockholders was $8.7 million, or $0.16 per share, versus a $15.2 million loss, or $0.46 per share. The filing cautions that acquisition activity limits comparability.
  • Same-store trends: Same-store revenue increased 11.6% in Q2 and 14.2% in the first half. Same-store operating income rose 23.2% and 29.7%, respectively. Management attributed revenue gains to higher occupancy and rents; first-half same-store occupancy averaged 93.3%, up from 87.3%, and annualized rent per occupied square foot rose to $13.34 from $12.49.
  • Cash flow: First-half operating cash flow was $7.2 million, compared with cash used of $3.8 million in 2016. Investing used $49.9 million, primarily for acquisitions; financing provided $40.3 million. Cash and cash equivalents were $12.6 million at June 30, down from $15.0 million at year-end; restricted cash was an additional $4.5 million.
  • Debt and liquidity: Debt, net, was $393.2 million, up from $320.8 million at December 31, 2016; the weighted-average interest rate was approximately 4.18%. Management reported roughly $263 million fixed-rate and $131 million variable-rate debt. Scheduled principal payments include $111.7 million in 2018. A 100-basis-point increase in variable rates was estimated to reduce annual earnings and cash flow by about $0.5 million.
  • Distributions and supplemental measures: First-half distributions totaled $16.2 million: 44% was funded by operating cash flow, 49% by DRP proceeds, and 7% by Primary Offering proceeds. FFO was $8.3 million and MFFO was $8.7 million for the first half; both are non-GAAP measures and are not substitutes for operating cash flow or GAAP results.

Material changes, outlook, and risks

  • The company acquired six Canadian-area properties in the Toronto Merger in February 2017 and acquired another property in January. Portfolio expansion drove much of the reported revenue and expense growth. The Primary Offering ended January 9, 2017; the DRP remained active.
  • The board declared third-quarter 2017 distributions at approximately $0.001644 per share per day. Management said distributions may be funded from sources other than operations, including equity proceeds, borrowing, or asset sales. Since inception, cumulative distributions of about $46 million exceeded cumulative FFO of about $4 million.
  • The filing says the company anticipates that operations may not be profitable in 2017. Management believed available offering proceeds and potential borrowing capacity could meet short-term capital needs, while long-term liquidity depends on financing, equity, operating cash flow, and property performance. No specific revenue or earnings guidance was provided.
  • On July 14, 2017, the property manager notified Extra Space of its intent to terminate U.S. sub-property management agreements effective October 1. The company expected to manage those properties directly and incur an approximately $0.8 million termination fee. Its sponsor was negotiating to reacquire U.S. rights to the SmartStop brand; completion was not assured.
  • Risks include persistent losses and accumulated deficit, reliance on non-operating sources for distributions, competition and occupancy/rent pressures, variable interest rates, Canadian-dollar exposure, debt covenants and maturities, and REIT qualification. The company reported approximately $42.1 million of recourse guarantees. It reported no material legal proceedings, defaults, or material control changes; disclosure controls were deemed effective.

Important facts for investors to verify

  1. Confirm the legal issuer and its relationship to SmartStop; this filing is for Strategic Storage Trust II, Inc.
  2. Assess same-store operating trends separately from acquisition-driven growth and verify whether occupancy and rent gains persist.
  3. Review debt covenants, refinancing needs—particularly the 2018 maturities—and exposure to variable rates and currency movements.
  4. Determine how distributions are funded and whether operating cash flow can sustainably support them; do not treat FFO or MFFO as cash available for distributions.
  5. Track the Extra Space management transition, expected termination cost, and any outcome of the SmartStop brand negotiations.
  6. Review the assumptions and limitations behind the board’s $10.22 estimated value per share, based on a December 31, 2016 valuation; the filing warns it may not equal realizable sale value.