Smartstop Self Storage REIT, Inc. annual report, FY2016

Business context and reporting period

Filing identity: The supplied filing is Strategic Storage Trust II, Inc.’s Form 10-K for the fiscal year ended December 31, 2016, not a filing under the company name in the request. It reports a full fiscal year, not standalone fourth-quarter results. The company is a non-traded REIT that acquires and operates self-storage properties.

At year-end, it owned 77 properties in 14 U.S. states and Ontario, with approximately 46,920 units and 5.5 million rentable square feet. Portfolio physical occupancy was 92%; the weighted average estimated first-year capitalization rate for 76 stabilized properties was 5.4%.

Financial performance and liquidity

Operating margin was approximately negative 32.8% and net loss margin approximately negative 57.4%, calculated from reported revenue and losses. The company reported $22.1 million of depreciation and amortization and $13.7 million of acquisition expenses. Its non-GAAP modified funds from operations (MFFO) was positive $9.2 million, versus negative $3.0 million in 2015; MFFO excludes acquisition-related and other items and is not cash flow available for distributions.

Debt comprised approximately $184.3 million fixed-rate and $137.0 million variable-rate borrowings. Management estimated that a 100-basis-point increase in variable rates would reduce annual earnings and cash flows by approximately $1.4 million. Contractual debt principal due in 2017 was $110.9 million; total contractual debt principal and interest obligations were $390.1 million, including $121.4 million due in 2017. The filing describes subsequent extensions and refinancing actions after year-end.

Material changes versus the prior comparable period

• Revenue increased 153.7%, primarily because the portfolio expanded from 33 properties at year-end 2015 to 77 at year-end 2016, including 44 property acquisitions during 2016. The filing cautions that annual results are not directly comparable because of acquisition timing.
• Same-store revenue at five facilities rose 12.2%; same-store operating income increased 13.9%. Average physical occupancy rose from 89% to 92%, and annualized rent per occupied square foot rose from $10.45 to $11.30.
• Net loss attributable to common stockholders widened to $26.1 million from $15.3 million, while loss per share narrowed, reflecting a substantially larger weighted-average share count as well as operating and financing changes.
• Debt grew substantially to fund acquisitions. Investing cash outflow increased to $510.3 million, largely for property purchases; financing cash inflow was $498.9 million from equity and debt issuance.
• The company redeemed all $59.5 million of preferred units in 2015; no preferred units remained outstanding at year-end 2016.

Distributions, outlook, risks, and unusual items

• Distributions declared were $0.60 per common share for 2016, totaling $22.2 million including reinvested distributions. None came from operating cash flow: 51% was funded from primary-offering proceeds and 49% from distribution-reinvestment proceeds. Approximately $21.2 million of 2016 distributions were classified as a nontaxable return of capital.
• The board declared a first-quarter 2017 distribution at $0.00164383561 per share per day, and the filing reports the same daily rate declared for the second quarter. Management cautions that distributions may be reduced or discontinued and may continue to be funded from sources other than operations.
• Management expects revenue and operating costs to increase with future acquisitions, but provides no quantified earnings or cash-flow guidance. The primary offering terminated January 9, 2017; the distribution reinvestment offering remained available, with up to $100.9 million registered.
• After year-end, the company acquired an Aurora, Colorado property for approximately $10.1 million and completed a merger adding five Toronto-area properties. The Toronto transaction included approximately $7.3 million cash consideration, 483,197 operating partnership units, guarantees of Canadian loans with approximately $50.1 million CAD outstanding, and repayment of approximately $33.1 million of affiliate debt and accrued interest.
• Key risks include the absence of a public trading market and limited redemption capacity; ongoing losses and distributions funded from offering proceeds; debt maturities, covenants and variable-rate exposure; concentration in self-storage; competition; related-party fees and conflicts; and Canadian-dollar exposure. The filing reports no legal proceedings expected to have a material adverse effect and no recognized impairment losses.
• The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to audit internal control.

Important facts for investors to verify

• Confirm the registrant’s identity: the filing is for Strategic Storage Trust II, Inc., notwithstanding the company name in the request.
• Review the sources and sustainability of distributions, given negative operating cash flow and the 2016 use of offering and reinvestment proceeds.
• Check the post-year-end repayment, refinancing and extension status of the substantial 2017 debt maturities, including the KeyBank property loan.
• Assess acquisition performance and same-store trends separately from growth driven by new properties; verify occupancy, rent, capital needs and purchase-price assumptions.
• Evaluate related-party acquisition, asset-management and property-management fees, conflicts of interest, and the affiliate debt repayment and equity consideration in the Toronto merger.
• Do not treat the $10.09 estimated value per share, based on December 31, 2015 valuations, as a current market price or assured liquidation value; no established public market exists.