Business context and reporting period
The filing is an unaudited Form 10-Q for the quarter ended March 31, 2016. The registrant named in the filing is Strategic Storage Trust II, Inc., a self-storage REIT; it is not identified as SmartStop Self Storage REIT, Inc. The company reported 40 properties in the U.S. and Canada, with 23,880 rentable units, 2.57 million rentable square feet and 82% physical occupancy at quarter-end. It had no employees and operated through an advisor and property manager.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 or prior date |
|---|---|---|
| Total revenue | $6.23 million | $3.01 million |
| Operating loss | $3.81 million | $2.92 million |
| Operating margin | -61.2% | -97.1% |
| Net loss | $4.51 million | $3.58 million |
| Net loss per share | $0.17, Class A and Class T | Class A $2.26; Class T not applicable |
| Cash from operations | -$1.85 million | $0.54 million |
| Cash from investing | -$74.15 million | -$111.19 million |
| Cash from financing | $111.60 million | $115.94 million |
| Cash and cash equivalents | $63.57 million at March 31 | $28.10 million at December 31, 2015 |
| Secured debt | $46.38 million carrying value | $23.03 million at December 31, 2015 |
| Total assets | $317.31 million | $193.45 million at December 31, 2015 |
Gross principal debt was $45.61 million: approximately $22.65 million fixed-rate and $22.97 million variable-rate. The amended KeyBank facility had a $145 million commitment and no outstanding balance at quarter-end. A 100-basis-point increase in variable rates was estimated to reduce annual earnings and cash flow by about $0.2 million. The filing does not provide a clear current ratio or other standard liquidity ratio.
FFO was negative $1.21 million and modified FFO (MFFO) was positive $1.60 million. These are non-GAAP supplemental measures; MFFO excludes acquisition expenses and is not a substitute for operating cash flow or GAAP results.
Material changes versus the prior comparable period
- Revenue more than doubled, primarily because the portfolio expanded: Q1 2016 included a full quarter from 33 properties and partial-quarter results from seven acquisitions, versus five full-quarter and 21 partial-quarter properties in Q1 2015. Management cautioned that the periods are not directly comparable.
- Operating loss widened in dollars, while operating margin improved. Net loss increased, although the 2015 common-shareholder loss included preferred-unit distributions and accretion that were absent in 2016; share issuance also materially changed weighted-average shares and per-share comparisons.
- Operating cash flow turned negative, principally reflecting working-capital changes. Cash rose largely through financing: the company raised $115.4 million gross from common stock in Q1 and also issued secured debt.
- Real estate facilities increased to $240.7 million before depreciation from $156.2 million at year-end, including $80.3 million of acquisitions and a $3.6 million foreign-exchange impact.
Outlook, risks and unusual items
- No numerical earnings or acquisition guidance was provided. Management expected revenues and property, affiliate and depreciation/amortization expenses to rise with acquisitions; results depend on occupancy, rents, tenant collections, costs and future capital raising.
- Distributions totaled $3.32 million in Q1, including reinvested distributions. The filing states that none were funded by operating cash flow: 50% came from primary-offering proceeds and 50% from distribution-reinvestment proceeds. Management warned distributions may be funded by offering proceeds, borrowing or asset sales and may constitute a return of capital. The board declared a Q2 daily rate of $0.00163934426 per share, subject to board discretion.
- At March 31, the company had agreements for two Oakland-area properties for about $50 million and a 27-property portfolio for about $371 million; both were expected to close in Q2 and/or Q3, but completion was not assured and earnest money could be forfeited. Other announced potential purchases included Sonoma and two Las Vegas properties. Subsequent to quarter-end, it acquired seven properties for $18.0 million, one for about $9.3 million and one for about $8.2 million; nine further properties were acquired after quarter-end in total.
- The company entered a 12-month CAD/USD forward hedge with a CAD $42.5 million notional amount; its quarter-end fair-value liability was approximately $986,000. Canadian operations remain exposed to currency effects.
- Related-party acquisition, asset-management and property-management fees are significant. Q1 related-party costs incurred totaled $13.18 million, including $1.62 million of acquisition expenses, $0.33 million of asset-management fees and $0.37 million of property-management fees.
- The board-approved estimated value per share was $10.09, based on a valuation of assets and liabilities as of December 31, 2015. The company said valuations are estimates and may not equal sale proceeds; it may update NAV only annually. Offering prices changed in April 2016.
- The company reported no material legal proceedings, no recognized impairment losses and effective disclosure controls. REIT qualification, acquisition execution, financing and covenant compliance, property valuations, competition, and the ability to fund distributions are material risks.
Important facts for investors to verify
- Confirm the registrant’s identity and whether this filing is the intended company’s report.
- Track whether announced acquisitions closed, their financing mix, purchase-price allocations and resulting leverage.
- Assess distribution coverage using recurring operating cash flow, not offering proceeds, reinvested distributions, FFO or MFFO alone.
- Review the annual NAV valuation methodology and assumptions, and compare estimated value with offering and redemption prices.
- Examine related-party fee arrangements, debt covenants, variable-rate exposure and the CAD hedge’s effectiveness.