Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 000-55617

 

 

Strategic Storage Trust II, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Maryland		46-1722812
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

10 Terrace Rd,

Ladera Ranch, California 92694

(Address of principal executive offices)

(877) 327-3485

(Registrant’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x  (Do not check if a smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 8, 2016, there were 40,163,180 outstanding shares of Class A common stock and 3,935,190 outstanding shares of Class T common stock of the registrant.

 

 

 

---

Table of Contents

FORM 10-Q

STRATEGIC STORAGE TRUST II, INC.

TABLE OF CONTENTS

 

				Page No.
		Cautionary Note Regarding Forward-Looking Statements			3
PART I.		FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements:			4
		Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015 (unaudited)			5
		Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)			6
		Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)			7
		Consolidated Statement of Equity for the Six Months Ended June 30, 2016 (unaudited)			8
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)			9
		Notes to Consolidated Financial Statements (unaudited)			10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			50
Item 4.		Controls and Procedures			51
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			51
Item 1A.		Risk Factors			51
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 3.		Defaults Upon Senior Securities			52
Item 4.		Mine Safety Disclosures			53
Item 5.		Other Information			53
Item 6.		Exhibits			53

 

2

---

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q of Strategic Storage Trust II, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, including known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “seek,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission. We cannot guarantee the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Any such forward-looking statements are subject to risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations and provide distributions to stockholders, and our ability to find suitable investment properties, may be significantly hindered. See the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission, as supplemented by the risk factors included in Part II, Item 1A of this Form 10-Q, for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.

 

3

---

Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The information furnished in the accompanying unaudited consolidated balance sheets and related consolidated statements of operations, comprehensive loss, equity and cash flows reflects all adjustments (consisting of normal and recurring adjustments) that are, in management’s opinion, necessary for a fair and consistent presentation of the aforementioned financial statements.

The accompanying financial statements should be read in conjunction with the notes to our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-Q. The accompanying financial statements should also be read in conjunction with our financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015. Our results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the operating results expected for the full year.

 

4

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

		June 30, 2016				December 31, 2015
ASSETS
Real estate facilities:
Land		$	214,398,537			$	47,653,000
Buildings			353,189,773				97,941,472
Site improvements			30,953,600				10,650,078
			598,541,910				156,244,550
Accumulated depreciation			(7,621,582	)			(3,755,709	)
			590,920,328				152,488,841
Construction in process			1,126,544				385,408
Real estate facilities, net			592,046,872				152,874,249
Cash and cash equivalents			12,566,872				28,104,470
Restricted cash			546,935				410,492
Other assets			9,040,925				6,017,845
Debt issuance costs, net of accumulated amortization			2,983,282				2,128,806
Intangible assets, net of accumulated amortization			15,150,590				3,910,966
Total assets		$	632,335,476			$	193,446,828
LIABILITIES AND EQUITY
Secured debt		$	290,126,612			$	23,029,775
Accounts payable and accrued liabilities			6,965,516				2,146,253
Due to affiliates			292,322				208,483
Distributions payable			2,043,619				986,886
Total liabilities			299,428,069				26,371,397
Commitments and contingencies (Note 8)
Redeemable common stock			4,801,445				1,223,483
Equity:
Strategic Storage Trust II, Inc. equity:
Preferred stock, $0.001 par value; 200,000,000 shares authorized; none issued and outstanding at June 30, 2016 and December 31, 2015			—				—
Class A common stock, $0.001 par value; 350,000,000 shares authorized; 38,807,307 and 20,684,791 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively			38,807				20,685
Class T common stock, $0.001 par value; 350,000,000 shares authorized; 3,437,723 and 608,982 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively			3,438				609
Additional paid-in capital			374,432,741				187,434,752
Distributions			(13,587,017	)			(3,893,528	)
Accumulated deficit			(32,916,659	)			(17,687,326	)
Accumulated other comprehensive income			172,695				—
Total Strategic Storage Trust II, Inc. equity			328,144,005				165,875,192
Noncontrolling interests in our Operating Partnership			(38,043	)			(23,244	)
Total equity			328,105,962				165,851,948
Total liabilities and equity		$	632,335,476			$	193,446,828

See notes to consolidated financial statements.

 

5

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Revenues:
Self storage rental revenue		$	9,721,596			$	4,365,253			$	15,918,438			$	7,300,982
Ancillary operating revenue			77,593				122,959				115,340				194,010
Total revenues			9,799,189				4,488,212				16,033,778				7,494,992
Operating expenses:
Property operating expenses			3,607,594				1,580,826				6,104,458				2,770,932
Property operating expenses – affiliates			1,214,278				546,490				1,915,587				971,423
General and administrative			754,098				460,218				1,448,866				855,898
Depreciation			2,436,412				910,421				3,893,696				1,485,357
Intangible amortization expense			2,853,212				1,597,581				4,707,977				2,588,640
Acquisition expenses—affiliates			6,632,826				374,238				8,256,031				2,418,441
Other property acquisition expenses			1,210,299				143,372				2,431,030				448,088
Total operating expenses			18,708,719				5,613,146				28,757,645				11,538,779
Operating loss			(8,909,530	)			(1,124,934	)			(12,723,867	)			(4,043,787	)
Other income (expense):
Interest expense			(1,290,001	)			(779,038	)			(1,772,208	)			(1,310,612	)
Interest expense—Accretion of fair market value of secured debt			107,286				22,448				143,012				41,663
Interest expense—Debt issuance costs			(601,455	)			(144,786	)			(819,563	)			(241,535	)
Other			(35,810	)			35,495				(65,538	)			(16,749	)
Net loss			(10,729,510	)			(1,990,815	)			(15,238,164	)			(5,571,020	)
Less: Distributions to preferred unitholders in our Operating Partnership			—				(1,644,706	)			—				(2,759,675	)
Less: Accretion of preferred equity costs			—				(428,916	)			—				(758,601	)
Net loss attributable to the noncontrolling interests in our Operating Partnership			5,381				26,800				8,831				71,930
Net loss attributable to Strategic Storage Trust II, Inc. common stockholders		$	(10,724,129	)		$	(4,037,637	)		$	(15,229,333	)		$	(9,017,366	)
Net loss per Class A share – basic and diluted		$	(0.27	)		$	(1.36	)		$	(0.46	)		$	(3.46	)
Net loss per Class T share – basic and diluted		$	(0.27	)			—			$	(0.46	)			—
Weighted average Class A shares outstanding – basic and diluted			36,939,428				2,968,500				31,012,035				2,606,780
Weighted average Class T shares outstanding – basic and diluted			2,855,018				—				1,946,388				—

See notes to consolidated financial statements.

 

6

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Net loss		$	(10,729,510	)		$	(1,990,815	)		$	(15,238,164	)		$	(5,571,020	)
Other comprehensive income (loss):
Foreign currency translation adjustment			11,311				—				1,707,596				—
Foreign currency forward contract loss			(148,892	)			—				(1,135,242	)			—
Interest rate swap contract loss			(399,659	)			—				(399,659	)			—
Other comprehensive income (loss)			(537,240	)			—				172,695				—
Comprehensive loss			(11,266,750	)			(1,990,815	)			(15,065,469	)			(5,571,020	)
Less: Distributions to preferred unitholders in our Operating Partnership			—				(1,644,706	)			—				(2,759,675	)
Less: Accretion of preferred equity costs			—				(428,916	)			—				(758,601	)
Comprehensive loss attributable to noncontrolling interests:
Comprehensive loss attributable to the noncontrolling interests in our Operating Partnership			5,650				26,800				8,557				71,930
Comprehensive loss attributable to Strategic Storage Trust II, Inc. common stockholders.		$	(11,261,100	)		$	(4,037,637	)		$	(15,056,912	)		$	(9,017,366	)

See notes to consolidated financial statements.

 

7

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

 

		Common Stock
		Class A								Class T
		Number of Shares				Common Stock Par Value				Number of Shares				Common Stock Par Value				Additional Paid-in Capital				Distributions				Accumulated Deficit				Accumulated Other Comprehensive Income				Total Strategic Storage Trust II, Inc. Equity				Noncontrolling Interests in our Operating Partnership				Total Equity				Redeemable Common Stock
Balance as of December 31, 2015			20,684,791			$	20,685				608,982			$	609			$	187,434,752			$	(3,893,528	)		$	(17,687,326	)		$	—			$	165,875,192			$	(23,244	)		$	165,851,948			$	1,223,483
Gross proceeds from issuance of common stock			17,759,497				17,759				2,807,950				2,808				206,284,358				—				—				—				206,304,925				—				206,304,925				—
Offering costs			—				—				—				—				(19,300,821	)			—				—				—				(19,300,821	)			—				(19,300,821	)			—
Changes to redeemable common stock			—				—				—				—				(4,265,316	)			—				—				—				(4,265,316	)			—				(4,265,316	)			4,265,316
Redemptions of common stock			(54,154	)			(54	)			—				—				—				—				—				—				(54	)			—				(54	)			(687,354	)
Distributions ($0.30 per share)			—				—				—				—				—				(9,693,489	)			—				—				(9,693,489	)			—				(9,693,489	)			—
Distributions for noncontrolling interests			—				—				—				—				—				—				—				—				—				(5,968	)			(5,968	)			—
Issuance of shares for distribution reinvestment plan			417,173				417				20,791				21				4,264,878				—				—				—				4,265,316				—				4,265,316				—
Stock compensation expense			—				—				—				—				14,890				—				—				—				14,890				—				14,890				—
Net loss attributable to Strategic Storage Trust II, Inc.			—				—				—				—				—				—				(15,229,333	)			—				(15,229,333	)			—				(15,229,333	)			—
Net loss attributable to the noncontrolling interests in our Operating Partnership			—				—				—				—				—				—				—				—				—				(8,831	)			(8,831	)			—
Foreign currency translation adjustment			—				—				—				—				—				—				—				1,707,596				1,707,596				—				1,707,596				—
Foreign currency forward contract loss			—				—				—				—				—				—				—				(1,135,242	)			(1,135,242	)			—				(1,135,242	)			—
Interest rate swap contract loss			—				—				—				—				—				—				—				(399,659	)			(399,659	)			—				(399,659	)			—
Balance as of June 30, 2016			38,807,307			$	38,807				3,437,723			$	3,438			$	374,432,741			$	(13,587,017	)		$	(32,916,659	)		$	172,695			$	328,144,005			$	(38,043	)		$	328,105,962			$	4,801,445

See notes to consolidated financial statements.

 

8

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended June 30,
		2016				2015
Cash flows from operating activities:
Net loss		$	(15,238,164	)		$	(5,571,020	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization			8,601,673				4,073,997
Accretion of fair market value adjustment of secured debt			(143,012	)			(41,663	)
Amortization of debt issuance costs			819,563				241,535
Expense related to issuance of restricted stock			14,890				—
Increase (decrease) in cash from changes in assets and liabilities:
Other assets			(1,477,917	)			(913,574	)
Restricted cash			(97,104	)			(41,211	)
Accounts payable and accrued liabilities			3,515,950				1,140,714
Due to affiliates			186,083				(855,499	)
Net cash used in operating activities			(3,818,038	)			(1,966,721	)
Cash flows from investing activities:
Purchase of real estate			(416,904,543	)			(124,994,259	)
Additions to real estate facilities			(3,512,980	)			(525,966	)
Restricted cash			(39,340	)			(47,558	)
Deposits on acquisition of real estate facilities			(5,550,100	)			—
Net cash flows used in investing activities			(426,006,963	)			(125,567,783	)
Cash flows from financing activities:
Proceeds from issuance of secured debt			259,598,908				71,295,000
Principal payments on secured debt			(25,150,211	)			(83,078	)
Proceeds from issuance of preferred equity in our Operating Partnership			—				52,820,000
Debt issuance costs			(3,924,121	)			(1,254,134	)
Gross proceeds from issuance of common stock			208,241,136				16,449,606
Offering costs			(19,409,638	)			(3,178,290	)
Redemption of common stock			(537,188	)			—
Distributions paid to common stockholders			(4,396,703	)			(430,970	)
Distributions paid to preferred unitholders in our Operating Partnership			—				(1,363,028	)
Distributions paid to noncontrolling interests in our Operating Partnership			(6,003	)			(5,984	)
Net cash flows provided by financing activities			414,416,180				134,249,122
Impact of foreign exchange rate changes on cash			(128,777	)			—
Change in cash and cash equivalents			(15,537,598	)			6,714,618
Cash and cash equivalents, beginning of period			28,104,470				6,531,152
Cash and cash equivalents, end of period		$	12,566,872			$	13,245,770
Supplemental disclosures and non-cash transactions:
Cash paid for interest		$	957,738			$	1,039,607
Supplemental disclosure of noncash activities:
Additions to construction in process in accounts payable and accrued liabilities		$	72,612			$	213,596
Deposits applied to purchase of real estate facilities		$	2,020,808			$	4,444,491
Proceeds from issuance of common stock in other assets		$	409,941			$	281,568
Secured debt assumed during purchase of real estate facilities		$	33,108,652			$	—
Redemption of common stock included in accounts payable and accrued liabilities		$	159,985			$	17,500
Other assets included in due to affiliates		$	—			$	77,556
Offering costs included in due to affiliates		$	57,983			$	239,952
Offering costs included in accounts payable and accrued liabilities		$	13,587			$	26,260
Debt issuance costs included in due to affiliates		$	—			$	64,006
Debt issuance costs included in accounts payable and accrued liabilities		$	47,844			$	25,750
Foreign currency contract and interest rate swap contract loss included in accounts payable and accrued liabilities		$	1,534,901			$	—
Issuance of shares pursuant to distribution reinvestment plan		$	4,265,316			$	262,014
Distributions payable		$	2,043,619			$	163,173
Distributions payable to preferred unitholders in our Operating Partnership		$	—			$	1,434,142
Preferred equity issuance costs		$	—			$	132,381

See notes to consolidated financial statements.

 

9

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

Note 1. Organization

Strategic Storage Trust II, Inc., a Maryland corporation (the “Company”), was formed on January 8, 2013 under the Maryland General Corporation Law for the purpose of engaging in the business of investing in self storage facilities. The Company’s year-end is December 31. As used in this report, “we,” “us,” “our,” and “Company” refer to Strategic Storage Trust II, Inc. and each of our subsidiaries.

Strategic Storage Holdings, LLC, a Delaware limited liability company (“SSH”), was the sponsor of our Offering (as defined below) through August 31, 2014. Effective August 31, 2014, SmartStop Self Storage, Inc. (“SmartStop”), entered into a series of transactions, agreements and amendments to its existing agreements and arrangements (such agreements and amendments hereinafter referred to collectively as the “Self Administration and Investment Management Transaction”) with SSH and its affiliates, pursuant to which, effective August 31, 2014, SmartStop acquired the self storage advisory, asset management, property management and investment management businesses of SSH including SSH’s sole membership interest in SmartStop Asset Management, LLC (formerly Strategic Storage Realty Group, LLC), which owns 97.5% of the economic interests (and 100% of the voting membership interests) of Strategic Storage Advisor II, LLC (our “Advisor”) and owns 100% of Strategic Storage Property Management II, LLC (our “Property Manager”).

On October 1, 2015, SmartStop and Extra Space Storage Inc. (“Extra Space”), along with subsidiaries of each of SmartStop and Extra Space, closed on a merger transaction (the “Merger”) in which SmartStop was acquired by Extra Space for $13.75 per share in cash, representing an enterprise value of approximately $1.4 billion. At the closing of the Merger, SmartStop Asset Management, LLC, the owner of our Property Manager and majority and sole voting member of our Advisor, was sold to an entity controlled by H. Michael Schwartz, our Chairman of the Board of Directors, Chief Executive Officer and President, and became our sponsor (our “Sponsor”). The former executive management team of SmartStop continues to serve as the executive management team for our Sponsor. In addition, our management team remains the same, as well as the management team of our Advisor and Property Manager.

We have no employees. Our Advisor, a Delaware limited liability company, was formed on January 8, 2013. Our Advisor is responsible for managing our affairs on a day-to-day basis and identifying and making acquisitions and investments on our behalf under the terms of the advisory agreement we have with our Advisor (our “Advisory Agreement”). The officers of our Advisor are also officers of us and our Sponsor.

On August 2, 2013, our Advisor purchased 100 shares of our common stock for $1,000 and became our initial stockholder. Our Articles of Amendment and Restatement, as amended, authorize 350,000,000 shares of Class A common stock, $0.001 par value per share (the “Class A Shares”) and 350,000,000 shares of Class T common stock, $0.001 par value per share (the “Class T Shares”) and 200,000,000 shares of preferred stock with a par value of $0.001. We are offering a maximum of $1.0 billion in common shares for sale to the public (the “Primary Offering”) and $95.0 million in common shares for sale pursuant to our distribution reinvestment plan (collectively, the “Offering”).

On January 10, 2014, the Securities and Exchange Commission (“SEC”) declared our registration statement effective. On May 23, 2014, we satisfied the $1.5 million minimum offering requirements of our Offering and commenced formal operations. On September 28, 2015, we revised our Primary Offering and are now offering two classes of shares of common stock: Class A Shares and Class T Shares. As of June 30, 2016, we had issued approximately 38.8 million Class A Shares and approximately 3.4 million Class T Shares in our Offering for gross proceeds of approximately $388.6 million and approximately $33.4 million, respectively. We intend to invest the net proceeds from the Offering primarily in self storage facilities and related self storage real estate investments. As of June 30, 2016 we owned 63 properties and subsequent to June 30, 2016 we acquired an additional property (see Note 12).

On April 8, 2016, our board of directors, upon recommendation of its nominating and corporate governance committee, approved an estimated value per share of our common stock of $10.09 for our Class A Shares and Class T Shares based on the estimated value of our assets less the estimated value of our liabilities, or net asset value, divided by the number of shares outstanding on a fully diluted basis, calculated as of December 31, 2015. See our Current Report on Form 8-K filed with the SEC on April 11, 2016 for a description of the methodologies and assumptions used to determine, and the limitations of, the estimated value per share.

 

10

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

As a result of the calculation of our estimated value per share, effective on April 14, 2016, the offering price of Class A Shares increased from $10.00 per share to $11.21 per share and the offering price of Class T Shares increased from $9.47 per share to $10.62 per share. Our board of directors determined the new per share offering price of each class of stock by taking the $10.09 estimated value per share and adding the per share up-front sales commissions and dealer manager fees to be paid with respect to the Class A Shares and Class T Shares, respectively, such that after the payment of such commissions and dealer manager fees, the net proceeds to us will be the same for both Class A Shares and Class T Shares. In addition, effective April 21, 2016, shares sold pursuant to our distribution reinvestment plan are sold at $10.09 per share for Class A and Class T Shares.

Our operating partnership, Strategic Storage Operating Partnership II, L.P., a Delaware limited partnership (our “Operating Partnership”), was formed on January 9, 2013. During 2013, our Advisor purchased limited partnership interests in our Operating Partnership for $200,000 and on August 2, 2013, we contributed the initial $1,000 capital contribution we received to our Operating Partnership in exchange for the general partner interest. Our Operating Partnership owns, directly or indirectly through one or more special purpose entities, all of the self storage properties that we have acquired and the self storage properties we will acquire in the future. As of June 30, 2016, we owned approximately 99.95% of the common units of limited partnership interests of our Operating Partnership. The remaining approximately 0.05% of the common units are owned by our Advisor. Our Operating Partnership had issued approximately 2.4 million Series A Cumulative Redeemable Preferred Units (the “Preferred Units”) to SSTI Preferred Investor, LLC (the “Preferred Investor”), a wholly-owned subsidiary of SmartStop Self Storage Operating Partnership, L.P., the former operating partnership of SmartStop, in exchange for an investment in our Operating Partnership of approximately $59.5 million. Such Preferred Units were owned by Extra Space subsequent to the Merger. As of December 31, 2015, we had redeemed all of the Preferred Units. As the sole general partner of our Operating Partnership, we have the exclusive power to manage and conduct the business of our Operating Partnership. We conduct certain activities through our taxable REIT subsidiary, Strategic Storage TRS II, Inc., a Delaware corporation (the “TRS”), which is a wholly-owned subsidiary of our Operating Partnership.

Our Property Manager was formed on January 8, 2013 to manage our properties. Our Property Manager derives substantially all of its income from the property management services it performs for us. Our Property Manager may enter into sub-property management agreements with third party management companies and pay part of its management fee to such sub-property manager. At the closing of the Merger, we entered into new property management agreements with our Property Manager and our Property Manager entered into sub-property management agreements with an affiliate of Extra Space for the management of our properties in the United States. Furthermore, Extra Space acquired the rights to the “SmartStop^® Self Storage” brand in the United States through the Merger and we can no longer utilize this brand in the United States. The properties we own were re-branded under the Extra Space name subsequent to the Merger. However, any properties owned or acquired in Canada will be managed by a subsidiary of our Sponsor and will continue to be branded using the SmartStop^® Self Storage brand.

Our dealer manager is Select Capital Corporation, a California corporation (our “Dealer Manager”). Our Dealer Manager is responsible for marketing our shares being offered pursuant to our Primary Offering. Our president owned, through a wholly-owned limited liability company, a 15% non-voting equity interest in our Dealer Manager through August 31, 2014. Effective August 31, 2014, SmartStop indirectly owned the 15% non-voting equity interest in our Dealer Manager, pursuant to the Self Administration and Investment Management Transaction. Effective October 1, 2015, in connection with the Merger, the 15% non-voting equity interest in our Dealer Manager is now owned by our Sponsor. An affiliate of our Dealer Manager continues to own a 2.5% non-voting membership interest in our Advisor.

As we accept subscriptions for shares of our common stock, we transfer substantially all of the net offering proceeds to our Operating Partnership as capital contributions in exchange for additional units of interest in our Operating Partnership. However, we are deemed to have made capital contributions in the amount of gross proceeds received from investors, and our Operating Partnership is deemed to have simultaneously paid the sales commissions and other costs associated with the Offering. In addition, our Operating Partnership is structured to make distributions with respect to limited partnership units that are equivalent to the distributions made to holders of common stock. Finally, a limited partner in our Operating Partnership may later exchange his or her limited partnership units in our Operating Partnership for shares of our common stock at any time after one year following the date of issuance of their limited partnership units, subject to certain restrictions outlined in our Operating Partnership’s limited partnership agreement (the “Operating Partnership Agreement”). Our Advisor is prohibited from exchanging or otherwise transferring its limited partnership units so long as it is acting as our Advisor pursuant to our Advisory Agreement.

 

11

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC.

Principles of Consolidation

Our financial statements, and the financial statements of our Operating Partnership, including its wholly-owned subsidiaries, are consolidated in the accompanying consolidated financial statements. The portion of these entities not wholly-owned by us is presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated in consolidation.

Consolidation Considerations

Current accounting guidance provides a framework for identifying a variable interest entity (“VIE”) and determining when a company should include the assets, liabilities, noncontrolling interests, and results of activities of a VIE in its consolidated financial statements. In general, a VIE is an entity or other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. Generally, a VIE should be consolidated if a party with an ownership, contractual, or other financial interest in the VIE (a variable interest holder) has the power to direct the VIE’s most significant activities and the obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities, and noncontrolling interest at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. As of June 30, 2016 and December 31, 2015, we had not entered into contracts/interests that would be deemed to be variable interests in VIEs.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. Management will adjust such estimates when facts and circumstances dictate. Actual results could materially differ from those estimates. The most significant estimates made include the allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed at fair value, the determination if certain entities should be consolidated, the evaluation of potential impairment of long-lived assets, and the useful lives of real estate assets and intangibles.

Cash and Cash Equivalents

We consider all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents.

We may maintain cash equivalents in financial institutions in excess of insured limits, but believe this risk will be mitigated by only investing in or through major financial institutions.

Restricted Cash

Restricted cash consists primarily of impound reserve accounts for property taxes, insurance and capital improvements in connection with the requirements of one of our loan agreements.

 

12

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Real Estate Purchase Price Allocation

We account for acquisitions in accordance with amended accounting guidance which requires that we allocate the purchase price of the property to the tangible and intangible assets acquired and the liabilities assumed based on estimated fair values. This guidance requires us to make significant estimates and assumptions, including fair value estimates, as of the acquisition date and to adjust those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which we may adjust the provisional amounts recognized for an acquisition). Acquisitions of portfolios of facilities are allocated to the individual facilities based upon an income approach or a cash flow analysis using appropriate risk adjusted capitalization rates which take into account the relative size, age, and location of the individual facility along with current and projected occupancy and rental rate levels or appraised values, if available. Allocations to the individual assets and liabilities are based upon comparable market sales information for land and estimates of depreciated replacement cost of equipment, building and site improvements. In allocating the purchase price, we determine whether the acquisition includes intangible assets or liabilities. Substantially all of the leases in place at acquired properties are at market rates, as the majority of the leases are month-to-month contracts. We also consider whether in-place, market leases represent an intangible asset. We recorded approximately $15.8 million and approximately $7.5 million in intangible assets to recognize the value of in-place leases related to our acquisitions during the six months ended June 30, 2016 and 2015, respectively. We do not expect, nor to date have we recorded, intangible assets for the value of customer relationships because we expect we will not have concentrations of significant customers and the average customer turnover will be fairly frequent. Our acquisition-related transaction costs are required to be expensed as incurred. During the three months ended June 30, 2016 and 2015 we expensed approximately $7.8 million and $0.5 million, respectively, of acquisition-related transaction costs. During the six months ended June 30, 2016 and 2015, we expensed approximately $10.7 million and $2.9 million of acquisition-related transaction costs, respectively.

Should the initial accounting for an acquisition be incomplete by the end of a reporting period that falls within the measurement period, we will report provisional amounts in our financial statements. During the measurement period, we will adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we will record those adjustments to our financial statements. We will recognize any measurement adjustments during the period in which we determine the amount of the adjustment to our financial statements, potentially including adjustments to interest, depreciation and amortization expense.

Evaluation of Possible Impairment of Long-Lived Assets

Management will continually monitor events and changes in circumstances that could indicate that the carrying amounts of our long-lived assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of the assets may not be recoverable, we will assess the recoverability of the assets by determining whether the carrying value of the long-lived assets will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, we will adjust the value of the long-lived assets to the fair value and recognize an impairment loss. For the six months ended June 30, 2016 and 2015, no impairment losses were recognized.

Revenue Recognition

Management believes that all of our leases are operating leases. Rental income is recognized in accordance with the terms of the leases, which generally are month-to-month. Revenues from any long-term operating leases are recognized on a straight-line basis over the term of the lease. The excess of rents received over amounts contractually due pursuant to the underlying leases is included in accounts payable and accrued liabilities in our consolidated balance sheets and contractually due but unpaid rent is included in other assets.

Allowance for Doubtful Accounts

Tenant accounts receivable is reported net of an allowance for doubtful accounts. Management’s estimate of the allowance is based upon a review of the current status of tenant accounts receivable. It is reasonably possible that management’s estimate of the allowance will change in the future.

 

13

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Real Estate Facilities

Real estate facilities are recorded at cost. We capitalize costs incurred to develop, construct, renovate and improve properties, including interest and property taxes incurred during the construction period. The construction period begins when expenditures for the real estate assets have been made and activities that are necessary to prepare the asset for its intended use are in progress. The construction period ends when the asset is substantially complete and ready for its intended use.

Depreciation of Real Property Assets

Our management is required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives.

Depreciation of our real property assets is charged to expense on a straight-line basis over the estimated useful lives as follows:

 

Description		Standard Depreciable Life
Land		Not Depreciated
Buildings		30-35 years
Site Improvements		7-10 years

Depreciation of Personal Property Assets

Personal property assets consist primarily of furniture, fixtures and equipment and are depreciated on a straight-line basis over the estimated useful lives generally ranging from 3 to 5 years, and are included in other assets on our consolidated balance sheets.

Intangible Assets

We have allocated a portion of our real estate purchase price to in-place leases. We are amortizing in-place leases on a straight-line basis over the estimated future benefit period. As of June 30, 2016 and December 31, 2015, the gross amounts allocated to in-place lease intangibles were approximately $25.2 million and $9.2 million, respectively, and accumulated amortization of in-place lease intangibles totaled approximately $10.0 million and $5.3 million, respectively.

Debt Issuance Costs

Costs incurred in connection with our revolving credit facility are presented as debt issuance costs on our consolidated balance sheets. Debt issuance costs are amortized on a straight-line basis over the term of the related loan, which is not materially different than the effective interest method. As of June 30, 2016 and December 31, 2015, accumulated amortization of debt issuance costs related to our revolving credit facility totaled approximately $0.4 million and $16,000, respectively.

Costs incurred in connection with obtaining non revolving debt are presented on the balance sheet as a deduction from secured debt (see Note 5).

 

14

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Organizational and Offering Costs

Our Advisor may fund organization and offering costs on our behalf. We will be required to reimburse our Advisor for such organization and offering costs; provided, however, our Advisor must reimburse us within 60 days after the end of the month in which the Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions, dealer manager fees and stockholder servicing fees) in excess of 3.5% of the gross offering proceeds from the Primary Offering. Such costs will be recognized as a liability when we have a present responsibility to reimburse our Advisor, which is defined in our Advisory Agreement as the date we satisfied the minimum offering requirements of our Offering (which occurred on May 23, 2014). If at any point in time we determine that the total organization and offering costs are expected to exceed 3.5% of the gross proceeds anticipated to be received from the Primary Offering, we will recognize such excess as a capital contribution from our Advisor. As of June 30, 2016, we do not believe total organization and offering costs will exceed 3.5% of the gross proceeds anticipated to be received from the Primary Offering. Offering costs are recorded as an offset to additional paid-in capital, and organization costs are recorded as an expense.

Foreign Currency Translation

For non-U.S. functional currency operations, assets and liabilities are translated to U.S. dollars at current exchange rates. Revenues and expenses are translated at the average rates for the period. All related adjustments are recorded in accumulated other comprehensive income (loss) as a separate component of equity. Transactions denominated in a currency other than the functional currency of the related operation are recorded at rates of exchange in effect at the date of the transaction. Gains or losses on foreign currency transactions are recorded in other income (expense).

Redeemable Common Stock

We adopted a share redemption program that will enable stockholders to sell their shares to us in limited circumstances.

We record amounts that are redeemable under the share redemption program as redeemable common stock in the accompanying consolidated balance sheet since the shares are redeemable at the option of the holder and therefore their redemption is outside our control. The maximum amount redeemable under our share redemption program is limited to the number of shares we can repurchase with the amount of the net proceeds from the sale of shares under the distribution reinvestment plan. However, accounting guidance states that determinable amounts that can become redeemable but that are contingent on an event that is likely to occur (e.g., the passage of time) should be presented as redeemable when such amount is known. Therefore, the net proceeds from the distribution reinvestment plan are considered to be temporary equity and are presented as redeemable common stock in the accompanying consolidated balance sheet.

In addition, current accounting guidance requires, among other things, that financial instruments that represent a mandatory obligation of us to repurchase shares be classified as liabilities and reported at settlement value. Our redeemable common shares will be contingently redeemable at the option of the holder. When we determine we have a mandatory obligation to repurchase shares under the share redemption program, we will reclassify such obligations from temporary equity to a liability based upon their respective settlement values.

For the six months ended June 30, 2016, we received redemption requests for a total of approximately 71,300 shares (approximately $690,000), $530,000 of which was fulfilled in April 2016, with the remaining $160,000 included in accounts payable and accrued liabilities as of June 30, 2016 and fulfilled in July 2016. For the six months ended June 30, 2015, we received one redemption request for 1,750 shares (approximately $17,500) which was fulfilled in July 2015.

Accounting for Equity Awards

The cost of restricted stock is required to be measured based on the grant date fair value and the cost recognized over the relevant service period.

 

15

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Fair Value Measurements

The accounting standard for fair value measurements and disclosures defines fair value, establishes a framework for measuring fair value, and provides for expanded disclosure about fair value measurements. Fair value is defined by the accounting standard for fair value measurements and disclosures as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels. The following summarizes the three levels of inputs and hierarchy of fair value we will use when measuring fair value:

 

•

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access;

 

•

Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as interest rates and yield curves that are observable at commonly quoted intervals; and

 

•

Level 3 inputs are unobservable inputs for the assets or liabilities that are typically based on an entity’s own assumptions as there is little, if any, related market activity.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the fair value measurement will fall within the lowest level that is significant to the fair value measurement in its entirety.

The accounting guidance for fair value measurements and disclosures provides a framework for measuring fair value and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In determining fair value, we will utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value. Considerable judgment will be necessary to interpret Level 2 and 3 inputs in determining fair value of our financial and non-financial assets and liabilities. Accordingly, there can be no assurance that the fair values we will present will be indicative of amounts that may ultimately be realized upon sale or other disposition of these assets.

Financial and non-financial assets and liabilities measured at fair value on a non-recurring basis in our consolidated financial statements consist of real estate and related liabilities assumed related to our acquisitions. The fair values of these assets and liabilities were determined as of the acquisition dates using widely accepted valuation techniques, including (i) discounted cash flow analysis, which considers, among other things, leasing assumptions, growth rates, discount rates and terminal capitalization rates, (ii) income capitalization approach, which considers prevailing market capitalization rates, and (iii) comparable sales activity. In general, we consider multiple valuation techniques when measuring fair values. However, in certain circumstances, a single valuation technique may be appropriate. All of the fair values of the assets and liabilities as of the acquisition dates were derived using Level 3 inputs.

The carrying amounts of cash and cash equivalents, restricted cash, other assets, accounts payable and accrued liabilities, distributions payable and amounts due to affiliates will approximate fair value because of the relatively short-term nature of these instruments.

 

16

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

The table below summarizes our fixed rate notes payable at June 30, 2016 and December 31, 2015. The estimated fair value of financial instruments is subjective in nature and is dependent on a number of important assumptions, including discount rates and relevant comparable market information associated with each financial instrument. The fair values of the fixed rate notes payable were estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the estimates presented below are not necessarily indicative of the amounts we would realize in a current market exchange.

 

		June 30, 2016								December 31, 2015
		Fair Value				Carrying Value				Fair Value				Carrying Value
Fixed Rate Secured Debt		$	45,800,000			$	44,611,598			$	13,300,000			$	13,237,237

To comply with GAAP, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of derivative contracts for the effect of non-performance risk, we will consider the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Derivative Instruments and Hedging Activities

We record all derivatives on our balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation.

For derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in accumulated other comprehensive income. The ineffective portion of the change in fair value of the derivatives are recognized directly in earnings. Amounts are reclassified out of other comprehensive income into earnings when the hedged net investment is either sold or substantially liquidated.

Foreign Currency Forward

During the first quarter of 2016, we entered into a foreign currency forward contract in order to hedge foreign currency exposure related to our investment in subsidiaries that hold properties we acquired in Canada. A foreign currency forward contract is a commitment to deliver a certain amount of currency at a certain price on a specific date in the future. By entering into the forward contract and holding it to maturity, we are locked into a future currency exchange rate in an amount equal to and for the term of the forward contract. We have designated the foreign currency forward as a net investment hedge and changes in the fair value of the derivative are reported in other comprehensive income.

The forward contract has a notional amount of $42.5 million CAD, a duration of 12 months, and a forward rate of approximately 1.339. As of June 30, 2016, the forward contract has a fair market value representing a liability of approximately $1.1 million USD which is recorded in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. The characteristics of this financial instrument, market data, and other comparative metrics utilized in determining this fair value are “Level 2” inputs as the term is defined in the accounting standard for fair value measurement.

Noncontrolling Interest in Consolidated Entities

We account for the noncontrolling interest in our Operating Partnership in accordance with the related accounting guidance. Due to our control through our general partnership interest in our Operating Partnership and the limited rights of the limited partner, our Operating Partnership, including its wholly-owned subsidiaries, are consolidated with the Company and the limited partner interest is reflected as a noncontrolling interest in the accompanying consolidated balance sheet. The noncontrolling interest shall be attributed its share of income and losses, even if that attribution results in a deficit noncontrolling interest balance.

 

17

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Income Taxes

We made an election to be taxed as a Real Estate Investment Trust (“REIT”), under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2014. To qualify as a REIT, we must continue to meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the REIT’s ordinary taxable income to stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT and intend to operate in the foreseeable future in such a manner that we will remain qualified as a REIT for federal income tax purposes.

Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income.

We filed elections to treat our TRS as a taxable REIT subsidiary effective January 1, 2014. In general, the TRS performs additional services for our customers and generally engages in any real estate or non-real estate related business. The TRS is subject to corporate federal and state income tax. The TRS follows accounting guidance which requires the use of the asset and liability method. Deferred income taxes represent the tax effect of future differences between the book and tax bases of assets and liabilities.

Per Share Data

Basic earnings per share attributable to us for all periods presented are computed by dividing net income (loss) attributable to us by the weighted average number of shares outstanding during the period, excluding unvested restricted stock. Diluted earnings per share are computed by dividing net income (loss) attributable to us by the weighted average number of shares outstanding, adjusted for the dilutive effect of unvested restricted stock, utilizing the treasury stock method. For all periods presented the dilutive effect of unrestricted stock was not included in the dilutive weighted average shares as such shares were antidilutive.

Recently Issued Accounting Guidance

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 “Revenue from Contracts with Customers” (“ASU 2014-09”) as Accounting Standards Codification (“ASC”) Topic 606. The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new standard, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC. In July 2015, the FASB voted to defer the effective date by one year to annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 and early adoption is permitted. This ASU shall still be applied using either a full retrospective or modified retrospective approach. We are in the process of evaluating the impact of this standard on our consolidated financial statements and the impact is unknown at this time.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, and affects the evaluation of fee arrangements in the primary beneficiary determination. ASU 2015-02 is effective for periods beginning after December 15, 2015 and early adoption is permitted. We adopted this ASU in the interim period ended March 31, 2016 and its adoption did not have a material impact on our consolidated financial statements.

 

18

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, in August 2015, the FASB issued ASU 2015-15, “Interest—Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”, which clarifies ASU No. 2015-03 by stating that the staff of the SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 and ASU 2015-15 are effective for periods beginning after December 15, 2015 and early adoption is permitted. We adopted this ASU on January 1, 2016 and retrospectively applied the guidance to our secured debt, excluding the Amended KeyBank Credit Facility. Unamortized debt issuance costs, which were previously included in debt issuance costs on our consolidated balance sheets, of approximately $0.2 million, are included in secured debt as of December 31, 2015.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which amends the guidance on accounting for leases. Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under ASU 2016-02, lessor accounting is largely unchanged. It also includes extensive amendments to the disclosure requirements. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted for financial statements that have not yet been made available for issuance. ASU 2016-02 requires a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are in the process of evaluating the impact of this standard on our consolidated financial statements and the impact is unknown at this time.

Note 3. Real Estate Facilities

The following summarizes the activity in real estate facilities during the six months ended June 30, 2016:

 

Real estate facilities
Balance at December 31, 2015		$	156,244,550
Facility acquisitions			436,146,451
Impact of foreign exchange rate changes			3,666,459
Improvements and additions			2,484,450
Balance at June 30, 2016		$	598,541,910
Accumulated depreciation
Balance at December 31, 2015		$	(3,755,709	)
Depreciation expense and impact of foreign exchange rate changes			(3,865,873	)
Balance at June 30, 2016		$	(7,621,582	)

 

19

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

The following table summarizes the preliminary purchase price allocation for our acquisitions during the six months ended June 30, 2016:

 

Property		Acquisition Date				Real Estate Assets				Intangibles				Total(1)				Debt Issued or Assumed				Allocation of Debt Premium				2016 Revenue(2)				2016 Property Operating Income (Loss)(3)
Boynton Beach - FL			1/7/16			$	17,164,000			$	736,000			$	17,900,000			$	—			$	—			$	662,087			$	390,027
Lancaster - CA			1/11/16				4,445,000				205,000				4,650,000				—				—				310,423				172,309
Milton - ONT(4)			2/11/16				9,026,972				463,364				9,490,336				4,820,717				262,621				351,556				206,038
Burlington I – ONT(4)			2/11/16				13,969,287				486,389				14,455,676				6,917,254				279,170				376,082				221,909
Oakville I - ONT(4)			2/11/16				15,717,232				—				15,717,232				7,243,413				—				27,343				(97,153	)
Oakville II - ONT(4)			2/29/16				11,889,390				895,219				12,784,609				7,392,762				—				349,087				221,263
Burlington II - ONT(4)			2/29/16				8,049,568				532,692				8,582,260				4,962,733				—				254,981				152,586
Xenia - OH			4/20/16				3,000,000				210,000				3,210,000				—				—				91,128				56,435
Sidney - OH			4/20/16				1,750,000				140,000				1,890,000				—				—				66,323				34,154
Troy - OH			4/20/16				3,030,000				180,000				3,210,000				—				—				89,132				53,304
Greenville - OH			4/20/16				1,790,000				140,000				1,930,000				—				—				67,064				36,485
Washington Court House - OH			4/20/16				2,120,000				170,000				2,290,000				—				—				74,837				41,527
Richmond - IN			4/20/16				3,310,000				200,000				3,510,000				—				—				93,110				50,993
Connersville - IN			4/20/16				1,830,000				130,000				1,960,000				—				—				62,046				31,986
Port St. Lucie - FL			4/29/16				8,930,000				370,000				9,300,000				—				—				135,625				69,498
Sacramento - CA			5/9/16				7,820,000				330,000				8,150,000				—				—				117,330				50,329
Oakland - CA			5/18/16				12,940,000				510,000				13,450,000				10,000,000				200,000				156,817				85,018
Concord - CA			5/18/16				35,980,000				1,180,000				37,160,000				10,000,000				560,000				314,694				208,032
Pompano Beach - FL			6/1/16				17,896,855				680,000				18,576,855				13,714,676				—				84,113				43,360
Lake Worth - FL			6/1/16				22,374,525				690,000				23,064,525				11,089,560				—				112,148				75,733
Jupiter - FL			6/1/16				26,075,993				850,000				26,925,993				12,469,383				—				143,402				96,960
Royal Palm Beach - FL			6/1/16				23,163,788				840,000				24,003,788				12,097,235				—				128,222				81,837
Port St. Lucie - FL			6/1/16				13,986,635				520,000				14,506,635				7,280,380				—				82,012				44,981
Wellington - FL			6/1/16				21,136,510				780,000				21,916,510				10,644,805				—				120,371				73,918
Doral - FL			6/1/16				24,068,715				770,000				24,838,715				12,081,860				—				116,814				61,131
Plantation - FL			6/1/16				35,288,783				1,030,000				36,318,783				15,624,241				—				170,438				109,962
Naples - FL			6/1/16				24,923,615				750,000				25,673,615				13,504,110				—				118,275				81,392
Delray - FL			6/1/16				29,807,488				980,000				30,787,488				11,160,313				—				159,097				116,347
Baltimore - MD			6/1/16				27,517,095				770,000				28,287,095				15,333,437				—				139,364				95,416
Sonoma - CA			6/14/16				7,145,000				280,000				7,425,000				—				—				30,950				10,066
Total						$	436,146,451			$	15,818,664			$	451,965,115			$	186,336,879			$	1,301,791			$	5,004,871			$	2,875,843

 

(1)	The allocations noted above are based on a preliminary determination of the fair value of the total consideration provided. Such valuations may change as we complete our purchase price accounting.

(2)	The operating results of the facilities acquired above have been included in our statement of operations since their respective acquisition date.

(3)	Property operating income excludes corporate general and administrative expenses, asset management fees, interest expense, depreciation, amortization and acquisition expenses.

(4)	Allocation based on CAD/USD exchange rates as of date of acquisition.

The purchase price allocations included above are preliminary and therefore, subject to change upon the completion of our analysis of appraisals and other information related to the acquisitions. We anticipate finalizing the purchase price allocations within one year of their acquisition date, as further evaluations are completed and additional information is received from third parties.

We incurred acquisition fees to our Advisor related to the above property acquisitions of approximately $7.9 million for the six months ended June 30, 2016.

 

20

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Note 4. Pro Forma Financial Information (Unaudited)

The table set forth below summarizes on an unaudited pro forma basis the combined results of operations of the Company for the six months ended June 30, 2016, and 2015 as if the Company’s acquisitions were completed as of January 1, 2015. This pro forma information does not purport to represent what the actual results of operations of the Company would have been for the periods indicated, nor do they purport to predict the results of operations for future periods.

 

		For the six months ended
		June 30, 2016				June 30, 2015
Pro forma revenue		$	26,533,330			$	25,490,597
Pro forma operating expenses			30,212,159				29,742,503
Pro forma net loss attributable to common stockholders			(9,307,525	)			(16,176,963	)

The pro forma financial information for the six months ended June 30, 2016 and 2015 were adjusted to exclude approximately $10.6 million and $2.9 million, respectively, for acquisition related expenses.

Note 5. Secured Debt

Amended KeyBank Credit Facility

On December 22, 2015, we, through our Operating Partnership, and certain affiliated entities, entered into an amended and restated revolving credit facility (the “Amended KeyBank Credit Facility”) with KeyBank National Association (“KeyBank”), as administrative agent and KeyBanc Capital Markets, LLC, as the sole book runner and sole lead arranger, and Texas Capital Bank, N.A., and Comerica Bank as co-lenders. The Amended KeyBank Credit Facility replaced our term credit facility with KeyBank in which we had a maximum borrowing capacity of approximately $71.3 million.

Under the terms of the Amended KeyBank Credit Facility, we initially had a maximum borrowing capacity of $105 million. It is anticipated that the Amended KeyBank Credit Facility will be used to fund our future self storage property acquisitions. The Amended KeyBank Credit Facility may be increased to a maximum credit facility size of $500 million, in minimum increments of $10 million, which KeyBank will arrange on a best efforts basis.

On February 18, 2016, we entered into a first amendment and joinder to amended and restated credit agreement (the “First Amendment”) with KeyBank. Under the terms of the First Amendment, we added an additional $40 million to our maximum borrowing capacity for a total of $145 million with the admission of US Bank National Association (the “Subsequent Lender”). It is anticipated that the additional borrowing capacity will be used to fund our future self storage property acquisitions. The Subsequent Lender also became a party to the Amended KeyBank Credit Facility through a joinder agreement in the First Amendment.

The Amended KeyBank Credit Facility is a revolving loan with an initial term of three years, maturing on December 22, 2018, with two one-year extension options subject to certain conditions outlined further in the credit agreement for the Amended KeyBank Credit Facility (the “Amended Credit Agreement”). Payments due pursuant to the Amended KeyBank Credit Facility are interest-only for the first 36 months and a 30-year amortization schedule thereafter. The Amended KeyBank Credit Facility bears interest based on the type of borrowing. The ABR Loans bear interest at the lesser of (x) the Alternate Base Rate (as defined in the Amended Credit Agreement) plus the Applicable Rate, or (y) the Maximum Rate (as defined in the Amended Credit Agreement). The Eurodollar Loans bear interest at the lesser of (a) the Adjusted LIBO Rate (as defined in the Amended Credit Agreement) for the Interest Period in effect plus the Applicable Rate, or (b) the Maximum Rate (as defined in the Amended Credit Agreement). The Applicable Rate corresponds to our total leverage, as specified in the Amended Credit Agreement. For any ABR Loans, the Applicable Rate is 125 basis points if our total leverage is less than 50%, and 150 basis points if our leverage is greater than 50%. For any Eurodollar Loan, the Applicable Rate is 225 basis points if our total leverage is less than 50% and 250 basis points if our total leverage is greater than 50%. As of June 30, 2016 the effective interest rate on our Amended KeyBank Credit Facility was 2.72%.

 

21

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

The Amended KeyBank Credit Facility is fully recourse and is secured by cross-collateralized first mortgage liens on 38 Mortgaged Properties (as defined in the Amended Credit Agreement). The Amended KeyBank Credit Facility may be prepaid or terminated at any time without penalty, provided, however, that the Lenders (as defined in the Amended Credit Agreement) shall be indemnified for any breakage costs. Pursuant to that certain guaranty (the “KeyBank Guaranty”), dated December 22, 2015, in favor of the Lenders, we serve as a guarantor of all obligations due under the Amended KeyBank Credit Facility.

Under certain conditions, the Borrower may cause the release of one or more of the properties serving as collateral for the Amended KeyBank Credit Facility, provided that no default or event of default is then outstanding or would reasonably occur as a result of such release, and after taking into account any prepayment of outstanding Loans (as defined in the Amended Credit Agreement) necessary to maintain compliance with the financial covenants.

The Amended KeyBank Credit Facility contains a number of other customary terms and covenants, including the following (capitalized terms are as defined in the Amended Credit Agreement): the aggregate borrowing base availability under the Amended KeyBank Facility is limited to the lesser of: (1) 60% of the Pool Value of the properties in the collateral pool, or (2) an amount that would provide a minimum Debt Service Coverage Ratio of no less than 1.35 to 1.0; and we must meet the following financial tests, calculated as of the close of each fiscal quarter: (1) a Total Leverage Ratio of no more than 60%; (2) a Tangible Net Worth not at any time to be less than the Base Amount plus 80% of Net Equity Proceeds received after the Effective Date; (3) an Interest Coverage Ratio of no less than 1.85 to 1.0; (4) a Fixed Charge Ratio of no less than 1.6 to 1.0; (5) a ratio of varying rate Indebtedness to total Indebtedness not in excess of 30%; (6) a Loan to Value Ratio of not greater than 60%; and (7) a Debt Service Coverage Ratio of not less than 1.35 to 1.0.

Additionally, on May 25, 2016, our Operating Partnership purchased an interest rate swap with a notional amount of $180 million, such that in no event will our interest rate exceed 3.75% thereon through December 31, 2016.

As of June 30, 2016, the outstanding principal balance under the Amended KeyBank Facility was $90 million. As of December 31, 2015, the outstanding principal balance under the Amended KeyBank Facility was $10.0 million.

The KeyBank Property Loan

On March 25, 2016, one of our subsidiaries executed purchase and sale agreements with unaffiliated third parties for the acquisition of 22 self storage facilities (10 in Florida, 11 in North Carolina, and one in Maryland), four parcels of land adjacent to the North Carolina properties and one redevelopment property in North Carolina (the “27 Property Portfolio”). On June 1, 2016 we closed on 11 self storage facilities in Florida and Maryland for approximately $275 million representing the first phase (“First Phase”) of the 27 Property Portfolio.

On June 1, 2016, we, through certain affiliated entities (collectively, the “Borrower”) entered into a credit agreement (the “Property Loan Agreement”) for a secured loan in the amount of $105 million (the “KeyBank Property Loan”) with KeyBank, as administrative agent, KeyBanc Capital Markets, LLC, as the sole book runner and sole lead arranger, and the lenders party thereto. The Borrower borrowed $105 million in connection with the purchase of the properties in the First Phase of the 27 Property Portfolio. The KeyBank Property Loan is a term loan facility that has a maturity date of December 31, 2016. We intend to repay the KeyBank Property Loan with net proceeds from our Offering, a draw down on the Amended KeyBank Credit Facility or other potential debt financing.

Payments due under the KeyBank Property Loan are interest-only due on the first day of each month. The KeyBank Property Loan bears interest based on the type of borrowing elected by the Borrower. An ABR Borrowing bears interest at the lesser of (x) the Alternate Base Rate (as defined in the Property Loan Agreement) plus the Applicable Rate, or (y) the Maximum Rate (as defined in the Property Loan Agreement). A Eurodollar Borrowing bears interest at the lesser of (a) the Adjusted LIBO Rate (as defined in the Property Loan Agreement) for the Interest Period in effect plus the Applicable Rate, or (b) the Maximum Rate (as defined in the Property Loan Agreement). The Applicable Rate means 225 basis points for any Eurodollar Borrowing and 125 basis points for any ABR Borrowing. The Borrower elected a Eurodollar Borrowing. The Borrower paid certain fees to the lenders in connection with the KeyBank Property Loan.

The KeyBank Property Loan is fully recourse, jointly and severally, to us and the Borrower and is secured by cross-collateralized first mortgage liens on 11 Mortgaged Properties (as defined in the Property Loan Agreement), which are the same properties acquired in the First Phase of the 27 Property Portfolio. The Borrower may prepay the KeyBank Property Loan at any time, without penalty, in whole or in part, with an exit fee payable under certain circumstances. Pursuant to that certain guaranty (the “Property Loan Guaranty”), dated June 1, 2016, in favor of the lenders, we serve as the guarantor of all obligations due under the Property Loan Agreement.

 

22

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

The Property Loan Agreement contains a number of other customary terms and covenants, including the following (capitalized terms are as defined in the Property Loan Agreement) financial tests the Borrower must maintain, on a consolidated basis in accordance with GAAP: (i) a Loan to Value Ratio of not greater than fifty five percent (55%); (ii) a Pool Debt Yield of at least ten and one half percent (10.5%), tested as of September 30, 2016 and as of the close of each fiscal quarter thereafter. Throughout the terms of the Property Loan Agreement, we shall have and maintain, on a consolidated basis in accordance with GAAP, tested as of the close of each fiscal quarter: (i) a total Leverage Ratio no greater than sixty percent (60%); (ii) a Tangible Net Worth not at any time to be less than approximately $260 million, plus eighty-five percent (85%) of the Net Equity Proceeds received after the Effective Date; (iii) an Interest Coverage Ratio of not less than 1.85:1.00; (iv) a Fixed Charge Ratio of not less than 1.60:1.00; and (v) a ratio of the Indebtedness that bears interest at a varying rate of interest or that does not have the interest rate fixed, capped or swapped pursuant to a hedging agreement to the sum of the Indebtedness, not in excess of thirty percent (30%).

As of June 30, 2016, the outstanding principal balance under the KeyBank Property Loan was $105 million and the effective interest rate was 2.72%.

The KeyBank Subordinate Loan

On June 1, 2016, in conjunction with the acquisition of the First Phase of the 27 Property Portfolio, we entered into a credit agreement (the “Subordinate Loan Agreement”) in which we borrowed $30 million (the “KeyBank Subordinate Loan”) with KeyBank, as administrative agent, KeyBanc Capital Markets, LLC, as the sole book runner and sole lead arranger, and the lenders party thereto. The KeyBank Subordinate Loan is a term loan facility that has a maturity date of December 31, 2016. We intend to repay the KeyBank Subordinate Loan with net proceeds from our Offering, a draw down on the Amended KeyBank Credit Facility or other potential debt financing.

Payments due pursuant to the KeyBank Subordinate Loan are interest-only due on the first day of each month. The KeyBank Subordinate Loan bears interest based on the type of borrowing elected by us. An ABR Borrowing bears interest at the lesser of (x) the Alternate Base Rate (as defined in the Subordinate Loan Agreement) plus the Applicable Rate, or (y) the Maximum Rate (as defined in the Subordinate Loan Agreement). A Eurodollar Borrowing bears interest at the lesser of (a) the Adjusted LIBO Rate (as defined in the Subordinate Loan Agreement) for the Interest Period in effect plus the Applicable Rate, or (b) the Maximum Rate (as defined in the Subordinate Loan Agreement). The Applicable Rate means 563 basis points for any Eurodollar Borrowing and 463 basis points for any ABR Borrowing. We elected a Eurodollar Borrowing. We paid certain fees to the lenders in connection with the KeyBank Subordinate Loan.

The KeyBank Subordinate Loan is non-recourse and unsecured. We may prepay the KeyBank Subordinate Loan at any time, without penalty, in whole or in part, with an exit fee payable under certain circumstances. The KeyBank Subordinate Loan contains a number of other customary terms and covenants, including the following (capitalized terms are as defined in the Subordinate Loan Agreement) financial tests we must maintain, on a consolidated basis in accordance with GAAP, tested as of the close of each fiscal quarter: (i) a Total Leverage Ratio no greater than sixty percent (60%); (ii) a Tangible Net Worth not at any time to be less than approximately $260 million, plus eighty-five percent (85%) of the Net Equity Proceeds received after the Effective Date; (iii) an Interest Coverage Ratio of not less than 1.85:1.00; (iv) a Fixed Charge Ratio of not less than 1.60:1.00; and (v) a ratio of the Indebtedness that bears interest at a varying rate of interest or that does not have the interest rate fixed, capped or swapped pursuant to a hedging agreement to the sum of the Indebtedness, not in excess of thirty percent (30%). It will be an event of default under the Subordinate Loan Agreement if an event of default is in existence under our Amended KeyBank Credit Facility or under the Property Loan Agreement.

As of June 30, 2016, the outstanding principal balance under the KeyBank Subordinate Loan was $30 million and the effective interest rate was 6.1%.

Assumption of Debt Related to the Oakland Properties

In connection with the acquisition of properties in Oakland and Concord, California (the “Oakland Properties”) on May 18, 2016, we, through two special purpose entities formed to acquire and hold the Oakland Properties, assumed a loan with USAmeriBank (“USAmeribank”).

We assumed the renewal promissory note dated October 28, 2015 in favor of USAmeriBank in the principal amount of $20 million (the “Oakland Loan”) that is secured by the Oakland Properties. The Oakland Loan accrues interest at a rate equal to the 30-day LIBOR Rate (as defined in the promissory note) plus 2.0% per annum. The Oakland Loan matures on April 10, 2023.

In connection with the Oakland Loan, we also assumed an interest rate swap with USAmeriBank that fixes the interest rate at 3.95% and that will expire on April 10, 2023. In conjunction with the preliminary purchase accounting, the interest rate swap was valued at approximately $760,000 and recorded as a debt premium. From the date of acquisition through June 30,

 

23

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

2016, the interest rate swap’s liability position has increased approximately $0.4 million which is recorded in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. The characteristics of this financial instrument, market data, and other comparative metrics utilized in determining this fair value are “Level 2” inputs as the term is defined in the accounting standard for fair value measurement.

As of June 30, 2016, the outstanding principal balance under the Oakland Loan was $20 million.

Additional Secured Debt

The components of our remaining secured debt, are summarized as follows:

 

		June 30, 2016				December 31, 2015
Fixed Rate Debt
Loans with banks bearing interest at fixed rates between 5.73% and 5.98%. The loans are secured by self storage facilities. Principal and interest payments are made monthly with all outstanding principal and interest due between October 2018 and September 2023. Approximately $10.3 million of these loans are denominated in Canadian dollars		$	22,613,950			$	12,437,841
Variable Rate Debt
Canadian dollar denominated loans with banks bearing floating interest rates based on Canadian Prime, or the Canadian Dealer Offered Rate (“CDOR”). Interest rates based on Canadian Prime are Canadian Prime plus 1.75%. Interest rates based on CDOR have a spread between 2.5% and 4.05%. The loans are secured by storage facilities. Payments are made monthly with all outstanding principal and interest due between December 2017 and February 2021			22,918,708				—
Total additional secured debt			45,532,658				12,437,841
Amended KeyBank Credit Facility			90,000,000				10,000,000
KeyBank Property Loan			105,000,000				—
KeyBank Subordinate Loan			30,000,000				—
Oakland Loan			20,000,000				—
Premium on secured debt, net			1,997,648				799,396
Debt issuance costs, net			(2,403,694	)			(207,462	)
Total		$	290,126,612			$	23,029,775

As of June 30, 2016, we provided guarantees totaling approximately $42 million in connection with our loans. We are subject to certain restrictive covenants relating to the outstanding secured debt.

The following table presents the future principal payment requirements on outstanding secured debt as of June 30, 2016:

 

2016		$	135,268,809
2017			8,387,138
2018			103,340,850
2019			965,708
2020			994,414
2021 and thereafter			41,575,739
Total payments			290,532,658
Premium on secured debt, net			1,997,648
Debt issuance costs, net			(2,403,694	)
Total		$	290,126,612

 

24

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Note 6. Preferred Equity

Issuance of Preferred Units by our Operating Partnership

On November 3, 2014, we and our Operating Partnership entered into a Series A Cumulative Redeemable Preferred Unit Purchase Agreement (the “Unit Purchase Agreement”) with the Preferred Investor, a wholly-owned subsidiary of SmartStop Self Storage Operating Partnership, L.P. Pursuant to the Unit Purchase Agreement, the Preferred Investor agreed to provide up to $65 million through a preferred equity investment in our Operating Partnership (the “Preferred Equity Investment”), to be used solely for investments in self storage properties, as described in the underlying documents, in exchange for up to 2.6 million preferred units of limited partnership interest of our Operating Partnership (the “Preferred Units”), each having a liquidation preference of $25.00 per Preferred Unit (the “Liquidation Amount”), plus all accumulated and unpaid distributions.

In addition to the Unit Purchase Agreement, we and our Operating Partnership entered into a Second Amended and Restated Limited Partnership Agreement of the Operating Partnership (the “Second Amended and Restated Limited Partnership Agreement”) and Amendment No. 1 to the Second Amended and Restated Limited Partnership Agreement (the “Amendment”). The Second Amended and Restated Limited Partnership Agreement authorizes the issuance of additional classes of units of limited partnership interest in the Operating Partnership, establishes a new series of preferred units of limited partnership interest in the Operating Partnership and sets forth other necessary corresponding changes. All other terms of the Second Amended and Restated Limited Partnership Agreement remained substantially the same. The Amendment sets forth key terms of the Preferred Units, some of which are discussed below.

In a number of transactions, the Preferred Investor invested a total of $59.5 million in our Operating Partnership and was issued approximately 2.4 million preferred units. As of December 31, 2015, we had redeemed all of the Preferred Units.

The holders of the Preferred Units received current distributions (the “Current Distributions”) at a rate of a one-month LIBOR plus 6.5% per annum on the Liquidation Amount, payable monthly and calculated on an actual/360 basis. In addition to the Current Distributions, our Operating Partnership had the obligation to elect either (A) to pay the holder of the Preferred Units additional distributions monthly in an amount equal to: (i) 4.35% per annum of the Liquidation Amount through March 31, 2017; and (ii) beginning April 1, 2017, 6.35% per annum of the Liquidation Amount or (B) defer the additional distributions ( the “Deferred Distributions”) in an amount that accumulated monthly in an amount equal to (i) LIBOR plus 10.85% of the Deferred Distributions through March 31, 2017; and (ii) beginning April 1, 2017, LIBOR plus 12.85% of the Deferred Distributions.

Note 7. Related Party Transactions

Fees to Affiliates

Our Advisory Agreement with our Advisor and dealer manager agreement (“Dealer Manager Agreement”) with our Dealer Manager, entitle our Advisor and our Dealer Manager to specified fees upon the provision of certain services with regard to the Offering and investment of funds in real estate properties, among other services, as well as reimbursement for organizational and offering costs incurred by our Advisor on our behalf and reimbursement of certain costs and expenses incurred by our Advisor in providing services to us.

Organization and Offering Costs

Organization and offering costs of the Offering may be paid by our Advisor on our behalf and will be reimbursed to our Advisor from the proceeds of our Offering. Organization and offering costs consist of all expenses (other than sales commissions, the dealer manager fees and stockholder servicing fees) paid by us in connection with the Offering, including our legal, accounting, printing, mailing and filing fees, charges of our escrow holder and other accountable organization and offering expenses, including, but not limited to, (i) amounts to reimburse our Advisor for all marketing related costs and expenses such as salaries and direct expenses of employees of our Advisor and its affiliates in connection with registering and marketing our shares; (ii) technology costs associated with the Offering; (iii) our costs of conducting our training and education meetings; (iv) our costs of attending retail seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses. Our Advisor must reimburse us within 60 days after the end of the month which the Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions and dealer manager fees) in excess of 3.5% of the gross offering proceeds from the Primary Offering.

 

25

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Advisory Agreement

We do not have any employees. Our Advisor is primarily responsible for managing our business affairs and carrying out the directives of our board of directors. Our Advisor receives various fees and expenses under the terms of our Advisory Agreement. We are required under our Advisory Agreement to reimburse our Advisor for organization and offering costs; provided, however, our Advisor is required to reimburse us within 60 days after the end of the month in which the Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions, dealer manager fees and stockholder servicing fees) in excess of 3.5% of the gross offering proceeds from the Primary Offering.

Our Advisory Agreement also requires our Advisor to reimburse us to the extent that offering expenses, including sales commissions, dealer manager fees, stockholder servicing fees and organization and offering expenses, are in excess of 15% of gross proceeds from the Offering.

Our Advisor receives acquisition fees equal to 1.75% of the contract purchase price of each property we acquire plus reimbursement of any acquisition expenses incurred by our Advisor. Our Advisor also receives a monthly asset management fee equal to 0.05208%, which is one-twelfth of 0.625%, of our aggregate asset value, as defined.

Under our Advisory Agreement, our Advisor receives disposition fees in an amount equal to the lesser of (i) one-half of the competitive real estate commission or (ii) 1% of the contract sale price for each property we sell, as long as our Advisor provides substantial assistance in connection with the sale. The total real estate commissions paid (including the disposition fee paid to our Advisor) may not exceed the lesser of a competitive real estate commission or an amount equal to 6% of the contract sale price of the property.

Our Advisor is also entitled to various subordinated distributions pursuant to our Operating Partnership Agreement if we (1) list our shares of common stock on a national exchange, (2) terminate our Advisory Agreement (other than a voluntary termination), (3) liquidate our portfolio, or (4) enter into an Extraordinary Transaction, as defined in the Operating Partnership Agreement.

Our Advisory Agreement provides for reimbursement of our Advisor’s direct and indirect costs of providing administrative and management services to us. Beginning four fiscal quarters after we acquired our first real estate asset, our Advisor is required to pay or reimburse us the amount by which our aggregate annual operating expenses, as defined, exceed the greater of 2% of our average invested assets or 25% of our net income, as defined, unless a majority of our independent directors determine that such excess expenses were justified based on unusual and non-recurring factors. For any fiscal quarter for which total operating expenses for the 12 months then ended exceed the limitation, we will disclose this fact in our next quarterly report or within 60 days of the end of that quarter and send a written disclosure of this fact to our stockholders. In each case the disclosure will include an explanation of the factors that the independent directors considered in arriving at the conclusion that the excess expenses were justified. Our aggregate annual operating expenses, as defined, did not exceed the thresholds described above.

 

26

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Dealer Manager Agreement

Our Dealer Manager receives a sales commission of up to 7.0% of gross proceeds from sales of Class A Shares and up to 2.0% of gross proceeds from the sales of Class T Shares in the Primary Offering and a dealer manager fee up to 3.0% of gross proceeds from sales of both Class A Shares and Class T Shares in the Primary Offering under the terms of the Dealer Manager Agreement. In addition, our Dealer Manager receives an ongoing stockholder servicing fee that is payable monthly and accrues daily in an amount equal to 1/365th of 1% of the purchase price per share of the Class T Shares sold in the Primary Offering. We will cease paying the stockholder servicing fee with respect to the Class T Shares sold in the Primary Offering at the earlier of (i) the date we list our shares on a national securities exchange, merge or consolidate with or into another entity, or sell or dispose of all or substantially all of our assets, (ii) the date at which the aggregate underwriting compensation from all sources equals 10% of the gross proceeds from the sale of both Class A Shares and Class T Shares in our Primary Offering (i.e., excluding proceeds from sales pursuant to our distribution reinvestment plan), which calculation shall be made by us with the assistance of our Dealer Manager commencing after the termination of the Primary Offering; (iii) the fifth anniversary of the last day of the fiscal quarter in which our Primary Offering (i.e., excluding our distribution reinvestment plan offering) terminates; and (iv) the date that such Class T Share is redeemed or is no longer outstanding. Our Dealer Manager has entered into participating dealer agreements with certain other broker-dealers which authorizes them to sell our shares. Upon sale of our shares by such broker-dealers, our Dealer Manager re-allows all of the sales commissions and, subject to certain limitations, the stockholder servicing fees paid in connection with sales made by these broker-dealers. Our Dealer Manager may also re-allow to these broker-dealers a portion of their dealer manager fee as marketing fees, reimbursement of certain costs and expenses of attending training and education meetings sponsored by our Dealer Manager, payment of attendance fees required for employees of our Dealer Manager or other affiliates to attend retail seminars and public seminars sponsored by these broker-dealers, or to defray other distribution-related expenses. Our Dealer Manager also receives reimbursement of bona fide due diligence expenses; however, to the extent these due diligence expenses cannot be justified, any excess over actual due diligence expenses will be considered underwriting compensation subject to a 10% FINRA limitation and, when aggregated with all other non-accountable expenses in connection with our Offering, may not exceed 3% of gross offering proceeds from sales in the Offering.

Affiliated Dealer Manager

Our Chief Executive Officer and President owned, through a wholly-owned limited liability company, a 15% non-voting equity interest in our Dealer Manager through August 31, 2014. Effective, August 31, 2014, SmartStop indirectly owned the 15% non-voting equity interest in our Dealer Manager, pursuant to the Self Administration and Investment Management Transaction. Effective October 1, 2015, in connection with the Merger, the 15% non-voting equity interest in our Dealer Manager is now owned by our Sponsor. An affiliate of our Dealer Manager continues to own a 2.5% non-voting membership interest in our Advisor.

Property Management Agreement

Through September 30, 2015, each of our self storage properties was managed by our Property Manager under separate property management agreements. Under each agreement, our Property Manager received a fee for its services in managing our properties, generally equal to the greater of $3,000 or 6% of the gross revenues from the properties plus reimbursement of the Property Manager’s costs of managing the properties. Reimbursable costs and expenses included wages and salaries and other expenses of employees engaged in operating, managing and maintaining our properties. Our Property Manager also received a one-time fee for each property acquired by us that was managed by our Property Manager in the amount of $3,750. In the event that our Property Manager assisted with the development or redevelopment of a property, we paid a separate market-based fee for such services. In addition, our Property Manager was entitled to a construction management fee equal to 5% of the cost of construction or capital improvement work in excess of $10,000 and an administration fee equal to $0.50 a month for each insurance policy purchased by a tenant at one of our properties in connection with the tenant insurance program. Additionally, each agreement included a non-solicitation provision and a provision regarding the Property Manager’s use of trademarks and other intellectual property owned by SmartStop.

 

27

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

As of October 1, 2015, each of our self storage properties located in the United States are subject to separate property management agreements with our Property Manager, which in turn has entered into sub-property management agreements with an affiliate of Extra Space, which provides on-site management of our properties. Such agreements were entered into effective on October 1, 2015. Under the property management agreements, our Property Manager receives a monthly management fee of $2,500 or 6% of the gross revenues, whichever is greater, plus reimbursement of the Property Manager’s costs of managing the properties. Extra Space agreed to pay up to $25,000 for each property managed toward the signage and set-up costs associated with converting each property to the Extra Space brand (the “Set-Up Amount”). The property management agreements have a three year term and automatically renew for successive one year periods thereafter, unless we or our Property Manager provides prior written notice at least 90 days prior to the expiration of the term. We may terminate a property management agreement without cause at any time during the initial three year term if we pay the Property Manager a termination fee equal to the Set-Up Amount, reduced by 1/36th of the Set-Up Amount for every full month of the term. After the end of the initial three year term, we may terminate a property management agreement on 30 days prior written notice without payment of a termination fee. Our Property Manager may terminate a property management agreement on 60 days prior written notice to us.

The sub-property management agreements between our Property Manager and Extra Space are substantially the same as the property management agreements between us and our Property Manager. Under the sub-property management agreements, our Property Manager pays Extra Space a monthly management fee of $2,500 or 6% of the gross revenues, whichever is greater, plus reimbursement of Extra Space’s costs of managing the properties; provided, however that no management fee is due and payable to Extra Space for the months of January and July each year during the term. Extra Space has the exclusive right to offer tenant insurance to the tenants and is entitled to all of the benefits of such tenant insurance. The sub-property management agreements also have a three year term and automatically renew for successive one year periods thereafter, unless our Property Manager or Extra Space provides prior written notice at least 90 days prior to the expiration of the term. Our Property Manager may terminate the sub-property management agreement without cause at any time during the initial three year term if it pays Extra Space a termination fee equal to the Set-Up Amount, reduced by 1/36th of the Set-Up Amount for every full month of the term. After the end of the initial three year term, our Property Manager may terminate a sub-property management agreement on 30 days prior written notice without payment of a termination fee. Extra Space may terminate a property management agreement on 60 days prior written notice to our Property Manager.

In addition, we entered into an agreement with Extra Space and our Property Manager in which we agreed that, subject to certain limitations, our Property Manager will retain Extra Space as sub-property manager for all self storage properties we acquire in the United States that will be managed by our Property Manager.

Our self storage properties located in Canada are subject to separate property management agreements with our Property Manager, which are substantially similar to our property management agreements for our properties in the United States prior to September 30, 2015, except there is an agreement to share net tenant insurance revenues equally between us and our Property Manager.

 

28

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Pursuant to the terms of the agreements described above, the following table summarizes related party costs incurred and paid by us for the year ended December 31, 2015 and the six months ended June 30, 2016, as well as any related amounts payable as of December 31, 2015 and June 30, 2016:

 

		Year Ended December 31, 2015												Six Months Ended June 30, 2016
		Incurred				Paid				Payable				Incurred				Paid				Payable
Expensed
Operating expenses (including organizational costs)		$	1,200,003			$	1,988,533			$	47,971			$	345,753			$	168,974			$	224,750
Asset management fees			865,757				888,011				—				939,023				939,023				—
Property management fees(1)			1,259,135				1,306,422				—				976,564				966,975				9,589
Acquisition expenses			2,776,679				3,479,712				—				8,256,031				8,256,031				—
Capitalized
Deferred financing costs			214,006				655,879				—				—				—				—
Other assets			77,556				539,048				—				—				—				—
Additional Paid-in Capital
Selling commissions			14,761,271				14,761,271				—				13,978,092				13,978,092				—
Dealer Manager fee			3,690,318				3,535,685				160,512				4,225,158				4,327,687				57,983
Offering costs			319,882				2,125,798				—				233,582				233,582				—
Total		$	25,164,607			$	29,280,359			$	208,483			$	28,954,203			$	28,870,364			$	292,322

 

(1)

During the year ended December 31, 2015, property management fees included approximately $0.3 million of fees paid to the sub-property manager of our properties. During the six months ended June 30, 2016, property management fees included approximately $0.9 million of fees paid to the sub-property manager of our properties.

Extra Space Self Storage

In connection with the Merger of SmartStop into Extra Space, certain of our executive officers, including H. Michael Schwartz, Paula Mathews, Michael McClure and James Berg, received units of limited partnership interest in Extra Space Storage LP, the operating partnership for Extra Space, in exchange for units of limited partnership of SmartStop Self Storage Operating Partnership, L.P., the operating partnership for SmartStop, owned by such executives.

Tenant Protection Plan

During the first quarter of 2016, in connection with our acquisitions of properties located in Canada, our board of directors approved our participation in a tenant protection plan pursuant to which we will receive 50% of the net revenues generated for each tenant protection plan purchased by a customer at our Canadian properties and our Property Manager will receive the other 50% of such net revenues.

Note 8. Commitments and Contingencies

Distribution Reinvestment Plan

We have adopted an amended and restated distribution reinvestment plan that allows both our Class A and Class T stockholders to have distributions otherwise distributable to them invested in additional shares of our Class A and Class T Shares, respectively. On April 21, 2016, the purchase price per share became equivalent to our estimated value per share of $10.09. We may amend or terminate the amended and restated distribution reinvestment plan for any reason at any time upon 10 days’ prior written notice to stockholders. No sales commissions or dealer manager fee will be paid on shares sold through the amended and restated distribution reinvestment plan. As of June 30, 2016 we had sold approximately 0.5 million shares through our distribution reinvestment plan offering for Class A Shares and approximately 21,000 shares for our Class T Shares.

 

29

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Share Redemption Program

We adopted a share redemption program that enables stockholders to sell their shares to us in limited circumstances. As long as our common stock is not listed on a national securities exchange or over-the-counter market, our stockholders who have held their stock for at least one year may be able to have all or any portion of their shares of stock redeemed by us. We may redeem the shares of stock presented for redemption for cash to the extent that we have sufficient funds available to fund such redemption.

Our board of directors may amend, suspend or terminate the share redemption program with 30 days’ notice to our stockholders. We may provide this notice by including such information in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to our stockholders. The complete terms of our share redemption program are described in our prospectus.

The amount that we may pay to redeem stock for redemptions is the redemption price set forth in the following table which is based upon the number of years the stock is held:

 

Number Years Held		Redemption Price
Less than 1		No Redemption Allowed
1 or more but less than 3		90.0% of Redemption Amount
3 or more but less than 4		95.0% of Redemption Amount
4 or more		100.0% of Redemption Amount

At any time we are engaged in an offering of shares, the Redemption Amount for shares purchased under our share redemption program will always be equal to or lower than the applicable per share offering price. As long as we are engaged in an offering, the Redemption Amount shall be the lesser of the amount the stockholder paid for their shares or the price per share in the current Offering. If we are no longer engaged in an offering, the per share Redemption Amount will be determined by our board of directors. Our board of directors will announce any redemption price adjustment and the time period of its effectiveness as a part of its regular communications with our stockholders. At any time the redemption price during an offering is determined by any method other than the offering price, if we have sold property and have made one or more special distributions to our stockholders of all or a portion of the net proceeds from such sales, the per share redemption price will be reduced by the net sale proceeds per share distributed to investors prior to the redemption date as a result of the sale of such property in the special distribution. Our board of directors will, in its sole discretion, determine which distributions, if any, constitute a special distribution. While our board of directors does not have specific criteria for determining a special distribution, we expect that a special distribution will only occur upon the sale of a property and the subsequent distribution of the net sale proceeds.

There are several limitations on our ability to redeem shares under the share redemption program including, but not limited to:

 

•

Unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability” (as defined under the share redemption program) or bankruptcy, we may not redeem shares until the stockholder has held his or her shares for one year.

 

•

During any calendar year, we will not redeem in excess of 5% of the weighted-average number of shares outstanding during the prior calendar year.

 

•

The cash available for redemption is limited to the proceeds from the sale of shares pursuant to our distribution reinvestment plan.

 

•

We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

For the six months ended June 30, 2016, we received redemption requests for an aggregate of approximately 71,300 shares (approximately $690,000), $530,000 of which was fulfilled in April 2016 and $160,000 of which was included in accounts payable and accrued liabilities as of June 30, 2016 and fulfilled in July 2016. For the six months ended June 30, 2015, we received one redemption request for 1,750 (approximately $17,500) shares which was fulfilled in July 2015.

 

30

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Operating Partnership Redemption Rights

The limited partners of our Operating Partnership have the right to cause our Operating Partnership to redeem their limited partnership units for cash equal to the value of an equivalent number of our shares, or, at our option, we may purchase their limited partnership units by issuing one share of our common stock for each limited partnership unit redeemed. These rights may not be exercised under certain circumstances that could cause us to lose our REIT election. Furthermore, limited partners may exercise their redemption rights only after their limited partnership units have been outstanding for one year. Our Advisor is prohibited from exchanging or otherwise transferring its limited partnership units so long as our Advisor is acting as our advisor under the Advisory Agreement.

Other Contingencies

From time to time, we are party to legal proceedings that arise in the ordinary course of our business. We are not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.

Note 9. Declaration of Distributions

On June 9, 2016, our board of directors declared a distribution rate for the third quarter of 2016 of $0.00163934426 per day per share on the outstanding shares of common stock payable to both Class A and Class T stockholders of record of such shares as shown on our books at the close of business on each day during the period, commencing on July 1, 2016 and continuing on each day thereafter through and including September 30, 2016. Such distributions payable to each stockholder of record during a month will be paid on such date of the following month as our Chief Executive Officer may determine.

Note 10. Selected Quarterly Data (Unaudited)

The following is a summary of quarterly financial information for the periods shown below:

 

		Three months ended
		June 30, 2015				September 30, 2015				December 31, 2015				March 31, 2016				June 30, 2016
Total revenues		$	4,488,212			$	5,053,724			$	5,356,983			$	6,234,589			$	9,799,189
Total operating expenses		$	5,613,146			$	5,989,195			$	5,454,605			$	10,048,926			$	18,708,719
Operating loss		$	(1,124,934	)		$	(935,471	)		$	(97,622	)		$	(3,814,337	)		$	(8,909,530	)
Net loss		$	(1,990,815	)		$	(1,854,575	)		$	(1,511,945	)		$	(4,508,654	)		$	(10,729,510	)
Net loss attributable to common stockholders		$	(4,037,637	)		$	(3,739,454	)		$	(2,534,121	)		$	(4,505,204	)		$	(10,724,129	)
Net loss per Class A Share-basic and diluted		$	(1.36	)		$	(0.82	)		$	(0.18	)		$	(0.17	)		$	(0.27	)
Net loss per Class T Share-basic and diluted		$	—			$	—			$	(0.18	)		$	(0.17	)		$	(0.27	)

Note 11. Potential Acquisitions

Potential Acquisition of Second Phase of 27 Property Portfolio

On March 25, 2016, one of our subsidiaries executed purchase and sale agreements with unaffiliated third parties for the acquisition of the 27 Property Portfolio. The purchase price for the 27 Property Portfolio is approximately $371 million, plus closing costs and acquisition fees. On June 1, 2016 we closed on the First Phase of the 27 Property Portfolio consisting of 11 self storage facilities in Florida and Maryland for approximately $275 million. We expect the acquisition of the remaining properties in the 27 Property Portfolio to close in the third quarter of 2016. We expect to fund the purchase of the additional properties in the 27 Property Portfolio with a combination of proceeds from our Offering, drawdown on our existing credit facility, and an assumption of existing debt on certain of the remaining properties. There can be no assurance that we will complete the acquisition. If we fail to acquire the remaining properties in the 27 Property Portfolio, in addition to the incurred acquisition costs, we may also forfeit earnest money as a result.

 

31

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Potential Acquisition—Pollock Drive—Las Vegas, Nevada

On May 10, 2016, one of our subsidiaries executed a purchase and sale agreement with an unaffiliated third party for the acquisition of a storage facility located in Las Vegas, Nevada (the “Pollock Drive Property”). The purchase price for the Pollock Drive Property is approximately $14.2 million, plus closing costs and acquisition fees. We expect to close on the acquisition of the Pollock Drive Property in the third quarter of 2016 and to fund such acquisition with net proceeds from our Offering and a draw down on the Amended KeyBank Credit Facility. There can be no assurance that we will complete the acquisition. If we fail to acquire the Pollock Drive Property, in addition to the incurred acquisition costs, we may also forfeit earnest money as a result.

Note 12. Subsequent Events

Acquisition—Silverado Ranch Road—Las Vegas, Nevada

On July 28, 2016, we purchased a self storage facility (the “Silverado Ranch Road Property”), located in Las Vegas Nevada. We acquired the Silverado Ranch Road Property from an unaffiliated third party for a purchase price of approximately $13.9 million, plus closing costs and acquisition fees. Our Advisor earned approximately $245,000 in acquisition fees in connection with this acquisition. We financed the acquisition of the Silverado Ranch Road Property with net proceeds from our Offering.

KeyBank CMBS Loan

On July 28, 2016, we, through 29 special purpose entities wholly owned by our Operating Partnership, entered into a loan agreement with KeyBank in which we borrowed $95 million from KeyBank (the “CMBS Loan”). Pursuant to the loan agreement, the collateral under the loan consists of our respective fee interests in 29 self storage properties (the “Mortgaged Properties”). The proceeds of the CMBS Loan were primarily used to pay down our Amended KeyBank Credit Facility, after which the Mortgaged Properties were released as collateral under the Amended KeyBank Credit Facility.

The CMBS Loan has an initial term of ten years, maturing on August 1, 2026. In connection with the CMBS Loan, we entered into two promissory notes, dated July 28, 2016, in the amounts of $70 million and $25 million (the “Promissory Notes”). Monthly payments due under the Promissory Notes are interest-only for the first five years and payments reflecting a 30-year amortization schedule begin thereafter. The Promissory Notes bear interest at 3.89%.

The CMBS Loan is secured by first mortgage liens or deeds of trusts on the Mortgaged Properties, an assignment of all leases/rents, perfected first priority security interests in all personal property, escrows, reserves and a cash management account. In addition, we have provided a guaranty (the “KeyBank Guaranty”), dated July 28, 2016, in favor of KeyBank, in which we serves as a guarantor of all obligations due under the Loan Agreement.

The CMBS Loan may be prepaid with payment of a yield maintenance premium only during the period commencing on the third anniversary of the first monthly payment and ending two years after the completion of securitization of the Promissory Notes by KeyBank. If KeyBank securitizes the Promissory Notes within three years of the first monthly payment, the CMBS Loan may not be prepaid but may be repaid in whole or in part through a partial or full defeasance (releasing one or more of the Mortgaged Properties from the liens) beginning two years after the Promissory Notes are securitized.

Potential Acquisition—West Sahara Ave –Las Vegas, Nevada

On August 1, 2016, one of our subsidiaries executed a purchase and sale agreement with an unaffiliated third party for the acquisition of a storage facility located in Las Vegas, Nevada (the “West Sahara Ave Property”). The purchase price for the West Sahara Ave Property is approximately $9.3 million, plus closing costs and acquisition fees. We expect to close on the acquisition of the West Sahara Ave Property in the third quarter of 2016 and to fund such acquisition with net proceeds from our Offering and a drawdown on the Amended KeyBank Credit Facility. There can be no assurance that we will complete the acquisition. If we fail to acquire the West Sahara Ave Property, in addition to the incurred acquisition costs, we may also forfeit earnest money as a result.

 

32

---

Table of Contents

STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

 

Offering Status

As of August 8, 2016, in connection with our Offering we have issued approximately 40.2 million Class A Shares of our common stock and approximately 3.9 million Class T Shares of our common stock for gross proceeds of approximately $403.6 million and approximately $38.7 million, respectively.

 

33

---

Table of Contents

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and notes thereto contained elsewhere in this report. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should also be read in conjunction with our financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015. See also “Cautionary Note Regarding Forward Looking Statements” preceding Part I.

Overview

Strategic Storage Trust II, Inc., a Maryland corporation (the “Company”), was formed on January 8, 2013 under the Maryland General Corporation Law for the purpose of engaging in the business of investing in self storage facilities and related self storage real estate investments. Our year-end is December 31. As used in this report, “we,” “us,” “our,” and “Company” refer to Strategic Storage Trust II, Inc. and each of our subsidiaries.

SmartStop Asset Management, LLC (our “Sponsor”), is the sponsor of our Offering (as defined below). Our Sponsor became our sponsor on October 1, 2015 in connection with the merger of SmartStop Self Storage, Inc. into Extra Space Storage, Inc. Our Sponsor owns 97.5% of the economic interests (and 100% of the voting membership interests) of Strategic Storage Advisor II, LLC, a Delaware limited liability company (our “Advisor”) and owns 100% of Strategic Storage Property Management II, LLC, a Delaware limited liability company (our “Property Manager”). See Note 1 of the Notes to the Consolidated Statements contained in this report for further details about our affiliates.

On January 10, 2014, we commenced a public offering of a maximum of $1.0 billion in common shares for sale to the public (the “Primary Offering”) and $95.0 million in common shares for sale pursuant to our distribution reinvestment plan (collectively, the “Offering”). On May 23, 2014, we satisfied the $1.5 million minimum offering requirements of our Offering and commenced formal operations. On September 28, 2015, we revised our Primary Offering and are now offering two classes of shares of common stock: Class A common stock, $0.001 par value per share (the “Class A Shares”) and Class T common stock, $0.001 par value per share (the “Class T Shares”). As of June 30, 2016, we had sold approximately 38.8 million Class A Shares and approximately 3.4 million Class T Shares in our Offering for gross proceeds of approximately $388.6 million and approximately $33.4 million, respectively. We intend to invest the net proceeds from the Offering primarily in self storage facilities and related self storage real estate investments.

 

34

---

Table of Contents

As of June 30, 2016, our self storage portfolio was comprised as follows:

 

State		No. of Properties				Units(1)				Sq. Ft. (net)(2)				% of Total Rentable Sq. Ft.				Physical Occupancy %(3)				Rental Income %(4)
Alabama			1				1,080				159,000				3.5	%			94	%			1.9	%
California			19				11,470				1,233,400				27.0	%			93	%			30.8	%
Colorado			3				1,740				173,800				3.8	%			81	%			3.4	%
Florida			13				10,440				1,237,900				27.0	%			96	%			32.2	%
Illinois			2				1,030				107,500				2.4	%			91	%			2.1	%
Indiana			2				1,000				112,100				2.5	%			95	%			1.5	%
Maryland			2				1,610				172,900				3.8	%			94	%			4.4	%
Michigan			4				2,180				261,000				5.7	%			90	%			4.6	%
New Jersey			1				460				51,000				1.1	%			82	%			0.8	%
North Carolina			3				1,070				159,600				3.5	%			91	%			2.9	%
Ohio			5				2,210				272,300				6.0	%			95	%			3.7	%
South Carolina			2				1,420				194,600				4.3	%			92	%			3.4	%
Washington			1				490				48,100				1.1	%			93	%			1.2	%
Greater Toronto Area			5				3,850				379,700				8.3	%			73	%			7.1	%
Total			63				40,050				4,562,900				100	%			92	%			100	%

 

(1)	Includes all rentable units, consisting of storage units, and parking (approximately 1,300 units).

(2)	Includes all rentable square feet consisting of storage units, and parking (approximately 350,000 square feet).

(3)	Represents the occupied square feet of all facilities we owned in a state or the Greater Toronto Area divided by total rentable square feet of all the facilities we owned in such state or area as of June 30, 2016.

(4)	Represents rental income for all facilities we owned in a state divided by our total rental income for the month ended June 30, 2016.

Critical Accounting Policies

We have established accounting policies which conform to generally accepted accounting principles (“GAAP”). Preparing financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. Following is a discussion of the estimates and assumptions used in setting accounting policies that we consider critical in the presentation of our financial statements. Many estimates and assumptions involved in the application of GAAP may have a material impact on our financial condition or operating performance, or on the comparability of such information to amounts reported for other periods, because of the subjectivity and judgment required to account for highly uncertain items or the susceptibility of such items to change. These estimates and assumptions affect our reported amounts of assets and liabilities, our disclosure of contingent assets and liabilities at the dates of the financial statements and our reported amounts of revenue and expenses during the period covered by this report. If management’s judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied or different amounts of assets, liabilities, revenues and expenses would have been recorded, thus resulting in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.

We believe that our critical accounting policies include the following: real estate purchase price allocations; the evaluation of whether any of our long-lived assets have been impaired; the determination of the useful lives of our long-lived assets; and the evaluation of the consolidation of our interests in joint ventures. The following discussion of these policies supplements, but does not supplant the description of our significant accounting policies, as contained in Note 2 of the Notes to the Consolidated Financial Statements contained in this report, and is intended to present our analysis of the uncertainties involved in arriving upon and applying each policy.

 

35

---

Table of Contents

Real Estate Purchase Price Allocation

We allocate the purchase prices of acquired properties based on a number of estimates and assumptions. We allocate the purchase prices to the tangible and intangible assets acquired and the liabilities assumed based on estimated fair values. These estimated fair values are based upon comparable market sales information for land and estimates of depreciated replacement cost of equipment, building and site improvements. Acquisitions of portfolios of properties are allocated to the individual properties based upon an income approach or a cash flow analysis using appropriate risk adjusted capitalization rates which we estimate based upon the relative size, age, and location of the individual property along with actual historical and estimated occupancy and rental rate levels, and other relevant factors. If available, and determined by management to be appropriate, appraised values are used, rather than these estimated values. Because we believe that substantially all of the leases in place at properties we acquire will be at market rates, as the majority of the leases are month-to-month contracts, we do not expect to allocate any portion of the purchase prices to above or below market leases. The determination of market rates is also subject to a number of estimates and assumptions. Our allocations of purchase prices could result in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements, as such allocations may vary dramatically based on the estimates and assumptions we use.

Impairment of Long-Lived Assets

The majority of our assets consist of long-lived real estate assets as well as intangible assets related to our acquisitions. We will continually evaluate such assets for impairment based on events and changes in circumstances that may arise in the future and that may impact the carrying amounts of our long-lived assets. When indicators of potential impairment are present, we will assess the recoverability of the particular asset by determining whether the carrying value of the asset will be recovered, through an evaluation of the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. This evaluation is based on a number of estimates and assumptions. Based on this evaluation, if the expected undiscounted future cash flows do not exceed the carrying value, we will adjust the value of the long-lived asset and recognize an impairment loss. Our evaluation of the impairment of long-lived assets could result in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements, as the amount of impairment loss, if any, recognized may vary based on the estimates and assumptions we use.

Estimated Useful Lives of Long-Lived Assets

We assess the useful lives of the assets underlying our properties based upon a subjective determination of the period of future benefit for each asset. We record depreciation expense with respect to these assets based upon the estimated useful lives we determine. Our determinations of the useful lives of the assets could result in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements, as such determinations, and the corresponding amount of depreciation expense, may vary dramatically based on the estimates and assumptions we use.

Consolidation of Investments in Joint Ventures

We will evaluate the consolidation of our investments in joint ventures in accordance with relevant accounting guidance. This evaluation requires us to determine whether we have a controlling interest in a joint venture through a means other than voting rights, and, if so, such joint venture may be required to be consolidated in our financial statements. Our evaluation of our joint ventures under such accounting guidance could result in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements, as the joint venture entities included in our financial statements may vary based on the estimates and assumptions we use.

REIT Qualification

We made an election under Section 856(c) of the Internal Revenue Code of 1986 (the Code) to be taxed as a REIT under the Code, commencing with the taxable year ended December 31, 2014. By qualifying as a REIT for federal income tax purposes, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is denied. Such an event could materially and adversely affect our net income and could have a material adverse impact on our financial condition and results of operations. However, we believe that we are organized and operate in a manner that will enable us to continue to qualify for treatment as a REIT for federal income tax purposes, and we intend to continue to operate as to remain qualified as a REIT for federal income tax purposes.

 

36

---

Table of Contents

Results of Operations

Overview

We derive revenues principally from: (i) rents received from tenants who rent storage units under month-to-month leases at each of our self storage facilities; and (ii) sales of packing- and storage-related supplies at our storage facilities. Therefore, our operating results depend significantly on our ability to retain our existing tenants and lease our available self storage units to new tenants, while maintaining and, where possible, increasing the prices for our self storage units. Additionally, our operating results depend on our tenants making their required rental payments to us.

Competition in the market areas in which we operate is significant and affects the occupancy levels, rental rates, rental revenues and operating expenses of our facilities. Development of any new self storage facilities would intensify competition of self storage operators in markets in which we operate.

Our operating results for the three and six months ended June 30, 2015 include full quarters of results for five facilities and partial results for the 21 facilities we acquired during the quarter ended March 31, 2015 and partial results for five facilities we acquired during the quarter ended June 30, 2015. Our operating results for the three and six months ended June 30, 2016 include full quarters of results for those 31 self storage facilities plus full quarter results for an additional two self storage facilities acquired during the third and fourth quarters of 2015 and partial quarter results for seven self storage facilities acquired in the first quarter of 2016 and 23 self storage facilities acquired in the second quarter of 2016. Therefore, we believe there is little basis for comparison between the three and six months ended June 30, 2016 and 2015. Operating results in future periods will depend on the results of operations of our existing properties and of the real estate properties that we acquire in the future.

Comparison of Operating Results for the Three Months Ended June 30, 2016 and 2015

Self Storage Rental Revenue

Rental revenue for the three months ended June 30, 2016 and 2015 were approximately $9.7 million and $4.4 million, respectively. The increase in rental revenue is primarily attributable to a full quarter of operations for 40 properties and a partial quarter of operations for 23 properties during the second quarter of 2016, compared to a full quarter of operations for 26 properties and partial quarter of operations of five properties for the second quarter of 2015. We expect rental revenue to increase in future periods commensurate with our future acquisition activity.

Property Operating Expenses

Property operating expenses for the three months ended June 30, 2016 and 2015 were approximately $3.6 million and $1.6 million, respectively. Property operating expenses includes the cost to operate our facilities including payroll, utilities, insurance, real estate taxes, and marketing. The increase in property operating expenses is primarily attributable to a full quarter of operations for 40 properties and a partial quarter of operations for 23 properties during the second quarter of 2016, compared to a full quarter of operations for 26 properties and partial quarter of operations of five properties for the second quarter of 2015. We expect property operating expenses to increase in future periods commensurate with our future acquisition activity.

 

37

---

Table of Contents

Property Operating Expenses – Affiliates

Property operating expenses – affiliates for the three months ended June 30, 2016 and 2015 were approximately $1.2 million and $0.5 million, respectively. Property operating expenses – affiliates includes property management fees and asset management fees. The increase in property operating expenses—affiliates is primarily attributable to a full quarter of operations for 40 properties and a partial quarter of operations for 23 properties during the second quarter of 2016, compared to a full quarter of operations for 26 properties and partial quarter of operations of five properties for the second quarter of 2015. We expect property operating expenses – affiliates to increase in future periods commensurate with our future acquisition activity.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2016 and 2015 were approximately $0.8 million and $0.5 million, respectively. General and administrative expenses consist primarily of legal expenses, transfer agent fees, directors’ and officers’ insurance expense, an allocation of a portion of our Advisor’s payroll related costs, accounting expenses and board of directors’ related costs. The increase in general and administrative expenses is primarily attributable to increases in accounting, transfer agent and legal costs commensurate with our increased operational activity. We expect general and administrative expenses to increase in the future as our operational activity increases, but decrease as a percentage of total revenues.

Depreciation and Amortization Expenses

Depreciation and amortization expenses for the three months ended June 30, 2016 and 2015 were approximately $5.3 million and $2.5 million, respectively. Depreciation expense consists primarily of depreciation on the buildings and site improvements at our properties. Amortization expense consists of the amortization of intangible assets resulting from our acquisitions. The increase in depreciation and amortization expenses is primarily attributable to a full quarter of operations for 40 properties and a partial quarter of operations for 23 properties during the second quarter of 2016, compared to a full quarter of operations for 26 properties and partial quarter of operations of five properties for the second quarter of 2015. We expect depreciation and amortization expense to increase in future periods commensurate with our future acquisition activity.

Acquisition Expenses - Affiliates

Acquisition expenses – affiliates for the three months ended June 30, 2016 and 2015 were approximately $6.6 million and $0.4 million, respectively. These acquisition expenses primarily relate to the costs associated with the self storage properties acquired in the respective periods. We expect acquisition expenses—affiliates to fluctuate commensurate with our acquisition activities.

Other Property Acquisition Expenses

Other property acquisition expenses for the three months ended June 30, 2016 and 2015 were approximately $1.2 million and $0.1 million, respectively. These acquisition expenses primarily relate to the costs associated with the self storage properties acquired in the respective periods or to be acquired in future periods. We expect acquisition expenses to fluctuate commensurate with our acquisition activities.

Interest Expense and Accretion of Fair Market Value of Secured Debt

Interest expense for the three months ended June 30, 2016 and 2015 were approximately $1.2 million and $0.8 million, respectively. We expect interest expense to increase in future periods commensurate with our future debt level.

Debt Issuance Costs

Debt issuance costs for the three months ended June 30, 2016 and 2015 were approximately $0.6 million and $0.1 million, respectively. The increase in debt issuance costs is attributable to the amortization of costs incurred in connection with obtaining financing for the acquisition of our self storage properties. We expect debt issuance costs to fluctuate commensurate with our future financing activity.

 

38

---

Table of Contents

Same-Store Facility Results

The following table sets forth operating data for our same-store facilities (those properties included in the consolidated results of operations since April 1, 2015) for the three months ended June 30, 2016 and 2015. We consider the following data to be meaningful as this allows for the comparison of results without the effects of acquisition or development activity.

 

		Same-Store Facilities												Non Same-Store Facilities												Total
		2016				2015				% Change				2016				2015				% Change				2016				2015				% Change
Revenue (1)		$	4,594,949			$	4,140,532				11.0	%		$	5,204,240			$	347,680				N/M			$	9,799,189			$	4,488,212				118.3	%
Property operating expenses (2)			1,987,321				1,721,484				15.4	%			2,228,025				148,951				N/M				4,215,346				1,870,435				125.4	%
Operating income		$	2,607,628			$	2,419,048				7.8	%		$	2,976,215			$	198,729				N/M			$	5,583,843			$	2,617,777				113.3	%
Number of facilities			26				26								37				5								63				31
Rentable square feet (3)			1,554,600				1,554,600								3,008,300				312,000								4,562,900				1,866,600
Average physical occupancy (4)			90.7	%			87.6	%							N/M				N/M								91.0	%			86.7	%
Annualized rent per occupied square foot (5)		$	13.29			$	12.40								N/M				N/M							$	13.90			$	12.10

N/M Not meaningful

(1)	Revenue includes rental revenue, ancillary revenue, and administrative and late fees.

(2)	Property operating expenses excludes corporate general and administrative expenses, asset management fees, interest expense, depreciation, amortization expense and acquisition expenses, but includes property management fees.

(3)	Of the total rentable square feet, parking represented approximately 350,000 and approximately 75,000 as of June 30, 2016 and 2015, respectively. On a same-store basis, for the same periods, parking represented approximately 50,000 square feet.

(4)

Determined by dividing the sum of the month-end occupied square feet for the applicable group of facilities for each applicable period by the sum of their month-end rentable square feet for the period. Properties are included in the respective calculations in their first full month of operations, as appropriate.

(5)

Determined by dividing the aggregate realized rental revenue for each applicable period by the aggregate of the month-end occupied square feet for the period. Properties are included in the respective calculations in their first full month of operations, as appropriate. We have excluded the realized rental revenue and occupied square feet related to parking herein for the purpose of calculating annualized rent per occupied square foot.

Our increase in same-store revenue of approximately $0.4 million was primarily the result of increased average physical occupancy of approximately 3.1% and increased rent per occupied square foot of approximately 7.2% for the three months ended June 30, 2016 over the three months ended June 30, 2015.

Our same-store property operating expenses increased by approximately $0.3 million for the three months ended June 30, 2016 compared to the three months ended June 30, 2015 primarily due to increased repair and maintenance expenses.

Comparison of Operating Results for the Six Months Ended June 30, 2016 and 2015

Self Storage Rental Revenue

Rental revenue for the six months ended June 30, 2016 and 2015 were approximately $15.9 million and $7.3 million, respectively. The increase in rental revenue is primarily attributable to a full two quarters of operations for 33 properties and a partial two quarters of operations for 30 properties during the six months ended June 30, 2016 compared to a full two quarters of operations for five properties and a partial two quarters of operations of 26 properties during the six months ended June 30, 2015. We expect rental revenue to increase in future periods commensurate with our future acquisition activity.

 

39

---

Table of Contents

Property Operating Expenses

Property operating expenses for the six months ended June 30, 2016 and 2015 were approximately $6.1 million and $2.8 million, respectively. Property operating expenses includes the cost to operate our facilities including payroll, utilities, insurance, real estate taxes, and marketing. The increase in property operating expenses is primarily attributable to a full two quarters of operations for 33 properties and a partial two quarters of operations for 30 properties during the six months ended June 30, 2016 compared to a full two quarters of operations for five properties and a partial two quarters of operations of 26 properties during the six months ended June 30, 2015. We expect property operating expenses to increase in future periods commensurate with our future acquisition activity.

Property Operating Expenses – Affiliates

Property operating expenses – affiliates for the six months ended June 30, 2016 and 2015 were approximately $1.9 million and $1.0 million, respectively. Property operating expenses – affiliates includes property management fees and asset management fees. The increase in property operating expenses—affiliates is primarily attributable to a full two quarters of operations for 33 properties and a partial two quarters of operations for 30 properties during the six months ended June 30, 2016 compared to a full two quarters of operations for five properties and a partial two quarters of operations of 26 properties during the six months ended June 30, 2015. We expect property operating expenses – affiliates to increase in future periods commensurate with our future acquisition activity.

General and Administrative Expenses

General and administrative expenses for the six months ended June 30, 2016 and 2015 were approximately $1.4 million and $0.9 million, respectively. General and administrative expenses consist primarily of legal expenses, transfer agent fees, directors’ and officers’ insurance expense, an allocation of a portion of our Advisor’s payroll related costs, accounting expenses and board of directors’ related costs. The increase in general and administrative expenses is primarily attributable to increases in accounting, transfer agent and legal costs commensurate with our increased operational activity. We expect general and administrative expenses to increase in the future as our operational activity increases, but decrease as a percentage of total revenues.

Depreciation and Amortization Expenses

Depreciation and amortization expenses for the six months ended June 30, 2016 and 2015 were approximately $8.6 million and $4.1 million, respectively. Depreciation expense consists primarily of depreciation on the buildings and site improvements at our properties. Amortization expense consists of the amortization of intangible assets resulting from our acquisitions. The increase in depreciation and amortization expense is primarily attributable to a full two quarters of operations for 33 properties and a partial two quarters of operations for 30 properties during the six months ended June 30, 2016 compared to a full two quarters of operations for five properties and a partial two quarters of operations of 26 properties during the six months ended June 30, 2015. We expect depreciation and amortization expense to increase in future periods commensurate with our future acquisition activity.

Acquisition Expenses - Affiliates

Acquisition expenses – affiliates for the six months ended June 30, 2016 and 2015 were approximately $8.3 million and $2.4 million, respectively. These acquisition expenses primarily relate to the costs associated with the self storage properties acquired in the respective periods. We expect acquisition expenses—affiliates to fluctuate commensurate with our acquisition activities.

Other Property Acquisition Expenses

Other property acquisition expenses for the six months ended June 30, 2016 and 2015 were approximately $2.4 million and $0.4 million, respectively. These acquisition expenses primarily relate to the costs associated with the self storage properties acquired in the respective periods or to be acquired in future periods. We expect acquisition expenses to fluctuate commensurate with our acquisition activities.

 

40

---

Table of Contents

Interest Expense and Accretion of Fair Market Value of Secured Debt

Interest expense for the six months ended June 30, 2016 and 2015 were approximately $1.6 million and $1.3 million, respectively. We expect interest expense to increase in future periods commensurate with our future debt level.

Debt Issuance Costs

Debt issuance costs for the six months ended June 30, 2016 and 2015 were approximately $0.8 million and $0.2 million, respectively. The increase in debt issuance costs is attributable to the amortization of costs incurred in connection with obtaining financing for the acquisition of our self storage properties. We expect debt issuance costs to fluctuate commensurate with our future financing activity.

Same-Store Facility Results

The following table sets forth operating data for our same-store facilities (those properties included in the consolidated results of operations since January 1, 2015) for the six months ended June 30, 2016 and 2015. We consider the following data to be meaningful as this allows for the comparison of results without the effects of acquisition or development activity.

 

		Same-Store Facilities												Non Same-Store Facilities												Total
		2016				2015				% Change				2016				2015				% Change				2016				2015				% Change
Revenue (1)		$	1,619,511			$	1,476,977				9.7	%		$	14,414,267			$	6,018,015				N/M			$	16,033,778			$	7,494,992				113.9	%
Property operating expenses (2)			666,600				598,680				11.3	%			6,414,422				2,650,146				N/M			$	7,081,022				3,248,826				118.0	%
Operating income		$	952,911			$	878,297				8.5	%		$	7,999,845			$	3,367,869				N/M			$	8,952,756			$	4,246,166				110.8	%
Number of facilities			5				5								58				26								63				31
Rentable square feet (3)			354,200				354,200								4,208,700				1,512,400								4,562,900				1,866,600
Average physical occupancy (4)			90.5	%			88.3	%							N/M				N/M								89.1	%			86.3	%
Annualized rent per occupied square foot (5)		$	11.00			$	10.29								N/M				N/M							$	14.01			$	12.31

N/M Not meaningful

(1)	Revenue includes rental revenue, ancillary revenue, and administrative and late fees.

(2)	Property operating expenses excludes corporate general and administrative expenses, asset management fees, interest expense, depreciation, amortization expense and acquisition expenses, but includes property management fees.

(3)	Of the total rentable square feet, parking represented approximately 350,000 and approximately 75,000 as of June 30, 2016 and 2015, respectively. On a same-store basis, for the same periods, parking represented approximately 40,000 square feet.

(4)

Determined by dividing the sum of the month-end occupied square feet for the applicable group of facilities for each applicable period by the sum of their month-end rentable square feet for the period. Properties are included in the respective calculations in their first full month of operations, as appropriate.

(5)

Determined by dividing the aggregate realized rental revenue for each applicable period by the aggregate of the month-end occupied square feet for the period. Properties are included in the respective calculations in their first full month of operations, as appropriate. We have excluded the realized rental revenue and occupied square feet related to parking herein for the purpose of calculating annualized rent per occupied square foot.

Our increase in same-store revenue of approximately $140,000 was primarily the result of increased average physical occupancy of approximately 2.2% and increased rent per occupied square foot of approximately 6.9% for the six months ended June 30, 2016 over the six months ended June 30, 2015.

 

41

---

Table of Contents

Our same-store property operating expenses increased by approximately $60,000 for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 primarily due to increased repair and maintenance expenses.

Non-GAAP Financial Measures

Funds from Operations and Modified Funds from Operations

Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income (loss) as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment write downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. Our FFO calculation complies with NAREIT’s policy described above.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Diminution in value may occur if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances or other measures necessary to maintain the assets are not undertaken. However, we believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. In addition, in the determination of FFO, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying value, or book value, exceeds the total estimated undiscounted future cash flows (including net rental revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Testing for impairment is a continuous process and is analyzed on a quarterly basis. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and that we intend to have a relatively limited term of our operations; it could be difficult to recover any impairment charges through the eventual sale of the property. To date, we have not recognized any impairments.

Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, assists in providing a more complete understanding of our performance to investors and to our management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income (loss).

However, FFO or modified funds from operations (“MFFO”), discussed below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be considered a more relevant measure of operational performance and is, therefore, given more prominence than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

 

42

---

Table of Contents

Changes in the accounting and reporting rules under GAAP that were put into effect and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, that are expensed as operating expenses under GAAP. We believe these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-traded REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. The purchase of properties, and the corresponding expenses associated with that process, is a key feature of our business plan in order to generate operational income and cash flow in order to make distributions to investors. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that publicly registered, non-traded REITs are unique in that they typically have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. As disclosed in the prospectus for our Offering, we will use the proceeds raised in our Offering to acquire properties, and we expect to begin the process of achieving a liquidity event (i.e., listing of our shares of common stock on a national securities exchange, a merger or sale, the sale of all or substantially all of our assets, or another similar transaction) within three to five years after the completion of our Offering, which is generally comparable to other publicly registered, non-traded REITs. Thus, we do not intend to continuously purchase assets and intend to have a limited life. The decision whether to engage in any liquidity event is in the sole discretion of our board of directors. Due to the above factors and other unique features of publicly registered, non-traded REITs, the Investment Program Association, or the IPA, an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-traded REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a publicly registered, non-traded REIT having the characteristics described above. MFFO is not equivalent to our net income (loss) as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not ultimately engage in a liquidity event. We believe that, because MFFO excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired and that we consider more reflective of investing activities, as well as other non-operating items included in FFO, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our Offering has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the publicly registered, non-traded REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our Offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our Offering has been completed and properties have been acquired, as it excludes acquisition fees and expenses that have a negative effect on our operating performance during the periods in which properties are acquired.

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds From Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items included in the determination of GAAP net income (loss): acquisition fees and expenses; amounts relating to straight line rents and amortization of above or below intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; non-recurring impairments of real estate related investments; mark-to-market adjustments included in net income; non-recurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income (loss) in calculating cash flows from operations and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.

 

43

---

Table of Contents

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, the amortization of fair value adjustments related to debt, realized and unrealized gains and losses on foreign exchange holdings and the adjustments of such items related to noncontrolling interests. The other adjustments included in the IPA’s Practice Guideline are not applicable to us for the periods presented. Acquisition fees and expenses are paid in cash by us, and we have not set aside or put into escrow any specific amount of proceeds from our Offering to be used to fund acquisition fees and expenses. We do not intend to fund acquisition fees and expenses in the future from operating revenues and cash flows, nor from the sale of properties and subsequent re-deployment of capital and concurrent incurring of acquisition fees and expenses. Acquisition fees and expenses include payments to our Advisor and third parties. Acquisition related expenses under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. In the future, if we are not able to raise additional proceeds from our Offering, this could result in us paying acquisition fees or reimbursing acquisition expenses due to our Advisor, or a portion thereof, with net proceeds from borrowed funds, operational earnings or cash flows, net proceeds from the sale of properties, or ancillary cash flows. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds.

Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income (loss) in determining cash flows from operations. In addition, we view fair value adjustments of derivatives and the amortization of fair value adjustments related to debt as items which are unrealized and may not ultimately be realized or as items which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance.

We use MFFO and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-traded REITs which intend to have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to publicly registered, non-traded REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures may be useful to investors. For example, acquisition fees and expenses are intended to be funded from the proceeds of our Offering and other financing sources and not from operations. By excluding expensed acquisition fees and expenses, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such charges that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations, which is an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other measurements as an indication of our performance. MFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete.

 

44

---

Table of Contents

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the publicly registered, non-traded REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO. The following is a reconciliation of net income (loss), which is the most directly comparable GAAP financial measure, to FFO and MFFO for each of the periods presented below:

 

		Three Months Ended June 30, 2016				Three Months Ended June 30, 2015				Six Months Ended June 30, 2016				Six Months Ended June 30, 2015
Net loss attributable to Strategic Storage Trust II, Inc. common stockholders(1)		$	(10,724,129	)		$	(4,037,637	)		$	(15,229,333	)		$	(9,017,366	)
Add:
Depreciation			2,418,884				899,811				3,863,955				1,471,698
Amortization of intangible assets			2,853,212				1,597,581				4,707,977				2,588,640
Deduct:
Adjustment for noncontrolling interests			(2,647	)			(16,458	)			(5,159	)			(29,461	)
FFO			(5,454,680	)			(1,556,703	)			(6,662,560	)			(4,986,489	)
Other Adjustments:
Acquisition expenses(2)			7,843,125				517,610				10,687,061				2,866,529
Accretion of fair market value of secured debt(3)			(107,286	)			(22,448	)			(143,012	)			(41,663	)
Realized and unrealized losses on foreign exchange holdings(4)			17,993				—				16,717				—
Adjustment for noncontrolling interests			(3,808	)			(3,282	)			(6,028	)			(25,462	)
MFFO(5)		$	2,295,344			$	(1,064,823	)		$	3,892,178			$	(2,187,085	)

As discussed above, our results of operations for the three and six months ended June 30, 2016 and 2015 have been significantly impacted by our acquisitions during the first and second quarters of each year. The information below should be read in conjunction with the discussion regarding the acquisitions above.

 

(1)

Net loss attributable to Strategic Storage Trust II, Inc. common stockholders for the three and six months ended June 30, 2015 included approximately $1.6 million and $2.8 million, respectively, in distributions to Preferred Unitholders in our Operating Partnership and approximately $0.4 million and $0.8 million, respectively, in accretion of preferred equity costs. As of December 31, 2015, we had redeemed all of the Preferred Units.

(2)

In evaluating investments in real estate, we differentiate the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for publicly registered, non-traded REITs that have generally completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition related expenses, we believe MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our Advisor and third parties. Acquisition related expenses under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property.

(3)

This represents the difference between the stated interest rate and the estimated market interest rate on assumed notes as of the date of acquisition. Such amounts have been excluded from MFFO because we believe MFFO provides useful supplementary information by focusing on operating fundamentals, rather than events not related to our normal operations. We are responsible for managing interest rate risk and do not rely on another party to manage such risk.

(4)

These amounts primarily relate to transactions with our non-U.S. functional currency entities. The losses are the result of fluctuations between the U.S. dollar and the Canadian dollar. Such amounts have been excluded from MFFO because we believe MFFO provides useful supplementary information by focusing on operating fundamentals, rather than events not related to our normal operations. We are responsible for managing hedge and foreign exchange risk and do not rely on another party to manage such risk.

(5)

The improvement in MFFO between the three and six months ended June 30, 2016 and 2015 is primarily the result of an increase in our net operating income. Total revenues less all property operating expenses were approximately $5.0 million and $2.4 million for the three months ended June 30, 2016 and 2015, respectively, and $8.0 million and $3.8 million for the six months ended June 30, 2016 and 2015, respectively, thereby increasing MFFO by approximately $3.3 million and $6.1 million for the three and six months ended June 30, 2016 and 2015, respectively.

 

45

---

Table of Contents

Non-cash Items Included in Net Loss:

Provided below is additional information related to selected non-cash items included in net loss above, which may be helpful in assessing our operating results:

 

•

Debt issuance costs of approximately $0.6 million and $0.1 million, respectively, were recognized for the three months ended June 30, 2016 and 2015. Debt issuance costs of approximately $0.8 million and $0.2 million, respectively, were recognized for the six months ended June 30, 2016 and 2015.

Cash Flows

A comparison of cash flows for operating, investing and financing activities for the six months ended June 30, 2016 and 2015 is as follows:

 

		Six Months Ended
		June 30, 2016				June 30, 2015				Change
Net cash flow provided by (used in):
Operating activities		$	(3,818,038	)		$	(1,966,721	)		$	(1,851,317	)
Investing activities			(426,006,963	)			(125,567,783	)			(300,439,180	)
Financing activities			414,416,180				134,249,122				280,167,058

Cash flows used in operating activities for the six months ended June 30, 2016 and 2015 were approximately $3.8 million and $2.0 million, respectively, a change of approximately $1.9 million. The change in cash used in our operating activities is primarily the result of an increase in net loss, excluding depreciation and amortization, of approximately $4.6 million (primarily the result of increased acquisition expense of approximately $7.8 million), offset by a change in working capital of approximately $2.8 million.

Cash flows used in investing activities for the six months ended June 30, 2016 and 2015 were approximately $426.0 million and $125.6 million, respectively, an increase in the use of cash of approximately $300.4 million. The change in cash used in investing activities primarily relates to cash consideration paid of approximately $416.9 million for our acquisitions during the first two quarters of 2016, compared to $125.0 million for the purchase of our acquisitions during the first two quarters of 2015.

Cash flows provided by financing activities for the six months ended June 30, 2016 and 2015 were approximately $414.4 million and $134.2 million, respectively, an increase in the cash provided of approximately $280.2 million. The change in cash provided by financing activities was comprised of approximately $175.5 million more in net proceeds from the issuance of common stock and by approximately $160.6 million more in net proceeds from the issuance of secured debt, offset by approximately $52.8 million less in proceeds from the issuance of preferred equity in our Operating Partnership.

Liquidity and Capital Resources

Short-Term Liquidity and Capital Resources

We generally expect that we will meet our short-term operating liquidity requirements from the combination of proceeds of our Offering, proceeds from secured or unsecured financing from banks or other lenders, net cash provided by property operations and advances from our Advisor which will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement set forth in our Advisory Agreement with our Advisor. Per the Advisory Agreement, all advances from our Advisor shall be reimbursed no less frequently than monthly, although our Advisor has indicated that it may waive such a requirement on a month-by-month basis. The organizational and offering costs associated with the Offering will initially be paid by us or our Advisor. Our Advisor must reimburse us within 60 days after the end of the month in which the Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions, dealer manager fees and stockholder servicing fees) in excess of 3.5% of the gross offering proceeds from the Primary Offering. Operating cash flows are expected to increase as properties are added to our portfolio.

 

46

---

Table of Contents

Distribution Policy

On June 9, 2016, our board of directors declared a distribution rate for the third quarter of 2016 of $0.00163934426 per day per share on the outstanding shares of common stock payable to both Class A and Class T stockholders of record of such shares as shown on our books at the close of business on each day during the period, commencing on July 1, 2016 and continuing on each day thereafter through and including September 30, 2016. Such distributions payable to each stockholder of record during a month will be paid on such date of the following month as our Chief Executive Officer may determine.

Currently, we are making distributions to our stockholders using proceeds of the Offering in anticipation of future cash flow. As such, this reduces the amount of capital we will ultimately invest in properties. Because substantially all of our operations will be performed indirectly through our Operating Partnership, our ability to pay distributions depends in large part on our Operating Partnership’s ability to pay distributions to its partners, including to us. In the event we do not have enough cash from operations to fund cash distributions, we may borrow, issue additional securities or sell assets in order to fund the distributions or make the distributions out of net proceeds from the Offering. Though we presently intend to pay only cash distributions, and potentially stock distributions, we are authorized by our charter to pay in-kind distributions of readily marketable securities, distributions of beneficial interests in a liquidating trust established for our dissolution and the liquidation of our assets in accordance with the terms of the charter or distributions that meet all of the following conditions: (a) our board of directors advises each stockholder of the risks associated with direct ownership of the property; (b) our board of directors offers each stockholder the election of receiving such in-kind distributions; and (c) in-kind distributions are only made to those stockholders who accept such offer.

During our Offering, when we may raise capital more quickly than we acquire income-producing assets, and for some period after our Offering, we may not be able to pay distributions from our cash flows from operations, in which case distributions may be paid in part from debt financing or from proceeds from our Offering.

Over the long-term, we expect that a greater percentage of our distributions will be paid from cash flows from operations. However, our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including our ability to raise and invest capital at favorable yields, the financial performance of our investments in the current real estate and financial environment and the types and mix of investments in our portfolio. As a result, future distributions declared and paid may exceed cash flow from operations.

Distributions are paid to our stockholders based on the record date selected by our board of directors. We currently declare and pay distributions monthly based on daily declaration and record dates so that investors may be entitled to distributions immediately upon purchasing our shares. We expect to continue to regularly pay distributions unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions will be authorized at the discretion of our board of directors, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Code. Our board of directors may increase, decrease or eliminate the distribution rate that is being paid at any time. Distributions will be made on all classes of our common stock at the same time. The per share amount of distributions on Class A Shares and Class T Shares will likely differ because of different allocations of class-specific expenses. Specifically, distributions on Class T Shares will likely be lower than distributions on Class A Shares because Class T Shares are subject to ongoing stockholder servicing fees. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:

 

•

the amount of time required for us to invest the funds received in the Offering;

 

•

our operating and interest expenses;

 

•

the amount of distributions or dividends received by us from our indirect real estate investments;

 

•

our ability to keep our properties occupied;

 

•

our ability to maintain or increase rental rates;

 

•

construction defects or capital improvements;

 

•

capital expenditures and reserves for such expenditures;

 

•

the issuance of additional shares; and

 

•

financings and refinancings.

 

47

---

Table of Contents

The following shows our distributions and the sources of such distributions for the respective periods presented:

 

		Six Months Ended June 30, 2016								Six Months Ended June 30, 2015
Distributions paid in cash — common stockholders		$	4,396,703							$	430,970
Distributions paid in cash — Operating Partnership unitholders			6,003								5,984
Distributions paid in cash — preferred unitholders			—								1,363,028
Distributions reinvested			4,265,316								262,014
Total distributions		$	8,668,022							$	2,061,996
Source of distributions
Cash flows provided by operations		$	—				—			$	—				—
Offering proceeds from Primary Offering			4,402,706				51	%			1,799,982				87	%
Offering proceeds from distribution reinvestment plan			4,265,316				49	%			262,014				13	%
Total sources		$	8,668,022				100	%		$	2,061,996				100	%

From our inception through June 30, 2016, we paid cumulative distributions of approximately $16.5 million, as compared to cumulative negative FFO of approximately $15.1 million. For the six months ended June 30, 2016, we incurred distributions of approximately $8.7 million, as compared to a negative FFO of approximately $6.7 million which reflects acquisition related expenses of approximately $10.7 million. For the six months ended June 30, 2015, we incurred distributions of approximately $2.1 million, as compared to a negative FFO of approximately $5.0 million which reflects acquisition related expenses of approximately $2.9 million. The payment of distributions from sources other than FFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.

We must distribute to our stockholders at least 90% of our taxable income each year in order to meet the requirements for being treated as a REIT under the Code. Our directors may authorize distributions in excess of this percentage as they deem appropriate. Because we may receive income from interest or rents at various times during our fiscal year, distributions may not reflect our income earned in that particular distribution period, but may be made in anticipation of cash flow that we expect to receive during a later period and may be made in advance of actual receipt of funds in an attempt to make distributions relatively uniform. To allow for such differences in timing between the receipt of income and the payment of expenses, and the effect of required debt payments, among other things, we could be required to borrow funds from third parties on a short-term basis, issue new securities, or sell assets to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We are not prohibited from undertaking such activities by our charter, bylaws or investment policies, and we may use an unlimited amount from any source to pay our distributions. These methods of obtaining funding could affect future distributions by increasing operating costs and decreasing available cash, which could reduce the value of our stockholders’ investment in our shares. In addition, such distributions may constitute a return of investors’ capital.

We have not been able to and may not be able to pay distributions from our cash flows from operations, in which case distributions may be paid in part from debt financing or from proceeds from the issuance of common stock in our Primary Offering and pursuant to our distribution reinvestment plan. The payment of distributions from sources other than cash flows from operations may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.

Over the long-term, we expect that a greater percentage of our distributions will be paid from cash flows from operations. However, our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including our ability to raise and invest capital at favorable yields, the financial performance of our investments in the current real estate and financial environment and the types and mix of investments in our portfolio. As a result, future distributions declared and paid may exceed cash flow from operations.

 

48

---

Table of Contents

Indebtedness

As of June 30, 2016, our total indebtedness was approximately $290.1 million, which included approximately $42.6 million in fixed rate debt, $247.9 million in variable rate debt and approximately $2.0 million in debt premium less approximately $2.4 million in debt issuance costs.

Long-Term Liquidity and Capital Resources

On a long-term basis, our principal demands for funds will be for property acquisitions, either directly or through entity interests, for the payment of operating expenses and distributions, and for the payment of interest on our outstanding indebtedness, if any.

Long-term potential future sources of capital include proceeds from our Offering, secured or unsecured financings from banks or other lenders, issuance of equity instruments and undistributed funds from operations. To the extent we are not able to secure requisite financing in the form of a credit facility or other debt, we will be dependent upon proceeds from the issuance of equity securities and cash flows from operating activities in order to meet our long-term liquidity requirements and to fund our distributions.

Contractual Obligations

The following table summarizes our contractual obligations as of June 30, 2016:

 

		Payments due during the years ending December 31:
		Total				2016				2017-2018				2019-2020				Thereafter
Mortgage interest(1)		$	23,394,455			$	5,526,934			$	10,660,913			$	3,684,614			$	3,521,994
Mortgage principal(2)			290,532,658				135,268,809				111,727,988				1,960,122				41,575,739
Total contractual obligations		$	313,927,113			$	140,795,743			$	122,388,901			$	5,644,736			$	45,097,733

 

(1)	Interest expense for fixed rate debt was calculated based upon the contractual rate and the interest expense on variable rate debt was calculated based on the rate in effect on June 30, 2016.

(2)	Amount represents principal payments only, excluding debt premium.

Off-Balance Sheet Arrangements

We do not currently have any relationships with unconsolidated entities or financial partnerships. Such entities are often referred to as structured finance or special purpose entities, which typically are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitments or intent to provide funding to any such entities.

Subsequent Events

Please see Note 12 of the Notes to the Consolidated Financial Statements contained in this report.

Seasonality

We believe that we will experience minor seasonal fluctuations in the occupancy levels of our facilities, which we believe will be slightly higher over the summer months due to increased moving activity.

 

49

---

Table of Contents

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk and to a lesser extent, foreign currency risk. We may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund acquisition, expansion, and financing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes.

As of June 30, 2016, our total indebtedness was approximately $290.1 million, which included approximately $42.6 million in fixed rate debt, $247.9 million in variable rate debt and approximately $2.0 million in debt premium less approximately $2.4 million in debt issuance costs. As of December 31, 2015, our total indebtedness was approximately $23.0 million, which included approximately $10.0 million in variable rate debt, approximately $12.4 million in fixed rate debt, approximately $0.8 million in debt premium, less $0.2 million in debt issuance costs. Our debt instruments were entered into for other than trading purposes. Changes in interest rates have different impacts on the fixed and variable debt. A change in interest rates on fixed rate debt impacts its fair value but has no impact on interest incurred or cash flows. A change in interest rates on variable debt could impact the interest incurred and cash flows and its fair value. If the underlying rate of the related index on our variable rate debt were to increase by 100 basis points, the increase in interest would decrease future earnings and cash flows by approximately $2.5 million annually.

Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

The following table summarizes future debt maturities and average interest rates on our outstanding debt as of June 30, 2016:

 

		Year Ending December 31,
		2016				2017				2018				2019				2020				Thereafter				Total
Fixed rate debt		$	139,163			$	359,029			$	10,754,236			$	706,417			$	735,123			$	29,919,982			$	42,613,950
Average interest rate (1)			4.93	%			4.93	%			4.80	%			4.63	%			4.63	%			4.63	%
Variable rate debt		$	135,129,646			$	8,028,109			$	92,586,614			$	259,291			$	259,291			$	11,655,757			$	247,918,708
Average interest rate(1)			3.23	%			2.95	%			2.81	%			3.41	%			3.41	%			3.41	%

 

(1)	Interest rate is based upon the contractual rate in effect on June 30, 2016.

Currently, our only foreign exchange rate risk comes from our Canadian properties and the Canadian Dollar (“CAD”). Our existing foreign currency hedge mitigates our foreign currency exposure of our net CAD denominated investments; however, we generate all of our revenues and expend essentially all of our operating expenses and third party debt service costs in CAD. As a result of fluctuations in currency exchange, our cash flows and results of operations could be affected.

 

50

---

Table of Contents

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June  30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

None.

 

ITEM 1A.

RISK FACTORS

The following should be read in conjunction with the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2015.

The risk factor captioned “We established the offering price on an arbitrary basis; as a result, the actual value of your investment may be substantially less than what you pay,” and the risk factor caption beginning “We will be required to disclose an estimated value per share of our common stock prior to, or shortly after, the conclusion of this offering, and such estimated value per share may be lower than the purchase price you pay for shares of our common stock in this offering,” are hereby deleted in their entirety and replaced with the following:

We may only calculate the value per share for our shares annually and, therefore, you may not be able to determine the net asset value of your shares on an ongoing basis during this offering.

On April 8, 2016, our board of directors approved an estimated value per share for our Class A shares and Class T shares of $10.09. Our board of directors approved this estimated value per share pursuant to recent amendments to rules promulgated by FINRA, which require us to disclose an estimated per share value of our shares based on a valuation no later than 150 days following the second anniversary of the date on which we break escrow in our offering. When determining the estimated value per share from and after 150 days following the second anniversary of breaking escrow in our offering and annually thereafter, there are currently no SEC, federal and state rules that establish requirements specifying the methodology to employ in determining an estimated value per share; provided, however, that the determination of the estimated value per share must be conducted by, or with the material assistance or confirmation of, a third-party valuation expert or service and must be derived from a methodology that conforms to standard industry practice.

We intend to use this estimated per share value of our shares until the next net asset valuation approved by our board of directors, which we are required to approve at least annually. We may not calculate the net asset value per share for our shares more than annually. Therefore, you may not be able to determine the net asset value of your shares on an ongoing basis during this offering.

 

51

---

Table of Contents

In determining our estimated value per share, we primarily relied upon a valuation of our portfolio of properties as of December 31, 2015. Valuations and appraisals of our properties are estimates of fair value and may not necessarily correspond to realizable value upon the sale of such properties, therefore our estimated net asset value per share may not reflect the amount that would be realized upon a sale of each of our properties. For the purposes of calculating the estimated value per share, an independent third party appraiser valued our properties as of December 31, 2015. The valuation methodologies used to value our properties involved certain subjective judgments. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions beyond our control and the control of our advisor and independent appraiser. Further, valuations do not necessarily represent the price at which an asset would sell, since market prices of assets can only be determined by negotiation between a willing buyer and seller. Therefore, the valuations of our properties and our investments in real estate related assets may not correspond to the timely realizable value upon a sale of those assets. Because the price you will pay for shares in this offering is primarily based on the estimated net asset value per share, you may pay more than realizable value when you purchase your shares or receive less than realizable value for your investment when you sell your shares.

We have incurred a net loss to date, have an accumulated deficit, and we anticipate that our operations may not be profitable in 2016.

We incurred a net loss of approximately $15.2 million for the six months ended June 30, 2016. Our accumulated deficit was approximately $32.9 million as of June 30, 2016. Given that we are still early in our fundraising and acquisition stage of development, we anticipate that our operations may not be profitable in 2016.

We have paid, and may continue to pay, distributions from sources other than cash flow from operations; therefore, we will have fewer funds available for the acquisition of properties, and our stockholders’ overall return may be reduced.

In the event we do not have enough cash from operations to fund our distributions, we may borrow, issue additional securities, or sell assets in order to fund the distributions or make the distributions out of net proceeds from our offering. We are not prohibited from undertaking such activities by our charter, bylaws or investment policies, and we may use an unlimited amount from any source to pay our distributions. From our inception through June 30, 2016, the payment of distributions has been paid from offering proceeds. If we continue to pay distributions from sources other than cash flow from operations, we will have fewer funds available for acquiring properties, which may reduce our stockholders’ overall returns. Additionally, to the extent distributions exceed cash flow from operations, a stockholder’s basis in our stock may be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize a capital gain.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a)

None.

 

(b)

On January 10, 2014, our initial Offering (SEC File No. 333-190983) for a maximum of 110 million shares of common stock, consisting of 100 million shares for sale to the public and 10 million shares for sale pursuant to our distribution reinvestment plan was declared effective by the SEC. On September 28, 2015, we revised our Primary Offering and are now offering two classes of shares of common stock: Class A common stock, $0.001 par value per share (the “Class A Shares”) and Class T common stock, $0.001 par value per share (the “Class T Shares”). As of June 30, 2016, we had issued approximately 38.8 million Class A Shares and approximately 3.4 million Class T Shares for gross proceeds of approximately $388.6 million and approximately $33.4 million, respectively. From this amount, we incurred approximately $38.4 million in selling commissions and dealer manager fees (of which approximately $29.8 million was re-allowed to third party broker-dealers), and approximately $4.1 million in other organization and offering costs. With the net offering proceeds and indebtedness, we acquired approximately $613.3 million in self storage facilities and made the other payments reflected under “Cash Flows from Financing Activities” in our consolidated statements of cash flows included in this report.

 

(c)

Our share redemption program enables our stockholders to have their shares redeemed by us, subject to the significant conditions and limitations described in our prospectus. During the six months ended June 30, 2016, we received redemption requests for approximately $690,000, of which approximately $530,000 was redeemed in April 2016, with the remainder redeemed in July of 2016.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

 

52

---

Table of Contents

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5.

OTHER INFORMATION

 

(a)	During the second quarter of 2016, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.

 

(b)	During the second quarter of 2016, there were no material changes to the procedures by which security holders may recommend nominees to our board of directors.

 

ITEM 6.

EXHIBITS

The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.

 

53

---

Table of Contents

EXHIBIT INDEX

The following exhibits are included in this report on Form 10-Q for the period ended June 30, 2016 (and are numbered in accordance with Item 601 of Regulation S-K).

 

Exhibit No.		Description
3.1		First Articles of Amendment and Restatement of Strategic Storage Trust II, Inc., incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K, filed on March 31, 2014, Commission File No. 333-190983
3.2		Articles of Amendment of Strategic Storage Trust II, Inc., incorporated by reference to Exhibit 3.1 to Post-Effective Amendment No. 7 to the Company’s Registration Statement on Form S-11, filed on September 28, 2015, Commission File No. 333-190983
3.3		Articles Supplementary of Strategic Storage Trust II, Inc., incorporated by reference to Exhibit 3.2 to Post-Effective Amendment No. 7 to the Company’s Registration Statement on Form S-11, filed on September 28, 2015, Commission File No. 333-190983
3.4		Bylaws of Strategic Storage Trust II, Inc., incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-11, filed on September 4, 2013, Commission File No. 333-190983
4.1		Form of Subscription Agreement and Subscription Agreement Signature Page (included as Appendix A to prospectus), incorporated by reference to Post-Effective Amendment No. 10 to the Company’s Registration Statement on Form S-11, filed on April 11, 2016, Commission File No. 333-190983
10.1		Property Loan Agreement, dated as of June 1, 2016, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed on June 7, 2016, Commission File No. 000-55617
10.2		Property Loan Guaranty, dated as of June 1, 2016, incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K, filed on June 7, 2016, Commission File No. 000-55617
10.3		Subordinate Loan Agreement, incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K, filed on June 7, 2016, Commission File No. 000-55617
10.3		Guaranty, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed on August 3, 2016, Commission File No. 000-55617
10.3		Promissory Note A-1, incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K, filed on August 3, 2016, Commission File No. 000-55617
10.3		Promissory Note A-2, incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K, filed on August 3, 2016, Commission File No. 000-55617
31.1*		Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
101*		The following Strategic Storage Trust II, Inc. financial information for the quarter ended June 30, 2016 formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss (iv) Consolidated Statement of Equity, (v) Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

 

*	Filed herewith.

 

54

---

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				STRATEGIC STORAGE TRUST II, INC. (Registrant)
Dated: August 15, 2016				By:		/s/ Michael S. McClure
						Michael S. McClure
						Executive Vice President, Chief Financial Officer and Treasurer and duly authorized officer

 

55