Business context and reporting period
SmartStop Self Storage REIT, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The self-managed REIT owns and operates self-storage facilities and also manages investment programs for affiliated Managed REITs. At quarter-end, it wholly owned 153 facilities with approximately 102,877 units and 11.8 million rentable square feet; same-store physical occupancy averaged 94.5% for the quarter.
During the period, SmartStop completed its June 1, 2022 merger with SSGT II, adding 10 wholly owned facilities and interests in three Canadian joint ventures. It also acquired four individual facilities during 2022. Its portfolio included 10 unconsolidated Canadian real estate ventures in which it held 50% interests.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $56.5 million | $44.9 million | $156.2 million | $121.8 million |
| Net income (loss) | $2.2 million | $1.1 million | $19.5 million | $(12.6) million |
| Net income (loss) attributable to common stockholders | $(1.3) million | $(2.2) million | $7.7 million | $(20.0) million |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $69.8 million | $42.7 million |
| Cash and cash equivalents at period-end | $41.2 million | September 30, 2022 |
- Q3 self-storage rental revenue was $51.0 million, up from $40.7 million. Same-store revenue rose 11.8% to $35.8 million, while same-store NOI increased 13.7% to $25.5 million. Same-store average occupancy was 94.5%, versus 95.9%; annualized rent per occupied square foot increased to $19.30 from $16.88.
- Nine-month same-store revenue increased 14.6% to $103.9 million and same-store NOI increased 19.5% to $74.2 million. Average same-store occupancy was 95.0% in both periods; rent per occupied square foot rose to $18.51 from $16.06.
- Q3 operating expenses included $16.0 million of property operating costs, $7.3 million of general and administrative expense, and $11.8 million of interest expense. Nine-month interest expense was $28.2 million.
- At September 30, total assets were $1.94 billion, total liabilities $1.08 billion, and total equity $578.5 million. Debt, net of issuance costs and discount, was $1.039 billion, compared with $874 million at December 31, 2021.
- Debt comprised approximately $443 million fixed-rate and $600 million variable-rate borrowings before debt-cost adjustments. The weighted-average rate on consolidated debt was approximately 4.55%. Cash plus restricted cash was $49.9 million.
- Nine-month investing cash outflow was $173.5 million, largely reflecting the SSGT II merger, property acquisitions, and investments in Managed REITs. Financing cash inflow was $110.4 million, principally from net borrowing.
Material changes versus prior comparable periods
- Revenue grew 25.6% in Q3 and 28.3% for the nine months, reflecting same-store rent growth, the SSGT II and SST IV acquisitions, and other acquired properties. The increased portfolio also raised property expenses, depreciation, and amortization.
- Q3 common-stockholder results remained a loss, although the loss narrowed year over year. Nine-month common-stockholder results moved to income from a loss, aided in part by a $16.1 million gain on preexisting equity interests recognized in the SSGT II merger. The company also recorded $2.0 million of contract and equity-interest write-offs related to that merger.
- Debt increased alongside acquisitions and merger activity. Variable-rate borrowing costs rose with interest rates, contributing to higher interest expense.
- Same-store Q3 occupancy declined 1.4 percentage points year over year even as realized rent per occupied square foot rose. For the nine months, same-store occupancy was unchanged.
Outlook, risks and unusual items
- Management expects same-store growth to normalize further as comparison periods change. It expects revenue to benefit from lease-up and newly acquired properties, but notes that performance depends on economic conditions, self-storage supply, occupancy, and rental rates. No quantified earnings or revenue guidance is provided.
- Management cites inflation, higher interest rates, tighter monetary conditions, slower home-price appreciation, and possible weaker consumer demand as risks. Higher rates have increased variable borrowing costs and the cost of capital and may limit acquisition accretion.
- The company had borrowed $338.2 million of its $450 million revolving capacity and all $250 million of its term-loan capacity. Additional borrowing is subject to facility conditions and a borrowing base that management says may be affected by Treasury rates. Management reported compliance with debt covenants at September 30.
- Scheduled principal payments include $352.8 million in 2024 and $341.9 million in 2026. A 100-basis-point increase in the index rates on variable-rate debt was estimated to reduce annual earnings and cash flows by approximately $3.8 million, before considering management actions.
- The board suspended the distribution reinvestment plan and share redemption program in March 2022. Redemption requests received since the suspension are not being processed unless the board resumes the program. Common distributions continue to be paid in cash; the October and November 2022 declared rates were approximately $0.00164 per share per day.
- Nine-month distributions totaled $54.8 million, including preferred and operating-partnership distributions. The filing reports that operating cash flow funded these distributions; common-stockholder distributions of approximately $40.1 million exceeded common-stockholder FFO of $37.2 million. Management cautions distributions may not be funded by operating cash flow in future periods.
- Preferred stock carries a 6.25% initial dividend rate and a $203.2 million liquidation preference, including accumulated unpaid distributions. The rate can increase under the stated terms if the shares are not redeemed.
- Other notable items include $350,000 of Hurricane Ian casualty loss in Q3, the final contingent earnout conversion in August 2022, and a $1.5 million nine-month expense related to a potential common-stock offering. The company disclosed no material legal proceedings and no real estate or goodwill impairment losses for the periods presented.
- Subsequent to quarter-end, SmartStop entered into three interest-rate caps totaling $300 million, each capping SOFR at 4.75%; the aggregate premium was approximately $2.9 million. It also reported approximately $82.1 million of potential acquisitions under contract after quarter-end, which may not be completed.
Most important facts for investors to verify
- Whether rent growth and same-store NOI gains persist as occupancy has softened and management expects growth to normalize.
- Available liquidity and borrowing-base capacity, covenant headroom, and the refinancing or repayment plan for the substantial 2024 and 2026 maturities.
- Exposure to rising rates after considering the variable-rate debt, existing hedges, and the subsequent SOFR caps.
- The sustainability and funding of common distributions given the DRP and redemption suspensions and the period’s distribution-to-FFO relationship.
- The recurring earnings contribution of the acquired SSGT II portfolio, separating it from the $16.1 million merger-related gain and other acquisition-related items.
- Progress and funding requirements for Canadian joint ventures and potential loans to Managed REITs, including the disclosed remaining funding commitments.