Smartstop Self Storage REIT, Inc. annual report, FY2020

Business context and reporting period

SmartStop Self Storage REIT, Inc. filed its Form 10-K for the fiscal year ended December 31, 2020. It owns and operates self-storage properties and earns fees through its Managed REIT Platform. At year-end, it owned 112 facilities with approximately 72,000 units and 8.2 million rentable square feet; results reflect operations before the subsequent SST IV merger.

Key financial and operating metrics

• Self-storage revenue was $110.2 million, up 6.8%. Same-store revenue increased 3.6%, average physical occupancy rose to 90.6% from 88.6%, and same-store property operating income increased 7.8% to $56.8 million. Total property operating income was $71.9 million, or 65.2% of self-storage revenue.
• Cash and cash equivalents were $72.7 million; restricted cash was $8.0 million. The filing does not provide a single current-liquidity ratio.
• Year-end debt comprised approximately $302 million fixed-rate and $420 million variable-rate borrowings. Weighted-average debt interest rate, before hedging effects, was 3.72%; the company reported compliance with debt covenants.
• Adjusted FFO, a non-GAAP measure, was $10.9 million versus $5.7 million in 2019. FFO was negative; these measures are not substitutes for GAAP earnings or operating cash flow.
• The company declared $0.60 per common share for 2020. It paid approximately $49.4 million in total distributions, funded 54.2% by operating cash flow, 13.5% by financing activities, and 32.3% by DRP proceeds. All 2020 distributions were characterized as return of capital for tax purposes.

Material changes versus the prior comparable period

• Revenue increased 13.2%, including higher self-storage and Managed REIT Platform revenue. Reimbursable Managed REIT costs increased, with matching expense recognition.
• Operating results were weighed down by $36.5 million of goodwill and intangible impairment and $4.4 million of impairment on Managed REIT investments. The impairments followed reduced capital-raising expectations after Managed REIT offerings were suspended during the pandemic.
• Despite higher revenue, the company moved from operating income to an operating loss. Lower interest expense and a $5.9 million deferred tax benefit partly offset operating pressures and impairment charges.
• Operating cash flow increased by $17.0 million. Investing outflows were much lower than in 2019, which included approximately $346 million of cash consideration for the SSGT mergers.

Outlook, commentary, risks and unusual items

• Management said customer demand recovered to normalized or higher levels in the second half of 2020 after the pandemic’s greatest operating impact in the second quarter. Same-store move-ins rose about 6% for the year, move-outs declined about 5%, and approximately 97% of rents were billed and collected within the same month. Management provided no formal numerical earnings or revenue guidance.
• Management expects 2021 results to be significantly affected by the SST IV merger. On March 17, 2021, the company completed the merger for an indicated transaction value of approximately $380 million, acquiring 24 facilities and a 50% interest in six Canadian joint ventures. The company reported a post-merger wholly owned portfolio of 136 properties, approximately 90,000 units and 10.3 million square feet.
• Also on March 17, 2021, the company entered a $500 million credit facility, with approximately $451 million drawn at closing, primarily to refinance existing and SST IV debt. The facility may be increased by up to $350 million subject to conditions. These are subsequent events, not year-end 2020 balances.
• Significant risks include the lack of a public trading market, a partially suspended share-redemption program, distributions partly funded outside operating cash flow, senior and cumulative preferred stock, leverage and refinancing exposure, variable-rate debt and Canadian-dollar risk, geographic concentration, and dependence on self-storage demand and Managed REIT fundraising. California, Florida and Ontario represented approximately 24%, 21% and 13% of December 2020 rental income, respectively.
• The $200 million Series A Convertible Preferred Stock carries a 6.25% initial annual dividend, ranks senior to common stock and has conversion and redemption provisions. Its dividend rate can step up if it remains outstanding beyond specified dates.
• Unusual item: a fourth-quarter out-of-period adjustment added approximately $6.9 million of net real-estate assets and a $5.8 million deferred tax liability, with related expenses and tax effects reducing 2020 net loss by approximately $1.1 million. Management said the adjustment was not material to 2020 or prior periods.
• The board’s $10.40 estimated value per common share was based on a December 31, 2019 valuation, predating COVID-19; it is not an audited GAAP value or a guarantee of realizable proceeds. The auditor issued an unqualified opinion on the financial statements; management concluded internal control over financial reporting was effective, but the auditor was not engaged to audit those controls.

Important facts for investors to verify

• Whether operating cash flow can sustain distributions, given the 2020 funding mix, negative GAAP earnings and distributions classified as return of capital.
• The post-merger debt balance, debt maturities, covenant headroom, interest-rate exposure and refinancing needs; the 2021 facility draw and merger financing materially changed the capital structure after year-end.
• Whether the SST IV portfolio and Canadian joint ventures deliver expected occupancy, revenue and cost synergies, and how their performance is reflected in subsequent filings.
• The valuation assumptions and future impairment risk for goodwill, Managed REIT contracts, trademarks and contingent earnout obligations.
• The status and practical availability of share redemptions, future estimated share value, preferred-stock rights and any path to liquidity or public listing.