SmartStop Self Storage REIT, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The unaudited results reflect a substantially expanded portfolio following the January 2019 SSGT mergers and the June 2019 self-administration transaction, limiting direct comparability with 2018.
Business context and reporting period
SmartStop is a self-managed self-storage REIT operating facilities in the United States and Ontario, Canada, and also earns fees from its Managed REIT Platform. At quarter-end it reported 112 operating facilities and one facility under development. Portfolio physical occupancy was 86.7%, or approximately 89% excluding properties identified as not stabilized.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $29.6 million | $20.3 million | $79.5 million | $60.2 million |
| Operating income | $1.8 million | $4.5 million | $4.5 million | $11.8 million |
| Net loss attributable to common stockholders | $(8.2) million | $(0.5) million | $(19.3) million | $(2.5) million |
| Net loss per share, Class A and T | $(0.14) | $(0.01) | $(0.33) | $(0.04) |
| Operating cash flow | — | $8.1 million | $16.4 million |
Operating margin was approximately 6.1% in Q3 2019 versus 22.0% in Q3 2018; nine-month operating margin was approximately 5.7% versus 19.6%. The filing does not provide a company-wide GAAP net profit margin measure separately.
Same-store property operating income increased 9.3% in Q3 and 1.9% for the nine months. Management’s adjusted same-store comparison showed Q3 revenue growth of 3.6% and nine-month revenue growth of 2.0%; these comparisons adjust 2018 for the 2019 lease-accounting presentation. Same-store occupancy was 89.4% in Q3, compared with 89.2% a year earlier.
At September 30, cash and cash equivalents were $14.1 million and restricted cash was $7.8 million. Debt, net of issuance costs, was $815.3 million, up from $406.1 million at year-end 2018; weighted-average debt interest was approximately 4.9%. Operating cash flow declined year over year, while investing cash outflow was $359.1 million, principally reflecting the SSGT merger. Financing provided $358.7 million.
Material changes versus the prior comparable period
- Revenue rose 46% in Q3, primarily from acquired SSGT properties and the newly consolidated Tenant Programs; total operating expenses also increased substantially.
- Interest expense and debt-issuance-cost amortization rose with merger-related borrowing. Debt increased by about $409 million from December 31, 2018.
- The self-administration transaction ended external advisory and property-management arrangements for SmartStop’s own properties, while adding employee compensation, overhead, Managed REIT fees and new acquired intangible assets.
- Results included a one-time $8.0 million gain from remeasuring previously held Tenant Programs joint-venture interests, $1.6 million of self-administration transaction expenses for the nine months, and a $1.5 million debt-extinguishment loss.
Outlook, risks and unusual items
- No formal earnings or revenue guidance was provided. Management expects SSGT portfolio occupancy and revenue to improve and estimates the portfolio could become accretive to adjusted FFO and cash flow over 24–36 months; this is forward-looking and depends on lease-up and development.
- Management expects Managed REIT Platform revenue and reimbursed costs to grow as the managed REITs acquire properties. These revenues depend on capital raising, investment activity, contract terms and continued advisory agreements.
- In October 2019, Extra Space Storage LP purchased $150 million of Series A Convertible Preferred Stock and committed, at its option and subject to limitations, to purchase up to another $50 million. The initial dividend rate is 6.25%; it increases under specified terms if the stock is not redeemed. Proceeds were used to repay approximately $95.4 million of the Senior Term and Tenant Program loans. The preferred stock ranks senior to common stock and restricts certain common distributions.
- After quarter-end, the company sold the San Antonio II property for approximately $16.1 million and applied about $15.3 million to debt repayment. The ordinary share redemption program was suspended effective September 27, 2019, except for specified hardship-related cases.
- Distributions paid during the first nine months totaled $26.7 million, versus negative FFO of $0.8 million. The filing reports sources as 30% operating cash flow, 25% financing activities and 45% distribution-reinvestment proceeds. Management cautions distributions may exceed operating cash flow and may be funded from borrowing or other sources.
- Variable-rate debt exposure is material: management estimated a 100-basis-point rate increase would reduce annual earnings and cash flow by approximately $1.2 million. Debt covenants were reported in compliance at September 30, 2019; some loan maturities occur within the following year.
- The self-administration transaction’s purchase-price allocation remained provisional. It created $78.4 million of goodwill, $19.8 million of trademarks and a $31.2 million contingent earnout liability; impairment or valuation changes could affect future results. Management reported no material litigation and effective disclosure controls.
Important facts for investors to verify
- Whether acquired and previously unstabilized properties deliver the occupancy, revenue and adjusted-FFO improvement management anticipates.
- Updated debt balances, maturities, covenant headroom, variable-rate exposure and the effects of the post-quarter preferred-stock financing and repayments.
- Whether operating cash flow can support common distributions, given the reported distribution funding mix and preferred dividend priority.
- Final purchase-price allocations, goodwill and intangible-asset assumptions, and progress toward the contingent earnout AUM thresholds.
- Managed REIT fee growth, contract renewal and termination provisions, and the costs and operating effectiveness of the newly self-managed structure.