SmartStop Self Storage REIT, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited consolidated statements; dollar amounts are U.S. dollars unless noted. The company is a self-managed self-storage REIT operating in the U.S. and Canada, with a Managed REIT Platform.
Business context and portfolio
- At September 30, the company owned 154 facilities; 153 were operating, with the San Gabriel property beginning formal operations in October. The operating portfolio comprised approximately 102,900 units and 11.8 million rentable square feet, with 92.5% physical occupancy.
- It also held 50% interests in 11 Canadian joint ventures and managed 31 operating properties for its Managed REITs and another property.
- Rental income was concentrated in Florida (22.8%), California (20.0%) and the Greater Toronto Area (10.3%) for September.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $58.7m | $56.5m | $175.4m | $156.2m |
| Income from operations | $18.1m | $12.9m | $53.7m | $49.5m |
| Net income | $3.0m | $2.2m | $9.3m | $19.5m |
| Net income (loss) attributable to common stockholders | ($0.6m) | ($1.3m) | ($1.6m) | $7.7m |
| Operating cash flow | — | — | $68.7m | $69.8m |
| FFO, as adjusted, attributable to common stockholders | $12.0m | $14.9m | $38.1m | $43.9m |
- Nine-month self-storage segment NOI was $106.9m, up 8.5%; its reported revenue was $162.1m. Same-store NOI increased 4.1% for the nine months and 3.8% for Q3. Same-store revenue growth was supported by higher rent per occupied square foot, while occupancy declined.
- For nine months, same-store revenue rose 5.6% and annualized rent per occupied square foot rose 8.2%, but average physical occupancy fell 1.8 percentage points to 93.2%. In Q3, same-store revenue rose 3.0%, rent per occupied square foot rose 5.1%, and occupancy declined 1.4 points to 93.2%.
- At September 30, total assets were $1.89bn, debt net of discounts and issuance costs was $1.055bn, and cash plus restricted cash was $43.8m. Debt included approximately $440.8m fixed-rate and $618.2m variable-rate borrowings; weighted-average consolidated debt interest rate was approximately 6.1% before hedging effects.
- The $450m revolving facility had $368.2m drawn, with the full stated current capacity available to draw subject to borrowing-base calculations. The $250m term loan was fully drawn. The revolver matures in March 2024, subject to a one-year extension option. Debt principal maturities include $370.9m in 2024 and $341.9m in 2026.
Material changes versus prior periods
- Nine-month revenue increased 12.3%, reflecting same-store growth, a full-period contribution from the 10 facilities acquired in the 2022 SSGT II merger, and higher Managed REIT Platform revenue.
- Nine-month interest expense rose to $45.5m from $28.2m, primarily due to higher rates on variable-rate debt. The 2022 private placement notes’ coupon increased from 4.53% to 5.28% after a leverage-ratio trigger; it returns to 4.53% only after the specified leverage test is met for two consecutive quarters.
- Despite higher revenue and operating income, nine-month net income fell year over year, partly because 2022 included a $16.1m acquisition-related gain on preexisting SSGT II interests. Adjusted FFO also declined, primarily due to increased interest expense.
- Property operating expenses rose 15.5% for the nine months, faster than same-store revenue, with management citing compensation, insurance and property-tax increases. General and administrative expense declined 5.3%.
Outlook, risks and unusual items
- Management expects self-storage revenue to depend on same-store performance and lease-up at acquired or developing properties. It described post-pandemic demand as normalizing and said the work-from-home trend had waned in 2023, contributing to elevated move-outs. No numeric company-wide earnings or revenue guidance is provided in the filing.
- Management cited inflation, higher interest rates, tighter lending conditions, slower housing activity, competition and new supply as risks to demand, margins, acquisitions and financing costs. Property insurance, taxes and payroll have faced above-average cost pressure.
- A 100-basis-point increase in the index rates on variable debt was estimated to reduce annual earnings and cash flows by approximately $2.3m, net of interest-rate derivatives. Canadian operations also expose results and cash flows to CAD/USD movements.
- The company paid $59.9m in distributions during the first nine months, including $43.8m to common stockholders, compared with $39.3m of common-stockholder FFO. Management cautions that distributions can exceed operating cash flow or FFO and may require financing or other sources. The SRP remains restricted to specified hardship circumstances; about $7.0m of redemption requests were payable at September 30 and were fulfilled in October.
- Series A preferred stock has a $203.2m liquidation preference, ranks ahead of common stock and carries a 6.25% initial dividend rate. Its redemption eligibility begins on or after October 29, 2024, subject to terms. These preferred distributions weigh on amounts available to common holders.
- Subsequent to quarter-end, the company and SmartCentres closed a CAD $70m JV term loan at a fixed 6.21%, principally refinancing allocated SmartCentres financing. SmartStop and SmartCentres each guarantee 50% of the secured obligations. SmartStop also entered into a sponsor funding agreement for SST VI, including an estimated $6m cash reimbursement and issuance of subordinated convertible units; the maximum commitment could be approximately $70m if the offering assumptions described in the filing are met.
- The company reported compliance with debt covenants, effective disclosure controls, no material legal proceedings, and no material changes to previously disclosed risk factors. Management reported no real-property impairment losses for the nine-month period.
Important facts for investors to verify
- Debt maturity and refinancing plans, particularly the $370.9m of scheduled 2024 principal and the revolver’s March 2024 maturity.
- Whether higher borrowing costs, leverage and variable-rate exposure affect interest expense, covenant headroom and access to credit.
- Same-store occupancy, rent growth and operating-cost trends, especially property insurance, taxes and payroll.
- Distribution coverage and funding sources, including the gap between common distributions and common-stockholder FFO, and SRP limitations or pending redemptions.
- Exposure to affiliated Managed REITs, including outstanding loans and receivables, the SST VI sponsor funding commitment, and potential conflicts of interest.
- Canadian JV debt and guarantees, development funding needs, and foreign-exchange exposure. The filing’s principal maturity table covers consolidated debt; JV financing obligations should be assessed separately.