SmartStop Self Storage REIT, Inc. — Q1 2023 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. SmartStop owns and operates self-storage properties and manages investment programs for affiliated Managed REITs. At quarter-end, it wholly owned 153 facilities with approximately 103,000 units and 11.8 million rentable square feet; its 50% interests in Canadian ventures included 11 properties or development sites.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Total revenue | $57.1 million | $48.0 million | Up 19.1% |
| Self-storage and ancillary revenue | $53.5 million | $45.0 million | Up approximately 19% |
| Income from operations | $16.9 million | $11.6 million | Up approximately 46% |
| Consolidated net income | $2.0 million | $3.3 million | Down approximately 38% |
| Net loss attributable to common stockholders | $1.4 million | $0.2 million | Loss per share: $0.02 vs. approximately $0.00 |
| Net cash from operations | $15.9 million | $15.6 million | Up $0.3 million |
| Cash, cash equivalents and restricted cash | $33.4 million | $43.5 million | Down $10.1 million year over year |
- Property performance: Same-store revenue rose 8.9% to $45.9 million and same-store NOI rose 6.9% to $31.7 million. Average same-store occupancy declined 1.9 percentage points to 93.1%, while annualized rent per occupied square foot increased 11.7% to $19.84. Property operating expenses rose 13.3% on a same-store basis.
- Margins and costs: Property operating expenses were 30.9% of self-storage revenue, compared with 29.1% a year earlier. Total operating expenses increased to $40.2 million from $36.4 million. Interest expense nearly doubled to $14.7 million from $7.6 million.
- FFO: FFO attributable to common stockholders was $12.2 million, down from $13.0 million. FFO, as adjusted, was $12.8 million versus $14.1 million. Management attributed the decline primarily to higher interest expense and, to a lesser extent, higher G&A.
- Debt: Debt, net, was $1.081 billion at March 31, 2023, versus $1.068 billion at December 31, 2022. Approximately $442 million was fixed-rate and $643 million variable-rate; the weighted average rate excluding hedges was approximately 5.82%. The company reported compliance with debt covenants. The credit-facility revolver had $393.2 million drawn of $450 million current capacity, with the company reporting remaining availability.
- Liquidity and maturities: Cash from operations was below cash distributions paid of $19.8 million; the company funded the $3.9 million difference from cash on hand. Principal payments are concentrated in 2024 ($395.9 million) and 2026 ($341.9 million). A 100-basis-point increase in variable rates was estimated to reduce annual earnings and cash flows by approximately $1.9 million, net of derivatives.
Material changes and unusual items
- Revenue growth reflected approximately $3.7 million of same-store revenue growth and approximately $3.9 million from ten facilities acquired in the June 2022 SSGT II merger. The merger also ended SSGT II management-fee revenue.
- On March 31, 2023, the leverage ratio for the $150 million 2032 private placement notes exceeded the 7.00-to-1.00 threshold. Their interest rate consequently increased prospectively by 75 basis points, from 4.53% to 5.28%, until the leverage condition is met for two consecutive quarters.
- Investing cash outflows included $15 million funded to SST VI as a mezzanine loan and $15 million as preferred equity, partly offset by a $17.5 million SSGT III mezzanine-loan repayment. After quarter-end, SST VI repaid the loan and redeemed the preferred investment for approximately $51.7 million and $15.1 million, respectively; SmartStop used proceeds to pay down $70 million on its revolver on May 3, 2023.
- The DRP was reinstated and the SRP partially reinstated on March 16, 2023. Redemptions remain limited to qualifying circumstances, and approximately $4.7 million of Q1 requests were fulfilled in April. The board declared common distributions of approximately $0.00164 per share per day for April and May 2023.
Outlook, risks and contingencies
- No numerical full-year earnings or revenue guidance is provided. Management expects demand and operating results to continue normalizing after pandemic-era strength, and notes inflation, higher interest rates, tighter monetary policy and slower housing activity could weaken demand. It expects future revenue to depend on same-store performance, occupancy and rental rates, acquisitions, and Managed REIT activity.
- Management says higher borrowing costs and the fact that acquisition capitalization rates have not risen as much as interest rates may constrain accretive acquisitions. Nearly 44% of March rental income came from Florida (23.1%), California (20.2%) and the Greater Toronto Area (9.9%), creating geographic and Canadian-dollar exposure.
- The company reported approximately $88.0 million of SmartCentres venture financing outstanding in U.S. dollars; it is a 50% recourse guarantor. Those loans carried an approximately 7.1% rate and matured May 2024, with extension options. The filing reports covenant compliance.
- Common distributions exceeded quarterly FFO attributable to common stockholders. Management cautions that distributions may be funded from cash, debt or other sources and could reduce funds available for investment or increase interest costs. Preferred stock ranks senior to common stock, has a 6.25% initial dividend rate and represents approximately $203.1 million of liquidation preference.
- Other disclosed risks include competition, property-tax and insurance increases, interest-rate and foreign-exchange volatility, related-party conflicts, Managed REIT investments, cybersecurity and environmental liabilities, and maintaining REIT qualification. The company reported no material legal proceedings and no real estate impairment losses for the quarter.
Key facts for investors to verify
- Track variable-rate exposure, revolver availability, the 2024 and 2026 maturities, and whether the leverage-triggered 2032 note rate returns to 4.53%.
- Assess whether same-store rent growth can offset lower occupancy and faster growth in operating expenses, especially taxes, insurance and compensation.
- Reconcile distribution coverage against FFO and operating cash flow, and monitor the limited SRP terms and any future changes in distributions.
- Review the terms, repayment status and credit exposure of loans and preferred investments to Managed REITs, as well as the SmartCentres venture guarantee.
- Consider that FFO and adjusted FFO are non-GAAP measures and are not substitutes for GAAP earnings or cash available for distributions; compare definitions and reconciliations when evaluating performance.