Smartstop Self Storage REIT, Inc. quarterly report, Q1 FY2021

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SmartStop Self Storage REIT, Inc. — Q1 2021 Form 10-Q

Reporting period: Three months ended March 31, 2021; financial statements are unaudited. SmartStop is a self-managed self-storage REIT with a Managed REIT Platform. Following its March 17 merger with SST IV, it owned 136 operating facilities in 18 U.S. states and Ontario, plus 50% interests in six Canadian real estate ventures.

Financial performance and liquidity

  • Revenue: $34.6 million, up 14.1% from $30.3 million. Self-storage revenue was $31.1 million, up 16.2%; Managed REIT Platform revenue was $2.3 million.
  • Property performance: Same-store revenue grew 9.7% and property operating income rose 14.2%. Same-store average occupancy increased to 93.1% from 88.7%; annualized rent per occupied square foot was $15.43, versus $14.90.
  • Profit and margins: Operating loss was $2.7 million versus a $31.1 million loss in Q1 2020; net loss was $12.3 million versus $37.7 million. Net loss attributable to common stockholders was $13.9 million, or $0.22 per share, compared with $35.1 million, or $0.59 per share. The prior-year loss included $36.5 million of goodwill and intangible impairment and $4.4 million of Managed REIT investment impairment. Q1 2021 included an $8.4 million write-off related to the SST IV merger and a $2.4 million debt-extinguishment loss.
  • Funds from operations: FFO attributable to common stockholders was negative $6.1 million, versus negative $26.6 million. Management’s non-GAAP FFO, as adjusted, was $4.8 million, versus $1.6 million.
  • Cash flow: Operating cash flow was $4.7 million, up from $3.7 million. Investing used $52.8 million, primarily reflecting the merger and property purchases; financing provided $6.5 million. Cash and cash equivalents were $30.4 million and restricted cash was $8.8 million at quarter-end.
  • Debt and liquidity: Debt, net, was $822.5 million, compared with $718.0 million at year-end 2020. It included approximately $341.8 million fixed-rate and $484.4 million variable-rate debt; the weighted-average rate, excluding hedging effects, was 3.22%. The new $500 million KeyBank facility comprises a $250 million revolver and $250 million term loan. Approximately $435 million was drawn at quarter-end. The company reported covenant compliance.

Material changes versus the prior comparable period

  • The SST IV merger added 24 facilities, approximately 2.0 million rentable square feet, and six 50%-owned Canadian joint ventures. Approximately 23.1 million Class A shares were issued; total consideration was approximately $286.0 million.
  • The new credit facility refinanced debt in connection with the merger. The company also paid off SST IV and other existing loans, recording a $2.4 million extinguishment loss.
  • Self-storage revenue growth reflected stronger same-store performance and merger-related properties. Same-store operating expenses rose 1.2%, slower than revenue growth.
  • Managed REIT fees and reimbursements are expected to decline following the merger because SmartStop no longer provides advisory and property-management services to SST IV.

Outlook, risks, contingencies and unusual items

  • Management said customer demand returned to at or above normalized levels during the second half of 2020 and continued into Q1 2021, supporting higher occupancy and rental rates. It expects the SST IV merger to be accretive to adjusted FFO as acquired properties lease up and Canadian ventures develop; this is a management expectation, not a guarantee.
  • COVID-19 remains a risk: renewed restrictions or economic weakness could reduce demand or collections. Management reported no significant change in rent collections to date but cautioned that prolonged economic stress could increase bad debt.
  • The company reported a net loss attributable to common stockholders of approximately $13.9 million for the quarter and an accumulated deficit of approximately $155.4 million. It stated that 2021 profitability is uncertain.
  • Distributions paid in Q1 totaled $13.1 million, funded 36% by operating cash flow, 35% by cash on hand and 29% by the distribution reinvestment plan. Distributions exceeded FFO; the filing warns they may be funded from sources other than operations. The declared Q2 rate was approximately $0.00164 per share per day; Class T distributions are lower after servicing fees.
  • The share redemption program remains largely suspended, except for specified circumstances such as death, qualifying disability, long-term care or other exigent circumstances. Q1 requests of approximately $0.7 million were fulfilled in April.
  • Series A preferred stock has a 6.25% initial annual dividend rate and a quarter-end liquidation preference of approximately $203.1 million. Its dividends rank ahead of common distributions and the rate can increase if not redeemed after the fifth anniversary.
  • Variable-rate debt creates rate exposure: management estimated a 100-basis-point increase in underlying rates would reduce annual earnings and cash flows by approximately $2.2 million. Canadian operations also face currency risk despite hedging.
  • Management reported no legal proceedings expected to have a material adverse effect and no material changes to internal controls. It cautioned that acquisition valuations, contingent earnout estimates and impairment assessments rely on significant judgment.

Important facts for investors to verify

  • Whether the SST IV properties achieve the occupancy, rental-rate and adjusted-FFO contribution assumed in management’s outlook, and how much recurring growth offsets the loss of SST IV platform fees.
  • Quarterly cash available after interest, capital spending and preferred dividends, and whether common distributions can increasingly be funded from operations rather than cash reserves or reinvested proceeds.
  • Revolver availability, debt maturities and covenant headroom, particularly the 2024 revolver maturity and the company’s substantial variable-rate exposure.
  • Progress in leasing and developing the six Canadian joint ventures, the status of their financing and guarantees, and the effects of CAD exchange-rate movements.
  • Changes to the suspended redemption program, the preferred stock’s dividend and redemption terms, and any subsequent share issuance or debt drawdowns.