Business context and reporting period
SmartStop Self Storage REIT, Inc. is a self-managed self-storage REIT. This unaudited Form 10-Q covers the three and six months ended June 30, 2020; financial amounts below are in U.S. dollars. At quarter-end, the company owned 112 facilities in 17 U.S. states and the Greater Toronto Area. Results are not directly comparable with 2019 because the SSGT merger and self-administration transaction occurred during 2019.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $29.5 million | $26.0 million | $59.8 million | $49.9 million |
| Operating income (loss) | $2.0 million | $0.8 million | $(29.1) million | $2.7 million |
| Net loss | $(7.1) million | $(2.3) million | $(44.8) million | $(11.2) million |
| Net loss attributable to common stockholders | $(8.5) million | $(2.2) million | $(43.6) million | $(11.1) million |
| Net cash from operating activities | Not presented quarterly | $14.2 million | $3.9 million |
- Q2 self-storage revenue was $26.1 million, up 0.9%. Same-store revenue declined 0.3%; same-store property operating income rose 7.2% to $16.4 million, helped by lower property expenses, including the elimination of external management fees.
- For the six months, operating expenses included $36.5 million of goodwill and intangible-asset impairment and $4.4 million of impairment of Managed REIT investments. A $6.7 million contingent-earnout adjustment partially offset expenses. No impairment of real estate assets was recorded.
- At June 30, cash and cash equivalents were $50.0 million and restricted cash was $8.1 million, versus combined cash and restricted cash of $68.6 million at year-end. Total assets were $1.24 billion and total equity was $272.0 million.
- Debt, net, was $710.1 million: approximately $302 million fixed-rate and $413 million variable-rate debt before net debt premium and issuance-cost adjustments. The weighted-average interest rate, excluding hedging, was approximately 3.74%. The company reported compliance with debt covenants.
- Six-month distributions totaled $24.2 million, including common, preferred and Operating Partnership distributions and amounts reinvested. Operating cash flow funded 59% of that total; DRP proceeds funded 33% and cash on hand 8%. Six-month FFO attributable to common stockholders was a loss of $26.5 million; FFO, as adjusted, was $2.8 million. These are non-GAAP measures and are not cash available for distributions.
Material changes versus the prior comparable period
- Q2 total revenue increased 13.4%, while self-storage revenue grew only 0.9%; six-month total revenue increased 19.9%, reflecting full-period contributions from properties and the Managed REIT Platform acquired or brought in-house during 2019.
- The six-month net loss widened substantially, primarily due to the Managed REIT-related impairment charges. Excluding those and other adjustments, management reported six-month FFO, as adjusted, of $2.8 million, compared with $1.9 million in 2019.
- Six-month operating cash flow rose to $14.2 million from $3.9 million. Investing cash outflow fell to $7.4 million from $346.4 million, largely because 2019 included the SSGT merger consideration. Financing cash flow was a $17.0 million outflow versus a $350.1 million inflow in 2019, when substantial debt financing was raised.
- Same-store average physical occupancy for the six-month comparison was 89.1%, up from 88.5%; annualized revenue per occupied square foot was $15.86 versus $15.74. Q2 same-store occupancy was 89.7% versus 89.5%.
Outlook, commentary, risks and unusual items
- Management said COVID-19 reduced move-in activity, late-fee revenue and rental rates for new customers, and led the company to pause existing-customer rate increases and auctions. Same-store move-ins declined 5% in Q2 (including a 22% decline in April), move-outs declined 12%, and late fees fell about 35% year over year. Approximately 96% of rent billed was collected in the same month, effectively unchanged year over year. The company reported no significant change in collections to date but warned that prolonged economic stress could increase bad debts and weaken demand.
- COVID-19 safety measures increased property expenses. Some auctions and late-fee practices resumed on a modified basis in certain jurisdictions beginning in June. Management said the duration and financial impact of the pandemic remain uncertain.
- The Managed REITs suspended their offerings effective April 30, 2020, amid market disruption and broker-dealer sales pauses. This reduced projected fundraising and contributed to impairments of Managed REIT contracts, trademarks, goodwill and investment interests. Management expects platform expenses to decline as services under its administrative-services agreement decrease; future platform revenue also depends in part on the Managed REITs’ assets and operations.
- A Canadian CitiBank loan of approximately $81.6 million, translated to U.S. dollars, matured October 9, 2020, with extension options. Management intended to extend it or refinance it. The May 2020 amendment to another secured loan raised the REIT-level liquidity covenant from $10 million to $15 million and added a REIT-level debt-service-coverage covenant.
- The share redemption program was completely suspended effective April 29, 2020; approximately $1.3 million of requests during the first half were not fulfilled. The board changed common-distribution authorizations from quarterly to monthly to retain flexibility during COVID-19. The reported daily distribution rate for common shares was approximately $0.00164 per share; Class T distributions are lower after servicing fees.
- Series A preferred stock carries a 6.25% initial dividend rate, senior to common stock, and approximately $152.4 million in liquidation preference at June 30. The company had an option, subject to limitations, to draw up to $50 million more under its preferred-stock commitment.
- The estimated $10.40 common-share value was based on a December 31, 2019 valuation, before COVID-19 emerged in the United States. The company cautioned that this estimate may not reflect realizable value and is not updated more than annually. No formal earnings guidance was provided.
Important facts for investors to verify
- Whether the Canadian loan was extended or refinanced at maturity, and the company’s ongoing compliance with the amended liquidity and coverage covenants.
- How rent collections, occupancy, move-ins, move-outs, asking rents and bad-debt expense develop as pandemic conditions and local restrictions change.
- Whether the Managed REIT offerings resume, how their fundraising and assets under management evolve, and whether additional impairments or contingent-earnout fair-value changes occur.
- How distributions are funded going forward, given first-half distributions exceeded operating cash flow and the redemption program remains suspended.
- Whether the $10.40 estimated share value remains representative in light of its pre-pandemic valuation date and the illiquidity of the shares.