SmartStop Self Storage REIT, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The unaudited results are not necessarily indicative of full-year performance.
Business context
SmartStop owns and operates self-storage properties and sponsors and manages other self-storage REITs. At quarter-end, it wholly owned 138 operating properties across 18 U.S. states and Ontario, totaling approximately 91,000 units and 10.5 million rentable square feet. It also held 50% interests in six Canadian real-estate ventures. The March 17, 2021 merger with SST IV added 24 properties and six joint ventures; SST IV shareholders received approximately 23.1 million Class A shares. SST VI OP ceased to be consolidated on May 1, 2021.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $42.3 million | $29.5 million | $76.8 million | $59.8 million |
| Operating income (loss) | $6.9 million | $2.0 million | $4.2 million | ($29.1 million) |
| Net loss | ($1.3 million) | ($7.1 million) | ($13.6 million) | ($44.8 million) |
| Net loss attributable to common stockholders | ($3.9 million) | ($8.5 million) | ($17.8 million) | ($43.6 million) |
| Net loss per common share | ($0.05) | ($0.14) | ($0.24) | ($0.74) |
| Cash flow from operations | Not presented here for Q2 alone | $21.6 million | $14.2 million |
Q2 self-storage revenue was $40.1 million, up 54% year over year, reflecting both the SST IV merger and stronger same-store performance. Same-store revenue rose 21.5% and property operating income rose 28.7%; same-store occupancy increased to 95.8% from 89.7%, and annualized rent per occupied square foot increased to $16.50 from $14.38. Q2 property operating income was $27.7 million, approximately 69% of self-storage revenue. Six-month property operating income was $48.4 million, versus $34.0 million a year earlier.
FFO attributable to common stockholders was $2.4 million for the first half, compared with a loss of $26.5 million in 2020; adjusted FFO was $13.2 million versus $2.8 million. These are non-GAAP measures and should not be treated as cash available for distributions.
At June 30, assets were $1.62 billion, total liabilities $910.6 million, and equity $444.9 million. Debt, net of issuance costs and premium, was $849.2 million, including approximately $341.7 million fixed-rate and $511.1 million variable-rate principal. The weighted average debt rate, excluding hedging effects, was approximately 3.05%. Cash and cash equivalents were $26.6 million, with restricted cash of $7.3 million. The $500 million credit facility had approximately $457 million drawn; the filing states the company complied with debt covenants.
Material changes versus prior periods
- Revenue growth was substantially acquisition-driven as well as supported by same-store improvement; the periods are not directly comparable following the SST IV merger and SST VI deconsolidation.
- First-half operating cash flow increased $7.5 million year over year. Investing cash use rose to $98.3 million, largely due to the merger and property purchases; financing provided $29.7 million, compared with $17.0 million used in the prior-year period.
- Cash, cash equivalents and restricted cash fell $46.8 million during the first half, ending at $33.9 million combined.
- First-half 2020 included $36.5 million of goodwill and intangible impairments and $4.4 million of Managed REIT investment impairment. First-half 2021 instead included an $8.4 million write-off of SST IV preexisting relationships and equity interests and a $2.4 million loss on debt extinguishment.
Outlook, risks and unusual items
- Management expects the SST IV merger to be accretive to adjusted FFO, citing lower cost of capital, property lease-up and growth in the Canadian joint ventures. This is an expectation, not quantified earnings guidance; the filing provides no specific full-year financial guidance.
- Management says self-storage demand recovered to or above normalized levels in the second half of 2020 and continued into 2021, supported by housing-market strength, work-from-home patterns and migration. It cautions that same-store growth comparisons are expected to normalize as prior-year comparisons change.
- COVID-19, economic weakness, governmental restrictions, new competing supply, acquisition execution and occupancy/rent trends remain risks. California, Florida and the Greater Toronto Area accounted for approximately 21%, 21% and 12% of June rental income, respectively.
- Variable-rate debt creates rate exposure: management estimated a 100-basis-point increase in the underlying index would reduce annual earnings and cash flow by approximately $2.5 million. Canadian operations also create foreign-exchange exposure, partly hedged with derivatives.
- Common distributions are not fully covered by reported cash from operations: first-half total distributions were $29.6 million, of which 73% was sourced from operating cash flow and 27% from distribution-reinvestment proceeds. Cumulative distributions since inception were approximately $212 million versus cumulative FFO of approximately $5.0 million. The share redemption program remains suspended except for limited qualifying circumstances.
- Series A preferred stock has priority over common equity, a 6.25% initial annual dividend rate and approximately $203.1 million aggregate liquidation preference at quarter-end. The common distribution declared for Q3 2021 was approximately $0.00164 per share per day.
- The contingent earnout liability was $19.9 million at quarter-end and depends on assets-under-management thresholds and other terms. The filing reports no legal proceedings expected to have a material adverse effect and no material subsequent events.
Important facts for investors to verify
- How much of revenue and same-store growth reflects sustainable rent and occupancy gains versus the SST IV acquisition and changing portfolio composition.
- Current credit-facility availability, variable-rate exposure, hedging coverage, covenant headroom and the large scheduled 2024 debt maturities.
- Whether operating cash flow can support common distributions after preferred dividends, capital expenditures and debt service, given reliance on reinvestment proceeds.
- The status of the share redemption program and the practical liquidity available to stockholders.
- Progress on SST IV property lease-up and the development, financing and potential returns of the six Canadian joint ventures.
- The assumptions behind adjusted FFO, contingent earnout valuation and merger accretion; reconcile non-GAAP measures to GAAP results and cash flows.