Business context and reporting period
SmartStop Self Storage REIT, Inc. is a self-managed, fully integrated self-storage REIT. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020. At quarter-end, the company owned 112 facilities in 17 U.S. states and Ontario, totaling approximately 8.24 million rentable square feet; portfolio physical occupancy was 91.6%. Results include self-storage operations and the Managed REIT Platform. Comparisons are affected by the 2019 SSGT merger and June 2019 self-administration transaction.
Financial and operating metrics
| Metric | Q3 2020 / September 30, 2020 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $31.4 million | $29.6 million in Q3 2019 |
| Operating income | $4.4 million | $1.8 million in Q3 2019 |
| Net loss attributable to common stockholders | $6.3 million; $0.10 per share | $8.2 million; $0.14 per share in Q3 2019 |
| Nine-month revenue | $91.1 million | $79.5 million in 2019 |
| Nine-month net loss attributable to common stockholders | $49.8 million; $0.84 per share | $19.3 million; $0.33 per share in 2019 |
| Cash from operating activities | $22.5 million for nine months | $8.1 million in 2019 |
| Cash, cash equivalents and restricted cash | $46.5 million | $68.6 million at December 31, 2019 |
| Debt, net | $712.8 million | $712.7 million at December 31, 2019 |
| Total assets | $1.23 billion | $1.31 billion at December 31, 2019 |
- Q3 self-storage revenue was $28.1 million, up 4.8% year over year. Same-store revenue grew 3.3%; same-store property operating income rose 4.7% to $17.5 million. Same-store occupancy was 91.7%, versus 89.8%.
- Managed REIT Platform revenue was $2.1 million in Q3, up 72% year over year, primarily due to higher assets under management. Reimbursable costs are recorded in both revenue and expense.
- For the nine months, operating cash flow was $22.5 million, investing cash outflow $18.6 million, and financing cash outflow $25.9 million. Capital expenditures and development additions were principal investing uses.
- Q3 FFO, as adjusted, was $3.5 million, compared with $1.7 million in Q3 2019; nine-month FFO, as adjusted, was $6.3 million, compared with $3.6 million. These are non-GAAP measures and are not a substitute for GAAP results or cash available for distributions.
- Debt included approximately $301.7 million fixed-rate and $415.4 million variable-rate debt before net premiums and issuance costs. The weighted-average rate, excluding hedging, was approximately 3.73%. Principal maturities are concentrated in 2021–2022, including approximately $323.4 million due in 2022. The company reported covenant compliance at September 30.
Material changes versus prior comparable periods
- Q3 net loss narrowed year over year, while operating income and self-storage revenue increased. Nine-month net loss widened substantially, chiefly reflecting $36.5 million of goodwill and intangible impairment and $4.4 million of Managed REIT investment impairment recorded in Q1 2020.
- Same-store revenue increased 2.2% for the nine months; same-store property operating income increased 7.0%. The company attributed revenue pressure to COVID-related suspension of rent increases and reduced late fees, partly offset by higher occupancy and Tenant Program revenue.
- Operating cash flow increased by $14.4 million year over year. The large decline in investing outflow versus 2019 mainly reflects the absence of the prior-year SSGT merger cash consideration; 2019 financing cash flow included substantial merger-related borrowing.
- Cash distributions paid or reinvested totaled $36.7 million for the first nine months, compared with $22.5 million of operating cash flow. The filing states that distributions were funded 61% by operating cash flow, 33% by DRP proceeds and 6% by cash on hand.
Outlook, risks, contingencies and unusual items
- Management reported that self-storage demand, move-ins and asking rates improved in Q3 from Q2, existing-customer rate increases resumed on a modified basis in most markets, and rent collections remained about 96% year over year. It cautioned that future COVID-19 effects on demand, collections, liquidity and results remain uncertain. No quantified company-wide earnings or revenue guidance is provided.
- Managed REIT offerings were suspended effective April 30, 2020 amid pandemic-related fundraising and market disruption. Management impairment assumptions reflected reduced fundraising prospects; further adverse changes in projections or valuation assumptions could lead to additional impairment.
- The share redemption program was fully suspended effective April 29, 2020, then partially reinstated September 23 for death, qualifying disability or long-term-care cases. The company reported that approximately $1.3 million of eligible requests were redeemed on October 30.
- Common distributions were changed from quarterly to monthly authorizations during Q2 for flexibility, then returned to quarterly authorizations beginning Q4. The declared Q4 rate was approximately $0.00164 per share per day; Class T distributions are reduced by servicing fees. Distributions may exceed operating cash flow and could be funded from other sources.
- Series A preferred stock carries a 6.25% initial dividend rate and senior claims to common stock. After quarter-end, the company issued the remaining $50 million commitment to Extra Space Storage LP on October 26, 2020.
- On November 10, 2020, the company agreed to acquire SST IV in a stock-for-stock merger, expected to close in the first half of 2021, subject to SST IV stockholder approval and other conditions. The agreement values SST IV at approximately $370 million and provides for 2.1875 SmartStop Class A shares per SST IV share. Closing is not assured; the transaction would add properties and debt and dilute existing ownership.
- The board’s $10.40 estimated value per common share was based on a December 31, 2019 valuation and does not reflect a valuation following the onset of COVID-19. The filing warns that estimated NAV may differ from realizable sale value.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The company reported no material legal proceedings.
Important facts for investors to verify
- Whether self-storage demand, occupancy, rental rates and collections remain resilient if COVID-related restrictions or economic weakness return.
- Debt maturities and refinancing plans, particularly the 2021–2022 concentration, variable-rate exposure and compliance with amended liquidity and coverage covenants.
- How recurring operating cash flow compares with common and preferred distributions, and the extent to which distributions rely on DRP proceeds, cash balances or financing.
- The assumptions underlying the Managed REIT impairment charges, continued fundraising suspensions, remaining contingent earnout and potential for further impairment.
- Completion terms, stockholder approval and integration effects of the proposed SST IV merger, including pro forma leverage, dilution and acquisition costs.
- The effect of the October 2020 preferred issuance, its senior dividend obligations, and the company’s remaining commitments to invest in SSGT II preferred units.