SmartStop Self Storage REIT, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2019. SmartStop owns and operates self-storage facilities in the United States and Canada. The period reflects the January acquisition of Strategic Storage Growth Trust (SSGT) and, from June 28, the company’s transition to self-management through the Self Administration Transaction.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $26.0 million | $20.0 million | $49.9 million | $39.9 million |
| Operating income | $0.8 million | $3.4 million | $2.7 million | $7.3 million |
| Net loss attributable to common stockholders | $2.2 million | $1.4 million | $11.1 million | $2.1 million |
| Net loss per share, Class A and T | $0.04 | $0.02 | $0.19 | $0.04 |
| Cash from operations | — | $3.9 million | $10.4 million |
- Q2 revenue increased approximately 30% year over year; six-month revenue increased approximately 25%. The increase primarily reflects SSGT’s 28 operating facilities, acquired in January 2019.
- Operating margin was approximately 3% in Q2 2019 versus 17% in Q2 2018, based on reported operating income and revenue. Higher depreciation, amortization, property costs, and affiliate fees contributed to the decline; affiliate management fees ceased prospectively after the June self-administration transaction.
- Six-month same-store property operating income fell 1.8% as reported. Management’s adjustments for lease-accounting presentation and currency indicate a 1.2% decline; same-store revenue was broadly flat as reported. Q2 same-store property operating income rose 1.2% as reported.
- At June 30, total assets were $1.279 billion, total liabilities $861.7 million, and equity $381.7 million. Cash and cash equivalents were $14.8 million, with an additional $6.6 million of restricted cash.
- Debt, net, was $798.8 million, up from $406.1 million at year-end 2018. The company reported a weighted-average interest rate of approximately 5.1%, and compliance with debt covenants. Debt included approximately $302.5 million of fixed-rate and $506.5 million of variable-rate debt. A 100-basis-point increase in applicable variable rates was estimated to reduce annual earnings and cash flows by approximately $1.1 million.
- Six-month distributions totaled $17.1 million, including reinvested distributions. Sources were operating cash flow (23%), financing (30%), and distribution-reinvestment proceeds (47%). Cash distributions to common stockholders and Operating Partnership unitholders totaled approximately $9.1 million.
Material changes versus the prior comparable period
- The SSGT merger increased the portfolio to 111 operating facilities and one facility under development, spanning 17 states and Ontario. The acquired portfolio was not fully stabilized; management reported that SSGT facilities had approximately 78% physical occupancy at acquisition.
- The SSGT merger financing and other borrowing increased debt and interest costs. Six-month interest expense was $18.3 million versus $8.8 million; debt issuance cost amortization was $1.9 million versus $0.6 million.
- Six-month operating cash flow decreased by $6.5 million to $3.9 million. Investing cash outflow was $346.4 million, primarily reflecting cash consideration for the SSGT merger; financing cash inflow was $350.1 million, largely from debt issuance.
- On June 28, the company acquired its former sponsor’s self-storage advisory, asset-management and property-management businesses, related personnel, brands, and Tenant Programs interests. It recorded provisional goodwill of $78.4 million, trademarks of $19.8 million, a $30.9 million contingent earnout liability, and a one-time $8.0 million gain from remeasuring previously held Tenant Programs interests.
- For the six months, the reported loss also included $1.5 million of debt-extinguishment loss and $1.5 million of self-administration transaction expenses. These items, and the $8.0 million gain, affect comparisons of underlying performance.
Outlook, risks, contingencies and unusual items
- Management expects the acquired SSGT properties to improve over the next 24–36 months and become accretive to MFFO and cash flow; it cautioned that MFFO was diluted in the current quarter by the merger and increased debt. Lease-up of the acquired properties and the Toronto development may weigh on occupancy in the near term.
- No specific full-year revenue or earnings guidance is provided. Management expects Managed REIT Platform revenues and related expenses to increase during 2019 as the company recognizes a full period of activity and managed portfolios grow.
- Management warns that distributions may exceed operating cash flow and may be funded by borrowing or distribution-reinvestment proceeds. The six-month distribution amount exceeded FFO, which was negative $1.1 million. This can reduce capital available for investment or increase interest expense.
- Debt maturities are concentrated: approximately $407.1 million of principal is scheduled in 2022. Management expects to address near-term maturities through extensions or other financing. Subsequent to quarter-end, the company borrowed additional amounts for a property acquisition and other purposes.
- Key risks include the company’s new self-managed operating model, execution and integration of acquired businesses, variable interest rates, Canadian-dollar exposure, potential impairment of acquired goodwill and intangible assets, and dependence on Managed REIT fee revenue. The $10.66 estimated share value is based on a valuation as of March 31, 2019 and may not equal realizable sale value.
- A proposed sale of the San Antonio II property for approximately $16.1 million remained subject to contingencies, with an estimated Q4 2019 closing. The filing reports no material legal proceedings and no impairment losses for the periods presented.
Important facts for investors to verify
- Whether SSGT properties achieve the occupancy, revenue, NOI and cash-flow improvement management expects, and how the Toronto development and Gilbert acquisition affect results.
- Debt repayment, refinancing and covenant capacity, especially the 2022 maturity concentration, variable-rate exposure, and the required paydown schedule on the KeyBank Tenant Program Loan.
- Whether distributions become better supported by recurring operating cash flow rather than borrowing and DRP proceeds.
- Final purchase accounting for the Self Administration Transaction, including the contingent earnout, goodwill allocation, and potential impairment exposure.
- Actual cost savings and operating results from self-management, and the sustainability and collectability of Managed REIT Platform fees.
- How the estimated $10.66 per-share value compares with later valuations and any realizable proceeds; the filing notes that share redemptions are subject to material limits.