Smartstop Self Storage REIT, Inc. quarterly report, Q3 FY2021

Full document

SmartStop Self Storage REIT, Inc. — Q3 2021 Form 10-Q

Business context and period: Unaudited results for the three and nine months ended September 30, 2021. SmartStop owns and operates self-storage facilities and sponsors a platform managing other REITs. At quarter-end it owned 138 facilities across 18 U.S. states and Ontario, with about 91,090 units, 10.5 million rentable square feet and 95.5% physical occupancy. It also held 50% interests in six Canadian real-estate ventures.

Financial highlights

  • Revenue: Q3 total revenue was $44.9 million, up 43% from $31.4 million. Nine-month revenue was $121.8 million, up 34% from $91.1 million. Self-storage revenue drove growth; Managed REIT Platform revenue declined.
  • Profitability: Q3 net income was $1.1 million, compared with a $4.5 million net loss a year earlier. After preferred distributions and noncontrolling interests, the loss attributable to common stockholders was $2.2 million, or $0.03 per share, versus a $6.3 million loss, or $0.10 per share. Nine-month common-stockholder loss was $20.0 million, or $0.26 per share, versus $49.8 million, or $0.84 per share.
  • Property performance: Q3 same-store revenue rose 19.4% and same-store NOI rose 28.1%; same-store average physical occupancy was 95.9%, versus 91.7%. For the first nine months, same-store revenue rose 16.9% and NOI rose 23.7%. Company-wide Q3 NOI was $30.1 million versus $18.3 million; nine-month NOI was $78.5 million versus $52.3 million.
  • Adjusted FFO: FFO, as adjusted, attributable to common stockholders was $11.8 million in Q3 versus $3.5 million; nine-month adjusted FFO was $25.0 million versus $6.3 million. These non-GAAP measures exclude specified items and are not equivalent to cash available for distributions.
  • Cash flow and liquidity: Nine-month operating cash flow was $42.7 million, up from $22.5 million. Investing used $101.4 million, principally for the SST IV merger and acquisitions; financing provided $15.9 million. Cash and cash equivalents were $29.2 million and restricted cash was $8.5 million at September 30.
  • Debt: Reported debt, net, was $848.8 million, up from $718.0 million at year-end 2020; the weighted-average debt rate was approximately 3.04%. Debt included about $341 million fixed-rate and $511 million variable-rate borrowings. Management reported compliance with debt covenants. A 100-basis-point rise in variable rates was estimated to reduce annual earnings and cash flow by about $4.1 million.
  • Capital and preferred stock: Total equity was $430.2 million. Series A preferred stock had a $203.2 million liquidation preference and a 6.25% initial annual dividend rate. Common distributions paid in the first nine months totaled $19.0 million, with another $14.2 million reinvested through the distribution plan.

Material changes versus prior period

  • The March 17, 2021 SST IV merger added 24 wholly owned facilities and interests in six Canadian joint ventures. Approximately 23.1 million Class A shares were issued as merger consideration. The merger materially expanded the portfolio and affects year-over-year comparability.
  • Same-store operating gains reflected higher rents and occupancy. Company-wide Q3 occupancy was 95.6%, versus 90.9% a year earlier.
  • Q3 property operating expenses increased 28%, less than the 52% increase in self-storage revenue; expenses were 29.5% of self-storage revenue versus 34.9% a year earlier.
  • Managed REIT Platform revenue decreased to $1.3 million in Q3 from $2.1 million, primarily because SmartStop acquired SST IV and no longer earns its former management fees.
  • Debt refinancing and repayment activity accompanied the merger. The company recorded a $2.4 million nine-month loss on extinguishment of debt. The prior-year period included $36.5 million of goodwill and intangible impairment and $4.4 million of Managed REIT investment impairment, contributing to the large improvement in reported losses.

Outlook, risks and unusual items

  • Management said storage demand recovered to at or above normalized levels in the second half of 2020 and continued into 2021, supported by work-from-home trends, migration and housing-market strength. It expects SST IV assets and Canadian joint ventures to contribute to growth, while noting results may normalize as comparisons change. No quantified earnings or revenue guidance is provided.
  • On October 7, 2021, after quarter-end, the revolving credit commitment increased by $200 million to $450 million, bringing total facility commitments to $700 million, with potential accordion capacity up to $1.05 billion subject to conditions. The company also reported subsequent property acquisitions and purchase agreements; completion of certain proposed acquisitions was not assured.
  • Common-share redemptions remained suspended except for specified hardship circumstances. The board set an estimated NAV of $15.08 per share in October 2021, based on a June 30 valuation; the prior estimate was $10.40. Management cautioned that NAV is an estimate and may not equal realizable sale value.
  • Management said COVID-19’s largest operating impact occurred in Q2 2020, but future effects from restrictions, economic weakness or changing conditions remain uncertain. Other key exposures include interest-rate and Canadian-dollar movements, acquisition and valuation assumptions, competition, and maintaining REIT qualification.
  • Distributions are discretionary and may exceed operating cash flow. In the first nine months of 2021, reported distributions totaled $46.9 million, funded 91% by operating cash flow and 9% by distribution-reinvestment proceeds. Preferred dividends rank ahead of common distributions.
  • The filing reports no legal proceedings expected to have a material adverse effect, and management concluded disclosure controls were effective at quarter-end.

Investor verification priorities

  • Review same-store revenue, occupancy, rental-rate trends and NOI, separately from merger-driven portfolio growth.
  • Reconcile GAAP losses to adjusted FFO and assess the recurring versus nonrecurring components of the improvement.
  • Check variable-rate debt exposure, interest-rate hedges, maturities, covenant headroom and use of the expanded credit facility.
  • Assess whether distributions are sustainably covered by operating cash flow and the implications of preferred dividends and the suspended redemption program.
  • Verify the assumptions, date and limitations underlying the $15.08 estimated NAV, and distinguish it from a market price or guaranteed redemption value.
  • Track the performance, financing obligations and completion status of the Canadian joint ventures and announced or proposed acquisitions.