SmartStop Self Storage REIT, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020 unless otherwise noted. The unaudited statements consolidate the REIT and its subsidiaries. Comparisons are affected by the 2019 SSGT merger and June 2019 transition to a self-managed business.
Business context
SmartStop owned 112 self-storage facilities across 17 U.S. states and Ontario, with 71,705 units and 8.24 million rentable square feet. Reported physical occupancy was 87.4%; excluding properties that were not stabilized, it was 88.8%. The company also operates a Managed REIT Platform, providing advisory, asset- and property-management services to two affiliated REITs.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $30.3 million | $23.9 million |
| Operating income (loss) | $(31.1) million | $1.9 million |
| Net loss attributable to common stockholders | $(35.1) million; $(0.59) per share | $(8.9) million; $(0.15) per share |
| FFO attributable to common stockholders | $(26.6) million | $(0.4) million |
| FFO, as adjusted, attributable to common stockholders | $1.6 million | $1.4 million |
| Net cash provided by operating activities | $3.7 million | $0.9 million |
| Cash and cash equivalents | $54.1 million | $62.3 million at Dec. 31, 2019 |
| Debt, net | $705.9 million | $712.7 million at Dec. 31, 2019 |
Revenue increased 26.9% year over year. Self-storage revenue rose 11.9%, including a full quarter of operations from acquired properties; same-store revenue grew 4.1%. Same-store average physical occupancy was 88.5%, up from 87.9%, and annualized rent per occupied square foot was $16.19 versus $15.71. Self-storage property operating income was $17.0 million, up 19.8%; the corresponding margin was approximately 63.8%, compared with 59.5%.
The net loss included $36.5 million of goodwill and intangible-asset impairment and $4.4 million of impairment on investments in Managed REITs. The contingent earnout fair-value adjustment reduced expense by $7.2 million. These items materially affected GAAP results; FFO and adjusted FFO are non-GAAP measures and are not substitutes for cash flow or net income.
Operating cash flow was $3.7 million; investing activities used $2.8 million, primarily for real-estate additions. Cash, cash equivalents and restricted cash totaled $61.0 million at quarter-end. Cash distributions paid to common stockholders, OP unitholders and preferred stockholders totaled approximately $7.6 million; total distributions, including reinvested distributions, were $11.6 million. The company reported that 32% of total distributions were sourced from operating cash flow, with the remainder funded by cash on hand and DRP proceeds.
Debt included approximately $302.1 million of fixed-rate and $410.0 million of variable-rate debt; weighted-average interest rate was approximately 4.2%. A 100-basis-point increase in applicable rates was estimated to reduce annual earnings and cash flow by approximately $0.9 million. Approximately $79.1 million of principal was scheduled for 2020, including a Canadian loan maturing in October 2020, which the company intended to extend or refinance.
Material changes versus prior period
- Revenue rose, reflecting acquired facilities, same-store growth and Managed REIT Platform revenue that was not present in Q1 2019.
- Operating results moved from income to a substantial loss, principally because of the Managed REIT-related impairments. The filing attributes those impairments to weaker Managed REIT fundraising prospects and revised projections.
- Operating cash flow improved by $2.8 million year over year. Investing and financing cash flows differed sharply from 2019, when the SSGT merger and related financing produced large acquisition and financing cash flows.
- Property operating expenses increased to $9.7 million from $8.2 million; the company cited acquired operations, COVID-related costs and higher compensation. General and administrative expense rose to $3.7 million from $1.7 million, primarily reflecting the self-managed workforce.
Outlook, risks and unusual items
- COVID-19: Management said move-in volumes had declined since late March, partly offset by lower move-outs, while rent collections had not yet changed significantly. It warned that collections, occupancy, revenue, liquidity and results could deteriorate; the duration and extent of impacts were uncertain. The company suspended auctions and existing-customer rent increases from mid-March and suspended certain fees.
- Managed REIT platform: Broker-dealers temporarily halted sales and both Managed REITs suspended offerings effective April 30, 2020. Reduced fundraising led to the reported impairment charges and may constrain platform revenues.
- Liquidity and covenants: On May 8, 2020, the company amended its secured loan, increasing the REIT-level minimum liquidity covenant from $10 million to $15 million and adding a REIT-level debt-service-coverage covenant. It reported compliance with debt covenants for Q1.
- Redemptions and distributions: The company did not fulfill Q1 share-redemption requests and completely suspended its redemption program effective April 29, 2020. The board shifted common distributions to monthly authorization to retain flexibility; April and May 2020 rates were approximately $0.001639 per share per day, with Class T distributions reduced for servicing fees. Future distributions are not assured and may exceed operating cash flow.
- Preferred stock: Extra Space Storage LP purchased $150 million of Series A convertible preferred stock; up to another $50 million was committed at the company’s option, subject to limitations. The preferred dividend initially accrues at 6.25% annually and ranks senior to common stock.
- Valuation: The board approved an estimated $10.40 per-share value for Class A and Class T shares in April, based on a December 31, 2019 valuation that predated the U.S. impact of COVID-19. The filing cautions that this estimate may not equal realizable sale value.
- Guidance: The filing provides no specific earnings or revenue guidance. Management expected SSGT properties to continue progressing toward stabilization and said this could support future revenue and FFO, but noted that timing and outcomes were uncertain.
Important facts for investors to verify
- Liquidity headroom and compliance with the amended $15 million minimum-liquidity covenant and new debt-service-coverage covenant.
- Whether the October 2020 Canadian loan is extended or refinanced, and the company’s ability to meet other scheduled maturities.
- Subsequent rent collections, move-ins, move-outs, occupancy, bad debt and the effects of suspended rent increases, auctions and fees.
- Whether Managed REIT offerings resume, fundraising improves, and further impairments or reductions in platform income occur.
- The cash source and sustainability of common distributions, particularly given distributions exceeded Q1 operating cash flow and redemptions were suspended.
- How COVID-19 affects property values and the relevance of the $10.40 estimated share value, which is based on year-end 2019 information.