SmartStop Self Storage REIT, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Comparisons are with the corresponding 2022 periods.
Business context
SmartStop is a self-managed self-storage REIT with two reportable segments: self-storage operations and its Managed REIT Platform. At quarter-end, it wholly owned 153 facilities across 19 U.S. states and the Greater Toronto Area, totaling about 102,900 units and 11.8 million rentable square feet; portfolio physical occupancy was 93.5%. It also held 50% interests in 11 Canadian real-estate joint ventures and managed 31 properties for its Managed REITs.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 |
|---|---|---|
| Total revenue | $59.6 million | $51.8 million |
| Self-storage rental revenue | $51.7 million | $46.5 million |
| Income from operations | $18.6 million | $25.1 million |
| Net income | $4.3 million | $14.0 million |
| Net income attributable to common stockholders | $0.4 million | $9.1 million |
| Net operating income (NOI) | $35.5 million | $33.1 million |
| FFO, as adjusted, attributable to common stockholders | $13.3 million | $15.0 million |
For the first half, revenue was $116.7 million versus $99.8 million; net income was $6.3 million versus $17.3 million, while common-stockholder results were a loss of $1.0 million versus income of $8.9 million. First-half NOI rose to $70.5 million from $63.3 million, but adjusted FFO attributable to common stockholders fell to $26.1 million from $29.1 million.
- Same-store performance: Q2 revenue increased 5.3% and NOI 1.9%. Average occupancy declined 1.8 percentage points to 93.7%, while annualized rent per occupied square foot rose 8.1% to $19.99. For the first half, same-store revenue grew 7.0% and NOI 4.3%; occupancy fell 1.8 points to 93.4% and rent per occupied square foot increased 9.8% to $19.91.
- Margins and expenses: Property operating expenses rose faster than same-store revenue, increasing 13.7% in Q2 and 13.5% for the first half, primarily from compensation, insurance, property taxes and advertising. Interest expense increased to $14.9 million in Q2 from $8.9 million and to $29.6 million for the first half from $16.4 million. The filing does not present a conventional gross-margin measure.
- Cash flow: First-half operating cash flow was $45.3 million, investing cash flow was $18.2 million provided, and financing cash flow was $67.1 million used. Cash and cash equivalents were $34.1 million at June 30; restricted cash was $8.6 million. Cash, cash equivalents and restricted cash together totaled $42.6 million.
- Debt: Net debt was $1.041 billion at June 30, down from $1.068 billion at year-end 2022. It included approximately $441 million fixed-rate and $603 million variable-rate debt. The weighted-average debt rate, excluding hedges, was about 6.03%; the company reported compliance with debt covenants.
- Liquidity: The $450 million revolver had $353.2 million drawn; the company stated it had the ability to draw the full current revolver capacity under its borrowing-base calculation. The $250 million term loan was fully drawn. The revolver matures March 17, 2024, with a one-year extension option; scheduled principal requirements are concentrated in 2024 ($355.9 million) and 2026 ($341.9 million).
Material changes versus the prior comparable period
- Q2 total revenue increased about 15%, supported by same-store growth and a full-quarter contribution from ten facilities acquired in the June 2022 SSGT II merger. First-half self-storage revenue increased about 15% for similar reasons.
- Q2 common-stockholder income fell sharply, despite higher revenue and NOI. Higher variable-rate borrowing costs and higher average debt drove much of the increase in interest expense; the prior-year comparison also included a $16.1 million gain on the SSGT II merger and a $2.4 million debt-extinguishment loss.
- Managed REIT Platform revenue more than doubled in Q2 to $4.3 million, primarily due to higher acquisition fees. First-half platform revenue was $6.6 million, up from $3.8 million.
- The company made no self-storage facility acquisitions during the first half of 2023. It repaid the SST VI mezzanine loan in May and subsequently advanced SST VI a $15 million promissory note.
Outlook, risks and unusual items
- Management expects self-storage revenue to depend on same-store operating performance, lease-up of properties and future acquisitions. It said occupancy and same-store growth have begun normalizing after unusually strong pandemic-era demand and may normalize further. It expects property expenses to rise with acquisitions and interest expense to fluctuate with debt levels and rates. No specific full-year earnings or revenue guidance is provided.
- Inflation, higher interest rates, tighter lending conditions and slower housing activity may weaken storage demand and increase funding costs. Management noted acquisition capitalization rates have not risen as much as interest rates, potentially limiting acquisition accretion.
- A leverage-ratio trigger was reached at March 31, 2023, increasing the rate on $150 million of 2032 private-placement notes from 4.53% to 5.28%. The lower rate returns only after leverage is at or below 7.00-to-1.00 for two consecutive quarters. A 100-basis-point increase in variable rates was estimated to reduce annual earnings and cash flows by about $1.8 million, net of derivatives.
- Geographic concentration is notable: Florida, California and the Greater Toronto Area accounted for 22.9%, 20.1% and 10.3% of June rental income, respectively. Canadian-dollar fluctuations remain a risk; hedges mitigate, but do not eliminate, exposure.
- The Series A preferred stock is senior to common stock and had a liquidation preference of about $203.1 million. Its initial dividend rate is 6.25%; the rate steps up after the fifth anniversary if it has not been redeemed.
- The share redemption program was partially reinstated in March 2023 only for specified hardship circumstances; other redemptions remain suspended. Approximately $11.9 million of eligible requests were received in the first half, of which $4.7 million was paid in April and $7.2 million was payable at June 30 and paid in July. The DRP was reinstated.
- Monthly common distributions declared for July and August 2023 were approximately $0.05096 per share. The filing cautions distributions may not be sustained from operating cash flow over time and could require other funding sources. First-half distributions, including reinvested amounts, totaled $39.8 million.
- After quarter-end, the company acquired the San Gabriel, California facility on July 13, 2023, for about $15.5 million. The company reported no legal proceedings it considered material and no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether occupancy stabilization and rent growth can offset property-cost inflation and whether same-store NOI trends improve.
- Variable-rate exposure, hedge coverage, the leverage trigger on the private-placement notes, and the 2024 revolver maturity and refinancing plan.
- Liquidity and funding for distributions, preferred dividends, the concentrated 2024 and 2026 debt maturities, and any future redemption requests.
- Managed REIT exposures, including the $15 million SST VI note due December 2023 (with an extension option) and the SSGT III mezzanine loan extended after quarter-end to August 2024.
- The impact of geographic concentration, Canadian currency movements, and the potential for further demand normalization.