SMARTSTOP SELF STORAGE REIT, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto contained elsewhere in this report. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should also be read in conjunction with our consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I.
Overview
We are a self-managed and fully-integrated self storage real estate investment
trust ("REIT"). Our year-end is December 31 . As used in this report, "we," "us,"
"our," and "Company" refer to SmartStop Self Storage REIT, Inc. and each of our
subsidiaries.
We focus on the acquisition, ownership, and operation of self storage properties
located primarily within the top 100 metropolitan statistical areas, or MSAs,
throughout the United States and the Greater Toronto Area in Canada . According
to the Inside Self Storage Top-Operators List for 2021, we are the 11th largest
owner and operator of self storage properties in the United States based on
number of properties, units, and rentable square footage. As of June 30, 2022 ,
our wholly-owned portfolio consisted of 153 self storage properties diversified
across 19 states and the Greater Toronto Area of Ontario, Canada comprising
approximately 103,000 units and 11.8 million net rentable square feet.
Additionally, we had a 50% equity interest in ten unconsolidated real estate
ventures located in the Greater Toronto Area , which consisted of six operating
self storage properties, three parcels of land currently under development into
self storage facilities, and one single tenant industrial building, which we
plan to convert into a self storage property over the long term. Further,
through our Managed REIT Platform, we serve as the sponsor of two Managed REITs:
Strategic Storage Trust VI, Inc. , a publicly-registered non-traded REIT ("SST
VI"), and Strategic Storage Growth Trust III, Inc. , a private company that
intends to elect to qualify as a REIT ("SSGT III"), both of which pay us fees to
manage these programs and operate their 11 operating self storage properties (as
of June 30, 2022 ).
Our primary business model is focused on owning and operating high quality self
storage properties in high growth markets in the United States and Canada . Our
business model is designed to maximize cash flow available for distribution to
our stockholders and to achieve sustainable long-term growth in cash flow in
order to maximize long-term stockholder value at acceptable levels of risk. We
execute our organic growth strategy by pursuing revenue-optimizing and
expense-minimizing opportunities in the operations of our existing portfolio. We
execute our external growth strategy by developing, redeveloping, acquiring and
managing self storage facilities in the United States and Canada , and we look to
acquire properties that are physically stabilized, recently developed, in
various stages of lease up or at certificate of occupancy. We seek to acquire
undermanaged facilities that are not operated by institutional operators, where
we can implement our proprietary management and technology to maximize net
operating income.
As discussed herein, we, through our subsidiaries, currently serve as the
sponsor of SST VI and SSGT III. We also served as the sponsor of Strategic
Storage Trust IV, Inc. , a public non-traded REIT ("SST IV") through March 17,
2021 , and Strategic Storage Growth Trust II, Inc. , a private REIT ("SSGT II")
through June 1, 2022 . Prior to March 17, 2021 and June 1, 2022 , SST IV and SSGT
II, respectively, were also referred as "Managed REITs." We operate the
properties owned by the Managed REITs, consisting of, as of June 30, 2022 , 11
operating properties and approximately 7,600 units and 0.9 million rentable
square feet. In addition, we have the internal capability to originate,
structure and manage additional self storage investment programs (the "Managed
REIT Platform") which would be sponsored by SmartStop REIT Advisors, LLC
("SRA"), our indirect subsidiary. We generate asset management fees, property
management fees, acquisition fees, and other fees and also receive substantially
all of the tenant protection program revenue earned by our Managed REITs. For
the property management and advisory services that we provide, we are reimbursed
for certain expenses that otherwise helps to offset our net operating expense
burden.
60
--------------------------------------------------------------------------------
As of June 30, 2022 , our wholly-owned self storage portfolio was comprised as
follows:
% of Total Physical Rental
No. of Sq. Ft. Rentable Occupancy Income
State Properties Units(1) (net)(2) Sq. Ft. %(3) %(4)
Alabama 1 1,090 163,300 1.4 % 95.9 % 0.8 %
Arizona 4 3,130 329,100 2.8 % 95.0 % 2.7 %
California 29 19,195 2,030,300 17.1 % 94.5 % 20.4 %
Colorado 8 4,550 493,085 4.2 % 93.5 % 3.2 %
Florida 26 19,870 2,363,100 20.1 % 94.7 % 22.3 %
Illinois 6 3,785 429,500 3.6 % 95.0 % 2.9 %
Indiana 2 1,030 112,700 1.0 % 96.3 % 0.6 %
Massachusetts 1 840 93,200 0.8 % 98.3 % 1.8 %
Maryland 2 1,610 169,500 1.4 % 94.9 % 1.5 %
Michigan 4 2,220 266,100 2.3 % 95.9 % 1.8 %
New Jersey 2 2,350 205,100 1.7 % 93.2 % 1.9 %
Nevada 9 7,160 865,000 7.3 % 95.2 % 7.1 %
North Carolina 19 9,190 1,192,400 10.1 % 95.1 % 8.1 %
Ohio 5 2,310 279,700 2.4 % 93.9 % 1.5 %
South Carolina 3 1,940 246,000 2.1 % 95.6 % 1.6 %
Texas 12 6,960 919,300 7.8 % 95.8 % 6.7 %
Virginia 1 830 71,100 0.6 % 97.9 % 0.9 %
Washington 5 3,427 390,545 3.3 % 89.7 % 3.2 %
Wisconsin 1 780 83,400 0.7 % 93.9 % 0.5 %
Ontario, Canada 13 10,610 1,092,300 9.3 % 95.5 % 10.5 %
Total 153 102,877 11,794,730 100 % 94.8 % 100 %
(1)
Includes all rentable units, consisting of storage units and parking
(approximately 3,400 units).
(2)
Includes all rentable square feet, consisting of storage units and parking
(approximately 1,016,000 square feet).
(3)
Represents the occupied square feet of all facilities in a state or province
divided by total rentable square feet of all the facilities in such state or
area as of June 30, 2022 ).
(4)
Represents rental income (excludes administrative fees, late fees, and other
ancillary income) for all facilities we owned in a state or province divided by
our total rental income for the month ended June 30, 2022 .
Additionally, we own our office located at
61
--------------------------------------------------------------------------------Critical Accounting Policies
We have established accounting policies which conform to generally accepted
accounting principles ("GAAP"). Preparing financial statements in conformity
with GAAP requires management to use judgment in the application of accounting
policies, including making estimates and assumptions. Following is a discussion
of the estimates and assumptions used in setting accounting policies that we
consider critical in the presentation of our consolidated financial statements.
Many estimates and assumptions involved in the application of GAAP may have a
material impact on our financial condition or operating performance, or on the
comparability of such information to amounts reported for other periods, because
of the subjectivity and judgment required to account for highly uncertain items
or the susceptibility of such items to change. These estimates and assumptions
affect our reported amounts of assets and liabilities, our disclosure of
contingent assets and liabilities at the dates of the financial statements and
our reported amounts of revenue and expenses during the period covered by this
report. If management's judgment or interpretation of the facts and
circumstances relating to various transactions had been different, it is
possible that different accounting policies would have been applied or different
amounts of assets, liabilities, revenues and expenses would have been recorded,
thus resulting in a materially different presentation of the financial
statements or materially different amounts being reported in the financial
statements. Additionally, other companies may use different estimates and
assumptions that may impact the comparability of our financial condition and
results of operations to those companies.
We believe that our critical accounting policies include the following: real
estate purchase price allocations; the evaluation of whether any of our
long-lived assets have been impaired; the valuation of goodwill and related
impairment considerations, the valuation of our trademarks and related
impairment considerations, the valuation of our contingent consideration
liability, the determination of the useful lives of our long-lived assets; and
the evaluation of the consolidation of our interests in joint ventures. The
following discussion of these policies supplements, but does not supplant the
description of our significant accounting policies, as contained in Note 2 -
Summary of Significant Accounting Policies, of the Notes to the Consolidated
Financial Statements contained in this report, and is intended to present our
analysis of the uncertainties involved in arriving upon and applying each
policy.
Real Estate Purchase Price Allocation
We account for asset acquisitions in accordance with GAAP which requires that we allocate the purchase price of a property to the tangible and intangible assets acquired and the liabilities assumed based on their relative fair values. This guidance requires us to make significant estimates and assumptions, including fair value estimates, which requires the use of significant unobservable inputs as of the acquisition date. The value of the tangible assets, consisting of land and buildings is determined as if vacant. Because we believe that substantially all of the leases in place at properties we will acquire will be at market rates, as the majority of the leases are month-to-month contracts, we do not expect to allocate any portion of the purchase prices to above or below market leases. We also consider whether in-place, market leases represent an intangible asset. Acquisitions of portfolios of facilities are allocated to the individual facilities based upon an income approach or a cash flow analysis using appropriate risk adjusted capitalization rates which take into account the relative size, age, and location of the individual facility along with current and projected occupancy and rental rate levels or appraised values, if available. Our allocations of purchase prices are based on certain significant estimates and assumptions, variations in such estimates and assumptions could result in a materially different presentation of the consolidated financial statements or materially different amounts being reported in the consolidated financial statements.
Real Property Assets Valuation
We evaluate our real property assets for impairment based on events and changes
in circumstances that may arise in the future and that may impact the carrying
amounts of such assets. When indicators of potential impairment are present, we
will assess the recoverability of the particular asset by determining whether
the carrying value of the asset will be recovered, through an evaluation of the
undiscounted future operating cash flows expected from the use of the asset and
its eventual disposition. This evaluation is based on a number of estimates and
assumptions. Based on this evaluation, if the expected undiscounted future cash
flows do not exceed the carrying value, we will adjust the value of the real
property asset and recognize an impairment loss. Our evaluation of the
impairment of real property assets could result in a materially different
presentation of the financial statements or materially different amounts being
reported in the financial statements, as the amount of impairment loss, if any,
recognized may vary based on the estimates and assumptions we use.
62
--------------------------------------------------------------------------------Intangible Assets Valuation
In connection with the acquisition of the self storage advisory, asset management and property management businesses and certain joint venture interests ofStrategic Asset Management I, LLC (f/k/aSmartStop Asset Management, LLC ), our former sponsor ("SAM"), along with certain other assets of SAM (collectively, the "Self Administration Transaction"), we allocated a portion of the consideration to the contracts that we acquired related to the Managed REITs and the customer relationships related to our tenant insurance, tenant protection plans or similar programs (the "Tenant Protection Programs"). For these intangibles, we are amortizing such amounts on a straight-line basis over the estimated benefit period of the contracts and customer relationships. We evaluate these intangible assets for impairment when an event occurs or circumstances change that indicate the carrying value may not be recoverable. In such an event, an impairment charge is recognized and the intangible asset is marked down to its fair value.
Goodwill Valuation
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible assets and other intangible assets acquired.Goodwill is allocated to various reporting units, as applicable, and is not amortized. We perform an annual impairment test for goodwill and between annual tests, we evaluate the recoverability of goodwill whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be fully recoverable. If circumstances indicate the carrying amount may not be fully recoverable, we perform a quantitative impairment test of goodwill to compare the fair value of each reporting unit to its respective carrying amount. If the carrying amount of goodwill exceeds its fair value, an impairment charge will be recognized.
Trademarks Valuation
Trademarks are based on the value of our brands. Trademarks are valued using the relief from royalty method, which presumes that without ownership of such trademarks, we would have to make a stream of payments to a brand or franchise owner in return for the right to use their name. By virtue of this asset, we avoid any such payments and record the related intangible value of our ownership of the brand name. We qualitatively evaluate whether any triggering events or changes in circumstances have occurred subsequent to our annual impairment test that would indicate an impairment condition may exist. If any change in circumstance or triggering event occurs, and results in a significant impact to our revenue and profitability projections, or any significant assumption in our valuation methods is adversely impacted, the impact could result in a material impairment charge in the future. Contingent Earnout Valuation In connection with the Self Administration Transaction, we issued the Class A-2 Units, as a form of contingent consideration, which is required to be revalued at each reporting period, based on the discounted probability weighted forecast of achieving the requisite AUM thresholds or the occurrence of an Earnout Acceleration Event (both as defined in Note 11 - Commitments and Contingencies, of the Notes to the Consolidated Financial Statements contained in this report).
Estimated Useful Lives of Real Property Assets
We assess the useful lives of the assets underlying our properties based upon a
subjective determination of the period of future benefit for each asset. We
record depreciation expense with respect to these assets based upon the
estimated useful lives we determine. Our determinations of the useful lives of
the assets could result in a materially different presentation of the
consolidated financial statements or materially different amounts being reported
in the consolidated financial statements, as such determinations, and the
corresponding amount of depreciation expense, may vary dramatically based on the
estimates and assumptions we use.
63
--------------------------------------------------------------------------------Consolidation Considerations
Current accounting guidance provides a framework for identifying a variable
interest entity ("VIE") and determining when a company should include the
assets, liabilities, noncontrolling interests, and results of activities of a
VIE in its consolidated financial statements. In general, a VIE is an entity or
other legal structure used to conduct activities or hold assets that either (1)
has an insufficient amount of equity to carry out its principal activities
without additional subordinated financial support, (2) has a group of equity
owners that are unable to make significant decisions about its activities, or
(3) has a group of equity owners that do not have the obligation to absorb
losses or the right to receive returns generated by its operations. Generally, a
VIE should be consolidated if a party with an ownership, contractual, or other
financial interest in the VIE (a variable interest holder) has the power to
direct the VIE's most significant activities and the obligation to absorb losses
or right to receive benefits of the VIE that could be significant to the VIE. A
variable interest holder that consolidates the VIE is called the primary
beneficiary. Upon consolidation, the primary beneficiary generally must
initially record all of the VIE's assets, liabilities, and noncontrolling
interest at fair value and subsequently account for the VIE as if it were
consolidated based on majority voting interest.
We evaluate the consolidation of our investments in joint ventures in accordance
with relevant accounting guidance. This evaluation requires us to determine
whether we have a controlling interest in a joint venture through a means other
than voting rights, and, if so, such joint venture may be required to be
consolidated in our financial statements. Our evaluation of our joint ventures
under such accounting guidance could result in a materially different
presentation of the financial statements or materially different amounts being
reported in the financial statements, as the joint venture entities included in
our consolidated financial statements may vary based on the estimates and
assumptions we use.
REIT Qualification
We made an election under Section 856(c) of the Internal Revenue Code of 1986 (the Code) to be taxed as a REIT under the Code, commencing with the taxable year endedDecember 31, 2014 . By qualifying as a REIT for federal income tax purposes, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is denied. Such an event could materially and adversely affect our net income and could have a material adverse impact on our financial condition and results of operations. However, we believe that we are organized and operate in a manner that will enable us to continue to qualify for treatment as a REIT for federal income tax purposes, and we intend to continue to operate as to remain qualified as a REIT for federal income tax purposes.
Current Market and Economic Conditions
Our rental revenue and operating results depend significantly on the demand for self storage space. Since the beginning of the COVID-19 pandemic in lateMarch 2020 , the challenges associated with the COVID-19 pandemic were partially offset by other trends that helped maintain the demand for self storage. The broader shift of people working from home, elevated migration patterns and strength in the housing market helped drive continued growth in self storage demand through the first half of 2022. As rental activity, occupancy levels, and rental rates increased during the second half of 2020 and through 2022, our financial performance has continued to be strong. However, same-store growth and overall results are expected to normalize over the coming quarters as the comparable periods change. Recently, the broader economy began experiencing increased levels of inflation, higher interest rates, tightening monetary and fiscal policies and a slowdown in home price appreciation. This could result in less discretionary spending, weakening consumer balance sheets and reduced demand for self storage. However, demand for self storage sector is dynamic with drivers that function in a multitude of economic environments, both cyclically and counter-cyclically. Demand for self storage tends to be needs-based, with numerous factors that lead customers to renting and maintaining storage units. In addition to the sector's numerous historical demand drivers, one significant demand driver that increased substantially during the COVID-19 pandemic is the work-from-home, or hybrid work environment. We believe the need for work space in residences will continue to be a driver of storage demand in 2022 and going forward, which could partially offset a potential reduction in population mobility caused by a softening housing market. Recently, theFederal Reserve has increased its targeted range for the federal funds rate, leading to increased interest rates. We currently have fixed interest rates for certain of our loans, either directly or indirectly through our use of interest rate hedges. The rise in overall interest rates has caused an increase in our variable rate borrowing costs and our overall cost of capital, resulting in an increase in net interest expense. Capitalization rates on acquisitions have not increased at the same magnitude as interest rates. This may limit our ability to acquire self storage properties in an as accretive manner going forward. 64 --------------------------------------------------------------------------------
Results of Operations Overview We derive revenues principally from: (i) rents received from our self storage tenant leases; (ii) fees generated from our Managed REITs; (iii) our Tenant Protection Programs; and (iv) sales of packing and storage-related supplies at our storage facilities. Therefore, our operating results depend significantly on our ability to retain our existing tenants and lease our available self storage units to new tenants, while maintaining and, where possible, increasing the prices for our self storage units. Competition in the market areas in which we operate is significant and affects the occupancy levels, rental rates, rental revenues and operating expenses of our facilities. Development of any new self storage facilities would intensify competition of self storage operators in markets in which we operate. As ofJune 30, 2022 and 2021, we wholly-owned 153 and 138 operating self storage facilities, respectively. Our operating results for the three months endedJune 30, 2022 include full quarter results for 140 self storage facilities and partial quarter results for 13 operating self storage facilities acquired during the quarter endedJune 30, 2022 . Our operating results for the three months endedJune 30, 2021 include full quarter results for 136 self storage facilities and partial quarter results for two operating self storage facilities acquired during the quarter endedJune 30, 2021 . Operating results in future periods will depend on the results of operations of these properties and of the real estate properties that we acquire in the future. Our operating results for the six months endedJune 30, 2022 include a full six months of results for 139 self storage facilities and partial period results for 14 operating self storage facilities acquired during the six months endedJune 30, 2022 . Our operating results for the six months endedJune 30, 2021 include a full six months of results for 112 self storage facilities and partial period results for 26 operating self storage facilities acquired during the six months endedJune 30, 2021 . Operating results in future periods will depend on the results of operations of these properties and of the real estate properties that we acquire in the future. As discussed below, the results of operations presented herein cover a period of time prior to the SST IV Merger and SSGT II Merger. Our 2021 and 2022 operating results have been and will continue to be significantly impacted by these mergers as a result of acquiring 34 operating self storage facilities and 50% equity interests in nine unconsolidated real estate ventures, as well as the elimination of management fees that we previously earned from SST IV and SSGT II. Over time we expect the SSGT II Merger and SST IV Merger to be accretive to FFO, as adjusted as the former SST IV and SSGT II properties eventually reach higher levels of either physical or economic occupancy or both.
SST IV Merger
OnMarch 17, 2021 , we acquired 24 operating self storage facilities and six real estate joint ventures by way of merger with SST IV. The 24 SST IV operating properties had a weighted average physical occupancy of 93.0% and 92.6% as ofJune 30, 2022 , and 2021, respectively.
SSGT II Merger
OnJune 1, 2022 , we acquired 10 operating self storage facilities and three real estate joint ventures by way of merger with SSGT II. The 10 SSGT II operating properties had a weighted average physical occupancy of 92.1% and 93.1% as ofJune 30, 2022 , and 2021, respectively.
Comparison of the Three Months Ended
Total Self Storage Revenues
Total self storage related revenues for the three months endedJune 30, 2022 and 2021 were approximately$48.6 million and$40.1 million , respectively. The increase in total self storage revenues of approximately$8.4 million , or approximately 21%, is primarily attributable to an increase in same-store revenues of approximately$4.3 million , an increase in revenue at the 24 operating self storage facilities acquired in connection with the SST IV Merger (approximately$1.3 million ), and the 10 operating self storage facilities acquired onJune 1, 2022 in connection with the SSGT II Merger (approximately$1.2 million ). We expect self storage revenues to increase in future periods as our lease-up properties continue to increase occupancy and rates, and to otherwise fluctuate based on the performance of our same-store pool, which will be influenced by the overall economic environment and increases in self storage supply, amongst other things. Additionally, we expect to see 65 --------------------------------------------------------------------------------
increases in self storage revenues from our future acquisitions and the inclusion of the properties we acquired in the SSGT II Merger for a full period.
Managed REIT Platform Revenue
Managed REIT Platform revenue for the three months endedJune 30, 2022 and 2021 was approximately$2.0 million and$1.1 million , respectively. The increase in Managed REIT Platform revenue of approximately$0.9 million is primarily attributable to acquisition fee revenue growth of$0.6 million from our Managed REITs. We expect Managed REIT Platform Revenue to decline in the short term as a result of the SSGT II Merger as we will no longer receive fees from SSGT II for providing property management and advisory services. We further expect Managed REIT Platform Revenue to fluctuate commensurate with our Managed REITs' increase in operations as we receive revenue for providing such services.
Reimbursable Costs from Managed REITs
Reimbursable costs from Managed REITs for the three months endedJune 30, 2022 and 2021 were approximately$1.2 million and$1.1 million , respectively. Such revenues consist of costs incurred by us as we provide property management and advisory services to the Managed REITs, which are reimbursed by our Managed REITs, pursuant to our related contracts with the Managed REITs. We expect Reimbursable Costs from Managed REITs to decline in future periods as a result of the SSGT II Merger as we will no longer receive reimbursement for providing such services. We further expect reimbursable costs from Managed REITs to fluctuate commensurate with our Managed REITs' increase in operations as we receive reimbursement for providing such services.
Property Operating Expenses
Property operating expenses for the three months endedJune 30, 2022 and 2021 were approximately$13.6 million (or 28.1% of self storage revenue) and$12.5 million (or 31.1% of self storage revenue), respectively. Property operating expenses include the costs to operate our facilities including payroll expense, utilities, insurance, real estate taxes, and marketing. The increase in property operating expenses of approximately$1.2 million is largely attributable to the 10 operating self storage facilities acquired in connection with the SSGT II Merger (approximately$0.4 million ), as well other property acquisitions during the period and increases in payroll and repairs and maintenance expense. We expect property operating expenses to decrease as a percentage of revenue as revenues increase.
Managed REIT Platform Expenses
Managed REIT Platform expenses for the three months endedJune 30, 2022 and 2021 were approximately$0.6 million and$0.3 million , respectively. Such expenses primarily consisted of expenses related to non-reimbursable costs associated with the operation of the Managed REIT Platform and the Administrative Services Agreement (as discussed in Note 9 - Related Party Transactions, of the notes to consolidated financial statements contained in this report). We expect Managed REIT Platform expenses to fluctuate in future periods commensurate with the level of services provided to the Managed REITs.
Reimbursable Costs from Managed REITs
Reimbursable costs from Managed REITs for the three months endedJune 30, 2022 and 2021 were approximately$1.2 million and$1.1 million , respectively. Such expenses consist of costs incurred by us as we provide property management and advisory services to the Managed REITs, which are reimbursed by our Managed REITs, pursuant to our related contracts with the Managed REITs. We expect reimbursable costs from Managed REITs to fluctuate commensurate with our Managed REITs' increase in operations as we receive reimbursement for providing such services, and decline in the short term due to the SSGT II Merger.
General and Administrative Expenses
General and administrative expenses for the three months endedJune 30, 2022 and 2021 were approximately$7.9 million and$6.8 million , respectively. Such expenses consist primarily of compensation-related costs, legal expenses, accounting expenses, transfer agent fees, directors' and officers' insurance expense and board of directors related costs. Additionally, during the current quarter we recorded expenses of approximately$1.4 million related to our filing of an S-11 registration statement and related costs in pursuit of the potential offering of our common stock. The increase is primarily attributable to expenses recorded related to a potential offering, increased board of directors related costs, transfer agent costs 66 --------------------------------------------------------------------------------
and compensation-related expenses. We expect general and administrative expenses to decrease as a percentage of total revenues over time.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for the three months endedJune 30, 2022 and 2021 were approximately$16.3 million and$14.4 million , respectively. Depreciation expense consists primarily of depreciation on the buildings and site improvements at our properties. Amortization expense consists of the amortization of our in place lease intangible assets resulting from our self storage acquisitions and amortization of certain intangible assets acquired in the Self Administration Transaction. The increase in depreciation and amortization expense is primarily attributable to additional depreciation and amortization on the properties and intangible assets acquired in the SSGT II Merger. Acquisition Expenses Acquisition expenses for the three months endedJune 30, 2022 and 2021 were approximately$0.3 million and$30,000 , respectively. These acquisition expenses were incurred prior to acquisitions becoming probable in accordance with our capitalization policy. Contingent Earnout Adjustment The contingent earnout adjustments for the three months endedJune 30, 2022 and 2021 reflects increases in the contingent earnout liability of approximately$0.8 million and$0.4 million , respectively. The contingent earnout adjustment reflects the change in the liability based on an updated valuation and changes in the discounted probability weighted forecast of our projected assets under management (as defined in the Operating Partnership Agreement, as amended).
Write-off of Equity Interest and Preexisting Relationships Upon Acquisition of Control
Write-off of equity interest and preexisting relationships upon acquisition of control for the three months endedJune 30, 2022 and 2021 was approximately$2.0 million and none, respectively. Such expense represents the Company's write-off of the intangible assets related to the SSGT II advisory agreement and property management contracts due to the termination of such contracts as a result of the SSGT II Merger. Gain on Sale of Real Estate Gain on sale of real estate for the three months endedJune 30, 2022 and 2021 was none and approximately$0.2 million , respectively. The gain in 2021 was related to a sale of a parcel of excess land attached to the self storage facility we own inMcKinney, Texas . The sale of this parcel did not affect the operations of ourMcKinney, Texas property.
Gain On Equity Interests Upon Acquisition
Gain on equity interests upon acquisition for the three months endedJune 30, 2022 and 2021 was approximately$16.1 million and none, respectively. The gain was related to recording the fair value of our preexisting special limited partnership interest in SSGT II in connection with the SSGT II Merger.
Interest Expense
Interest expense for the three months endedJune 30, 2022 and 2021 was approximately$8.9 million and$8.4 million , respectively. Interest expense includes interest expense, accretion of fair market value of debt, amortization of debt issuance costs, and amortization of interest rate caps. The increase of approximately$0.4 million is primarily attributable to an increase in the average outstanding principal balance, primarily as a result of the SSGT II Merger as well as three other self storage acquisitions that were funded by draws on the Credit Facility Revolver during the quarter. We expect interest expense to fluctuate in future periods commensurate with our future debt levels and interest rates.
Net Loss on Extinguishment of Debt
Net loss on extinguishment of debt for the three months endedJune 30, 2022 and 2021 were approximately$2.4 million and none, respectively. The increase in net loss on debt extinguishment is primarily attributable to debt defeasance costs for the Midland North Carolina CMBS Loan which was defeased onMay 19, 2022 , as well as the write-off of related unamortized debt issuance costs. 67 --------------------------------------------------------------------------------
Other
Other for the three months endedJune 30, 2022 and 2021 was approximately$0.2 million of income and$0.2 million of income, respectively. Other consists primarily of state and federal tax expense, adjustments to deferred tax liabilities, foreign currency fluctuations, changes in value related to our foreign currency and interest rate hedges not designated for hedge accounting, and equity in earnings attributable to our unconsolidated joint ventures. The change of approximately$40,000 is comprised of additional deferred tax liability adjustments of approximately$1.0 million primarily attributable to the write-off of the asset management and property management intangible assets related to the SSGT II Merger and deferred tax liability adjustments at our Canadian properties, offset by foreign currency related adjustments.
Same-Store Facility Results - Three Months Ended
The following table sets forth operating data for our same-store facilities (those properties included in the consolidated results of operations sinceJanuary 1, 2021 , excluding three lease-up properties we owned as ofJanuary 1, 2021 ) for the three months endedJune 30, 2022 and 2021. We consider the following data to be meaningful as this allows for the comparison of results without the effects of acquisition, lease up, or development activity. Same-Store Facilities Non Same-Store Facilities Total % % % 2022 2021 Change 2022 2021(6) Change 2022 2021 Change Revenue (1)$ 34,694,481 $ 30,396,194 14.1 % $
12,039,007
21.6 % Property
operating
expenses (2) 9,543,263 9,488,105 0.6 %
4,093,968 2,991,864 N/M 13,637,231 12,479,969
9.3 %
Net operating
income $ 25,151,218 $ 20,908,089 20.3 % $
7,945,039
27.6 % Number of facilities 109 109 44 30 153 139 Rentable square feet (3) 8,036,285 8,034,200 3,758,445 2,543,800 11,794,730 10,578,000
Average
physical
occupancy (4) 95.5 % 95.8 % 92.5 % 88.9 % 94.5 % 94.6 % Annualized rent per occupied square foot (5)$ 18.47 $ 16.02 N/M N/M$ 18.09 $ 15.76 N/M Not meaningful
(1)
Revenue includes rental revenue, certain ancillary revenue, administrative and late fees, and excludes Tenant Protection Program revenue.
(2)
Property operating expenses excludes corporate general and administrative expenses, interest expense, depreciation, amortization expense, and acquisition expenses.
(3)
Of the total rentable square feet, parking represented approximately 1,016,000 square feet and 937,000 square feet as ofJune 30, 2022 and 2021, respectively. On a same-store basis, for the same periods, parking represented approximately 680,000 square feet.
(4)
Determined by dividing the sum of the month-end occupied square feet for the applicable group of facilities for each applicable period by the sum of their month-end rentable square feet for the period.
(5)
Determined by dividing the aggregate realized rental income for each applicable period by the aggregate of the month-end occupied square feet for the period. Properties are included in the respective calculations in their first full month of operations, as appropriate. We have excluded the realized rental revenue and occupied square feet related to parking herein for the purpose of calculating annualized rent per occupied square foot.
(6)
Included in the non same-store data is a self storage facility consisting of approximately 84,000 square feet owned by SST VI OP, which was consolidated by us fromMarch 10, 2021 untilMay 1, 2021 . Our same-store revenue increased by approximately$4.3 million , or approximately 14.1%, for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 due to higher annualized rent per occupied square foot, partially offset by a slight decrease in average occupancy. 68 -------------------------------------------------------------------------------- The following table presents a reconciliation of net income (loss) as presented on our consolidated statements of operations to net operating income, as stated above, for the periods indicated: For the Three Months Ended June 30, 2022 2021 Net income (loss)$ 14,013,122 $ (1,310,838 ) Adjusted to exclude: Tenant Protection Program revenue(1) (1,836,707 ) (1,712,671 ) Managed REIT Platform revenue (2,013,134 ) (1,058,291 ) Managed REIT Platform expenses 617,846 316,142 General and administrative 7,946,583 6,811,313 Depreciation 11,826,106 10,742,801 Intangible amortization expense 4,471,973 3,653,681 Acquisition expenses 285,097 30,448 Contingent earnout adjustment 800,000 400,000
Write-off of equity interest and
preexisting relationships upon
acquisition of control 2,049,682 - Gain on equity interests upon acquisition (16,101,237 ) - Gain on sale of real estate - (178,631 ) Interest expense 8,852,586 8,416,349 Net loss on extinguishment of debt 2,393,475 - Other, net (209,135 ) (171,203 ) Total net operating income$ 33,096,257 $ 25,939,100
(1) Approximately
Comparison of the Six Months Ended
Total Self Storage Revenues
Total self storage related revenues for the six months endedJune 30, 2022 and 2021 were approximately$93.6 million and$71.2 million , respectively. The increase in total self storage revenues of approximately$22.4 million , or approximately 31%, is largely attributable to an increase in same-store revenues of approximately$9.5 million , as well as the 10 and 24 operating self storage facilities acquired in connection with the SSGT II Merger and SST IV Merger, respectively, representing increased revenues over the prior periods of approximately$1.1 million and$8.7 million , respectively. We expect self storage revenues to increase in future periods as our lease-up properties continue to increase occupancy and rates, and to otherwise fluctuate based on the performance of our same-store pool, which will be influenced by the overall economic environment and increases in self storage supply, amongst other things. Additionally, we expect to see increases in self storage revenues from our future acquisitions and from the inclusion of the properties we acquired in the SSGT II Merger for a full period.
Managed REIT Platform Revenue
Managed REIT Platform revenue for the six months endedJune 30, 2022 and 2021 was approximately$3.8 million and$3.3 million , respectively. The increase in Managed REIT Platform revenue of approximately$0.5 million is primarily attributable to acquisition fee revenue growth of$1.0 million from our Managed REITs. We expect Managed REIT Platform Revenue to decline in the short term as a result of the SSGT II Merger as we will no longer receive fees from SSGT II for providing property management and advisory services. We further expect Managed REIT Platform Revenue to fluctuate commensurate with our Managed REITs' increase in operations. 69 --------------------------------------------------------------------------------
Reimbursable Costs from Managed REITs
Reimbursable costs from Managed REITs for the six months endedJune 30, 2022 and 2021 were approximately$2.3 million and$2.3 million , respectively. Such revenues consist of costs incurred by us as we provide property management and advisory services to the Managed REITs, which are reimbursed by our Managed REITs, pursuant to our related contracts with the Managed REITs. We expect Reimbursable Costs from Managed REITs to decline in future periods as a result of the SSGT II Merger as we will no longer receive reimbursement for providing such services. We further expect reimbursable costs from Managed REITs to fluctuate commensurate with our Managed REITs' increase in operations as we receive reimbursement for providing such services.
Property Operating Expenses
Property operating expenses for the six months endedJune 30, 2022 and 2021 were approximately$26.7 million (or 28.6% of self storage revenue) and$22.8 million (or 32.1% of self storage revenue), respectively. Property operating expenses include the costs to operate our facilities including payroll expense, utilities, insurance, real estate taxes, and marketing. The increase in property operating expenses of approximately$3.9 million is largely attributable to the 24 and 10 operating self storage facilities acquired in connection with the SST IV Merger and the SSGT II Merger, respectively. We expect property operating expenses to decrease as a percentage of revenue as revenues increase.
Managed REIT Platform Expenses
Managed REIT Platform expenses for the six months endedJune 30, 2022 and 2021 were approximately$1.0 million and$0.6 million , respectively. Such expenses primarily consisted of expenses related to non-reimbursable costs associated with the operation of the Managed REIT Platform and the Administrative Services Agreement (as discussed in Note 9 - Related Party Transactions, of the notes to consolidated financial statements contained in this report). We expect Managed REIT Platform expenses to fluctuate in future periods commensurate with the level of services provided to the Managed REITs.
Reimbursable Costs from Managed REITs
Reimbursable costs from Managed REITs for the six months endedJune 30, 2022 and 2021 were approximately$2.3 million and$2.3 million , respectively. Such expenses consist of costs incurred by us as we provide property management and advisory services to the Managed REITs, which are reimbursed by our Managed REITs, pursuant to our related contracts with the Managed REITs. We expect reimbursable costs from Managed REITs to fluctuate commensurate with our Managed REITs' increase in operations as we receive reimbursement for providing such services, and decline in the short term due to the SSGT II Merger.
General and Administrative Expenses
General and administrative expenses for the six months endedJune 30, 2022 and 2021 were approximately$13.8 million and$11.6 million , respectively. Such expenses consist primarily of compensation-related costs, legal expenses, accounting expenses, transfer agent fees, directors' and officers' insurance expense and board of directors related costs. Additionally, during the six months endedJune 30, 2022 , we recorded expenses of approximately$1.4 million related to our filing of an S-11 registration statement and related costs in pursuit of the potential offering of our common stock. The increase is primarily attributable to expenses recorded related to a potential offering, increased board of directors related costs, transfer agent costs and compensation-related expenses. We expect general and administrative expenses to decrease as a percentage of total revenues over time.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for the six months endedJune 30, 2022 and 2021 were approximately$31.3 million and$24.2 million , respectively. Depreciation expense consists primarily of depreciation on the buildings and site improvements at our properties. Amortization expense consists of the amortization of our in place lease intangible assets resulting from our self storage acquisitions and amortization of certain intangible assets acquired in the Self Administration Transaction. The increase in depreciation and amortization expense is primarily attributable to additional depreciation and amortization on the properties and intangible assets acquired in the SST IV Merger and the SSGT II Merger.
Acquisition Expenses
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Acquisition expenses for the six months ended June 30, 2022 and 2021 were
approximately $0.7 million and $0.3 million , respectively. These acquisition
expenses were incurred prior to acquisitions becoming probable in accordance
with our capitalization policy.
Contingent Earnout Adjustment
The contingent earnout adjustment for the six months endedJune 30, 2022 and 2021 reflects increases in the contingent earnout liability of approximately$1.3 million and$2.5 million , respectively. The contingent earnout adjustment reflects the change in the liability based on an updated valuation and changes in the discounted probability weighted forecast of our projected assets under management (as defined in the Operating Partnership Agreement, as amended).
Write-off of equity interest and preexisting relationships upon acquisition of control
Write-off of equity interest and preexisting relationships upon acquisition of control for the six months endedJune 30, 2022 and 2021 was approximately$2.0 and$8.4 million , respectively. Such expenses in 2022 represents the write-off of the intangible assets related to the SSGT II advisory agreement and property management contracts due to the termination of such contracts with the SSGT II Merger. Such expenses in 2021 primarily represents the write-off of the intangible assets related to the SST IV advisory agreement and property management contracts due to the termination of such contracts with the SST IV Merger, and to a lesser extent, the write-off of the SST IV special limited partnership interest we held in SST IV, which per the terms of the SST IV Merger, terminated without consideration.
Gain on Sale of Real Estate
Gain on sale of real estate for the six months endedJune 30, 2022 and 2021 was none and approximately$0.2 million , respectively. The gain in 2021 was related to a sale of a parcel of excess land attached to the self storage facility we own inMcKinney, Texas . The sale of this parcel did not affect the operations of ourMcKinney, Texas property.
Gain On Equity Interests Upon Acquisition
Gain on equity interests upon acquisition for the six months endedJune 30, 2022 and 2021 was approximately$16.1 million and none, respectively. The gain was related to recording the fair value of our preexisting special limited partnership interest in SSGT II in connection with the SSGT II Merger.
Interest Expense
Interest expense for the six months endedJune 30, 2022 and 2021 was approximately$16.4 million and$17.0 million , respectively. Interest expense includes interest expense, accretion of fair market value of debt, and amortization of debt issuance costs and amortization of interest rate caps. The decrease of approximately$0.6 million is primarily attributable to lower rates on a year over year basis for the first three months of 2022 due in part to the expiration of our$235 million LIBOR swap, partially offset by higher interest rates and an increase in the average outstanding principal balance during the six months endedJune 30, 2022 . The increase in the average outstanding principal balance was primarily the result of the SSGT II Merger, and four other acquisitions in 2022. We expect interest expense to fluctuate in future periods commensurate with our future debt levels and interest rates.
Net Loss on Extinguishment of Debt
Net loss on extinguishment of debt for the six months endedJune 30, 2022 and 2021 were approximately$2.4 million and$2.4 million , respectively. The net loss on debt extinguishment for the six months endedJune 30, 2022 is attributable to the write-off of unamortized debt issuance costs and debt defeasance costs for the Midland North Carolina CMBS Loan which was defeased onMay 19, 2022 . The net loss on debt extinguishment for the six months endedJune 30, 2021 is attributable to the write-off of unamortized debt issuance costs on loans that were paid off in connection with the Credit Facility that was obtained in conjunction with the SST IV Merger.
Other
Other income (expense) for the six months ended
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deferred tax liabilities, foreign currency fluctuations, changes in value
related to our foreign currency and interest rate hedges not designated for
hedge accounting, and equity in earnings attributable to our unconsolidated
joint ventures. The change of approximately $2.1 million is primarily the result
of a reduction in the deferred tax liabilities as a result of the write-off the
asset management and property management intangible assets of approximately $0.5
million and $1.9 million during the six months ended June 30, 2022 and 2021,
related to the SSGT II Merger and the SST IV Merger, respectively.
Same-Store Facility Results - Six Months Ended
The following table sets forth operating data for our same-store facilities (those properties included in the consolidated results of operations sinceJanuary 1, 2021 , excluding three lease-up properties we owned as ofJanuary 1, 2021 ) for the six months endedJune 30, 2022 and 2021. We consider the following data to be meaningful as this allows for the comparison of results without the effects of acquisition, lease up, or development activity. Same-Store Facilities Non Same-Store Facilities Total % % % 2022 2021 Change 2022 2021(6) Change 2022 2021 Change Revenue (1)$ 68,018,946 $ 58,552,193 16.2 %$ 21,991,236 $ 9,590,980 N/M$ 90,010,182 $ 68,143,173 32.1 % Property operating expenses (2) 19,310,992 18,906,251 2.1 % 7,431,564 3,916,999 N/M 26,742,556 22,823,250 17.2 % Net operating income$ 48,707,954 $ 39,645,942 22.9 %$ 14,559,672 $ 5,673,981 N/M$ 63,267,626 $ 45,319,923 39.6 % Number of facilities 109 109 44 30 153 139 Rentable square feet (3) 8,036,285 8,034,200 3,758,445 2,543,800 11,794,730 10,578,000 Average physical occupancy (4) 95.3 % 94.5 % 92.2 % 90.1 % 94.3 % 93.5 % Annualized rent per occupied square foot (5)$ 18.12 $ 15.65 N/M N/M$ 17.78 $ 15.46 N/M Not meaningful
(1)
Revenue includes rental revenue, certain ancillary revenue, administrative and late fees, and excludes Tenant Protection Program revenue.
(2)
Property operating expenses excludes corporate general and administrative expenses, interest expense, depreciation, amortization expense, and acquisition expenses.
(3)
Of the total rentable square feet, parking represented approximately 1,016,000 square feet and 937,000 square feet as ofJune 30, 2022 and 2021, respectively. On a same-store basis, for the same periods, parking represented approximately 680,000 square feet.
(4)
Determined by dividing the sum of the month-end occupied square feet for the applicable group of facilities for each applicable period by the sum of their month-end rentable square feet for the period.
(5)
Determined by dividing the aggregate realized rental income for each applicable period by the aggregate of the month-end occupied square feet for the period. Properties are included in the respective calculations in their first full month of operations, as appropriate. We have excluded the realized rental revenue and occupied square feet related to parking herein for the purpose of calculating annualized rent per occupied square foot.
(6)
Included in the non same-store data is a self storage facility consisting of approximately 84,000 square feet owned by SST VI OP, which was consolidated by us fromMarch 10, 2021 untilMay 1, 2021 . Our same-store revenue increased by approximately$9.5 million , or approximately 16.2%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 primarily due to higher annualized rent per occupied square foot. The following table presents a reconciliation of net income (loss) as presented on our consolidated statements of operations to net operating income, as stated above, for the periods indicated: 72 --------------------------------------------------------------------------------
For the Six Months Ended
June 30,
2022 2021
Net income (loss) $ 17,282,581 $ (13,614,304 )
Adjusted to exclude:
Tenant Protection Program revenue(1) (3,591,205 ) (3,049,439 )
Managed REIT Platform revenue (3,822,230 ) (3,346,031 )
Managed REIT Platform expenses 1,007,111 636,032
General and administrative 13,784,230 11,564,302
Depreciation 22,934,092 19,286,728
Intangible amortization expense 8,372,857 4,913,228
Acquisition expenses 702,871 336,098
Contingent earnout adjustment 1,313,821 2,519,744
Write-off of equity interest and
preexisting relationships upon
acquisition of control 2,049,682 8,389,573 Gain on sale of real estate - (178,631 ) Interest expense 16,428,370 17,032,420 Net loss on extinguishment of debt 2,393,475 2,444,788 Gain on equity interests upon acquisition (16,101,237 ) - Other, net 513,208 (1,614,585 ) Total net operating income$ 63,267,626 $ 45,319,923
(1) Approximately
Non-GAAP Financial Measures
Funds from Operations
Funds from operations ("FFO"), is a non-GAAP financial metric promulgated by the
National Association of Real Estate Investment Trusts (NAREIT) that we believe
is an appropriate supplemental measure to reflect our operating performance. We
define FFO consistent with the standards established by the White Paper on FFO
approved by the Board of Governors of NAREIT, or the White Paper. The White
Paper defines FFO as net income (loss) computed in accordance with GAAP,
excluding gains or losses from sales of property and real estate related asset
impairment write downs, plus depreciation and amortization and after adjustments
for unconsolidated partnerships and joint ventures. Additionally, gains and
losses from change in control are excluded from the determination of FFO.
Adjustments for unconsolidated partnerships and joint ventures are calculated to
reflect FFO on the same basis. Our FFO calculation complies with NAREIT's policy
described above.
FFO, as Adjusted
We use FFO, as adjusted, as an additional non-GAAP financial measure to evaluate
our operating performance. FFO, as adjusted, provides investors with
supplemental performance information that is consistent with the performance
models and analysis used by management. In addition, FFO, as adjusted, is a
measure used among our peer group, which includes publicly traded REITs.
Further, we believe FFO, as adjusted, is useful in comparing the sustainability
of our operating performance with the sustainability of the operating
performance of other real estate companies.
In determining FFO, as adjusted, we make further adjustments to the NAREIT
computation of FFO to exclude the effects of non-real estate related asset
impairments and intangible amortization, acquisition related costs, other
write-offs incurred in connection with acquisitions, contingent earnout
expenses, accretion of fair value of debt adjustments, gains or losses from
extinguishment of debt, adjustments of deferred tax liabilities, realized and
unrealized gains/losses on foreign exchange transactions, and gains/losses on
foreign exchange and interest rate derivatives not designated for hedge
accounting, which we believe are not indicative of our overall long-term
operating performance. We exclude these items from GAAP net income (loss) to
arrive at FFO, as adjusted, as they are not the primary drivers in our
decision-making process and excluding these items provides investors a view of
our continuing operating portfolio performance over time, which in any
respective period may experience fluctuations in such acquisition, merger or
other similar activities that are not
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of a long-term operating performance nature. FFO, as adjusted, also reflects
adjustments for unconsolidated partnerships and jointly owned investments. We
use FFO, as adjusted, as one measure of our operating performance when we
formulate corporate goals and evaluate the effectiveness of our strategies.
Presentation of FFO and FFO, as adjusted, is intended to provide useful
information to investors as they compare the operating performance of different
REITs. However, not all REITs calculate FFO and FFO, as adjusted, the same way,
so comparisons with other REITs may not be meaningful. Furthermore, FFO and FFO,
as adjusted, are not necessarily indicative of cash flow available to fund cash
needs and should not be considered as an alternative to net income (loss) as an
indication of our performance, as an alternative to cash flows from operations
as an indication of our liquidity or indicative of funds available to fund our
cash needs including our ability to make distributions to our stockholders. FFO
and FFO, as adjusted, should be reviewed in conjunction with other measurements
as an indication of our performance.
The following is a reconciliation of net loss, which is the most directly comparable GAAP financial measure, to FFO and FFO, as adjusted (attributable to common stockholders), for each of the periods presented below:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Net income (loss)
(attributable to common
stockholders) $ 9,138,542 $ (3,881,184 ) $ 8,921,987 $ (17,789,848 )
Add:
Depreciation of real estate 11,619,040 10,521,283 22,481,157 18,898,768
Amortization of real estate
related intangible assets 4,286,753 3,441,144 7,946,836 4,003,229
Depreciation and amortization of
real estate and
intangible assets from
unconsolidated entities 358,716 213,959 658,729 230,996
Deduct:
Gain on deconsolidation - (169,533 ) - (169,533 )
Gain on sale of real estate - (178,631 ) - (178,631 )
Gain on equity interests upon
acquisition (7) (16,101,237 ) - (16,101,237 ) -
Adjustment for noncontrolling
interests (6) 58,107 (1,500,869 ) (1,540,958 ) (2,616,924 )
FFO (attributable to common
stockholders) 9,359,921 8,446,169 22,366,514 2,378,057
Other Adjustments:
Intangible amortization expense -
contracts (1) 185,220 212,537 426,021 909,999
Acquisition expenses (2) 285,097 30,448 702,871 336,098
Acquisition expenses and foreign
currency
(gains) losses, net from
unconsolidated
entities 31,460 107,388 51,956 107,388
Contingent earnout adjustment (3) 800,000 400,000 1,313,821 2,519,744
Write-off of equity interest and
preexisting
relationships upon acquisition
of control 2,049,682 - 2,049,682 8,389,573
Accretion of fair market value of
secured debt (7,556 ) (31,250 ) (42,198 ) (63,116 )
Net loss on extinguishment of debt
(4) 2,393,475 - 2,393,475 2,444,788
Foreign currency and interest rate
derivative
losses, net (5) 251,804 (643,547 ) 76,272 (425,549 )
Adjustment of deferred tax
liabilities (1) (1,040,711 ) (56,880 ) (799,123 ) (1,929,746 )
Offering related expenses (8) 1,387,760 - 1,387,760 -
Adjustment for noncontrolling
interests (6) (744,709 ) (1,784 ) (876,681 ) (1,435,079 )
FFO, as adjusted (attributable to
common
stockholders) $ 14,951,443 $ 8,463,081 $ 29,050,370 $ 13,232,157 The following is a reconciliation of FFO and FFO, as adjusted (attributable to common stockholders), to FFO and FFO, as adjusted (attributable to common stockholders and OP Unit holders), for each of the periods presented below:
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Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
FFO (attributable to common
stockholders and
OP unit holders) Calculation:
FFO (attributable to common
stockholders) $ 9,359,921 $ 8,446,169
Net income (loss) attributable to
the noncontrolling
interests 1,758,141 (546,092 ) 2,161,963 (2,023,086 )
Adjustment for noncontrolling interests(6) (58,107 ) 1,500,869 1,540,958 2,616,924 FFO (attributable to common stockholders and OP unit holders)$ 11,059,955 $ 9,400,946 $ 26,069,435 $ 2,971,895 FFO, as adjusted (attributable to common stockholders and OP unit holders) Calculation: FFO, as adjusted (attributable to common stockholders)$ 14,951,443 $ 8,463,081
Net income (loss) attributable to
the noncontrolling
interests 1,758,141 (546,092 ) 2,161,963 (2,023,086 )
Adjustment for noncontrolling interests(6) 686,602 1,502,653 2,417,639 4,052,003 FFO, adjusted (attributable to common stockholders and OP unit holders)$ 17,396,186 $ 9,419,642 $ 33,629,972 $ 15,261,074
(1) These items represent the amortization, accretion, or adjustment of intangible assets or deferred tax liabilities.
(2) This represents acquisition expenses associated with investments in real estate that were incurred prior to the acquisitions becoming probable and therefore not capitalized in accordance with our capitalization policy.
(3) The contingent earnout adjustment represents the adjustment to the fair value during the period of the Class A-2 Units issued in connection with the self administration transaction.
(4) The net loss associated with the extinguishment of debt includes prepayment penalties, defeasance costs, the write-off of unamortized deferred financing fees, and other fees incurred. (5) This represents the mark-to-market adjustment for our derivative instruments not designated for hedge accounting and the ineffective portion of the change in fair value of derivatives recognized in earnings, as well as changes in foreign currency related to our foreign equity investments not classified as long term.
(6) This represents the portion of the above stated adjustments in the calculations of FFO and FFO, as adjusted, that are attributable to our non-controlling interests.
(7) This gain relates to the mark up in fair value of our preexisting equity interests in SSGT II as a result of our acquisition of control in the SSGT II Merger. (8) Such costs relate to our filing of an S-11 registration statement and our pursuit of a potential offering of our common stock. As this item is non-recurring and not a primary driver in our decision-making process, FFO is adjusted for its effect to arrive at FFO, as adjusted, as a means of determining a comparable sustainable operating performance metric.
Cash Flows
A comparison of cash flows for operating, investing and financing activities for
the six months ended
Six Months Ended
June 30, 2022 June 30, 2021 Change
Net cash flow provided by (used in): Operating activities$ 41,260,764 $ 21,629,817 $ 19,630,947 Investing activities (146,001,246 ) (98,333,499 ) (47,667,747 ) Financing activities 113,723,939 29,734,478 83,989,461 75
-------------------------------------------------------------------------------- Cash flows provided by operating activities for the six months endedJune 30, 2022 and 2021 were approximately$41.3 million and$21.6 million , respectively, an increase of approximately$19.6 million . The increase in cash provided by our operating activities is primarily the result of an increase in net income when excluding the impact of non-cash items included in the determination of net income, which resulted in an increase in cash provided by operating activities of approximately$17.5 million , as well as an improvement of approximately$2.2 million resulting from changes in working capital accounts. Cash flows used in investing activities for the six months endedJune 30, 2022 and 2021 were approximately$146.0 million and$98.3 million , respectively, an increase in the use of cash of approximately$47.7 million . The increase in cash used in investing activities primarily relates to funding the SSGT II Merger and four other property acquisitions, collectively representing cash outflows of approximately$138.0 million during the six months endedJune 30, 2022 , compared to approximately$93.6 million of cash outflows during the six months endedJune 30, 2022 used to complete the SST IV Merger and one other property acquisition. Cash flows provided by financing activities for the six months endedJune 30, 2022 and 2021 were approximately$113.7 million and$29.7 million , respectively, a change of approximately$84.0 million . The change in financing activities is primarily attributable to the net proceeds from the issuance of debt of approximately$150.5 million during the six months endedJune 30, 2022 compared to the approximately$54.6 million net proceeds from the issuance of debt during the six months endedJune 30, 2021 .
Liquidity and Capital Resources
Short-Term Liquidity and Capital Resources
We generally expect that we will meet our short-term liquidity requirements from the combination of existing cash balances and net cash provided from property operations and the Managed REIT Platform and further supported by our Credit Facility. Alternatively, we may issue additional secured or unsecured financing from banks or other lenders, or we may enter into various other forms of financing. Volatility in the debt and equity markets and continued and/or further impact of COVID-19, inflation and other economic events will depend on future developments, which are highly uncertain. While we do not expect such events to have a material impact upon our liquidity in the short-term, continued uncertainty or deterioration in the debt and equity markets over an extended period of time could potentially impact our liquidity over the long-term.
Distribution Policy and Distributions
Preferred Stock Dividends
The shares of Series A Convertible Preferred Stock rank senior to all other
shares of our capital stock, including our common stock, with respect to rights
to receive dividends and to participate in distributions or payments upon any
voluntary or involuntary liquidation, dissolution or winding up of the Company.
Dividends payable on each share of Series A Convertible Preferred Stock will
initially be equal to a rate of 6.25% per annum, which accrues daily but is
payable quarterly in arrears. If the Series A Convertible Preferred Stock has
not been redeemed on or prior to the fifth anniversary date of the Initial
Closing, the dividend rate will increase an additional 0.75% per annum each year
thereafter to a maximum of 9.0% per annum until the tenth anniversary of the
Initial Closing, at which time the dividend rate shall increase 0.75% per annum
each year thereafter until the Series A Convertible Preferred Stock is either
converted or repurchased in full.
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--------------------------------------------------------------------------------Common Stock Distributions
OnJune 23, 2022 , our board of directors declared a distribution rate for the month ofJuly 2022 of approximately$0.00164 per day per share on the outstanding shares of common stock payable to Class A and Class T stockholders of record of such shares as shown on our books at the close of business on each day of the period commencing onJuly 1, 2022 and endingJuly 31, 2022 . Such distributions payable to each stockholder of record during a month will be paid the following month. OnJuly 21, 2022 , our board of directors declared a distribution rate for the month ofAugust 2022 of approximately$0.00164 per day per share on the outstanding shares of common stock payable to Class A and Class T stockholders of record of such shares as shown on our books at the close of business on each day of the period commencing onAugust 1, 2022 and endingAugust 31, 2022 . Such distributions payable to each stockholder of record during a month will be paid the following month.
Background and History of Common Stock Distributions
Since substantially all of our operations are performed indirectly through ourOperating Partnership , our ability to pay distributions depends in large part on ourOperating Partnership's ability to pay distributions to its partners, including to us. In the event we do not have enough cash from operations to fund cash distributions, we may borrow, issue additional securities or sell assets in order to fund the distributions. The terms of the Series A Convertible Preferred Stock place certain restrictions on our ability to pay distributions to our common stockholders. In general, we are prohibited from paying distributions to our common stockholders other than regular cash dividends on a basis consistent with past practice and dividends payable in shares of common stock in connection with an initial listing of such shares. Accordingly, we are presently only permitted to pay cash distributions, which may be reinvested in stock pursuant to our DRP, unless otherwise approved by the holder of the Series A Convertible Preferred Stock. Absent the foregoing restrictions, our charter allows our board of directors to authorize payments to stockholders in cash or other assets of the Company or in stock, including in stock of one class payable to holders of stock of another class.
We may not be able to pay distributions from our cash flows from operations, in which case distributions may be paid in part from debt or other financing sources.
Distributions are paid to our common stockholders based on the record date selected by our board of directors. Such distributions are based on daily declaration and record dates. We expect to continue to regularly pay distributions unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions are authorized at the discretion of our board of directors, which are directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Code. Absent the restrictions noted above, our board of directors may increase, decrease or eliminate the distribution rate that is being paid on our common stock at any time. Distributions are made on all classes of our common stock at the same time. The funds that are available for distribution may be affected by a number of factors, including the following:
•
our operating and interest expenses;
•
our ability to keep our properties occupied;
•
our ability to maintain or increase rental rates;
•
construction defects or capital improvements;
•
capital expenditures and reserves for such expenditures;
•
the issuance of additional shares;
•
financings and refinancings; and
•
dividends with respect to the outstanding shares of our Series A Convertible Preferred Stock.
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--------------------------------------------------------------------------------The following shows our distributions paid and the sources of such distributions for the respective periods presented:
Six Months Six Months
Ended Ended
June 30, 2022 June 30, 2021
Distributions paid in cash - common
stockholders $ 20,200,992 $ 11,798,066
Distributions paid in cash - Operating Partnership unitholders 3,360,975
2,927,564
Distributions paid in cash - preferred stockholders 6,232,877 6,010,812 Distributions reinvested 5,243,398 8,849,845 Total distributions$ 35,038,242 $ 29,586,287 Source of distributions Cash flows provided by operations$ 35,038,242 100 %$ 21,629,817 73 % Cash on hand - 0 % - 0 % Offering proceeds from distribution reinvestment plan - 0 % 7,956,470 27 % Total sources$ 35,038,242 100 %$ 29,586,287 100 % From our inception throughJune 30, 2022 , we paid cumulative distributions of approximately$282 million , of which approximately$232 million were paid to common stockholders, as compared to cumulative FFO of approximately$41.4 million . For the six months endedJune 30, 2022 , we paid distributions of approximately$20.2 million , of which approximately$20.2 million were paid to common stockholders, as compared to FFO (attributable to common stockholders) of approximately$22.4 million , which reflects debt defeasance costs of approximately$2.4 million and acquisition related expenses of approximately$0.7 million . For the six months endedJune 30, 2021 , we paid distributions of approximately$29.6 million , of which approximately$11.8 million were paid to common stockholders, as compared to FFO (attributable to common stockholders) of approximately$2.4 million , which reflects a write-off of equity interest and preexisting relationships of approximately$8.4 million and acquisition related expenses of approximately$0.3 million .
The payment of distributions from sources other than FFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.
We must distribute to our stockholders at least 90% of our taxable income each
year in order to meet the requirements for being treated as a REIT under the
Code. Our directors may authorize distributions in excess of this percentage as
they deem appropriate. Because we may receive income from interest or rents at
various times during our fiscal year, distributions may not reflect our income
earned in that particular distribution period, but may be made in anticipation
of cash flow that we expect to receive during a later period and may be made in
advance of actual receipt of funds in an attempt to make distributions
relatively uniform. To allow for such differences in timing between the receipt
of income and the payment of expenses, and the effect of required debt payments,
among other things, we could be required to borrow funds from third parties on a
short-term basis, issue new securities, or sell assets to meet the distribution
requirements that are necessary to achieve the tax benefits associated with
qualifying as a REIT. We are not prohibited from undertaking such activities by
our charter, bylaws or investment policies, and we may use an unlimited amount
from any source to pay our distributions. These methods of obtaining funding
could affect future distributions by increasing operating costs and decreasing
available cash, which could reduce the value of our stockholders' investment in
our shares. In addition, such distributions may constitute a return of
investors' capital.
We may not be able to pay distributions from our cash flows from operations, in
which case distributions may be paid in part from available funds or from debt
financing and pursuant to our distribution reinvestment plan. The payment of
distributions from sources other than cash flows from operations may reduce the
amount of proceeds available for investment and operations or cause us to incur
additional interest expense as a result of borrowed funds.
Over the long-term, we expect that a greater percentage of our distributions
will be paid from cash flows from operations. However, our operating performance
cannot be accurately predicted and may deteriorate in the future due to numerous
factors, including our ability to raise and invest capital at favorable yields,
the financial performance of our investments in the current real estate and
financial environment and the types and mix of investments in our portfolio. As
a result, future distributions declared and paid may exceed cash flow from
operations.
78
--------------------------------------------------------------------------------Indebtedness
As ofJune 30, 2022 , our net debt was approximately$1.0 billion , which included approximately$444 million in fixed rate debt and approximately$584 million in variable rate debt, less$0.1 million in debt discount and approximately$5.0 million in net debt issuance costs. See Note 5 - Debt, of the Notes to the Consolidated Financial Statements contained in this report for more information about our indebtedness. Additionally, we are party to a master mortgage commitment agreement (the "SmartCentres Financing") withSmartCentres Storage Finance LP (the "SmartCentres Lender"). The SmartCentres Lender is an affiliate of SmartCentres Real Estate Investment Trust, an unaffiliated third party ("SmartCentres"), that owns the other 50% of our unconsolidated real estate joint ventures located in theGreater Toronto Area ofCanada . As ofJune 30, 2022 , approximately$101.1 million Canadian Dollars ("CAD") was outstanding on the SmartCentres Financing. The proceeds of the SmartCentres Financing have been and will be used to finance the development and construction of the SmartCentres joint venture properties. See Note 4 - Investments inUnconsolidated Real Estate Ventures , of the Notes to the Consolidated Financial Statements contained in this report for additional information regarding the SmartCentres Financing.
Long-Term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for potential property acquisitions, either directly or through entity interests, for the payment of operating expenses and distributions, to fund the growth of our Managed REITs through investment in loans, and/or advances, and for the payment of principal and interest on our outstanding indebtedness.
Long-term potential future sources of capital include proceeds from secured or
unsecured financings from banks or other lenders, issuance of equity
instruments, undistributed funds from operations, and additional public or
private offerings. To the extent we are not able to secure requisite financing
in the form of a credit facility or other debt, we will be dependent upon
proceeds from the issuance of equity securities and cash flows from operating
activities in order to meet our long-term liquidity requirements and to fund our
distributions.
Our material cash requirements from contractual and other obligations primarily
relate to our debt obligations. The expected timing of those outstanding
principal payments are shown in the table below. The information in this section
should be read in conjunction with Note 5 - Debt, and Note 11 - Commitments and
Contingencies, of the Notes to the Consolidated Financial Statements contained
within this report.
Principal payments due during the years ending
December 31:
2022 $ 1,270,186
2023 2,639,402
2024 336,539,683
2025 2,869,187
2026 341,916,098
2027 and thereafter 342,605,555
Total payments $ 1,027,840,111
Additionally, as of June 30, 2022 , pursuant to the SST VI Mezzanine Loan, we
were potentially required to fund an additional $38.2 million in debt to SST VI
at their option. On July 8, 2022 , SST VI borrowed $7.2 million pursuant to the
SST VI Mezzanine Loan and we were potentially required to fund an additional
$31.0 million as of such date pursuant to the SST VI Mezzanine Loan.
On August 9, 2022 we entered into a mezzanine loan for up to approximately $50.0
million with SSGT III and initially funded $42.0 million . Pursuant to such loan,
after this initial funding, we are potentially still required to fund an
additional $8.0 million .
During the quarter ended June 30, 2022 , SmartStop committed to contribute $5.0
million to SSGT III's operating partnership in exchange for common units in SSGT
III's operating partnership at such time as SSGT III has raised $10 million in
its private placement offering.
See Note 9 - Related Party Transactions and Note 13 - Subsequent Events, of the
Notes to the Consolidated Financial Statements for more information about our
obligations under these agreements.
For cash requirements related to potential acquisitions currently under contract, please see Note 3 - Real Estate Facilities of the Notes to the Consolidated Financial Statements.
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--------------------------------------------------------------------------------Subsequent Events
Please see Note 13 - Subsequent Events of the Notes to the Consolidated Financial Statements contained in this report.
Seasonality
We believe that we will experience minor seasonal fluctuations in the occupancy levels of our facilities, which we believe will be slightly higher over the summer months due to increased moving activity.
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