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STSFF SmartStop Self Storage REIT

Filed: 12 Aug 20, 1:02pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                      

Commission File Number: 000-55617

 

SmartStop Self Storage REIT, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Maryland

46-1722812

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

10 Terrace Road

Ladera Ranch, California 92694

(Address of principal executive offices)

(877) 327-3485

(Registrant’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

None

None

None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

☒  

 

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

As of August 11, 2020, there were 52,227,775 outstanding shares of Class A common stock and 7,818,047 outstanding shares of Class T common stock of the registrant.

 

 

 


FORM 10-Q

SMARTSTOP SELF STORAGE REIT, INC.

TABLE OF CONTENTS

 

 

 

 

Page
No.

 

Cautionary Note Regarding Forward-Looking Statements

 

3

 

 

 

 

PART I.

FINANCIAL INFORMATION

 

4

 

 

 

 

Item 1.

Consolidated Financial Statements:

 

4

 

Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019

 

5

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)

 

6

 

Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)

 

7

 

Consolidated Statements of Equity for the Three Months Ended March 31, 2019 and  June 30, 2019 (unaudited)

 

8

 

Consolidated Statements of Equity for the Three Months Ended March 31, 2020 and  June 30, 2020 (unaudited)

 

10

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (unaudited)

 

12

 

Notes to Consolidated Financial Statements (unaudited)

 

14

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

56

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

78

Item 4.

Controls and Procedures

 

79

 

 

 

 

PART II.

OTHER INFORMATION

 

80

 

 

 

 

Item 1.

Legal Proceedings

 

80

Item 1A.

Risk Factors

 

80

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

81

Item 3.

Defaults Upon Senior Securities

 

81

Item 4.

Mine Safety Disclosures

 

81

Item 5.

Other Information

 

81

Item 6.

Exhibits

 

81

 

2


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q of SmartStop Self Storage REIT, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, including known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “seek,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission. We cannot guarantee the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Any such forward-looking statements are subject to risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, including without limitation, changes in the political and economic climate, economic conditions and fiscal imbalances in the United States, and other major developments, including wars, natural disasters, epidemics and pandemics, including the outbreak of novel coronavirus (COVID-19), military actions, and terrorist attacks. The occurrence or severity of any such event or circumstance is difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations and provide distributions to stockholders, and our ability to find suitable investment properties, may be significantly hindered.

For further information regarding risks and uncertainties associated with our business, and important factors that could cause our actual results to vary materially from those expressed or implied in such forward-looking statements, please refer to the factors listed and described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Risk Factors” sections of the documents we file from time to time with the U.S. Securities and Exchange Commission, including, but not limited to, our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission, as supplemented by the risk factors included in Part II, Item 1A of this Form 10-Q.

 

3


PART I. FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The information furnished in the accompanying unaudited consolidated balance sheets and related consolidated statements of operations, comprehensive loss, equity and cash flows reflects all adjustments (consisting of normal and recurring adjustments) that are, in management’s opinion, necessary for a fair and consistent presentation of the aforementioned consolidated financial statements.

The accompanying consolidated financial statements should be read in conjunction with the notes to our consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-Q. The accompanying consolidated financial statements 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 ended December 31, 2019. Our results of operations for the three and six months ended June 30, 2020, are not necessarily indicative of the operating results expected for the full year.

4


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS  

 

 

June 30,

2020

(Unaudited)

 

 

December 31,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Real estate facilities:

 

 

 

 

 

 

 

 

Land

 

$

330,552,878

 

 

$

332,350,688

 

Buildings

 

 

790,712,015

 

 

 

780,969,455

 

Site improvements

 

 

62,655,552

 

 

 

60,505,225

 

 

 

 

1,183,920,445

 

 

 

1,173,825,368

 

Accumulated depreciation

 

 

(98,435,981

)

 

 

(83,692,491

)

 

 

 

1,085,484,464

 

 

 

1,090,132,877

 

Construction in process

 

 

932,368

 

 

 

12,237,722

 

Real estate facilities, net

 

 

1,086,416,832

 

 

 

1,102,370,599

 

Cash and cash equivalents

 

 

49,952,383

 

 

 

62,279,757

 

Restricted cash

 

 

8,102,770

 

 

 

6,291,366

 

Investments in and advances to Managed REITs

 

 

1,615,664

 

 

 

6,072,399

 

Other assets, net

 

 

7,170,160

 

 

 

6,318,037

 

Intangible assets, net

 

 

14,760,842

 

 

 

30,040,426

 

Trademarks

 

 

16,264,706

 

 

 

19,688,167

 

Goodwill

 

 

53,643,331

 

 

 

78,372,980

 

Total assets

 

$

1,237,926,688

 

 

$

1,311,433,731

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Debt, net

 

$

710,116,684

 

 

$

712,733,002

 

Accounts payable and accrued liabilities

 

 

23,260,173

 

 

 

18,576,230

 

Due to affiliates

 

 

984,467

 

 

 

1,624,474

 

Distributions payable

 

 

5,868,759

 

 

 

5,159,105

 

Contingent earnout

 

 

24,400,000

 

 

 

31,100,000

 

Deferred tax liabilities

 

 

3,586,458

 

 

 

6,609,571

 

Total liabilities

 

 

768,216,541

 

 

 

775,802,382

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Redeemable common stock

 

 

51,374,754

 

 

 

43,391,362

 

Preferred Stock, $0.001 par value; 200,000,000 shares authorized:

 

 

 

 

 

 

 

 

Series A Convertible Preferred Stock, $0.001 par value; 200,000 shares authorized; 150,000 shares issued and outstanding at June 30, 2020 and December 31, 2019, with aggregate liquidation preferences of $152,383,940, and $151,665,753 at June 30, 2020 and December 31, 2019, respectively

 

 

146,379,708

 

 

 

146,426,164

 

Equity:

 

 

 

 

 

 

 

 

SmartStop Self Storage REIT, Inc. equity:

 

 

 

 

 

 

 

 

Class A common stock, $0.001 par value; 350,000,000 shares

    authorized; 52,118,882 and 51,435,124 shares issued and

    outstanding at June 30, 2020 and December 31, 2019,

    respectively

 

 

52,119

 

 

 

51,435

 

Class T common stock, $0.001 par value; 350,000,000 shares

    authorized; 7,801,216 and 7,699,893 shares issued and

    outstanding at June 30, 2020 and December 31, 2019,

    respectively

 

 

7,801

 

 

 

7,700

 

Additional paid-in capital

 

 

491,870,566

 

 

 

491,433,240

 

Distributions

 

 

(146,094,279

)

 

 

(128,642,787

)

Accumulated deficit

 

 

(130,655,858

)

 

 

(87,090,486

)

Accumulated other comprehensive loss

 

 

(6,096,431

)

 

 

(1,955,335

)

Total SmartStop Self Storage REIT, Inc. equity

 

 

209,083,918

 

 

 

273,803,767

 

Noncontrolling interests in our Operating Partnership

 

 

62,849,967

 

 

 

71,988,256

 

Other noncontrolling interests

 

 

21,800

 

 

 

21,800

 

Total noncontrolling interests

 

 

62,871,767

 

 

 

72,010,056

 

Total equity

 

 

271,955,685

 

 

 

345,813,823

 

Total liabilities and equity

 

$

1,237,926,688

 

 

$

1,311,433,731

 

See notes to consolidated financial statements.

5


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self storage rental revenue

 

$

24,946,793

 

 

$

25,154,971

 

 

$

50,514,812

 

 

$

48,386,620

 

Ancillary operating revenue

 

 

1,183,418

 

 

 

749,375

 

 

 

2,336,261

 

 

 

1,401,051

 

Managed REIT Platform revenue

 

 

1,852,893

 

 

 

29,062

 

 

 

3,636,680

 

 

 

29,062

 

Reimbursable costs from Managed REITs

 

 

1,486,441

 

 

 

47,109

 

 

 

3,279,915

 

 

 

47,109

 

Total revenues

 

 

29,469,545

 

 

 

25,980,517

 

 

 

59,767,668

 

 

 

49,863,842

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

9,195,043

 

 

 

8,775,557

 

 

 

18,870,069

 

 

 

16,974,602

 

Property operating expenses – affiliates

 

 

 

 

 

3,380,954

 

 

 

 

 

 

6,605,670

 

Managed REIT Platform expenses

 

 

1,008,014

 

 

 

10,569

 

 

 

2,182,823

 

 

 

10,569

 

Reimbursable costs from Managed REITs

 

 

1,486,441

 

 

 

47,109

 

 

 

3,279,915

 

 

 

47,109

 

General and administrative

 

 

4,149,713

 

 

 

1,826,886

 

 

 

7,817,660

 

 

 

3,481,070

 

Depreciation

 

 

7,842,443

 

 

 

7,420,510

 

 

 

15,559,114

 

 

 

14,288,918

 

Intangible amortization expense

 

 

3,218,152

 

 

 

2,354,332

 

 

 

6,887,783

 

 

 

4,081,308

 

Self administration transaction expenses

 

 

 

 

 

1,350,188

 

 

 

 

 

 

1,488,271

 

Acquisition expenses – affiliates

 

 

 

 

 

45,119

 

 

 

 

 

 

84,061

 

Other acquisition expenses

 

 

97,221

 

 

 

387

 

 

 

125,326

 

 

 

84,236

 

Contingent earnout adjustment

 

 

500,000

 

 

 

 

 

 

(6,700,000

)

 

 

 

Impairment of goodwill and intangible assets

 

 

 

 

 

 

 

 

36,465,732

 

 

 

 

Impairment of investments in Managed REITs

 

 

 

 

 

 

 

 

4,376,879

 

 

 

 

Total operating expenses

 

 

27,497,027

 

 

 

25,211,611

 

 

 

88,865,301

 

 

 

47,145,814

 

Operating income (loss)

 

 

1,972,518

 

 

 

768,906

 

 

 

(29,097,633

)

 

 

2,718,028

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(8,284,429

)

 

 

(9,762,302

)

 

 

(16,623,732

)

 

 

(18,323,804

)

Interest expense – accretion of fair market value of

   secured debt

 

 

32,892

 

 

 

33,191

 

 

 

65,549

 

 

 

65,659

 

Interest expense – debt issuance costs

 

 

(936,278

)

 

 

(1,073,725

)

 

 

(1,879,761

)

 

 

(1,915,258

)

Net loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

(1,487,867

)

Gain resulting from acquisition of unconsolidated

   affiliates

 

 

 

 

 

8,017,353

 

 

 

 

 

 

8,017,353

 

Other

 

 

152,456

 

 

 

(267,395

)

 

 

2,729,155

 

 

 

(306,401

)

Net loss

 

 

(7,062,841

)

 

 

(2,283,972

)

 

 

(44,806,422

)

 

 

(11,232,290

)

Net loss attributable to the noncontrolling

    interests in our Operating Partnership

 

 

933,443

 

 

 

71,527

 

 

 

5,965,095

 

 

 

128,286

 

Less: Distributions to preferred stockholders

 

 

(2,362,023

)

 

 

 

 

 

(4,724,045

)

 

 

 

Net loss attributable to SmartStop Self Storage

   REIT, Inc. common stockholders

 

$

(8,491,421

)

 

$

(2,212,445

)

 

$

(43,565,372

)

 

$

(11,104,004

)

Net loss per Class A share – basic and diluted

 

$

(0.14

)

 

$

(0.04

)

 

$

(0.74

)

 

$

(0.19

)

Net loss per Class T share – basic and diluted

 

$

(0.14

)

 

$

(0.04

)

 

$

(0.74

)

 

$

(0.19

)

Weighted average Class A shares outstanding – basic and

    diluted

 

 

51,622,509

 

 

 

50,679,825

 

 

 

51,469,807

 

 

 

50,603,703

 

Weighted average Class T shares outstanding – basic and

    diluted

 

 

7,776,128

 

 

 

7,581,180

 

 

 

7,764,393

 

 

 

7,563,544

 

 

See notes to consolidated financial statements.

6


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net loss

 

$

(7,062,841

)

 

$

(2,283,972

)

 

$

(44,806,422

)

 

$

(11,232,290

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

1,959,220

 

 

 

1,192,459

 

 

 

(2,607,900

)

 

 

2,059,720

 

Foreign currency hedge contract gains

    (losses)

 

 

(1,932,451

)

 

 

(1,039,585

)

 

 

2,634,344

 

 

 

(1,886,166

)

Interest rate swap and cap contract gains

    (losses)

 

 

672,354

 

 

 

(1,861,933

)

 

 

(4,803,195

)

 

 

(3,177,025

)

Other comprehensive gain (loss)

 

 

699,123

 

 

 

(1,709,059

)

 

 

(4,776,751

)

 

 

(3,003,471

)

Comprehensive loss

 

 

(6,363,718

)

 

 

(3,993,031

)

 

 

(49,583,173

)

 

 

(14,235,761

)

Comprehensive loss attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to the

    noncontrolling interests in our Operating

    Partnership

 

 

841,054

 

 

 

125,049

 

 

 

6,600,750

 

 

 

162,589

 

Comprehensive loss attributable to SmartStop

     Self Storage REIT, Inc. stockholders

 

$

(5,522,664

)

 

$

(3,867,982

)

 

$

(42,982,423

)

 

$

(14,073,172

)

 

See notes to consolidated financial statements.

 

 

7


 

SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class T

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

of Shares

 

 

Common

Stock

Par Value

 

 

Number

of Shares

 

 

Common

Stock

Par Value

 

 

Additional

Paid-in

Capital

 

 

Distributions

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

SmartStop

Self Storage

REIT,

Inc. Equity

 

 

Noncontrolling

Interests

 

 

Total

Equity

 

 

Preferred

Equity

 

 

Redeemable

Common

Stock

 

Balance as of December 31, 2018

 

 

50,437,059

 

 

$

50,437

 

 

 

7,533,790

 

 

$

7,534

 

 

$

500,474,807

 

 

$

(94,248,326

)

 

$

(62,340,153

)

 

$

1,390,354

 

 

$

345,334,653

 

 

$

(77,756

)

 

$

345,256,897

 

 

$

 

 

$

32,226,815

 

Offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,418

)

 

 

 

 

 

 

 

 

 

 

 

(2,418

)

 

 

 

 

 

(2,418

)

 

 

 

 

 

 

Issuance of limited partnership units

   in our Operating Partnership in

   connection with the SSGT

   Mergers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,217,399

 

 

 

4,217,399

 

 

 

 

 

 

 

Changes to redeemable common

   stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,963,393

)

 

 

 

 

 

 

 

 

 

 

 

(3,963,393

)

 

 

 

 

 

(3,963,393

)

 

 

 

 

 

3,963,393

 

Redemptions of common stock

 

 

(120,000

)

 

 

(120

)

 

 

(21,291

)

 

 

(21

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(141

)

 

 

 

 

 

(141

)

 

 

 

 

 

(2,044,001

)

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,411,426

)

 

 

 

 

 

 

 

 

(8,411,426

)

 

 

 

 

 

(8,411,426

)

 

 

 

 

 

 

Distributions to noncontrolling

   interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(46,584

)

 

 

(46,584

)

 

 

 

 

 

 

Issuance of shares for distribution

   reinvestment plan

 

 

322,580

 

 

 

323

 

 

 

49,604

 

 

 

50

 

 

 

3,963,393

 

 

 

 

 

 

 

 

 

 

 

 

3,963,766

 

 

 

 

 

 

3,963,766

 

 

 

 

 

 

 

Equity based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,957

 

 

 

 

 

 

 

 

 

 

 

 

21,957

 

 

 

 

 

 

21,957

 

 

 

 

 

 

 

Net loss attributable to SmartStop

    Self Storage REIT, Inc. common

    stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,891,558

)

 

 

 

 

 

(8,891,558

)

 

 

 

 

 

(8,891,558

)

 

 

 

 

 

 

Net loss attributable to the

   noncontrolling interests in

   our Operating Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(56,759

)

 

 

(56,759

)

 

 

 

 

 

 

Foreign currency translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

867,261

 

 

 

867,261

 

 

 

 

 

 

867,261

 

 

 

 

 

 

 

Foreign currency forward contract

   loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(846,581

)

 

 

(846,581

)

 

 

 

 

 

(846,581

)

 

 

 

 

 

 

Interest rate swap and cap contract

   loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,315,092

)

 

 

(1,315,092

)

 

 

 

 

 

(1,315,092

)

 

 

 

 

 

 

Balance as of March 31, 2019

 

 

50,639,639

 

 

$

50,640

 

 

 

7,562,103

 

 

$

7,563

 

 

$

500,494,346

 

 

$

(102,659,752

)

 

$

(71,231,711

)

 

$

95,942

 

 

$

326,757,028

 

 

$

4,036,300

 

 

$

330,793,328

 

 

$

 

 

$

34,146,207

 

 

 

 

 

See notes to consolidated financial statements.


8


 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class T

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

of Shares

 

 

Common

Stock

Par Value

 

 

Number

of Shares

 

 

Common

Stock

Par Value

 

 

Additional

Paid-in

Capital

 

 

Distributions

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

SmartStop

Self Storage

REIT,

Inc. Equity

 

 

Noncontrolling

Interests

 

 

Total

Equity

 

 

Preferred

Equity

 

 

Redeemable

Common

Stock

 

Balance as of March 31, 2019

 

 

50,639,639

 

 

$

50,640

 

 

 

7,562,103

 

 

$

7,563

 

 

$

500,494,346

 

 

$

(102,659,752

)

 

$

(71,231,711

)

 

$

95,942

 

 

$

326,757,028

 

 

$

4,036,300

 

 

$

330,793,328

 

 

$

 

 

$

34,146,207

 

Offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,559

)

 

 

 

 

 

 

 

 

 

 

 

(1,559

)

 

 

 

 

 

(1,559

)

 

 

 

 

 

 

Issuance of limited partnership

   units in our Operating Partnership

   in connection with the Self

   Administration Transaction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63,643,000

 

 

 

63,643,000

 

 

 

 

 

 

 

Issuance of limited partnership

   units in our Operating Partnership

   in exchange for special limited

   partnership interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,687,035

 

 

 

 

 

 

 

 

 

 

 

 

9,687,035

 

 

 

9,112,965

 

 

 

18,800,000

 

 

 

 

 

 

 

Contribution of special limited

   partnership interest in exchange

   for limited partnership interests in

   our Operating Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,800,000

)

 

 

 

 

 

 

 

 

 

 

 

(18,800,000

)

 

 

 

 

 

(18,800,000

)

 

 

 

 

 

 

Noncontrolling interests related to

   the consolidated Tenant

   Programs joint ventures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,800

 

 

 

21,800

 

 

 

 

 

 

 

Redemption of limited partnership

   interests held by our Former

   Advisor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(291,103

)

 

 

 

 

 

 

 

 

 

 

 

(291,103

)

 

 

91,103

 

 

 

(200,000

)

 

 

 

 

 

 

Changes to redeemable common

   stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,049,066

)

 

 

 

 

 

 

 

 

 

 

 

(4,049,066

)

 

 

 

 

 

(4,049,066

)

 

 

 

 

 

4,049,066

 

Redemptions of common stock

 

 

(199,883

)

 

 

(200

)

 

 

(10,242

)

 

 

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(211

)

 

 

 

 

 

(211

)

 

 

 

 

 

(2,052,078

)

Issuance of restricted stock

 

 

232,176

 

 

 

232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

232

 

 

 

 

 

 

232

 

 

 

 

 

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,533,201

)

 

 

 

 

 

 

 

 

(8,533,201

)

 

 

 

 

 

(8,533,201

)

 

 

 

 

 

 

Distributions to noncontrolling

   interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(105,140

)

 

 

(105,140

)

 

 

 

 

 

 

Issuance of shares for distribution

   reinvestment plan

 

 

328,392

 

 

 

328

 

 

 

50,757

 

 

 

50

 

 

 

4,049,066

 

 

 

 

 

 

 

 

 

 

 

 

4,049,444

 

 

 

 

 

 

4,049,444

 

 

 

 

 

 

 

Equity based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25,136

 

 

 

 

 

 

 

 

 

 

 

 

25,136

 

 

 

 

 

 

25,136

 

 

 

 

 

 

 

Net loss attributable to SmartStop

   Self Storage REIT, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,212,445

)

 

 

 

 

 

(2,212,445

)

 

 

 

 

 

(2,212,445

)

 

 

 

 

 

 

Net loss attributable to the

   noncontrolling interests in our

   Operating Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(71,527

)

 

 

(71,527

)

 

 

 

 

 

 

Foreign currency translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,192,459

 

 

 

1,192,459

 

 

 

 

 

 

1,192,459

 

 

 

 

 

 

 

Foreign currency forward contract

   loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,039,585

)

 

 

(1,039,585

)

 

 

 

 

 

(1,039,585

)

 

 

 

 

 

 

Interest rate swap and cap contract

   loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,861,933

)

 

 

(1,861,933

)

 

 

 

 

 

(1,861,933

)

 

 

 

 

 

 

Balance as of June 30, 2019

 

 

51,000,324

 

 

$

51,000

 

 

 

7,602,618

 

 

$

7,602

 

 

$

491,113,855

 

 

$

(111,192,953

)

 

$

(73,444,156

)

 

$

(1,613,117

)

 

$

304,922,231

 

 

$

76,728,501

 

 

$

381,650,732

 

 

$

 

 

$

36,143,195

 

 

 

 

See notes to consolidated financial statements.

9


 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class T

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

of Shares

 

 

Common

Stock

Par Value

 

 

Number

of Shares

 

 

Common

Stock

Par Value

 

 

Additional

Paid-in

Capital

 

 

Distributions

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

SmartStop Self Storage REIT,

Inc. Equity

 

 

Noncontrolling

Interests

 

 

Total

Equity

 

 

Preferred

Equity

 

 

Redeemable

Common

Stock

 

Balance as of December 31, 2019

 

 

51,435,124

 

 

$

51,435

 

 

 

7,699,893

 

 

$

7,700

 

 

$

491,433,240

 

 

$

(128,642,787

)

 

$

(87,090,486

)

 

$

(1,955,335

)

 

$

273,803,767

 

 

$

72,010,056

 

 

$

345,813,823

 

 

$

146,426,164

 

 

$

43,391,362

 

Offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28,822

)

 

 

 

 

 

 

 

 

 

 

 

(28,822

)

 

 

 

 

 

(28,822

)

 

 

 

 

 

 

Preferred equity issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(46,456

)

 

 

 

Changes to redeemable common

   stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,979,539

)

 

 

 

 

 

 

 

 

 

 

 

(3,979,539

)

 

 

 

 

 

(3,979,539

)

 

 

 

 

 

3,979,539

 

Redemptions of common stock

 

 

(42,040

)

 

 

(42

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(42

)

 

 

 

 

 

(42

)

 

 

 

 

 

 

Issuance of restricted stock

 

 

47,842

 

 

 

48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48

 

 

 

 

 

 

48

 

 

 

 

 

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,668,726

)

 

 

 

 

 

 

 

 

(8,668,726

)

 

 

 

 

 

(8,668,726

)

 

 

 

 

 

 

Distributions to noncontrolling

   interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,356,799

)

 

 

(1,356,799

)

 

 

 

 

 

 

Issuance of shares for distribution

   reinvestment plan

 

 

322,411

 

 

 

322

 

 

 

50,046

 

 

 

50

 

 

 

3,979,167

 

 

 

 

 

 

 

 

 

 

 

 

3,979,539

 

 

 

 

 

 

3,979,539

 

 

 

 

 

 

 

Equity  based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

219,603

 

 

 

 

 

 

 

 

 

 

 

 

219,603

 

 

 

 

 

 

219,603

 

 

 

 

 

 

 

Net loss attributable to SmartStop

   Self Storage REIT, Inc. common

   stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35,073,951

)

 

 

 

 

 

(35,073,951

)

 

 

 

 

 

(35,073,951

)

 

 

 

 

 

 

Net loss attributable to the

   noncontrolling interests in

   our Operating Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,031,652

)

 

 

(5,031,652

)

 

 

 

 

 

 

Foreign currency translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,959,904

)

 

 

(3,959,904

)

 

 

(607,216

)

 

 

(4,567,120

)

 

 

 

 

 

 

Foreign currency forward contract

   gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,959,594

 

 

 

3,959,594

 

 

 

607,201

 

 

 

4,566,795

 

 

 

 

 

 

 

Interest rate swap and cap contract

   loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,747,520

)

 

 

(4,747,520

)

 

 

(728,029

)

 

 

(5,475,549

)

 

 

 

 

 

 

Balance as of March 31, 2020

 

 

51,763,337

 

 

$

51,763

 

 

 

7,749,939

 

 

$

7,750

 

 

$

491,623,649

 

 

$

(137,311,513

)

 

$

(122,164,437

)

 

$

(6,703,165

)

 

$

225,504,047

 

 

$

64,893,561

 

 

$

290,397,608

 

 

$

146,379,708

 

 

$

47,370,901

 

See notes to consolidated financial statements.


10


 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class T

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

of Shares

 

 

Common

Stock

Par Value

 

 

Number

of Shares

 

 

Common

Stock

Par Value

 

 

Additional

Paid-in

Capital

 

 

Distributions

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

SmartStop Self Storage REIT,

Inc. Equity

 

 

Noncontrolling

Interests

 

 

Total

Equity

 

 

Preferred

Equity

 

 

Redeemable

Common

Stock

 

Balance as of March 31, 2020

 

 

51,763,337

 

 

$

51,763

 

 

 

7,749,939

 

 

$

7,750

 

 

$

491,623,649

 

 

$

(137,311,513

)

 

$

(122,164,437

)

 

$

(6,703,165

)

 

$

225,504,047

 

 

$

64,893,561

 

 

$

290,397,608

 

 

$

146,379,708

 

 

$

47,370,901

 

Offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22

)

 

 

 

 

 

 

 

 

 

 

 

(22

)

 

 

 

 

 

(22

)

 

 

 

 

 

 

Changes to redeemable common

   stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,011,353

)

 

 

 

 

 

 

 

 

 

 

 

(4,011,353

)

 

 

 

 

 

(4,011,353

)

 

 

 

 

 

4,011,353

 

Redemptions of common stock

 

 

(750

)

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

 

 

(7,500

)

Issuance of restricted stock

 

 

23,725

 

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

 

 

 

 

 

 

24

 

 

 

 

 

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,782,766

)

 

 

 

 

 

 

 

 

(8,782,766

)

 

 

 

 

 

(8,782,766

)

 

 

 

 

 

 

Distributions to noncontrolling

   interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,356,800

)

 

 

(1,356,800

)

 

 

 

 

 

 

Issuance of shares for distribution

   reinvestment plan

 

 

332,570

 

 

 

333

 

 

 

51,277

 

 

 

51

 

 

 

4,010,969

 

 

 

 

 

 

 

 

 

 

 

 

4,011,353

 

 

 

 

 

 

4,011,353

 

 

 

 

 

 

 

Equity  based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

247,323

 

 

 

 

 

 

 

 

 

 

 

 

247,323

 

 

 

176,060

 

 

 

423,383

 

 

 

 

 

 

 

Net loss attributable to SmartStop

   Self Storage REIT, Inc. common

   stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,491,421

)

 

 

 

 

 

(8,491,421

)

 

 

 

 

 

(8,491,421

)

 

 

 

 

 

 

Net loss attributable to the

   noncontrolling interests in

   our Operating Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(933,443

)

 

 

(933,443

)

 

 

 

 

 

 

Foreign currency translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,700,259

 

 

 

1,700,259

 

 

 

258,961

 

 

 

1,959,220

 

 

 

 

 

 

 

Foreign currency forward contract

   loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,677,000

)

 

 

(1,677,000

)

 

 

(255,451

)

 

 

(1,932,451

)

 

 

 

 

 

 

Interest rate swap and cap contract

   gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

583,475

 

 

 

583,475

 

 

 

88,879

 

 

 

672,354

 

 

 

 

 

 

 

Balance as of June 30, 2020

 

 

52,118,882

 

 

$

52,119

 

 

 

7,801,216

 

 

$

7,801

 

 

$

491,870,566

 

 

$

(146,094,279

)

 

$

(130,655,858

)

 

$

(6,096,431

)

 

$

209,083,918

 

 

$

62,871,767

 

 

$

271,955,685

 

 

$

146,379,708

 

 

$

51,374,754

 

See notes to consolidated financial statements.

 

11


 

SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(44,806,422

)

 

$

(11,232,290

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

22,446,897

 

 

 

18,370,226

 

Change in deferred tax liability

 

 

(3,023,113

)

 

 

 

Accretion of fair market value adjustment of secured debt

 

 

(65,549

)

 

 

(65,659

)

Amortization of debt issuance costs

 

 

1,879,761

 

 

 

1,915,258

 

Equity based compensation expense

 

 

642,986

 

 

 

47,093

 

Contingent earnout adjustment

 

 

(6,700,000

)

 

 

 

Impairment of goodwill and intangible assets

 

 

36,465,732

 

 

 

 

Impairment of investments in Managed REITs

 

 

4,376,879

 

 

 

 

Unrealized foreign currency and derivative (gains) losses

 

 

350,781

 

 

 

(259,336

)

Net loss on extinguishment of debt

 

 

 

 

 

1,487,867

 

Gain resulting from acquisition of unconsolidated affiliates

 

 

 

 

 

(8,017,353

)

Increase (decrease) in cash from changes in assets and liabilities:

 

 

 

 

 

 

 

 

Other assets, net

 

 

235,042

 

 

 

467,125

 

Accounts payable and accrued liabilities

 

 

2,619,780

 

 

 

1,328,303

 

Managed REITs receivables

 

 

79,845

 

 

 

 

Due to affiliates

 

 

(325,046

)

 

 

(105,305

)

Net cash provided by operating activities

 

 

14,177,573

 

 

 

3,935,929

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to real estate

 

 

(7,744,136

)

 

 

(5,632,641

)

Deposits on acquisition of real estate

 

 

(73,340

)

 

 

 

Settlement of foreign currency hedges

 

 

398,951

 

 

 

1,586,484

 

SSGT Mergers, net of cash acquired

 

 

 

 

 

(345,538,595

)

Self Administration Transaction, net of cash acquired

 

 

 

 

 

(3,292,958

)

Settlement of company owned life insurance

 

 

 

 

 

3,122,962

 

Sale of real estate joint venture

 

 

 

 

 

3,357,814

 

Net cash used in investing activities

 

 

(7,418,525

)

 

 

(346,396,934

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Gross proceeds from issuance of debt

 

 

335,855

 

 

 

514,388,032

 

Repayment of debt

 

 

 

 

 

(141,088,724

)

Scheduled principal payments on debt

 

 

(349,450

)

 

 

(55,299

)

Debt issuance costs

 

 

(4,459

)

 

 

(8,462,191

)

Preferred stock issuance costs

 

 

(46,457

)

 

 

 

Debt defeasance costs

 

 

 

 

 

(1,690,703

)

Offering costs

 

 

(352,345

)

 

 

(340,654

)

Redemption of common stock

 

 

(438,783

)

 

 

(3,335,663

)

Redemption of noncontrolling interest

 

 

 

 

 

(200,000

)

Distributions paid to preferred stockholders

 

 

(3,974,779

)

 

 

 

Distributions paid to common stockholders

 

 

(9,495,228

)

 

 

(9,004,432

)

Distributions paid to noncontrolling interest in OP

 

 

(2,718,583

)

 

 

(89,332

)

Net cash provided by (used in) financing activities

 

 

(17,044,229

)

 

 

350,121,034

 

Impact of foreign exchange rate changes on cash and restricted cash

 

 

(230,789

)

 

 

(292,071

)

Change in cash, cash equivalents, and restricted cash

 

 

(10,515,970

)

 

 

7,367,958

 

Cash, cash equivalents, and restricted cash beginning of period

 

 

68,571,123

 

 

 

14,012,208

 

Cash, cash equivalents, and restricted cash end of period

 

$

58,055,153

 

 

$

21,380,166

 

 

12


 

 

Supplemental disclosures and non-cash transactions:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

16,772,069

 

 

$

16,422,557

 

Supplemental disclosure of noncash activities:

 

 

 

 

 

 

 

 

Issuance of shares pursuant to distribution reinvestment plan

 

$

7,990,892

 

 

$

8,013,210

 

Distributions payable

 

$

5,868,759

 

 

$

2,879,771

 

Additions to real estate and construction in process included in

   accounts payable

 

$

334,128

 

 

$

432,353

 

Redemption of common stock included in accounts payable and

   accrued liabilities

 

$

 

 

$

2,052,077

 

Issuance of units in our Operating Partnership in SSGT Mergers

 

$

 

 

$

4,217,399

 

Debt assumed in SSGT Mergers

 

$

 

 

$

5,038,435

 

Net liabilities assumed in SSGT Mergers

 

$

 

 

$

1,712,596

 

Write-off of unamortized debt issuance costs

 

$

 

 

$

356,519

 

Issuance of Class A-1 units in our Operating Partnership in the Self

   Administration Transaction

 

$

 

 

$

63,643,000

 

Debt assumed in the Self Administration Transaction

 

$

 

 

$

19,219,126

 

Contingent earnout consideration issued in the Self Administration Transaction

 

$

 

 

$

30,900,000

 

Issuance of limited partnership units in our Operating Partnership in

   exchange for special limited partnership interest

 

$

 

 

$

18,800,000

 

Deferred tax liabilities related to the Self Administration Transaction

 

$

 

 

$

7,415,654

 

Accounts payable and other accrued liabilities assumed in the Self

   Administration Transaction

 

$

 

 

$

722,286

 

Transfer of other assets to debt issuance costs

 

$

 

 

$

1,075,000

 

 

See notes to consolidated financial statements.

 

13


 

SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

Note 1. Organization

SmartStop Self Storage REIT, Inc, a Maryland corporation (the “Company”), is a self-managed and fully-integrated self storage real estate investment trust (“REIT”), formed on January 8, 2013, under the Maryland General Corporation Law. The Company’s 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.

On June 28, 2019, we acquired the self storage advisory, asset management and property management businesses and certain joint venture interests (the “Self Storage Platform”) of SmartStop Asset Management, LLC, our former sponsor (“SAM”), along with certain other assets of SAM (collectively, the “Self Administration Transaction”).  As a result of the Self Administration Transaction, SAM is no longer our sponsor, and the special limited partnership interest and limited partnership interests it held in SmartStop OP, L.P. (our “Operating Partnership”) through our Former External Advisor (defined below) have been redeemed. We are now self-managed and succeed to the advisory, asset management and property management businesses and certain joint ventures previously in place for us, Strategic Storage Trust IV, Inc. (“SST IV”), a public non-traded REIT, and Strategic Storage Growth Trust II, Inc. (“SSGT II”) (collectively with SST IV, the “Managed REITs”), a private non-traded REIT. In addition, as a sponsor to the Managed REITs, we now have the internal capability to originate, structure and manage additional investment products (the “Managed REIT Platform”) which would be sponsored by SmartStop REIT Advisors, LLC (“SRA”), our indirect subsidiary. As a result of the Self Administration Transaction, we indirectly own 100% of the membership interests in Strategic Storage Advisor II, LLC (our “Former External Advisor”) and each of Strategic Storage Property Management II, LLC and SS Growth Property Management, LLC (together, our “Former External Property Managers”). See Note 4, Self Administration Transaction, for additional information.

Prior to the Self Administration Transaction, our Former External Advisor was responsible for managing our affairs on a day-to-day basis and identifying and making acquisitions and investments on our behalf under the terms of an advisory agreement and our properties were previously managed by our Former External Property Managers pursuant to property management agreements. However, upon completion of the Self Administration Transaction, we acquired approximately 350 self storage professionals and now perform such services on our own behalf. Please see Note 11 – Related Party Transactions.

Offering Related

Our Articles of Amendment and Restatement, as amended and supplemented, authorize 350,000,000 shares of Class A common stock, $0.001 par value per share (the “Class A Shares”), and 350,000,000 shares of Class T common stock, $0.001 par value per share (the “Class T Shares”), and 200,000,000 shares of preferred stock with a par value of $0.001, 200,000 shares of which have been classified as Series A Convertible Preferred Stock. We offered a maximum of $1.0 billion in common shares for sale to the public (the “Primary Offering”) and $95.0 million in common shares for sale pursuant to our distribution reinvestment plan (collectively, the “Offering”).

On January 10, 2014, the Securities and Exchange Commission (“SEC”) declared our registration statement effective. On May 23, 2014, we satisfied the $1.5 million minimum offering requirements of our Offering and commenced formal operations. On January 9, 2017, our Offering terminated. We sold approximately 48 million Class A Shares and approximately 7 million Class T Shares for approximately $493 million and $73 million respectively, in our Offering. On November 30, 2016, prior to the termination of our Offering, we filed with the SEC a Registration Statement on Form S-3, which registered up to an additional $100.9 million in shares under our distribution reinvestment plan (our “DRP Offering”). The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders. As of June 30, 2020, we had sold approximately 4.7 million Class A Shares and approximately 0.7 million Class T Shares for approximately $48.6 million and $7.5 million, respectively, in our DRP Offering.

14


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

On October 29, 2019 (the “Commitment Date”), we entered into a preferred stock purchase agreement (the “Purchase Agreement”) with Extra Space Storage LP (the “Investor”), a subsidiary of Extra Space Storage Inc. (NYSE: EXR), pursuant to which the Investor committed to purchase up to $200 million in shares (the aggregate shares to be purchased, the “Preferred Shares”) of our Series A Convertible Preferred Stock (the “Series A Convertible Preferred Stock”), in one or more closings (each, a “Closing,” and collectively, the “Closings”). The initial closing (the “Initial Closing”) in the amount of $150 million occurred on the Commitment Date. The Investor has committed to purchase up to an additional $50 million, at our option, within 12 months following the Initial Closing, subject to certain limitations.

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. 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 redeemed or repurchased in full.  See Note 8, Preferred Equity, for additional information.

We invested the net proceeds from our Offering primarily in self storage facilities. As of June 30, 2020, we owned 112 self storage facilities located in 17 states (Alabama, Arizona, California, Colorado, Florida, Illinois, Indiana, Maryland, Massachusetts, Michigan, New Jersey, Nevada, North Carolina, Ohio, South Carolina, Texas and Washington) and Canada (the Greater Toronto Area).

On April 20, 2020, our board of directors, upon recommendation of our Nominating and Corporate Governance Committee, approved an estimated value per share of our common stock of $10.40 for our Class A Shares and Class T Shares based on the estimated value of our assets less the estimated value of our liabilities, or net asset value, divided by the number of shares outstanding on a fully diluted basis, calculated as of December 31, 2019.

As a result of the calculation of our estimated value per share, beginning in May 2020, shares sold pursuant to our distribution reinvestment plan are being sold at the estimated value per share of $10.40 for both Class A Shares and Class T Shares.

Prior to the termination of our Primary Offering, Select Capital Corporation, a California corporation (our “Dealer Manager”), was responsible for marketing our shares offered pursuant to our Primary Offering. SAM indirectly owns a 15% non-voting equity interest in our Dealer Manager. Now that our Primary Offering has terminated, our Dealer Manager no longer provides such services for us. However, we pay our Dealer Manager an ongoing stockholder servicing fee with respect to the Class T Shares sold. Please see Note 11 – Related Party Transactions – Dealer Manager Agreement.

Other Corporate History

Our Operating Partnership was formed on January 9, 2013. During 2013, our Former External Advisor purchased limited partnership interests in our Operating Partnership for $200,000 and on August 2, 2013, we contributed the initial $1,000 capital contribution we received to our Operating Partnership in exchange for the general partner interest. See Note 4, Self Administration Transaction, for additional information.

As we accepted subscriptions for shares of our common stock, we transferred all of the net Offering proceeds to our Operating Partnership as capital contributions in exchange for additional units of interest in our Operating Partnership. However, we were deemed to have made capital contributions in the amount of gross proceeds received from investors, and our Operating Partnership was deemed to have simultaneously paid the sales commissions and other costs associated with the Offering. In addition, our Operating Partnership is structured to make distributions with respect to limited partnership units that are equivalent to the distributions made to holders of common stock. Finally, a limited partner in our Operating Partnership may later exchange his or her limited partnership units in our Operating Partnership for shares of our common stock at any time after one year following the date of issuance of their limited partnership units, subject to certain restrictions outlined in our Operating Partnership’s limited partnership agreement.

15


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Our Operating Partnership owns, directly or indirectly through one or more special purpose entities, all of the self storage properties that we own. As of June 30, 2020, we owned approximately 86.4% of the common units of limited partnership interests of our Operating Partnership. The remaining approximately 13.6% of the common units are owned indirectly by SAM and affiliates of our Dealer Manager. As the sole general partner of our Operating Partnership, we have the exclusive power to manage and conduct the business of our Operating Partnership. We conduct certain activities through SmartStop TRS, Inc. (our “TRS”), which is a wholly-owned subsidiary of our Operating Partnership.

On October 1, 2018, we, our Operating Partnership, and SST II Growth Acquisition, LLC, our wholly-owned subsidiary (“Merger Sub”), entered into an Agreement and Plan of Merger (the “SSGT Merger Agreement”) with Strategic Storage Growth Trust, Inc. (“SSGT”), a non-traded REIT then sponsored by SAM, and SS Growth Operating Partnership, L.P. (“SSGT OP”).  Pursuant to the terms and conditions set forth in the Merger Agreement, on January 24, 2019: (i) we acquired SSGT by way of a merger of SSGT with and into Merger Sub, with Merger Sub being the surviving entity (the “SSGT REIT Merger”); and (ii) immediately after the SSGT REIT Merger, SSGT OP merged with and into our Operating Partnership, with the Operating Partnership continuing as the surviving entity and remaining a subsidiary of the Company (the “SSGT Partnership Merger” and, together with the SSGT REIT Merger, the “SSGT Mergers”).  SSGT was a REIT with stated investment objectives to acquire opportunistic self storage properties, including development and lease-up properties. See Note 3, Real Estate Facilities—Merger with Strategic Storage Growth Trust, Inc., for additional information related to the SSGT Mergers.

COVID-19

The global economy has continued to be adversely impacted by the COVID-19 pandemic, including in the United States and in the markets in which we operate. The COVID-19 pandemic and the resulting effects, including shutdowns or weakness in national, regional and local economies that negatively impact the demand for self storage space have adversely impacted and could continue to adversely impact our business, financial condition, liquidity and results of operations, however, the extent and duration to which our operations will be impacted is highly uncertain and cannot be predicted.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC.

Principles of Consolidation

Our financial statements, and the financial statements of our Operating Partnership, including its wholly-owned subsidiaries, are consolidated in the accompanying consolidated financial statements. The portion of these entities not wholly-owned by us is presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated in consolidation.

16


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

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. Our Operating Partnership is deemed to be a VIE and is consolidated by the Company as the primary beneficiary.

As of June 30, 2020, and December 31, 2019, we were not a party to any other contracts/interests that would be deemed to be variable interest in VIEs other than our Tenant Programs joint ventures with SST IV and SSGT II which were acquired in the Self Administration Transaction, which are consolidated.  

Equity Investments

Under the equity method, our investments will be stated at cost and adjusted for our share of net earnings or losses and reduced by distributions and impairments, as applicable. Equity in earnings will generally be recognized based on our ownership interest in the earnings of each of the unconsolidated investments.

Noncontrolling Interests in Consolidated Entities

We account for the noncontrolling interests in our Operating Partnership and the noncontrolling interests in our Tenant Programs joint ventures with SST IV and SSGT II in accordance with the related accounting guidance. Due to our control through our general partnership interest in our Operating Partnership and the limited rights of the limited partners, our Operating Partnership, including its wholly-owned subsidiaries, are consolidated with the Company and the limited partner interests are reflected as a noncontrolling interests in the accompanying consolidated balance sheets. We also consolidate our interests in the SST IV and SSGT II Tenant Programs and present the minority interests as noncontrolling interests in the accompanying consolidated balance sheets. The noncontrolling interests shall be attributed their share of income and losses, even if that attribution results in a deficit noncontrolling interests balance.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. Management will adjust such estimates when facts and circumstances dictate. Actual results could materially differ from those estimates. The most significant estimates made include the allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed at relative fair value, the determination if certain entities should be consolidated, the evaluation of potential impairment of indefinite and long-lived assets and goodwill, and the estimated useful lives of real estate assets and intangibles.

Cash and Cash Equivalents

We consider all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents.

We may maintain cash and cash equivalents in financial institutions in excess of insured limits, but believe this risk will be mitigated by only investing in or through major financial institutions.

17


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Restricted Cash

Restricted cash consists primarily of impound reserve accounts for property taxes, insurance and capital improvements in connection with the requirements of certain of our loan agreements.

Real Estate Purchase Price Allocation

We account for 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. Substantially all of the leases in place at acquired properties are at market rates, as the majority of the leases are month-to-month contracts. We also consider whether in-place, market leases represent an intangible asset. We recorded NaN and approximately $13.6 million in intangible assets to recognize the value of in-place leases related to our acquisitions during the six months ended June 30, 2020 and 2019, respectively. We do not expect, nor to date have we recorded, intangible assets for the value of customer relationships because we expect we will not have concentrations of significant customers and the average customer turnover will be fairly frequent.

Allocation of purchase price to 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.

Acquisitions that do not meet the definition of a business, as defined under current GAAP, are accounted for as asset acquisitions. During the six months ended June 30, 2019, our property acquisitions did not meet the definition of a business because substantially all of the fair value was concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets) or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. As a result, once an acquisition is deemed probable, transaction costs are capitalized rather than expensed. 

During the three months ended June 30, 2020 and 2019, we expensed approximately $97,000 and $46,000, respectively, of acquisition-related transaction costs that did not meet our capitalization policy during the respective periods. During the six months ended June 30, 2020 and 2019, we expensed approximately $125,000 and $168,000, respectively, of acquisition-related transaction costs that did not meet our capitalization policy during the respective periods.

Purchase Price Allocation for the Acquisition of a Business

Should the initial accounting for an acquisition that meets the definition of a business be incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we may adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we record those adjustments to our financial statements. We apply any measurement period adjustments in the period in which the provisional amounts are finalized.

As discussed in Note 4, the Self Administration Transaction was an acquisition of a business.

Evaluation of Possible Impairment of Real Property Assets

Management monitors events and changes in circumstances that could indicate that the carrying amounts of our real property assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of the assets may not be recoverable, we will assess the recoverability of the assets by determining whether the carrying value of the real property assets will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, we will adjust the value of the real property assets to the fair value and recognize an impairment loss. For the three and six months ended June 30, 2020 and 2019, 0 impairment losses related to our real property assets were recognized.

18


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Goodwill Valuation

We initially recorded goodwill of approximately $78.4 million as a result of the Self Administration Transaction. 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. In our impairment test of goodwill, we perform a quantitative analysis 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.

See Note 5—Self Administration Transaction - Intangibles, Goodwill, and Certain Other Assets and Liabilities for additional information.

Trademarks

In connection with the Self Administration Transaction, we initially recorded $19.8 million associated with the 2 primary trademarks acquired. Prior thereto we had 0 amounts recorded related to trademarks.

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 fair value of our ownership of the brand name. We used the following significant projections and assumptions to determine fair value under the relief from royalty method: revenues; royalty rate; tax expense; terminal growth rate; and discount rate. For the SmartStop® trademark, the projections underlying this relief from royalty model were forecasted for eight years and then a terminal value calculation was applied. For the Strategic Storage® trademark, the projections underlying the relief from royalty model were forecasted for seven years. Applying the selected pretax royalty rates to the applicable revenue base in each period yielded pretax income for each of our trademarks. These pretax totals were tax effected utilizing the applicable tax rate to arrive at net, after-tax cash flows. The net, after-tax cash flows were then discounted to present value utilizing an appropriate discount rate. The present value of the after-tax cash flows were then added to the present value of the amortization tax benefit (considering the 15-year amortization of intangible assets pursuant to U.S. tax legislation) to arrive at the recommended fair values for the trademarks.

The total estimated future amortization expense of the “Strategic Storage®” trademark asset for the years ending December 31, 2020, 2021, 2022, 2023, 2024 and thereafter is approximately $70,000, $140,000, $140,000, $140,000,
$70,000 and NaN, respectively.

We 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.  

See Note 5—Self Administration Transaction - Intangibles, Goodwill, and Certain Other Assets and Liabilities for additional information.

Revenue Recognition

Self Storage Operations

Management believes that all of our leases are operating leases. Rental income is recognized in accordance with the terms of the leases, which generally are month-to-month. Revenues from any long-term operating leases are recognized on a straight-line basis over the term of the lease. The excess of rents received over amounts contractually due pursuant to the underlying leases is included in accounts payable and accrued liabilities in our consolidated balance sheets, and contractually due but unpaid rent is included in other assets.

19


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Managed REIT Platform

We earn property management and asset management revenue, pursuant to the respective property management and advisory agreement contracts, in connection with providing services to the Managed REITs. We have determined under ASC 606 – Revenue from Contracts with Customers (“ASC 606”), that the performance obligation for the property management services and asset management services are satisfied as the services are rendered. While we are compensated for our services on a monthly basis, these services represent a series of distinct daily services in accordance with ASC 606. Such revenue is recorded in the Managed REIT Platform revenue line within our consolidated statements of operations.

The Managed REITs’ advisory agreements also provide for reimbursement to us of our direct and indirect costs of providing administrative and management services to the Managed REITs. These reimbursements include costs incurred in relation to organization and offering services provided to the Managed REITs and the reimbursement of salaries, bonuses, and other expenses related to benefits paid to our employees while performing services for the Managed REITs.  The Managed REITs’ property management agreements also provide reimbursement to us for the property manager’s costs of managing the properties. Reimbursable costs include wages and salaries and other expenses that arise in operating, managing and maintaining the Managed REITs’ properties.

Under ASC 606, direct reimbursement of such costs does not represent a separate performance obligation from our obligation to perform property management and asset management services. The reimbursement income is considered variable consideration, and is recognized as the costs are incurred, subject to limitations on the Managed REIT Platform’s ability to incur offering costs or limitations imposed by the advisory agreements. We have elected to separately record such revenue in the Reimbursable costs from Managed REITs line within our consolidated statements of operations.

Additionally, we earn revenue in connection with our Tenant Programs joint ventures with our Managed REITs. We also earn development and construction management revenue from services we provide in connection with the project design, coordination and oversite of development and certain capital improvement projects undertaken by the Managed REITs.  We recognize such revenue in the Managed REIT Platform revenue line within our consolidated statements of operations. See Note 11 – Related Party Transactions, for additional information regarding revenue generated from our Managed REIT Platform.

Allowance for Doubtful Accounts

Tenant accounts receivable is reported net of an allowance for doubtful accounts. Management records a general reserve estimate based upon a review of the current status of tenant accounts receivable. It is reasonably possible that management’s estimate of the allowance will change in the future.

Real Estate Facilities

Real estate facilities are recorded based on relative fair value as of the date of acquisition. We capitalize costs incurred to develop, construct, renovate and improve properties, including interest and property taxes incurred during the construction period. The construction period begins when expenditures for the real estate assets have been made and activities that are necessary to prepare the asset for its intended use are in progress. The construction period ends when the asset is substantially complete and ready for its intended use.

Depreciation of Real Property Assets

Our management is required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives.

20


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Depreciation of our real property assets is charged to expense on a straight-line basis over the estimated useful lives as follows:

 

Description

 

Standard Depreciable Life

Land

 

Not Depreciated

Buildings

 

30-40 years

Site Improvements

 

7-10 years

 

Depreciation of Personal Property Assets

Personal property assets consist primarily of furniture, fixtures and equipment and are depreciated on a straight-line basis over the estimated useful lives, generally ranging from 3 to 5 years, and are included in other assets on our consolidated balance sheets.

Intangible Assets

We have allocated a portion of our real estate purchase price to in-place lease intangibles. We are amortizing in-place lease intangibles on a straight-line basis over the estimated future benefit period. As of June 30, 2020, the gross amount allocated to in-place lease intangibles was approximately $46.5 million and accumulated amortization of in-place lease intangibles totaled approximately $44.5 million. As of December 31, 2019, the gross amounts allocated to in-place lease intangibles were approximately $46.8 million and accumulated amortization of in-place lease intangibles totaled approximately $40.4 million.

The total estimated future amortization expense of intangible assets related to our self storage properties for the years ending December 31, 2020, 2021, 2022, 2023, 2024, and thereafter is approximately $0.6 million, $0.1 million, $0.1 million, $0.1 million, $0.1 million, and $1.0 million, respectively.

In connection with 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 the Tenant Programs joint ventures. For these intangibles, we are amortizing such amounts on a straight-line basis over the estimated benefit period of the contracts and customer relationships. 

As of June 30, 2020, the gross amount of the intangible assets related to the Managed REITs contracts and the customer relationships related to the Tenant Programs joint ventures was approximately $18.1 million and accumulated amortization of those intangibles totaled approximately $5.3 million. As of December 31, 2019, the gross amount of the intangibles related to the Managed REITs contracts and the customer relationships related to the Tenant Programs joint ventures was approximately $26.5 million and accumulated amortization of those intangibles totaled approximately $2.9 million.

The total estimated future amortization expense for such intangible assets for the years ending December 31, 2020, 2021, 2022, 2023, 2024 and thereafter is approximately $2.0 million, $2.9 million, $2.9 million, $2.9 million, $1.8 million, and $0.3 million, respectively.

We 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 valuations methods is adversely impacted, the impact could result in a material impairment charge in the future. See Note 5—Self Administration Transaction - Intangibles, Goodwill, and Certain Other Assets and Liabilities for additional information.

Debt Issuance Costs

The net carrying value of costs incurred in connection with obtaining non revolving debt are presented on the balance sheet as a deduction from debt (see Note 7). Debt issuance costs are amortized on a straight-line basis over the term of the related loan, which is not materially different than the effective interest method. As of June 30, 2020, the gross amount allocated to debt issuance costs related to non-revolving debt totaled approximately $11.8 million and accumulated amortization of debt issuance costs related to non-revolving debt totaled approximately $6.1 million. As of December 31,

21


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

2019, the gross amount allocated to debt issuance costs related to non-revolving debt totaled approximately $11.9 million and accumulated amortization of debt issuance costs related to non-revolving debt totaled approximately $4.3 million.

Organizational and Offering Costs

We pay our Dealer Manager an ongoing stockholder servicing fee that is payable monthly and accrues daily in an amount equal to 1/365th of 1% of the purchase price per share of the Class T Shares sold in the Primary Offering. We will cease paying the stockholder servicing fee with respect to the Class T Shares sold in the Primary Offering at the earlier of (i) the date we list our shares on a national securities exchange, merge or consolidate with or into another entity, or sell or dispose of all or substantially all of our assets; (ii) the date at which the aggregate underwriting compensation from all sources equals 10% of the gross proceeds from the sale of both Class A Shares and Class T Shares in our Primary Offering (i.e., excluding proceeds from sales pursuant to our distribution reinvestment plan), which calculation shall be made by us with the assistance of our Dealer Manager commencing after the termination of the Primary Offering; (iii)  the fifth anniversary of the last day of the fiscal quarter in which our Primary Offering (i.e., excluding our distribution reinvestment plan offering) terminated; and (iv) the date that such Class T Share is redeemed or is no longer outstanding. Our Dealer Manager entered into participating dealer agreements with certain other broker-dealers which authorized them to sell our shares. Upon sale of our shares by such broker-dealers, our Dealer Manager re-allowed all of the sales commissions and, subject to certain limitations, the stockholder servicing fees paid in connection with sales made by these broker-dealers. Our Dealer Manager was also permitted to re-allow to these broker-dealers a portion of their dealer manager fee as marketing fees, reimbursement of certain costs and expenses of attending training and education meetings sponsored by our Dealer Manager, payment of attendance fees required for employees of our Dealer Manager or other affiliates to attend retail seminars and public seminars sponsored by these broker-dealers, or to defray other distribution-related expenses. Our Dealer Manager also received reimbursement of bona fide due diligence expenses; however, to the extent the due diligence expenses could not be justified, any excess over actual due diligence expenses would have been considered underwriting compensation subject to a 10% FINRA limitation and, when aggregated with all other non-accountable expenses in connection with our Public Offering, could not exceed 3% of gross offering proceeds from sales in the Public Offering. We recorded a liability within due to affiliates for the future estimated stockholder servicing fees at the time of sale of Class T Shares as an offering cost.

Foreign Currency Translation

For non-U.S. functional currency operations, assets and liabilities are translated to U.S. dollars at current exchange rates. Revenues and expenses are translated at the average rates for the period. All adjustments related to amounts classified as long term net equity investments are recorded in accumulated other comprehensive income (loss) as a separate component of equity. Transactions denominated in a currency other than the functional currency of the related operation are recorded at rates of exchange in effect at the date of the transaction. Changes in equity investments not classified as long term are recorded in other income (expense) and represented a gain of approximately $0.5 million and a gain of approximately $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and represented a loss of approximately $0.6 million and a gain of approximately $0.9 million for the six months ended June 30, 2020 and 2019, respectively.

Redeemable Common Stock

We previously adopted a share redemption program that previously enabled stockholders to sell their shares to us in limited circumstances.

We record amounts that are redeemable under the share redemption program as redeemable common stock in the accompanying consolidated balance sheets since the shares are redeemable at the option of the holder and therefore their redemption is outside our control. The maximum amount redeemable under our share redemption program is limited to the number of shares we can repurchase with the amount of the net proceeds from the sale of shares under the distribution reinvestment plan. However, accounting guidance states that determinable amounts that can become redeemable should be presented as redeemable when such amount is known. Therefore, the net proceeds from the distribution reinvestment plan are considered to be temporary equity and are presented as redeemable common stock in the accompanying consolidated balance sheets.  

In addition, current accounting guidance requires, among other things, that financial instruments that represent a mandatory obligation of us to repurchase shares be classified as liabilities and reported at settlement value. On August 26,

22


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

2019, our board of directors approved the suspension of our share redemption program, effective as of September 27, 2019, so that common shares were redeemable at the option of the holder only in connection with (i) death or disability of a stockholder, (ii) confinement to a long-term care facility, or (iii) other exigent circumstances. In order to preserve cash in light of the uncertainty relating to COVID-19 and its potential impact on our overall financial results, on March 30, 2020, our board of directors approved the complete suspension of our share redemption program, effective on April 29, 2020. The share redemption program will remain suspended until its resumption is approved by the board, if ever. When we determine we have a mandatory obligation to repurchase shares under the share redemption program, we reclassify such obligations from temporary equity to a liability based upon their respective settlement values. As a result, we were not able to honor redemption requests made during the six months ended June 30, 2020.

For the year ended December 31, 2019, we received redemption requests totaling approximately $4.9 million (approximately 0.5 million shares), approximately $4.5 million of which were fulfilled during the year ended December 31, 2019, with the remaining approximately $0.4 million included in accounts payable and accrued liabilities as of December 31, 2019, and fulfilled in January 2020. During the six months ended June 30, 2020, approximately 0.1 million shares, or $1.3 million, were requested to be redeemed; however, due to the suspension of our share redemption program, no share redemption requests were fulfilled.

Accounting for Equity Awards

We issue equity based awards in two forms: (1) restricted stock awards consisting of shares of our common stock and (2) long-term incentive plan units of our Operating Partnership (“LTIP Units”), both of which may be issued subject to either time based vesting criteria or performance based vesting criteria restrictions. For time based awards granted which contain a graded vesting schedule, compensation cost is recognized as an expense on a straight-line basis over the requisite service period as if the award was, in substance, a single award. For performance based awards, compensation cost is recognized over the requisite service period if and when we determine the performance condition is probable of being achieved. We record the cost of such equity based awards based on the grant date fair value, and have elected to record forfeitures as they occur.

Fair Value Measurements

Under GAAP, we are required to measure certain financial instruments at fair value on a recurring basis. In addition, we are required to measure other financial instruments and balances at fair value on a non-recurring basis. Fair value is defined by the accounting standard for fair value measurements and disclosures as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels. The following summarizes the three levels of inputs and hierarchy of fair value we use when measuring fair value:

 

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access;

 

Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as interest rates and yield curves that are observable at commonly quoted intervals; and

 

Level 3 inputs are unobservable inputs for the assets or liabilities that are typically based on an entity’s own assumptions as there is little, if any, related market activity.

23


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the fair value measurement will fall within the lowest level that is significant to the fair value measurement in its entirety.

The accounting guidance for fair value measurements and disclosures provides a framework for measuring fair value and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In determining fair value, we will utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value. Considerable judgment will be necessary to interpret Level 2 and 3 inputs in determining fair value of our financial and non-financial assets and liabilities. Accordingly, there can be no assurance that the fair values we will present will be indicative of amounts that may ultimately be realized upon sale or other disposition of these assets.

Financial and non-financial assets and liabilities measured at fair value on a non-recurring basis in our consolidated financial statements consist of real estate and related liabilities assumed related to our acquisitions along with the assets and liabilities described in Note 4, Self Administration Transaction. The fair values of these assets and liabilities were determined as of the acquisition dates using widely accepted valuation techniques, including (i) discounted cash flow analysis, which considers, among other things, leasing assumptions, growth rates, discount rates and terminal capitalization rates, (ii) income capitalization approach, which considers prevailing market capitalization rates, and (iii) comparable sales activity. Additionally, certain such assets and liabilities are required to be fair valued periodically or valued pursuant to ongoing impairment analyses and have been valued subsequently utilizing the same techniques noted above. In general, we consider multiple valuation techniques when measuring fair values. However, in certain circumstances, a single valuation technique may be appropriate. All of the fair values of the assets and liabilities as of the acquisition dates were derived using Level 3 inputs.

The carrying amounts of cash and cash equivalents, restricted cash, other assets, variable-rate debt, accounts payable and accrued liabilities, distributions payable and amounts due to affiliates approximate fair value.

The table below summarizes our fixed rate notes payable at June 30, 2020, and December 31, 2019. The estimated fair value of financial instruments is subjective in nature and is dependent on a number of important assumptions, including discount rates and relevant comparable market information associated with each financial instrument. The fair value of the fixed rate notes payable was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the estimates presented below are not necessarily indicative of the amounts we would realize in a current market exchange.

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

Fixed Rate Secured Debt

 

$

320,500,000

 

 

$

302,405,789

 

 

$

311,700,000

 

 

$

302,820,786

 

 

As of June 30, 2020, and December 31, 2019, we had interest rate swaps, interest rate caps, and a net investment hedge (See Notes 7 and 9). The valuations of these instruments were determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivative. The analyses reflect the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The fair value of the interest rate swaps were determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash payments.  Our fair values of our net investment hedges are based on the change in the spot rate at the end of the period as compared with the strike price at inception.

To comply with GAAP, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of derivative contracts for the effect of non-performance risk, we consider the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

24


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Although we had determined that the majority of the inputs used to value our derivatives were within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilized Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counterparties. However, through June 30, 2020, we had assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of our derivatives. As a result, we determined that our derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy.

Derivative Instruments and Hedging Activities

We record all derivatives on our balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. We may enter into derivative contracts that are intended to economically hedge certain of our risks, even though hedge accounting does not apply or we elect not to apply hedge accounting.

For derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in accumulated other comprehensive income (loss). The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of other comprehensive (loss) income into earnings (loss) when the hedged net investment is either sold or substantially liquidated.

Income Taxes

We made an election to be taxed as a Real Estate Investment Trust (“REIT”), under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2014. To qualify as a REIT, we must continue to meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the REIT’s ordinary taxable income to stockholders (which is computed without regard to the dividends paid deduction or net capital gains and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes 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 during which qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT and intend to operate in the foreseeable future in such a manner that we will remain qualified as a REIT for federal income tax purposes.

Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income.

We filed an election to treat our TRS as a taxable REIT subsidiary effective January 1, 2014. In general, the TRS performs additional services for our customers and provides the advisory and property management services to the Managed REITs and otherwise generally engages in any real estate or non-real estate related business. The TRS is subject to corporate federal and state income tax. The TRS follows accounting guidance which requires the use of the asset and liability method. Deferred income taxes represent the tax effect of future differences between the book and tax bases of assets and liabilities.

Segment Reporting

Our business is comprised of 2 reportable segments: (i) self storage operations and (ii) the Managed REIT Platform business. Please see Note 10 – Segment Disclosures for additional detail.

25


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Convertible Preferred Stock

We classify our Series A Convertible Preferred Stock on our consolidated balance sheets using the guidance in ASC 480‑10‑S99. Our Series A Convertible Preferred Stock can be redeemed by us on or after the fifth anniversary of its issuance, or if certain events occur, such as the listing of our common stock on a national securities exchange, a change in control, or if a redemption would be required to maintain our REIT status. Additionally, if we do not maintain our REIT status the holder can require redemption. As the shares are contingently redeemable, and under certain circumstances not solely within our control, we have classified our Series A Convertible Preferred Stock as temporary equity.

We have analyzed whether the conversion features in our Series A Convertible Preferred Stock should be bifurcated under the guidance in ASC 815‑10 and have determined that bifurcation is not necessary.

Per Share Data

Basic earnings per share attributable to our common stockholders for all periods presented are computed by dividing net income (loss) attributable to our common stockholders by the weighted average number of common shares outstanding during the period, excluding unvested restricted stock. Diluted earnings per share is computed by including the dilutive effect of the conversion of all potential common stock equivalents (which includes unvested restricted stock and convertible preferred stock) and the adding back of the Series A Convertible Preferred Stock dividends. For all periods presented, the dilutive effect of convertible preferred stock and unvested restricted stock was not included in the diluted weighted average shares as such impact was antidilutive.

Note 3. Real Estate Facilities

The following summarizes the activity in real estate facilities during the six months ended June 30, 2020:

 

Real estate facilities

 

 

 

 

Balance at December 31, 2019

 

$

1,173,825,368

 

Construction in process placed in service

 

 

13,263,262

 

Impact of foreign exchange rate changes

 

 

(7,620,467

)

Improvements and additions

 

 

4,452,282

 

Balance at June 30, 2020

 

$

1,183,920,445

 

Accumulated depreciation

 

 

 

 

Balance at December 31, 2019

 

$

(83,692,491

)

Depreciation expense

 

 

(15,293,130

)

Impact of foreign exchange rate changes

 

 

549,640

 

Balance at June 30, 2020

 

$

(98,435,981

)

 

26


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Potential Acquisition

On June 2, 2020, one of our subsidiaries executed a purchase and sale agreement with an unaffiliated third party for the acquisition of a plot of land (the “Kipling Property”) in the city of Toronto that we intend to develop into a self storage facility. The purchase price for the Kipling Property is approximately $2.2 million CAD, with an adjustment factor depending on the final survey, plus closing costs. We expect to complete the acquisition in the first or second quarter of 2022; however, there can be no assurance that we will complete the acquisition. If we fail to acquire the Kipling Property, in addition to the incurred acquisition costs, we may also forfeit earnest money deposits as a result.

Merger with Strategic Storage Growth Trust, Inc.

On October 1, 2018, we, our Operating Partnership, and SST II Growth Acquisition, LLC, our wholly-owned subsidiary (“Merger Sub”), entered into an Agreement and Plan of Merger (the “SSGT Merger Agreement”) with Strategic Storage Growth Trust, Inc. (“SSGT”), a non-traded REIT then sponsored by SAM, and SS Growth Operating Partnership, L.P. (“SSGT OP”).  Pursuant to the terms and conditions set forth in the SSGT Merger Agreement, on January 24, 2019: (i) we acquired SSGT by way of a merger of SSGT with and into Merger Sub, with Merger Sub being the surviving entity (the “SSGT REIT Merger”); and (ii) immediately after the SSGT REIT Merger, SSGT OP merged with and into our Operating Partnership, with the Operating Partnership continuing as the surviving entity and remaining a subsidiary of the Company (the “SSGT Partnership Merger” and, together with the SSGT REIT Merger, the “SSGT Mergers”).

The proceeds used to fund the SSGT Mergers and the repayment of approximately $141 million of our outstanding debt were funded by the SSGT Merger Financings, totaling approximately $500 million, as described in Note 7.

At the effective time of the SSGT Partnership Merger, each outstanding unit of partnership interest in SSGT OP was converted automatically into 1.127 units of partnership interest in our Operating Partnership, which resulted in approximately 396,000 Class A Units of our Operating Partnership being issued to SS Growth Advisor, LLC, a subsidiary of SAM.

SSGT was a REIT with stated investment objectives to acquire opportunistic self storage properties, including development, and lease-up properties. As a result of the SSGT Mergers, we acquired all of the real estate owned by SSGT, consisting of 28 operating self storage facilities located in 10 states and in the Greater Toronto Area, and 1 development property in the Greater Toronto Area. Additionally, we obtained the rights to acquire a self storage facility which was under development located in Gilbert, Arizona that was previously under contract with SSGT and was acquired by us in July 2019.

The following table reconciles the total consideration transferred during the SSGT Mergers:

 

Fair value of consideration transferred:

 

 

 

 

 

Cash

 

$

346,231,561

 

(1)

Issuance of limited partnership units in

   our Operating Partnership to SS Growth Advisor, LLC

 

 

4,217,399

 

 

Total consideration transferred

 

$

350,448,960

 

 

 

(1)

The approximately $346 million cash consideration consisted of approximately $320 million paid to the SSGT stockholders, approximately $19 million of SSGT debt that was repaid at closing, approximately $5 million of other SSGT liabilities paid at closing, and approximately $1 million in transaction costs.

 

Note 4. Self Administration Transaction

Overview

On June 28, 2019, we, our Operating Partnership and our TRS entered into a series of transactions, agreements, and amendments to our existing agreements and arrangements with our then-sponsor SAM and SS OP Holdings, a subsidiary of

27


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

SAM, pursuant to which, effective June 28, 2019, we acquired the self storage advisory, asset management and property management businesses and certain joint venture interests of SAM, along with certain other assets of SAM.  

As a result of the Self Administration Transaction, SAM is no longer our sponsor, and we are now self-managed and succeed to the advisory, asset management and property management businesses and certain joint ventures previously in place for us, SST IV, SSGT II, and we now have the internal capability to originate, structure and manage additional future investment products which would be sponsored by SRA. The Self Administration Transaction and the other transactions discussed herein were approved by our board of directors at the recommendation of a special committee of our board of directors comprised solely of independent directors.

Agreements

Contribution Agreement

On June 28, 2019, we along with our Operating Partnership, as contributee, and SAM and SS OP Holdings, as contributor, entered into a Contribution Agreement (the “Contribution Agreement”) whereby the Operating Partnership acquired the Self Storage Platform and certain other assets, including (a) SAM’s, or its subsidiaries’, 100% membership interests in our Former External Advisor and Former External Property Managers, the advisor and property manager for SST IV, the advisor and property manager for SSGT II, entities related to the Tenant Programs joint ventures, and certain entities related to SAM’s self storage business in Canada; (b) all equipment, furnishings, fixtures and computer equipment as set forth in the Contribution Agreement; (c) certain personal property as set forth in the Contribution Agreement; (d) all intellectual property, goodwill, licenses and sublicenses granted and obtained with respect thereto (including all rights to the “SmartStop®” brand and “Strategic Storage®” related trademarks); (e) SAM’s processes, practices, procedures and workforce related to the self storage business (then consisting of a total of approximately 350 on-site self storage employees, regional and district managers, other personnel and the then current executive management team of the Company); and (f) certain other assets as set forth in the Contribution Agreement, in exchange for $769,126 in cash, assumption of existing debt in the amount of $15 million, and 8,698,956 Class A-1 limited partnership units of the Operating Partnership (“Class A-1 Units”) and 3,283,302 Class A-2 limited partnership units of the Operating Partnership (“Class A-2 Units”). For a description of the Class A-1 Units and Class A-2 Units, see below under the heading “Third Amended and Restated Limited Partnership Agreement and Redemption of Limited Partner Interest Agreement.”

The Contribution Agreement contains customary representations, warranties, covenants, agreements and indemnification obligations and rights of us, the Operating Partnership, SAM and SS OP Holdings.

Third Amended and Restated Limited Partnership Agreement and Redemption of Limited Partner Interest Agreement

On June 28, 2019, we entered into the Third Amended and Restated Limited Partnership Agreement of the Operating Partnership (the “Operating Partnership Agreement”), which amended and superseded the Second Amended and Restated Limited Partnership Agreement (the “Former OP Agreement”), and a Redemption of Limited Partner Interest Agreement (the “Redemption of Limited Partner Interest Agreement”) with the Former External Advisor and the Operating Partnership, pursuant to which the Operating Partnership redeemed all of the limited partnership interests held by the Former External Advisor in the Operating Partnership. As a result of the Redemption of Limited Partner Interest Agreement and the Self Administration Transaction, the Former External Advisor’s parent entity, SAM and its affiliates no longer hold either their previously existing 20,000 limited partnership units or their special limited partnership interest in the Operating Partnership; however, SAM received cash of $200,000 and also now holds Class A-1 Units and Class A-2 Units in the Operating Partnership, as further described below.

 

In addition, the revised Operating Partnership Agreement created two new classes of units issued to SS OP Holdings in connection with the Self Administration Transaction: Class A-1 Units and Class A-2 Units.

 

The Class A-1 Units are subject to the general restrictions on transfer contained in the Operating Partnership Agreement. In addition, until June 28, 2021 (the “Lock-Up Expiration”), the Class A-1 Units may not be sold, pledged, or otherwise transferred or encumbered except in certain limited circumstances set forth in the Contribution Agreement.  The Class A-1 Units are otherwise entitled to all rights and duties of the Class A limited partnership units in the Operating Partnership, including cash distributions and the allocation of any profits or losses in the Operating Partnership.  The Class A-2 Units may convert into Class A-1 Units as earnout consideration, as described below.  The Class A-2 Units are not entitled to cash distributions or the allocation of any profits or losses in the Operating Partnership until the Class A-2 Units are converted into Class A-1 Units.

28


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

The conversion features of the Class A-2 Units are as follows: (A) the first time the aggregate incremental assets under management (“AUM”) (as defined in the Operating Partnership Agreement) of the Operating Partnership equals or exceeds $300,000,000, one-third of the Class A-2 Units will automatically convert into Class A-1 Units, (B) the first time the incremental AUM of the Operating Partnership equals or exceeds $500,000,000, an additional one-third of the Class A-2 Units will automatically convert into Class A-1 Units, and (C) the first time the incremental AUM equals or exceeds $700,000,000, the remaining one-third of the Class A-2 Units will automatically convert into Class A-1 Units (each an “Earnout Achievement Date”).  On each Earnout Achievement Date, the Class A-2 Units will automatically convert into Class A-1 Units based on an earnout unit exchange ratio, which is equal to $10.66 divided by the then current value of our Class A common stock.  The Class A-2 Units conversion rights will expire seven years following the closing date of the Self Administration Transaction.  Notwithstanding the foregoing, the earnout consideration will be earned and automatically convert in the event of an “Earnout Acceleration Event” (as defined in the Operating Partnership Agreement), which includes each of the following: certain change of control events (as described in the Operating Partnership Agreement), or H. Michael Schwartz being removed either as a member of our board of directors or as one of our executive officers for any reason other than for cause.

The Redemption of Limited Partner Interest Agreement contained various customary representations and warranties.

Membership Interest Purchase Agreement – Ladera Office

 

On June 28, 2019, immediately following the Self Administration Transaction, SAM and its then wholly-owned subsidiary, 10 Terrace Rd, LLC (“10 Terrace Rd”), and SmartStop Storage Advisors, LLC (“SSA”), our indirect subsidiary, entered into a Membership Interest Purchase Agreement (the “Membership Interest Purchase Agreement”), pursuant to which SSA purchased 100% of the membership interests in 10 Terrace Rd for $6.5 million, payable through the assumption of existing debt in the amount of approximately $4.2 million, and cash in the amount of approximately $2.3 million.  10 Terrace Rd is the owner of an office condominium located at 10 Terrace Rd., Ladera Ranch, California (the “Ladera Office”) which, as a result of the Membership Interest Purchase Agreement, we now indirectly own. The Ladera Office houses our corporate headquarters.

Fair Value of Consideration Transferred

 

We accounted for the Contribution Agreement and Membership Interest Purchase Agreement discussed above as a business combination under the acquisition method of accounting. During the six months ended June 30, 2019, we incurred approximately $1.5 million for legal fees and fees and expenses of our other professional and financial advisors related to the Self Administration Transaction, which are included in the self administration transaction expenses line-item in the accompanying consolidated statements of operations.

 The estimated fair value of the consideration transferred totaled approximately $111.3 million and consisted of the following:

 

Estimated Fair Value of Consideration

   Transferred

 

 

 

 

Cash(1)

 

$

3,918,185

 

Class A-1 Units

 

 

63,643,000

 

Class A-2 Units (contingent earnout)

 

 

30,900,000

 

Total Consideration Transferred

 

 

98,461,185

 

Fair value of our preexisting 50% equity

   interests

 

 

12,800,000

 

Total

 

$

111,261,185

 

29


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

 

(1)We assumed a net asset of approximately $0.5 million, which per the Contribution Agreement we were required to pay to SAM the value thereof and such amount was included above as cash consideration.  

As a result of this acquisition, we remeasured the book value of our preexisting 50% equity method investments in our Tenant Programs joint ventures to fair value, which resulted in a gain of approximately $8.0 million which was presented in the gain resulting from acquisition of unconsolidated affiliates line-item in our consolidated statements of operations as of the date of the acquisition. The fair values of the Tenant Programs joint ventures were determined based on a discounted cash flow valuation of the projected cash flows.

The estimated fair value of the Class A-1 Units issued was determined using the Company’s then current net asset value, which was based on an income approach to value the properties and the valuation of the assets acquired in the Self Administration Transaction, as described herein, adjusted for market related adjustments and illiquidity discounts.

These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as discussed in Note 2. The key assumptions used in estimating the fair value of the Class A-1 Units and Class A-2 Units consideration included (i) a marketability discount of 5%, (ii) a capitalization rate of 5.16%, and (iii) annual net operating income.

The estimated fair value of the contingent earnout, Class A-2 Units, was determined using the net asset value calculation described above and further adjusted based on a discounted probability weighted forecast of achieving the requisite AUM thresholds. Subsequent to the completion of the Self Administration Transaction, such liability is required to be recorded at fair value. For additional information, see Note 5 – Self Administration Transaction – Intangible Assets, Goodwill and Certain Other Assets and Liabilities. As of June 30, 2020, we have added incremental assets under management of approximately $184 million since the close of the Self Administration Transaction.

30


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Allocation of Consideration

The consideration transferred pursuant to the Self Administration Transaction was allocated to the assets acquired and liabilities assumed, based upon their estimated fair values as of the acquisition date. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:

 

Identifiable Assets Acquired at Fair Value

 

 

 

 

Cash and cash equivalents

 

$

36,443

 

Restricted cash

 

 

94,999

 

Land

 

 

975,000

 

Building

 

 

5,389,000

 

Site Improvements

 

 

136,000

 

Equipment, furniture and fixtures

 

 

651,000

 

Investments in Managed REITs

 

 

5,600,000

 

Other assets

 

 

1,084,629

 

Intangibles - customer relationships

 

 

1,600,000

 

Trademarks

 

 

19,800,000

 

Intangibles - management contracts

 

 

24,900,000

 

Total identifiable assets acquired

 

$

60,267,071

 

 

 

 

 

 

Identifiable Liabilities Assumed at Fair Value

 

 

 

 

Debt

 

$

19,219,126

 

Accounts payable and accrued expenses

 

 

722,286

 

Deferred tax liabilities, net

 

 

7,415,654

 

Total liabilities assumed

 

$

27,357,066

 

Net identifiable assets acquired

 

$

32,910,005

 

Goodwill

 

 

78,372,980

 

Non-controlling interest related to consolidated

   Tenant Programs joint ventures

 

 

(21,800

)

Net assets acquired

 

$

111,261,185

 

The fair value estimate of property and equipment utilized a combination of the income, cost and market approaches, depending on the characteristics of the asset classification. The fair value of land was determined using the market approach, which considers sales of comparable assets and applies compensating factors for any differences specific to the particular assets. Equipment was valued based on estimated replacement cost. Building and site improvements were valued using the cost approach using a direct cost model built on estimates of replacement cost.

The intangible assets acquired primarily consist of trademarks and the property management and advisory contracts related to the Managed REITs. The value of the property management and advisory contracts were determined based on a discounted cash flow valuation of the projected cash flows of the acquired contracts. The deferred tax liability is the result of differences between the GAAP carrying value of certain amortizing assets and the carrying value for tax purposes related to activities which are conducted through our TRS.

The goodwill recognized was supported by several factors, including that the Company becoming self-managed; additionally, the Managed REIT Platform business brings an established management platform with numerous strategic benefits including growth from new income streams and the ability to offer new products.

The results of the acquisition have been included in our consolidated statements of operations since the closing date of the transaction.

31


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Fair Value of Equity Exchanged Related to the Redemption of Limited Partnership Interests

In connection with the Redemption of Limited Partner Interest Agreement and the Contribution Agreement, the Former External Advisor redeemed its special limited partnership interest and 20,000 limited partnership units in the Operating Partnership in exchange for $200,000 in cash and Class A-1 Units. The exchange was accounted for as a transaction among equity holders with 0 gain or loss recognized. The fair value of the special limited partnership interest contributed was determined to be approximately $18.8 million, while the book value of the Class A-1 Units issued that was recorded in noncontrolling interest was approximately $9.1 million. The difference between the fair value of the special limited partnership interest received and the book value of the Operating Partnership Units issued was recorded to additional paid in capital.

The estimated fair value of the Class A-1 Units issued was determined consistent with the methodology described above.  The fair value of the special limited partnership interest was determined based on discounted projections of the future value of the special limited partnership interest which included various assumptions, including estimated future distributions and the related timing thereto.

 

Administrative Services Agreement

 

On June 28, 2019, we along with our Operating Partnership, the TRS and SSA (collectively, the “Company Parties”) entered into an Administrative Services Agreement with SAM (the “Administrative Services Agreement”), which, as amended, requires that the Company Parties will be reimbursed for providing certain operational and administrative services to SAM which may include, without limitation, accounting and financial support, IT support, HR support, advisory services and operations support, and administrative support as set forth in the Administrative Services Agreement and SAM will be reimbursed for providing certain operational and administrative services to the Company Parties which may include, without limitation, due diligence support, marketing, fulfillment and offering support, events support, insurance support, and administrative and facilities support.  SAM will receive reimbursement based on the actual costs for providing its services and the Company Parties will receive monthly reimbursement based on actual cost for providing its services under the Administrative Services Agreement. SAM will also pay the Company Parties an allocation of rent and overhead for the portion it occupies in the Ladera Office. Such agreement has a term of three years and is subject to certain adjustments as defined in the agreement.

 

 

Note 5. Self Administration Transaction - Intangible Assets, Goodwill and Certain Other Assets and Liabilities

The emergence and ongoing spread of the COVID-19 pandemic has caused significant volatility in the economy and the capital markets. The increase in consumer and investor uncertainty has had an impact on our Managed REITs, specifically the Managed REITs’ ability to attract investor equity in the face of economic weakness and volatility. Further, starting in April 2020 various broker dealers that our Managed REITs have selling agreements with temporarily halted non-traded REIT sales within their advisory networks. Effective April 30, 2020, the Managed REITs suspended their offerings. Given the disruption that COVID-19 had on our Managed REITs and their ability to raise additional equity, we evaluated the various intangible assets and liabilities associated with the sponsorship of the Managed REITs for impairment as of March 31, 2020.

Based on the above facts, we revised our capital raise projections for the Managed REITs. We then evaluated the revised projected undiscounted future cash flows of our amortizing intangible assets to determine if they exceeded their respective carrying values and we determined that certain trademarks and management contracts acquired in the Self Administration Transaction were impaired. For such assets we recorded impairments to reduce their carrying value to their respective fair values. For our indefinite-lived trademark we determined that the carrying value was in excess of its fair value and therefore recorded an impairment equal to the difference. As a result, in March 2020, we recorded impairment charges totaling approximately $11.7 million to intangible assets, consisting of approximately $3.3 million related to our trademarks, approximately $2.2 million related to the management contracts of SST IV and approximately $6.2 million related to the management contracts of SSGT II. We similarly evaluated goodwill for impairment and determined that the carrying value of the goodwill related to our Managed REIT segment was in excess of fair value, and therefore impaired and we recognized an impairment charge of approximately $24.7 million. Goodwill related to our self storage operations was not impaired.

In connection with the Self Administration Transaction, we acquired a special limited partnership interest in SST IV and SSGT II. This interest, in certain situations, may entitle us to various subordinated distributions under SST IV’s and

32


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

SSGT II’s operating partnership agreements. Given the revised capital projections noted above, the projected future subordinated distributions had revised estimated fair values less than their carrying values. We deemed this difference to be an other than temporary decline in value and have therefore recorded an impairment charge of approximately $4.4 million.

As a result of the Self Administration Transaction, we recorded a deferred tax liability, which is the result of differences between the GAAP carrying value of certain amortizing assets and the carrying value for tax purposes of certain assets related to activities which are conducted through our TRS. As we reduced the GAAP carrying value of such assets, primarily the Managed REIT management contracts, we adjusted the value of our deferred tax liabilities by pro-rata amounts, reducing the deferred tax liabilities in aggregate by approximately $2.4 million, and recorded such adjustment as of March 31, 2020, as other income within the other line-item in our consolidated statement of operations.

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.  The revised capital raise projections discussed above reduced the probability of the Class A-2 Units converting, which had the result of decreasing the estimated fair value of the contingent earnout liability from $31.1 million as of December 31, 2019 to $23.9 million as of March 31, 2020, the date of the impairment analysis. As of June 30, 2020, the estimated fair value of the contingent earnout liability is $24.4 million.

 

Note 6. Pro Forma Financial Information (Unaudited)

The table set forth below summarizes, on a pro forma basis, the combined results of operations of the Company for the six months ended June 30, 2020 and 2019. Such presentation reflects the Company’s acquisitions that occurred during 2019, which met the GAAP definition of a business in effect at that time, as if the acquisitions had occurred as of January 1, 2018. This pro forma information does not purport to represent what the actual consolidated results of operations of the Company would have been for the periods indicated, nor does it purport to predict the results of operations for future periods.

 

 

 

For the Six Months ended

 

 

 

June 30, 2019

 

 

June 30, 2020

 

Pro forma revenue

 

$

54,182,467

 

 

$

59,767,668

 

Pro forma operating expenses

 

$

(48,943,530

)

 

$

(88,331,968

)

Pro forma net income (loss) attributable to

   common stockholders

 

$

(14,317,825

)

 

$

(43,181,285

)

 

The pro forma financial information for the six months ended June 30, 2020 and 2019 was adjusted to exclude NaN and approximately $1.5 million, respectively, for acquisition related expenses.

33


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Note 7. Debt

The Company’s debt is summarized as follows:

 

Encumbered Property

 

June 30,

2020

 

 

December 31,

2019

 

 

Interest

Rate

 

 

Maturity

Date

KeyBank CMBS Loan(1)

 

$

95,000,000

 

 

$

95,000,000

 

 

 

3.89

%

 

8/1/2026

KeyBank Florida CMBS Loan(2)

 

 

52,000,000

 

 

 

52,000,000

 

 

 

4.65

%

 

5/1/2027

Midland North Carolina CMBS Loan(3)

 

 

46,738,807

 

 

 

47,048,287

 

 

 

5.31

%

 

8/1/2024

Canadian CitiBank Loan(4)

 

 

81,582,900

 

 

 

85,500,660

 

 

 

2.77

%

 

10/9/2020

CMBS SASB Loan(5)

 

 

235,000,000

 

 

 

235,000,000

 

 

 

3.16

%

 

2/9/2022

CMBS Loan(6)

 

 

104,000,000

 

 

 

104,000,000

 

 

 

5.00

%

 

2/1/2029

Secured Loan(7) (8)

 

 

85,512,000

 

 

 

85,512,000

 

 

 

3.00

%

 

1/24/2022

Stoney Creek Loan(9)

 

 

5,335,719

 

 

 

5,591,950

 

 

 

4.65

%

 

10/1/2021

Torbarrie Loan(10)

 

 

6,000,627

 

 

 

5,936,996

 

 

 

4.65

%

 

9/1/2021

Ladera Office Loan

 

 

4,140,024

 

 

 

4,179,994

 

 

 

4.29

%

 

11/1/2026

Premium on secured debt, net

 

 

526,958

 

 

 

592,505

 

 

 

 

 

 

 

Debt issuance costs, net

 

 

(5,720,351

)

 

 

(7,629,390

)

 

 

 

 

 

 

Total debt

 

$

710,116,684

 

 

$

712,733,002

 

 

 

 

 

 

 

 

(1) 

This fixed rate loan encumbers 29 properties (Whittier, La Verne, Santa Ana, Upland, La Habra, Monterey Park, Huntington Beach, Chico, Lancaster I, Riverside, Fairfield, Lompoc, Santa Rosa, Federal Heights, Aurora, Littleton, Bloomingdale, Crestwood, Forestville, Warren I, Sterling Heights, Troy, Warren II, Beverly, Everett, Foley, Tampa, Boynton Beach, and Lancaster II) with monthly interest only payments until September 2021, at which time both interest and principal payments will be due monthly. The separate assets of these encumbered properties are not available to pay our other debts.

(2) 

This fixed rate loan encumbers 5 properties (Pompano Beach, Lake Worth, Jupiter, Royal Palm Beach, and Delray) with monthly interest only payments until June 2022, at which time both interest and principal payments will be due monthly. The separate assets of these encumbered properties are not available to pay our other debts.  

(3) 

This fixed rate loan encumbers 11 self storage properties (Asheville I, Arden, Asheville II, Hendersonville I, Asheville III, Asheville IV, Asheville V, Asheville VI, Asheville VII, Asheville VIII, and Hendersonville II) with monthly interest only payments until September 2019, at which time both interest and principal payments became due monthly.

(4) 

This variable rate loan encumbers 10 of our Canadian properties and the amounts shown above are in USD based on the foreign exchange rate in effect of the dates presented. We have purchased interest rate caps that cap CDOR at 3.0% until October 15, 2021. The separate assets of these encumbered properties are not available to pay our other debts.

(5) 

This variable rate loan encumbers 29 properties (Morrisville, Cary, Raleigh, Vallejo, Xenia, Sidney, Troy, Greenville, Washington Court House, Richmond, Connersville, Port St Lucie, Sacramento, Concord, Oakland, Wellington, Doral, Naples, Baltimore, Aurora, Jones Blvd - Las Vegas, Russell Rd - Las Vegas, Riverside, Stockton, Azusa, Romeoville, Elgin, San Antonio, Kingwood). In June 2019, we purchased an interest rate swap whereby LIBOR is fixed at 1.79% though February 15, 2022, which results in an effective fixed interest rate of 4.79%. The separate assets of these encumbered properties are not available to pay our other debts.

(6) 

This fixed rate loan encumbers 10 properties (Myrtle Beach I, Myrtle Beach II, Port St. Lucie, Plantation, Sonoma, Las Vegas I, Las Vegas II, Las Vegas III, Ft Pierce, Nantucket Island). The separate assets of these encumbered properties are not available to pay our other debts.

(7) 

This variable rate loan encumbers 16 properties (Colorado Springs, Aurora, Phoenix, 3173 Sweeten Creek Rd - Asheville, Elk Grove, Garden Grove, Deaverview Rd - Asheville, Highland Center Blvd - Asheville, Sarasota, Mount Pleasant, Pembroke Pines, Riverview, Eastlake, McKinney, Hualapai Way - Las Vegas, Gilbert). The separate assets of these encumbered properties are not available to pay our other debts.

(8) 

On January 29, 2019, we entered into a $161.2 million notional interest rate swap whereby LIBOR was fixed at approximately 2.6% until August 1, 2020. On October 29, 2019, in connection with the pay off of the Senior Term Loan, we terminated approximately $75.7 million of this interest rate swap which required a settlement payment of approximately $0.6 million. The remaining $85.5 million of the interest rate swap effectively fixes the interest rate on the Secured Loan at 5.1%.

34


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

(9) 

This variable rate loan bears interest at a rate of 1.95% plus Royal Bank of Canada Prime Rate, which was approximately 2.45% as of June 30, 2020, and in no event shall the total interest rate fall below 4.65% per annum. The Stoney Creek loan was assumed in the SSGT Mergers and had a balance of approximately $5 million USD as of the SSGT Mergers date. The Stoney Creek loan is secured by a first lien deed of trust on the Stoney Creek property and all improvements thereto, is cross-collateralized with the Torbarrie property, and is guaranteed by the Company. The amounts shown above are in USD based on the foreign exchange rate in effect as of June 30, 2020.

(10) 

This variable rate loan bears interest at a rate of 1.95% plus Royal Bank of Canada Prime Rate, which was approximately 2.45% as of June 30, 2020, and in no event shall the total interest rate fall below 4.65% per annum. The Torbarrie loan was assumed in the SSGT Mergers and had 0 outstanding balance as of the date of the SSGT Mergers. The Torbarrie loan is a construction loan and is secured by a first lien deed of trust on the Torbarrie property and all improvements thereto, is cross-collateralized with the Stoney Creek property, and is guaranteed by the Company. The amounts shown above are in USD based on the foreign exchange rate in effect as of June 30, 2020.

 

The weighted average interest rate on our consolidated debt, excluding the impact of our interest rate hedging activities, as of June 30, 2020 was approximately 3.74%.

We are subject to certain restrictive covenants relating to the outstanding debt. As of June 30, 2020, we were in compliance with all such covenants.

 

On January 24, 2019, in conjunction with the SSGT Mergers, we, through certain wholly-owned special purpose entities, entered into various financings (“SSGT Merger Financings”), as follows:

 

Merger Financings

 

Principal

Borrowing as of

Merger Date

 

CMBS SASB Loan

 

$

235,000,000

 

CMBS Loan

 

 

104,000,000

 

Secured Loan

 

 

89,178,000

 

Senior Term Loan

 

 

72,000,000

 

Total

 

$

500,178,000

 

 

The proceeds from the SSGT Merger Financings were primarily used to facilitate the SSGT Mergers as previously described, including the payment of the SSGT merger consideration and the repayment, in full, of certain of our debt, as follows:

 

Merger Financings

 

Principal

Repaid

 

Raleigh/Myrtle Beach promissory note

 

$

11,862,471

 

Amended KeyBank Credit Facility

 

 

98,782,500

 

Oakland and Concord loan

 

 

19,443,753

 

$11M KeyBank Subordinate Loan

 

 

11,000,000

 

Total

 

$

141,088,724

 

 

In conjunction with the SSGT Merger Financings, we recognized a loss on extinguishment of debt of approximately $1.5 million, primarily attributable to prepayment penalties related to the early pay off of the Raleigh/Myrtle Beach promissory note and the write-off of the unamortized loan premium and debt issuance costs on the repaid loans.  

CMBS SASB Loan

This loan is a $235 million commercial mortgage-backed securities (“CMBS”), single-asset/single-borrower (“SASB”) financing (the “CMBS SASB Loan”) with KeyBank, National Association (“KeyBank”) and Citi Real Estate Funding Inc. or its affiliates (“Citibank”), as initial lenders (together, the “CMBS SASB Lenders”), comprised of (A) a mortgage loan in the amount of $180 million (the “CMBS SASB Mortgage Loan”) and (B) a mezzanine loan in the amount of $55 million (the “CMBS SASB Mezzanine Loan”).  The CMBS SASB Mortgage Loan is secured by a first mortgage or deed of trust on each

35


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

of 29 wholly owned properties (the “CMBS SASB Properties”), and the CMBS SASB Mezzanine Loan is secured by a pledge of the equity interests in the 29 special purpose entities that own the CMBS SASB Properties. Each loan has a maturity date of February 9, 2022, which may, in certain circumstances, be extended at the option of the respective borrower for 2 consecutive terms of one year each, as set forth in the respective loan agreement (collectively, the “CMBS SASB Loan Agreements”). Monthly payments due under the CMBS SASB Loan Agreements are interest-only, with the full principal amount becoming due and payable on the respective maturity date.

The amounts outstanding under the CMBS SASB Loan Agreements bear interest at an annual rate equal to LIBOR plus 3%. In addition, pursuant to the requirements of the CMBS SASB Loan Agreements: (a) the borrower with respect to the CMBS SASB Mortgage Loan has purchased an interest rate cap with a notional amount of $180 million, with an effective date of January 24, 2019, whereby LIBOR is capped at 3% through February 15, 2022 and (b) the borrower with respect to the CMBS SASB Mezzanine Loan has purchased an interest rate cap with a notional amount of $55 million, with an effective date of January 24, 2019, whereby LIBOR is capped at 3% through February 15, 2022. On June 7, 2019, to effectively terminate our $180 million and $55 million existing interest rate caps, we sold an offsetting interest rate cap with a notional amount of $235 million, whereby LIBOR is capped at 3% through February 15, 2022.  We simultaneously entered into an interest rate swap with a notional amount of $235 million, whereby LIBOR is fixed at 1.79% through February 15, 2022. None of the CMBS SASB Loan may be prepaid, in whole or in part, without satisfying certain conditions as set forth in the respective CMBS SASB Loan Agreements, such as the payment of a spread maintenance premium if the prepayment is made within the first two years. Thereafter the CMBS SASB Loan may be prepaid in whole or in part at par without penalty.

The loan documents for the CMBS SASB Loan contain: customary affirmative, negative and financial covenants; agreements; representations; warranties and borrowing conditions; reserve requirements and events of default all as set forth in such loan documents. In addition, and pursuant to the terms of the limited recourse guaranties, with respect to the CMBS SASB Mortgage Loan (the “CMBS SASB Mortgage Loan Guaranty”), and with respect to the CMBS SASB Mezzanine Loan (the “CMBS SASB Mezzanine Loan Guaranty” and collectively the “CMBS SASB Guarantees”), each dated January 24, 2019, in favor of the CMBS SASB Lenders, the Company serves as a non-recourse guarantor with respect to each of the CMBS SASB Mortgage Loan and the CMBS SASB Mezzanine Loan and is subject to certain net worth and liquidity requirements, each as described in the CMBS SASB Guarantees.

CMBS Loan

The CMBS loan is a $104 million CMBS financing with KeyBank as lender (the “CMBS Lender”) pursuant to a mortgage loan (the “CMBS Loan”), and is secured by a first mortgage or deed of trust on each of 10 wholly owned properties. The loan has a maturity date of February 1, 2029. Monthly payments due under the loan agreement (the “CMBS Loan Agreement”) are interest-only, with the full principal amount becoming due and payable on the maturity date.

The amounts outstanding under the CMBS Loan bear interest at an annual fixed rate equal to 5%. Commencing two years after securitization, the CMBS Loan may be defeased in whole, but not in part, subject to certain conditions as set forth in the CMBS Loan Agreement.

 

The loan documents for the CMBS Loan contain: customary affirmative, negative and financial covenants; agreements; representations; warranties and borrowing conditions; reserve requirements and events of default all as set forth in such loan documents. In addition, and pursuant to the terms of the limited recourse guaranty dated January 24, 2019, in favor of the CMBS Lender, the Company serves as a non-recourse guarantor with respect to the CMBS Loan.

Secured Loan

This represents secured financing with KeyBank, Fifth Third Bank (“Fifth Third”), and SunTrust Bank (“SunTrust”) as equal co-lenders (the “Secured Lenders”) for an amount up to approximately $96.4 million pursuant to a mortgage loan (the “Secured Loan”). At close, the Secured Loan was secured by a first mortgage or deed of trust on each of 16 wholly owned properties. The loan has a maturity date of January 24, 2022, which may, in certain circumstances, be extended at the option of the borrower for 1 additional term equal to one year, as set forth in the Secured Loan Agreement. Monthly payments due under the Secured Loan Agreement are interest-only, with the full principal amount becoming due and payable on the maturity date. On January 24, 2019, an initial borrowing of approximately $89.2 million was made under the Secured

36


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Loan. On July 11, 2019, in conjunction with the acquisition of the Riggs Road Property, the Riggs Road Property was mortgaged pursuant to the terms of the loan agreement (the “Secured Loan Agreement”), and an additional approximate $5.7 million was drawn. On August 30, 2019, we drew an additional approximately $0.5 million from the interest reserve, increasing the then total amount outstanding on the loan to approximately $95.4 million. In October 2019, in connection with the sale of our San Antonio II property, we paid off approximately $9.9 million of the Secured Loan.

The amounts outstanding under the Secured Loan Agreement bear interest at an annual rate equal to LIBOR plus 2.5%. On January 24, 2019, the borrowers entered into an interest rate swap arrangement with a notional amount of approximately $89.2 million, such that LIBOR is fixed at approximately 2.6% until August 1, 2020. On October 29, 2019, in connection with the settlement of the Senior Term Loan, we restructured this swap to reduce the notional amount to approximately $85.5 million, an amount equivalent to the then outstanding principal on the Secured Loan. The Secured Loan may be prepaid at any time, subject to certain conditions as set forth in the Secured Loan Agreement.

The loan documents for the Secured Loan contain: customary affirmative, negative and financial covenants; agreements; representations; warranties and borrowing conditions; reserve requirements and events of default all as set forth in such loan documents. In particular, the Secured Loan Agreement imposes certain requirements on the Company such as a total leverage ratio, tangible net worth and liquidity requirements, fixed charge coverage ratios and limits on the amount of unhedged variable rate debt exposure. On May 8, 2020, we completed an amendment to the Secured Loan with the Secured Lenders. The Secured Loan amendment revised certain financial covenants, including increasing the REIT-level liquidity covenant from $10 million to $15 million, and the addition of a REIT-level debt service coverage ratio. Additionally, the amendment added a minimum rate for LIBOR of 0.50%. In addition, and pursuant to the terms of the full recourse guaranty (the “Secured Loan Guaranty”), dated January 24, 2019, in favor of the Secured Lenders, we, along with our Operating Partnership serve as full recourse guarantors with respect to the Secured Loan.

Canadian CitiBank Loan

On October 11, 2018, we, through 10 special purpose entities wholly owned by our Operating Partnership, entered into a loan agreement with CitiBank, N.A. (“CitiBank”), as lender.  Under the terms of the loan agreement (the “CitiBank Loan Agreement”), we have a maximum borrowing capacity of $112 million CAD, of which we initially borrowed $99.3 million CAD (the “Initial Proceeds”). The Initial Proceeds were primarily used to pay off all of the existing loans encumbering 10 of our properties located in the greater Toronto area, Canada, all of which now serve as collateral under the CitiBank Loan Agreement. As of June 30, 2020, we had an outstanding balance of $111.3 million CAD, and have the right to receive future advances in the aggregate amount of up to $0.7 million CAD, subject to certain conditions as set forth in the CitiBank Loan Agreement.

The CitiBank Loan Agreement is a term loan that matures on October 9, 2020, which may, in certain circumstances, be extended at our option for 3 consecutive terms of one year each. Monthly payments due under the CitiBank Loan Agreement are interest-only, with the full principal amount becoming due and payable on the maturity date.

The amounts outstanding under the CitiBank Loan Agreement bear interest at a rate equal to the sum of the “CDOR” (as defined in the CitiBank Loan Agreement) and 2.25%. If we exercise our third extension option, the interest rate shall be increased by 0.25%. In addition, pursuant to the requirements of the CitiBank Loan Agreement, we have purchased interest rate caps with a combined notional amount of $112 million CAD, whereby the CDOR is capped at 3.00% through October 15, 2021.

37


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

The following table presents the future principal payment requirements on outstanding debt as of June 30, 2020:

 

2020

 

$

81,941,703

 

2021

 

 

12,630,984

 

2022

 

 

323,426,828

 

2023

 

 

3,384,577

 

2024

 

 

47,035,145

 

2025 and thereafter

 

 

246,890,840

 

Total payments

 

 

715,310,077

 

Premium on secured debt, net

 

 

526,958

 

Debt issuance costs, net

 

 

(5,720,351

)

Total

 

$

710,116,684

 

 

Note 8. Preferred Equity

Series A Convertible Preferred Stock

On October 29, 2019 (the “Commitment Date”), we entered into a preferred stock purchase agreement (the “Purchase Agreement”) with Extra Space Storage LP (the “Investor”), a subsidiary of Extra Space Storage Inc. (NYSE: EXR), pursuant to which the Investor committed to purchase up to $200 million in preferred shares (the aggregate shares to be purchased, the “Preferred Shares”) of our new Series A Convertible Preferred Stock (the “Series A Convertible Preferred Stock”), in one or more closings (each, a “Closing,” and collectively, the “Closings”). The initial closing (the “Initial Closing”) in the amount of $150 million occurred on the Commitment Date. The Investor has committed to purchase up to an additional $50 million, at our option, within 12 months following the Initial Closing, subject to certain limitations. We pay the Investor a fee of 0.25% per annum on the remaining commitment amount until drawn, or the 12-month anniversary of the Initial Closing. We incurred approximately $3.6 million in issuance costs related to the Series A Convertible Preferred Stock, which are recorded as a reduction to Series A Convertible Preferred stock on our consolidated balance sheets.

The shares of Series A Convertible Preferred Stock rank senior to all other shares 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. 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 redeemed or repurchased in full. The dividends are payable in arrears for the prior calendar quarter on or before the 15th day of March, June, September and December of each year.

Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of Series A Convertible Preferred Stock will be entitled to receive a payment equal to the greater of (i) aggregate purchase price of all outstanding Preferred Shares, plus any accrued and unpaid dividends (the “Liquidation Amount”) and (ii) the amount that that would have been payable had the Preferred Shares been converted into common stock pursuant to the terms of the Purchase Agreement immediately prior to such liquidation.

Subject to certain additional redemption rights, as described herein, we have the right to redeem the Series A Convertible Preferred Stock for cash at any time following the fifth anniversary of the Initial Closing. The amount of such redemption will be equal to the Liquidation Amount. Upon the listing of our common stock on a national securities exchange (the “Listing”), we have the right to redeem any or all outstanding Series A Convertible Preferred Stock at an amount equal to the greater of (i) the amount that would have been payable had such Preferred Shares been converted into common stock pursuant to the terms of the Purchase Agreement immediately prior to the Listing, and then all of such Preferred Shares were sold in the Listing, or (ii) the Liquidation Amount, plus a premium amount (the “Premium Amount”) of 10%, 8%, 6%, 4%, or 2% if redeemed prior to the first, second, third, fourth, or fifth anniversary dates of issuance, respectively, or 0% if redeemed thereafter, as set forth in the Articles Supplementary. Upon a change of control event, we have the right to redeem any or all outstanding Series A Convertible Preferred Stock at an amount equal to the greater of (i) the amount that would have been payable had the Preferred Shares been converted into common stock pursuant to the terms of the Purchase

38


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Agreement immediately prior to such change of control or (ii) the Liquidation Amount, plus the Premium Amount, as set forth in the Articles Supplementary. In addition, subject to certain cure provisions, if we fail to maintain our status as a real estate investment trust, the holders of Series A Convertible Preferred Stock have the right to require us to repurchase the Series A Convertible Preferred Stock at an amount equal to the Liquidation Amount with 0 Premium Amount.

At any time after the earlier to occur of (i) the second anniversary of the Initial Closing or (ii) 180 days after a Listing, the holders of Series A Convertible Preferred Stock have the right to convert any or all of the Series A Convertible Preferred Stock held by such holders into common stock at a rate per share equal to the quotient obtained by dividing the Liquidation Amount by the conversion price. The conversion price is $10.66, as may be adjusted in connection with stock splits, stock dividends and other similar transactions.

The holders of Series A Convertible Preferred Stock are not entitled to vote on any matter submitted to a vote of our stockholders, except that in the event that the dividend for the Series A Convertible Preferred Stock has not been paid for at least four quarters (whether or not consecutive), the holders of Series A Convertible Preferred Stock have the right to vote together with our stockholders on any matter submitted to a vote of our stockholders, upon which the holders of the Series A Convertible Preferred Stock and holders of common stock shall vote together as a single class. The number of votes applicable to a share of Series A Convertible Preferred Stock will be equal to the number of shares of common stock a share of Series A Convertible Preferred Stock could have been converted into as of the record date set for purposes of such stockholder vote. This foregoing limited voting right shall cease when all past dividend periods have been paid in full. In addition, the affirmative vote of the holders of a majority of the outstanding shares of Series A Convertible Preferred Stock is required in certain customary circumstances, as well as other circumstances, such as (i) our real estate portfolio exceeding a leverage ratio of 60% loan-to-value, (ii) entering into certain transactions with our Executive Chairman as of the Commitment Date, or his affiliates, (iii) effecting a merger (or similar) transaction with an entity whose assets are not at least 80% self storage related and (iv) entering into any line of business other than self storage and ancillary businesses, unless such ancillary business represents revenues of less than 10% of our revenues for our last fiscal year.

In connection with the issuance of the Series A Convertible Preferred Stock, we and the Investor also entered into an investors’ rights agreement (the “Investors’ Rights Agreement”) which provides the Investor with certain customary protections, including demand registration rights and “piggyback” registration rights with respect to our common stock issued to the Investor upon conversion of the Preferred Shares.

As of June 30, 2020, there were 150,000 Preferred Shares outstanding with an aggregate liquidation preference of approximately $152.4 million, which consisted of $150 million from the Initial Closing, approximately $2.3 million of accumulated and unpaid distributions, and approximately $0.1 million of accumulated and unpaid fees on the undrawn commitment. As of December 31, 2019, there were 150,000 Preferred Shares outstanding with an aggregate liquidation preference of approximately $151.7 million, which consisted of $150 million from the Initial Closing, approximately $1.7 million of accumulated and unpaid distributions, and approximately $0.1 million of accumulated and unpaid fees on the undrawn commitment.

 

Note 9. Derivative Instruments

Interest Rate Derivatives

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we use interest rate swaps and caps as part of our interest rate risk management strategy. The effective portion of the change in the fair value of the derivative that qualifies as a cash flow hedge is recorded in accumulated other comprehensive income (loss) (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt.

We do not use interest rate derivatives for trading or speculative purposes.  Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate movements and other identified risks but we have elected

39


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

not to apply hedge accounting. Changes in the fair value of interest rate derivatives not designated in hedging relationships are recorded in other income (expense) as income within our consolidated statements of operations.

Foreign Currency Hedges

Our objectives in using foreign currency derivatives are to add stability to potential fluctuations in exchange rates between foreign currencies and the U.S. dollar and to manage our exposure to exchange rate movements. To accomplish this objective, we use foreign currency forwards and foreign currency options as part of our exchange rate risk management strategy. A foreign currency forward contract is a commitment to deliver a certain amount of currency at a certain price on a specific date in the future. By entering into the forward contract and holding it to maturity, we are locked into a future currency exchange rate in an amount equal to and for the term of the forward contract. A foreign currency option contract is a commitment by the seller of the option to deliver, solely at the option of the buyer, a certain amount of currency at a certain price on a specific date. For derivatives designated as net investment hedges, the changes in the fair value of the derivatives are reported in accumulated other comprehensive income. Amounts are reclassified out of accumulated other comprehensive income (loss) into earnings when the hedged net investment is either sold or substantially liquidated.  

The following table summarizes the terms of our derivative financial instruments as of June 30, 2020:

 

 

 

Notional

Amount

 

 

Strike

 

 

Effective Date

 

Maturity Date

Interest Rate Swaps:

 

 

 

 

 

 

 

 

 

 

 

 

LIBOR Swap

 

$

85,512,000

 

 

 

2.61

%

 

January 24, 2019

 

August 1, 2020

LIBOR Swap

 

 

235,000,000

 

 

 

1.79

%

 

June 15, 2019

 

February 15, 2022

Interest Rate Cap:

 

 

 

 

 

 

 

 

 

 

 

 

CDOR Cap

 

$

99,300,000

 

(1)

 

3.00

%

 

October 11, 2018

 

October 15, 2021

CDOR Cap

 

 

1,000,000

 

(1)

 

3.00

%

 

March 28, 2019

 

October 15, 2021

CDOR Cap

 

 

11,700,000

 

(1)

 

3.00

%

 

May 28, 2019

 

October 15, 2021

Foreign Currency Forward:

 

 

 

 

 

 

 

 

 

 

 

 

Denominated in CAD

 

$

95,000,000

 

(1)

 

1.334

 

 

February 10, 2020

 

February 10, 2021

 

(1)

Notional amounts shown are denominated in CAD.   

On January 25, 2019, we settled a $90 million CAD foreign currency forward, receiving a net settlement of approximately $2.1 million and simultaneously entered into a $95 million CAD foreign currency forward. On July 8, 2019, we settled the $95 million CAD foreign currency forward, paying a net settlement of approximately $0.6 million and simultaneously entered into a $95 million CAD currency option. On December 9, 2019 the CAD currency option expired and we simultaneously entered into a two month $95 million CAD foreign currency forward. On February 10, 2020, we settled the CAD currency forward, receiving a net settlement of approximately $0.5 million and simultaneously entered into a one year $95 million CAD foreign currency forward. A portion of our gain (loss) from our settled and unsettled foreign currency hedges is recorded net in foreign currency hedge contract gain (loss) in our consolidated statements of comprehensive loss, the other portion, a loss of approximately $0.5 million and a gain of approximately $0.5 million related to the ineffective portion is recorded in other income (expense) within our consolidated statements of operations for the three and six months ended June 30, 2020, respectively.

40


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

The following table summarizes the terms of our derivative financial instruments as of December 31, 2019:

 

 

 

Notional

Amount

 

 

Strike

 

 

Effective Date

 

Maturity Date

 

Interest Rate Swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

LIBOR Swap

 

$

85,512,000

 

 

 

2.61

%

 

January 24, 2019

 

August 1, 2020(3)

 

LIBOR Swap

 

 

235,000,000

 

 

 

1.79

%

 

June 15, 2019

 

February 15, 2022

 

Interest Rate Cap:

 

 

 

 

 

 

 

 

 

 

 

 

 

CDOR Cap

 

$

99,300,000

 

(1)

 

3.00

%

 

October 11, 2018

 

October 15, 2021

 

CDOR Cap

 

 

1,000,000

 

(1)

 

3.00

%

 

March 28, 2019

 

October 15, 2021

 

CDOR Cap

 

 

11,700,000

 

(1)

 

3.00

%

 

May 28, 2019

 

October 15, 2021

 

Foreign Currency Option:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominated in CAD

 

$

95,000,000

 

(1)

 

1.323

 

 

December 9, 2019

 

February 10, 2020(2)

 

 

(1)

Notional amount shown is denominated in CAD.

(2)

We settled this forward on February 10, 2020, receiving a net settlement of approximately $0.5 million and simultaneously entered into another $95 million CAD foreign currency forward with a maturity date of February 10, 2021. 

(3)

On August 3, 2020, we entered into a LIBOR interest rate cap for a notional amount of $80 million which caps LIBOR at 0.5% through August 2, 2021.

The following table presents a gross presentation of the fair value of our derivative financial instruments as well as their classification on our consolidated balance sheets as of June 30, 2020 and December 31, 2019:

 

 

 

Asset/Liability Derivatives

 

 

 

Fair Value

 

Balance Sheet Location

 

June 30,

2020

 

 

December 31,

2019

 

Interest Rate Swaps

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

6,533,137

 

 

$

1,695,140

 

Interest Rate Caps

 

 

 

 

 

 

 

 

Other assets

 

$

 

 

$

28,847

 

Foreign Currency Hedges

 

 

 

 

 

 

 

 

Other assets

 

$

1,202,140

 

 

$

 

Accounts payable and accrued liabilities

 

 

 

 

 

1,425,632

 

 

 

 

Note 10. Segment Disclosures

Prior to the Self Administration Transaction on June 28, 2019, we internally evaluated all of our properties and interests therein as one industry segment and, accordingly, did not report segment information.

Subsequent to the Self Administration Transaction, we now operate in 2 reportable business segments: (i) self storage operations and (ii) our Managed REIT Platform business.

Management evaluates performance based upon net operating income (“NOI”). For our self storage operations, NOI is defined as leasing and related revenues, less property level operating expenses. NOI for the Company’s Managed REIT Platform business represents Managed REIT Platform revenues less Managed REIT Platform expenses.

41


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

The following tables summarizes information for the reportable segments for the three months ended June 30, 2020 below:

 

 

Three Months Ended June 30, 2020

 

 

 

 

 

 

 

Managed REIT

 

 

Corporate

 

 

 

 

 

 

 

Self Storage

 

 

Platform

 

 

and Other

 

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self storage rental revenue

 

$

24,946,793

 

 

$

 

 

$

 

 

$

24,946,793

 

Ancillary operating revenue

 

 

1,183,418

 

 

 

 

 

 

 

 

 

1,183,418

 

Managed REIT Platform revenue

 

 

 

 

 

1,852,893

 

 

 

 

 

 

1,852,893

 

Reimbursable costs from Managed REITs

 

 

 

 

 

1,486,441

 

 

 

 

 

 

1,486,441

 

Total revenues

 

 

26,130,211

 

 

 

3,339,334

 

 

 

 

 

 

29,469,545

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

9,195,043

 

 

 

 

 

 

 

 

 

9,195,043

 

Managed REIT Platform expense

 

 

 

 

 

1,008,014

 

 

 

 

 

 

1,008,014

 

Reimbursable costs from Managed REITs

 

 

 

 

 

1,486,441

 

 

 

 

 

 

1,486,441

 

General and administrative

 

 

 

 

 

 

 

 

4,149,713

 

 

 

4,149,713

 

Depreciation

 

 

7,720,655

 

 

 

 

 

 

121,788

 

 

 

7,842,443

 

Intangible amortization expense

 

 

2,191,854

 

 

 

1,026,298

 

 

 

 

 

 

3,218,152

 

Other acquisition expenses

 

 

97,221

 

 

 

 

 

 

 

 

 

97,221

 

Contingent earnout expense

 

 

 

 

 

500,000

 

 

 

 

 

 

500,000

 

Total operating expenses

 

 

19,204,773

 

 

 

4,020,753

 

 

 

4,271,501

 

 

 

27,497,027

 

Operating income (loss)

 

 

6,925,438

 

 

 

(681,419

)

 

 

(4,271,501

)

 

 

1,972,518

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(8,239,472

)

 

 

 

 

 

(44,957

)

 

 

(8,284,429

)

Interest expense – accretion of fair market

   value of secured debt

 

 

32,892

 

 

 

 

 

 

 

 

 

32,892

 

Interest expense – debt issuance costs

 

 

(933,919

)

 

 

 

 

 

(2,359

)

 

 

(936,278

)

Other

 

 

(35,900

)

 

 

174,145

 

 

 

14,211

 

 

 

152,456

 

Net loss

 

$

(2,250,961

)

 

$

(507,274

)

 

$

(4,304,606

)

 

$

(7,062,841

)

The following tables summarizes information for the reportable segments for the six months ended June 30, 2020 below:

 

 

Six Months Ended June 30, 2020

 

 

 

 

 

 

 

Managed REIT

 

 

Corporate

 

 

 

 

 

 

 

Self Storage

 

 

Platform

 

 

and Other

 

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self storage rental revenue

 

$

50,514,812

 

 

$

 

 

$

 

 

$

50,514,812

 

Ancillary operating revenue

 

 

2,336,261

 

 

 

 

 

 

 

 

 

2,336,261

 

Managed REIT Platform revenue

 

 

 

 

 

3,636,680

 

 

 

 

 

 

3,636,680

 

Reimbursable costs from Managed REITs

 

 

 

 

 

3,279,915

 

 

 

 

 

 

3,279,915

 

Total revenues

 

 

52,851,073

 

 

 

6,916,595

 

 

 

 

 

 

59,767,668

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

18,870,069

 

 

 

 

 

 

 

 

 

18,870,069

 

Managed REIT Platform expense

 

 

 

 

 

2,182,823

 

 

 

 

 

 

2,182,823

 

Reimbursable costs from Managed REITs

 

 

 

 

 

3,279,915

 

 

 

 

 

 

3,279,915

 

General and administrative

 

 

 

 

 

 

 

 

7,817,660

 

 

 

7,817,660

 

Depreciation

 

 

15,321,826

 

 

 

 

 

 

237,288

 

 

 

15,559,114

 

Intangible amortization expense

 

 

4,388,682

 

 

 

2,499,101

 

 

 

 

 

 

6,887,783

 

Other acquisition expenses

 

 

125,326

 

 

 

 

 

 

 

 

 

125,326

 

Contingent earnout adjustment

 

 

 

 

 

(6,700,000

)

 

 

 

 

 

(6,700,000

)

Impairment of goodwill and intangible assets

 

 

 

 

 

36,465,732

 

 

 

 

 

 

36,465,732

 

Impairment of investments in Managed REITs

 

 

 

 

 

4,376,879

 

 

 

 

 

 

4,376,879

 

Total operating expenses

 

 

38,705,903

 

 

 

42,104,450

 

 

 

8,054,948

 

 

 

88,865,301

 

Operating income (loss)

 

 

14,145,170

 

 

 

(35,187,855

)

 

 

(8,054,948

)

 

 

(29,097,633

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(16,533,565

)

 

 

 

 

 

(90,167

)

 

 

(16,623,732

)

Interest expense – accretion of fair market

   value of secured debt

 

 

65,549

 

 

 

 

 

 

 

 

 

65,549

 

Interest expense – debt issuance costs

 

 

(1,875,043

)

 

 

 

 

 

(4,718

)

 

 

(1,879,761

)

Other

 

 

(335,272

)

 

 

2,917,497

 

 

 

146,930

 

 

 

2,729,155

 

Net loss

 

$

(4,533,161

)

 

$

(32,270,358

)

 

$

(8,002,903

)

 

$

(44,806,422

)

42


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

 

The following tables summarizes information for the reportable segments for the three months ended June 30, 2019 below:

 

 

 

Three Months Ended June 30, 2019

 

 

 

 

 

 

 

Managed REIT

 

 

Corporate

 

 

 

 

 

 

 

Self Storage

 

 

Platform

 

 

and Other

 

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self storage rental revenue

 

$

25,154,971

 

 

$

 

 

$

 

 

$

25,154,971

 

Ancillary operating revenue

 

 

749,375

 

 

 

 

 

 

 

 

 

749,375

 

Managed REIT Platform revenue

 

 

 

 

 

29,062

 

 

 

 

 

 

29,062

 

Reimbursable costs from Managed REITs

 

 

 

 

 

47,109

 

 

 

 

 

 

47,109

 

Total revenues

 

 

25,904,346

 

 

 

76,171

 

 

 

 

 

 

25,980,517

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

8,775,557

 

 

 

 

 

 

 

 

 

8,775,557

 

Property operating expenses – affiliates

 

 

3,380,954

 

 

 

 

 

 

 

 

 

3,380,954

 

Managed REIT Platform expense

 

 

 

 

 

10,569

 

 

 

 

 

 

10,569

 

Reimbursable costs from Managed REITs

 

 

 

 

 

47,109

 

 

 

 

 

 

47,109

 

General and administrative

 

 

 

 

 

 

 

 

1,826,886

 

 

 

1,826,886

 

Depreciation

 

 

7,420,510

 

 

 

 

 

 

 

 

 

7,420,510

 

Intangible amortization expense

 

 

2,286,161

 

 

 

68,171

 

 

 

 

 

 

2,354,332

 

Self administration transaction expenses

 

 

 

 

 

 

 

 

1,350,188

 

 

 

1,350,188

 

Acquisition expenses – affiliates

 

 

45,119

 

 

 

 

 

 

 

 

 

45,119

 

Other acquisition expenses

 

 

387

 

 

 

 

 

 

 

 

 

387

 

Total operating expenses

 

 

21,908,688

 

 

 

125,849

 

 

 

3,177,074

 

 

 

25,211,611

 

Operating income (loss)

 

 

3,995,658

 

 

 

(49,678

)

 

 

(3,177,074

)

 

 

768,906

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(9,760,794

)

 

 

 

 

 

(1,508

)

 

 

(9,762,302

)

Interest expense – accretion of fair market

   value of secured debt

 

 

33,191

 

 

 

 

 

 

 

 

 

33,191

 

Interest expense – debt issuance costs

 

 

(1,073,725

)

 

 

 

 

 

 

 

 

(1,073,725

)

Gain resulting from acquisition of

    unconsolidated affiliates

 

 

8,017,353

 

 

 

 

 

 

 

 

 

8,017,353

 

Other

 

 

(267,395

)

 

 

 

 

 

 

 

 

(267,395

)

Net loss

 

$

944,288

 

 

$

(49,678

)

 

$

(3,178,582

)

 

$

(2,283,972

)

43


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

 

The following tables summarizes information for the reportable segments for the six months ended June 30, 2019 below:

 

 

 

Six Months Ended June 30, 2019

 

 

 

 

 

 

 

Managed REIT

 

 

Corporate

 

 

 

 

 

 

 

Self Storage

 

 

Platform

 

 

and Other

 

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self storage rental revenue

 

$

48,386,620

 

 

$

 

 

$

 

 

$

48,386,620

 

Ancillary operating revenue

 

 

1,401,051

 

 

 

 

 

 

 

 

 

1,401,051

 

Managed REIT Platform revenue

 

 

 

 

 

29,062

 

 

 

 

 

 

29,062

 

Reimbursable costs from Managed REITs

 

 

 

 

 

47,109

 

 

 

 

 

 

47,109

 

Total revenues

 

 

49,787,671

 

 

 

76,171

 

 

 

 

 

 

49,863,842

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

16,974,602

 

 

 

 

 

 

 

 

 

16,974,602

 

Property operating expenses – affiliates

 

 

6,605,670

 

 

 

 

 

 

 

 

 

6,605,670

 

Managed REIT Platform expense

 

 

 

 

 

10,569

 

 

 

 

 

 

10,569

 

Reimbursable costs from Managed REITs

 

 

 

 

 

47,109

 

 

 

 

 

 

47,109

 

General and administrative

 

 

 

 

 

 

 

 

3,481,070

 

 

 

3,481,070

 

Depreciation

 

 

14,288,918

 

 

 

 

 

 

 

 

 

14,288,918

 

Intangible amortization expense

 

 

4,013,137

 

 

 

68,171

 

 

 

 

 

 

4,081,308

 

Self administration transaction expenses

 

 

 

 

 

 

 

 

1,488,271

 

 

 

1,488,271

 

Acquisition expenses – affiliates

 

 

84,061

 

 

 

 

 

 

 

 

 

84,061

 

Other acquisition expenses

 

 

84,236

 

 

 

 

 

 

 

 

 

84,236

 

Total operating expenses

 

 

42,050,624

 

 

 

125,849

 

 

 

4,969,341

 

 

 

47,145,814

 

Operating income (loss)

 

 

7,737,047

 

 

 

(49,678

)

 

 

(4,969,341

)

 

 

2,718,028

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(18,322,296

)

 

 

 

 

 

(1,508

)

 

 

(18,323,804

)

Interest expense – accretion of fair market

   value of secured debt

 

 

65,659

 

 

 

 

 

 

 

 

 

65,659

 

Interest expense – debt issuance costs

 

 

(1,915,258

)

 

 

 

 

 

 

 

 

(1,915,258

)

Net loss on extinguishment of debt

 

 

(1,487,867

)

 

 

 

 

 

 

 

 

(1,487,867

)

Gain resulting from acquisition of

    unconsolidated affiliates

 

 

8,017,353

 

 

 

 

 

 

 

 

 

8,017,353

 

Other

 

 

(306,401

)

 

 

 

 

 

 

 

 

(306,401

)

Net loss

 

$

(6,211,763

)

 

$

(49,678

)

 

$

(4,970,849

)

 

$

(11,232,290

)

 

The following table summarizes our total assets by segment as of June 30, 2020:

 

Segments

 

June 30, 2020

 

 

Self Storage

 

$

1,157,571,515

 

(1)

Managed REIT Platform

 

 

30,962,182

 

(1)

Corporate and Other

 

 

49,392,991

 

 

Total assets

 

$

1,237,926,688

 

 

 

(1)

Included in the assets of the Self Storage and the Managed REIT Platform segments as of June 30, 2020, are approximately $45.3 million and $8.4 million of goodwill, respectively.

 

Note 11. Related Party Transactions

Through the closing of the Self Administration Transaction on June 28, 2019, we incurred expenses under the following advisory and property management agreements; commencing on such closing and continuing thereafter we no longer incur such expenses. The Dealer Manager Agreement and the Transfer Agent Agreement described below were not impacted by the Self Administration Transaction.

44


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Fees to Affiliates

Our Advisory Agreement with our Former External Advisor, our dealer manager agreement, as amended ("Dealer Manager Agreement") with our Dealer Manager, our Property Management Agreements with our Former External Property Managers and our Transfer Agent Agreement with our Transfer Agent entitle such affiliates to specified fees upon the provision of certain services with regard to our Offering and investment of funds in real estate properties, among other services, as well as certain reimbursements, as described below.

Advisory Agreement

Prior to the Self Administration Transaction we did not have any employees. Our Former External Advisor was primarily responsible for managing our business affairs and carrying out the directives of our board of directors. Our Former External Advisor received various fees and expenses under the terms of our Advisory Agreement. As a result of the Self Administration Transaction, on June 28, 2019, we acquired approximately 350 self storage professionals and other personnel and now perform such services on our own behalf.

Our Former External Advisor received acquisition fees equal to 1.75% of the contract purchase price of each property we acquired plus reimbursement of any acquisition expenses incurred by our Former External Advisor. Our Former External Advisor also received a monthly asset management fee equal to 0.05208%, which is one-twelfth of 0.625%, of our aggregate asset value, as defined in the Advisory Agreement.

Pursuant to the Advisory Agreement, our Former External Advisor was entitled to reimbursement of our Former External Advisor’s direct and indirect costs of providing administrative and management services to us.

Dealer Manager Agreement

In connection with our Primary Offering, our Dealer Manager received a sales commission of up to 7.0% of gross proceeds from sales of Class A Shares and up to 2.0% of gross proceeds from the sales of Class T Shares in the Primary Offering and a dealer manager fee up to 3.0% of gross proceeds from sales of both Class A Shares and Class T Shares in the Primary Offering under the terms of the Dealer Manager Agreement. In addition, our Dealer Manager receives an ongoing stockholder servicing fee that is payable monthly and accrues daily in an amount equal to 1/365th of 1% of the purchase price per share of the Class T Shares sold in the Primary Offering. We will cease paying the stockholder servicing fee with respect to the Class T Shares sold in the Primary Offering at the earlier of (i) the date we list our shares on a national securities exchange, merge or consolidate with or into another entity, or sell or dispose of all or substantially all of our assets; (ii) the date at which the aggregate underwriting compensation from all sources equals 10% of the gross proceeds from the sale of both Class A Shares and Class T Shares in our Primary Offering (i.e., excluding proceeds from sales pursuant to our distribution reinvestment plan), which calculation shall be made by us with the assistance of our Dealer Manager commencing after the termination of the Primary Offering; (iii) the fifth anniversary of the last day of the fiscal quarter in which our Primary Offering (i.e., excluding our distribution reinvestment plan offering) terminated; and (iv) the date that such Class T Share is redeemed or is no longer outstanding. Our Dealer Manager entered into participating dealer agreements with certain other broker-dealers which authorized them to sell our shares. Upon sale of our shares by such broker-dealers, our Dealer Manager re-allowed all of the sales commissions and, subject to certain limitations, the stockholder servicing fees paid in connection with sales made by these broker-dealers.

Affiliated Dealer Manager

SAM owns a 15% non-voting equity interest in our Dealer Manager. Affiliates of our Dealer Manager own limited partnership interests in our Operating Partnership.

45


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Transfer Agent Agreement

SAM owns 100% of the membership interests of Strategic Transfer Agent Services, LLC, our transfer agent (“Transfer Agent”), which is a registered transfer agent with the SEC. Pursuant to our transfer agent agreement, our Transfer Agent provides transfer agent and registrar services to us. These services are substantially similar to what a third party transfer agent would provide in the ordinary course of performing its functions as a transfer agent, including, but not limited to: providing customer service to our stockholders, processing the distributions and any servicing fees with respect to our shares and issuing regular reports to our stockholder. Our Transfer Agent may retain and supervise third party vendors in its efforts to administer certain services. We believe that our Transfer Agent, through its knowledge and understanding of the direct participation program industry which includes non-traded REITs, is particularly suited to provide us with transfer agent and registrar services. Our Transfer Agent also conducts transfer agent and registrar services for other non-traded REITs sponsored by SRA.

Fees paid to our Transfer Agent are based on a fixed quarterly fee, one-time account setup fees and monthly open account fees. In addition, we will reimburse our Transfer Agent for all reasonable expenses or other changes incurred by it in connection with the provision of its services to us, and we will pay our Transfer Agent fees for any additional services we may request from time to time, in accordance with its rates then in effect. Upon the request of our Transfer Agent, we may also advance payment for substantial reasonable out-of-pocket expenditures to be incurred by it.

The initial term of the transfer agent agreement is three years, which term will be automatically renewed for one year successive terms, but either party may terminate the transfer agent agreement upon 90 days’ prior written notice. In the event that we terminate the transfer agent agreement, other than for cause, we will pay our transfer agent all amounts that would have otherwise accrued during the remaining term of the transfer agent agreement; provided, however, that when calculating the remaining months in the term for such purposes, such term is deemed to be a 12 month period starting from the date of the most recent annual anniversary date.

Property Management Agreements

As a result of the Self Administration Transaction, we acquired approximately 350 self storage professionals and other personnel and now perform property management services on our own behalf.

Through June 28, 2019, pursuant to the property management agreements, our Former External Property Managers received: (i) a monthly management fee for each property equal to the greater of $3,000 or 6% of the gross revenues from the properties plus reimbursement of the property manager’s costs of managing the properties and (ii) a construction management fee equal to 5% of the cost of construction or capital improvement work in excess of $10,000. In addition, we had agreed with our Former External Property Managers or an affiliate to share equally in the net revenue attributable to the sale of tenant insurance, protection plans, or other indemnity plans at our properties. With respect to each new property we acquired for which we entered into a property management agreement with our Former External Property Managers we paid our Former External Property Managers a one-time start-up fee in the amount of $3,750.

Our self storage properties located in Canada were subject to separate property management agreements with our Former External Property Managers on terms substantially the same as the amended property management agreements described above.

All of our properties in the United States and Canada are operated under the “SmartStop® Self Storage” brand, which as a result of the Self Administration Transaction we now own.

46


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Pursuant to the terms of the agreements described above, the following table summarizes related party costs incurred and paid by us for the year ended December 31, 2019, and the six months ended June 30, 2020, as well as any related amounts payable as of December 31, 2019 and June 30, 2020:

 

 

 

Year Ended December 31, 2019

 

 

Six Months Ended June 30, 2020

 

 

 

Incurred

 

 

Paid

 

 

Payable

 

 

Incurred

 

 

Paid

 

 

Payable

 

Expensed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

$

975,985

 

 

$

1,185,370

 

 

$

 

 

$

 

 

$

 

 

$

 

Transfer Agent fees

 

 

324,943

 

 

 

374,404

 

 

 

 

 

 

313,618

 

 

 

282,962

 

 

 

30,656

 

Asset management fees

 

 

3,622,559

 

 

 

3,622,559

 

 

 

 

 

 

 

 

 

 

 

 

 

Property management fees

 

 

2,983,110

 

 

 

2,983,110

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition expenses

 

 

84,061

 

 

 

84,061

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition costs

 

 

235,932

 

 

 

235,932

 

 

 

 

 

 

 

 

 

 

 

 

 

Self Administration

    Transaction working

    capital true-up

 

 

493,785

 

 

 

493,785

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholder servicing fee(1)

 

 

 

 

 

667,651

 

 

 

1,277,340

 

 

 

 

 

 

323,529

 

 

 

953,811

 

Total

 

$

8,720,375

 

 

$

9,646,872

 

 

$

1,277,340

 

 

$

313,618

 

 

$

606,491

 

 

$

984,467

 

 

(1)

We pay our Dealer Manager an ongoing stockholder servicing fee that is payable monthly and accrues daily in an amount equal to 1/365th of 1% of the purchase price per share of the Class T Shares sold in the Primary Offering.

 

Please see Note 3 – Real Estate Facilities and Note 4 – Self Administration Transaction for detail regarding additional related party transactions.

Tenant Programs

We may offer a tenant insurance plan, tenant protection plan or similar program (collectively “Tenant Programs”) to customers at our properties.  We and an affiliate of our Former External Property Manager previously agreed to transfer our respective rights in such Tenant Programs revenue to a joint venture owned 50% by our TRS subsidiary and, through the date of the Self Administration Transaction, 50% by our Former External Property Manager’s affiliate (the “Former PM Affiliate”). Under the terms of the joint venture agreement, the TRS received 50% of the net economics generated from such Tenant Programs and the Former PM Affiliate received the other 50% of such net economics. In addition, we shared equally in the net revenue attributable to the sale of Tenant Programs at the properties we acquired in the SSGT Mergers on substantially similar terms as set forth above. In connection with the Self Administration Transaction we now wholly-own both such Tenant Programs joint venture entities.

For the three and six months ended June 30, 2020, we recorded net revenues of approximately $1.0 million and $1.9 million, respectively, related to Tenant Programs which was included in ancillary operating revenue in the consolidated statements of operations. For the three and six months ended June 30, 2019, we recorded net revenues of approximately $0.6 million and $1.0 million, respectively, related to Tenant Programs which was included in ancillary operating revenue in the consolidated statements of operations.

Acquisition of Self Storage Platform from SmartStop Asset Management, LLC and Other Transactions

As a result of the Self Administration Transaction, the advisor and property manager entities of SST IV and SSGT II, became our indirect subsidiaries. As a result, we are entitled to receive various fees and expense reimbursements under the terms of the SST IV and SSGT II advisory and property management agreements as described below.

47


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Advisory Agreement Fees

Our indirect subsidiaries, Strategic Storage Advisor IV, LLC, the advisor to SST IV (the “SST IV Advisor”), and SS Growth Advisor II, LLC, the advisor to SSGT II (the “SSGT II Advisor”), are entitled to receive various fees and expense reimbursements under the terms of the SST IV and SSGT II advisory agreements.

SST IV Advisory Agreement

The SST IV Advisor provides acquisition and advisory services to SST IV pursuant to an advisory agreement (the “SST IV Advisory Agreement”). SST IV is required to reimburse SST IV Advisor for organization and offering costs under the SST IV Advisory Agreement; however, the SST IV Advisor funds, and will not be reimbursed for 1.15% of the gross offering proceeds from the sale of Class W shares sold in the SST IV offering. Such amounts for the three and six months ended June 30, 2020 totaled approximately $2,000 and $25,000, respectively.  The SST IV Advisor will be required to reimburse SST IV within 60 days after the end of the month in which the SST IV public offering terminates to the extent SST IV paid or reimbursed organization and offering costs (excluding sales commissions and dealer manager fees) in excess of 3.5% of the gross offering proceeds from the SST IV offering. The SST IV Advisory Agreement also requires the SST IV Advisor to reimburse SST IV to the extent that offering expenses, including sales commissions, dealer manager fees and organization and offering expenses, are in excess of 15% of gross proceeds from the SST IV offering.

 

The SST IV Advisor also receives a monthly asset management fee equal to 0.0833%, which is one-twelfth of 1%, of SST IV’s aggregate asset value, as defined.

The SST IV Advisor may potentially also be entitled to various subordinated distributions under SST IV’s operating partnership agreement pursuant to the special limited partnership interest and its cash flow participation distribution rights if SST IV (1) lists its shares of common stock on a national exchange, (2) terminates the SST IV Advisory Agreement, (3) liquidates its portfolio, or (4) enters into an Extraordinary Transaction, as defined in the SST IV operating partnership agreement.

The SST IV Advisory Agreement provides for reimbursement of the SST IV Advisor’s direct and indirect costs of providing administrative and management services to SST IV. The SST IV Advisor will be required to pay or reimburse SST IV the amount by which SST IV’s aggregate annual operating expenses, as defined, exceed the greater of 2% of SST IV’s average invested assets or 25% of SST IV’s net income, as defined, unless a majority of SST IV’s independent directors determine that such excess expenses were justified based on unusual and non-recurring factors.

SSGT II Advisory Agreement

The SSGT II Advisor provides acquisition and advisory services to SSGT II pursuant to an advisory agreement (the “SSGT II Advisory Agreement”).  In connection with the SSGT II private placement offering, SSGT II is required to reimburse the SSGT II Advisor for organization and offering costs from the SSGT II private offering pursuant to the SSGT II Advisory Agreement.

The SSGT II Advisor will receive a monthly asset management fee equal to 0.1042%, which is one-twelfth of 1.25%, of SSGT II’s aggregate asset value, as defined.

The SSGT II Advisor may also be potentially entitled to various subordinated distributions under SSGT II’s operating partnership agreement pursuant to the special limited partnership interest and its cash flow participation distribution rights. So long as the SSGT II Advisory Agreement has not been terminated (including by means of non-renewal), SSGT II is required to pay the SSGT II Advisor a distribution from its operating partnership (other than net sale proceeds), pursuant to a special limited partnership interest, equal to 10.0% of any amount distributed to stockholders in excess of the amount required to provide stockholders with an annual aggregate distribution equal to 5.0% (reflective of the weighted average purchase price per share), cumulative within the subject calendar year (as adjusted for partial periods outstanding). Such distribution will be reconciled and paid annually. The cash flow participation distribution may be payable in cash or operating partnership units (or any combination thereof), at the election of the SSGT II Advisor.

48


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

The SSGT II Advisor may also be potentially entitled to various subordinated distributions under SSGT II’s operating partnership agreement if SSGT II (1) lists its shares of common stock on a national exchange, (2) terminates the SSGT II Advisory Agreement, (3) liquidates its portfolio, or (4) merges with another entity or enters into an Extraordinary Transaction, as defined in the SSGT II operating partnership agreement.

 

The SSGT II Advisory Agreement provides for reimbursement of the SSGT II Advisor’s direct and indirect costs of providing administrative and management services to SSGT II.

Managed REIT Property Management Agreements

Our indirect subsidiaries, Strategic Storage Property Management IV, LLC and SS Growth Property Management II, LLC (collectively the “Managed REITs Property Managers”), are entitled to receive fees for their services in managing the properties owned by the Managed REITs pursuant to property management agreements entered into between the owner of the property and the applicable Managed REIT’s Property Manager. The Managed REIT’s Property Managers will receive a property management fee equal to 6% of the gross revenues from the properties, generally subject to a monthly minimum of $3,000 per property, plus reimbursement of the costs of managing the properties, and a one-time fee of $3,750 for each property acquired that would be managed by the Managed REITs Property Managers. Reimbursable costs and expenses include wages and salaries and other expenses of employees engaged in operating, managing and maintaining such properties. Pursuant to the property management agreements, we through our Operating Partnership employ the on-site staff for the Managed REITs’ properties.

The SST IV property manager will be entitled to a construction management fee equal to 5% of the cost of a related construction or capital improvement work project in excess of $10,000.

Summary of Fees and Revenue Related to the Managed REITs

Pursuant to the terms of the various agreements described above for the Managed REITs, the following summarizes the related party fees for the three and six months ended June 30, 2020:

 

Managed REIT Platform Revenues

 

Three Months

Ended

June 30, 2020

 

 

Six Months

Ended

June 30, 2020

 

Property management agreement – SST IV

 

$

333,034

 

 

$

672,497

 

Property management agreement – SSGT II

 

 

76,832

 

 

 

151,555

 

Advisory agreement – SST IV

 

 

775,213

 

 

 

1,545,854

 

Advisory agreement – SSGT II

 

 

271,458

 

 

 

507,093

 

Tenant Program revenue – SST IV

 

 

191,862

 

 

 

357,750

 

Tenant Program revenue – SSGT II

 

 

50,156

 

 

 

79,613

 

Other Managed REIT revenue(1)

 

 

154,338

 

 

 

322,318

 

Total

 

$

1,852,893

 

 

$

3,636,680

 

(1)

Such revenues primarily includes construction management and development fees.

 

Reimbursable costs from affiliates includes reimbursement of both the SST IV and SSGT II Advisors’ direct and indirect costs of providing administrative and management services to the Managed REITs. Additionally, reimbursable costs includes reimbursement pursuant to the property management agreements for reimbursement of the costs of managing the Managed REITs’ properties, including wages and salaries and other expenses of employees engaged in operating, managing and maintaining such properties.

As of June 30, 2020, we had receivables due from SST IV and SSGT II totaling approximately $170,000 and $30,000, respectively, which are included in investments in and advances to the Managed REITs line-item in our consolidated balance sheet. Such amounts included unpaid amounts relative to the above table, in addition to other direct routine expenditures of the Managed REITs that we directly funded.

49


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Administrative Services Agreement

For the three and six months ended June 30, 2020, we incurred fees to SAM under the Administrative Services Agreement of approximately $0.8 million and $1.9 million, respectively, which were recorded in our Managed REIT Platform expenses in our consolidated statement of operations for the three and six months ended June 30, 2020. We recorded reimbursements from SAM of approximately $0.1 million and $0.3 million, respectively, related to services provided to SAM as well as reimbursements of rent and overhead for the portion of the Ladera Office occupied by SAM, which were included in Managed REIT Platform revenue in our consolidated statement of operations for the three and six months ended June 30, 2020, respectively.

As of June 30, 2020, a receivable of approximately $8,000 was due from SAM related to the Administrative Services Agreement and included in the other assets line in our consolidated balance sheet.

Note 12. Equity Based Compensation

We issue equity based compensation pursuant to the employee and director long-term incentive plan of SmartStop Self Storage REIT, Inc. (the “Plan”). Pursuant to the Plan, we are able to issue various forms of equity based compensation. Through June 30, 2020, we have issued equity based awards in two forms: (1) restricted stock awards consisting of shares of our common stock and (2) long-term incentive plan units of our Operating Partnership (“LTIP Units”).

Through April 2020, we had only issued restricted stock, which shares are subject to a time based vesting period. In April 2020 the Compensation Committee of the Board of Directors approved the 2020 executive compensation program for our executive officers, which included (1) performance based awards, and (2) time based awards. For both such awards the recipient could choose either LTIP Units or restricted stock consisting of shares of our common stock.

The fair value of the restricted stock and the LTIP Units was determined based on an estimated value per share, adjusted for an illiquidity discount due to the illiquid nature of the underlying equity. The fair value of the LTIP Units was further adjusted by applying an additional discount as the LTIP Units are not initially economically equivalent to our restricted stock. For the performance based awards, a fair value was determined for each performance ranking scenario, with stock compensation expense recorded using the fair value of the scenario determined to be probable of achievement.

Time Based Awards

We have granted various time based awards, which generally vest ratably over either one, three, or four years commencing in the year of grant, subject to the recipient’s continued employment or service through the applicable vesting date. All grants of time based restricted stock have limitations on transferability during the vesting period, and the grantee does not have the ability to vote any unvested shares. Transferability during the vesting period depends upon when the grant was made, as follows (i) with respect to grants of time based restricted stock made prior to April 2020, the restriction on transfers applies to the entirety of the grant, regardless of vesting, and (ii) with respect to grants of time based restricted stock made in or subsequent to April 2020, the restriction on transfer applies only to the unvested portion of the restricted stock.

With respect to grants of time based restricted stock made to our executive officers in 2020, distributions began to accrue effective January 1, 2020 and are payable as distributions are paid on our Class A Shares without regard to whether the underlying restricted shares have vested. With respect to all other outstanding grants of time based restricted stock, distributions accrue on non-vested shares granted and are paid when the underlying restricted shares vest.

Holders of time based LTIP Units receive allocations of profits and losses with respect to the LTIP Units as of the effective date, distributions from the effective date in an amount equivalent to the distributions declared and paid on our Class A Shares, and the same voting rights as holders of common units, voting as a class with each LTIP Unit holder having one vote per LTIP Unit held. Prior to vesting, time based LTIP Units generally may not be transferred, other than by laws of descent and distribution.

The following table summarizes the activity related to our time based awards:

50


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

 

 

Restricted Stock

 

 

LTIPs

 

Time Based Award Grants

 

Shares

 

 

Weighted-Average

Grant-Date

Fair Value

 

 

Units

 

 

Weighted-Average

Grant-Date

Fair Value

 

Unvested at December 31, 2018

 

 

21,438

 

 

$

10.38

 

 

$

 

 

$

 

Granted

 

 

251,993

 

 

 

9.48

 

 

 

 

 

 

 

Vested

 

 

(7,625

)

 

 

10.29

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Unvested at December 31, 2019

 

 

265,806

 

 

$

9.53

 

 

 

 

 

$

 

Granted

 

 

72,383

 

 

 

9.78

 

 

 

214,521

 

 

 

9.09

 

Vested

 

 

(64,732

)

 

 

9.57

 

 

 

 

 

 

 

Forfeited

 

 

(6,567

)

 

 

9.78

 

 

 

 

 

 

 

Unvested at June 30, 2020

 

 

266,890

 

 

$

9.58

 

 

 

214,521

 

 

$

9.09

 

 

Performance Based Awards

With respect to performance based awards, the number of shares of restricted stock granted as of the grant date equaled 100% of the targeted award, whereas the number of LTIP Units granted as of the grant date equaled 200% of the targeted award. The targeted award for each executive was determined and approved by the Compensation Committee of our Board of Directors. The actual number of shares of restricted stock or LTIP Units, as applicable, to be issued upon vesting may range from 0% to 200% of the targeted award, such determination being based upon the results of the performance measure. Performance based awards vest based upon our performance as ranked amongst a peer group of self storage related companies. This comparison will be conducted using a performance measure of average annual same-store revenue growth, analyzed over a three-year period. Earned awards for the 2020 grant will vest, as applicable, no later than March 31, 2023.

Recipients of performance based restricted stock accrue distributions during the performance period, and such distributions will only be payable on the date that any such shares of restricted stock vest, based upon the performance level attained. Recipients of performance based LTIP Units are issued LTIP Units at 200% of the targeted award and are entitled to receive distributions and allocations of profits and losses with respect to the performance based LTIP Units as of the effective date of January 1, 2020 in an amount equal to 10% of the distributions and allocations available to such LTIP Units, until the Distribution Participation Date (as defined in the Partnership Agreement). The remaining 90% of distributions will accrue and will be payable on the Distribution Participation Date based upon the performance level attained and number of performance based LTIP Units that vest. Following the Distribution Participation Date, recipients will be entitled to receive the full amount of distributions and allocations of profits and losses with respect to the vested performance-based LTIP Units, such amount being equivalent to distributions declared and paid on our Class A Shares.

The following table summarizes our activity related to our performance based awards:

 

 

Restricted Stock

 

 

LTIPs

 

Performance Based Award Grants

 

Shares

 

 

Weighted-Average

Grant-Date

Fair Value

 

 

Units

 

 

Weighted-Average

Grant-Date

Fair Value

 

Unvested at December 31, 2019

 

 

 

 

$

 

 

 

 

 

$

 

Granted

 

 

5,752

 

 

 

9.78

 

 

 

130,638

 

 

 

9.09

 

Vested

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Unvested at June 30, 2020

 

 

5,752

 

 

$

9.78

 

 

 

130,638

 

 

$

9.09

 

 

Holders of performance based restricted stock do not have any rights as a stockholder with respect to the unvested portion of such restricted stock awards.  Prior to vesting, shares of performance based restricted stock generally may not be transferred, other than by laws of descent and distribution.

51


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Holders of performance based LTIP Units have the same voting rights as holders of common units, voting as a class with each LTIP Unit holder having one vote per LTIP Unit held. Prior to vesting, performance based LTIP Units generally may not be transferred, other than by laws of descent and distribution.

LTIP Units are designed to qualify as “profits interests” in the Operating Partnership for federal income tax purposes. The profits interests’ characteristics of the LTIP Units mean that initially they will not be treated as economically equivalent in value to a common unit and the issuance of LTIP Units will not be a taxable event to the Operating Partnership or the recipient. If and when certain events occur pursuant to applicable tax regulations and in accordance with the Partnership Agreement, LTIP Units may increase in value over time and become equivalent to common units of limited partnership interest of our Operating Partnership on a one-for-one basis.

As of June 30, 2020, 5,637,012 shares of stock were available for issuance under the Plan.

We recorded approximately $0.4 million and $0.6 million of equity based compensation expense, primarily in general and administrative expense and to a lesser extent, in property operating expenses, within our consolidated statements of operations for the three and six months ended June 30, 2020, respectively. As of June 30, 2020, there was approximately $4.8 million of total unrecognized compensation expense related to non-vested equity awards. Such cost is expected to be recognized over a weighted-average period of approximately 2.9 years.

 

 

Note 13. Commitments and Contingencies

Distribution Reinvestment Plan

We have adopted an amended and restated distribution reinvestment plan that allows both our Class A and Class T stockholders to have distributions otherwise distributable to them invested in additional shares of our Class A and Class T Shares, respectively. The purchase price per share pursuant to our distribution reinvestment plan is equivalent to the estimated value per share approved by our board of directors and in effect on the date of purchase of shares under the plan. In conjunction with the board of directors’ declaration of a new estimated value per share of our common stock on April 20, 2020, beginning in May 2020, shares sold pursuant to our distribution reinvestment plan are sold at the estimated value per share of $10.40 per Class A Share and Class T Share. On November 30, 2016, we filed with the SEC a Registration Statement on Form S-3, which registered up to an additional $100.9 million in shares under our distribution reinvestment plan (our “DRP Offering”).  We may amend or terminate the amended and restated distribution reinvestment plan for any reason at any time upon 10 days’ prior written notice to stockholders. NaN sales commissions, dealer manager fee, or stockholder servicing fee will be paid on shares sold through the amended and restated distribution reinvestment plan. Through the termination of our Offering on January 9, 2017, we had sold approximately 1.1 million Class A shares and 0.1 million Class T Shares through our original distribution reinvestment plan. As of June 30, 2020, we had sold approximately 4.7 million Class A Shares and approximately 0.7 million Class T Shares through our DRP Offering.

Share Redemption Program

We previously adopted a share redemption program that enabled stockholders to sell their shares to us in limited circumstances. On August 26, 2019, our board of directors approved the suspension of our share redemption program effective as of September 27, 2019, except with respect to redemption requests made in connection with the death or disability of a stockholder, redemption due to confinement to a long-term care facility, or other exigent circumstances. On March 30, 2020, our board of directors approved the complete suspension of our share redemption program, effective on April 29, 2020. If the suspension is lifted, we may redeem the shares of stock presented for redemption for cash to the extent that such requests comply with the below terms of our share redemption program and we have sufficient funds available to fund such redemption. We are not obligated to redeem shares under the share redemption program.

Our board of directors may amend, suspend or terminate the share redemption program with 30 days’ notice to our stockholders. We may provide this notice by including such information in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to our stockholders.

52


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

The amount that we may pay to redeem stock for redemptions is the redemption price set forth in the following table which is based upon the number of years the stock is held:

 

 Number Years Held

 

Redemption Price

Less than 1

 

NaN Redemption Allowed

1 or more but less than 3

 

90.0% of Redemption Amount

3 or more but less than 4

 

95.0% of Redemption Amount

4 or more

 

100.0% of Redemption Amount

 

Excluding any period while the program is suspended, any time we are engaged in an offering of shares, the Redemption Amount for shares purchased under our share redemption program will always be equal to or lower than the applicable per share offering price. As long as we are engaged in an offering, the Redemption Amount shall be the lesser of the amount the stockholder paid for their shares or the price per share in the current offering. If we are no longer engaged in an offering, our board of directors will announce any redemption price adjustment and the time period of its effectiveness as a part of its regular communications with our stockholders. At any time the redemption price during an offering is determined by any method other than the offering price, if we have sold property and have made one or more special distributions to our stockholders of all or a portion of the net proceeds from such sales, the per share redemption price will be reduced by the net sale proceeds per share distributed to investors prior to the redemption date as a result of the sale of such property in the special distribution. Our board of directors will, in its sole discretion, determine which distributions, if any, constitute a special distribution. While our board of directors does not have specific criteria for determining a special distribution, we expect that a special distribution will only occur upon the sale of a property and the subsequent distribution of the net sale proceeds.

There are several limitations in addition to those noted above on our ability to redeem shares under the share redemption program including, but not limited to:

 

During any calendar year, we will not redeem in excess of 5% of the weighted-average number of shares outstanding during the prior calendar year.

 

The cash available for redemption is limited to the proceeds from the sale of shares pursuant to our distribution reinvestment plan, less any prior redemptions.

 

We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

For the year ended December 31, 2019, we received redemption requests totaling approximately $4.9 million (approximately 0.5 million shares), approximately $4.5 million of which were fulfilled during the year ended December 31, 2019, with the remaining approximately $0.4 million included in accounts payable and accrued liabilities as of December 31, 2019 and fulfilled in January 2020. During the six months ended June 30, 2020, approximately 0.1 million shares, or $1.3 million, were requested to be redeemed; however, due to the complete suspension of our share redemption program, 0 share redemption requests were fulfilled.

Operating Partnership Redemption Rights

Generally, the limited partners of our Operating Partnership, excluding any limited partners with respect to their A-2 Units, have the right to cause our Operating Partnership to redeem their limited partnership units for cash equal to the value of an equivalent number of our shares, or, at our option, we may purchase their limited partnership units by issuing 1 share of our common stock for each limited partnership unit redeemed. These rights may not be exercised under certain circumstances that could cause us to lose our REIT election. Furthermore, limited partners may exercise their redemption rights only after their limited partnership units have been outstanding for one year.  

Additionally, the Class A-1 Units issued in connection with the Self Administration Transaction are subject to the general restrictions on transfer contained in the Operating Partnership Agreement. In addition, until the Lock-Up Expiration, the Class A-1 Units may not be sold, pledged, or otherwise transferred or encumbered except in certain limited circumstances set forth in the Contribution Agreement.  The Class A-1 Units are otherwise entitled to all rights and duties of the Class A

53


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

limited partnership units in the Operating Partnership, including cash distributions and the allocation of any profits or losses in the Operating Partnership.

Other Contingencies

From time to time, we are party to legal proceedings that arise in the ordinary course of our business. We are not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.

 

Note 14. Declaration of Distributions

 

On March 30, 2020, our board of directors changed its distribution authorizations from a quarterly to monthly authorization starting with the second quarter of 2020. This change in the distribution policy was in order to give our board maximum flexibility to monitor and evaluate the situation related to the financial impact of COVID-19. In connection with this, for the months of April, May, June, and July 2020, our board of directors authorized a daily distribution rate 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.  After the stockholder servicing fee is paid, approximately $0.0014 per day will be paid per Class T share. Such distributions payable to each stockholder of record during a month will be paid the following month.

Note 15. Selected Quarterly Data

The following is a summary of quarterly financial information for the periods shown below:

 

 

 

Three months ended

 

 

 

June 30,

2019

 

 

September 30,

2019

 

 

December 31,

2019

 

 

March 31,

2020

 

 

June 30,

2020

 

Total revenues

 

$

25,980,517

 

 

$

29,588,014

 

 

$

30,076,693

 

 

$

30,298,123

 

 

$

29,469,545

 

Total operating expenses

 

$

25,211,611

 

 

$

27,773,486

 

 

$

26,965,933

 

 

$

61,368,274

 

 

$

27,497,027

 

Operating income (loss)

 

$

768,906

 

 

$

1,814,528

 

 

$

7,055,456

 

 

$

(31,070,151

)

 

$

1,972,518

 

Net loss

 

$

(2,283,972

)

 

$

(9,541,579

)

 

$

(4,321,670

)

 

$

(37,743,581

)

 

$

(7,062,841

)

Net loss attributable to common

   stockholders

 

$

(2,212,445

)

 

$

(8,214,826

)

 

$

(5,431,504

)

 

$

(35,073,951

)

 

$

(8,491,421

)

Net loss per Class A Share-basic

   and diluted

 

$

(0.04

)

 

$

(0.14

)

 

$

(0.09

)

 

$

(0.59

)

 

$

(0.14

)

Net loss per Class T Share-basic

   and diluted

 

$

(0.04

)

 

$

(0.14

)

 

$

(0.09

)

 

$

(0.59

)

 

$

(0.14

)

 

 

Note 16. Subsequent Events

Distribution Declaration

On July 22, 2020, our board of directors declared a distribution rate for August 2020 of approximately $0.00164 per day per share on the outstanding shares of common stock payable to both Class A and Class T stockholders of record of such shares as shown on our books at the close of business on each day during the period, commencing on August 1, 2020, and continuing on each day thereafter through and including August 31, 2020. In connection with this distribution, after the stockholder servicing fee is paid, approximately $0.0014 per day will be paid per Class T share. Such distributions payable to each stockholder of record during a month will be paid the following month.

54


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

Land Acquisition – Riverview, Florida

On July 21, 2020, we purchased an undeveloped parcel of land adjacent to our existing Riverview, Florida self storage facility for $800,000, plus closing costs. We acquired the parcel from an unaffiliated third party and intend on expanding our existing self storage facility on the newly acquired land; thereby adding approximately 170 units and approximately 25,000 rentable square feet. We expect development to be completed in the second or third quarter of 2021.

 

55


 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our 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 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 ended December 31, 2019. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.

Overview

SmartStop Self Storage REIT, Inc., a Maryland corporation (the “Company”), is a self-managed and fully-integrated self storage real estate investment trust (“REIT”), formed on January 8, 2013 under the Maryland General Corporation Law. 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.

On June 28, 2019, we and our operating partnership, SmartStop OP, L.P. (our “Operating Partnership”), and SmartStop TRS, Inc. (the “TRS”) entered into a series of transactions, agreements, and amendments to our existing agreements and arrangements (such agreements and amendments hereinafter referred to collectively as the “Self Administration Transaction”), with SmartStop Asset Management, LLC, our former sponsor (“SAM”) and SmartStop OP Holdings, LLC (“SS OP Holdings”), a subsidiary of SAM, pursuant to which, effective June 28, 2019, we acquired the self storage advisory, asset management and property management businesses and certain joint venture interests of SAM (the “Self Storage Platform”), along with certain other assets of SAM.  As a result of the Self Administration Transaction, SAM is no longer our sponsor, and the special limited partnership interest and limited partnership interest it held in our Operating Partnership through our Former External Advisor have been redeemed. We are now self-managed and succeed to the advisory, asset management and property management businesses and certain joint ventures previously in place for us, Strategic Storage Trust IV, Inc. (“SST IV”), a public non-traded REIT, and Strategic Storage Growth Trust II, Inc. (“SSGT II”) (collectively with SST IV the “Managed REITs”), a private non-traded REIT. In addition, as a sponsor to the Managed REITs, we now have the internal capability to originate, structure and manage additional investment products (the “Managed REIT Platform”) which would be sponsored by SmartStop REIT Advisors, LLC (“SRA”), our indirect subsidiary. As a result of the Self Administration Transaction, we indirectly own 100% of the membership interests in Strategic Storage Advisor II, LLC (our “Former External Advisor”) and each of Strategic Storage Property Management II, LLC and SS Growth Property Management, LLC (together, our “Former External Property Managers”). See Note 4 of the Notes to the Consolidated Financial Statements contained in this report for additional information.

On October 1, 2018, we, our Operating Partnership, and SST II Growth Acquisition, LLC, our wholly-owned subsidiary (“Merger Sub”), entered into an Agreement and Plan of Merger (the “SSGT Merger Agreement”) with Strategic Storage Growth Trust, Inc. (“SSGT”), a non-traded REIT sponsored by our former sponsor, and SS Growth Operating Partnership, L.P. (“SSGT OP”).  Pursuant to the terms and conditions set forth in the Merger Agreement, on January 24, 2019: (i) we acquired SSGT by way of a merger of SSGT with and into Merger Sub, with Merger Sub being the surviving entity (the “SSGT REIT Merger”); and (ii) immediately after the SSGT REIT Merger, SSGT OP merged with and into our Operating Partnership, with the Operating Partnership continuing as the surviving entity and remaining a subsidiary of the Company (the “SSGT Partnership Merger” and, together with the SSGT REIT Merger, the “SSGT Mergers”).  SSGT was focused on opportunistic self storage properties, including development and lease-up properties. See Note 3, Real Estate Facilities—Merger with Strategic Storage Growth Trust, Inc., for additional information related to the SSGT Mergers.

In our initial public offering, which commenced on January 10, 2014, and ended on January 9, 2017, we offered a maximum of $1.0 billion in common shares for sale to the public (the “Primary Offering”) and $95.0 million in common shares for sale pursuant to our distribution reinvestment plan (collectively, the “Offering”) and sold approximately 48.4 million Class A Shares and approximately 7.3 million Class T Shares for approximately $493 million and $73 million, respectively.

56


 

As of June 30, 2020, we owned 112 operating self storage facilities located in 17 states (Alabama, Arizona, California, Colorado, Florida, Illinois, Indiana, Maryland, Massachusetts, Michigan, New Jersey, Nevada, North Carolina, Ohio, South Carolina, Texas and Washington) and Ontario, Canada (the Greater Toronto Area).

As of June 30, 2020, our self storage portfolio was comprised as follows:

 

State

 

No. of

Properties

 

 

Units(1)

 

 

Sq. Ft.

(net)(2)

 

 

% of Total

Rentable

Sq. Ft.

 

 

Physical

Occupancy

%(3)

 

 

Rental

Income %(4)

 

Alabama

 

 

1

 

 

 

1,080

 

 

 

159,000

 

 

 

2.0

%

 

 

88.1

%

 

 

1.0

%

Arizona

 

 

2

 

 

 

1,815

 

 

 

190,700

 

 

 

2.3

%

 

 

76.8

%

 

 

1.6

%

California

 

 

24

 

 

 

15,230

 

 

 

1,588,000

 

 

 

19.6

%

 

 

90.7

%

 

 

21.6

%

Colorado

 

 

6

 

 

 

3,190

 

 

 

348,500

 

 

 

4.3

%

 

 

87.9

%

 

 

4.1

%

Florida

 

 

17

 

 

 

13,260

 

 

 

1,512,300

 

 

 

18.4

%

 

 

89.7

%

 

 

22.6

%

Illinois

 

 

5

 

 

 

2,920

 

 

 

305,800

 

 

 

3.9

%

 

 

88.2

%

 

 

3.3

%

Indiana

 

 

2

 

 

 

1,000

 

 

 

112,100

 

 

 

1.4

%

 

 

91.5

%

 

 

0.9

%

Massachusetts

 

 

1

 

 

 

840

 

 

 

93,000

 

 

 

1.1

%

 

 

85.9

%

 

 

2.4

%

Maryland

 

 

2

 

 

 

1,610

 

 

 

172,900

 

 

 

2.1

%

 

 

91.3

%

 

 

2.7

%

Michigan

 

 

4

 

 

 

2,180

 

 

 

261,000

 

 

 

3.2

%

 

 

89.3

%

 

 

2.6

%

New Jersey

 

 

1

 

 

 

460

 

 

 

51,000

 

 

 

0.6

%

 

 

94.5

%

 

 

0.7

%

Nevada

 

 

6

 

 

 

5,040

 

 

 

623,500

 

 

 

7.6

%

 

 

92.5

%

 

 

6.7

%

North Carolina

 

 

17

 

 

 

7,230

 

 

 

1,019,300

 

 

 

12.4

%

 

 

89.9

%

 

 

9.3

%

Ohio

 

 

5

 

 

 

2,210

 

 

 

272,300

 

 

 

3.4

%

 

 

94.7

%

 

 

2.3

%

South Carolina

 

 

3

 

 

 

1,920

 

 

 

242,600

 

 

 

3.0

%

 

 

88.8

%

 

 

2.4

%

Texas

 

 

3

 

 

 

1,690

 

 

 

230,800

 

 

 

2.8

%

 

 

90.7

%

 

 

2.5

%

Washington

 

 

1

 

 

 

490

 

 

 

48,100

 

 

 

0.6

%

 

 

85.5

%

 

 

0.5

%

Ontario, Canada(5)

 

 

12

 

 

 

9,540

 

 

 

1,006,700

 

 

 

11.3

%

 

 

87.5

%

 

 

12.8

%

Total

 

 

112

 

 

 

71,705

 

 

 

8,237,600

 

 

 

100

%

 

 

89.6

%

 

 

100

%

 

(1)

Includes all rentable units, consisting of storage units and parking (approximately 2,400 units).

(2)

Includes all rentable square feet, consisting of storage units and parking (approximately 678,000 square feet).

(3)

Represents the occupied square feet of all facilities we owned in a state or province divided by total rentable square feet of all the facilities we owned in such state or area as of June 30, 2020. As of June 30, 2020, the following properties were not physically and/or economically stabilized: Eastlake, 3173 Sweeten Creek Rd—Asheville, Gilbert and Torbarrie. Excluding these properties, our physical occupancy as of June 30, 2020 was approximately 90.7%.

(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, 2020.

(5)

Our Torbarrie property in Toronto, Canada was substantially completed and partially opened in March 2020. Construction activities at our Torbarrie property had been temporarily halted due to the COVID-19 pandemic; however, they resumed during May 2020 and the property received its full certificate of occupancy in June 2020.

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 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.

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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 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 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 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.

Intangible Assets Valuation

In connection with 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 the Tenant Programs joint ventures. 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.

See Note 5 of the consolidated financial statements contained within this report for additional information.

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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. In our impairment test of goodwill, we perform a quantitative analysis 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.

See Note 5 of the consolidated financial statements contained within this report for additional information.

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 used the following significant projections and assumptions to determine value under the relief from royalty method: revenues; royalty rate; tax expense; terminal growth rate; and discount rate. For the SmartStop® trademark, the projections underlying this relief from royalty model were forecasted for eight years and then a terminal value calculation was applied. For the Strategic Storage® trademark, the projections underlying the relief from royalty model were forecasted for seven years. Applying the selected pretax royalty rates to the applicable revenue base in each period yielded pretax income for each of our trademarks. These pretax totals were tax effected utilizing the applicable tax rate to arrive at net, after-tax cash flows. The net, after-tax flows were then discounted to present value utilizing an appropriate discount rate. The present value of the after-tax cash flows were then added to the present value of the amortization tax benefit (considering the 15-year amortization of intangible assets pursuant to U.S. tax legislation) to arrive at the estimated fair values for the trademarks.

We 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 valuations methods is adversely impacted, the impact could result in a material impairment charge in the future.

See Note 5 of the consolidated financial statements contained within this report for additional information.

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 financial statements or materially different amounts being reported in the financial statements, as such determinations, and the corresponding amount of depreciation expense, may vary dramatically based on the estimates and assumptions we use.

Consolidation of Investments in Joint Ventures

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 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 ended December 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

59


 

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.

Recent Market 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 March 2020, national and local governments in every jurisdiction in which we operate have, at various times, issued orders causing temporary shutdowns of businesses and restrictions on the ability of residents to conduct business or engage in certain activities outside of their homes, as well as restrictions on certain commercial activities. These orders have impacted, and could continue to impact, our facilities and operations.  Beginning in late March, we saw reductions in our move-in volumes which were partially offset by lower move-out volumes. While rental activity recovered to more typical seasonally adjusted levels in May and June, any future periods of extended stay-at-home orders or other temporary shutdowns could cause a reduction in our rental activity.

In addition, we have instituted the use of masks, plastic dividers, additional cleaning measures and social distancing at all of our self storage facilities, as well as instituted remote working measures at our corporate headquarters and call center. We have also adjusted our in-store operations in order to comply with the various governmental orders, and, in certain cases, we had to temporarily close some of our offices.

To date there has been no significant change in our rent collections. However, rent collections could be impacted by prolonged economic stress and unemployment, which could affect our customers’ ability to pay rent and thus would increase bad debt expense. While we have recently implemented a contactless option for servicing our customers, we typically conduct aspects of our leasing activities at our facilities, as well as the offering of various ancillary products, including moving and packing supplies, such as locks and boxes, and other services, such as tenant protection plans. Reductions in the ability and willingness of customers to visit our facilities due to the COVID-19 outbreak along with the economic impact of COVID-19 on customers could reduce rental revenue and ancillary operating revenue produced by our facilities. Concerns relating to COVID-19 have also affected, and could continue to affect, our on-site staffing, which could have an adverse impact our ability to adequately manage our facilities.

Various jurisdictions have issued orders or proclamations impacting our ability to charge certain fees, conduct auctions or increase our rental rates. Beginning in mid-March, we elected to suspend all auctions and rate increases for our existing customers, as well as suspend or waive certain fees. Furthermore, reduced rental activity during late March and April, as well as lower prices offered by competitors, caused lower rental rates for incoming customers during the second quarter. As a result, we have generally seen a negative impact on our revenues beginning primarily in April 2020. Additionally, we have seen increases in our property operating expenses caused by the cost of increased safety precautions, including personal protective equipment, increased cleaning and specialized sanitizing procedures, and one-time cash bonuses for our store and field personnel. Beginning June 2020, in certain jurisdictions, we resumed certain normal operating procedures on a modified basis, including auctions and charging late fees.

Below is a summary of various business metrics and indicators impacted by the COVID-19 pandemic which impacted our self storage revenues during second quarter 2020:

 

No rate increases for our existing customers during second quarter 2020;

 

A reduction in late fees during second quarter 2020, which amounted to a reduction of approximately 35% on a same-store basis as compared to second quarter 2019;

 

Same-store move-ins declined approximately 5% during the second quarter 2020 as compared to second quarter 2019, after declining approximately 22% on a same-store basis for the month of April 2020 vs. April 2019;

 

Same-store move-outs declined approximately 12% for the second quarter 2020 as compared to second quarter 2019;

 

Same-store asking rates for new customers declined during the second quarter 2020 as compared to second quarter 2019;

 

Rents billed and collected within the same month, were effectively unchanged on a year-over-year basis at approximately 96% during the second quarter 2020.

The ultimate extent and duration of the impact of the COVID-19 outbreak, including the corresponding governmental orders, on the demand for self storage space or on our business, financial condition, collections, bad debt expense, liquidity, results of operations and prospects will depend on future developments, which are highly uncertain and cannot be predicted. This includes new information that may also emerge concerning the breadth or severity of the COVID-19 outbreak, as well as the actions to contain or treat its impact.

60


 

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 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. Additionally, our operating results depend on our tenants making their required rental payments to us, maintaining our fees from our Managed REITs, and the success of our Tenant Programs.

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 of June 30, 2020 and 2019, we owned 112 and 111 operating self storage facilities, respectively. The comparability of our results of operations was affected by our acquisition activity in 2019, particularly the SSGT Mergers and the Self Administration Transaction, both of which were completed during the six months ended June 30, 2019. The six months ended June 30, 2020, includes full six-month results for 111 operating self storage facilities and partial period results for one operating property that development was completed and the property was placed in service during the six months ended June 30, 2020. The six months ended June 30, 2019, includes full six-month results for 83 operating self storage facilities and partial period results for 28 operating properties acquired during the six months ended June 30, 2019.

SSGT Mergers

On January 24, 2019, we merged with SSGT, a REIT focused on opportunistic self storage properties, including development and lease-up properties. Through the SSGT Mergers, we acquired 27 operating self storage facilities which had a physical occupancy of approximately 77% at acquisition, along with one property that was subsequently sold in October 2019 located in San Antonio, Texas, one development property in the Greater Toronto, Canada area, and the rights to acquire another property under development in Gilbert, Arizona, which was acquired in July 2019.  While the SSGT portfolio generated positive net operating income since the completion of the SSGT Mergers, the portfolio is not yet physically or economically stabilized and is expected to continue to grow in various key metrics. Additionally, during the second quarter of 2020, the SSGT portfolio had a slight revenue decrease from the first quarter of 2020 as a result of COVID-19. However, occupancy for the SSGT properties continued to grow during the second quarter of 2020. The chart below illustrates the growth in occupancy and total revenues in the SSGT portfolio of assets since the completion of the SSGT Mergers:

 

 

(1)

Physical occupancy represents the percentage of square feet occupied for 27 SSGT operating properties through June 30, 2019, 28 properties through December 31, 2019 including the newly acquired Gilbert property, and 29 properties for the March 31, 2020 and June 30, 2020 periods including the Toronto development property. Properties that were under development or had not yet been acquired were excluded from each respective period. Additionally, the San Antonio II property, which was sold in October 2019, has been excluded from all periods.

61


 

(2)

Total revenue represents the total self storage revenues earned during each respective quarter for 27 SSGT operating properties through June 30, 2019, 28 SSGT properties through December 31, 2019, and all 29 SSGT properties thereafter. Properties that were under development or had not yet been acquired were excluded from each respective period. Additionally, the San Antonio II property, which was sold in October 2019, has been excluded from all periods.

(3)

Physical occupancy declined from June 30, 2019, to September 30, 2019, due to the inclusion of the Gilbert property, which was acquired in July 2019 at 0% occupancy. Physical occupancy for March 31, 2020, and June 30, 2020, also included the Toronto development property, which was partially opened during first quarter 2020 and fully opened during second quarter 2020. The equivalent September 30, 2019, December 31, 2019, March 31, 2020, and June 30, 2020 occupancies for the 27 properties excluding the Gilbert and Toronto properties, were approximately 84%, 85%, 86%, and 90% respectively.

Over the next 24 to 36 months, we believe the SSGT portfolio will continue to grow revenues and net operating income and will become accretive to FFO, as adjusted, and cash flow over that time. While the SSGT Mergers caused initial dilution in FFO, as adjusted as a result of an increase in debt and interest expense, the progress in metrics such as physical occupancy and total revenue, coupled with the acquisition of the Gilbert property and the completion of the Toronto development property, we believe will result in accretive cash flows, portfolio value and FFO, as adjusted, in the future.   The SSGT portfolio grew occupancy meaningfully during the second quarter 2020, in the midst of the COVID-19 pandemic, and while revenue growth was dampened by reduced late fees, pausing existing customer rate increases and lower rental rates to incoming customers, we would expect that pattern of growing revenue to resume in the coming quarters, absent further significant impact from COVID-19.

Self Administration Transaction

On June 28, 2019, we completed the Self Administration Transaction, in which we became self-managed and succeed to the advisory, asset management and property management businesses and certain joint ventures previously in place for us, SST IV and SSGT II. Additionally, we now have the internal capability to originate, structure and manage additional investment products which would be sponsored by SRA. The Self Administration Transaction and the other transactions discussed herein were approved by our board of directors at the recommendation of a special committee of our board of directors comprised solely of independent directors. As a result of the Self Administration Transaction, we now own all the intellectual property associated with the “SmartStop® Self Storage” brand name, including the trademarks, domain names, websites, internal processes and procedures utilized across the United States and Canada. We also acquired a dedicated workforce of over 350 self storage professionals who were previously employees of SAM. With the Self Administration Transaction we became a self-managed and fully-integrated self storage company.

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Our operating results since the completion of the Self Administration Transaction have been, and we expect our operating results in future periods will continue to be, significantly impacted. As a result of the Self Administration Transaction, effective June 28, 2019, we no longer incur acquisition, asset and property management fees, which we previously incurred while we were externally advised. Additionally, we now receive incremental Tenant Program revenues as a result of the Self Administration Transaction. However, we now incur additional compensation expense and related overhead costs. Additionally, we serve as the sponsor of the Managed REITs, generating revenue and incurring expenses associated with such activities.

As the assets under management of the Managed REITs have increased, we have seen an increase in property management and asset management fees, as well as incremental revenues from our Tenant Program joint ventures. At the time of the Self Administration Transaction, the total assets under management of the Managed REITs was approximately $220 million. As of June 30, 2020, the Managed REITs had total assets under management of approximately $404 million, an increase of approximately $184 million since the close of the Self Administration Transaction. See Note 4 of the Notes to the Consolidated Financial Statements contained in this report for additional information.

Below we have summarized the estimated impact, before noncontrolling interests, depreciation, amortization, impairments, contingent earnout adjustments, adjustments to deferred tax liabilities, and interest expense, related to the Self Administration Transaction to our consolidated financial statements (in millions):

 

Description

Three Months Ended

June 30, 2020

 

 

 

 

Six Months Ended

June 30, 2020

 

Elimination of property management and asset

   management fees

$

3.5

 

 

 

 

$

7.0

 

Incremental Tenant Program revenues

 

0.5

 

 

 

 

 

1.0

 

Incremental compensation and other expenses

 

(2.5

)

 

 

 

 

(4.9

)

Managed REIT Platform

 

0.8

 

 

 

 

 

1.5

 

Total

$

2.3

 

 

 

 

$

4.6

 

 

Comparison of the Three Months Ended June 30, 2020 and 2019

Total Self Storage Revenues

Total self storage related revenues for the three months ended June 30, 2020 and 2019, were approximately $26.1 million and $25.9 million, respectively. The increase in total self storage revenues of approximately $0.2 million, or 0.9%, is primarily attributable to increases in non-same-store revenues. Our total self storage revenues were otherwise negatively impacted as a result of the COVID-19 pandemic and the resulting suspension of rate increases to our existing customers and significantly less income from late fees.  Additionally, in response to reduced prices by our competitors, our rental rates for incoming customers decreased. This was partially offset by an increase in revenues attributable to incremental Tenant Program revenues as a result of the Self Administration Transaction. We expect total self storage revenues to increase in future periods as the SSGT and other lease up properties become economically and physically stabilized and revenues to otherwise fluctuate depending on the economic impact of the COVID-19 pandemic and its impact on the demand for self storage.

Managed REIT Platform Revenue

Managed REIT Platform revenue for the three months ended June 30, 2020 and 2019, was approximately $1.9 million and $30,000, respectively. Such revenue consisted of approximately $1.0 million of asset management fee revenue, approximately $0.4 million of property management fee revenue and approximately $0.4 million of other revenue earned pursuant to our management contracts with the Managed REITs. This revenue was derived from the Managed REIT Platform business, acquired through the Self Administration Transaction on June 28, 2019. We expect our Managed REIT Platform revenue will grow in future periods as our Managed REITs acquire additional properties.

63


 

Reimbursable Costs from Managed REITs

Reimbursable costs from Managed REITs for the three months ended June 30, 2020 and 2019, were approximately $1.5 million and $50,000, 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 increase in future periods as our Managed REITs acquire additional properties.

Property Operating Expenses

Property operating expenses for the three months ended June 30, 2020 and 2019, were approximately $9.2 million (or 35.2% of self storage revenue) and $8.8 million (or 33.9% of self storage revenue), respectively. Property operating expenses includes the costs to operate our facilities including payroll expense, utilities, insurance, real estate taxes, and marketing. The increase in property operating expenses of approximately $0.4 million, is primarily attributable to an increase of approximately $0.2 million related to increased compensation expense primarily as a result of the Self Administration Transaction, and an increase of approximately $0.1 million related to COVID-19 related expenses. We expect property operating expenses to decrease as a percentage of revenue as overall occupancy grows and therefore revenues increases, particularly in the SSGT properties.

Property Operating Expenses – Affiliates

Property operating expenses – affiliates for the three months ended June 30, 2020 and 2019, were none and approximately $3.4 million, respectively. Property operating expenses – affiliates included property management fees and asset management fees. The decrease in property operating expenses – affiliates of approximately $3.4 million is attributable to the Self Administration Transaction. As a result of the Self Administration Transaction, we no longer incur such expenses.

Managed REIT Platform Expenses

Managed REIT Platform expenses for the three months ended June 30, 2020 and 2019, were approximately $1.0 million and $10,000, respectively. Such expenses primarily consisted of expenses related to the Administrative Services Agreement (as discussed in Note 4, Self Administration Transaction, of the Notes to the Consolidated Financial Statements contained in this report), and other non-reimbursable costs associated with the operation of the Managed REIT Platform we acquired on June 28, 2019. We expect Managed REIT Platform expenses to decrease in future periods due to a reduction in the level of services provided through the Administrative Services Agreement as a result of the suspension of the Managed REITs’ offerings.

Reimbursable Costs from Managed REITs

Reimbursable costs from Managed REITs for the three months ended June 30, 2020 and 2019, were approximately $1.5 million and $50,000, 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 increase in future periods as our Managed REITs acquire additional properties.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2020 and 2019, were approximately $4.1 million and $1.8 million, respectively. These 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.  Prior to June 28, 2019, we recognized compensation-related costs based on certain required reimbursements from our Former External Advisor. Since June 28, 2019, as a result of the Self Administration Transaction, we are now self-managed and employ our own workforce, which resulted in an increase of approximately $1.9 million related to compensation-related costs for the three months ended June 30, 2020 in comparison to the three months ended June 30, 2019. We expect general and administrative expenses to decrease as a percentage of total revenues over time.

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Depreciation and Amortization Expenses

Depreciation and amortization expenses for the three months ended June 30, 2020 and 2019, were approximately $11.1 million and $9.8 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 a full three months of amortization on the intangible assets amortization and depreciation on our corporate office, acquired in the Self Administration Transaction.

Self Administration Transaction Expenses

Self Administration Transaction expenses for the three months ended June 30, 2020 and 2019, were none and approximately $1.4 million, respectively. Self Administration Transaction expenses consisted primarily of legal fees, and fees and expenses of our professional and financial advisors.

Contingent Earnout Adjustment

The contingent earnout adjustments for the three months ended June 30, 2020 and 2019, were approximately $0.5 million and none, respectively. Such adjustment was due to the increase in the estimated fair value of the contingent earnout liability.

Interest Expense and Accretion of Fair Market Value of Secured Debt

Interest expense and the accretion of fair market value of secured debt for the three months ended June 30, 2020 and 2019, were approximately $8.3 million and $9.7 million, respectively. The decrease of approximately $1.5 million is primarily attributable to decreased debt outstanding during the second quarter of 2020 when compared to the second quarter of 2019, and decreased interest rates on variable rate debt. We expect interest expense to fluctuate in future periods commensurate with our future debt levels and interest rates.

Interest Expense – Debt Issuance Costs

Interest expense – debt issuance costs for the three months ended June 30, 2020 and 2019, were approximately $0.9 million and $1.1 million, respectively. The decrease in interest expense – debt issuance costs of $0.2 million is primarily attributable to the payoff of the Senior Term Loan in the third quarter of 2019 and simultaneous write-off of debt issuance costs related to such loan.  We expect interest expense - debt issuance costs to fluctuate commensurate with our future financing activity.

Gain Resulting from Acquisition of Unconsolidated Affiliates

Gain resulting from acquisition of unconsolidated affiliates for the three months ended June 30, 2020 and 2019, was none and approximately $8.0 million, respectively. The gain was related to our remeasurement to fair value of the Tenant Programs joint ventures upon our acquisition of 100% of such entities in the Self Administration Transaction.

Other

Other income (expense) for the three months ended June 30, 2020 and 2019, was approximately $0.2 million of income, as compared to approximately $0.3 million of expense, respectively. Other consists primarily of state and federal tax expense, adjustments to deferred tax liabilities, foreign currency fluctuations, and changes in value related to our foreign currency and interest rate hedges not designated for hedge accounting. The change is primarily the result of favorable deferred tax adjustments during the second quarter of 2020.

65


 

Same-Store Facility Results - Three Months Ended June 30, 2020 and 2019

The following table sets forth operating data for our same-store facilities (those properties included in the consolidated results of operations since April 1, 2019, excluding 10 lease-up properties we owned as of April 1, 2019) for the three months ended June 30, 2020 and 2019. 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

 

 

 

2020

 

 

2019

 

 

%

Change

 

 

2020

 

 

2019

 

 

%

Change

 

2020

 

 

2019

 

 

%

Change

 

Revenue (1)

 

$

24,566,919

 

 

$

24,633,588

 

 

 

(0.3

)%

 

$

1,563,292

 

 

$

1,270,758

 

 

N/M

 

$

26,130,211

 

 

$

25,904,346

 

 

 

0.9

%

Property

   operating

   expenses (2)

 

 

8,206,420

 

 

 

9,376,349

 

 

 

(12.5

)%

 

 

988,623

 

 

 

921,474

 

 

N/M

 

 

9,195,043

 

 

 

10,297,823

 

 

 

(10.7

)%

Property

   operating

   income

 

$

16,360,499

 

 

$

15,257,239

 

 

 

7.2

%

 

$

574,669

 

 

$

349,284

 

 

N/M

 

$

16,935,168

 

 

$

15,606,523

 

 

 

8.5

%

Number of

   facilities

 

 

102

 

 

 

102

 

 

 

 

 

 

 

10

 

 

 

10

 

 

 

 

 

112

 

 

 

112

 

 

 

 

 

Rentable square

   feet (3)

 

 

7,509,300

 

 

 

7,509,300

 

 

 

 

 

 

 

728,300

 

 

 

715,000

 

 

 

 

 

8,237,600

 

 

 

8,224,300

 

 

 

 

 

Average physical

   occupancy (4)

 

 

89.7

%

 

 

89.5

%

 

 

 

 

 

N/M

 

 

N/M

 

 

 

 

 

88.1

%

 

 

86.4

%

 

 

 

 

Annualized

   revenue per

   occupied

   square foot (5)

 

$

15.30

 

 

$

15.41

 

 

 

 

 

 

N/M

 

 

N/M

 

 

 

 

$

15.05

 

 

$

15.31

 

 

 

 

 

N/M Not meaningful

(1)

Revenue includes rental revenue, Tenant Programs revenue, ancillary revenue, and administrative and late fees.

(2)

Property operating expenses excludes corporate general and administrative expenses, asset management fees, interest expense, depreciation, amortization expense, and acquisition expenses, but includes property management fees if applicable. Same-store property operating expenses for the three months ended June 30, 2020 also include COVID-19 related costs, including specialized cleaning costs, the purchase of personal protective equipment, and bonuses to our field personnel, totaling approximately $0.1 million.

(3)

Of the total rentable square feet, parking represented approximately 678,000 square feet and 695,000 square feet as of June 30, 2020 and 2019, respectively. On a same-store basis, for the same periods, parking represented approximately 678,000 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 revenue 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.

Our same-store revenue decreased by approximately $0.1 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily due to the impact of the COVID-19 pandemic and the resulting reduction in late fees, pausing existing customer rate increases and lower rental rates