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STSFF SmartStop Self Storage REIT

Filed: 14 May 21, 2:36pm

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 March 31, 2021

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 May 13, 2021, there were 76,180,550 outstanding shares of Class A common stock and 7,946,012 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 March 31, 2021 (unaudited) and December 31, 2020

 

5

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020 (unaudited)

 

6

 

Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2021 and 2020 (unaudited)

 

7

 

Consolidated Statements of Equity for the Three Months Ended March 31, 2021 and 2020 (unaudited)

 

8

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (unaudited)

 

10

 

Notes to Consolidated Financial Statements (unaudited)

 

12

Item 2.

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

 

56

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

72

Item 4.

Controls and Procedures

 

73

 

 

 

 

PART II.

OTHER INFORMATION

 

74

 

 

 

 

Item 1.

Legal Proceedings

 

74

Item 1A.

Risk Factors

 

74

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

74

Item 3.

Defaults Upon Senior Securities

 

74

Item 4.

Mine Safety Disclosures

 

74

Item 5.

Other Information

 

74

Item 6.

Exhibits

 

74

 

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 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 realize the plans, strategies and prospects contemplated by 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, 2020, 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, 2020. Our results of operations for the three months ended March 31, 2021 are not necessarily indicative of the operating results expected for the full year.

4


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS  

 

 

March 31,

2021

(Unaudited)

 

 

December 31,

2020

 

ASSETS

 

 

 

 

 

 

 

 

Real estate facilities:

 

 

 

 

 

 

 

 

Land

 

$

392,801,173

 

 

$

335,800,354

 

Buildings

 

 

1,083,055,321

 

 

 

810,480,845

 

Site improvements

 

 

77,101,174

 

 

 

63,821,383

 

 

 

 

1,552,957,668

 

 

 

1,210,102,582

 

Accumulated depreciation

 

 

(124,490,121

)

 

 

(115,903,045

)

 

 

 

1,428,467,547

 

 

 

1,094,199,537

 

Construction in process

 

 

4,260,712

 

 

 

1,761,303

 

Real estate facilities, net

 

 

1,432,728,259

 

 

 

1,095,960,840

 

Cash and cash equivalents

 

 

30,371,284

 

 

 

72,705,624

 

Restricted cash

 

 

8,809,279

 

 

 

7,952,052

 

Investments in unconsolidated real estate ventures (Note 4)

 

 

17,488,416

 

 

 

 

Investments in and advances to Managed REITs

 

 

736,355

 

 

 

15,624,389

 

Other assets, net

 

 

15,202,719

 

 

 

7,734,276

 

Intangible assets, net of accumulated amortization

 

 

24,409,277

 

 

 

12,406,427

 

Trademarks, net of accumulated amortization

 

 

16,158,824

 

 

 

16,194,118

 

Goodwill

 

 

53,643,331

 

 

 

53,643,331

 

Debt issuance costs, net of accumulated amortization

 

 

2,481,254

 

 

 

 

Total assets

 

$

1,602,028,998

 

 

$

1,282,221,057

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Debt, net

 

$

822,490,580

 

 

$

717,952,233

 

Accounts payable and accrued liabilities

 

 

25,515,670

 

 

 

23,038,976

 

Due to affiliates

 

 

1,668,662

 

 

 

667,429

 

Distributions payable

 

 

7,446,393

 

 

 

6,650,317

 

Contingent earnout

 

 

19,500,000

 

 

 

28,600,000

 

Deferred tax liabilities

 

 

7,539,241

 

 

 

8,380,215

 

Total liabilities

 

 

884,160,546

 

 

 

785,289,170

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Redeemable common stock

 

 

60,388,518

 

 

 

57,335,575

 

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

 

 

 

 

 

 

 

 

Series A Convertible Preferred Stock, $0.001 par value; 200,000 shares authorized;

    200,000 and 200,000 shares issued and outstanding at March 31, 2021 and

    December 31, 2020, respectively, with aggregate liquidation preferences of

    $203,082,192 and $202,928,620 at March 31, 2021 and December 31, 2020,

    respectively

 

 

196,356,107

 

 

 

196,356,107

 

Equity:

 

 

 

 

 

 

 

 

SmartStop Self Storage REIT, Inc. equity:

 

 

 

 

 

 

 

 

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

    authorized; 76,096,756 and 52,660,402 shares issued and

    outstanding at March 31, 2021 and December 31, 2020, respectively

 

 

76,098

 

 

 

52,661

 

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

    authorized; 7,948,354 and 7,903,911 shares issued and

    outstanding at March 31, 2021 and December 31, 2020, respectively

 

 

7,949

 

 

 

7,904

 

Additional paid-in capital

 

 

723,891,165

 

 

 

492,408,006

 

Distributions

 

 

(173,328,354

)

 

 

(163,953,169

)

Accumulated deficit

 

 

(155,353,544

)

 

 

(141,444,880

)

Accumulated other comprehensive loss

 

 

(2,937,741

)

 

 

(3,834,228

)

Total SmartStop Self Storage REIT, Inc. equity

 

 

392,355,573

 

 

 

183,236,294

 

Noncontrolling interests in our Operating Partnership

 

 

68,707,354

 

 

 

59,982,111

 

Other noncontrolling interests

 

 

60,900

 

 

 

21,800

 

Total noncontrolling interests

 

 

68,768,254

 

 

 

60,003,911

 

Total equity

 

 

461,123,827

 

 

 

243,240,205

 

Total liabilities and equity

 

$

1,602,028,998

 

 

$

1,282,221,057

 

See notes to consolidated financial statements.

5


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Revenues:

 

 

 

 

 

 

 

 

Self storage rental revenue

 

$

29,503,442

 

 

$

25,568,019

 

Ancillary operating revenue

 

 

1,557,430

 

 

 

1,152,843

 

Managed REIT Platform revenue

 

 

2,287,740

 

 

 

1,783,787

 

Reimbursable costs from Managed REITs

 

 

1,216,043

 

 

 

1,793,474

 

Total revenues

 

 

34,564,655

 

 

 

30,298,123

 

Operating expenses:

 

 

 

 

 

 

 

 

Property operating expenses

 

 

10,343,281

 

 

 

9,675,026

 

Managed REIT Platform expenses

 

 

319,890

 

 

 

1,174,809

 

Reimbursable costs from Managed REITs

 

 

1,216,043

 

 

 

1,793,474

 

General and administrative

 

 

4,752,989

 

 

 

3,667,947

 

Depreciation

 

 

8,543,927

 

 

 

7,716,671

 

Intangible amortization expense

 

 

1,259,547

 

 

 

3,669,631

 

Acquisition expenses

 

 

305,650

 

 

 

28,105

 

Contingent earnout adjustment

 

 

2,119,744

 

 

 

(7,200,000

)

Impairment of goodwill and intangible assets

 

 

0

 

 

 

36,465,732

 

Impairment of investments in Managed REITs

 

 

0

 

 

 

4,376,879

 

Write-off of equity interest and preexisting relationships in

      SST IV upon acquisition of control

 

 

8,389,573

 

 

 

0

 

Total operating expenses

 

 

37,250,644

 

 

 

61,368,274

 

Operating loss

 

 

(2,685,989

)

 

 

(31,070,151

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(7,975,464

)

 

 

(8,339,303

)

Interest expense – accretion of fair market value of secured debt

 

 

31,866

 

 

 

32,657

 

Interest expense – debt issuance costs

 

 

(672,473

)

 

 

(943,483

)

Net loss on extinguishment of debt

 

 

(2,444,788

)

 

 

0

 

Other

 

 

1,443,382

 

 

 

2,576,699

 

Net loss

 

 

(12,303,466

)

 

 

(37,743,581

)

Net loss attributable to the noncontrolling

     interests in our Operating Partnership

 

 

1,476,994

 

 

 

5,031,652

 

Less: Distributions to preferred stockholders

 

 

(3,082,192

)

 

 

(2,362,022

)

Net loss attributable to SmartStop Self Storage

     REIT, Inc. common stockholders

 

$

(13,908,664

)

 

$

(35,073,951

)

Net loss per Class A share – basic and diluted

 

$

(0.22

)

 

$

(0.59

)

Net loss per Class T share – basic and diluted

 

$

(0.22

)

 

$

(0.59

)

Weighted average Class A shares outstanding – basic and diluted

 

 

56,398,876

 

 

 

51,313,351

 

Weighted average Class T shares outstanding – basic and diluted

 

 

7,927,821

 

 

 

7,726,469

 

 

See notes to consolidated financial statements.

6


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Net loss

 

$

(12,303,466

)

 

$

(37,743,581

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

587,729

 

 

 

(4,567,120

)

Foreign currency hedge contract gains (losses)

 

 

(803,069

)

 

 

4,566,795

 

Interest rate swap and cap contract gains (losses)

 

 

1,241,434

 

 

 

(5,475,549

)

Other comprehensive income (loss)

 

 

1,026,094

 

 

 

(5,475,874

)

Comprehensive loss

 

 

(11,277,372

)

 

 

(43,219,455

)

Comprehensive loss attributable to noncontrolling interests:

 

 

 

 

 

 

 

 

Comprehensive loss attributable to the noncontrolling

      interests in our Operating Partnership

 

 

1,347,387

 

 

 

5,761,649

 

Comprehensive loss attributable to SmartStop

     Self Storage REIT, Inc. common stockholders

 

$

(9,929,985

)

 

$

(37,457,806

)

 

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

Stock

 

 

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

 

 

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

Stock

 

 

Redeemable

Common

Stock

 

Balance as of December 31, 2020

 

 

52,660,402

 

 

$

52,661

 

 

 

7,903,911

 

 

$

7,904

 

 

$

492,408,006

 

 

$

(163,953,169

)

 

$

(141,444,880

)

 

$

(3,834,228

)

 

$

183,236,294

 

 

$

60,003,911

 

 

$

243,240,205

 

 

$

196,356,107

 

 

$

57,335,575

 

Gross proceeds from issuance of

     operating partnership units in

     SST VI OP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,000

 

 

 

50,000

 

 

 

 

 

 

 

Issuance of common stock

     in connection with SST IV

     Merger

 

 

23,137,540

 

 

 

23,138

 

 

 

 

 

 

 

 

 

231,389,332

 

 

 

 

 

 

 

 

 

 

 

 

231,412,470

 

 

 

 

 

 

231,412,470

 

 

 

 

 

 

 

Offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(150,000

)

 

 

 

 

 

 

 

 

 

 

 

(150,000

)

 

 

 

 

 

(150,000

)

 

 

 

 

 

 

Issuance of Class A-1 Units in our

     Operating Partnership in

     connection with the contingent

     earnout related to the Self

     Administration Transaction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,219,744

 

 

 

11,219,744

 

 

 

 

 

 

 

Acquisition of noncontrolling

     interest related to the Tenant

     Programs joint ventures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,900

)

 

 

(10,900

)

 

 

 

 

 

 

Changes to redeemable common

     stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,737,890

)

 

 

 

 

 

 

 

 

 

 

 

(3,737,890

)

 

 

 

 

 

(3,737,890

)

 

 

 

 

 

3,737,890

 

Redemptions of common stock

 

 

(66,238

)

 

 

(66

)

 

 

(4,110

)

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(70

)

 

 

 

 

 

(70

)

 

 

 

 

 

(684,947

)

Issuance of restricted stock

 

 

54,192

 

 

 

54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54

 

 

 

 

 

 

54

 

 

 

 

 

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,375,185

)

 

 

 

 

 

 

 

 

(9,375,185

)

 

 

 

 

 

(9,375,185

)

 

 

 

 

 

 

Distributions to noncontrolling

     interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,393,957

)

 

 

(1,393,957

)

 

 

 

 

 

 

Issuance of shares for distribution

   reinvestment plan

 

 

310,860

 

 

 

311

 

 

 

48,553

 

 

 

49

 

 

 

3,737,530

 

 

 

 

 

 

 

 

 

 

 

 

3,737,890

 

 

 

 

 

 

3,737,890

 

 

 

 

 

 

 

Equity based  compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

244,187

 

 

 

 

 

 

 

 

 

 

 

 

244,187

 

 

 

246,843

 

 

 

491,030

 

 

 

 

 

 

 

Net loss attributable to SmartStop

    Self Storage REIT, Inc. common

     stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,908,664

)

 

 

 

 

 

(13,908,664

)

 

 

 

 

 

(13,908,664

)

 

 

 

 

 

 

Net loss attributable to the

     noncontrolling interests in

     our Operating Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,476,994

)

 

 

(1,476,994

)

 

 

 

 

 

 

Foreign currency translation

     adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

513,632

 

 

 

513,632

 

 

 

74,097

 

 

 

587,729

 

 

 

 

 

 

 

Foreign currency forward contract

     loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(701,823

)

 

 

(701,823

)

 

 

(101,246

)

 

 

(803,069

)

 

 

 

 

 

 

Interest rate swap and cap contract

     gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,084,678

 

 

 

1,084,678

 

 

 

156,756

 

 

 

1,241,434

 

 

 

 

 

 

 

Balance as of March 31, 2021

 

 

76,096,756

 

 

$

76,098

 

 

 

7,948,354

 

 

$

7,949

 

 

$

723,891,165

 

 

$

(173,328,354

)

 

$

(155,353,544

)

 

$

(2,937,741

)

 

$

392,355,573

 

 

$

68,768,254

 

 

$

461,123,827

 

 

$

196,356,107

 

 

$

60,388,518

 

See notes to consolidated financial statements.

 

9


 

SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(12,303,466

)

 

$

(37,743,581

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,803,474

 

 

 

11,386,302

 

Change in deferred tax liability

 

 

(1,872,866

)

 

 

(2,746,896

)

Accretion of fair market value adjustment of secured debt

 

 

(31,866

)

 

 

(32,657

)

Amortization of debt issuance costs

 

 

672,473

 

 

 

943,483

 

Equity based compensation expense

 

 

491,030

 

 

 

219,603

 

Contingent earnout adjustment

 

 

2,119,744

 

 

 

(7,200,000

)

Impairment of goodwill and intangible assets

 

 

0

 

 

 

36,465,732

 

Impairment of investments in Managed REITs

 

 

0

 

 

 

4,376,879

 

Unrealized foreign currency and derivative gains

 

 

489,151

 

 

 

438,057

 

Net loss on extinguishment of debt

 

 

2,444,788

 

 

 

0

 

Write-off of equity interest and preexisting relationships in

      SST IV upon acquisition of control

 

 

8,389,573

 

 

 

0

 

Increase (decrease) in cash from changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Other assets, net

 

 

(1,486,741

)

 

 

(1,074,412

)

Accounts payable and accrued liabilities

 

 

(3,824,996

)

 

 

(426,003

)

Managed REITs receivables

 

 

(200,744

)

 

 

(590,687

)

Due to affiliates

 

 

3,902

 

 

 

(331,673

)

Net cash provided by operating activities

 

 

4,693,456

 

 

 

3,684,147

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

SST IV Merger, net of cash acquired

 

 

(46,486,510

)

 

 

0

 

Purchase of real estate

 

 

(16,012,854

)

 

 

0

 

Additions to real estate

 

 

(1,657,513

)

 

 

(3,164,429

)

Redemption of preferred equity investment in SSGT II

 

 

13,500,000

 

 

 

0

 

Purchase of other investments

 

 

(1,400,000

)

 

 

0

 

Deposits on acquisition of real estate

 

 

(710,668

)

 

 

0

 

Settlement of foreign currency hedges

 

 

0

 

 

 

398,951

 

Net cash used in investing activities

 

 

(52,767,545

)

 

 

(2,765,478

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Gross proceeds from issuance of non-revolver debt

 

 

258,641,870

 

 

 

341,397

 

Net proceeds from issuance of revolver debt

 

 

186,005,250

 

 

 

0

 

Repayment of non-revolver debt

 

 

(422,190,754

)

 

 

0

 

Scheduled principal payments on non-revolver debt

 

 

(193,907

)

 

 

(177,223

)

Debt issuance costs

 

 

(4,933,363

)

 

 

(4,533

)

Debt defeasance costs

 

 

(525,728

)

 

 

0

 

Preferred stock issuance costs

 

 

0

 

 

 

(46,457

)

Offering costs

 

 

(308,556

)

 

 

(190,257

)

Redemption of common stock

 

 

(720,422

)

 

 

(431,284

)

Distributions paid to preferred stockholders

 

 

(2,928,620

)

 

 

(1,643,836

)

Distributions paid to common stockholders

 

 

(5,010,842

)

 

 

(4,643,913

)

Distributions paid to noncontrolling interest in OP

 

 

(1,377,906

)

 

 

(1,358,066

)

Net cash provided by (used in) financing activities

 

 

6,457,022

 

 

 

(8,154,172

)

Impact of foreign exchange rate changes on cash and restricted cash

 

 

139,954

 

 

 

(361,396

)

Change in cash, cash equivalents, and restricted cash

 

 

(41,477,113

)

 

 

(7,596,899

)

Cash, cash equivalents, and restricted cash beginning of period

 

 

80,657,676

 

 

 

68,571,123

 

Cash, cash equivalents, and restricted cash end of period

 

$

39,180,563

 

 

$

60,974,224

 

10


 

 

 

Supplemental disclosures and non-cash transactions:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

8,330,968

 

 

$

8,515,504

 

Supplemental disclosure of noncash activities:

 

 

 

 

 

 

 

 

Issuance of shares pursuant to distribution reinvestment plan

 

$

3,737,890

 

 

$

3,979,539

 

Distributions payable

 

$

7,446,393

 

 

$

5,921,299

 

Foreign currency contracts, interest rate swaps, and interest rate cap

   contract in accounts payable and accrued liabilities and other

   assets

 

$

160,354

 

 

$

2,502,155

 

Additions to real estate and construction in process included in

   accounts payable

 

$

24,750

 

 

$

307,100

 

Debt assumed in the SST IV Merger

 

$

81,165,978

 

 

$

0

 

Issuance of common stock in connection with the SST IV Merger

 

$

231,412,470

 

 

$

0

 

Redemption of common stock included in accounts payable and

   accrued liabilities

 

$

697,249

 

 

$

0

 

Proceeds receivable from issuance of operating partnership units

   in SST VI OP

 

$

50,000

 

 

$

0

 

Conversion of A-2 Units into A-1 Units

 

$

11,219,744

 

 

$

0

 

 

See notes to consolidated financial statements.

 

11


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(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. Our year-end is December 31. As used in this report, “we,” “us,” “our,” and “Company” refer to SmartStop Self Storage REIT, Inc. and each of our subsidiaries.

We acquire, own and operate self storage facilities—including facilities owned by us as well as those owned by the entities sponsored by us. As of March 31, 2021, we owned 136 self storage facilities located in 18 states (Alabama, Arizona, California, Colorado, Florida, Illinois, Indiana, Maryland, Massachusetts, Michigan, New Jersey, Nevada, North Carolina, Ohio, South Carolina, Texas, Virginia, and Washington) and the Greater Toronto Area of Ontario, Canada. As discussed herein, we, through our subsidiaries, also served as the sponsor of Strategic Storage Trust IV, Inc., a public non-traded REIT (“SST IV”) through March 17, 2021, and currently serve as the sponsor of Strategic Storage Growth Trust II, Inc., a private non-traded REIT (“SSGT II”) and Strategic Storage Trust VI, Inc., a private non-traded REIT (“SST VI”) (SSGT II, SST VI, and prior to March 17, 2021, SST IV, the “Managed REITs”), and operate the properties owned by the Managed REITs, consisting of, as of March 31, 2021, 12 properties and approximately 9,000 units and 1.0 million rentable square feet. Through our Managed REIT Platform (as defined below), we have the internal capability to originate, structure, and manage additional investment products.

The square footage, unit count, and occupancy percentage data and related disclosures included in these notes to the consolidated financial statements are outside the scope of our independent registered accounting firm’s review.

Significant Acquisitions and Transactions

SST IV Merger

On March 17, 2021, we closed on our merger with SST IV (the “SST IV Merger”). As a result, we acquired all of the real estate owned by SST IV, consisting of (i) 24 self storage facilities located in 9 states comprising approximately 18,000 self storage units and approximately 2.0 million net rentable square feet, and (ii) SST IV’s 50% equity interest in 6 unconsolidated real estate ventures located in the Greater Toronto Area of Ontario, Canada (the “JV Properties”). The JV Properties consist of 3 operating self storage properties and 3 parcels of land in various stages of development into self storage facilities, with subsidiaries of SmartCentres Real Estate Investment Trust, an unaffiliated third party (“SmartCentres”). Additionally, we obtained the rights to acquire, upon its completion, a self storage property that is being developed in San Gabriel, California.

At the effective time of the SST IV Merger (the “SST IV Merger Effective Time”), each share of SST IV common stock, par value $0.001 per share (the “SST IV Common Stock”), outstanding immediately prior to the SST IV Merger Effective Time (other than shares owned by SST IV and its subsidiaries or us and our subsidiaries) was automatically converted into 2.1875 Class A Shares. Immediately prior to the SST IV Merger Effective Time, all shares of SST IV Common Stock that were subject to vesting and other restrictions also became fully vested. As a result of the SST IV Merger, approximately 10.6 million shares of SST IV Common Stock were converted into approximately 23.1 million Class A Shares.

New Credit Facility

On March 17, 2021, we, through SmartStop OP, L.P. (our “Operating Partnership”), entered into a credit facility with KeyBank, National Association as administrative agent, with an initial aggregate commitment of $500 million (the “Credit Facility”), which consists of a $250 million revolving credit facility and a $250 million term loan. We used the initial draw proceeds of approximately $451 million primarily to pay off certain existing indebtedness as well as indebtedness of SST IV in connection with the SST IV Merger. See Note 6 for additional information.

Equity

The Company was formed on January 8, 2013, under the Maryland General Corporation Law.  We commenced our initial public offering in January 2014, in which we offered a maximum of $1.0 billion in common shares for sale to the

12


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

public (the “Primary Offering”) and $95.0 million in common shares for sale pursuant to our distribution reinvestment plan (collectively, the “Offering”). At the termination of our offering in January 2017, we had sold approximately 48 million Class A Shares and approximately 7 million Class T Shares for approximately $493 million and $73 million respectively.

In November 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”). The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders. As of March 31, 2021, we had sold approximately 5.6 million Class A Shares and approximately 0.9 million Class T Shares for approximately $58.8 million and $9.0 million, respectively, in our DRP Offering.

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 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, and the second and final closing in the amount of $50 million occurred on October 26, 2020.

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 7, Preferred Equity, for additional information.

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 “Former 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 Former Dealer Manager. Now that our Primary Offering has terminated, our Former Dealer Manager no longer provides such services for us. However, we pay our Former Dealer Manager an ongoing stockholder servicing fee with respect to the Class T Shares sold. Please see Note 10 – Related Party Transactions – Former Dealer Manager Agreement.

Other Corporate History

Our Operating Partnership was formed on January 9, 2013. During 2013, Strategic Storage Advisor II, LLC, our former external advisor (“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 5, Self Administration Transaction, for additional information.

13


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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.

Our Operating Partnership owns, directly or indirectly through one or more subsidiaries, all of the self storage properties that we own. As of March 31, 2021, we owned approximately 88.8% of the common units of limited partnership interests of our Operating Partnership. The remaining approximately 11.2% of the common units are owned by certain members of our executive management team or indirectly by SmartStop Asset Management, LLC, our former sponsor (“SAM”) and affiliates of our Former 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”), or other taxable REIT subsidiaries which are directly or indirectly wholly-owned subsidiaries of our Operating Partnership.

COVID-19

Our rental revenue and operating results depend significantly on the demand for self storage space. Since the beginning of the COVID-19 pandemic in late March 2020, our operations have adjusted to meet the needs of our customers and employees, while striving to create a safe environment at our properties and our corporate offices. The operational and financial impact associated with COVID-19 were most significant to our business in the second quarter of 2020, with customer demand for self storage resuming at or above normalized levels during the second half of 2020 and continuing into 2021. Future governmental orders causing restrictions on our business or broad economic weakness could 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, as well as Strategic Storage Operating Partnership VI, L.P. (“SST VI OP”), and its wholly-owned subsidiaries, are consolidated in the accompanying consolidated financial statements. SST VI OP is the operating partnership of SST VI. 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.

14


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(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 and SST VI OP are deemed to be VIEs and are consolidated by the Company as we are currently the primary beneficiary. Our sole significant asset is our investment in our Operating Partnership; as a result, substantially all of our assets and liabilities represent those assets and liabilities of our Operating Partnership and its wholly owned subsidiaries.

As of March 31, 2021, we were not a party to any other contracts/interests that would be deemed to be variable interests in VIEs other than our joint ventures with SmartCentres acquired in the SST IV Merger, which are all accounted for under the equity method of accounting (see Note 4 for additional information), and our Tenant Programs joint venture with SSGT II, which was acquired in the Self Administration Transaction, which is consolidated.  

As of December 31, 2020, we were also a party to and consolidated our Tenant Programs joint venture with SST IV, which became a wholly owned entity as a result of the SST IV Merger. 

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.

Investments in and Advances to Managed REITs

As of March 31, 2021, and December 31, 2020, we owned equity investments with a carrying value of approximately $3,000 and $15.1 million, respectively, in the Managed REITs; such amounts are included in Investments in and advances to Managed REITs within our consolidated balance sheets. We account for these investments using the equity method of accounting as we have the ability to exercise significant influence, but not control, over the Managed REITs’ operating and financial policies through our advisory and property management agreements with the respective Managed REITs. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the respective Managed REIT’s earnings and reduced by distributions.

Also included in Investments in and advances to Managed REITs as of March 31, 2021 are receivables from the Managed REITs of approximately $0.7 million. As of December 31, 2020, receivables from the Managed REITs approximated $0.5 million. For additional discussion, see Note 10 – Related Party Transactions.

Noncontrolling Interest in Consolidated Entities

We account for the noncontrolling interests in our Operating Partnership, SST VI OP, and the noncontrolling interests in our Tenant Programs joint venture with 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 VI OP and the SSGT II Tenant Program 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.

15


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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 ongoing fair value determination of contingent liabilities, 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.

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 as of the date of acquisition. 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 approximately $20 million and NaN in intangible assets to recognize the value of in-place leases related to our acquisitions during the three months ended March 31, 2021 and 2020, 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 three months ended March 31, 2021 and 2020, our property acquisitions, including the SST IV Merger, 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 acquisitions did 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 March 31, 2021 and 2020, we expensed approximately $305,000 and $30,000, 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

16


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

the measurement period, we 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 those measurement period adjustments in the period in which the provisional amounts are finalized.

As discussed in Note 5, 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 months ended March 31, 2021 and 2020, 0 real property asset impairment losses were recognized.

Goodwill Valuation

We initially recorded goodwill 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 for additional information.

Trademarks

In connection with the Self Administration Transaction, we recorded the fair value associated with the 2 primary trademarks acquired therein. 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.

As of March 31, 2021 and December 31, 2020, $15.7 million was recorded related to the SmartStop® Self Storage trademark, which is an indefinite lived trademark. As of March 31, 2021 and December 31, 2020, approximately $0.5 million and $0.5 million, respectively, was recorded to the “Strategic Storage®” trademark, which is a definite lived trademark. The total estimated future amortization expense of the “Strategic Storage®” trademark asset for the years ending December 31, 2021, 2022, 2023, 2024, and thereafter is approximately $105,000, $140,000, $140,000, $70,000 and NaN, respectively.

We qualitatively evaluate whether any triggering events or changes in circumstances have occurred subsequent to our annual impairment test that would indicate an impairment condition may exist. If any change in circumstance or triggering

17


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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 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.

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.

18


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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 10 – 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 this general reserve estimate based upon a review of the current status of accounts receivable. It is reasonably possible that management’s estimate of the allowance will change in the future.

Real Estate Facilities

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.

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 amortize in-place lease intangibles on a straight-line basis over the estimated future benefit period. As of March 31, 2021, the gross amount allocated to in-place lease intangibles was approximately $67.5 million and accumulated amortization of in-place lease intangibles totaled approximately $46.1 million. As of December 31, 2020, the gross amounts allocated to in-place lease intangibles were approximately $47.3 million and accumulated amortization of in-place lease intangibles totaled approximately $45.7 million.

The total estimated future amortization expense of intangible assets related to our self storage properties for the years ending December 31, 2021, 2022, 2023, 2024, 2025 and thereafter is approximately $10.3 million, $9.8 million, $0.1 million, $0.1 million, $0.1 million, and $0.8 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 (“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. 

19


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

As of March 31, 2021, 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 $6.8 million and accumulated amortization of those intangibles totaled approximately $3.8 million. As of December 31, 2020, 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 $18.1 million and accumulated amortization of those intangibles totaled approximately $7.3 million.

The total estimated future amortization expense for such intangible assets for the years ending December 31, 2021, 2022, 2023, 2024 and 2025 is approximately $0.5 million, $0.7 million, $0.7 million, $0.7 million, and $0.3, 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 and Note 10 – Related Party Transactions 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; amounts incurred related to obtaining revolving debt are included in the debt issuance costs line on our consolidated balance sheet (see Note 6). Debt issuance costs are amortized using the effective interest method.

As of March 31, 2021 and December 31, 2020, approximately $2.5 million and NaN, respectively of gross debt issuance costs were recorded related to our revolving credit facility.

As of March 31, 2021, the gross amount allocated to debt issuance costs related to non-revolving debt totaled approximately $5.8 million and accumulated amortization of debt issuance costs related to non-revolving debt totaled approximately $1.7 million. As of December 31, 2020, the gross amount allocated to debt issuance costs related to non-revolving debt totaled approximately $12.0 million and accumulated amortization of debt issuance costs related to non-revolving debt totaled approximately $7.9 million.

Organizational and Offering Costs

We pay our Former 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 Former 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 Former 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 Former 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 Former 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 Former Dealer Manager, payment of attendance fees required for employees of our Former Dealer Manager or other affiliates to attend retail seminars and public seminars sponsored by these broker-dealers, or to defray other distribution-related expenses. 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

20


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

as long term net 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 investments not classified as long term are recorded in other income (expense) and represented a gain of approximately $0.1 million and a loss of approximately $1.1 million for the three months ended March 31, 2021 and 2020, respectively.

Redeemable Common Stock

We adopted a share redemption program (“SRP”) that enables stockholders to sell their shares to us in limited circumstances.

We record amounts that are redeemable under the SRP 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 SRP 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. When we determine we have a mandatory obligation to repurchase shares under the SRP, we reclassify such obligations from temporary equity to a liability based upon their respective settlement values.

On August 26, 2019, our board of directors approved a partial suspension of our SRP, 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 SRP, effective on April 29, 2020. Due to the complete suspension, we were unable to honor redemption requests made during the quarter ended March 31, 2020 or the quarter ended June 30, 2020.

On August 20, 2020, our board of directors determined that it would be in our best interests to partially reinstate the SRP, effective as of September 23, 2020.

Currently, our redemption program remains suspended other than for redemptions sought in connection with a stockholder’s death, qualifying disability, confinement to a long-term care facility or other exigent circumstances.

During the three months ended March 31, 2021, approximately 70,000 shares, or $0.7 million, were requested to be redeemed; all of which were included in accounts payable and accrued liabilities as of March 31, 2021, and fulfilled in April 2021.

For the year ended December 31, 2020, we received redemption requests totaling approximately $2.0 million (approximately 0.2 million shares), approximately $1.3 million of which were fulfilled during the year ended December 31, 2020, with the remaining approximately $0.7 million included in accounts payable and accrued liabilities as of December 31, 2020 and fulfilled in January 2021.

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.

21


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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.

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 3 – Real Estate Facilities and Note 5 – 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 fair value requirements and 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 March 31, 2021 and December 31, 2020. 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.

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

Fixed Rate Secured Debt

 

$

358,000,000

 

 

$

342,146,919

 

 

$

316,000,000

 

 

$

301,988,969

 

 

22


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

As of March 31, 2021, and December 31, 2020, 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.

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 December 31, 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.

23


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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 equal net income as calculated in accordance with GAAP).  For income tax purposes, distributions to common stockholders are characterized as ordinary dividends, capital gain dividends, or as nontaxable distributions. To the extent that we make a distribution in excess of our current or accumulated earnings and profits, the distribution will be a non-taxable return of capital, reducing the tax basis in each U.S. stockholder’s shares, and the amount of each distribution in excess of a U.S. stockholder’s tax basis in its shares will be taxable as gain realized from the sale of its shares. 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, local, and foreign 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, our 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.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. As of March 31, 2021, the net deferred tax liability of approximately $7.5 million was comprised of a deferred tax liability of approximately $0.7 million related to our intangible assets acquired in the Self Administration Transaction, and a net deferred tax liability of approximately $6.8 million recorded at certain of our Canadian entities. The $6.8 million net deferred tax liability is comprised of a gross deferred tax liability of approximately $10.7 million, net of a gross deferred tax asset of approximately $3.9 million.

As of December 31, 2020, the net deferred tax liability of approximately $8.4 million was comprised of a deferred tax liability of approximately $2.6 million related to our intangible assets acquired in the Self Administration Transaction, and a net deferred tax liability of approximately $5.8 million recorded at certain of our Canadian entities’ properties. The $5.8 million net deferred tax liability is comprised of a gross deferred tax liability of approximately $9.6 million, net of a gross deferred tax asset of approximately $3.8 million.

The income tax benefit for the three months ended March 31, 2021 and 2020 includes a deferred tax benefit of approximately $1.9 million and $2.7 million, respectively, and a current tax expense of approximately $40,000 and NaN, respectively.

The Company recorded a net combined foreign, federal, and state income tax benefit of approximately $1.8 million and $2.7 million for the three months ended March 31, 2021 and 2020, respectively, which are included in other in our consolidated statements of operations. At March 31, 2021 and December 31, 2020, there were 0 material unrecognized tax benefits. Interest and penalties relating to uncertain tax positions will be recognized in income tax expense when incurred. As of March 31, 2021 and December 31, 2020, the Company had 0 interest or penalties related to uncertain tax positions. Income taxes payable are classified within accounts payable and accrued liabilities in the consolidated balance sheets. The tax years 2016-2019 remain open to examination by the major taxing jurisdictions to which we are subject.

Concentration

No single self storage customer represents a significant concentration of our revenues. For the month of March 2021, approximately 22%, 21%, and 13% of our rental income was concentrated in California, Florida, and the Greater Toronto Area of Canada, respectively. Our properties within the aforementioned geographic areas are dispersed therein, operating in multiple different regions and sub-markets.

24


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

Segment Reporting

Our business is comprised of 2 reportable segments: (i) self storage operations and (ii) the Managed REIT Platform business. Please see Note 9 – Segment Disclosures for additional detail.

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.

Recently Issued Accounting Guidance

In August 2020, the FASB issued ASU 2020-06, "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)." The new guidance simplifies the accounting for convertible instruments and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity. Additionally, this standard amends the related earnings per share guidance. The guidance in ASU 2020-06 becomes effective for fiscal years beginning after December 15, 2021. The Company is currently assessing the impact of the adoption of the new standard on its consolidated financial statements and related disclosures.

25


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)." ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

Note 3. Real Estate Facilities

Potential Acquisitions

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 “Etobicoke Property”) in the city of Toronto. On September 1, 2020, we executed a second purchase and sale agreement with the same seller for the acquisition of another plot of land (the “Scarborough Property”) in the city of Toronto. We intend on developing both the Etobicoke Property and the Scarborough Property into self storage facilities. The purchase price for the Etobicoke Property and the Scarborough Property are each approximately $2.2 million CAD, with adjustment factors to the purchase price based on the final surveys, plus closing costs.

There can be no assurances that we will complete these acquisitions. If we fail to acquire the Etobicoke Property or the Scarborough Property, in addition to the incurred acquisition costs, we may also forfeit earnest money deposits as a result.

We may decide to enter into joint venture agreements with SmartCentres for some or all of the above mentioned Canadian properties currently under contract.

On April 23, 2021, one of our subsidiaries executed a purchase and sale agreement with an unaffiliated third party for the acquisition of an existing operating self storage facility located in the city of Riverside, California (the “Riverside III Property”). The purchase price for the Riverside III Property is approximately $10.7 million, plus closing costs. There can be no assurance that we will complete the acquisition. If we fail to acquire the Riverside III Property, in addition to the incurred acquisition costs, we may also forfeit earnest money as a result.

We may assign certain of the above purchase and sale agreements to one of our Managed REITs.

The following summarizes the activity in real estate facilities during the three months ended March 31, 2021:

 

Real estate facilities

 

 

 

 

Balance at December 31, 2020

 

$

1,210,102,582

 

Facilities acquired through merger with SST IV

 

 

324,344,636

 

Other facility acquisitions(1)

 

 

15,689,143

 

Impact of foreign exchange rate changes

 

 

2,138,321

 

Improvements and additions

 

 

682,986

 

Balance at March 31, 2021

 

$

1,552,957,668

 

Accumulated depreciation

 

 

 

 

Balance at December 31, 2020

 

$

(115,903,045

)

Depreciation expense

 

 

(8,377,485

)

Impact of foreign exchange rate changes

 

 

(209,591

)

Balance at March 31, 2021

 

$

(124,490,121

)

 

(1)Such acquisition was completed by SST VI OP, which is consolidated within our consolidated financial statements.

26


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

Merger with Strategic Storage Trust IV, Inc.

On November 10, 2020, we, SST IV Merger Sub, LLC, a Maryland limited liability company and a wholly-owned subsidiary of ours (“SST IV Merger Sub”), and SST IV entered into an agreement and plan of merger (the “SST IV Merger Agreement”). Pursuant to the terms and conditions set forth in the SST IV Merger Agreement, on March 17, 2021 (the “SST IV Merger Date”), we acquired SST IV by way of a merger of SST IV with and into SST IV Merger Sub, with SST IV Merger Sub being the surviving entity.

On the SST IV Merger Date, each share of SST IV Common Stock outstanding immediately prior to the SST IV Merger Date (other than shares owned by SST IV and its subsidiaries or us and our subsidiaries) was automatically converted into 2.1875 Class A Shares (the “SST IV Merger Consideration”). Immediately prior to the SST IV Merger Effective Time, all shares of SST IV Common Stock that were subject to vesting and other restrictions also became fully vested and converted into the right to receive the SST IV Merger Consideration.

As a result of the SST IV Merger, we acquired all of the real estate owned by SST IV, consisting of 24 wholly-owned self storage facilities located across 9 states and 6 self storage real estate joint ventures located in the Greater Toronto Area of Ontario, Canada. The real estate joint ventures consist of 3 operating properties and 3 properties in various stages of development.

The following table reconciles the total consideration transferred in the SST IV Merger:

 

Fair value of consideration transferred:

 

 

 

 

 

Common stock issued

 

$

231,412,470

 

 

Cash(1)

 

 

54,250,000

 

 

Other

 

 

365,703

 

 

Total consideration transferred

 

$

286,028,173

 

 

(1)The approximately $54.3 million in cash was primarily used to pay off approximately $54.0 million of SST IV debt that we did not assume in the Merger, as well as approximately $0.3 million in transaction costs.

27


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

We issued approximately 23.1 million Class A Shares to the former SST IV shareholders in connection with the SST IV Merger. The estimated fair value of our common stock issued was determined primarily based on an income approach to value the properties as well as our Managed REIT Platform, adjusted for market related adjustments and illiquidity discounts, less the estimated fair value of our debt and other liabilities.

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 our common stock included a marketability discount of 6%, and projected annual net operating income.

The following table summarizes the relative fair values of the assets acquired and liabilities assumed in the SST IV Merger:

Assets Acquired:

 

 

 

 

Land

 

$

54,385,560

 

Buildings

 

 

257,618,228

 

Site improvements

 

 

12,340,848

 

Construction in process

 

 

1,467,090

 

Intangible assets

 

 

20,052,449

 

Investments in real estate joint ventures

 

 

17,495,254

 

Cash and cash equivalents, and restricted cash

 

 

7,763,490

 

Other assets

 

 

4,145,394

 

Total assets acquired

 

$

375,268,313

 

Liabilities assumed:

 

 

 

 

Debt(1)

 

$

81,165,978

 

Accounts payable and other liabilities

 

 

8,074,162

 

Total liabilities assumed

 

$

89,240,140

 

Total net assets acquired

 

$

286,028,173

 

(1)Debt assumed includes approximately $40.5 million of debt on the KeyBank SST IV CMBS Loan, a $0.1 million fair market value discount on such debt, and the approximately $40.8 million SST IV TCF Loan.  See Note 6 – Debt for additional information.

The following table summarizes the purchase price allocation for the real estate related assets acquired in the SST IV Merger:

Acquisition

 

Acquisition

Date

 

Real Estate

Assets

 

 

Construction in Process

 

 

Investments in Real Estate Joint Ventures

 

 

Intangibles

 

 

Total(1)

 

 

2021

Revenue(2)

 

 

2021

Property

Operating

Income(2)(3)

 

 

SST IV Merger

 

3/17/2021

 

$

324,344,636

 

 

$

1,467,090

 

 

$

17,495,254

 

 

$

20,052,449

 

 

$

363,359,429

 

 

$

1,073,078

 

 

$

623,412

 

 

(1)

The allocations noted above are based on a determination of the relative fair value of the total consideration provided and represent the amount paid including capitalized acquisition costs.

(2)

The operating results of the self storage properties acquired in the SST IV Merger have been included in our consolidated statements of operations since the SST IV Merger Date. Such amount does not include activity from our investments in real estate joint ventures, which are included in Other in our consolidated statements of operations. For additional information. See Note 4 – Investments in Unconsolidated Real Estate Ventures.

(3)

Property operating income excludes corporate general and administrative expenses, interest expenses, depreciation, amortization and acquisition related expenses.

28


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

Acquisition Completed by SST VI OP

On March 10, 2021, SmartStop OP made an investment of $5.0 million in SST VI OP, in exchange for common units of limited partnership interest in SST VI OP. On March 11, 2021, SST VI OP, through a wholly-owned subsidiary, used these funds, in part, to acquire its first self storage facility in Phoenix, Arizona for approximately $16 million. In connection with SST VI OP’s acquisition of the Phoenix property, we provided a $3.5 million mezzanine loan to a wholly-owned subsidiary of SST VI OP with an initial interest rate of 8.5% and term of six months; as well as a 180 day extension option which, if exercised, would increase the interest rate to 9.25%. In addition to the aforementioned mezzanine loan, SST VI financed the acquisition, in part, by obtaining a third party mortgage loan on the property of approximately $9 million, which had an initial interest rate of 3.5%, and a three year term, with two one year extension options. SST VI commenced its private offering in the first quarter of 2021. Given our current level of ownership as of March 31, 2021, SST VI OP and its subsidiaries are consolidated in our financial statements, and all related intercompany transactions have been eliminated. SST VI OP and its consolidated subsidiaries’ assets are not available to us, and their creditors do not have recourse to us. Included in our consolidated balance sheet as of March 31, 2021 are approximately $17 million of assets, approximately $16 million of which are included in real estate facilities, net and approximately $9 million of liabilities, including the third party mortgage loan noted above. Our consolidation of SST VI OP will continue to be evaluated as SST VI continues to raise additional equity in its private offering.

Note 4. Investments in Unconsolidated Real Estate Ventures

As a result of the SST IV Merger, we acquired 6 self storage real estate joint ventures located in the Greater Toronto Area of Ontario, Canada. The real estate joint ventures consist of 3 operating properties and 3 properties in various stages of development. These joint venture agreements are with a subsidiary of SmartCentres, an unaffiliated third party, to acquire tracts of land and develop and operate the properties as self storage facilities.

We account for these investments using the equity method of accounting and they are stated at cost and adjusted for our share of net earnings or losses and reduced by distributions. Equity in earnings (loss) will generally be recognized based on our ownership interest in the earnings (loss) of each of the unconsolidated investments.

The following table summarizes our investments in unconsolidated real estate ventures:

 

JV Property

 

Location

 

Date Real Estate

Venture Acquired

Land

 

Real Estate

Venture Status

 

Equity

Ownership %

 

 

Carrying Value

of Investment as of March 31, 2021

 

Oshawa

 

Oshawa, Ontario

 

September 2018

 

Under Development

 

50%

 

 

$

1,151,236

 

East York

 

East York, Ontario

 

January 2019

 

Operational

 

50%

 

 

 

6,505,313

 

Brampton

 

Brampton, Ontario

 

September 2019

 

Operational

 

50%

 

 

 

2,419,381

 

Vaughan

 

Vaughan, Ontario

 

August 2019

 

Operational

 

50%

 

 

 

2,979,203

 

Scarborough

 

Scarborough, Ontario

 

August 2020

 

Under Development

 

50%

 

 

 

1,704,805

 

Kingspoint

 

Kingspoint, Ontario

 

February 2021

 

Under Development

 

50%

 

 

 

2,728,478

 

 

 

 

 

 

 

 

 

 

 

 

 

$

17,488,416

 

 

Financing Agreement

We, through our acquisition of the Oshawa, East York, Brampton, Vaughan, and Scarborough joint venture partnerships (“the JV Properties”), also became party to a master mortgage commitment agreement (the “MMCA”) with SmartCentres Storage Finance LP (the “SmartCentres Lender”) (collectively, the “SmartCentres Financing”). The SmartCentres Lender is an affiliate of SmartCentres. The initial maximum amount available is approximately $60 million CAD, however, the SmartCentres Financing includes an accordion feature such that borrowings pursuant thereto may be increased up to approximately $120 million CAD subject to certain conditions set forth in the MMCA. As of March 31, 2021, approximately $46.7 million CAD was outstanding on the SmartCentres Financing. The proceeds of the SmartCentres Financing will be used to finance the development and construction of the JV Properties.

29


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

The SmartCentres Financing is secured by first mortgages on each of the JV Properties.  Interest on the SmartCentres Financing is a variable annual rate equal to the aggregate of: (i) the BA Equivalent Rate, plus: (ii) a margin based on the External Credit Rating, plus (iii) a margin under the Senior Credit Facility, each as defined and described further in the MMCA. As of March 31, 2021, the total interest rate was approximately 2.86%.

The SmartCentres Financing had an original maturity date of May 11, 2021. On April 30, 2021, the SmartCentres Financing was amended and the maturity date was extended until May 11, 2024, and contains two one year extension options. Monthly interest payments are initially capitalized on the outstanding principal balance. Upon a JV Property generating sufficient Net Cash Flow (as defined in the MMCA), the SmartCentres Financing provides for the commencement of quarterly payments of interest. As of March 31, 2021, no such payments had commenced. The borrowings advanced pursuant to the SmartCentres Financing may be prepaid without penalty, subject to certain conditions set forth in the MMCA.

The SmartCentres Financing contains customary affirmative and negative covenants, agreements, representations, warranties and borrowing conditions (including a loan to value ratio of no greater than 70% with respect to each JV Property) and events of default, all as set forth in the MMCA. We serve as a full recourse guarantor with respect to 50% of the SmartCentres Financing.

 

Note 5. 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 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, along with certain other assets of SAM.  

As a result of the Self Administration Transaction, SAM is no longer our sponsor, and we became self-managed and succeeded to the advisory, asset management and property management businesses and certain joint ventures previously in place for us, SST IV (until the SST IV Merger Date), SSGT II, and we acquired the internal capability to originate, structure and manage additional future investment products which would be sponsored by SRA.

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.”

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 (as amended, 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

30


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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 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.

The conversion features of the Class A-2 Units are as follows: (A) the first time the aggregate incremental assets under management, as amended (“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. For additional information, see the Accounting Considerations Subsequent to Acquisition section further below.

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. 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

 

(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.

31


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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.

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,

32


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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.

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 and the Company Parties will reimburse one another based on the actual costs of providing their respective services. Additionally, SAM will 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.

Accounting Considerations Subsequent to Acquisition

The emergence and spread of the COVID-19 pandemic caused significant volatility and disruption in the economy and the capital markets beginning in the first quarter of 2020. The increase in consumer and investor uncertainty had an impact on our Managed REITs, specifically the Managed REITs’ ability to attract investor equity in the face of economic weakness and volatility. The volatility and uncertainty in the economy caused various broker dealers that our Managed REITs had selling agreements with to temporarily halt 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 the capital markets and our Managed REITs and their ability to raise additional equity, accordingly 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, 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 during the quarter ended March 31, 2020. 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 during the quarter ended March 31, 2020. 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 SSGT II’s operating partnership agreements. Given the revised capital projections noted above, the projected future

33


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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 during the quarter ended March 31, 2020.

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 the impairment charge 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 other income within the other line-item in our consolidated statement of operations during the quarter ended March 31, 2020.

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 approximately $31.1 million as of December 31, 2019 to approximately $23.9 million as of the date of the impairment analysis.

On March 24, 2021, we, as the general partner of our Operating Partnership, entered into Amendment No. 3 (the “Amendment”) to the Third Amended and Restated Limited Partnership Agreement of the Operating Partnership dated June 28, 2019, as amended to date (the “Partnership Agreement”), to make certain revisions to Exhibit D (Description of Class A-2 Units) to the Partnership Agreement.

The Amendment (i) revised the definition of “AUM” in connection with the earnout of the Class A-2 Units so that it (A) includes assets acquired by us and our affiliates and (B) includes 100% of any joint venture assets, rather than a pro rata percentage, and (ii) clarifies that the Class A-2 Units may be transferred after the two-year holding period.  

On March 24, 2021, 1,094,434 Class A-2 Units held by an affiliate of SAM, were converted into 1,121,795 Class A-1 Units pursuant to the achievement of the first tier of earnout consideration. The fair value of the contingent earnout liability was reduced as the Class A-2 Units were converted into Class A-1 Units in our Operating Partnership and the fair value of such units was reclassified to the noncontrolling interest in our Operating Partnership line in the equity section of our consolidated balance sheet.

As of March 31, 2021, pursuant to the revised definition of “AUM” as described above, we had added incremental assets under management of approximately $321 million, and the estimated fair value of the contingent earnout liability was approximately $19.5 million.

 

34


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

Note 6. Debt

The Company’s debt is summarized as follows:

 

Loan

 

March 31,

2021

 

 

December 31,

2020

 

 

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)

 

 

46,255,586

 

 

 

46,427,994

 

 

 

5.31

%

 

8/1/2024

Canadian CitiBank Loan(4)(12)

 

 

-

 

 

 

87,337,110

 

 

 

2.72

%

 

10/9/2021

CMBS SASB Loan(5)(12)

 

 

-

 

 

 

235,000,000

 

 

 

3.13

%

(11)

2/9/2022

CMBS Loan(6)

 

 

104,000,000

 

 

 

104,000,000

 

 

 

5.00

%

 

2/1/2029

Secured Loan(7) (8)(12)

 

 

-

 

 

 

85,512,000

 

 

 

3.00

%

 

1/24/2022

Stoney Creek Loan(9)(12)

 

 

-

 

 

 

5,712,058

 

 

 

4.65

%

 

10/1/2021

Torbarrie Loan(10)(12)

 

 

-

 

 

 

6,423,863

 

 

 

4.65

%

 

9/1/2021

SST IV CMBS Loan

 

 

40,500,000

 

 

 

-

 

 

 

3.56

%

 

2/1/2030

SST IV TCF Loan

 

 

40,782,255

 

 

 

-

 

 

 

3.75

%

 

3/30/2023

Credit Facility Term Loan - USD(14)

 

 

150,000,000

 

 

 

-

 

 

 

2.06

%

 

3/17/2026

Credit Facility Term Loan - CAD(13)(14)

 

 

99,024,270

 

 

 

-

 

 

 

2.37

%

 

3/17/2026

Credit Facility Revolver - USD(14)

 

 

184,000,000

 

 

 

-

 

 

 

2.11

%

 

3/17/2024

Credit Facility Revolver - CAD(13)(14)

 

 

1,985,250

 

 

 

-

 

 

 

2.42

%

 

3/17/2024

SST VI Baseline TCF Loan

 

 

8,620,000

 

 

 

-

 

 

 

3.50

%

 

3/11/2024

Ladera Office Loan

 

 

4,077,652

 

 

 

4,099,152

 

 

 

4.29

%

 

11/1/2026

Premium on secured debt, net

 

 

313,681

 

 

 

461,823

 

 

 

 

 

 

 

Debt issuance costs, net

 

 

(4,068,114

)

 

 

(4,021,767

)

 

 

 

 

 

 

Total debt

 

$

822,490,580

 

 

$

717,952,233

 

 

 

 

 

 

 

 

(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 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 encumbered 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 purchased interest rate caps that cap CDOR at 3.0% until October 15, 2021.

(5) 

This variable rate loan encumbered 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).

(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 encumbered 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).

(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 fixed the interest rate on

35


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

the Secured Loan at 5.1% until August 1, 2020. To continue hedging our interest rate risk related to this loan, we purchased an interest rate cap on August 3, 2020 with a notional amount of $80 million that effectively caps LIBOR at 0.5% through August 2, 2021.

(9)

This variable rate loan bore interest at a rate of 1.95% plus Royal Bank of Canada Prime Rate, which was approximately 2.45% as of December 31, 2020, and in no event would the total interest rate have fallen below 4.65% per annum. The amounts shown above are in USD based on the foreign exchange rate in effect as of December 31, 2020.

(10)

This variable rate loan bore interest at a rate of 1.95% plus Royal Bank of Canada Prime Rate, which was approximately 2.45% as of December 31, 2020, and in no event would the total interest rate have fallen below 4.65% per annum. The amounts shown above are in USD based on the foreign exchange rate in effect as of December 31, 2020.

(11)

This loan incurred interest at LIBOR plus 3%, which resulted in an interest rate of 3.13% as of December 31, 2020. However, 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% on this loan.

(12)

On March 17, 2021, these loans were paid off in full in conjunction with the SST IV Merger, and an aggregate net loss on extinguishment of debt of approximately $2.4 million was recorded.

(13)

The amounts shown above are in USD based on the foreign exchange rate in effect as of the date presented.

(14)

For additional information regarding the Credit Facility, see below.

 

The weighted average interest rate on our consolidated debt, excluding the impact of our interest rate hedging activities, as of March 31, 2021 was approximately 3.22%. We are subject to certain restrictive covenants relating to the outstanding debt, and as of March 31, 2021, we were in compliance with all such covenants.

Credit Facility

On March 17, 2021, we, through our Operating Partnership (the “Borrower”), entered into a credit facility with KeyBank, National Association, as administrative agent, KeyBanc Capital Markets, LLC, Wells Fargo Securities, Citibank, N.A., and BMO Capital Markets, as joint book runners and joint lead arrangers, and certain other lenders party thereto (the “Credit Facility”).

The initial aggregate amount of the Credit Facility is $500 million, which consists of a $250 million revolving credit facility (the “Credit Facility Revolver”) and a $250 million term loan (the “Credit Facility Term Loan”). The Borrower has the right to increase the amount available under the Credit Facility by an additional $350 million, for a total aggregate amount of $850 million, subject to certain conditions. The Credit Facility also includes sublimits of (a) up to $25 million for letters of credit and (b) up to $25 million for swingline loans; each of these sublimits are part of, and not in addition to, the amounts available under the Credit Facility Revolver. Borrowings under the Credit Facility may be in either U.S. dollars (each, a “US Borrowing”) or Canadian dollars (each, a “CAD Borrowing”). Upon the closing of the Credit Facility, the Borrower immediately made the following drawdowns: (i) under the Credit Facility Revolver (A) $199 million in US Borrowings and (B) CAD$2.5 million in CAD Borrowings (approximately $2 million equivalent in U.S. dollars), and (ii) under the Credit Facility Term Loan (A) $150 million in US Borrowings and (B) CAD$124.7 million in CAD Borrowings (approximately $100 million equivalent in U.S. dollars), for an aggregate amount of approximately $451 million. We used the proceeds primarily to pay off certain existing indebtedness as well as indebtedness of SST IV.

The maturity date of the Credit Facility Revolver is March 17, 2024, subject to a one-year extension option. The maturity date of the Credit Facility Term Loan is March 17, 2026, which cannot be extended. The Credit Facility may be prepaid or terminated at any time without penalty; provided, however, that the lenders shall be indemnified for certain breakage costs.

Amounts borrowed under the Credit Facility Revolver and Credit Facility Term Loan bear interest based on both the type of borrowing (either ABR Loans or Eurodollar Loans, each as defined in the Credit Facility), as well as the currency of the borrowing. ABR Loans bear interest at the lesser of (x) the alternate base rate plus the applicable rate, or (y) the maximum rate. Eurodollar Loans bear interest at the lesser of (a) the adjusted LIBO rate or CDOR rate (depending on whether the loan is a US Borrowing or a CAD Borrowing, respectively) for the interest period in effect plus the applicable rate, or (b) the maximum rate. The corresponding applicable rate varies depending on the type of borrowing and our consolidated leverage ratio. Initial advances under the Credit Facility Term Loan bear interest at 195 basis points over 30-day

36


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

LIBOR or 30-day CDOR, while initial advances under the Credit Facility Revolver bear interest at 200 basis points over 30-day LIBOR or 30-day CDOR. The Credit Facility is also subject to an annual unused fee based upon the average amount of the unused portion of the Credit Facility Revolver, which varies from 15 bps to 25 bps, depending on the size of the unused amount, as well as whether a Security Interest Termination Event (defined below) has occurred.

The Credit Facility is fully recourse, jointly and severally, to us, our Operating Partnership, and certain of our subsidiaries (the “Subsidiary Guarantors”). In connection with this, we, our Operating Partnership, and our Subsidiary Guarantors executed guarantees in favor of the lenders. The Credit Facility is also cross-defaulted to (i) any recourse debt of ours, our Operating Partnership, or the Subsidiary Guarantors and (ii) any non-recourse debt of ours, our Operating Partnership, or the Subsidiary Guarantors of at least $75 million.

The Credit Facility is initially secured by a pledge of equity interests in the Subsidiary Guarantors. However, upon the achievement of certain security interest termination conditions, the pledges shall be released and the Credit Facility shall become unsecured (the “Security Interest Termination Event”). The Security Interest Termination Event occurs at the Borrower’s election, once the Borrower satisfies the following security interest termination conditions: (i) a fixed charge coverage ratio of no less than 1.50:1.00; (ii) an unsecured interest coverage ratio of not less than 2.00:1.00; (iii) a consolidated capitalization rate leverage ratio of not greater than 60%; and (iv) a secured debt ratio of no greater than 40%. Following the occurrence of the Security Interest Termination Event, certain terms and conditions of the Credit Facility are modified, including, but not limited to: (i) in certain circumstances, a reduction in the applicable interest rate under the Credit Facility, (ii) the modification or addition of certain financial covenants, (iii) the addition of a floor of at least $25 million for any cross-defaulted recourse debt of ours, our Operating Partnership, or any Subsidiary Guarantor, and (iv) in certain circumstances, a reduction in the annual unused fee for the Credit Facility Revolver.

The Credit Facility contains certain customary representations and warranties, affirmative, negative and financial covenants, borrowing conditions, and events of default. In particular, the financial covenants imposed include: a maximum leverage ratio, a minimum fixed charge coverage ratio, a minimum tangible net worth, certain limits on both secured debt and secured recourse debt, certain payout ratios of dividends paid to core funds from operations, limits on unhedged variable rate debt, and minimum liquidity. If an event of default occurs and continues, the Borrower is subject to certain actions by the administrative agent, including, without limitation, the acceleration of repayment of all amounts outstanding under the Credit Facility.

On March 30, 2021, we paid down $15 million in USD borrowings on the Credit Facility Revolver, reducing the total borrowings on the Credit Facility to approximately $435 million.

Subsequent to March 31, 2021, on April 16, 2021, we made a US Borrowing draw of $4.5 million on the Credit Facility Revolver. Additionally, on May 3, 2021, we converted all of our CAD Borrowings to US Borrowings.

SST IV CMBS Loan

On March 17, 2021, in connection with the SST IV Merger, we assumed a $40.5 million CMBS financing with KeyBank as the initial lender pursuant to a mortgage loan (the “SST IV CMBS Loan”). The SST IV CMBS Loan is secured by a first mortgage or deed of trust on each of 7 properties owned by us (Jensen Beach, Texas City, Riverside, Las Vegas IV, Puyallup, Las Vegas V, and Plant City). The separate assets of these encumbered properties are not available to pay our other debt. The loan has a maturity date of February 1, 2030. Monthly payments due under the loan agreement (the “SST IV CMBS Loan Agreement”) are interest-only, with the full principal amount becoming due and payable on the maturity date.

The amounts outstanding under the SST IV CMBS Loan bear interest at an annual fixed rate equal to 3.56%. 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 SST IV CMBS Loan Agreement.

The loan documents for the SST IV CMBS Loan contain: customary affirmative and negative 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 in favor of KeyBank, we serve as a non-recourse guarantor with respect to the SST IV CMBS Loan.

37


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

SST IV TCF Loan

On March 17, 2021, in connection with the SST IV Merger, we assumed a term loan with TCF National Bank, a national banking association (“TCF”), as lead arranger and administrative agent for up to $40.7 million (the “SST IV TCF Loan”). The SST IV TCF Loan is secured by a first mortgage on each of the Ocoee Property, the Ardrey Kell Property, the Surprise Property, the Escondido Property, and the Punta Gorda Property (the “SST IV TCF Properties”).

The interest rate on the SST IV TCF Loan is equal to the greater of (i) 3.75% per annum or (ii) an adjustable annual rate equal to LIBOR plus 3.00%. Upon achievement of certain financial conditions, the interest rate will be equal to the greater of (i) 3.50% per annum or (ii) an adjustable annual rate equal to LIBOR plus 2.50%. As of March 31, 2021, the interest rate on the SST IV TCF Loan was 3.75%. In connection with the SST IV Merger, we also assumed an interest rate cap with a notional amount of $30.5 million, such that in no event will LIBOR exceed 0.75% thereon through May 2022.

The SST IV TCF Loan matures on March 30, 2023, with 2 one-year extension options subject to certain conditions outlined further in the SST IV TCF Loan documents. During the initial term, monthly payments are interest only; during any extension periods, monthly payments are principal and interest. The SST IV TCF Loan may be prepaid in whole or in part, subject to certain conditions as set forth in the SST IV TCF loan agreement

The SST IV TCF loan agreement also contains a debt service coverage ratio covenant applicable to the borrowers whereby, commencing on March 31, 2022, the SST IV TCF Properties must have a debt service coverage ratio of not less than 1.20 to 1.00. The SST IV TCF loan agreement also contains: customary affirmative, negative and financial covenants; agreements; representations; warranties and borrowing conditions; and events of default all as set forth in such loan agreement.

We serve as a limited recourse guarantor with respect to the SST IV TCF Loan during the initial term. Our obligations as guarantor may decrease based on the debt service coverage ratio on the SST IV TCF Properties.

The following table presents the future principal payment requirements on outstanding debt as of March 31, 2021:

 

2021

 

$

1,100,437

 

2022

 

 

2,914,419

 

2023

 

 

44,166,400

 

2024

 

 

241,648,647

 

2025

 

 

2,869,187

 

2026 and thereafter

 

 

533,545,923

 

Total payments

 

 

826,245,013

 

Premium on secured debt, net

 

 

313,681

 

Debt issuance costs, net

 

 

(4,068,114

)

Total

 

$

822,490,580

 

 

38


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

Note 7. 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, and the second and final closing in the amount of $50 million occurred on October 26, 2020. We incurred approximately $3.6 million in issuance costs related to the Series A Convertible Preferred Stock, which were 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 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

39


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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 March 31, 2021, there were 200,000 Preferred Shares outstanding with an aggregate liquidation preference of approximately $203.1 million, which consists of $150 million from the Initial Closing, $50 million from a closing on October 26, 2020 and approximately $3.1 million of accumulated and unpaid distributions. As of December 31, 2020, there were 200,000 Preferred Shares outstanding with an aggregate liquidation preference of approximately $202.9 million, which consists of $150 million from the Initial Closing, $50 million from a closing on October 26, 2020 and approximately $2.9 million of accumulated and unpaid distributions.

 

Note 8. 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 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.

40


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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 March 31, 2021:

 

 

 

Notional

Amount

 

 

Strike

 

 

Effective Date

or Date Assumed

 

Maturity Date

Interest Rate Swaps:

 

 

 

 

 

 

 

 

 

 

 

 

LIBOR Swap

 

$

235,000,000

 

 

 

1.79

%

 

June 15, 2019

 

February 15, 2022

Interest Rate Cap:

 

 

 

 

 

 

 

 

 

 

 

 

LIBOR Cap

 

$

80,000,000

 

 

 

0.50

%

 

August 3, 2020

 

August 2, 2021

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(3)

 

$

95,000,000

 

(1)

 

1.3344

 

 

February 10, 2021

 

April 12, 2021(2)

(1)

Notional amounts shown are denominated in CAD.

(2)

On April 12, 2021, we settled this currency forward, paying a net settlement of approximately $4.5 million, and entered into a new $125.9 million CAD currency forward with a strike price of 1.25925, and a maturity date of April 12, 2023.

(3)

On May 6, 2021 we entered into a new approximately $122 million CAD currency forward with a strike price of 1.2202, and a maturity date of April 12, 2022.

41


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

On December 9, 2019, in connection with an expiring foreign currency option, we 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. On February 10, 2021, we rolled this currency forward into a two month $95 million CAD foreign currency forward, with a settlement date of April 12, 2021. On April 12, 2021, we settled this foreign currency forward, paying a net settlement of approximately $4.5 million, and simultaneously entered into a new $125.9 million CAD 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 $0.3 million and a gain of approximately $0.9 million related to the ineffective portion is recorded in other income within our consolidated statements of operations for the three months ended March 31, 2021 and 2020, respectively.

 

The following table summarizes the terms of our derivative financial instruments as of December 31, 2020:

 

 

 

Notional

Amount

 

 

Strike

 

 

Effective Date

or Date Assumed

 

Maturity Date

 

Interest Rate Swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

LIBOR Swap

 

$

235,000,000

 

 

 

1.79

%

 

June 15, 2019

 

February 15, 2022

 

Interest Rate Cap:

 

 

 

 

 

 

 

 

 

 

 

 

 

LIBOR Cap

 

$

80,000,000

 

 

 

0.50

%

 

August 3, 2020

 

August 2, 2021

 

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)

 

1.3340

 

 

February 10, 2020

 

February 10, 2021

 

 

(1)

Notional amount shown is denominated in CAD.

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 March 31, 2021 and December 31, 2020:

 

 

 

Asset/Liability Derivatives

 

 

 

Fair Value

 

Balance Sheet Location

 

March 31,

2021

 

 

December 31,

2020

 

Interest Rate Swaps

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

3,416,001

 

 

$

4,379,424

 

Foreign Currency Hedges

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

4,407,893

 

 

$

3,270,910

 

 

 

Note 9. Segment Disclosures

We operate in 2 reportable business segments: (i) self storage operations and (ii) our Managed REIT Platform business.

Management evaluates performance based upon property 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.

42


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

The following tables summarize information for the reportable segments for the periods presented:

 

 

 

Three Months Ended March 31, 2021

 

 

 

 

 

 

 

Managed REIT

 

 

Corporate

 

 

 

 

 

 

 

Self Storage

 

 

Platform

 

 

and Other

 

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self storage rental revenue

 

$

29,503,442

 

 

$

 

 

$

 

 

$

29,503,442

 

Ancillary operating revenue

 

 

1,557,430

 

 

 

 

 

 

 

 

 

1,557,430

 

Managed REIT Platform revenue

 

 

 

 

 

2,287,740

 

 

 

 

 

 

2,287,740

 

Reimbursable costs from Managed REITs

 

 

 

 

 

1,216,043

 

 

 

 

 

 

1,216,043

 

Total revenues

 

 

31,060,872

 

 

 

3,503,783

 

 

 

 

 

 

34,564,655

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

10,343,281

 

 

 

 

 

 

 

 

 

10,343,281

 

Managed REIT Platform expense

 

 

 

 

 

319,890

 

 

 

 

 

 

319,890

 

Reimbursable costs from Managed REITs

 

 

 

 

 

1,216,043

 

 

 

 

 

 

1,216,043

 

General and administrative

 

 

 

 

 

 

 

 

4,752,989

 

 

 

4,752,989

 

Depreciation

 

 

8,347,819

 

 

 

 

 

 

196,108

 

 

 

8,543,927

 

Intangible amortization expense

 

 

587,741

 

 

 

671,806

 

 

 

 

 

 

1,259,547

 

Acquisition expenses

 

 

305,650

 

 

 

 

 

 

 

 

 

305,650

 

Contingent earnout adjustment

 

 

 

 

 

2,119,744

 

 

 

 

 

 

2,119,744

 

Impairment of goodwill and intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

Impairment of investments in Managed

   REITs

 

 

 

 

 

 

 

 

 

 

 

 

Write-off of equity interest and preexisting

   relationships in SST IV upon acquisition

   of control

 

 

 

 

 

8,389,573

 

 

 

 

 

 

8,389,573

 

Total operating expenses

 

 

19,584,491

 

 

 

12,717,056

 

 

 

4,949,097

 

 

 

37,250,644

 

Operating income (loss)

 

 

11,476,381

 

 

 

(9,213,273

)

 

 

(4,949,097

)

 

 

(2,685,989

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(7,931,649

)

 

 

 

 

 

(43,815

)

 

 

(7,975,464

)

Interest expense – accretion of fair market

   value of secured debt

 

 

31,866

 

 

 

 

 

 

 

 

 

31,866

 

Interest expense – debt issuance costs

 

 

(672,473

)

 

 

 

 

 

 

 

 

(672,473

)

Net loss on extinguishment of debt

 

 

(2,444,788

)

 

 

 

 

 

 

 

 

(2,444,788

)

Other

 

 

(218,027

)

 

 

1,872,866

 

 

 

(211,457

)

 

 

1,443,382

 

Net loss

 

$

241,310

 

 

$

(7,340,407

)

 

$

(5,204,369

)

 

$

(12,303,466

)

43


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

 

 

 

Three Months Ended March 31, 2020

 

 

 

 

 

 

 

Managed REIT

 

 

Corporate

 

 

 

 

 

 

 

Self Storage

 

 

Platform

 

 

and Other

 

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Self storage rental revenue

 

$

25,568,019

 

 

$

 

 

$

 

 

$

25,568,019

 

Ancillary operating revenue

 

 

1,152,843

 

 

 

 

 

 

 

 

 

1,152,843

 

Managed REIT Platform revenue

 

 

 

 

 

1,783,787

 

 

 

 

 

 

1,783,787

 

Reimbursable costs from Managed REITs

 

 

 

 

 

1,793,474

 

 

 

 

 

 

1,793,474

 

Total revenues

 

 

26,720,862

 

 

 

3,577,261

 

 

 

 

 

 

30,298,123

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

9,675,026

 

 

 

 

 

 

 

 

 

9,675,026

 

Managed REIT Platform expense

 

 

 

 

 

1,174,809

 

 

 

 

 

 

1,174,809

 

Reimbursable costs from Managed REITs

 

 

 

 

 

1,793,474

 

 

 

 

 

 

1,793,474

 

General and administrative

 

 

 

 

 

 

 

 

3,667,947

 

 

 

3,667,947

 

Depreciation

 

 

7,601,171

 

 

 

 

 

 

115,500

 

 

 

7,716,671

 

Intangible amortization expense

 

 

2,196,828

 

 

 

1,472,803

 

 

 

 

 

 

3,669,631

 

Acquisition expenses

 

 

28,105

 

 

 

 

 

 

 

 

 

28,105

 

Contingent earnout adjustment

 

 

 

 

 

(7,200,000

)

 

 

 

 

 

(7,200,000

)

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

 

 

19,501,130

 

 

 

38,083,697

 

 

 

3,783,447

 

 

 

61,368,274

 

Operating income (loss)

 

 

7,219,732

 

 

 

(34,506,436

)

 

 

(3,783,447

)

 

 

(31,070,151

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(8,294,093

)

 

 

 

 

 

(45,210

)

 

 

(8,339,303

)

Interest expense – accretion of fair market

   value of secured debt

 

 

32,657

 

 

 

 

 

 

 

 

 

32,657

 

Interest expense – debt issuance costs

 

 

(941,124

)

 

 

 

 

 

(2,359

)

 

 

(943,483

)

Other

 

 

(170,197

)

 

 

2,746,896

 

 

 

 

 

 

2,576,699

 

Net loss

 

$

(2,153,025

)

 

$

(31,759,540

)

 

$

(3,831,016

)

 

$

(37,743,581

)

The following table summarizes our total assets by segment:

 

Segments

 

March 31, 2021

 

 

 

December 31, 2020

 

 

Self Storage(1)

 

$

1,541,859,350

 

(1)

 

$

1,172,178,148

 

(1)

Managed REIT Platform(1)

 

 

13,233,823

 

(1)

 

 

44,482,625

 

(1)

Corporate and Other

 

 

46,935,825

 

 

 

 

65,560,284

 

 

Total assets

 

$

1,602,028,998

 

 

 

$

1,282,221,057

 

 

 

(1)

Included in the assets of the Self Storage and the Managed REIT Platform segments as of March 31, 2021, are approximately $49.8 million, and $3.9 million of goodwill, respectively. As of December 31, 2020, such amounts were approximately $45.3 million and $8.4 million of goodwill, respectively.

 

44


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

Note 10. Related Party Transactions

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

Former Dealer Manager Agreement

In connection with our Primary Offering, our Former 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 of 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 Former Dealer Manager Agreement. In addition, our Former Dealer Manager receives an ongoing stockholder servicing fee as discussed in Note 2 – Summary of Significant Accounting Policies – Organization and Offering Costs.

Affiliated Former Dealer Manager

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

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.

45


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

Fees paid to our Transfer Agent include a fixed quarterly fee, one-time account setup fees, monthly open account fees and fees for investor inquiries. 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.

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, 2020 and the three months ended March 31, 2021, as well as any related amounts payable as of December 31, 2020 and March 31, 2021:

 

 

 

Year Ended December 31, 2020

 

 

Three Months Ended March 31, 2021

 

 

 

Incurred

 

 

Paid

 

 

Payable

 

 

Incurred

 

 

Paid

 

 

Payable

 

Expensed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfer Agent fees

 

$

525,108

 

 

$

489,108

 

 

$

36,000

 

 

$

177,642

 

 

$

173,740

 

 

$

39,902

 

Additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfer Agent fees

 

 

 

 

 

 

 

 

 

 

 

150,000

 

 

 

150,000

 

 

 

 

     Stockholder servicing fee(1)

 

 

 

 

 

645,911

 

 

 

631,429

 

 

 

 

 

 

158,556

 

 

 

472,873

 

     Stockholder servicing fee -

          SST IV(2)

 

 

 

 

 

 

 

 

 

 

 

1,155,887

 

 

 

 

 

 

1,155,887

 

Total

 

$

525,108

 

 

$

1,135,019

 

 

$

667,429

 

 

$

1,483,529

 

 

$

482,296

 

 

$

1,668,662

 

 

(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.

(2)

Represents the stockholder servicing fee liability assumed in the SST IV Merger.

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

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 became 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.

Advisory Agreement Fees

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

46


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

SST IV Advisory Agreement

The SST IV Advisor provided acquisition and advisory services to SST IV pursuant to an advisory agreement (the “SST IV Advisory Agreement”) to SST IV up until the SST IV Merger on March 17, 2021.

SST IV was required to reimburse the SST IV Advisor for organization and offering costs under the SST IV Advisory Agreement; however, the SST IV Advisor funded, and was not 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 months ended March 31, 2021, and 2020, totaled NaN and approximately $25,000, respectively. The SST IV Advisor was required to reimburse SST IV within 60 days after the end of the month in which the SST IV public offering terminated to the extent SST IV paid or reimbursed organization and offering costs (excluding sales commissions, and dealer manager fees, stockholder servicing fees, and dealer manager servicing fees) in excess of 3.5% of the gross offering proceeds from the SST IV offering. The SST IV Advisory Agreement also required 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.

Effective as of April 30, 2020, SST IV suspended its offering due to various factors, including the uncertainty relating to the ongoing COVID-19 outbreak and its potential economic impact, the status of fundraising in the non-traded REIT industry due to such uncertainty and the termination of their dealer manager agreement. SST IV’s public offering terminated on September 11, 2020.

Subsequent to the termination of SST IV’s primary offering, SST IV determined that total organization and offering costs (excluding sales commissions, and dealer manager fees, stockholder servicing fees, and dealer manager servicing fees) did not exceed 3.5% of the gross proceeds received from its primary offering, and thus we were not required to reimburse SST IV. Additionally, SST IV determined that total organization and offering costs did not exceed 15% of the gross proceeds received in its primary offering, and thus we were not required to reimburse SST IV for any excess offering costs.

The SST IV Advisor also received 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 was potentially also 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) listed its shares of common stock on a national exchange, (2) terminated the SST IV Advisory Agreement, (3) liquidated its portfolio, or (4) entered into an Extraordinary Transaction, as defined in the SST IV operating partnership agreement.

The SST IV Advisory Agreement provided 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 was 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. No such amounts were required to be reimbursed by the SST IV Advisor.

Effective March 17, 2021, in connection with the SST IV Merger, the SST IV Advisory Agreement was terminated and none of the aforementioned subordinated distributions or fees were paid. As a result of us acquiring SST IV and terminating such contracts, we recorded a write-off of approximately $5.3 million related to the carrying value of the SST IV Advisory Agreement contract. Similarly, we recorded a write-off of approximately $1.2 million related to our special limited partnership interest, which per the terms of the SST IV Merger Agreement, terminated without consideration.

As a result of the Self Administration Transaction, we recorded a deferred tax liability, which is the result of the difference between the GAAP carrying value of the SST IV Advisory Agreement and its carrying value for tax purposes. As we reduced the GAAP carrying value of such intangible asset, we adjusted the value of our deferred tax liabilities by pro-rata amounts, reducing the deferred tax liabilities in aggregate by approximately $1.3 million, and recorded such adjustment as other income within the other line-item in our consolidated statements of operations.

47


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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.

Effective as of April 30, 2020, SSGT II suspended their offering due to various factors, including the uncertainty relating to the ongoing COVID-19 outbreak and its potential economic impact, the status of fundraising in the non-traded REIT industry due to such uncertainty and the termination of their dealer manager agreement.

The SSGT II Advisor receives 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.

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.

SST VI Advisory Agreement

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

Subject to the SST VI Advisory Agreement, the SST VI Advisor will receive acquisition fees equal to 1.00% of the contract purchase price of each property SST VI acquires plus reimbursement of any acquisition expenses that SST VI Advisor incurs. The SST VI Advisor also receives a monthly asset management fee equal to 0.0625%, which is one-twelfth of 0.75%, of SST VI’s aggregate asset value, as defined.

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

 

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

48


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

Managed REIT Property Management Agreements

Our indirect subsidiaries, Strategic Storage Property Management IV, LLC, SS Growth Property Management II, LLC, and Strategic Storage Property Management VI, 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 REITs’ 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 and SST VI property managers are 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.

Effective March 17, 2021, in connection with the SST IV Merger, the SST IV property management contracts were terminated. As a result of us acquiring SST IV and terminating such contracts, we recorded a write-off of approximately $1.9 million related to the carrying value of the SST IV property management contracts.

We previously recorded a deferred tax liability, which is the result of the difference between the GAAP carrying value of the SST IV property management contracts and their carrying value for tax purposes. As we reduced the GAAP carrying value of such intangible assets, we adjusted the value of our deferred tax liabilities by pro-rata amounts, reducing the deferred tax liabilities in aggregate by approximately $0.5 million, and recorded such adjustment as other income within the other line-item in our consolidated statement of operations.

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 months ended March 31, 2021 and 2020:

 

Managed REIT Platform Revenues

 

Three Months

Ended

March 31,

2021

 

 

Three Months

Ended

March 31,

2020

 

Advisory agreement – SST IV(1)

 

$

716,278

 

 

$

771,186

 

Advisory agreement – SSGT II

 

 

463,262

 

 

 

235,635

 

Property management agreement – SST IV(1)

 

 

346,179

 

 

 

338,918

 

Property management agreement – SSGT II

 

 

140,234

 

 

 

74,723

 

Tenant Program revenue – SST IV

 

 

285,959

 

 

 

165,888

 

Tenant Program revenue – SSGT II

 

 

122,042

 

 

 

29,457

 

Other Managed REIT revenue(2)

 

 

213,786

 

 

 

167,980

 

Total

 

$

2,287,740

 

 

$

1,783,787

 

(1)   On March 17, 2021, we acquired SST IV and will no longer earn such fees.

 

(2)

Such revenues primarily include construction management, development fees, acquisition fees, and other miscellaneous revenues.

 

Reimbursable costs from Managed REITs includes reimbursement of both the SST IV (until the SST IV Merger Date) 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 March 31, 2021 and December 31, 2020 we had receivables due from the Managed REITs totaling approximately $0.7 million, and $0.6 million, respectively. Such amounts are included in investments in and advances to the

49


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

Managed REITs line-item in our consolidated balance sheets. 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.

Investment in SSGT II OP

On September 21, 2020, a wholly owned subsidiary of our Operating Partnership (the “Preferred Investor”), entered into a preferred unit purchase agreement (the “SSGT II Unit Purchase Agreement”) with SS Growth Operating Partnership II, L.P. (the “SSGT II OP”) and SSGT II. Pursuant to the terms of the SSGT II Unit Purchase Agreement, the Preferred Investor agreed to purchase, in one or more tranches, up to 1.6 million units of limited partnership interest in SSGT II OP (the “SSGT II Preferred Units”) for an aggregate of up to $40 million (the “SSGT II Investment”). Upon the closing of each tranche of the SSGT II Investment, the Preferred Investor was due an investment fee equal to 1% of the investment amount of such tranche. The Preferred Investor received distributions, payable monthly in arrears, at a rate of 7.25% per annum from the date of investment until 180 days after the date of investment, 8.25% per annum from 181 days after the date of investment until 360 days after the date of investment, and 9.25% per annum thereafter (collectively, the “Pay Rate”). The proceeds of the SSGT II Investment may be used by SSGT II OP to finance self-storage acquisition, development, and improvement activities, and working capital or other general partnership purposes. Each SSGT II Preferred Unit has a liquidation preference of $25.00, plus all accumulated and unpaid distributions. The foregoing distributions are payable monthly, and calculated on an actual/360 day basis, and any unpaid distributions accrue at the applicable Pay Rate.

On September 21, 2020, October 29, 2020, and November 4, 2020, the Preferred Investor invested approximately $6.5 million, $13 million, and $13 million, respectively, in the SSGT II Operating Partnership. On November 12, 2020, SSGT II redeemed $19 million of our SSGT II Preferred Units, reducing our investment in SSGT II Preferred Units to $13.5 million, which was recorded in investments in and advances to Managed REITs in our consolidated balance sheets as of December 31, 2020. As of March 31, 2021 and December 31, 2020, we were potentially required to purchase an additional $7.5 million in SSGT II Preferred Units.

On January 21, 2021, SSGT II redeemed the remaining $13.5 million of our outstanding SSGT II Preferred Units.

For the three months ended March 31, 2021, we recorded income related to the SSGT II Preferred Units totaling approximately $0.1 million, which is recorded within the Other line item in our consolidated statements of operations.

Administrative Services Agreement

For the three months ended March 31, 2021, and 2020, we incurred fees payable to SAM under the Administrative Services Agreement of approximately $0.1 million, and $0.9 million, respectively, which were recorded in the Managed REIT Platform expenses line item in our consolidated statement of operations. We recorded reimbursements from SAM of approximately $0.1 million and $0.2 million during three months ended March 31, 2021, and 2020, 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.

As of March 31, 2021 and December 31, 2020, a receivable of approximately $60,000 and $50,000 was due from SAM related to the Administrative Services Agreement, respectively, and was included in the other assets line in our consolidated balance sheets.

Note 11. 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 March 31, 2021, 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 March 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 additional awards 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 are 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 are further adjusted by applying an additional discount as the LTIP Units are not initially economically equivalent to our restricted stock.

50


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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:

 

 

 

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, 2019

 

 

265,806

 

 

$

9.53

 

 

 

 

 

$

 

Granted

 

 

72,383

 

 

 

9.78

 

 

 

214,521

 

 

 

9.09

 

Vested

 

 

(82,351

)

 

 

9.55

 

 

 

(53,630

)

 

 

9.09

 

Forfeited

 

 

(6,567

)

 

 

9.78

 

 

 

 

 

 

 

Unvested at December 31, 2020

 

 

249,271

 

 

 

9.58

 

 

 

160,891

 

 

 

9.09

 

Granted

 

 

54,192

 

 

 

9.78

 

 

 

 

 

 

 

Vested

 

 

(11,882

)

 

 

9.78

 

 

 

 

 

 

 

Forfeited

 

 

(2,189

)

 

 

9.78

 

 

 

 

 

 

 

Unvested at March 31, 2021

 

 

289,392

 

 

$

9.61

 

 

 

160,891

 

 

$

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

51


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

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 December 31, 2020

 

 

5,752

 

 

 

9.78

 

 

 

130,638

 

 

 

9.09

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Unvested at March 31, 2021

 

 

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.

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 become economically equivalent to common units of limited partnership interest of our Operating Partnership on a one-for-one basis.

As of March 31, 2021, 7,993,108 shares of stock were available for issuance under the Plan.

We recorded approximately $0.5 million and $0.2 million of equity based compensation expense in general and administrative expense and approximately $20,000 and NaN of equity based compensation expense in property operating expenses, within our consolidated statements of operations for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, there was approximately $4.0 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 2.3 years.

On February 26, 2021, we announced the retirement of Michael S. McClure, then our Chief Executive Officer, effective as of April 15, 2021 (the “Transition Date”).  In connection with Mr. McClure’s retirement, and in order to provide an orderly transition, we entered into an Executive Transition Services Agreement with Mr. McClure (the “Agreement”) on February 26, 2021, pursuant to which Mr. McClure will provide consulting services to the Company for a twelve-month period (the “Transition Period”) commencing on the Transition Date.

Pursuant to the Agreement, during the Transition Period and subject to the early termination provisions contained in the Agreement, we will pay Mr. McClure a monthly fee as well as provide reimbursement for costs of continuing group health insurance coverage.  Mr. McClure’s existing time-based equity awards will continue to vest during the Transition Period and,

52


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

upon successful completion of the Transition Period, any remaining outstanding unvested time-based equity awards will immediately vest in full.  Mr. McClure’s existing performance-based equity awards will remain outstanding and vest on a pro rata basis at the rate of two-thirds of the amount that would have otherwise vested based on the terms of the awards and actual performance of the Company during the performance period. 

In April 2021, the compensation committee of our board of directors approved the 2021 executive compensation terms for our executives and certain awards were granted.  See Note 15—Subsequent Events for additional information.

 

Note 12. 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 $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 March 31, 2021, we had sold approximately 5.6 million Class A Shares and approximately 0.9 million Class T Shares through our DRP Offering.

Share Redemption Program

As described in Note 2 – Redeemable Common Stock, we have an SRP, which is partially suspended. Please refer to Note 2 for additional details.  Pursuant to the SRP, 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 SRP and we have sufficient funds available to fund such redemption.

Our board of directors may amend, suspend or terminate the SRP 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.

On August 20, 2020, our board of directors determined that it would be in the best interests of the Company to amend the terms of the SRP to revise the redemption price per share for all redemptions under the SRP to be equal to the most recently published estimated net asset value per share of the applicable share class (the “SRP Amendment”). Prior to the SRP Amendment, the redemption amount was the lesser of the amount the stockholders paid for their shares or the price per share in the current offering.

There are several limitations in addition to those noted above on our ability to redeem shares under the SRP 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.

53


SMARTSTOP SELF STORAGE REIT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(Unaudited)

For the year ended December 31, 2020, we received redemption requests totaling approximately $2.0 million (approximately 0.2 million shares), approximately $1.3 million of which were fulfilled during the year ended December 31, 2020, with the remaining approximately $0.7 million included in accounts payable and accrued liabilities as of December 31, 2020 and fulfilled in January 2021. During the three months ended March 31, 2021, we received redemption requests totaling approximately 70,000 shares, or approximately $0.7 million, which were included in accounts payable and accrued liabilities as of March 31, 2021 and fulfilled in April 2021.

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 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, regulatory and other proceedings that arise in the ordinary course of our business.  In accordance with applicable accounting guidance, management accrues an estimated liability when those matters present loss contingencies that are both probable and reasonably estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. We are not aware of any such proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition.

Note 13. Declaration of Distributions

 

On March 3, 2021, our board of directors declared a distribution rate for the second quarter of 2021 of approximately $0.00164 per day per share on the outstanding shares of common stock payable to Class A and Class T stockholders of record of such shares as shown on our books at the close of business on each day of the period commencing on April 1, 2021 and ending June 30, 2021. 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

March 31, 2021

(Unaudited)

Note 14. Selected Quarterly Data

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

 

 

 

Three months ended

 

 

 

March 31,

2020

 

 

June 30,

2020

 

 

September 30,

2020

 

 

December 31,

2020

 

 

March 31,

2021

 

Total revenues

 

$

30,298,123

 

 

$

29,469,545

 

 

$

31,363,122

 

 

$

32,893,573

 

 

$

34,564,655

 

Total operating expenses

 

$

61,368,274

 

 

$

27,497,027

 

 

$

26,992,137

 

 

$

29,307,135

 

 

$

37,250,644

 

Operating income (loss)

 

$

(31,070,151

)

 

$

1,972,518

 

 

$

4,370,985

 

 

$

3,586,438

 

 

$

(2,685,989

)

Net loss

 

$

(37,743,581

)

 

$

(7,062,841

)

 

$

(4,456,497

)

 

$

(1,943,884

)

 

$

(12,303,466

)

Net loss attributable to common

   stockholders

 

$

(35,073,951

)

 

$

(8,491,421

)

 

$

(6,259,114

)

 

$

(4,529,908

)

 

$

(13,908,664

)

Net loss per Class A Share-basic

   and diluted

 

$

(0.59

)

 

$

(0.14

)

 

$

(0.10

)

 

$

(0.08

)

 

$

(0.22

)

Net loss per Class T Share-basic

   and diluted

 

$

(0.59

)

 

$

(0.14

)

 

$

(0.10

)

 

$

(0.08

)

 

$

(0.22

)

 

 

Note 15. Subsequent Events

Acquisition of Oakville III Property

On April 16, 2021, we purchased a self storage facility (the “Oakville III Property”) located in the Greater Toronto Area of Ontario, Canada. We acquired the Oakville III Property from an unaffiliated third party for a purchase price of approximately $25.0 million CAD, plus closing costs. Upon acquisition, the property was approximately 42% occupied.

We partially financed the Oakville III property acquisition with a loan from Bank of Montreal (the “BMO Loan”), which is secured by a first lien on the Oakville III property. The loan is denominated in Canadian dollars and the proceeds from the loan were approximately $16.3 million CAD.  We provided a full recourse guaranty on the loan, which will remain in effect until the property achieves 75% physical occupancy, at which point such guaranty will be reduced to 50% of the loan balance. The loan is prepayable at any time without penalty, and bears interest at a rate of 2.25% + CDOR. The BMO Loan contains customary affirmative and negative covenants, agreements, representations, warranties and borrowing conditions.

Issuance of Equity Awards

In April 2021, the compensation committee of our board of directors approved the 2021 executive compensation terms for our executives, which included (1) performance-based equity grants in the form of either, at the election of the executive, restricted stock awards, or LTIP Units, and (2) time-based equity grants in the form of either, at the election of the executive, restricted stock awards or LTIP Units.

In April 2021 an aggregate of approximately 148,400 LTIP Units were issued to our executive officers in connection with performance-based equity grants.  With respect to performance-based equity grants, the number of LTIP Units granted as of the grant date was equal 200% of the targeted award. These are non-vested grants which shall vest based on ranges from a threshold of 0% to a maximum of 200% of the targeted equity award set for each executive by the compensation committee, with such percentage being determined based upon our ranking as compared to a peer group of publicly traded self storage REITs in terms of the average same-store revenue growth, analyzed over a three-year period.

Similarly, in April 2021 an aggregate of approximately 222,600 LTIP Units were issued to our executive officers in connection with time-based equity grants.  These are non-vested grants which shall vest ratably over four years commencing on December 31, 2021, subject to the recipient’s continued employment through the applicable vesting date.

 

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, 2020. 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”). Our year-end is December 31. As used in this report, “we,” “us,” “our,” and “Company” refer to SmartStop Self Storage REIT, Inc. and each of our subsidiaries.

We acquire, own and operate self storage facilities—including facilities owned by us as well as those owned by the entities sponsored by us. As of March 31, 2021, we wholly-owned 136 operating self storage properties located in 18 states (Alabama, Arizona, California, Colorado, Florida, Illinois, Indiana, Maryland, Massachusetts, Michigan, New Jersey, Nevada, North Carolina, Ohio, South Carolina, Texas, Virginia and Washington) and Ontario, Canada (the Greater Toronto Area) comprising approximately 90,000 units and 10.3 million net rentable square feet as well as 50% equity interests in six unconsolidated real estate ventures located in the Greater Toronto Area. Our unconsolidated real estate ventures consist of three operating self storage properties and three parcels of land in various stages of development into self storage facilities, with subsidiaries of SmartCentres owning the other 50% of such entities. As discussed herein, as of March 31, 2021, we, through our subsidiaries, serve as the sponsor of Strategic Storage Growth Trust II, Inc., a private non-traded REIT (“SSGT II”), and Strategic Storage Trust VI, Inc., a private REIT focused on acquiring income and growth self storage properties (“SST VI”), and operate properties owned by SSGT II and SST VI, consisting of 12 properties and approximately 9,000 units and 1.0 million square feet.

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, we became self-managed and the sponsor of Strategic Storage Trust IV, Inc. (“SST IV”), a public non-traded REIT, SSGT II (collectively with SST IV, the “Managed REITs”), a private non-traded REIT. In addition, we 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. See Note 5 – Self Administration Transaction and Note 10 – Related Party Transactions of the Notes to the Consolidated Financial Statements for additional information.

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 million Class A Shares and approximately 7 million Class T Shares for approximately $493 million and $73 million, respectively.

SST IV Merger

On November 10, 2020, we entered into a merger agreement with Strategic Storage Trust IV, Inc., or SST IV, pursuant to which SST IV would merge with and into our wholly-owned subsidiary (the “SST IV Merger”). The SST IV Merger was approved by SST IV’s stockholders on March 10, 2021, and it was completed on March 17, 2021.

New Credit Facility

On March 17, 2021, we, through SmartStop OP, L.P. (our “Operating Partnership”), entered into a credit facility with KeyBank, National Association as administrative agent, with an initial aggregate commitment of $500 million (the “Credit Facility”), which consists of a $250 million revolving credit facility and a $250 million term loan. We used the initial draw proceeds of approximately $451 million primarily to pay off certain existing indebtedness as well as indebtedness of SST IV in connection with the SST IV Merger.

56


 

As of March 31, 2021, we owned 136 operating self storage facilities located in 18 states (Alabama, Arizona, California, Colorado, Florida, Illinois, Indiana, Maryland, Massachusetts, Michigan, New Jersey, Nevada, North Carolina, Ohio, South Carolina, Texas, Virginia and Washington) and Ontario, Canada (the Greater Toronto Area) comprising approximately 90,000 units and 10.3 million net rentable square feet as well as 50% equity interests in six unconsolidated real estate ventures located in the Greater Toronto Area. Our unconsolidated real estate ventures consist of three operating self storage properties and three parcels of land in various stages of development into self storage facilities, with subsidiaries of SmartCentres owning the other 50% of such entities.

As of March 31, 2021, our wholly-owned 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

 

 

 

1.6

%

 

 

93.8

%

 

 

1.0

%

Arizona(5)

 

 

3

 

 

 

2,535

 

 

 

269,700

 

 

 

2.6

%

 

 

94.1

%

 

 

1.9

%

California

 

 

26

 

 

 

16,850

 

 

 

1,742,000

 

 

 

17.0

%

 

 

94.1

%

 

 

22.2

%

Colorado

 

 

6

 

 

 

3,190

 

 

 

348,500

 

 

 

3.4

%

 

 

95.5

%

 

 

3.2

%

Florida

 

 

22

 

 

 

17,090

 

 

 

2,031,400

 

 

 

19.9

%

 

 

92.1

%

 

 

21.4

%

Illinois

 

 

5

 

 

 

2,920

 

 

 

305,800

 

 

 

3.1

%

 

 

92.9

%

 

 

2.7

%

Indiana

 

 

2

 

 

 

1,000

 

 

 

112,100

 

 

 

1.1

%

 

 

94.6

%

 

 

0.8

%

Massachusetts

 

 

1

 

 

 

840

 

 

 

93,000

 

 

 

0.9

%

 

 

95.7

%

 

 

2.1

%

Maryland

 

 

2

 

 

 

1,610

 

 

 

172,900

 

 

 

1.7

%

 

 

93.6

%

 

 

2.0

%

Michigan

 

 

4

 

 

 

2,180

 

 

 

261,000

 

 

 

2.6

%

 

 

92.6

%

 

 

2.4

%

North Carolina

 

 

19

 

 

 

9,140

 

 

 

1,195,800

 

 

 

11.6

%

 

 

93.7

%

 

 

8.8

%

New Jersey

 

 

2

 

 

 

2,360

 

 

 

209,000

 

 

 

1.4

%

 

 

93.3

%

 

 

1.6

%

Nevada

 

 

8

 

 

 

6,260

 

 

 

755,000

 

 

 

7.4

%

 

 

94.4

%

 

 

6.8

%

Ohio

 

 

5

 

 

 

2,210

 

 

 

272,300

 

 

 

2.7

%

 

 

94.9

%

 

 

2.0

%

South Carolina

 

 

3

 

 

 

1,920

 

 

 

242,600

 

 

 

2.4

%

 

 

92.8

%

 

 

2.0

%

Texas

 

 

11

 

 

 

6,300

 

 

 

836,700

 

 

 

8.2

%

 

 

94.7

%

 

 

4.7

%

Virginia

 

 

1

 

 

 

830

 

 

 

71,000

 

 

 

0.7

%

 

 

96.6

%

 

 

0.5

%

Washington

 

 

3

 

 

 

1,670

 

 

 

194,100

 

 

 

1.9

%

 

 

93.7

%

 

 

1.4

%

Ontario, Canada

 

 

12

 

 

 

9,540

 

 

 

1,006,700

 

 

 

9.8

%

 

 

90.6

%

 

 

12.5

%

Total

 

 

136

 

 

 

89,525

 

 

 

10,278,600

 

 

 

100

%

 

 

93.4

%

 

 

100

%

 

(1)

Includes all rentable units, consisting of storage units and parking (approximately 3,000 units).

(2)

Includes all rentable square feet, consisting of storage units and parking (approximately 920,000 square feet).

(3)

Represents the occupied square feet of all facilities in a state or province divided by total rentable square feet of all the facilities in such state or area as of March 31, 2021.

(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 March 31, 2021.

(5)

SST VI OP and its assets and liabilities are included in our consolidated financial statements pursuant to GAAP. However, we have included only our wholly-owned properties in the table above. SST VI OP’s property is located in Arizona and contains 810 units and 84,200 square feet and was 47% occupied as of March 31, 2021.

 

Additionally, we own our office located at 10 Terrace Rd, Ladera Ranch, California (the “Ladera Office”) which houses our corporate headquarters.

57


 

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.

We believe that our critical accounting policies include the following: real estate purchase price allocations; the evaluation of whether any of our long-lived assets have been impaired; the valuation of goodwill and related impairment considerations, the valuation of our trademarks and related impairment considerations, the valuation of our contingent consideration liability, the determination of the useful lives of our long-lived assets; and the evaluation of the consolidation of our interests in joint ventures. The following discussion of these policies supplements, but does not supplant the description of our significant accounting policies, as contained in Note 2 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.

58


 

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 “Tenant Programs”. For these intangibles, we are amortizing such amounts on a straight-line basis over the estimated benefit period of the contracts and customer relationships. We evaluate these intangible assets for impairment when an event occurs or circumstances change that indicate the carrying value may not be recoverable.  In such an event, an impairment charge is recognized and the intangible asset is marked down to its fair value.

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

Goodwill Valuation

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible assets and other intangible assets acquired. Goodwill is allocated to various reporting units, as applicable, and is not amortized. We perform an annual impairment test for goodwill and between annual tests, we evaluate the recoverability of goodwill whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be fully recoverable. If circumstances indicate the carrying amount may not be fully recoverable, we perform a quantitative impairment test of goodwill to compare the fair value of each reporting unit to its respective carrying amount. If the carrying amount of goodwill exceeds its fair value, an impairment charge will be recognized.

See Note 5—Self Administration Transaction 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 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 estimated fair values for the trademarks.

We qualitatively evaluate whether any triggering events or changes in circumstances have occurred subsequent to our annual impairment test that would indicate an impairment condition may exist. If any change in circumstance or triggering event occurs, and results in a significant impact to our revenue and profitability projections, or any significant assumption in our valuation methods is adversely impacted, the impact could result in a material impairment charge in the future.

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

Contingent Earnout Valuation

In connection with the Self Administration Transaction, we issued the Class A-2 Units, as a form of contingent consideration, which is required to be revalued at each reporting period, based on the discounted probability weighted forecast of achieving the requisite AUM thresholds or the occurrence of an Earnout Acceleration Event (both as defined in Note 5 – Self Administration Transaction in the Notes to the Financial Statements).

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

59


 

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 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.

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 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 late March 2020, our operations have adjusted to meet the needs of our customers and employees, while striving to create a safe environment for everyone at our properties and corporate offices. The operational and financial impact associated with COVID-19 were most significant to our business in the second quarter of 2020, with customer demand for self storage resuming at or above normalized levels during the second half of 2020 and continuing into 2021.

Since the beginning of March 2020, we have been focused on creating a safe environment for our customers and employees given the spread of COVID-19. We have instituted the use of masks, plastic dividers, additional cleaning measures and social distancing at all of our self storage facilities, and have continued significant 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. Additionally, we have expanded our options for customers to rent units via contactless means, including directly through our website and call center.

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.

60


 

The challenges associated with the COVID-19 pandemic were partially offset by other trends that helped maintain the demand for self storage. The broader shift of people working from home, migration patterns away from dense urban markets, and strength in the housing market helped drive continued growth in self storage demand during the first quarter of 2021.

While the combination of reduced rental activity and lower rates affected our revenue growth in the second quarter of 2020, underlying self storage fundamentals improved in the third and fourth quarters, resulting in higher occupancies and higher rental rates, as compared to the second quarter of 2020 and on a year-over-year basis. The return of self storage demand drivers combined with our resumption of existing customer rate increases in the third quarter of 2020 resulted in strong same-store revenue growth, which has continued through the first quarter of 2021.

The underlying relative strength in the self storage industry in the midst of the COVID-19 pandemic continued into 2021. The ultimate extent and duration of the COVID-19 pandemic could still affect the self storage industry and/or us, potentially by the impact of governmental orders or broader economic conditions, which impact our customers, which could affect our financial condition, collections, liquidity, and results of operations. These potential future developments are uncertain and cannot be predicted. This includes new information that may also emerge concerning the breadth of the COVID-19 outbreak, as well as the actions to contain or treat its impact, including the distribution and broad acceptance of various vaccines for COVID-19.

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, management fees earned 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 March 31, 2021 and 2020, we wholly-owned 136 and 112 operating self storage facilities, respectively. Our operating results for the three months ended March 31, 2021 include full quarter results for 112 self storage facilities and partial quarter results for 24 operating self storage facilities acquired during the quarter ended March 31, 2021. Our operating results for the three months ended March 31, 2020 include full quarter results for 111 self storage facilities and partial quarter results for one operating self storage facility partially opened during the quarter ended March 31, 2020. Operating results in future periods will depend on the results of operations of these properties and of the real estate properties that we acquire in the future.

As discussed previously, the results of operations presented herein cover a period of time prior to the SST IV Merger. We expect our 2021 operating results to be significantly impacted by the SST IV Merger as a result of acquiring 24 operating self storage facilities and SST IV’s 50% equity interest in six unconsolidated real estate ventures, as well as the elimination of fees that we previously earned from SST IV.

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SST IV Merger

On March 17, 2021, we acquired SST IV by way of merger. Through the SST IV Merger, we acquired 24 operating self storage facilities and six real estate joint ventures.

We expect the SST IV Merger to have a positive impact in the short term and long term on our statement of operations and strategic plans, due to a variety of factors, including but not limited to:

 

Utilizing SmartStop Class A Common Stock as an efficient source of capital to complete the transaction;

 

Adding a high quality portfolio of self storage assets already branded as SmartStop® Self Storage locations;

 

Adding to strategically important regions in the United States, including expansion in the state of Texas;

 

Further consolidating our portfolio in high growth markets, including California, Florida, and the Greater Toronto Area of Ontario, Canada;

 

Achieving lower leverage and lower cost of capital, given the new Credit Facility closed concurrently with the SST IV Merger;

 

Achieving further economies of scale as well as other efficiencies, with additional properties in the aggregate and in certain markets; and

 

Improved positioning of the Company, including facilitating an eventual liquidity event, as a result of our increased size and scale.

We expect the SST IV Merger to be accretive to FFO, as adjusted as the former SST IV properties reach higher levels of occupancy and the continued growth from the six joint venture properties in various stages of lease up and development.

Comparison of the Three Months Ended March 31, 2021 and 2020

Total Self Storage Revenues

Total self storage related revenues for the three months ended March 31, 2021 and 2020, were approximately $31.1 million and $26.7 million, respectively. The increase in total self storage revenues of approximately $4.4 million, or 16%, is primarily attributable to increased same-store revenues (approximately $2.5 million, or 9.7%), with the remainder relating to non-same store revenue increases, primarily revenue from the SST IV Merger, which contributed approximately $1.1 million of self storage revenues.

We expect self storage revenues to increase in future periods as the properties we acquired in the SSGT Mergers, SST IV Merger, and other lease up properties continue to increase occupancy and rents and otherwise fluctuate depending on the overall economic environment, including the impact of COVID-19, and the increased supply of self storage facilities from continued development.

Managed REIT Platform Revenue

Managed REIT Platform revenue for the three months ended March 31, 2021 and 2020 was approximately $2.3 million and $1.8 million, respectively. The increase in Managed REIT Platform revenue of approximately $0.5 million is primarily attributable to an increase in assets under management prior to the SST IV Merger. We expect Managed REIT Platform Revenue to decrease in future periods as a result of the SST IV Merger as we will no longer receive fees from SST IV for providing property management and advisory services.

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Reimbursable Costs from Managed REITs

Reimbursable costs from Managed REITs for the three months ended March 31, 2021 and 2020 were approximately $1.2 million and $1.8 million, respectively. Such revenues consist of costs incurred by us as we provide property management and advisory services to the Managed REITs, which are reimbursed by our Managed REITs, pursuant to our related contracts with the Managed REITs. We expect reimbursable costs from Managed REITs to decrease as a result of the SST IV Merger, as we will no longer receive reimbursement for providing such services.

Property Operating Expenses

Property operating expenses for the three months ended March 31, 2021 and 2020 were approximately $10.3 million (or 33.3% of self storage revenue) and $9.7 million (or 36.2% of self storage revenue), respectively. Property operating expenses include the costs to operate our facilities including payroll expense, utilities, insurance, real estate taxes, and marketing. The increase in property operating expenses of approximately $0.6 million is primarily attributable to the 24 operating self storage facilities acquired in connection with the SST IV Merger (approximately $0.4 million). We expect property operating expenses to decrease as a percentage of revenue as overall occupancy grows and therefore revenues increase.

Managed REIT Platform Expenses

Managed REIT Platform expenses for the three months ended March 31, 2021 and 2020 were approximately $0.3 million and $1.2 million, 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 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. Managed REIT Platform expenses decreased primarily 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 March 31, 2021 and 2020 were approximately $1.2 million and $1.8 million, respectively. Such expenses consist of costs incurred by us as we provide property management and advisory services to the Managed REITs, which are reimbursed by our Managed REITs, pursuant to our related contracts with the Managed REITs. We expect reimbursable costs from Managed REITs to decrease as a result of the SST IV Merger, as we will no longer receive reimbursement for providing such services.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2021 and 2020 were approximately $4.8 million and $3.7 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. The increase is primarily attributable to increased compensation related expenses. We expect general and administrative expenses to decrease as a percentage of total revenues over time.

Depreciation and Amortization Expenses

Depreciation and amortization expenses for the three months ended March 31, 2021 and 2020 were approximately $9.8 million and $11.4 million, respectively. Depreciation expense consists primarily of depreciation on the buildings and site improvements at our properties. Amortization expense consists of the amortization of our in place lease intangible assets resulting from our self storage acquisitions and amortization of certain intangible assets acquired in the Self Administration Transaction. The decrease in depreciation and amortization expense is primarily attributable to intangibles acquired in the SSGT Mergers becoming fully amortized during the third quarter of 2020, partially offset by depreciation and amortization on the properties and intangibles acquired in the SST IV Merger.

Acquisition Expenses

Acquisition expenses for the three months ended March 31, 2021 and 2020 were approximately $0.3 million and $30,000, respectively. These acquisition expenses were incurred prior to acquisitions becoming probable in accordance with our capitalization policy. The increase is primarily attributable to the acquisition costs incurred during 2021 related to the SST IV Merger.

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Contingent Earnout Adjustment

The contingent earnout adjustments for the three months ended March 31, 2021 and 2020 reflects an increase in the contingent earnout liability of approximately $2.1 million and a reduction in the liability of approximately $7.2 million, respectively. The change of $9.3 million was due to the determination that the liability had increased in value on a net basis based on an updated discounted probability weighted forecast of our projected assets under management (as defined in the Partnership Agreement, as amended) in the Managed REIT Platform during the three months ended March 31, 2021 as compared to a decrease for the three months ended March 31, 2020.

Impairment of Goodwill and Intangible Assets

Impairment of goodwill and intangible assets for the three months ended March 31, 2021 and 2020 was none and approximately $36.5 million, respectively. The impairment charge incurred in the first quarter of 2020 was the result of the impairment of certain intangible assets and goodwill associated with the Managed REIT Platform.

Impairment of Investments in Managed REITs

Impairment of investments in Managed REITs for the three months ended March 31, 2021 and 2020 was none and approximately $4.4 million, respectively. Certain of our equity investments in the Managed REITs derive their value from the potential to receive certain subordinated distributions based on certain performance criteria of the Managed REITs, and we determined in the first quarter of 2020 that those criteria were less likely to be met, causing a reduction in the fair value of the related equity investments. We determined that such reduction in fair value was other than temporary, therefore requiring the impairment charge recorded.

Write-off of equity interest and preexisting relationships in SST IV upon acquisition of control

Write-off of assets related to preexisting relationships in SST IV upon the SST IV Merger for the three months ended March 31, 2021 and 2020 was approximately $8.4 million, and none, respectively. Such expense represents the Company’s write-off of the SST IV special limited partnership interest we held in SST IV, which per the terms of the SST IV Merger, terminated without consideration, as well as the write-off of the intangible assets related to the SST IV advisory agreement and property management contracts due to the termination of such contracts with the SST IV Merger.

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 March 31, 2021 and 2020 were approximately $7.9 million and $8.3 million, respectively. The decrease of approximately $0.4 million is primarily attributable to lower rates on a year over year basis. 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 March 31, 2021 and 2020 were approximately $0.7 million and $0.9 million, respectively. We expect interest expense - debt issuance costs to fluctuate commensurate with our future financing activity.

Net Loss on Extinguishment of Debt

Net loss on extinguishment of debt for the three months ended March 31, 2021 and 2020 were approximately $2.4 million and none, respectively. The increase in net loss on debt extinguishment is primarily attributable to the write-off of unamortized debt issuance costs on loans that were paid off in connection with the new Credit Facility that was obtained in conjunction with the SST IV Merger.

Other

Other income (expense) for the three months ended March 31, 2021 and 2020 was approximately $1.4 million of income, as compared to approximately $2.6 million of income, 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 a reduction in the deferred tax liabilities of approximately $1.9 million during the three months ended March 31, 2021 as a result of the write-

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off of the asset management and property management intangible assets, compared to a reduction in the deferred tax liabilities of approximately $2.4 million during the three months ended March 31, 2020 related to the intangible impairment analyses noted above.

Same-Store Facility Results - Three Months Ended March 31, 2021 and 2020

The following table sets forth operating data for our same-store facilities (those properties included in the consolidated results of operations since January 1, 2020) for the three months ended March 31, 2021 and 2020. 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

 

 

 

2021

 

 

2020

 

 

%

Change

 

 

2021

 

 

2020

 

 

%

Change

 

2021

 

 

2020

 

 

%

Change

 

Revenue (1)

 

$

27,871,895

 

 

$

25,405,035

 

 

 

9.7

%

 

$

3,188,977

 

 

$

1,315,827

 

 

N/M

 

$

31,060,872

 

 

$

26,720,862

 

 

 

16.2

%

Property operating

   expenses (2)

 

 

8,817,512

 

 

 

8,716,694

 

 

 

1.2

%

 

 

1,525,769

 

 

 

958,332

 

 

N/M

 

 

10,343,281

 

 

 

9,675,026

 

 

 

6.9

%

Property operating

   income

 

$

19,054,383

 

 

$

16,688,341

 

 

 

14.2

%

 

$

1,663,208

 

 

$

357,495

 

 

N/M

 

$

20,717,591

 

 

$

17,045,836

 

 

 

21.5

%

Number of

   facilities

 

 

103

 

 

 

103

 

 

 

 

 

 

 

34

 

 

 

9

 

 

 

 

 

137

 

 

 

112

 

 

 

 

 

Rentable square

   feet (3)

 

 

7,557,300

 

 

 

7,557,300

 

 

 

 

 

 

 

2,805,500

 

 

 

680,300

 

 

 

 

 

10,362,800

 

 

 

8,237,600

 

 

 

 

 

Average physical

   occupancy (4)

 

 

93.1

%

 

 

88.7

%

 

 

 

 

 

N/M

 

 

N/M

 

 

 

 

 

92.6

%

 

 

86.3

%

 

 

 

 

Annualized rent

   per occupied

   square foot (5)

 

$

15.43

 

 

$

14.90

 

 

 

 

 

 

N/M

 

 

N/M

 

 

 

 

$

15.21

 

 

$

14.70

 

 

 

 

 

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. Property operating expenses for the three months ended March 31, 2020 also includes COVID-19 related costs, including specialized cleaning costs, the purchase of personal protective equipment, and bonuses to our store personnel, totaling approximately $0.4 million. On a same-store basis, COVID-19 related costs represented approximately $0.4 million of the total property operating expenses for the three months ended March 31, 2020.

(3)

Of the total rentable square feet, parking represented approximately 920,000 square feet and 678,000 square feet as of March 31, 2021 and 2020, 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 rental income for each applicable period by the aggregate of the month-end occupied square feet for the period. Properties are included in the respective calculations in their first full month of operations, as appropriate. We have excluded the realized rental revenue and occupied square feet related to parking herein for the purpose of calculating annualized rent per occupied square foot.

Our same-store revenue increased by approximately $2.5 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to both higher occupancy and higher annualized rent per occupied square foot.

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The following table presents a reconciliation of net loss as presented on our consolidated statements of operations to property operating income, as stated above, for the periods indicated:

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Net loss

 

$

(12,303,466

)

 

$

(37,743,581

)

Adjusted to exclude:

 

 

 

 

 

 

 

 

Managed REIT Platform revenue

 

 

(2,287,740

)

 

 

(1,783,787

)

Managed REIT Platform expenses

 

 

319,890

 

 

 

1,174,809

 

General and administrative

 

 

4,752,989

 

 

 

3,667,947

 

Depreciation

 

 

8,543,927

 

 

 

7,716,671

 

Intangible amortization expense

 

 

1,259,547

 

 

 

3,669,631

 

Acquisition expenses

 

 

305,650

 

 

 

28,105

 

Contingent earnout adjustment

 

 

2,119,744

 

 

 

(7,200,000

)

Impairment of goodwill and intangible assets

 

 

 

 

 

36,465,732

 

Impairment of investments in Managed

     REITs

 

 

 

 

 

4,376,879

 

Write-off of equity interest and preexisting

     relationships in SST IV upon acquisition

     of control

 

 

8,389,573

 

 

 

 

Interest expense

 

 

7,975,464

 

 

 

8,339,303

 

Interest expense – accretion of fair market

     value of secured debt

 

 

(31,866

)

 

 

(32,657

)

Interest expense – debt issuance costs

 

 

672,473

 

 

 

943,483

 

Net loss on extinguishment of debt

 

 

2,444,788

 

 

 

 

Other

 

 

(1,443,382

)

 

 

(2,576,699

)

Total property operating income

 

$

20,717,591

 

 

$

17,045,836

 

 

Non-GAAP Financial Measures

Funds from Operations

Funds from operations (“FFO”) is an industry wide metric promulgated by the National Association of Real Estate Investment Trusts, or NAREIT, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure.

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, or the White Paper. The White Paper defines FFO as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property and real estate related asset impairment write downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Additionally, gains and losses from change in control are excluded from the determination of FFO. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. Our FFO calculation complies with NAREIT’s policy described above.

FFO, as Adjusted

We use FFO, as adjusted, as an additional non-GAAP financial measure to evaluate our operating performance. We previously used Modified Funds from Operations (“MFFO”) (as defined by the Institute for Portfolio Alternatives) as a non-GAAP measure of operating performance. Management replaced the MFFO measure with FFO, as adjusted, because FFO, as adjusted, provides investors with supplemental performance information that is consistent with the performance models and analysis used by management. In addition, FFO, as adjusted, is a measure used among our peer group, which includes publicly traded REITs. Further, we believe FFO, as adjusted, is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies.

In determining FFO, as adjusted, we make further adjustments to the NAREIT computation of FFO to exclude the effects of non-real estate related asset impairments and intangible amortization, acquisition related costs, other write-offs incurred in connection with acquisitions, contingent earnout expenses, accretion of fair value of debt adjustments, gains or

66


 

losses from extinguishment of debt, adjustments of deferred tax liabilities, realized and unrealized gains/losses on foreign exchange transactions, and gains/losses on foreign exchange and interest rate derivatives not designated for hedge accounting, which we believe are not indicative of the Company’s overall long-term operating performance. We exclude these items from GAAP net income to arrive at FFO, as adjusted, as they are not the primary drivers in our decision-making process and excluding these items provides investors a view of our continuing operating portfolio performance over time and makes our results more comparable period to period and to other REITs, which in any respective period may experience fluctuations in such acquisition, merger or other similar activities that are not of a long-term operating performance nature.  FFO, as adjusted, also reflects adjustments for unconsolidated partnerships and jointly owned investments. We use FFO, as adjusted, as one measure of our operating performance when we formulate corporate goals and evaluate the effectiveness of our strategies.

Presentation of FFO and FFO, as adjusted, is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and FFO, as adjusted, the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and FFO, as adjusted, are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations, which is an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and FFO, as adjusted, should not be considered as an alternative to net income (determined in accordance with GAAP) and should be reviewed in conjunction with other measurements as an indication of our performance.

Neither the SEC, NAREIT, nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or FFO, as adjusted. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the publicly registered, non-traded REIT industry, and we would have to adjust our calculation and characterization of FFO or FFO, as adjusted. The following is a reconciliation of net income (loss), which is the most directly comparable GAAP financial measure, to FFO and FFO, as adjusted, for each of the periods presented below:  

 

 

 

Three Months

Ended

March 31,

2021

 

 

Three Months

Ended

March 31,

2020

 

Net loss (attributable to common stockholders)

 

$

(13,908,664

)

 

$

(35,073,951

)

Add:

 

 

 

 

 

 

 

 

Depreciation of real estate

 

 

8,377,485

 

 

 

7,587,338

 

Depreciation and amortization of real estate and intangible

      assets from our Joint Ventures

 

 

34,074

 

 

 

 

Amortization of real estate related intangible assets

 

 

562,085

 

 

 

2,172,565

 

Deduct:

 

 

 

 

 

 

 

 

Adjustment for noncontrolling interests

 

 

(1,118,036

)

 

 

(1,297,630

)

FFO (attributable to common stockholders)

 

 

(6,053,056

)

 

 

(26,611,678

)

Other Adjustments:

 

 

 

 

 

 

 

 

Intangible amortization expense - contracts(1)

 

 

697,462

 

 

 

1,497,066

 

Acquisition expenses(2)

 

 

305,650

 

 

 

28,105

 

Contingent earnout adjustment(3)

 

 

2,119,744

 

 

 

(7,200,000

)

Impairment of goodwill and intangible assets(4)

 

 

 

 

 

36,465,732

 

Impairment of investments in Managed REITs(4)

 

 

 

 

 

4,376,879

 

Write-off of equity interest and preexisting relationships in

     SST IV upon acquisition of control

 

 

8,389,573

 

 

 

 

Accretion of fair market value of secured debt(5)

 

 

(31,866

)

 

 

(32,657

)

Net loss on extinguishment of debt(6)

 

 

2,444,788

 

 

 

 

Foreign currency and interest rate derivative (gains) losses, net(7)

 

 

217,998

 

 

 

167,519

 

Adjustment of deferred tax liabilities(1)

 

 

(1,872,866

)

 

 

(2,746,896

)

Adjustment for noncontrolling interests

 

 

(1,433,296

)

 

 

(4,319,933

)

FFO, as adjusted (attributable to common stockholders)

 

$

4,784,131

 

 

$

1,624,137

 

 

(1)

These items represent the amortization, accretion, or adjustment of intangible assets or deferred tax liabilities. As these items are non-cash and not primary drivers in our decision-making process, FFO is adjusted for their effect to arrive at

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FFO, as adjusted, as a means of determining a comparable sustainable operating performance metric to other real estate companies.

(2)

In evaluating investments in real estate, we differentiate the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for publicly registered, non-traded REITs that have generally completed their acquisition activity and have other similar operating characteristics.

(3)

The contingent earnout adjustment represents the adjustment to the fair value of the Class A-2 Units issued in connection with the Self Administration Transaction. FFO is adjusted to arrive at FFO, as adjusted, as this acquisition related item is not a primary driver in our decision-making process and excluding this provides investors a view of our continuing operating portfolio performance over time.

(4)

The impairment charges relate to our goodwill, intangible assets and investments in the Managed REIT Platform acquired in the Self Administration Transaction. We believe that adjusting for such non-recurring items provides useful supplemental information because such expenses may not be reflective of on-going operations and is consistent with management’s analysis of our operating performance and provides for a means of determining a comparable sustainable operating performance metric

(5)

This represents the difference between the stated interest rate and the estimated market interest rate on assumed notes as of the date of acquisition. Such amounts have been excluded from FFO, as adjusted, because we believe FFO, as adjusted, provides useful supplementary information by focusing on operating fundamentals, rather than events not related to our normal operations. We are responsible for managing interest rate risk and do not rely on another party to manage such risk.

(6)

The net loss associated with the extinguishment of debt includes prepayment penalties, the write-off of unamortized deferred financing fees, and other fees incurred.  We believe that adjusting for such non-recurring items provides useful supplemental information because such losses may not be reflective of on-going transactions and operations and is consistent with management’s analysis of our operating performance.

(7)

This represents the mark-to-market adjustment for our derivative instruments not designated for hedge accounting and the ineffective portion of the change in fair value of derivatives recognized in earnings, as well as changes in foreign currency related to our foreign equity investments not classified as long term. These derivative contracts are intended to manage the Company’s exposure to interest rate and foreign currency risk which may not be reflective of our ongoing performance and may reflect unrealized impacts on our operating performance. Such amounts are recorded in “Other” within our consolidated statements of operations.

Cash Flows

A comparison of cash flows for operating, investing and financing activities for the three months ended March 31, 2021 and 2020 is as follows:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

2021

 

 

March 31,

2020

 

 

Change

 

Net cash flow provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

4,693,456

 

 

$

3,684,147

 

 

$

1,009,309

 

Investing activities

 

 

(52,767,545

)

 

 

(2,765,478

)

 

 

(50,002,067

)

Financing activities

 

 

6,457,022

 

 

 

(8,154,172

)

 

 

14,611,194

 

 

Cash flows provided by operating activities for the three months ended March 31, 2021 and 2020 were approximately $4.7 million and $3.7 million, respectively, an increase of approximately $1.0 million. The increase in cash provided by our operating activities is primarily the result of an increase in net income when excluding the impact of non-cash items included in the determination of net income, which resulted in an increase in cash provided by operating activities of approximately $4.1 million, offset by a decrease of approximately $3.1 million resulting from a change in working capital accounts.

Cash flows used in investing activities for the three months ended March 31, 2021 and 2020 were approximately $52.8 million and $2.8 million, respectively, an increase in the use of cash of approximately $50.0 million. The increase in cash used in investing activities primarily relates to the SST IV Merger that was completed during the three months ended March 31, 2021 as compared to only normal capital improvement and development activities with no acquisitions of real estate during the three months ended March 31, 2020.

Cash flows provided by (used in) financing activities for the three months ended March 31, 2021 and 2020 were approximately $6.5 million and ($8.2) million, respectively, a change of approximately $14.6 million. The change in

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financing activities is primarily attributable to the approximately $16.6 million of additional net debt proceeds during the three months ended March 31, 2021.

Liquidity and Capital Resources

Short-Term Liquidity and Capital Resources

We generally expect that we will meet our short-term liquidity requirements from the combination of existing cash balances, net cash provided from property operations and the Managed REIT Platform. Alternatively, we may issue additional secured or unsecured financing from banks or other lenders. On March 17, 2021 we entered into a new debt facility (the “Credit Facility”). Pursuant to the Credit Facility, we now have the ability to draw on the facility to meet our liquidity needs.

COVID-19 initially caused significant volatility in the debt and equity markets and the continued and/or further impact will depend on future developments, which are highly uncertain.  While, we do not expect such events to have a material impact upon our liquidity in the short-term, continued volatility or further deterioration in the debt and equity markets over an extended period of time could potentially impact our liquidity over the long-term.

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 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, and the second and final closing in the amount of $50 million occurred on October 26, 2020. See Note 7, Preferred Equity, of the Notes to the Consolidated Financial Statements contained in this report for additional information.

Distribution Policy and Distributions

Preferred Stock Dividends

The shares of Series A Convertible Preferred Stock rank senior to all other shares of our capital stock, including our common stock, with respect to rights to receive dividends and to participate in distributions or payments upon any voluntary or involuntary liquidation, dissolution or winding up of the Company. Dividends payable on each share of Series A Convertible Preferred Stock will initially be equal to a rate of 6.25% per annum, which accrues daily but is payable quarterly in arrears. If the Series A Convertible Preferred Stock has not been redeemed on or prior to the fifth anniversary date of the Initial Closing, the dividend rate will increase an additional 0.75% per annum each year thereafter to a maximum of 9.0% per annum until the tenth anniversary of the Initial Closing, at which time the dividend rate shall increase 0.75% per annum each year thereafter until the Series A Convertible Preferred Stock is either converted or repurchased in full.

Common Stock Distributions

On March 3, 2021, our board of directors declared a distribution rate for the second quarter of 2021, 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 April 1, 2021 and continuing on each day thereafter through and including June 30, 2021. In connection with these distributions, 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.

Background and History of Common Stock Distributions

Since substantially all of our operations are performed indirectly through our Operating Partnership, our ability to pay distributions depends in large part on our Operating Partnership’s ability to pay distributions to its partners, including to us. In the event we do not have enough cash from operations to fund cash distributions, we may borrow, issue additional securities or sell assets in order to fund the distributions. The terms of the Series A Convertible Preferred Stock place certain restrictions on our ability to pay distributions to our common stockholders. In general, we are prohibited from paying distributions to our common stockholders other than regular cash dividends on a basis consistent with past practice and dividends payable in shares of common stock in connection with an initial listing of such shares. Accordingly, we are presently only permitted to pay cash distributions, which may be reinvested in stock pursuant to our DRP, unless otherwise

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approved by the holder of the Series A Convertible Preferred Stock. Absent the foregoing restrictions, our charter allows our board of directors to authorize payments to stockholders in cash or other assets of the Company or in stock, including in stock of one class payable to holders of stock of another class.

We may not be able to pay distributions from our cash flows from operations, in which case distributions may be paid in part from debt or other financing sources.

Distributions are paid to our common stockholders based on the record date selected by our board of directors. Such distributions are based on daily declaration and record dates. We expect to continue to regularly pay distributions unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions are authorized at the discretion of our board of directors, which are directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Code. Absent the restrictions noted above, our board of directors may increase, decrease or eliminate the distribution rate that is being paid on our common stock at any time. Distributions are made on all classes of our common stock at the same time. The per share amount of distributions on Class A Shares and Class T Shares differ because of different allocations of class-specific expenses. Specifically, distributions on Class T Shares are lower than distributions on Class A Shares because Class T Shares are subject to ongoing stockholder servicing fees. The funds that are available for distribution may be affected by a number of factors, including the following:

 

our operating and interest expenses;

 

our ability to keep our properties occupied;

 

our ability to maintain or increase rental rates;

 

construction defects or capital improvements;

 

capital expenditures and reserves for such expenditures;

 

the issuance of additional shares;

 

financings and refinancings; and

 

dividends with respect to the outstanding shares of our Series A Convertible Preferred Stock.

The following shows our distributions paid and the sources of such distributions for the respective periods presented:

 

 

 

Three Months

Ended

March 31, 2021

 

 

 

 

 

 

Three Months

Ended

March 31, 2020

 

 

 

 

 

Distributions paid in cash — common stockholders

 

$

5,010,842

 

 

 

 

 

 

$

4,643,913

 

 

 

 

 

Distributions paid in cash — Operating Partnership

    unitholders

 

 

1,377,906

 

 

 

 

 

 

 

1,358,066

 

 

 

 

 

Distributions paid in cash — preferred stockholders

 

 

2,928,620

 

 

 

 

 

 

 

1,643,836

 

 

 

 

 

Distributions reinvested

 

 

3,737,890

 

 

 

 

 

 

 

3,979,539

 

 

 

 

 

Total distributions

 

$

13,055,258

 

 

 

 

 

 

$

11,625,354

 

 

 

 

 

Source of distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows provided by operations

 

$

4,693,456

 

 

36%

 

 

$

3,684,147

 

 

32%

 

Cash on hand

 

 

4,623,912

 

 

35%

 

 

 

3,961,668

 

 

34%

 

Offering proceeds from distribution reinvestment plan

 

 

3,737,890

 

 

29%

 

 

 

3,979,539

 

 

34%

 

Total sources

 

$

13,055,258

 

 

100%

 

 

$

11,625,354

 

 

100%

 

From our inception through March 31, 2021, we paid cumulative distributions of approximately $195 million, of which approximately $169 million were paid to common stockholders, as compared to cumulative FFO of approximately ($5.6) million. For the three months ended March 31, 2021, we paid distributions of approximately $13.1 million, of which approximately $8.7 million were paid to common stockholders, as compared to FFO of approximately ($6.1) million, which reflects a write-off of equity interest and preexisting relationships of approximately $8.4 million and acquisition related expenses of approximately $0.3 million. For the three months ended March 31, 2020, we paid distributions of approximately $11.6 million, of which approximately $8.6 million were paid to common stockholders, as compared to FFO of approximately ($26.6) million, which reflects impairment of goodwill, intangible assets, and our investments in Managed REITs, net of deferred tax liability and contingent earnout adjustments, of approximately $30.9 million, and acquisition related expenses of

70


 

approximately $30,000. The payment of distributions from sources other than FFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.

We must distribute to our stockholders at least 90% of our taxable income each year in order to meet the requirements for being treated as a REIT under the Code. Our directors may authorize distributions in excess of this percentage as they deem appropriate. Because we may receive income from interest or rents at various times during our fiscal year, distributions may not reflect our income earned in that particular distribution period, but may be made in anticipation of cash flow that we expect to receive during a later period and may be made in advance of actual receipt of funds in an attempt to make distributions relatively uniform. To allow for such differences in timing between the receipt of income and the payment of expenses, and the effect of required debt payments, among other things, we could be required to borrow funds from third parties on a short-term basis, issue new securities, or sell assets to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We are not prohibited from undertaking such activities by our charter, bylaws or investment policies, and we may use an unlimited amount from any source to pay our distributions. These methods of obtaining funding could affect future distributions by increasing operating costs and decreasing available cash, which could reduce the value of our stockholders’ investment in our shares. In addition, such distributions may constitute a return of investors’ capital.

We may not be able to pay distributions from our cash flows from operations, in which case distributions may be paid in part from available funds or from debt financing and pursuant to our distribution reinvestment plan. The payment of distributions from sources other than cash flows from operations may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.

Over the long-term, we expect that a greater percentage of our distributions will be paid from cash flows from operations. However, our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including our ability to raise and invest capital at favorable yields, the financial performance of our investments in the current real estate and financial environment and the types and mix of investments in our portfolio. As a result, future distributions declared and paid may exceed cash flow from operations.

Indebtedness

As of March 31, 2021, our net debt was approximately $822 million, which included approximately $342 million in fixed rate debt, $484 million in variable rate debt and approximately $0.3 million in net debt premium less approximately $4.1 million in net debt issuance costs. See Note 6 – Debt of the Notes to the Consolidated Financial Statements for more information about our indebtedness.

Long-Term Liquidity and Capital Resources

On a long-term basis, our principal demands for funds will be for property acquisitions, either directly or through entity interests, for the payment of operating expenses and distributions, and for the payment of interest on our outstanding indebtedness, if any.

Long-term potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, issuance of equity instruments, undistributed funds from operations, and additional public or private offerings. To the extent we are not able to secure requisite financing in the form of a credit facility or other debt, we will be dependent upon proceeds from the issuance of equity securities and cash flows from operating activities in order to meet our long-term liquidity requirements and to fund our distributions.

Contractual Obligations

The following table summarizes our contractual obligations as of March 31, 2021:

 

 

 

Payments due during the years ending December 31:

 

 

 

Total

 

 

2021

 

 

2022-2023

 

 

2024-2025

 

 

Thereafter

 

Debt interest(1)

 

$

141,851,633

 

 

$

19,745,933

 

 

$

52,537,881

 

 

$

39,476,478

 

 

$

30,091,341

 

Debt principal(2)

 

 

826,245,013

 

 

 

1,100,437

 

 

 

47,080,819

 

 

 

244,517,834

 

 

 

533,545,923

 

Total contractual obligations

 

$

968,096,646

 

 

$

20,846,370

 

 

$

99,618,700

 

 

$

283,994,312

 

 

$

563,637,264

 

 

 

(1)

Interest expense for fixed rate debt was calculated based upon the contractual rate and the interest expense on variable rate debt was calculated based on the rate in effect on March 31, 2021. Debt denominated in foreign currency has been converted based on the rate in effect as of March 31, 2021.

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(2)

Amount represents principal payments only, excluding net debt premium and debt issuance costs.

Off-Balance Sheet Arrangements

We do not currently have any relationships with off-balance sheet entities or financial partnerships. Such entities are often referred to as structured finance or special purpose entities, which typically are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Subsequent Events

Please see Note 15 of the Notes to the Consolidated Financial Statements contained in this report.

Seasonality

We believe that we will experience minor seasonal fluctuations in the occupancy levels of our facilities, which we believe will be slightly higher over the summer months due to increased moving activity.

ITEM  3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk and to a lesser extent, foreign currency risk. We may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund acquisition, expansion, and financing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes.

As of March 31, 2021, our net debt was approximately $822 million, which included approximately $342 million in fixed rate debt, $484 million in variable rate debt and approximately $0.3 million in net debt premium less approximately $4.1 million in net debt issuance costs. As of December 31, 2020, our net debt was approximately $718 million, which included approximately $302 million in fixed rate debt, $420 million in variable rate debt and approximately $0.5 million in net debt premium less approximately $4 million in net debt issuance costs. Our debt instruments were entered into for other than trading purposes. Changes in interest rates have different impacts on the fixed and variable debt. A change in interest rates on fixed rate debt impacts its fair value but has no impact on interest incurred or cash flows. A change in interest rates on variable debt could impact the interest incurred and cash flows and its fair value. If the underlying rate of the related index on our variable rate debt were to increase by 100 basis points, the increase in interest would decrease future earnings and cash flows by approximately $2.2 million annually.

Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

 

The following table summarizes annual debt maturities and average interest rates on our outstanding debt as of March 31, 2021:

 

 

 

Year Ending December 31,

 

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

2025

 

 

Thereafter

 

 

Total

 

Fixed rate debt

 

$

1,100,437

 

 

$

2,914,419

 

 

$

3,384,145

 

 

$

47,043,397

 

 

$

2,869,187

 

 

$

284,521,653

 

 

$

341,833,238

 

Average interest rate(1)

 

 

4.50

%

 

 

4.50

%

 

 

4.50

%

 

 

4.46

%

 

 

4.38

%

 

 

4.47

%

 

 

 

 

Variable rate debt

 

$

 

 

$

 

 

$

40,782,255

 

 

$

194,605,250

 

 

$

 

 

$

249,024,270

 

 

$

484,411,775

 

Average interest rate(1)

 

 

2.31

%

 

 

2.31

%

 

 

2.22

%

 

 

2.18

%

 

 

2.18

%

 

 

2.18

%

 

 

 

 

 

(1)

Interest expense for fixed rate debt was calculated based upon the contractual rate and the interest expense on variable rate debt was calculated based on the rate in effect on March 31, 2021. Debt denominated in foreign currency has been converted based on the rate in effect as of March 31, 2021.

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Currently, our only foreign exchange rate risk comes from our Canadian properties and the Canadian Dollar (“CAD”). Our existing foreign currency hedge mitigates most of our foreign currency exposure of our net CAD denominated investments; however, we generate all of our revenues and expend essentially all of our operating expenses and third party debt service costs related to our Canadian Properties in CAD. As a result of fluctuations in currency exchange, our cash flows and results of operations could be affected.

ITEM  4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

ITEM  1.

None.

ITEM 1A.

RISK FACTORS

The following should be read in conjunction with the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2020. With the exception of the risk factors set forth below, there have been no material changes from the risk factors set forth in our 2020 Annual Report on Form 10-K for the year ended December 31, 2020.

We have incurred a net loss to date, have an accumulated deficit, and it is possible that our operations may not be profitable in 2021.

We incurred a net loss attributable to common stockholders of approximately $14 million for the three months ended March 31, 2021. Our accumulated deficit was approximately $155 million as of March 31, 2021.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)

None.

(b)

None.

(c)

Our share redemption program enabled our stockholders to have their shares redeemed by us, subject to the significant conditions and limitations described in our publicly filed documents. During the three months ended March 31, 2021, we redeemed shares as follows:

 

For the Month Ended

 

Total Number of

Shares Redeemed

 

 

Average Price

Paid per Share

 

 

Total Number of

Shares Redeemed as

Part of Publicly

Announced Plans or

Programs

 

 

Maximum Number

of Shares That May

Yet be Purchased

Under the Plans

or Programs

January 31, 2021

 

 

70,348

 

 

$

10.40

 

 

 

70,348

 

 

2,980,820(1)

February 28, 2021

 

 

 

 

$

 

 

 

 

 

2,980,820(1)

March 31, 2021

 

 

 

 

$

 

 

 

 

 

2,980,820(1)

 

(1)

A description of the maximum number of shares that may be purchased under our share redemption program is included in Note 12 – Commitments and Contingencies, of the Notes to the Consolidated Financial Statements contained in this report.

ITEM  3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM  5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.

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EXHIBIT INDEX

The following exhibits are included in this report on Form 10-Q for the period ended March 31, 2021 (and are numbered in accordance with Item 601 of Regulation S-K).

 

Exhibit

No.

 

Description

 

 

 

  3.1

 

Second Articles of Amendment and Restatement of SmartStop Self Storage REIT, Inc., incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on September 19, 2019, Commission File No. 000-55617

 

 

 

  3.2

 

Articles Supplementary for Series A Convertible Preferred Stock of SmartStop Self Storage REIT, Inc., incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on October 30, 2019, Commission File No. 000-55617

 

 

 

  3.3

 

Amended and Restated Bylaws of SmartStop Self Storage REIT, Inc., incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on September 19, 2019, Commission File No. 000-55617

 

 

 

  4.1

 

Distribution Reinvestment Plan Enrollment Form (included as Appendix A to prospectus), incorporated by reference to the Company’s Registration Statement on Form S-3, filed on November 30, 2016, Commission File No. 333-214848

 

 

 

  4.2

 

Second Amended and Restated Distribution Reinvestment Plan (included as Appendix B to prospectus), incorporated by reference to the Company’s Registration Statement on Form S-3, filed on November 30, 2016, Commission File No. 333-214848

 

 

 

  10.1

 

Executive Transition Services Agreement, dated February 26, 2021, by and among SmartStop Self Storage REIT, Inc., SmartStop OP, L.P., and SmartStop Storage Advisors, LLC, and Michael S. McClure, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on February 26, 2021, Commission File No. 000-55617

 

 

 

  10.2

 

Credit Agreement, dated March 17, 2021, among SmartStop OP, L.P., as borrower, KeyBank, National Association, as administrative agent, certain other financial institutions acting as joint book runners, joint lead arrangers, syndication agents and documentation agents, and certain lenders party thereto, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on March 17, 2021, Commission File No. 000-55617

 

 

 

  10.3

 

Amendment No. 3 to Third Amended and Restated Limited Partnership Agreement of SmartStop OP, L.P., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on March 25, 2021, Commission File No. 000-55617

 

 

 

 31.1*

 

Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 31.2*

 

Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 32.1*

 

Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 32.2*

 

Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101*

 

The following SmartStop Self Storage REIT, Inc. financial information for the three months ended March 31, 2021 formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.  The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

104*

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 has been formatted in Inline XBRL.

 

*

Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

SMARTSTOP SELF STORAGE REIT, INC.

(Registrant)

 

 

 

Dated: May 14, 2021

By:

/s/ James R. Barry

 

 

James R. Barry

 

 

Chief Financial Officer and Treasurer

(Principal Financial Officer)

 

76