SmartStop Self Storage REIT, Inc. (SMA) Q3 2025 Earnings Call Transcript

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Overview

The earnings call summary presents a mixed outlook. While there are positive elements such as expected margin expansion, cautious optimism about 2026, and strategic partnerships, there are also concerns like the inability to provide specific financial guidance, reliance on concessions, and unresolved issues with a bankrupt tenant. The Q&A section reveals management's reluctance to disclose certain information, which could raise investor concerns. Overall, the sentiment is balanced, leading to a neutral prediction for the stock price movement.

Key Financial Performance

Same-store revenue growth 2.5% year-over-year increase. This was achieved with less concessions and limited marketing dollars while maintaining strong occupancy of over 92%.

Operating expense growth 4.5% year-over-year increase. Property taxes were up 4.8%, marketing expense was up 1.8%, and property insurance was down 4.5%.

Net Operating Income (NOI) 1.5% year-over-year increase. This was in line with expectations, despite a 10 basis point FX headwind from Canadian assets.

Average occupancy 92.6%, up 40 basis points year-over-year. Ending occupancy was 92.4%, up 10 basis points year-over-year.

Web rates Down 3.9% year-over-year for the third quarter. Achieved move-in rates were down 8.5% on average.

FFO as adjusted per share $0.47, which was $0.02 below expectations. This was due to an $825,000 performance-based equity compensation expense and a $730,000 annual NOI loss from an industrial tenant default.

Acquisitions $83 million for 6 properties and $1 million for a piece of land during the quarter. Total acquisitions for the year through September were $318 million.

Managed REIT fees $3.6 million in gross fees. Managed REITs had assets under management of $972 million and a combined portfolio of 48 properties.

Interest income $1.5 million during the quarter, driven by a $20 million increase in loans and preferred investments to managed REITs.

Maple bond issuance CAD 200 million raised at a 3.89% coupon with a 5-year maturity. This was multiple times oversubscribed.

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Operating Highlights

Argus Transaction: Acquired Argus Professional Storage Management, doubling store count to over 460 properties in North America and increasing net rental square feet to over 35 million. This acquisition enhances revenue management, property clustering, and provides access to a captive pipeline of acquisition targets.

Mobile App and Smart Pay: Nearly 50,000 customers have downloaded the mobile app, and 25% of new rentals utilize the Smart Pay feature for payments.

Canadian Maple Bond Market: Raised CAD 200 million at a 3.89% coupon with a 5-year maturity, marking a return to the Canadian Maple bond market.

Market Expansion in Canada: The Argus acquisition paves the way for expanding third-party management in Canada, an underserved market.

Same-Store Revenue Growth: Achieved sector-leading same-store revenue growth of 2.5% with average occupancy of 92.6%.

Operational Efficiencies: Reduced property insurance costs by 4.5% and maintained delinquencies at below-average levels.

Third-Party Management Strategy: Entered the third-party management business through the Argus acquisition, avoiding the need to develop a platform from scratch.

Debt Refinancing: Refinanced joint venture debt in Canada, reducing the weighted average cost from 5.7% to 3.87%.

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Risk or Challenges

Unexpected tenant default: A tenant renting industrial space unexpectedly defaulted on their lease and vacated the space, resulting in a loss of approximately $730,000 in annual NOI. This was the company's only industrial space, and efforts are underway to find a replacement tenant or redevelop the space into traditional self-storage.

Performance-based equity compensation expense: The company incurred an approximate $825,000 expense due to performance-based equity compensation, which was not initially accounted for in the full-year guidance. This impacted FFO as adjusted per share by about $0.015.

Choppy self-storage market: The self-storage market remains volatile with uncertain capital markets and broader economic challenges, impacting customer demand and rental rates.

Weaker-than-expected September demand: While July and August showed healthy demand, September was weaker than anticipated, reflecting ongoing choppiness in customer demand.

Negative year-over-year move-in rates: Move-in rates continue to be negative year-over-year, though the decline is less severe compared to previous years.

Rising operating expenses: Operating expenses grew by 4.5% year-over-year, driven by increases in property taxes and marketing expenses, though some categories like property insurance saw decreases.

Retail shareholder lockup expiration: The expiration of the retail shareholder lockup led to elevated stock price volatility and trading volume, though these have since normalized.

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Guidance & Outlook

Full Year 2025 FFO Guidance: Maintained the midpoint of full year 2025 FFO as adjusted per share guidance at $1.87 to $1.91.

Revenue Growth Expectations: Same-store revenue growth is expected in the range of 1.9% to 2.3% for the full year 2025.

Operating Expense Growth: Operating expense growth is projected in the range of 4.0% to 4.4% for the full year 2025.

NOI Growth: Net Operating Income (NOI) growth is expected to be in the range of 0.9% to 1.1% for the full year 2025.

Acquisition Guidance: Narrowed acquisitions guidance to $365 million to $385 million for the full year 2025.

Market Recovery Outlook: 2025 is expected to be incrementally better than 2024, with a slow and steady recovery in the self-storage sector, creating momentum heading into 2026.

Rental Rates and Occupancy: Move-in rates are stabilizing but remain negative year-over-year. Occupancy levels are being maintained above 92%, with October ending occupancy at 92.5%, up 20 basis points year-over-year.

Debt and Financing: Raised CAD 200 million in Maple bonds at a 3.89% coupon with a 5-year maturity. Refinanced joint venture debt with a CAD 160 million term loan at a fixed interest rate of 3.87%.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:How is the company approaching acquisitions given the current volatility in capital costs and leverage?

A:The company aims to maintain a target leverage range of 5 to 6x. While they would like to grow the portfolio by 10% or more annually, achieving this would require issuing common equity, which they are not willing to do at unfavorable cap rates. They plan to be prudent and opportunistic in deploying capital.

Q:What is the integration plan and timeline for the Argus acquisition?

A:The company does not plan to fully integrate Argus into SmartStop. Instead, they will offer a menu of options to entrepreneurial owners, allowing them to choose their level of integration. They expect to see some benefits from the acquisition within 60 to 90 days from a technology perspective and will hold a large operator meeting in January to engage with owners.

Q:What are the considerations for the implied fourth-quarter FFO and its implications for 2026?

A:The implied fourth-quarter FFO of $0.56 is based on a share count of 59.2 million. It reflects the impact of various financing activities completed this year. G&A expenses are expected to normalize between $7 million and $9 million. The company will provide detailed guidance in February.

Q:How does the company source investment opportunities, and what is the conversion rate?

A:The company sources opportunities through brokers, owners, developers, and third parties. They believe they see most acquisitions in the U.S. and Canada. While they did not provide a specific conversion rate, they are confident in their ability to transact on desired acquisitions.

Q:What is the company's macroeconomic outlook for 2026, and how does it impact move-in rents and occupancy?

A:The company is cautiously optimistic about 2026, expecting reduced impact from new supply in the U.S. self-storage market. They anticipate natural absorption in the market and believe urban densification and barriers to new supply will support demand.

Q:What synergies are expected from the third-party managed platform?

A:The company expects margin expansion in markets with at least 10 properties, with margins 300 to 500 basis points higher than the portfolio average. They also anticipate improved pricing strategies and expense control as they integrate data from the Argus platform.

Q:What is the outlook for the Toronto market in 2026, including new supply and performance?

A:The Toronto market is experiencing new supply, with approximately 10% of existing stock under construction. This is expected to drop to 5-6% next year. The company remains optimistic about the market, citing high occupancy rates and barriers to new supply.

Q:What is the company's stance on deploying capital through the SmartCentres JV?

A:The company is committed to the SmartCentres JV and sees it as a valuable opportunity to leverage underutilized land in retail locations for self-storage development. They plan to expand in Canada while maintaining this partnership.

Q:What is the potential recapture rate for managed REIT funds post-IPO lockup?

A:The company is currently behind in launching new products due to a transition to a new managing broker-dealer. They expect to evaluate the recapture rate in 2026.

Q:Can the company disclose the industrial tenant that went bankrupt?

A:The company is limited in what it can disclose about the tenant due to ongoing evaluations of options related to the contract. They mentioned potential redevelopment or re-leasing opportunities for the affected property.

Q:How much higher are margins in markets with at least 10 properties compared to others?

A:Margins in markets with at least 10 properties are generally 300 basis points higher than the portfolio average, and in Toronto, they are closer to 500 basis points higher.

Q:What is the rationale for adding an institutional acquisitions joint venture?

A:An institutional acquisitions JV would allow the company to compete for larger deals by contributing a smaller percentage of the total capital, making such deals more achievable and accretive.

Q:Is the company shifting its revenue management strategy to focus on occupancy?

A:Yes, the company is currently employing an occupancy-focused strategy to maintain high occupancy during slower seasons, which positions them for better economic occupancy during busier seasons.

Q:What is driving the slight uptick in fourth-quarter same-store revenue guidance?

A:The uptick is primarily driven by reductions in operating expenses rather than increases in same-store revenue.

Q:How is the company addressing competitive pressures in revenue management?

A:The company has reduced its reliance on concessions compared to last year but is utilizing them more in the current quarter. Marketing spend has also been reduced, and rentals have increased, indicating the strategy is effective.

Q:Review of Unclear Management Responses

A:Management avoided directly answering the question about disclosing the industrial tenant that went bankrupt, citing limitations due to ongoing evaluations of options related to the contract.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

SMA Transcript

SmartStop Self Storage REIT, Inc. (SMA) Q3 2025 Earnings Call Transcript

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