Earnings Call Transcript - SMA Q2 2025

Operator, Operator

Thank you for standing by. My name is Kayla, and I will be the conference operator today. At this time, I'd like to welcome everyone to the SmartStop Self Storage REIT Second Quarter 2025 Earnings Call. Operator provided instructions. I would now like to turn the call over to David Corak, Senior Vice President of Corporate Finance and Strategy. You may begin.

David Corak, Senior Vice President, Corporate Finance and Strategy

Thank you, operator. Before we begin, I would like to remind everyone that certain statements made during today's call, including statements about our future plans, prospects and expectations may be considered forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements are subject to numerous risks and uncertainties as described in our filings with the Securities and Exchange Commission, and these risks could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in our earnings release that we issued last night, along with the comments on this call, are made only as of today. The company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, we will also refer to certain non-GAAP financial measures. Information regarding our use of these measures and a reconciliation of these measures to GAAP measures can be found in our earnings release and supplemental disclosure that we issued last night and are available for download on our website at investors.smartstopselfstorage.com. In addition to myself, today, we have H. Michael Schwartz, Founder, Chairman and CEO; as well as James Barry, our CFO. Now I'll turn it over to Mike.

H. Michael Schwartz, Founder, Chairman and CEO

Thank you, David. Thank you for joining us today for our second quarter earnings call to discuss our inaugural quarter as a New York Stock Exchange-listed company. I'll start with some introductory remarks on SmartStop and the industry before I hand it over to James to discuss the quarter. After that, we'll open it up for Q&A with James, David and myself. Before we dive into high-level remarks, a few highlights of our second quarter results. We posted a strong second quarter with our same-store revenue growth of positive 40 basis points; average occupancy, 93.1%; and FFO as adjusted per share of $0.42, all largely in line with our expectations. We maintained our full year 2025 same-store NOI guidance of 1.1%, and raised our FFO as adjusted per share guidance by $0.01 on the midpoint. We had an exceptionally robust quarter, both in terms of performance and activity. We raised approximately $1.3 billion of capital during the quarter. First, we raised $931 million in April with our initial public offering. Second, we raised CAD 500 million with our inaugural Maple bond in June at a sub-4% coupon. These transactions dramatically improved our balance sheet, setting us up for future growth. In June, we received an inaugural rating from DBRS Morningstar of BBB Mid with a Stable trend. And in July, we received an upgrade from Kroll to BBB Flat with a stable outlook. During the quarter, we acquired approximately $150 million of Class A storage properties on balance sheet, another $75 million in the managed REITs and put under contract a CAD 97 million portfolio in Alberta. These on-balance sheet acquisitions are primary Class A properties located in top markets with going-in yields in the mid-5 range with management upside, while the deals into the managed REITs are more stabilized, consistent with our communicated acquisition strategy. On the managed REIT front, we grew AUM by $78 million during the quarter and entered into a new retail distribution partnership with Orchard Securities, who we feel is a best-in-class distribution partner for our managed REIT products. We opened 3 new developments in Canada, all within our managed REITs, including the first purpose-built self-storage property in Montreal in nearly 2 decades. We also funded loans of $41 million to the managed REITs. Between these loans and our on-balance sheet acquisitions, we deployed about $200 million of accretive capital during the quarter. Additionally, we're proud of SmartStop's inclusion as a member of the Russell 3000 Index in late June. Lastly, but certainly not least, we bolstered our Board of Directors by adding Lora Gotcheva, who is an extremely experienced portfolio manager and REIT investor. Needless to say, it was quite an active quarter. With these accomplishments, we believe we are off to a strong start as a publicly traded company, executing on the story we laid out on our IPO roadshow in March. We feel SmartStop is well positioned to succeed and deliver on double-digit FFO share growth this year with a reasonable leverage profile. Turning to the industry. On the operational front, we continue to believe that 2025 will be incrementally better than 2024, but not as strong as a more normalized year in storage. Likewise, we believe we will see more normalized rental season as compared to the past 2 years, but again, still not quite a typical rental season. The recovery in storage is happening, but the choppiness in demand continues. As we saw during the quarter, we had a tough April, strong May and then a weaker-than-anticipated June. Industry move-in rates continue to stabilize, but are largely still negative year-over-year, though significantly less negative than the previous 2 years. Occupancies of large operators are in line or better than historical averages, but small operators have lost market share and now are operating at lower occupancies. Our customers' health remains strong to date. We've seen little to no impact from recent economic volatility in the U.S. and Canada. Website visits are up significantly; reservations remain strong; delinquencies remain at below average levels; and ECRIs remain healthy without a change in attrition. Canada continues to experience a more positive dynamic despite a softening economy. With less supply per capita, lower institutional competition and strong demographic growth and slightly different demand drivers in the U.S., the GTA has become an outperformer versus the U.S., and that trend continues in 2025. In the second quarter, our Toronto portfolio posted 2% same-store revenue growth on a constant currency basis with an ending occupancy of about 93%. With our year-to-date results through the busy season paired with an improving supply picture and steady demand, we remain optimistic on the sector's slow and steady recovery, creating momentum as we head into 2026. Now I'll turn it over to James to discuss the quarter.

James Barry, Chief Financial Officer

Thank you, Michael. I'll remind everyone that the second quarter was our last partial quarter of being a nontraded REIT. So the impacts from the April IPO are not fully reflected in the financial results. Starting with our operating performance. We are pleased to report that our same-store pool posted year-over-year revenue growth of 40 basis points with operating expense growth of 3.5%, leading to an NOI decline of 1.1%. The FX impact from our 13 Canadian same-store assets was a headwind of approximately 10 basis points to our overall same-store pool as we posted constant currency revenue growth of positive 50 basis points with expense growth of 3.6% and an NOI decline of 1%. Revenue growth was slightly less than expected for the second quarter, driven by weaker-than-anticipated demand in June, but we accomplished positive growth for the quarter, utilizing less marketing dollars and less concessions while maintaining strong occupancy of over 93%. On the operating expense front, property taxes were up 7.8%, with property insurance up 5.9% and marketing expense down 6.3%. We saw muted or negative expense growth in utilities, professional and administrative expenses. The result was that same-store operating expenses were up 3.5% year-over-year, better than our expectation. This combination led to slightly better-than-expected NOI in the quarter. Our same-store pool ended the quarter at 93% occupancy, up 40 basis points year-over-year, while average occupancy was 93.1%, up 90 basis points year-over-year. Our web rates were up approximately 2.4% year-over-year, while our achieved move-in rates were down 2.5% on average for the second quarter as the stabilization of the REIT environment slowly but surely continues. For reference, the sequential deceleration in year-over-year revenue growth from the first quarter was expected and was reflected in our full year guidance, driven by comps from last year. Keep in mind, our same-store revenue growth in 2Q 2024 was positive 1.3%. We did see healthy growth in revenue sequentially over the first quarter of 2025 of about 1%. As we moved into July, we started to see the stabilization of rates take effect as revenue growth has begun to reaccelerate. July ended occupancy at 92.8%, up 80 basis points year-over-year. In-place rates were up 10 basis points year-over-year and up 1.2% month-over-month versus June, and concessions continue to be very muted versus last year. On the external growth front, we acquired 7 properties for $150 million during the quarter, leading to full year acquisitions of $232 million through the end of June. As previously announced, we are under contract to acquire 5 properties in Canada for approximately CAD 97 million or about USD 70 million using today's FX rates. We expect this portfolio to close in late August. Including these under-contract properties, we will have fulfilled just over $300 million of our full year acquisition guide of $375 million at the midpoint. And taking a step back to September 30, 2024, we will have added nearly $500 million on balance sheet. These acquisitions, along with the assets acquired to date, are primarily Class A properties located in top 25 MSAs with going-in yields in the mid-5% range with management upside. Further, the properties are primarily in markets in which we already operate and add to our clustering. Turning to the managed REIT platform. Our 3 managed REIT funds, inclusive of 1031 eligible DST programs increased AUM by $78 million during the quarter, with AUM ending at nearly $974 million. We recognized gross fees of $3.7 million, and the managed REITs acquired 2 properties this quarter, both of which can be characterized as non-stabilized. The managed REITs have a combined portfolio of 48 operating properties and approximately 4 million rentable square feet at quarter end. We also funded $41 million of loans to the managed REITs in June. Between these loans and our on-balance sheet acquisition, we deployed about $200 million of capital during the quarter. The result of all of this is that for the second quarter 2025, we posted fully diluted FFO as adjusted per share and unit of $0.42. Obviously, a quarter with a lot of transactions given the various capital raises, but we are pleased with our second quarter results. We look forward to the rest of the year, which we expect to be more reflective of our go-forward earnings run rate. Speaking of the remainder of 2025, last night, we updated our guidance for the full year. We are now expecting same-store revenue growth in the 1.75% to 2.75% range with operating expense growth in the 4.25% to the 5.25% range, resulting in NOI growth of 0.6% to 1.6%. The other moving pieces as compared to our previous guidance were as follows: Better-than-expected execution on the Canadian Maple Bond, partially offset by higher interest rates in the U.S.; better-than-expected managed REIT EBITDA driven by AUM growth in the first half of the year and better margins; and slightly higher G&A driven by higher-than-expected performance-based equity comp. We did have that baked into the high end of our previous G&A guidance. We also narrowed our acquisitions guidance to $350 million to $400 million, maintaining the midpoint of $375 million. The result of these updates is that we are expecting FFO as adjusted per share of $1.85 to $1.93, up $0.01 from our previous guidance issued in May. Lastly, turning to the balance sheet. As we covered on our last call, our April IPO raised $931 million of gross proceeds. The use of those proceeds were primarily to redeem in full the $200 million Series A preferred and paid down debt to the tune of approximately $650 million. We flipped our senior credit facility and 2032 private placement notes to fully unsecured and rightsized our revolver to $600 million of capacity. With the flip unsecured and the step down in leverage, our overall cost on the revolver stepped down 65 basis points during the second quarter. In June, we priced our inaugural Maple Bond, raising CAD 500 million or approximately USD 370 million. The notes have a 3-year maturity and bear a coupon of 3.91%, which we hedged to an effective interest rate of 3.85% prior to pricing. We were extremely pleased with this execution, which serves to naturally hedge our Canadian FX exposure, term out our floating rate debt at an attractive coupon and ladder out our debt maturity schedule. Additionally, it allows us to more efficiently return to this market for potentially longer duration bonds in the future. In tandem with the Maple Bond issuance, we received an inaugural rating from DBRS Morningstar of BBB mid. And subsequent to quarter end in July, we received an upgrade from Kroll to BBB flat with a stable outlook. The completion of the SmartStop IPO in April is a transformational step forward with our entrance into the publicly traded markets, and our Maple Bond demonstrates SmartStop's unique access to multiple debt capital markets, giving us the flexibility to be opportunistic in both the U.S. and Canada. And with that, operator, we will open it up to questions.

Operator, Operator

Operator provided instructions. Your first question comes from the line of Jonathan Hughes with Raymond James.

Jonathan Hughes, Analyst, Raymond James

Can you talk about the revenue growth volatility last year? And what drove that and how that impacted your management of REIT and occupancy in the quarter and into the back half of this year?

James Barry, Chief Financial Officer

Yes. This is James. Thanks, Jonathan. Just to touch base and to kind of go back in time to 2024, keep in mind, as we said in our opening remarks that from a same-store perspective, we were cycling a much tougher comp here in the second quarter, and that was baked into our guidance that we would see that deceleration. That comp was positive 130 basis points in the second quarter of last year. The comps do get easier as we go through the rest of the year here.

David Corak, Senior Vice President, Corporate Finance and Strategy

Yes Jonathan, it's Corak. I'll add a couple of things about the second quarter and how we balanced rate and occupancy versus last year. I’d refer you to comments from the last earnings call about this balance and the optionality we have to push rate in markets where occupancy and demand were strong. That's what we did during the quarter. Breaking out the months: April had a really tough comp as discussed on the last call. May was a very strong month across nearly every metric. We started June strong, but demand tapered off about ten days in, so we pulled back on rates. We also ran a successful Fourth of July sale in late June, which shows up in the June rate data. For the quarter, move-in rates were down about 2.5% year-over-year, while web rates were up about 2%. Concession levels are down significantly from last year—roughly 20% and still improving. By balancing rate and occupancy and pushing rate where appropriate, we grew occupancy sequentially and year-over-year, and we did it with advertising spend down over 6% year-over-year. Looking year-to-date in the first half of 2025, move-in rates are down about 4% year-over-year; by comparison, the same period in 2024 they were down roughly 11 to 12% year-over-year. So results are still negative year-over-year, but much easier to overcome than in the past two or three years.

Jonathan Hughes, Analyst, Raymond James

Yes. I appreciate all that color. And then just one more. Could you kind of help us walk through or bridge the big moving pieces in guidance to get from the $0.42 per share of FFO in the second quarter to the implied guidance of $0.53 a share in 3Q and 4Q?

David Corak, Senior Vice President, Corporate Finance and Strategy

Yes, happy to. Let me walk through the major pieces, and I'll start on the capital side and then go to operations and management, et cetera. So on the capital side, the easiest thing to really point to is the Maple Bond transaction and the uses of proceeds on that deal. We paid off a CAD-denominated loan that was priced at 6.42%, acquired a $108 million portfolio with a mid-5% going-in yield, and then we paid down our revolver by over $200 million. That revolver was priced at 5.8% at the time in the second quarter. So you add all that up with paying that off with 3.91% debt, that's about $2 million per quarter in accretion, right? And we did all that in very late June, so there's very little benefit of that in the second quarter results. Keeping on the capital side, the revolver will be priced at unsecured levels now, whereas in the second quarter of the year we only got that benefit for about two-thirds of the quarter. And then SOFR is obviously expected to continue to drop based on the curve from the second quarter levels. We also took on two pieces of what I would call below-market debt in the quarter with a 5.15% loan, the Houston loan, and a 3.45% BC loan. So both are really attractive pieces of debt. We're also in the process of recapping the debt on the 10 joint venture properties. Those properties are underlevered, and the rates on the current debt were in the high 5s, I think 5.7% during the second quarter. Given the Maple Bond price, everyone has a sense of where Canadian interest rates are these days. So not only will there be proceeds out of that deal to us, but certainly some interest rate savings on that piece. And then lastly on the capital side, I'll remind everyone that we have a 75 basis point step down coming on the $150 million U.S. private placement that will occur on October 1. Flipping to the operations side, we certainly expect all three of our pools — the same-store pool, the non-same-store pool and the joint venture — to post sequential growth in net operating income versus the second quarter and certainly the first quarter. On the managed REIT side, average AUM in the third quarter and fourth quarter will be higher than in the second quarter. And I'll note the loan balance there is roughly $45 million to $50 million higher as we go into the second half of the year versus the first half of the year. We also have additional accretive growth coming. If you look at the implied external growth, I would highlight the Canadian five-pack, which will be roughly a high-5% going-in cap rate, and that should close at the end of this month. And lastly, on the G&A front, there was a lot of noise in the G&A line in the second quarter. The run rate on G&A is lower by about $1 million per quarter as we head into the third quarter. So when you add all of these pieces up, it obviously becomes quite material. So Jonathan, I hope that answers that question for you.

Operator, Operator

Operator provided instructions. And your next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

Todd Thomas, Analyst, KeyBanc Capital Markets

First, I just wanted to see, are you able to share July occupancy and rent trends? Any color on July specifically?

David Corak, Senior Vice President, Corporate Finance and Strategy

Yes. Sure, Todd. It's Dave again. July ended the month occupancy 92.8%, that is up 80 basis points year-over-year. So that occupancy gap actually widened in July. As James mentioned, in-place rates were up slightly. The interesting thing about July, and I mentioned this earlier, is concessions are down. They're down about 25% year-over-year. So we continue to use that lever a lot less, and we're using the advertising lever a lot less. But when you add up all 3 of these data points, we're only 7 days into August here, but it looks like revenue growth in July on a year-over-year basis is pushing 2%, right? So when you look at that, the reacceleration is already taking effect. It looks like August is shaping up to be a better month than July. In terms of the move-in rates, because I know you're going to ask this as well, they were down about 10% year-over-year in July, but are actually flat year-over-year to date in August. And the occupancy gap sitting here 7 days into August continues to be strong around 90 basis points year-over-year. So keep in mind that the comps are getting a little bit easier for us as we enter the second half of the year.

Todd Thomas, Analyst, KeyBanc Capital Markets

Okay. So I mean, it sounds like June was sort of the weaker month. It may have started off okay, but I think you said about 10 days in demand started to taper off. Sort of looking back, any sort of insight around more specifically what happened in June because it sounds like July trends have recovered some ground and maybe are holding a little bit here early on in August. So really a couple of weeks in June, any insight around that period specifically?

James Barry, Chief Financial Officer

Yes, Todd, this is James. I'll jump in there and say, well, first of all, I think what we saw was just a little bit more competitive pressure on the pricing side. Obviously, we were still able to maintain strong occupancies over the course of June, but we had to get a little more competitive on the rate front. And obviously, it's a market-by-market analysis, but it's pretty consistent with what you've heard across the entire industry. What we feel strongly about and what we feel comfortable in terms of our outlook for the rest of the year is, as David mentioned, kind of the reacceleration that we're seeing on a year-over-year basis, also coupled with we're still seeing really strong activity, right? Some other metrics for the month of July, we were actually up 6.5% from a rental perspective. So we are still seeing that demand come in. And part of that is from the 4th of July sale, but we're still seeing a lot of activity. We're not having to push as hard on the marketing lever as we get more efficient on that front. And we are seeing reductions in the overall promotional dollars we're offering.

H. Michael Schwartz, Founder, Chairman and CEO

And Todd, I'll just add that, obviously, the housing market remains anemic. So there hasn't been any pickup there. And so I think one thing that's different this year is that rates have stabilized. And we've been able to hold rate and even drive it, as we've said, in certain markets without sacrificing occupancy. Last year, we would sacrifice occupancy when we started to push rates. In addition, we want to underscore that we are doing that today with lower discounts and promotions. And that's not something that we've been able to say for 2 years. So for an example, the first half 2025, our achieved rate is up 50 basis points at the 92.7% occupancy. Our second quarter occupancy is up at 93%. And that concession aspect that David talked about, I think, is incredibly important. That first half of the year, we're down 20%. The second quarter, we're down 25%. And so when we take a look at this competitive rate environment, we've been very clear that the market has bottomed. The market is recovering. It's slow, it's steady, it's methodical, and it's not a hockey stick. And I think we've been very, very clear with that. And so also just taking a look at our website traffic, which is something that is incredibly important. The second quarter traffic have been up mid-teens year-over-year. June and July, our traffic is up 32% and 45%. And so the reality is the demand is there, and it's just a matter of who's going to be capturing the demand. So we feel pretty comfortable from that perspective.

Operator, Operator

Operator provided instructions. And your next question comes from the line of Wes Golladay with Baird.

Wes Golladay, Analyst, Robert W. Baird

I'm just going to ask a big-picture question. I understand the comp story, but it sounds like demand is picking up based on the commentary. Do you think we may have experienced a short, roughly two-month soft patch because of uncertainty around the tariffs and the Big Beautiful Bill, and now people are returning to normal? Did that soft patch have any impact?

David Corak, Senior Vice President, Corporate Finance and Strategy

Yes. I mean, look, sorry, it's Corak. I do think that as we got through the summer months, you saw the volatility in demand, right? Certain months were good, certain months were not good, right? It was, to use the hockey term, the puck hit the backboard. That's not a hockey term. All right. So the thing is that when we went into June, we felt good about where the rate environment was. We felt good about occupancy and pulled back, right? And so it's really hard to attribute exactly what happened to that demand. And right, we've been very clear on that from the get-go that it's really hard to point to one thing or another. But obviously, the beauty of self-storage is that there are a lot of different demand drivers out there. So I'd like to call it a soft patch, and we'll see where the rest of the year shakes out, but we are feeling better as we head into the back half of the year.

H. Michael Schwartz, Founder, Chairman and CEO

Yes. I'd say that from a customer standpoint, I can't say that at this point we're seeing any impact to date in the key metrics we follow, whether in the U.S. or Canada. I think demand is actually better now than it was last year and better than 2019. Consumer behavior—acceptance, ECRIs, bad debt, length of stay—shows no significant changes. It's probably a little too early to tell, but as we've said before, we do see people adjusting to the new normal, which is that rates are not going back to zero. If you live in Las Vegas and your grandkids are in North Carolina, you're not waiting for rates to return to zero to go spend time with them. We're starting to see small positive signs that people are on the move again.

Wes Golladay, Analyst, Robert W. Baird

Okay. And then just one final one on the agreement with Orchard Securities. Can you talk about what that means for the company, I guess, versus original plans maybe 3 or 4 months ago? Do you anticipate raising more money, better terms? Just kind of a little bit more discussion on that.

H. Michael Schwartz, Founder, Chairman and CEO

Yes, absolutely. We felt it was a good time to kind of change partners. Specifically Orchard, I think it is a good fit for us with respect to some of the 1031 Delaware Statutory Trust programs that we currently have in the market. And I think to your point is we are also able to kind of negotiate a lower-cost deal that we believe will help our overall shareholders out. And so I think all in all, it's a good trend. You do take a few steps back in these types of transition to new firms. But nonetheless, we have launched our second Delaware Statutory Trust program. And we actually just started to see equity start to flow in this week. And obviously, July, August tend to be pretty slow month. So we feel pretty good about the relationship, pretty good about the positioning and the continued growth in that area of our business.

James Barry, Chief Financial Officer

Yes. Wes, to dive a little deeper into the managed REIT guidance and the update we provided: the transition to Orchard is a major reason we raised our EBITDA guidance. Because of the lower-cost deal Michael mentioned, we are saving and becoming more efficient on that line item. That, together with acquisitions and property openings outlined in the second quarter and the underlying performance of the managed REIT properties driving incremental fees over the rest of the year, are the three components behind our decision to raise managed REIT guidance last night.

Operator, Operator

Operator provided instructions. And your next question comes from the line of Nicholas Yulico with Scotiabank.

Nicholas Yulico, Analyst, Scotiabank

Sticking with the managed REIT business, can you just give us a feel for like at what point in the year you think you may have some more visibility on how to think about like the forward AUM of the business as we're thinking about potential impact in 2026?

H. Michael Schwartz, Founder, Chairman and CEO

Right now we're at almost $1 billion of assets under management in those programs. They provide benefits from additional economies of scale, property management fees, tenant insurance, asset management fees, and some acquisition fees. We achieved about $4 million in revenue in the second quarter, a little higher than we had guided. We will see how this year unfolds given macro volatility and any recycling events that may occur, which we expect to be more likely in 2026. It's a little too early to provide significant detail, but as we move through the third and fourth quarters we'll have a better picture.

Nicholas Yulico, Analyst, Scotiabank

Okay. And then second question is just going back to the guidance on same-store revenue. I know you guys just look at this sort of total revenue. But in terms of the components, is it right to think that the adjustment lower on same-store revenue growth was more of a rate than occupancy issue?

James Barry, Chief Financial Officer

Yes. If we take a step back on how we arrived at our second quarter same-store revenue and the tightening of that range, we lowered the top end by about 75 basis points while raising the bottom end by about 25 basis points. Much of that reflected what we saw in the second quarter, particularly in June. While we don't break out attribution between occupancy and rate because we're constantly adjusting across markets, we feel very good about occupancy. We did see some weakness in move-in rates in June, and that is what drove the tightening of the revenue range from our previous guidance.

Operator, Operator

Operator provided instructions. And your next question comes from the line of Ki Bin Kim with Truist.

Ki Bin Kim, Analyst, Truist

Can you talk about the Toronto operations? I know you had volatile comps in that market, but your same-store revenue cadence dropped to about 2% from the prior quarter. Can you discuss the comps and, overall, your views on the Toronto market and how a weak housing market might affect it going forward?

David Corak, Senior Vice President, Corporate Finance and Strategy

So as you know, Canada is a very different environment than the U.S. from a storage perspective, different demand drivers, et cetera. But it's been a nice outperformer for us. On a constant currency basis, to your point, same-store revenue growth was up 2% in the second quarter and about 4%, 4.5% year-to-date. The comp was obviously much harder in the second quarter. It was 1.3% in 2Q 2024. So a lot harder to overcome that comp. But still the 2% was a solid print for us in the second quarter. If you look at our JV properties that would meet the definition of same-store, they actually did even better than that. So we always like to incorporate that as well. We're sitting here today in July with occupancy on our 13 same-store Toronto assets at 92.8%, down a little bit from last year. Move-in rates were down about 5% in the second quarter, but the overall demand remains pretty strong. I'm going to turn it over to Michael to give some higher-level thoughts on Canada.

H. Michael Schwartz, Founder, Chairman and CEO

I want to address the economy and demand in Canada. We have not seen any weakness from changes to immigration policy or tariffs. From our boots on the ground, it feels like a recession in Canada right now, yet our rentals increased 10% in the second quarter and 17% in July. Given our operational advantages there and other positive storage-related trends, we feel good about the short-, medium- and long-term prospects in the Canadian market. If Canada enters a significant recession, we expect it to react similarly to the U.S.: some more price-sensitive customers will cycle out, but others will move in who need storage because of the recessionary environment. Demand drivers are largely the same as in the U.S., but the emphasis is different: in Canada demand is more structurally rooted in space constraints, urban densification, immigration patterns and lifestyle needs. We see stronger demand from life-stage transitions such as divorce, death, downsizing, and seasonal needs because most of Canada has four seasons, as well as from urban constraints and smaller, denser living environments. Overall the market remains significantly undersupplied. We operated in Toronto for 13 years before we decided to expand into other major metropolitan markets, and we are already seeing strong results from acquisitions and improved aggregate performance with that diversification.

Ki Bin Kim, Analyst, Truist

Switching topics a little bit here. On your managed REIT platform, can you remind us and walk us through what KPIs you're setting for third-party equity growth, especially as we look toward 2026? I believe when we were all working on our IPO there was expected growth in the fee business. How does that tie into how much AUM you want to grow? Can you provide some simple KPIs for us?

James Barry, Chief Financial Officer

Yes, Ki Bin, this is James. Just to speak to kind of some of the metrics, obviously, the metrics we are guiding to are 2 of the key ones we're focused on, right, whether that be managed REIT EBITDA, which we put out a range for, as well as the AUM growth. The equity is a leading indicator for that AUM growth. But remember, AUM sequencing versus equity raise, in a lot of cases, tends to be mismatched. Coupled with the fact that we've got some other events that are going to occur. David alluded to the lockup of the retail shareholders expiring on October 1, whatever recycle is going to occur as a result of that, which, again, is very difficult to forecast and foresee at this time. So we're going to be monitoring the equity raise. The DST programs, right, those are discrete programs that have defined overall equity raises. So we've got 3 programs in the market, one is $30 million, one is $62 million and one is $54 million. Once those are done, right, then the equity raise for that program stops and then we're trying to backfill with more product. But overall, we're trying to drive AUM growth because it's a very attractive business and a very accretive business to us to kind of supplement and scale our platform.

Operator, Operator

Operator provided instructions. And your next question comes from the line of Michael Mueller with JPMorgan.

Michael Mueller, Analyst, JPMorgan

I guess following up on the distribution questions. Considering you switched the partner, should we look at that as a sign that you're kind of doubling down on the managed REIT platform and it's really kind of a vehicle that you want to be in the longer term, maybe compared to what you were thinking a year or so ago?

H. Michael Schwartz, Founder, Chairman and CEO

I think we've been very clear that we think that there's benefits to the managed REITs in the short and probably the mid term, the long term, I don't foresee us being in the managed REIT business over the long term. As you know, with the dislocation in the stock market a few years ago, the managed REIT business helped us continue to grow off balance sheet. And so no, I would say that it's just a transition to a partner to capitalize on some programs that we have on the market to get some additional economies of scale, which all then create some future growth for SmartStop in the future.

Michael Mueller, Analyst, JPMorgan

Got it. Okay. And then separately, how should we be thinking about what's in the pipeline in terms of forward acquisitions, split between focusing on building scale in existing markets versus moving into newer markets going forward?

H. Michael Schwartz, Founder, Chairman and CEO

Well, all right. Well, let me just step back. Obviously, I want to emphasize that we were incredibly disciplined during kind of the increase in interest rates. We only bought one asset. In the past 6 or 9 months, we saw some, I think, a lot of great opportunities out there. And so in pricing and product. And so we bought approximately about $0.5 billion of high-quality self-storage properties since September of last year. We're still seeing a lot of attractive opportunities out there on the stabilized front, both the U.S. and Canada. The deals that we've closed and that we have in contracts are just great example of those. Those mid-5 cap rates with nice management upside. And you know what we're just encouraged by the pipeline, the consistent deal flow and sellers that are far more rational and reasonable than they were a few years ago. There are larger portfolios out there. But you know what, we've been primarily focusing on the onesies and twosies, which we believe we can create some additional value. And so we've acquired or have under contract about $300 million. Our guide was $375 million. So that's a really meaningful growth for us. It is enough for us to kind of move that needle. And that's obviously because of our size. And so deals in the pipeline, we haven't seen a lot of movement in the bid-ask spread. I think it's been pretty consistent. But we'll see how that occurs and shakes out in the next few months. And then from a Canadian perspective, I think that we're seeing a healthy amount of opportunities that would make sense for us. And obviously, lower interest rate environment there obviously helps out dramatically. But in addition, the buyer pools are much different than Canada and U.S. So I think overall, we feel pretty comfortable and confident about where we're at and fulfilling kind of our guide.

James Barry, Chief Financial Officer

Yes. I'll just add to that. If you look at what we've acquired, both leading into December, in the back half of 2024, and year-to-date in 2025, I think it represents the opportunities we're seeing and what we'll target. We will focus, though not exclusively, on acquiring to build scale and add to the clusters we've been discussing. The Houston portfolio we acquired in June materially increases our operations in that market, bringing us into the double digits. The Alberta portfolio we have under contract, which we've disclosed, complements the three operating assets we already have in the Edmonton market, and those assets have performed quite well. Our platform works in that market, so we're excited to scale. We also see opportunities to add one-off assets in markets where we already have some exposure and want to increase scale to reach critical mass.

Operator, Operator

Operator provided instructions. And your next question comes from the line of Spenser Glimcher with Green Street.

Spenser Allaway, Analyst, Green Street

I realize Alberta is a smaller market for you guys, but can you just provide a little color on the market just in terms of existing supply landscape? And then as you think about looking to expand any existing properties or look at additional acquisitions in the province, do you have any concerns over this being an economically sensitive market, just given its dependence on energy?

James Barry, Chief Financial Officer

Yes, Spenser, great question. First of all, we've been operating in the Edmonton market within managed REITs for almost three years now, so we've experienced multiple busy seasons there. As I said earlier, our platform continues to work, and we're excited to continue expanding in the major CMAs across Canada. Whether that's in the GTA, where we have a strong and storied track record, or in Vancouver where we're already operating within managed REITs, we're also expanding our presence in the Alberta market. The supply story in both major metros, Edmonton and Calgary, remains attractive, especially relative to the U.S. There is new supply in Calgary, but we're excited about entering that market, and Edmonton is actually relatively low, still under three square feet per capita in that market. More importantly, this gives us an opportunity to reach eight operating assets all within a reasonable drive time, which will help us be much more efficient operationally.

H. Michael Schwartz, Founder, Chairman and CEO

And I think you just have to also add that with less sophisticated operators and leveraging our platform, I think it's a recipe for some really nice growth in those markets in various economic times.

Spenser Allaway, Analyst, Green Street

Okay. Great. And then have there been any deal opportunities or underwriting in terms of the maritime provinces? I just know that there is a substantial amount of supply in those markets, especially on the residential side. So potentially a good indicator for future demand.

James Barry, Chief Financial Officer

Yes. What I'll say is we see everything in Canada, and our major focus is the top six CMAs. We want to be in those markets: the GTA, Vancouver, Montreal, Edmonton, Calgary and Ottawa. That's our focus. We still look at other opportunities as they come across our desk. But to your point, if there isn't sufficient population density, we're not going to pencil those deals or seek to acquire them. There are a lot of ripe opportunities for us to grow in Canada's major markets first.

Operator, Operator

Operator provided instructions. And your next question comes from the line of Matt Kornack with National Bank.

Matt Kornack, Analyst, National Bank

Sorry to keep on the Canada theme here. But there's been some pretty sizable transactions in Toronto as well as West at ridiculously low cap rates, it looks like. Does that make it more difficult for you to acquire? And have you thought of maybe kind of doing some capital recycling within the existing portfolio given where some of those assets have traded?

H. Michael Schwartz, Founder, Chairman and CEO

Well, I think that's good news, bad news, right? Good news is I saw the opportunity in 2010, and we've built upon it, and we've created an amazing portfolio. I think the bad news is that the cap rates in some of those deals were incredibly low. I believe one of them was a 2.5% cap rate. However, from my understanding, that buyer is not trying to buy anymore, they're trying to just figure out day-to-day operations with what they're doing. So I think from our perspective, Canada is really a marathon. It's not a sprint. And I think we've built just a high-quality portfolio in Toronto, and we're now starting to build a high-quality portfolio in the major metropolitan cities. I think that there's just a tremendous amount of additional growth that I think that we can achieve in undersupplied markets that have a lack of, I think, some sophisticated institutional markets. And so I think from our perspective, we're in a growth mode. We have a very strong pipeline of development deals, primarily it will probably go on our managed REITs because they'd be dilutive to SmartStop. And so I think that there will always be certain times in cycles where you can point to was that a potential recycling event. I can now look back and say, you know what, you look back and say, if you had recycled, you would have probably sold a lot less than what the value of that real estate and the additional cash flow on a go-forward basis.

James Barry, Chief Financial Officer

I think the other thing, as it relates to this question that's important to keep in mind is, in a way, we did capital recycle. We levered up in Canadian dollars through the Maple bond. We leveraged the portfolio that we've created thus far in the GTA at very attractive financing, and we brought it back across border and deployed it at mid- to high 5 cap rate deals that we acquired in the States, right? So that is an attractive opportunity for us to, in essence, retail capital without actually selling assets.

Matt Kornack, Analyst, National Bank

Makes sense. Maybe switching to the states. As we think of kind of a rebound in the space, is there a single kind of forward-looking indicator or catalyst, whether it's housing market transactions or something to that effect that we should be looking for to kind of give us comfort that we are, in fact, inflecting and that demand is going to pick up?

H. Michael Schwartz, Founder, Chairman and CEO

Well, I don't want to beat a dead horse, but the first thing is you have to focus on supply. We had a 10-year cycle of supply when it should have been a five-year cycle, and then COVID hit and it became 10 years. So we're focused on supply, and we're starting to see real absorption accumulating. It is going slow — we all want it to be immediate and a hockey stick, but it's not. The good news is that will keep developers on the sideline longer. As we get through this choppiness, I can see better days ahead for storage because supply will likely be more muted than many expect. So first, focus on supply. Second, focus on our portfolio and optimize it as much as possible. We have shown we'll emphasize rate over promotions and discounts. It's interesting how we've performed even without a full housing recovery; storage operators now have better technology, better sophistication, and better access to data. In our relatively small portfolio, we're making about three million pricing changes a month and modifying our approach based on supply and aggregate demand. When the next demand driver comes — whether it's a housing rebound, rental trends, another COVID-like event, hurricanes, earthquakes, or something else — SmartStop Storage is prepared to capture the upside.

Operator, Operator

And there are no further questions at this time. H. Michael Schwartz, I turn the call back over to you.

H. Michael Schwartz, Founder, Chairman and CEO

Thank you, operator. It's been an amazing first 4 months as a publicly traded company. We look forward to the next 2 quarters in 2026. Thank you for your time and your interest in SmartStop Self Storage, the smarter way to store. Have a great day.