S-11/A: SmartStop Self Storage REIT Files Amendment No. 3 to Form S-11 Registration Statement

SmartStop Self Storage REIT has filed an amendment to its registration statement, detailing financial transactions, property acquisitions, and debt management activities.

Summary

• SmartStop rolled a CAD denominated hedge on January 16, 2024, and again on February 16, 2024, without cash settlement, extending the maturity to March 7, 2024, and paid approximately $0.5 million at settlement.
• The company paid a monthly stockholder servicing fee to its Dealer Manager, which was adjusted for the year ended December 31, 2022, based on the cessation date of March 31, 2022.
• SmartStop acquired SST IV on March 17, 2021, and SSGT II on June 1, 2022, ceasing to earn certain fees, and now includes their Tenant Protection Program revenue in ancillary operating revenue.
• SmartStop funds certain costs of SST VI's share sales, and in return receives Series C Units in SST VI's OP, with the excess funding reducing Managed REIT Platform revenues from SST VI.
• As of December 31, 2023, $1.5 million was available to be drawn on the SSGT III Mezzanine Loan.
• Approximately $76.3 million in cash was used to pay off $75.1 million of SSGT IIs debt and $1.2 million in transaction costs.
• Upon acquisition of SSGT II, a gain of approximately $16.1 million was recorded to reflect the fair market value of our special limited partnership interest in SSGT II operating partnership.
• Approximately $8.0 million of intangible assets acquired related to the intrinsic value of a purchase and sale agreement for the acquisition of a property in San Gabriel, CA.
• Approximately $54.3 million in cash was used to pay off $54.0 million of SST IV debt and $0.3 million in transaction costs.
• As of December 31, 2023, the Self Storage segment had approximately $52.2 million of goodwill, and the Managed REIT Platform segment had approximately $1.4 million of goodwill, net of accumulated impairment charges of approximately $24.7 million.
• We deferred payment on a SOFR cap until January 2, 2025, at which point, monthly payments will become due on the first of each month until the date of its maturity.
• The value of certain SOFR interest rate caps, net of approximately $8.2 million in deferred payments, as well as the fair value of our CORRA swap are included.
• Joint venture properties were acquired through the SSGT II Merger, which closed on June 1, 2022, and the SST IV Merger, which closed on March 17, 2021.
• A property was acquired on January 12, 2023 in connection with a purchase agreement assumed in the SSGT II Merger.
• On April 15, 2021, we purchased the Oakville III Property, partially financed with a CAD $16.3 million loan, which was fully paid off on March 24, 2023.
• A fixed rate loan encumbers 29 properties with monthly interest only payments until September 2021, at which time both interest and principal payments became due monthly.
• As of March 31, 2023, a Total Leverage Ratio Event had occurred, and the interest rate on such Note increased to 5.28% prospectively.
• A fixed rate, interest only loan encumbers 10 properties with monthly interest only payments until June 2022, at which time both interest and principal payments became due monthly.
• On March 17, 2021, in connection with the SST IV Merger, we assumed a $40.5 million fixed rate CMBS financing with KeyBank as the initial lender.
• The SSGT III Mezzanine Loan expired on the maturity date of August 9, 2024.
• On November 16, 2023, we, through eight of our wholly-owned Canadian subsidiaries entered into a term loan (the 2028 Canadian Term Loan) with affiliates of QuadReal Finance LP, receiving net proceeds of $110.0 million CAD on such date.
• The 2028 Canadian Term Loan is secured by eight Canadian properties, has a maturity date of December 1, 2028, and carries a fixed interest rate for the term of the loan of 6.41%.
• On March 2, 2023 the Compensation Committee of the board of directors approved the vesting of the 2020 performance grant at 200% of the targeted award.
• Hurricane Helene caused record flooding in late September 2024 in Asheville, North Carolina, resulting in a net casualty loss of approximately $4.6 million, which was offset by a recorded receivable related to pending insurance claims.

Sentiment

Score: 7

Explanation: The document is generally positive, highlighting growth and strategic initiatives, but also acknowledges risks and challenges. The sentiment is cautiously optimistic.

Positives

• The company has successfully rolled over hedges without cash settlement, indicating effective risk management.
• The company has successfully integrated Tenant Protection Program revenue from acquired entities into ancillary operating revenue.
• The company has a $1.5 million line of credit available for SSGT III.
• The company recorded a gain of approximately $16.1 million upon the acquisition of SSGT II.
• The company has a new $110 million CAD term loan with a fixed interest rate of 6.41%.
• The company has a receivable related to pending insurance claims that offset the casualty loss from Hurricane Helene.

Negatives

• The company paid approximately $0.5 million at settlement of a CAD denominated hedge.
• The company incurred approximately $1.2 million in transaction costs related to the SSGT II acquisition.
• The company incurred approximately $0.3 million in transaction costs related to the SST IV acquisition.
• The company has deferred payment on a SOFR cap until January 2, 2025.
• The SSGT III Mezzanine Loan expired on August 9, 2024.
• A net casualty loss of approximately $4.6 million was recorded due to Hurricane Helene.

Risks

• The company is exposed to fluctuations in foreign exchange rates, particularly with the CAD.
• The company is exposed to interest rate risk, particularly with variable rate debt.
• The company is exposed to the risk of property damage from natural disasters, such as Hurricane Helene.
• The company is exposed to the risk of a Total Leverage Ratio Event, which can increase interest rates on debt.

Future Outlook

The document does not contain any specific forward-looking statements or guidance.

Management Comments

• Management believes that the self storage sector has distinguished itself as a core asset class with attractive long-term organic growth characteristics and strong free cash flow generation.
• Management expects long-term self storage drivers, which include population growth, the percentage of renter occupied housing units and self storage supply constraints, to continue to underpin competitive risk adjusted returns relative to the broader real estate sector.
• Management believes Canada presents a compelling investment opportunity as home to several of the most attractive North American storage markets, highlighted by low supply per capita, increasing product utilization, top-tier demographic trends, and limited institutional competition.

Industry Context

The document highlights the self storage industry's resilience and growth potential, particularly in the context of population growth and urbanization trends. It also notes the fragmented nature of the industry, suggesting opportunities for consolidation and growth for larger operators.

Comparison to Industry Standards

• The document notes that the company's same-store portfolio has averaged 8.3% NOI growth over the three-year period ended September 30, 2024.
• The document notes that the company's same-store revenue growth was 7.3%, or approximately 10 bps higher than the U.S. Publicly Listed REITs over the same period.
• The document notes that the company's adjusted gross margin percentage of its same-store portfolio was 67.6% for the quarter ended September 30, 2024, 530 basis points below that of the average of the U.S. Listed Self Storage REITs.
• The document notes that the company's adjusted gross margin percentage for its non-stabilized wholly-owned portfolio was 47.7% for the quarter ended September 30, 2024, 25.2% below the average of the U.S. Listed Self Storage REITs same-store portfolios for the quarter ended September 30, 2024.
• The document notes that the company is the tenth largest owner and operator of self storage properties in the United States and the largest in the GTA based on rentable square footage.
• The document notes that the GTA has 2.3x square feet of self storage space per capita vs. 6.3x in the United States.

Related Party Transactions

• The company has various related party transactions with SAM, its former sponsor, and its affiliates, including the Administrative Services Agreement, and the Sponsor Funding Agreement.
• The company has a joint venture with SmartCentres, which owns a diversified portfolio of real estate in Canada and is one of the largest Toronto Stock Exchange-listed REITs.

Stakeholder Impact

• Shareholders will be impacted by the potential for share price volatility and dilution.
• Employees may benefit from the Listing Equity Grants.
• Customers may benefit from the company's focus on customer service and technology.
• Creditors may be impacted by the company's debt management activities.

Next Steps

• The company intends to list its common stock on the NYSE under the symbol SMA.
• The company intends to use the net proceeds from the offering to redeem the Series A Preferred Stock, pay down debt, fund acquisitions, and for general corporate purposes.

Key Dates

Keywords

self storage, REIT, real estate, acquisition, debt, financing, hedge, Canada, operating partnership, Managed REIT