SmartStop Self Storage REIT Announces $200 Million Preferred Stock Sale to Extra Space Storage

October 30, 2019 | James Sprow | Blue Vault

On October 29, 2019, SmartStop Self Storage REIT, Inc. (“the Company”) entered into a preferred stock purchase agreement with Extra Space Storage LP, a subsidiary of Extra Space Storage Inc. (NYSE: EXR), pursuant to which Extra Space Storage committed to purchase up to $200 million in shares of the Company’s new Series A Convertible Preferred Stock, in one or more closings. The initial closing in the amount of $150 million occurred on October 29. Extra Space Storage has committed to purchase up to an additional $50 million, at the Company’s option, within 12 months following the initial closing, subject to certain limitations. The Company will pay Extra Space Storage a fee of 0.25% per annum on the remaining commitment amount until drawn, or the 12-month anniversary of the initial closing.

The purchase agreement provides that the purchase price for the preferred shares shall be equal to $1,000 per share. The terms of the Series A Preferred Stock, including the payment of dividends, liquidation preference, redemption rights, conversion rights, and negative covenants, are partially described below.

The Company intends to use the net proceeds from the preferred stock sale to payoff indebtedness, to finance self storage acquisition, development, and improvement pipelines, and for working capital or other general corporate purposes.

Key Take-Aways from the SmartStop/Extra Space Convertible Preferred Financing

According to SmartStop, these are the key take-aways from the financing arrangement:

1. The $200 million investment by EXR is confirmation by one of the largest publicly traded U.S. self storage REITs of the value of SmartStop’s portfolio and its self-managed and fully-integrated self storage platform. This affirmation by a highly credible industry player is unique in the Non-Traded REIT space and has never happened before.
2. The proceeds of the $200 million of preferred financing will be used to retire higher interest rate, higher principal amortizing debt, future capital improvement programs, and the acquisition of new assets, the net result of which is expected to be improvements in MFFO and cash flow per share while improving (lowering) overall portfolio leverage levels from approximately 55% to approximately 45%, providing SmartStop with a more conservative balance sheet profile.
3. This transaction positions SmartStop to maximize its opportunity for completing a strategic alternative of either merging with a strategic partner or listing on an established exchange at the earliest possible time, since the overall impact of the transaction is to improve MFFO and cash flow per share, reduce leverage levels and increase the size of the portfolio, each of which are attractive attributes for a listing or merger transaction. The potential acceleration of a strategic alternative for SmartStop is likely to be an influencing factor for the potential future liquidity events of Strategic Storage Trust IV, Inc. (“SST IV”) and Strategic Storage Growth Trust II, Inc. (“SSGT II”).

SmartStop’s Additional Rationale for the Convertible Preferred Financing with Extra Space

A. The Transaction significantly strengthens the balance sheet

1. First, approximately $100 million will be used to retire high interest, unsecured debt, reducing interest expense and unlocking cash flow from a portion of the debt which was hyper-amortizing. Thus, the payoff of debt is accretive from an MFFO, and also a cash flow perspective.
2.  Payoff of debt will lower overall leverage from 55% loan to value to 45% loan to value, further strengthening SmartStop’s balance sheet for a variety of short-term economic conditions

B. The Transaction provides additional capital to improve and enhance SmartStop’s institutional quality portfolio

1) The remaining proceeds will be used to enhance the existing portfolio by:

i. Completing identified and in-process expansion projects:

• an expansion at SmartStop’s existing Riverview, FL location;

• a development of a Starbucks drive-thru location at SmartStop’s Oakville, Ontario, Canada property;

• a number of multi-story redevelopments of existing drive-up buildings; among other opportunities.

ii. Investing in income-enhancing capital projects, such as solar panels and LED lighting

iii. Completing the portfolio-wide retail office renovation at every SmartStop location

2) Additional proceeds could be invested in new acquisitions, with an emphasis on further enhancing the institutional quality, demographics, and rents per square foot of the portfolio

C. Positions SmartStop to evaluate future strategic alternatives

1. 1.  A transaction of this size ($200M) with a direct competitor is unique, and speaks to the relationship between SmartStop and EXR. EXR clearly sees value in the investment.
   2. The conversion feature is benchmarked at $10.66 per share, our current net asset value (NAV). With EXR investing at the $10.66 conversion price, they see the upside and potential value in SmartStop’s portfolio above SmartStop’s current NAV.
   3. The transaction provides the flexibility to explore a variety of alternatives for the portfolio in order to maximize shareholder value.

Terms of the Series A Convertible Preferred Stock

The shares of Series A Preferred Stock rank senior to all other shares of the Company’s capital stock, including the Common Stock of the Company, 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 Preferred Stock will initially be equal to a rate of 6.25% per annum. If the Series A 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 Preferred Stock is redeemed or repurchased in full.

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

The Company has the right to redeem the Series A Preferred Stock for cash at any time following the fifth anniversary of the initial closing, subject to certain additional redemption rights. The amount of redemption will be equal to the Liquidation Amount. Upon the listing of Common Stock on a national securities exchange (the “Listing”), the Company has the right to redeem any or all outstanding Series A Preferred Stock at an amount equal to the greater of (i) the amount that would have been payable had the shares been converted into Common Stock pursuant to the terms of the purchase agreement immediately prior to the Listing, and then all of the shares were sold in the Listing, or (ii) the Liquidation Amount, plus a premium amount. Upon a change of control event, the Company has the right to redeem any or all outstanding Series A Preferred Stock at an amount equal to the greater of (i) the amount that would have been payable had the 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 a premium amount. In addition, subject to certain cure provisions, if the Company fails to maintain its status as a real estate investment trust, the holders of Series A Preferred Stock have the right to require the Company to repurchase the Series A Preferred Stock at an amount equal to the Liquidation 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 Preferred Stock have the right to convert any or all of the Series A 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 Preferred Stock are not entitled to vote on any matter submitted to a vote of the stockholders of the Company, except that in the event that the dividend for the Series A Preferred Stock has not been paid for at least four quarters (whether or not consecutive), the holders of Series A Preferred Stock have the right to vote together with the stockholders of the Company on any matter submitted to a vote of the stockholders of the Company, upon which the holders of the Series A Preferred Stock and holders of Common Stock shall vote together as a single class.

Other Covenants and Stipulations

The Form 8-K filing with the SEC that details the preferred stock purchase agreement contains other covenants and stipulations, including an amendment to the Operating Partnership Agreement of SmartStop OP, L.P. The Company and Extra Space entered into an investors’ rights agreement that gives Extra Space the right to request the Company to register for resale under the Securities Act of 1933 the shares of the Company’s Class A Common Stock or other class of Common Stock approved for listing on a national securities exchange, issued to Extra Space upon conversion of the shares acquired.

For a complete presentation of the terms of the purchase agreement, see the 8-K filed with the SEC at www.sec.gov, using the search term for “SmartStop Self Storage REIT, Inc.”

Source: SEC