SmartStop OP, L.P. Ratings Under Review
SmartStop OP, L.P. is facing significant scrutiny as KBRA recently placed its BBB- issuer rating on Rating Watch Downgrade. This decision stems from the review of SmartStop's recent acquisition activities and the evolving landscape of its parent company, SmartStop Self Storage REIT, Inc. This includes the updated S-11 filing concerning a potential initial public offering (IPO).
Recent Acquisition Activities
After a phase of subdued acquisition efforts, SmartStop has resumed its external growth initiatives by proceeding with the acquisition of eight self-storage properties, amounting to approximately $234 million. These facilities are strategically located within larger metropolitan statistical areas (MSAs) across the country and one in Canada. The funding for these acquisitions is entirely sourced through debt, particularly with a $175 million bridge loan allocated for this purpose.
Expansion Plans
The projected total for acquisitions through the forthcoming year is around $289 million, which encompasses several properties that were financed prior under SmartStop's revolving credit facility. This aggressive growth strategy signifies SmartStop's commitment to enhancing its portfolio.
Location and Facility Insights
The acquired storage properties are primarily situated in first-tier MSAs such as Boston, Denver, Los Angeles, New York, and San Jose. While the expansion is a positive sign, the accompanying increase in funded debt raises concerns regarding its creditworthiness and liquidity. KBRA evaluates the net debt leverage, which currently stands at an estimated 55%, factoring in the anticipated capitalization rate.
Impact on Credit Metrics and Borrowing
With the ongoing enhancements to SmartStop's portfolio, key credit metrics reveal a concerning increase in funded debt, negatively impacting liquidity factors. As of the latest calculations, the recourse net debt loan-to-value (LTV) ratio is at 45%, while it improves to an approximated 47% when full consolidation of properties encumbered by $420 million mortgage debt is considered.
Borrowing Base Credit Metrics
KBRA highlights the bolstering of SmartStop's borrowing base credit metrics due to the recent defeasance of a $50 million CMBS loan, which leveraged proceeds from an inflated $700 million revolving credit facility. Nevertheless, with nearly 95% revolving credit utilization, SmartStop faces tight liquidity, relying on either IPO proceeds or refinancing options.
Future Monitoring and Expectations
KBRA intends to keep a close eye on SmartStop's capital strategies throughout a 90-day Watch period. This includes potential pathways for raising common equity, particularly through an IPO. Without successful equity offerings, there is a likelihood that SmartStop's ratings could deteriorate by one to two notches.
About SmartStop Self Storage REIT, Inc.
Headquartered in Ladera Ranch, California, SmartStop Self Storage REIT, Inc. boasts a portfolio valued at approximately $3 billion. They specialize in the ownership and management of over 200 storage facilities across 22 states and Canada. According to various sources, SmartStop is recognized as the tenth largest operator of storage facilities in the United States, highlighting its significant market presence.
Frequently Asked Questions
What does it mean for SmartStop OP, L.P. to be placed on Watch Downgrade?
This status indicates potential risks related to the company’s financial metrics, particularly due to increased debt from acquisitions.
What recent activities contributed to the ratings review?
The review was influenced by SmartStop's updated S-11 filing and its recent acquisition spree to enhance growth despite increased debt.
How does the location of acquired properties impact SmartStop?
Acquiring properties in larger metropolitan areas typically offers greater demand, but the increased debt can pressure financial stability.
What actions is KBRA taking regarding SmartStop’s ratings?
KBRA is monitoring the company’s growth plans and liquidity, which may influence future ratings outcomes, particularly if equity is not raised.
What is the current financial standing of SmartStop Self Storage?
SmartStop holds a strong position with a substantial portfolio; however, challenges arise from increased borrowing and market conditions affecting liquidity.
