KBRA Places SmartStop OP, L.P. BBB- Issuer and Senior Secured Note Ratings on Watch Downgrade

KBRA has placed its BBB- issuer rating for SmartStop OP, L.P. on Rating Watch Downgrade, which follows KBRA's review of recent acquisition activity and parent SmartStop Self Storage REIT, Inc.'s (collectively 'SmartStop') updated S-11 filing for a potential initial public offering (IPO). The BBB- rating for SmartStop OP's outstanding $150 million 4.53% senior secured notes due 2032 is also placed on Watch Downgrade.

Following a period of reduced acquisition activity, SmartStop has begun to increase its external growth pipeline and is now in the process of closing eight self storage properties ($234 million) located in larger MSA's across the U.S., and one property in Canada. The acquisitions are expected to be 100% debt funded through various facilities, including a $175 million bridge loan. The twelve month acquisition total through March 31, 2025, is expected to be approximately $289 million, which includes three earlier properties that were funded under SmartStop's revolving credit facility.

The acquired properties are generally larger facilities located in first-tier MSA's including Boston, Denver, Los Angeles, New York, and San Jose. While further expansion and diversification of SmartStop's portfolio would otherwise be a credit positive, the dollar-for-dollar increase in funded debt has had a negative impact on key credit metrics and liquidity factors. On a pro forma basis, net debt leverage within the recourse debt pool is calculated by KBRA at approximately 55% using an estimated 5.75% capitalization rate, which includes adjustment for the $175 million SmartStop guaranteed bridge debt facility. KBRA previously reported recourse net debt LTV at 45% as of year-end 2023. Leverage does improve to approximately 47% on a fully consolidated basis at share when including properties encumbered by $420 million of mortgage debt at a KBRA-estimated 36% LTV. KBRA also notes the pro forma benefit to SmartStop's borrowing base credit metrics from the recent defeasance of a $50 million CMBS loan, using proceeds drawn from an upsized $700 million revolving credit facility. However, with KBRA-estimated revolving credit utilization currently at 95%, liquidity remains constrained, with remaining liquidity sources limited to proceeds from the proposed IPO or mortgage refinancings.

KBRA will continue to monitor SmartStop's capital plans over the 90-day Watch period, including the potential for raising common equity through an IPO or through other means. Absent an equity offering, the KBRA ratings are likely to be lowered by one to two notches.

Headquartered in Ladera Ranch, CA, SmartStop Self Storage REIT, Inc. is a $3 billion non-traded equity REIT specializing in the ownership and management of over 200 storage properties in 22 states and Canada. The company is the tenth largest operator of storage facilities in the U.S. according to published sources and among the largest operators in Canada.

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