Business Context and Reporting Period
Company: SmartStop Self Storage REIT, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: October 29, 2019
Event: Entry into a Material Definitive Agreement for the issuance of Series A Convertible Preferred Stock.
Key Financial Metrics and Transaction Details
- Investor: Extra Space Storage LP (subsidiary of Extra Space Storage Inc.).
- Total Commitment: Up to $200 million in Series A Convertible Preferred Stock.
- Initial Closing: $150 million executed on October 29, 2019.
- Remaining Commitment: Up to $50 million available at the Company's option within 12 months.
- Commitment Fee: 0.25% per annum on the undrawn portion of the commitment.
- Purchase Price: $1,000 per share.
- Initial Dividend Rate: 6.25% per annum.
- Dividend Step-Up: Increases by 0.75% annually after the fifth anniversary, capped at 9.0% until the tenth anniversary, then increases by 0.75% annually thereafter until redemption.
- Conversion Price: $10.66 per share of Common Stock.
- Use of Proceeds: Payoff indebtedness, finance self-storage acquisition/development/improvement pipelines, and working capital.
Material Changes and Terms
The filing details the creation of a new class of senior securities (Series A Preferred Stock) with specific rights and restrictions not previously in place:
- Liquidation Preference: Senior to Common Stock; holders receive the greater of the aggregate purchase price plus accrued dividends or the value if converted to Common Stock immediately prior to liquidation.
- Redemption Rights:
- Company may redeem after the fifth anniversary at the Liquidation Amount.
- Company may redeem upon a Listing of Common Stock or a Change of Control at the greater of the conversion value or Liquidation Amount plus a premium.
- Holders may require repurchase if the Company fails to maintain REIT status.
- Voting Rights: Generally no voting rights, except if dividends are unpaid for four quarters (cumulative or non-consecutive), at which point holders vote as a single class with Common Stockholders.
- Protective Provisions: Majority vote of Series A holders required for:
- Portfolio leverage exceeding 60% loan-to-value.
- Transactions with the Executive Chairman or affiliates.
- Mergers with entities where less than 80% of assets are self-storage related.
- Entering non-self-storage lines of business (unless ancillary revenue is <10%).
Guidance, Outlook, and Risks
Management Commentary: The Company intends to utilize the proceeds to strengthen its balance sheet by paying off debt and funding growth initiatives in the self-storage sector.
Risks and Contingencies:
- Dividend Obligation: The Company is obligated to pay dividends at rates that increase over time if the stock is not redeemed, potentially impacting future cash flow.
- Conversion Risk: Future dilution to Common Stockholders if the Series A Preferred Stock is converted, particularly if the Common Stock price exceeds the conversion price of $10.66.
- Operational Restrictions: The protective provisions limit the Company's ability to increase leverage beyond 60% LTV or diversify into non-self-storage businesses without investor approval.
Key Facts for Investor Verification
- Verify the exact amount of indebtedness paid off with the initial $150 million proceeds.
- Confirm the current leverage ratio of the Company to ensure it remains below the 60% loan-to-value threshold requiring Series A approval.
- Review the "Articles Supplementary" (Exhibit 3.1) for the specific premium amounts applicable to redemption upon Listing or Change of Control.
- Monitor the Company's ability to maintain REIT status to avoid mandatory repurchase obligations.
- Assess the impact of the 6.25% initial dividend rate on the Company's Funds From Operations (FFO) and distributable cash flow.