SmartStop Asset Management is tapping the securitization market to help finance the $350 merger of two real estate investment trusts that it manages, cashing out $56 million of equity on their in the process.
In January, Strategic Storage Trust II (SSTII), a public non-traded REIT, completed a $350 million acquisition of Strategic Storage Growth Trust (SSGT), another public non-traded REIT. SSTII then obtained $225 million in loans from Citigroup and KeyBank backed by a portfolio of 29 self-storage properties consisting of a $180 million mortgage and $55 million of mezzanine debt, according to rating agency presale reports. Twenty of the properties are from SSTI's portfolio; the other nine were originally held by SSGT.
Proceeds were used to defease or refinance $162.4 million of existing debt, pay merger costs of $6.2 million, fund reserves, pay closing costs, and return approximately $56.5 million of equity to SSTII.
The mortgage, which pays a floating rate of interest and has an initial three-year term with two one-year extension options, is being securitized in a transaction called Citigroup Commercial Mortgage Trust 2019-SST2.
The portfolio properties total 2.1 million square feet, including 17,186 storage units totaling 1.9 million square feet and 208,071 square feet of parking and other commercial space. Overall, 29.8% of the portfolio’s self-storage sf (26.9% of total) is climate-controlled. The properties are located in 18 different MSAs across 10 states, led by California (35.8%), Florida (21.6%) and Nevada (10.4%). The assets were built between 1979 and 2014 and are on average approximately 21 years old. As of October 2018, the portfolio had a weighted average physical occupancy rate of 86.9%.
The prior debt encumbering four collateral properties (11.8%) was previously securitized in two transactions. One of the properties (6.2%) was securitized in MSBAM 2013-C12 with a loan balance of $6.2 million, and three properties (5.6%) were part of a portfolio, of which $12.8 million was securitized in WFRBS 2013-C16.
The SSTII portfolio consists of 111 self-storage facilities across 17 states and in Toronto that total approximately 70,300 units and 8 million square feet.
While potential investors view cashing out equity unfavorably, there are mitigating factors, Moody's rating analysis considers mitigating factors, including the length of time that SSTII has held most of the properties, the REIT's continued capital investment in the properties, and the fact that nine properties were previously unencumbered by debt. Also, SSTII will still have "implied" equity of $56 million in the portfolio after the refinancing, based on the “as-is” appraised value of $291 million.
Both rating agencies consider the transaction to be highly leveraged. Kroll puts the loan-to-value ratio of the debt being securitized at 101.9%, which is the highest among the single- borrower CMBS securitizations it has rated over the last 12 months, which ranged from 55.0% to 99.6% and had an average of 87.1%. However, this figure is in line with the average KLTV of the loans collateralized by self-storage properties securitized in the 26 conduits rated by KBRA over the past 12 months of 110%. After taking into account the mezzanine debt, however, the LTV rises to 133% is higher due to the presence of $55 million of existing mezzanine debt held outside the trust.
“Higher leverage implies lower borrower equity levels and higher default probability,” the presale report states. Moreover, “should a default occur, the presence of additional debt could introduce additional creditors that could attempt to exercise remedies that are adverse to the trust, or support a bankruptcy plan."
Moody's Investors Service puts the LTV of debt held inside the securitization trust even higher, at 112.3%, and that rises to 146.6% after taking into account the mezzanine debt.
Both Kroll and Moody's expect to assign a triple-A rating to the senior tranche of mortgage bonds to be issued.
