SmartStop Self Storage REIT has agreed to invest approximately $74 million in a limited partnership with Calgary-based ICM Bluebird Canadian Self Storage LP to support acquisitions, capital improvements and continued self-storage portfolio expansion across Canada.

The joint venture fund, known as Strategic Storage Canada LP, will provide SmartStop with a 50 per cent general partner ownership interest and an initial approximate 34 per cent limited partner ownership interest in 14 self-storage properties in Canada.

The Canadian portfolio is comprised of approximately 961,000 net rentable square feet and 9,600 units. It’s in early lease-up and approximately 50 per cent occupied. 

The investment positions SmartStop as Canada's third-largest self-storage operator, with 70 operating properties comprising approximately 59,000 units and six million square feet.

“We have pretty deep knowledge with respect to Canada and the Strategic Storage Canada LP announcement just further strengthens that,” SmartStop founder, chairman and CEO H. Michael Schwartz told RENX.

“We partnered with some extremely talented sponsors, which include StoreWest Developments, Meckelborg Financial Group and ICM Asset Management. All are well-heeled investors and people that are equally passionate about self-storage.”

Other aspects of the investment

Ladera Ranch, Calif.-based and publicly traded SmartStop also has the opportunity to make additional investments of up to $228 million over the next few years, primarily in connection with additional self-storage properties being acquired by the Canadian joint venture fund.

"If there are operating assets that our partners want to contribute, we now have the mechanism and the funding to get that done and continue to grow this fund, which I think was important to our partners," said Schwartz.

In connection with the investment, SmartStop will provide property management services on properties in the fund under five-year contracts. 

SmartStop will also receive a right of first offer on all fund properties and has been awarded third-party management contracts on three additional Canadian properties outside the fund, along with exclusivity on future third-party management for future development projects by the fund’s affiliates.

SmartStop anticipates completing the transaction in the fourth quarter of this year. 

Canadian growth strategy

“One of the ways we're going to generate value creation is through continued Canadian expansion, so we have the SmartCentres development pipeline, which is a generator of growth,” Schwartz said of a joint venture launched in 2018 with Vaughan, Ont.-headquartered SmartCentres REIT to develop self-storage facilities across Canada.

The partnership has resulted in the creation of 15 properties so far and there’s a strong pipeline of facilities under construction or locations that have been identified or approved for development. All of these activities make SmartStop and SmartCentres the largest developers of self-storage facilities in Canada, according to Schwartz.

“Two, we have this new fund and investment in Strategic Storage Canada, which is a joint venture for operating assets,” Schwartz continued. “Then three, we’ll have third-party management for entrepreneurial owners in Canada that are looking for us to potentially manage the day-to-day activity of their portfolio.

“Our retail investors that raise money will also potentially acquire Canadian assets, so it's a multi-pronged strategy of growth in Canada.”

Expansion into current and new markets

The Strategic Storage Canada LP investment expands SmartStop's presence in Vancouver, Calgary and the Greater Toronto Area (GTA) and establishes a new footprint in Halifax and Quebec City.

SmartStop now has 41 locations and is the largest self-storage provider in the GTA. It also added eight facilities to its single location in Calgary.

“We expect to realize clustering and margin expansion not only for this portfolio but for our existing portfolio, so it's a win-win,” said Schwartz.

“With this platform that we've built in Canada over the last 16 years, I think the stabilized yield is north of six per cent, which is very attractive not only for us but for all the partners within this program.”

Maple bonds

SmartStop closed on a Maple bond offering for $200 million in August. It was its third completion of a senior unsecured Canadian bond offering, which leverages its Canadian exposure to raise capital at an attractive rate.

A Maple bond is a fixed-income security issued in Canada by a foreign entity, but denominated in Canadian dollars.

“We were the first self-storage company to tap the Maple bond market, and thus far we’ve raised close to $900 million in Maple bonds,” said Schwartz. 

“We've been able to leverage the Canadian market from a debt perspective. It's a natural hedge against any currency changes and I think it's another successful story with respect to SmartStop.”

Comparing the Canadian and American markets

SmartStop had an owned or managed portfolio of approximately 475 operating properties in 36 American states, the District of Columbia and Canada, comprising more than 285,000 units and approximately 36.8 million rentable square feet, as of Sept. 29. 

There are a lot more self-storage operators and facilities in the United States, where there’s also been more development of the asset class. There was a 10-year cycle where supply increased by about 40 per cent, which is now being absorbed after its initial negative impact, according to Schwartz.

“It was pretty tough,” he said. “Market rents went down anywhere from 20 to 50 per cent even though we maintained fairly consistent and high occupancy.”

Canada has consistently outperformed the U.S. over the past decade and, even with new supply coming online, solid demand dynamics have remained.

SmartStop’s same-store Canadian portfolio experienced occupancy increases of approximately 75 basis points year-over-year as of Aug. 31, outperforming trends in its U.S. portfolio over the same period.

“Utilization is growing and there's still a need for additional supply in a lot of markets, so we feel the Canadian market presents a tremendous opportunity over the next five to 10 years,” said Schwartz.