Real estate investment firm MacKenzie Capital Management is offering some Strategic Storage Trust investors a chance to cash out, but the private REIT is urging shareholders not to sell.

In July, Moraga, CA-based MacKenzie Capital Management sent letters to shareholders of Strategic Storage Trust, operator of the SmartStop Self Storage brand, offering to buy their shares for $7.25 each. The firm is seeking to buy as many as 3 million shares, or about a 5 percent stake in the self-storage operator.

If all of those shares were sold, MacKenzie would be coughing up about $21.75 million.

Cashing out

Chip Patterson, managing director and general counsel of MacKenzie, said he doesn’t expect to obtain all of the shares the firm is prepared to buy.

“If we get a fraction of a percent of the shareholders selling to us, it is a success,” Patterson said. “We almost never reach the amount we are offering to buy.”

Patterson said his firm makes about 100 offers a year to buy shares of illiquid real estate investments. According to InvestingAnswers.com, illiquid assets can’t be sold quickly because there aren’t enough buyers or because there’s a lack of an established trading market.

“We look for securities to buy that suffer from some sort of illiquidity,” Patterson said. “Strategic Storage Trust is a great company, but they are not traded on the stock exchange.”

Providing a market

Because Strategic is a private REIT, a market isn’t readily available for stockholders to sell their shares. “We provide that market,” Patterson said.

H. Michael Schwartz
H. Michael Schwartz, president and CEO of Strategic Storage Trust, opposes the $7.25-a-share offer.

Patterson said his firm aims to buy stock at a discount and hold it until a liquidity event happens (such as a sale or IPO), allowing MacKenzie to cash out and presumably turn a profit. Of course, MacKenzie also would earn dividends.

Strategic Storage Trust’s shareholders have been given a Sept. 4 deadline to respond to the MacKenzie offer.

Not so fast

In an Aug. 1 letter to its more than 16,000 shareholders, Ladera Ranch, CA-based Strategic Storage Trust advised investors to hang onto their shares. Under federal law, Strategic Storage Trust must recommend a course of action to its shareholders when such an offer is made.

In the letter, company President and CEO H. Michael Schwartz described the offer as an “opportunistic attempt to purchase your shares at a low share price.”

According to the company’s most recent valuation, shares of the REIT are worth $10.79 each. Schwartz said MacKenzie is trying to take advantage of the fact that the REIT suspended a program that let stockholders sell their shares back to the company.

As of March 31, Strategic Storage Trust’s assets were worth nearly $708 million. Revenue for the first quarter of 2014 totaled more than $23.1 million. SmartStop operates more than 90 facilities in the U.S. and Canada.

‘Liquidity strategies’ explored

Schwartz said the REIT’s board is exploring “potential liquidity strategies.” That could mean the potential for a sale or merger, for instance, but neither of those two paths was laid out in Schwartz’s letter. He advises shareholders to be patient if they want to reap long-term gains from their investments.

Patterson said any number of reasons — death, divorce or financial problems, for example — why some shareholders might not be able to wait. In fact, he said he’d recommend that only those stockholders who need cash now accept his firm’s offer.

“If you don’t need the cash, then no, you shouldn’t sell,” Patterson said.

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Alexander Harris