Today's Self-Storage Finance Options · Overview Current state of affairs •Debt markets extremely active •CMBS market volatility •Historically low interest and cap rates •Excellent

Today's Self-Storage Finance Options:Locking In Low Rates

and Unlocking Equity Potential

Presented by:

Shawn Hill, Principal

The BSC Group LLC

#ISSExpoinsideselfstorageworldexpo.com

Overview Current state of affairs

• Debt markets extremely active• CMBS market volatility• Historically low interest and cap rates• Excellent borrowing and rate environment• Excellent selling environment

Industry performance (poised for continued growth)• Institutional trends• CMBS loan performance• Historical benchmark interest rates

Overview of debt options• Different types of debt available• Overview of each type• Case studies

Questions


Current State of Affairs Period of renaissance

• Rock-star status It’s a borrower’s/seller’s market

• Capital readily available to support transactions• Feverish acquisition and refinance activity• Sell, lock-n-load or be strategic

Industry is consolidating• REITs leading the charge

o Third-party management• Technology is a game-changer

o SEO and mobile spend• Revenue management

Unprecedented creativity


10-Year Treasury Perspective10-Year Treasury as of April 4, 2016: 1.78%


Historical Benchmark Indices

10-year swap rate currently 1.65% as of April 4, 2016;down 40 bps from roughly one year ago


Institutional Trends Common share prices at all-time record highs (as of 4/4/16)

Increasing revenue and NOI

• Revenue increased 6.5% to 9.6%

• NOI increased 7.8% to 11.5%

New development and C of O property acquisitions ramping up

• PSA has $396M development pipeline (YE2015)

Extremely competitive acquisition market (REITs $2.49B in 2015)

• Public companies and private operators with institutional capital

• Going-in cap rates trending downward for portfoliosand single assets

Improved management and operating platforms

• Driving traffic and revenue through Internetmarketing and revenue-management initiatives

Implied cap rates based on common share prices

Source: MJ Partners, BMO Capital Markets

CubeSmart – $31.36Extra Space – $86.29Public Storage – $256.17Sovran – $109.06

CubeSmart – 4.2%Extra Space – 4.0%Public Storage – 3.8%Sovran – 5.3%


Self-Storage Industry Returns

Source: NAREIT


Self-Storage Loan Performance

Source: Dominion Bond Rating Service

Market-Statistics Data (CMBS):

Historical Loss Rate by Property Type


Self-Storage Industry Growth

Source: Self Storage Association, CEL Associates


Are We Insane? 10-Year Real Estate Cycles

Source: Self Storage Association, CEL Associates


Are We Insane? 10-year real estate cycle

Albert Einstein's definition

• Same road, different results?

• 10-year cycles

• 2018?

Underwriting more sane – for now

• No pro forma

• NOI to support loan dollars

Strong fundamentals

• Low vacancy, limited supply

Concern for builders?

• Timing lag


Readily Available Capital SourcesVariety of options for self-storage borrowers:

Commercial mortgage-backed securities (CMBS)

• 40 lenders

• Exceeding $100B

Life-insurance companylending (life company)

Banks

Credit unions

SBA

Private money

Equity

13.7%

36.9%

19.5%

16.1%

13.8%

Life-insurance companies Banks and thrifts

CMBS, CDO and other ABS issues Agency and GSE portfolios and MBS

Other


CMBS – What Is It? Commercial mortgage-backed securities: They are bonds. Lenders originate loans with the express intent of contributing

them into a structure that allows the cash flow from mortgage payments to be rated and sold to investors as bonds.

The process is referred to as securitization. Once the bonds are securitized, capital is returned to the lenders,

who can then redeploy that capital to make more loans. Structure enables capital to flow efficiently between borrowers,

lenders and investors, hence the name "conduit" given to these lenders.

Conduit lenders have historically provided significant sources of volume and liquidity that’s extremely important to the health of commercial lending and real estate market.

Per the Q315 MBA Databook, CMBS and other securitized products comprise approximately 20% of the $2.76 trillion in outstanding commercial-property debt.


Non-Recourse CMBS Non-recourse subject to carve outs (bad-boy acts) Long-term fixed rates – five-, seven- and 10-year terms Up to 30-year amortization with interest-only periods Cash-flow lending – acquisition or refi 75% LTV, 8% debt yield, 1.25x DSCR Transaction costs – more expensive than bank deals Prepayment – defeasance or yield maintenance Assumable Tax-free cash-out – equity recapture Great for “story” and tougher deals No borrower exposure issues – transaction mindset Current rates = ~5%

• 2% + 3% = 5%• Last year – 2% + 2% = 4%

Very aggressive in 2015 (~$100B)


CMBS Case Study (Portfolio) $12.62M loan request Midwest portfolio

• Refi of eight properties (Illinois and Wisconsin)• Minor cash-out – capital expenditures, closing costs• Largely kiosk-run properties

Loan terms• 9% debt yield• 75% LTV• 10/30 + one-year interest-only• 335 over 10-year T (~5.25%)

Very competitively bid (12 bids) Savvy financial game plan

• Refi of active acquisition guidance line • Acquire/consolidate and lift/refi


CMBS Case Study (Small Loan) Houston, Texas

$1.6M non-recourse loan

Aggressively bid

• Fixed-costs program

• 5.08% rate (270 over)

• 10/30 + two-year interest-only

$400K cash-out

Limited tenure of ownership (2012)

Imperfect borrower – limited liquidity

Fixed-closing costs – $25K

Tough neighborhood, economic concerns of Houston (oil)

Borrower fatigued by SBA process

“Most borrowers probably associate CMBS

with ‘larger loans’due to the costs and

complexities; however, the distinct advantagesof this loan made good business sense, even ona relatively small loan.”

−Property owner


Insurance-Company Lending Best of breed – picky (core assets, markets, borrowers) Conservative by nature Non-recourse loans Five-, seven- and 10-year term with amortizations that vary

• Fully amortizing structures available Typically lower leverage (less than 65%)

• Stressed values Extremely competitive terms for deals that fit

• Flexibility is a cornerstone attribute Typically $5M and up

• Fraction of the participants active for smaller loans Transaction costs

• More expensive than bank deals, similar to CMBS Allocations – tend to fill up


Insurance Case Study $19M refinance – various locations

Low leverage (50% LTV)

• Insurance companies questioned cap rate

• Had to provide market support

High-quality assets

Unique structure

• 20/25 – 20-year term, 25-year amortization, two years interest-only

Quoted at 225 over the interpolated T = low 4% range

• Roughly 13-year average useful life

• 4% floor

30/360 not actual 360

Rate lock at application

Yield maintenance with last three years declining (3%, 2%, 1%)

Release provisions

Balance-sheet execution (flexibility)


Bank Financing Local, regional and national banks

Balance-sheet lenders (hold loans vs. sell them)

Typically shorter-term debt

• Three- to five-year terms

20- to 25-year amortization

Typically personal guarantees

• Limited or non-recourse at lower leverage

Offer fixed and floating product

Very attractive rates

More flexible prepayment

Reasonable transaction costs

Acquisition, refinance, repositioning, construction

Relationship lending

• Depository relationships


Credit Union Loan Programs Increasing presence post-recession

A lot like bank debt with notable differences*

Acquisition and refinance – no construction

Typically shorter-term debt

Up to 75% LTV

Typically recourse lenders

Competitive rates

Very reasonable transaction costs

Flexible or open prepayment*

• Federal credit union law prohibits prepayment penalties

Great for small loans and smaller markets

• Military example

Transaction-oriented*

• Out-of-state borrowers or properties

51% rule: Borrower must control 51% for eligibility


Construction Case Study Experienced developer in concert with institutional partner Major East Coast MSA Programmatic lending platform

• Discretion in a box Structured loan

• 65% LTC• Limited recourse with burn-off• Declining variable rates – L+200 to L+300• Four-year + 1 option• 0.5%/0.2%

Non-recourse available at lower LTC (60%)• Requires major sponsorship• REIT quality management

Jernigan Capital – participating debt programs Creativity


SBA Loan Programs 504 and 7a Higher leverage than conventional Doesn’t make direct loans to borrowers

• Relies on network of SBA-approved lenders All lenders not the same Somewhat new to self-storage

• Guideline changes during recession• Continuing to refine process and understanding

Smaller borrowers most likely to benefit• Owner-managed facilities• Secondary markets• Smaller deals

Evolving


Best Practices

Start early.

Constantly evaluate the options.

Understand your game plan for the future.

Take advantage of your current situation.

Work with a professional.


Contact the Presenter

PrincipalThe BSC Group [email protected]

Shawn Hill

mailto:[email protected]

http://www.thebscgroup.com/

Documents

Today's Self-Storage Finance Options · Overview Current state of affairs •Debt markets extremely active •CMBS market volatility •Historically low interest and cap rates •Excellent