Today's Self-Storage Finance Options: Locking In Low Rates and Unlocking Equity Potential. Presented by: Shawn Hill, Principal The BSC Group LLC

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2 Today's Self-Storage Finance Options: Locking In Low Rates and Unlocking Equity Potential Presented by: Shawn Hill, Principal The BSC Group LLC

3 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

4 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

5 10-Year Treasury Perspective 10-Year Treasury as of April 4, 2016: 1.78%

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

7 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 portfolios and single assets Improved management and operating platforms Driving traffic and revenue through Internet marketing and revenue-management initiatives Implied cap rates based on common share prices CubeSmart $31.36 Extra Space $86.29 Public Storage $ Sovran $ CubeSmart 4.2% Extra Space 4.0% Public Storage 3.8% Sovran 5.3% Source: MJ Partners, BMO Capital Markets

8 Self-Storage Industry Returns Source: NAREIT

9 Self-Storage Loan Performance Market-Statistics Data (CMBS): Historical Loss Rate by Property Type Source: Dominion Bond Rating Service

10 Self-Storage Industry Growth Source: Self Storage Association, CEL Associates

11 Are We Insane? 10-Year Real Estate Cycles Source: Self Storage Association, CEL Associates

12 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

13 Readily Available Capital Sources Variety of options for self-storage borrowers: Commercial mortgage-backed securities (CMBS) 40 lenders Exceeding $100B Life-insurance company lending (life company) 13.8% 13.7% Banks 16.1% Credit unions 36.9% SBA 19.5% Private money Equity Life-insurance companies CMBS, CDO and other ABS issues Other Banks and thrifts Agency and GSE portfolios and MBS

14 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.

15 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)

16 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

17 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 Most borrowers probably associate CMBS with larger loans due to the costs and complexities; however, the distinct advantages of this loan made good business sense, even on a relatively small loan. Property owner Tough neighborhood, economic concerns of Houston (oil) Borrower fatigued by SBA process

18 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

19 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)

20 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

21 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

22 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

23 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

24 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.

25 Contact the Presenter Shawn Hill Principal The BSC Group LLC

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