Recently, I attended the ISS World Expo conference in Vegas. This was my first time at this event to learn a little about the self-storage product type. The overall layout of the conference and education sessions were well thought out. It allowed for me to pick a track of education to really get a better understanding of what the product type and how it really operates.
The first educational session I attended focused on the financing of the product. Where it is today and where it has been. Some of my key takeaways from this session were:
-SS operations are always focused on revenue management
-SS historically has the lowest default rate on CMBS loans of any product type
-In January 2018, the default rate of CMBS loans was .04%
-Underwriting SS is based upon historic NOI (usually the trailing 12 months)
-They are seeing a plateau of occupancy (upper 80s low 90s)
-Since 2016, they have seen almost $10B of new construction
—2018-$4B is expected
-SS is micro market specific (usually uses 3.5 mile demographic analysis)
-Average SS uses 7 SF per individual for gap analysis
-They are starting to see interest-only (I/O) loans for the term of the loan (CMBS)
-Rates are hovering around 180 bps over the 10 Year
-Banks are getting more creative in in their financing terms for property acquisitions
-Life Companies are starting to focus on SS as a property to fund loans on.
The best comment I took away from this session was: “If Hotels and Industrial properties got together and had a child, it would be a Self-Storage property.”
Session 2 - Deal Sourcing
The panelist for this session did a deep dive into deal sourcing and operations. His focused on the idea that as a broker, you should have a focus on 1-Deal sourcing (brokerage activities) and 2-Capital Raise (consistent raise for opportunities found).
When listening further into the Capital Raise, the idea is to always be on the lookout for potential partners for when you find a deal that you would want to purchase and note which of the clients that you could potentially partner with. This is not a new concept and typically how most syndicator in commercial real estate get started.
The panelist honed in on the idea that most of the capital raise is coming from money managers that has a sole focus on placing money on behalf of others to try and hit certain yields that they guaranteed. The really like the real estate for that purpose.
Deal structure is always going to depend on the type of equity you are working with as a partner, again nothing new. It could be simple water-falls for return guarantees to more complicated wholesale/retail profit splits, etc.
The key driver for most equity groups can be boiled down to two simple measurements: 1-IRR and 2-Equity Multiple. The IRR is going to focus on the life of the deal and most equity groups are still looking for the high teens for IRR. Today, most of the equity groups are looking for a 1.5 x on the Equity Multiple.
The panelist concluded with some sound advice to anyone looking to raise capital. Listen. Listen to the investors you are working with well before you start your “elevator pitch” on being an investor on the deal. This will get you further along with the right investors you are looking for.
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