How is the Size of the Loan Impacting Rate and Leverage

Discussion about Capital Markets


Karr Self Storage spends most of the time in the primary markets throughout Texas. But, one of the interesting things that were seen that is relative to the capital markets is an interest in secondary markets. A portfolio was recently closed out in The Permian in West Texas, not too long ago. And this was a unique transaction in the sense that the asset quality was high across the board. There was a demonstrable cash flow that had been very predictable for a number of years. But, as many folks who invest and live in Texas, it is understood that The Permian is severely influenced by the global oil and gas industry.

There is an investor with a high degree of experience in that particular market and they used some conventional portfolio lending to get the deal done. The questions are:

What can be seen now that there is a stronger discussion about storage particularly, and can be seen from a leverage standpoint for storage assets that have been performing well over the years? 

Is it still going to be in the 60 and 65 range for the CMBS debt and maybe higher leverage for conventional financing?

From the banks, it's going to be very sponsor-driven. There are big institutional sponsors, and there are sponsors that have their own management companies that have real-time data that can support adding on another asset within their portfolio pretty easily. Those types of sponsors will warrant a little bit higher leverage, if they want that higher leverage, whether it's from the banks or the CBS market.

And so, it also depends on whether they're stabilized, a value add, or a construction deal. So, as much as the market, as much as the product type matters, the focus needs to be on the sponsor, just as much. And so the CBS market currently is kind of in that 65% range to finance a deal. But, with more products coming out and liquidity starting to open up, and more lenders coming out, that leverage point will go up back to the 70, 75% arena that was in order to compete with the banks.

What were the challenges of doing a deal from the capital markets side? How long does it take the whole process of properties to be closing? Especially because of COVID. 

With COVID, things can get slower, so now it would take about four months for properties to be closing. The challenge would be the financing side of things. Lenders that have either an existing relationship with a borrower or are wanting to lend in certain product types, they'll get aggressive in order to land into, let's say a self-storage portfolio. When you go out to the market, you'll go out to the market to multiple lenders and we'll take data points from those multiple lenders on what product types that they're looking for. And so, you'll look in your database and see that XYZ lender is looking to get aggressive on self-storage. That's the person that you would want to talk to almost immediately, because they're looking to diversify their loan portfolios away from some of the product types that are struggling into self-storage assets.