- Alright, gentlemen,
thank you for joining
Danny and I here today.
- Glad to be here.
- We're happy that we're
able to do this to United put
together videos in the past for
our storage owners and operators.
And we'd like to put one together today
to discuss the capital markets.
So I'll ask you to paint
with some broad strokes here
for a moment, and then
maybe we'll get into some
of the fine print relative to
the self storage asset class.
But right now, and well
actually let's back up
and kinda talk pre-COVID and during COVID.
If we're having a range
from a rate perspective,
where were we?
Where are we today?
Is it influenced exclusively
by where treasuries are?
Is it sponsor specific?
Is it geographically based?
How, what can we talk about
when it comes to rates?
- With a broad stroke
rates have relatively,
they're not changed from
pre-COVID to current environment.
And everyone sees that
treasuries have retracted
quite a bit.
Prime has retracted,
LIBOR is at a near zero,
but spreads have widened out
given the inherent risk that we are
in a uncertain environment.
So when you look at all in coupon,
whether it's on floating
rate or a fixed rate,
typically rates are
unchanged, that being said,
there are certain product types
out there that we finance,
and that's with the banks and
that's the permanent loans.
Now there is an area of
financing that we get
a lot of that we get a lot done,
which is with the bridge
lenders and the mortgage rates
and the debt funds.
Those type of lenders typically require
a capital markets execution that's done
through warehouse lines or CLO executions.
Those lender's pricing,
they're either out of the
market or their pricing is
extremely wide because their
capital markets executions
aren't there.
So when you, when we had pricing,
let's say in the L 300 or
350 range from a debt fund,
that's gonna look like
more like L plus 500 today.
Just because they're unable
to finance their position
in the capital markets.
- Okay, what percentage
of y'all's business
is represented by portfolio lending versus
the conduit markets versus life
versus smaller credit
unions and local banks,
how are y'all diversifying that?
- Great question.
Historically over our 28 year history,
60% of our business is
done with the banks.
So what that tells you is we
do a lot of financing with
local, regional, and even
national banks for construction,
fortuitous acquisitions, even term loans
when borrowers want a little bit
more flexibility on prepayment.
So we do quite a bit of bank
financing and that other 40%
equates to a CMBS life
company type permanent debt.
We also do a lot of preferred
equity and mezzanine
financing, and then some JV capital.
In addition to that also the
non-recourse bridge financing
we do quite a bit of,
but currently in today's
environment that we're not seeing a
lot of bridge lending getting done,
- Is there a difference from the rate
in the LTV perspective
between CMBS markets right now
and call it everything else?
- I mean, I'd say CMBS
at this point in time,
given their kind of term,
the spigot back on the highest
real LTV we've seen as far as
about 65% and relative to
everything else, that's a,
you know, banks, credit unions,
they could still stretch up to 70 or 75
assuming recourse and
assuming a strong borrower.
So that's really the,
I'd say the difference
that drives the leverage.
- So CMBS is still non-recourse provided.
we still have the conventional
bad boy clauses and so forth.
- [All] Absolutely.
- And we don't see that change.
- So the general theme that
we're seeing in today, again,
sitting in the middle of the
summer of 2020 as the CMBS
market has reopened general
leverage is down about 10%.
So deals that you were getting done
at 75% pre-COVID are 65%.
At 65% pre-COVID are now 55%.
So that's what you're
seeing that being said
as we get through this COVID
environment and there's more
product to be financed,
we think that the leverage
points will come up again.
- So reopened presumes that
there was a previous closing,
how long was that the case?
And was it just for CMBS exclusively
or what was y'all's experience?
- Mainly CMBS, but as Sunny mentioned,
the CLL executions and
the warehouse lines also
were kind of shut down.
A CLO is kind of a cousin to CMBS.
- Right.
- And so we saw the
CMBS completely come to
a halt in mid-March and they re-entered
the market about the last week of May.
And when they did, like
anything else they dipped back
into the market with caution and as such,
they dropped leverage and
they tried to maintain their
spreads equal to a rate of
kind of where they were before.
Although the tenure is so low
that you can't borrow on a
CMBS at sub four for the right deal.
You're fixed, so we have a
deal in the shop right now
that if it were to lock today,
it'd be about three six,
three seven, is that right Sunny?
- So 10 years I-O.
- 10 years interest only.
- Wow.
- That's 60%.
- Interesting.
- So there's aggressive money out there
if you have a deal that fits
in that lower level of the box.
- Also to your question,
you know, how long was
the capital markets closed?
It, they never closed.
There was a lot of
liquidity in the market.
It just depended on where you
were to get it from and at
what leverage a price.
And when the CMBS market,
we like to look at the
CMBS market kind of top
of the food chain, because
when the CMBS market shuts off,
that's the ultimate backstop and exit
to other types of lenders.
So banks, bridge lenders,
more transitionary assets.
We usually underwrite
to a CES exit because
that's the kind of fail
safe and the liquidity
for all the product types.
When the CMBS market turns off,
all other capital sources
proceed with caution because
they're not sure whether there's an exit.
Now that CMBS market
has come back into play
for product types that are outside
of hospitality and some
retail, those other lenders,
banks, bridge funds, live
companies, et cetera,
are coming back into the market.
- Let me say it a different way
just so we can hit both angles here,
The banks and the credit unions
never got to see pristine,
fully-leased up stabilized
cashflow and deals
that they got to make loans on.
And it was very rare.
Their bread and butter was
making loans on construction
or transitionary product
types or something where
as somebody mentioned, that borrower
just wanted flexibility.
So when that happens,
banks don't have to go down the
risk spectrum to make loans.
So they say to themselves,
why would we take construction risk,
when we can make loans on
these stabilized assets
because CMBS is no longer.
So they're gonna go take their share
of this assets at the moment.
What Sunny's saying is
that now that CMBS is
opening back up,
those loans will start to
involve those banks' books.
And the banks will then
start to have to divert their
attention to what they used to do,
which was construction assets
that aren't quite nearly
stabilized, where it needs some recourse.
And so you'll see the market
start to open back up at a
lagging effect from CMBS opening back up.
So while some borrowers will tell you,
we don't want to borrow CMBS,
we don't like that product type.
It's definitely a good
thing to see them come back.
And as Sunny mentioned it is
at the top of the food chain.
And when those lenders
come back in the market
and revive fluidity, it
takes pressure off the banks.
So then it starts the engine to go again.
- That's good impact and
interesting content there.
