Self-storage owner/operator taps into CMBS for cash-out refinancing

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A Brooklyn-based real estate investment firm specializing in self-storage acquisitions is co-sponsoring its first securitization involving a newly issued $323.85 million cash-out refinancing loan secured by a portfolio of 78 properties across the country.

Merit Hill Capital will market six classes of commercial-mortgage backed term bonds as well as two interest-only tranches of notes and commercial paper via the Merit 2020-HILL trust, according to Moody’s Investors Services.

The notes will be funded through the receivables from the self-storage properties that were 90.7% occupied for the twelve months prior to May 2020. The units are located in 42 metropolitan statistical areas in 23 states.

The self-storage units are primarily older properties (weighted average age of 33 years), and are managed under third-party arrangements with three of the five largest self-storage operators in the U.S.: CubeSmart (NYSE: CUBE), ExtraSpace (NYSE:EXR) and Life Storage. (CubeSmart and ExtraSpace are each structured as real estate investment trusts).

Moody’s gave positive marks to the portfolio’s historical operating performance, geographic diversity and experienced property management.

But offsetting those strengths are the properties’ average age (33 years) and the large number of non-climate controlled units in the portfolio: only 23.9% (by appraised value) are fully climate-controlled and 63.8% have fewer than a quarter of their units on site with climate-control features.

Merit Hill has been acquiring self-storage units since 2017, when the newly founded firm was infused with a $300 million equity investment by Centerbridge Partners. Moody’s stated 35 of the 78 properties have been held by Merit Hill in excess of 12 months.

The loan secured by the properties is a two-year, interest-only obligation (one-month Libor plus 2.76%) with three one-year extension options, according to Moody’s. The ratings agency estimates a debt-to-service coverage ratio of 2.7x for the borrower. (The sponsor’s debt yield on the proposed CMBS notes is 8.1%).

The loan was sold into the trust by JPMorgan and Citi Real Estate Funding.

Merit Hill and Centerbridge pulled out $24.95 million in equity in the refinancing, and will have implied equity of $188.1 million at loan closing, Moody’s report staged.

Moody’s noted the properties are encumbered by a mezzanine loan of $57.15 million held outside the trust, totaling 15% of the total refinancing. Moody’s pooled trust loan-to-value ratio is 114.3%, but the subordinate financing increases that total LTV to 134.5%.

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