Citigroup is shopping $540 million of bonds backed by a portfolio of 102 self-storage facilities.
The owner of the portfolio, Simply Self Storage, was acquired by Brookfield Asset Management in March. At the time, the portfolio was encumbered by $528.8 million in debt. On Sept. 1, Brookfield obtained a $760 million package of loans from Citi that allowed it retire the original loan, pay closings costs, fund upfront reserves, and cash out $202.8 million of equity in the properties.
Citigroup is now securitizing the $540 million first-lien mortgage via CGCMT 2016-SMPL; the property is also encumbered by $210 million of mezzanine debt held outside the securitization trust. Kroll Bond Rating Agency expects to assign an ‘AAA’ rating to the $301 million senior tranche of notes to be issued by the deal.
A key credit consideration for KBRA was the deal’s high leverage. It calculates the loan to value ratio of debt held in the securitization trust at 86.4%, which is relatively high for a single-borrower securitization. After taking into account the mezzanine debt held outside the trust, the LTV rises to 120%. (Kroll calculates LTV based on an estimate of "normalized sustainable property performance," which is generally lower than third party appraiser value.) The rating agency puts the cap rate at 9.72%; the implied cap rate, based on issuer cash flow and appraised value, is 7.37%.
Moreover, the fixed-rate mortgage pays only interest, and no principal, for its entire five-year term. This increases the risk that it will be difficult to refinance at the end of its term.
KBRA views self-storage facilities as one of the least risky kinds of commercial real estate loans. It recently published a study of 2,415 commercial mortgages originated for securitization between July 1995 and June 2015. Self-storage loans exhibited the lowest cumulative default rate (6.4%) among all of the property types with the exception of cooperative housing.
The portfolio properties total 7.9 million square feet via 63,141 units. In total, 28.7% of the portfolio’s total unit count is climate-controlled. The portfolio is geographically diverse: the properties are located in 28 different metro areas across 16 states and the Commonwealth of Puerto Rico, with three states, Michigan, Massachusetts and Ohio, representing more than 10% of the pool balance. The assets were built between 1959 and 2008 and are on average approximately 22 years old. As of July 2016, the portfolio had a weighted average occupancy rate of 91.6%.
However, approximately 76.5% of the collateral properties are located in secondary (64.8%) and tertiary (11.7%) markets; they might not perform as well as properties in primary markets that are more economically diverse.
Editor's note: An earlier version of this story understated the number of properties backing the transaction.