Equity Based Services, Inc

by Troy Downing

2008 was a banner year for Equity Based Services, Inc. In terms of transactions, growth, income production, and community outreach, we have had our best year ever and expect to navigate the ever-changing financial landscape to another banner year in 2009.

The Lending Markets

This year we have seen the lending markets completely morph into something new. There were positives and negatives to these changes. On one side, lender scrutiny and due diligence increased significantly. This requires more time and effort to get loans placed. This also forced a number of smaller, less sophisticated operators out of the market.

We also saw available leverage pull back slightly. Historically, Self Storage has been a high-leverage (80%) asset. Leverage has pulled back to the mid 70% range in certain markets, all the way back to 60% in others. (Those Insurance Company terms are starting to look better!)

Many lenders are also starting to frown at certain Tenant in Common (TIC) Structures. Most will lend to small groups of TICs but are unwilling to lend on projects with larger numbers of TICs on Title. (This is usually mitigated using special purpose entities, and/or Private Equity Funds rather than having TICs directly on Title.)

Loan terms have also changed significantly, with higher discount points, shorter Interest Only periods and increasing levels of recourse. But, the interest rates have remained relatively low, especially with floating rate loans based on LIBOR which is hovering near it’s all time lows.

The tightening of credit available has also had another, significant perk for us in Commercial Real Estate. Lenders will simply not loan money on overstated property values. Easy access to debt was causing a number of facilities to trade at artificially high sales prices. EBS buys based on cash flow, not on property appreciation speculation. If the numbers don’t make sense and generate the Return on Investment that we need, we simply pass on the projects. It was difficult to compete with buyers who where unsophisticated and would simply pay whatever it took to buy a property based on easy credit, inflated appraisals, and the hope that the property value would simply keep going up without a cohesive or realistic business plan to get it there.

In November, EBS was able to refinance a facility in Texas, paying off the note holder, a large European Lender and replace the debt with a Midwestern Regional Bank at a very reasonable 6% interest rate and 2 years of Interest Only payments. This demonstrates that even into the forth quarter of 2008, new debt was still available.

The Housing Crisis of 2008

Over the last year, we have all seen a certain level of devastation in the housing markets. Record foreclosures and bankruptcies. We have also seen downsizing in a number of businesses from small to very large. These corrections have created an enormous need for Self Storage. One of the worst hit housing markets in the country was in Las Vegas. Our Vegas portfolio has been one of our stronger performers.

Private Equity Placement

This year EBS placed all of the capital from its closed Private Equity Funds. The EBS Income and Growth Fund II and the Pilot Equity Value Add Fund were both fully placed in 2008. These are fully subscribed and closed funds that were used to acquire both Income producing properties and Opportunistic acquisitions of Self Storage Properties. The Income and Growth Fund II will continue to hold the high quality properties that it was placed into and distribute cash flow to its limited partners while the Pilot Equity Value Add Fund will stabilize and reposition the properties in its portfolio.

New Construction

In 2008, we finished construction of a ground-up 2 story expansion of one of our facilities in Peoria, AZ. This is a Class-A, climate controlled facility that received its Certificate of Occupancy in February and is well on its way to absorption and economic stabilization. Peoria has historically been a strong producer for us and we expect this to continue and strengthen for the foreseeable future.

We also saw a huge demand for wine storage in our Palm Desert facility. The wine storage was 100% occupied requiring an expansion of this niche, high quality, climate controlled facility. This expansion was completed in December and was financed through the strong cash flow already being generated through the facility. We have a waiting list of wine storage customers and expect a rapid absorption of this expansion.

New Acquisitions

Overall, EBS acquired 15 new facilities in 2008. These facilities were purchased in Texas, Las Vegas, Tennessee, and finally, California. Historically, California hasn’t made sense in our template for Self Storage. The value of the real estate had outpaced the rental income that it could produce. Since we are more concerned with cash flow, these investments haven’t really “penciled” for us in the past. The overall “softening” in the California real estate markets has brought many opportunities to market for us. We can now acquire a leveraged California property, that produces strong cash flow immediately. The cash flow will continue to grow and, eventually, the California real estate market will also recover allowing us to enjoy property appreciation along side of the Cash Flow generated.

In 2008, we acquired our first facility in the state of California, Country Club Self Storage in Palm Desert. We have also looked at a number of other facilities in California including a few that we currently have under contract. We expect to see increased opportunity in California over the next year.

Equity Based Services, Inc. acquired the following facilities in 2008:

March:

• Silver Star Self Storage, Austin, Texas

April:

• StorageOne, Las Vegas, Nevada
• StorageOne, Henderson, Nevada

May:

• Storage Works, Dallas, Texas
• Desert Country Club Storage, Palm Desert, CA

June:

• Silo Self Storage, Nashville, Tennessee

August:

• Gladstell Self Storage, Houston, Texas
• 34^th Street Self Storage, Houston, Texas
• ExtraSpace Self Storage, Austin, Texas
• Central Self Storage, Austin, Texas
• Central Self Storage, Corpus Christi, Texas

September:

• Silverado Self Storage, Las Vegas, Nevada
• Assured Self Storage, Lewisville, Texas (Dallas Area)
• All Star Self Storage, Lewisville, Texas (Dallas Area)
• StorageOne Self Storage (Annie Oakley), Las Vegas, Nevada

This represents approximately $80 Million in acquisitions in 2008.

Looking Forward

We expect a slow recovery in the real estate and lending markets. This should allow EBS to continue to find high quality Self Storage investments and will limit competition. It is all but impossible for a small owner/operator or sponsor to enter the market today. This will also limit competition with new facilities as new construction has all but disappeared and construction debt is very difficult to obtain.

The slow recovery in the economy also relates to an increase in demand for Self Storage, so, we expect our Gross Potential Income on our portfolio facilities to grow, and we expect them to continue to lease up to full stabilized economic occupancy.

Upon a demonstrable recovery in the overall economy, the rents may taper off a bit, but, we expect to see more property appreciation as things return to normal.

We look forward to a prosperous 2009. We would like to thank all of our friends, partners, and colleagues for helping EBS succeed in 2008 and look forward to working with you in the coming year.

This is for informational purposes only. This is not investment advice. This is not a solicitation to buy or sell securities.