Equity Based Services, Inc

Today, EBS is announcing the acquisition of two new facilities in Arlington, TX. These facilities were financed with a limited recourse, interest-only loan that has a term of 5 years, first year I/O and the remaining term amortized over 25 years.

The loan is floating rate based on Wall Street Journal Prime and is starting at approximately 6% Interest.

A Press Release about the transaction will follow shortly.

by Troy Downing

There is still a lot of turmoil in the equities markets. It almost seems as if the stock market is an economic news amplifier. If there is good news, the market rises, neutral news, the market recedes, bad news and the market falls.

These movements are essentially mob-driven reactions to how the masses think reports will affect the markets. As I’ve mentioned in earlier posts, this is a self-fulfilling prophecy. In other words, the mere impression that bad news will affect the markets is enough to affect the markets. This is great if you can tell the future and hedge your bets on what future reports will say. This is also great if you have a knack for predicting what the mob will think and how they will react.

Unfortunately, I don’t have these skills. I can “guess”, but guessing is just gambling. Sometimes I’m right, and it feels really good to be right. But, sometimes I’m wrong… and it feels even worse to be wrong. Even picking “sectors” of the equity markets is a difficult task. A given sector may be tossed higher or pounded lower on the merits (or lack thereof) of that particular sector, but, once again these movements are going to be amplified or exacerbated by the movements of the overall markets. In other words, there is correlation.

Correlated Assets

Correlated assets are assets that are tied to the movement of other assets or markets. In other words, they move in lockstep with the movement of others. So, the stock of a particular bank will be correlated with movements in the banking industry and will have some correlation to the stock markets in general as well as other correlated indicators such as the local, national, and global economies.

Here’s the problem (or the opportunity)- With the prolonged recession, weakness in the banking and lending markets, inflationary pressures, lack of liquidity, and weakness in the stock markets, we have seen a strong correlation in most equities. We have seen weakness in retail due to weakness in the economy. We have seen weakness in real estate due to weakness in the economy, weakness in the lending markets, weakness in the job markets, and an overall lack of liquidity. In other words, we have seen a lot of downside and loss in value in correlated assets.

Non-Correlated Assets

Non-correlated assets are assets that move contrary, or without influence from broader markets. In other words, these assets are unchanged due to fluctuations in broader markets or economies. Precious metals and related Funds tend to not correlate to the stock market, but rather correlate to inflation and the value of the dollar.

Negatively correlated assets

This sounds like a negatively charged phrase, but, in the last year or so, being negatively correlated to the stock markets would have not been such a bad thing. Negative correlation refers to an asset moving opposite to its correlation. In other words, this would be an asset that moved up as the stock market moved down, or verse vica.

Real Estate Correlation

As I mentioned earlier, Real Estate in general, is correlated to the economy, liquidity, and availability of debt. As debt becomes more difficult to obtain and/or more expensive, Real Estate values suffer. This is, however, a very broad and simplistic statement. Not all Real Estate is suffering. In commercial Real Estate, there is still a lot of value to be had and a lot of opportunities to invest in an asset that is uncorrelated to the Stock Market. These non-correlated assets are a great hedge against the downside in a stock portfolio.

I have no idea if we have seen the bottom of the Real Estate markets- at least in terms of Residential Real Estate. This market has obviously suffered the last couple of years with record foreclosures, bankruptcies, and price recession.

So, what are some safe bets for non-correlated Real Estate assets to hedge an equity heavy portfolio? Obviously retail is out. Retail will continue to suffer in a down economy. People buy less when they feel less wealthy. This makes sense. Manufacturing is also a tough one right now. But what about Real Estate that is valued by cash flow from a business running on top of it that performs well in any market? There are a number of Real Estate investments that make sense in a down economy. People still get sick. So, medical and nursing facilities make sense. People still get old, so retirement and elder care facilities make sense. The government should be around for awhile, so, Real Estate with stable government contracts makes sense. Many businesses have a legal obligation to store records, so records storage might make sense… And my favorite, of course, Self Storage. In down economies, people downsize, move, reset, restructure, etc… All of these create a demand for storage. As businesses downsize or enter stasis modes, they generate a need for Storage. The Self Storage Industry continues to prove resiliency in otherwise down economies.

“Self Storage is not correlated to the stock market.” This statement is not 100% true, since there are Public Self Storage companies. These public Real Estate Investment Trusts (REITs) are traded on the public markets as equities. Since they are equities, they are correlated to the equity markets. This means that the value of a share is affected by overall movements in the stock markets. We have seen this in some great companies such as Public Storage and Extra Space. These companies are well run with strong strategies, but, they have been affected by stock market recession. The value recession has nothing to do with the underlying asset that continues to perform well.

So, to correct the earlier statement- “Privately held Self Storage is a non-correlated asset.”

In addition to being a great hedge against equities as well as a hedge against public REITs, Self Storage is also an inflation neutral asset. The main reason for this is that Self Storage is generally a month-to-month lease business. Leases expire every month. This means that rents can be adjusted on a monthly basis. So, as inflationary pressures set in, the manager of a Self Storage facility can adjust rents to match inflation. This keeps the cash flow increasing with inflation rates. There may be some movement in CAP rates, but, the increased value of the cash flow and the inflationary appreciation of the underlying asset should keep the overall returns neutral on an inflationary basis. Compare this to a savings account which affords flexibility, but, over time is a guaranteed loss. Think about it. If you’re earning 1.5% interest in a savings account, and inflation stays at its recent historical levels around 3%, that’s a guaranteed loss of 1.5% per year. If inflation goes higher, that’s even more loss in buying power. And, to add insult to injury, that 1.5% in earned interest is taxed as ordinary income. Compare that to the tax sheltered income produced through a commercial real estate business and there is an advantage on an order of magnitude to the Real Estate investment. Obviously, liquidity is important. And it is worth paying the premium for liquidity to some extent. You should have savings to deal with contingencies, emergencies, and opportunities- but, think of what this costs and how much really should be in taxable, guaranteed loss instruments.

Personally, I believe in a balanced portfolio approach for most people. I believe that everyone should have equities balanced with non-correlated assets such as commercial Real Estate. I believe that everyone should have liquid savings. I believe that everyone should have assets that are negatively correlated to the value of the dollar, such as gold or silver. It’s a balancing act that allows you to grow, to take advantage of opportunity, to participate in substantive upswings in equities markets, but to hedge them with less speculative non-correlated assets. This way, you are more likely to have something to smile about when one of your investments does poorly.

by Troy Downing

There is no question that acquisitions in Self Storage Properties have slowed down in the last year. There has been very little news of the big public operators acquiring new facilities. One of the smaller newcomers, SST has been moving on some small portfolio deals, but, in general acquisitions are slow.

There are a number of factors that are driving this. First of all is the availability of debt. Debt is much tighter than it has been and is only available to very strong borrowers acquiring strong, stabilized deals. Historically, Storage investments have been leveraged cash flow deals. We’ve seen leverage in some operators fall dramatically and there are a number of both public and private operators who are buying facilities unleveraged. This obviously creates a much safer investment, but, the unleveraged returns will be smaller. And a typical stabilized facility in a strong location is arguably a safe investment even with moderate to high leveraging and the right loan.

Another factor in the acquisition slowdown is the strength of the asset class. Stabilized Self Storage operations are cash flow generating machines. In times of economic uncertainty, a huge premium is placed on safe, steady, and predictable cash generators that have historical data supporting strong returns in receding economies. Many are concerned about other parts of their portolios as we have seen many asset class values fall dramatically and now flaggelate wildly in the eddies created by uncertainty. In other words, owner/operators of stabilized cash flow properties like the cash flow, like the stability, and there are few safe alternatives if they were to sell a property.

There are many “value add” or lease up deals available. These are fantastic opportunities for operators looking to acquire these unlevereaged. If you assume a 36 month plan (obviously a generalization) to stabilize these facilities, then you’ve created a strong commodity. At this point, the property should bear the scrutiny of lenders and cash out financing should allow the owner a return of capital. A stabilized property is much easier to finance and much easier to sell. There should be a lot of upside in this type of deal, but on the down side, all cash transactions can tie up liquidity for quite some time and there seems to be less of an appetite for this type of transactions.

Are There Opportunities in Stabilized Facilities?

Yes! There are still opportunities. There are a few operators that are looking to revamp their portfolios and concentrate on certain markets. They are not going to “fire sale” their properties, but, there are some fair valutions floating around out there. Also, there are still a number of operators that are distressed in other parts of their portfolios. In other words, non-storage assets such as retail, industrial, land banks, housing tracts, etc. Many of these developers are having problems that can only be fixed with cash. The easiest and strongest assets to liquidate are the strongest performers, such as stabilized self storage. We should continue to see these types of transactions for quite some time as we continue to see bumps in the overall economy and lending markets.

Large operators are starting to evaluate more deals. Eventually there has to be movement, and we are on the brink of the next acquisition wave. This is a natural, and organic route to consolidation that WILL happen in the Self Storage Industry. With 85% of the market still held as “ma and pops” or by small owner/operators, there will be a consolidation. As professional operators create more and more of an institutional look and feel, we will see a drive towards this end as the small operators benefit from the acquisitions of institutional operators, and the institutional operators see value from economies of scale.

In the short to mid-term time frames, we have another benefit that we have inherited from the tight lending markets. Construction and bridge loans have all but dissapeared. There is very little movement in new development. Extra Space announced last week that they were halting their development efforts due to the inability to place reasonable construction debt on these projects. This is a good thing for the industry, and a good thing for the current operators out there because it limits inventory. It limits future competition and oversaturation in the markets. There are definitely markets that have been overbuilt with storage facilities at times when money was cheap and easy.

Not just in Self Storage, but in real estate development in general there has been a dramatic slowdown. I expect this to continue for quite some time. This will benefit us all in the long run.

Historically, we have put a premium on facilities in infill locations with little to no competition. This is still the case, but, the fact that there will be less new development makes some other opportunities attractive as well.

So, let the acquisitions begin! The opportunities are out there.

by Troy Downing

In the Self Storage Industry tenants store at their own risk. The vast majority of Self Storage leases state that the owner/operator assumes no risk of loss or damage to contents due to flood, fire, earthquake, burglary, or pretty much any other peril.

 

 

This doesn’t mean that Self Storage owner/operators won’t give some sort of compensation as a “good will” gesture to maintain good tenants. Tenant relationships, especially long term paying customers, are a huge asset that contribute greatly to the success of the business. Sometimes it simply makes sense to help out a performing tenant if there is a loss due to fire, flood, wind, or burglary.

Self Storage is also a commodity business that is successful due to a large volume of small payments. Obviously the most significant is the rent, but these facilities succeed through the collection of other sources of ancillary income such as the sales of locks and boxes, rental income from truck rental companies and other similar products and services as well. In other words, every dollar counts and the dollars add up.

With this in mind, paid losses can cut into the bottom line. Of course it doesn’t make sense to insure the contents for your renters because it would be cost prohibitive and possibly make the business unviable. The next best solution is to educate the renters and make sure that they know what is covered and what the likely outcome will be in case of a loss. Then, offer industry specific third party insurance coverage (Such as Bader Company or MiniCo).

Most large operators are now requiring insurance coverage. Some operators, such as Public Storage require renters to buy the insurance that they offer. Other operators with mandatory insurance programs allow renters to insure with unrelated third parties, such as through their homeowner’s or renter’s insurance policies. Large operators such as Uncle Bob’s and Extra Space have mandatory programs that require that all tenants have insurance for their stored property, but, do not require teh renter to buy the insurance that they offer. A tenant can simply bring in a copy of a declaration page from another policy that states that their property is insured while stored.

The reason that these mandatory programs are a “win-win” situation is manifold. First of all, all of your tenants will be covered in the event of catastrophic loss. This is an obvious benefit to your tenants. If it’s worth storing, it’s worth insuring. This is also an obvious benefit to the owner/operator because you won’t have to deal with angry tenants demanding compensation for losses and you won’t have the out of pocket costs of compensating your exceptional renters.

There are many benefits to the owner/operator. Most of us, at some point, have compensated a tenant for a loss. This is a good-will gesture to maintain positive relationships with good customers. With a mandatory insurance program, this will never be a consideration. The owner/operator can rest assured that the property of every one of their tenants is covered. There will never be compensation expenses related to tenant losses.

Finally there is a potential benefit to the bottom line. Most third party insurance companies will offer an “administration fee” for offering insurance. This is not always the case, but, it is definitely a common perk. Since the operators are not “insurance agents”, they can’t receive commissions for selling insurance policies (insurance regulations vary by state). But, there may be a small fee paid for processing the payments and making the programs available. These fees are generally small, but, can add up. As I mentioned before, this is a commodity business where every dollar counts.

Let’s assume that a given facility has 500 renters. If an owner/operator has a mandatory insurance program with a third party provider and that provider pays a $1 fee for every monthly policy written, that’s $500/month in extra income. That equates to $6,000 in gross annual income and if we assume a property value based on a 7 CAP, we have just increased our property value by almost $86k. Obviously, this is simple math… you could double those numbers with a $2 fee.

So, at the end of the day, you have:

·         Provided a valuable service for your tenants

·         Reduced costs for paying tenant losses

·         Increased cash flow

·         Increased the value of your facility

Recommendations to Owner/Operators:

1.    Adopt a mandatory insurance program.

2.    Offer third party insurance and negotiate a fee for administrating it.

Recommendations to Tentants:

1.    If it’s worth storing, it’s worth insuring.

2.    Check to see if your existing homeowner’s or renters insurance policy covers stored property.

3.    If you don’t have homeowner’s or similar insurance, pay the small premium to cover your property in storage. Industry standard insurance policies are generally below $10/month and well worth the peace of mind.

by Troy Downing

We’re up, we’re down… Finally a recovery… oh, never mind… Financial companies are getting back into the market and showing positive earning, uh, oh more problems. The Stock market is up/down/up/down/down/down…

What’s going on out there? Sometimes it feels like the stock market is simply a news megaphone. Picture one of those orange cones that you see on the side of the road. Have you ever yelled into one? It makes even the tiniest voice loud and bombastic. Imagine this same device amplifying the stock market based on media inputs. Instead of just getting louder, it makes the markets swing wider. Unfortunately, the swings over the last year or so have been mostly down. We had a glimmer of hope last week as we saw some gains. Some would argue huge gains. That is, of course, if you don’t put it into perspective of the values 2 years ago… or even a year ago. Yes, a 20% increase is a great short-term increase, but, when we’re still 40% off of our highs, it doesn’t look all that great. I think we’ve probably seen the lows, but, I also think that we’ll see it again. I expect that we’ll see a DOW Jones Industrial composite somewhere near 6,500 again before the end of the year, but, I highly doubt that we well see 12,000 again for several years. But, it’s not about where you came from, it’s all about where you can get from here.

If you are good at predicting and anticipating mob reactions to financial and economic reports, you could do great as a day trader. It’s pretty clear that any news that’s positive will cause an upswing, any news that is negative will cause a down swing, any time President Obama speaks it causes a down swing, and when he leaves the country, we seem to see an upswing… Weird… Seems like Wall Street doesn’t much care for his ideas and policies, but, that’s a topic for a different forum.

What is clear, however, is that nobody knows what’s next. I’ve read a few articles making the argument that we’ve finally seen the bottom and that we should expect to see a settling and eventual recovery. Maybe… Maybe not…. That’s the problem. Only in hindsight do you truly know where the bottom was and when the recovery began. Personally, I don’t have the stomach for it right now. I’ll put “play” money into equities, and maybe some really, really long term money into equities, such as a retirement account… But, that’s about it. I don’t want to worry about the flagellations caused daily by the unwashed masses.

I still like gold. Even if it doesn’t make sense, I think there is still some opportunity there. What scares me about gold is that some day, hopefully not in my lifetime, but some day, someone’s going to say “what is the intrinsic value of this shiny metal?” That’s a good question. If we produce more than we need and we use it basically for jewelry, some industrial uses, and putting gold leaf on the boarders of old icon paintings, what really is the intrinsic value? Of course we still mint coins from it, but, why? We have used it as a store of wealth for millennia, but, there were times and cultures where bronze was used as a source to hold and preserve wealth. We haven’t really seen that since the bronze age, but, how is that different from gold? Yes, it’s not as rare, but… It’s just a shiny metal.

OK. I’ve gone off on a tangent there. The bottom line is, gold tends to move up with inflationary pressures and the devaluation of currency. It is also seen as a hedge to more aggressive investments and tends to hold value if not grow it. It had a great run up over the last decade, but, it’s not very far below its highs.  So, from 10,000 feet, it appears that it’s holding steady near its highs. There may be a pull back. But, instability and inflationary pressures should cause its price to rise and mass realization that it’s just a shiny metal may make it fall. I’ve heard some gold analysts say they think it will double in the next couple of years. The problem is, most of the people writing this have something to gain from high gold prices so, I take it with a grain of salt.

Personally, I’m holding. We’ll see what happens.

Inflation vs Depression

Here’s the conundrum. Do you think that the “Stimulus” package will work? If you do, there is a high probability that it will heat up the market. Once this happens, there are very strong inflationary pressures at work. As I’ve mentioned before, we’ve seen very high inflation in the United States under President Carter. We’ve seen hyperinflation in Argentina. It got so bad there that you needed a wheelbarrow to carry your cash to the grocery store. Craziness. I don’t think we will see anything like that, but, I do think we will see inflation once this takes hold. We saw 18% during the Carter Administration, but, I’ve heard some predict as much as 25%. I don’t think we’ll see it that bad, but, I don’t think that 9 or 10% is an unreasonable expectation.

So, what do you do to curb inflation? Increase interest rates! What happens when you increase interest rates and make debt and liquidity harder to find? Recession! Ouch. This is making my head hurt…

I was at a conference last week and heard a talk by the Senior Economist at Wells Fargo, Eugenio Aleman. Aleman stated “The [US] Government is printing so much money that inflation HAS to happen.” He went on to say that he “expects the Fed’s programs to work” and that he is “expecting inflation in the near term.” Aleman also stated that “interest rates are going up. Now is the best time for debt.” – “The best sector in the country is the Real Estate Market”. The part that got me a little concerned was his statement that “the US Economy is looking more like Argentina every day.”

Like I said, I don’t think we will see it as bad as Argentina did, but, I do think we will see inflation, and I think we will see it sooner rather than later.

So, let’s look at the alternative. If you don’t believe that the “Stimulus” package is going to work, where does that leave us? Depression? Clearly if this doesn’t take hold, the government doesn’t have many more tools in their bag. In my opinion, they’ve already done too much and blurred the delineation between free market forces, government intervention, and nationalization.

I’ve heard so many people state their dissatisfaction in corporate bonuses paid to AIG employees… Maybe if the government could keep their grubby hands off, and let AIG go into Chapter 11, they could have reorganized and renegotiated some of those bonus contracts… This would have been a cleaner alternative than the hobbled, nationalized mess that we have to deal with now and that we will have to pay for for generations.

As I stated before, I believe that the “Stimulus” package will start “Stimulating” the economy. I also agree with Aleman that we will see inflation. I, personally, don’t think we will see inflation on an Argentine level, but, it will be there. If we experience an inflationary period, we HAVE TO see interest rate increases.  It’s a scary thought to think that your savings account is earning 1% in interest and we’re experiencing 10% inflation. That’s a guaranteed loss of 9%, but, to add insult to injury, you pay taxes on that 1% that you actually “earn”. Couple this with the fact that the Fed will increase borrowing interest rates to try to keep inflation in check. Crazy machinations. That’s just a fun word… machinations… I’ll have to use that again… But, back on topic- What does this mean to those of us who are trying to preserve wealth? Or even better, GROW wealth?

I think it’s a good time to have a little money on the sidelines. Take advantage of opportunities as they present themselves. But, I’m also worried about the guaranteed loss that cash/savings/CDs present. So, this is not an investment, it’s really not even savings since there is a guaranteed loss that you still pay taxes on. Rather, it’s dry powder. It’s the dry powder that you keep to deal with contingencies, emergencies, and opportunities. Unfortunately, larger amounts are needed in liquid accounts to satisfy lenders for potential deals, but, this too will pass.

As for preserving and growing wealth, we need to find inflation resistant or inflation neutral assets. Historically, as I’ve mentioned before, Gold has been a strong hedge against inflationary influences. I believe that this will be the case for awhile, but, I wouldn’t want a majority of my holdings to be in gold, just a hedge.

Cash flow real estate is an excellent hedge. But, there are pitfalls. The cash flow has to also be inflation neutral. In other words, if you have a light industrial complex with long term leases in place, you may see increases in expenses as they are hit by inflationary pressures, but, the leases may be locked in and unable to keep pace with inflation. In that circumstance, you will see a reduced Net Operating Income (NOI) because your gross income was limited, but, your expenses grew. On the brighter side, you probably saw the value of the underlying asset grow in pace with broader cost inflation.

So, of course, I have to tie this into what we do here at EBS, Self Storage. Self Storage is positioned as a strong hedge to inflation, it is inflation neutral, and has the kicker that it performs well in receding economies. So, up or down, it has proven to perform well.

One of the strongest, and most compelling reasons that Self Storage remains mostly inflation neutral is the fact that there are no long-term leases. All of the leases are month-to-month. This means that an operator can adjust rental rates as often as they see fit to keep pace with market rates and inflation. They won’t be locked into longer term, lower rates if the market bears higher rental rates.

Retail sales will also keep pace. The operator will simply mark up a market based margin on goods sold, such as boxes and locks. The value of the underlying property should also move in lockstep with broader real estate market inflation, but, in general, the value of the property is directly correlated to the Net Operating Income (NOI) that the property produces. Since the rental rates can be adjusted monthly, the annualized rental income should keep pace with inflation. Even if there is slight CAP rate expansion, this should be neutralized by the increase in gross income. Of course, expenses will go higher, but, again, this will be offset by higher gross receipts. So, the gross income to expense relation should remain constant.

The true risk in this type of an investment is the inability to retain tenants. This is a very real risk if we see another Great Depression. We’re currently at about 8.5% unemployment, which is a lagging indicator, but, I haven’t heard many that expect that to peak any higher than 10 or 11%. Yes, this will have adverse affects on the macro economy, but, this, for the most part, guarantees a constant tenant stream for the Self Storage industry.

When people are hit hard, economically, they tend to “downsize”. When they downsize, they generally have a need for storage. When businesses downsize, they also have a need for storage. So, whether the economy stays the same, grows out of control, or continues to slowly recede, I think we have it hedged.

We have it hedged with an inflation neutral asset, that produces tax sheltered income, and performs well in both expanding and receding economies. Where else can you do that?

by Troy Downing

I’ve been getting a few questions about how to interpret the numbers on a Schedule K-1 lately. Obviously, this is a question for a tax professional, which I am not, but, I will try to answer the basic questions of what numbers are represented on our K-1s and how to interpret them.

First off, I want to reiterate what our business is. We invest in tax sheltered, cash flow Real Estate (specifically Self Storage). “Tax sheltered” is an important concept in this type of an investment. It doesn’t mean tax free and it doesn’t mean tax evade. What it means is that the income and returns that are generated have demonstrable tax benefits and means for deferring the payment of taxes.

In other words, the cash flow from the project is sheltered. Part of this sheltered cash flow is taken as depreciation. Depreciation decreases your tax basis in a project and is recaptured as capital gains taxes upon the sale of the asset… Most investors defer the capital gains tax consequences by exchanging the proceeds into a like kind project (”like kind” being a very loose interpretation of what the new investment can be.)

Let’s put this into a hypothetical situation. Let’s use very round and exaggerated numbers to get the point across. First of all, let’s assume that we purchase a cash flow Self Storage real estate project for $1 Million. We finance 50% of it, so, our down payment is $500k. Let’s also assume that this project produces $80,000 per year as gross income.

Normally, one would assume that there was ordinary income, or passive investment income of $80,000. But, there are some things that reduce that. First off, there are expenses. Let’s say that 30% of the gross income is spent on insurance, utilities, taxes, etc. So now, our net income is $56,000. Well, let’s not forget debt service… After all, the bank expects us to pay the mortgage. So, let’s assume a 7% Interest-only loan… This will reduce the net income to $21,000.

So, to summarize, we bought a facility for $1 Million, financed $500k, generated gross income in year one of $80,000 and paid $59,000 in expenses for a final net cash flow of $21,000.

So, the $21,000 is what we receive, so, that’s what we pay taxes on right? Well, not exactly… If you depreciate your property, you can reduce the taxable portion of this income. So, let’s assume, for round numbers, that our project depreciates over a 25 year period. In other words, we reduce the value of the project evenly over 25 years and count it as a loss. So, on our $1 Million investment let’s assume that the value of the improvements (structures) are $475k. If we divide $475k by 25 years, we get $19k in depreciation per year. So, we received $21k in Net Income, but, we only pay taxes on $2k of that. In other words, approximately 90% of our income was sheltered.

The obvious question is, “why is this possible?” We all know that the Tax Man wants his money. So, why does he allow depreciation? The answer is simple- we have not completely rid ourselves of our tax liability, we simply deferred it. Eventually, Uncle Sam will get his share. In this case, he gets it in the form of recapture.

As we depreciate our property over time, we reduce our tax basis in the project. In other words, the base point at which we entered the deal, in this case $500k, is reduced by $19k per year. So, if we held onto this project for 25 years, we would have a near zero cost basis.

The reason that this matters is because our capital gains taxes are based on the difference between the selling price and our tax basis. So, rather than being taxed on the amount you paid for the project, you pay capital gains taxes on the depreciated basis. Currently, capital gains taxes are at 15% federal, so in the grand scheme of things, this is a relatively low tax (please lobby the current administration not to raise these) .

But, there is still a way to avoid, or defer these gains… The IRS 1031 Like Kind Exchange. The IRS allows you, within certain guidelines, to exchange your proceeds into another investment. As long as you do this correctly, the tax liability that was created from the sale of the depreciated project can be applied completely to the new project. Currently, the tax code allows you to do this ad infinitum. Many investors strategize to defer the taxes on these projects beyond their lifetimes. Of course, you may also choose to take part of the return, pay taxes on that portion, and exchange the rest. There is some flexibility with this, and the proceeds may go into more than one project.

So, all of this information about depreciation and recapture is simply exposition to answer the most common question I get on Schedule K-1s…. “Why did my capital account go down?”

The IRS Schedule K-1 is a tax document that reports a partner’s share of Income, loss and Deductions from a business. In general, it will report the percentage of ownership a partner has in a project, what percentage of profit, loss, and capital they own, and their share of any debt that the partnership has on its books.

The interesting parts on the K-1 for answering these questions are as follows.

Section L- Partner’s Capital Account Analysis
This section lists the partner’s capital account value at the beginning, any capital added during the year, and any increase or decrease in that account with an ending value at the end. To put it simply, the beginning amount is the capital contributed to the partnership. So, this is the partner’s starting basis. The basis is reduced by depreciating the property over the year. So, if there were no contributions during the year, and depreciation was taken, the basis will go down over time. This does not mean that the partner’s ownership in the project has gone down, or that the value of the project has gone down. It simply means that the basis has been reduced. This will also have a line item for distributions. Distributions are cash returned to the investor and are not necessarily income. Just as taking money out of your bank account is not income, but the interest it generates is.

Even if the project produced positive cash flow, the depreciation will reduce this.

In Part III there are usually 3 sections that have numbers of interest. First off, line 1 shows the amount of ordinary business income or loss. This will be the net from normal operations of the business with the exception of rental income. So, this will generally be retail sales and services. Line 2 is the Net income or loss from rental real estate income, and line 5 is any interest that the project generated, usually in interest bearing reserve bank accounts.

In lease-up deals, the cash flow generally starts out very low and increases as the project is stabilized. The real value in the project comes from the increased value of the real estate upon stabilization. Because of this, the net income numbers will start out very low or negative. This is expected and is normal.

On stabilized projects, especially newer acquisitions, you will often see the “Distributions” line in section L much higher than the net income numbers in Part III. This is due to the fact that the distributions are not directly indicative of the net profit/loss of the business. These have been reduced for all of the reasons that were mentioned above.

So, the most common question I get asked from a new investor trying to decipher a K-1… “My K1 only showed $1,000 in income last year, but, you sent me $10,000 in distribution checks. Is this a mistake?”. My answer, of course, “No. It’s not a mistake. You are just seeing 90% of your cash flow tax sheltered because you invested in a tax sheltered, cash flow real estate project.”

The second most common question: “I see that my capital account was reduced. Does that mean that the project isn’t performing?” Again, “no, this is normal and expected. This is a result of deprecation and tax sheltering. It allows you to keep more of the cash flow dollars in your pocket.”

Finally, my disclaimer- I am not a tax professional, I am a Real Estate Professional. These are not complete and should be verified with a tax professional to understand the nuances and to verify this information. I believe the statements to be true and correct, but, not necessarily complete as it is not my area of expertise.

If you are an EBS investor and have questions about this, please call and set up a meeting or call with our in-house CPA.

by Troy Downing

In early 2008, MJ Partners brought us a storage deal in Palm Desert, California- Desert Country Club Self Storage.

Historically, California had been a difficult market for us to make sense of. Since we are primarily a cash flow oriented operator, and we typically leverage acquisitions between 65 and 80% of the purchase price, the California markets that we were interested in simply didn’t make sense. The value of the underlying real estate had greatly outpaced the rental income that the business on top of it could produce. So, given the high valuations of the underlying land, a project simply wouldn’t cash flow at the market rents that they could support. We needed a correction in real estate values in order to turn speculative real estate investments that we would need to “feed” into our bread and butter… a cash flow business.

We really wanted to move into California markets and were simply waiting for the numbers to start making sense or the right deals to come along.

The correction that we saw in California Real Estate prices last year gave us hope that cash flow CRE would start making sense in our own back yard.

When MJ Partners brought us this deal, it was priced at $8.5 Million. Looking at the potential, we thought it was close and put the property under contract to conduct a more thorough due-dilegence inspection.

The physical plant was Class-A. It was a great build out and had been well maintained. Management was strong, but, this was a single-property owner/operator that didn’t benefit from the economies of scale that a larger operator would enjoy.The location was not prime, but workable. It was in a small retail/office park just off of Country Club Drive near Washington Street in Palm Desert. It was recessed from the main road and had some, but not much visibility from Country Club Drive.

The facility is climate controlled, has concrete drives, and is definately a class-A institutional quality facility. It has 57,310 net rentable square feet of space and 423 units. The seller’s listed gross potential income was $865,668 and claimed a trailing 24 month average occupancy of 94%. The seller claimed an average rent per square foot of $12.95.

Desert Country Club Self Storage was opened in 2000 but had been very well maintained and appeared new. There was a marked and noticable pride in ownership from the seller who was hands-on in the operation of this facility.

The facility also boasted a wine storage operation. The wine storage was nearly 100% occupied, had higher rents per square foot than the traditional storage units, and had a strong boutique following of clients. These were relationships that the owner and manager had obviously fostered and catered to. The wine operation was comprised of nearly 1,000 square feet of space and 106 units that brought in an additional $7,524/month in income.

The build out of the wine storage was very nice. There was a large, imported wooden door just off of the main lobby of the facility with a wine-themed mural painted on the wall. When you entered the temperature and humidity controlled facility, there were wooden individual lockers that could hold a few cases of wine and large steel lockers that could hold hundreds of bottles.

During our due diligence process, we evaluated the engineering, the rent rolls, the tax returns, and the profit and loss statements going all the way back to the original opening of the business. The seller wasn’t used to such close scrutiny but complied with our requests. We also analyzed the local market and what we thought the market rates for the units should be. There were a couple of competiters in the local market, and at least one of them was better positioned physically, but had much weaker management. One thing that I thought was of particular interest- When Stephen Kaplan and I were touring the competing facilities, we would ask them about wine storage.; None of them offered it, but every one of them freely referred us to the facility that we had under contract.

After compiling and analyzing our due diligence materials, and assesing the available debt for this project, we determined that it was priced just a little high to pencil into our model. We presented the seller with our analysis and told him that we needed a price reduction in order to make the project “pencil”. Another determining factor to this was the availability of debt. Lenders simply wouldn’t lend on the project at the asking price. Another factor in the reduced valuation was the fact that the seller had large lease blocks to single tenants. In other words, he had a single commercial tenant that was renting somewhere near 15% of his inventory. This tenant no longer needed the space and was moving out. Obviously, having a single source for a significant percentage of inventory added risk elements and made the trailing occupancy numbers a little weaker. The loss of this large tenant would change the occupancy from 94% to around 80%, obviously reducing the value of the deal.

We presented the seller with a price reduction request, and eventually closed the deal at $7.8 Million. The historical income plus the added value of our management systems and the expectation of growing the NOI made this a very attractive investment.

Shortly after we took over the facility, the wine storage operation was at capacity and had a waiting list of new potential tenants. We made the decision to increase the size of the wine storage operation by approximately 50%. We were able to finance this expansion completely with proceeds from the cash flow from the project. Construction was completed several months ago and we are well on our way to absorbtion.

A great side effect of this deal was the introduction that we recieved to the seller. The seller was a successful businessman who had had success in a number of different businesses. At first he was surprised at our insistence on a high level of detail and the large amount of scrutiny that goes into each and every one of our acquisitions. We strive to know everything that can be known about a project before we at it to our portfolio. As he saw how EBS conducted business as a buyer and as an operator, our model made sense to him.

Before closing the transaction, he approached us about doing a 1031 exchange from the proceeds of the sale. This was a huge compliment to us and I found it very flattering. Within 6 months of buying his facility, he exchanged the proceeds into 3 other EBS projects. This allowed him to defer paying capital gains taxes from the sale, but, more importantly… it allowed him to remain in this type of asset class without having to run the facilities himself. It allowed him to participate in a strong cash flow oriented real estate asset that is recession resistant, and inflation neutral. To enjoy tax sheltered income from cash flow real estate without having to worry about day to day operations. In case I haven’t made it clear, I think Self Storage is an outstanding investment that gives strong and predictable returns, in a tax shelted, inflation neutral manner in a low risk investment. I can’t think of a single other investment that is this strong, safe, or predictable.

March 16, 2009
2:00 p.m. PST
STEVE KAPLAN, CEO, EBS: Hi, I just want to welcome everybody to the first annual Equity Based Services corporate conference call. I am proud that our company has grown to the size and status that merits a call like this. And I want to thank all the investors, team members, and third party affiliates who have helped to grow this company, and have a stake in its ongoing success.

I am Steve Kaplan. I am CEO of the company. I am sitting with Howard Kaplan, President of the company, Troy Downing, Managing Member of the company, Eric Kaplan, COO of the company, and Greg Caledonia, who is involved in Investor Relations & Construction.

2008 was an extremely successful year in terms of strategic acquisitions, portfolio growth, and management execution. I am going to do a year-end review for 2008. This past year we saw the strongest and highest quality acquisitions in company history.

In large part it had to do with access to the funds invested in the EBS Income and Growth Fund and the Pilot Equity Value Added Fund. This combined with our ability to move quickly to evaluate projects and putting those projects that merited it under contract. This coupled with the lenders knowledge that we had access to those equity funds, gave the lending community confidence in our company and we were then able to move quickly, secure debt for the projects and move forward to closing the acquisitions.

Our management company, All American Property Management has grown to become one of the leaders and one of the strongest management companies in the self-storage industry. Coupled with our strong management systems that allows us to watch all of our transactions Real Time. The fact that we have strong reporting mechanisms have further given our lending contacts confidence in our overall operation and helped us secure debt in a time when many other acquirers of self-storage have had to sit on the sidelines.

2008 was a year that we saw most “mom & pop” operator acquisitions pushed to the wayside. They were not able to satisfy the lenders tighter lending requirements, increased reporting requirements, and could not meet the lenders stricter criteria to present a solid overall corporate structure.

Equity Based Services emerged as a leader in obtaining financing. This was achieved by presenting our strong portfolio of performing debt to lenders proving not only our strength as an acquisition company, but the strength of our management company. EBS now owns and operates about 60 self-storage properties for its private client investors.

This is actually one of the largest privately held self-storage portfolios in the United States. And it is just slightly behind a company like Public Storage or an Extra Space Storage, not in terms of size, but in terms of overall reach, market penetration and branding. One of our goals for 2009 is to move forward and increase our American Mini Storage image and brand recognition.

Our expansion in acquisitions and brand penetration has remained focused on our Sun Belt model. Some of what I consider to be our best strategic acquisitions have been in the Las Vegas market where we acquired AM IV, Bonanza, AMS V Racetrack, and AMS VI Silverado Self Storage. Additional key performing strategic acquisitions have been in the Louisiana, Tennessee, Dallas, Houston, Austin, San Antonio, Corpus Christi, and of course, Desert Country Club Storage in Palm Desert, California.

Equity Based Services acquired 15 new self-storage facilities in 2008 for its private client investors. We currently own and operate properties in California, Colorado, Arizona, Nevada, Texas, Louisiana, Virginia, Tennessee, North Carolina, South Carolina, and Florida. As I said before, we have focused on staying true to our Sun Belt model, the Colorado facility being the only exception.

Our model has takes into consideration employment opportunities and growth, as well as, locations where we believe that people will be moving to. So in growing demographic areas. We have always focused on microeconomic economies that are very conducive to self-storage. We look at those microeconomic economies being the engine that drive and facilitate growth and demand for self-storage.

For example, in Las Vegas, which I consider to be almost the perfect storm for self-storage, you have people constantly moving into the area, people constantly moving out of the area. You have a military base there. You have service related industries, casinos, retirement. You have medical facilities. What self-storage really needs is a catalyst for use. And Las Vegas has probably more of those catalysts than any other market in the country.

As I had previously mentioned, we have also acquired properties in Austin, Dallas and Corpus Christi. In 2008, in terms of new job creation, the Texas region has also been one of the strongest and fastest growing regions in the United States. For example, Austin had the second largest increase in job growth of any United States City in terms of its population per capita. Houston had the fourth largest, San Antonio had the fifth largest, and Dallas Fort Worth, the ninth largest amount of job growth of any United States City. All of this has played very well into our Sun Belt acquisition model.

Shreveport and Bossier City is another area that we are going to continue targeting for new acquisitions. This is largely because of Barksdale Air Force Base continues to add jobs to expand its nuclear mission. The potential addition of a global command strike center, a cyber command center is very appealing. And these two new installations could literally add thousands of jobs to that area.

The Haynesville shale find has the potential of being a major economic vehicle that is projected to bring thousands of jobs and millions of dollars in economic investment to the area. And surprisingly to me, the movie industry has moved into Bossier City Shreveport area and brought millions of dollars into the local economy. And that is increasing Bossier City Louisiana’s digital media footprint, and also expected to add hundreds of new jobs.

So our Sun Belt model, which shows us that there will continue to be shifts of population from the northern and eastern centers of the country down into the Sun Belt region really has worked well for us. And I think that even in this economic downturn we are still seeing upticks in occupancy and movement into the areas where we have facilities.

In the Phoenix market, we have made a couple of strategic acquisitions in 2008. And we continue to see strong performance in those acquisitions moving into the summertime.

My brother Eric Kaplan, who heads up the management company, will be talking about those acquisitions. But it is important to remember from my standpoint, that when times are good, people often buy new things. And they tend to put their old things in self-storage.

During downtimes businesses tend to move out of the expensive office buildings that they have purchased and leased, and downsize and move to a grassroots type operation. They take all their office furniture that they have acquired, and they put it in self-storage. In the hope that when things turn around they can take those items out of storage and expand again.

This model also applies for individuals, they move out of the large house, which is happening quite a bit in Phoenix, and move into apartments. They are taking all of the furniture that they purchased when they bought the big new houses and they are moving it into storage.

Self-storage is basically an investment that functions very well in good times, and also does well in bad times.

So we are definitely seeing stabilized occupancies and even upticks in a lot of areas in housing markets that have been devastated. Las Vegas and Phoenix being two of those that still show very strong portfolio growth for our self-storage.

One of the reasons why I think we have continued to be successful with the projects that we acquire and for these projects to maintain occupancy levels is the due diligence process that we go through when we acquire a project. And I just wanted to go through some of the steps involved in that. It is a very lengthy and in-depth process.

But our due diligence process and methods allow us to maximize opportunities for price reductions. A great example of that is Silverado self-storage where we started negotiating that project at about $13.5 million. After we put it under contract and started doing the due diligence on it, we quickly noticed that there were revenue streams attached to a billboard sign that overlooked the 215 freeway that may not be sustainable.

So we entered into a complete due diligence process that did studies on traffic counts. It studied consumer use of gasoline. It studied the amount of eyes actually viewing the sign. And what we noticed was is that there will probably be a downturn in the amount of revenue that a sign like that would be able to generate. So we went back to the seller of that facility who owned that sign. We knew that the lease on the sign that produced about $125,000 to $150,000 a year. But we believed that we would only be able to lease this sign to a triple net billboard company for a lower number, approximately $50,000 to $75,000 a year, and that that was the way the market was going.

We also were able to present to the seller on this particular property the fact that the lending markets were in chaos and that we could no longer achieve 80 to 85 percent leverage, not that we would leverage up that high. But many of the sellers believed that people could obtain that leverage. And by the time we went through and explained the current economics of the cell phone tower, the billboard, the current lending environment, we were able to negotiate a purchase price from $13.5 million down to around $11.3 million.

And all this really feeds into how we conduct our due diligence. What we do is we separate out the different areas of due diligence that we focus on. There is property specific due diligence. There is market specific due diligence There is due diligence involving the municipalities. And there is very strong financial due diligence that goes on.

When we look at the properties specifically, we look at the unit mixes, the tenant mixes, the amenities that the property has. And then we send out due diligence and compliance officers. Our top due diligence and compliance officer happens to be Jon Nunes who is a licensed attorney in California and Florida, and also a licensed contractor in California, Florida, and Hawaii.

What Jon does is he goes to the site and he ties the rent rolls that the sellers are representing to the physical characteristics of the self-storage itself. So, he walks through the property and makes sure that every unit that is supposed to be occupied is occupied. And it says that it is occupied on the rent roll. And if there are variances, he notes those discrepancies. And we use them as negotiating tools, or even reasons for cutting the property loose in due diligence.

Back here at the office, we have a financial due diligence team that ties the rent rolls to the financial statements, and ties the financial statements to the bank statements. And goes through the bills for every property that we put under contract. That way we are able to reconcile the information that we have to a financial statement so we know that the Net Operating Income (NOI) that we are acquiring at is a true and accurate NOI.

We also look at the seller’s tax returns. Make sure that he is representing the income that we think that he is representing. Because we have found that sellers are not willing to pay taxes on money they didn’t actually receive. So it is a very, very in-depth financial due diligence process. And then we branch out to the broader market in general for the market survey.

We have to figure that the facility that we are buying based on the population who are in the area around it, this will define if we do our analysis within a three-mile radius, or a five mile radius, this may even turn into a seven-mile radius. The more dense the population, the smaller the ring of concentric circle that is drawn around that property.

So if you are in a high densely populated area you really focused on that three to five-mile radius. What we are then able to do is identify the market that the subject facility competes in. Then we go to competing facilities within that market to make sure that the gross potential income for our facility is aligned with the gross potential income with the other properties around it.

Then based on this competition analysis Jon Nunes, our compliance officer, interviews the competing facilities on sight managers, this allows us to establish the actual occupancy of the competing facilities, as well as, the amenities of the competing facilities. Generally, we can get a good feeling for where the new acquisition sits within its market.

All of these are very important steps that we have to take in any acquisition. And one of the things that really separates our company from most of the other companies is that we are not relying on third party market data at all. We are going out there, and we are verifying data straight from the other facilities. And many times straight off the competing facility’s computers.

Then we perform due diligence from a municipal standpoint, we have to understand the zoning requirements of the property that we are purchasing. We need to make sure that all the income sources that we are acquiring are actually in compliance with the zooming regulations for the area. For instance, if are buying self storage facility that has RV parking, and we are generating an extra 100,000 NOI a year from RV parking, but RV parking is not a permitted use, then when we go back to that seller we have to discount all of the income generated by RV parking and demand a price reduction for those dollars. Because thoes dollars that are allowable based upon the permitted use for the property.

We also have to look at flood zones. And another thing that we pay very important attention to is of course public works projects. Now often times we find you know that a new onramp is being constructed. And that will actually be a benefit to the facility and position our facility in the market to the betterment of that facility in the future. But a public works project that blocks access to one of the facilities that we are looking to acquire for six to nine months. Could be very detrimental to the project.

So we need to understand exactly what is going on with the property and its surroundings, before acquiring, so there are no surprises into the future. We also run crime reports on the surrounding area. We try to do everything that we possibly can in our power to stay away from troubled facilities that have problems that in our view are unsolvable.

All of our due diligence efforts are really geared toward assessing the subject properties viability as an acquisition and focusing on identifying any items that may require a price adjustment, or just items that are un-addressable by us, and not something that we can enhance value through.

Also I just want to divert over to another area of our company where we handle expansions of properties. And as many of you are aware, we bought a property called EZ Store Self Storage. And we actually doubled the size of that property. We call it our Peoria Expansion. The expansion is currently 74 percent occupied by square foot. It is important to remember that an expansion lease up happens at three distinct phases.

And I wanted to take the time to explain the different phases of how an expansion lease-up worked. Because I know that the process is in-depth and some of us may not understand completely all the involved steps that go into it. But the very first step is dealing with the municipalities to complete the construction of a project. And that is getting the final certificate of occupancy and having the water company sign off, and the electric company sign off. Basically, being able to open the doors of that property for business.

Now often times the property can actually have its construction completed in a pretty expedient manner. Only to have it sit and wait for all the different municipalities and all the different governing agencies to sign the final certificate of occupancy and thus the inability to have that property up and running.

What happened with Peoria Expansion is that we got it built in a timely manner. And we managed to work our way through a majority of red tape and get the property signed off, and get it opened for business in a very reasonable amount of time. But the city of Peoria is not an easy municipality to work with. I am very proud of what we achieved over there to get that property built and open in such a timely manner.

The property is currently 74 percent occupied by square foot. The way a lease up works is that once you get the property expanded, and the certificate of occupancy in place, and you are open for business, you do everything you can to lease that property up to 88 percent to 90 percent by square foot. And that includes giving discounts, giving incentives, giving credits. Doing whatever it takes to get clients in the door.

Because once they are in the door we will be able to maximize the economic occupancy over time. And generally speaking it takes about 36 months to get a property leased up to stabilized economic occupancy once you have certificate of occupancy.

So I think that this property received its certificate of occupancy on 03/21/2008. And being at a 74 percent, 75 percent square foot occupancy is quite an achievement. And I do fully expect that by September of 2009, we will be very close to stabilized physical occupancy of that property. Once we have reached physical occupancy stabilization, we will start really concentrating on maximizing economic occupancy. And I expect to have this project perform very well in a short period of time.

I also wanted to talk about a property that we bought in Austin where a retaining law had collapsed. We bought this property from a seller that when he purchased the property; he bought a very, very well located property in a strong market. Austin is a dynamic market, very conducive to self-storage. About two weeks after he closed on that property, he had a retaining law fall in.

Now this wall was actually supporting a highly transited street. And right on that street there are high-tension power lines. And underneath where that retaining wall fell, there is a high compression gas line that runs all the way from a refinery along that wall. So the repair of this retaining law was not a small feat at all. And the seller was very panicked by it, which allowed us to negotiate a deep discount to acquire the property.

When we took the property over, we started dealing with the local contractors, and the local municipalities, and what I would call the good ‘ol boys network that was involved and trying to stall and trying to make little profits on different permits and basically looking at grease to get the job done. And we brought in Gregg Caledonia who decided and wisely so, to pull away from the engineers that we were involved with in the Texas region in Austin, and took it over - the project over to an engineer out of Colorado Springs that he had worked with before.

And from there, we were able to bring the project in just slightly under budget and get it all done in a very short amount of time. And since that has happened, since the wall was completed in mid-January, we have leased over 83 units at that particular facility. And the facility looks beautiful, it is a strategically located, and not far from the University of Austin. We expect that we will have that facility stabilized probably by the end of summertime as well. This is a very, very strong acquisition.

In 2009 I believe that we will be targeting somewhere between 5 to 10 acquisitions. We are going to continue to focus on the Sun Belt and emphasize acquisitions in Texas and California, as well as, looking to acquire more properties in the Colorado Springs area.

We are going to continue focusing on Class “A” acquisitions located in the Sun Belt. We will be focused on acquiring cash flowing properties at discounted prices. What we are currently seeing in the acquisitions market is that we are able to purchase properties from sellers who are distressed, who are willing or need to sell assets at a discount because of their own personal distressed situations.

This doesn’t mean that the properties themselves are distressed. But what it means is that the sellers need to pay down loans and solve other financial problems that they have. Because there aren’t many buyers in the market right now for self storage, we can gain value-added pricing on these assets strictly by negotiating hard and thus acquiring strong cash flow at a discount.

So I think that as we move forward we are going to see more of these strong cash flow properties in 2009. And we are going to continue to negotiate hard for real strong pricing.

At this time, I am going to move on to Eric Kaplan who is going to give you more of a management depiction.

ERIC KAPLAN, COO, EBS: Hi, I am Eric Kaplan, COO of Equity Based Services and all American Property Management. I am going to mainly address the performance of our current portfolio, how we are maximizing the value for our investors.

First I want to just say how enthusiastic I am about this platform. This will allow us communicate how we strengthen our properties, strengthen our management systems, and as such strengthen the status of your investment. So thank you all for joining us.

I am going to first speak to just the overall portfolio. Overall we have 60 properties currently, which include properties we purchased stabilized, and properties we purchased in lease up. Now when you combine all those properties, we are at an 84 percent cumulative occupancy. And when considering all of the lease up properties we have purchased over the last couple of years, this really speaks to the strength of our overall portfolio, the strength of the properties, the management, and the acquisition strategy that we have incorporated.

Now I am going to address three subjects regarding the performance of the properties. The first being the strength in the individual markets that we have acquired facilities, the asset management strategies that we are using to maximize the value for your properties, and I just wanted to point out thirdly some highlights or achievements over the last few months and of individual properties.

I would like to address the strengths in some of the markets that we are in. First, I will start with areas where foreclosures have affected the local economies, and the housing markets are in turmoil. As Steve mentioned, where there is foreclosures, storage generally benefits.

Las Vegas, for instance, we have been in that market for about five years now. And we are acquiring more and more facilities there. Well, in the five years that we have been there, and the five years I have been managing properties out there, I have never seen a stronger storage market. Occupancies are high for the most part across the board. Income on average at each of the sites is up about eight percent year-over-year and gross collected income as well. Occupancies range in the high 80s, low 90s. For instance, one property, Storage Inn we purchased at 90 percent occupancy. And we brought it up to 100 percent over the last few months. And they have aggressively raised rates as a result. The occupancy has maintained a 90 percent plus range. Income is higher than ever. And we see no sign of slowdown in leasing.

So Las Vegas is a very strong market. We are going to continue to push the envelope with and increase - and push to increase occupancies further and income.

The next area that I would like to speak to is Phoenix, Arizona where the foreclosure market is nearly as bad as the Las Vegas market. It is a very large city, so it is very segmented. We have seen a slowdown in general through the winter months going through January. The last two months though we have seen a huge increase in leasing activity. As a result income has been rising at the majority of our Phoenix sites.

A great example of this trend is, AMS I Phoenix, which we purchased was a management enhancement deal. The facility was about 77 percent occupied back in January. Well as of today it is approximately 84 percent occupied. As a result we are going to administer rate increase. Especially as we enter the spring season, which is a prime season for storage in the Phoenix area, we hope to see occupancy continue to rise to the 90 percent range.

Texas, where we have properties throughout the state, in Austin, San Antonio, Houston, Dallas, Tyler Texas. We also have properties adjacent to Tyler in Shreveport Louisiana. This region of Texas and Louisiana, is where our stronger performing properties are located and thus one of the strongest performing regions.

In the Tyler area, you are looking at the average occupancy high 80’s, this after we have implemented a considerable amount of rent increases throughout the facilities.

In the Dallas region we are seeing huge amount of leasing activity. At one site in February, which is the slowest month of the year we saw approximately 50 new leases. We have high occupancy in Saginaw, which is outside of Fort Worth at 95 percent. And so for the most part the Dallas and Fort Worth are doing exceedingly well.

In the Houston region we have leased up a property out there from 79 to 86 percent occupancy over the last few months. Our other property in Houston is in the high 90s. We have been implementing rate increases over all the winter months, which again are traditionally the slowest time of the year. So, throughout Texas we are seeing great performance, year-over-year increases in income.

One region I would like to address is the Florida region where everybody knows has struggled a little more than the other regions in the United States. The reason why I wanted to address it in this call is I am seeing a bit of a turnaround. In St. Augustine in the last few months we have seen occupancy in our occupancy rise from 77 percent occupancy to 86 percent occupancy. And for the first time in about a year-and-a-half we are putting together some rate increases that are going to start maximizing income at this facility.

So we are very excited to see that, and hopefully it will carry across to other sites. As for our other sites in Florida we are seeing a slight uptick in leasing activity. And we are pushing the envelope with our grassroots marketing. And nonetheless, in those areas we are seeing low occupancies in the lows of 79 to 83 percent.

So that said, we are pushing the envelope and increasing occupancy as we move on into the springtime months, which is exciting to see in that area.

Another region I would like to touch upon is Colorado Springs. And the reason I like to discuss that one is it is not within the Sun Belt acquisition strategy. But it has enough of the demographic strength and shifts in population that make it function like larger region. A current example, the property we have out there is 100 percent occupied. And as a result, we have implemented a number of very aggressive rent increases. However, we are still seeing occupancy at about 98 percent, 97 percent, and maintaining that level. Well year-over-year you are seeing that translate into an increase in income of about 10 percent to 11 percent gross collected income. And then the expense ratios are maintained in the mid 30s this all points to a very healthy facility.

So we will be looking aggressively to expand in Colorado so we can take advantage of the strength of having a number of properties in one region, having multiple yellow page ads consolidated into one. Sharing other costs like landscaping, things like that.

So across the board we are seeing general strength in the storage market on the management front. And I am very excited to see that. We are outperforming other asset classes like office space and retail. And for me as a storage guy makes me very happy about the progress that we are making.

I would like to move on to some of the asset management strategies that we are incorporating as a company, All American Property Management in order to maximize the value of your sites. The first item I would like to speak to is an idea that I took from Southwest Airlines, because they are one of the few profitable airlines. So I was wondering, what makes them profitable? What they do is lock into long-term oil contracts in order to sustain low pricing, among other things.

So how can we take advantage of that? Well oil was 150 just a little while back a barrel. It is about 50 now. So what we are doing is, we are locking into a long-term electricity contract. Electricity, especially in areas of deregulation like Texas for instance, parts of Louisiana has been one of the biggest thorns in the net operating income side of those properties.

Now the perfect opportunity for us to lock into five, 10 year contracts for those properties and regions. And then take advantage of these low utility costs. So we are in the process of locking up Texas right now. We are going to move on to Las Vegas and Phoenix. And just branch outward to all the regions as a lot of these utility prices are lower.

Another thing we are doing is we are starting to expand - or experiment, excuse me, on the Internet phone system. They are a fraction of the cost of landlines. Right now we are experimenting with a couple of sites. Because we have to make sure that they work for a storage facility. We want to make sure that we can count on them running, and that if their Internet goes down we have a suitable alternative so we don’t miss any calls and so we don’t have to shut down operations because the Internet went down. Right now we are in the very beginning stages. We are testing it with two sites. So far so good. But the jury is still out. Once and if we do decide to pull the trigger and use this as a way to increase the value of property we are going to go site-by-site. And on a very measured way in order to implement this.

The third thing that I would like to speak about is advertising. One of the biggest costs for advertising your self-storage facility, which affects your bottom line is yellow page contracts and yellow page advertising. Well we are seeing a trend in our studies that show the use of yellow pages is going down. The use of Internet advertising is increasing.

So we are starting to cut back on our yellow page ads and yellow page budgeting and moving dollar amount - dollars for advertising to Internet advertising. And specifically search engine advertising. So when somebody searches your site in that area your site pops up as one of the first results. We are using a company called G5 for that.

And you know the smart yellow pages making sure we are high up on the list when people search in that area. So we have already started with a number of sites doing this, and it has been very effective. But we are tracking all move ins, all calls, where they came from, and where to maximize the advertising dollar.

And we feel you know using the Internet is going to be probably the most cost effect saving for the marketing of our sites going forward. And we are going to be out of the game as this progress.

Lastly, I would like to speak about Penske. We have established Penske truck rental at a number of our sites already. The more we set up their truck rental services the better our relationship has become. It is a very profitable relationship between the both of us. I would like to say not only does it increase the top of the line when we do have Penske truck rental, it brings and increases traffic to the site exponentially. Wherever we have room to park the Penske trucks we are going to start using this company as a way of augmenting the income and to drive traffic to the site. Right now we have it at about 15 to 20 sites. I hope by the end of the year it is about 30 to 40 sites. So we are aggressively pursuing our relationship with Penske and implementing the truck rental at many sites.

Lastly, I would like to just touch upon some of the properties that you may be invested in and some of the highlights. First, I would like to speak to AMS 1 Saginaw. Saginaw is outside of Fort Worth Texas. We bought that property about 90 percent occupied. It was bringing in about $26,000 a month.

You know it was in shambled though as a result of just mismanagement from the seller. We renovated the site after we purchased it. We took it over. We brought in our own management systems. We cleaned out all of the padding the seller had in there. Occupancy dropped to about 83 - or excuse me, 80 percent.

Well over the last few months, we leased it back up to 93 percent and it is bringing in close to $30,000 a month. So that has been a big homerun for the fund that is invested in that site. And yes, I mentioned AMS 1 Colorado. We are still implementing the rental increases. It still remains at 98 percent occupancy. AMS 1 Shreveport, which is one of the main investments of our pilot equity fund, when we purchased that site they were averaging 19,000 to 20,000 a month in income. Since, we have leased it up it is now averaging almost close to $30,000 a month. And we are looking into doing expansion there because the storage market is so strong.

I would also like to speak about Converse self storage, Converse which is outside of San Antonio. We purchased it at 90 percent occupancy. We have had it above 96 percent occupancy since we have owned it. We have increased rent aggressively throughout our ownership over the last year. We continue to maintain occupancy and should not be affected going into the spring and summer months. We are going to do another rent increase out there. In this site the seller averaged about $52,000 a month, we are averaging about 58,000 a month.

So overall we are very happy with the performance of our portfolio. And we look forward to another strong 2009. I am going to turn it over to Troy Downing.

TROY DOWNING, MANAGING MEMBER, EBS: This is Troy Downing. Thanks, Eric. Thanks for joining us. I am going to keep this brief. I am going to talk a little bit about current state of the economy and how that is affecting our business.

First a little bit about the lending markets and how these are affecting our business. Everybody has been affected by what we have seen in the economy over the last 12 to 16 months. Stock markets are reeling. They are obviously way down. People have seen upwards of 50 percent loss in stock values. We have seen high jobless rates.

We have seen receding real estate markets in general, with that said, I want to add the caveat that the one performing real estate asset, and at least in terms of real estate investment trusts (REITs) has been self storage. So we are feeling pretty lucky to be in that business.

But as Steve and Eric have mentioned, down economies cause downsizing, not only for people but for small businesses. Moving from large houses into a small houses or businesses either closing up shop or just downsizing. It all drives customers into self-storage. This creates a huge need.

The more income that we can create on these facilities, the more value we have. Not only in current cash flow, but also in the value of our projects. So we have seen these downturns in the economy actually give us one of our strongest years. And we continue to see strong receipts as Eric has mentioned.

I know it has been mentioned before, but, just to underline the fact that Las Vegas being one of the - I want to say almost the poster child of a housing crisis and in a job loss crisis; it has been one of our stronger performing portfolios. We have been very, very happy about that.

The other thing I want to mention is the metamorphosis of debt markets. It wasn’t really that long ago, say two or three years ago when we were finding mostly conduit debt, that is, commercial mortgaged-back securities (CMBS). And we were finding very easy debt. We were placing up to 10 years of interest-only loans, low interest rates. Non-recourse loans. It was actually very easy to find debt for the facilities.

And you know it is a double-edged sword because that easy debt made it easy for us to find very attractive loans. But it also made it easy for other people to find attractive loans which somewhat inflated the prices in some markets, and actually added a lot of competition in the markets which didn’t necessarily need to be there.

So noq we have seen, at least for the time being, the end of the conduit loan. And as the debt markets have changed, we have seen a whole new set of lenders. We went from conduit lenders to debt funds to mutual funds that had money to lend in real estate assets. There are still insurance companies lending out there. And we just have been turning over stones finding new debt. It has gone all the way down to the regional banks and the local banks.

We have found that regional and local banks, although the terms have changed a lot, still have money to lend. I think they have been the least affected by the sub prime debacle and all the other factors that have caused problems with some of the larger lenders. So there is still a lot of opportunity out there.

Now one of the things about lenders in general have gotten very much tighter in their lending criteria. The level of due diligence has increased by an order of magnitude.

The strength of the sponsors, the strength of a business, the strength of the project, everything is scrutinized to such a strict level that it is really again, a double-edged sword. It has caused a lot more work for us. But it has also forced most of our competition out of the market because lesser sponsors, lesser operators that don’t have our strength, our infrastructure, and simply can’t find debt.

So we have found that to be a great advantage. And we continue to turn over stones looking for new lenders. And you know we have a lot of things going for us. First of all we have somewhere in the area of 60 performing loans. So that is very strong. We only do self-storage. And the lenders like that. And we are very good at operating self-storage. We are one of the best, if not THE best owner operator in the space, thanks to Eric and his team.

We have a lot going for us in terms of qualifying for and placing this debt. We have seen some things change. Like the ability to fund un-stabilized facilities has gotten much more difficult. But we are still finding debt on stabilized facilities. I am not sure if Steve mentioned it, but we are finding a lot of stabilized facilities now that are acting a lot more like an opportunistic deal in terms of all-in returns.

They are cash flowing at the beginning. But we are able to negotiate prices that are showing us very strong returns at the tail end and we are very excited about that. One of the other things that is going away is the ability to find interest only loans. The 10-year is completely gone. So we are seeing more amortized loans for 25, 30-year periods. So that is changing our pro formas on projects going forward.

But we are still hitting very strong numbers. The other thing that we have seen almost completely disappear if not completely is the ability to find non-recourse debt. And one thing that I just wanted to point out to our investors is that our recourse is not passed on down to the investors. So if and when we have to take recourse debt, the principles of EBS are signing on those and not passing anything down which is really the only way that an investor should be situated in a situation like this.

So what we have seen also coming up on the types of loans coming available is you know the 10-year notes are getting harder to find. And a lot of banks are trying to get shorter and shorter terms. And we have been very proactive in negotiating terms so that we stagger maturity dates on our portfolio so that we are not stuck refinancing a bunch of loans at once.

So just for example, in 2009 we have only one loan coming due. And that is coming due in July. It is a loan that we are already negotiating with the bank. And it should be a relatively easy loan to either extend or to refinance because it is on that Easy Store expansion that Steve had already mentioned, which is obviously leasing up very quickly. So we are very comfortable in moving forward with that.

So in terms of recovery of the banking system, what is happening, and banks have to loan money to stay in business. I know there has been a lot of uncertainty over the last year. And a lot of banks have tried to give the impression that they are still in business without really letting a lot of dollars out. And that has got to change. Banks have to do business to stay in business. Things are going to move forward.

The pace at which we recover is anybody’s guess. But I personally would expect us to see a bottom in 2009, and a very slow recovery. I don’t think this is going to be the kind of recovery where the stock markets start jumping up and down in broad strokes. I think we are going to see lenders slowly start coming back to the market. We are going to start to see activity. And we are going to start to see a recovery in the real estate markets and overall economy. By the time we start to see a larger number of our loans coming due in our portfolio, we should be well on the road to recovery. And I think we have got that well under control.

So moving on. Howard Kaplan, our president. Howard?

HOWARD KAPLAN, PRESIDENT, EBS: Hello, everyone. Thank you for taking your time to join us. My job today is to context to everything that you have heard by giving you the insight into the structure of Equity Based Services.

Equity Based Services as a company is departmentalized for functions. You have heard Steve talk about the acquisitions and the due diligence. Eric talk through the management and the marketing, and Troy speak to the financing. In-house we have a legal department; Matthew Lab, the Senior Attorney within the legal department. He is assisted by one other attorney and a staff of four other people.

Within the legal department, what we accomplish is the ongoing acquisition legal documentation and compliance documentation that goes back and forth. Jon Nunes who is also an attorney is in the field not only interpreting the documentation, but getting us the source documentation. And of course when you are putting together the kind of loans that we have to put together, lenders require a give and take of legal reviews and documentation and legal opinions.

All of that goes on in-house and is a strong asset for all of our client base. Because we do things more directly rather than farm out a lot of work. However, we do use a law firm of Foley & Lardner to activate an oversight supervising law firm for all the work that goes out to our partners and investors. And we have used them probably now - well the original firm and the successor firm I am going to say over 20 years.

We also take care of the accounting within Equity Based Services; this has a separate accounting division. The way that is structured is that we have bookkeeping accountings that have a portfolio project for which they are responsible. There are five accountants handling each of their portfolio properties. There is a supervisory accountant who manages their forward work and does the oversight - the initial oversight.

And then there is Dan Anderson who is a CPA of course is the final supervising party and compliance party to all the work that is generated by the accounting department. The accounting department is responsible for a number of functions, and I will just mention a few. Of course they have to sign off of all of the due diligence accounting that is done for acquisitions and for 1031 exchange, percentages and the like.

They are also responsible for the day-to-day review of the operations - financial operations of each project. And at this time of the year it is their job to complete all the tax-reporting requirements, which they should have finalized and out to everybody within over the next 10 days we should be complete with material going out as we speak on a project-by-project basis.

The accounting responsibility is an ongoing responsibility so that there are quarterly reviews internally as well as monthly reviews of operations as one accountant has to report to their senior party. Another important function is the insurance function of each of these properties. The insurance dollars that are required are very large at this point, when we have 60 properties.

Together with Steve Kaplan and his insurance department have been able to put together a master insurance policy to cover all of the properties, which have saved us substantial premium dollars going into 2009. And that was quite an undertaking and quite a feat. And is responsible for a growth of bottom line numbers.

Also within Equity Based Services, we have to have another expenditure looked at annually and looked at continually annually over each of the properties, and that is a real estate tax imposition. I would say each part of the country handles their taxation of each project separately and in different ways. We have to use consultants in each region in order to protest any tax increases. But it is through the accounting and the insurance department and the legal department that we are able to give our third party resources or appeals the information to use.

EBS has successfully put together three funds during the past two years. And EBS Income Fund, EBS Income Fund II and Pilot Equity have deployed all of thier assets, all the dollars raised, and have acquired properties, performing properties in each of those funds. And year-to-year these properties within the fund have increased in activity, increased in gross income. We are very proud of this and it has given us additional strength to the marketplace.

Referring to what you have heard about the lending market and about acquisitions, the reality today from my perspective is that the lenders that exist are looking for proven experience and proven principles to sponsor their loans that they give out. Therefore while others have struggled in 2008 and going into 2009, Equity Based Services closed 15 acquisitions in that time period with a number of different lenders. And at a time when others were finding their lending avenues contracting, we were able actually to expand the amount of lenders we use in that time period.

It is not going to be easy on 2009. But it is something that we have an inside track on, and we are moving forward with three new lenders as we speak. The mission for Equity Based Services remains what it always has been. And that is we continue to manage aggressively the portfolio properties that we have. And in so doing, by the way, each of these properties is a standalone asset so that all the applause that comes for one property functioning well, or any of the obstacles that that property has, is isolated to that property.

So there is no spillover either for the good or for the negative in any one property. And that is part of our strategy and in our ongoing strategy.

Having said that, as each of these properties grow in value, our strength grows in the overall storage market. So we are managing these properties aggressively. We are increasing income aggressively. We have instituted ways to increase new income streams at each of the properties. And as we do that in our existing portfolio, we are preserving the value of the dollars that have been invested in those properties. We are growing the value of the assets.

And therefore growing the value of the dollars invested. EBS will continue to target income-producing properties in 2009. Properties that will as Stephen has stated, and as Troy has stated, will produce income immediately, cash flow immediately. But will have an upside for performance because of the due diligence in both location of the properties, due diligence in verifying the performance of the properties, and due diligence in estimating the growth of those markets.

With that, I want to thank all of you for taking your time. If you have any questions or like to speak with any of us we are very available to you. Once again, thank you for your time.
END

The following is a replay of the Equity Based Services Annual Shareholder Conference Call held on March 16th, 2009.

A written trascript should be available in a couple of days if you are unable to access this recording.

Opening remarks by Stephen Kaplan

Management overview by Eric Kaplan

Economy and Debt overview by Troy Downing

Infrastructure and closing remarks by Howard Kaplan

by Troy Downing

It started about a year or so ago… the stock market would have a huge drop. This would be followed by a huge rally… It worked like clockwork… You could assume that if there was a huge movement in one direction, there would be a huge movement in the other direction. This volatility was great for those that had the stomach to be day traders…

That’s definitely not me. I don’t want my life to be defined by sitting in front of a computer screen, watching ticker symbols and trying to figure out which way the market was going to move today. So, I really didn’t bet anything significant in the stock market, but, what I did have I didn’t touch.

I have some money in a self directed IRA that contains stocks, some in an old 401(k) that I had from my Yahoo! days, and a few dollars in an online brokerage account, but, these have mostly been dormant for quite some time.

We are still seeing volatility, but, the down turns have been greatly outweighing the ups. I’ve heard conversations, especially in the last couple of months, about people that are sure that we are near or at the bottom… “I’m gonna buy B of A –or- I’m gonna buy GE”, or whatever it is that’s been hammered as of late… But, the prices keep dropping… Some of them pull the trigger, just to see their holdings continue to drop. The Dow is below 7,000 today… It will probably be north of 7,000 by the end of the week, and, maybe 6,500 in another two weeks… Who wants to catch the falling knife?

I had an investor sitting across from my desk this morning. He told me that he had 1% of his net worth in the stock market. “I don’t really like stocks. I have 1% of my net worth in the stock market, but, it was 2% this time last year.” I thought that was pretty funny. He last half of the value of his stock portfolio, but, only 1% of his net worth.

We were talking about diversification versus concentration. We discussed the fact that most fortunes are made by concentrating but most wealth is preserved by diversifying. This was a relatively young man who said that he really liked commercial real estate, and was concentrating there in an effort to create meaningful wealth. He said that that was the reason that he’d invested much of his money with EBS over the years.

It’s not a sexy investment… It’s not about 1,000% returns in a dot.com venture. It’s not a crazy corporate jet company, or a chain of fancy restaurants… Cash Flow Real Estate. Self Storage Assets… It’s about the preservation of value and the generation of cash. It’s a slow grind compared to the dot.com boom, but, it’s a respectable and meaningful return in times of unprecedented losses in other assets.

Here’s the sexy part… They make money! They hold value, and they cash flow. Let’s look at some of our options over the last year.

1.       Stocks have been hit hard. The value of the stock market had receded significantly in the last year. The market hasn’t closed for the day, but, as of this writing, The Dow is at 6,830 and the NASDAQ is at 1,333. This is from 12,214 and 2,273 a year ago, respectively. This is a drop in value of 44% in the DOW and 41% in the NASDAQ. Ouch!

2.       Precious metals- Gold was about $980 per ounce a year ago and is $940 an ounce today. This represents a roughly 4% decline in value over a year. It’s a loss, but, it is an order of magnitude smaller than the losses in the stock market. Also, this is not a cash flow deal, and should basically tread water, increasing in value with a weakening economy, growing inflation, and a weak dollar, and softening in value with a strong dollar, and deflation.

3.       Cash Flow Real Estate- Many sectors of Commercial Real Estate have been hit hard the last year. Retail and office buildings have not done well in general. This makes sense in terms of what’s going on in the world right now. Low consumer confidence and low spending have hurt the bottom line in retail. Downsizing and closures have hurt office space… There are a number of other CRE classes hit, but, let’s talk about the positive… Self Storage.

 

Self Storage has been the beneficiary of a weak economy. The values of Self Storage properties in general have held their own. We have actually grown the NOI of our Self Storage portfolio as a whole and thereby grown the overall value. The market CAP rates have spread somewhat, but, the NOI has kept pace and in most instances, outpaced CAP rate expansion. This has not only preserved, but, grown the overall value of our portfolio in Self Storage.

 

Sexy or not the preservation of value and the generation of cash flow is a strong proposition in times of unprecedented losses of wealth.