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JCAP Jernigan Capital

Filed: 1 Nov 19, 4:14pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

OR

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                               to                              

001-36892

(Commission file number)

JERNIGAN CAPITAL, INC.

(Exact name of registrant as specified in its charter)

Maryland

 

47-1978772

State or other jurisdiction
of incorporation or organization

 

(I.R.S. Employer
Identification No.)

 

6410 Poplar Avenue, Suite 650

 

 

Memphis, Tennessee

 

38119

(Address of principal executive offices)

 

(Zip Code)

 

(901) 567-9510

Registrant’s telephone number, including area code

 

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     ☒    No     ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes     ☒     No     ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  

 

Accelerated filer  

Non-accelerated filer  

 

Smaller reporting company  

 

 

Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     ☐    No     ☒

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

 Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

 JCAP

New York Stock Exchange

7.00% Series B cumulative redeemable perpetual preferred stock, $0.01 par value per share

JCAP PR B

New York Stock Exchange

 

As of October 31, 2019, Jernigan Capital, Inc. had 22,236,871 shares of common stock outstanding.

 

 

 

 

2

In this quarterly report on Form 10-Q (“report”), unless the context indicates otherwise, references to “Jernigan Capital,” “we,” “the Company,” “our” and “us” refer to the activities of and the assets and liabilities of the business and operations of Jernigan Capital, Inc.; “Operating Company” refers to Jernigan Capital Operating Company, LLC, a Delaware limited liability company; and “our Manager” refers to JCAP Advisors, LLC, a Florida limited liability company.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

JERNIGAN CAPITAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

September 30, 2019

 

December 31, 2018

Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,961

 

$

8,715

Self-Storage Investment Portfolio:

 

 

 

 

 

 

Development property investments at fair value

 

 

508,887

 

 

373,564

Bridge investments at fair value

 

 

 -

 

 

84,383

Self-storage real estate owned, net

 

 

232,822

 

 

96,202

Investment in and advances to self-storage real estate venture

 

 

11,027

 

 

14,155

Other loans, at cost

 

 

4,417

 

 

4,835

Deferred financing costs

 

 

4,090

 

 

4,619

Prepaid expenses and other assets

 

 

7,813

 

 

3,702

Fixed assets, net

 

 

216

 

 

233

Total assets

 

$

776,233

 

$

590,408

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Secured revolving credit facility

 

$

125,000

 

$

 -

Term loans, net of unamortized costs

 

 

40,735

 

 

24,609

Due to Manager

 

 

2,749

 

 

3,334

Accounts payable, accrued expenses and other liabilities

 

 

5,392

 

 

2,402

Dividends payable

 

 

12,940

 

 

12,199

Total liabilities

 

 

186,816

 

 

42,544

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

7.00% Series A preferred stock, $0.01 par value, 300,000 shares authorized; 131,375 and 125,000 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively, at liquidation preference of $131.4 million and $125.0 million, net of offering costs, respectively

 

 

128,512

 

 

122,137

7.00% Series B cumulative redeemable perpetual preferred stock, $0.01 par value, 3,750,000 shares authorized; 1,571,734 shares issued and outstanding as of September 30, 2019 and December 31, 2018, at liquidation preference of $39.3 million, net of offering costs

 

 

37,298

 

 

37,401

Common stock, $0.01 par value, 500,000,000 shares authorized at September 30, 2019 and December 31, 2018; 22,236,871 and 20,430,218 issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

222

 

 

204

Additional paid-in capital

 

 

422,240

 

 

386,394

Retained earnings

 

 

1,645

 

 

1,728

Accumulated other comprehensive income (loss)

 

 

(500)

 

 

 -

Total equity

 

 

589,417

 

 

547,864

Total liabilities and equity

 

$

776,233

 

$

590,408

See accompanying notes to consolidated financial statements.

3

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30,

 

September 30,

 

 

2019

 

2018

 

2019

 

2018

Revenues:

 

 

 

 

 

 

 

 

 

Interest income from investments

 

$

10,216

 

$

8,086

 

$

27,578

 

$

19,051

Rental and other property-related income from real estate owned

 

 

1,988

 

 

970

 

 

5,075

 

 

2,398

Other revenues

 

 

45

 

 

35

 

 

312

 

 

99

Total revenues

 

 

12,249

 

 

9,091

 

 

32,965

 

 

21,548

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

2,137

 

 

1,727

 

 

6,273

 

 

5,579

Fees to Manager

 

 

2,131

 

 

1,872

 

 

6,203

 

 

4,758

Property operating expenses of real estate owned

 

 

989

 

 

473

 

 

2,538

 

 

1,204

Depreciation and amortization of real estate owned

 

 

1,372

 

 

854

 

 

3,491

 

 

2,443

Other expenses

 

 

268

 

 

 -

 

 

268

 

 

290

Total costs and expenses

 

 

6,897

 

 

4,926

 

 

18,773

 

 

14,274

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

5,352

 

 

4,165

 

 

14,192

 

 

7,274

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings from unconsolidated real estate venture

 

 

165

 

 

440

 

 

407

 

 

1,425

Realized gain on investments

 

 

 -

 

 

619

 

 

 -

 

 

619

Net unrealized gain on investments

 

 

7,974

 

 

11,060

 

 

28,847

 

 

24,003

Interest expense

 

 

(2,546)

 

 

(467)

 

 

(5,535)

 

 

(1,521)

Other interest income

 

 

 9

 

 

147

 

 

30

 

 

315

Total other income

 

 

5,602

 

 

11,799

 

 

23,749

 

 

24,841

Net income

 

 

10,954

 

 

15,964

 

 

37,941

 

 

32,115

Net income attributable to preferred stockholders

 

 

(5,157)

 

 

(4,790)

 

 

(15,283)

 

 

(12,965)

Net income attributable to common stockholders

 

$

5,797

 

$

11,174

 

$

22,658

 

$

19,150

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share attributable to common stockholders

 

$

0.26

 

$

0.58

 

$

1.06

 

$

1.17

Diluted earnings per share attributable to common stockholders

 

$

0.26

 

$

0.57

 

$

1.06

 

$

1.16

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share of common stock

 

$

0.35

 

$

0.35

 

$

1.05

 

$

1.05

 

See accompanying notes to consolidated financial statements.

4

 

 

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30,

 

September 30,

 

 

2019

 

2018

 

2019

 

2018

Net Income

 

$

10,954

 

$

15,964

 

$

37,941

 

$

32,115

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on interest rate swaps

 

 

(58)

 

 

 -

 

 

(495)

 

 

 -

Reclassification of realized gains on interest rate swaps

 

 

(1)

 

 

 -

 

 

(5)

 

 

 -

Other comprehensive income (loss)

 

 

(59)

 

 

 -

 

 

(500)

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

10,895

 

$

15,964

 

$

37,441

 

$

32,115

 

 

 

 

5

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

 

 

 

 

 

 

 

Earnings

 

Other

 

Total

 

Non-

 

 

 

 

 

Preferred Stock

 

Preferred Stock

 

Common Stock

 

Additional

 

(Accumulated

 

Comprehensive

 

Stockholders'

 

Controlling

 

Total

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-In-Capital

 

Deficit)

 

Income (Loss)

 

Equity

 

Interests

 

Equity

Balance at December 31, 2017

 

 

40,000

 

$

37,764

 

 

-

 

$

-

 

14,429,055

 

$

144

 

$

276,814

 

$

(8,902)

 

$

 -

 

$

305,820

 

$

-

 

$

305,820

Issuance of preferred stock, net of offering costs

 

 

35,000

 

 

34,417

 

 

1,500,000

 

 

35,988

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

70,405

 

 

-

 

 

70,405

Stock dividend paid on preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

2,222

 

 

 -

 

 

44

 

 

-

 

 

 -

 

 

44

 

 

-

 

 

44

Repurchase and retirement of shares of common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

(2,234)

 

 

 -

 

 

(40)

 

 

-

 

 

 -

 

 

(40)

 

 

-

 

 

(40)

Issuances of stock-based awards

 

 

-

 

 

-

 

 

-

 

 

-

 

18,000

 

 

-

 

 

 -

 

 

-

 

 

-

 

 

 -

 

 

-

 

 

 -

Stock-based compensation

 

 

-

 

 

-

 

 

-

 

 

-

 

 -

 

 

 -

 

 

376

 

 

-

 

 

 -

 

 

376

 

 

-

 

 

376

Dividends declared on Series A preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

 -

 

 

(3,034)

 

 

-

 

 

(3,034)

 

 

-

 

 

(3,034)

Dividends declared on Series B preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(561)

 

 

-

 

 

(561)

 

 

-

 

 

(561)

Dividends declared on common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(5,056)

 

 

-

 

 

(5,056)

 

 

-

 

 

(5,056)

Net income

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

5,354

 

 

-

 

 

5,354

 

 

-

 

 

5,354

Balance at March 31, 2018

 

 

75,000

 

$

72,181

 

 

1,500,000

 

$

35,988

 

14,447,043

 

$

144

 

$

277,194

 

$

(12,199)

 

$

 -

 

$

373,308

 

$

 -

 

$

373,308

 

See accompanying notes to consolidated financial statements.

6

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

 

 

 

 

 

 

 

Earnings

 

Other

 

Total

 

Non-

 

 

 

 

 

Preferred Stock

 

Preferred Stock

 

Common Stock

 

Additional

 

(Accumulated

 

Comprehensive

 

Stockholders'

 

Controlling

 

Total

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-In-Capital

 

Deficit)

 

Income (Loss)

 

Equity

 

Interests

 

Equity

Balance at March 31, 2018

 

 

75,000

 

$

72,181

 

 

1,500,000

 

$

35,988

 

14,447,043

 

$

144

 

$

277,194

 

$

(12,199)

 

$

 -

 

$

373,308

 

$

 -

 

$

373,308

Issuance of preferred stock, net of offering costs

 

 

35,000

 

 

34,987

 

 

-

 

 

(8)

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

34,979

 

 

-

 

 

34,979

At-the-market issuance of preferred stock, net of offering costs

 

 

-

 

 

-

 

 

71,734

 

 

1,483

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1,483

 

 

-

 

 

1,483

Proceeds from issuance of common stock, net of offering costs

 

 

-

 

 

-

 

 

-

 

 

-

 

4,600,000

 

 

46

 

 

81,103

 

 

-

 

 

-

 

 

81,149

 

 

-

 

 

81,149

At-the-market issuance of common stock, net of offering costs

 

 

-

 

 

-

 

 

-

 

 

-

 

44,016

 

 

 -

 

 

682

 

 

-

 

 

-

 

 

682

 

 

-

 

 

682

Stock dividend paid on preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

120,028

 

 

 1

 

 

2,124

 

 

-

 

 

-

 

 

2,125

 

 

-

 

 

2,125

Repurchase and retirement of shares of common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

(14,279)

 

 

 -

 

 

(274)

 

 

-

 

 

-

 

 

(274)

 

 

-

 

 

(274)

Issuances of stock-based awards

 

 

-

 

 

-

 

 

-

 

 

-

 

57,333

 

 

 1

 

 

(1)

 

 

-

 

 

-

 

 

 -

 

 

-

 

 

 -

Stock-based compensation

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

808

 

 

-

 

 

-

 

 

808

 

 

-

 

 

808

Dividends declared on Series A preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(3,892)

 

 

-

 

 

(3,892)

 

 

-

 

 

(3,892)

Dividends declared on Series B preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(688)

 

 

-

 

 

(688)

 

 

-

 

 

(688)

Dividends declared on common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(6,739)

 

 

-

 

 

(6,739)

 

 

-

 

 

(6,739)

Net income

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

10,797

 

 

-

 

 

10,797

 

 

-

 

 

10,797

Balance at June 30, 2018

 

 

110,000

 

$

107,168

 

 

1,571,734

 

$

37,463

 

19,254,141

 

$

192

 

$

361,636

 

$

(12,721)

 

$

 -

 

$

493,738

 

$

 -

 

$

493,738

 

See accompanying notes to consolidated financial statements.

7

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

 

 

 

 

 

 

 

Earnings

 

Other

 

Total

 

Non-

 

 

 

 

 

Preferred Stock

 

Preferred Stock

 

Common Stock

 

Additional

 

(Accumulated

 

Comprehensive

 

Stockholders'

 

Controlling

 

Total

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-In-Capital

 

Deficit)

 

Income (Loss)

 

Equity

 

Interests

 

Equity

Balance at June 30, 2018

 

 

110,000

 

$

107,168

 

 

1,571,734

 

$

37,463

 

19,254,141

 

$

192

 

$

361,636

 

$

(12,721)

 

$

 -

 

$

493,738

 

$

 -

 

$

493,738

Issuance of preferred stock, net of offering costs

 

 

15,000

 

 

14,969

 

 

 -

 

 

 -

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

14,969

 

 

-

 

 

14,969

At-the-market issuance of preferred stock, net of offering costs

 

 

-

 

 

 -

 

 

 -

 

 

(38)

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(38)

 

 

-

 

 

(38)

Proceeds from issuance of common stock, net of offering costs

 

 

-

 

 

-

 

 

-

 

 

-

 

 -

 

 

 -

 

 

(6)

 

 

-

 

 

-

 

 

(6)

 

 

-

 

 

(6)

At-the-market issuance of common stock, net of offering costs

 

 

-

 

 

-

 

 

-

 

 

-

 

 -

 

 

 -

 

 

(43)

 

 

-

 

 

-

 

 

(43)

 

 

-

 

 

(43)

Stock dividend paid on preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

111,199

 

 

 1

 

 

2,124

 

 

-

 

 

-

 

 

2,125

 

 

-

 

 

2,125

Repurchase and retirement of shares of common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

(1,001)

 

 

 -

 

 

(19)

 

 

-

 

 

-

 

 

(19)

 

 

-

 

 

(19)

Stock-based compensation

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

416

 

 

-

 

 

-

 

 

416

 

 

-

 

 

416

Dividends declared on Series A preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(4,102)

 

 

-

 

 

(4,102)

 

 

-

 

 

(4,102)

Dividends declared on Series B preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(688)

 

 

-

 

 

(688)

 

 

-

 

 

(688)

Dividends declared on common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(6,777)

 

 

-

 

 

(6,777)

 

 

-

 

 

(6,777)

Net income

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

15,964

 

 

-

 

 

15,964

 

 

-

 

 

15,964

Balance at September 30, 2018

 

 

125,000

 

$

122,137

 

 

1,571,734

 

$

37,425

 

19,364,339

 

$

193

 

$

364,108

 

$

(8,324)

 

$

 -

 

$

515,539

 

$

 -

 

$

515,539

 

8

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

 

 

 

 

 

 

 

Earnings

 

Other

 

Total

 

Non-

 

 

 

 

 

Preferred Stock

 

Preferred Stock

 

Common Stock

 

Additional

 

(Accumulated

 

Comprehensive

 

Stockholders'

 

Controlling

 

Total

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-In-Capital

 

Deficit)

 

Income (Loss)

 

Equity

 

Interests

 

Equity

Balance at December 31, 2018

 

 

125,000

 

$

122,137

 

 

1,571,734

 

$

37,401

 

20,430,218

 

$

204

 

$

386,394

 

$

1,728

 

$

 -

 

$

547,864

 

$

-

 

$

547,864

Equity offering costs related to preferred stock

 

 

 -

 

 

 -

 

 

 -

 

 

(103)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(103)

 

 

 -

 

 

(103)

At-the-market issuance of common stock, net of offering costs

 

 

-

 

 

-

 

 

-

 

 

-

 

136,192

 

 

 1

 

 

2,751

 

 

 -

 

 

 -

 

 

2,752

 

 

-

 

 

2,752

Stock dividend paid on preferred stock

 

 

2,125

 

 

2,125

 

 

-

 

 

-

 

 -

 

 

 -

 

 

 -

 

 

-

 

 

-

 

 

2,125

 

 

-

 

 

2,125

Repurchase and retirement of shares of common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

(3,408)

 

 

-

 

 

(73)

 

 

-

 

 

-

 

 

(73)

 

 

-

 

 

(73)

Issuance of stock-based awards

 

 

-

 

 

-

 

 

-

 

 

-

 

4,692

 

 

 -

 

 

 -

 

 

-

 

 

-

 

 

 -

 

 

-

 

 

 -

Stock-based compensation

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

359

 

 

-

 

 

-

 

 

359

 

 

-

 

 

359

Dividends declared on Series A preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(4,344)

 

 

 -

 

 

(4,344)

 

 

-

 

 

(4,344)

Dividends declared on Series B preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(688)

 

 

 -

 

 

(688)

 

 

-

 

 

(688)

Dividends declared on common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(7,205)

 

 

 -

 

 

(7,205)

 

 

-

 

 

(7,205)

Net income

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

12,114

 

 

 -

 

 

12,114

 

 

-

 

 

12,114

Balance at March 31, 2019

 

 

127,125

 

$

124,262

 

 

1,571,734

 

$

37,298

 

20,567,694

 

$

205

 

$

389,431

 

$

1,605

 

$

 -

 

$

552,801

 

$

 -

 

$

552,801

 

See accompanying notes to consolidated financial statements.

 

9

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

 

 

 

 

 

 

 

Earnings

 

Other

 

Total

 

Non-

 

 

 

 

 

Preferred Stock

 

Preferred Stock

 

Common Stock

 

Additional

 

(Accumulated

 

Comprehensive

 

Stockholders'

 

Controlling

 

Total

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-In-Capital

 

Deficit)

 

Income (Loss)

 

Equity

 

Interests

 

Equity

Balance at March 31, 2019

 

 

127,125

 

$

124,262

 

 

1,571,734

 

$

37,298

 

20,567,694

 

$

205

 

$

389,431

 

$

1,605

 

$

 -

 

$

552,801

 

$

 -

 

$

552,801

At-the-market issuance of common stock, net of offering costs

 

 

-

 

 

-

 

 

-

 

 

-

 

1,452,076

 

 

15

 

 

29,976

 

 

 -

 

 

 -

 

 

29,991

 

 

-

 

 

29,991

Stock dividend paid on preferred stock

 

 

2,125

 

 

2,125

 

 

-

 

 

-

 

 -

 

 

 -

 

 

 -

 

 

-

 

 

-

 

 

2,125

 

 

-

 

 

2,125

Repurchase and retirement of shares of common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

(18,544)

 

 

-

 

 

(396)

 

 

-

 

 

-

 

 

(396)

 

 

-

 

 

(396)

Issuance of stock-based awards

 

 

-

 

 

-

 

 

-

 

 

-

 

133,730

 

 

 1

 

 

(1)

 

 

-

 

 

-

 

 

 -

 

 

-

 

 

 -

Stock-based compensation

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

750

 

 

-

 

 

-

 

 

750

 

 

-

 

 

750

Forfeiture and retirement of shares related to stock-based awards

 

 

-

 

 

-

 

 

-

 

 

-

 

(1,666)

 

 

-

 

 

 -

 

 

-

 

 

-

 

 

 -

 

 

-

 

 

 -

Dividends declared on Series A preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(4,407)

 

 

 -

 

 

(4,407)

 

 

-

 

 

(4,407)

Dividends declared on Series B preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(688)

 

 

 -

 

 

(688)

 

 

-

 

 

(688)

Dividends declared on common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(7,754)

 

 

 -

 

 

(7,754)

 

 

-

 

 

(7,754)

Other comprehensive income (loss) - derivative instruments

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

 -

 

 

(441)

 

 

(441)

 

 

-

 

 

(441)

Net income

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

14,874

 

 

 -

 

 

14,874

 

 

-

 

 

14,874

Balance at June 30, 2019

 

 

129,250

 

$

126,387

 

 

1,571,734

 

$

37,298

 

22,133,290

 

$

221

 

$

419,760

 

$

3,630

 

$

(441)

 

$

586,855

 

$

 -

 

$

586,855

 

See accompanying notes to consolidated financial statements.

10

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

 

 

 

 

 

 

 

Earnings

 

Other

 

Total

 

Non-

 

 

 

 

 

Preferred Stock

 

Preferred Stock

 

Common Stock

 

Additional

 

(Accumulated

 

Comprehensive

 

Stockholders'

 

Controlling

 

Total

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-In-Capital

 

Deficit)

 

Income (Loss)

 

Equity

 

Interests

 

Equity

Balance at June 30, 2019

 

 

129,250

 

$

126,387

 

 

1,571,734

 

$

37,298

 

22,133,290

 

$

221

 

$

419,760

 

$

3,630

 

$

(441)

 

$

586,855

 

$

 -

 

$

586,855

At-the-market issuance of common stock, net of offering costs

 

 

-

 

 

-

 

 

-

 

 

-

 

96,081

 

 

 1

 

 

1,900

 

 

 -

 

 

 -

 

 

1,901

 

 

-

 

 

1,901

Stock dividend paid on preferred stock

 

 

2,125

 

 

2,125

 

 

-

 

 

-

 

 -

 

 

 -

 

 

 -

 

 

-

 

 

-

 

 

2,125

 

 

-

 

 

2,125

Issuance of stock-based awards

 

 

-

 

 

-

 

 

-

 

 

-

 

7,500

 

 

 -

 

 

 -

 

 

-

 

 

-

 

 

 -

 

 

-

 

 

 -

Stock-based compensation

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

580

 

 

-

 

 

-

 

 

580

 

 

-

 

 

580

Dividends declared on Series A preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(4,469)

 

 

 -

 

 

(4,469)

 

 

-

 

 

(4,469)

Dividends declared on Series B preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(688)

 

 

 -

 

 

(688)

 

 

-

 

 

(688)

Dividends declared on common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(7,782)

 

 

 -

 

 

(7,782)

 

 

-

 

 

(7,782)

Other comprehensive income (loss) - derivative instruments

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

 -

 

 

(59)

 

 

(59)

 

 

-

 

 

(59)

Net income

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

10,954

 

 

 -

 

 

10,954

 

 

-

 

 

10,954

Balance at September 30, 2019

 

 

131,375

 

$

128,512

 

 

1,571,734

 

$

37,298

 

22,236,871

 

$

222

 

$

422,240

 

$

1,645

 

$

(500)

 

$

589,417

 

$

 -

 

$

589,417

 

See accompanying notes to consolidated financial statements.

 

 

 

11

 

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

2019

 

2018

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

37,941

 

$

32,115

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

Interest capitalized on outstanding loans

 

 

(22,069)

 

 

(15,939)

Net unrealized gain on investments

 

 

(28,847)

 

 

(24,622)

Stock-based compensation

 

 

1,689

 

 

1,600

Equity in earnings from unconsolidated self-storage real estate venture

 

 

(399)

 

 

(1,417)

Return on investment from unconsolidated self-storage real estate venture

 

 

328

 

 

599

Depreciation and amortization

 

 

3,537

 

 

2,493

Amortization of deferred financing costs

 

 

1,440

 

 

626

Accretion of origination fees

 

 

(867)

 

 

(593)

Unrealized loss on mark-to-market interest rate cap

 

 

89

 

 

 -

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(1,346)

 

 

(513)

Due to Manager

 

 

(585)

 

 

825

Accounts payable, accrued expenses, and other liabilities

 

 

280

 

 

314

Net cash used in operating activities

 

 

(8,809)

 

 

(4,512)

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of corporate fixed assets

 

 

(29)

 

 

(84)

Purchase of self-storage real estate owned

 

 

(10,347)

 

 

(12,675)

Capital additions to self-storage real estate owned

 

 

(1,309)

 

 

(417)

Capital contributions to unconsolidated self-storage real estate venture

 

 

(683)

 

 

(2,033)

Return of capital from unconsolidated self-storage real estate venture

 

 

3,833

 

 

 -

Advances to unconsolidated self-storage real estate venture

 

 

(12,723)

 

 

(14,211)

Repayment of advances to unconsolidated self-storage real estate venture

 

 

12,773

 

 

16,516

Proceeds received from settlement of profits interest

 

 

 -

 

 

619

Funding of investment portfolio:

 

 

 

 

 

 

Origination fees received in cash

 

 

1,114

 

 

1,906

Development property and bridge investments

 

 

(129,377)

 

 

(208,538)

Funding of other loans

 

 

(185)

 

 

(4,839)

Repayments of investment portfolio investments

 

 

361

 

 

16,911

Repayments of other loans

 

 

205

 

 

1,173

Net cash used in investing activities

 

 

(136,367)

 

 

(205,672)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Cash received from Credit Facility, net of issuance costs

 

 

124,261

 

 

34,343

Cash received from term loans, net of issuance costs

 

 

15,995

 

 

24,564

Repurchase of senior loan participation

 

 

 -

 

 

(732)

Repayment of Credit Facility

 

 

 -

 

 

(35,000)

Stock repurchase

 

 

(468)

 

 

(333)

Net proceeds from issuance of common stock

 

 

34,645

 

 

81,782

Net proceeds from issuance of Series A preferred stock

 

 

 -

 

 

84,932

Net proceeds (offering costs) from issuance of Series B preferred stock

 

 

(103)

 

 

37,425

Dividends paid on Series A preferred stock

 

 

(6,736)

 

 

(3,055)

Dividends paid on Series B preferred stock

 

 

(2,064)

 

 

(1,249)

Dividends paid on common stock

 

 

(22,108)

 

 

(16,846)

Net cash provided by financing activities

 

 

143,422

 

 

205,831

Net change in cash and cash equivalents

 

 

(1,754)

 

 

(4,353)

Cash and cash equivalents at the beginning of the period

 

 

8,715

 

 

46,977

Cash and cash equivalents at the end of the period

 

$

6,961

 

$

42,624

 

See accompanying notes to consolidated financial statements.

12

JERNIGAN CAPITAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data, percentages and as otherwise indicated)

1.  ORGANIZATION AND FORMATION OF THE COMPANY

Jernigan Capital, Inc. (together with its consolidated subsidiaries, the “Company”) makes debt and equity investments in self-storage development projects and existing self-storage facilities, most of which were recently constructed, and also owns self-storage facilities. The Company is a Maryland corporation that was organized on October 1, 2014 and completed its initial public offering (the “IPO”) on April 1, 2015. The Company is structured as an Umbrella Partnership REIT (“UPREIT”) and conducts its investment activities through its operating company, Jernigan Capital Operating Company, LLC (the “Operating Company”). The Company is externally managed by JCAP Advisors, LLC (the “Manager”).

 

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986 (the “Code”), as amended. As a REIT, the Company generally will not be subject to U.S. federal income taxes on REIT taxable income, determined without regard to the deduction for dividends paid and excluded capital gains, to the extent that it annually distributes all of its REIT taxable income to stockholders and complies with various other requirements for qualification as a REIT set forth in the Code.

 

 2.  SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

 

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying interim consolidated financial statements include all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods included therein. Substantially all operations are conducted through the Operating Company, and all significant intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates.

 

Variable Interest Entities

 

The Company invests in entities that may qualify as variable interest entities (“VIEs”). A VIE is a legal entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. Management bases the qualitative analysis on its review of the design of the entity, its organizational structure including allocation of decision-making authority and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. Management reassesses the initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

 

A VIE must be consolidated only by its primary beneficiary, which is defined as the party that, along with its affiliates and agents, has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. Management determines whether the Company is the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for the Company or other interests to provide financial support; and consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to the Company’s business activities and the other interests. Management reassesses the determination of whether the Company is the primary beneficiary of a VIE each reporting period.

 

13

Equity Investments

 

Investments in real estate ventures and entities over which the Company exercises significant influence but not control are accounted for using the equity method. In accordance with Accounting Standards Codification (“ASC”) 825, Financial Instruments (“ASC 825-10”), issued by the Financial Accounting Standards Board (“FASB”), the Company has elected the fair value option of accounting for its development property investments and bridge investments, which would otherwise be required to be accounted for under the equity method. The Company also holds an investment in a self-storage real estate venture that is accounted for under the equity method of accounting.

 

Investments and Election of Fair Value Option of Accounting for Certain Investments

 

The Company has elected the fair value option of accounting for all of its investment portfolio loan and equity investments, including those that are required under GAAP to be accounted for under the equity method, in order to provide stockholders and others who rely on the Company’s financial statements with a more complete and accurate understanding of the Company’s economic performance including its revenues and value inherent in the Company’s equity participation in development projects. Changes in the fair value of these investments are recorded in net unrealized gain on investments within other income. Interest income is reported in interest income from investments in the Consolidated Statements of Operations and is not included in the net unrealized gain on investments within other income. All direct loan costs are charged to expense as incurred.

 

Each loan investment, including those recorded at cost and presented on the Consolidated Balance Sheets as other loans, is evaluated for impairment on a periodic basis. For loans carried at fair value, indicators of impairment are reflected in the measurement of the loan. For loans that are carried at cost, the Company estimates an allowance for loan loss at each reporting date. In evaluating loan impairment, the Company also periodically evaluates the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower on a loan by loan basis. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the property. In addition, the Company considers the overall economic environment, real estate sector and geographic sub-market in which the borrower operates. A loan will be considered impaired when, based on current information and events, it is probable that the loan will not be collected according to the contractual terms of the loan agreement. Factors to be considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

 

Realized Gains and Net Unrealized Gain on Investments

 

The Company measures realized gains by the difference between the net proceeds resulting from the sale of a self-storage property underlying one of the Company’s loan investments, excluding any prepayment penalties paid to the Company in connection with the repayment of the loan secured by the self-storage property, which are recognized in interest income from investments, and the cost basis of the investment, without regard to unrealized gain or loss previously recognized. Net unrealized gain on investments reflects the unrealized gains and losses recognized on certain investments during the reporting period, including any reversal of previously recorded unrealized gains when gains are realized. All fluctuations in fair value are included in net unrealized gain on investments on the Consolidated Statements of Operations. Prior to the quarter ended September 30, 2018, a sale of a self-storage property underlying one of the Company’s loan investment had not yet occurred and, thus, the Company had not yet realized any fair value gains on its investments. Accordingly, net increases in fair value of the Company’s investments had previously been reported in a single line item ‘Changes in fair value of investments’ in the Consolidated Statements of Operations.

 

Fair Value Measurement

 

The Company carries certain financial instruments at fair value because it has elected to apply the fair value option on an instrument by instrument basis under ASC 825-10. The Company’s financial instruments consist of cash, development property investments and bridge investments (which are generally structured as first mortgages and a 49.9% Profits Interest in the project), operating property loans (loans secured by operating properties), the investment in self-storage real estate venture, other loans, receivables, the secured revolving Credit Facility (as defined below), the term loans, payables, and derivative financial instruments.

14

The following table presents the financial instruments measured at fair value on a recurring basis at September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Derivative financial instruments (asset position)

 

$

25

 

$

 -

 

$

25

 

$

 -

Derivative financial instruments (liability position)

 

 

(500)

 

 

 -

 

 

(500)

 

 

 -

Development property investments

 

 

508,887

 

 

 -

 

 

 -

 

 

508,887

 

The following table presents the financial instruments measured at fair value on a recurring basis at December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Development property investments

 

$

373,564

 

$

 -

 

$

 -

 

$

373,564

Bridge investments

 

 

84,383

 

 

 -

 

 

 -

 

 

84,383

 

Estimating fair value requires the use of judgment. The types of judgments involved depend upon the availability of observable market information. Management’s judgments include determining the appropriate valuation model to use, estimating unobservable inputs and applying valuation adjustments. See Note 4, Fair Value of Financial Instruments, for additional disclosure on the valuation methodology and significant assumptions, as well as the election of the fair value option for certain financial instruments.

 

Derivative instruments and hedging activities

 

All derivative financial instruments are recorded on the balance sheet at fair value. Changes in fair value are recognized either in earnings or as other comprehensive income (loss), depending on whether the derivative has been designated as a fair value or cash flow hedge and whether it qualifies as part of a hedging relationship, the nature of the exposure being hedged, and how effective the derivative is at offsetting movements in underlying exposure. Hedge accounting is discontinued when it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; the derivative expires or is sold, terminated, or exercised; it is no longer probable that the forecasted transaction will occur; or management determines that designating the derivative as a hedging instrument is no longer appropriate. The Company uses interest rate swaps and interest rate caps to effectively convert a portion of its variable rate debt to fixed rate, thus reducing the impact of changes in interest rates on interest payments (see Note 7, Debt, and Note 8, Risk Management and Use of Financial Instruments).

 

The changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in "Accumulated other comprehensive income (loss)" and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. In accordance with ASU 2017-12, Derivatives and Hedging (Topic 815) as long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, there is no longer the requirement for periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses will be recognized in the period in which hedged transactions impact earnings, regardless of whether or not economic mismatches exist in the hedging relationship. Amounts reported in "Accumulated other comprehensive income (loss)" related to derivatives designated as qualifying cash flow hedges will be reclassified to interest expense as interest payments are made on the Company's variable rate or fixed rate debt. Changes in fair value for financial instruments not designated as cash flow hedges are recognized in earnings within interest expense in the Consolidated Statements of Operations.

 

Self-Storage Real Estate Owned

 

Land is carried at historical cost. Building and improvements are carried at historical cost less accumulated depreciation and impairment losses. The cost consists primarily of: (i) the funded principal balance of the loan to the Company, net of unamortized origination fees; (ii) unrealized appreciation recognized as of the acquisition date; and (iii) the cash consideration paid and assumed liabilities, if applicable, to acquire the interests of other equity owners of the project. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives. The costs of building and improvements are generally depreciated using the straight-line method based on a useful life of 40 years.

 

The Company expects that the majority of future self-storage facility acquisitions will be considered asset acquisitions, however, the Company will evaluate each acquisition using Accounting Standards Update (“ASU”) 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business to determine whether accounting for a business combination or asset acquisition applies.

15

When facilities are acquired, the cost is allocated to the tangible and intangible assets acquired and liabilities assumed based on relative fair values. Allocations to the individual assets and liabilities are based upon their relative fair values as estimated by management.

 

In allocating the purchase price for an acquisition, the Company determines whether the acquisition includes intangible assets or liabilities. The Company allocates a portion of the cost to an intangible asset attributable to the value of in-place leases. This intangible asset is amortized to expense over the expected remaining term of the respective leases, which is generally one year. Substantially all of the leases in place at acquired facilities are at market rates, as the majority of the leases are month-to-month contracts. Accordingly, to date, no portion of the basis for an acquired property has been allocated to above- or below-market lease intangibles. To date, no intangible asset has been recorded for the value of customer relationships, because the Company does not have any concentrations of significant customers and the average customer turnover is fairly frequent.

 

The Company evaluates long-lived assets for impairment when events and circumstances, such as declines in occupancy and operating results, indicate that there may be an impairment. The carrying value of these long-lived assets is compared to the undiscounted future net operating cash flows, plus a terminal value, attributable to the assets to determine if the facility’s basis is recoverable. If an asset’s basis is not considered recoverable, an impairment loss is recorded to the extent the net carrying value of the asset exceeds the fair value. The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset. There were no impairment losses recognized in accordance with these procedures during the three and nine months ended September 30, 2019 and 2018.

 

Cash and Cash Equivalents

 

Cash, investments in money market accounts and certificates of deposit with original maturities of three months or less are considered to be cash equivalents. The Company places its cash and cash equivalents primarily with three financial institutions, and the balance at each financial institution exceeds the Federal Deposit Insurance Corporation insurance limit of $250,000 per institution.

 

Other Loans

 

The Company’s other loans balance primarily includes principal balances for certain revolving loan agreements, short-term mortgage loans, and land loans made by the Company in situations where it was determined that making such loans would benefit the Company’s primary business. These loans are accounted for under the cost method, and fair value approximates cost at September 30, 2019 and December 31, 2018. None of these loans are in non-accrual status as of September 30, 2019 and December 31, 2018. The Company determined that no allowance for loan loss was necessary at September 30, 2019 and December 31, 2018.

 

Fixed Assets

 

Fixed assets are recorded at cost and consist of furniture, office and computer equipment, and software. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets, which range from three to seven years. Fixed assets are generally purchased by the Manager and the cost reimbursed by the Company. Maintenance and repair costs are charged to expense as incurred. Upon sale or retirement, the asset cost and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in income.

 

Revenue Recognition

 

Interest income is recognized as earned on a simple interest basis and is reported in interest income from investments in the Consolidated Statements of Operations. Accrual of interest will be discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. The Company will recognize income on impaired loans when they are placed into non-accrual status on a cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company will not recognize income on such loans.

 

The Company’s loan origination fees are accreted into interest income over the term of the investment using the effective yield method.

 

The operations of the self-storage real estate owned are managed by a third-party self-storage management company. All rental leases are operating leases, and rental income is recognized in accordance with the terms of the leases, which generally are month to month.

16

Debt Issuance Costs

 

Costs related to the issuance of a debt instrument are deferred and amortized as interest expense over the estimated life of the related debt instrument using the straight-line method, which approximates the effective interest method. If a debt instrument is repurchased, modified, or exchanged prior to its original maturity date, the Company evaluates both the unamortized balance of debt issuance costs as well as any new debt issuance costs, including third party fees, to determine if the costs should be written off to interest expense or, if significant, included in “loss on modification or extinguishment of debt” in the Consolidated Statements of Operations. Debt issuance costs related to the term loans are presented in the Consolidated Balance Sheets as a deduction from the carrying amount of the principal balance. Debt issuance costs related to the revolving Credit Facility are presented in the Consolidated Balance Sheets as Deferred Financing Costs.

 

Other expenses

 

Other expenses of $0.3 million during the three and nine months ended September 30, 2019 consist of professional costs incurred with respect to ongoing discussions and negotiations related to our Management Agreement. Other expenses of $0.3 million during the nine months ended September 30, 2018 consist of costs related to the termination of an employee contract and have been expensed as incurred.

 

Offering and Registration Costs

 

Offering and registration costs represent underwriting discounts and commissions, professional fees, fees paid to various regulatory agencies, and other costs incurred in connection with the registration and sale of the Company’s securities. Offering and registration costs incurred in connection with the Company’s stock offerings are reflected as a reduction of additional paid-in capital.

 

Income Taxes

 

The Company has elected to be taxed as a REIT and to comply with the related provisions of the Code. Accordingly, the Company will generally not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met. To qualify as a REIT, the Company must annually distribute at least 90% of its REIT taxable income to its stockholders and meet certain other requirements.

 

Earnings per Share (“EPS”)

 

Basic EPS includes only the weighted average number of common shares outstanding during the period. Diluted EPS includes the weighted average number of common shares and the dilutive effect of restricted stock, accrued stock dividends, and redeemable Operating Company units when such instruments are dilutive.

 

All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are treated as participating in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted EPS must be applied.

 

Segment Reporting

 

The Company does not evaluate performance on a relationship specific or transactional basis and does not distinguish its principal business or group its operations on a geographical basis for purposes of measuring performance. Accordingly, the Company believes it has a single operating segment for reporting purposes in accordance with GAAP.

 

Recent Accounting Pronouncements

 

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update creates a single accounting model for all share-based payments. As a result of this update, the existing employee guidance will apply to nonemployee share-based transactions, with the cost of nonemployee awards continuing to be recorded as if the grantor had paid cash for the goods or services. The equity-classified share-based payment awards issued to nonemployees will now be measured on the grant date, instead of the previous requirement to re-measure the awards through the performance completion date. This ASU is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. As allowed, the Company has elected to early adopt the amendments in ASU 2018-07 effective April 1, 2018. As required by the ASU, the Company has established a grant date fair value of $18.10 based on the

17

market value of the award as of April 1, 2018 for all nonemployee awards that have not vested as of April 1, 2018. The cumulative-effect adjustment to retained earnings as of January 1, 2018 was immaterial to the financial statements as a whole. As such, the Company recorded this adjustment through its Consolidated Statements of Operations for the year ended December 31, 2018.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. This guidance is effective for smaller reporting companies for fiscal years and for interim periods within those fiscal years, beginning after December 15, 2022, with early adoption being allowed as of the fiscal years beginning after December 15, 2018. The Company is currently assessing the impact this new accounting guidance will have on its consolidated financial statements; however, the Company does not expect the new accounting guidance to have a material impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is the final standard on accounting for leases. The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short term leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. The Company does have rental income from month-to-month self-storage leases within the scope of ASU 2016-02. The Company does not have material amounts of rental or lease expense. The amendments in ASU 2016-02 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company has assessed the impact this new accounting guidance had on its consolidated financial statements and concluded that the new accounting guidance does not have a material impact on its consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2017. This ASU outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. Several ASUs expanding and clarifying the initial guidance issued in ASU 2014-09 have been released since May 2014. The Company adopted the ASU effective January 1, 2018. The Company has evaluated all applicable contracts and revenue streams and has concluded that the adoption does not have an effect on its consolidated financial statements, primarily due to the new guidance not applying to revenue associated with loans or derived from lease contracts.

 

Consolidated Statements of Cash Flows - Supplemental Disclosures

 

The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows:

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

2019

 

2018

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Interest paid

 

$

3,359

 

$

920

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Stock dividend paid on preferred stock

 

$

6,375

 

$

4,294

Dividends declared, but not paid, on preferred stock

 

 

5,157

 

 

4,790

Dividends declared, but not paid, on common stock

 

 

7,783

 

 

6,777

Reclassification of self-storage real estate owned

 

 

125,715

 

 

44,877

Assumed liabilities with acquisition of self-storage real estate owned

 

 

 -

 

 

264

Other loans paid off with issuance of development property investments

 

 

404

 

 

117

Reclassification of deferred costs to cumulative preferred stock

 

 

 -

 

 

559

 

 

 

 

 

 

3.  SELF-STORAGE INVESTMENT PORTFOLIO

The Company’s self-storage investments at September 30, 2019 consisted of the following:

Investments reported at fair value

·

Development Property Investments - The Company had 50 investments totaling an aggregate committed principal amount of approximately $608.9 million to finance the ground-up construction of, or conversion of existing buildings into, self-storage facilities. Each development property investment is generally funded as the developer constructs the project and is typically comprised of a first mortgage and a 49.9% Profits Interest to the Company. The loans are secured by first priority mortgages or deeds of trust on the projects and, in certain cases, first priority security interests in the membership interests of the owners of the

18

projects. Loans comprising development property investments are non-recourse with customary carve-outs and subject to completion guaranties, are interest-only with a fixed interest rate of typically 6.9% per annum and typically have a term of 72 months. As of September 30, 2019, five of the development property investments totaling $55.0 million of aggregate committed amount were structured as preferred equity investments, which will be subordinate to a first mortgage loan procured or expected to be procured from a third party lender for 60% to 70% of the cost of the project.

The Company has commenced foreclosure proceedings against the borrower of its $14.3 million Philadelphia development property investment because the borrower has defaulted under the loan by, among other things, failing to pay the general contractor. The total unpaid balance of the loan is $11.2 million. As the investment was a collateral dependent loan, the Company considered the fair value of the collateral when determining the fair value of the investment as of September 30, 2019. The fair value of the investment as of September 30, 2019 is $11.7 million.

·

Bridge Investments - On September 17, 2019, the Company purchased 100% of the Class A membership units of the limited liability companies that owned the Miami 4, Miami 5, Miami 6, Miami 7 and Miami 8 bridge investments with a Profits Interest. Accordingly, as of the date of acquisition, the Company wholly owns and consolidates these investments in the accompanying consolidated financial statements, and, as a result, the Company had no outstanding bridge investments as of September 30, 2019.

 

As of September 30, 2019, the aggregate committed principal amount of the Company’s development property investment was approximately $608.9 million and outstanding principal was $445.6 million, as described in more detail in the table below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Metropolitan

 

Total

 

 

 

 

Remaining

 

 

 

 

 

Statistical Area

 

Investment

 

Funded

 

Unfunded

 

 

 

Closing Date

 

("MSA")

 

Commitment

 

Investment (1)

 

Commitment

 

Fair Value

Development property investments (includes a profits interest):

 

 

 

 

 

 

 

 

 

7/2/2015

 

Milwaukee (2)(7)

 

$

7,650

 

$

7,648

 

$

 2

 

$

9,146

8/14/2015

 

Raleigh (2)(7)

 

 

8,792

 

 

8,789

 

 

 3

 

 

8,640

10/27/2015

 

Austin (2)(7)

 

 

8,658

 

 

8,136

 

 

522

 

 

8,040

9/20/2016

 

Charlotte 2 (2)(7)

 

 

12,888

 

 

12,413

 

 

475

 

 

13,600

1/18/2017

 

Atlanta 3 (2)(7)

 

 

14,115

 

 

12,433

 

 

1,682

 

 

14,921

1/31/2017

 

Atlanta 4 (2)(7)

 

 

13,678

 

 

13,497

 

 

181

 

 

16,857

2/24/2017

 

Orlando 3 (2)(7)

 

 

8,056

 

 

7,629

 

 

427

 

 

9,473

2/24/2017

 

New Orleans (2)(7)

 

 

12,549

 

 

11,668

 

 

881

 

 

13,927

2/27/2017

 

Atlanta 5 (2)(7)

 

 

17,492

 

 

17,492

 

 

 -

 

 

19,880

3/1/2017

 

Fort Lauderdale (2)(7)

 

 

9,952

 

 

9,191

 

 

761

 

 

12,974

3/1/2017

 

Houston (2)

 

 

14,825

 

 

14,825

 

 

 -

 

 

17,820

4/14/2017

 

Louisville 1 (2)(7)

 

 

8,523

 

 

7,422

 

 

1,101

 

 

9,224

4/20/2017

 

Denver 1 (2)(7)

 

 

9,806

 

 

9,117

 

 

689

 

 

10,179

4/20/2017

 

Denver 2 (2)(7)

 

 

11,164

 

 

10,995

 

 

169

 

 

12,632

5/2/2017

 

Atlanta 6 (2)(7)

 

 

12,543

 

 

11,818

 

 

725

 

 

14,367

5/2/2017

 

Tampa 2 (2)(7)

 

 

8,091

 

 

7,513

 

 

578

 

 

8,790

5/19/2017

 

Tampa 3 (2)(7)

 

 

9,224

 

 

8,089

 

 

1,135

 

 

9,906

6/12/2017

 

Tampa 4 (2)(7)

 

 

10,266

 

 

9,379

 

 

887

 

 

12,654

6/19/2017

 

Baltimore 1 (2)(4)(7)

 

 

10,775

 

 

10,453

 

 

751

 

 

12,159

6/28/2017

 

Knoxville (2)(7)

 

 

9,115

 

 

8,463

 

 

652

 

 

10,316

6/29/2017

 

Boston 1 (2)(6)

 

 

 -

 

 

 -

 

 

 -

 

 

3,232

6/30/2017

 

New York City 2 (2)(4)

 

 

27,982

 

 

28,267

 

 

1,160

 

 

29,877

7/27/2017

 

Jacksonville 3 (2)(7)

 

 

8,096

 

 

7,520

 

 

576

 

 

9,538

8/30/2017

 

Orlando 4 (2)(7)

 

 

9,037

 

 

7,967

 

 

1,070

 

 

10,164

9/14/2017

 

Los Angeles 1

 

 

28,750

 

 

9,470

 

 

19,280

 

 

9,722

9/14/2017

 

Miami 1 (3)

 

 

14,657

 

 

10,329

 

 

4,328

 

 

10,541

9/28/2017

 

Louisville 2 (2)(7)

 

 

9,940

 

 

9,311

 

 

629

 

 

11,527

10/12/2017

 

Miami 2 (4)

 

 

9,459

 

 

1,432

 

 

8,097

 

 

1,245

10/30/2017

 

New York City 3 (4)

 

 

15,301

 

 

6,472

 

 

9,077

 

 

6,114

11/16/2017

 

Miami 3 (4)

 

 

20,168

 

 

8,365

 

 

12,060

 

 

8,113

11/21/2017

 

Minneapolis 1 (2)

 

 

12,674

 

 

9,767

 

 

2,907

 

 

11,289

12/1/2017

 

Boston 2 (2)(7)

 

 

8,771

 

 

7,737

 

 

1,034

 

 

9,602

12/15/2017

 

New York City 4 (3)

 

 

10,591

 

 

4,887

 

 

5,704

 

 

5,350

12/27/2017

 

Boston 3

 

 

10,174

 

 

2,710

 

 

7,464

 

 

2,638

19

12/28/2017

 

New York City 5 (3)

 

 

16,073

 

 

10,718

 

 

5,355

 

 

12,065

2/8/2018

 

Minneapolis 2 (2)(7)

 

 

10,543

 

 

9,527

 

 

1,016

 

 

11,159

3/30/2018

 

Philadelphia (2)(4)(8)

 

 

14,338

 

 

11,429

 

 

3,264

 

 

11,688

4/6/2018

 

Minneapolis 3 (3)

 

 

12,883

 

 

8,613

 

 

4,270

 

 

10,075

5/1/2018

 

Miami 9 (4)

 

 

12,421

 

 

3,423

 

 

9,118

 

 

3,314

5/15/2018

 

Atlanta 7 (3)

 

 

9,418

 

 

4,515

 

 

4,903

 

 

5,195

5/23/2018

 

Kansas City (3)

 

 

9,968

 

 

6,376

 

 

3,592

 

 

7,516

6/7/2018

 

Orlando 5 (3)

 

 

12,969

 

 

8,190

 

 

4,779

 

 

9,613

11/16/2018

 

Baltimore 2

 

 

9,247

 

 

715

 

 

8,532

 

 

672

3/1/2019

 

New York City 6

 

 

18,796

 

 

3,111

 

 

15,685

 

 

3,088

4/18/2019

 

New York City 7 (4)

 

 

23,462

 

 

6,309

 

 

17,232

 

 

6,093

 

 

 

 

$

553,880

 

$

394,130

 

$

162,753

 

$

454,935

Preferred equity investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6/12/2018

 

Los Angeles 2 (5)

 

 

9,298

 

 

4,839

 

 

4,874

 

 

4,883

3/15/2019

 

Stamford (2)(5)

 

 

2,904

 

 

3,014

 

 

 -

 

 

4,990

5/8/2019

 

New York City 8 (5)

 

 

21,000

 

 

21,580

 

 

 -

 

 

22,126

7/11/2019

 

New York City 9 (5)

 

 

13,095

 

 

13,298

 

 

 -

 

 

13,280

8/21/2019

 

New York City 10 (5)

 

 

8,674

 

 

8,741

 

 

 -

 

 

8,673

 

 

 

 

$

54,971

 

$

51,472

 

$

4,874

 

$

53,952

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments reported at fair value

 

$

608,851

 

$

445,602

 

$

167,627

 

$

508,887

 

(1)

Represents principal balance of loan gross of origination fees. The principal balance includes interest accrued on the investment.

(2)

Construction at the facility was substantially complete and/or certificate of occupancy had been received as of September 30, 2019. See Note 4, Fair Value of Financial Instruments, for information regarding recognition of entrepreneurial profit.

(3)

Facility had achieved at least 40% construction completion but construction was not considered substantially complete as of September 30, 2019. See Note 4, Fair Value of Financial Instruments, for information regarding recognition of entrepreneurial profit.

(4)

These investments contain a higher loan-to-cost (“LTC”) ratio and a higher interest rate, some of which interest is payment-in-kind PIK interest. The PIK interest, computed at the contractual rate specified in each debt agreement, is periodically added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. The funded amount of these investments include PIK interest accrued. These PIK interest amounts are not included in the commitment amount for each investment.

(5)

A traditional bank has or is expected to provide 60-70% of the total cost through a first mortgage construction loan. Of the remaining 30-40% of costs required to complete the project, the Company will provide 90% through a preferred equity investment, pursuant to which the Company will receive a preferred return on its investment of 6.9% per annum that will be paid out of future cash flows of the underlying facility, a 1% transaction fee and a 49.9% Profits Interest. The funded amount of these investments include interest accrued on the preferred equity investment. These interest amounts are not included in the commitment amount for each investment.

(6)

The Company’s loan was repaid in full through a refinancing initiated by the Company’s partner. The investment represents the Company’s 49.9% Profits Interest which was retained during the transaction.

(7)

As of September 30, 2019, this investment was pledged as collateral to the Company’s Credit Facility.

(8)

The Company has commenced foreclosure proceedings against the borrower of its $14.3 million Philadelphia development property investment because it has defaulted under the loan by, among other things, failing to pay the general contractor. As the investment was a collateral dependent loan, the Company considered the fair value of the collateral when determining the fair value of the investment as of September 30, 2019.

 

The following table provides a reconciliation of the funded principal to the fair market value of investments at September 30, 2019:

 

 

 

 

 

 

 

 

Funded principal

    

$

445,602

Adjustments:

 

 

 

Unamortized origination and other fees

 

 

(5,843)

Net unrealized gain on investments

 

 

69,212

Other

 

 

(84)

Fair value of investments

 

$

508,887

 

20

As of December 31, 2018, the aggregate committed principal amount of the Company’s development property investments and bridge investments was approximately $634.3 million and outstanding principal was $413.5 million, as described in more detail in the table below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Metropolitan

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

Statistical Area

 

Total Investment

 

Funded

 

Unfunded

 

 

 

Closing Date

 

("MSA")

 

Commitment

 

Investment (1)

 

Commitment

 

Fair Value

Development property investments (includes a profits interest):

 

 

 

 

 

 

 

 

 

7/2/2015

 

Milwaukee (2)(8)

 

$

7,650

 

$

7,648

 

$

 2

 

$

9,057

7/31/2015

 

New Haven (2)(8)(9)

 

 

6,930

 

 

6,827

 

 

103

 

 

8,350

8/14/2015

 

Raleigh (2)(8)

 

 

8,792

 

 

8,498

 

 

294

 

 

8,002

10/27/2015

 

Austin (2)(8)

 

 

8,658

 

 

7,817

 

 

841

 

 

7,763

9/20/2016

 

Charlotte 2 (2)(8)

 

 

12,888

 

 

11,445

 

 

1,443

 

 

12,793

11/17/2016

 

Jacksonville 2 (2)(8)(9)

 

 

7,530

 

 

7,157

 

 

373

 

 

9,122

1/18/2017

 

Atlanta 3 (3)

 

 

14,115

 

 

8,711

 

 

5,404

 

 

9,337

1/31/2017

 

Atlanta 4 (2)

 

 

13,678

 

 

12,957

 

 

721

 

 

16,031

2/24/2017

 

Orlando 3 (2)

 

 

8,056

 

 

7,229

 

 

827

 

 

8,592

2/24/2017

 

New Orleans (2)

 

 

12,549

 

 

10,587

 

 

1,962

 

 

12,221

2/27/2017

 

Atlanta 5 (3)

 

 

17,492

 

 

14,095

 

 

3,397

 

 

15,371

3/1/2017

 

Fort Lauderdale (2)

 

 

9,952

 

 

7,604

 

 

2,348

 

 

10,475

3/1/2017

 

Houston (3)(7)

 

 

14,825

 

 

10,936

 

 

3,889

 

 

13,285

4/14/2017

 

Louisville 1 (2)(8)

 

 

8,523

 

 

6,979

 

 

1,544

 

 

8,540

4/20/2017

 

Denver 1 (3)

 

 

9,806

 

 

6,884

 

 

2,922

 

 

7,706

4/20/2017

 

Denver 2 (2)

 

 

11,164

 

 

10,235

 

 

929

 

 

12,403

5/2/2017

 

Atlanta 6 (2)

 

 

12,543

 

 

10,589

 

 

1,954

 

 

12,774

5/2/2017

 

Tampa 2 (3)

 

 

8,091

 

 

5,493

 

 

2,598

 

 

6,020

5/19/2017

 

Tampa 3 (2)

 

 

9,224

 

 

7,154

 

 

2,070

 

 

8,391

6/12/2017

 

Tampa 4 (2)

 

 

10,266

 

 

8,846

 

 

1,420

 

 

11,419

6/19/2017

 

Baltimore 1 (2)(4)

 

 

10,775

 

 

9,177

 

 

1,598

 

 

10,805

6/28/2017

 

Knoxville (2)(8)

 

 

9,115

 

 

7,717

 

 

1,398

 

 

8,652

6/29/2017

 

Boston 1 (2)(6)

 

 

 -

 

 

 -

 

 

 -

 

 

2,614

6/30/2017

 

New York City 2 (2)(4)

 

 

26,482

 

 

24,760

 

 

1,722

 

 

28,102

7/27/2017

 

Jacksonville 3 (2)

 

 

8,096

 

 

6,836

 

 

1,260

 

 

8,251

8/30/2017

 

Orlando 4 (2)

 

 

9,037

 

 

6,769

 

 

2,268

 

 

8,264

9/14/2017

 

Los Angeles 1

 

 

28,750

 

 

8,692

 

 

20,058

 

 

8,418

9/14/2017

 

Miami 1

 

 

14,657

 

 

6,882

 

 

7,775

 

 

6,562

9/28/2017

 

Louisville 2 (2)(8)

 

 

9,940

 

 

8,691

 

 

1,249

 

 

10,652

10/12/2017

 

Miami 2 (4)

 

 

9,459

 

 

1,335

 

 

8,124

 

 

1,082

10/30/2017

 

New York City 3 (4)

 

 

14,701

 

 

4,835

 

 

9,866

 

 

4,383

11/16/2017

 

Miami 3 (4)

 

 

20,168

 

 

4,096

 

 

16,072

 

 

3,542

11/21/2017

 

Minneapolis 1

 

 

12,674

 

 

3,214

 

 

9,460

 

 

3,070

12/1/2017

 

Boston 2 (3)

 

 

8,771

 

 

3,978

 

 

4,793

 

 

4,246

12/15/2017

 

New York City 4

 

 

10,591

 

 

1,777

 

 

8,814

 

 

1,631

12/27/2017

 

Boston 3

 

 

10,174

 

 

2,563

 

 

7,611

 

 

2,402

12/28/2017

 

New York City 5

 

 

16,073

 

 

6,523

 

 

9,550

 

 

6,400

2/8/2018

 

Minneapolis 2 (3)

 

 

10,543

 

 

7,802

 

 

2,741

 

 

8,773

3/30/2018

 

Philadelphia (3)(4)

 

 

14,338

 

 

7,870

 

 

6,468

 

 

8,093

4/6/2018

 

Minneapolis 3

 

 

12,883

 

 

2,333

 

 

10,550

 

 

2,206

5/1/2018

 

Miami 9 (4)

 

 

12,421

 

 

2,803

 

 

9,618

 

 

2,564

5/15/2018

 

Atlanta 7

 

 

9,418

 

 

861

 

 

8,557

 

 

775

5/23/2018

 

Kansas City

 

 

9,968

 

 

1,228

 

 

8,740

 

 

1,137

6/7/2018

 

Orlando 5

 

 

12,969

 

 

800

 

 

12,169

 

 

673

6/12/2018

 

Los Angeles 2 (5)

 

 

9,298

 

 

4,597

 

 

4,701

 

 

4,581

11/16/2018

 

Baltimore 2

 

 

9,247

 

 

390

 

 

8,857

 

 

301

 

 

 

 

$

533,280

 

$

314,220

 

$

219,060

 

$

355,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

12/23/2015

 

Miami (10)

 

 

17,733

 

 

17,733

 

 

 -

 

 

17,733

 

 

 

 

$

17,733

 

$

17,733

 

$

0

 

$

17,733

Total development property investments

 

$

551,013

 

$

331,953

 

$

219,060

 

$

373,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridge investments (includes a profits interest):

 

 

 

 

 

 

 

 

 

 

 

 

3/2/2018

 

Miami 4 (2)(8)(9)

 

 

20,201

 

 

20,201

 

 

 -

 

 

22,823

3/2/2018

 

Miami 5 (2)(4)(8)(9)

 

 

17,738

 

 

16,883

 

 

855

 

 

14,432

3/2/2018

 

Miami 6 (2)(8)(9)

 

 

13,370

 

 

13,370

 

 

 -

 

 

17,372

3/2/2018

 

Miami 7 (2)(4)(8)(9)

 

 

18,462

 

 

17,581

 

 

881

 

 

15,971

3/2/2018

 

Miami 8 (2)(8)(9)

 

 

13,553

 

 

13,472

 

 

81

 

 

13,785

Total bridge investments

 

$

83,324

 

$

81,507

 

$

1,817

 

$

84,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments reported at fair value

 

$

634,337

 

$

413,460

 

$

220,877

 

$

457,947

(1)

Represents principal balance of loan gross of origination fees. The principal balance includes interest and fees accrued on the investment.

(2)

Construction at the facility was substantially complete and/or certificate of occupancy had been received as of December 31, 2018. See Note 4, Fair Value of Financial Instruments, for information regarding recognition of entrepreneurial profit.

(3)

Facility had achieved at least 40% construction completion but construction was not considered substantially complete as of December 31, 2018. See Note 4, Fair Value of Financial Instruments, for information regarding recognition of entrepreneurial profit.

(4)

These investments contain a higher LTC ratio and a higher interest rate, some of which interest is PIK interest. The PIK interest, computed at the contractual rate specified in each debt agreement, is periodically added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment.

(5)

This investment has a total project cost of $29.5 million of which a traditional bank has or is expected to provide 60-70% of the total cost through a first mortgage construction loan. Of the remaining 30-40% of costs required to complete the project, the Company will provide 90% through a preferred equity investment, pursuant to which the Company will receive a preferred return on its investment of 6.9% per annum that will be paid out of future cash flows of the underlying facility, a 1% transaction fee and a 49.9% Profits Interest.

(6)

The Company’s loan was repaid in full through a refinancing initiated by the Company’s partner. The investment represents the Company’s 49.9% Profits Interest which was retained during the transaction.

(7)

On December 31, 2018, the Company increased the total commitment amount of this loan in exchange for a fee that was immediately advanced on the loan. The fee will be recognized into income in the future as earned and will be received in cash upon the repayment of the loan.

(8)

As of December 31, 2018, this investment was pledged as collateral to the Company’s Credit Facility.

(9)

During the nine months ended September 30, 2019, the Company purchased its partner’s 50.1% Profits Interest in this investment.

(10)

During the three months ended September 30, 2019, the Company purchased the interests in the entity that owned the property securing the Miami construction loan in connection with the entry into a settlement agreement related to foreclosure proceedings that the Company had commenced against the borrower.

 

The following table provides a reconciliation of the funded principal to the fair market value of investments at December 31, 2018:

 

 

 

 

 

 

 

 

Funded principal

    

$

413,460

Adjustments:

 

 

 

Unamortized origination and other fees

 

 

(6,382)

Net unrealized gain on investments

 

 

50,953

Other

 

 

(84)

Fair value of investments

 

$

457,947

 

The Company has elected the fair value option of accounting for all of its investment portfolio investments in order to provide stockholders and others who rely on the Company’s financial statements with a more complete and accurate understanding of the Company’s economic performance, including its revenues and value inherent in its equity participation in development projects. See Note 4, Fair Value of Financial Instruments, for additional disclosure on the valuation methodology and significant assumptions.

 

No loans were in non-accrual status as of September 30, 2019, and no loans, with the exception of the $17.7 million Miami construction loan, were in non-accrual status as of December 31, 2018. As described below, on July 2, 2019, the Company entered into an agreement pursuant to which it acquired all of the interests in the entity that owned the property securing the Miami construction loan and both parties dismissed all state court litigation related to that loan.

 

22

All of the Company’s development property investments with a Profits Interest would have been accounted for under the equity method had the Company not elected the fair value option. Prior to the acquisition of the developer’s interest in the bridge investments during the three months ended September 30, 2019, the bridge investments would have been accounted for under the equity method had the Company not elected the fair value option for the bridge investments.  For these investments with a Profits Interest, the assets and liabilities of the equity method investees approximated $506.1 million and $445.6 million, respectively, at September 30, 2019 and approximated $442.6 million and $395.7 million, respectively, at December 31, 2018. These investees had revenues of approximately $2.3 million and $4.5 million and operating expenses of approximately $2.7 million and $6.4 million for the three and nine months ended September 30, 2019, respectively. These investees had revenues of approximately $1.5 million and $3.7 million and operating expenses of approximately $1.4 million and $3.4 million for the three and nine months ended September 30, 2018, respectively. During the nine months ended September 30, 2019 and 2018, no individual investment comprised more than 20% of the Company’s net income.

 

For sixteen of the Company’s development property investments with a Profits Interest as of September 30, 2019 and December 31, 2018, an investor has an option to put its interest to the Company upon the event of default of the underlying property loans. The put, if exercised, requires the Company to purchase the member’s interest at the original purchase price plus a yield of 4.5% on such purchase price. The Company concluded that the likelihood of loss is remote and assigned no value to these put provisions as of September 30, 2019 and December 31, 2018.

 

Investments reported at cost (Self-Storage Real Estate Owned)

 

YTD 2019 Activity

 

On March 8, 2019, the Company purchased 100% of the Class A membership units of the limited liability company that owned the New Haven development property investment with a Profits Interest. On July 2, 2019, the Company acquired all of the interests in the entity that owned the property securing the Miami construction loan. On August 16, 2019, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Jacksonville 2 development property investment with a Profits Interest. On September 17, 2019, the Company purchased 100% of the Class A membership units of the limited liability companies that owned the Miami 4, Miami 5, Miami 6, Miami 7 and Miami 8 bridge investments with a Profits Interest. Accordingly, as of the dates of acquisition, the Company wholly owns and consolidates these investments in the accompanying consolidated financial statements. The acquisition date basis of these investments of $138.9 million is primarily comprised of the development property investment or bridge investment at fair value of $125.7 million and the cash consideration of $10.5 million, which is inclusive of paid and accrued transaction costs.  The Company allocated the basis based on the relative fair value of the tangible and intangible assets acquired. Intangible assets consisted of in-place leases, which aggregated to $4.9 million at the time of the acquisitions. The estimated life of these in-place leases was 12 months.

 

The basis of the Miami investment acquired on July 2, 2019 is currently presented in construction-in-progress within Self-storage real estate owned, net, in the table below. As of September 30, 2019, this facility has not been placed into service.  

 

YTD 2018 Activity

 

On January 10, 2018, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Jacksonville 1 development property investment with a Profits Interest. On February 2, 2018, the Company purchased 100% of the Class A membership units of the limited liability companies that owned the Atlanta 1 and Atlanta 2 development property investments with a Profits Interest. On February 20, 2018, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Pittsburgh development property investment with a Profits Interest. On August 31, 2018, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Charlotte 1 development property investment with a Profits Interest. The acquisition date basis of these investments of $58.1 million is primarily comprised of the development property investment at fair value of $44.9 million and the cash consideration paid of $13.0 million, inclusive of transaction costs and assumed liabilities. The Company allocated the basis based on the relative fair value of the tangible and intangible assets acquired. Intangible assets consisted of in-place leases, which aggregated to $2.1 million at the time of the acquisitions. The estimated life of these in-place leases was 12 months.

 

The Company evaluated the purchases under ASU 2017-01 and concluded that the transactions consisted of a single identifiable asset or a group of similar identifiable assets that represent substantially all of the fair value of the gross assets acquired. Therefore, these transactions do not constitute the purchase of a business and have been treated as asset acquisitions. In accordance with ASU 2017-01, as of the respective acquisition dates, the Company’s basis in the self-storage real estate owned is recorded at cost (generally equal to the cash consideration paid, assumed liabilities, if applicable, and the funded loan balance, net of unamortized origination fees), plus

23

unrealized gains recorded at the date of acquisition. The allocation to the basis of the assets acquired is based on their relative fair values.

 

The following table shows the components of the real estate investments as presented in the Company’s accompanying Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

Land

 

$

25,548

 

$

10,797

Building and improvements

 

 

186,341

 

 

85,067

In-place leases

 

 

8,485

 

 

3,552

Property equipment

 

 

81

 

 

13

Construction-in-progress

 

 

19,754

 

 

670

Accumulated depreciation and amortization

 

 

(7,387)

 

 

(3,897)

Self-storage real estate owned, net

 

$

232,822

 

$

96,202

 

 

 

 

 

4.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value option under ASC 825-10 allows companies to elect to report selected financial assets and liabilities at fair value. The Company has elected the fair value option of accounting for its development property investments and bridge investments in order to provide stockholders and others who rely on the Company’s financial statements with a more complete and accurate understanding of the Company’s economic performance, including its revenues and value inherent in its equity participation in self-storage development projects.

 

The Company applies ASC 820, Fair Value Measurement (“ASC 820”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosure of fair value measurements. ASC 820 defines fair value as the price that would be received for an investment in an orderly transaction between market participants on the measurement date. ASC 820 requires the Company to assume that the investment is sold in its principal market to market participants or, in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with ASC 820, the Company considers its principal market as the market for the purchase and sale of self-storage properties, which the Company believes would be the most likely market for the Company’s loan and equity investments given the nature of the collateral securing such loans and the types of borrowers. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820, these inputs are summarized in the three broad levels listed below:

 

Level 1-Quoted prices for identical assets or liabilities in an active market.

Level 2-Financial assets and liabilities whose values are based on the following: (i) Quoted prices for similar assets or liabilities in active markets; (ii) Quoted prices for identical or similar assets or liabilities in non-active markets; (iii) Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.

Level 3-Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.

 

Financial assets and liabilities that are not measured at fair value on a recurring basis are cash, other loans, receivables, the secured revolving credit facility, term loans and payables and their carrying values approximate their fair values due to their short-term nature or due to a variable interest rate. Cash, receivables, and payables are categorized as Level 1 instruments in the measurement of fair value. Other loans, the secured revolving credit facility and term loans are categorized as Level 2 instruments in the measurement of fair value as the fair values of these investments are determined using a discounted cash flow model with inputs from third-party pricing sources and similar instruments.

 

As discussed in Note 8, Risk Managements and Use of Financial Instruments, interest rate swaps and interest rate caps are used to manage interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative and these instruments are categorized in Level 2 of the fair value hierarchy. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps and interest rate caps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or

24

payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

 

Credit valuation adjustments are incorporated to appropriately reflect the Company's and the counterparty's respective nonperformance risk in the fair value measurements. In adjusting the fair value of the derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

 

The following table summarizes the instruments measured at fair value on a recurring basis categorized in Level 3 of the fair value hierarchy and the valuation techniques and inputs used to measure their fair value.

 

 

 

 

 

 

 

 

 

 

Instrument

 

Valuation technique and assumptions

 

Hierarchy classification

 

 

 

 

 

Development property investments with a profits interest and bridge investments 

 

Valuations are determined using an Income Approach analysis, using the discounted cash flow method model, capturing the prepayment penalty / call price schedule as applicable. The valuation models are calibrated to the total investment net drawn amount as of the issuance date factoring in the value of the Profits Interests. Typically, the calibration is done on an investment level basis. In certain instances, we may acquire a portfolio of investments in which case the calibration is done on an aggregate basis to the aggregate net drawn amount as of the date of issuance.

An option-pricing method (OPM) framework is utilized to calculate the value of the Profits Interests. At certain stages in the investments life cycle (as described subsequently), the OPM requires an enterprise value derived from fair value of the underlying real estate project. The fair value of the underlying real estate project is determined using either a discounted cash flows model or direct capitalization approach.

 

Level 3

 

The Company’s development property investments and bridge investments are valued using two different valuation techniques. The first valuation technique is an income approach analysis of the debt instrument components of the Company’s investments. The second valuation technique is an OPM that is used to determine the fair value of any Profits Interests associated with an investment. The valuation models are calibrated to the total investment net drawn amount as of the issuance date factoring in the value of the Profits Interests. At the issuance date of each development property investment, generally the value of the property underlying such investment approximates the sum of the net investment drawn amount plus the developer’s equity investment. Typically the calibration is done on an investment level basis. To the extent investments are entered into on a portfolio basis, the valuation models are calibrated on an aggregate basis to the aggregate net investment proceeds using the overall implied internal rate of return using a discounted cash flow for each investment.

 

For development property investments with a Profits Interest, at a certain stage of construction, the OPM incorporates an adjustment to measure entrepreneurial profit. Entrepreneurial profit is a monetary return above total construction costs that provides compensation for the risk of a development project. Under this method, the value of each property is estimated based on the cost incurred to date, plus an estimated earned entrepreneurial profit. Total entrepreneurial profit is estimated as the difference between the projected value of a property at stabilization and the total development costs, including land, building improvements, and lease-up costs. Utilizing information obtained from the market coupled with the Company’s own experience, the Company has estimated that in most cases, approximately one-third of the entrepreneurial profit is earned during the construction period beginning when construction is approximately 40% complete and ending when construction is substantially complete, and approximately two-thirds of the entrepreneurial profit is earned from when construction is substantially complete through stabilization. For the seven development property investments that were 40% complete but for which construction was not substantially complete at September 30, 2019, the Company has estimated the entrepreneurial profit adjustment to the enterprise value input used in the OPM to be equal to one-third of the estimated entrepreneurial profit, allocated on a straight-line basis. Thirty development property investments, not including the properties reported as self-storage real estate owned, had reached substantial construction completion and/or received a certificate of occupancy at September 30, 2019. For the Company’s development property investments at substantial construction completion, a discounted cash flow model, based on periodically updated estimates of rental rates, occupancy and operating expenses, is the primary method for projecting value of a project. The Company also will consider inputs such as appraisals which differ from the developer’s equity investment, bona fide third-party offers to purchase development projects, sales of development projects, or sales of comparable properties in its markets.

25

 

Level 3 Fair Value Measurements

 

The following tables summarize the significant unobservable inputs the Company used to value its development property investments with a profits interest and bridge investments categorized within Level 3 as of September 30, 2019 and December 31, 2018. These tables are not intended to be all-inclusive, but instead to capture the significant unobservable inputs relevant to the Company’s determination of fair values.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2019

 

 

Unobservable Inputs

Primary Valuation

 

 

 

 

 

Weighted

Techniques

 

Input

 

Estimated Range

 

Average

 

 

 

 

 

 

 

Income approach analysis

 

Market yields/discount rate

 

5.70 - 10.06%

 

8.22%

 

 

Exit date (b)

 

1.76 - 6.95 years

 

3.53 years

 

 

 

 

 

 

 

Option pricing model

 

Volatility

 

62.50 - 95.38%

 

75.04%

 

 

Exit date (b)

 

1.76 - 6.95 years

 

3.53 years

 

 

Capitalization rate (a)

 

4.75 - 5.75%

 

5.46%

 

 

Discount rate (a)

 

7.75 - 8.75%

 

8.46%

(a)

Thirty-seven properties were 40% - 100% complete, thus requiring a capitalization rate and/or discount rate to derive entrepreneurial profit which are used to derive the enterprise value input to the OPM. Capitalization rates are estimated based on current data derived from independent sources in the markets in which the Company holds investments.

(b)

The exit dates for the development property investments are generally the estimated date of stabilization of the underlying property.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

Unobservable Inputs

 

 

Primary Valuation

 

 

 

 

 

Weighted

Asset Category

 

Techniques

 

Input

 

Estimated Range

 

Average

 

 

 

 

 

 

 

 

 

Development property investments and bridge investments (a)

 

Income approach analysis

 

Market yields/discount rate

 

4.72 - 13.09%

 

9.48%

 

 

 

 

Exit date (d)

 

2.25 - 5.95 years

 

3.44 years

 

 

 

 

 

 

 

 

 

Development property investments with a profits interest and bridge investments (b)

 

Option pricing model

 

Volatility

 

53.25 - 94.30%

 

75.10%

 

 

 

 

Exit date (d)

 

2.25 - 5.95 years

 

3.44 years

 

 

 

 

Capitalization rate (c)

 

4.75 - 6.00%

 

5.42%

 

 

 

 

Discount rate (c)

 

7.75 - 11.74%

 

8.83%

 

 

 

 

 

 

 

 

 

(a)

The valuation technique for the development property investments with a Profits Interest does not differ from the development property investments without a Profits Interest. Therefore, this line item focuses on all development property investments, including those with a Profits Interest. The significant unobservable inputs associated with the construction loan presented as a development property investment are not included as the fair value was determined based on the fair value of the underlying collateral. The fair value of the underlying collateral was determined using a market comparable approach and an income approach based on a capitalization rate within the range provided above for capitalization rates associated with development property investments with a profits interest.

(b)

The valuation technique for the development property investments with a Profits Interest does not differ from the development property investments without a Profits Interest. The development property investments with a Profits Interest only require incremental valuation techniques to determine the value of the Profits Interest. Therefore this line only focuses on the Profits Interest valuation.

26

(c)

Thirty-five properties were 40% - 100% complete, thus requiring a capitalization rate and/or discount rate to derive entrepreneurial profit, which are used to derive the enterprise value input to the OPM. Capitalization rates are estimated based on current data derived from independent sources in the markets in which the Company holds investments.

(d)

The exit dates for the development property investments and bridge investments are generally the estimated date of stabilization of the underlying property.

 

The fair value measurements are sensitive to changes in unobservable inputs. A change in those inputs to a different amount might result in a significantly higher or lower fair value measurement. The following provides a discussion of the impact of changes in each of the unobservable inputs on the fair value measurement.

 

Market yields - changes in market yields and discount rates, each in isolation, may change the fair value of certain of the Company’s investments. Generally, an increase in market yields or discount rates may result in a decrease in the fair value of certain of the Company’s investments. The following fluctuations in the market yields/discount rates would have had the following impact on the fair value of our investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in fair value of investments

Change in market yields/discount rates (in millions)

 

September 30, 2019

 

December 31, 2018

Up 25 basis points

 

$

(2.1)

 

$

(1.9)

Down 25 basis points, subject to a minimum yield/rate of 10 basis points

 

 

2.2

 

 

2.0

 

 

 

 

 

 

 

Up 50 basis points

 

 

(4.2)

 

 

(3.9)

Down 50 basis points, subject to a minimum yield/rate of 10 basis points

 

 

4.5

 

 

4.1

 

Capitalization rate - changes in capitalization rate, in isolation and all else equal, may change the fair value of certain of the Company’s development investments containing Profits Interests. Generally an increase in the capitalization rate assumption may result in a decrease in the fair value of the Company’s investments. The following fluctuations in the capitalization rates would have had the following impact on the fair value of the Company’s investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in fair value of investments

Change in capitalization rates (in millions)

 

September 30, 2019

 

December 31, 2018

Up 25 basis points

 

$

(9.0)

 

$

(8.9)

Down 25 basis points

 

 

9.8

 

 

9.8

 

 

 

 

 

 

 

Up 50 basis points

 

 

(17.1)

 

 

(17.0)

Down 50 basis points

 

 

20.7

 

 

20.5

 

Exit date - changes in exit date, in isolation and all else equal, may change the fair value of certain of the Company’s investments that have Profits Interests. Generally, an acceleration in the exit date assumption may result in an increase in the fair value of the Company’s investments.

 

Volatility - changes in volatility, in isolation and all else equal, may change the fair value of certain of the Company’s investments that have Profits Interests. Generally, an increase in volatility may result in an increase in the fair value of the Profits Interests in certain of the Company’s investments.

 

Operating cash flow projections - changes in the operating cash flow projections of the underlying self-storage facilities, in isolation and all else equal, may change the fair value of certain of the Company’s investments that have Profits Interests. Generally, an increase in operating cash flow projections may result in an increase in the fair value of the Profits Interests in certain of the Company’s investments.

 

The Company also evaluates the impact of changes in instrument-specific credit risk in determining the fair value of investments. There were no significant gains or losses attributable to changes in instrument-specific credit risk in the three and nine months ended September 30, 2019 and 2018.

 

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of the Company’s investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize. Further, such investments are generally subject to legal and other

27

restrictions on resale or otherwise are less liquid than publicly traded securities. If the Company was required to liquidate an investment in a forced or liquidation sale, it could realize significantly less than the value at which the Company has recorded it. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned.

 

The following tables present changes in investments that use Level 3 inputs:

 

 

 

 

 

 

 

 

Balance at December 31, 2018

    

$

457,947

Realized gains

 

 

 -

Unrealized gains

 

 

28,847

Fundings of principal and change in unamortized origination fees

 

 

126,100

Repayments of loans

 

 

(361)

Payment-in-kind interest

 

 

22,069

Reclassification of self-storage real estate owned

 

 

(125,715)

Net transfers in or out of Level 3

 

 

 -

Balance at September 30, 2019

 

$

508,887

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

    

$

234,171

Realized gains

 

 

(619)

Unrealized gains

 

 

24,622

Fundings of principal and change in unamortized origination fees

 

 

207,486

Repayments of loans

 

 

(16,911)

Payment-in-kind interest

 

 

15,939

Reclassification of self-storage real estate owned

 

 

(44,877)

Net transfers in or out of Level 3

 

 

 -

Balance at September 30, 2018

 

$

419,811

 

As of September 30, 2019 and December 31, 2018, the total net unrealized appreciation on the investments that use Level 3 inputs was $69.2 million and $51.0 million, respectively.

 

For the three and nine months ended September 30, 2019 and 2018, substantially all of the net unrealized gain on investments in the Company’s Consolidated Statements of Operations were attributable to unrealized gains relating to the Company’s Level 3 assets still held as of the respective balance sheet date.

 

Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfers occur.

 

5.  INVESTMENT IN SELF-STORAGE REAL ESTATE VENTURE

On March 7, 2016, the Company, through its Operating Company, entered into the Limited Liability Company Agreement (the “JV Agreement”) of Storage Lenders LLC, a Delaware limited liability company, to form a real estate venture (the “SL1 Venture”) with HVP III Storage Lenders Investor, LLC (“HVP III”), an investment vehicle managed by Heitman Capital Management LLC (“Heitman”). The SL1 Venture was formed for the purpose of providing capital to developers of self-storage facilities identified and underwritten by the Company. Upon formation, HVP III committed $110.0 million for a 90% interest in the SL1 Venture, and the Company committed $12.2 million for a 10% interest.

On March 31, 2016, the Company contributed to the SL1 Venture three of its existing development property investments with a Profits Interest located in Miami and Fort Lauderdale, Florida that were not yet under construction. These investments had an aggregate committed principal amount of approximately $41.9 million and an aggregate drawn balance of $8.1 million. In exchange, the Company’s initial funding commitment of $12.2 million was reduced by $8.1 million, representing the Company’s initial “Net Invested Capital” balance as defined in the JV Agreement. The Company accounted for this contribution in accordance with ASC 845, Nonmonetary Transactions, and recorded an investment in the SL1 Venture based on the fair value of the contributed development property investments, which is the same as carryover basis. The fair value of the contributed development property investments as of March 31, 2016 was $7.7 million. Pursuant to the JV Agreement, Heitman, in fulfilling its initial $110.0 million commitment, provides capital to the SL1 Venture as cash is required, including funding draws on the three contributed development property investments. During the year ended December 31, 2016, HVP III and the Company agreed to true up the balances in the respective members’ capital accounts to be in accordance with the 90% commitment and 10% commitment made by HVP III and the Company,

28

respectively. Accordingly, during the year ended December 31, 2016, HVP III contributed cash of $7.3 million to the SL1 Venture, and the Company received a $7.3 million cash distribution as a return of its capital.

As of December 31, 2018, the SL1 Venture had closed on eight new development property investments with a Profits Interest with an aggregate commitment amount of approximately $81.4 million, bringing the total aggregate commitment of the SL1 Venture’s investments to $123.3 million. Accordingly, HVP III’s total commitment for a 90% interest in the SL1 Venture is $111.0 million, and the Company’s total commitment for a 10% interest in the SL1 Venture is $12.3 million.

Under the JV Agreement, the Company receives a priority distribution (after debt service and any reserve but before any other distributions) out of operating cash flow and residual distributions based upon 1% of the committed principal amount of loans made by the SL1 Venture, exclusive of the loans contributed to the SL1 Venture by the Company. Operating cash flow of the SL1 Venture (after debt service, reserves and the foregoing priority distributions) is distributed in accordance with capital commitments. Residual cash flow from capital and other events (after debt service, reserves and priority distributions) will be distributed (i) pro rata in accordance with capital commitments (its “Percentage Interest”) until each member has received a return of all capital contributed; (ii) pro rata in accordance with each member’s Percentage Interest until Heitman has achieved a 14% internal rate of return; (iii) to Heitman in an amount equal to its Percentage Interest less 10% and to the Company in an amount equal to the Company’s Percentage Interest plus 10% until Heitman has achieved a 17% internal rate of return; (iv) to Heitman in an amount equal to its Percentage Interest less 20% and to the Company in an amount equal to the Company’s Percentage Interest plus 20% until Heitman has achieved a 20% internal rate of return; and (v) any excess to Heitman in an amount equal to its Percentage Interest less 30% and to the Company in an amount equal to the Company’s Percentage Interest plus 30%. However, the Company will not be entitled to any such promoted interest prior to the earlier to occur of the third anniversary of the JV Agreement and Heitman receiving distributions to the extent necessary to provide Heitman with a 1.48 multiple on its contributed capital.

Since the allocation of cash distributions and liquidating distributions are determined as described in the preceding paragraph, the Company has applied the hypothetical-liquidation-at-book-value (“HLBV”) method to allocate the earnings of the SL1 Venture. Under the HLBV approach, the Company’s share of the investee’s earnings or loss is calculated by:

·

The Company’s capital account at the end of the period assuming that the investee was liquidated or sold at book value, plus

·

Cash distributions received by the Company during the period, minus

·

Cash contributions made by the Company during the period, minus

·

The Company’s capital account at the beginning of the period assuming that the investee were liquidated or sold at book value.

 

On January 28, 2019, the SL1 Venture purchased 100% of the Class A membership units of the LLCs that owned the Atlanta 1, Jacksonville, Atlanta 2, and Denver development property investments with a Profits Interest. These purchases increased the SL1 Venture’s ownership interest on each development property investment from 49.9% to 100%. The SL1 Venture now wholly owns the self-storage properties through these LLCs. The acquisition date basis of these investments of $57.2 million is primarily comprised of the development property investment at fair value and the cash consideration paid.

 

On February 27, 2019, the SL1 Venture closed on a $36.1 million term loan secured by these four owned properties that bears interest at LIBOR plus 2.15% and matures on February 27, 2022. The SL1 Venture distributed $19.0 million and $2.1 million to HVP III and the Company, respectively, of these debt proceeds. In April 2019, the SL1 Venture entered into an interest rate swap to fix the interest rate on the variable rate term loan.  The SL1 Venture interest rate swap bears a notional amount of $36.1 million, a fixed LIBOR rate of 2.29%, and matures on April 1, 2021.  

29

The SL1 Venture has elected the fair value option of accounting for its development property investments with a Profits Interest, which are equity method investments of the SL1 Venture. The assumptions used to value the SL1 Venture’s investments are materially consistent with those used to value the Company’s investments. As of September 30, 2019, the SL1 Venture had seven development property investments with a Profits Interest as described in more detail in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Metropolitan

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

Statistical Area

 

Total Investment

 

Funded

 

Unfunded

 

 

 

Closing Date

 

("MSA")

 

Commitment

 

Investment (1)

 

Commitment

 

Fair Value

5/14/2015

 

Miami 1 (2)(3)

 

$

13,867

 

$

12,819

 

$

1,048

 

$

15,716

5/14/2015

 

Miami 2 (2)(3)

 

 

14,849

 

 

14,519

 

 

330

 

 

15,864

9/25/2015

 

Fort Lauderdale (2)(3)

 

 

13,230

 

 

12,899

 

 

331

 

 

16,969

4/15/2016

 

Washington DC (3)(4)

 

 

 -

 

 

 -

 

 

 -

 

 

3,043

7/21/2016

 

New Jersey (3)

 

 

7,828

 

 

7,085

 

 

743

 

 

8,593

9/28/2016

 

Columbia (3)

 

 

9,199

 

 

9,072

 

 

127

 

 

10,348

12/22/2016

 

Raleigh (3)

 

 

8,877

 

 

8,856

 

 

21

 

 

9,539

 

 

Total

 

$

67,850

 

$

65,250

 

$

2,600

 

$

80,072

 

 

(1)

Represents principal balance of loan gross of origination fees. The principal balance includes interest accrued on the investment.

(2)

These development property investments (having approximately $8.1 million of outstanding principal at contribution) were contributed to the SL1 Venture on March 31, 2016 by the Company.

(3)

Certificate of occupancy had been received as of September 30, 2019. See Note 4, Fair Value of Financial Instruments, for information regarding recognition of entrepreneurial profit.

(4)

The SL1 Venture’s loan was repaid in full through a refinancing initiated by the SL1 Venture’s partner. This investment represents the SL1 Venture’s 49.9% Profits Interest which was retained during the transaction.

 

As of December 31, 2018, the SL1 Venture had eleven development property investments with a Profits Interest as described in more detail in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Metropolitan

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

Statistical Area

 

Total Investment

 

Funded

 

Unfunded

 

 

 

Closing Date

 

("MSA")

 

Commitment

 

Investment (1)

 

Commitment

 

Fair Value

5/14/2015

 

Miami 1 (2)(3)

 

$

13,867

 

$

12,250

 

$

1,617

 

$

14,338

5/14/2015

 

Miami 2 (2)(3)

 

 

14,849

 

 

13,961

 

 

888

 

 

14,562

9/25/2015

 

Fort Lauderdale (2)(3)

 

 

13,230

 

 

12,352

 

 

878

 

 

16,409

4/15/2016

 

Washington DC (3)

 

 

17,269

 

 

17,005

 

 

264

 

 

19,200

4/29/2016

 

Atlanta 1 (3)(4)

 

 

10,223

 

 

9,915

 

 

308

 

 

11,352

7/19/2016

 

Jacksonville (3)(4)

 

 

8,127

 

 

7,422

 

 

705

 

 

11,406

7/21/2016

 

New Jersey (3)

 

 

7,828

 

 

5,749

 

 

2,079

 

 

6,717

8/15/2016

 

Atlanta 2 (3)(4)

 

 

8,772

 

 

8,293

 

 

479

 

 

9,004

8/25/2016

 

Denver (3)(4)

 

 

11,032

 

 

10,221

 

 

811

 

 

12,716

9/28/2016

 

Columbia (3)

 

 

9,199

 

 

8,868

 

 

331

 

 

9,972

12/22/2016

 

Raleigh (3)

 

 

8,877

 

 

8,432

 

 

445

 

 

9,450

 

 

Total

 

$

123,273

 

$

114,468

 

$

8,805

 

$

135,126

(1)

Represents principal balance of loan gross of origination fees. The principal balance includes interest accrued on the investment.

(2)

These development property investments (having approximately $8.1 million of outstanding principal at contribution) were contributed to the SL1 Venture on March 31, 2016 by the Company.

(3)

Construction at the facility was substantially complete and/or certificate of occupancy had been received as of December 31, 2018. See Note 4, Fair Value of Financial Instruments, for information regarding recognition of entrepreneurial profit.

(4)

On January 28, 2019, the SL1 Venture purchased its developer partner’s 50.1% equity interest in this investment. As a result, the SL1 Venture now wholly owns the self-storage property.

 

As of September 30, 2019, the SL1 Venture had total assets of $139.3 million and total liabilities of $37.9 million. During the three and nine months ended September 30, 2019, the SL1 Venture had net income of $1.6 million and $3.9 million, of which $0.2 million and $0.4 million was allocated to the Company and $1.4 million and $3.5 million was allocated to HVP III, respectively, under the HLBV method. At September 30, 2019, $0.2 million of transaction expenses were included in the carrying amount of the Company’s investment in the SL1 Venture. Additionally, the Company may from time to time make advances to the SL1 Venture. At September 30, 2019 and December 31, 2018, the Company had $0.4 million in advances to the SL1 Venture, and the related interest on these

30

advances are classified in equity in earnings from unconsolidated self-storage real estate venture in the Consolidated Statements of Operations. The Company has committed to fund fifty percent of costs incurred above and beyond the committed amount of the SL1 Venture loan to three borrowers within the SL1 Venture. These amounts are contractual receivables and earn interest at 6.9%. As of September 30, 2019, the Company has funded $0.3 million related to this arrangement and the maximum estimated potential commitment is $1.2 million.

 

Under the JV Agreement, Heitman and the Company will seek to obtain and, if obtained, will share joint rights of first refusal to acquire self-storage facilities that are the subject of development property investments made by the SL1 Venture. Additionally, so long as the Company, through its operating subsidiary, is a member of the SL1 Venture and the SL1 Venture holds any assets, the Company will not make any investment of debt or equity or otherwise, directly or indirectly, in one or more new joint ventures or similar programs for the purposes of funding or providing development loans or financing, directly or indirectly, for the development, construction or conversion of self-storage facilities, in each case without first offering such opportunity to Heitman to participate on substantially the same terms as those set forth in the JV Agreement, either through the SL1 Venture or a newly formed real estate venture.

 

The JV Agreement permits Heitman to cause the Company to repurchase from Heitman its Developer Equity Interests (as defined in the JV Agreement) in certain limited circumstances. Under the JV Agreement, if a developer causes to be refinanced a self-storage facility with respect to which the SL1 Venture has made a development property investment and such refinancing does not coincide with a sale of the underlying self-storage facility, then at any time after the fourth anniversary of the commencement of the SL1 Venture, Heitman may either put to the Company its share of the Developer Equity Interests in respect of each such development property investment, or sell Heitman’s Developer Equity Interests to a third party. The Company concluded that the likelihood of loss is remote and assigned no value to these puts as of September 30, 2019 and December 31, 2018.

 

The Company is the managing member of the SL1 Venture and manages and administers (i) the day-to-day business and affairs of the SL1 Venture and any of its acquired properties and (ii) loan servicing and other administration of the approved development property investments. The Company will be paid a monthly expense reimbursement amount by the SL1 Venture in connection with its role as managing member, as set forth in the JV Agreement. Heitman may remove the Company as the managing member of the SL1 Venture if it commits an event of default (as defined in the JV Agreement), if it undergoes a change of control (as defined in the JV Agreement), or if it becomes insolvent.

 

Heitman approves all “Major Decisions” of the SL1 Venture, as defined in the JV Agreement, including, but not limited to, each investment of capital, the incurrence of any indebtedness, the sale or other disposition of assets of the SL1 Venture, the replacement of the managing member, the acceptance of new members into the SL1 Venture and the liquidation of the SL1 Venture.

 

6.  VARIABLE INTEREST ENTITIES

 

Development Property Investments and Bridge Investments

 

The Company holds variable interests in its development property investments and bridge investments. The Company has determined that these investees qualify as VIEs because the entities do not have enough equity to finance their activities without additional subordinated financial support. In determining whether the Company is the primary beneficiary of the development property VIEs, the Company identified the activities that most significantly impact the development property VIEs’ economic performance. Such activities are (1) managing the construction and operations of the project, (2) selecting the property manager, (3) making financing decisions, (4) authorizing capital expenditures and (5) disposing of the property. Although the Company has certain participating and protective rights, it does not have the power to direct the activities that most significantly impact the development property VIEs’ economic performance and is not the primary beneficiary; therefore, the Company does not consolidate the development property VIEs.

 

The Company has recorded assets of $508.9 million and $457.9 million at September 30, 2019 and December 31, 2018, respectively, for its variable interest in the development property and bridge investment VIEs which is included in the development property investments and bridge investments at fair value line items in the Consolidated Balance Sheets. The Company’s maximum exposure to loss as a result of its involvement with the development property and bridge investment VIEs is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

Assets recorded related to VIEs

 

$

508,887

 

$

457,947

Unfunded loan commitments to VIEs

 

 

167,627

 

 

220,877

Maximum exposure to loss

 

$

676,514

 

$

678,824

31

 

The Company has a construction completion guaranty from the managing members of the development property VIEs or individual affiliates/owners of such managing members.

 

Investment in Real Estate Venture

 

The Company determined that the SL1 Venture qualifies as a VIE because it does not have enough equity to finance its activities without additional subordinated financial support. In determining whether the Company is the primary beneficiary of the entity, the Company identified the activities that most significantly impact the entity’s economic performance. Such activities are (1) approving self-storage development investments and acquiring self-storage properties, (2) managing directly-owned properties, (3) obtaining debt financing, and (4) disposing of investments. Although the Company has certain rights, it does not have the power to direct the activities that most significantly impact the entity’s economic performance and thus is not the primary beneficiary. As such, the Company does not consolidate the entity and accounts for its unconsolidated interest in the SL1 Venture using the equity method of accounting. The Company’s investment in the SL1 Venture is included in the investment in and advances to self-storage real estate venture balance in the Consolidated Balance Sheets, and earnings from the SL1 Venture are included in equity in earnings from unconsolidated real estate venture in the Company’s Consolidated Statements of Operations. The Company’s maximum contribution to the SL1 Venture is $12.3 million, and as of September 30, 2019 and December 31, 2018, the Company’s remaining unfunded commitment to the SL1 Venture is $0.3 million and $0.9 million, respectively. At September 30, 2019 and December 31, 2018, the Company had $0.4 million in advances to the SL1 Venture. The Company has committed to fund fifty percent of costs incurred above and beyond the committed amount of the SL1 Venture loan to three borrowers within the SL1 Venture. These amounts are contractual receivables and earn interest at 6.9%. As of September 30, 2019, the Company has funded $0.3 million related to this arrangement and the maximum estimated potential commitment is $1.2 million.

 

7.  DEBT

A summary of the Company’s debt is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective

 

Carrying Value as of

 

Maturity Date

 

Interest Rate

 

September 30, 2019

 

December 31, 2018

Secured revolving credit facility (1)

December 28, 2021

 

5.25%

 

$

125,000

 

$

 -

Term Loans:

 

 

 

 

 

 

 

 

 

Term loan 1 (2)

August 1, 2021

 

4.39%

 

 

9,150

 

 

9,150

Term loan 2 (2)

August 1, 2021

 

4.39%

 

 

7,125

 

 

7,125

Term loan 3 (2)

August 1, 2021

 

4.39%

 

 

8,625

 

 

8,625

Term loan 4 (2)

August 1, 2021

 

4.39%

 

 

9,188

 

 

 -

Term loan 5 (2)

August 1, 2021

 

4.39%

 

 

7,087

 

 

 -

Total Term Loans

 

 

 

 

 

41,175

 

 

24,900

Term loan debt issuance costs

 

 

 

 

 

(440)

 

 

(291)

Net Term Loans

 

 

 

 

 

40,735

 

 

24,609

Total debt

 

 

 

 

$

165,735

 

$

24,609

(1) Includes amounts subject to interest rate cap. Effective interest rate represents the weighted average contractual interest rate before the interest rate cap as of September 30, 2019. See further discussion of interest rate cap in Note 8, Risk Management and Use of Financial Instruments.

(2) Balance is subject to interest rate swap. Interest rate represents the contractual interest on the loan as of September 30, 2019. See further discussion in Note 8, Risk Management and Use of Financial Instruments.  

 

Credit Facility

 

On December 28, 2018, the Operating Company entered into an amended and restated senior secured revolving Credit Facility of up to $235 million with KeyBank National Association, as administrative agent, KeyBanc Capital Markets Inc., Raymond James Bank, N.A. and BMO Capital Markets Corp., as joint lead arrangers and syndication agents, and the other lenders party thereto (the “Credit Facility”). Pursuant to an accordion feature, the Operating Company may from time to time increase the commitments up to an aggregate amount of $400 million, subject to, among other things, an absence of default under the Credit Facility, as well as receiving commitments from lenders for the additional amounts. The Operating Company typically uses borrowings under the Credit Facility to fund its investments, to make secured or unsecured loans to borrowers in connection with its investments and for general corporate purposes.

 

32

On December 28, 2018, the Company and certain wholly-owned subsidiaries of the Operating Company (the “Subsidiaries”) entered into an Unconditional Guaranty of Payment and Performance whereby they have agreed to unconditionally guarantee the obligations of the Operating Company under the Credit Facility. The Credit Facility is secured by a portion of the Company’s investments made through the Subsidiaries, and other subsidiaries of the Operating Company may be added as guarantors from time to time during the term of the Credit Facility. The Credit Facility has a scheduled maturity date on December 28, 2021, with two one-year extension options to extend the maturity of the facility to December 28, 2023. Borrowings under the Credit Facility are secured by three different pools of collateral: the first consisting of the Company’s mortgage loans extended to developers, the second consisting of certain non-stabilized self-storage properties owned by the Company and the third consisting of certain stabilized self-storage properties owned by the Company or one of its wholly-owned subsidiaries.

 

The amount available to borrow under the Credit Facility is limited according to a borrowing base valuation of the assets available as collateral. For loans secured by Company mortgage loans, the borrowing base availability is the lesser of (i) 60% of the outstanding balance of the Company mortgage loans and (ii) the maximum principal amount which would not cause the outstanding loans under the Credit Facility secured by the Company mortgage loans to be greater than 50% of the underlying real estate asset fair value securing the Company mortgage loans. For loans secured by non-stabilized self-storage properties, the borrowing base availability is the lesser of (i) the maximum principal amount that would not cause the outstanding loans under the Credit Facility secured by the non-stabilized self-storage properties to be greater than 60% of the as-stabilized value of such non-stabilized self-storage properties, (ii) the maximum principal amount which would not cause the outstanding loans under the Credit Facility to be greater than 75% of the total development cost of the non-stabilized self-storage properties, and (iii) whichever of the following is then applicable: (a) the maximum principal amount that would not cause the ratio of (1) stabilized net operating income from the non-stabilized self-storage properties included in the borrowing base divided by (2) an implied debt service coverage amount to be less than 1.35 to 1.00, (b) for any underlying real estate asset securing the non-stabilized self-storage properties that has been included in the borrowing base for greater than 18 months, the maximum principal amount which would not cause the ratio of (1) actual adjusted net operating income for the underlying real estate asset securing such non-stabilized self-storage properties divided by (2) an implied debt service amount to be less than 0.50 to 1.00, and (c) for any underlying real estate asset securing the non-stabilized self-storage properties that has been included in the borrowing base for greater than 30 months, the maximum principal amount which would not cause the ratio of (1) actual adjusted net operating income for the underlying real estate asset securing such non-stabilized self-storage properties divided by (2) an implied debt service amount to be less than 1.00 to 1.00. For loans secured by stabilized self-storage properties, the borrowing base availability is the lesser of (i) the maximum principal amount that would not cause the outstanding loans under the Credit Facility secured by the underlying real estate asset securing the stabilized self-storage properties to be greater than 65% of the value of such self-storage properties and (ii) the maximum principal amount that would not cause the ratio of (i) aggregate adjusted net operating income from the underlying real estate asset securing such stabilized self-storage properties included in the borrowing base divided by (ii) an implied debt service coverage amount to be less than 1.30 to 1.00.

 

The Credit Facility includes certain requirements that may limit the borrowing capacity available to the Company from time to time. Under the terms of the Credit Facility, the outstanding principal balance of the revolving credit loans, swing loans and letter of credit liabilities under the Credit Facility may not exceed the borrowing base availability.

 

Each loan made under the Credit Facility bears interest at either, at the Operating Company’s election, (i) a base rate plus a margin of 1.25%,  1.75% or 2.25% or (ii) LIBOR plus a margin of 2.25%,  2.75% or 3.25%, in each case depending on the borrowing base available for such loan. In addition, the Operating Company is required to pay a fee of a per diem rate of either 0.25% or 0.30% per annum depending on the amount outstanding under the Credit Facility at the time, times the excess of the sum of the commitments of the lenders, as in effect from time to time, over the outstanding principal amount of revolving credit loans under the Credit Facility.

 

LIBOR is expected to be discontinued after 2021. None of the Company’s current debt that has an interest rate tied to LIBOR has a maturity date of later than December 31, 2021 unless the extension options under the Credit Facility are exercised. The Credit Facility provides procedures for determining an alternative base rate in the event that LIBOR is discontinued. However, there can be no assurances as to what that alternative base rate will be and whether that base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. The Company intends to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and work with its lenders to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.

 

The Credit Facility contains certain customary representations and warranties and financial and other affirmative and negative covenants. The Operating Company’s ability to borrow under the Credit Facility is subject to ongoing compliance by the Company and the Operating Company with various customary restrictive covenants, including but not limited to limitations on its incurrence of

33

indebtedness, investments, dividends, asset sales, acquisitions, mergers and consolidations and liens and encumbrances. In addition, the Credit Facility contains certain financial covenants including the following:

 

·

total consolidated indebtedness not exceeding 50% of gross asset value;

·

a minimum fixed charge coverage ratio (defined as the ratio of consolidated adjusted earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.20 to 1.00 during the period between December 28, 2018 and December 31, 2020, 1.30 to 1.00 during the period between January 1, 2021 and December 31, 2022 and 1.40 to 1.00 during the period between January 1, 2023 through the maturity of the Credit Facility;

·

a minimum consolidated tangible net worth (defined as gross asset value less total consolidated indebtedness) of $373.6 million plus 75% of the sum of any additional net offering proceeds;

·

when aggregate loan commitments under the Credit Facility exceed $50 million, unhedged variable rate debt cannot exceed 40% of consolidated total indebtedness;

·

liquidity of no less than the greater of (a) future funding commitments of us and our subsidiaries for the three months following each date of determination and (b) $50 million for the period between December 31, 2018 and December 31, 2019 or on and after January 1, 2020, liquidity of no less than the greater of (i) future funding commitments of the Company and its subsidiaries for the six months following each date of determination and (ii) $50 million; and

·

a debt service coverage ratio (defined as the ratio of consolidated adjusted earnings before interest, taxes, depreciation and amortization to the Company’s consolidated interest expense and debt principal payments for any given period) of 2.00 to 1.00.

 

The Credit Facility provides for standard events of default, including nonpayment of principal and other amounts when due, non-performance of covenants, breach of representations and warranties, certain bankruptcy or insolvency events, and changes in control. If any of certain key executives ceases to be in senior management of the Company and actively involved in the daily activities of the Company and the required lenders do not approve a replacement within 90 days of such event, then it will be considered a change in control and, as a result, an event of default under the Credit Facility. If an event of default occurs and is continuing under the Credit Facility, the lenders may, among other things, terminate their commitments under the Credit Facility and require the immediate payment of all amounts owed thereunder.

 

As of September 30, 2019, the Company had $125.0 million outstanding under the Credit Facility of $198.5 million of total availability for borrowing under the Credit Facility before considering any amounts outstanding.

As of September 30, 2019, the Company was in compliance with all of its financial covenants of the Credit Facility.

As of September 30, 2019 and December 31, 2018, certain of the Company’s development property investments as described in Note 3, Self-Storage Investment Portfolio, were pledged as collateral against the Credit Facility. In addition, as of September 30, 2019, the Jacksonville 1, New York City 1, Miami 4, Miami 5, Miami 6, Miami 7, and Miami 8 properties, which are included in self-storage real estate owned, net, were pledged as collateral against the Credit Facility. As of December 31, 2018, all of the Company’s bridge investments as described in Note 3, Self-Storage Investment Portfolio, as well as the New York City 1 property, which is included in self-storage real estate owned, net, were also pledged as collateral against the Credit Facility.

Term Loans

On August 17, 2018, the Company entered into loan agreements with FirstBank (“FirstBank”) with respect to three term loans in the aggregate principal amount of $24.9 million. On January 18, 2019, the Company entered into a loan agreement with FirstBank with respect to a term loan in the aggregate principal amount of $9.2 million. Additionally, on August 13, 2019, the Company entered into a loan agreement with FirstBank with respect to a term loan in the aggregate principal amount of $7.1 million. These loans are collectively referred to as the “FirstBank Term Loans.” The FirstBank Term Loans are secured by first mortgages on the Company’s five wholly-owned self-storage facilities located in Orlando, Florida, Atlanta, Georgia, Charlotte, North Carolina and New Haven, Connecticut. As a condition to FirstBank providing the FirstBank Term Loans, the Company has agreed to unconditionally guarantee the subsidiaries’ obligations under the FirstBank Term Loans pursuant to guaranty agreements with FirstBank (the “FirstBank Guaranties”).

The FirstBank Term Loans will mature on August 1, 2021.  Borrowings under the FirstBank Term Loans bear interest at a floating variable rate of one-month LIBOR plus 2.25%, which is reset monthly.  The FirstBank Term Loans are each subject to an interest rate swap to fix the 30-day LIBOR rate.  Term Loans 1 to 4 swaps fix 30-day LIBOR at 2.2925% and Term Loan 5 fixes 30-day LIBOR at 1.6025%. See further discussion of the utilization of interest rate swaps in Note 8, Risk Management and Use of Financial Instruments.  

34

The FirstBank Term Loans contain customary representations and warranties and affirmative and negative covenants. The FirstBank Term Loans contain a financial covenant that requires the Operating Company to maintain a debt service coverage ratio of 1.35 to 1. The debt service coverage ratio will be calculated pursuant to the terms of the Credit Facility. FirstBank is a lender under the Credit Facility. The FirstBank Term Loans also contain a covenant that requires the Operating Company to maintain a loan to value ratio on the outstanding balance of the loan that does not exceed the loan to value ratio at closing.

The FirstBank Term Loans provide for standard events of default, including nonpayment of principal and other amounts when due, non-performance of covenants, breach of representations and warranties and certain bankruptcy or insolvency events. If an event of default occurs and is continuing under the FirstBank Term Loans, FirstBank may, among other things, terminate its commitments under the FirstBank Term Loans and require the immediate payment of all amounts owed thereunder. The FirstBank Term Loans each contain cross-default provisions with the Credit Facility, pursuant to which an event of default under the FirstBank Term Loans is triggered by the occurrence of an event of default under the Credit Facility that results in acceleration of the outstanding obligations of the Operating Company under the Credit Facility.

As of September 30, 2019, the Company was in compliance with all of its financial covenants of the FirstBank Term Loans.

 

8. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS 

 

The Company’s use of derivative instruments is limited to the utilization of interest rate swap and cap agreements to manage interest rate risk exposures and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure, as well as to hedge specific liabilities. The counterparties to these arrangements are major financial institutions with which the Company and its subsidiaries may also have other financial relationships. The Company is potentially exposed to credit loss in the event of non-performance by these counterparties. However, because of the high credit ratings of the counterparties, the Company does not anticipate that any of the counterparties will fail to meet these obligations as they come due. The Company does not hedge credit or property value market risks.

 

The Company enters into interest rate swap agreements that qualify and are designated as cash flow hedges designed to reduce the impact of interest rate changes on its variable rate debt. Therefore, the interest rate swaps are recorded in the Consolidated Balance Sheets at fair value and the related gains or losses are deferred in stockholders’ equity as accumulated other comprehensive income (loss). These deferred gains and losses are amortized into interest expense during the period or periods in which the related interest payments affect earnings. During the three months ended September 30, 2019, the Company entered into an interest rate swap related to its Term Loan entered into during the quarter. The Company entered into interest rate swaps for all five of its First Bank Term Loans during the nine months ended September 30, 2019.

 

The Company formally assesses, both at inception of a hedge and on an on-going basis, whether each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If management determines that a derivative was highly-effective as a hedge, then the Company accounts for the derivative using hedge accounting, pursuant to which gains or losses inherent in the derivative did not impact the Company’s results of operations. If management determines that a derivative was not highly-effective as a hedge or if a derivative ceased to be a highly-effective hedge, the Company will discontinue hedge accounting prospectively and reflect in its statement of operations realized and unrealized gains and losses in respect of the derivative.

 

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. In addition, the Company has agreements with each of its derivative counterparties that contain a provision where the Operating Partnership could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. As of September 30, 2019, the Company had not breached the provisions of these agreements. Although the Company's derivative contracts are subject to master netting arrangements, which serve as credit mitigants to both the Company and its counterparties under certain situations, the Company does not net its derivative fair values or any existing rights or obligations to cash collateral in the Consolidated Balance Sheets.

35

 The following table summarizes the terms and fair values of the Company’s derivative financial instruments designated as hedges as of September 30, 2019 and December 31, 2018, respectively (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

 

 

 

 

 

 

 

Fair Value

Hedge Product

   

Hedge Type (1)

 

September 30, 2019

   

December 31, 2018

   

Strike

 

 

Effective Date

 

Maturity

 

September 30, 2019

   

December 31, 2018

Swap

 

Cash flow

 

$

9,150

 

$

 -

 

2.2925

%  

 

6/3/2019

 

8/1/2021

 

$

(131)

 

$

 -

Swap

 

Cash flow

 

 

7,125

 

 

 -

 

2.2925

%  

 

6/3/2019

 

8/1/2021

 

 

(102)

 

 

 -

Swap

 

Cash flow

 

 

8,625

 

 

 -

 

2.2925

%  

 

6/3/2019

 

8/1/2021

 

 

(123)

 

 

 -

Swap

 

Cash flow

 

 

9,188

 

 

 -

 

2.2925

%  

 

6/3/2019

 

8/1/2021

 

 

(131)

 

 

 -

Swap

 

Cash flow

 

 

7,087

 

 

 -

 

1.6025

%  

 

8/13/2019

 

8/1/2021

 

 

(13)

 

 

 -

 

 

 

 

$

41,175

 

$

 -

 

 

 

 

 

 

 

 

$

(500)

 

$

 -

(1) Hedging variable rate Term Loans by fixing 30-day LIBOR.

 

The Company measures its derivative instruments designated as cash flow hedges at fair value and records them in the balance sheet as either an asset or liability. As of September 30, 2019, all derivative instruments designated as cash flow hedges are included in accounts payable, accrued expenses and other liabilities in the accompanying Consolidated Balance Sheets. As of December 31, 2018, there were no derivative instruments outstanding.  The changes in the fair value of the derivatives are reported in accumulated other comprehensive income (loss). Amounts reported in accumulated other comprehensive income (loss) related to derivatives are reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

 

The following table presents the effect of derivatives designated as hedging instruments on the Consolidated Statements of Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives in Cash Flow Hedging Relationships

 

Amount of Loss Recognized in Accumulated OCL on Derivative

 

Gain Reclassified from Accumulated OCL into Interest Income

 

Location of Gain Reclassified from Accumulated OCL into Income

Three months ended  September 30,

 

2019

 

2018

 

2019

 

2018

 

 

 

 

 

 

Term loan interest rate contracts

 

$

(58)

 

$

 -

 

$

(1)

 

$

 -

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loan interest rate contracts

 

$

(495)

 

$

 -

 

$

(5)

 

$

 -

 

Interest Expense

 

The changes in accumulated other comprehensive income (loss) for the three months and nine months ended September 30, 2019 and 2018, are summarized as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30,

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

Accumulated other comprehensive income beginning of period

 

$

(441)

 

$

 -

 

$

 -

 

$

 -

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on interest rate swaps

 

 

(58)

 

 

 -

 

 

(495)

 

 

 -

Reclassification of realized gains on interest rate swaps

 

 

(1)

 

 

 -

 

 

(5)

 

 

 -

Amount included in other comprehensive income (loss)

 

 

(59)

 

 

 -

 

 

(500)

 

 

 -

Accumulated other comprehensive income (loss) end of period

 

$

(500)

 

$

 -

 

$

(500)

 

$

 -

 

During the next twelve months, the Company estimates that an additional $0.2 million will be reclassified to earnings as an increase to interest expense, which primarily represents the difference between the fixed interest rate swap payments and the projected variable interest rate swap receipts.

 

The Company also entered into an interest rate cap agreement in June 2019 with a notional amount of $100 million and a one-month LIBOR interest rate cap of 2.50% that expires on December 28, 2021 (the “Interest Rate Cap Agreement”). The Interest Rate Cap Agreement is for a period equal to the existing term of the Credit Facility (as defined in Note 7, Debt) and has a notional amount equal to or greater than the then outstanding principal balance of the Credit Facility. The Company did not designate the interest rate cap as a hedge. As of September 30, 2019, the net carrying amount of the interest rate cap was $0.03 million and is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets. There were no interest rate caps outstanding at December 31, 2018.

36

 

The following table presents the effect of derivatives not designated as hedging instruments on the Consolidated Statements of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments

 

Amount of Gain (Loss) Recognized in Earnings on Derivative

 

 

Location of Gain (Loss) Recognized in Income on Derivative

Three months ended  September 30,

 

2019

 

2018

 

 

 

 

 

 

Credit Facility interest rate cap

 

$

(61)

 

$

 -

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

Credit Facility interest rate cap

 

$

(89)

 

$

 -

 

 

Interest Expense

 

 

 

 

9.  STOCKHOLDERS’ EQUITY

 

The Company had 22,236,871 and 20,430,218 shares of common stock issued and outstanding, which included 216,165 and 159,165 shares of non-vested restricted stock, as of September 30, 2019 and December 31, 2018, respectively. The Company had 131,375 and 125,000 shares of Series A Preferred Stock issued and outstanding as of September 30, 2019 and December 31, 2018, respectively. The Company also had 1,571,734 shares of Series B Preferred Stock issued and outstanding as of September 30, 2019 and December 31, 2018.

 

ATM Program

 

On December 7, 2018, the Company entered into a new Equity Distribution Agreement with an aggregate offering price under an at the market equity offering program (the “ATM Program”) of up to $75.0 million. As of September 30, 2019, the Company has issued and sold an aggregate of 3,966,123 shares of common stock at a weighted average price of $21.48 per share under the ATM Program and the Company’s previous ATM Program, receiving net proceeds after commissions and other offering costs of $83.0 million. During the nine months ended September 30, 2019, the Company issued and sold an aggregate of 1,684,349 shares of common stock at a weighted average price per share of $21.05 under the ATM Program, receiving net proceeds after commissions and other offering costs of $34.6 million. The Company does not currently have an active ATM Program.

Stock Repurchase Plan

 

On May 20, 2016, the Company’s Board of Directors authorized a share repurchase program for the repurchase of up to $10.0 million of the outstanding shares of common stock of the Company. As of September 30, 2019, the Company had repurchased and retired a total of 213,078 shares of its common stock at an aggregate cost of approximately $3.2 million. As of September 30, 2019, the Company has $6.8 million remaining under the Board’s authorization to repurchase shares of its common stock.

 

Equity Incentive Plan

 

The Company maintains the Second Amended and Restated 2015 Equity Incentive Plan (the “2015 Equity Incentive Plan”) for the purpose of attracting and retaining directors, executive officers, investment professionals and other key personnel and service providers, including officers and employees of the Manager and other affiliates, and to stimulate their efforts toward the Company’s continued success, long-term growth and profitability. The 2015 Equity Incentive Plan provides for the grant of stock options, share awards (including restricted common stock and restricted stock units), stock appreciation rights, dividend equivalent rights, performance awards, annual incentive cash awards and other equity-based awards, including Long-Term Incentive Plan (“LTIP”) units, which are convertible on a one-for-one basis into Operating Company Units (“OC Units”). On May 1, 2019, the Company’s stockholders approved, and the Company adopted, the Second Amended and Restated 2015 Equity Incentive Plan increasing the number of shares reserved for issuance under the Plan by 380,000 to an aggregate of 750,000 shares and extending the term of the Plan until May 1, 2029.

 

Restricted Stock Awards

 

The Second Amended and Restated 2015 Equity Incentive Plan permits the issuance of restricted shares of the Company’s common stock to employees of the Manager (as the Company has no employees) and the Company’s non-employee directors. As of September 30, 2019 and December 31, 2018, 509,509 and 363,587 shares of restricted stock, respectively, had been granted, of which 55,172 vested in 2016, 46,413 vested in 2017, 99,503 vested in 2018, 87,256 vested during the nine months ended September 30, 2019,

37

107,372 is expected to vest in 2020, 55,711 is expected to vest in 2021 and 53,082 is expected to vest in 2022. Additionally, 1,666 were forfeited during the nine months ended September 30, 2019 and 1,667 were forfeited during each of the years ended December 31, 2018 and 2016. Non-vested shares are earned over the respective vesting period based on a service condition only. Expenses related to restricted stock awards are charged to compensation expense and are recognized over the respective vesting period (primarily three to five years) of the awards. For restricted stock issued to non-employee directors of the Company, compensation expense is based on the market value of the shares at the grant date. For restricted stock awards issued to employees of the Manager, prior to the adoption of ASU 2018-07, compensation expense was re-measured at each reporting date until service was complete and the restricted shares became vested based on the then current value of the Company’s common stock. The Company early adopted ASU 2018-07 effective April 1, 2018, which established a grant date fair value of $18.10 based on the market value of the award as of April 1, 2018 for all nonemployee awards that have not vested as of April 1, 2018. Furthermore, for future awards, compensation expense is based on the market value of the shares at the grant date.

 

The Company recognized approximately $0.6 and $0.4 million of stock-based compensation expense for the three months ended September 30, 2019 and 2018, respectively, and $1.7 million and $1.6 million of stock-based compensation expense for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019 and December 31, 2018, the total unrecognized compensation cost related to the Company’s restricted shares was approximately $3.6 million and $2.1 million, respectively, based on the grant date market value for awards issued to non-employee directors of the Company and the fair value of awards as of the adoption date of ASU 2018-07 for awards issued to employees of the Manager. This cost is expected to be recognized over the remaining weighted average period of 2.2 years. The Company presents stock-based compensation expense in general and administrative expenses in the Consolidated Statements of Operations.

 

A summary of changes in the Company’s restricted shares of common stock for the three and nine months ended September 30, 2019 and 2018 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Three months ended

 

 

September 30, 2019

 

September 30, 2018

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

average grant

 

 

 

average grant

 

 

Shares

 

date fair value

 

Shares

 

date fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonvested at June 30,

 

 

208,665

 

$

20.35

 

 

172,499

 

$

18.37

Granted

 

 

7,500

 

 

19.84

 

 

 -

 

 

 -

Vested

 

 

 -

 

 

 -

 

 

(11,667)

 

 

18.10

Nonvested at September 30,

 

 

216,165

 

$

20.34

 

 

160,832

 

$

18.39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

Nine months ended

 

 

September 30, 2019

 

September 30, 2018

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

average grant

 

 

 

average grant

 

 

Shares

 

date fair value

 

Shares

 

date fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonvested at December 31,

 

 

159,165

 

$

18.39

 

 

185,002

 

$

21.58

Granted

 

 

145,922

 

 

21.60

 

 

75,333

 

 

19.18

Vested

 

 

(87,256)

 

 

18.95

 

 

(99,503)

 

 

18.48

Forfeited

 

 

(1,666)

 

 

18.10

 

 

 -

 

 

 -

Nonvested at September 30,

 

 

216,165

 

$

20.34

 

 

160,832

 

$

18.39

 

Nonvested restricted shares of common stock receive dividends which are nonforfeitable.

 

Series A Preferred Stock

 

On July 27, 2016 (the “Effective Date”), the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with accounts managed by NexPoint Advisors, L.P., an affiliate of Highland Capital Management, L.P. (collectively, the “Buyers”) relating to the issuance and sale, from time to time until the second anniversary of the Effective Date (such period, the “Commitment Period”), of up to $125 million in shares of the Company’s Series A Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), at a price of $1,000 per share (the “Liquidation Value”). The Company has issued all shares of Series A Preferred Stock available for

38

issuance under the Purchase Agreement and the Articles Supplementary except for shares of Series A Preferred Stock issuable as in-kind dividends.

 

The Series A Preferred Stock ranks senior to the shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company, on parity with any class or series of capital stock of the Company expressly designated as ranking on parity with the Series A Preferred Stock with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company, junior to any class or series of capital stock of the Company expressly designated as ranking senior to the Series A Preferred Stock with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company and junior in right of payment to the Company’s existing and future indebtedness.

 

Holders of Series A Preferred Stock are entitled to a cumulative cash distribution (“Cash Distribution”) equal to (A) 7.0% per annum on the Liquidation Value for the period beginning on the respective date of issuance until the sixth anniversary of the Effective Date, payable quarterly in arrears, (B) 8.5% per annum on the Liquidation Value for the period beginning the day after the sixth anniversary of the Effective Date and for each year thereafter as long as the Series A Preferred Stock remains issued and outstanding, payable quarterly in arrears, and (C) an amount in addition to the amounts in (A) and (B) equal to 5.0% per annum on the Liquidation Value upon the occurrence of certain triggering events (a “Cash Premium”). In addition, the holders of the Series A Preferred Stock will be entitled to a cumulative dividend payable in-kind in shares of Common Stock or additional shares of Series A Preferred Stock, at the election of the holders (the “Stock Dividend”), equal in the aggregate to the lesser of (Y) 25% of the incremental increase in the Company’s book value (as adjusted for equity capital issuances, share repurchases and certain non-cash expenses) plus, to the extent the Company owns equity interests in income-producing real property, the incremental increase in net asset value (provided, however, that no interest in the same real estate asset will be double counted) and (Z) an amount that would, together with the Cash Distribution, result in a 14.0% internal rate of return for the holders of the Series A Preferred Stock from the date of issuance of the Series A Preferred Stock, as set forth in the Articles Supplementary classifying the Series A Preferred Stock (the “Series A Articles Supplementary”). Triggering events that will trigger the payment of a Cash Premium with respect to a Cash Distribution include: (i) the occurrence of certain change of control events affecting the Company after the third anniversary of the Effective Date, (ii) the Company’s ceasing to be subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act, (iii) the Company’s failure to remain qualified as a real estate investment trust, (iv) an event of default under the Purchase Agreement, (v) the failure by the Company to register for resale shares of Common Stock pursuant to the Registration Rights Agreement, (vi) the Company’s failure to redeem the Series A Preferred Stock as required by the Purchase Agreement, or (vii) the filing of a complaint, a settlement with, or a judgment entered by the Securities and Exchange Commission against the Company or any of its subsidiaries or a director or executive officer of the Company relating to the violation of the securities laws, rules or regulations with respect to the business of the Company.

 

For the first three fiscal quarters of the fiscal years 2018, 2019 and 2020 and for the first fiscal quarter of 2021, the Company will declare and pay an Aggregate Stock Dividend equal to $2,125,000 (the “Target Stock Dividend”). For the last fiscal quarter of each of 2018, 2019 and 2020 and for the second fiscal quarter of 2021, the Company will compute the cumulative Aggregate Stock Dividend for all periods after December 31, 2017 through the end of such fiscal quarter equal to 25% of the incremental increase in the Company’s book value (as adjusted for equity capital issuances, share repurchases and certain non-cash expenses) plus, to the extent that we own equity interests in income-producing real property, the incremental increase in net asset value (provided, however, that no interest in the same real estate asset will be double counted) (the “Computed Stock Dividend”), and will declare and pay for such quarter an Aggregate Stock Dividend equal to the greater of the Target Stock Dividend or the Computed Stock Dividend minus the sum of all Aggregate Stock Dividends declared and paid for all fiscal quarters after December 31, 2017 and before the fiscal quarter for which such payment is computed, in each case subject to an amount that would, together with the Cash Distribution (as defined in the Series A Articles Supplementary), result in a 14.0% internal rate of return for the holders of Series A Preferred Stock from the date of issuance of the Series A Preferred Stock. Accrued but unpaid Cash Distributions and Stock Dividends on the Series A Preferred Stock will accumulate and will earn additional Cash Distributions and Stock Dividends as calculated above, compounded quarterly.

Accrued but unpaid Cash Distributions and Stock Dividends on the Series A Preferred Stock will accumulate and will earn additional Cash Distributions and Stock Dividends as calculated above, compounded quarterly.

As long as shares of Series A Preferred Stock remain outstanding, the Company is required to maintain a ratio of debt to total tangible assets determined under U.S. generally accepted accounting principles of no more than 0.4:1, measured as of the last day of each fiscal quarter. The Company has complied with this covenant as of September 30, 2019.

The Series A Preferred Stock may be redeemed at the Company’s option (i) after five years from the Effective Date at a price equal to 105% of the Liquidation Value per share plus the value of all accumulated and unpaid Cash Distributions and Stock Dividends, and

39

(ii) after six years from the Effective Date at a price equal to 100% of the Liquidation Value per share plus the value of all accumulated and unpaid Cash Distributions and Stock Dividends. In the event of certain change of control events affecting the Company prior to the third anniversary of the Effective Date, the Company must redeem all shares of Series A Preferred Stock for a price equal to (a) the Liquidation Value, plus (b) accumulated and unpaid Cash Distributions and Stock Dividends, plus (c) a make-whole premium designed to provide the holders of the Series A Preferred Stock with a return on the redeemed shares equal to a 14.0% internal rate of return through the third anniversary of the Effective Date.

In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Stock shall be entitled to receive an amount equal to the greater of (i) the Liquidation Value, plus all accumulated but unpaid Cash Distributions and Stock Dividends thereon to, but not including, the date of any liquidation, but excluding any Cash Premium and (ii) the amount that would be paid on such date in the event of a redemption following a change of control.

Further, at any time that the Series A Preferred Stock remains outstanding, if Dean Jernigan, the Company’s current Executive Chairman of the Board, voluntarily leaves the position (a “Key Man Event”), the holders of the Series A Preferred Stock shall have the right to accept or reject the service of any person as Chief Executive Officer (“CEO”) (or such person serving as the principal executive officer) of the Company.

On July 31, 2019, the Company declared a (i) cash distribution of $17.84 per share of Series A Preferred Stock, payable on October 15, 2019, to holders of Series A Preferred Stock of record on the close of business on October 1, 2019, and (ii) distributions payable in kind in a number of shares of Series A Preferred Stock as determined in accordance with the terms of the designation of the Series A Preferred Stock, payable on October 15, 2019, to holders of Series A Preferred Stock of record on the close of business on October 1, 2019.

Series B Preferred Stock

As of September 30, 2019, the Company had 3,750,000 shares of its 7.00% Series B cumulative redeemable perpetual preferred stock (the “Series B Preferred Stock”) authorized and 1,571,734 shares of Series B Preferred Stock outstanding. Series B Preferred Stock ranks senior to the Company’s common stock, with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company, and on parity with the Series A Preferred Stock and any other class or series of capital stock of the Company expressly designated as ranking on parity with the Series B Preferred Stock with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company, junior to any class or series of capital stock of the Company expressly designated as ranking senior to the Series B Preferred Stock with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company and junior in right of payment to the Company’s existing and future indebtedness. Holders of the Series B Preferred Stock generally do not have voting rights.

Dividends on the Series B Preferred Stock are payable quarterly in arrears on the fifteenth (15th) day of January, April, July and October of each year (or if not a business day, on the immediately preceding business day) (each, a “dividend payment date”) at a rate equal to 7.00% of the $25.00 per share liquidation preference (equivalent to an annual rate of $1.7500 per share). On or after January 26, 2023, the Series B Preferred Stock may be redeemed, at the Company’s option, upon not less than 30 nor more than 60 days’ written notice, in whole or in part, at any time and from time to time, for cash at a redemption price equal to $25.00 per share, plus any accrued and unpaid dividends (whether or not authorized or declared) to, but excluding, the date fixed for redemption. Holders of Series B Preferred Stock will have no right to require the redemption or repurchase of the Series B Preferred Stock. Upon the occurrence of a Change of Control (as defined in the articles supplementary designating the terms of the Series B Preferred Stock (the “Series B Articles Supplementary”)), the Company may redeem for cash, in whole or in part, the Series B Preferred Stock within 120 days after the date on which such Change of Control occurred, by paying $25.00 per share, plus any accrued and unpaid dividends (whether or not authorized or declared) to, but excluding, the date fixed for redemption.

In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock shall be entitled to receive a liquidating distribution in the amount of  $25.00 per share, plus accrued and unpaid dividends (whether or not authorized or declared) to, but excluding, the date of final distribution to such holders.

Series B Preferred Stock At-the-Market Offering Program

On March 29, 2018, the Company and the Operating Company entered into a Distribution Agreement (the “Distribution Agreement”), by and among the Company, the Operating Company, the Manager and B. Riley FBR, Inc. (the “Agent”) in connection with the commencement of an at-the-market continuous offering program (the “Preferred ATM Program”). Pursuant to the terms and conditions of the Distribution Agreement, the Company may, from time to time, issue and sell through or to the Agent, shares of the Series B Preferred Stock, having an aggregate offering price of up to $45.0 million (the “Preferred ATM Shares”).

40

As of September 30, 2019, the Company has sold 71,734 shares of Series B Preferred Stock at a weighted average price of $22.94, receiving net proceeds after commissions and other offering costs of $1.3 million under the Preferred ATM Program. During the nine months ended September 30, 2019, the Company made no sales under the Preferred ATM Program. The Preferred ATM Program was terminated upon the effectiveness of the Company’s registration statement on Form S-3 (File No. 333-231374) on July 12, 2019.

 

10.  EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of shares outstanding during the period. All outstanding unvested restricted share awards contain rights to non-forfeitable dividends and participate in undistributed earnings with common shareholders and, accordingly, are considered participating securities that are included in the two-class method of computing basic earnings per share. Both the unvested restricted shares and the assumed share-settlement of the accrued stock dividend to holders of the Series A Preferred Stock, and the related impacts to earnings, are considered when calculating earnings per share on a diluted basis with the Company’s diluted earnings per share being the more dilutive of the treasury stock or two-class methods. For the three and nine months ended September 30, 2019 and 2018, the Company’s basic earnings per share is computed using the two-class method, and the Company’s diluted earnings per share is computed using the more dilutive of the treasury stock method or two-class method:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

2019

 

2018

 

2019

 

2018

Shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - basic

 

 

22,019,875

 

 

19,184,172

 

 

21,173,946

 

 

16,253,410

Effect of dilutive securities

 

 

213,719

 

 

275,579

 

 

191,293

 

 

286,957

Weighted average common shares, all classes

 

 

22,233,594

 

 

19,459,751

 

 

21,365,239

 

 

16,540,367

 

 

 

 

 

 

 

 

 

 

 

 

 

Calculation of Earnings per Share - basic

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,954

 

$

15,964

 

$

37,941

 

$

32,115

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to preferred stockholders

 

 

5,157

 

 

4,790

 

 

15,283

 

 

12,965

Net income allocated to unvested restricted shares (1)

 

 

56

 

 

96

 

 

203

 

 

207

Net income attributable to common shareholders - two-class method

 

$

5,741

 

$

11,078

 

$

22,455

 

$

18,943

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - basic

 

 

22,019,875

 

 

19,184,172

 

 

21,173,946

 

 

16,253,410

Earnings per share - basic

 

$

0.26

 

$

0.58

 

$

1.06

 

$

1.17

 

 

 

 

 

 

 

 

 

 

 

 

 

Calculation of Earnings per Share - diluted

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,954

 

$

15,964

 

$

37,941

 

$

32,115

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated to preferred stockholders

 

 

5,157

 

 

4,790

 

 

15,283

 

 

12,965

Net income attributable to common shareholders - two-class method

 

$

5,797

 

$

11,174

 

$

22,658

 

$

19,150

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - diluted

 

 

22,233,594

 

 

19,459,751

 

 

21,365,239

 

 

16,540,367

Earnings per share - diluted

 

$

0.26

 

$

0.57

 

$

1.06

 

$

1.16

 

 

(1)

Unvested restricted shares of common stock participate in dividends with unrestricted shares of common stock on a 1:1 basis and thus are considered participating securities under the two-class method for the three and nine months ended September 30, 2019 and 2018.

 

 

 

41

11. RELATED PARTY TRANSACTIONS

Equity Method Investments

Certain of the Company’s development property investments and bridge investments are equity method investments for which the Company has elected the fair value option of accounting. The fair value of these equity method investments at September 30, 2019 and December 31, 2018 was $508.9 million and $440.2 million, respectively. The interest income realized and the net unrealized gain from these equity method investments was $16.5 million and $18.4 million for the three months ended September 30, 2019 and 2018, respectively and $47.2 million and $42.1 million for the nine months ended September 30, 2019 and 2018, respectively.

 

The Company’s investment in the real estate venture, the SL1 Venture, has a carrying amount of $11.0 million and $14.2 million at September 30, 2019 and December 31, 2018, respectively, and the earnings from this venture were $0.2 million and $0.4 million for the three and nine months ended September 30, 2019, respectively. The earnings from this venture were $0.4 million and $1.4 million for the three and nine months ended September 30, 2018, respectively.

 

Management Agreement

As of September 30, 2019, the Company did not have any employees. The Company relies on the personnel, properties and resources of the Manager to conduct its operations. The Company and the Manager are parties to a management agreement (as amended and restated, the “Management Agreement”), which was originally entered into on April 1, 2015 and was amended and restated on May 23, 2016, April 1, 2017 and November 1, 2017. Pursuant to the Management Agreement, the Manager is responsible for (a) the Company’s day-to-day operations (including finance, accounting and investor relations), (b) determining investment criteria and strategy in conjunction with the Company’s Board of Directors, (c) sourcing, analyzing, originating, underwriting, structuring, and acquiring the Company’s portfolio investments, (d) sourcing, analyzing, procuring and managing the Company’s capital and (e) performing portfolio management duties. The Manager has an Investment Committee that approves investments in accordance with the Company’s investment guidelines, investment strategy, and financing strategy.

The initial term of the Management Agreement will expire on March 31, 2020, with up to a maximum of three one-year extensions that end on March 31, 2023. The Company’s independent directors will review the Manager’s performance annually. At the end of the initial term and any extension term, the Management Agreement may be terminated upon the affirmative vote of at least two-thirds of the Company’s independent directors if such independent directors determine: (a) the Manager has performed its duties in an unsatisfactory manner that is materially detrimental to the Company; or (b) the compensation payable to the Manager is not fair, subject to the Manager’s right to prevent termination based on unfair compensation by accepting a reduction of compensation agreed to by at least two-thirds of the independent directors. Under the terms of the Management Agreement, the Company is required to provide the Manager with a minimum 180 days’ prior notice of such a termination. In connection with ongoing discussions regarding internalizing the Manager, the Manager and a special committee comprised solely of independent members of the Company’s Board of Directors have agreed to extend the date of notice of termination to November 30, 2019. Upon such a termination, the Company will pay the Manager a Termination Fee except as provided below in the subsection entitled “Termination of Management Agreement.”

The Manager may terminate the Management Agreement if the Company becomes required to register as an investment company under the 1940 Act, with such termination deemed to occur immediately before such event, in which case the Company would not be required to pay the Manager a Termination Fee. The Manager may also decline to renew the Management Agreement by providing the Company with 180 days’ written notice, in which case the Company would not be required to pay a Termination Fee.

Management Fees

Pursuant to the Management Agreement, the Company pays the Manager a base management fee in an amount equal to 0.375% of the Company’s stockholders’ equity (a 1.5% annual rate) calculated and payable quarterly in arrears in cash. For purposes of calculating the base management fee, the Company’s stockholder’s equity means: (a) the sum of (i) the net proceeds from all issuances of the Company’s equity securities since its IPO (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus (ii) the Company’s retained earnings at the end of the most recently completed fiscal quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods); less (b) any amount that the Company pays to repurchase its common stock since its IPO. If the Company’s retained earnings are in a net deficit position (following any required adjustments set forth below), then retained earnings shall not be included in stockholders’ equity. Retained earnings also excludes (x) any unrealized gains and losses and other non-cash items that have impacted stockholders’ equity as reported in the Company’s financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and (y) one-

42

time events pursuant to changes in GAAP (such as a cumulative change to the Company’s operating results as a result of a codification change pursuant to GAAP), and certain non-cash items not otherwise described above (such as depreciation and amortization), in each case after discussions between the Manager and the Company’s independent directors and approval by a majority of the Company’s independent directors. As a result, the Company’s stockholders’ equity, for purposes of calculating the base management fee, could be greater or less than the amount of stockholders’ equity shown on its financial statements. The base management fee is payable independent of the performance of the Company’s portfolio. The Manager computes the base management fee within 30 days after the end of the fiscal quarter with respect to which such installment is payable and promptly delivers such calculation to the Company’s Board of Directors. The amount of the installment shown in the calculation is due and payable no later than the date which is five business days after the date of delivery of such computation to the Board of Directors. The base management fee was $2.1 million and $1.9 million for the three months ended September 30, 2019 and 2018, respectively, and $6.2 million and $4.8 million for the nine months ended September 30, 2019 and 2018, respectively.

Incentive Fee

The Manager may also earn an incentive fee each fiscal quarter (or part thereof that the Management Agreement is in effect) payable in arrears in cash. The incentive fee will be an amount, not less than zero, determined pursuant to the following formula:

Incentive Fee = .20 times (A minus (B times .08)) minus C

In the foregoing formula:

·

A equals the Company’s Core Earnings (as defined below) for the previous 12-month period;

·

B equals (i) the weighted average of the issue price per share of the Company’s common stock of all of its public offerings of common stock, multiplied by (ii) the weighted average number of all shares of common stock outstanding (including (i) any restricted stock units and any restricted shares of common stock in the previous 12-month period and (ii) shares of common stock issuable upon conversion of outstanding OC Units); and

·

C equals the sum of any incentive fees earned by the Manager with respect to the first three fiscal quarters of such previous 12-month period.

Notwithstanding application of the incentive fee formula, any incentive fee earned shall not be paid with respect to any fiscal quarter unless cumulative annual stockholder total return for the four most recently completed fiscal quarters is greater than 8%. Any computed incentive fee earned but not paid because of the foregoing hurdle will accrue until such 8% cumulative annual stockholder total return is achieved. The total return is calculated by adding stock price appreciation (based on the volume-weighted average of the closing price of the Company’s common stock on the New York Stock Exchange (or other applicable trading market) for the last ten consecutive trading days of the applicable computation period minus the volume-weighted average of the closing market price of the Company’s common stock for the last ten consecutive trading days of the period immediately preceding the applicable computation period) plus dividends per share paid during such computation period, divided by the volume-weighted average of the closing market price of the Company’s common stock for the last ten consecutive trading days of the period immediately preceding the applicable computation period. For purposes of computing the Incentive Fee, “Core Earnings” is defined as (1) net income (loss) determined under GAAP, plus (2) non-cash equity compensation expense, the incentive fee, depreciation and amortization, plus (3) any unrealized losses or other non-cash expense items reflected in GAAP net income (loss), less (4) any unrealized gains reflected in GAAP net income (including any unrealized appreciation with respect to self-storage facilities that the Company has not yet acquired). The amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between the Manager and the Company’s independent directors and after approval by a majority of the independent directors. In addition, with respect to any self-storage facility acquired by the Company with respect to which it had an outstanding loan as of the time of such acquisition, the amount of Core Earnings determined pursuant to the formula above in the period of such acquisition shall also be increased by the difference between (A) the appraised value, as determined by a nationally recognized, independent third-party appraiser, mutually agreed to by the Company and the Manager, who has significant expertise in valuing self-storage properties, and (B) (i) the outstanding principal amount of any one of the Company’s loans secured by such acquired self-storage facility at the time of such acquisition plus (ii) any other consideration given to the former owner upon such acquisition. This addition is intended to include in Core Earnings the amount of the Company’s unrealized gain on account of its acquisition of a self-storage facility without such facility being sold to a third party buyer in the open market.

The Manager computes the incentive fee each quarter within 45 days after the end of the fiscal quarter that is currently payable and if an incentive fee results, promptly delivers such calculation to the Company’s Board of Directors. The amount of any incentive fee

43

shown in the calculation is due and payable no later than the date which is five business days after the date of delivery of such computation to the Board of Directors. The Manager did not earn an incentive fee for the three and nine months ended September 30, 2019 and 2018.

At September 30, 2019 and December 31, 2018, the Company had outstanding fees due to Manager of $2.7 million and $3.3 million, respectively, consisting of the management fees payable, incentive fees payable, and certain reimbursable expenses.

 

Expense Reimbursement

In addition to Management Fees and Incentive Fees as described above, the Management Agreement provides that the Company will reimburse payroll, occupancy, business development, marketing and other expenses of the Manager for conducting the business of the Company, excluding the salaries and cash bonuses of the Manager’s CEO and Chief Financial Officer (“CFO”), and certain other costs as determined by the Manager in accordance with the Management Agreement. Certain prepaid expenses and fixed assets are also purchased through the Manager and reimbursed by the Company. Under the Management Agreement, the Manager may engage independent contractors that provide investment banking, securities brokerage, mortgage brokerage and other financial, legal and account services as may be required for the Company’s investments, and the Company agrees to reimburse the Manager for costs and expenses incurred in connection with these services; however, expenses incurred by the Manager are reimbursable to the Manager by the Company only to the extent such expenses are not otherwise directly reimbursed by an unaffiliated third party. The amount of expenses to be reimbursed to the Manager by the Company are reduced dollar-for-dollar by the amount of any such payment or reimbursement. Amounts reimbursable to the Manager for expenses are included in general and administrative expenses in the Consolidated Statements of Operations and totaled $1.1 million and $1.0 million for the three months ended September 30, 2019 and 2018, respectively, and $3.1 million and $2.8 million for the nine months ended September 30, 2019 and 2018, respectively.

Termination of Management Agreement

In the event that the Company terminates the Management Agreement per the terms of the agreement, other than for cause or the Company being required to register as an investment company, there will be a Termination Fee due to the Manager. If the Management Agreement terminates other than for Cause, voluntary non-renewal by the Manager or the Company being required to register as an investment company under the 1940 Act, then the Company shall pay to the Manager, on the date on which such termination is effective, a Termination Fee equal to the greater of (i) three times the sum of the average annual Base Management Fee and Incentive Fee earned by the Manager during the 24 month period prior to such termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination, or (ii) a price, based on the lesser of (a) the Manager’s earnings before interest, taxes, depreciation and amortization (adjusted for unusual, extraordinary and non-recurring charges and expenses), or “EBITDA”, annualized based on the most recent quarter ended, multiplied by a specific multiple, or EBITDA Multiple, depending on our achieved total annual return, and (b) the Company’s equity market capitalization multiplied by a specific percentage, or Capitalization Percentage, depending on our achieved total return (the “Internalization Price”).

The EBITDA and Capitalization Percentage are as follows based on our total annual return:

 

 

 

Total Annual Return

EBITDA Multiple

Capitalization %

<8%

5x

5%

8% to 12%

5.5x

5.5%

>12%

6x

6%

 

Any Termination Fee will be payable by the Operating Company in cash.

The Company also may terminate the Management Agreement at any time, including during the initial term, without the payment of any Termination Fee, with 30 days’ prior written notice from the Board of Directors, for cause. “Cause” is defined as: (i) the Manager’s continued breach of any material provision of the Management Agreement following a prescribed period; (ii) the occurrence of certain events with respect to the bankruptcy or insolvency of the Manager; (iii) a change of control of the Manager that a majority of the Company’s independent directors determines is materially detrimental to the Company; (iv) the Manager committing fraud against the Company, misappropriating or embezzling our funds, or acting grossly negligent in the performance of its duties under the Management Agreement; (v) the dissolution of the Manager; (vi) the Manager fails to provide adequate or appropriate personnel that are reasonably necessary for the Manager to identify investment opportunities for the Company and to manage and develop the Company’s investment portfolio if such default continues uncured for a period of 60 days after written notice thereof, which notice must contain a request that the same be remedied; (vii) the Manager is convicted (including a plea of nolo contendere) of a felony; or (viii) both the current Executive Chairman and the current CEO are no longer senior executive officers of the Manager or the Company during the term of the Management Agreement other than by reason of death or disability.

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Internalization of Manager

 

No later than 180 days prior to the end of the initial term of the Management Agreement, the Manager must offer to contribute to the Operating Company at the end of the initial term all of the assets or equity interests in the Manager (an “Internalization Transaction”). Such offer shall specify an internalization price and such terms and conditions as the Manager shall determine.

Upon receipt of the Manager’s initial internalization offer, a special committee consisting solely of the Company’s independent directors may accept the Manager’s proposal or submit a counter offer to the Manager. Discussions related to a potential internalization of the Manager began in the third quarter of 2019 and are ongoing. If the Manager and the special committee are unable to agree, the Manager and the special committee will repeat this process annually during the term of any extension of the Management Agreement. Acquisition of the Manager pursuant to this process requires a fairness opinion from a nationally recognized investment banking firm and stockholder approval, in addition to approval by the special committee. As described above, if an Internalization Transaction has not occurred prior to March 31, 2023, the last day of the last renewal term, then the Manager and the Company shall consummate an Internalization Transaction to be effective as of that date, and such Internalization Transaction shall not require a fairness opinion, the approval of a special committee of the Company’s Board of Directors or the approval of the Company’s stockholders. The Company can provide no assurances that an internalization of the Manager will be agreed upon prior to March 2023 on favorable terms or at all, or the effects of the failure to complete such internalization, including the effects of an amendment or termination of the Management Agreement.

Under the Management Agreement, if an Internalization Transaction has not occurred prior to March 31, 2023, the last day of the last renewal term, then the Manager and the Company shall consummate an Internalization Transaction to be effective as of that date and all assets of the Manager (or, alternatively, all of the equity interests in the Manager) shall be conveyed to and acquired by the Operating Company in exchange for the Internalization Price (as described herein). At such time, all employees of the Manager shall become employees of the Operating Company and the Manager shall discontinue all business activities. Unlike an Internalization Transaction that occurs prior to the end of the final renewal term of the