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JCAP Jernigan Capital

Filed: 8 May 20, 5:26pm

 

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 March 31, 2020

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

 

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

 

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     ☒

 

As of May 7, 2020, Jernigan Capital, Inc. had 23,271,648 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 “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

 

 

March 31, 2020

 

December 31, 2019

Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,341

 

$

3,278

Self-Storage Investment Portfolio:

 

 

 

 

 

 

Development property investments at fair value

 

 

427,435

 

 

549,684

Self-storage real estate owned, net

 

 

384,424

 

 

230,844

Investment in and advances to self-storage real estate venture

 

 

6,113

 

 

11,247

Other loans, at cost

 

 

219

 

 

4,713

Deferred financing costs

 

 

7,752

 

 

4,154

Prepaid expenses and other assets

 

 

7,925

 

 

8,654

Fixed assets, net

 

 

200

 

 

203

Total assets

 

$

841,409

 

$

812,777

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Secured revolving credit facility

 

$

198,000

 

$

162,000

Term loans, net of unamortized costs

 

 

40,851

 

 

40,791

Due to Manager

 

 

 -

 

 

3,164

Accounts payable, accrued expenses and other liabilities

 

 

7,703

 

 

4,817

Dividends payable

 

 

10,751

 

 

13,131

Total liabilities

 

 

257,305

 

 

223,903

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

7.00% Series A preferred stock, $0.01 par value, 300,000 shares authorized; 135,625 and 133,500 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively, at liquidation preference of $135.6 million and $133.5 million, net of offering costs, respectively

 

 

132,762

 

 

130,637

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 March 31, 2020 and December 31, 2019, at liquidation preference of $39.3 million, net of offering costs

 

 

37,298

 

 

37,298

Common stock, $0.01 par value, 500,000,000 shares authorized at March 31, 2020 and December 31, 2019; 23,271,859 and 22,423,283 issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

232

 

 

224

Additional paid-in capital

 

 

450,318

 

 

426,129

Accumulated deficit

 

 

(68,417)

 

 

(5,021)

Accumulated other comprehensive income (loss)

 

 

(1,002)

 

 

(393)

Total Jernigan Capital, Inc. stockholders' equity

 

 

551,191

 

 

588,874

Non-controlling interests

 

 

32,913

 

 

 -

Total equity

 

 

584,104

 

 

588,874

Total liabilities and equity

 

$

841,409

 

$

812,777

 

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

 

 

March 31,

 

 

2020

 

2019

Revenues:

 

 

 

 

Interest income from investments

 

$

7,758

 

$

8,212

Rental and other property-related income from real estate owned

 

 

3,878

 

 

1,450

Other revenues

 

 

61

 

 

222

Total revenues

 

 

11,697

 

 

9,884

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

General and administrative expenses

 

 

2,764

 

 

1,762

Fees to Manager

 

 

1,230

 

 

2,003

Property operating expenses of real estate owned

 

 

2,047

 

 

762

Depreciation and amortization of real estate owned

 

 

3,584

 

 

1,029

Goodwill impairment loss

 

 

4,738

 

 

 -

Internalization expenses

 

 

37,783

 

 

 -

Total costs and expenses

 

 

52,146

 

 

5,556

 

 

 

 

 

 

 

Operating income (loss)

 

 

(40,449)

 

 

4,328

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

Equity in earnings (losses) from unconsolidated real estate venture

 

 

(165)

 

 

156

Net unrealized gain (loss) on investments

 

 

(10,962)

 

 

8,830

Interest expense

 

 

(3,212)

 

 

(1,213)

Other interest income

 

 

 6

 

 

13

Total other income (loss)

 

 

(14,333)

 

 

7,786

Net income (loss)

 

$

(54,782)

 

$

12,114

Net income attributable to preferred stockholders

 

 

(5,207)

 

 

(5,032)

Less: Net loss attributable to non-controlling interests

 

 

1,947

 

 

 -

Net income (loss) attributable to common stockholders

 

$

(58,042)

 

$

7,082

 

 

 

 

 

 

 

Basic earnings (loss) per share attributable to common stockholders

 

$

(2.53)

 

$

0.35

Diluted earnings (loss) per share attributable to common stockholders

 

$

(2.53)

 

$

0.35

 

 

 

 

 

 

 

Dividends declared per share of common stock

 

$

0.23

 

$

0.35

 

See accompanying notes to consolidated financial statements.

4

 

 

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

March 31,

 

 

2020

 

2019

Net Income (loss)

 

$

(54,782)

 

$

12,114

Other comprehensive income (loss):

 

 

 

 

 

 

Unrealized losses on interest rate swaps

 

 

(682)

 

 

 -

Reclassification of realized losses on interest rate swaps

 

 

51

 

 

 -

Other comprehensive income (loss)

 

 

(631)

 

 

 -

Comprehensive income (loss)

 

 

(55,413)

 

 

12,114

Less: Net loss attributable to non-controlling interest

 

 

1,947

 

 

 -

Less: Other comprehensive income (loss) attributable to non-controlling interest

 

 

22

 

 

 -

Comprehensive income (loss) attributable to common stockholders

 

$

(53,444)

 

$

12,114

 

 

 

 

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, 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.

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 December 31, 2019

 

 

133,500

 

$

130,637

 

 

1,571,734

 

$

37,298

 

22,423,283

 

$

224

 

$

426,129

 

$

(5,021)

 

$

(393)

 

$

588,874

 

$

-

 

$

588,874

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

 

 

-

 

 

-

 

 

-

 

 

-

 

810,000

 

 

 8

 

 

15,064

 

 

 -

 

 

 -

 

 

15,072

 

 

-

 

 

15,072

Issuance of Operating Company (“OC”) Units for property acquisitions

 

 

-

 

 

-

 

 

-

 

 

-

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,536

 

 

1,536

Issuance of OC Units for Internalization

 

 

-

 

 

-

 

 

-

 

 

-

 

 -

 

 

 -

 

 

8,554

 

 

 -

 

 

 -

 

 

8,554

 

 

33,538

 

 

42,092

Stock dividend paid on preferred stock

 

 

2,125

 

 

2,125

 

 

-

 

 

-

 

 -

 

 

 -

 

 

 -

 

 

-

 

 

-

 

 

2,125

 

 

-

 

 

2,125

Repurchase and retirement of shares of common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

(1,926)

 

 

-

 

 

(36)

 

 

-

 

 

-

 

 

(36)

 

 

-

 

 

(36)

Issuance of stock-based awards 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

40,502

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Stock-based compensation

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

607

 

 

-

 

 

-

 

 

607

 

 

-

 

 

607

Dividends declared on Series A preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(4,519)

 

 

 -

 

 

(4,519)

 

 

-

 

 

(4,519)

Dividends declared on Series B preferred stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(688)

 

 

 -

 

 

(688)

 

 

-

 

 

(688)

Dividends declared on common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(5,354)

 

 

 -

 

 

(5,354)

 

 

-

 

 

(5,354)

Distributions declared to Non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 -

 

 

(192)

 

 

(192)

Other comprehensive income (loss) - derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(609)

 

 

(609)

 

 

(22)

 

 

(631)

Net income (loss)

 

 

-

 

 

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(52,835)

 

 

 -

 

 

(52,835)

 

 

(1,947)

 

 

(54,782)

Balance at March 31, 2020

 

 

135,625

 

$

132,762

 

 

1,571,734

 

$

37,298

 

23,271,859

 

$

232

 

$

450,318

 

$

(68,417)

 

$

(1,002)

 

$

551,191

 

$

32,913

 

$

584,104

 

See accompanying notes to consolidated financial statements.

 

 

7

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

2020

 

2019

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

(54,782)

 

$

12,114

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

Interest capitalized on outstanding loans

 

 

(6,104)

 

 

(6,932)

Net unrealized (gain) loss on investments

 

 

10,962

 

 

(8,830)

Stock-based compensation

 

 

607

 

 

359

Equity in (earnings) losses from unconsolidated self-storage real estate venture

 

 

168

 

 

(154)

Return on investment from unconsolidated self-storage real estate venture

 

 

94

 

 

52

Depreciation and amortization

 

 

3,602

 

 

1,043

Amortization of deferred financing costs

 

 

598

 

 

462

Internalization – settlement of preexisting contractual relationship

 

 

37,353

 

 

 -

Goodwill impairment loss

 

 

4,738

 

 

 -

Accretion of origination fees

 

 

(265)

 

 

(257)

Unrealized gain on mark-to-market interest rate cap

 

 

(5)

 

 

 -

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(276)

 

 

(71)

Due to Manager

 

 

(3,165)

 

 

(1,068)

Accounts payable, accrued expenses, and other liabilities

 

 

690

 

 

311

Net cash used in operating activities

 

 

(5,785)

 

 

(2,971)

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of corporate fixed assets

 

 

(14)

 

 

(1)

Purchase of self-storage real estate owned

 

 

(26,630)

 

 

(2,636)

Capital additions to self-storage real estate owned

 

 

(241)

 

 

(335)

Capital contributions to unconsolidated self-storage real estate venture

 

 

(166)

 

 

(216)

Return of capital from unconsolidated self-storage real estate venture

 

 

4,683

 

 

2,106

Advances to unconsolidated self-storage real estate venture

 

 

 -

 

 

(12,304)

Repayment of advances to unconsolidated self-storage real estate venture

 

 

355

 

 

12,310

Funding of investment portfolio:

 

 

 

 

 

 

Origination fees received in cash

 

 

 -

 

 

217

Development property and bridge investments

 

 

(8,573)

 

 

(29,548)

Funding of other loans

 

 

 -

 

 

(185)

Repayments of investment portfolio investments

 

 

 -

 

 

342

Repayments of other loans

 

 

4,196

 

 

 2

Net cash used in investing activities

 

 

(26,390)

 

 

(30,248)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Cash received from Credit Facility, net of issuance costs

 

 

32,164

 

 

26,793

Cash received from term loans, net of issuance costs

 

 

 -

 

 

9,069

Stock repurchase

 

 

(36)

 

 

(73)

Net proceeds from issuance of common stock

 

 

15,116

 

 

2,752

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

 

 

 -

 

 

(103)

Dividends paid on Series A preferred stock

 

 

(2,382)

 

 

(2,236)

Dividends paid on Series B preferred stock

 

 

(688)

 

 

(688)

Dividends paid on common stock

 

 

(7,936)

 

 

(7,150)

Net cash provided by financing activities

 

 

36,238

 

 

28,364

Net change in cash and cash equivalents

 

 

4,063

 

 

(4,855)

Cash and cash equivalents at the beginning of the period

 

 

3,278

 

 

8,715

Cash and cash equivalents at the end of the period

 

$

7,341

 

$

3,860

 

See accompanying notes to consolidated financial statements.

8

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”). Until February 20, 2020, the Company was externally managed by JCAP Advisors, LLC (the “Manager”).

 

On December 16, 2019, the Company, the Operating Company, the Manager, Dean Jernigan, John A. Good and Jonathan Perry entered into an Asset Purchase Agreement (the “Purchase Agreement”) providing for the acquisition by the Operating Company of substantially all of the operating assets and liabilities of the Manager (the “Internalization”). A special committee of the Board consisting solely of all of the independent and disinterested directors (the “Special Committee”) negotiated the terms of the Internalization on behalf of the Company and the Operating Company. The Purchase Agreement and the Internalization were unanimously approved by the Special Committee, and, upon recommendation by the Special Committee, by the Company’s Board of Directors. On February 20, 2020, the Company held a special meeting of common stockholders, at which the Company’s common stockholders approved the proposal necessary for the completion of the Internalization.

On February 20, 2020, the Company completed the Internalization pursuant to the Purchase Agreement, and the Operating Company issued to the Manager 1,794,872 common units of limited liability company interest in the Operating Company (“OC Units”). In addition, if either (a) the Company’s common stock trades at or above a daily volume weighted average price of $25.00 per share for at least 30 days during any 365-day period prior to December 31, 2024 or (b) there is a change of control of the Company (as defined in the Purchase Agreement) prior to December 31, 2024 that is approved by the Company’s Board of Directors and the common stockholders of the Company, the Operating Company will issue an additional 769,231 OC Units to the Manager. The OC Units issued in the Internalization were Class B OC Units, so the initial distributions payable on the OC Units issued in the Internalization were prorated for the number of days during the initial distribution period that such OC Units were outstanding. The Class B OC Units were otherwise identical to Class A OC Units and automatically converted to Class A OC Units following the initial distribution period that ended April 15, 2020.

Upon completion of the Internalization, the Company’s current employees, who were previously employed by the Manager, became employees of the Company and the functions previously performed by the Manager were internalized by the Company. As an internally managed company, the Company will no longer pay the Manager any fees or expense reimbursements arising from the Management Agreement (as defined in Note 11).

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). 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.

 

9

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.

 

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, 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 development property investments 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 (loss) 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, including the impact of the COVID-19 pandemic on property operations. 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.

 

10

Realized Gains and Net Unrealized Gain (Loss) 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 (loss) 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 (loss) on investments on 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 (which are generally structured as first mortgages and a 49.9% Profits Interest in the project), 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.

The following table presents the financial instruments measured at fair value on a recurring basis at March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Derivative financial instruments (asset position)

 

$

31

 

$

 -

 

 

31

 

 

 -

Derivative financial instruments (liability position)

 

 

(1,024)

 

 

 -

 

 

(1,024)

 

 

 -

Development property investments

 

 

427,435

 

 

 -

 

 

 -

 

 

427,435

 

The following table presents the financial instruments measured at fair value on a recurring basis at December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Derivative financial instruments (asset position)

 

$

14

 

$

 -

 

$

14

 

$

 -

Derivative financial instruments (liability position)

 

 

(393)

 

 

 -

 

 

(393)

 

 

 -

Development property investments

 

 

549,684

 

 

 -

 

 

 -

 

 

549,684

 

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).

 

11

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

 

To date, all self-storage real estate owned has consisted of self-storage facilities that were developed and constructed with financing provided by the Company. Each facility collateralized a mortgage loan that, together with the related Profits Interest, was reported by the Company as a development property investment carried at fair value. Each such property became self-storage real estate owned during the period when the Company acquired the developer’s interest in the entity that owns the facility. After such time, fair value accounting for such investment ceases.

 

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.

 

All of the Company’s acquisitions have been asset acquisitions and the Company expects that the majority of future self-storage facility acquisitions will be considered asset acquisitions, however, the Company will continue to evaluate each future 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.

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 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 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 months ended March 31, 2020 or during the year ended December 31, 2019.

 

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 two of the financial institutions exceeds the Federal Deposit Insurance Corporation insurance limit.

12

 

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 March 31, 2020 and December 31, 2019. None of these loans are in non-accrual status as of March 31, 2020 and December 31, 2019. The Company determined that no allowance for loan loss was necessary at March 31, 2020 and December 31, 2019.

 

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. Prior to the Internalization, fixed assets were 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.

 

Goodwill

 

Goodwill represents the excess of consideration paid over the fair value of underlying identifiable net assets of businesses acquired.  During the three months ended March 31, 2020, the Company recorded $4.7 million of Goodwill related to the Internalization, and the Company has one reporting unit. Goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Subsequent to the Internalization, the Company determined that dramatically deteriorating macroeconomic conditions driven by the impact of the COVID-19 pandemic on capital markets, and specifically the Company’s market capitalization, was a triggering event for an interim goodwill impairment test. In accordance with ASC 350, Intangibles - Goodwill and Other, since the Company’s common stock is traded in an active market, the Company calculated its fair value primarily based on the Company’s market capitalization as of March 31, 2020. The fair value calculated as of March 31, 2020, was determined to be below the Company’s carrying value.  As a result, the Company recorded a goodwill impairment loss of $4.7 million for the three months ended March 31, 2020, and there is no Goodwill as of March 31, 2020 or December 31, 2019.

 

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.

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.

 

13

Internalization Expenses

As described in Note 1, Organization and Formation, the Internalization was completed on February 20, 2020. The total amount of consideration for the Internalization was $42.1 million, as described in Note 1 and shown in the table below:

 

 

 

 

 

OC Units issuable as Initial Consideration(1):  

$

33,538

 

OC Units contingently issuable as Earn Out Consideration(2):  

 

8,554

 

 

$

42,092

 

(1)

Represents the fair value of 1,794,872 OC Units issuable as the Initial Consideration based upon the Company's closing stock price as of February 20, 2020 of $20.31 adjusted for an 8% marketability discount for the fair value impact of the one year holding period and annual limits on selling of OC Units.

(2)

Represents the fair value of 769,231 OC Units issuable as the Earn Out Consideration contingent upon (1) the Company’s common stock trading at or above a daily volume weighted price of $25.00 per share for at least 30 days during any trailing 365-day period prior to December 31, 2024, or (2) a change of control of the Company that is approved by the board of directors and stockholders of the Company occurring prior to December 31, 2024, based on a Black-Scholes Merton valuation of the OC Units.  The significant assumptions utilized in the valuation of the Earn Out Consideration were a risk-free rate of 1.41%, a dividend yield of 4.53%, volatility of 27%, and a marketability discount of 8%.

 

In accordance with ASC 805, Business Combinations, the portion of the Internalization transaction price attributed to the settlement of a preexisting contractual relationship (the Management Agreement) of $37.4 million was recognized immediately as internalization expenses for the three months ended March 31, 2020 and the $4.7 million of excess consideration paid over the fair value of underlying identifiable net assets of businesses acquired was recorded as Goodwill. As part of the Internalization, the Company also incurred $0.4 million of acquisition-related expenses. These acquisition-related expenses were recognized in earnings immediately and are included within Internalization expenses for the three months ended March 31, 2020.

The table below presents the revenue and net income of the business combination on a pro forma basis as if the Internalization occurred on January 1, 2019. As the Manager’s historical revenues were entirely comprised of amounts received from the Company for management services performed by the Manager and intercompany amounts are eliminated in consolidation, there was no pro forma adjustment to the Company’s revenue for the three months ended March 31, 2020 and 2019.  Pro forma net loss for the three months ended March 31, 2020 includes the elimination of non-recurring expenses for the settlement of the pre-existing contractual agreement of $37.4 million and acquisition related expenses of $0.4 million. Pro forma adjustments for the periods ended March 31, 2020 and 2019, also include the impact of additional compensation expense for employees previously employed by the Manager and the elimination of fees paid to the Manager. The pro forma results are not necessarily indicative of the results which actually would have occurred if the business combination had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods.

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

 

Three Months Ended March 31, 2019

Pro forma total revenue (unaudited)

$

11,697

 

 

 

$

9,884

 

Pro forma net income (loss) allocable to common shares (unaudited)

 

(19,998)

 

 

 

 

7,618

 

 

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 OC Units when such instruments are dilutive.

 

14

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. Beginning on the first anniversary of the date of issuance, OC Units may be tendered for redemption by the holder thereof for cash per OC Unit equal to the then-current market price of the Company’s common stock, or at the Company’s option, shares of the Company’s common stock on a one-for-one basis and the income allocable to such OC Units is allocated on this same basis and reflected as non-controlling interests in the accompanying consolidated financial statements. The Company’s diluted earnings per share represents the more dilutive of the treasury stock or two-class methods and OC Units are included in dilutive earnings per share calculations when the units are dilutive to earnings per share. Net losses are not attributed to participating securities and net loss attributable to common shareholders is adjusted for dividends declared on unvested restricted shares in periods with a net loss. Diluted earnings per share includes contingently issuable OC Units only if the market condition would have been met had the end of the reporting period been the measurement period. Stock awards with a market condition do not participate in nonforfeitable rights to dividends and are excluded from the calculation of diluted EPS.

 

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 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.

 

Consolidated Statements of Cash Flows - Supplemental Disclosures

 

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

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

2020

 

2019

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Interest paid

 

$

2,545

 

$

556

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Stock dividend paid on preferred stock

 

$

2,125

 

$

2,125

Dividends declared, but not paid, on preferred stock

 

 

5,207

 

 

5,032

Dividends declared, but not paid, on common stock

 

 

5,354

 

 

7,205

Reclassification of development property investments to self-storage real estate owned

 

 

126,225

 

 

8,351

Reclassification of other assets and liabilities to self-storage real estate owned

 

 

1,798

 

 

 -

OC Units issued for self-storage real estate owned acquisitions

 

 

1,536

 

 

 -

OC Units issued for Internalization

 

 

33,538

 

 

 -

Contingent consideration for Internalization

 

 

8,554

 

 

 -

 

 

 

 

 

3.  SELF-STORAGE INVESTMENT PORTFOLIO

 

The Company’s self-storage investments at March 31, 2020 consisted of the following:

 

Investments reported at fair value

 

·

Development Property Investments - The Company had 41 investments totaling an aggregate committed principal amount of approximately $501.8 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

15

deeds of trust on the projects and, in certain cases, first priority security interests in the membership interests of the owners of the 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 March 31, 2020, 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 $11.5 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 March 31, 2020.

The Company has also commenced foreclosure proceedings against the borrower of its $14.8 million Houston development property because the borrower has defaulted under the loan by, among other things, failing to pay interest and operating expenses with respect to the property. The total unpaid balance of the loan is $14.8 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 March 31, 2020.

 

As of March 31, 2020, the aggregate committed principal amount of the Company’s development property investments was approximately $501.8 million and outstanding principal was $390.1 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

 

$

8,503

8/14/2015

 

Raleigh (2)(7)

 

 

8,792

 

 

8,789

 

 

 3

 

 

8,558

10/27/2015

 

Austin (2)(7)

 

 

8,658

 

 

8,136

 

 

522

 

 

8,111

2/24/2017

 

Orlando 3 (2)(7)

 

 

8,056

 

 

7,905

 

 

151

 

 

9,741

2/24/2017

 

New Orleans (2)(7)

 

 

12,549

 

 

12,148

 

 

401

 

 

14,383

3/1/2017

 

Houston (2)(9)

 

 

14,825

 

 

14,825

 

 

 -

 

 

17,820

4/20/2017

 

Denver 1 (2)(7)

 

 

9,806

 

 

9,789

 

 

17

 

 

10,420

4/20/2017

 

Denver 2 (2)(7)

 

 

11,164

 

 

11,009

 

 

155

 

 

10,904

5/2/2017

 

Tampa 2 (2)(7)

 

 

8,091

 

 

7,776

 

 

315

 

 

9,156

5/19/2017

 

Tampa 3 (2)(7)

 

 

9,224

 

 

8,470

 

 

754

 

 

10,079

6/12/2017

 

Tampa 4 (2)(7)

 

 

10,266

 

 

9,808

 

 

458

 

 

12,748

6/19/2017

 

Baltimore 1 (2)(4)(7)

 

 

10,775

 

 

11,204

 

 

162

 

 

13,421

6/29/2017

 

Boston 1 (2)(6)

 

 

 -

 

 

 -

 

 

 -

 

 

3,700

6/30/2017

 

New York City 2 (2)(4)

 

 

27,982

 

 

29,692

 

 

163

 

 

29,063

7/27/2017

 

Jacksonville 3 (2)(7)

 

 

8,096

 

 

7,889

 

 

207

 

 

10,061

8/30/2017

 

Orlando 4 (2)(7)

 

 

9,037

 

 

8,156

 

 

881

 

 

10,132

9/14/2017

 

Los Angeles 1

 

 

28,750

 

 

10,393

 

 

18,357

 

 

10,365

9/14/2017

 

Miami 1 (3)

 

 

14,657

 

 

13,417

 

 

1,240

 

 

14,215

9/28/2017

 

Louisville 2 (2)(7)

 

 

9,940

 

 

9,695

 

 

245

 

 

11,252

10/12/2017

 

Miami 2 (4)(10)

 

 

9,459

 

 

1,528

 

 

8,023

 

 

1,287

10/30/2017

 

New York City 3 (4)(10)

 

 

15,301

 

 

6,932

 

 

8,717

 

 

6,426

11/16/2017

 

Miami 3 (3)(4)

 

 

20,168

 

 

13,714

 

 

6,879

 

 

14,979

11/21/2017

 

Minneapolis 1 (2)(7)

 

 

12,674

 

 

11,281

 

 

1,393

 

 

12,079

12/15/2017

 

New York City 4 (3)

 

 

10,591

 

 

7,705

 

 

2,886

 

 

8,835

12/27/2017

 

Boston 3 (10)

 

 

10,174

 

 

2,805

 

 

7,369

 

 

2,683

12/28/2017

 

New York City 5 (2)

 

 

16,073

 

 

14,991

 

 

1,082

 

 

17,657

2/8/2018

 

Minneapolis 2 (2)(7)

 

 

10,543

 

 

10,077

 

 

466

 

 

10,368

3/30/2018

 

Philadelphia (2)(4)(8)

 

 

14,338

 

 

11,536

 

 

3,264

 

 

11,807

4/6/2018

 

Minneapolis 3 (2)(7)

 

 

12,883

 

 

10,898

 

 

1,985

 

 

11,713

5/1/2018

 

Miami 9 (4)(10)

 

 

12,421

 

 

3,642

 

 

8,951

 

 

3,424

5/15/2018

 

Atlanta 7 (2)

 

 

9,418

 

 

6,923

 

 

2,495

 

 

8,045

5/23/2018

 

Kansas City (2)

 

 

9,968

 

 

8,423

 

 

1,545

 

 

9,750

6/7/2018

 

Orlando 5 (2)

 

 

12,969

 

 

11,206

 

 

1,763

 

 

12,480

16

11/16/2018

 

Baltimore 2 (10)

 

 

9,247

 

 

770

 

 

8,477

 

 

706

3/1/2019

 

New York City 6

 

 

18,796

 

 

3,572

 

 

15,224

 

 

3,462

4/18/2019

 

New York City 7 (4)

 

 

23,462

 

 

9,823

 

 

13,827

 

 

9,451

 

 

 

 

$

446,803

 

$

332,575

 

$

118,379

 

$

367,784

Preferred equity investments:

 

 

 

 

 

 

 

 

 

 

 

 

6/12/2018

 

Los Angeles 2 (5)

 

 

9,298

 

 

9,332

 

 

649

 

 

9,579

3/15/2019

 

Stamford (2)(5)

 

 

2,904

 

 

3,115

 

 

 -

 

 

5,167

5/8/2019

 

New York City 8 (5)

 

 

21,000

 

 

22,306

 

 

 -

 

 

22,384

7/11/2019

 

New York City 9 (5)

 

 

13,095

 

 

13,751

 

 

 -

 

 

13,588

8/21/2019

 

New York City 10 (5)

 

 

8,674

 

 

9,041

 

 

 -

 

 

8,933

 

 

 

 

$

54,971

 

$

57,545

 

$

649

 

$

59,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments reported at fair value

 

$

501,774

 

$

390,120

 

$

119,028

 

$

427,435

 

(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 March 31, 2020. 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 March 31, 2020. 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 March 31, 2020, 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. The total unpaid balance of the loan is $11.5 million. In addition to its development property investment, the Company has funded protective advances and recorded receivables related to accrued interest totaling $4.5 million within “Prepaid expenses and other assets” in its Consolidated Balance Sheets. 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 and the collectability of the related protective advances and interest receivables as of March 31, 2020.

(9)

The Company has commenced foreclosure proceedings against the borrower of its $14.8 million Houston development property because the borrower has defaulted under the loan by, among other things, failing to pay interest and operating expenses with respect to the property. The total unpaid balance of the loan is $14.8 million. In addition to its development property investment, the Company has funded protective advances and recorded receivables related to accrued interest totaling $1.3 million within “Prepaid expenses and other assets” in its Consolidated Balance Sheets. 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 and the collectability of the related protective advances and interest receivables as of March 31, 2020.

(10)

The Company has re-assessed these development property investments for which either development or construction has not yet commenced and communicated our intent to forgo those projects with the respective developers. The Company and its respective developer partners on these investments are in active dialogues concerning the repayment of its outstanding principal along with any current and future accrued interest.

17

 

The following table provides a reconciliation of the funded principal to the fair market value of investments at March 31, 2020:

 

 

 

 

 

 

 

 

Funded principal

    

$

390,120

Adjustments:

 

 

 

Unamortized origination and other fees

 

 

(4,709)

Net unrealized gain (loss) on investments

 

 

42,108

Other

 

 

(84)

Fair value of investments

 

$

427,435

 

As of December 31, 2019, the aggregate committed principal amount of the Company’s development property investments was approximately $608.9 million and outstanding principal was $478.6 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

 

$

8,884

8/14/2015

 

Raleigh (2)(7)

 

 

8,792

 

 

8,789

 

 

 3

 

 

8,593

10/27/2015

 

Austin (2)(7)

 

 

8,658

 

 

8,136

 

 

522

 

 

8,099

9/20/2016

 

Charlotte 2 (2)(7)(10)

 

 

12,888

 

 

12,677

 

 

211

 

 

13,984

1/18/2017

 

Atlanta 3 (2)(7)(10)

 

 

14,115

 

 

13,297

 

 

818

 

 

16,130

1/31/2017

 

Atlanta 4 (2)(7)(10)

 

 

13,678

 

 

13,497

 

 

181

 

 

17,082

2/24/2017

 

Orlando 3 (2)(7)

 

 

8,056

 

 

7,767

 

 

289

 

 

9,725

2/24/2017

 

New Orleans (2)(7)

 

 

12,549

 

 

12,021

 

 

528

 

 

14,504

2/27/2017

 

Atlanta 5 (2)(7)(10)

 

 

17,492

 

 

17,492

 

 

 -

 

 

19,970

3/1/2017

 

Fort Lauderdale (2)(7)(10)

 

 

9,952

 

 

9,383

 

 

569

 

 

13,635

3/1/2017

 

Houston (2)(9)

 

 

14,825

 

 

14,825

 

 

 -

 

 

17,820

4/14/2017

 

Louisville 1 (2)(7)(10)

 

 

8,523

 

 

7,552

 

 

971

 

 

9,550

4/20/2017

 

Denver 1 (2)(7)

 

 

9,806

 

 

9,616

 

 

190

 

 

10,947

4/20/2017

 

Denver 2 (2)(7)

 

 

11,164

 

 

11,009

 

 

155

 

 

12,383

5/2/2017

 

Atlanta 6 (2)(7)(10)

 

 

12,543

 

 

12,025

 

 

518

 

 

14,744

5/2/2017

 

Tampa 2 (2)(7)

 

 

8,091

 

 

7,644

 

 

447

 

 

9,196

5/19/2017

 

Tampa 3 (2)(7)

 

 

9,224

 

 

8,326

 

 

898

 

 

10,086

6/12/2017

 

Tampa 4 (2)(7)

 

 

10,266

 

 

9,614

 

 

652

 

 

12,673

6/19/2017

 

Baltimore 1 (2)(4)(7)

 

 

10,775

 

 

11,010

 

 

274

 

 

13,581

6/28/2017

 

Knoxville (2)(7)(10)

 

 

9,115

 

 

8,628

 

 

487

 

 

10,355

6/29/2017

 

Boston 1 (2)(6)

 

 

 -

 

 

 -

 

 

 -

 

 

3,361

6/30/2017

 

New York City 2 (2)(4)

 

 

27,982

 

 

28,974

 

 

665

 

 

31,047

7/27/2017

 

Jacksonville 3 (2)(7)

 

 

8,096

 

 

7,751

 

 

345

 

 

10,129

8/30/2017

 

Orlando 4 (2)(7)

 

 

9,037

 

 

8,107

 

 

930

 

 

10,251

9/14/2017

 

Los Angeles 1

 

 

28,750

 

 

10,157

 

 

18,593

 

 

10,347

9/14/2017

 

Miami 1 (3)

 

 

14,657

 

 

12,618

 

 

2,039

 

 

13,373

9/28/2017

 

Louisville 2 (2)(7)

 

 

9,940

 

 

9,530

 

 

410

 

 

11,688

10/12/2017

 

Miami 2 (4)

 

 

9,459

 

 

1,494

 

 

8,045

 

 

1,280

10/30/2017

 

New York City 3 (4)

 

 

15,301

 

 

6,776

 

 

8,822

 

 

6,383

11/16/2017

 

Miami 3 (3)(4)

 

 

20,168

 

 

12,086

 

 

8,413

 

 

12,898

11/21/2017

 

Minneapolis 1 (2)(7)

 

 

12,674

 

 

10,684

 

 

1,990

 

 

12,290

12/1/2017

 

Boston 2 (2)(7)(10)

 

 

8,771

 

 

7,918

 

 

853

 

 

10,024

12/15/2017

 

New York City 4 (3)

 

 

10,591

 

 

6,705

 

 

3,886

 

 

7,528

12/27/2017

 

Boston 3

 

 

10,174

 

 

2,757

 

 

7,417

 

 

2,674

12/28/2017

 

New York City 5 (2)

 

 

16,073

 

 

13,817

 

 

2,256

 

 

16,373

2/8/2018

 

Minneapolis 2 (2)(7)

 

 

10,543

 

 

9,904

 

 

639

 

 

11,763

3/30/2018

 

Philadelphia (2)(4)(8)

 

 

14,338

 

 

11,536

 

 

3,263

 

 

11,807

4/6/2018

 

Minneapolis 3 (2)(7)

 

 

12,883

 

 

10,337

 

 

2,546

 

 

12,043

5/1/2018

 

Miami 9 (4)

 

 

12,421

 

 

3,560

 

 

9,006

 

 

3,427

5/15/2018

 

Atlanta 7 (3)

 

 

9,418

 

 

6,563

 

 

2,855

 

 

7,683

5/23/2018

 

Kansas City (2)

 

 

9,968

 

 

8,235

 

 

1,733

 

 

9,663

18

6/7/2018

 

Orlando 5 (2)

 

 

12,969

 

 

10,340

 

 

2,629

 

 

11,780

11/16/2018

 

Baltimore 2

 

 

9,247

 

 

757

 

 

8,490

 

 

709

3/1/2019

 

New York City 6

 

 

18,796

 

 

3,168

 

 

15,628

 

 

3,122

4/18/2019

 

New York City 7 (4)

 

 

23,462

 

 

7,304

 

 

16,287

 

 

7,067

 

 

 

 

$

553,880

 

$

422,034

 

$

135,455

 

$

490,651

Preferred equity investments:

 

 

 

 

 

 

 

 

 

 

 

 

6/12/2018

 

Los Angeles 2 (5)

 

 

9,298

 

 

9,173

 

 

649

 

 

9,403

3/15/2019

 

Stamford (2)(5)

 

 

2,904

 

 

3,064

 

 

 -

 

 

4,952

5/8/2019

 

New York City 8 (5)

 

 

21,000

 

 

21,945

 

 

 -

 

 

22,359

7/11/2019

 

New York City 9 (5)

 

 

13,095

 

 

13,526

 

 

 -

 

 

13,489

8/21/2019

 

New York City 10 (5)

 

 

8,674

 

 

8,892

 

 

 -

 

 

8,830

 

 

 

 

$

54,971

 

$

56,600

 

$

649

 

$

59,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments reported at fair value

 

$

608,851

 

$

478,634

 

$

136,104

 

$

549,684

(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 December 31, 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 December 31, 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 December 31, 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. The total unpaid balance of the loan is $11.5 million. In addition to its development property investment, the Company has funded protective advances and recorded receivables related to accrued interest totaling $4.5 million within “Prepaid expenses and other assets” in its Consolidated Balance Sheets. 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 and the collectability of the related protective advances and interest receivables as of December 31, 2019.

(9)

The Company has commenced foreclosure proceedings against the borrower of its $14.8 million Houston development property because the borrower has defaulted under the loan by, among other things, failing to pay interest and operating expenses with respect to the property. The total unpaid balance of the loan is $14.8 million. In addition to its development property investment, the Company has funded protective advances and recorded receivables related to accrued interest totaling $0.9 million within “Prepaid expenses and other assets” in its Consolidated Balance Sheets. 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 and the collectability of the related protective advances and interest receivables as of December 31, 2019.

(10)

During the three months ended March 31, 2020, the Company purchased its partner’s 50.1% Profits Interest in this investment.

 

19

The following table provides a reconciliation of the funded principal to the fair market value of investments at December 31, 2019:

 

 

 

 

 

 

 

 

Funded principal

    

$

478,634

Adjustments:

 

 

 

Unamortized origination and other fees

 

 

(5,633)

Net unrealized gain on investments

 

 

76,767

Other

 

 

(84)

Fair value of investments

 

$

549,684

 

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, with the exception of the $14.3 million Philadelphia and $14.8 Houston development property investments, were in non-accrual status as of March 31, 2020. No loans, with the exception of the $14.8 Houston development property investment, were in non-accrual status as of December 31, 2019.

 

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. For these investments with a Profits Interest, the assets and liabilities of the equity method investees approximated $497.2 million and $448.5 million, respectively, at March 31, 2020 and approximated $592.3 million and $531.7 million, respectively, at December 31, 2019. These investees had revenues of approximately $2.2 million and operating expenses of approximately $2.3 million for the three months ended March 31, 2020. These investees had revenues of approximately $1.8 million and operating expenses of approximately $2.3 million for the three months ended March 31, 2019. During the three months ended March 31, 2020 and 2019, no individual investment comprised more than 20% of the Company’s net income (loss).

 

For seven and sixteen of the Company’s development property investments with a Profits Interest as of March 31, 2020 and December 31, 2019, respectively, 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 March 31, 2020 and December 31, 2019.

 

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

 

2020 Activity

 

On February 10, 2020, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Charlotte II, Knoxville, Louisville 1, Atlanta 3, Atlanta 5 and Atlanta 6 development property investments with a Profits Interest. On February 14, 2020, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Fort Lauderdale and Boston 2 development property investments with a Profits Interest. On February 21, 2020, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Atlanta 4 development property investment 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 $156.9 million is primarily comprised of the development property investment at fair value of $126.2 million, the cash consideration of $26.6 million, which is inclusive of paid and accrued transaction costs, and OC Units valued at $1.5 million. 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 $3.7 million at the time of the acquisitions. The estimated life of these in-place leases was 12 months.

 

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

20

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 $5.1 million at the time of the acquisitions. The estimated life of these in-place leases was 12 months.

 

As of December 31, 2019, the basis of the Miami investment acquired on July 2, 2019 was presented in land, $3.9 million, and construction-in-progress, $16.5 million within Self-storage real estate owned, net, in the table below. The facility was placed into service on February 10, 2020.

 

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 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 March 31, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

Land

 

$

55,834

 

$

29,430

Building and improvements

 

 

329,734

 

 

186,295

In-place leases

 

 

12,379

 

 

8,629

Property equipment

 

 

153

 

 

122

Construction-in-progress

 

 

 -

 

 

16,460

Accumulated depreciation and amortization

 

 

(13,676)

 

 

(10,092)

Self-storage real estate owned, net

 

$

384,424

 

$

230,844

 

 

 

 

 

4.  FAIR VALUE OF FINANCIAL INSTRUMENTS

Estimates inherent in the determination of fair value inevitably involve assumptions about future events and actual results may differ from those estimates. The COVID-19 pandemic has adversely impacted and is likely to further adversely impact the self-storage industry, generally, and the Company’s operations and value, specifically. Specific negative impacts could include lateness and, ultimately, uncollectibility of an increased number of rental payments, the length of time required to lease-up recently-constructed properties and the ability to increase rental rates, all of which negatively impact revenue from properties and/or the value of our investments. The full extent to which the pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition will depend on future developments that are difficult to predict. These developments include, but are not limited to, the duration and extent of continued spread of the novel coronavirus, the severity of the virus, the actions to contain the virus or address its impact, governmental actions to contain the spread of the virus and to respond to economic deterioration caused by the pandemic (including rapidly accelerating unemployment rates, business bankruptcies, dislocation of equity and debt markets and a dramatic decline in consumer spending and gross domestic product), and how quickly and to what extent normal economic and operating conditions can resume. Management has considered the foregoing factors and the impact of the pandemic, generally, on the economy, the self-storage industry and the Company and adjusted certain estimates, where relevant, used in the preparation of its fair value measurements.

 

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 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

21

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 Management 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 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

 

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, the Company 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 investment's 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

 

22

The Company’s development property 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 three development property investments that were 40% complete but for which construction was not substantially complete at March 31, 2020, 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. Twenty-six 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 March 31, 2020. 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, occupancy trends 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.

 

Level 3 Fair Value Measurements

 

The following tables summarize the significant unobservable inputs the Company used to value its investments categorized within Level 3 as of March 31, 2020 and December 31, 2019. 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 March 31, 2020

 

 

Unobservable Inputs

Primary Valuation

 

 

 

 

 

Weighted

Techniques

 

Input

 

Estimated Range

 

Average

Income approach analysis

 

Market yields/discount rate

 

7.55 - 10.84%

 

9.01%

 

 

Exit date (a)

 

1.33 - 6.44 years

 

3.73 years

 

 

 

 

 

 

 

Option pricing model

 

Volatility

 

70.63 - 104.08%

 

84.62%

 

 

Exit date (a)

 

1.33 - 6.44 years

 

3.73 years

 

 

Capitalization rate (b)

 

4.75 - 5.50%

 

5.45%

 

 

Discount rate (b)

 

7.75 - 8.50%

 

8.45%

(a)

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

(b)

Twenty-nine 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.

23

 

 

 

 

 

 

 

As of December 31, 2019

 

 

Unobservable Inputs

Primary Valuation

 

 

 

 

 

Weighted

Techniques

 

Input

 

Estimated Range

 

Average

Income approach analysis

 

Market yields/discount rate

 

6.89 - 10.16%

 

8.39%

 

 

Exit date (a)

 

1.50 - 6.69 years

 

3.40 years

 

 

 

 

 

 

 

Option pricing model

 

Volatility

 

60.95 - 93.83%

 

73.24%

 

 

Exit date (a)

 

1.50 - 6.69 years

 

3.40 years

 

 

Capitalization rate (b)

 

4.75 - 5.75%

 

5.46%

 

 

Discount rate (b)

 

7.75 - 8.75%

 

8.46%

(a)

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

(b)

Thirty-eight 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.

 

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)

 

March 31, 2020

 

December 31, 2019

Up 25 basis points

 

$

(1.8)

 

$

(2.1)

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

 

 

1.6

 

 

2.2

 

 

 

 

 

 

 

Up 50 basis points

 

 

(3.5)

 

 

(4.2)

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

 

 

1.7

 

 

4.5

 

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)

 

March 31, 2020

 

December 31, 2019

Up 25 basis points

 

$

(7.1)

 

$

(10.2)

Down 25 basis points

 

 

7.8

 

 

11.1

 

 

 

 

 

 

 

Up 50 basis points

 

 

(14.0)

 

 

(19.4)

Down 50 basis points

 

 

16.3

 

 

23.4

 

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

24

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 months ended March 31, 2020 and 2019.

 

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 restrictions on resale or otherwise are less liquid than publicly traded securities. If the Company were 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, 2019

    

$

549,684

Realized gains

 

 

 -

Unrealized losses

 

 

(10,962)

Fundings of principal and change in unamortized origination fees

 

 

8,834

Repayments of loans

 

 

 -

Payment-in-kind interest

 

 

6,104

Reclassification of self-storage real estate owned

 

 

(126,225)

Net transfers in or out of Level 3

 

 

 -

Balance at March 31, 2020

 

$

427,435

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

    

$

457,947

Realized gains

 

 

 -

Unrealized gains

 

 

8,830

Fundings of principal and change in unamortized origination fees

 

 

28,029

Repayments of loans

 

 

(342)

Payment-in-kind interest

 

 

6,932

Reclassification of self-storage real estate owned

 

 

(8,351)

Net transfers in or out of Level 3

 

 

 -

Balance at March 31, 2019

 

$

493,045

 

As of March 31, 2020 and December 31, 2019, the total net unrealized appreciation on the investments that use Level 3 inputs was $42.1 million and $76.8 million, respectively.

 

For the three months ended March 31, 2020 and 2019, substantially all of the net unrealized gain (loss) on investments in the Company’s Consolidated Statements of Operations were attributable to unrealized gains (losses) 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.

25

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, 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

26

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.  

 

On September 17, 2019, the SL1 Venture’s loan related to the Washington D.C. development property investment was repaid in full through a refinancing initiated by the SL1 Venture’s partner. The SL1 Venture distributed $15.5 million and $1.7 million to HVP III and the Company, respectively, of these loan repayment proceeds. The Washington D.C. investment at March 31, 2020, represents the SL1 Venture’s 49.9% Profits Interest which was retained during the transaction.

 

On November 7, 2019, the SL1 Venture purchased 100% of the Class A membership units of the LLC that owned the Raleigh development property investment with a Profits Interest. The SL1 Venture now wholly owns the self-storage property through this LLC. This purchase 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 this investment of $9.7 million is primarily comprised of the development property investment at fair value.

 

On January 31, 2020, the SL1 Venture closed on a $3.2 million term loan secured by the Raleigh owned property that bears interest at LIBOR plus 2.15% and matures on February 27, 2022. The SL1 Venture distributed $2.7 million and $0.3 million to HVP III and the Company, respectively, of these debt proceeds.

 

On March 4, 2020 the SL1 Venture’s loans related to the Miami 1, Miami 2, and Fort Lauderdale development property investments were repaid in full through a refinancing initiated by the SL1 Venture’s development partner. The SL1 Venture distributed $36.5 million and $4.1 million to HVP III and the Company, respectively, of these loan repayment proceeds. The Miami 1, Miami 2, and Fort Lauderdale investments at March 31, 2020, represents the SL1 Venture’s 49.9% Profits Interest which was retained during the transaction.

 

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 March 31, 2020, the SL1 Venture had six 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)(4)

 

$

 -

 

$

 -

 

$

 -

 

$

1,608

5/14/2015

 

Miami 2 (2)(3)(4)

 

 

 -

 

 

 -

 

 

 -

 

 

1,661

9/25/2015

 

Fort Lauderdale (2)(3)(4)

 

 

 -

 

 

 -

 

 

 -

 

 

4,884

4/15/2016

 

Washington DC (3)(4)

 

 

 -

 

 

 -

 

 

 -

 

 

3,795

7/21/2016

 

New Jersey (3)

 

 

7,828

 

 

7,429

 

 

399

 

 

8,559

9/28/2016

 

Columbia (3)

 

 

9,199

 

 

9,073

 

 

126

 

 

10,199

 

 

Total

 

$

17,027

 

$

16,502

 

$

525

 

$

30,706

 

 

(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 March 31, 2020. 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.

 

27

As of December 31, 2019, the SL1 Venture had six 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

 

$

13,114

 

$

753

 

$

16,222

5/14/2015

 

Miami 2 (2)(3)

 

 

14,849

 

 

14,519

 

 

330

 

 

16,588

9/25/2015

 

Fort Lauderdale (2)(3)

 

 

13,230

 

 

12,899

 

 

331

 

 

17,156

4/15/2016

 

Washington DC (3)(4)

 

 

 -

 

 

 -

 

 

 -

 

 

3,339

7/21/2016

 

New Jersey (3)

 

 

7,828

 

 

7,357

 

 

471

 

 

9,036

9/28/2016

 

Columbia (3)

 

 

9,199

 

 

9,073

 

 

126

 

 

10,445

 

 

Total

 

$

58,973

 

$

56,962

 

$

2,011

 

$

72,786

(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 December 31, 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 March 31, 2020, the SL1 Venture had total assets of $97.1 million and total liabilities of $40.6 million. During the three months ended March 31, 2020, the SL1 Venture had a net loss of $1.7 million, of which $0.2 million was allocated to the Company and $1.5 million was allocated to HVP III, respectively, under the HLBV method. At March 31, 2020, $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 March 31, 2020 and December 31, 2019, the Company had none and $0.3 million, respectively, in advances to the SL1 Venture, and the related interest on these advances are classified in equity in earnings from unconsolidated self-storage real estate venture in the Consolidated Statements of Operations.

 

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 March 31, 2020 and December 31, 2019.

 

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.

 

28

6.  VARIABLE INTEREST ENTITIES

 

Operating Company Investment

The Company has determined that its investment in the Operating Company represents a VIE and that the Company is the primary beneficiary of the VIE.  In determining whether the Company is the primary beneficiary of a VIE, management considers both qualitative and quantitative factors, including but not limited to, those activities that most significantly impact the VIE's economic performance and which party controls such activities. Accordingly, management has determined that the Company’s ownership of  over 90% of the outstanding OC Units and corresponding ability to direct the activities that most significantly impact the VIE’s economic performance along with the lack of substantive kick-out right or substantive participating rights indicates that the company is the primary beneficiary of the VIE, therefore, the Company consolidates the Operating Company.

 

Development Property Investments

 

The Company holds variable interests in its development property 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 $427.4 million and $549.7 million at March 31, 2020 and December 31, 2019, respectively, for its variable interest in the development property investment VIEs which is included in the development property 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 investment VIEs is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

Assets recorded related to VIEs

 

$

427,435

 

$

549,684

Unfunded loan commitments to VIEs

 

 

119,028

 

 

136,104

Maximum exposure to loss

 

$

546,463

 

$

685,788

 

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 March 31, 2020 and December 31, 2019, the Company’s remaining unfunded commitment to the SL1 Venture is $0.05 million and $0.2 million, respectively. At March 31, 2020 and December 31, 2019, the Company had none and $0.3 million, respectively, in advances to the SL1 Venture.

 

29

7.  DEBT

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective

 

Carrying Value as of

 

Maturity Date

 

Interest Rate

 

March 31, 2020

 

December 31, 2019

Secured revolving credit facility (1)

March 24, 2023

 

4.33%

 

$

198,000

 

$

162,000

Term Loans:

 

 

 

 

 

 

 

 

 

Term loan 1 (2)

August 1, 2021

 

3.83%

 

 

9,150

 

 

9,150

Term loan 2 (2)

August 1, 2021

 

3.83%

 

 

7,125

 

 

7,125

Term loan 3 (2)

August 1, 2021

 

3.83%

 

 

8,625

 

 

8,625

Term loan 4 (2)

August 1, 2021

 

3.83%

 

 

9,188

 

 

9,188

Term loan 5 (2)

August 1, 2021

 

3.83%

 

 

7,087

 

 

7,087

Total Term Loans

 

 

 

 

 

41,175

 

 

41,175

Term loan debt issuance costs

 

 

 

 

 

(324)

 

 

(384)

Net Term Loans

 

 

 

 

 

40,851

 

 

40,791

Total debt

 

 

 

 

$

238,851

 

$

202,791

(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 March 31, 2020. 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 March 31, 2020. See further discussion in Note 8, Risk Management and Use of Financial Instruments.  

 

Credit Facility

 

On March 26, 2020, the Operating Company entered into a second amended and restated senior secured revolving credit facility of up to $375 million (the “Amended and Restated Credit Facility”) with KeyBank National Association, as administrative agent, KeyBanc Capital Markets Inc. and BMO Capital Markets Corp., as joint lead arrangers, BMO Capital Markets Corp. as syndication agent, Raymond James Bank, N.A. as documentation agent and the other lenders party thereto. Pursuant to an accordion feature, the Operating Company may from time to time increase the commitments under the Amended and Restated Credit Facility up to an aggregate amount of $750 million, subject to, among other things, an absence of default under the Amended and Restated Credit Facility, borrowing base capacity, as well as receiving commitments from lenders for the additional amounts. The Amended and Restated Credit Facility amends and restates the Company’s existing credit facility in all respects. The Operating Company intends to use future borrowings under the Amended and Restated Credit Facility to fund its investments, to make secured or unsecured loans to borrowers in connection with its investments and for general corporate purposes.

 

On March 26, 2020, the Company and certain wholly-owned subsidiaries of the Operating Company (the “Subsidiaries”) entered into a Second Amended and Restated Unconditional Guaranty of Payment and Performance whereby they have agreed to unconditionally guarantee the obligations of the Operating Company under the Amended and Restated Credit Facility. The Amended and Restated Credit Facility is secured by certain 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 Amended and Restated Credit Facility.

 

The Amended and Restated Credit Facility has a scheduled maturity date on March 24, 2023 with two one-year extension options to extend the maturity of the facility to March 26, 2025. Borrowings under the Amended and Restated Credit Facility are secured by three different pools of collateral: the first consisting of the mortgage loans held by the Company or its subsidiaries extended to developers (each a “Mortgage Loan”), the second consisting of certain non-stabilized self-storage properties owned by the Company or one of its wholly owned subsidiaries(the “Non-Stabilized Real Estate Collateral”) and the third consisting of certain stabilized self-storage properties owned by the Company or one of its wholly owned subsidiaries (the “Stabilized Real Estate Collateral” and, together with the Mortgage Loans and the Non-Stabilized Real Estate Collateral, the “Borrowing Base Assets”).

 

The amount available to borrow under the Amended and Restated Credit Facility is limited according to a borrowing base valuation of the assets available as collateral. For loans secured by Mortgage Loans, the borrowing base availability is the lesser of (i) 60% of the outstanding balance of the Mortgage Loans and (ii) the maximum principal amount which would not cause the outstanding loans under the Amended and Restated Credit Facility secured by the Mortgage Loans to be greater than 50% of the underlying real estate assets securing the Mortgage Loans. For loans secured by Non-Stabilized Real Estate Collateral, the borrowing base availability is the lesser of (i) the maximum principal amount that would not cause the outstanding loans under the Amended and Restated Credit Facility secured by Non-Stabilized Real Estate Collateral to be greater than 60% of the as-stabilized value of such Non-Stabilized Real Estate Collateral, (ii) the maximum principal amount which would not cause the outstanding loans and letter of credit liabilities under

30

the Amended and Restated Facility to be greater than 75% of the total development cost of the Non-Stabilized Real Estate Collateral, 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 Real Estate Collateral 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 Real Estate Collateral 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 Real Estate Collateral 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 Real Estate Collateral 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 Real Estate Collateral divided by (2) an implied debt service amount to be less than 1.00 to 1.00. For loans secured by Stabilized Real Estate Collateral, the borrowing base availability is the lesser of (i) the maximum principal amount that would not cause the outstanding loans under the Amended and Restated Credit Facility secured by the underlying real estate asset securing the Stabilized Real Estate Collateral to be greater than 65% of the value of such self-storage property and (ii) the maximum principal amount that would not cause the ratio of (a) actual adjusted net operating income from the underlying real estate asset securing such Stabilized Real Estate Collateral divided by (b) an implied debt service coverage amount to be less than 1.30 to 1.00.  Notwithstanding the foregoing, the borrowing base availability will be reduced by certain aggregate operating and interest holdbacks, which must be updated by the Company on a quarterly basis and may be updated by the Company on a monthly basis as leasing at the Company’s properties progresses. All such amounts are subject to approval by the administrative agent.

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

Each loan made under the Amended and Restated Credit Facility will bear interest at either, at the Operating Company’s election, (i) a base rate plus a margin of 1.10%, 1.50% or 2.00% or (ii) LIBOR plus a margin of 2.10%, 2.50% or 3.00% (subject to customary LIBOR replacement protocols), in each case depending on the borrowing base available for such loan. In addition, the Operating Company is required to pay a per diem fee at the rate of either 0.25% or 0.30% per annum, depending on the amount outstanding under the Amended and Restated 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 Amended and Restated Credit Facility.

 

LIBOR is expected to be discontinued after 2021. The Amended and Restated 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 Amended and Restated 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 Amended and Restated 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 indebtedness, investments, dividends, asset sales, acquisitions, mergers and consolidations and liens and encumbrances. In addition, the Amended and Restated Credit Facility contains certain financial covenants including the following:

 

·

total consolidated indebtedness not exceeding (i) 45% of gross asset value during the period between March 26, 2020 and December 31, 2020, and (ii) 50% of gross asset value during the period between January 1, 2021 through the maturity of the Amended and Restated Credit Facility;

·

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 not less than (i) 1.15 to 1.00 during the period between March 26, 2020 and December 31, 2020, (ii) 1.20 to 1.00 during the period between January 1, 2021 and December 31, 2021 and (iii) 1.40 to 1.00 during the period between January 1, 2022 through the maturity of the Amended and Restated Credit Facility

·

a minimum consolidated tangible net worth (defined as gross asset value less total consolidated indebtedness) of $360.5 million plus 75% of the sum of any additional net offering proceeds;

31

·

when aggregate outstanding loans under the Amended and Restated Credit Facility exceed $50 million, unhedged variable rate debt cannot exceed 40% of consolidated total indebtedness;

·

liquidity of no less than the greater of (i) future funding commitments of the Company and its subsidiaries for the three months after each date of determination and (ii) $25 million for the period between March 26, 2020 and December 31, 2020 or, on and after January 1, 2021, 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) $25 million;

·

a ratio of adjusted consolidated EBITDA determined for the most recently ended calendar quarter, annualized, to debt service for the most recently ended calendar quarter, annualized, of no less than 2.00 to 1;

·

a requirement to maintain at all times a minimum of 25 Borrowing Base Assets with an aggregate borrowing base availability of not less than (i) $150 million for the period between March 26, 2020 and December 31, 2020, and (ii) $250 million for the period between January 1, 2021 through the maturity of the Amended and Restated Credit Facility; and

·

a minimum borrowing base availability attributable to Non-Stabilized Real Estate Collateral and Stabilized Real Estate Collateral of not less than (i) 20% of total borrowing base availability for the period between March 26, 2020 and December 31, 2020, (ii) 40% of total borrowing base availability for the period between January 1, 2021 and December 31, 2021 and (iii) 60% of total borrowing base availability for the period between January 1, 2022 through the maturity of the Amended and Restated Credit Facility.

 

The Amended and Restated 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 an event of default occurs and is continuing under the Amended and Restated Credit Facility, the lenders may, among other things, terminate their commitments under the Amended and Restated Credit Facility and require the immediate payment of all amounts owed thereunder.

 

As of March 31, 2020, the Company had $198.0 million outstanding of our $249.6 million of total availability for borrowing under the Amended and Restated Credit Facility. As such, the Company had $51.6 million of remaining capacity for borrowing under the Amended and Restated Credit Facility.

As of March 31, 2020, the Company was in compliance with all of its financial covenants of the Amended and Restated Credit Facility.

As of March 31, 2020 and December 31, 2019, certain of the Company’s development property investments as described in Note 3, Self-Storage Investment Portfolio, were pledged as collateral against the Amended and Restated Credit Facility. In addition, as of March 31, 2020, the Jacksonville 1, New York City 1, Miami 4, Miami 5, Miami 6, Miami 7, Miami 8, Pittsburgh, Jacksonville 2, Charlotte 2, Atlanta 3, Atlanta 5, Louisville 1, Atlanta 6, Knoxville, Boston 2, Fort Lauderdale, Atlanta 4, and Miami properties, which are included in self-storage real estate owned, net, were also pledged as collateral against the Amended and Restated Credit Facility. As of December 31, 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 Amended and Restated 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 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.  

32

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 March 31, 2020, 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 March 31, 2020, the Company was subject to interest rate swaps for all five of its First Bank Term Loans. There were no interest rate swaps outstanding during the three months ended March 31, 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 March 31, 2020, 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.

 

33

 The following table summarizes the terms and fair values of the Company’s derivative financial instruments designated as hedges as of March 31, 2020 and December 31, 2019, respectively (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

��

 

 

 

 

 

Fair Value

Hedge Product

   

Hedge Type (1)

 

March 31, 2020

   

December 31, 2019

   

Strike

 

Effective Date

 

Maturity

 

March 31, 2020

   

December 31, 2019

Swap

 

Cash flow

 

$

9,150

 

$

9,150

 

2.2925%

 

6/3/2019

 

8/1/2021

 

$

(242)

 

$

(104)

Swap

 

Cash flow

 

 

7,125

 

 

7,125

 

2.2925%

 

6/3/2019

 

8/1/2021

 

 

(189)

 

 

(81)

Swap

 

Cash flow

 

 

8,625

 

 

8,625

 

2.2925%

 

6/3/2019

 

8/1/2021

 

 

(228)

 

 

(98)

Swap

 

Cash flow

 

 

9,188

 

 

9,188

 

2.2925%

 

6/3/2019

 

8/1/2021

 

 

(243)

 

 

(105)

Swap

 

Cash flow

 

 

7,087

 

 

7,087

 

1.6025%

 

8/13/2019

 

8/1/2021

 

 

(122)

 

 

(5)

 

 

 

 

$

41,175

 

$

41,175

 

 

 

 

 

 

 

$

(1,024)

 

$

(393)

(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 March 31, 2020 and December 31, 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. 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

 

Loss Reclassified from Accumulated OCL into Interest Income

 

Location of Loss Reclassified from Accumulated OCL into Income

Three months ended March 31,

 

2020

 

2019

 

2020

 

2019

 

 

 

 

 

 

Term loan interest rate contracts

 

$

(658)

 

$

 -

 

$

49

 

$

 -

 

Interest Expense

 

The changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2020 and 2019, are summarized as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

Three months ended

 

 

March 31,

 

 

 

2020

 

 

2019

Accumulated other comprehensive income beginning of period

 

$

(393)

 

$

 -

Other comprehensive income (loss):

 

 

 

 

 

 

Unrealized losses on interest rate swaps

 

 

(658)

 

 

 -

Reclassification of realized losses on interest rate swaps

 

 

49

 

 

 -

Amount included in other comprehensive income (loss)

 

 

(609)

 

 

 -

Accumulated other comprehensive income (loss) end of period

 

$

(1,002)

 

$

 -

 

During the next twelve months, the Company estimates that an additional $0.8 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% and an interest rate cap agreement in March 2020 with a notional amount of $20 million and a one-month LIBOR interest rate cap of 1.50%, collectively the “Interest Rate Cap Agreements”. The Interest Rate Cap Agreements are for a period equal to the term of the Credit Facility at the time of the Interest Rate Cap Agreements and expire on December 28, 2021. The Company did not designate the interest rate caps as hedges. As of March 31, 2020 and December 31, 2019, the net carrying amount of the interest rate cap was $0.03 million and $.01 million, respectively and are included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets.

 

34

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 March 31,

 

2020

 

2019

 

 

 

 

 

 

Credit Facility interest rate cap

 

$

 5

 

$

 -

 

 

Interest Expense

 

 

 

 

 

 

9.  STOCKHOLDERS’ EQUITY

 

The Company had 23,271,859 and 22,423,283 shares of common stock issued and outstanding, which included 250,667 and 216,165 shares of unvested restricted stock, as of March 31, 2020 and December 31, 2019, respectively. The Company had 135,625 and 133,500 shares of Series A Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), issued and outstanding as of March 31, 2020 and December 31, 2019, respectively. The Company also had 1,571,734 shares of 7.00% Series B cumulative redeemable perpetual preferred stock (the “Series B Preferred Stock”) and outstanding as of March 31, 2020 and December 31, 2019.

 

ATM Program

 

On December 18, 2019, 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 $100.0 million. As of March 31, 2020, the Company has issued and sold an aggregate of 4,962,535 shares of common stock at a weighted average price of $21.01 per share under the ATM Program and the Company’s previous ATM Program, receiving net proceeds after commissions and other offering costs of $101.4 million. During the three months ended March 31, 2020, the Company issued and sold an aggregate of 810,000 shares of common stock at a weighted average price per share of $19.07 under the ATM Program, receiving net proceeds after commissions and other offering costs of $15.1 million.

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”).

 

Restricted Stock Awards

 

The 2015 Equity Incentive Plan permits the issuance of restricted shares of the Company’s common stock to the Company’s employees and non-employee directors. As of March 31, 2020 and December 31, 2019, 550,011 and 509,509 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 in 2019, 6,000 vested during the three months ended March 31, 2020, 101,372 is expected to vest during the remainder of 2020, 65,835 is expected to vest in 2021, 63,207 is expected to vest in 2022, 10,124 is expected to vest in 2023 and 10,129 is expected to vest in 2024. Additionally, 1,666 were forfeited during the year ended December 31, 2019 and 1,667 were forfeited during each of the years ended December 31, 2018 and 2016.

 

35

A summary of changes in the Company’s restricted shares of common stock for the three months ended March 31, 2020 and 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Three months ended

 

 

March 31, 2020

 

March 31, 2019

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

average grant

 

 

 

average grant

 

 

Shares

 

date fair value

 

Shares

 

date fair value

Unvested at December 31,

 

 

216,165

 

$

20.34

 

 

159,165

 

$

18.39

Granted

 

 

40,502

 

 

20.31

 

 

4,692

 

 

21.46

Vested

 

 

(6,000)

 

 

18.10

 

 

(10,692)

 

 

19.57

Unvested at March 31,

 

 

250,667

 

$

20.39

 

 

153,165

 

$

18.40

 

Unvested restricted shares of common stock that vest based on a service condition receive dividends which are nonforfeitable. Awards with a market condition that vest are entitled to dividend equivalent rights for dividends issued during the measurement period contingent upon the achievement of the market condition.

 

Market Condition Restricted Stock Unit Awards

 

Prior to 2020, all unvested shares were earned over the respective vesting period based on a service condition only. During the three months ended March 31, 2020, the Company also issued 31,243 restricted stock unit awards (“RSUs”) with a market condition and implied service period that are expected to vest in 2023. Vesting of restricted stock unit awards with a market condition is based on the Company’s performance as measured by total stockholder return relative to the appreciation of a specified stock index (50%) or a specified peer group (50%) over the measurement period, subject to each participant's continued employment through the conclusion of the measurement period. The fair value of the restricted stock unit awards with a market condition is estimated using a Monte Carlo simulation model and is affected by the grant date, length of the measurement period, and the realized performance and volatility of JCAP and the respective comparison peer group or index. A summary of changes in the Company’s RSUs for the three months ended March 31, 2020 and 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Three months ended

 

 

March 31, 2020

 

March 31, 2019

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

average grant

 

 

 

average grant

 

 

RSUs

 

date fair value

 

RSUs

 

date fair value

Unvested at December 31,

 

 

 -

 

$

 -

 

 

 -

 

$

 -

Granted

 

 

31,243

 

 

26.00

 

 

 -

 

 

 -

Unvested at March 31,

 

 

31,243

 

$

26.00

 

 

 -

 

$

 -

 

Stock-based Compensation Expense

 

Expenses related to restricted stock awards and RSUs 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. Compensation expense is based on the market value of the shares at the grant date. Stock-based compensation expense for RSUs that vest based on a market condition is based on the fair value of the award and is recorded from the grant date through the conclusion of the required service period. 

 

The Company recognized approximately $0.6 and $0.4 million of stock-based compensation expense for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and December 31, 2019, the total unrecognized compensation cost related to the Company’s restricted shares was approximately $4.0 million and $3.0 million, respectively. This cost is expected to be recognized over the remaining weighted average period of 2.5 years. The Company presents stock-based compensation expense in general and administrative expenses in the Consolidated Statements of Operations.

 

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. relating to the issuance and sale,

36

from time to time until the second anniversary of the Effective Date, of up to $125 million in shares of the Company’s 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 issuance under the Purchase Agreement and the Articles Supplementary classifying the Series A Preferred Stock (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. 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 March 31, 2020.

37

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 (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.

On February 21, 2020, the Company declared a (i) cash distribution of $17.65 per share of Series A Preferred Stock, payable on April 15, 2020, to holders of Series A Preferred Stock of record on the close of business on April 1, 2020, 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 April 15, 2020, to holders of Series A Preferred Stock of record on the close of business on April 1, 2020.

Series B Preferred Stock

As of March 31, 2020, the Company had 3,750,000 shares of its 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.

As of March 31, 2020, 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. 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.

38

 

Non-controlling interests

 

Non-controlling interests are comprised of OC Units issued in connection with the acquisition of self-storage real estate owned (see Note 3, Self-Storage Investment Portfolio) and the OC Units issued in the Internalization (See Note 2, Significant Accounting Policies). The Company reports these OC Units held by third parties as non-controlling interests. The Company records these non-controlling interests at their initial fair value, adjusting the basis prospectively for their share of the respective consolidated investments’ net income or loss and equity contributions and distributions. These non-controlling interests are not redeemable by the equity holders and are presented as part of permanent equity. Beginning on the first anniversary of the date of issuance, OC Units may be tendered for redemption by the holder thereof for cash per OC Unit equal to the then-current market price of the Company’s common stock, or at the Company’s option, shares of the Company’s common stock on a one-for-one basis based on the portion of the period the Units were outstanding. The income and losses attributed to non-controlling interests are also allocated based on the pro-rata weighted average Units outstanding. 

 

10.  EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of shares outstanding during the period. Beginning on the first anniversary of the date of issuance, OC Units may be tendered for redemption by the holder thereof for cash per OC Unit equal to the then-current market price of the Company’s common stock, or at the Company’s option, shares of the Company’s common stock on a one-for-one basis and the income allocable to such OC Units is allocated on this same basis and reflected as non-controlling interests in the accompanying consolidated financial statements. All outstanding unvested restricted share awards that vest solely on a service condition 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. Net losses are not attributed to participating securities and net loss attributable to common shareholders is adjusted for dividends declared on unvested restricted shares in periods with a net loss. Diluted earnings per share includes contingently issuable OC Units only if the market condition would have been met had the end of the reporting period been the measurement period. Stock awards with a market condition do not participate in nonforfeitable rights to dividends and are excluded from the calculation of diluted EPS. For the three months ended March 31, 2020 and 2019, the Company’s basic earnings (loss) per share is computed using the two-class method, and the Company’s diluted earnings (loss) per share is computed using the more dilutive of the treasury stock method or two-class method:

 

 

 

 

 

 

 

39

 

 

Three months ended March 31,

 

 

2020

 

2019

Shares outstanding

 

 

 

 

 

 

Weighted average common shares - basic

 

 

22,973,028

 

 

20,297,551

Effect of dilutive securities(1)

 

 

 -

 

 

157,565

Weighted average common shares

 

 

22,973,028

 

 

20,455,116

 

 

 

 

 

 

 

Calculation of Earnings per Share - basic

 

 

 

 

 

 

Net income (loss)

 

$

(54,782)

 

$

12,114

Less:

 

 

 

 

 

 

Net income allocated to preferred stockholders

 

 

5,207

 

 

5,032

Net loss attributable to non-controlling interest

 

 

(1,947)

 

 

 -

Net income allocated to unvested restricted shares(2)

 

 

 -

 

 

55

Dividends declared on unvested restricted shares

 

 

58

 

 

n/a

Net income (loss) attributable to common shareholders, adjusted

 

$

(58,100)

 

$

7,027

 

 

 

 

 

 

 

Weighted average common shares - basic

 

 

22,973,028

 

 

20,297,551

Earnings (loss) per share - basic

 

$

(2.53)

 

$

0.35

 

 

 

 

 

 

 

Calculation of Earnings per Share - diluted

 

 

 

 

 

 

Net income (loss)

 

$

(54,782)

 

$

12,114

Less:

 

 

 

 

 

 

Net income allocated to preferred stockholders

 

 

5,207

 

 

5,032

Net loss attributable to non-controlling interest

 

 

(1,947)

 

 

 -

Dividends declared on unvested restricted shares

 

 

58

 

 

n/a

Net income (loss) attributable to common shareholders, adjusted

 

$

(58,100)

 

$

7,082

 

 

 

 

 

 

 

Weighted average common shares - diluted(1)

 

 

22,973,028

 

 

20,455,116

Earnings (loss) per share - diluted

 

$

(2.53)

 

$

0.35

 

(1)

Diluted earnings per share is calculated on the more dilutive of the treasury stock method or two-class method.  For the three months ended March 31, 2020, 854,929 OC Units and their related loss as well as 232,831 unvested restricted shares were excluded from the calculation of diluted shares as they are not dilutive.

(2)

Unvested restricted shares of common stock with vesting based on service 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 months ended March 31, 2020 and 2019.  Under the two-class method, losses are not allocated to participating securities, therefore no loss was allocated to unvested restricted shares for the three months ended March 31, 2020.

 

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 March 31, 2020 and December 31, 2019 was $427.4 million and $549.7 million, respectively. The interest income realized and the net unrealized loss from these equity method investments was a net loss of $4.3 million for the three months ended March 31, 2020 and the interest income and the net unrealized gain from these equity method investments was net income of $12.0 million for the three months ended March 31, 2019.

 

The Company’s investment in the real estate venture, the SL1 Venture, has a carrying amount of $6.1 million and $11.2 million at March 31, 2020 and December 31, 2019, respectively. The losses from this venture were $0.2 million for the three months ended March 31, 2020 and the earnings from this venture were $0.2 million for the three months ended March 31, 2019.

 

40

Management Agreement

Prior to the completion of the Internalization, the Company relied on the personnel, properties and resources of the Manager to conduct its operations. The Company and the Manager were 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 was 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.

Management Fees

Pursuant to the Management Agreement, the Company paid 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-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 computed the base management fee within 30 days after the end of the fiscal quarter with respect to which such installment is payable and promptly delivered 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 $1.2 million and $2.0 million for the period prior to Internalization ended February 20, 2020 and the three months ended March 31, 2019, respectively.

Incentive Fee

The Manager was also able to 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

41

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 was 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 computed 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 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 period prior to Internalization ended February 20, 2020 and the three months ended March 31, 2019.

At March 31, 2020, the Company has no outstanding fees due to Manager. At December 31, 2019, the Company had outstanding fees due to Manager of $3.2 million 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 required that the Company 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 had the ability to 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 agreed to reimburse the Manager for costs and expenses incurred in connection with these services; however, expenses incurred by the Manager were 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 $0.4 million and $0.9 million for the period prior to Internalization ended February 20, 2020 and the three months ended March 31, 2019, respectively.

 

12. SUBSEQUENT EVENTS

The Company’s management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. Other than those disclosed below, there have been no subsequent events that occurred during such period that require disclosure or recognition in the accompanying consolidated financial statements.

Subsequent to March 31, 2020, the global economy has continued to be severely impacted by the COVID-19 pandemic and we are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it will impact our development property investments and self-storage real estate owned in the near and long term. The extent of the COVID-19 pandemic’s effect on our operational and financial performance will depend on future developments, including the duration, spread

42

and intensity of the pandemic and the duration of government measures to mitigate the pandemic, all of which are uncertain and difficult to predict.

 

The Company acquired 100% of the Class A membership units of the LLCs that own the Raleigh and Jacksonville 3 development property investments. With these acquisitions, the Company now wholly owns 31 facilities on its balance sheet or in its SL1 Joint Venture.

The Company entered into a $100 million interest rate swap and a $100 million interest rate cap on the Company’s $375 million senior secured revolving line of credit, locking in a maximum one-month LIBOR of 0.43% on $200 million of debt capital through March 24, 2023. With these contracts in place, the Company has locked in a maximum cost of debt on $200 million of debt capital at approximately 3.1%, which the Company anticipates will decrease as investments underlying the borrowing base mature.

 

Dividend Declarations

On May 7, 2020, the Company’s Board of Directors declared a cash dividend to the holders of the Series A Preferred Stock and a distribution payable in kind, if applicable, in a number of shares of common stock or Series A Preferred Stock as determined in accordance with the election of the holders of the Series A Preferred Stock for the quarter ending June 30, 2020. The dividends are payable on July 15, 2020 to holders of Series A Preferred Stock of record on July 1, 2020.

On May 7, 2020, the Company’s Board of Directors declared a cash dividend on the Series B Preferred Stock in the amount of $0.4375 per share for the quarter ending June 30, 2020. The dividends are payable on July 15, 2020 to holders of Series B Preferred Stock of record on July 1, 2020.

On May 7, 2020, the Company’s Board of Directors declared a cash dividend of $0.23 per share of common stock for the quarter ending June 30, 2020. The dividend is payable on July 15, 2020 to stockholders of record on July 1, 2020.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements

We make statements in this Quarterly Report on Form 10-Q that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). These forward-looking statements include, without limitation, statements about our estimates, expectations, predictions and forecasts of our future business plans and financial and operating performance and/or results, as well as statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. When we use the words “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” or similar expressions or their negatives, as well as statements in future tense, we intend to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance and our actual financial and operating results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such differences are described in the section entitled “Risk Factors” elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”), which was filed with the Securities and Exchange Commission (“SEC”) on February 27, 2020, and in other filings we make with the SEC from time to time, which factors include, without limitation, the following:

·

the negative impact of the ongoing COVID-19 pandemic and the measures intended to prevent its spread, which, in addition to exacerbating the risks set forth below, may result in:

o

a prolonged global economic downturn, recession or depression;

o

reductions in move-ins at the properties that we own;

o

slower increases in physical occupancy, or decreases in occupancy, due to declines in discretionary household income and rates of consumption;

o

temporary holds on existing customer rental rate increases and the deferral of auctions of delinquent tenants initiated by our third-party managers, as well as slower rent collections and potential increases in uncollectible accounts;

o

the delay in construction or development of certain of our investments and the cancellation of certain potential investments;

o

adverse impacts on the value of our debt investments due to impairment of our developers’ ability to make timely payments and disruptions in the capital markets that have negatively impacted the values of debt instruments;

o

adverse impacts on assumptions made in evaluating our investments accounted for using the fair value method;

o

the interplay of the pandemic and over-development in the self-storage industry; and

o

the adverse impacts on developers and development with respect to which we have made investments;

·

our ability to successfully source, structure, negotiate and close investments in and acquisitions of self-storage facilities;

·

changes in our business strategy and the market’s acceptance of our investment terms;

·

our ability to fund our outstanding and future investment commitments;

·

our ability to acquire our developers’ interests on favorable terms;

·

our ability to complete construction, obtain certificates of occupancy and complete leasing for self-storage development projects in which we invest;

·

our ability to increase rental rates;

·

the future availability of borrowings under our credit facility (including borrowing base capacity, compliance with covenants and the availability of the accordion feature);

·

availability and terms of equity and debt capital, as well as our rate of deployment of such capital (which may worsen as result of the COVID-19 pandemic);

·

our ability to hire and retain qualified personnel;

·

our ability to recognize the anticipated benefits from the internalization of our manager;

·

changes in the self-storage industry, interest rates or the general economy;

·

the degree and nature of our competition;

·

volatility in the value of our assets carried at fair market value created by the current economic turmoil or otherwise;

·

potential limitations on our ability to pay dividends at expected rates or other changes to our dividend rate;

·

limitations in our existing and future debt agreements on our ability to pay distributions;

·

the impact of our outstanding preferred stock on our ability to execute our business plan and pay distributions on our common stock; and

44

·

general volatility of the capital markets (which has significantly increased as a result of the COVID-19 pandemic) and the market price of our common stock.

 

Given these uncertainties, undue reliance should not be placed on our forward-looking statements. We assume no duty or responsibility to publicly update or revise any forward-looking statement that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events. We urge you to review the disclosures concerning risks in the sections entitled “Risk Factors,” “Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q, the 2019 Form 10-K and in other filings we make with the SEC from time to time.

 

Overview

 

We are a commercial real estate company that invests primarily in new or recently constructed and opened self-storage facilities located predominately in dense urban submarkets within the top-50 United States Metropolitan Statistical Areas, or MSAs.. Facilities in which we invest are largely vertical (three to ten floors), 100% climate controlled and technologically adapted buildings, which we call Generation V facilities. These facilities are located in submarkets with demographic profiles and competitive positions that management believes will support successful lease-up of such facilities and value creation for our stockholders. Our investments include wholly owned self-storage facilities, as well as mortgage loans secured by self-storage facilities, which are typically coupled with equity interests.

 

Our principal business objective is to deliver attractive risk-adjusted returns by investing in new Generation V self-storage facilities, primarily in urban submarkets. A substantial majority of our investments to date have been first mortgage loans to finance ground-up construction of and conversion of existing buildings into new Generation V self-storage facilities. These investments, which we refer to as “development property investments,” are typically structured as loans equal to between 90% and 97% of facility costs (including land, pre-development and other “soft” costs, hard construction costs, fees and interest and operating reserves). We receive a fixed rate of interest on loaned amounts and up to a 49.9% interest in the positive cash flows from operations, sales and /or refinancings of self-storage facilities, which we refer to as “Profits Interest”. We also typically receive a right of first refusal, or ROFR, to acquire the self-storage facility upon sale.

 

We intend to acquire 100% ownership of a substantial majority of the self-storage facilities that we have financed either through the exercise of ROFRs or through privately negotiated transactions with our investment counterparties, subject to acquisition prices being consistent with our investment objective of creating long-term value for our stockholders. As of March 31, 2020, we own 24 facilities through wholly-owned subsidiaries and fully consolidate these facilities in our consolidated financial statements.

 

We account for our investments (prior to acquisition of 100% ownership, as discussed above) at fair value, with appreciation and depreciation in the value of these investments being reflected in the carrying value of the assets and in the determination of net income. In determining fair value, we re-value each development property investment, which re-valuation includes an analysis of the current value of any Profits Interest associated with the investment. We believe that carrying our assets at fair value and reflecting appreciation and depreciation in our earnings provide our stockholders and others who rely on our financial statements with a more complete and accurate understanding of our financial condition and economic performance, including revenues and the creation of value through our Profits Interests as self-storage facilities we finance are constructed, leased-up and become stabilized.

 

We have historically funded our on-balance sheet investments with (i) proceeds from sales of our securities, including sales of our common stock in follow-on offerings and pursuant to our common stock at-the-market equity offering program (the “ATM Program”), (ii) funds from secured indebtedness, including borrowings under our senior secured revolving credit facility (the “Credit Facility”) and term loans on individual properties, and (iii) net proceeds from the monetization of existing development property investments. We have also funded investments using proceeds from the sale of senior participations,  Series A Preferred Stock, and Series B Preferred Stock. We maintain an effective shelf registration statement on Form S-3 registering the future sale from time to time of up to $500.0 million of our securities, which includes an ATM Program pursuant to which we may issue up to $100 million in shares of our common stock. As of May 7, 2020, we have approximately $80.9 million available for issuance under our ATM Program.

 

As of March 31 2020, we have remaining unfunded commitments under our development investments of approximately $119.1 million, including non-cash interest reserves of approximately $26.0 million. Of the $119.1 million of unfunded commitments, $41.5 million is related to the five development projects we anticipate forgoing resulting in minimal additional fundings on those investments. As of March 31, 2020, we have $7.3 million of cash on hand and $51.6 million of remaining capacity under our Credit Facility.  In addition, we have $125 million of potential availability as assets are added to the borrowing base to increase borrowing capacity and the accordion feature under our Credit Facility provides for an additional $375 million of capacity, which is subject to

45

various conditions, including obtaining commitments from lenders for the additional amounts. We may also use any combination of the following additional capital sources to fund capital needs:

 

·

Developer refinancings/repayments of JCAP mortgage indebtedness (49.9% profits interest and ROFR retained),

·

Potential sales of facilities underlying current development investments to a third party, and

·

Additional common stock issuances.

 

While our access to capital may be adversely impacted as a result of the COVID-19 pandemic (as discussed below), we currently believe we have sufficient access to capital for the foreseeable future to fund our commitments. However, we can provide no assurance that, if the impact of the COVID-19 pandemic significantly worsens in duration or intensity, such capital will be available to us on acceptable terms or at all. See “Risk Factors” in this Quarterly Report in Form 10-Q.

 

On March 7, 2016, we, through our Operating Company, entered into the Limited Liability Company Agreement of Storage Lenders (the “SL1 Venture”) with HVP III Storage Lenders Investor, LLC (“HVP III”), an investment vehicle managed by Heitman. The SL1 Venture was formed for the purpose of providing capital to developers of self-storage facilities identified and underwritten by us. Upon formation, HVP III committed $110.0 million for a 90% interest in the SL1 Venture, and we committed $12.2 million for a 10% interest. On March 31, 2016, we contributed to the SL1 Venture three self-storage development investments with an aggregate commitment amount of $41.9 million. As of December 31, 2018, the SL1 Venture had closed on eight additional development property investments with a Profits Interest with an aggregate commitment amount of approximately $81.4 million, bringing the total aggregate commitment of SL1 Venture’s investments to $123.3 million. In January 2019, the SL1 Venture acquired the 50.1% equity interests of its developer partners in the LLCs that own the Jacksonville, Atlanta 1, Atlanta 2, and Denver development properties. In November 2019, the SL1 Venture acquired the 50.1% equity interests of its developer partner in the LLC that owns the Raleigh development property. The SLI Venture now owns 100% of the membership interests in the LLCs that own these five facilities.

 

Prior to February 20, 2020, we were externally managed and advised by JCAP Advisors, LLC (the “Manager”). On February 20, 2020, our common stockholders voted to approve the internalization of management pursuant to an Asset Purchase Agreement (the “Purchase Agreement”) dated as of December 16, 2019. Later on February 20, 2020, we closed the Internalization, resulting in, among other things, the Operating Company acquiring substantially all of the operating assets and liabilities of the Manager and each of the employees of the Manager became an employee of the Company. As of February 20, 2020, we are an internally advised REIT.

 

We are a Maryland corporation that was organized on October 1, 2014 and has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (“the Code”). As a REIT, we generally will not be subject to U.S. federal income taxes on our taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains, to the extent that we annually distribute all of our REIT taxable income to stockholders and comply with certain other requirements for qualification as a REIT set forth in the Code. We are structured as an UPREIT and conduct our investment activities through our Operating Company. We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the 1940 Act.

 

Factors Impacting Our Operating Results

 

Impact of COVID-19 Pandemic on Our Business and Market Conditions

The measures taken to protect the population from the health impact of and the economic crisis caused by the ongoing COVID-19 pandemic have negatively impacted, and may continue to negatively impact, our business, assets and results of operations. The most significant impact thus far has been the decline in fair value of our investments. For the first time since we began measuring fair value of our assets, we recognized an overall net decrease in fair value for the three months ended March 31, 2020. This net decrease is primarily the result of the economic fallout caused by the COVID-19 pandemic paired with the ongoing negative impact from elevated new self-storage supply in certain of our markets and increases in credit spreads. The pandemic and resulting economic turmoil have negatively impacted, and may continue to negatively impact, our properties, and consequently their values, in the following ways:

 

·

Unprecedented unemployment, business closures and fear of a lingering recession have eroded discretionary household incomes, seriously damaged consumer confidence and prompted many prospective customers to delay life decisions (e.g., relocation or new home purchase) that drive storage demand or cut household budgets, including use of self-storage;

·

Traffic in self-storage facilities has been reduced by local “shelter-in-place” orders, resulting in a significant decline in move-ins since the last week of March;

·

Our third-party managers have suspended rent increases to existing customers and delayed auctions and other collection actions with respect to tenants who have not paid their rent, resulting in below-budget revenues and reduced occupancy rates

46

at certain facilities, which has the effect of lengthening the period to economic stabilization and reducing the value of the discounted cash flows from those facilities;

·

The timing and length of the pandemic, which was declared in mid-March, threatens to shorten or eliminate altogether the 2020 leasing season, resulting in the potential addition of a full year to the projected stabilization period of certain facilities, which also has the effect of reducing the value of the discounted cash flows from those facilities; and

·

Shelter in place and stay at home orders, along with business closures, have caused construction delays, which delays can impact the amount of fair value increases we recognize.

 

All of these factors are layering on top of an already challenging self-storage rental market caused by elevated new supply in certain markets that has not been fully absorbed. Declines in fair value will likely continue if there is further deterioration in the economy generally. However, as described under —“Results of Operations,” we experienced increased occupancy and rental rates in the first quarter of 2020.

 

We are taking proactive steps with our developer partners to combat the impact of the pandemic and its repercussions. We have also increased the frequency of communication with our third-party managers to monitor operations and overall performance. Despite our efforts, loans that we have made can be expected to have an elevated rate of defaults, prompting us to negotiate an increasing number of workouts with developers, which workouts could include an increased number of acquisitions of developer interests in projects we have financed. As of March 31, 2020, we had two loans in non-accrual status, both of which were in foreclosure before the COVID-19 crisis. We have also re-assessed five development projects for which either development or construction has not yet commenced and communicated our intent to forgo those projects with the respective developers.  The aggregate principal amount of these investments is approximately $56.7 million with an outstanding principal balance of $15.7 million as of March 31, 2020.

Despite these headwinds, we believe the self-storage sector to be more recession resistant than other real estate sectors. Demand for storage is driven primarily by recurring life events, along with business expansions and contractions. When the economy is weak, we believe that significant life events increase, which have historically driven higher demand for self-storage. In addition, we expect to see increased length of stay for our customers due to increases in autopay than previous cycles and the fact that self-storage costs comprise a much smaller percentage of household income than rental payments and mortgage payments. Moreover, we expect to see increased demand for self-storage from commercial customers, who may be more likely to store business items during closures or otherwise store excess hard goods or inventory for later expansion, and some businesses may move from retail or flex office spaces into newer Generation V self-storage facilities where they can have the technology and room they need rather than what a landlord imposes on them.

 

The results of our operations have historically been affected, and will continue to be affected, by a number of factors (which may be exacerbated by the COVID-19 pandemic) including, among other things:

 

·

the pace at which we are able to deploy capital into development property investments and begin earning interest income, which pace can be dependent on the overall economic climate, timing of government issuance of building permits, weather and other factors outside our control;

·

the timing of the completion of facilities we finance, which can be dependent on the inspection process of municipal building departments that are from time to time understaffed;

·

the pace and strength of the lease-up of the facilities we finance or wholly own;

·

availability of capital (and whether investments are made on-balance sheet or through off-balance sheet joint ventures), which may be diminished due to;

o

the potential reduction in the borrowing base under our credit facility due to potential declines in real estate values and/or delays in construction;

o

the potential inability of developers to refinance or repay our loans due to disruptions in the credit markets;

o

the potential inability to dispose of self-storage facilities underlying our investments or self-storage facilities that we wholly own at prices that would be in the best interests of our shareholders, or at all; and

o

disruptions in capital markets (including market volatility) that negatively impact the availability and cost of debt and/or equity;

·

changes in the fair value of our assets;

·

our ability to acquire self-storage facilities at attractive prices; and

·

the performance of self-storage facilities in which we have invested, either directly or through the SL1 Venture, and the performance of the third party managers of those respective facilities.

 

The self-storage sector experienced a record number of new self-storage construction starts and deliveries in 2016 through 2019, with a large number of deliveries expected in 2020 as well. While absorption of excess new supply during a pandemic could slow

47

significantly for a period, we believe the economic crisis will accelerate the end of the development cycle, thereby counterbalancing to some degree the effect of the pandemic and paving the way for better fundamentals at an earlier time than if the pandemic had not occurred but new deliveries remained elevated.

 

Further, we believe that the crisis could accelerate our consolidation of developer interests and 100% ownership of facilities we have financed. As the economic impact of the pandemic and the lingering effect of elevated new supply continue to challenge fundamentals, some of the projects we have financed can be expected to lease-up more slowly and at lower rental rates than projected, prompting developers to desire an early exit to avoid significant additional capital contributions to the projects to pay interest on our loans. We expect these circumstances to present us with the opportunity to acquire developer interests in self-storage assets at attractive prices. In addition, we may modify or recapitalize existing financing on current investments for our developers in exchange for loan-related fees to compensate us for these modifications. On occasion, we expect certain of our developer partners to refinance our development investments. In these cases, refinancing proceeds would be used to return our capital associated with the first mortgage, but we would retain our Profits Interest and ROFR in the investment. These market dynamics are conducive to continued strong creation of value in our existing investment portfolio.

 

As our focus shifts to acquiring the newly-developed facilities that we have financed since our IPO (as well as possibly acquiring properties that we have not financed), our results of operations will also be impacted by the following additional factors, in addition to the factors described above:

 

·

our ability to generate these new types of investment opportunities while at the same time managing our existing pipeline of development investment opportunities;

·

our ability to generate additional fee income from modifications and/or recapitalizations of existing investments;

·

our ability to redeploy the net proceeds from any potential refinancing of our development property investments;

·

our additional emphasis on net rental income and/or net operating income and less emphasis on fair value accretion and current interest income; and

·

our ability to access debt and equity capital at a cost commensurate with the returns from outright ownership of self-storage facilities.

 

Our total investment income includes interest income from loan investments, which also reflects the accretion of origination fees and recognition of modification fees, and is recognized utilizing the effective interest method based on the contractual rate and the outstanding principal balance of the loans we originate. The objective of the effective interest method is to arrive at periodic interest income that yields a level rate of return over the loan term. Interest rates may vary according to the type of loan, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers. Our income also includes earnings (losses) from our investment in the SL1 Venture, which is calculated based on the allocation of earnings (losses) as prescribed in the JV Agreement. In addition, our operating results are affected by the valuation of our development property investments. These investments are marked to fair value each quarter, and increases and decreases in fair value are reflected in the carrying values of the investments in our Consolidated Balance Sheets and as unrealized increases/decreases in fair value in our Consolidated Statements of Operations. We have made, and in the future we may make, additional equity investments in self-storage facilities, either for fee simple ownership by our Operating Company or in joint ventures with our developers, institutional or other strategic partners. In that regard, in connection with many of our development investments, we have obtained rights of first refusal in connection with potential future sales of self-storage facilities that we finance. Our operating results include rental income and related operating expenses from owned self-storage facilities. Our results for the three months ended March 31, 2020 and 2019 also were impacted by our accounting methods as discussed below.

 

Changes in Fair Value of Our Assets

 

We have elected the fair value option of accounting for our development property investments.  We have elected fair value accounting for these financial instruments because we believe such accounting provides stockholders and others who rely on our financial statements with a more complete and accurate understanding of our economic performance, including our revenues and the creation of value through our Profits Interests as self-storage facilities we finance are constructed, leased-up and become stabilized. Under the fair value option, we mark our development property investments to estimated fair value at the end of each accounting period, with corresponding increases or decreases in fair value being reflected in our Consolidated Statements of Operations. Accordingly, changes to the values of profits interests and debt valuations for which fair value elections have been made will be reflected in our results of operations. If these development property investments were wholly owned and/or the fair value election had not been made on these investments, reductions in the expected value of the investments would not be booked under Generally Accepted Accounting Principles. There is no active secondary market for our development property investments and no readily available market value;

48

accordingly, our determination of fair value requires judgment and extensive use of estimates. 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 our development property investments may fluctuate from period to period. Additionally, the fair value of our development property 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 we may ultimately realize. Our development property investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate an investment in a forced or liquidation sale, we could realize significantly less than the value at which we have 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.

 

Changes in Market Interest Rates and Credit Spreads

 

With respect to our business operations, increases in interest rates and credit spreads, in general, may over time cause: the interest expense associated with our borrowings to increase; the value of mortgage loans in our investment portfolio to decline; interest rates on any floating rate loans to reset, although on a delayed basis, to higher interest rates; and to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase. Conversely, decreases in interest rates and credit spreads, in general, may over time cause: the interest expense associated with our borrowings to decrease; the value of mortgage loans in our investment portfolio to increase; interest rates on any floating rate loans to reset, although on a delayed basis, to lower interest rates; and to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease. As described above, the fair value of our investments declined in the first quarter of 2020, and a significant portion of such decline was attributable to rapidly expanding credit spreads caused by the COVID-19 pandemic and resulting economic distress. During times of economic distress, the valuation process becomes more unpredictable and volatile, which may result in significant swings in fair value. Our results of operations may continue to be negatively impacted, and such impact may be significant, if we continue to see declines in the fair values of our investments as a result of the current economic uncertainty. 

 

Credit Risk

 

We are subject to varying degrees of credit risk in connection with our target investments and other loans. We seek to mitigate this risk by seeking to originate or acquire loans of higher quality at appropriate prices given anticipated and unanticipated losses, by utilizing a comprehensive selection, underwriting and due diligence review process, and by proactively monitoring originated or acquired loans. Although we expect that our borrowers will perform in full on their obligations under the loan documents, one of our underwriting principles is that we will generally not make a loan secured by a property that we, at the time of our investment decision, do not wish to ultimately own. We believe this principle and our ability to effectively own and operate self-storage properties mitigates credit risk. Nevertheless, unanticipated credit losses could occur that could adversely impact our operating results.

 

Recent Developments

 

Subsequent to March 31, 2020, the global economy has continued to be severely impacted by the COVID-19 pandemic and we are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it will impact our development property investments and self-storage real estate owned in the near and long term. The extent of the COVID-19 pandemic’s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic and the duration of government measures to mitigate the pandemic, all of which are uncertain and difficult to predict.

 

We acquired 100% of the Class A membership units of the LLCs that own the Raleigh and Jacksonville 3 development property investments. With these acquisitions, we now wholly own 31 facilities on our balance sheet or in our SL1 Joint Venture.

We entered into a $100 million interest rate swap and a $100 million interest rate cap on our $375 million senior secured revolving line of credit, locking in a maximum one-month LIBOR of 0.43% on $200 million of debt capital through March 24, 2023. With these contracts in place, we have locked in a maximum cost of debt on $200 million of debt capital at approximately 3.1%, which we anticipate will decrease as investments underlying the borrowing base mature.

 

49

Dividend Declarations 

 

On May 7, 2020, our Board of Directors declared a cash dividend to the holders of the Series A Preferred Stock and a distribution payable in kind, if applicable, in a number of shares of common stock or Series A Preferred Stock as determined in accordance with the election of the holders of the Series A Preferred Stock for the quarter ending June 30, 2020. The dividends are payable on July 15, 2020 to holders of Series A Preferred Stock of record on July 1,  2020.

 

On May 7, 2020, our Board of Directors declared a cash dividend on the Series B Preferred Stock in the amount of $0.4375 per share for the quarter ending June 30, 2020. The dividends are payable on July 15, 2020 to holders of Series B Preferred Stock of record on July 1,  2020.

 

On May 7, 2020, our Board of Directors declared a cash dividend of $0.23 per share of common stock for the quarter ending June 30, 2020. The dividend is payable on July 15, 2020 to stockholders of record on July 1,  2020.

 

Investment Activity

 

Overview of total investment activity

 

As of March 31, 2020, our self-storage investment portfolio consists of 24 wholly-owned self-storage facilities, 41 on-balance sheet development property investments with a Profits Interest (26 of which are secured by facilities in lease-up and 10 of which are secured by facilities under construction, and 5 of which are forgone investments, as described further below), six development property investments with a profits interest in our SL1 Venture (all of which are secured by facilities in lease-up), and five self-storage facilities wholly-owned by the SL1.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

# Properties

 

# of Properties Open and Operating

 

# of Properties Under Construction

 

Size (NRSF)

 

 

Total JCAP Investment Commitment
(in thousands)

On-balance sheet

 

 

 

 

 

 

 

 

 

 

 

Wholly Owned Assets

24

 

24

 

0

 

1,841,876

 

$

341,452

 

Development Property Investments

36

 

26

 

10

 

3,004,821

 

$

445,172

 

Forgone Investments

5

 

0

 

0

 

0

 

$

56,602

Joint Venture

 

 

 

 

 

 

 

 

 

 

 

Wholly Owned Assets

5

 

5

 

0

 

371,465

 

$

5,726

 

Development Property Investments

6

 

6

 

0

 

457,494

 

$

1,703

 

50

On-balance sheet investment activity

 

Our on-balance sheet self-storage investments at March 31, 2020 consisted of the following:

 

·

Wholly-Owned Property Investments – As of March 31, 2020, we had acquired 100% of the membership interests in the LLCs of 24 of our previous development property investments, resulting in the ownership of 24 self-storage facilities, as described in more detail in the table below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(MSA)

 

Date

 

Date

 

Gross

 

Accumulated

 

Net

 

Size

 

Months

 

% Physical

 

Address

 

Opened

 

Acquired

 

Basis

 

Depreciation

 

Basis

 

(NRSF) (1)

 

Open (2)

 

Occupancy (2)

 

Orlando 1/2

 

5/1/2016

 

8/9/2017

 

$

15,829

 

$

(1,620)

 

$

14,209

 

93,965

 

48

 

91.6

%

 

Jacksonville 1

 

8/12/2016

 

1/10/2018

 

 

11,664

 

 

(1,166)

 

 

10,498

 

59,848

 

45

 

85.7

%

 

Atlanta 2

 

5/24/2016

 

2/2/2018

 

 

11,859

 

 

(1,000)

 

 

10,859

 

66,187

 

47

 

83.6

%

 

Atlanta 1

 

5/25/2016

 

2/2/2018

 

 

13,204

 

 

(1,017)

 

 

12,187

 

71,718

 

47

 

87.2

%

 

Pittsburgh

 

5/11/2017

 

2/20/2018

 

 

10,076

 

 

(569)

 

 

9,507

 

47,828

 

36

 

68.6

%

 

Charlotte 1

 

8/18/2016

 

8/31/2018

 

 

12,783

 

 

(983)

 

 

11,800

 

86,750

 

45

 

69.1

%

 

New York City 1

 

9/29/2017

 

12/21/2018

 

 

25,950

 

 

(1,604)

 

 

24,346

 

105,272

 

31

 

73.6

%

 

New Haven

 

12/16/2016

 

3/8/2019

 

 

11,055

 

 

(816)

 

 

10,239

 

64,225

 

41

 

85.1

%

 

Miami

 

2/10/2020

 

7/2/2019

 

 

20,586

 

 

(70)

 

 

20,516

 

69,739

 

3

 

12.9

%

 

Jacksonville 2

 

3/27/2018

 

8/16/2019

 

 

11,607

 

 

(389)

 

 

11,218

 

70,255

 

25

 

73.6

%

 

Miami 4

 

10/9/2016

 

9/17/2019

 

 

24,187

 

 

(989)

 

 

23,198

 

74,635

 

43

 

93.5

%

 

Miami 5

 

8/13/2018

 

9/17/2019

 

 

15,180

 

 

(361)

 

 

14,819

 

77,075

 

21

 

66.0

%

 

Miami 6

 

8/12/2016

 

9/17/2019

 

 

20,076

 

 

(784)

 

 

19,292

 

76,765

 

45

 

85.0

%

 

Miami 7

 

3/26/2018

 

9/17/2019

 

 

21,544

 

 

(590)

 

 

20,954

 

86,450

 

25

 

69.7

%

 

Miami 8

 

12/12/2016

 

9/17/2019

 

 

15,572

 

 

(640)

 

 

14,932

 

51,923

 

41

 

90.4

%

 

Charlotte 2

 

8/30/2018

 

2/10/2020

 

 

16,641

 

 

(139)

 

 

16,502

 

76,545

 

20

 

54.1

%

 

Atlanta 3

 

8/6/2019

 

2/10/2020

 

 

19,720

 

 

(109)

 

 

19,611

 

93,283

 

9

 

27.3

%

 

Atlanta 5

 

4/8/2019

 

2/10/2020

 

 

24,501

 

 

(126)

 

 

24,375

 

87,150

 

13

 

32.1

%

 

Louisville 1

 

8/15/2018

 

2/10/2020

 

 

12,189

 

 

(118)

 

 

12,071

 

65,871

 

21

 

52.7

%

 

Atlanta 6

 

10/15/2018

 

2/10/2020

 

 

17,831

 

 

(131)

 

 

17,700

 

82,690

 

19

 

43.4

%

 

Knoxville

 

11/30/2018

 

2/10/2020

 

 

12,930

 

 

(123)

 

 

12,807

 

72,455

 

17

 

66.5

%

 

Boston 2

 

3/19/2019

 

2/14/2020

 

 

13,061

 

 

(102)

 

 

12,959

 

76,606

 

13

 

46.5

%

 

Fort Lauderdale

 

5/2/2019

 

2/14/2020

 

 

18,779

 

 

(73)

 

 

18,706

 

80,569

 

12

 

57.9

%

 

Atlanta 4

 

7/12/2018

 

2/21/2020

 

 

21,276

 

 

(157)

 

 

21,119

 

104,072

 

22

 

42.2

%

 

Total Owned Properties

 

 

 

$

398,100

 

$

(13,676)

 

$

384,424

 

1,841,876

 

29

 

63.7

%

(3)

(1)

The NRSF includes only climate controlled and non-climate controlled storage space. It does not include retail space, office space, non-covered RV space or parking spaces.

(2)

As of May 3, 2020.

(3)

Average weighted based on NRSF.

 

·

Development Property Investments - We had 41 investments totaling an aggregate committed principal amount of approximately $501.8 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 us. 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 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 March 31, 2020,  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 expected to be procured from a third party lender for 60% to 70% of the cost of the project.

 

We have commenced foreclosure proceedings against the borrower of our $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 $11.5 million. As the investment was a collateral dependent loan, we considered the fair value of the collateral when determining the fair value of the investment as of March 31, 2020.  

 

We have also commenced foreclosure proceedings against the borrower of our $14.8 million Houston development property because the borrower has defaulted under the loan by, among other things, failing to pay interest and operating expenses with respect to the property. The total unpaid balance of the loan is $14.8 million. As the investment was a collateral dependent loan, we considered the fair value of the collateral when determining the fair value of the investment as of March 31, 2020.  

51

 

As of March 31, 2020, the aggregate committed principal amount of our development property investments for which the underlying self-storage facility was open and operating was approximately $276.7 million and outstanding principal was $261.4 million, as described in more detail in the table below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

(MSA)

 

Investment

Date

 

Months

 

Size

 

% Physical

 

 

 

 

 

Funded

 

Unfunded

 

Fair

Address

 

Date

Opened

 

Open (1)

 

(NRSF) (2)

 

Occupancy (1)

 

 

Commitment

 

Investment

 

Commitment (3)

 

Value

Orlando 3
12709 E Colonial Dr

 

2/24/2017

7/26/2018

 

21

 

69,558

 

59.2

%

 

 

$

8,056

 

$

7,905

 

$

151

 

$

9,741

Orlando 4
9001 Eastmar Commons

 

8/30/2017

1/16/2019

 

16

 

76,340

 

52.9

%

 

 

 

9,037

 

 

8,156

 

 

881

 

 

10,132

Orlando 5
7360 W Sand Lake Rd

 

6/7/2018

12/27/2019

 

4

 

75,736

 

12.2

%

 

 

 

12,969

 

 

11,206

 

 

1,763

 

 

12,480

Orlando MSA

 

 

 

 

14

 

221,634

 

41.0

%

(7)

 

$

30,062

 

$

27,267

 

$

2,795

 

$

32,353

Tampa 4
3201 32nd Ave S

 

6/12/2017

10/9/2018

 

19

 

72,665

 

61.0

%

 

 

 

10,266

 

 

9,808

 

 

458

 

 

12,748

Tampa 3
2460 S Falkenburg Rd

 

5/19/2017

11/29/2018

 

17

 

70,574

 

54.0

%

 

 

 

9,224

 

 

8,470

 

 

754

 

 

10,079

Tampa 2
9125 Ulmerton Rd

 

5/2/2017

5/9/2019

 

12

 

70,967

 

43.7

%

 

 

 

8,091

 

 

7,776

 

 

315

 

 

9,156

Tampa MSA

 

 

 

 

16

 

214,206

 

53.0

%

(7)

 

$

27,581

 

$

26,054

 

$

1,527

 

$

31,983

Minneapolis 2
3216 Winnetka Ave N

 

2/8/2018

3/14/2019

 

14

 

83,648

 

32.6

%

 

 

 

10,543

 

 

10,077

 

 

466

 

 

10,368

Minneapolis 1
631 Transfer Rd

 

11/21/2017

9/3/2019

 

8

 

88,898

 

16.0

%

 

 

 

12,674

 

 

11,281

 

 

1,393

 

 

12,079

Minneapolis 3
101 American Blvd West

 

4/6/2018

12/13/2019

 

5

 

87,375

 

9.2

%

 

 

 

12,883

 

 

10,898

 

 

1,985

 

 

11,713

Minneapolis MSA

 

 

 

 

9

 

259,921

 

19.1

%

(7)

 

$

36,100

 

$

32,256

 

$

3,844

 

$

34,160

Denver 2
3110 S Wadsworth Blvd

 

4/20/2017

7/31/2018

 

21

 

74,307

 

56.2

%

 

 

 

11,164

 

 

11,009

 

 

155

 

 

10,904

Denver 1
6206 W Alameda Ave

 

4/20/2017

6/28/2019

 

10

 

59,524

 

31.5

%

 

 

 

9,806

 

 

9,789

 

 

17

 

 

10,420

Denver MSA

 

 

 

 

16

 

133,831

 

45.2

%

(7)

 

$

20,970

 

$

20,798

 

$

172

 

$

21,324

New York City 2 (5)
465 W 150th St

 

6/30/2017

12/28/2018

 

16

 

40,951

 

40.3

%

 

 

 

27,982

 

 

29,692

 

 

163

 

 

29,063

New York City 5
374 S River St

 

12/28/2017

3/9/2020

 

2

 

90,575

 

5.8

%

 

 

 

16,073

 

 

14,991

 

 

1,082

 

 

17,657

New York City MSA

 

 

 

 

9

 

131,526

 

16.6

%

(7)

 

$

44,055

 

$

44,683

 

$

1,245

 

$

46,720

Milwaukee
420 W St Paul Ave

 

7/2/2015

10/9/2016

 

43

 

81,489

 

76.3

%

 

 

 

7,650

 

 

7,648

 

 

 2

 

 

8,503

Austin
251 North A W Grimes Blvd

 

10/27/2015

3/16/2017

 

38

 

76,134

 

94.0

%

 

 

 

8,658

 

 

8,136

 

 

522

 

 

8,111

Raleigh (8)
1515 Sunrise Ave

 

8/14/2015

3/8/2018

 

26

 

60,171

 

80.2

%

 

 

 

8,792

 

 

8,789

 

 

 3

 

 

8,558

Boston 1 (4)
329 Boston Post Rd E

 

6/29/2017

8/8/2018

 

21

 

90,503

 

53.9

%

 

 

 

 -

 

 

 -

 

 

 -

 

 

3,700

Louisville 2
3415 Bardstown Rd

 

9/28/2017

8/31/2018

 

20

 

76,603

 

48.9

%

 

 

 

9,940

 

 

9,695

 

 

245

 

 

11,252

Jacksonville 3 (8)
2004 Edison Ave

 

7/27/2017

11/6/2018

 

18

 

68,100

 

46.7

%

 

 

 

8,096

 

 

7,889

 

 

207

 

 

10,061

Baltimore 1 (5)
1835 Washington Blvd

 

6/19/2017

11/20/2018

 

17

 

83,560

 

36.9

%

 

 

 

10,775

 

 

11,204

 

 

162

 

 

13,421

New Orleans
2705 Severn Ave

 

2/24/2017

12/21/2018

 

16

 

86,545

 

48.7

%

 

 

 

12,549

 

 

12,148

 

 

401

 

 

14,383

Philadelphia (5)(6)
550 Allendale Rd

 

3/30/2018

4/25/2019

 

12

 

69,930

 

37.9

%

 

 

 

14,338

 

 

11,536

 

 

3,264

 

 

11,807

Houston (6)
1050 Brittmoore Rd

 

3/1/2017

5/21/2019

 

11

 

131,845

 

18.6

%

 

 

 

14,825

 

 

14,825

 

 

 -

 

 

17,820

Stamford (5)
370 West Main St

 

3/15/2019

10/24/2019

 

6

 

38,650

 

19.5

%

 

 

 

2,904

 

 

3,115

 

 

 -

 

 

5,167

Kansas City
510 Southwest Blvd

 

5/23/2018

12/12/2019

 

5

 

76,822

 

15.6

%

 

 

 

9,968

 

 

8,423

 

 

1,545

 

 

9,750

Atlanta 7
2915 Webb Rd

 

5/15/2018

3/23/2020

 

1

 

73,972

 

1.7

%

 

 

 

9,418

 

 

6,923

 

 

2,495

 

 

8,045

Total Completed Development Investments

 

15

 

1,975,442

 

39.5

%

(7)

 

$

276,681

 

$

261,389

 

$

18,429

 

$

297,118

(1)

As of May 3, 2020.

(2)

The NRSF includes only climate controlled and non-climate controlled storage space. It does not include retail space, office space, non-covered RV space or parking spaces.

52

(3)

Commitment is fixed during underwriting at an amount deemed sufficient to cover interest carry and excess operating expenses over rental revenue during lease-up and deferred developer’s fees (if any) payable upon stabilization. Remaining unfunded commitment on completed projects is expected to be utilized primarily for such purposes. To the extent not needed for such purposes, such commitment will not be advanced.

(4)

This loan was repaid in full through a refinancing negotiated by our partner. The investment represents our 49.9% Profits Interest which was retained during the transaction.

(5)

The funded amount of these investments include PIK interest accrued on our loan or interest accrued on our preferred equity investment, as applicable. These interest amounts are not included in the commitment amount for each investment.

(6)

The Company has commenced foreclosure proceedings against the borrower.

(7)

Average weighted based on NRSF.

(8)

Subsequent to March 31, 2020, the Company purchased its partner’s 50.1% Profits Interest in these investments.

 

As of March 31, 2020, the underlying self-storage facilities of 15 of our 41 development property investments were classified as under construction, representing an aggregate committed principal amount of approximately $225.1 million and outstanding principal of $128.7 million. Of these 15 development property investments, we have re-assessed five development projects for which either development or construction has not yet commenced and communicated our intent to forgo those projects with the respective developers. The aggregate committed principal amount of the five investments is approximately $56.7 million with an outstanding principal of $15.7 million as of March 31, 2020. We and our respective developer partners on these investments are in active dialogues concerning the repayment of our outstanding principal along with any current and future accrued interest, but, more importantly, we are no longer obligated to fund the balance of those commitments, which positively affects our liquidity.

 

The ten investments under construction that are expected to be continued and funded are described in more detail in the table below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

 

 

Estimated

 

 

(MSA)

 

 

 

 

Funded

 

Unfunded

 

Fair

 

Size

 

Construction

 

C/O

Closing Date

 

Address

 

Commitment

 

Investment

 

Commitment

 

Value

 

(NRSF) (1)

 

Start Date

 

Quarter (3)

9/14/2017

 

Los Angeles 1
959 W Hyde Park Blvd

 

 

28,750

 

 

10,393

 

 

18,357

 

 

10,365

 

120,038

 

Q3 2020

 

Q3 2021

9/14/2017

 

Miami 1
4250 SW 8th St

 

 

14,657

 

 

13,417

 

 

1,240

 

 

14,215

 

69,555

 

Q2 2018

 

Q2 2020

11/16/2017

 

Miami 3 (3)
120-132 NW 27th Ave

 

 

20,168

 

 

13,714

 

 

6,879

 

 

14,979

 

96,295

 

Q4 2018

 

Q2 2020

12/15/2017

 

New York City 4
6 Commerce Center Dr

 

 

10,591

 

 

7,705

 

 

2,886

 

 

8,835

 

78,325

 

Q2 2018

 

Q3 2020

6/12/2018

 

Los Angeles 2 (3)
7855 Haskell Ave

 

 

9,298

 

 

9,332

 

 

649

 

 

9,579

 

117,097

 

Q1 2020

 

Q2 2021

3/1/2019

 

New York City 6
435 Tompkins Ave

 

 

18,796

 

 

3,572

 

 

15,224

 

 

3,462

 

76,250

 

Q3 2020

 

Q3 2021

4/18/2019

 

New York City 7 (3)
14 Merrick Rd

 

 

23,462

 

 

9,823

 

 

13,827

 

 

9,451

 

95,331

 

Q3 2019

 

Q1 2021

5/8/2019

 

New York City 8 (3)
74 Bogart St

 

 

21,000

 

 

22,306

 

 

 -

 

 

22,384

 

193,763

 

Q4 2020

 

Q4 2021

7/11/2019

 

New York City 9 (3)
74-16 Grand Ave

 

 

13,095

 

 

13,751

 

 

 -

 

 

13,588

 

105,950

 

Q3 2020

 

Q2 2021

8/21/2019

 

New York City 10 (3)
1401 4th Ave

 

 

8,674

 

 

9,041

 

 

 -

 

 

8,933

 

76,775

 

Q3 2019

 

Q2 2021

Total Development Investments in Progress

 

$

168,491

 

$

113,054

 

$

59,062

 

$

115,791

 

1,029,379

 

 

 

 

(1)

The NRSF includes only climate controlled and non-climate controlled storage space. It does not include retail space, office space, non-covered RV space or parking spaces.

(2)

Estimated C/O dates represent the Company’s best estimate as of March 31, 2020 based on project specific information learned through underwriting and communications with respective developers. These dates are subject to change due to unexpected project delays/efficiencies.

(3)

The funded amount of these investments include PIK interest accrued on our loan or interest accrued on our preferred equity investment, as applicable. These interest amounts are not included in the commitment amount for each investment.

 

53

The five investments that we have elected to forgo are described in more detail in the table below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

Location

 

Original

 

 

 

 

Unfunded

 

 

 

 

 

(MSA)

 

Investment

 

Funded

 

Original

 

Fair

Closing Date

 

Address

 

Commitment

 

Investment

 

Commitment (2)

 

Value

10/12/2017

 

Miami 2 (1)
880 W Prospect Rd

 

 

9,459

 

 

1,528

 

 

8,023

 

 

1,287

10/30/2017

 

New York City 3 (1)
5203 Kennedy Blvd

 

 

15,301

 

 

6,932

 

 

8,717

 

 

6,426

12/27/2017

 

Boston 3
19 Coolidge Hill Rd

 

 

10,174

 

 

2,805

 

 

7,369

 

 

2,683

5/1/2018

 

Miami 9 (1)
10651 W Okeechobee Rd

 

 

12,421

 

 

3,642

 

 

8,951

 

 

3,424

11/16/2018

 

Baltimore 2
8179 Ritchie Hwy

 

 

9,247

 

 

770

 

 

8,477

 

 

706

Total Forgone Investments

 

$

56,602

 

$

15,677

 

$

41,537

 

$

14,526

(1)

The funded amount of these investments include PIK interest accrued on our loan. These interest amounts are not included in the commitment amount for each investment.

(2)

We expect minimal additional fundings on these investments as we and our respective developer partners are in active dialogues concerning the repayment of our outstanding principal along with any current and future accrued interest.

 

Real estate venture activity

 

As of March 31, 2020, the SL1 Venture wholly owned the five self-storage properties described in more detail in the table below (dollars in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(MSA)

 

Date

 

Date

 

Gross

 

Accumulated

 

Net

 

Size

 

Months

 

% Physical

 

Address

 

Opened

 

Acquired

 

Basis

 

Depreciation

 

Basis

 

(NRSF) (1)

 

Open (2)

 

Occupancy (2)

 

Jacksonville

 

7/26/2017

 

1/28/2019

 

$

16,606

 

$

(1,271)

 

$

15,335

 

80,621

 

33

 

87.1

%

 

Atlanta 2

 

9/14/2017

 

1/28/2019

 

 

10,850

 

 

(626)

 

 

10,224

 

70,089

 

32

 

78.2

%

 

Denver

 

12/14/2017

 

1/28/2019

 

 

16,473

 

 

(956)

 

 

15,517

 

85,500

 

29

 

65.9

%

 

Atlanta 1

 

4/12/2018

 

1/28/2019

 

 

13,283

 

 

(644)

 

 

12,639

 

71,147

 

25

 

60.6

%

 

Raleigh

 

6/8/2018

 

11/7/2019

 

 

9,684

 

 

(243)

 

 

9,441

 

64,108

 

23

 

62.9

%

 

Total Owned Properties

 

 

 

$

66,896

 

$

(3,740)

 

$

63,156

 

371,465

 

28

 

71.3

%

(3)

(1)

The NRSF includes only climate controlled and non-climate controlled storage space. It does not include retail space, office space, non-covered RV space or parking spaces.

(2)

As of May 3, 2020.

(3)

Average weighted based on NRSF.

 

As of March 31, 2020, the SL1 Venture had six development property investments with a Profits Interest as described in more detail in the table below (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

(MSA)

 

Investment

 

Date

Months

 

Size

 

% Physical

 

 

 

 

Funded

 

Unfunded

 

Fair

Address

 

Date

 

Opened

Open(1)

 

(NRSF)(2)

 

Occupancy(1)

 

Commitment

 

Investment

 

Commitment(3)

 

Value

Columbia
401 Hampton St

 

9/28/2016

 

8/23/2017

32

 

70,935

 

79.2

%

 

 

$

9,199

 

$

9,073

 

$

126

 

$

10,199

Washington DC (4)
1325 Kenilworth Ave NE

 

4/15/2016

 

9/25/2017

31

 

90,405

 

74.6

%

 

 

 

 -

 

 

 -

 

 

 -

 

 

3,795

Miami 1 (4)
490 NW 36th St

 

5/14/2015

 

2/23/2018

26

 

75,770

 

73.5

%

 

 

 

 -

 

 

 -

 

 

 -

 

 

1,608

Fort Lauderdale (4)
812 NW 1st St

 

9/25/2015

 

7/26/2018

21

 

87,384

 

73.3

%

 

 

 

 -

 

 

 -

 

 

 -

 

 

4,884

Miami 2 (4)
1100 NE 79th St

 

5/14/2015

 

10/30/2018

18

 

73,890

 

76.2

%

 

 

 

 -

 

 

 -

 

 

 -

 

 

1,661

New Jersey
6 Central Ave

 

7/21/2016

 

1/24/2019

15

 

59,110

 

56.7

%

 

 

 

7,828

 

 

7,429

 

 

399

 

 

8,559

Total Completed Development Investments

24

 

457,494

 

72.8

%

(5)

 

$

17,027

 

$

16,502

 

$

525

 

$

30,706

 

 

 

(1)

As of May 3, 2020.