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JCAP Jernigan Capital

Filed: 9 Nov 20, 4:31pm
0001622353--12-312020Q3false1571734157173415717341571734Jernigan Capital, Inc.1398751335002326313022423283P3Y12242328323263130133500139875P3Y0001622353jcap:Denver2Memberjcap:DevelopmentPropertyInvestmentsMemberjcap:LoanInvestmentsMember2019-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 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 November 5, 2020, Jernigan Capital, Inc. had 23,263,130 shares of common stock outstanding.

EXPLANATORY NOTE

On November 6, 2020, Jernigan Capital, Inc. (the “Company”) consummated the transactions contemplated by that certain Agreement and Plan of Merger (the “Merger Agreement”), dated as of August 3, 2020 and amended September 21, 2020, by and among Jernigan Capital, Inc. (the “Company”), Jernigan Capital Operating Company, LLC (the “Operating Company”), NexPoint RE Merger, Inc. (“Parent”) and NexPoint RE Merger OP, LLC (the “Parent OP”) , both of whom are affiliates of NexPoint Advisors, L.P. (“NexPoint”). Pursuant to the terms and conditions set forth in the Merger Agreement, on November 6, 2020, the Parent merged with and into the Company, with the Company continuing as the surviving entity (the “Company Merger”), and, immediately following the Company Merger, the Parent OP merged with and into the Operating Company, with the Operating Company continuing as the surviving entity (the “Operating Company Merger” and, together with the Company Merger, the “Mergers”). Following consummation of the Mergers, The New York Stock Exchange filed a notification of removal from listing on Form 25 with the Securities and Exchange Commission (the “SEC”) with respect to the delisting and deregistration of the Company’s common stock, par value $0.01 per share (the “Common Stock”). In addition, the New York Stock Exchange filed a notification of removal from listing on Form 25 with the SEC with respect to the delisting and deregistration of the Company’s 7.00% Series B Cumulative Redeemable Perpetual Preferred Stock, liquidation preference amount $25.00 per share (the “Series B Preferred Stock”). The Common Stock and Series B Preferred Stock ceased being traded prior to the opening of the market on November 6, 2020, and are no longer listed on The New York Stock Exchange. Accordingly, the Company is no longer a publicly traded company. In addition, the Company intends to file with the SEC a Form 15 requesting the suspension of the reporting obligations of the Company under Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. The financial information in this quarterly report on Form 10-Q (this “Quarterly Report”) and the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations reflect the corporate status of the Company as it was at September 30, 2020.

In this Quarterly 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.

3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

JERNIGAN CAPITAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Unaudited)

As of

September 30, 2020

December 31, 2019

Assets:

Cash and cash equivalents

$

22,183

$

3,278

Self-Storage Investment Portfolio:

Development property investments at fair value

316,254

549,684

Self-storage real estate owned, net

513,993

230,844

Investment in and advances to self-storage real estate venture

4,053

11,247

Other loans, at cost

850

4,713

Deferred financing costs

7,717

4,154

Prepaid expenses and other assets

9,107

8,654

Fixed assets, net

127

203

Total assets

$

874,284

$

812,777

���

Liabilities:

Secured revolving credit facility

$

242,000

$

162,000

Term loans, net of unamortized costs

40,973

40,791

Due to Manager

0

3,164

Accounts payable, accrued expenses and other liabilities

13,388

4,817

Dividends payable

5,309

13,131

Total liabilities

301,670

223,903

Equity:

7.00% Series A preferred stock, $0.01 par value, 300,000 shares authorized; 139,875 and 133,500 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively, at liquidation preference of $139.9 million and $133.5 million, net of offering costs, respectively

137,012

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 September 30, 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 September 30, 2020 and December 31, 2019; 23,263,130 and 22,423,283 issued and outstanding at September 30, 2020 and December 31, 2019, respectively

232

224

Additional paid-in capital

451,182

426,129

Accumulated deficit

(89,289)

(5,021)

Accumulated other comprehensive income (loss)

(1,084)

(393)

Total Jernigan Capital, Inc. stockholders' equity

535,351

588,874

Non-controlling interests

37,263

0

Total equity

572,614

588,874

Total liabilities and equity

$

874,284

$

812,777

See accompanying notes to consolidated financial statements.

4

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

Three months ended

Nine months ended

September 30,

September 30,

2020

2019

2020

2019

Revenues:

Interest income from investments

$

5,553

$

10,216

$

20,117

$

27,578

Rental and other property-related income from real estate owned

6,287

1,988

14,982

5,075

Other revenues

38

45

143

312

Total revenues

11,878

12,249

35,242

32,965

Costs and expenses:

General and administrative expenses

2,592

2,137

8,817

6,273

Fees to Manager

0

2,131

1,230

6,203

Property operating expenses of real estate owned

3,781

989

8,454

2,538

Depreciation and amortization of real estate owned

5,414

1,372

13,319

3,491

Goodwill impairment loss

0

0

4,738

0

Internalization expenses

10

268

37,798

268

Merger expenses

5,031

0

5,031

0

Total costs and expenses

16,828

6,897

79,387

18,773

Operating income (loss)

(4,950)

5,352

(44,145)

14,192

Other income (expense):

Equity in earnings (losses) from unconsolidated real estate venture

��

(2,041)

165

(2,195)

407

Net unrealized gain (loss) on investments

4,540

7,974

(5,630)

28,847

Interest expense

(3,196)

(2,546)

(9,475)

(5,535)

Other interest income

16

9

38

30

Total other income (loss)

(681)

5,602

(17,262)

23,749

Net income (loss)

$

(5,631)

$

10,954

$

(61,407)

$

37,941

Net income attributable to preferred stockholders

(5,309)

(5,157)

(15,760)

(15,283)

Less: Net loss attributable to non-controlling interests

1,005

0

3,604

0

Net income (loss) attributable to common stockholders

$

(9,935)

$

5,797

$

(73,563)

$

22,658

Basic earnings (loss) per share attributable to common stockholders

$

(0.43)

$

0.26

$

(3.20)

$

1.06

Diluted earnings (loss) per share attributable to common stockholders

$

(0.43)

$

0.26

$

(3.20)

$

1.06

Dividends declared per share of common stock

$

0

$

0.35

$

0.46

$

1.05

See accompanying notes to consolidated financial statements.

5

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

Three months ended

Nine months ended

September 30,

September 30,

2020

2019

2020

2019

Net Income (loss)

$

(5,631)

$

10,954

$

(61,407)

$

37,941

Other comprehensive income (loss):

Unrealized gains (losses) on interest rate swaps

(59)

(58)

(1,216)

(495)

Reclassification of realized losses (gains) on interest rate swaps

262

(1)

501

(5)

Other comprehensive income (loss)

203

(59)

(715)

(500)

Comprehensive income (loss)

(5,428)

10,895

(62,122)

37,441

Less: Net loss attributable to non-controlling interest

1,005

0

3,604

0

Less: Other comprehensive loss attributable to non-controlling interest

(18)

0

25

0

Comprehensive income (loss) attributable to common stockholders

$

(4,441)

$

10,895

$

(58,493)

$

37,441

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, 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.

7

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)

Retained

Accumulated

Series A

Series B

Earnings

Other

Total

Non-

Preferred Stock

Preferred Stock

Common Stock

Additional

(Accumulated

Comprehensive

Stockholders'

Controlling

Total

Shares

Amount

Shares

Amount

Shares

Amount

Paid-In-Capital

Deficit)

Income (Loss)

Equity

Interests

Equity

Balance at March 31, 2019

127,125

$

124,262

1,571,734

$

37,298

20,567,694

$

205

$

389,431

$

1,605

$

-

$

552,801

$

-

$

552,801

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

-

-

-

-

1,452,076

15

29,976

-

-

29,991

-

29,991

Stock dividend paid on preferred stock

2,125

2,125

-

-

-

-

-

-

-

2,125

-

2,125

Repurchase and retirement of shares of common stock

-

-

-

-

(18,544)

-

(396)

-

-

(396)

-

(396)

Issuance of stock-based awards

-

-

-

-

133,730

1

(1)

-

-

-

-

-

Stock-based compensation

-

-

-

-

-

-

750

-

-

750

-

750

Forfeiture and retirement of shares related to stock-based awards

-

-

-

-

(1,666)

-

-

-

-

-

-

-

Dividends declared on Series A preferred stock

-

-

-

-

-

-

-

(4,407)

-

(4,407)

-

(4,407)

Dividends declared on Series B preferred stock

-

-

-

-

-

-

-

(688)

-

(688)

-

(688)

Dividends declared on common stock

-

-

-

-

-

-

-

(7,754)

-

(7,754)

-

(7,754)

Other comprehensive income (loss) - derivative instruments

-

-

-

-

-

-

-

-

(441)

(441)

-

(441)

Net income

-

-

-

-

-

-

-

14,874

-

14,874

-

14,874

Balance at June 30, 2019

129,250

$

126,387

1,571,734

$

37,298

22,133,290

$

221

$

419,760

$

3,630

$

(441)

$

586,855

$

-

$

586,855

See accompanying notes to consolidated financial statements

8

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

Retained

Accumulated

Series A

Series B

Earnings

Other

Total

Non-

Preferred Stock

Preferred Stock

Common Stock

Additional

(Accumulated

Comprehensive

Stockholders'

Controlling

Total

Shares

Amount

Shares

Amount

Shares

Amount

Paid-In-Capital

Deficit)

Income (Loss)

Equity

Interests

Equity

Balance at June 30, 2019

129,250

$

126,387

1,571,734

$

37,298

22,133,290

$

221

$

419,760

$

3,630

$

(441)

$

586,855

$

-

$

586,855

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

-

-

-

-

96,081

1

1,900

-

-

1,901

-

1,901

Stock dividend paid on preferred stock

2,125

2,125

-

-

-

-

-

-

-

2,125

-

2,125

Issuance of stock-based awards

-

-

-

-

7,500

-

-

-

-

-

-

-

Stock-based compensation

-

-

-

-

-

-

580

-

-

580

-

580

Dividends declared on Series A preferred stock

-

-

-

-

-

-

-

(4,469)

-

(4,469)

-

(4,469)

Dividends declared on Series B preferred stock

-

-

-

-

-

-

-

(688)

-

(688)

-

(688)

Dividends declared on common stock

-

-

-

-

-

-

-

(7,782)

-

(7,782)

-

(7,782)

Other comprehensive income (loss) - derivative instruments

-

-

-

-

-

-

-

-

(59)

(59)

-

(59)

Net income

-

-

-

-

-

-

-

10,954

-

10,954

-

10,954

Balance at September 30, 2019

131,375

$

128,512

1,571,734

$

37,298

22,236,871

$

222

$

422,240

$

1,645

$

(500)

$

589,417

$

-

$

589,417

See accompanying notes to consolidated financial statements.

9

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

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 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.

10

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)

Retained

Accumulated

Series A

Series B

Earnings

Other

Total

Non-

Preferred Stock

Preferred Stock

Common Stock

Additional

(Accumulated

Comprehensive

Stockholders'

Controlling

Total

Shares

Amount

Shares

Amount

Shares

Amount

Paid-In-Capital

Deficit)

Income (Loss)

Equity

Interests

Equity

Balance at 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

Equity offering costs related to the at-the-market issuance of common stock

-

-

-

-

-

-

(24)

-

-

(24)

-

(24)

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

-

-

-

-

-

-

-

-

-

-

5,157

5,157

Stock dividend paid on preferred stock

2,125

2,125

-

-

-

-

-

-

-

2,125

-

2,125

Repurchase and retirement of shares of common stock

-

-

-

-

(27,629)

-

(363)

-

-

(363)

-

(363)

Issuance of stock-based awards

-

-

-

-

18,900

-

-

-

-

-

-

-

Stock-based compensation

-

-

-

-

-

-

814

-

-

814

-

814

Dividends declared on Series A preferred stock

-

-

-

-

-

-

-

(4,557)

-

(4,557)

-

(4,557)

Dividends declared on Series B preferred stock

-

-

-

-

-

-

-

(688)

-

(688)

-

(688)

Dividends declared on common stock

-

-

-

-

-

-

-

(5,351)

-

(5,351)

-

(5,351)

Distributions declared to Non-controlling interests

-

-

-

-

-

-

-

-

-

-

(433)

(433)

Other comprehensive income (loss) - derivative instruments

-

-

-

-

-

-

-

-

(266)

(266)

(21)

(287)

Net loss

-

-

-

-

-

-

-

(341)

-

(341)

(652)

(993)

Balance at June 30, 2020

137,750

$

134,887

1,571,734

$

37,298

23,263,130

$

232

$

450,745

$

(79,354)

$

(1,268)

$

542,540

$

36,964

$

579,504

See accompanying notes to consolidated financial statements.

11

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)

Retained

Accumulated

Series A

Series B

Earnings

Other

Total

Non-

Preferred Stock

Preferred Stock

Common Stock

Additional

(Accumulated

Comprehensive

Stockholders'

Controlling

Total

Shares

Amount

Shares

Amount

Shares

Amount

Paid-In-Capital

Deficit)

Income (Loss)

Equity

Interests

Equity

Balance at June 30, 2020

137,750

$

134,887

1,571,734

$

37,298

23,263,130

$

232

$

450,745

$

(79,354)

$

(1,268)

$

542,540

$

36,964

$

579,504

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

-

-

-

-

-

-

-

-

-

-

1,285

1,285

Stock dividend paid on preferred stock

2,125

2,125

-

-

-

-

-

-

-

2,125

-

2,125

Stock-based compensation

-

-

-

-

-

-

437

-

-

437

-

437

Dividends declared on Series A preferred stock

-

-

-

-

-

-

-

(4,621)

-

(4,621)

-

(4,621)

Dividends declared on Series B preferred stock

-

-

-

-

-

-

-

(688)

-

(688)

-

(688)

Other comprehensive income (loss) - derivative instruments

-

-

-

-

-

-

-

-

184

184

19

203

Net loss

-

-

-

-

-

-

-

(4,626)

(4,626)

(1,005)

(5,631)

Balance at September 30, 2020

139,875

$

137,012

1,571,734

$

37,298

23,263,130

$

232

$

451,182

$

(89,289)

$

(1,084)

$

535,351

$

37,263

$

572,614

See accompanying notes to consolidated financial statements.

12

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

Nine months ended September 30,

2020

2019

Cash flows from operating activities:

Net income (loss)

$

(61,407)

$

37,941

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

Interest capitalized on outstanding loans

(15,219)

(22,069)

Net unrealized (gain) loss on investments

5,630

(28,847)

Stock-based compensation

1,857

1,689

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

2,202

(399)

Return on investment from unconsolidated self-storage real estate venture

198

328

Depreciation and amortization

13,365

3,537

Amortization of deferred financing costs

2,055

1,440

Internalization – settlement of preexisting contractual relationship

37,353

0

Goodwill impairment loss

4,738

0

Accretion of origination fees

(834)

(867)

Unrealized loss on mark-to-market interest rate cap

208

89

Other

56

0

Changes in operating assets and liabilities:

Prepaid expenses and other assets

(1,460)

(1,346)

Due to Manager

(3,165)

(585)

Accounts payable, accrued expenses, and other liabilities

6,265

280

Net cash used in operating activities

(8,158)

(8,809)

Cash flows from investing activities:

Purchase of corporate fixed assets

(26)

(29)

Purchase of self-storage real estate owned

(29,970)

(10,347)

Capital additions to self-storage real estate owned

(354)

(1,309)

Capital contributions to unconsolidated self-storage real estate venture

(170)

(683)

Return of capital from unconsolidated self-storage real estate venture

4,683

3,833

Advances to unconsolidated self-storage real estate venture

(51)

(12,723)

Repayment of advances to unconsolidated self-storage real estate venture

355

12,773

Funding of investment portfolio:

Origination fees received in cash

0

1,114

Development property and bridge investments

(26,249)

(129,377)

Funding of other loans

0

(185)

Repayments of investment portfolio investments

13,878

361

Repayments of other loans

4,225

205

Net cash used in investing activities

(33,679)

(136,367)

Cash flows from financing activities:

Cash received from Credit Facility, net of issuance costs

74,671

124,261

Cash received from term loans, net of issuance costs

0

15,995

Stock repurchase

(399)

(468)

Net proceeds from issuance of common stock

15,004

34,645

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

0

(103)

Dividends paid on Series A preferred stock

(7,208)

(6,736)

Dividends paid on Series B preferred stock

(2,064)

(2,064)

Dividends paid on Non-controlling interest

(624)

0

Dividends paid on common stock

(18,638)

(22,108)

Net cash provided by financing activities

60,742

143,422

Net change in cash and cash equivalents

18,905

(1,754)

Cash and cash equivalents at the beginning of the period

3,278

8,715

Cash and cash equivalents at the end of the period

$

22,183

$

6,961

See accompanying notes to consolidated financial statements.

13

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).

Merger Agreement

On November 6, 2020, the Company consummated the transactions contemplated by that certain Agreement and Plan of Merger (the “Merger Agreement”), dated as of August 3, 2020, and amended September 21, 2020, by and among the Company, the Operating Company, NexPoint RE Merger, Inc. (“Parent”) and NexPoint RE Merger OP, LLC (the “Parent OP”). Pursuant to the terms and conditions set forth in the Merger Agreement, on November 6, 2020, the Parent merged with and into the Company, with the Company continuing as the surviving entity (the “Company Merger”) and immediately following the Company Merger, the Parent OP merged with and into the Operating Company, with the Operating Company continuing as the surviving entity (the “Operating Company Merger” and, together with the Company Merger, the “Mergers”). 

At the effective time of the Company Merger (the “Company Merger Effective Time”), each share of Company common stock, $0.01 par value per share (the “Common Stock”) held by the Parent, Parent OP, or any subsidiary of the Company (a “Company Subsidiary”), was 0 longer outstanding and was automatically retired and ceased to exist, and no payment was made with respect thereto. Each share of Common Stock held by the Company in the Company’s treasury was automatically retired and ceased to exist, and no payment was made with respect thereto. All other shares of Common Stock issued and outstanding immediately prior to the Company Merger Effective Time were automatically converted into the right to receive an amount in cash equal to $17.30 per share, without interest (the “Merger Consideration”), and less any required withholding taxes.

14

At the Company Merger Effective Time, each share of the Company’s Series A Preferred Stock (the “Series A Preferred Shares”) issued and outstanding immediately prior to the Company Merger Effective Time was converted into the right to receive one validly issued, fully paid and non-assessable share of common stock, $0.01 par value of the surviving company (the “Series A Preferred Merger Consideration”), without interest, subject to any applicable withholding tax. All Series A Preferred Shares, so converted, are 0 longer outstanding and have automatically been cancelled and retired and have ceased to exist.

At the Company Merger Effective Time, each share of the Company’s 7.00% Series B Cumulative Redeemable Perpetual Preferred Stock (the “Series B Preferred Shares”) issued and outstanding immediately prior to the Company Merger Effective Time was converted into the right to receive the Series B liquidation value, pursuant to the terms of the Company’s charter (the “Series B Preferred Merger Consideration”), without interest, subject to any applicable withholding tax. All Series B Preferred Shares so converted, are 0 longer outstanding and have automatically been cancelled and retired and have ceased to exist.

At the effective time of the Operating Company Merger (“Operating Company Merger Effective Time”), (a) each Operating Company Unit (the “Operating Company Units”) issued and outstanding immediately prior to the Operating Company Merger Effective Time held by the Company was automatically converted into membership interests of the surviving operating company, (b) each Operating Company Unit (the “Operating Company Units”) issued and outstanding immediately prior to the Operating Company Merger Effective Time that was held by any Company Subsidiary is 0 longer outstanding and has automatically been retired and ceased to exist, and no payment has been made with respect thereto, and (c) each other Operating Company Unit issued and outstanding immediately prior to the Operating Company Merger Effective Time has automatically been converted into the right to receive an amount in cash equal to the Merger Consideration (the “Operating Company Merger Consideration”), and all Operating Company Units, so converted, are no longer outstanding and have automatically been cancelled, retired and have ceased to exist.

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.

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.

15

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.

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.

16

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 September 30, 2020:

Fair Value Measurements Using

Total

Level 1

Level 2

Level 3

Derivative financial instruments (asset position)

$

47

$

0

47

0

Derivative financial instruments (liability position)

(1,109)

0

(1,109)

0

Development property investments

316,254

0

0

316,254

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

$

0

$

14

$

0

Derivative financial instruments (liability position)

(393)

0

(393)

0

Development property investments

549,684

0

0

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).

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.

17

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, 0 portion of the basis for an acquired property has been allocated to above- or below-market lease intangibles. To date, 0 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 0 impairment losses recognized in accordance with these procedures during the three or nine months ended September 30, 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.

Other Loans

The Company’s other loans balance primarily includes principal balances for certain revolving loan agreements, short-term mortgage loans, and land loans made by the Company in situations where it was determined that making such loans would benefit the Company’s primary business. These loans are accounted for under the cost method, and fair value approximates cost at September 30, 2020 and December 31, 2019. None of these loans are in non-accrual status as of September 30, 2020 and December 31, 2019. The Company determined that 0 allowance for loan loss was necessary at September 30, 2020 and December 31, 2019.

18

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 nine months ended September 30, 2020, the Company recorded $4.7 million of Goodwill related to the Internalization, and the Company has 1 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 nine months ended September 30, 2020, and there is 0 Goodwill as of September 30, 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.

19

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 nine months ended September 30, 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 NaN and $0.4 million of acquisition-related expenses for the three and nine months ended September 30, 2020, respectively. These acquisition-related expenses were recognized in earnings immediately and are included within Internalization expenses.

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 nine months ended September 30, 2020 and 2019. Pro forma net loss for the nine months ended September 30, 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 September 30, 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.

Nine Months Ended September 30, 2020

Nine Months Ended September 30, 2019

Pro forma total revenue (unaudited)

$

35,242

$

32,965

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

(35,236)

25,882

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.

20

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.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in this ASU is optional and may be elected over time as reference rate reform activities occur. For the three and nine months ended September 30, 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

Consolidated Statements of Cash Flows - Supplemental Disclosures

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

Nine months ended September 30,

2020

2019

Supplemental disclosure of cash flow information:

Interest paid

$

6,986

$

3,359

Supplemental disclosure of non-cash investing and financing activities:

Stock dividend paid on preferred stock

$

6,375

$

6,375

Dividends declared, but not paid, on preferred stock

5,309

5,157

Dividends declared, but not paid, on common stock

0

7,783

Dividends declared, but not paid, on OC Units

0

0

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

255,495

125,715

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

1,074

0

Other loans paid off with issuance of development property investments

0

404

OC Units issued for self-storage real estate owned acquisitions

7,978

0

OC Units issued for Internalization

33,538

0

Contingent consideration for Internalization

8,554

0

21

3.  SELF-STORAGE INVESTMENT PORTFOLIO

The Company’s self-storage investments at September 30, 2020 consisted of the following:

Investments reported at fair value

Development Property Investments - The Company had 29 investments totaling an aggregate committed principal amount of approximately $314.5 million to finance the ground-up construction of, or conversion of existing buildings into, self-storage facilities. Each development property investment is generally funded as the developer constructs the project and is typically comprised of a first mortgage and a 49.9% Profits Interest to the Company. The loans are secured by first priority mortgages or deeds of trust on the projects and, in certain cases, first priority security interests in the membership interests of the owners of the projects. Loans comprising development property investments are non-recourse with customary carve-outs and subject to completion guaranties, are interest-only with a fixed interest rate of typically 6.9% per annum and typically have a term of 72 months. As of September 30, 2020, 5 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, before considering protective advances and unpaid interest, 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 September 30, 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, before considering protective advances and unpaid interest, 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 September 30, 2020.

As of September 30, 2020, the aggregate committed principal amount of the Company’s development property investments was approximately $314.5 million and outstanding principal was $283.3 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

$

8,316

10/27/2015

Austin (2)(7)

8,658

8,184

474

8,071

2/24/2017

New Orleans (2)(7)

12,549

12,371

178

15,017

3/1/2017

Houston (2)(9)

14,825

14,825

0

15,661

5/2/2017

Tampa 2 (2)(7)

8,091

7,984

107

9,444

5/19/2017

Tampa 3 (2)(7)

9,224

8,618

606

10,561

6/12/2017

Tampa 4 (2)(7)

10,266

10,014

252

13,317

6/29/2017

Boston 1 (2)(6)

0

0

0

3,850

8/30/2017

Orlando 4 (2)(7)

9,037

8,329

708

10,376

9/14/2017

Los Angeles 1

28,750

10,923

17,827

11,143

9/14/2017

Miami 1 (3)

14,657

14,463

194

15,657

10/12/2017

Miami 2 (4)(10)

0

1,661

0

1,459

10/30/2017

New York City 3 (4)(10)

0

8,261

0

7,916

11/16/2017

Miami 3 (2)(4)(7)

20,168

19,093

1,745

21,914

12/15/2017

New York City 4 (2)(7)

10,591

9,747

844

11,435

12/28/2017

New York City 5 (2)

16,073

16,064

9

17,646

3/30/2018

Philadelphia (2)(4)(8)

14,338

11,536

3,264

11,313

5/1/2018

Miami 9 (4)(10)

0

3,877

0

3,639

5/15/2018

Atlanta 7 (2)(7)

9,418

8,502

916

9,948

5/23/2018

Kansas City (2)(7)

9,968

8,754

1,214

10,489

6/7/2018

Orlando 5 (2)

12,969

12,057

912

13,885

22

11/16/2018

Baltimore 2 (10)

0

785

0

690

3/1/2019

New York City 6

18,796

4,297

14,499

4,311

4/18/2019

New York City 7 (3)(4)

23,462

15,781

8,050

17,374

$

259,490

$

223,774

$

51,801

$

253,432

Preferred equity investments:

6/12/2018

Los Angeles 2 (3)(5)

9,298

9,659

649

10,384

3/15/2019

Stamford (2)(5)

2,904

3,222

0

5,479

5/8/2019

New York City 8 (5)

21,000

23,073

0

23,492

7/11/2019

New York City 9 (5)

13,095

14,218

0

14,177

8/21/2019

New York City 10 (5)

8,674

9,346

0

9,290

$

54,971

$

59,518

$

649

$

62,822

Total investments reported at fair value

$

314,461

$

283,292

$

52,450

$

316,254

(1)Represents principal balance of loan gross of origination fees. The principal balance includes interest accrued on the investment.
(2)Construction at the facility was substantially complete and/or certificate of occupancy had been received as of September 30, 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 September 30, 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 September 30, 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 September 30, 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 $1.8 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 September 30, 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.

23

The following table provides a reconciliation of the funded principal to the fair market value of investments at September 30, 2020:

Funded principal

    

$

283,292

Adjustments:

Unamortized origination and other fees

(3,292)

Net unrealized gain (loss) on investments

36,340

Other

(86)

Fair value of investments

$

316,254

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)(10)

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)(10)

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

0

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

0

17,820

4/14/2017

Louisville 1 (2)(7)(10)

8,523

7,552

971

9,550

4/20/2017

Denver 1 (2)(7)(10)

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)

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)

0

0

0

3,361

6/30/2017

New York City 2 (2)(4)(10)

27,982

28,974

665

31,047

7/27/2017

Jacksonville 3 (2)(7)(10)

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)(10)

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)(10)

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))

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)(10)

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

24

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

0

4,952

5/8/2019

New York City 8 (5)

21,000

21,945

0

22,359

7/11/2019

New York City 9 (5)

13,095

13,526

0

13,489

8/21/2019

New York City 10 (5)

8,674

8,892

0

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 nine months ended September 30, 2020, the Company purchased its partner’s 50.1% Profits Interest in this investment.

25

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 (loss) 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 September 30, 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 $377.9 million and $341.7 million, respectively, at September 30, 2020 and approximated $592.3 million and $531.7 million, respectively, at December 31, 2019. These investees had revenues of approximately $1.9 million and $4.7 million and operating expenses of approximately $1.1 million and $2.7 million for the three and nine months ended September 30, 2020, respectively. These investees had revenues of approximately $2.3 million and $4.5 million and operating expenses of approximately $2.7 million and $6.4 million for the three and nine months ended September 30, 2019, respectively. During the three and nine months ended September 30, 2020 and 2019, no individual investment comprised more than 20% of the Company’s net income (loss).

For three and sixteen of the Company’s development property investments with a Profits Interest as of September 30, 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 September 30, 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. On April 10, 2020 and May 6, 2020, respectively, the Company purchased 100% of the Class A membership units of the limited liability companies that owned the Raleigh and Jacksonville 3 development property investments with a Profits Interest. Additionally, on June 30, 2020, the Company purchased 100% of the Class A membership units of the limited liability companies that owned the Baltimore 1, Louisville 2, Minneapolis 1, Minneapolis 2, and Minneapolis 3 development property investments with a Profits Interest. On July 15, 2020, the Company acquired 100% of the Class A membership units of the LLC that owned the New York City 2 development property investment. On July 31, 2020, the Company acquired 100% of the Class A membership units of the LLCs that own the Orlando 3 and Denver 1 development property investments. 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 $296.1 million is primarily comprised of the development property investment at fair value of $255.5 million, the cash consideration of $30.0 million, which is inclusive of paid and accrued transaction costs, and OC Units valued at $8.0 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 $7.5 million at the time of the acquisitions. The estimated life of these in-place leases was 12 months.

26

2019 Activity

On March 8, 2019, the Company purchased 100% of the Class A membership units of the limited liability company that owned the New Haven development property investment with a Profits Interest. On July 2, 2019, the Company acquired all of the interests in the entity that owned the property securing the Miami construction loan. On August 16, 2019, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Jacksonville 2 development property investment with a Profits Interest. On September 17, 2019, the Company purchased 100% of the Class A membership units of the limited liability companies that owned the Miami 4, Miami 5, Miami 6, Miami 7 and Miami 8 bridge investments with a Profits Interest. Accordingly, as of the dates of acquisition, the Company wholly owns and consolidates these investments in the accompanying consolidated financial statements. The acquisition date basis of these investments of $138.9 million is primarily comprised of the development property investment or bridge investment at fair value of $125.7 million and the cash consideration of $10.5 million, which is inclusive of paid and accrued transaction costs. The Company allocated the basis based on the relative fair value of the tangible and intangible assets acquired. Intangible assets consisted of in-place leases, which aggregated to $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 September 30, 2020 and December 31, 2019:

September 30, 2020

December 31, 2019

Land

$

72,262

$

29,430

Building and improvements

448,796

186,295

In-place leases

16,128

8,629

Property equipment

217

122

Construction-in-progress

0

16,460

Accumulated depreciation and amortization

(23,410)

(10,092)

Self-storage real estate owned, net

$

513,993

$

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.

27

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 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.

28

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

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 September 30, 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. NaN development property investments, not including the properties reported as self-storage real estate owned, had reached substantial construction completion and/or received a certificate of occupancy at September 30, 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 September 30, 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. The significant unobservable inputs associated with the Philadelphia and Houston investments are not included as the fair value was determined based on the fair value of the underlying collateral. The fair value of the underlying collateral was determined, in part, by using a market comparable approach and an income approach based on a capitalization rate within the range provided below for capitalization rates associated with development property investments with a profits interest.

29

As of September 30, 2020

Unobservable Inputs

Primary Valuation

Weighted

Techniques

Input

Estimated Range

Average

Income approach analysis

Market yields/discount rate

6.94 - 9.16%

8.10%

Exit date (a)

0.83 - 5.94 years

3.65 years

Option pricing model

Volatility

67.03 - 96.75%

78.51%

Exit date (a)

0.83 - 5.94 years

3.65 years

Capitalization rate (b)

5.25 - 5.50%

5.43%

Discount rate (b)

8.25 - 8.50%

8.43%

(a)The exit dates for the development property investments are generally the estimated date of stabilization of the underlying property.
(b)Twenty 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.

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)

September 30, 2020

December 31, 2019

Up 25 basis points

$

(1.1)

$

(2.1)

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

0.5

2.2

Up 50 basis points

(2.2)

(4.2)

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

0.5

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

30

result in a decrease in the fair value of the Company’s investments. The following fluctuations in the capitalization rates would have had the following impact on the fair value of the Company’s investments:

Increase (decrease) in fair value of investments

Change in capitalization rates (in millions)

September 30, 2020

December 31, 2019

Up 25 basis points

$

(4.8)

$

(10.2)

Down 25 basis points

5.2

11.1

Up 50 basis points

(9.5)

(19.4)

Down 50 basis points

11.0

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 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 0 significant gains or losses attributable to changes in instrument-specific credit risk in the three and nine months ended September 30, 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

0

Unrealized losses

(5,630)

Fundings of principal and change in unamortized origination fees

26,354

Repayments of loans

(13,878)

Payment-in-kind interest

15,219

Reclassification of self-storage real estate owned

(255,495)

Net transfers in or out of Level 3

0

Balance at September 30, 2020

$

316,254

31

Balance at December 31, 2018

$

457,947

Unrealized gains

28,847

Fundings of principal and change in unamortized origination fees

126,100

Repayments of loans

(361)

Payment-in-kind interest

22,069

Reclassification of self-storage real estate owned

(125,715)

Net transfers in or out of Level 3

0

Balance at September 30, 2019

$

508,887

As of September 30, 2020 and December 31, 2019, the total net unrealized appreciation on the investments that use Level 3 inputs was $36.3 million and $76.8 million, respectively.

For the three and nine months ended September 30, 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.

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 8 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

32

a 20% internal rate of return; and (v) any excess to Heitman in an amount equal to its Percentage Interest less 30% and to the Company in an amount equal to the Company’s Percentage Interest plus 30%. However, the Company will not be entitled to any such promoted interest prior to the earlier to occur of the third anniversary of the JV Agreement and Heitman receiving distributions to the extent necessary to provide Heitman with a 1.48 multiple on its contributed capital.

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

The Company’s capital account at the end of the period assuming that the investee was liquidated or sold at book value, plus
Cash distributions received by the Company during the period, minus
Cash contributions made by the Company during the period, minus
The Company’s capital account at the beginning of the period assuming that the investee were liquidated or sold at book value.

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

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

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 September 30, 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. This purchase increased the SL1 Venture’s ownership interest on this development property investment from 49.9% to 100%. The SL1 Venture now wholly owns the self-storage property through this LLC. 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 September 30, 2020, represents the SL1 Venture’s 49.9% Profits Interest which was retained during the transaction.

On June 24, 2020 the SL1 Venture purchased 100% of the Class A membership units of the LLC that owned the Columbia development property investment with a Profits Interest. This purchase increased the SL1 Venture’s ownership interest on this development property investment from 49.9% to 100%. The SL1 Venture now wholly owns the self-storage property through this LLC. The acquisition date basis of this investment of $10.3 million is primarily comprised of the development property investment at fair value.

33

The SL1 Venture has elected the fair value option of accounting for its development property investments with a Profits Interest, which are equity method investments of the SL1 Venture. The assumptions used to value the SL1 Venture’s investments are materially consistent with those used to value the Company’s investments. As of September 30, 2020, the SL1 Venture had 5 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)

$

0

$

0

$

0

$

1,638

5/14/2015

Miami 2 (2)(3)(4)

0

0

0

1,702

9/25/2015

Fort Lauderdale (2)(3)(4)

0

0

0

4,211

4/15/2016

Washington DC (3)(4)

0

0

0

3,727

7/21/2016

New Jersey (3)

7,828

7,471

357

8,880

Total

$

7,828

$

7,471

$

357

$

20,158

(1)Represents principal balance of loan gross of origination fees. The principal balance includes interest accrued on the investment.
(2)These development property investments (having approximately $8.1 million of outstanding principal at contribution) were contributed to the SL1 Venture on March 31, 2016 by the Company.
(3)Certificate of occupancy had been received as of September 30, 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.

As of December 31, 2019, the SL1 Venture had 6 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)

0

0

0

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 September 30, 2020, the SL1 Venture had total assets of $95.3 million and total liabilities of $41.0 million. During the three and nine months ended September 30, 2020, the SL1 Venture had a loss of $(1.4) million and $(3.0) million, of which ($0.1) million and $(0.3) million were allocated to the Company and ($1.3) million and $(2.7) million were allocated to HVP III, respectively, under the HLBV method. At September 30, 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 September 30, 2020 and December 31, 2019, the Company had NaN 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

34

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. On September 30, 2020, Heitman notified the Company of its intent to exercise its put of its Developer Equity Interests in 4 properties. As of September 30, 2020, the expected exercise price of Heitman’s puts would result in a loss on settlement of these puts for the Company. Accordingly, the Company recognized a loss of $1.9 million on these puts for the three months and nine months ended September 30, 2020. Based on the Company’s assessment as of December 31, 2019, the likelihood of loss on the puts was deemed remote and therefore no value was assigned to the puts as of that date.

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

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

6.  VARIABLE INTEREST ENTITIES

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.

35

The Company has recorded assets of $316.3 million and $549.7 million at September 30, 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:

September 30, 2020

December 31, 2019

Assets recorded related to VIEs

$

316,254

$

549,684

Unfunded loan commitments to VIEs

52,450

136,104

Maximum exposure to loss

$

368,704

$

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 September 30, 2020 and December 31, 2019, the Company’s remaining unfunded commitment to the SL1 Venture is $0.04 million and $0.2 million, respectively. At September 30, 2020 and December 31, 2019, the Company had NaN and $0.3 million, respectively, in advances to the SL1 Venture.

7.  DEBT

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

Effective

Carrying Value as of

Maturity Date

Interest Rate

September 30, 2020

December 31, 2019

Secured revolving credit facility (1)

March 24, 2023

2.65%

$

242,000

$

162,000

Term Loans:

Term loan 1 (2)

August 1, 2021

2.41%

9,150

9,150

Term loan 2 (2)

August 1, 2021

2.41%

7,125

7,125

Term loan 3 (2)

August 1, 2021

2.41%

8,625

8,625

Term loan 4 (2)

August 1, 2021

2.41%

9,188

9,188

Term loan 5 (2)

August 1, 2021

2.41%

7,087

7,087

Total Term Loans

41,175

41,175

Term loan debt issuance costs

(202)

(384)

Net Term Loans

40,973

40,791

Total debt

$

282,973

$

202,791

(1) Includes amounts subject to interest rate caps and an interest rate swap. Effective interest rate represents the weighted average contractual interest rate before the interest rate caps and interest rate swap as of September 30, 2020. See further discussion of interest rate caps and interest rate swap in Note 8, Risk Management and Use of Financial Instruments.

(2) Balance is subject to interest rate swap. Interest rate represents the contractual interest on the loan as of September 30, 2020. See further discussion in Note 8, Risk Management and Use of Financial Instruments.

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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 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.

37

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;
the minimum fixed charge coverage ratio is reduced to 1.05 to 1.00 for no more than one (1) period of up to two (2) consecutive calendar quarters immediately following a Material Acquisition. The period ended September 30, 2020, was subject to this reduced fixed charge coverage ratio as a result of a Material Acquisition.
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;
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.

38

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 September 30, 2020, the Company had $242.0 million outstanding of our $283.8 million of total availability for borrowing under the Amended and Restated Credit Facility. As such, the Company had $41.8 million of remaining capacity for borrowing under the Amended and Restated Credit Facility.

As of September 30, 2020, the Company was in compliance with all of its financial covenants of the Amended and Restated Credit Facility.

As of September 30, 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 September 30, 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, Miami, Raleigh, Jacksonville 3, Louisville 2, Baltimore 1, Minneapolis 1, Minneapolis 2, Minneapolis 3, New York City 1, Orlando 3 and Denver 1 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 and 2, New York City 1, Pittsburgh, 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.

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

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

As of September 30, 2020, the Company was in compliance with all of its financial covenants of the FirstBank Term Loans.

39

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 and nine months ended September 30, 2020 and 2019, the Company was subject to interest rate swaps for all five of its First Bank Term Loans. In addition, the Company was also subject to a $100 million interest rate swap on its Amended and Restated Credit Facility during the three and nine months ended September 30, 2020.

 

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

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. In addition, the Company has agreements with each of its derivative counterparties that contain a provision where the Operating Partnership could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. As of September 30, 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.

The following table summarizes the terms and fair values of the Company’s derivative financial instruments designated as hedges as of September 30, 2020 and December 31, 2019, respectively (dollars in thousands):

Notional Amount

Fair Value

Hedge Product

   

Hedge Type (1)

September 30, 2020

   

December 31, 2019

   

Strike

Effective Date

Maturity

September 30, 2020

   

December 31, 2019

Swap

Cash flow

$

9,150

$

9,150

2.2925%

6/3/2019

8/1/2021

$

(165)

$

(104)

Swap

Cash flow

7,125

7,125

2.2925%

6/3/2019

8/1/2021

(129)

(81)

Swap

Cash flow

8,625

8,625

2.2925%

6/3/2019

8/1/2021

(155)

(98)

Swap

Cash flow

9,188

9,188

2.2925%

6/3/2019

8/1/2021

(165)

(105)

Swap

Cash flow

7,087

7,087

1.6025%

8/13/2019

8/1/2021

(87)

(5)

Swap

Cash flow

100,000

0

0.3570%

5/1/2020

3/24/2023

(408)

0

$

141,175

$

41,175

$

(1,109)

$

(393)

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

The Company measures its derivative instruments designated as cash flow hedges at fair value and records them in the balance sheet as either an asset or liability. As of September 30, 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.

40

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 Gain (Loss) Recognized in Accumulated OCL on Derivative

Loss Reclassified from Accumulated OCL into Interest Expense (Income)

Location of Loss Reclassified from Accumulated OCL into Expense (Income)

Three months ended September 30,

2020

2019

2020

2019

Term loan interest rate contracts

$

(54)

$

(58)

$

238

$

(1)

Interest Expense

Nine months ended September 30,

Term loan interest rate contracts

$

(1,152)

$

(495)

$

461

$

(5)

Interest Expense

The changes in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019, are summarized as follows (dollars in thousands):

Three months ended

Nine months ended

September 30,

September 30,

2020

2019

2020

2019

Accumulated other comprehensive income beginning of period

$

(1,268)

$

(441)

$

(393)

$

0

Other comprehensive income (loss):

Unrealized gains (losses) on interest rate swaps

(54)

(58)

(1,152)

(495)

Reclassification of realized losses (gains) on interest rate swaps

238

(1)

461

(5)

Amount included in other comprehensive income (loss)

184

(59)

(691)

(500)

Accumulated other comprehensive income (loss) end of period

$

(1,084)

$

(500)

$

(1,084)

$

(500)

During the next twelve months, the Company estimates that an additional $0.9 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%, 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%, and an interest rate cap agreement in May 2020 with a notional amount of $100 million and a one-month LIBOR interest rate cap of 0.50%, 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. Thus, the June 2019 and March 2020 interest rate cap agreements expire on December 28, 2021 and the May 2020 interest rate cap agreement expires on March 24, 2023. The Company did not designate the interest rate caps as hedges. As of September 30, 2020 and December 31, 2019, the net carrying amount of the interest rate cap was $0.05 million and $.01 million, respectively and are included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets.

Derivatives Not Designated as Hedging Instruments

Amount of Gain (Loss) Recognized in Earnings on Derivative

Location of Gain (Loss) Recognized in Income on Derivative

Three months ended September 30,

2020

2019

Credit Facility interest rate cap

$

(127)

$

(61)

Interest Expense

Nine months ended September 30,

Credit Facility interest rate cap

$

(208)

$

(89)

Interest Expense

41

9.  STOCKHOLDERS’ EQUITY

The Company had 23,263,130 and 22,423,283 shares of common stock issued and outstanding, which included 148,961 and 216,165 shares of unvested restricted stock, as of September 30, 2020 and December 31, 2019, respectively. The Company had 139,875 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 September 30, 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 September 30, 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 September 30, 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 nine months ended September 30, 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 $15.0 million. During the three months ended September 30, 2020, the Company did not issue any shares of common stock under the ATM Program.

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 September 30, 2020 and December 31, 2019, 568,911 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, 126,606 vested during the nine months ended September 30, 2020, 65,501 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.

A summary of changes in the Company’s restricted shares of common stock for the three and nine months ended September 30, 2020 and 2019 is as follows:

Three months ended

Three months ended

September 30, 2020

September 30, 2019

Weighted

Weighted

average grant

average grant

Shares

date fair value

Shares

date fair value

Unvested at June 30,

150,836

$

20.93

208,665

$

20.35

Granted

-

7,500

19.84

Vested

(1,875)

19.84

-

Forfeited

0

0

-

Unvested at September 30,

148,961

$

20.94

216,165

$

20.34

42

Nine months ended

Nine months ended

September 30, 2020

September 30, 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

59,402

18.00

145,922

21.60

Vested

(126,606)

18.53

(87,256)

18.95

Forfeited

0

0

(1,666)

18.10

Unvested at September 30,

148,961

$

20.94

216,165

$

20.34

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 nine months ended September 30, 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 and nine months ended September 30, 2020 and 2019 is as follows:

Three months ended

Three months ended

September 30, 2020

September 30, 2019

Weighted

Weighted

average grant

average grant

RSUs

date fair value

RSUs

date fair value

Unvested at June 30,

31,243

$

26.00

0

$

0

Granted

0

0

0

0

Unvested at September 30,

31,243

$

26.00

0

$

0

Nine months ended

Nine months ended

September 30, 2020

September 30, 2019

Weighted

Weighted

average grant

average grant

Shares

date fair value

Shares

date fair value

Unvested at December 31,

$

$

Granted

31,243

26.00

Unvested at September 30,

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 r