All other schedules are omitted because they are not required or
the required information is shown in the financial statements or notes thereto.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(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 newly-constructed and existing self-storage facilities. The Company
is a Maryland corporation that was organized on October 1, 2014. The Company closed its initial public offering of its common
stock (the “IPO”) on April 1, 2015, and has used proceeds of the IPO primarily to fund real estate loans to private
developers, owners and operators of self-storage facilities. The Company is structured as an Umbrella Partnership REIT (“UPREIT”)
and conducts its investment activities through its operating company, Jernigan Capital Operating Company, LLC (the “Operating
Company”). The Company is externally managed by JCAP Advisors, LLC (the “Manager”).
The Company has elected to be taxed as a real estate investment
trust (“REIT”) under the Internal Revenue Code of 1986 (the “Code”), as amended. As a REIT, the Company
generally will not be subject to U.S. federal income taxes on REIT taxable income, determined without regard to the deduction
for dividends paid and excluded capital gains, to the extent that it annually distributes all of its REIT taxable income to stockholders
and complies with various other requirements for qualification as a REIT set forth in the Code.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company’s consolidated financial statements are prepared
in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Substantially
all operations are conducted through the Operating Company, and all significant intercompany transactions and balances have been
eliminated in consolidation. There were no operations from October 1, 2014 (inception of the Company) to December 31, 2014. As
a result, there is no statement of operations or statement of cash flows for the period ended December 31, 2014.
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.
Reclassification
In the Annual Report on Form 10-K for the year ended December 31,
2015, the Company reported on the Consolidated Balance Sheet $1.5 million of prepaid expenses and other assets, which included
$1.2 million of other loan assets recorded at cost. In this Annual Report on Form 10-K for the year ended December 31, 2016, the
Company has reported the $1.2 million of other loans recorded at cost separately from prepaid expenses and other assets on the
December 31, 2015 Consolidated Balance Sheet.
Variable Interest Entities
The Company invests in entities that may qualify as variable interest
entities (“VIEs”). A VIE is a legal entity that lacks one or more of the characteristics of a voting interest entity.
A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support
from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. Management
bases the qualitative analysis on its review of the design of the entity, its organizational structure including allocation of
decision-making authority and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity.
Management reassesses the initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.
A VIE must be consolidated only by its primary beneficiary, which
is defined as the party that, along with its affiliates and agents, has both the: (i) power to direct the activities that
most significantly impact the VIE’s economic performance and (ii) obligation to absorb the losses of the VIE or the
right to receive the benefits from the VIE, which could be significant to the VIE. Management determines whether the Company is
the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities
most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics
of its investment; the obligation or likelihood for the Company or other interests to provide financial support; 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 real estate venture that is accounted for under the equity method of accounting.
Loan Investments and Election of Fair Value Option of Accounting
for Certain Loan Investments
The Company has elected the fair value option of accounting for
all of its investment portfolio loan investments, including those that are required under GAAP to be accounted for under the equity
method, in order to provide stockholders and others who rely on the Company’s financial statements with a more complete
and accurate understanding of the Company’s economic performance including its revenues and value inherent in the Company’s
equity participation in development projects. Changes in the fair value of these investments are recorded in change in fair value
of 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 measurement of the loan. For loans that are carried at cost, the Company
estimates an allowance for loan loss at each reporting date. In evaluating loan impairment, the Company also periodically evaluates
the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property
as well as the financial and operating capability of the borrower on a loan by loan basis. The Company also evaluates the financial
wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the property. In addition,
the Company considers the overall economic environment, real estate sector and geographic sub-market in which the borrower operates.
A loan will be considered impaired when, based on current information and events, it is probable that the loan will not be collected
according to the contractual terms of the loan agreement. Factors to be considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as impaired. At December 31, 2016
and 2015, there were no loans that were deemed to be impaired loans. Additionally, for loans recorded at cost, the Company determined
that no allowance for loan loss was necessary at December 31, 2016 and 2015.
For investments carried at fair value, fees and costs are expensed
as incurred.
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 typically structured as first mortgages and
a 49.9% profits interest in the development project), operating property loans (loans secured by operating properties), the investment
in real estate venture, other loans, receivables, senior loan participations, and payables.
The following table presents the financial instruments measured
at fair value on a recurring basis at December 31, 2016:
|
|
Fair Value Measurements
Using
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Development property investments
|
|
$
|
95,102
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
95,102
|
|
Operating property loans
|
|
|
9,905
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,905
|
|
Total investments
|
|
$
|
105,007
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
105,007
|
|
The following table presents the financial instruments measured
at fair value on a recurring basis at December 31, 2015:
|
|
Fair Value Measurements
Using
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Development property investments
|
|
$
|
40,222
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
40,222
|
|
Operating property loans
|
|
|
19,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,600
|
|
Total investments
|
|
$
|
59,822
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
59,822
|
|
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.
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 two financial institutions, and the balance at each financial institution exceeds the Federal
Deposit Insurance Corporation insurance limit of $250,000 per institution.
Other Loans
The Company’s other loans balance at December 31, 2016 includes
principal balances for six revolving loan agreements and five mortgage loans. The Company’s other loans balance at December
31, 2015 includes principal balances for three revolving loan agreements and one mortgage loan. Because these loans are not part
of the Company’s core investment portfolio, these loans are accounted for under the cost method.
Fixed Assets
Fixed assets are recorded at cost and consist of furniture, office
and computer equipment, and software. Depreciation is computed on a straight-line basis over the estimated useful lives of the
related assets, which range from three to seven years. Fixed assets are generally purchased by the Manager and the cost reimbursed
by the Company. Maintenance and repair costs are charged to expense as incurred. Upon sale or retirement, the asset cost and related
accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in income.
Revenue recognition
Interest income is recognized as earned on a simple interest basis
and is reported in interest income from investments in the Consolidated Statements of Operations. Accrual of interest will be
discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that
the borrower’s financial condition is such that collection of interest is doubtful. The Company will recognize income on
impaired loans when they are placed into non-accrual status on a cash basis when the loans are both current and the collateral
on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company will
not recognize income on such loans. Accrued interest generally is reversed when a loan is placed on non-accrual status.
The Company’s loan origination fees are accreted into interest
income over the term of the investment using the effective yield method.
Debt Issuance Costs
Costs related to the sale of senior participations are deferred
and are amortized as interest expense over the estimated life of the related senior participation using the straight-line method,
which approximates the effective interest method. If a debt instrument is repurchased prior to its original maturity date, the
unamortized balance of debt issuance costs are written off to interest expense or, if significant, included in “early extinguishment
of debt.” Effective January 1, 2016, we adopted ASU 2015-03,
Interest-Imputation of Interest (Subtopic 835-30): Simplifying
the Presentation of Debt Issuance Costs
, which impacts the balance sheet presentation of debt issuance costs and accordingly,
the Company’s debt issuance costs are presented in the December 31, 2016 Consolidated Balance Sheet as a deduction from
the carrying amount of the principal balance. See "Recently Adopted Accounting Pronouncements" for further discussion.
Transaction and other expenses
Transaction and other expenses consist of non-capitalizable advisory
fees and other unreimbursed expenses incurred in connection with various financing and investment transactions and are expensed
as incurred. The Company incurred $2.1 million and $0.3 million of such costs during the years ended December 31, 2016 and 2015,
respectively.
Offering and Registration Costs
Offering and registration costs represent underwriting 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. Underwriting commissions and offering costs incurred in connection with the Company’s
common stock offerings are reflected as a reduction of additional paid-in capital.
On July 27, 2016, the Company entered into a Stock Purchase Agreement
(see Note 9,
Stockholders’ Equity
) which requires the Company to issue and sell a minimum of $50.0 million of Series
A Preferred Stock by July 27, 2018. The Company incurred $2.8 million of preferred stock offering costs in conjunction with the
execution of the Stock Purchase Agreement. Such costs are presented as deferred costs on the Consolidated Balance Sheet until
such time as Series A Preferred Stock is issued. A pro rata portion of such deferred costs, based upon the ratio of the amount
issued to the $50.0 million minimum issuance of Series A Preferred Stock, is reclassified to cumulative preferred stock upon issuance
of the Series A Preferred Stock. Of the $2.8 million of offering costs incurred, $2.2 million is in deferred costs on the Consolidated
Balance Sheet at December 31, 2016, and $0.6 million has reduced the cumulative preferred stock balance on the Consolidated Balance
Sheet at December 31, 2016.
Organization Costs
Costs incurred to organize the Company were expensed as incurred.
Restructuring Costs
Restructuring costs consist of severance and benefits costs, lease
termination costs, and other costs incurred by the Company in conjunction with consolidating its offices and moving its corporate
headquarters. The Company recognizes these severance and other charges when the requirements of ASC 420,
Exit or Disposal Cost
Obligations
(“ASC 420”), have been met regarding a plan of termination and when communication has been made to
employees. All restructuring activities were completed during the quarter ended September 30, 2015.
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. The Company had no
taxable income for the years ended December 31, 2016 and 2015. To qualify as a REIT, the Company must annually distribute at least
90% of its REIT taxable income to its stockholders and meet certain other requirements.
Earnings per Share (“EPS”)
Basic EPS includes only the weighted average number of common shares
outstanding during the period. Diluted EPS includes the weighted average number of common shares and the dilutive effect of restricted
stock, accrued stock dividends, and redeemable Operating Company units when such instruments are dilutive.
All outstanding unvested share-based payment awards that contain
rights to nonforfeitable dividends are treated as participating in undistributed earnings with common shareholders. Awards of
this nature are considered participating securities and the two-class method of computing basic and diluted EPS must be applied.
Comprehensive Income
For the years ended December 31, 2016 and 2015, comprehensive income
equaled net income; therefore, separate Consolidated Statements of Comprehensive Income are not included in the accompanying consolidated
financial statements.
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 August 2016, the FASB issued Accounting Standards Update (“ASU”)
2016-15
, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. This
ASU provides guidance on the classification of certain cash receipts and payments in the statement of cash flows, including
distributions received from equity method investees. This guidance is effective for public business entities for fiscal years
and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption being allowed. The Company
is currently assessing the impact this new accounting guidance will have on its consolidated financial statements.
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 public business entities for fiscal years and for interim periods within
those fiscal years, beginning after December 15, 2019, 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.
In March 2016, the FASB issued ASU 2016-09,
Compensation -
Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting.
This ASU simplifies
several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification
of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for public
business entities for fiscal years and for interim periods within those fiscal years, beginning after December 15, 2016, with
early adoption being allowed. The Company does not expect that the impact of this new accounting guidance will be material to
its consolidated financial statements and disclosures.
In April 2015, the FASB issued ASU 2015-03,
Interest-Imputation
of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
. This guidance simplifies the presentation
of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a deduction from the carrying
amount of the related debt liability, consistent with debt discount or premiums. The recognition guidance for debt issuance costs
is not affected by amendments in this update. This guidance is effective for public business entities for fiscal years and for
interim periods within those fiscal years, beginning after December 15, 2015, with early adoption being allowed. In accordance
with the adoption of this ASU, debt issuance costs related to the Company’s senior participations are presented in the December
31, 2016 Consolidated Balance Sheet as a deduction from the carrying amount of the principal balance.
In February 2015, the FASB issued ASU 2015-02,
Amendments to
the Consolidation Analysis
. This ASU amends the assessment of whether a limited partnership or limited liability company is
a variable interest entity; the effect that fees paid to a decision maker have on the consolidation analysis; how variable interests
held by a reporting entity’s related parties or de facto agents affect its consolidation conclusion; and for entities other
than limited partnerships and limited liability companies, clarifies how to determine whether the equity holders as a group have
power over an entity. This guidance is effective for public business entities for fiscal years and for interim periods within
those fiscal years, beginning after December 15, 2015, with early adoption being allowed. The Company early adopted the provisions
of this ASU in 2015, and there was no impact on its consolidated financial statements as a result of the adoption.
In August 2014, the FASB issued ASU 2014-15,
Presentation
of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern
. This ASU requires management to evaluate whether there are conditions and events that raise substantial
doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued
(or available to be issued when applicable) and, if so, disclose that fact. This ASU is effective for annual periods ending after
December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for
annual or interim reporting periods for which the financial statements have not previously been issued. The adoption of this guidance
did not have a material effect on the Company’s consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts
with Customers
(“ASU 2014-09”), which is effective for fiscal years, and interim periods within those years, beginning
on or after December 15, 2016. In August 2015, the FASB extended the effective date by one year to years beginning on and after
December 15, 2017. The standard may be adopted as early as the original effective date but early adoption prior to that date is
not permitted. This ASU outlines a new, single comprehensive model for entities to use in accounting for revenue arising from
contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. In March
2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing,
as an amendment to ASU 2014-09. This amendment clarifies how to identify the unit of accounting for the principal
versus agent evaluation, how to apply the control principle to certain types of arrangements, such as service transactions, and
reframed the indicators in the guidance to focus on evidence that an entity is acting as a principal rather than as an agent.
In April 2016 and May 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing,
and ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients,
respectively. ASU 2016-10 clarifies the existing guidance on identifying performance obligations
and licensing implementation. ASU 2016-12 adds practical expedients related to the transition for contract modifications and further
defines a completed contract, clarifies the objective of the collectability assessment and how revenue is recognized if collectability
is not probable, and when non-cash considerations should be measured. The Company is currently assessing the impact these standards
will have on its consolidated financial statements.
Consolidated Statements of Cash Flows – Supplemental Disclosures
The following table provides supplemental disclosures related to
the Consolidated Statements of Cash Flows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
484
|
|
|
$
|
-
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Dividends declared on preferred stock
|
|
$
|
996
|
|
|
$
|
-
|
|
Dividends declared on common stock
|
|
|
3,134
|
|
|
|
2,157
|
|
Contribution of assets to real estate venture
|
|
|
7,693
|
|
|
|
-
|
|
Loans paid off with issuance of new loans
|
|
|
-
|
|
|
|
2,573
|
|
Conversion of investment (preferred equity to mezzanine loan)
|
|
|
-
|
|
|
|
924
|
|
Retirement of common stock
|
|
|
-
|
|
|
|
1
|
|
3. INVESTMENTS
The Company’s self-storage investments at December 31, 2016
consisted of the following:
|
·
|
Development
Property Investments
- The Company had 14 investments totaling an aggregate committed
principal amount of approximately $101.8 million to finance the ground-up construction
of, or conversion of existing buildings into, self-storage facilities. Each development
property investment is funded over time as the developer constructs the project, is secured
by a first mortgage on the development project and includes a 49.9% interest in the positive
cash flows (including the sale and refinancing proceeds after debt repayment) of the
project. 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 6.9% per annum and have a term of 72 months.
|
The Company also had three construction loan investments
totaling an aggregate committed principal amount of approximately $30.0 million, each of which has an initial term of 18 months
that can be extended on a case-by-case basis. Each construction loan is interest-only at a fixed interest rate of 6.9% per annum,
has no equity participation and is secured by a first priority mortgage or deed of trust on the project. Each of these construction
loans is subject to a purchase and sale agreement between the developer and a third-party purchaser or has a bona fide written
offer on the property, containing certain conditions, pursuant to which the financed project is anticipated to be sold and our
loan repaid on or about the time a certificate of occupancy is issued for the financed self-storage facility. Subsequent to December
31, 2016, the Company received $6.7 million for the repayment of the construction loan in the West Palm Beach, Florida MSA.
|
·
|
Operating
property loans
- The Company had four term loans totaling $10.0 million of aggregate
committed principal amount, the proceeds of which were used by borrowers to finance the
acquisition of, refinance existing indebtedness on, or recapitalize operating self-storage
facilities. These loans are secured by first mortgages on the projects financed, are
interest-only with fixed interest rates ranging from 5.85% to 6.9% per annum, and generally
have a term of 72 months.
|
The Company’s development property investments and operating
property loans are collectively referred to herein as the Company’s investment portfolio.
As of December 31, 2016, the aggregate committed principal amount
of the Company’s investment portfolio was approximately $141.9 million and outstanding principal was $86.9 million, as described
in more detail in the table below:
Closing Date
|
|
Metropolitan
Statistical Area
("MSA")
|
|
Total Investment
Commitment
|
|
|
Funded
Investment
(1)
|
|
|
Remaining
Unfunded
Commitment
|
|
|
Fair Value
|
|
Development property investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan investments with a profits interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/21/2015
|
|
Orlando 1
(2)
|
|
$
|
5,372
|
|
|
$
|
5,308
|
|
|
$
|
64
|
|
|
$
|
7,302
|
|
6/10/2015
|
|
Atlanta 1
(2)
|
|
|
8,132
|
|
|
|
7,694
|
|
|
|
438
|
|
|
|
10,404
|
|
6/19/2015
|
|
Tampa
(2)
|
|
|
5,369
|
|
|
|
5,285
|
|
|
|
84
|
|
|
|
6,279
|
|
6/26/2015
|
|
Atlanta 2
(2)
|
|
|
6,050
|
|
|
|
5,620
|
|
|
|
430
|
|
|
|
8,900
|
|
6/29/2015
|
|
Charlotte 1
(2)
|
|
|
7,624
|
|
|
|
6,842
|
|
|
|
782
|
|
|
|
9,853
|
|
7/2/2015
|
|
Milwaukee
(2)
|
|
|
7,650
|
|
|
|
5,608
|
|
|
|
2,042
|
|
|
|
7,008
|
|
7/31/2015
|
|
New Haven
(2)
|
|
|
6,930
|
|
|
|
5,257
|
|
|
|
1,673
|
|
|
|
6,730
|
|
8/10/2015
|
|
Pittsburgh
(3)
|
|
|
5,266
|
|
|
|
3,497
|
|
|
|
1,769
|
|
|
|
4,551
|
|
8/14/2015
|
|
Raleigh
|
|
|
8,792
|
|
|
|
1,460
|
|
|
|
7,332
|
|
|
|
1,396
|
|
9/30/2015
|
|
Jacksonville 1
(2)
|
|
|
6,445
|
|
|
|
5,852
|
|
|
|
593
|
|
|
|
7,962
|
|
10/27/2015
|
|
Austin
(3)
|
|
|
8,658
|
|
|
|
4,366
|
|
|
|
4,292
|
|
|
|
5,192
|
|
9/20/2016
|
|
Charlotte 2
|
|
|
12,888
|
|
|
|
1,446
|
|
|
|
11,442
|
|
|
|
1,298
|
|
11/17/2016
|
|
Orlando 2
|
|
|
5,134
|
|
|
|
1,342
|
|
|
|
3,792
|
|
|
|
1,237
|
|
11/17/2016
|
|
Jacksonville 2
|
|
|
7,530
|
|
|
|
624
|
|
|
|
6,906
|
|
|
|
551
|
|
|
|
|
|
$
|
101,840
|
|
|
$
|
60,201
|
|
|
$
|
41,639
|
|
|
$
|
78,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/5/2015
|
|
West Palm Beach
(4)
|
|
|
7,500
|
|
|
|
6,712
|
|
|
|
788
|
|
|
|
6,702
|
|
8/5/2015
|
|
Sarasota
|
|
|
4,792
|
|
|
|
3,485
|
|
|
|
1,307
|
|
|
|
3,473
|
|
12/23/2015
|
|
Miami
|
|
|
17,733
|
|
|
|
6,517
|
|
|
|
11,216
|
|
|
|
6,264
|
|
|
|
|
|
$
|
30,025
|
|
|
$
|
16,714
|
|
|
$
|
13,311
|
|
|
$
|
16,439
|
|
|
|
Subtotal
|
|
$
|
131,865
|
|
|
$
|
76,915
|
|
|
$
|
54,950
|
|
|
$
|
95,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating property loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/19/2015
|
|
New Orleans
|
|
|
2,800
|
|
|
|
2,800
|
|
|
|
-
|
|
|
|
2,768
|
|
7/7/2015
|
|
Newark
|
|
|
3,480
|
|
|
|
3,480
|
|
|
|
-
|
|
|
|
3,441
|
|
10/30/2015
|
|
Nashville
|
|
|
1,210
|
|
|
|
1,210
|
|
|
|
-
|
|
|
|
1,204
|
|
12/22/2015
|
|
Chicago
|
|
|
2,502
|
|
|
|
2,500
|
|
|
|
2
|
|
|
|
2,492
|
|
|
|
Subtotal
|
|
$
|
9,992
|
|
|
$
|
9,990
|
|
|
$
|
2
|
|
|
$
|
9,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
141,857
|
|
|
$
|
86,905
|
|
|
$
|
54,952
|
|
|
$
|
105,007
|
|
|
(1)
|
Represents
principal balance of loan gross of origination fees
|
|
(2)
|
Facility
had received certificate of occupancy as of December 31, 2016. 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 had not received certificate of
occupancy as of December 31, 2016. See Note 4,
Fair Value of Financial Instruments
,
for information regarding recognition of entrepreneurial profit.
|
|
(4)
|
This
investment was repaid in January 2017
|
The following table provides a reconciliation of the funded principal
to the fair market value of investments at December 31, 2016:
Funded principal
|
|
$
|
86,905
|
|
Adjustments:
|
|
|
|
|
Unamortized origination fees
|
|
|
(1,056
|
)
|
Change in fair value of investments
|
|
|
19,242
|
|
Other
|
|
|
(84
|
)
|
Fair value of investments
|
|
$
|
105,007
|
|
As of December 31, 2015, the aggregate committed principal amount
of the Company’s investment portfolio was approximately $175.7 million and outstanding principal was $60.7 million, as described
in more detail in the table below:
Closing Date
|
|
MSA
|
|
Commitment
Amount
|
|
|
Funded
Principal
(1)
|
|
|
Unfunded
Commitment
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development property investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan investments with a profits interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/21/2015
|
|
Orlando
|
|
$
|
5,372
|
|
|
$
|
3,254
|
|
|
$
|
2,118
|
|
|
$
|
3,400
|
|
5/14/2015
|
|
Miami
(2)
|
|
|
13,867
|
|
|
|
2,258
|
|
|
|
11,609
|
|
|
|
2,115
|
|
5/14/2015
|
|
Miami
(2)
|
|
|
14,849
|
|
|
|
3,076
|
|
|
|
11,773
|
|
|
|
2,929
|
|
6/10/2015
|
|
Atlanta 1
|
|
|
8,132
|
|
|
|
4,723
|
|
|
|
3,409
|
|
|
|
4,829
|
|
6/19/2015
|
|
Tampa
|
|
|
5,369
|
|
|
|
3,720
|
|
|
|
1,649
|
|
|
|
3,820
|
|
6/26/2015
|
|
Atlanta 2
|
|
|
6,050
|
|
|
|
2,799
|
|
|
|
3,251
|
|
|
|
2,823
|
|
6/29/2015
|
|
Charlotte
|
|
|
7,624
|
|
|
|
1,124
|
|
|
|
6,500
|
|
|
|
1,554
|
|
7/2/2015
|
|
Milwaukee
|
|
|
7,650
|
|
|
|
2,529
|
|
|
|
5,121
|
|
|
|
2,463
|
|
7/31/2015
|
|
New Haven
|
|
|
6,930
|
|
|
|
997
|
|
|
|
5,933
|
|
|
|
960
|
|
8/10/2015
|
|
Pittsburgh
|
|
|
5,266
|
|
|
|
1,542
|
|
|
|
3,724
|
|
|
|
1,542
|
|
8/14/2015
|
|
Raleigh
|
|
|
8,998
|
|
|
|
1,026
|
|
|
|
7,972
|
|
|
|
934
|
|
9/25/2015
|
|
Fort Lauderdale
(2)
|
|
|
13,230
|
|
|
|
2,144
|
|
|
|
11,086
|
|
|
|
2,009
|
|
9/30/2015
|
|
Jacksonville
|
|
|
6,445
|
|
|
|
1,213
|
|
|
|
5,232
|
|
|
|
1,180
|
|
10/27/2015
|
|
Austin
|
|
|
8,658
|
|
|
|
800
|
|
|
|
7,858
|
|
|
|
708
|
|
|
|
|
|
$
|
118,440
|
|
|
$
|
31,205
|
|
|
$
|
87,235
|
|
|
$
|
31,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/5/2015
|
|
West Palm Beach
|
|
|
7,500
|
|
|
|
2,011
|
|
|
|
5,489
|
|
|
|
1,951
|
|
8/5/2015
|
|
Sarasota
|
|
|
4,792
|
|
|
|
1,036
|
|
|
|
3,756
|
|
|
|
998
|
|
11/17/2015
|
|
Chicago
|
|
|
6,808
|
|
|
|
775
|
|
|
|
6,033
|
|
|
|
706
|
|
12/23/2015
|
|
Miami
|
|
|
17,733
|
|
|
|
5,655
|
|
|
|
12,078
|
|
|
|
5,301
|
|
|
|
|
|
$
|
36,833
|
|
|
$
|
9,477
|
|
|
$
|
27,356
|
|
|
$
|
8,956
|
|
|
|
Subtotal
|
|
$
|
155,273
|
|
|
$
|
40,682
|
|
|
$
|
114,591
|
|
|
$
|
40,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating property loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/19/2015
|
|
New Orleans
|
|
|
2,800
|
|
|
|
2,800
|
|
|
|
-
|
|
|
|
2,736
|
|
7/7/2015
|
|
Newark
|
|
|
3,480
|
|
|
|
3,480
|
|
|
|
-
|
|
|
|
3,416
|
|
10/30/2015
|
|
Nashville
|
|
|
1,210
|
|
|
|
1,210
|
|
|
|
-
|
|
|
|
1,192
|
|
11/10/2015
|
|
Sacramento
|
|
|
5,500
|
|
|
|
5,500
|
|
|
|
-
|
|
|
|
5,401
|
|
11/24/2015
|
|
Nashville
|
|
|
4,968
|
|
|
|
4,863
|
|
|
|
105
|
|
|
|
4,755
|
|
12/22/2015
|
|
Chicago
|
|
|
2,502
|
|
|
|
2,130
|
|
|
|
372
|
|
|
|
2,100
|
|
|
|
Subtotal
|
|
$
|
20,460
|
|
|
$
|
19,983
|
|
|
$
|
477
|
|
|
$
|
19,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
175,733
|
|
|
$
|
60,665
|
|
|
$
|
115,068
|
|
|
$
|
59,822
|
|
|
(1)
|
Represents
principal balance of loan gross of origination fees
|
|
(2)
|
These
development property investments (having approximately $8.1 million of outstanding principal
balances as of the time of contribution on March 31, 2016) were contributed to the SL1
Venture (defined in Note 5,
Investment in Real Estate Venture
) in partial satisfaction
of the Company’s required $12.2 million capital commitment to the SL1 Venture.
See Note 5,
Investment in Real Estate Venture.
|
The following table provides a reconciliation of the funded principal
to the fair market value of investments at December 31, 2015:
Funded principal
|
|
$
|
60,665
|
|
Adjustments:
|
|
|
|
|
Unamortized origination fees
|
|
|
(1,715
|
)
|
Change in fair value of investments
|
|
|
872
|
|
Fair value of investments
|
|
$
|
59,822
|
|
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.
On May 9, 2016, the Company received $5.6 million (including a
prepayment penalty of $0.1 million recognized in interest income from investments in the Consolidated Statements of Operations)
for the early payoff of an operating property loan in the Sacramento, California MSA.
On November 17, 2016, the Company received $4.5 million for the
payoff of a construction loan investment in the Chicago, Illinois MSA.
On December 14, 2016, the Company received $5.2 million (including
a prepayment penalty of $0.2 million recognized in interest income from investments in the Consolidated Statements of Operations)
for the early payoff of an operating property loan in the Nashville, Tennessee MSA.
No loans were in non-accrual status as of December 31, 2016 and
2015.
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 the year ended December 31, 2016, the total income (interest income and change in fair value) from one development property
investment with a profits interest exceeded 20% of the Company’s net income. The Company recorded total income for the year
ended December 31, 2016 of $3.6 million from the Atlanta 2 MSA development property investment with a profits interest.
The assets and liabilities of the Atlanta 2 MSA development property
investment with a profits interest were $5.8 million and $5.6 million, respectively, at December 31, 2016, and were $3.4 million
and $2.7 million, respectively, at December 31, 2015. The revenues and net operating loss of the Atlanta 2 MSA development property
investment with a profits interest were $0.1 million and $0.2 million, respectively, for the year ending December 31, 2016. The
Atlanta 2 MSA development property investment with a profits interest had no significant revenues or expenses for the year ended
December 31, 2015 as the underlying development property was still under construction during this period.
The assets and liabilities of the equity method investees excluding
the Atlanta 2 MSA development property investment with a profits interest approximated $65.2 million and $54.6 million, respectively,
at December 31, 2016, and approximated $41.0 million and $28.5 million, respectively, at December 31, 2015. The revenues and net
operating losses of the equity method investees excluding the Atlanta 2 MSA development property investment with a profits interest
were $0.8 million and $0.7 million, respectively, for the year ended December 31, 2016. These investees had no significant revenues
or expenses for the year ended December 31, 2015 since the development properties were under construction during this period.
For one of the Company’s development property investments
with a profits interest, 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 this put provision at December 31, 2016.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value option under ASC 825-10 allows companies to elect
to report selected financial assets and liabilities at fair value. The Company has elected the fair value option of accounting
for its development property investments and operating property loan 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 Measurements and Disclosures
(“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 a current sale, which assumes 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 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.
|
The carrying values of cash, other loans, receivables,
senior loan participations and payables 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 and senior loan participations 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. The below table summarizes the valuation techniques and inputs used to measure the fair value of items
categorized in Level 3 of the fair value hierarchy.
Instrument
|
|
Valuation technique and assumptions
|
|
Hierarchy classification
|
|
|
|
|
|
Development property investments
|
|
Valuations are determined using an Income Approach analysis, using the discounted cash flow method model, capturing the
prepayment penalty / call price schedule as applicable. The valuation models are calibrated to the total investment
net drawn amount as of the issuance date.
|
|
Level 3
|
|
|
|
|
|
Development property investments with a profits interest
(a)
|
|
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.
|
|
Level 3
|
|
|
|
|
|
|
|
An option-pricing method (OPM) framework is utilized to calculate the value of the profits interests.
|
|
|
|
|
|
|
|
Operating property loans
|
|
Valuations are determined using an Income Approach analysis, using the discounted cash flow method model, capturing the
prepayment penalty / call price schedule as applicable.
|
|
Level 3
|
|
(a)
|
Certain
of the Company's development property investments include profits interests.
|
The Company’s development property investments and operating
property loan 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 option pricing
model 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.
For development property investments with a profits interest, at
a certain stage of construction, the option pricing method 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 100% complete, and approximately two-thirds of the entrepreneurial profit is earned from construction
completion through stabilization. For the two properties between 40% and 100% complete at December 31, 2016, the Company
has estimated the entrepreneurial profit adjustment to the enterprise value input used in the option pricing model to be equal
to one-third of the estimated entrepreneurial profit, allocated on a straight-line basis. Eight properties have reached construction
completion at December 31, 2016. For the Company’s development property investments at or around completion of construction,
a discounted cash flow model, based on periodically updated estimates of rental rates, occupancy and operating expenses, is the
primary method for projecting value of a project. The Company also will consider inputs such as appraisals which differ from the
developer’s equity investment, bona fide third-party offers to purchase development projects, sales of development projects,
or sales of comparable properties in its markets.
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 December 31, 2016 and 2015. These tables are not
intended to be all-inclusive, but instead to capture the significant unobservable inputs relevant to the Company’s determination
of fair values.
As of December
31, 2016
|
|
|
|
|
Unobservable
Inputs
|
Asset Category
|
|
Primary
Valuation
Techniques
|
|
Input
|
|
Estimated Range
|
|
Weighted
Average
|
Development property investments
(a)
|
|
Income approach analysis
|
|
Market yields/ discount rate
|
|
7.23 - 9.28%
|
|
8.34%
|
|
|
|
|
Exit date
|
|
0.17 - 3.88 years
|
|
1.81 years
|
|
|
|
|
|
|
|
|
|
Development property investments with a profits interest
(b)
|
|
Option pricing model
|
|
Volatility
|
|
68.72 - 73.46%
|
|
73.17%
|
|
|
|
|
Exit date
|
|
1.42 - 3.88 years
|
|
2.12 years
|
|
|
|
|
Capitalization rate
(c)
|
|
5.25 - 5.50%
|
|
5.47%
|
|
|
|
|
Discount rate
|
|
8.25 – 8.50%
|
|
8.47%
|
|
|
|
|
|
|
|
|
|
Operating property loans
|
|
Income approach analysis
|
|
Market yields/ discount rate
|
|
6.09 - 7.20%
|
|
6.73%
|
|
|
|
|
Exit date
(d)
|
|
4.50 – 5.66 years
|
|
5.07 years
|
(a)
|
The valuation technique for the development property investments with a profits interest
does not differ from the development property investments without a profits interest. Therefore, this line item focuses on
all development property investments, including those with a profits interest.
|
(b)
|
The valuation technique for the development property investments with a profits interest
does not differ from the development property investments without a profits interest. The development property investments
with a profits interest only require incremental valuation techniques to determine the value of the profits interest. Therefore
this line only focuses on the profits interest valuation.
|
(c)
|
Ten properties were 40% - 100% complete, thus requiring a capitalization rate to derive
entrepreneurial profit. Capitalization rates are estimated based on current data derived from independent sources in the markets
in which the Company holds investments.
|
(d)
|
The exit dates for the operating property loans are the contractual
maturity dates.
|
As of December
31, 2015
|
|
|
|
|
Unobservable
Inputs
|
Asset Category
|
|
Primary
Valuation
Techniques
|
|
Input
|
|
Estimated Range
|
|
Weighted
Average
|
Development property investments
(a)
|
|
Income approach analysis
|
|
Market yields/
discount rate
|
|
7.74 - 9.35%
|
|
8.77%
|
|
|
|
|
Exit date
|
|
1.17 - 3.83 years
|
|
3.02 years
|
|
|
|
|
|
|
|
|
|
Development property investments with a profits interest
(b)
|
|
Option pricing model
|
|
Volatility
|
|
72.46 - 73.12%
|
|
72.82%
|
|
|
|
|
Exit date
|
|
3.31 - 3.83 years
|
|
3.49 years
|
|
|
|
|
Capitalization rate
(c)
|
|
6.00 - 6.50%
|
|
6.38%
|
|
|
|
|
|
|
|
|
|
Operating property loans
|
|
Income approach analysis
|
|
Market yields/
discount rate
|
|
6.22 - 7.53%
|
|
6.91%
|
|
|
|
|
Exit date
(d)
|
|
5.50 - 6.68 years
|
|
5.97 years
|
(a)
|
The valuation technique for the development property investments
with a profits interest does not differ from the development property investments without a profits interest. Therefore, this
line item focuses on all development property investments, including those with a profits interest.
|
(b)
|
The valuation technique for the development property investments
with a profits interest does not differ from the development property investments without a profits interest. The development
property investments with a profits interest only require incremental valuation techniques to determine the value of the profits
interest. Therefore this line only focuses on the profits interest valuation.
|
(c)
|
Four properties were 40% - 100% complete, thus requiring a capitalization
rate to derive entrepreneurial profit. Capitalization rates are estimated based on current data derived from independent sources
in the markets in which the Company holds investments.
|
(d)
|
The exit dates for the operating property
loans are the contractual maturity dates.
|
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)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Up 25 basis points
|
|
$
|
(0.3
|
)
|
|
$
|
(0.5
|
)
|
Down 25 basis points, subject to a minimum yield/rate of 10
basis points
|
|
|
0.3
|
|
|
|
0.4
|
|
Capitalization rate - changes in capitalization rate, in isolation
and all else equal, may change the fair value of certain of the Company’s development investments containing profits interests.
Generally an increase in the capitalization rate assumption may result in a decrease in the fair value of the entrepreneurial
profit associated with certain of the Company’s investments. The following fluctuations in the capitalization rates would
have had the following impact on the fair value of our investments:
|
|
Increase (decrease) in
fair value of investments
|
|
Change in capitalization rates
(in millions)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Up 25 basis points
|
|
$
|
(2.1
|
)
|
|
$
|
(0.1
|
)
|
Down 25 basis points
|
|
|
2.3
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Up 50 basis points
|
|
|
(3.8
|
)
|
|
|
(0.1
|
)
|
Down 50 basis points
|
|
|
4.6
|
|
|
|
0.2
|
|
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 profits interests in certain of the Company’s
investments.
Volatility - changes in volatility, in isolation and all else equal,
may change the fair value of certain of the Company’s investments that have profits interests. Generally, an increase in
volatility may result in an increase in the fair value of the profits interests in certain of the Company’s investments.
Operating cash flow projections - changes in the operating cash
flow projections of the underlying self-storage facilities, in isolation and all else equal, may change the fair value of certain
of the Company’s investments that have profits interests. Generally, an increase in operating cash flow projections may
result in an increase in the fair value of the profits interests in certain of the Company’s investments.
The Company also evaluates the impact of changes in instrument-specific
credit risk in determining the fair value of investments. There were no gains or losses attributable to changes in instrument-specific
credit risk in the years ended December 31, 2016 and 2015.
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 was required to liquidate an investment in a forced or liquidation
sale, it could realize significantly less than the value at which the Company has recorded it. In addition, changes in the market
environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized
on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned.
The following table presents changes in investments that use Level 3
inputs for the years ended December 31, 2016 and 2015:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance as of beginning of period
|
|
$
|
59,822
|
|
|
$
|
-
|
|
Net realized gains
|
|
|
-
|
|
|
|
-
|
|
Net unrealized gains
|
|
|
18,370
|
|
|
|
872
|
|
Fundings of principal and change in unamortized origination fees
|
|
|
45,689
|
|
|
|
63,996
|
|
Repayments of loans
|
|
|
(15,037
|
)
|
|
|
(6,019
|
)
|
Payment-in-kind interest
|
|
|
3,856
|
|
|
|
973
|
|
Contribution of assets to SL1 Venture (see Note 5,
Investment in Real
Estate Venture
)
|
|
|
(7,693
|
)
|
|
|
-
|
|
Net transfers in or out of Level 3
|
|
|
-
|
|
|
|
-
|
|
Balance at end of period
|
|
$
|
105,007
|
|
|
$
|
59,822
|
|
As of December 31, 2016 and 2015, the total net unrealized appreciation
on the investments that use Level 3 inputs was $19.2 million and $0.9 million, respectively.
For the years ended December 31, 2016 and 2015, substantially all
of the change in fair value of investments in the Company’s Consolidated Statements of Operations were attributable to unrealized
gains relating to the Company’s Level 3 assets still held as of the respective balance sheet date.
Transfers between levels, if any, are recognized at the beginning
of the quarter in which the transfers occur.
5. INVESTMENT IN 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, 2016, the SL1 Venture had closed on eight new
development property investments with a profits interest with an aggregate commitment amount of approximately $81.4 million, bringing
the total aggregate commitment of SL1 Venture’s investments to $123.3 million as of December 31, 2016. 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 will receive 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)
will be distributed in accordance with capital commitments. Residual cash flow from capital and other events (after debt service,
reserves and priority distributions) will be distributed (i) pro rata in accordance with capital commitments (its “Percentage
Interest”) until each member has received a return of all capital contributed; (ii) pro rata in accordance with each member’s
Percentage Interest until Heitman has achieved a 14% internal rate of return; (iii) to Heitman in an amount equal to its Percentage
Interest less 10% and to the Company in an amount equal to the Company’s Percentage Interest plus 10% until Heitman has
achieved a 17% internal rate of return; (iv) to Heitman in an amount equal to its Percentage Interest less 20% and to the Company
in an amount equal to the Company’s Percentage Interest plus 20% until Heitman has achieved a 20% internal rate of return;
and (v) any excess to Heitman in an amount equal to its Percentage Interest less 30% and to the Company in an amount equal to
the Company’s Percentage Interest plus 30%. However, the Company will not be entitled to any such promoted interest prior
to the earlier to occur of the third anniversary of the JV Agreement and Heitman receiving distributions to the extent necessary
to provide Heitman with a 1.48 multiple on its contributed capital.
Since the allocation of cash distributions and liquidating distributions
are determined as described in the preceding paragraph, the Company has applied the hypothetical-liquidation-at-book-value (“HLBV”)
method to allocate the earnings of 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.
|
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 SL1 Venture. The assumptions
used to value SL1 Venture’s investments are materially consistent with those used to value the Company’s investments.
As of December 31, 2016, SL1 Venture had eleven development property investments with a profits interest as described in more
detail in the table below:
Closing Date
|
|
MSA
|
|
Total Investment
Commitment
|
|
|
Funded
Investment
(1)
|
|
|
Remaining
Unfunded
Commitment
|
|
|
Fair Value
|
|
5/14/2015
|
|
Miami 1
(2)
|
|
$
|
13,867
|
|
|
$
|
5,593
|
|
|
$
|
8,274
|
|
|
$
|
5,598
|
|
5/14/2015
|
|
Miami 2
(2)
|
|
|
14,849
|
|
|
|
4,753
|
|
|
|
10,096
|
|
|
|
4,690
|
|
9/25/2015
|
|
Fort Lauderdale
(2)
|
|
|
13,230
|
|
|
|
3,499
|
|
|
|
9,731
|
|
|
|
3,428
|
|
4/15/2016
|
|
Washington DC
|
|
|
17,269
|
|
|
|
7,201
|
|
|
|
10,068
|
|
|
|
7,092
|
|
4/29/2016
|
|
Atlanta 1
|
|
|
10,223
|
|
|
|
371
|
|
|
|
9,852
|
|
|
|
271
|
|
7/19/2016
|
|
Jacksonville
|
|
|
8,127
|
|
|
|
1,845
|
|
|
|
6,282
|
|
|
|
1,769
|
|
7/21/2016
|
|
New Jersey
|
|
|
7,828
|
|
|
|
583
|
|
|
|
7,245
|
|
|
|
499
|
|
8/15/2016
|
|
Atlanta 2
|
|
|
8,772
|
|
|
|
1,233
|
|
|
|
7,539
|
|
|
|
1,133
|
|
8/25/2016
|
|
Denver
|
|
|
11,032
|
|
|
|
2,044
|
|
|
|
8,988
|
|
|
|
1,912
|
|
9/28/2016
|
|
Columbia
|
|
|
9,199
|
|
|
|
1,416
|
|
|
|
7,783
|
|
|
|
1,303
|
|
12/22/2016
|
|
Raleigh
|
|
|
8,877
|
|
|
|
957
|
|
|
|
7,920
|
|
|
|
873
|
|
|
|
Total
|
|
$
|
123,273
|
|
|
$
|
29,495
|
|
|
$
|
93,778
|
|
|
$
|
28,568
|
|
|
(1)
|
Represents
principal balance of loan gross of origination fees
|
|
(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.
|
As of December 31, 2016, the SL1 Venture had
total assets of $28.7 million and total liabilities of $2.4 million. During the year ended December 31, 2016, the SL1 Venture
had net income of $1.1 million, of which income of $1.2 million was allocated to the Company and loss of $0.1 million was allocated
to HVP III under the HLBV method. At December 31, 2016, $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 December 31, 2016, the Company had $2.3 million in advances to the SL1 Venture, and the related interest on these
advances are classified in equity in earnings from unconsolidated real estate venture in the Consolidated Statements of Operations.
In accordance
with the JV Agreement, for each development property investment, the borrower must deliver to the SL1 Venture a completion guarantee
whereby the borrower agrees to cover all costs in excess of the agreed-upon budget amount. Additionally, the Company is required
to deliver to the SL1 Venture a backstop completion guarantee for each development property investment to guarantee completion
in the event the borrower does not satisfy its obligations. The Company concluded that the likelihood of loss is remote and assigned
no value to this guarantee as of December 31, 2016.
Under the JV Agreement, Heitman and the Company will seek to obtain
and, if obtained, will share joint rights of first refusal to acquire self-storage facilities that are the subject of development
property investments made by the SL1 Venture. Additionally, so long as the Company, through its operating subsidiary, is a member
of the SL1 Venture and the SL1 Venture holds any assets, the Company will not make any investment of debt or equity or otherwise,
directly or indirectly, in one or more new joint ventures or similar programs for the purposes of funding or providing development
loans or financing, directly or indirectly, for the development, construction or conversion of self-storage facilities, in each
case without first offering such opportunity to Heitman to participate on substantially the same terms as those set forth in the
JV Agreement, either through the SL1 Venture or a newly formed real estate venture.
The JV Agreement permits Heitman to cause the Company to repurchase
from Heitman its Developer Equity Interests (as defined in the JV Agreement) in certain limited circumstances. Under the JV Agreement,
if a developer causes to be refinanced a self-storage facility with respect to which the SL1 Venture has made a development property
investment and such refinancing does not coincide with a sale of the underlying self-storage facility, then at any time after
the fourth anniversary of the commencement of the SL1 Venture, Heitman may either put to the Company its share of the Developer
Equity Interests in respect of each such development property investment, or sell Heitman’s Developer Equity Interests to
a third party. The Company concluded that the likelihood of loss is remote and assigned no value to the put as of December 31,
2016.
The Company is the managing member of the SL1 Venture and will
manage and administer (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 has the right to approve 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.
For four of the SL1 Venture development property investments with
a profits interest, 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 at December 31, 2016.
6. VARIABLE INTEREST ENTITIES
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 VIEs, the Company identified the activities that most significantly impact the VIEs’ economic performance.
Such activities are (1) managing the construction and operations of the project, (2) selecting the property manager, (3) financing
decisions, (4) authorizing capital expenditures and (5) disposition 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 VIEs’ economic
performance and is not the primary beneficiary; therefore, the Company does not consolidate the VIEs.
The Company has recorded assets of $95.1 million and $40.2 million
at December 31, 2016 and 2015, respectively, for its variable interest in the VIEs which is included in the development property
investments at fair value line item in the Consolidated Balance Sheets. The Company’s maximum exposure to loss as a result
of its involvement with the VIEs is as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Assets recorded related to VIEs
|
|
$
|
95,102
|
|
|
$
|
40,222
|
|
Unfunded loan commitments to VIEs
|
|
|
54,950
|
|
|
|
114,591
|
|
Maximum exposure to loss
|
|
$
|
150,052
|
|
|
$
|
154,813
|
|
The Company has a construction completion guaranty from the managing
members of the 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 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.
7. OTHER LOANS, AT COST
The Company had executed six revolving loan agreements with an
aggregate outstanding principal amount of $1.7 million at December 31, 2016. Five of the agreements are with individuals who are
owners of limited liability companies, one is with a limited liability company, and all are personally guaranteed. Four of the
borrowers are either directly or indirectly owners of certain of the Company’s development property investments, and two
are prospective developers. Three of the agreements provide for borrowings of up to $0.5 million, one provides for borrowings
of up to $0.25 million, one provides for borrowings of up to $0.7 million, and one agreement provides for borrowings of up to
$1.0 million (total of $3.5 million) to fund expenses for pursuit costs to contract for and perform diligence on additional self-storage
sites. The revolving loans are typically unsecured but cross-defaulted against development loans. One of the revolving loans is
guaranteed by a part owner of one of the Company’s development loan investments, and this guaranty is secured by a pledge
of the owner’s membership interest in one of the Company’s development loan investments. The loans bear interest at
6.9-7.0% per annum and are due in full in three years. During the year ended December 31, 2016, the Company received repayments
on these revolving loan agreements of $1.3 million. At December 31, 2015, the Company had executed three revolving loan agreements
with an aggregate outstanding principal amount of $0.5 million. These loans are accounted for under the cost method, and fair
value approximates cost at December 31, 2016. None of these loans are in non-accrual status as of December 31, 2016 and 2015.
The Company determined that no allowance for loan loss was necessary at December 31, 2016 and 2015.
As of December 31, 2016, the Company also had an aggregate balance
of $10.1 million related to five loans extended to four limited liability companies that are under common control with borrowers
in certain of the Company’s development property investments. These loans are secured by first mortgages on real and personal
property, are personally guaranteed, and are interest-only with a fixed interest rate of 6.9% per annum, and mature in three to
nine months. The maturities are based upon the estimated time needed to prepare the sites for closing into a development loan.
During the year ended December 31, 2016, the Company received repayments of $4.1 million related to three loans and entered into
seven new loans with an aggregate commitment of $13.5 million. At December 31, 2015, the Company had executed one loan agreement
of $0.7 million to a limited liability company that was under common control with a borrower in a development property investment.
These loans are accounted for under the cost method, and fair value approximates cost at December 31, 2016 and 2015. None of these
loans are in non-accrual status as of December 31, 2016 and 2015. The Company determined that no allowance for loan loss was necessary
at December 31, 2016 and 2015.
8. SENIOR PARTICIPATIONS
On April 29, 2016, the Company sold senior participations (the
“Operating Property A Notes”) in two separate operating property loans in the Nashville, Tennessee and
New Orleans, Louisiana MSAs, having an aggregate outstanding principal balance of $7.8 million, to a regional commercial bank
in exchange for cash consideration of $5.0 million. The sale of Operating Property A Notes was effected pursuant
to participation agreements between the bank and the Company (the “Participation Agreements”). Under
the Participation Agreements, the Company will continue to service the underlying loans so long as it is not in default under
the Participation Agreements. The bank has the option to “put” either of the senior participations to the Company
in the event the underlying borrower defaults on the underlying loan or if the Company defaults under the
applicable Participation Agreement. The Company will pay to the bank interest on the outstanding balance of the Operating
Property A Notes at the rate of 30-day LIBOR plus 3.85%, or 4.47% at December 31, 2016. The Operating Property A Notes mature
on April 1, 2019, at which time the Company is obligated to repurchase the Operating Property A Notes at the then
outstanding principal balances thereof. As part of the Participation Agreements, the Company will maintain a minimum
aggregate balance of $0.5 million in depository or money market accounts at the bank, and if such balance is not maintained,
the interest rate will increase. On December 14, 2016, the Company received proceeds of $5.2 million for an early payoff on the
operating property loan in the Nashville, Tennessee MSA, and the Company repurchased the senior participation on this loan
that was included in Operating Property A Notes. The Company paid the regional commercial bank a total of $3.4 million in
conjunction with the repurchase, which included a $0.1 million prepayment penalty that is recorded in interest expense in the
Consolidated Statements of Operations. The outstanding balance for the remaining Operating Property A Note at December 31,
2016 was $1.8 million.
On May 27, 2016, the Company sold a third senior participation
in a construction loan on a facility in the Miami, Florida MSA (“the Miami A Note”), having a commitment amount of
$17.7 million, to the same commercial bank that purchased the Operating Property A Notes in exchange for a commitment by the bank
to provide net proceeds of $10.0 million to fund construction draws under the construction loan (the “Miami A Note Sale”)
once the total outstanding principal balance exceeds $7.7 million. The Miami A Note Sale was effected pursuant to a participation
agreement between the bank and the Company (the “Miami Participation Agreement”). Under the Miami Participation Agreement,
the Company will continue to service the underlying loan so long as it is not in default under the Miami Participation Agreement.
The bank has the option to “put” the senior participation to the Company in the event the underlying borrower defaults
on the underlying loan or if the Company defaults under the Miami Participation Agreement. The Company will pay to the bank interest
on the outstanding balance of the Miami A Note at the rate of 30-day LIBOR plus 3.10%, or 3.72% at December 31, 2016. The Company
also paid a loan fee of 100 basis points, or $0.1 million upon closing of the loan. The Miami A Note matures on July 1, 2017,
at which time the Company is obligated to repurchase the Miami A Note at the then outstanding principal balance thereof. No proceeds
have been received as of December 31, 2016 from the Miami A Note.
On July 26, 2016, the Company sold to a national commercial bank
operating in the Company’s markets senior participations in the construction loans of four separate development property
investments with a profits interest (the “July 2016 A Notes”) (one in the Orlando, Florida MSA, two in the Atlanta,
Georgia MSA, and one in the Tampa, Florida MSA) having an aggregate committed principal balance of approximately $21.8 million
and earning interest at a rate of 6.9% per annum, in exchange for a commitment by the bank to provide net proceeds of $14.2 million
(the “July 2016 A Note Sales”). Construction has been completed and certificates of occupancy have been issued for
these properties. At closing, the bank paid to the Company approximately $12.5 million for senior participations in the construction
loans and will fund up to a total of $14.2 million as future draws are made on the construction loans. The Company will pay interest
to the bank on its senior participations at the annual rate of 30-day LIBOR plus 3.50%, or 4.12% at December 31, 2016. The July
2016 A Notes mature on August 1, 2019, at which time the Company is obligated to repurchase the July 2016 A Notes at the then
outstanding principal balance thereof. As part of the senior participation agreements, the Company will maintain a minimum aggregate balance of $0.5
million in depository or money market accounts at the bank, and if such balance is not maintained, the interest
rate will increase. The outstanding balance for the July 2016 A Notes at December 31, 2016 was $13.4 million.
On October 11, 2016 and December 20, 2016, the Company received
$0.7 million and $0.2 million, respectively, of additional funds from existing senior participations in the construction loans
on four of its development property investments with a profits interest.
On October 18, 2016, the Company sold to a local Memphis,
Tennessee-based community bank a senior participation in the construction loan of one of the Company’s development
property investments with a profits interest (the “October 2016 A Note”) in Charlotte, North Carolina having a
committed principal balance of approximately $6.8 million and earning interest at a rate of 6.9% per annum, in exchange for a
commitment by the bank to provide net proceeds of $4.4 million (the “October 2016 A Note Sale”). Construction has
been completed and a certificate of occupancy has been issued for this property. At closing, the bank paid to the Company
approximately $3.4 million for the senior participation in the construction loan and will fund up to a total of $4.4 million
as future draws are made on the construction loans. The Company will pay interest to the bank on the senior participation at
the annual rate of 30-day LIBOR plus 3.50%, or 4.12% at December 31, 2016. The October 2016 A Note matures on September 1,
2021, at which time the Company is obligated to repurchase the October 2016 A Note at the then outstanding principal balance
thereof. The outstanding balance for the October 2016 A Note at December 31, 2016 was $3.4 million.
The table below details the bank commitments and outstanding balances
of our various senior participations at December 31, 2016:
|
|
Commitment by
Bank
|
|
|
Amount
Borrowed
|
|
|
Remaining
Funds
|
|
|
Interest Rate
|
|
Effective
Interest
Rate at
December
31, 2016
|
|
|
Maturity Date
|
Operating Property A Note
|
|
$
|
1,820
|
|
|
$
|
1,820
|
|
|
$
|
-
|
|
|
30-day LIBOR + 3.85%
|
|
|
4.47
|
%
|
|
April 1, 2019
|
Miami A Note
|
|
|
10,001
|
|
|
|
-
|
|
|
|
10,001
|
|
|
30-day LIBOR + 3.10%
|
|
|
3.72
|
%
|
|
July 1, 2017
|
July 2016 A Notes
|
|
|
14,185
|
|
|
|
13,420
|
|
|
|
765
|
|
|
30-day LIBOR + 3.50%
|
|
|
4.12
|
%
|
|
August 1, 2019
|
October 2016 A Note
|
|
|
4,405
|
|
|
|
3,375
|
|
|
|
1,030
|
|
|
30-day LIBOR + 3.50%
|
|
|
4.12
|
%
|
|
September 1, 2021
|
Total
|
|
$
|
30,411
|
|
|
$
|
18,615
|
|
|
$
|
11,796
|
|
|
|
|
|
|
|
|
|
Unamortized fees
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance
|
|
|
|
|
|
$
|
18,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. STOCKHOLDERS’ EQUITY
The Company was organized in Maryland on October 1, 2014, and under
the Company’s Articles of Incorporation, as amended, the Company is authorized to issue up to 500,000,000 shares of common
stock and 100,000,000 shares of preferred stock. The sole stockholder of the Company prior to the closing of its IPO was the founder
and chief executive officer, who is an affiliate of the Company. The founder’s initial capital contribution to the Company
was $1.0 thousand made on October 2, 2014, in exchange for 1,000 shares of common stock. These shares were retired effective with
the IPO.
Common Stock Offering
On April 1, 2015, the Company closed its IPO and received $93.0
million in proceeds, net of underwriter’s discount. Simultaneously, the Company received $5.0 million in proceeds from the
concurrent private placement with an affiliate of its founder. In connection with these transactions, the Company issued 5,000,000
and 250,000 shares of common stock, respectively and the initial 1,000 shares of common stock issued on October 2, 2014 were retired.
On April 9, 2015, the Company completed the sale of shares of common
stock to the underwriters of its IPO pursuant to the underwriters’ over-allotment option. The Company issued 750,000 shares
of common stock and received $14.0 million, net of underwriters’ discount.
On December 13, 2016, the Company received $53.5 million in proceeds,
net of underwriter’s discount and offering costs, related to the issuance of 2,996,311 shares of common stock.
Stock Repurchase Plan
On May 20, 2016, the Company’s Board of Directors authorized
a share repurchase program for the repurchase of up to $10.0 million of the outstanding shares of common stock of the Company.
As of December 31, 2016, the Company had repurchased and retired a total of 213,078 shares of its common stock at an aggregate
cost of approximately $3.2 million. As of December 31, 2016, the Company has $6.8 million remaining under the Board’s authorization
to repurchase shares of its common stock.
Equity Incentive Plan
In connection with the IPO, the Company established 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”). A total of 200,000 shares of common stock are reserved for issuance pursuant to the 2015 Equity
Incentive Plan, subject to certain adjustments set forth in the plan. On April 1, 2015, each non-employee director of the Company
received an award of 2,500 shares of restricted common stock (total of 10,000 shares) which vest ratably over a three-year period.
On June 15, 2015, in connection with the appointment of the Company’s President and Chief Operating Officer (an employee
of the Manager), 100,000 shares of restricted common stock were granted, which shares vest ratably over a five-year period. During
the year ended December 31, 2015, the Company granted 52,500 shares of restricted common stock to an executive officer (an employee
of the Manager) and key employees of the Manager, which shares vest ratably over a three-year period. The Manager provides services
to the Company. On May 20, 2016, each non-employee director of the Company received an award of 3,585 shares of common stock (total
of 14,340 shares) which immediately vested on the grant date.
Restricted Stock Awards
The 2015 Equity Incentive Plan permits the issuance of restricted
stock awards to employees of the Manager (as the Company has no employees) and non-employee directors. Granted stock awards at
December 31, 2016 and 2015 aggregated 176,840 and 162,500 service-based stock awards, respectively, of which 55,172 vested during
the year ended December 31, 2016, 39,999 will vest in 2017, 40,002 will vest in 2018, and 20,000 will vest in 2019 and 2020, respectively.
Additionally, 1,667 and none were forfeited during the years ended December 31, 2016 and 2015, respectively. Non-vested shares
are earned over the respective vesting period based on a service condition only. Expenses related to restricted stock awards are
charged to compensation expense and are recognized over the respective vesting period (primarily three to five years) of the awards.
For restricted stock issued to non-employee directors of the Company, compensation expense is based on the market value of the
shares at the grant date. For restricted stock awards issued to employees of the Manager, compensation expense is re-measured
at each reporting date until service is complete and the restricted shares become vested based on the then current value of the
Company’s common stock.
The Company recognized approximately $1.1 million and $0.3 million
of stock-based compensation expense for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016 and
2015, the total unrecognized compensation cost related to the Company’s restricted shares was approximately $2.0 million
and $2.2 million, respectively, based on the grant date market value for awards issued to non-employee directors of the Company
and based on the measurement of awards using the Company’s stock price of $21.05 and $14.95 as of December 31, 2016 and
2015, respectively, for awards issued to employees of the Manager. This cost is expected to be recognized over the remaining weighted
average period of 2.9 years. The Company presents stock-based compensation expense in general and administrative expenses in the
Consolidated Statements of Operations.
A summary of changes in the Company’s restricted shares for
the years ended December 31, 2016 and 2015 is as follows:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Shares
|
|
|
Weighted
average grant
date fair value
|
|
|
Shares
|
|
|
Weighted
average grant
date fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at beginning of period,
|
|
|
162,500
|
|
|
$
|
20.08
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
14,340
|
|
|
|
13.95
|
|
|
|
162,500
|
|
|
|
20.08
|
|
Vested
|
|
|
(55,172
|
)
|
|
|
18.27
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(1,667
|
)
|
|
|
20.00
|
|
|
|
-
|
|
|
|
-
|
|
Nonvested at end of period,
|
|
|
120,001
|
|
|
$
|
20.10
|
|
|
|
162,500
|
|
|
$
|
20.08
|
|
Nonvested restricted shares receive dividends which are nonforfeitable.
Series A Preferred Stock Private Placement
On July 27, 2016 (the “Effective Date”), the Company
entered into a Stock Purchase Agreement (the “Purchase Agreement”) with accounts managed by NexPoint Advisors, L.P.,
an affiliate of Highland Capital Management, L.P. (collectively, the “Buyers”) relating to the issuance and sale,
from time to time until the second anniversary of the Effective Date (such period, the “Commitment Period”), of up
to $100 million in shares of the Company’s newly designated Series A Preferred Stock, par value $0.01 per share (the “Series
A Preferred Stock”), at a price of $1,000 per share (the “Liquidation Value”) (subject to a minimum amount
of $50 million of Series A Preferred Stock to be issued and sold by the Company on or prior to the expiration of the Commitment
Period), which may be increased at the request of the Company up to $125 million. The sale of shares of Series A Preferred Stock
pursuant to the Purchase Agreement may occur from time to time, in minimum monthly increments of $5 million, maximum monthly increments
of $15 million and maximum increments of $35 million over any rolling three month period, all to be completed during the Commitment
Period.
The Series A Preferred Stock will rank senior to the shares of
the Company’s common stock, par value $0.01 per share (the “Common Stock”), with respect to distribution rights
and rights upon liquidation, winding up and dissolution of the Company, on parity with any class or series of capital stock of
the Company expressly designated as ranking on parity with the Series A Preferred Stock with respect to distribution rights and rights
upon liquidation, winding up and dissolution of the Company, junior to any class or series of capital stock of the Company expressly
designated as ranking senior to the Series A Preferred Stock with respect to distribution rights and rights upon liquidation,
winding up and dissolution of the Company and junior in right of payment to the Company’s existing and future indebtedness.
Holders of Series A Preferred Stock are entitled to a cumulative
cash distribution (“Cash Distribution”) equal to (A) 7.0% per annum on the Liquidation Value for the period beginning
on the respective date of issuance until the sixth anniversary of the Effective Date, payable quarterly in arrears, (B) 8.5% per
annum on the Liquidation Value for the period beginning the day after the sixth anniversary of the Effective Date and for each
year thereafter so long as the Series A Preferred Stock remains issued and outstanding, payable quarterly in arrears, and (C)
an amount in addition to the amounts in (A) and (B) equal to 5.0% per annum on the Liquidation Value upon the occurrence of certain
triggering events (a “Cash Premium”). In addition, the holders of the Series A Preferred Stock will be entitled to
a cumulative dividend payable in-kind in shares of Common Stock or additional shares of Series A Preferred Stock, at the election
of the holders (the “Stock Dividend”), equal in the aggregate to the lesser of (Y) 25% of the incremental increase
in the Company’s book value (as adjusted for equity capital issuances, share repurchases and certain non-cash expenses)
plus, to the extent the Company owns equity interests in income-producing real property, the incremental increase in net asset
value (provided, however, that no interest in the same real estate asset will be double counted) and (Z) an amount that would,
together with the Cash Distribution, result in a 14.0% internal rate of return for the holders of the Series A Preferred Stock
from the date of issuance of the Series A Preferred Stock, as set forth in the Articles Supplementary classifying the Series A
Preferred Stock (the “Articles Supplementary”). Triggering events that will trigger the payment of a Cash Premium
with respect to a Cash Distribution include: (i) the occurrence of certain change of control events affecting the Company after
the third anniversary of the Effective Date, (ii) the Company’s ceasing to be subject to the reporting requirements of Section
13 or Section 15(d) of the Exchange Act, (iii) the Company’s failure to remain qualified as a real estate investment
trust, (iv) an event of default under the Purchase Agreement, (v) the failure by the Company to register for resale shares of
Common Stock pursuant to the Registration Rights Agreement (a “Registration Default”), (vi) the Company’s failure
to redeem the Series A Preferred Stock as required by the Purchase Agreement, or (vii) the filing of a complaint, a settlement
with, or a judgment entered by the Securities and Exchange Commission against the Company or any of its subsidiaries or a director
or executive officer of the Company relating to the violation of the securities laws, rules or regulations with respect to the
business of the Company. Accrued but unpaid Cash Distributions and Stock Dividends on the Series A Preferred Stock will accumulate
and will earn additional Cash Distributions and Stock Dividends as calculated above, compounded quarterly.
The holders of Series A Preferred Stock have the right to purchase
their pro rata share of any qualified offering of Common Stock, which consists of any offering by the Company of Common Stock
except any shares of Common Stock issued (i) in connection with a merger, consolidation, acquisition or similar business combination,
(ii) in connection with a joint venture, strategic alliance or similar corporate partnering arrangement, (iii) in connection with
any acquisition of assets by the Company, (iv) at market prices pursuant to a registered at-the-market program and/or (v) as part
of a compensatory or employment arrangement.
So long as shares of Series A Preferred Stock remain outstanding,
the Company is required to maintain a ratio of debt to total tangible assets determined under U.S. generally accepted accounting
principles of no more than 0.4:1, measured as of the last day of each fiscal quarter. The Company has complied with this covenant
as of December 31, 2016.
The Series A Preferred Stock may be redeemed at the Company’s
option (i) after five years from the Effective Date at a price equal to 105% of the Liquidation Value per share plus the value
of all accumulated and unpaid Cash Distributions and Stock Dividends, and (ii) after six years from the Effective Date at a price
equal to 100% of the Liquidation Value per share plus the value of all accumulated and unpaid Cash Distributions and Stock Dividends.
In the event of certain change of control events affecting the Company prior to the third anniversary of the Effective Date, the
Company must redeem all shares of Series A Preferred Stock for a price equal to (a) the Liquidation Value, plus (b) accumulated
and unpaid Cash Distributions and Stock Dividends, plus (c) a make-whole premium designed to provide the holders of the Series
A Preferred Stock with a return on the redeemed shares equal to a 14.0% internal rate of return through the third anniversary
of the Effective Date.
Holders of Series A Preferred Stock will be entitled to a separate
class vote with respect to (i) any amendments to the Company’s Amended and Restated Articles of Incorporation (the “Charter”),
as supplemented by the Articles Supplementary, or bylaws that would alter or change the rights, preferences, privileges or restrictions
of the Series A Preferred Stock so as to materially and adversely affect such Series A Preferred Stock and (ii) reclassification
or otherwise, any issuances by the Company of securities that are senior to, or equal in priority with, the Series A Preferred
Stock.
In the event of any liquidation, dissolution or winding up of the
Company, the holders of the Series A Preferred Stock shall be entitled to receive an amount equal to the greater of (i) the Liquidation
Value, plus all accumulated but unpaid Cash Distributions and Stock Dividends thereon to, but not including, the date of any liquidation,
but excluding any Cash Premium and (ii) the amount that would be paid on such date in the event of a redemption following a change
of control.
Pursuant to the Purchase Agreement and the Articles Supplementary,
the Company increased the size of its Board by one director and elected James Dondero as preferred representative of the Buyers,
to the Board for a term expiring at the Company’s 2017 annual meeting of stockholders. Thereafter, so long as any shares
of the Series A Preferred Stock are outstanding, the holders of the Series A Preferred Stock, voting as a single class, are entitled
to nominate and elect one individual to serve on our Board of Directors.. If the Company has not paid the full amount of the Cash
Distribution or the Stock Dividend on the shares of the Series A Preferred Stock for six or more quarterly dividend periods (whether
or not consecutive), the Company will increase the size of the Board by two directors and the holders of the our Series A Preferred
Stock are entitled to elect two additional directors to serve on our Board of Directors until the Company pays in full all accumulated
and unpaid Cash Distributions and Stock Dividends.
Further, at any time that the Series A Preferred Stock remains
outstanding, if Dean Jernigan, the Company’s current Chief Executive Officer and Chairman of the Board, voluntarily leaves
the position of Chief Executive Officer, and is not serving as the Executive Chairman of the Board (a “Key Man Event”),
the holders of the Series A Preferred Stock shall have the right to accept or reject the service of any person as Chief Executive
Officer (or such person serving as the principal executive officer) of the Company.
The Purchase Agreement requires that the Company and its subsidiaries
conduct their business in the ordinary course of business consistent with past practice and use reasonable best efforts to (i)
preserve substantially intact the business organization and (ii) avoid becoming subject to the requirements of the Investment
Company Act of 1940, as amended. Additionally, the Company and its subsidiaries may not change or alter materially its method
of accounting or the manner in which it keeps its accounting books and records unless required by the Securities and Exchange
Commission to reflect changes in U.S. generally accepted accounting principles or, in the business judgment of the Board, such
change would be in the best interests of the Company or stockholders.
Future issuances of shares of Series A Preferred Stock at any one
or more closings after the Effective Date are contingent upon the satisfaction of certain conditions at the time of such proposed
purchase, including that (i) the representations and warranties of the Purchase Agreement remain true and correct in all material
respects and the Company has complied with all covenants and conditions under the Purchase Agreement, the Articles Supplementary,
the Registration Rights Agreement and the documents related thereto, (ii) no material adverse effect (as such term is defined
in the Purchase Agreement) has occurred, (iii) there is no suspension of trading of the Common Stock on the New York Stock Exchange
or such other market or exchange on which the Common Stock is then listed or traded (the “Principal Market”), (iv)
a Key Man Event shall not have occurred, as described above, and (v) the Company has delivered certain customary closing deliverables.
An event of default under the Purchase Agreement terminates the
obligation of the Buyers to acquire shares of Series A Preferred Stock from the Company and also triggers the Cash Premium described
above. Such events of default under the Purchase Agreement include (i) a Registration Default, (ii) the suspension of trading
or delisting of the Common Stock on the Principal Market, (iii) the failure by the transfer agent of the Company to issue shares
of the Series A Preferred Stock to the Buyers (subject to an applicable cure period), (iv) the Company’s breach of a representation
or warranty, covenant or other term or condition under the Purchase Agreement, Articles Supplementary, the Registration Rights
Agreement or the documents related thereto that has a material adverse effect (subject to an applicable cure period), (v) the
failure of the Company to sell $50 million of shares of Series A Preferred Stock on or prior to the tenth business day after the
expiration of the Commitment Period, (vi) an event of default under any secured indebtedness of the Company, or (vii) certain
bankruptcy proceedings.
The holders of the Series A Preferred Stock will have certain customary
registration rights with respect to the Common Stock issued as Stock Dividends pursuant to the terms of a Registration Rights
Agreement.
The issuance and sale of the Series A Preferred Stock, and the
issuance of shares of common stock and/or additional shares of Series A Preferred Stock issuable as Stock Dividends, will be exempt
from registration under the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(a)(2)
of the Securities Act and Rule 506 of Regulation D thereunder. The Buyers represented to the Company that they are “accredited
investors” as defined in Rule 501 of the Securities Act and that the Series A Preferred Stock is being acquired for investment
purposes and not with a view to, or for sale in connection with, any distribution thereof, and appropriate legends will be affixed
to any certificates evidencing the shares of Series A Preferred Stock or Common Stock issuable pursuant to the Stock Purchase
Agreement.
On October 4, 2016, the Company issued 10,000 restricted shares
of the Series A Preferred Stock to the Buyers and received $10.0 million in proceeds pursuant to the terms of the Purchase Agreement.
10.
DIVIDENDS AND DISTRIBUTIONS
The following table summarizes the Company’s dividends declared
on its common stock during the year ended December 31, 2016:
Date declared
|
|
Record date
|
|
Payment date
|
|
Per share amount
|
|
|
Total amount
|
|
March 10, 2016
|
|
April 1, 2016
|
|
April 15, 2016
|
|
$
|
0.35
|
|
|
$
|
2,157
|
|
May 20, 2016
|
|
July 1, 2016
|
|
July 15, 2016
|
|
$
|
0.35
|
|
|
$
|
2,087
|
|
September 2, 2016
|
|
October 1, 2016
|
|
October 14, 2016
|
|
$
|
0.35
|
|
|
$
|
2,087
|
|
November 2, 2016
|
|
January 3, 2017
|
|
January 13, 2017
|
|
$
|
0.35
|
|
|
$
|
3,134
|
|
The following table summarized the Company’s dividends declared
on its Series A Preferred Stock during the year ended December 31, 2016:
Date declared
|
|
Record date
|
|
Payment date
|
|
Per share amount
|
|
|
Total amount
|
|
Cash dividend:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2016
|
|
January 1, 2017
|
|
January 13, 2017
|
|
$
|
17.31
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividend:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2016
|
|
January 1, 2017
|
|
February 15, 2017
(1)
|
|
$
|
82.25
|
|
|
$
|
823
|
|
|
(1)
|
41,353 shares of common stock were issued at the
election of the Holders
|
The following table summarizes the Company’s dividends declared
on its common stock during the year ended December 31, 2015:
Date declared
|
|
Record date
|
|
Payment date
|
|
Per share amount
|
|
|
Total amount
|
|
June 3, 2015
|
|
July 6, 2015
|
|
July 15, 2015
|
|
$
|
0.35
|
|
|
$
|
2,139
|
|
August 26, 2015
|
|
October 1, 2015
|
|
October 15, 2015
|
|
$
|
0.35
|
|
|
$
|
2,157
|
|
November 6, 2015
|
|
January 1, 2016
|
|
January 15, 2016
|
|
$
|
0.35
|
|
|
$
|
2,157
|
|
11. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by
the weighted average number of shares outstanding during the period. All outstanding unvested restricted share awards
contain rights to non-forfeitable dividends and participate in undistributed earnings with common shareholders and, accordingly,
are considered participating securities that are included in the two-class method of computing basic earnings per share. Both
the unvested restricted shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted
basis with our diluted earnings per share being the more dilutive of the treasury stock or two-class methods. Redeemable
Operating Company Units are included in dilutive earnings per share calculations when they are dilutive to earnings per share.
For the years ended December 31, 2016 and 2015, the Company’s basic earnings per share is computed using the two-class
method, and our diluted earnings per share is computed using the more dilutive of the treasury stock method or two-class method:
|
|
Year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted average common shares - basic
|
|
|
6,060,100
|
|
|
|
4,504,356
|
|
Effect of dilutive securities
(1)
|
|
|
152,548
|
|
|
|
-
|
|
Weighted average common shares, all classes
|
|
|
6,212,648
|
|
|
|
4,504,356
|
|
|
|
|
|
|
|
|
|
|
Calculation of Earnings per Share - basic
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16,017
|
|
|
$
|
(2,943
|
)
|
Less:
|
|
|
|
|
|
|
|
|
Net income (loss) allocated to preferred stockholders
|
|
|
996
|
|
|
|
-
|
|
Net income (loss) allocated to unvested restricted shares
(2)
|
|
|
345
|
|
|
|
-
|
|
Dividends declared on unvested restricted shares
|
|
|
n/a
|
|
|
|
152
|
|
Net income (loss) attributable to common shareholders
– two-class method
|
|
$
|
14,676
|
|
|
$
|
(3,095
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic
|
|
|
6,060,100
|
|
|
|
4,504,356
|
|
Earnings (loss) per share - basic
|
|
$
|
2.42
|
|
|
$
|
(0.69
|
)
|
|
|
|
|
|
|
|
|
|
Calculation of Earnings per Share - diluted
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16,017
|
|
|
$
|
(2,943
|
)
|
Less:
|
|
|
|
|
|
|
|
|
Net income (loss) allocated to preferred stockholders
|
|
|
996
|
|
|
|
-
|
|
Dividends declared on unvested restricted shares
|
|
|
n/a
|
|
|
|
152
|
|
Net income (loss) attributable to common shareholders
– two-class method
|
|
$
|
15,021
|
|
|
$
|
(3,095
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - diluted
|
|
|
6,212,648
|
|
|
|
4,504,356
|
|
Earnings (loss) per share - diluted
|
|
$
|
2.42
|
|
|
$
|
(0.69
|
)
|
|
(1)
|
For the
year ended December 31, 2015, potentially dilutive securities consisting of unvested
restricted shares are not included in the diluted earnings per share calculation as they
are not dilutive.
|
|
(2)
|
Unvested restricted shares participate in dividends
with common shares on a 1:1 basis and thus are considered participating securities under
the two-class method for the year ended December 31, 2016.
|
12. RELATED PARTY TRANSACTIONS
The Company’s founder was reimbursed for $0.1 million of
organizational costs and $0.1 million of offering costs in April 2015 following the closing of the Company’s IPO.
Equity Method Investments
Certain of the Company’s development property investments
are equity method investments for which the Company has elected the fair value option of accounting. The fair value of these equity
method investments at December 31, 2016 and 2015 were $78.7 million and $31.3 million, respectively. The interest income realized
and the change in fair value from these equity method investments was $21.4 million and $2.0 million for the years ended December
31, 2016 and 2015, respectively.
The Company’s investment in the real estate venture, the
SL1 Venture, has a carrying amount of $5.4 million at December 31, 2016 and the earnings from this venture were $1.3 million for
the year ended December 31, 2016.
Management Agreement
On April 1, 2015, the Company entered into a management agreement
with its Manager (the “Management Agreement”). Pursuant to the terms of the Management Agreement, the Manager will
be responsible for (a) the Company’s day-to-day operations, (b) determining investment criteria and strategy in conjunction
with the Company’s Board of Directors, (c) sourcing, analyzing, originating, underwriting, structuring, and acquiring the
Company’s portfolio investments, and (d) performing portfolio management duties. The Manager has an Investment Committee
that approves investments in accordance with the Company’s investment guidelines, investment strategy, and financing strategy.
On May 23, 2016, the Company entered into an Amended and Restated
Management Agreement (the “Amended and Restated Management Agreement”) by and among the Company, the Operating Company
and the Manager that amends and restates the original Management Agreement dated April 1, 2015. The Amended and Restated Management
Agreement was approved on behalf of the Company and the Operating Company by a unanimous vote of the Nominating and Corporate
Governance Committee of the Company’s Board of Directors, which consists solely of independent directors.
The Amended and Restated Management Agreement modifies certain
procedures with respect to the future internalization of the Manager (as described in the Amended and Restated Management Agreement,
an “Internalization Transaction”). Prior to entry into the Amended and Restated Management Agreement, if no Internalization
Transaction had occurred prior to the end of the last renewal term, the Manager would have been entitled to the Termination Fee
(as defined in the Amended and Restated Management Agreement) and the Company would not have acquired the assets of the Manager.
The Amended and Restated Management Agreement, however, requires an Internalization Transaction at the end of the last renewal
term (if an Internalization Transaction or termination of the Amended and Restated Management Agreement has not occurred prior
to that date). The Internalization Price in such event would equal the Termination Fee amount and the Company would receive
the Manager’s assets. Accordingly, the amount the Manager would receive has not changed, but the Company now would
receive the assets of the Manager, which it would not have received prior to the Amended and Restated Management Agreement.
Under the Amended and Restated Management Agreement, if an Internalization
Transaction has not occurred prior to March 31, 2023, the last day of the last renewal term, then the Manager and the Company
shall consummate an Internalization Transaction to be effective as of that date and all assets of the Manager (or, alternatively,
all of the equity interests in the Manager) shall be conveyed to and acquired by the Operating Company in exchange for the Internalization
Price (as described herein). At such time, all employees of the Manager shall become employees of the Operating Company and the
Manager shall discontinue all business activities. Unlike an Internalization Transaction that occurs prior to the end of the final
renewal term of the Amended and Restated Management Agreement, an Internalization Transaction that occurs at the end of the final
renewal term shall not require a fairness opinion, the approval of a special committee of the Company’s Board of Directors
or the approval of the Company’s stockholders.
The “Internalization Price” payable in the event of
an Internalization Transaction at the end of the last renewal term shall be equal to the Termination Fee and the Board of Directors
of the Company has no discretion to change such Internalization Price or the conditions applicable to its payment.
The Internalization Price paid to the Manager in any Internalization
Transaction will be payable by the Operating Company in the number of units of limited liability company interests (“OC
Units”) of the Operating Company equal to the Internalization Price, divided by the volume-weighted average of the closing
market price of the common stock of the Company for the ten consecutive trading days immediately preceding the date with respect
to which value must be determined. However, if the common stock of the Company is not traded on a national securities exchange
at the time of closing of any Internalization Transaction, then the number of OC Units shall be determined by agreement between
the Board of Directors of the Company and the Manager or, in the absence of such agreement, the Internalization Price shall be
paid in cash.
Prior to entry into the Amended and Restated Management Agreement,
any Termination Fee would have been payable by the Operating Company in OC Units equal to the Termination Fee divided by the average
of the daily market price of the Common Stock for the ten consecutive trading days immediately preceding the date of termination
within 90 days after occurrence of the event requiring the payment of the Termination Fee. In accordance with ASC 505-50,
Equity
- Equity-based Payments to Non-Employees,
since the number of OC Units to be issued was dependent upon different possible
outcomes, the Company recognized the lowest aggregate amount within the range of outcomes. Accordingly, the Company estimated
the deferred termination fee payable and accrued the expense over the term of the Management Agreement. Upon entry into the Amended
and Restated Management Agreement, the Company ceased recognizing the deferred termination fee expense and reclassified the Non-Controlling
Interests to Additional Paid-In-Capital since the Termination Fee is no longer certain of being paid other than in exchange for
either the assets or equity of the Manager. Accordingly, the Company recorded $0.2 million and $0.5 million of expense for the
deferred termination fee for the years ended December 31, 2016 and 2015, respectively.
The initial term of the Management Agreement will be five years,
with up to a maximum of three, one-year extensions that end on the applicable anniversary of the completion of the Company’s
offering. The Company’s independent directors will review the Manager’s performance annually. Following the initial
term, the Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds of the Company’s
independent directors based upon: (a) the Manager’s unsatisfactory performance that is materially detrimental to the Company;
or (b) the Company’s determination that the management fees payable to the Manager are not fair, subject to the Manager’s
right to prevent termination based on unfair fees by accepting a reduction of management fees agreed to by at least two-thirds
of the independent directors. The Company will provide its Manager with 180 days’ prior notice of such a termination. Upon
such a termination, the Company will pay the Manager a Termination Fee except as provided below.
No later than 180 days prior to the end of the initial term of
the Management Agreement, the Manager will offer to contribute to the Company’s Operating Company at the end of the initial
term all of the assets or equity interests in the Manager at the internalization price and on such terms and conditions included
in a written offer provided by the Manager.
Upon receipt of the Manager’s initial internalization offer,
a special committee consisting solely of the Company’s independent directors may accept the Manager’s proposal or
submit a counter offer to the Manager. If the Manager and the special committee are unable to agree, the Manager and the special
committee will repeat this process annually during the term of any extension of the Management Agreement. Acquisition of the Manager
pursuant to this process requires a fairness opinion from a nationally recognized investment banking firm and stockholder approval,
in addition to approval by the special committee. As described above, if an Internalization Transaction has not occurred prior
to March 31, 2023, the last day of the last renewal term, then the Manager and the Company shall consummate an Internalization
Transaction to be effective as of that date, and such Internalization Transaction shall not require a fairness opinion, the approval
of a special committee of the Company’s Board of Directors or the approval of the Company’s stockholders.
If the Management Agreement terminates other than for Cause, voluntary
non-renewal by the Manager or the Company being required to register as an investment company under the Investment Company Act
of 1940, then the Company shall pay to the Manager, on the date on which such termination is effective, a Termination Fee equal
to the greater of (i) three times the sum of the average annual Base Management Fee and Incentive Fee earned by the Manager during
the 24-month period prior to such termination, calculated as of the end of the most recently completed fiscal quarter prior to
the date of termination, or (ii) the offer price, which will be based on the lesser of (a) the Manager’s earnings before
interest, taxes, depreciation and amortization (adjusted for unusual, extraordinary and non-recurring charges and expenses), or
“EBITDA” annualized based on the most recent quarter ended, multiplied by a specific multiple, or EBITDA Multiple,
depending on the Company’s achieved total annual return, and (b) the Company’s equity market capitalization multiplied
by a specific percentage, or Capitalization Percentage, depending on the Company’s achieved total return (the Internalization
Price). Any Termination Fee will be payable by the Operating Company in cash.
The Company also may terminate the Amended and Restated Management
Agreement at any time, including during the initial term, without the payment of any Termination Fee, with 30 days’ prior
written notice from the Board of Directors, for cause. “Cause” is defined as: (i) the Manager’s continued breach
of any material provision of the Amended and Restated Management Agreement following a prescribed period; (ii) the occurrence
of certain events with respect to the bankruptcy or insolvency of the Manager; (iii) a change of control of the Manager that a
majority of the Company’s independent directors determines is materially detrimental to the Company; (iv) the Manager committing
fraud against the Company, misappropriating or embezzling the Company’s funds, or acting grossly negligent in the performance
of its duties under the Amended and Restated Management Agreement; (v) the dissolution of the Manager; (vi) the Manager fails
to provide adequate or appropriate personnel that are reasonably necessary for the Manager to identify investment opportunities
for the Company and to manage and develop the Company’s investment portfolio if such default continues uncured for a period
of 60 days after written notice thereof, which notice must contain a request that the same be remedied; (vii) the Manager is convicted
(including a plea of nolo contendere) of a felony; or (viii) both the current Chief Executive Officer and the current President
and Chief Operating Officer are no longer senior executive officers of the Manager or the Company during the term of the Amended
and Restated Management Agreement other than by reason of death or disability.
The Manager may terminate the Amended and Restated Management Agreement
if the Company becomes required to register as an investment company under the 1940 Act, with such termination deemed to occur
immediately before such event, in which case the Company would not be required to pay the Manager a Termination Fee. The Manager
may also decline to renew the Amended and Restated Management Agreement by providing the Company with 180 days’ written
notice, in which case the Company would not be required to pay a Termination Fee.
The Amended and Restated Management Agreement provides for the
Manager to earn a base management fee and an incentive fee. In addition, the Company will reimburse certain expenses of the Manager,
excluding the salaries and cash bonuses of the Manager’s chief executive officer and chief financial officer, a portion
of the salary of the president and chief operating officer, and certain other costs as determined by the Manager in accordance
with the Amended and Restated Management Agreement. Certain prepaid expenses and fixed assets are also purchased through the Manager
and reimbursed by the Company. In the event that the Company terminates the Amended and Restated Management Agreement per the
terms of the agreement, other than for cause or the Company being required to register as an investment company, there will be
a Termination Fee due to the Manager. Amounts reimbursable to the Manager for expenses are included in general and administrative
expenses in the Consolidated Statements of Operations and totaled $3.3 million and $2.1 million for the years ended December 31,
2016 and 2015, respectively.
Management Fees
As of December 31, 2016, the Company did not have any personnel.
As a result, the Company is relying on the properties, resources and personnel of the Manager to conduct operations. The Company
has agreed to pay the Manager a base management fee in an amount equal to 0.375% of the Company’s stockholders’ equity
(a 1.5% annual rate) calculated and payable quarterly in arrears in cash. For purposes of calculating the base management fee,
the Company’s stockholder’s equity means: (a) the sum of (i) the net proceeds from all issuances of the Company’s
equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such
issuance), plus (ii) the Company’s retained earnings at the end of the most recently completed fiscal quarter (without taking
into account any non-cash equity compensation expense incurred in current or prior periods); less (b) any amount that the Company
pays to repurchase the Company’s common stock since inception, provided that if the Company’s retained earnings are
in a net deficit position (following any required adjustments set forth below), then retained earnings shall not be included in
stockholders’ equity. It also excludes (x) any unrealized gains and losses and other non-cash items that have impacted stockholders’
equity as reported in the Company’s financial statements prepared in accordance with accounting principles generally accepted
in the United States, or GAAP, and (y) one-time events pursuant to changes in GAAP (such as a cumulative change to the Company’s
operating results as a result of a codification change pursuant to GAAP), and certain non-cash items not otherwise described above
(such as depreciation and amortization), in each case after discussions between the Company’s Manager and the Company’s
independent directors and approval by a majority of the Company’s independent directors. As a result, the Company’s
stockholders’ equity, for purposes of calculating the base management fee, could be greater or less than the amount of stockholders’
equity shown on the Company’s financial statements. The base management fee is payable independent of the performance of
the Company’s portfolio. The Manager computes the base management fee within 30 days after the end of the fiscal quarter
with respect to which such installment is payable and promptly delivers such calculation to the Company’s Board of Directors.
The amount of the installment shown in the calculation is due and payable no later than the date which is five business days after
the date of delivery of such computation to the Board of Directors. The calculation generally will be reviewed by the Board of
Directors at their regularly scheduled quarterly board meeting. The base management fee was $1.7 million and $1.2 million for
the years ended December 31, 2016 and 2015, respectively. At December 31, 2016 and 2015, the Company had outstanding fees due
to Manager of $1.0 million and $0.7 million, respectively, consisting of the management fees payable and certain general and administrative
fees payable.
Incentive Fee
The Manager is entitled to an incentive fee with respect to each
fiscal quarter (or part thereof that the Amended and Restated Management Agreement is in effect) in arrears in cash. The incentive
fee will be an amount, not less than zero, determined pursuant to the following formula:
IF = .20 times (A minus (B times .08)) minus C
In the foregoing formula:
·
A equals the Company’s Core Earnings (as defined below) for the previous 12-month period;
·
B
equals (i) the weighted average of the issue price per share of the Company’s common stock of all of its public offerings
of common stock, multiplied by (ii) the weighted average number of all shares of common stock outstanding (including (i) any restricted
stock units and any restricted shares of common stock in the previous 12-month period and (ii) shares of common stock issuable
upon conversion of outstanding OC Units); and
·
C
equals the sum of any incentive fees earned by the Manager with respect to the first three fiscal quarters of such previous 12-month
period.
Notwithstanding application of the incentive fee formula, no incentive
fee shall be paid with respect to any fiscal quarter unless cumulative annual stockholder total return for the four most recently
completed fiscal quarters is greater than 8%. Any computed incentive fee earned but not paid because of the foregoing hurdle will
accrue until such 8% cumulative annual stockholder total return is achieved. The total return is calculated by adding stock price
appreciation (based on the volume-weighted average of the closing price of the Company’s common stock on the NYSE (or other
applicable trading market) for the last ten consecutive trading days of the applicable computation period minus the volume-weighted
average of the closing market price of the Company’s common stock for the last ten consecutive trading days of the period
immediately preceding the applicable computation period) plus dividends per share paid during such computation period, divided
by the volume-weighted average of the closing market price of the Company’s common stock for the last ten consecutive trading
days of the period immediately preceding the applicable computation period. For purposes of computing the Incentive Fee, “Core
Earnings” is defined as net income (loss) determined under GAAP, plus non-cash equity compensation expense, the incentive
fee, depreciation and amortization (to the extent that the Company forecloses on any facilities underlying the Company’s
target investments), any unrealized losses or other non-cash expense items reflected in GAAP net income (loss), less any unrealized
gains reflected in GAAP net income. The amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain
other non-cash charges after discussions between the Manager and the Company’s independent directors and after approval
by a majority of the independent directors.
The Manager computes each quarterly installment of the incentive
fee within 45 days after the end of the fiscal quarter with respect to which such installment is payable and promptly delivers
such calculation to the Company’s Board of Directors. The amount of the installment shown in the calculation is due and
payable no later than the date which is five business days after the date of delivery of such computation to the Board of Directors.
The calculation generally will be reviewed by the Board of Directors at their regularly scheduled quarterly board meeting. The
Manager has not earned an incentive fee for any quarter in the years ended December 31, 2016 and 2015.
13. RESTRUCTURING COSTS
On August 11, 2015, the Company’s Board of Directors approved
consolidating its offices and moving the corporate headquarters to Memphis, Tennessee. In connection with the consolidation and
moving of the Company’s headquarters, the Company added legal, accounting, loan administration and business development
personnel in Memphis and closed its offices in Miami, Florida and Cleveland, Ohio. The consolidation was completed by the end
of the third quarter of 2015.
Restructuring costs reflected in the accompanying Consolidated
Statements of Operations relate primarily to one-time termination benefits and lease termination costs. The Company recognizes
these severance and other charges when the requirements of ASC 420 have been met regarding a plan of termination and when communication
has been made to employees. During the years ended December 31, 2016 and 2015, the Company incurred $54.0 thousand and $0.3 million
in restructuring costs in the Consolidated Statements of Operations, respectively.
|
|
Year Ended December 31, 2016
|
|
Cost Type
|
|
Restructuring
costs liability at
December 31, 2015
|
|
|
Restructuring
costs incurred
|
|
|
Cash
payments
|
|
|
Non-cash
activity
|
|
|
Restructuring
costs liability at
December 31,
2016
|
|
|
Total cumulative
restructuring costs
incurred or
expected to be
incurred
|
|
Severance
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
97
|
|
Fixed asset disposal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
Lease termination
|
|
|
85
|
|
|
|
64
|
|
|
|
(70
|
)
|
|
|
-
|
|
|
|
79
|
|
|
|
187
|
|
Other
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
13
|
|
Total restructuring costs
|
|
$
|
95
|
|
|
$
|
64
|
|
|
$
|
(70
|
)
|
|
$
|
(10
|
)
|
|
$
|
79
|
|
|
$
|
330
|
|
|
|
Year
Ended December 31, 2015
|
|
Cost Type
|
|
Restructuring
costs liability at
December 31, 2014
|
|
|
Restructuring
costs incurred
|
|
|
Cash
payments
|
|
|
Non-cash
activity
|
|
|
Restructuring
costs liability at
December 31,
2015
|
|
|
Total cumulative
restructuring costs
incurred or
expected to be
incurred
|
|
Severance
|
|
$
|
-
|
|
|
$
|
97
|
|
|
$
|
97
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
97
|
|
Fixed asset disposal
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
33
|
|
Lease termination
|
|
|
-
|
|
|
|
124
|
|
|
|
39
|
|
|
|
-
|
|
|
|
85
|
|
|
|
124
|
|
Other
|
|
|
-
|
|
|
|
22
|
|
|
|
12
|
|
|
|
-
|
|
|
|
10
|
|
|
|
22
|
|
Total restructuring costs
|
|
$
|
-
|
|
|
$
|
276
|
|
|
$
|
148
|
|
|
$
|
33
|
|
|
$
|
95
|
|
|
$
|
276
|
|
14. COMMITMENTS AND CONTINGENCIES
As described in Note 3,
Investments
, the Company has $55.0
million of unfunded loan commitments related to its investment portfolio. As described in Note 7,
Other Loans
, the Company
has $1.8 million of unfunded loan commitments related to six revolving loan agreements.
In conjunction with the Management Agreement with its Manager,
the Company also is obligated under several operating leases (primarily for office spaces). The Company recognized $0.2 million
of rent expense for the year ended December 31, 2016, all of which is included in general and administrative expenses in the Consolidated
Statements of Operations. During the year ended December 31, 2015, the Company recognized $0.4 million of rent expense (gross
of $0.2 million of sublease income). Of this amount, $0.1 million was included in general and administrative expenses, and the remaining amount was included in restructuring costs in the Consolidated Statements of Operations. The following
table summarizes the maturities of the Company’s senior participations and future minimum payments (gross of any sublease
income) under the operating leases as of December 31, 2016:
Contractual Obligations
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
Long-Term Debt Obligations
(1) (2)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,240
|
|
|
$
|
-
|
|
|
$
|
3,375
|
|
|
$
|
18,615
|
|
Operating Lease Obligations
|
|
|
301
|
|
|
|
209
|
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
|
514
|
|
Total
|
|
$
|
301
|
|
|
$
|
209
|
|
|
$
|
15,242
|
|
|
$
|
2
|
|
|
$
|
3,375
|
|
|
$
|
19,129
|
|
|
(1)
|
Represents
principal gross of discounts and debt issuance costs.
|
|
(2)
|
Amounts exclude interest, which is variable based on
30-day LIBOR plus spreads ranging from 3.10% to 3.85%.
|
The Company from time to time may be party to litigation relating
to claims arising in the normal course of business. The Company is not aware of any legal claims that could materially impact
its financial position, results of operations, or cash flows.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company’s quarterly financial
results for each quarter of the year ended December 31, 2016:
|
|
For the three month
period ended,
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,143
|
|
|
$
|
1,533
|
|
|
$
|
1,698
|
|
|
$
|
2,158
|
|
Net income
|
|
$
|
1,122
|
(1)
|
|
$
|
5,412
|
|
|
$
|
4,994
|
|
|
$
|
4,489
|
|
Net income attributable to common stockholders
|
|
$
|
1,122
|
|
|
$
|
5,412
|
|
|
$
|
4,994
|
|
|
$
|
3,493
|
|
Net income per common share - basic
|
|
$
|
0.18
|
|
|
$
|
0.89
|
|
|
$
|
0.84
|
|
|
$
|
0.53
|
|
Net income per common share - diluted
|
|
$
|
0.18
|
|
|
$
|
0.89
|
|
|
$
|
0.84
|
|
|
$
|
0.53
|
|
|
(1)
|
Includes $2.0 million in transaction and other expenses.
|
The following table summarizes the
Company’s quarterly financial results for each quarter of the year ended December 31, 2015:
|
|
For the three month
period ended,
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
-
|
|
|
$
|
157
|
|
|
$
|
578
|
|
|
$
|
1,008
|
|
Net loss
|
|
$
|
(147
|
)
|
|
$
|
(558
|
)
|
|
$
|
(1,407
|
)
|
|
$
|
(831
|
)
|
Net loss per common share - basic
|
|
|
n/a
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.15
|
)
|
Net loss per common share - diluted
|
|
|
n/a
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.15
|
)
|
16. SUBSEQUENT EVENTS
The Company’s management has evaluated subsequent events
through the date of issuance of the consolidated financial statements included herein. Other than those disclosed below, there
have been no subsequent events that occurred during such period that require disclosure or recognition in the accompanying consolidated
financial statements as of and for the year ended December 31, 2016.
Investment Activity
Subsequent to December 31, 2016 we closed on the following development
property investments with a profits interest:
Closing Date
|
|
MSA
|
|
Total
Investment
Commitment
|
|
1/4/2017
|
|
New York City
|
|
$
|
16,117
|
|
1/18/2017
|
|
Atlanta 3
|
|
|
14,115
|
|
1/31/2017
|
|
Atlanta 4
|
|
|
13,678
|
|
2/24/2017
|
|
Orlando 3
|
|
|
8,056
|
|
2/24/2017
|
|
New Orleans
|
|
|
12,549
|
|
2/27/2017
|
|
Atlanta 5
|
|
|
17,492
|
|
3/1/2017
|
|
Fort Lauderdale
|
|
|
9,952
|
|
3/1/2017
|
|
Houston
|
|
|
13,630
|
|
|
|
Total
|
|
$
|
105,589
|
|
On January 26, 2017, the Company received $6.7 million for the
payoff of a construction loan in the West Palm Beach, Florida MSA.
On February 3, 2017, the Company purchased 50% of the economic
rights of the Class A membership units of a limited liability company which owns a development property investment with a profits
interest in Orlando, Florida for a price of $1.3 million. Additionally, the Company’s profits interest on this development
property investment was increased from 49.9% to 74.9%. The Class A member retains all management and voting rights in the limited
liability company.
First Quarter Dividend Declarations
On March 7, 2017, the Company’s Board of Directors
declared a cash dividend of $17.50 per share of Series A Preferred Stock and a distribution payable in kind in a number of shares
of common stock or Series A Preferred Stock as determined in accordance with the election of the holders of the Series A Preferred
Stock for the quarter ending March 31, 2017. The dividends are payable on April 15, 2017 (or if not a business day, on the next
business day) to holders of Series A Preferred Stock of record on April 1, 2017.
On March 7, 2017, the Company’s Board of Directors
also declared a cash dividend of $0.35 per share of common stock for the quarter ending March 31, 2017. The dividend is payable
on April 14, 2017 to stockholders of record on April 3, 2017.
JERNIGAN CAPITAL,
INC.
Schedule IV
Mortgage Loans
on Real Estate
December 31,
2016
(Dollars in
thousands)
Column A
|
|
Column B
|
|
|
Column C
|
|
Column D
|
|
Column E
|
|
|
Column F
|
|
|
Column G
|
|
|
Column H
|
|
Description
|
|
Location
|
|
Interest
Rate
|
|
|
Final Maturity
Date
|
|
Periodic
Payment
Terms
|
|
Prior Liens
|
|
|
Face
Amount of
Loans
|
|
|
Carrying
Amount of
Loans (1)
|
|
|
Principal Amount
of Loans Subject
to Delinquent
Principal or Interest
|
|
Development
property investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development
investments with a profits interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage
development project
|
|
Orlando
|
|
|
6.90
|
%
|
|
1-May-21
|
|
(2)(4)
|
|
$
|
-
|
|
|
$
|
5,308
|
|
|
$
|
7,302
|
|
|
$
|
-
|
|
Self-storage development
project
|
|
Atlanta
|
|
|
6.90
|
%
|
|
1-Jul-21
|
|
(2)(6)
|
|
|
-
|
|
|
|
7,694
|
|
|
|
10,404
|
|
|
|
-
|
|
Self-storage development
project
|
|
Tampa
|
|
|
6.90
|
%
|
|
1-Jul-21
|
|
(2)(5)
|
|
|
-
|
|
|
|
5,285
|
|
|
|
6,279
|
|
|
|
-
|
|
Self-storage development
project
|
|
Atlanta
|
|
|
6.90
|
%
|
|
1-Jul-21
|
|
(2)(6)
|
|
|
-
|
|
|
|
5,620
|
|
|
|
8,900
|
|
|
|
-
|
|
Self-storage development
project
|
|
Charlotte
|
|
|
6.90
|
%
|
|
1-Aug-21
|
|
(2)(6)
|
|
|
-
|
|
|
|
6,842
|
|
|
|
9,853
|
|
|
|
-
|
|
Self-storage development
project
|
|
Milwaukee
|
|
|
6.90
|
%
|
|
1-Aug-21
|
|
(2)(6)
|
|
|
-
|
|
|
|
5,608
|
|
|
|
7,008
|
|
|
|
-
|
|
Self-storage development
project
|
|
New Haven
|
|
|
6.90
|
%
|
|
1-Sep-21
|
|
(2)(7)
|
|
|
-
|
|
|
|
5,257
|
|
|
|
6,730
|
|
|
|
-
|
|
Self-storage development
project
|
|
Pittsburgh
|
|
|
6.90
|
%
|
|
1-Sep-21
|
|
(2)(7)
|
|
|
-
|
|
|
|
3,497
|
|
|
|
4,551
|
|
|
|
-
|
|
Self-storage development
project
|
|
Raleigh
|
|
|
6.90
|
%
|
|
1-Sep-21
|
|
(2)(6)
|
|
|
-
|
|
|
|
1,460
|
|
|
|
1,396
|
|
|
|
-
|
|
Self-storage development
project
|
|
Jacksonville
|
|
|
6.90
|
%
|
|
1-Oct-21
|
|
(2)(8)
|
|
|
-
|
|
|
|
5,852
|
|
|
|
7,962
|
|
|
|
-
|
|
Self-storage development
project
|
|
Austin
|
|
|
6.90
|
%
|
|
27-Oct-21
|
|
(2)(6)
|
|
|
-
|
|
|
|
4,366
|
|
|
|
5,192
|
|
|
|
-
|
|
Self-storage development
project
|
|
Charlotte
|
|
|
6.90
|
%
|
|
20-Sep-22
|
|
(2)(6)
|
|
|
-
|
|
|
|
1,446
|
|
|
|
1,298
|
|
|
|
-
|
|
Self-storage development
project
|
|
Orlando
|
|
|
6.90
|
%
|
|
17-Nov-22
|
|
(3)(6)
|
|
|
-
|
|
|
|
1,342
|
|
|
|
1,237
|
|
|
|
-
|
|
Self-storage
development project
|
|
Jacksonville
|
|
|
6.90
|
%
|
|
17-Nov-22
|
|
(3)(6)
|
|
|
-
|
|
|
|
624
|
|
|
|
551
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
60,201
|
|
|
$
|
78,663
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans - first mortgages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage development
project
|
|
West Palm Beach
|
|
|
6.90
|
%
|
|
1-Mar-17
|
|
(9)
|
|
$
|
-
|
|
|
$
|
6,712
|
|
|
$
|
6,702
|
|
|
$
|
-
|
|
Self-storage development
project
|
|
Sarasota
|
|
|
6.90
|
%
|
|
1-Mar-17
|
|
(9)
|
|
|
-
|
|
|
|
3,485
|
|
|
|
3,473
|
|
|
|
-
|
|
Self-storage
development project
|
|
Miami
|
|
|
6.90
|
%
|
|
1-Jul-17
|
|
(9)
|
|
|
-
|
|
|
|
6,517
|
|
|
|
6,264
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
16,714
|
|
|
$
|
16,439
|
|
|
$
|
-
|
|
Operating
property loans - first mortgages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-storage property
|
|
New Orleans
|
|
|
6.90
|
%
|
|
1-Jul-21
|
|
(11)
|
|
$
|
-
|
|
|
$
|
2,800
|
|
|
$
|
2,768
|
|
|
$
|
-
|
|
Self-storage property
|
|
Newark
|
|
|
5.85
|
%
|
|
1-Aug-22 (10)
|
|
(11)
|
|
|
-
|
|
|
|
3,480
|
|
|
|
3,441
|
|
|
|
-
|
|
Self-storage property
|
|
Nashville
|
|
|
6.90
|
%
|
|
1-Nov-21
|
|
(11)
|
|
|
-
|
|
|
|
1,210
|
|
|
|
1,204
|
|
|
|
-
|
|
Self-storage
property
|
|
Chicago
|
|
|
6.90
|
%
|
|
22-Dec-21
|
|
(11)
|
|
|
-
|
|
|
|
2,500
|
|
|
|
2,492
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
9,990
|
|
|
$
|
9,905
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
86,905
|
|
|
$
|
105,007
|
|
|
$
|
-
|
|
Other
loans - first mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
Denver
|
|
|
6.90
|
%
|
|
1-Mar-17
|
|
(12)
|
|
$
|
-
|
|
|
$
|
1,800
|
|
|
$
|
1,796
|
|
|
$
|
-
|
|
Land
|
|
Denver
|
|
|
6.90
|
%
|
|
1-Mar-17
|
|
(13)
|
|
|
-
|
|
|
|
1,030
|
|
|
|
1,027
|
|
|
|
-
|
|
Land
|
|
Fort Lauderdale
|
|
|
6.90
|
%
|
|
1-Mar-17
|
|
(13)
|
|
|
-
|
|
|
|
1,324
|
|
|
|
1,321
|
|
|
|
-
|
|
Land
|
|
Atlanta
|
|
|
6.90
|
%
|
|
7-Jun-17
|
|
(13)
|
|
|
-
|
|
|
|
3,018
|
|
|
|
2,994
|
|
|
|
-
|
|
Land
|
|
Houston
|
|
|
6.90
|
%
|
|
14-Mar-17
|
|
(13)
|
|
|
-
|
|
|
|
2,913
|
|
|
|
2,894
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
10,085
|
|
|
$
|
10,032
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
96,990
|
|
|
$
|
115,039
|
|
|
$
|
-
|
|
(1) The
face amount of loans in Column F approximate the aggregate cost for federal income tax purposes.
(2) Development loan
investments with a profits interest are comprised of a construction loan secured by a first mortgage on the development project
and a mezzanine loan secured by a first priority security interest in the membership interests of the owners of the project. These
loans are entered into simultaneously and are valued as a single instrument for accounting purposes.
(3) Development loan
investments with a profits interest are comprised of a construction loan secured by a first mortgage on the development project.
(4) Interest only
monthly (funded from interest reserve); balloon payment due at maturity; prepayment penalty - On or before 15th month - no prepayment
premium; on or after 15th month but prior to 28th month, 3%; on or after 28th month but prior to 40th month, 2%; on or after 40th
month but prior to 52nd month, 1%; on or after 52nd month - no prepayment premium.
(5) Interest only
monthly (funded from interest reserve); balloon payment due at maturity; prepayment penalty - On or before 25th month - no prepayment
premium; on or after 25th month but prior to 37th month, 3%; on or after 37th month but prior to 49th month, 2%; on or after 49th
month but prior to 61st month, 1%; on or after 61st month - no prepayment premium.
(6) Interest only
monthly (funded from interest reserve); balloon payment due at maturity; prepayment penalty - On or before 37th month - no prepayment
premium; on or after 37th month but prior to 49th month, 3%; on or after 49th month but prior to 61st month, 2%; on or after 61st
month but prior to 70th month, 1%; on or after 70th month - no prepayment premium.
(7) Interest only
monthly (funded from interest reserve); balloon payment due at maturity; prepayment penalty - On or before 19th month - no prepayment
premium; on or after 19th month but prior to 31st month, 3%; on or after 31st month but prior to 43rd month, 2%; on or after 43rd
month but prior to 55th month, 1%; on or after 70th month - no prepayment premium.
(8) Interest only
monthly (funded from interest reserve); balloon payment due at maturity; prepayment penalty - On or before 19th month - no prepayment
premium; on or after 19th month but prior to 49th month, 3%; on or after 49th month but prior to 61st month, 2%; on or after 61st
month but prior to 70th month, 1%; on or after 70th month - no prepayment premium.
(9) Interest only
monthly; balloon payment due at maturity subject to contribution agreements from equity REIT; no prepayment permitted for all
or any portion of the loan prior to completion of construction and receipt of certificate of occupancy.
(10) Original maturity
date is August 1, 2022 with an option to extend 36 months to August 1, 2025.
(11) Interest only
monthly; balloon payment due at maturity; no prepayment during first 36 months, thereafter stepdown prepayment of 3%, 2%, 1%,
no prepayment the last 90 days prior to maturity.
(12) Interest only
monthly; balloon payment due at maturity; any prepayment of the Loan shall be made by paying on the date of prepayment (i) the
amount of principal being prepaid, (ii) all accrued interest, and (iii) all other sums due under the note and the other loan documents.
(13) Balloon payment,
including interest, due at maturity; any prepayment of the Loan shall be made by paying on the date of prepayment (i) the amount
of principal being prepaid, (ii) all accrued interest, and (iii) all other sums due under the note and the other loan documents.
The following table
sets forth the activity of mortgage loans for the year ended December 31, 2016:
Balance as of December 31, 2015
|
|
$
|
60,515
|
|
Fundings of principal, net of unamortized origination fees
|
|
|
59,102
|
|
Contribution of assets to Heitman Joint Venture
|
|
|
(7,693
|
)
|
Payment-in-kind interest
|
|
|
3,856
|
|
Repayments of principal
|
|
|
(19,111
|
)
|
Net unrealized gains
|
|
|
18,370
|
|
Balance as of December 31, 2016
|
|
$
|
115,039
|
|