NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data, percentages and as otherwise indicated)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Jernigan Capital, Inc. (together with its consolidated subsidiaries, the “Company”) makes debt and equity investments in 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 and other capital sources 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, as amended (the “Code”). As a REIT, the Company generally will not be subject to U.S. federal income taxes on REIT taxable income, determined without regard to the deduction for dividends paid and excluded capital gains, to the extent that it annually distributes all of its REIT taxable income to stockholders and complies with various other requirements for qualification as a REIT set forth in the Code.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying interim consolidated financial statements include all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods included therein. Substantially all operations are conducted through the Operating Company, and all significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates.
Variable Interest Entities
The Company invests in entities that may qualify as variable interest entities (“VIEs”). A VIE is a legal entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. Management bases the qualitative analysis on its review of the design of the entity, its organizational structure including allocation of decision-making authority and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. Management reassesses the initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.
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 September 30, 2017 and December 31, 2016, 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 September 30, 2017 and December 31, 2016.
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,
the secured revolving credit facility,
senior loan participations, and payables.
The following table presents the financial instruments measured at fair value on a recurring basis at September 30, 2017:
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Fair Value Measurements Using
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Development property investments
|
|
$
|
188,540
|
|
$
|
-
|
|
$
|
-
|
|
$
|
188,540
|
Operating property loans
|
|
|
5,990
|
|
|
-
|
|
|
-
|
|
|
5,990
|
Total investments
|
|
$
|
194,530
|
|
$
|
-
|
|
$
|
-
|
|
$
|
194,530
|
The following table presents the financial instruments measured at fair value on a recurring basis at December 31, 2016:
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|
|
|
|
|
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
|
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.
Self-Storage Real Estate Owned
Land is carried at historical cost. Building and improvements are carried at historical cost less accumulated depreciation and impairment losses. The cost primarily reflects the funded principal balance of the loan to the Company, net of unamortized origination fees, unrealized appreciation recognized as of the acquisition date, and the cash consideration paid to the developer to
acquire his portion of profits
interest. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments, whic
h improve or extend the life of
the asset, are capitalized and depreciated over their estimated useful lives. The costs of building and improvements are generally depreciated using the straight-line method based on a useful life of
40
years.
The
Company expects that the majority of future self-storage facility acquisitions will
be
considered asset acquisitions
, however the Company will evaluate each acquisition using Accounting Standards Update
(“ASU”) 2017-01 -
Business Combinations (Topic 80
5
): Clarifying the Definition of a Business
to determine whether accounting for a business combination or asset acquisition applies.
When facilities are acquired, the cost is allocated to the tangible and intangible assets acquired and liabilities assumed based on relative fair values. Allocations to the individual assets and liabilities are based upon their relative fair values as estimated by management.
In allocating the purchase price for an acquisition, the Company determines whether the acquisition includes intangible assets or liabilities. The Company allocates a portion of the cost to an intangible asset attributable to the value of in-place leases. This intangible asset is amortized to expense over the expected remaining term of the respective leases, which is generally one year. Substantially all of the leases in place at acquired
facilitie
s are at market rates, as the majority of the leases are month-to-month contracts. Accordingly, to date
,
no portion of the basis for an acquired property has been allocated to above- or below-market lease intangibles. To date, no intangible asset has been recorded for the value of customer relationships, because the Company does not have any concentrations of significant customers and the average customer turnover is fairly frequent.
The Company evaluates long-lived assets for impairment when events and circumstances
,
such as declines in occupancy and operating results
,
indicate that there may be an impairment. The carrying value of these long-lived assets is compared to the undiscounted future net operating cash flows, plus a terminal value, attributable to the assets to determine if the facility’s basis is recoverable. If an asset’s basis is not considered recoverable, an impairment loss is recorded to the extent the net carrying value of the asset exceeds the fair value. The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset.
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 t
hree
financial institutions, and the balance at each financial institution exceeds the Federal Deposit Insurance Corporation insurance limit of $250,000 per institution.
Other Loans
The Company’s other loans balance primarily includes principal balances for certain revolving loan agreements and short-term mortgage loans made by the Company in situations where it was determined that making such loans would benefit the Company’s primary business. These loans are accounted for under the cost method.
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.
The operations of the self-storage real estate owned are managed by a third-party self-storage management company. All rental leases are operating leases, and rental income is recognized in accordance with the terms of the leases, which generally are month to month.
Debt Issuance Costs
Costs related to the issuance of a de
bt instrument are deferred and
amortized as interest expense over the estimated life of the related debt instrument using the straight-line method, which approximates the effective interest method. If a debt instrument is repurchased prior to its original maturity date, the Company evaluates both the unamortized balance of debt issuance costs as well as any new debt issuance costs, including third party fees, to determine if the costs should
be
written off to interest expense or, if significant, included in “loss on modification or extinguishment of debt”
in the Consolidated Statements of Operations
. Debt issuance costs related to the sale of senior participations are
presented in the Consolidated Balance Sheets as a deduction from the carrying amount of the principal balance. Debt issuance costs related to the revolving credit facility are presented in the Consolidated Balance Sheets as Deferred Costs.
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. There were
no
transaction and other expenses for the three or nine months ended September 30, 2017. During the three and nine months ended September 30, 2016, the Company incurred
$2
,000
and
$2.1
million
, respectively, in
transaction and other expenses.
Offering and Registration Costs
Offering and registration costs represent underwriting discounts and commissions, professional fees, fees paid to various regulatory agencies, and other costs incurred in connection with the registration and sale of the Company’s securities. Offering and registration costs incurred in connection with the Company’s common stock offerings are reflected as a reduction of additional paid-in capital.
On July 27, 2016, t
he Company entered into a
Purchase Agreement
(as defined below)
(see Note 10,
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 connection
with the execution of the
Purchase Agreement. Such costs are presented as deferred costs on the Consolidated Balance Sheets 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 each 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 September 30, 2017, and
$0.6
million has reduced the cumulative preferred stock balance on the Consolidated Balance Sheet at September 30, 2017.
Income Taxes
The Company has elected to be taxed as a REIT and to comply with the related provisions of the Code. Accordingly, the Company will generally not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met. To qualify as a REIT, the Company must annually distribute at least 90% of its REIT taxable income to its stockholders and meet certain other requirements.
Earnings per Share (“EPS”)
Basic EPS includes only the weighted average number of common shares outstanding during the period. Diluted EPS includes the weighted average number of common shares and the dilutive effect of restricted stock, accrued stock dividends, and redeemable Operating Company units when such instruments are dilutive.
All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are treated as participating in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted EPS must be applied.
Comprehensive Income
For the three and nine months ended September 30, 2017 and 2016, 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 January 2017, the FASB issued
ASU
2017-01
which
provides guidance on whether transactions should be accounted for as acquisitions or disposals of assets or businesses. Specifically, when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set of assets is not a business. Additionally, ASU 2017-01 also provides other guidance providing a more robust framework to use in determining whether a set of assets and activities is a business. Upon adoption of the new guidance, the Company expects that the majority of future self-storage facility acquisitions will now be considered asset acquisitions
. This guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted. The Company
adopted ASU 2017-01 for new acquisitions beginning on July 1, 2017. The costs related to the acquisitions of self-storage facilities that qualify as asset acquisitions will be capitalized as part of the purchase.
In August 2016, the FASB issued 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; however, the Company does not expect the new accounting guidance to have a material impact on its consolidated financial statements as the Company is currently presenting distributions received from equity method investees consistent with the presentation required under ASU 2016-05.
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; however, the Company does not expect the new accounting guidance to have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which is the final standard on accounting for leases. The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The amendments in ASU 2016-02 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the impact this new accounting guidance will have on its consolidated financial statements.
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, 2017. This ASU outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. Several ASUs expanding and clarifying the initial guidance issued in ASU 2014-09 have been released since May 2014. The Company will adopt the ASU effective January 1, 2018 and does not expect the adoption to have a material effect on its consolidated financial statements as the new guidance does not apply to revenue associated with loans or derived from lease contracts; however, the Company is still in the process of evaluating 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:
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|
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Nine months ended September 30,
|
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|
2017
|
|
2016
|
Supplemental disclosure of cash flow information:
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|
|
|
|
|
Interest paid
|
|
$
|
705
|
|
$
|
141
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
Stock dividend paid on preferred stock
|
|
$
|
1,194
|
|
$
|
-
|
Dividends declared, but not paid, on preferred stock
|
|
|
310
|
|
|
-
|
Dividends declared, but not paid, on common stock
|
|
|
4,983
|
|
|
2,087
|
Contribution of assets to real estate venture
|
|
|
-
|
|
|
7,693
|
Reclassification of self-storage real estate owned
|
|
|
12,919
|
|
|
-
|
Other loans paid off with issuance of development property investments
|
|
|
1,587
|
|
|
-
|
Upon the closing of the credit facility, the Company received cash of $0.4 million as presented within “Cash received upon closing of the credit facility” in the Consolidated Statement of Cash Flows for the nine months ended September 30, 2017. The amount received was comprised of a
$20.0
million draw on the credit facility offset by $17.8 million from the repurchase of senior loan participations and $1.8 million of costs incurred upon closing of the credit facility.
3. INVESTMENTS
In addition to the self-storage real estate owned as described in Note 7,
Self-Storage Real Estate Owned
, the Company’s self-storage investments at September 30, 2017 consisted of the following:
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Development Property Investments
- The Company had
36
investments totaling an aggregate committed principal amount of approximately
$397.5
million to finance the ground-up construction of or conversion of existing buildings into self-storage facilities. Each development property investment is funded as the developer constructs the project, is secured by a first mortgage on the development project and generally 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 typically
6.9%
per annum and typically have a term of
72
months.
|
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|
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The Company also had one construction loan investment with a committed principal amount of approximately
$17.7
million, which had an initial term of
18
months that was extended during the first quarter of 2017. This 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 on the project. It is also subject to a purchase and sale agreement between the developer and a third-party purchaser pursuant to which the financed project is anticipated to be sold and the loan repaid on or about the time a certificate of occupancy is issued for the financed self-storage facility.
|
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|
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|
Operating property loans
- The Company had two term loans totaling $6.0 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 September 30, 2017, the aggregate committed principal amount of the Company’s investment portfolio was approximately $421.2 million and outstanding principal was $173.7 million, as described in more detail in the table below:
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Metropolitan
|
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Remaining
|
|
|
|
|
|
Statistical Area
|
|
Total Investment
|
|
Funded
|
|
Unfunded
|
|
|
|
Closing Date
|
|
("MSA")
|
|
Commitment
|
|
Investment
(1)
|
|
Commitment
|
|
Fair Value
|
Development property investments:
|
|
|
|
|
|
|
|
|
|
Loan investments with a profits interest:
|
|
|
|
|
|
|
|
|
|
6/10/2015
|
|
Atlanta 1
(2)
|
|
$
|
8,132
|
|
$
|
8,010
|
|
$
|
122
|
|
$
|
10,507
|
6/19/2015
|
|
Tampa 1
(2)
|
|
|
5,369
|
|
|
5,285
|
|
|
84
|
|
|
6,058
|
6/26/2015
|
|
Atlanta 2
(2)
|
|
|
6,050
|
|
|
5,754
|
|
|
296
|
|
|
8,519
|
6/29/2015
|
|
Charlotte 1
(2)
|
|
|
7,624
|
|
|
7,126
|
|
|
498
|
|
|
10,551
|
7/2/2015
|
|
Milwaukee
(2)
|
|
|
7,650
|
|
|
7,377
|
|
|
273
|
|
|
8,762
|
7/31/2015
|
|
New Haven
(2)
|
|
|
6,930
|
|
|
6,412
|
|
|
518
|
|
|
8,399
|
8/10/2015
|
|
Pittsburgh
(2)
|
|
|
5,266
|
|
|
4,574
|
|
|
692
|
|
|
6,591
|
8/14/2015
|
|
Raleigh
(3)
|
|
|
8,792
|
|
|
4,277
|
|
|
4,515
|
|
|
4,260
|
9/30/2015
|
|
Jacksonville 1
(2)
|
|
|
6,445
|
|
|
5,988
|
|
|
457
|
|
|
8,830
|
10/27/2015
|
|
Austin
(2)
|
|
|
8,658
|
|
|
7,000
|
|
|
1,658
|
|
|
8,779
|
9/20/2016
|
|
Charlotte 2
(3)
|
|
|
12,888
|
|
|
4,517
|
|
|
8,371
|
|
|
4,360
|
11/17/2016
|
|
Jacksonville 2
(3)
|
|
|
7,530
|
|
|
3,899
|
|
|
3,631
|
|
|
4,453
|
1/4/2017
|
|
New York City 1
(2)
|
|
|
16,117
|
|
|
13,165
|
|
|
2,952
|
|
|
16,712
|
1/18/2017
|
|
Atlanta 3
|
|
|
14,115
|
|
|
3,471
|
|
|
10,644
|
|
|
3,314
|
1/31/2017
|
|
Atlanta 4
|
|
|
13,678
|
|
|
5,698
|
|
|
7,980
|
|
|
5,667
|
2/24/2017
|
|
Orlando 3
|
|
|
8,056
|
|
|
1,468
|
|
|
6,588
|
|
|
1,409
|
2/24/2017
|
|
New Orleans
|
|
|
12,549
|
|
|
-
|
|
|
12,549
|
|
|
-
|
2/27/2017
|
|
Atlanta 5
|
|
|
17,492
|
|
|
3,910
|
|
|
13,582
|
|
|
3,790
|
3/1/2017
|
|
Fort Lauderdale
|
|
|
9,952
|
|
|
1,945
|
|
|
8,007
|
|
|
1,875
|
3/1/2017
|
|
Houston
|
|
|
13,630
|
|
|
3,382
|
|
|
10,248
|
|
|
3,283
|
4/14/2017
|
|
Louisville 1
|
|
|
8,523
|
|
|
1,471
|
|
|
7,052
|
|
|
1,394
|
4/20/2017
|
|
Denver 1
|
|
|
9,806
|
|
|
1,906
|
|
|
7,900
|
|
|
1,822
|
4/20/2017
|
|
Denver 2
|
|
|
11,164
|
|
|
2,877
|
|
|
8,287
|
|
|
2,790
|
5/2/2017
|
|
Atlanta 6
|
|
|
12,543
|
|
|
3,117
|
|
|
9,426
|
|
|
3,017
|
5/2/2017
|
|
Tampa 2
|
|
|
8,091
|
|
|
890
|
|
|
7,201
|
|
|
813
|
5/19/2017
|
|
Tampa 3
|
|
|
9,224
|
|
|
729
|
|
|
8,495
|
|
|
639
|
6/12/2017
|
|
Tampa 4
|
|
|
10,266
|
|
|
1,364
|
|
|
8,902
|
|
|
1,266
|
6/19/2017
|
|
Baltimore
(4)
|
|
|
10,775
|
|
|
2,672
|
|
|
8,103
|
|
|
2,484
|
6/28/2017
|
|
Knoxville
|
|
|
9,115
|
|
|
1,656
|
|
|
7,459
|
|
|
1,573
|
6/29/2017
|
|
Boston
|
|
|
14,103
|
|
|
2,031
|
|
|
12,072
|
|
|
1,898
|
6/30/2017
|
|
New York City 2
(4)
|
|
|
26,482
|
|
|
16,712
|
|
|
9,770
|
|
|
16,333
|
7/27/2017
|
|
Jacksonville 3
|
|
|
8,096
|
|
|
888
|
|
|
7,208
|
|
|
810
|
8/30/2017
|
|
Orlando 4
|
|
|
9,037
|
|
|
1,790
|
|
|
7,247
|
|
|
1,698
|
9/14/2017
|
|
Los Angeles
|
|
|
28,750
|
|
|
7,382
|
|
|
21,368
|
|
|
7,284
|
9/14/2017
|
|
Miami
|
|
|
14,657
|
|
|
5,761
|
|
|
8,896
|
|
|
5,644
|
9/28/2017
|
|
Louisville 2
|
|
|
9,940
|
|
|
2,230
|
|
|
7,710
|
|
|
2,139
|
|
|
|
|
$
|
397,495
|
|
$
|
156,734
|
|
$
|
240,761
|
|
$
|
177,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/23/2015
|
|
Miami
|
|
|
17,733
|
|
|
10,999
|
|
|
6,734
|
|
|
10,817
|
|
|
|
|
$
|
17,733
|
|
$
|
10,999
|
|
$
|
6,734
|
|
$
|
10,817
|
|
|
Subtotal
|
|
$
|
415,228
|
|
$
|
167,733
|
|
$
|
247,495
|
|
$
|
188,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating property loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/7/2015
|
|
Newark
|
|
|
3,480
|
|
|
3,480
|
|
|
-
|
|
|
3,477
|
12/22/2015
|
|
Chicago
|
|
|
2,502
|
|
|
2,500
|
|
|
2
|
|
|
2,513
|
|
|
Subtotal
|
|
$
|
5,982
|
|
$
|
5,980
|
|
$
|
2
|
|
$
|
5,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
421,210
|
|
$
|
173,713
|
|
$
|
247,497
|
|
$
|
194,530
|
|
|
(1)
|
Represents principal balance of loan gross of origination fees.
|
(2)
|
Facility had received certificate of occupancy as of September 30, 2017. 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 September 30, 2017. See Note 4,
Fair Value of Financial Instruments
, for information regarding recognition of entrepreneurial profit.
|
(4)
|
These investments contain a higher loan-to-cost ratio and a higher interest rate, some of which interest is payment-in-kind ("PIK") interest. The PIK interest, computed at the contractual rate specified in each debt agreement, is periodically added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment.
|
The following table provides a reconciliation of the funded principal to the fair market value of investments at September 30, 2017:
|
|
|
|
|
|
|
|
Funded principal
|
|
$
|
173,713
|
Adjustments:
|
|
|
|
Unamortized origination fees
|
|
|
(3,627)
|
Change in fair value of investments
|
|
|
24,528
|
Other
|
|
|
(84)
|
Fair value of investments
|
|
$
|
194,530
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metropolitan
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Statistical Area
|
|
Total Investment
|
|
Funded
|
|
Unfunded
|
|
|
|
Closing Date
|
|
("MSA")
|
|
Commitment
|
|
Investment
(1)
|
|
Commitment
|
|
Fair Value
|
Development property investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan investments with a profits interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
4/21/2015
|
|
Orlando 1
(2) (5)
|
|
$
|
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)
|
|
|
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)
|
|
|
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
(4)
|
|
|
2,800
|
|
|
2,800
|
|
|
-
|
|
|
2,768
|
7/7/2015
|
|
Newark
|
|
|
3,480
|
|
|
3,480
|
|
|
-
|
|
|
3,441
|
10/30/2015
|
|
Nashville
(4)
|
|
|
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)
|
These investments were fully repaid during the nine months ended September 30, 2017.
|
(5)
|
In the nine months ended September 30, 2017, the Company purchased the economic rights of the Class A membership units of the limited liability companies which own these development property investments. As such, these investments are presented as self-storage real estate owned in the September 30, 2017 Consolidated Balance Sheet. See Note 7,
Self-Storage Real Estate Owned
, for additional discussion.
|
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
|
The Company has elected the fair value option of accounting for all of its investment portfolio investments in order to provide stockholders and others who rely on the Company’s financial statements with a more complete and accurate understanding of the Company’s economic performance, including its revenues and value inherent in its equity participation in development projects. See Note 4,
Fair Value of Financial Instruments
, for additional disclosure on the valuation methodology and significant assumptions.
No loans were in non-accrual status as of September 30, 2017 and December 31, 2016.
All of the Company’s development property investments with a profits interest would have been accounted for under the equity method had the Company not elected the fair value option. For these development property investments with a profits interest, the assets and liabilities of the equity method investees totaled approximately
$188.2
million and
$156.7
million, respectively, at September 30, 2017 and totaled approximately
$71.0
million and
$60.2
million, respectively, at December 31, 2016. These investees had revenues of approximately
$2.2
million and a net operating income, excluding depreciation and interest expense, of approximately
$0.2
for the
nine months ended September 30, 2017. These investees had revenues of approximately
$0.3
million and a net operating loss, excluding dep
reciation and interest expense,
of approximately
$0.6
million for the nine months ended September 30, 2016. For the nine months ended September 30, 2017, 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 nine months ended September 30, 2017 of
$4.1
million from the New York City 1 MSA development property investment with a profits interest.
For 11 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 these put provisions as of September 30, 2017.
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 table below 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
three
properties
between 40% and 100% complete at September 30, 2017, 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.
Ten
properties
had
reached construction completion at September 30, 2017. 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 that differ from the developer’s equity investment, bona fide third-party offers to purchase development projects, sales of development projects, or sales of comparable properties in its markets.
Level 3 Fair Value Measurements
The following tables summarize the significant unobservable inputs the Company used to value its investments categorized within Level 3 as of September 30, 2017 and December 31, 2016. These tables are not intended to be all-inclusive, but instead to capture the significant unobservable inputs relevant to the Company’s determination of fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
|
|
Unobservable Inputs
|
|
|
Primary Valuation
|
|
|
|
|
|
Weighted
|
Asset Category
|
|
Techniques
|
|
Input
|
|
Estimated Range
|
|
Average
|
|
|
|
|
|
|
|
|
|
Development property investments
(a)
|
|
Income approach analysis
|
|
Market yields/discount rate
|
|
7.72 - 10.37%
|
|
8.72%
|
|
|
|
|
Exit date
|
|
0.33 - 6.96 years
|
|
2.87 years
|
|
|
|
|
|
|
|
|
|
Development property investments with a profits interest
(b)
|
|
Option pricing model
|
|
Volatility
|
|
63.82 - 93.54%
|
|
73.85%
|
|
|
|
|
Exit date
|
|
0.67 - 6.96 years
|
|
3.02 years
|
|
|
|
|
Capitalization rate
(c)
|
|
5.35 - 6.00%
|
|
5.50%
|
|
|
|
|
Discount rate
|
|
8.35 - 9.00%
|
|
8.50%
|
|
|
|
|
|
|
|
|
|
Operating property loans
|
|
Income approach analysis
|
|
Market yields/discount rate
|
|
5.86 - 6.76%
|
|
6.24%
|
|
|
|
|
Exit date
(d)
|
|
4.23 - 4.91 years
|
|
4.62 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)
|
Thirteen
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, 2016
|
|
|
|
|
Unobservable Inputs
|
|
|
Primary Valuation
|
|
|
|
|
|
Weighted
|
Asset Category
|
|
Techniques
|
|
Input
|
|
Estimated Range
|
|
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.
|
The fair value measurements are sensitive to changes in unobservable inputs. A change in those inputs to a different amount might result in a significantly higher or lower fair value measurement. The following provides a discussion of the impact of changes in each of the unobservable inputs on the fair value measurement.
Market yields - changes in market yields and discount rates, each in isolation, may change the fair value of certain of the Company’s investments. Generally, an increase in market yields or discount rates may result in a decrease in the fair value of certain of the Company’s investments. The following fluctuations in the market yields/discount rates would have had the following impact on the fair value of our investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in fair value of investments
|
Change in market yields/discount rates
(in millions)
|
|
September 30, 2017
|
|
December 31, 2016
|
Up 25 basis points
|
|
$
|
(0.9)
|
|
$
|
(0.3)
|
Down 25 basis points, subject to a minimum yield/rate of 10 basis points
|
|
|
1.0
|
|
|
0.3
|
Capitalization rate - changes in capitalization rate, in isolation and all else equal, may change the fair value of certain of the Company’s development investments containing profits interests. Generally an increase in the capitalization rate assumption may result in a decrease in the fair value of the Company’s investments. The following fluctuations in the capitalization rates would have had the following impact on the fair value of our investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in fair value of investments
|
Change in capitalization rates
(in millions)
|
|
September 30, 2017
|
|
December 31, 2016
|
Up 25 basis points
|
|
$
|
(2.5)
|
|
$
|
(2.1)
|
Down 25 basis points
|
|
|
2.7
|
|
|
2.3
|
|
|
|
|
|
|
|
Up 50 basis points
|
|
|
(4.8)
|
|
|
(3.8)
|
Down 50 basis points
|
|
|
5.8
|
|
|
4.6
|
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 three and nine months ended September 30, 2017 and 2016.
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 nine month period ended September 30, 2017:
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
105,007
|
Net realized gains
|
|
|
-
|
Net unrealized gains
|
|
|
9,066
|
Fundings of principal and change in unamortized origination fees
|
|
|
110,600
|
Repayments of loans
|
|
|
(22,746)
|
Payment-in-kind interest
|
|
|
5,522
|
Reclassification of self-storage real estate owned
|
|
|
(12,919)
|
Net transfers in or out of Level 3
|
|
|
-
|
Balance at September 30, 2017
|
|
$
|
194,530
|
As of September 30, 2017 and December 31, 2016, the total net unrealized appreciation on the investments that use Level 3 inputs was
$24.5
million and
$19.2
million, respectively.
For the three and nine months ended September 30, 2017 and 2016, substantially all of the change in fair value of investments in the Company’s Consolidated Statements of Operations was 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 September 30, 2017, the SL1 Venture had closed on eight new development property investments with a profits interest with an aggregate commitment amount of approximately
$81.4
million, bringing the total aggregate commitment of
the
SL1 Venture’s investments to
$123.3
million as of September 30, 2017. Accordingly, HVP III’s total commitment for a 90% interest in the SL1 Venture is
$111.0
million, and the Company’s total commitment for a 10% interest in the SL1 Venture is
$12.3
million.
Under the JV Agreement, the Company receives a priority distribution (after debt service and any reserve but before any other distributions) out of operating cash flow and residual distributions based upon
1% of the committed principal amount of loans made by the SL1 Venture, exclusive of the loans contributed to the SL1 Venture by the Company. Operating cash flow of the SL1 Venture (after debt service, reserves and the foregoing priority distributions) is distributed in accordance with capital commitments. Residual cash flow from capital and other events (after debt service, reserves and priority distributions) will be distributed (i) pro rata in accordance with capital commitments (its “Percentage Interest”) until each member has received a return of all capital contributed; (ii) pro rata in accordance with each member’s Percentage Interest until Heitman has achieved a 14% internal rate of return; (iii) to Heitman in an amount equal to its Percentage Interest less 10% and to the Company in an amount equal to the Company’s Percentage Interest plus 10% until Heitman has achieved a 17% internal rate of return; (iv) to Heitman in an amount equal to its Percentage Interest less 20% and to the Company in an amount equal to the Company’s Percentage Interest plus 20% until Heitman has achieved a 20% internal rate of return; and (v) any excess to Heitman in an amount equal to its Percentage Interest less 30% and to the Company in an amount equal to the Company’s Percentage Interest plus 30%. However, the Company will not be entitled to any such promoted interest prior to the earlier to occur of the third anniversary of the JV Agreement and Heitman receiving distributions to the extent necessary to provide Heitman with a 1.48 multiple on its contributed capital.
Since the allocation of cash distributions and liquidating distributions are determined as described in the preceding paragraph, the Company has applied the hypothetical-liquidation-at-book-value (“HLBV”) method to allocate the earnings of
the
SL1 Venture. Under the HLBV approach, the Company’s share of the investee’s earnings or loss is calculated by:
|
|
|
|
|
The Company’s capital account at the end of the period assuming that the investee was liquidated or sold at book value, plus
|
|
|
|
|
|
Cash distributions received by the Company during the period, minus
|
|
|
|
|
|
|
Cash contributions made by the Company during the period, minus
|
|
|
|
|
|
|
The Company’s capital account at the beginning of the period assuming that the investee were liquidated or sold at book value.
|
The
SL1 Venture has elected the fair value option of accounting for its development property investments with a profits interest, which are equity method investments of
the
SL1 Venture. The assumptions used to value
the
SL1 Venture’s investments are materially consistent with those used to value the Company’s investments. As of September 30, 2017,
the
SL1 Venture had eleven development property investments with a profits interest as described in more detail in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metropolitan
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Statistical Area
|
|
Total Investment
|
|
Funded
|
|
Unfunded
|
|
|
|
Closing Date
|
|
("MSA")
|
|
Commitment
|
|
Investment
(1)
|
|
Commitment
|
|
Fair Value
|
5/14/2015
|
|
Miami 1
(2) (3)
|
|
$
|
13,867
|
|
$
|
9,455
|
|
$
|
4,412
|
|
$
|
10,929
|
5/14/2015
|
|
Miami 2
(2) (3)
|
|
|
14,849
|
|
|
8,486
|
|
|
6,363
|
|
|
8,947
|
9/25/2015
|
|
Fort Lauderdale
(2) (3)
|
|
|
13,230
|
|
|
7,298
|
|
|
5,932
|
|
|
7,796
|
4/15/2016
|
|
Washington DC
(4)
|
|
|
17,269
|
|
|
14,346
|
|
|
2,923
|
|
|
15,937
|
4/29/2016
|
|
Atlanta 1
(3)
|
|
|
10,223
|
|
|
5,140
|
|
|
5,083
|
|
|
5,459
|
7/19/2016
|
|
Jacksonville
(4)
|
|
|
8,127
|
|
|
6,989
|
|
|
1,138
|
|
|
10,541
|
7/21/2016
|
|
New Jersey
|
|
|
7,828
|
|
|
1,621
|
|
|
6,207
|
|
|
1,561
|
8/15/2016
|
|
Atlanta 2
(4)
|
|
|
8,772
|
|
|
6,535
|
|
|
2,237
|
|
|
7,423
|
8/25/2016
|
|
Denver
(3)
|
|
|
11,032
|
|
|
7,605
|
|
|
3,427
|
|
|
8,678
|
9/28/2016
|
|
Columbia
(4)
|
|
|
9,199
|
|
|
7,651
|
|
|
1,548
|
|
|
8,525
|
12/22/2016
|
|
Raleigh
|
|
|
8,877
|
|
|
2,431
|
|
|
6,446
|
|
|
2,398
|
|
|
Total
|
|
$
|
123,273
|
|
$
|
77,557
|
|
$
|
45,716
|
|
$
|
88,194
|
|
|
(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.
|
(3)
|
Facility had achieved at least
40%
construction completion but had not received certificate of occupancy as of September 30, 2017. See Note 4,
Fair Value of Financial Instruments
, for information regarding recognition of entrepreneurial profit.
|
(4)
|
Facility had received certificate of occupancy as of September 30, 2017. See Note 4,
Fair Value of Financial Instruments
, for information regarding recognition of entrepreneurial profit.
|
As of September 30, 2017, the SL1 Venture had total assets of
$88.8
million and total liabilities of
$3.6
million. During the three and nine months ended September 30, 2017, the SL1 Venture had net income of
$6.6
million and
$14.1
million, of which
$0.7
million and
$1.7
million was allocated to the Company and
$5.8
million and
$12.4
million was allocated to HVP III, respectively, under the HLBV method. At September 30, 2017,
$0.2
million of transaction expenses were included in the carrying amount of the Company’s investment in the SL1 Venture. Additionally, the Company may from time to time make advances to the SL1 Venture. At September 30, 2017 and December 31, 2016, the Company had
$3.5
million and
$2.3
million, respectively, 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 these guarantees as of September 30, 2017.
Under the JV Agreement, Heitman and the Company seek to obtain and, if obtained, share joint rights of first refusal to acquire self-storage facilities that are the subject of development property investments made by the SL1 Venture. Additionally, so long as the Company, through its operating subsidiary, is a member of the SL1 Venture and the SL1 Venture holds any assets, the Company will not make any investment of debt or equity or otherwise, directly or indirectly, in one or more new joint ventures or similar programs for the purposes of funding or providing development loans or financing, directly or indirectly, for the development, construction or conversion of self-storage facilities, in each case without first offering such opportunity to Heitman to participate on substantially the same terms as those set forth in the JV Agreement, either through the SL1 Venture or a newly formed real estate venture.
The JV Agreement permits Heitman to cause the Company to repurchase from Heitman its Developer Equity Interests (as defined in the JV Agreement) in certain limited circumstances. Under the JV Agreement, if a developer causes to be refinanced a self-storage facility with respect to which the SL1 Venture has made a development property investment and such refinancing does not coincide with a sale of the underlying self-storage facility, then at any time after the fourth anniversary of the commencement of the SL1 Venture, Heitman may either put to the Company its share of the Developer Equity Interests in respect of each such development property investment, or sell Heitman’s Developer Equity Interests to a third party. The Company concluded that the likelihood of loss is remote and assigned no value to these puts as of September 30, 2017.
The Company is the managing mem
ber of the SL1 Venture and
manage
s
and administer
s
(i) the day-to-day business and affairs of the SL1 Venture and any of its acquired properties and (ii) loan servicing and other administration of the approved development property investments. The Company will be paid a monthly expense reimbursement amount by the SL1 Venture in connection with its role as managing member, as set forth in the JV Agreement. Heitman may remove the Company as the managing member of the SL1 Venture if it commits an event of default (as defined in the JV Agreement), if it undergoes a change of control (as defined in the JV Agreement), or if it becomes insolvent.
Heitman approves all “Major Decisions” of the SL1 Venture, as defined in the JV Agreement, including, but not limited to, each investment of capital, the incurrence of any indebtedness, the sale or other disposition of assets of the SL1 Venture, the replacement of the managing member, the acceptance of new members into the SL1 Venture and the liquidation of the SL1 Venture.
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 und
erlying property loans. The put options
, if exercised, require 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 options
at September 30, 2017.
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
development property
VIEs, the Company identified the activities that most significantly impact the
development property
VIEs’ economic performance. Such activities are (1) managing the construction and operations of the project, (2) selecting the property manager, (3) making financing decisions, (4) authorizing capital expenditures and (5) disposing of the property. Although the Company has certain participating and protective rights, it does not have the power to direct the activities that most significantly impact the
development property
VIEs’ economic performance and is not the primary beneficiary; therefore, the Company does not consolidate the
development property
VIEs.
The Company has recorded assets of
$188.5
million and $95.1 million at
September 30, 2017
and
December 31, 2016
, respectively, for its variable interest in the
development property
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
development property
VIEs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Assets recorded related to VIEs
|
|
$
|
188,540
|
|
$
|
95,102
|
Unfunded loan commitments to VIEs
|
|
|
247,495
|
|
|
54,950
|
Maximum exposure to loss
|
|
$
|
436,035
|
|
$
|
150,052
|
The Company has a construction completion guaranty from the managing members of the
development property
VIEs or individual affiliates/owners of such managing members.
Investment in Real Estate Venture
The Company determined that the SL1 Venture qualifies as a VIE because it does not have enough equity to finance its activities without additional subordinated financial support. In determining whether the Company is the primary beneficiary of the entity, the Company identified the activities that most significantly impact the entity’s economic performance. Such activities are (1) approving self-storage development investments and acquiring self-storage properties, (2) managing directly-owned properties, (3) obtaining debt financing, and (4) disposing of investments. Although the Company has certain rights, it does not have the power to direct the activities that most significantly impact the entity’s economic performance and thus is not the primary beneficiary. As such, the Company does not consolidate the entity and accounts for its unconsolidated interest in the SL1 Venture using the equity method of accounting. The Company’s investment in the SL1 Venture is included in the investment in and advances to real estate venture balance in the Consolidated Balance Sheets, and earnings from the SL1 Venture are included in equity in earnings from unconsolidated real estate venture in the Company’s Consolidated Statements of Operations. The Company’s maximum contribution to the SL1 Venture is
$12.3
million, and as of
September 30, 2017
and
December 31, 2016
, the Company’s remaining unfunded commitment to the SL1 Venture is
$4.5
million and
$9.4
million, respectively.
7. SELF-STORAGE REAL ESTATE OWNED
On February 3, 2017, the Company purchased
50%
of the economic rights of the Class A membership units of a limited liability company that owns the Orlando 1 development property investment with a profits interest for
$1.3
million and increased its profits interest on this development property investment from
49.9%
to
74.9%
. The Class A member retained all management and voting rights in the limited liability company. Previously, the Company accounted for this investment as an equity method investment. Because the Company was entitled to greater than 50% of the residual profits from the investment, the Company accounted for this investment as a real estate investment in its consolidated financial statements in accordance with ASC 310.
On August 9, 2017, the Company purchased the remaining
50%
of the economic rights of the Class A membership units of a limited liability company that owns the Orlando 1 development property investment with a profits interest and
100%
of the economic rights of the Class A membership units of a limited liability company that owns the Orlando 2 development property investment with a profits interest for
$1.6
million and increased its profits interest on these development property investment from 74.9% to
100%
and 49.9% to
100%
, respectively
.
The Orlando 2 investment is an additional phase to the Orlando 1 investment that is being operated as one self-storage facility.
The Company now owns all management and voting rights in the limited liability companies. Previously, the Company accounted for the Orlando 1 investment as a real estate investment and the Orlando 2 investment as an equity method investment. Because the Company is now entitled to greater than 50% of the residual profits from the Orlando 2 investment, the Company will account for this investment as a real estate investment in its consolidated financial statements. The Company will continue to account for the Orlando
1
investment as a real estate investment. Accordingly, as of August 9, 2017, the Company wh
olly owns and fully consolidates these investments in the
accompanying consolidated financial statements
.
The Company evaluated this purchase under ASU 2017-01 and concluded that the transaction consisted of a single identifiable asset that represents substantially all of the fair value of the gross assets acquired. Therefore, this transaction does not constitute the purchase of a business and has been treated as an asset acquisition.
In accordance with ASU
2017-01
, as of August 9, 2017, the Company’s basis in the self-storage real estate owned is recorded at cost (equal to
the
cash
consideration
paid
and
the funded loan balance
, net of unamortized origination fees)
, plus unrealized gains recorded at the date of
acquisition
, which was February 3, 2017 for the Orlando 1 development property investment and August 9, 2017 for the Orlando 2
development property investment
. The allocation to
the basis of the assets acquired is based on their relative fair values
.
Th
e following table shows the Company’s
basis
in this facility
as of August 9, 2017:
|
|
|
|
|
|
|
|
Funded principal balance, net of unamortized origination fees
|
|
$
|
9,139
|
Unrealized appreciation on investments
|
|
|
3,780
|
Cash consideration paid
|
|
|
2,856
|
Net property working capital acquired
|
|
|
52
|
Total cost basis
|
|
$
|
15,827
|
The following table shows the impact of this real estate investment on the Company’s Consolidated Balance Sheet as of
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Cash and cash equivalents
|
|
$
|
60
|
Prepaid expenses and other assets
|
|
|
2
|
|
|
|
|
Land
|
|
|
1,505
|
Building and improvements
|
|
|
13,720
|
In-place leases
|
|
|
602
|
Accumulated depreciation and amortization
|
|
|
(233)
|
Self-storage real estate owned
|
|
$
|
15,594
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities
|
|
$
|
125
|
The following table shows the impact of this real estate investment on the Company’s Consolidated Statement of Operations for the three and
nine
months ended
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30, 2017
|
|
September 30, 2017
|
|
|
|
|
|
|
|
Rental revenues
|
|
$
|
160
|
|
$
|
328
|
|
|
|
|
|
|
|
Property operating expenses of real estate owned
|
|
|
(114)
|
|
|
(188)
|
Depreciation and amortization expense
|
|
|
(172)
|
|
|
(233)
|
Total expenses of real estate owned
|
|
$
|
(286)
|
|
$
|
(421)
|
8. OTHER LOANS, AT COST
As of
September 30, 2017
, the Company had no outstanding bridge loans. During the
nine
months ended
September 30, 2017
, the Company received repayments of
$17.4
million related to seven bridge loans and entered into two new bridge loans with an aggregate commitment and funded amount of
$7.3
million
, which are included in the seven bridge loans repaid during the year
. At
December 31, 2016
, the Company had executed five bridge loans with a balance of
$10.1
million extended to four limited liability companies that are under common control with borrowers in certain of the Company’s development property investments. These bridge loans were accounted for under the cost method, and fair value approximates cost at
December 31, 2016
. None of these bridge loans were in non-accrual status as of
December 31, 2016
. The Company determined that
no
allowance for loan loss was necessary at
December 31, 2016
.
The Company also had executed eight revolving loan agreements with an aggregate outstanding principal amount of
$1.4
million at September 30, 2017. Seven 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. Seven of these borrowers are either directly or indirectly owners of certain of the Company’s development property investments and one is a prospective developer.
Four
of
the
agreements
provide
for borrowings of up to
$0.5
million,
one
provides for borrowings of up to
$0.1
million,
one
provides for borrowings of up to
$0.
4
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
$4.2
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
nine
months ended
September 30, 2017
, the Company received repayments on these revolving loan agreements of
$2.9
million and draws of
$2.6
million. At
December 31, 2016
, the Company had executed six revolving loan agreements with an aggregate outstanding principal amount of
$1.7
million. These loans are accounted for under the cost method, and fair value approximates cost at
September 30, 2017
and
December 31, 2016
. None of these loans are in non-accrual status as of
September 30, 2017
and
December 31, 2016
. The Company determined that
no
allowance for loan loss was necessary at
September 30, 2017
and
December 31, 2016
.
9. DEBT
Credit Facility
On July 25, 2017, the Operating Company entered into
a
$100
million senior secured revolving credit facility
with KeyBank National Association, as ad
ministrative agent
, KeyBanc Capital Markets Inc., as lead arranger, and the other lenders party thereto
(the “Credit Facility”)
. Pursuant to an accordion feature, the Operating Company may from time to time increase the commitments up to an aggregate amount of
$200
million, subject to, among other things, an absence of default under the Credit Facility, as well as receiving commitments from lenders for the additional amounts.
At closing, the Operating Company borrowed
$20.0
million of the
$33.3
million then available under the Credit Facility. The Company used the proceeds to repurchase senior participation interests outstanding on five of the Company’s development investments from the commercial banks who held such senior participation interests, each of whom agreed to participate as lenders in the Credit Facility, and to pay fees and expenses of procuring the Credit Facility. On July 26, 2017, the Operating Company used proceeds from the Company’s recently completed offering of its common stock to fully repay the
$20.0
million borrowed at closing, leaving
$33.3
million available under the credit facility for future draws.
The Operating Company intends to use future borrowings under the Credit Facility to fund its investments, to make secured or unsecured loans to borrowers in connection with its investments and for general corporate purposes.
On July 25, 2017, the Company and certain wholly-owned subsidiaries of the Operating Company entered into an Unconditional Guaranty of Payment and Performance whereby they have agreed to unconditionally guarantee the obligations of the Operating Company under the Credit Facility. The Credit Facility is secured by substantially all of
the Company’s
development investments, and other subsidiaries of the Operating Company may be added as guarantors from time to time during the term of the Credit Facility. The Credit Facility has a scheduled maturity date on
July 24, 2020
. Borrowings under the Credit Facility are secured by two different pools of collateral: one consisting of the Company’s mortgage loans extended to developers and the other consisting of self-storage properties owned by the Company.
The amount available to borrow under the Credit Facility is limited according to a borrowing base valuation of the assets available as collateral. For loans secured by Company mortgage loans, the borrowing base availability is the lesser of (i)
60%
of the value of the Company mortgage loans, (ii) the maximum principal amount which would not cause the outstanding loans under the Credit Facility secured by the Company mortgage loans to be greater than
50%
of the underlying real estate asset fair value securing the Company mortgage loans and (iii) for any Company mortgage loan that has been included in the borrowing base for greater than
18
months, the maximum principal amount which would not cause the ratio of (a) adjusted net operating income for the underlying real estate asset securing such Company mortgage loan divided by (b) an implied debt service amount to be less than
1.30
to 1.00. For loans secured by self-storage properties, the borrowing base availability is the lesser of (i) the maximum principal amount that would not cause the outstanding loans under the Credit Facility secured by self-storage properties to be greater than
65%
of the value of such self-storage properties and (ii) the maximum principal amount that would not cause the ratio of (i) aggregate adjusted net operating income from all self-storage properties included in the borrowing base divided by (ii) an implied debt service coverage amount to be less than
1.30
to 1.00.
The Credit Facility includes certain requirements that may limit the borrowing capacity available to the Company from time to time. Under the terms of the Credit Facility, the outstanding principal balance of the revolving credit loans, swing loans and letter of credit liabilities under the Credit Facility may not exceed the borrowing base availability.
Each loan made under the Credit Facility will bear interest at either, at the Operating Company’s election, a base rate plus a margin of either
1.75%
or
2.75%
or LIBOR plus a margin of either
2.75%
or
3.75%
, in each case depending on the borrowing base available for such loan. In addition, the Operating Company is required to pay a fee of a per diem rate of
0.35%
per annum, times the excess of the sum of the commitments of the lenders, as in effect from time to time, over the outstanding principal amount of revolving credit loans under the Credit Facility.
The Credit Facility contains certain customary representations and warranties and financial and other affirmative and negative covenants. The Operating Company’s ability to borrow under the Credit Facility is subject to ongoing compliance by the Company and the Operating Company with various customary restrictive covenants, including but not limited to limitations on its incurrence of indebtedness, investments, dividends, asset sales, acquisitions, mergers and consolidations and liens and encumbrances. In addition, the Credit Facility contains certain financial covenants including the following:
|
|
|
|
|
total consolidated indebtedness not exceeding
50%
of gross asset value;
|
|
|
a minimum fixed charge coverage ratio (defined as the ratio of consolidated adjusted earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of
0.75
to 1.00 during the period between July 25, 2017 and June 30, 2018,
0.90
to 1 during the period between July 1, 2018 and December 31, 2018 and
1.20
to 1 during the period between January 1, 2019 through the maturity of the Credit Facility;
|
|
|
a minimum consolidated tangible net worth (defined as gross asset value less total consolidated indebtedness) of
$183.3
million plus
75%
of the sum of any additional net offering proceeds;
|
|
|
when aggregate loan commitments under the Credit Facility exceed
$50
million, unhedged variable rate debt cannot exceed
25%
of consolidated total indebtedness;
|
|
|
liquidity of no less than
$50
million for the period between July 25, 2017 and December 31, 2018 or on and after December 31, 2018, liquidity of no less than the sum of (i) total unfunded loan commitments of the Company and its subsidiaries plus (ii)
$25
million; and
|
|
|
a debt service coverage ratio (defined as the ratio of consolidated adjusted earnings before interest, taxes, depreciation and amortization to the Company’s consolidated interest expense and debt principal payments for any given period) of
2
to 1.
|
The Credit Facility provides for standard events of default, including nonpayment of principal and other amounts when due, non-performance of covenants, breach of representations and warranties, certain bankruptcy or insolvency events, and changes in control. If an event of default occurs and is continuing under the Credit Facility, the lenders may, among other things, terminate their commitments under the Credit Facility and require the immediate payment of all amounts owed thereunder.
As of September 30, 2017,
no
borrowings were outstanding under the Credit Facility and
$33.3
million was available for borrowing under the Credit Facility.
As of September 30, 2017, the Company was in compliance with all of its financial covenants and it anticipates being in compliance with all of its financial covenants throughout the term of the Credit Facility.
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”). 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 connection with the repurchase, which included a
$0.1
million prepayment penalty that is recorded in interest expense in the Consolidated Statements of Operations. The Company
paid to the
bank interest on the outstanding balance of the Operating Property A Note at the rate of 30-day LIBOR plus
3.85%
for the three and nine months ended September 30, 2017
. On July 20, 2017, the Company received proceeds of
$2.8
million for an early payoff on the remaining Operating Property A Note in the New Orleans, Louisiana MSA, and the Company repurchased the senior participation on this loan. The Company paid the regional commercial bank a total of
$1.8
million in conjunction with the repurchase, which included an
$18,000
prepayment penalty.
As such, t
here was
no
outstanding balance for the Operating Property A Note at
September 30, 2017
.
O
n 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 as 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. As part of the Participation Agreement, 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 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
4.33%
at September 30, 2017.
The Company also paid a loan fee of 100 basis points, or $0.1 million upon closing of the loan.
The Miami A Note initially had a maturity date of
July 1, 2017
. During the
nine
months ended
September 30, 2017
, the maturity date was extended to
January 31, 2018
, at which time the Company is obligated to repurchase the Miami A Note at the then outstanding principal balance thereof. The outstanding
balance for the Miami A Note as of
September 30, 2017 was
$0.7
million.
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
paid
interest to the bank on its senior participations at the annual rate of 30-day LIBOR plus
3.50%
,
for the three and nine months ended
September 30, 2017
. On July 25, 2017, the Company entered into the Credit Facility and subsequently repurchased the July 2016 A Notes. As such, there is
no
outstanding balance as of September 30, 2017.
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
paid
interest to the bank on the senior participation at the annual rate of 30-day LIBOR plus
3.50%
,
for the three and nine months
ended
September 30, 2017
. On July 25, 2017, the Company entered into the Credit Facility and subsequently repurchased the October 2016 A Note. As such, there is
no
outstanding balance as of September 30, 2017.
In connection with the repurchase of the July 2016 A Notes and the October 2016 A Notes and entering into the Credit Facility, the Company recorded a loss on modification of debt of
$0.2
million for the three and nine months ended September 30, 2017.
The table below details the bank commitment and outstanding balance of our senior participation at
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment by Bank
|
|
Amount Borrowed
|
|
Remaining Funds
|
|
Interest Rate
|
|
Effective Interest Rate at September 30, 2017
|
|
Maturity Date
|
Miami A Note
|
|
$
|
10,001
|
|
$
|
732
|
|
$
|
9,269
|
|
30-day LIBOR + 3.10%
|
|
4.33
|
%
|
|
January 31, 2018
|
Unamortized fees
|
|
|
|
|
|
(64)
|
|
|
|
|
|
|
|
|
|
|
Net balance
|
|
|
|
|
$
|
668
|
|
|
|
|
|
|
|
|
|
|
The table below details the bank commitments and outstanding balances of our 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
|
|
|
|
|
|
|
|
|
|
|
10. STOCKHOLDERS’ EQUITY
The Company had
14,235,848
and
8,956,354
shares of common stock
issued
and
outstanding
, which included
185,002
and
120,001
of nonvested restricted stock, as of September 30, 2017 and December 31, 2016, respectively. The Company had
10,000
shares of Series A Preferred Stock issued and
outstanding
as of September 30, 2017 and December 31, 2016.
Common Stock Offerings
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.
On April 5, 2017, the Company entered into an at-the-market continuous equity offering program (“ATM Program”) with an aggregate offering price of up to
$50.0
million. As of September 30, 2017, the Company has issued and sold an aggregate of
1,093,202
shares of common stock at a weighted average price of
$22.69
per share under the ATM Program, receiving net proceeds after commissions of
$24.2
million.
On June 27, 2017, the Company received
$83.9
million in proceeds, net of underwriter’s discount and offering costs, related to the public offering of
4,025,000
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 September 30, 2017, the Company had repurchased and retired a total of
213,078
shares of its common stock at an aggregate cost of approximately
$3.2
million. As of September 30, 2017, 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 were 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. On May 3, 2017, the Company’s stockholders approved, and the Company adopted, the Amended and Restated 2015 Stock Incentive Plan increasing the number of shares of common stock reserved for issuance under the Plan by
170,000
shares from 200,000 shares to
370,000
shares and extending the term of the Plan until May 2, 2027. On May 3, 2017, three non-employee directors of the Company were each granted an award of
2,138
shares of common stock (total of
6,414
shares), which immediately vested on the grant date. In addition, certain of the Company’s officers and certain employees of the Manager were granted a cumulative total of
105,000
shares of restricted common stock, which vest ratably over a
three
-year period.
Restricted Stock Awards
The Amended and Restated 2015 Equity Incentive Plan permits the issuance of restricted
shares of the Company’s common stock
to employees
of the Manager (as the Company has no employees) and the Company’s non-employee directors. As of September 30, 2017 and December 31, 2016
,
288,254
and
176,840
shares of restricted stock
, respectively,
had been granted,
of which
55,172
vested in 2016, 46,413 vested during the nine months ended September 30, 2017,
75,003
will vest in 2018,
55,001
will vest in 2019 and
54,998
will vest in 2020. Additionally,
1,667
were forfeited during the year ended December 31, 2016. Non-vested shares are earned over the respective vesting period based on a service condition only. Expenses related to restricted stock awards are charged to compensation expense and are recognized over the respective vesting period (primarily
three
to
five
years) of the awards. For restricted stock issued to non-employee directors of the Company, compensation expense is based on the market value of the shares at the grant date. For restricted stock awards issued to employees of the Manager, 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
$0.3
million of stock-based compensation expense for the three months ended September 30, 2017 and 2016, and
$1.0
million and
$0.8
million of stock-based compensation expense for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017 and December 31, 2016, the total unrecognized compensation cost related to the Company’s restricted shares was approximately
$3.3
million and
$2.0
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
$20.55
and
$21.05
as of September 30, 2017 and December 31, 2016, respectively, for awards issued to employees of the Manager. This cost is expected to be recognized over the remaining weighted average period of
2.5
years. The Company presents stock-based compensation expense in general and administrative expenses in the Consolidated Statements of Operations.
A summary of changes in the Company’s restricted shares
of common stock
for the three and nine months ended September 30, 2017 and 2016 is as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Three months ended
|
|
|
September 30, 2017
|
|
September 30, 2016
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
average grant
|
|
|
|
average grant
|
|
|
Shares
|
|
date fair value
|
|
Shares
|
|
date fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30,
|
|
|
202,502
|
|
$
|
21.33
|
|
|
139,168
|
|
$
|
19.91
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Vested
|
|
|
(17,500)
|
|
|
18.64
|
|
|
(17,500)
|
|
|
18.64
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Nonvested at September 30,
|
|
|
185,002
|
|
$
|
21.58
|
|
|
121,668
|
|
$
|
20.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
Nine months ended
|
|
|
September 30, 2017
|
|
September 30, 2016
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
average grant
|
|
|
|
average grant
|
|
|
Shares
|
|
date fair value
|
|
Shares
|
|
date fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31,
|
|
|
120,001
|
|
$
|
20.10
|
|
|
162,500
|
|
$
|
20.08
|
Granted
|
|
|
111,414
|
|
|
22.59
|
|
|
14,340
|
|
|
13.95
|
Vested
|
|
|
(46,413)
|
|
|
20.28
|
|
|
(55,172)
|
|
|
18.27
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Nonvested at September 30,
|
|
|
185,002
|
|
$
|
21.58
|
|
|
121,668
|
|
$
|
20.10
|
Nonvested restricted shares
of common stock
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 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
ranks
senior to the shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company, on parity with any class or series of capital stock of the Company expressly designated as ranking on parity with the Series A Preferred Stock with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company, junior to any class or series of capital stock of the Company expressly designated as ranking senior to the Series A Preferred Stock with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company and junior in right of payment to the Company’s existing and future indebtedness.
Holders of Series A Preferred Stock are entitled to a cumulative cash distribution (“Cash Distribution”) equal to (A)
7.0%
per annum on the Liquidation Value for the period beginning on the respective date of issuance until the sixth anniversary of the Effective Date, payable quarterly in arrears, (B)
8.5%
per annum on the Liquidation Value for the period beginning the day after the sixth anniversary of the Effective Date and for each year thereafter as long as the Series A Preferred Stock remains issued and outstanding, payable quarterly in arrears, and (C) an amount in addition to the amounts in (A) and (B) equal to
5.0%
per annum on the Liquidation Value upon the occurrence of certain triggering events (a “Cash Premium”). In addition, the holders of the Series A Preferred Stock will be entitled to a cumulative dividend payable in-kind in shares of Common Stock or additional shares of Series A Preferred Stock, at the election of the holders (the “Stock Dividend”), equal in the aggregate to the lesser of (Y)
25%
of the incremental increase in the Company’s book value (as adjusted for equity capital issuances, share repurchases and certain non-cash expenses) plus, to the extent the Company owns equity interests in income-producing real property, the incremental increase in net asset value (provided, however, that no interest in the same real estate asset will be double counted) and (Z) an amount that would, together with the Cash Distribution, result in a
14.0%
internal rate of return for the holders of the Series A
Preferred Stock from the date of issuance of the Series A Preferred Stock, as set forth in the Articles Supplementary classifying the Series A Preferred Stock (the “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.
As long as shares of Series A Preferred Stock remain outstanding, the Company is required to maintain a ratio of debt to total tangible assets determined under U.S. generally accepted accounting principles of no more than
0.4
:1, measured as of the last day of each fiscal quarter. The Company has complied with this covenant as of September 30, 2017.
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 representative of the Buyers, to the Board for a term expiring at the Company’s 2017 annual meeting of stockholders (Mr. Dondero has subsequently been reelected to the Board for a term expiring at the Company’s 2018 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
(the “1940 Act”)
. 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
Purchase Agreement.
As of September 30, 2017, the Company had 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.
On October 26, 2017, the Company issued an additional 10,000 restricted shares of the Series A Preferred Stock and received an additional $10.0 million in proceeds pursuant to the terms of the Purchase Agreement.
On
March 7, 2017
, the Company declared a (i) cash distribution of
$17.50
per share of Series A Preferred
S
tock, payable on
April 14, 2017
, to holders of Series A Preferred Stock of record on the close of business on
April 1, 2017
, and (ii) distributions payable in kind in a number of shares of common stock as determined in accordance with the terms of the designation of the Series A Preferred
S
tock, payable on April 17, 2017, to holders of Series A Preferred Stock of record on the close of business on April 1, 2017.
On
May 3, 2017
, the Company declared a cash distribution of
$17.69
per share of Series A Preferred
S
tock, payable on
July 14, 2017
, to holders of Series A Preferred Stock of record on the close of business on
July 1, 2017
. No distributions in kind were payable in connection with the July distribution.
On
August
1
, 2017
, the Company declared a cash distribution of
$17.89
per share of Series A Preferred
S
tock, payable on
October 13, 2017
, to holders of Series A Preferred Stock of record on the close of business on
October 1, 2017
, and (ii) distributions payable in kind in a number of shares of common stock as determined in accordance with the terms of the designation of the Series A Preferred
S
tock, payable on October 13, 2017, to holders of Series A Preferred Stock of record on the close of business on October 2, 2017.
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 assumed share-settlement of the stock dividend to holders of the Series A Preferred Stock, and the related impacts to earnings, are considered when calculating earnings per share on a diluted basis with our diluted earnings per share being the more dilutive of the treasury stock or two-class methods. For the three and nine months ended September 30, 2017 and 2016, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic
|
|
|
14,042,350
|
|
|
5,831,135
|
|
|
10,935,776
|
|
|
5,926,215
|
Effect of dilutive securities
|
|
|
201,995
|
|
|
131,958
|
|
|
172,764
|
|
|
149,971
|
Weighted average common shares, all classes
|
|
|
14,244,345
|
|
|
5,963,093
|
|
|
11,108,540
|
|
|
6,076,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Earnings per Share - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,457
|
|
$
|
4,994
|
|
$
|
11,434
|
|
$
|
11,528
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to preferred stockholders
|
|
|
310
|
|
|
n/a
|
|
|
1,033
|
|
|
n/a
|
Net income allocated to unvested restricted shares
|
|
|
57
|
|
|
111
|
|
|
156
|
|
|
285
|
Net income attributable to common shareholders - two-class method
|
|
$
|
4,090
|
|
$
|
4,883
|
|
$
|
10,245
|
|
$
|
11,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic
|
|
|
14,042,350
|
|
|
5,831,135
|
|
|
10,935,776
|
|
|
5,926,215
|
Earnings per share - basic
|
|
$
|
0.29
|
|
$
|
0.84
|
|
$
|
0.94
|
|
$
|
1.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of Earnings per Share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,457
|
|
$
|
4,994
|
|
$
|
11,434
|
|
$
|
11,528
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to preferred stockholders
|
|
|
310
|
|
|
n/a
|
|
|
1,033
|
|
|
n/a
|
Net income attributable to common shareholders - two-class method
|
|
$
|
4,147
|
|
$
|
4,994
|
|
$
|
10,401
|
|
$
|
11,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - diluted
|
|
|
14,244,345
|
|
|
5,963,093
|
|
|
11,108,540
|
|
|
6,076,186
|
Earnings per share - diluted
|
|
$
|
0.29
|
|
$
|
0.84
|
|
$
|
0.94
|
|
$
|
1.90
|
|
|
(1)
|
Unvested restricted shares
of common stock
participate in dividends with
unrestricted shares of
common
stock
on a 1:1 basis and thus are considered participating securities under the two-class method for the three and nine months ended September 30, 2017 and 2016.
|
12. RELATED PARTY TRANSACTIONS
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
as of
September 30, 2017 and December 31, 2016 w
as
$177.7
million and
$78.7
million, respectively. The interest income realized and the change in fair value from these equity method investments was
$4.8
million and
$5.7
million for the three months ended September 30, 2017 and 2016, respectively, and
$13.0
million and
$15.7
million for the nine months ended September 30, 2017 and 2016, respectively.
The Company’s investment in the real estate venture, the SL1 Venture, has a carrying amount of
$12.6
million and
$5.4
million at September 30, 2017 and December 31, 2016, respectively, and the earnings from this venture were
$0.7
million and
$1.7
million for the three and nine months ended September 30, 2017. The earnings from this venture were
$0.4
million and
$0.9
million for the three and nine months ended September 30, 2016.
Management Agreement
On April 1, 2015, the Company entered into a management agreement with its Manager (
as subsequently amended,
the “Management Agreement”). Pursuant to the terms of the Management Agreement, the Manager
is
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 Restat
ed Management Agreement modified
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 no expense for the deferred termination fee in the three and nine months ended September 30, 2017, and it recorded no expense and
$0.2
million of expense for the three and nine months ended September 30, 2016, respectively.
On April 1, 2017, the Company, the Operating Company and the Ma
nager entered into a Second
Amended
and
Restated Management Agreement to modify the manner in which certain expenses incurred by the Manager are accounted for and paid by the Company. Under the Amended and Restated Management Agreement, the Manager may engage independent contractors that provide investment banking, securities brokerage, mortgage brokerage and other financial, legal and account services as may be required for the Company’s investments, and the Company agrees to reimburse the Manager for costs and expenses incurred in connection with these services. The Second Amended and Restated Management Agreement now provides that expenses incurred by the Manager are reimbursable to the Manager by the Company only to the extent such expenses are not otherwise directly reimbursed by an unaffiliated third party. The amount of expenses to be reimbursed to the Manager by the Company will be reduced dollar-for-dollar by the amount of any such payment or reimbursement.
The initial term of the Management Agreement will
expire on March 31, 2020
, with up to a maximum of three, one-year extensions that end on
March 31, 2023
. The Comp
any’s independent directors
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
is required to
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
(as defined below)
, voluntary non-renewal by the Manager or the Company being required to register as an investment company under the 1940
Act
, then the Company shall pay to the Manager, on the date on which such termination is effective, a Termination Fee equal to the greater of (i) three times the sum of the average annual Base Management Fee and Incentive Fee earned by the Manager during the 24-month period prior to such termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination, or (ii) 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 Management Agreement at any time, including during the initial term, without the payment of any Termination Fee, with 30 days’ prior written notice from the Board of Directors, for cause. “Cause” is defined as: (i) the Manager’s continued breach of any material provision of the Management Agreement following a prescribed period; (ii) the occurrence of certain events with respect to the bankruptcy or insolvency of the Manager; (iii) a change of control of the Manager that a majority of the Company’s independent directors determines is materially detrimental to the Company; (iv) the Manager committing fraud against the Company, misappropriating or embezzling the Company’s funds, or acting grossly negligent in the performance of its duties under the Management Agreement; (v) the dissolution of the Manager; (vi) the Manager fails to provide adequate or appropriate personnel that are reasonably necessary for the Manager to identify investment opportunities for the Company and to manage and develop the Company’s investment portfolio if such default continues uncured for a period of 60 days after written notice thereof, which notice must contain a request that the same be remedied; (vii) the Manager is convicted (including a plea of nolo contendere) of a felony; or (viii) both the current 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 Management Agreement other than by reason of death or disability.
The Manager may terminate the Management Agreement if the Company becomes required to register as an investment company under the 1940 Act, with such termination deemed to occur immediately before such event, in which case the Company would not be required to pay the Manager a Termination Fee. The Manager may also decline to renew the Management Agreement by providing the Company with 180 days’ written notice, in which case the Company would not be required to pay a Termination Fee.
The Management Agreement provides for the Manager to earn a base management fee and an incentive fee
, both of which are described further below
. 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 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 Management Agreement p
ursuant to its
terms, other than for
C
ause or the Company being required to register as an investment company
under the 1940 Act
, 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
$0.8
million for both the three months ended September 30, 2017 and 2016 and
$2.3
million and
$2.4
million for the nine months ended September 30, 2017 and 2016, respectively.
On November 1, 2017, the Company, the Operating Company and the Manager entered into a Third Amended and Restated Management Agreement, which is described below in Note 13,
Subsequent Events
.
Management Fees
As of September 30, 2017, 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.
Pursuant to the Management Agreement, t
he Company
pays
the Manager a base management fee in an amount equal to
0.375%
of the Company’s stockholders’ equity (a
1.5%
annual rate) calculated and payable quarterly in arrears in cash. For purposes of calculating the base management fee, the Company’s stockholder’s equity means: (a) the sum of (i) the net proceeds from all issuances of the Company’s equity securities since 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
$1.0
million and
$0.4
million for the three months ended September 30, 2017 and 2016, respectively, and
$2.4
million and
$1.2
million for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017 and December 31, 2016, the Company had outstanding fees due to Manager of
$1.4
million and
$1.0
million consisting of the management fees payable and certain general and administrative reimbursements payable.
Incentive Fee
The Manager is entitled to an incentive fee with respect to each fiscal quarter (or part thereof that the Management Agreement is in effect) in arrears in cash. The incentive fee
is
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
New York Stock Exchange
(or other applicable trading market) for the last ten consecutive trading days of the applicable computation period minus the volume-weighted average of the closing market price of the Company’s common stock for the last ten consecutive trading days of the period immediately preceding the applicable computation period) plus dividends per share paid during such computation period, divided by the volume-weighted average of the closing market price of the Company’s common stock for the last ten consecutive trading days of the period immediately preceding the applicable computation period. For purposes of computing the Incentive Fee, “Core Earnings” is defined as 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.
Going forward, “Core Earnings” will be calculated based on the new formulation set forth in the Third Amended and Restated Management Agreement, which the Company, the Operating Company and the Manager entered into on November 1, 2017 and is described further below in Note 13,
Subsequent Events
.
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 the three and nine months ended September 30, 2017 and 2016.
13. 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.
Investment Activity
Subsequent to September 30, 2017, the Company closed on the following development property investment with a profits interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment
|
Closing Date
|
|
MSA
|
|
Commitment
|
10/12/2017
|
|
Miami 2
|
|
$
|
9,459
|
10/30/2017
|
|
New Jersey
|
|
|
14,701
|
|
|
Total
|
|
$
|
24,160
|
At-the-
M
arket
Offering
Program
On October 6, 2017, the Company issued and sold
29,416
shares of common stock at a weighted average price of
$20.50
per share under the ATM Program, receiving net proceeds after commissions of
$0.6
million.
Series A Preferred Stock
On October 26, 2017, 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.
Dividend Declarations
On November 1, 2017, the Company’s Board of Directors declared a cash dividend to the holders of the Series A Preferred Stock and a distribution payable in kind, if applicable, in a number of shares of common stock or Series A Preferred Stock as determined in accordance with the election of the holders of the Series A Preferred Stock for the quarter ending December 31, 2017. The dividends are payable on January 15, 2018 (or if not a business day, on the next business day) to holders of Series A Preferred Stock of record on January 1, 2018.
On
November 1, 2017
, the Company’s Board of Directors also declared a cash dividend of
$0.35
per share of common stock for the quarter ending December 31, 2017. The dividend is payable on
January 12, 2018
to stockholders of record on
January 2, 2018
.
Third Amended and Restated Management Agreement
On November 1, 2017, the Company, the Operating Company and the Manager entered into the Third Amended and Restated Management Agreement in order
to clarify the original intent of the parties with respect to the definition of Core Earnings and to make other minor changes necessary to reflect the current and anticipated business model from and after this time. The Third Amended and Restated Management Agreement is otherwise substantially consistent with the Second Amended and Restated Management Agreement.
Under the Third Amended and Restated Management Agreement, “Core Earnings” is defined as (1) net income (loss) determined under GAAP, plus (2) non-cash equity compensation expense, the incentive fee, depreciation and amortization, plus (3) any unrealized losses or other non-cash expense items reflected in GAAP net income (loss), less (4) any unrealized gains reflected in GAAP net income (including any unrealized appreciation with respect to self-storage facilities that the Company has not yet acquired). The Third Amended and Restated Management Agreement clarifies that in addition to certain previously agreed upon adjustments, with respect to any self-storage facility acquired by the Company with respect to which the Company had an outstanding loan as of the time of such acquisition, the amount of Core Earnings determined pursuant to the formula above in the period of such acquisition shall also be increased by the difference between (A) the appraised value, as determined by a nationally recognized, independent third-party appraiser mutually agreed to by the Company and the Manager who has significant expertise in valuing self-storage properties, and (B) (i) the outstanding principal amount of any Company loan secured by such acquired self-storage facility at the time of such acquisition plus (ii) any other consideration given to the former owner upon such acquisition. This addition is intended to include in Core Earnings the amount of the Company’s unrealized gain on account of the Company’s acquisition of a self-storage facility without such facility being sold to a third party buyer in the open market.