Note Regarding Forward-Looking Statements
We make statements in this Quarterly Report on Form 10-Q that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). These forward-looking statements include, without limitation, statements about our estimates, expectations, predictions and forecasts of our future business plans and financial and operating performance and/or results, as well as statements of management's goals and objectives and other similar expressions concerning matters that are not historical facts. When we use the words "may," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" or similar expressions or their negatives, as well as statements in future tense, we intend to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance and our actual financial and operating results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such differences are described in the section entitled "Risk Factors" elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 (the "2019 Form 10-K"), which was filed with theSecurities and Exchange Commission ("SEC") onFebruary 27, 2020 , and in other filings we make with theSEC from time to time, which factors include, without limitation, the following:
· the negative impact of the ongoing COVID-19 pandemic and the measures intended
to prevent its spread, which, in addition to exacerbating the risks set forth
below, may result in: o a prolonged global economic downturn, recession or depression; o reductions in move-ins at the properties that we own; o slower increases in physical occupancy, or decreases in occupancy, due to declines in discretionary household income and rates of consumption;
o temporary holds on existing customer rental rate increases and the deferral of
auctions of delinquent tenants initiated by our third-party managers, as well
as slower rent collections and potential increases in uncollectible accounts;
o the delay in construction or development of certain of our investments and the
cancellation of certain potential investments;
o adverse impacts on the value of our debt investments due to impairment of our
developers' ability to make timely payments and disruptions in the capital
markets that have negatively impacted the values of debt instruments;
o adverse impacts on assumptions made in evaluating our investments accounted for
using the fair value method;
o the interplay of the pandemic and over-development in the self-storage
industry; and
o the adverse impacts on developers and development with respect to which we have
made investments;
· our ability to successfully source, structure, negotiate and close investments
in and acquisitions of self-storage facilities;
· changes in our business strategy and the market's acceptance of our investment
terms;
· our ability to fund our outstanding and future investment commitments;
· our ability to acquire our developers' interests on favorable terms;
· our ability to complete construction, obtain certificates of occupancy and
complete leasing for self-storage development projects in which we invest;
· our ability to increase rental rates;
· the future availability of borrowings under our credit facility (including
borrowing base capacity, compliance with covenants and the availability of the
accordion feature);
· availability and terms of equity and debt capital, as well as our rate of
deployment of such capital (which may worsen as result of the COVID-19
pandemic);
· our ability to hire and retain qualified personnel;
· our ability to recognize the anticipated benefits from the internalization of
our manager;
· changes in the self-storage industry, interest rates or the general economy;
· the degree and nature of our competition;
· volatility in the value of our assets carried at fair market value created by
the current economic turmoil or otherwise;
· potential limitations on our ability to pay dividends at expected rates or
other changes to our dividend rate;
· limitations in our existing and future debt agreements on our ability to pay
distributions;
· the impact of our outstanding preferred stock on our ability to execute our
business plan and pay distributions on our common stock; and 44 Table of Contents
· general volatility of the capital markets (which has significantly increased as
a result of the COVID-19 pandemic) and the market price of our common stock.
Given these uncertainties, undue reliance should not be placed on our forward-looking statements. We assume no duty or responsibility to publicly update or revise any forward-looking statement that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events. We urge you to review the disclosures concerning risks in the sections entitled "Risk Factors," "Forward-Looking Statements," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q, the 2019 Form 10-K and in other filings we make with theSEC from time to time. Overview We are a commercial real estate company that invests primarily in new or recently constructed and opened self-storage facilities located predominately in dense urban submarkets within the top-50 United States Metropolitan Statistical Areas, or MSAs.. Facilities in which we invest are largely vertical (three to ten floors), 100% climate controlled and technologically adapted buildings, which we call Generation V facilities. These facilities are located in submarkets with demographic profiles and competitive positions that management believes will support successful lease-up of such facilities and value creation for our stockholders. Our investments include wholly owned self-storage facilities, as well as mortgage loans secured by self-storage facilities, which are typically coupled with equity interests. Our principal business objective is to deliver attractive risk-adjusted returns by investing in new Generation V self-storage facilities, primarily in urban submarkets. A substantial majority of our investments to date have been first mortgage loans to finance ground-up construction of and conversion of existing buildings into new Generation V self-storage facilities. These investments, which we refer to as "development property investments," are typically structured as loans equal to between 90% and 97% of facility costs (including land, pre-development and other "soft" costs, hard construction costs, fees and interest and operating reserves). We receive a fixed rate of interest on loaned amounts and up to a 49.9% interest in the positive cash flows from operations, sales and /or refinancings of self-storage facilities, which we refer to as "Profits Interest". We also typically receive a right of first refusal, or ROFR, to acquire the self-storage facility upon sale. We intend to acquire 100% ownership of a substantial majority of the self-storage facilities that we have financed either through the exercise of ROFRs or through privately negotiated transactions with our investment counterparties, subject to acquisition prices being consistent with our investment objective of creating long-term value for our stockholders. As ofMarch 31, 2020 , we own 24 facilities through wholly-owned subsidiaries and fully consolidate these facilities in our consolidated financial statements. We account for our investments (prior to acquisition of 100% ownership, as discussed above) at fair value, with appreciation and depreciation in the value of these investments being reflected in the carrying value of the assets and in the determination of net income. In determining fair value, we re-value each development property investment, which re-valuation includes an analysis of the current value of any Profits Interest associated with the investment. We believe that carrying our assets at fair value and reflecting appreciation and depreciation in our earnings provide our stockholders and others who rely on our financial statements with a more complete and accurate understanding of our financial condition and economic performance, including revenues and the creation of value through our Profits Interests as self-storage facilities we finance are constructed, leased-up and become stabilized. We have historically funded our on-balance sheet investments with (i) proceeds from sales of our securities, including sales of our common stock in follow-on offerings and pursuant to our common stock at-the-market equity offering program (the "ATM Program"), (ii) funds from secured indebtedness, including borrowings under our senior secured revolving credit facility (the "Credit Facility") and term loans on individual properties, and (iii) net proceeds from the monetization of existing development property investments. We have also funded investments using proceeds from the sale of senior participations, Series A Preferred Stock, and Series B Preferred Stock. We maintain an effective shelf registration statement on Form S-3 registering the future sale from time to time of up to$500.0 million of our securities, which includes an ATM Program pursuant to which we may issue up to$100 million in shares of our common stock. As ofMay 7, 2020 , we have approximately$80.9 million available for issuance under our ATM Program. As ofMarch 31 2020 , we have remaining unfunded commitments under our development investments of approximately$119.1 million , including non-cash interest reserves of approximately$26.0 million . Of the$119.1 million of unfunded commitments,$41.5 million is related to the five development projects we anticipate forgoing resulting in minimal additional fundings on those investments. As ofMarch 31, 2020 , we have$7.3 million of cash on hand and$51.6 million of remaining capacity under our Credit Facility. In addition, we have$125 million of potential availability as assets are added to the borrowing base to increase borrowing capacity and the accordion feature under our Credit Facility provides for an additional$375 million of capacity, which is subject to 45 Table of Contents
various conditions, including obtaining commitments from lenders for the additional amounts. We may also use any combination of the following additional capital sources to fund capital needs:
· Developer refinancings/repayments of JCAP mortgage indebtedness (49.9% profits
interest and ROFR retained),
· Potential sales of facilities underlying current development investments to a
third party, and
· Additional common stock issuances.
While our access to capital may be adversely impacted as a result of the COVID-19 pandemic (as discussed below), we currently believe we have sufficient access to capital for the foreseeable future to fund our commitments. However, we can provide no assurance that, if the impact of the COVID-19 pandemic significantly worsens in duration or intensity, such capital will be available to us on acceptable terms or at all. See "Risk Factors" in this Quarterly Report in Form 10-Q. OnMarch 7, 2016 , we, through ourOperating Company , entered into the Limited Liability Company Agreement of Storage Lenders (the "SL1 Venture") withHVP III Storage Lenders Investor, LLC ("HVP III"), an investment vehicle managed by Heitman. The SL1 Venture was formed for the purpose of providing capital to developers of self-storage facilities identified and underwritten by us. Upon formation, HVP III committed$110.0 million for a 90% interest in the SL1 Venture, and we committed$12.2 million for a 10% interest. OnMarch 31, 2016 , we contributed to the SL1 Venture three self-storage development investments with an aggregate commitment amount of$41.9 million . As ofDecember 31, 2018 , the SL1 Venture had closed on eight additional development property investments with a Profits Interest with an aggregate commitment amount of approximately$81.4 million , bringing the total aggregate commitment of SL1 Venture's investments to$123.3 million . InJanuary 2019 , the SL1 Venture acquired the 50.1% equity interests of its developer partners in the LLCs that own theJacksonville ,Atlanta 1,Atlanta 2, andDenver development properties. InNovember 2019 , the SL1 Venture acquired the 50.1% equity interests of its developer partner in the LLC that owns theRaleigh development property. The SLI Venture now owns 100% of the membership interests in the LLCs that own these five facilities.
Prior toFebruary 20, 2020 , we were externally managed and advised byJCAP Advisors, LLC (the "Manager"). OnFebruary 20, 2020 , our common stockholders voted to approve the internalization of management pursuant to an Asset Purchase Agreement (the "Purchase Agreement") dated as ofDecember 16, 2019 . Later onFebruary 20, 2020 , we closed the Internalization, resulting in, among other things, theOperating Company acquiring substantially all of the operating assets and liabilities of the Manager and each of the employees of the Manager became an employee of the Company. As ofFebruary 20, 2020 , we are an internally advised REIT.
We are aMaryland corporation that was organized onOctober 1, 2014 and has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended ("the Code"). As a REIT, we generally will not be subject toU.S. federal income taxes on our taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains, to the extent that we annually distribute all of our REIT taxable income to stockholders and comply with certain other requirements for qualification as a REIT set forth in the Code. We are structured as an UPREIT and conduct our investment activities through ourOperating Company . We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the 1940 Act.
Factors Impacting Our Operating Results
Impact of COVID-19 Pandemic on Our Business and Market Conditions
The measures taken to protect the population from the health impact of and the economic crisis caused by the ongoing COVID-19 pandemic have negatively impacted, and may continue to negatively impact, our business, assets and results of operations. The most significant impact thus far has been the decline in fair value of our investments. For the first time since we began measuring fair value of our assets, we recognized an overall net decrease in fair value for the three months endedMarch 31, 2020 . This net decrease is primarily the result of the economic fallout caused by the COVID-19 pandemic paired with the ongoing negative impact from elevated new self-storage supply in certain of our markets and increases in credit spreads. The pandemic and resulting economic turmoil have negatively impacted, and may continue to negatively impact, our properties, and consequently their values, in the following ways:
· Unprecedented unemployment, business closures and fear of a lingering recession
have eroded discretionary household incomes, seriously damaged consumer
confidence and prompted many prospective customers to delay life decisions
(e.g., relocation or new home purchase) that drive storage demand or cut
household budgets, including use of self-storage;
· Traffic in self-storage facilities has been reduced by local "shelter-in-place"
orders, resulting in a significant decline in move-ins since the last week of
March;
· Our third-party managers have suspended rent increases to existing customers
and delayed auctions and other collection actions with respect to tenants who
have not paid their rent, resulting in below-budget revenues and reduced occupancy rates 46 Table of Contents
at certain facilities, which has the effect of lengthening the period to economic stabilization and reducing the value of the discounted cash flows from those facilities;
· The timing and length of the pandemic, which was declared in mid-March,
threatens to shorten or eliminate altogether the 2020 leasing season, resulting
in the potential addition of a full year to the projected stabilization period
of certain facilities, which also has the effect of reducing the value of the
discounted cash flows from those facilities; and
· Shelter in place and stay at home orders, along with business closures, have
caused construction delays, which delays can impact the amount of fair value
increases we recognize. All of these factors are layering on top of an already challenging self-storage rental market caused by elevated new supply in certain markets that has not been fully absorbed. Declines in fair value will likely continue if there is further deterioration in the economy generally. However, as described under -"Results of Operations," we experienced increased occupancy and rental rates in the first quarter of 2020. We are taking proactive steps with our developer partners to combat the impact of the pandemic and its repercussions. We have also increased the frequency of communication with our third-party managers to monitor operations and overall performance. Despite our efforts, loans that we have made can be expected to have an elevated rate of defaults, prompting us to negotiate an increasing number of workouts with developers, which workouts could include an increased number of acquisitions of developer interests in projects we have financed. As ofMarch 31, 2020 , we had two loans in non-accrual status, both of which were in foreclosure before the COVID-19 crisis. We have also re-assessed five development projects for which either development or construction has not yet commenced and communicated our intent to forgo those projects with the respective developers. The aggregate principal amount of these investments is approximately$56.7 million with an outstanding principal balance of$15.7 million as ofMarch 31, 2020 . Despite these headwinds, we believe the self-storage sector to be more recession resistant than other real estate sectors. Demand for storage is driven primarily by recurring life events, along with business expansions and contractions. When the economy is weak, we believe that significant life events increase, which have historically driven higher demand for self-storage. In addition, we expect to see increased length of stay for our customers due to increases in autopay than previous cycles and the fact that self-storage costs comprise a much smaller percentage of household income than rental payments and mortgage payments. Moreover, we expect to see increased demand for self-storage from commercial customers, who may be more likely to store business items during closures or otherwise store excess hard goods or inventory for later expansion, and some businesses may move from retail or flex office spaces into newer Generation V self-storage facilities where they can have the technology and room they need rather than what a landlord imposes on them. The results of our operations have historically been affected, and will continue to be affected, by a number of factors (which may be exacerbated by the COVID-19 pandemic) including, among other things:
· the pace at which we are able to deploy capital into development property
investments and begin earning interest income, which pace can be dependent on
the overall economic climate, timing of government issuance of building
permits, weather and other factors outside our control;
· the timing of the completion of facilities we finance, which can be dependent
on the inspection process of municipal building departments that are from time
to time understaffed;
· the pace and strength of the lease-up of the facilities we finance or wholly
own;
· availability of capital (and whether investments are made on-balance sheet or
through off-balance sheet joint ventures), which may be diminished due to;
o the potential reduction in the borrowing base under our credit facility due to
potential declines in real estate values and/or delays in construction;
o the potential inability of developers to refinance or repay our loans due to
disruptions in the credit markets;
o the potential inability to dispose of self-storage facilities underlying our
investments or self-storage facilities that we wholly own at prices that would
be in the best interests of our shareholders, or at all; and
o disruptions in capital markets (including market volatility) that negatively
impact the availability and cost of debt and/or equity;
· changes in the fair value of our assets;
· our ability to acquire self-storage facilities at attractive prices; and
· the performance of self-storage facilities in which we have invested, either
directly or through the SL1 Venture, and the performance of the third party
managers of those respective facilities.
The self-storage sector experienced a record number of new self-storage construction starts and deliveries in 2016 through 2019, with a large number of deliveries expected in 2020 as well. While absorption of excess new supply during a pandemic could slow
47 Table of Contents significantly for a period, we believe the economic crisis will accelerate the end of the development cycle, thereby counterbalancing to some degree the effect of the pandemic and paving the way for better fundamentals at an earlier time than if the pandemic had not occurred but new deliveries remained elevated. Further, we believe that the crisis could accelerate our consolidation of developer interests and 100% ownership of facilities we have financed. As the economic impact of the pandemic and the lingering effect of elevated new supply continue to challenge fundamentals, some of the projects we have financed can be expected to lease-up more slowly and at lower rental rates than projected, prompting developers to desire an early exit to avoid significant additional capital contributions to the projects to pay interest on our loans. We expect these circumstances to present us with the opportunity to acquire developer interests in self-storage assets at attractive prices. In addition, we may modify or recapitalize existing financing on current investments for our developers in exchange for loan-related fees to compensate us for these modifications. On occasion, we expect certain of our developer partners to refinance our development investments. In these cases, refinancing proceeds would be used to return our capital associated with the first mortgage, but we would retain our Profits Interest and ROFR in the investment. These market dynamics are conducive to continued strong creation of value in our existing investment portfolio. As our focus shifts to acquiring the newly-developed facilities that we have financed since our IPO (as well as possibly acquiring properties that we have not financed), our results of operations will also be impacted by the following additional factors, in addition to the factors described above:
· our ability to generate these new types of investment opportunities while at
the same time managing our existing pipeline of development investment
opportunities;
· our ability to generate additional fee income from modifications and/or
recapitalizations of existing investments;
· our ability to redeploy the net proceeds from any potential refinancing of our
development property investments;
· our additional emphasis on net rental income and/or net operating income and
less emphasis on fair value accretion and current interest income; and
· our ability to access debt and equity capital at a cost commensurate with the
returns from outright ownership of self-storage facilities.
Our total investment income includes interest income from loan investments, which also reflects the accretion of origination fees and recognition of modification fees, and is recognized utilizing the effective interest method based on the contractual rate and the outstanding principal balance of the loans we originate. The objective of the effective interest method is to arrive at periodic interest income that yields a level rate of return over the loan term. Interest rates may vary according to the type of loan, conditions in the financial markets, creditworthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers. Our income also includes earnings (losses) from our investment in the SL1 Venture, which is calculated based on the allocation of earnings (losses) as prescribed in the JV Agreement. In addition, our operating results are affected by the valuation of our development property investments. These investments are marked to fair value each quarter, and increases and decreases in fair value are reflected in the carrying values of the investments in our Consolidated Balance Sheets and as unrealized increases/decreases in fair value in our Consolidated Statements of Operations. We have made, and in the future we may make, additional equity investments in self-storage facilities, either for fee simple ownership by ourOperating Company or in joint ventures with our developers, institutional or other strategic partners. In that regard, in connection with many of our development investments, we have obtained rights of first refusal in connection with potential future sales of self-storage facilities that we finance. Our operating results include rental income and related operating expenses from owned self-storage facilities. Our results for the three months endedMarch 31, 2020 and 2019 also were impacted by our accounting methods as discussed below.
Changes in Fair Value of Our Assets
We have elected the fair value option of accounting for our development property investments. We have elected fair value accounting for these financial instruments because we believe such accounting provides stockholders and others who rely on our financial statements with a more complete and accurate understanding of our economic performance, including our revenues and the creation of value through our Profits Interests as self-storage facilities we finance are constructed, leased-up and become stabilized. Under the fair value option, we mark our development property investments to estimated fair value at the end of each accounting period, with corresponding increases or decreases in fair value being reflected in our Consolidated Statements of Operations. Accordingly, changes to the values of profits interests and debt valuations for which fair value elections have been made will be reflected in our results of operations. If these development property investments were wholly owned and/or the fair value election had not been made on these investments, reductions in the expected value of the investments would not be booked under Generally Accepted Accounting Principles. There is no active secondary market for our development property investments and no readily available market value; 48
Table of Contents
accordingly, our determination of fair value requires judgment and extensive use of estimates. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our development property investments may fluctuate from period to period. Additionally, the fair value of our development property investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Our development property investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate an investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned.
Changes in Market Interest Rates and Credit Spreads
With respect to our business operations, increases in interest rates and credit spreads, in general, may over time cause: the interest expense associated with our borrowings to increase; the value of mortgage loans in our investment portfolio to decline; interest rates on any floating rate loans to reset, although on a delayed basis, to higher interest rates; and to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase. Conversely, decreases in interest rates and credit spreads, in general, may over time cause: the interest expense associated with our borrowings to decrease; the value of mortgage loans in our investment portfolio to increase; interest rates on any floating rate loans to reset, although on a delayed basis, to lower interest rates; and to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease. As described above, the fair value of our investments declined in the first quarter of 2020, and a significant portion of such decline was attributable to rapidly expanding credit spreads caused by the COVID-19 pandemic and resulting economic distress. During times of economic distress, the valuation process becomes more unpredictable and volatile, which may result in significant swings in fair value. Our results of operations may continue to be negatively impacted, and such impact may be significant, if we continue to see declines in the fair values of our investments as a result of the current economic uncertainty. Credit Risk We are subject to varying degrees of credit risk in connection with our target investments and other loans. We seek to mitigate this risk by seeking to originate or acquire loans of higher quality at appropriate prices given anticipated and unanticipated losses, by utilizing a comprehensive selection, underwriting and due diligence review process, and by proactively monitoring originated or acquired loans. Although we expect that our borrowers will perform in full on their obligations under the loan documents, one of our underwriting principles is that we will generally not make a loan secured by a property that we, at the time of our investment decision, do not wish to ultimately own. We believe this principle and our ability to effectively own and operate self-storage properties mitigates credit risk. Nevertheless, unanticipated credit losses could occur that could adversely impact our operating results. Recent Developments Subsequent toMarch 31, 2020 , the global economy has continued to be severely impacted by the COVID-19 pandemic and we are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it will impact our development property investments and self-storage real estate owned in the near and long term. The extent of the COVID-19 pandemic's effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic and the duration of government measures to mitigate the pandemic, all of which are uncertain and difficult to predict.
We acquired 100% of the Class A membership units of the LLCs that own the
We entered into a$100 million interest rate swap and a$100 million interest rate cap on our$375 million senior secured revolving line of credit, locking in a maximum one-month LIBOR of 0.43% on$200 million of debt capital throughMarch 24, 2023 . With these contracts in place, we have locked in a maximum cost of debt on$200 million of debt capital at approximately 3.1%, which we anticipate will decrease as investments underlying the borrowing base mature. 49 Table of Contents Dividend Declarations OnMay 7, 2020 , our Board of Directors declared a cash dividend to the holders of the Series A Preferred Stock and a distribution payable in kind, if applicable, in a number of shares of common stock or Series A Preferred Stock as determined in accordance with the election of the holders of the Series A Preferred Stock for the quarter endingJune 30, 2020 . The dividends are payable onJuly 15, 2020 to holders of Series A Preferred Stock of record onJuly 1, 2020 . OnMay 7, 2020 , our Board of Directors declared a cash dividend on the Series B Preferred Stock in the amount of$0.4375 per share for the quarter endingJune 30, 2020 . The dividends are payable onJuly 15, 2020 to holders of Series B Preferred Stock of record onJuly 1, 2020 .
On
Investment Activity
Overview of total investment activity
As ofMarch 31, 2020 , our self-storage investment portfolio consists of 24 wholly-owned self-storage facilities, 41 on-balance sheet development property investments with a Profits Interest (26 of which are secured by facilities in lease-up and 10 of which are secured by facilities under construction, and 5 of which are forgone investments, as described further below), six development property investments with a profits interest in our SL1 Venture (all of which are secured by facilities in lease-up), and five self-storage facilities wholly-owned by the SL1. Total JCAP # of # of Investment Properties Properties Commitment Open and Under (in # Properties Operating Construction Size (NRSF) thousands) On-balance sheet Wholly Owned Assets 24 24 0
1,841,876
Development Property
Investments 36 26 10
3,004,821
Forgone Investments 5 0 0 0$ 56,602 Joint Venture Wholly Owned Assets 5 5 0
371,465
Development Property
Investments 6 6 0 457,494$ 1,703 50 Table of Contents
On-balance sheet investment activity
Our on-balance sheet self-storage investments at
·
of the membership interests in the LLCs of 24 of our previous development
property investments, resulting in the ownership of 24 self-storage facilities,
as described in more detail in the table below (dollars in thousands): Location (MSA) Date Date Gross Accumulated Net Size Months % Physical Address Opened Acquired Basis Depreciation Basis (NRSF) (1) Open (2) Occupancy (2) Orlando 1/2 5/1/2016 8/9/2017$ 15,829 $ (1,620) $ 14,209 93,965 48 91.6 % Jacksonville 1 8/12/2016 1/10/2018 11,664 (1,166) 10,498 59,848 45 85.7 % Atlanta 2 5/24/2016 2/2/2018 11,859 (1,000) 10,859 66,187 47 83.6 % Atlanta 1 5/25/2016 2/2/2018 13,204 (1,017) 12,187 71,718 47 87.2 % Pittsburgh 5/11/2017 2/20/2018 10,076 (569) 9,507 47,828 36 68.6 % Charlotte 1 8/18/2016 8/31/2018 12,783 (983) 11,800 86,750 45 69.1 % New York City 1 9/29/2017 12/21/2018 25,950 (1,604) 24,346 105,272 31 73.6 % New Haven 12/16/2016 3/8/2019 11,055 (816) 10,239 64,225 41 85.1 % Miami 2/10/2020 7/2/2019 20,586 (70) 20,516 69,739 3 12.9 % Jacksonville 2 3/27/2018 8/16/2019 11,607 (389) 11,218 70,255 25 73.6 % Miami 4 10/9/2016 9/17/2019 24,187 (989) 23,198 74,635 43 93.5 % Miami 5 8/13/2018 9/17/2019 15,180 (361) 14,819 77,075 21 66.0 % Miami 6 8/12/2016 9/17/2019 20,076 (784) 19,292 76,765 45 85.0 % Miami 7 3/26/2018 9/17/2019 21,544 (590) 20,954 86,450 25 69.7 % Miami 8 12/12/2016 9/17/2019 15,572 (640) 14,932 51,923 41 90.4 % Charlotte 2 8/30/2018 2/10/2020 16,641 (139) 16,502 76,545 20 54.1 % Atlanta 3 8/6/2019 2/10/2020 19,720 (109) 19,611 93,283 9 27.3 % Atlanta 5 4/8/2019 2/10/2020 24,501 (126) 24,375 87,150 13 32.1 % Louisville 1 8/15/2018 2/10/2020 12,189 (118) 12,071 65,871 21 52.7 % Atlanta 6 10/15/2018 2/10/2020 17,831 (131) 17,700 82,690 19 43.4 % Knoxville 11/30/2018 2/10/2020 12,930 (123) 12,807 72,455 17 66.5 % Boston 2 3/19/2019 2/14/2020 13,061 (102) 12,959 76,606 13 46.5 % Fort Lauderdale 5/2/2019 2/14/2020 18,779 (73) 18,706 80,569 12 57.9 % Atlanta 4 7/12/2018 2/21/2020 21,276 (157) 21,119 104,072 22 42.2 %Total Owned Properties $ 398,100 $ (13,676) $ 384,424 1,841,876 29 63.7 % (3)
(1) The NRSF includes only climate controlled and non-climate controlled storage
space. It does not include retail space, office space, non-covered RV space
or parking spaces. (2) As ofMay 3, 2020 .
(3) Average weighted based on NRSF.
·
committed principal amount of approximately
ground-up construction of, or conversion of existing buildings into
self-storage facilities. Each development property investment is generally
funded as the developer constructs the project and is typically comprised of a
first mortgage and a 49.9% Profits Interest to us. The loans are secured by
first priority mortgages or deeds of trust on the projects and, in certain
cases, first priority security interests in the membership interests of the
owners of the projects. Loans comprising development property investments are
non-recourse with customary carve-outs and subject to completion guaranties,
are interest-only with a fixed interest rate of typically 6.9% per annum and
typically have a term of 72 months. As of
development property investments totaling
amount were structured as preferred equity investments, which will be
subordinate to a first mortgage loan expected to be procured from a third party
lender for 60% to 70% of the cost of the project.
We have commenced foreclosure proceedings against the borrower of our$14.3 million Philadelphia development property investment because the borrower has defaulted under the loan by, among other things, failing to pay the general contractor. The total unpaid balance of the loan is$11.5 million . As the investment was a collateral dependent loan, we considered the fair value of the collateral when determining the fair value of the investment as ofMarch 31, 2020 .
We have also commenced foreclosure proceedings against the borrower of our$14.8 million Houston development property because the borrower has defaulted under the loan by, among other things, failing to pay interest and operating expenses with respect to the property. The total unpaid balance of the loan is$14.8 million . As the investment was a collateral dependent loan, we considered the fair value of the collateral when determining the fair value of the investment as ofMarch 31, 2020 . 51 Table of Contents As ofMarch 31, 2020 , the aggregate committed principal amount of our development property investments for which the underlying self-storage facility was open and operating was approximately$276.7 million and outstanding principal was$261.4 million , as described in more detail in the table below (dollars in thousands): Location Remaining (MSA) Investment Date Months Size % Physical Funded Unfunded Fair Address Date Opened Open (1) (NRSF) (2) Occupancy (1) Commitment Investment Commitment (3) Value Orlando 3 12709 E Colonial Dr 2/24/2017 7/26/2018 21 69,558 59.2 %$ 8,056 $ 7,905 $ 151$ 9,741 Orlando 4 9001 Eastmar Commons 8/30/2017 1/16/2019 16 76,340 52.9 % 9,037 8,156 881 10,132 Orlando 5 7360 W Sand Lake Rd 6/7/2018 12/27/2019 4 75,736 12.2 % 12,969 11,206 1,763 12,480 Orlando MSA 14 221,634 41.0 % (7)$ 30,062 $ 27,267 $ 2,795$ 32,353 Tampa 4 3201 32nd Ave S 6/12/2017 10/9/2018 19 72,665 61.0 % 10,266 9,808 458 12,748 Tampa 3 2460 S Falkenburg Rd 5/19/2017 11/29/2018 17 70,574 54.0 % 9,224 8,470 754 10,079 Tampa 2 9125 Ulmerton Rd 5/2/2017 5/9/2019 12 70,967 43.7 % 8,091 7,776 315 9,156 Tampa MSA 16 214,206 53.0 % (7)$ 27,581 $ 26,054 $ 1,527$ 31,983 Minneapolis 2 3216 Winnetka Ave N 2/8/2018 3/14/2019 14 83,648 32.6 % 10,543 10,077 466 10,368 Minneapolis 1 631 Transfer Rd 11/21/2017 9/3/2019 8 88,898 16.0 % 12,674 11,281 1,393 12,079 Minneapolis 3 101 American Blvd West 4/6/2018 12/13/2019 5 87,375 9.2 % 12,883 10,898 1,985 11,713 Minneapolis MSA 9 259,921 19.1 % (7)$ 36,100 $ 32,256 $ 3,844$ 34,160 Denver 2 3110 S Wadsworth Blvd 4/20/2017 7/31/2018 21 74,307 56.2 % 11,164 11,009 155 10,904 Denver 1 6206 W Alameda Ave 4/20/2017 6/28/2019 10 59,524 31.5 % 9,806 9,789 17 10,420 Denver MSA 16 133,831 45.2 % (7)$ 20,970 $ 20,798 $ 172$ 21,324 New York City 2 (5) 465 W 150th St 6/30/2017 12/28/2018 16 40,951 40.3 % 27,982 29,692 163 29,063 New York City 5 374 S River St 12/28/2017 3/9/2020 2 90,575 5.8 % 16,073 14,991 1,082 17,657 New York City MSA 9 131,526 16.6 % (7)$ 44,055 $ 44,683 $ 1,245$ 46,720 Milwaukee 420 W St Paul Ave 7/2/2015 10/9/2016 43 81,489 76.3 % 7,650 7,648 2 8,503 Austin 251 North A W Grimes Blvd 10/27/2015 3/16/2017 38 76,134 94.0 % 8,658 8,136 522 8,111 Raleigh (8) 1515 Sunrise Ave 8/14/2015 3/8/2018 26 60,171 80.2 % 8,792 8,789 3 8,558 Boston 1 (4) 329 Boston Post Rd E 6/29/2017 8/8/2018 21 90,503 53.9 % - - - 3,700 Louisville 2 3415 Bardstown Rd 9/28/2017 8/31/2018 20 76,603 48.9 % 9,940 9,695 245 11,252 Jacksonville 3 (8) 2004 Edison Ave 7/27/2017 11/6/2018 18 68,100 46.7 % 8,096 7,889 207 10,061 Baltimore 1 (5) 1835 Washington Blvd 6/19/2017 11/20/2018 17 83,560 36.9 % 10,775 11,204 162 13,421 New Orleans 2705 Severn Ave 2/24/2017 12/21/2018 16 86,545 48.7 % 12,549 12,148 401 14,383 Philadelphia (5)(6) 550 Allendale Rd 3/30/2018 4/25/2019 12 69,930 37.9 % 14,338 11,536 3,264 11,807 Houston (6) 1050 Brittmoore Rd 3/1/2017 5/21/2019 11 131,845 18.6 % 14,825 14,825 - 17,820 Stamford (5) 370 West Main St 3/15/2019 10/24/2019 6 38,650 19.5 % 2,904 3,115 - 5,167 Kansas City 510 Southwest Blvd 5/23/2018 12/12/2019 5 76,822 15.6 % 9,968 8,423 1,545 9,750 Atlanta 7 2915 Webb Rd 5/15/2018 3/23/2020 1 73,972 1.7 % 9,418 6,923 2,495 8,045
Total Completed Development Investments 15 1,975,442
39.5 % (7)$ 276,681 $ 261,389 $ 18,429 $ 297,118 (1) As ofMay 3, 2020 .
(2) The NRSF includes only climate controlled and non-climate controlled storage
space. It does not include retail space, office space, non-covered RV space or parking spaces. 52 Table of Contents
(3) Commitment is fixed during underwriting at an amount deemed sufficient to
cover interest carry and excess operating expenses over rental revenue during
lease-up and deferred developer's fees (if any) payable upon stabilization.
Remaining unfunded commitment on completed projects is expected to be utilized primarily for such purposes. To the extent not needed for such purposes, such commitment will not be advanced.
(4) This loan was repaid in full through a refinancing negotiated by our partner.
The investment represents our 49.9% Profits Interest which was retained
during the transaction.
(5) The funded amount of these investments include PIK interest accrued on our
loan or interest accrued on our preferred equity investment, as applicable.
These interest amounts are not included in the commitment amount for each investment.
(6) The Company has commenced foreclosure proceedings against the borrower.
(7) Average weighted based on NRSF.
(8) Subsequent to
Profits Interest in these investments. As ofMarch 31, 2020 , the underlying self-storage facilities of 15 of our 41 development property investments were classified as under construction, representing an aggregate committed principal amount of approximately$225.1 million and outstanding principal of$128.7 million . Of these 15 development property investments, we have re-assessed five development projects for which either development or construction has not yet commenced and communicated our intent to forgo those projects with the respective developers. The aggregate committed principal amount of the five investments is approximately$56.7 million with an outstanding principal of$15.7 million as ofMarch 31, 2020 . We and our respective developer partners on these investments are in active dialogues concerning the repayment of our outstanding principal along with any current and future accrued interest, but, more importantly, we are no longer obligated to fund the balance of those commitments, which positively affects our liquidity. The ten investments under construction that are expected to be continued and funded are described in more detail in the table below (dollars in thousands): Location Remaining Estimated (MSA) Funded Unfunded Fair Size Construction C/O Closing Date Address Commitment Investment Commitment Value (NRSF) (1) Start Date Quarter (3) Los Angeles 1 9/14/2017 959 W Hyde Park Blvd 28,750 10,393 18,357 10,365 120,038 Q3 2020 Q3 2021 Miami 1 9/14/2017 4250 SW 8th St 14,657 13,417 1,240 14,215 69,555 Q2 2018 Q2 2020 Miami 3 (3) 11/16/2017 120-132 NW 27th Ave 20,168 13,714 6,879 14,979 96,295 Q4 2018 Q2 2020 New York City 4 12/15/2017 6 Commerce Center Dr 10,591 7,705 2,886 8,835 78,325 Q2 2018 Q3 2020 Los Angeles 2 (3) 6/12/2018 7855 Haskell Ave 9,298 9,332 649 9,579 117,097 Q1 2020 Q2 2021 New York City 6 3/1/2019 435 Tompkins Ave 18,796 3,572 15,224 3,462 76,250 Q3 2020 Q3 2021 New York City 7 (3) 4/18/2019 14 Merrick Rd 23,462 9,823 13,827 9,451 95,331 Q3 2019 Q1 2021 New York City 8 (3) 5/8/2019 74 Bogart St 21,000 22,306 - 22,384 193,763 Q4 2020 Q4 2021 New York City 9 (3) 7/11/2019 74-16 Grand Ave 13,095 13,751 - 13,588 105,950 Q3 2020 Q2 2021 New York City 10 (3) 8/21/2019 1401 4th Ave 8,674 9,041 - 8,933 76,775 Q3 2019 Q2 2021
Total Development Investments in Progress
(1) The NRSF includes only climate controlled and non-climate controlled storage
space. It does not include retail space, office space, non-covered RV space
or parking spaces.
(2) Estimated C/O dates represent the Company's best estimate as of
2020 based on project specific information learned through underwriting and
communications with respective developers. These dates are subject to change
due to unexpected project delays/efficiencies.
(3) The funded amount of these investments include PIK interest accrued on our
loan or interest accrued on our preferred equity investment, as applicable.
These interest amounts are not included in the commitment amount for each investment. 53 Table of Contents
The five investments that we have elected to forgo are described in more detail in the table below (dollars in thousands):
Remaining Location Original Unfunded (MSA) Investment Funded Original Fair Closing Date Address Commitment Investment Commitment (2) Value
Miami 2 (1) 10/12/2017 880 W Prospect Rd 9,459 1,528 8,023 1,287 New York City 3 (1) 10/30/2017 5203 Kennedy Blvd 15,301 6,932 8,717 6,426 Boston 3 12/27/2017 19 Coolidge Hill Rd 10,174 2,805 7,369 2,683 Miami 9 (1) 5/1/2018 10651 W Okeechobee Rd 12,421 3,642 8,951 3,424 Baltimore 2 11/16/2018 8179 Ritchie Hwy 9,247 770 8,477 706 Total Forgone Investments$ 56,602 $ 15,677 $ 41,537 $ 14,526
(1) The funded amount of these investments include PIK interest accrued on our
loan. These interest amounts are not included in the commitment amount for
each investment. (2) We expect minimal additional fundings on these investments as we and our respective developer partners are in active dialogues concerning the
repayment of our outstanding principal along with any current and future
accrued interest.
Real estate venture activity
As of
Location (MSA) Date Date Gross Accumulated Net Size Months % Physical Address Opened Acquired Basis Depreciation Basis (NRSF) (1) Open (2) Occupancy (2) Jacksonville 7/26/2017 1/28/2019$ 16,606 $ (1,271) $ 15,335 80,621 33 87.1 % Atlanta 2 9/14/2017 1/28/2019 10,850 (626) 10,224 70,089 32 78.2 % Denver 12/14/2017 1/28/2019 16,473 (956) 15,517 85,500 29 65.9 % Atlanta 1 4/12/2018 1/28/2019 13,283 (644) 12,639 71,147 25 60.6 % Raleigh 6/8/2018 11/7/2019 9,684 (243) 9,441 64,108 23 62.9 %Total Owned Properties $ 66,896 $ (3,740) $ 63,156 371,465 28 71.3 % (3)
(1) The NRSF includes only climate controlled and non-climate controlled storage
space. It does not include retail space, office space, non-covered RV space
or parking spaces. (2) As ofMay 3, 2020 .
(3) Average weighted based on NRSF.
As ofMarch 31, 2020 , the SL1 Venture had six development property investments with a Profits Interest as described in more detail in the table below (dollars in thousands): Location Remaining (MSA) Investment Date Months Size % Physical Funded Unfunded Fair Address Date Opened Open(1) (NRSF)(2) Occupancy(1) Commitment Investment Commitment(3) ValueColumbia 401 Hampton St 9/28/2016 8/23/2017 32 70,935 79.2 %$ 9,199 $ 9,073 $ 126$ 10,199 Washington DC (4) 1325 Kenilworth Ave NE 4/15/2016 9/25/2017 31 90,405 74.6 % - - - 3,795 Miami 1 (4) 490 NW 36th St 5/14/2015 2/23/2018 26 75,770 73.5 % - - - 1,608 Fort Lauderdale (4) 812 NW 1st St 9/25/2015 7/26/2018 21 87,384 73.3 % - - - 4,884 Miami 2 (4) 1100 NE 79th St 5/14/2015 10/30/2018 18 73,890 76.2 % - - - 1,661 New Jersey 6 Central Ave 7/21/2016 1/24/2019 15 59,110 56.7 % 7,828 7,429 399 8,559 Total Completed Development Investments 24 457,494 72.8 % (5)$ 17,027 $ 16,502 $ 525$ 30,706 (1) As ofMay 3, 2020 .
(2) The NRSF includes only climate controlled and non-climate controlled storage
space. It does not include retail space, office space, non-covered RV space
or parking spaces.
(3) Commitment is fixed during underwriting at an amount deemed sufficient to
cover interest carry and excess operating expenses over rental revenue during
lease-up and deferred developer's fees (if any) payable upon stabilization.
Remaining unfunded commitment on completed projects is expected to be utilized primarily for such purposes. To the extent not needed for such purposes, such commitment will not be advanced. 54 Table of Contents
(4) The SL1 Venture's loan was repaid in full through a refinancing initiated by
the SL1 Venture's partner. This investment represents the SL1 Venture's 49.9%
Profits Interest which was retained during the transaction. (5) Average weighted based on NRSF. Business Outlook Prior to the Covid-19 pandemic that is currently affectingthe United States , we adopted a cautious approach to the origination of new development investments, especially in thoseU.S. markets that have seen an above average level of new deliveries this development cycle. Primarily due to the elevated amount of new supply, we expected to experience a significant reduction in our new development investment commitment amounts in 2020 as compared to prior years. The uncertainty surrounding the impact of the pandemic and eventual recovery has solidified our view toward reduced or no originations of new development investment commitments for the foreseeable future. We will continuously monitor the development market and reassess both existing and potential new opportunities going forward. As visibility into the impact of the pandemic improves, our appetite for new development may change. As ofMarch 31, 2020 , the underlying self-storage facilities of 15 of our 41 development property investments were classified as under construction, representing an aggregate committed principal amount of approximately$225.1 million and outstanding principal of$128.7 million . Of these 15 development property investments, we have re-assessed five development projects for which either development or construction has not yet commenced and communicated our intent to forgo those projects with the respective developers. The aggregate committed principal amount of the five investments is approximately$56.7 million with an outstanding principal of$15.7 million as ofMarch 31, 2020 . We and our respective developer partners on these investments are in active dialogues concerning the repayment of our outstanding principal along with any current and future accrued interest, but, more importantly, we are no longer obligated to fund the balance of those commitments, which positively affects our liquidity. As has been the case for the past 18 months, our focus has shifted to potential acquisition opportunities of our developers' interests in our development investments and newly-constructed and opened self-storage facilities that complement our existing portfolio, as well as other potential growth initiatives such as the acquisition of properties from third partners, whether on balance sheet or by means of an institutional joint venture. We still intend to acquire the majority of the self-storage facilities that we have financed either through the exercise of ROFRs or through privately negotiated transactions with our investment counterparties, subject to acquisition prices being consistent with our investment objective to create long-term value for our stockholders. From the third quarter of 2017 throughMay 7, 2020 , we acquired 20 self-storage facilities from our core development program through privately negotiated transactions with our developer partners on our balance sheet, five self-storage facilities within our real estate venture with Heitman, one facility that was designated a construction loan and the five self-storage facilities underlying ourMiami bridge investment. The 25 acquisitions from our core development program and Heitman Joint Venture occurred on average 16 months after the respective self-storage facilities commenced operating activities. While there is no assurance that this trend will continue, we believe the frequency of opportunities to acquire our developers' interests has accelerated due to the fact that of the 34 underlying facilities in our remaining development portfolio as ofMay 7, 2020 , at least 22 facilities will have been open for 16 months or more byMarch 31, 2021 . We believe as developers seek liquidity during this ongoing economic crisis, we may be able to acquire properties at attractive prices. Additionally, we could see an increased amount of opportunities to acquire our developer partner's interests due to the Covid-19 pandemic. However, we believe we will have more clarity on the market for acquisitions in future periods, and we can provide no assurances that this will come to fruition, and, as described above, such acquisitions will be dependent on our continued access to capital. In certain investments, we expect one or more factors, including longer than expected construction times and slower than expected lease up times, to result in potential shortages in interest reserves and/or operating reserves. We expect that the impact of the COVID-19 pandemic could increase the frequency of these situations and/or increase the amount of the potential reserve shortages therein. In certain situations, we may modify the investments in exchange for additional economics, primarily in the form of loan related fees. These fees have and will continue to be recognized in interest income from investments within our Consolidated Statements of Operations. In certain circumstances, these reserve shortages and/or other factors could result in foreclosure of the underlying facility or negotiated acquisition of the respective developer partner's interests. As a result, the average consideration to acquire the interests of our developer partners in our development property investments may decrease. As we experience an increase in the acquisitions of self-storage properties that we have financed, the amount of fair value appreciation recognized in future periods in our Consolidated Statement of Operations will likely be reduced as compared to previous years, as fair value appreciation is not recognized after the acquisition date; however, our property operating income will increase as we acquire and consolidate additional self-storage facilities. Additionally, the construction progress and deliveries of our on-balance sheet investments to date contributed to significant fair value appreciation in 2018 and 2019. As the number of these deliveries is expected to decrease in 2020 and 2021, prior to the COVID-19 we already expected fair value appreciation in these years to decrease as compared to 2019, all else being equal. The COVID-19 related economic crisis has not only caused a slowdown in appreciation of fair value, but in the first 55 Table of Contents quarter of 2020, we actually experienced an overall net decrease in the fair value of our investment portfolio. The net decrease in fair value was driven by increased credit spreads that impact the value of our debt investments, loss of a portion (or possibly all) of the upcoming rental season resulting in slower occupancy increases than previously anticipated and the current inability of our managers to increase rental rates. In light of these factors, over the next few years, we expect the primary driver of our earnings to shift from fair value appreciation and interest income, to property operating income. As a result, we expect sometime in the next four quarters to begin publicly reporting funds from operations and adjusted funds from operations, which are non-GAAP measures reported by many equity REITS. The pace and magnitude of this shift will depend on our ability to acquire our developer partner's interests and the rate at which the facilities lease up, both of which will be impacted by the timing of the recovery from the current economic crisis.
Critical Accounting Policies
During the three months ended
Goodwill represents the excess of consideration paid over the fair value of underlying identifiable net assets of businesses acquired. During the three months endedMarch 31, 2020 , we recorded$4.7 million ofGoodwill related to the Internalization and we have one reporting unit.Goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Subsequent to the Internalization transaction, we determined that dramatically deteriorating macroeconomic conditions driven by the impact of COVID-19 on capital markets, and specifically our market capitalization, was a triggering event for an interim goodwill impairment test. In accordance with ASC 350, Intangibles -Goodwill and Other, since our common stock is traded in an active market, we calculated its fair value primarily based on our market capitalization as ofMarch 31, 2020 . The fair value calculated as ofMarch 31, 2020 , was determined to be below our carrying value. As a result, we recorded a goodwill impairment loss of$4.7 million for the three months endedMarch 31, 2020 and there is noGoodwill as ofMarch 31, 2020 orDecember 31, 2019 .
Other than the item described above, there have been no significant changes to our critical accounting policies as disclosed in the 2019 Form 10-K.
Recent Accounting Pronouncements
See Note 2 to the accompanying interim consolidated financial statements, Significant Accounting Policies, for a discussion of recent accounting pronouncements.
56 Table of Contents Results of Operations The following discussion of our results of operations for the three months endedMarch 31, 2020 and 2019 should be read in conjunction with the unaudited interim consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Comparison of the three months ended
(Dollars in thousands) Three months endedMarch 31, 2020 March 31, 2019 Revenues:
Interest income from investments $ 7,758 $
8,212
Rental and other property-related income from real estate owned 3,878 1,450 Other revenues 61 222 Total revenues 11,697 9,884 Costs and expenses:
General and administrative expenses 2,764
1,762
Fees to Manager 1,230
2,003
Property operating expenses of real estate owned 2,047
762
Depreciation and amortization of real estate owned 3,584 1,029 Goodwill impairment loss 4,738 - Internalization expenses 37,783 - Total costs and expenses 52,146 5,556 Operating income (loss) (40,449) 4,328 Other income (expense): Equity in earnings (losses) from unconsolidated real estate venture (165)
156
Net unrealized gain (loss) on investments (10,962)
8,830 Interest expense (3,212) (1,213) Other interest income 6 13 Total other income (loss) (14,333) 7,786 Net income (loss)$ (54,782) $ 12,114 Net income attributable to preferred stockholders (5,207)
(5,032)
Less: Net loss attributable to non-controlling interests 1,947
-
Net income (loss) attributable to common stockholders$ (58,042) $ 7,082 Revenues
Total interest income from investments for the three months endedMarch 31, 2020 was$7.8 million , a decrease of approximately$0.5 million , or 6%, from the three months endedMarch 31, 2019 . The decrease is primarily attributable to a decrease in the principal amount of development loans and bridge loans outstanding as a result of the acquisitions of 17 additional self-storage facilities which are no longer generating interest income. Rental revenue from real estate owned during the three months endedMarch 31, 2020 increased$2.4 million , or 167%, to$3.9 million compared to$1.5 million from real estate owned during the prior year period. This increase is the result of 17 acquisitions of our developer's interests during 2019 and the three months endedMarch 31, 2020 , coupled with increased property net operating income on existing real estate owned resulting from higher occupancy and rental rates. 57 Table of Contents Expenses
The following table provides a detail of total general and administrative expenses (dollars in thousands):
Three months endedMarch 31, 2020 March
31, 2019
Compensation and benefits $ 1,677$ 1,029 Occupancy 98 102 Business development 52 61 Professional fees 578 292 Other 359 278 General and administrative expenses $ 2,764 $
1,762
Fees to Manager 1,230
2,003
Total general and administrative expenses $ 3,994 $
3,765
Total general and administrative expenses
Total general and administrative expenses for the three months endedMarch 31, 2020 were$4.0 million , an increase of$0.2 million , or 6%, from the three months endedMarch 31, 2019 , primarily due to annual compensation increases, as well as the addition of two professional employees during the third quarter of 2019 who were hired for various functions rendered necessary by our continuing conversion to an equity REIT. Compensation and benefits expense also increased as a result of the Company becoming solely responsible for compensation of the Company's chief executive officer and chief financial officer. Prior to the Internalization, the Manager paid for a majority of the compensation related expenses of the chief executive officer and chief financial officer. Compensation and benefits included non-cash expense of stock-based compensation of$0.6 million and$0.3 million for the three months endedMarch 31, 2020 and 2019, respectively. Professional fees increased primarily due to legal fees incurred during the three months endedMarch 31, 2020 regarding certain foreclosure proceedings. We also incurred Manager fees of$1.2 million and$2.0 million in the three months endedMarch 31, 2020 and 2019, respectively, pursuant to the management agreement. The decrease in fees to our Manager was primarily the result of the timing of the closing of the Internalization onFebruary 20, 2020 . We no longer incur any Manager fees effective as of that
date.Goodwill impairment loss
Goodwill impairment loss of$4.7 million represents a loss recorded due to an interim impairment assessment caused by the dramatically deteriorating macroeconomic conditions driven by the impact of COVID-19 on capital markets and specifically the Company's reduced market capitalization. The Company determined that the fair value of its single reporting unit was below its carrying value. As a result, the Company recorded a goodwill impairment loss of$4.7 million for the three months endedMarch 31, 2020 . No such loss was recorded for the three months endedMarch 31, 2019 . Property-related expenses
Property operating expenses of real estate owned and depreciation and amortization of real estate owned relate to the operating activities of our self-storage real estate owned and has increased primarily due to the timing of the acquisitions of the properties generating these expenses.
Other operating expenses Internalization expenses of$37.8 million during the three months endedMarch 31, 2020 consist of$37.4 million of expense recognized as a result of the settlement of a preexisting contractual relationship in connection with the internalization and$0.4 million of professional costs incurred related to Internalization. The Company incurred no internalization expenses during the three months endedMarch 31, 2019 . Other income (expense) For the three months endedMarch 31, 2020 and 2019, we recorded other income (loss) of$(14.3) million and$7.8 million , respectively, which primarily relates to the net unrealized gain (loss) on investments. Other income (expense) includes a decrease in the fair value of investments of$11.0 million , compared to an increase of$8.8 million for the comparable period in 2019. The decrease in fair value was primarily driven by 1) elongated economic stabilization timelines (slower physical lease-up and lower realized rates) of the majority of the underlying properties in our development investment portfolio caused by
the COVID-19 58 Table of Contents
pandemic as well as the ongoing impact of new supply and 2) the net impact of debt valuations, which were negatively impacted by the dramatic increase in credit spreads during the quarter caused by the pandemic and resulting economic downturn. The year-over-year reduction in the increases in the fair value of investments for the quarter endedMarch 31, 2020 as compared to the same period in 2019 was primarily driven by the aforementioned impacts as well as the fact that fewer properties attained certificates of occupancy and an increased pace of acquisitions of developers' interests during the quarter endedMarch 31, 2020 as compared to the quarter endedMarch 31, 2019 . The$(0.2) million and$0.2 million of equity in earnings (loss) from unconsolidated real estate venture in the three months endedMarch 31, 2020 and 2019, respectively, relates to our allocated earnings from the SL1 Venture. The SL1 Venture has elected the fair value option of accounting for its development property investments. The decrease in our equity in earnings from unconsolidated real estate venture is attributed to the decline in fair value of investments as mentioned above. Interest expense for the three months endedMarch 31, 2020 and 2019 was$3.2 million and$1.2 million , respectively, and relates primarily to amortization of deferred financing costs and interest incurred on our Credit Facility and term loans. Other interest income relates to interest earned on our cash deposits. Adjusted Earnings
Adjusted Earnings is a performance measure that is not specifically defined by GAAP and is defined as net income attributable to common stockholders (computed in accordance with GAAP) plus stock dividends to preferred stockholders, stock-based compensation expense, net loss attributable to non-controlling interests, fees to Manager, depreciation and amortization on real estate assets, depreciation and amortization on SL1 Venture real estate assets, goodwill impairment loss and internalization expenses. Fees to Manager have been included in Adjusted Earnings for all periods throughDecember 31, 2019 as at that time they related to our then-ongoing business operations as an externally-managed company. For periods subsequent toDecember 31, 2019 , Fees to Manager are not included in Adjusted Earnings as they no longer relate to our ongoing business operations as an internally-managed company following the Internalization. We have paid a prorated management fee to the Manager for the period during the first quarter of 2020 prior to the completion of the Internalization and will no longer pay management fees going forward. Adjusted Earnings should not be considered as an alternative to net income or any other GAAP measurement of performance or as an alternative to cash flow from operating, investing, and financing activities as a measure of liquidity. We believe that Adjusted Earnings is helpful to investors as a starting point in measuring our operational performance, because it excludes various equity-based payments (including stock dividends) and other items included in net income that do not relate to or are not indicative of our operating performance, which can make periodic and peer analyses of operating performance more difficult. Our computation of Adjusted Earnings may not be comparable to other key performance indicators reported by other REITs or real estate companies.
The following tables are reconciliations of Adjusted Earnings to net income attributable to common stockholders (dollars in thousands):
Three months endedMarch 31, 2020 March
31, 2019
Net income (loss) attributable to common
stockholders$ (58,042) $
7,082
Plus: stock dividends to preferred
stockholders 2,125
2,125
Plus: stock-based compensation 606
328
Plus: net loss attributable to
non-controlling interests (1,947)
-
Plus: fees to Manager 1,230
-
Plus: depreciation and amortization on real
estate assets 3,584
1,029
Plus: depreciation and amortization on SL1
Venture real estate assets 63
56
Plus: goodwill impairment loss 4,738
-
Plus: internalization expenses 37,783
- Adjusted Earnings (loss) $ (9,860) $ 10,620
Liquidity Outlook and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including commitments to fund construction mortgage loans included in our investment portfolio, repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs. We use significant cash to originate our target investments, acquire the interests of developers in self-storage facilities we have financed, make distributions to our stockholders and fund our operations. We will require cash to pay the net purchase price for the remaining interests in self-storage facilities that we purchase from our developer partners, to the extent we do not issue OC Units as consideration. We have not yet generated sufficient cash flow from operations or investment activities to enable us to make any investments or cover our distributions to our stockholders. As a result, we are dependent
on 59 Table of Contents
borrowings under our Credit Facility, the issuance of equity securities and other access to third-party sources of capital, as well as capital recycling, to continue our investing activities and pay distributions to our stockholders.
Our liquidity position is dependent on our ability to borrow under our Credit Facility and, to a lesser extent, our ability to issue common stock under our ATM Program or otherwise or our ability to liquidate or procure repayment of investments and recycle capital. As described below, we increased the size of our Credit Facility to$375.0 million with the ability to increase the capacity up to$750.0 million pursuant to an accordion feature. However, despite this increase in the potential borrowing capacity, our ability to use our Credit Facility is subject to borrowing base requirements. Our borrowing base capacity is in part tied to the fair value of our portfolio investments. Our borrowing base capacity did not significantly decrease as a result of the decrease in fair value of our investments for the three months endedMarch 31, 2020 . However, we can provide no assurances that our borrowing base capacity will remain constant or increase in future periods. Future declines in fair value could cause our borrowing base capacity to decrease, which would limit our liquidity position. In certain circumstances, a decline in our borrowing base capacity could cause us to be overdrawn on our Credit Facility, which would cause a default. Furthermore, we do not intend to issue common stock under our ATM Program or otherwise at current market prices, which further limits our liquidity position. We intend to monitor our stock price and liquidity position to determine when it is appropriate to issue common stock.
Cash Flows
The following table sets forth changes in cash and cash equivalents (dollars in thousands): Three months ended March 31, 2020 2019 Net income (loss)$ (54,782)
48,997
(15,085)
Net cash used in operating activities (5,785) (2,971) Net cash used in investing activities (26,390)
(30,248)
Net cash provided by financing activities 36,238 28,364 Change in cash and cash equivalents $ 4,063
$ (4,855)
Cash increased$4.1 million during the three months endedMarch 31, 2020 as compared to a decrease in cash of$4.9 million during the three months endedMarch 31, 2019 . Net cash used in operating activities for the three months endedMarch 31, 2020 and 2019 was$5.8 million and$3.0 million , respectively. The primary components of cash used in operating activities during the three months endedMarch 31, 2020 were net loss adjusted for non-cash transactions of$3.1 million and the decrease in cash from working capital of$2.8 million , offset by$0.1 million of return on investment from the SL1 Venture. The primary components of cash used in operating activities during the three months endedMarch 31, 2019 were net income adjusted for non-cash transactions of$2.2 million , offset by$0.8 million of return on investment from the SL1 Venture and the change in cash from working capital of$0.1 million . Net cash used in investing activities for the three months endedMarch 31, 2020 and 2019 was$26.4 million and$30.2 million , respectively. For the three months endedMarch 31, 2020 , the cash used for investing activities consisted primarily of$26.6 million to purchase the developers' interest in nine of our development property investments,$8.6 million to fund investments, and$0.2 million in capital additions to our self-storage real estate owned, offset, in part, by$4.7 million in return of capital from the SL1 Venture and$4.2 million in repayments of other loans. For the three months endedMarch 31, 2019 , the cash used for investing activities consisted primarily of$29.5 million to fund investments,$2.6 million to purchase additional interests in one of our development property investments, offset, in part, by$2.1 million return of capital of from the SL1 Venture. Net cash provided by financing activities for the three months endedMarch 31, 2020 totaled$36.2 million and primarily related to$32.2 million of net proceeds received from the Credit Facility,$15.1 million of net proceeds from common stock issuances, offset, in part, by$11.0 million of dividends paid. For the three months endedMarch 31, 2019 , net cash provided by financing activities totaled$28.4 million and primarily related to$26.8 million of net proceeds received from the Credit Facility,$2.8 million of net proceeds from common stock issuances,$9.1 million of net proceeds received from term loans, offset, in part, by$10.1 million of dividends paid. 60
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Liquidity Outlook and Capital Requirements
As ofMarch 31, 2020 , we had remaining unfunded commitments of$119.1 million , including non-cash interest reserves of approximately$26.0 million , related to our investment portfolio and SL1 Venture. Of the$119.1 million of unfunded commitments,$41.5 million is related to the five development projects we anticipate forgoing resulting in minimal additional fundings on those investments. Of the remaining unfunded commitments of$77.6 , the amounts are estimated to be funded on the following schedule. 2023 and Future Fundings for Investments 2020 2021 2022
thereafter Total Estimated Funding Amount$ 39,324 $ 30,085 $ 7,436 $ 651 $ 77,496
We expect to fund the remaining unfunded commitments primarily with cash on hand, borrowings under our Credit Facility, recycled capital from loan repayments or property dispositions and, if we deem market prices to be attractive, future issuances of common stock.
As ofMarch 31, 2020 , we had$7.3 million of cash on hand and$51.6 million of remaining current borrowing capacity under our Credit Facility. In addition, we have$125 million of potential availability as assets are added to the borrowing base to increase borrowing capacity and a$375.0 million accordion feature under our Credit Facility, which is subject to various conditions, including obtaining commitments from lenders for the additional amounts. We may also use any combination of the following additional capital sources to fund capital needs:
· Developer refinancings/repayments of JCAP mortgage indebtedness (49.9% profits
interest and ROFR retained),
· Potential sales of facilities underlying current development investments to a
third party and
· Additional common stock issuances.
While our access to capital may be adversely impacted as a result of the COVID-19 pandemic (as discussed above), we currently believe we have sufficient access to capital for the foreseeable future to fund our commitments. However, we can provide no assurance that, if the impact of the COVID-19 pandemic significantly worsens in duration or intensity, such capital will be available to us on acceptable terms or at all. See "Risk Factors" in this Quarterly Report on Form 10-Q. Credit Facility OnMarch 26, 2020 , we entered into a second amendment and restatement of the Credit Facility to, among other things allow up to$375 million of borrowings and an accordion feature permitting expansion up to$750 million . Our development property investments are eligible to be added to the base of collateral available to secure loans under the Credit Facility once they receive a certificate of occupancy, thereby increasing the borrowing capacity under the Credit Facility. Accordingly, we believe our availability under the Credit Facility will increase substantially over the next twelve months as construction on several investments in our investment portfolio are completed. However, we can provide no assurances that we will have access to the full amount of the Credit Facility. As ofMarch 31, 2020 , we had$198.0 million outstanding of our$249.6 million in total availability under the Credit Facility. As ofMay 7, 2020 , we had$225.0 million outstanding of our$249.6 million in total availability under the Credit Facility, and we had approximately$16 million of cash on hand. During the remainder of 2020, we believe we will have substantial opportunities for new investments, consisting primarily in the buyout of developers' interests in self-storage facilities we have financed. Since our IPO, we have been able to issue publicly-traded common stock and preferred stock, access preferred equity in a private placement, sell senior participations in existing loans, procure the Credit Facility, and enter into term loan debt. Moreover, as self-storage facilities we have financed are completed, opened and leased up, developers will have the right and the opportunity to sell or refinance such facilities, providing us with an additional source of capital if refinancings occur or we choose to allow sales to occur without exercising our ROFRs with respect to sold facilities. Cash received from sales and refinancings can be recycled into new investments. Accordingly, we believe we will have adequate capital to finance new investments for at least the next 12 months. LIBOR is expected to be discontinued after 2021. The Credit Facility provides procedures for determining an alternative base rate in the event that LIBOR is discontinued. However, there can be no assurances as to what that alternative base rate will be and whether that base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. We intend to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and work with our lenders to ensure any transition away from LIBOR will have minimal impact on our financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR. 61 Table of Contents Common Stock ATM Program OnDecember 18, 2019 , we entered into a new equity distribution with respect to a$100 million ATM Program. We have sold 996,412 shares for a weighted average price of$19.16 under our current ATM Program and have$80.9 of availability remaining. Since the inception of our initial ATM Program onApril 5, 2017 , we have sold an aggregate of 4,962,535 shares of common stock at a weighted average price of$21.01 per share, receiving net proceeds after commissions and other offering costs of$101.4 million under our ATM Programs. Equity Capital Policies Subject to applicable law and NYSE listing standards, our Board of Directors has the authority, without further stockholder approval, to issue additional authorized common stock and preferred stock or otherwise raise capital, including through the issuance of senior securities, in any manner and on the terms and for the consideration it deems appropriate, including in exchange for property. Stockholders will have no preemptive right to additional shares issued in any offering, and any offering may cause a dilution of your investment. Additionally, the holders of our 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 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 us, (iv) at market prices pursuant to a registered at-the-market program and/or (v) as part of a compensatory or employment arrangement. Leverage Policies To date, we have funded a substantial portion of our investments with the net proceeds from offerings of our common stock, including our ATM Programs, proceeds from the issuance of our Series A Preferred Stock, and proceeds from the issuance of our Series B Preferred Stock. AtMarch 31, 2020 , we had total indebtedness of$239.2 million , or 28% of total assets. During 2020, we expect to utilize borrowings under our Credit Facility along with the other sources of capital described herein to fund our investment commitments. Our investment guidelines state that our leverage will generally be 25% to 35% of our total assets. Additionally, as long as shares of Series A Preferred Stock remain outstanding, we are required to maintain a ratio of debt to total tangible assets determined under GAAP of no more than 0.4:1, measured as of the last day of each fiscal quarter. Our Credit Facility contains certain financial covenants including: (i) total consolidated indebtedness not exceeding 45% of gross asset value during the period betweenMarch 26, 2020 andDecember 31, 2020 , and (ii) 50% of gross asset value during the period betweenJanuary 1, 2021 through the maturity of the Credit Facility; (ii) a minimum fixed charge coverage ratio (defined as the ratio of consolidated adjusted earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of not less than (i) 1.15 to 1.00 during the period betweenMarch 26, 2020 andDecember 31, 2020 , (ii) 1.20 to 1.00 during the period betweenJanuary 1, 2021 andDecember 31, 2021 and (iii) 1.40 to 1.00 during the period betweenJanuary 1, 2022 through the maturity of the Credit Facility; (iii) a minimum consolidated tangible net worth (defined as gross asset value less total consolidated indebtedness) of$360.5 million plus 75% of the sum of any additional net offering proceeds; (iv) when the outstanding balance under the Credit Facility exceeds$50 million , unhedged variable rate debt cannot exceed 40% of consolidated total indebtedness; (v) must maintain liquidity of no less than the greater of (i) future funding commitments of the Company and its subsidiaries for the three months after each date of determination and (ii)$25 million for the period betweenMarch 26, 2020 andDecember 31, 2020 or, on and afterJanuary 1, 2021 , liquidity of no less than the greater of (i) future funding commitments of the Company and its subsidiaries for the six months following each date of determination and (ii)$25 million ; (vi) a debt service coverage ratio (defined as the ratio of consolidated adjusted earnings before interest, taxes, depreciation and amortization to our consolidated interest expense and debt principal payments for any given period) of 2.00 to 1.00; and (vii) a requirement to maintain at all times a minimum of 25 Borrowing Base Assets with an aggregate borrowing base availability of not less than (i)$150 million for the period betweenMarch 26, 2020 andDecember 31, 2020 , and (ii)$250 million for the period betweenJanuary 1, 2021 through the maturity of the Credit Facility. The amount available to borrow under the Credit Facility is limited according to a borrowing base valuation of the assets available as collateral. We are required to maintain a minimum borrowing base availability attributable to Non-Stabilized Real Estate Collateral and Stabilized Real Estate Collateral of not less than (i) 20% of total borrowing base availability for the period betweenMarch 26, 2020 andDecember 31, 2020 , (ii) 40% of total borrowing base availability for the period betweenJanuary 1, 2021 andDecember 31, 2021 and (iii) 60% of total borrowing base availability for the period betweenJanuary 1, 2022 through the maturity of the Credit Facility. 62 Table of Contents Our actual leverage will depend on the composition of our investment portfolio. Our charter and bylaws do not limit the amount of indebtedness we can incur, and our Board of Directors has discretion to deviate from or change our investment guidelines at any time. We will use corporate leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates. Our financing strategy focuses on the use of match-funded financing structures. This means that we will seek to match the maturities and/or repricing schedules of our financial obligations with those of our investment portfolio to minimize the risk that we will have to refinance our liabilities prior to the maturities of our investments and to reduce the impact of changing interest rates on earnings, which our new Credit Facility will help us better achieve. We will disclose any material changes to our leverage policies in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the quarterly report on Form 10Q or annual report on Form 10K for the period in which the change was made, or in a Current Report on Form 8K if required by the rules of theSEC or the Board of Directors deems it advisable, in its sole discretion.
Future Revisions in Policies and Strategies
The Board of Directors has the power to modify or waive our investment policies and strategies without the consent of our stockholders to the extent that the Board of Directors (including a majority of our independent directors) determines that a modification or waiver is in the best interest of our stockholders. Among other factors, developments in the market that either affect the policies and strategies mentioned herein or that change our assessment of the market may cause our Board of Directors to revise our policies and strategies.
Contractual Obligations and Commitments
The following table reflects our total contractual cash obligations as of
Contractual Obligations 2020 2021 2022 2023 Thereafter Total Long-term debt obligations (1)(2) $ -$ 41,175 $ -$ 198,000 $ -$ 239,175
(1) Represents principal payments gross of discounts and debt issuance costs.
(2) Amount excludes interest, which is variable based on 30-day LIBOR plus spreads ranging from 2.10% to 3.00%.
The following schedule depicts the impact of interest rate swaps and interest
rate caps on our debt as of
Effective
Interest
Principal LIBOR Margin Rate Effective Date Maturity Term Loans under interest rate swaps$ 34,088 2.29 % 2.25 % 4.54 % 6/3/2019 8/1/2021 Term Loan under interest rate swap 7,087 1.60 % 2.25 % 3.85 % 8/13/2019 8/1/2021 Secured revolving credit facility under interest rate cap(1) 100,000 1.58 % 2.75 % 4.33 % 6/25/2019 12/28/2021 Secured revolving credit facility under interest rate cap(2) 20,000 1.58 % 2.75 % 4.33 % 3/18/2020 12/28/2021$ 161,175
(1) The effective interest rate represents the average on the underlying variable
debt unless the cap rate of LIBOR plus 2.50% is reached.
(2) The effective interest rate represents the average on the underlying variable
debt unless the cap rate of 1.50% of LIBOR is reached. The first interest
period after the effective date beginsApril 1, 2020 . AtMarch 31, 2020 , we had$119.0 million of unfunded loan commitments related to our investment portfolio and$0.05 million related to the SL1 Venture. Of the$119.1 million of unfunded commitments,$41.5 million is related to the five development projects we anticipate forgoing resulting in minimal additional fundings on those investments. These commitments are primarily funded over the 12-30 months following the investment closing date as construction is completed.
Off-Balance Sheet Arrangements
AtMarch 31, 2020 , we did not have any relationships, including those with unconsolidated entities or financial partnerships, for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
Our investment in real estate venture is recorded using the equity method as we do not have a controlling interest.
63 Table of Contents Dividends For the quarter endedMarch 31, 2020 , we declared a cash dividend to our stockholders of$0.23 per share, payable onApril 15, 2020 to stockholders of record onApril 1, 2020 . OnDecember 16, 2019 , the Company announced that in connection with the Company's accelerated transition to an equity REIT, the Board of Directors elected to right-size the Company's annual dividend, effective with the first quarter 2020 dividend payable inApril 2020 . The Board of Directors determined that the new annual dividend rate with respect to the Company's Common Stock will be$0.92 per share, payable quarterly at the rate of$0.23 per share, and declared the first quarter dividend at itsFebruary 21, 2020 regular meeting. We intend to make regular quarterly distributions to holders of our common stock.U.S. federal income tax law generally requires that a REIT annually distribute at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We intend to pay regular quarterly dividends to our stockholders in an amount equal to or greater than our net taxable income, if and to the extent authorized by our Board of Directors. Before we pay any dividend, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on any secured funding facilities, other lending facilities, repurchase agreements and other debt payable. If our cash available for distribution is less than our net taxable income, we could be required to reduce our dividends, sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. Additionally, holders of our Series A Preferred Stock are entitled to a cumulative cash distribution ("Cash Distribution") equal to (A) 7.0% per annum on the liquidation value, or$1,000 per share of Series A Preferred Stock (the "Liquidation Value") for the period beginning on the respective date of issuance until the sixth anniversary of the Effective Date, payable quarterly in arrears, (B) 8.5% per annum on the Liquidation Value for the period beginning the day after the sixth anniversary of the Effective Date and for each year thereafter so long as the Series A Preferred Stock remains issued and outstanding, payable quarterly in arrears, and (C) an amount in addition to the amounts in (A) and (B) equal to 5.0% per annum on the Liquidation Value upon the occurrence of certain triggering events (a "Cash Premium"). In addition, the holders of the Series A Preferred Stock will be entitled to a cumulative dividend payable in-kind in shares of our 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 our book value (as adjusted for equity capital issuances, share repurchases and certain non-cash expenses) plus, to the extent we own equity interests in income-producing real property, the incremental increase in net asset value (provided, however, that no interest in the same real estate asset will be double counted) 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. For the first three fiscal quarters of the fiscal years 2018, 2019 and 2020 and for the first fiscal quarter of 2021, we will declare and pay a Series A Aggregate Stock Dividend equal to$2,125,000 , or the Series A Target Stock Dividend. For the last fiscal quarter of each of 2018, 2019 and 2020 and for the second fiscal quarter of 2021, we will compute the cumulative Series A Aggregate Stock Dividend for all periods afterDecember 31, 2018 through the end of such fiscal quarter equal to 25% of the incremental increase in our book value (as adjusted for equity capital issuances, share repurchases and certain non-cash expenses) plus, to the extent we own equity interests in income-producing real property, the incremental increase in net asset value (provided, however, that no interest in the same real estate asset will be double counted), or the Series A Computed Stock Dividend, and will declare and pay for such quarter a Series A Aggregate Stock Dividend equal to the greater of the Series A Target Stock Dividend or the Series A Computed Stock Dividend minus the sum of all Series A Aggregate Stock Dividends declared and paid for all fiscal quarters afterDecember 31, 2018 and before the fiscal quarter for which such payment is computed, in each case subject to an amount that would, together with the Series A 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. 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 us after the third anniversary of the Effective Date, (ii) our ceasing to be subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act, (iii) our failure to remain qualified as a real estate investment trust, (iv) an event of default under the Purchase Agreement, (v) the failure by us to register for resale shares of our common stock pursuant to the Registration Rights Agreement (a "Registration Default"), (vi) our 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 theSEC against us or any of our subsidiaries or any of our directors or executive officers relating to the violation of the securities laws, rules or regulations with respect to our business. 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. Holders of Series B Preferred Stock are entitled to receive, when, as and if authorized by our Board of Directors and declared by us, out of funds legally available for the payment of dividends underMaryland law, cumulative cash dividends from, and including, the 64
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original issue date quarterly in arrears on the fifteenth (15th) day of January, April, July and October of each year (or if not a business day, on the immediately preceding business day) (each, a "dividend payment date"). These cumulative cash dividends will accrue on the liquidation preference amount of$25.00 per share at a rate per annum equal to 7.00% with respect to each dividend period from and including the original issue date (equivalent to an annual rate of$1.7500 per share) from the date of issuance of such Series B Preferred Stock. Dividends will be payable to holders of record as of5:00 p.m. ,New York City time, on the related record date. The record dates for the Series B Preferred Stock are the close of business on the first (1st) day of January, April, July or October immediately preceding the relevant dividend payment date (each, a "dividend record date"). If any dividend record date falls on any day other than a business day as defined in the Series B Articles Supplementary, the dividend record date shall be the immediately succeeding business day. Inflation
Virtually all of our assets and liabilities will be interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our distributions will be determined by our Board of Directors consistent with our obligation to distribute to our stockholders at least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.
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