UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM N-CSR
 
 
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
 
 
  Investment Company Act file number: 811-08025
 
 
Global Self Storage, Inc.
(Exact name of registrant as specified in charter)
 
 
 
 11 Hanover Square, New York, NY  10005
 (Address of principal executive offices) (Zipcode)
 
 
 
John F. Ramirez, Esq.
11 Hanover Square
New York, NY 10005
(Name and address of agent for service)
 
Registrant’s telephone number, including area code: 1-212-785-0900
 
Date of fiscal year end: 12/31
 
Date of reporting period: 1/1/15 - 12/31/15
 
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policy making roles.
 
A registrant is required to disclose the information specified by Form N-CSR and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a current valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under clearance requirements of 44 U.S.C. sec. 3507.

 

 

LOGO

 

 

 

 

LOGO

2015

 
 

 

PORTFOLIO ANALYSIS

 

        
    

 

December 31, 2015  

 

 

 

 

 

 

TOP TEN

  

 

December 31, 2015 

 HOLDINGS

 

 
   
1     

SSG Bolingbrook LLC

    
   
2     

SSG Rochester LLC

    
   
3     

SSG Dolton LLC

    
   
4     

SSG Merrillville LLC

    
   
5     

SSG Sadsbury LLC

    
   
6     

SSG Summerville I LLC

    
   
7     

SSG Summerville II LLC

    
   
8     

Extra Space Storage, Inc.

    
   
9     

CubeSmart

    
   
10     

Public Storage

    
 

Top ten holdings comprise approximately 87% of total assets.

 

 

Holdings are subject to change. The above portfolio information should not be considered as a recommendation to purchase or sell a particular security and there is no assurance whether or not any securities will be retained.

 

 

1        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 

TO OUR STOCKHOLDERS

 

        
February 15, 2016     

 

Financial Statements

 

 

 

Dear Fellow Stockholders:

 

It is a pleasure to welcome the new stockholders who have made their investment in Global Self Storage, Inc. (NASDAQ: SELF) (the “Company”), formerly Self Storage Group, Inc., since our last report. The Company is a self-administered and self-managed real estate investment trust (“REIT”) focused on the ownership, operation, acquisition, development and redevelopment of self storage facilities. Our self storage facilities are designed to offer affordable, easily accessible and secure storage space for residential and commercial customers. The Company currently owns and operates seven self storage properties located in New York, Pennsylvania, Illinois, Indiana, and South Carolina.

As previously reported in our press release on January 19, 2016, the Company changed its name to Global Self Storage, Inc., changed its Securities and Exchange Commission (“SEC”) registration from an investment company to an operating company, and uplisted to the NASDAQ Capital Market (“NASDAQ”).

Global Self Storage Financial Update

We grew our top-line results by increasing same-store revenues by 11.6% for the year ended December 31, 2015 versus the year ended December 31, 2014. Same-store cost of operations

was relatively flat and decreased slightly by 0.2% over the same periods. Same-store funds from operations increased by 21.3% over the same periods as a result of the increase in year over year revenues and steady hold on operating expenses. Corporate overhead decreased by 9.1% over the same periods. Going forward, although we expect some corporate overhead expense reductions associated with our discontinued registration as an investment company, we expect to gain a number of new expenses related to, among other things, the Company’s new reporting requirements and compliance with the Sarbanes-Oxley Act of 2002.

Our results were driven by, among other things, our internet marketing initiatives which helped our overall average occupancy approach the 90% mark. Also contributing to our strong results were our customer service efforts which were essential in building local brand loyalty resulting in powerful referral and word-of-mouth market demand for our storage units and services. Another major contributing factor to our results was our revenue rate management program which helped increase our total annualized revenue per leased square foot by 15% year over year. All of the Company’s employees contributed to the results, which are summarized below.

 

LOGO

 

SAME – STORE PROPERTIES (1)

Year ended December 31, 2015

 

       
      2015      2014        Variance       

    Percentage      

    Difference      

       

Revenues

       $4,439,407               $3,979,492               $459,915           11.6%          
       

Costs of Operations

   1,800,982           1,804,818           (3,836)          (0.2%)         
       

Funds from Operations

   2,638,425           2,174,674           463,751           21.3%          
       

Sq. ft. occupancy

   87.9%        87.7%        0.2%        0.3%          
       

Revenue per Leased Sq Ft

 

   $       10.40           $         9.04           $      1.36           15.0%          

 

 

  (1) 

The table above is not a full and complete financial presentation of the Company’s results in accordance with U.S. generally accepted accounting principles (“GAAP”), but is rather a Non-GAAP summary of certain of its self storage properties’ financial highlights. For example, certain expense and income items such as “Corporate overhead expense”, “Securities dividends and interest income” and “Realized gain (or losses) on securities” are not included, presented or discussed in this table. Funds From Operations (“FFO”) is a Non-GAAP financial metric and is defined by the National Association of Real Estate Investment Trusts, Inc. as net income computed in accordance with GAAP, excluding gains or losses on sales of operating properties and impairment write downs of depreciable real estate assets, plus depreciation and amortization and after adjustments to record unconsolidated partnerships and joint ventures on the same basis. The Company believes that to further understand the Company’s performance of its self storage properties, FFO should be considered along with the reported net income and cash flows in accordance with GAAP, as presented in the Company’s financial statements. FFO does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to net income as an indication of the Company’s performance, as an alternative to net cash flow from operating activities as a measure of liquidity, or as an indicator of the Company’s ability to make cash distributions. Revenues and revenues per leased sq. ft. include rental revenue from climate-controlled and traditional units and outside parking.

 

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        2

 

 

 
          
    

 

President’s Letter  

 

 

We have been actively reviewing a number of property and portfolio acquisition candidates and have been working to further develop and expand our current properties. Importantly, at our Sadsburyville, PA facility in 2015, we completed construction of a state-of-the-art, all climate-controlled two story storage building adding 16,756 leasable square feet featuring a number of unique drive-up, climate-controlled units. This expansion has been well received by the local community. As of December 31, 2015, 82% of the first floor and 50% of the entire building have been leased, since the completion of construction. As previously reported, we are moving forward with site work and construction of the expansion project in Boling-brook, IL which, when completed, will add a little over 45,000 leasable square feet of climate-controlled and traditional storage units. The project has a budget of $2,200,000, which equates to an all-in projected cost of approximately $49 per square foot and a completion date of mid-2016.

Global Self Storage Operational Progress

As of December 31, 2015, the Company’s ownership of its self

storage facilities comprised more than 80% of its net assets, with the balance of net assets comprised of investment securities and a money market fund. All together, these facilities total 485,579 net rentable square feet and offer 3,813 storage units. In addition to traditional and climate-controlled units, many of the facilities feature both covered and outside auto/RV/boat storage.

As of December 31, 2015, the average overall square foot occupancy for all of the Company’s facilities combined was 87.9%, up from 87.7% on December 31, 2014, and up from 79.3% on December 31, 2013. During 2015, our self storage properties experienced the usual late spring and early summer seasonal boost in overall occupancy along with a slight occupancy decrease during late fall and early winter. We believe that through our various marketing initiatives, we are continuing to attract high quality, long term tenants who we expect will be storing with us for years. Currently, our average tenant duration of stay is over two years.

 

LOGO

 

GLOBAL SELF STORAGE FACILITIES

Year ended December 31, 2015

 

             
Property    Address    Year
  Opened   
    Number  
 of Units  
    Net Leasable  
 Square Feet (1)  
  

 Dec. 31, 2015  

 Square Foot  
 Occupancy %  

    Dec. 31, 2014   
 Square Foot   
 Occupancy %   
           

SSG BOLINGBROOK LLC

   296 North Weber Road Bolingbrook, IL 60440    1997    497    66,250    93.9%    85.5%
           

SSG DOLTON LLC

   14900 Woodlawn Avenue     Dolton, IL 60419    2007    649    86,725    93.2%    92.2%
           

SSG MERRILLVILLE LLC

  

6590 Broadway

Merrillville, IN 46410

   2005    507    71,420    95.6%    92.5%
           

SSG ROCHESTER LLC

   2255 Buffalo Road Rochester, NY 14624    2010    650    68,022    87.1%    88.3%
           

SSG SADSBURY LLC

   21 Aim Boulevard Sadsburyville, PA 19369    2006    699    79,004    80.2%    94.8%
           

SSG SUMMERVILLE I LLC

   1713 Old Trolley Road Summerville, SC 29485    1990    557    72,700    77.9%    71.2%
           

SSG SUMMERVILLE II LLC

   900 North Gum Street Summerville, SC 29483    1997    254    41,458    88.2%    92.5%
           

TOTAL

         3,813    485,579    87.9%    87.7%

 

 

  (1) 

Includes outside auto/RV/boat storage space of approximately 13,000 square feet at SSG Sadsbury LLC, 9,900 square feet at SG Dolton LLC, 11,170 square feet at SSG Merrillville LLC and 5,300 square feet at SSG Summerville II LLC. During the first half of 2015, SSG Sadsbury LLC added 219 all-climate controlled storage units comprising 16,756 leasable square feet. Also during the first half of 2015, SSG Bolingbrook LLC eliminated 98 parking spaces (32,700 square feet) to accommodate the new buildings construction project which, when complete, will add some 320 climate-controlled and traditional storage units totaling 45,000 leasable square feet to the facility. Approximately 42% of our total available units are climate-controlled, 54% are traditional and 4% are parking.

 

 

 

3        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 
          
    

 

Financial Statements

 

 

Global Self Storage Marketing and Customer Service

Our storage facilities in the Northeast, Mid-Atlantic and MidWest are located in densely populated and high traffic areas near major roads and highways. All of our properties display prominent road signage and most feature LED marquee boards describing the property features and move-in rent specials. Our facilities are located in areas with strong zoning laws and attentive planning boards which make it difficult for our competition to develop new facilities near ours. As we evaluate potential self-storage facilities, we seek properties in areas with these high barriers to entry.

From a marketing perspective, we have developed the brand, “Global Self Storage,” and now use it in all of our on-site signage, online advertising and other marketing materials. We have also launched our new corporate website www.Global-SelfStorage.us, where prospective customers can learn about the features of each facility and view high resolution images. The site also allows customers to pay their rent online.

We continue to develop the Global Self Storage online presence through advertising and search engine optimization. We solicit customer reviews for posting to the “Testimonials” section of our website and encourage others to view these testimonials, as most customers give us the top rating of 5 stars. We have found that our most reliable source of new tenants is through referrals of current tenants.

Attracting high quality, long-term tenants is the top priority for our company, and we strongly believe in tenant quality over tenant quantity. In our marketing efforts, we have seen tremendous success in our referral marketing program, as nothing seems to be as productive as asking our satisfied customers to recommend Global Self Storage to their family, friends, and colleagues. We also believe our property managers’ attention to detail – maintaining security, cleanliness and attentive customer service – is essential to attracting high quality tenants.

Each of our Global Self Storage facilities features a rental and payment center kiosk available 24 hours a day, seven days a week, where prospective tenants can rent a unit and current tenants can pay their rent. All of our facilities have on-site property managers who are committed to delivering the finest customer service. Our customer call center handles telephone inquiries from current and prospective tenants whenever our property managers are not available. They can respond to questions

about our facilities and storage features, and book reservations. Our top priorities are delivering convenience and high quality customer service to our storage customers, as well as maintaining clean and secure self storage facilities at all times.

Also of importance, we have implemented an ongoing revenue management program which includes regular internet data scraping of local competitors’ prices. We do this in order to maintain our competitive market price advantage for our various sized storage units at all of our Global Self Storage properties. This program helps us maximize our occupancy rates, which improves our revenue and net operating income.

Self Storage Market Report

Throughout 2015 and into 2016, the self storage industry continued to enjoy positive trends, which included:

   

All time high occupancies reported by the public REITs

   

Pricing power leading to rental rate growth

   

Reduced move-in discounting

   

New development completion increasing local competition in select markets

   

Per capita usage of storage is growing

   

Continued ownership consolidation

   

Growing difference in operational management expertise between the larger and more sophisticated operators and the rest of the field

Demand for self storage space was sustained by the recovering job and housing markets. All-time high occupancy rates led to higher asking rental rates in many markets. Rental rate discounting (ex. “$1 Move-In”, “First Month Free”) was widely reported to be reduced due to higher occupancies. Permits for the new development of self storage facilities have increased considerably over previous years even though there continued to be a relatively low number of newly developed self storage properties coming on line. Over time this new supply of competition may have a significant impact on the industry. However, for the foreseeable future we expect that the aforementioned positive trends, especially the rise in per capita demand for storage space, should continue to support positive absorption across most markets. We have noted a strong trend towards ownership consolidation led by the REITs and other well-capitalized owner/operators. This has been accompanied by a greater gulf developing between the more sophisticated operators [large and small] and those without the resources or interest in utilizing the various technology advantages available to maximize occupancies and revenues, control expenses and maximize net operating income.

 

 

    GLOBAL SELF STORAGE INC.

 

       

 

Annual Report 2015        4

 

 

 
          
    

 

President’s Letter  

 

 

Positive operational trends continued to attract new investors into the self storage real property market. Capitalization rates have compressed for high quality Class A institutional size properties, traditionally in demand by REITs and private equity groups. This phenomenon of many players seeking and bidding up relatively few available Class A assets has sent yield seeking investors down the quality scale to capture higher returns in stabilized assets in one-off markets and Class B and Class C assets located in secondary and tertiary markets. We expect these trends to continue through 2016. As such, we intend to continue seeking acquisition opportunities in these secondary and tertiary markets and to apply our strict standards in evaluating all new opportunities. Also, as previously mentioned, we intend to expand some of our self storage facilities with new construction where economically feasible. In addition to the completed expansion at Global Self Storage in Sadsburyville, PA and the new construction project at Global Self Storage in Bolingbrook, IL, we intend to explore the feasibility of profitable expansion at the Merrillville facility.

Risk Factors

Stockholders and potential investors should note that there are a number of risks related to the Company’s business. These include, but are not limited to, risks related to the operating performance of the Company’s self storage facilities and risks associated with the Company’s real estate investments. There are also risks related to the Company’s organization and structure and risks related to the Company’s tax status as a REIT.

The foregoing is qualified by reference to a more complete statement of applicable risks contained in this report under “Policies and Risks-Risk Factors” and in the Company’s Form 10 filed with the SEC on December 14, 2015, which is available at www.globalselfstorageinc.com.

Strategy and Returns

The Company’s strategy in 2015 continued to be to own and operate self storage facilities and seek self storage facility acquisition opportunities. The Company’s strategy resulted in a total return for the year ended December 31, 2015 based on net asset value of 19.00% and a total return based on market price value of 10.86%. Distributions for the year ended

December 31, 2015 totaled $0.26 per share. The Company’s net asset value per share was $5.70 and its share closing market price was $3.75. Investment return and value will vary and shares of the Company may subsequently be worth more or less than original cost.

Distribution Policy and Tax Treatment

The current distribution policy is to provide investors with a stable quarterly distribution out of current income, supplemented by realized capital gains, and to the extent necessary, paid in capital. As noted above for the year ended December 31, 2015, distributions paid totaled $0.26 per share. The majority of these distributions were comprised of net investment income and net capital gains and the remainder return of capital. The estimated components of each quarterly distribution, which may include a return of capital, were provided to stockholders of record in a notice accompanying these distributions.

Stockholder Rights Plan

On January 28, 2016, the Company announced that its Board of Directors, after careful consideration and based on the recommendation of a special committee comprised solely of the independent directors, by the unanimous vote of the directors present, adopted a stockholder rights plan (the “Rights Plan”).

The Rights Plan is designed to ensure that all Company stockholders receive fair and equal treatment in the event of an unsolicited attempt to acquire the Company. The adoption of the Rights Plan is intended to deter partial and “two step” tender offers or other coercive takeover tactics, and to prevent an acquirer from gaining control of the Company without offering a fair price to all of the Company’s stockholders. The Rights Plan was not adopted in response to any known offers for the Company and is similar to stockholder rights plans adopted by many other companies.

To implement the Rights Plan, the Board of Directors declared a dividend distribution of one right for each outstanding share of Company common stock, par value $.01 per share, to holders of record of the shares of common stock at the close of business on January 29, 2016. Each right entitles the registered holder to purchase from the Company one one-thousandth of a share of preferred stock, par value $.01 per share. The rights will be distributed as a non-taxable dividend and will expire on January 29, 2026. The rights will be evidenced by the underlying Company common stock, and no separate preferred

 

 

5        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 
          
    

 

President’s Letter  

 

 

stock purchase rights certificates will presently be distributed. The rights to acquire preferred stock are not immediately exercisable and will become exercisable only if a person or group, other than certain exempt persons, acquires or commences a tender offer for 9.8% or more of the Company’s common stock.

If a person or group, other than an Exempt Person (as defined in the Rights Plan agreement), acquires or commences a tender offer for 9.8% or more of the Company’s common stock, each holder of a right, except the acquirer, will be entitled, subject to the Company’s right to redeem or exchange the right, to exercise, at an exercise price of $12, the right for one one-thousandth of a share of the Company’s newly-created Series A Participating Preferred Stock, or the number of shares of Company common stock equal to the holder’s number of rights multiplied by the exercise price and divided by 50% of the market price of the Company’s common stock on the date of the occurrence of such an event. The Company’s Board of Directors may terminate the Rights Plan at any time or redeem the rights, for $0.01 per right, at any time before a person acquires 9.8% or more of the Company’s common stock.

A summary of the Rights Plan is available on the Company’s website at www.globalselfstorageinc.com and a copy of the Rights Plan agreement was filed with the SEC as an exhibit to a current report on Form 8-K dated January 29, 2016.

Company Website

The Company’s website, www.GlobalSelfStorageInc.com, provides investors with investment information, news, and other material regarding the Company. You are invited to use this resource to learn more about the Company. Information about the Company’s self storage facilities can be found at www.GlobalSelfStorage.us.

As always, we are grateful to the Company’s long standing stockholders for their continuing support.

 

Sincerely,

LOGO

Mark C. Winmill

President

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        6

 

 

 

SCHEDULE OF PORTFOLIO INVESTMENTS

 

      

December 31, 2015  

 

    

 

Financial Statements  

 

 

Member

Equity Interest

 

            

Value 

 

     
  

WHOLLY OWNED SUBSIDIARIES (81.88%)

       
  

Real Estate Owned (81.82%)

       
  

Self Storage Properties (81.82%)

       
  100%              

SSG Bolingbrook LLC (a) (b)

       $    6,100,000    
  100%              

SSG Dolton LLC (a) (b)

     5,900,000    
  100%              

SSG Merrillville LLC (a) (b)

     5,700,000    
  100%              

SSG Rochester LLC (a) (b)

     5,950,000    
  100%              

SSG Sadsbury LLC (a) (b)

     5,700,000    
  100%              

SSG Summerville I LLC (a) (b)

     3,400,000    
  100%              

SSG Summerville II LLC (a) (b)

     1,850,000    
       

 

  
  

Total real estate owned (Cost $27,725,000)

     34,600,000    
       

 

  
  

Other (0.06%)

       
  100%              

SSG Operations LLC (a) (b) (Cost $24,573)

     24,573    
       

 

  
  

Total wholly owned subsidiaries (Cost $27,749,573)

     34,624,573    
       

 

  
  Shares              

COMMON STOCKS (7.34%)

       
  

Real Estate Investment Trusts (7.34%)

       
  

Diversified (1.58%)

       
  2,700              

Public Storage

     668,790    
       

 

  
  

Industrial (5.76%)

       
  24,000              

CubeSmart

     734,880    
  12,000              

Extra Space Storage, Inc.

     1,058,520    
  6,000              

Sovran Self Storage, Inc.

     643,860    
       

 

  
        2,437,260    
       

 

  
  

Total common stocks (Cost $1,360,102)

     3,106,050    
       

 

  
  

PREFERRED STOCKS (2.79%)

       
  

Real Estate Investment Trusts (2.79%)

       
  

Industrial (0.93%)

       
  15,000              

CubeSmart 7.75%, Series A

     392,250    
  

Retail (1.86%)

       
  15,000              

Pennsylvania Real Estate Investment Trust, 8.25%, Series A

     387,150    
  15,000              

Realty Income Corp., 6.625%, Series F

     397,350    
       

 

  
        784,500    
       

 

  
  

Total preferred stocks (Cost $1,087,753)

     1,176,750    
       

 

  
  

OTHER (0%)

       
  2              

RMR Asia Pacific Fund Fractional shares (b) (Cost $0)

       
       

 

  
          
          
          
          

See notes to financial statements.

 

 

7        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 

SCHEDULE OF PORTFOLIO INVESTMENTS

 

        
    

 

Financial Statements  

 

 

Shares

 

    

SHORT TERM INVESTMENT (8.34%)

 

    

Value 

 

     
          
  3,526,337      

SSgA Money Market Fund, 7 day annualized yield 0.01% (Cost $3,526,337)

       $    3,526,337    
       

 

  
  

Total investments (Cost $33,723,765) (100.35%)

     42,433,710    
  

Liabilities in excess of other assets (-0.35%)

     (147,188)   
       

 

  
  

Net assets (100.00%)

       $  42,286,522    
       

 

  
 

(a) Controlled affiliate.

       
 

(b) Illiquid and/or restricted security that has been fair valued.

       
 

LLC Limited Liability Company

       
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          
          

See notes to financial statements.

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        8

 

 

 

STATEMENT OF ASSETS AND LIABILITIES

 

        
    

 

Financial Statements  

 

 

   

December 31, 2015

 

Assets

                       

Investments, at value

     

Wholly owned subsidiaries (cost $27,749,573)

      $  34,624,573   

Unaffiliated issuers (cost $5,974,192)

    7,809,137   
   

 

 
    42,433,710   

Cash

    29,763   

Dividends receivable

    14,403   

Other assets

    12,320   
   

 

 

Total assets

    42,490,196   
   

 

 

Liabilities

     

Accounts payable and accrued expenses

    139,025   

Due to affiliates

    64,649   
   

 

 

Total liabilities

    203,674   
   

 

 

Net Assets

      $  42,286,522   
   

 

 

Net Asset Value Per Share

     

(applicable to 7,416,766 shares outstanding: 20,000,000 shares of $.01 par value authorized)

     $             5.70   
   

 

 

Net Assets Consist of

     

Paid in capital

      $  32,983,056   

Undistributed net investment income

    593,521   

Net unrealized appreciation on investments

    8,709,945   
   

 

 
      $  42,286,522   
   

 

 

See notes to financial statements.

     

 

 

9        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 

STATEMENT OF OPERATIONS

 

        
    

 

Financial Statements  

 

 

   

Year Ended

December 31, 2015

 

Investment Income

                       

Dividends

     

Wholly owned subsidiaries

      $    2,600,000   

Unaffiliated issuers

    131,431   
   

 

 

Total investment income

    2,731,431   
   

 

 

Expenses

     

Compensation and benefits

    757,213   

Occupancy and other office expenses

    125,259   

Bookkeeping and pricing

    79,005   

Registration

    62,956   

Auditing

    48,140   

Directors

    38,505   

Stockholder communications

    21,992   

Legal

    19,600   

Custodian

    12,080   

Insurance

    11,790   

Transfer agent

    11,430   

Other

    3,798   
   

 

 

Total expenses

    1,191,768   
   

 

 

Net investment income

    1,539,663   
   

 

 

Realized and Unrealized Gain

     

Net realized gain on investments in unaffiliated issuers

    903,061   

Net unrealized appreciation

     

Wholly owned subsidiaries

    3,320,002   

Unaffiliated issuers

    351,247   
   

 

 

Net realized and unrealized gain

    4,574,310   
   

 

 

Net increase in net assets resulting from operations

      $    6,113,973   
   

 

 

See notes to financial statements.

     

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        10

 

 

 

STATEMENTS OF CHANGES IN NET ASSETS

 

        

For the Years Ended December 31, 2015 and 2014

 

    

 

Financial Statements  

 

 

 

               

2015

 

                         

2014

 

           

Operations

                           

Net investment income

          $     1,539,663                   $    1,126,343       

Net realized gain

        903,061                 1,459,315       

Unrealized appreciation

        3,671,249                 3,503,130       
       

 

             

 

     

Net increase in net assets resulting from operations

        6,113,973                 6,088,788       
       

 

             

 

     

Distributions to Stockholders

                           

Net investment income

        (848,415)                 (450,425)      

Net realized gains

        (903,061)                 (1,477,934)      

Return of capital

        (176,883)                      
       

 

             

 

     

Total distributions

        (1,928,359)                 (1,928,359)      
       

 

             

 

     

Total increase in net assets

        4,185,614                 4,160,429       

Net Assets

                           

Beginning of period

        38,100,908                 33,940,479       
       

 

             

 

     

End of period

          $   42,286,522                   $  38,100,908       
       

 

             

 

     

End of period net assets include undistributed net investment income (loss)

          $        593,521                   $        (97,728)      
       

 

             

 

     

 

 

 

See notes to financial statements.

                           

 

 

11        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 

STATEMENT OF CASH FLOWS

 

        
    

 

Financial Statements  

 

 

 

   

Year Ended

    December 31, 2015      

 

Cash Flows From Operating Activities

     

Net increase in net assets resulting from operations

    $       6,113,973   

Adjustments to reconcile increase in net assets resulting from operations to net cash provided by (used in) operating activities:

                     

Unrealized appreciation of investments

    (3,671,249)  

Net realized gain on sales of investment securities

    (903,061)  

Capital invested in wholly owned subsidiaries

    (474,573)  

Proceeds from sales of investment securities

    933,999   

Net purchases of short term investments

    (105,144)  

Decrease in due from subsidiaries

    3,372   

Increase in dividends receivable

    (1,201)  

Increase in other assets

    (2,125)  

Increase in accounts payable and accrued expenses

    13,802   

Increase in due to affiliates

    20,575   
   

 

 

Net cash provided by operating activities

    1,928,368   
   

 

 

Cash Flows from Financing Activities

     

Cash distributions paid

    (1,928,359)  
   

 

 

Net cash used in financing activities

    (1,928,359)  
   

 

 

Net change in cash

     

Cash

     

Beginning of period

    29,754   
   

 

 

End of period

    $            29,763   
   

 

 

 

 

See notes to financial statements.

     

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        12

 

 

 

NOTES TO FINANCIAL STATEMENTS

 

      

December 31, 2015  

 

    

 

Financial Statements  

 

 

1.    ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Global Self Storage, Inc. (formerly Self Storage Group, Inc.) (the “Company”), a Maryland corporation registered under the Investment Company Act of 1940, as amended (the “Act”) is a non-diversified, closed end management investment company. The Securities and Exchange Commission (“SEC”) effective order approving the Company’s application with the Securities and Exchange Commission (“SEC”) to deregister from the Act was granted on January 19, 2016. Accordingly, effective January 19, 2016, the Company changed its name to Global Self Storage, Inc., changed its SEC registration to a reporting company under the Securities Exchange Act of 1934, as amended (from an investment company under the Act), and listed its common stock on the Nasdaq Capital Market under the symbol “SELF”. The Company, a real estate investment trust (“REIT”), owns and operates self storage facilities. Prior to deregistration as an investment company, the Company’s primary investment objective under the Act was to provide a high level of income, with capital appreciation as a secondary objective.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require management to make certain estimates and assumptions at the date of the financial statements. Actual results could differ from those estimates. Subsequent events, if any, through the date that the financial statements were issued have been evaluated in the preparation of the financial statements. The following summarizes the significant accounting policies of the Company:

Valuation of Investments – Portfolio securities are valued by various methods depending on the primary market or exchange on which they trade. Most equity securities for which the primary market is in the United States are valued at the official closing price, last sale price or, if no sale has occurred, at the closing bid price. Most equity securities for which the primary market is outside the United States are valued using the official closing price or the last sale price in the principal market in which they are traded. If the last sale price on the local exchange is unavailable, the last evaluated quote or closing bid price normally is used. Certain debt securities may be priced through pricing services that may utilize a matrix pricing system which takes into consideration factors such as yields, prices, maturities, call features, and ratings on comparable securities. Open end investment companies are valued at their net asset value. Foreign securities markets may be open on days when the U.S. markets are closed. For this reason, the value of any foreign securities owned by the Company could change on a day when stockholders cannot buy or sell shares of the Company. Securities for which market

quotations are not readily available or reliable and other assets may be valued as determined in good faith by the Valuation Committee (“VC”) of the Company under the direction of or pursuant to procedures approved by the Company’s Board of Directors. Due to the inherent uncertainty of valuation, such fair value pricing values may differ from the values that would have been used had a readily available market for the securities existed. These differences in valuation could be material. A security’s valuation may differ depending on the method used for determining value. The use of fair value pricing by the Company may cause the net asset value of its shares to differ from the net asset value that would be calculated using market prices. A fair value price is an estimate and there is no assurance that such price will be at or close to the price at which a security is next quoted or next trades.

Investments in Other Investment Companies – The Company may invest in shares of other investment companies (the “Acquired Fund”) in accordance with the Act and related rules. Stockholders in the Company bear the pro rata portion of the fees and expenses of an Acquired Fund in addition to the Company’s expenses. Expenses incurred by the Company that are disclosed in the statement of operations do not include fees and expenses incurred of an Acquired Fund. The fees and expenses of an Acquired Fund are reflected in such Acquired Fund’s total returns.

Investments in Real Estate Investment Trusts – Dividend income is recorded based on the income included in distributions received from the REIT investments using published REIT reclassifications including some management estimates when actual amounts are not available. Distributions received in excess of this estimated amount are recorded as a reduction of the cost of investments or reclassified to capital gains. The actual amounts of income, return of capital, and capital gains are only determined by each REIT after its fiscal year end, and may differ from the estimated amounts.

Real Estate Owned - Self Storage Properties – The Company owns and operates self storage properties through wholly owned subsidiaries.

Short Sales – The Company may sell a security short it does not own in anticipation of a decline in the market value of the security. When the Company sells a security short, it must borrow the security sold short and deliver it to the broker/dealer through which it made the short sale. The Company is liable for any dividends or interest paid on securities sold short. A gain, limited to the price at which the Company sold the security short, or a loss, unlimited in size, will be recognized upon the termination of the short sale. Securities sold short result in off balance sheet risk as the Company’s

 

 

13        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 

NOTES TO FINANCIAL STATEMENTS

 

      

continued  

 

    

 

Financial Statements  

 

 

ultimate obligation to satisfy the terms of the sale of securities sold short may exceed the amount recognized in the Statement of Assets and Liabilities.

Investment Transactions – Investment transactions are accounted for on the trade date (the date the order to buy or sell is executed). Realized gains or losses are determined by specifically identifying the cost basis of the investment sold.

Investment Income – Interest income is recorded on the accrual basis. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income is recorded on the ex-dividend date or, in the case of foreign securities, as soon as practicable after the Company is notified. Taxes withheld on income from foreign securities have been provided for in accordance with the Company’s understanding of the applicable country’s tax rules and rates.

Expenses – Expenses deemed by the Company to have been incurred solely by the Company are borne by the Company. Expenses deemed by the Company to have been incurred jointly by the Company and one or more of the other investment companies for which its affiliates serve as investment manager or other related entities are allocated on the basis of relative net assets, except where a more appropriate allocation can be made fairly in the judgment of the Company.

Expense Reduction Arrangement – Through arrangements with the Company’s custodian, credits realized as a result of uninvested cash balances are used to reduce custodian expenses. No credits were realized by the Company during the periods covered by this report.

Distributions to Stockholders – Distributions to stockholders are determined in accordance with income tax regulations and are recorded on the ex-dividend date.

Income Taxes – The Company has elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended (“IRC”). In order to maintain its qualification as a REIT, among other things, the Company is required to distribute at least 90% of its REIT taxable income to its stockholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Company is not subject to federal income tax with respect to that portion of its income which meets certain criteria and is distributed annually to stockholders. The Company plans to continue to operate so that it meets the requirements for taxation as a REIT. Many of these requirements, however, are highly technical and complex. If the Company were to fail to meet these requirements, it would be subject to federal income tax. The Company is subject to certain state and local taxes.

Foreign securities held by the Company may be subject to foreign

taxation. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Company invests.

The Company recognizes the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. The Company has reviewed its tax positions and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on federal, state, and local income tax returns for open tax years (2012 – 2014), or expected to be taken in the Company’s 2015 tax returns.

2.  RELATED PARTY TRANSACTIONS Certain officers and directors of the Company also serve as officers and directors of Winmill & Co. Incorporated (“Winco”), Bexil Corporation, Tuxis Corporation (“Tuxis”), and their affiliates (collectively with the Company, the “Affiliates”). As of December 31, 2015, certain of the Affiliates owned approximately 2% of the Company’s outstanding common stock. Pursuant to an arrangement between a professional employer organization (“PEO”) and the Affiliates, the PEO provides payroll, benefits, compliance, and related services for employees of the Affiliates in accordance with applicable rules and regulations under the IRC and, in connection therewith, Midas Management Corporation (“MMC”), a subsidiary of Winco, acts as a conduit payer of compensation and benefits to the Affiliates’ employees including those who are concurrently employed by the Company and its Affiliates. Rent expense of concurrently used office space and overhead expenses for various concurrently used administrative and support functions incurred by the Affiliates are allocated at cost among them. The Affiliates participate in a 401(k) retirement savings plan for substantially all qualified employees. A matching expense based upon a percentage of contributions to the plan by eligible employees is incurred and allocated among the Affiliates. The matching expense is accrued and funded on a current basis and may not exceed the amount permitted as a deductible expense under the IRC. The aggregate compensation and benefits accrued and paid by the Company for the year ended December 31, 2015 was $747,523. The aggregate rent and overhead accrued and paid by the Company for the year ended December 31, 2015 was $62,403. As of December 31, 2015, the Company had reimbursements payable to MMC and Winco for compensation and benefits and rent and overhead of $64,649.

Under the terms of the Company’s employment agreement with its President, Mark C. Winmill, the maximum monthly automobile allowance is $1,000 per month. To the extent that the monthly maximum payment under the Company’s automobile lease exceeds the monthly allowance, Mr. Winmill must reimburse the Company for the excess amount. In this regard, Mr. Winmill has reimbursed the Company $1,878 for the automobile payments paid and due in 2015.

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        14

 

 

 

NOTES TO FINANCIAL STATEMENTS

 

      

continued  

 

    

 

Financial Statements  

 

 

The Company leases office space from Tuxis under a rental agreement. The terms of occupancy are month to month and automatically renew unless terminated by either party on ten days written notice. The monthly rental charges are $1,000 per month due and payable on the first day of each month. For the year ended December 31, 2015, the total rent paid by the Company to Tuxis was $14,000.

3.  DISTRIBUTIONS TO STOCKHOLDERS AND DISTRIBUTABLE EARNINGS The tax character of distributions paid by the Company for the years ended December 31, 2015 and 2014 are summarized as follows:

 

  Distributions paid from:    2015                   2014           

Net investment income

   $ 848,811                   $ 450,425           

 

Net realized gains

 

     902,665                     1,477,934           

Return of capital

     176,883                     -           

 

Total distributions

   $   1,928,359                   $   1,928,359           
                   
     

As of December 31, 2015, distributable earnings on a tax basis was comprised of $9,303,466 of unrealized appreciation.

The difference between book and tax unrealized appreciation is attributable to income of the Company’s wholly owned unconsolidated subsidiaries. Federal income tax regulations permit post-October net capital losses, if any, to be deferred and recognized on the tax return of the next succeeding taxable year.

Federal income tax regulations permit post-October net capital losses, if any, to be deferred and recognized on the tax return of the next succeeding taxable year.

GAAP requires certain components related to permanent differences of net assets to be classified differently for financial reporting than for tax reporting purposes. These differences have no effect on net assets or net asset value per share. These differences which may result in distribution reclassifications, are primarily due to differences in, return of capital dividends, recharacterization of capital gain income, and timing of distributions. As of December 31, 2015, the Company recorded the following financial reporting reclassifications to the net asset accounts to reflect those differences:

 

                    Increase  in Undistributed

                    Net  Investment Income

  

Decrease in Net Realized

Gain on Investments

 

Decrease in                     

Paid in Capital                     

                    $1,079,944    $(903,061)   $(176,883)                    
          
    

4.  VALUE MEASUREMENT GAAP establishes a hierarchy that prioritizes inputs to valuation methods. The three levels of inputs are:

Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities including securities actively traded on a securities exchange.

Level 2 – observable inputs other than quoted prices included in level 1 that are observable for the asset or liability which may include quoted prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates, and similar data.

Level 3 – unobservable inputs for the asset or liability including the Company’s own assumptions about the assumptions a market participant would use in valuing the asset or liability.

The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets for the security, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for investments categorized in level 3. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those securities.

 

 

15        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 

NOTES TO FINANCIAL STATEMENTS

 

      

continued  

 

    

 

Financial Statements  

 

 

The following is a description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis:

Real estate assets – Real estate assets, including self storage facilities held indirectly through one or more wholly owned and controlled subsidiaries, are valued using fair value pricing as determined in good faith by the VC under the direction of or pursuant to procedures approved by the Company’s Board of Directors. Real estate assets may be valued by reference to, among other things, quarterly appraisals by an independent third party and additional factors which may include assessment of comparable recent acquisitions, changes in cash flows from the operation of the subject property, and material events affecting the operation of the property.

Equity securities (common and preferred stock) – Most publicly traded equity securities are valued normally at the most recent official closing price, last sale price, evaluated quote, or closing bid price. To the extent these securities are actively traded and valuation adjustments are not applied, they may be categorized in level 1 of the fair value hierarchy. Equities on inactive markets or valued by reference to similar instruments may be categorized in level 2.

Restricted and/or illiquid securities – Restricted and/or illiquid securities for which quotations are not readily available or reliable may be valued with fair value pricing as determined in good faith by the VC under the direction of and pursuant to procedures approved by the Company’s Board of Directors. Restricted securities issued by publicly traded companies are generally valued at a discount to similar publicly traded securities. Restricted or illiquid securities issued by nonpublic entities may be valued by reference to comparable public entities or fundamental data relating to the issuer or both similar inputs. Depending on the relative significance of valuation inputs, these instruments may be categorized in either level 2 or level 3 of the fair value hierarchy.

The following is a summary of the inputs used as of December 31, 2015 in valuing the Company’s assets. Refer to the Schedule of Portfolio Investments for detailed information on specific investments.

 

 

  ASSETS

 

  

 

Level 1

 

    

Level 2

 

    

Level 3

 

    

Total

 

 

Investments, at value

 

             

 Wholly owned subsidiaries

 

             

Self storage properties

   $ -           $                 -           $   34,600,000           $   34,600,000       

 

Other

 

  

 

 

 

 

-    

 

 

  

 

  

 

 

 

 

-    

 

 

  

 

  

 

 

 

 

24,573    

 

 

  

 

  

 

 

 

 

24,573    

 

 

  

 

Common stocks

 

    

 

3,106,050    

 

  

 

    

 

-    

 

  

 

    

 

-    

 

  

 

    

 

3,106,050    

 

  

 

Preferred stocks

 

    

 

1,176,750    

 

  

 

    

 

-    

 

  

 

    

 

-    

 

  

 

    

 

1,176,750    

 

  

 

Other

 

    

 

-    

 

  

 

    

 

-    

 

  

 

    

 

0    

 

  

 

    

 

0    

 

  

 

Short term investments

 

    

 

3,526,337    

 

  

 

    

 

-    

 

  

 

    

 

-    

 

  

 

    

 

3,526,337    

 

  

 

Total investments, at value

   $   7,809,137           $ -           $ 34,624,573           $ 42,433,710       
                                     
           

There were no securities transferred from level 1 at December 31, 2014 to level 2 at December 31, 2015.

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        16

 

 

 

NOTES TO FINANCIAL STATEMENTS

 

      

continued  

 

    

 

Financial Statements  

 

 

The following is a reconciliation of level 3 assets including securities valued at zero:

 

 

Wholly Owned Subsidiaries

 

    

Other    

 

      

Total    

 

 

 

Balance at December 31, 2014

 

 

  $  30,830,000          

 

     $

 

519,765       

 

  

 

     $

 

  31,349,765       

 

  

 

Cost of purchases

 

 

474,573          

 

      

 

-       

 

  

 

      

 

474,573       

 

  

 

Proceeds from sales

 

 

-          

 

      

 

(900,368)      

 

  

 

      

 

(900,368)      

 

  

 

Realized gain

 

 

-          

 

      

 

900,368       

 

  

 

      

 

900,368       

 

  

 

Transfers into (out of) level 3

 

 

-          

 

      

 

-       

 

  

 

      

 

-       

 

  

 

Change in unrealized appreciation

 

 

3,320,000          

 

      

 

(519,765)      

 

  

 

      

 

2,800,235       

 

  

 

Balance at December 31, 2015

 

 

  $  34,624,573          

 

     $

 

0       

 

  

 

     $

 

34,624,573       

 

  

 

                         

Net change in unrealized appreciation attributable to assets
still held as level 3 at December 31, 2015

 

 

  $    3,320,000          

 

     $

 

0       

 

  

 

     $

 

3,320,000       

 

  

 

                           
           

Unrealized gains (losses) are included in the related amounts on investments in the Statement of Operations.

The VC, under the direction of the Company’s Board of Directors, considers various valuation approaches for valuing assets categorized within level 3 of the fair value hierarchy. The factors used in determining the value of such assets may include, but are not limited to: marketability, professional appraisals of portfolio companies, company and industry results and outlooks, and general market conditions. The VC then recommends a value for each asset in light of all the information available. The determination of fair value involves subjective judgments. As a result, using fair value to price an investment may result in a price materially different from the price used by other investors or the price that may be realized upon the actual sale of the asset. Significant changes in any of those inputs in isolation may result in a significantly lower or higher value measurement. The pricing of all fair value assets is reported to the Company’s Board of Directors.

In valuing the self storage properties owned through the Company’s wholly owned subsidiaries as of December 31, 2015, the VC used a number of significant unobservable inputs to develop a range of possible values for the properties. It used a sales comparison approach which looks at recent sales of self storage properties considered similar to the subject property, an income capitalization approach which looks at discounted cash flow analysis based on certain assumptions regarding the property’s trend in income and expenses, and a cost approach which looks at recent comparable land sales in the subject area and the estimated replacement value of the existing buildings and site improvements.

The values obtained from weighting the three methods described above, with greater weight given to the sales comparison approach, were then discounted for the lack of marketability of the Company’s membership interest in each subsidiary, which represents the range of rates the VC believes market participants may apply. The resulting range of values, together with the underlying support, other information about each underlying property’s financial condition and results of operations and its industry outlook, were considered by the VC, which recommended a value for each subsidiary.

The following table presents additional information about valuation methodologies and inputs used for investments that are measured at fair value and categorized as level 3 as of December 31, 2015:

 

    

 

Fair Value    

 

   

Valuation Technique

 

 

  Unobservable Input    

 

 

Range    

 

       

WHOLLY OWNED SUBSIDIARIES

 

                   
       

Self Storage Properties

 

  $

 

  34,600,000    

 

  

 

  Income capitalization approach    

 

  Capitalization rates

 

  5.3% - 9.6%    

 

       

Other

 

  $

 

24,573    

 

  

 

  Replacement cost

 

  Lack of marketability

 

  0%    

 

       

OTHER

 

  $

 

0    

 

  

 

  Liquidating value

 

  Discount rate for lack
of marketability

 

  100%    

 

                     
       

 

 

17        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 

NOTES TO FINANCIAL STATEMENTS

 

      

continued  

 

    

 

Financial Statements  

 

 

5.  INVESTMENTS IN WHOLLY OWNED SUBSIDIARIES The following summary sets forth the Company’s membership equity ownership including membership equity capital additions and reductions, cash dividends received by the Company, and the value of each wholly owned subsidiary as recorded in the schedule of portfolio investments as of and for the year ended December 31, 2015.

 

    

Beginning    
Equity Interest    
Percentage    

 

  Membership Equity        

Ending
    Equity Interest    
Percentage

 

  Dividend  
Income  
    Value
December 31, 2015
 
   

Gross    
Additions    

 

   

Gross  
Reductions  

 

       

SSG

Bolingbrook LLC

  100%   $ -          $      -            100%   $   390,000          $  6,100,000           
         

SSG

Dolton LLC

  100%   $ -          $      -            100%   $ 542,000          $  5,900,000           
         

SSG

Merrillville LLC

  100%   $ -          $      -            100%   $ 431,000          $  5,700,000           
         

SSG

Rochester LLC

  100%   $ -          $      -            100%   $ 587,000          $  5,950,000           
         

SSG

Sadsbury LLC

  100%   $   450,000          $      -            100%   $ 265,000          $  5,700,000           
         

SSG

Summerville I LLC

  100%   $ -          $      -            100%   $ 250,000          $  3,400,000           
         

SSG

Summerville II LLC

  100%   $ -          $      -            100%   $ 135,000          $  1,850,000           
         

SSG

Operations LLC

 

  0%

 

  $

 

24,573  

 

  

 

   

 

$      -      

 

  

 

  100%

 

  $

 

-  

 

  

 

   

 

$       24,753        

 

  

 

                                         
           

The Company’s wholly owned subsidiaries are each a controlled affiliate as defined under the Act. A controlled affiliate is an issuer in which the Company’s holdings represent 25% or more of the outstanding voting securities of such issuer.

6.  SUMMARIZED FINANCIAL INFORMATION OF WHOLLY OWNED SUBSIDIARIES Each of the Company’s wholly owned subsidiaries, except for SSG Operations LLC, owns and operates a self storage facility business. The following sets forth unaudited summarized information as to assets, liabilities, and selected operating information for each wholly owned subsidiary as of and for the year ended December 31, 2015:

 

Dollars in thousands

 

  SSG
Bolingbrook  
LLC
  SSG
Dolton
LLC
  SSG  
Merrillville  
LLC  
  SSG  
Rochester  
LLC  
  SSG  
Sadsbury  
LLC  
  SSG  
Summerville I  
LLC  
  SSG  
Summerville II  
LLC  
 

SSG 

Operations  
LLC 

               
OPERATING DATA
Year ended Dec. 31, 2015
                                       

Rental revenues

    $ 653        $ 775         $ 627        $   1,009        $ 648        $ 477        $ 250        $  
               

Costs of operations

      268          235           212          433          349          202          94           
               
     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
               

Income from operations

    $ 385        $ 540         $ 415        $ 576        $ 299        $ 275        $ 156        $ (8)   
               

Depreciation and amortization

    $ 129        $ 117         $ 113        $ 86        $ 105        $ 55        $ 31        $  
               

Net income (loss)

    $ 256        $ 423         $ 258        $ 490        $ 194        $ 216        $ 119        $ (8)   
                                                                                 
               

BALANCE SHEET DATA

Dec. 31, 2015

                                       
               

Real estate assets, net

    $   5,511        $   4,881         $ 4,599        $ 3,471        $   4,521        $ 2,205        $ 1,240        $  
               

Total assets

    $ 5,599        $ 5,015         $   4,644        $ 3,599        $ 4,591        $   2,237        $   1,263        $       17   
               

Total liabilities

    $ 136        $ 106         $ 76        $ 33        $ 20        $ 21        $ 11        $  
                                                                                 
                               

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        18

 

 

 

NOTES TO FINANCIAL STATEMENTS

 

      

continued  

 

    

 

Financial Statements  

 

 

7.  ILLIQUID AND RESTRICTED INVESTMENTS The Company holds investments that have a limited trading market and/or certain restrictions on trading and, therefore, may be illiquid and/or restricted. These investment holdings have been valued at fair value. Due to the inherent uncertainty of valuation, fair value pricing values may differ from the values that would have been used had a readily available market for the securities existed. These differences in valuation could be material. Illiquid and/or restricted investment holdings owned at December 31, 2015, were as follows:

 

       

 

Acquisition Date          

 

      

 

Cost          

 

      

 

Value          

 

 

 

SSG Bolingbrook LLC

    

 

 

 

6/27/13                

 

  

    

 

$

 

5,700,000               

 

  

    

 

$

 

6,100,000               

 

  

 

SSG Dolton LLC

    

 

 

 

6/27/13                

 

  

    

 

 

 

5,100,000               

 

  

    

 

 

 

5,900,000               

 

  

 

SSG Merrillville LLC

    

 

 

 

6/27/13                

 

  

    

 

 

 

4,825,000               

 

  

    

 

 

 

5,700,000               

 

  

 

SSG Rochester LLC

    

 

 

 

12/5/12                

 

  

    

 

 

 

3,750,000               

 

  

    

 

 

 

5,950,000               

 

  

 

SSG Sadsbury LLC

    

 

 

 

12/24/12                

 

  

    

 

 

 

4,750,000               

 

  

    

 

 

 

5,700,000               

 

  

 

SSG Summerville I LLC

    

 

 

 

7/12/13                

 

  

    

 

 

 

2,300,000               

 

  

    

 

 

 

3,400,000               

 

  

 

SSG Summerville II LLC

    

 

 

 

8/20/13                

 

  

    

 

 

 

1,300,000               

 

  

    

 

 

 

1,850,000               

 

  

 

SSG Operations LLC

    

 

 

 

8/11/15                

 

  

    

 

 

 

24,573               

 

  

    

 

 

 

24,573               

 

  

 

RMR Asia Pacific Fund Fractional shares

 

    

 

 

 

 

2010                

 

 

  

 

    

 

 

 

 

0               

 

 

  

 

    

 

 

 

 

0               

 

 

  

 

 

Total

 

           

 

$

 

 

  27,749,573               

 

 

  

 

    

 

$

 

 

  34,624,573               

 

 

  

 

 

Percent of net assets

 

           

 

 

 

 

66%            

 

 

  

 

    

 

 

 

 

82%            

 

 

  

 

                                  
                                  
              

8.  INVESTMENT TRANSACTIONS Purchases and proceeds of investments, excluding short term investments, were $474,573 and $900,368, respectively, for the year ended December 31, 2015. As of December 31, 2015, for federal income tax purposes, the aggregate cost of investments was $33,158,473 and net unrealized appreciation was $9,275,237, comprised of gross unrealized appreciation of $9,275,237 and gross unrealized depreciation of $0.

9.  BORROWING AND SECURITIES LENDING The Company has entered into a Committed Facility Agreement (the “CFA”) with BNP Paribas Prime Brokerage, Inc. (“BNP”) that allows the Company to adjust its credit facility amount up to $20,000,000, and a Lending Agreement, as defined below. Borrowings under the CFA are secured by assets of the Company that are held with the Company’s custodian in a separate account (the “pledged collateral”). Interest is charged at the 1 month LIBOR (London Inter-bank Offered Rate) plus 0.95% on the amount borrowed and 0.50% on the undrawn balance. Because the Company adjusts the facility amount each day to equal borrowing drawn that day, the 0.50% annualized rate charge on undrawn facility amounts provided for by the CFA has not been incurred. As of December 31, 2015, there was no outstanding loan balance or assets pledged as collateral and there was no borrowing activity during the year ended December 31, 2015.

The Lending Agreement provides that BNP may borrow a portion of the pledged collateral (the “Lent Securities”) in an amount not to exceed the outstanding borrowings owed by the Company to BNP under the CFA. BNP may re-register the Lent Securities in its own name or in another name other than the Company and may pledge, re-pledge, sell, lend, or otherwise transfer or use the Lent Securities with all attendant rights of ownership. The Company may designate any security within the pledge collateral as ineligible to be a Lent Security, provided there are eligible securities within the pledged collateral in an amount equal to the outstanding borrowing owed by the Company. BNP must remit payment to the Company equal to the amount of all dividends, interest, or other distributions earned or made by the Lent Securities.

 

 

19        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 

NOTES TO FINANCIAL STATEMENTS

 

      

continued  

 

    

 

Financial Statements  

 

 

Under the Lending Agreement, Lent Securities are marked to market daily and, if the value of the Lent Securities exceeds the value of the then-outstanding borrowings owed by the Company to BNP under the CFA (the “Current Borrowings”), BNP must, on that day, either (1) return Lent Securities to the Company’s custodian in an amount sufficient to cause the value of the outstanding Lent Securities to equal the Current Borrowings; or (2) post cash collateral with the Company’s custodian equal to the difference between the value of the Lent Securities and the value of the Current Borrowings. If BNP fails to perform either of these actions as required, the Company will recall securities, as discussed below, in an amount sufficient to cause the value of the outstanding Lent Securities to equal the Current Borrowings. The Company can recall any of the Lent Securities and BNP is obligated, to the extent commercially possible, to return such security or equivalent security to the Company’s custodian no later than three business days after such request. If the Company recalls a Lent Security pursuant to the Lending Agreement, and BNP fails to return the Lent Securities or equivalent securities in a timely fashion, BNP shall remain liable to the Company’s custodian for the ultimate delivery of such Lent Securities, or equivalent securities, and for any buy-in costs that the executing broker for the sales transaction may impose with respect to the failure to deliver. The Company shall also have the right to apply and set-off an amount equal to one hundred percent (100%) of the then-current fair value of such Lent Securities against the Current Borrowings. The Company earns securities lending income consisting of payments received from BNP for lending certain securities, less any rebates paid to borrowers and lending agent fees associated with the loan. As of and for the year ended December 31, 2015, there were no Lent Securities.

10.  INVESTMENT AND SECURITIES RISK

Foreign securities risk. Investments in the securities of foreign issuers involve special risks, including changes in foreign exchange rates and the possibility of future adverse political and economic developments, which could adversely affect the value of such securities. Moreover, securities of foreign issuers and traded in foreign markets may be less liquid and their prices more volatile than those of U.S. issuers and markets.

Non-diversification risk. The Company is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified company. As a result, changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a diversified company.

Equity securities risk. The prices of equity securities change in response to many factors including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.

Concentration risk. The Company’s assets are concentrated in investments in the real estate industry and, as a result, the value of the Company’s common stock may be subject to greater volatility than an investment company with a portfolio that is less concentrated by industry. If the securities of the real estate industry or self storage companies as a group fall out of favor with investors, the Company could underperform other companies that have greater industry diversification. A more concentrated portfolio may cause the Company’s net asset value to be more volatile and thus may subject stockholders to more risk. As of December 31, 2015, the Company held approximately 82% of its assets in self storage properties. Thus, the volatility of the Company’s net asset value, and its performance in general, depends disproportionately more on the performance of a single industry than that of a more diversified company.

REIT risk. The Company’s investments in securities of real estate companies involve risks. The REITs in which the Company invests are subject to risks inherent in the direct ownership of real estate. These risks include, but are not limited to, the risk of a possible lack of mortgage funds and associated interest rate risks, overbuilding, property vacancies, increases in property taxes and operating expenses, changes in zoning laws, losses due to environmental damages and changes in neighborhood values and appeal to purchasers.

11.  CAPITAL STOCK The Company is authorized to issue 20,000,000 shares of $0.01 par value common stock. There were no transactions in common stock during 2015 or 2014.

12.  STOCKHOLDER RIGHTS PLAN On November 25, 2015, the Company’s Board of Directors adopted a stockholder rights plan (the “Plan”) dated November 25, 2015. To implement the Plan, the Board of Directors declared a special dividend distribution of one non-transferable right for each outstanding share of the Company’s common stock, par value $.01 per share, to stockholders of record at the close of business on November 25, 2015. Each right entitles the registered holder to purchase from the Company one share of its common stock, par value $.01 per share, subject to adjustment. The rights will be distributed as a non-taxable dividend and will expire at the close of business on March 24, 2016, unless earlier redeemed or exchanged by the Company. The rights will be evidenced by the underlying Company common stock and no separate rights certificates will presently be distributed. Subject to certain exceptions in the rights agreement, (“Rights Agreement”) the rights will become exercisable 10 days following a public announcement that a “person” (as defined in the Rights Agreement) or a group of affiliated or associated persons have acquired “beneficial ownership” (as defined in the Rights Agreement) of 15% or more of the outstanding shares of the Company’s common stock. In this event, however, any

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        20

 

 

 

NOTES TO FINANCIAL STATEMENTS

 

      

continued  

 

    

 

Financial Statements  

 

 

person who “beneficially owns” (as defined in the Rights Agreement) more than 15% of the outstanding common shares of the Company’s common stock will not be permitted to exercise any rights associated with common shares beneficially owned in excess of 15% of the outstanding common shares of the Company, and those additional rights will be deemed null and void. The Board of Directors may terminate the Plan at any time or redeem the rights, for $.01 per right, at any time before a person or a group of affiliated or associated persons beneficially owns 15% or more of the Company’s common stock. Under certain circumstances, as set forth in the Rights Agreement, certain rights owned by any person who is or becomes an acquiring person (as defined in the Rights Agreement) shall become null and void. A copy of the Rights Agreement specifying the terms and conditions of the rights is available on the Company’s website at www.GlobalSelfStorageInc.com.

13. COMMITMENTS AND CONTINGENCIES The Company indemnifies its officers and directors from certain liabilities that might arise from their performance of their duties for the Company. Additionally, in the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and which may provide general indemnifications. The Company’s maximum exposure under these arrangements is unknown as it involves future claims that may be made against the Company under circumstances that have not occurred.

The Company leases an automobile under a lease expiring on February 25, 2017. The future minimum lease payments under the lease in aggregate are $15,035 comprised of annual payments of $13,878 and $1,157 for the years ending December 31, 2016 and 2017, respectively.

14. UNAUDITED PROFORMA BALANCE SHEET Upon receiving the deregistration order from the SEC under the Act granted on January 19, 2016 the Company will prepare financial statements on a consolidated basis to include the financial position, results of operations, and cash flows of the Company and its wholly owned subsidiaries, rather than by the current investment company fair valuation approach.

The following table presents the Company’s unaudited pro forma balance sheet and has been prepared as if the deregistration order was effective on December 31, 2015. The unaudited pro forma balance sheet is based upon available information and upon certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma balance sheet presents the Company’s change in status from an investment company to an operating company no longer regulated as an investment company under the Act. This unaudited pro forma balance sheet does not-purport to represent what the Company’s financial position would

actually have been if the deregistration order in fact had occurred on such date or the Company’s financial position for any future dates or periods.

 

 

  Assets

    

  Property, plant and equipment

    $ 34,503,666      

  Cash and cash equivalents

     3,854,104      

  Available-for-sale securities

     4,282,800      

  Other assets

     253,029      
  

 

 

   

  Total assets

     $   42,893,599      
  

 

 

   

  Liabilities

    $ 607,077      

  Stockholders’ equity

     42,286,522      
  

 

 

   

  Total liabilities and stockholders’ equity

    $ 42,893,599      
  

 

 

   
    

15. SUBSEQUENT EVENTS Effective January 19, 2016, the Company changed its name to Global Self Storage, Inc., changed its SEC registration to an operating company from an investment company, and listed its common stock on the Nasdaq Capital Market under the symbol “SELF”. Following deregistration as an investment company, the Company terminated its agreements with BNP, its custodian, and net asset value fund accountant.

On January 28, 2016 the Company announced that its Board of Directors has adopted a stockholders rights plan (the “Rights Plan”). To implement the Rights Plan, the Board of Directors declared a dividend distribution of one right for each outstanding share of Company common stock, par value $.01 per share, to holders of record of the shares of common stock at the close of business on January 29, 2016. Each right entitles the registered holder to purchase from the Company one one-thousandth of a share of preferred stock, par value $.01 per share. The rights will be distributed as a non-taxable dividend and will expire on January 29, 2026. The rights will be evidenced by the underlying Company common stock, and no separate preferred stock purchase rights certificates will presently be distributed. The rights to acquire preferred stock are not immediately exercisable and will become exercisable only if a person or group, other than certain exempt persons, acquires or commences a tender offer for 9.8% or more of the Company’s common stock. If a person or group, other than an Exempt Person (as defined in the Rights Plan agreement), acquires or commences a tender offer for 9.8% or more of the Company’s common stock, each holder of a right, except the acquirer, will be entitled, subject to the Company’s right to redeem or exchange the right, to exercise, at an exercise price of $12, the right for one one-thousandth of a share of the Company’s newly created Series A Participating Preferred Stock, or the number of shares of Company common stock equal to the holder’s number of rights multiplied by the exercise price and divided by 50% of the market price of the Company’s common stock on the date of

 

 

21        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 

NOTES TO FINANCIAL STATEMENTS

 

      

concluded  

 

    

 

Financial Statements  

 

 

the occurrence of such an event. The Company’s Board of Directors may terminate the Rights Plan at any time or redeem the rights, for $0.01 per right, at any time before a person acquires 9.8% or more of the Company’s common stock. The Rights Plan is intended to replace the Plan dated November 25, 2015, which will expire on its own terms on March 24, 2016.

Effective January 29, 2016, the Board of Directors reclassified 100,000 unissued shares of the Company’s common stock into 100,000 shares of Series A Participating Preferred Stock, par value $.01 per share.

A summary of the Rights Plan is available on the Company’s website at www.globalselfstorageinc.com and a copy of the Rights Plan agreement was filed with the SEC as an exhibit to a current report on Form 8-K dated January 29, 2016.

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        22

 

 

 

FINANCIAL HIGHLIGHTS

 

      

December 31, 2015  

 

    

 

Financial Statements  

 

 

    Year Ended December 31,
    2015   2014   2013   2012   2011

Per Share Operating Performance

(for a share outstanding throughout each period)

                             

Net asset value, beginning of period

      $5.14            $4.58            $4.74            $4.60            $5.00     

Income from investment operations:

                             

Net investment income (loss) (1)

      .21            .15            (.09         .01            .19     

Net realized and unrealized gain (loss) on investments

      .61            .67            .28            .60            (.33  

Total income from investment operations

      .82            .82            .19            .61            (.14  

Less distributions:

                             

Net investment income

      (.12         (.06         (.06         (.02         (.26  

Net realized gains

      (.12         (.20         (.29         (.45         -     

Return of capital

      (.02         -            -            -            -     

Total distributions

      (.26         (.26         (.35         (.47         (.26  

Net asset value, end of period

      $5.70            $5.14            $4.58            $4.74            $4.60     
                                                           

Market value, end of period

      $3.75            $3.63            $3.59            $3.69            $3.78     
                                                           

Total Return (2)

                             

Based on net asset value

      19.00         20.67         5.70         16.22         (1.86 )%   

Based on market price

      10.86         8.72         6.43         10.10         (3.30 )%   

Ratios/Supplemental Data (3)

                             

Net assets at end of period (000s omitted)

      $42,287            $38,101            $33,940            $35,155            $34,102     

Ratio of total expenses to average net assets

      3.02         3.72         3.14         2.60         2.31  

Ratio of net expenses excluding loan interest and fees to average net assets

      3.02         3.71         3.14         2.60         2.30  

Ratio of net investment income (loss) to average net assets

      3.90         3.19         (1.88 )%          0.25         4.31  

Portfolio turnover rate

 

       

 

1

 

 

           

 

1

 

 

           

 

57

 

 

           

 

115

 

 

           

 

22

 

 

   
   

 

(1)

The per share amounts were calculated using the average number of common shares outstanding during the period.

 

(2)

Total return on a market value basis is calculated assuming a purchase of common stock on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s dividend reinvestment plan if in effect or, if there is no plan in effect, at the lower of the per share net asset value or the closing market price of the Company’s shares on the dividend/distribution date. Generally, total return on a net asset value basis will be higher than total return on a market value basis in periods where there is an increase in the discount or a decrease in the premium of the market value to the net asset value from the beginning to the end of such periods. Conversely, total return on a net asset value basis will be lower than total return on a market value basis in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to the end of such periods. The calculation does not reflect brokerage commissions, if any.

 

(3)

Expenses and income ratios do not include expenses incurred by an Acquired Fund in which the Company invests.

 

See notes to financial statements.

 

 

23        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

  

December 31, 2015  

 

    

 

Financial Statements  

 

 

To the Board of Directors and Stockholders of

Global Self Storage, Inc.

We have audited the accompanying statement of assets and liabilities of Global Self Storage, Inc., including the schedule of portfolio investments as of December 31, 2015 and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years indicated thereon. These financial statements and financial highlights are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly,

we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2015, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Global Self Storage, Inc. as of December 31, 2015, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years indicated thereon, in conformity with accounting principles generally accepted in the United States of America.

TAIT, WELLER & BAKER LLP

Philadelphia, Pennsylvania

February 23, 2016

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        24

 

 

 

POLICIES AND RISKS

 

      

(Unaudited)  

 

    

 

Financial Statements  

 

 

Investment Objectives and Policies

Prior to January 19, 2016, the Company’s primary investment objective was to provide a high level of income. This objective under the Act was fundamental and could not be changed without stockholder approval. The Company was also subject to certain investment restrictions, set forth in its most recently effective Statement of Additional Information, that were fundamental and could not be changed without stockholder approval. The Company’s secondary investment objective of capital appreciation was not fundamental and could be changed by the Board of Directors without stockholder approval.

Risk Factors

Stockholders should note that there are a number of risks related to the Company’s business. Additionally, there are risks related to the operating performance of the Company’s self storage facilities and the Company’s performance will be subject to risks associated with the real estate industry. There are also risks related to the Company’s organization and structure and risks related to the Company’s tax status as a REIT. The summary of risk factors below is qualified by reference to a more complete statement of applicable risks contained in the Company’s Form 10 filed with the SEC on December 14, 2015, which is available at www.globalselfstorageinc.com.

There are a number of risks related to the Company’s business and they should be noted:

 

 

The Company is pursuing a business in which it has limited operating history.

 

 

The Company’s investments are subject to concentration risk.

 

 

The Company’s performance is subject to risks associated with operation of self storage facilities.

The following factors, among others, may adversely affect the operating performance of the Company’s self storage facilities:

 

 

Perceptions by prospective tenants of the Company’s self storage properties of the safety, convenience, and attractiveness of such properties and the areas in which they are located.

 

 

A general decline in rental rates or an increase in tenant defaults.

 

 

Vacancies or inability to rent storage space on favorable terms.

 

 

Increases in operating costs.

 

 

Actual or perceived oversupply or declining demand of self storage in a particular area.

 

 

Difficulties in hiring, training and maintaining skilled field personnel.

 

 

Competition from other self storage facilities which may adversely impact the markets in which the Company invests and in which the Company’s self storage companies operate.

The Company’s performance may be subject to risks associated with

the real estate industry. Some of these risks include:

 

 

The Company expects to invest in a limited number of self storage facilities.

 

 

Prevailing economic conditions may adversely affect the Company’s business, financial condition and results of operations.

 

 

The Company may be unable to complete acquisitions that would grow its business.

 

 

The inability to achieve satisfactory completion of due diligence investigations and other customary closing conditions.

 

 

The consideration paid for properties may exceed their value.

 

 

The Company may acquire properties subject to liabilities.

 

 

The Company’s investments in development and redevelopment projects may not yield anticipated returns.

 

 

The Company may not complete development projects on schedule or within projected budgeted amounts.

 

 

The Company may encounter delays or refusals in obtaining all necessary zoning, land use, building, occupancy and other required governmental permits and authorizations.

 

 

The Company may be unable to increase occupancy at a newly acquired property as quickly as expected or at all.

 

 

The Company may be unable to obtain financing for these projects on favorable terms or at all.

 

 

The Company may fail to successfully integrate and operate acquired properties.

 

 

Regulatory compliance costs will reduce the Company’s income.

 

 

The Company may incur liability from tenant and employment-related claims and litigation.

 

 

Uninsured losses or losses in excess of the Company’s insurance coverage could adversely affect its financial condition and cash flow.

 

 

Perceptions of the self storage industry.

 

 

The Company’s investments will be relatively illiquid.

 

 

The Company’s performance may be subject to the risks of investment in publicly traded REITs.

 

 

Delays in acquisitions of self storage facilities may adversely affect your investment.

 

 

The Company may be unable to maintain its current level of distributions or increase distributions over time.

There are risks related to the Company’s organization and structure:

 

 

Management has limited experience operating a REIT.

 

 

25        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 

POLICIES AND RISKS

 

      

(Unaudited)  

 

    

 

Financial Statements  

 

 

 

The Board may revoke the Company’s REIT election at any time.

 

 

The Company’s business could be harmed if key personnel with business experience in the self storage industry terminate their employment with the Company.

 

 

There may be conflicts of interest resulting from the relationships among the Company and its affiliates and other related parties.

 

 

The Company may sell its common stock at a price below book value without stockholder approval.

 

 

Certain provisions of Maryland law and the Company’s Charter and By-laws may prevent changes in control or otherwise discourage takeover attempts that may be beneficial to stockholders.

There are risks related to the Company’s tax status as a REIT:

 

 

Even though the Company currently qualifies for federal tax treatment as a REIT, it may face tax liabilities that will reduce its cash flow.

 

 

Complying with the REIT requirements may cause the Company to forego, or to liquidate, otherwise attractive opportunities.

 

 

Failure to continue to qualify for treatment as a REIT may have adverse tax consequences.

 

 

The Company’s REIT taxable income may exceed its cash flow for a year, which could necessitate its borrowing funds and/or subject it to tax, thus reducing the cash available for distribution to its stockholders.

 

 

Distributions or gain on sale of shares may be treated as unrelated business taxable income to tax-exempt investors.

 

 

Dividends payable by the Company will not qualify for the reduced tax rates available for “qualified dividend income.”

 

 

REIT restrictions on ownership of shares may delay or prevent its acquisition by a third party.

 

 

The Company may be subject to adverse legislative or regulatory tax changes.

Proxy Voting

The Company’s Proxy Voting Guidelines, which describe the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities, as well as its proxy voting record for the most recent 12 months ended June 30, are available without charge by calling the Company collect at 1-212-785-0900, on the SEC’s web-site at www.sec.gov, and on the Company’s website at www.SelfStorageGroupInc.com.

Quarterly Schedule Of Portfolio Holdings

Prior to January 19, 2016, the Company filed its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Company’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Company’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC, and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

Distributions

The Company’s current distribution policy is to provide stockholders with a relatively stable cash flow. The distributions are paid from ordinary income and any net capital gains, with the balance representing return of capital. The policy may be changed or discontinued without notice. The Company’s distributions are not tied to its net income and do not represent yield or investment return. The Company is subject to U.S. corporate, tax, and securities laws. Under U.S. tax accounting rules, the amount of distributable net income is determined on an annual basis. Therefore, the exact amount of distributable income can only be determined as of the end of the Company’s fiscal year. In January, the Company sends stockholders a Form 1099-DIV for the prior calendar year stating the amount and composition of distributions and providing information about their appropriate tax treatment.

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        26

 

 

 

DIVIDENDS

 

      

(Unaudited)  

 

    

 

Additional Information  

 

 

 

    HISTORICAL DISTRIBUTION SUMMARY

              

 

    PERIOD

 

  

Investment Income

 

  

Return of Capital

 

  

Capital Gains

 

  

Total          

 

    2015

   $ 0.120    $ 0.020    $ 0.120    $ 0.260          

    2014

   $ 0.060    $ 0.000    $ 0.200    $ 0.260          

    2013

   $ 0.060    $ 0.000    $ 0.290    $ 0.350          

    2012

   $ 0.020    $ 0.000    $ 0.450    $ 0.470          

    2011

   $ 0.260    $ 0.000    $ 0.000    $ 0.260          

    2010

   $ 0.220    $ 0.000    $ 0.000    $ 0.220          

    2009

   $ 0.235    $ 0.000    $ 0.000    $ 0.235          

    2008

   $ 0.240    $ 0.000    $ 0.000    $ 0.240          

    2007

   $ 0.170    $ 0.050    $ 0.000    $ 0.220          

    2006

   $ 0.130    $ 0.150    $ 0.000    $ 0.280          

    2005

   $ 0.200    $ 0.080    $ 0.000    $ 0.280          

    2004

   $ 0.245    $ 0.090    $ 0.000    $ 0.335          

    2003

   $ 0.220    $ 0.140    $ 0.000    $ 0.360          

    2002

   $ 0.280    $ 0.220    $ 0.000    $ 0.500          

    2001

   $ 0.360    $ 0.200    $ 0.000    $ 0.560          

    2000

   $ 0.420    $ 0.160    $ 0.000    $ 0.580          

    6 months ended 12/31/99

   $ 0.230    $ 0.070    $ 0.000    $ 0.300          

    12 months ended 6/30/99

   $ 0.550    $ 0.130    $ 0.000    $ 0.680          

    From June 29, 1998 to November 30, 1998

   $ 0.520    $ 0.320    $ 0.000    $ 0.840          

 

           

 

 

27        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 

DIRECTORS AND OFFICERS

 

      

(Unaudited)  

 

    

 

Additional Information  

 

 

The following table sets forth certain information concerning the directors currently serving on the Board of Directors of the Company, as of January 19, 2016. The term of the Class I director shall last until the annual meeting of stockholders held in 2017 and until his successor is elected and qualifies. The term of the Class II directors shall last until the annual meeting of stockholders held in 2018 and until their successors are elected and qualify. The term of the Class III directors shall last until the annual meeting of stockholders held in 2019 and until their successors are elected and qualify. At each annual meeting of the stockholders of the Company, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term continuing until the annual meeting of stockholders held in the third year following the year of their election and until their successors are elected and qualify. Unless otherwise noted, the address of record for the directors and officers is 11 Hanover Square, New York, New York 10005.

 

 

INTERESTED DIRECTORS

 

   

    Name, Address, and    
Date of Birth

 

 

Position(s)
Held
with the
Company

 

 

Director 
Since 

 

 

Principal

Occupation(s)

for the Past Five Years

 

     

 

Number of 
Portfolios in 
Fund Complex 
Overseen by 
Director (1) 

 

 

   Other

   Directorships

   Held by

   Director (2)

 

    
               
MARK C. WINMILL(3) November 26, 1957   Class III Director   2012   

President, Chief Executive Officer, and a Director or Manager of the Company, and its subsidiaries and Tuxis Corporation (a real estate company) and its subsidiaries (“Tuxis”). He is Vice President of the Fund Complex and Chief Investment Strategist of Bexil Advisers LLC and Midas Management Corporation (registered investment advisers and, collectively, the “Advisers”). He is Executive Vice President and a Director of Winmill & Co. Incorporated (a holding company) (“Winco”). He is a principal of Bexil Securities LLC and Midas Securities Group, Inc. (registered broker-dealers and, collectively, the “Broker-Dealers”). He is Vice President of Bexil Corporation (a holding company). He is the brother of Thomas B. Winmill.

 

    None      None    
               

THOMAS B. WINMILL, ESQ.(3)

PO Box 4

Walpole, NH 03608

June 25, 1959

  Class II Director   1997   

Vice President and a Director of the Company. He is Vice President of Tuxis. He is President, Chief Executive Officer, and a Director or Trustee of the Fund Complex. He is President, Chief Executive Officer, General Counsel, and a Director or Manager of the Advisers, the Broker-Dealers, Bexil Corporation, and Winco. He is a Director of Bexil American Mortgage Inc. He is a member of the New York State Bar and the SEC Rules Committee of the Investment Company Institute. He is the brother of Mark C. Winmill.

 

        None    

 

INDEPENDENT DIRECTORS*

 

   
               
Russell E. Burke III August 23, 1946   Class III Director   2016   

He is President of Ninigret Trading Corporation, an art investment and appraisal company, and a Director of Tuxis. He is also a Board Member of the New Britain Museum of American Art.

 

    None      None    
               
George B. Langa August 31, 1962   Class II Director   2016   

He is Executive Vice President of Millbrook Real Estate, LLC, licensed real estate brokers in NY and CT. He specializes in premium Estates, Development, Land, Commercial and Agricultural Properties.

 

    None      None    
               
William C. Zachary December 9, 1964   Class I Director   2016   

Since 2011, he has been Director of Municipal Finance at SunLight General Capital, an owner and developer of solar energy systems located at schools, municipal buildings, and other small, institutional users. Prior to that, he was the head of Municipal Finance at Société Générale. He is also a Director of Tuxis.

 

      None      None    

 

(1) As of January 19, 2016, the “Fund Complex” is comprised of Dividend and Income Fund, Foxby Corp., and Midas Series Trust. Dividend and Income Fund, Foxby Corp., and Midas Series Trust are managed by affiliates of the Company. (2) Refers to directorships held by a director in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or any company registered as an investment company under the Act, excluding those within the Fund Complex. (3) He is an “interested person” of the Company as defined in the Act due to his role as an officer of the Company.

 

Messrs. Burke, Langa, and Zachary also serve on the Audit, Nominating, and Compensation Committees of the Board. Mr. Mark Winmill also serves on the Executive Committee of the Board. Each of the directors serves on the Continuing Directors Committee of the Board.

 

*Effective January 19, 2016, Messrs. Burke, Langa, and Zachary were elected to serve as independent directors on the Board of Directors. Effective upon the election of Messrs. Burke, Langa, and Zachary, Messrs. Bruce B. Huber, James E. Hunt, and Peter K. Werner resigned as independent directors from the Board.

 

   

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        28

 

 

 

DIRECTORS AND OFFICERS

 

      

(Unaudited)  

 

    

 

Additional Information  

 

 

The executive officers, other than those who serve as directors, and their relevant biographical information are set forth below.

 

 

EXECUTIVE OFFICERS

 

   

Name and

Date of Birth

 

 

 

Position(s)

Held with

the Company

 

 

    Officer    
    Since*    

 

 

Principal

Occupation(s)

for the Past Five Years

 

    
         

Russell Kamerman, Esq.  

July 8, 1982

 

Chief Compliance

Officer, AML

Officer, Associate

General Counsel,

Vice President and

  Assistant Secretary  

  2014  

Chief Compliance Officer, Anti-money laundering Officer, Associate General Counsel, Vice President and Assistant Secretary of Tuxis, the Fund Complex, the Advisers, the Broker-Dealers, Bexil Corporation and Winco. He is a member of the New York State Bar and the Chief Compliance Officer Committee of the Investment Company Institute. Previously, he was an attorney in private practice focusing on regulatory, compliance and other general corporate matters relating to the structure, formation and operation of investment funds and investment advisers.

 

   
         

Heidi Keating

March 28, 1959

 

Vice

President

  1997  

Vice President of Tuxis, the Fund Complex, the Advisers, the Broker-Dealers, Bexil Corporation, and Winco.

 

   
         

Robert J. Mathers

May 5, 1967

 

Vice

President,

Operations

 

  2012  

Vice President, Operations of Tuxis.

   
         

Thomas O’Malley

July 22, 1958

 

Chief Financial Officer,

Treasurer,

Vice President

 

  2005  

Chief Financial Officer, Treasurer, and Vice President of Tuxis, the Fund Complex, the Advisers, the Broker-Dealers, Bexil Corporation, and Winco. He is a certified public accountant.

   
         

John F. Ramirez, Esq.

April 29, 1977

 

General

Counsel, Chief

Legal Officer,

Secretary,

Vice President

  2005  

General Counsel, Chief Legal Officer, Vice President, and Secretary of the Fund Complex and Tuxis. He is Vice President, Senior Associate General Counsel, and Secretary of the Advisers, the Broker-Dealers, Bexil Corporation, and Winco. He also is a member of the New York State Bar and the Investment Advisers Committee, Small Funds Committee, and Compliance Advisory Committee of the Investment Company Institute.

 

   

 

*Officers hold their positions with the Company until a successor has been duly elected and qualifies. Officers are generally elected annually. The officers were last elected on December 9, 2015.

 

   

 

 

29        Annual Report 2015

      

 

GLOBAL SELF STORAGE, INC.    

 

 

 

GENERAL INFORMATION

 

      

(Unaudited)  

 

    

 

Additional Information  

 

 

STOCK DATA        

Ticker Symbol

     SELF   

 

CUSIP Number

     37955N106   

 

2016 QUARTERLY DISTRIBUTION DATES

 

Declaration    Record    Payment

March 1

  

March 15

  

March 31

June 1

  

June 17

  

June 30

September 1

  

September 16

  

September 30

December 1

  

December 15

  

December 29

COMPANY INFORMATION

Stock Transfer Agent and Registrar

American Stock Transfer & Trust Company, LLC

6201 15th Avenue

Brooklyn, NY 11219

www.amstock.com

1-800-278-4353

GLOBALSELFSTORAGEINC.COM

Visit us on the web at www.GlobalSelfStorageInc.com.

The site provides information about the Company, including market performance, dividends, press releases, and stockholder reports. For further information, please email us at info@GlobalSelfStorageInc.com.

    

 

Cautionary Note Regarding Forward Looking Statements - This report contains certain “forward looking statements” as defined under the U.S. federal securities laws. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” and similar expressions identify forward looking statements, which generally are not historical in nature. Forward looking statements are subject to certain risks and uncertainties that could cause actual results to materially differ from the Company’s historical experience and its current expectations or projections indicated in any forward looking statements. These risks include, but are not limited to, real estate risk, leverage and borrowing risk, management risk, and other risks discussed in the Company’s filings with the Securities and Exchange Commission. You should not place undue reliance on forward looking statements, which speak only as of the date they are made. The Company undertakes no obligation to update or revise any forward looking statements made herein.

Company Information - This report, including the financial statements herein, is transmitted to the stockholders of the Company for their information. This is not a prospectus, circular, or representation intended for use in the purchase of shares of the Company or any securities mentioned in this report. This communication shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of, these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state, or an exemption therefrom.

 

 

    GLOBAL SELF STORAGE, INC.

 

       

 

Annual Report 2015        30

 

 

 

 

LOGO

 

 

SELF

TICKER

Printed on Recycled Paper

 


 
Item 2. Code of Ethics.
 
(a)
 
The registrant has adopted a code of ethics (the “Code”) that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party.
     
(b)
 
No information need be disclosed pursuant to this paragraph.
     
(c)
 
Not applicable.
     
(d)
 
Not applicable.
     
(e)
 
Not applicable.
     
(f)
 
The text of the Code may be obtained free of charge by calling Winmill & Co. Incorporated collect at 1-212-785-0900.
 
 
Item 3. Audit Committee Financial Expert.
 
                    The registrant’s Board of Directors has determined that it has three “audit committee financial experts” serving on its audit committee, each of whom are “independent” Directors. As of December 31, 2015 the members of the audit committee are Bruce B. Huber, James E. Hunt, and Peter K. Werner. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an “expert” for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Directors in the absence of such designation or identification. The designation or identification of a person as an audit committee financial expert pursuant to this Item does not affect the duties, obligations, or liability of any other member of the audit committee or board of directors.
 
 
Item 4. Principal Accountant Fees and Services.
 
 
(a)
The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years are as follows:
     
   
AUDIT FEES
   
2015 - $29,000
   
2014 - $26,500
     
     
 
(b)
The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of this Item are as follows:
     
   
AUDIT RELATED FEES
   
2015 - $1,500
   
2014 - $3,000
     
   
Audit-related fees include amounts reasonably related to the performance of the audit of the registrant’s financial statements, including the issuance of a report on internal controls and review of periodic reporting.
     
     
 
(c)
The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. Registrants shall describe the nature of the services comprising the fees disclosed under this category are as follows:
     
   
TAX FEES
   
2015 - $10,750
   
2014 - $10,750
     
   
Tax fees include amounts related to tax compliance, tax planning, and tax advice.
     
     
 
(d)
The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item. Registrants shall describe the nature of the services comprising the fees disclosed under this category are as follows:
     
   
ALL OTHER FEES
   
2015 - $6,250
   
2014 - N/A
     
     
 
(e)
(1) Pursuant to the registrant’s Audit Committee Charter, the Audit Committee shall consider for pre-approval any audit and non-audit services proposed to be provided by the auditors to the registrant and any non-audit services proposed to be provided by such auditors to the registrant’s investment adviser, if the engagement relates directly to the registrant’s operations or financial reporting. In those situations when it is not convenient to obtain full Audit Committee approval, the Chairman of the Audit Committee is delegated the authority to grant pre-approvals of audit, audit-related, tax, and all other services so long as all such pre-approved decisions are reviewed with the full Audit Committee at its next scheduled meeting. Such pre-approval of non-audit services proposed to be provided by the auditors to the Fund is not necessary, however, under the following circumstances: (1) all such services do not aggregate to more than 5% of total revenues paid by the Fund to the auditor in the fiscal year in which services are provided; (2) such services were not recognized as non-audit services at the time of the engagement; and (3) such services are brought to the attention of the Audit Committee, and approved by the Audit Committee, prior to the completion of the audit.
     
   
(2) No services included in (b) - (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
     
     
 
(f)
Not applicable.
     
     
 
(g)
The aggregate non-audit fees billed by the registrant’s accountant for services rendered to the registrant, and rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant were $42,000 in 2015 and $35,750 in 2014.
     
     
 
(h)
The registrant’s audit committee has determined that the provision of non-audit services that were rendered by accountant to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.
 
Item 5. Audit Committee of Listed Registrants.
 
                   The registrant has a standing audit committee. As of December 31, 2015 the members of the audit committee are Bruce B. Huber, James E. Hunt, and Peter K. Werner.
 
Item 6. Schedule of Investments.
 
                   Included as part of the report to shareholders filed under Item 1 of this Form.
 

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.


AMENDED PROXY VOTING POLICIES AND PROCEDURES
2016

Global Self Storage, Inc.
 
Global Self Storage, Inc. (the “Fund") delegates the responsibility for voting proxies of portfolio companies held in the Fund’s portfolio to Institutional Shareholder Services (“ISS”).  A concise summary of the Proxy Voting Guidelines of ISS (see attached) is incorporated by reference herein as the Fund’s proxy voting policies and procedures, as supplemented by the terms hereof.  The Fund retains the right to override the delegation to ISS on a case-by-case basis, in which case the  ADDENDUM – NON-DELEGATED PROXY VOTING POLICIES AND PROCEDURES   supersede the Proxy Voting Guidelines of ISS in their entirety. In all cases, the Fund will seek to vote its proxies in the best interests of the Fund.
 
With respect to a vote upon which the Fund overrides the delegation to ISS, to the extent that such vote presents a material conflict of interest between the Fund and its Investment Manager or any affiliated person of the Investment Manager, the Fund normally will disclose such conflict to, and obtain consent from, its Independent Directors, or a committee thereof, prior to voting the proxy.
 
 
ADDENDUM
NON-DELEGATED PROXY VOTING POLICIES AND PROCEDURES
 
These proxy voting policies and procedures are intended to provide general guidelines regarding the issues they address.  As such, they cannot be “violated.” In each case the vote generally will be based on maximizing shareholder value over the long term, as consistent with overall investment objectives and policies.
 
Board and Governance Issues
 
Board of Director Composition
 
Typically, we will not object to slates with at least a majority of independent directors.
 
We generally will not object to shareholder proposals that request that the board audit, compensation and/or nominating committees include independent directors exclusively.
 
Approval of IRPAF
 
We will evaluate on a case-by-case basis instances in which the audit firm has a significant audit relationship with the company to determine whether we believe independence has been compromised.
 
We will review and evaluate the resolutions seeking ratification of the auditor when fees for financial systems design and implementation substantially exceed audit and all other fees, as this can compromise the independence of the auditor.
 
We will carefully review and evaluate the election of the audit committee chair if the audit committee recommends an auditor whose fees for financial systems design and implementation substantially exceed audit and all other fees, as this can compromise the independence of the auditor.
 
Increase Authorized Common Stock
 
We will generally support the authorization of additional common stock necessary to facilitate a stock split.
 
We will generally support the authorization of additional common stock.
 
Blank Check Preferred Stock
 
 

 
Blank check preferred is stock with a fixed dividend and a preferential claim on company assets relative to common shares.  The terms of the stock (voting, dividend and conversion rights) are determined at the discretion of the Board when the stock is issued.  Although such an issue can in theory be used for financing purposes, often it has been used in connection with a takeover defense. Accordingly, we will generally evaluate the creation of blank check preferred stock.
 
Classified or “Staggered” Board
 
On a classified (or staggered) board, directors are divided into separate classes (usually three) with directors in each class elected to overlapping three-year terms.  Companies argue that such Boards offer continuity in direction which promotes long-term planning.  However, in some instances they may serve to deter unwanted takeovers since a potential buyer would have to wait at least two years to gain a majority of Board seats.
 
We will vote on a case-by-case basis on issues involving classified boards.
 
Supermajority Vote Requirements
 
Supermajority vote requirements in a company  charter or bylaws require a level of voting approval in excess of simple majority.  Generally, supermajority provisions require at least 2/3 affirmative vote for passage of issues.
 
We will vote on a case-by-case basis regarding issues involving supermajority voting.
 
Restrictions on Shareholders to Act by Written Consent
 
Written consent allows shareholders to initiate and carry out a shareholder action without waiting until the annual meeting or by calling a special meeting.  It permits action to be taken by the written consent of the same percentage or outstanding shares that would be required to effect the proposed action at a shareholder meeting.
 
We will generally not object to proposals seeking to preserve the right of shareholders to act by written consent.
 
Restrictions on Shareholders to Call Meetings
 
We will generally not object to proposals seeking to preserve the right of the shareholders to call meetings.
 
Limitations, Director Liability and Indemnification
 
Because of increased litigation brought against directors of corporations and the increase costs of director  liability insurance, many states have passed laws limiting director liability for those acting in good faith.  Shareholders, however, often must opt into such statutes.  In addition, many companies are seeking to add indemnification of directors to corporate bylaws.
 
We will generally support director liability and indemnification resolutions because it is important for companies to be able to attract the most qualified individuals to their Boards.
 
Reincorporation
 
Corporations are in general bound by the laws of the state in which they are incorporated.  Companies reincorporate for a variety of reasons including shifting incorporation to a state where the company has its most active operations or corporate headquarters, or shifting incorporation to take advantage of state corporate takeovers laws.
 
We typically will not object to reincorporation proposals.
 
Cumulative Voting
 
Cumulative voting allows shareholders to cumulate their votes behind one or a few directors running for the board  that is, cast more than one vote for a director thereby helping a minority of shareholders to win board representation.  Cumulative voting generally gives minority shareholders an opportunity to effect change in corporate affairs.
 
 

 
We typically will not object to proposals to adopt cumulative voting in the election of directors.
 
Dual Classes of Stock
 
In order to maintain corporate control in the hands of a certain group of shareholders, companies may seek to create multiple classes of stock with differing rights pertaining to voting and dividends.
 
We will vote on a case-by-case basis dual classes of stock.  However, we will typically not object to dual classes of stock.
 
Limit Directors Tenure
 
In general, corporate directors may stand for re-election indefinitely.  Opponents of this practice suggest that limited tenure would inject new perspectives into the boardroom as well as possibly creating room for directors from diverse backgrounds; however, continuity is important to corporate leadership and in some instances alternative means may be explored for injecting new ideas or members from diverse backgrounds into corporate boardrooms.
 
Accordingly, we will vote on a case-by-case basis regarding attempts to limit director tenure.
 
Minimum Director Stock Ownership
 
The director share ownership proposal requires that all corporate directors own a minimum number of shares in the corporation.  The purpose of this resolution is to encourage directors to have the same interest as other shareholders.
 
We normally will not object to resolutions that require corporate directors to own shares in the company.
 
 
Executive Compensation
 
Disclosure of CEO, Executive, Board and Management Compensation
 
On a case-by-case basis, we will support shareholder resolutions requesting companies to disclose the salaries of top management and the Board of Directors.
 
Compensation for CEO, Executive, Board and Management
 
We typically will not object to proposals regarding executive compensation if we believe the compensation clearly does not reflect the current and future circumstances of the company.
 
Formation and Independence of Compensation Review Committee
 
We normally will not object to shareholder resolutions requesting the formation of a committee of independent directors to review and examine executive compensation.
 
Stock Options for Board and Executives
 
We will generally review the overall impact of stock option plans that in total offer greater than 25% of shares outstanding because of voting and earnings dilution.
 
We will vote on a case-by-case basis option programs that allow the repricing of underwater options.
 
In most cases, we will oppose stock option plans that have option exercise prices below the marketplace on the day of the grant.
 
Generally, we will support options programs for outside directors subject to the same constraints previously described.
 
Employee Stock Ownership Plan (ESOPs)
 
We will generally not object to ESOPs created to promote active employee ownership.  However, we will generally oppose any ESOP whose purpose is to prevent a corporate takeover.
 
 

 
 
Changes to Charter or By-Laws
 
We will conduct a case-by-case review of the proposed changes with the voting decision resting on whether the proposed changes are in shareholder  best interests.
 
Confidential Voting
 
Typically, proxy voting differs from voting in political elections in that the company is made aware of shareholder votes as they are cast.  This enables management to contact dissenting shareholders in an attempt to get them to change their votes.
 
We generally will not object to confidential voting.
 
Equal Access to Proxy
 
Equal access proposals ask companies to give shareholders access to proxy materials to state their views on contested issues, including director nominations.  In some cases they would actually allow shareholders to nominate directors. Companies suggest that such proposals would make an increasingly complex process even more burdensome.
 
In general, we will not oppose resolutions for equal access proposals.
 
Golden Parachutes
 
Golden parachutes are severance payments to top executives who are terminated or demoted pursuant to a takeover.  Companies argue that such provisions are necessary to keep executives from  “jumping ship” during potential takeover attempts.
 
 
We will not object to the right of shareholders to vote on golden parachutes because they go above and beyond ordinary compensation practices.  In evaluating a particular golden parachute, we will examine if considered material total management compensation, the employees covered by the plan, and the quality of management and all other factors deemed pertinent.
 
Mergers and Acquisitions
 
Mergers, Restructuring and Spin-offs
 
A merger, restructuring, or spin-off in some way affects a change in control of the company  assets.  In evaluating the merit of each issue, we will consider the terms of each proposal.  This will include an analysis of the potential long-term value of the investment.
 
On a case by case basis, we will review management proposals for merger or restructuring to determine the extent to which the transaction appears to offer fair value and other proxy voting policies stated are not violated.
 
Poison Pills
 
Poison pills (or shareholder rights plans) are triggered by an unwanted takeover attempt and cause a variety of events to occur which may make the company financially less attractive to the suitor.  Typically, directors have enacted these plans without shareholder approval.  Most poison pill resolutions deal with putting poison pills up for a vote or repealing them altogether.
 
We typically will not object to most proposals to put rights plans up for a shareholder vote.  In general, poison pills will be reviewed for the additional value provided to shareholders, if any.
 
Anti-Greenmail Proposals
 
Greenmail is the payment a corporate raider receives in exchange for his/her shares.  This payment is usually at a premium to the market price, so while greenmail can ensure the continued independence of the company, it discriminates against other shareholders.
We generally will support anti-greenmail provisions.
 
 
 
 

 
Opt-Out of State Anti-takeover Law
 
A strategy for dealing with anti-takeover issues has been a shareholder resolution asking a company to opt-out of a particular state  anti-takeover laws.
 
We generally will not object to bylaws changes requiring a company to opt out of state anti-takeover laws. Resolutions requiring companies to opt into state anti-takeover statutes generally will be subject to further review for appropriateness.
 
Other Situations
 
In the event an issue is not addressed in the above guidelines, we will determine on a case-by-case basis any proposals that may arise from management or shareholders.  To the extent that a proposal from management does not infringe on shareholder rights, we will generally support management  position.  We may also elect to abstain or not vote on any given matter.
 
January 1, 2016
 


United States
Concise Proxy Voting Guidelines

 
2016 Benchmark Policy Recommendations



Effective for Meetings on or after February 1, 2016
Published January 22, 2016
 
 

 
 

 



The policies contained herein are a sampling of selected key U.S. proxy voting guidelines and are not intended to be exhaustive. A full summary of ISS' 2016 proxy voting guidelines can be found at:      http://www.issgovernance.com/policy-gateway/2016-policy-information/


BOARD OF DIRECTORS:

Voting on Director Nominees in Uncontested Elections
 
General Recommendation: Generally vote for director nominees, except under the following circumstances:

1.
Accountability

Vote against1 or withhold from the entire board of directors (except new nominees2, who should be considered case- by-case) for the following:

Problematic Takeover Defenses

Classified Board Structure:

1.1.
The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.

Director Performance Evaluation:

1.2.
The board lacks accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one- and three-year total shareholder returns in the bottom half of a company's four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company's five-year total shareholder return and operational metrics. Problematic provisions include but are not limited to:
    A classified board structure;
    A supermajority vote requirement;
Either a plurality vote standard in uncontested director elections or a majority vote standard with no plurality carve-out for contested elections;
    The inability of shareholders to call special meetings;
    The inability of shareholders to act by written consent;
    A dual-class capital structure; and/or
    A non–shareholder-approved poison pill.
----------------------
1 In general, companies with a plurality vote standard use "Withhold" as the contrary vote option in director elections; companies
with a majority vote standard use "Against". However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company.
2 A "new nominee" is any current nominee who has not already been elected by shareholders and who joined the board after the
problematic action in question transpired. If ISS cannot determine whether the nominee joined the board before or after the problematic action transpired, the nominee will be considered a "new nominee" if he or she joined the board within the 12 months prior to the upcoming shareholder meeting.



Poison Pills:

1.3.
The company's poison pill has a "dead-hand" or "modified dead-hand" feature. Vote against or withhold from nominees every year until this feature is removed;
1.4.
The board adopts a poison pill with a term of more than 12 months ("long-term pill"), or renews any existing pill, including any "short-term" pill (12 months or less), without shareholder approval. A commitment or policy that puts a newly adopted pill to a binding shareholder vote may potentially offset an adverse vote recommendation. Review such companies with classified boards every year, and such companies with annually elected boards at least once every three years, and vote against or withhold votes from all nominees if the company still maintains a non-shareholder-approved poison pill; or
1.5.
The board makes a material adverse change to an existing poison pill without shareholder approval. Vote case-by-case on all nominees if:
1.6.
The board adopts a poison pill with a term of 12 months or less ("short-term pill") without shareholder approval, taking into account the following factors:
The date of the pill's adoption relative to the date of the next meeting of shareholders—i.e. whether the company had time to put the pill on the ballot for shareholder ratification given the circumstances;
    The issuer's rationale;
    The issuer's governance structure and practices; and
    The issuer's track record of accountability to shareholders.

Problematic Audit-Related Practices

Generally vote against or withhold from the members of the Audit Committee if:

1.7.
The non-audit fees paid to the auditor are excessive (see discussion under "Auditor Ratification");
1.8.
The company receives an adverse opinion on the company's financial statements from its auditor; or
1.9.
There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.

Vote case-by-case on members of the Audit Committee and potentially the full board if:

1.10.
Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company's efforts at remediation or corrective actions, in determining whether withhold/against votes are warranted.

Problematic Compensation Practices/Pay for Performance Misalignment

In the absence of an Advisory Vote on Executive Compensation ballot item or in egregious situations, vote against or withhold from the members of the Compensation Committee and potentially the full board if:

1.11.
There is a significant misalignment between CEO pay and company performance (pay for performance);
1.12.
The company maintains significant problematic pay practices;
1.13.
The board exhibits a significant level of poor communication and responsiveness to shareholders;
1.14.
The company fails to submit one-time transfers of stock options to a shareholder vote; or
1.15.
The company fails to fulfill the terms of a burn rate commitment made to shareholders.



Vote case-by-case on Compensation Committee members (or, in exceptional cases, the full board) and the Management Say-on-Pay proposal if:


1.16.
The company's previous say-on-pay received the support of less than 70 percent of votes cast, taking into account:
    The company's response, including:
Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support;
    Specific actions taken to address the issues that contributed to the low level of support;
    Other recent compensation actions taken by the company;
    Whether the issues raised are recurring or isolated;
    The company's ownership structure; and
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.


Unilateral Bylaw/Charter Amendments

1.17.
Generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if the board amends the company's bylaws or charter without shareholder approval in a manner that materially diminishes shareholders' rights or that could adversely impact shareholders, considering the following factors:
    The board's rationale for adopting the bylaw/charter amendment without shareholder ratification;
    Disclosure by the company of any significant engagement with shareholders regarding the amendment;
The level of impairment of shareholders' rights caused by the board's unilateral amendment to the bylaws/charter;
The board's track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;
    The company's ownership structure;
    The company's existing governance provisions;
The timing of the board's amendment to the bylaws/charter in connection with a significant business development; and,
Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.

Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case- by-case on director nominees. Generally vote against (except new nominees, who should be considered case-by-case) if the directors:
    Classified the board;
    Adopted supermajority vote requirements to amend the bylaws or charter; or
    Eliminated shareholders' ability to amend bylaws.

1.18.
For newly public companies, generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if, prior to or in connection with the company's public offering, the company or its board adopted bylaw or charter provisions materially adverse to shareholder rights, considering the following factors:
    The level of impairment of shareholders' rights caused by the provision;
    The disclosed rationale for adopting the provision;
The ability to change the governance structure in the future (e.g., limitations on shareholders' right to amend the bylaws or charter, or supermajority vote requirements to amend the bylaws or charter);



The ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure; and,
A public commitment to put the provision to a shareholder vote within three years of the date of the initial public offering.
Unless the adverse provision is reversed or submitted to a vote of public shareholders, vote case-by-case on director nominees in subsequent years.

Governance Failures

Under extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:

1.19.
Material failures of governance, stewardship, risk oversight3, or fiduciary responsibilities at the company;
1.20.
Failure to replace management as appropriate; or
1.21.
Egregious actions related to a director's service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company.

2.
Responsiveness
Vote case-by-case on individual directors, committee members, or the entire board of directors as appropriate if:

2.1.
The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year. Factors that will be considered are:

    Disclosed outreach efforts by the board to shareholders in the wake of the vote;
    Rationale provided in the proxy statement for the level of implementation;
    The subject matter of the proposal;
    The level of support for and opposition to the resolution in past meetings;
    Actions taken by the board in response to the majority vote and its engagement with shareholders;
The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and
    Other factors as appropriate.

2.2.
The board failed to act on takeover offers where the majority of shares are tendered;
2.3.
At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote;
2.4.
The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the majority of votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency; or
2.5.
The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received a plurality, but not a majority, of the votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency, taking into account:
The board's rationale for selecting a frequency that is different from the frequency that received a plurality;
    The company's ownership structure and vote results;


----------------------
3 Examples of failure of risk oversight include, but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; significant adverse legal judgments or settlements; hedging of company stock; or significant pledging of company stock.



ISS' analysis of whether there are compensation concerns or a history of problematic compensation practices; and
    The previous year's support level on the company's say-on-pay proposal.


3.
Composition
Attendance at Board and Committee Meetings:

3.1.
Generally vote against or withhold from directors (except new nominees, who should be considered case-by- case4) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
    Medical issues/illness;
    Family emergencies; and
    Missing only one meeting (when the total of all meetings is three or fewer).

3.2.
If the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold from the director(s) in question.

Overboarded Directors:

Vote against or withhold from individual directors who:

3.3.
Sit on more than six public company boards; with respect to annual meetings on or after Feb. 1, 20175, sit on more than five public company boards; or
3.4.
Are CEOs of public companies who sit on the boards of more than two public companies besides their own— withhold only at their outside boards6.


4.
Independence
Vote against or withhold from Inside Directors and Affiliated Outside Directors (per the Categorization of Directors) when:
4.1.
The inside or affiliated outside director serves on any of the three key committees: audit, compensation, or nominating;
4.2.
The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee;
4.3.
The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee; or
4.4.
Independent directors make up less than a majority of the directors.
----------------------
4 For new nominees only, schedule conflicts due to commitments made prior to their appointment to the board are considered if disclosed in the proxy or another SEC filing.
5 This policy change includes a 1-year transition period to allow time for affected directors to address necessary changes if they wish.
6 Although all of a CEO's subsidiary boards will be counted as separate boards, ISS will not recommend a withhold vote from the CEO
of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent, but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships.



Independent Chair (Separate Chair/CEO)
General Recommendation: Generally vote for shareholder proposals requiring that the chairman's position be filled by an independent director, taking into consideration the following:

    The scope of the proposal;
    The company's current board leadership structure;
    The company's governance structure and practices;
    Company performance; and
    Any other relevant factors that may be applicable.

Regarding the scope of the proposal, consider whether the proposal is precatory or binding and whether the proposal is seeking an immediate change in the chairman role or the policy can be implemented at the next CEO transition.

Under the review of the company's board leadership structure, ISS may support the proposal under the following scenarios absent a compelling rationale: the presence of an executive or non-independent chair in addition to the CEO; a recent recombination of the role of CEO and chair; and/or departure from a structure with an independent chair. ISS will also consider any recent transitions in board leadership and the effect such transitions may have on independent board leadership as well as the designation of a lead director role.

When considering the governance structure, ISS will consider the overall independence of the board, the independence of key committees, the establishment of governance guidelines, board tenure and its relationship to CEO tenure, and any other factors that may be relevant. Any concerns about a company's governance structure will weigh in favor of support for the proposal.

The review of the company's governance practices may include, but is not limited to poor compensation practices, material failures of governance and risk oversight, related-party transactions or other issues putting director independence at risk, corporate or management scandals, and actions by management or the board with potential or realized negative impact on shareholders. Any such practices may suggest a need for more independent oversight at the company thus warranting support of the proposal.

ISS' performance assessment will generally consider one-, three, and five-year TSR compared to the company's peers and the market as a whole. While poor performance will weigh in favor of the adoption of an independent chair policy, strong performance over the long-term will be considered a mitigating factor when determining whether the proposed leadership change warrants support.

Proxy Access
 
      General Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions:

    Ownership threshold: maximum requirement not more than three percent (3%) of the voting power;
Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group;
    Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group;
    Cap: cap on nominees of generally twenty-five percent (25%) of the board.

Review for reasonableness any other restrictions on the right of proxy access. Generally vote against proposals that are more restrictive than these guidelines.



Proxy Contests/Proxy Access — Voting for Director Nominees in Contested Elections
 
General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors:

    Long-term financial performance of the company relative to its industry;
    Management's track record;
    Background to the contested election;
    Nominee qualifications and any compensatory arrangements;
    Strategic plan of dissident slate and quality of the critique against management;
    Likelihood that the proposed goals and objectives can be achieved (both slates); and
    Stock ownership positions.

In the case of candidates nominated pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the nominee(s) and/or to the nature of the election (such as whether or not there are more candidates than board seats).

CAPITAL/RESTRUCTURING

Common Stock Authorization
 
General Recommendation: Vote for proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with a transaction on the same ballot that warrants support.

Vote against proposals at companies with more than one class of common stock to increase the number of authorized shares of the class of common stock that has superior voting rights.

Vote against proposals to increase the number of authorized common shares if a vote for a reverse stock split on the same ballot is warranted despite the fact that the authorized shares would not be reduced proportionally.

Vote case-by-case on all other proposals to increase the number of shares of common stock authorized for issuance. Take into account company-specific factors that include, at a minimum, the following:

    Past Board Performance:
    The company's use of authorized shares during the last three years

    The Current Request:
    Disclosure in the proxy statement of the specific purposes of the proposed increase;
Disclosure in the proxy statement of specific and severe risks to shareholders of not approving the request; and
The dilutive impact of the request as determined relative to an allowable increase calculated by ISS (typically 100 percent of existing authorized shares) that reflects the company's need for shares and total shareholder returns.


ISS will apply the relevant allowable increase below to requests to increase common stock that are for general corporate purposes (or to the general corporate purposes portion of a request that also includes a specific need):

A.
Most companies: 100 percent of existing authorized shares.



B.
Companies with less than 50 percent of existing authorized shares either outstanding or reserved for issuance: 50 percent of existing authorized shares.
C.
Companies with one- and three-year total shareholder returns (TSRs) in the bottom 10 percent of the U.S. market as of the end of the calendar quarter that is closest to their most recent fiscal year end: 50 percent of existing authorized shares.
D.
Companies at which both conditions (B and C) above are both present: 25 percent of existing authorized shares.

If there is an acquisition, private placement, or similar transaction on the ballot (not including equity incentive plans) that ISS is recommending FOR, the allowable increase will be the greater of (i) twice the amount needed to support the transactions on the ballot, and (ii) the allowable increase as calculated above.

Mergers and Acquisitions
 
General Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including:

Valuation - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction and strategic rationale.
Market reaction - How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal.
Strategic rationale - Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions.
Negotiations and process - Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation "wins" can also signify the deal makers' competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value.
Conflicts of interest - Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the "ISS Transaction Summary" section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists.
Governance - Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance.

COMPENSATION

Executive Pay Evaluation

Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:

1.
Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs;



2.
Avoid arrangements that risk "pay for failure": This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation;
3.
Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed);
4.
Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly;
5.
Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors does not compromise their independence and ability to make appropriate judgments in overseeing managers' pay and performance. At the market level, it may incorporate a variety of generally accepted best practices.

Advisory Votes on Executive Compensation—Management Proposals (Management Say-on- Pay)
 
General Recommendation: Vote case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation.

Vote against Advisory Votes on Executive Compensation (Management Say-on-Pay—MSOP) if:

    There is a significant misalignment between CEO pay and company performance (pay for performance);
    The company maintains significant problematic pay practices;
    The board exhibits a significant level of poor communication and responsiveness to shareholders.

Vote against or withhold from the members of the Compensation Committee and potentially the full board if:

There is no MSOP on the ballot, and an against vote on an MSOP is warranted due to pay for performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof;
The board fails to respond adequately to a previous MSOP proposal that received less than 70 percent support of votes cast;
The company has recently practiced or approved problematic pay practices, including option repricing or option backdating; or
    The situation is egregious.

Primary Evaluation Factors for Executive Pay

Pay-for-Performance Evaluation

ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the Russell 3000 or Russell 3000E Indices7, this analysis considers the following:
 
----------------------
7 The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities.



1.
Peer Group8 Alignment:
 
The degree of alignment between the company's annualized TSR rank and the CEO's annualized total pay rank within a peer group, each measured over a three-year period.
    The multiple of the CEO's total pay relative to the peer group median.

2.
Absolute Alignment9 – the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years – i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period.

If the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of companies outside the Russell indices, misaligned pay and performance are otherwise suggested, our analysis may include any of the following qualitative factors, as relevant to evaluating how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:

    The ratio of performance- to time-based equity awards;
    The overall ratio of performance-based compensation;
    The completeness of disclosure and rigor of performance goals;
    The company's peer group benchmarking practices;
Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers;
Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards);
    Realizable pay10 compared to grant pay; and
    Any other factors deemed relevant.

Problematic Pay Practices

The focus is on executive compensation practices that contravene the global pay principles, including:

    Problematic practices related to non-performance-based compensation elements;
    Incentives that may motivate excessive risk-taking; and
    Options Backdating.

Problematic Pay Practices related to Non-Performance-Based Compensation Elements

Pay elements that are not directly based on performance are generally evaluated case-by-case considering the context of a company's overall pay program and demonstrated pay-for-performance philosophy. Please refer to ISS' Compensation FAQ document for detail on specific pay practices that have been identified as potentially problematic and may lead to negative recommendations if they are deemed to be inappropriate or unjustified relative to executive pay best practices. The list below highlights the problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:

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8 The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for
certain financial firms), GICS industry group, and company's selected peers' GICS industry group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market cap bucket that is reflective of the company's. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant.
9 Only Russell 3000 Index companies are subject to the Absolute Alignment analysis.
10 ISS research reports include realizable pay for S&P1500 companies.



Repricing or replacing of underwater stock options/SARS without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options);
    Excessive perquisites or tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting;
    New or extended agreements that provide for:
    CIC payments exceeding 3 times base salary and average/target/most recent bonus;
CIC severance payments without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers);
    CIC payments with excise tax gross-ups (including "modified" gross-ups);
Insufficient executive compensation disclosure by externally- managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI's executives is not possible.


Incentives that may Motivate Excessive Risk-Taking

    Multi-year guaranteed bonuses;
    A single or common performance metric used for short- and long-term plans;
    Lucrative severance packages;
    High pay opportunities relative to industry peers;
    Disproportionate supplemental pensions; or
    Mega annual equity grants that provide unlimited upside with no downside risk.

Factors that potentially mitigate the impact of risky incentives include rigorous claw-back provisions and robust stock ownership/holding guidelines.

Options Backdating

The following factors should be examined case-by-case to allow for distinctions to be made between "sloppy" plan administration versus deliberate action or fraud:

    Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes;
    Duration of options backdating;
    Size of restatement due to options backdating;
Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and
Adoption of a grant policy that prohibits backdating, and creates a fixed grant schedule or window period for equity grants in the future.


Compensation Committee Communications and Responsiveness

Consider the following factors case-by-case when evaluating ballot items related to executive pay on the board's responsiveness to investor input and engagement on compensation issues:

    Failure to respond to majority-supported shareholder proposals on executive pay topics; or
Failure to adequately respond to the company's previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account:
    The company's response, including:
Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support;
    Specific actions taken to address the issues that contributed to the low level of support;
    Other recent compensation actions taken by the company;



    Whether the issues raised are recurring or isolated;
    The company's ownership structure; and
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.

Equity-Based and Other Incentive Plans

 
General Recommendation: Vote case-by-case on certain equity-based compensation plans11 depending on a combination of certain plan features and equity