UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

FORM 10-Q

 

(Mark One)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2017

or

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________________ to ____________________

Commission File Number: 001-12681

 

GLOBAL SELF STORAGE, INC.

(Exact name of registrant as specified in its charter) 

 

 

Maryland

 

13-3926714

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

Global Self Storage, Inc.

11 Hanover Square, 12th Floor

New York, NY 10005

(212) 785-0900

(Address, including zip code, and telephone number, including area code, of Company’s principal executive offices)

Donald Klimoski II, Esq.

Global Self Storage, Inc.

11 Hanover Square, 12th Floor

New York, NY 10005

(212) 785-0900

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

(Do not check if a smaller reporting company)

 

 

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   No

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of October 31, 2017, was 7,619,469.

 

 

 

 

 


 

Table of Contents

 

STATEMENT ON FORWARD LOOKING INFORMATION

 

3

PART I – FINANCIAL INFORMATION

 

5

 

Item 1.

Financial Statements (Unaudited).

 

5

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

21

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

36

 

Item 4.

Controls and Procedures.

 

36

PART II – OTHER INFORMATION

 

37

 

Item 1.

Legal Proceedings.

 

37

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

37

 

Item 3.

Defaults Upon Senior Securities.

 

37

 

Item 4.

Mine Safety Disclosures.

 

37

 

Item 5.

Other Information.

 

37

 

Item 6.

Exhibits.

 

37

Exhibit Index

 

38

SIGNATURES

 

39

 

2


 

STATEMENT ON FORWARD LOOKING INFORMATION

Certain information presented in this report contains “forward-looking statements” within the meaning of the federal securities laws including, but not limited to, the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Forward looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. In some cases, forward looking statements can be identified by terminology such as “believes,” “expects,” “estimates,” “may,” “will,” “should,” “anticipates” or “intends,” or the negative of such terms or other comparable terminology, or by discussions of strategy. We may also make additional forward looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements. All forward-looking statements, including without limitation, management’s examination of historical operating trends and estimates of future earnings, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but there can be no assurance that management’s expectations, beliefs and projections will result or be achieved.

All forward looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. Any forward-looking statements should be considered in light of the risks referenced in “Item 1A. Risk Factors” included in our most recent registration statement on Form 10. Such factors include, but are not limited to:

 

general risks associated with the ownership and operation of real estate, including changes in demand, risks related to development of self storage facilities, potential liability for environmental contamination, natural disasters and adverse changes in tax, real estate and zoning laws and regulations;

 

risks associated with downturns in the national and local economies in the markets in which we operate, including risks related to current economic conditions and the economic health of our customers;

 

the impact of competition from new and existing self storage and commercial facilities and other storage alternatives;

 

difficulties in our ability to successfully evaluate, finance, integrate into our existing operations, and manage acquired and developed facilities;

 

risks related to our development of new facilities and/or participation in joint ventures;

 

risks of ongoing litigation and other legal and regulatory actions, which may divert management’s time and attention, require us to pay damages and expenses or restrict the operation of our business;

 

the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing the environment, taxes and our tenant reinsurance business and real estate investment trusts (“REITs”), and risks related to the impact of new laws and regulations;

 

risk of increased tax expense associated either with a possible failure by us to qualify as a REIT, or with challenges to intercompany transactions with our taxable REIT subsidiaries;

 

changes in federal or state tax laws related to the taxation of REITs, which could impact our status as a REIT;

 

increases in taxes, fees and assessments from state and local jurisdictions;

 

security breaches or a failure of our networks, systems or technology could adversely impact our business, customer and employee relationships;

 

our ability to obtain and maintain financing arrangements on favorable terms;

 

market trends in our industry, interest rates, the debt and lending markets or the general economy;

 

the timing of acquisitions and our ability to execute on our acquisition pipeline;

 

general volatility of the securities markets in which we participate;

 

changes in the value of our assets;

3


 

 

changes in interest rates and the degree to which our hedging strategies may or may not protect us from interest rate volatility;

 

our ability to continue to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes;

 

availability of qualified personnel;

 

difficulties in raising capital at a reasonable cost;

 

estimates relating to our ability to make distributions to our stockholders in the future; and

 

economic uncertainty due to the impact of terrorism or war.

 

4


 

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

GLOBAL SELF STORAGE, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Real estate assets, net

 

$

55,031,125

 

 

$

55,775,068

 

Cash and cash equivalents

 

 

2,506,811

 

 

 

2,911,640

 

Restricted cash

 

 

89,713

 

 

 

54,054

 

Investments in securities

 

 

1,452,173

 

 

 

1,473,950

 

Accounts receivable

 

 

100,324

 

 

 

157,607

 

Prepaid expenses and other assets

 

 

320,928

 

 

 

265,045

 

Intangible assets, net

 

 

33,183

 

 

 

317,140

 

Goodwill

 

 

694,121

 

 

 

694,121

 

Total assets

 

$

60,228,378

 

 

$

61,648,625

 

Liabilities and equity

 

 

 

 

 

 

 

 

Note payable

 

$

19,406,797

 

 

$

19,374,971

 

Accounts payable and accrued expenses

 

 

1,904,483

 

 

 

1,723,458

 

Total liabilities

 

 

21,311,280

 

 

 

21,098,429

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, 19,900,000 shares authorized; 7,619,469 and

   7,619,469 issued and outstanding at September 30, 2017 and December 31, 2016,

   respectively

 

 

76,195

 

 

 

76,195

 

Series A participating preferred stock, $0.01 par value, 100,000 shares authorized:

   zero shares issued and outstanding

 

 

 

 

 

 

Additional paid in capital

 

 

33,881,863

 

 

 

33,881,863

 

Accumulated comprehensive income

 

 

696,686

 

 

 

718,463

 

Retained earnings

 

 

4,262,354

 

 

 

5,873,675

 

Total equity

 

 

38,917,098

 

 

 

40,550,196

 

Total liabilities and equity

 

$

60,228,378

 

 

$

61,648,625

 

 

 

See notes to unaudited consolidated financial statements.

 

 

5


 

GLOBAL SELF STORAGE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Successor Basis)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 19, 2016

 

 

 

For the Three Months Ended September 30,

 

 

Nine Months Ended

 

 

through

 

 

 

2017

 

 

2016

 

 

September 30, 2017

 

 

September 30, 2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

1,871,642

 

 

$

1,306,822

 

 

$

5,357,521

 

 

$

3,305,590

 

Other property related income

 

 

61,515

 

 

 

42,463

 

 

 

171,556

 

 

 

114,208

 

Total revenues

 

 

1,933,157

 

 

 

1,349,285

 

 

 

5,529,077

 

 

 

3,419,798

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operations

 

 

777,872

 

 

 

525,102

 

 

 

2,190,818

 

 

 

1,449,341

 

General and administrative

 

 

640,566

 

 

 

393,561

 

 

 

1,489,566

 

 

 

1,055,014

 

Depreciation and amortization

 

 

439,342

 

 

 

236,503

 

 

 

1,341,261

 

 

 

595,478

 

Business development and property acquisition costs

 

 

105

 

 

 

238,537

 

 

 

14,295

 

 

 

397,570

 

Total expenses

 

 

1,857,885

 

 

 

1,393,703

 

 

 

5,035,940

 

 

 

3,497,403

 

Operating income (loss)

 

 

75,272

 

 

 

(44,418

)

 

 

493,137

 

 

 

(77,605

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend and interest income

 

 

15,591

 

 

 

46,905

 

 

 

41,965

 

 

 

133,559

 

Interest expense

 

 

(220,209

)

 

 

(219,859

)

 

 

(660,626

)

 

 

(236,511

)

Total other income (expense), net

 

 

(204,618

)

 

 

(172,954

)

 

 

(618,661

)

 

 

(102,952

)

Net loss

 

$

(129,346

)

 

$

(217,372

)

 

$

(125,524

)

 

$

(180,557

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic and diluted

 

$

(0.02

)

 

$

(0.03

)

 

$

(0.02

)

 

$

(0.02

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic and diluted

 

 

7,619,469

 

 

 

7,416,766

 

 

 

7,619,469

 

 

 

7,416,766

 

 

See notes to unaudited consolidated financial statements.

 

 

6


 

GLOBAL SELF STORAGE, INC.

STATEMENT OF OPERATIONS (Predecessor Basis)

For the Period January 1, 2016 through January 18, 2016

(Unaudited)

 

Investment Income

 

 

 

 

Dividends

 

 

 

 

Unaffiliated issuers

 

$

5,165

 

 

 

 

 

 

Total investment income

 

 

5,165

 

 

 

 

 

 

Expenses

 

 

 

 

Compensation and benefits

 

 

39,109

 

Auditing

 

 

6,570

 

Occupancy and other office expenses

 

 

4,091

 

Directors

 

 

2,070

 

Bookkeeping and pricing

 

 

1,440

 

Custodian

 

 

720

 

Insurance

 

 

720

 

Transfer agent

 

 

630

 

Stockholder communications

 

 

360

 

Registration

 

 

77

 

 

 

 

 

 

Total expenses

 

 

55,787

 

 

 

 

 

 

Net investment loss

 

 

(50,622

)

 

 

 

 

 

Realized and Unrealized Gain (Loss)

 

 

 

 

Net unrealized depreciation unaffiliated issuers

 

 

(22,605

)

 

 

 

 

 

Net unrealized loss

 

 

(22,605

)

 

 

 

 

 

Net decrease in net assets resulting from operations

 

$

(73,227

)

 

See notes to unaudited consolidated financial statements.

 

 

7


 

GLOBAL SELF STORAGE, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Successor Basis)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 19, 2016

 

 

 

For the Three Months Ended September 30,

 

 

Nine Months Ended

 

 

through

 

 

 

2017

 

 

2016

 

 

September 30, 2017

 

 

September 30, 2016

 

Net loss

 

$

(129,346

)

 

$

(217,372

)

 

$

(125,524

)

 

$

(180,557

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investment securities available-for-sale

 

 

70,812

 

 

 

(451,410

)

 

 

(21,777

)

 

 

(364,092

)

Comprehensive loss

 

$

(58,534

)

 

$

(668,782

)

 

$

(147,301

)

 

$

(544,649

)

 

See notes to unaudited consolidated financial statements.

 

 

8


 

GLOBAL SELF STORAGE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid in

 

 

Comprehensive

 

 

Retained

 

 

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Income

 

 

Earnings

 

 

Equity

 

Balances at December 31, 2016

 

 

7,619,469

 

 

$

76,195

 

 

$

33,881,863

 

 

$

718,463

 

 

$

5,873,675

 

 

$

40,550,196

 

Unrealized loss on available-for-sale securities

 

 

 

 

 

 

 

 

(21,777

)

 

 

 

 

(21,777

)

Net loss

 

 

 

 

 

 

 

 

 

 

(125,524

)

 

 

(125,524

)

Dividends

 

 

 

 

 

 

 

 

 

 

(1,485,797

)

 

 

(1,485,797

)

Balances at September 30, 2017

 

 

7,619,469

 

 

$

76,195

 

 

$

33,881,863

 

 

$

696,686

 

 

$

4,262,354

 

 

$

38,917,098

 

 

See notes to unaudited consolidated financial statements.

 

 

9


 

GLOBAL SELF STORAGE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Successor Basis)

(Unaudited)

 

 

 

 

 

 

 

For the Period

 

 

 

 

 

 

 

January 19, 2016

 

 

 

Nine Months Ended

 

 

through

 

 

 

September 30, 2017

 

 

September 30, 2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(125,524

)

 

$

(180,557

)

Adjustments to reconcile net income to net cash provided by (used in) operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,341,262

 

 

 

595,478

 

Amortization of loan procurement costs

 

 

31,826

 

 

 

10,609

 

Cash from wholly owned subsidiaries consolidated upon change of status

 

 

 

 

464,586

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Restricted cash

 

 

(35,659

)

 

 

(86,668

)

Accounts receivable

 

 

57,283

 

 

 

(50,861

)

Prepaid expenses and other assets

 

 

(55,883

)

 

 

(28,880

)

Accounts payable and accrued expenses

 

 

181,025

 

 

 

344,469

 

Net cash provided by operating activities

 

 

1,394,330

 

 

 

1,068,176

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Improvements and equipment additions

 

 

(212,973

)

 

 

(124,024

)

Construction in progress

 

 

(100,389

)

 

 

(2,314,073

)

Acquisition of self storage facilities

 

 

 

 

(13,000,000

)

Proceeds from sale of investments

 

 

 

 

3,429,889

 

Net cash used in investing activities

 

 

(313,362

)

 

 

(12,008,208

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Dividends paid

 

 

(1,485,797

)

 

 

(1,446,269

)

Proceeds from note payable, net

 

 

 

 

19,353,754

 

Net cash (used in) provided by financing activities

 

 

(1,485,797

)

 

 

17,907,485

 

Net (decrease) increase in cash and cash equivalents

 

 

(404,829

)

 

 

6,967,453

 

Cash and cash equivalents, beginning of period

 

 

2,911,640

 

 

 

29,763

 

Cash and cash equivalents, end of period

 

$

2,506,811

 

 

$

6,997,216

 

Supplemental schedule of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

628,800

 

 

$

225,902

 

 

See notes to unaudited consolidated financial statements.

 

 

10


 

GLOBAL SELF STORAGE, INC.

STATEMENT OF CASH FLOWS (Predecessor Basis)

For the Period January 1, 2016 through January 18, 2016

(Unaudited)

 

Cash Flows From Operating Activities

 

 

 

 

Net decrease in net assets resulting from operations

 

$

(73,227

)

Adjustments to reconcile decrease in net assets resulting from operations to net cash

   provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Unrealized depreciation of investments

 

 

22,605

 

Net sales of short term investments

 

 

96,448

 

Decrease in dividends receivable

 

 

9,232

 

Decrease in other assets

 

 

715

 

Decrease in accrued expenses

 

 

(69,986

)

Increase in due to affiliates

 

 

14,213

 

 

 

 

 

 

Net cash provided by operating activities

 

 

 

 

 

 

 

 

Cash

 

 

 

 

Beginning of period, December 31, 2015

 

 

29,763

 

 

 

 

 

 

End of period, January 18, 2016

 

$

29,763

 

 

See notes to unaudited consolidated financial statements.

 

 

11


 

GLOBAL SELF STORAGE, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

1. ORGANIZATION

Global Self Storage, Inc. a Maryland corporation (the “Company,” “we,” “our,” or “us”), 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 (“stores”) in the United States. The Company stores are located in the Northeast, Mid-Atlantic and Mid-West regions of the United States. The Company was formerly registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as a non-diversified, closed end management investment company. The Securities and Exchange Commission’s (“SEC”) order approving the Company’s application to deregister from the 1940 Act was granted on January 19, 2016. Accordingly, effective January 19, 2016, the Company changed its name to Global Self Storage, Inc. from Self Storage Group, Inc., changed its SEC registration to a reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (from an investment company under the 1940 Act), and listed its common stock on the Nasdaq Capital Market (“NASDAQ”) under the symbol “SELF.”

The Company has elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “IRC”). To the extent the Company continues to qualify as a REIT, it will not be subject to tax, with certain limited exceptions, on the taxable income that is distributed to its stockholders.

The Company invests in self storage facilities by acquiring stores through its wholly owned subsidiaries. At September 30, 2017, the Company owned and operated 11 stores. The Company operates primarily in one segment:  rental operations.

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

Upon deregistration as an investment company, the Company's status changed to an operating company from an investment company since it no longer met the assessment of an investment company under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 946 (“ASC 946”). The Company discontinued applying the guidance in ASC 946 and began to account for the change in status prospectively by accounting for its investments in accordance with other U.S. generally accepted accounting principles (“GAAP”) topics as of the date of the change in status.

The Company’s financial statements for the period subsequent to the deregistration are prepared 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 investment company fair valuation approach. This change in status and the concomitant accounting policies affect the comparability of the financial statements for directly presenting corresponding items for 2017 and 2016. As such, the consolidated statements of operations and cash flows have been presented on the Predecessor Basis of accounting as an investment company from January 1, 2016 through January 18, 2016, and on the current basis of accounting as an operating company from January 19, 2016 through September 30, 2017.

The accompanying unaudited consolidated financial statements of the Company are presented on the accrual basis of accounting in accordance with GAAP for interim financial information, and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they may not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The consolidated balance sheet as of December 31, 2016 has been derived from the Company’s audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2016.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses generally consist of property tax accruals, unearned rental income, and trade payables.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments, and may include money market fund shares, purchased with an original maturity of three months or less. The carrying amount reported on the balance sheet for cash and cash equivalents approximates fair value.

12


 

Restricted Cash

Restricted cash is comprised of escrowed funds deposited with a bank relating to capital expenditures.

Income Taxes

The Company has elected to be treated as a REIT under the 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.

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 (2014 – 2016), or is expected to be taken in the Company’s 2017 tax returns.

Investments in Securities

Investments in equity securities that have readily determinable fair values are accounted for as available-for-sale. Available-for-sale securities are measured at fair value. Gains or losses from changes in the fair value of available-for-sale securities are recorded in accumulated other comprehensive income, until the investment is sold or otherwise disposed of, or until the investment is determined to be other-than-temporarily impaired, at which time the cumulative gain or loss previously reported in equity is included in income. The specific identification method is used to determine the realized gain or loss on investments sold or otherwise disposed.

Fair value is determined using a valuation hierarchy generally by reference to an active trading market, using quoted closing or bid prices. Judgment is used to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.

Prior to January 19, 2016, gains and losses from the changes in fair value of investment securities were recorded in the Statement of Operations.

Real Estate Assets

Real estate assets are carried at the appreciated value as of January 19, 2016, the effective date of the Company’s change in status to an operating company, less accumulated depreciation from that date. Purchases subsequent to the effective date of the change in status are carried at cost, less accumulated depreciation. Direct and allowable internal costs associated with the development, construction, renovation, and improvement of real estate assets are capitalized. Property taxes and other costs associated with development incurred during a construction period are capitalized. A construction period begins when expenditures for a real estate asset have been made and activities that are necessary to prepare the asset for its intended use are in progress. A construction period ends when an asset is substantially complete and ready for its intended use.

We allocate the net acquisition cost of acquired operating self storage properties to the underlying land, buildings, identified intangible assets, and any noncontrolling interests that remain outstanding based upon their respective individual estimated fair values.  Any difference between the net acquisition cost and the estimated fair value of the net tangible and intangible assets acquired is recorded as goodwill. 

Internal and external transaction costs associated with acquisitions or dispositions of real estate, as well as repairs and maintenance costs, are charged to expense as incurred. Major replacements and betterments that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives. Depreciation is computed using the straight-line method over the estimated useful lives of the buildings and improvements, which are generally between 5 and 39 years.    

13


 

Revenue and Expense Recognition

Revenues from stores, which are primarily composed of rental income earned pursuant to month-to-month leases for storage space, as well as associated late charges and administrative fees, are recognized as earned. Promotional discounts reduce rental income over the promotional period, which is generally one month. Ancillary revenues from sales of merchandise and tenant insurance and other income are recognized when earned.

The Company accrues for property tax expense based upon actual amounts billed and, in some circumstances, estimates and historical trends when bills or assessments have not been received from the taxing authorities or such bills and assessments are in dispute. If these estimates are incorrect, the timing and amount of expense recognition could be incorrect. Cost of operations and general and administrative expense are expensed as incurred.

Credit Risk

Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and certain portions of accounts receivable including rents receivable from our tenants. Cash and cash equivalents are on deposit with highly rated commercial banks.

Evaluation of Asset Impairment

The Company evaluates its real estate assets, intangible assets consisting of in-place leases, and goodwill for impairment annually.  If there are indicators of impairment and we determine that an asset is not recoverable from future undiscounted cash flows to be received through the asset’s remaining life (or, if earlier, the expected disposal date), we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value or net proceeds from expected disposal.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from management’s estimates.

Recently Issued Accounting Standards

In February 2017, as part of the new revenue standard, the FASB issued ASU No. 2017-05 – Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance, which focuses on recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. Specifically, the new guidance defines “in substance nonfinancial asset,” unifies guidance related to partial sales of nonfinancial assets, eliminates rules specifically addressing sales of real estate, removes exceptions to the financial asset derecognition model, and clarifies the accounting for contributions of nonfinancial assets to joint ventures. The new guidance is effective at the same time an entity adopts the new revenue standard. Upon adoption, the Company expects that the majority of its sale transactions will be treated as dispositions of nonfinancial assets rather than dispositions of a business given the FASB’s recently revised definition of a business (see ASU No. 2017-01 below). Additionally, in partial sale transactions where the Company sells a controlling interest in real estate but retains a noncontrolling interest, the Company expects to now fully recognize a gain or loss on the fair value measurement of the retained interest as the new guidance eliminates the partial profit recognition model.

In January 2017, the FASB issued ASU 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business, which changes the definition of a business to include an input and a substantive process that together significantly contribute to the ability to create outputs. A framework is provided to evaluate when an input and a substantive process are present.  The new guidance also narrows the definition of outputs, which are defined as the results of inputs and substantive processes that provide goods or services to customers, other revenue, or investment income. The standard is effective on January 1, 2018, however early adoption is permitted. Upon adoption of the new guidance, the Company expects that the majority of future property acquisitions will now be considered asset acquisitions, resulting in the capitalization of acquisition related costs incurred in connection with these transactions and the allocation of purchase price and acquisition related costs to the assets acquired based on their relative fair values.

In November 2016, the FASB issued ASU No. 2016-18 - Statement of Cash Flows (Topic 230): Restricted Cash, which requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The new guidance also requires entities to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. The standard is effective on January 1, 2018, however early adoption is permitted. The standard requires the use of the retrospective transition method. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.

14


 

In August 2016, the FASB issued ASU No. 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The eight items that the ASU provides classification guidance on include (1) debt prepayment and extinguishment costs, (2) settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principle. The standard is effective on January 1, 2018, however early adoption is permitted. The standard requires the use of the retrospective transition method. The Company is in the process of evaluating the impact of this new guidance.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance allows for entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the guidance allows employers to withhold shares to satisfy minimum statutory tax withholding requirements up to the employees’ maximum individual tax rate without causing the award to be classified as a liability. The guidance also stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows. The standard became effective on January 1, 2017.  The adoption of this guidance did not have an impact on the Company’s consolidated financial position or results of operations as the Company does not have an equity compensation plan

In February 2016, the FASB issued ASU No. 2016-02 - Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard is effective on January 1, 2019, however early adoption is permitted. The Company is in the process of evaluating the impact of this new guidance.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance under GAAP when it becomes effective. The new standard will be effective for the Company beginning on January 1, 2018, however early application beginning on January 1, 2017 is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company does not believe the standard will have a material impact on its consolidated financial statements or results of operations primarily because most of its revenue is derived from lease contracts, which are excluded from the scope of the new guidance.

 

 

15


 

3. CHANGE IN STATUS

Prior to the January 19, 2016 change in status from a registered investment company to an operating company, the Company recorded its investments in the self storage properties at fair value and recorded the changes in the fair value as an unrealized gain or loss. Upon the effective date of the deregistration of the Company as a registered investment company, the fair value accounting as a registered investment company was no longer applicable to the Company, rather the Company began presenting on a consolidated basis, the underlying assets and liabilities of the self storage properties. The Company’s initial carrying value of the net assets of the self storage properties is the fair value on the effective date of the change in status determined as follows:

 

Fair value of self storage properties on the effective date of the

   change in status

 

 

 

 

 

$

34,624,573

 

Total net assets of combined self storage properties

 

 

 

 

 

 

 

 

Property plant and equipment - self storage

 

$

26,388,167

 

 

 

 

 

Cash and cash equivalents

 

 

464,585

 

 

 

 

 

Accounts receivable

 

 

87,103

 

 

 

 

 

Prepaid expenses and other assets

 

 

206,146

 

 

 

 

 

Accounts payable and accrued expenses

 

 

(488,514

)

 

 

26,657,487

 

Increase to the initial carrying value of the net assets of self storage properties on the

   effective date of the change in status

 

 

 

 

 

$

7,967,086

 

 

 

4. INVESTMENTS IN SECURITIES

Investments in securities as of September 30, 2017 consisted of the following:

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

 

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Value

 

Investment securities, available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stocks

 

$

755,487

 

 

$

696,686

 

 

$

 

 

$

1,452,173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment in securities

 

$

755,487

 

 

$

696,686

 

 

$

 

 

$

1,452,173

 

 

 

5. REAL ESTATE ASSETS

The carrying value of the Company’s real estate assets is summarized as follows:

 

Self storage properties, at cost:

 

 

 

 

Beginning balance

 

$

51,156,701

 

Improvements and equipment additions

 

 

212,973

 

Ending balance

 

 

51,369,674

 

 

 

 

 

 

Land

 

 

 

 

Beginning balance

 

 

5,493,814

 

Ending balance

 

 

5,493,814

 

 

 

 

 

 

Accumulated depreciation:

 

 

 

 

Beginning balance

 

 

(875,447

)

Depreciation expense

 

 

(1,057,305

)

Ending balance

 

 

(1,932,752

)

 

 

 

 

 

Construction in progress:

 

 

 

 

Beginning balance

 

 

Current development

 

 

100,389

 

Ending balance

 

 

100,389

 

 

 

 

 

 

Total real estate assets at September 30, 2017

 

$

55,031,125

 

 

16


 

Construction in progress consists of the expansion projects in Merrillville, IN and Millbrook, NY. The Merrillville, IN expansion, which, when completed, will add approximately 13,300 gross square feet of traditional drive-up storage units, for an aggregate cost of approximately $400,000. The Millbrook, NY expansion, which, when completed, will add approximately 16,500 of gross square feet of all-climate-controlled units. The planning for the Millbrook, NY expansion is under development and the Company is actively evaluating proposals for its construction. As of September 30, 2017, a final estimate of construction costs has not yet been determined. As of September 30, 2017, development costs for these projects have been capitalized while the projects are under construction and are reflected in real estate assets, net on the Company’s consolidated balance sheet.

 

 

6. FAIR VALUE MEASUREMENTS

GAAP establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2017:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in securities

 

$

1,452,173

 

 

$

 

 

$

 

 

$

1,452,173

 

Total assets at fair value

 

$

1,452,173

 

 

$

 

 

$

 

 

$

1,452,173

 

 

 

There were no assets transferred from level 1 to level 2 as of September 30, 2017. The Company did not have any assets or liabilities that are re-measured on a recurring basis using significant unobservable inputs as of September 30, 2017.

 

The fair values of financial instruments including cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximated their respective carrying values as of September 30, 2017. The aggregate carrying value of the Company’s debt was $20,000,000 as of September 30, 2017. The estimated fair value of the Company’s debt was $20,000,000 as of September 30, 2017. This estimate was based on market interest rates for comparable obligations. Rates take into consideration general market conditions and maturity. The Company’s debt is classified as level 2 of the fair value hierarchy.

 

 

7. NOTE PAYABLE

On June 24, 2016, certain wholly-owned subsidiaries (“Secured Subsidiaries”) of the Company entered into a loan agreement and certain other related agreements (collectively, the “Loan Agreement”) between the Secured Subsidiaries and Insurance Strategy Funding IV, LLC (the “Lender”). Under the Loan Agreement, the Secured Subsidiaries are borrowing from the Lender in the principal amount of $20 million pursuant to a promissory note (the “Promissory Note”). The Promissory Note bears an interest rate equal to 4.192% per annum (effective interest rate 4.40%) and is due to mature on July 1, 2036. Pursuant to a security agreement (the “Security Agreement”), the obligations under the Loan Agreement are secured by certain real estate assets owned by the Secured Subsidiaries.

The Company entered into a non-recourse guaranty on June 24, 2016 (the “Guaranty,” and together with the Loan Agreement, the Promissory Note and the Security Agreement, the “Loan Documents”) to guarantee the payment to Lender of certain obligations of the Secured Subsidiaries under the Loan Agreement.

The Loan Documents require the Secured Subsidiaries and the Company to comply with certain covenants, including, among others, a minimum net worth test and other customary covenants. The Lender may accelerate amounts outstanding under the Loan Documents upon the occurrence of an event of default (as defined in the Loan Agreement) including, but not limited to, the failure to pay amounts due or commencement of bankruptcy proceedings.

The Company incurred loan procurement costs of $646,246 and such costs have been recorded net of the note payable on the consolidated balance sheet and are amortized as an adjustment to interest expense over the term of the loan.

17


 

As of September 30, 2017, the Company’s note payable is summarized as follows:

 

Note Payable

 

Carrying Value

 

Principal balance outstanding

 

$

20,000,000

 

Less: Loan procurement costs, net

 

 

(593,203

)

Total note payable, net

 

$

19,406,797

 

 

As of September 30, 2017, the note payable was secured by certain of its stores with an aggregate net book value of approximately $ 34.3 million. The note payable pays interest only from August 1, 2016 through June 30, 2018. The following table represents the future principal payment requirements on the note payable as of September 30, 2017:

 

2017

 

$

 

2018

 

 

228,987

 

2019

 

 

472,600

 

2020

 

 

492,797

 

2021

 

 

513,857

 

2022 and thereafter

 

 

18,291,759

 

Total principal payments

 

 

20,000,000

 

Less: Loan procurement costs, net

 

 

(593,203

)

Total note payable

 

$

19,406,797

 

 

 

8. EARNINGS PER SHARE

Basic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to potentially diluted securities. The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 19, 2016

 

 

 

For the Three Months Ended September 30,

 

 

Nine Months Ended

 

 

through

 

 

 

2017

 

 

2016

 

 

September 30, 2017

 

 

September 30, 2016

 

Net loss

 

$

(129,346

)

 

$

(217,372

)

 

$

(125,524

)

 

$

(180,557

)

Basic and diluted weighted average common shares

   outstanding

 

 

7,619,469

 

 

 

7,416,766

 

 

 

7,619,469

 

 

 

7,416,766

 

Basic and diluted per share net loss

 

$

(0.02

)

 

$

(0.03

)

 

$

(0.02

)

 

$

(0.02

)

 

Common stock dividends, including amounts paid to the Company’s restricted common stockholder, totaled $495,266 ($0.065 per share) and $482,090 ($0.065 per share) for the three months ended September 30, 2017 and 2016, respectively, and $1,485,797 ($0.195 per share) and $1,446,269 ($0.195 per share) for the nine months ended September 30, 2017 and 2016, respectively. The Company estimates that the dividends paid for the nine months ended September 30, 2017 are substantially comprised of return of capital based on information available at this time and may be subject to change. The classification of these dividends for federal income tax purposes is expected to be determined after the Company’s fiscal year ending December 31, 2017.

 

 

9. 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 September 30, 2017, certain of the Affiliates owned approximately 5% 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

18


 

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 rent and overhead accrued and paid by the Company to Winco for the three and nine months ended September 30, 2017 was $13,607 and $46,009, respectively. As of September 30, 2017, the Company had reimbursements payable to MMC and Winco for compensation and benefits and rent and overhead of $9,471.

The Company provides a maximum monthly automobile allowance of $1,000 per month to its President, Mark C. Winmill. 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 $3,228 for the automobile payments paid and due in 2017.

The Company leases office space to 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 charge is $1,000 per month, due and payable on the first day of each month. For the three and nine months ended September 30, 2017, the total rent paid by Tuxis to the Company was $3,000 and $9,000, respectively.

 

 

10. CAPITAL STOCK

As of September 30, 2017, the Company was authorized to issue 19,900,000 shares of common stock, $0.01 par value per share. The Company also had 100,000 shares of Series A participating preferred stock, $0.01 par value per share, authorized, of which none had been issued.  See Note 13, Subsequent Events, for additional information related to the Company’s Capital Stock.

 

 

11. STOCKHOLDER RIGHTS PLAN

On January 28, 2016, the Company announced that the Board of Directors had 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 entitled the registered holder to purchase from the Company one one-thousandth of a share of preferred stock, par value $.01 per share. The rights were distributed as a non-taxable dividend and were set to expire on January 29, 2026. The rights were evidenced by the underlying Company common stock, and no separate preferred stock purchase rights certificates had been distributed. The rights to acquire preferred stock were not immediately exercisable and would have become exercisable only if a person or group, other than Exempt Persons (as defined in the Rights Plan agreement), acquired or commenced a tender offer for 9.8% or more of the Company’s common stock. If a person or group, other than an Exempt Person, acquired or commenced a tender offer for 9.8% or more of the Company’s common stock, each holder of a right, except the acquirer, would have been entitled, subject to the Company’s right to redeem or exchange the right, to exercise, at an exercise price of $12, the right to purchase 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 could terminate the Rights Plan at any time or redeem the rights, for $0.01 per right, at any time before a person acquired 9.8% or more of the Company’s common stock. This Rights Plan replaced the Company’s stockholders rights plan dated November 25, 2015, which expired on its own terms on March 24, 2016.  See Note 13, Subsequent Events, for additional information related to the Company’s Stockholder Rights Plan.

 

 

12. COMMITMENTS AND CONTINGENCIES

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 January 3, 2020. The future minimum lease payments under the lease in aggregate are $45,684, comprised of annual payments of $15,288 for the years ending December 31, 2017, 2018, and 2019, respectively.

Upon the satisfaction of certain conditions described in the 2016 Purchase Agreement with Tuxis, in connection with expanding the Company’s Millbrook, New York store, an additional $900,000 cash payment is due to Tuxis from the Company. On May 2, 2017, the Company received approval from the local municipality for the Millbrook expansion project and, upon commencement of construction, the additional cash payment is expected to be made by the Company to Tuxis.  

 

 

19


 

13. SUBSEQUENT EVENTS

 

On October 16, 2017, the Company’s stockholders approved the amendment and restatement of the Company’s charter which, among other things, increased the total number of shares of stock which the Company has authority to issue to 500,000,000 consisting of 450,000,000 shares of common stock, $0.01 par value per share, and 50,000,000 shares of preferred stock, $0.01 par value per share. Stockholders also approved the Company’s 2017 Equity Incentive Plan (the “Plan”). The Plan is designed to provide equity-based incentives to certain eligible persons, as defined in the Plan, in the form of options, share appreciation rights, restricted shares, restricted share units, dividend equivalent rights or other forms of equity-based compensation as determined in the discretion of the Board of Directors, the Compensation Committee of the Board of Directors, or other designee thereof.

On October 20, 2017, the Company and American Stock Transfer & Trust Company, LLC, as rights agent (the “Rights Agent”), entered into an amendment (the “Amendment”) to the Rights Plan, dated as of January 29, 2016, between the Company and the Rights Agent.  The Amendment accelerated the expiration of the Company’s preferred share purchase rights under the Rights Plan from the Close of Business (as such term is defined in the Rights Plan) on January 29, 2026 to the Close of Business on October 20, 2017, and the Rights Plan was terminated at such time. At the time of the termination of the Rights Plan, all of the rights distributed to holders of the Company’s common stock pursuant to the Rights Plan expired.

 

20


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY LANGUAGE

The following discussion and analysis should be read in conjunction with our unaudited “Condensed Consolidated Financial Statements” and the “Notes to Condensed Consolidated Financial Statements (unaudited)” appearing elsewhere in this report. We make statements in this section that may be forward looking statements within the meaning of the federal securities laws. For a complete discussion of forward looking statements, see the section in this report entitled “Statement on Forward Looking Information.” References to the “Company,” “we,” “us,” or “our company” refer to Global Self Storage, Inc., a Maryland corporation, including, as the context requires, its direct and indirect subsidiaries.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements contained elsewhere in this report, which have been prepared in accordance with GAAP. Our notes to the unaudited condensed consolidated financial statements contained elsewhere in this report describe the significant accounting policies essential to our unaudited condensed consolidated financial statements. Preparation of our financial statements requires estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions that we have used are appropriate and correct based on information available at the time they were made. These estimates, judgments, and assumptions can affect our reported assets and liabilities as of the date of the financial statements, as well as the reported revenues and expenses during the period presented. If there are material differences between these estimates, judgments, and assumptions and actual facts, our financial statements may be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. There are areas in which our judgment in selecting among available alternatives would not produce a materially different result, but there are some areas in which our judgment in selecting among available alternatives would produce a materially different result. Please refer to the notes to the unaudited condensed consolidated financial statements that contain additional information regarding our critical accounting policies and other disclosures.

Management’s Discussion and Analysis Overview

The Company is a self-administered and self-managed REIT focused on the ownership, operation, acquisition, development, and redevelopment of self storage facilities in the United States. Our stores are designed to offer affordable, easily accessible, and secure storage space for residential and commercial customers. The Company currently owns and operates, through its wholly owned subsidiaries, eleven stores located in Connecticut, Illinois, Indiana, New York, Ohio, Pennsylvania, and South Carolina. As previously reported in our press release on January 19, 2016, on that day, the Company changed its name to Global Self Storage, Inc. from Self Storage Group, Inc., changed its SEC registration from an investment company to an operating company reporting under the Exchange Act, and uplisted to NASDAQ.

Our store operations generated most of our net income for all periods presented herein. Accordingly, a significant portion of management’s time is devoted to seeking to maximize cash flows from our existing stores, as well as seeking investments in additional stores. The Company expects to continue to earn a majority of its net income from its store operations as its current store operations continue to develop and as it makes additional store acquisitions. Over time, the Company expects to divest its remaining portfolio of investment securities and use the proceeds to acquire, develop, redevelop, and/or operate additional stores. The Company expects its income from investment securities to continue to decrease as it continues to divest its holdings of investment securities.

Financial Condition and Results of Operations

On June 24, 2016, certain wholly owned subsidiaries (“Secured Subsidiaries”) of the Company entered into a loan agreement and certain other related agreements (collectively, the “Loan Agreement”) between the Secured Subsidiaries and Insurance Strategy Funding IV, LLC (the “Lender”). Under the Loan Agreement, the Secured Subsidiaries are borrowing from the Lender in the principal amount of $20 million pursuant to a promissory note (the “Promissory Note”). The Promissory Note bears an interest rate equal to 4.192% per annum and is due to mature on July 1, 2036. Pursuant to a security agreement (the “Security Agreement”), the obligations under the Loan Agreement are secured by certain real estate assets owned by the Secured Subsidiaries. J.P. Morgan Investment Management, Inc. acted as Special Purpose Vehicle Agent of the Lender.

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The Company entered into a non-recourse guaranty on June 24, 2016 (the “Guaranty,” and together with the Loan Agreement, the Promissory Note and the Security Agreement, the “Loan Documents”) to guarantee the payment to Lender of certain obligations of the Secured Subsidiaries under the Loan Agreement. The Loan Documents require the Secured Subsidiaries and the Company to comply with certain covenants, including, among others, a minimum net worth test and other customary covenants. The Lender may accelerate amounts outstanding under the Loan Documents upon the occurrence of an Event of Default (as defined in the Loan Agreement) including, but not limited to, the failure to pay amounts due or commencement of bankruptcy proceedings. The Company and the Secured Subsidiaries paid customary fees and expenses in connection with their entry into the Loan Documents. There is no material relationship between the Company, its Secured Subsidiaries, or its affiliates and the Lender, other than in respect of the Loan Documents. The foregoing description is qualified in its entirety by the full terms and conditions of the Loan Documents, filed as Exhibits 10.1, 10.2, 10.3 and 10.4 to the Current Report on Form 8-K filed on June 30, 2016. We used the proceeds of such debt financing primarily in connection with store acquisitions in 2016 as described below.

As of September 30, 2017, we had capital resources totaling approximately $4.0 million, comprised of $2.5 million of cash and cash equivalents and $1.5 million of marketable securities. Capital resources derived from retained cash flow have been and are currently expected to continue to be negligible. Retained operating cash flow represents our expected cash flow provided by operating activities, less stockholder distributions and capital expenditures to maintain stores.

We have been actively reviewing a number of store and store portfolio acquisition opportunities and have been working to further develop and expand our current stores. On August 29, 2016, we acquired our store in Lima, OH for approximately $5,300,000 in cash and, on September 26, 2016, we acquired our store in Fishers, IN for approximately $7,700,000 in cash.

Additionally, on December 30, 2016, we acquired our stores in Clinton, CT and Millbrook, NY, along with an adjacent property with expansion potential in Millbrook, NY, from Tuxis Corporation, a Company affiliate (“Tuxis”), for $5,925,000 in cash and 202,703 unregistered and restricted shares of the Company’s common stock. Upon the satisfaction of certain conditions, an additional $900,000 cash payment is expected to be made by the Company to Tuxis. On May 2, 2017, the Company received approval from the local municipality for the Millbrook expansion project and, upon commencement of construction, the additional cash payment is expected to be made by the Company to Tuxis.

 

Results of Operations for the Three Months Ended September 30, 2017 Compared with the Three Months Ended September 30, 2016

Revenues

Rental income increased from $1,306,822 during the three months ended September 30, 2016 to $1,871,642 during the three months ended September 30, 2017, an increase of $564,820, or 43.2%. The increase was primarily attributable to the additional income from the stores acquired in 2016, included in our non same-store portfolio. The increase in same-store revenue was due primarily to an increase in rental and occupancy rates and net leased square footage. Our stores in Illinois, Indiana, Pennsylvania, New York, and South Carolina were our strongest market performers as far as occupancy, revenue, and net operating income growth.

Other store related income consists of customer insurance fees, sales of storage supplies, and other ancillary revenues. Other store related income increased from $42,463 during the three months ended September 30, 2016 to $61,515 during the three months ended September 30, 2017, an increase of $19,052, or 44.9%. This increase was primarily attributable to increased insurance fees on the stores acquired in 2016 and an increase in same-store property related income mainly attributable to increased insurance participation and higher average occupancy.

Operating Expenses

Store operating expenses increased from $525,102 during the three months ended September 30, 2016 to $777,872 during the three months ended September 30, 2017, an increase of $252,770, or 48.1%, which was primarily attributable to the increased expenses associated with our newly acquired stores.

Depreciation and amortization increased from $236,503 during the three months ended September 30, 2016 to $439,342 during the three months ended September 30, 2017, an increase of $202,839, or 85.8%. The difference is primarily attributable to (i) depreciation of the building and fixtures related to the stores acquired in 2016, (ii) the expansion of the Bolingbrook store, and (iii) and amortization of the in-place leases related to the stores acquired in 2016.

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General and administrative expenses increased from $393,561 during the three months ended September 30, 2016 to $640,566 during the three months ended September 30, 2017, an increase of $247,005, or 62.8%. The change was primarily attributable to increased legal expenses in connection with our transformation from an investment company to an operating company.  Increased expenses for payroll, stockholder communications and vice president level employee acquisition also contributed to the change.  

Business development and store acquisition related costs decreased from $238,537 during the three months ended September 30, 2016 to $105 during the three months ended September 30, 2017. Business development and store acquisition-related costs are typically non-recurring and fluctuate based on periodic business development and acquisition activity.

Other income (expense)

Interest expense on loans increased from $219,859 during the three months ended September 30, 2016 to $220,209 during the three months ended September 30, 2017.

Dividend and interest income was $46,905 during the three months ended September 30, 2016 and $15,591 during the three months ended September 30, 2017. The decrease was primarily attributable to the sale of certain investment securities held by the Company.

Net income (loss)

For the three months ended September 30, 2016, the net loss was $217,372, or $0.03 per share. For the three months ended September 30, 2017, the net loss was $129,346, or $0.02 per share.

 

Results of Operations for the Nine Months Ended September 30, 2017 Compared with the Period January 19, 2016 through September 30, 2016

The Company’s results of operations for the period subsequent to its change in status from an investment company to an operating company on January 19, 2016 are presented on a consolidated basis to include the Company and its wholly owned subsidiaries, rather than using the investment company fair valuation approach. For the period January 1, 2016 to January 18, 2016, the Company was a registered investment company and applied the accounting guidance in ASC 946 and such period is not reflected in the following discussion. The change in status and related accounting policies affect the direct comparability of the results of operations for the first nine months of 2017 with the first nine months of 2016. As such, for the nine months of 2016, the presentation of the results of operations is limited to the period during which the Company has applied operating company accounting policies (January 19, 2016 through September 30, 2017) and relates to the unaudited consolidated financial statements presented for such period in this report.

Revenues

Rental income increased from $3,305,590 during the period January 19, 2016 to September 30, 2016 to $5,357,521 during the nine months ended September 30, 2017, an increase of $2,051,931, or 62.1%. The increase was primarily attributable to the additional income from the stores acquired in 2016, included in our non same-store portfolio. The increase in same-store revenue was due primarily to an increase in rental and occupancy rates and net leased square footage. Our stores in Illinois, Indiana, Pennsylvania, New York, and South Carolina were our strongest market performers as far as occupancy, revenue, and net operating income growth.

Other store related income consists of customer insurance fees, sales of storage supplies, and other ancillary revenues. Other store related income increased from $114,208 during the period January 19, 2016 to September 30, 2016 to $171,556 during the nine months ended September 30, 2017, an increase of $57,348, or 50.2%. This increase was primarily attributable to increased fee revenue and insurance fees on the stores acquired in 2016 and an increase in same-store property related income mainly attributable to increased insurance participation and higher average occupancy.

Operating Expenses

Store operating expenses increased from $1,449,341 during the period January 19, 2016 to September 30, 2016 to $2,190,818 during the nine months ended September 30, 2017, an increase of $741,477, or 51.2%, which was primarily attributable to the increased expenses associated with our newly acquired stores.

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Depreciation and amortization increased from $595,478 during the period January 19, 2016 to September 30, 2016 to $1,341,261 during the nine months ended September 30, 2017, an increase of 745,783, or 125.2%. The difference is primarily attributable to (i) the shorter 2016 comparable period commencing on January 19, 2016, the effective date of the Company’s deregistration as an investment company, versus the full nine month period in 2017, (ii) depreciation of the building and fixtures related to the stores acquired in 2016, (iii) the expansion of the Bolingbrook store, and (iv) amortization of the in-place leases related to the stores acquired in 2016.

General and administrative expenses increased from $1,055,014 during the period January 19, 2016 to September 30, 2016 to $1,489,566 during the nine months ended September 30, 2017, an increase of $434,552, or 41.2%. The change was primarily attributable to increased legal expenses in connection with our transformation from an investment company to an operating company.  Increased expenses for payroll, state taxes, stockholder communications and vice president level employee acquisition also contributed to the change.

Business development and store acquisition related costs decreased from $397,570 during the period January 19, 2016 to September 30, 2016 to $14,295 during the nine months ended September 30, 2017. Business development and store acquisition-related costs are typically non-recurring and fluctuate based on periodic business development and acquisition activity.

Other income (expense)

Interest expense on loans increased from $236,511 during the period January 19, 2016 to September 30, 2016 to $660,626 during the nine months ended September 30, 2017. The increase was primarily attributable to a higher amount of outstanding debt during the nine months ended September 30, 2017 as compared to the period January 19, 2016 to September 30, 2016.

Dividend and interest income was $133,559 during the period January 19, 2016 to September 30, 2016 and $41,965 during the nine months ended September 30, 2017. The decrease was primarily attributable to the sale of certain investment securities held by the Company.

Net income (loss)

For the period January 19, 2016 to September 30, 2016, the net loss was $180,557, or $0.02 per share. For the nine months ended September 30, 2017, the net loss was $125,524, or $0.02 per share.

 

Non-GAAP Financial Measures

Funds from Operations (“FFO”) and FFO per share are non-GAAP measures defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and are considered helpful measures of REIT performance by REITs and many REIT analysts. NAREIT defines FFO as a REIT’s net income, excluding gains or losses from sales of property, and adding back real estate depreciation and amortization. FFO and FFO per share are not a substitute for net income or earnings per share. FFO is not a substitute for GAAP net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes financing activities presented on our statements of cash flows. In addition, other REITs may compute these measures differently, so comparisons among REITs may not be helpful. However, the Company believes that to further understand the performance of its stores, FFO should be considered along with the net income and cash flows reported in accordance with GAAP and as presented in the Company’s financial statements.

Adjusted FFO (“AFFO”) represents FFO excluding the effects of business development and acquisition related costs and non-recurring items, which we believe are not indicative of the Company’s operating results. We present AFFO because we believe it is a helpful measure in understanding our results of operations insofar as we believe that the items noted above that are included in FFO, but excluded from AFFO, are not indicative of our ongoing operating results. We also believe that the investment community considers our AFFO (or similar measures using different terminology) when evaluating us. Because other REITs or real estate companies may not compute AFFO in the same manner as we do, and may use different terminology, our computation of AFFO may not be comparable to AFFO reported by other REITs or real estate companies.

We believe net operating income or “NOI” is a meaningful measure of operating performance because we utilize NOI in making decisions with respect to, among other things, capital allocations, determining current store values, evaluating store performance, and in comparing period-to-period and market-to-market store operating results. In addition, we believe the investment community utilizes NOI in determining operating performance and real estate values, and does not consider depreciation expense because it is based upon historical cost. NOI is defined as net store earnings before general and administrative expenses, interest, taxes, depreciation, and amortization.

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NOI is not a substitute for net income, net operating cash flow, or other related GAAP financial measures, in evaluating our operating results.

Self Storage Portfolio

The following discussion and analysis of our same-store self storage operations and our combined same-store and non same-store (“Combined store”) self storage operations are presented on a comparative basis for the three and nine months ended September 30, 2016 and September 30, 2017, respectively.

GLOBAL SELF STORAGE STORES

 

 

 

 

 

Year Store

 

Number

 

 

Net Leasable

 

 

September 30, 2017 Square Foot

 

 

September 30, 2016 Square Foot

 

Property

 

Address

 

Opened / Opened

 

of Units

 

 

Square Feet

 

 

Occupancy %

 

 

Occupancy %

 

SSG BOLINGBROOK LLC

 

296 North Weber Road, Bolingbrook, IL 60440

 

1997 / 2013

 

 

781

 

 

 

111,200

 

 

 

91.8

%

 

 

95.6

%

SSG DOLTON LLC

 

14900 Woodlawn Avenue,   Dolton, IL 60419

 

2007 / 2013

 

 

652

 

 

 

86,950

 

 

 

92.7

%

 

 

94.2

%

SSG MERRILLVILLE LLC

 

6590 Broadway, Merrillville, IN 46410

 

2005 / 2013

 

 

491

 

 

 

66,820

 

 

 

98.1

%

 

 

92.5

%

SSG ROCHESTER LLC

 

2255 Buffalo Road, Rochester, NY 14624

 

2010 / 2012

 

 

648

 

 

 

68,017

 

 

 

88.2

%

 

 

88.3

%

SSG SADSBURY LLC

 

21 Aim Boulevard, Sadsburyville, PA 19369

 

2006 / 2012

 

 

693

 

 

 

78,842

 

 

 

90.5

%

 

 

91.1

%

SSG SUMMERVILLE I LLC

 

1713 Old Trolley Road, Summerville, SC 29485

 

1990 / 2013

 

 

557

 

 

 

72,700

 

 

 

91.5

%

 

 

86.3

%

SSG SUMMERVILLE II LLC

 

900 North Gum Street, Summerville, SC 29483

 

1997 / 2013

 

 

248

 

 

 

41,665

 

 

 

90.9

%

 

 

92.4

%

TOTAL/AVERAGE

   SAME-STORES

 

 

 

 

 

 

4,070

 

 

 

526,194

 

 

 

92.0

%

 

 

91.4

%