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, 2019

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common shares, $0.01 par value per share

 

SELF

 

NASDAQ

 

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 every Interactive Data File required to be submitted 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 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

 

 

 

 

 

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, 2019, was 7,729,006.


 

 

 

 

 

2


 

Table of Contents

 

STATEMENT ON FORWARD LOOKING INFORMATION

 

4

PART I – FINANCIAL INFORMATION

 

6

 

Item 1.

Financial Statements (Unaudited).

 

6

 

Item 2.

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

 

22

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

32

 

Item 4.

Controls and Procedures.

 

32

PART II – OTHER INFORMATION

 

33

 

Item 1.

Legal Proceedings.

 

33

 

Item 1A.

Risk Factors.

 

33

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

33

 

Item 3.

Defaults Upon Senior Securities.

 

33

 

Item 4.

Mine Safety Disclosures.

 

33

 

Item 5.

Other Information.

 

33

 

Item 6.

Exhibits.

 

33

Exhibit Index

 

34

SIGNATURES

 

35

 

3


 

STATEMENT ON FORWARD LOOKING INFORMATION

Certain information presented in this report may contain “forward-looking statements” within the meaning of the federal securities laws including, but not limited to, the Private Securities Litigation Reform Act of 1995. 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,” “plans,” “intends,” “expects,” “estimates,” “may,” “will,” “should,” or “anticipates” or the negative of such terms or other comparable terminology, or by discussions of strategy. All forward-looking statements by the Company involve known and unknown risks, uncertainties and other factors, many of which are beyond the control of the Company, which may cause the Company’s actual results to be materially different from those expressed or implied by such statements. 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. Except as required by law, 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.

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 report on Form 10-K and in our other filings with the Securities and Exchange Commission (the “SEC”). 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 properties, 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 properties and other storage alternatives;

 

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

 

risks related to our development of new properties 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, including the acquisition of the West Henrietta Property;

4


 

 

general volatility of the securities markets in which we participate;

 

changes in the value of our assets;

 

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;

 

fiscal policies or inaction at the U.S. federal government level, which may lead to federal government shutdowns or negative impacts on the U.S economy;

 

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.

 

5


 

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

GLOBAL SELF STORAGE, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

September 30, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Real estate assets, net

 

$

53,233,742

 

 

$

53,811,737

 

Cash and cash equivalents

 

 

1,116,000

 

 

 

1,526,203

 

Restricted cash

 

 

244,059

 

 

 

186,063

 

Investments in securities

 

 

1,922,709

 

 

 

1,567,607

 

Accounts receivable

 

 

102,083

 

 

 

67,604

 

Prepaid expenses and other assets

 

 

457,029

 

 

 

263,767

 

Line of credit issuance costs, net

 

 

351,701

 

 

 

471,196

 

Goodwill

 

 

694,121

 

 

 

694,121

 

Total assets

 

$

58,121,444

 

 

$

58,588,298

 

Liabilities and equity

 

 

 

 

 

 

 

 

Note payable, net

 

$

18,949,101

 

 

$

19,269,250

 

Accounts payable and accrued expenses

 

 

2,385,332

 

 

 

2,113,172

 

Line of credit borrowing

 

 

380,000

 

 

 

 

Total liabilities

 

 

21,714,433

 

 

 

21,382,422

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 50,000,000 shares authorized, no shares outstanding

 

 

 

 

 

 

Common stock, $0.01 par value: 450,000,000 shares authorized, 7,729,006 and 7,692,624 issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

77,290

 

 

 

76,926

 

Additional paid in capital

 

 

34,096,859

 

 

 

33,961,903

 

Retained earnings

 

 

2,232,862

 

 

 

3,167,047

 

Total equity

 

 

36,407,011

 

 

 

37,205,876

 

Total liabilities and equity

 

$

58,121,444

 

 

$

58,588,298

 

 

 

See notes to unaudited consolidated financial statements.

 

 

6


 

GLOBAL SELF STORAGE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

2,115,053

 

 

$

1,988,133

 

 

$

6,231,190

 

 

$

5,844,286

 

Other property related income

 

 

72,194

 

 

 

70,020

 

 

 

211,255

 

 

 

195,482

 

Total revenues

 

 

2,187,247

 

 

 

2,058,153

 

 

 

6,442,445

 

 

 

6,039,768

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operations

 

 

869,231

 

 

 

785,795

 

 

 

2,706,109

 

 

 

2,459,160

 

General and administrative

 

 

533,418

 

 

 

436,335

 

 

 

1,644,057

 

 

 

1,358,088

 

Depreciation and amortization

 

 

351,711

 

 

 

349,507

 

 

 

1,056,087

 

 

 

1,047,553

 

Business development

 

 

72,691

 

 

 

15,000

 

 

 

95,985

 

 

 

25,000

 

Total expenses

 

 

1,827,051

 

 

 

1,586,637

 

 

 

5,502,238

 

 

 

4,889,801

 

Operating income

 

 

360,196

 

 

 

471,516

 

 

 

940,207

 

 

 

1,149,967

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend and interest income

 

 

17,180

 

 

 

17,665

 

 

 

51,826

 

 

 

58,790

 

Unrealized gain (loss) on marketable equity securities

 

 

127,820

 

 

 

(180,021

)

 

 

355,102

 

 

 

(4,579

)

Interest expense

 

 

(255,963

)

 

 

(219,792

)

 

 

(773,234

)

 

 

(660,209

)

Total other income (expense), net

 

 

(110,963

)

 

 

(382,148

)

 

 

(366,306

)

 

 

(605,998

)

Net income

 

$

249,233

 

 

$

89,368

 

 

$

573,901

 

 

$

543,969

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

0.01

 

 

$

0.08

 

 

$

0.07

 

Diluted

 

$

0.03

 

 

$

0.01

 

 

$

0.08

 

 

$

0.07

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,646,875

 

 

 

7,623,182

 

 

 

7,639,588

 

 

 

7,620,747

 

Diluted

 

 

7,652,257

 

 

 

7,626,286

 

 

 

7,640,874

 

 

 

7,621,769

 

 

See notes to unaudited consolidated financial statements.

 

 

 

 

 

7


 

GLOBAL SELF STORAGE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

249,233

 

 

$

89,368

 

 

$

573,901

 

 

$

543,969

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

249,233

 

 

$

89,368

 

 

$

573,901

 

 

$

543,969

 

 

See notes to unaudited consolidated financial statements.

8


 

GLOBAL SELF STORAGE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid in

 

 

Retained

 

 

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Earnings

 

 

Equity

 

Balances at December 31, 2018

 

 

7,692,624

 

 

$

76,926

 

 

$

33,961,903

 

 

$

3,167,047

 

 

$

37,205,876

 

Restricted stock grants issued

 

 

41,343

 

 

 

414

 

 

 

(414

)

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

54,160

 

 

 

 

 

54,160

 

Net income

 

 

 

 

 

 

 

 

187,823

 

 

 

187,823

 

Dividends

 

 

 

 

 

 

 

 

(503,294

)

 

 

(503,294

)

Balances at March 31, 2019

 

 

7,733,967

 

 

 

77,340

 

 

 

34,015,649

 

 

 

2,851,576

 

 

 

36,944,565

 

Restricted stock grant forfeitures

 

 

(4,637

)

 

 

(47

)

 

 

47

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

51,730

 

 

 

 

 

51,730

 

Net income

 

 

 

 

 

 

 

 

136,845

 

 

 

136,845

 

Dividends

 

 

 

 

 

 

 

 

(502,407

)

 

 

(502,407

)

Balances at June 30, 2019

 

 

7,729,330

 

 

 

77,293

 

 

 

34,067,426

 

 

 

2,486,014

 

 

 

36,630,733

 

Restricted stock grant forfeitures

 

 

(324

)

 

 

(3

)

 

 

3

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

29,430

 

 

 

 

 

29,430

 

Net income

 

 

 

 

 

 

 

 

249,233

 

 

 

249,233

 

Dividends

 

 

 

 

 

 

 

 

(502,385

)

 

 

(502,385

)

Balances at September 30, 2019

 

 

7,729,006

 

 

$

77,290

 

 

$

34,096,859

 

 

$

2,232,862

 

 

$

36,407,011

 

 

See notes to unaudited consolidated financial statements.

 

 

9


 

GLOBAL SELF STORAGE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid in

 

 

Comprehensive

 

 

Retained

 

 

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Income

 

 

Earnings

 

 

Equity

 

Balances at December 31, 2017

 

 

7,619,469

 

 

$

76,195

 

 

$

33,881,863

 

 

$

796,603

 

 

$

3,746,323

 

 

$

38,500,984

 

Adjustment from financial instruments update ASU 2016-01

 

 

 

 

 

 

 

 

(796,603

)

 

 

796,603

 

 

 

Restricted stock grants issued

 

 

73,155

 

 

 

731

 

 

 

(731

)

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

884

 

 

 

 

 

 

 

884

 

Net income

 

 

 

 

 

 

 

 

 

 

59,126

 

 

 

59,126

 

Dividends

 

 

 

 

 

 

 

 

 

 

(495,266

)

 

 

(495,266

)

Balances at March 31, 2018

 

 

7,692,624

 

 

 

76,926

 

 

 

33,882,016

 

 

 

 

 

4,106,786

 

 

 

38,065,728

 

Restricted stock grant forfeitures

 

 

 

 

 

 

26,428

 

 

 

 

 

 

 

26,428

 

Net income

 

 

 

 

 

 

 

 

 

 

395,475

 

 

 

395,475

 

Dividends

 

 

 

 

 

 

 

 

 

 

(500,020

)

 

 

(500,020

)

Balances at June 30, 2018

 

 

7,692,624

 

 

 

76,926

 

 

 

33,908,444

 

 

 

 

 

4,002,241

 

 

 

37,987,611

 

Stock-based compensation

 

 

 

 

 

 

26,729

 

 

 

 

 

 

 

26,729

 

Net income

 

 

 

 

 

 

 

 

 

 

89,368

 

 

 

89,368

 

Dividends

 

 

 

 

 

 

 

 

 

 

(500,021

)

 

 

(500,021

)

Balances at September 30, 2018

 

 

7,692,624

 

 

$

76,926

 

 

$

33,935,173

 

 

$

 

 

$

3,591,588

 

 

$

37,603,687

 

 

10


 

GLOBAL SELF STORAGE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

573,901

 

 

$

543,969

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,056,087

 

 

 

1,047,553

 

Unrealized gain on marketable equity securities

 

 

(355,102

)

 

 

4,579

 

Amortization of loan procurement costs

 

 

150,708

 

 

 

31,806

 

Stock-based compensation

 

 

135,320

 

 

 

54,041

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(34,479

)

 

 

6,823

 

Prepaid expenses and other assets

 

 

(193,262

)

 

 

(186,005

)

Accounts payable and accrued expenses

 

 

265,957

 

 

 

(33,524

)

Net cash provided by operating activities

 

 

1,599,130

 

 

 

1,469,242

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Construction

 

 

(424,382

)

 

 

(74,808

)

Improvements and equipment additions

 

 

(53,710

)

 

 

(36,342

)

Net cash used in investing activities

 

 

(478,092

)

 

 

(111,150

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Principal payments on note payable

 

 

(351,362

)

 

 

(75,797

)

Line of credit borrowing

 

 

380,000

 

 

 

Dividends paid

 

 

(1,501,883

)

 

 

(1,493,354

)

Net cash used in financing activities

 

 

(1,473,245

)

 

 

(1,569,151

)

Net decrease in cash and cash equivalents

 

 

(352,207

)

 

 

(211,059

)

Cash, cash equivalents, and restricted cash, beginning of period

 

 

1,712,266

 

 

 

2,256,415

 

Cash, cash equivalents, and restricted cash, end of period

 

$

1,360,059

 

 

$

2,045,356

 

Supplemental schedule of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

618,344

 

 

$

628,403

 

 

See notes to unaudited consolidated financial statements.

 

 

 

 

 

11


 

GLOBAL SELF STORAGE, INC.

NOTES TO CONSOLIDATED 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”) that owns, operates, manages, acquires, develops and redevelops self storage properties (“stores” or “properties”) in the United States. The Company’s properties 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. On January 19, 2016, 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), and listed its common stock on 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 properties by acquiring stores through its wholly owned subsidiaries. At September 30, 2019, the Company owned and operated eleven self storage properties. 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 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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The consolidated balance sheet as of December 31, 2018 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, 2018.

Reclassifications

Certain amounts from the prior year have been reclassified to conform to current year presentation as described below.

Cash, Cash Equivalents, and Restricted Cash

The Company’s cash is deposited with financial institutions located throughout the United States and at times may exceed federally insured limits. The Company considers all highly liquid investments, which may include money market fund shares, with a maturity of three months or less to be cash equivalents. Restricted cash is comprised of escrowed funds deposited with a bank relating to capital expenditures.

The carrying amount reported on the balance sheet for cash, cash equivalents, and restricted cash approximates fair value.

 

12


 

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. In managements’ opinion, the requirements to maintain these elections are being fulfilled. 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 (2016 – 2018), or is expected to be taken in the Company’s 2019 tax returns.

Legislation, commonly known as the Tax Cuts and Jobs Act (“TCJA”), was signed into law on December 22, 2017. The TCJA makes significant changes to the U.S. federal income tax rates for taxation of individuals and corporations (including REITs), generally effective for taxable years beginning after December 31, 2017.

Marketable Equity Securities

Investments in equity securities that have readily determinable fair values are accounted for equity securities measured at fair value. Gains or losses from changes in the fair value of equity securities are recorded in net income, until the investment is sold or otherwise disposed. 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.

 

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.

 

Acquisition costs are accounted for in accordance with Accounting Standard Update ("ASU") No. 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business, which was adopted on January 1, 2018 and are generally capitalized. When properties are acquired, the purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on estimated fair values. Allocations to land, building and improvements, and equipment are recorded based upon their respective fair values as estimated by management.

 

In allocating the purchase price for an acquisition, the Company determines whether the acquisition includes intangible assets or liabilities. The Company allocates a portion of the purchase price to an intangible asset attributed to the value of in-place leases. This intangible is generally amortized to expense over the expected remaining term of the respective leases. Substantially all of the leases in place at acquired properties are at market rates, as the majority of the leases are month-to-month contracts. 

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.

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Derivative Financial Instruments

The Company carries all derivative financial instruments on the balance sheet at fair value. Fair value of derivatives is determined by reference to observable prices that are based on inputs not quoted on active markets, but corroborated by market data. The accounting for changes in the fair value of a derivative instrument depends on whether the derivative has been designated and qualifies as part of a hedging relationship. The Company’s use of derivative instruments has been limited to interest cap agreements. The fair values of derivative instruments are included in prepaid expenses and other assets in the accompanying balance sheets. For derivative instruments not designated as cash flow hedges, the unrealized gains and losses are included in interest expense in the accompanying statements of operations. For derivatives designated as cash flow hedges, the effective portion of the changes in the fair value of the derivatives is initially reported in accumulated other comprehensive income (loss) in the Company’s balance sheets and subsequently reclassified into earnings when the hedged transaction affects earnings. The valuation of interest rate cap agreements is determined using widely accepted valuation techniques. This analysis reflects the contractual terms of derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses generally consist of property tax accruals, unearned rental income, and trade payables. At September 30, 2019 and December 31, 2018, accounts payable and accrued expenses included a $900,000 contingent payment in connection with the purchase of a property made in 2016.

Revenue and Expense Recognition

Revenues from properties, 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 and intangible assets consisting of in-place leases for impairment quarterly. 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.

The Company evaluates goodwill for impairment annually and whenever relevant events, circumstances, and other related factors indicate that fair value may be less that carrying amounts. If it is determined that the carrying amount of goodwill exceeds the amount that would be allocated to goodwill if the reporting unit were acquired for estimated fair value, an impairment charge is recorded.

Stock-based Compensation

The measurement and recognition of compensation expense for all stock-based payment awards to employees are based on estimated fair values. Awards granted are valued at fair value and any compensation expense is recognized over the service periods of each award. For awards granted which contain a graded vesting schedule and the only condition for vesting is a service condition, compensation cost is recognized as an expense on a straight-line basis over the requisite service period as if the award was, in substance, a single award. For awards granted for which vesting is subject to a performance condition, compensation cost is recognized over the requisite service period if and when the Company concludes it is probable that the performance condition will be achieved.

 

Loan Procurement Costs

14


 

 

In accordance with ASU No. 2015-03, Loan procurement costs, net are presented as a direct deduction from the carrying amount of the related debt liability. If there is not an associated debt liability recorded on the consolidated balance sheets, loan procurement costs related to the line of credit are recorded as an asset net of accumulated amortization. Loan procurement costs associated with the Company's revolving credit facility are shown as Line of credit issuance costs, net of amortization on the Company's consolidated balance sheets. The costs are amortized over the estimated life of the related debt.

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 August 2017, the FASB issued ASU No. 2017-12 – Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.  The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities.  The standard became effective on January 1, 2019.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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 became effective on January 1, 2019. This standard will not have a material impact on operating results or financial condition, because all lease revenues are derived from month to month self storage leases and the Company does not incur a material amount of lease expense.

 

 

 

 

 

 

3. REAL ESTATE ASSETS

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

 

 

 

September 30, 2019

 

 

December 31, 2018

 

Land

 

$

5,493,814

 

 

$

5,493,814

 

Buildings, improvements, and equipment

 

 

51,933,037

 

 

 

51,879,327

 

Construction in progress

 

 

519,198

 

 

 

94,816

 

Self storage properties

 

 

57,946,049

 

 

 

57,467,957

 

Less: Accumulated depreciation

 

 

(4,712,307

)

 

 

(3,656,220

)

Real estate assets, net

 

$

53,233,742

 

 

$

53,811,737

 

 

The Company began construction on the Millbrook, NY expansion in the second quarter of 2019, which, when completed, will add approximately 16,500 of gross square feet of all-climate-controlled units. As of September 30, 2019, development costs for this project has been capitalized and are reflected in real estate assets, net on the Company’s consolidated balance sheet. We currently anticipate that the construction project will proceed accordingly, with construction completion approximately nine to twelve months from project commencement. However, there is no guarantee that we will complete this project in this timeframe or at all.

 

 

 

 

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4. MARKETABLE EQUITY SECURITIES

Investments in marketable equity securities consisted of the following:

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

September 30, 2019

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Value

 

Investment in marketable equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stocks

 

$

755,487

 

 

$

1,167,222

 

 

$

 

 

$

1,922,709

 

Total investment in marketable equity securities

 

$

755,487

 

 

$

1,167,222

 

 

$

 

 

$

1,922,709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

December 31, 2018

 

Cost Basis

 

 

Gains

 

 

Losses

 

 

Value

 

Investment in marketable equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stocks

 

$

755,487

 

 

$

812,120

 

 

$

 

 

$

1,567,607

 

Total investment in marketable equity securities

 

$

755,487

 

 

$

812,120

 

 

$

 

 

$

1,567,607

 

 

 

 

 

 

5. 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:

 

September 30, 2019

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

$

1,922,709

 

 

$

 

 

$

 

 

$

1,922,709

 

Interest rate cap derivative

 

 

 

 

118

 

 

 

 

 

 

118

 

Total assets at fair value

 

$

1,922,709

 

 

$

118

 

 

$

 

 

$

1,922,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

$

1,567,607

 

 

$

 

 

$

 

 

$

1,567,607

 

Interest rate cap derivative

 

 

 

 

4,889

 

 

 

 

 

 

4,889

 

Total assets at fair value

 

$

1,567,607

 

 

$

4,889

 

 

$

 

 

$

1,572,496

 

 

 

There were no assets transferred from level 1 to level 2 as of September 30, 2019. 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, 2019.

 

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, 2019. The aggregate carrying value of the Company’s debt was $19,838,149 as of September 30, 2019. The estimated fair value of the Company’s debt was approximately $20,100,000 as of September 30, 2019. This estimate was based on market interest rates for comparable obligations, general market conditions, and maturity. The Company’s debt is classified as level 2 of the fair value hierarchy.

 

 

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6. DERIVATIVES

The Company’s objective in using an interest rate derivative is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses an interest rate cap to manage interest rate risk. The Company carries the premium paid for the interest rate cap as an asset on the balance sheet at fair value. The change in the unrealized gain or loss of the premium is recorded as an increase or decrease to interest expense.

 

The following table summarizes the terms of the Company’s derivative financial instrument as of September 30, 2019:

 

 

 

 

Notional Amount

 

 

 

 

Effective

 

Maturity

Product

 

September 30, 2019

 

 

December 31, 2018

 

 

Strike

 

Date

 

Date

Cap Agreement

 

$

7,500,000

 

 

$

7,500,000

 

 

3.50% - 4.00%

 

12/24/2018

 

12/20/2021

The counterparty to this arrangement is SMBC Capital Markets. The Company is potentially exposed to credit loss in the event of non-performance by the counterparty. The Company does not anticipate the counterparty to fail to meet its obligations as they become due.

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. The Company recorded amortization expense of $10,342 and $10,588 for the three months ended September 30, 2019 and 2018, respectively, and $31,213 and $31,806 for the nine months ended September 30, 2019 and 2018, respectively.

The carrying value of the Company’s note payable is summarized as follows:

 

Note Payable

 

September 30, 2019

 

 

December 31, 2018

 

Principal balance outstanding

 

$

19,458,149

 

 

$

19,809,511

 

Less: Loan procurement costs, net

 

 

(509,048

)

 

 

(540,261

)

Total note payable, net

 

$

18,949,101

 

 

$

19,269,250

 

 

As of September 30, 2019, the note payable was secured by certain of its stores with an aggregate net book value of approximately $34.3 million.  The following table represents the future principal payment requirements on the note payable as of September 30, 2019:

 

2019

 

$

159,736

 

2020

 

 

492,797