Attached files
| file | filename |
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| EX-31.2 - EX-31.2 - Strategic Storage Growth Trust, Inc. | d140226dex312.htm |
| EX-32.2 - EX-32.2 - Strategic Storage Growth Trust, Inc. | d140226dex322.htm |
| EX-32.1 - EX-32.1 - Strategic Storage Growth Trust, Inc. | d140226dex321.htm |
| EX-31.1 - EX-31.1 - Strategic Storage Growth Trust, Inc. | d140226dex311.htm |
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2015
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: 333-193480
Strategic Storage Growth Trust, Inc.
(Exact name of Registrant as specified in its charter)
| Maryland | 46-2335760 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
111 Corporate Drive, Suite 120, Ladera Ranch,
California 92694
(Address of principal executive offices)
(877) 872-1031
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Name of Each Exchange on Which Registered | |
| None | None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 x 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 x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment of this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | |||
| Non-Accelerated Filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There is currently no established public market for the registrant’s shares of common stock. Based on the $10.00 offering price of the Class A shares and the $9.47 offering price of Class T shares in effect on June 30, 2015, the aggregate market value of the stock held by non-affiliates of the registrant on such date was $8,834,660.
As of March 18, 2016, there were 3,560,524 outstanding shares of Class A common stock and 89,225 outstanding shares of Class T common stock of the registrant.
Documents Incorporated by Reference:
The registrant incorporates by reference in Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K portions of its Definitive Proxy Statement for the 2016 Annual Meeting of Stockholders.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K of Strategic Storage Growth Trust, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, including known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “seek,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission. We cannot guarantee the accuracy of any such forward-looking statements contained in this Form 10-K, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Any such forward-looking statements are subject to risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to realize the plans, strategies and prospects contemplated by such forward-looking statements, including our ability to generate positive cash flow from operations and provide distributions to stockholders, and our ability to find suitable investment properties, may be significantly hindered.
For further information regarding risks and uncertainties associated with our business, and important factors that could cause our actual results to vary materially from those expressed or implied in such forward-looking statements, please refer to the factors listed and described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Risk Factors” sections of the documents we file from time to time with the U.S. Securities and Exchange Commission, including, but not limited to, this report and our quarterly reports on Form 10-Q, copies of which may be obtained from our website at www.strategicreit.com.
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PART I
| ITEM 1. | BUSINESS |
Overview
Strategic Storage Growth Trust, Inc. was formed on March 12, 2013 under the Maryland General Corporation Law for the purpose of engaging in the business of investing in self storage facilities and related self storage real estate investments. Our year end is December 31. As used in this report, “we,” “us,” “our,” and “Company” refer to Strategic Storage Growth Trust, Inc. and each of our subsidiaries.
Strategic Storage Holdings, LLC, a Delaware limited liability company (“SSH”), was the sponsor of our Private Offering (as defined below) through August 31, 2014. Effective August 31, 2014, SmartStop Self Storage, Inc. (“SmartStop”), formerly known as Strategic Storage Trust, Inc., entered into a series of transactions, agreements and amendments to its existing agreements and arrangements (such agreements and amendments hereinafter referred to collectively as the “Self Administration and Investment Management Transaction”) with SSH and its affiliates, pursuant to which, effective August 31, 2014, SmartStop acquired the self storage advisory, asset management, property management and investment management businesses of SSH including SSH’s sole membership interest in SmartStop Asset Management, LLC (formerly Strategic Storage Realty Group, LLC), which owns 97.5% of the economic interests (and 100% of the voting membership interests) of SS Growth Advisor, LLC, a Delaware limited liability company (our “Advisor”) and owns 100% of SS Growth Property Management, LLC, a Delaware limited liability company (our “Property Manager”).
On October 1, 2015, SmartStop and Extra Space Storage Inc. (“Extra Space”), along with subsidiaries of each of SmartStop and Extra Space, closed on a merger transaction (the “Merger”) in which SmartStop was acquired by Extra Space for $13.75 per share in cash, representing an enterprise value of approximately $1.4 billion. At the closing of the Merger, SmartStop Asset Management, LLC, the owner of our Property Manager and majority and sole voting member of our Advisor, was sold to an entity controlled by H. Michael Schwartz, our Chairman of the Board of Directors, Chief Executive Officer and President, and became our sponsor (our “Sponsor”). The former executive management team of SmartStop continues to serve as the executive management team for our Sponsor. In addition, our management team remains the same, as well as the management team of our Advisor and Property Manager.
We have no employees. Our Advisor, a Delaware limited liability company, was formed on March 12, 2013. Our Advisor is responsible for managing our affairs on a day-to-day basis and identifying and making acquisitions and investments on our behalf under the terms of the advisory agreement we have with our Advisor (our “Advisory Agreement”). The officers of our Advisor are also officers of us and our Sponsor.
On May 31, 2013, our Advisor purchased 100 shares of our common stock for $1,000 and became our initial stockholder. Our Second Articles of Amendment and Restatement, as amended, authorize 350,000,000 shares of Class A common stock, $0.001 par value per share (the “Class A Shares”) and 350,000,000 shares of Class T common stock, $0.001 par value per share (the “Class T Shares”) and 200,000,000 shares of preferred stock with a par value of $0.001. On June 17, 2013, we commenced a private placement offering to accredited investors only for a maximum of $109.5 million in shares of common stock, including shares being offered pursuant to our distribution reinvestment plan (the “Private Offering”). On May 23, 2014, we satisfied the minimum offering requirements of $1 million from our Private Offering and commenced formal operations. We terminated the Private Offering on January 16, 2015. We raised gross offering proceeds of approximately $7.8 million from the issuance of approximately 830,000 shares pursuant to the Private Offering.
On January 20, 2015, we commenced a public offering of a maximum of $1,000,000,000 in common shares for sale to the public (the “Primary Offering”) and $95,000,000 in common shares for sale pursuant to our distribution reinvestment plan (collectively, the “Public Offering,” or the “Offering”). On September 28, 2015, we revised our Primary Offering and are now offering two classes of shares of common stock: Class A Shares and Class T Shares. As of December 31, 2015, we had sold approximately 2.6 million Class A Shares and approximately 20,000 Class T Shares in our Public and Private Offerings for gross proceeds of approximately $25.8 million and approximately $0.2 million, respectively. We intend to invest the net proceeds from our offerings primarily in opportunistic self storage facilities, which may include facilities to be developed, currently under development or in lease-up and self storage facilities in need of expansion, redevelopment or repositioning.
Our operating partnership, SS Growth Operating Partnership, L.P., a Delaware limited partnership (our “Operating Partnership”), was formed on March 13, 2013. During 2013, our Advisor purchased limited partnership interests in our Operating Partnership for $201,000 and on May 31, 2013, we contributed the initial $1,000 capital contribution we received to our Operating Partnership in exchange for the general partner interest. Our Operating Partnership owns, directly or
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indirectly through one or more special purpose entities, all of the self storage properties that we acquire. As of December 31, 2015, we owned approximately 99.25% of the common units of limited partnership interests of our Operating Partnership. The remaining approximately 0.75% of the common units are owned by our Advisor. As of December 31, 2015, our Operating Partnership had issued and outstanding approximately 638,463 Series A Cumulative Redeemable Preferred Units (the “Preferred Units”) to SSTI Preferred Investor, LLC (the “Preferred Investor”), a wholly-owned subsidiary of SmartStop Self Storage Operating Partnership, L.P., the former operating partnership of SmartStop, in exchange for an investment in our Operating Partnership of approximately $16.0 million. Such Preferred Units are now owned by Extra Space subsequent to the Merger. As the sole general partner of our Operating Partnership, we have the exclusive power to manage and conduct the business of our Operating Partnership. We will conduct certain activities through our taxable REIT subsidiary, SS Growth TRS, Inc., a Delaware corporation (the “TRS”) which was formed on March 14, 2013, and is a wholly owned subsidiary of our Operating Partnership.
Our Property Manager was formed on March 12, 2013 to manage our properties. Our Property Manager derives substantially all of its income from the property management services it performs for us. At the closing of the Merger, we entered into new property management agreements with our Property Manager and our Property Manager entered into sub-property management agreements with Extra Space for the management of our properties. Furthermore, Extra Space acquired the rights to the “SmartStop® Self Storage” brand in the United States through the Merger and we can no longer utilize this brand in the United States. The properties we own were re-branded under the Extra Space name subsequent to the Merger. However, any properties owned or acquired in Canada will be managed by a subsidiary of our Sponsor and will continue to be branded using the SmartStop® Self Storage brand.
Our dealer manager is Select Capital Corporation, a California corporation (our “Dealer Manager”). Our Dealer Manager marketed our shares in our Private Offering and is responsible for marketing our shares offered pursuant to our Public Offering. Our president owned, through a wholly-owned limited liability company, a 15% non-voting equity interest in our Dealer Manager through August 31, 2014. Effective August 31, 2014, SmartStop indirectly owned such 15% non-voting equity interest in our Dealer Manager, pursuant to the Self Administration and Investment Management Transaction. Effective October 1, 2015, in connection with the Merger, the 15% non-voting equity interest in our Dealer Manager is now owned by our Sponsor. An affiliate of our Dealer Manager continues to own a 2.5% non-voting membership interest in our Advisor.
As we accept subscriptions for shares of our common stock, we transfer substantially all of the net offering proceeds to our Operating Partnership as capital contributions in exchange for additional units of interest in our Operating Partnership. However, we are deemed to have made capital contributions in the amount of gross proceeds received from investors, and our Operating Partnership is deemed to have simultaneously paid the sales commissions and other costs associated with the Offering. In addition, our Operating Partnership is structured to make distributions with respect to limited partnership units that will be equivalent to the distributions made to holders of common stock. Finally, a limited partner in our Operating Partnership may later exchange his or her limited partnership units in our Operating Partnership for shares of our common stock at any time after one year following the date of issuance of their limited partnership units, subject to certain restrictions outlined in our Operating Partnership’s limited partnership agreement (the “Operating Partnership Agreement”). Our Advisor is prohibited from exchanging or otherwise transferring its limited partnership units so long as it is acting as our Advisor pursuant to our Advisory Agreement.
As of December 31, 2015, we owned 12 self storage facilities located in six states (California, Colorado, Florida, Illinois, Nevada and Texas) comprising approximately 8,020 units and approximately 896,500 rentable square feet.
Industry Summary
“Self storage” refers to properties that offer do-it-yourself, month-to-month storage unit rental for personal or business use. Self storage offers a cost-effective and flexible storage alternative. Customers rent fully-enclosed spaces that can vary in size according to their specific needs. Customers typically have access to their storage units from 6:00AM – 10:00PM (365 days per year), and some of our facilities provide 24-hour access. Customers have responsibility for moving their items into and out of their units. Self storage unit sizes typically range from five feet by five feet to 10 feet by 30 feet.
Self storage provides a convenient way for individuals and businesses to store their possessions, whether due to a life change or simply because of a need for extra storage space. According to the 2016 Self Storage Almanac, self storage facilities generally have a customer mix of approximately 70% residential, 18% commercial, 6% military and 6% students. The mix of residential customers using a self storage property is determined by a property’s local demographics and often includes people who are looking to downsize their living space or who are not yet settled in a large home. The items that residential customers place in self storage properties range from cars, boats and recreational vehicles to furniture, household items and appliances. Commercial customers tend to include small business owners who require easy and frequent access to
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their goods, records or extra inventory, or storage for seasonal goods. Self storage properties provide an accessible storage alternative at a relatively low cost. Properties generally have on-site managers who supervise and run the day-to-day operations, providing customers with assistance as needed.
The six key demand drivers of self storage are: (1) population growth; (2) percentage of renter-occupied housing units; (3) average household size; (4) average household income; (5) supply constraints; and (6) economic growth. Customers choose a self storage property based largely on the convenience of the site to their home or business. Therefore, high-density, high-traffic population centers are ideal locations for a self storage property. A property’s perceived security and the general professionalism of the site managers and staff are also contributing factors to a site’s ability to secure rentals. Although most self storage properties are leased to customers on a month-to-month basis, customers tend to continue their leases for extended periods of time. However, there are seasonal fluctuations in occupancy rates for self storage properties. Generally, there is increased leasing activity at self storage properties during the late spring and early summer months due to the higher number of people who relocate during this period.
As population densities have increased in the U.S., there has been an increase in self storage awareness and development. According to the Self Storage Association’s Self Storage Industry Fact Sheet (July 2015):
| • | at year-end 1984 there were 6,601 facilities with 289.7 million square feet of rentable self storage in the U.S. At year-end 2014 there were approximately 48,500 “primary” self storage facilities (where self storage is the primary source of revenue) in the U.S. representing approximately 2.5 billion square feet; |
| • | as of Q2 2015 there were approximately 60,000 self storage facilities worldwide including more than 3,000 self storage facilities in Canada; and |
| • | the self storage industry has been one of the fastest-growing sectors of the United States commercial real estate industry over the period of the last 40 years. |
According to the 2016 Self Storage Almanac, the top 10 self storage companies own approximately 15.0% of the total self storage facilities. The market share of the top 100 self storage companies is approximately 19.0%.
The growth in the industry has created more competition in various geographic regions. This has led to an increased emphasis on site location, property design, innovation and functionality to accommodate local planning and zoning boards and to distinguish a facility from other offerings in the market. This is especially true for new sites slated for high-density population centers.
Self storage operators have placed increased emphasis on offering ancillary products that provide incremental revenues. Moving and packing supplies, such as locks and boxes, and the offering of other services, such as tenant insurance and truck rentals, help to increase revenues. As more sophisticated self storage operators continue to develop innovative products and services such as online rentals, 24-hour accessibility, climate-controlled storage, wine storage, customer-service call center access and after-hours storage, local operators may be increasingly unable to meet higher customer expectations, which could encourage consolidation in the industry.
We expect the “baby boomer” generation to have a major impact on the future of the self storage industry. During the 19-year period from 1946 to 1964, approximately 77 million babies, or “baby boomers,” were born in the U.S. According to the U.S. Census Bureau, “baby boomers” make up nearly 27% of the U.S. population. These “baby boomers” are heading towards retirement age and have accumulated possessions which they wish to retain. As the “baby boomers” move into retirement age and begin to downsize their households, we believe there will be a great need for self storage facilities to assist them in protecting and housing these possessions for prolonged periods of time.
We also believe that the self storage industry possesses attractive characteristics not found in other commercial real estate sectors, including the following:
| • | no reliance on a “single large customer” whose vacating can have a devastating impact on rental revenue; |
| • | no leasing commissions and/or tenant improvements; |
| • | relatively low capital expenditures; |
| • | brand names can be developed at local, regional and even national levels; |
| • | opportunity for a great deal of geographic diversification, which could enhance the stability and predictability of cash flows; and |
| • | the lowest loan default rate of any commercial property type. |
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Business Overview
Unlike many other REITs and real estate companies, we are an operating business. We develop, acquire, own, operate and manage self storage facilities. Our self storage facilities offer inexpensive, easily accessible, enclosed storage units or parking spaces to residential and commercial users on a month-to-month basis. Most of our facilities are fenced with computerized gates and well lighted. Many of our properties are single-story, thereby providing customers with the convenience of direct vehicle access to their storage units. At certain facilities, we offer climate controlled units that offer heating in the winter and cooling in the summer. Many of our facilities also offer outside vehicle, boat and recreational vehicle storage areas. Our facilities are generally constructed of masonry or steel walls resting on concrete slabs and have standing seam metal, shingle, or tar and gravel roofs. Customers typically have access to their storage units from 6:00 AM – 10:00 PM, and some of our facilities provide 24-hour access. Individual storage units are secured by a lock furnished by the customer to provide the customer with control of access to the space.
As an operating business, self storage requires a much greater focus on strategic planning and tactical operation plans. As we grow our portfolio of self storage facilities, we will be able to consolidate and streamline a number of aspects of our operations through economies of scale. For example, we expect that size and geographic diversification, as well as institution of a blanket property and casualty insurance program over all properties managed by our Property Manager and sub-property manager nationwide, will reduce our total insurance costs per property. As we acquire facilities, increased diversification will further mitigate against risk and reduce the cost of insurance per property. To the extent we can acquire facilities in clusters within geographic regions, we will see property management efficiencies resulting in reduction of personnel and other administrative costs.
Investment Objectives
Overview
We have invested and will continue to invest a substantial amount of the net proceeds of the Offering in opportunistic self storage facilities and related self storage real estate investments. We may also use net offering proceeds to pay down debt or make distributions if our cash flows from operations are insufficient. We may use an unlimited amount from any source to pay our distributions. Our investment objectives, strategy and policies may be amended or changed at any time by our board of directors. Although we have no plans at this time to change any of our investment objectives, our board of directors may change any and all such investment objectives, including our focus on self storage facilities, if our board believes such changes are in the best interests of our stockholders. In addition, we may invest in real estate properties other than self storage facilities if our board deems such investments to be in the best interests of our stockholders. We cannot assure our stockholders that our policies or investment objectives will be attained or that the value of our common stock will not decrease.
Primary Investment Objectives
Our primary investment objectives are to:
| • | invest in opportunistic self storage properties in a manner that allows us to qualify as a REIT for federal income tax purposes; |
| • | achieve appreciation in the value of our properties and, hence, appreciation in stockholder value; |
| • | preserve and protect our stockholders’ invested capital; and |
| • | grow net cash flow from operations in order to provide sustainable cash distributions to our stockholders over the long-term. |
We cannot assure our stockholders that we will attain these primary investment objectives.
Liquidity Events
Subject to then-existing market conditions and the sole discretion of our board of directors, we intend to seek one or more of the following liquidity events within three to five years after completion of our Public Offering:
| • | merge, reorganize or otherwise transfer our company or its assets to another entity with listed securities; |
| • | commence the sale of all of our properties and liquidate our company; |
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| • | list our shares on a national securities exchange; or |
| • | otherwise create a liquidity event for our stockholders. |
However, we cannot assure our stockholders that we will achieve one or more of the above-described liquidity events within the time frame contemplated or at all. This time frame represents our best faith estimate of the time necessary to build a portfolio sufficient enough to effectuate one of the liquidity events listed above. Our charter does not require us to pursue a liquidity transaction at any time. Our board of directors has the sole discretion to continue operations beyond five years after completion of the Public Offering if it deems such continuation to be in the best interests of our stockholders. Even if we do accomplish one or more of these liquidity events, we cannot guarantee that a public market will develop for the securities listed or that such securities will trade at a price higher than what was paid for shares in our Offering. At the time it becomes necessary for our board of directors to determine which liquidity event, if any, is in our best interest and the best interests of our stockholders, we expect that the board will take all relevant factors at that time into consideration when making a liquidity event decision. We expect that the board will consider various factors including, but not limited to, costs and expenses related to each possible liquidity event and the potential subordinated distributions payable to our Advisor.
Our Self Storage Acquisition Strategy
Opportunistic Investment Strategy
We use the net proceeds we raise in our Public Offering to primarily invest in opportunistic self storage properties with the primary objective of achieving appreciation in the value of our properties and, hence, appreciation in stockholder value. We seek to achieve our objectives by primarily investing in the following types of self storage properties:
| • | self storage facilities to be developed, currently under development or in lease-up; |
| • | self storage facilities in need of expansion, redevelopment or repositioning; and |
| • | other opportunistic self storage investments. |
We may also invest in self storage facilities internationally, as well as mortgage loans and other real estate-related investments. In executing our opportunistic investment strategy, we will seek to invest in assets that we believe may be developed, repositioned or redeveloped so that they will reach an optimum value within three to five years from the termination of our Offering. We may acquire properties with lower quality construction or management or low occupancy rates and reposition them by seeking to improve the property, management quality and occupancy rates and thereby increase lease revenues and overall property value. We may also acquire properties in markets that are depressed or overbuilt with the anticipation that, within our targeted holding period, the markets will recover and favorably impact the value of these properties. We may also acquire properties from sellers who are distressed or face time-sensitive deadlines with the expectation that we can achieve better success with the properties. Many of the markets where we will acquire properties may have high growth potential in lease rates and sale prices.
Self Storage Focus
“Self storage” refers to properties that offer do-it-yourself, month-to-month storage unit rental for personal or business use. According to the Self Storage Association’s Self Storage Industry Fact Sheet (July 2015), the self storage industry in the United States consists of approximately 2.5 billion rentable square feet at approximately 48,500 “primary” facilities (where self storage is the primary source of revenue). The self storage industry is highly fragmented, comprised mainly of local operators and a few national owners and operators, including, we believe, only four publicly traded self storage REITs. As a result of the track record of our Sponsor and its affiliates in investing in self storage facilities, our experienced management team and the fragmented nature of the self storage industry, we believe there is a significant opportunity for us to achieve market penetration in our markets.
We intend to focus on pursuing investments in self storage facilities and related self storage real estate investments in markets with varying economic and demographic characteristics, including large urban cities, densely populated suburban cities and smaller rural cities, as long as the property meets our acquisition criteria described below under “— General Acquisition and Investment Policies.” We also intend to expand and develop certain facilities we purchase in order to capitalize on underutilization and excess demand. The development of certain facilities we purchase may include an expansion of the self storage units or the services and ancillary products offered as well as making units available for office space. Future investments, however, will not be limited to any geographic area, to a type of facility or to a specified percentage of our total assets. We will strategically invest in specific domestic or foreign markets when opportunities that meet our investment criteria are available. In general, when evaluating potential acquisitions of self storage facilities, the primary factor we will consider is the property’s potential for achieving appreciation in value.
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General Acquisition and Investment Policies
While we intend to focus our investment strategy on self storage facilities and related self storage real estate investments, we may invest in other storage-related investments such as storage facilities for automobiles, recreation vehicles and boats. We may additionally invest in other types of commercial real estate properties if our board of directors deems appropriate; however, we have no current intention of investing more than 20% of the net proceeds of our Offering in such other commercial real estate properties. We will seek to make investments that will satisfy the primary investment objective of achieving appreciation in the value of our properties and, hence, appreciation in stockholder value.
Our Advisor has substantial discretion with respect to the selection of specific properties. However, each acquisition will be approved by our board of directors. The consideration paid for a property will ordinarily be based on the fair market value of the property as determined by a majority of our board of directors. In selecting a potential property for acquisition, we and our Advisor will consider a number of factors, including, but not limited to, the following:
| • | projected demand for self storage facilities in the area; |
| • | a property’s geographic location and type; |
| • | a property’s physical location in relation to population density, traffic counts and access; |
| • | construction quality and condition; |
| • | potential for capital appreciation; |
| • | proposed purchase price, terms and conditions; |
| • | historical financial performance; |
| • | rental rates and occupancy levels for the property and competing properties in the area; |
| • | potential for rent increases; |
| • | demographics of the area; |
| • | operating expenses being incurred and expected to be incurred, including, but not limited to property taxes and insurance costs; |
| • | potential capital improvements and reserves required to maintain the property; |
| • | potential for expanding the physical layout of the property; |
| • | the potential for the construction of new properties in the area; |
| • | treatment under applicable federal, state and local tax and other laws and regulations; |
| • | evaluation of title and impediments, if any, to obtaining satisfactory title insurance; and |
| • | evaluation of any reasonably ascertainable risks such as environmental contamination. |
There is no limitation on the number, size or type of properties that we may acquire or on the percentage of net Offering proceeds that may be invested in any particular property type or single property. The number and mix of properties will depend upon real estate market conditions and other circumstances existing at the time of acquisition and the amount of proceeds raised in our Offering. In determining whether to purchase a particular property, we may obtain an option on such property. The amount paid for an option, if any, is normally surrendered if the property is not purchased and may or may not be credited against the purchase price if the property is ultimately purchased.
Our Borrowing Strategy and Policies
Although we intend to use moderate leverage (between 55% and 65% based on loan to purchase price) to make our investments during our Offering, at certain times during our Offering, our debt leverage levels may be temporarily higher as we acquire properties in advance of funds being raised in our Offering. Our board of directors will regularly monitor our investment pipeline in relation to our projected fundraising efforts and otherwise evaluate market conditions related to our debt leverage ratios throughout our Offering.
We may incur indebtedness in the form of bank borrowings, purchase money obligations to the sellers of properties and publicly- or privately-placed debt instruments or financing from institutional investors or other lenders. We may obtain a credit facility or a separate loan for certain acquisitions. Our indebtedness may be unsecured or may be secured by mortgages or other interests in our properties. We may use borrowing proceeds to finance acquisitions of new properties, to pay for capital improvements, repairs or buildouts, to refinance existing indebtedness, to pay distributions, to fund redemptions of our shares or to provide working capital.
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There is no limitation on the amount we can borrow for the purchase of any property. Our aggregate borrowings, secured and unsecured, must be reasonable in relation to our net assets and must be reviewed by our board of directors at least quarterly. Our charter limits our borrowing to 300% of our net assets, as defined, (approximately 75% of the cost basis of our assets) unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders in our next quarterly report, with a justification for such excess.
We may borrow funds from our Advisor or its affiliates only if such loan is approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction as fair, competitive, commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties under the circumstances.
Except as set forth in our charter regarding debt limits, we may re-evaluate and change our debt strategy and policies in the future without a stockholder vote. Factors that we could consider when re-evaluating or changing our debt strategy and policies include then-current economic and market conditions, the relative cost of debt and equity capital, any acquisition opportunities, the ability of our properties to generate sufficient cash flow to cover debt service requirements and other similar factors. Further, we may increase or decrease our ratio of debt to equity in connection with any change of our borrowing policies.
Acquisition Structure
Although we are not limited as to the form our investments may take, our investments in real estate will generally constitute acquiring fee title or interests in joint ventures or similar entities that own and operate real estate. We may also enter into the following types of leases relating to real property:
| • | a ground lease in which we enter into a long-term lease (generally greater than 30 years) with the owner for use of the property during the term whereby the owner retains title to the land; or |
| • | a master lease in which we enter into a long-term lease (typically 10 years with multiple renewal options) with the owner in which we agree to pay rent to the owner and pay all costs of operating and maintaining the property (a net lease) and typically have an option to purchase the property in the future. |
We make acquisitions of our real estate investments directly or indirectly through our Operating Partnership, SS Growth Operating Partnership, L.P. We will acquire interests in real estate either directly through our Operating Partnership or indirectly through limited liability companies or limited partnerships, or through investments in joint ventures.
Conditions to Closing Acquisitions
Generally, we will not purchase any property unless and until we obtain at least a Phase I environmental assessment and environmental history for each property purchased and we are sufficiently satisfied with the property’s environmental status. In addition, we will generally condition our obligation to close the purchase of any investment on the delivery and verification of certain documents from the seller or other independent professionals, including, but not limited to, where appropriate:
| • | appraisals, property surveys and site audits; |
| • | building plans and specifications, if available; |
| • | soil reports, seismic studies, flood zone studies, if available; |
| • | licenses, permits, maps and governmental approvals; |
| • | historical financial statements and tax statement summaries of the properties; |
| • | proof of marketable title, subject to such liens and encumbrances as are acceptable to us; and |
| • | liability and title insurance policies. |
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Joint Venture Investments
We may acquire some of our properties in joint ventures, some of which may be entered into with affiliates of our Advisor, including Strategic Storage Trust II, Inc. (“SST II”), a public non-traded REIT focused on stabilized self storage properties. We may also enter into joint ventures, general partnerships, co-tenancies and other participations with real estate developers, owners and others for the purpose of owning and leasing real properties. Among other reasons, we may want to acquire properties through a joint venture with third parties or affiliates in order to diversify our portfolio of properties in terms of geographic region or property type or to co-invest with one of our property management partners. Joint ventures may also allow us to acquire an interest in a property without requiring that we fund the entire purchase price. In addition, certain properties may be available to us only through joint ventures. In determining whether to recommend a particular joint venture, our Advisor will evaluate the real property which such joint venture owns or is being formed to own under the same criteria described elsewhere in this report.
We may enter into joint ventures with our Advisor or any affiliate thereof for the acquisition of properties, but only provided that:
| • | a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction approve the transaction as being fair and reasonable to us; and |
| • | the investment by us and the joint venture partner are on substantially the same terms and conditions. |
To the extent possible and if approved by our board of directors, including a majority of our independent directors, we will attempt to obtain a right of first refusal or option to buy if such venture partner elects to sell its interest in the joint venture entity or the property held by the joint venture. In the event that the venture partner were to elect to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the venture partner’s interest in the property held by the joint venture. Entering into joint ventures with affiliates of our Advisor will result in certain conflicts of interest.
Government Regulations
Our business will be subject to many laws and governmental regulations. Changes in these laws and regulations, or their interpretation by agencies and courts, occur frequently.
Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990, or ADA, all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Complying with the ADA requirements could require us to remove access barriers. Failing to comply could result in the imposition of fines by the federal government or an award of damages to private litigants. Although we intend to develop and acquire properties that substantially comply with these requirements, we may incur additional costs to comply with the ADA. In addition, a number of additional federal, state and local laws may require us to modify any properties we purchase, or may restrict further renovations thereof, with respect to access by disabled persons. Additional legislation could impose financial obligations or restrictions with respect to access by disabled persons. Although we believe that these costs will not have a material adverse effect on us, if required changes involve a greater amount of expenditures than we currently anticipate, our ability to make distributions to our stockholders could be adversely affected.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of removing or remediating hazardous or toxic substances. These laws often impose clean-up responsibility and liability without regard to whether the owner or operator was responsible for, or even knew of, the presence of the hazardous or toxic substances. The costs of investigating, removing or remediating these substances may be substantial, and the presence of these substances may adversely affect our ability to rent units or sell the property, or to borrow using the property as collateral, and may expose us to liability resulting from any release of or exposure to these substances. If we arrange for the disposal or treatment of hazardous or toxic substances at another location, we may be liable for the costs of removing or remediating these substances at the disposal or treatment facility, whether or not the facility is owned or operated by us. We may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site that we own or operate. Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances.
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Other Regulations
The properties we develop and acquire will be subject to various federal, state and local regulatory requirements, such as zoning and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We intend to acquire properties that are in material compliance with all such regulatory requirements. However, we cannot make assurances that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by us and could have an adverse effect on our financial condition and results of operations.
Disposition Policies
As of December 31, 2015, we had not disposed of any of our self storage facilities. We generally intend to hold each property we acquire for an extended period. However, we may sell a property at any time if, in our judgment, the sale of the property is in the best interests of our stockholders.
The determination of whether a particular property should be sold or otherwise disposed of will generally be made after consideration of relevant factors, including prevailing economic conditions, other investment opportunities and considerations specific to the condition, value and financial performance of the property. In connection with our sales of properties, we may lend the purchaser all or a portion of the purchase price. In these instances, our taxable income may exceed the cash received in the sale.
We may sell assets to third parties or to affiliates of our Advisor. Our Nominating and Corporate Governance Committee of our board of directors, which is comprised solely of independent directors, must review and approve all transactions between us and our Advisor and its affiliates.
Investment Limitations in Our Charter
Our charter places numerous limitations on us with respect to the manner in which we may invest our funds, most of which are required by various provisions of the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (NASAA REIT Guidelines). Pursuant to the NASAA REIT Guidelines, we will not:
| • | Invest in equity securities unless a majority of our directors, including a majority of our independent directors not otherwise interested in the transaction, approve such investment as being fair, competitive and commercially reasonable. |
| • | Invest in commodities or commodity futures contracts, except for futures contracts when used solely for the purpose of hedging in connection with our ordinary business of investing in real estate assets and mortgages. |
| • | Invest in real estate contracts of sale, otherwise known as land sale contracts, unless the contract is in recordable form and is appropriately recorded in the chain of title. |
| • | Make or invest in mortgage loans unless an appraisal is obtained concerning the underlying property, except for those mortgage loans insured or guaranteed by a government or government agency. In cases where our independent directors determine, and in all cases in which the transaction is with any of our directors or our Advisor and its affiliates, we will obtain an appraisal from an independent appraiser. We will maintain such appraisal in our records for at least five years and it will be available to our stockholders for inspection and duplication. We will also obtain a mortgagee’s or owner’s title insurance policy as to the priority of the mortgage or condition of the title. |
| • | Make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans on such property would exceed an amount equal to 85% of the appraised value of such property, as determined by an appraisal, unless substantial justification exists for exceeding such limit because of the presence of other loan underwriting criteria. |
| • | Make or invest in mortgage loans that are subordinate to any mortgage or equity interest of any of our directors, our Advisor or their respective affiliates. |
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| • | Make investments in unimproved property or indebtedness secured by a deed of trust or mortgage loans on unimproved property in excess of 10% of our total assets. |
| • | Issue equity securities on a deferred payment basis or other similar arrangement. |
| • | Issue debt securities in the absence of adequate cash flow to cover debt service. |
| • | Issue equity securities that are assessable after we have received the consideration for which our board of directors authorized their issuance. |
| • | Issue “redeemable securities” redeemable solely at the option of the holder, which restriction has no effect on our ability to implement our share redemption program. |
| • | Grant warrants or options to purchase shares to our Advisor or its affiliates or to officers or directors affiliated with our Advisor except on the same terms as options or warrants that are sold to the general public. Further, the amount of the options or warrants cannot exceed an amount equal to 10% of outstanding shares on the date of grant of the warrants and options. |
| • | Lend money to our directors, or to our Advisor or its affiliates, except for certain mortgage loans described above. |
Investment Allocation Policy
In the event that an investment opportunity becomes available, our Sponsor will allocate such investment opportunity to us or SST II based on the following factors:
| • | the investment objectives of each program; |
| • | the amount of funds available to each program; |
| • | the financial and investment characteristics of each program, including investment size, potential leverage, transaction structure and anticipated cash flows; |
| • | the strategic location of the investment in relationship to existing properties owned by each program; |
| • | the effect of the investment on the diversification of each program’s investments; and |
| • | the impact of the financial metrics of the investment, such as revenue per square foot, on each program. |
If, after consideration and analysis of these factors, the investment opportunity is suitable for us and SST II, then:
| • | SST II will have priority for stabilized self storage facilities (i.e., properties with occupancy rates greater than 75%); and |
| • | we will have priority for lease-up, development, repositioning and other opportunistic properties. |
In the event all acquisition allocation factors have been exhausted and an investment opportunity remains suitable for both SST II and us, then our Sponsor will offer the investment opportunity to the program that has had the longest period of time elapse since it was offered an investment opportunity. It will be the duty of our board of directors, including the independent directors, to ensure that this method is applied fairly to us. In determining whether or not an investment opportunity is being fairly applied to us, our Advisor, subject to approval by our board of directors, shall examine, among others, the following factors:
| • | the investment objectives and criteria of each program; |
| • | anticipated cash flow of the property to be acquired and the cash requirements of each program; |
| • | effect of the acquisition on diversification of each program’s investments; |
| • | policy of each program relating to leverage of properties; |
| • | income tax effects of the purchase to each program; |
| • | size of the investment; and |
| • | amount of funds available to each program and the length of time such funds have been available for investment. |
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If a subsequent development, such as a delay in the closing of a property or a delay in the construction of a property, causes any such investment, in the opinion of our Advisor, to be more appropriate for a program other than the program that committed to make the investment, our Advisor may determine that another program affiliated with our Advisor or its affiliates will make the investment. Our directors, including our independent directors, have a duty to ensure that the method used by our Advisor for the allocation of the acquisition of properties by two or more affiliated programs seeking to acquire similar types of properties is applied fairly to us.
Changes in Investment Policies and Limitations
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interests of our stockholders. Each determination and the basis therefor is required to be set forth in the applicable meeting minutes. The methods of implementing our investment policies may also vary as new investment techniques are developed. The methods of implementing our investment objectives and policies, except as otherwise provided in our charter, may be altered by a majority of our directors, including a majority of our independent directors, without the approval of our stockholders. The determination by our board of directors that it is no longer in our best interests to continue to be qualified as a REIT shall require the concurrence of two-thirds of the board of directors. Investment policies and limitations specifically set forth in our charter, however, may only be amended by a vote of the stockholders holding a majority of our outstanding shares.
Investments in Mortgage Loans
As of December 31, 2015, we had not invested in any mortgages. While we intend to emphasize equity real estate investments and, hence, operate as what is generally referred to as an “equity REIT,” as opposed to a “mortgage REIT,” we may invest in first or second mortgage loans, mezzanine loans secured by an interest in the entity owning the real estate or other similar real estate loans consistent with our REIT status. We may make such loans to developers in connection with construction and redevelopment of self storage facilities. Such mortgages may or may not be insured or guaranteed by the Federal Housing Administration, the Veterans Benefits Administration or another third party. We may also invest in participating or convertible mortgages if our directors conclude that we and our stockholders may benefit from the cash flow or any appreciation in the value of the subject property. Such mortgages are similar to equity participation.
Investment Company Act of 1940 and Certain Other Policies
We intend to operate in such a manner that we will not be subject to regulation under the Investment Company Act of 1940, or the 1940 Act. Our Advisor will continually review our investment activity to attempt to ensure that we do not come within the application of the 1940 Act. Among other things, our Advisor will attempt to monitor the proportion of our portfolio that is placed in various investments so that we do not come within the definition of an “investment company” under the 1940 Act. If at any time the character of our investments could cause us to be deemed as an investment company for purposes of the 1940 Act, we will take all necessary actions to attempt to ensure that we are not deemed to be an “investment company.” In addition, we do not intend to underwrite securities of other issuers or actively trade in loans or other investments.
Subject to the restrictions we must follow in order to qualify to be taxed as a REIT, we may make investments other than as previously described, although we do not currently intend to do so. We have authority to purchase or otherwise reacquire our common shares or any of our other securities. We have no present intention of repurchasing any of our common shares except pursuant to our share redemption program, and we would only take such action in conformity with applicable federal and state laws and the requirements for qualifying as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).
Employees
We have no employees. The employees of our Advisor and its affiliates provide management, acquisition, advisory and certain administrative services for us.
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Competition
The extent of competition in a market area depends significantly on local market conditions. The primary factors upon which competition in the self storage industry is based are location, rental rates, suitability of the property’s design and the manner in which the property is operated and marketed. We believe we will compete successfully on these bases.
Many of our competitors are larger and have substantially greater resources than we do. Such competitors may, among other possible advantages, be capable of paying higher prices for acquisitions and obtaining financing on better terms than us.
Industry Segments
We have internally evaluated all of our properties and interests therein as one industry segment and, accordingly, we do not report segment information.
Geographic Information
As of December 31, 2015, we owned 12 self storage facilities located in six states comprising approximately 8,020 units and approximately 896,500 rentable square feet.
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| ITEM 1A. | RISK FACTORS |
Below are risks and uncertainties that could adversely affect our operations that we believe are material to stockholders. Additional risks and uncertainties not presently known to us or that we do not consider material based on the information currently available to us may also harm our business.
Risks Related to an Investment in Strategic Storage Growth Trust, Inc.
We have limited prior operating history and the prior performance of real estate investment programs sponsored by affiliates of our Sponsor may not be an indication of our future results.
We were incorporated in March 2013 and commenced active business operations on May 23, 2014. As of December 31, 2015, we owned 12 self storage facilities located in six states (California, Colorado, Florida, Illinois, Nevada and Texas).
Stockholders should consider our prospects in light of the risks, uncertainties and difficulties frequently encountered by companies that are, like us, in their early stage of development. To be successful, we must, among other things:
| • | identify and acquire investments that further our investment objectives; |
| • | increase awareness of the “Strategic Storage Growth Trust, Inc.” name within the investment products market; |
| • | expand and maintain our network of participating broker-dealers; |
| • | attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations; |
| • | respond to competition for our targeted real estate properties and other investments as well as for potential investors; and |
| • | continue to build and expand our operational structure to support our business. |
We cannot guarantee that we will succeed in achieving these goals, and our failure to do so could cause our stockholders to lose all or a portion of their investment.
We have incurred a net loss to date and have an accumulated deficit.
We incurred a net loss attributable to common shareholders of approximately $5.5 million for the fiscal year ended December 31, 2015. Our accumulated deficit was approximately $7.3 million as of December 31, 2015.
We have paid, and may continue to pay, distributions from sources other than cash flow from operations; therefore, we will have fewer funds available for the acquisition of properties, and our stockholders’ overall return may be reduced.
In the event we do not have enough cash from operations to fund our distributions, we may borrow, issue additional securities, or sell assets in order to fund the distributions or make the distributions out of net proceeds from our offering. We are not prohibited from undertaking such activities by our charter, bylaws or investment policies, and we may use an unlimited amount from any source to pay our distributions. From commencement of paying cash distributions in November 2015 through December 31, 2015, the payment of cash distributions has been paid from offering proceeds. If we continue to pay distributions from sources other than cash flow from operations, we will have fewer funds available for acquiring properties, which may reduce our stockholders’ overall returns. Additionally, to the extent distributions exceed cash flow from operations, a stockholder’s basis in our stock may be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize a capital gain.
There is currently no public trading market for our shares and there may never be one; therefore, it will be difficult for our stockholders to sell their shares. Our charter does not require us to pursue a liquidity transaction at any time.
There is currently no public market for our shares and there may never be one. Stockholders may not sell their shares unless the buyer meets applicable suitability and minimum purchase standards. Our charter also prohibits the
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ownership by any one individual of more than 9.8% of our stock, unless waived by our board of directors, which may inhibit large investors from desiring to purchase our stockholders’ shares. Moreover, our share redemption program includes numerous restrictions that would limit a stockholder’s ability to sell their shares to us. Our board of directors could choose to amend, suspend or terminate our share redemption program upon 30 days’ notice. Therefore, it may be difficult for a stockholder to sell their shares promptly or at all. If stockholders are able to sell their shares, they will likely have to sell them at a substantial discount to the price they paid for the shares. It also is likely that their shares would not be accepted as the primary collateral for a loan. Our stockholders should purchase the shares only as a long-term investment because of the illiquid nature of the shares.
Our stockholders may be unable to sell their shares because their ability to have their shares redeemed pursuant to our share redemption program is subject to significant restrictions and limitations and if our stockholders are able to sell their shares under the program, our stockholders may not be able to recover the amount of their investment in our shares.
Even though our share redemption program may provide our stockholders with a limited opportunity to sell their shares to us after they have held them for a period of one year, our stockholders should be fully aware that our share redemption program contains significant restrictions and limitations. Further, our board of directors may limit, suspend, terminate or amend any provision of the share redemption program upon 30 days’ notice. Redemption of shares, when requested, will generally be made quarterly. During any calendar year, we will not redeem in excess of 5% of the weighted average number of shares outstanding during the prior calendar year and redemptions will be funded solely from proceeds from our distribution reinvestment plan. Therefore, in making a decision to purchase our shares, our stockholders should not assume that they will be able to sell any of their shares back to us pursuant to our share redemption program at any time or at all.
The purchase price for shares we repurchase under our share redemption program will depend on the length of time our stockholders have held such shares. The purchase price will be as follows: 90% of the redemption amount, as defined, after one year from the purchase date; 95% of the redemption amount after three years from the purchase date; and 100% of the redemption amount after four years from the purchase date. While we are offering shares, the redemption amount equals the amount the stockholder paid for the shares, until the offering price of such shares changes (as described in our share redemption program). Accordingly, our stockholders may receive less by selling their shares back to us than they would receive if our investments were sold for their estimated values and such proceeds were distributed in our liquidation.
We established the offering price on an arbitrary basis; as a result, the actual value of our stockholders’ investment may be substantially less than what our stockholders paid.
Our board of directors arbitrarily determined the selling price of the shares and such price bears no relationship to our book or asset values, or to any other established criteria for valuing issued or outstanding shares. Because the offering price is not based upon any independent valuation, the offering price may not be indicative of the proceeds that our stockholders would receive upon liquidation.
We will be required to disclose an estimated value per share of our common stock prior to, or shortly after, the conclusion of our Offering, and such estimated value per share may be lower than the purchase price our stockholders paid for shares of our common stock in our Offering. Until we provide our first estimated value per share, we will generally use the gross offering price of a share of the common stock in our Offering as the per share estimated value thereof, subject to then-applicable rules and regulations of the Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission (the “SEC”). The estimated value per share may not be an accurate reflection of the fair value of our assets and liabilities and likely will not represent the amount of net proceeds that would result if we were liquidated or dissolved or completed a merger or other sale of our company.
As required by recent amendments to rules promulgated by FINRA, we will be required to disclose an estimated per share value of our shares based on a valuation no later than 150 days following the second anniversary of the date on which we broke escrow in our Offering, although we may determine to provide an estimated per share value based upon a valuation earlier than presently anticipated. If we provide an estimated per share value of our shares based on a valuation prior to the conclusion of our Offering, our board of directors may determine to modify the offering price, including the price at which the shares are offered pursuant to our distribution reinvestment plan, to reflect the estimated value per share. Further, an amendment to NASD Rule 2340 will take effect on April 11, 2016, prior to the anticipated conclusion of our Offering, and if we have not yet disclosed an estimated net asset value per share before the amended rule takes effect, then our stockholders customer account statements will include a value per share that is less than the offering price, because the amendment requires the “value” on the customer account statement to be equal to the offering price less up-front underwriting compensation and certain organization and offering expenses.
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Until the time of our first valuation or until FINRA rules require otherwise, we generally will use the gross offering price of a share of the common stock in our Offering as the estimated per share value thereof. This use of the gross offering price as the estimated per share value is not likely to reflect the proceeds you would receive upon our liquidation or upon the sale of our stockholders’ shares. In addition, this per share valuation method is not designed to arrive at a valuation that is related to any individual or aggregated value estimates or appraisals of the value of our assets.
When determining the estimated value per share, there are currently no SEC, federal and state rules that establish requirements specifying the methodology to employ in determining an estimated value per share; provided, however, that the determination of the estimated value per share must be conducted by, or with the material assistance or confirmation of, a third-party valuation expert or service and must be derived from a methodology that conforms to standard industry practice. After the initial valuation, a valuation will be performed at least annually. The valuations will be estimates and consequently should not be viewed as an accurate reflection of the fair value of our investments nor will they represent the amount of net proceeds that would result from an immediate sale of our assets.
We may be unable to pay or maintain cash distributions or increase distributions over time.
There are many factors that can affect the availability and timing of cash distributions to stockholders. Distributions will be based principally on distribution expectations of our potential investors and cash available from our operations. The amount of cash available for distribution will be affected by many factors, such as the yields on securities of other real estate programs that we invest in and our operating expense levels, as well as many other variables. Actual cash available for distribution may vary substantially from estimates. We cannot assure our stockholders that we will be able to pay or maintain distributions or that distributions will increase over time, nor can we give any assurance that rents from the properties will increase, that the securities we buy will increase in value or provide constant or increased distributions over time, or that future acquisitions of real properties will increase our cash available for distribution to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing the distribution rate to stockholders.
The value of a share of our common stock may be diluted as a result of our stock distributions.
Our board has authorized stock distributions to our stockholders beginning with the second quarter of 2015. While our objective is to acquire assets that appreciate in value, there can be no assurance that assets we acquire will appreciate in value. Furthermore, we are uncertain as to whether we will change our $10.00 per share public offering price during our Primary Offering. Therefore, investors who purchase our shares early in our Primary Offering and receive a stock distribution will receive more shares for the same cash investment as a result of any stock distributions, as compared with later investors. Because they own more shares, upon a sale or liquidation of the company, these early investors will receive more sales proceeds or liquidating distributions relative to their invested capital compared to later investors. Furthermore, unless our assets appreciate in an amount sufficient to offset the dilutive effect of the prior stock distributions, the value per share for later investors purchasing our stock will be below the value per share of earlier investors.
The Preferred Units rank senior to all classes or series of partnership interest in our operating partnership and therefore, any cash we have to pay distributions may be used to pay distributions to the holder of the Preferred Units, Extra Space, first, which could have a negative impact on our ability to pay distributions.
The Preferred Units rank senior to all common stockholders or common series of partnership units in our Operating Partnership, and therefore, the rights of holders of Preferred Units to distributions may be senior to distributions to our common stockholders. Furthermore, distributions on the Preferred Units are cumulative and are payable monthly. As the holder of the Preferred Units, Extra Space has a liquidation preference in the event of our involuntary liquidation, dissolution or winding up of the affairs of our operating partnership (a “liquidation”) which could negatively affect any payments to our common stockholders in the event of a liquidation. In addition, our Operating Partnership’s right to redeem the Preferred Units at any time, could have a negative effect on our ability to pay distributions to our stockholders.
If we, through our Advisor, are unable to find suitable investments, then we may not be able to achieve our investment objectives or pay distributions.
Our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of our Advisor in selecting our investments and obtaining suitable financing. Our stockholders will essentially have no opportunity to evaluate the terms of transactions or other economic or financial data concerning our investments prior to the time we
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make them. Our stockholders must rely entirely on the management ability of our Advisor and the oversight of our board of directors. We cannot be sure that our Advisor will be successful in obtaining suitable investments on financially attractive terms or that, if it makes investments on our behalf, our objectives will be achieved. If we are unable to find suitable investments, we will hold the proceeds of our Offering in an interest-bearing account or invest the proceeds in short-term, investment-grade investments. In such an event, our ability to pay distributions to our stockholders would be adversely affected.
We may suffer from delays in locating suitable investments, which could adversely affect our ability to make distributions and the value of our stockholders’ investment.
We could suffer from delays in locating suitable investments, particularly as a result of our reliance on our Advisor at times when management of our Advisor is simultaneously seeking to locate suitable investments for other affiliated programs, including SST II. Delays we encounter in the selection, acquisition and development of opportunistic properties are likely to adversely affect our ability to make distributions and may also adversely affect the value of our stockholders’ investment. In such event, we may pay all or a substantial portion of any distributions from the proceeds of our Primary Offering or from borrowings in anticipation of future cash flow, which may constitute a return of our stockholders’ capital. We are not prohibited from undertaking such activities by our charter, bylaws or investment policies. We have established no maximum of distributions to be paid from such funds. Distributions from the proceeds of future offerings or from borrowings also could reduce the amount of capital we ultimately invest in properties. This, in turn, would reduce the value of our stockholders’ investment. In particular, if we acquire properties prior to the start of construction or during the early stages of construction, it will typically take several months to complete construction and rent available storage units. Therefore, our stockholders could suffer delays in the receipt of cash distributions attributable to those particular properties.
If our Sponsor, Advisor or Property Manager loses or is unable to retain its executive officers, our ability to implement our investment objectives could be delayed or hindered, which could adversely affect our ability to make distributions and the value of our stockholders’ investment.
Our success depends to a significant degree upon the contributions of our executive officers and the executive officers of our Advisor and Property Manager, including H. Michael Schwartz, Paula Mathews, Michael S. McClure, Wayne Johnson, James Berg and Ken Morrison, each of whom would be difficult to replace. Neither our Advisor nor our Property Manager, as applicable, has an employment agreement with any of these key personnel and we cannot guarantee that all, or any particular one, will remain affiliated with us and/or our Advisor or our Property Manager. If any of these executive officers were to cease their affiliation with our Sponsor, our Advisor or our Property Manager, our operating results could suffer. Further, we only intend to maintain key person life insurance on our Chief Executive Officer. If our Sponsor, our Advisor or our Property Manager loses or is unable to retain its executive officers or does not establish or maintain appropriate strategic relationships, our ability to implement our investment strategies could be delayed or hindered, which could adversely affect our ability to make distributions and the value of our stockholders’ investment.
Our ability to operate profitably will depend upon the ability of our Advisor to efficiently manage our day-to-day operations and the ability of our Property Manager and sub-property manager to effectively manage our properties.
We rely on our Advisor to manage our business and assets. Our Advisor makes all decisions with respect to our day-to-day operations. In addition, we rely on our Property Manager and our sub-property manager to effectively manage our properties. Thus, the success of our business depends in large part on the ability of our Advisor, Property Manager and sub-property manager to manage our operations. Any adversity experienced by any of these parties could adversely impact our operations and, consequently, our cash flow and ability to make distributions to our stockholders.
We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements.
In April 2012, President Obama signed into law the Jumpstart Our Business Startups Act, or the JOBS Act. We are an “emerging growth company,” as defined in the JOBS Act, and are eligible to take advantage of certain exemptions from, or reduced disclosure obligations relating to, various reporting requirements that are normally applicable to public companies.
We could remain an “emerging growth company” for up to five years, or until the earliest of (1) the last day of the first fiscal year in which we have total annual gross revenue of $1 billion or more, (2) December 31 of the fiscal year that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act (which would occur if the market value of our common stock held by non-affiliates exceeds $700 million, measured as of the last business day of our most recently
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completed second fiscal quarter, and we have been publicly reporting for at least 12 months) or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. Under the JOBS Act, emerging growth companies are not required to (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with new audit rules adopted by the PCAOB after April 5, 2012 (unless the SEC determines otherwise), (3) provide certain disclosures relating to executive compensation generally required for larger public companies or (4) hold shareholder advisory votes on executive compensation. If we take advantage of any of these exemptions, we do not know if some investors will find our common stock less attractive as a result.
Additionally, the JOBS Act provides that an “emerging growth company” may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means an “emerging growth company” can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. However, we are electing to “opt out” of such extended transition period, and will therefore comply with new or revised accounting standards on the applicable dates on which the adoption of such standards are required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of such extended transition period for compliance with new or revised accounting standards is irrevocable.
We may loan a portion of the proceeds of the Offering to fund the development or purchase of opportunistic self storage facilities, and we may invest in mortgage or other loans, but if these loans are not fully repaid, the resulting losses could reduce the value of our stockholders’ investment.
We may loan a portion of the net offering proceeds from our Offering to entities developing or acquiring self storage facilities, including affiliates of our Advisor, subject to the limitations in our charter. We may also invest in first or second mortgage loans, mezzanine loans secured by an interest in the entity owning the real estate or other similar real estate loans consistent with our REIT status. We may also invest in participating or convertible mortgages if our directors conclude that we and our stockholders may benefit from the cash flow or any appreciation in the value of the subject property. There can be no assurance that these loans will be repaid to us in part or in full in accordance with the terms of the loan or that we will receive interest payments on the outstanding balance of the loan. We anticipate that these loans will be secured by mortgages on the self storage facilities, but in the event of a foreclosure, there can be no assurances that we will recover the outstanding balance of the loan. If there are defaults under these loans, we may not be able to repossess and sell the underlying properties quickly. The resulting time delay and associated costs could reduce the value of our investment in the defaulted loans. An action to foreclose on a property securing a mortgage loan is regulated by state statutes and regulations and is subject to many of the delays and expenses of other lawsuits if the defendant raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the mortgage loan.
A recent proposal by the U.S. Department of Labor regarding the definitional scope of “investment advice” under ERISA and the Internal Revenue Code, could have a negative impact on our ability to raise capital.
In April 2015, the U.S. Department of Labor issued a proposed regulation that would, if finalized in its current form, substantially expand the range of activities that would be considered to be fiduciary investment advice under ERISA and the Internal Revenue Code, which may make it more difficult to qualify for a prohibited transaction exemption. If this proposed regulation is finalized as proposed, it could have negative implications on our ability to raise capital from potential investors, including those investing through individual retirement accounts.
Risks Related to Conflicts of Interest
Our Advisor, Property Manager and their officers and certain of our key personnel will face competing demands relating to their time, and this may cause our operating results to suffer.
Our Advisor, Property Manager and their officers and certain of our key personnel and their respective affiliates are key personnel, advisors, managers and sponsors of other real estate programs having investment objectives and legal and financial obligations similar to ours, including SST II, and may have other business interests as well. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and fewer resources to our business than is necessary or appropriate. If this occurs, the returns on our stockholders’ investments may suffer.
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Our officers and one of our directors face conflicts of interest related to the positions they hold with affiliated entities, which could hinder our ability to successfully implement our investment objectives and to generate returns to our stockholders.
Our executive officers and one of our directors are also officers of our Advisor, our Property Manager, and other affiliated entities, including our Sponsor and SST II. As a result, these individuals owe fiduciary duties to these other entities and their owners, which fiduciary duties may conflict with the duties that they owe to our stockholders and us. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our investment objectives. Conflicts with our business and interests are most likely to arise from involvement in activities related to (1) allocation of new investments and management time and services between us and the other entities, (2) our purchase of properties from, or sale of properties to, affiliated entities, (3) the timing and terms of the investment in or sale of an asset, (4) development of our properties by affiliates, (5) investments with affiliates, (6) compensation to our Advisor, and (7) our relationship with our Dealer Manager and Property Manager. If we do not successfully implement our investment objectives, we may be unable to generate cash needed to make distributions to our stockholders and to maintain or increase the value of our assets.
Our Advisor will face conflicts of interest relating to the purchase of properties, including conflicts with SST II, and such conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
We may be buying properties at the same time as one or more of the other programs managed by officers and key personnel of our Advisor, including SST II, a public non-traded REIT sponsored by our Sponsor that registered its initial public offering on January 10, 2014. As of December 31, 2015, SST II had sold approximately $212 million in shares of its Class A and Class T common stock. Our Advisor and its affiliates are actively involved in six other real estate programs (three of which invest in self storage properties) that may compete with us or otherwise have similar business interests. Our Advisor and our Property Manager will have conflicts of interest in allocating potential properties, acquisition expenses, management time, services and other functions between various existing enterprises or future enterprises with which they may be or become involved and the Sponsor’s investment allocation policy may not mitigate these risks. There is a risk that our Advisor will choose a property that provides lower returns to us than a property purchased by another program sponsored by our Sponsor or its affiliates. We cannot be sure that officers and key personnel acting on behalf of our Advisor and on behalf of these other programs will act in our best interests when deciding whether to allocate any particular property to us. Such conflicts that are not resolved in our favor could result in a reduced level of distributions we may be able to pay to our stockholders and the value of their investment. If our Advisor or its affiliates breach their legal or other obligations or duties to us, or do not resolve conflicts of interest in the manner described herein, we may not meet our investment objectives, which could reduce our expected cash available for distribution to stockholders and the value of their investment.
We may face a conflict of interest if we purchase properties from, or sell properties to, affiliates of our Advisor.
We may purchase properties from, or sell properties to, one or more affiliates of our Advisor in the future. A conflict of interest may exist if such acquisition or disposition occurs. The business interests of our Advisor and its affiliates may be adverse to, or to the detriment of, our interests. Additionally, if we purchase properties from affiliates of our Advisor, the prices we pay to these affiliates for our properties may be equal to, or in excess of, the prices paid by them, plus the costs incurred by them relating to the acquisition and financing of the properties. If we sell properties to affiliates of our Advisor, the offers we receive from these affiliates for our properties may be equal to, or less than, the prices we paid for the properties. These prices will not be the subject of arm’s-length negotiations, which could mean that the acquisitions may be on terms less favorable to us than those negotiated in an arm’s-length transaction. Even though we will use an independent third-party appraiser to determine fair market value when acquiring properties from, or selling properties to, our Advisor and its affiliates, we may pay more, or may not be offered as much, for particular properties than we would have in an arm’s-length transaction, which would reduce our cash available for investment in other properties or distribution to our stockholders.
Furthermore, because any agreement that we enter into with affiliates of our Advisor will not be negotiated in an arm’s-length transaction, our Advisor may be reluctant to enforce the agreements against its affiliated entities.
Our Advisor will face conflicts of interest relating to the incentive fee structure under our Operating Partnership Agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
Pursuant to our Operating Partnership Agreement, our Advisor and its affiliates will be entitled to distributions that are structured in a manner intended to provide incentives to our Advisor to perform in our best interests and in the best interests of our stockholders. The amount of such compensation has not been determined as a result of arm’s-length
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negotiations, and such amounts may be greater than otherwise would be payable to independent third parties. However, because our Advisor does not maintain a significant equity interest in us and is entitled to receive substantial minimum compensation regardless of performance, our Advisor’s interests will not be wholly aligned with those of our stockholders. In that regard, our Advisor could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance or sales proceeds that would entitle our Advisor to distributions. In addition, our Advisor’s entitlement to distributions upon the sale of our assets and to participate in sale proceeds could result in our Advisor recommending sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle our Advisor to compensation relating to such sales, even if continued ownership of those investments might be in our best long-term interest.
Our Operating Partnership Agreement requires us to pay a performance-based termination distribution to our Advisor in the event that we terminate our Advisor prior to the listing of our shares for trading on an exchange or, absent such listing, in respect of its participation in net sale proceeds. To avoid paying this distribution, our board of directors may decide against terminating the Advisory Agreement prior to our listing of our shares or disposition of our investments even if, but for the termination distribution, termination of the Advisory Agreement would be in our best interest. In addition, the requirement to pay the distribution to our Advisor at termination could cause us to make different investment or disposition decisions than we would otherwise make in order to satisfy our obligation to pay the distribution to the terminated advisor.
Our Advisor will face conflicts of interest relating to joint ventures that we may form with affiliates of our Advisor, which conflicts could result in a disproportionate benefit to other joint venture partners at our expense.
We may enter into joint ventures with other programs sponsored by our Sponsor or its affiliates for the acquisition, development or improvement of properties. Our Advisor may have conflicts of interest in determining which program should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our Advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer and in managing the joint venture. Since our Advisor and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceeds the percentage of our investment in the joint venture, and this could reduce the returns on investment.
There is no separate counsel for us and our affiliates, which could result in conflicts of interest.
Nelson Mullins Riley & Scarborough LLP (Nelson Mullins) acts as legal counsel to us and also represents our Sponsor, Advisor and some of their affiliates. There is a possibility in the future that the interests of the various parties may become adverse and, under the code of professional responsibility of the legal profession, Nelson Mullins may be precluded from representing any one or all of such parties. If any situation arises in which our interests appear to be in conflict with those of our Advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should a conflict of interest not be readily apparent, Nelson Mullins may inadvertently act in derogation of the interest of the parties, which could affect our ability to meet our investment objectives.
Risks Related to Our Corporate Structure
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
In order for us to qualify as a REIT, no more than 50% of our outstanding stock may be beneficially owned, directly or indirectly, by five or fewer individuals (including certain types of entities) at any time during the last half of each taxable year. To ensure that we do not fail to qualify as a REIT under this test, our charter restricts ownership by one person or entity to no more than 9.8% of the value of our then-outstanding capital stock or more than 9.8% of the value or number of shares, whichever is more restrictive, of our then outstanding common stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our board of directors to issue up to 900,000,000 shares of capital stock. In addition, our board of directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the
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aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of our company, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
We will not be afforded the protection of Maryland law relating to business combinations.
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
| • | any person who beneficially owns 10% or more of the voting power of the corporation’s shares; or |
| • | an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation. |
These prohibitions are intended to prevent a change of control by interested stockholders who do not have the support of our board of directors. Since our charter contains limitations on ownership of 9.8% or more of our common stock, we opted out of the business combinations statute in our charter. Therefore, we will not be afforded the protections of this statute and, accordingly, there is no guarantee that the ownership limitations in our charter would provide the same measure of protection as the business combinations statute and prevent an undesired change of control by an interested stockholder.
Our stockholders’ investment returns may be reduced if we are required to register as an investment company under the Investment Company Act of 1940. If we lose our exemption from registration under the 1940 Act, we will not be able to continue our business.
We do not intend to register as an investment company under the Investment Company Act of 1940 (1940 Act). We intend that our investments in real estate will represent the substantial majority of our total asset mix, which would not subject us to the 1940 Act. In order to maintain an exemption from regulation under the 1940 Act, we must engage primarily in the business of buying real estate. If we are unable to invest a significant portion of the proceeds of our Offering in properties within applicable time periods, we may avoid being required to register as an investment company by temporarily investing any unused proceeds in government securities with low returns, which would reduce the cash available for distribution to investors and possibly lower our stockholders’ returns.
To maintain compliance with our 1940 Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may be required to acquire additional income- or loss-generating assets that we might not otherwise acquire or forego opportunities to acquire interests in companies that we would otherwise want to acquire. If we are required to register as an investment company but fail to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
Our stockholders are bound by the majority vote on matters on which our stockholders are entitled to vote and, therefore, each stockholder’s vote on a particular matter may be superseded by the vote of other stockholders.
Our stockholders may vote on certain matters at any annual or special meeting of stockholders, including the election of directors. However, each stockholder will be bound by the majority vote on matters requiring approval of a majority of the stockholders even if the stockholder does not vote with the majority on any such matter.
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If one of our stockholders does not agree with the decisions of our board of directors, the stockholder only has limited control over changes in our policies and operations and may not be able to change such policies and operations, except as provided for in our charter and under applicable law.
Our board of directors determines our major policies, including our policies regarding investments, financing, growth, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of our stockholders. Under the Maryland General Corporation Law and our charter, our stockholders have a right to vote only on the following:
| • | the election or removal of directors; |
| • | any amendment of our charter, except that our board of directors may amend our charter without stockholder approval to increase or decrease the aggregate number of our shares, to increase or decrease the number of our shares of any class or series that we have the authority to issue, or to classify or reclassify any unissued shares by terms and conditions of redemption of such shares, provided however, that any such amendment does not adversely affect the rights, preferences and privileges of the stockholders; |
| • | our liquidation or dissolution; and |
| • | any merger, consolidation or sale or other disposition of substantially all of our assets. |
The board of directors must declare advisable any amendment to the charter or any merger, consolidation, transfer of assets, or share exchange, prior to such amendment or transaction, under the Maryland General Corporation Law. All other matters are subject to the discretion of our board of directors. Therefore, our stockholders are limited in their ability to change our policies and operations.
Our rights and the rights of our stockholders to recover claims against our officers, directors and our Advisor are limited, which could reduce our stockholders’ and our recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter, in the case of our directors, officers, employees and agents, and our Advisory Agreement, in the case of our Advisor, requires us to indemnify our directors, officers, employees and agents, and our Advisor and its affiliates, for actions taken by them in good faith and without negligence or misconduct. Additionally, our charter limits the liability of our directors and officers for monetary damages to the maximum extent permitted under Maryland law. As a result, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our Advisor and its affiliates, than might otherwise exist under common law, which could reduce our stockholders’ and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our Advisor and its affiliates in some cases which would decrease the cash otherwise available for distribution to our stockholders.
Our board of directors may change any of our investment objectives, including our focus on self storage facilities.
Our board of directors may change any of our investment objectives, including our focus on self storage facilities. If our stockholders do not agree with a decision of our board to change any of our investment objectives, our stockholders only have limited control over such changes. Additionally, we cannot assure our stockholders that we would be successful in attaining any of these investment objectives, which may adversely impact our financial performance and ability to make distributions to our stockholders.
Our stockholders’ interests in us will be diluted as we issue additional shares.
Our stockholders will not have preemptive rights to any shares issued by us in the future. Subject to any limitations set forth under Maryland law, our board of directors may increase the number of authorized shares of stock (currently 900,000,000 shares), increase or decrease the number of shares of any class or series of stock designated, or reclassify any unissued shares without the necessity of obtaining stockholder approval. All such shares may be issued in the discretion of our board of directors. Therefore, as we (1) sell shares in the Offering, including those issued pursuant to our distribution reinvestment plan, or sell additional shares in the future (2) sell securities that are convertible into shares of our common stock, (3) issue shares of our common stock in a private offering of securities (4) issue restricted shares of our common stock to our independent directors, (5) issue shares to our Advisor, its successors or assigns, in payment of an outstanding fee obligation as set forth under our Advisory Agreement, or (6) issue shares of our common stock in a merger or to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our Operating Partnership, existing stockholders and investors purchasing shares in the Offering will experience dilution of their equity investment in us. Because the limited partnership interests of our Operating Partnership may, in the discretion of our board of directors, be exchanged for shares of our common stock, any merger, exchange or conversion between our Operating Partnership and
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another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders. Because of these and other reasons, our stockholders may experience substantial dilution in their percentage ownership of our shares.
Payment of fees to our Advisor and its affiliates will reduce cash available for investment and distribution.
Our Advisor and its affiliates perform services for us in connection with the offer and sale of our shares, the selection and acquisition of our investments, and the management of our properties. They are paid substantial fees for these services, which reduces the amount of cash available for investment in properties or distribution to stockholders. As additional compensation for selling Class T Shares in our Offering and for ongoing stockholder services, we will pay our Dealer Manager a stockholder servicing fee. The amount available for distributions on all Class T Shares will be reduced by the amount of stockholder servicing fees payable to our Dealer Manager with respect to the Class T Shares issued in the Primary Offering. Payment of these fees to our Advisor and its affiliates will reduce cash available for investment and distribution.
We are uncertain of our sources of debt or equity for funding our future capital needs. If we cannot obtain funding on acceptable terms, our ability to make necessary capital improvements to our properties, pay other expenses or expand our business may be impaired or delayed.
The gross proceeds of the Offering will be used to purchase real estate investments and to pay various fees and expenses. In addition, in order to continue to qualify as a REIT, we generally must distribute to our stockholders at least 90% of our taxable income each year, excluding capital gains. Because of this distribution requirement, it is not likely that we will be able to fund a significant portion of our future capital needs from retained earnings. We have not identified any sources of debt, other than our current credit facility with KeyBank National Association (“KeyBank”), or equity for future funding, and such sources of funding may not be available to us on favorable terms or at all. If we do not have access to sufficient funding in the future, we may not be able to make necessary capital improvements to our properties, pay other expenses or expand our business.
Our Advisor may receive economic benefits from its status as a special limited partner without bearing any of the investment risk.
Our Advisor is a special limited partner in our operating partnership. As the special limited partner, our Advisor is entitled to receive, among other distributions, an incentive distribution of net proceeds from the sale of properties after we have received and paid to our stockholders a specified threshold return. We will bear all of the risk associated with the properties but, as a result of the incentive distributions to our Advisor, we may not be entitled to all of our Operating Partnership’s proceeds from a property sale and certain other events.
Risks Related to the Self Storage Industry
Because we are focused on the self storage industry, our rental revenues will be significantly influenced by demand for self storage space generally, and a decrease in such demand would likely have a greater adverse effect on our rental revenues than if we owned a more diversified real estate portfolio.
Because our portfolio of properties consists primarily of self storage facilities, we are subject to risks inherent in investments in a single industry. A decrease in the demand for self storage space would likely have a greater adverse effect on our rental revenues than if we owned a more diversified real estate portfolio. Demand for self storage space has been and could be adversely affected by weakness in the national, regional and local economies and changes in supply of or demand for similar or competing self storage facilities in an area. To the extent that any of these conditions occur, they are likely to affect demand and market rents for self storage space, which could cause a decrease in our rental revenue. Any such decrease could impair our ability to make distributions to our stockholders. We do not expect to invest in other real estate or businesses to hedge against the risk that industry trends might decrease the profitability of our self storage-related investments.
We will face significant competition in the self storage industry, which may increase the cost of acquisitions or developments or impede our ability to retain customers or re-let space when existing customers vacate.
We will face intense competition in every market in which we purchase or develop self storage facilities. We will compete with numerous national, regional, and local developers, owners and operators in the self storage industry, including SST II and other REITs, some of which own or may in the future own facilities similar to, or in the same markets as, the self storage properties we develop or acquire, and some of which will have greater capital resources, greater cash reserves, less
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demanding rules governing distributions to stockholders and a greater ability to borrow funds to acquire facilities. In addition, due to the relatively low cost of each individual self storage facility, other developers, owners and operators have the capability to build facilities that may compete with our facilities. In addition, competition for suitable investments may reduce the number of suitable investment opportunities available to us, may increase acquisition costs and may reduce demand for self storage units in certain areas where our facilities are located, all of which may adversely affect our operating results. Additionally, an economic slowdown in a particular market could have a negative effect on our self storage revenues.
If competitors build new facilities that compete with our facilities or offer space at rental rates below the rental rates we charge our customers, we may lose potential or existing customers and we may be pressured to discount our rental rates to retain customers. As a result, our rental revenues may become insufficient to make distributions to our stockholders. In addition, increased competition for customers may require us to make capital improvements to facilities that we would not otherwise make.
The acquisition of new properties may give rise to difficulties in predicting revenue potential.
New acquisitions could fail to perform in accordance with our expectations. If we fail to accurately estimate occupancy levels, rental rates, operating costs or costs of improvements to bring an acquired facility up to our standards, the performance of the facility may be below expectations. Properties we acquire may have characteristics or deficiencies affecting their valuation or revenue potential that we have not yet discovered. We cannot assure our stockholders that the performance of properties we acquire will increase or be maintained under our management.
We may be unable to promptly re-let units within our facilities at satisfactory rental rates.
Generally our unit leases will be on a month-to-month basis. Delays in re-letting units as vacancies arise would reduce our revenues and could adversely affect our operating performance. In addition, lower-than-expected rental rates and higher rental concessions upon re-letting could adversely affect our rental revenues and impede our growth.
We depend on the on-site personnel to maximize customer satisfaction at each of our facilities and any difficulties our Property Manager or sub-property manager encounters in hiring, training and retaining skilled field personnel may adversely affect our rental revenues.
The customer service, marketing skills, knowledge of local market demand and competitive dynamics of our facility managers will be contributing factors to our ability to maximize our rental income and to achieve the highest sustainable rent levels at each of our facilities. If our Property Manager or sub-property manager is unable to successfully recruit, train and retain qualified field personnel, our rental revenues may be adversely affected, which could impair our ability to make distributions to our stockholders.
Legal claims related to moisture infiltration and mold could arise in one or more of our properties, which could adversely affect our revenues.
There has been an increasing number of claims and litigation against owners and managers of rental and self storage properties relating to moisture infiltration, which can result in mold or other property damage. We cannot guarantee that moisture infiltration will not occur at one or more of our properties. When we receive a complaint concerning moisture infiltration, condensation or mold problems and/or become aware that an air quality concern exists, we will implement corrective measures in accordance with guidelines and protocols we have developed with the assistance of outside experts. We cannot assure our stockholders that material legal claims relating to moisture infiltration and the presence of, or exposure to, mold will not arise in the future. These legal claims could require significant expenditures for legal defense representation which could adversely affect our revenues.
Delays in development and lease-up of our properties would reduce our profitability.
We may acquire properties that require repositioning or redeveloping such properties with the goal of increasing cash flow, value or both. Construction delays to new or existing self storage properties due to weather, unforeseen site conditions, personnel problems, and other factors could delay our anticipated customer occupancy plan which could adversely affect our profitability and cash flow. Furthermore, our estimate of the costs of repositioning or redeveloping an acquired property may prove to be inaccurate, which may result in our failure to meet our profitability goals. Additionally, we may acquire a new property that has a relatively low physical occupancy, and the cash flow from existing operations may be insufficient to pay the operating expenses associated with that property until the property is adequately leased. If one or more of these properties do not perform as expected or we are unable to successfully integrate new properties into our existing operations, our financial performance and our ability to make distributions may be adversely affected.
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The risks associated with storage contents may increase our operating costs or expose us to potential liability that may not be covered by insurance, which may have adverse effects on our results of operations and returns to our stockholders.
The self storage facilities we intend to own and operate are leased directly to customers who store their belongings without any immediate inspections or oversight from us. We may unintentionally lease space to groups engaged in illegal and dangerous activities. Damage to storage contents may occur due to, among other occurrences, the following: war, acts of terrorism, earthquakes, floods, hurricanes, pollution, environmental matters, fires or events caused by fault of a customer, fault of a third party or fault of our own. Such damage may or may not be covered by insurance maintained by us, if any. Our Advisor will determine the amounts and types of insurance coverage that we will maintain including any coverage over the contents of any properties in which we may invest. Such determinations will be made on a case-by-case basis by our Advisor, based on the type, value, location and risks associated with each investment, as well as any lender requirements, among any other factors our Advisor may consider relevant. There is no guarantee as to the type of insurance that we will obtain for any investments that we may make and there is no guarantee that any particular damage to storage contents would be covered by such insurance, even if obtained. The costs associated with maintaining such insurance, as well as any liability imposed upon us due to damage to storage contents, may have an adverse effect on our results of operations and returns to our stockholders.
Additionally, although we will require our customers to sign an agreement stating that they will not store flammable, hazardous, illegal or dangerous contents in the self storage units, we cannot ensure that our customers will abide by such agreement. The storage of such materials might cause destruction to a facility or impose liability on us for the costs of removal or remediation if these various contents or substances are released on, from or in a facility, which may have an adverse effect on our results of operations and returns to our stockholders.
Our operating results may be affected by regulatory changes that have an adverse impact on our specific facilities, which may adversely affect our results of operations and returns to our stockholders.
Certain regulatory changes may have a direct impact on our self storage facilities, including but not limited to, land use, zoning and permitting requirements by governmental authorities at the local level, which can restrict the availability of land for development, and special zoning codes which omit certain uses of property from a zoning category. These special uses (i.e., hospitals, schools, and self storage facilities) are allowed in that particular zoning classification only by obtaining a special use permit and the permission of local zoning authority. If we are delayed in obtaining or unable to obtain a special use permit where one is required, new developments or expansion of existing developments could be delayed or reduced. Additionally, certain municipalities require holders of a special use permit to have higher levels of liability coverage than is normally required. The acquisition of, or the inability to obtain, a special use permit and the possibility of higher levels of insurance coverage associated therewith may have an adverse effect on our results of operations and returns to our stockholders.
A failure in, or breach of, our operational or security systems or infrastructure, or those of our third party vendors and other service providers or other third parties, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses.
We rely heavily on communications and information systems to conduct our business. Information security risks for our business have generally increased in recent years in part because of the proliferation of new technologies; the use of the Internet and telecommunications technologies to process, transmit and store electronic information, including the management and support of a variety of business processes, including financial transactions and records, personally identifiable information, and tenant and lease data; and the increased sophistication and activities of organized crime, hackers, and terrorists, activists, and other external parties. As customer, public, and regulatory expectations regarding operational and information security have increased, our operating systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, and breakdowns. Our business, financial, accounting, and data processing systems, or other operating systems and facilities, may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control. For example, there could be electrical or telecommunication outages; natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and as described below, cyber attacks.
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Our business relies on its digital technologies, computer and email systems, software and networks to conduct its operations. Although we have information security procedures and controls in place, our technologies, systems and networks and, because the nature of our business involves the receipt and retention of personal information about our customers, our customers’ personal accounts may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of our or our customers’ or other third parties’ confidential information. Third parties with whom we do business or who facilitate our business activities, including intermediaries or vendors that provide service or security solutions for our operations, and other third parties, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security.
While we have disaster recovery and other policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. Our risk and exposure to these matters remain heightened because of the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of our controls, processes, and practices designed to protect our systems, computers, software, data, and networks from attack, damage or unauthorized access remain a focus for us. As threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber attacks or security breaches of the networks, systems or devices that our customers use to access our products and services, could result in customer attrition, regulatory fines, penalties or intervention, reputation damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could have a material effect on our results of operations or financial condition. Furthermore, if such attacks are not detected immediately, their effect could be compounded. To date, to our knowledge, we have not experienced any material impact relating to cyber-attacks or other information security breaches.
If we enter into non-compete agreements with the sellers of the self storage properties that we acquire, and the terms of those agreements expire, the sellers may compete with us within the general location of one of our self storage facilities, which could have an adverse effect on our operating results and returns to our stockholders.
We may enter into non-compete agreements with the sellers of the self storage properties that we acquire in order to prohibit the seller from owning, operating, or being employed by a competing self storage property for a predetermined time frame and within a geographic radius of a self storage facility we acquire. When these non-compete agreements expire, we may face the risk that the seller will develop, own, operate or become employed by a competing self storage facility within the general location of one of our properties, which could have an adverse effect on our operating results and returns to our stockholders.
General Risks Related to Investments in Real Estate
Our opportunistic property-acquisition strategy involves a higher risk of loss than more conservative investment strategies.
Our strategy for acquiring properties may involve the acquisition of properties in markets that are depressed or overbuilt, and/or have high growth potential in real estate lease rates and sale prices. As a result of our investment in these types of markets, we will face increased risks relating to changes in local market conditions and increased competition for similar properties in the same market, as well as increased risks that these markets will not recover and the value of our properties in these markets will not increase, or will decrease, over time. In addition, we will be acquiring self storage properties that require lease-up or repositioning in order to increase the value of such properties. For these and other reasons, we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our real estate properties, and as a result, our ability to make distributions to our stockholders could be affected. Our intended approach to acquiring and operating opportunistic assets involves more risk than comparable real estate programs that have a targeted holding period for investments that is longer than ours, utilize leverage to a lesser degree and/or employ more conservative investment strategies.
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Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our real estate properties.
Our operating results will be subject to risks generally incident to the ownership of real estate, including:
| • | changes in general economic or local conditions; |
| • | changes in supply of or demand for similar or competing properties in an area; |
| • | changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive; |
| • | changes in tax, real estate, environmental and zoning laws; |
| • | changes in property tax assessments and insurance costs; and |
| • | increases in interest rates and tight money supply. |
These and other reasons may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
We may suffer reduced or delayed revenues for, or have difficulty selling, properties with vacancies.
We anticipate that the majority of the properties we acquire will have some level of vacancy at the time of closing either because the property is in the process of being developed and constructed, it is newly constructed and in the process of obtaining customers, or because of economic or competitive or other factors. Shortly after a new property is opened, during a time of development and construction, or because of economic or competitive or other factors, we may suffer reduced revenues resulting in lower cash distributions to our stockholders due to a lack of an optimum level of customers. The resale value of properties with prolonged low occupancy rates could suffer, which could further reduce our stockholders’ returns.
Our operating results may be negatively affected by potential development and construction delays and result in increased costs and risks, which could diminish the return on our stockholders’ investment.
We may invest some or all of the proceeds available for investment in the acquisition, development and/or redevelopment of properties upon which we will develop and construct improvements. We could incur substantial capital obligations in connection with these types of investments. We will be subject to risks relating to uncertainties associated with rezoning for development and environmental concerns of governmental entities and/or community groups and our builder’s ability to control construction costs or to build in conformity with plans, specifications and timetables. The builder’s failure to perform may necessitate legal action by us to rescind the purchase or the construction contract or to compel performance. Performance may also be affected or delayed by conditions beyond the builder’s control. We may incur additional risks when we make periodic progress payments or other advances to such builders prior to completion of construction. These and other such factors can result in increased costs of a project or loss of our investment. Substantial capital obligations could delay our ability to make distributions. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. Furthermore, we must rely upon projections of rental income and expenses and estimates of the fair market value of property upon completion of construction when agreeing upon a price to be paid for the property at the time of acquisition of the property. If our projections are inaccurate, we may pay too much for a property, and the return on our investment could suffer.
In addition, we may invest in unimproved real property. Returns from development of unimproved properties are also subject to risks and uncertainties associated with rezoning the land for development and environmental concerns of governmental entities and/or community groups. Although our intention is to limit any investment in unimproved property to property we intend to develop, our stockholders’ investment nevertheless is subject to the risks associated with investments in unimproved real property.
We may obtain only limited warranties when we purchase a property.
The seller of a property will often sell such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. Also, many sellers of real estate are single purpose entities without significant other assets. The purchase of properties with limited warranties or from undercapitalized sellers increases the risk that we may lose some or all of our invested capital in the property as well as rental income from that property.
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Our inability to sell a property when we desire to do so could adversely impact our ability to pay cash distributions to our stockholders.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Real estate generally cannot be sold quickly. Also, the tax laws applicable to REITs require that we hold our facilities for investment, rather than for sale in the ordinary course of business, which may cause us to forego or defer sales of facilities that otherwise would be in our best interest. Therefore, we may not be able to dispose of facilities promptly, or on favorable terms, in response to economic or other market conditions, and this may adversely impact our ability to make distributions to our stockholders.
In addition, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct such defects or to make such improvements.
In acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would also restrict our ability to sell a property.
We may not be able to sell our properties at a price equal to, or greater than, the price for which we purchased such properties, which may lead to a decrease in the value of our assets.
We may be purchasing our properties at a time when capitalization rates are at historically low levels and purchase prices are high. Therefore, the value of our properties may not increase over time, which may restrict our ability to sell our properties, or in the event we are able to sell such property, may lead to a sale price less than the price that we paid to purchase the properties.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
Lock-out provisions are provisions that generally prohibit repayment of a loan balance for a certain number of years following the origination date of a loan. Such provisions are typically provided for by the Code or the terms of the agreement underlying a loan. Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for distribution to our stockholders. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties.
Lock-out provisions could impair our ability to take actions during the lock-out period that would otherwise be in our stockholders’ best interests and, therefore, may have an adverse impact on the value of the shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control, even though that disposition or change in control might be in our stockholders’ best interests.
Rising expenses could reduce cash available for future acquisitions.
Any properties that we buy in the future will be subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds for that property’s operating expenses. Our properties will be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses.
If we are unable to offset such cost increases through rent increases, we could be required to fund those increases in operating costs which could adversely affect funds available for future acquisitions or cash available for distribution.
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Adverse economic conditions will negatively affect our returns and profitability.
The following market and economic challenges may adversely affect our operating results:
| • | poor economic times may result in customer defaults under leases or bankruptcy; |
| • | re-leasing may require reduced rental rates under the new leases; and |
| • | increased insurance premiums, resulting in part from the increased risk of terrorism and natural disasters, may reduce funds available for distribution. |
We are susceptible to the effects of adverse macro-economic events that can result in higher unemployment, shrinking demand for products, large-scale business failures and tight credit markets. Because our portfolio of facilities consists of self storage facilities, we are subject to risks inherent in investments in a single industry, and our results of operations are sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending, as well as to increased bad debts due to recessionary pressures. A continuation of, or slow recovery from, ongoing adverse economic conditions affecting disposable consumer income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs, could reduce consumer spending or cause consumers to shift their spending to other products and services. A general reduction in the level of discretionary spending or shifts in consumer discretionary spending could adversely affect our growth and profitability.
Since we cannot predict when real estate markets may recover, the value of the properties we acquire may decline if market conditions persist or worsen. Further, the results of operations for a property in any one period may not be indicative of results in future periods, and the long-term performance of such property generally may not be comparable to, and cash flows may not be as predictable as, other properties owned by third parties in the same or similar industry.
We rely on our sub-property manager to operate our self storage facilities.
Our property manager has entered into sub-property management agreements with Extra Space Management, Inc. in connection with the management of our self storage facilities. We do not supervise our sub-property manager or its personnel on a day-to-day basis, and we cannot assure you that our sub-property manager will manage our properties in a manner that is consistent with its obligations under the sub-property management agreements, that our sub-property manager will not be negligent in its performance or engage in other criminal or fraudulent activity, or that our sub-property manager will not otherwise default on its management obligations to us. If any of the foregoing occurs, we could incur liabilities resulting from loss or injury to our property or to persons at our properties, any of which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay distributions to stockholders.
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipated profits.
Material losses may occur in excess of insurance proceeds with respect to any property, as insurance may not be sufficient to fund the losses. However, there are types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, floods, fires, hurricanes, pollution or environmental matters, which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase specific coverage against terrorism as a condition for providing mortgage loans. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our potential properties. In these instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure our stockholders that we will have adequate coverage for such losses. The Terrorism Risk Insurance Act of 2002 is designed for a sharing of terrorism losses between insurance companies and the federal government. We cannot be certain how this act will impact us or what additional cost to us, if any, could result. If such an event damaged or destroyed one or more of our properties, we could lose both our invested capital and anticipated profits from such property.
Delays in the acquisition, development and construction of properties may have adverse effects on our results of operations and returns to our stockholders.
Delays we encounter in the selection, acquisition and development of real properties could adversely affect the returns of our stockholders. From time to time we may acquire unimproved real property, properties that are in need of redevelopment, or properties that are under development or construction. Investments in such properties will be subject to the uncertainties associated with the development and construction of real property, including those related to re-zoning land for
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development, environmental concerns of governmental entities and/or community groups and our builders’ ability to build in conformity with plans, specifications, budgets and timetables. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder’s performance may also be affected or delayed by conditions beyond the builder’s control.
Where properties are acquired prior to the start of construction or during the early stages of construction, it will typically take up to 24 months or more to complete construction, prior to beginning to lease the available space, which can take as long or longer as the construction process. Therefore, our stockholders could suffer delays in the receipt of cash distributions attributable to those particular real properties. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other factors can result in increased costs of a project or loss of our investment. We also must rely on rental income and expense projections and estimates of the fair market value of a property upon completion of construction when agreeing upon a purchase price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and the return on our investment could suffer.
Costs of complying with governmental laws and regulations, including those relating to environmental matters, may adversely affect our income and the cash available for distribution.
All real property, including any self storage properties we acquire, and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on customers, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent a property, or to pledge such property as collateral for future borrowings.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our customers’ activities, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply, and that may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions to our stockholders and may reduce the value of our stockholders’ investments.
We cannot assure our stockholders that the independent third-party environmental assessments we obtain prior to acquiring any properties we purchase will reveal all environmental liabilities or that a prior owner of a property did not create a material environmental condition not known to us. We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted, or what environmental conditions may be found to exist in the future. We cannot assure our stockholders that our business, assets, results of operations, liquidity or financial condition will not be adversely affected by these laws, which may adversely affect cash available for distribution, and the amount of distributions to our stockholders.
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for distribution.
Our properties will be subject to the Americans with Disabilities Act of 1990, or ADA. Under the ADA, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The ADA’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. We will attempt to acquire properties that comply with the ADA or place the burden on the seller or other third party to ensure compliance with the ADA. However, we cannot assure our stockholders that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, our funds used for ADA compliance may affect cash available for distribution and the amount of distributions to our stockholders.
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If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows.
In some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders. Additionally, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to make distributions to our stockholders.
Property taxes may increase, which will adversely affect our net operating income and cash available for distributions.
Each of the properties we acquire will be subject to real property taxes. Some local real property tax assessors may seek to reassess some of our properties as a result of our acquisition of the property. From time to time, our property taxes may increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. Recent local government shortfalls in tax revenue may cause pressure to increase tax rates or assessment levels. Increases in real property taxes will adversely affect our net operating income and cash available for distributions.
We will be subject to additional risks if we make international investments.
We may acquire properties located outside the United States, and we may make or purchase loans or participations in loans secured by property located outside the United States. These investments may be affected by factors peculiar to the laws and business practices of the jurisdictions in which the properties are located. These laws and business practices may expose us to risks that are different from and in addition to those commonly found in the United States. Foreign investments pose the following risks:
| • | the burden of complying with a wide variety of foreign laws; |
| • | changing governmental rules and policies, including changes in land use and zoning laws, more stringent environmental laws or changes in such laws; |
| • | existing or new laws relating to the foreign ownership of real property or loans and laws restricting the ability of foreign persons or companies to remove profits earned from activities within the country to the person’s or company’s country of origin; |
| • | the potential for expropriation; |
| • | possible currency transfer restrictions; |
| • | imposition of adverse or confiscatory taxes; |
| • | changes in real estate and other tax rates or laws and changes in other operating expenses in particular countries; |
| • | possible challenges to the anticipated tax treatment of the structures that allow us to acquire and hold investments; |
| • | adverse market conditions caused by terrorism, civil unrest and changes in national or local governmental or economic conditions; |
| • | the willingness of domestic or foreign lenders to make loans in certain countries and changes in the availability, cost and terms of loan funds resulting from varying national economic policies; |
| • | general political and economic instability in certain regions; |
| • | the potential difficulty of enforcing obligations in other countries; and |
| • | the limited experience and expertise in foreign countries of our Advisor’s and its affiliates’ employees relative to their experience and expertise in the United States. |
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Investments in properties or other real estate investments outside the United States subject us to foreign currency risks, which may adversely affect distributions and our REIT status.
Revenues generated from any properties or other real estate investments we acquire or ventures we enter into relating to transactions involving assets located in markets outside the United States likely will be denominated in the local currency. Therefore, any investments we make outside the United States may subject us to foreign currency risk due to potential fluctuations in exchange rates between foreign currencies and the U.S. dollar. As a result, changes in exchange rates of any such foreign currency to U.S. dollars may affect our revenues, operating margins and distributions and may also affect the book value of our assets and the amount of stockholders’ equity.
Changes in foreign currency exchange rates used to value a REIT’s foreign assets may be considered changes in the value of the REIT’s assets. These changes may adversely affect our ability to qualify as a REIT. Further, bank accounts in foreign currency which are not considered cash or cash equivalents may adversely affect our ability to qualify as a REIT.
Changes in the Canadian Dollar/USD exchange rate could have a material adverse effect on our operating results and value of the investment of our stockholders.
We plan to purchase properties in Canada. As a result, our financial results may be adversely affected by fluctuations in the Canadian Dollar/USD exchange rate. We cannot predict with any certainty changes in foreign currency exchange rates or our ability to mitigate these risks. Several factors may affect the Canadian Dollar/USD exchange rate, including:
| • | Sovereign debt levels and trade deficits; |
| • | domestic and foreign inflation rates and interest rates and investors’ expectations concerning those rates; |
| • | other currency exchange rates; |
| • | changing supply and demand for a particular currency; |
| • | monetary policies of governments; |
| • | changes in balances of payments and trade; |
| • | trade restrictions; |
| • | direct sovereign intervention, such as currency devaluations and revaluations; |
| • | investment and trading activities of mutual funds, hedge funds and currency funds; and |
| • | other global or regional political, economic or financial events and situations. |
These events and actions are unpredictable. In addition, the Canadian Dollar may not maintain its long term value in terms of purchasing power in the future. The resulting volatility in the Canadian Dollar/USD exchange rate could materially and adversely affect our performance.
We are subject to additional risks due to the location of any of our properties in Canada.
In addition to currency exchange rates, the value of any properties we purchase in Canada may be affected by factors peculiar to the laws and business practices of Canada. Canadian laws and customs may expose us to risks that are different from and in addition to those commonly found in the United States. Ownership and operation of foreign assets pose several risks, including, but not limited to the following:
| • | the burden of complying with both Canadian and United States’ laws; |
| • | changing governmental rules and policies, including changes in land use and zoning laws, more stringent environmental laws or changes in such laws; |
| • | existing or new Canadian laws relating to the foreign ownership of real property or loans and laws restricting the ability of Canadian persons or companies to remove profits earned from activities within the country to the person’s or company’s country of origin; |
| • | the potential for expropriation; |
| • | imposition of adverse or confiscatory taxes; |
| • | changes in real estate and other tax rates or laws and changes in other operating expenses in Canada; |
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| • | possible challenges to the anticipated tax treatment of our revenue and our properties; |
| • | adverse market conditions caused by terrorism, civil unrest and changes in national or local governmental or economic conditions; and |
| • | our limited experience and expertise in foreign countries relative to our experience and expertise in the United States. |
Risks Associated with Debt Financing
We have broad authority to incur debt, and high debt levels could hinder our ability to make distributions and could decrease the value of our stockholders’ investments.
Our charter generally limits us to incurring debt no greater than 300% of our net assets before deducting depreciation or other non-cash reserves (equivalent to 75% leverage), unless any excess borrowing is approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report, along with a justification for such excess borrowing. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments, and could be accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of our stockholders’ investments.
We have incurred and may incur mortgage indebtedness and other borrowings, which may increase our business risks.
We have incurred mortgage indebtedness under the KeyBank Facility and may place permanent financing on our properties or obtain additional credit facilities or other similar financing arrangements in order to acquire properties as funds are being raised in our Offering. We may also decide to later further leverage our properties. We may incur mortgage debt and pledge all or some of our real properties as security for that debt to obtain funds to acquire real properties. We may borrow if we need funds to pay a desired distribution rate to our stockholders. We may also borrow if we deem it necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes. If there is a shortfall between the cash flow from our properties and the cash flow needed to service mortgage debt, then the amount available for distribution to our stockholders may be reduced.
If we breach covenants under the KeyBank Facility with KeyBank, we could be held in default under such loan, which could accelerate our repayment date and materially adversely affect the value of our stockholders’ investment in us.
On July 31, 2014 and as amended on December 17, 2015, we entered into the KeyBank Facility with KeyBank with a total commitment of $46.25 million which we may, subject to the discretion of KeyBank and any other lender who may ultimately participate in the secured credit facility, request commitments of an additional $110 million. This KeyBank Facility is secured by cross-collateralized first mortgage liens or first lien deeds of trust on our current properties. The loan imposes a number of financial covenant requirements on us. If we should breach certain of those financial covenant requirements or otherwise default on this KeyBank Facility, KeyBank could accelerate our repayment dates. If we do not have sufficient cash to repay these loans at that time, KeyBank could foreclose on the properties securing the loans. Such foreclosure could result in a material loss for us and would adversely affect the value of our stockholders’ investment in us.
We intend to incur indebtedness secured by our properties, which may result in foreclosure.
Most of our borrowings to acquire properties will be secured by mortgages on our properties. If we default on our secured indebtedness, the lender may foreclose and we could lose our entire investment in the properties securing such loan, which could adversely affect distributions to our stockholders. To the extent lenders require us to cross-collateralize our properties, or our loan agreements contain cross-default provisions, a default under a single loan agreement could subject multiple properties to foreclosure.
High interest rates may make it difficult for us to refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make.
To the extent we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the properties are refinanced, we may not be able to refinance the properties and our income could be reduced. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise capital by issuing more stock or by borrowing more money.
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Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
When providing financing, a lender could impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage or replace our Advisor. These or other limitations may adversely affect our flexibility and limit our ability to make distributions to our stockholders.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders.
We currently have outstanding debt payments and Preferred Unit distribution payments which are indexed to variable interest rates. We may also incur additional debt or issue additional preferred equity in the future which rely on variable interest rates. Increases in these variable interest rates in the future would increase our interest costs and Preferred Unit distribution payments, which would likely reduce our cash flows and our ability to make distributions to our stockholders. In addition, if we need to make payments on instruments which contain variable interest during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
Disruptions in the credit markets could have a material adverse effect on our results of operations, financial condition and ability to pay distributions to our stockholders.
Domestic and international financial markets recently experienced significant disruptions which were brought about in large part by failures in the U.S. banking system. These disruptions severely impacted the availability of credit and contributed to rising costs associated with obtaining credit. If debt financing is not available on terms and conditions we find acceptable, we may not be able to obtain financing for investments. If these disruptions in the credit markets resurface, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets will be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, we may be forced to use a greater proportion of our offering proceeds to finance our acquisitions, reduce the number of properties we can purchase, and/or dispose of some of our assets. These disruptions could also adversely affect the return on the properties we do purchase. In addition, if we pay fees to lock in a favorable interest rate, falling interest rates or other factors could require us to forfeit these fees. All of these events would have a material adverse effect on our results of operations, financial condition and ability to pay distributions.
Federal Income Tax Risks
Failure to qualify as a REIT would adversely affect our operations and our ability to make distributions as we will incur additional tax liabilities.
We believe we operate in a manner that allows us to qualify as a REIT for U.S. federal income tax purposes under the Code. Qualification as a REIT involves highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. Our qualification as a REIT will depend upon our ability to meet, through investments, actual operating results, distributions and satisfaction of specific stockholder rules, the various tests imposed by the Code.
If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax and any applicable alternative minimum tax on our taxable income at regular corporate rates. If our REIT status is terminated for any reason, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of such termination. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the distributions paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Qualification as a REIT is subject to the satisfaction of tax requirements and various factual matters and circumstances that are not entirely within our control. New legislation, regulations, administrative interpretations or court decisions could change the tax laws with respect to qualification as a REIT or the federal income tax consequences of being a REIT. Our failure to continue to qualify as a REIT would adversely affect the return of our stockholders’ investment.
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To qualify as a REIT, and to avoid the payment of federal income and excise taxes and maintain our REIT status, we may be forced to borrow funds, use proceeds from the issuance of securities (including the Offering), or sell assets to pay distributions, which may result in our distributing amounts that may otherwise be used for our operations.
To obtain the favorable tax treatment accorded to REITs, we normally will be required each year to distribute to our stockholders at least 90% of our REIT taxable income, generally determined without regard to the deduction for distributions paid and excluding net capital gains. We will be subject to federal income tax on our undistributed taxable income and net capital gain and subject to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income, and (3) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on acquisitions of properties and it is possible that we might be required to borrow funds, use proceeds from the issuance of securities or sell assets in order to distribute enough of our taxable income to maintain our REIT status and to avoid the payment of federal income and excise taxes. These methods of obtaining funding could affect future distributions by increasing operating costs and decreasing available cash. In addition, such distributions may constitute a return of investor’s capital for federal income tax purposes.
If any of our partnerships fails to maintain its status as a partnership for federal income tax purposes, its income would be subject to taxation and our REIT status would be terminated.
We intend to maintain the status of our partnerships, including our Operating Partnership, as partnerships for federal income tax purposes. However, if the Internal Revenue Service (IRS) were to successfully challenge the status of any of our partnerships as a partnership, it would be taxable as a corporation. Such an event would reduce the amount of distributions that such partnership could make to us. This would also result in our losing REIT status and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the return on our stockholders’ investments. In addition, if any of the entities through which any of our partnerships owns its properties, in whole or in part, loses its characterization as a partnership for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to such partnership. Such a recharacterization of any of our partnerships or an underlying property owner could also threaten our ability to maintain REIT status.
If we were considered to actually or constructively pay a “preferential dividend’ to our stockholders, our status as a REIT could be adversely affected.
As discussed above, in order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which may not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for distributions paid and excluding net capital gains. In order for distributions to be counted as satisfying the annual distribution requirements for REITs, and to provide us with a REIT-level tax deduction, the distributions must not be “preferential dividends.” A dividend is not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with any preferences among different classes of stock as set forth in our organizational documents. Currently, there is uncertainty as to the IRS’s position regarding whether certain arrangements involving REITs could give rise to the inadvertent payment of a preferential dividend (e.g., the pricing methodology for stock purchased under a distribution reinvestment plan, the terms of stock redemptions or the allocation of certain fees among different classes of stock), except as otherwise set forth with respect to a particular REIT in a private letter ruling from the IRS to such REIT. We believe that differences in dividends distributed to holders of Class A shares as compared to Class T shares, as a result of the distribution and stockholder servicing fees, will not result in preferential dividends. However, we have not applied for a ruling from the IRS with respect to our multi-class stock structure, or our ability to deduct dividend payments in connection with that structure and its possible effect on our qualification as a REIT. We have received the opinion of Nelson Mullins that our class structure complies with current tax law requirements and that dividend payments by us will be deductible and will not adversely affect our qualification as a REIT. This opinion has been issued in connection with this offering. Opinions of counsel are not binding on the IRS or on any court. Therefore, if the IRS were to successfully assert that we paid a preferential dividend, we may be deemed to have either (a) distributed less than 100% of our REIT taxable income and therefore be subject to tax on the undistributed portion, or (b) distributed less than 90% of our REIT taxable income, in which case our status as a REIT could be terminated if we were unable to cure such failure.
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Our stockholders may have tax liability on distributions they elect to reinvest in our common stock.
If our stockholders participate in our distribution reinvestment plan, our stockholders will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless our stockholders are a tax-exempt entity, our stockholders may have to use funds from other sources to pay their tax liability on the value of the common stock received.
In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available for distribution to our stockholders.
Even if we qualify and maintain our status as a REIT, we may be subject to federal income taxes or state taxes. For example, net income from a “prohibited transaction” will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly, at the level of our Operating Partnership, or at the level of any other companies through which we indirectly own our assets. Any federal or state taxes we pay will reduce our cash available for distribution to our stockholders.
We may be required to pay some taxes due to actions of our taxable REIT subsidiaries, which would reduce our cash available for distribution to our stockholders.
Any net taxable income earned directly by our taxable REIT subsidiaries, or through entities that are disregarded for federal income tax purposes as entities separate from our taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax. We have elected to treat SS Growth TRS, Inc., as a taxable REIT subsidiary, and we may elect to treat other subsidiaries as taxable REIT subsidiaries in the future. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct certain interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by a taxable REIT subsidiary if the economic arrangements between the REIT, the REIT’s customers, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income, because not all states and localities follow the federal income tax treatment of REITs. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our stockholders.
Distributions to tax-exempt investors may be classified as unrelated business taxable income.
Neither ordinary nor capital gain distributions with respect to our common stock, nor gain from the sale of common stock, should generally constitute unrelated business taxable income (UBTI) to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:
| • | part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock may be treated as UBTI if shares of our common stock are predominately held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT share ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as UBTI; |
| • | part of the income and gain recognized by a tax-exempt investor with respect to our common stock would constitute UBTI if the investor incurs debt in order to acquire the common stock; and |
| • | part or all of the income or gain recognized with respect to our common stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from federal income taxation under Sections 501(c)(7), (9), (17) or (20) of the Code may be treated as UBTI. |
Complying with the REIT requirements may cause us to forego otherwise attractive opportunities.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders
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and the ownership of shares of our common stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, or we may be required to liquidate otherwise attractive investments in order to comply with the REIT tests. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Legislative or regulatory action could adversely affect investors.
Individuals with incomes below certain thresholds are subject to taxation at a 15% qualified dividend rate. For those with income above such thresholds, the qualified dividend rate is 20%. These tax rates are generally not applicable to distributions paid by a REIT, unless such distributions represent earnings on which the REIT itself has been taxed. As a result, distributions (other than capital gain distributions) we pay to individual investors generally will be subject to the tax rates that are otherwise applicable to ordinary income for federal income tax purposes, which currently are as high as 39.6%. This disparity in tax treatment may make an investment in our shares comparatively less attractive to individual investors than an investment in the shares of non-REIT corporations, and could have an adverse effect on the value of our common stock. Our stockholders are urged to consult with their own tax advisors with respect to the impact of recent legislation on our stockholders’ investments in our common stock and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our common stock.
Foreign purchasers of our common stock may be subject to FIRPTA tax upon the sale of their shares.
A foreign person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to a tax, known as FIRPTA tax, on the gain recognized on the disposition. Such FIRPTA tax does not apply, however, to the disposition of stock in a REIT if the REIT is “domestically controlled.” A REIT is “domestically controlled” if less than 50% of the REIT’s stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT’s existence.
We cannot assure our stockholders that we will qualify as a “domestically controlled” REIT. If we were to fail to so qualify, gain realized by foreign investors on a sale of our shares would be subject to FIRPTA tax, unless our shares were traded on an established securities market and the foreign investor did not at any time during a specified testing period directly or indirectly own more than 5% of the value of our outstanding common stock.
ERISA Risks
There are special considerations that apply to pension or profit-sharing trusts or IRAs investing in our shares which could cause an investment in our company to be a prohibited transaction and could result in additional tax consequences.
If our stockholders are investing the assets of a pension, profit-sharing, 401(k), Keogh or other qualified retirement plan or the assets of an IRA in our common stock, they should satisfy themselves that, among other things:
| • | their investment is consistent with their fiduciary obligations under ERISA and the Code; |
| • | their investment is made in accordance with the documents and instruments governing their plan or IRA, including their plan’s investment policy; |
| • | their investment satisfies the prudence and diversification requirements of ERISA; |
| • | their investment will not impair the liquidity of the plan or IRA; |
| • | their investment will not produce UBTI for the plan or IRA; |
| • | they will be able to value the assets of the plan annually in accordance with ERISA requirements; and |
| • | their investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code. |
Persons investing the assets of employee benefit plans should consider ERISA risks of investing in the shares.
ERISA and Code Section 4975 prohibit certain transactions that involve (1) certain pension, profit-sharing, employee benefit, or retirement plans or individual retirement accounts and Keogh plans, and (2) any person who is a “party-in-interest” or “disqualified person” with respect to such a plan. Consequently, the fiduciary of a plan contemplating an
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investment in the shares should consider whether we, any other person associated with the issuance of the shares, or any of their affiliates is or might become a “party-in-interest” or “disqualified person” with respect to the plan and, if so, whether an exception from such prohibited transaction rules is applicable. In addition, the Department of Labor (“DOL”) plan asset regulations provide that, subject to certain exceptions, the assets of an entity in which a plan holds an equity interest may be treated as assets of an investing plan, in which event the underlying assets of such entity (and transactions involving such assets) would be subject to the prohibited transaction provisions. We intend to take such steps as may be necessary to qualify us for one or more of the exceptions available, and thereby prevent our assets as being treated as assets of any investing plan.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
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| ITEM 2. | PROPERTIES |
As of December 31, 2015, we owned 12 self storage facilities located in six states comprising approximately 8,020 units and approximately 896,500 rentable square feet.
As of December 31, 2015, we owned the following 12 self storage facilities:
| Property |
Acquisition Date |
Acquisition Price |
Year Built |
Approx. Units |
Approx. Sq. Ft. (net) |
% of Total Rentable Sq. Ft. |
Physical Occupancy %(1) |
|||||||||||||||||||||
| Ft. Pierce – FL |
7/31/14 | $ | 3,850,000 | 2008 | 770 | 88,400 | 9.9 | % | 87.6 | % | ||||||||||||||||||
| Las Vegas I – NV |
7/31/14 | $ | 9,450,000 | 1999 | 1,210 | 171,100 | 19.1 | % | 82.4 | % | ||||||||||||||||||
| Las Vegas II – NV |
9/29/14 | $ | 6,050,000 | 1996 | 1,040 | 89,000 | 9.9 | % | 77.7 | % | ||||||||||||||||||
| Colorado Springs – CO |
1/29/15 | $ | 4,216,875 | 1983 | 680 | 61,800 | 6.9 | % | 78.9 | % | ||||||||||||||||||
| Riverside – CA |
2/05/15 | $ | 2,076,875 | 1980 | 610 | 60,100 | 6.7 | % | 87.6 | % | ||||||||||||||||||
| Stockton – CA |
2/05/15 | $ | 1,586,875 | 1984 | 560 | 49,100 | 5.5 | % | 88.0 | % | ||||||||||||||||||
| Azusa – CA |
2/05/15 | $ | 4,186,875 | 1986 | 660 | 64,400 | 7.2 | % | 82.7 | % | ||||||||||||||||||
| Romeoville – IL |
2/05/15 | $ | 3,426,875 | 1986 | 680 | 66,700 | 7.4 | % | 64.9 | % | ||||||||||||||||||
| Elgin – IL |
2/05/15 | $ | 686,875 | 1986 | 410 | 49,600 | 5.5 | % | 71.1 | % | ||||||||||||||||||
| San Antonio I – TX |
12/17/15 | $ | 12,290,000 | 1998 | 490 | 76,700 | 8.6 | % | 91.3 | % | ||||||||||||||||||
| Kingwood – TX |
12/17/15 | $ | 8,460,000 | 2001 | 470 | 60,100 | 6.7 | % | 84.2 | % | ||||||||||||||||||
| Aurora – CO |
12/17/15 | $ | 5,940,000 | 2015 | 440 | 59,500 | 6.6 | % | 55.2 | % | ||||||||||||||||||
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|
|||||||||||||||||||
| Totals |
$ | 62,221,250 | 8,020 | 896,500 | 100 | % | 80.0 | % | ||||||||||||||||||||
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|
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| (1) | Represents the occupied square feet divided by total rentable square feet as of December 31, 2015. |
The weighted average capitalization rate for the 12 self storage facilities we owned as of December 31, 2015 was approximately 5.76%. The weighted average capitalization rate is calculated as the estimated first year net operating income at the respective property divided by the property purchase price, exclusive of offering costs, closing costs and fees paid to our advisor. Estimated first year net operating income on our real estate investments is total estimated revenues generally derived from the terms of in-place leases, less property operating expenses generally based on the operating history of the property. In instances where management determines that historical amounts will not be representative of first year revenues or property operating expenses, management uses its best faith estimate of such amounts based on anticipated property operations. Estimated first year net operating income excludes interest expense, asset management fees, depreciation and amortization and our company-level general and administrative expenses. Historical operating income for these properties is not necessarily indicative of future operating results.
As of December 31, 2015, our self storage portfolio was comprised as follows:
| State |
No. of Properties |
Units(1) | Sq. Ft. (net)(2) |
% of Total Rentable Sq. Ft. |
Physical Occupancy %(3) |
|||||||||||||||
| California |
3 | 1,830 | 173,600 | 19.4 | % | 85.9 | % | |||||||||||||
| Colorado |
2 | 1,120 | 121,300 | 13.5 | % | 66.7 | % | |||||||||||||
| Florida |
1 | 770 | 88,400 | 9.9 | % | 87.6 | % | |||||||||||||
| Illinois |
2 | 1,090 | 116,300 | 13.0 | % | 67.5 | % | |||||||||||||
| Nevada |
2 | 2,250 | 260,100 | 29.0 | % | 80.8 | % | |||||||||||||
| Texas |
2 | 960 | 136,800 | 15.2 | % | 88.2 | % | |||||||||||||
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|
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|
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|
|
|
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| Total |
12 | 8,020 | 896,500 | 100.0 | % | 80.0 | % | |||||||||||||
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| (1) | Includes all rentable units, consisting of storage units, parking (approximately 275 units) and an immaterial amount of commercial office units. |
| (2) | Includes all rentable square feet consisting of storage units, parking (approximately 83,000 square feet) and an immaterial number of commercial office units. |
| (3) | Represents the occupied square feet of all facilities we owned in a state divided by total rentable square feet of all the facilities we owned in such state as of December 31, 2015. |
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Subsequent Acquisitions
On January 6, 2016, we closed on one self storage facility located in San Antonio, Texas for a purchase price of approximately $12.3 million, plus closing costs and acquisition fees, which was funded by a combination of a draw of approximately $8 million under the KeyBank Facility with KeyBank, and the remainder from the net proceeds of our offering. We incurred acquisition fees of approximately $215,000 in connection with the acquisition. See Note 11 of the Notes to the Consolidated Financial Statements contained in this report.
On February 11, 2016, we closed on vacant land located in the Stoney Creek area of Toronto, Canada that will be developed into a self storage facility (the “Stoney Creek Property”) for a U.S. dollar equivalent purchase price of approximately $1.5 million, plus closing costs and acquisition fees, which was funded from net proceeds of our public offering. We incurred acquisition fees of approximately $26,000 in connection with the acquisition. See Note 11 of the Notes to the Consolidated Financial Statements contained in this report.
| ITEM 3. | LEGAL PROCEEDINGS |
| (a) | From time to time, we are party to legal proceedings that arise in the ordinary course of our business. We are not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities. |
| (b) | None. |
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not Applicable.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
As of March 18, 2016, we had approximately 3,560,524 shares of Class A common stock outstanding and approximately 89,225 shares of Class T common stock outstanding, held by a total of approximately 1,015 stockholders of record.
There is no established trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all. We are currently selling Class A shares of our common stock to the public at a price of $10.00 per share and at a price of approximately $9.50 per Class A share pursuant to our distribution reinvestment plan and Class T shares of our common stock to the public at a price of $9.47 per share and at a price of approximately $9.00 per Class T share pursuant to our distribution reinvestment plan. Additionally, we provide discounts in our Offering for certain categories of purchasers, including based on volume discounts. Pursuant to the terms of our charter, certain restrictions are imposed on the ownership and transfer of shares.
Unless and until our shares are listed for trading on a national securities exchange, it is not expected that a public market for our shares will develop. To assist fiduciaries of plans subject to the annual reporting requirements of ERISA and account trustees or custodians to prepare reports relating to an investment in our shares, we intend to provide reports of our quarterly and annual determinations of the current value of our net assets per outstanding share to those fiduciaries (including account trustees and custodians) who identify themselves to us and request the reports. Until the time of our first estimated valuation, we generally will use the gross offering price of a share of the common stock in our Primary Offering as the per share estimated value thereof or, with respect to an offering of other securities from which the value of a share of common stock can be estimated, the value derived from the gross offering price of the other security as the per share estimated value of the common stock. This use of the gross offering price as the estimated value is not likely to reflect the proceeds a stockholder would receive upon a liquidation or upon the sale of their shares. In addition, this per share valuation method is not designed to arrive at a valuation that is related to any individual or aggregated value estimates or appraisals of the value of our assets.
As required by recent amendments to rules promulgated by FINRA, we expect to disclose an estimated per share value of our shares based on a valuation no later than 150 days following the second anniversary of the date on which we broke escrow in our Offering, although we may determine to provide an estimated per share value based upon a valuation earlier than presently anticipated. When determining the estimated value per share, there are currently no SEC, federal and state rules that establish requirements specifying the methodology to employ in determining an estimated value per share; provided, however, that the determination of the estimated value per share must be conducted by, or with the material assistance or confirmation of, a third-party valuation expert or service and must be derived from a methodology that conforms to standard industry practice. The valuations will be estimates and consequently should not be viewed as an accurate reflection of the fair value of our investments nor will they represent the amount of net proceeds that would result from an immediate sale of our assets.
With respect to any estimate of the value of our common stock, there can be no assurance that the estimated value, or method used to estimate value, would be sufficient to enable an ERISA fiduciary or an IRA custodian to comply with the ERISA or other regulatory requirements. The DOL or the IRS may determine that a plan fiduciary or an IRA custodian is required to take further steps to determine the value of our shares.
Distributions
We elected to be taxed as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Code beginning with the taxable year ended December 31, 2014. By qualifying as a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT and intend to operate in the foreseeable future in such a manner that we will remain qualified as a REIT for federal income tax purposes.
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For income tax purposes, cash distributions to common stockholders are characterized as ordinary dividends, capital gain dividends, or as nontaxable distributions. To the extent that we make a cash distribution in excess of our current or accumulated earnings and profits, the distribution will be a non-taxable return of capital, reducing the tax basis in each U.S. stockholder’s shares, and the amount of each distribution in excess of a U.S. stockholder’s tax basis in its shares will be taxable as gain realized from the sale of its shares. We did not declare or pay any distributions to our common shareholders during the year ended December 31, 2014. For 2015, all of our cash distributions constituted non-taxable returns of capital, which were paid from offering proceeds.
As of December 31, 2015, our Operating Partnership had issued and outstanding approximately 638,463 or approximately $16.0 million of Preferred Units. The Preferred Units receive current distributions (the “Current Distributions”) at a rate of one-month LIBOR plus 6.5% per annum, payable monthly and calculated on an actual/360 basis. In addition to the Current Distributions, our Operating Partnership has the obligation to elect either (A) pay the holder of the Preferred Units additional distributions monthly in an amount that will accrue at the rate of: (i) 4.35% until January 31, 2017; and (ii) thereafter, 6.35% or (B) defer the additional distributions in an amount that will accrue monthly at the rate of (i) for the period until January 31, 2017, LIBOR plus 10.85% and (ii) thereafter, LIBOR plus 12.85% (the “Deferred Distributions”).
During the year ended December 31, 2015, approximately $1.1 million of Current Distributions were paid. As of December 31, 2015, Current Distributions and Deferred Distributions totaling approximately $1.0 million were accrued.
On April 13, 2015, our board of directors authorized a stock distribution of 0.01 Class A shares, $0.001 par value per share, or 1.0% of each outstanding Class A Share (equivalent to a 4% annualized stock distribution), to the stockholders of record at the close of business on June 30, 2015 which totaled 8,849 Class A shares which were issued on July 15, 2015.
On July 22, 2015, our board of directors authorized a stock distribution of 0.01 Class A shares, $0.001 par value per share, or 1.0% of each outstanding Class A Share (equivalent to a 4% annualized stock distribution), to the stockholders of record at the close of business on September 30, 2015 which totaled 11,975 Class A shares which were issued on October 15, 2015.
On October 20, 2015, our board of directors authorized a stock distribution of 0.0075 Class A Shares, $0.001 par value per share, or 0.75% of each outstanding Class A Share (equivalent to a 3.0% annualized stock distribution), and 0.0075 Class T Shares, $0.0001 par value per share, or 0.75% of each outstanding Class T Share (equivalent to a 3.0% annualized stock distribution) to the holders of record of all the issued and outstanding Class A Shares and Class T Shares as of the close of business on December 31, 2015. Such stock distribution totaled 19,906 Class A shares and 135 Class T Shares, which were issued on January 15, 2016.
On October 20, 2015, our board of directors declared a daily cash distribution in the amount of $0.000259 per day per share (equivalent to an annualized distribution rate of 1.0% assuming the Class T Share was purchased for $9.47, and a rate of approximately 0.95% assuming the Class A Share was purchased for $10.00) on the outstanding shares of common stock, payable to stockholders of record of such shares as shown on our books as of the close of business on each day during the period commencing on November 1, 2015 and ending December 31, 2015.
The following table shows the cash distributions we have paid through December 31, 2015:
| Quarter |
Preferred Unitholders |
OP Unit Holders |
Common Stockholders (1) |
Distributions Declared per Common Share |
||||||||||||
| 1st Quarter 2014 |
$ | — | $ | — | $ | — | $ | — | ||||||||
| 2nd Quarter 2014 |
$ | — | $ | — | $ | — | $ | — | ||||||||
| 3rd Quarter 2014 |
$ | 41,513 | $ | — | $ | — | $ | — | ||||||||
| 4th Quarter 2014 |
$ | 151,008 | $ | — | $ | — | $ | — | ||||||||
| 1st Quarter 2015 |
$ | 121,579 | $ | — | $ | — | $ | — | ||||||||
| 2nd Quarter 2015 |
$ | 384,709 | $ | — | $ | — | $ | — | ||||||||
| 3rd Quarter 2015 |
$ | 298,384 | $ | — | $ | — | $ | — | ||||||||
| 4th Quarter 2015 |
$ | 276,536 | $ | — | $ | 5,983 | $ | 0.016 | ||||||||
| (1) | Declared distributions are paid monthly in arrears |
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We have not been able to and may not be able to pay Current and Deferred Distributions to Preferred Units and distributions on our common stock from our cash flows from operations, in which case distributions may be paid in part from debt financing or from proceeds from the issuance of common stock. The payment of distributions from sources other than cash flows from operations may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.
Over the long-term, we expect that a greater percentage of our distributions will be paid from cash flows from operations. However, our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including our ability to raise and invest capital at favorable yields, the financial performance of our investments in the current real estate and financial environment and the types and mix of investments in our portfolio. As a result, future distributions declared and paid may exceed cash flow from operations.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides details of our Employee and Director Long-Term Incentive Plan as of December 31, 2015, under which shares of our Class A common stock are authorized for issuance.
| Plan Category |
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights |
Number of Securities Remaining for Future Issuance Under Equity Compensation Plans(1) |
|||||||||
| Equity Compensation Plans Approved by Security Holders |
— | — | 263,183 | |||||||||
| Equity Compensation Plans Not Approved by Security Holders |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
— | — | 263,183 | |||||||||
|
|
|
|
|
|
|
|||||||
| (1) | The total number of shares of our Class A common stock reserved for issuance under the plan is equal to 10% of our outstanding shares of Class A and Class T common stock at any time, net of any shares already issued under the plan, but not to exceed 10,000,000 shares in the aggregate. As of December 31, 2015, we had 2,694,325 outstanding shares of common stock. |
Recent Sales of Unregistered Securities
On May 31, 2013, our Advisor purchased 100 shares of common stock for $1,000 and became our initial stockholder. These shares were issued in a private transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Until January 16, 2015, we were engaged in a Private Offering of up to $109,500,000 in shares of common stock to accredited investors (as defined in Rule 501 under the Act). On May 23, 2014, we reached the minimum offering amount of $1.0 million in sales of shares in our Private Offering, at which time subscriptions held in escrow pending our satisfaction of the minimum offering amount were released and we commenced operations. We terminated the Private Offering on January 16, 2015. We raised gross offering proceeds of approximately $7.8 million in shares, before commissions, fees and expenses. Select Capital Corporation was the dealer manager for the Private Offering.
Each of the purchasers of our common shares in the Private Offering has represented to us that he or she is an accredited investor. Based upon these representations, we believe that the issuances of our common shares were exempt from the registration requirements pursuant to Rule 506 and Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder.
Use of Proceeds from Registered Securities
On January 20, 2015, our Initial Offering (SEC File No. 333-193480) for a maximum of 110 million shares of common stock, consisting of 100 million shares for sale to the public and 10 million shares for sale pursuant to our distribution reinvestment plan, was declared effective by the SEC. On September 28, 2015, we revised our Primary Offering and are now offering two classes of shares of common stock: Class A common stock, $0.001 par value per share (the “Class A Shares”)
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and Class T common stock, $0.001 par value per share (the “Class T Shares”). As of December 31, 2015, we had sold approximately 1.8 million Class A Shares and approximately 20,000 Class T Shares in our Public Offering for gross proceeds of approximately $17.9 million and approximately $0.2 million, respectively. From this amount, we incurred approximately $1.7 million in selling commissions and dealer manager fees (of which approximately $1.4 million was re-allowed to third party broker-dealers), and approximately $1.3 million in organization and offering costs. With the net offering proceeds, Preferred Units and indebtedness, we acquired approximately $42.9 million in self storage facilities and made the other payments reflected under “Cash Flows from Financing Activities” in our consolidated statements of cash flows included in this report.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
As noted in Item 1 of this report and above, on May 31, 2013, our Advisor purchased 100 shares of common stock for $1,000 and became our initial stockholder.
Redemption Program
Our share redemption program enables our stockholders to have their shares redeemed by us, subject to the significant conditions and limitations described in our prospectus. Since inception, we have not received any redemption requests nor did we redeem any shares of common stock.
| ITEM 6. | SELECTED FINANCIAL DATA |
The following selected financial and operating information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements and related notes thereto included elsewhere in this Form 10-K:
| As of and for the Year Ended December 31, 2015 |
As of and for the Year Ended December 31, 2014 |
As of and for the Period 2013 |
||||||||||
| Operating Data |
||||||||||||
| Total revenues |
$ | 4,857,407 | $ | 665,135 | $ | — | ||||||
| Operating loss |
(2,350,689 | ) | (1,219,938 | ) | — | |||||||
| Net loss attributable to Strategic Storage Growth Trust, Inc. |
(5,465,772 | ) | (1,817,257 | ) | — | |||||||
| Net loss per Class A common share-basic and diluted |
(4.59 | ) | (7.31 | ) | — | |||||||
| Net loss per Class T common share-basic and diluted |
(4.59 | ) | — | — | ||||||||
| Dividends declared per common share |
0.016 | — | — | |||||||||
| Balance Sheet Data |
||||||||||||
| Real estate facilities |
$ | 60,329,399 | $ | 18,967,479 | $ | — | ||||||
| Total assets |
69,929,708 | 24,967,883 | 202,000 | |||||||||
| Total debt |
38,300,000 | 9,545,386 | — | |||||||||
| Total liabilities |
40,644,751 | 11,964,177 | — | |||||||||
| Equity |
13,389,399 | 3,095,402 | 202,000 | |||||||||
| Other Data |
||||||||||||
| Net cash used in operating activities |
$ | (672,711 | ) | $ | (598,022 | ) | $ | — | ||||
| Net cash used in investing activities |
(44,311,649 | ) | (20,172,479 | ) | — | |||||||
| Net cash provided by financing activities |
47,084,108 | 25,068,799 | 202,000 | |||||||||
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with the “Selected Financial Data” above and our accompanying consolidated financial statements and the notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.
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Overview
Strategic Storage Growth Trust, Inc. was formed on March 12, 2013 under the Maryland General Corporation Law for the purpose of engaging in the business of investing in self storage facilities and related self storage real estate investments. Our year end is December 31. As used in this report, “we,” “us,” “our,” and “Company” refer to Strategic Storage Growth Trust, Inc. and each of our subsidiaries.
SmartStop Asset Management, LLC (our “Sponsor”), is the sponsor of our Offering (as defined below). Our Sponsor became our sponsor on October 1, 2015 in connection with the merger of SmartStop Self Storage, Inc. into Extra Space Storage, Inc. Our Sponsor owns 97.5% of the economic interests (and 100% of the voting membership interests) of SS Growth Advisor, LLC, a Delaware limited liability company (our “Advisor”) and owns 100% of SS Growth Property Management, LLC, a Delaware limited liability company (our “Property Manager”). See Note 1 of the Notes to the Consolidated Financial Statements contained in this report for further details about our affiliates.
On January 20, 2015, we commenced a public offering of a maximum of $1,000,000,000 in common shares for sale to the public (the “Primary Offering”) and $95,000,000 in common shares for sale pursuant to our distribution reinvestment plan (collectively, the “Public Offering,” or the “Offering”). On September 28, 2015, we revised our Primary Offering and are now offering two classes of shares of common stock: Class A common stock, $0.001 par value per share (the “Class A Shares”) and Class T common stock, $0.001 par value per share (the “Class T Shares”). As of December 31, 2015, we had sold approximately 2.6 million Class A Shares and approximately 20,000 Class T Shares in our Public and Private Offerings for gross proceeds of approximately $25.8 million and approximately $0.2 million, respectively. We intend to invest the net proceeds from our offerings primarily in opportunistic self storage facilities, which may include facilities to be developed, currently under development or in lease-up and self storage facilities in need of expansion, redevelopment or repositioning.
As of December 31, 2015, we owned 12 self storage facilities located in six states (California, Colorado, Florida, Illinois, Nevada and Texas) comprising approximately 8,020 units and approximately 896,500 rentable square feet.
Critical Accounting Policies
We have established accounting policies which conform to generally accepted accounting principles (“GAAP”). Preparing financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. Following is a discussion of the estimates and assumptions used in setting accounting policies that we consider critical in the presentation of our financial statements. Many estimates and assumptions involved in the application of GAAP may have a material impact on our financial condition or operating performance, or on the comparability of such information to amounts reported for other periods, because of the subjectivity and judgment required to account for highly uncertain items or the susceptibility of such items to change. These estimates and assumptions affect our reported amounts of assets and liabilities, our disclosure of contingent assets and liabilities at the dates of the financial statements and our reported amounts of revenue and expenses during the period covered by this report. If management’s judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied or different amounts of assets, liabilities, revenues and expenses would have been recorded, thus resulting in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.
We believe that our critical accounting policies include the following: real estate purchase price allocations; the evaluation of whether any of our long-lived assets have been impaired; the determination of the useful lives of our long-lived assets; and the evaluation of the consolidation of our interests in joint ventures. The following discussion of these policies supplements, but does not supplant the description of our significant accounting policies, as contained in Note 2 of the Notes to the Consolidated Financial Statements contained in this report, and is intended to present our analysis of the uncertainties involved in arriving upon and applying each policy.
Real Estate Purchase Price Allocation
We allocate the purchase prices of acquired properties based on a number of estimates and assumptions. We allocate the purchase prices to the tangible and intangible assets acquired and the liabilities assumed based on estimated fair values. These estimated fair values are based upon comparable market sales information for land and estimates of depreciated replacement cost of equipment, building and site improvements. Acquisitions of portfolios of properties are allocated to the individual properties based upon an income approach or a cash flow analysis using appropriate risk adjusted capitalization rates which we estimate based upon the relative size, age, and location of the individual property along with actual historical and estimated occupancy and rental rate levels, and other relevant factors. If available, and determined by management to be
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appropriate, appraised values are used, rather than these estimated values. Because we believe that substantially all of the leases in place at properties we will acquire will be at market rates, as the majority of the leases are month-to-month contracts, we do not expect to allocate any portion of the purchase prices to above or below market leases. The determination of market rates is also subject to a number of estimates and assumptions. Our allocations of purchase prices could result in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements, as such allocations may vary dramatically based on the estimates and assumptions we use.
Impairment of Long-Lived Assets
The majority of our assets consist of long-lived real estate assets as well as intangible assets related to our acquisitions. We will continually evaluate such assets for impairment based on events and changes in circumstances that may arise in the future and that may impact the carrying amounts of our long-lived assets. When indicators of potential impairment are present, we will assess the recoverability of the particular asset by determining whether the carrying value of the asset will be recovered, through an evaluation of the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. This evaluation is based on a number of estimates and assumptions. Based on this evaluation, if the expected undiscounted future cash flows do not exceed the carrying value, we will adjust the value of the long-lived asset and recognize an impairment loss. Our evaluation of the impairment of long-lived assets could result in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements, as the amount of impairment loss, if any, recognized may vary based on the estimates and assumptions we use.
Estimated Useful Lives of Long-Lived Assets
We assess the useful lives of the assets underlying our properties based upon a subjective determination of the period of future benefit for each asset. We record depreciation expense with respect to these assets based upon the estimated useful lives we determine. Our determinations of the useful lives of the assets could result in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements, as such determinations, and the corresponding amount of depreciation expense, may vary dramatically based on the estimates and assumptions we use.
Consolidation of Investments in Joint Ventures
We will evaluate the consolidation of our investments in joint ventures in accordance with relevant accounting guidance. This evaluation requires us to determine whether we have a controlling interest in a joint venture through a means other than voting rights, and, if so, such joint venture may be required to be consolidated in our financial statements. Our evaluation of our joint ventures under such accounting guidance could result in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements, as the joint venture entities included in our financial statements may vary based on the estimates and assumptions we use.
REIT Qualification
We made an election under Section 856(c) of the Internal Revenue Code of 1986 (the Code) to be taxed as a REIT under the Code, commencing with the taxable year ended December 31, 2014. By qualifying as a REIT for federal income tax purposes, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is denied. Such an event could materially and adversely affect our net income and could have a material adverse impact on our financial condition and results of operations. However, we believe that we are organized and operate in a manner that will enable us to continue to qualify for treatment as a REIT for federal income tax purposes, and we intend to continue to operate as to remain qualified as a REIT for federal income tax purposes.
Results of Operations
Overview
We derived revenues principally from: (i) rents received from tenants who rent storage units under month-to-month leases at each of our self storage facilities; (ii) sales of packing- and storage-related supplies at our storage facilities; and (iii) until October 1, 2015, our tenant insurance program. Therefore, our operating results depend significantly on our ability to retain our existing tenants and lease our available self storage units to new tenants, while maintaining and, where possible, increasing the prices for our self storage units. Additionally, our operating results depend on our tenants making their required rental payments to us.
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Competition in the market areas in which we operate is significant and affects the occupancy levels, rental rates, rental revenues and operating expenses of our facilities. Development of any new self storage facilities would intensify competition of self storage operators in markets in which we operate.
As of December 31, 2015, we owned 12 self storage properties comprising approximately 8,020 units and approximately 896,500 rentable square feet. Our operating results for the year ended December 31, 2014 include results for partial year periods for three self storage facilities that we owned as of December 31, 2014, while our operating results for the year ended December 31, 2015 include full year periods for those three self storage facilities plus partial year periods for the nine self storage facilities we acquired during 2015; therefore, we believe there is little basis for comparison between the years ended December 31, 2015 and 2014. Operating results in future periods will depend on the results of operations of these properties and of the real estate properties that we acquire in the future.
Comparison of the Years Ended December 31, 2015 and 2014
Self Storage Rental Revenue
Rental revenue for the year ended December 31, 2015 was approximately $4.7 million, as compared to rental revenue for the year ended December 31, 2014 of approximately $0.6 million, an increase of approximately $4.1 million. The increase in rental revenue is primarily attributable to the acquisition of nine self storage properties during 2015 and to a lesser extent a full year of operations from the three properties acquired during 2014. We expect rental revenue to increase in future periods commensurate with our future acquisition activity.
Ancillary Operating Revenue
Ancillary operating revenue for the year ended December 31, 2015 was approximately $150,000, as compared to ancillary operating revenue for the year ended December 31, 2014 of approximately $24,000, an increase of approximately $126,000. The increase in ancillary operating revenue is primarily attributable to the acquisition of nine self storage properties during 2015 and to a lesser extent a full year of operations from the three properties acquired during 2014. We expect ancillary operating revenue to increase in future periods commensurate with our future acquisition activity.
Property Operating Expenses
Property operating expenses for the year ended December 31, 2015 were approximately $2.2 million, as compared to property operating expenses for the year ended December 31, 2014 of approximately $0.3 million, an increase of approximately $1.9 million. Property operating expenses includes the cost to operate our facilities including payroll, utilities, insurance, real estate taxes, and marketing. The increase in property operating expenses is primarily attributable to the acquisition of nine self storage properties during 2015 and to a lesser extent a full year of operations from the three properties acquired during 2014. We expect property operating expenses to increase in the future as our operational activity increases.
Property Operating Expenses – Affiliates
Property operating expenses – affiliates for the year ended December 31, 2015 were approximately $0.6 million, as compared to property operating expenses – affiliates for the year ended December 31, 2014 of approximately $0.1 million, an increase of approximately $0.5 million. Property operating expenses – affiliates includes property management fees and asset management fees. The increase in property operating expenses – affiliates is primarily attributable to the acquisition of nine self storage properties during 2015 and to a lesser extent a full year of operations from the three properties acquired during 2014. We expect property operating expenses – affiliates to increase in future periods as we have a full year of results from our 2015 acquisitions and commensurate with our future acquisition activity.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2015 were approximately $1.2 million, as compared to general and administrative expenses for the year ended December 31, 2014 of approximately $0.5 million, an increase of approximately $0.7 million. General and administrative expenses consist primarily of legal expenses, transfer agent fees, directors’ and officers’ insurance expense, an allocation of a portion of our Advisor’s payroll related costs, accounting expenses and board of directors’ related costs. We expect general and administrative expenses to increase in the future as our operational activity increases.
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Depreciation and Amortization Expenses
Depreciation and amortization expenses for the year ended December 31, 2015 were approximately $2.1 million, as compared to approximately $0.4 million for the year ended December 31, 2014. Depreciation expense consists primarily of depreciation on the buildings and site improvements at our properties. Amortization expense consists of the amortization of intangible assets resulting from our acquisitions. The increase in depreciation and amortization expense is primarily attributable to the acquisition of nine self storage properties during 2015 and to a lesser extent a full year of operations from the three properties acquired during 2014. We expect depreciation and amortization expense to increase in future periods as we have a full year of results from our 2015 acquisitions and commensurate with our future acquisition activity.
Acquisition Expenses - Affiliates
Acquisition expenses – affiliates for the year ended December 31, 2015 were approximately $0.8 million, as compared to approximately $0.5 million for the year ended December 31, 2014. These acquisition expenses relate to the costs associated with the nine properties acquired during 2015 and three properties acquired in the third quarter of 2014. We expect acquisition expenses - affiliates to fluctuate commensurate with our acquisition activities.
Other Property Acquisition Expenses
Other property acquisition expenses for the year ended December 31, 2015 were approximately $0.3 million, as compared to approximately $0.1 million for the year ended December 31, 2014. These acquisition expenses relate to the due diligence costs associated with the nine properties acquired during 2015 and three properties acquired in the third quarter of 2014. We expect acquisition expenses to fluctuate commensurate with our acquisition activities.
Interest Expense
Interest expense for the year ended December 31, 2015 was approximately $0.7 million, as compared to approximately $0.2 million for the year ended December 31, 2014. The increase in interest expense is attributable to the debt obtained in conjunction with the acquisition of nine self storage properties during 2015. We expect interest expense to increase in future periods as we have a full year of interest from existing debt and commensurate with future increases to our debt level.
Debt issuance costs expense
Debt issuance costs expense for the year ended December 31, 2015 were approximately $0.4 million, as compared to approximately $0.1 million for the year ended December 31, 2014. The increase in debt issuance costs expense is attributable to the costs incurred in connection with obtaining financing for the acquisition of nine self storage properties during 2015. We expect debt issuance costs expense to increase in future periods as we have a full year of expense and commensurate with our future financing activity.
Distributions to Preferred Unitholders in our Operating Partnership
Distributions to preferred unitholders in our Operating Partnership for the year ended December 31, 2015 were approximately $1.9 million, as compared to approximately $0.4 million for the year ended December 31, 2014. The increase in distributions to preferred unitholders in our Operating Partnership is attributable to the increase in preferred equity investment made in our Operating Partnership during 2015 which was used to partially finance the acquisitions of six self storage properties acquired during the first quarter of 2015. We expect distributions to preferred unitholders in our Operating Partnership to fluctuate depending on the outstanding preferred equity balance.
Comparison of the Year Ended December 31, 2014 and the Period from March 12, 2013(date of inception) through December 31, 2013
Self Storage Rental Revenue
Rental revenue for the year ended December 31, 2014 and the period from March 12, 2013 (date of inception) through December 31, 2013 were approximately $0.6 million and none, respectively. The increase in rental revenue is attributable to the acquisition of our three self storage properties during 2014.
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Ancillary Operating Revenue
Ancillary operating revenue for the year ended December 31, 2014 and the period from March 12, 2013 (date of inception) through December 31, 2013 were approximately $24,000 and none, respectively. The increase in ancillary operating revenue is attributable to the acquisition of our three self storage properties during 2014.
Property Operating Expenses
Property operating expenses for the year ended December 31, 2014 and the period from March 12, 2013 (date of inception) through December 31, 2013 were approximately $288,000 and none, respectively. Property operating expenses includes the cost to operate our facilities including payroll, utilities, insurance, real estate taxes, and marketing. The increase in property operating expenses is attributable to the acquisition of our three self storage properties during 2014.
Property Operating Expenses – Affiliates
Property operating expenses – affiliates for the year ended December 31, 2014 and the period from March 12, 2013 (date of inception) through December 31, 2013 were approximately $104,000 and none, respectively. Property operating expenses – affiliates includes property management fees and asset management fees. The increase in property operating expenses – affiliates is attributable to the acquisition of our three self storage properties during 2014.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2014 and the period from March 12, 2013 (date of inception) through December 31, 2013 were approximately $0.5 million and none, respectively. General and administrative expenses consist primarily of legal expenses, transfer agent fees, directors’ and officers’ insurance expense, an allocation of a portion of our Advisor’s payroll related costs, accounting expenses and board of directors’ related costs.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for the year ended December 31, 2014 and the period from March 12, 2013 (date of inception) through December 31, 2013 were approximately $0.4 million and none, respectively. Depreciation expense consists primarily of depreciation on the buildings and site improvements at our properties. Amortization expense consists of the amortization of intangible assets resulting from our acquisitions. The increase in depreciation and amortization expense is attributable to the acquisition of our three self storage properties during 2014.
Acquisition Expenses - Affiliates
Acquisition expenses – affiliates for the year ended December 31, 2014 and the period from March 12, 2013 (date of inception) through December 31, 2013 were approximately $0.5 million and none, respectively. These acquisition expenses primarily relate to the due diligence costs associated with the potential acquisitions.
Other Property Acquisition Expenses
Other property acquisition expenses for the year ended December 31, 2014 and the period from March 12, 2013 (date of inception) through December 31, 2013 were approximately $0.1 million and none, respectively. These acquisition expenses primarily relate to the due diligence costs associated with the potential acquisitions.
Interest Expense
Interest expense for the year ended December 31, 2014 and the period from March 12, 2013 (date of inception) through December 31, 2013 were approximately $0.2 million and none, respectively. The increase in interest expense is attributable to the debt obtained in conjunction with the acquisition of our three self storage properties during 2014.
Debt issuance costs expense
Debt issuance costs expense for the year ended December 31, 2014 and the period from March 12, 2013 (date of inception) through December 31, 2013 were approximately $65,000 and none, respectively. The increase in debt issuance costs expense is attributable to the costs incurred in connection with obtaining financing for the acquisition of our three self storage properties during 2014.
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Cash Flows
A comparison of cash flows for operating, investing and financing activities for the years ended December 31, 2015 and 2014 are as follows:
| Year ended December 31, 2015 |
Year ended December 31, 2014 |
Change | ||||||||||
| Net cash flow provided by (used in): |
||||||||||||
| Operating activities |
$ | (672,711 | ) | $ | (598,022 | ) | $ | (74,689 | ) | |||
| Investing activities |
(44,311,649 | ) | (20,172,479 | ) | (24,139,170 | ) | ||||||
| Financing activities |
47,084,108 | 25,068,799 | 22,015,309 | |||||||||
Cash flows used in operating activities for the years ended December 31, 2015 and 2014 were approximately $0.7 and $0.6 million, respectively, an increase in cash used year to year of approximately $0.1 million.
Cash flows used in investing activities for the years ended December 31, 2015 and 2014 were approximately $44.3 million and $20.2 million, respectively, an increase in the use of cash of approximately $24.1 million. The increase in cash used in investing activities primarily relates to acquiring nine properties for approximately $42.9 million during 2015 in comparison to three properties for approximately $19.4 million during 2014.
Cash flows provided by financing activities for the years ended December 31, 2015 and 2014 were approximately $47.1 million and $25.1 million, respectively, an increase of approximately $22.0 million. The increase in cash provided by financing activities over the prior period consisted of approximately $18.8 million from the net proceeds of secured debt, approximately $8.2 million of net proceeds from the issuance of common stock, partially offset primarily by a reduction of approximately $4.1 million from the net proceeds from preferred equity in our Operating Partnership and increased distributions thereto of approximately $0.9 million.
Liquidity and Capital Resources
Short-Term Liquidity and Capital Resources
We generally expect that we will meet our short-term operating liquidity requirements from the combination of proceeds of our Offering, proceeds from secured or unsecured financing from banks or other lenders, net cash provided by property operations and advances from our Advisor which will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement set forth in our advisory agreement with our Advisor. Per the advisory agreement, all advances from our Advisor shall be reimbursed no less frequently than monthly, although our Advisor has indicated that it may waive such a requirement on a month-by-month basis. The organizational and offering costs associated with the Offering may be paid by us or our Advisor. Our Advisor must reimburse us within 60 days after the end of the month in which the Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions and dealer manager fees) in excess of 3.5% of the gross offering proceeds from the Primary Offering. Operating cash flows are expected to increase as properties are added to our portfolio and as our properties continue to lease-up.
Distribution Policy
As a result of our investment focus on opportunistic self storage properties, we cannot assure our stockholders we will continue to make cash distributions. Until we are generating operating cash flow sufficient to make distributions to our stockholders, we may decide to continue to make stock distributions or to continue to make distributions using a combination of stock and cash, and to fund some or all of our distributions from the proceeds of our Offering or from borrowings in anticipation of future cash flow, which may reduce the amount of capital we ultimately invest in properties. Because substantially all of our operations will be performed indirectly through our Operating Partnership, our ability to pay distributions depends in large part on our Operating Partnership’s ability to pay distributions to its partners, including to us. In the event we do not have enough cash from operations to fund cash distributions, we may borrow, issue additional securities or sell assets in order to fund the distributions or make the distributions out of net proceeds from our Offering. Though we have no present intention to make in-kind distributions, we are authorized by our charter to make in-kind distributions of readily marketable securities, distributions of beneficial interests in a liquidating trust established for our dissolution and the liquidation of our assets in accordance with the terms of the charter or distributions that meet all of the following conditions: (a) our board of directors advises each stockholder of the risks associated with direct ownership of the property; (b) our board of directors offers each stockholder the election of receiving such in-kind distributions; and (c) in-kind distributions are only made to those stockholders who accept such offer.
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Over the long-term, we expect that a greater percentage of our distributions will be paid from cash flows from operations. However, our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including our ability to raise and invest capital at favorable yields, the financial performance of our investments in the current real estate and financial environment and the types and mix of investments in our portfolio. As a result, future distributions declared and paid may exceed cash flow from operations.
Distributions are paid to our stockholders based on the record date selected by our board of directors. We currently declare and pay cash distributions monthly based on daily declaration and record dates so that investors may be entitled to distributions immediately upon purchasing our shares. Distributions will be authorized at the discretion of our board of directors, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Code. Our board of directors may increase, decrease or eliminate the distribution rate that is being paid at any time. Distributions will be made on all classes of our common stock at the same time. The per share amount of distributions on Class A Shares and Class T Shares will likely differ because of different allocations of class-specific expenses. Specifically, distributions on Class T Shares will likely be lower than distributions on Class A Shares because Class T Shares are subject to ongoing stockholder servicing fees. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
| • | the amount of time required for us to invest the funds received in the Offering; |
| • | our operating and interest expenses; |
| • | the amount of distributions or dividends received by us from our indirect real estate investments; |
| • | our ability to keep our properties occupied; |
| • | our ability to maintain or increase rental rates; |
| • | construction defects or capital improvements; |
| • | capital expenditures and reserves for such expenditures; |
| • | the issuance of additional shares; and |
| • | financings and refinancings. |
The following shows our cash distributions and the sources of such distributions for the respective periods presented:
| Year Ended December 31, 2015 |
Year Ended December 31, 2014 |
|||||||||||||||
| Distributions paid in cash — common stockholders |
$ | 5,984 | $ | — | ||||||||||||
| Distributions paid in cash — Operating Partnership unitholders |
— | — | ||||||||||||||
| Distributions paid in cash — preferred unitholders |
1,081,208 | 192,521 | ||||||||||||||
| Distributions reinvested |
10,706 | — | ||||||||||||||
|
|
|
|
|
|||||||||||||
| Total distributions |
$ | 1,097,898 | $ | 192,521 | ||||||||||||
|
|
|
|
|
|||||||||||||
| Source of distributions |
||||||||||||||||
| Cash flows provided by operations |
$ | — | — | $ | — | — | ||||||||||
| Offering proceeds from Primary Offering |
1,087,192 | 99.0 | % | 192,521 | 100.0 | % | ||||||||||
| Offering proceeds from distribution reinvestment plan |
10,706 | 1.0 | % | — | — | |||||||||||
|
|
|
|
|
|||||||||||||
| Total sources |
$ | 1,097,898 | 100.0 | % | $ | 192,521 | 100.0 | % | ||||||||
|
|
|
|
|
|||||||||||||
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For the year ended December 31, 2015, we paid total distributions of approximately $1.1 million. For the year ended December 31, 2014, we declared no distributions on our common stock. From our commencement of paying cash distributions on our common shares in November 2015 through December 31, 2015, the payment of distributions has been paid solely from Offering proceeds. We must distribute to our stockholders at least 90% of our taxable income each year in order to meet the requirements for being treated as a REIT under the Code. Our directors may authorize distributions in excess of this percentage as they deem appropriate. Because we may receive income from interest or rents at various times during our fiscal year, distributions may not reflect our income earned in that particular distribution period, but may be made in anticipation of cash flow that we expect to receive during a later period and may be made in advance of actual receipt of funds in an attempt to make distributions relatively uniform. To allow for such differences in timing between the receipt of income and the payment of expenses, and the effect of required debt payments, among other things, we could be required to borrow funds from third parties on a short-term basis, issue new securities, or sell assets to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We are not prohibited from undertaking such activities by our charter, bylaws or investment policies, and we may use an unlimited amount from any source to pay our distributions. These methods of obtaining funding could affect future distributions by increasing operating costs and decreasing available cash, which could reduce the value of our stockholders’ investment in our shares. In addition, such distributions may constitute a return of investors’ capital.
We have not been able to and may not be able to pay distributions from our cash flows from operations, in which case distributions may be paid in part from debt financing or from proceeds from the issuance of common stock in our Primary Offering and pursuant to our distribution reinvestment plan. The payment of distributions from sources other than cash flows from operations may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.
Over the long-term, we expect that a greater percentage of our distributions will be paid from cash flows from operations. However, our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including our ability to raise and invest capital at favorable yields, the financial performance of our investments in the current real estate and financial environment and the types and mix of investments in our portfolio. As a result, future distributions declared and paid may exceed cash flow from operations.
Indebtedness
As of December 31, 2015, we had $38.3 million of outstanding consolidated indebtedness. As of December 31, 2015, all of our total consolidated indebtedness was variable rate.
On July 31, 2014, we, through our Operating Partnership and certain property-owning special purpose entities wholly-owned by our Operating Partnership, obtained a senior secured revolving term loan (the “KeyBank Facility”) from KeyBank National Association (“KeyBank”) pursuant to a credit agreement (the “Credit Agreement”) for the purpose of funding real property acquisitions. The maximum amount we could borrow under the KeyBank Facility was initially $20,000,000. On December 17, 2015, we entered into an Amendment to the Credit Agreement (the “Amendment”), whereby KeyBank agreed to lend us up to $40 million total under the KeyBank Facility and we borrowed an additional approximately $20.5 million. As of December 31, 2015, the total amount borrowed under the KeyBank Facility was $38.3 million.
In addition, the Amendment permits us to borrow up to an additional $6.25 million (the “Additional Borrowing”) within 120 days following December 17, 2015 (the “Adjustment Period”), for a total potential borrowing amount of $46.25 million during the Adjustment Period. Pursuant to the Amendment, we must repay the Additional Borrowing by the end of the Adjustment Period.
On January 6, 2016, we borrowed an additional approximately $8 million to partially fund a self storage facility acquisition.
During the Curtailment Period (as that term is defined in the Amendment), we and the Operating Partnership must apply all proceeds from all asset sales and refinancing as well as all net proceeds of equity issuances to pay down the outstanding principal balance on the KeyBank Facility to an aggregate amount of the lesser of either $40 million or the borrowing base available calculated in accordance with the covenants that are applied outside of the Adjustment Period.
Subsequent to December 31, 2015, the KeyBank Facility was further amended. See Note 11 of the Notes to the Consolidated Financial Statements contained in this report.
We have the right to request the KeyBank Facility be increased up to $150,000,000 in minimum increments of $20,000,000 during the first 26 months of the term of the KeyBank Facility.
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Table of Contents
The KeyBank Facility has an initial term of three years, maturing on July 31, 2017, with two one-year extension options subject to certain conditions outlined further in the Credit Agreement. Payments due pursuant to the KeyBank Facility are interest-only for the first 36 months and a 30-year amortization schedule thereafter. The KeyBank Facility normally bears interest at our option of either (i) LIBOR plus 325 basis points, or (ii) Base Rate plus 225 basis points. Base Rate is the greater of (i) Agent Prime or (ii) the Fed Funds rate plus 0.50%. However, borrowings made during the Adjustment Period bear interest at the Borrower’s option of either (x) LIBOR plus 375 basis points, or (y) Base Rate plus 275 basis points. The Borrower elected to have LIBOR plus 375 basis points apply to its outstanding borrowing, which equated to an interest rate of approximately 4.1% as of December 31, 2015.
The KeyBank Facility is full recourse, jointly and severally, to our Operating Partnership and the special purpose entity borrowers and is secured by cross-collateralized first mortgage liens on our properties. The KeyBank Facility may be prepaid or terminated at any time without penalty, provided, however, that KeyBank will be indemnified for any breakage costs associated with any LIBOR borrowings. Pursuant to that certain guaranty dated July 31, 2014 in favor of KeyBank, we serve as a guarantor of all obligations due under the KeyBank Facility.
The KeyBank Facility contains a number of other customary terms and covenants, including the following (capitalized terms are as defined in the Credit Agreement): the aggregate borrowing base availability under the KeyBank Facility is limited to the lesser of: (1) 55% of the Pool Value of the properties in the collateral pool, or (2) an amount that would provide a minimum Debt Service Coverage Ratio of no less than 1.35 to 1.0; and we must meet the following financial tests, calculated as of the close of each fiscal quarter: (1) a Total Leverage Ratio of no more than 60%; (2) a Tangible Net Worth not less than (a) $5,937,713, plus (b) 80% of Net Equity Proceeds received after the Effective Date, less (c) any amounts paid for the redemption or retirement of the Preferred Equity Investment; (3) an Interest Coverage Ratio of no less than 1.6 to 1.0 commencing at the earlier of the fiscal quarter immediately following the acquisition of the final Portfolio Property or March 31, 2015 increasing to 1.75 to 1.0 in year 2 and 1.85 to 1.0 in year 3; (4) a Fixed Charge Ratio of no less than 1.6 to 1.0 commencing at the earlier of the fiscal quarter immediately following the acquisition of the final Portfolio Property or March 31, 2015; (5) a ratio of varying rate Indebtedness to total Indebtedness not in excess of 30%; (6) a Loan to Value Ratio of not greater than fifty-five percent (55%); and (7) a Debt Service Coverage Ratio of not less than 1.35 to 1.0.
The Amendment modified certain covenants contained in the Credit Agreement, including the following (capitalized terms are as defined in the Amendment and the Credit Agreement):
| • | The aggregate borrowing base availability under the KeyBank Credit Facility is limited to the lesser of: (1) during the Adjustment Period, sixty five percent (65%) of the Pool Value of the Mortgaged Properties, and at all other times fifty-five percent (55%) of the Pool Value of the Mortgaged Properties, or (2) during the Adjustment Period, a loan amount which would provide a Pool Debt Yield of no less than nine percent (9%), and at all other times a loan amount which would provide a minimum Debt Service Coverage Ratio of no less than 1.35 to 1.0. |
| • | a Total Leverage Ratio no greater than sixty-five percent (65%) during the Adjustment Period and at all other times no greater than sixty percent (60%); |
| • | an Interest Coverage Ratio of not less than 1.65:1.00 during the Adjustment Period, and thereafter 1.75:1.00 through the quarter ending June 30, 2016, and increasing to 1.85:1.00 as of September 30, 2016 and on each quarter end thereafter; |
| • | a ratio of (i) the Indebtedness that bears interest at a varying rate of interest or that does not have the interest rate fixed, capped or swapped pursuant to a Hedging Agreement (excluding any such Indebtedness constituting the increased Commitment hereunder during the Adjustment Period) to (ii) the sum of the Indebtedness (excluding the increased Commitment hereunder during the Adjustment Period), not in excess of thirty percent (30%); and |
| • | during the Adjustment Period, a Loan to Value Ratio of not greater than sixty-five percent (65%) and at all other times a Loan to Value Ratio of not greater than fifty-five percent (55%). |
The Amendment allows us to incur a maximum aggregate amount of recourse debt of 15% of our Total Asset Value (as the term is defined in the Amendment) prior to December 31, 2017, and a maximum aggregate amount of 10% of its Total Asset Value thereafter.
On July 31, 2014, our Operating Partnership purchased an interest rate cap with a notional amount of $15 million, such that in no event will our interest rate exceed 5.25% thereon through August 1, 2016. Additionally, this interest rate cap was amended on December 14, 2015, to increase the notional amount to $37 million.
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Table of Contents
Long-Term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for property acquisitions, either directly or through entity interests, for the payment of operating expenses and distributions, and for the payment of interest on our outstanding indebtedness, if any.
Long-term potential future sources of capital include proceeds from our Public Offering, secured or unsecured financings from banks or other lenders, issuance of equity instruments and undistributed funds from operations. To the extent we are not able to secure requisite financing in the form of a credit facility or other debt; we will be dependent upon proceeds from the issuance of equity securities and cash flows from operating activities in order to meet our long-term liquidity requirements and to fund our distributions.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2015:
| Payments due during the years ending December 31, | ||||||||||||||||||||
| Total | 2016 | 2017-2018 | 2019-2020 | Thereafter | ||||||||||||||||
| Mortgage interest(1) |
$ | 2,486,606 | $ | 1,570,488 | $ | 916,118 | $ | — | $ | — | ||||||||||
| Mortgage principal |
38,300,000 | — | 38,300,000 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total contractual obligations |
$ | 40,786,606 | $ | 1,570,488 | $ | 39,216,118 | $ | — | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) | The interest expense on variable rate debt was calculated based on the rate in effect on December 31, 2015 of 4.1%. |
Off-Balance Sheet Arrangements
We do not currently have any relationships with unconsolidated entities or financial partnerships. Such entities are often referred to as structured finance or special purpose entities, which typically are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitments or intent to provide funding to any such entities.
Subsequent Events
Please see Note 11 of the Notes to the Consolidated Financial Statements contained in this report.
Seasonality
We believe that we will experience minor seasonal fluctuations in the occupancy levels of our facilities, which we believe will be slightly higher over the summer months due to increased moving activity.
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| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.
As of December 31, 2015, our debt consisted of $38.3 million in variable rate debt. Our debt instruments were entered into for other than trading purposes. Changes in interest rates have different impacts on fixed and variable debt. A change in interest rates on fixed rate debt impacts its fair value but has no impact on interest incurred or cash flows. A change in interest rates on the variable debt could impact the interest incurred and cash flows and its fair value. If the underlying rate of the related index on our variable rate debt were to increase or decrease by 100 basis points, the increase or decrease in interest would increase or decrease future earnings and cash flows by approximately $0.4 million annually.
The Preferred Unit holder is entitled to receive current distributions (the “Current Distributions”) at a rate of one-month LIBOR plus 6.5% per annum, payable monthly and calculated on an actual/360 basis. In addition to the Current Distributions, our Operating Partnership has the obligation to elect either (A) pay the holder of the Preferred Units additional distributions monthly in an amount that will accrue at the rate of: (i) 4.35% until January 31, 2017; and (ii) thereafter, 6.35% or (B) defer the additional distributions in an amount that will accrue monthly at the rate of (i) for the period until January 31, 2017, LIBOR plus 10.85% and (ii) thereafter, LIBOR plus 12.85% (the “Deferred Distributions”).
Based on the approximately $16.0 million of Preferred Units outstanding and the accumulated Deferred Distributions of approximately $0.9 million as of December 31, 2015, if LIBOR changed by 100 basis points, the total distributions would change by approximately $0.2 million annually.
Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.
The following table summarizes annual debt maturities and average interest rates on our outstanding debt as of December 31, 2015:
| Year Ending December 31, | ||||||||||||||||||||||||||||
| 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | ||||||||||||||||||||||
| Fixed rate debt |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| Average interest rate |
— | — | — | — | — | — | — | |||||||||||||||||||||
| Variable rate debt |
— | $ | 38,300,000 | — | — | — | — | $ | 38,300,000 | |||||||||||||||||||
| Average interest rate(1) |
4.1 | % | 4.1 | % | — | — | — | — | — | |||||||||||||||||||
| (1) | The average interest rate was calculated based on the rate in effect on December 31, 2015. |
In the future, we may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund acquisition, expansion, and financing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument or foreign currency hedges to mitigate our risk to foreign currency exposure. We will not enter into derivative or interest rate transactions for speculative purposes.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements and supplementary data filed as part of this report are set forth below beginning on page F-1 of this report.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
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Table of Contents
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for us. Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of December 31, 2015, the effectiveness of our internal control over financial reporting using the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2015.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
For the year ended December 31, 2015, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.
PART III
We expect to file a definitive Proxy Statement for our 2016 Annual Meeting of Stockholders (the “2016 Proxy Statement”) with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instructions G(3) to Form 10-K and is incorporated by reference to the 2016 Proxy Statement. Only those sections of the 2016 Proxy Statement that specifically address the items required to be set forth herein are incorporated by reference.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this Item is incorporated by reference to the 2016 Proxy Statement to be filed with the SEC.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item is incorporated by reference to the 2016 Proxy Statement to be filed with the SEC.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is incorporated by reference to the 2016 Proxy Statement to be filed with the SEC.
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| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this Item is incorporated by reference to the 2016 Proxy Statement to be filed with the SEC.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this Item is incorporated by reference to the 2016 Proxy Statement to be filed with the SEC.
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PART IV
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| (a) | List of Documents Filed. |
| 1. | The list of the financial statements contained herein is set forth on page F-1 hereof. |
| 2. | Schedule III—Real Estate and Accumulated Depreciation is set forth beginning on page S-1 hereof. All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted. |
| 3. | The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index below. |
| (b) | See (a) 3 above. |
| (c) | See (a) 2 above. |
58
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Ladera Ranch, State of California, on March 29, 2016.
| STRATEGIC STORAGE GROWTH TRUST, INC. | ||
| By: | /s/ H. Michael Schwartz | |
| H. Michael Schwartz | ||
| Chief Executive Officer, President and Director | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| Signature |
Title |
Date | ||
| /s/ H. Michael Schwartz H. Michael Schwartz |
Chairman of the Board of Directors, Chief Executive Officer and President (Principal Executive Officer) |
March 29, 2016 | ||
| /s/ Michael S. McClure Michael S. McClure |
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
March 29, 2016 | ||
| /s/ Leon Holmes Leon Holmes |
Independent Director |
March 29, 2016 | ||
| /s/ Stephen G. Muzzy Stephen G. Muzzy |
Independent Director |
March 29, 2016 | ||
59
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2015
| Consolidated Financial Statements |
||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
| Financial Statement Schedule |
||||
| S-1 | ||||
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Strategic Storage Growth Trust, Inc.
We have audited the accompanying consolidated balance sheets of Strategic Storage Growth Trust, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, equity, and cash flows for the years ended December 31, 2015 and 2014 and the period from March 12, 2013 (date of inception) through December 31, 2013. Our audits of the consolidated financial statements included the financial statement schedule listed in the accompanying index. Strategic Storage Growth Trust, Inc.’s management is responsible for these consolidated financial statements and the financial statement schedule. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Strategic Storage Growth Trust, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years ended December 31, 2015 and 2014 and the period from March 12, 2013 (date of inception) through December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ CohnReznick LLP
Los Angeles, California
March 29, 2016
F-2
Table of Contents
STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2015 and 2014
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| Real estate facilities: |
||||||||
| Land |
$ | 13,180,000 | $ | 4,260,000 | ||||
| Buildings |
42,338,012 | 13,815,359 | ||||||
| Site improvements |
4,811,387 | 892,120 | ||||||
|
|
|
|
|
|||||
| 60,329,399 | 18,967,479 | |||||||
| Accumulated depreciation |
(1,157,113 | ) | (182,836 | ) | ||||
|
|
|
|
|
|||||
| 59,172,286 | 18,784,643 | |||||||
| Construction in process |
30,808 | — | ||||||
|
|
|
|
|
|||||
| Real estate facilities, net |
59,203,094 | 18,784,643 | ||||||
| Cash and cash equivalents |
6,600,046 | 4,500,298 | ||||||
| Other assets |
1,871,423 | 709,604 | ||||||
| Debt issuance costs, net of accumulated amortization |
801,005 | 523,053 | ||||||
| Intangible assets, net of accumulated amortization |
1,454,140 | 450,285 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 69,929,708 | $ | 24,967,883 | ||||
|
|
|
|
|
|||||
| LIABILITIES AND EQUITY | ||||||||
| Secured debt |
$ | 38,300,000 | $ | 9,545,386 | ||||
| Accounts payable and accrued liabilities |
1,028,660 | 339,582 | ||||||
| Due to affiliates |
252,997 | 1,849,448 | ||||||
| Distributions payable |
20,700 | — | ||||||
| Distributions payable to preferred unitholders in our Operating Partnership |
1,042,394 | 229,761 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
40,644,751 | 11,964,177 | ||||||
|
|
|
|
|
|||||
| Commitments and contingencies (Note 7) |
||||||||
| Redeemable common stock |
10,706 | — | ||||||
| Preferred equity in our Operating Partnership |
15,884,852 | 9,908,304 | ||||||
|
|
|
|
|
|||||
| Equity: |
||||||||
| Strategic Storage Growth Trust, Inc. equity: |
||||||||
| Preferred Stock, $0.001 par value; 200,000,000 shares authorized; none issued and outstanding at December 31, 2015 and 2014 |
— | — | ||||||
| Class A Common stock, $0.001 par value; 350,000,000 shares authorized; 2,676,239 and 740,814 shares issued and outstanding at December 31, 2015 and 2014, respectively |
2,676 | 741 | ||||||
| Class T Common stock, $0.001 par value; 350,000,000 shares authorized; 18,086 and none issued and outstanding at December 31, 2015 and 2014, respectively |
18 | — | ||||||
| Additional paid-in capital |
20,735,425 | 4,839,882 | ||||||
| Distributions |
(37,073 | ) | — | |||||
| Accumulated deficit |
(7,283,029 | ) | (1,817,257 | ) | ||||
|
|
|
|
|
|||||
| Total Strategic Storage Growth Trust, Inc. equity |
13,418,017 | 3,023,366 | ||||||
|
|
|
|
|
|||||
| Noncontrolling interests in our Operating Partnership |
(28,618 | ) | 72,036 | |||||
|
|
|
|
|
|||||
| Total equity |
13,389,399 | 3,095,402 | ||||||
|
|
|
|
|
|||||
| Total liabilities and equity |
$ | 69,929,708 | $ | 24,967,883 | ||||
|
|
|
|
|
|||||
See notes to consolidated financial statements.
F-3
Table of Contents
STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2015 and 2014 and the Period from March 12, 2013 (date of inception)
through December 31, 2013
| Year Ended December 31, 2015 |
Year Ended December 31, 2014 |
Period from March 12, 2013 (date of inception) through December 31, 2013 |
||||||||||
| Revenues: |
||||||||||||
| Self storage rental revenue |
$ | 4,708,208 | $ | 641,036 | $ | — | ||||||
| Ancillary operating revenue |
149,199 | 24,099 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total revenues |
4,857,407 | 665,135 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Operating expenses: |
||||||||||||
| Property operating expenses |
2,205,173 | 287,724 | — | |||||||||
| Property operating expenses – affiliates |
558,250 | 104,394 | — | |||||||||
| General and administrative |
1,224,892 | 463,234 | — | |||||||||
| Depreciation |
1,161,013 | 183,604 | — | |||||||||
| Intangible amortization expense |
946,146 | 254,715 | — | |||||||||
| Acquisition expense - affiliates |
822,798 | 488,660 | — | |||||||||
| Other property acquisition expenses |
289,824 | 102,742 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total operating expenses |
7,208,096 | 1,885,073 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Operating loss |
(2,350,689 | ) | (1,219,938 | ) | — | |||||||
| Other income (expense): |
||||||||||||
| Interest expense |
(651,479 | ) | (153,638 | ) | — | |||||||
| Debt issuance costs expense |
(375,319 | ) | (65,433 | ) | — | |||||||
| Other |
1,766 | 3,374 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net loss |
(3,375,721 | ) | (1,435,635 | ) | — | |||||||
| Less: Distributions to preferred unitholders in our Operating Partnership |
(1,893,841 | ) | (422,282 | ) | — | |||||||
| Less: Accretion of preferred equity costs |
(296,548 | ) | (88,304 | ) | — | |||||||
| Net loss attributable to the noncontrolling interests in our Operating Partnership |
100,338 | 128,964 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net loss attributable to Strategic Storage Growth Trust, Inc. common shareholders |
$ | (5,465,772 | ) | $ | (1,817,257 | ) | $ | — | ||||
|
|
|
|
|
|
|
|||||||
| Net loss per Class A share—basic and diluted |
$ | (4.59 | ) | $ | (7.31 | ) | $ | — | ||||
| Net loss per Class T share—basic and diluted |
$ | (4.59 | ) | $ | — | $ | — | |||||
|
|
|
|
|
|
|
|||||||
| Weighted average Class A shares outstanding—basic and diluted |
1,190,486 | 248,565 | 73 | |||||||||
| Weighted average Class T shares outstanding—basic and diluted |
1,250 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
See notes to consolidated financial statements.
F-4
Table of Contents
STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Years Ended December 31, 2015 and 2014 and the Period from March 12, 2013 (date of inception) through December 31, 2013
| Common Stock | ||||||||||||||||||||||||||||||||||||||||||||
| Class A | Class T | |||||||||||||||||||||||||||||||||||||||||||
| Number of Shares |
Common Stock Par Value |
Number of Shares |
Common Stock Par Value |
Additional Paid-in Capital |
Distributions | Accumulated Deficit |
Total Strategic Storage Growth Trust, Inc. Equity |
Noncontrolling Interests in our Operating Partnership |
Total Equity |
Preferred Equity in our Operating Partnership |
||||||||||||||||||||||||||||||||||
| Balance as of March 12, 2013 (date of inception) |
— | $ | — | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
| Gross proceeds from issuance of common stock |
100 | — | — | — | 1,000 | — | — | 1,000 | 201,000 | 202,000 | — | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Balance as of December 31, 2013 |
100 | — | — | — | 1,000 | — | — | 1,000 | 201,000 | 202,000 | — | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Gross proceeds from issuance of common stock |
740,714 | 741 | — | — | 6,994,416 | — | — | 6,995,157 | — | 6,995,157 | — | |||||||||||||||||||||||||||||||||
| Offering costs |
— | — | — | (2,155,534 | ) | — | — | (2,155,534 | ) | — | (2,155,534 | ) | — | |||||||||||||||||||||||||||||||
| Net loss attributable to Strategic Storage Growth Trust, Inc. |
— | — | — | — | — | — | (1,817,257 | ) | (1,817,257 | ) | — | (1,817,257 | ) | — | ||||||||||||||||||||||||||||||
| Net loss attributable to the noncontrolling interests |
— | — | — | — | — | — | — | — | (128,964 | ) | (128,964 | ) | — | |||||||||||||||||||||||||||||||
| Gross proceeds from issuance of preferred equity in our Operating Partnership |
— | — | — | — | — | — | — | — | — | — | 10,263,581 | |||||||||||||||||||||||||||||||||
| Preferred equity issuance costs |
— | — | — | — | — | — | — | — | — | — | (443,581 | ) | ||||||||||||||||||||||||||||||||
| Accretion of preferred equity issuance costs |
— | — | — | — | — | — | — | — | — | — | 88,304 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Balance as of December 31, 2014 |
740,814 | 741 | — | — | 4,839,882 | — | (1,817,257 | ) | 3,023,366 | 72,036 | 3,095,402 | 9,908,304 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Gross proceeds from issuance of common stock |
1,887,318 | 1,887 | 17,951 | 18 | 18,918,202 | — | — | 18,920,107 | — | 18,920,107 | — | |||||||||||||||||||||||||||||||||
| Offering costs |
— | — | — | — | (3,028,827 | ) | — | — | (3,028,827 | ) | — | (3,028,827 | ) | — | ||||||||||||||||||||||||||||||
| Changes to redeemable common stock |
— | — | — | — | (10,706 | ) | — | — | (10,706 | ) | — | (10,706 | ) | — | ||||||||||||||||||||||||||||||
| Issuance of restricted stock |
6,250 | 6 | — | — | (6 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Distributions ($0.016 per share) |
— | — | — | — | — | (37,073 | ) | — | (37,073 | ) | — | (37,073 | ) | — | ||||||||||||||||||||||||||||||
| Distributions of common stock |
40,730 | 41 | 135 | — | (41 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests |
— | — | — | — | — | — | — | — | (316 | ) | (316 | ) | — | |||||||||||||||||||||||||||||||
| Issuance of shares for distribution reinvestment plan |
1,127 | 1 | — | — | 10,705 | — | — | 10,706 | — | 10,706 | — | |||||||||||||||||||||||||||||||||
| Stock based compensation expense |
— | — | — | — | 6,216 | — | — | 6,216 | — | 6,216 | — | |||||||||||||||||||||||||||||||||
| Net loss attributable to Strategic Storage Growth Trust, Inc. |
— | — | — | — | — | — | (5,465,772 | ) | (5,465,772 | ) | — | (5,465,772 | ) | — | ||||||||||||||||||||||||||||||
| Net loss attributable to the noncontrolling interests |
— | — | — | — | — | — | — | — | (100,338 | ) | (100,338 | ) | — | |||||||||||||||||||||||||||||||
| Gross proceeds from issuance of preferred equity in our Operating Partnership |
— | — | — | — | — | — | — | — | — | — | 7,197,995 | |||||||||||||||||||||||||||||||||
| Redemption of preferred equity in our Operating Partnership |
— | — | — | — | — | — | — | — | — | — | (1,500,000 | ) | ||||||||||||||||||||||||||||||||
| Preferred equity issuance costs |
— | — | — | — | — | — | — | — | — | — | (17,995 | ) | ||||||||||||||||||||||||||||||||
| Accretion of preferred equity issuance costs |
— | — | — | — | — | — | — | — | — | — | 296,548 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Balance as of December 31, 2015 |
2,676,239 | $ | 2,676 | 18,086 | $ | 18 | $ | 20,735,425 | $ | (37,073 | ) | $ | (7,283,029 | ) | $ | 13,418,017 | $ | (28,618 | ) | $ | 13,389,399 | $ | 15,884,852 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
See notes to consolidated financial statements.
F-5
Table of Contents
STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2015 and 2014 and Period from March 12, 2013 (date of inception)
through December 31, 2013
| Year Ended December 31, 2015 |
Year Ended December 31, 2014 |
Period from March 12, 2013 (date of inception) through December 31, 2013 |
||||||||||
| Cash flows from operating activities: |
||||||||||||
| Net loss |
$ | (3,375,721 | ) | $ | (1,435,635 | ) | $ | — | ||||
| Adjustments to reconcile net loss to cash used in operating activities: |
||||||||||||
| Depreciation and amortization |
2,380,225 | 503,752 | — | |||||||||
| Expense related to issuance of restricted stock |
6,216 | — | — | |||||||||
| Increase (decrease) in cash and cash equivalents from changes in assets and liabilities: |
||||||||||||
| Other assets |
(501,401 | ) | (62,967 | ) | — | |||||||
| Accounts payable and accrued liabilities |
747,237 | 222,537 | — | |||||||||
| Due to affiliates |
70,733 | 174,291 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash used in operating activities |
(672,711 | ) | (598,022 | ) | — | |||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from investing activities: |
||||||||||||
| Purchase of real estate |
(42,871,250 | ) | (19,350,000 | ) | — | |||||||
| Additions to real estate facilities |
(648,294 | ) | (322,479 | ) | — | |||||||
| Deposits on acquisitions of real estate facilities |
(1,292,105 | ) | (500,000 | ) | — | |||||||
| Return of deposits on acquisitions of real estate facilities |
500,000 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash flows used in investing activities |
(44,311,649 | ) | (20,172,479 | ) | — | |||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from financing activities: |
||||||||||||
| Proceeds from issuance of secured debt |
28,754,614 | 9,545,386 | — | |||||||||
| Proceeds from issuance of preferred equity in Operating Partnership |
7,180,000 | 9,820,000 | — | |||||||||
| Redemption of preferred equity in our Operating Partnership |
(1,500,000 | ) | — | — | ||||||||
| Gross proceeds from issuance of common stock |
18,961,011 | 6,935,157 | 1,000 | |||||||||
| Offering costs |
(4,452,137 | ) | (671,909 | ) | — | |||||||
| Debt issuance costs |
(772,189 | ) | (367,314 | ) | — | |||||||
| Distributions paid to preferred unitholders in our Operating Partnership |
(1,081,208 | ) | (192,521 | ) | — | |||||||
| Distributions paid to common stockholders |
(5,983 | ) | — | — | ||||||||
| Issuance of Operating Partnership units |
— | — | 201,000 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash flows provided by financing activities |
47,084,108 | 25,068,799 | 202,000 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net change in cash and cash equivalents |
2,099,748 | 4,298,298 | 202,000 | |||||||||
| Cash and cash equivalents, beginning of period |
4,500,298 | 202,000 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents, end of period |
$ | 6,600,046 | $ | 4,500,298 | $ | 202,000 | ||||||
|
|
|
|
|
|
|
|||||||
| Supplemental disclosures and non-cash transactions: |
||||||||||||
| Cash paid for interest |
$ | 594,587 | $ | 116,191 | $ | — | ||||||
| Supplemental disclosure of noncash activities: |
||||||||||||
| Other assets included in due to affiliates |
$ | — | $ | 87,405 | $ | — | ||||||
| Proceeds from issuance of common stock in other assets |
$ | 25,640 | $ | 60,000 | $ | — | ||||||
| Offering costs included in due to affiliates |
$ | 7,973 | $ | 1,422,210 | $ | — | ||||||
| Offering costs included in accounts payable and accrued liabilities |
$ | 58,886 | $ | 61,415 | $ | — | ||||||
| Debt issuance costs included in due to affiliates |
$ | — | $ | 165,542 | $ | — | ||||||
| Debt issuance cost included in accounts payable and accrued liabilities |
$ | — | $ | 55,630 | $ | — | ||||||
| Distributions payable to preferred unitholders in our Operating Partnership |
$ | 873,809 | $ | 229,761 | $ | — | ||||||
| Stock distributions of common stock |
$ | 41 | $ | — | $ | — | ||||||
| Issuance of shares pursuant to distribution reinvestment plan |
$ | 10,706 | $ | — | $ | — | ||||||
| Issuance of restricted stock |
$ | 6 | $ | — | $ | — | ||||||
| Preferred equity issuance costs |
$ | 17,995 | $ | 443,581 | $ | — | ||||||
See notes to consolidated financial statements.
F-6
Table of Contents
STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Note 1. Organization
Strategic Storage Growth Trust, Inc., a Maryland corporation (the “Company”), was formed on March 12, 2013 under the Maryland General Corporation Law for the purpose of engaging in the business of investing in self storage facilities. The Company’s year-end is December 31. As used in this report, “we” “us,” “our” and “Company” refer to Strategic Storage Growth Trust, Inc.
Strategic Storage Holdings, LLC, a Delaware limited liability company (“SSH”), was the sponsor of our Private Offering (as defined below) through August 31, 2014. Effective August 31, 2014, SmartStop Self Storage, Inc. (“SmartStop”), entered into a series of transactions, agreements and amendments to its existing agreements and arrangements (such agreements and amendments hereinafter referred to collectively as the “Self Administration and Investment Management Transaction”) with SSH and its affiliates, pursuant to which, effective August 31, 2014, SmartStop acquired the self storage advisory, asset management, property management and investment management businesses of SSH including SSH’s sole membership interest in SmartStop Asset Management, LLC, a Delaware limited liability company (formerly Strategic Storage Realty Group, LLC), which owns 97.5% of the economic interests (and 100% of the voting membership interests) of SS Growth Advisor, LLC (our “Advisor”) and owns 100% of SS Growth Property Management, LLC (our “Property Manager”).
On October 1, 2015, SmartStop and Extra Space Storage Inc. (“Extra Space”), along with subsidiaries of each of SmartStop and Extra Space, closed on a merger transaction (the “Merger”) in which SmartStop was acquired by Extra Space for $13.75 per share in cash, representing an enterprise value of approximately $1.4 billion. At the closing of the Merger, SmartStop Asset Management, LLC, the owner of our Property Manager and majority and sole voting member of our Advisor, was sold to an entity controlled by H. Michael Schwartz, our Chairman of the Board of Directors, Chief Executive Officer and President, and became our sponsor (our “Sponsor”). The former executive management team of SmartStop continues to serve as the executive management team for our Sponsor. In addition, our management team remains the same, as well as the management team of our Advisor and Property Manager.
We have no employees. Our Advisor, a Delaware limited liability company, was formed on March 12, 2013. Our Advisor is responsible for managing our affairs on a day-to-day basis and identifying and making acquisitions and investments on our behalf under the terms of the advisory agreement we have with our Advisor (our “Advisory Agreement”). The officers of our Advisor are also officers of us and our Sponsor.
On May 31, 2013, our Advisor purchased 100 shares of our common stock for $1,000 and became our initial stockholder. Our Second Articles of Amendment and Restatement, as amended, authorizes 350,000,000 shares of Class A common stock, $0.001 par value per share (the “Class A Shares”) and 350,000,000 shares of Class T common stock, $0.001 par value per share (the “Class T Shares”) and 200,000,000 shares of preferred stock with a par value of $0.001. On June 17, 2013, we commenced a private placement offering to accredited investors only for a maximum of $109.5 million in shares of common stock, including shares being offered pursuant to our distribution reinvestment plan (the “Private Offering”). On May 23, 2014, we satisfied the minimum offering requirements of $1 million from our Private Offering and commenced formal operations. We terminated the Private Offering on January 16, 2015. We raised gross offering proceeds of approximately $7.8 million from the issuance of approximately 830,000 shares pursuant to the Private Offering.
On January 20, 2015 we commenced a public offering of a maximum of $1,000,000,000 in common shares for sale to the public (the “Primary Offering”) and $95,000,000 in common shares for sale pursuant to our distribution reinvestment plan (collectively, the “Public Offering”). On September 28, 2015, we revised our Primary Offering and are now offering two classes of shares of common stock: Class A common stock, $0.001 par value per share (the “Class A Shares”) and Class T common stock, $0.001 par value per share (the “Class T Shares”). As of December 31, 2015, we had sold approximately 2.6 million Class A Shares and approximately 20,000 Class T Shares in our Public and Private Offerings for gross proceeds of approximately $25.8 million and approximately $0.2 million, respectively. We intend to invest the net proceeds from our offerings primarily in opportunistic self storage facilities, which may include facilities to be developed, currently under development or in lease-up and self storage facilities in need of expansion, redevelopment or repositioning. As of December 31, 2015 we owned 12 self storage facilities located in six states (California, Colorado, Florida, Illinois, Nevada and Texas).
F-7
Table of Contents
STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Our operating partnership, SS Growth Operating Partnership, L.P., a Delaware limited partnership (our “Operating Partnership”), was formed on March 13, 2013. During 2013, our Advisor purchased a limited partnership interest in our
Operating Partnership totaling $201,000 and on May 31, 2013, we contributed the initial $1,000 capital contribution we received to our Operating Partnership in exchange for the general partner interest. Our Operating Partnership owns, directly or indirectly through one or more special purpose entities, all of the self storage properties that we have acquired and the self storage properties we will acquire in the future. As of December 31, 2015, we owned approximately 99.25% of the common units of limited partnership interests of our Operating Partnership. The remaining approximate 0.75% of the common units are owned by our Advisor. As of December 31, 2015, our Operating Partnership had outstanding approximately 638,463 Series A Cumulative Redeemable Preferred Units (the “Preferred Units”) issued to SSTI Preferred Investor, LLC (the “Preferred Investor”), formerly a wholly-owned subsidiary of SmartStop Self Storage Operating Partnership, L.P., the operating partnership of SmartStop, in exchange for an investment in our Operating Partnership of approximately $16.0 million. Such Preferred Units are now owned by Extra Space subsequent to the Merger. As the sole general partner of our Operating Partnership, we have the exclusive power to manage and conduct the business of our Operating Partnership. We conduct certain activities (such as selling packing supplies and locks and renting trucks or other moving equipment) through our taxable REIT subsidiary, SS Growth TRS, Inc., a Delaware corporation (the “TRS”) which was formed on March 14, 2013, and is a wholly owned subsidiary of our Operating Partnership.
Our Property Manager was formed on March 12, 2013 to manage our properties. Our Property Manager derives substantially all of its income from the property management services it performs for us. Our Property Manager may enter into sub-property management agreements with third party management companies and pay part of its management fee to such property manager. At the closing of the Merger, we entered into new property management agreements with our Property Manager and our Property Manager entered into sub-property management agreements with Extra Space for the management of our properties in the United States. Furthermore, Extra Space acquired the rights to the “SmartStop® Self Storage” brand in the United States through the merger and we can no longer utilize this brand in the United States. The properties we own were re-branded under the Extra Space name subsequent to the Merger. However, any properties owned or acquired in Canada will be managed by a subsidiary of our Sponsor and will continue to be branded using the SmartStop® Self Storage brand.
Our dealer manager is Select Capital Corporation, a California corporation (our “Dealer Manager”). Our Dealer Manager is responsible for marketing our shares being offered pursuant to our Primary Offering. Our president owned, through a wholly-owned limited liability company, a 15% non-voting equity interest in our Dealer Manager through August 31, 2014. Effective August 31, 2014, SmartStop indirectly owned such 15% non-voting equity interest in our Dealer Manager, pursuant to the Self Administration and Investment Management Transaction. Effective October 1, 2015, in connection with the Merger, the 15% non-voting equity interest in our Dealer Manager is now owned by our Sponsor. An affiliate of our Dealer Manager continues to own a 2.5% non-voting membership interest in our Advisor.
As we accept subscriptions for shares of our common stock, we transfer substantially all of the net offering proceeds to our Operating Partnership as capital contributions in exchange for additional units of interest in our Operating Partnership. However, we are deemed to have made capital contributions in the amount of gross proceeds received from investors, and our Operating Partnership is deemed to have simultaneously paid the sales commissions and other costs associated with the Offering. In addition, our Operating Partnership is structured to make distributions with respect to limited partnership units that are equivalent to the distributions made to holders of common stock. Finally, a limited partner in our Operating Partnership may later exchange his or her limited partnership units in our Operating Partnership for shares of our common stock at any time after one year following the date of issuance of their limited partnership units, subject to certain restrictions outlined in the limited partnership agreement of our Operating Partnership, as amended (the “Operating Partnership Agreement”). Our Advisor is prohibited from exchanging or otherwise transferring its limited partnership units so long as it is acting as our Advisor pursuant to our Advisory Agreement.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC.
F-8
Table of Contents
STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Principles of Consolidation
Our financial statements, and the financial statements of our Operating Partnership, including its wholly-owned subsidiaries, are consolidated in the accompanying consolidated financial statements. The portion of these entities not wholly-owned by us is presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated in consolidation.
Consolidation Considerations
Current accounting guidance provides a framework for identifying a variable interest entity (“VIE”) and determining when a company should include the assets, liabilities, noncontrolling interests, and results of activities of a VIE in its consolidated financial statements. In general, a VIE is an entity or other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. Generally, a VIE should be consolidated if a party with an ownership, contractual, or other financial interest in the VIE (a variable interest holder) has the power to direct the VIE’s most significant activities and the obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities, and noncontrolling interest at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. As of December 31, 2015 and 2014, we had not entered into contracts/interests that would be deemed to be variable interests in VIEs.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. Management will adjust such estimates when facts and circumstances dictate. Actual results could materially differ from those estimates. The most significant estimates made include the allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed at fair value, the determination if certain entities should be consolidated, the evaluation of potential impairment of long-lived assets, and the useful lives of real estate assets and intangibles.
Cash and Cash Equivalents
We consider all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents.
We may maintain cash equivalents in financial institutions in excess of insured limits, but believe this risk will be mitigated by only investing in or through major financial institutions.
Real Estate Purchase Price Allocation
We account for acquisitions in accordance with amended accounting guidance which requires that we allocate the purchase price of the property to the tangible and intangible assets acquired and the liabilities assumed based on estimated fair values. This guidance requires us to make significant estimates and assumptions, including fair value estimates, as of the acquisition date and to adjust those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which we may adjust the provisional amounts recognized for an acquisition). Acquisitions of portfolios of facilities are allocated to the individual facilities based upon an income approach or a cash flow analysis using appropriate risk adjusted capitalization rates which take into account the relative size, age, and location of the individual facility along with current and projected occupancy and rental rate levels or appraised values, if available. Allocations to the individual assets and liabilities are based upon comparable market sales information for land and estimates of depreciated replacement cost of equipment, building and site improvements. In allocating the purchase price, we determine whether the acquisition includes intangible assets or liabilities. 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. We also consider whether in-place, market leases represent an intangible asset. We recorded approximately $2.0 million and approximately $0.7 million in intangible assets to recognize the value of
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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
in-place leases related to our acquisitions during 2015 and 2014, respectively. We do not expect, nor to date have we recorded, intangible assets for the value of customer relationships because we expect we will not have concentrations of significant customers and the average customer turnover will be fairly frequent. Our acquisition-related transaction costs are required to be expensed as incurred. During the years ended December 31, 2015 and 2014 we expensed approximately $1.1 million and approximately $0.6 million, respectively, of acquisition-related transaction costs.
Should the initial accounting for an acquisition be incomplete by the end of a reporting period that falls within the measurement period, we will report provisional amounts in our financial statements. During the measurement period, we will adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we will record those adjustments to our financial statements. We will recognize any measurement period adjustments during the period in which we determine the amount of the adjustment to our financial statements, potentially including adjustments to interest, depreciation and amortization expense.
Evaluation of Possible Impairment of Long-Lived Assets
Management will continually monitor events and changes in circumstances that could indicate that the carrying amounts of our long-lived assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of the assets may not be recoverable, we will assess the recoverability of the assets by determining whether the carrying value of the long-lived assets will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, we will adjust the value of the long-lived assets to the fair value and recognize an impairment loss. As of December 31, 2015 and 2014, no impairment losses were recognized.
Revenue Recognition
Management believes that all of our leases are operating leases. Rental income is recognized in accordance with the terms of the leases, which generally are month-to-month. Revenues from any long-term operating leases are recognized on a straight-line basis over the term of the lease. The excess of rents received over amounts contractually due pursuant to the underlying leases is included in accounts payable and accrued liabilities in our consolidated balance sheets and contractually due but unpaid rent is included in other assets.
Allowance for Doubtful Accounts
Tenant accounts receivable is reported net of an allowance for doubtful accounts. Management’s estimate of the allowance is based upon a review of the current status of tenant accounts receivable. It is reasonably possible that management’s estimate of the allowance will change in the future.
Real Estate Facilities
Real estate facilities are recorded at cost. We capitalize costs incurred to develop, construct, renovate and improve properties, including interest and property taxes incurred during the construction period. The construction period begins when expenditures for the real estate assets have been made and activities that are necessary to prepare the asset for its intended use are in progress. The construction period ends when the asset is substantially complete and ready for its intended use.
Depreciation of Real Property Assets
Our management is required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives.
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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Depreciation of our real property assets is charged to expense on a straight-line basis over the estimated useful lives as follows:
| Description |
Standard Depreciable Life | |
| Land |
Not Depreciated | |
| Buildings |
30-35 years | |
| Site Improvements |
7-10 years |
As described in Note 1, after the close of the Merger all of our properties in the United States were re-branded under the Extra Space name. As such, for the year ended December 31, 2015, the depreciable lives for capitalized SmartStop branded signs were reduced to their estimated remaining useful lives. Depreciation expense for the year ended December 31, 2015 includes approximately $175,000 of accelerated depreciation related to the SmartStop branded signs.
Depreciation of Personal Property Assets
Personal property assets consist primarily of furniture, fixtures and equipment and are depreciated on a straight-line basis over the estimated useful lives generally ranging from 3 to 5 years, and are included in other assets on our consolidated balance sheets.
Intangible Assets
We have allocated a portion of our real estate purchase price to in-place leases. We are amortizing in-place leases on a straight-line basis over the estimated future benefit period. As of December 31, 2015 and 2014, the gross amounts allocated to in-place lease intangibles were approximately $2.7 million and approximately $0.7 million, respectively, and accumulated amortization of in-place lease intangibles totaled approximately $1.2 million and approximately $0.3 million, respectively.
The total estimated amortization expense of intangible assets for the years ending December 31, 2016 and 2017, are approximately $1.1 million, approximately $0.4 million, respectively, and none for the years thereafter.
Debt Issuance Costs
Costs incurred in connection with obtaining financing are deferred and amortized on a straight-line basis over the term of the related loan, which is not materially different than the effective interest method. As of December 31, 2015 and 2014, accumulated amortization of debt issuance costs totaled approximately $0.3 million and $0.1 million, respectively.
Organizational and Offering Costs
Our Advisor may fund organization and offering costs on our behalf. We will be required to reimburse our Advisor for such organization and offering costs; provided, however, our Advisor must reimburse us within 60 days after the end of the month in which the Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions and dealer manager fees) in excess of 3.5% of the gross offering proceeds from the Primary Offering. Such costs will be recognized as a liability when we have a present responsibility to reimburse our Advisor, which is defined in our Advisory Agreement as the date we satisfied the minimum offering requirements of our Private Offering (which occurred on May 23, 2014). If at any point in time we determine that the total organization and offering costs are expected to exceed 3.5% of the gross proceeds anticipated to be received from the Primary Offering, we will recognize such excess as a capital contribution from our Advisor. As of December 31, 2015, we do not believe total organization and offering costs will exceed 3.5% of the gross proceeds anticipated to be received from the Primary Offering. Offering costs are recorded as an offset to additional paid-in capital, and organization costs are recorded as an expense.
Redeemable Common Stock
We adopted a share redemption program that will enable stockholders to sell their shares to us in limited circumstances.
We record amounts that are redeemable under the share redemption program as redeemable common stock in the accompanying consolidated balance sheet since the shares are redeemable at the option of the holder and therefore their redemption is outside our control. The maximum amount redeemable under our share redemption program is limited to the number of shares we can repurchase with the amount of the net proceeds from the sale of shares under the distribution reinvestment plan. However, accounting guidance states that determinable amounts that can become redeemable but that are contingent on an event that is likely to occur (e.g., the passage of time) should be presented as redeemable when such amount is known. Therefore, the net proceeds from the distribution reinvestment plan are considered to be temporary equity and are presented as redeemable common stock in the accompanying consolidated balance sheet.
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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
In addition, current accounting guidance requires, among other things, that financial instruments that represent a mandatory obligation of us to repurchase shares be classified as liabilities and reported at settlement value. Our redeemable common shares will be contingently redeemable at the option of the holder. When we determine we have a mandatory obligation to repurchase shares under the share redemption program, we will reclassify such obligations from temporary equity to a liability based upon their respective settlement values.
Through December 31, 2015 we had not received any requests for redemptions.
Accounting for Equity Awards
The cost of restricted stock is required to be measured based on the grant date fair value and the cost recognized over the relevant service period.
Fair Value Measurements
The accounting standard for fair value measurements and disclosures defines fair value, establishes a framework for measuring fair value, and provides for expanded disclosure about fair value measurements. Fair value is defined by the accounting standard for fair value measurements and disclosures as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels. The following summarizes the three levels of inputs and hierarchy of fair value we will use when measuring fair value:
| • | Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access; |
| • | Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as interest rates and yield curves that are observable at commonly quoted intervals; and |
| • | Level 3 inputs are unobservable inputs for the assets or liabilities that are typically based on an entity’s own assumptions as there is little, if any, related market activity. |
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the fair value measurement will fall within the lowest level that is significant to the fair value measurement in its entirety.
The accounting guidance for fair value measurements and disclosures provides a framework for measuring fair value and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In determining fair value, we will utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in our assessment of fair value. Considerable judgment will be necessary to interpret Level 2 and 3 inputs in determining fair value of our financial and non-financial assets and liabilities. Accordingly, there can be no assurance that the fair values we will present will be indicative of amounts that may ultimately be realized upon sale or other disposition of these assets.
Financial and non-financial assets and liabilities measured at fair value on a non-recurring basis in our consolidated financial statements consist of real estate and related liabilities assumed related to our acquisitions. The fair values of these assets and liabilities were determined as of the acquisition dates using widely accepted valuation techniques, including (i) discounted cash flow analysis, which considers, among other things, leasing assumptions, growth rates, discount rates and terminal capitalization rates, (ii) income capitalization approach, which considers prevailing market capitalization rates, and (iii) comparable sales activity. In general, we consider multiple valuation techniques when measuring fair values. However, in certain circumstances, a single valuation technique may be appropriate. All of the fair values of the assets and liabilities as of the acquisition dates were derived using Level 3 inputs.
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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
The carrying amounts of cash and cash equivalents, tenant accounts receivable, other assets, accounts payable and accrued liabilities, distributions payable and amounts due to affiliates will approximate fair value because of the relatively short-term nature of these instruments.
To comply with GAAP, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of derivative contracts for the effect of nonperformance risk, we will consider the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Noncontrolling Interest in Consolidated Entities
We account for the noncontrolling interest in our Operating Partnership in accordance with the related accounting guidance. Due to our control through our general partnership interest in our Operating Partnership and the limited rights of the limited partner, our Operating Partnership, including its wholly-owned subsidiaries, are consolidated with the Company and the limited partner interest is reflected as a noncontrolling interest in the accompanying consolidated balance sheet. The noncontrolling interest shall be attributed its share of income and losses, even if that attribution results in a deficit noncontrolling interest balance.
Income Taxes
We made an election to be taxed as a Real Estate Investment Trust (“REIT”), under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2014. To continue to qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the REIT’s ordinary taxable income to stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to continue to qualify for treatment as a REIT and intend to operate in the foreseeable future in such a manner that we will remain qualified as a REIT for federal income tax purposes.
Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income.
We filed elections to treat our TRS as a taxable REIT subsidiary effective January 1, 2014. In general, the TRS performs additional services for our customers and generally engages in any real estate or non-real estate related business. The TRS is subject to corporate federal and state income tax. The TRS follows accounting guidance which requires the use of the asset and liability method. Deferred income taxes represent the tax effect of future differences between the book and tax bases of assets and liabilities.
Per Share Data
Basic earnings per share attributable to Strategic Storage Growth Trust, Inc. for all periods presented are computed by dividing net income (loss) attributable to Strategic Storage Growth Trust, Inc. by the weighted average number of shares outstanding during the period, excluding unvested restricted stock. Diluted earnings per share are computed by dividing net income (loss) attributable to Strategic Storage Growth Trust, Inc. by the weighted average number of shares outstanding, adjusted for the dilutive effect of unvested restricted stock, utilizing the treasury stock method. For all periods presented the dilutive effective of unrestricted stock was not included in the dilutive weighted average shares as such shares were antidilutive.
Recently Issued Accounting Guidance
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 “Revenue from Contracts with Customers” (“ASU 2014-09”) as Accounting Standards Codification (“ASC”) Topic 606. The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with
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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new standard, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC. In July 2015, the FASB voted to defer the effective date by one year to annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 and early adoption is permitted. This ASU shall still be applied using either a full retrospective or modified retrospective approach. We are in the process of evaluating the impact of this standard on our consolidated financial statements and the impact is unknown at this time.
In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, and affects the evaluation of fee arrangements in the primary beneficiary determination. ASU 2015-02 is effective for periods beginning after December 15, 2015 and early adoption is permitted. We are in the process of evaluating the impact of this standard on our consolidated financial statements and the impact is unknown at this time.
In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, in August 2015, the FASB issued ASU 2015-15, “Interest - Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”, which clarifies ASU No. 2015-03 by stating that the staff of the SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 and ASU 2015-15 are effective for periods beginning after December 15, 2015 and early adoption is permitted. We are in the process of evaluating the impact of this standard on our consolidated financial statements and the impact is unknown at this time.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments”. The amendments in the update require an acquirer in a business combination to recognize adjustments to estimated amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer must record the effect of the adjustments on earnings as if the accounting had been completed at the acquisition date and the acquirer must disclose in its financial statements the portion of the amounts recorded in each line item of current-period earnings that would have been recorded in previous periods if the adjustments to estimated amounts had been recognized as of the acquisition date. The update is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted for financial statements that have not been issued. We early adopted this new guidance and the effect on our financial statements is discussed in Notes 3 and 9.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which amends the guidance on accounting for leases. Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under ASU 2016-02, lessor accounting is largely unchanged. It also includes extensive amendments to the disclosure requirements. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted for financial statements that have not yet been made available for issuance. ASU 2016-02 requires a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are in the process of evaluating the impact of this standard on our consolidated financial statements and the impact is unknown at this time.
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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Note 3. Real Estate Facilities
The following summarizes the activity in real estate facilities during the years ended December 31, 2015 and 2014:
| Real estate facilities |
||||
| Balance at December 31, 2013 |
$ | — | ||
| Facility acquisitions |
18,645,000 | |||
| Improvements and additions |
322,479 | |||
|
|
|
|||
| Balance at December 31, 2014 |
18,967,479 | |||
| Asset disposals |
(176,816 | ) | ||
| Facility acquisitions |
40,921,250 | |||
| Improvements and additions |
617,486 | |||
|
|
|
|||
| Balance at December 31, 2015 |
$ | 60,329,399 | ||
|
|
|
|||
| Accumulated depreciation |
||||
| Balance at December 31, 2013 |
$ | — | ||
| Depreciation expense |
(182,836 | ) | ||
|
|
|
|||
| Balance at December 31, 2014 |
(182,836 | ) | ||
| Asset disposals |
176,816 | |||
| Depreciation expense |
(1,151,093 | ) | ||
|
|
|
|||
| Balance at December 31, 2015 |
$ | (1,157,113 | ) | |
|
|
|
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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
The following tables summarize the purchase price allocations for our acquisitions during the years ended December 31, 2015 and 2014:
| Property |
Acquisition Date |
Real Estate Assets |
Intangibles | Total | Debt Issued | 2015 Revenue(1) |
2015 Property Operating Income(3) |
|||||||||||||||||||
| Colorado Springs—Colorado |
1/29/2015 | $ | 4,036,875 | $ | 180,000 | $ | 4,216,875 | $ | 2,564,614 | $ | 414,392 | $ | 200,274 | |||||||||||||
| Riverside—California |
2/05/2015 | 1,986,875 | 90,000 | 2,076,875 | 947,524 | 422,072 | 167,241 | |||||||||||||||||||
| Stockton—California |
2/05/2015 | 1,506,875 | 80,000 | 1,586,875 | 439,230 | 377,643 | 166,988 | |||||||||||||||||||
| Azusa—California |
2/05/2015 | 3,976,875 | 210,000 | 4,186,875 | 2,500,668 | 617,013 | 362,085 | |||||||||||||||||||
| Romeoville—Illinois |
2/05/2015 | 3,246,875 | 180,000 | 3,426,875 | 1,852,578 | 474,062 | 230,243 | |||||||||||||||||||
| Elgin—Illinois |
2/05/2015 | 656,875 | 30,000 | 686,875 | — | 303,823 | 108,535 | |||||||||||||||||||
| San Antonio I—Texas(2) |
12/17/2015 | 11,620,000 | 670,000 | 12,290,000 | 9,426,260 | 35,968 | 19,343 | |||||||||||||||||||
| Kingwood—Texas(2) |
12/17/2015 | 8,030,000 | 430,000 | 8,460,000 | 6,461,880 | 24,722 | 11,696 | |||||||||||||||||||
| Aurora—Colorado(2) |
12/17/2015 | 5,860,000 | 80,000 | 5,940,000 | 4,561,860 | 18,393 | 9,003 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| 2015 Total |
$ | 40,921,250 | $ | 1,950,000 | $ | 42,871,250 | $ | 28,754,614 | $ | 2,688,088 | $ | 1,275,408 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Property |
Acquisition Date |
Real Estate Assets |
Intangibles | Total | Debt Issued | 2014 Revenue(1) |
2014 Property Operating Income(3) |
|||||||||||||||||||
| Fort Pierce—Florida |
7/31/2014 | $ | 3,760,000 | $ | 90,000 | $ | 3,850,000 | $ | 988,659 | $ | 142,382 | $ | 27,673 | |||||||||||||
| Las Vegas I—Nevada |
7/31/2014 | 9,045,000 | 405,000 | 9,450,000 | 5,360,706 | 380,826 | 230,916 | |||||||||||||||||||
| Las Vegas II—Nevada |
9/29/2014 | 5,840,000 | 210,000 | 6,050,000 | 3,196,021 | 141,927 | 74,745 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| 2014 Total |
$ | 18,645,000 | $ | 705,000 | $ | 19,350,000 | $ | 9,545,386 | $ | 665,135 | $ | 333,334 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (1) | The operating results of the facilities acquired above have been included in our statement of operations since their respective acquisition date. |
| (2) | The allocations noted above are based on a preliminary determination of the fair value of the total consideration provided. Such valuations may change as we complete our purchase price accounting. |
| (3) | Property operating income excludes corporate general and administrative expenses, asset management fees, interest expense, depreciation, amortization and acquisition expenses. |
Certain purchase price allocations noted above are preliminary and therefore, subject to change upon the completion of our analysis of appraisals and other information related to the acquisitions. We anticipate finalizing such purchase price allocations by December 31, 2016, as further evaluations are completed and additional information is received from third parties.
During 2015 we completed the purchase price allocations for the properties acquired during 2014 and there were no changes to the provisional amounts recorded. During 2015 we also completed the purchase price allocations for the properties acquired during the first quarter of 2015 and recognized during the fourth quarter measurement period adjustments, which had the aggregate impact of increasing our allocation to buildings by approximately $1.8 million, with reductions to land, site improvements and intangible assets of approximately $0.8 million, $0.2 million and $0.8 million, respectively. The impact of such reclassifications was that we recognized measurement period adjustments during the fourth quarter to our consolidated statement of operations, which had the aggregate impact of an increase to depreciation expense during the year of approximately $25,000 and a decrease to intangible amortization expense of approximately $0.2 million for the year.
We incurred acquisition fees to our Advisor related to the above properties of approximately $0.6 and $0.2 million for the years ended December 31, 2015 and 2014, respectively.
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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Note 4. Secured Debt
KeyBank Facility
On July 31, 2014, we, through our Operating Partnership and certain property-owning special purpose entities wholly-owned by our Operating Partnership (collectively with the Operating Partnership, the “Borrower”), obtained a senior secured revolving term loan (the “KeyBank Facility”) from KeyBank National Association (“KeyBank”) pursuant to a credit agreement (the “Credit Agreement”) for the purpose of funding real property acquisitions. The maximum amount we could borrow under the KeyBank Facility was initially $20,000,000. On December 17, 2015, the Borrower entered into an Amendment to the Credit Agreement (“the “Amendment”), whereby KeyBank agreed to lend us up to $40 million total under the KeyBank Facility and we borrowed an additional approximately $20.5 million. As of December 31, 2015, the total amount borrowed under the KeyBank Facility was $38.3 million.
In addition, the Amendment permits us to borrow up to an additional $6.25 million (the “Additional Borrowing”) within 120 days following December 17, 2015 (the “Adjustment Period”), for a total potential borrowing amount of $46.25 million during the Adjustment Period. Pursuant to the Amendment, we must repay the Additional Borrowing by the end of the Adjustment Period.
On January 6, 2016, we borrowed an additional approximately $8 million to partially fund a self storage facility acquisition (see Note 11).
During the Curtailment Period (as that term is defined in the Amendment), we and the Operating Partnership must apply all proceeds from all asset sales and refinancing as well as all net proceeds of equity issuances to pay down the outstanding principal balance on the KeyBank Facility to an aggregate amount of the lesser of either $40 million or the borrowing base availability calculated in accordance with the covenants that are applied outside of the Adjustment Period.
Subsequent to December 31, 2015, the KeyBank Facility was further amended. See additional discussion in Note 11.
The Borrower has the right to request the KeyBank Facility be increased up to $150,000,000 in minimum increments of $20,000,000 during the first 26 months of the term of the KeyBank Facility.
The KeyBank Facility has an initial term of three years, maturing on July 31, 2017, with two one-year extension options subject to certain conditions outlined further in the Credit Agreement. Payments due pursuant to the KeyBank Facility are interest-only for the first 36 months and a 30-year amortization schedule thereafter. The KeyBank Facility normally bears interest at the Borrower’s option of either (i) LIBOR plus 325 basis points, or (ii) Base Rate plus 225 basis points. Base Rate is the greater of (i) Agent Prime or (ii) the Fed Funds rate plus 0.50%. However, borrowings made during the Adjustment Period bear interest at the Borrower’s option of either (x) LIBOR plus 375 basis points, or (y) Base Rate plus 275 basis points. The Borrower elected to have LIBOR plus 375 basis points apply to its outstanding borrowing, which equated to an interest rate of approximately 4.1% as of December 31, 2015.
The KeyBank Facility is full recourse, jointly and severally, to us and the Borrower and is secured by cross-collateralized first mortgage liens on the Mortgaged Properties (as defined in the Credit Agreement). The KeyBank Facility may be prepaid or terminated at any time without penalty, provided, however, that KeyBank shall be indemnified for any breakage costs associated with any LIBOR borrowings. Pursuant to that certain guaranty dated July 31, 2014 in favor of KeyBank, we serve as a guarantor of all obligations due under the KeyBank Facility.
Under certain conditions, we may cause the release of one or more of the properties serving as collateral for the KeyBank Facility, subject to no default or event of default is then outstanding or would reasonably occur as a result of such release, including compliance with the Pool Debt-Service Coverage Ratio (as defined in the Credit Agreement).
The KeyBank Facility contains a number of other customary terms and covenants, including the following (capitalized terms are as defined in the Credit Agreement): the aggregate borrowing base availability under the KeyBank Facility is limited to the lesser of: (1) 55% of the Pool Value of the properties in the collateral pool, or (2) an amount that would provide a minimum Debt Service Coverage Ratio of no less than 1.35 to 1.0; and we must meet the following financial tests, calculated as of the close of each fiscal quarter: (1) a Total Leverage Ratio of no more than 60%; (2) a Tangible Net Worth
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not less than (a) $5,937,713, plus (b) 80% of Net Equity Proceeds received after the Effective Date, less (c) any amounts paid for the redemption or retirement of the Preferred Equity Investment; (3) an Interest Coverage Ratio of no less than 1.6 to 1.0 commencing at the earlier of the fiscal quarter immediately following the acquisition of the final Portfolio Property or March 31, 2015 increasing to 1.75 to 1.0 in year 2 and 1.85 to 1.0 in year 3; (4) a Fixed Charge Ratio of no less than 1.6 to 1.0 commencing at the earlier of the fiscal quarter immediately following the acquisition of the final Portfolio Property or March 31, 2015; (5) a ratio of varying rate Indebtedness to total Indebtedness not in excess of 30%; (6) a Loan to Value Ratio of not greater than fifty-five percent (55%); and (7) a Debt Service Coverage Ratio of not less than 1.35 to 1.0.
The Amendment modified certain covenants contained in the Credit Agreement, including the following (capitalized terms are as defined in the Amendment and the Credit Agreement):
| • | The aggregate borrowing base availability under the KeyBank Credit Facility is limited to the lesser of: (1) during the Adjustment Period, sixty five percent (65%) of the Pool Value of the Mortgaged Properties, and at all other times fifty-five percent (55%) of the Pool Value of the Mortgaged Properties, or (2) during the Adjustment Period, a loan amount which would provide a Pool Debt Yield of no less than nine percent (9%), and at all other times a loan amount which would provide a minimum Debt Service Coverage Ratio of no less than 1.35 to 1.0. |
| • | a Total Leverage Ratio no greater than sixty-five percent (65%) during the Adjustment Period and at all other times no greater than sixty percent (60%); |
| • | an Interest Coverage Ratio of not less than 1.65:1.00 during the Adjustment Period, and thereafter 1.75:1.00 through the quarter ending June 30, 2016, and increasing to 1.85:1.00 as of September 30, 2016 and on each quarter end thereafter; |
| • | a ratio of (i) the Indebtedness that bears interest at a varying rate of interest or that does not have the interest rate fixed, capped or swapped pursuant to a Hedging Agreement (excluding any such Indebtedness constituting the increased Commitment hereunder during the Adjustment Period) to (ii) the sum of the Indebtedness (excluding the increased Commitment hereunder during the Adjustment Period), not in excess of thirty percent (30%); and |
| • | during the Adjustment Period, a Loan to Value Ratio of not greater than sixty-five percent (65%) and at all other times a Loan to Value Ratio of not greater than fifty-five percent (55%). |
The Amendment allows us to incur a maximum aggregate amount of recourse debt of 15% of our Total Asset Value (as the term is defined in the Amendment) prior to December 31, 2017, and a maximum aggregate amount of 10% of its Total Asset Value thereafter.
On July 31, 2014, our Operating Partnership purchased an interest rate cap with a notional amount of $15 million, such that in no event will our interest rate exceed 5.75% thereon through August 1, 2016. Additionally, this interest rate cap was amended on December 14, 2015, to increase the notional amount to $37 million.
The following table presents the future principal payment requirements on outstanding secured debt as of December 31, 2015:
| 2016 |
$ | — | ||
| 2017 |
38,300,000 | |||
| 2018 |
— | |||
| 2019 |
— | |||
| 2020 |
— | |||
| 2021 and thereafter |
— | |||
|
|
|
|||
| Total payments |
$ | 38,300,000 | ||
|
|
|
Note 5. Preferred Equity
Issuance of Preferred Units by our Operating Partnership
On July 31, 2014, we and our Operating Partnership entered into a Series A Cumulative Redeemable Preferred Unit Purchase Agreement (the “Unit Purchase Agreement”) with SSTI Preferred Investor, LLC (the “Preferred Investor”), a
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December 31, 2015
wholly-owned subsidiary of SmartStop Self Storage Operating Partnership, L.P. through September 30, 2015, and a subsidiary of Extra Space effective October 1, 2015 as a result of the Merger. Pursuant to the Unit Purchase Agreement, the Preferred Investor agreed to provide up to $18,100,000 through a preferred equity investment in our Operating Partnership (the “Investment”), to be used solely for investments in self storage properties, as described in the underlying documents, in exchange for up to 724,000 preferred units of limited partnership interest of our Operating Partnership (the “Preferred Units”), each having a liquidation preference of $25.00 per Preferred Unit (the “Liquidation Amount”), plus all accrued and unpaid distributions.
In addition to the Unit Purchase Agreement, we and our Operating Partnership entered into a Second Amended and Restated Limited Partnership Agreement of the Operating Partnership (the “Second Amended and Restated Limited Partnership Agreement”), and Amended and Restated Amendment No. 1 to the Second Amended and Restated Limited Partnership Agreement (the “First Amendment”). The Second Amended and Restated Limited Partnership Agreement authorized the issuance of additional classes of units of limited partnership interest in the Operating Partnership, established a new series of preferred units of limited partnership interest in the Operating Partnership and set forth other necessary corresponding changes. All other terms of the Second Amended and Restated Limited Partnership Agreement remained substantially the same as the original Limited Partnership Agreement. The First Amendment sets forth key terms of the Preferred Units, some of which are discussed below.
On July 31, 2014, the Preferred Investor invested approximately $7.1 million in the first tranche of its Investment in our Operating Partnership which proceeds were used in connection with the acquisitions of the Ft. Pierce property and the Las Vegas I property and in exchange the Preferred Investor received approximately 280,000 Preferred Units in our Operating Partnership.
On September 29, 2014, the Preferred Investor invested approximately $2.8 million in the second tranche of its Investment in our Operating Partnership which proceeds were used in connection with the acquisition of the Las Vegas II property and in exchange the Preferred Investor received approximately 113,000 Preferred Units in our Operating Partnership. On December 31, 2014, we issued approximately 17,000 Preferred Units in our Operating Partnership to the Preferred Investor to cover the approximately $420,000 in costs incurred by the Preferred Investor in making its investment.
On January 29, 2015, and February 5, 2015, we closed on a portfolio of six properties. These acquisitions were funded in part by the issuance of approximately 80,000 and 208,000 Preferred Units in our Operating Partnership, respectively, which were issued for approximately $2.0 million and $5.2 million, respectively.
On September 23, 2015 we redeemed $1.5 million in Liquidation Amount of the Preferred Units. As of December 31, 2015, the Preferred Investor had a remaining amount invested of approximately $16 million and approximately 640,000 Preferred Units in our Operating Partnership.
The holders of Preferred Units receive current distributions (the “Current Distributions”) at a rate of one-month LIBOR plus 6.5% per annum on the Liquidation Amount, payable monthly and calculated on an actual/360 basis. In addition to the Current Distributions, our Operating Partnership has the obligation to elect either (A) pay the holder of the Preferred Units additional distributions monthly in an amount that will accrue at the rate of: (i) 4.35% until January 31, 2017; and (ii) thereafter, 6.35% or (B) defer the additional distributions in an amount that will accrue monthly at the rate of (i) for the period until January 31, 2017, LIBOR plus 10.85% and (ii) thereafter, LIBOR plus 12.85% (the “Deferred Distributions”). As of December 31, 2015 and 2014, we had elected to defer the additional distributions and had accrued approximately $0.9 million and $0.2 million of such distributions, respectively.
The Preferred Units may be redeemed by our Operating Partnership, in whole or in part, at the option of our Operating Partnership at any time. The redemption price (the “Redemption Price”) for the Preferred Units will be equal to: (i) in the event of a partial redemption, the sum of the Liquidation Amount plus all accumulated and unpaid Current Distributions thereon to the date of redemption; and (ii) in the event of the redemption of all outstanding Preferred Units, the sum of the Liquidation Amount plus all accumulated and unpaid Current Distributions and any accumulated Deferred Distributions thereon to the date of redemption. If fewer than all of the outstanding Preferred Units are to be redeemed at the option of our Operating Partnership, the Preferred Units to be redeemed will be determined pro rata or by lot or in such other manner as determined by us, as the general partner of our Operating Partnership to be fair and equitable to all holders of the Preferred Units.
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December 31, 2015
The holder of the Preferred Units may require our Operating Partnership to repurchase the Preferred Units upon the occurrence of any of the following (each an “Optional Repurchase Event” and as defined within the Amendment): (A) a breach of any of the Protective Provisions; (B) an Event of Default; (C) a Change of Control that has not been consented to in accordance with the terms of the Amendment; (D) our failure to qualify as a REIT under the Internal Revenue Code; or (E) the occurrence and continuance of a monetary or a material default beyond any applicable cure period under any of the loan documents for each of the properties in the portfolio. The repurchase price for the Preferred Units will be the Redemption Price.
Note 6. Related Party Transactions
Fees to Affiliates
Our Advisory Agreement with our Advisor and dealer manager agreement (“Dealer Manager Agreement”) with our Dealer Manager, entitle our Advisor and our Dealer Manager to specified fees upon the provision of certain services with regard to the Public Offering and investment of funds in real estate properties, among other services, as well as reimbursement for organizational and offering costs incurred by our Advisor on our behalf and reimbursement of certain costs and expenses incurred by our Advisor in providing services to us. Additionally, the advisory agreement (the “Private Offering Advisory Agreement”) and dealer manager agreement (the “Private Offering Dealer Manager Agreement”) executed in connection with the Private Offering, entitled our Advisor and our Dealer Manager to specified fees upon the provision of certain services with regard to the Private Offering and investment of funds in real estate properties, among other services, as well as reimbursement for organizational and offering costs incurred by our Advisor on our behalf and reimbursement of certain costs and expenses incurred by our Advisor in providing services to us.
Organization and Offering Costs
Organization and offering costs of the Private Offering were paid by our Advisor on our behalf and were reimbursed to our Advisor from the proceeds of our Private Offering pursuant to the Private Offering Advisory Agreement. Organization and offering costs incurred in connection with the Private Offering consisted of all expenses (other than sales commissions and the dealer manager fee) to be paid by us in connection with the Private Offering, including our legal, accounting, printing, mailing and filing fees, charges of our escrow holder and other accountable organization and offering expenses, including, but not limited to, (i) amounts to reimburse our Advisor for all marketing related costs and expenses such as salaries and direct expenses of employees of our Advisor and its affiliates in connection with registering and marketing our shares; (ii) technology costs associated with the offering; (iii) our costs of conducting our training and education meetings; (iv) our costs of attending retail seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses. We have incurred and will continue to incur similar organization and offering costs in connection with the Public Offering. Pursuant to the Advisory Agreement, our Advisor must reimburse us within 60 days after the end of the month which the Public Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions and dealer manager fees) in excess of 3.5% of the gross offering proceeds from the Primary Offering.
Advisory Agreement
We do not have any employees. Our Advisor is primarily responsible for managing our business affairs and carrying out the directives of our board of directors. Our Advisor receives various fees and expenses under the terms of our Advisory Agreement and the Private Offering Advisory Agreement (which terminated upon commencement of the Advisory Agreement). As discussed above, we are required under our Advisory Agreement to reimburse our Advisor for organization and offering costs from the Public Offering; provided, however, pursuant to the Advisory Agreement, our Advisor will be required to reimburse us within 60 days after the end of the month in which the Public Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions and dealer manager fees) in excess of 3.5% of the gross offering proceeds from the Primary Offering.
The Advisory Agreement also requires our Advisor to reimburse us to the extent that offering expenses, including sales commissions, dealer manager fees and organization and offering expenses, are in excess of 15% of gross proceeds from the Public Offering. Our Advisor receives acquisition fees equal to 1.75% and 1%, respectively, of the contract purchase price of each property we acquire plus reimbursement of any acquisition expenses our Advisor incurs pursuant to the Advisory Agreement and the Private Offering Advisory Agreement. Our Advisor also receives a monthly asset management fee equal to 0.04167%, which is one-twelfth of 0.5%, of our average invested assets, as defined. We also pay our Advisor a financing fee of up to 0.5% of the borrowed amount of a loan for arranging for financing in connection with the acquisition, development or repositioning of our properties. Our Advisor may reallow a portion of the financing fee to a third party in the event such party assisted us in arranging such financing.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Under our Advisory Agreement, our Advisor receives disposition fees in an amount equal to the lesser of (i) one-half of the competitive real estate commission or (ii) 1% of the contract sale price for each property we sell, as long as our Advisor provides substantial assistance in connection with the sale. As provided under the Advisory Agreement, the total real estate commissions paid (including the disposition fee paid to our Advisor) may not exceed the lesser of a competitive real estate commission or an amount equal to 6% of the contract sale price of the property. We also pay our Advisor or its affiliate a market-based development fee some or all of which may be reallowed to a third party developer. The development fee is paid in connection with properties that we anticipate developing or expanding within 12 months of the acquisition of such properties. A development fee to a third party developer may take the form of an up-front fee and participation in a back-end performance fee. Our Advisor is also entitled to various subordinated distributions under the Second Amended and Restated Limited Partnership Agreement if we (1) list our shares of common stock on a national exchange, (2) terminate our Advisory Agreement, (3) liquidate our portfolio, or (4) merge with another entity or enter into an Extraordinary Transaction, as defined in the Second Amended and Restated Limited Partnership Agreement.
Our Advisory Agreement provides for reimbursement of our Advisor’s direct and indirect costs of providing administrative and management services to us. Beginning four fiscal quarters after we acquire our first real estate asset, pursuant to the Advisory Agreement, our Advisor is required to pay or reimburse us the amount by which our aggregate annual operating expenses, as defined, exceed the greater of 2% of our average invested assets or 25% of our net income, as defined, unless a majority of our independent directors determine that such excess expenses were justified based on unusual and non-recurring factors. For any fiscal quarter for which total operating expenses for the 12 months then ended exceed the limitation, we will disclose this fact in our next quarterly report or within 60 days of the end of that quarter and send a written disclosure of this fact to our stockholders. In each case the disclosure will include an explanation of the factors that the independent directors considered in arriving at the conclusion that the excess expenses were justified.
As of December 31, 2015, we had incurred total operating expenses for the 12 months then ended that exceeded the greater of 2% of our average invested assets or 25% of our net income, as defined, in the four consecutive fiscal quarters then ended by approximately $255,000 (the “Excess Expenses”). On March 4, 2016, our board of directors, including all of the independent directors, determined that there are unusual and non-recurring factors that are sufficient to justify the Excess Expenses, including but not limited to: (1) the amounts reflect legitimate operating expenses necessary for the operation of our business; (2) we are in our first full year of operations and we are still in the acquisition and development stage; (3) the start-up costs associated with our first full year of operations, including the expenses associated with being a public company (such as audit and legal services, director and officer liability insurance and fees for directors), are significant and disproportionate to our average invested assets and net income; (4) our average invested assets was low due to us owning between 3 and 12 properties during the four fiscal quarter period; and (5) our focus on acquisition of self storage properties that are not yet stabilized.
Dealer Manager Agreement
In connection with our Private Offering, our Dealer Manager received a sales commission of up to 7.0% of gross proceeds from sales in the Private Offering and a dealer manager fee equal to up to 3.75% of gross proceeds from sales in the Private Offering under the terms of the dealer manager agreement for our Private Offering (the “Private Offering Dealer Manager Agreement”). In connection with our Primary Offering, our Dealer Manager receives a sales commission of up to 7.0% of gross proceeds from sales of Class A Shares and up to 2.0% of gross proceeds from the sales of Class T Shares in the Primary Offering and a dealer manager fee up to 3.0% of gross proceeds from sales of both Class A Shares and Class T Shares in the Primary Offering under the terms of the Dealer Manager Agreement. In addition, our Dealer Manager receives an ongoing stockholder servicing fee that is payable monthly and accrues daily in an amount equal to 1/365th of 1% of the purchase price per share of the Class T Shares sold in the Primary Offering. We will cease paying the stockholder servicing fee with respect to the Class T shares sold in the Primary Offering at the earlier of (i) the date we list our shares on a national securities exchange, merge or consolidate with or into another entity, or sell or dispose of all or substantially all of our assets, (ii) the date at which the aggregate underwriting compensation from all sources equals 10% of the gross proceeds from the sale of both Class A shares and Class T shares in our Primary Offering (i.e., excluding proceeds from sales pursuant to our distribution reinvestment plan); (iii) the fifth anniversary of the last day of the fiscal quarter in which our Public Offering (excluding our distribution reinvestment plan offering) terminates; and (iv) the date that such Class T share is redeemed or is no longer outstanding. Our Dealer Manager has entered into participating dealer agreements with certain other broker-dealers which authorizes them to sell our shares. Upon sale of our shares by such broker-dealers, our Dealer Manager re-allows all of the sales commissions and, subject to certain limitations, the stockholder servicing fees paid in connection with sales made by these broker-dealers. Our Dealer Manager may also re-allow to these broker-dealers a portion of their dealer manager fee as marketing fees, reimbursement of certain costs and expenses of attending training and education meetings sponsored by our
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Dealer Manager, payment of attendance fees required for employees of our Dealer Manager or other affiliates to attend retail seminars and public seminars sponsored by these broker-dealers, or to defray other distribution-related expenses. Our Dealer Manager also receives reimbursement of bona fide due diligence expenses; however, to the extent these due diligence expenses cannot be justified, any excess over actual due diligence expenses will be considered underwriting compensation subject to a 10% FINRA limitation and, when aggregated with all other non-accountable expenses in connection with our Public Offering, may not exceed 3% of gross offering proceeds from sales in the Public Offering.
Affiliated Dealer Manager
Our President and Chief Executive Officer owned, through a wholly-owned limited liability company, a 15% non-voting equity interest in our Dealer Manager through August 31, 2014. Effective August 31, 2014, SmartStop indirectly owned the 15% non-voting equity interest in our Dealer Manager, pursuant to the Self Administration and Investment Management Transaction. Effective October 1, 2015, in connection with the Merger, the 15% non-voting equity interest in our Dealer Manager is now owned by our Sponsor. An affiliate of our Dealer Manager continues to own a 2.5% non-voting membership interest in our Advisor.
Property Management Agreement
Through September 30, 2015, each of our self storage properties was managed by our Property Manager under separate property management agreements. Under each agreement, our Property Manager received a fee for its services in managing our properties, generally equal to the greater of $3,000 or 6% of the gross revenues from the properties plus reimbursement of the Property Manager’s costs of managing the properties. Reimbursable costs and expenses included wages and salaries and other expenses of employees engaged in operating, managing and maintaining our properties. Our Property Manager also received a one-time fee for each property acquired by us that was managed by our Property Manager in the amount of $3,750. In the event that our Property Manager assisted with the development or redevelopment of a property, we paid a separate market-based fee for such services. In addition, our Property Manager was entitled to a construction management fee equal to 5% of the cost of construction or capital improvement work in excess of $10,000 and an administration fee equal to $0.50 a month for each insurance policy purchased by a tenant at one of our properties in connection with the tenant insurance program. Additionally, each agreement included a non-solicitation provision and a provision regarding the Property Manager’s use of trademarks and other intellectual property owned by SmartStop.
As of October 1, 2015, each of our self storage properties are subject to separate property management agreements with our Property Manager, which in turn has entered into sub-property management agreements with Extra Space, which provides on-site management of our properties. Such agreements were entered into effective on October 1, 2015. Under the property management agreements, our Property Manager receives a monthly management fee of $2,500 or 6% of the gross revenues, whichever is greater, plus reimbursement of the Property Manager’s costs of managing the properties. Extra Space agreed to pay up to $25,000 for each property managed toward the signage and set-up costs associated with converting each property to the Extra Space brand (the “Set-Up Amount”). The property management agreements have a three year term and automatically renew for successive one year periods thereafter, unless we or our Property Manager provides prior written notice at least 90 days prior to the expiration of the term. We may terminate a property management agreement without cause at any time during the initial three year term if we pay the Property Manager a termination fee equal to the Set-Up Amount, reduced by 1/36th of the Set-Up Amount for every full month of the term. After the end of the initial three year term, we may terminate a property management agreement on 30 days prior written notice without payment of a termination fee. Our Property Manager may terminate a property management agreement on 60 days prior written notice to us.
The sub-property management agreements between our Property Manager and Extra Space are substantially the same as the property management agreements between us and our Property Manager. Under the sub-property management agreements, our Property Manager pays Extra Space a monthly management fee of $2,500 or 6% of the gross revenues, whichever is greater, plus reimbursement of Extra Space’s costs of managing the properties; provided, however that no management fee is due and payable to Extra Space for the months of January and July each year during the term. Extra Space has the exclusive right to offer tenant insurance to the tenants and is entitled to all of the benefits of such tenant insurance. The sub-property management agreements also have a three year term and automatically renew for successive one year periods thereafter, unless our Property Manager or Extra Space provides prior written notice at least 90 days prior to the expiration of the term. Our Property Manager may terminate the sub-property management agreement without cause at any time during the initial three year term if it pays Extra Space a termination fee equal to the Set-Up Amount, reduced by 1/36th of the Set-Up Amount for every full month of the term. After the end of the initial three year term, our Property Manager may terminate a sub-property management agreement on 30 days prior written notice without payment of a termination fee. Extra Space may terminate a property management agreement on 60 days prior written notice to our Property Manager.
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December 31, 2015
In addition, we entered into an agreement with Extra Space and our Property Manager in which we agreed that, subject to certain limitations, our Property Manager will retain Extra Space as sub-property manager for all self storage properties we acquire in the United States that will be managed by our Property Manager.
Pursuant to the terms of the agreements described above, the following table summarizes related party costs incurred and paid by us for the years ended December 31, 2014 and 2015, as well as any related amounts payable as of December 31, 2014 and 2015 (there were no related party costs incurred during the period from March 12, 2013 (date of inception) through December 31, 2013):
| Year Ended December 31, 2014 | Year Ended December 31, 2015 | |||||||||||||||||||||||
| Incurred | Paid | Payable | Incurred | Paid | Payable | |||||||||||||||||||
| Expensed |
||||||||||||||||||||||||
| Operating expenses (including organizational costs) |
$ | 421,921 | $ | 421,921 | $ | — | $ | 774,212 | $ | 748,513 | $ | 25,699 | ||||||||||||
| Asset management fees |
36,248 | — | 36,248 | 180,060 | 216,308 | — | ||||||||||||||||||
| Property management fees(1) |
68,146 | — | 68,146 | 378,190 | 446,336 | — | ||||||||||||||||||
| Acquisition expenses |
488,660 | 418,763 | 69,897 | 822,798 | 775,620 | 117,075 | ||||||||||||||||||
| Debt issuance costs |
— | — | — | 143,773 | 41,523 | 102,250 | ||||||||||||||||||
| Capitalized |
||||||||||||||||||||||||
| Debt issuance costs |
323,822 | 158,280 | 165,542 | — | 165,542 | — | ||||||||||||||||||
| Other assets |
87,405 | — | 87,405 | 20,000 | 107,405 | — | ||||||||||||||||||
| Additional Paid-in Capital |
||||||||||||||||||||||||
| Selling commissions |
470,336 | 442,337 | 27,999 | 1,462,535 | 1,490,534 | — | ||||||||||||||||||
| Dealer manager fees |
201,572 | 189,571 | 12,001 | 365,634 | 372,474 | 5,161 | ||||||||||||||||||
| Offering costs |
1,422,211 | 40,001 | 1,382,210 | 471,519 | 1,850,917 | 2,812 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 3,520,321 | $ | 1,670,873 | $ | 1,849,448 | $ | 4,618,721 | $ | 6,215,172 | $ | 252,997 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| (1) | During the year ended December 31, 2015, property management fees include approximately $92,000 of fees paid to the sub-property manager of our properties. |
Tenant Insurance Program
Prior to the closing of the Merger on October 1, 2015, SmartStop participated in a tenant reinsurance program whereby customers of our self storage facilities were able to purchase insurance to cover damage or destruction to their property while stored at our facilities. SmartStop invested in a Cayman Islands company (the “Reinsurance Company”) that insured a portion of the insurance required by the program insurer to cover the risks of loss at participating facilities in the program. The program insurer provided fees (approximately 50% of the tenant premium paid) to us as owner of the facilities. The Reinsurance Company was required to fund additional capital or entitled to receive distributions of profits depending on actual losses incurred under the program. Commensurate with the effective date of the Self Administration and Investment Management Transaction of August 31, 2014, SmartStop acquired its interest in the Reinsurance Company from our President and Chief Executive Officer. For the years ended December 31, 2015 and 2014, we recorded approximately $0.1 million and none, respectively, of revenue from the program insurer. Effective October 1, 2015, Extra Space was entitled to all tenant insurance revenues for properties located in the United States and we will no longer receive any such tenant insurance revenues.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Extra Space Self Storage
In connection with the merger of SmartStop into Extra Space, certain of our executive officers, including H. Michael Schwartz, Paula Mathews, Michael McClure and James Berg, received units of limited partnership interest in Extra Space Storage LP, the operating partnership for Extra Space, in exchange for units of limited partnership of SmartStop Self Storage Operating Partnership, L.P., the operating partnership for SmartStop, owned by such executives.
Note 7. Commitments and Contingencies
Distribution Reinvestment Plan
We have adopted an amended and restated distribution reinvestment plan that allows both our Class A and Class T stockholders to have distributions otherwise distributable to them invested in additional shares of our Class A and Class T Shares, respectively. The purchase price per share is 95% of the current offering price of our shares in the Primary Offering. We may amend or terminate the amended and restated distribution reinvestment plan for any reason at any time upon 10 days’ prior written notice to stockholders. No sales commissions or dealer manager fee will be paid on shares sold through the amended and restated distribution reinvestment plan. As of December 31, 2015, we had sold approximately 1,000 shares shares through our distribution reinvestment plan offering for Class A Shares and none for our Class T Shares.
Share Redemption Program
We adopted a share redemption program that enables stockholders to sell their shares to us in limited circumstances. As long as our common stock is not listed on a national securities exchange or over-the-counter market, our stockholders who have held their stock for at least one year may be able to have all or any portion of their shares of stock redeemed by us. We may redeem the shares of stock presented for redemption for cash to the extent that we have sufficient funds available to fund such redemption.
Our board of directors may amend, suspend or terminate the share redemption program with 30 days’ notice to our stockholders. We may provide this notice by including such information in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to our stockholders. The complete terms of our share redemption program are described in our prospectus
The amount that we may pay to redeem stock for redemptions is the redemption price set forth in the following table which is based upon the number of years the stock is held:
| Number Years Held |
Redemption Price | |
| Less than 1 |
No Redemption Allowed | |
| 1 or more but less than 3 |
90.0% of Redemption Amount | |
| 3 or more but less than 4 |
95.0% of Redemption Amount | |
| 4 or more |
100.0% of Redemption Amount |
At any time we are engaged in an offering of shares, the Redemption Amount for shares purchased under our share redemption program will always be equal to or lower than the applicable per share offering price. As long as we are engaged in an offering, the Redemption Amount shall be the lesser of the amount the stockholder paid for their shares or the price per share in the current offering. If we are no longer engaged in an offering, the per share Redemption Amount will be determined by our board of directors. Our board of directors will announce any redemption price adjustment and the time period of its effectiveness as a part of its regular communications with our stockholders. At any time the redemption price during an offering is determined by any method other than the offering price, if we have sold property and have made one or more special distributions to our stockholders of all or a portion of the net proceeds from such sales, the per share redemption price will be reduced by the net sale proceeds per share distributed to investors prior to the redemption date as a result of the sale of such property in the special distribution. Our board of directors will, in its sole discretion, determine which distributions, if any, constitute a special distribution. While our board of directors does not have specific criteria for determining a special distribution, we expect that a special distribution will only occur upon the sale of a property and the subsequent distribution of the net sale proceeds.
Notwithstanding the foregoing, until we establish an estimated value per share, shares received as a stock distribution will be redeemed at a purchase price of $0.00. In addition, the purchase price per share will be adjusted for any stock
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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
combinations, splits, recapitalizations and the like with respect to the shares of common stock and reduced by the aggregate amount of net sale or refinance proceeds per share, if any distributed to the redeeming stockholder prior to the redemption date.
There are several limitations on our ability to redeem shares under the share redemption program including, but not limited to:
| • | Unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability” (as defined under the share redemption program) or bankruptcy, we may not redeem shares until the stockholder has held his or her shares for one year. |
| • | During any calendar year, we will not redeem in excess of 5% of the weighted-average number of shares outstanding during the prior calendar year. |
| • | The cash available for redemption is limited to the proceeds from the sale of shares pursuant to our distribution reinvestment plan. |
| • | We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency. |
Through December 31, 2015 we had not received any requests for the redemption of shares under our share redemption program. Additionally, as of December 31, 2015, we had issued 1,127 shares under our distribution reinvestment plan.
Operating Partnership Redemption Rights
The limited partners of our Operating Partnership have the right to cause our Operating Partnership to redeem their limited partnership units for cash equal to the value of an equivalent number of our shares, or, at our option, we may purchase their limited partnership units by issuing one share of our common stock for each limited partnership unit redeemed. These rights may not be exercised under certain circumstances that could cause us to lose our REIT election. Furthermore, limited partners may exercise their redemption rights only after their limited partnership units have been outstanding for one year. Our Advisor is prohibited from exchanging or otherwise transferring its limited partnership units so long as our Advisor is acting as our advisor under the Advisory Agreement.
Other Contingencies
From time to time, we are party to legal proceedings that arise in the ordinary course of our business. We are not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.
Note 8. Pro Forma Financial Information (Unaudited)
The table set forth below summarizes on an unaudited pro forma basis the combined results of operations of the Company for the years ended December 31, 2015 and 2014 as if the Company’s acquisitions discussed in Note 3 were completed as of January 1, 2014. This pro forma information does not purport to represent what the actual results of operations of the Company would have been for the periods indicated, nor do they purport to predict the results of operations for future periods.
| Year Ended December 31, 2015 |
Year Ended December 31, 2014 |
|||||||
| Pro forma revenue |
$ | 6,676,289 | $ | 5,874,046 | ||||
| Pro forma operating expenses |
(8,021,824 | ) | (7,463,592 | ) | ||||
| Pro forma net loss attributable to common shareholders |
(5,350,389 | ) | (5,516,182 | ) | ||||
F-25
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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
The pro forma financial information for the years ended December 31, 2015 and 2014 were adjusted to exclude approximately $1.1 million and $0.6, respectively, for acquisition related expenses.
F-26
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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Note 9. Selected Quarterly Data (Unaudited)
The following is a summary of quarterly financial information for the years ended December, 31, 2015 and 2014 (there were no operations from the period from March 12, 2013 (date of inception) through December 31, 2013):
| Three months ended | ||||||||||||||||
| March 31, 2015 | June 30, 2015 | September 30, 2015 | December 31, 2015 | |||||||||||||
| Total revenues |
$ | 951,653 | $ | 1,241,755 | $ | 1,292,224 | $ | 1,371,775 | ||||||||
| Total operating expenses |
$ | 1,592,434 | $ | 1,619,962 | $ | 1,836,662 | $ | 2,159,038 | ||||||||
| Operating loss |
$ | (640,781 | ) | $ | (378,207 | ) | $ | (544,438 | ) | $ | (787,263 | ) | ||||
| Net loss |
$ | (834,329 | ) | $ | (590,767 | ) | $ | (758,800 | ) | $ | (1,191,825 | ) | ||||
| Net loss attributable to common shareholders |
$ | (1,302,893 | ) | $ | (1,154,918 | ) | $ | (1,314,402 | ) | $ | (1,693,559 | ) | ||||
| Net loss per Class A share-basic and diluted |
$ | (1.60 | ) | $ | (1.36 | ) | $ | (1.26 | ) | $ | (0.82 | ) | ||||
| Net loss per Class T share-basic and diluted |
— | — | — | $ | (0.82 | ) | ||||||||||
| Three months ended | ||||||||||||||||
| March 31, 2014 | June 30, 2014 | September 30, 2014 | December 31, 2014 | |||||||||||||
| Total revenues |
$ | — | $ | — | $ | 205,442 | $ | 459,693 | ||||||||
| Total operating expenses |
— | 412,853 | 723,462 | 748,758 | ||||||||||||
| Operating loss |
— | (412,853 | ) | (518,020 | ) | (289,065 | ) | |||||||||
| Net loss |
— | (412,853 | ) | (599,148 | ) | (423,634 | ) | |||||||||
| Net loss attributable to common shareholders |
— | (357,246 | ) | (694,376 | ) | (765,635 | ) | |||||||||
| Net loss per share-basic and diluted |
— | (6.20 | ) | (2.14 | ) | (1.27 | ) | |||||||||
As discussed in Note 3, during the fourth quarter of 2015 we completed the purchase price allocations for the properties acquired during the first quarter of 2015. During the fourth quarter we recognized the cumulative measurement period adjustments in our consolidated statement of operations. If such measurement period adjustments were retroactively recorded they would have had the aggregate impact of increasing depreciation by approximately $6,000, $9,000 and $10,000 and decreasing intangible amortization expense by approximately $45,000, $74,000 and $75,000, respectively related to the first, second and third quarters of 2015. However, as discussed in Note 2, we early adopted new amended accounting guidance and the cumulative measurement period adjustments were recorded in the fourth quarter.
Note 10. Declaration of Distributions
Stock Distribution Declaration
On December 4, 2015, our board of directors declared a stock distribution to the holders of record of all the issued and outstanding shares of Class A common stock and Class T common stock as of the close of business on March 31, 2016, in the amount of 0.005 shares of Class A common stock, $0.001 par value per share, per each class of Class A common stock outstanding (equivalent to a 0.75% stock distribution) and 0.005 shares of Class T common stock, $0.001 par value per share, per each share of Class T common stock (equivalent to a 0.75% stock distribution). Such stock distribution will be issued on April 15, 2016.
F-27
Table of Contents
STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Cash Distribution Declaration
On December 4, 2015, our board of directors declared a daily distribution in the amount of $0.00054645 per share (equivalent to an annualized distribution rate of 2.0% assuming the Class A Share was purchased for $10.00, and a rate of approximately 2.1% assuming the Class T Share was purchased for $9.47) on the outstanding shares of common stock, payable to stockholders of record of such shares as shown on our books as of the close of business on each day during the period commencing on January 1, 2016 and ending March 31, 2016. Such distributions payable to each stockholder of record during a month will be paid the following month.
Note 11. Subsequent Events
Acquisitions
On January 6, 2016, we closed on one self storage facility located in San Antonio, Texas for a purchase price of approximately $12.3 million, plus closing costs and acquisition fees, which was funded by a combination of a draw of approximately $8 million under the KeyBank Facility, and the remainder from the net proceeds of our Offering. We incurred acquisition fees of approximately $215,000 in connection with the acquisition.
On February 9, 2016, we closed on vacant land located in the Stoney Creek area of Toronto, Canada that will be developed into a self storage facility (the “Stoney Creek Property”) for a U.S. dollar equivalent purchase price of approximately $1.5 million, plus closing costs and acquisition fees, which was funded from net proceeds of our Offering. We incurred acquisition fees of approximately $26,000 in connection with the acquisition.
Cash Distribution Declaration
On March 22, 2016, our board of directors declared a daily distribution in the amount of $0.0010928962 per share (equivalent to an annualized distribution rate of 4.0% assuming the Class A Share was purchased for $10.00, and a rate of approximately 4.2% assuming the Class T Share was purchased for $9.47) on the outstanding shares of common stock, payable to stockholders of record of such shares as shown on our books as of the close of business on each day during the period commencing on April 1, 2016 and ending June 30, 2016. Such distributions payable to each stockholder of record during a month will be paid the following month.
Amendment to KeyBank Facility
On March 28, 2016, we amended (the “Third Amendment”) our KeyBank Facility thereby extending the Adjustment Period to June 30, 2016. Additionally, the Third Amendment eliminated the requirement to apply the net proceeds of our equity issuances during the Curtailment Period to pay down the outstanding principal balance on the KeyBank Facility to an aggregate amount of the lesser of either $40 million or the borrowing base availability calculated in accordance with the covenants that are applied outside of the Adjustment Period. As of March 18, 2016, the total amount borrowed under the KeyBank Facility was approximately $41 million.
Offering Status
As of March 18, 2016, in connection with our Primary Offering we had issued approximately 2,674,000 Class A shares of our common stock and approximately 89,000 Class T Shares of our common stock for gross proceeds of approximately $26.6 million and approximately $0.8 million, respectively.
F-28
Table of Contents
STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2015
| Initial Cost to Company | Gross Carrying Amount at December 31, 2015 | |||||||||||||||||||||||||||||||||||||||||||
| Description |
ST | Encumbrance | Land | Building and Improvements |
Total | Cost Capitalized Subsequent to Acquisition |
Land | Building and Improvements |
Total | Accumulated Depreciation |
Date of Construction |
Date Acquired | ||||||||||||||||||||||||||||||||
| Fort Pierce |
FL | $ | 988,659 | $ | 700,000 | $ | 3,060,000 | $ | 3,760,000 | $ | 54,962 | $ | 700,000 | $ | 3,114,962 | $ | 3,814,962 | $ | (156,346 | ) | 2008 | 7/31/2014 | ||||||||||||||||||||||
| Las Vegas I |
NV | 5,360,706 | 2,180,000 | 6,865,000 | 9,045,000 | 192,022 | 2,180,000 | 7,057,022 | 9,237,022 | (348,485 | ) | 1999 | 7/31/2014 | |||||||||||||||||||||||||||||||
| Las Vegas II |
NV | 3,196,021 | 1,380,000 | 4,460,000 | 5,840,000 | 120,997 | 1,380,000 | 4,580,997 | 5,960,997 | (196,478 | ) | 1996 | 9/29/2014 | |||||||||||||||||||||||||||||||
| Colorado Springs |
CO | 2,564,614 | 1,510,000 | 2,526,875 | 4,036,875 | 59,104 | 1,510,000 | 2,585,979 | 4,095,979 | (99,796 | ) | 1983 | 1/29/2015 | |||||||||||||||||||||||||||||||
| Riverside |
CA | 947,524 | 220,000 | 1,766,875 | 1,986,875 | 46,072 | 220,000 | 1,812,947 | 2,032,947 | (61,954 | ) | 1980 | 2/05/2015 | |||||||||||||||||||||||||||||||
| Stockton |
CA | 439,230 | 150,000 | 1,356,875 | 1,506,875 | 21,159 | 150,000 | 1,378,034 | 1,528,034 | (48,871 | ) | 1984 | 2/05/2015 | |||||||||||||||||||||||||||||||
| Azusa |
CA | 2,500,668 | 1,260,000 | 2,716,875 | 3,976,875 | 56,173 | 1,260,000 | 2,773,048 | 4,033,048 | (95,060 | ) | 1986 | 2/05/2015 | |||||||||||||||||||||||||||||||
| Romeoville |
IL | 1,852,578 | 480,000 | 2,766,875 | 3,246,875 | 56,946 | 480,000 | 2,823,821 | 3,303,821 | (98,452 | ) | 1986 | 2/05/2015 | |||||||||||||||||||||||||||||||
| Elgin |
IL | — | 110,000 | 546,875 | 656,875 | 155,714 | 110,000 | 702,589 | 812,589 | (21,073 | ) | 1986 | 2/05/2015 | |||||||||||||||||||||||||||||||
| San Antonio I |
TX | 9,426,260 | 2,600,000 | 9,020,000 | 11,620,000 | — | 2,600,000 | 9,020,000 | 11,620,000 | (11,940 | ) | 1998 | 12/17/2015 | |||||||||||||||||||||||||||||||
| Kingwood |
TX | 6,461,880 | 1,760,000 | 6,270,000 | 8,030,000 | — | 1,760,000 | 6,270,000 | 8,030,000 | (9,036 | ) | 2001 | 12/17/2015 | |||||||||||||||||||||||||||||||
| Aurora |
CO | 4,561,860 | 830,000 | 5,030,000 | 5,860,000 | — | 830,000 | 5,030,000 | 5,860,000 | (9,622 | ) | 2015 | 12/17/2015 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| $ | 38,300,000 | $ | 13,180,000 | $ | 46,386,250 | $ | 59,566,250 | $ | 763,149 | $ | 13,180,000 | $ | 47,149,399 | $ | 60,329,399 | $ | (1,157,113 | ) | ||||||||||||||||||||||||||
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
Activity in real estate facilities during 2015 was as follows:
| 2015 | ||||
| Real estate facilities |
||||
| Balance at beginning of year |
$ | 18,967,479 | ||
| Asset disposals |
(176,816 | ) | ||
| Facility acquisitions |
40,921,250 | |||
| Improvements |
617,486 | |||
|
|
|
|||
| Balance at end of year |
$ | 60,329,399 | ||
|
|
|
|||
| Accumulated depreciation |
||||
| Balance at beginning of year |
$ | 182,836 | ||
| Asset disposals |
(176,816 | ) | ||
| Depreciation expense |
1,151,093 | |||
|
|
|
|||
| Balance at end of year |
$ | 1,157,113 | ||
| Construction in process |
||||
| Balance at beginning of year |
$ | — | ||
| Additions |
30,808 | |||
|
|
|
|||
| Balance at end of year |
$ | 30,808 | ||
|
|
|
|||
| Real estate facilities, net |
$ | 59,203,094 | ||
|
|
|
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S-1
Table of Contents
STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES
EXHIBIT INDEX
| Exhibit No. |
Description | |
| 1.1 | Amended and Restated Dealer Manager Agreement and Participating Dealer Agreement, incorporated by reference to Exhibit 1.1 to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11, filed on January 15, 2015, Commission File No. 333-193480 | |
| 1.2 | Amendment No. 1 to Dealer Manager Agreement and Participating Dealer Agreement, incorporated by reference to Exhibit 1.1 to Post-Effective Amendment No. 4 to the Company’s Registration Statement on Form S-11, filed on September 28, 2015, Commission File No. 333-193480 | |
| 3.1 | Second Articles of Amendment and Restatement of Strategic Storage Growth Trust, Inc., incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11, filed on January 15, 2015, Commission File No. 333-193480 | |
| 3.2 | Articles of Amendment of Strategic Storage Growth Trust, Inc., incorporated by reference to Exhibit 3.1 to Post-Effective Amendment No. 4 to the Company’s Registration Statement on Form S-11, filed on September 28, 2015, Commission File No. 333-193480 | |
| 3.3 | Articles Supplementary of Strategic Storage Growth Trust, Inc., incorporated by reference to Exhibit 3.2 to Post-Effective Amendment No. 4 to the Company’s Registration Statement on Form S-11, filed on September 28, 2015, Commission File No. 333-193480 | |
| 3.4 | Amended and Restated Bylaws of Strategic Growth Storage Trust, Inc., incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-11, filed on January 22, 2014, Commission File No. 333-193480 | |
| 4.1 | Form of Subscription Agreement and Subscription Agreement Signature Page (included as Appendix A to prospectus), incorporated by reference to Post-Effective Amendment No. 6 to the Company’s Registration Statement on Form S-11, filed on March 10, 2016, Commission File No. 333-193480 | |
| 10.1 | Second Amended and Restated Limited Partnership Agreement of SS Growth Operating Partnership, L.P., incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-11, filed on September 29, 2014, Commission File No. 333-193480 | |
| 10.2 | Second Amended and Restated Advisory Agreement by and among Strategic Storage Growth Trust, Inc., SS Growth Operating Partnership, L.P. and SS Growth Advisor, LLC, incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K, filed on March 27, 2015, Commission File No. 333-193480 | |
| 10.3 | Strategic Storage Trust II, Inc. Amended and Restated Distribution Reinvestment Plan (included as Appendix B to prospectus), incorporated by reference to Post-Effective Amendment No. 6 to the Company’s Registration Statement on Form S-11, filed on March 10, 2016, Commission File No. 333-193480 | |
| 10.4 | Employee and Director Long-Term Incentive Plan of Strategic Storage Growth Trust, Inc., incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K, filed on March 27, 2015, Commission File No. 333-193480 | |
| 10.5 | Amendment No. 1 to the Second Amended and Restated Limited Partnership Agreement of SS Growth Operating Partnership, L.P. establishing Series A Cumulative Redeemable Preferred Units of Limited Partnership Interest, incorporated by reference to Exhibit 10.4 to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11, filed on September 29, 2014, Commission File No. 333-193480 | |
| 10.6 | Series A Cumulative Redeemable Preferred Unit Purchase Agreement, incorporated by reference to Exhibit 10.5 to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11, filed on September 29, 2014, Commission File No. 333-193480 | |
| 10.7 | Credit Agreement with KeyBank, N.A. dated July 31, 2014, incorporated by reference to Exhibit 10.6 to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11, filed on September 29, 2014, Commission File No. 333-193480 | |
| 10.8 | Six Property Portfolio Purchase and Sale Agreement, incorporated by reference to Exhibit 10.7 to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11, filed on September 29, 2014, Commission File No. 333-193480 | |
| 10.9 | Partial Assignment for one Property of the Six Property Portfolio, incorporated by reference to Exhibit 10.8 to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11, filed on September 29, 2014, Commission File No. 333-193480 | |
| 10.10 | Schedule of Omitted Documents, incorporated by reference to Exhibit 10.9 to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11, filed on September 29, 2014, Commission File No. 333-193480 | |
| 10.11 | Baseline Purchase Agreement, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed on June 5, 2015, Commission File No. 333-193480 | |
Table of Contents
| Exhibit No. |
Description | |
| 10.12 | Amendment No. 2 to the Second Amended and Restated Limited Partnership Agreement of SS Growth Operating Partnership, L.P., incorporated by reference to Exhibit 10.1 to Post-Effective Amendment No. 4 to the Company’s Registration Statement on Form S-11, filed on September 28, 2015, Commission File No. 333-193480 | |
| 10.13 | Arrington Portfolio Purchase Agreement, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed on October 30, 2015, Commission File No. 333-193480 | |
| 10.14 | Storage Spot Purchase Agreement, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on November 19, 2015, Commission File No. 333-193480 | |
| 10.15 | Assignment of the Burlington and Milton Properties, incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on November 19, 2015, Commission File No. 333-193480 | |
| 10.16 | Second Amendment to Credit Agreement with KeyBank National Association, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed on December 22, 2015, Commission File No. 333-193480 | |
| 10.17 | Assignment of Oakville Property, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed on January 8, 2016, Commission File No. 333-193480 | |
| 21.1 | Subsidiaries of Strategic Storage Growth Trust, Inc., incorporated by reference to the Company’s Registration Statement on Form S-11, filed on January 22, 2014, Commission File No. 333-193480 | |
| 31.1* | Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1* | Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2* | Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101* | The following Strategic Storage Growth Trust, Inc. financial information for the Year Ended December 31, 2015, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statement of Equity, (iv) Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements. | |
| * | Filed herewith. |