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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

 

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: 000-55616

 

 

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.)

10 Terrace Road,

Ladera Ranch, California 92694

(Address of principal executive offices)

(877) 327-3485

(Registrant’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

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

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

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

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

As of August 7, 2017, there were 18,830,303 outstanding shares of Class A common stock and 7,514,847 outstanding shares of Class T common stock of the registrant.

 

 

 


Table of Contents

FORM 10-Q

STRATEGIC STORAGE GROWTH TRUST, INC.

TABLE OF CONTENTS

 

          Page
No.
 

PART I.

   FINANCIAL INFORMATION   
   Cautionary Note Regarding Forward-Looking Statements      3  

Item 1.

   Consolidated Financial Statements:      3  
   Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016      4  
   Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)      5  
   Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)      6  
   Consolidated Statement of Equity for the Six Months Ended June 30, 2017 (unaudited)      7  
   Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited)      8  
   Notes to Consolidated Financial Statements (unaudited)      9  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      31  

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      46  

Item 4.

   Controls and Procedures      46  

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      47  

Item 1A.

   Risk Factors      47  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      48  

Item 3.

   Defaults Upon Senior Securities      48  

Item 4.

   Mine Safety Disclosures      48  

Item 5.

   Other Information      48  

Item 6.

   Exhibits      48  

 

2


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q 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-Q, 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 meet 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. See the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission, as supplemented by the risk factors included in Part II, Item 1A of this Form 10-Q, for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

The information furnished in the accompanying unaudited consolidated balance sheets and related consolidated statements of operations, comprehensive loss, equity and cash flows reflects all adjustments (consisting of normal and recurring adjustments) that are, in management’s opinion, necessary for a fair and consistent presentation of the aforementioned financial statements.

The accompanying financial statements should be read in conjunction with the notes to our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-Q. The accompanying financial statements should also be read in conjunction with our financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016. Our results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the operating results expected for the full year.

 

3


Table of Contents

STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     June 30,
2017
(Unaudited)
    December 31,
2016
 
ASSETS     

Real estate facilities:

    

Land

   $ 34,525,391     $ 24,315,650  

Buildings

     90,021,715       57,722,965  

Site improvements

     8,661,708       5,542,989  
  

 

 

   

 

 

 
     133,208,814       87,581,604  

Accumulated depreciation

     (4,814,361     (3,300,523
  

 

 

   

 

 

 
     128,394,453       84,281,081  

Construction in process

     4,805,045       2,174,191  
  

 

 

   

 

 

 

Real estate facilities, net

     133,199,498       86,455,272  

Cash and cash equivalents

     103,832,600       3,642,631  

Other assets, net

     4,414,787       3,156,769  

Debt issuance costs, net

     18,347       292,160  

Intangible assets, net

     481,712       391,143  
  

 

 

   

 

 

 

Total assets

   $ 241,946,944     $ 93,937,975  
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Secured debt, net

   $ 4,815,546     $ 12,509,308  

Accounts payable and accrued liabilities

     2,300,038       1,499,984  

Due to affiliates

     3,653,863       963,535  

Distributions payable

     799,810       305,764  
  

 

 

   

 

 

 

Total liabilities

     11,569,257       15,278,591  
  

 

 

   

 

 

 

Commitments and contingencies (Note 8)

    

Redeemable common stock

     2,945,034       1,086,603  
  

 

 

   

 

 

 

Equity:

    

Strategic Storage Growth Trust, Inc. equity:

    

Preferred Stock, $0.001 par value; 200,000,000 shares authorized; none issued and outstanding at June 30, 2017 and December 31, 2016

     —       —  

Class A Common stock, $0.001 par value; 350,000,000 shares authorized; 18,800,393 and 8,607,246 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

     18,800       8,607  

Class T Common stock, $0.001 par value; 350,000,000 shares authorized; 7,504,711 and 1,716,957 issued and outstanding at June 30, 2017 and December 31, 2016, respectively

     7,505       1,717  

Additional paid-in capital

     247,970,983       92,442,198  

Distributions

     (5,732,934     (2,010,167

Accumulated deficit

     (14,872,656     (12,655,490

Accumulated other comprehensive income (loss)

     108,423       (153,079
  

 

 

   

 

 

 

Total Strategic Storage Growth Trust, Inc. equity

     227,500,121       77,633,786  
  

 

 

   

 

 

 

Noncontrolling interests in our Operating Partnership

     (67,468     (61,005
  

 

 

   

 

 

 

Total equity

     227,432,653       77,572,781  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 241,946,944     $ 93,937,975  
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

4


Table of Contents

STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2017     2016     2017     2016  

Revenues:

        

Self storage rental revenue

   $ 3,024,621     $ 2,229,763     $ 5,711,108     $ 4,284,944  

Ancillary operating revenue

     23,760       19,828       41,704       37,532  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     3,048,381       2,249,591       5,752,812       4,322,476  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Property operating expenses

     1,338,707       1,093,115       2,488,203       2,003,047  

Property operating expenses – affiliates

     360,456       245,286       659,783       464,112  

General and administrative

     597,542       459,151       1,178,676       1,041,032  

Depreciation

     854,560       488,469       1,533,665       990,964  

Intangible amortization expense

     245,843       342,666       444,431       734,985  

Acquisition expenses – affiliates

     463,469       244,325       1,072,488       550,236  

Other property acquisition expenses

     237,100       81,329       339,906       149,215  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     4,097,677       2,954,341       7,717,152       5,933,591  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (1,049,296     (704,750     (1,964,340     (1,611,115

Other income (expenses):

        

Interest expense

     (24,055     (401,610     (39,155     (841,878

Interest expense – debt issuance costs

     (178,558     (162,630     (326,797     (336,227

Other

     123,859       (10,843     110,650       (10,614
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (1,128,050     (1,279,833     (2,219,642     (2,799,834

Less: Distributions to preferred unitholders in our Operating Partnership

     —         (490,151     —         (974,206

Less: Accretion of preferred equity costs

     —         (21,551     —         (51,518

Net loss attributable to the noncontrolling interests in our Operating Partnership

     1,081       8,015       2,476       20,445  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Strategic Storage Growth Trust, Inc. common stockholders

   $ (1,126,969   $ (1,783,520   $ (2,217,166   $ (3,805,113
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per Class A share—basic and diluted

   $ (0.04   $ (0.39   $ (0.11   $ (0.98

Net loss per Class T share—basic and diluted

   $ (0.04   $ (0.39   $ (0.11   $ (0.98
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average Class A shares outstanding—basic and diluted

     18,486,387       4,315,350       14,753,319       3,741,820  

Weighted average Class T shares outstanding—basic and diluted

     7,368,963       205,915       5,171,021       127,882  
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

5


Table of Contents

STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2017     2016     2017     2016  

Net loss

   $ (1,128,050   $ (1,279,833   $ (2,219,642   $ (2,799,834

Other comprehensive (loss) income:

        

Foreign currency translation adjustments

     215,085       (32,478     261,502       82,969  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (912,965     (1,312,311     (1,958,140     (2,716,865

Less: Distributions to preferred unitholders in our Operating Partnership

     —         (490,151     —         (974,206

Less: Accretion of preferred equity costs

     —         (21,551     —         (51,518

Comprehensive loss attributable to noncontrolling interests:

        

Comprehensive loss attributable to the noncontrolling interests in our Operating Partnership

     931       8,301       2,258       20,016  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to Strategic Storage Growth Trust, Inc. common stockholders

   $ (912,034   $ (1,815,712   $ (1,955,882   $ (3,722,573
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

6


Table of Contents

STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

 

     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
    Accumulated
Other
Comprehensive
Income (Loss)
    Total Strategic
Storage
Growth Trust,
Inc. Equity
    Noncontrolling
Interests in
our Operating
Partnership
    Total
Equity
    Redeemable
Common
Stock
 

Balance as of December 31, 2016

     8,607,246     $ 8,607       1,716,957      $ 1,717      $ 92,442,198     $ (2,010,167   $ (12,655,490   $ (153,079   $ 77,633,786     $ (61,005   $ 77,572,781     $ 1,086,603  

Gross proceeds from issuance of common stock

     10,061,206       10,061       5,749,586        5,750        171,146,672       —         —         —         171,162,483       —         171,162,483       —    

Offering costs

     —         —         —          —          (15,628,840     —         —         —         (15,628,840     —         (15,628,840     —    

Changes to redeemable common stock

     —         —         —          —          (1,920,766     —         —         —         (1,920,766     —         (1,920,766     1,920,766  

Redemptions of common stock

     (10,977     (11     —          —          —         —         —         —         (11     —         (11     (62,335

Issuance of restricted stock

     2,500       3       —          —          —         —         —         —         3       —         3       —    

Distributions ($0.20 per share)

     —         —         —          —          —         (3,722,767     —         —         (3,722,767     —         (3,722,767     —    

Distributions to noncontrolling interests

     —         —         —          —          —         —         —         —         —         (3,987     (3,987     —    

Issuance of shares for distribution reinvestment plan

     140,418       140       38,168        38        1,920,588       —         —         —         1,920,766       —         1,920,766       —    

Stock based compensation expense

     —         —         —          —          11,131       —         —         —         11,131       —         11,131       —    

Net loss attributable to Strategic Storage Growth Trust, Inc.

     —         —         —          —          —         —         (2,217,166     —         (2,217,166     —         (2,217,166     —    

Net loss attributable to the noncontrolling interests

     —         —         —          —          —         —         —         —         —         (2,476     (2,476     —    

Foreign currency translation adjustment

     —         —         —          —          —         —         —         261,502       261,502       —         261,502       —    
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2017

     18,800,393     $ 18,800       7,504,711      $ 7,505      $ 247,970,983     $ (5,732,934   $ (14,872,656   $ 108,423     $ 227,500,121     $ (67,468   $ 227,432,653     $ 2,945,034  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

7


Table of Contents

STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended June 30,  
     2017     2016  

Cash flows from operating activities:

    

Net loss

   $ (2,219,642   $ (2,799,834

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

    

Depreciation and amortization

     2,304,893       1,996,701  

Expense related to issuance of restricted stock

     11,131       8,192  

Increase (decrease) in cash and cash equivalents from changes in assets and liabilities:

    

Other assets, net

     (246,002     (343,103

Accounts payable and accrued liabilities

     627,803       338,479  

Due to affiliates

     40,407       223,848  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     518,590       (575,717
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of real estate

     (45,050,000     (22,389,051

Additions to real estate

     (2,885,276     (1,904,915

Deposits on acquisitions of real estate facilities

     (2,250,000     (600,000

Return of deposits on acquisition of real estate facilities

     —         331,714  
  

 

 

   

 

 

 

Net cash used in investing activities

     (50,185,276     (24,562,252
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of revolving secured debt

     5,000,000       7,950,000  

Principal payments of revolving secured debt

     (12,647,000     (9,603,000

Proceeds from issuance of non-revolving secured debt

     —         5,053,000  

Debt issuance costs

     (95,063     (175,584

Redemption of preferred equity in our Operating Partnership

     —         (1,000,000

Gross proceeds from issuance of common stock

     171,980,653       22,522,103  

Offering costs

     (12,999,556     (2,528,091

Redemption of common stock

     (89,593     —    

Distributions paid to preferred unitholders in our Operating Partnership

     —         (652,154

Distributions paid to common stockholders

     (1,307,975     (142,276

Distributions paid to noncontrolling interests

     (3,967     (2,662
  

 

 

   

 

 

 

Net cash provided by financing activities

     149,837,499       21,421,336  
  

 

 

   

 

 

 

Impact of foreign exchange rate changes on cash

     19,156       —    
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     100,189,969       (3,716,633

Cash and cash equivalents, beginning of period

     3,642,631       6,600,046  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 103,832,600     $ 2,883,413  
  

 

 

   

 

 

 

Supplemental disclosures and non-cash transactions:

    

Cash paid for interest

   $ 255,103     $ 832,742  

Interest capitalized

   $ 151,763     $ 33,665  

Supplemental disclosure of noncash activities:

    

Deposits applied to purchase of real estate facilities

   $ 400,000     $ —    

Proceeds from issuance of common stock in other assets

   $ —       $ 48,800  

Offering costs included in accounts payable and accrued liabilities

   $ —       $ 28,166  

Offering costs included in due to affiliates

   $ 2,793,738     $ 96,945  

Increase in distributions payable to preferred unitholders in our Operating Partnership

   $ —       $ 414,743  

Stock distributions of common stock

   $ —       $ 20  

Issuance of shares pursuant to distribution reinvestment plan

   $ 1,920,766     $ 329,022  

Redemptions of common stock

   $ 9,204     $ —    

See notes to consolidated financial statements.

 

8


Table of Contents

STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

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. and each of our subsidiaries.

SmartStop Asset Management, LLC, a Delaware limited liability company organized in 2013, is the sponsor of our Offering of shares of common stock (our “Sponsor”), as described below. Our Sponsor is a company focused on providing real estate advisory, asset management, and property management services. Our Sponsor 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 Self Storage, Inc. (“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, our Sponsor, which was previously owned by SmartStop, was sold to an entity controlled by H. Michael Schwartz, our Chairman of the Board of Directors and Chief Executive Officer, and became our Sponsor. The former executive management team of SmartStop continued to serve on the executive management team for our Sponsor. In addition, our management team at the time of the Merger continues to serve on our management team, 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 and 350,000,000 shares of Class T common stock, $0.001 par value per share 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 $1.0 billion in common shares for sale to the public (the “Primary Offering”) and $95.0 million 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 began 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”).

On November 7, 2016, our board of directors extended the termination date of our initial public offering from January 19, 2017 until January 19, 2018, which was three years after the effective date of our initial public offering. Our board of directors reserved the right to further extend the initial public offering, in certain circumstances, or terminate our initial public offering at any time prior to January 19, 2018. The close down of our Primary Offering occurred on March 31, 2017. We sold approximately 17.9 million Class A Shares and approximately 7.5 million Class T Shares for approximately $193 million and $79 million respectively, in our Public Offering. On May 5, 2017, we filed with the SEC a Registration Statement on Form S-3, which registered up to an additional $115.6 million in shares under our distribution reinvestment plan (our “DRP Offering”). The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders. As of June 30, 2017, we had sold approximately 32,000 Class A Shares and approximately 11,000 Class T Shares for approximately $0.4 million and $0.1 million, respectively, in our DRP Offering.

 

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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 June 30, 2017 we owned 22 self storage facilities located in eight states (Arizona, California, Colorado, Florida, Illinois, Nevada, North Carolina and Texas) and Canada (the Greater Toronto Area).

On April 13, 2017, our board of directors, upon recommendation of our nominating and corporate governance committee, approved an estimated value per share of our common stock of $11.56 for our Class A Shares and Class T Shares based on the estimated value of our assets less the estimated value of our liabilities, or net asset value, divided by the number of shares outstanding on a fully diluted basis, calculated as of December 31, 2016. See our Current Report on Form 8-K filed with the SEC on April 17, 2017 for a description of the methodologies and assumptions used to determine, and the limitations of, the estimated value per share.

As a result of the calculation of our estimated value per share, effective in May 2017, shares sold pursuant to our distribution reinvestment plan will prospectively be sold at the estimated value per share of our common stock of $11.56 per share for Class A and Class T Shares.

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 June 30, 2017, we owned approximately 99.9% of the common units of limited partnership interests of our Operating Partnership. The remaining approximately 0.1% of the common units are owned by our Advisor. Our Operating Partnership previously issued approximately 700,000 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 $17.5 million. Such Preferred Units were owned by Extra Space subsequent to the Merger. As of December 31, 2016, we had redeemed all of the Preferred Units.

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. Our Property Manager may enter into sub-property management agreements with third party management companies and pay part of its management fee to such sub-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 an affiliate of 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 are managed by a subsidiary of our Sponsor and continue to be branded using the SmartStop® Self Storage brand.

On July 14, 2017, our Property Manager provided written notice to Extra Space of its intention to terminate each sub-property management agreement effective October 1, 2017. Please see Note 12 – Subsequent Events.

Our dealer manager is Select Capital Corporation, a California corporation (our “Dealer Manager”). Our Dealer Manager was responsible for marketing our shares being offered pursuant to our Primary Offering. Our Sponsor owns a 15% non-voting equity interest in our Dealer Manager. An affiliate of our Dealer Manager owns a 2.5% non-voting membership interest in our Advisor.

As we accepted subscriptions for shares of our common stock, we transferred 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 were deemed to have made capital contributions in the amount of gross proceeds received from investors, and our Operating Partnership was deemed to have simultaneously paid the sales commissions and other costs

 

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associated with the Public 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.

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. Our Operating Partnership is deemed to be a VIE and is consolidated by the Company as the primary beneficiary.

As of June 30, 2017 and December 31, 2016, we had not entered into other contracts/interests that would be deemed to be variable interests in VIEs.

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 sheets. The noncontrolling interest shall be attributed its share of income and losses, even if that attribution results in a deficit noncontrolling interest balance.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP 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

 

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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 and 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 GAAP 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. 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 $0.5 million and approximately $0.4 million in intangible assets to recognize the value of in-place leases related to our acquisitions during the six months ended June 30, 2017 and the year ended December 31, 2016, 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. During the three months ended June 30, 2017 and 2016, we expensed approximately $0.7 million and approximately $0.3 million, respectively, of acquisition-related transaction costs. During the six months ended June 30, 2017 and 2016, we expensed approximately $1.4 million and approximately $0.7 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 consolidated financial statements. We will recognize any measurement period adjustments during the period in which we determine the amount of the adjustment to our consolidated financial statements, potentially including adjustments to interest, depreciation and amortization expense.

Evaluation of Possible Impairment of Long-Lived Assets

Management monitors 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. For the three and six months ended June 30, 2017 and 2016, no impairment losses were recognized.

Real Estate Held for Sale

We generally consider real estate to be “held for sale” when the following criteria are met: (i) management commits to a plan to sell the property, (ii) the property is available for sale immediately, (iii) the property is actively being marketed for sale at a price that is reasonable in relation to its current fair value, (iv) the sale of the property within one year is considered

 

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probable and (v) significant changes to the plan to sell are not expected. Real estate that is held for sale is classified as “real estate held for sale” in the accompanying consolidated financial statements for the periods when it was held for sale. Real estate classified as held for sale is no longer depreciated and is reported at the lower of its carrying value or its estimated fair value less estimated costs to sell. Operating results and related gains (losses) on sale of properties that were disposed of or classified as held for sale in the ordinary course of business are included in continuing operations on our consolidated statements of operations, consistent with current accounting guidance.

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.

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

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 lease intangibles on a straight-line basis over the estimated future benefit period. As of June 30, 2017 and December 31, 2016, the gross amounts allocated to in-place lease intangibles were approximately $3.3 million and approximately $2.7 million, respectively, and accumulated amortization of in-place lease intangibles totaled approximately $2.8 million and approximately $2.3 million, respectively.

 

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Foreign Currency Translation

For non-U.S. functional currency operations, assets and liabilities are translated to U.S. dollars at current exchange rates. Revenues and expenses are translated at the average rates for the period. All related adjustments are recorded in accumulated other comprehensive income (loss) as a separate component of equity. Transactions denominated in a currency other than the functional currency of the related operation are recorded at rates of exchange in effect at the date of the transaction. Gains or losses on foreign currency transactions are recorded in other income (expense).

Debt Issuance Costs

The net carrying value of costs incurred in connection with obtaining revolving financing are presented in debt issuance costs on our consolidated balance sheets and such amount as of June 30, 2017 and December 31, 2016 totaled approximately $18,000 and approximately $292,000, respectively. The net carrying value of costs incurred in connection with obtaining non-revolving financing are presented in our consolidated balance sheets as a deduction from secured debt and such amounts as of June 30, 2017 and December 31, 2016 totaled approximately $0.2 million and approximately $0.2 million, respectively. Debt issuance costs are amortized on a straight-line basis over the term of the related loan, which is not materially different than the effective interest method.

Organization and Offering Costs

Our Advisor may fund organization and offering costs on our behalf. We are 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 Primary Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions, dealer manager fees and stockholder servicing 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. Subsequent to the close down of our Primary Offering, we determined that total organization and offering costs did not exceed 3.5% of the gross proceeds 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.

We pay our Dealer Manager 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), which calculation shall be made by us with the assistance of our Dealer Manager commencing after the termination of the Primary Offering; (iii) the fifth anniversary of the last day of the fiscal quarter in which our Primary Offering (i.e., 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 entered into participating dealer agreements with certain other broker-dealers which authorized them to sell our shares. Upon sale of our shares by such broker-dealers, our Dealer Manager re-allowed 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 was also permitted to 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 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 received reimbursement of bona fide due diligence expenses; however, to the extent the due diligence expenses could not be justified, any excess over actual due diligence expenses would have been considered underwriting compensation subject to a 10% FINRA limitation and, when aggregated with all other non-accountable expenses in connection with our Public Offering, could not exceed 3% of gross offering proceeds from sales in the Public Offering. We record a liability within Due to affiliates for the future estimated stockholder servicing fees at the time of sale of Class T shares as an offering cost.

 

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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 sheets 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.

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.

For the six months ended June 30, 2017, we received redemption requests totaling approximately 7,000 shares and approximately $62,000. Such requests were fulfilled in April and July 2017. For the year ended December 31, 2016, we received one redemption request for approximately 4,000 shares and approximately $36,000. Such request was fulfilled in January 2017.

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

Under GAAP, we are required to measure certain financial instruments at fair value on a recurring basis. In addition, we are required to measure other financial instruments and balances at fair value on a non-recurring basis. 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.

 

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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.

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 their relatively short-term nature.

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.

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 qualify as a REIT, we must continue to meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the REIT’s ordinary taxable income to stockholders (which is computed without regard to the dividends paid deduction or net capital gains and which does not necessarily equal net income as calculated in accordance with GAAP). 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.

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 our common stockholders for all periods presented is computed by dividing net income (loss) attributable to our common stockholders by the weighted average number of shares outstanding during the period, excluding unvested restricted stock. Diluted earnings per share is computed by including the dilutive effect of unvested restricted stock, utilizing the treasury stock method. For all periods presented the dilutive effect of unrestricted stock was not included in the diluted weighted average shares as such shares were antidilutive.

 

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(Unaudited)

 

Recently Issued Accounting Guidance

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers” as 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 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 with early adoption permitted. This ASU shall still be applied using either a full retrospective or modified retrospective approach. We have determined that our self storage rental revenues will not be subject to the guidance in ASU 2014-09, as they qualify as lease contracts, which are excluded from its scope.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments–Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 updates guidance related to recognition and measurement of financial assets and financial liabilities. ASU 2016-01 requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in ASU 2016-01 also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in ASU 2016-01 eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. ASU 2016-01 is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. We do not anticipate the adoption of this standard to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 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 do not anticipate the adoption of this standard to have a material impact on our consolidated financial statements, because substantially all of our lease revenues are derived from month-to-month self storage leases.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 addresses eight classification issues related to the statement of cash flows. The guidance will become effective for periods beginning after December 15, 2017, with early adoption permitted. We do not anticipate the adoption of this standard to have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016-18 will require companies to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will require a disclosure of a reconciliation between the statement of financial position and the statement of cash flows when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. Entities with material restricted cash and restricted cash equivalent balances will be required to disclose the nature of the restrictions. ASU 2016-18 is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and will be applied retrospectively to all periods presented. As of June 30, 2017 and December 31, 2016, we did not have any restricted cash. We do not anticipate the adoption of this standard to have a material impact on our consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework provides guidance for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. This update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for transactions that have not been reported in previously issued (or available to be issued) financial statements and shall be applied on a prospective basis. We expect that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets) or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replaced without significant cost, effort or delay. The adoption of this guidance will likely result in a decrease in acquisition related costs being expensed, as our acquisition of real estate properties will likely be considered asset acquisitions rather than business combinations under ASU 2017-01.

Note 3. Real Estate Facilities

The following summarizes the activity in real estate facilities during the six months ended June 30, 2017:

 

Real estate facilities

  

Balance at December 31, 2016

   $ 87,581,604  

Facility acquisitions

     44,915,000  

Impact of foreign exchange rate changes

     135,548  

Improvements and additions

     576,662  
  

 

 

 

Balance at June 30, 2017

   $ 133,208,814  
  

 

 

 

Accumulated depreciation

  

Balance at December 31, 2016

   $ (3,300,523

Depreciation expense

     (1,513,838
  

 

 

 

Balance at June 30, 2017

   $ (4,814,361
  

 

 

 

The following table summarizes the purchase price allocations for our acquisitions during the six months ended June 30, 2017:

 

Property

   Acquisition
Date
     Real Estate
Assets
     Intangibles      Total(1)      Debt Issued      2017
Revenue (2)
     2017 Property
Operating
Income
(Loss)(3)
 

Elk Grove – IL(4)

     01/13/17      $ 10,095,000      $ 5,000      $ 10,100,000      $ —      $ 151,996      $ (52,722

Garden Grove – CA(5)

     03/16/17        18,400,000        —        18,400,000        —        46,301        (94,799

Asheville II – NC

     05/11/17        4,693,406        250,000        4,943,406        —        70,348        38,902  

Asheville III – NC

     05/11/17        5,026,594        280,000      5,306,594        —        74,358        39,355  

Sarasota – FL(6)

     05/23/17        6,700,000        —        6,700,000        —        3,059        (42,266
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      $ 44,915,000      $ 535,000      $ 45,450,000      $ —      $ 346,062      $ (111,530
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  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.
(2)  The operating results of the facilities acquired above have been included in our statement of operations since their respective acquisition date.
(3)  Property operating income (loss) excludes corporate general and administrative expenses, asset management fees, interest expense, depreciation, amortization, and acquisition expenses.
(4)  We acquired the Elk Grove Property, a lease-up property, with initial occupancy of approximately 32%. The property’s occupancy has increased to approximately 56% as of June 30, 2017.
(5)  We acquired the Garden Grove Property, a lease-up property, with initial occupancy of approximately 9%. The property’s occupancy has increased to approximately 39% as of June 30, 2017.
(6)  We acquired the Sarasota Property, a lease-up property, with initial occupancy of 0%. The property’s occupancy has increased to approximately 18% as of June 30, 2017.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

The purchase price allocations included 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 the purchase price allocations by December 31, 2017, as further evaluations are completed and additional information is received from third parties.

We incurred acquisition fees to our Advisor related to the above properties of approximately $0.8 million for the six months ended June 30, 2017.

Note 4. 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 six months ended June 30, 2017 and 2016 as if the Company’s acquisitions completed during 2016 and 2017 were completed as of January 1, 2016. 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.

 

     For the six months ended  
     June 30, 2017      June 30, 2016  

Pro forma revenue

   $ 5,762,471      $ 4,852,267  

Pro forma operating expenses

     (7,007,052      (6,104,737

Pro forma net loss attributable to common stockholders

     (1,503,946      (3,463,292

The pro forma financial information for the six months ended June 30, 2017 and 2016 were adjusted to exclude approximately $1.1 million and $0.5 million, respectively, for acquisition related expenses.

Note 5. 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 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 potential amount we may borrow under the KeyBank Facility is $40 million.

The KeyBank Facility had 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. On July 26, 2017, we amended the Credit Agreement to extend the maturity date of the initial term of the KeyBank Facility to September 29, 2017. 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 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%. Additionally, an unused line fee of 25 basis points is assessed on the average daily unused amount of the maximum potential amount we may borrow. As of June 30, 2017, the interest rate was approximately 4.29% which was based on LIBOR plus 325 basis points.

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).

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

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 1.85 to 1.0 as of December 31, 2016 and on each quarter end thereafter; (4) a Fixed Charge Ratio of no less than 1.6 to 1.0; (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.

As of December 31, 2016, the outstanding principal balance under the KeyBank Facility was approximately $7.6 million. On January 11, 2017, we borrowed $5 million to partially fund the acquisition of the Elk Grove property and subsequently paid off the full balance of the KeyBank Facility. As of June 30, 2017, there was no outstanding principal balance under the KeyBank Facility.

The Baseline Loan

On May 26, 2016, the special-purpose entity (a subsidiary of our Operating Partnership) which acquired and owns our property in Phoenix, Arizona (the “Baseline Property”) entered into a loan agreement for a loan in the amount of approximately $5.1 million (the “Baseline Loan”) with TCF National Bank (“TCF”) as the lender. The Baseline Loan has a maturity date of May 26, 2019, unless extended for up to an additional three years. Payments due under the Baseline Loan are interest-only and due on the first day of each month. The Baseline Loan bears interest at a variable interest rate, which adjusts monthly to be equal to 2.75% in excess of the LIBOR Rate (as defined in the Baseline Loan agreement), subject to a minimum rate of 3.25% per annum. As of June 30, 2017, the interest rate was approximately 3.79%, which was based on LIBOR plus 275 basis points.

The Baseline Loan is secured by a first lien deed of trust on the Baseline Property. We may prepay the Baseline Loan at any time, without penalty, in whole or in part. Pursuant to that certain guaranty, dated May 26, 2016, in favor of TCF, we provided a guaranty of the Baseline Loan.

The Baseline Loan contains a number of other customary terms and covenants.

The Torbarrie Loan

In connection with the redevelopment of one of our properties in Toronto, Canada (the “Torbarrie Property”), on November 3, 2016, we, through a subsidiary of our Operating Partnership which acquired and owns the Torbarrie Property, entered into a construction loan agreement (the “Torbarrie Loan”) with First National Financial LP (“First National”) which, as amended, will allow for borrowings up to approximately $10.3 million CAD. The Torbarrie Loan has a maturity date four years from the first day of the month following the initial advance. Payments due under the Torbarrie Loan are initially interest-only and due in arrears on the first day of each month. The Torbarrie Loan will require principal amortization upon achieving a debt service coverage ratio of 1.10 (as defined in the loan agreement for the Torbarrie Loan), at which time principal will be due and payable based on a 25 year amortization period. The Torbarrie Loan bears interest at a variable interest rate of 1.95% in excess of the variable Royal Bank of Canada Prime Rate (as defined in the loan agreement for the Torbarrie Loan), which was approximately 2.7% as of June 30, 2017 (in no event will the interest rate fall below 4.65% per annum). The Torbarrie Loan is secured by a first lien deed of trust on the Torbarrie Property and all improvements thereto. The Torbarrie Loan may be prepaid at any time, without penalty, in whole or in part. We are the guarantor under the Torbarrie Loan and the loan agreement for the Torbarrie Loan contains a number of other customary terms and covenants. As of June 30, 2017, no amounts were drawn on the Torbarrie Loan.

The Stoney Creek Loan

On May 3, 2017, a subsidiary of our Operating Partnership which owns our property in the Stoney Creek area of Toronto, Canada (the “Stoney Creek Property”) entered into a construction loan agreement (the “Stoney Creek Loan”) with First National which, as amended, will allow for borrowings up to approximately $7.5 million CAD. The Stoney Creek Loan has a maturity date four years from the first day of the month following the initial advance. Payments due under the Stoney Creek Loan are initially interest-only and due in arrears on the first day of each month. The Stoney Creek Loan will require

 

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June 30, 2017

(Unaudited)

 

principal amortization upon achieving a debt service coverage ratio of 1.10 (as defined in the Stoney Creek loan agreement), at which time principal will be due and payable based on a 25 year amortization period. The Stoney Creek Loan will bear interest at a variable interest rate of 1.95% in excess of the variable Royal Bank of Canada Prime Rate (as defined in the Stoney Creek loan agreement), which was approximately 2.7% as of June 30, 2017 (in no event will the interest rate fall below 4.65% per annum). The Stoney Creek Loan is secured by a first lien deed of trust on the Stoney Creek Property and is fully guaranteed by us. We may prepay the Stoney Creek Loan at any time, without penalty, in whole but not in part. We are the guarantor under the Stoney Creek Loan and the loan agreement for the Stoney Creek Loan contains a number of other customary terms and covenants. As of June 30, 2017, no amounts were drawn on the Stoney Creek Loan.

Future Principal Requirements

The following table presents the future principal payment requirements on outstanding secured debt as of June 30, 2017:

 

2017

   $ —  

2018

     —  

2019

     5,053,000  

2020

     —  

2021

     —  

2022 and thereafter

     —    
  

 

 

 

Total payments

     5,053,000  

Non-revolving debt issuance costs, net

     (237,454
  

 

 

 

Total

   $ 4,815,546  
  

 

 

 

Note 6. 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 the Preferred Investor. Pursuant to the Unit Purchase Agreement, the Preferred Investor agreed to provide up to $18.1 million 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, each having a liquidation preference of $25.00 per Preferred Unit (the “Liquidation Amount”), plus all accrued and unpaid distributions.

During 2014 and 2015, in a number of transactions, the Preferred Investor invested a total of approximately $17.5 million in our Operating Partnership and was issued approximately 700,000 Preferred Units. In September 2015, we redeemed $1.5 million of the Liquidation Amount of the Preferred Units.

During the year ended December 31, 2016, we redeemed the remaining approximately $16 million in Liquidation Amount of the Preferred Units outstanding and approximately $1.5 million in Deferred Distributions owed thereon. No further Preferred Units are outstanding and no further Deferred Distributions are owed, such that we no longer have any remaining obligations related to the Preferred Units.

In connection with entering into 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.

 

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June 30, 2017

(Unaudited)

 

The holder of Preferred Units was entitled to 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 had the obligation to elect either to (A) pay the holder of the Preferred Units additional distributions monthly in an amount that would 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 would 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”).

 

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June 30, 2017

(Unaudited)

 

Note 7. 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.

Organization and Offering Costs

Organization and offering costs incurred in connection with the Primary Offering consisted of all expenses (other than sales commissions, dealer manager fees and stockholder servicing fees) to be paid by us in connection with the Primary 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 Primary 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. Pursuant to the Advisory Agreement, our Advisor was obligated to reimburse us within 60 days after the end of the month which the Primary Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions, dealer manager fees and stockholder servicing fees) in excess of 3.5% of the gross offering proceeds from the Primary Offering. Subsequent to the close down of our Primary Offering, we determined that total organization and offering costs did not exceed 3.5% of the gross proceeds received 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. As discussed above, we were required under our Advisory Agreement to reimburse our Advisor for organization and offering costs.

The Advisory Agreement also requires our Advisor to reimburse us to the extent that offering expenses, including sales commissions, dealer manager fees, stockholder servicing fees and organization and offering expenses, are in excess of 15% of gross proceeds from the Public Offering. Subsequent to the close down of our Primary Offering, we determined offering expenses were not in excess of 15% of gross proceeds from the Offering.

Pursuant to the Advisory Agreement, our Advisor receives acquisition fees equal to 1.75% of the contract purchase price of each property we acquire plus reimbursement of any acquisition expenses incurred by our Advisor. 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 in the Advisory Agreement. 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 assists us in arranging such financing.

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 may 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 (other than a voluntary termination), (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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

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 acquired our first real estate asset, pursuant to the Advisory Agreement, our Advisor became obligated 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.

For the six months ended June 30, 2017, our aggregate annual operating expenses, as defined, did not exceed the thresholds described above.

Dealer Manager Agreement

In connection with our Primary Offering, our Dealer Manager received 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), which calculation shall be made by us with the assistance of our Dealer Manager commencing after the termination of the Primary Offering; (iii) the fifth anniversary of the last day of the fiscal quarter in which our Primary Offering (i.e., 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 entered into participating dealer agreements with certain other broker-dealers which authorized them to sell our shares. Upon sale of our shares by such broker-dealers, our Dealer Manager re-allowed 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 was also permitted to 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 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 received reimbursement of bona fide due diligence expenses; however, to the extent these due diligence expenses could not be justified, any excess over actual due diligence expenses would have been considered underwriting compensation subject to a 10% FINRA limitation and, when aggregated with all other non-accountable expenses in connection with our Public Offering, could not exceed 3% of gross offering proceeds from sales in the Public Offering.

Affiliated Dealer Manager

Our Sponsor owns a 15% non-voting equity interest in our Dealer Manager. An affiliate of our Dealer Manager owns a 2.5% non-voting membership interest in our Advisor.

Property Management Agreement

Each of our self storage properties are subject to separate property management agreements with our Property Manager. For properties located in the United States, our Property Manager has entered into sub-property management agreements with Extra Space, which provides on-site management of such properties. Such agreements were entered into effective the later of October 1, 2015 or their respective acquisition date. Under the property management agreements for properties located in the United States, 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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

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 sub-property management agreement on 60 days prior written notice to our Property Manager.

On July 14, 2017, our Property Manager provided written notice to Extra Space of its intention to terminate each sub-property management agreement effective October 1, 2017. Please see Note 12 – Subsequent Events.

Pursuant to the terms of the agreements described above, the following table summarizes related party costs incurred and paid by us for the year ended December 31, 2016 and the six months ended June 30, 2017, as well as any related amounts payable as of December 31, 2016 and June 30, 2017:

 

     Year Ended December 31, 2016      Six Months Ended June 30, 2017  
     Incurred      Paid      Payable      Incurred      Paid      Payable  

Expensed

                 

Operating expenses (including organizational costs)

   $ 545,696      $ 561,480      $ 9,915      $ 392,406      $ 354,524      $ 47,797  

Asset management fees

     417,217        409,967        7,250        295,203        292,669        9,784  

Property management fees(1)

     565,519        565,519        —          364,580        364,580        —    

Acquisition expenses

     753,090        863,741        6,424        1,072,488        1,072,497        6,415  

Debt issuance costs

     65,015        167,265        —          —          —          —    

Additional Paid-in Capital

                 

Selling commissions

     5,348,277        5,348,277        —          9,233,704        9,233,704        —    

Dealer Manager fees

     1,474,763        1,380,898        99,026        3,064,148        3,163,174        —    

Stockholder servicing fees(2)

     873,133        32,213        840,920        3,053,829        304,882        3,589,867  

Offering costs

     431,718        434,530        —          165,055        165,055        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,474,428      $ 9,763,890      $ 963,535      $ 17,641,413      $ 14,951,085      $ 3,653,863  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  During the year ended December 31, 2016, and six months ended June 30, 2017, property management fees include approximately $475,000 and $310,000, respectively, of fees paid to the sub-property manager of our properties.
(2)  We pay our Dealer Manager 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.

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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

Tenant Protection Plan

In connection with our first acquisition of a property in Canada, our board of directors approved our participation in a tenant protection plan pursuant to which we will receive 50% of the net revenues generated for each tenant protection plan purchased by a customer at our Canadian properties and our Property Manager will receive the other 50% of such net revenues.

Storage Auction Program

In March of 2017, our Sponsor acquired a minority interest in a company (the “Auction Company”) that serves as a web portal for self storage companies to post their auctions for the contents of abandoned storage units online instead of using live auctions conducted at the self storage facilities. The Auction Company is expected to receive a service fee for such services. Our sub-property manager to date has not utilized the Auction Company at our properties, but may in the future and we would be responsible for paying any fees related to our properties. Our properties would receive the proceeds from such online auctions.

Note 8. 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 pursuant to our distribution reinvestment plan is equivalent to the estimated value per share approved by our board of directors and in effect on the date of purchase of shares under the plan. In conjunction with the board of directors’ declaration of a new estimated value per share of our common stock on April 13, 2017, beginning in May 2017, shares sold pursuant to our distribution reinvestment plan are sold at the new estimated value per share of $11.56 per Class A Share or Class T Share. 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 June 30, 2017, we had sold approximately 247,000 Class A shares and approximately 44,000 Class T Shares through our distribution reinvestment plan.

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 per share amount the stockholder paid for their shares or the price per share in the current offering. The Redemption Amount for shares received as a stock distribution shall be equal to the lesser of the per share amount you paid for your original shares purchased or the price per share in the current offering.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

The length of time shares received as a stock distribution are held will be based on the date such stock distribution was declared. In addition, the redemption price per share will be adjusted for any stock combinations, splits and recapitalizations with respect to 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. 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.

The Redemption Amount for shares received as a stock distribution shall be equal to the lesser of the per share amount the stockholder paid for the original shares purchased or the price per share in the current offering. The length of time shares received as a stock distribution are held shall start on the date such stock distribution was declared. In addition, the redemption price per share will be adjusted for any stock combinations, splits and recapitalizations 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, less any prior redemptions.

 

    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.

For the year ended December 31, 2016, we received one redemption request for approximately 4,000 shares (approximately $36,000) which was fulfilled in January 2017. For the six months ended June 30, 2017, we received redemption requests totaling approximately 7,000 shares (approximately $62,000) which were fulfilled in April and July 2017. As of June 30, 2017, we had issued approximately 291,000 shares (approximately $3.0 million) 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.

 

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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

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 9. Potential Acquisitions

Pembroke Pines, Florida

On February 8, 2016, one of our subsidiaries executed a purchase and sale agreement with an unaffiliated third party for the acquisition of property that is being developed into a self storage facility located in Pembroke Pines, Florida (the “Pembroke Pines Property”). The purchase price for the Pembroke Pines Property is approximately $15.7 million, plus closing costs and acquisition fees. We expect the acquisition of the Pembroke Pines Property to close in the fourth quarter of 2017 after construction is complete on the self storage facility and a certificate of occupancy has been issued. We expect to fund such acquisition with net proceeds from our Public Offering. If we fail to acquire the Pembroke Pines Property, in addition to the incurred acquisition costs, we may also forfeit earnest money as a result.

Gilbert, Arizona

On April 5, 2017, one of our subsidiaries executed a purchase and sale agreement with an unaffiliated third party for the acquisition of property that is being developed into a self storage facility located in Gilbert, AZ (the “Riggs Road Property”). The purchase price for the Riggs Road Property is $10.0 million, plus closing costs and acquisition fees. We expect the acquisition of the Riggs Road Property to close in the second quarter of 2018 after construction is complete on the self storage facility and a certificate of occupancy has been issued. We expect to fund such acquisition with net proceeds from our Public Offering. If we fail to acquire the Riggs Road Property, in addition to the incurred acquisition costs, we may also forfeit earnest money as a result.

Las Vegas, Nevada

On May 9, 2017, we entered into an assignment with our Sponsor in which our Sponsor assigned us a purchase and sale agreement with an unaffiliated third party for the acquisition of property that is being developed into a self storage facility located in Las Vegas, NV (the “Deer Springs Property”). The purchase price for the Deer Springs Property is approximately $9.2 million, plus closing costs and acquisition fees. We expect the acquisition of the Deer Springs Property to close in the first quarter of 2018 after construction is complete on the self storage facility and a certificate of occupancy has been issued. We expect to fund such acquisition with net proceeds from our Public Offering. If we fail to acquire the Deer Springs Property, in addition to the incurred acquisition costs, we may also forfeit earnest money as a result.

Eastlake, California

On June 5, 2017, we entered into an assignment with our Sponsor in which our Sponsor assigned us a purchase and sale agreement with an unaffiliated third party for the acquisition of property that is being developed into a self storage facility located in Eastlake, CA (the “Eastlake Property”). The purchase price for the Eastlake Property is approximately $17.0 million, plus closing costs and acquisition fees. We expect the acquisition of the Eastlake Property to close in the fourth quarter of 2017 after construction is complete on the self storage facility and a certificate of occupancy has been issued. We expect to fund such acquisition with net proceeds from our Public Offering. If we fail to acquire the Eastlake Property, in addition to the incurred acquisition costs, we may also forfeit earnest money as a result.

Riverview, Florida

On June 9, 2017, we entered into an assignment with our Sponsor in which our Sponsor assigned us a purchase and sale agreement with an unaffiliated third party for the acquisition of property that is being developed into a self storage facility located in Riverview, FL (the “Riverview Property”). The purchase price for the Riverview Property is approximately $7.8 million, plus closing costs and acquisition fees. We expect the acquisition of the Riverview Property to close in the first quarter of 2018 after construction is complete on the self storage facility and a certificate of occupancy has been issued. We expect to fund such acquisition with net proceeds from our Public Offering. If we fail to acquire the Riverview Property, in addition to the incurred acquisition costs, we may also forfeit earnest money as a result.

 

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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

Note 10. Selected Quarterly Data (Unaudited)

The following is a summary of quarterly financial information for the periods shown below:

 

     Three months ended  
     June 30, 2016     September 30, 2016     December 31, 2016     March 31, 2017     June 30, 2017  

Total revenues

   $ 2,249,591     $ 2,437,082     $ 2,554,201     $ 2,704,431     $ 3,048,381  

Total operating expenses

     2,954,341       2,486,959       2,751,160       3,619,475       4,097,677  

Operating loss

     (704,750     (49,877     (196,959     (915,044     (1,049,296

Net loss

     (1,279,833     (571,599     (583,941     (1,091,592     (1,128,050

Net loss attributable to the common stockholders

     (1,783,520     (964,435     (602,913     (1,090,197     (1,126,969

Net loss per Class A share-basic and diluted

     (0.39     (0.17     (0.09     (0.08     (0.04

Net loss per Class T share-basic and diluted

     (0.39     (0.17     (0.09     (0.08     (0.04

Note 11. Declaration of Distributions

Cash Distribution Declaration

On June 22, 2017, our board of directors declared a daily distribution in the amount of $0.0010958904 per share on the outstanding shares of common stock, payable to both Class A and Class T 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 July 1, 2017 and ending September 30, 2017. Such distributions payable to each stockholder of record during a month will be paid the following month.

Note 12. Subsequent Events

Completed Acquisitions

Mount Pleasant, South Carolina

On July 11, 2017, we closed on a self storage facility located in Mt. Pleasant, SC (the “Wando Park Property”) for a purchase price of approximately $5.7 million, plus closing costs and acquisition fees, which was funded with the net proceeds of our Public Offering. There is also a provision for an additional purchase price payment of up to approximately $0.8 million that could become due based upon the property exceeding certain performance hurdles in its third year of operations. We incurred acquisition fees of approximately $0.1 million in connection with the acquisition.

Potential Acquisitions

Nantucket, Massachusetts

On July 26, 2017, one of our subsidiaries entered into an assignment with a subsidiary of our Sponsor in which our Sponsor assigned us a purchase and sale agreement with an unaffiliated third party for the acquisition of a self storage facility located in Nantucket, MA (the “Nantucket Property”). The purchase price for the Nantucket Property is approximately $37.5 million, plus closing costs and acquisition fees. We expect the acquisition of the Nantucket Property to close in the third quarter of 2017. We expect to fund such acquisition with net proceeds from our Public Offering. If we fail to acquire the Nantucket Property, in addition to the incurred acquisition costs, we may also forfeit earnest money as a result.

 

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STRATEGIC STORAGE GROWTH TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

Property Management Agreement

On July 14, 2017, our Property Manager provided written notice to Extra Space of its intention to terminate each sub-property management agreement effective October 1, 2017, after which our Property Manager will manage our properties directly. In connection with the termination of the sub-property management agreements with Extra Space and the anticipated amendments to the underlying property management agreements with our Property Manager, we will incur a termination fee of approximately $0.2 million. Our Sponsor is currently in negotiations to reacquire the rights to the “SmartStop® Self Storage” brand in the United States which, if successfully acquired, we anticipate using at our properties.

KeyBank Facility

On July 26, 2017, the Borrower under the KeyBank Facility entered into the Fifth Amendment to the Credit Agreement with KeyBank to extend the maturity date under the Credit Agreement to September 29, 2017. The remaining terms and conditions of the Credit Agreement continue in full force and effect.

Distribution Reinvestment Plan Offering

As of August 7, 2017, we have issued approximately 0.1 million shares of our common stock for gross proceeds of approximately $1.0 million, pursuant to our DRP Offering.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and notes thereto contained elsewhere in this report. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should also be read in conjunction with our financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016. See also “Cautionary Note Regarding Forward Looking Statements” preceding Part I.

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 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 Statements contained in this report for further details about our affiliates.

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 billion in common shares for sale to the public (the “Primary Offering”) and $95 million 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 Public Offering and began 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”).

On November 7, 2016, our board of directors extended the termination date of our initial public offering from January 19, 2017 until January 19, 2018, which was three years after the effective date of our initial public offering. Our board of directors reserved the right to further extend the initial public offering, in certain circumstances, or terminate our initial public offering at any time prior to January 19, 2018. The close down of our Primary Offering occurred on March 31, 2017. We sold approximately 17.9 million Class A Shares and approximately 7.5 million Class T Shares in our Public Offering for gross proceeds of approximately $193 million and approximately $79 million, respectively. On May 5, 2017, we filed with the SEC a Registration Statement on Form S-3, which registered up to an additional $115.6 million in shares under our distribution reinvestment plan (our “DRP Offering”). As of June 30, 2017, we had sold approximately 32,000 Class A Shares and approximately 11,000 Class T Shares for approximately $0.4 million and $0.1 million, respectively, in our DRP Offering. The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.

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.

 

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As of June 30, 2017, 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)
    Rental
Income(5)
 

Arizona

     1        840        94,000        6.6     86.9     5.7

California

     4        2,790        268,600        18.8     97.4 %(3)      19.6

Colorado

     2        1,120        121,300        8.5     87.4     9.5

Florida

     2        1,255        136,400        9.6     98.0 %(3)      6.5

Illinois

     3        1,890        198,300        13.9     91.4 %(3)      11.0

Nevada

     2        2,250        260,100        18.3     96.6     17.3

North Carolina(4)

     3        1,510        197,200        8.8     91.2     8.0

Texas

     3        1,400        220,200        15.5     93.5     22.4

Toronto, Canada(4)

     2        1,680        166,600        N/A (4)      N/A (4)      N/A (4) 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     22        14,735        1,662,700        100     93.5     100
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1)  Includes all rentable units, consisting of storage units, and parking units (approximately 520 units).
(2)  Includes all rentable square feet consisting of storage units, and parking units (approximately 154,000 square feet).
(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 June 30, 2017. We acquired the Elk Grove Property in Illinois on January 13, 2017 with occupancy of approximately 32%. The property’s occupancy has increased to approximately 56% as of June 30, 2017. We acquired the Garden Grove Property in California on March 16, 2017 with occupancy of approximately 9%. The property’s occupancy has increased to approximately 39% as of June 30, 2017. We acquired the Sarasota Property in Florida on May 23, 2017 with occupancy at 0%. The property’s occupancy has increased to approximately 18% as of June 30, 2017. The Elk Grove, Garden Grove and Sarasota properties were excluded from the physical occupancy statistics above.
(4)  Our two properties in Toronto, Canada and one property in Asheville, North Carolina, are self storage properties that are under construction and the numbers are approximate.
(5)  Represents rental income for all facilities we owned in a state divided by our total rental income for the month of June 2017.

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.

 

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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 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 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.

 

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Results of Operations

Overview

We derive revenues principally from: (i) rents received from tenants who rent storage units under month-to-month leases at each of our self storage facilities; and (ii) sales of packing and storage-related supplies at our storage facilities. 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.

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 June 30, 2017 and 2016, we owned 22 and 16 self storage facilities, respectively. The comparability of our results of operations was significantly affected by our acquisition activity in 2017 and 2016 as listed below.

 

    The three months ended June 30, 2017 includes full quarter results for 16 self storage facilities and partial quarter results for three operating properties acquired during the three months ended June 30, 2017. The three months ended June 30, 2016 includes full quarter results for 13 self storage facilities and partial quarter results for one operating property acquired on May 26, 2016.

 

    The six months ended June 30, 2017 includes full six month results for 14 self storage facilities and partial period results for five operating properties acquired during the six months ended June 30, 2017. The six months ended June 30, 2016 includes full six month results for 12 self storage facilities and partial period results for two operating properties acquired during the six months ended June 30, 2016.

 

    During the three and six months ended June 30, 2017, we acquired one and three lease-up properties, respectively. Given the lease-up nature of such properties, they will initially have a negative impact on our results of operations.

Therefore, we believe there is little basis for comparison between the three and six months ended June 30, 2017 and 2016. Operating results in future periods will depend on the results of operations of our existing properties and of the real estate properties that we acquire in the future.

Comparison of Operating Results for the Three Months Ended June 30, 2017 and 2016

Total Revenue

Total revenue for the three months ended June 30, 2017 and 2016 was approximately $3.0 million and $2.2 million, respectively. The increase in total revenues arose primarily from the partial results from the five self storage properties acquired during the first six months of 2017, increased same-store revenues (approximately $330,000 or 16%) and to a lesser extent, the inclusion of a full three months of results for one self storage property acquired on May 26, 2016. We expect total revenue to increase in future periods commensurate with our future acquisition activity.

Property Operating Expenses

Property operating expenses for the three months ended June 30, 2017 and 2016 were approximately $1.3 million and $1.1 million, 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 primarily attributable to the partial results from the five self storage properties acquired during the first six months of 2017, and to a lesser extent, the inclusion of a full three months of results for one self storage property acquired on May 26, 2016. We expect property operating expenses to increase in future periods commensurate with our future acquisition activity.

Property Operating Expenses – Affiliates

Property operating expenses – affiliates for the three months ended June 30, 2017 and 2016 were approximately $0.4 million and $0.2 million, respectively. Property operating expenses – affiliates includes property management fees and asset management fees. The increase in property operating expenses is primarily attributable to the partial results from the five self storage properties acquired during the first six months of 2017, and to a lesser extent, the inclusion of a full three months of results for one self storage property acquired on May 26, 2016. We expect property operating expenses – affiliates to increase in future periods commensurate with our future acquisition activity.

 

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General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2017 and 2016 were approximately $0.6 million and $0.5 million, 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. We expect general and administrative expenses to increase in the future as our operational activity increases.

Depreciation and Amortization Expenses

Depreciation and amortization expenses for the three months ended June 30, 2017 and 2016 were approximately $1.1 million and $0.8 million, 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. We expect depreciation and amortization expenses to increase in future periods commensurate with our future acquisition activity.

Acquisition Expenses Affiliates

Acquisition expenses – affiliates for the three months ended June 30, 2017 and 2016 were approximately $0.5 million and $0.2 million, respectively. These acquisition expenses primarily relate to the costs associated with the self storage properties acquired in the respective periods. We expect acquisition expenses – affiliates to fluctuate commensurate with our acquisition activities.

Other Property Acquisition Expenses

Other property acquisition expenses for the three months ended June 30, 2017 and 2016 were approximately $0.2 million and $0.1 million, respectively. These acquisition expenses primarily relate to the costs associated with the self storage properties acquired in the respective periods. We expect other property acquisition expenses to fluctuate commensurate with our acquisition activities.

Interest Expense

Interest expense for the three months ended June 30, 2017 and 2016 was approximately $24,000 and $402,000, respectively. The decrease in interest expense is primarily attributable to us having no outstanding balance on the KeyBank Facility during the three months ended June 30, 2017. We expect interest expense to increase in future periods commensurate with our future debt level.

Interest Expense—Debt Issuance Costs

Interest expense—debt issuance costs for the three months ended June 30, 2017 and 2016 was approximately $0.2 million and $0.2 million, respectively. We expect interest expense—debt issuance costs to increase commensurate with our future financing activity.

Other

Other income (expense) for the three months ended June 30, 2017 and 2016 was approximately $124,000 and ($11,000), respectively. The increase is primarily a result of interest income earned on our cash balances.

Distributions to the Preferred Unitholder in our Operating Partnership

Distributions to the preferred unitholder (the “Preferred Unitholder”) in SS Growth Operating Partnership, L.P., our operating partnership (the “Operating Partnership”), for the three months ended June 30, 2017 and 2016 were none and approximately $0.5 million, respectively. The decrease in distributions to the Preferred Unitholder is attributable to the full redemption of such Preferred Units in December 2016.

 

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Same-Store Facility Results

The following table sets forth operating data for our same-store facilities (those properties included in the consolidated results of operations since April 1, 2016, excluding one lease-up property we owned as of April 1, 2016) for the three months ended June 30, 2017 and 2016. We consider the following data to be meaningful as this allows for the comparison of results without the effects of acquisition or development activity.

 

    Same-Store Facilities     Non Same-Store Facilities     Total  
    2017     2016     %
Change
    2017     2016     %
Change
    2017     2016     %
Change
 

Revenue(1)

  $ 2,447,289     $ 2,117,367       15.6   $ 601,092     $ 132,224       N/M     $ 3,048,381     $ 2,249,591       35.5

Property operating expenses(2)

    1,001,442       1,114,149       (10.1 %)      533,979       117,631       N/M       1,535,421       1,231,780       24.7
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Operating income

  $ 1,445,847     $ 1,003,218       44.1   $ 67,113     $ 14,593       N/M     $ 1,512,960     $ 1,017,811       48.6
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Number of facilities

    12       12         10       4         22       16    

Rentable square feet(3)

    920,400       920,400         742,300       320,100         1,662,700       1,240,500    

Average physical occupancy(4)

    94.8     89.3       N/M       N/M         85.0 %(6)      88.6  

Annualized rent per occupied square foot(5)

  $ 12.11     $ 11.03         N/M       N/M       $ 11.22     $ 11.01    

N/M Not meaningful

 

(1)  Revenue includes rental revenue, ancillary revenue, and administrative and late fees.
(2)  Property operating expenses excludes corporate general and administrative expenses, asset management fees, interest expense, depreciation, amortization expense and acquisition expenses, but includes property management fees.
(3)  Of the total rentable square feet, parking represented approximately 154,000 and approximately 117,000 as of June 30, 2017 and 2016, respectively. On a same-store basis, for the same periods, parking represented approximately 102,000 square feet.
(4)  Determined by dividing the sum of the month-end occupied square feet for the applicable group of facilities for each applicable period by the sum of their month-end rentable square feet for the period. Properties are included in the respective calculations in their first full month of operations, as appropriate.
(5)  Determined by dividing the aggregate realized revenue for each applicable period by the aggregate of the month-end occupied square feet for the period. Properties are included in the respective calculations in their first full month of operations, as appropriate. We have excluded the realized revenue and occupied square feet related to parking herein for the purpose of calculating annualized rent per occupied square foot.
(6)  Decrease in average physical occupancy for the quarter ended June 30, 2017 as compared to June 30, 2016 is a result of our acquisition of three lease-up properties subsequent to June 30, 2016.

Our increase in same-store revenue of approximately $0.3 million was the result of increased average physical occupancy of approximately 5.5% and increased rent per occupied square foot of approximately 9.8% for the three months ended June 30, 2017 over the three months ended June 30, 2016.

Our decrease in same-store property operating expenses of approximately $0.1 million was primarily the result of decreased property tax expense over the three months ended June 30, 2016.

Comparison of Operating Results for the Six Months Ended June 30, 2017 and 2016

Total Revenue

Total revenue for the six months ended June 30, 2017 and 2016 was approximately $5.8 million and $4.3 million, respectively. The increase in total revenues arose primarily from increased same-store revenues (approximately $656,000 or 18%), the inclusion of a full six months of results for the two self storage properties acquired during 2016 and, the partial results from the five self storage properties acquired during the first six months of 2017. We expect total revenue to increase in future periods commensurate with our future acquisition activity.

 

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Property Operating Expenses

Property operating expenses for the six months ended June 30, 2017 and 2016 were approximately $2.5 million and $2.0 million, 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 primarily attributable to the inclusion of a full six months of results for the two self storage properties acquired during 2016 and, the partial results from the five self storage properties acquired during the first six months of 2017. We expect property operating expenses to increase in future periods commensurate with our future acquisition activity.

Property Operating Expenses – Affiliates

Property operating expenses – affiliates for the six months ended June 30, 2017 and 2016 were approximately $0.7 million and $0.5 million, respectively. Property operating expenses – affiliates includes property management fees and asset management fees. The increase in property operating expenses is primarily attributable to the inclusion of a full six months of results for the two self storage properties acquired during 2016 and, the partial results from the five self storage properties acquired during the first six months of 2017. We expect property operating expenses – affiliates to increase in future periods commensurate with our future acquisition activity.

General and Administrative Expenses

General and administrative expenses for the six months ended June 30, 2017 and 2016 were approximately $1.2 million and $1.0 million, 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. We expect general and administrative expenses to increase in the future as our operational activity increases.

Depreciation and Amortization Expenses

Depreciation and amortization expenses for the six months ended June 30, 2017 and 2016 were approximately $2.0 million and $1.7 million, 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. We expect depreciation and amortization expenses to increase in future periods commensurate with our future acquisition activity.

Acquisition Expenses Affiliates

Acquisition expenses – affiliates for the six months ended June 30, 2017 and 2016 were approximately $1.1 million and $0.6 million, respectively. These acquisition expenses primarily relate to the costs associated with the self storage properties acquired in the respective periods. We expect acquisition expenses – affiliates to fluctuate commensurate with our acquisition activities.

Other Property Acquisition Expenses

Other property acquisition expenses for the six months ended June 30, 2017 and 2016 were approximately $0.3 million and $0.1 million, respectively. These acquisition expenses primarily relate to the costs associated with the self storage properties acquired in the respective periods. We expect other property acquisition expenses to fluctuate commensurate with our acquisition activities.

Interest Expense

Interest expense for the six months ended June 30, 2017 and 2016 was approximately $39,000 and $842,000, respectively. The decrease in interest expense is primarily attributable to us having a minimal outstanding balance on the KeyBank Facility during the six months ended June 30, 2017. We expect interest expense to increase in future periods commensurate with our future debt level.

Interest Expense—Debt Issuance Costs

Interest expense—debt issuance costs for the six months ended June 30, 2017 and 2016 was approximately $0.3 million and $0.3 million, respectively. We expect interest expense—debt issuance costs to increase commensurate with our future financing activity.

 

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Other

Other income (expense) for the six months ended June 30, 2017 and 2016 was approximately $111,000 and ($11,000), respectively. The increase is primarily a result of interest income earned on our cash balances.

Distributions to the Preferred Unitholder in our Operating Partnership

Distributions to the Preferred Unitholder in our Operating Partnership for the six months ended June 30, 2017 and 2016 were none and approximately $1.0 million, respectively. The decrease in distributions to the Preferred Unitholder is attributable to the full redemption of such Preferred Units in December 2016.

Same-Store Facility Results

The following table sets forth operating data for our same-store facilities (those properties included in the consolidated results of operations since January 1, 2016, excluding one lease-up property we owned as of January 1, 2016) for the six months ended June 30, 2017 and 2016. We consider the following data to be meaningful as this allows for the comparison of results without the effects of acquisition or development activity.

 

     Same-Store Facilities     Non Same-Store Facilities      Total  
     2017     2016     %
Change
    2017      2016      %
Change
     2017     2016     %
Change
 

Revenue(1)

   $ 4,253,777     $ 3,597,524       18.2   $ 1,499,035      $ 724,952        N/M      $ 5,752,812     $ 4,322,476       33.1

Property operating expenses(2)

     1,669,126       1,734,082       (3.7 %)      1,183,657        534,956        N/M        2,852,783       2,269,038       25.7
  

 

 

   

 

 

     

 

 

    

 

 

       

 

 

   

 

 

   

 

 

 

Operating income

   $ 2,584,651     $ 1,863,442       38.7   $ 315,378      $ 189,996        N/M      $ 2,900,029     $ 2,053,438       41.2
  

 

 

   

 

 

     

 

 

    

 

 

       

 

 

   

 

 

   

 

 

 

Number of facilities

     11       11         11        5           22       16    

Rentable square feet(3)

     837,000       837,000         825,700        403,500           1,662,700       1,240,500    

Average physical occupancy(4)

     94.3     87.1       N/M        N/M           83.2 %(6)      85.6  

Annualized rent per occupied square foot(5)

   $ 11.62     $ 10.61         N/M        N/M         $ 11.16     $ 11.00    

N/M Not meaningful

 

(1)  Revenue includes rental revenue, ancillary revenue, and administrative and late fees.
(2)  Property operating expenses excludes corporate general and administrative expenses, asset management fees, interest expense, depreciation, amortization expense and acquisition expenses, but includes property management fees.
(3)  Of the total rentable square feet, parking represented approximately 154,000 and approximately 117,000 as of June 30, 2017 and 2016, respectively. On a same-store basis, for the same periods, parking represented approximately 79,000 square feet.
(4)  Determined by dividing the sum of the month-end occupied square feet for the applicable group of facilities for each applicable period by the sum of their month-end rentable square feet for the period. Properties are included in the respective calculations in their first full month of operations, as appropriate.
(5)  Determined by dividing the aggregate realized revenue for each applicable period by the aggregate of the month-end occupied square feet for the period. Properties are included in the respective calculations in their first full month of operations, as appropriate. We have excluded the realized revenue and occupied square feet related to parking herein for the purpose of calculating annualized rent per occupied square foot.
(6)  Decrease in average physical occupancy for the six months ended June 30, 2017 as compared to June 30, 2016 is a result of our acquisition of three lease-up properties subsequent to June 30, 2016.

Our increase in same-store revenue of approximately $0.7 million was the result of increased average physical occupancy of approximately 7.2% and increased rent per occupied square foot of approximately 9.5% for the six months ended June 30, 2017 over the six months ended June 30, 2016.

Our decrease in same-store property operating expenses of approximately $0.1 million was primarily the result of decreased repairs and maintenance expense compared to the six months ended June 30, 2016.

 

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Non-GAAP Financial Measures

Funds from Operations and Modified Funds from Operations

Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income (loss) as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment write downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. Our FFO calculation complies with NAREIT’s policy described above.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Diminution in value may occur if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances or other measures necessary to maintain the assets are not undertaken. However, we believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. In addition, in the determination of FFO, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying value, or book value, exceeds the total estimated undiscounted future cash flows (including net rental revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Testing for impairment is a continuous process and is analyzed on a quarterly basis. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and that we intend to have a relatively limited term of our operations; it could be difficult to recover any impairment charges through the eventual sale of the property. To date, we have not recognized any impairments.

Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, assists in providing a more complete understanding of our performance to investors and to our management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income (loss).

However, FFO or modified funds from operations (“MFFO”), discussed below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be considered a more relevant measure of operational performance and is, therefore, given more prominence than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

Changes in the accounting and reporting rules under GAAP that were put into effect and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, that are expensed as operating expenses under GAAP. We believe these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-traded REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. The purchase of properties, and the corresponding expenses associated with that process, is a key feature of our business plan in order to generate operational income and cash flow in order to make distributions to investors. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that publicly registered, non-traded REITs are unique in that they typically have a limited life with targeted exit

 

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strategies within a relatively limited time frame after the acquisition activity ceases. As disclosed in the prospectus for our Offering, we will use the proceeds raised in our Offering, including our DRP Offering, to acquire properties, and we expect to begin the process of achieving a liquidity event (i.e., listing of our shares of common stock on a national securities exchange, a merger or sale, the sale of all or substantially all of our assets, or another similar transaction) within three to five years after the completion of our Primary Offering, which is generally comparable to other publicly registered, non-traded REITs. Thus, we do not intend to continuously purchase assets and intend to have a limited life. The decision whether to engage in any liquidity event is in the sole discretion of our board of directors. Due to the above factors and other unique features of publicly registered, non-traded REITs, the Investment Program Association, or the IPA, an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-traded REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a publicly registered, non-traded REIT having the characteristics described above. MFFO is not equivalent to our net income (loss) as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not ultimately engage in a liquidity event. We believe that, because MFFO excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired and that we consider more reflective of investing activities, as well as other non-operating items included in FFO, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our Primary Offering has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the publicly registered, non-traded REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our Primary Offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our Primary Offering has been completed and properties have been acquired, as it excludes acquisition fees and expenses that have a negative effect on our operating performance during the periods in which properties are acquired.

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds From Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items included in the determination of GAAP net income (loss): acquisition fees and expenses; amounts relating to straight line rents and amortization of above or below intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; non-recurring impairments of real estate related investments; mark-to-market adjustments included in net income; non-recurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, adjustments relating to contingent purchase price obligations included in net income, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income (loss) in calculating cash flows from operations and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses. The other adjustments included in the IPA’s Practice Guideline are not applicable to us for the periods presented. Acquisition fees and expenses are paid in cash by us, and we have not set aside or put into escrow any specific amount of proceeds from our Offering to be used to fund acquisition fees and expenses. We do not intend to fund acquisition fees and expenses in the future from operating revenues and cash flows, nor from the sale of properties and subsequent re-deployment of capital and concurrent incurring of acquisition fees and expenses. Acquisition fees and expenses include payments to our Advisor and third parties. Acquisition related expenses under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. In the future, if we are not able to raise additional proceeds from our DRP Offering or other offerings, this could result in us paying acquisition fees or reimbursing acquisition expenses due to our Advisor, or a portion thereof, with net proceeds from borrowed funds, operational earnings or cash flows, net proceeds from the sale of properties, or ancillary cash flows. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds.

 

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Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income (loss) in determining cash flows from operations. In addition, we view fair value adjustments of derivatives and the amortization of fair value adjustments related to debt as items which are unrealized and may not ultimately be realized or as items which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance.

We use MFFO and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-traded REITs which intend to have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to publicly registered, non-traded REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures may be useful to investors. For example, acquisition fees and expenses are intended to be funded from the proceeds of our Offering and other financing sources and not from operations. By excluding expensed acquisition fees and expenses, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such charges that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations, which is an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other measurements as an indication of our performance. MFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete.

Neither the SEC, NAREIT, nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the publicly registered, non-traded REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO. The following is a reconciliation of net income (loss), which is the most directly comparable GAAP financial measure, to FFO and MFFO for each of the periods presented below:

 

     Three Months Ended      Six Months Ended  
     June 30,
2017
     June 30,
2016
     June 30,
2017
     June 30,
2016
 

Net loss attributable to Strategic Storage Growth Trust, Inc. common stockholders(1)

   $ (1,126,969    $ (1,783,520    $ (2,217,166    $ (3,805,113

Add:

           

Depreciation

     844,234        483,537        1,513,838        981,913  

Amortization of intangible assets

     245,843        342,666        444,431        734,985  

Deduct:

           

Adjustment for noncontrolling interests

     (885      (3,666      (2,096      (8,912
  

 

 

    

 

 

    

 

 

    

 

 

 

FFO

     (37,777      (960,983      (260,993      (2,097,127

Other Adjustments:

           

Acquisition expenses(2)

     700,569        325,654        1,412,394        699,451  

Adjustment for noncontrolling interests

     (561      (1,367      (1,521      (3,920
  

 

 

    

 

 

    

 

 

    

 

 

 

MFFO

   $ 662,231      $ (636,696    $ 1,149,880      $ (1,401,596
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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As discussed above, among other factors our results of operations for the three and six months ended June 30, 2017 and 2016 have been significantly impacted by a favorable increase in same store results of approximately $0.4 million and $0.7 million, respectively, a decrease in interest expense of approximately $0.4 million and $0.8 million, respectively, and a decrease in distributions to preferred interest holders of approximately $0.5 million and $1.0 million, respectively. The information below should be read in conjunction with the discussion regarding the acquisitions and the table above.

 

(1)  Net loss attributable to Strategic Storage Growth Trust, Inc. common stockholders for the three months ended June 30, 2017 and 2016 included none and approximately $0.5 million, respectively, in distributions to Preferred Unitholders in our Operating Partnership and none and approximately $22,000, respectively, in accretion of preferred equity costs. Net loss attributable to Strategic Storage Growth Trust, Inc. common stockholders for the six months ended June 30, 2017 and 2016 included none and approximately $1.0 million, respectively, in distributions to Preferred Unitholders in our Operating Partnership and none and approximately $52,000, respectively, in accretion of preferred equity costs. As of December 31, 2016, we had redeemed all of the Preferred Units.
(2)  In evaluating investments in real estate, we differentiate the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for publicly registered, non-traded REITs that have generally completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition related expenses, we believe MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our Advisor and third parties. Acquisition related expenses under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property.

Non-cash Items Included in Net Loss:

Provided below is additional information related to selected non-cash items included in net loss above, which may be helpful in assessing our operating results:

 

    Debt issuance costs of approximately $179,000 and $163,000, respectively, were recognized for the three months ended June 30, 2017 and 2016. Debt issuance costs of approximately $327,000 and $336,000, respectively, were recognized for the six months ended June 30, 2017 and 2016.

Liquidity and Capital Resources

Cash Flows

A comparison of cash flows for operating, investing and financing activities for the six months ended June 30, 2017 and 2016 is as follows:

 

     Six Months Ended         
     June 30, 2017      June 30, 2016      Change  

Net cash flow provided by (used in):

        

Operating activities

   $ 518,590      $ (575,717    $ 1,094,307  

Investing activities

     (50,185,276      (24,562,252      (25,623,024

Financing activities

     149,837,499        21,421,336        128,416,163  

Cash flows provided by and used in operating activities for the six months ended June 30, 2017 and 2016 were approximately $0.5 million and $0.6 million, respectively, a change of approximately $1.1 million. The change in cash used in our operating activities is primarily the result of incurring a smaller net loss, adjusted for depreciation and amortization.

Cash flows used in investing activities for the six months ended June 30, 2017 and 2016 were approximately $50.2 million and $24.6 million, respectively, an increase in the use of cash of approximately $25.6 million. The change in cash used in investing activities primarily relates to an increase in cash consideration paid for the purchase of real estate.

Cash flows provided by financing activities for the six months ended June 30, 2017 and 2016 were approximately $149.8 million and $21.4 million, respectively, a change of approximately $128.4 million. The increase in cash provided by financing activities over the prior period was primarily the result of an increase of approximately $139 million from the net proceeds from the issuance of common stock, primarily offset by a net change in debt principal outflows/inflows of approximately $11 million.

 

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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 Primary Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions, dealer manager fees and stockholder servicing fees) in excess of 3.5% of the gross offering proceeds from the Primary Offering. Subsequent to the close down of our Primary Offering, we determined that total organization and offering costs did not exceed 3.5% of the gross proceeds received 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

On June 22, 2017, our board of directors declared a daily distribution in the amount of $0.0010958904 per share on the outstanding shares of common stock, payable to both Class A and Class T 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 July 1, 2017 and ending September 30, 2017. Such distributions payable to each stockholder of record during a month will be paid the following month.

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 make stock distributions or 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.

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 costs. 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;

 

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    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:

 

     Six Months Ended
June 30, 2017
           Six Months Ended
June 30, 2016
        

Distributions paid in cash—common stockholders

   $ 1,307,975        $ 142,276     

Distributions paid in cash—Operating Partnership unitholders

     3,967          2,662     

Distributions paid in cash—preferred unitholders

            652,154     

Distributions reinvested

     1,920,766          329,022     
  

 

 

      

 

 

    

Total distributions

   $ 3,232,708        $ 1,126,114     
  

 

 

      

 

 

    

Source of distributions

          

Cash flows provided by operations

   $ 518,590        16.0   $ —        —    

Offering proceeds from Primary Offering

     793,352        24.6     797,092        70.8

Offering proceeds from distribution reinvestment plan

     1,920,766        59.4     329,022        29.2
  

 

 

      

 

 

    

Total sources

   $ 3,232,708        100.0   $ 1,126,114        100.0
  

 

 

      

 

 

    

From our inception through June 30, 2017, we paid cumulative distributions of approximately $8.6 million (including approximately $3.7 million related to our preferred unitholders), as compared to cumulative net loss attributable to our common stockholders of approximately $14.9 million. For the six months ended June 30, 2017, we paid distributions of approximately $3.2 million, as compared to a net loss attributable to our common stockholders of approximately $2.2 million. Net loss attributable to our common stockholders for the six months ended June 30, 2017 reflects non-cash depreciation and amortization of approximately $2.3 million, and acquisition related expenses of approximately $1.4 million. Cumulative net loss attributable to our common stockholders reflects non-cash depreciation and amortization of approximately $9.0 million, acquisition related expenses of approximately $4.1 million, and distributions to preferred unitholders of approximately $3.7 million.

For the six months ended June 30, 2017, we paid total distributions of approximately $3.2 million. For the six months ended June 30, 2016, we paid total distributions of approximately $1.1 million. From our commencement of paying cash distributions on our common shares in November 2015, the payment of distributions was paid solely from offering proceeds. For the year ended December 31, 2016, the payment of distributions was paid 4.1% from cash flows from operations and 95.9% from offering proceeds. For the six months ended June 30, 2017, the payment of distributions was paid 16.0% from cash flows from operations and 84.0% 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.

 

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We 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 June 30, 2017, we had approximately $5.1 million of outstanding consolidated indebtedness. As of June 30, 2017, all of our total consolidated indebtedness was at variable rates. See Note 5 – Secured Debt – KeyBank Facility – of the Notes to the Consolidated Statements contained in this report for more information about our indebtedness.

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 Offering, including our DRP 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 June 30, 2017:

 

     Payments due during the years ending December 31,         
     Total      2017      2018-2019      2020-2021      Thereafter  

Mortgage interest(1)

   $ 367,425      $ 95,850      $ 271,575      $
 —  
 
   $  —    

Mortgage principal

     5,053,000        —        5,053,000        —        —  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 5,420,425      $ 95,850      $ 5,324,575      $  —      $  —  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  The interest expense was calculated based on the rate of 3.79% which was in effect as of June 30, 2017.

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 12 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 3. 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 and to a lesser extent, foreign currency risk. 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. We will not enter into derivative or interest rate transactions for speculative purposes.

As of June 30, 2017, our debt consisted of approximately $5.1 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 $0.1 million annually.

The following table summarizes annual debt maturities and average interest rates on our outstanding debt as of June 30, 2017:

 

     Year Ending December 31,  
     2017     2018     2019     2020      2021      Thereafter      Total  

Fixed rate debt

   $  —     $  —     $  —     $  —        $  —      $  —      $  —  

Average interest rate

     —       —       —       —        —        —        —  

Variable rate debt

     —       —     $ 5,053,000       —        —        —      $ 5,053,000  

Average interest rate(1)

     3.79     3.79     3.79     —        —        —        —  

 

(1)  The average interest rate was calculated based on the rate in effect on June 30, 2017.

 

ITEM 4. 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

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

None.

 

ITEM 1A. RISK FACTORS

The following should be read in conjunction with the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2016. With the exception of the risk factors set forth below, there have been no material changes from the risk factors set forth in our 2016 Annual Report on Form 10-K for the year ended December 31, 2016.

We have incurred a net loss to date, have an accumulated deficit, and we anticipate that our operations may not be profitable in 2017.

We incurred a net loss of approximately $2.2 million for the six months ended June 30, 2017. Our accumulated deficit was approximately $14.9 million as of June 30, 2017.

We have paid, and may continue to pay, distributions from sources other than cash flows 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. For the years ended December 31, 2014 and 2015, we funded 100% of our distributions using proceeds from our Offering. For the year ended December 31, 2016, the payment of distributions was paid 4.1% from cash flows from operations and 95.9% from offering proceeds. For the six months ended June 30, 2017, the payment of distributions was paid 16.0% from cash flows from operations and 84.0% from offering proceeds. If we continue to pay distributions from sources other than cash flows 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.

We may only calculate the value per share for our shares annually and, therefore, you may not be able to determine the net asset value of your shares on an ongoing basis.

On April 13, 2017, our board of directors approved an estimated value per share for our Class A shares and Class T shares of $11.56. Our board of directors approved this estimated value per share pursuant to recent amendments to rules promulgated by FINRA, which require us 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. When determining the estimated value per share from and after 150 days following the second anniversary of breaking escrow in our Offering and annually thereafter, 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.

We intend to use this estimated per share value of our shares until the next net asset valuation approved by our board of directors, which we are required to approve at least annually. We may not calculate the net asset value per share for our shares more than annually. Therefore, you may not be able to determine the net asset value of your shares on an ongoing basis.

In determining our estimated value per share, we primarily relied upon a valuation of our portfolio of properties as of December 31, 2016. Valuations and appraisals of our properties are estimates of fair value and may not necessarily correspond to realizable value upon the sale of such properties, therefore our estimated net asset value per share may not reflect the amount that would be realized upon a sale of each of our properties.

 

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For the purposes of calculating the estimated value per share, an independent third party appraiser valued our properties as of December 31, 2016. The valuation methodologies used to value our properties involved certain subjective judgments. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions beyond our control and the control of our advisor and independent appraiser. Further, valuations do not necessarily represent the price at which an asset would sell, since market prices of assets can only be determined by negotiation between a willing buyer and seller. Therefore, the valuations of our properties and our investments in real estate related assets may not correspond to the timely realizable value upon a sale of those assets. Because the price you will pay for shares in this offering is primarily based on the estimated net asset value per share, you may pay more than realizable value when you purchase your shares or receive less than realizable value for your investment when you sell your shares.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a) None.

 

(b) 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 began 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 June 30, 2017, we had sold approximately 17.9 million Class A Shares and approximately 7.5 million Class T Shares in our Public Offering for gross proceeds of approximately $193 million and approximately $79 million, respectively. From this amount, we incurred approximately $24.6 million in selling commissions and dealer manager fees (of which approximately $19.7 million was re-allowed to third party broker-dealers), and approximately $2.7 million in organization and offering costs. With the net offering proceeds, Preferred Units and indebtedness, we acquired approximately $114.7 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.

 

(c) 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. For the three months ended June 30, 2017, we received redemption requests totaling approximately 1,000 shares and approximately $9,000.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

(a) During the second quarter of 2017, 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.

 

(b) During the second quarter of 2017, there were no material changes to the procedures by which security holders may recommend nominees to our board of directors.

 

ITEM 6. EXHIBITS

The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.

 

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EXHIBIT INDEX

The following exhibits are included in this report on Form 10-Q for the period ended June 30, 2017 (and are numbered in accordance with Item 601 of Regulation S-K).

 

Exhibit

No.

  

Description

 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    Distribution Reinvestment Plan Enrollment Form (included as Appendix A to prospectus), incorporated by reference to the Company’s Registration Statement on Form S-3, filed on May 5, 2017, Commission File No. 333-217716
 4.2    Second Amended and Restated Distribution Reinvestment Plan (included as Appendix B to prospectus), incorporated by reference to the Company’s Registration Statement on Form S-3, filed on May 5, 2017, Commission File No. 333-217716
10.1    Nantucket Purchase Agreement, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed on July 28, 2017, Commission File No. 000-55616
10.2    Nantucket Assignment, incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K, filed on July 28, 2017, Commission File No. 000-55616
10.3*    First Amendment to Nantucket Purchase Agreement
10.4    Fifth Amendment to the Credit Agreement, incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K, filed on July 28, 2017, Commission File No. 000-55616
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 Six Months Ended June 30, 2017, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

 

* Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    STRATEGIC STORAGE GROWTH TRUST, INC.
    (Registrant)
Dated: August 11, 2017     By:   /s/ Michael O. Terjung
      Michael O. Terjung
      Chief Financial Officer and Treasurer
      (Principal Financial and Accounting Officer)

 

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