Filed Pursuant to Rule 424(b)(3)
Registration No. 333-190983
STRATEGIC STORAGE TRUST II, INC.
SUPPLEMENT NO. 8 DATED NOVEMBER 20, 2014
TO THE PROSPECTUS DATED JANUARY 10, 2014
This document supplements, and should be read in conjunction with, the prospectus of Strategic Storage Trust II, Inc. dated January 10, 2014 and Supplement No. 7 thereto dated November 6, 2014 (which amended and superseded all prior supplements). Unless otherwise defined in this supplement, capitalized terms used in this supplement shall have the same meanings as set forth in the prospectus.
The purpose of this supplement is to disclose:
| an update on the status of our public offering; |
| an update to one of our risk factors under the Risks Related to this Offering and an Investment in Strategic Storage Trust II, Inc. section of our prospectus; |
| an update to the Our Self Storage Properties section of our prospectus; |
| an update to the Managements Discussion and Analysis of Financial Condition and Results of Operations section of our prospectus to include information for the three and nine months ended September 30, 2014; and |
| our unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2014. |
Status of Our Offering
We commenced the initial public offering of shares of our common stock on January 10, 2014. On May 23, 2014, we reached the minimum offering amount of $1.5 million in sales of shares and commenced operations. As of November 17, 2014, we have received gross offering proceeds of approximately $13.4 million from the sale of approximately 1.3 million shares in our initial public offering. As of November 17, 2014, approximately $1.08 billion in shares remained available for sale to the public under our initial public offering, including shares available under our distribution reinvestment plan.
Changes to One of our Risk Factors
The risk factor under the Risks Related to this Offering and an Investment in Strategic Storage Trust II, Inc. on page 20 of our prospectus titled We may pay distributions from sources other than cash flow from operations; therefore, we will have fewer funds available for the acquisition of properties, and our stockholders overall return may be reduced is hereby deleted and replaced with the following:
We may pay distributions from sources other than cash flow from operations; therefore, we will have fewer funds available for the acquisition of properties, and our stockholders overall return may be reduced.
In the event we do not have enough cash from operations to fund our distributions, we may borrow, issue additional securities, or sell assets in order to fund the distributions or make the distributions out of net
1
proceeds from this 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. It is likely that we will use offering proceeds to fund a majority of our initial distributions. If we pay distributions from sources other than cash flow from operations, we will have fewer funds available for acquiring properties which may reduce our stockholders overall returns. Additionally, to the extent distributions exceed cash flow from operations, a stockholders basis in our stock may be reduced and, to the extent distributions exceed a stockholders basis, the stockholder may recognize a capital gain. We have not yet generated positive cash flow from operations to cover distribution payments and may not do so unless our asset base grows significantly. We began paying distributions to stockholders of record after we satisfied our minimum offering requirements on May 23, 2014. All of the distributions paid to stockholders to date have been paid from the net proceeds of our best efforts offering, which reduces the proceeds available for other purposes. Accordingly, until such time as we are generating cash flow from operations sufficient to cover distributions, during the pendency of our best efforts offering, we have and will likely continue to pay distributions from the net proceeds of the offering. See the Description of Shares - Distribution Policy section of the prospectus.
Update to the Our Self Storage Properties Section of Prospectus
The Our Properties subsection of the Our Self Storage Properties section of our prospectus is hereby deleted and replaced with the following:
Portfolio Summary
Our self storage facilities offer inexpensive, easily accessible, enclosed storage space to residential and commercial users on a month-to-month basis. Most of our facilities are fenced with computerized gates and are well-lighted. Many of our properties are single-story, thereby providing customers with the convenience of direct vehicle access to their storage spaces. Our facilities range in size from approximately 36,900 to approximately 100,100 net rentable square feet, with an average of approximately 70,840 net rentable square feet. Our facilities generally are constructed of masonry or steel walls resting on concrete slabs and have standing seam metal, shingle, or tar and gravel roofs. Customers have access to their storage areas during business hours, and some of our facilities provide 24-hour access. Individual storage spaces are secured by a lock furnished by the customer to provide the customer with control of access to the space.
As of November 17, 2014, our wholly-owned self storage portfolio was comprised as follows:
Property |
Units | Sq. Ft. (net) |
% of Total Rentable Sq. Ft. |
Physical Occupancy %(1) |
Climate Controlled %(2) |
|||||||||||||||
Morrisville - NC |
320 | 36,900 | 10.4% | 87% | 27% | |||||||||||||||
Cary - NC |
310 | 62,100 | 17.5% | 89% | 23% | |||||||||||||||
Raleigh - NC |
440 | 60,600 | 17.1% | 93% | 20% | |||||||||||||||
Myrtle Beach I - SC |
760 | 100,100 | 28.3% | 88% | 28% | |||||||||||||||
Myrtle Beach II - SC |
660 | 94,500 | 26.7% | 89% | 40% | |||||||||||||||
Totals |
354,200 | 100.0% |
(1) | Represents the occupied square feet divided by total rentable square feet as of November 17, 2014. |
(2) | Represents the percentage of rentable square feet in climate controlled units as of November 17, 2014. |
The weighted average capitalization rate at acquisition for the five self storage facilities we owned as of November 17, 2014 was approximately 7.40%. The weighted average capitalization rate is calculated as the estimated first year annual net operating income at the respective property divided by the property purchase
2
price, exclusive of offering costs, closing costs and fees paid to our advisor. Estimated first year net operating income on our real estate investments is total estimated revenues generally derived from the terms of in-place leases at the time we acquire the property, less property operating expenses generally based on the operating history of the property. In instances where management determines that historical amounts will not be representative of first year revenues or property operating expenses, management uses its best faith estimate of such amounts based on anticipated property operations. Estimated first year net operating income excludes interest expense, asset management fees, depreciation and amortization and our company-level general and administrative expenses. Historical operating income for these properties is not necessarily indicative of future operating results.
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements 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 supplement. The following Managements Discussion and Analysis of Financial Condition and Results of Operations should also be read in conjunction with our financial statements and notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the period from January 8, 2013 (date of inception) through December 31, 2013.
Overview
Strategic Storage Trust II, Inc. was formed on January 8, 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. Strategic Storage Trust II, Inc. is newly formed and is subject to the general risks associated with a start-up enterprise, including the risk of business failure. Our year end is December 31. As used in this supplement, we us and our refer to Strategic Storage Trust II, Inc.
On August 2, 2013, our Advisor purchased 100 shares of our common stock for $1,000 and became our initial stockholder. Our Articles of Amendment and Restatement authorize 700,000,000 shares of common stock with a par value of $0.001 and 200,000,000 shares of preferred stock with a par value of $0.001. We are offering a maximum of $1,000,000,000 of common shares for sale to the public (the Primary Offering) and $95,000,000 of common shares for sale pursuant to our distribution reinvestment plan (collectively, the Offering).
On January 10, 2014, the Securities and Exchange Commission (SEC) declared our registration statement effective. On May 23, 2014, we satisfied the minimum $1.5 million offering requirements of our Offering and commenced formal operations. As of September 30, 2014, we had issued approximately 1.1 million shares of our common stock for gross proceeds of approximately $10.5 million. We intend to invest the net proceeds from the Offering primarily in self storage facilities and related self storage real estate investments.
As of September 30, 2014, we had not acquired any self storage properties.
Strategic Storage Holdings, LLC, a Delaware limited liability company (our Prior Sponsor), was the sponsor of our Offering through August 31, 2014. Effective August 31, 2014, SmartStop Self Storage, Inc. (our Sponsor), formerly known as Strategic Storage Trust, Inc., entered into a series of transactions, agreements and amendments to its existing agreements and arrangements (such agreements and amendments hereinafter referred to collectively as the Self Administration and Investment Management Transaction) with our Prior Sponsor and its affiliates, pursuant to which, effective August 31, 2014, our Sponsor acquired the self storage advisory, asset management, property management and investment management businesses of our Prior Sponsor including our Prior Sponsors sole membership interest in Strategic Storage Realty Group, LLC, which owns
3
97.5% of the economic interests (and 100% of the voting membership interests) of Strategic Storage Trust Advisor II, LLC (our Advisor) and owns 100% of Strategic Storage Property Management II, LLC (our Property Manager). Our Sponsor was formed on August 14, 2007 for the purpose of engaging in the business of investing in self storage facilities. As of September 30, 2014, our Sponsor owned 126 self storage facilities located in 17 states and Canada representing approximately 10.5 million rentable square feet.
Our Operating Partnership was formed on January 9, 2013. Our Operating Partnership will own, directly or indirectly through one or more special purpose entities, all of the self storage properties that we acquire.
Our Dealer Manager, Select Capital Corporation, is responsible for marketing our shares being offered pursuant to the Offering. Our Chief Executive Officer and President owned, through a wholly-owned limited liability company, a 15% non-voting equity interest in our Dealer Manager through August 31, 2014. Effective, August 31, 2014, our Sponsor now indirectly owns the 15% non-voting equity interest in our Dealer Manager, pursuant to the Self Administration and Investment Management Transaction. An affiliate of our Dealer Manager continues to own a 2.5% non-voting membership interest in our Advisor.
We have no paid employees. 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 an advisory agreement with our Advisor. Our Advisor was formed on January 8, 2013.
Our Property Manager was formed on January 8, 2013 to manage our properties. Our Property Manager will derive 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.
Our results of operations for the third quarter of 2014 are not indicative of those expected in future periods as we expect that rental income, operating expenses, depreciation expense, amortization expense and interest expense will each increase in future periods as a result of anticipated future acquisitions of real estate assets.
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 supplement. If managements 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.
4
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 supplement, and is intended to present our analysis of the uncertainties involved in arriving upon and applying each policy.
Real Estate Purchase Price Allocation
As of September 30, 2014, we had not yet acquired any properties. However, upon the acquisition of each of our properties, we will allocate the purchase prices of acquired properties based on a number of estimates and assumptions. We will 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 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
Once we begin acquiring properties, the majority of our assets will consist of long-lived real estate assets as well as intangible assets related to our acquisitions. We will continually evaluate such assets for impairment based on events and changes in circumstances that may arise in the future and that may impact the carrying amounts of our long-lived assets. When indicators of potential impairment are present, we will assess the recoverability of the particular asset by determining whether the carrying value of the asset will be recovered, through an evaluation of the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. This evaluation is based on a number of estimates and assumptions. Based on this evaluation, if the expected undiscounted future cash flows do not exceed the carrying value, we will adjust the value of the long-lived asset and recognize an impairment loss. Our evaluation of the impairment of long-lived assets could result in a materially different presentation of the financial statements or materially different amounts being reported in the financial statements, as the amount of impairment loss, if any, recognized may vary based on the estimates and assumptions we use.
Estimated Useful Lives of Long-Lived Assets
As we purchase properties, we will be required to 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 will 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.
5
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 entities included in our financial statements may vary based on the estimates and assumptions we use.
REIT Qualification
We intend to make 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 ending December 31, 2014. If we qualify 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 will operate in a manner that will enable us to qualify for treatment as a REIT for federal income tax purposes commencing with the year ending December 31, 2014, and we intend to continue to operate as to remain qualified as a REIT for federal income tax purposes.
Results of Operations
Overview
On May 23, 2014, we satisfied the minimum offering requirements of our public offering and commenced formal operations. Pursuant to the terms of our Advisory Agreement, upon achieving the minimum offering requirements of our public offering on May 23, 2014, we became liable to our Advisor for the costs that they had incurred on our behalf through such date. As of September 30, 2014, we had issued approximately 1.1 million shares of our common stock in connection with our Offering for gross proceeds of approximately $10.5 million. Operating results in future periods will depend on the results of operations of the real estate properties that we acquire.
As of September 30, 2014, we had not acquired any self storage properties.
Comparison of Operating Results for the Three Months Ended September 30, 2014 and 2013
Revenue
We have yet to acquire any operating facilities and therefore have not recorded any revenues. We expect to record revenue as we acquire operating facilities.
6
General and Administrative Expenses
General and administrative expenses for the three months ended September 30, 2014 and 2013 were approximately $0.2 million and none, respectively. General and administrative expenses consist primarily of legal expenses, transfer agent fees, directors and officers insurance expense, an allocation of a portion of our Advisors payroll related costs, accounting expenses and board of directors related costs. We expect general and administrative costs to increase in the future as our operational activity increases.
Acquisition Expenses
Acquisition expenses for the three months ended September 30, 2014 and 2013 were approximately $0.3 million and none, respectively. These acquisition expenses primarily relate to the due diligence costs associated with the potential acquisitions of a total of 31 properties. We expect acquisition expenses to fluctuate commensurate with our acquisition activities.
Comparison of Operating Results for the Nine Months Ended September 30, 2014 and the Period from January 8, 2013 (date of inception) through September 30, 2013
Revenue
We have yet to acquire any operating facilities and therefore have not recorded any revenues. We expect to record revenue as we acquire operating facilities.
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30, 2014 and the period from January 8, 2013 (date of inception) through September 30, 2013 were approximately $0.6 million and none, respectively. General and administrative expenses consist primarily of legal expenses, transfer agent fees, directors and officers insurance expense, an allocation of a portion of our Advisors payroll related costs, accounting expenses and board of directors related costs. We expect general and administrative costs to increase in the future as our operational activity increases.
Acquisition Expenses
Acquisition expenses for the nine months ended September 30, 2014 and the period from January 8, 2013 (date of inception) through September 30, 2013 were approximately $0.7 million and none, respectively. These acquisition expenses primarily relate to the due diligence costs associated with the potential acquisitions of a total of 31 properties. We expect acquisition expenses to fluctuate commensurate with our acquisition activities.
Liquidity and Capital Resources
Short-Term Liquidity and Capital Resources
Through May 23, 2014, the date we satisfied the minimum offering requirements of our Offering, we met our short-term operating liquidity requirements through advances from our Advisor or its affiliates, as we needed to fund our offering costs and operating expenses incurred before we met the minimum offering requirements of our Offering. Currently, 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 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.
7
Distribution Policy
On September 24, 2014, our board of directors authorized a daily distribution in the amount of $0.00164383561 per share (equivalent to an annualized distribution rate of 6.0%, assuming a purchase price of $10.00 per share) on the outstanding shares of common stock payable to stockholders of record of such shares as shown on our books as of the close of business on each day during the period, commencing on October 1, 2014 and continuing on each day thereafter through and including December 31, 2014.
Currently, we are making distributions to our stockholders using proceeds of the Offering in anticipation of future cash flow. As such, this reduces the amount of capital we will 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 Partnerships 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 the Offering. Though we presently intend to pay only cash distributions, and potentially stock distributions, we are authorized by our charter to pay 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.
During our Offering, when we may raise capital more quickly than we acquire income-producing assets, 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 our Offering.
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 investment in our portfolio. As a result, future distributions declared and paid may exceed cash flow from operations.
Distributions will be paid to our stockholders as of the record date selected by our board of directors. We declare and pay distributions monthly based on daily declaration and record dates so that investors may be entitled to distributions immediately upon purchasing our shares. We expect to continue to regularly pay distributions unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. 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. 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; |
8
| our ability to keep our properties occupied; |
| our ability to maintain or increase rental rates; |
| capital expenditures and reserves for such expenditures; |
| the issuance of additional shares; and |
| financings and refinancings. |
For the nine months ended September 30, 2014, we incurred distributions of approximately $109,000. For the period ended December 31, 2013, we declared no distributions. From our inception through September 30, 2014, the payment of distributions has been paid solely from Offering proceeds.
We must distribute to our stockholders at least 90% of our taxable income each year in order to meet the requirements for being treated as a REIT under the Code. Our directors may authorize distributions in excess of this percentage as they deem appropriate. Because we may receive income from interest or rents at various times during our fiscal year, distributions may not reflect our income earned in that particular distribution period, but may be made in anticipation of cash flow that we expect to receive during a later period and may be made in advance of actual receipt of funds in an attempt to make distributions relatively uniform. To allow for such differences in timing between the receipt of income and the payment of expenses, and the effect of required debt payments, among other things, we could be required to borrow funds from third parties on a short-term basis, issue new securities, or sell assets to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We are not prohibited from undertaking such activities by our charter, bylaws or investment policies, and we may use an unlimited amount from any source to pay our distributions. These methods of obtaining funding could affect future distributions by increasing operating costs and decreasing available cash, which could reduce the value of our stockholders investment in our shares. In addition, such distributions may constitute a return of investors capital.
Indebtedness
As of September 30, 2014, we did not have any third-party 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 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 instruments and cash flows from operating activities in order to meet our long-term liquidity requirements and to fund our distributions.
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 purposes 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.
9
Subsequent Events
Please see Note 7 of the Notes to the Consolidated Financial Statements contained in this supplement.
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.
10
The financial statements listed below are contained in this supplement: |
Page | |
Consolidated Financial Statements |
||
Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013 (unaudited) |
F-1 | |
F-2 | ||
Consolidated Statement of Equity for the Nine Months Ended September 30, 2014 (unaudited) |
F-3 | |
F-4 | ||
F-5 |
11
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
(Unaudited)
September 30, 2014 | December 31, 2013 | |||||||
ASSETS | ||||||||
Cash and cash equivalents |
$ | 5,586,411 | $ | 201,000 | ||||
Escrow receivable |
23,000 | | ||||||
Other assets |
5,287,857 | | ||||||
|
|
|
|
|||||
Total assets |
$ | 10,897,268 | $ | 201,000 | ||||
|
|
|
|
|||||
LIABILITIES AND EQUITY | ||||||||
Due to affiliates |
$ | 4,213,141 | $ | | ||||
Distributions payable |
49,979 | | ||||||
|
|
|
|
|||||
Total liabilities |
4,263,120 | | ||||||
Commitments and contingencies (Note 4) |
||||||||
Redeemable common stock |
21,420 | | ||||||
Equity: |
||||||||
Strategic Storage Trust II, Inc. equity: |
||||||||
Preferred Stock, $0.001 par value; 200,000,000 shares authorized; none issued and outstanding at September 30, 2014 and December 31, 2013, respectively |
| | ||||||
Common Stock, $0.001 par value; 700,000,000 shares authorized; 1,054,128 and 100 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively |
1,054 | 1 | ||||||
Additional paid-in capital |
7,890,186 | 999 | ||||||
Distributions |
(108,879 | ) | | |||||
Accumulated deficit |
(1,271,740 | ) | | |||||
|
|
|
|
|||||
Total Strategic Storage Trust II, Inc. equity |
6,510,621 | 1,000 | ||||||
|
|
|
|
|||||
Noncontrolling interest in our Operating Partnership |
102,107 | 200,000 | ||||||
|
|
|
|
|||||
Total equity |
6,612,728 | 201,000 | ||||||
|
|
|
|
|||||
Total liabilities and equity |
$ | 10,897,268 | $ | 201,000 | ||||
|
|
|
|
See notes to consolidated financial statements.
F-1
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
Period from January 8, 2013 (date of inception) through September 30, |
||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenues: |
$ | | $ | | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating expenses: |
||||||||||||||||
General and administrative |
204,067 | | 646,806 | | ||||||||||||
Acquisition expenses affiliates |
284,051 | | 708,303 | | ||||||||||||
Other acquisition expenses |
10,217 | | 10,217 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
498,335 | | 1,365,326 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
(498,335 | ) | | (1,365,326 | ) | | ||||||||||
Less: Net loss attributable to the noncontrolling interests in our Operating Partnership |
(15,732 | ) | | (93,586 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss attributable to Strategic Storage Trust II, Inc. |
$ | (482,603 | ) | $ | | $ | (1,271,740 | ) | $ | | ||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss per share basic and diluted |
$ | (0.77 | ) | $ | | $ | (5.17 | ) | $ | | ||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average shares outstanding basic and diluted |
626,566 | | 246,184 | | ||||||||||||
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-2
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
Number of Shares |
Common Stock Par Value |
Additional Paid-in Capital |
Distributions | Accumulated Deficit |
Total Strategic Storage Trust II, Inc. Equity |
Noncontrolling Interests |
Total | |||||||||||||||||||||||||
Balance as of December 31, 2013 |
100 | $ | 1 | $ | 999 | $ | | $ | | $ | 1,000 | $ | 200,000 | $ | 201,000 | |||||||||||||||||
Gross proceeds from issuance of common stock |
1,051,773 | 1,051 | 10,489,262 | | | 10,490,313 | | 10,490,313 | ||||||||||||||||||||||||
Offering costs |
| | (2,600,073 | ) | | | (2,600,073 | ) | | (2,600,073 | ) | |||||||||||||||||||||
Changes to redeemable common stock |
| | (21,420 | ) | | | (21,420 | ) | | (21,420 | ) | |||||||||||||||||||||
Distributions ($0.60 per share) |
| | | (108,879 | ) | | (108,879 | ) | | (108,879 | ) | |||||||||||||||||||||
Distributions to noncontrolling interests |
| | | | | | (4,307 | ) | (4,307 | ) | ||||||||||||||||||||||
Issuance of shares for distribution reinvestment plan |
2,255 | 2 | 21,418 | | | 21,420 | | 21,420 | ||||||||||||||||||||||||
Net loss attributable to Strategic Storage Trust II, Inc. |
| | | | (1,271,740 | ) | (1,271,740 | ) | | (1,271,740 | ) | |||||||||||||||||||||
Net loss attributable to the noncontrolling interests |
| | | | | | (93,586 | ) | (93,586 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance as of September 30, 2014 |
1,054,128 | $ | 1,054 | $ | 7,890,186 | $ | (108,879 | ) | $ | (1,271,740 | ) | $ | 6,510,621 | $ | 102,107 | $ | 6,612,728 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, 2014 |
Period from January 8, 2013 (date of inception) through September 30, 2013 |
|||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (1,365,326 | ) | $ | | |||
Adjustments to reconcile net loss to cash used in operating activities: |
||||||||
Increase in cash from change in liabilities: |
||||||||
Due to affiliates |
1,345,595 | | ||||||
|
|
|
|
|||||
Net cash flows used in operating activities |
(19,731 | ) | | |||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Deposits on acquisitions of real estate facilities |
(4,000,000 | ) | | |||||
|
|
|
|
|||||
Net cash flows used in investing activities |
(4,000,000 | ) | | |||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Gross proceeds from issuance of common stock |
10,467,313 | 1,000 | ||||||
Offering costs |
(1,020,384 | ) | | |||||
Issuance of operating partnership units |
| 200,000 | ||||||
Distributions paid to common stockholders |
(38,466 | ) | | |||||
Distributions paid to noncontrolling interest |
(3,321 | ) | | |||||
|
|
|
|
|||||
Net cash flows provided by financing activities |
9,405,142 | 201,000 | ||||||
|
|
|
|
|||||
Net increase in cash and cash equivalents |
5,385,411 | 201,000 | ||||||
Cash and cash equivalents, beginning of period |
201,000 | | ||||||
|
|
|
|
|||||
Cash and cash equivalents, end of period |
$ | 5,586,411 | $ | 201,000 | ||||
|
|
|
|
|||||
Supplemental cash flow and non-cash transactions: |
||||||||
Distributions payable |
$ | 49,979 | $ | | ||||
Issuance of shares pursuant to distribution reinvestment plan |
$ | 21,420 | $ | | ||||
Non-cash transactions with our Sponsor and affiliates |
$ | 4,210,866 | $ | | ||||
Amount due to Dealer Manager |
$ | 2,275 | $ | | ||||
Escrow receivable |
$ | 23,000 | $ | |
See notes to consolidated financial statements.
F-4
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
Note 1. Organization
Strategic Storage Trust II, Inc., a Maryland corporation (the Company), was formed on January 8, 2013 under the Maryland General Corporation Law for the purpose of engaging in the business of investing in self storage facilities. The Companys year-end is December 31. As used in this supplement, we us and our refer to Strategic Storage Trust II, Inc.
Strategic Storage Holdings, LLC, a Delaware limited liability company (our Prior Sponsor), was the sponsor of our Offering through August 31, 2014. Effective August 31, 2014, SmartStop Self Storage, Inc. (our Sponsor), formerly known as Strategic Storage Trust, Inc., entered into a series of transactions, agreements and amendments to its existing agreements and arrangements (such agreements and amendments hereinafter referred to collectively as the Self Administration and Investment Management Transaction) with our Prior Sponsor and its affiliates, pursuant to which, effective August 31, 2014, our Sponsor acquired the self storage advisory, asset management, property management and investment management businesses of our Prior Sponsor including our Prior Sponsors sole membership interest in Strategic Storage Realty Group, LLC, which owns 97.5% of the economic interests (and 100% of the voting membership interests) of Strategic Storage Trust Advisor II, LLC (our Advisor) and owns 100% of Strategic Storage Property Management II, LLC (our Property Manager). Our Sponsor was formed on August 14, 2007 for the purpose of engaging in the business of investing in self storage facilities. As of September 30, 2014, our Sponsor owned 126 self storage facilities located in 17 states and Canada.
Our Advisor, a Delaware limited liability company, was formed on January 8, 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 an advisory agreement we have with our Advisor (our Advisory Agreement). The officers of our Advisor are also officers of us and our Sponsor.
On August 2, 2013, our Advisor purchased 100 shares of our common stock for $1,000 and became our initial stockholder. Our Articles of Amendment and Restatement authorize 700,000,000 shares of common stock with a par value of $0.001 and 200,000,000 shares of preferred stock with a par value of $0.001. We are offering a maximum of $1,000,000,000 of common shares for sale to the public (the Primary Offering) and $95,000,000 of common shares for sale pursuant to our distribution reinvestment plan (collectively, the Offering).
On January 10, 2014, the Securities and Exchange Commission (SEC) declared our registration statement effective. On May 23, 2014, we satisfied the $1.5 million minimum offering requirements of our Offering and commenced formal operations. As of September 30, 2014, we had issued approximately 1.1 million shares of our common stock for gross proceeds of approximately $10.5 million. We intend to invest the net proceeds from the Offering primarily in self storage facilities and related self storage real estate investments. As of September 30, 2014, we had not purchased any properties; however, we had identified certain potential acquisitions and subsequent to September 30, 2014 closed on a portfolio of five properties (see Notes 6 and 7).
Our operating partnership, Strategic Storage Operating Partnership II, L.P., a Delaware limited partnership (our Operating Partnership), was formed on January 9, 2013. On August 2, 2013, our Advisor purchased a limited partnership interest in our Operating Partnership for $200,000 and on August 2, 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 will own, directly or indirectly through one or more special purpose entities, all of the self storage properties that we acquire in the future. As of September 30, 2014, we owned 98% of the limited partnership interests of our Operating Partnership. The remaining limited partnership interests are owned by our Advisor (2%). As the sole general partner of our Operating Partnership, we have the
F-5
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
exclusive power to manage and conduct the business of our Operating Partnership. We will conduct certain activities (such as tenant insurance and selling packing supplies and locks) through our taxable REIT subsidiary, Strategic Storage TRS II, Inc., a Delaware corporation (the TRS) which was formed on January 10, 2013, and is a wholly owned subsidiary of our Operating Partnership.
Our Property Manager was formed on January 8, 2013 to manage our properties. Our Property Manager will derive 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.
Our dealer manager is Select Capital Corporation, a California corporation (our Dealer Manager). Our Dealer Manager is responsible for marketing our shares being offered pursuant to our Primary Offering. Our president owned, through a wholly-owned limited liability company, a 15% non-voting equity interest in our Dealer Manager through August 31, 2014. Effective August 31, 2014, our Sponsor now indirectly owns the 15% non-voting equity interest in our Dealer Manager, pursuant to the Self Administration and Investment Management Transaction. An affiliate of our Dealer Manager continues to own a 2.5% non-voting membership interest in our Advisor.
As we accept subscriptions for shares of our common stock, we transfer substantially all of the net offering proceeds to our Operating Partnership as capital contributions in exchange for additional units of interest in our Operating Partnership. However, we are deemed to have made capital contributions in the amount of gross proceeds received from investors, and our Operating Partnership is deemed to have simultaneously paid the sales commissions and other costs associated with the Offering. In addition, our Operating Partnership is structured to make distributions with respect to limited partnership units that will be equivalent to the distributions made to holders of common stock. Finally, a limited partner in our Operating Partnership may later exchange his or her limited partnership units in our Operating Partnership for shares of our common stock at any time after one year following the date of issuance of their limited partnership units, subject to certain restrictions outlined in the limited 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 for Investments in Joint Ventures
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
F-6
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
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 VIEs 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 VIEs assets, liabilities, and noncontrolling interest at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. As of September 30, 2014, we had not entered into contracts/interests that would be deemed to be variable interests in VIEs.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. Management will adjust such estimates when facts and circumstances dictate. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
We consider all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents.
We may maintain cash equivalents in financial institutions in excess of insured limits, but believe this risk will be mitigated by only investing in or through major financial institutions.
Other Assets
As of September 30, 2014, other assets included approximately $0.6 million related to deferred financing costs associated with loans related to potential acquisitions (see Notes 6 and 7). The remaining amount relates to acquisition deposits, some of which were funded by our Advisor, on the properties described in Notes 6 and 7.
Real Estate Purchase Price Allocation
We will account for acquisitions in accordance with amended accounting guidance which requires that we allocate the purchase price of the property to the tangible and intangible assets acquired and the liabilities assumed based on estimated fair values. This guidance will require us to make significant estimates and assumptions, including fair value estimates, as of the acquisition date and to adjust those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which we may adjust the provisional amounts recognized for an acquisition). Acquisitions of portfolios of facilities will be 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 will be 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,
F-7
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
we will determine whether the acquisition includes intangible assets or liabilities. Substantially all of the leases in place at acquired properties will be at market rates, as the majority of the leases will be month-to-month contracts. We will also consider whether in-place, market leases represent an intangible asset. We do not expect 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.
Should the initial accounting for an acquisition be incomplete by the end of a reporting period that falls within the measurement period, we will report provisional amounts in our financial statements. During the measurement period, we will adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we will record those adjustments to our financial statements. We will apply those measurement period adjustments that we determine to be significant retrospectively to comparative information in our financial statements, potentially including adjustments to interest, depreciation and amortization expense.
Evaluation of Possible Impairment of Long-Lived Assets
Management will continually monitor events and changes in circumstances that could indicate that the carrying amounts of our long-lived assets, including those held through joint ventures, 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.
Equity Investments
Investments in unconsolidated real estate joint ventures and VIEs in which we are not the primary beneficiary, where we have significant influence, but not control, will be recorded under the equity method of accounting in our consolidated financial statements. Under the equity method, our investments in real estate ventures will be stated at cost and adjusted for our share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures will be generally recognized based on the allocation of cash distributions upon liquidation of the investment in accordance with the joint venture agreements.
Investments representing passive preferred equity and/or minority interests will be accounted for under the cost method. Under the cost method, our investments in real estate ventures will be carried at cost and adjusted for other-than-temporary declines in fair value, distributions representing a return of capital and additional investments.
Revenue Recognition
Management expects that all of our leases will be operating leases. Rental income will be recognized in accordance with the terms of the leases, which generally are month-to-month. Revenues from any long-term operating leases will be 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 will be included in accounts payable and accrued liabilities in our consolidated balance sheet and contractually due but unpaid rent will be included in other assets.
F-8
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
Allowance for Doubtful Accounts
Customer accounts receivable will be reported net of an allowance for doubtful accounts. Managements estimate of the allowance will be based upon a review of the current status of customer accounts receivable. It is reasonably possible that managements estimate of the allowance will change in the future.
Depreciation of Real Property Assets
Our management will be required to make subjective assessments as to the useful lives of our depreciable assets. We will consider the period of future benefit of the asset to determine the appropriate useful lives.
Depreciation of our real property assets is expected to be charged to expense on a straight-line basis over the estimated useful lives as follows:
Description |
Standard Depreciable Life | |
Land |
Not Depreciated | |
Buildings |
30 to 35 years | |
Site Improvements |
7 to 15 years |
Depreciation of Personal Property Assets
Personal property assets are expected to consist primarily of furniture, fixtures and equipment and will be depreciated on a straight-line basis over the estimated useful lives generally ranging from 3 to 5 years, and will be included in other assets on our consolidated balance sheet.
Intangible Assets
We will allocate a portion of our real estate purchase price to in-place leases. We will amortize in-place leases on a straight-line basis over the estimated future benefit period.
Amortization of Deferred Financing Costs
Costs incurred in connection with obtaining financing will be deferred and amortized over the term of the related loan.
Organizational and Offering Costs
Our Advisor may fund organization and offering costs on our behalf. We will be required to reimburse our Advisor for such organization and offering costs; provided, however, our Advisor must reimburse us within 60 days after the end of the month in which the Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions and dealer manager fees) in excess of 3.5% of the gross offering proceeds from the Primary Offering. Such costs will be recognized as a liability when we have a present responsibility to reimburse our Advisor, which is defined in our Advisory Agreement as the date we satisfied the minimum offering requirements of our Offering (which occurred on May 23, 2014). If at any point in time we determine that the total organization and offering costs are expected to exceed 3.5% of the gross proceeds anticipated to be received from the Primary Offering, we will recognize such excess as a capital contribution from our Advisor. As of September 30, 2014, we do not believe total organization and offering costs will exceed 3.5% of the gross proceeds anticipated to be received from the Primary Offering. Offering costs are recorded as an offset to additional paid-in capital, and organization costs are recorded as an expense.
F-9
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
Redeemable Common Stock
We adopted a share redemption program that will enable stockholders to sell their shares to us in limited circumstances.
We record amounts that are redeemable under the share redemption program as redeemable common stock in the accompanying consolidated balance sheet since the shares are redeemable at the option of the holder and therefore their redemption is outside our control. The maximum amount redeemable under our share redemption program is limited to the number of shares we can repurchase with the amount of the net proceeds from the sale of shares under the distribution reinvestment plan. However, accounting guidance states that determinable amounts that can become redeemable but that are contingent on an event that is likely to occur (e.g., the passage of time) should be presented as redeemable when such amount is known. Therefore, the net proceeds from the distribution reinvestment plan are considered to be temporary equity and are presented as redeemable common stock in the accompanying consolidated balance sheet.
In addition, current accounting guidance requires, among other things, that financial instruments that represent a mandatory obligation of us to repurchase shares be classified as liabilities and reported at settlement value. Our redeemable common shares will be contingently redeemable at the option of the holder. When we determine we have a mandatory obligation to repurchase shares under the share redemption program, we will reclassify such obligations from temporary equity to a liability based upon their respective settlement values.
Through September 30, 2014 we had not received any requests for redemptions.
Fair Value Measurements
The accounting standard for fair value measurements and disclosures defines fair value, establishes a framework for measuring fair value, and provides for expanded disclosure about fair value measurements. Fair value is defined by the accounting standard for fair value measurements and disclosures as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels. The following summarizes the three levels of inputs and hierarchy of fair value we will use when measuring fair value:
| Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access; |
| Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as interest rates and yield curves that are observable at commonly quoted intervals; and |
| Level 3 inputs are unobservable inputs for the assets or liabilities that are typically based on an entitys 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
F-10
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
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.
The carrying amounts of cash and cash equivalents, customer accounts receivable, other assets, accounts payable and accrued liabilities, distributions payable and amounts due to affiliates will approximate fair value because of the relatively short-term nature of these instruments.
To comply with GAAP, we will incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterpartys nonperformance risk in the fair value measurements. In adjusting the fair value of derivative contracts for the effect of nonperformance risk, we will consider the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Noncontrolling Interest in Consolidated Entities
We account for the noncontrolling interest in our Operating Partnership in accordance with the related accounting guidance. Due to our control through our general partnership interest in our Operating Partnership and the limited rights of the limited partner, our Operating Partnership, including its wholly-owned subsidiaries, are consolidated with the Company and the limited partner interest is reflected as a noncontrolling interest in the accompanying consolidated balance sheet. The noncontrolling interest shall be attributed its share of income and losses, even if that attribution results in a deficit noncontrolling interest balance.
Income Taxes
We intend to make 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 ending December 31, 2014. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the REITs ordinary taxable income to stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we will be 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 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 will file elections to treat our TRS as a taxable REIT subsidiary effective January 1, 2014. In general, the TRS may perform additional services for our customers and generally may engage in any real estate or non-real estate related business. The TRS is subject to corporate federal and state income tax. The TRS will follow accounting guidance which will require the use of the asset and liability method. Deferred income taxes will represent the tax effect of future differences between the book and tax bases of assets and liabilities.
F-11
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
Per Share Data
We currently have no potentially dilutive instruments. Both basic and diluted earnings per share attributable for all periods presented are computed by dividing net income (loss) by the weighted average number of shares outstanding during the period.
Recently Issued Accounting Guidance
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09 Revenue from Contracts with Customers (ASU 2014-09) as Accounting Standards Codification (ASC) Topic 606. The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with 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. This ASU is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 and shall be applied using either a full retrospective or modified retrospective approach. Early adoption is not permitted. We are in the process of evaluating the impact of this standard on our consolidated financial statements and the impact is unknown at this time.
Note 3. 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 Offering and investment of funds in real estate properties, among other services, as well as reimbursement for organizational and offering costs incurred by our Advisor on our behalf and reimbursement of certain costs and expenses incurred by our Advisor in providing services to us.
Organization and Offering Costs
Organization and offering costs of the Offering may be paid by our Advisor on our behalf and will be reimbursed to our Advisor from the proceeds of our Offering. Organization and offering costs will consist of all expenses (other than sales commissions and the dealer manager fee) to be paid by us in connection with the Offering, including our legal, accounting, printing, mailing and filing fees, charges of our escrow holder and other accountable organization and offering expenses, including, but not limited to, (i) amounts to reimburse our Advisor for all marketing related costs and expenses such as salaries and direct expenses of employees of our Advisor and its affiliates in connection with registering and marketing our shares; (ii) technology costs associated with the Offering; (iii) our costs of conducting our training and education meetings; (iv) our costs of attending retail seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses. Our Advisor must reimburse us within 60 days after the end of the month which the Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions and dealer manager fees) in excess of 3.5% of the gross offering proceeds from the Primary Offering.
F-12
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
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 will receive various fees and expenses under the terms of our Advisory Agreement. As discussed above, we will be required under our Advisory Agreement to reimburse our Advisor for organization and offering costs; provided, however, our Advisor will be required to reimburse us within 60 days after the end of the month in which the Offering terminates to the extent we paid or reimbursed organization and offering costs (excluding sales commissions and dealer manager fees) in excess of 3.5% of the gross offering proceeds from the Primary Offering.
Our Advisory Agreement also requires our Advisor to reimburse us to the extent that offering expenses, including sales commissions, dealer manager fees and organization and offering expenses, are in excess of 15% of gross proceeds from the Offering.
Our Advisor will receive acquisition fees equal to 1.75% of the contract purchase price of each property we acquire plus reimbursement of any acquisition expenses our Advisor incurs. Our Advisor will also receive a monthly asset management fee equal to 0.05208%, which is one-twelfth of 0.625%, of our aggregate asset value, as defined.
Under our Advisory Agreement, our Advisor will receive 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. 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.
Our Advisor may also be entitled to various subordinated distributions pursuant to our Operating 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) enter into an Extraordinary Transaction, as defined in the Operating Partnership agreement.
Our Advisory Agreement provides for reimbursement of our Advisors direct and indirect costs of providing administrative and management services to us. Beginning four fiscal quarters after we acquire our first real estate asset, our Advisor will be required to pay or reimburse us the amount by which our aggregate annual operating expenses, as defined, exceed the greater of 2% of our average invested assets or 25% of our net income, as defined, unless a majority of our independent directors determine that such excess expenses were justified based on unusual and non-recurring factors. For any fiscal quarter for which total operating expenses for the 12 months then ended exceed the limitation, we will disclose this fact in our next quarterly report or within 60 days of the end of that quarter and send a written disclosure of this fact to our stockholders. In each case the disclosure will include an explanation of the factors that the independent directors considered in arriving at the conclusion that the excess expenses were justified.
Dealer Manager Agreement
Our Dealer Manager receives a sales commission of up to 7.0% of gross proceeds from sales in the Primary Offering and a dealer manager fee equal to up to 3.0% of gross proceeds from sales in the Primary Offering under the terms of our Dealer Manager Agreement. Our Dealer Manager has entered into participating dealer agreements with certain other broker-dealers which authorizes them to sell our shares. Upon sale of our shares by such broker-dealers, our Dealer Manager will re-allow all of the sales commissions paid in connection with sales made by these broker-dealers. Our Dealer Manager may also re-allow to these broker-dealers a portion of the 3.0% dealer manager fee as marketing fees, reimbursement of certain costs and expenses of
F-13
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
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 receives reimbursement of bona fide due diligence expenses; however, to the extent these due diligence expenses cannot be justified, any excess over actual due diligence expenses will be considered underwriting compensation subject to a 10% FINRA limitation and, when aggregated with all other non-accountable expenses may not exceed 3% of gross offering proceeds from sales in the Primary Offering.
Affiliated Dealer Manager
Our Chief Executive Officer and President owned, through a wholly-owned limited liability company, a 15% non-voting equity interest in our Dealer Manager through August 31, 2014. Effective, August 31, 2014, our Sponsor now indirectly owns the 15% non-voting equity interest in our Dealer Manager, pursuant to the Self Administration and Investment Management Transaction. An affiliate of our Dealer Manager continues to own a 2.5% non-voting membership interest in our Advisor.
Property Management Agreement
Each of our self storage properties will be managed by our Property Manager under separate property management agreements. Under each agreement, our Property Manager will receive a fee for its services in managing our properties, generally equal to 6% of the gross revenues from the properties plus reimbursement of the Property Managers costs of managing the properties. Reimbursable costs and expenses include wages and salaries and other expenses of employees engaged in operating, managing and maintaining our properties. In the event that our Property Manager assists with the development or redevelopment of a property, we may pay a separate market-based fee for such services. In addition, our Property Manager will be entitled to a construction management fee equal to 5% of the cost of construction or capital improvement work in excess of $10,000 and an administration fee equal to $0.50 a month for each insurance policy purchased by a customer at one of our facilities in connection with the tenant insurance program. Additionally, each agreement will include a non-solicitation provision and a provision regarding the Property Managers use of trademarks and other intellectual property owned by our Sponsor.
Pursuant to the terms of the agreements described above, the following related party costs incurred by us for the three months ended September 30, 2014 and 2013 and for the nine months ended September 30, 2014 and for the period from January 8, 2013 (date of inception) through September 30, 2013, and any related amounts payable as of September 30, 2014 are summarized below:
F-14
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
Three Months Ended September 30, 2014 |
Three Months Ended September 30, 2013 |
Nine Months Ended September 30, 2014 |
Period from January 8, 2013 (date of inception) through September 30, 2013 |
|||||||||||||
Expensed |
||||||||||||||||
Operating expenses (including organizational costs) |
$ | 194,553 | $ | | $ | 637,292 | $ | | ||||||||
Acquisition expenses |
284,051 | | 708,303 | | ||||||||||||
Capitalized |
||||||||||||||||
Other assets |
316,226 | | 1,287,857 | | ||||||||||||
Additional Paid-in Capital |
||||||||||||||||
Selling commissions |
532,582 | | 715,861 | | ||||||||||||
Dealer Manager fee |
228,250 | | 306,798 | | ||||||||||||
Offering costs |
110,600 | | 1,577,414 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,666,262 | $ | | $ | 5,233,525 | $ | | ||||||||
|
|
|
|
|
|
|
|
As of September 30, 2014 and December 31, 2013, we had amounts due to affiliates totaling approximately $4.2 million and none, respectively.
Tenant Reinsurance Program
Affiliates of our Sponsor, including our Chief Executive Officer and President participated in a tenant reinsurance program whereby we expect that customers of our self storage facilities will be able to purchase insurance to cover damage or destruction to their property while stored at our facilities. Such affiliates invested in a Cayman Islands company (the Reinsurance Company) that will insure a portion of the insurance required by the program insurer to cover the risks of loss at participating facilities in the program. The program insurer will provide fees (approximately 50% of the tenant premium paid) to us as owner of the facilities. The Reinsurance Company may be required to fund additional capital or entitled to receive distributions of profits depending on actual losses incurred under the program. Effective August 31, 2014, our Sponsor acquired such investment in the Reinsurance Company. As of September 30, 2014, we had not incurred any fees in connection with the tenant reinsurance program.
Storage Auction Program
Our Chief Executive Officer and President, and our Senior Vice President Property Management and the president of our Property Manager, own minority interests in a company (the Auction Company) that serves as a web portal for self storage companies to post their auctions online instead of using live auctions conducted at the self storage facilities. Once the contents of a storage unit are sold at auction, we will pay the Auction Company a service fee based upon the sale price of the unit. Collectively, these officers own 9% of the voting interests in the Auction Company. Our Chief Executive Officer and President serves on the Board of Advisors of the Auction Company. As of September 30, 2014, we had not incurred any fees in connection with the Auction Company.
Note 4. Commitments and Contingencies
Distribution Reinvestment Plan
We adopted a distribution reinvestment plan that allows our stockholders to have distributions otherwise
F-15
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
distributable to them invested in additional shares of our common stock. The purchase price per share is 95% of the current offering price of our shares in the Primary Offering. No sales commission or dealer manager fee will be paid on shares sold through the distribution reinvestment plan. We may amend or terminate the distribution reinvestment plan for any reason at any time upon 10 days prior written notice to stockholders.
Share Redemption Program
We adopted a share redemption program that enables stockholders to sell their shares to us in limited circumstances. As long as our common stock is not listed on a national securities exchange or over-the-counter market, our stockholders who have held their stock for at least one year may be able to have all or any portion of their shares of stock redeemed by us. We may redeem the shares of stock presented for redemption for cash to the extent that we have sufficient funds available to fund such redemption.
Our board of directors may amend, suspend or terminate the share redemption program with 30 days notice to our stockholders. We may provide this notice by including such information in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to our stockholders. The complete terms of our share redemption program are described in our prospectus.
The amount that we may pay to redeem stock for redemptions is the redemption price set forth in the following table which is based upon the number of years the stock is held:
Number Years Held |
Redemption Price | |
Less than 1 |
No Redemption Allowed | |
1 or more but less than 3 |
90.0% of Redemption Amount | |
3 or more but less than 4 |
95.0% of Redemption Amount | |
4 or more |
100.0% of Redemption Amount |
At any time we are engaged in an offering of shares, the Redemption Amount for shares purchased under our share redemption program will always be equal to or lower than the applicable per share offering price. As long as we are engaged in an offering, the Redemption Amount shall be the lesser of the amount the stockholder paid for their shares or the price per share in the current Offering. If we are no longer engaged in an offering, the per share Redemption Amount will be determined by our board of directors. Our board of directors will announce any redemption price adjustment and the time period of its effectiveness as a part of its regular communications with our stockholders. At any time the redemption price during an offering is determined by any method other than the offering price, if we have sold property and have made one or more special distributions to our stockholders of all or a portion of the net proceeds from such sales, the per share redemption price will be reduced by the net sale proceeds per share distributed to investors prior to the redemption date as a result of the sale of such property in the special distribution. Our board of directors will, in its sole discretion, determine which distributions, if any, constitute a special distribution. While our board of directors does not have specific criteria for determining a special distribution, we expect that a special distribution will only occur upon the sale of a property and the subsequent distribution of the net sale proceeds.
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 stockholders 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. |
F-16
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
| During any calendar year, we will not redeem in excess of 5% of the weighted-average number of shares outstanding during the prior calendar year. |
| The cash available for redemption is limited to the proceeds from the sale of shares pursuant to our distribution reinvestment plan. |
| We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency. |
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.
Note 5. Declaration of Distributions
On September 24, 2014, our board of directors declared a distribution rate for the fourth quarter of 2014 of $0.00164383561 per day per share on the outstanding shares of common stock payable to stockholders of record of such shares as shown on our books as of the close of business on each day during the period, commencing on October 1, 2014 and continuing on each day thereafter through and including December 31, 2014.
Note 6. Potential Acquisitions
26 Property Portfolio
On August 13, 2014, our board of directors approved our potential acquisition of a 26 property portfolio (the 26 Property Portfolio) that our Prior Sponsor had under contract through a purchase and sale agreement with unaffiliated third parties. Commensurate with such approval, our Prior Sponsor assigned its interests in the purchase and sale agreement relating to the 26 Property Portfolio to us and we made an additional earnest money deposit of approximately $4 million. The portfolio consists of 14 facilities located in California; four facilities located in Michigan; three facilities located in Colorado; two facilities located in Illinois and one facility in each of New Jersey, Washington and Maryland.
The purchase price for the 26 Property Portfolio is approximately $128.2 million, plus closing costs and acquisition fees. We expect this acquisition to close in the first quarter of 2015 in several tranches and to fund such acquisition with a combination of net proceeds from our Offering, the Preferred Equity Investment (see Note 7), and other potential financing sources. There can be no assurance that we will complete the acquisition. If we fail to acquire some or all of the facilities, in addition to the incurred acquisition costs, we may also forfeit earnest money as a result.
F-17
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
Note 7. Subsequent Events
Acquisitions
On November 3, 2014, we closed on the acquisition of a portfolio of five properties (the Raleigh/Myrtle Beach Portfolio) from an unaffiliated third party, which consisted of the following:
Property |
Acquisition Date | Acquisition Price (1) | Year Built | |||||||
Morrisville NC |
11/3/2014 | $ | 2,130,000 | 2004 | ||||||
Cary NC |
11/3/2014 | 4,570,000 | 1998/2005/ 2006 | |||||||
Raleigh NC |
11/3/2014 | 3,920,000 | 1999 | |||||||
Myrtle Beach I SC |
11/3/2014 | 5,940,000 | 1998/2005/ 2006/2007 | |||||||
Myrtle Beach II SC |
11/3/2014 | 5,540,000 | 1999/2006 | |||||||
|
|
|||||||||
Total |
$ | 22,100,000 | ||||||||
|
|
(1) | The acquisition prices 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. |
We incurred approximately $0.4 million in acquisition fees payable to our Advisor in connection with such acquisition.
In connection with the acquisition of the Raleigh/Myrtle Beach Portfolio, we assumed an existing mortgage loan with a principal balance of approximately $12.6 million (the Raleigh/Myrtle Beach Promissory Note). The Raleigh/Myrtle Beach Promissory Note matures on September 1, 2023, bears a fixed interest rate of 5.73% per annum and has a 30-year amortization schedule. We and our Sponsor executed a guaranty in favor of the lender guaranteeing payment of the Raleigh/Myrtle Beach Promissory Note (the Raleigh/Myrtle Beach Guaranty). The Raleigh/Myrtle Beach Guaranty requires that we and our Sponsor, collectively, maintain a net worth of at least $6 million and an aggregate liquidity of at least $2 million, exclusive of the interest in the Raleigh/Myrtle Beach Portfolio and the Preferred Equity Investment as defined below. Our Sponsor may be released from its obligations under the Raleigh/Myrtle Beach Guaranty if certain conditions are met, including that we alone satisfy the aforementioned net worth and liquidity requirements.
Issuance of Preferred Units by our Operating Partnership
On November 3, 2014, we and our Operating Partnership entered into a Series A Cumulative Redeemable Preferred Unit Purchase Agreement (the Unit Purchase Agreement) with SSTI Preferred Investor, LLC (the Preferred Investor), a wholly-owned subsidiary of SmartStop Self Storage Operating Partnership, L.P. Pursuant to the Unit Purchase Agreement, the Preferred Investor agreed to provide up to $65 million through a preferred equity investment in our Operating Partnership (the Preferred Equity Investment), which amount may be invested in one or more tranches, to be used solely for investments in self storage properties, as described in the underlying documents, in exchange for up to 2.6 million preferred units of limited partnership interest of our Operating Partnership (the Preferred Units), each having a liquidation preference of $25.00 per Preferred Unit (the Liquidation Amount), plus all of accumulated and unpaid distributions.
In addition to the Unit Purchase Agreement, we and our Operating Partnership entered into a Second Amended and Restated Limited Partnership Agreement of the Operating Partnership (the Second Amended and
F-18
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
Restated Limited Partnership Agreement) and Amendment No. 1 to the Second Amended and Restated Limited Partnership Agreement (the Amendment). The Second Amended and Restated Limited Partnership Agreement authorizes the issuance of additional classes of units of limited partnership interest in the Operating Partnership, establishes a new series of preferred units of limited partnership interest in the Operating Partnership and sets forth other necessary corresponding changes. All other terms of the Second Amended and Restated Limited Partnership Agreement remained substantially the same. The Amendment sets forth key terms of the Preferred Units, some of which are discussed below.
On November 3, 2014, the Preferred Investor invested approximately $6.5 million in the first tranche of its Preferred Equity Investment in our Operating Partnership, of which (i) approximately $5.0 million was used to fund a portion of the Raleigh/Myrtle Beach Portfolio acquisition, and (ii) approximately $1.5 million was used to pay expenses incurred by the Preferred Investor in accordance with the Amendment. The Preferred Investor received approximately 260,000 Preferred Units in our Operating Partnership.
The holders of the Preferred Units will receive current distributions (the Current Distributions) at a rate of a one-month LIBOR plus 6.5% per annum on the Liquidation Amount, payable monthly and calculated on an actual/360 basis. In addition to the Current Distributions, our Operating Partnership has the obligation to elect either (A) to pay the holder of the Preferred Units additional distributions monthly in an amount equal to: (i) 4.35% per annum of the Liquidation Amount through March 31, 2017; and (ii) beginning April 1, 2017, 6.35% per annum of the Liquidation Amount or (B) defer the additional distributions ( the Deferred Distributions) in an amount that will accumulate monthly in an amount equal to (i) LIBOR plus 10.85% of the Deferred Distributions through March 31, 2017; and (ii) beginning April 1, 2017, LIBOR plus 12.85% of the Deferred Distributions.
The Preferred Units may be redeemed by our Operating Partnership, in whole or in part, at the option of our Operating Partnership at any time. The redemption price (the Redemption Price) for the Preferred Units will be equal to: (i) in the event of a partial redemption, the sum of the Liquidation Amount plus all accumulated and unpaid Current Distributions thereon to the date of redemption; and (ii) in the event of the redemption of all outstanding Preferred Units, the sum of the Liquidation Amount plus all accumulated and unpaid Current Distributions and any accumulated Deferred Distributions thereon to the date of redemption. If fewer than all of the outstanding Preferred Units are to be redeemed at the option of our Operating Partnership, the Preferred Units to be redeemed will be determined pro rata or by lot or in such other manner as determined by us, as the general partner of our Operating Partnership to be fair and equitable to all holders of the Preferred Units.
A holder of the Preferred Units may require our Operating Partnership to repurchase the Preferred Units upon the occurrence of any of the following (each an Optional Repurchase Event) and as defined within the Amendment: (A) a breach of any of the Protective Provisions; (B) an Event of Default; (C) a Change of Control that has not been consented to in accordance with the terms of the Amendment; (D) our failure to qualify as a REIT under the Internal Revenue Code; or (E) the occurrence and continuance of a monetary or a material default beyond any applicable cure period under any of the loan documents for each of the properties in our portfolio. The repurchase price for the Preferred Units will be the Redemption Price.
Offering Status
As of November 7, 2014, in connection with our Offering we have issued approximately 1.3 million shares of our common stock for gross proceeds of approximately $12.8 million.
F-19
D!
M\@'Z`@,"#`(4`AT")@(O`C@"00)+`E0"70)G`G$">@*$`HX"F`*B`JP"M@+!
M`LL"U0+@`NL"]0,``PL#%@,A`RT#.`-#`T\#6@-F`W(#?@.*`Y8#H@.N`[H#
MQP/3`^`#[`/Y!`8$$P0@!"T$.P1(!%4$8P1Q!'X$C`2:!*@$M@3$!-,$X03P
M!/X%#044%]@8&!A8&)P8W!D@&
M609J!GL&C`:=!J\&P`;1!N,&]0<'!QD'*P<]!T\'80=T!X8'F0>L![\'T@?E
M!_@("P@?"#((1@A:"&X(@@B6"*H(O@C2".<(^PD0"24).@E/"60)>0F/":0)
MN@G/">4)^PH1"B<*/0I4"FH*@0J8"JX*Q0K<"O,+"PLB"SD+40MI"X`+F`NP
M"\@+X0OY#!(,*@Q##%P,=0R.#*<,P`S9#/,-#0TF#4`-6@UT#8X-J0W##=X-
M^`X3#BX.20YD#G\.FPZV#M(.[@\)#R4/00]>#WH/E@^S#\\/[!`)$"800Q!A
M$'X0FQ"Y$-<0]1$3$3$13Q%M$8P1JA')$>@2!Q(F$D429!*$$J,2PQ+C$P,3
M(Q-#$V,3@Q.D$\43Y10&%"<4211J%(L4K13.%/`5$A4T%585>!6;%;T5X!8#
M%B86219L%H\6LA;6%OH7'1=!%V47B1>N%](7]Q@;&$`891B*&*\8U1CZ&2`9
M11EK&9$9MQG=&@0:*AI1&G<:GAK%&NP;%!L[&V,;BANR&]H<`APJ'%(<>QRC
M',P<]1T>'4<=:AZ4'KX>Z1\3'SX?:1^4'[\?ZB`5($$@
M;""8(,0@\"$<(4@A=2&A( &YXS'DJ>8EYYWI&
M>J5[!'MC>\)\(7R!?.%]07VA?@%^8G["?R-_A'_E@$>`J($*@6N!S8(P@I*"
M](-7@[J$'82`A..%1X6KA@Z& 0QRH4:6"1DV3*"!N1L'##@XZTZ-.E+#3J2C=QMU
M[MA5G5CB(0B])7Z=K'V!KFL1:#X/U+6KBUN+RWL;9[B:*U4-*40%FV@D`D`$
MXS7A7AG]J#X:^)A\/KA;?7M#TGQQ+Y/A35=6TAH;/4IN=L*R`L$=MIVK)M+8
MXS7KOQ`N(;7X%^,IKB00Q+HEUEF_ZXL/SSQBOS%^%T?BCPO^QC^RUX_\5:3-
M\0OA3X19IM8\/V.DNNI^%[W<\<&H/&I+W*0AWW(5#+Y@D`;`QO@\+1K4)2GO
M>RUM>\9.RZ7NEOZ;V,<5B*E*JHQVM=_)I?=9O\]C]:!RM>?W/Q.\&VG[2.E_
M":XU01^.-0T276+6RV_>MXY!&QSV8DL0O4JC'M6LOC3PO_PJYO&2:U;S>&4M
M#='4(V+)Y8&2?7/;;C=GC&>*_.7QOX5^*6J?`R#]JS2;/2F\6:=XB7QMI]C'
M!.=5_LM8Q;C2F(;9M^QC+1[<^87_`(B &[/_@H7^UA=ZW\3]8^&-O<7NF-I][IY2.*_\JS*R%3)"XE*-\NU"#\Q'4\5
MA*%.O[1M/W4FM_YDNFNS9.)K3H^S2>[L]NS?73='Z61RB2U25590RA@&R/
MYUY+_P`+G\.WWC;7-`\(Z+KOQ`O-$N#:ZQ-X?LDDM;*X`!-NT\LD<;2@$;D1
MF*Y&[!KU"WN%U#P]#=6[20I