UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June~~September 30, 2020

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

For the transition period from to

001-36892

(Commission file number)

JERNIGAN CAPITAL, INC.

(Exact name of registrant as specified in its charter)

Maryland		47-1978772
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)


6410 Poplar Avenue, Suite 650
Memphis, Tennessee		38119
(Address of principal executive offices)		(Zip Code)

(901) 567-9510

Registrant’s telephone number, including area code

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	JCAP	New York Stock Exchange
7.00% Series B cumulative redeemable perpetual preferred stock, $0.01 par value per share	JCAP PR B	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer ☐		Accelerated filer ☒
Non-accelerated filer ☐		Smaller reporting company ☒
		Emerging growth company ☒

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

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

As of ~~August~~November 65, 2020, Jernigan Capital, Inc. had 23,263,130 shares of common stock outstanding.

Table of Contents

Table of Contents

PART I. FINANCIAL INFORMATION		34

Item 1. Financial Statements		34

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		4751

Item 3. Quantitative and Qualitative Disclosures About Market Risk		71

Item 4. Controls and Procedures		72

PART II. Other information		7374

Item 1. Legal Proceedings		7374

Item 1A. Risk Factors		7374

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities		7574

Item 3. Defaults Upon Senior Securities		7574

Item 4. Mine Safety Disclosures		7574

Item 5. Other Information		7574

Item 6. Exhibits		7675

Table of Contents

InEXPLANATORY this quarterly report on Form 10-Q (“report”), unless the context indicates otherwise, references to “Jernigan Capital,” “we,” “the Company,” “our” and “us” refer to the activities of and the assets and liabilities of the business and operations of Jernigan Capital, Inc.; “Operating Company” refers to Jernigan Capital Operating Company, LLC, a Delaware limited liability company; and “Manager” refers to JCAP Advisors, LLC, a Florida limited liability company.NOTE

On November 6, 2020, Jernigan Capital, Inc. (the “Company”) consummated the transactions contemplated by that certain Agreement and Plan of Merger (the “Merger Agreement”), dated as of August 3, 2020 and amended September 21, 2020, by and among Jernigan Capital, Inc. (the “Company”), Jernigan Capital Operating Company, LLC (the “Operating Company”), NexPoint RE Merger, Inc. (“Parent”) and NexPoint RE Merger OP, LLC (the “Parent OP”) , both of whom are affiliates of NexPoint Advisors, L.P. (“NexPoint”). Pursuant to the terms and conditions set forth in the Merger Agreement, on November 6, 2020, the Parent merged with and into the Company, with the Company continuing as the surviving entity (the “Company Merger”), and, immediately following the Company Merger, the Parent OP merged with and into the Operating Company, with the Operating Company continuing as the surviving entity (the “Operating Company Merger” and, together with the Company Merger, the “Mergers”). Following consummation of the Mergers, The New York Stock Exchange filed a notification of removal from listing on Form 25 with the Securities and Exchange Commission (the “SEC”) with respect to the delisting and deregistration of the Company’s common stock, par value $0.01 per share (the “Common Stock”). In addition, the New York Stock Exchange filed a notification of removal from listing on Form 25 with the SEC with respect to the delisting and deregistration of the Company’s 7.00% Series B Cumulative Redeemable Perpetual Preferred Stock, liquidation preference amount $25.00 per share (the “Series B Preferred Stock”). The Common Stock and Series B Preferred Stock ceased being traded prior to the opening of the market on November 6, 2020, and are no longer listed on The New York Stock Exchange. Accordingly, the Company is no longer a publicly traded company. In addition, the Company intends to file with the SEC a Form 15 requesting the suspension of the reporting obligations of the Company under Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. The financial information in this quarterly report on Form 10-Q (this “Quarterly Report”) and the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations reflect the corporate status of the Company as it was at September 30, 2020.

In this Quarterly Report, unless the context indicates otherwise, references to “Jernigan Capital,” “we,” “the Company,” “our” and “us” refer to the activities of and the assets and liabilities of the business and operations of Jernigan Capital, Inc.; “Operating Company” refers to Jernigan Capital Operating Company, LLC, a Delaware limited liability company; and “Manager” refers to JCAP Advisors, LLC, a Florida limited liability company.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

JERNIGAN CAPITAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Unaudited)


	As of
	~~June~~September 30, 2020		December 31, 2019
Assets:
Cash and cash equivalents	$	1522,~~459~~183	$	3,278
Self-Storage Investment Portfolio:
Development property investments at fair value		~~364~~316,~~688~~254		549,684
Self-storage real estate owned, net		~~467~~513,~~950~~993		230,844
Investment in and advances to self-storage real estate venture		64,~~096~~053		11,247
Other loans, at cost		~~216~~850		4,713
Deferred financing costs		7,~~389~~717		4,154
Prepaid expenses and other assets		109,~~237~~107		8,654
Fixed assets, net		~~137~~127		203
Total assets	$	~~872~~874,~~172~~284	$	812,777

Liabilities:
Secured revolving credit facility	$	~~230~~242,000	$	162,000
Term loans, net of unamortized costs		40,~~912~~973		40,791
Due to Manager		—		3,164
Accounts payable, accrued expenses and other liabilities		1013,~~727~~388		4,817
Dividends payable		115,~~029~~309		13,131
Total liabilities		~~292~~301,~~668~~670		223,903

Equity:
7.00% Series A preferred stock, $0.01 par value, 300,000 shares authorized; 137,750 and 133,500 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively, at liquidation preference of $137.8 million and $133.5 million, net of offering costs, respectively		134,887		130,637
7.00% Series A preferred stock, $0.01 par value, 300,000 shares authorized; 139,875 and 133,500 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively, at liquidation preference of $139.9 million and $133.5 million, net of offering costs, respectively		137,012		130,637
7.00% Series B cumulative redeemable perpetual preferred stock, $0.01 par value, 3,750,000 shares authorized; 1,571,734 shares issued and outstanding as of June 30, 2020 and December 31, 2019, at liquidation preference of $39.3 million, net of offering costs		37,298		37,298
7.00% Series B cumulative redeemable perpetual preferred stock, $0.01 par value, 3,750,000 shares authorized; 1,571,734 shares issued and outstanding as of September 30, 2020 and December 31, 2019, at liquidation preference of $39.3 million, net of offering costs		37,298		37,298
Common stock, $0.01 par value, 500,000,000 shares authorized at June 30, 2020 and December 31, 2019; 23,263,130 and 22,423,283 issued and outstanding at June 30, 2020 and December 31, 2019, respectively		232		224
Common stock, $0.01 par value, 500,000,000 shares authorized at September 30, 2020 and December 31, 2019; 23,263,130 and 22,423,283 issued and outstanding at September 30, 2020 and December 31, 2019, respectively		232		224
Additional paid-in capital		~~450~~451,~~745~~182		426,129
Accumulated deficit		(7989,~~354~~289)		(5,021)
Accumulated other comprehensive income (loss)		(1,~~268~~084)		(393)
Total Jernigan Capital, Inc. stockholders' equity		~~542~~535,~~540~~351		588,874
Non-controlling interests		3637,~~964~~263		—
Total equity		~~579~~572,~~504~~614		588,874
Total liabilities and equity	$	~~872~~874,~~172~~284	$	812,777

See accompanying notes to consolidated financial statements.

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JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)


	Three months ended				~~Six~~Nine months ended
	~~June~~September 30,				~~June~~September 30,
	2020		2019		2020		2019
Revenues:
Interest income from investments	$	65,~~806~~553	$	910,~~150~~216	$	1420,~~564~~117	$	1727,~~362~~578
Rental and other property-related income from real estate owned		46,~~817~~287		1,~~638~~988		814,~~695~~982		35,~~087~~075
Other revenues		4438		4445		~~105~~143		~~267~~312
Total revenues		11,~~667~~878		1012,~~832~~249		2335,~~364~~242		2032,~~716~~965

Costs and expenses:
General and administrative expenses		32,~~462~~592		2,~~373~~137		68,~~226~~817		46,~~136~~273
Fees to Manager		—		2,~~069~~131		1,230		46,~~072~~203
Property operating expenses of real estate owned		23,~~626~~781		~~786~~989		48,~~673~~454		12,~~549~~538
Depreciation and amortization of real estate owned		45,~~320~~414		1,~~090~~372		713,~~904~~319		23,~~119~~491
Goodwill impairment loss		—		—		4,738		—
Internalization expenses		510		—268		37,~~788~~798		—268
Total costs and expenses		10,413		6,318		62,559		11,876
Merger expenses		5,031		—		5,031		—
Total costs and expenses		16,828		6,897		79,387		18,773

Operating income (loss)		1(4,~~254~~950)		45,~~514~~352		(3944,~~195~~145)		814,~~840~~192

Other income (expense):
Equity in earnings (losses) from unconsolidated real estate venture		12(2,041)		85165		(~~154~~2,195)		~~242~~407
Net unrealized gain (loss) on investments		~~791~~4,540		127,~~043~~974		(105,~~170~~630)		2028,~~873~~847
Interest expense		(3,~~067~~196)		(12,~~776~~546)		(69,~~279~~475)		(25,~~989~~535)
Other interest income		1716		89		2338		2130
Total other income (loss)		(~~2,247~~681)		105,~~360~~602		(1617,~~580~~262)		1823,~~147~~749
Net income (loss)	$	(~~993~~5,631)	$	1410,~~874~~954	$	(5561,~~775~~407)	$	2637,~~987~~941
Net income attributable to preferred stockholders		(5,~~245~~309)		(5,~~094~~157)		(1015,~~451~~760)		(1015,~~126~~283)
Less: Net loss attributable to non-controlling interests		~~652~~1,005		—		23,~~598~~604		—
Net income (loss) attributable to common stockholders	$	(59,~~586~~935)	$	95,~~780~~797	$	(6373,~~628~~563)	$	1622,~~861~~658

Basic earnings (loss) per share attributable to common stockholders	$	(0.2443)	$	0.4626	$	(23.7720)	$	01.8106
Diluted earnings (loss) per share attributable to common stockholders	$	(0.2443)	$	0.4626	$	(23.7720)	$	01.8106

Dividends declared per share of common stock	$	~~0.23~~—	$	0.35	$	0.46	$	01.7005

See accompanying notes to consolidated financial statements.

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JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)


	Three months ended				~~Six~~Nine months ended
	~~June~~September 30,				~~June~~September 30,
	2020		2019		2020		2019
Net Income (loss)	$	(~~993~~5,631)	$	1410,~~874~~954	$	(5561,~~775~~407)	$	2637,~~987~~941
Other comprehensive income (loss):
Unrealized losses on interest rate swaps		(475)		(437)		(1,157)		(437)
Unrealized gains (losses) on interest rate swaps		(59)		(58)		(1,216)		(495)
Reclassification of realized losses (gains) on interest rate swaps		~~188~~262		(41)		~~239~~501		(45)
Other comprehensive income (loss)		~~(287)~~203		(~~441~~59)		(~~918~~715)		(~~441~~500)
Comprehensive income (loss)		(15,~~280~~428)		1410,~~433~~895		(5662,~~693~~122)		2637,~~546~~441
Less: Net loss attributable to non-controlling interest		~~652~~1,005		—		23,~~598~~604		—
Less: Other comprehensive loss attributable to non-controlling interest		21(18)		—		4325		—
Comprehensive income (loss) attributable to common stockholders	$	(~~607~~4,441)	$	1410,~~433~~895	$	(5458,~~052~~493)	$	2637,~~546~~441

See accompanying notes to consolidated financial statements.

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JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)


														Retained		Accumulated
	Series A				Series B									Earnings		Other		Total		Non-
	Preferred Stock				Preferred Stock				Common Stock			Additional		(Accumulated		Comprehensive		Stockholders'		Controlling		Total
	Shares		Amount		Shares		Amount		Shares	Amount		Paid-In-Capital		Deficit)		Income (Loss)		Equity		Interests		Equity
Balance at December 31, 2018		125,000	$	122,137		1,571,734	$	37,401	20,430,218	$	204	$	386,394	$	1,728	$	-	$	547,864	$	-	$	547,864
Equity offering costs related to preferred stock		-		-		-		(103)	-		-		-		-		-		(103)		-		(103)
At-the-market issuance of common stock, net of offering costs		-		-		-		-	136,192		1		2,751		-		-		2,752		-		2,752
Stock dividend paid on preferred stock		2,125		2,125		-		-	-		-		-		-		-		2,125		-		2,125
Repurchase and retirement of shares of common stock		-		-		-		-	(3,408)		-		(73)		-		-		(73)		-		(73)
Issuance of stock-based awards		-		-		-		-	4,692		-		-		-		-		-		-		-
Stock-based compensation		-		-		-		-	-		-		359		-		-		359		-		359
Dividends declared on Series A preferred stock		-		-		-		-	-		-		-		(4,344)		-		(4,344)		-		(4,344)
Dividends declared on Series B preferred stock		-		-		-		-	-		-		-		(688)		-		(688)		-		(688)
Dividends declared on common stock		-		-		-		-	-		-		-		(7,205)		-		(7,205)		-		(7,205)
Net income		-		-		-		-	-		-		-		12,114		-		12,114		-		12,114
Balance at March 31, 2019		127,125	$	124,262		1,571,734	$	37,298	20,567,694	$	205	$	389,431	$	1,605	$	-	$	552,801	$	-	$	552,801

See accompanying notes to consolidated financial statements.

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JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)


														Retained		Accumulated
	Series A				Series B									Earnings		Other		Total		Non-
	Preferred Stock				Preferred Stock				Common Stock			Additional		(Accumulated		Comprehensive		Stockholders'		Controlling		Total
	Shares		Amount		Shares		Amount		Shares	Amount		Paid-In-Capital		Deficit)		Income (Loss)		Equity		Interests		Equity
Balance at March 31, 2019		127,125	$	124,262		1,571,734	$	37,298	20,567,694	$	205	$	389,431	$	1,605	$	-	$	552,801	$	-	$	552,801
At-the-market issuance of common stock, net of offering costs		-		-		-		-	1,452,076		15		29,976		-		-		29,991		-		29,991
Stock dividend paid on preferred stock		2,125		2,125		-		-	-		-		-		-		-		2,125		-		2,125
Repurchase and retirement of shares of common stock		-		-		-		-	(18,544)		-		(396)		-		-		(396)		-		(396)
Issuance of stock-based awards		-		-		-		-	133,730		1		(1)		-		-		-		-		-
Stock-based compensation		-		-		-		-	-		-		750		-		-		750		-		750
Forfeiture and retirement of shares related to stock-based awards		-		-		-		-	(1,666)		-		-		-		-		-		-		-
Dividends declared on Series A preferred stock		-		-		-		-	-		-		-		(4,407)		-		(4,407)		-		(4,407)
Dividends declared on Series B preferred stock		-		-		-		-	-		-		-		(688)		-		(688)		-		(688)
Dividends declared on common stock		-		-		-		-	-		-		-		(7,754)		-		(7,754)		-		(7,754)
Other comprehensive income (loss) - derivative instruments		-		-		-		-	-		-		-		-		(441)		(441)		-		(441)
Net income		-		-		-		-	-		-		-		14,874		-		14,874		-		14,874
Balance at June 30, 2019		129,250	$	126,387		1,571,734	$	37,298	22,133,290	$	221	$	419,760	$	3,630	$	(441)	$	586,855	$	-	$	586,855

See accompanying notes to consolidated financial statements

Table of Contents

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)


														Retained		Accumulated
	Series A				Series B									Earnings		Other		Total		Non-
	Preferred Stock				Preferred Stock				Common Stock			Additional		(Accumulated		Comprehensive		Stockholders'		Controlling		Total
	Shares		Amount		Shares		Amount		Shares	Amount		Paid-In-Capital		Deficit)		Income (Loss)		Equity		Interests		Equity
Balance at June 30, 2019		129,250	$	126,387		1,571,734	$	37,298	22,133,290	$	221	$	419,760	$	3,630	$	(441)	$	586,855	$	-	$	586,855
At-the-market issuance of common stock, net of offering costs		-		-		-		-	96,081		1		1,900		-		-		1,901		-		1,901
Stock dividend paid on preferred stock		2,125		2,125		-		-	-		-		-		-		-		2,125		-		2,125
Issuance of stock-based awards		-		-		-		-	7,500		-		-		-		-		-		-		-
Stock-based compensation		-		-		-		-	-		-		580		-		-		580		-		580
Dividends declared on Series A preferred stock		-		-		-		-	-		-		-		(4,469)		-		(4,469)		-		(4,469)
Dividends declared on Series B preferred stock		-		-		-		-	-		-		-		(688)		-		(688)		-		(688)
Dividends declared on common stock		-		-		-		-	-		-		-		(7,782)		-		(7,782)		-		(7,782)
Other comprehensive income (loss) - derivative instruments		-		-		-		-	-		-		-		-		(59)		(59)		-		(59)
Net income		-		-		-		-	-		-		-		10,954		-		10,954		-		10,954
Balance at September 30, 2019		131,375	$	128,512		1,571,734	$	37,298	22,236,871	$	222	$	422,240	$	1,645	$	(500)	$	589,417	$	-	$	589,417


														Retained		Accumulated
	Series A				Series B									Earnings		Other		Total		Non-
	Preferred Stock				Preferred Stock				Common Stock			Additional		(Accumulated		Comprehensive		Stockholders'		Controlling		Total
	Shares		Amount		Shares		Amount		Shares	Amount		Paid-In-Capital		Deficit)		Income (Loss)		Equity		Interests		Equity
Balance at December 31, 2019		133,500	$	130,637		1,571,734	$	37,298	22,423,283	$	224	$	426,129	$	(5,021)	$	(393)	$	588,874	$	-	$	588,874
At-the-market issuance of common stock, net of offering costs		-		-		-		-	810,000		8		15,064		-		-		15,072		-		15,072
Issuance of Operating Company (“OC”) Units for property acquisitions		-		-		-		-	-		-		-		-		-		-		1,536		1,536
Issuance of OC Units for Internalization		-		-		-		-	-		-		8,554		-		-		8,554		33,538		42,092
Stock dividend paid on preferred stock		2,125		2,125		-		-	-		-		-		-		-		2,125		-		2,125
Repurchase and retirement of shares of common stock		-		-		-		-	(1,926)		-		(36)		-		-		(36)		-		(36)
Issuance of stock-based awards		-		-		-		-	40,502		-		-		-		-		-		-		-
Stock-based compensation		-		-		-		-	-		-		607		-		-		607		-		607
Dividends declared on Series A preferred stock		-		-		-		-	-		-		-		(4,519)		-		(4,519)		-		(4,519)
Dividends declared on Series B preferred stock		-		-		-		-	-		-		-		(688)		-		(688)		-		(688)
Dividends declared on common stock		-		-		-		-	-		-		-		(5,354)		-		(5,354)		-		(5,354)
Distributions declared to Non-controlling interests		-		-		-		-	-		-		-		-		-		-		(192)		(192)
Other comprehensive income (loss) - derivative instruments																	(609)		(609)		(22)		(631)
Net loss		-		-		-		-	-		-		-		(52,835)		-		(52,835)		(1,947)		(54,782)
Balance at March 31, 2020		135,625	$	132,762		1,571,734	$	37,298	23,271,859	$	232	$	450,318	$	(68,417)	$	(1,002)	$	551,191	$	32,913	$	584,104

See accompanying notes to consolidated financial statements.

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JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)


														Retained		Accumulated
	Series A				Series B									Earnings		Other		Total		Non-
	Preferred Stock				Preferred Stock				Common Stock			Additional		(Accumulated		Comprehensive		Stockholders'		Controlling		Total
	Shares		Amount		Shares		Amount		Shares	Amount		Paid-In-Capital		Deficit)		Income (Loss)		Equity		Interests		Equity
Balance at December 31, 2019		133,500	$	130,637		1,571,734	$	37,298	22,423,283	$	224	$	426,129	$	(5,021)	$	(393)	$	588,874	$	-	$	588,874
At-the-market issuance of common stock, net of offering costs		-		-		-		-	810,000		8		15,064		-		-		15,072		-		15,072
Issuance of Operating Company (“OC”) Units for property acquisitions		-		-		-		-	-		-		-		-		-		-		1,536		1,536
Issuance of OC Units for Internalization		-		-		-		-	-		-		8,554		-		-		8,554		33,538		42,092
Stock dividend paid on preferred stock		2,125		2,125		-		-	-		-		-		-		-		2,125		-		2,125
Repurchase and retirement of shares of common stock		-		-		-		-	(1,926)		-		(36)		-		-		(36)		-		(36)
Issuance of stock-based awards		-		-		-		-	40,502		-		-		-		-		-		-		-
Stock-based compensation		-		-		-		-	-		-		607		-		-		607		-		607
Dividends declared on Series A preferred stock		-		-		-		-	-		-		-		(4,519)		-		(4,519)		-		(4,519)
Dividends declared on Series B preferred stock		-		-		-		-	-		-		-		(688)		-		(688)		-		(688)
Dividends declared on common stock		-		-		-		-	-		-		-		(5,354)		-		(5,354)		-		(5,354)
Distributions declared to Non-controlling interests		-		-		-		-	-		-		-		-		-		-		(192)		(192)
Other comprehensive income (loss) - derivative instruments		-		-		-		-	-		-		-				(609)		(609)		(22)		(631)
Net loss		-		-		-		-	-		-		-		(52,835)		-		(52,835)		(1,947)		(54,782)
Balance at March 31, 2020		135,625	$	132,762		1,571,734	$	37,298	23,271,859	$	232	$	450,318	$	(68,417)	$	(1,002)	$	551,191	$	32,913	$	584,104

See accompanying notes to consolidated financial statements.

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JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)


														Retained		Accumulated
	Series A				Series B									Earnings		Other		Total		Non-
	Preferred Stock				Preferred Stock				Common Stock			Additional		(Accumulated		Comprehensive		Stockholders'		Controlling		Total
	Shares		Amount		Shares		Amount		Shares	Amount		Paid-In-Capital		Deficit)		Income (Loss)		Equity		Interests		Equity
Balance at March 31, 2020		135,625	$	132,762		1,571,734	$	37,298	23,271,859	$	232	$	450,318	$	(68,417)	$	(1,002)	$	551,191	$	32,913	$	584,104
Equity offering costs related to the at-the-market issuance of common stock		-		-		-		-	-		-		(24)		-		-		(24)		-		(24)
Issuance of Operating Company (“OC”) Units for property acquisitions		-		-		-		-	-		-		-		-		-		-		5,157		5,157
Stock dividend paid on preferred stock		2,125		2,125		-		-	-		-		-		-		-		2,125		-		2,125
Repurchase and retirement of shares of common stock		-		-		-		-	(27,629)		-		(363)		-		-		(363)		-		(363)
Issuance of stock-based awards		-		-		-		-	18,900		-		-		-		-		-		-		-
Stock-based compensation		-		-		-		-	-		-		814		-		-		814		-		814
Dividends declared on Series A preferred stock		-		-		-		-	-		-		-		(4,557)		-		(4,557)		-		(4,557)
Dividends declared on Series B preferred stock		-		-		-		-	-		-		-		(688)		-		(688)		-		(688)
Dividends declared on common stock		-		-		-		-	-		-		-		(5,351)		-		(5,351)		-		(5,351)
Distributions declared to Non-controlling interests		-		-		-		-	-		-		-		-		-		-		(433)		(433)
Other comprehensive income (loss) - derivative instruments		-		-		-		-	-		-		-		-		(266)		(266)		(21)		(287)
Net loss		-		-		-		-	-		-		-		(341)		-		(341)		(652)		(993)
Balance at June 30, 2020		137,750	$	134,887		1,571,734	$	37,298	23,263,130	$	232	$	450,745	$	(79,354)	$	(1,268)	$	542,540	$	36,964	$	579,504

See accompanying notes to consolidated financial statements.

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JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)


														Retained		Accumulated
	Series A				Series B									Earnings		Other		Total		Non-
	Preferred Stock				Preferred Stock				Common Stock			Additional		(Accumulated		Comprehensive		Stockholders'		Controlling		Total
	Shares		Amount		Shares		Amount		Shares	Amount		Paid-In-Capital		Deficit)		Income (Loss)		Equity		Interests		Equity
Balance at June 30, 2020		137,750	$	134,887		1,571,734	$	37,298	23,263,130	$	232	$	450,745	$	(79,354)	$	(1,268)	$	542,540	$	36,964	$	579,504
Issuance of Operating Company (“OC”) Units for property acquisitions		-		-		-		-	-		-		-		-		-		-		1,285		1,285
Stock dividend paid on preferred stock		2,125		2,125		-		-	-		-		-		-		-		2,125		-		2,125
Stock-based compensation		-		-		-		-	-		-		437		-		-		437		-		437
Dividends declared on Series A preferred stock		-		-		-		-	-		-		-		(4,621)		-		(4,621)		-		(4,621)
Dividends declared on Series B preferred stock		-		-		-		-	-		-		-		(688)		-		(688)		-		(688)
Other comprehensive income (loss) - derivative instruments		-		-		-		-	-		-		-		-		184		184		19		203
Net loss		-		-		-		-	-		-		-		(4,626)				(4,626)		(1,005)		(5,631)
Balance at September 30, 2020		139,875	$	137,012		1,571,734	$	37,298	23,263,130	$	232	$	451,182	$	(89,289)	$	(1,084)	$	535,351	$	37,263	$	572,614

9See accompanying notes to consolidated financial statements.

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JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	~~Six~~Nine months ended ~~June~~September 30,
	2020		2019
Cash flows from operating activities:
Net income (loss)	$	(5561,~~775~~407)	$	2637,~~987~~941
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Interest capitalized on outstanding loans		(1115,~~237~~219)		(1422,~~613~~069)
Net unrealized (gain) loss on investments		105,~~170~~630		(2028,~~873~~847)
Stock-based compensation		1,~~421~~857		1,~~109~~689
Equity in (earnings) losses from unconsolidated self-storage real estate venture		~~159~~2,202		(~~237~~399)
Return on investment from unconsolidated self-storage real estate venture		198		~~188~~328
Depreciation and amortization		713,~~936~~365		23,~~148~~537
Amortization of deferred financing costs		12,~~287~~055		~~925~~1,440
Internalization – settlement of preexisting contractual relationship		37,353		—
Goodwill impairment loss		4,738		—
Accretion of origination fees		(~~511~~834)		(~~541~~867)
Unrealized gain on mark-to-market interest rate cap		81		28
Unrealized loss on mark-to-market interest rate cap		208		89
Other		56		—
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(1,~~646~~460)		(~~785~~1,346)
Due to Manager		(3,165)		(~~881~~585)
Accounts payable, accrued expenses, and other liabilities		26,~~232~~265		~~762~~280
Net cash used in operating activities		(68,~~703~~158)		(58,~~783~~809)

Cash flows from investing activities:
Purchase of corporate fixed assets		(2226)		(2229)
Purchase of self-storage real estate owned		(29,~~996~~970)		(210,~~636~~347)
Capital additions to self-storage real estate owned		(~~308~~354)		(1,~~022~~309)
Capital contributions to unconsolidated self-storage real estate venture		(170)		(~~357~~683)
Return of capital from unconsolidated self-storage real estate venture		4,683		23,~~106~~833
Advances to unconsolidated self-storage real estate venture		(51)		(12,~~674~~723)
Repayment of advances to unconsolidated self-storage real estate venture		355		12,~~712~~773
Funding of investment portfolio:
Origination fees received in cash		—		~~896~~1,114
Development property and bridge investments		(1826,~~592~~249)		(81129,~~500~~377)
Funding of other loans		—		(185)
Repayments of investment portfolio investments		—13,878		361
Repayments of other loans		4,~~199~~225		~~203~~205
Net cash used in investing activities		(3933,~~902~~679)		(82136,~~118~~367)

Cash flows from financing activities:
Cash received from Credit Facility, net of issuance costs		6374,~~813~~671		62124,~~346~~261
Cash received from term loans, net of issuance costs		—		915,~~024~~995
Stock repurchase		(399)		(~~469~~468)
Net proceeds from issuance of common stock		15,004		3234,~~743~~645
Net proceeds (offering costs) from issuance of Series B preferred stock		—		(103)
Dividends paid on Series A preferred stock		(47,~~776~~208)		(46,~~455~~736)
Dividends paid on Series B preferred stock		(12,~~376~~064)		(12,~~376~~064)
Dividends paid on Non-controlling interest		(~~191~~624)		—
Dividends paid on common stock		(1318,~~289~~638)		(1422,~~355~~108)
Net cash provided by financing activities		5860,~~786~~742		83143,~~355~~422
Net change in cash and cash equivalents		1218,~~181~~905		(41,~~546~~754)
Cash and cash equivalents at the beginning of the period		3,278		8,715
Cash and cash equivalents at the end of the period	$	1522,~~459~~183	$	46,~~169~~961

See accompanying notes to consolidated financial statements.

1013

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JERNIGAN CAPITAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data, percentages and as otherwise indicated)

1. ORGANIZATION AND FORMATION OF THE COMPANY

Jernigan Capital, Inc. (together with its consolidated subsidiaries, the “Company”) makes debt and equity investments in self-storage development projects and existing self-storage facilities, most of which were recently constructed, and also owns self-storage facilities. The Company is a Maryland corporation that was organized on October 1, 2014 and completed its initial public offering (the “IPO”) on April 1, 2015. The Company is structured as an Umbrella Partnership REIT (“UPREIT”) and conducts its investment activities through its operating company, Jernigan Capital Operating Company, LLC (the “Operating Company”). Until February 20, 2020, the Company was externally managed by JCAP Advisors, LLC (the “Manager”).

On December 16, 2019, the Company, the Operating Company, the Manager, Dean Jernigan, John A. Good and Jonathan Perry entered into an Asset Purchase Agreement (the “Purchase Agreement”) providing for the acquisition by the Operating Company of substantially all of the operating assets and liabilities of the Manager (the “Internalization”). A special committee of the Board consisting solely of all of the independent and disinterested directors (the “Special Committee”) negotiated the terms of the Internalization on behalf of the Company and the Operating Company. The Purchase Agreement and the Internalization were unanimously approved by the Special Committee, and, upon recommendation by the Special Committee, by the Company’s Board of Directors. On February 20, 2020, the Company held a special meeting of common stockholders, at which the Company’s common stockholders approved the proposal necessary for the completion of the Internalization.

On February 20, 2020, the Company completed the Internalization pursuant to the Purchase Agreement, and the Operating Company issued to the Manager 1,794,872 common units of limited liability company interest in the Operating Company (“OC Units”). In addition, if either (a) the Company’s common stock trades at or above a daily volume weighted average price of $25.00 per share for at least 30 days during any 365-day period prior to December 31, 2024 or (b) there is a change of control of the Company (as defined in the Purchase Agreement) prior to December 31, 2024 that is approved by the Company’s Board of Directors and the common stockholders of the Company, the Operating Company will issue an additional 769,231 OC Units to the Manager. The OC Units issued in the Internalization were Class B OC Units, so the initial distributions payable on the OC Units issued in the Internalization were prorated for the number of days during the initial distribution period that such OC Units were outstanding. The Class B OC Units were otherwise identical to Class A OC Units and automatically converted to Class A OC Units following the initial distribution period that ended April 15, 2020.

Upon completion of the Internalization, the Company’s current employees, who were previously employed by the Manager, became employees of the Company and the functions previously performed by the Manager were internalized by the Company. As an internally managed company, the Company will no longer pay the Manager any fees or expense reimbursements arising from the Management Agreement (as defined in Note 11).

Merger Agreement

On November 6, 2020, the Company consummated the transactions contemplated by that certain Agreement and Plan of Merger (the “Merger Agreement”), dated as of August 3, 2020, and amended September 21, 2020, by and among the Company, the Operating Company, NexPoint RE Merger, Inc. (“Parent”) and NexPoint RE Merger OP, LLC (the “Parent OP”). Pursuant to the terms and conditions set forth in the Merger Agreement, on November 6, 2020, the Parent merged with and into the Company, with the Company continuing as the surviving entity (the “Company Merger”) and immediately following the Company Merger, the Parent OP merged with and into the Operating Company, with the Operating Company continuing as the surviving entity (the “Operating Company Merger” and, together with the Company Merger, the “Mergers”).

At the effective time of the Company Merger (the “Company Merger Effective Time”), each share of Company common stock, $0.01 par value per share (the “Common Stock”) held by the Parent, Parent OP, or any subsidiary of the Company (a “Company Subsidiary”), was no longer outstanding and was automatically retired and ceased to exist, and no payment was made with respect thereto. Each share of Common Stock held by the Company in the Company’s treasury was automatically retired and ceased to exist, and no payment was made with respect thereto. All other shares of Common Stock issued and outstanding immediately prior to the Company Merger Effective Time were automatically converted into the right to receive an amount in cash equal to $17.30 per share, without interest (the “Merger Consideration”), and less any required withholding taxes.

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At the Company Merger Effective Time, each share of the Company’s Series A Preferred Stock (the “Series A Preferred Shares”) issued and outstanding immediately prior to the Company Merger Effective Time was converted into the right to receive one validly issued, fully paid and non-assessable share of common stock, $0.01 par value of the surviving company (the “Series A Preferred Merger Consideration”), without interest, subject to any applicable withholding tax. All Series A Preferred Shares, so converted, are no longer outstanding and have automatically been cancelled and retired and have ceased to exist.

At the Company Merger Effective Time, each share of the Company’s 7.00% Series B Cumulative Redeemable Perpetual Preferred Stock (the “Series B Preferred Shares”) issued and outstanding immediately prior to the Company Merger Effective Time was converted into the right to receive the Series B liquidation value, pursuant to the terms of the Company’s charter (the “Series B Preferred Merger Consideration”), without interest, subject to any applicable withholding tax. All Series B Preferred Shares so converted, are no longer outstanding and have automatically been cancelled and retired and have ceased to exist.

At the effective time of the Operating Company Merger (“Operating Company Merger Effective Time”), (a) each Operating Company Unit (the “Operating Company Units”) issued and outstanding immediately prior to the Operating Company Merger Effective Time held by the Company was automatically converted into membership interests of the surviving operating company, (b) each Operating Company Unit (the “Operating Company Units”) issued and outstanding immediately prior to the Operating Company Merger Effective Time that was held by any Company Subsidiary is no longer outstanding and has automatically been retired and ceased to exist, and no payment has been made with respect thereto, and (c) each other Operating Company Unit issued and outstanding immediately prior to the Operating Company Merger Effective Time has automatically been converted into the right to receive an amount in cash equal to the Merger Consideration (the “Operating Company Merger Consideration”), and all Operating Company Units, so converted, are no longer outstanding and have automatically been cancelled, retired and have ceased to exist.

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company generally will not be subject to U.S. federal income taxes on REIT taxable income, determined without regard to the deduction for dividends paid and excluded capital gains, to the extent that it annually distributes all of its REIT taxable income to stockholders and complies with various other requirements for qualification as a REIT set forth in the Code.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying interim consolidated financial statements include all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods included therein. Substantially all operations are conducted through the Operating Company, and all significant intercompany transactions and balances have been eliminated in consolidation.

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Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates.

Variable Interest Entities

The Company invests in entities that may qualify as variable interest entities (“VIEs”). A VIE is a legal entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. Management bases the qualitative analysis on its review of the design of the entity, its organizational structure including allocation of decision-making authority and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. Management reassesses the initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

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A VIE must be consolidated only by its primary beneficiary, which is defined as the party that, along with its affiliates and agents, has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. Management determines whether the Company is the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for the Company or other interests to provide financial support; and consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to the Company’s business activities and the other interests. Management reassesses the determination of whether the Company is the primary beneficiary of a VIE each reporting period.

Equity Investments

Investments in real estate ventures and entities over which the Company exercises significant influence but not control are accounted for using the equity method. In accordance with Accounting Standards Codification (“ASC”) 825, Financial Instruments (“ASC 825-10”), issued by the Financial Accounting Standards Board (“FASB”), the Company has elected the fair value option of accounting for its development property investments, which would otherwise be required to be accounted for under the equity method. The Company also holds an investment in a self-storage real estate venture that is accounted for under the equity method of accounting.

Investments and Election of Fair Value Option of Accounting for Certain Investments

The Company has elected the fair value option of accounting for all of its development property investments that are required under GAAP to be accounted for under the equity method, in order to provide stockholders and others who rely on the Company’s financial statements with a more complete and accurate understanding of the Company’s economic performance including its revenues and value inherent in the Company’s equity participation in development projects. Changes in the fair value of these investments are recorded in net unrealized gain (loss) on investments within other income. Interest income is reported in interest income from investments in the Consolidated Statements of Operations and is not included in the net unrealized gain on investments within other income. All direct loan costs are charged to expense as incurred.

Each loan investment, including those recorded at cost and presented on the Consolidated Balance Sheets as other loans, is evaluated for impairment on a periodic basis. For loans carried at fair value, indicators of impairment are reflected in the measurement of the loan. For loans that are carried at cost, the Company estimates an allowance for loan loss at each reporting date. In evaluating loan impairment, the Company also periodically evaluates the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower on a loan by loan basis. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the property, including the impact of the COVID-19 pandemic on property operations. In addition, the Company considers the overall economic environment, real estate sector and geographic sub-market in which the borrower operates. A loan will be considered impaired when, based on current information and events, it is probable that the loan will not be collected according to the contractual terms of the loan agreement. Factors to be considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

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Realized Gains and Net Unrealized Gain (Loss) on Investments

The Company measures realized gains by the difference between the net proceeds resulting from the sale of a self-storage property underlying one of the Company’s loan investments, excluding any prepayment penalties paid to the Company in connection with the repayment of the loan secured by the self-storage property, which are recognized in interest income from investments, and the cost basis of the investment, without regard to unrealized gain or loss previously recognized. “Net unrealized gain (loss) on investments” reflects the unrealized gains and losses recognized on certain investments during the reporting period, including any reversal of previously recorded unrealized gains when gains are realized. All fluctuations in fair value are included in net unrealized gain (loss) on investments on the Consolidated Statements of Operations.

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Fair Value Measurement

The Company carries certain financial instruments at fair value because it has elected to apply the fair value option on an instrument by instrument basis under ASC 825-10. The Company’s financial instruments consist of cash, development property investments (which are generally structured as first mortgages and a 49.9% Profits Interest in the project), the investment in self-storage real estate venture, other loans, receivables, the secured revolving Credit Facility (as defined below), the term loans, payables, and derivative financial instruments.

The following table presents the financial instruments measured at fair value on a recurring basis at ~~June~~September 30, 2020:

Fair Value Measurements Using

Total

Level 1

Level 2

Level 3

Derivative financial instruments (asset position)

~~174~~47

—

~~174~~47

—

Derivative financial instruments (liability position)

(1,~~311~~109)

—

(1,~~311~~109)

—

Development property investments

~~364~~316,~~688~~254

—

~~364~~316,~~688~~254

The following table presents the financial instruments measured at fair value on a recurring basis at December 31, 2019:


	Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
Derivative financial instruments (asset position)	$	14	$	—	$	14	$	—
Derivative financial instruments (liability position)		(393)		—		(393)		—
Development property investments		549,684		—		—		549,684

Estimating fair value requires the use of judgment. The types of judgments involved depend upon the availability of observable market information. Management’s judgments include determining the appropriate valuation model to use, estimating unobservable inputs and applying valuation adjustments. See Note 4, Fair Value of Financial Instruments, for additional disclosure on the valuation methodology and significant assumptions, as well as the election of the fair value option for certain financial instruments.

Derivative Instruments and Hedging Activities

All derivative financial instruments are recorded on the balance sheet at fair value. Changes in fair value are recognized either in earnings or as other comprehensive income (loss), depending on whether the derivative has been designated as a fair value or cash flow hedge and whether it qualifies as part of a hedging relationship, the nature of the exposure being hedged, and how effective the derivative is at offsetting movements in underlying exposure. Hedge accounting is discontinued when it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; the derivative expires or is sold, terminated, or exercised; it is no longer probable that the forecasted transaction will occur; or management determines that designating the derivative as a hedging instrument is no longer appropriate. The Company uses interest rate swaps and interest rate caps to effectively convert a portion of its variable rate debt to fixed rate, thus reducing the impact of changes in interest rates on interest payments (see Note 7, Debt, and Note 8, Risk Management and Use of Financial Instruments).

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The changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in “Accumulated other comprehensive income (loss)” and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. In accordance with ASU 2017-12, Derivatives and Hedging (Topic 815) as long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, there is no longer the requirement for periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses will be recognized in the period in which hedged transactions impact earnings, regardless of whether or not economic mismatches exist in the hedging relationship. Amounts reported in “Accumulated other comprehensive income (loss)” related to derivatives designated as qualifying cash flow hedges will be reclassified to interest expense as interest payments are made on the Company's variable rate or fixed rate debt. Changes in fair value for financial instruments not designated as cash flow hedges are recognized in earnings within interest expense in the Consolidated Statements of Operations.

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Self-Storage Real Estate Owned

To date, all self-storage real estate owned has consisted of self-storage facilities that were developed and constructed with financing provided by the Company. Each facility collateralized a mortgage loan that, together with the related Profits Interest, was reported by the Company as a development property investment carried at fair value. Each such property became self-storage real estate owned during the period when the Company acquired the developer’s interest in the entity that owns the facility. After such time, fair value accounting for such investment ceases.

Land is carried at historical cost. Building and improvements are carried at historical cost less accumulated depreciation and impairment losses. The cost consists primarily of: (i) the funded principal balance of the loan to the Company, net of unamortized origination fees; (ii) unrealized appreciation recognized as of the acquisition date; and (iii) the cash consideration paid and assumed liabilities, if applicable, to acquire the interests of other equity owners of the project. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives. The costs of building and improvements are generally depreciated using the straight-line method based on a useful life of 40 years.

All of the Company’s acquisitions have been asset acquisitions and the Company expects that the majority of future self-storage facility acquisitions will be considered asset acquisitions, however, the Company will continue to evaluate each future acquisition using Accounting Standards Update (“ASU”) 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business to determine whether accounting for a business combination or asset acquisition applies.

When facilities are acquired, the cost is allocated to the tangible and intangible assets acquired and liabilities assumed based on relative fair values. Allocations to the individual assets and liabilities are based upon their relative fair values as estimated by management.

In allocating the purchase price for an acquisition, the Company determines whether the acquisition includes intangible assets or liabilities. The Company allocates a portion of the cost to an intangible asset attributable to the value of in-place leases. This intangible asset is amortized to expense over the expected remaining term of the respective leases, which is generally one year. Substantially all the leases in place at acquired facilities are at market rates, as the majority of the leases are month-to-month contracts. Accordingly, to date, no portion of the basis for an acquired property has been allocated to above- or below-market lease intangibles. To date, no intangible asset has been recorded for the value of customer relationships, because the Company does not have any concentrations of significant customers and the average customer turnover is frequent.

The Company evaluates long-lived assets for impairment when events and circumstances, such as declines in occupancy and operating results, indicate that there may be an impairment. The carrying value of these long-lived assets is compared to the undiscounted future net operating cash flows, plus a terminal value, attributable to the assets to determine if the facility’s basis is recoverable. If an asset’s basis is not considered recoverable, an impairment loss is recorded to the extent the net carrying value of the asset exceeds the fair value. The impairment loss recognized equals the excess of net carrying value over the related fair value of the asset. There were no impairment losses recognized in accordance with these procedures during the three or ~~six~~nine months ended ~~June~~September 30, 2020 or during the year ended December 31, 2019.

Cash and Cash Equivalents

Cash, investments in money market accounts and certificates of deposit with original maturities of three months or less are considered to be cash equivalents. The Company places its cash and cash equivalents primarily with three financial institutions, and the balance at two of the financial institutions exceeds the Federal Deposit Insurance Corporation insurance limit.

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Other Loans

The Company’s other loans balance primarily includes principal balances for certain revolving loan agreements, short-term mortgage loans, and land loans made by the Company in situations where it was determined that making such loans would benefit the Company’s primary business. These loans are accounted for under the cost method, and fair value approximates cost at ~~June~~September 30, 2020 and December 31, 2019. None of these loans are in non-accrual status as of ~~June~~September 30, 2020 and December 31, 2019. The Company determined that no allowance for loan loss was necessary at ~~June~~September 30, 2020 and December 31, 2019.

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Fixed Assets

Fixed assets are recorded at cost and consist of furniture, office and computer equipment, and software. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets, which range from three to seven years. Prior to the Internalization, fixed assets were generally purchased by the Manager and the cost reimbursed by the Company. Maintenance and repair costs are charged to expense as incurred. Upon sale or retirement, the asset cost and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in income.

Goodwill

Goodwill represents the excess of consideration paid over the fair value of underlying identifiable net assets of businesses acquired. During the ~~six~~nine months ended ~~June~~September 30, 2020, the Company recorded $4.7 million of Goodwill related to the Internalization, and the Company has one reporting unit. Goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Subsequent to the Internalization, the Company determined that dramatically deteriorating macroeconomic conditions driven by the impact of the COVID-19 pandemic on capital markets, and specifically the Company’s market capitalization, was a triggering event for an interim goodwill impairment test. In accordance with ASC 350, Intangibles - Goodwill and Other, since the Company’s common stock is traded in an active market, the Company calculated its fair value primarily based on the Company’s market capitalization as of March 31, 2020. The fair value calculated as of March 31, 2020, was determined to be below the Company’s carrying value. As a result, the Company recorded a goodwill impairment loss of $4.7 million for the ~~six~~nine months ended ~~June~~September 30, 2020, and there is no Goodwill as of ~~June~~September 30, 2020 or December 31, 2019.

Revenue Recognition

Interest income is recognized as earned on a simple interest basis and is reported in interest income from investments in the Consolidated Statements of Operations. Accrual of interest will be discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. The Company will recognize income on impaired loans when they are placed into non-accrual status on a cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company will not recognize income on such loans.

The Company’s loan origination fees are accreted into interest income over the term of the investment using the effective yield method.

The operations of the self-storage real estate owned are managed by a third-party self-storage management company. All rental leases are operating leases, and rental income is recognized in accordance with the terms of the leases, which generally are month to month.

Debt Issuance Costs

Costs related to the issuance of a debt instrument are deferred and amortized as interest expense over the estimated life of the related debt instrument using the straight-line method, which approximates the effective interest method. If a debt instrument is repurchased, modified, or exchanged prior to its original maturity date, the Company evaluates both the unamortized balance of debt issuance costs as well as any new debt issuance costs, including third party fees, to determine if the costs should be written off to interest expense or, if significant, included in “loss on modification or extinguishment of debt” in the Consolidated Statements of Operations. Debt issuance costs related to the term loans are presented in the Consolidated Balance Sheets as a deduction from the carrying amount of the principal balance. Debt issuance costs related to the revolving Credit Facility are presented in the Consolidated Balance Sheets as Deferred Financing Costs.

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Internalization Expenses

As described in Note 1, Organization and Formation, the Internalization was completed on February 20, 2020. The total amount of consideration for the Internalization was $42.1 million, as described in Note 1 and shown in the table below:


OC Units issuable as Initial Consideration⁽¹⁾:	$	33,538
OC Units contingently issuable as Earn Out Consideration⁽²⁾:		8,554
	$	42,092

(1)

Represents the fair value of 1,794,872 OC Units issuable as the Initial Consideration based upon the Company's closing stock price as of February 20, 2020 of $20.31 adjusted for an 8% marketability discount for the fair value impact of the one year holding period and annual limits on selling of OC Units.

(2)

Represents the fair value of 769,231 OC Units issuable as the Earn Out Consideration contingent upon (1) the Company’s common stock trading at or above a daily volume weighted price of $25.00 per share for at least 30 days during any trailing 365-day period prior to December 31, 2024, or (2) a change of control of the Company that is approved by the board of directors and stockholders of the Company occurring prior to December 31, 2024, based on a Black-Scholes Merton valuation of the OC Units. The significant assumptions utilized in the valuation of the Earn Out Consideration were a risk-free rate of 1.41%, a dividend yield of 4.53%, volatility of 27%, and a marketability discount of 8%.

In accordance with ASC 805, Business Combinations, the portion of the Internalization transaction price attributed to the settlement of a preexisting contractual relationship (the Management Agreement) of $37.4 million was recognized immediately as internalization expenses for the ~~six~~nine months ended ~~June~~September 30, 2020 and the $4.7 million of excess consideration paid over the fair value of underlying identifiable net assets of businesses acquired was recorded as Goodwill. As part of the Internalization, the Company also incurred nil and $0.4 million of acquisition-related expenses for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. These acquisition-related expenses were recognized in earnings immediately and are included within Internalization expenses.

The table below presents the revenue and net income of the business combination on a pro forma basis as if the Internalization occurred on January 1, 2019. As the Manager’s historical revenues were entirely comprised of amounts received from the Company for management services performed by the Manager and intercompany amounts are eliminated in consolidation, there was no pro forma adjustment to the Company’s revenue for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019. Pro forma net loss for the ~~six~~nine months ended ~~June~~September 30, 2020 includes the elimination of non-recurring expenses for the settlement of the pre-existing contractual agreement of $37.4 million and acquisition related expenses of $0.4 million. Pro forma adjustments for the periods ended ~~June~~September 30, 2020 and 2019, also include the impact of additional compensation expense for employees previously employed by the Manager and the elimination of fees paid to the Manager. The pro forma results are not necessarily indicative of the results which actually would have occurred if the business combination had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods.


	~~Six~~Nine Months Ended ~~June~~September 30, 2020		~~Six~~Nine Months Ended ~~June~~September 30, 2019
Pro forma total revenue (unaudited)	$	2335,~~364~~242	$	2032,~~716~~965
Pro forma net income (loss) allocable to common shares (unaudited)		(2535,~~371~~236)		1825,~~621~~882

Offering and Registration Costs

Offering and registration costs represent underwriting discounts and commissions, professional fees, fees paid to various regulatory agencies, and other costs incurred in connection with the registration and sale of the Company’s securities. Offering and registration costs incurred in connection with the Company’s stock offerings are reflected as a reduction of additional paid-in capital.

Income Taxes

The Company has elected to be taxed as a REIT and to comply with the related provisions of the Code. Accordingly, the Company will generally not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met. To qualify as a REIT, the Company must annually distribute at least 90% of its REIT taxable income to its stockholders and meet certain other requirements.

Earnings per Share (“EPS”)

Basic EPS includes only the weighted average number of common shares outstanding during the period. Diluted EPS includes the weighted average number of common shares and the dilutive effect of restricted stock, accrued stock dividends, and redeemable OC Units when such instruments are dilutive.

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All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are treated as participating in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted EPS must be applied. Beginning on the first anniversary of the date of issuance, OC Units may be tendered for redemption by the holder thereof for cash per OC Unit equal to the then-current market price of the Company’s common stock, or at the Company’s option, shares of the Company’s common stock on a one-for-one basis and the income allocable to such OC Units is allocated on this same basis and reflected as non-controlling interests in the accompanying consolidated financial statements. The Company’s diluted earnings per share represents the more dilutive of the treasury stock or two-class methods and OC Units are included in dilutive earnings per share calculations when the units are dilutive to earnings per share. Net losses are not attributed to participating securities and net loss attributable to common shareholders is adjusted for dividends declared on unvested restricted shares in periods with a net loss. Diluted earnings per share includes contingently issuable OC Units only if the market condition would have been met had the end of the reporting period been the measurement period. Stock awards with a market condition do not participate in nonforfeitable rights to dividends and are excluded from the calculation of diluted EPS.

Segment Reporting

The Company does not evaluate performance on a relationship specific or transactional basis and does not distinguish its principal business or group its operations on a geographical basis for purposes of measuring performance. Accordingly, the Company believes it has a single operating segment for reporting purposes in accordance with GAAP.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. This guidance is effective for smaller reporting companies for fiscal years and for interim periods within those fiscal years, beginning after December 15, 2022, with early adoption being allowed as of the fiscal years beginning after December 15, 2018. The Company is currently assessing the impact this new accounting guidance will have on its consolidated financial statements; however, the Company does not expect the new accounting guidance to have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in this ASU is optional and may be elected over time as reference rate reform activities occur. For the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

Consolidated Statements of Cash Flows - Supplemental Disclosures

The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows:


	~~Six~~Nine months ended ~~June~~September 30,
	2020		2019
Supplemental disclosure of cash flow information:
Interest paid	$	46,~~851~~986	$	13,~~675~~359

Supplemental disclosure of non-cash investing and financing activities:
Stock dividend paid on preferred stock	$	46,~~250~~375	$	46,~~250~~375
Dividends declared, but not paid, on preferred stock		5,~~245~~309		5,~~094~~157
Dividends declared, but not paid, on common stock		~~5,351~~—		7,~~754~~783
Dividends declared, but not paid, on OC Units		~~433~~—		—
Reclassification of development property investments to self-storage real estate owned		~~205~~255,~~153~~495		8125,~~351~~715
Reclassification of other assets and liabilities to self-storage real estate owned		1,~~504~~074		—
Other loans paid off with issuance of development property investments		—		~~247~~404
OC Units issued for self-storage real estate owned acquisitions		67,~~693~~978		—
OC Units issued for Internalization		33,538		—
Contingent consideration for Internalization		8,554		—

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3. SELF-STORAGE INVESTMENT PORTFOLIO

The Company’s self-storage investments at ~~June~~September 30, 2020 consisted of the following:

Investments reported at fair value

●Development Property Investments - The Company had 3429 investments totaling an aggregate committed principal amount of approximately $~~371~~314.5 million to finance the ground-up construction of, or conversion of existing buildings into, self-storage facilities. Each development property investment is generally funded as the developer constructs the project and is typically comprised of a first mortgage and a 49.9% Profits Interest to the Company. The loans are secured by first priority mortgages or deeds of trust on the projects and, in certain cases, first priority security interests in the membership interests of the owners of the projects. Loans comprising development property investments are non-recourse with customary carve-outs and subject to completion guaranties, are interest-only with a fixed interest rate of typically 6.9% per annum and typically have a term of 72 months. As of ~~June~~September 30, 2020, five of the development property investments totaling $55.0 million of aggregate committed amount were structured as preferred equity investments, which will be subordinate to a first mortgage loan procured or expected to be procured from a third party lender for 60% to 70% of the cost of the project.

The Company has commenced foreclosure proceedings against the borrower of its $14.3 million Philadelphia development property investment because the borrower has defaulted under the loan by, among other things, failing to pay the general contractor. The total unpaid balance of the loan, before considering protective advances and unpaid interest, is $11.5 million. As the investment was a collateral dependent loan, the Company considered the fair value of the collateral when determining the fair value of the investment as of ~~June~~September 30, 2020.

The Company has also commenced foreclosure proceedings against the borrower of its $14.8 million Houston development property because the borrower has defaulted under the loan by, among other things, failing to pay interest and operating expenses with respect to the property. The total unpaid balance of the loan, before considering protective advances and unpaid interest, is $14.8 million. As the investment was a collateral dependent loan, the Company considered the fair value of the collateral when determining the fair value of the investment as of ~~June~~September 30, 2020.

As of ~~June~~September 30, 2020, the aggregate committed principal amount of the Company’s development property investments was approximately $~~371~~314.5 million and outstanding principal was $~~334~~283.03 million, as described in more detail in the table below (dollars in thousands):


	Metropolitan	Total				Remaining
	Statistical Area	Investment		Funded		Unfunded
Closing Date	("MSA")	Commitment		Investment (1)		Commitment		Fair Value
Development property investments (includes a profits interest):
7/2/2015	Milwaukee (2)(7)	$	7,650	$	7,648	$	2	$	8,~~567~~316
10/27/2015	Austin (2)(7)		8,658		8,~~137~~184		~~521~~474		78,~~962~~071
2/24/2017	~~Orlando~~New 3Orleans (2)(7)		812,~~056~~549		812,~~002~~371		54178		1015,~~000~~017
2/24/2017	New Orleans (2)(7)		12,549		12,253		296		14,736
3/1/2017	Houston (2)(9)		14,825		14,825		—		15,661
4/20/2017	Denver 1 (2)(7)		9,806		9,806		—		10,623
5/2/2017	Tampa 2 (2)(7)		8,091		7,984		107		9,444
4/20/2017	Denver 2 (2)(7)		11,164		11,010		154		11,055
5/19/2017	Tampa 3 (2)(7)		9,224		8,618		606		10,561
5/2/2017	Tampa 2 (2)(7)		8,091		7,911		180		9,314
6/12/2017	Tampa 4 (2)(7)		10,266		10,014		252		13,317
5/19/2017	Tampa 3 (2)(7)		9,224		8,568		656		10,375
6/29/2017	Boston 1 (2)(6)		—		—		—		3,850
6/12/2017	Tampa 4 (2)(7)		10,266		9,956		310		13,137
8/30/2017	Orlando 4 (2)(7)		9,037		8,329		708		10,376
6/29/2017	Boston 1 (2)(6)		—		—		—		3,743
9/14/2017	Los Angeles 1		28,750		10,923		17,827		11,143
6/30/2017	New York City 2 (2)(4)		27,982		29,912		160		29,676
9/14/2017	Miami 1 (3)		14,657		14,463		194		15,657
8/30/2017	Orlando 4 (2)(7)		9,037		8,224		813		10,103
10/12/2017	Miami 2 (4)(10)		—		1,661		—		1,459
9/14/2017	Los Angeles 1		28,750		10,663		18,087		10,763
10/30/2017	New York City 3 (4)(10)		—		8,261		—		7,916
9/14/2017	Miami 1 (3)		14,657		14,528		129		15,653
11/16/2017	Miami 3 (2)(4)(7)		20,168		19,093		1,745		21,914
10/12/2017	Miami 2 (4)(10)		—		1,613		—		1,397
12/15/2017	New York City 4 (2)(7)		10,591		9,747		844		11,435
10/30/2017	New York City 3 (4)(10)		—		7,925		—		7,511
12/28/2017	New York City 5 (2)		16,073		16,064		9		17,646
11/16/2017	Miami 3 (2)(4)		20,168		16,908		3,797		19,433
3/30/2018	Philadelphia (2)(4)(8)		14,338		11,536		3,264		11,313
12/15/2017	New York City 4 (2)		10,591		8,966		1,625		10,566
5/1/2018	Miami 9 (4)(10)		—		3,877		—		3,639
12/27/2017	Boston 3 (10)(11)		—		2,854		—		2,721
5/15/2018	Atlanta 7 (2)(7)		9,418		8,502		916		9,948
12/28/2017	New York City 5 (2)		16,073		15,407		666		16,605
5/23/2018	Kansas City (2)(7)		9,968		8,754		1,214		10,489
6/7/2018	Orlando 5 (2)		12,969		12,057		912		13,885

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3/30/2018	Philadelphia (2)(4)(8)		14,338		11,536		3,264		11,313
11/16/2018	Baltimore 2 (10)		—		785		—		690
5/1/2018	Miami 9 (4)(10)		—		3,765		—		3,487
3/1/2019	New York City 6		18,796		4,297		14,499		4,311
5/15/2018	Atlanta 7 (2)(7)		9,418		8,355		1,063		9,539
4/18/2019	New York City 7 (3)(4)		23,462		15,781		8,050		17,374
5/23/2018	Kansas City (2)(7)		9,968		8,603		1,365		10,103
		$	259,490	$	223,774	$	51,801	$	253,432
6/7/2018	Orlando 5 (2)		12,969		11,757		1,212		13,310
11/16/2018	Baltimore 2 (10)		—		778		—		677
3/1/2019	New York City 6		18,796		3,637		15,159		3,573
4/18/2019	New York City 7 (3)(4)		23,462		11,940		11,791		12,161
		$	316,498	$	275,487	$	61,304	$	303,764
Preferred equity investments:
6/12/2018	Los Angeles 2 (3)(5)		9,298		9,~~493~~659		649		910,~~799~~384
3/15/2019	Stamford (2)(5)		2,904		3,~~168~~222		—		5,~~288~~479
5/8/2019	New York City 8 (5)		21,000		2223,~~682~~073		—		2223,~~873~~492
7/11/2019	New York City 9 (5)		13,095		1314,~~976~~218		—		1314,~~861~~177
8/21/2019	New York City 10 (5)		8,674		9,~~190~~346		—		9,~~103~~290
		$	54,971	$	5859,~~509~~518	$	649	$	6062,~~924~~822

Total investments reported at fair value		$	~~371~~314,~~469~~461	$	~~333~~283,~~996~~292	$	6152,~~953~~450	$	~~364~~316,~~688~~254

(1)Represents principal balance of loan gross of origination fees. The principal balance includes interest accrued on the investment.

(2)Construction at the facility was substantially complete and/or certificate of occupancy had been received as of ~~June~~September 30, 2020. See Note 4, Fair Value of Financial Instruments, for information regarding recognition of entrepreneurial profit.

(3)Facility had achieved at least 40% construction completion but construction was not considered substantially complete as of ~~June~~September 30, 2020. See Note 4, Fair Value of Financial Instruments, for information regarding recognition of entrepreneurial profit.

(4)These investments contain a higher loan-to-cost (“LTC”) ratio and a higher interest rate, some of which interest is payment-in-kind PIK interest. The PIK interest, computed at the contractual rate specified in each debt agreement, is periodically added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. The funded amount of these investments include PIK interest accrued. These PIK interest amounts are not included in the commitment amount for each investment.

(5)A traditional bank has or is expected to provide 60-70% of the total cost through a first mortgage construction loan. Of the remaining 30-40% of costs required to complete the project, the Company will provide 90% through a preferred equity investment, pursuant to which the Company will receive a preferred return on its investment of 6.9% per annum that will be paid out of future cash flows of the underlying facility, a 1% transaction fee and a 49.9% Profits Interest. The funded amount of these investments include interest accrued on the preferred equity investment. These interest amounts are not included in the commitment amount for each investment.

(6)The Company’s loan was repaid in full through a refinancing initiated by the Company’s partner. The investment represents the Company’s 49.9% Profits Interest which was retained during the transaction.

(7)As of ~~June~~September 30, 2020, this investment was pledged as collateral to the Company’s Credit Facility.

(8)The Company has commenced foreclosure proceedings against the borrower of its $14.3 million Philadelphia development property investment because it has defaulted under the loan by, among other things, failing to pay the general contractor. The total unpaid balance of the loan is $11.5 million. In addition to its development property investment, the Company has funded protective advances and recorded receivables related to accrued interest totaling $4.5 million within “Prepaid expenses and other assets” in its Consolidated Balance Sheets. As the investment was a collateral dependent loan, the Company considered the fair value of the collateral when determining the fair value of the investment and the collectability of the related protective advances and interest receivables as of ~~June~~September 30, 2020.

(9)The Company has commenced foreclosure proceedings against the borrower of its $14.8 million Houston development property because the borrower has defaulted under the loan by, among other things, failing to pay interest and operating expenses with respect to the property. The total unpaid balance of the loan is $14.8 million. In addition to its development property investment, the Company has funded protective advances and recorded receivables related to accrued interest totaling $1.58 million within “Prepaid expenses and other assets” in its Consolidated Balance Sheets. As the investment was a collateral dependent loan, the Company considered the fair value of the collateral when determining the fair value of the investment and the collectability of the related protective advances and interest receivables as of ~~June~~September 30, 2020.

(10)

The Company has re-assessed these development property investments for which either development or construction has not yet commenced and communicated our intent to forgo those projects with the respective developers. The Company and its respective developer partners on these investments are in active dialogues concerning the repayment of its outstanding principal along with any current and future accrued interest.

~~(11) The Company’s loan was repaid in full subsequent to June 30, 2020.~~23

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The following table provides a reconciliation of the funded principal to the fair market value of investments at ~~June~~September 30, 2020:



Funded principal	$	~~333~~283,~~996~~292
Adjustments:
Unamortized origination and other fees		(3,~~972~~292)
Net unrealized gain (loss) on investments		3436,~~748~~340
Other		(8486)
Fair value of investments	$	~~364~~316,~~688~~254

As of December 31, 2019, the aggregate committed principal amount of the Company’s development property investments was approximately $608.9 million and outstanding principal was $478.6 million, as described in more detail in the table below (dollars in thousands):


	Metropolitan	Total				Remaining
	Statistical Area	Investment		Funded		Unfunded
Closing Date	("MSA")	Commitment		Investment (1)		Commitment		Fair Value
Development property investments (includes a profits interest):
7/2/2015	Milwaukee (2)(7)	$	7,650	$	7,648	$	2	$	8,884
8/14/2015	Raleigh (2)(7)(10)		8,792		8,789		3		8,593
10/27/2015	Austin (2)(7)		8,658		8,136		522		8,099
9/20/2016	Charlotte 2 (2)(7)(10)		12,888		12,677		211		13,984
1/18/2017	Atlanta 3 (2)(7)(10)		14,115		13,297		818		16,130
1/31/2017	Atlanta 4 (2)(7)(10)		13,678		13,497		181		17,082
2/24/2017	Orlando 3 (2)(7)(10)		8,056		7,767		289		9,725
2/24/2017	New Orleans (2)(7)		12,549		12,021		528		14,504
2/27/2017	Atlanta 5 (2)(7)(10)		17,492		17,492		—		19,970
3/1/2017	Fort Lauderdale (2)(7)(10)		9,952		9,383		569		13,635
3/1/2017	Houston (2)(9)		14,825		14,825		—		17,820
4/14/2017	Louisville 1 (2)(7)(10)		8,523		7,552		971		9,550
4/20/2017	Denver 1 (2)(7)(10)		9,806		9,616		190		10,947
4/20/2017	Denver 2 (2)(7)		11,164		11,009		155		12,383
5/2/2017	Atlanta 6 (2)(7)(10)		12,543		12,025		518		14,744
5/2/2017	Tampa 2 (2)(7)		8,091		7,644		447		9,196
5/19/2017	Tampa 3 (2)(7)		9,224		8,326		898		10,086
6/12/2017	Tampa 4 (2)(7)		10,266		9,614		652		12,673
6/19/2017	Baltimore 1 (2)(4)(7)(10)		10,775		11,010		274		13,581
6/28/2017	Knoxville (2)(7)(10)		9,115		8,628		487		10,355
6/29/2017	Boston 1 (2)(6)		—		—		—		3,361
6/30/2017	New York City 2 (2)(4)(10)		27,982		28,974		665		31,047
7/27/2017	Jacksonville 3 (2)(7)(10)		8,096		7,751		345		10,129
8/30/2017	Orlando 4 (2)(7)		9,037		8,107		930		10,251
9/14/2017	Los Angeles 1		28,750		10,157		18,593		10,347
9/14/2017	Miami 1 (3)		14,657		12,618		2,039		13,373
9/28/2017	Louisville 2 (2)(7)(10)		9,940		9,530		410		11,688
10/12/2017	Miami 2 (4)		9,459		1,494		8,045		1,280
10/30/2017	New York City 3 (4)		15,301		6,776		8,822		6,383
11/16/2017	Miami 3 (3)(4)		20,168		12,086		8,413		12,898
11/21/2017	Minneapolis 1 (2)(7)(10)		12,674		10,684		1,990		12,290
12/1/2017	Boston 2 (2)(7)(10)		8,771		7,918		853		10,024
12/15/2017	New York City 4 (3)		10,591		6,705		3,886		7,528
12/27/2017	Boston 3		10,174		2,757		7,417		2,674
12/28/2017	New York City 5 (2)		16,073		13,817		2,256		16,373
2/8/2018	Minneapolis 2 (2)(7)(10))		10,543		9,904		639		11,763
3/30/2018	Philadelphia (2)(4)(8)		14,338		11,536		3,263		11,807
4/6/2018	Minneapolis 3 (2)(7)(10)		12,883		10,337		2,546		12,043
5/1/2018	Miami 9 (4)		12,421		3,560		9,006		3,427
5/15/2018	Atlanta 7 (3)		9,418		6,563		2,855		7,683
5/23/2018	Kansas City (2)		9,968		8,235		1,733		9,663

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6/7/2018	Orlando 5 ⁽²⁾		12,969		10,340		2,629		11,780
11/16/2018	Baltimore 2		9,247		757		8,490		709
3/1/2019	New York City 6		18,796		3,168		15,628		3,122
4/18/2019	New York City 7 ⁽⁴⁾		23,462		7,304		16,287		7,067
		$	553,880	$	422,034	$	135,455	$	490,651
Preferred equity investments:
6/12/2018	Los Angeles 2 ⁽⁵⁾		9,298		9,173		649		9,403
3/15/2019	Stamford ⁽²⁾⁽⁵⁾		2,904		3,064		—		4,952
5/8/2019	New York City 8 ⁽⁵⁾		21,000		21,945		—		22,359
7/11/2019	New York City 9 ⁽⁵⁾		13,095		13,526		—		13,489
8/21/2019	New York City 10 ⁽⁵⁾		8,674		8,892		—		8,830
		$	54,971	$	56,600	$	649	$	59,033

Total investments reported at fair value		$	608,851	$	478,634	$	136,104	$	549,684

(1)Represents principal balance of loan gross of origination fees. The principal balance includes interest accrued on the investment.

(2)Construction at the facility was substantially complete and/or certificate of occupancy had been received as of December 31, 2019. See Note 4, Fair Value of Financial Instruments, for information regarding recognition of entrepreneurial profit.

(3)Facility had achieved at least 40% construction completion but construction was not considered substantially complete as of December 31, 2019. See Note 4, Fair Value of Financial Instruments, for information regarding recognition of entrepreneurial profit.

(7)As of December 31, 2019, this investment was pledged as collateral to the Company’s Credit Facility.

(9)The Company has commenced foreclosure proceedings against the borrower of its $14.8 million Houston development property because the borrower has defaulted under the loan by, among other things, failing to pay interest and operating expenses with respect to the property. The total unpaid balance of the loan is $14.8 million. In addition to its development property investment, the Company has funded protective advances and recorded receivables related to accrued interest totaling $0.9 million within “Prepaid expenses and other assets” in its Consolidated Balance Sheets. As the investment was a collateral dependent loan, the Company considered the fair value of the collateral when determining the fair value of the investment and the collectability of the related protective advances and interest receivables as of December 31, 2019.

(10) During the ~~six~~nine months ended ~~June~~September 30, 2020, the Company purchased its partner’s 50.1% Profits Interest in this investment.

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The following table provides a reconciliation of the funded principal to the fair market value of investments at December 31, 2019:



Funded principal	$	478,634
Adjustments:
Unamortized origination and other fees		(5,633)
Net unrealized gain (loss) on investments		76,767
Other		(84)
Fair value of investments	$	549,684

The Company has elected the fair value option of accounting for all of its investment portfolio investments in order to provide stockholders and others who rely on the Company’s financial statements with a more complete and accurate understanding of the Company’s economic performance, including its revenues and value inherent in its equity participation in development projects. See Note 4, Fair Value of Financial Instruments, for additional disclosure on the valuation methodology and significant assumptions.

No loans, with the exception of the $14.3 million Philadelphia and $14.8 Houston development property investments, were in non-accrual status as of ~~June~~September 30, 2020. No loans, with the exception of the $14.8 Houston development property investment, were in non-accrual status as of December 31, 2019.

All of the Company’s development property investments with a Profits Interest would have been accounted for under the equity method had the Company not elected the fair value option. For these investments with a Profits Interest, the assets and liabilities of the equity method investees approximated $~~433~~377.79 million and $~~392~~341.47 million, respectively, at ~~June~~September 30, 2020 and approximated $592.3 million and $531.7 million, respectively, at December 31, 2019. These investees had revenues of approximately $21.09 million and $34.67 million and operating expenses of approximately $1.81 million and $32.37 million for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. These investees had revenues of approximately $2.63 million and $4.45 million and operating expenses of approximately $2.87 million and $56.04 million for the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively. During the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, no individual investment comprised more than 20% of the Company’s net income (loss).

For three and sixteen of the Company’s development property investments with a Profits Interest as of ~~June~~September 30, 2020 and December 31, 2019, respectively, an investor has an option to put its interest to the Company upon the event of default of the underlying property loans. The put, if exercised, requires the Company to purchase the member’s interest at the original purchase price plus a yield of 4.5% on such purchase price. The Company concluded that the likelihood of loss is remote and assigned no value to these put provisions as of ~~June~~September 30, 2020 and December 31, 2019.

Investments reported at cost (Self-Storage Real Estate Owned)

2020 Activity

On February 10, 2020, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Charlotte II, Knoxville, Louisville 1, Atlanta 3, Atlanta 5 and Atlanta 6 development property investments with a Profits Interest. On February 14, 2020, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Fort Lauderdale and Boston 2 development property investments with a Profits Interest. On February 21, 2020, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Atlanta 4 development property investment with a Profits Interest. On April 10, 2020 and May 6, 2020, respectively, the Company purchased 100% of the Class A membership units of the limited liability companies that owned the Raleigh and Jacksonville 3 development property investments with a Profits Interest. Additionally, on June 30, 2020, the Company purchased 100% of the Class A membership units of the limited liability companies that owned the Baltimore 1, Louisville 2, Minneapolis 1, Minneapolis 2, and Minneapolis 3 development property investments with a Profits Interest. On July 15, 2020, the Company acquired 100% of the Class A membership units of the LLC that owned the New York City 2 development property investment. On July 31, 2020, the Company acquired 100% of the Class A membership units of the LLCs that own the Orlando 3 and Denver 1 development property investments. Accordingly, as of the dates of acquisition, the Company wholly owns and consolidates these investments in the accompanying consolidated financial statements. The acquisition date basis of these investments of $~~244~~296.71 million is primarily comprised of the development property investment at fair value of $~~205~~255.25 million, the cash consideration of $30.0 million, which is inclusive of paid and accrued transaction costs, and OC Units valued at $68.70 million. The Company allocated the basis based on the relative fair value of the tangible and intangible assets acquired. Intangible assets consisted of in-place leases, which aggregated to $5.7.5 million at the time of the acquisitions. The estimated life of these in-place leases was 12 months.

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2019 Activity

On March 8, 2019, the Company purchased 100% of the Class A membership units of the limited liability company that owned the New Haven development property investment with a Profits Interest. On July 2, 2019, the Company acquired all of the interests in the entity that owned the property securing the Miami construction loan. On August 16, 2019, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Jacksonville 2 development property investment with a Profits Interest. On September 17, 2019, the Company purchased 100% of the Class A membership units of the limited liability companies that owned the Miami 4, Miami 5, Miami 6, Miami 7 and Miami 8 bridge investments with a Profits Interest. Accordingly, as of the dates of acquisition, the Company wholly owns and consolidates these investments in the accompanying consolidated financial statements. The acquisition date basis of these investments of $138.9 million is primarily comprised of the development property investment or bridge investment at fair value of $125.7 million and the cash consideration of $10.5 million, which is inclusive of paid and accrued transaction costs. The Company allocated the basis based on the relative fair value of the tangible and intangible assets acquired. Intangible assets consisted of in-place leases, which aggregated to $5.1 million at the time of the acquisitions. The estimated life of these in-place leases was 12 months.

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A membership units of the limited liability company that owned the Jacksonville 2 development property investment with a Profits Interest. On September 17, 2019, the Company purchased 100% of the Class A membership units of the limited liability companies that owned the Miami 4, Miami 5, Miami 6, Miami 7 and Miami 8 bridge investments with a Profits Interest. Accordingly, as of the dates of acquisition, the Company wholly owns and consolidates these investments in the accompanying consolidated financial statements. The acquisition date basis of these investments of $138.9 million is primarily comprised of the development property investment or bridge investment at fair value of $125.7 million and the cash consideration of $10.5 million, which is inclusive of paid and accrued transaction costs. The Company allocated the basis based on the relative fair value of the tangible and intangible assets acquired. Intangible assets consisted of in-place leases, which aggregated to $5.1 million at the time of the acquisitions. The estimated life of these in-place leases was 12 months.

As of December 31, 2019, the basis of the Miami investment acquired on July 2, 2019 was presented in land, $3.9 million, and construction-in-progress, $16.5 million within Self-storage real estate owned, net, in the table below. The facility was placed into service on February 10, 2020.

The Company evaluated the purchases under ASU 2017-01 and concluded that the transactions consisted of a single identifiable asset or a group of similar identifiable assets that represent substantially all of the fair value of the gross assets acquired. Therefore, these transactions do not constitute the purchase of a business and have been treated as asset acquisitions. In accordance with ASU 2017-01, as of the respective acquisition dates, the Company’s basis in the self-storage real estate owned is recorded at cost (generally equal to the cash consideration paid, assumed liabilities, if applicable, and the funded loan balance, net of unamortized origination fees), plus unrealized gains recorded at the date of acquisition. The allocation to the basis of the assets acquired is based on their relative fair values.

The following table shows the components of the real estate investments as presented in the Company’s accompanying Consolidated Balance Sheets as of ~~June~~September 30, 2020 and December 31, 2019:



	~~June~~September 30, 2020		December 31, 2019
Land	$	6572,~~828~~262	$	29,430
Building and improvements		~~405~~448,~~646~~796		186,295
In-place leases		1416,~~286~~128		8,629
Property equipment		~~186~~217		122
Construction-in-progress		—		16,460
Accumulated depreciation and amortization		(1723,~~996~~410)		(10,092)
Self-storage real estate owned, net	$	~~467~~513,~~950~~993	$	230,844

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

Estimates inherent in the determination of fair value inevitably involve assumptions about future events and actual results may differ from those estimates. The COVID-19 pandemic has adversely impacted and is likely to further adversely impact the self-storage industry, generally, and the Company’s operations and value, specifically. Specific negative impacts could include lateness and, ultimately, uncollectibility of an increased number of rental payments, the length of time required to lease-up recently-constructed properties and the ability to increase rental rates, all of which negatively impact revenue from properties and/or the value of our investments. The full extent to which the pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition will depend on future developments that are difficult to predict. These developments include, but are not limited to, the duration and extent of continued spread of the novel coronavirus, the severity of the virus, the actions to contain the virus or address its impact, governmental actions to contain the spread of the virus and to respond to economic deterioration caused by the pandemic (including rapidly accelerating unemployment rates, business bankruptcies, dislocation of equity and debt markets and a dramatic decline in consumer spending and gross domestic product), and how quickly and to what extent normal economic and operating conditions can resume. Management has considered the foregoing factors and the impact of the pandemic, generally, on the economy, the self-storage industry and the Company and adjusted certain estimates, where relevant, used in the preparation of its fair value measurements.

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The fair value option under ASC 825-10 allows companies to elect to report selected financial assets and liabilities at fair value. The Company has elected the fair value option of accounting for its development property investments in order to provide stockholders and others who rely on the Company’s financial statements with a more complete and accurate understanding of the Company’s economic performance, including its revenues and value inherent in its equity participation in self-storage development projects.

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The Company applies ASC 820, Fair Value Measurement (“ASC 820”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosure of fair value measurements. ASC 820 defines fair value as the price that would be received for an investment in an orderly transaction between market participants on the measurement date. ASC 820 requires the Company to assume that the investment is sold in its principal market to market participants or, in the absence of a principal market, the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with ASC 820, the Company considers its principal market as the market for the purchase and sale of self-storage properties, which the Company believes would be the most likely market for the Company’s loan and equity investments given the nature of the collateral securing such loans and the types of borrowers. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820, these inputs are summarized in the three broad levels listed below:

Level 1-

Quoted prices for identical assets or liabilities in an active market.

Level 2-

Financial assets and liabilities whose values are based on the following: (i) Quoted prices for similar assets or liabilities in active markets; (ii) Quoted prices for identical or similar assets or liabilities in non-active markets; (iii) Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.

Level 3-

Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.

Financial assets and liabilities that are not measured at fair value on a recurring basis are cash, other loans, receivables, the secured revolving credit facility, term loans and payables and their carrying values approximate their fair values due to their short-term nature or due to a variable interest rate. Cash, receivables, and payables are categorized as Level 1 instruments in the measurement of fair value. Other loans, the secured revolving credit facility and term loans are categorized as Level 2 instruments in the measurement of fair value as the fair values of these investments are determined using a discounted cash flow model with inputs from third-party pricing sources and similar instruments.

As discussed in Note 8, Risk Management and Use of Financial Instruments, interest rate swaps and interest rate caps are used to manage interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative and these instruments are categorized in Level 2 of the fair value hierarchy. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps and interest rate caps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

Credit valuation adjustments are incorporated to appropriately reflect the Company's and the counterparty's respective nonperformance risk in the fair value measurements. In adjusting the fair value of the derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

The following table summarizes the instruments measured at fair value on a recurring basis categorized in Level 3 of the fair value hierarchy and the valuation techniques and inputs used to measure their fair value.

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Instrument	Valuation technique and assumptions	Hierarchy classification

Development property investments with a profits interest	Valuations are determined using an Income Approach analysis, using the discounted cash flow method model, capturing the prepayment penalty / call price schedule as applicable. The valuation models are calibrated to the total investment net drawn amount as of the issuance date factoring in the value of the Profits Interests. Typically, the calibration is done on an investment level basis. In certain instances, the Company may acquire a portfolio of investments in which case the calibration is done on an aggregate basis to the aggregate net drawn amount as of the date of issuance. An option-pricing method (OPM) framework is utilized to calculate the value of the Profits Interests. At certain stages in the investment's life cycle (as described subsequently), the OPM requires an enterprise value derived from fair value of the underlying real estate project. The fair value of the underlying real estate project is determined using either a discounted cash flows model or direct capitalization approach.	Level 3

The Company’s development property investments are valued using two different valuation techniques. The first valuation technique is an income approach analysis of the debt instrument components of the Company’s investments. The second valuation technique is an OPM that is used to determine the fair value of any Profits Interests associated with an investment. The valuation models are calibrated to the total investment net drawn amount as of the issuance date factoring in the value of the Profits Interests. At the issuance date of each development property investment, generally the value of the property underlying such investment approximates the sum of the net investment drawn amount plus the developer’s equity investment. Typically the calibration is done on an investment level basis. To the extent investments are entered into on a portfolio basis, the valuation models are calibrated on an aggregate basis to the aggregate net investment proceeds using the overall implied internal rate of return using a discounted cash flow for each investment.

For development property investments with a Profits Interest, at a certain stage of construction, the OPM incorporates an adjustment to measure entrepreneurial profit. Entrepreneurial profit is a monetary return above total construction costs that provides compensation for the risk of a development project. Under this method, the value of each property is estimated based on the cost incurred to date, plus an estimated earned entrepreneurial profit. Total entrepreneurial profit is estimated as the difference between the projected value of a property at stabilization and the total development costs, including land, building improvements, and lease-up costs. Utilizing information obtained from the market coupled with the Company’s own experience, the Company has estimated that in most cases, approximately one-third of the entrepreneurial profit is earned during the construction period beginning when construction is approximately 40% complete and ending when construction is substantially complete, and approximately two-thirds of the entrepreneurial profit is earned from when construction is substantially complete through stabilization. For the ~~two~~three development property investments that were 40% complete but for which construction was not substantially complete at ~~June~~September 30, 2020, the Company has estimated the entrepreneurial profit adjustment to the enterprise value input used in the OPM to be equal to one-third of the estimated entrepreneurial profit, allocated on a straight-line basis. ~~Twenty~~Seventeen development property investments, not including the properties reported as self-storage real estate owned, had reached substantial construction completion and/or received a certificate of occupancy at ~~June~~September 30, 2020. For the Company’s development property investments at substantial construction completion, a discounted cash flow model, based on periodically updated estimates of rental rates, occupancy, occupancy trends and operating expenses, is the primary method for projecting value of a project. The Company also will consider inputs such as appraisals which differ from the developer’s equity investment, bona fide third-party offers to purchase development projects, sales of development projects, or sales of comparable properties in its markets.

Level 3 Fair Value Measurements

The following tables summarize the significant unobservable inputs the Company used to value its investments categorized within Level 3 as of ~~June~~September 30, 2020 and December 31, 2019. These tables are not intended to be all-inclusive, but instead to capture the significant unobservable inputs relevant to the Company’s determination of fair values. The significant unobservable inputs associated with the Philadelphia and Houston investments are not included as the fair value was determined based on the fair value of the underlying collateral. The fair value of the underlying collateral was determined, in part, by using a market comparable approach and an income approach based on a capitalization rate within the range provided below for capitalization rates associated with development property investments with a profits interest.

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As of June 30, 2020
As of September 30, 2020
	Unobservable Inputs
Primary Valuation			Weighted
Techniques	Input	Estimated Range	Average
Income approach analysis	Market yields/discount rate	76.2694 - 109.4416%	8.6610%
	Exit date (a)	10.0883 - 65.1994 years	3.7065 years

Option pricing model	Volatility	6867.7403 - ~~102~~96.0375%	8278.6151%
	Exit date (a)	10.0883 - 65.1994 years	3.7065 years
	Capitalization rate (b)	45.7525 - 5.50%	5.4243%
	Discount rate (b)	78.7525 - 8.50%	8.4243%

(a)	The exit dates for the development property investments are generally the estimated date of stabilization of the underlying property.

(b) Twenty~~-two~~ properties were 40% - 100% complete, thus requiring a capitalization rate and/or discount rate to derive entrepreneurial profit, which are used to derive the enterprise value input to the OPM. Capitalization rates are estimated based on current data derived from independent sources in the markets in which the Company holds investments.


As of December 31, 2019
	Unobservable Inputs
Primary Valuation			Weighted
Techniques	Input	Estimated Range	Average
Income approach analysis	Market yields/discount rate	6.89 - 10.16%	8.39%
	Exit date ^(a)	1.50 - 6.69 years	3.40 years

Option pricing model	Volatility	60.95 - 93.83%	73.24%
	Exit date ^(a)	1.50 - 6.69 years	3.40 years
	Capitalization rate ^(b)	4.75 - 5.75%	5.46%
	Discount rate^(b)	7.75 - 8.75%	8.46%

(a)	The exit dates for the development property investments are generally the estimated date of stabilization of the underlying property.

(b)

Thirty-eight properties were 40% - 100% complete, thus requiring a capitalization rate and/or discount rate to derive entrepreneurial profit, which are used to derive the enterprise value input to the OPM. Capitalization rates are estimated based on current data derived from independent sources in the markets in which the Company holds investments.

The fair value measurements are sensitive to changes in unobservable inputs. A change in those inputs to a different amount might result in a significantly higher or lower fair value measurement. The following provides a discussion of the impact of changes in each of the unobservable inputs on the fair value measurement.

Market yields - changes in market yields and discount rates, each in isolation, may change the fair value of certain of the Company’s investments. Generally, an increase in market yields or discount rates may result in a decrease in the fair value of certain of the Company’s investments. The following fluctuations in the market yields/discount rates would have had the following impact on the fair value of our investments:



	Increase (decrease) in fair value of investments
Change in market yields/discount rates (in millions)	~~June~~September 30, 2020		December 31, 2019
Up 25 basis points	$	(1.31)	$	(2.1)
Down 25 basis points, subject to a minimum yield/rate of 10 basis points		0.75		2.2

Up 50 basis points		(2.72)		(4.2)
Down 50 basis points, subject to a minimum yield/rate of 10 basis points		0.85		4.5

Capitalization rate - changes in capitalization rate, in isolation and all else equal, may change the fair value of certain of the Company’s development investments containing Profits Interests. Generally an increase in the capitalization rate assumption may

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result in a decrease in the fair value of the Company’s investments. The following fluctuations in the capitalization rates would have had the following impact on the fair value of the Company’s investments:



	Increase (decrease) in fair value of investments
Change in capitalization rates (in millions)	~~June~~September 30, 2020		December 31, 2019
Up 25 basis points	$	(64.08)	$	(10.2)
Down 25 basis points		65.62		11.1

Up 50 basis points		(129.15)		(19.4)
Down 50 basis points		1311.90		23.4

Exit date - changes in exit date, in isolation and all else equal, may change the fair value of certain of the Company’s investments that have Profits Interests. Generally, an acceleration in the exit date assumption may result in an increase in the fair value of the Company’s investments.

Volatility - changes in volatility, in isolation and all else equal, may change the fair value of certain of the Company’s investments that have Profits Interests. Generally, an increase in volatility may result in an increase in the fair value of the Profits Interests in certain of the Company’s investments.

Operating cash flow projections - changes in the operating cash flow projections of the underlying self-storage facilities, in isolation and all else equal, may change the fair value of certain of the Company’s investments that have Profits Interests. Generally, an increase in operating cash flow projections may result in an increase in the fair value of the Profits Interests in certain of the Company’s investments.

The Company also evaluates the impact of changes in instrument-specific credit risk in determining the fair value of investments. There were no significant gains or losses attributable to changes in instrument-specific credit risk in the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of the Company’s investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If the Company were required to liquidate an investment in a forced or liquidation sale, it could realize significantly less than the value at which the Company has recorded it. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned.

The following tables present changes in investments that use Level 3 inputs:



Balance at December 31, 2019	$	549,684
Realized gains		—
Unrealized losses		(105,~~170~~630)
Fundings of principal and change in unamortized origination fees		1926,~~090~~354
Repayments of loans		—(13,878)
Payment-in-kind interest		1115,~~237~~219
Reclassification of self-storage real estate owned		(~~205~~255,~~153~~495)
Net transfers in or out of Level 3		—
Balance at June 30, 2020	$	364,688
Balance at September 30, 2020	$	316,254

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Balance at December 31, 2018	$	457,947
Unrealized gains		2028,~~873~~847
Fundings of principal and change in unamortized origination fees		81126,~~646~~100
Repayments of loans		(361)
Payment-in-kind interest		1422,~~613~~069
Reclassification of self-storage real estate owned		(8125,~~351~~715)
Net transfers in or out of Level 3		—
Balance at June 30, 2019	$	566,367
Balance at September 30, 2019	$	508,887

As of ~~June~~September 30, 2020 and December 31, 2019, the total net unrealized appreciation on the investments that use Level 3 inputs was $3436.73 million and $76.8 million, respectively.

For the three and ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, substantially all of the net unrealized gain (loss) on investments in the Company’s Consolidated Statements of Operations were attributable to unrealized gains (losses) relating to the Company’s Level 3 assets still held as of the respective balance sheet date.

Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfers occur.

5. INVESTMENT IN SELF-STORAGE REAL ESTATE VENTURE

On March 7, 2016, the Company, through its Operating Company, entered into the Limited Liability Company Agreement (the “JV Agreement”) of Storage Lenders LLC, a Delaware limited liability company, to form a real estate venture (the “SL1 Venture”) with HVP III Storage Lenders Investor, LLC (“HVP III”), an investment vehicle managed by Heitman Capital Management LLC (“Heitman”). The SL1 Venture was formed for the purpose of providing capital to developers of self-storage facilities identified and underwritten by the Company. Upon formation, HVP III committed $110.0 million for a 90% interest in the SL1 Venture, and the Company committed $12.2 million for a 10% interest.

On March 31, 2016, the Company contributed to the SL1 Venture three of its existing development property investments with a Profits Interest located in Miami and Fort Lauderdale, Florida that were not yet under construction. These investments had an aggregate committed principal amount of approximately $41.9 million and an aggregate drawn balance of $8.1 million. In exchange, the Company’s initial funding commitment of $12.2 million was reduced by $8.1 million, representing the Company’s initial “Net Invested Capital” balance as defined in the JV Agreement. The Company accounted for this contribution in accordance with ASC 845, Nonmonetary Transactions, and recorded an investment in the SL1 Venture based on the fair value of the contributed development property investments, which is the same as carryover basis. The fair value of the contributed development property investments as of March 31, 2016 was $7.7 million. Pursuant to the JV Agreement, Heitman, in fulfilling its initial $110.0 million commitment, provides capital to the SL1 Venture as cash is required, including funding draws on the three contributed development property investments. During the year ended December 31, 2016, HVP III and the Company agreed to true up the balances in the respective members’ capital accounts to be in accordance with the 90% commitment and 10% commitment made by HVP III and the Company, respectively. Accordingly, during the year ended December 31, 2016, HVP III contributed cash of $7.3 million to the SL1 Venture, and the Company received a $7.3 million cash distribution as a return of its capital.

As of December 31, 2018, the SL1 Venture had closed on eight new development property investments with a Profits Interest with an aggregate commitment amount of approximately $81.4 million, bringing the total aggregate commitment of the SL1 Venture’s investments to $123.3 million. Accordingly, HVP III’s total commitment for a 90% interest in the SL1 Venture is $111.0 million, and the Company’s total commitment for a 10% interest in the SL1 Venture is $12.3 million.

Under the JV Agreement, the Company receives a priority distribution (after debt service and any reserve but before any other distributions) out of operating cash flow and residual distributions based upon 1% of the committed principal amount of loans made by the SL1 Venture, exclusive of the loans contributed to the SL1 Venture by the Company. Operating cash flow of the SL1 Venture (after debt service, reserves and the foregoing priority distributions) is distributed in accordance with capital commitments. Residual cash flow from capital and other events (after debt service, reserves and priority distributions) will be distributed (i) pro rata in accordance with capital commitments (its “Percentage Interest”) until each member has received a return of all capital contributed; (ii) pro rata in accordance with each member’s Percentage Interest until Heitman has achieved a 14% internal rate of return; (iii) to Heitman in an amount equal to its Percentage Interest less 10% and to the Company in an amount equal to the Company’s Percentage Interest plus 10% until Heitman has achieved a 17% internal rate of return; (iv) to Heitman in an amount equal to its Percentage Interest less 20% and to the Company in an amount equal to the Company’s Percentage Interest plus 20% until Heitman has achieved

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a 20% internal rate of return; and (v) any excess to Heitman in an amount equal to its Percentage Interest less 30% and to the Company in an amount equal to the Company’s Percentage Interest plus 30%. However, the Company will not be entitled to any such promoted interest prior to the earlier to occur of the third anniversary of the JV Agreement and Heitman receiving distributions to the extent necessary to provide Heitman with a 1.48 multiple on its contributed capital.

Since the allocation of cash distributions and liquidating distributions are determined as described in the preceding paragraph, the Company has applied the hypothetical-liquidation-at-book-value (“HLBV”) method to allocate the earnings of the SL1 Venture. Under the HLBV approach, the Company’s share of the investee’s earnings or loss is calculated by:

●	The Company’s capital account at the end of the period assuming that the investee was liquidated or sold at book value, plus

●	Cash distributions received by the Company during the period, minus

●	Cash contributions made by the Company during the period, minus

●	The Company’s capital account at the beginning of the period assuming that the investee were liquidated or sold at book value.

On January 28, 2019, the SL1 Venture purchased 100% of the Class A membership units of the LLCs that owned the Atlanta 1, Jacksonville, Atlanta 2, and Denver development property investments with a Profits Interest. These purchases increased the SL1 Venture’s ownership interest on each development property investment from 49.9% to 100%. The SL1 Venture now wholly owns the self-storage properties through these LLCs. The acquisition date basis of these investments of $57.2 million is primarily comprised of the development property investment at fair value and the cash consideration paid.

On February 27, 2019, the SL1 Venture closed on a $36.1 million term loan secured by these four owned properties that bears interest at LIBOR plus 2.15% and matures on February 27, 2022. The SL1 Venture distributed $19.0 million and $2.1 million to HVP III and the Company, respectively, of these debt proceeds. In April 2019, the SL1 Venture entered into an interest rate swap to fix the interest rate on the variable rate term loan. The SL1 Venture interest rate swap bears a notional amount of $36.1 million, a fixed LIBOR rate of 2.29%, and matures on April 1, 2021.

On September 17, 2019, the SL1 Venture’s loan related to the Washington D.C. development property investment was repaid in full through a refinancing initiated by the SL1 Venture’s partner. The SL1 Venture distributed $15.5 million and $1.7 million to HVP III and the Company, respectively, of these loan repayment proceeds. The Washington D.C. investment at ~~June~~September 30, 2020, represents the SL1 Venture’s 49.9% Profits Interest which was retained during the transaction.

On November 7, 2019, the SL1 Venture purchased 100% of the Class A membership units of the LLC that owned the Raleigh development property investment with a Profits Interest. This purchase increased the SL1 Venture’s ownership interest on this development property investment from 49.9% to 100%. The SL1 Venture now wholly owns the self-storage property through this LLC. The acquisition date basis of this investment of $9.7 million is primarily comprised of the development property investment at fair value.

On January 31, 2020, the SL1 Venture closed on a $3.2 million term loan secured by the Raleigh owned property that bears interest at LIBOR plus 2.15% and matures on February 27, 2022. The SL1 Venture distributed $2.7 million and $0.3 million to HVP III and the Company, respectively, of these debt proceeds.

On March 4, 2020 the SL1 Venture’s loans related to the Miami 1, Miami 2, and Fort Lauderdale development property investments were repaid in full through a refinancing initiated by the SL1 Venture’s development partner. The SL1 Venture distributed $36.5 million and $4.1 million to HVP III and the Company, respectively, of these loan repayment proceeds. The Miami 1, Miami 2, and Fort Lauderdale investments at ~~June~~September 30, 2020, represents the SL1 Venture’s 49.9% Profits Interest which was retained during the transaction.

On June 24, 2020 the SL1 Venture purchased 100% of the Class A membership units of the LLC that owned the Columbia development property investment with a Profits Interest. This purchase increased the SL1 Venture’s ownership interest on this development property investment from 49.9% to 100%. The SL1 Venture now wholly owns the self-storage property through this LLC. The acquisition date basis of this investment of $10.3 million is primarily comprised of the development property investment at fair value.

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The SL1 Venture has elected the fair value option of accounting for its development property investments with a Profits Interest, which are equity method investments of the SL1 Venture. The assumptions used to value the SL1 Venture’s investments are materially consistent with those used to value the Company’s investments. As of September 30, 2020, the SL1 Venture had five development property investments with a Profits Interest as described in more detail in the table below:

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