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 30, 2019

OR

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

For the transition period from to

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

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     ☒

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

As of August 1, 2019, Jernigan Capital, Inc. had 22,236,871 shares of common stock outstanding.

Table of Contents

PART I.  FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
Item 3. Quantitative and Qualitative Disclosures About Market Risk	65
Item 4. Controls and Procedures	66
PART II.  Other information	66
Item 1. Legal Proceedings	66
Item 1A. Risk Factors	66
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities	67
Item 3. Defaults Upon Senior Securities	67
Item 4. Mine Safety Disclosures	67
Item 5. Other Information	67
Item 6. Exhibits	67

2

In 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 “our Manager” refers to JCAP Advisors, LLC, a Florida limited liability company.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

JERNIGAN CAPITAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Unaudited)

	As of
	June 30, 2019		December 31, 2018
Assets:
Cash and cash equivalents	$	4,169	$	8,715
Self-Storage Investment Portfolio:
Development property investments at fair value		476,889		373,564
Bridge investments at fair value		89,478		84,383
Self-storage real estate owned, net		106,083		96,202
Investment in and advances to self-storage real estate venture		12,416		14,155
Other loans, at cost		4,576		4,835
Deferred financing costs		4,327		4,619
Prepaid expenses and other assets		5,129		3,702
Fixed assets, net		225		233
Total assets	$	703,292	$	590,408
Liabilities:
Secured revolving credit facility	$	62,900	$	-
Term loans, net of unamortized costs		33,711		24,609
Due to Manager		2,453		3,334
Accounts payable, accrued expenses and other liabilities		4,526		2,402
Dividends payable		12,847		12,199
Total liabilities		116,437		42,544
Equity:
7.00% Series A preferred stock, $0.01 par value, 300,000 shares authorized; 129,250 and 125,000 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively, at liquidation preference of $129.3 million and $125.0 million, net of offering costs, respectively		126,387		122,137
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, 2019 and December 31, 2018, at liquidation preference of $39.3 million, net of offering costs		37,298		37,401
Common stock, $0.01 par value, 500,000,000 shares authorized at June 30, 2019 and December 31, 2018; 22,133,290 and 20,430,218 issued and outstanding at June 30, 2019 and December 31, 2018, respectively		221		204
Additional paid-in capital		419,760		386,394
Retained earnings		3,630		1,728
Accumulated other comprehensive income (loss)		(441)		-
Total equity		586,855		547,864
Total liabilities and equity	$	703,292	$	590,408

See accompanying notes to consolidated financial statements.

3

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

	Three months ended				Six months ended
	June 30,				June 30,
	2019		2018		2019		2018
Revenues:
Interest income from investments	$	9,150	$	6,403	$	17,362	$	10,965
Rental and other property-related income from real estate owned		1,638		805		3,087		1,428
Other revenues		44		33		267		64
Total revenues		10,832		7,241		20,716		12,457
Costs and expenses:
General and administrative expenses		2,373		2,034		4,136		3,852
Fees to Manager		2,069		1,582		4,072		2,886
Property operating expenses of real estate owned		786		420		1,549		731
Depreciation and amortization of real estate owned		1,090		887		2,119		1,589
Other expenses		-		-		-		290
Total costs and expenses		6,318		4,923		11,876		9,348
Operating income		4,514		2,318		8,840		3,109
Other income (expense):
Equity in earnings from unconsolidated real estate venture		85		435		242		985
Net unrealized gain on investments		12,043		8,623		20,873		12,943
Interest expense		(1,776)		(638)		(2,989)		(1,054)
Other interest income		8		59		21		168
Total other income		10,360		8,479		18,147		13,042
Net income		14,874		10,797		26,987		16,151
Net income attributable to preferred stockholders		(5,094)		(4,580)		(10,126)		(8,175)
Net income attributable to common stockholders	$	9,780	$	6,217	$	16,861	$	7,976
Basic earnings per share attributable to common stockholders	$	0.46	$	0.40	$	0.81	$	0.53
Diluted earnings per share attributable to common stockholders	$	0.46	$	0.40	$	0.81	$	0.53
Dividends declared per share of common stock	$	0.35	$	0.35	$	0.70	$	0.70

See accompanying notes to consolidated financial statements.

4

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

	Three months ended				Six months ended
	June 30,				June 30,
	2019		2018		2019		2018
Net Income	$	14,874	$	10,797	$	26,987	$	16,151
Other comprehensive income (loss):
Unrealized losses on interest rate swaps		(437)		-		(437)		-
Reclassification of realized gains on interest rate swaps		(4)		-		(4)		-
Other comprehensive income (loss)		(441)		-		(441)		-
Comprehensive income (loss)	$	14,433	$	10,797	$	26,546	$	16,151

5

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, 2017		40,000	$	37,764		-	$	-	14,429,055	$	144	$	276,814	$	(8,902)	$	-	$	305,820	$	-	$	305,820
Issuance of preferred stock, net of offering costs		35,000		34,417		1,500,000		35,988	-		-		-		-		-		70,405		-		70,405
Stock dividend paid on preferred stock		-		-		-		-	2,222		-		44		-		-		44		-		44
Repurchase and retirement of shares of common stock		-		-		-		-	(2,234)		-		(40)		-		-		(40)		-		(40)
Issuances of stock-based awards		-		-		-		-	18,000		-		-		-		-		-		-		-
Stock-based compensation		-		-		-		-	-		-		376		-		-		376		-		376
Dividends declared on Series A preferred stock		-		-		-		-	-		-		-		(3,034)		-		(3,034)		-		(3,034)
Dividends declared on Series B preferred stock		-		-		-		-	-		-		-		(561)		-		(561)		-		(561)
Dividends declared on common stock		-		-		-		-	-		-		-		(5,056)		-		(5,056)		-		(5,056)
Net income		-		-		-		-	-		-		-		5,354		-		5,354		-		5,354
Balance at March 31, 2018		75,000	$	72,181		1,500,000	$	35,988	14,447,043	$	144	$	277,194	$	(12,199)	$	-	$	373,308	$	-	$	373,308

See accompanying notes to consolidated financial statements.

6

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, 2018		75,000	$	72,181		1,500,000	$	35,988	14,447,043	$	144	$	277,194	$	(12,199)	$	-	$	373,308	$	-	$	373,308
Issuance of preferred stock, net of offering costs		35,000		34,987		-		(8)	-		-		-		-		-		34,979		-		34,979
At-the-market issuance of preferred stock, net of offering costs		-		-		71,734		1,483	-		-		-		-		-		1,483		-		1,483
Proceeds from issuance of common stock, net of offering costs		-		-		-		-	4,600,000		46		81,103		-		-		81,149		-		81,149
At-the-market issuance of common stock, net of offering costs		-		-		-		-	44,016		-		682		-		-		682		-		682
Stock dividend paid on preferred stock		-		-		-		-	120,028		1		2,124		-		-		2,125		-		2,125
Repurchase and retirement of shares of common stock		-		-		-		-	(14,279)		-		(274)		-		-		(274)		-		(274)
Issuances of stock-based awards		-		-		-		-	57,333		1		(1)		-		-		-		-		-
Stock-based compensation		-		-		-		-	-		-		808		-		-		808		-		808
Dividends declared on Series A preferred stock		-		-		-		-	-		-		-		(3,892)		-		(3,892)		-		(3,892)
Dividends declared on Series B preferred stock		-		-		-		-	-		-		-		(688)		-		(688)		-		(688)
Dividends declared on common stock		-		-		-		-	-		-		-		(6,739)		-		(6,739)		-		(6,739)
Net income		-		-		-		-	-		-		-		10,797		-		10,797		-		10,797
Balance at June 30, 2018		110,000	$	107,168		1,571,734	$	37,463	19,254,141	$	192	$	361,636	$	(12,721)	$	-	$	493,738	$	-	$	493,738

See accompanying notes to consolidated financial statements.

7

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.

8

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.

9

JERNIGAN CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Six months ended June 30,
	2019		2018
Cash flows from operating activities:
Net income	$	26,987	$	16,151
Adjustments to reconcile net income to net cash used in operating activities:
Interest capitalized on outstanding loans		(14,613)		(9,410)
Net unrealized gain on investments		(20,873)		(12,943)
Stock-based compensation		1,109		1,184
Equity in earnings from unconsolidated self-storage real estate venture		(237)		(980)
Return on investment from unconsolidated self-storage real estate venture		188		462
Depreciation and amortization		2,148		1,624
Amortization of deferred financing costs		925		381
Accretion of origination fees		(541)		(341)
Unrealized loss on mark-to-market interest rate cap		28		-
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(785)		(171)
Due to Manager		(881)		403
Accounts payable, accrued expenses, and other liabilities		762		151
Net cash used in operating activities		(5,783)		(3,489)
Cash flows from investing activities:
Purchase of corporate fixed assets		(22)		(34)
Purchase of self-storage real estate owned		(2,636)		(9,087)
Capital additions to self-storage real estate owned		(1,022)		(205)
Capital contributions to unconsolidated self-storage real estate venture		(357)		(1,653)
Return of capital from unconsolidated self-storage real estate venture		2,106		-
Advances to unconsolidated self-storage real estate venture		(12,674)		(11,832)
Repayment of advances to unconsolidated self-storage real estate venture		12,712		13,014
Funding of investment portfolio:
Origination fees received in cash		896		1,868
Development property and bridge investments		(81,500)		(170,989)
Funding of other loans		(185)		(718)
Repayments of investment portfolio investments		361		3,257
Repayments of other loans		203		534
Net cash used in investing activities		(82,118)		(175,845)
Cash flows from financing activities:
Cash received from Credit Facility, net of issuance costs		62,346		34,433
Cash received from term loans, net of issuance costs		9,024		-
Repurchase of senior loan participation		-		(732)
Repayment of Credit Facility		-		(35,000)
Stock repurchase		(469)		(314)
Net proceeds from issuance of common stock		32,743		81,831
Net proceeds from issuance of Series A preferred stock		-		69,963
Net proceeds (offering costs) from issuance of Series B preferred stock		(103)		37,463
Dividends paid on Series A preferred stock		(4,455)		(1,288)
Dividends paid on Series B preferred stock		(1,376)		(561)
Dividends paid on common stock		(14,355)		(10,107)
Net cash provided by financing activities		83,355		175,688
Net change in cash and cash equivalents		(4,546)		(3,646)
Cash and cash equivalents at the beginning of the period		8,715		46,977
Cash and cash equivalents at the end of the period	$	4,169	$	43,331

See accompanying notes to consolidated financial statements.

10

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”). The Company is externally managed by JCAP Advisors, LLC (the “Manager”).

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986 (the “Code”), as amended. 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.

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.

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.

11

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 and bridge 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 investment portfolio loan and equity investments, including those 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 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. 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.

Realized Gains and Net Unrealized Gain 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 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 on investments on the Consolidated Statements of Operations. Prior to the quarter ended September 30, 2018, a sale of a self-storage property underlying one of the Company’s loan investment had not yet occurred and, thus, the Company had not yet realized any fair value gains on its investments. Accordingly, net increases in fair value of the Company’s investments had previously been reported in a single line item ‘Changes in fair value of investments’ in the Consolidated Statements of Operations.

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 and bridge investments (which are generally structured as first mortgages and a 49.9% Profits Interest in the project), operating property loans (loans secured by operating properties), 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.

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The following table presents the financial instruments measured at fair value on a recurring basis at June 30, 2019:

	Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
Derivative financial instruments (asset position)	$	86	$	-	$	86	$	-
Derivative financial instruments (liability position)		(441)		-		(441)		-
Development property investments		476,889		-		-		476,889
Bridge investments		89,478		-		-		89,478

The following table presents the financial instruments measured at fair value on a recurring basis at December 31, 2018:

	Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
Development property investments	$	373,564	$	-	$	-	$	373,564
Bridge investments		84,383		-		-		84,383

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).

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.

Self-Storage Real Estate Owned

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.

The Company expects that the majority of future self-storage facility acquisitions will be considered asset acquisitions, however, the Company will evaluate each 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.

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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 of 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 fairly 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 and six months ended June 30, 2019 and 2018.

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 each financial institution exceeds the Federal Deposit Insurance Corporation insurance limit of $250,000 per institution.

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 30, 2019 and December 31, 2018. None of these loans are in non-accrual status as of June 30, 2019 and December 31, 2018. The Company determined that no allowance for loan loss was necessary at June 30, 2019 and December 31, 2018.

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. Fixed assets are 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.

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. Accrued interest generally is reversed when a loan is placed on non-accrual status.

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.

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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 sale of senior participations or 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.

Other expenses

Other expenses of $0.3 million during the six months ended June 30, 2018 consist of costs related to the termination of an employee contract and have been expensed as incurred. The Company incurred no other expense during the six months ended June 30, 2019.

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 Operating Company units when such instruments are dilutive.

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.

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 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update creates a single accounting model for all share-based payments. As a result of this update, the existing employee guidance will apply to nonemployee share-based transactions, with the cost of nonemployee awards continuing to be recorded as if the grantor had paid cash for the goods or services. The equity-classified share-based payment awards issued to nonemployees will now be measured on the grant date, instead of the previous requirement to re-measure the awards through the performance completion date. This ASU is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. As allowed, the Company has elected to early adopt the amendments in ASU 2018-07 effective April 1, 2018. As required by the ASU, the Company has established a grant date fair value of $18.10 based on the market value of the award as of April 1, 2018 for all nonemployee awards that have not vested as of April 1, 2018. The cumulative-

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effect adjustment to retained earnings as of January 1, 2018 was immaterial to the financial statements as a whole. As such, the Company recorded this adjustment through its Consolidated Statements of Operations for the year ended December 31, 2018.

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 public business entities for fiscal years and for interim periods within those fiscal years, beginning after December 15, 2019, 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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is the final standard on accounting for leases. The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short term leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. The Company does have rental income from month-to-month self-storage leases within the scope of ASU 2016-02. The Company does not have material amounts of rental or lease expense. The amendments in ASU 2016-02 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company has assessed the impact this new accounting guidance had on its consolidated financial statements and concluded that the new accounting guidance does not have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2017. This ASU outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. Several ASUs expanding and clarifying the initial guidance issued in ASU 2014-09 have been released since May 2014. The Company adopted the ASU effective January 1, 2018. The Company has evaluated all applicable contracts and revenue streams and has concluded that the adoption does not have an effect on its consolidated financial statements, primarily due to the new guidance not applying to revenue associated with loans or derived from lease contracts.

Consolidated Statements of Cash Flows - Supplemental Disclosures

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

	Six months ended June 30,
	2019		2018
Supplemental disclosure of cash flow information:
Interest paid	$	1,675	$	743
Supplemental disclosure of non-cash investing and financing activities:
Stock dividend paid on preferred stock	$	4,250	$	2,169
Dividends declared, but not paid, on preferred stock		5,094		4,580
Dividends declared, but not paid, on common stock		7,754		6,739
Reclassification of self-storage real estate owned		8,351		35,281
Assumed liabilities with acquisition of self-storage real estate owned		-		1,258
Other loans paid off with issuance of development property investments		247		117
Reclassification of deferred costs to cumulative preferred stock		-		559

3.  SELF-STORAGE INVESTMENT PORTFOLIO

The Company’s self-storage investments at June 30, 2019 consisted of the following:

Investments reported at fair value

· Development Property Investments - The Company had 50 investments totaling an aggregate committed principal amount of approximately $612.3 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

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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 30, 2019, three of the development property investments totaling $33.2 million of aggregate committed amount were structured as preferred equity investments, which will be subordinate to a first mortgage loan 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 is $11.2 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 30, 2019. The fair value of the investment as of June 30, 2019 is $11.6 million.

Included in development property investments as of June 30, 2019 was one construction loan with a committed principal amount of approximately $17.7 million that is interest-only at a fixed interest rate of 6.9% annum, has no equity participation and is secured by a first priority mortgage on the project. This construction loan had an initial term of 18 months that was extended during the first quarter of 2017 and in 2018. This loan matured and became due and payable on June 30, 2018; but was not timely repaid. Accordingly, this construction loan was in default and was placed on non-accrual status during the three months ended December 31, 2018. Since that time, no interest income has been recognized and will only be recognized if interest is collected in cash. The total unpaid balance of the loan as of June 30, 2019 was $17.7 million. As the investment is a collateral dependent loan, the Company considered the fair value of the collateral when determining the fair value of the investment as of June 30, 2019. The fair value of the investment as of June 30, 2019 is $17.7 million. On July 2, 2019, the Company entered into an agreement with the borrower pursuant to which the Company acquired all of the interests in the entity that owns the property that secured the loan and both parties dismissed all state court litigation related to that loan. See Note 12, Contingencies.

· Bridge Investments - The Company had five bridge investments with an aggregate committed principal amount of approximately $83.3 million. Three of these bridge investments amounting to an aggregate committed principal amount of $47.1 million are secured by first priority mortgages on self-storage properties with an aggregate of over 203,000 net rentable square feet that were completed and began lease-up in 2016, which loans bear interest at an annual rate of 6.9%, payable monthly. The Company has a 49.9% Profits Interest in these three properties. Two of these bridge investments aggregating a committed principal amount of $36.2 million are secured by first priority mortgages on two newly-completed self-storage properties with an aggregate of over 163,000 net rentable square feet, which loans bear interest at an annual rate of 9.5%, with 6.5% payable monthly and 3.0% payment-in-kind (“PIK”) interest accruing and payable upon maturity of the loan. The Company also has a 49.9% Profits Interest, after the other members of the borrower receive $1.0 million of preferential payments per loan. All five loans will mature five years from the date of closing, with the borrower having two extension options for one year each.

As of June 30, 2019, the aggregate committed principal amount of the Company’s development property investments and bridge investments was approximately $695.7 million and outstanding principal was $502.4 million, as described in more detail in the table below:

	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	$	9,006
8/14/2015	Raleigh (2)(7)		8,792		8,789		3		8,635
10/27/2015	Austin (2)(7)		8,658		8,089		569		7,966
9/20/2016	Charlotte 2 (2)(7)		12,888		12,110		778		13,666
11/17/2016	Jacksonville 2 (2)(7)		7,530		7,405		125		9,471
1/18/2017	Atlanta 3(2)		14,115		10,973		3,142		12,966
1/31/2017	Atlanta 4 (2)(7)		13,678		13,413		265		16,385
2/24/2017	Orlando 3 (2)(7)		8,056		7,491		565		9,255
2/24/2017	New Orleans (2)(7)		12,549		11,469		1,080		13,494
2/27/2017	Atlanta 5(2)		17,492		16,114		1,378		19,307
3/1/2017	Fort Lauderdale(2)(7)		9,952		9,015		937		12,562
3/1/2017	Houston (2)		14,825		14,549		276		17,536
4/14/2017	Louisville 1 (2)(7)		8,523		7,294		1,229		8,821
4/20/2017	Denver 1 (2)		9,806		8,136		1,670		9,629
4/20/2017	Denver 2 (2)(7)		11,164		10,788		376		12,612
5/2/2017	Atlanta 6 (2)(7)		12,543		11,412		1,131		14,211
5/2/2017	Tampa 2 (2)		8,091		7,361		730		8,663

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5/19/2017	Tampa 3 (2)(7)		9,224		7,949		1,275		9,559
6/12/2017	Tampa 4 (2)(7)		10,266		9,218		1,048		12,256
6/19/2017	Baltimore 1(2)(4)(7)		10,775		10,172		954		12,198
6/28/2017	Knoxville(2)(7)		9,115		8,317		798		9,728
6/29/2017	Boston 1 (2)(6)		-		-		-		2,867
6/30/2017	New York City 2 (2)(4)		27,982		27,221		1,996		29,920
7/27/2017	Jacksonville 3 (2)(7)		8,096		7,391		705		9,242
8/30/2017	Orlando 4(2)(7)		9,037		7,830		1,207		9,825
9/14/2017	Los Angeles 1		28,750		9,230		19,520		9,395
9/14/2017	Miami 1 (3)		14,657		8,556		6,101		8,593
9/28/2017	Louisville 2 (2)(7)		9,940		9,151		789		11,213
10/12/2017	Miami 2 (4)		9,459		1,399		8,119		1,202
10/30/2017	New York City 3 (4)		15,301		5,602		9,900		5,315
11/16/2017	Miami 3 (4)		20,168		6,430		13,941		6,090
11/21/2017	Minneapolis 1 (3)		12,674		7,950		4,724		9,046
12/1/2017	Boston 2(2)		8,771		7,176		1,595		8,764
12/15/2017	New York City 4 (3)		10,591		3,723		6,868		3,833
12/27/2017	Boston 3		10,174		2,653		7,521		2,553
12/28/2017	New York City 5 (3)		16,073		9,440		6,633		10,308
2/8/2018	Minneapolis 2(2)		10,543		9,040		1,503		9,972
3/30/2018	Philadelphia (2)(4)(9)		14,338		11,324		3,264		11,569
4/6/2018	Minneapolis 3 (3)		12,883		6,691		6,192		7,629
5/1/2018	Miami 9 (4)		12,421		3,344		9,171		3,242
5/15/2018	Atlanta 7		9,418		1,798		7,620		1,797
5/23/2018	Kansas City (3)		9,968		4,500		5,468		5,065
6/7/2018	Orlando 5 (3)		12,969		4,977		7,992		5,491
11/16/2018	Baltimore 2		9,247		703		8,544		652
3/1/2019	New York City 6		18,796		3,021		15,775		2,962
4/18/2019	New York City 7 (4)		23,462		5,770		17,726		5,484
		$	561,410	$	372,632	$	191,205	$	429,955
Preferred equity investments:
6/12/2018	Los Angeles 2 (5)		9,298		4,756		4,874		4,780
3/15/2019	Stamford (5)		2,904		2,963		-		2,975
5/8/2019	New York City 8 (5)		21,000		21,214		-		21,446
		$	33,202	$	28,933	$	4,874	$	29,201
Construction loans:
12/23/2015	Miami(8)		17,733		17,733		-		17,733
		$	17,733	$	17,733	$	-	$	17,733
Total development property investments		$	612,345	$	419,298	$	196,079	$	476,889
Bridge investments (includes a profits interest):
3/2/2018	Miami 4 (2)(7)		20,201		20,201		-		23,665
3/2/2018	Miami 5 (2)(4)(7)		17,738		17,674		718		15,962
3/2/2018	Miami 6 (2)(7)		13,370		13,370		-		17,970
3/2/2018	Miami 7 (2)(4)(7)		18,462		18,311		832		17,485
3/2/2018	Miami 8 (2)(7)		13,553		13,553		-		14,396
Total bridge investments		$	83,324	$	83,109	$	1,550	$	89,478
Total investments reported at fair value		$	695,669	$	502,407	$	197,629	$	566,367

⁽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 30, 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 June 30, 2019. 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

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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 30, 2019, this investment was pledged as collateral to the Company’s Credit Facility.

⁽⁸⁾ On July 2, 2019, the Company entered into an agreement with the borrower pursuant to which the Company acquired all of the interests in the entity that owns the property that secured the loan and both parties dismissed all state court litigation related to that loan. As a result, the loan is no longer outstanding.

⁽⁹⁾ 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. 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 30, 2019.

The following table provides a reconciliation of the funded principal to the fair market value of investments at June 30, 2019:

Funded principal	$	502,407
Adjustments:
Unamortized origination and other fees		(6,243)
Net unrealized gain on investments		70,287
Other		(84)
Fair value of investments	$	566,367

As of December 31, 2018, the aggregate committed principal amount of the Company’s development property investments and bridge investments was approximately $634.3 million and outstanding principal was $413.5 million, as described in more detail in the table below:

	Metropolitan					Remaining
	Statistical Area	Total Investment		Funded		Unfunded
Closing Date	("MSA")	Commitment		Investment (1)		Commitment		Fair Value
Development property investments (includes a profits interest):
7/2/2015	Milwaukee (2)(8)	$	7,650	$	7,648	$	2	$	9,057
7/31/2015	New Haven (2)(8)(9)		6,930		6,827		103		8,350
8/14/2015	Raleigh (2)(8)		8,792		8,498		294		8,002
10/27/2015	Austin (2)(8)		8,658		7,817		841		7,763
9/20/2016	Charlotte 2 (2)(8)		12,888		11,445		1,443		12,793
11/17/2016	Jacksonville 2 (2)(8)		7,530		7,157		373		9,122
1/18/2017	Atlanta 3(3)		14,115		8,711		5,404		9,337
1/31/2017	Atlanta 4 (2)		13,678		12,957		721		16,031
2/24/2017	Orlando 3 (2)		8,056		7,229		827		8,592
2/24/2017	New Orleans (2)		12,549		10,587		1,962		12,221
2/27/2017	Atlanta 5(3)		17,492		14,095		3,397		15,371
3/1/2017	Fort Lauderdale(2)		9,952		7,604		2,348		10,475
3/1/2017	Houston (3)(7)		14,825		10,936		3,889		13,285
4/14/2017	Louisville 1 (2)(8)		8,523		6,979		1,544		8,540
4/20/2017	Denver 1 (3)		9,806		6,884		2,922		7,706
4/20/2017	Denver 2 (2)		11,164		10,235		929		12,403
5/2/2017	Atlanta 6 (2)		12,543		10,589		1,954		12,774
5/2/2017	Tampa 2 (3)		8,091		5,493		2,598		6,020
5/19/2017	Tampa 3 (2)		9,224		7,154		2,070		8,391
6/12/2017	Tampa 4 (2)		10,266		8,846		1,420		11,419
6/19/2017	Baltimore 1(2)(4)		10,775		9,177		1,598		10,805

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6/28/2017	Knoxville(2)(8)		9,115		7,717		1,398		8,652
6/29/2017	Boston 1 (2)(6)		-		-		-		2,614
6/30/2017	New York City 2 (2)(4)		26,482		24,760		1,722		28,102
7/27/2017	Jacksonville 3 (2)		8,096		6,836		1,260		8,251
8/30/2017	Orlando 4(2)		9,037		6,769		2,268		8,264
9/14/2017	Los Angeles 1		28,750		8,692		20,058		8,418
9/14/2017	Miami 1		14,657		6,882		7,775		6,562
9/28/2017	Louisville 2 (2)(8)		9,940		8,691		1,249		10,652
10/12/2017	Miami 2 (4)		9,459		1,335		8,124		1,082
10/30/2017	New York City 3 (4)		14,701		4,835		9,866		4,383
11/16/2017	Miami 3 (4)		20,168		4,096		16,072		3,542
11/21/2017	Minneapolis 1		12,674		3,214		9,460		3,070
12/1/2017	Boston 2(3)		8,771		3,978		4,793		4,246
12/15/2017	New York City 4		10,591		1,777		8,814		1,631
12/27/2017	Boston 3		10,174		2,563		7,611		2,402
12/28/2017	New York City 5		16,073		6,523		9,550		6,400
2/8/2018	Minneapolis 2(3)		10,543		7,802		2,741		8,773
3/30/2018	Philadelphia (3)(4)		14,338		7,870		6,468		8,093
4/6/2018	Minneapolis 3		12,883		2,333		10,550		2,206
5/1/2018	Miami 9 (4)		12,421		2,803		9,618		2,564
5/15/2018	Atlanta 7		9,418		861		8,557		775
5/23/2018	Kansas City		9,968		1,228		8,740		1,137
6/7/2018	Orlando 5		12,969		800		12,169		673
6/12/2018	Los Angeles 2 (5)		9,298		4,597		4,701		4,581
11/16/2018	Baltimore 2		9,247		390		8,857		301
		$	533,280	$	314,220	$	219,060	$	355,831
Construction loans:
12/23/2015	Miami		17,733		17,733		-		17,733
		$	17,733	$	17,733	$	0	$	17,733
Total development property investments		$	551,013	$	331,953	$	219,060	$	373,564
Bridge investments (includes a profits interest):
3/2/2018	Miami 4 (2)(8)		20,201		20,201		-		22,823
3/2/2018	Miami 5 (2)(4)(8)		17,738		16,883		855		14,432
3/2/2018	Miami 6 (2)(8)		13,370		13,370		-		17,372
3/2/2018	Miami 7 (2)(4)(8)		18,462		17,581		881		15,971
3/2/2018	Miami 8 (2)(8)		13,553		13,472		81		13,785
Total bridge investments		$	83,324	$	81,507	$	1,817	$	84,383
Total investments reported at fair value		$	634,337	$	413,460	$	220,877	$	457,947

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

⁽²⁾ Construction at the facility was substantially complete and/or certificate of occupancy had been received as of December 31, 2018. 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, 2018. See Note 4, Fair Value of Financial Instruments, for information regarding recognition of entrepreneurial profit.

⁽⁴⁾ These investments contain a higher LTC ratio and a higher interest rate, some of which interest is 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.

⁽⁵⁾ This investment has a total project cost of $29.5 million of which 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.

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⁽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⁾ On December 31, 2018, the Company increased the total commitment amount of this loan in exchange for a fee that was immediately advanced on the loan. The fee will be recognized into income in the future as earned and will be received in cash upon the repayment of the loan.

⁽⁸⁾ As of December 31, 2018, this investment was pledged as collateral to the Company’s Credit Facility.

⁽⁹⁾ During the six months ended June 30, 2019, the Company purchased its partner’s 50.1% Profits Interest in this investment.

The following table provides a reconciliation of the funded principal to the fair market value of investments at December 31, 2018:

Funded principal	$	413,460
Adjustments:
Unamortized origination and other fees		(6,382)
Net unrealized gain on investments		50,953
Other		(84)
Fair value of investments	$	457,947

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 $17.7 million Miami construction loan, were in non-accrual status as of June 30, 2019 and December 31, 2018. As described above, subsequent to June 30, 2019, the Company entered into an agreement pursuant to which it acquired all of the interests in the entity that owned the property securing the Miami construction loan and both parties dismissed all state court litigation related to that loan.

All of the Company’s development property investments and bridge 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 development property investments and bridge investments with a Profits Interest, the assets and liabilities of the equity method investees approximated $533.7 million and $484.7 million, respectively, at June 30, 2019 and approximated $442.6 million and $395.7 million, respectively, at December 31, 2018. These investees had revenues of approximately $2.6 million and $4.4 million and operating expenses of approximately $2.8 million and $5.0 million for the three and six months ended June 30, 2019, respectively. These investees had revenues of approximately $1.5 million and $2.3 million and operating expenses of approximately $1.1 million and $1.8 million for the three and six months ended June 30, 2018, respectively. During the six months ended June 30, 2019, no individual investment comprised more than 20% of the Company’s net income. For the six months ended June 30, 2018, the total income (interest income and net unrealized gain on investments) from one bridge investment with a Profits Interest exceeded 20% of the Company’s net income. The Company recorded total income for the six months ended June 30, 2018 of $4.2 million from the Miami 6 MSA bridge investment with a Profits Interest.

For sixteen of the Company’s development property investments with a Profits Interest as of June 30, 2019 and December 31, 2018, 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 30, 2019 and December 31, 2018.

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

YTD 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. Accordingly, as of March 8, 2019, the Company wholly owns and consolidates this investment in the accompanying consolidated financial statements. The acquisition date basis of this investment of $11.1 million is primarily comprised of the development property investment at fair value and the cash consideration paid.

As described above, subsequent to June 30, 2019, the Company acquired all of the interests in the entity that owned the property securing the Miami construction loan. In future periods, that property will be classified as self-storage real estate owned.

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YTD 2018 Activity

On January 10, 2018, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Jacksonville 1 development property investment with a Profits Interest. On February 2, 2018, the Company purchased 100% of the Class A membership units of the limited liability companies that owned the Atlanta 1 and Atlanta 2 development property investments with a Profits Interest. On February 20, 2018, the Company purchased 100% of the Class A membership units of the limited liability company that owned the Pittsburgh development property investment 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 $45.4 million is primarily comprised of the development property investment at fair value of $35.3 million and the cash consideration paid of $9.6 million.

The Company evaluated the purchases under ASU 2017-01 and concluded that the transactions consisted of a single identifiable asset that represents 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 30, 2019 and December 31, 2018:

	June 30, 2019		December 31, 2018
Land	$	11,723	$	10,797
Building and improvements		95,368		85,067
In-place leases		4,085		3,552
Property equipment		32		13
Construction-in-progress		891		670
Accumulated depreciation and amortization		(6,016)		(3,897)
Self-storage real estate owned, net	$	106,083	$	96,202

4.  FAIR VALUE OF FINANCIAL INSTRUMENTS

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 and bridge 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.

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.

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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 Managements and Use of Financial Instruments, interest rate swaps and interest rate caps are used to manage interest raterisk. 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.

Instrument	Valuation technique and assumptions	Hierarchy classification
Development property investments with a profits interest and bridge investments	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, we 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 investments 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 and bridge 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

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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 seven development property investments that were 40% complete but for which construction was not substantially complete at June 30, 2019, 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. Thirty-four development property and bridge 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 30, 2019. For the Company’s development property and bridge investments at substantial construction completion, a discounted cash flow model, based on periodically updated estimates of rental rates, occupancy 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 development property investments with a profits interest and bridge investments categorized within Level 3 as of June 30, 2019 and December 31, 2018. 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.

As of June 30, 2019
	Unobservable Inputs
Primary Valuation			Weighted
Techniques (a)	Input	Estimated Range	Average
Income approach analysis	Market yields/discount rate	3.66 - 23.78%	8.59%
	Exit date (c)	0.25 - 7.20 years	3.40 years
Option pricing model	Volatility	54.53 - 95.52%	74.50%
	Exit date (c)	0.25 - 7.20 years	3.40 years
	Capitalization rate (b)	4.75 - 6.00%	5.45%
	Discount rate (b)	7.75 - 11.74%	8.82%

^(a) The significant unobservable inputs associated with the construction loan presented as a development property investment 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 using a market comparable approach and an income approach based on a capitalization rate within the range provided above for capitalization rates associated with development property investments with a profits interest.

^(b) Forty-one 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.

^(c) The exit dates for the development property investments and bridge investments are generally the estimated date of stabilization of the underlying property.

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As of December 31, 2018
		Unobservable Inputs
	Primary Valuation			Weighted
Asset Category	Techniques	Input	Estimated Range	Average
Development property investments and bridge investments (a)	Income approach analysis	Market yields/discount rate	4.72 - 13.09%	9.48%
		Exit date (d)	2.25 - 5.95 years	3.44 years
Development property investments with a profits interest and bridge investments (b)	Option pricing model	Volatility	53.25 - 94.30%	75.10%
		Exit date (d)	2.25 - 5.95 years	3.44 years
		Capitalization rate (c)	4.75 - 6.00%	5.42%
		Discount rate (c)	7.75 - 11.74%	8.83%

^(a) The valuation technique for the development property investments with a Profits Interest does not differ from the development property investments without a Profits Interest. Therefore, this line item focuses on all development property investments, including those with a Profits Interest. The significant unobservable inputs associated with the construction loan presented as a development property investment 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 using a market comparable approach and an income approach based on a capitalization rate within the range provided above for capitalization rates associated with development property investments with a profits interest.

^(b) The valuation technique for the development property investments with a Profits Interest does not differ from the development property investments without a Profits Interest. The development property investments with a Profits Interest only require incremental valuation techniques to determine the value of the Profits Interest. Therefore this line only focuses on the Profits Interest valuation.

^(c) Thirty-five 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.

^(d) The exit dates for the development property investments and bridge investments are generally the estimated date of stabilization of the underlying property.

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 30, 2019		December 31, 2018
Up 25 basis points	$	(2.2)	$	(1.9)
Down 25 basis points, subject to a minimum yield/rate of 10 basis points		2.3		2.0
Up 50 basis points		(4.3)		(3.9)
Down 50 basis points, subject to a minimum yield/rate of 10 basis points		4.6		4.1

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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 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 30, 2019		December 31, 2018
Up 25 basis points	$	(10.7)	$	(8.9)
Down 25 basis points		11.7		9.8
Up 50 basis points		(20.5)		(17.0)
Down 50 basis points		24.7		20.5

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 months ended June 30, 2019 and 2018.

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 was 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, 2018	$	457,947
Realized gains		-
Unrealized gains		20,873
Fundings of principal and change in unamortized origination fees		81,646
Repayments of loans		(361)
Payment-in-kind interest		14,613
Reclassification of self-storage real estate owned		(8,351)
Net transfers in or out of Level 3		-
Balance at June 30, 2019	$	566,367

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Balance at December 31, 2017	$	234,171
Realized gains		-
Unrealized gains		12,943
Fundings of principal and change in unamortized origination fees		169,702
Repayments of loans		(3,257)
Payment-in-kind interest		9,410
Reclassification of self-storage real estate owned		(35,281)
Net transfers in or out of Level 3		-
Balance at June 30, 2018	$	387,688

As of June 30, 2019 and December 31, 2018, the total net unrealized appreciation on the investments that use Level 3 inputs was $70.3 million and $51.0 million, respectively.

For the three and six months ended June 30, 2019 and 2018, substantially all of the net unrealized gain on investments in the Company’s Consolidated Statements of Operations were attributable to unrealized gains 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.  

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 June 30, 2019, the SL1 Venture had seven development property investments with a Profits Interest as described in more detail in the table below:

	Metropolitan					Remaining
	Statistical Area	Total Investment		Funded		Unfunded
Closing Date	("MSA")	Commitment		Investment (1)		Commitment		Fair Value
5/14/2015	Miami 1 (2)(3)	$	13,867	$	12,722	$	1,145	$	15,455
5/14/2015	Miami 2 (2)(3)		14,849		14,518		331		15,676
9/25/2015	Fort Lauderdale (2)(3)		13,230		12,898		332		17,034
4/15/2016	Washington DC (3)		17,269		17,269		-		20,162
7/21/2016	New Jersey (3)		7,828		6,964		864		8,302
9/28/2016	Columbia (3)		9,199		9,071		128		9,996
12/22/2016	Raleigh (3)		8,877		8,725		152		9,292
	Total	$	85,119	$	82,167	$	2,952	$	95,917

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

⁽²⁾ These development property investments (having approximately $8.1 million of outstanding principal at contribution) were contributed to the SL1 Venture on March 31, 2016 by the Company.

⁽³⁾ Certificate of occupancy had been received as of June 30, 2019. See Note 4, Fair Value of Financial Instruments, for information regarding recognition of entrepreneurial profit.

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As of December 31, 2018, the SL1 Venture had eleven development property investments with a Profits Interest as described in more detail in the table below:

	Metropolitan					Remaining
	Statistical Area	Total Investment		Funded		Unfunded
Closing Date	("MSA")	Commitment		Investment (1)		Commitment		Fair Value
5/14/2015	Miami 1 (2)(3)	$	13,867	$	12,250	$	1,617	$	14,338
5/14/2015	Miami 2 (2)(3)		14,849		13,961		888		14,562
9/25/2015	Fort Lauderdale (2)(3)		13,230		12,352		878		16,409
4/15/2016	Washington DC (3)		17,269		17,005		264		19,200
4/29/2016	Atlanta 1 (3)(4)		10,223		9,915		308		11,352
7/19/2016	Jacksonville (3)(4)		8,127		7,422		705		11,406
7/21/2016	New Jersey (3)		7,828		5,749		2,079		6,717
8/15/2016	Atlanta 2 (3)(4)		8,772		8,293		479		9,004
8/25/2016	Denver (3)(4)		11,032		10,221		811		12,716
9/28/2016	Columbia (3)		9,199		8,868		331		9,972
12/22/2016	Raleigh (3)		8,877		8,432		445		9,450
	Total	$	123,273	$	114,468	$	8,805	$	135,126

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

⁽²⁾ These development property investments (having approximately $8.1 million of outstanding principal at contribution) were contributed to the SL1 Venture on March 31, 2016 by the Company.

⁽³⁾ Construction at the facility was substantially complete and/or certificate of occupancy had been received as of June 30, 2019. See Note 4, Fair Value of Financial Instruments, for information regarding recognition of entrepreneurial profit.

⁽⁴⁾ On January 28, 2019, the SL1 Venture purchased its developer partner’s 50.1% equity interest in this investment. As a result, the SL1 Venture now wholly owns the self-storage property.

As of June 30, 2019, the SL1 Venture had total assets of $156.0 million and total liabilities of $38.0 million. During the three and six months ended June 30, 2019, the SL1 Venture had net income of $0.8 million and $2.3 million, of which $0.1 million and $0.2 million was allocated to the Company and $0.7 million and $2.0 million was allocated to HVP III, respectively, under the HLBV method.At June 30, 2019, $0.2 million of transaction expenses were included in the carrying amount of the Company’s investment in the SL1 Venture. Additionally, the Company may from time to time make advances to the SL1 Venture. At June 30, 2019 and December 31, 2018, the Company had $0.4 million in advances to the SL1 Venture, and the related interest on these advances are classified in equity in earnings from unconsolidated self-storage real estate venture in the Consolidated Statements of Operations.

Under the JV Agreement, Heitman and the Company will seek to obtain and, if obtained, will share joint rights of first refusal to acquire self-storage facilities that are the subject of development property investments made by the SL1 Venture. Additionally, so long as the Company, through its operating subsidiary, is a member of the SL1 Venture and the SL1 Venture holds any assets, the Company will not make any investment of debt or equity or otherwise, directly or indirectly, in one or more new joint ventures or similar programs for the purposes of funding or providing development loans or financing, directly or indirectly, for the development, construction or conversion of self-storage facilities, in each case without first offering such opportunity to Heitman to participate on substantially the same terms as those set forth in the JV Agreement, either through the SL1 Venture or a newly formed real estate venture.

The JV Agreement permits Heitman to cause the Company to repurchase from Heitman its Developer Equity Interests (as defined in the JV Agreement) in certain limited circumstances. Under the JV Agreement, if a developer causes to be refinanced a self-storage facility with respect to which the SL1 Venture has made a development property investment and such refinancing does not coincide with a sale of the underlying self-storage facility, then at any time after the fourth anniversary of the commencement of the SL1 Venture, Heitman may either put to the Company its share of the Developer Equity Interests in respect of each such development property investment, or sell Heitman’s Developer Equity Interests to a third party. The Company concluded that the likelihood of loss is remote and assigned no value to these puts as of June 30, 2019 and December 31, 2018.

The Company is the managing member of the SL1 Venture and manages and administers (i) the day-to-day business and affairs of the SL1 Venture and any of its acquired properties and (ii) loan servicing and other administration of the approved development property investments. The Company will be paid a monthly expense reimbursement amount by the SL1 Venture in connection with its role as managing member, as set forth in the JV Agreement. Heitman may remove the Company as the managing member of the SL1 Venture if it commits an event of default (as defined in the JV Agreement), if it undergoes a change of control (as defined in the JV Agreement), or if it becomes insolvent.

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Heitman approves all “Major Decisions” of the SL1 Venture, as defined in the JV Agreement, including, but not limited to, each investment of capital, the incurrence of any indebtedness, the sale or other disposition of assets of the SL1 Venture, the replacement of the managing member, the acceptance of new members into the SL1 Venture and the liquidation of the SL1 Venture.

6.  VARIABLE INTEREST ENTITIES

Development Property Investments and Bridge Investments

The Company holds variable interests in its development property investments and bridge investments. The Company has determined that these investees qualify as VIEs because the entities do not have enough equity to finance their activities without additional subordinated financial support. In determining whether the Company is the primary beneficiary of the development property VIEs, the Company identified the activities that most significantly impact the development property VIEs’ economic performance. Such activities are (1) managing the construction and operations of the project, (2) selecting the property manager, (3) making financing decisions, (4) authorizing capital expenditures and (5) disposing of the property. Although the Company has certain participating and protective rights, it does not have the power to direct the activities that most significantly impact the development property VIEs’ economic performance and is not the primary beneficiary; therefore, the Company does not consolidate the development property VIEs.

The Company has recorded assets of $566.4 million and $457.9 million at June 30, 2019 and December 31, 2018, respectively, for its variable interest in the development property and bridge investment VIEs which is included in the development property investments and bridge investments at fair value line items in the Consolidated Balance Sheets. The Company’s maximum exposure to loss as a result of its involvement with the development property and bridge investment VIEs is as follows:

	June 30, 2019		December 31, 2018
Assets recorded related to VIEs	$	566,367	$	457,947
Unfunded loan commitments to VIEs		197,629		220,877
Maximum exposure to loss	$	763,996	$	678,824

The Company has a construction completion guaranty from the managing members of the development property VIEs or individual affiliates/owners of such managing members.

Investment in Real Estate Venture

The Company determined that the SL1 Venture qualifies as a VIE because it does not have enough equity to finance its activities without additional subordinated financial support. In determining whether the Company is the primary beneficiary of the entity, the Company identified the activities that most significantly impact the entity’s economic performance. Such activities are (1) approving self-storage development investments and acquiring self-storage properties, (2) managing directly-owned properties, (3) obtaining debt financing, and (4) disposing of investments. Although the Company has certain rights, it does not have the power to direct the activities that most significantly impact the entity’s economic performance and thus is not the primary beneficiary. As such, the Company does not consolidate the entity and accounts for its unconsolidated interest in the SL1 Venture using the equity method of accounting. The Company’s investment in the SL1 Venture is included in the investment in and advances to self-storage real estate venture balance in the Consolidated Balance Sheets, and earnings from the SL1 Venture are included in equity in earnings from unconsolidated real estate venture in the Company’s Consolidated Statements of Operations. The Company’s maximum contribution to the SL1 Venture is $12.3 million, and as of June 30, 2019 and December 31, 2018, the Company’s remaining unfunded commitment to the SL1 Venture is $0.3 million and $0.9 million, respectively. At June 30, 2019 and December 31, 2018, the Company had $0.4 million in advances to the SL1 Venture.

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7.  DEBT

A summary of the Company’s debt is as follows:

		Effective	Carrying Value as of
	Maturity Date	Interest Rate	June 30, 2019		December 31, 2018
Secured revolving credit facility (1)	December 28, 2021	5.47%	$	62,900	$	-
Term Loans:
Term loan 1 (2)	August 1, 2021	4.69%		9,150		9,150
Term loan 2 (2)	August 1, 2021	4.69%		7,125		7,125
Term loan 3 (2)	August 1, 2021	4.69%		8,625		8,625
Term loan 4 (2)	August 1, 2021	4.69%		9,188		-
Total Term Loans				34,088		24,900
Term loan debt issuance costs				(377)		(291)
Net Term Loans				33,711		24,609
Total debt			$	96,611	$	24,609

(1) Includes amounts subject to interest rate cap. Effective interest rate represents the weighted average contractual interest rate before the interest rate cap as of June 30, 2019. See further discussion of interest rate cap in Note 8, Risk Management and Use of Financial Instruments.

(2) Balance is subject to interest rate swap. Interest rate represents the contractual interest on the loan as of June 30, 2019. See further discussion in Note 8, Risk Management and Use of Financial Instruments.  

Credit Facility

On December 28, 2018, the Operating Company entered into an amended and restated senior secured revolving Credit Facility of up to $235 million with KeyBank National Association, as administrative agent, KeyBanc Capital Markets Inc., Raymond James Bank, N.A. and BMO Capital Markets Corp., as joint lead arrangers and syndication agents, and the other lenders party thereto (the “Credit Facility”). Pursuant to an accordion feature, the Operating Company may from time to time increase the commitments up to an aggregate amount of $400 million, subject to, among other things, an absence of default under the Credit Facility, as well as receiving commitments from lenders for the additional amounts. The Operating Company typically uses borrowings under the Credit Facility to fund its investments, to make secured or unsecured loans to borrowers in connection with its investments and for general corporate purposes.

On December 28, 2018, the Company and certain wholly-owned subsidiaries of the Operating Company (the “Subsidiaries”) entered into an Unconditional Guaranty of Payment and Performance whereby they have agreed to unconditionally guarantee the obligations of the Operating Company under the Credit Facility. The Credit Facility is secured by a portion of the Company’s investments made through the Subsidiaries, and other subsidiaries of the Operating Company may be added as guarantors from time to time during the term of the Credit Facility. The Credit Facility has a scheduled maturity date on December 28, 2021, with two one-year extension options to extend the maturity of the facility to December 28, 2023. Borrowings under the Credit Facility are secured by three different pools of collateral: the first consisting of the Company’s mortgage loans extended to developers, the second consisting of certain non-stabilized self-storage properties owned by the Company and the third consisting of certain stabilized self-storage properties owned by the Company or one of its wholly-owned subsidiaries.

The amount available to borrow under the Credit Facility is limited according to a borrowing base valuation of the assets available as collateral. For loans secured by Company mortgage loans, the borrowing base availability is the lesser of (i) 60% of the outstanding balance of the Company mortgage loans and (ii) the maximum principal amount which would not cause the outstanding loans under the Credit Facility secured by the Company mortgage loans to be greater than 50% of the underlying real estate asset fair value securing the Company mortgage loans. For loans secured by non-stabilized self-storage properties, the borrowing base availability is the lesser of (i) the maximum principal amount that would not cause the outstanding loans under the Credit Facility secured by the non-stabilized self-storage properties to be greater than 60% of the as-stabilized value of such non-stabilized self-storage properties, (ii) the maximum principal amount which would not cause the outstanding loans under the Credit Facility to be greater than 75% of the total development cost of the non-stabilized self-storage properties, and (iii) whichever of the following is then applicable: (a) the maximum principal amount that would not cause the ratio of (1) stabilized net operating income from the non-stabilized self-storage properties included in the borrowing base divided by (2) an implied debt service coverage amount to be less than 1.35 to 1.00, (b) for any underlying real estate asset securing the non-stabilized self-storage properties that has been included in the borrowing base for greater than 18 months, the maximum principal amount which would not cause the ratio of (1) actual adjusted net operating income for the underlying real estate asset securing such non-stabilized self-storage properties divided by (2) an implied debt service amount to be less than 0.50 to 1.00, and (c) for any underlying real estate asset securing the non-stabilized self-storage properties that has been

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included in the borrowing base for greater than 30 months, the maximum principal amount which would not cause the ratio of (1) actual adjusted net operating income for the underlying real estate asset securing such non-stabilized self-storage properties divided by (2) an implied debt service amount to be less than 1.00 to 1.00. For loans secured by stabilized self-storage properties, the borrowing base availability is the lesser of (i) the maximum principal amount that would not cause the outstanding loans under the Credit Facility secured by the underlying real estate asset securing the stabilized self-storage properties to be greater than 65% of the value of such self-storage properties and (ii) the maximum principal amount that would not cause the ratio of (i) aggregate adjusted net operating income from the underlying real estate asset securing such stabilized self-storage properties included in the borrowing base divided by (ii) an implied debt service coverage amount to be less than 1.30 to 1.00.

The Credit Facility includes certain requirements that may limit the borrowing capacity available to the Company from time to time. Under the terms of the Credit Facility, the outstanding principal balance of the revolving credit loans, swing loans and letter of credit liabilities under the Credit Facility may not exceed the borrowing base availability.

Each loan made under the Credit Facility bears interest at either, at the Operating Company’s election, (i) a base rate plus a margin of 1.25%,  1.75% or 2.25% or (ii) LIBOR plus a margin of 2.25%,  2.75% or 3.25%, in each case depending on the borrowing base available for such loan. In addition, the Operating Company is required to pay a fee of a per diem rate of either 0.25% or 0.30% per annum depending on the amount outstanding under the Credit Facility at the time, times the excess of the sum of the commitments of the lenders, as in effect from time to time, over the outstanding principal amount of revolving credit loans under the Credit Facility.

LIBOR is expected to be discontinued after 2021. None of the Company’s current debt that has an interest rate tied to LIBOR has a maturity date of later than December 31, 2021 unless the extension options under the Credit Facility are exercised. The Credit Facility provides procedures for determining an alternative base rate in the event that LIBOR is discontinued. However, there can be no assurances as to what that alternative base rate will be and whether that base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. The Company intends to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and work with its lenders to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.

The Credit Facility contains certain customary representations and warranties and financial and other affirmative and negative covenants. The Operating Company’s ability to borrow under the Credit Facility is subject to ongoing compliance by the Company and the Operating Company with various customary restrictive covenants, including but not limited to limitations on its incurrence of indebtedness, investments, dividends, asset sales, acquisitions, mergers and consolidations and liens and encumbrances. In addition, the Credit Facility contains certain financial covenants including the following:

· total consolidated indebtedness not exceeding 50% of gross asset value;

· a minimum fixed charge coverage ratio (defined as the ratio of consolidated adjusted earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.20 to 1.00 during the period between December 28, 2018 and December 31, 2020, 1.30 to 1.00 during the period between January 1, 2021 and December 31, 2022 and 1.40 to 1.00 during the period between January 1, 2023 through the maturity of the Credit Facility;

· a minimum consolidated tangible net worth (defined as gross asset value less total consolidated indebtedness) of $373.6 million plus 75% of the sum of any additional net offering proceeds;

· when aggregate loan commitments under the Credit Facility exceed $50 million, unhedged variable rate debt cannot exceed 40% of consolidated total indebtedness;

· liquidity of no less than the greater of (a) future funding commitments of us and our subsidiaries for the three months following each date of determination and (b) $50 million for the period between December 31, 2018 and December 31, 2019 or on and after January 1, 2020, liquidity of no less than the greater of (i) future funding commitments of the Company and its subsidiaries for the six months following each date of determination and (ii) $50 million; and

· a debt service coverage ratio (defined as the ratio of consolidated adjusted earnings before interest, taxes, depreciation and amortization to the Company’s consolidated interest expense and debt principal payments for any given period) of 2.00 to 1.00.

The Credit Facility provides for standard events of default, including nonpayment of principal and other amounts when due, non-performance of covenants, breach of representations and warranties, certain bankruptcy or insolvency events, and changes in control. If an event of default occurs and is continuing under the Credit Facility, the lenders may, among other things, terminate their commitments under the Credit Facility and require the immediate payment of all amounts owed thereunder.

As of June 30, 2019, the Company had $62.9 million outstanding under the Credit Facility of $162.9 million of total availability for borrowing under the Credit Facility before considering any amounts outstanding.

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As of June 30, 2019, the Company was in compliance with all of its financial covenants of the Credit Facility.

As of June 30, 2019 and December 31, 2018, certain of the Company’s development property investments and bridge investments as described in Note 3, Self-Storage Investment Portfolio, were pledged as collateral against the Credit Facility. In addition, as of June 30, 2019, the Jacksonville 1 and New York City 1 properties, which are included in self-storage real estate owned, net, were pledged as collateral against the Credit Facility. As of December 31, 2018, the New York City 1 property, which is included in self-storage real estate owned, net, was pledged as collateral against the Credit Facility.

Term Loans

On August 17, 2018, the Company entered into loan agreements with FirstBank (“FirstBank”) with respect to three term loans in the aggregate principal amount of $24.9 million. On January 18, 2019, the Company entered into a loan agreement with FirstBank with respect to a term loan in the aggregate principal amount of $9.2 million. These loans are collectively referred to as the “FirstBank Term Loans.” The FirstBank Term Loans are secured by first mortgages on the Company’s four wholly-owned self-storage facilities located in Orlando, Florida, Atlanta, Georgia, and Charlotte, North Carolina. As a condition to FirstBank providing the FirstBank Term Loans, the Company has agreed to unconditionally guarantee the subsidiaries’ obligations under the FirstBank Term Loans pursuant to guaranty agreements with FirstBank (the “FirstBank Guaranties”).

The FirstBank Term Loans will mature on August 1, 2021.  Borrowings under the FirstBank Term Loans bear interest at a floating variable rate of one-month LIBOR plus 2.25%, which is reset monthly.  The FirstBank Term Loans are each subject to an interest rate swap to fix the 30-day LIBOR rate at 2.2925%. See further discussion of the utilization of interest rate swaps in Note 8, Risk Management and Use of Financial Instruments.  

The FirstBank Term Loans contain customary representations and warranties and affirmative and negative covenants. The FirstBank Term Loans contain a financial covenant that requires the Operating Company to maintain a debt service coverage ratio of 1.35 to 1. The debt service coverage ratio will be calculated pursuant to the terms of the Credit Facility. FirstBank is a lender under the Credit Facility. The FirstBank Term Loans also contain a covenant that requires the Operating Company to maintain a loan to value ratio on the outstanding balance of the loan that does not exceed the loan to value ratio at closing.

The FirstBank Term Loans provide for standard events of default, including nonpayment of principal and other amounts when due, non-performance of covenants, breach of representations and warranties and certain bankruptcy or insolvency events. If an event of default occurs and is continuing under the FirstBank Term Loans, FirstBank may, among other things, terminate its commitments under the FirstBank Term Loans and require the immediate payment of all amounts owed thereunder. The FirstBank Term Loans each contain cross-default provisions with the Credit Facility, pursuant to which an event of default under the FirstBank Term Loans is triggered by the occurrence of an event of default under the Credit Facility that results in acceleration of the outstanding obligations of the Operating Company under the Credit Facility.

As of June 30, 2019, the Company was in compliance with all of its financial covenants of the FirstBank Term Loans.

Senior Participation

On May 27, 2016, the Company sold a senior participation in a construction loan on a facility in the Miami, Florida MSA (“the Miami A Note”), having a commitment amount of $17.7 million in exchange for a commitment by the bank to provide net proceeds of $10.0 million to fund construction draws under the construction loan (the “Miami A Note Sale”) once the total outstanding principal balance exceeded $7.7 million. The Miami A Note Sale was effected pursuant to a participation agreement between the bank and the Company (the “Miami Participation Agreement”). Under the Miami Participation Agreement, the Company continued to service the underlying loan as long as it was not in default under the Miami Participation Agreement. The bank had the option to “put” the senior participation to the Company in the event the underlying borrower defaulted on the underlying loan or if the Company defaulted under the Miami Participation Agreement. As part of the Participation Agreement, the Company maintained a minimum aggregate balance of $0.5 million in depository or money market accounts at the bank, and if such balance was not maintained, the interest rate would have increased. The Company paid to the bank interest on the outstanding balance of the Miami A Note at the rate of 30-day LIBOR plus 3.10%.  The Company also paid a loan fee of 100 basis points, or $0.1 million upon closing of the loan. The Miami A Note initially had a maturity date of July 1, 2017. On March 31, 2018, the maturity date was extended to June 30, 2018. The Company repurchased the Miami A Note on June 19, 2018.

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8. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS

The Company’s use of derivative instruments is limited to the utilization of interest rate swap and cap agreements to manage interest rate risk exposures and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure, as well as to hedge specific liabilities. The counterparties to these arrangements are major financial institutions with which the Company and its subsidiaries may also have other financial relationships. The Company is potentially exposed to credit loss in the event of non-performance by these counterparties. However, because of the high credit ratings of the counterparties, the Company does not anticipate that any of the counterparties will fail to meet these obligations as they come due. The Company does not hedge credit or property value market risks.

The Company enters into interest rate swap agreements that qualify and are designated as cash flow hedges designed to reduce the impact of interest rate changes on its variable rate debt. Therefore, the interest rate swaps are recorded in the Consolidated Balance Sheets at fair value and the related gains or losses are deferred in stockholders’ equity as accumulated other comprehensive income (loss). These deferred gains and losses are amortized into interest expense during the period or periods in which the related interest payments affect earnings.During the three months ended June 30, 2019, the Company entered into four interest rate swaps related to its Term Loans.

The Company formally assesses, both at inception of a hedge and on an on-going basis, whether each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If management determines that a derivative was highly-effective as a hedge, then the Company accounts for the derivative using hedge accounting, pursuant to which gains or losses inherent in the derivative did not impact the Company’s results of operations. If management determines that a derivative was not highly-effective as a hedge or if a derivative ceased to be a highly-effective hedge, the Company will discontinue hedge accounting prospectively and reflect in its statement of operations realized and unrealized gains and losses in respect of the derivative.

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. In addition, the Company has agreements with each of its derivative counterparties that contain a provision where the Operating Partnership could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. As of June 30, 2019, the Company had not breached the provisions of these agreements. Although the Company's derivative contracts are subject to master netting arrangements, which serve as credit mitigants to both the Company and its counterparties under certain situations, the Company does not net its derivative fair values or any existing rights or obligations to cash collateral in the Consolidated Balance Sheets.

 The following table summarizes the terms and fair values of the Company’s derivative financial instruments designated as hedges as of June 30, 2019 and December 31, 2018, respectively (dollars in thousands):

		Notional Amount								Fair Value
Hedge Product	Hedge Type (1)	June 30, 2019		December 31, 2018		Strike		Effective Date	Maturity	June 30, 2019		December 31, 2018
Swap	Cash flow	$	9,150	$	-	2.2925	%	6/3/2019	8/1/2021	$	(118)	$	-
Swap	Cash flow		7,125		-	2.2925	%	6/3/2019	8/1/2021		(92)		-
Swap	Cash flow		8,625		-	2.2925	%	6/3/2019	8/1/2021		(112)		-
Swap	Cash flow		9,188		-	2.2925	%	6/3/2019	8/1/2021		(119)		-
		$	34,088	$	-					$	(441)	$	-

(1) Hedging variable rate Term Loans by fixing 30-day LIBOR.

The Company measures its derivative instruments designated as cash flow hedges at fair value and records them in the balance sheet as either an asset or liability. As of June 30, 2019, all derivative instruments designated as cash flow hedges are included in accounts payable, accrued expenses and other liabilities in the accompanying Consolidated Balance Sheets. As of December 31, 2018, there were no derivative instruments outstanding.  The changes in the fair value of the derivatives are reported in accumulated other comprehensive income (loss). Amounts reported in accumulated other comprehensive income (loss) related to derivatives are reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

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The following table presents the effect of derivatives designated as hedging instruments on the Consolidated Statements of Comprehensive Income:

Derivatives in Cash Flow Hedging Relationships	Amount of Loss Recognized in Accumulated OCL on Derivative				Gain Reclassified from Accumulated OCL into Interest Income				Location of Gain Reclassified from Accumulated OCL into Income
Three months ended June 30,	2019		2018		2019		2018
Term loan interest rate contracts	$	(441)	$	-	$	4	$	-	Interest Expense
Six months ended June 30,
Term loan interest rate contracts	$	(441)	$	-	$	4	$	-	Interest Expense

The changes in accumulated other comprehensive income (loss) for the three months and six months ended June 30, 2019 and 2018, are summarized as follows (dollars in thousands):

	Three months ended				Six months ended
	June 30,				June 30,
		2019		2018		2019		2018
Accumulated other comprehensive income beginning of period	$	-	$	-	$	-	$	-
Other comprehensive income (loss):
Unrealized losses on interest rate swaps		(437)		-		(437)		-
Reclassification of realized gains on interest rate swaps		(4)		-		(4)		-
Amount included in other comprehensive income (loss)		(441)		-		(441)		-
Accumulated other comprehensive income (loss) end of period	$	(441)	$	-	$	(441)	$	-

During the next twelve months, the Company estimates that an additional $0.1 millionwill be reclassified to earnings as an increase to interest expense, which primarily represents the difference between the fixed interest rate swap payments and the projected variable interest rate swap receipts.

The Company also entered into an interest rate cap agreement in June 2019 with a notional amount of $100 million and a one-month LIBOR interest rate cap of 2.50% that expires on December 28, 2021 (the “Interest Rate Cap Agreement”). The Interest Rate Cap Agreement is for a period equal to the existing term of the Credit Facility (as defined in Note 7, Debt) and has a notional amount equal to or greater than the then outstanding principal balance of the Credit Facility. The Company did not designate the interest rate cap as a hedge. As of June 30, 2019, the net carrying amount of the interest rate cap was $0.1 million and is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets. There were no interest rate caps outstanding at December 31, 2018.

The following table presents the effect of derivatives not designated as hedging instruments on the Consolidated Statements of Operations:

Derivatives Not Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in Earnings on Derivative				Location of Gain (Loss) Recognized in Income on Derivative
For the three months ended June 30,	2019		2018
Credit Facility interest rate cap	$	(28)	$	-	Interest Expense
For the six months ended June 30,
Credit Facility interest rate cap	$	(28)	$	-	Interest Expense

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9.  STOCKHOLDERS’ EQUITY

The Company had 22,133,290 and 20,430,218 shares of common stock issued and outstanding, which included 208,665 and 159,165 shares of non-vested restricted stock, as of June 30, 2019 and December 31, 2018, respectively. The Company had 129,250 and 125,000 shares of Series A Preferred Stock issued and outstanding as of June 30, 2019 and December 31, 2018, respectively. The Company also had 1,571,734 shares of Series B Preferred Stock issued and outstanding as of June 30, 2019 and December 31, 2018.

ATM Program

On December 7, 2018, the Company entered into a new Equity Distribution Agreement with an aggregate offering price under the ATM Program of up to $75.0 million. As of June 30, 2019, the Company has issued and sold an aggregate of 3,870,042 shares of common stock at a weighted average price of $21.49 per share under the ATM Programs, receiving net proceeds after commissions and other offering costs of $81.1 million. During the six months ended June 30, 2019, the Company issued and sold an aggregate of 1,588,268 shares of common stock at a weighted average price per share of $21.08 under the ATM Programs, receiving net proceeds after commissions and other offering costs of $32.7 million.

Stock Repurchase Plan

On May 20, 2016, the Company’s Board of Directors authorized a share repurchase program for the repurchase of up to $10.0 million of the outstanding shares of common stock of the Company. As of June 30, 2019, the Company had repurchased and retired a total of 213,078 shares of its common stock at an aggregate cost of approximately $3.2 million. As of June 30, 2019, the Company has $6.8 million remaining under the Board’s authorization to repurchase shares of its common stock.

Equity Incentive Plan

The Company maintains the Second Amended and Restated 2015 Equity Incentive Plan (the “2015 Equity Incentive Plan”) for the purpose of attracting and retaining directors, executive officers, investment professionals and other key personnel and service providers, including officers and employees of the Manager and other affiliates, and to stimulate their efforts toward the Company’s continued success, long-term growth and profitability. The 2015 Equity Incentive Plan provides for the grant of stock options, share awards (including restricted common stock and restricted stock units), stock appreciation rights, dividend equivalent rights, performance awards, annual incentive cash awards and other equity-based awards, including Long-Term Incentive Plan (“LTIP”) units, which are convertible on a one-for-one basis into Operating Company Units (“OC Units”). On May 1, 2019, the Company’s stockholders approved, and the Company adopted, the Second Amended and Restated 2015 Equity Incentive Plan increasing the number of shares reserved for issuance under the Plan by 380,000 to an aggregate of 750,000 shares and extending the term of the Plan until May 1, 2029.

Restricted Stock Awards

The Second Amended and Restated 2015 Equity Incentive Plan permits the issuance of restricted shares of the Company’s common stock to employees of the Manager (as the Company has no employees) and the Company’s non-employee directors. As of June 30, 2019 and December 31, 2018, 502,009 and 363,587 shares of restricted stock, respectively, had been granted, of which 55,172 vested in 2016, 46,413 vested in 2017, 99,503 vested in 2018, 87,256 vested during the six months ended June 30, 2019, 105,497 is expected to vest in 2020, 53,836 is expected to vest in 2021 and 49,332 is expected to vest in 2022. Additionally, 1,666 were forfeited during the six months ended June 30, 2019 and 1,667 were forfeited during each of the years ended December 31, 2018 and 2016. Non-vested shares are earned over the respective vesting period based on a service condition only. Expenses related to restricted stock awards are charged to compensation expense and are recognized over the respective vesting period (primarily three to five years) of the awards. For restricted stock issued to non-employee directors of the Company, compensation expense is based on the market value of the shares at the grant date. For restricted stock awards issued to employees of the Manager, prior to the adoption of ASU 2018-07, compensation expense was re-measured at each reporting date until service was complete and the restricted shares became vested based on the then current value of the Company’s common stock. The Company early adopted ASU 2018-07 effective April 1, 2018, which established a grant date fair value of $18.10 based on the market value of the award as of April 1, 2018 for all nonemployee awards that have not vested as of April 1, 2018. Furthermore, for future awards, compensation expense is based on the market value of the shares at the grant date.

The Company recognized approximately $0.8 million of stock-based compensation expense for the three months ended June 30, 2019 and 2018, and $1.1 million and $1.2 million of stock-based compensation expense for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019 and December 31, 2018, the total unrecognized compensation cost related to the Company’s

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restricted shares was approximately $4.0 million and $2.1 million, respectively, based on the grant date market value for awards issued to non-employee directors of the Company and the fair value of awards as of the adoption date of ASU 2018-07 for awards issued to employees of the Manager. This cost is expected to be recognized over the remaining weighted average period of 2.3 years. The Company presents stock-based compensation expense in general and administrative expenses in the Consolidated Statements of Operations.

A summary of changes in the Company’s restricted shares of common stock for the three and six months ended June 30, 2019 and 2018 is as follows:

	Three months ended				Three months ended
	June 30, 2019				June 30, 2018
			Weighted				Weighted
			average grant				average grant
	Shares		date fair value		Shares		date fair value
Nonvested at March 31,		153,165	$	18.40		195,502	$	21.32
Granted		133,730		20.97		57,333		19.52
Vested		(76,564)		18.86		(80,336)		18.46
Forfeited		(1,666)		18.10		-		-
Nonvested at June 30,		208,665	$	20.35		172,499	$	18.37

	Six months ended				Six months ended
	June 30, 2019				June 30, 2018
			Weighted				Weighted
			average grant				average grant
	Shares		date fair value		Shares		date fair value
Nonvested at December 31,		159,165	$	18.39		185,002	$	21.58
Granted		138,422		21.70		75,333		19.18
Vested		(87,256)		18.95		(87,836)		18.53
Forfeited		(1,666)		18.10		-		-
Nonvested at June 30,		208,665	$	20.35		172,499	$	18.37

Nonvested restricted shares of common stock receive dividends which are nonforfeitable.

Series A Preferred Stock

On July 27, 2016 (the “Effective Date”), the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with accounts managed by NexPoint Advisors, L.P., an affiliate of Highland Capital Management, L.P. (collectively, the “Buyers”) relating to the issuance and sale, from time to time until the second anniversary of the Effective Date (such period, the “Commitment Period”), of up to $125 million in shares of the Company’s Series A Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), at a price of $1,000 per share (the “Liquidation Value”). The Company has issued all shares of Series A Preferred Stock available for issuance under the Purchase Agreement and the Articles Supplementary except for shares of Series A Preferred Stock issuable as in-kind dividends.

The Series A Preferred Stock ranks senior to the shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company, on parity with any class or series of capital stock of the Company expressly designated as ranking on parity with the Series A Preferred Stock with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company, junior to any class or series of capital stock of the Company expressly designated as ranking senior to the Series A Preferred Stock with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company and junior in right of payment to the Company’s existing and future indebtedness.

Holders of Series A Preferred Stock are entitled to a cumulative cash distribution (“Cash Distribution”) equal to (A) 7.0% per annum on the Liquidation Value for the period beginning on the respective date of issuance until the sixth anniversary of the Effective Date, payable quarterly in arrears, (B) 8.5% per annum on the Liquidation Value for the period beginning the day after the sixth anniversary

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of the Effective Date and for each year thereafter as long as the Series A Preferred Stock remains issued and outstanding, payable quarterly in arrears, and (C) an amount in addition to the amounts in (A) and (B) equal to 5.0% per annum on the Liquidation Value upon the occurrence of certain triggering events (a “Cash Premium”). In addition, the holders of the Series A Preferred Stock will be entitled to a cumulative dividend payable in-kind in shares of Common Stock or additional shares of Series A Preferred Stock, at the election of the holders (the “Stock Dividend”), equal in the aggregate to the lesser of (Y) 25% of the incremental increase in the Company’s book value (as adjusted for equity capital issuances, share repurchases and certain non-cash expenses) plus, to the extent the Company owns equity interests in income-producing real property, the incremental increase in net asset value (provided, however, that no interest in the same real estate asset will be double counted) and (Z) an amount that would, together with the Cash Distribution, result in a 14.0% internal rate of return for the holders of the Series A Preferred Stock from the date of issuance of the Series A Preferred Stock, as set forth in the Articles Supplementary classifying the Series A Preferred Stock (the “Series A Articles Supplementary”). Triggering events that will trigger the payment of a Cash Premium with respect to a Cash Distribution include: (i) the occurrence of certain change of control events affecting the Company after the third anniversary of the Effective Date, (ii) the Company’s ceasing to be subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act, (iii) the Company’s failure to remain qualified as a real estate investment trust, (iv) an event of default under the Purchase Agreement, (v) the failure by the Company to register for resale shares of Common Stock pursuant to the Registration Rights Agreement, (vi) the Company’s failure to redeem the Series A Preferred Stock as required by the Purchase Agreement, or (vii) the filing of a complaint, a settlement with, or a judgment entered by the Securities and Exchange Commission against the Company or any of its subsidiaries or a director or executive officer of the Company relating to the violation of the securities laws, rules or regulations with respect to the business of the Company.

For the first three fiscal quarters of the fiscal years 2018, 2019 and 2020 and for the first fiscal quarter of 2021, the Company will declare and pay an Aggregate Stock Dividend equal to $2,125,000 (the “Target Stock Dividend”). For the last fiscal quarter of each of 2018, 2019 and 2020 and for the second fiscal quarter of 2021, the Company will compute the cumulative Aggregate Stock Dividend for all periods after December 31, 2017 through the end of such fiscal quarter equal to 25% of the incremental increase in the Company’s book value (as adjusted for equity capital issuances, share repurchases and certain non-cash expenses) plus, to the extent that we own equity interests in income-producing real property, the incremental increase in net asset value (provided, however, that no interest in the same real estate asset will be double counted) (the “Computed Stock Dividend”), and will declare and pay for such quarter an Aggregate Stock Dividend equal to the greater of the Target Stock Dividend or the Computed Stock Dividend minus the sum of all Aggregate Stock Dividends declared and paid for all fiscal quarters after December 31, 2017 and before the fiscal quarter for which such payment is computed, in each case subject to an amount that would, together with the Cash Distribution (as defined in the Series A Articles Supplementary), result in a 14.0% internal rate of return for the holders of Series A Preferred Stock from the date of issuance of the Series A Preferred Stock. Accrued but unpaid Cash Distributions and Stock Dividends on the Series A Preferred Stock will accumulate and will earn additional Cash Distributions and Stock Dividends as calculated above, compounded quarterly.

Accrued but unpaid Cash Distributions and Stock Dividends on the Series A Preferred Stock will accumulate and will earn additional Cash Distributions and Stock Dividends as calculated above, compounded quarterly.

As long as shares of Series A Preferred Stock remain outstanding, the Company is required to maintain a ratio of debt to total tangible assets determined under U.S. generally accepted accounting principles of no more than 0.4:1, measured as of the last day of each fiscal quarter. The Company has complied with this covenant as of June 30, 2019.

The Series A Preferred Stock may be redeemed at the Company’s option (i) after five years from the Effective Date at a price equal to 105% of the Liquidation Value per share plus the value of all accumulated and unpaid Cash Distributions and Stock Dividends, and (ii) after six years from the Effective Date at a price equal to 100% of the Liquidation Value per share plus the value of all accumulated and unpaid Cash Distributions and Stock Dividends. In the event of certain change of control events affecting the Company prior to the third anniversary of the Effective Date, the Company must redeem all shares of Series A Preferred Stock for a price equal to (a) the Liquidation Value, plus (b) accumulated and unpaid Cash Distributions and Stock Dividends, plus (c) a make-whole premium designed to provide the holders of the Series A Preferred Stock with a return on the redeemed shares equal to a 14.0% internal rate of return through the third anniversary of the Effective Date.

In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Stock shall be entitled to receive an amount equal to the greater of (i) the Liquidation Value, plus all accumulated but unpaid Cash Distributions and Stock Dividends thereon to, but not including, the date of any liquidation, but excluding any Cash Premium and (ii) the amount that would be paid on such date in the event of a redemption following a change of control.

Further, at any time that the Series A Preferred Stock remains outstanding, if Dean Jernigan, the Company’s current Executive Chairman of the Board, voluntarily leaves the position (a “Key Man Event”), the holders of the Series A Preferred Stock shall have the

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right to accept or reject the service of any person as Chief Executive Officer (“CEO”) (or such person serving as the principal executive officer) of the Company.

On May 1, 2019, the Company declared a (i) cash distribution of $17.65 per share of Series A Preferred Stock, payable on July 15, 2019, to holders of Series A Preferred Stock of record on the close of business on July 1, 2019, and (ii) distributions payable in kind in a number of shares of Series A Preferred Stock as determined in accordance with the terms of the designation of the Series A Preferred Stock, payable on July 15, 2019, to holders of Series A Preferred Stock of record on the close of business on July 1, 2019.

Series B Preferred Stock

As of June 30, 2019, the Company had 3,750,000 shares of its 7.00% Series B cumulative redeemable perpetual preferred stock (the “Series B Preferred Stock”) authorized and 1,571,734 shares of Series B Preferred Stock outstanding. Series B Preferred Stock ranks senior to the Company’s common stock, with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company, and on parity with the Series A Preferred Stock and any other class or series of capital stock of the Company expressly designated as ranking on parity with the Series B Preferred Stock with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company, junior to any class or series of capital stock of the Company expressly designated as ranking senior to the Series B Preferred Stock with respect to distribution rights and rights upon liquidation, winding up and dissolution of the Company and junior in right of payment to the Company’s existing and future indebtedness. Holders of the Series B Preferred Stock generally do not have voting rights.

Dividends on the Series B Preferred Stock are payable quarterly in arrears on the fifteenth (15th) day of January, April, July and October of each year (or if not a business day, on the immediately preceding business day) (each, a “dividend payment date”) at a rate equal to 7.00% of the $25.00 per share liquidation preference (equivalent to an annual rate of $1.7500 per share). On or after January 26, 2023, the Series B Preferred Stock may be redeemed, at the Company’s option, upon not less than 30 nor more than 60 days’ written notice, in whole or in part, at any time and from time to time, for cash at a redemption price equal to $25.00 per share, plus any accrued and unpaid dividends (whether or not authorized or declared) to, but excluding, the date fixed for redemption. Holders of Series B Preferred Stock will have no right to require the redemption or repurchase of the Series B Preferred Stock. Upon the occurrence of a Change of Control (as defined in the articles supplementary designating the terms of the Series B Preferred Stock (the “Series B Articles Supplementary”)), the Company may redeem for cash, in whole or in part, the Series B Preferred Stock within 120 days after the date on which such Change of Control occurred, by paying $25.00 per share, plus any accrued and unpaid dividends (whether or not authorized or declared) to, but excluding, the date fixed for redemption.

In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock shall be entitled to receive a liquidating distribution in the amount of  $25.00 per share, plus accrued and unpaid dividends (whether or not authorized or declared) to, but excluding, the date of final distribution to such holders.

Series B Preferred Stock At-the-Market Offering Program

On March 29, 2018, the Company and the Operating Company entered into a Distribution Agreement (the “Distribution Agreement”), by and among the Company, the Operating Company, the Manager and B. Riley FBR, Inc. (the “Agent”) in connection with the commencement of an at-the-market continuous offering program (the “Preferred ATM Program”). Pursuant to the terms and conditions of the Distribution Agreement, the Company may, from time to time, issue and sell through or to the Agent, shares of the Series B Preferred Stock, having an aggregate offering price of up to $45.0 million (the “Preferred ATM Shares”).

As of June 30, 2019, the Company has sold 71,734 shares of Series B Preferred Stock at a weighted average price of $22.94, receiving net proceeds after commissions and other offering costs of $1.3 million under the Preferred ATM Program. During the six months ended June 30, 2019, the Company made no sales under the Preferred ATM Program. The Preferred ATM Program was terminated upon the effectiveness of the Company’s registration statement on Form S-3 (File No. 333-231374) on July 12, 2019.

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10.  EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of shares outstanding during the period. All outstanding unvested restricted share awards contain rights to non-forfeitable dividends and participate in undistributed earnings with common shareholders and, accordingly, are considered participating securities that are included in the two-class method of computing basic earnings per share. Both the unvested restricted shares and the assumed share-settlement of the accrued stock dividend to holders of the Series A Preferred Stock, and the related impacts to earnings, are considered when calculating earnings per share on a diluted basis with the Company’s diluted earnings per share being the more dilutive of the treasury stock or two-class methods. For the three and six months ended June 30, 2019 and 2018, the Company’s basic earnings per share is computed using the two-class method, and the Company’s diluted earnings per share is computed using the more dilutive of the treasury stock method or two-class method:

	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Shares outstanding
Weighted average common shares - basic		21,185,484		15,274,459		20,743,971		14,763,741
Effect of dilutive securities		201,978		289,858		179,894		294,446
Weighted average common shares, all classes		21,387,462		15,564,317		20,923,865		15,058,187
Calculation of Earnings per Share - basic
Net income	$	14,874	$	10,797	$	26,987	$	16,151
Less:
Net income allocated to preferred stockholders		5,094		4,580		10,126		8,175
Net income allocated to unvested restricted shares (1)		92		72		145		98
Net income attributable to common shareholders - two-class method	$	9,688	$	6,145	$	16,716	$	7,878
Weighted average common shares - basic		21,185,484		15,274,459		20,743,971		14,763,741
Earnings per share - basic	$	0.46	$	0.40	$	0.81	$	0.53
Calculation of Earnings per Share - diluted
Net income	$	14,874	$	10,797	$	26,987	$	16,151
Less:
Net income allocated to preferred stockholders		5,094		4,580		10,126		8,175
Net income attributable to common shareholders - two-class method	$	9,780	$	6,217	$	16,861	$	7,976
Weighted average common shares - diluted		21,387,462		15,564,317		20,923,865		15,058,187
Earnings per share - diluted	$	0.46	$	0.40	$	0.81	$	0.53

⁽¹⁾ Unvested restricted shares of common stock participate in dividends with unrestricted shares of common stock on a 1:1 basis and thus are considered participating securities under the two-class method for the three and six months ended June 30, 2019 and 2018.

11. RELATED PARTY TRANSACTIONS

Equity Method Investments

Certain of the Company’s development property investments and bridge investments are equity method investments for which the Company has elected the fair value option of accounting. The fair value of these equity method investments at June 30, 2019 and December 31, 2018 was $548.6 million and $440.2 million, respectively. The interest income realized and the net unrealized gain from these equity method investments was $21.0. million and $14.7 million for the three months ended June 30, 2019 and 2018, respectively and $37.7 million and $23.0 million for the six months ended June 30, 2019 and 2018, respectively.

The Company’s investment in the real estate venture, the SL1 Venture, has a carrying amount of $12.4 million and $14.2 million at June 30, 2019 and December 31, 2018, respectively, and the earnings from this venture were $0.1 million and $0.2 million for the

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three and six months ended June 30, 2019, respectively.  The earnings from this venture were $0.4 million and $1.0 million for the three and six months ended June 30, 2018, respectively.

Management Agreement

As of June  30, 2019, the Company did not have any employees. The Company relies on the personnel, properties and resources of the Manager to conduct its operations. The Company and the Manager are parties to a management agreement (as amended and restated, the “Management Agreement”), which was originally entered into on April 1, 2015 and was amended and restated on May 23, 2016, April 1, 2017 and November 1, 2017. Pursuant to the Management Agreement, the Manager is responsible for (a) the Company’s day-to-day operations (including finance, accounting and investor relations), (b) determining investment criteria and strategy in conjunction with the Company’s Board of Directors, (c) sourcing, analyzing, originating, underwriting, structuring, and acquiring the Company’s portfolio investments, (d) sourcing, analyzing, procuring and managing the Company’s capital and (e) performing portfolio management duties. The Manager has an Investment Committee that approves investments in accordance with the Company’s investment guidelines, investment strategy, and financing strategy.

The initial term of the Management Agreement will expire on March 31, 2020, with up to a maximum of three one-year extensions that end on March 31, 2023. The Company’s independent directors will review the Manager’s performance annually. At the end of the initial term and any extension term, the Management Agreement may be terminated upon the affirmative vote of at least two-thirds of the Company’s independent directors if such independent directors determine: (a) the Manager has performed its duties in an unsatisfactory manner that is materially detrimental to the Company; or (b) the compensation payable to the Manager is not fair, subject to the Manager’s right to prevent termination based on unfair compensation by accepting a reduction of compensation agreed to by at least two-thirds of the independent directors. The Company is required to provide the Manager with a minimum 180 days’ prior notice of such a termination. Upon such a termination, the Company will pay the Manager a Termination Fee except as provided below in the subsection entitled “Termination of Management Agreement”.

The Manager may terminate the Management Agreement if the Company becomes required to register as an investment company under the 1940 Act, with such termination deemed to occur immediately before such event, in which case the Company would not be required to pay the Manager a Termination Fee. The Manager may also decline to renew the Management Agreement by providing the Company with 180 days’ written notice, in which case the Company would not be required to pay a Termination Fee.

Management Fees

Pursuant to the Management Agreement, the Company pays the Manager a base management fee in an amount equal to 0.375% of the Company’s stockholders’ equity (a 1.5% annual rate) calculated and payable quarterly in arrears in cash. For purposes of calculating the base management fee, the Company’s stockholder’s equity means: (a) the sum of (i) the net proceeds from all issuances of the Company’s equity securities since its IPO (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus (ii) the Company’s retained earnings at the end of the most recently completed fiscal quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods); less (b) any amount that the Company pays to repurchase its common stock since its IPO. If the Company’s retained earnings are in a net deficit position (following any required adjustments set forth below), then retained earnings shall not be included in stockholders’ equity. Retained earnings also excludes (x) any unrealized gains and losses and other non-cash items that have impacted stockholders’ equity as reported in the Company’s financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, and (y) one-time events pursuant to changes in GAAP (such as a cumulative change to the Company’s operating results as a result of a codification change pursuant to GAAP), and certain non-cash items not otherwise described above (such as depreciation and amortization), in each case after discussions between the Manager and the Company’s independent directors and approval by a majority of the Company’s independent directors. As a result, the Company’s stockholders’ equity, for purposes of calculating the base management fee, could be greater or less than the amount of stockholders’ equity shown on its financial statements. The base management fee is payable independent of the performance of the Company’s portfolio. The Manager computes the base management fee within 30 days after the end of the fiscal quarter with respect to which such installment is payable and promptly delivers such calculation to the Company’s Board of Directors. The amount of the installment shown in the calculation is due and payable no later than the date which is five business days after the date of delivery of such computation to the Board of Directors. The base management fee was $2.1 million and $1.6 million for the three months ended June  30, 2019 and 2018, respectively, and $4.1 million and $2.9 million for the six months ended June 30, 2019 and 2018, respectively.

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Incentive Fee

The Manager may also earn an incentive fee each fiscal quarter (or part thereof that the Management Agreement is in effect) payable in arrears in cash. The incentive fee will be an amount, not less than zero, determined pursuant to the following formula:

Incentive Fee = .20 times (A minus (B times .08)) minus C

In the foregoing formula:

· A equals the Company’s Core Earnings (as defined below) for the previous 12-month period;

· B equals (i) the weighted average of the issue price per share of the Company’s common stock of all of its public offerings of common stock, multiplied by (ii) the weighted average number of all shares of common stock outstanding (including (i) any restricted stock units and any restricted shares of common stock in the previous 12-month period and (ii) shares of common stock issuable upon conversion of outstanding OC Units); and

· C equals the sum of any incentive fees earned by the Manager with respect to the first three fiscal quarters of such previous 12-month period.

Notwithstanding application of the incentive fee formula, any incentive fee earned shall not be paid with respect to any fiscal quarter unless cumulative annual stockholder total return for the four most recently completed fiscal quarters is greater than 8%. Any computed incentive fee earned but not paid because of the foregoing hurdle will accrue until such 8% cumulative annual stockholder total return is achieved. The total return is calculated by adding stock price appreciation (based on the volume-weighted average of the closing price of the Company’s common stock on the New York Stock Exchange (or other applicable trading market) for the last ten consecutive trading  days of the applicable computation period minus the volume-weighted average of the closing market price of the Company’s common stock for the last ten consecutive trading days of the period immediately preceding the applicable computation period) plus dividends per share paid during such computation period, divided by the volume-weighted average of the closing market price of the Company’s common stock for the last ten consecutive trading days of the period immediately preceding the applicable computation period. For purposes of computing the Incentive Fee, “Core Earnings” is defined as (1) net income (loss) determined under GAAP, plus (2) non-cash equity compensation expense, the incentive fee, depreciation and amortization, plus (3) any unrealized losses or other non-cash expense items reflected in GAAP net income (loss), less (4) any unrealized gains reflected in GAAP net income (including any unrealized appreciation with respect to self-storage facilities that the Company has not yet acquired). The amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between the Manager and the Company’s independent directors and after approval by a majority of the independent directors. In addition, with respect to any self-storage facility acquired by the Company with respect to which it had an outstanding loan as of the time of such acquisition, the amount of Core Earnings determined pursuant to the formula above in the period of such acquisition shall also be increased by the difference between (A) the appraised value, as determined by a nationally recognized, independent third-party appraiser, mutually agreed to by the Company and the Manager, who has significant expertise in valuing self-storage properties, and (B) (i) the outstanding principal amount of any one of the Company’s loans secured by such acquired self-storage facility at the time of such acquisition plus (ii) any other consideration given to the former owner upon such acquisition. This addition is intended to include in Core Earnings the amount of the Company’s unrealized gain on account of its acquisition of a self-storage facility without such facility being sold to a third party buyer in the open market.

The Manager computes the incentive fee each quarter within 45 days after the end of the fiscal quarter that is currently payable and if an incentive fee results, promptly delivers such calculation to the Company’s Board of Directors. The amount of any incentive fee shown in the calculation is due and payable no later than the date which is five business days after the date of delivery of such computation to the Board of Directors. The Manager did not earn an incentive fee for the three and six months ended June 30, 2019 and 2018.

At June 30, 2019 and December 31, 2018, the Company had outstanding fees due to Manager of $2.5 million and $3.3 million, respectively, consisting of the management fees payable, incentive fees payable, and certain reimbursable expenses.

Expense Reimbursement

In addition to Management Fees and Incentive Fees as described above, the Management Agreement provides that the Company will reimburse payroll, occupancy, business development, marketing and other expenses of the Manager for conducting the business of the Company, excluding the salaries and cash bonuses of the Manager’s CEO and Chief Financial Officer (“CFO”), and certain other

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costs as determined by the Manager in accordance with the Management Agreement. Certain prepaid expenses and fixed assets are also purchased through the Manager and reimbursed by the Company. Under the Management Agreement, the Manager may engage independent contractors that provide investment banking, securities brokerage, mortgage brokerage and other financial, legal and account services as may be required for the Company’s investments, and the Company agrees to reimburse the Manager for costs and expenses incurred in connection with these services; however, expenses incurred by the Manager are reimbursable to the Manager by the Company only to the extent such expenses are not otherwise directly reimbursed by an unaffiliated third party. The amount of expenses to be reimbursed to the Manager by the Company are reduced dollar-for-dollar by the amount of any such payment or reimbursement. Amounts reimbursable to the Manager for expenses are included in general and administrative expenses in the Consolidated Statements of Operations and totaled $1.0 million and $0.9 million for the three months ended June 30, 2019 and 2018, respectively, and $1.9 million and $1.8 million for the six months ended June 30, 2019 and 2018, respectively.

Termination of Management Agreement

In the event that the Company terminates the Management Agreement per the terms of the agreement, other than for cause or the Company being required to register as an investment company, there will be a Termination Fee due to the Manager. If the Management Agreement terminates other than for Cause, voluntary non-renewal by the Manager or the Company being required to register as an investment company under the 1940 Act, then the Company shall pay to the Manager, on the date on which such termination is effective, a Termination Fee equal to the greater of (i) three times the sum of the average annual Base Management Fee and Incentive Fee earned by the Manager during the 24 month period prior to such termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination, or (ii) a price, based on the lesser of (a) the Manager’s earnings before interest, taxes, depreciation and amortization (adjusted for unusual, extraordinary and non-recurring charges and expenses), or “EBITDA”, annualized based on the most recent quarter ended, multiplied by a specific multiple, or EBITDA Multiple, depending on our achieved total annual return, and (b) the Company’s equity market capitalization multiplied by a specific percentage, or Capitalization Percentage, depending on our achieved total return (the “Internalization Price”).

The EBITDA and Capitalization Percentage are as follows based on our total annual return:

Total Annual Return	EBITDA Multiple	Capitalization %
<8%	5x	5%
8% to 12%	5.5x	5.5%
>12%	6x	6%

Any Termination Fee will be payable by the Operating Company in cash.

The Company also may terminate the Management Agreement at any time, including during the initial term, without the payment of any Termination Fee, with 30 days’ prior written notice from the Board of Directors, for cause. “Cause” is defined as: (i) the Manager’s continued breach of any material provision of the Management Agreement following a prescribed period; (ii) the occurrence of certain events with respect to the bankruptcy or insolvency of the Manager; (iii) a change of control of the Manager that a majority of the Company’s independent directors determines is materially detrimental to the Company; (iv) the Manager committing fraud against the Company, misappropriating or embezzling our funds, or acting grossly negligent in the performance of its duties under the Management Agreement; (v) the dissolution of the Manager; (vi) the Manager fails to provide adequate or appropriate personnel that are reasonably necessary for the Manager to identify investment opportunities for the Company and to manage and develop the Company’s investment portfolio if such default continues uncured for a period of 60 days after written notice thereof, which notice must contain a request that the same be remedied; (vii) the Manager is convicted (including a plea of nolo contendere) of a felony; or (viii) both the current Executive Chairman and the current CEO are no longer senior executive officers of the Manager or the Company during the term of the Management Agreement other than by reason of death or disability.

Internalization of Manager

No later than 180 days prior to the end of the initial term of the Management Agreement, the Manager must offer to contribute to the Operating Company at the end of the initial term all of the assets or equity interests in the Manager (an “Internalization Transaction”). Such offer shall specify an internalization price and such terms and conditions as the Manager shall determine.

Upon receipt of the Manager’s initial internalization offer, a special committee consisting solely of the Company’s independent directors may accept the Manager’s proposal or submit a counter offer to the Manager. If the Manager and the special committee are unable to agree, the Manager and the special committee will repeat this process annually during the term of any extension of the Management Agreement. Acquisition of the Manager pursuant to this process requires a fairness opinion from a nationally recognized investment banking firm and stockholder approval, in addition to approval by the special committee. As described above, if an

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Internalization Transaction has not occurred prior to March 31, 2023, the last day of the last renewal term, then the Manager and the Company shall consummate an Internalization Transaction to be effective as of that date, and such Internalization Transaction shall not require a fairness opinion, the approval of a special committee of the Company’s Board of Directors or the approval of the Company’s stockholders.

Under the Management Agreement, if an Internalization Transaction has not occurred prior to March 31, 2023, the last day of the last renewal term, then the Manager and the Company shall consummate an Internalization Transaction to be effective as of that date and all assets of the Manager (or, alternatively, all of the equity interests in the Manager) shall be conveyed to and acquired by the Operating Company in exchange for the Internalization Price (as described herein). At such time, all employees of the Manager shall become employees of the Operating Company and the Manager shall discontinue all business activities. Unlike an Internalization Transaction that occurs prior to the end of the final renewal term of the Management Agreement, an Internalization Transaction that occurs at the end of the final renewal term shall not require a fairness opinion, the approval of a special committee of the Company’s Board of Directors or the approval of the Company’s stockholders.

The “Internalization Price” payable in the event of an Internalization Transaction at the end of the last renewal term shall be equal to the Termination Fee and the Company’s Board of Directors has no discretion to change such Internalization Price or the conditions applicable to its payment.

The Internalization Price paid to the Manager in any Internalization Transaction will be payable by the Operating Company in the number of units of limited liability company interests (“OC Units”) of the Operating Company equal to the Internalization Price, divided by the volume-weighted average of the Company’s closing market price of the common stock for the ten consecutive trading days immediately preceding the date with respect to which value must be determined. However, if the Company’s common stock is not traded on a national securities exchange at the time of closing of any Internalization Transaction, then the number of OC Units shall be determined by agreement between the Company’s Board of Directors and the Manager or, in the absence of such agreement, the Internalization Price shall be paid in cash.

12. CONTINGENCIES

As described in Note 3, Self-Storage Investment Portfolio, on January 8, 2019, the Company commenced proceedings to foreclose on the underlying collateral of the Company’s $17.7 million Miami construction loan. The foreclosure proceedings were commenced by the Company in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida in an action entitled Jernigan Capital Operating Company v. Storage Partners of Miami I, LLC et. al. On May 1, 2019, the defendant borrower filed an answer to the Company’s complaint and a counter-claim against the Company. An agreement between the Company and the borrower was executed on July 2, 2019, which resulted in the Company acquiring all of the interests in the entity that owns the property that secured the loan and both parties dismissing all state court litigation related to that loan.

13. SUBSEQUENT EVENTS

The Company’s management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. Other than those disclosed below, there have been no subsequent events that occurred during such period that require disclosure or recognition in the accompanying consolidated financial statements.

Investment Activity

Subsequent to June 30, 2019, the Company closed on the following development property investment with a Profits Interest (preferred equity investment):

		Total Investment
Closing Date	MSA	Commitment
7/11/2019	New York City 9		13,095
	Total	$	13,095

As described in Note 3, Self-Storage Investment Portfolio and Note 12, Contingencies, an  agreement related to litigation on the Company’s Miami construction loan was executed on July 2, 2019. In connection with the agreement, the Company acquired all of the interests in the entity that owns the property that secured the loan and both parties dismissed all state court litigation related to that loan.

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Dividend Declarations

On July 31, 2019, the Company’s Board of Directors declared a cash dividend to the holders of the Series A Preferred Stock and a distribution payable in kind, if applicable, in a number of shares of common stock or Series A Preferred Stock as determined in accordance with the election of the holders of the Series A Preferred Stock for the quarter ending September 30, 2019. The dividends are payable on October 15, 2019 to holders of Series A Preferred Stock of record on October 1, 2019.

On July 31, 2019, the Company’s Board of Directors declared a cash dividend on the Series B Preferred Stock in the amount of $0.4375 per share for the quarter ending September 30, 2019. The dividends are payable on October 15, 2019 to holders of Series B Preferred Stock of record on October 1, 2019.

On July 31, 2019, the Company’s Board of Directors declared a cash dividend of $0.35 per share of common stock for the quarter ending September 30, 2019. The dividend is payable on October 15, 2019 to stockholders of record on October 1, 2019.

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

Note Regarding Forward-Looking Statements

We make statements in this Quarterly Report on Form 10-Q that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). These forward-looking statements include, without limitation, statements about our estimates, expectations, predictions and forecasts of our future business plans and financial and operating performance and/or results, as well as statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. When we use the words “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” or similar expressions or their negatives, as well as statements in future tense, we intend to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance and our actual financial and operating results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such differences are described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”), which was filed with the Securities and Exchange Commission (“SEC”) on March 1, 2019, and in other filings we make with the SEC from time to time, which factors include, without limitation, the following:

· our ability to successfully source, structure, negotiate and close investments in and acquisitions of self-storage facilities;

· changes in our business strategy and the market’s acceptance of our investment terms;

· our ability to fund our outstanding and future investment commitments;

· our ability to complete construction and obtain certificates of occupancy for self-storage development projects in which we invest;

· the future availability for borrowings under our credit facility (including borrowing base capacity and the availability of the accordion feature);

· availability, terms and our rate of deployment of equity and debt capital;

· our manager’s ability to hire and retain qualified personnel;

· the internalization of our Manager, which may or may not occur on the timeline anticipated or at all;

· changes in the self-storage industry, interest rates or the general economy;

· the degree and nature of our competition;

· volatility in the value of our assets carried at fair market value;

· potential limitations on our ability to pay dividends at historical rates;

· limitations in our existing and future debt agreements on our ability to pay distributions;

· the impact of our outstanding preferred stock on our ability to execute our business plan and pay distributions on our common stock; and

· general volatility of the capital markets and the market price of our common stock.

Given these uncertainties, undue reliance should not be placed on our forward-looking statements. We assume no duty or responsibility to publicly update or revise any forward-looking statement that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events. We urge you to review the disclosures concerning risks in the sections entitled “Risk Factors,” “Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2018 Form 10-K and in other filings we make with the SEC from time to time.

Overview

We are a commercial real estate company that invests primarily in new or recently-constructed and opened self-storage facilities located predominately in dense urban submarkets within top-50 United States MSAs. Facilities in which we invest are largely vertical (three to ten floors), 100% climate controlled and technologically adapted buildings, which we call Generation V facilities. These facilities are located in submarkets with demographic profiles and competitive positions that management believes will support successful lease-up of such facilities and value creation for our stockholders. Our investments include mortgage loans typically coupled with equity interests as well as outright ownership of self-storage facilities.

Our principal business objective is to deliver attractive risk-adjusted returns by investing in new Generation V self-storage facilities primarily in urban submarkets. A substantial majority of our investments to date have been first mortgage loans to finance ground-up construction of and conversion of existing buildings into new Generation V self-storage facilities. These investments, which we refer

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to as “development property investments,” are typically structured as loans equal to between 90% and 97% of facility costs (including land, pre-development and other “soft” costs, hard construction costs, fees and interest and operating reserves). We receive a fixed rate of interest on loaned amounts and up to a 49.9% interest in the positive cash flows from operations, sales and /or refinancings of self-storage facilities, which we refer to as “Profits Interest”. We also typically receive a ROFR to acquire the self-storage facility upon sale.

Additionally, in March 2018 we closed a bridge financing investment consisting of five separate loans with an aggregate commitment amount of $83.3 million secured by first mortgages with equity participations and ROFRs on five self-storage properties in the Miami, Florida MSA that are in lease-up. We refer to this investment herein as a “Bridge Investment.” We have also selectively made construction loans and mortgage loans secured by mature operating self-storage facilities.

In addition to the foregoing, we intend to acquire self-storage facilities that we have financed either through the exercise of ROFRs or through privately negotiated transactions with our investment counterparties, subject to acquisition prices being consistent with our investment objective to create long-term value for our stockholders. In March 2019, we acquired the 50.1% equity interest of our developer partner in the LLC that owned the New Haven development property. During the year ended December 31, 2018, we acquired the 50.1% equity interests of our developer partners in the LLCs that own the Jacksonville 1, Atlanta 1, Atlanta 2, Pittsburgh, Charlotte 1, and New York City 1 development properties. During the year ended December 31, 2017, we acquired the 50.1% equity interests of our developer partner in the LLCs that own the Orlando 1 and Orlando 2 development property investments, which are two self-storage facilities adjacent to each other. We now own 100% of the membership interests in the LLCs that own these eight facilities and fully consolidate these facilities in the accompanying consolidated financial statements.

We account for our development property investments and bridge investments at fair value, with appreciation and depreciation in the value of these investments being reflected in the carrying value of the assets and in the determination of net income. In determining fair value, we re-value each development property investment and bridge investment  each quarter, which re-valuation includes an analysis of the current value of any Profits Interest associated with the investment. We believe that carrying our assets at fair value and reflecting appreciation and depreciation in our earnings provide our stockholders and others who rely on our financial statements with a more complete and accurate understanding of our financial condition and economic performance, including revenues and the creation of value through our Profits Interests as self-storage facilities we finance are constructed, leased-up and become stabilized.

We generally fund our on-balance sheet investments with (i) proceeds from sales of our securities, including sales of our common stock in follow-on offerings and pursuant to our common stock at-the-market equity offering program (the “ATM Program”), (ii) funds from secured indebtedness, including borrowings under our $235 million Credit Facility and term loans on individual properties, and (iii) net proceeds from the monetization of existing development property investments. In the past we also have used proceeds from the sale of senior participations, the sale of our Series A Preferred Stock pursuant to the Purchase Agreement, pursuant to which we issued $125 million of Series A Preferred Stock, and the sale of our Series B Preferred Stock.

On March 7, 2016, we, through our Operating Company, entered into the Limited Liability Company Agreement of Storage Lenders (the “SL1 Venture”) with HVP III Storage Lenders Investor, LLC (“HVP III”), an investment vehicle managed by Heitman. The SL1 Venture was formed for the purpose of providing capital to developers of self-storage facilities identified and underwritten by us. Upon formation, HVP III committed $110.0 million for a 90% interest in the SL1 Venture, and we committed $12.2 million for a 10% interest. On March 31, 2016, we contributed to the SL1 Venture three self-storage development investments with an aggregate commitment amount of $41.9 million. As of December 31, 2018, the SL1 Venture had closed on eight additional development property investments with a Profits Interest with an aggregate commitment amount of approximately $81.4 million, bringing the total aggregate commitment of SL1 Venture’s investments to $123.3 million. In January 2019, the SL1 Venture acquired the 50.1% equity interests of its developer partners in the LLCs that own the Jacksonville, Atlanta 1, Atlanta 2, and Denver development properties. The SLI Venture now owns 100% of the membership interests in the LLCs that own these four facilities.

We are externally managed and advised by JCAP Advisors, LLC (the “Manager”). The Manager is led by our founder and Executive Chairman, Dean Jernigan, our Chief Executive Officer (“CEO”), John A. Good, and our President and Chief Investment Officer (“CIO”), Jonathan Perry. Mr. Jernigan is a 30-year veteran of the self-storage industry, including a combined 16 years as the CEO of Storage USA and CubeSmart, both New York Stock Exchange (“NYSE”) listed self-storage REITs. During his time at these two companies, Mr. Jernigan oversaw the investment of several billion dollars of capital in the self-storage industry. Mr. Good has over 30 years of experience working with senior management teams and boards of directors of public companies in the REIT and financial services industries on corporate finance, corporate governance, merger and acquisition, tax, executive compensation, joint venture, and strategic planning projects as a nationally recognized corporate and securities lawyer. Prior to joining the Company, he served as lead counsel on over 200 securities offerings, including our IPO, raising in excess of $25 billion over the past 25 years, with more than 125 of those deals being in the REIT industry. Mr. Perry has over 20 years of experience in the self-storage sector having joined the

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Company in June 2018 from CubeSmart, where he most recently served as Senior Vice President and CIO. Mr. Perry has led several billion dollars of self-storage investments and transactions over his career and has established extensive relationships across the industry. We believe the industry experience and depth of relationships of our senior management team and other investment professionals provide us with a significant competitive advantage in sourcing, evaluating, underwriting and servicing self-storage investments.

We are a Maryland corporation that was organized on October 1, 2014 that has elected to be taxed as a REIT under the Internal Revenue Code of 1986 (“the Code”), as amended. As a REIT, we generally will not be subject to U.S. federal income taxes on our taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains, to the extent that we annually distribute all of our REIT taxable income to stockholders and comply with certain other requirements for qualification as a REIT set forth in the Code. We are structured as an UPREIT and conduct our investment activities through our Operating Company. We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the 1940 Act.

Factors Impacting Our Operating Results

The results of our operations have historically been affected, and will continue to be affected, by a number of factors including, among other things:

· the pace at which we are able to deploy capital into development property investments and begin earning interest income, which pace can be dependent on the timing of government issuance of building permits, weather and other factors outside our control;

· the timing of the completion of facilities we finance, which can be dependent on the inspection process of municipal building departments that are from time to time understaffed;

· the pace and strength of the lease-up of the facilities we finance;

· availability of capital and whether investments are made on-balance sheet or through off-balance sheet joint ventures;

· changes in the fair value of our assets;

· our ability to acquire self-storage facilities at attractive prices; and

· the performance of self-storage facilities in which we have invested, either directly or through the SL1 Venture.

As the current development cycle nears its end, we believe that developers who constructed new self-storage facilities earlier in the cycle will seek to sell their ownership positions or seek to recapitalize existing financing. We believe our current developer partners and other developers with whom we do not currently have financing relationships will be seeking early exits from their development projects, providing opportunities for us to acquire new Generation V self-storage facilities in the lease-up phase. We intend to pursue bridge investments of recently built self-storage facilities in lease-up phase, selectively evaluate acquisitions of our current developer partners’ membership interests in projects that we have financed and selectively evaluate acquisitions of self-storage projects that we have not financed. In addition, we may modify or recapitalize existing financing on current investments for our developers in exchange for loan-related fees to compensate us for these modifications. On occasion, we expect certain of our developer partners to refinance our development investments. In these cases, refinancing proceeds would be used to return our capital associated with the first mortgage, but we would retain our Profits Interest and ROFR in the investment.

As our focus shifts to acquiring the newly-developed facilities that we have financed since our IPO and acquiring properties that we have not financed, our results of operations will also be impacted by the following additional factors, in addition to the factors described above:

· our ability to generate these new types of investment opportunities while at the same time managing our existing pipeline of development investment opportunities;

· our ability to generate additional fee income from modifications and/or recapitalizations of existing investments;

· our ability to redeploy the net proceeds from any potential refinancing of our development property investments;

· our additional emphasis on net rental income and/or net operating income and less emphasis on fair value accretion and current interest income; and

· our ability to access debt and equity capital at a cost commensurate with the returns from outright ownership of self-storage facilities.

Our total investment income includes interest income from loan investments, which also reflects the accretion of origination fees and recognition of modification fees, and is recognized utilizing the effective interest method based on the contractual rate and the outstanding principal balance of the loans we originate. The objective of the effective interest method is to arrive at periodic interest income that yields a level rate of return over the loan term. Interest rates may vary according to the type of loan, conditions in the

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financial markets, creditworthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers. Our income also includes earnings from our investment in the SL1 Venture, which is calculated based on the allocation of earnings as prescribed in the JV Agreement. In addition, our operating results are affected by the valuation of our development property investments and bridge investments. These investments are marked to fair value each quarter, and increases and decreases in fair value are reflected in the carrying values of the investments in our Consolidated Balance Sheets and as unrealized increases/decreases in fair value in our Consolidated Statements of Operations. We have made, and in the future we may make, additional equity investments in self-storage facilities, either for fee simple ownership by our Operating Company or in joint ventures with our developers, institutional or other strategic partners. In that regard, in connection with many of our development investments, we have obtained rights of first refusal in connection with potential future sales of self-storage facilities that we finance. Our operating results include rental income and related operating expenses from owned self-storage facilities. Our results for the three and six months ended June 30, 2019 and 2018 also were impacted by our accounting methods as discussed below.

Changes in Fair Value of Our Assets

We have elected the fair value option of accounting for our development property investments and bridge investments. We have elected fair value accounting for these financial instruments because we believe such accounting provides stockholders and others who rely on our financial statements with a more complete and accurate understanding of our economic performance, including our revenues and the creation of value through our Profits Interests as self-storage facilities we finance are constructed, leased-up and become stabilized. Under the fair value option, we mark our development property investments, bridge investments, and operating property loans to estimated fair value at the end of each accounting period, with corresponding increases or decreases in fair value being reflected in our Consolidated Statements of Operations. There is no active secondary market for our development property investments and bridge investments and no readily available market value; accordingly, our determination of fair value requires judgment and extensive use of estimates. 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 our development property investments and bridge investments may fluctuate from period to period. Additionally, the fair value of our development property investments and bridge 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 we may ultimately realize. Our development property investments and bridge investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate an investment in a forced or liquidation sale, we could realize significantly less than the value at which we have 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.

Changes in Market Interest Rates

With respect to our business operations, increases in interest rates, in general, may over time cause: the interest expense associated with our borrowings to increase; the value of mortgage loans in our investment portfolio to decline; interest rates on any floating rate loans to reset, although on a delayed basis, to higher interest rates; and to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase. Conversely, decreases in interest rates, in general, may over time cause: the interest expense associated with our borrowings to decrease; the value of mortgage loans in our investment portfolio to increase; interest rates on any floating rate loans to reset, although on a delayed basis, to lower interest rates; and to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease.

Credit Risk

We are subject to varying degrees of credit risk in connection with our target investments and other loans. Our Manager seeks to mitigate this risk by seeking to originate or acquire loans of higher quality at appropriate prices given anticipated and unanticipated losses, by utilizing a comprehensive selection, underwriting and due diligence review process, and by proactively monitoring originated or acquired loans. Although we expect that our borrowers will perform in full on their obligations under the loan documents, one of our underwriting principles is that we will generally not make a loan secured by a property that we, at the time of our investment decision, do not wish to ultimately own. We believe this principle and our ability to effectively own and operate self-storage properties mitigates credit risk. Nevertheless, unanticipated credit losses could occur that could adversely impact our operating results.

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Market Conditions

We believe that present conditions in certain markets continue to be conducive to realizing attractive risk-adjusted returns on investments in self-storage facilities owned by private operators. The self-storage sector has experienced substantially higher new self-storage construction starts and deliveries during 2016, 2017 and 2018. 2019 is expected to experience new deliveries at levels similar to 2018, which was the highest year for new deliveries in this development cycle. The key demand drivers of the self-storage sector include population mobility and new job creation, both of which are experiencing increases since the 2009/2010 recession, as well as population growth. These drivers have created demand for self-storage, which in turn have developers looking to develop and match demand with supply. The main deterrents for developers at this point in the cycle are government regulations (primarily zoning restrictions), lack of available land sites on which to develop, compressing development yields as compared to prevailing market cap rates and the lack of financing available in the sector. Typically, lenders are only willing to lend up to 65% loan-to-cost (“LTC”), whereas our substantial industry knowledge enables us to make loans at ratios of approximately 90% LTC. In certain situations, we will advance more than 90% of cost and receive a higher rate of interest. In these situations, we expect to receive overall economics that are more attractive than our 90% of cost deals, but some of the interest income in these deals will be received as payment-in-kind (“PIK”) interest rather than cash interest. In certain investments, we expect a combination of factors including longer than expected construction times and slower than expected lease up times, to result in potential shortages in interest reserves and/ or operating reserves. In these situations, we may modify the investments in exchange for additional loan-related fees. In certain circumstances, these reserve shortages and/or other factors could result in foreclosure of the underlying facility.

Recent Developments

Investment Activity

Subsequent to June 30, 2019, we closed on the following development property investment with a Profits Interest (preferred equity investment):

		Total Investment
Closing Date	MSA	Commitment
7/11/2019	New York City 9		13,095
	Total	$	13,095

Settlement of Miami Construction Loan Foreclosure and Related Claims

As described in Note 3, Self-Storage Investment Portfolio and Note 12, Contingencies, an agreement with the borrower under our Miami construction loan was executed on July 2, 2019. In connection with the agreement, the Company acquired all of the interests in the entity that owns the property that secured the loan and both parties dismissed all state court litigation related to that loan.

Dividend Declarations

On July 31, 2019, our Board of Directors declared a cash dividend to the holders of the Series A Preferred Stock and a distribution payable in kind, if applicable, in a number of shares of common stock or Series A Preferred Stock as determined in accordance with the election of the holders of the Series A Preferred Stock for the quarter ending September 30, 2019. The dividends are payable on October 15, 2019 to holders of Series A Preferred Stock of record on October 1, 2019.

On July 31, 2019, our Board of Directors declared a cash dividend on the Series B Preferred Stock in the amount of $0.4375 per share for the quarter ending September 30, 2019. The dividends are payable on October 15, 2019 to holders of Series B Preferred Stock of record on October 1, 2019.

On July 31, 2019, our Board of Directors declared a cash dividend of $0.35 per share of common stock for the quarter ending September 30, 2019. The dividend is payable on October 15, 2019 to stockholders of record on October 1, 2019.

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Investment Activity

Overview of total investment activity

As of June 30, 2019, our self-storage investment portfolio consists of eight wholly-owned self-storage facilities, 49 on-balance sheet development property investments with a Profits Interest (28 of which are secured by facilities in lease-up and 21 of which are secured by facilities under construction), seven development property investments with a profits interest in our SL1 Venture (all of which are secured by facilities in lease-up), four self-storage facilities wholly-owned by the SL1 Venture and five bridge investments secured by facilities that are all in lease-up. We also have one construction loan secured by a facility under construction.

		# Properties	# of Properties Open and Operating	# of Properties Under Construction	Size (NRSF)		Total JCAP Investment Commitment
On-balance sheet
	Wholly Owned Assets	8	8	0	594,159	$	88,275
	Development Property Investments	49	28	21	3,946,127	$	594,612
	Bridge Investments	5	5	0	367,088	$	83,324
	Construction Loans	1	0	1	71,953	$	17,733
Joint Venture
	Wholly Owned Assets	4	4	0	307,482	$	4,831
	Development Property Investments	7	7	0	521,672	$	8,512

On-balance sheet investment activity

Our on-balance sheet self-storage investments at June 30, 2019 consisted of the following:

· Wholly-Owned Property Investments – As of June 30, 2019, we had acquired 100% of the membership interests in the LLCs of eight of our previous development property investments with a profits interest, resulting in the ownership of eight self-storage facilities, as described in more detail in the table below (dollars in thousands):

Location
(MSA)	Date	Date	Gross		Accumulated		Net		Size	Months	% Physical
Address	Opened	Acquired	Basis		Depreciation		Basis		(NRSF) (1)	Open (2)	Occupancy (2)
Orlando 1/2	5/1/2016	8/9/2017	$	15,829	$	(1,353)	$	14,476	93,965	39	89.5	%
Jacksonville 1	8/12/2016	1/10/2018		11,664		(967)		10,697	59,848	36	92.1	%
Atlanta 2	5/24/2016	2/2/2018		11,857		(808)		11,049	66,187	38	83.8	%
Atlanta 1	5/25/2016	2/2/2018		13,193		(825)		12,368	71,718	38	88.7	%
Pittsburgh	5/11/2017	2/20/2018		10,036		(396)		9,640	47,594	27	54.3	%
Charlotte 1	8/18/2016	8/31/2018		12,746		(662)		12,084	85,350	35	64.0	%
New York City 1	9/29/2017	12/21/2018		25,722		(756)		24,966	105,272	22	69.9	%
New Haven	12/16/2016	3/8/2019		11,051		(248)		10,803	64,225	31	81.9	%
Total Owned Properties			$	112,098	$	(6,015)	$	106,083	594,159

⁽¹⁾ The NRSF includes only climate controlled and non-climate controlled storage space. It does not include retail space, office space, non-covered RV space or parking spaces.

⁽²⁾ As of July 28, 2019.

· Development Property Investments - We had 50 investments totaling an aggregate committed principal amount of approximately $612.3 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 us. 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 30, 2019, three of the development property investments totaling $33.2 million of aggregate committed amount were structured as preferred equity investments, which will be subordinate to a first mortgage loan 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

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contractor. The total unpaid balance of the loan is $11.2 million. As the investment was a collateral dependent loan, we considered the fair value of the collateral when determining the fair value of the investment as of June 30, 2019. The fair value of the investment as of June 30, 2019 is $11.6 million.

Also included in development property investments as of June 30, 2019 was one construction loan with a committed principal amount of approximately $17.7 million that is interest-only at a fixed interest rate of 6.9% annum, has no equity participation and is secured by a first priority mortgage on the project. This construction loan had an initial term of 18 months that was extended during the first quarter of 2017 and in 2018. This loan matured and became due and payable on June 30, 2018; but was not timely repaid. Accordingly, this construction loan was in default and was placed on non-accrual status during the three months ended December 31, 2018. Since that time, no interest income has been recognized and will only be recognized if interest is collected in cash. The total unpaid balance of the loan as of June 30, 2019 was $17.7 million. As the investment is a collateral dependent loan, we considered the fair value of the collateral when determining the fair value of the investment as of June 30, 2019. The fair value of the investment as of June 30, 2019 is $17.7 million. On July 2, 2019, the Company entered into an agreement with the borrower pursuant to which it acquired all of the interests in the entity that owns the property that secured the loan and both parties dismissed all state court litigation related to that loan. See Note 12, Contingencies.

As of June 30, 2019, the aggregate committed principal amount of our development property investments for which the underlying self-storage facility was open and operating was approximately $300.3 million and outstanding principal was $275.9 million, as described in more detail in the table below (dollars in thousands):

	Location					Remaining
	(MSA)			Funded		Unfunded		Fair		Size	Date	Months	% Physical
Closing Date	Address	Commitment		Investment		Commitment (1)		Value		(NRSF) (2)	Opened	Open (3)	Occupancy (3)
7/2/2015	Milwaukee	$	7,650	$	7,648	$	2	$	9,006	81,489	10/9/2016	34	72.6	%
10/27/2015	Austin		8,658		8,089		569		7,966	77,234	3/16/2017	28	87.1	%
8/14/2015	Raleigh		8,792		8,789		3		8,635	60,171	3/8/2018	17	55.1	%
11/17/2016	Jacksonville 2		7,530		7,405		125		9,471	70,255	3/27/2018	16	54.8	%
1/31/2017	Atlanta 4		13,678		13,413		265		16,385	103,600	7/12/2018	13	39.1	%
2/24/2017	Orlando 3		8,056		7,491		565		9,255	69,645	7/26/2018	12	55.5	%
4/20/2017	Denver 2		11,164		10,788		376		12,612	74,347	7/31/2018	12	34.5	%
6/29/2017	Boston 1 (4)		-		-		-		2,867	90,553	8/8/2018	12	35.8	%
4/14/2017	Louisville 1		8,523		7,294		1,229		8,821	65,786	8/15/2018	11	41.0	%
9/20/2016	Charlotte 2		12,888		12,110		778		13,666	76,985	8/30/2018	11	42.2	%
9/28/2017	Louisville 2		9,940		9,151		789		11,213	76,603	8/31/2018	11	34.8	%
6/12/2017	Tampa 4		10,266		9,218		1,048		12,256	72,765	10/9/2018	10	37.9	%
5/2/2017	Atlanta 6		12,543		11,412		1,131		14,211	80,635	10/15/2018	9	29.6	%
7/27/2017	Jacksonville 3		8,096		7,391		705		9,242	68,100	11/6/2018	9	35.5	%
6/19/2017	Baltimore 1 (5)		10,775		10,172		954		12,198	83,635	11/20/2018	8	24.3	%
5/19/2017	Tampa 3		9,224		7,949		1,275		9,559	70,474	11/29/2018	8	39.2	%
6/28/2017	Knoxville		9,115		8,317		798		9,728	72,490	11/30/2018	8	45.0	%
2/24/2017	New Orleans		12,549		11,469		1,080		13,494	86,545	12/21/2018	7	30.7	%
6/30/2017	New York City 2 (5)		27,982		27,221		1,996		29,920	40,951	12/28/2018	7	18.5	%
8/30/2017	Orlando 4		9,037		7,830		1,207		9,825	76,340	1/16/2019	6	39.2	%
2/8/2018	Minneapolis 2		10,543		9,040		1,503		9,972	82,260	3/14/2019	4	25.4	%
12/1/2017	Boston 2		8,771		7,176		1,595		8,764	76,146	3/19/2019	4	19.0	%
2/27/2017	Atlanta 5		17,492		16,114		1,378		19,307	87,485	4/8/2019	4	10.4	%
3/30/2018	Philadelphia (5)(6)		14,338		11,324		3,264		11,569	69,930	4/25/2019	3	18.0	%
3/1/2017	Fort Lauderdale		9,952		9,015		937		12,562	80,534	5/2/2019	3	20.7	%
5/2/2017	Tampa 2		8,091		7,361		730		8,663	71,671	5/9/2019	3	21.5	%
3/1/2017	Houston		14,825		14,549		276		17,536	128,466	5/21/2019	2	3.6	%
4/20/2017	Denver 1		9,806		8,136		1,670		9,629	56,580	6/28/2019	1	7.9	%
Total Completed Development Investments		$	300,284	$	275,872	$	26,248	$	328,332	2,151,675

⁽¹⁾ Commitment is fixed during underwriting at an amount deemed sufficient to cover interest carry and excess operating expenses over rental revenue during lease-up and deferred developer’s fees (if any) payable upon stabilization. Remaining unfunded commitment on completed projects is expected to be utilized primarily for such purposes. To the extent not needed for such purposes, such commitment will not be advanced.

⁽²⁾ The NRSF includes only climate controlled and non-climate controlled storage space. It does not include retail space, office space, non-covered RV space or parking spaces.

⁽³⁾ As of July 28, 2019.

⁽⁴⁾ This loan was repaid in full through a refinancing negotiated by our partner. The investment represents our 49.9% Profits Interest which was retained during the transaction.

⁽⁵⁾ The funded amount of these investments include PIK interest accrued on our loan or interest accrued on our preferred equity investment, as applicable. These interest amounts are not included in the commitment amount for each investment.

⁽⁶⁾ The Company has commenced foreclosure proceedings against the borrower.

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As of June 30, 2019, the aggregate committed principal amount of our development property investments for which the underlying self-storage facility was still under construction was approximately $294.3 million and outstanding principal was $125.7 million, as described in more detail in the tables below (dollars in thousands):

	Location					Remaining						Estimated
	(MSA)			Funded		Unfunded		Fair		Size	Construction	C/O
Closing Date	Address	Commitment		Investment		Commitment		Value		(NRSF) (1)	Start Date	Quarter (2)
1/18/2017	Atlanta 3	$	14,115	$	10,973	$	3,142	$	12,966	92,935	Q4 2017	Q3 2019
9/14/2017	Los Angeles 1		28,750		9,230		19,520		9,395	120,038	Q4 2019	Q1 2021
9/14/2017	Miami 1		14,657		8,556		6,101		8,593	69,175	Q2 2018	Q1 2020
10/12/2017	Miami 2 (3)		9,459		1,399		8,119		1,202	58,000	Q4 2019	Q3 2020
10/30/2017	New York City 3 (3)		15,301		5,602		9,900		5,315	68,660	Q4 2017	Q3 2020
11/16/2017	Miami 3 (3)		20,168		6,430		13,941		6,090	96,295	Q4 2018	Q2 2020
11/21/2017	Minneapolis 1		12,674		7,950		4,724		9,046	88,348	Q2 2018	Q3 2019
12/15/2017	New York City 4		10,591		3,723		6,868		3,833	78,425	Q2 2018	Q1 2020
12/27/2017	Boston 3		10,174		2,653		7,521		2,553	62,700	Q1 2020	Q1 2021
12/28/2017	New York City 5		16,073		9,440		6,633		10,308	90,700	Q4 2018	Q4 2019
4/6/2018	Minneapolis 3		12,883		6,691		6,192		7,629	87,084	Q3 2018	Q4 2019
5/1/2018	Miami 9 (3)		12,421		3,344		9,171		3,242	70,538	Q3 2019	Q3 2020
5/15/2018	Atlanta 7		9,418		1,798		7,620		1,797	76,519	Q3 2018	Q1 2020
5/23/2018	Kansas City		9,968		4,500		5,468		5,065	76,751	Q3 2018	Q4 2019
6/7/2018	Orlando 5		12,969		4,977		7,992		5,491	76,518	Q4 2018	Q4 2019
6/12/2018	Los Angeles 2 (3)		9,298		4,756		4,874		4,780	116,022	Q3 2019	Q4 2020
11/16/2018	Baltimore 2		9,247		703		8,544		652	61,750	Q2 2019	Q3 2020
3/1/2019	New York City 6		18,796		3,021		15,775		2,962	76,250	Q3 2019	Q4 2020
3/15/2019	Stamford (3)		2,904		2,963		-		2,975	38,650	Q2 2019	Q4 2019
4/18/2019	New York City 7 (3)		23,462		5,770		17,726		5,484	95,331	Q3 2019	Q3 2020
5/8/2019	New York City 8 (3)		21,000		21,214		-		21,446	193,763	Q1 2020	Q3 2021
Total Development Investments in Progress		$	294,328	$	125,693	$	169,831	$	130,824	1,794,452

⁽¹⁾ The NRSF includes only climate controlled and non-climate controlled storage space. It does not include retail space, office space, non-covered RV space or parking spaces.

⁽²⁾ Estimated C/O dates represent the Company’s best estimate as of June 30, 2019 based on project specific information learned through underwriting and communications with respective developers. These dates are subject to change due to unexpected project delays/efficiencies.

⁽³⁾ The funded amount of these investments include PIK interest accrued on our loan or interest accrued on our preferred equity investment, as applicable. These interest amounts are not included in the commitment amount for each investment.

· Bridge Investments – We have five separate bridge investments with an aggregate commitment amount of $83.3 million secured by first mortgages on five properties in the Miami, Florida MSA. Three of these bridge investments amounting to an aggregate principal amount of $47.1 million are secured by first priority mortgages on self-storage properties with an aggregate of over 203,000 net rentable square feet that were completed and began lease-up in 2016, which loans bear interest at an annual rate of 6.9%, payable monthly in cash. We have a 49.9% Profits Interest in these three properties. Two of these bridge investments aggregating a principal amount of $36.2 million are secured by first priority mortgages on two recently-completed self-storage properties with an aggregate of over 163,000 net rentable square feet, which loans bear interest at an annual rate of 9.5%, with 6.5% payable monthly in cash and 3.0% PIK interest, accruing and payable upon maturity of the loan. We also have a 49.9% Profits Interest, after the other members of the borrower receive $1.0 million of preferential payments per loan. All five loans mature five years from the date of closing, with the borrower having two extension options for one year each.

As of June 30, 2019, the aggregate committed principal amount of our bridge investments was approximately $83.3 million and our outstanding principal was $83.1 million, as described in more detail in the table below(dollars in thousands):

	Location					Remaining
	(MSA)			Funded		Unfunded		Fair		Size	Date	Months	% Physical
Closing Date	Address	Commitment		Investment		Commitment (1)		Value		(NRSF) (2)	Opened	Open (3)	Occupancy (3)
3/2/2018	Miami 6	$	13,370	$	13,370	$	-	$	17,970	76,765	8/12/2016	36	88.6	%
3/2/2018	Miami 4		20,201		20,201		-		23,665	74,685	10/9/2016	34	94.4	%
3/2/2018	Miami 8		13,553		13,553		-		14,396	51,923	12/12/2016	32	93.9	%
3/2/2018	Miami 7 (4)		18,462		18,311		832		17,485	86,640	3/26/2018	16	59.4	%
3/2/2018	Miami 5 (4)		17,738		17,674		718		15,962	77,075	8/13/2018	12	39.8	%
Total Completed Bridge Investments		$	83,324	$	83,109	$	1,550	$	89,478	367,088

⁽¹⁾ Commitment is fixed during underwriting at an amount deemed sufficient to cover interest carry and excess operating expenses over rental revenue during lease-up and deferred developer’s fees (if any) payable upon stabilization. Remaining unfunded commitment on completed projects is expected to be utilized primarily for such purposes. To the extent not needed for such purposes, such commitment will not be advanced.

⁽²⁾ The NRSF includes only climate controlled and non-climate controlled storage space. It does not include retail space, office space, non-covered RV space or parking spaces.

⁽³⁾ As of July 28, 2019.

⁽⁴⁾ The funded amount of these investments include PIK interest accrued on our loan or interest accrued on our preferred equity investment, as applicable. These interest amounts are not included in the commitment amount for each investment.

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Real estate venture activity

As of June 30, 2019, the SL1 Venture wholly owns the four self-storage properties described in more detail in the table below (dollars in thousands):

Location
(MSA)	Date	Date	Gross		Accumulated		Net		Size	Months	% Physical
Address	Opened	Acquired	Basis		Depreciation		Basis		(NRSF) (1)	Open (2)	Occupancy (2)
Jacksonville	7/26/2017	1/28/2019	$	16,602	$	(505)	$	16,097	80,621	24	87.0	%
Atlanta 2	9/14/2017	1/28/2019		10,850		(244)		10,606	70,139	22	66.5	%
Denver	12/14/2017	1/28/2019		16,470		(374)		16,096	85,575	19	64.4	%
Atlanta 1	4/12/2018	1/28/2019		13,283		(248)		13,035	71,147	16	53.5	%
Total Owned Properties			$	57,205	$	(1,371)	$	55,834	307,482

⁽¹⁾ The NRSF includes only climate controlled and non-climate controlled storage space. It does not include retail space, office space, non-covered RV space or parking spaces.

⁽²⁾ As of July 28, 2019.

As of June 30, 2019, the SL1 Venture had seven development property investments with a Profits Interest as described in more detail in the table below (dollars in thousands):

	Location					Remaining
	(MSA)			Funded		Unfunded		Fair		Size	Date	Months	% Physical
Closing Date	Address	Commitment		Investment		Commitment (1)		Value		(NRSF) (2)	Opened	Open (3)	Occupancy (3)
9/28/2016	Columbia	$	9,199	$	9,071	$	128	$	9,996	70,935	8/23/2017	23	92.4	%
4/15/2016	Washington DC		17,269		17,269		-		20,162	90,325	9/25/2017	22	76.1	%
5/14/2015	Miami 1		13,867		12,722		1,145		15,455	75,770	2/23/2018	17	64.5	%
12/22/2016	Raleigh		8,877		8,725		152		9,292	64,108	6/8/2018	14	50.9	%
9/25/2015	Fort Lauderdale		13,230		12,898		332		17,034	87,384	7/26/2018	12	32.9	%
5/14/2015	Miami 2		14,849		14,518		331		15,676	74,140	10/30/2018	9	54.0	%
7/21/2016	New Jersey		7,828		6,964		864		8,302	59,010	1/24/2019	6	28.8	%
Total Completed Development Investments		$	85,119	$	82,167	$	2,952	$	95,917	521,672

⁽¹⁾ Commitment is fixed during underwriting at an amount deemed sufficient to cover interest carry and excess operating expenses over rental revenue during lease-up and deferred developer’s fees (if any) payable upon stabilization. Remaining unfunded commitment on completed projects is expected to be utilized primarily for such purposes. To the extent not needed for such purposes, such commitment will not be advanced.

⁽²⁾ The NRSF includes only climate controlled and non-climate controlled storage space. It does not include retail space, office space, non-covered RV space or parking spaces.

⁽³⁾ As of July 28, 2019.

Business Outlook

Investment Activity

We continue to experience demand for our capital for the development of state-of-the-art Class A self-storage facilities in top U.S. markets. As of August 1, 2019, we had projects that were in various stages of our underwriting process, including ones subject to executed term sheets, for prospective development property investment amounts in excess of $300 million. We have reduced our pipeline intentionally, as the development cycle is now in its fifth year. While we continue to seek new development commitments in select markets around the United States, we intend to reduce our new development investment commitment amounts as compared to 2016, 2017 and 2018 as our focus is shifting to potential acquisition opportunities of our developers’ interests in our development investments and newly-constructed and opened self-storage facilities that complement our existing portfolio. 

We intend to acquire the majority of the self-storage facilities that we have financed either through the exercise of ROFRs or through privately negotiated transactions with our investment counterparties, subject to acquisition prices being consistent with our investment objective to create long-term value for our stockholders. From the third quarter of 2017 through the second quarter of 2019, we acquired eight self-storage facilities through privately negotiated transactions with our developer partners on our balance sheet and four self-storage facilities within our real estate venture with Heitman. Those twelve acquisitions occurred on average 17 months after the respective self-storage facilities commenced operating activities. While there is no assurance that this trend will continue, we believe the frequency of opportunities to acquire our developers’ interests will begin to accelerate in the second half of 2019 and even more so into 2020 due to the fact that of the 62 underlying facilities in our development portfolio as of June 30, 2019, at least 40 facilities will have been open for 17 months or more by December 31, 2020. 

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If we experience an increase in the acquisitions of self-storage properties that we have financed, the amount of fair value appreciation recognized in future periods in our Consolidated Statement of Operations may be reduced as compared to previous years, as fair value appreciation is not recognized after the acquisition date; however, our property operating income will increase as we acquire and consolidate additional self-storage facilities. Additionally, the construction progress and deliveries of our on-balance sheet investments to date contributed to significant fair value appreciation in 2018 in excess of that recognized in previous years. As the number of these deliveries is expected to decrease in 2019 and 2020, we would expect fair value appreciation in these years to decrease as compared to 2018, all else being equal. Fair value appreciation recognized during lease-up can be negatively impacted by lower rental rates due to supply saturation in some markets, which we have experienced and expect to continue to experience. In light of these factors, over the next few years, we expect the primary driver of our earnings to shift from fair value appreciation and interest income, to property operating income. The pace and magnitude of this shift will depend on our ability to acquire our developer partner’s interests and the rate at which the facilities lease up.

In certain investments, we expect one or more factors, including longer than expected construction times and slower than expected lease up times, to result in potential shortages in interest reserves and/or operating reserves. In these situations, we may modify the investments in exchange for additional economics, primarily in the form of loan related fees. These fees have and will continue to be recognized in interest income from investments within our Consolidated Statements of Operations. In certain circumstances, these reserve shortages and/or other factors could result in foreclosure of the underlying facility.

Shift in Business Model

At the time of our IPO, we contemplated that beginning no later than the beginning of the fourth quarter 2019, we would commence discussions to acquire our Manager subject to approval by a special committee of our board of directors, delivery of a fairness opinion of a nationally-recognized investment banking firm and a vote of our stockholders. The process for internalizing our manager is set forth in detail in the Management Agreement with our Manager, which has been filed with the SEC since our IPO and described in our public filings.

In addition, we continue to acquire interests of our developer partners in our development property investments, exercise ROFRs and/or acquire self-storage properties that we did not finance. We believe that within the next 24 months, a majority of our assets will be owned self-storage facilities; we also expect to internalize management within that timeframe. While we expect to continue our development and bridge investing programs, we believe that we are, and that our institutional stockholders are beginning to view us more as, an owner-operator of self-storage properties, or an equity REIT, rather than as a specialty finance company, or mortgage REIT. This change in business model will necessarily entail a change in the way we expect to operate and finance the Company in the future. As this shift in business model occurs, we anticipate that our Board of Directors will continue to evaluate our investment, leverage and dividend policies in light of changes in the ways in which we generate a majority of our revenue and income, changes in stockholder expectations, and changes in the nature of our business and investment returns/cash flows. Any of these policies could be changed at the discretion of our Board of Directors. We can provide no assurance that we will be successful in our acquisition program and change in business model on the timeline expected or at all, and there can be no assurance that we will complete an internalization of our Manager prior to 2023, when such action must occur under our Management Agreement to the extent that it is not terminated previously.

Critical Accounting Policies

There have been no significant changes to our critical accounting policies as disclosed in the 2018 Form 10-K.

Recent Accounting Pronouncements

See Note 2 to the accompanying interim consolidated financial statements, Significant Accounting Policies, for a discussion of recent accounting pronouncements.

Results of Operations

The following discussion of our results of operations for the three and six months ended June 30, 2019 and 2018 should be read in conjunction with the unaudited interim consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

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Comparison of the three months ended June 30, 2019 and June 30, 2018:

(Dollars in thousands)	Three months ended
	June 30, 2019		June 30, 2018
Revenues:
Interest income from investments	$	9,150	$	6,403
Rental and other property-related income from real estate owned		1,638		805
Other revenues		44		33
Total revenues		10,832		7,241
Costs and expenses:
General and administrative expenses		2,373		2,034
Fees to Manager		2,069		1,582
Property operating expenses of real estate owned		786		420
Depreciation and amortization of real estate owned		1,090		887
Other expenses		-		-
Total costs and expenses		6,318		4,923
Operating income		4,514		2,318
Other income (expense):
Equity in earnings from unconsolidated real estate venture		85		435
Net unrealized gain on investments		12,043		8,623
Interest expense		(1,776)		(638)
Other interest income		8		59
Total other income		10,360		8,479
Net income		14,874		10,797
Net income attributable to preferred stockholders		(5,094)		(4,580)
Net income attributable to common stockholders	$	9,780	$	6,217

Revenues

Total interest income from investments for the three months ended June 30, 2019 was $9.2 million, an increase of approximately $2.7 million, or 43%, from the three months ended June 30, 2018. The increase is primarily attributable to the increase in the outstanding principal balances of our investment portfolio. We also had rental revenue of $1.6 million and $0.8 million from real estate owned during the three months ended June 30, 2019 and 2018, respectively that has increased primarily due to the timing of the acquisitions of the properties generating these revenues. This increase is the result of three acquisitions of our developer’s interests in the second half of 2018 and the first half of 2019 coupled with increasing occupancy and rental rates.

Expenses

The following table provides a detail of total general and administrative expenses, excluding fees to Manager  (dollars in thousands):

	Three months ended
	June 30, 2019		June 30, 2018
Compensation and benefits	$	1,433	$	1,444
Occupancy		107		111
Business development		43		49
Professional fees		478		130
Other		312		300
Total general and administrative expenses (excluding fees to Manager)	$	2,373	$	2,034

Total general and administrative expenses

Total general and administrative expenses (excluding fees to Manager) for the three months ended June 30, 2019 were $2.4 million, an increase of $0.3 million, or 17%, from the three months ended June 30, 2018 primarily as a result of an increase in professional fees.  

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Professional fees increased primarily due to legal fees incurred during the three months ended June 30, 2019 regarding certain foreclosure proceedings.

Other operating expenses

We paid our Manager fees of $2.1 million and $1.6 million in the three months ended June 30, 2019 and 2018, respectively, pursuant to the management agreement. The increase in fees to our Manager was primarily the result of a follow-on offering of our common stock during the second quarter of 2018, the issuance of common stock under our ATM Program, and the issuances of our Series A preferred stock. Property operating expenses of real estate owned and depreciation and amortization of real estate owned relate to the operating activities of our self-storage real estate owned and has increased primarily due to the timing of the acquisitions of the properties generating these expenses.

Other income (expense)

For the three months ended June 30, 2019 and 2018, we recorded other income of $10.4 million and $8.5 million, respectively, which primarily relates to the net unrealized gain on investments. During the period January 1 through August 31, 2016, we made no on-balance sheet development property investments, with all such investments being made through the SL1 Venture pursuant to the terms of our joint venture agreement executed in March 2016. From the second half of 2016 through the end of 2018, we invested solely on-balance sheet, closing 44 development property investments with a Profits Interest and five bridge investments with aggregate committed principal of $535.4 million and $83.3 million, respectively. Of these 44 development property investments with a Profits Interest, two opened for leasing in 2017, two opened for leasing in the first quarter of 2018, none opened during the second quarter of 2018, 14 opened during the remainder of 2018, and many of the remaining investments were partially constructed during late 2018 and into 2019. The construction progress and deliveries of these on-balance sheet investments contributed to fair value appreciation in the second quarter of 2019 in excess of that recognized in the second quarter of 2018. In addition, market interest rate decreases resulted in significant fair value appreciation of the debt component of our investments in the second quarter of 2019.

The $0.1 million and $0.4 million of equity in earnings from unconsolidated real estate venture in the three months ended June 30, 2019 and 2018, respectively, relates to our allocated earnings from the SL1 Venture. The SL1 Venture has elected the fair value option of accounting for its development property investments. The decrease in our equity in earnings from unconsolidated real estate venture is attributed to higher fair value gains being recognized in 2018 by the SL1 Venture, resulting in higher income allocations to us during that year. Interest expense for the three months ended June 30, 2019 and 2018 was $1.8 million and $0.6 million, respectively, and relates primarily to amortization of deferred financing costs and interest incurred on our Credit Facility and term loans. Other interest income relates to interest earned on our cash deposits.

Comparison of the six months ended June 30, 2019 and June 30, 2018:

(Dollars in thousands)	Six months ended
	June 30, 2019		June 30, 2018
Revenues:
Interest income from investments	$	17,362	$	10,965
Rental and other property-related income from real estate owned		3,087		1,428
Other revenues		267		64
Total revenues		20,716		12,457
Costs and expenses:
General and administrative expenses		4,136		3,852
Fees to Manager		4,072		2,886
Property operating expenses of real estate owned		1,549		731
Depreciation and amortization of real estate owned		2,119		1,589
Other expenses		-		290
Total costs and expenses		11,876		9,348
Operating income		8,840		3,109
Other income (expense):
Equity in earnings from unconsolidated real estate venture		242		985
Net unrealized gain on investments		20,873		12,943

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Interest expense		(2,989)		(1,054)
Other interest income		21		168
Total other income		18,147		13,042
Net income		26,987		16,151
Net income attributable to preferred stockholders		(10,126)		(8,175)
Net income attributable to common stockholders	$	16,861	$	7,976

Revenues

Total interest income from investments for the six months ended June 30, 2019 was $17.4 million, an increase of approximately $6.4 million, or 58%, from the six months ended June  30, 2018. The increase is primarily attributable to the increase in the outstanding principal balances of our investment portfolio. We also had rental revenue of $3.1 million and $1.4 million from real estate owned during the six months ended June  30, 2019 and 2018, respectively that has increased primarily due to the timing of the acquisitions of the properties generating these revenues.  This increase is the result of seven acquisitions of our developer’s interests in 2018 and the first half of 2019 coupled with increasing occupancy and rental rates. Other revenues of $0.3 million earned during the six months ended June 30, 2019 were derived primarily from fees earned in connection with the procurement of the term loans in the SL1 Venture and management fee revenue generated from the SL1 Venture.

Expenses

The following table provides a detail of total general and administrative expenses, excluding fees to Manager  (dollars in thousands):

	Six months ended
	June 30, 2019		June 30, 2018
Compensation and benefits	$	2,462	$	2,403
Occupancy		210		211
Business development		104		229
Professional fees		770		476
Other		590		533
Total general and administrative expenses (excluding fees to Manager)	$	4,136	$	3,852

Total general and administrative expenses

Total general and administrative expenses (excluding fees to Manager) for the six months ended June 30, 2019 were $4.1 million, an increase of $0.3 million, or 7%, from the six months ended June 30, 2018 primarily as a result of an increase in professional fees partially offset by a decrease in business development expenses. Professional fees increased primarily due to legal fees incurred during the six months ended June 30, 2019 regarding certain foreclosure proceedings. Business development expenses decreased largely due to our not holding a developer conference in the first half of 2019 while we held such a conference in the six months ended June 30, 2018. Industry association dues and trade show costs also decreased for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. 

Other operating expenses

We paid our Manager fees of $4.1 million and $2.9 million in the six months ended June 30, 2019 and 2018, respectively, pursuant to the management agreement. The increase in fees to our Manager was primarily the result of a follow-on offering of our common stock during the second quarter of 2018, the issuance of common stock under our ATM Program, and the issuances of our Series A and Series B preferred stock. Property operating expenses of real estate owned and depreciation and amortization of real estate owned relate to the operating activities of our self-storage real estate owned and has increased primarily due to the timing of the acquisitions of the properties generating these expenses.

Other expenses

Other expenses for the six months ended June 30, 2018 consist of costs related to the termination of an employee contract. There were no other expenses for the six months ended June 30, 2019.

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Other income (expense)

For the six months ended June 30, 2019 and 2018, we recorded other income of $18.1 million and $13.0 million, respectively, which primarily relates to the net unrealized gain on investments. During the period January 1 through August 31, 2016, we made no on-balance sheet development property investments, with all such investments being made through the SL1 Venture pursuant to the terms of our joint venture agreement executed in March 2016. From the second half of 2016 through the end of 2018, we invested solely on-balance sheet, closing 44 development property investments with a Profits Interest and five bridge investments with aggregate committed principal of $535.4 million and $83.3 million, respectively. Of these 44 development property investments with a Profits Interest, two opened for leasing in 2017, two opened during the first six months of 2018, 14 opened during the remainder of 2018, and many of the remaining investments were partially constructed during late 2018 and into 2019. The construction progress and deliveries of these on-balance sheet investments contributed to fair value appreciation in the first half of 2019 in excess of that recognized in the first half of 2018. In addition, market interest rate decreases resulted in significant fair value appreciation of the debt component of our investments in the first half of 2019.

The $0.2 million and $1.0 million of equity in earnings from unconsolidated real estate venture in the six months ended June 30, 2019 and 2018, respectively, relates to our allocated earnings from the SL1 Venture. The SL1 Venture has elected the fair value option of accounting for its development property investments. The decrease in our equity in earnings from unconsolidated real estate venture is attributed to higher fair value gains being recognized in 2018 by the SL1 Venture, resulting in higher income allocations to us during that year. Interest expense for the six months ended June 30, 2019 and 2018 was $3.0 million and $1.1 million, respectively, and relates primarily to amortization of deferred financing costs and interest incurred on our Credit Facility and term loans. Other interest income relates to interest earned on our cash deposits.

Adjusted Earnings

Adjusted Earnings is a performance measure that is not specifically defined by GAAP and is defined as net income attributable to common stockholders (computed in accordance with GAAP) plus stock dividends to preferred stockholders, stock-based compensation expense, depreciation and amortization on real estate assets, depreciation and amortization on SL1 Venture real estate assets and other expenses.

Adjusted Earnings should not be considered as an alternative to net income or any other GAAP measurement of performance or as an alternative to cash flow from operating, investing, and financing activities as a measure of liquidity. We believe that Adjusted Earnings is helpful to investors as a starting point in measuring our operational performance, because it excludes various equity-based payments (including stock dividends) and other items included in net income that do not relate to or are not indicative of our operating performance, which can make periodic and peer analyses of operating performance more difficult. Our computation of Adjusted Earnings may not be comparable to other key performance indicators reported by other REITs or real estate companies.

The following tables are reconciliations of Adjusted Earnings to net income attributable to common stockholders (dollars in thousands):

	Three months ended
	June 30, 2019		June 30, 2018
Net income attributable to common stockholders	$	9,780	$	6,217
Plus: stock dividends to preferred stockholders		2,125		2,125
Plus: stock-based compensation		719		777
Plus: depreciation and amortization on real estate assets		1,090		887
Plus: depreciation and amortization on SL1 Venture real estate assets		82		-
Adjusted Earnings	$	13,796	$	10,006

	Six months ended
	June 30, 2019		June 30, 2018
Net income attributable to common stockholders	$	16,861	$	7,976
Plus: stock dividends to preferred stockholders		4,250		4,250
Plus: stock-based compensation		1,047		1,122
Plus: depreciation and amortization on real estate assets		2,119		1,589
Plus: depreciation and amortization on SL1 Venture real estate assets		137		-
Plus: other expenses		-		290
Adjusted Earnings	$	24,414	$	15,227

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Liquidity Outlook and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including commitments to fund construction mortgage loans included in our investment portfolio, repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs. We use significant cash to originate our target investments, acquire the interests of developers in self-storage facilities we have financed, make distributions to our stockholders and fund our operations. In the future periods we will likely require cash to pay the net purchase price for self-storage facilities with respect to which we exercise ROFRs. We have not yet generated sufficient cash flow from operations or investment activities to enable us to make any investments or cover our distributions to our stockholders. As a result, we are dependent on the issuance of equity securities, borrowings under our Credit Facility and other access to third-party sources of capital to continue our investing activities and pay distributions to our stockholders.

Cash Flows

The following table sets forth changes in cash and cash equivalents (dollars in thousands):

	Six months ended June 30,
	2019		2018
Net income	$	26,987	$	16,151
Adjustments to reconcile net income to net cash used in operating activities:		(32,770)		(19,640)
Net cash used in operating activities		(5,783)		(3,489)
Net cash used in investing activities		(82,118)		(175,845)
Net cash provided by financing activities		83,355		175,688
Change in cash and cash equivalents	$	(4,546)	$	(3,646)

Cash decreased $4.5 million during the six months ended June 30, 2019 as compared to a decrease in cash of $3.6 million during the six months ended June 30, 2018. Net cash used in operating activities for the six months ended June 30, 2019 and 2018 was $5.8 million and $3.5 million, respectively. The primary components of cash used in operating activities during the six months ended June 30, 2019 were net income adjusted for non-cash transactions of $5.1 million and the change in cash from working capital of $0.9 million, offset by $0.2 million of return on investment from the SL1 Venture. The primary components of cash used in operating activities during the six months ended June 30, 2018 were net income adjusted for non-cash transactions of $4.3 million, offset by $0.5 million of return on investment from the SL1 Venture and the change in cash from working capital of $0.4 million.

Net cash used in investing activities for the six months ended June 30, 2019 and 2018 was $82.1 million and $175.8 million, respectively. For the six months ended June 30, 2019, the cash used for investing activities consisted primarily of $81.5 million to fund investments, $2.6 million to purchase additional interests in one of our development property investments, offset, in part, by $2.1 million in return of capital from the SL1 Venture. For the six months ended June 30, 2018, the cash used for investing activities consisted primarily of $171.0 million to fund investments, $9.3 million to purchase additional interests in four of our development property investments and capital additions to those properties, offset, in part, by origination fees received in cash of $1.9 million and $3.8 million from repayments of development property investments and other loan investments.

Net cash provided by financing activities for the six months ended June 30, 2019 totaled $83.4 million and primarily related to $62.3 million of net proceeds received from the Credit Facility, $32.7 million of net proceeds from common stock issuances, $9.0 million of net proceeds received from term loans, offset, in part, by $20.2 million of dividends paid. For the six months ended June 30, 2018, net cash provided by financing activities totaled $175.7 million and primarily related to $107.4 million of net proceeds from preferred stock issuances, $81.8 million of net proceeds from common stock issuances, offset, in part, by $12.0 million of dividends paid and net repayments on the Credit Facility of $0.6 million.

Liquidity Outlook and Capital Requirements

As of June 30, 2019, we had unrestricted cash of approximately $4.2 million, and we had remaining unfunded commitments of $197.6 million related to our investment portfolio and $0.3 million related to the SL1 Venture. During the remainder of 2019, we also expect to acquire additional developer interests in self-storage facilities we have financed and to execute commitments to provide capital to additional self-storage development projects. We believe that the sources of capital discussed below will provide us with adequate liquidity to fund our operations and investment activities for at least the next 12 months.

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Remaining unfunded commitments of $197.9 million related to our investment portfolio and SL1 Venture are estimated to be funded on the following schedule:

Future Fundings for Investments	2019		2020		2021		2022		2023 and thereafter		Total
Estimated Funding Amount	$	64,956	$	108,412	$	19,478	$	2,166	$	2,913	$	197,925

Credit Facility

On December 28, 2018, we entered into an amendment and restatement of the Credit Facility to, among other things allow up to $235 million of borrowings and an accordion feature permitting expansion up to $400 million. Our development property investments are eligible to be added to the base of collateral available to secure loans under the Credit Facility once they receive a certificate of occupancy, thereby increasing the borrowing capacity under the Credit Facility. Accordingly, we believe our availability under the Credit Facility will increase substantially over the next twelve months as construction on several investments in our investment portfolio are completed. However, we can provide no assurances that we will have access to the full amount of the Credit Facility. As of August 1, 2019, we had $97.9 million outstanding of our  $162.9 million in total availability under the Credit Facility.

During 2019, we believe we will have substantial opportunities for new investments. Since our IPO, we have been able to issue publicly-traded common stock and preferred stock, access preferred equity in a private placement, sell senior participations in existing loans, procure the Credit Facility, and enter into term loan debt. Moreover, as self-storage facilities we have financed are completed, opened and leased up, developers will have the right and the opportunity to sell or refinance such facilities, providing us with an additional source of capital if refinancings occur or we choose to allow sales to occur without exercising our ROFRs with respect to sold facilities. Cash received from sales and refinancings can be recycled into new investments. Accordingly, we believe we will have adequate capital to finance new investments for at least the next 12 months.

LIBOR is expected to be discontinued after 2021. None of our current debt that has an interest rate tied to LIBOR has a maturity date of later than December 31, 2021 unless the extension options under the Credit Facility are exercised. The Credit Facility provides procedures for determining an alternative base rate in the event that LIBOR is discontinued. However, there can be no assurances as to what that alternative base rate will be and whether that base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. We intend to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and work with our lenders to ensure any transition away from LIBOR will have minimal impact on our financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.

Common Stock ATM Program

On April 5, 2017, we entered into the ATM Program with an aggregate offering price of up to $50.0 million. On December 7, 2018, we entered into a new equity distribution agreement with an aggregate offering price under the new ATM Program of up to $75.0 million. Since the inception of the ATM Programs, we have sold an aggregate of 3,870,042 shares of common stock at a weighted average price of $21.49 per share, receiving net proceeds after commissions and other offering costs of $81.1 million. As of August 1, 2019, we have approximately $39.7 million available for issuance under the ATM Program.

Equity Capital Policies

Subject to applicable law and NYSE listing standards, our Board of Directors has the authority, without further stockholder approval, to issue additional authorized common stock and preferred stock or otherwise raise capital, including through the issuance of senior securities, in any manner and on the terms and for the consideration it deems appropriate, including in exchange for property. Stockholders will have no preemptive right to additional shares issued in any offering, and any offering may cause a dilution of your investment.

Additionally, the holders of our Series A Preferred Stock have the right to purchase their pro rata share of any qualified offering of common stock, which consists of any offering of common stock except any shares of common stock issued (i) in connection with a merger, consolidation, acquisition or similar business combination, (ii) in connection with a joint venture, strategic alliance or similar corporate partnering arrangement, (iii) in connection with any acquisition of assets by us, (iv) at market prices pursuant to a registered at-the-market program and/or (v) as part of a compensatory or employment arrangement.

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Leverage Policies

To date, we have funded a substantial portion of our investments with the net proceeds from our IPO and concurrent private placement, which were consummated on April 1, 2015, proceeds from the issuance of our Series A Preferred Stock, proceeds from three follow-on public offerings of common stock, which were consummated on December 13, 2016, June 27, 2017, and June 14, 2018, proceeds received from sales of shares from time to time under the ATM Programs and proceeds from the issuance of our Series B Preferred Stock. At June  30, 2019, we had total indebtedness of $97.0 million, or 13.8% of total assets. During 2019, we expect to utilize borrowings under our Credit Facility along with the other sources of capital described herein to fund our investment commitments. Our investment guidelines state that our leverage will generally be 25% to 35% of our total assets. Additionally, as long as shares of Series A Preferred Stock remain outstanding, we are required to maintain a ratio of debt to total tangible assets determined under GAAP of no more than 0.4:1, measured as of the last day of each fiscal quarter. Our Credit Facility contains certain financial covenants including: (i) total consolidated indebtedness not exceeding 50% of gross asset value; (ii) a minimum fixed charge coverage ratio (defined as the ratio of consolidated adjusted earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.20 to 1.00 during the period between December 28, 2018 and December 31, 2020, 1.30 to 1.00 during the period between January 1, 2021 and December 31, 2022 and 1.40 to 1.00 during the period between January 1, 2023 through the maturity of the Credit Facility; (iii) a minimum consolidated tangible net worth (defined as gross asset value less total consolidated indebtedness) of $373.6 million plus 75% of the sum of any additional net offering proceeds; (iv) when the outstanding balance under the Credit Facility exceeds $50 million, unhedged variable rate debt cannot exceed 40% of consolidated total indebtedness; (v) liquidity of no less than the greater of (a) future funding commitments of us and our subsidiaries for the three months following each date of determination and (b) $50 million for the period between December 31, 2018 and December 31, 2019 or on and after January 1, 2020, liquidity of no less than the greater of (a) future funding commitments of us and our subsidiaries for the six months following each date of determination and (b) $50 million; and (vi) a debt service coverage ratio (defined as the ratio of consolidated adjusted earnings before interest, taxes, depreciation and amortization to our consolidated interest expense and debt principal payments for any given period) of 2.00 to 1.00.

The amount available to borrow under the Credit Facility is limited according to a borrowing base valuation of the assets available as collateral. For loans secured by our mortgage loans, the borrowing base availability is the lesser of (i) 60% of the outstanding balance of our mortgage loans and (ii) the maximum principal amount which would not cause the outstanding loans under the Credit Facility secured by our mortgage loans to be greater than 50% of the underlying real estate asset fair value securing our mortgage loans. For loans secured by non-stabilized self-storage properties, the borrowing base availability is the lesser of (i) the maximum principal amount that would not cause the outstanding loans under the Credit Facility secured by the non-stabilized self-storage properties to be greater than 60% of the as-stabilized value of such non-stabilized self-storage properties, (ii) the maximum principal amount which would not cause the outstanding loans under the Credit Facility to be greater than 75% of the total development cost of the non-stabilized self-storage properties, and (iii) whichever of the following is then applicable: (a) the maximum principal amount that would not cause the ratio of (1) stabilized net operating income from the non-stabilized self-storage properties included in the borrowing base divided by (2) an implied debt service coverage amount to be less than 1.35 to 1.00, (b) for any underlying real estate asset securing the non-stabilized self-storage properties that has been included in the borrowing base for greater than 18 months, the maximum principal amount which would not cause the ratio of (1) actual adjusted net operating income for the underlying real estate asset securing such non-stabilized self-storage properties divided by (2) an implied debt service amount to be less than 0.50 to 1.00, and (c) for any underlying real estate asset securing the non-stabilized self-storage properties that has been included in the borrowing base for greater than 30 months, the maximum principal amount which would not cause the ratio of (1) actual adjusted net operating income for the underlying real estate asset securing such non-stabilized self-storage properties divided by (2) an implied debt service amount to be less than 1.00 to 1.00. For loans secured by stabilized self-storage properties, the borrowing base availability is the lesser of (i) the maximum principal amount that would not cause the outstanding loans under the Credit Facility secured by the underlying real estate asset securing the stabilized self-storage properties to be greater than 65% of the value of such self-storage properties and (ii) the maximum principal amount that would not cause the ratio of (i) aggregate adjusted net operating income from the underlying real estate asset securing such stabilized self-storage properties included in the borrowing base divided by (ii) an implied debt service coverage amount to be less than 1.30 to 1.00.

Our actual leverage will depend on the composition of our investment portfolio. Our charter and bylaws do not limit the amount of indebtedness we can incur, and our Board of Directors has discretion to deviate from or change our investment guidelines at any time. We will use corporate leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates. Our financing strategy focuses on the use of match-funded financing structures. This means that we will seek to match the maturities and/or repricing schedules of our financial obligations with those of our investment portfolio to minimize the risk that we will have to refinance our liabilities prior to the maturities of our investments and to reduce the impact of changing interest rates on earnings, which our new Credit Facility will help us better achieve. We will disclose any material changes to our leverage policies in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the quarterly report on

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Form 10‑Q or annual report on Form 10‑K for the period in which the change was made, or in a Current Report on Form 8‑K if required by the rules of the SEC or the Board of Directors deems it advisable, in its sole discretion.

Future Revisions in Policies and Strategies

The Board of Directors has the power to modify or waive our investment policies and strategies without the consent of our stockholders to the extent that the Board of Directors (including a majority of our independent directors) determines that a modification or waiver is in the best interest of our stockholders. Among other factors, developments in the market that either affect the policies and strategies mentioned herein or that change our assessment of the market may cause our Board of Directors to revise our policies and strategies.

Contractual Obligations and Commitments

The following table reflects our total contractual cash obligations as of June 30, 2019  (dollars in thousands):

Contractual Obligations	2019		2020		2021		2022		2023		Thereafter		Total
Long-term debt obligations (1)(2)	$	-	$	-	$	96,988	$	-	$	-	$	-	$	96,988

⁽¹⁾ Represents principal payments gross of discounts and debt issuance costs.

⁽²⁾ Amount excludes interest, which is variable based on 30-day LIBOR plus spreads ranging from 2.25% to 3.25%.

The following schedule depicts the impact of interest rate swaps and interest rate caps on our debt as of June 30, 2019:

	Principal		LIBOR		Margin		Effective Interest Rate		Effective Date	Maturity
Term Loans under interest rate swaps	$	34,088	2.2925	%	2.25	%	4.5425	%	6/3/2019	8/1/2021
Secured revolving credit facility under interest rate cap(1)		62,900	2.4112	%	3.0592	%	5.4704	%	6/25/2019	12/28/2021
	$	96,988

⁽¹⁾ The effective interest rate represents the average on the underlying variable debt unless the cap rate of LIBOR plus 2.50% is reached.

At June 30, 2019, we had $197.6 million of unfunded loan commitments related to our investment portfolio and $0.3 million related to the SL1 Venture. These commitments are primarily funded over the 12-30 months following the investment closing date as construction is completed. At June 30, 2019, we had $2.4 million of unfunded loan commitments related to our other assets.

As of June 30, 2019, we had unrestricted cash of approximately $4.2 million.

Off-Balance Sheet Arrangements

At June 30, 2019, we did not have any relationships, including those with unconsolidated entities or financial partnerships, for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

Our investment in real estate venture is recorded using the equity method as we do not have a controlling interest.

Dividends

For the quarter ended June 30, 2019, we declared a cash dividend to our stockholders of $0.35 per share, payable on July 15, 2019 to stockholders of record on July 1, 2019. We intend to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT annually distribute at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We intend to pay regular quarterly dividends to our stockholders in an amount equal to or greater than our net taxable income, if and to the extent authorized by our Board of Directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on any secured funding facilities, other lending facilities, repurchase agreements and other debt payable. If our cash available for distribution is less than our net taxable income, we could be required to reduce our dividends, sell assets or borrow funds to make cash

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distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

Additionally, holders of our Series A Preferred Stock are entitled to a cumulative cash distribution (“Cash Distribution”) equal to (A) 7.0% per annum on the liquidation value, or $1,000 per share of Series A Preferred Stock (the “Liquidation Value”) for the period beginning on the respective date of issuance until the sixth anniversary of the Effective Date, payable quarterly in arrears, (B) 8.5% per annum on the Liquidation Value for the period beginning the day after the sixth anniversary of the Effective Date and for each year thereafter so long as the Series A Preferred Stock remains issued and outstanding, payable quarterly in arrears, and (C) an amount in addition to the amounts in (A) and (B) equal to 5.0% per annum on the Liquidation Value upon the occurrence of certain triggering events (a “Cash Premium”). In addition, the holders of the Series A Preferred Stock will be entitled to a cumulative dividend payable in-kind in shares of our common stock or additional shares of Series A Preferred Stock, at the election of the holders (the “Stock Dividend”), equal in the aggregate to the lesser of (Y) 25% of the incremental increase in our book value (as adjusted for equity capital issuances, share repurchases and certain non-cash expenses) plus, to the extent we own equity interests in income-producing real property, the incremental increase in net asset value (provided, however, that no interest in the same real estate asset will be double counted) and (Z) an amount that would, together with the Cash Distribution, result in a 14.0% internal rate of return for the holders of the Series A Preferred Stock from the date of issuance of the Series A Preferred Stock, as set forth in the Articles Supplementary classifying the Series A Preferred Stock (the “Articles Supplementary”). For the first three fiscal quarters of the fiscal years 2018, 2019 and 2020 and for the first fiscal quarter of 2021, we will declare and pay a Series A Aggregate Stock Dividend equal to $2,125,000, or the Series A Target Stock Dividend. For the last fiscal quarter of each of 2018, 2019 and 2020 and for the second fiscal quarter of 2021, we will compute the cumulative Series A Aggregate Stock Dividend for all periods after December 31, 2018 through the end of such fiscal quarter equal to 25% of the incremental increase in our book value (as adjusted for equity capital issuances, share repurchases and certain non-cash expenses) plus, to the extent we own equity interests in income-producing real property, the incremental increase in net asset value (provided, however, that no interest in the same real estate asset will be double counted), or the Series A Computed Stock Dividend, and will declare and pay for such quarter a Series A Aggregate Stock Dividend equal to the greater of the Series A Target Stock Dividend or the Series A Computed Stock Dividend minus the sum of all Series A Aggregate Stock Dividends declared and paid for all fiscal quarters after December 31, 2018 and before the fiscal quarter for which such payment is computed, in each case subject to an amount that would, together with the Series A Cash Distribution, result in a 14.0% internal rate of return for the holders of the Series A Preferred Stock from the date of issuance of the Series A Preferred Stock.

Triggering events that will trigger the payment of a Cash Premium with respect to a Cash Distribution include: (i) the occurrence of certain change of control events affecting us after the third anniversary of the Effective Date, (ii) our ceasing to be subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act, (iii) our failure to remain qualified as a real estate investment trust, (iv) an event of default under the Purchase Agreement, (v) the failure by us to register for resale shares of our common stock pursuant to the Registration Rights Agreement (a “Registration Default”), (vi) our failure to redeem the Series A Preferred Stock as required by the Purchase Agreement, or (vii) the filing of a complaint, a settlement with, or a judgment entered by the SEC against us or any of our subsidiaries or any of our directors or executive officers relating to the violation of the securities laws, rules or regulations with respect to our business. Accrued but unpaid Cash Distributions and Stock Dividends on the Series A Preferred Stock will accumulate and will earn additional Cash Distributions and Stock Dividends as calculated above, compounded quarterly.

Holders of Series B Preferred Stock are entitled to receive, when, as and if authorized by our Board of Directors and declared by us, out of funds legally available for the payment of dividends under Maryland law, cumulative cash dividends from, and including, the original issue date quarterly in arrears on the fifteenth (15th) day of January, April, July and October of each year (or if not a business day, on the immediately preceding business day) (each, a “dividend payment date”). These cumulative cash dividends will accrue on the liquidation preference amount of $25.00 per share at a rate per annum equal to 7.00% with respect to each dividend period from and including the original issue date (equivalent to an annual rate of  $1.7500 per share) from the date of issuance of such Series B Preferred Stock. Dividends will be payable to holders of record as of 5:00 p.m., New York City time, on the related record date. The record dates for the Series B Preferred Stock are the close of business on the first (1st) day of January, April, July or October immediately preceding the relevant dividend payment date (each, a “dividend record date”). If any dividend record date falls on any day other than a business day as defined in the Series B Articles Supplementary, the dividend record date shall be the immediately succeeding business day.

Inflation

Virtually all of our assets and liabilities will be interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our distributions will be determined by our

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Board of Directors consistent with our obligation to distribute to our stockholders at least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns through ownership of our capital stock. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.

There have been no material changes in our credit risk, interest rate risk, interest rate mismatch risk, or real estate risks from what was disclosed in the 2018 Form 10-K except as set forth below.

Market Risk

Our development property investments and bridge investments generally will be reflected at their estimated fair value, with changes in fair market value recorded in our income. The estimated fair value of these investments fluctuates primarily due to changes in interest rates, capitalization rates, and other factors. Generally, in a rising interest rate environment, the estimated fair value of the fixed-rate securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of the fixed-rate securities would be expected to increase. As market volatility increases or liquidity decreases, the fair value of our investments may be adversely impacted. If we are unable to readily obtain independent pricing to validate our estimated fair value of any loan investment in our portfolio, the fair value gains or losses recorded in income may be adversely affected.

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 30, 2019		December 31, 2018
Up 25 basis points	$	(2.2)	$	(1.9)
Down 25 basis points, subject to a minimum yield/rate of 10 basis points		2.3		2.0
Up 50 basis points		(4.3)		(3.9)
Down 50 basis points, subject to a minimum yield/rate of 10 basis points		4.6		4.1

The following fluctuations in the capitalization rates would have had the following impact on the fair value of our investments:

	Increase (decrease) in fair value of investments
Change in capitalization rates (in millions)	June 30, 2019		December 31, 2018
Up 25 basis points	$	(10.7)	$	(8.9)
Down 25 basis points		11.7		9.8
Up 50 basis points		(20.5)		(17.0)
Down 50 basis points		24.7		20.5

Interest Rate Risk

As of June 30, 2019, the effect of our hedge agreements was to fix the interest rate on our $34.1 million variable rate term loans and our Credit Facility. Based on our current debt balances and interest rate swaps and caps in effect as of June 30, 2019, a one hundred basis point increase/decrease in the 30 day LIBOR interest rate would have the following impact on our annual cash interest expense: 

	Increase (decrease) in annual cash interest expense
Change in 30 Day LIBOR	June 30, 2019
Up 100 basis points	$	0.1
Down 100 basis points		(0.6)

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Derivative financial instruments expose us to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements. We believe we minimize our credit risk on these transactions by dealing with major, creditworthy financial institutions. As part of our on-going control procedures, we monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing credit risk concentration. We believe the likelihood of realized losses from counterparty non-performance is remote.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. The controls evaluation was conducted under the supervision and with the participation of management, including our CEO and CFO. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as this quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Based on the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information related to our company and our consolidated subsidiaries is made known to management, including the CEO and CFO.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the quarter ended June  30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be involved in various claims and legal actions in the ordinary course of business. Other than as described below, we are not currently involved in any material legal proceedings outside the ordinary course of our business.

As described elsewhere in this Quarterly Report on Form 10-Q, on January 8, 2019, the Company commenced proceedings to foreclose on the underlying collateral of the Company’s $17.7 million Miami construction loan. The foreclosure proceedings were commenced by the Company in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida in an action entitled Jernigan Capital Operating Company v. Storage Partners of Miami I, LLC et. al. On May 1, 2019, the defendant borrower filed an answer to the Company’s complaint and a counter-claim against the Company. An agreement between the Company and the borrower was executed on July 2, 2019. In connection with the agreement, the Company acquired all of the interests in the entity that owns the property that secured the loan and both parties dismissed all state court litigation related to that loan.

ITEM 1A. RISK FACTORS

The discussion of our business and operations should be read together with the risk factors contained in Part I, Item 1A of our 2018 Form 10-K, which describes the various additional risks and uncertainties to which we are or may be subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows and prospects in a material adverse manner.

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

Unregistered Sales of Equity Securities

None.

Repurchases of Common Stock

The following table							Maximum Dollar
provides information					Total Number of		Value
about repurchases of our	Total				Shares Purchased		that May Yet Be
common shares during	Number of		Average		as Part of Publicly		Purchased Under the
the three months	Shares		Price Paid		Announced Plans or		Plans or Programs (1)
ended June 30, 2019:	Purchased		Per Share		Programs		(dollars in thousands)
April 1-April 30		-	$	-		-	$	6,848
May 1-May 31		-		-		-		6,848
June 1-June 30		-		-		-		6,848
Total		-	$	-		-	$	6,848

⁽¹⁾ On May 23, 2016, we announced a program permitting us to repurchase a portion of our outstanding common stock not to exceed a dollar maximum of $10.0 million established by our Board of Directors.

During the three months ended June 30, 2019, certain officers and employees of the Manager returned 18,544 shares of our common stock to us in connection with the vesting of 64,834 shares of restricted stock, in order to satisfy tax withholding obligations.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

(a) Not applicable.

(b) Not applicable.

ITEM 6.  EXHIBITS

The exhibits listed in the accompanying Exhibit Index, which is incorporated herein by reference, are filed or furnished as part of this Quarterly Report on Form 10-Q.

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EXHIBIT INDEX 

*This certification is deemed not filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.

Exhibit No.	Exhibit Description
31.1*	Certification by CEO pursuant to Rule 13(a)-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2*	Certification by CFO pursuant to Rule 13(a)-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1*	Certification by CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

*Filed herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		JERNIGAN CAPITAL, INC.
Date: August 2, 2019	By:	/s/ John A. Good
		John A. Good
		Chief Executive Officer
		(Principal Executive Officer)
Date: August 2, 2019	By:	/s/ Kelly P. Luttrell
		Kelly P. Luttrell
		Senior Vice President, Chief Financial Officer, Treasurer and Corporate Secretary
		(Principal Financial and Accounting Officer)

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