SMARTSTOP SELF STORAGE REIT, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview


SmartStop Self Storage REIT, Inc. (f/k/a Strategic Storage Trust II, Inc.), a
Maryland corporation (the "Company"), was formed on  under the
Maryland General Corporation Law for the purpose of engaging in the business of
investing in self storage facilities and related self storage real estate
investments. Our year-end is . As used in this report, "we," "us,"
"our," and "Company" refer to SmartStop Self Storage REIT, Inc. and each of our
subsidiaries.

On , we and our operating partnership, SmartStop OP, L.P. (f/k/a
Strategic Storage Operating Partnership II, L.P.) (our "Operating Partnership"),
and SmartStop TRS, Inc. (f/k/a Strategic Storage TRS II, Inc.) (the "TRS")
entered into a series of transactions, agreements, and amendments to our
existing agreements and arrangements (such agreements and amendments hereinafter
referred to collectively as the "Self Administration Transaction"), with
SmartStop Asset Management LLC, our former sponsor ("SAM") and SmartStop OP
Holdings, LLC ("SS OP Holdings"), a subsidiary of SAM, pursuant to which,
effective , we acquired the self storage advisory, asset management
and property management businesses and Tenant Programs (as defined in Note 9 of
the Notes to the Consolidated Financial Statements contained in this report)
joint venture interests of SAM (the "Self Storage Platform"), along with certain
other assets of SAM. As a result of the Self Administration Transaction, SAM is
no longer our sponsor, and the special limited partnership interest and limited
partnership interest it held in our Operating Partnership through our Former
External Advisor have been redeemed. Additionally, we are now self-managed and
succeed to the advisory, asset management and property management businesses and
Tenant Programs joint ventures previously in place for us, Strategic Storage
Trust IV, Inc. ("SST IV"), a public non-traded REIT, and Strategic Storage
Growth Trust II, Inc. ("SSGT II") (collectively with SST IV "the Managed
REITs"), a private non-traded REIT, and now as a sponsor to the Managed REITs
have the internal capability to originate, structure and manage additional
investment products (the "Managed REIT Platform") which would be sponsored by
SmartStop REIT Advisors, LLC ("SRA"), our indirect subsidiary. As a result of
the Self Administration Transaction, we indirectly own 100% of the membership
interests in Strategic Storage Advisor II, LLC (our "Former External Advisor")
and each of Strategic Storage Property Management II, LLC and SS Growth Property
Management, LLC (together, our "Former External Property Managers"). See Note 4
of the Notes to the Consolidated Financial Statements contained in this report,
for additional information.

On , we, our Operating Partnership, and SST II Growth
Acquisition, LLC, our wholly-owned subsidiary ("Merger Sub"), entered into an
Agreement and Plan of Merger (the "SSGT Merger Agreement") with Strategic
Storage Growth Trust, Inc. ("SSGT"), a non-traded REIT sponsored by our former
sponsor, and SS Growth Operating Partnership, L.P. ("SSGT OP"). Pursuant to the
terms and conditions set forth in the Merger Agreement, on : (i)
we acquired SSGT by way of a merger of SSGT with and into Merger Sub, with
Merger Sub being the surviving entity (the "SSGT REIT Merger"); and
(ii) immediately after the SSGT REIT Merger, SSGT OP merged with and into our
Operating Partnership, with the Operating Partnership continuing as the
surviving entity and remaining a subsidiary of the Company (the "SSGT
Partnership Merger" and, together with the SSGT REIT Merger, the "SSGT
Mergers"). SSGT was focused on opportunistic self storage properties, including
development, and lease-up properties. See Note 3, Real Estate Facilities-Merger
with Strategic Storage Growth Trust, Inc., for additional information related to
the SSGT Mergers.

On , we commenced a public offering of a maximum of $1.0 billion
in common shares for sale to the public (the "Primary Offering") and
$95.0 million in common shares for sale pursuant to our distribution
reinvestment plan (collectively, the "Offering"). On , we satisfied
the $1.5 million minimum offering requirements of our Offering and commenced
formal operations. On , we revised our Primary Offering and
offered two classes of shares of common stock: Class A common stock, $0.001 par
value per share (the "Class A Shares") and Class T common stock, $0.001 par
value per share (the "Class T Shares"). Our Primary Offering terminated on
. We sold approximately 48 million Class A Shares and
approximately 7 million Class T Shares in our Offering for gross proceeds of
approximately $493 million and approximately $73 million, respectively. On
, prior to the termination of our Offering, we filed with the
SEC a Registration Statement on Form S-3, which registered up to an additional
$100.9 million in shares under our distribution reinvestment plan (our "DRP
Offering"). The DRP Offering may be terminated at any time upon 10 days' prior
written notice to stockholders. As of , we had sold approximately

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3.3 million Class A Shares and approximately 0.5 million Class T Shares for approximately $34.8 million and $5.3 million, respectively, in our DRP Offering.


As of , we owned 111 operating self storage facilities and one
facility under development located in 17 states (Alabama, Arizona, California,
Colorado, Florida, Illinois, Indiana, Maryland, Massachusetts, Michigan, New
Jersey, Nevada, North Carolina, Ohio, South Carolina, Texas and Washington) and
Ontario, Canada (the Greater Toronto Area).

As of , our self storage portfolio was comprised as follows:



                                                                 % of Total        Physical
                     No. of                        Sq. Ft.        Rentable        Occupancy           Rental
State              Properties      Units(1)       (net)(2)         Sq. Ft.           %(3)           Income %(4)
Alabama                      1         1,080         159,000             1.9 %             84 %              1.1 %
Arizona                      1           840          94,000             1.1 %             89 %              1.0 %
California                  24        15,230       1,588,000            19.3 %             88 %             23.6 %
Colorado                     6         3,190         348,500             4.2 %             88 %              3.8 %
Florida                     17        13,260       1,512,300            18.4 %             85 %             21.0 %
Illinois                     5         2,920         305,800             3.7 %             91 %              2.8 %
Indiana                      2         1,000         112,100             1.4 %             90 %              0.9 %
Massachusetts                1           840          93,000             1.1 %             87 %              2.7 %
Maryland                     2         1,610         172,900             2.1 %             86 %              2.4 %
Michigan                     4         2,180         261,000             3.2 %             90 %              2.9 %
New Jersey                   1           460          51,000             0.6 %             89 %              0.6 %
Nevada                       6         5,040         623,500             7.6 %             87 %              6.3 %
North Carolina              17         7,230       1,019,300            12.4 %             86 %              9.3 %
Ohio                         5         2,210         272,300             3.3 %             92 %              2.2 %
South Carolina               3         1,920         242,600             3.0 %             83 %              2.4 %
Texas                        4         2,130         314,200             3.8 %             87 %              3.7 %
Washington                   1           490          48,100             0.6 %             90 %              0.7 %
Ontario, Canada             12         9,540       1,006,700            12.3 %             90 %             12.6 %
Total                      112        71,170       8,224,300             100 %             87 %              100 %



(1) Includes all rentable units, consisting of storage units and parking

(approximately 2,400 units).

(2) Includes all rentable square feet, consisting of storage units and parking

(approximately 695,000 square feet).

(3) Represents the occupied square feet of all facilities we owned in a state or

province divided by total rentable square feet of all the facilities we owned

in such state or area as of . As of , the following

properties were not physically and/or economically stabilized: Elk Grove,

Garden Grove, Sarasota, Mount Pleasant, Pembroke Pines, Riverview, Eastlake,

3173 Sweeten Creek Rd-Asheville, Stoney Creek, and the Hualapai Way-Las Vegas

properties. Excluding these properties, our physical occupancy as of ,

2019 was approximately 89%.

(4) Represents rental income (excludes administrative fees, late fees, and other

ancillary income) for all facilities we owned in a state or province divided

by our total rental income for the month ended .

Critical Accounting Policies


We have established accounting policies which conform to generally accepted
accounting principles ("GAAP"). Preparing financial statements in conformity
with GAAP requires management to use judgment in the application of accounting
policies, including making estimates and assumptions. Following is a discussion
of the estimates and assumptions used in setting accounting policies that we
consider critical in the presentation of our financial statements. Many
estimates and assumptions involved in the application of GAAP may have a
material impact on our financial condition or operating performance, or on the
comparability of such information to amounts reported for other periods, because
of the subjectivity and judgment required to account for highly uncertain items
or the susceptibility of such items to change. These estimates and assumptions
affect our reported amounts of assets and liabilities, our disclosure of
contingent assets and liabilities at the dates of the financial statements and
our reported amounts of revenue and expenses during the period covered by this
report. If management's judgment or interpretation of the facts and
circumstances relating to various transactions had been different, it is
possible that different accounting policies would have been applied or different
amounts of assets, liabilities, revenues and expenses would have been recorded,
thus resulting in a materially different presentation of the financial
statements or materially different amounts being reported in the financial
statements. Additionally, other companies may use different

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estimates and assumptions that may impact the comparability of our financial
condition and results of operations to
those companies.

We believe that our critical accounting policies include the following: real
estate purchase price allocations; the evaluation of whether any of our
long-lived assets have been impaired; the valuation of goodwill and related
impairment considerations, the valuation of our trademarks and related
impairment considerations, the determination of the useful lives of our
long-lived assets; and the evaluation of the consolidation of our interests in
joint ventures. The following discussion of these policies supplements, but does
not supplant the description of our significant accounting policies, as
contained in Note 2 of the Notes to the Consolidated Financial Statements
contained in this report, and is intended to present our analysis of the
uncertainties involved in arriving upon and applying each policy.

Real Estate Purchase Price Allocation


We account for acquisitions in accordance with GAAP which requires that we
allocate the purchase price of a property to the tangible and intangible assets
acquired and the liabilities assumed based on their relative fair values. This
guidance requires us to make significant estimates and assumptions, including
fair value estimates, which requires the use of significant unobservable inputs
as of the acquisition date.

The value of the tangible assets, consisting of land and buildings is determined
as if vacant. Because we believe that substantially all of the leases in place
at properties we will acquire will be at market rates, as the majority of the
leases are month-to-month contracts, we do not expect to allocate any portion of
the purchase prices to above or below market leases. We also consider whether
in-place, market leases represent an intangible asset. Acquisitions of
portfolios of facilities are allocated to the individual facilities based upon
an income approach or a cash flow analysis using appropriate risk adjusted
capitalization rates which take into account the relative size, age, and
location of the individual facility along with current and projected occupancy
and rental rate levels or appraised values, if available.

Our allocations of purchase prices are based on certain significant estimates
and assumptions, variations in such estimates and assumptions could result in a
materially different presentation of the consolidated financial statements or
materially different amounts being reported in the consolidated financial
statements.

Impairment of Long-Lived Assets


The majority of our assets consist of long-lived real estate assets as well as
intangible assets related to our acquisitions. We evaluate such assets for
impairment based on events and changes in circumstances that may arise in the
future and that may impact the carrying amounts of our long-lived assets. When
indicators of potential impairment are present, we will assess the
recoverability of the particular asset by determining whether the carrying value
of the asset will be recovered, through an evaluation of the undiscounted future
operating cash flows expected from the use of the asset and its eventual
disposition. This evaluation is based on a number of estimates and assumptions.
Based on this evaluation, if the expected undiscounted future cash flows do not
exceed the carrying value, we will adjust the value of the long-lived asset and
recognize an impairment loss. Our evaluation of the impairment of long-lived
assets could result in a materially different presentation of the financial
statements or materially different amounts being reported in the financial
statements, as the amount of impairment loss, if any, recognized may vary based
on the estimates and assumptions we use.

Goodwill Valuation


Goodwill is recorded as the difference, if any, between the aggregate
consideration paid for an acquisition and the fair value of the net tangible
assets and other intangible assets acquired. Goodwill is allocated to various
reporting units, as applicable and is not amortized. We will perform an annual
impairment test for goodwill and between annual tests, we will evaluate the
recoverability of goodwill whenever events or changes in circumstances indicate
that the carrying amount of goodwill may not be fully recoverable. In our
impairment tests of goodwill, we will first assess qualitative factors to
determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If based on this assessment, management
determines that the fair value of the reporting unit is not less than its
carrying amount, then performing the additional two-step impairment test is
unnecessary. If the carrying amount of goodwill exceeds its fair value, an
impairment charge will be recognized.

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Trademarks Valuation


Trademarks are based on the value of our brands. Trademarks are valued using the
relief from royalty method, which presumes that without ownership of such
trademarks, we would have to make a stream of payments to a brand or franchise
owner in return for the right to use their name. By virtue of this asset, we
avoid any such payments and record the related intangible value of our ownership
of the brand name. We used the following significant projections and assumptions
to determine value under the relief from royalty method: revenues; royalty rate;
tax expense; terminal growth rate; and discount rate. For the SmartStop®
trademark, the projections underlying this relief from royalty model were
forecasted for eight years and then a terminal value calculation was applied.
For the Strategic Storage® trademark, the projections underlying the relief from
royalty model were forecasted for seven years. Applying the selected pretax
royalty rates to the applicable revenue base in each period yielded pretax
income for each of our trademarks. These pretax totals were tax effected
utilizing the applicable tax rate to arrive at net, after-tax cash flows. The
net, after-tax flows were then discounted to present value utilizing an
appropriate discount rate. The present value of the after-tax cash flows were
then added to the present value of the amortization tax benefit (considering the
15-year amortization of intangible assets pursuant to U.S. tax legislation) to
arrive at the recommended fair values for the trademarks.

We will evaluate whether any triggering events or changes in circumstances have
occurred subsequent to our annual impairment test that would indicate an
impairment condition may exist. If any change in circumstance or triggering
event occurs, and results in a significant impact to our revenue and
profitability projections, or any significant assumption in our valuations
methods is adversely impacted, the impact could result in a material impairment
charge in the future.

Estimated Useful Lives of Long-Lived Assets


We assess the useful lives of the assets underlying our properties based upon a
subjective determination of the period of future benefit for each asset. We
record depreciation expense with respect to these assets based upon the
estimated useful lives we determine. Our determinations of the useful lives of
the assets could result in a materially different presentation of the financial
statements or materially different amounts being reported in the financial
statements, as such determinations, and the corresponding amount of depreciation
expense, may vary dramatically based on the estimates and assumptions we use.

Consolidation of Investments in Joint Ventures


We evaluate the consolidation of our investments in joint ventures in accordance
with relevant accounting guidance. This evaluation requires us to determine
whether we have a controlling interest in a joint venture through a means other
than voting rights, and, if so, such joint venture may be required to be
consolidated in our financial statements. Our evaluation of our joint ventures
under such accounting guidance could result in a materially different
presentation of the financial statements or materially different amounts being
reported in the financial statements, as the joint venture entities included in
our financial statements may vary based on the estimates and assumptions we use.

REIT Qualification


We made an election under Section 856(c) of the Internal Revenue Code of 1986
(the Code) to be taxed as a REIT under the Code, commencing with the taxable
year ended . By qualifying as a REIT for federal income tax
purposes, we generally will not be subject to federal income tax on income that
we distribute to our stockholders. If we fail to qualify as a REIT in any
taxable year, we will be subject to federal income tax on our taxable income at
regular corporate rates and will not be permitted to qualify for treatment as a
REIT for federal income tax purposes for four years following the year in which
our qualification is denied. Such an event could materially and adversely affect
our net income and could have a material adverse impact on our financial
condition and results of operations. However, we believe that we are organized
and operate in a manner that will enable us to continue to qualify for treatment
as a REIT for federal income tax purposes, and we intend to continue to operate
as to remain qualified as a REIT for federal income tax purposes.

Results of Operations

Overview


We derive revenues principally from: (i) rents received from tenants who rent
storage units under month-to-month leases at each of our self storage
facilities; and (ii) sales of packing- and storage-related supplies at our
storage facilities; and (iii) our Tenant Programs; and (iv) fees earned pursuant
to our agreements with our Managed REITs. Therefore, our operating results
depend significantly on our ability to retain our existing tenants and lease our
available self storage units to

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new tenants, while maintaining and, where possible, increasing the prices for
our self storage units. Additionally, our operating results depend on our
tenants making their required rental payments to us, maintaining and increasing
fees from our Managed REITs, and, to a lesser degree, the success of our Tenant
Programs.

Competition in the market areas in which we operate is significant and affects
the occupancy levels, rental rates, rental revenues and operating expenses of
our facilities. Development of any new self storage facilities would intensify
competition of self storage operators in markets in which we operate.

As of and 2018, we owned 111 and 83 operating self storage facilities, respectively. The comparability of our results of operations was significantly affected by our acquisition activity in 2019 as listed below.

• The three months ended includes full three-month results for

111 operating self storage facilities. The three months ended ,

2018 includes full three-month results for 83 operating self storage

facilities.

• The six months ended includes full six-month results for 83

operating self storage facilities and partial period results for 28

operating properties acquired during the six months ended .

The six months ended includes full six-month results for 83

operating self storage facilities.

SSGT Mergers


On , we merged with SSGT, a REIT focused on opportunistic self
storage properties, including development and lease-up properties. Through the
SSGT Mergers, we acquired 28 operating self storage facilities which had a
physical occupancy of approximately 78% at acquisition, along with one
development property in the Greater Toronto, Canada area and the rights to
acquire another property under development in Gilbert, Arizona, which was
acquired subsequent to .  While the SSGT portfolio generated
positive operating income in the first and second quarters of 2019, the
portfolio was not yet physically or economically stabilized and is expected to
continue to grow in various key metrics. The chart below illustrates the growth
in the SSGT portfolio of assets since the completion of the SSGT Mergers:



                               [[Image Removed]]


(1) Physical Occupancy represents the percentage of square feet occupied for

all 28 SSGT operating properties as of the date presented. Properties that

were under development or had not yet been acquired were excluded from each

respective period.



Over the next 24 to 36 months, we believe the SSGT properties will continue to
grow revenues and NOI, and will become accretive to MFFO and cash flow over that
time. While we expect physical occupancy to continue to improve as the SSGT
properties continue to approach stabilization, the acquisition of the Gilbert
property and the opening of the Toronto development may cause short term
dilution in physical occupancy. While MFFO for the current quarter was diluted
as a

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result of the SSGT Mergers and associated increase in debt, the progress in the
lease up of the SSGT portfolio shown above, coupled with the acquisition of the
Gilbert property and the completion of the Toronto development property, we
believe will be further accretive to cash flow and MFFO in the future.



Self Administration Transaction


As a result of the Self Administration Transaction, effective , we
no longer incur acquisition, asset and property management fees, which we
previously incurred while we were externally advised. However, we now incur
additional payroll and overhead related costs. Additionally, we now are the
sponsor for the Managed REITs, generating revenue and incurring expenses
associated with such activities. We expect our 2019 operating results to be
significantly impacted by the impact of the Self Administration Transaction. See
Note 4 of the Notes to the Consolidated Financial Statements contained in this
report, for additional information.

Comparison of Operating Results for the Three Months Ended and 2018


Total Self Storage Revenues

Total self storage revenues for the three months ended  and 2018
were approximately $25.9 million and $20.0 million, respectively. The increase
in total self storage revenues of approximately $5.9 million or 29%, is
primarily attributable to the 28 operating self storage facilities acquired in
 in connection with the SSGT Mergers (approximately $5.8 million),
partially offset by the impact of adopting ASU 2016-02, which reduced total self
storage revenues by approximately $0.4 million as amounts previously recorded to
bad debt expense within property operating expenses are now presented as a
reduction to self storage rental revenue.

Managed REIT Platform Revenues


Managed REIT Platform related revenues for the three months ended 
and 2018 were approximately $76,000 and none, respectively. Such revenue
consisted of approximately $19,000 of asset management fee revenue,
approximately $10,000 of property management fee revenue, and approximately
$47,000 in reimbursable costs pursuant to our management contracts with our
Managed REITs. These revenues were derived from the Managed REIT Platform
business we acquired from SAM, effective . We expect Managed REIT
Platform related revenues to increase during fiscal year 2019 as we recognize
such revenues for the remainder of fiscal year 2019 and as our Managed REITs
acquire additional properties.

Property Operating Expenses


Property operating expenses for the three months ended  and 2018
were approximately $8.8 million and $6.3 million, respectively. Property
operating expenses includes the costs to operate our facilities including
payroll, utilities, insurance, real estate taxes, and marketing. The increase in
property operating expenses of approximately $2.5 million, is primarily
attributable to the 28 operating self storage facilities acquired in  in connection with the SSGT Mergers.

Property Operating Expenses - Affiliates


Property operating expenses - affiliates for the three months ended  and 2018 were approximately $3.4 million and $2.6 million, respectively.
Property operating expenses - affiliates includes property management fees and
asset management fees related to our Former External Property Managers and our
Former External Advisor, respectively. The increase in property operating
expenses - affiliates of approximately $0.8 million is primarily attributable to
the 28 operating self storage facilities acquired in  in connection
with the SSGT Mergers. As a result of the Self Administration Transaction, we
will no longer incur such expenses.

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Managed REIT Related Expenses


Managed REIT related expenses for the three months ended  and 2018
were approximately $58,000 and none, respectively. Such expenses primarily
consisted of allocated payroll associated with the management of the Managed
REITs. These expenses are a result of the managed REIT platform business we
acquired from our Former Advisor, effective . We expect Managed
REIT related expenses to increase during fiscal year 2019 as such expenses will
be incurred for the remainder of fiscal year 2019 and as our Managed REITs
acquire additional properties.

General and Administrative Expenses


General and administrative expenses for the three months ended  and
2018 were approximately $1.8 million and $1.4 million, respectively. General and
administrative expenses consist primarily of legal expenses, transfer agent
fees, directors' and officers' insurance expense, an allocation of a portion of
our Former External Advisor's payroll related costs, accounting expenses and
board of directors related costs. The increase in general and administrative is
primarily attributable to increases in accounting expenses related to the Self
Administration Transaction and payroll related costs.

Depreciation and Amortization Expenses


Depreciation and amortization expenses for the three months ended 
and 2018 were approximately $9.8 million and $6.1 million, respectively.
Depreciation expense consists primarily of depreciation on the buildings and
site improvements at our properties. Amortization expense consists of the
amortization of intangible assets resulting from our property acquisitions and
amortization of certain intangible assets acquired in the Self Administration
Transaction. The increase in depreciation and amortization expense is primarily
attributable to the 28 operating self storage facilities acquired in  in connection with the SSGT Mergers.

Self Administration Transaction Expenses


Self Administration Transaction expenses for the three months ended  and 2018 were approximately $1.4 million and none, respectively. Self
Administration Transaction expenses consist primarily of legal fees, and fees
and expenses of our professional and financial advisors.

Acquisition Expenses - Affiliates


Acquisition expenses - affiliates for the three months ended  and
2018 were approximately $45,000 and $18,000, respectively. Acquisition expenses
- affiliates primarily relate to acquisition costs that were payable or
reimbursable to an affiliate incurred in the pursuit of self storage properties
which may be acquired in future periods, but do not yet meet our capitalization
criteria.

Other Property Acquisition Expenses


Other property acquisition expenses for the three months ended  and
2018 were approximately $1,000 and $200,000, respectively. These acquisition
expenses were incurred by third parties prior to such acquisitions becoming
probable in accordance with our capitalization policy.

Interest Expense and Accretion of Fair Market Value of Secured Debt


Interest expense and the accretion of fair market value of secured debt for the
three months ended  and 2018 were approximately $9.7 million and
$4.4 million, respectively. The increase of approximately $5.3 million is
primarily attributable to the additional debt obtained in connection with the
SSGT Mergers during the first quarter of 2019. We expect interest expense to
fluctuate in future periods commensurate with our future debt level and interest
rates.

Interest Expense - Debt Issuance Costs


Interest expense - debt issuance costs for the three months ended 
and 2018 were approximately $1.1 million and $0.3 million, respectively. The
increase in interest expense - debt issuance costs of $0.8 million is primarily
attributable to loan fees related to the new debt obtained in connection with
the SSGT Mergers. We expect debt issuance costs to fluctuate commensurate with
our future financing activity.

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Gain Resulting from Acquisition of Unconsolidated Affiliates


Gain resulting from acquisition of unconsolidated affiliates for the three
months ended  and 2018 was approximately $8.0 million and none,
respectively. The gain was related to our remeasurement to fair value of the
Tenant Programs joint ventures upon our acquisition of 100% of such entities in
the Self Administration Transaction.

Other Expense

Other expense for the three months ended and 2018 were approximately $0.3 million and $0.2 million, respectively. The increase of approximately $0.1 million primarily relates to increased state taxes expense.

Same-Store Facility Results - Three Months Ended and 2018


The following table sets forth operating data for our same-store facilities
(those properties included in the consolidated results of operations since
 excluding Centennial (which was a lease up facility during 2018),
for the three months ended  and 2018. We consider the following
data to be meaningful as this allows for the comparison of results without the
effects of acquisition or development activity.



                               Same-Store Facilities                               Non Same-Store Facilities                           Total
                                                             %                                                %                                           %
                     2019              2018               Change                2019            2018        Change       2019             2018         Change
Revenue (3)      $ 19,921,453      $ 19,883,627                0.2 %  (1)(2) $ 5,982,893     $  161,889        N/M   $ 25,904,346     $ 20,045,516        29.2 %
Property
operating                                                             (1)(2)
  expenses (4)      7,256,766         7,368,914               (1.5 )%          3,041,057        103,933        N/M     10,297,823        7,472,847        37.8 %
Property
operating
  income         $ 12,664,687      $ 12,514,713                1.2 %         $ 2,941,836     $   57,956        N/M   $ 15,606,523     $ 12,572,669        24.1 %
Number of
facilities                 82                82                                       30              1                       112               83
Rentable
square
  feet (5)          5,963,100         5,963,100                                2,261,200         66,500                 8,224,300        6,029,600
Average
physical
  occupancy
(6)                      89.1 %            88.6 %                                    N/M            N/M                      86.4 %           88.5 %
Annualized
rent per
occupied                                          (1)(2)
square foot
(7)              $      15.78      $      15.88                                      N/M            N/M              $      15.31     $      15.83


N/M Not meaningful

(1) The adoption of ASU 2016-02 Leases (Topic 842) on , requires

our expected loss related to collectability of rental payments, previously

reflected in property operating expenses as bad debt expense, to be reflected

as a reduction to self storage rental revenue. If we had applied this ASU to

our 2018 results, same-store revenue and property operating expenses for the

three months ended would have been approximately $19.6 million

and $7.0 million, respectively. This would have resulted in an increase in

same-store revenue for the three months ended of approximately

$0.4 million, or 1.8%, and an increase in same-store property operating

expenses for the same period of approximately $0.2 million, or 2.9%. In

addition, annualized rent per occupied square foot would have been $15.62,

resulting in an annual increase of approximately 1.1% for the three months

ended .

(2) Our same-store results for the three months ended and 2018

include 9 self storage facilities located in the Greater Toronto Area whose

transactions are denominated in Canadian Dollars and translated to U.S.

dollars at the average rates for the period. Including the application of ASU

2016-02 Leases (Topic 842) treatment to our 2018 results as noted in note 1

above and adjusting foreign exchange rates on a same-currency basis, the

adjusted result would have been an increase in same-store revenue for the

three months ended of approximately $0.5 million, or 2.4% and

an increase in same-store net operating income for the same period of

approximately $0.2 million, or 1.7%.

(3) Revenue includes rental revenue, ancillary revenue, and administrative and

late fees.

(4) Property operating expenses excludes corporate general and administrative

expenses, asset management fees, interest expense, depreciation, amortization

expense, and acquisition expenses, but includes property management fees.



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(5) Of the total rentable square feet, parking represented approximately 695,000

    square feet and 540,000 square feet as of  and 2018,
    respectively. On a same-store basis, for the same periods, parking
    represented approximately 540,000 square feet.

(6) Determined by dividing the sum of the month-end occupied square feet for the

applicable group of facilities for each applicable period by the sum of their

month-end rentable square feet for the period.

(7) Determined by dividing the aggregate realized rental revenue for each

applicable period by the aggregate of the month-end occupied square feet for

the period. Properties are included in the respective calculations in their

first full month of operations, as appropriate. We have excluded the realized

rental revenue and occupied square feet related to parking herein for the

purpose of calculating annualized rent per occupied square foot.



Our same-store property operating expenses decreased by approximately $0.1
million for the three months ended  compared to the three months
ended  primarily due to an increase in payroll and property taxes,
offset by the adoption of ASU 2016-02.

The following table presents a reconciliation of net loss as presented on our
consolidated statements of operations to property operating income, as stated
above, for the periods indicated:

                                                        For the Three Months Ended June 30,
                                                           2019                     2018
Net loss                                            $       (2,283,972 )     $       (1,437,330 )
Adjusted to exclude:
Managed REIT Platform revenue                                  (29,062 )                      -
Asset management fees (1)                                    1,858,688      

1,361,291

Managed REIT Platform expenses                                  10,569                        -
General and administrative                                   1,826,886                1,430,276
Depreciation                                                 7,420,510                5,081,042
Intangible amortization expense                              2,354,332      

1,038,263

Self administration transaction expenses                     1,350,188                        -
Acquisition expenses-affiliates                                 45,119                   17,915
Other property acquisition expenses                                387                  204,079
Interest expense                                             9,762,302      

4,467,403

Interest expense-accretion of fair market value
of secured debt                                                (33,191 )               (111,151 )
Interest expense-debt issuance costs                         1,073,725                  325,569
Gain resulting from acquisition of unconsolidated
affiliates                                                  (8,017,353 )                      -
Other                                                          267,395                  195,312
Total property operating income                     $       15,606,523      

$ 12,572,669

(1) Asset management fees are included in Property operating expenses -

affiliates in the consolidated statements of operations.

Comparison of Operating Results for the Six Months Ended and 2018

Total Self Storage Revenues


Total self storage related revenues for the six months ended  and
2018 were approximately $49.8 million and $39.9 million, respectively. The
increase in total self storage revenues of approximately $10.0 million or 25%,
is primarily attributable to the 28 operating self storage facilities acquired
in  in connection with the SSGT Mergers (approximately $9.9
million), partially offset by the impact of adopting ASU 2016-02, which reduced
total self storage revenues by approximately $0.6 million as amounts previously
recorded to bad debt expense within property operating expenses are now
presented as a reduction to self storage rental revenue.

Managed REIT Platform Related Revenues


Managed REIT Platform related revenues for the six months ended 
and 2018 were approximately $76,000 and none, respectively. Such revenue
consisted of approximately $19,000 of asset management fee revenue,
approximately $10,000 of property management fee revenue, and approximately
$47,000 in reimbursable costs pursuant to our management contracts with our
Managed REITs. These revenues were derived from the Managed REIT Platform
business we acquired from SAM, effective . We expect Managed REIT
Platform related revenues to increase

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during fiscal year 2019 as we recognize such revenues for the remainder of fiscal year 2019 and as our Managed REITs acquire additional properties.

Property Operating Expenses


Property operating expenses for the six months ended  and 2018 were
approximately $17.0 million and $12.2 million, respectively. Property operating
expenses includes the costs to operate our facilities including payroll,
utilities, insurance, real estate taxes, and marketing. The increase in property
operating expenses of approximately $4.8 million, is primarily attributable to
the 28 operating self storage facilities acquired in  in connection
with the SSGT Mergers (approximately $4.4 million) and an increase in same-store
operating expenses of approximately $0.9 million, primarily attributable to
increases in repairs and maintenance, payroll and property taxes, offset by the
impact of adopting ASU 2016-02, which reduced property operating expenses by
approximately $0.6 million as amounts previously recorded to bad debt expense
within property operating expenses are now presented as a reduction to self
storage rental revenue.

Property Operating Expenses - Affiliates


Property operating expenses - affiliates for the six months ended 
and 2018 were approximately $6.6 million and $5.1 million, respectively.
Property operating expenses - affiliates includes property management fees and
asset management fees. The increase in property operating expenses - affiliates
of approximately $1.5 million is primarily attributable to the 28 operating self
storage facilities acquired in  in connection with the SSGT Mergers.
As a result of the Self Administration Transaction, we will no longer incur such
expenses.

Managed REIT Related Expenses


Managed REIT related expenses for the six months ended  and 2018
were approximately $58,000 and none, respectively. Such expenses primarily
consisted of allocated payroll associated with the management of the Managed
REITs. These expenses are a result of the Managed REIT Platform business we
acquired from our Former Advisor, effective . We expect Managed
REIT related expenses to increase during fiscal year 2019 as such expenses will
be incurred for the remainder of fiscal year 2019 and as our Managed REITs
acquire additional properties.

General and Administrative Expenses


General and administrative expenses for the six months ended  and
2018 were approximately $3.5 million and $2.6 million, respectively. General and
administrative expenses consist primarily of legal expenses, transfer agent
fees, directors' and officers' insurance expense, an allocation of a portion of
our Former External Advisor's payroll related costs, accounting expenses and
board of directors related costs. The increase in general and administrative
expenses of approximately $0.8 million is primarily attributable to increases in
accounting expenses related to the SSGT Mergers and Self Administration
Transaction and payroll related costs.

Depreciation and Amortization Expenses


Depreciation and amortization expenses for the six months ended 
and 2018 were approximately $18.4 million and $12.4 million, respectively.
Depreciation expense consists primarily of depreciation on the buildings and
site improvements at our properties. Amortization expense consists of the
amortization of intangible assets resulting from our acquisitions and
amortization of certain intangible assets acquired in the Self Administration
Transaction. The increase in depreciation and amortization expense is primarily
attributable to the 28 operating self storage facilities acquired in  in connection with the SSGT Mergers.

Self Administration Transaction Expenses


Self administration transaction expenses for the six months ended 
and 2018 were approximately $1.5 million and none, respectively. Self
administration transaction expenses consist primarily of legal fees, and fees
and expenses of our professional and financial advisors.

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Acquisition Expenses - Affiliates

Acquisition expenses - affiliates for the six months ended and 2018 were approximately $84,000 and $26,000, respectively. The acquisition expenses during 2019 primarily relate to the costs associated with the SSGT Mergers prior to such merger becoming probable in accordance with our capitalization policy.

Other Property Acquisition Expenses


Other property acquisition expenses for the six months ended  and
2018 were approximately $84,000 and $253,000, respectively. These acquisition
expenses were incurred by third parties prior to such acquisitions becoming
probable in accordance with our capitalization policy.

Interest Expense and Accretion of Fair Market Value of Secured Debt


Interest expense and the accretion of fair market value of secured debt for the
six months ended  and 2018 were approximately $18.3 million and
$8.6 million, respectively. The increase of approximately $9.7 million is
primarily attributable to the additional debt obtained in connection with the
SSGT Mergers during the first quarter of 2019. We expect interest expense to
fluctuate in future periods commensurate with our future debt level and interest
rates.

Interest Expense - Debt Issuance Costs


Interest expense - debt issuance costs for the six months ended 
and 2018 were approximately $1.9 million and $0.6 million, respectively. The
increase in interest expense - debt issuance costs of $1.3 million is primarily
attributable to loan fees related to the new debt obtained in connection with
the SSGT Mergers. We expect debt issuance costs to fluctuate commensurate with
our future financing activity.

Net Loss on Extinguishment of Debt


Net loss on extinguishment of debt for the six months ended  and
2018 was approximately $1.5 million and none, respectively. The increase in net
loss on debt extinguishment is primarily attributable to prepayment penalties
related to the early payoff of the Raleigh/Myrtle Beach promissory note, and the
write-off of unamortized debt issuance costs on loans that were paid off in
connection with the SSGT Mergers.

Gain Resulting from Acquisition of Unconsolidated Affiliates


Gain resulting from acquisition of unconsolidated affiliates for the six months
ended  and 2018 was approximately $8.0 million and none,
respectively. The gain was related to our remeasurement to fair value of the
Tenant Programs joint ventures upon our acquisition of 100% of such entities in
the Self Administration Transaction.

Other Expense

Other expense for the six months ended and 2018 were approximately $0.3 million and $0.2 million, respectively.

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Same-Store Facility Results


The following table sets forth operating data for our same-store facilities
(those properties included in the consolidated results of operations since
, excluding Centennial (which was a lease up facility during
2018) for the six months ended  and 2018. We consider the following
data to be meaningful as this allows for the comparison of results without the
effects of acquisition or development activity.

                                        Same-Store Facilities                              Non Same-Store Facilities                            Total
                                                                      %                                                %                                           %
                                2019             2018              Change                2019            2018        Change       2019             2018         Change
Revenue (3)                 $ 39,491,355     $ 39,603,895             (0.3 )% (1)(2) $ 10,296,316     $  308,078      N/M     $ 49,787,671     $ 39,911,973        24.7 %
Property operating
  expenses (4)                14,715,251       14,381,415              2.3 %  (1)(2)    5,242,462        226,780      N/M       19,957,713       14,608,195        36.6 %
Property operating
  income                    $ 24,776,104     $ 25,222,480             (1.8 )%        $  5,053,854     $   81,298      N/M     $ 29,829,958     $ 25,303,778        17.9 %
Number of facilities                  82               82                                      30              1                       112               83
Rentable square
  feet (5)                     5,963,100        5,963,100                               2,261,200         66,500                 8,224,300        6,029,600
Average physical
  occupancy (6)                     88.5 %           88.6 %                                   N/M            N/M                      85.6 %           88.5 %
Annualized rent per
  occupied square
  foot (7)                  $      15.76     $      15.80   (1)(2)                            N/M            N/M              $      15.31     $      15.76


N/M Not meaningful

(1) The adoption of ASU 2016-02 Leases (Topic 842) on , requires

our expected loss related to collectability of rental payments, previously

reflected in property operating expenses as bad debt expense, to be reflected

as a reduction to self storage rental revenue. If we had applied this ASU to

our 2018 results, same-store revenue and property operating expenses for the

six months ended would have been approximately $39.0 million

and $13.8 million, respectively. This would have resulted in an increase in

same-store revenue for the six months ended of approximately

$0.5 million, or 1.2%, and an increase in same-store property operating

expenses for the same period of approximately $0.9 million, or 6.6%. In

addition, annualized rent per occupied square foot would have been $15.56,

resulting in an annual increase of approximately 1.2% for the six months

ended .

(2) Our same-store results for the six months ended and 2018

include 9 self storage facilities located in the Greater Toronto Area whose

transactions are denominated in Canadian Dollars and translated to U.S.

dollars at the average rates for the period. Including the application of ASU

2016-02 Leases (Topic 842) treatment to our 2018 results as noted in note 1

above and adjusting foreign exchange rates on a same-currency basis, the

adjusted result would have been an increase in same-store revenue for the six

    months ended  of approximately $0.7 million, or 1.8% and a
    decrease in same-store net operating income for the same period of
    approximately $0.3 million, or 1.2%.

(3) Revenue includes rental revenue, ancillary revenue, and administrative and

late fees.

(4) Property operating expenses excludes corporate general and administrative

expenses, asset management fees, interest expense, depreciation, amortization

expense, and acquisition expenses, but includes property management fees.

(5) Of the total rentable square feet, parking represented approximately 695,000

    square feet and 540,000 square feet as of  and 2018,
    respectively. On a same-store basis, for the same periods, parking
    represented approximately 540,000 square feet.

(6) Determined by dividing the sum of the month-end occupied square feet for the

applicable group of facilities for each applicable period by the sum of their

month-end rentable square feet for the period.

(7) Determined by dividing the aggregate realized rental revenue for each

applicable period by the aggregate of the month-end occupied square feet for

the period. Properties are included in the respective calculations in their

first full month of operations, as appropriate. We have excluded the realized

rental revenue and occupied square feet related to parking herein for the

purpose of calculating annualized rent per occupied square foot.



Our same-store property operating expenses increased by approximately $0.3
million for the six months ended  compared to the six months ended
 primarily due to increases in payroll, property taxes, advertising
and

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repairs and maintenance, offset by approximately $0.6 million of bad debt expense recorded in property operating expenses for the six months ended , prior to the adoption of ASU 2016-02.


The following table presents a reconciliation of net loss as presented on our
consolidated statements of operations to property operating income, as stated
above, for the periods indicated:

                                                       For the Six Months Ended June 30,
                                                           2019                   2018
Net loss                                            $      (11,232,290 )     $    (2,104,377 )
Adjusted to exclude:
Managed REIT Platform revenue                                  (29,062 )                   -
Asset management fees (2)                                    3,622,559      

2,728,423

Managed REIT Platform expenses                                  10,569                     -
General and administrative                                   3,481,070             2,633,210
Depreciation                                                14,288,918            10,147,586
Intangible amortization expense                              4,081,308      

2,218,765

Self administration transaction expenses                     1,488,271                     -
Acquisition expenses-affiliates                                 84,061      

26,220

Other property acquisition expenses                             84,236      

253,430

Interest expense                                            18,323,804      

8,829,468

Interest expense-accretion of fair market value
of secured debt                                                (65,659 )            (225,511 )
Interest expense-debt issuance costs                         1,915,258      

644,952

Net loss on extinguishment of debt                           1,487,867                     -
Gain resulting from acquisition of unconsolidated
affiliates                                                  (8,017,353 )                   -
Other                                                          306,401      

151,612

Total property operating income                     $       29,829,958       $    25,303,778


Non-GAAP Financial Measures

Funds from Operations and Modified Funds from Operations


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

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

The historical accounting convention used for real estate assets requires
straight-line depreciation of buildings and improvements, which implies that the
value of real estate assets diminishes predictably over time. Diminution in
value may occur if such assets are not adequately maintained or repaired and
renovated as required by relevant circumstances or other measures necessary to
maintain the assets are not undertaken. However, we believe that, since real
estate values historically rise and fall with market conditions, including
inflation, interest rates, the business cycle, unemployment and consumer
spending, presentations of operating results for a REIT using historical
accounting for depreciation may be less informative. In addition, in the
determination of FFO, we believe it is appropriate to disregard impairment
charges, as this is a fair value adjustment that is largely based on market
fluctuations and assessments regarding general market conditions which can
change over time. An asset will only be evaluated for impairment if certain
impairment indications exist and if the carrying value, or book value, exceeds
the total estimated undiscounted future cash flows (including net rental
revenues, net proceeds on the sale of the property, and any other ancillary cash
flows at a property or group level under GAAP) from such asset.

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Testing for impairment is a continuous process and is analyzed on a quarterly
basis. Investors should note, however, that determinations of whether impairment
charges have been incurred are based partly on anticipated operating
performance, because estimated undiscounted future cash flows from a property,
including estimated future net rental revenues, net proceeds on the sale of the
property, and certain other ancillary cash flows, are taken into account in
determining whether an impairment charge has been incurred. While impairment
charges are excluded from the calculation of FFO as described above, investors
are cautioned that due to the fact that impairments are based on estimated
future undiscounted cash flows and that we intend to have a relatively limited
term of our operations; it could be difficult to recover any impairment charges
through the eventual sale of the property. To date, we have not recognized any
impairments.

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

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

Changes in the accounting and reporting rules under GAAP that were put into
effect and other changes to GAAP accounting for real estate subsequent to the
establishment of NAREIT's definition of FFO have prompted an increase in
cash-settled expenses, specifically acquisition fees and expenses. Prior to
, when we adopted new accounting guidance, such costs were
entirely expensed as operating expenses under GAAP. Subsequent to , certain of such costs continue to be expensed. We believe these fees and
expenses do not affect our overall long-term operating performance. Publicly
registered, non-traded REITs typically have a significant amount of acquisition
activity and are substantially more dynamic during their initial years of
investment and operation. The purchase of properties, and the corresponding
expenditures associated with that process, is a key feature of our business plan
in order to generate operational income and cash flow in order to make
distributions to investors. While other start-up entities may also experience
significant acquisition activity during their initial years, we believe that
publicly registered, non-traded REITs are unique in that they typically have a
limited life with targeted exit strategies within a relatively limited time
frame after the acquisition activity ceases. We have used the proceeds raised in
our Offering, including our DRP Offering, to acquire properties, and we expect
to begin the process of achieving a liquidity event (i.e., listing of our shares
of common stock on a national securities exchange, a merger or sale, the sale of
all or substantially all of our assets, or another similar transaction) within
three to five years after the completion of our Primary Offering, which is
generally comparable to other publicly registered, non-traded REITs. Thus, we do
not intend to continuously purchase assets and intend to have a limited life.
The decision whether to engage in any liquidity event is in the sole discretion
of our board of directors. Due to the above factors and other unique features of
publicly registered, non-traded REITs, the Investment Program Association, or
the IPA, an industry trade group, has standardized a measure known as MFFO,
which the IPA has recommended as a supplemental measure for publicly registered,
non-traded REITs and which we believe to be another appropriate supplemental
measure to reflect the operating performance of a publicly registered,
non-traded REIT having the characteristics described above. MFFO is not
equivalent to our net income (loss) as determined under GAAP, and MFFO may not
be a useful measure of the impact of long-term operating performance on value if
we do not ultimately engage in a liquidity event. We believe that, because MFFO
excludes any acquisition fees and expenses that affect our operations only in
periods in which properties are acquired and that we consider more reflective of
investing activities, as well as other non-operating items included in FFO, MFFO
can provide, on a going-forward basis, an indication of the sustainability (that
is, the capacity to continue to be maintained) of our operating performance
after the period in which we are acquiring our properties and once our portfolio
is in place. By providing MFFO, we believe we are presenting useful information
that assists investors and analysts to better assess the sustainability of our
operating performance after our Primary Offering has been completed and our
properties have been acquired. We also believe that MFFO is a recognized measure
of sustainable operating performance by the publicly registered, non-traded REIT
industry. Further, we believe MFFO is useful in comparing the sustainability of
our operating performance after our Primary Offering and acquisitions are
completed with the sustainability of the operating performance of other real
estate companies that are not as involved in acquisition activities. Investors
are cautioned that MFFO should only be used to assess the sustainability of our
operating performance after our Primary Offering has been completed and
properties have been acquired, as it excludes any acquisition fees and expenses
that have a negative effect on our operating performance during the periods in
which properties are acquired.

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

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

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

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

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

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



                                       Three Months      Three Months       Six Months        Six Months
                                           Ended             Ended             Ended            Ended
                                         June 30,          June 30,          June 30,          June 30,
                                           2019              2018              2019              2018
Net loss (attributable to common
stockholders)                          $  (2,212,445 )   $  (1,427,056 )   $ (11,104,004 )   $ (2,088,259 )
Add:
Depreciation of real estate                7,325,953         5,019,318        14,125,014       10,022,905
Amortization of real estate related
intangible assets                          2,286,161         1,038,263         4,013,137        2,218,765
Deduct:
Gain resulting from acquisition of
unconsolidated affiliates(1)              (8,017,353 )               -        (8,017,353 )              -
Adjustment for noncontrolling
interests                                    (54,817 )         (52,872 )        (106,875 )       (107,112 )
FFO (attributable to common
stockholders)                               (672,501 )       4,577,653        (1,090,081 )     10,046,299
Other Adjustments:
Acquisition expenses(2)                       45,506           221,994           168,297          279,650
Self administration transaction
expenses (3)                               1,350,188                 -         1,488,271                -
Accretion of fair market value of
secured debt(4)                              (33,191 )        (111,151 )         (65,659 )       (225,511 )
Net loss on extinguishment of
debt(5)                                            -                 -         1,487,867                -
Foreign currency and interest rate
derivative (gains) losses, net(6)           (169,666 )               -           (78,783 )        (91,055 )
Adjustment for noncontrolling
interests                                      6,362             2,077              (929 )         (3,585 )
MFFO (attributable to common
stockholders)                          $     526,698     $   4,690,573     

$ 1,908,983 $ 10,005,798

As discussed in the Results of Operations, our 2019 results have been significantly impacted by the SSGT Mergers and additional debt incurred to finance such acquisition. The information below should be read in conjunction with the discussion regarding the SSGT Mergers.

(1) Such gain was recorded as a result of obtaining control of certain of our

Tenant Programs joint ventures in the Self Administration Transaction and in

accordance with the NAREIT White Paper was excluded from the determination of

FFO.

(2) In evaluating investments in real estate, we differentiate the costs to

acquire the investment from the operations derived from the investment. Such

information would be comparable only for publicly registered, non-traded

REITs that have generally completed their acquisition activity and have other

similar operating characteristics. By excluding expensed acquisition related

expenses, we believe MFFO provides useful supplemental information that is

comparable for each type of real estate investment and is consistent with

management's analysis of the investing and operating performance of our

properties. Acquisition fees and expenses include payments to our Former

External Advisor and third parties. Acquisition related expenses under GAAP

are considered operating expenses and as expenses included in the

determination of net income (loss) and income (loss) from continuing

operations, both of which are performance measures under GAAP. All paid and

accrued acquisition fees and expenses will have negative effects on returns

to investors, the potential for future distributions, and cash flows

generated by us, unless earnings from operations or net sales proceeds from

the disposition of other properties are generated to cover the purchase price

of the property, these fees and expenses and other costs related to such

    property.


                                       68
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(3) Self administration transaction expenses consist primarily of legal fees, as

    well as fees for other professionals and financial advisors incurred in
    connection with the Self Administration Transaction. We believe that
    adjusting for such non-recurring items provides useful supplemental
    information because such expenses may not be reflective of on-going

operations and is consistent with management's analysis of our operating

performance.

(4) This represents the difference between the stated interest rate and the

estimated market interest rate on assumed notes as of the date of

acquisition. Such amounts have been excluded from MFFO because we believe

MFFO provides useful supplementary information by focusing on operating

fundamentals, rather than events not related to our normal operations. We are

responsible for managing interest rate risk and do not rely on another party

to manage such risk.

(5) The net loss associated with the extinguishment of debt includes prepayment

penalties, the write-off of unamortized deferred financing fees, and other

fees incurred. We believe that adjusting for such non-recurring items

provides useful supplemental information because such losses may not be

reflective of on-going transactions and operations and is consistent with

management's analysis of our operating performance.

(6) This represents the mark-to-market adjustment for our derivative instruments

not designated for hedge accounting and the ineffective portion of the change

in fair value of derivatives recognized in earnings, as well as changes in

foreign currency related to our foreign equity investments not classified as

long term. These derivative contracts are intended to manage the Company's

exposure to interest rate and foreign currency risk which may not be

reflective of our ongoing performance and may reflect unrealized impacts on

our operating performance. Such amounts are recorded in "Other" within our

consolidated statements of operations.

Non-cash Items Included in Net Loss:

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

• Interest expense - debt issuance costs of approximately $1.1 million and

$0.3 million, respectively, were recognized for the three months ended

and 2018. Interest expense - debt issuance costs of

approximately $1.9 million and $0.6 million, respectively, were recognized

for the six months ended and 2018.

Cash Flows

A comparison of cash flows for operating, investing and financing activities for the six months ended and 2018 is as follows:



                                               Six Months Ended
                                          June 30,           June 30,
                                            2019               2018              Change
Net cash flow provided by (used in):
Operating activities                   $    3,935,929     $   10,405,512     $   (6,469,583 )
Investing activities                     (346,396,934 )       (1,404,231 )     (344,992,703 )
Financing activities                      350,121,034        (10,414,897 )      360,535,931




Cash flows provided by operating activities for the six months ended  and 2018 were approximately $3.9 million and $10.4 million, respectively, a
decrease of approximately $6.5 million. The decrease in cash provided by our
operating activities is primarily the result of a decrease in net income when
excluding the impact of non-cash adjustments, including depreciation,
amortization, net loss on extinguishment of debt, and gain resulting from
acquisition of unconsolidated affiliates. The decrease in net income when
excluding the impact of non-cash adjustments comprises a decrease in cash
provided by operating activities of approximately $8.4 million, offset by an
increase of approximately $2.0 million resulting from a change in working
capital accounts.

Cash flows used in investing activities for the six months ended 
and 2018 were approximately $346.4 million and $1.4 million, respectively, a
change of approximately $345.0 million. The change in cash used in investing
activities primarily relates to cash consideration paid of approximately
$346 million for the SSGT Mergers in the first quarter of 2019.

                                       69

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Cash flows provided by (used in) financing activities for the six months ended
 and 2018 were approximately $350.1 million and ($10.4 million),
respectively, a change of approximately $360.5 million. The increase in cash
provided by financing activities is primarily attributable to the approximately
$363.2 million increase in net debt issued in 2019, primarily related to the
SSGT Mergers.

Liquidity and Capital Resources

Short-Term Liquidity and Capital Resources


Our Primary Offering terminated on . We generally expect that we
will meet our short-term liquidity requirements from the combination of the
proceeds from secured or unsecured financing from banks or other lenders, the
issuance of equity instruments and net cash provided by property operations.

Distribution Policy and Distributions


On , our board of directors declared a distribution rate for the
third quarter of 2019 of approximately $0.001644 per day per share on the
outstanding shares of common stock payable to both Class A and Class T
stockholders of record of such shares as shown on our books at the close of
business on each day during the period, commencing on  and
continuing on each day thereafter through and including . In
connection with this distribution, after the stockholder servicing fee is paid,
approximately $0.0014 per day will be paid per Class T share. Such distributions
payable to each stockholder of record during a month will be paid the following
month.

Historically, we have primarily made distributions to our stockholders using
proceeds of the Offering in anticipation of future cash flow. As such, this
reduced the amount of capital we ultimately had available to invest in
properties. Because substantially all of our operations will be performed
indirectly through our Operating Partnership, our ability to pay distributions
depends in large part on our Operating Partnership's ability to pay
distributions to its partners, including to us. In the event we do not have
enough cash from operations to fund cash distributions, we may borrow, issue
additional securities or sell assets in order to fund the distributions. Though
we presently intend to pay only cash distributions, and potentially stock
distributions, we are authorized by our charter to pay in-kind distributions of
readily marketable securities, distributions of beneficial interests in a
liquidating trust established for our dissolution and the liquidation of our
assets in accordance with the terms of the charter or distributions that meet
all of the following conditions: (a) our board of directors advises each
stockholder of the risks associated with direct ownership of the property;
(b) our board of directors offers each stockholder the election of receiving
such in-kind distributions; and (c) in-kind distributions are only made to those
stockholders who accept such offer.

For some period after our Offering, we may not be able to pay distributions from
our cash flows from operations, in which case distributions may be paid in part
from debt financing.

Distributions are paid to our stockholders based on the record date selected by
our board of directors. We currently declare and pay distributions monthly based
on daily declaration and record dates so that investors may be entitled to
distributions immediately upon purchasing our shares. We expect to continue to
regularly pay distributions unless our results of operations, our general
financial condition, general economic conditions, or other factors inhibit us
from doing so. Distributions are authorized at the discretion of our board of
directors, which are directed, in substantial part, by its obligation to cause
us to comply with the REIT requirements of the Code. Our board of directors may
increase, decrease or eliminate the distribution rate that is being paid at any
time. Distributions are made on all classes of our common stock at the same
time. The per share amount of distributions on Class A Shares and Class T Shares
differ because of different allocations of class-specific expenses.
Specifically, distributions on Class T Shares are lower than distributions on
Class A Shares because Class T Shares are subject to ongoing stockholder
servicing fees. The funds we receive from operations that are available for
distribution may be affected by a number of factors, including the following:

• our operating and interest expenses;

• the amount of distributions or dividends received by us from our indirect

        real estate investments;


  • our ability to keep our properties occupied;


  • our ability to maintain or increase rental rates;


  • construction defects or capital improvements;


                                       70
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  • capital expenditures and reserves for such expenditures;


  • the issuance of additional shares; and


  • financings and refinancings.

The following shows our distributions paid and the sources of such distributions for the respective periods presented:



                                           Six Months                  Six Months
                                              Ended                       Ended
                                            June 30,                    June 30,
                                              2019                        2018
Distributions paid in cash - common
stockholders                              $   9,004,432               $   

8,668,185

Distributions paid in cash - Operating
Partnership
  unitholders                                    89,332                     150,546
Distributions reinvested                      8,013,210                   8,002,795
Total distributions                       $  17,106,974               $  16,821,526
Source of distributions
Cash flows provided by operations         $   3,935,929        23 %   $  10,405,512        62 %
Cash provided by financing activities         5,157,835        30 %               -         0 %
Offering proceeds from distribution
reinvestment
  plan                                        8,013,210        47 %       6,416,014        38 %
Total sources                             $  17,106,974       100 %   $  16,821,526       100 %


From our inception through , we paid cumulative distributions of
approximately $113.5 million, as compared to cumulative FFO of approximately
$23.3 million. For the six months ended , we paid distributions of
approximately $17.1 million, as compared to FFO of approximately ($1.1) million,
which reflects acquisition related expenses of approximately $168,000, and a net
loss on extinguishment of debt of approximately $1.5 million. For the six months
ended , we paid distributions of approximately $16.8 million, as
compared to FFO of approximately $10.0 million which reflects acquisition
related expenses of approximately $0.3 million. The payment of distributions
from sources other than FFO may reduce the amount of proceeds available for
investment and operations or cause us to incur additional interest expense as a
result of borrowed funds.

We must distribute to our stockholders at least 90% of our taxable income each
year in order to meet the requirements for being treated as a REIT under the
Code. Our directors may authorize distributions in excess of this percentage as
they deem appropriate. Because we may receive income from interest or rents at
various times during our fiscal year, distributions may not reflect our income
earned in that particular distribution period, but may be made in anticipation
of cash flow that we expect to receive during a later period and may be made in
advance of actual receipt of funds in an attempt to make distributions
relatively uniform. To allow for such differences in timing between the receipt
of income and the payment of expenses, and the effect of required debt payments,
among other things, we could be required to borrow funds from third parties on a
short-term basis, issue new securities, or sell assets to meet the distribution
requirements that are necessary to achieve the tax benefits associated with
qualifying as a REIT. We are not prohibited from undertaking such activities by
our charter, bylaws or investment policies, and we may use an unlimited amount
from any source to pay our distributions. These methods of obtaining funding
could affect future distributions by increasing operating costs and decreasing
available cash, which could reduce the value of our stockholders' investment in
our shares. In addition, such distributions may constitute a return of
investors' capital.

We may not be able to pay distributions from our cash flows from operations, in
which case distributions may be paid in part from debt financing and pursuant to
our distribution reinvestment plan. The payment of distributions from sources
other than cash flows from operations may reduce the amount of proceeds
available for investment and operations or cause us to incur additional interest
expense as a result of borrowed funds.

Over the long-term, we expect that a greater percentage of our distributions
will be paid from cash flows from operations. However, our operating performance
cannot be accurately predicted and may deteriorate in the future due to numerous
factors, including our ability to raise and invest capital at favorable yields,
the financial performance of our investments in the current real estate and
financial environment and the types and mix of investments in our portfolio. As
a result, future distributions declared and paid may exceed cash flow from
operations.

                                       71

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Indebtedness


As of , our total indebtedness was approximately $798.8 million,
which included approximately $302.5 million in fixed rate debt, $506.5 million
in variable rate debt and approximately $0.7 million in net debt premium less
approximately $10.8 million in net debt issuance costs. Some of our loans have
maturity dates within the next year. We intend to repay these loans through loan
extensions or other debt financing. See Note 6 of the Notes to the Consolidated
Financial Statements for more information about our indebtedness.

Long-Term Liquidity and Capital Resources


On a long-term basis, our principal demands for funds will be for property
acquisitions, either directly or through entity interests, for the payment of
operating expenses and distributions, and for the payment of interest on our
outstanding indebtedness, if any.

Long-term potential future sources of capital include proceeds from secured or
unsecured financings from banks or other lenders, issuance of equity
instruments, undistributed funds from operations, and additional public or
private offerings. To the extent we are not able to secure requisite financing
in the form of a credit facility or other debt, we will be dependent upon
proceeds from the issuance of equity securities and cash flows from operating
activities in order to meet our long-term liquidity requirements and to fund our
distributions.

Contractual Obligations

The following table summarizes our contractual obligations as of :



                                        Payments due during the years ending December 31:
                           Total             2019           2020-2021         2022-2023        Thereafter
Debt interest(1)       $ 177,998,920     $ 20,864,993     $  78,519,283     $  31,998,264     $  46,616,380
Debt principal(2)        808,940,333        1,240,844       101,204,862       412,568,670       293,925,957
Total contractual
obligations            $ 986,939,253     $ 22,105,837     $ 179,724,145     

$ 444,566,934 $ 340,542,337

(1) Interest expense for fixed rate debt was calculated based upon the

contractual rate and the interest expense on variable rate debt was

calculated based on the rate in effect on . Debt denominated in

foreign currency has been converted based on the rate in effect as of June

30, 2019.

(2) Amount represents principal payments only, excluding debt premium and debt

issuance costs.

Off-Balance Sheet Arrangements


Other than our minority equity investment in an auction company, we do not
currently have any relationships with unconsolidated entities or financial
partnerships. Such entities are often referred to as structured finance or
special purpose entities, which typically are established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.

Subsequent Events

Please see Note 14 of the Notes to the Consolidated Financial Statements contained in this report.

Seasonality

We believe that we will experience minor seasonal fluctuations in the occupancy levels of our facilities, which we believe will be slightly higher over the summer months due to increased moving activity.

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DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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