# Global Self Storage, Inc.: Form 10-Q for the period ended Mar 31, 2016

- Company: [Global Self Storage, Inc.](/companies/self.md) (CIK 1031235)
- Form: 10-Q
- Filed: 2016-05-16
- Accepted by EDGAR: May 16, 2016, 17:30 ET
- Period: 2016-03-31
- Accession: 0001564590-16-019595
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1031235/000156459016019595/self-10q_20160331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1031235/000156459016019595/

## Management's discussion and analysis

As filed, 27,297 characters.

### CAUTIONARY LANGUAGE

The following discussion and analysis should be read in conjunction with our unaudited “Condensed Consolidated Financial Statements” and the “Notes to Condensed Consolidated Financial Statements (unaudited)” appearing elsewhere in this report. We make statements in this section that may be forward looking statements within the meaning of the federal securities laws. For a complete discussion of forward looking statements, see the section in this Form 10-Q entitled “Statement on Forward Looking Information.”

### CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements contained elsewhere in this report, which have been prepared in accordance with GAAP. Our notes to the unaudited condensed consolidated financial statements contained elsewhere in this report describe the significant accounting policies essential to our unaudited condensed consolidated financial statements. Preparation of our financial statements requires estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions that we have used are appropriate and correct based on information available at the time they were made. These estimates, judgments and assumptions can affect our reported assets and liabilities as of the date of the financial statements, as well as the reported revenues and expenses during the period presented. If there are material differences between these estimates, judgments and assumptions and actual facts, our financial statements may be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. There are areas in which our judgment in selecting among available alternatives would not produce a materially different result, but there are some areas in which our judgment in selecting among available alternatives would produce a materially different result. See the notes to the unaudited condensed consolidated financial statements that contain additional information regarding our accounting policies and other disclosures.

### Management’s Discussion and Analysis Overview

The Company is a self-administered and self-managed REIT focused on the ownership, operation, acquisition, development and redevelopment of self storage facilities. Our stores are designed to offer affordable, easily accessible and secure storage space for residential and commercial customers. The Company currently owns and operates seven stores located in New York, Pennsylvania, Illinois, Indiana, and South Carolina. As previously reported in our press release on January 19, 2016, on that day the Company changed its name to Global Self Storage, Inc. from Self Storage Group, Inc., changed its SEC registration from an investment company to an operating company, and uplisted to NASDAQ.

Our store operations generated most of our net income for all periods presented. Accordingly, a significant portion of management’s time is devoted to maximizing cash flows from our existing stores, as well as seeking additional investments in stores.

Most of our stores compete with other well-managed and well-located competitors and we are subject to general economic conditions, particularly those that affect the spending habits of consumers and moving trends. We believe that our centralized information networks, national telephone and online reservation system, the brand name “Global Self Storage,” and our economies of scale help enable us to meet such challenges effectively.

The Company expects to continue to earn a majority of its gross income from its store operations as its current store operations continue to develop and as it makes additional store acquisitions. Over time, the Company expects to divest its remaining portfolio of investment securities and use the proceeds to acquire and operate additional stores. The Company expects its income from investment securities to continue to decrease as it continues to divest its holdings of investment securities.

#### Financial Condition and Results of Operations

We have been actively reviewing a number of property and portfolio acquisition candidates and have been working to further develop and expand our current properties. On May 9, 2016, our wholly owned subsidiary entered into an agreement with Gray Eagle Development, LLP (the "Seller") to acquire a self storage facility located in Fishers, Indiana (the "New Property") for the sum of $7,700,000 (the "Purchase Agreement"). Our obligation to close under the Purchase Agreement is expressly conditioned upon (i) the New Property being satisfactory to us in all respects upon completion of our due diligence review and inspection of the New Property and (ii) the occurrence or fulfillment of other conditions precedent to closing under the Purchase Agreement. If certain of the conditions precedent to closing under the Purchase Agreement are not satisfied, we, in addition to its other remedies set forth in the

Purchase Agreement, will be entitled to (A) terminate the Purchase Agreement and the Purchase Agreement will be deemed null and void, (B) pursue specific performance of the Purchase Agreement and/or (C) pursue any other remedies at law or in equity.

Additionally, the Company is currently pursuing debt financing opportunities and intends to use the proceeds of such debt financing primarily in connection with future potential store acquisitions. As of March 31, 2016, the Company had no debt and approximately $7.9 million in cash and marketable securities.

For the period January 19, 2016 to March 31, 2016, net income was $49,121 or $0.01 per share.

#### Non-GAAP Measures

Funds from Operations (“FFO”) and FFO per share are non-GAAP measures defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and are considered helpful measures of REIT performance by REITs and many REIT analysts. NAREIT defines FFO as a REIT's net income, excluding gains or losses from sales of property, and adding back real estate depreciation and amortization. FFO and FFO per share are not a substitute for net income or earnings per share. FFO is not a substitute for GAAP net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes financing activities presented on our statements of cash flows. In addition, other REITs may compute these measures differently, so comparisons among REITs may not be helpful. However, the Company believes that to further understand the performance of its self-storage properties, FFO should be considered along with the reported net income and cash flows in accordance with GAAP, as presented in the Company’s financial statements.

We believe net operating income or “NOI” is a meaningful measure of operating performance, because we utilize NOI in making decisions with respect to capital allocations, determining current property values, evaluating property performance and in comparing period-to-period and market-to-market property operating results. In addition, we believe the investment community utilizes NOI in determining operating performance and real estate values, and does not consider depreciation expense because it is based upon historical cost. NOI is defined as net property earnings before general and administrative expenses, interest, taxes, depreciation, and amortization. NOI is not a substitute for net income, net operating cash flow, or other related GAAP financial measures, in evaluating our operating results.

The following table presents a reconciliation and computation of net income to FFO and earnings per share to FFO per share for the period January 19, 2016 to March 31, 2016:

|  | Computation and Reconciliation of FFO | Computation and Reconciliation of FFO per share |
| --- | ---: | ---: |
| Net income | $49,121 | $0.01 |
| Eliminate items excluded from FFO: |  |  |
| Depreciation and amortization | 169,967 | 0.02 |
| FFO | $219,088 | $0.03 |

### Same-Store Self Storage Operations

We grew our top-line results by increasing same-store revenues by 6.3% for the quarter ended March 31, 2016 versus the quarter ended March 31, 2015. Same-store cost of operations increased 4.5%. Same-store net operating income increased by 7.8% over the same periods as a result of the increase in year over year revenues and slightly lower growth rate of operating expenses. General and administrative expense decreased by 13.2% over the same periods. Going forward, although we expect some general and administrative expense reductions associated with our discontinued registration as an investment company, we expect to incur a number of new expenses related to, among other things, the Company’s new reporting requirements and compliance with the Sarbanes-Oxley Act of 2002.

Our results were driven by, among other things, our internet marketing initiatives which helped our overall average occupancy approach the 90% mark. Also contributing to our strong results were our customer service efforts which were essential in building local brand loyalty resulting in powerful referral and word-of-mouth market demand for our storage units and services. Another major contributing factor to our results was our revenue rate management program which helped increase our total annualized revenue per leased square foot by 4.3% year over year. These results are summarized as follows:

*SAME - STORE PROPERTIES*

| Three Months ended March 31 | 2016 | 2015 | Variance | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $1,143,725 | $1,075,880 | $67,845 | 6.3% |
| Cost of operations | $497,785 | $476,503 | $21,282 | 4.5% |
| Net operating income | $645,940 | $599,377 | $46,563 | 7.8% |
| Depreciation and amortization | $161,459 | $153,107 | $8,352 | 5.5% |
| Net leasable square footage at period end | 485,574 | 477,751 | 7,823 | 1.6% |
| Net leased square footage at period end | 427,554 | 419,618 | 7,936 | 1.9% |
| Average overall square foot occupancy | 88.1% | 87.8% | 0.3% | 0.2% |
| Total annualized revenue per leased square foot | $10.70 | $10.26 | $0.44 | 4.3% |
| Number of leased storage units | 3,251 | 3,167 | 84 | 2.7% |

#### Analysis of Same-Store Revenue

The 6.3% revenue increase was due primarily to a 4.3% increase in total annualized revenue per leased square foot and to a small increase in net leased square footage and same store average overall square foot occupancy. The increase in total annualized revenue per leased square foot was due primarily to annual rent increases given to existing tenants, an increase in available climate-controlled leasable square feet compared to available leasable parking square feet, and, to a lesser extent, increased move-in rental rates. Same store average overall square foot occupancy for all of the Company’s facilities combined increased to 88.1% in the three months ended March 31, 2016 from 87.8% in the three months ended March 31, 2015, representing an increase of 0.3%.

We believe that high occupancies help maximize our rental income. We seek to maintain an average square foot occupancy level of about 90% by regularly adjusting the rental rates and promotions offered to attract new tenants as well as adjusting our marketing efforts on both television and the Internet in order to generate sufficient move-in volume to replace tenants that vacate. Demand fluctuates due to various local and regional factors, including the overall economy. Demand is higher in the summer months than in the winter months and, as a result, rental rates charged to new tenants are typically higher in the summer months than in the winter months.

We believe rental income growth in the remainder of 2016 will need to come from a combination of the following: (i) continued annual rent increases to tenants, (ii) higher rental rates charged to new tenants, (iii) lower promotional discounts and, to a lesser extent, and (iv) higher occupancies. Our future rental income growth will also be dependent upon many factors for each market that we operate in, including demand for self storage space, the level of competitor supply of self storage space and the average length of stay of our tenants.

Increasing rental rates to existing tenants, generally on an annual basis is a key component of our revenue growth. We determine the level of rental increases based upon our expectations regarding the impact of existing tenant rate increases on incremental move-outs. We expect rent increases to existing tenants for the remainder of 2016 to be slightly less than the prior year.

We believe that the current trends in move-in, move-out, in place contractual rents and occupancy levels are consistent with our expectation of continued revenue growth in the remainder of 2016. However, such trends, when viewed in the short-run, are volatile and not necessarily predictive of our revenues going forward because they are subject to many short-term factors. Such factors include, but are not limited to, initial move-in rates, seasonal factors, the unit size and geographical mix of the specific tenants moving in or moving out, the length of stay of the tenants moving in or moving out, changes in our pricing strategies, and the degree and timing of rate increases previously passed to existing tenants.

Importantly, we continue to refine our ongoing revenue management program which includes regular internet data scraping of local competitors’ prices. We do this in order to maintain our competitive market price advantage for our various sized storage units at our Global Self Storage properties. This program helps us maximize and realize our properties’ occupancies and our self storage revenue and net operating income. We believe that through our various marketing initiatives, we will continue to attract high quality, long term tenants who we expect will be storing with us for years. Currently, our average tenant duration of stay is a little under three years, up from about two years for the same period in 2015.

### GLOBAL SELF STORAGE FACILITIES

### (As of March 31, 2016)

| Property | Address | Year Self Storage Facility Opened | Number of Units | Net Leasable Square Feet(1) | March 31, 2016 Square Foot Occupancy % | March 31, 2015 Square Foot Occupancy % |
| --- | --- | --- | ---: | ---: | ---: | ---: |
| SSG BOLINGBROOK LLC | 296 North Weber Road, Bolingbrook, IL 60440 | 1997 | 497 | 66,850 | 96.7% | 83.9% |
| SSG DOLTON LLC | 14900 Woodlawn Avenue, Dolton, IL 60419 | 2007 | 649 | 86,725 | 95.5% | 93.1% |
| SSG MERRILLVILLE LLC | 6590 Broadway, Merrillville, IN 46410 | 2005 | 507 | 71,420 | 94.2% | 93.0% |
| SSG ROCHESTER LLC | 2255 Buffalo Road, Rochester, NY 14624 | 2010 | 650 | 68,012 | 88.2% | 84.2% |
| SSG SADSBURY LLC | 21 Aim Boulevard, Sadsburyville, PA 19369 | 2006 | 699 | 79,004 | 85.5% | 93.6% |
| SSG SUMMERVILLE I LLC | 1713 Old Trolley Road, Summerville, SC 29485 | 1990 | 557 | 72,700 | 74.1% | 73.3% |
| SSG SUMMERVILLE II LLC | 900 North Gum Street, Summerville, SC 29483 | 1997 | 254 | 41,608 | 83.5% | 91.0% |
| **TOTAL/AVERAGE** |  |  | **3,813** | **485,574** | 88.1% | 87.8% |

(1) Includes outside auto/RV/boat storage space of approximately 13,000 square feet at SSG Sadsbury LLC; 11,300 square feet at SSG Bolingbrook LLC; 9,900 square feet at SSG Dolton LLC; 11,170 square feet at SSG Merrillville LLC; and 5,300 square feet at SSG Summerville II LLC. During 2015, upon completion of its new construction project SSG Sadsbury LLC added 219 climate-controlled storage units comprising 16,756 leasable square feet. Also during 2015, SSG Bolingbrook LLC eliminated 98 parking spaces (32,700 square feet) to accommodate its new buildings construction project which, when complete, will add some 306 climate-controlled and traditional storage units totaling 44,260 leasable square feet to the facility. Approximately 42% of our total available units are climate-controlled, 54% are traditional and 4% are parking. The average annualized revenue per leased square foot was $10.70 and $10.26 for the periods ended March 31, 2016 and March 31, 2015, respectively.

#### Analysis of Same-Store Cost of Operations

Same-store cost of operations increased 4.5% or $21,398 for the quarter ended March 31, 2016 versus the quarter ended March 31, 2015. This increase in same-store cost of operations was due primarily to increased property tax expense, employment costs, repair and maintenance and marketing expense, which were partially offset by decreases in professional, utilities, administrative, and lien administration costs.

Property tax expense increased 7.1% or $9,961 in the three months ended March 31, 2016 as compared to the same period in 2015, due primarily to higher assessed values and tax rates, in particular for our Sadsburyville, PA store. We expect property tax expense growth of approximately the same amount in the remainder of 2016.

On-site property manager payroll expense increased 5.7% or $6,957 in the three months ended March 31, 2016 as compared to the same period in 2015. This increase was due primarily to wage increases and higher employee health plan expenses. We expect inflationary increases in compensation rates for existing employees and other increases in compensation costs as we add new properties as well as District and Regional Managers in the remainder of 2016.

Repairs and maintenance expense increased 38.6% or $9.070 in the three months ended March 31, 2016 as compared to the same period in 2015 due primarily to our ongoing LED light replacement program expenses in the 2016 period compared to the 2015 period. We anticipate continued focus on our LED light replacement program throughout 2016. At our stores fully converted to LED lighting we have realized utilities expense savings year-over-year of approximately 40% due to lower kilowatt per hour usage.

Our utility expenses are comprised of electricity, oil and gas costs, which vary by store and are dependent upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Also affecting our utilities expenses over time is our aforementioned ongoing LED light replacement program at all of our stores which has already resulted in lower electricity usage. Utility expense decreased 24.3% or $12,616 in the three months ended March 31, 2016 as compared to the same period in 2015 primarily due to 2016’s milder winter in most of our stores’ areas and the benefit of lower electricity usage due to our LED light replacement program. It is difficult to estimate future utility costs because weather, temperature, and energy prices are volatile and not predictable. However, based upon current trends and expectations regarding commercial electricity rates, we expect inflationary increases in rates combined with lower usage resulting in net lower utility costs for the remainder of 2016.

Landscaping expenses, which include snow removal costs, were unchanged in the three months ended March 31, 2016 compared to the same period in 2015. Landscaping expense levels are dependent upon many factors such as weather conditions, which can impact landscaping needs including snow removal, inflation in material and labor costs, and random events. We expect inflationary increases in landscaping expense in the remainder of 2016, excluding snow removal expense, which is primarily weather dependent and not predictable.

Marketing expense is comprised principally of Internet advertising and the operating costs of our 24/7 kiosk and telephone call and reservation center. Marketing expense varies based upon demand, occupancy levels, and other factors. Internet advertising, in particular, can increase or decrease significantly in the short run in response to these factors. Marketing expense increased 19.4% or $8,209 in the three months ended March 31, 2016 as compared to the same period in 2015 primarily due to the increased internet advertising expenses and the costs associated with the production and addition of size estimator and locations videos to our facilities’ website, www.globalselfstorage.us. Based upon current trends in move-ins, move-outs, and occupancies, we expect marketing expense to increase in the remainder of 2016.

Other direct property costs include administrative expenses incurred at the self storage facilities, such as property insurance, business license costs, bank charges related to processing the facilities’ cash receipts, credit card fees, and the cost of operating each property’s rental office including supplies and telephone data communication lines. These costs increased a negligible amount in the three months ended March 31, 2016 as compared to the same period in 2015. The small increase in this three month period was due primarily to higher credit card fees. Credit card fees increased due to a higher proportion of collections being received from credit cards, which is one of the results of our initiatives in building a higher quality overall tenant base. We expect moderate increases in other direct property costs in the remainder of 2016.

#### Analysis of General and Administrative Expenses

General and administrative expenses represent direct and allocated expenses for shared general corporate functions, which are allocated to store operations to the extent they are related to store operations. Such functions include data processing, human resources, legal, corporate and operational accounting and finance, marketing, and compensation of senior executives.

| Three months ended | 2016 | 2015 | Variance | % Change |
| --- | ---: | ---: | ---: | ---: |
| General and administrative | $422,728 | $486,825 | $(64,097) | (13.2)% |

General and administrative expenses decreased 13.2% in the three months ended March 31, 2016 as compared to the same period in 2015. We experienced certain cost reductions due to our transition from an investment company to an operating company, such as costs associated with fund accounting, custodian, registration, and quarterly appraisals. Concomitantly, we experienced increased legal, auditing, and investor relations expenses. Going forward, although we expect some general and administrative expense reductions associated with our discontinued registration as an investment company, we expect to incur a number of new expenses related to, among other things, the Company’s new reporting requirements and compliance with the Sarbanes-Oxley Act of 2002. Separately, we also expect increased legal and consulting costs in connection with future potential store acquisitions.

#### Analysis of Global Self Storage Property Operations

In addition to actively reviewing a number of property and portfolio acquisition candidates, we have been working to further develop and expand our current properties. At our Sadsburyville, PA facility in 2015, we completed construction of a state-of-the-art, all climate-controlled two story storage building, adding 16,756 leasable square feet featuring a number of unique drive-up, climate-controlled units. This expansion has been well received by the local community. As of March 31, 2016, approximately 11 months after construction was completed and lease-up commenced, 96% of the first floor and 65% of the entire building have been leased. As previously reported, we are moving forward with site work and construction of the expansion project in Bolingbrook, IL which, when completed, will add a little over 45,000 leasable square feet of climate-controlled and traditional storage units. The project features a final budget of $2,400,000, which equates to an all-in projected cost of approximately $53 per square foot and an anticipated completion date of mid-2016. Next up for expansion review is the Merrillville, IN Global Self Storage facility.

Our stores in the Northeast, Mid-Atlantic and Mid-West are located in densely populated and high traffic areas near major roads and highways. All of our properties display prominent road signage and most feature LED marquee boards describing the property features and move-in rent specials. Our stores are located in areas with strong zoning laws and attentive planning boards which make it difficult for our competition to develop new facilities near ours. As we evaluate potential stores, we seek properties in areas with these high barriers to entry.

From a marketing perspective, we have developed the brand, “Global Self Storage,” and now use it in all of our on-site signage, Internet advertising and other marketing materials. During 2015, we launched our new re-designed stores’ website www.GlobalSelfStorage.us, where prospective tenants can learn about the features of each facility and view high resolution images and videos. The site also allows tenants to pay their rent online.

We continue to develop the Global Self Storage Internet presence through advertising and search engine optimization. We solicit tenant reviews for posting to the “Testimonials” section of our website and encourage others to view these testimonials, as we frequently receive the top rating of 5 stars. We have found that our most reliable source of new tenants is through referrals of current tenants.

Attracting high quality, long-term tenants is the top priority for the Company, and we strongly believe in tenant quality over tenant quantity. In our marketing efforts, we have seen tremendous success in our referral marketing program, as nothing seems to be as productive as asking our satisfied tenants to recommend Global Self Storage to their family, friends, and colleagues. We also believe our store managers’ attention to detail – maintaining security, cleanliness and attentive customer service – is essential to attracting high quality tenants.

Each of our Global Self Storage facilities features a rental and payment center kiosk available 24 hours a day, seven days a week, where prospective tenants can rent a unit and current tenants can pay their rent. All of our facilities have on-site property managers who are committed to delivering the finest customer service. Our customer call center handles telephone inquiries from current and prospective tenants whenever our store managers are not available. They can respond to questions about our stores and storage features, and book reservations. Our top priorities are delivering convenience and high quality customer service to our tenants, as well as maintaining clean and secure facilities at all times.

All of our tenant leases at all of our facilities are “month-to-month” leases. We deliver at least 30 days’ written notice of any rental rate change. Lease rates at each self storage facility may be set monthly, semi-annually, annually, or at any time on a case-by-case basis as determined in the discretion of management. Tenants may be assessed late, administrative, and/or other fees. To date, none of the Company’s properties have experienced any material delinquencies.

#### Distributions and Closing Market Prices

Distributions for the three months ended March 31, 2016 totaled $0.065 per share. The Company’s closing market price as of December 31, 2015 was $3.75, and as of March 31, 2016 was $4.87. Past performance does not guarantee future results.

## Controls and procedures

As filed, 2,282 characters.

#### Disclosure Controls and Procedures.

We maintain disclosure controls and procedures to ensure that information required to be disclosed in the reports we file pursuant to the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e) of the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide a reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We have a disclosure committee that is responsible for considering the materiality of information and determining our disclosure obligations a timely basis. The disclosure committee meets quarterly and reports directly to our Chief Executive Officer and Chief Financial Officer.

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.

#### Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during our most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed May 16, 2016.
Source: SEC EDGAR, the filing index for accession 0001564590-16-019595. Last ingested by Listed: Nov 13, 2026, 15:40 ET. No prices; not investment advice.