INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURE |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Method Investments and Joint Ventures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURE |
INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURE
During the year ended December 31, 2016, the Company, through a newly formed subsidiary (the "NSA Member"), entered into an agreement (the "Agreement") to form a joint venture (the "Joint Venture") with a state pension fund (the "JV Investor," together with the NSA Member, the "Members") advised by Heitman Capital Management LLC to acquire and operate the "iStorage" facilities portfolio (the "JV Portfolio") for an aggregate purchase price of approximately $630.0 million (the "Acquisition"). The JV Portfolio consists of 66 properties containing approximately 4.5 million rentable square feet, configured in approximately 36,000 storage units and located across 12 states.
On October 4, 2016, the Joint Venture completed its acquisition of the JV Portfolio. The Joint Venture financed the Acquisition with approximately $320.0 million in equity (approximately $80.0 million from the NSA Member in exchange for a 25% ownership interest and approximately $240.0 million from the JV Investor in exchange for a 75% ownership interest) with the balance of the purchase price funded using proceeds from new debt financing. A subsidiary of the Company is acting as the non-member manager of the Joint Venture (the "NSA Manager"). The NSA Manager directs, manages and controls the day-to-day operations and affairs of the Joint Venture but may not cause the Joint Venture to make certain major decisions involving the business of the Joint Venture without the consent of all of the Members, including the approval of annual budgets, sales and acquisitions of properties, financings, and certain actions relating to bankruptcy.
The Joint Venture pays certain customary fees to the Company for managing and operating the properties, including a monthly property management fee equal to 6% of gross revenues and net sales revenues from Joint Venture assets, an annual call center fee equal to 1% of monthly gross revenues and net sales revenues from Joint Venture assets, a monthly platform fee equal to $1,250 per Joint Venture property, an acquisition fee equal to 0.65% of the gross capitalization (including debt and equity) of the original JV Portfolio, of which one quarter is earned each year over the first four years of the Joint Venture, with an additional fee determined on a sliding scale for future acquisitions, and a development management fee for any development projects acquired by the Joint Venture equal to 3% of construction costs (excluding "soft costs"). An affiliate of the NSA Manager provides tenant warranty protection to tenants at the Joint Venture properties in exchange for 50% of all proceeds from the tenant warranty protection program at each Joint Venture property. During the year ended December 31, 2016, the Company earned $1.8 million of management and other fees for managing and operating its unconsolidated real estate venture. The fees are reported in management fees and other revenue in the Company's consolidated statements of operations.
The Company's investment in the Joint Venture is accounted for using the equity method of accounting and is included in investment in unconsolidated real estate venture in the Company’s consolidated balance sheets. The Company's investment in the unconsolidated real estate venture totaled $81.5 million as of December 31, 2016. This investment includes $3.2 million of direct costs incurred by the Company primarily related to sourcing a joint venture partner. Due to the nature of these costs, this additional investment basis is not amortized.
The Company’s earnings (losses) from its investment in the Joint Venture is presented in equity in losses of unconsolidated real estate venture on the Company’s consolidated statements of operations and totaled $1.5 million for the year ended December 31, 2016.
Condensed financial information of the Joint Venture as of December 31, 2016 and for the year ended December 31, 2016 follows (in thousands):
Separately, the Company, through certain newly formed subsidiaries, agreed to acquire the iStorage property management platform related to the JV Portfolio, including a property management company, a captive insurance company, and related intellectual property for $20.0 million. On October 4, 2016, the Company completed its acquisition of the property management platform. The property management platform was accounted for as a business combination whereby the Company allocated the total purchase price to the estimated fair value of tangible and intangible assets acquired, and liabilities assumed. The Company allocated a portion of the purchase price to tangible fixed assets of $0.4 million and intangible assets consisting of the management contract with an estimated fair value of $10.6 million and the iStorage trade name with an estimated fair value of $3.2 million. The excess of the aggregate consideration paid for the property management platform over the identified assets acquired and liabilities assumed, equal to $5.8 million, was allocated to goodwill. The tangible and intangible assets related to the property management platform are reported in other assets, net in the Company's consolidated balance sheets.
The Company’s fair value measurements were based, in part, on valuations prepared by an independent valuation firm and the allocation of the property management platform purchase price required a significant amount of judgment. The Company measured the fair value of the management contract based on discounted future cash flows expected under the management contract. Neither the management contract nor the Joint Venture have a finite term. Accordingly, the Company assigned probabilities to the term of the Joint Venture and the Company’s management relationship with the Joint Venture using the Company’s best estimates and assumptions. The management contract asset is charged to amortization expense on a straight-line basis over 15 years, which represents the time period over which the majority of value was attributed in the Company’s discounted cash flow model. The Company measured the fair value of the trade name, which has an indefinite life and is not amortized, using the relief from royalty method.
The results of operations for the property management platform are included in the Company's statements of operations beginning on October 4, 2016. On an unaudited pro forma basis, after giving effect to the acquisition of the property management platform as if it was acquired on January 1, 2015, the Company would have recorded incremental additional revenue of $4.9 million and $6.3 million for the years ended December 31, 2016 and 2015, respectively, and incremental net income of $0.6 million and $0.7 million for the years ended December 31, 2016 and 2015, respectively. This pro forma information was prepared using the following significant assumptions: the Joint Venture acquired the JV Portfolio and the management contract was effective on January 1, 2015; the Company financed the purchase price of the property management platform through borrowings under its Revolver with interest computed based on the effective interest rate of 2.17% as of December 31, 2016; and assumed depreciation and amortization expense is based on the actual acquisition-date fair values and useful lives assigned to tangible fixed assets and the management contract.
The unaudited pro forma information in the paragraph above does not purport to represent what the actual results of operations would have been for the periods indicated, nor does it purport to represent the Company's future results of operations. The pro forma information was prepared using audited and unaudited historical financial information related to the JV Portfolio obtained by the Company as part of its underwriting and due diligence process and does not give effect to any assumptions about improved operating performance of the JV Portfolio under the management of the NSA Manager nor does it give effect to potential property acquisitions by the Joint Venture, as such assumptions would require projections and estimates of management’s intentions that are not factually supportable.
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