SOURCE: Strategic Storage Trust II, Inc.

Strategic Storage Trust II, Inc.

November 15, 2016 15:09 ET

Strategic Storage Trust II, Inc. Reports Third Quarter 2016 Results

LADERA RANCH, CA--(Marketwired - Nov 15, 2016) - Strategic Storage Trust II, Inc.

  • Increased Same-Store Revenues by 13.9% for the Quarter and 10.6% Year-To-Date
  • Increased Same-Store Net Operating Income by 17.3% for the Quarter and 11.3% Year-To-Date
  • Increased Same-Store Average Physical Occupancy by 4.3% for the Quarter and 2.4% Year-To-Date
  • Increased Same-Store Annualized Rent per Occupied Square Foot by 8.9% for the Quarter and 8.0% Year-To-Date

Strategic Storage Trust II, Inc. (SST II) announced operating results for the three and nine months ended September 30, 2016.

"We are pleased to report solid third quarter results," commented H. Michael Schwartz, CEO of Strategic Storage Trust II, Inc. "We continue to be pleased with our year-over-year same-store occupancy and revenue growth and we are excited about our three acquisitions in the Las Vegas market."

Key Highlights for the Three Months Ended September 30, 2016:

  • Increased same-store revenues and net operating income ("NOI") by 13.9% and 17.3%, respectively, for the three months ended September 30, 2016 compared to the three months ended September 30, 2015.

  • Increased same-store average physical occupancy by approximately 4.3% to 92.3% for the three months ended September 30, 2016 from 88.0% for the three months ended September 30, 2015.

  • Increased same-store annualized rent per occupied square foot by approximately 8.9% to $13.47 for the three months ended September 30, 2016 from $12.37 for the three months ended September 30, 2015.

  • Modified funds from operations increased by approximately $2.6 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The increase was primarily related to an increase in NOI and a decrease in distributions to preferred unit holders offset by an increase in interest expense and debt issuance costs.

Key Highlights for the Nine Months Ended September 30, 2016:

  • Increased same-store revenues and NOI by 10.6% and 11.3%, respectively, for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.

  • Increased same-store average physical occupancy by approximately 2.4% to 91.4% for the nine months ended September 30, 2016 from 89.0% for the nine months ended September 30, 2015.

  • Increased same-store annualized rent per occupied square foot by approximately 8.0% to $11.20 for the nine months ended September 30, 2016 from $10.37 for the nine months ended September 30, 2015.

  • Modified funds from operations increased by approximately $8.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The increase was primarily related to an increase in NOI and a decrease in distributions to preferred unit holders offset by an increase in interest expense and debt issuance costs.

Acquisitions:

During the quarter ended September 30, 2016 we acquired the following three properties for a total purchase price of approximately $37.4 million:

  • On July 28, 2016, we purchased a self storage facility located in Las Vegas, Nevada. We acquired the Las Vegas I property from an unaffiliated third party for a purchase price of approximately $13.9 million, plus closing costs and acquisition fees. The facility has approximately 770 units and 106,800 rentable square feet.

  • On September 23, 2016, we purchased a second self storage facility located in Las Vegas, Nevada. We acquired the Las Vegas II property from an unaffiliated third party for a purchase price of approximately $14.2 million, plus closing costs and acquisition fees. The facility has approximately 810 units and 101,400 rentable square feet.

  • On September 27, 2016, we purchased a third self storage facility located in Las Vegas, Nevada. We acquired the Las Vegas III property from an unaffiliated third party for a purchase price of approximately $9.3 million, plus closing costs and acquisition fees. The facility has approximately 640 units and 82,200 rentable square feet.

Capital Transactions:

Debt Transactions

On July 28, 2016, we entered into a CMBS loan agreement with KeyBank in which we borrowed $95 million. The CMBS loan has an initial term of ten years, maturing on August 1, 2026. Monthly payments due under the loan are interest-only for the first five years and payments reflecting a 30-year amortization schedule begin thereafter. The loan bears interest at 3.89%. The proceeds of the CMBS loan were primarily used to pay down the amended KeyBank credit facility.

Equity Raise

As of September 30, 2016, we had issued approximately 42 million Class A Shares and approximately 5 million Class T Shares in our Offering for gross proceeds of approximately $427 million and approximately $49 million, respectively.

Quarterly Dividend:

On September 19, 2016, our board of directors declared a distribution rate for the fourth quarter of 2016 of $0.00163934426 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 October 1, 2016 and continuing on each day thereafter through and including December 31, 2016. The distribution to the Class T stockholders will be reduced by the stockholder servicing fee due from the Class T stockholders. Such distributions payable to each stockholder of record during a month will be paid on such date of the following month as our Chief Executive Officer may determine.

About Strategic Storage Trust II, Inc.:

SST II is a public non-traded REIT that focuses on the acquisition of stabilized, income producing self storage properties. The SST II portfolio currently consists of 66 operating self storage facilities located in 14 states and Toronto, Canada, comprising approximately 42,300 self storage units and approximately 4,850,000 net rentable square feet of storage space.

About SmartStop Asset Management, LLC:

SmartStop Asset Management, LLC is a diversified real estate company with a managed portfolio that currently includes approximately 59,400 self storage units and approximately 6.7 million rentable square feet and nearly $1 billion of real estate assets under management. The company is the asset manager for 89 self storage facilities located throughout the United States and Toronto, Canada. SmartStop Asset Management is the sponsor of SST II and Strategic Storage Growth Trust, Inc. (SSGT), a public non-traded REIT focusing on opportunistic self storage assets. The facilities offer affordable and accessible storage units for residential and commercial customers. In addition, they offer secure interior and exterior storage units as well as outside storage areas for vehicles, RVs and boats. Additional information is available at www.smartstopassetmanagement.com.

This press release may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as "may," "will," "expect," "intend," "anticipate," "estimate," "believe," "continue," or other similar words. Because such statements include risks, uncertainties and contingencies, actual results may differ materially from the expectations, intentions, beliefs, plans or predictions of the future expressed or implied by such forward-looking statements. These risks, uncertainties and contingencies include, but are not limited to: uncertainties relating to changes in general economic and real estate conditions; uncertainties relating to the implementation of our real estate investment strategy; uncertainties relating to financing availability and capital proceeds; uncertainties relating to the closing of property acquisitions; uncertainties related to the timing and availability of distributions; and other risk factors as outlined in the Company's public filings with the Securities and Exchange Commission. This is neither an offer nor a solicitation to purchase securities.

   
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES  
CONSOLIDATED BALANCE SHEETS  
(Unaudited)  
   
           
  September 30,
2016
    December 31,
2015
 
ASSETS              
Real estate facilities:              
  Land $ 223,164,615     $ 47,653,000  
  Buildings   378,839,821       97,941,472  
  Site improvements   32,472,652       10,650,078  
    634,477,088       156,244,550  
  Accumulated depreciation   (11,329,843 )     (3,755,709 )
    623,147,245       152,488,841  
  Construction in process   2,423,653       385,408  
    Real estate facilities, net   625,570,898       152,874,249  
Cash and cash equivalents   11,962,163       28,104,470  
Restricted cash   2,324,883       410,492  
Other assets   8,777,371       6,017,845  
Debt issuance costs, net of accumulated amortization   1,780,464       2,128,806  
Intangible assets, net of accumulated amortization   12,785,410       3,910,966  
Total assets $ 663,201,189     $ 193,446,828  
               
LIABILITIES AND EQUITY              
Debt $ 284,133,892     $ 23,029,775  
Accounts payable and accrued liabilities   6,585,420       2,146,253  
Due to affiliates   2,772,203       208,483  
Distributions payable   2,285,075       986,886  
Total liabilities   295,776,590       26,371,397  
Commitments and contingencies              
Redeemable common stock   7,519,326       1,223,483  
Equity:              
Strategic Storage Trust II, Inc. equity:              
Preferred stock, $0.001 par value; 200,000,000 shares authorized; none issued and outstanding at September 30, 2016 and December 31, 2015   --       --  
Class A common stock, $0.001 par value; 350,000,000 shares authorized; 42,267,020 and 20,684,791 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively   42,267       20,685  
Class T common stock, $0.001 par value; 350,000,000 shares authorized; 4,955,383 and 608,982 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively   4,955       609  
Additional paid-in capital   419,045,485       187,434,752  
Distributions   (20,227,032 )     (3,893,528 )
Accumulated deficit   (39,255,012 )     (17,687,326 )
Accumulated other comprehensive income   338,383       --  
    Total Strategic Storage Trust II, Inc. equity   359,949,046       165,875,192  
Noncontrolling interests in our Operating Partnership   (43,773 )     (23,244 )
Total equity   359,905,273       165,851,948  
Total liabilities and equity $ 663,201,189     $ 193,446,828  
               
               
               
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES  
CONSOLIDATED STATEMENTS OF OPERATIONS  
(Unaudited)  
   
                       
  Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
  2016     2015     2016     2015  
Revenues:                              
  Self storage rental revenue $ 14,374,412     $ 4,917,356     $ 30,292,850     $ 12,218,338  
  Ancillary operating revenue   83,138       136,368       198,478       330,377  
                               
    Total revenues   14,457,550       5,053,724       30,491,328       12,548,715  
                               
Operating expenses:                              
  Property operating expenses   4,813,732       1,808,751       10,918,186       4,579,684  
  Property operating expenses - affiliates   1,860,606       573,200       3,776,193       1,544,622  
  General and administrative   637,302       416,472       2,086,167       1,272,371  
  Depreciation   3,741,831       1,228,624       7,635,527       2,713,979  
  Intangible amortization expense   3,620,992       1,680,290       8,328,969       4,268,928  
  Acquisition expenses - affiliates   751,331       206,862       9,007,362       2,625,303  
  Other property acquisition expenses   327,309       74,996       2,758,340       523,084  
    Total operating expenses   15,753,103       5,989,195       44,510,744       17,527,971  
                               
Operating loss   (1,295,553 )     (935,471 )     (14,019,416 )     (4,979,256 )
Other income (expense):                              
  Interest expense   (2,905,979 )     (816,265 )     (4,678,187 )     (2,126,877 )
  Interest expense--accretion of fair market value of secured debt   110,831       24,615      
 253,843
      66,278  
  Interest expense--debt issuance costs   (2,088,310 )     (151,308 )     (2,907,873 )     (392,845 )
  Other   (162,058 )     23,854       (227,597 )     7,106  
Net loss   (6,341,069 )     (1,854,575 )     (21,579,230 )     (7,425,594 )
  Less: Distributions to preferred unitholders in our Operating Partnership   --       (1,567,904 )     --       (4,327,578 )
  Less: Accretion of preferred equity costs   --       (334,719 )     --       (1,093,320 )
  Net loss attributable to the noncontrolling interests in our Operating Partnership   2,713       17,744       11,544       89,674  
Net loss attributable to Strategic Storage Trust II, Inc. common stockholders $ (6,338,356 )   $ (3,739,454 )   $ (21,567,686 )   $ (12,756,818 )
Net loss per Class A share - basic and diluted $ (0.14 )   $ (0.82 )   $ (0.58 )   $ (3.91 )
Net loss per Class T share - basic and diluted $ (0.14 )   $ --     $ (0.58 )   $ --  
Weighted average Class A shares outstanding - basic and diluted   40,557,461       4,581,131       34,205,460       3,259,830  
Weighted average Class T shares outstanding - basic and diluted   4,134,602       --       2,680,558       --  
                               
                               
                               
STRATEGIC STORAGE TRUST II, INC. AND SUBSIDIARIES  
NON-GAAP MEASURE - COMPUTATION OF MODIFIED FUNDS FROM OPERATIONS  
(Unaudited)  
   
   
  Three Months Ended     Nine Months Ended  
  September 30,
2016
    September 30,
2015
    September 30,
2016
    September 30,
2015
 
Net loss attributable to Strategic Storage Trust II, Inc. common stockholders(1) $ (6,338,356 )   $ (3,739,454 )   $ (21,567,686 )   $ (12,756,818 )
Add:                              
  Depreciation   3,719,241       1,219,424       7,583,196       2,691,122  
  Amortization of intangible assets.   3,620,992       1,680,290       8,328,969       4,268,928  
Deduct:                              
  Adjustment for noncontrolling interests   (3,308 )     (12,736 )     (8,467 )     (42,196 )
FFO   998,569       (852,476 )     (5,663,988 )     (5,838,964 )
Other Adjustments:                              
  Acquisition expenses(2)   1,078,640       281,858       11,765,702       3,148,387  
  Accretion of fair market value of secured debt(3)   (110,831 )     (24,615 )     (253,843 )     (66,278 )
  Adjustment for noncontrolling interests   (443 )     (1,013 )     (6,471 )     (26,475 )
MFFO $ 1,965,935     $ (596,246 )   $ 5,841,400     $ (2,783,330 )
                               

Our results of operations for the three and nine months ended September 30, 2016 and 2015 have been significantly impacted by our acquisitions during the first, second and third quarters of each year.

(1) Net loss attributable to Strategic Storage Trust II, Inc. common stockholders for the three and nine months ended September 30, 2015 included approximately $1.6 million and $4.3 million, respectively, in distributions to preferred unitholders in our operating partnership and approximately $0.3 million and $1.1 million, respectively, in accretion of preferred equity costs. As of December 31, 2015, we had redeemed all of the preferred units.
(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 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.
(3) 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.

ADDITIONAL INFORMATION REGARDING NOI, FFO, and MFFO

Net Operating Income ("NOI")

NOI is a non-GAAP measure that we define as net income (loss), computed in accordance with GAAP, generated from properties before corporate general and administrative expenses, asset management fees, interest expense, depreciation, amortization, acquisition expenses and other non-property related expenses. We believe that NOI is useful for investors as it provides a measure of the operating performance of our operating assets because NOI excludes certain items that are not associated with the operation of the properties. Additionally, we believe that NOI is a widely accepted measure of comparative operating performance in the real estate community. However, our use of the term NOI may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount.

Funds from Operations ("FFO") and Modified Funds from Operations ("MFFO")

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, as revised in February 2004, 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. 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. 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, that are expensed as operating expenses under GAAP. 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 expenses 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. As disclosed in the prospectus for our offering, we will use the proceeds raised in our 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 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 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 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 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 offering has been completed and properties have been acquired, as it excludes acquisition fees and expenses that have a negative effect on our operating performance during the periods in which properties are acquired.

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 November 2010. 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, 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, realized and unrealized gains and losses on foreign exchange holdings 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 incurring of acquisition fees and expenses. Acquisition fees and expenses include payments to our 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. In the future, if we are not able to raise additional proceeds from our offering, this could result in us paying acquisition fees or reimbursing acquisition expenses due to our 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 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.

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.

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