Good day, and welcome to the Jernigan Capital Incorporated Third Quarter 2016 Earnings Conference Call. This call is being recorded today, Thursday, November 3, 2016. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following management’s prepared remarks. [Operator Instructions] This call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws, including statements regarding our future performance, our fourth quarter 2016 earnings guidance and full-year 2016 updated earnings guidance, including related key assumptions, future value of investments, our pipeline and future investment closings and expected lease up trends with respect to self-storage developments we finance. The ultimate occurrence of events and results referenced in these forward-looking statements is subject to known and unknown risks and uncertainties, many of which are beyond our control. These forward-looking statements are based upon the Company’s present intentions and expectations, but the events and results referenced in these statements are not guaranteed to occur. Investors should not place undue reliance upon forward-looking statements. For a discussion of these and other risks facing our business, see the information under the heading Risk Factors in our annual report on Form 10-K filed with the Securities and Exchange Commission and our other filings with the SEC from time to time which are accessible on the SEC’s website at www.sec.gov. It is now my pleasure to turn the floor over to Dean Jernigan, CEO and Chairman of Jernigan Capital Incorporated. You may begin sir.

Okay. Good morning to all. Thanks for joining us this morning. We look forward to talking to you about our quarter, but before we go there let’s talk about the quarter for all six REITs that focus on the self-storage sector, to of course include ourselves. The grades are in for the quarter, I can only assign Honor Roll distinction to three companies during this quarter, those being CubeSmart, National Storage Affiliates, and of course I thought our results were outstanding and deserved Honor Roll distinction as well. So congrats to Chris Marr and Arlen Nordhagen for great quarter. And I think it’s worth spending a few minutes to talk about why the other three companies didn’t deserve Honor Roll distinction this quarter. They had great numbers, very, very solid when compared to other REIT sectors, but the expectations for the storage sector have been so high for so long, of course 4% and 5% topline growth no longer meet those expectations. So we have situations with those three companies that are unique, I think and I have my guesses as to why the performances weren’t so great with those three companies. Those three being of course Life, and Extra Space, and Public Storage, but I’ll tell you none of those reasons for a lack of perfect performance this quarter relate to overbuilding our new supply in my opinion. We will get into that more and I’ll talk about where we are in the cycle, but that’s an excuse people are using already, but I think – there are other reasons, three companies underperformed expectations for this quarter. New supply is coming. It has in fact arrived in Texas, and so with the possible exception of Houston and Dallas and Austin, I don’t think new supply had any impact on…

All right. Thanks Dean, and appreciate that overview. I’d like to talk about three JCAP’s specific topics prior to opening the conversation for Q&A. Number one, the performance of our existing portfolio. Secondly, the possible impact of decelerating rental increases on our investment portfolio and our investment performance. And finally, our pipeline and its potential impact on operating results going forward. Going to the first topic. At September 30, we had six development properties that had achieved certificates of occupancy and we’re in lease-up with the last two having come online in late August. As of this past Monday and we track this information really on a daily basis, the four properties that came online in May had average fiscal occupancy of 50.4%. We have two Central Florida properties, which came online April 11 and May 1 that had fiscal occupancies of 64.4% and 63% respectively. And as we’ve stated publicly included in our investor presentation and also talked about on prior conference calls, we underwrite to a 40% lease-up by the end of the first year following a certificate of occupancy. So based on our initial underwriting, as you can see these properties are performing exceptionally well. We have two Atlanta properties that came online at the end of May and their physical occupancies right now are 43.8%, 30.5% respectively. We have a Jacksonville, Florida property that opened on August 12 and it’s already at a 32.6% fiscal occupancy. And we have a suburban Charlotte property that opened April 8 – August 18, that’s currently at an 11% fiscal occupancy. These lease-up rates indicate that we should stabilize the Central Florida properties, the Jacksonville property and both Atlanta properties in advance of our projected three-year stabilization rates. We underwrite to stabilization at the end of the third year following…

And the floor is now open for questions. [Operator Instructions] And we’ll take our first question from RJ Milligan with Baird. Please go ahead. Your line is open.

Hey, good morning guys, this is Will Harman on for RJ.

Good morning, Will.

Hi, Will.

Just the first question you guys touched on the impact, just given the slowing and growth in over the markets with the REITs you’ve talked about, you mentioned the impact underwriting, but I was just curious the impact, this fair value adjustments over the next six to 12 months?

Well, we’ve given guidance for the next quarter. And we think that guidance is solid as I said in my remarks earlier. We don’t expect a significant impact over the next few quarters of rate decreases. And therefore, we still think that our development yields are going to track in excess of 9%. Our lease-up is going faster than we projected. So we still feel good about the fair value, the fair value possibilities that we have over the next two or three quarters. After that point in time, it’s going to be impacted by such things, as how quickly our new investments come online, how quickly they’re built with the performance of the Heitman portfolio and a lot of other things that really are not predictable until we get a little bit later in this year and into the first quarter, and we’ll talk about that when we issue guidance in the first quarter of next year.

Thanks, that’s helpful. And then, it sounds like the hype in JV is now filled up and you’re doing loans on balance sheet now, which is curious. You got a great pipeline there. Which markets are you targeting to start doing some – deploying some new capital?

Hi, Will, it’s Dean. We do this – I like this term surgical, it’s – and we really are going after this with our developers. We have a 20 to 25 developer – development teams now. They were doing things around the country [indiscernible] and we’re working hand-in-hand with them on selecting markets. For example, our guys who have done Denver and Charlotte, we’re probably done in both of those markets after two in Charlotte and three in Denver and we’ll be moving on into additional markets with them. And so, probably rather not just lay out all the markets, but I can tell you that there are plenty of markets out there today and I’ll speak to California. California is still in the second inning of this. I mean it’s still very early in California. Of course, it’s difficult in California, but there are plenty of markets around the country and even more sub-markets within additional markets that are still right for development and we’re using all of our data to direct those developers to those markets. So we feel like – and probably a better answer is how much longer do we have, I talk about being in the fifth inning or something. I mean we’re about half over from a general landscape standpoint as far as this development cycles concern from JCAP’s perspective. Again, Texas we’re done. But rest of the country, we’re only about half over.

Okay. And then just the last question from me is the mix of the type of the loans that you guys have lined up here, is it more development with equity participations, operating development without…

It’s a 100%.

All development with the participations. That’s where the revenue and the profit opportunities are for our shareholders.

Okay. That’s it for me. I’ll join back in the queue. Thanks guys.

We’ll take the next question from Jonathan Hughes with Raymond James. Please go ahead.

Hi, good morning guys. Thanks for the color earlier Dean and John, really appreciate it. So, last time we saw industry-wide slowing growth that was heading into a recession and amid extreme supply growth as you said earlier, Dean. And then you gave some projections of average growth going forward from here, but those are averages meaning that some years can be below the 45% growth rate range, so I’m not asking you to project where the number going into a recession, but could you see growth go as low as flat or 1% over the next few years as demand slows and new supply continues to build?

Two answers there, Jonathan. One is for the entire sector and the other answer is for the public companies. No, for the public companies. The public companies, we will revert to the mean and go below the mean in this next two to three years in my opinion. Yes, the mean over since 1994 has been just over 4% for revenue growth and 5.5% for NOI growth. We will go below that for the whole sector, but again I speak to the power of the platforms. You just look back at what the REITs did in 2009-2010, it is amazing. I mean at the depths of the recession, at the end of 2009, public storage still had 89% occupancy, and the others were right there right behind them. So the rest of the sector 10 percentage points, 12 percentage points behind that. So it’s not going to be good for the small entrepreneur with this new supply coming, no question. I will tell you that it is – there is a silver lining in it for the REITs, because it’s going to create some big buying opportunities for them and us as well, as we move forward and eventually evolve into a pure or more of an equity REIT. So, there is a good opportunity. I mean, we will roll right out of a development cycle right into an acquisition cycle. And there’s going to be enormous amount of new Class A property to buy out there that’s underperforming. It’s going to be a huge opportunity for the equity REITs to include us. So, I don’t see us going negative, I get asked that question time-to-time. I don’t see the whole sector even going negative, but I don’t see the REITs, I mean, I think they’re going to normalize at this time more at 5% on revenue and 6% – 6.5% on NOI growth going forward. And so, we’ll drop below that a little bit in the depths of this oversupply, probably just over but not much. They’re going to continue to outperform the other sectors in my opinion even through this new supply growth.

Hi Dean, this is Paul. Thanks for that. Just would love to hear your comments on the demand side and really in Texas and Austin specifically, but where you think demand is going across the U.S. and some of the markets that are most troubled?

Yes, that’s a good news and the silver lining in Texas, Paul, is that, Houston and Dallas and Austin you got over 2% population growth and what’s happening in those cities, especially Dallas, North River, Northwest, North Dallas. That’s where all the growth is. That’s where the population is coming in and that’s pretty well, where all the supply growth is coming in. Austin, it spread around and Houston is more spread around west-northwest Houston, but anyway the tremendous population growth in Texas, off a big denominators as far as Houston and Dallas, it’s about 7 million each. So that’s a lot of opportunity there to, lot of demand to fill up this oversupply, that’s been coming. So I don’t think it will take us long to dig out of it in Texas because of that. But as far as general new demand drivers, we can – we are continuing to see and starting to get more benefit on a quarterly basis now from this unit sized living that where we’ve gone from home ownership at 69.4% to wherever it is now, 62% perhaps. People are sizing down, not only they’re sizing down into apartments, as the apartments are getting smaller as we all know. And so, that speaks volumes to the demand being better for us going forward in storage sector. So I don’t really see any negatives now, we could have a negative and that is if we dropped into another, something more than two quarter down recession, but a longer recession and we lost our discretionary customer or we had another black swan event that I describe as 9/11. If we have something like that, we lose our discretionary customer. The props go out from underneath us and we’ll lose 7 percentage points or 8 percentage points right away as an industry, but the REITs will hold that occupancy. They will not lose as much and they will just outperform because those powerful platforms they have.

Thanks. One more from me. And I think John’s got another one. The developers – who’s funding the developers?

Who’s funding the – around the country other than us? Yes, it’s still your local banks, not your national banks, because of Basel III reserve requirements and regulators [indiscernible] But it’s your local banks and small regional players have free money. I mean they’re not paying anything for deposits, and they are really – that’s the reason our A note sales are going so well, Paul. They are really scrapping for yield to be able to put good loans out, particularly like ours versus just making a straight construction loan because we eliminate the construction risks and the development risks for them, but it’s the small banks and small regional banks.

Yes, one thing on that topic though Paul, even the small and the regional banks are underwriting very conservatively, they’re requiring significant equity in the projects, they’re requiring full guarantees from whoever has money and the deals. So while that money is out there, it’s not as easy to get not like taking candy from a baby, if you will, you have to work for it.

Yes, when we get some more information out there that will help the banks discipline here as well. We’re certainly seeing it in the apartment sector.

Exactly, Paul, exactly, exactly. And we’re going to be proactive on that and making sure these banks understand what’s going on, we at JCAP, so you’re exactly right. I’m hoping we will have some of that happening at the lending level as well as the developer level.

Thanks guys. And then one quick last one. Last quarter you mentioned you’re going to do a cap rate study to see where they’ve moved, any update there, especially given the commentary over the past couple of weeks on the equity repair saying that cap rates have somewhat stabilized?

Yes, Jonathan. We had a national firm do a study in all of our markets and we got a relatively detailed report that we were able to use in backing up our fair value marks. As we’ll stated in our 10-Q and as we – I think have said at other times we are at about a 5.5% cap rate for our portfolio and we think that that’s a good reasonable number right now. There are obviously some trades that are lower than that for properties that are of the same type quality, maybe a little bit in some cases maybe a little bit older than ours, but we feel like the cap rate study that we did justified and supported what we’ve been doing for the last few quarters.

Okay. Thanks for the color guys [indiscernible]

Thank you.

[Operator Instructions] We’ll go next to David Corak with FBR Capital Markets.

Hey, good morning, guys. Just looking at the pipeline, John, and the term sheet, specifically on funding that how are you thinking about common equity these days versus these preferred?

Yes, we’re fortunately not at a point where we’re having to think a lot about that for the next few months. We have a few of our original loans that were effectively financings of takeout deals with the REITs – CO deals with the REITs that will be paying off over the next 45 days. So, our funding for our next three months is pretty well set. Going forward, we’re going to look at it just like we always do, it’s going to be a function of what our stock price is and what’s the best cost of capital for us. We don’t have a lot of capacity for the next several months on the A note front. We’re kind of down to with the CO properties that we have and expect to have between now and kind of the end of the first quarter of 2017. We’re down to about $20.2 million of A note capacity, so that $150 million is going to have to be financed to a large degree with equity and we’re just going to make those decisions based upon cost and to the extent, we have the ability to hit the common equity market. We will consider that at the time. And in the meantime, we have the $125 million forward commitment from Highland Capital for the preferred stock of which we only used at this point $10 million. I think it will be a game-time decision as we move into the point in time, where we’re going to need the funding.

Okay. That makes sense. I guess on that same note, you have given the change in the liquidity position in about six months and how well the stock has done and how much the store is progressed. How are you guys thinking about a line of credit, not that you actually need at these days, at this moment, but we just haven’t mentioned a lot, I was just thinking about what are your thoughts are on that today?

Well, David at this point, I think the game is still the same on the line of credit from the bank’s perspective. They’re more interested in buying the senior piece of our existing underwritten deals then extending a revolving line of credit where basically their collateral is paper. I have ongoing conversations with a few banks and what they’re basically telling us is, we are happy to see the finance – the debt financing right now, be at CO and be through the senior participation or A note purchases, once you start acquiring properties, once you start buying in some of the properties in which you’ve invested up today. At that point in time, we are all in, in terms of providing a credit facility. So, I think it’s going to be for the next 12 months, a lot more of the same A note transactions as we can do them. And that’s generally at the time of CO and those deals are very easy to execute. We have about a 13-page participation agreement, they’ll go and get an appraisal done and you can effectively close those more or less contemporaneously with the Certificate of Occupancy being issued.

Yes, that makes sense. Okay and then just switching gears a little bit. I guess you guys mentioned the estimate of the fair value or intrinsic value whatever you want to call it from the investor deck you published earlier this quarter, can you give us just an update on where you think that stands with a, given the fully committed Heitman JV and the recently announced deals?

[indiscernible] Yes, I think we’re in the same place, that investor deck is not very old and we have pretty good visibility into our fair value mark. So, what we’ve done in our deck is we came up with the term, that we call our current intrinsic value, which is basically just taking what we have in place, which is the investments we’ve made today and the Heitman JV and the profit potential that we have out of that and we still believe that’s in the $23 share range. We have another slide in our deck that covers the additional value that we can add, as we deploy the equity commitment that we have from Highland and later on additional A note leverage as we get that equity fully invested and get those projects built into Certificate of Occupancy and that’s obviously a higher number, that’s more in the high-20s range. But we still feel good about those numbers now. The wildcard and all of this is what do rents do and what do cap rates do. We still feel good about our underwritten rents, and we still feel good about our cap rates and there’s still a lot of money looking to get into the storage sector and cap rates in many respects, are supply and demand driven.

Thanks a lot guys.

And it appears that we have no further questions. I’ll return the floor to our presenters for any additional or closing remarks.

Okay. Thank you very much everybody for your call today, and look forward to seeing some of you at NAREIT. Good day.