Welcome to the Jernigan Capital, Inc. First Quarter 2017 Earnings Conference Call. Today's conference is being recorded today, Thursday, May 4, 2017. [Operator Instructions] This call includes forward-looking statements and in the meaning of Private Securities Litigation Reform Act of 1995 and other federal security laws, including statements regarding our future performance and second quarter 2017 earnings guidance and full-year 2017 earnings guidance, including our key related assumptions, future value investments, our pipeline, and future investment closing, and expectedly subtrends with respect to self storage developments and refinance. The ultimate occurrence of events and results referred in these forward-looking statements are subject to known and unknown risks and uncertainties, many of which are beyond our control. These forward-looking statements are based on the Company's present intentions and expectations, but these events and results referenced in these statements are not guaranteed to occur. Investors should not place on undue reliance upon forward-looking statements. For a discussion of fees and other risks facing our business, see the information under the heading risk factors in our annual report on Form 10-K filed in the Securities Exchange Commission, SEC, 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, Inc. You may begin.

Okay. Thank you very much. Good morning to everyone. Thanks for joining us this morning. I'll spend a few minutes talking about the sector, as always, and then turn it over to John and Kelly to talk about the Company performance. But this morning, I want to talk about the great expectations I have for this development cycle that we're in and what's unique about this development cycle. Most of you probably know that I'm doing my best to keep a tab on new starts around the country and how those new starts are impacting the existing supply out there. Where we are in the development cycle, how much longer is going to last, and what the impacts are of this cycle. So a few things I want to point out in this cycle, which leads me to my great expectations, is that we have professional developers, architects, and builders, general contractors, who are doing the vast majority of our work from day to day. This is very different from what we've had in the past. This is my fourth development cycle. And in years past, we've had many people who thought they wanted to develop a storage facility, had no idea how to do it, hired an architect who had no idea, and a general contractor who had never built one before. Too many storage facilities have been built over the years at bad locations in such a manner. This cycle is totally different. As you know in this cycle, we're building almost exclusively vertical buildings -- three- to seven-story vertical concrete and steel buildings. That just brings by itself a level of professionalism like we've never had in our sector before. Secondly, we have good data. That data is getting better every day, as a matter of fact,…

Thanks, Dean. And I'll add my welcome to those that you heard from Dean and thank you all for being on the call and your continued interest in Jernigan Capital. Our results for the first quarter can best be summed up in two words: sustained progress. We ended 2016 with a very successful follow-on offering and a pipeline of potential investments in excess of $750 million. The challenge for us at that time was to efficiently but prudently invest the proceeds from that follow-on offering while maintaining that strong pipeline. We are very happy to report great results since the beginning of the year. During the first quarter of 2017, we closed $105.6 million of investments and closed an additional $50.1 million in the 32 days since March 31. So year to date, we've closed on $155.7 million of new on-balance-sheet investments. In addition, we currently have executed term sheets for an additional $212 million. And we have had a very high incidence of ultimate closings on our term sheets. Very few term sheets done don't ultimately result in an investment. Furthermore, we have projects in various stages of underwriting totaling $613 million for a total pipeline of $825 million. I call that sustained progress. Our terrific business development team continues to execute very well our strategy of attracting programmatic developers to Jernigan Capital. We currently have closed investments with 23 developers, seven of whom have multiple projects with us currently. We also expect seven new developers to execute definitive investment agreements over the next few months. Six of these are working on multiple sites with us. So needless to say, these programmatic relationships are numerous and we believe produce many tangible and intangible relationship benefits and efficiencies. Our investments in our operating properties continue to perform very well. The…

Thanks, John, and hello, everyone. Hope you all are doing well. Overall, we are very pleased with our first quarter result. Last night we announced net income attributable to common shareholders of $0.14 per share for the quarter and adjusted earnings of $0.21 per share, the latter of which was $0.04 above the high end of our Q1 guidance. You all likely noticed some new additions to our financial statements this quarter relating to our self storage real estate owned. During the quarter in early February, we acquired one half of the interest of our development partner in our Orlando 1 project in Ocoee, Florida, such that we now have 74.9% ownership interest in that project. We paid $1.3 million to acquire this additional interest. And as a result, we are now reporting our 75% share of the property on our balance sheet and 75% of the property's operations in our income statement. We still maintain 25% of the loan to the project on our balance sheet, which we're continuing to mark to fair value. And we are still recognizing 25% of the interest income of the loan in our income statement. Overall, we are very excited to have been presented with the opportunity to purchase this additional interest in this high quality self storage facility. And we view this as a first small step in our building of our real estate portfolio. Included in our results was a $1.4 million increase in our fair value of our on balance sheet investment. And while this is a decrease from prior year, as discussed on last quarter's call, our 2017 results are directly impacted by our investment activities in 2016, during which time a significant portion of our investing occurred within our Highland joint venture. Accordingly, we expected 2017 fair value…

[Operator Instructions] Our first question comes from the line of David Corak with FBR Capital Markets. Please state your question.

Good morning, everyone. In terms of selectivity, it seems like you guys are using a lot of the same relationship developers that have really proven themselves and some new ones. But in terms of kind of overall deal flow, I think you've mentioned previously that you've done I think it's 6% of the deals that have come all the way through or that you initially looked at. Has that moved in recent quarters or is that pretty consistent? And then just piggybacking off that, in terms of capacity, have you guys bulked up the team there or do you plan to with the pipeline that's coming through?

David, I'll answer that question. And we are still being very selective. And when we go through our internal deal management system, we are now up to somewhere north of $7 billion of deals that we've analyzed and the closings are as we've noted on this call and prior calls. So we are still at a very low rate of actual closings to deals that we look at. The deals that have made it into the term sheet stage are obviously deals that we like very much and we fully intend to close. As we move deals through the underwriting process, all of those won't get done and those will get moved over into those deals analyzed and passed on. So I don't think we've changed anything in that regard and we're still being very selective.

Okay. That's great. And then in terms of the capacity, is there any plan to bulk up the team at all there, John?

No. We are operating right now at a good pace. We're not having any difficulty going through the underwriting process. Everybody is working hard, but nobody is pulling all-nighters three nights a week. So I think that right now we're at a good balance, and we have a big pipeline. I don't see the pipeline getting much bigger than this. So we feel pretty comfortable right now with our level of personnel.

Okay. That sounds good. And then can you guys talk about your underwriting process right now? Any changes to the stabilization periods? How you're looking at trending or not trending rents in certain markets? And then just kind of walk us through the thought process of how that is today versus how it was when you guys came out of the gate? Any changes to the return profile and the deals that might follow there?

Sure. Good morning, David. That's my area there; I'm very keen to answer this question for you. When we came out of the gate, we established very conservative underwriting guidelines to begin with, knowing full well that our properties were probably going to, after construction at the beginning of lease-up, the rates were probably going to be higher. But we underwrote them at the snapshot rates while we were underwriting them. And we also used a full 36 months for lease-up, which we also knew the early properties would lease-up quicker than that. And so kind of our magic number over the years on all underwriting these properties have been a non-unlevered yield. So that was kind of our hurdle. As we have gone further into the process -- and we have seen more supply that's coming on in some markets and so we'd consider that. We've added some months to lease up in some properties. Now we go out as far as 48 months in our underwriting for a lease up. And we also consider turning rents down. We've never turned rents up and I don't think we'll ever turn rents up. But we normally have a range for where we think the rents could be at stabilization. And now we're starting to look more at the low end of that range rather than the midpoint. So more conservative is your answer.

Okay. And I would assume those particular markets are the ones that you've mentioned previously on your watchlist?

Sure. Exactly.

Okay. Fair enough. And then one last one for me, if I may. There seems to be some of the larger equity REITs out there have talked about the bid ask spread that's out there between buyers and sellers. Can you just give us some color on how you see that playing out going forward? Maybe how that's shaped out in the past couple cycles here and how you think about that going forward?

Sure. I hear those same comments. And of course, we have an independent review done quarterly as to where cap rates are. So we understand where they are trading at. Not so much on the inside as far as where the bid and ask are, because we're not actually negotiating to buy or sell any of those assets. But I hear the comments, and from my previous years of experience, I'll tell you, in times like this, the bid ask tends to spread out some, in that the quality of the assets -- we were at the very end -- people who are still trying to buy today are buying assets that have been -- we're at the end of an asset acquisition cycle. And so they are not great assets. There are some exceptions, of course; large portfolios. But on the one-off deals -- and I think I'm on every broker's list out there. I see everything that is coming across -- they all tend to be first generation properties. And so there's not much left out there to buy of real quality in this cycle. And so the other aspect of it is just the cost of capital for the public guys especially. They've all pulled their horns in on the acquisition front. And so we're in a period now that there's not going to be a whole lot of trading. I don't think the people who have the assets are going to be adjusting their expectations much on what they expect to get out of the assets. So I think we'll have somewhat of a lull as indicated by the guidance that you are seeing from acquisitions from the public guys. But the spread seems to be fairly constant right now.

All right. Thank you for the color, guys.

Thank you. The next question comes from the line of George Hoglund with Jefferies. Please state your question.

Just one question in terms of on the capital raising side. The stock has performed well year to date. And now that you have the ATM program in place and you've already been running that, how does that impact the timing and amount of other capital raising in terms of loan participations? And then in how much and how quickly you guys tap the Series A preferreds?

George, as you know, we try very hard to match fund our fundings on our development investments. And the ATM is a perfect vehicle to do that because you can turn it on and turn it off when you want to and when the stock price is right. The A note or senior participation market has been wide open to us and we just haven't really needed to tap it to this point, but it's still a tool in our toolbox. And then finally, we have the preferred equity line, which we will really need to start drawing on in October in order to fully utilize it by the sunset of that stock purchase agreement with Highland Capital. So I think that what you could expect is us to start hitting the preferred equity line beginning in October. And in the meantime, we still have cash on the balance sheet from our access of the ATM over the last several weeks. And we also continue to have access to the senior participation market. We're also seen an increasing interest in potential credit lines. So that's something else that we'll continue to monitor. And what we'll try to do is access all that capital in an optimal way for shareholders, matching the funding of our development investments as best we can.

Okay. Thanks. And then also as far as with the REITs pulling back from CofO deals, are you seeing more developers coming to you guys looking for capital? Looking for a takeout, saying, hey, we had a REIT who was looking at us, but they walked away?

We put the word out there, George, that we would consider looking at one or two CO deals, just because there is a void in that space right now. And really have nothing -- we're very selective as to what we're looking for. We have nothing really to report as to any promise on the horizon of a CO deal. So I think what's happened is since the broad market left them as far as an opportunity to exit CO, they have more or less forgotten about CO deals. And yes is the answer to your question. We have had developers who would have earlier considered a CO deal who are now in our standard program. So it's been somewhat of a positive for us.

Okay. Thanks. And then just last one from me. In terms of markets that you guys look at, are you getting more selective by market in terms of maybe redlining certain markets saying hey, you know what? Development's getting -- there's an additional market that's getting overbuilt. We're going to avoid this market?

Absolutely. We do that on if not a daily basis, a weekly basis. And it's not just markets, George. It's submarkets as well. So you take Miami, for example. We will still do a deal in the broad Miami MSA, but we have selected submarkets that we have redlined. And it's something that we focus on a constant basis.

Okay. And if possible, could you share some of those markets you've redlined recently?

Well, we do that with our watchlist and things that they are down to, they're submarkets. Not to belabor it too much, but look at a watchlist for example. Nashville is a market that is in our danger zone, but we will do a couple deals in Nashville that are in the suburbs of Nashville and maybe even one right in The Gulch district where they are not overbuilt yet. So specifically Nashville as an MSA is on our danger zone the list, but we still have two or three submarkets in that Nashville MSA that it would do us well to build stores slowly in there.

Thank you. Our next question comes from the line of Jonathan Hughes with Raymond James. Please state your question.

Thanks for taking my questions. Congrats to Kelly on the new role. So I'll just jump in. Dean, you gave the inning reference earlier nationwide as being in the fifth or sixth; Texas maybe in extra innings. And on past calls, you mentioned an industry wide reversion to average kind of 4% 5% top line growth. But some of the operators are already guiding to below this for 2017. Given your expectation for peak deliveries next year, where do we bottom this cycle? I'm just trying to reconcile this and how it impacts your assumption of deriving fair value income?

Good morning, Jonathan. I think there's a conclusion you've jumped to there that I'm not sure is a fair one. Some of the guidance you talked about from some of the companies -- there's other things in there besides new supply. I'm not going to get into names, but I will mention that new supply does have some impact, but there are other things that will impact your top line than new supply. New supply is something that is going to have a greater impact on the existing supply out there in 2018 than it is in 2017. So I think 2018 will be the year, hopefully, that we have the most concern for new supply. But 2017 will be the year that I hope we peak in the number of starts.

Okay. So that's the supply side. I guess on the demand side, is it pretty weak? There seems to be pockets across the country -- obviously it's very submarket specific. But I think overall, it seems like demand is maybe a little weaker than some might have expected six months ago.

Well, I listen to some of the calls -- I don't get them all. But I'm hearing searches are up year over year. And I keep hearing this term renter fatigue, but I don't get it, when existing customers are absorbing rate increases of 9% to 10%. So I just think that there are a lot of things that will go on from time to time within companies that impact their ability to generate revenue other than external forces such as new supply. And so I think some of the companies are doing well.I think NSA has just had a call or has got a call today and they look like they had really stellar numbers last night. So I don't think it's just new supply, and whatever impact is coming from new supply, I think will be mainly next year.

Jonathan, one other thing to note there -- and you are trying to reconcile that without fair value marks. Keep in mind that we are determining our fair value marks projecting out a lease up period probably extends beyond -- with lot of our properties extends beyond 2017 and 2018. And we are basing those estimates off of trailing 12-month rent, some of which go back to 2014, 2015. So we continue to feel very positive about the conservatism in our fair value process.

Okay. Have any markets flipped from watchlist to danger zone? I think there were, what, six on the watchlist last time that was updated in February?

No, we've got about 12 or so on the danger zone list now. And it looks like 8 on the watchlist. And I get a question every once in a while, we updated it, I think, since then, maybe, Jonathan. But I get a question occasionally, why I don't have New York City; we don't have New York City on there. And the answer is long term, I'm not at all concerned about New York City. It's such an underdeveloped market. Now, there's going to be some temporary pain in the suburbs and the boroughs. But with all the new supply that's being built right now, but that is only temporary. So I still am not concerned about the boroughs and of course Manhattan. But we have quite a few cities on the danger list now.

Okay. Fair enough. And then just one more I guess for John. You hit the ATM pretty hard in April. Seems like you expect to basically use the remaining capacity by year end. How do you think about using that relative to your share price and timing of capital needs? You mentioned the match funding of the ATM is pretty attractive. Can we read through that that makes large overnight offerings like the one from December less likely?

Jonathan, I think that you have to look at the total expectations for the year. And we've thrown out a $350 million to $375 million number. And that obviously has to be funded at some point in time. So I don't think we're going to take any capital option off the table right now. I think we're going to continue to monitor the capital markets, monitor our access to capital, and do what's best for our shareholders. We're going to seek that capital that is the best priced for us, at the time knowing that we're going to ultimately have a use for a lot more than the remaining $30 million on the ATM and the $115 million that we have available from Highland.

Okay. That's it for me. Thanks for taking my questions.

Our next question comes from the line of Steve DeLaney with JMP. Please state your question.

Great. Good morning, everyone, and thank you for taking my question. I apologize; I'm on a train. I hope you can hear me okay.

Yes. Go ahead.

Great. Thank you. So Dean, your pipe and joint venture certainly appeared to have been very beneficial to the Company. I'm just curious if you see any additional future opportunities to lever your platform with third-party capital or what we call OPM. And if that is attractive in terms of incremental fees and carried interest, how you look at that versus your own capital such as the ATM plant, et cetera, that's been discussed? Thank you.

Well, we would prefer to do everything on balance sheet with our own capital. It's a far greater return to our shareholders. The time to use other people's money is when you don't really have enough money yourself. And I've done this many times over the years and they know that's what they are there for. I will be happy to tell you that when the equity windows close for a REIT, they are there. So we used that capital last year to keep our pipeline flowing and it worked perfectly for that. They got a really good deal and it worked for us; it was a good deal for us. But no, we'd rather develop and invest all of our dollars off our balance sheet.

Steve, it's John. If we did have some interesting differences from our current business model that would work better in a joint venture that would give us a line on properties going forward, allow us to roll those up in the future into a brand new owned property pipeline, we would certainly consider that if that arose. We are not currently faced with that kind of a situation.

Okay. Great. Well, congratulations on the progress and thanks for the comments this morning.

Thank you. Our next question comes from the line of RJ Miligan with Robert W. Baird. Please state your question.

Good morning, guys. This is Will Harman on for RJ. Just want to go back to the comments about the credit facility. I was just curious if that's something you are actively working on? And if you could just talk about the terms that creditors have laid out if it is something you are actively working on. And when you could expect that source of capital to become available?

Will, we are just gauging interest at this point in time. And when we have something more concrete to say about that, we will. But we are seeing an increased interest among certain banks beyond what we had at this stage a year ago.

Got you. And then just looking at the markets where you guys have committed capital so far in 2017, particularly Atlanta and Houston, where we've seen -- we've heard about a meaningful amount of new supply coming online over the next 12 to 18 months. I was just curious where you are seeing most of that new supply or where you would expect to come online in those markets. And where your development sites are relative to that?

Well, we're going to do one deal, as it stands right now, in Houston, up on the Katy Freeway, which is in a protected submarket, which is going to perhaps be an incredible deal for us. And we're very, very excited about that one. And then we have one that's in Austin and we have one that we're probably going to do north of San Antonio. And that's probably going to be about it. There could be someone who could come on with, again, another unique situation in some unique submarket that we would consider. But right now, that's probably going to be it for Texas.

And then Atlanta, too. I was just curious if you could provide any color on that?

I'm sorry. Atlanta -- Atlanta is a -- it was about a year, year and a half, actually, maybe, behind Texas getting started in the development cycle. And it is a very strong market for us. We have two or three good developers in Atlanta and they can continue to find projected submarkets in Atlanta. So we're still bullish on Atlanta. Although I have it on a watchlist as an MSA, we're still bullish on certain submarkets in Atlanta on a go-forward basis. I could see us still doing just a handful more deals in Atlanta.

Will, Atlanta is a huge MSA geographically. You have a lot of population flow now out into certain suburbs, where there really isn't much storage. And a couple of the other REITs have commented on their calls that Atlanta was very good to them last quarter. So I would add to what Dean said about Atlanta and we're still seeing great deals there.

Got it. Appreciate that, guys. That's all RJ and I have today.

Thank you. There are no further questions. That does conclude our question-and-answer session. At this time, I will now turn the floor back over to your CEO and Chairman, Mr. Dean Jernigan, for closing comments.

All right. Thank you very much. Thanks to everyone for your interest in the Company. Hope to see you all at NAREIT. Good day.