Welcome to the Jernigan Capital, Inc. Third Quarter 2017 Earnings Conference Call. Today’s conference is being recorded today, Thursday, November 2, 2017. At this time, all participants are in a listen only mode. The floor will be open for your questions following management’s prepared remarks. Before we begin, please remember that management’s prepared remarks and answers to your questions may contain forward-looking statements as defined by the SEC in the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the Company’s business. These forward-looking statements are qualified by the cautionary statements contained in the Company’s latest filings with the SEC, which we encourage you to review. A reconciliation of the GAAP to non-GAAP financial measures provided on this call is included in our earnings press release. You can find our press release, SEC reports and audio webcast replay of this conference call on our website at http://investors.jernigancapital.com. It is now my pleasure to turn the floor over to Dean Jernigan; CEO and Chairman of Jernigan Capital, Inc. You may begin.

Thank you. Good morning to everyone. Thanks for joining us this morning. We are excited to talk to you today about our wonderful quarter that we have -- that we had and I’ll leave most of that to Kelly and John to talk about. What I want to talk about today is first of all, let me jump back. I want to congratulate my old associates at Extra Space and CubeSmart, yes, I have associates -- old associates of both companies that -- for their third quarter. I thought their results were outstanding. I thought their results were exactly in line with where I thought good companies would be reporting in this development cycle that we are in, with the new supply that’s come on board this year, with the fantastic platforms that these REITs now have. I think Extra Space and Cube really did the job in spite of new supply and tackling them on a daily basis. So, tip of the hat to them. Last night, John Good, our President and Chief Operating Officer, put out an exceptionally good piece I thought with Yardi Matrix on supply -- existing supply and supply growth in the top 50 markets in the country. And I think, by the way, the top 50 markets, that is a good proxy for what most of us are interested in. As I understand, 86% of all REIT owned assets are in the top 50 markets. But, anyway, I’m -- that piece, I encourage you to read it. I am thrilled that the conversation has started in our sector about new supply. And the conversation from this point on I think is going to be led by professional data collectors, like Yardi Matrix and STR. I understand STR has put out a nice piece as…

Thanks, Dean, and good morning, everybody. I, like Dean, am delighted to comment on another strong quarter. As of today, we’ve closed on $330.3 million of development investment commitment in 2017, and accordingly we are pleased to have been able to raise our 2017 estimated investment range to between $395 million and $405 million from what our prior guidance reflected of $350 million to $375 million. Our pipeline of development deals continues to be robust, currently exceeds $700 million with over $185 million represented by 14 executed term sheet. Those term sheets will be partially closed over the balance of this year, but we do expect to enter 2018 with at least $100 million of executed term sheets. And thus, we have issued preliminary guidance going into next year of an estimate of $200 million to $230 million of new self-storage development investments. As many of these sub markets experience increased new self-storage deliveries in 2018, we intend to become even more selective than we have been in underwriting new development sites and will begin evaluating acquisitions of developer interest and properties as we move through 2018 and as properties move toward stabilization. Moreover, in our press release yesterday afternoon, we announced the rollout of a bridge loan product that we believe will further enhance our growth and will lead to a more off-market -- to more off-market acquisition opportunities as we move toward the end of this cycle and into an acquisition cycle. In regard to new supply, as Dean mentioned, utilizing data, largely provided by Yardi Matrix, last night we issued a -- we completed and issued an exhaustive study of new supply in the top 50 MSAs. Based on that data, we issued new danger and watch list which you can see in the release that we…

Thanks, John, and good morning, everybody. Last night, we announced adjusted earnings for the quarter of $0.35 per share, exceeding the high end of our guidance for Q3 by a $0.01, driven primarily by stronger than expected operating results. Our total revenues increased 29% from the second quarter of 2017, and nearly doubled as compared to the third quarter of last year, while our G&A expenses excluding the management fees remained relatively flat as compared to the second quarter of 2017 and improved by over 5% relative to the third quarter of last year. These strong operating results demonstrate the effectiveness of our business model and the scalability of our operating platform. Last night, we also issued fourth quarter guidance with the GAAP earnings per share range of $0.10 to $0.15 and adjusted earnings per share range of $0.16 to $0.20. And we issued updated full year 2017 guidance and preliminary 2018 guidance on certain elements of our business. As John mentioned in his comments and as detailed in our release, we had two projects, one in Houston and one in Jacksonville that experienced delays in permitting and construction as a result of hurricanes Harvey and Irma that pushed back construction timing and ultimate days these projects are expected to be delivered. Both of these things are key drivers of our fair-value recognition. Accordingly, we shifted a significant portion of the fair value appreciation we expected to recognize in the fourth quarter 2017 to the first half of 2018. We have also adjusted our full year 2017 fair value appreciation range from $16.3 million to $18.8 million, to an updated range of $10.4 million to $10.7 million. And we provided full way of range of fair value appreciation for next year of $46 million to $56 million. On our previous…

Thank you. [Operator Instructions] Our next question comes from the line of David Corak with B. Riley. Please proceed with your question.

Hey. Good morning. I will start with a bigger picture question before getting into the same JCAP’s specific items. You talked on the last call about supply deliveries peaking in 2018. And in light of kind of your recent piece and some of the events that have occurred during the quarter, has that view changed at all, has supply been pushed back at all, in other words? And would you say we are getting more or less supply over the next three years because of it? And maybe another way of asking it, Dean, is just what inning are we in now of the development cycle?

Intuitively, we thought that it would peak with -- at a little stepper point in 2018. But, with all the work that Yardi Matrix has done for us and with what John has done with his piece we put out last night, it looks like it’s a little bit different there. And, I’ll let John comment on his work.

Okay. David, thanks for the question. And what we are really seeing is something of a crest that is beginning this year. And when we look at our projections, and this is taking what has already delivered in 2017 and then projecting out what we believe will deliver over the last three months of the year, our data was all as of the end of September. We feel like this year will be slightly behind next year. But then, when you get into 2019, there is going to be a relatively significant drop-off, just based upon what’s in planning right now and what’s likely to fall out of planning. As you go around the country and you look at the dynamics in the various markets, first of all, the number of facilities and planning has started to move downtime. But then, there is also the dynamic of financing is less available than perhaps it was two years ago or a year and half ago. I think the banks -- we know anecdotally of couple of banks that were very actively lending into self-storage development construction back in 2015, maybe the first part of 2016 that have completely pulled out. They are not making any more loans. Furthermore, you have additional regulatory initiatives in certain markets. We have seen in the last nine months or so an initiative, a moratorium that was imposed along the beltline in Atlanta, which is probably the most desirable location to build in Atlanta. And we were able to get one great located property in Buckhead under the approved and under construction under the wire, but nothing else is going to be built there. And that’s just an example of things that are going on all over the country. So, there’s a big drop-off of what’s ultimately going to be built. And that’s at a time when the items coming in the planning are on the decline. So, we feel like 2017 and 2018 are going to be kind of co-peak years with 2018 being slightly ahead of 2017. But then, after that, it starts to drop off pretty significantly. So, these are a lot better baseball analogies, as I’m, or than I’m. But, it kind of feels like we’re in the top half of the seventh inning maybe. And I’ll let Dean disagree with that, if he wants to.

No, that’s good. I think that is about right, John. I just want to add one other thing, David, anecdotally. I spoke last week with a developer who is probably the most prolific developer in this cycle self-storage across the whole country. And now, they are looking in only two markets. They’ve reduced their scope, which they had a scope across the whole country and they were probably in at least 10 if not 15 markets. They are now down to two markets because of supply. So, we are feeling really good about the position we are taking.

So, peak deliveries maybe next year at some point, but when in relation to that would you think fundamentals trough? If we are delivering -- if we are peaking in deliveries next year, would fundamental thus trough in 2019, given that’s kind of the peak for lease-up here?

What I would say kind of all along is I don’t think there’s going to be that much disruption from the supply that we see out there today. You see the 4% to 4.5%, the Cube, Extra Space put up in Q3, that’s in light of supply and markets that they are facing every day. These platforms, these public companies are really strong. So, if you are talking about public companies that are functioning really well, I don’t see a deep trough, if you will. And as far as being able to pick exactly when that is, I think as we get on into this, we are going to see how well some are performing in the light of new supply. Like I said, we are certainly not going to go negative, we are certainly not going to drop much blow -- again, best-performing companies not going to go out much flow our averages that we’ve had since 1994 of about 4% top-line growth. I mean, it will drop down to 3s, I’m sure. It’s when that’s going to be, maybe 2019, but I don’t think it’s going to be 2020.

All right. As promised, I’ll switch over to more company specific stuff. Are you guys starting to see more opportunities in some of the smaller markets, maybe the 20 to 50 top MSAs? And do you look at underwriting assumptions any differently in those markets?

David, we are seeing opportunities in some of those markets, markets like Minneapolis, Kansas City, Louisville, Kentucky, great markets, good growth, a lot of high income people there and Dave, in many respects than overlooked thus far by the development cycles. So, we’re seeing a lot of opportunities to go into those markets. And we’ve actually asked some of our more prolific developers to look for sites in those markets and they are finding good sites. So, the answer to that part of the question is, yes. In terms of our underwriting, we’re still looking at the same hurdles that we’ve looked for throughout the existence of the Company, trying to hit that 9% development hurdle. And in markets like that, one thing you find is that the land is a little bit less expensive. And also, because you haven’t had a whole lot of new supply come on, the lease-up times are likely to be that three-year lease-up time. So, hitting those development yields as we feel like we’re going to consistently do with the 50 projects that we’ve developed today, we think it’s going to be just business as usual for JCAP.

And then, can you give us some details on this bridge loan product? Is there a model you’re basing this on? Dean, did you do anything like this at Storage USA? And how big would you expect this to get? And then, how does this product play into the potential transition to “equity REIT” down the line a little bit?

That’s a long answer. I’m going to give into discussion. But, David, how about, will let somebody else jump in with some questions right now and you come back around with that question? Do you mind?

Fair enough, Dean. Thanks.

All right. Let’s take another question. I’ll come back to the bridge loan question just a little bit later. But, let’s get some more questions from some other folks.

Our next question comes from the line of Todd Thomas with KeyBanc. Please proceed with your question.

Just back to the development commentary a little bit. We’ve still seen some significant pressure in certain markets. Is it your sense that the developments today that are being delivered in this cycle are having a disproportionate impact on existing facilities versus prior cycles or is that not the case? And then, Dean, your comments around soft landing, I mean, what does the soft landing look like, as it pertains to occupancy and revenue growth?

Yes. I mean, I think I talked some out a few minutes ago. I mean, I can see, and again, we have five public companies out there only, equity side, that were all talking about, and I think that’s who we should be talking about, not so much the less the small entrepreneurs around the country, but. And all five of those companies have different platforms and are functioning differently. They have different assets, different ages of assets and different platforms. So, not all are equal. And so, what I tend to focus on are the companies I think that are functioning quite well. And it appears this quarter, and NSA is yet to report, and I have an idea, they’ll have a good quarter as well. So, the companies are functioning well. I don’t really see them having to get down below the 3% on a same-store basis anytime during this development cycle in the next two to three years. And so, that’s kind of the bottom end. And when it comes back, I’ve said before that I think because of the platforms, it will go a little bit above the historic norms of 4% top-line growth, 5.5% NOI growth. I think it could be 50 basis points better than that, because they are going to continue in stabilized market after the development is absorbed. They are going to continue to take market share from the small entrepreneurs, and they are going to continue to buy assets. Now, I’ve talked about this silver lining in this development cycle before, and that is there is going to be a lot of wonderful gen V assets out there that the REITs are going to be buying with tremendous upsides. And so, external growth is going to be a big factor starting next year, I think for the REITs. And so that’s kind of what I see. They’ll operate at their occupancy. They’ll still operate very high occupancies where they are today. So, I don’t see that changing much. You can talk about expenses, because I don’t know much about expenses anymore. But, as far your first question, what’s different in this cycle than in the past. Yes, I think the best companies will continue to perform and outperform, even better in turbulent waters, when the waters get a little rough, the best boats or ships our there are going to perform better than the others. And that’s how we kind of characterize where we are today as the waters are starting to get choppy. But again, 4% to 4.5% revenue growth compared to any other sector in this environment is still outstanding and that’s what I see the better -- best performers are putting up.

And then just thinking ahead to 2018, can you just talk about the potential to consolidate additional properties, what you are seeing there in terms of the pipeline or conversations that you’re having with developers today?

Yes. Todd, I’ll take that one. I’ll take that one. We have those opportunities starting to arise right now as some of these facilities move toward stabilization. As I mentioned in my comments, our Fleming Island, Florida project is 90% leased up. And while we haven’t heard from that developer yet, my suspicion is we probably will in the not too distant future. And as projects are getting 65% to 75% leased, we are starting to have those conversations. So, it’s really a function of how close it is to stabilization. And developers are developers. They want to maximize their profits and we want to be fair to them but we want to maximize our yield on ultimate cost of projects, and it’s a dance we do with them that’s going to start in earnest as we move into 2018 with a number of people. And we will just see where it plays out. We have safeguards in our investment documents that keep a developer from going out and actually actively marketing a property and causing us to have to make a decision on a rofer [ph] until the later of three years after we closed our commitment with the developer or two years after the project, chief certificate of occupancy. So that’s going to put our first 11 properties to some degree in that -- in the play over the next 18 months. But it is hard to predict right now how many will do, we don’t know but we’re going to have those discussions.

Okay, great. And then, just lastly, I guess maybe you could speak, Dean, to that and the new bridge loan product that you expect to roll out, maybe some detail there would be helpful on pricing. What your expectations are for volume over the next, say to 12 to 24 months and sort of how should we think about, where those loans will fall within the capital stack relative to your current loan program?

Sure. I’ll be happy to give you some general parameters. The program is still being developed and so I’m not going to be able to get too specific with you. But, I can tell you what we’re doing with this product is just basically following the development cycle through. When this company started in 2015, it was the beginning of development cycle. As we matured as a company, this cycle, as we were rolling through this development cycle, we have developers out there, not only our own developers but many other developers around the country who have bank loans today on their properties. And those bank loans, the lease-ups may be going well, they may not be going far as well as they were hoping, and those bank loans are going to come due. And we are going to be in a position to give those developers, and we will go higher in the capital stack, give them capital to payout those bank loans. We will be able to give developers capital by going higher in the stack to about their partners if they want to. And there will be properties that are taking longer to lease up and so there may be need little bit more in the way of interest reserve. We are going to be able to help with that. So, we are going to be totally entrepreneur with our shareholders’ capital to help in a sector that we understand and we know there are going to be some needs. So, some general ideas on coupons for example. It’s according to how high we go into capital stack, it will be priced similarly to what we are getting now because we’ve priced our loan now 6.9% and we have not wavered from that, since they won and…

Our next question comes from the line of RJ Milligan with Baird. Please proceed with your question.

I noticed that you guys issued $10 million of the Series A preferred in October. I think guidance includes 20 more issuance. Can you remind us, how much more you have left and the expected timing of that funding?

Hi. Good morning. RJ, it’s Kelly. We are required under the stock purchase agreement to purchase a total minimum of $50 million. So, currently, right now, after going through multiple various scenarios, we are planning to issue the full remaining $105 million. So, we have $20 million outstanding as of today, we’re required to issue 30 more. But, we currently are planning to issue the full 105 that’s remaining of the total 125 commitment. That’s something that we are continuing to assess every day, as we look at all of our capital sources.

And then, on the revolver, can you talk about as you bring assets on balance sheet and full ownership, how do you expect the balance sheet to change over the next couple of years?

The way we view the line of credit is, one, it’s very helpful and that it allows us to match fund our development as the actual funding occurs over the lifecycle of the construction. And we are -- as we stated before, we are looking to utilize line of credit to leverage our balance sheet to a pretty low level consistent with the other REITs. Our ultimate goal is as our asset base grows, to get unsecured facilities and investment grade ratings, so we are going to keep our leverage low in that 25%, 35% range. So, we definitely intend to use the line of credit to maximize our returns to shareholders but don’t anticipate levering up to a very significant amount.

And then, my final question is on the 2018 guidance of $46 million to $56 million of fair value adjustments. Can you talk about the anticipated timing of those? I know we obviously have some that have been pushed back from the fourth quarter into first and second quarter, do you expect any sort of waiting to ay particularly time of the year?

If you look at our supplement, one of the key drivers of -- and this is what we experienced this quarter, time example. Key drivers of fair value timing recognition is dependent on the construction progress and obtaining certificates of occupancies of properties. And so, in our supplement, we have in our table of our developments and process, we put with the construction start date and the CO date, expected CO date. So, those two give you an indicator of the quarters and how we expect that accretion to come on line during the year next year.

Yes. RJ, you can look at pages 14 and 15 of the supplement, and that gives you project by project what our estimate is.

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

Thanks for taking my questions. Following up on the bridge loan from earlier, and I don’t think you mentioned this. But, Dean, if you have done in the past and if there is something that will be used for providing financing to developments or facilities and leases-up or stabilized assets or all three?

Yes. Good morning, Jonathan. I have not done this in the past. Our program at Storage USA was limited to the program that we’re presently running at JCAP. This is just a natural extension of providing some liquidity capital to developers that we know will be needing this capital over the next two to four years. I would say, at -- toward the end of that, the three to four-year period, the assets that are being built that would need a bridge loan, would be -- are reaching stabilization. And so, at this point in time, we do not have a program to address assets that are stabilized. So, this would be typically a property that is -- has been COed. So, we have eliminated the development and construction risk. It is in some stage of lease-up, so if it has reached, let’s 60% and is stalled somewhat or perhaps their timing is just running out with their underlying loan or perhaps they’ve got a partner who just would like to get out, we can be there for them at 60%. And if that’s the case, we’ve eliminated 60% of the lease-up and we can certainly evaluate a lot easier what the risk are running from 60% to 85%, price our loans accordingly and get our rofers. [Ph] But, we would take something after CO. But, I think most likely there is going to be some lease-up that’s been achieved on the assets.

And then, one for Kelly. How should we think about the Highland preferreds and when you use that with your share price, trading, not modestly above book value, whether you go above the $50 million required draw?

So, like I mentioned in the response earlier, we’ve this quarter -- and every day, honestly, we spend a lot of time evaluating our capital sources and running multiple scenarios to detriment, based on what the equity window looks like in the common markets, what the most accretive solution and structure in our capital stack looks like. And right now, our conclusion based on all of our analyses is that the full issuance of the Highland preferred is the most accretive, not only to earnings but also to our book value. So, right now, our main course of action to issues the full remaining balance of the Highland preferreds.

And you would be open to going above that, I think the cap is what, 125 million?

Right. The maximum is 125 and we’re required to issue a total of 50.

Okay. And then, going back to the supply commentary, just to be clear, on the danger and watch list, are the thresholds for those markets to be included, are they still greater than I think it was 10% inventory growth for the danger list and 5% for the watch list? And maybe which markets have switched from one to the other, as you’ve refined it over the past several months?

Jonathan, I haven’t gone back and looked at our -- I think the last time we issued a list was maybe two or three months ago. And so, I haven’t looked at the movement. It’s a little more complicated than just setting a percentage. We’re also looking at -- we are vetting the market, not only based on new supply coming on line but also the propensity for the market to utilize storage, the amount of undersupply at the beginning of the cycle or the amount of undersupply right now, looking at a per capita square footage in the market, and also, not to be understated, looking at population growth rates. And all of those weigh in. But, I can tell you that the seven or eight -- the eight markets that are on the danger zone list are all north of 10% new supply over existing supply. And in the watch list markets, it ranges from 5% to little bit north of 10%. But those that are little north of 10% have some of those positive propensities that would indicate that absorption will be more rapid. And therefore, we have not put it on the danger list just based upon arbitrary cutoff, we’ve factored in these other considerations as we comprised or populated these lists.

And does that supply -- do your supply estimates include conversions, warehouses or big box retail stores?

Well, they include conversions to the extent that we know about them. And I think that STR and Yardi, both, if there’s a warehouse that’s going to be changed from an industrial property to a self-storage property or if there is an old retail box that’s going to be converted to self-storage, our belief and understanding is that that shows up in the report. So that would be included. What’s not included are additions to existing facilities. For example, if you have a facility that was built in the early 2000s and that have some extra land and so they are adding some more units on that extra land; that is not being captured. But, those are most likely not new gen V buildings that are being put in the urban infill areas that everybody’s focused on.

And last one, are any of the markets on that list, are they redlined from your investment parameters, kind of going forward due to optically deploying money in self defined danger markets?

Yes. As I’ve said in our supply piece last night, even within some danger zone markets, there are submarkets that are still underserved. And we have since day one been an extremely submarket focused business. We look very carefully at all of the demographic, all of the competitive, all of the new supply dynamics of the submarkets. And so, you can find submarkets in many these. Without -- we haven’t really talked about it but I can tell you that there are some markets that a developer would be very hard pressed to convince us that would be worth going into right now, Nashville being one. We have a couple of facilities in Raleigh-Durham right now but the idea of us doing another one there is probably -- that would be a pretty remote likelihood, if a developer came to us with that. The Texas markets, we have one is Austin and one in Houston. And as we’ve said over many calls, unlikely that we are going to do more in those markets in the near term. In Dallas, we basically had on our list since day one. So, those are some markets that come to mind. Denver, we have a few projects there. And there could be another submarkets there that could stand one more project. But, Denver is pretty active right now and we are certainly not actively looking in Denver and we are not encouraging developers to look in Denver. So, those are some markets. And Dean may want to add to that.

No, I think you got it exactly right, John. I’m good with your answer.

Our next question comes from the line of George Hoglund with Jefferies. Please proceed with your question.

Just one quick question following up on the last one there. The 5% and 10% increases to inventory growth, kind of over what timeframes are those?

Well, what those are right now, George, is just an estimate of proposed new supply that’s both under construction and our vetted amount that’s in planning and our vetted amount of prospective things that there is some evidence that there is a lot of project going on. We go through a vetting process. And so, when you look at -- when you take that and you compare it to the verified, existing supply, that’s what we are using as our metric there.

And then, just one other one. When you have conversations with the developers who may be looking to exit early and where you might buy in some properties early, what ballpark percent of those developers are looking to recycle that capital into a new project as opposed to them just looking to reduce risk and take money off the board?

I’ll let, Dean. Dean, you can give your estimate on that and I’ll agree or disagree with you.

I don’t know anybody who is in the market for a boat, I think they are all interested in recycling their capital right now. These are professional merchant builders. And I know the first one was done exactly for that reason. The ones that I talked to, that’s all they’re interested in at this point in time. So, no boats on the horizon for any of our developers yet.

Yes. And I think that’s a great answer and I agree with it completely.

Thank you. We have reached the end of the question-and-answer session. Mr. Jernigan, I would now like to turn the floor back over to you for closing comments.

Okay. that’s great. Thanks a lot, Enjoyed speaking to everyone today. See you soon.