Greetings and welcome to the Jernigan Capital First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Corak, Senior Vice President of Corporate Finance. Thank you. You may begin

Good morning, everyone. And welcome to the Jernigan Capital First Quarter of 2018 Earnings Conference Call. My name is David Corak, Senior Vice President of Corporate Finance. Today’s conference is being recorded, Thursday May 3, 2018. At this time, all participants are in a listen-only mode. 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 Security 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 the conference call on our website at www.jernigancapital.com. In addition to myself, on the call today, we have Dean Jernigan, Chairman and CEO; John Good, President and COO; and Kelly Luttrell, CFO. I’ll now turn the floor over to Mr. Jernigan. Dean?

Okay. Good morning, everyone. Thanks, David. Thanks for joining us today. We’re excited to talk to you about our quarter. And as usual, I want to spend a few minutes talking about the entire sector. I assume you are as pleased as I was with the results of the public companies, all public companies who have reported their first quarter results. From my experience, I know first quarter tends to set the trend for the year. You have a good first quarter, you’re likely to have a really good year. And to expand on that, just for a minute and looking at Q2, my expectations in Q2 are going to be pleasant surprises to the upside for all. I think the – again, getting off to a good start in Q1, considering the rough winter the Northeast had, all pluses. And April results are in, I think some of the other CEOs talked about their good results they’re seeing so far in April. I think we are setting ourselves up for an outstanding Q2 in the entire sector. Everyone’s always concerned about deliveries, new supply, and I want to just cover that briefly, and then we’ll get back to our company. Something that’s hardly ever spoken about is natural absorption in our sector. If you just take population growth as the demand driver, we’d note there are other positive demand drivers in our sector, such as the trend toward smaller housing, the trend towards single-family to multifamily, the trend toward moving back into the urban core. All of this tends to add demand. Another one I want to add this quarter is how attractive this product is that we’re building today, our Gen V, the vertical buildings that are being built by virtually all the professional developer across the country,…

Thanks, Dean, and good morning, everyone. 2018 started off as an exceptional year for JCAP. After a record year of development and investments in 2017 – or development commitments in 2017, we’ve already committed $133 million of capital year-to-date in 2018, which represents approximately 62% of the midpoint of our full year 2018 commitment guidance. Commitments this year include our inaugural investments under the recently launched bridge refinancing program, which is an exciting new program for us. The quality of the development and investments remained high, and the yields are consistent with our underwriting since the IPO. We believe that through March 31, 2018, we’d only recognized approximately 16% of our prospective fair value on projects we’ve financed, which provides us with significant potential for earnings growth as projects are built during 2018 and 2019 and begin to lease up upon completion. Diving right into the operations of our portfolio. Our five wholly owned facilities outperformed our expectations this quarter, driven by higher expected rate and occupancy. Our 14 development facilities currently in lease-up that are not wholly owned continue to outperform, with average occupancy continuing to exceed our initial underwriting. We’d point out that all but two of our facilities that are in lease-up are operated by CubeSmart. As we saw with CubeSmart’s exceptional first quarter results, they provide industry-leading management of their portfolio, that gives us a high level of confidence that they’re providing industry-leading management of our portfolio. Our 40 development properties under construction continue to progress well, which is in part what led to our experienced more fair value gains during the quarter than initially expected. As Kelly will discuss further in a moment, our development partners are making excellent progress in building high-quality storage facilities across the country, and their professionalism and experience continues to…

Thanks, John, and hello, everybody. I’m going to provide detail on the quarter’s results and touch on guidance before turning the call over to David to discuss our capital plan. Last night, we’ve reported a strong first quarter, with earnings per share of $0.12 and adjusted earnings per share of $0.36, both of which exceeded the high end of our quarterly guidance. We continue to experience strong revenue growth, with total revenues increasing 33% from last quarter and 127% as compared to the same quarter last year as well as higher-than-expected net operating income from owned properties and above-expected increases in the fair value of our investments. A few noteworthy elements to the results that we believe warrant further discussion. First, NOI on our five wholly owned assets came in above our first quarter guidance as rate and occupancy were higher than we had anticipated while expenses were in line. Also, interest income exceeded our first quarter guidance as we deployed more capital than anticipated. Second, we experienced some other expenses this quarter related primarily to the retirement of our in-house real estate counsel and some contractual charges incurred with his departure. However, the related decrease in our recurring G&A expense offsets the additional compensation of our new SVP of Corporate Finance. Accordingly, we did not feel the need to adjust our full year G&A guidance for 2018. Last but certainly not least, our fair value increases of $4.3 million exceeded the top end of our guidance range. As noted in our earnings release, the primary drivers were faster-than-expected accretion from our new bridge loan investment, faster-than-expected construction at various properties in the portfolio and less of an impact from rising interest rates than we anticipated. In regards to construction progression, we have stated repeatedly over the last several quarters,…

Thanks, Kelly. You’ll notice that we added a few new pages this quarter to our supplemental package around capital funding and our balance sheet. We thought it prudent to give our investors a better sense of funding – our funding position going forward to supplement what we provided in March with the full year guidance. On Page 17 of the supplemental, we provided a table of capital sources and uses. Note that the $409 million of uses is an all-in number, including remaining capital need for contractual investment obligations as well as $110 million of additional 2018 commitments per the midpoint of our 2018 guidance. This represents our total estimated cash investment through 2022, not just 2018. In the chart on the bottom of the page, you’ll see that our total estimated cash investments for the rest of 2018 is $198 million. We have funding in place for all of our 2018 commitments and a portion of our 2019 commitments, comprised of a combination of cash on hand, existing capacity on our line, our Series A preferred equity line and expected repayments of existing investments. Beyond that, we have remaining capital needs of approximately $150 million over the next few years. Just like any growth-oriented REIT that’s in the development business, we require capital to grow. We have noted potential sources of capital including, but not limited to, loan refinancing activities, asset sales, Series B preferred ATM sales, common equity sales, secure debt and joint venture proceeds. To that end, we have proven to be opportunistic and prudent in managing our capital and we will continue to be so. One of the many hats I’m wearing in my new role here at JCAP is to help optimize the company’s capital structure. Over my first six weeks here, the finance team…

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from George Hoglund from Jefferies. Please go ahead.

Hey, George.

Hey, good morning, Dean. I guess just one question in terms of the lending environment for developers. I mean, we’ve seen kind of new entrants into the lending business, some doing programs somewhat similar to you guys. Just wondering, what are you seeing from a competitive landscape in new entrants on the lending side? And how do you think the overall appetite is trending from lenders for new development?

Good morning, George. It’s Dean. Of course, we monitor this very carefully. And it seems to me that they’re a little late to the game, that we’re definitely on the backside of this development cycle. And anyone coming out with a new program today will – they may get a few deals done, but it’s very, very late in this cycle. The bigger concern for us, has been all along, are the commercial banks. That’s who’s providing the lion’s share of capital out there for developers across the country. And from what I understand, that one article that was written in the Wall Street Journal about three months ago, was the beginning of the end for that stream of capital as that spigot’s been turned down dramatically. And the other thing that is working in the favor of less new supply coming on is that the numbers just don’t pencil anymore. A bank will go out and do a survey and people have reduced rates in these markets where they have new competition, or in some cases, anticipated new competition, they’ve reduced rate. And so the numbers just don’t really pencil on a broad basis like they have in the past. So we’re not at all concerned about any late entrants to the space or even the commercial banks at this point.

Okay, thanks. And then just one thing, do you have any update on your danger and watchlist markets? Has that changed at all from last quarter?

The list itself hasn’t really changed, George. The markets that continue to show the most new supply and potentially the greatest negative impact on results are kind of the state – the Southern state capitals, Nashville, Austin, Raleigh, all three of those markets have new supply that’s upwards to 20% of existing supply, not real high barriers to entry and pretty high levels of square footage per capita. So we’re staying away from those markets, generally. And those are the ones about which we’re most concerned. From a watchlist standpoint, Portland has kind of seen a big spike in not only new projects under construction, but also projects that are in planning. Portland’s showing the potential to become a real problem market. Other than that, a lot of markets have new supply. We continue to monitor those. But from a list standpoint, those are the highlights of our list.

Okay, thanks. Appreciate the color.

Our next question is from Jonathan Hughes from Raymond James. Please go ahead.

Hey, good morning. Hopefully, that’s just a fire drill, not a real fire.

It’s not on our end.

All right. Not on our end neither. Good morning. So one are the equity REITs mentioned they’re seeing some developers not leasing up as fast as budgeted and looking to sell earlier than anticipated. And this obviously plays in bridge loan product. Can you just talk about the opportunities there? Maybe compare that to last year. Meaning, are you seeing more coming to you looking for exit solutions?

Good morning, Jonathan. Yes, sure. We knew this day was coming, and it really hasn’t arrived quite yet. I think the pressure comes from two sources for these developers. One is, yes, maybe it’s not leasing up at the rates they wanted and quite as quickly as they wanted; but also as time goes by, the construction loans are – they’re showing to see the end of the construction loan. And that’s the big one, when they have that construction loan they got to pay off. And so I said all along that I thought our bridge loan program would really kind of kick in toward the end of this year and on into next year. This first group that we did, first five that we did, were early properties that were started in 2015, had development probably started in 2014 in Miami. So we know that Texas started early, Miami started early and the Boroughs in New York started early in this development cycle. And that’s an example of that. So that’s the reason we got a good one early there. But yes, that’s starting to happen. And than I’ve said all along that the silver bullet – the silver lining in this development cycle we’re in is a lot of new product, beautiful Gen V properties, are going to be built for sale. I’ve always guessed that 75% of them would be for sale early on, and those companies with capital are going to be there. And so that includes the public REITs and that also includes some private equity money sitting on the sidelines. And so I do think the acquisition cycle will kick into high gear next year. It will start a little bit this year. And it’s motivated primarily by construction loans coming due and developers getting to a certain point in their lease up that they think they can convince a buyer to go ahead and pay them full dollar.

Okay. Appreciate that color. And maybe just kind of extending that. What’s the composition of your pipeline in terms of development projects? And then maybe the non-stabilized assets that would fit the bridge loan.

Currently, of the $450 million, most of it continues to be new development. As Dean said, the real impetus for bridge financing probably hasn’t hit yet because a lot of the – because the deliveries didn’t really spike up to a large degree until 2017. So we see those opportunities later. And right now, our pipeline is predominantly development investment.

Okay. And then just one more for me. And I know I’ve asked this in the past, but in the supp, you show the $150 million capital need that will come from various sources over the next few years. Just curious if you can elaborate on the attractiveness of each source at the moment. How you think about debt and equity, your current cost of capital.

It’s David. So as I mentioned in the prepared remarks, we have funding in place for all of our 2018 commitments and a portion of the 2019 commitment. So we don’t think there is an immediate need for capital beyond what we have lined up. But as you can see on Page 17, just on the midpoint of our ‘18 guidance, we’ve got that $150 million that we’ll need to fund over the course of the next couple of years. And so what we did this quarter is we included a list of options for potentially funding that in the back of the supplemental there. And we’re going to prioritize those options in a manner that focuses on driving the most shareholder value. And so one of them I would highlight is this opportunity to potentially refinance our first mortgage loans. And so you think about some of the products that we have that are pretty far along in the lease up. And if we had the opportunity to refinance our first mortgage loan but retain the 49.9% profit interest and the ROFR while giving us an opportunity to recycle the older invested capital into our newer projects, we think that makes a lot of sense. We’d look at this is effectively giving us a two-for-one deal, right? Two profit interest and two ROFRs for a single investment amount, which drives our IRRs even higher and creates a lot of value for shareholders. As our portfolio matures, developers will have the opportunity to sell assets if they want. There are a handful of some of our earliest investments that might not really fit, either from a market style or a property kind of perspective, so that we – as we have all along, we have the optionality to either buy or sell these assets at the end of the day. So we’ll continue to make some decisions on that account as properties mature. And then we continue to have the option to issue common stock off of our ATM. Or otherwise, if we can do – as long as we can do so in an accretive price, we think that makes sense. We think we’ve proven to be pretty good towards of shareholders capital, and we’ve been opportunistic. So we feel pretty comfortable with the capital situation as it stands today.

Okay, that’s it for me. Thanks everyone. Congrats, Dave, on the new role.

Thank you.

Our next question comes from Tim Hayes from FBR. Please go ahed.

Hey, everyone. Thanks for taking my question. The first one, just with regard to the pipeline, have you been dynamic or doing anything different with the structure or pricing of loans in order to kind of offset the narrower scope you’re taking, since you’re kind of focusing on home runs now?

No, we haven’t. It’s – our pricing, as you know, Tim, is really a unitranche pricing. We have a very profitable investment here, driving IRRs in the high teens on an unleveraged basis. And you have several components of that. You have components of more senior financing, you have components of mezzanine debt and you have components of equity. And it all drives a real high return. We don’t think rates have moved enough to justify us really going and changing the coupon rate. So right now, we’re leaving that as it is. Yes, if rates were to spike up a lot and the market became such that, that 6.9% ought to be 7.5% or 7.9%, certainly at that time, we’ll evaluate that. But we don’t think we’re anywhere close to there. The short-term bumps, as Kelly alluded to, you’ve seen more flattening of the yield curve than you’ve seen expansion – rapid expansion and massive expansion of long-term rates. So we feel really good about our pricing right now. And we’ll just monitor it as circumstances change.

Okay. Thanks for the color there. And speaking, I guess, of interest rates, do you guys have a certain amount of Fed hikes built into your guidance and your underwriting? And if so, would you be able to share that?

We do. And actually in our – on the Page 10 of, I believe, of our supplement, we added in our full year assumptions, what the exact assumption is. And we – in our full year, $41 million to $47 million, we assumed four 25 basis point interest rate hikes in our guidance.

Four. Sorry, I missed that earlier. It’s of four 25 basis rate hikes over what period of time?

Over the whole year.

Over the year, got it. Okay. And then one more from me. You identified a small asset sale that could be a potential source of liquidity. And just wondering if that was a loan or one of the properties. And then also, kind of what are the drivers behind you wanting to divest of that asset specifically?

Well, our earliest investment, I think this is our very it first investment, is beyond the period where the developer’s locked out from doing anything. And so the developer has the desire to sell the asset. The asset is not a Gen V asset. It’s a single-story drive-up asset. And we – we’re focused on the urban core multistory Gen V, latest-generation assets. And so we feel like that’s one that we – that doesn’t really fit our longer-term ownership strategy. It’s not a real big deal, as it’s – the price of that is not going to be a massive price.

Right, okay. Thank you again for taking my questions.

Our next question comes from Todd Thomas from KeyBanc Capital Markets. Please go ahead.

Hi, thanks. Good morning. First question. So I know you’re at 62% of the way through the commitment guidance. And as you look at the pipeline today, which you mentioned is down about 50% to around $450 million, does that increase in selectivity that you discussed, does that keep you within the range you’ve outlined for the year? Or is there appetite for additional commitments growing?

Yes, Todd, we’ve always based our guidance on term sheets that we’ve issued or the term sheets that we expect to issue in the near future. And right now, based upon the term sheets that are outstanding, all of which we expect to close, were within that guidance range.

Okay. And then in terms of inbound interest in general, again, I realize the pipeline is down again. But from a higher level, even been think about what you’re just screening initially or whether or not the phones’s ringing, sort of more or less, can you just describe maybe the general level of construction interest from developers? I mean, is that also down 50%? Or is that not consistent?

Well, as you know, and we’ve spent a lot of time with you kind of telling you our strategy with respect to developers. We’re focused on a very finite number of professional developers. And those guys are still working hard. But one of the beauties of our program and the beauty of the relationship that we have with these developers is these guys know what they’re doing. And there and seeing the same thing we’re seeing in terms of projects becoming more difficult. So they’re still working hard, they’re still looking for sites, but they’re being selective just like we are. I mean, they’re our first line of defense on the selectivity front. So I think while you can’t assign a number to what they are seeing, they’re still working projects, and that’s where our inbound calls come from and that’s where we want our inbound calls to come from, our existing pipeline of developers. They’re the partners that we’ve selected to walk with us through this whole journey, and they’ve done a great job so far.

Okay. And then question maybe for Dean to chime in here. Just in terms of your read on construction costs, we’ve had some mixed response from some of the self-storage management teams on this. And I’m just wondering what you think the impact from rising steel and labor and other costs will have on new development going forward. And I know that there are some new innovative ways to develop, whether prefab units that can be dropped into new builds or containers that are being used and so forth, seems like it could more than offset the rise in construction cost. I’m just wondering how all that plays into the development landscape and the impact that rising construction costs might have, and how you’re thinking about all of that.

Sure, Todd. We – I think it’s – it doesn’t move the needle from a net standpoint. Yes, steel prices are up, labor up a little bit. But the offsetting factor is the price of the ground. And that’s the big one. We have far less demand for pricing on the ground today than we had last year or two years ago or three years ago just because there are fewer people out there looking, there are fewer products that we’re having to – multifamily two years ago, we were slugging it out, our developers were, with multifamily developers over sites. And so that competition has diminished greatly. And so I think it’s that little bit of price increase we’ve got on labor. And it is those two things, labor and steel, is being offset by the price of ground. And the other things you mentioned are – yes, they’re factors but fairly, fairly de minimis.

Okay, that’s helpful. And then also, you commented that you think this generation here, Gen V facilities that are being built, actually could stimulate or create demand. And I understand storage is necessity-based, nobody really rents storage for fun without having a need for storage. Can you just describe a little bit more about what you think is happening there?

Sure. I mean, I’ll go back to my very early days in the business in storage 34 years ago, I guess, but storage was brand new in some markets. And so people discovered a useful real estate product for them that they didn’t really know existed before. Well, this is an evolutionary step from that same direction. You will see, I think going forward, potential customers who, in the past, have driven past our one-story garage-looking storage facilities, thinking, I don’t really need to go there for anything, to these nice, pretty, shiny buildings thinking, Well, I maybe would like to clean out that dining room for a playroom for our new baby. And go and rent storage for a year. Whereas in the past, they didn’t really think about it, didn’t see it. That’s another thing. Being so visible is a big plus. Our one-story, first-generation, second-, third-generation properties, tended to be not on the main thoroughfare, tended to be back off a little bit, and they were kind of destinations. And we would drive them there with our Yellow Pages. But today, these buildings are on the main thoroughfare or if they’re 0.5 blocks off, they’re five stories tall and they look like they’re on the main thoroughfare. And again, I have to say myself, I think they’re really pretty, really nice. We took a tour of a few here in Atlanta a couple of days ago, and it astounds everyone to see how nice these properties are. So I do think – I can’t put a number on it yet, Todd, but I do think that we’re going to create a new customer out of the attractiveness of our buildings.

Got it. So it stimulates some demand, but if generally, demand is steady, moving activity is stable across the industry. I mean, is it your view that the Gen V properties take share from older facilities, properties that have inferior curb appeal or just look less appealing online?

No question about it. That’s happening every day out there. And so what we’re going to see a year from now, two years from now and on forward, is the Gen V property, not only is going to be higher-occupied, it’s going to get higher rents. And when it gets ready to be sold, the buyer will pay a lower cap rate for it.

Okay, thank you.

[Operator Instructions] And our next question comes from R.J. Milligan from Robert W. Baird. Please go ahead.

Hey, good morning guys. Just one question from me, most of my other questions have been answered. How should we think about the volume and cadence of buyouts of developers’ interests for the rest of the year and into 2019?

Yes, I think for the rest of the year, R.J., it’s going to be pretty quiet. And keep in mind that it’s really based upon ripeness for buyouts. The facilities have to be at a certain point of lease-up and the developer has to be motivated to engage in discussions about a buyout. So I think that for the rest of this year, it’s very quiet. You could maybe see one, but also maybe not. So I wouldn’t count on even one. As you start to move into the latter part of 2019, second half of 2019, first half of 2020, that’s when a significant portion of our portfolio gets to the stage of lease-up where developers are really starting think about their own personal exits. And so that’s more the period of time where, I think, this discussion will be a lot more relevant, and we’ll be prepared to give you more specific information.

Okay, that’s helpful. And then for the developers’ interests for the properties that you have brought on the balance sheet, have you guys calculated sort of a blended average cap rate on projected stabilized for those acquisitions?

We have, and that’s in the supplement. And...

Page 11.

Page 11 of the supplements. And what we’ve done is we’ve presented that in two ways. We’ve presented the estimated stabilized NOI yield on our cash cost. So that’s basically what we funded in terms of construction financing during the build of the facility, and than what we paid the developer in cash to buy the developer’s 50.1% interest. And you’ll see that, on average, we’re at about an 8.7% number of stabilized return on cash invested. If you add to that the fair value marks that we took from the time we started taking fair value marks on those facilities until the time of purchase, which at the time of purchase, we quit taking fair value marks, that blended yield is, I think, 6.7%. So Page 11, if you go to Page 11, that should give you everything you need.

Great. Thanks, guys.

Thank you. This concludes the question-and-answer session. I’d like to turn the floor back over to management for any closing comments.

No closing comments. Thank you very much. Hope to see you all soon.