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

Good morning everyone and welcome to the Jernigan Capital fourth quarter 2018 earnings conference call. My name is David Corak, Senior Vice President of Corporate Finance. Today's conference is being recorded Thursday, February 28, 2019. At this time, all participants are in a listen-only mode. The floor will be opened 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 www.jernigancapital.com. In addition to myself on the call today, we have Dean Jernigan, Executive Chairman; John Good, CEO; Jonathan Perry, President and Chief Investment Officer; and Kelly Luttrell, Senior Vice President and CFO. I will turn the floor over to Mr. Jernigan. Dean?

Okay, thanks, Dave. Good morning to all, thanks for joining us this morning. I have just got a few comments in fact just one subject, talk about this morning, is kind of one of my favorite subjects. I'm just thinking the short while ago about this really goes back to UBS Self-Storage conference in 2011, when I started making comparison between self-storage and the hotel industry, more specifically the limited service hotel industry that industry came about. I remember Hampton Inn, started I think back in 1984 and they progressed nicely through the 1980s , 1990s then someone got the idea there would be really good to turn those exterior doors into interior corridors and build four-story, five-story buildings with interior quarters. And so this is my latest subject in making the comparison between hotel sector and storage. I have always said that you can really just look in the rear view mirror at what hotel guys have done and we are following right in their footsteps. In 2011, I talked about third-party management, I said it was going to become a big thing in our sector that everyone is going to need a brand in our flag flying in front of their storage facility because of what the Internet was doing to us, that we need to be on the first page of Google and the only way to get there is to be associated with a large company and I said, we weren't going to do it in a typical franchise manner. The way the hotels have done. We would do it through third-party management. And with that comes revenue management and the right kind of marketing to keep showing first page of Google. And what not, so that, all that appears to have been playing out very…

Thanks Dean and good morning everyone. 2018 was a tremendous year for our Company. Our excellent team continued to execute very well the business plan that we have consistently articulated over the last four years. The result was a year of strong double-digit total returns for our shareholders. We had a very successful investment year and enhanced our already strong capital position with additional equity and an expanded credit facility that has a lower cost and substantially longer term than that which it replaced. We also added during the year, key members to our senior management team; David Corak and Jonathan Perry and to our Board of Directors Randy Churchey and Becky Owen. We executed a seamless senior management transition and we transformed our shareholder base into a truly institutional base. We are very pleased with our investment accomplishments in 2018 as well. Our strategic objective has always been to wholly owned the vast majority of the development properties in which we invest and to that end during 2018, we acquired our developers interests in six facilities, including interest in our Long Island, New York development investment, which we acquired toward the end of the fourth quarter. In addition, our joint venture with Heitman recently acquired the developers interests in four development investments located in Atlanta, Jacksonville, and Denver. With those purchases, we either alone or with our joint venture partner, have now acquired full ownership of 11 of the 69 development projects that we have financed in our core development program. Which is our program where we have profits, interests and rights of first refusal to acquire the properties. We believe we will continue to consistently see developer buyout opportunities as completed projects go through the lease-up. Turning to our portfolio in lease-up, our development partners during 2018 opened…

Thank you, John and good morning everybody. Last night we reported fourth quarter earnings per share of $0.87 and adjusted earnings per share of $1.04, both of which were above consensus. Full-year EPS was $2.10 and full-year adjusted EPS was $2.92 or $0.09 and $0.11 respectively above the midpoint of the guidance ranges that we reaffirmed in our Q3 earnings release. There are a few noteworthy elements that we believe we may have further discussion. First NOI on a wholly owned assets came in above the high end of our guidance, in part due to the acquisitions of our Charlotte and Long Island, New York properties during the latter part of the year. However, even without the benefit of these acquisitions, NOI for the five properties we owned for the majority of the year, came in above guidance as revenues were higher than we anticipated and expenses were in line. Second, our total G&A came in approximately 2% lower than our guidance midpoint for the full-year despite the fact that fees paid to our manager came in slightly higher due to a $730,000 incentive fee earned in the fourth quarter. This fee was driven by the incremental value created by the acquisition of our developers interests and the six properties we acquired in 2018. Particularly, the New York property we acquired in Q4, which was one of the larger assets in our portfolio. Lastly, interest income was above our guidance midpoint for the year. Due in part by the average overall outstanding principal balances on our loans being higher than expected. Thus driving higher than expected interest income and we received a few prepayment fees as well, which further contributed to higher than expected interest income. In our release last night, we also provided a full-year 2019 earnings per share…

Thank you, ladies and gentlemen we will now be conducting our Q&A session. [Operator Instructions] Our first question comes from the line of Todd Thomas from KeyBanc. You are now live.

Hi, thanks, good morning. First question, I will start with Dean, so your comments about the Gen V facilities and some of the earlier generation facilities, we have seen transactions for some of the earlier generation stores in the 6% cap rate, and even sub six cap rate range and these facilities, they do cash flow really well seems so. What do you think the spread in pricing for stabilized assets between the Gen V properties and some of these earlier generation properties is today and what do you think it should be just based on your comments ?

Good morning, Todd. I will take a shot at it. I will differ to Jonathan probably, who will have a better handle on this, I mean, I think we have to look at the hotel sector and see what they are getting. You can look at the difference between Class A and Class B office, I don't think there is much difference. I would think at least 50, could be approaching 100 basis points better for the Gen V properties on a cap rate versus early generation properties. Jonathan, you have a different thought?

No, Dean, I think that, that range is right and Todd because if you think back, really what's been going on in the transaction market, really going back to late 2016. Most of the stabilized product cleared the end of 2016 on into 2017. So when you think about yields on early Gen product and even some secondary markets, investors chasing yield, it's caused a compression in the spreads. So, the relatively tight right now, relative to historical standards, but I would think that they will presumably widen. And I think that it's anywhere from 75 to 125 basis points is probably the gap that you would expect.

Okay. And with some of the new development that we are seeing, which is primarily climate-controlled and multi story. Do you think that there is sort of an imbalance beginning to present itself in certain markets, some of the top MSAs where there will be a disproportionate amount of climate-controlled higher priced premium units or you know, do you think that is not really an issue?

I will take a guess. And Jonathan you can come in behind me. I think it's -- the Gen V properties are still got way in the minority. You see them, are there in all the right locations in town. But in most of the suburbs, we didn't build Gen V products in many suburbs in this sector, at least not yet. And so, I think it will be a while, I mean again look at the hotels, there will be a while before we cycled through to get to interior quarter of Gen V Class A storage facilities. But those are the ones that are the most obvious. Jonathan, can you add some?

I was just trying to kind of think back through markets and where you have, where storage has been a widely accepted use and you think about major markets throughout Florida, you think about the Texas markets, you think about Denver, and Phoenix, which typically are traditionally has an abundance of early Gen product and as we know even in the suburbs in those markets, you are having new Gen V product being developed. So those markets come to mind as where you could see a shift on the horizon.

Okay. And then shifting over to the balance sheet, looking at your sources and uses, so the $69 million that you detailed in the supplement for remaining capital needs and also the credit facility capacity that you expect to increase throughout the year I guess a couple of questions, how much capacity do you expect to have at year-end on the facility based on the corporate model and what you are expecting, and then can you talk about the $69 million of remaining needs, how you will, kind of source that capital ?

Hi, Todd. Good morning, so in regards to the credit facility capacity, we ended up the year at around $91 million of availability. Sitting here today, we have added some more assets into our borrowing base to about $118 million and we have got more that were in the process of adding today as well that are ready to go in. The key timing that impacts when assets are go into the borrowing base, is when they reach CO and we still have a lot of assets that are going to reach that milestone this year, so from an availability perspective, it's going to continue to significantly increase as we go throughout the year. So, we have planned and anticipate using our credit facility this year, now that our asset base is larger and so we have no concerns about our ability to do so as we go throughout the year. And regards to that $69 million that is noted in the supplement, we have listed kind of in the middle part of that page all the other remaining sources and uses and with various refinancing. We have our common and preferred ATM that we always evaluate when it's appropriate and accretive to do so and so there are significant sources of capital, we have maximum optionality right now. In regards to that $69 million, and from a timing perspective it's not all needed in 2019, so we are able to best match fund our needs with the right source of capital at the right time.

Yes, I mean, Todd, this is John. If you look at the bar chart that we have in the supplement in the sources and uses table and you look at it by year of that $69 million, $21 million of it is after 2020, so the real number for the next couple of years is only $48 million. By the end of this year, we expect to have put assets into the borrowing base that will get the availability of the credit facility up to right at the $235 million cap and we don't have the accordion built into any of our capital availability assumptions for the next two years. Keep in mind that as we go into 2020, there is still a number of more properties that achieved certificate of occupancy and also as we go into 2020 some of our older owned properties will hit that point where they are much closer to stabilization and they get a higher level of capacity under the credit facility borrowing base computation that allows us to then at that point get into the accordion. So, without even talking about refinancing, we have had during 2018, a couple of loans that paid off and those are capital recycling opportunities for us. When a loan is repaid, we are able to take that capital and use that to fund existing commitments that we have and you don't lose anything in the process. You have a 6.9% loan paid off and the proceeds, more or less immediately go into another loan that is earning the same interest rate and we retain the profits interest on that loan that paid off. So, we will see some of those events occur. We don't know which ones, it's really at the borrowers discretion, but we are hitting that stage where they are beyond their lockout periods. We believe that banks still have some appetite to loan owned properties that are closer to stabilization and those opportunities will be - I'm confident explored by our developers as they go through 2019 and on into the future.

Thank you, [Operator Instructions] Our next question comes from the line of Tim Hayes from B Riley, FBR. You are now live.

Hi, good morning everyone. Thank you for taking my questions. My first one, I know you gave guidance for investment activity for the year and I know you didn't disclose this, but can you roughly break out from a high level how much you expect to be in the form of loan commitments versus buyouts and, and if that ratio is too difficult to predict at this time, maybe you can just talk around your pipeline for lending and for buyouts ?

Yes. Hey Tim, it's John. And thanks for the question, it's a good question. From the investment into new development perspective, we said in the prepared remarks that the pipeline was still around $350 million with projects moving through that at various paces. And in that regard, there is a lot going into taking a project from a pipeline idea with a known cite to closure. You have zoning that you have to deal with, you have planning on the part of the developer, the developer has to go hire a contractor, determine what the facility is going to look like, what the mix is going to be. So, there is a long lead time there, and it makes absolute determination of timing, very difficult. Likewise with the acquisitions, the acquisitions are virtually completely at the discretion of the developer. We don't know when those opportunities will arise. We don't know what opportunities will arise and from a timing standpoint, you could have a bunch of them come in at one time or you could have them spread out over time, so for us to give definitive guidance between the two buckets of investment activity. It's just very difficult to predict. That is why we have a broad range in the guidance. Yes, I think our $10 million range, kind of $30 million range. I'm getting my ranges mixed up - our $30 million range kind of takes into account the uncertainty involved and the lack of control we have over the process and also the fact that we don't know what the mix is going to be. Yes, that get more clarity on that as we move through the year.

Yes, that is completely understandable. So I appreciate you touching on that and maybe just if you could expand a little bit more on the acquisition pipeline. How many assets are currently kind of in that sweet spot where they might be right for acquisition now and then reflecting your updated assumptions around expectations and timing of lease-up. How many you expect maybe to be in that sweet spot by the end of this year?

You know, first of all, what the sweet spot is, it's kind of hard to define because what our sweet spot might be, is sometimes completely out of the developers' sweet spot. So again, I want to emphasize the fact that the developer controls this process. Right now we feel like there are probably between four and 10 projects during the year that could entail some kind of an [indiscernible] from the developer. Yes, the timing of that again, we don't know, you could see all of it come at the end of the year, you could see it come evenly throughout the year. That is not addressing the properties that are in the joint venture and as we announced with our release, we did through the joint venture with Heitman acquired four of the properties that are in that venture and keep in mind that that venture was launched in April of 2016, and was fully invested kind of in the fall of 2016. So, those properties are all completed, and those are some of the more mature properties in the portfolio, not saying they are stabilized because they are not, but as we saw toward the end of the year, the opportunity to buy those four, there could be additional opportunities there during the year. That is I can't put a number on it, because those are subject to even more uncertainty, given the fact that we have a partner that has to weigh in on that as well.

Yes, Tim, this Jonathan. When you think about that range, first of all, it's -- you just think about the size of the investments, so the targeted investment range, it's going to be weighted toward new development. When you think about - particularly when you just take into account the consideration that we pay whenever we acquire an asset. So it's much smaller bites, it's in that $2 million to $4 million range. And then to John's point, that bite is even smaller whenever we bring these properties on through the joint venture because we are only 10% partner on that yields. When you think about the projects that may - the first ones that are going to come up, they are going to be really outside of that 24-month lockout period, I believe the majority of those are in the joint venture. So, you may see some accelerated activity in the venture this year.

Got it, OK, that is all really helpful, appreciate the comments around that. And then just one more from me and I apologize if you touched a little bit on this earlier, I did jump on from another conference call, but just wondering what transaction activity look like for self-storage assets in 4Q and so far this year and then maybe more specifically around - with the new Gen assets?

Yes, just from a macro standpoint, there continues to be a tremendous amount of capital looking to get into the space. I think the private equity continues to step in and fill the void while some of the primary REITs have been on the sidelines, which has kept cap rates at historically low standards and I don't think cap rates have moved much at all. If any, I think you could argue that maybe in the top 15 markets, they have actually compressed a little bit over the last six plus months. When you look out on the horizon and you subscribe to the theory that the majority of the assets being developed in the cycle are being built to sell. I do think that you should probably see an uptick or would expect to see an uptick in acquisitions volume transactions once we get well into the rental season and on the backside of the 2019 rental season.

Thank you. Our next question comes from the line of Omotayo Okusanya from Jefferies. You are now live.

Hi, good morning. Question, over the next 12 to 18 months that you start to own more properties, does that change your relationship at all with your third-party asset managers and by that I mean you get in the better negotiation i.e. in a better negotiation position to you kind of get concessions from them they otherwise would not have gotten because you have a smaller portfolio today?

Yes. Hey Tayo, John and thanks for the question. You need to understand how these third-party management relationships come to pass. Generally speaking when a development project is launched and when we close on it, that third-party management agreement is put into place and those are generally multi-year agreements. So, the first time that you really have to evaluate terms and have a discussion with the manager about terms, is somewhere generally after three years following the date that the project goes into lease up. So you are getting closer to stabilization at that time. I think in most of our instances, you are probably some period away from starting to have those discussions, while that goes through the economics of the management agreements, just know that we evaluate the performance of the managers on a daily basis really. We are having the dialog with our developers who are also evaluating the performance of managers. So, we have discussions on an ongoing basis about property performance and we really have a team approach to making sure that all of these facilities are performing at optimal levels, but we are not at a point where we are going back and having an opportunity to or feel a need to renegotiate a lot of these management contracts.

Okay, that is helpful and then, in regards to new loan origination in 2019 and beyond, could you just talk a little bit about markets where you still feel comfortable putting money to work in markets where maybe you are more reluctant to put money to work ?

Sure, this is Jonathan. When you think about opportunities on the horizon, I do think that California, Los Angeles in particular, Coastal California, it's been so hard to get deals done out there. Just simply because of the, entitlement process, but we have partners who have been on the ground there, trying to find opportunities really for the last 24 months and so I do think that, hopefully, we will soon begin to see some of the fruits of that labor. So, I would say that California is certainly a targeted geography for us and I do think that up in New York, I think there continue to be opportunities up there, and also along the mid-Atlantic. So, those are the three that come to mind, top of mind.

Thank you, ladies and gentlemen, we have no further questions in queue at this time, I would like to turn the floor back over to Management for closing.

Thanks everybody again for your questions and for your continued support of Jernigan Capital and we look forward to speaking with you again around May 1st, everybody take care.

Thank you, ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation and have a wonderful day.