Greetings. Welcome to the Jernigan Capital Inc. Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host, David Corak, VP of Corporate Finance. David, you may begin.

Good morning, everyone, and welcome to the Jernigan Capital Third Quarter 2019 Earnings Conference Call. My name is David Corak, Senior Vice President of Corporate Finance. Today's conference call is being recorded Thursday, October 31, 2019. [Operator Instructions]. Before we begin, please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined 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 John Good, CEO; Jonathan Perry, President and Chief Investment Officer; and Kelly Luttrell, Senior Vice President and CFO. I'll now turn the floor over to Mr. Good. John?

Thanks, David, good morning, everyone. We're very happy with our third quarter performance from the perspectives of both financial metrics and key operating metrics. Kelly will go through the financial performance, but I'd like to comment on progress we've made on the operations side. Currently, 54 of the 76 self-storage developments we've financed are completed and open for business, and approximately 85% of those open properties have experienced a full rental season. Given the young age of this portfolio, our primary focus continues to be on physical occupancy. Our properties added meaningfully to occupancy during the quarter, and fiscal occupancy is running approximately 290 basis points, ahead of initial underwriting for our 46 properties that have been open for at least one leasing season. We had a busy quarter on the transaction front. For the full year, we've committed $101 million of capital to 18 self-storage investments, exceeding the midpoint of our $100 million full year investment guidance that we issued in February and reaffirmed during the year. During the third quarter, we originated 2 new development investments with profits, interest and rights of first refusal, or ROFRs, both in very dense and underserved micromarkets in the New York City MSA. These projects are being developed with an experienced developer with whom JCAP has done multiple projects in New York area. There aren't many of these deals left in the -- in this development cycle, and we expect the level of our investment in new development to moderate as we've noted previously. We're not forecasting any additional development investments for the balance of the year. On the acquisitions front, the third quarter was our most active quarter in JCAP's history. During the quarter, we acquired developer's interests in 7 projects we've previously financed. These include the 5 self-storage facilities underlying…

Thanks, John, and good morning, everybody. Last night, we've reported third quarter earnings per share of $0.26 and adjusted earnings per share of $0.46, both of which exceeded the high end of our quarterly guidance. Overall for the quarter, our results came in above our expeditions with a few noteworthy items on which I'll provide some additional color for everybody. First, fair value for the quarter came in at the high end of our range. This was primarily driven by a favorable movement of interest rate, along with overall better-than-expected construction progress. Second, our interest income exceeded the high end of our guidance, driven primarily by higher-than-expected default interests and modification fees recognized on certain investments. And lastly, property NOI was above the high end of our range, driven by the timing of our acquisitions during the quarter. In regards to guidance, as of the end of the third quarter, our construction progress and timing of deliveries remained on track. Our operating portfolio is performing in line with expectations, and we have more visibility now on the impact of market interest rates over the balance of the year. Based on these factors, we are once again able to adjust our guidance ranges. The net effect of all this is an increase in the midpoint of our full year adjusted EPS guidance range and a tightening of our EPS guidance range. Turning to the balance sheet. We issued $2 million of common stock under our ATM program during the quarter at an average share price of $20.68, which was an approximate 8% premium to our June 30 book value per share. We also utilized our credit facility with $125 million drawn at quarter end and our leverage as measured by net debt to gross assets stood at approximately 20% at quarter end. Our table of capital sources and uses contained on Page 17 of our supplement reflects sufficient capital to fund our investments for the next year. And as we've done since inception, we will continue to prudently seek to match our funding obligation for the sources of capital and thus add to the value of our company and maintain our debt levels in the range of 25% to 30% of gross assets. And with that, I'll turn it back over to John.

Thanks, Kelly. And if I can just make a quick note on Q&A, which we'll go to right now. We understand that the internalization process is top of mind for you and all of our shareholders. However, because the process is ongoing right now, we aren't able to answer questions beyond questions concerning the contractual process to be followed. So we'll respectfully ask that in Q&A, you limit your questions to the topic of the technical process. With that said, I'll now turn it over for Q&A. Daryl?

[Operator Instructions]. Our first question comes from the line of Todd Thomas of KeyBanc Capital Markets.

First question, John, your comments around the dividend. I think you mentioned that there would be -- the Board and management are committed to potentially rightsizing the dividend in an orderly manner. What does that mean exactly? And I guess how was the Board thinking about the magnitude of a potential reduction that might be in order in light of the potential cash flow growth you'd expect our the next 18 months from both bringing stores onto the balance sheet and also seeing cash flow growth from lease-up?

Yes. Thanks, Todd. Good question. And in terms of timing, you probably all saw this morning that we made our announcement for the fourth quarter dividend payable January 15 and let the dividend at the same level. So you can infer from that, that the earliest we're talking about is the April 2020 dividend payment, our first quarter 2020 dividend. We're not ready yet to comment on the magnitude of the adjustment. Obviously, we have a Board and management ongoing process, and we're monitoring everything that's going on. And as you know, there's a lot going on right now. However, what I can say is that the stock process is centered on covering the dividend with adjusted FFO within a reasonable time frame, with an understanding that our cash flows grow at a pretty high rate as our portfolio stabilizes. We have a whole lot of confidence in the portfolio. The portfolio has performed very well and very predictably for us over a relatively decent period of time. We also have a high level of confidence in our ability to model our cash flows. And we have a high level of confidence in our Board to do things that are in the best interest of shareholders. So we believe when you add all of that together, we'll reach an optimal result as we go through this exercise. And it's going to be a 2020 exercise.

Okay. Would you expect the dividend be covered by maybe the end of 2020 on an annualized basis? Or do you think that we should be thinking about coverage a little further out in the future?

Yes. I really can't. Because of the stage of discussions, Todd, it's probably not appropriate to provide an estimate of that right now. You guys have modeled the cash flows of the company and you can kind of see how they grow. And the real growth starts to take place probably after 2020. But at this point in time, it's premature to speculate on when that coverage date might be. But we are committed to doing it within a reasonable period of time that would meet expectations of our shareholders.

Okay. It's helpful. And then as you think about making new loan commitments here, you announced two new deals in New York recently. I think you said previously you'd be looking to slow down Miami growth or start to limit your exposure to Miami. You're at 20% there. So you're just under that New York. I guess how are you thinking about your New York exposure? And then can you talk about some other markets that you might be circling today where you don't have a presence that we could start to maybe see you become active in?

Yes. Let me take the first part of the question. and then I'll let Jonathan comment on markets that we constantly monitor and may have interest in or not. As we've said now for the last several quarters, we're getting late in the cycle. And as deals come to us and we evaluate those deals, we look at supply in these markets, we look at fundamentals, we look at all of the things that go into the underwriting process. There aren't many deals that are clear in the bar. We have a pretty high hurdle to clear before we commit to a deal. And there aren't many that are clearing that. So I would anticipate that going forward over the coming quarters, we'll be very selective in making additional commitments to development. Jonathan, you might want to comment on markets that just maybe could stand a few more deals.

Yes. Just looking on the horizon and the deals that are in the pipeline in some form, whether it's simply evaluating sites or full-blown underwriting, Todd. You've got -- you're looking to possibly add to opportunities up in Boston. We have a couple up there now. And we'd like to round out a nice portfolio up there. And then we've talked in the past about California, and it's just been tough sledding out there for everybody trying to get sites approved and permitted. We have a couple of sites out there right now in the queue that are moving ahead nicely and should begin the construction phase in short order. We continue to look at sites in LA and also up in the Bay Area. And then heading back to the East Coast, D.C., Northern Virginia. Northern Virginia has seen a lot of new supply but there are still some pockets in those markets in and around D.C. And to your point on New York, we've committed quite a bit of capital up there. We really like our projects. I do think that New York, for us, it's a big market. It's not just the boroughs. It's out on Long Island, up in -- touching into Connecticut and also the Northern New Jersey. So you can still find some pockets up there where some deals make sense.

Our next question comes from the line of Tim Hayes of B. Riley FBR.

Just one more on the dividend. You talked about that being a -- the process being a 2020 event. But just trying to understand what that means with respect to a potential internalization announcement. Do you expect to kind of have your thoughts and finalized on the dividend? And maybe that road map planned out when you do make an announcement -- if you do make an announcement, excuse me?

Yes. I mean, I think that in many respects, it's all tied in with the transformation of the company into an equity REIT that includes internalization, it includes additional acquisitions of development interests. The internalization, we expect to be very accretive to the earnings of the company and it all, I think, feeds into a desire to be really a conforming company when you think about us compared to the rest of the REIT world. We've operated for the last 4.5 years with a lot of people looking at us much as a specialty finance company. And we've always thought of ourselves as an equity REIT. Since day 1, we've had significant ownership interests in all of these properties we own. We feel like as we move into internalization, more property acquisitions in 2020, rightsizing the dividend really in conjunction with all of that likely makes sense.

Okay. That's helpful. And then I'll try to be respected. One more around internalization and I'll be respectful of your wishes there. But can you just reminders the motions you need to go through before any formal announcement would or could be made? And what the expected time frame around these processes are?

Sure. And I'm going to get a little bit technical just more or less quoting from memory, which this is forever etched in my memory, the management agreement. Under the management agreement the -- and this has been the case since before our IPO. An offer to internalize must be made by the manager no later than 180 days prior to the first expiration date of the management agreement. It was a 5-year management agreement that was executed on March 31 of 2015. So that expiration date is March 31 of 2020. When you back up 180 days from there, next year being leap year, that was -- that date was October 3 of this year. So that date has passed. The offer was made. The agreement then requires that the Board acting through a special committee, consisting solely of independent directors is required to evaluate that offer and either accept that offer or counter the offer. I can tell you that special committee was formed, the special committee consists of all 5 of our independent directors. And they are currently engaged with the manager in negotiating a transaction. There won't be any announcement or any further commentary until there is a transaction to announce. Going back to the management agreement. Under the management agreement, any transaction that is agreed to between the manager and the company must be supported by an opinion, by a nationally recognized investment bank that the financial consideration to be delivered in that internalization transaction is fair to the shareholders of the company from a financial point of view. So I would suggest or suspect that no announcement would be made before you have an agreement and before that fairness opinion has been delivered. And once that happens, you go into a process of a shareholder vote. The management agreement also requires approval by a majority of the shareholders voting at a duly called meeting of the company's shareholders. And so once those first 2 steps are done, we'll go through the proxy solicitation process and shareholders will be permitted to vote on the transaction at that point in time and must approve it before the transaction can close. Yes, the process of fairness opinion, proxy statement, shareholder vote, that's kind of 75- to 90-day process. So if you want to look at timing of things, nothing's going to happen this year from a closing standpoint. So I think that, that is probably the most I can say about process. And happy to answer any additional questions on the aspect of that, that doesn't go to the merits to the discussions.

Yes. No, that answered my question. Appreciate the comments there. And then I know you mentioned -- switching gears to the fundamentals. I know you mentioned you don't expect to see any more investment activity for the rest of the year. But do you have any insight into the amount of projects that might deliver before year-end?

Jonathan is probably the best person to -- are you talking about for JCAP or...

Are you talking about supply or are you talking about for...

Oh, sorry. No, JCAP specifically.

Yes. So on the -- when you think about the development projects and the assets that are under construction, we would expect, at this point, another 4 to deliver in the fourth quarter.

Okay. Another four delivered. Got it. And then just one more for me. Many of your peers have noted using an increased amount of promotion or advertising spend and lower rates in order to support lease-up in the face of new supply. Just wondering which of these tactics, if any, you guys are using? And how you're same-store OpEx has trended as a result?

Yes. We don't have the same-store OpEx per se. But as it relates specifically to the marketing spend, I understand that you've seen quite a bit of increases from the other public companies that have reported. For us, looking back 2018 and '19, it's relatively flat. It's grown at most at inflationary levels from an advertising and marketing standpoint and actually trended down in the month of September. So we -- our management company, company's portal have been doing a nice job of monitoring that for us and there really haven't been any surprises.

And would you attribute just to kind of target market selection? Or why isn't that headwinds maybe been as pronounced for you guys?

Yes. I think it's a couple of things. One is, I think, is very targeted marketing, to your point, and I think that, again, the management companies have done a nice job of gaining efficiencies there. And then secondly, we have management agreements and we have budgets that our management companies adhere to. So they may not have quite as much liberty per se with our portfolio to push different levers than they may on their own.

We have reached the end of the question-and-answer session. I will now turn the call over to John Good for any closing remarks.

All right, thanks, and thanks, everyone, for being on the call, and thanks for your continued interest in JCAP, and we look forward to talking to you again in late February. We will be at Nareit a week from Monday. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.