Greetings. Welcome to the Jernigan Capital Incorporated Fourth Quarter 2019 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] Please note this conference is being recorded. I will now turn the conference over to your host David Corak, Senior Vice President of Corporate Finance. You may begin.

Good morning everyone and welcome to the Jernigan Capital fourth quarter 2019 earnings conference call. My name is David Corak, Senior Vice President of Corporate Finance. Today's conference call is being recorded, Thursday, February 27th, 2020. At this time, all participants are in a listen-only mode. The floor will be open to 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 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, Chairman and CEO; Jonathan Perry, President and Chief Investment Officer; and Kelly Luttrell, Senior Vice President and CFO. I'll now turn the floor -- I'll now turn it over to Mr. Good. John?

Thanks David and good morning everyone. 2019 was a tremendous year for our company. Our team continued to execute the business plan that we have consistently articulated and steadfastly followed over the past five years and the table is now set for the next stage of our life as an internally advised equity REIT. Under that backdrop, I'd like to use my time to summarize our major achievements over the past 12 months. Firstly, in December of 2019, we executed a definitive agreement for our internalization which was overwhelmingly approved by our shareholders and closed last Thursday. We had over 75% of our shares represented at the Special Stockholders Meeting held on February 20th and 99% of those represented shares voted in favor of the internalization. We strongly believe that the fair price, substantial cost savings, strong alignment between management and stockholders, and incentive to increase stockholder value as evidenced by the earnout provision of the internalization consideration have increased interest in the stock, boosted our value in stock price, and positioned us for future success. Also during the year, we achieved a solid level of external growth. During 2019, we committed $101 million of capital to new developments and the acquisitions of developer interest which number exceeded the midpoint of our guidance for the full year of $100 million which guidance we issued in February of last year and reaffirmed during the year. In the past 12 months, we've acquired developer interest in 22 properties including non-developer interest that we've acquired since the beginning of this year. Today, we wholly-own either on our own balance sheet or in our Heitman joint venture, 29 of the Generation V self-storage properties we financed since our 2015 IPO, accounting for about 37% of the net rentable square feet in our overall portfolio.…

Thank you, John and good morning everyone. Last night, we reported fourth quarter earnings per share of $0.06 and adjusted earnings per share of $0.39. Exclusive of $0.09 of onetime internalization-related expenses, which impacts our EPS only, both GAAP EPS and adjusted EPS came in above the midpoint of our initial annual guidance, as well as our updated annual guidance issued with our third quarter earnings. Overall, for the quarter, our results came in above our expectations. The primary driver of the beat was fair value, which came in at about $0.04 above implied fourth quarter guidance, primarily due to better-than-expected construction progress during the quarter. Additionally, property NOI on our wholly owned assets was above the high end of the range, driven by stronger-than-expected fourth quarter results. In regards to guidance for 2020, last night we provided a full year adjusted earnings per share guidance range of $0.52 to $0.87. As John mentioned, we expect strong external growth in 2020, but that growth will look slightly different than it has in years past, with it being weighted more towards acquisitions to new development. Specifically, we are expecting one to two new development commitments this year, as we have become quite selective about development opportunities we are willing to pursue this late in the cycle and in the current environment of fundamentals. Additionally, we are expecting to acquire between 15 to 20 developer interest, inclusive of the nine we acquired year-to-date. From a value creation standpoint, these acquisitions are very accretive to longer-term NAV and shareholder value and they will meaningfully add to NOI and AFFO growth during their lease-up. However, as we discussed publicly for several quarters, our development -- our developer acquisitions are near-term dilutive to earnings per share because we, one, discontinue recording fair value; and two,…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question is from Todd Thomas from KeyBanc Capital Markets. Please proceed with your question.

Hi, thanks. Good morning. First question just with regard to the dividend coverage and the expectation of sort of being there by early 2022. Just given the uncertainty around the timing of the investments and the buyout of developer interest, how much sort of cushion is there, I guess in that estimate to the extent that there are more buyout transactions than expected? How should we think about that?

Yes. Todd, this is John and thanks for the question. When we went through the exercise of resetting the dividend and looking at the time for coverage, we were very careful to consider the pace of acquisitions and probably earn more on the side of more acquisitions earlier. So we've taken into account the dilutive impact of those acquisitions and we've sensitized the numbers and we wouldn't have – we wouldn't have made the statements we did if we didn't feel very comfortable about that. Just to put it in perspective, if the pace of acquisitions were not as fast then you'd have the 6.9% rate of interest that we collect on these notes. And that 6.9% is higher than what the in-place NOI is on these properties when we buy them. That's the explanation Kelly gave during her prepared remarks of the near-term dilutive impact. So we've gone through a robust exercise of sensitizing those numbers and feel very comfortable with where we've landed.

Okay. And for the nine buyouts completed year-to-date. Can you just talk about sort of the timing there? What caused those to happen a little bit earlier in the lease-up cycle than they had – than the buyouts had happened? Previously it was a sort of operational, financially driven or something else. And then in general, how much visibility do you have on the timing of those transactions?

Yes. So Todd on the acquisition that we made early in the year, keep in mind that as we've said for the last five years, the timing of buyout, the timing of refinancings, it's all in control of the developers. And in this particular case, we had a group of a few developers, I think it was five or six developers who were backed by the same private equity investor and this was an IRR-driven private equity investor, as we commented for several quarters in a row. When you have IRR-driven private equity backing these projects, time is not something that they like to see pass by. So when you get to a certain point, the private equity sponsor starts to push for a liquidity event, that's what happened in this case. And as is always the case with our acquisitions, we wait for the developer to come to us with an offer. They came to us with an offer here. We engaged in a negotiation. We landed on a price that we like and we made a deal. But that – this happened in much the same way that every one of our acquisitions has happened.

Okay. And then Kelly, you talked about approximately $40 million of potential capital recycling this year in 2020 to help fund the $80 million of fundings. Can you talk about the plan to permanently finance fine balance longer term? And are you able to share what the outstanding balance on the revolver is today pro forma the nine acquisitions?

Right. So right now we are in the process of working through moving all of our assets that we just purchased in the various tranches of our facility. And so right now our outstanding drawn balance on our facilities are $191 million. In regards to the recycling opportunities, as John mentioned, those events are at the developers' discretion and timing. And so we are expecting opportunities upwards of $40 million this year. And part of that as I mentioned in my comments there are some repayments. We did have one land loan repay already this quarter of $4 million. And then the other opportunity were potential sales or refinancings, which are driven by the developer. And so when that occurs we can take the proceeds from those or redeploy those, either to pay down our line or redeploy into new investments.

Okay. Is there any financing, permanent financing embedded in the guidance?

No. No. It's all credit facility.

Right.

And as you know we have an accordion in our credit facility. As we move through the year as principal balances on loans go up, that increases the borrowing base availability. So from a capital adequacy standpoint, we're in great shape. I think we hit a certain point where the credit facility kind of tops out, and we – and through NOI, through other earnings that we get and through these capital events we have the ability to bring that balance down some. I can't comment on timing of that. But we feel comfortable that the total leverage model when you look out several quarters is going to remain very reasonable. And at a certain point in time, as these properties approach stabilization and start kicking off a substantial amount of cash, we have the ability to make meaningful reductions in the line and create dry powder for whatever we choose to do at that point in time.

Okay. Great. Thank you.

Our next question is from Tim Hayes from B. Riley FBR. Please proceed with your question.

Hey, good morning, guys. Congrats on a good quarter. My first question, John you mentioned the private equity investor that drove the buyout activity this quarter. Just wondering, if that investor is involved in any other properties in the portfolio and could maybe bolster a near-term acquisition plan for you. And then just similarly excuse me if there are any other kind of relationships like that that you could see other investors looking to drive sales in the not-too-distant future?

Yeah. That one P investor has an interest in seven other projects. Now, a couple of those projects are still under construction. So they're nowhere near right for that sort of an event. But there are a few others that as you go much later in this year, more likely into next year there could be an opportunity to trade on some other properties.

Got it. That's helpful. And then you mentioned just kind of your expectations for NOI growth. But can you touch on the potential impact on your portfolio from new deliveries this year? And also the – I guess, the strong supply that's come online over the past couple of years?

Well, we've always been – we've always noted that we're focused top 50 markets. So my comments will relate solely to the top 50 markets. We like everybody else are impacted by new supply. I think right now if you look out next year or two, somewhere north of 60% of our properties have some new competition coming online. But keep in mind that we – our properties are managed by the best-in-class platforms. So in terms of managing through this, we've been dealing with new supply for three years now. And from a physical lease-up standpoint, we're doing just fine. We don't see that changing. And I think that we're going to continue to lease in a way that is rational and that the pressure is going to ease as we get into 2021. You probably read the transcripts I've been on the calls of the other REITS. And 2020 is projected to be a tough year for everybody, but everybody when they start looking into 2021, 2022 sees deliveries dropping off pretty dramatically. And when you look at the supply picture in general, we have pretty strong anecdotal evidence that the banks have moved away from the self-storage sector to a fairly significant degree particularly on the development and the financing of lease-up properties the cost of that debt has gone up. It's pretty well-documented that you have labor shortages in every major market in the country. I think the number is maybe 0.7 people to fill every job that's available and construction filling construction jobs is even more difficult. So, yeah, we have a high level of confidence that as you move through 2020 and on into 2021 starts drop very significantly. What's in process is delivered and gets absorbed in a rational way and every and the sky start to clear here as you get into the latter part of 2021 and first part of 2022

Got it. That's helpful. I appreciate the color there. And definitely, note your comment there about how physical lease-up has been in the face of new supply. It's been very strong and ahead of your initial underwriting. But just on the Street rate side. How do you see that comparing to your initial underwriting and just trending broadly over the course of the year?

Yeah Tim, this is Jonathan. As it relates to the underwriting as you know the way we look at underwriting pro forma really the first three rental seasons are – the focus is entirely on occupancy. And you get the rate and the pricing power on that last leg or that fourth rental season. So we're still optimistic that we're going to get to our numbers in the defined time period. Realistically, there are going to be some properties as the markets that were hit harder and so you may need an extra season to get there. But we don't see any concerns today on achieving the goals on a -- on the lease-up front and really rate projections into 2020. We've seen the ability year-over-year to push street rates north of 6% on our 14 at the time wholly owned properties. So we are seeing some green shoots there and some positive momentum. And then additionally one lever that we have that others may not is the rate increases to existing tenants. So traditionally those have run in the 8% to 10% range on our portfolio to-date really throughout 2019. We've been pushing rates on existing tenants in the low teens and I don't see that trend really slowing down. So we do have some opportunities there to bring those existing customers up to what we believe market rate is and a reasonable time frame.

Okay. Yes that's really helpful. And so my next question you've kind of answered some of this but your stock is down pretty significantly today along with the broader market of course. But can you just talk about the potential impacts that the coronavirus epidemic could have on your business? It doesn't seem to have direct exposure today, but just thinking about the second and third derivatives. Do you see it weighing on new construction activity? Does that mean even fewer opportunities to invest and potentially for developers to look to sell assets as they can't find opportunities to recycle capital into? And do you think you could even see less foot traffic coming through areas or fewer people moving and needing storage of results? Just any comments around that would be helpful.

Yes. Tim, on the coronavirus and I don't want to get overly political or philosophical or whatever on this topic. But you have what looks to be a knee-jerk reaction based on speculation as to something that might happen, but might not happen. And if you look at the statistics around the coronavirus sure you had 82,000 cases reported in China. China has a population of 3 billion people. And out of that 82 million -- or out of that 82,000 reported number of cases about 2% have resulted in death and most people have recovered. And it appears to be kind of like the flu. And I don't want to be flipping in the comments. It's certainly a serious global health concern. But at the same time in the U.S. and the 2019/2020 flu season you've had 14,000 reported deaths from that and it's just part of human life that because of headlines and because of speculation you've seen this dramatic impact on -- short-term impact on markets. And it's -- none of it's based on any fact other than in a contrary halfway around the world you've got a bunch of people who've gotten sick. And I feel like long-term if it turns out to be a true pandemic where a lot of people die then everybody in the world is impacted by that and storage is impacted and office is impacted and everyone else is impacted. There's just no evidence right now that's definitive that it's going to be that bad. And this appears to me to be purely a case of a reaction based upon people's speculation about what might happen in the future which I find to be really dangerous. We deal with facts. And from a factual standpoint people are going to continue running storage space because they continue to need a place to put things that they don't have room for otherwise. And I guess if half the world dies then you're probably going to see a lessening of storage demand.

Yes. Well, let's hope it doesn't come to that. I appreciate the comments. And thanks for taking my questions.

[Operator Instructions] Our next question is from Jon Petersen from Jefferies. Please proceed with your question

Great. Maybe to start with more of a high-level commentary, obviously, you guys have internalized the management you're becoming more of -- it seems like by the end of this year you'll definitely more of an owner than a lender. So how should we think about what's going to change from a management style of the company management of the properties? How are things going to evolve over the next year or two?

Jon, that's a good question that gets into something that we spend a lot of time on every day and that's looking out and trying to make decisions to position us to maximize shareholder value. Certainly from a strategic standpoint as we get larger and add scale, we'll possibly consider at some point in the future internalization of property management. If we end up with a large portfolio, where we feel like we can do that well and continue to drive shareholder value and by do it well, I mean, do it better than the guys who are currently managing the facilities and that's a high bar. I mean, the people who are managing our facilities right now are doing an exceptional job and we will continue to reap those benefits as long as it makes sense to do so, adding management is costly. It involves a significant front-end capital investment. It involves a substantial investment in people, substantial investment in systems and policies and procedures and all of those things. And there is a level of scale below, which it just makes a whole lot more sense to do what we're doing right now. But we'll continue to look at the growth trajectory of the company and continue to think about that as we go. And I think that we have been on target for five years and making decisions on a timely basis to do things. And I don't see that decision being any different than the way we've made decisions in the past.

Hey, Jon. This is Jonathan. Just to add a little more color to that. Our current model right now, particularly when you think about our portfolio in the states and in lease-up, there's tremendous value we believe in operator optionality. And so we have to John's point best-in-class platforms behind the wheel at these assets. And at this stage, we have all four of the REITs managing for us. So we feel like we're in really good hands right now.

Okay. And I'm hoping at risk of asking for multiple years of guidance here, I mean, obviously, at some point in the future you get to a more stabilized portfolio and your growth rate should be more or less similar than a lot of your self-storage peers. But I mean how should we think about AFFO growth over the next few years as you bring this stuff online? Obviously, there's some puts and takes there, you're bringing in stuff that's lower leased, but you've got this lease-up period where it would seem like there's a lot of growth. I guess, I'm just kind of curious if you had any thoughts on high level what the trajectory should be of AFFO over the next few years?

Yeah. I mean, I think that you can draw some conclusions from the commentary that we have given around dividend coverage. We very -- we've been very vocal that we think by the first quarter of 2022 we'll be covering a $0.92 dividend. And so that kind of gives you a trajectory from right now to that point in time. And that's looking out basically seven, eight quarters. Beyond that you can take the portfolio and make assumptions on acquisitions based on what we've done today and pretty easily come to the conclusion that AFFO growth is in the double-digits certainly for the next three years -- three or four years and possibly into a fifth year. So we feel like that -- and that's the internal growth engine that I've discussed in my prepared remarks. The fact that we have invested in development, which historically has been higher returning than acquisitions, the fact that we feel like we've underwritten good sites and really good markets should give a lot of confidence to investors in that growth rate. And as we achieve that kind of growth, as we achieve the rewards that come with increasing stock price and lower cost of capital, that results from good performance, then the window kind of opens for us to look at doing other things acquisitions, acquisition, joint ventures. All of those things that can accelerate that growth even more. But we're pretty confident in the internal growth certainly over the next three or four years.

Okay. And then just one more. Can you remind us when maybe your first opportunity might be to refinance the Series A preferred stock, which is relatively expensive?

Yeah. The Series A is callable by its terms in July of 2021, so about what 15, 16 months from now.

Okay. Is there any opportunity to do anything before then? Or you have kind have to wait until then?

That's really up to the holder of the stock. There's no contractual opportunity to do anything before then. If there were something done, it would be a negotiated transaction. And so I can't -- really can't comment on that that would be pure speculation.

Fair enough. All right. Thank you very much.

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

Thank you everyone for your interest in JCAP for participating in the call and we look forward to talking to you again in about seven weeks, I guess, seven or eight weeks. So thanks and have a good day. Bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.