Welcome to the Jernigan Capital Incorporated First Quarter 2016 Earnings Conference Call This call is being recorded today, Thursday, May 5, 2016. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following management's prepared remarks. [Operator Instructions] This call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other Federal Security laws, including statements regarding our future performance, our second quarter 2016 earnings guidance and full-year 2016 updated earnings guidance, including related key assumptions, future profits from investments, our anticipated loan closings, our access to capital and our ability to fund our existing loan commitments. The ultimate occurrence of events and results referenced in these forward-looking statements is subject to known and unknown risks and uncertainties, many of which are beyond our control. These forward-looking statements are based upon the company's present intentions and expectations, but the events and results referenced in these statements are not guaranteed to occur. Investors should not place undue reliance upon forward-looking statements. For a discussion of these and other risks facing our business, see the information under the heading Risk Factors in our annual report on Form 10-K filed with the Securities and Exchange Commission and our other filings with the SEC from time to time which are accessible on the SEC's website at www.sec.gov. It is now my pleasure to turn the floor over to Dean Jernigan, CEO and Chairman of Jernigan Capital Incorporated. You may begin.

Okay, thank you very much. Good morning to all. Thanks for your interest in us and being on the call this morning. As usual, I'd like to start with kind of an overview of the self-storage sector. I'll get into also markets around the country that we're seeing a lot of construction activity. But first of all, starting with the public companies, wow, what a first quarter they just reported. Top line revenue growth of 7% to 10% between the companies. NOI growth double-digits, 10% to 13%. In an economy with zero to almost zero inflation, of course those are just incredible numbers. So congratulations to all those companies as to their quarter. As far as the balance of the year is concerned for those guys, I see also a continued success and numbers in those ranges, maybe a little bit short of those numbers, but just some incredible performances being put up by the REITs. As far as going beyond this year, we are starting to see now construction activity across the country. We're measuring it very carefully. We're working closely with STR Global out of Nashville, Tennessee, who most of you know have been following the hotel sector for 30 years and put out that great Star report and they also are building similar reports for the storage sector, with one being most important to us now, and that's a pipeline report. We're working with them and keeping up with where all the new activity is around the country. And really the only market that I'm seeing right now that I'm ready to put on our watch list is the Dallas-Fort Worth Metroplex area. There's substantial activity in the Metroplex, about 100 properties that we're following that are either in the entitled process or some of them are…

Thanks, Dean. As you guys have seen in the release, for the quarter we reported $3.8 million of value creation which was 76% of the low end of our March full year guidance and over 50% of the high end of our March guidance. We believe, as a company, that this demonstrates to you that we're generating exceptional value for you. We've increased our guidance, as you've saw in the release, by approximately 50% and we believe we've developed a clear picture of how we expect the facilities that we are financing the development of, to perform for us and our developers over the coming months. Over the past couple of months the market's seen fit to focus on things other than our exceptional opportunity and the value that we've created. And that's the market's prerogative to do so. Current reality is we're a micro-cap public company with a large growth opportunity, but limited access at this time to public equity. And so, in the face of that reality, we have to be really good and really careful when it comes to putting the right debt and equity financing in place. We believe with the joint venture with Heitman, and a world-renowned institutional partner, we've obtained a strong source of additional value and some fee income on a minimal capital contribution. And then, our decision to discontinue negotiations on what would have been a bad credit facility deal for us in favor of pursuing a more flexible, and less costly source of leverage that's just now opened up to us as our investment portfolio has matured, was the right thing to do. This latter decision, in our view, reflects the discipline and adaptability and good long-term business decision-making of this team rather than failure to formulate and adhere to a…

Thank you. [Operator Instructions] Our first question will come from RJ Milligan, Baird. Your line is open.

Hey, good morning, guys. John, I was wondering…

Morning RJ.

I was wondering if you could talk about what the outlook is for additional commitments throughout the rest of the year given that the joint venture is getting close to full within the next couple of months and there's still a decent size that's unfunded for previously committed capital. I'm just curious what the expectations are going forward for making additional commitments.

Well, making additional commitments is going to be dependent in large part on capital solutions. We're not going to go make commitments for which we don't have committed or known sources of funding. In terms of commitments that are already on the book, we have a very clear and sustainable path to fund everything that we have and fund the business for the foreseeable future. As we said in the release we have approximately $24 million of repayments coming back over the balance of the year. As I talked about, we have a lot of assets that have now gotten to the point that we believe they're leveragable. So we're not at all worried about what we have to do right now. We'll also have capacity to do some additional investing, we believe. But we have a robust pipeline, so we obviously have to figure out other capital solutions. The one thing that you should know is that we're not going to commit to things that we don't know that we can fund at the time we make the commitments.

That's helpful, John. What are the different capital solutions that you're looking at or considering for the additional round of more commitments?

Well, as we've said, I believe in the last couple of calls, there's been a lot of interest in this company from the institutional marketplace, as evidenced by the Heitman joint venture. So we'll explore all of those alternatives and we'll pick the best source of capital that we can pick. People are not running away from us. They're flocking to us. And we're going to do the best we can to develop a solution that promotes the highest value for you guys. And that's a consistent strategy. It will remain a consistent strategy. And it's kind of a blank piece of paper right now. We'll consider all the options and take the one that's best for everybody.

Thanks and I noticed that you guys doubled your guidance for the expected equity participation components because the IRRs have been so robust. And I'm curious if you guys can comment, are any of the development deals, are any of those under contract, at CO? Or do you have any contracts with any of the REITs for potential take-outs of any of these development projects?

No, it's -- go ahead, Dean. You answer that.

Let me jump in and take that one, because I talk to these developers on a daily basis. And the developers are seeing the wisdom to not sell at CO as the lease-up opportunities are so robust, so quick, as we're at the very front-end of this development cycle. And so, our developers also want long-term capital gains. And so they would need to put the property in service for a year and a day before they could sell it to get a long-term capital gain. So we do expect to see the vast majority, almost all if not all, of our assets that we are funding to be built, leased up to some point, and then sold, most likely to REITs, but also there is a lot of institutional capital out there that's waiting to get into the sector. And the best way for them to get in is through acquisitions. And so that's going to keep cap rates down, in my opinion, in the range where they are today, for a sustainable period of time now, that wall of capital that's out there looking for a place in storage, looking for an entry point. So I think we'll start to see selling probably 2018, 2019, not only from our sector, but for again, the vast majority of the assets being built out there. So the public companies who have that great access to capital, they're going to start to see enormous acquisition opportunities. And so their internal growth story that they have today that's so successful, it's going to roll into an external growth story starting in 2018.

And Dean, can I add one thing to that? One thing that we've emphasized in the past and I want to make the point again is on the lion's share of these development deals that we're funding, we have rights of first refusal on those assets. So in some ways, that enhances the value in that we are there to buy them if the prices are too low. But maybe more importantly, we're there to buy them at a cheaper price than the REITs do because we've already funded everything except for the developer's share of that. So when those come up for sale, we have a pretty clear path to equity ownership in these properties in that we'll only be required to buy out the developers' equity at a profit. We'll have our profit participation that just rolls in the deal and at that time, we'll have a relatively unleveraged or low leveraged balance sheet. So plenty of access to capital at that time. So we could be a buyer at that time as well.

Thank you, guys.

Hey, thanks RJ.

[Operator Instructions] We will move next to Jonathan Hughes of Raymond James.

Hey good morning guys. Glad to see a solid quarter. You already touched on capital solutions over the next year. I assume that includes the funding of G&A and your dividends? And have you guys looked at whether that $1.40 a share is sustainable?

John, you still there?

Yeah.

I'll answer, I'll answer Jonathan. It is something that we look at every quarter. We do our dividend evaluation on a quarterly basis at Jernigan Capital. That is a Board decision. And it's something that we'll be looking at in the next couple of weeks. We'll have a Board meeting two weeks from today, as a matter of fact, and it'll be considered again. I think it's interesting to note that our interest income is very close to covering our overhead. And when you look at our earnings as it relates to the value creation that's out there with these properties, we're making a lot of money for our shareholders. And so, we're confident that the Board will evaluate all opportunities with a dividend, and again we will do this on a quarterly basis in the early years of this company rather than going to annual guidance. But you can expect guidance after a good robust discussion at our Board meeting coming up in a couple weeks.

Okay, I guess just touching on that, we're not necessarily getting the same answers in terms of interest income, talking [ph] to G&A. And maybe what's the split between the stabilized operating loans and the development loans of that interest income right now, if you have that color?

Well, are you talking about covering G&A with cash? Is that the question? I mean, from a GAAP basis, if you just look at the guidance, for the full year, at the end of the year, on the high end, we're within $300,000 of covering G&A. On the low end, it's a little bit broader. It's a little bit broader delta. But that includes still some ramp-up. We still have, we're at the end of the quarter, about $60 million to $70 million funded. And we have $100 million or so of commitments on the books. And each month, we're putting out more money. And so, as we put out more money, that interest income increases. So when you start looking into 2017, that interest income increases and then we also start to recognize income from the Heitman joint venture. So I think Dean's right. We are close on a run rate basis to covering right now. And then by the end of the year, I think it's going to be pretty clear. Now as you know, when you're funding development, a lot of that interest income is self-funded for a period of time. It's added to the loan balance. But we're still able to draw that and use the cash. So while we're paying ourselves we're ultimately going to get that back when the loan pays off. But for GAAP purposes, it's certainly going to be covering by the end of the year on a run rate basis.

Okay, that's great. Thank you for that. And earlier you mentioned there were five developments approaching CO at the end of this month. Where are the pro forma yields on those developments shaking out today versus stabilized acquisition cap rates? And maybe where have those compressed over the past year?

I would love to answer that question, because again, I'm out there with these guys all the time. And the news just keeps getting better. It's not going to keep getting better forever, Jonathan, because obviously as more of these properties get developed, if I'm wrong in my guess that there's so much capital out there looking to get in, that cap rates will rise, then that will take place. But my thinking is that where cap rates are today, I think they're going to stay there almost irrespective of any minor interest increases that the Fed might impose on us. But if -- in the markets that we're in, we're in the five to six cap rate ranges for all these assets. And we're still developing on an unlevered basis at nines. So a 9% yield on an unlevered basis. That's our underwriting at 85% occupancy and that's not trending rents. So that's just taking a snapshot of where rents are today. And you can see with the public companies reporting how much they're increasing rents. And so what's happening now, and John alluded to it in his earlier remarks, is that as we go back and re-underwrite these, which we do on a quarterly basis now, by the way, we've got two international accounting firms looking at our valuations and they have valuation departments in house, plus we have our national appraisal firm doing the work on these properties for us. And so they go back and they look at it on, not so much how we underwrote it a year ago, six months ago, as to where it is today. Rates haven't increased. Cap rates have remained down, remained constant. And so that's the bump that we're getting in appreciated values. And so, I see that continuing at least for another, through all next year, another 18 plus months, 20 months. And then we'll start to look at 2018 next year. But again I'm very confident that cap rates are where they're going to be for a while. And the performance of these properties are just continuing to get better.

Jonathan, let me add one thing. When we underwrite -- several of these assets we underwrote back in February of last year, February and March of last year. And we were getting nines at that point in time based upon rental rates at that time. And you've seen what's happened since then. So you can kind of do the math and ascertain that our spreads are really robust right now.

Paul Puryear is here with me. I think he's got one question.

Hey, good morning guys. A couple of questions. Dean, we're hearing all sorts of numbers about the development pipeline from the REIT CEOs and some of the other sources we track. We'd really like to hear your perspective on the size of the pipeline that's out there and what's going to be delivered, the number of properties delivered, you think, in 2016 and 2017?

Yeah, I'm going to promise you, Paul, that I'm going to have a good number for you next quarter. I won't make a guess for you this quarter. And I'm still, because we are working hard to get our arms around this. For the first time in my entire career, we have technology and we have information available to us to make good value judgments now on where to build a storage facility and whether to build it or not because of a pipeline, because of new supply coming on. And we're going to make that very available to the market, I say we, with STR Global, by the summertime. So next quarter we should have some good numbers. But I still don't see, and I'm literally out there every week, I still don't see where we delivered more than about 150 properties last year in the top 50 markets. This year, I'm guessing that will probably double to about 300. But again, that's still substantially below what we need just to keep up with population trends. My estimate is about 450 properties a year, just to keep up with population trends. And so we feel then, we're not going to deliver enough this year, and again, I'm just focused on the top 50 markets. And I hear what those guys have to say and I'm going to suggest to them, and I do from time to time when I see them, that I am out there at least as much if not more than them, and I'm focused on new development. And they throw out big numbers, sometimes they throw out big numbers. Maybe they have reasons why they would like for the market to make sure it doesn't get overbuilt and that's a way that they try to control it. But it's not anywhere close to that yet. But I am starting to see a lot of activity in some markets, Dallas being the first one I'm concerned about.

Thanks for that. One more question, are you seeing any other capital sources come in to the development funding business?

No. And at this point in time, I think I can say with a fair amount of confidence that we're not going to because we're now a year and a half into this cycle. And if you haven't geared up a program at this point in time, this is not only from a capital providing standpoint from debt, but also a developer. I mean, I have conversations with people all the time [Technical Difficulty] …another public company, a real estate company that's in another sector, not in storage, they were looking to ramp-up a development program in storage because the returns are so attractive. And I told them it's too late. They have to start today and get a program going quickly enough that you'll be able to take advantage of this cycle. Because this cycle will close two years out. It will be on the tail end of it for certain two years out. And so it's too late.

Okay, and then I just had one more. Two of the equity REITs mentioned CO deals that ultimately fell through due to permitting issues on 1Q calls. What percentage of your pipeline is zoned and permitted with the last piece of the puzzle being the financing that you're ultimately providing?

Well, all the pipeline is [Technical Difficulty] …take zoning risk. We will close a deal after the developer gets all the entitlements and we make sure we have a clean site. We'll close before permitting. But at this point in time, the three properties that where the struggle is in permitting are, two in Miami and one in Fort Lauderdale, and those were in the Heitman deal. But I believe at this point in time, all three of those now have permits. And so permitting, as far as looking at our pipeline, hardly ever do these developers get permits before the loans close. So their focus is on getting the right site tied up, getting it under contract and getting it entitled and make [Technical Difficulty] site. And so that's where most of it is, Jonathan. But, as far as our pipeline of closed deals, at this point in time, everything is entitled and I believe everything is permitted.

Yeah, and Jonathan, everything right now that is scheduled to close into the Heitman JV is fully entitled. And a substantial amount of that's already permitted. And then we have several million, tens of millions of dollars of deals, I'm not going to say hundreds of millions, but there are a number of deals behind that that are already entitled. But they're just a little bit behind in construction, contracting and design and that sort of work. So I think Dean's comments are right on. But, we're not going to take any kind of risk that would result in a property not being available to be developed for self-storage.

Okay, thanks for the color, guys. Appreciate it.

Okay, thanks.

[Operator Instructions] And it does appear that we have no further questions at this time. I'd like to return the program back over to our host.

Thank you very much again for your interest in Jernigan Capital. And rest assured we're working hard for all of our shareholders on a daily basis. Look forward to talking to all of you very soon. Thank you very much. Good day.