Greetings and welcome to the Jernigan Capital Second Quarter 2019 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 conference is being recorded. It is now my pleasure to introduce your host, Mr. David Corak, Senior Vice President of Corporate Finance. Thank you Mr. Corak, you may begin.

Good morning, everyone, and welcome to the Jernigan Capital second quarter 2019 earnings conference call. My name is David Corak, SVP of Corporate Finance. Today's conference is being recorded, Thursday, August 1, 2019. At this time, all participants are in 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 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. The second quarter of 2019 was another productive quarter for us. Since our last call, we originated three new development investments for profits interests and rights of first refusal, all of these being in the New York MSA. We continue to originate development investments with highly experienced developers in sub-markets, where, we believe, we can earn healthy development yields over prevailing cap rates and avoid excess new supply. We believe these three new investments fit those criteria. Today, in 2019, we've committed capital exceeding 83% of the midpoint of our annual investment guidance range, which we provided in February, and we're hitting our targets for allocating capital to new development. However, development cycle winds down, we expect to be disciplined in our selection of development and investments, and for the level of our investment in new development to moderate. During the quarter, we did not close the acquisition of any developer's interests in projects we have financed. Instead, we chose to wait until the rental season was over to engage in discussions with developers who expressed a desire to sell. Subsequent to the end of the quarter, we successfully resolved the Miami construction loan dispute, which we had previously reported, and we took full ownership of that property. We look forward to completing that project and placing it in service in the next few months, and we continue to believe that, that property will be a great addition to our Miami investment portfolio. We expect to continue to evaluate numerous opportunities to buy out the interests of developers over the next 18 months. While our sector's dealing with the issue of elevated supply in certain markets and the impact of such elevated supply on self-storage fundamentals, we're happy to report that our portfolio continues to lease-up nicely. As of today, the 2019 rental season is effectively completed. Approximately 61% of our development investment properties have now experienced one full rental season. These properties have added an average of 1,590 basis points or 15.9% of physical occupancy between April 1 and this past weekend. Physical occupancy, which is our primary focus, given the age of our portfolio is running approximately 600 basis points ahead of initial underwriting for our 46 properties that have been open for at least one leasing season. In summary, we're delighted by the way our business performed in the second quarter, and we're optimistic about our prospects moving forward. With that, I'll turn things over to Kelly to talk about our results of operations.

Thank you, John and hello everyone. Last night, we reported second quarter earnings per share of $0.46 and adjusted earnings per share of $0.65, both of which are above the high end of our quarterly guidance. Overall, for the quarter, our results came in above our expectations on several line items, but there were a few noteworthy items on which I'll provide some additional color. First, fair value for the quarter came in $5 million above the midpoint of our range. This was primarily driven by favorable movements of interest rates, along with overall better-than-expected construction progress on our portfolio. Second, interest income exceeded the high end of our guidance, driven by higher-than-expected loan fundings and additional fee income. And lastly, our interest expense came in below our guidance midpoint as we sold more common stock than expected for our ATM program during the quarter. Taking all of this into consideration, even if fair value would have been in our $7 million midpoint, quarterly EPS and adjusted EPS would have been $0.03 above the midpoint of our guidance range. Moving on to guidance for the remaining part of the year. As of the end of the second quarter, our construction progress and timing of deliveries remain on track. Our operating portfolio is performing in line or slightly better than budgeted. And we have greater visibility now on the impact of market interest rates over the balance of the year. Additionally, we now have more clarity on prospective acquisitions of developer interest than we had before the rental season began. Based on these factors, we have determined that it is now appropriate to adjust our EPS and our adjusted EPS guidance ranges. We currently expect to acquire more developer interest than we initially forecast, when we issued guidance in February. And…

Thank you. [Operator Instructions] The first question is from Tim Hayes, B. Riley FBR. Please go ahead, sir.

Hey, good morning, everyone. Thank you for taking my questions. I appreciate the comments around the acquisition pipeline and encouraged to hear that the pace should be picking up in the back half of the year. Some of your peers have noted on conference calls this quarter that their acquisition pipelines have picked up as sellers have rationalized exit price expectations and have become more willing to sell earlier in the projects, even before construction starts, in some cases. Just wondering if you're seeing this trend? And if you're willing, maybe size your pipeline for buyouts for the second half of the year?

Yes, Tim, this is Jonathan. I think that, for us, our developers have been coming to us on average, 18 months post CO. And when you think about everything that is being developed in this cycle, I think, a good estimate is that 75% of those projects are being built by merchant developers with the intent to sell at some point in the future. I think, for us, that percentage is higher, greater than 75%. So if you just look at the age of our properties when they were placed in service and use that 17 to 18-month mark, by the end of 2020, 12/31/2020, we will have had 40 assets in our portfolio that would hit that mark. So I think that we would expect those conversations, assuming that, that trend holds, to continue to pick up the balance of the year and continue on into 2020.

Okay. Great. I appreciate those comments. And then interest income was pretty high this quarter relative to your guidance. Was there any outsized early prepayment or loan modification income in there? Or does this just reflect an expectation that you would have acquired an asset during the quarter, which would have decreased interest income?

Good question, Tim. There were some modification and fee income that we had during the quarter, kind of in line with what we saw last quarter, maybe a little bit higher, so about $300,000 total recognized this quarter. As a reminder, those are facts and circumstances specific and are episodic in nature. We also had some loan closings that we have set through development investments that we closed earlier in the quarter. And so we were able to deploy some capital and start earning income on that sooner than we had initially projected. Those are the big drivers of this quarter.

Okay, thanks Kelly. And then recently, as you pointed out, your new commitments have been largely in the greater New York City area. Just wondering if you can talk a little bit more about the trends you're seeing there, that keep you interested even as the new supply pipeline has picked up in that area. And if you think the recent multifamily rent control legislation, was any impact of future development there?

Yes. I don't think that -- I don't see a major impact on the rent control. The demographics in New York is the population densities up there and the movement across the those are just characteristics unlike really any other metro area in the country. So as long as long as that trend continues, then we continue to be bullish on New York. It just so happens that our most recent investments have been up there. Again, if you think about our where we are right now in the cycle, we have, what I would say, to be about a half a dozen, I would call them programmatic developers or partners, and we continue to look at opportunities obviously in New York, but also in the Mid-Atlantic and other parts of the country. So it just happens timing on getting these particular deals across the goal line as to why you’re seeing a little bit of a surge of activity from us in New York. Timothy Paul Hayes

Okay. I appreciate the comments there. I’m going to sneak one more in, and then I’ll hop in the queue. The internalization process, I believe, formally begins in October. Just wondering if there’s any comments to be made around that at this point? If – how conversations have been progressing? And just any color would be appreciated.

Yes. Tim, this is John, and thanks for the question. We’ve communicated since before the IPO closed through SEC filings, I think every SEC filing that we have – the we’ve made since that point in time, that outlines the process for internalization. It’s all set forth in the management agreement that is on file. And under the management agreement, as you noted, the process is required to begin no later than October 3. Under the agreement that what that process requires is that for the manager to make an offer to JCAP, the company’s Board then appoints a special committee to evaluate the offer, and the special committee can either accept, reject or counter the offer. If and when the special committee and the manager agree upon the terms of an internalization transaction, the special committee is then required to obtain a fairness opinion from a nationally recognized investment bank. Once that’s happened, the stockholders will then be asked to approve the transaction. And at that time, we’ll issue a proxy statement, call a meeting and everything that’s going on will be described in that proxy statement. It’s – I think this process was designed to produce a fair result for all the parties, and there will really be nothing to comment on until the process has run its course.

Okay. Appreciate the comments guys.

We have a question from Todd Thomas, KeyBanc Capital Markets. Please go ahead, sir.

Hi. Thanks. Good morning. Wanted to circle back to your comments and the increase in your assumption for the acquisition of developer interest here. What do you think is an appropriate range for us to consider in terms of partner buyouts? And how many additional assets do you think that you might expect to own heading into 2020.

Yes, that’s a great question, Todd. And while the – while the conversations have heated up and have progressed, as you would expect, coming on the heels of – out of this current rental season, I don’t know that I can – we can give you a specific range. I would think that earlier in the year, we may have indicated a range of four to 10 developer buyouts. I would think that you would be – or discussions. I think that you’re probably towards the upper end of that range?

Yes, Todd, let me make a quick comment along those lines. As we’ve told people all along, the developer is really in control of this process, and we can’t control when or if they come to us. And so we evaluate all of this in light of really the stage of lease-up of properties. So as we, I think, a pretty consistently disclosed over the last several quarters, the trend has been, and I think Jonathan alluded to this earlier, that when a property is somewhere between 16 and 18 months of lease up, somewhere 50% plus physically occupied, those conversations begin. And I think earlier in the year, we indicated that four to 10 of those properties would kind of hit that sweet spot of potential for discussions. And as Jonathan just said, we hold to that range. I think the number of discussions probably ends up at the upper end of that range. But in terms of what ultimately happens, I – we don’t control that.

Okay. That’s helpful. And then you have the one store in Miami that you took possession of after the quarter end. Are there others that you’re watching today, where it appears as though you could be headed down that road?

Not really. There’s – I think it’s episodic, and it depends upon how things go from a lease-up standpoint. And I think our propensity has generally been – if a project was long delayed in delivery, and we’ve ended up with a prolonged period of construction, that’s maybe eaten into reserves, our propensity has always been to get with the developer, have discussions, move more toward modifications than taking the properties and adjust economics accordingly. As you know, that, that Miami loan was the only remaining construction loan that we had, and we did not have a profits interest in that. So that was really a completely different type of situation than what our typical situation is, but with respect to the rest of our portfolio, we don’t expect to have any more situations like that where we end up not working things out with the developer.

Okay. And then just lastly, wondering if you could maybe just comment on development activity, in general. Just curious to get your updated read on your outlook heading into 2020. But in that context, maybe as you think about your developer partners, specifically, which maybe is not representative of the entire industry, I was curious, though, if your partners that you’re working with or have worked with, if they’re slowing down their pace of development and their pipelines are changing at all?

Yes, Todd. I mean, you’ve been on all the other calls that have occurred thus far. And I think the commentary is pretty consistently been that the cycle is starting to wind down. 2019, it looks as if deliveries will be down a little bit from 2018, but in our markets, maybe more in the range of 10% to 20%. We focus only on the top 50 markets. So we’re not looking at it from a nationwide basis and what goes on in non-top 50 markets is really not particularly relevant to us. We feel like, from the standpoint of new starts, and I think some of our friends in the sector have commented on this, developers in certain markets will find opportunities, where they feel that they can get yields that are appealing to them. But we believe that the banks are looking at things much more carefully. We believe that bank’s underwriting has probably tightened a lot, and banks have been the primary source of capital to those kinds of developers. With respect to our developers, as Jonathan said a little earlier, we’re – we have about six programmatic developers. And they’re really at a point, where they are collaborating with us on potential submarkets, where perhaps you have seen an insufficient amount of new supply delivered, where there is a demand, and we’re guiding them to those submarkets and asking them to go find sites in those submarkets. And we’ll continue to do that as long as company exists, I believe. I mean, that’s an important part of our business model. And we believe that this relationship between us and these developers, which is programmatic and very collaborative, will continue to produce good opportunities, but our – everybody who follows us closely knows that a couple of years ago, we were running a really large pipeline, and that pipeline has, has shrunk to about $300 million of projects that are under some level of evaluation by us. We obviously won’t close all of those. And we’ll just continue to be very careful and very prudent in underwriting and look for those submarkets where there’s a real need for new development.

Todd, just to add a little bit more color on the macro front, I think that you can attribute the slowdown to really probably three factors. I think you have local bank financing, which John alluded to, is getting tighter, I think that the – some of the equity that was funding development early in the cycle has pivoted, and they’re focused more on acquisitions. And then sites, in general, they’re harder to find. It’s harder to find pockets or locations in underserved markets, and zoning continues to be a challenge. And then, obviously, lastly, on the absorption of new supplies weighing on fundamentals which just makes deals harder to pencil this late in the cycle. So you have a host of factors that are bringing this development cycle to a close.

Okay. Thank you.

We have a question from Jonathan Hughes, Raymond James. Please go ahead sir.

Hey, good morning. I was hoping you could give us some details on the Miami project, that’s now wholly owned? What stage of construction that project is in and who will be finishing it? And then also, maybe comment on the overall new supply pipeline in South Florida, and when you see pressure from new deliveries on fundamentals bottoming there?

Yes, Jonathan, the property in South Florida is largely completed. There is one technical fix that has to be made before it’s – it gets a certificate of occupancy, and that has to do with the ventilation system to meet the fire code. There was some confusion with the parties that were involved in designing the building with respect to the legal requirements for that. And we’re in the process of bidding that out. The general contractor on that project continues to be very cooperative with us and work with us. And everything is going very well. It’s just a matter of going through the permitting process and getting that work done. I think we’ve commented since maybe our very first conference call back in August of 2015, that dealing with the permitting process and the inspection process in Miami-Dade County is not an effort or an activity for the faint of heart. It takes a while. There are a lot of hoops that you have to jump through. And so we’re really at that very tail end process. Yes, the property is, I would say, 99.1% completed. And should be entering lease-up within the next couple of three months. I’ll let Jonathan comment on the level of supply in South Florida, in general?

Yes. So South Florida has been interesting, Jonathan, because deliveries have come online at a measured pace. And that has been really a function of having to navigate the permitting process, generally projects have been -- they’ve been on the boards, but they’ve been slower to get out of the ground and slower to open up or CO. So if you look back, really, 2017, 2018 and 2019, it’s been a steady, measurable flow of assets being placed into service. Not really aware of too much on the board, meaning new starts planned down in South Florida. Our data suggest that it’s going to be a pretty significant drop off in 2020. So I think that we have the final push of deliveries should be this year, you’re going to see a pretty substantial drop off.

Yes. One point I’d like to add to Jonathan’s comments on Miami Dade, in particular, is a lot of our development projects there are in Miami-Dade County. And two or three years ago Miami-Dade County a distance restriction for new self-storage facility, So even if a site is zoned for self-storage, if that site’s within, I think it’s a 0.5 mile or so 0.5 mile perhaps a little bit less than 0.5 mile from an existing self-storage facility, then notwithstanding the zoning, developer is not entitled to build self-storage on that site. So when you start drawing circles around existing sites, finding a place to develop new suppliers going to be very, very difficult. So we feel really good about the location of our portfolio, the location of our projects. And notwithstanding what happens in South Florida, in general, and South Florida is a huge MSA. It runs -- some people define the MSA all the way from kind of West Palm Beach down to the Keys. And when you start looking at a geographic area that, that’s big, we feel like we’re in the prime locations within that whole MSA, and we have other legal protections against new supply coming in and disrupting what we’ve already done.

Appreciate all the color. And just one more from me. I’m following upon Tim’s earlier question on the internationalization in that negotiation process, I realize you’re limited and what you can say, but can you give us any color or commentary about other corporate actions that could be address this part of that process, like capital structure, distributions or operational strategy?

Yes, Jonathan. Thanks for the question. That is a good question. When we began the company back in 2015, we adopted a business model that was going to be an evolutionary or an evolving business model over a period of time, that involves several phases or several stages, and each stage is different from the other stage. So, our initial stage was the investment in new development in these loan structures that are effectively joint ventures with developers, and the control of those joint ventures were largely in the hands of the developers. So we adopted, at that time, capitalization policies, leverage policies, personnel, headcount policies, distribution policies that all fit that particular stage of our evolutionary process. As we move along, everybody knows we've been acquiring properties on balance sheet, and we are in the process of shifting into our next evolutionary stage, which I'll call our ownership and operator stage. That stage is – going to be marked by longer-term focus on owning, operating and maximizing the value of what we believe is a preeminent portfolio of self-storage properties. But that type of a business model is different than the business stage in which we've been for the last four years. So, I think that our Board always evaluates – we evaluate all of our policies on an ongoing basis. And as the company changes, as we own more properties and become more of an owner operator, more of a true equity REIT, I think they'll continue to evaluate those policies, and as appropriate to ensure that we have the best possibility for sustained growth and maximization of shareholder value to the extent that we need to adjust policies to accomplish those goals, I think, we'll do so. And so I think that it's a situation of a management team and a Board that is very keyed in on shareholder value and very keyed in on doing the things and making the judgment calls that maximize that value.

All right. Appreciate the color. Thanks for the time.

[Operator Instructions] There are no further questions at this time. I'd like to turn the floor back over to John Good, the CEO, for closing comments. Please go ahead, sir.

Thanks and thanks everybody for the questions. Thanks for participating in the call, and thanks for your continued interest in JCAP. And we'll talk to you next quarter. Bye.

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