Jefferson Capital, Inc. Common Stock

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 actually under construction. Very few have been delivered at this point in time.

There are seven million people in that market, it will take a lot of new product, but we're just a little bit concerned about that market. Fortunately for us, we have no loans in the Dallas-Fort Worth Metroplex, so we're feeling good about that in case it does get a little bit over built.

As far as going forward, then I will get onto our company, the performance of the sector is going to continue to be strong in my opinion in years 2017 and 2018. My crystal ball's fairly clear out that far.

The new supply that's coming on is not going to dramatically impact the public companies. Their platforms are so strong today that they're going to continue to take market share from the small entrepreneurs.

And so, it's a great time to be in storage. Great time to be long in storage.

So onto Jernigan Capital. It's great to see the early morning trading.

I'm glad to see that we're getting some appreciation for all of the incredible hard work that the Jernigan Capital staff has been putting in, in recent months as it relates to getting the Heitman joint venture up and started. Now John's going to talk some about our A notes, sales, getting that program started.

So our team, our incredible team, led by John Good is making very, very good loans on a weekly basis to entrepreneurs around the country. And we are excited to see that some of these properties, five I think, have gotten to either CO stage or nearing CO stage.

I think we'll have five by the end of this month that will be completed. And I know John's going to get into how valuable those are for us.

But a tip of the cap to our team led by John Good. All yours John, take it away.

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 financing strategy that's dependent on factors that we don't have any control over. Of course, we're disappointed that the credit facility transaction was not the holistic leverage solution that we had all hoped for.

Our negotiations started with one set of terms and expectations and ended with a deal that took away all of our corporate flexibility to build value for our shareholders and would have put us in a position of running the company for a credit facility provider, who had less than a 30% stake in the value of our assets, rather than for our real constituents which are our shareholders. We'd never do that as a team.

We think that the recent senior participation transactions that we've closed over the last several days and other conversations we've had with other potential buyers of these A notes, have provided us a pathway for accomplishing the same result we would have received from a holistic credit facility on better, more flexible terms and with the timing of funding that better matches our capital needs. We're confident that we're going to be able to sell these senior participations or A notes.

Over the past several months we've spoken with many bankers and all of them have advised us that A note sales were unlikely on our assets at the time because our assets were still fairly immature. As our assets have matured, and as Dean just mentioned, we have five that look like they'll be coming, two of them are at CO right now.

Three more should be coming to CO within the next two weeks. And as those assets have come to CO, we've started to hear from bankers, yeah, we need loan growth.

And we would very much like to talk to you about buying a senior participation in these loans. So we've begun to explore that interest.

Some of these banks are community banks. Some of them are relatively large community banks that are in markets that our assets are either in or our assets are close to.

So we believe this is a very viable alternative for us going forward. As I've said, at the end of the month we'll have five development projects that will be in lease up.

And two other stabilized properties that are unencumbered. And those seven assets give us potential access to in the neighborhood of $23 million to $25 million of potential capital from the sale of A notes.

We have another batch coming behind that, that will start to mature in the fall. And that gives us access to another $15 million to $20 million of potential leverage.

So we believe this is a crucial capital strategy for us going forward. To comment a little bit about the investment portfolio itself, at this stage we've populated more than half of our Heitman joint venture.

And we expect it to be full within the next couple of months. We have deals that are waiting to close that will absorb the available capital in that joint venture.

We expect to begin seeing the economic benefit from the joint venture in the third quarter with fair value accretion actually starting to occur in the fourth quarter and to a larger degree, in the first quarter of next year. In the meantime, we maintain a robust pipeline.

Some of the pipeline deals are entitled and ready to go. And some of them are in the process of becoming entitled and permitted.

But, there is still a robust pipeline and we need to go to work immediately to arrange for the best capital solution to fund that pipeline so we can keep these developers developing during the crucial phase of this development cycle, which we believe has another few years to run. We reflected in our operating results approximately $2 million of transaction and other expenses.

Those were banking and legal fees that we paid on the joint venture and legal fees that we paid on the aborted credit facility and we don't expect those to be recurring charges. We do expect there to be a small amount of additional legal expense from the credit facility in the second quarter, but there will be very little transaction-related expense for the balance of the year.

As you saw in our earnings release, our G&A declined by 8.6% from the fourth quarter of 2015. And our guidance reflects that we've stabilized our G&A and we look forward to leveraging our platform over more investment dollars so that, that G&A is even more productive than it is now.

Our earnings and adjusted earnings guidance has been increased significantly from what we provided in March. Much of this is attributable to stronger than expected value accretion as we've gotten more visibility into rental rates in the markets in which we're developing, as well as cap rates in those markets.

And it also recognizes that we've achieved some savings in G&A expense, as well as lower interest expense than what we projected. When we gave our guidance in March, we were thinking that the credit facility was going to be our leverage solution.

As we have moved to more flexible credit solutions at a lower cost and with more flexible funding, that's allowed us to decrease the amount of interest expense that we guided to in March. We still have a lot of wood to chop.

But we remain very confident in our investment decisions that we've made today. And we're strong believers that capital will follow good, high-yielding investments that have reasonable risk profiles, and good management teams who are long-term focused.

We believe we fit that profile. We'll continue to carefully and prudently explore all options for capital, maintaining at all times the strict discipline that's led us to pursue the alternatives that we, as large owners ourselves, believe build long-term value.

Dean and I, collectively, and the Board and the rest of the management team, own a significant amount of stock and we're, none of us want to do anything other than create a huge amount of value on those investments. We'll harvest that long-term value in due course through the best alternatives that we can reasonably develop.

Overall, we're confident in our model. We're confident in our team.

We're confident in our investments. We sincerely hope that the public markets will grab onto the story and use this as a great entry point for a very successful investment.

With that, I'm finished with my prepared remarks and we can turn it over to Q&A.

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.

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.

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.