Jefferson Capital, Inc. Common Stock

Good morning, thanks to all for joining us this morning. Happy, you could be with us.

I will start and talk about the sector a little bit and then turn it over to John and Kelly to talk about the company. But as we all know, this earnings season has been fairly unique for self-storage sector.

The waters have got very choppy out there. And so I plan to address that some in the comments.

I've had some success over the years at -- and looking out and being able to look around corners a little bit. And make some good guesses as to what things are going -- how things are going to happen in the future.

And I tend to do that my looking in the past. Looking in the rear-view mirror and so I want to do that little bit with you this morning, to try to characterize what I think this storm on the horizon we see today in new supply coming, how that's going to impact those companies out there.

Hopefully, in deep enough waters to sustain this storm that's coming. And I will talk about the past.

But anyway, this is my fourth development cycle, some of you heard me say that before. The first story definitely created storms from overbuilding.

But even with that, we always were able to come out stronger after the storm had passed and with greater opportunities in fact after the storm had passed. Except for the development cycles, we've had two other instances that have created extreme choppy waters in our sector, one being 9/11 in 2001.

We've talked about that in the past as well when we lost our discretionary customer because of uncertainty primarily. And I would rank that as about a 6.5 on a Richter scale as it impacted our self-storage sector.

And then the great recession came along 2008, 2009 and that went away up there to look at a 9.0 on the Richter scale. Both we lost 10 or 12 occupancy points.

But with the great recession and because of the economy needing a long time to heal, it was slower for us to regain our occupancy and after regaining occupancy being able to regain good rent growth. But that happened, we went from down 3% as the sector in 2009.

That's year-over-year revenue growth on a same store basis. Two, a trickling of the tide coming back in in 2010, when we went on a weighted basis just positive but 0.4% [ph] positive on a same store basis.

But then we started to trend up nicely. Topped out in 2015 and this is just using the four REITs that were public in 2009, but we topped out again on a weighted basis at 7.1% for revenue growth on a same store basis which of course we all know is extraordinary and of course we all know was unsustainable because what happens when you have such tremendous performance in a sector.

Everybody understands you have an undersupplied sector because you're able to raise rent so much and you're able to sustain such incredibly high occupancies. That brings about new building and that of course started in 2015, ramped-up in 2016.

We'll talk more about where we are in 2017. But -- so back to my rear-view mirror concept.

I do like to look at a worst case scenario, that would have been the great recession because we took us -- took our [indiscernible] down. We all had to reduce rates dramatically to try to maintain some occupancy, and it took us a long-term to recovery back to -- even back to a normal about 4% year-over-year.

My guess is, this time, we will not come close to the results that we had in the great recession. Revenue will not go negative for the sector.

Some companies even will not drop below 3% in my percent -- in my opinion on a year-over-year same-store basis on the revenue line. And so we could see that next year, the storm will arrive.

It's not here yet. They are -- the storm will arrive next year.

It will be big. It will be a name stone.

And the tide will start to recede. And what's going to happen at that point in time?

Companies with good state-of-the-art systems, quality people will navigate the storm just fine. Others, most notably, the small owners will struggle and that will offer opportunities to the strong.

So how does -- how all this affect Jernigan Capital? Well, first of all, most importantly, we are not at sea.

We're not subject to a receding tide. We are on dry land in a secure facility.

We anticipated this storm when we set this company up and went public. We of course encourage our developers to build only state-of-the-art facilities.

We require them to hire professional management because we could see the storm coming. But one of the most important things we did was -- is -- we gave them a 6-year term loan, which gives them plenty of time in my opinion to navigate through the storm and come up on the other side, a stronger opportunity, a stronger investment for them.

And lastly, these are well capitalized investments. We have structured their reserves to be able to navigate through the storm.

So I get asked from time-to-time what keeps me up at night. And of course always the quick answer is nothing because I'm a great sleeper.

But I do tend to wake up early sometimes with an idea and that is what is happening to me in this day and time. In fact, I woke up again early this morning with an idea and we're starting to have -- starting to see some opportunities because of these choppy waters we are in.

I'd like to wrap-up by thanking those people who see our vision to sign on to our vision. Those would be our new shareholders who came in to ownership of our stock, my last follow-on offering.

Appreciate the fact that they understand that we are well capitalized -- the company well capitalized developers and we will get through the strong that we are starting to see the beginning sort of now. And that, we feel sure that our vision is good and that we will get through the storm and we will come out on the other side, a stronger company with greater opportunities than ever before.

Okay, with that, I'll turn it over to John and Kelly, and they will talk some about the company.

All right, thanks, Dean. And I'll spend some time talking about the quarter and then Kelly will dive into the financials.

And on that note, our second quarter was really terrific in every respect. We had a record quarter for new investment commitments.

We continue to source well-priced capital to fund our investment pipeline. We continue to experience strong lease-up of our initial 10 development investments and our team continues to operate the business in an efficient and highly cost-effective way.

During the second quarter, we closed a record number of investment commitments, right at $130 million in 11 high-quality development projects. These investment commitments included entry into a couple of exciting sub-markets in Manhattan and Boston among others.

Over the first six months, we closed 19 investment commitments for an aggregate committed amount of $236 million, which roughly equals the development investment commitments we made during the first 21 months we were in business. So halfway through the year, we were approaching 63% of the way toward achieving our annual investment target.

With a strong pipeline of $700 million, we're confident in our ability to achieve our investment goals for 2017. We ensured funding of those 19 new commitments with $208 million in new capital, which consisted of $24 million of net proceeds raised under our ATM program right at $84 million in net proceeds from a very successful follow-on offering, and we also procured $100 million credit facility, which can be increased to $200 million in the future upon additional syndication satisfaction of customary conditions.

The net proceeds per share of the common stock that we issued during the quarter was approximately $21.12 were right at 120% of our March 31 book value. We're very pleased with the efficient pricing that we received on our common stock sales.

We believe this efficient pricing together with the high-teens, internal rates of return on the development investments into which these proceeds will be deployed should drive significant shareholder value over those coming several quarters as we complete these developments and these properties lease up. We're really happy with the pace of our -- of the leasing out of our operating properties.

As we've told you guys in the past, we generally underwrite developed storage facilities to reach 40% physical occupancy one year after the project opens, 70% fiscal occupancy, two years after opening, and 85%, four years after opening of which 85% we consider stabilize from an occupancy standpoint. As of today, our initial two development investments, each of which has been open approximately 15 months are both at or near stabilization from the fiscal occupancy standpoint and our next three development investments, which have been open on an average of 13 months had average occupancy of approximately 70%.

So those projects hit that 70% mark almost a year earlier than we underwrote. Finally, I'd like to comment briefly on the performance of our team.

We operate quite a lean business at Jernigan Capital with 17 people and in 28 months, this team has sourced and closed over $500 million of investment commitments, maintained remarkably consistent pipeline of high-quality investment opportunities in the $600 million to $800 million range. Developed outstanding control systems and reporting protocol that have produced excellent transparent public reports.

And has tackled a number of unique capitalization projects like our Heitman joint venture and the Highland preferred equity line. Even more impressive is that this team has accomplished so much while holding our G&A expense growth, excluding stock-based compensation for the first half of 2017 to around 3%.

This is a testimony to the confidence, cohesiveness and hard work of the JCAP team and we're very proud of these results. On that note, I'd like to turn things over to Kelly Luttrell, our Chief Financial Officer to discuss our quarterly financial results.

Thank you, John and hello, everyone. All in all, we had another great quarter.

Last night, we announced adjusted earnings through the quarter of $0.55 per share, exceeding the high end of our Q2 guidance by $0.13. The main drivers were higher-than-expected fair value gains recognized on our on-balance sheet investment portfolio, higher total revenues and JV income that we forecasted and our G&A expenses came in lower than anticipated.

Included in our results was a $4.3 million increase in our -- the fair value of our on- balance sheet investments. While this is a reduction from prior year, as I've discussed on previous calls, our 2017 results are directly impacted by our investment activities in 2016, during which, a significant portion of our investing occurred within our Heitman joint venture.

As such, we expected fair value additions in 2017 to be back-end loaded as compared with the prior year as the approximately $270 million of investments that we have closed between late 2016 and today, near construction completion and move into lease up. As I mentioned earlier, our second fair -- quarter fair value markets exceeded our expectations and this was primarily due to increased fundings and being further along in construction at quarter end than anticipated on several investments.

In regards to the latter half of the year, we still expect that significant benefits from interest income and fair value increases from our more recent investment activities will begin to contribute at a higher pace in Q4 of this year and will continue into 2018 and beyond that these projects come online. Last night, we also issued third quarter guidance with a GAAP earnings per share range of $0.23 to $0.30 and adjusted earnings per share range of $0.27 to $0.34.

And we issued updated full year 2017 guidance as well. The updated full year 2017 guidance included an increase in net income available to common shareholders and adjusted earnings of approximately $2.3 million at the midpoint.

And we also adjusted our per share estimates to incorporate the equity capital that was raised in the second quarter. This resulted in an updated range of GAAP earnings per share of $1.41 to $1.71 from $1.62 to $2.02 in our previous guidance and an updated range of adjusted earnings per share of $1.

58 to $1.8 from $1.80 to $2.30. Our expected closings of development investments for the year remains between $350 million and $375 million, and approximately $244 million of those closings have occurred between January 1, and today.

And our pipeline of approximately $700 million, including $174 million of executed term sheet is more than sufficient to last to meet our closing goals for 2017 and provide additional funding opportunities into '18. On the capital front, as John noted in his remarks, we accomplish significant capital raising achievements during the quarter with $108 million of capital raised during our June follow-on offering and under our ATM program.

This has given us sufficient cash to fund our investments in operations over the balance of the year and with the closing of the $100 million credit facility subsequent to quarter-end, and the $115 million of preferred capital still available to us, our future funding decisions will be constantly evaluated as we look to optimize our various sources of capital and the best interest to maximize our return to our stockholders. Before I turn it over, I'd like to now add a bit more detail on the credit facility we closed in July.

This line of credit provides additional flexibility and better access to lower-cost capital. We have already benefited from this facility borrowing five of our senior participations in [indiscernible] closing and then paying the outstanding balance down to zero, with proceeds we received from our second quarter capital raises.

The reduction in interest expense associated with the repurchase of the senior participations will be offset by the amortization of approximately $1.9 million of upfront cost and fees incurred with procuring the credit facility. We currently have approximately $33 million of availability on the line, and we anticipate that we will have the full availability of $100 million by the middle of '18 as the projects underlying our investments obtain certificates of occupancy.

That's all, we have in the form of prepared remarks, I'll now turn it over for Q&A.

And Dean, I would appreciate the comment Jernigan used on the sector. Hopefully, you can get to more shade in the back half of the year?

Good, Jonathan. Good morning to you.

But Dean, I know sub-storage is a very sub-market specific business. But are you still expecting next year to be peak deliveries on a nationwide basis or has this changed -- has we moved -- as we move throughout the year?

No, that's still my expectations Jonathan. But it is yet to be determined, how good my expectation is.

Looking at the data that I tried to collect and one of them, you heard me talk about before is U.S. Census data.

It is not that good. In that, they used Dodge as their collector and Dodge, we've run over the years, misses a lot of starts, but directionally, I think, it's good.

And it does appear to me that just looking back have the numbers from probably last three months, four months. We've been around the $3 billion to $3.5 billion of seasonally adjusted annual rate of construction.

And so, that's leveled out somewhat in my opinion because it went from 2014 to $700 million to $800 million in 2015, $1.9 billion in 2016 to $3.4 billion this year in June. So directionally, that was expected as well.

So I have a little hope that people are listing, people are realizing that we're building a lot of storage and that next year is going to be our peak season. I'm hoping, our data providers will start providing more clarity on that soon.

I'm hoping that all four of them will start at the September, Analyst Day Annual Conference in Los Vegas. I am hoping, they're going to roll out some numbers for us, so I'm still optimistic.

Long-winded answer, Jonathan. But I am still optimistic.

Next year will be peak year deliveries.

And you also in the release from last night, you mentioned about 30 current and perspective development partners. I am just trying to determine, how many of these are self-storage focused versus coming from other sectors like multi-family or hospitality and then maybe also if you could just touch on what you provide is more of a JV partner to these developers to ensure their successive projects.

Sure. I think, you might have misread the release a little bit, but I will let John give the color.

We have 30 all total, 23 existing and seven new ones, but go ahead, John.

Actually, it's 24 and -- 24 and 6, I guess. But -- that these guys come from -- these guys come from a lot of different backgrounds, Jonathan.

We have some who have been doing self-storage for a long time. We have some really good developers, experienced guys who've done retail or apartments and so the quality of the developers are very high.

We have a very interactive relationship with them. We're looking at -- we're looking at progress on a daily basis.

We're talking to them very frequently. So while a bank would maybe get out to see a project once a quarter or something like that.

We are staying in constant contact. We also have a third-party consultant that's doing monthly inspections.

So those guys who have not been in the business, yes, they get a lot of upfront hand-holding and education from us just from our experience. And then as they go through the construction process, it's a very hands on process, a very interactive relationship where they're giving us constant reports.

We're in constant dialog and we haven't had any significant problems today but the communication is such that if and when we ever do, we're going to be on top of it very quickly. I hope that answers your question.

That's definitely helpful. I will try to squeeze in just one more.

I know, it's a little early, but as we get closer to 2018. How should we think about the impact of fair value accounting income next year.

You projected $350 million, $375 million of commitment this year or about 3x the on-balance sheet commitments from last year. So this number jumped pretty significantly, right.

Am I thinking about that they correctly?

Hi, Jonathan. Yes, you are thinking of it correctly.

And that's consistent with, you know -- how -- what we have been trying to communicate all along and that all the investment activities that we've been doing this year especially as those come online, you think through how we model out our fair value. A lot of that comes on as the properties are constructed, and so we anticipate seeing significant pick up in that in '18.

Jonathan, I will add something. I realized this is very difficult for you in trying to keep your model and we're going to give you much more clarity with when we report third quarter result.

So will help you with that when we report third quarter.

I appreciate the addition of the detailed guidance this quarter.

Thanks, Jonathan.

Good morning. I was wondering if you could give a little bit of color on the overall pipeline in terms of what you think will have in for the rest of the years.

And so it looks like the pipeline went from about $830 million down to $700 million, which looks like it's just because of the closings during the quarter. Just you can talk about what might come in and what if anything, might be a -- cancel any projects going out of the pipeline.

Hi, George. It's John, I'll take that one.

If you look at our pipeline on a day-to-day or week-to-week basis, it moves up and down. And I think, the important thing to look at is the longer term trends.

And when we were having this call in August of 2015, I think our pipeline was at $500 million and then we had this call last year, our pipeline was at $600 million. And now, we're having this call a year later and it's at $700 million, and you saw out of the $600 million that we talk about at this time last year.

What we believe will be $350 million to $375 million of investments in 2017. So you're correct that we had a big closing month in June, lot of -- a lot of deals that were in that pipeline that we report at the end of the first quarter.

We're actually closed during the second quarter and we think that's a really good -- a really good thing. As Kelly said in her remarks, we have a lot of term sheets that are executed and projects working in the closing -- working through the closing process.

And so we feel good about accomplishing what we have guided you guys to for 2017. And then as you get into 2018, I think, it's very instructive to take that $700 million that we're reporting right now compare it to $600 million that we reported last year and know that there is a good pipeline of deals going into 2018.

We have deals come in to and go out of the pipeline every day, and we don't close all of them. There are some that -- there are some that fall out but when you go to that category of deals that are working through the underlining process, there is still an awful lot in there.

And there will be more as the year, as the year goes on. Naturally speaking, as the development cycle starts to wind down next year and the year after, these numbers will start to go down.

So we're probably pushing the top of the bell curve, right now, but there is still plenty of opportunity out there.

And then just with lease-up or the pace of lease-up on properties so far and it's been ahead of expectation. But with kind of increasing headwinds out there and I would say, anticipated lease-up paces generally slowing down.

Does this change at all you guys have forecast of, one, I guess, when you would like to be buying -- start buying in more properties and then also from the developers, you guys have. Does it change their philosophy in terms of when they want to exit, do they want to exit earlier than anticipated?

Good morning, George. This is Dean.

I will take that one. As far as how we buy them.

We have -- the developer can't pay off the loan or they can't sell the asset prior to the third anniversary of the loan to three-year. So they are locked out.

It's a harsh term. But they are locked out for three-years.

So if they want to try to do something in that period of time, they can only come to us. And we just make a wide decision, where is the property in lease-up?

What do we expect it takes to for the property to fill up, how much more in other words, what's the carry in the meantime and what's the likely cap rate at -- after stabilization after the three-year period, if we exercise the rover [ph] and just make the judgment. I mean, it's pretty easy, and the numbers are pretty firm.

So that's a decision we will make on an ongoing basis when developers come to us within that first three-year period wanting to sell. Now what motivates them; normally, just what's motivate them so far to talk to us about the couple of conversations we've had and one deal that we've done is to monetize, to have more capital to do a few more deals with us in this development cycle.

No one is focused on shopping for boats to buy or airplanes to buy or anything like that, it's -- everybody is totally focused on creating more value for them and their families during this cycle. So I think that's the main motivation.

Okay. And then just last question for me; so CubeSmart and definitely the preferred third-party managers so far, and, do you anticipate that there will be the exclusive manager going forward or do you think, you'll try to spread out some of the, I don't want to say risk but of adding another manager on some of the other properties?

We will definitely use other managers. We continue to have conversations with Extra Space and they're very interested in managing for us.

And so, I think when -- we even have a developer now, that in the queue at Extra Space. So yes, we will have more professional managers other than CubeSmart as we go forward.

Dean, I wanted to follow up on your comments about the industry, curious how you're now looking at underwritings. Have you changed the lease-up expectations?

Have you underwritten rents differently just from last quarter when you went through some of those highlights?

Sure. Hi, R.J.

Yes, we are -- we started off two years ago writing --underwriting very conservatively, we've done. And we are even more conservative today.

The good news is we're still seeing deals because of their locations and some uniqueness about them and some cases that will clear our 9% hurdle on an unlevered yield. And so, but what we are doing.

Certainly in markets, if we are in a sub-market and we are second in that sub-market, the sub-market may only have three or four square feet per person already and it can take two properties. We will extend that lease up to four years.

If it is a larger facility, normally in our facilities are net rentables 70,000 to 75,000 square feet. Whatever reason it's a high density market that only has three square feet per person already and we're going in to that market.

We will add a fifth year. I'm not sure, we've actually done a fifth year yet but we've considered it, and we will, certainly have that as an opportunity or an alternative going forward.

As far as rents are concerned, from the beginning, we said, we've never turned it rents. And when we said, we didn't turn rents, everybody understood that we didn't turn rents up.

We hardly ever said up but we didn't -- we didn't turn rents. Well today, as we discuss, we are really taking the bottom end of rents in a stabilized environment.

We don't underwrite in a market that's already severely dislocated through for whatever reason, take Houston. If we wanted to do a deal in Houston, which I mean, we have one deal in Houston and it's going to be a great one.

But that's only the only one right now that we think we will do in Houston. But we found -- some by -- came to us within another property in a sub-market that's protected like the one we have up on the Katy Freeway under construction now.

If we had another one like that, we would go back to the stabilized period, be it six months ago, and say, okay, they were getting $24 rents, six months ago. Then we would underwrite on those $24 rents and we would -- the underwriting would be -- would probably add a 4th year or a 5th year, and say, at the end of 4th year or down 5th year, our underwriting would hope that the rents would be back to that $24 level.

And if you look historically, when top line growth have been little more in the 4%, I think our chance is really good. So that's how we're underwriting today.

We really take into consideration the conservative end of the rents but on a stabilized rents, not in a period where there's a lot of slashing of rates going on. That's going to happen.

Now what we do take into consideration there is the interest reserve. We will get our budgets from our third-party manager and those budgets will include rates that are below asking, below what you are underwriting but we understand that they're filling up the property and the hope is four, five, six years out, we're back to that underwritten number which was using stabilize numbers just prior to the spirit of dislocation, if in fact that's what happening.

That make sense.

Makes sense. Thanks, Dean.

And I guess just a follow-up on George's question; so if we remove sort of the three-year restriction for your development partners to sell, has the, I guess, more rapid deterioration in fundamentals this year adjusted your time line from when you think the development cycle and the acquisition cycle begins.

I think the -- no is the answer to your question. I think, the development cycle will start to wind down next year.

I think, as I said earlier. I think, that will be.

I think, this is our peak year for starts, hopefully, and next year are peak year for delivery. So it will start to wind down.

And there will be a short period, but not a very long period, where not too much happens. And then acquisitions start to happen in a pretty big way.

I mean, it's happen, the other four cycles I have been through. So we will -- we will start to see acquisitions happening in a big way, and quite frankly, I mean, the equity REITs are going to start talking about it next year.

There is going to be huge opportunity for those well-capitalized equity REITs to start buying deals next year. So you will not be as focused next year on internal growth as you are this year in my opinion.

You'll start to be focused more on external growth.

We've heard some anecdotes that there is generally less development financing available out there for maybe in the smaller and regional banks. Can you comment on what you're seeing out there.

Any color on that would be great from a competitive standpoint?

John, let me jump in and I know both of us talk to these developers on a regular basis, and I am sure, you have some thoughts too. But, I think -- I think the banks are keeping their ear to the ground pretty well and have a good idea what's going on in storage right now and are pulling back some.

And I think that does add to the quality of our pipeline. I do think, we have -- maybe some developers who are talking to us now who would like to have an alternative of going to a bank.

But the capital requirements -- not so much the rate but the capital requirements are such and the other details regarding the loans are not as attractive and they are coming to us. What's your thought, John?

I mean, we've actually seen it. We've experienced it with a couple of deals where we were actually working on a structure where senior debt might have been put on in the beginning and we could have done something that would have given us the same, same back end profits interests, but we would have funded in more of a mass mode.

And even with us involved in the project and with a very strong developer, banks still had a hard time getting there. So these were a couple of pretty significant projects, but we are hearing over and over again, guys going and trying to get bank financing and then coming back to us saying, we just can't -- we just can't get there with them.

They either want too much recourse upfront, the pricings is not as good as they -- as they go into the process believing it will be. I think, the banks have started to price a risk premium and to -- some of these loans and then the big banks just can't touch them because of all of the Basel III high volatility commercial real estate excess reserve requirement.

That makes sense. And then just going back to the refers versus the buyouts, I know, we've talked about this a couple of times.

But can you just kind of give us some color, today, what is the preferred. Would you prefer to wait and exercise the refer and kind of ride out the storm a little bit or would you rather kind of exercise a sort of buyout if the developer comes to you today, obviously it's an asset-by-asset decision.

But how are you kind of thinking about the decision today, what are the economics look like on each?

But the price is all about the economics. It's [indiscernible] does any other from our standpoint, whoever bought now buy it later.

It's just -- what are the numbers and what are the expectations of the seller.

Okay, fair enough. And then just lot of pressure on rates right now on some of the high supply markets, most of the equity REITs are still saying the cap rates haven't moved materially partly because there's probably less transactions right now and given the bid-ask spread, but just wondering on some of the more recently completed deals, the ones that have just recently received the C&Os [ph].

How have those appraisals kind of come in versus your initial expectations are valuations in general still kind of in line with or better than what you were expecting on the more recent deals?

I'll talk about cap rates little bit and John and Kelly, you all can come in on the -- about the appraisals. But cap rates have not moved and is for two reasons, I think; one is, there's not been that much activity, but the activity that has taken place out there, there is still lot of people want to own storage, a lot of institutional capital still interested in owning storage.

I think, that's not going away. So what it appears to me that -- unless that dried up completely, cap rates are not going to move unless interest rate start to move.

And John is our internal expert on the interest rates. John, why don't you pick it up from here.

I mean, as far as -- I can't, I don't have a crystal ball that's good enough to predict what interest rates are going to do, but what I can tell you, we are seeing is we get these valuation reports each quarter from a national real estate firm. Of course, the RIETs have pulled in their horns a little bit.

So there aren't a lot of comps out there. There aren't enough trades to really be able to spot a trend but those deals that -- that trades that we do see and some involve properties that have been a year, year and a half; some of the CO deals and you can kind of imply cap rate from those.

We know what the RIETs pay for CO deals because we've had a number of people talk to the RIETs about doing CO deals. And when you look at our stabilized yields.

I think, our cap rates are still tracking kind of right what we expected them to be. Rates -- what rates do going forward, the increases in short-term rates.

We don't pay a lot of attention to the 10-year has continued to stay very low and I think economically, as you move on into 2018 and 2019, I don't see anything coming out of Washington that leads me to believe that the economy is just going to take off to the point that you're going to have a very dramatic increase in long-term rates. I know the Fed is making the statements it's making, but at the same time, they have to operate within a global environment and within our own economy and nothing's getting done from a policy standpoint, and it -- just -- they were saying, this time last year, long-term rates are going to start to move pretty significantly, and a year later, they're basically where they were.

So we kind of feel good about where cap rates are. There is still lot of money out there looking to get into the sector, particularly on the private equity side.

And then last one for me. Dean, maybe you can just comment on the -- any updates on the potential development bank in New York with [indiscernible] plan and how do you think that affects the New York market both the current stock and future stock to be developing?

I have a little bit of a different opinion than most people. I would not likely see that market get overbuilt.

I think the building in industrial zones typically have not been where we wanted to put storage. I think, it's an easy place to go to build storage but our customers normally don't want to go there.

So I'm fine. If somebody want to put a ban on building storage in industrial zone property, all over the country, I would be fine with that, because we want to be out on a commercial site.

And so I think, the guys who are long in the New York City area are in great shape. I just don't see that market ever getting overbuilt.

I mean, I have not developed that market for 30 plus years. But I will tell you the market that we have developed in or I have developed in is Washington, D.C., right there in your backyard, David.

And it's never been over-developed. We never had serious softness in that market just because of growth and just what a great market is.

Well New York is even better. So New York is not going to be overbuilt.

Yes, there will be some temporary maybe in the Bronx, Brooklyn. So a little bit of temporary strain on rates and what not.

But it will come out quickly. It will not be any kind of even small storm.

It will -- New York is going to be just fine.

All right, good. I would argue, Baltimore is your best market.

But you know, I am a little biased.

Thanks for taking my follow-up. Just one from a modeling standpoint, but, the credit facility provides you with yet another capital source, which is a nice problem to have.

I'm curious if this is effectively replace the loan trenching program or if we can still expect to see those used along with the facility going forward?

Jonathan, I'll take that one. We will not be using that going forward under the credit facility.

We are effectively prohibited from trenching loans without the consent of the bank group. They want all of our deals to go into the facility.

We can go to them on a one-off basis if we have some kind of a special situation and ask for a consent, but that will not be a significant -- that will not be a financing tool that we use extensively going forward.

Okay, so that's one -- remove another sources, what's happening?

Yes, one is replacing the other.

All right, well that's it from me. Thanks for taking the follow-up.

Okay. Very nice call, thanks to everyone who joined us and look forward to seeing or talking to you soon, good day.