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Jernigan Capital Inc (NYSE:JCAP)
Q4 2019 Earnings Call
Feb 27, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Jernigan Capital Inc. Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]

I will now turn the conference over to your host David Corak Senior Vice President of Corporate Finance. You may begin.

David Corak -- Senior Vice President, Corporate Finance

Good morning everyone and welcome to the Jernigan Capital Fourth Quarter 2019 Earnings Conference Call. My name is David Corak Senior Vice President of Corporate Finance. Today's conference call is being recorded Thursday February 27 2020. [Operator Instructions] Before we begin please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business.

These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC which we encourage you to review. A reconciliation of the GAAP to non-GAAP financial measures provided on this call is included in our earnings press release. You can find our press release SEC reports and audio webcast replay of this conference call on our website at www.jernigancapital.com. In addition to myself on the call today we have John Good Chairman and CEO; Jonathan Perry President and Chief Investment Officer; and Kelly Luttrell Senior Vice President and CFO.

I'll now turn the floor I'll now turn it over to Mr. Good. John?

John A. Good -- Chairman and Chief Executive Officer

All right. Thanks David and good morning everyone. 2019 was a tremendous year for our company. Our team continued to execute the business plan that we have consistently articulated and steadfastly followed over the past five years and the table is now set for the next stage of our life as an internally advised equity REIT. Under that backdrop I'd like to use my time to summarize our major achievements over the past 12 months. Firstly in December of 2019 we executed a definitive agreement for our internalization which was overwhelmingly approved by our shareholders and closed last Thursday. We had over 75% of our shares represented at the Special Stockholders meeting held on February 20 and 99% of those represented shares voted in favor of the internalization.

We strongly believe that the fair price substantial cost savings strong alignment between management and stockholders and incentive to increase stockholder value as evidenced by the earn-out provision of the internalization consideration have increased interest in the stock boosted our value in stock price and positioned us for future success. Also during the year we achieved a solid level of external growth. During 2019 we committed $101 million of capital to new developments and the acquisitions of developer interest which number exceeded the midpoint of our guidance for the full year of $100 million which guidance we issued in February of last year and reaffirmed during the year. In the past 12 months we've acquired developer interest in 22 properties including non-developer interest that we've acquired since the beginning of this year.

Today we wholly own either on our own balance sheet or in our Heitman joint venture 29 of the Generation V self-storage properties we financed since our 2015 IPO accounting for about 37% of the net rentable square feet in our overall portfolio. Looking forward we've guided to between 15 and 20 acquisitions in 2020 which includes what we've already closed and we would expect to wholly own more than 50% of our portfolio by the end of the year. We enhanced our already strong capital position by strategically placing approximately $54 million of common stock under our end market program since the beginning of 2019. We rightsized our dividend to an annual rate of $0.92 per share which is the level befitting an equity REIT of our age and positioning within the self-storage sector. We announced this dividend change in connection with internalization.

And we also announced that we have a strong belief that we have an achievable path to the fully AFFO coverage by early 2022. In November we were included in the MSCI US REIT Index also known as the RMZ. This was the official coordination of JCAP as an equity REIT. We've engaged in a program of continuous shareholder outreach that we believe has transformed our shareholder base into a truly institutional base with over 80% of our flow now held by institutions and insiders at the end of 2019. Meanwhile our portfolio of state-of-the-art Gen V storage facilities has continued to mature nicely as leasing commenced on 16 facilities in 2019 and as of today 59 of the 76 self-storage developments to which we've committed are completed and open for business at an average occupancy rate of 52% on a physical occupancy basis.

We entered 2020 with a best-in-class portfolio of recently developed Gen V self-storage assets and what we believe are some of the best self-storage markets in the United States. This portfolio consists of a combination of wholly owned assets and development investments. As has been the case since our inception our development investment structure with product interests and rights of first refusal or levers provides us with a large captive pipeline of potential acquisitions. When combined with an intention to participate in the impending acquisition cycle we are well positioned for significant external growth. We're also a company with a great internal growth story inherent in the organic growth of our lease-up assets.

As our portfolio continues this season we expect to begin to capture pricing power as properties move closer to stabilization even in this period of elevated new supply. While many stabilized self-storage assets face internal growth headwinds we expect our wholly owned portfolio to produce double-digit annual NOI growth over the next few years. Lastly we believe we can accomplish this growth with a decrease in cost of capital as our portfolio grows and matures. We have a great deal of confidence in our proven business model and the track record great execution by the JCAP team and we believe we are well positioned to add significant shareholder value in the coming quarters.

With that I'll turn things over to Kelly to review financial results and guidance.

Kelly Luttrell -- Senior Vice President, Chief Financial Officer, Treasurer, and Corporate Secretary

Thank you John and good morning everyone. Last night we reported fourth quarter earnings per share of $0.06 and adjusted earnings per share of $0.39. Exclusive of $0.09 of onetime internalization-related expenses which impacts our EPS only both GAAP EPS and adjusted EPS came in above the midpoint of our initial annual guidance as well as our updated annual guidance issued with our third quarter earnings. Overall for the quarter our results came in above our expectations. The primary driver of the beat was fair value which came in at about $0.04 above implied fourth quarter guidance primarily due to better-than-expected construction progress during the quarter. Additionally property NOI on our wholly owned assets was above the high end of the range driven by stronger-than-expected fourth quarter results.

In regards to guidance for 2020 last night we provided a full year adjusted earnings per share guidance range of $0.52 to $0.87. As John mentioned we expect strong external growth in 2020 but that growth will look slightly different than it has in years past with it being weighted more toward acquisitions to new development. Specifically we are expecting one to two new development commitments this year as we have become quite selective about development opportunities we are willing to pursue this late in the cycle and in the current environment of fundamentals. Additionally we are expecting to acquire between 15 to 20 developer interest inclusive of the nine we acquired year-to-date.

From a value creation standpoint these acquisitions are very accretive to longer-term NAV and shareholder value and they will meaningfully add to NOI and AFFO growth during their lease-up. However as we discussed publicly for several quarters our development our developer acquisitions are near-term dilutive to earnings per share because we one discontinue recording fair value; and two assume the operating burden of lease-up assets as they move toward stabilization. On that note we expect that the properties we consolidate in 2020 will be less mature than those consolidated in 2018 and 2019 with less in-place NOI at the time of acquisition and a longer period of stabilization. For frame of reference the 2019 operating assets that we consolidated prior to 2020 were approximately 21 months into lease-up and were on average 63% occupied when acquired.

By comparison the average physical occupancy of the nine assets acquired thus far in 2020 was about 39% and they were only 14 months into lease-up. Overall the large quantity timing and relatively younger ages of these acquisitions are expected to have a greater near-term dilutive effect on adjusted EPS and in years past. Specifically adjusted EPS is expected to be $0.35 to $0.42 per share lower than our targeted level of acquisitions than if our capital had remained in loans with profits interest that accretive fair value on a quarterly basis. We strongly believe that the long-term value and earnings growth that we will receive from acquiring these developers' interest at good prices earlier in lease-up as they become available easily justify the short-term dilutive impact on earnings that we experienced from the lease-up of these assets.

Moving on to the capital front. We intend to primarily utilize the company's credit facility to fund our estimated development draws of approximately $80 million this year and our leverage level remains very reasonable and we expect to continue to have the ability to opportunistically issue common stock under our ATM when we think it makes sense. Ultimately we expect to maintain our leverage levels in the range of 25% to 30% of our gross assets. Additionally this year we expect to have some capital recycling opportunities. While we have our development projects in a desire to own a substantial majority of the facilities we finance we always have the optionality to allow the sale refinance or repayment of the facility when it makes sense. In 2020 we are anticipating capital recycling opportunities upwards of $40 million composed of structural refinancing repayments and/or asset sales.

A combination of capital recycling availability on our line and opportunistic ATM issuances provides ample liquidity to fund developer buyouts as they become available. Our table of capital sources and uses on page 19 of our supplement reflects sufficient capital to fund our commitments for this year. Lastly we know much of the focus of the analyst and investment community is on the growth trajectory of this company beyond this year. Specifically the growth of funds from operations and adjusted funds from operations. We expect to begin reporting FFO and AFFO no later than Q1 2021 as we believe that when a majority of our business becomes ownership and operation of properties we will have reached an inflection point on which metric investors care most about. And finally at this time we still feel very good about covering our common dividend by early 2022 as John referenced and as we noted in our internalization presentation.

With that we will now open it up for Q&A.

Questions and Answers:

Operator

[Operator Instructions] And our first question is from Todd Thomas from KeyBanc Capital Markets. Please proceed with your question.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

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

John A. Good -- Chairman and Chief Executive Officer

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

Todd Thomas -- KeyBanc Capital Markets -- Analyst

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

John A. Good -- Chairman and Chief Executive Officer

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

Todd Thomas -- KeyBanc Capital Markets -- Analyst

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

Kelly Luttrell -- Senior Vice President, Chief Financial Officer, Treasurer, and Corporate Secretary

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

Todd Thomas -- KeyBanc Capital Markets -- Analyst

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

John A. Good -- Chairman and Chief Executive Officer

No. No. It's all credit facility.

Kelly Luttrell -- Senior Vice President, Chief Financial Officer, Treasurer, and Corporate Secretary

Right.

John A. Good -- Chairman and Chief Executive Officer

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

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. Great. Thank you.

Operator

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

Tim Hayes -- B. Riley FBR -- Analyst

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

John A. Good -- Chairman and Chief Executive Officer

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

Tim Hayes -- B. Riley FBR -- Analyst

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

John A. Good -- Chairman and Chief Executive Officer

Well we've always been we've always noted that we're focused top 50 markets. So my comments will relate solely to the top 50 markets. We like everybody else are impacted by new supply. I think right now if you look out next year or two somewhere north of 60% of our properties have some new competition coming online. But keep in mind that we our properties are managed by the best-in-class platforms. So in terms of managing through this we've been dealing with new supply for three years now. And from a physical lease-up standpoint we're doing just fine. We don't see that changing. And I think that we're going to continue to lease in a way that is rational and that the pressure is going to ease as we get into 2021. You probably read the transcripts I've been on the calls of the other REITS. And '20 is projected to be a tough year for everybody but everybody when they start looking into 2021 2022 sees deliveries topping off pretty dramatically.

And when you look at the supply picture in general we have pretty strong anecdotal evidence that the banks have moved away from the self-storage sector to a fairly significant degree particularly on the development and the financing of lease-up properties the cost of that debt has gone up. It's pretty well-documented that you have labor shortages in every major market in the country. I think the number is maybe 0.7 people to fill every job that's available and construction filling construction jobs is even more difficult. So we have a high level of confidence that as you move through 2020 and on into '21 starts drop very significantly. What's in process is delivered and gets absorbed in a rational way and every and the sky start to clear here as you get into the latter part of 2021 and first part of '22.

Tim Hayes -- B. Riley FBR -- Analyst

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

Jonathan Perry -- President and Chief Investment Officer

Yes Tim this is Jonathan. As it relates to the underwriting as you know the way we look at underwriting pro forma really the first three rental seasons are the focus is entirely on occupancy. And you get the rate and the pricing power on that last leg or that fourth rental season. So we're still optimistic that we're going to get to our numbers in the defined time period. Realistically there are going to be some properties as the markets that were hit harder and so you may need an extra season to get there. But we don't see any concerns today on achieving the goals on a on the lease-up front and really rate projections into 2020. We've seen the ability year-over-year to push street rates north of 6% on our 14 at the time wholly owned properties.

So we are seeing some green shoots there and some positive momentum. And then additionally one lever that we have that others may not is the rate increases to existing tenants. So traditionally those have run in the 8% to 10% range on our portfolio to date really throughout 2019. We've been pushing rates on existing tenants in the low teens and I don't see that trend really slowing down. So we do have some opportunities there to bring those existing customers up to what we believe market rate is and a reasonable time frame.

Tim Hayes -- B. Riley FBR -- Analyst

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

John A. Good -- Chairman and Chief Executive Officer

Yes. Tim on the coronavirus and I don't want to get overly political or philosophical or whatever on this topic. But you have what looks to be a knee-jerk reaction based on speculation as to something that might happen but might not happen. And if you look at the statistics around the coronavirus sure you had 82000 cases reported in China. China has a population of three billion people. And out of that 82 million or out of that 82000 reported number of cases about 2% have resulted in death and most people have recovered. And it appears to be kind of like the flu. And I don't want to be flipping in the comments. It's certainly a serious global health concern. But at the same time in the U.S. and the 2019/'20 flu season you've had 14000 reported deaths from that and it's just part of human life that because of headlines and because of speculation you've seen this dramatic impact on short-term impact on markets.

And it's none of it's based on any fact other than in a contrary halfway around the world you've got a bunch of people who've gotten sick. And I feel like long term if it turns out to be a true pandemic where a lot of people die then everybody in the world is impacted by that and storage is impacted and office is impacted and everyone else is impacted. There's just no evidence right now that's definitive that it's going to be that bad. And this appears to me to be purely a case of a reaction based upon people's speculation about what might happen in the future which I find to be really dangerous. We deal with facts. And from a factual standpoint people are going to continue running storage space because they continue to need a place to put things that they don't have room for otherwise. And I guess if half the world dies then you're probably going to see a lessening of storage demand.

Tim Hayes -- B. Riley FBR -- Analyst

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

Operator

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

Jon Petersen -- Jefferies -- Analyst

Great. Maybe to start with more of a high-level commentary. Obviously you guys have internalized the management you're becoming more of it seems like by the end of this year you'll definitely more of an owner than a lender. So how should we think about what's going to change from a management style of the company management of the properties? How are things going to evolve over the next year or 2?

John A. Good -- Chairman and Chief Executive Officer

Jon that's a good question that gets into something that we spend a lot of time on every day and that's looking out and trying to make decisions to position us to maximize shareholder value. Certainly from a strategic standpoint as we get larger and add scale we'll possibly consider at some point in the future internalization of property management. If we end up with a large portfolio where we feel like we can do that well and continue to drive shareholder value and by do it well I mean do it better than the guys who are currently managing the facilities and that's a high bar. I mean the people who are managing our facilities right now are doing an exceptional job and we will continue to reap those benefits as long as it makes sense to do so adding management is costly.

It involves a significant front-end capital investment. It involves a substantial investment in people substantial investment in systems and policies and procedures and all of those things. And there is a level of scale below which it just makes a whole lot more sense to do what we're doing right now. But we'll continue to look at the growth trajectory of the company and continue to think about that as we go. And I think that we have been on target for five years and making decisions on a timely basis to do things. And I don't see that decision being any different than the way we've made decisions in the past.

Jonathan Perry -- President and Chief Investment Officer

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

Jon Petersen -- Jefferies -- Analyst

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

John A. Good -- Chairman and Chief Executive Officer

Yes. I mean I think that you can draw some conclusions from the commentary that we have given around dividend coverage. We very we've been very vocal that we think by the first quarter of '22 we'll be covering a $0.92 dividend. And so that kind of gives you a trajectory from right now to that point in time. And that's looking out basically seven eight quarters. Beyond that you can take the portfolio and make assumptions on acquisitions based on what we've done today and pretty easily come to the conclusion that AFFO growth is in the double digits certainly for the next three years three or four years and possibly into a fifth year. So we feel like that and that's the internal growth engine that I've discussed in my prepared remarks.

The fact that we have invested in development which historically has been higher returning than acquisitions the fact that we feel like we've underwritten good sites and really good markets should give a lot of confidence to investors in that growth rate. And as we achieve that kind of growth as we achieve the rewards that come with increasing stock price and lower cost of capital that results from good performance then the window kind of opens for us to look at doing other things acquisitions acquisition joint ventures. All of those things that can accelerate that growth even more. But we're pretty confident in the internal growth certainly over the next three or four years.

Jon Petersen -- Jefferies -- Analyst

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

John A. Good -- Chairman and Chief Executive Officer

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

Jon Petersen -- Jefferies -- Analyst

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

John A. Good -- Chairman and Chief Executive Officer

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

Jon Petersen -- Jefferies -- Analyst

Fair enough. All right. Thank you very much.

Operator

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

John A. Good -- Chairman and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 37 minutes

Call participants:

David Corak -- Senior Vice President, Corporate Finance

John A. Good -- Chairman and Chief Executive Officer

Kelly Luttrell -- Senior Vice President, Chief Financial Officer, Treasurer, and Corporate Secretary

Jonathan Perry -- President and Chief Investment Officer

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Tim Hayes -- B. Riley FBR -- Analyst

Jon Petersen -- Jefferies -- Analyst

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