Q3 2019 Earnings Call
Greetings and welcome to the Jernigan capital Inc. third quarter 2019 earnings Conference call.
At this time, all participants are in listen only mode.
Question answer session will follow the formal presentation.
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Please note. This conference is being recorded I will now turn the conference over to your host David Corak VP of corporate Finance, David you may begin.
Good morning, everyone and welcome to the Jernigan capital third quarter 2019 earnings Conference call. My name is David Corak Senior Vice President Corporate Finance Today's conference call is being recorded Thursday October 31st 2019 at this time all participants are in listen only mode.
For all the open for your questions. Following management's prepared remarks before we begin please remember the 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 no stated or implied by our forward looking statements due to risk.
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 FCC, which we encourage you to review.
Reconciliation of the GAAP to non-GAAP financial measures provided on this call. It included in our earnings press release, you can find our press release. That's you see reports an audio webcast replay of this conference call on our website at Www Dot Jernigan capital Dotcom.
In addition to myself on the call today, we have John Good CEO , Jonathan Perry, President and Chief Investment Officer, and Kelly lateral senior Vice President and CFO I'll now turn the floor ever to Mr. good job.
Thanks, David and good morning, everyone. We're very happy with our third quarter performance from the perspective, so that was financial metrics and key operating metrics.
Kelly will go through the financial performance, but I'd like to comment on progress we've made on the operation side.
Currently 54 of the 76 self storage developments, we financed are completed and open for business and approximately 85% of does open properties have experienced a full rental season, given the young age of this portfolio. Our primary focus continues to be on physical occupancy.
Our properties added meaningfully to occupancy during the quarter and physical occupancy is running approximately 290 basis points ahead of initial underwriting for our 46 properties that had been opened for at least one leasing season.
We had a busy quarter on the transaction fraud for the full year, we've committed $101 million of capital to 18 self storage investments exceeding the midpoint of our 100 million dollar full year investment guidance that we issued in February and re affirmed during the year during the third quarter.
Are we originated two new development investments with profits interest and rights of first refusal ropers, both in very dense an underserved micro markets in the New York City M.S. say.
These projects are being developed within experience developer with J cap is done multiple projects in the New York area. There aren't many of these deals left in the and this development cycle and we expect the level of our investment in new development to moderate as we've noted previously we're not forecasting any additional development investment.
For the balance of the year.
On the acquisitions fried the third quarter was our most active quarter NJ caps history.
During the quarter, we acquired developers interest and seven projects. We had previously financed these include the five self storage facilities the underlying our Miami rich portfolio that we closed in March of 2018, our Jacksonville, two development investment as well as the facility underlying our mine.
Any construction.
While we are regularly in discussions with our developer partners about acquiring their positions and projects. We financed we believe those discussions are more likely to bear fruit and 2020 than in 2019. Therefore, we're not forecasting any additional acquisition closings in 2019.
We now wholly own either on our balance sheet are within our heitman joint venture 19 of the Gen be self storage properties, we financed since our 2015 IPO accounting for just under 25% of the net rentable square feet, our overall portfolio.
Going forward and we believe the frequency of opportunities to acquire developers interest will accelerate.
While the past is not necessarily a predictor of the future our developers have us historically initiated buyout conversations with us at about the halfway point in physical lease up that history provides us with a means to make an educated estimate of the timing of future buyout opportunities on the.
Basis of data analysis over the next 18 months a majority of our portfolio will have hit the milestone at which these conversations typically began.
Therefore, we believe there's a realistic scenario, where we wholly own a majority of the self storage developments, we financed within the next 18 months keep in mind that while we have refers on all of our development projects and a desire to own a substantial majority of the facilities. We finance we always have.
The optionality to allow the sale of a facility in realize a profit when it makes sense to us and our shareholders.
Looking forward, we expect 2020 to be a transformational year for Jay Cat first as mentioned a minute ago, we expect the pace of acquisitions of developer buyouts to increase and thus our wholly owned portfolio to increase significantly.
Second we expect to begin to capture pricing power in our portfolio is our properties move closer to stabilization.
Thirdly, we expect to have optionality on the capital front to be able to participate in what we believe will be I robust upcoming acquisition cycle and finally, while discussions are ongoing and there's no transaction to announce at this point, we expect to internalize the external advisor of the company.
Cap advisors LLC.
All of these events have been part of our strategic vision and plan since inception and position us more as a traditional owner operator of properties or an equity rate in contrast to the specialty finance company label that we born since our IPO.
And that lie and as the company's transformation to an equity REIT becomes especially pronounced in 2020 management in the board continue to evaluate Jay caps key investing financing an operating policies, including our dividend policy.
Our board and management collectively believe a rightsizing of our dividend will be in order in the coming months and while we're not yet ready to determine the magnitude of such Rightsizing, we will focus on an orderly and timely progression to a covered dividend as our outstanding portfolio of self storage properties stabilized.
Yes.
Turning to the internalization process at this point in the process of Special Committee, which is comprised of all our independent directors has commenced discussions with the potential.
Regarding the potential internalization of the company's external advisor.
With that I'll turn things over to Kelly.
Thanks, John and good morning, everybody.
Last night, we reported third quarter earnings per share of 26 cents and adjusted earnings per share 46 cents, both of which exceeded the high end of our quarterly guidance.
Overall for the quarter our results came in above expectations with a few noteworthy items on which I'll provide some additional color for everybody first fair value for the quarter came it came in at the high end of our range. This was primarily driven by favorable movements of interest rate along with overall better than expected construction progress.
Second our interest income exceeded the high end of our guidance driven primarily by higher than expected default interest and modification fees recognized on certain investments.
And lastly property at all I was above the high end of our range driven by the timing of our acquisitions during the quarter.
In regards to guidance as of the ended the third quarter, our construction progress and timing of deliveries remained on track our operating portfolio is performing in line with expectations. We have more visibility now the impact of market interest rates over the balance of year.
Based on these factors we are once again able to adjust our guidance ranges. The net effect of all this is an increase in the midpoint of our full year adjusted EPS guidance range and a tightening of our EPS guidance range.
Turning to the balance sheet, we see 2 million common stock under our ATM program during the quarter at an average share price at $20.68, which was an approximate 8% premium to our June thirtyth of value per share.
We also utilize our credit facility with 125 million drawn at quarter end and our leverage as measured by net debt to gross assets stood at approximately 20% at quarter end.
Our table of capital sources and uses contain on page 17 of our supplement reflects sufficient capital to fund our investments for the next year and as we've done since inception, we will continue to prudently seeks to match our funding obligations with the sources of capital the best that's the value of our company and maintain our debt levels in the range of 25% to 30%.
If gross assets now with that ill turn it back over to John Thanks, Kelly and if I can just make a quick note on Q in a which will go to right now.
We understand that the internalization process is top of mind for you and all of our shareholders. However, because the process is ongoing right now we aren't able to answer questions beyond questions concerning the contractual process to be followed.
Well respectfully ask that in Q and now you limit your questions to the topic of the technical process with that said I'll now turn it over for QNX.
Daryl.
At this time, we will be conducting a question and answer session. If you would like to ask the question. Please press star one in your telephone keypad confirmation tone will indicate your line is in the question Q.
Press Star too if you would like to remove your question from the Q or participants using speaker equipment and may be necessary to pick up a handset before pressing the star.
One moment, please while we poll for questions.
[noise].
Our first question comes from the line of Todd Thomas of Keybanc Capital markets. Please proceed with your question.
Hi, Good morning first question John your comments around the dividend I think you mentioned that there would be.
The board and management or are committed to potentially rightsizing the dividend in orderly manner.
What does that mean exactly and I guess, how has the board thinking about the magnitude of.
Potential reduction that might be an order in light of the potential cash flow growth you'd expect over the next 18 months from both bringing stores onto the balance sheet and also seeing cash flow growth from from lease up.
Yes. Thanks, Todd Good question in terms of timing you probably all saw this morning that we made our announcement for the fourth quarter dividend payable January 15, and left the dividend at the same level. So you can infer from that that the earliest we're talking about.
Is the April 2020 dividend payment, our first quarter 2020 dividend.
We're not ready yet to comment on the magnitude of the adjustment obviously, yeah. It's a board board and management ongoing process and we're monitoring everything that's going on and as you know theres lot going on right. Now however, what I can say is that this thought process is centered on covering the dividend.
And with adjusted FFO within a reasonable timeframe with an understanding that our cash flows grow at a pretty high rate as our portfolio stabilizes.
We have a whole lot of confidence in the portfolio the portfolios for performed very well and very predictably for us over a.
Relatively.
Decent period of time.
We also have a high.
Hi level of confidence in our ability to model our cash flows and we have a high level of confidence in our board to do things that are in the best interest to shareholders. So we believe when you add all of that together will reach an optimal result, as we go through this exercise and Ed.
It's going to be at 2020 exercise.
Okay would you would you expect the dividend to be and will be covered by maybe the end of 2020 on an annualized basis or do you think that we should be thinking.
You know about coverage a little further out in the future.
I really can't because of the stage of of discussions tides, probably not appropriate.
To provide an estimate of that right. Now you guys have modeled the cash flows as a company and you can kind of see how how they grow in the end the real growth starts to take place.
Probably after 2020, but at this point in time, it's premature to speculate on when that coverage date might be but but we are committed to doing it within a reasonable period of time that would.
That would meet expectations of our share of our shareholders.
Okay. That's helpful and then as you think about making new.
Loan commitments here, you announced two new deals in New York recently.
I think you've said previously you'd be looking to slow down.
Miami growth or start to limit your your exposure to Miami.
20% there.
So you're just under that New York I guess, how are you thinking about.
Your New York exposure and then can you can you talk about some other markets that you might be circling today, where you don't have a presence that we could start to maybe see you become active in.
Yes, let me let me take the first part of the question then I'll, let Jonathan comment on on markets that that we constantly monitor and may have interest in or not.
As we've said now for the last several quarters, we're getting light in the cycle and as deals come to us and we evaluate those deals we look at supply in these markets. We look at fundamentals, we look at all of the things that go into the underwriting process there.
Aren't many deals that are clear in the bar, we have a pretty hot pretty high hurdle to clear before we commit to a deal and there aren't many that are clearing that so I would anticipate that going forward over the coming quarters. So we'll be very selective and making additional commitments to two development.
Jonathan you may want to comment on markets that yeah, just maybe could stand a few more deals yeah, just looking on the horizon and the deals that are.
In the pipeline in some form whether it's simply evaluating sites or full blown underwriting Todd.
You've got.
You are looking to possibly add to opportunities up in Boston.
We have we have a couple up there now and would like to round out a nice portfolio up there and then we've talked in the past about California initiates been tough sledding out there for everybody trying to.
Get sites approved and permitted we have couple of sites out there right now into Q.
That.
Our moving ahead nicely and should begin the construction phase in short order. We continue to look at sites in La and also up in the Bay area and then heading back to the East Coast DC, Northern Virginia, Northern Virginia has seen a lot of new supply, but there's still some nice pockets in those.
Markets in and around DC and.
To your point on New York, we have.
We have committed quite a bit of capital up there, we really like our projects I do think that New York for US. It's a big market is not just the boroughs. It's it's out on long island up in touching in Connecticut, and also northern New Jersey. So you can still find some pockets up there were some deals makes sense.
Okay, great. Thank you.
Our next question comes from the line of Tim Hayes.
Highly FBR.
Please proceed with your question.
Hey, good morning, guys. Thanks for taking my questions.
Just one more on the dividend.
You talked about that being at the process being a 2020 event, but just trying to understand what that means with respect to potential internalization announcement do you expect to kind of have your thoughts and finalized on the dividend and maybe that roadmap planned out when you do you make an announcement.
If you do make an announcement excuse me.
Yes, I mean, I think that in many respects, it's all tied in with the transformation of the company into an equity rate that includes that includes internalization. It includes.
Additional additional acquisitions of development interest.
The internalization, we expect to be very.
Very accretive to the earnings of the company and and it all.
I think feeds into a desire to be really a conforming company. When you think about us compared to the rest of the REIT World. Yeah. We've operated for the last four and a half years with a lot of people looking at us much as a specialty finance company.
And we've always thought of ourselves as an equity rate since day, one we've had significant ownership interest in all of these.
All of these properties, we own we feel like as we move into internalization.
More property acquisitions in 2020.
Right sizing the dividend really in conjunction with all of that likely make sense.
Okay.
And then.
I will try to be respectful, one more around internalization and I'll be respectful of your wishes there, but can you just remind us the motions you need to go through before any formal announcement order could be made and what the expected timeframe around these processes are.
Sure so.
And I'm going to get a little bit technical just more or less.
Turning from memory, which this is forever etched in my memory the management agreement.
Thank you.
Under under the management agreement.
The and this has been the case since before our IPO.
And offer to internalize must be made by the manager no later than a 180 days prior to the first expiration date of the management agreement. It was a five year management agreement that was executed on March 31 of 2015, so that X.
Operation date is March 31, 2020, when you back up 180 days from there next year being a leap year that was that date was October 3rd of this year. So that date is passed the offer was made.
The the agreement then requires that the board acting through a special committee consisting solely of independent directors.
Is required to evaluate that offer and either except that offer or counter the offer I can tell you that the special Committee was formed the special Committee consists of all five of our independent directors and they are currently engaged.
With the manager in negotiating a transaction.
Yes.
I want be any announcement or any further commentary until there is a transaction to announce.
Going back to the management agreement under the management agreement any transactions that has agreed to between the manager and the company must be supported by an opinion by nationally recognized and vast investment bank that the financial consideration to be.
Delivered in that internalization transaction is fair to the shareholders of the company from a financial point of view.
So I would I would suggest or suspect that no announcement would be made before you have an agreement and before that fairness opinion has been delivered and once that happens you go into a process of a shareholder vote. The management agreement also approved requires approach.
Well bomb majority of the shareholders voting at duly called meeting of the of the of the company shareholders and so once those first two steps are done we'll go through the proxy solicitation process and shareholders will be.
Permitted to vote on the transaction at that point time and must approve it before the transaction can close yes. The process of fairness opinion proxy statements shareholder vote, yes kind of a 75 to 90 day process. So if you want to if you want to look at timing of things nothing's going to add.
Happened this year from a closing standpoint.
So I think that that that is probably the most I can say about process and happy to answer any additional questions on any aspect of that that doesn't go to the merits of the discussions.
Yes, no that answered my question to anti appreciate the comments there.
And then I know you mentioned switching gears the fundamentals I know you mentioned you don't expect to see any more investment activity for the rest the year, but give any insight into the amount of projects that might deliver before year end.
Jonathan.
Probably best person.
Are you talking about four for Jay cap or you're talking about supply or are you talking about for Oh, sorry, no JJ cap specifically.
Yes, so on the when you think about the development projects and the assets that are under construction, we would expect at this point another four to deliver and.
Fourth quarter.
Okay.
Got it and then just one more from me.
Many of your peers have noted using an increased amount of promotion or advertising spend and lower rates in order to support lease up.
In the face a new supply just just wondering which of these tactics. If any you guys are using.
How your same store Opex has trended as a result.
Yes, we don't have the same store.
Opex per se, but but as it relates specifically to the marketing spend and I understand that.
You are seeing quite a bit of increases from the other public companies that have reported.
For us looking back 2018 to 19, it's it's relatively flat it's grown at most at inflationary levels.
From a from an advertising or marketing standpoint and actually.
Trended down in the month of September so we.
Our our management company.
Companies floral have been doing a nice job monitoring that for us in there really hasn't been any surprises.
And is would you attribute that just to kind of.
Target market selection or why or why isn't that headwind many been as pronounced for you guys.
Yeah, I think it it's a couple of things one is I think it is very targeted.
Marketing to your point and I think that.
Again, the management companies have done a nice job of gaining efficiencies. There and then then secondly, we have we have management agreements and we have budgets that our.
Management companies at here too so.
They may not have quite as much liberty per se with our portfolio too.
Push different levers than than they may on their own.
Okay.
Yep understood that makes sense, all right well I'll hop back into queue, but thanks again for taking my questions.
Extend.
We have reached the end of the question and answer session I will now turn the call over to John good for any closing remarks.
Hi, Thanks, and thanks, everyone for being on the call and thanks for your continued interest in Jay cap and we look forward to talk and see again in late February .
We will be it may read.
A week from a week from Monday.
Thank you.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.