Q4 2019 Earnings Call
Greetings and welcome to the Jernigan capital incorporated fourth quarter 2019 earnings Conference call. At this time, all participants are any listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
Well now turn the conference over to your host David Koresh Senior Vice President of corporate Finance you may begin.
Good morning, everyone and welcome to the during the capital fourth quarter 2019 earnings Conference call. My name is David Corak Senior Vice President Corporate Finance Today's conference call is being recorded Thursday February 27 2020.
Time, all participants are in listen only mode before will be open for your questions. Following management's prepared remarks.
Before we begin please remember that management's prepared remarks and answers to your questions may contain forward looking statements as defined in the private Securities Litigation Reform Act up 1995, and other federal security 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 FCC, which we encourage you to review.
Reconciliation of the GAAP to non-GAAP financial measures provided on this call. It included on our earnings press release, you can find our press release, that's you see reports and audio webcast replay of this conference call on our website at Www Dot Jernigan capital Dot com.
In addition, myself on the call today, we have John Good Chairman and CEO, Jonathan Perry, President and Chief Investment Officer, and Kelly lateral senior Vice President and CFO I'll now turn the floor <unk> I'll now turn it over to Mr. good job.
Hi, 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 tables now sat for the next stage of our life as an internally advised equity rate.
Under that backdrop I'd like to use my time to summarize our major achievements over the past 12 months.
Firstly in December of 20 night chain, 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 a special stockholders meeting held on February 20, yet and 99% of those represented shares voted in favor of the internalization, we strongly believe that a fair price substantial cost savings strong alignment between managements.
And stockholders and incentive to increase stockholder value as evidenced by the Earnout provision of the earn out of the internalization consideration.
<unk> increased interest in the stock boosted our value in stock price and positioned us for future success.
Also during the year, we achieved 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 out of our guidance for the full year of 100 million dollar.
Hours, which guidance we issued in February of last year and reaffirmed during the year.
For the past 12 months, we've acquired developer interest in 22 properties, including nine developer interest that we've acquired since the beginning of this year today, we wholly owned either on our own balance sheet are within our heitman joint venture 29 of the generation based del self storage properties, we finish.
Since our 2015 IPO accounting for about 37% of the net rentable square feet in our overall portfolio.
Looking forward, we guided to between 15 and 20 acquisitions in 20, Twond age, which includes what we've already closed and we would expect a wholly own more than 50% of our portfolio by the end of year.
We've enhanced our already strong capital position by strategically, placing approximately $54 million a common stock under our aftermarket program since the beginning of 29 chain.
We right sized our dividend to an annual rate of 92 cents per share, which is the level, but fitting in equity you read of our agent 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 Pat the full lay up that five coverage by early 2022.
In November we were included in the M.S.C.I.U.S. Rina Index also known as the RM Z. This was the official coronation of J cap as an equity rate.
We've engaged in a program of continuous shareholder outreach that we believe is transformed our shareholder base into a truly institutional base with over 80% of our why now held by institutions and insiders at the end of 2019.
Meanwhile, our portfolio of state of the yard Gen. The storage facilities can has continued to mature nicely isn't leasing commenced on 16 facilities in 29 chain and adds up today 59 of the 76 self storage developments to which we've committed to our company.
Weighted and open for business at an average occupancy rate of 52% on a physical occupancy bases.
We enter 2020 with a best in class portfolio of recently developed Gen be self storage assets and what we believe or some of the best self storage markets in the United States. This portfolio consists of a combination of Hollywood assets and development investments.
As has been the case since our inception, our development investment structure with profits actress and rights of first refusal or ropers provides us with a large captive pipeline of potential acquisitions, when combined with an intention to participate in the impending acquisition cycle. We are we.
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 to 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.
Dave was self storage assets space internal growth had wins, we expect our our wholly owned portfolio to produced double digit annual and I'll walk right over the next few years Lastly, we believe we can accomplish this growth with a decrease in cost of capital is our portfolio grows and matures.
We have a great deal of confidence in our proven business model and the track record of great execution by the J Cat chain 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. Thank you John and good morning, everyone.
Last night, we reported fourth quarter earnings per share of six cents and adjusted earnings per share a 39 cents.
Exclusive of nine cents of onetime internalization related expenses, which impacts our S. 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 about four cents above implied fourth quarter guidance.
Early due to better than expected construction progress during the quarter.
Additionally property in 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 52 cents 87 cents.
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 towards acquisitions, the new development.
Specifically, we are expecting one to two new development commitments. This year as we've become quite selective about development opportunities. We are willing to pursue this late in the cycle in the current environment fundamentals.
Additionally, we are expecting to acquire between 15 to 20 developer interest inclusive of the nine we acquired here today.
The value creation standpoint, these acquisitions are very accretive to longer term and Ivy and shareholder value and they will meaningfully add to in a wide at that focus during their lease up however, as we've discussed publicly for several quarters, our development our developer acquisitions, our near term dilutive to earnings per share because we won.
This continue recording fair value and to assume the operating burden of lease up assets as they move towards stabilization.
On that note, we expect that the properties, we consolidate and 2020 will be less much further those consolidated 2018 in 2019 with less in place in a lie at the time with acquisition in a longer period to stabilization.
For frame of reference the 19 operating assets that we consolidated prior to 2020 were approximately 21 months into lease up we 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 than in years past.
Typically adjusted EPS is expected to be 35 to 42 cents per share lower than our targeted level of acquisitions and if our capital and remained in line with profits interest that accreted fair value on a quarterly basis.
We strongly believe it's a long term value and earnings growth that we will receive from acquiring these developers interest at good prices earlier and lease up as they become available easily justify the short term dilutive impact on earnings that we experienced from at least that's why these assets.
Moving on to the capital Fred 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 as she 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 progress asset.
Additionally, this year, we expect to have some capital recycling opportunities.
While we have Roper holler 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 repayment of facility when it makes sense.
2020, we are anticipating capital recycling opportunities upwards of $40 million compose a potential refinancing repayments and or asset sales.
The combination of capital recycling availability on our line and opportunistic ATM issuances provides ample liquidity to fund developer bias as they become available.
He will have capital sources and uses on page 19 of our sample it looks like sufficient capital to fund our commitments for the next year.
Lastly, we not much of the focus of the enlisted 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 AFFO and AFFO no later than Q1 2021, as we believe that when a majority of our business becomes ownership in 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 harboring covering our common dividend by early 2022, it's John referenced and as we noted in our internalization presentation.
With that really well now open it up for acuity.
Thank you at this time will be conducting a question and answer session. If you like to ask your question. Please press star one on your telephone keypad. It confirmation going a little indicate your line is in the question Keith [noise].
May press Star too if you would like to remove your question from the Q for prices with using speaker equipment. They may be necessary to pick up you had said before pressing the star keys, one moment, please while we pull for questions.
And our first question is from Todd Thomas from Keybanc Capital markets. Please proceed with your question.
Hi, Thanks. Good morning, just first question just with regard to that the dividend coverage and the expectation of sort of being there by early 2022, I'm just given the uncertainty around the timing of 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.
Yeah, Todd this is John thanks to the question.
When we went through the exercise of resetting the dividend and looking at the time for coverage.
We were very careful to to consider the pace of acquisitions and probably heard more on the side of more acquisitions earlier. So we've taken into account the dilutive impact of does acquisitions and Weve sense.
The ties the numbers and we wouldn't have put we wouldn't have made the statements. We did if we didnt feel very comfortable about that just to put it in and perspective, yes. If the pace of acquisitions were not as fast then you'd have the 6.9% right of interest that we collect on these notes and yeah that.
6.9% is higher than what the in place in Hawaii is on these properties when we buy them. Yeah. 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.
So very comfortable with with where we've landed.
Okay and for the nine buyouts completed year to date can you just talk about.
You know sort of the timing there what caused those to happen.
You know a little bit earlier in the lease up cycle than than they had then the buyouts had happened previously was a sort of operational.
Financially driven or something else and then in general how much visibility do you have on the timing of of those transactions yeah. So Todd on the 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 a buy outs the timing of refinancings 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 so.
Next developers who are backed by the same private equity investor.
And this was an IR are driven private equity investor Yeah, as we commented.
Several for several quarters in a row. When you have when you have IR are driven private equity backing these projects.
No time isn't it time is not something that they like to see past buys. So when you get to a certain point the private equity sponsors starts to push for all 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 liked and we made it and we made a deal but that does happen in much the same way that every one of our acquisitions has happened.
Okay, and and then and then Kelly you know you talked about.
Approximately $40 million of potential capital recycling. This year in 2020 to help fund the $80 million of a a fundings.
Can you can you talk about the plan.
Permanently finance buying balance a longer term and are you able to share what the outstanding balance on the revolver is today pro forma the nine acquisitions.
Right. So right now we are in the process of working through moving Oliver assets that we just purchase into various tranches of our facility answer right now our outstanding drawn balance on our facilities 191 million.
In regard to the recycling opportunities as John mentioned, those events or 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 you know, there's some repayments we did.
I have one land loan repay already this this quarter a $4 million.
And then the other opportunities are essential failed 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.
Okay is there any financing.
Permanent financing embedded in the in the guidance.
No no it's all its all credit facility.
And yeah as you know we have a we have an accordion and our credit facility.
As we as we move through the year as principal balances on loans go up that increases the borrowing base availability. So from a from an adequate from a capital adequacy standpoint, we're in we're in great shape in I think it we hit a certain point where the.
Were yeah, the credit facility kinda tops out and we and and through.
Through in a wide through other earnings that we get an through these capital events, we have the ability to to bring that that balance down. Some you can't comment on timing of that but we feel comfortable that though that the total leverage level. When you. When you look out several quarters is going.
We remain very reasonable and at at certain point in time as these properties a approach stabilization and start kicking off substantial amounts of cash yeah, we have the ability to make meaningful meaningful reductions in the line and create drop.
Powder for whatever we choose to do at that point on it.
Okay, great. Thank you.
Thanks, Doug.
Our next question is from Tim Hayes from B. Riley FBR. Please proceed with your question.
Hey, good morning, guys. Congrats on a good quarter. My first question, John You mentioned, the private equity investor that drove the the buyout activity. This quarter, just wondering if that investor who is involved in any other properties in the portfolio and could maybe bolster in near term acquisition.
Pipeline for you and then just similar similar similarly excuse me if there are any other kind of relationship to like that that you could see other investors looking to drive sales in the not too distant future.
Yeah that that one p. investor has an interest in seven other projects now a couple of that a couple of those projects are still under construction. So yes, they're nowhere near ripe for for that sort of an event but.
Yeah. There are there are a few others that that as you as you go you know much lighter and this year more likely into next year, a there's there could be an opportunity to trade on some other properties mhm.
Got it that's helpful. And then you mentioned just can your expectations for Allied 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.
Well you know we've always been but we've always noted that we're focused top 50 market. So my comments will relate.
Solely to the top 50 markets, we like everybody else are impacted by new supply. Thank you know right now if you look if you look out next next year or two.
Somewhere somewhere north of 60% of our properties have some new competition coming online, but keep in mind that we are our properties are managed by the best in class platforms.
So in terms of managing through this we've 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.
Where were going to continue to lease and away that is rational and that the pressures going to ease as we get into 2021.
You probably read the transcript ever been on the calls of the other of the other rates.
And you know 20 is projected to be a tough year for everybody, but but everybody when they start looking into 2021 2020 to seize deliveries dropping off pretty dramatically.
When you look at the supply picture in General Oh, 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 dad has gone up yeah pretty well documented that you had you have labor shortages in every major market in the country I think the number is maybe <unk> 0.7 people to fill out.
Three job that's available in construction billing construction jobs is even more difficult. So yeah, we have a high level of confidence that 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 and everything and the skies start to clear here as you get in to get into the latter part of 2021 and first part of 22.
<unk>.
Got it that's that's helpful. I appreciate the color there and definitely no your comment there about how physical lease up has been in the face of new supply it's been very.
Very strong in ahead of your initial underwriting, but just on the street rate side, you know how do you see that comparing.
Your initial underwriting and just trending broadly over the course there.
Yeah, Tim as Jonathan.
As it relates to the underwriting as you know the.
The way, we look at at underwriting pro forma really the first three rental seasons or or the focus is entirely on occupancy.
And you get the rate and the pricing power on that that last leg or that fourth rental season. So we are we're still optimistic that we're going to.
To get to our our numbers in the defined time period realistically, they're going to be some some properties and some markets that were hit harder and so you may need an extra season to get there, but we don't we don't see any concerns today on achieving the goals on.
[music].
On the on the lease up front.
And really rate projections into 2020, which 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 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.
You have some.
Some opportunities there to bring those.
Existing customers up to what we believe market rate is and in a reasonable timeframe.
Okay, Yeah, that's really helpful.
And so my next question you've kind of answered some of this by you know your stock is down pretty significantly today, along with the broader market of course.
But can you let potential impacts that the current virus epidemic could have on your business you know 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 can even see less foot traffic coming three areas or fewer people moving and eating storage results just any comments around that would be helpful. [noise].
Yes, Tim you know on the Corona virus and I don't want as I don't Wanna get overly.
Political or philosophical or whatever on this topic, but you have 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 if you look at the statistics.
Around the Corona virus sure you Bad 82000 cases reported in China, China has a population of 3 billion people and out of that 82 million.
Our out of that 82000 reported number of cases about 2% have resulted in dathan. Most people have recovered and its and 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 me in the U.S. and the 2000 1920 flu season, you've had 14000 reported deaths from that and it's just part of part of human life that because of headlines and because of because of speculation you seem to.
This dramatic impact on a short term impact on markets and it's none of it's based on number of is based on any fact other than in a country you're halfway around the world you've had a bunch people who've gotten sick and and <unk>.
I feel like long term if it if it turns out to be a true pandemic, where a lot of people die.
Then you know every body in the world's impacted by that and storage is impacted and office is impacted and everyone else is impacted.
There's just 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 of our reaction based upon.
People speculation about what might happen in the future, which I find to be really dangerous.
We we deal with facts and run the factual standpoint people are going to continue renting storage space because they continue to need a place to put things that they don't have room for otherwise and.
I guess of half the World dies, then you're probably going to see probably going to see.
A lessening of of storage demand.
Yes, well, let's hope it doesnt come to that I appreciate the comments and thanks for taking my questions.
And once again, if you have a question you May press star one on your telephone keypad.
Our next question is from John Peterson from Jefferies. Please proceed with your question.
Okay great.
Maybe just start with.
More of a high level commentary that you guys have internalized management, you are becoming more of it seems like by the end of this year, you'll definitely more of an owner now lender. So how should we think about what's going to change from management style of the company management has the properties how are things going with evolve over the next year too.
Yeah, John 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 and trying to make decisions to position us to maximize shareholder value certainly from a strategic standpoint, as we get larger and add scale.
It will will possibly can set or some so at some point the future.
Internalization of property management, you know that 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 doing 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 were managing our facilities right now are doing an exceptional job and we will.
You know 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 who.
Total investment in systems, and policies and procedures and all of those things and yeah, there's 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 yen 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.
We've made decisions in the past.
Okay. That's helpful. Jonathan right just to add just add a little bit more color to that our current model right now, particularly when you think about our portfolio and the stages and lease up.
There there is tremendous value we believe in an 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 of the rights managing for US. So we feel like we're in really good hands right now.
Okay.
Hoping at risk of asking for multiple years of guidance here I mean, obviously at some point in the future you get to more stabilized portfolio in your growth rate should be more or less similar than your self storage peers, but I mean, how should we think about half AFFO growth over the next few years as you bring that stuff.
You know online obviously, some puts and takes there you're bringing stuff that's lower lease, but you've got this lease up.
Period, where it would seem like there's a lot of growth I guess im just kind of curious if you had any thoughts on high level, what the trajectory should be of an AFFO over the next few years.
Yeah, I mean, I think that you can you can draw some conclusions from.
From the commentary that we have given around dividend coverage.
Weve very.
Barry.
We've been very vocal that we think about first quarter of 22 will be covering a 92 cents dividend and so that kind of gives you a trajectory from right now to that point in time, and that's looking out basically 778 quarters.
Beyond that you can you can take the portfolio and and make assumptions on on acquisitions based upon what we've done today and pretty easily come to the conclusion that at that FFO growth is into 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 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 Weve underwritten good sites in really good markets should give should give a lot of confidence to.
Investors in that growth rate.
And.
As as we achieved that kind of growth as we achieve the the rewards that come with increasing stock price and lower cost of capital.
That results from good performance. Yeah. Then the then the window kind of opens for us to to look at doing other things acquisitions acquisition joint ventures or all of those all those things that can.
That can accelerate that growth, even more but where we're pretty pretty confident in the in the internal growth certainly over the next three or four years.
Okay, and just one mark can you remind us when maybe your first opportunity might be to refinance the series a preferred stock which is relatively expensive.
Yeah. The series a is callable by its terms in July 2021, so about what the 15 16 months from now.
Okay.
Is there any opportunity to do anything before then are you have kind of to wait till then.
Yes, that's really up to the holder of the the holder of the of the stock there is 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'd be pure speculation.
Alright, Thank you very much.
And we have reached the end of our question answer session and I will now turn the call over to John Good for closing remarks.
Thank you everyone for your interest in Jay cap and for participating in the call and we look forward to talking to you again.
About seven weeks, I guess seven or eight weeks, so thanks and have a good day.
Right.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.