Jernigan Capital's (JCAP) CEO Dean Jernigan on Q4 2017 Results - Earnings Call Transcript

Jernigan Capital Inc. (NYSE:JCAP) Q4 2017 Earnings Conference Call March 1, 2018 11:00 AM ET

Executives

Dean Jernigan – Chief Executive Officer and Chairman

John Good – Chief Operating Officer and President

Kelly Luttrell – Senior Vice President, Chief Financial Officer and Treasurer

Analysts

Todd Thomas – KeyBanc Capital Markets

George Hoglund – Jefferies

Jonathan Hughes – Raymond James

David Corak – FBR Capital Markets

Operator

Welcome to the Jernigan Capital Fourth Quarter 2017 Earnings Conference Call. Today’s conference is being recorded today, Thursday, March 1, 2018. At this time, all participants are in a listen only mode. The floor 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 by the SEC in the Private Securities Litigation Reform Act of 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 SEC, which we encourage you to review. A reconciliation of the GAAP to non-GAAP financial measures provided on this call is included on 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.

It is now my pleasure to turn the floor over to Dean Jernigan, CEO and Chairman of Jernigan Capital. Thank you, you may begin.

Dean Jernigan

Okay. Good morning to you all. Thanks for joining us today. We look forward to this call. I’ll speak some about the sector and John and Kelly will talk about our company. I want to start with just I think hopefully a clever little paraphrase of a Samuel Clemens quote.

The paraphrase is the reports on the demise of the storage sector are greatly exaggerated. That’s the tone of my few comments today. I think Clemens was talking about reading about his – reading his obituary in some newspaper that his death was greatly exaggerated, but I’m talking about the storage sector. We are still very much alive and well and 2018 will prove it I think.

I read every line of the transcripts of the other company, conference calls. And more importantly, I try to read between the lines as well. And I think 2018 is going to be a much better year than what anyone is thinking at this point in time, or most people are thinking. I think the sector will get back toward historical norms as far as top line growth of about 4%, and I think they’re being very cautious on expenses as the – probably taxes are always kind of an unknown. But it looks good to me as for our 2018 is concerned and I think we will – I think, the whole sector should be a strong about right now.

I am good optimistic on 2018, where the expectations are and where I think we’re going to come out and of course what drives that. There’s nothing on the demand side, the demand is still there. As all the other companies reported, they’re seeing no drop off in demand and so our population continues to grow. And I talked briefly about expenses, expenses are not that relevant in the overall scheme of things.

It’s all about supply and where we think supply is going to hamper the performance of the companies in this year and next year and even 2020. But we’ll talk some about that as we go on. But with the new starts for last year that we’re expecting to become completions in 2018 roughly only about 400 properties. That’s in the top 50 markets and we think we have something just less than that 357 or so completions in 2017 in the top 50 markets.

And everyone seems hesitant to talk about 2019. But I think we have pretty good visibility into it. And I think 2019 will be – will have completions, deliveries in 2019 little bit less than 2018, so it’s kind of a flat top year 2017, 2018, 2019 as far as deliveries are concerned. But I think that number will drop precipitously in 2020, back to a 150 to maybe 200 deliveries in 2020. So what was that mean to all the operators out there, who are – who have new supply in their markets? Well, again, reading the transcripts, the guys are – public companies are suggesting that somewhere between 20% and 40% of their properties, they’re expecting new supply to impact them this year on a site-by-site basis.

And so you think about what how consistent is that with some other metrics that you can run and something that I keep up with is population growth, because that is a driver our demand. So the top 50 market, we have about 175 million people today, and an average submarket for us is a 3-mile radius with about 100,000 people in there. Of course, that changes from how dense your market is but that’s the average.

So with 100,000 people in the submarket that means we are about 1,750 submarkets in the top 50 markets. And so we just look at the deliveries in the top 50 markets being, 350 to 400 properties that’s impacting 35% of existing product there. It would appear just on the surface and using round numbers. And so I think we have – I think these expectations now have been setup by the other public companies are very achievable in times of uncertainty.

All guidance is going to be naturally conservative, and that we have a year of uncertainty in 2018. So I’m excited about where the sector is shaping up for 2018 from a – just a fundamental performance standpoint and I’m equally excited about what we’re doing at Jernigan Capital, and John and Kelly are going to talk some about that. And I look forward to your questions at the end. So John, why don’t you take it from here?

John Good

Thanks Dean and good morning, everyone. 2017 was a terrific year for JCAP. The $409 million of own balance sheet investments that we made last year exceeded our own guidance and also almost doubled the total on-off balance sheet investments that we made as a company during our nine-month 2015 short-year and for the full year of 2016.

The quality of these development investments that we made during 2017 remained very high and underwritten developing yields remain consistently in that 9% to 9.25% range on average, which was comparable to the development yields on the investments that we closed during 2015 and 2016.

And we believe that through December 31 of last year, we had only recognized about 14% of our prospective fair value on the projects that we finance, which provides us with significant potential for earnings growth as projects are built during 2018 and 2019. And begin to lease up shortly thereafter. We provided guidance as a fair value increases for the full year of 2018, which Kelly can talk about, and the pace at which that fair value increases can be expected to occur.

Excuse me. We’re also very excited about our new bridge loan program. We think this program is a triple win, it’s a wins for our developers and that they’re able to stretch out their participation in NOI growth of their projects, over a longer period without worrying about paying off construction loans. It’s a win for our developers equity partners, which most of our developers have private equity partners in the sense that those private equity partners can potentially receive all their money back with the returns significantly earlier than, if they waited to stabilize the property and payoff traditional construction financing through a sale of the property.

And finally, these bridge loans are win for us in that we have a means to continue to grow our investment portfolio notwithstanding the fact that the development cycle is winding down and we have a chance to do it at investment yields that are quite similar to the yields on the development investments that we’ve made over the last 2.5 years. We get the added benefit of increasing our pipeline of potential off-market acquisitions down the road through ROFOs that we’re receiving on these bridges investments.

Our initial $82 million bridge investment, which we expect to close tomorrow, provides us with an excellent current return of 6.9% on three of the loans, which is equal to the coupon that we’re getting on our development investment and a 6.5% cash return in a 3% paid in kind or PIK return on two of other loans, which gives us a 9.5% yield – interest yield on those loans and on all them, we have a 49.9% profits interest. These bridge loans are owned five terrific Miami properties great submarkets and it will do very well.

For the developer, this bridge investment eliminates the refinancing risk that would otherwise be faced with existing construction lenders and provides the developer with five to seven more years to maximize the value of these five properties.

One last comment, I’d like to make is, since the beginning of the year, we bought out our developer partners and our Fleming Island property, which is in a Jacksonville submarket, our Alpharetta and Marietta in the Atlanta metro area and our Pittsburgh, Pennsylvania facility and by doing so, we’ve unlocked capitals for the developers of these projects for future development, while at the same time acquiring for ourselves 100% ownership of some very high quality assets.

The average cap rate that we paid for these assets based on stabilized NOIs in the low 8%’s and at the same time, our additional cash investment in these projects is a modest $9 million or about $2.25 million per property, because as you know, when we execute a partner buyout, we’ve already funded 90% of the cost of the project and we own 50% of the value increase that we’re effectively only paying the developer for a accommodation of his equity in the deal end is – and his share of the profit.

We’ll continue to be opportunistic and pursuing acquisitions from our developers, but we’ll also be disciplined generally staking to remove as much lease up risk as we possibly can, before we’re converting first mortgage loans and profit participations in outright ownership. Other than what we’ve done to date, we don’t see many additional developer buyouts in 2018.

So with that, I’ll conclude my prepared remarks, and I’ll now turn things over to Kelly to discuss financial result.

Kelly Luttrell

Thanks, John, and good morning, everyone. Last night, we reported fourth quarter adjusted earnings of $0.23 per share and full year adjusted earnings of $1.31 per share. Both of these exceeded the high end of our guidance by $0.03. We continued experience strong operating results with total revenues increasing 87% year-over-year, while our G&A excluding stock comp increased only 1.4%.

We also issued last night, our detailed first quarter and 2018 annual guidance, with annual adjusted earnings per share range of $2.68 to $3.43. We expect 2018 to be a great year, with significant growth in our core interest income, building off of the momentum provided by our record 2017 investment volume. And our new bridge loan product that John just discussed.

As well as significant growth in our rental revenue stream as the now five wholly-owned properties continue to lease up. Additionally, we expect substantial growth in the fair value increases of over 300% from 2017 to the midpoint of our 2018 guidance. As you all recall and remember, we issued a preliminary 2018 guidance back in November, and we now have the benefit of four months of insight into the progress of 2017 investment, our perspective 2018 investment activity and the potential impact of global economic factors like interest rate.

As such we have updated our guidance to reflect the impact of our Q1 investment and capital activities, including the recent acquisitions, the issuance of our Series B, the amendment to our Series A, the impact of the first bridge loan through investment as well as our exceeded expectations regarding the significant construction milestone that we received based on feedback from our developers. And finally, an update based on the current interest rate environment.

Hopefully, you all follow-on Page 13 of our fourth quarter supplement. We included a table comparing our preliminary 2018 guidance to our updated ranges. As you all know, we’re raising our total revenue guidance by approximately $4 million of the midpoint driven largely by positive impact of the immediate deployment of capital upon closing of our bridge loan investment versus the typical development of investment.

We are lowering expected fair value gains from a range of $46 million to $56 million to a range of $41 million to $47 million. The most significant driver of the fair value changes was feedback we received from our developers regarding the progress of development projects over the past four month. More specifically, permitting delayed continue to be a challenge as municipalities struggle to streamline and effectively approve final permitting. Particularly in locations that have experienced significant increases in all types of construction.

Additionally, winter weather and construction labor shortages have also attributed some of these delays. Obviously, these delays extend the timing of expected certificates of occupancy or COs as well the construction progress in general. And the timing of our fair value recognition is directly associated with the actual progress being made on the underlying real estate. Therefore, these delays in construction and CO timing shift timing a fair value appreciation to later in 2018 and ultimately add times in 2019.

Also some regards to the impact of the current interest rate environment, since the beginning of the year, risk free rate have increase about 40 basis points for three to five-year term and are expected to continue to rise given indicators from the fed and expectations that inflation will get back to or near historical norms.

As such, we felt it prudent to increase the potential impact of interest rate on the debt component of our investment. All that said, our updated fair value range results in substantial fair value gains and balance sheet growth in 2018. From 2015, at our inception through 2017, we recognized a cumulative $30 million of on balance sheet fair value appreciation. And at the midpoint of updated 2018 fair value range of $44 million, results in a – over 45% growth above and beyond that cumulative amount in just one-year. As we see significant construction continue to progress on our underlying investment. We all here at JCAP are excited to see these investments open for business and perform consistently with our current operating investment.

And regards to our capital tragedy, we are continuing to evaluate all source of the capital in order to access the best mix of a long-term capital to maximize returns to our shareholders, as we have several attractive sources available to fund our investments. We do plan to issue the remaining shares of Series A preferred stock up to the maximum amount of $125 million between now and the end of July, while utilizing our revolving credit facility over the course of the year to further fund our investment.

That’s all we have in the form of prepared remarks and we will now turn it over to Q&A.

Question-and-Answer Session

Operator

Great, thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Todd Thomas from KeyBanc Capital Markets. Please go ahead.

Todd Thomas

Hi, thanks. Good morning. First question, Dean or John, you know the bridge loan program, it seems to be off to a pretty good start here and for the traditional loan program, you talked about how many billions of dollars of development deals you’ve underwritten and how careful you’ve been about sourcing deals? Can you just talk about the volume that you’re seeing for takeout for bridge financing here in the context of the $82 million of commitments? And do you foresee there being a ramp in loans that cannot be extended or refinanced rising delinquencies from development, I’m just curious what you’re seeing out there?

Dean Jernigan

I’ll take bridge. Go ahead.

John Good

Thanks with question, Todd. We have created the bridge program to effectively follow the cycle, as development financing – as development is starting to wind down as Dean talked about in his prepared remarks, and the cycle is transitioning from development into what will ultimately be an acquisition cycle. There will be just period of time and yes, you know how long it will last. But during that time, you’ll have properties that have come online, that will be in lease up and some properties may do just fine in lease-up, but you may have impatient money in those projects. We’ve already seen that private equity that’s IRR driven that really doesn’t want to stay in there for five years.

And we’ll have opportunities on that side of the spectrum. And then on the opposite end of the spectrum would be projects and markets where maybe the supply has been a little heavier than the developer originally anticipated, maybe the developer didn’t negotiate as good a construction loan or they could have and it’s facing a shorter term maturity, and in those situations, unless they want to effectively engage in the stretch sales of the properties, we’ll have the opportunity to step in and extend that period in which the developer can stay in fall with the property to try to maximize his value, while at the same time, for us we see the same kind of economics or very similar economics to what we’ve done on the developer investments or the development investments, also obtaining right to first refusal in these deals, so that we’ll ultimately have a seat at the table when these properties come up for sale.

So we think there’s going to be a lot of opportunity. What that opportunity is going to be? It’s hard to quantify right now. Because you’re still in that phase of properties being delivered and our programs new – we really can’t just roll that out the beginning of the year and so we are fielding calls. We feel like the fact that we started out with an $82 million transaction right off the bat, is a pretty good indicator of what we potentially can do and we’ll just continue to update you guys as we move quarter-to-quarter as to how that volume ramps, but so far so good.

Todd Thomas

Okay. And I saw for two of the bridge loans, the interest rates, a little bit higher 9.5%, 6.5% in cash, 3% on accrual. But how are you thinking about that in the context of the increase in interest rates in general. Just for the bridge program, but also for the traditional loan program, Kelly, you mentioned, the risk free rate up 40 basis points since the start of the year. And you took a little bit of – you got revision to the change in fair value related to interest rates. I mean, how are you thinking about the 6.9% going forward and also the interest rate for bridge financing going forward.

John Good

Well, Todd. I think all of us here at JCAP and I know you guys all have your economics to the varying views. But as you look at long term rates going forward, the long term rates and other contracts are still dramatically lower than what they are here? And you do have that balance inflationary concerns with recession concerns, and so we feel like, we’re in a period where rates make spike short term but over the longer term there are still going to be relatively below what they were back 10 years ago. And we feel like in pricing all of our investments and this goes for both our development investment the end our new bridge investments. The 6.9% coupon is a representatively very good rate of return, when you combine the various levels of the capital stat at which we’re investing. There’s an element to our loans that are senior debt and there’s an element that’s mezz debt and we’re getting the proper participation over and above that.

So we feel like, we have look a lot of profit in our deals and we have, if you will, various shock absorbers if rates rise due to inflation, then rental rates rise at storage facilities, which increases our share of property participation. So with all, as look at as a kind of a unit trench type investment is a very profitable investment to us and we don’t see a reason to really move those rate, unless there’s a very dramatic spike in rates. And if that’s the case in the market for senior debt goes up dramatically, then of course, we’ll evaluate that at the time and if appropriate – make appropriate adjustments. But we feel really good about the way, we’ve priced everything at this stage and absent dramatically increase still like where we’re appropriately priced.

Todd Thomas

Okay. And just one more here and then I’ll yield the floor. But I’m just curious, if you could comment on and third party management today. The company begins to consolidate interests here and expand its platform and footprint. You have most of your properties are being managed by CubeSmart today, Extra Space and now aside a bunch of other private operators are in the third-party management business and Public’s, Public Storage is making a big push now. They had 27 third-party managed properties at the end of the year. But plans to really grow that business, it sounds like – and clearly they have the largest platform and most recognizable brand and they planned to offer a low cost model. I’m just curious how you’re thinking about JCAP’s strategy for third-party management going forward here. If you could speak to that?

Dean Jernigan

We’re very pleased with the results we’re getting out of CubeSmart right now. And virtually all of our properties, I think now as of today with exception of one or with CubeSmart and the results are extremely good. They have a major presence in all of the markets that our property is rent. So it doesn’t make any difference where they have 2,000 properties or 1,000 or 500 properties as long as they have a major presence in the markets that we’re in and they are on the first page of Google and are the top, that’s all we’re hoping for. And we know they have a very good a management system would be third-party owner being the major focused. Now with said, Extra Space has a good platform as well and I know all the size coming along.

Public Storage, that’s a really legacy, we’ll have to see how they progressed with their – somewhat of a cultural change, I think it will have to take at that company for them to become a servant for anyone in the form of a manager of a – for another owner. We will see and we’ll keep all options open. Pass that, we don’t really ever anticipate having a private operator – operate properly for our owners.

Todd Thomas

Got it. Dean, do you think that a low cost model could have an impact on existing third-party management programs. I guess, do you think it will help development deals maybe clear underwriting hurdles with sort of the extra savings or the insurance income that maybe would not otherwise accrue to the developer.

Dean Jernigan

No. Because that could be here today, gone tomorrow, I mean, as I said, I read the transcripts and what I read between the lines was they’re going to go out and try to buy some business, but doesn’t mean those rates won’t change later on. So now we will continue to underwrite with a proper management fee, not a something that could be a loss leader.

Todd Thomas

Okay. Thank you.

Operator

Your next question is from George Hoglund from Jefferies. Please go ahead.

George Hoglund

Hey, good morning, guys. Just following along that same line of questioning. How might the bridge program impact the roster of third-party managers, in terms of – if it’s all of the property has already managed by someone else saying will that impacts your decision on who you would do the bridge loan to depending on who the property is managed by? Or you just kind of inherit whatever managers there?

Dean Jernigan

We’re not on the same page. We’re obviously not in the same location so we’re not on the same page, but let me take part of it anyway. If this being managed properly by someone and result are good and the way we underwrite it’s full covering debt service and everything we’re expecting. We would not insist upon them changing as long as if they professional manager in managing it. But in the case of them maybe trying to manage it themselves or not on the first page of Google every day. Then we would suggest for good – and if they are not performing, if they’re performing, I mean, it’s hard for us to go in and assist on the change, but if they’re not performing, it will be easy to insist.

John Good

And George just to add on a little bit there. As we underwrite these bridge loans, you keep in mind that we’ve looked at over $9 billion of prospective deal sense kind of the end of 2014. And we have a very strange in underwriting process and as we right on the front end, the management is one of the elements of the underwriting equation that will very strongly evaluate. And it’s going been an advantage to people seeking in bridge financing, if they’re already using one of these third-party managers and these bridge loans can come in at any point in the lifecycle of a property. They can come in as early as certificate of occupancy like two of the properties in this initial pool. But we’re financing or they can come in and closer to the point of stabilization. And at that point in time, as Dean mentioned, we can evaluate the performance of the manager today, and if that performance is good like he said there’s no reason to change. But this is not going to be kind of a one-size fits all program and all of these factors will be considered by us as we underwrite deals.

George Hoglund

Okay, thanks. And just one more. In terms of capital raising this year, I mean, you guys did alluded to a – plans utilize all of the Series A Preferred. But hypothetically, if the stock hovers around the current levels, I mean, how would that impact future kind of investment plans and then it’s additional capital raising plans.

Kelly Luttrell

Hey, George, good morning. I’ll take that one and give Dean and John a break. So just make sure everyone is on the same page. From a pure liquidity perspective with the Series A and our revolving credit facility, we have the position in capital to match fund our investments and run the business throughout the course of 2018. So what that does, it gives us the flexibility to continue to monitor all of the sources of capital and all the various markets to be able to opportunistically take advantage of whatever window opens to make sure our capital stack is aligning to ultimately generate the maximum return for shareholders. So I mean sitting here today, we know we’re comfortable at lead, we were going to be able to fulfill our commitments and what the ultimate mix since that are being this year, where we’re going to be monitoring and making sure that we make the right decisions and as opportunity to arise. And so, part of those things that we really like about the Series A and an our credit facilities in fact that gives us that flexibility to be prudent.

Dean Jernigan

We also feel like there, as we talked about earlier. There is some much additional value to be recognized in this company. That we don’t believe there’s any way that current common stock prices can stay where they are. I mean, at some point in time, it just has to go up because the company just becomes that much more valuable. I think the market is lot more than to leave it where it is over a long period of time.

George Hoglund

Okay. Thanks. I appreciate the color.

Operator

Our next question is from Jonathan Hughes from Raymond James. Please go ahead.

Jonathan Hughes

Hey, good morning. Thanks for taking my question and thank you for the increased disclosure, it’s very helpful. So Dean, its sounds like the delivery projections for 2019. They did take up a bit from November and I know some of that due to construction delay. But I mean, given your change in expected fair value guidance due to delay. Why do you think 2019 will see a slowdown in delivery? I mean, couldn’t we face the similar situation where product get delayed pushed into 2019 and that could actually be a year where deliveries accelerate from 2018?

Dean Jernigan

Yes. You’d have to – Hi, Jonathan. You’d have to assume though that everything else remain the same. In other words, the level activity of new start would be the same, and that’s not going to be the case. I think you can look at our company is kind of being a proxy for the whole sector. And you’ll see that starts in 2018, that would get completed in 2018 are going to be down and I just think that – and in fact they started trending down in the last two quarters or last year. And why they’re trending down? It’s just getting a whole lot of harder to find a site that works. It’s a lot harder to find a submarket you want to be in where you can find a site that someone or two people haven’t found before you.

And so, starts to going to trend down dramatically from this point on. When we first sat down with you in 2014, 2015 I guess, the Raymond James we talked about this being a cycle to a little bit longer than most development cycles lasted three years, and we built enough to do over build the market and – but this time I’d say I thought would last a little bit longer, maybe an additional one year, year and a half, and that’s what’s happening, if you pay rather, the start of this cycle being January 2015, which I do, we were starting our four year in the cycle. And of course, the cycle started in Texas and Florida in 2014. So the start are just going to be down. Yes, some will rap over in the next year but that starts, of course driving that number more than anything else.

Jonathan Hughes

Okay. And that’s fair. And then acquisition in cap rates, sound stable due to the strong demand you mentioned earlier. But it sounds like maybe stabilized underwritten yields have come down double-digit number on product developed a few years ago to high single-digit today. Has there been any change in your underwriting metrics at all and in return your fair value calc that was turning the book value as the cycle has progressed.

Dean Jernigan

The only change that we’ve made is extending when appropriate and when possible, adding another year to the lease up. But let me just go back clarify what you said, we never underwrite double digits, we’ve had some that we ended up that way through just good performance. But we’ve always been underwriting into that probably to 9% and 9.5% early on unlevered yield. And we’re still there in fact what we’ve told our team just recently is we only use baseball jargon for this. We don’t want any singles, doubles and we don’t any want triples this year. All we want home runs, we don’t want to triple, what we think might turn into home run. And so that would being much more selective because the market is insisting upon that. You can’t – you don’t want to go up doing a facility that is – you’re entered into a submarket and your lease ups are going to be dramatically longer and you may not get the rates, what you thought you’re going to get. So underwriting, I’ve said before, our rates – we look a little bit more critically at the rates so we hope to stabilize that four, five and six years out. But adding the year to the lease up is something else we do. But all-in-all, our numbers are about the same, as far as, what we’re expecting out of new development deals, we are putting on the books today.

Jonathan Hughes

Okay. That’s great. And then just one more for me and then I’ll jump off. And this kind of an extension of George’s questions earlier. So you guided to where funding will come from in 2018, but after that, where will the money come from if the stock doesn’t recover? The Highland money tapped out and the revolver will be near fully drawn. Would you would look at selling assets, putting in place long-term fixed debt, I’m just trying to understand where funding will come from past this year?

John Good

Yes, Jonathan we to date we’ve – if you look at right side of our balance sheet. We’ve done common, we’ve done a couple of types of preferred, we have debt, we done the Heitman joint venture. There is a very high level of interest out there in the private equity world – in the private equity world for joint ventures. There’s going to be an increasing appetite, while there are already is a big appetite right now to buy Gen V properties in the top 50 markets that are new. So long as the pricing is right. So I think as we move three things, it’s really kind of hard to predict what capital is going to be available to you more than a few months in advance. Because things change so much, but we’re shown demonstrated ability to kind of access all evidence. So we’ll continue to keep all options on the table and do what’s best for shareholders, depending upon what the circumstances are at the time. But as I said earlier, we don’t believe common stock prices are going to stay at $17 a share.

Jonathan Hughes

Which you would you look at trying to put in five-year say term loans is it to maybe pay down the revolver?

John Good

We can look at that on owned assets. Yes, that is something we could do, but the problem with that is when you do it you kind of give up a lot of flexibility. And so if you put five-year term loan on a significant number of assets and then the equity capital markets get a whole lot better and you can’t pay those term loans off without being very punitive, then you’ve made a bad decision at that time, various hedging mechanisms that you can use inside of the credit facility that limits your interest rate exposure and we’re already getting good advance rights on our assets. So I feel like, again as we’ve said, we’re just going to keep all those options open, always being sensitive to what level of debt we keep on the balance sheet. We certainly – we’ve always said that we don’t want to over-lever this company.

Dean Jernigan

Let me just jump in – one quick comment, Jonathan. In all my years, access to capital – capital has always been available, because of the attractiveness of this sector. It’s just a matter at what cost. And so we’re not at all concerned about having capital to fund this company going forward, it will just be a matter of, of which direction it comes from and what the costs are going to be.

Jonathan Hughes

Okay, fair enough. I appreciate the time. Thanks for taking question.

Operator

[Operator Instructions] And our last question will come from David Corak from FBR Capital Markets. Please go ahead.

David Corak

Good morning, everyone. Well, let’s start with the buying up a partner’s interest. Appreciate the comments in your prepared remarks. But when we look at the timeline on those, I think it’s later – a three years from close or two years from CO. But can it happen sooner than that with certain of your assets that are approaching that, kind of like we saw with Ocoee? How many could hit in 2018 and what kind of spend would that entail?

John Good

David, what we generally look to is, how well they’re leasing up and we want to give the properties some time to build that leasing momentum. And so the two years from CO, you have three to four years for closing that you referenced, that would be kind of a typical case. And if you look at two Atlanta area assets the Alpharetta and Marietta projects, those hit CO in late May of 2016 and we just bought them. So just about two years from CO. There are the very good performers like Ocoee, like the Fleming Island project, where they go from zero to 80% in a year. And in that case, if the developer comes to us and we like the pricing, sure, we will take advantage of those deals when they come available. One thing to keep in mind is that for the rest of 2018 – yes, we’ve executed four transactions thus far in 2018. And as you look at the portfolio, there probably is not a lot more of those really high performers, 80% occupancy in a year out there.

And the other thing to note is that everything we did in 2016, until the very end of the year was done in the Heitman joint venture. And the equation is a little more complicated in that case, because, if we want to own those assets, they kind of want to own them as well and we have to work out the timing of those purchases with them. And so, yes, a lot of those assets just came on line kind of in the last half of last year and they’re in lease-up and they’re doing really well, but realistically, you’re not – you’re looking at 2019 before most of those become available. Now, could there be one, maybe two over the balance of the year that have those compelling features and a great price for us? Yes, possible, and at that point in time, we’ll do – go through our evaluation and maintain the discipline that we’ve shown today.

David Corak

All right, fair enough. Well, speaking of discipline, the pipeline is at $500 million, which is down a little bit. Is that you guys just being more disciplined, being pickier, or is that kind of the stage of the development cycle or some combination there then?

Dean Jernigan

Yes. I’ll take that one. Hi David. Yes, I mean, as I said before, it is definitely – it’s both. It’s definitely us being – keeping our bar high and by keeping the bar high, fewer sites are clearing that bar. And so it’s that. And the fact that – as I said before, we have a much, much more sophisticated developer in the cycle than we’ve ever had before. Again, nothing to – don’t want to disparage homebuilders, but no homebuilders, no people who just owned a piece of property and think they want to build a storage facility. These are – these generation V buildings are complicated, expensive buildings to build on small pieces of property. And so we have a sophisticated developer this time, and sophisticated developers are listening to calls like this and reading transcripts and bankers are too. And so I just don’t think we’re going to overbuild the cycle. In fact, I am very certain of it at this point in time. and for that to be the case it’s time to start turning down on starts. And so that’s little bit about.

David Corak

Okay, fair enough. And then I guess, just sticking with that, as we move kind of more into the acquisition cycle, Dean you’ve mentioned previously that three quarters of new developments per cycle are being completed by folks that don’t intend to hold them for the long term. Any kind of guess on how big that opportunity is in the top 50 markets, if we just look at the deliveries, kind of 2015 or when really things started picking up and to 2019?

Dean Jernigan

Yes, I mean, if you go through 2019, so it’s about 1,600 facilities, maybe, and so what’s that? 1,200 facilities. I mean a lot, a whole lot. And this is what I’ve talked about for two years now. There is a silver lining end of this development, cycle and that is, are those people with good access to capital are going to be able to buy some really nice properties, because there are going to be a lot of properties out there for sale.

David Corak

All right. Makes sense, that’s all for me. Thanks, guys.

Operator

Thank you. This concludes the question-and-answer session. I’d like to turn the floor back over to management for any closing comment.

Dean Jernigan

Okay. Just looking at my notes here today, things I want to get across. I left one off, and that is that all of you out there managing assets today, keep calm, stop slashing rents and carry on, sub-storage sector is going to do very well this year. And we look forward to our next call with you. Thank you very much. Good day.

Operator

This concludes today’s teleconference. Thank you for your participation, you may disconnect your lines at this time.