After completing its first quarter as a public company, Jernigan Capital CEO Dean Jernigan realized that he made one significant miscalculation: under estimating the demand for development loans in the self-storage industry.
“I anticipated this company to be wildly successful with our development product,” said Jernigan during the company’s conference call with analysts. “I should have seen that opportunity as a much larger opportunity and an opportunity that was going to be upon us much quicker than I did see.”
The company formed as a capital lender to the self-storage sector with a focus on development loans. The company issued 10 loans totaling $74.5 million during the second quarter, and six more loans totalling $35.6 million since the quarter ended June 30. Ninety-two percent of the proceeds have gone towards development loans.
React and adapt
“We expected to get there in two years and we got there in two quarters and two months,” said Jernigan, who formerly served as CEO of CubeSmart before spearheading the new venture.
Beyond the loans already closed, Jernigan Capital has another 22 loans on track to close by the end of the year worth a total of $182.6 million.
The unprecedented deal flow has caused the company to relocate its headquarters from Miami, FL to Memphis, TN, Jernigan said. The company also closed its satellite office in Cleveland, OH to bring the entire team under one roof.
The company also hired William Drummond to replace Greg Ward as chief financial officer.
Drummond previously spent 37 years at Ernst & Young as an audit partner and later the managing partner of the Memphis office. The company is staffing up further with the addition of two new business development roles this month, and a general counsel joining the company in September.
Jernigan said the company has made a few other adjustments to its loan products following its first few months of operation. The company dropped a requirement that borrowers have building permits prior to closing a loan.
“We learned that the building departments…around the country are virtually swamped in every market,” Jernigan said.
Because of the amount of time it takes to obtain permits, Jernigan said the company now only requires that borrowers have clear title to the property and that it is entitled for storage development. Borrowers are able to obtain permits 90 to 120 days after closing the loan, Jernigan said.
“We should have anticipated far less income in this quarter as part of the delay getting this money out the door,” Jernigan said.
The company collected $145,000 in interest income from loans during the second quarter. Jernigan said they plan to roll out a new refinance loan product at the upcoming Self Storage Association Fall Trade Show and Conference in Las Vegas.
“That will give us more immediate funding and give us more interest income going forward,” Jernigan said.
Borrowers who obtained loans early in the second quarter are already coming back to the well to borrow more, according to John Good, chief operating officer of the company.
“We have one developer who we put three loans in the books for in the month of August alone,” Good said.
Jernigan said the company is working with about 25 different borrowers now and that it hopes to grow to about one for each of the Top 50 MSAs.
“We are not going to have a lot of partners in the same market competing with each other,” Jernigan said.
Assessing the market
Jernigan said the surging demand for self-storage is largely attributable to a “seismic shift” from homeownership to people choosing to live in multifamily housing.
“The person who is renting moves every three years, versus the person owning who moves every 10 years. Fifty percent of our customers in the storage space are people in transition,” Jernigan said. “That speaks volumes to the demand we are seeing now.”
With only 300 facilities built between 2010-2015, Jernigan said the industry has failed to keep up with population growth.
“We need to catch up by building about 1,600 facilities,” Jernigan said. The industry will have to add another 900 on top of that to keep up with population growth over the next five years, he added.
“That’s $25 billion worth of storage that need to be built,” Jernigan said.