JCAP - NASDAQ

Greetings, and welcome to the Jernigan Capital Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Corak. Please go ahead.

Good morning, everyone, and welcome to the Jernigan Capital Second Quarter 2018 Earnings Conference Call. My name is David Corak, Senior Vice President of Corporate Finance. Today's conference is being recorded, Wednesday, August 1, 2018. At this time, all participants are in a listen-only mode. The floor will be open for your questions following our 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 in our press release. You can find our press release, SEC reports and audio webcast replay of this conference call on our website at www.jernigancapital.com. In addition to myself, on the call today, we have Dean Jernigan, Chairman and CEO; John Good, President and COO; and Kelly Luttrell, CFO. I'll now turn the floor over to Mr. Jernigan. Dean?

Okay. Thanks, David. Good morning, everyone. Thanks for joining us. Thanks for your interest in Jernigan Capital. I just have a few remarks this morning, but one, I hope, will ring true to some of you and feel good about our position on this. We've been speaking now for about a year that we thought we could see a soft landing coming. We suspected. We hoped for soft landing in the national self-storage sector, as it relates to this construction development cycle that we're in today. Well, I can tell you that we are very confident today that we are out of the clouds. The runway is in sight. The tower has cleared us to land and we will have a soft landing toward the latter parts of next year. We are very confident that 2018, 2019 will be twin peak years as far as deliveries are concerned. We're very confident today that lending and starts are starting to trend down and we will see a dramatic decrease in starts as we go forward between now and Q1 of next year. As you know, we track a lot of data. We collect a lot of data. I doubt there's anyone out there that looks at more development project opportunities than we do. And I doubt anyone is collecting from more sources -- collecting data from more sources than we do. And I am extremely confident at this point in time that the lending has tapered dramatically, starts are trending down, deliveries will start to trend down and as we get into 2020, we will have normal supply-demand numbers again in our sector. In other words, there will still be some development, but it will be development really just matching population growth. More along the lines of 150 to 200 properties being delivered each year across the top-50 markets, just to match the population growth of a little over 1% in those markets. So do we still have some challenges in certain submarkets? Absolutely, you heard us talk about Austin, Nashville, Raleigh and perhaps a few more. I think the data providers today are doing a good job, very good job of trying to collect as much data and provide that to the marketplace as possible to ensure we're making good decisions on a daily basis. So I'll defer to those data providers for details. As you may have noticed, we've stopped providing a watch list, because the data providers are doing a better job than we could perhaps, do with our watch list. But Austin, Nashville and Raleigh are good examples of markets that I want to talk about just for a minute. They're very attractive markets, as it relates to millennials, where millennials may want to migrate to after University or early in their job career. They all 3 are, of course, capital cities, large university populations and very attractive, as I said. So those 3 cities, among a few others, have attracted an outsized development pipeline, if you will. And so there will be a little turbulence left there. But those markets have very high population growth, well in excess, maybe double -- probably double the national average. Those 3 cities I know for sure are about 2% population growth. So that extra supply that's going to be added in those markets will be absorbed. So long term, I'm not at all concerned about those markets or in fact, any markets as all of this development that we're seeing out there today will be absorbed and rates will trend back up to normal stabilized numbers. So looking at what's been reported so far by 2 public companies, we're trending back, as we suggested, I think, early on, maybe over the last 3 or 4 quarters that we would trend back to a top-line growth more along the lines of our national average over the last 20-plus years at about 4%. And I think that's about where that top line will stay over the next few quarters, before it starts trending back up again. I think it will stabilize in 2020 closer to 5%, because the platforms, as I've discussed in the past, are so strong for these public companies. So what's driven this development cycle. I think it's really interesting, and I'll just share some thoughts with you quickly. It's all about the millennials. The millennials have really caused the need in a big way in this development cycle. Of course, we didn't develop much of anything for the 5 or 6 years prior to our cycle kicking off in 2015. But when the millennials decided they wanted to live either in or close to the urban core, they wanted to live in smaller housing. They no longer had the house with the white picket fence around it in mind as far as their first residence. The multifamily guys started building, no longer, these 2 and 3-story walk-ups, sprawling garden apartments out in suburbia. They came back to the urban core and started building these 5, 6, 7-story apartment complexes without swimming pools, without tennis courts. That's where the millennials wanted to live, close to or in the inner core, close to public transportation, close to where they work and close to where they play. Well, that's where then, we needed to be. So they helped us with the need, because we shifted about 6 to 7 million households from single-family to multifamily living as a result of the Great Recession. And many of those were the millennials. I would say most of those were probably millennials. They picked the location for us and they have also had a great deal of influence on the architectural look. As we know, we're all building what we call Gen V properties. Vs meaning vertical, generation vertical properties, vertical buildings, 3, 4, 5, 6, 7-story buildings. Concrete, steel, a lot of glass, and they're beautiful. Everybody's very pleased, including municipal planners. So the millennials did us a favor, helping define the location, the look and developing the need for us in this sector. And because of the location and the new building that we're building, we, of course, had a different developer, a more experienced developer, a vertical developer, a concrete and steel developer and I think a smarter developer, a more data-driven developer. So those developers are listening because of so much data being out there today. The lenders are listening. People like us are listening, or we see what's going on, and so the trend is definitely down, down dramatically. So I'm very, very pleased today to say, clearly, that we have a soft landing in our future. With that, I'll turn it over to John.

Thanks, Dean, and thanks everyone for being here, and good morning. We continue to be very pleased with our 2018 performance. The financial results, we believe, speak for themselves, a solid beat this quarter. In addition, during the second quarter alone, we closed on 6 new on-balance-sheet development investments that brings our total to $175.2 million of capital commitments to date in 2018, which is 81% of the midpoint of our annual investment guidance. The quality of these investments remains very high, and our expected yields are consistent with our projects underwritten since our IPO. We also continue to believe that we have substantial unlocked value in our existing portfolio as through the end of the second quarter, we had only recognized approximately 18% of our prospective fair value on projects we financed. All this provides us with the potential for significant future earnings and book value growth. Moving on to the end of the quarter. As of the end of the quarter, we surpassed the $500 million mark in total assets for the first time. And this balance sheet is comprised of investments in 72 high-quality generation V self-storage facilities that we believe are in some of the best markets in America and the best submarkets in America. During the quarter, we also strengthened our balance sheet by issuing $82 million of common stock and we issued an additional $37 million of preferred stock, while also signing a nonbinding term sheet for a $25 million secured loan that will be secured by 3 of our wholly-owned properties. We're very pleased with how our portfolio has performed this rental season. We had 21 self-storage properties at the end of the quarter that are in lease-up and those properties added an average of 1,100 basis points of occupancy from the end of April through this past weekend. In addition, our 5 wholly-owned facilities outperformed our expectations this quarter and that outperformance was driven by higher-than-expected rate and occupancy. We think this is a very strong result for our portfolio, and its continual indication of the quality of our assets, the excellence of our micro market locations as well as the strength of the platforms of our third-party managers both on the revenue management side and on the marketing side. We continue to make progress on the 44 properties that are under construction. On previous calls, we've noted feedback received from some of our developers that their projects in some cases are moving slowly than they would like. And this can be due to a number of different factors, a combination of permitting delays in certain municipalities, could be extreme weather conditions in some places, construction labor shortages continue to pop up here and there. In addition, we are routinely experiencing delays at the tail end of projects in the inspection of completed work and the issuance of certificates of occupancy, as building departments nationwide seem to be understaffed and the number of projects of all property types appear to be at cyclical highs. So municipalities are overworked. We think this is a consistent story being told throughout the self-storage sector and deliveries continue to be pushed back sector-wide. During the quarter, especially in June, the sector saw a number of deliveries slip from the second quarter into the third quarter in many of the top-50 MSAs. And we think that this trend could continue and potentially push back some 2018 deliveries in the top-50 markets into 2019. We think this is a short-term timing issue and not a longer-term issue. As an industry, we're all going to have a better sense of this as we get further into the year. And while our developer partners continue to attack this issue head-on, we, like everybody else is, are vulnerable to delays in some markets over the balance of the year, which could impact our top line and our fair value recognition. Looking forward, our investment pipeline stands at approximately $475 million today. You'll notice that this is down from levels that we've reported in prior quarters and in the comparable period last year. As we previously communicated, pretty loudly, this is an intentional phenomenon on our part, as the development cycle's now in its fourth year. We continue to be very meticulous in our underwriting and deal selectivity. We're focused on deals that we deem to be home run deals. Finally, I want to touch a bit on personnel, as we had a very exciting addition to our team in June. We added Jonathan Perry to our senior team as Executive Vice President, Chief Investment Officer. Many of you know Jonathan from his time at CubeSmart where he served as Chief Investment Officer. Over a 20-year career, Jonathan has led billions of dollars of self-storage investment transactions and that investment experience will be invaluable to us as he leads our investment efforts. We believe that as the real estate cycle progresses, we will have many opportunities for customized and innovative investment opportunities. We expect to see many opportunities in the coming months to acquire developer interest in our properties. And we expect to have other accretive growth initiatives over and above those. I'm very confident that Jonathan will add enormous value to our team and our shareholders as we pursue our strategic initiatives. So that's all from me in terms of prepared remarks, and with that, I'll turn things over to Kelly and David for the balance of the prepared remarks.

Thanks, John. Good morning, everybody. I'll provide a bit more detail on the quarter's results before turning the call over to David to discuss our capital position. Last night, we reported second quarter earnings per share of $0.40 and adjusted EPS of $0.64, both exceeding the high end of our quarterly guidance. We continue to experience strong revenue growth with total revenue increasing 39% quarter-over-quarter and 197% -- excuse me, 179% year-over-year. There are a few noteworthy elements to the results that we believe warrant further discussion. First, NOI on our 5 wholly-owned assets came in above our Q2 guidance as rate and occupancy were higher than we had anticipated while expenses were in line with our expectations. Second, our interest income was above our guidance range for the second quarter, due largely to faster-than-expected fundings on various investments in our portfolio. And third, our change in fair value came in slightly above the high end of our guidance range for the second quarter at $8.6 million. The primary drivers of this were, one, faster-than-expected lease-up and construction at various properties in the portfolio; and two, slightly less impact from interest rates than we anticipated. Lastly, there were several effects related to our common stock offering in June, including a higher weighted average shares outstanding, lower interest expense and higher fees to our manager. The net effect of all these elements was a beat relative to our second quarter guidance as John mentioned, even with the higher share count from the offering. You'll also notice in our earnings release that we adjusted certain components of our 2018 annual guidance and provided third quarter guidance as well. We're adjusting our full year EPS and adjusted EPS down slightly to account for the June common stock offering. Additionally, we raised our expected interest income, we lowered our expected interest expense and we increased our expected fees to the manager. We have also chosen to maintain our full year fair value guidance at this time rather than narrow guidance. While we are pleased overall with the pace of construction in our portfolio, as John mentioned, the issues currently being experienced in our sector with inspections, labor shortages and [indiscernible] delays. We continue to monitor all of our projects, but we note that several are scheduled to deliver in the fourth quarter. If we experience some of the delays being experienced by others, some of our fair value recognition could be deferred into the first quarter of 2019. In light of these uncertainties, we have not changed our fair value guidance. We're going to continue to work closely with our developers to monitor construction progress on our projects. And we'll revisit the range with our third quarter earnings. On that note, we also provided third quarter guidance in our earnings release last night. You'll notice that the $11.5 million midpoint of our change in fair value guidance for the third quarter is slightly lower than the $14 million midpoint we provided as part of our guidance we issued in May. This is solely due to timing and is attributed to us coming in $1.6 million higher than the midpoint in Q2 and we expect a portion will hit in Q4 as well. With that, I'll turn it over to David to discuss capital.

Thanks, Kelly. As John noted in his remarks, we had an active quarter in the capital markets. We issued about $82 million in common stock through our June public offering and through our ATM program, with prices to the public at premiums to book value. We also issued an additional $35 million of our Series A preferred stock to Highland Capital. And lastly, we issued $1.5 million of Series B preferred stock through our preferred ATM. We also had some notable activities subsequent to quarter end. First, we entered into a nonbinding term sheet with one of our credit line banks to obtain $24.9 million of term debt secured by 3 of our wholly-owned assets. We believe this demonstrates the demand from commercial banks to finance self-storage facilities that are on lease-up, reflects the strategic value of our owning the development projects that we finance and further evidences our ability to access the appropriate types of capital as the cycle progresses. Second, recognizing that the June public offering left us with some excess cash on the balance sheet temporarily, we and Highland Capital agreed to extend the final date to issue the last $15 million of Series A preferred stock from July 27 to September 30, 2018. This has the positive effect of saving 2 months of cash dividend on that $15 million of stock. As of today, we have $15 million of Series A capacity remaining. These capital activities have fortified our balance sheet and provided ample dry powder for future growth. Notably, leverage as measured by debt-to-total assets stood at 0% at quarter end and debt plus preferred to total assets stood at around 29%. We believe these leverage levels are conservative and consistent with the levels that we have continuously communicated as our target levels. Looking forward, we believe we're entering the second half 2018 from a position of strength in terms of capital. Looking at our table of capital, sources and uses contained on Page 18 of our earnings supplemental, we have identified $349 million of capital uses through 2022, which includes current contractual investment obligations as well as the remaining $40 million of commitments to be expect to incur per the midpoint of our 2018 guidance. Also, you'll see that our total investment -- our total estimated cash investment for the rest of 2018 is $123 million. Importantly, we have funding in place for all of our 2018 and 2019 projected commitments comprised of a combination of cash on hand, existing capacity in our line, the aforementioned property-specific debt, our Series A preferred equity line and expected repayments of existing investments. Beyond that, we have remaining capital needs of approximately $43 million over the next few years, all of which falls in 2020 and beyond. We have noted several potential sources of capital, including, but not limited to, loan refinancing activities, additional asset sales, Series B preferred ATM sales, common equity sales, secured debt and joint venture proceeds. As we believe we have done since inception, we will continue to prudently seek to match our funding obligations with the sources of capital that best add value to our company. So that's all we have in terms of prepared remarks. I'll now turn it over to Q&A.

[Operator Instructions] Our first question comes from R.J. Milligan of Robert W. Baird.

Good morning guys. You guys cited that the leasing season was pretty strong for the assets in lease-up and that you're now about 1,000 basis points ahead of underwriting in terms of occupancy. I'm just curious, if you could give any comments or color, where you guys are relative to underwriting on the effective rent side?

Yes, R.J., I'll take that one. And as you know, you've been there since day 1, so you know our underwriting process as well as anybody. We underwrite to a stabilized net operating income and that -- we hit that result after a 3- to 4-year physical lease-up period. And then you add on to that generally, a season of -- a leasing season to stabilize your rates. So for us to comment on where we are in terms of expectations this early in the lease-up process, probably a little bit hard to do, because rates are a dynamic factor, when you're in lease up. I will say that when we look at the amount of cash that is being contributed to the company from those projects that are getting into that kind of 65% to 70% lease-up range, it appears as if we are tracking very well. I can't give you statistics, because, again, it's a little too early, but we're tracking very well toward those stabilized underwritten numbers. And so we feel like when we get to that 3 years out or 4 years out, we're going to be very much on target.

Okay, that's helpful. I guess my second question is with the addition of Jonathan, when do you guys expect to start buying developers' interest? And what are they -- how would a deal structure that work for Jernigan? And what are the other possible sort of customized opportunities that you guys see out there versus just buying one-off acquisitions?

Okay. So to deal with that question in the 3 parts. The first part is developer interest purchases. And as you know, we've bought 5 developer interests to this point. And those were some of the early projects that we did, those that were done in kind of the summer of 2015. As you know, as we got into 2016, much of our investment activity happened through the Heitman joint venture. And Heitman is very much a party to and a voice in when those transactions occur. At this point in the joint venture portfolio, you're still generally in the first year of lease-up of most of those properties. So they're not ripe and then once they start to get more mature, Heitman will have a say in how that happens. That leaves us with the balance of our on-balance-sheet portfolio and many of those investments were 2017 investments. And typically speaking, you need at least a leasing season, maybe 2 leasing seasons before the developer is ready to sell. Now we've had some incidences of developers who have wanted to monetize their equity investment in these projects so they can go do other investments in self-storage. And we could have a few of those happen between now and the end of 2019. But at the end of 2019, this portfolio that was begun in -- or portion of the portfolio that was begun in 2017, will really start to mature. And at that point in time, I think we'll have a number of developers who will begin to come to us and want to monetize their equity investments in these projects. Now for the second part of your question, you know that we've done the bridge, the bridge transaction. We did that transaction in early January and that involved a portfolio that was really began in 2014. So it was one of the earlier major development projects in the current development cycle. In a few other markets, the Texas market is coming to mind, you have projects that have similar types of situations that are just a little later. And that situation is construction loans that are facing maturity and private equity investors who have had their equity at risk for a substantial period of time and are beginning to want to see their own monetization event. Many of these private equity investors are IRR driven, so timing is everything to them. We feel like, as we move into the back half of this year, we have a good likelihood of seeing some of those types of transactions. That's not a one-size fits all deal structure. I think each transaction is different. And so I think having Jonathan here to help us with the creative structuring of those deals will be very helpful. But I think that that's the back half of 2018 and on into early 2019 opportunity. And then finally, as you move toward the end of this cycle and as properties get through a couple of leasing seasons, the acquisition cycle is likely to begin. And we feel like there's going to be a nice opportunity for us to, at least, have a look at properties that are in markets that are the same types of markets that we've invested in development throughout the cycle as well as will be nice add-ins to existing projects that we have in those particular markets. And those types of opportunities, we think, are 2019 opportunities. There may be a few over the balance of this year. But as we move into next year, I think those opportunities become more numerous. And so we will take a look at those. I think we have the best guy in the business to source those. He knows most of these projects off the top of his head right now. And we feel like we're going to have an opportunity to be a player in that part of the cycle as well.

Our next question comes from Jonathan Hughes of Raymond James. Please proceed with your question.

Hey good morning, thanks for the time. Dean, earlier you mentioned that the concrete and steel components of the Gen V products being built today, and then also, some delays on projects. I think, John, you mentioned that. But could you maybe just talk about construction cost, quantify what you're seeing in terms of your increases in materials and then maybe also labor?

Good morning, Jonathan. Yes, the costs have gone up some. I wouldn't say materially on both steel and just general cost of building a storage facility. That has not been a deal-breaker. Labor shortages are all around us out there. That has not been a deal-breaker. Really what has been the deal-breaker from an underwriting standpoint is the fact that, that added to the fact that we're in the middle of a lease-up of a big development cycle, rents have been rolled back in order to capture occupancy, as R.J. was alluding too. And so the numbers -- they just don't pencil. A combination of those items, I can add one more, and that is property tax assessors have gotten more aggressive across the country. I know early in my career, we were way off the radar screen for those guys, but now, we're no longer. And so we're seeing property taxes being a little bit of a problem from an underwriting standpoint as well. You add that altogether and the banks have basically closed the window for developers. And so that's -- those are the components of the reason we're seeing, and rightly so, a diminished supply line of new development. We're just not going to need it going forward. So I think this is a very responsible development cycle we're in. The first ever from my experience.

Okay. I mean, that supports the dual peak view that you've had and you've been very consistent on that, and you did just talk about banks. But what have you seen in terms of the competitors to fund developments? I know it's hard to quantify what somebody else is doing. But maybe what you're seeing in terms of activity from other sources on a year-over-year basis?

We talk to these guys all the time and even developers that we don't fund. And one of the largest, I just had a conversation with the other day. And clearly they have drawn in all of their battle lines, and they're now focused on only 2 markets in the country where they think they see a need for more storage. So it has -- I mean, we're regulating ourselves to a fair amount. And we're not just dependent upon the bankers not being willing to lend any more. We're much, much smarter than we've ever been. I think John has something to add.

Yes, Jonathan, I think to answer your question regarding sources of capital. I know that the Yardi Matrix has begun to track construction loan origination data. And the data that I've seen -- for Q2 of 2018 it has not yet been updated, but I think I've gotten good data for the last several quarters through the first quarter of this year. And you had a period from the third -- beginning with the third quarter of 2016 running through the second quarter of 2017, where construction loan originations were up in the mid-100 range, somewhere between 130 and 150 properties per quarter. And that would be consistent with kind of the deliveries that we're seeing for 2018 and expected for 2019. Well, the data that has been shared with me for the last 2 quarters of last year and then the first quarter of this year show a precipitous decline in those construction loan originations. And when you combine that with data that we're seeing that show the number of proposed projects going down really every month that's indicative to me that the combination of banks closing the window, as Dean said, and projects not penciling like they were earlier in the cycle has resulted in what we can now pretty confidently call soft landing and an expectation that when you get into 2020, the number of deliveries will drop off pretty significantly.

Okay, that's exactly what I was looking for. And then I guess, just one more. There is obviously a big portfolio deal that traded last month at [5, 6] stabilized cap rate, obviously, that had a premium embedded in it to a degree. Curious if that's changed, maybe how you look at your 5.5 cap rate estimate used in your fair value income calculation?

Yes, Jonathan, we have consistently tried to be reasonable and conservative in the way that we have both underwritten and then also, as we've moved through the process, recorded fair value increases. And I know trade that occurred was at a cap rate that was south of what we underwrite. And I don't think the properties involved were of the same ilk that our properties are. But at the same time, we feel the need to be prudent and to stay reasonably conservative. And so we don't have any intention right now to change that 5.5 kind of average cap rate to which we're evaluating fair value, at least for the foreseeable future.

Okay, that's it for me. Thanks for taking my questions.

Our next question comes from Todd Thomas of KeyBanc Capital Markets. Please proceed with your question.

Hey, good morning. This is Drew on for Todd. Just curious regarding the slower pace of new loan commitments. John, you mentioned that you've been more selective and you're looking for home run deals. Just to be curious, if your definition of what a home-run deal has changed at all recently, in terms of your underwriting criteria? And then maybe, if you could comment on what you think the pace of new commitments might look like in 2019?

Well, our definition of home run has been consistent throughout the year. And I think maybe at the call in March, I might have said -- I might have tried to put some more definitive criteria around that. But just generally, we're looking for very dense submarkets: urban infill location, very high degree of multifamily tenancy and a significantly below national average of square footage per capita in that submarket. And you throw in things like high traffic counts and good visibility of the projects. And finally, a lack of new supply that's ahead of us. We don't want to be the third or fourth facility in a particular submarket. So that's our definition of a home run. And I think that, that selectivity is why our pipeline is what it is right now. We feel confident that we're going to hit our guidance range for this year. And then as we look into 2019, it just remains to be seen. We're going to be looking for markets that we think are home run sub markets like we've looked for this year. And we'll know in 2019 if they exist or not.

Got it, that's helpful. And the just a follow up on that. Has your piece of inbound volume changed at all recently, could you comment on that?

We, about half way through our life cycle, we had developed our pipeline of developers. So a lot of our pipeline is coming from our existing relationships. And these guys are continuing to work hard, but they've become very well educated not only in how we underwrite, but now they have kind of adopted the same type of philosophy in their own underwriting. So they're outsourcing deals and they're all working very hard -- this is their full-time job. But they're bringing to us those projects that they believe meet that home run criteria. And so there is plenty of inbound activity. We don't really measure it in terms of number of calls, because we have this definitive group with whom we're working.

And this is Dean, let me pile onto that one. We -- I see every inbound query online that comes into the company, in other words that comes through our website. I don't hear all the calls, but I can tell you that through the website, those are down dramatically. And I suspect our calls from developers who are not in our program are down. Would you confirm -- agree with that?

I agree with that. I completely agree with that. And I think we were always intending to get our core group together and focus on that and that's what we're doing. We feel like that's the best way to build our company.

Got it, that's helpful color, guys. And then just one last one from me, kind of following the acquisition of Jonathan Perry to the team. Just curious, as you guys sort of transition to more of an equity REIT, is there any further staffing needs that you guys see in the future of that magnitude? Anything that you might see on the horizon?

Not immediately. I think we're very appropriately staffed now, and we're very scalable for what we're doing at this point. To look at significant additional staffing, you have to really have a crystal ball that goes out several years. And we're not really at a point now where we can give you much help on that. As we continue to evolve and as we continue to actively plan strategically for the future, which we do on a daily basis, as things develop, we'll let you guys know.

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

I just want to try and piece together a few of the comments each of you had said earlier on the call. And Kelly were you saying that the fair value guidance for the year does not reflect the potential impacts from construction delays that John touched on? And Dean, were your comments on the soft landing in '19 reflective of that headwind as well?

Go ahead, Kelly.

Good morning. No, the range -- we did not -- we chose not to narrow that range by virtue to give us enough contingency to capture any significant delays, should we experience what the sector starts to experience as well. So that was our reasoning behind -- at this point, we still have a good portion of half the year left to go through with a lot of deliveries expected during the latter part of the year. So that's why we opted not to narrow the range at this time.

Got it, okay.

And Tim, ask your question again. I didn't quite understand what you were asking.

Dean, just wondering, if your comments on the soft landing in '19 and your expected view of supply in '19 specifically, was reflective of the, I guess, the near-term headwind from construction delays.

No, no, no. I was really speaking of just the balancing the supply with the demand out there. The fact that the numbers no longer worked, a little bit on the cost side, but also on the income side. Bank window is closed. We are getting very, very particular. I mean, we have always been particular, but it's just that it's very difficult to find a submarket in a top-50 market out there today that doesn't already have 1 or 2 new starts or properties that have just been recently completed. And so we're coming to the end of a cycle and that's not all headwinds regarding anything that John was talking about. It's just that we're coming to an end of a cycle and it's very clear to me.

Okay, got it. And then Dave, you highlighted potential asset sale and loan repayment in 3Q just on the capital side. Do the proceeds reflect any gain or loss expected from the asset sale or any early repayment fees on the loan?

You're talking about in the sources in use system?

Correct.

Yes, so that just reflects the portion that we'll get back of our net proceeds.

Okay.

I think this is one of our very earliest assets and we are not at a point of any kind of definitive agreement yet. So I don't want to get into any details about it. But my expectation is, we would get whatever early payment fee we're entitled to under our loan agreement. And in terms of any gain or loss, it will be minimal, if any. This is a small asset and it's been appropriately marked to market as we've worked through our fair value accounting over the last 4 years.

[Operator Instructions] Our next question comes from George Hoglund of Jefferies.

Good morning. Just one question in terms of the acquisitions going forward. How much capital -- if you could put some sort of goalposts around it, how much capital would you potentially target to invest in '19 in terms of acquisitions? And then also, assuming it's going to be done within a JV, would that be kind of a 25% interest you'd have in the JV? Or has that been planned out? And then also what do you view as kind of competition for acquisitions going forward since we still hear of a lot of capital looking to get into self-storage?

Yes, George, I think, from the standpoint of JV structure, first of all, I will say that I think to the extent we engage in acquisitions or projects that we have not already invested in, in other words, third-party acquisitions, we likely would be doing in a joint venture with someone. I think at this point, it's kind of hard to say what that structure would be and how much capital we would commit to it. We need to actually get into an acquisition cycle where there are properties available. And I'm not sure we're quite there yet. But as we develop those plans, we'll give more insights on future calls. I think Dean might want to talk about the competition a little bit.

Yes, we look forward to competing with anyone toe-to-toe on buying assets, either marketed assets or off-market assets. I mean, my Storage USA days, we bought about 550 assets, I believe it was. And moving over CubeSmart, we did another 1.5 billion. And since I left there, Jonathan has -- and he was involved in all of those. Since I've left he's continued on and they've bought another probably equal number of assets. So I really put my experience and Jonathan's experience up there with anybody as far as how to buy a storage facility. And So we're excited about, really excited about it. And we will source the right capital to do it with, but there is no doubt that we know how to underwrite the acquisition of a storage facility.

George, one last comment I'll make to you and this goes to your question of potential capital that we would need. You have access to the sources and uses table in the supplemental. As you see in the table, we're fully covered on everything we've committed to through 2019 and then when we get into 2020, there's only about $43 million of remaining amount to cover in our existing portfolio. And we identified about $150 million of additional sources of capital just that we have right now, and any joint venture -- joint venture structures are such that the amount of capital that we would require for that is going to be very well within that amount of capital that we currently have available through these other sources that we've identified.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to Mr. Dean Jernigan for closing comments.