Preferred Apartment Communities, Inc. Reports Results for Second Quarter 2017

Staff Report From Metro Atlanta CEO

Tuesday, August 8th, 2017

Preferred Apartment Communities, Inc. reported results for the quarter ended June 30, 2017. Unless otherwise indicated, all per share results are reported based on the basic weighted average shares of Common Stock and Class A Units of the Company's operating partnership ("Class A Units") outstanding.

"PAC had another very strong quarter, with all areas of the Company performing extremely well," said John A. Williams, Preferred Apartment Communities' Chairman and Chief Executive Officer.

Financial Highlights

Our operating results are presented below.

 
 
   

Three months ended June 30,

     

Six months ended June 30,

     
   

2017

 

2016

 

% change

 

2017

 

2016

 

% change

 
                               
 

Revenues

$

70,890,913

   

$

45,853,944

   

54.6%

 

$

137,452,248

   

$

87,589,725

   

 

56.9%

 
                           
 

Per share data:

                       
 

Net income (loss) (1)

$

(0.40)

   

$

(0.40)

   

 

$

0.09

   

$

(0.88)

   

 
                           
 

FFO (2)

$

0.31

   

$

0.18

   

72.2%

 

$

0.65

   

$

0.35

   

85.7%

 
                           
 

Core FFO (2)

$

0.37

   

$

0.31

   

19.4%

 

$

0.73

   

$

0.61

   

19.7%

 
                           
 

Dividends (3)

$

0.235

   

$

0.2025

   

16.0%

 

$

0.455

   

$

0.395

   

15.2%

 
                           

(1) Per weighted average share of Common Stock outstanding for the periods indicated.

(2) FFO and Core FFO are presented per weighted average share of Common Stock and Class A Unit in our Operating Partnership outstanding for the periods indicated. See Reconciliations of FFO, Core FFO and AFFO (each as defined below) to Net Income (Loss) Attributable to Common Stockholders on pages S-3 and S-4.

(3)  Per share of Common Stock and Class A Unit outstanding.

Net loss per share for the three months ended June 30, 2017 reflects a realized gain on the sale of Enclave at Vista Ridge of approximately $6.9 million, or $0.23 per share. Funds from operations for the three months ended June 30, 2016 reflect acquisition-related costs of approximately $2.8 million. In 2017, the majority of these type of costs are deferred and amortized over the life of the acquired assets (see  "2017 Guidance" section). Core Funds From Operations Attributable to Common Stockholders and Unitholders excludes acquisition costs and certain other costs not representative of our ongoing operations. Adjusted Funds From Operations Attributable to Common Stockholders and Unitholders removes significant non-cash revenues and expenses from our Core FFO results.

  • For the second quarter 2017, our Core FFO payout ratio to our Common Stockholders and Unitholders was approximately 68.3% and our AFFO payout ratio to Common Stockholders and Unitholders was approximately 81.5%. (1)

  • For the second quarter 2017, our Core FFO payout ratio (before the deduction of preferred dividends) to our Series A Preferred Stockholders was approximately 57.3% and our AFFO payout ratio (before the deduction of preferred dividends) to our Series A Preferred Stockholders was approximately 61.6%. (1)

  • As of June 30, 2017, our total assets were approximately $2.6 billion compared to approximately $1.8 billion as of June 30, 2016, an increase of approximately $0.9 billion, or approximately 50.2%. This growth was driven primarily by the net addition of 18 real estate properties and an increase of approximately $114.3 million of the funded amount of our real estate loan investment portfolio since June 30, 2016.

  • As of June 30, 2017, the average age of our multifamily communities was approximately 6.5 years, which we believe is among the youngest in the multifamily REIT industry.

  • At June 30, 2017, our leverage, as measured by the ratio of our debt to the undepreciated book value of our total assets, was approximately 54.0%.

  • Cash flow from operations for the quarter ended June 30, 2017 was approximately $24.1 million, an increase of approximately $4.6 million, or 23.6%, compared to approximately $19.5 million for the quarter ended June 30, 2016.

(1) We calculate the Core FFO and AFFO payout ratios to Common Stockholders and Unitholders as the ratio of Common Stock dividends and distributions to Unitholders to Core FFO or AFFO, respectively. We calculate the Core FFO and AFFO payout ratios to Series A Preferred Stockholders as the ratio of Preferred Stock dividends to the sum of Preferred Stock dividends and Core FFO or AFFO, respectively. Since our operations resulted in a net loss from continuing operations for the periods presented, a payout ratio based on net loss is not calculable. See Definitions of Non-GAAP Measures on page S-21.

Acquisitions of Properties

- During the second quarter 2017, we acquired the following properties:

 
                     
 

Property

 

Location

 

Type

 

Units

 

Leasable square feet

 
                     
 

Castleberry-Southard

 

Atlanta, GA

 

Grocery-anchored shopping center

 

n/a

 

80,018

   
 

Rockbridge Village

 

Atlanta, GA

 

Grocery-anchored shopping center

 

n/a

 

102,432

   
 

Claiborne Crossing

 

Louisville, KY

 

Multifamily community

 

242

   

n/a

   
                     
                         

Sale of Property

  • During the second quarter 2017, we sold our 300-unit Enclave at Vista Ridge multifamily community located in Dallas, Texas for $44.0 million and recorded a realized gain on the sale of approximately $6.9 million. Our average annualized return on the property was approximately 15.6%.

Real Estate Loan Investments

  • On April 20, 2017, we closed on a loan investment of up to approximately $31.5 million to acquire a 6.5 acre site located in San Jose, California that is currently zoned to provide for up to 551 multifamily units and approximately 37,000 square feet of commercial space.

  • On June 5, 2017, we closed on a loan investment of up to approximately $2.4 million to acquire a 26 acre site located in Nashville, Tennessee in support of a proposed 301 unit multifamily community.

Debt Refinancing

On June 22, 2017, we refinanced the existing $16.3 million mortgage on our Stone Creek multifamily community which bore interest at a fixed 3.75% rate per annum (the all-in rate including the mortgage insurance premium was 4.74% per annum) and was 29 years from maturity into a mortgage of $20.6 million, which bears interest at a fixed rate of 3.22% per annum (the all-in rate including the mortgage insurance premium is 3.47% per annum) and matures in 35 years.

On June 15, 2017, we refinanced the existing $61.75 million mortgage on our 525 Avalon multifamily community which bore interest at a variable rate of 1 Month LIBOR plus 200 basis points per annum and the secondary financing note of $3.25 million which bore interest at a variable rate of 1 Month LIBOR plus 1100 basis points per annum (both of which were to mature in less than two years) into a single mortgage of $67.38 million, which bears interest at a fixed rate of 3.98% per annum and matures in seven years.

These transactions permitted us to utilize approximately $4.1 million of equity from these two assets for deployment into future acquisitions and reduced our exposure to possible future interest rate increases.

Real Estate Assets

       
           
 

Owned as of
June 30, 2017

 

Potential additions
from real estate
loan investment
portfolio (1)

 

Potential total

Multifamily communities:

         

Properties

25

   

16

   

41

 

Units

8,074

   

4,712

   

12,786

 

Grocery-anchored shopping centers:

         

Properties

33

   

1

   

34

 

Gross leasable area (square feet)

3,477,941

   

200,000

(2)

 

3,677,941

 

Student housing properties:

         

Properties

2

   

8

   

10

 

Units

444

   

1,874

   

2,318

 

Beds

1,319

   

5,693

   

7,012

 

Office buildings:

         

Properties

3

   

   

3

 

Rentable square feet

1,094,000

   

   

1,094,000

 
           

(1) We evaluate each project individually and we make no assurance that we will acquire any of the underlying properties from our real estate loan investment portfolio.

(2) Square footage represents area covered by our purchase options and excludes 123,590 square feet owned by the grocery anchor.

Subsequent to Quarter End

  • On July 11, 2017, we closed on a loan investment of up to approximately $22.4 million in support of the construction of a 356-unit multifamily community located in Atlanta, Georgia.

  • On July 26, 2017, we closed on the acquisition of a 280-unit multifamily community located in Sarasota, Florida.

  • On July 26, 2017, we closed on the acquisition of a 99,384-square foot grocery-anchored shopping center located in the Columbia, South Carolina market.

  • On July 31, 2017, we closed on two loan investments of up to an aggregate of approximately $17.9 million in support of the construction of a 258-unit multifamily community to be located in Atlanta, Georgia.

Same Store Operations

The following table presents the percentage change in same store multifamily gross revenues, operating expenses and net operating income for the second quarter 2017 versus 2016. Our same store property operating results exclude any properties that are not comparable for the periods presented. See page S-20 of our Supplemental Financial Data Report for more details on our same store results.

               
   

Year over year growth

 
   

three months ended June 30, 2017 versus 2016

 
   

Total Revenues

 

Operating
Expenses

 

Net
Operating
Income

 
               
 

Multifamily

0.1%

 

(1.0)%

 

1.0%

 
               
                     

Capital Markets Activities

On May 12, 2017, the Company sold 2,750,000 shares of its common stock, par value $.01 per share, or Common Stock, at a public price of $15.25 per share pursuant to an underwritten public offering. On May 30, 2017, the Company sold an additional 412,500 shares of Common Stock at $15.25 per share pursuant to the underwriters' exercise in full of an option received in connection with the public offering. The combined gross proceeds of the two sales was approximately $48.2 million before deducting underwriting discounts and commissions and other estimated offering expenses.

During the second quarter 2017, we issued and sold an aggregate of 62,482 Units from our offering of up to 1,500,000 Units, with each Unit consisting of one share of Series A Redeemable Preferred Stock and one Warrant to purchase up to 20 shares of Common Stock (the "$1.5 Billion Series A Unit Offering"), resulting in gross proceeds of approximately $62.4 million. In addition, during the second quarter 2017, we issued approximately 1.1 million shares of Common Stock pursuant to the exercise of warrants issued under our Series A Preferred Stock offerings, resulting in aggregate gross proceeds of approximately $13.9 million.

During the second quarter 2017, we issued and sold an aggregate of 6,215 shares of Series M Redeemable Preferred Stock ("mShares"), resulting in aggregate gross proceeds of approximately $6.2 million.

During the second quarter 2017, we sold 718,842 shares of Common Stock pursuant to our "at the market" offering (the "Common Stock ATM Offering"), resulting in aggregate gross proceeds of approximately $10.0 million.

Collectively, these activities added approximately 5 million shares to our outstanding shares of Common Stock, which totaled approximately 32.4 million shares at June 30, 2017. The closing price of our Common Stock was $15.75 on June 30, 2017 versus $14.72 on June 30, 2016. Our total equity book value increased approximately 56.8% to $1.1 billion at June 30, 2017 from $687 million at June 30, 2016.

Dividends

Quarterly Dividends on Common Stock and Class A OP Units

On April 17, 2017, we declared a quarterly dividend on our Common Stock of $0.235 per share for the second quarter 2017. This represents a 16.0% increase in our common stock dividend from our second quarter 2016 common stock dividend of $0.2025 per share, and an annualized dividend growth rate of 14.8% since June 30, 2011, the first quarter end following our initial public offering in April 2011. The second quarter dividend was paid on July 14, 2017 to all stockholders of record on June 15, 2017. In conjunction with the Common Stock dividend, the Company's operating partnership declared a distribution on its Class A Units of $0.235 per unit for the second quarter 2017, which was paid on July 14, 2017 to all Class A Unit holders of record as of June 15, 2017.

Monthly Dividends on Series A Redeemable Preferred Stock

We declared and paid monthly dividends of $5.00 per share on our Series A Redeemable Preferred Stock, which totaled approximately $15.1 million for the quarter ended June 30, 2017 and represents a 6% annual yield.