Preferred Apartment Communities, Inc. reported results for the quarter ended June 30, 2018. 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.

"We had another strong quarter across all of our business operations. At the beginning of the year, we increased our focus on results at the property level and our same store net operating income numbers reflect that effort," said Daniel M. DuPree, Preferred Apartment Communities' Chairman and Chief Executive Officer.

Financial Highlights

Our operating results are presented below:

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

⁽²⁾ FFO and AFFO results are presented per weighted average share of Common Stock and Class A Unit in our Operating Partnership outstanding for the periods indicated. See Reconciliation of FFO and AFFO to Net Income (Loss) Attributable to Common Stockholders and Definitions of Non-GAAP Measures.

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

• For the second quarter 2018, our FFO payout ratio to Common Stockholders and Unitholders was approximately 66.8% and our FFO payout ratio (before the deduction of preferred dividends) to our preferred stockholders was approximately 57.4%.

• For the second quarter 2018, our AFFO payout ratio to Common Stockholders and Unitholders was approximately 68.6% and our AFFO payout ratio (before the deduction of preferred dividends) to our preferred stockholders was approximately 58.0%.^(A)

• For the second quarter 2018, our same store net operating income for our established multifamily communities increased approximately 5% as compared to the second quarter 2017. (B) For the quarter ended June 30, 2018, our average established multifamily communities' physical occupancy was 95.2% and our same-store rental revenue grew 3.4% from the second quarter 2017. For the six-month period ended June 30, 2018, our same store net operating income for our established multifamily communities increased approximately 8% as compared to the six-month period ended June 30, 2017.

• At June 30, 2018, the market value of our common stock was $16.99 per share. A hypothetical investment in our Common Stock in our initial public offering on April 5, 2011, assuming the reinvestment of all dividends and no transaction costs, would have resulted in an average annual return of approximately 23.4% through June 30, 2018.

• As of June 30, 2018, the average age of our multifamily communities was approximately 5.6 years, which is the youngest in the public multifamily REIT industry.

• Approximately 89.8% of our permanent property-level mortgage debt has fixed interest rates or has variable interest rates which are capped. We believe we are well protected against potential increases in market interest rates.

• In the second quarter, PAC closed on its first "B" piece investment in the Freddie Mac K program. This investment was approximately $4.6 million and used to purchase a zero coupon security in the ML-04 pool of multifamily mortgages securitized by Freddie Mac. Due to accounting rules, we were required to include the assets, liabilities and cash flows of the entire ML-04 pool on our consolidated balance sheets and consolidated statements of cash flows. Our maximum amount at risk is $4.6 million, the amount of our investment. 

• At June 30, 2018, our leverage, as measured by the ratio of our debt to the undepreciated book value of our total assets, was approximately 53.9%. Our leverage calculation excludes the gross assets of approximately $266.7 million and liabilities of approximately $261.9 million that we consolidated as a result of our investment in the Freddie Mac K program.

• As of June 30, 2018, our total assets were approximately $3.9 billion compared to approximately $2.6 billion as of June 30, 2017, an increase of approximately $1.3 billion, or approximately 48.5%. This growth was driven primarily by the acquisition of 23 real estate properties (net of the sale of one property). In addition, our assets increased due to the consolidation of the ML-04 pool.

• Cash flow from operations for the quarter ended June 30, 2018 was approximately $41.7 million, an increase of approximately $17.7 million, or 73.4%, compared to approximately $24.1 million for the quarter ended June 30, 2017. Cash flow from operations for the second quarter 2018 was more than sufficient to fund our aggregate dividends and distributions for the period, which totaled approximately $31.3 million.

• On April 11, 2018, we closed on two real estate loan investments aggregating up to approximately $30.2 million in support of a multifamily community project in Alexandria, Virginia. On May 24, 2018, we closed on two real estate loan investments aggregating up to approximately $11.9 million in support of a multifamily community project in Nashville, Tennessee.

• On May 7, 2018, we terminated our existing purchase options on the Encore, Bishop Street and Hidden River multifamily communities and the Haven 46 and Haven Charlotte student housing properties, all of which are partially supported by real estate loan investments held by us. In exchange, we received termination fees aggregating approximately $12.5 million from the developers. These fees are treated as additional interest revenue and are amortized over the period ending with the earlier of the sale of the underlying property or the maturity of the associated real estate loan. For the second quarter 2018, we recorded approximately $2.2 million of interest revenue related to these transactions.

^(A) We calculate the AFFO payout ratio to Common Stockholders as the ratio of Common Stock dividends and distributions to AFFO. We calculate the AFFO payout ratio to preferred stockholders as the ratio of Preferred Stock dividends to the sum of Preferred Stock dividends and AFFO. 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.

^(B) Same store net operating income is a non-GAAP measure. See Definitions of Non-GAAP Measures.

Acquisitions of Properties

During the second quarter 2018, we acquired the following properties:

Real Estate Assets

Subsequent to Quarter End

• On July 6, 2018, we acquired a grocery-anchored shopping center located in the Charlotte, North Carolina MSA comprising 122,028 square feet of gross leasable area.

Multifamily Established Communities Financial Data

The following chart presents same store operating results for the Company's established communities. Effective with the fourth quarter 2017, we define our population of established communities as those that have been stabilized for at least three consecutive months and that have been owned for at least 15 full months as of the end of the first quarter of each year, enabling comparisons of the current year quarterly and annual reporting periods to the prior year comparative periods. The Company excludes the operating results of properties for which construction of adjacent phases has commenced and properties which are undergoing significant capital projects, have sustained significant casualty losses, or are being marketed for sale as of the end of the reporting period. For the periods presented, same store operating results consist of the operating results of the following multifamily established communities:

At June 30, 2018, our Stone Rise and Stoneridge Farms at Hunt Club multifamily communities were being marketed for sale and are therefore excluded from our established communities same store population.

Same store net operating income is a non-GAAP measure that is most directly comparable to net income (loss), with a reconciliation following below.

Capital Markets Activities

During the second quarter 2018, we issued and sold an aggregate of 114,524 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 net proceeds of approximately $103.1 million after commissions and other fees. In addition, during the second quarter 2018, we issued 101,760 shares of Common Stock pursuant to the exercise of warrants issued under our Series A Preferred Stock offering, resulting in aggregate gross proceeds of approximately $1.2 million.

During the second quarter 2018, we issued and sold an aggregate of 8,360 shares of Series M Redeemable Preferred Stock ("mShares"), resulting in net proceeds of approximately $8.1 million after dealer manager fees.

Our outstanding shares of Common Stock totaled approximately 39.7 million shares at June 30, 2018. The market value  of our Common Stock was $16.99 per share on June 30, 2018 versus $15.75 on June 30, 2017. Our total equity book value increased 33.0% to approximately $1.4 billion at June 30, 2018 from $1.1 billion at June 30, 2017.

Dividends

Quarterly Dividends on Common Stock and Class A OP Units

On April 30, 2018, we declared a quarterly dividend on our Common Stock of $0.255 per share for the second quarter 2018. This represents a 8.5% increase in our common stock dividend from our second quarter 2017 common stock dividend of $0.235 per share, and an annualized dividend growth rate of 14.9% since June 30, 2011, the first quarter end following our initial public offering in April 2011. The second quarter dividend was paid on July 16, 2018 to all stockholders of record on June 15, 2018. In conjunction with the Common Stock dividend, the Company's operating partnership declared a distribution on its Class A Units of $0.255 per unit for the second quarter 2018, which was paid on July 16, 2018 to all Class A Unit holders of record as of June 15, 2018.

Monthly Dividends on Preferred Stock

We declared and paid monthly dividends of $5.00 per share on our Series A Redeemable Preferred Stock, which totaled approximately $20.5 million for the quarter ended June 30, 2018 and represent a 6% annual yield. We declared and paid dividends totaling approximately $342,000 on our Series M Redeemable Preferred Stock, or mShares, for the quarter ended June 30, 2018. The mShares have an escalating dividend rate from 5.75% in year one of issuance to 7.50% in year eight and thereafter.