Preferred Apartment Communities, Inc. reported results for the quarter ended June 30, 2019. 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. See Definitions of Non-GAAP Measures.

"The company hit on all operational cylinders in the second quarter while we continued to make strategic moves to strengthen our business model and to seek to make long-term market overperformance an attainable goal," said Daniel M. DuPree, Preferred Apartment Communities' Chairman and Chief Executive Officer.

Financial Highlights

For the second quarter 2019, our FFO payout ratio to Common Stockholders and Unitholders was approximately 73.9% and our FFO payout ratio (before the deduction of preferred dividends) to our preferred stockholders was approximately 63.3%. ^(A)

Our AFFO payout ratio to Common Stockholders and Unitholders was approximately 119.4% for the second quarter 2019 and 85.0% for the trailing twelve-month period ended June 30, 2019. Our AFFO payout ratio (before the deduction of preferred dividends) to our preferred stockholders was approximately 73.6% for the second quarter 2019 and 65.3% for the trailing twelve-month period ended June 30, 2019. ^(B)

For the quarter ended June 30, 2019, our rental revenue increased approximately 3.4% and our operating expenses increased 1.5%, resulting in an increase in net operating income of approximately 3.9% for our same-store multifamily communities as compared to the quarter ended June 30, 2018.^(C) For the second quarter 2019, our average same-store multifamily communities' physical occupancy was 95.6%.

At June 30, 2019, the market value of our common stock was $14.95 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 19.1% through June 30, 2019.

As of June 30, 2019, the average age of our multifamily communities was approximately 5.4 years, which is the youngest in the public multifamily REIT industry.

At the end of the second quarter 2019, we had $0 drawn on our $200 million revolving line of credit.

Approximately 90.3% of our permanent property-level mortgage debt has fixed interest rates and approximately 5.7% has variable interest rates which are capped. In addition, we are continuing to refinance the remaining uncapped variable rate mortgage debt into new fixed rate instruments during the remainder of 2019. We believe we are well protected against potential increases in market interest rates.

Over the next six quarters, the company has ten mortgage loans with balloon payments due at their maturity of approximately $130 million: eight retail assets and two student housing assets. Six of the eight retail assets have already acquired new debt and we have locked rate for a third quarter closing. For the remaining two retail assets, we plan to pay off the loans at their maturity and have them remain unencumbered. For the two student housing assets, we plan to refinance them shortly before their maturity.

At June 30, 2019, our leverage, as measured by the ratio of our debt to the undepreciated book value of our total assets, was approximately 52.0%. Included in our total assets were our investments in the Series 2018-ML04 and Series 2019-ML05 from the Freddie Mac K program. Our leverage calculation excludes the gross assets and liabilities of approximately $572.0 million that are owned by other pool participants in the Freddie Mac K program that we consolidated under the VIE rules.

As of June 30, 2019, our total assets were approximately $5.0 billion compared to approximately $3.9 billion as of June 30, 2018, an increase of approximately $1.1 billion, or approximately 27.4%. This growth was driven by (i) the acquisition of nine real estate properties (partially offset by the sale of three properties) and (ii) the consolidation of the mortgage pools from the Freddie Mac K program. Excluding the VIE mortgage pool assets from other participants in the K Program, our total assets grew approximately $762.2 million, or 20.9% since June 30, 2018.

On April 12, 2019, we closed on a real estate loan investment of up to approximately $7.2 million in connection with the development of a 204-unit second phase of our Lodge at Hidden River multifamily community located in Tampa, Florida.

On April 12, 2019, we refinanced the variable-rate mortgage on our Royal Lakes Marketplace grocery-anchored shopping center into a new 10 year, $9,700,000 loan with a fixed rate of 4.29%.

On April 12, 2019, we refinanced the variable-rate mortgage on our Cherokee Plaza grocery-anchored shopping center into a new 8 year, $25,200,000 loan with a fixed rate of 4.28%.

Effective June 30, 2019, we amended and sold the senior construction loan held by us on the 8West office development to a third party and collected a gross fee of $1.55 million from the buyer.

Acquisitions of Properties

During the second quarter 2019, we acquired the following properties:

Real Estate Assets

Subsequent to Quarter End

On July 25, 2019, we acquired CAPTRUST Tower, a class A office building in Raleigh, North Carolina comprising 300,389 rentable square feet.

On July 29, 2019, we refinanced the mortgage on our Citilakes multifamily community from a floating to a fixed interest rate of 3.66%.

On July 29, 2019, we entered into a purchase and sale agreement pursuant to which we will sell six of our student housing properties to a third party. We anticipate receiving a non-refundable security deposit within three days and expect the sale to close during fourth quarter 2019. We expect to realize a book gain on the sale.

Same-Store Multifamily Communities Financial Data

The following chart presents same-store operating results for the Company's multifamily communities. We define our population of same-store multifamily communities as those that have achieved occupancy at or above 93% for all three consecutive months within a single quarter (stabilized) before the beginning of the prior year and that have been owned for at least 15 full months as of the end of the first quarter of the current 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 communities containing an aggregate 6,172 units:

Same-store net operating income is a non-GAAP measure that is most directly comparable to net income (loss), as shown in the reconciliations below.

Capital Markets Activities

During the second quarter 2019, we issued and sold an aggregate of 125,093 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 $112.6 million after commissions and other fees.

In addition, during the second quarter 2019, we issued 252,300 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 $3.3 million. We also issued approximately 746,100 shares of Common Stock for redemptions of 11,916 shares of our Series A Redeemable Preferred Stock.

During the second quarter 2019, we issued and sold an aggregate of 17,137 shares of Series M Redeemable Preferred Stock ("mShares"), resulting in net proceeds of approximately $16.6 million after dealer manager fees.

Dividends

Quarterly Dividends on Common Stock and Class A OP Units

On May 2, 2019, we declared a quarterly dividend on our Common Stock of $0.2625 per share for the second quarter 2019. This represents a 2.9% increase in our common stock dividend from our second quarter 2018 common stock dividend of $0.255 per share, and an average annual dividend growth rate of 13.8% since June 30, 2011, the first quarter end following our initial public offering in April 2011. The second quarter dividend was paid on July 15, 2019 to all stockholders of record on June 14, 2019. In conjunction with the Common Stock dividend, the Company's operating partnership declared a distribution on its Class A Units of $0.2625 per unit for the second quarter 2019, which was paid on July 15, 2019 to all Class A Unit holders of record as of June 14, 2019.

Monthly Dividends on Preferred Stock

We declared monthly dividends of $5.00 per share on our Series A Redeemable Preferred Stock, which totaled approximately $26.5 million for the second quarter 2019 and represent a 6% annual yield. We declared dividends totaling approximately $1.0 million on our Series M Redeemable Preferred Stock, or mShares, for the second quarter 2019. The mShares have a dividend rate that escalates from 5.75% in year one of issuance to 7.50% in year eight and thereafter.