Preferred Apartment Communities, Inc.
Q2 2021 Earnings Call Transcript

Published: 10 Aug 2021

[Operator:]

Good morning, and welcome to the Preferred Apartment Communities' Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'd now like to turn the conference over to Paul Cullen, Executive Vice President, Investor Relations. Please go ahead.

[Paul Cullen:]

Thank you for joining us, and welcome to Preferred Apartment Communities' second quarter 2021 earnings call. We hope each of you have had an opportunity to review our second quarter earnings report, which was released yesterday after the market close. In a moment, I'll turn the call over to Joel Murphy, our Chief Executive Officer, to share some initial thoughts, and then John Isakson, our Chief Financial Officer, will share some additional details about financial metrics and capital markets. Then Joel will return to conclude our pre-prepared remarks. Following Joel's remarks, we'll be pleased to answer any questions you might have. I'd like everyone to note that forward-looking statements may be made during our call. These statements are not guarantees of future performance and involve various risks and uncertainties. As you know, actual events and results may differ materially from these forward-looking statements, and the company does not undertake a duty to update any forward-looking statements. These risks and uncertainties include, but are not limited to the impact of COVID-19 pandemic on our business operations, our customers, the economic conditions in the markets in which we operate, the global economy and the financial markets, our ability to mitigate the impacts arising from COVID-19 and those included in our SEC filings. For a discussion of these and other risks and uncertainties, you should review the forward-looking statement disclosure in yesterday's earnings press release as well as our SEC filings. Our press release and other SEC filings can be found on our website at pacapts.com. The press release also includes our supplemental financial data report for the second quarter 2021 with definitions and reconciliations of non-GAAP financial measures to most directly compared GAAP financial metrics and other terms that may be used in today's discussion, and the reasons management uses these non-GAAP measures. We encourage you to refer to this information during your review of our operating results and financial performance. Unless otherwise indicated, all per share results that we discuss this morning are based on the basic weighted average shares of common stock and Class A partnership units, outstanding for the period. I would now like to turn the call over to Joel. Go ahead, Joel.

[Joel Murphy:]

Thank you, Paul. Good morning, everyone, and thank you for joining our call today. It is a very exciting time for Preferred Apartment Communities and we appreciate your interest in our company. I'm very proud of our solid performance today in 2021 in our agile effective and continued tactical execution against our strategic goals. As we reported just 12 days ago, and as part of our strategy to simplify our business and realign our balance sheet, we closed on the disposition of five office building assets and one real estate loan investment to Highwoods Properties for approximately $645 million. The closing of this strategic transaction, which we first announced on April 19, occurred on time and on the same terms. This transaction could not have gone any smoother from beginning to end, and we wish the Highwoods team the best with these high quality assets. They were an absolute pleasure to work with. This closing marks a significant and important milestone for us in our strategic transformation to realign our business and capital investment towards lower CapEx, higher growth multifamily assets complemented by our grocery-anchored retail investments. We purposely structured our agreement with Highwoods so that we could withdraw the Armour Yards sub portfolio from that transaction. We have exercised this right, and it's more fully described in our July 29th press release. We are under contract with Northwood Investors, another well-respected counterparty to sell that portfolio. Northwood has completed their due diligence, posted an earnest money deposit that is non-refundable except in limited circumstances. And we expect this sale to be completed later this quarter. This is further evidence of our intent and capability to monetize our few remaining office assets thoughtfully and over time. For us, this significant strategic milestone continues a process we kicked off at the beginning of 2020 to simplify our business, enhance alignment with stockholders, increase the flexibility of our balance sheet and ultimately achieve a durable and attractive long-term growth rate. Let me summarize our accomplishments and update you on where we are today. In January of last year, we completed the internalization of our external manager, leading to significant cost savings, a simplified structure, and a stronger alignment of interests with management and our stockholders. In November of 2020, we closed on the disposition in one transaction of our entire student housing portfolio to TPG, another well-respected counterparty, for approximately $479 million. Just a few days later in November of 2020, during a special stockholders meeting, our common stockholders overwhelmingly approved our recommendation to amend our charter, to allow common stockholders to propose amendments to our bylaws and to reduce the call option on our Series A preferred stock to five years, both enhancing corporate governance and improving the long-term flexibility of our balance sheet. With that approval in hand, and with a substantial majority of the net proceeds resulting from the student housing sale, we immediately redeemed and called in approximately $209 million of our Series A preferred stock. And now with the sale of substantial majority of our office assets less than two weeks ago, near simultaneous redemption of an additional $221 million of our Series A preferred stock, we are ready to accelerate our pivot to growth, building off of what we believe to be one of the highest quality best positioned portfolios in the public REIT sector. These significant and sequential strategic initiatives were carefully planned in scope and scale and were executed with first-class counterparties at excellent pricing. These are steps built upon one another and have resulted in a transformative change of our company through simplification, capital rotation, realignment of our balance sheet and an increased focus on our core Sunbelt multifamily business. These complex strategic transactions and initiatives did not distract us from achieving solid operational performance. To the contrary, our strong operational performance allowed us to make these strategic moves quickly and with conviction. Now let me summarize where we are today. Our 11,255 unit multifamily portfolio is the youngest in the public REIT industry. Our grocery-anchored portfolio is anchored by market leading grocers, such as Publix, Kroger, Harris Teeter and ATB. Our performance throughout the pandemic is a testament to the high quality nature of our assets with rent collections at or above the top of our multifamily and retail peers. In short, we own great assets operated by first-class team of professionals and associates, and located in vibrant and growing Sunbelt markets. Our multifamily retail assets are aligned, both benefiting from accelerated migration patterns. Let me discuss a couple of these trends and while we believe they will continue into the foreseeable future. First, with regard to migration patterns, Sunbelt markets have enjoyed solid growth for decades, benefiting from business-friendly regulatory structures, lower costs of living and lower taxes and drawing in people primarily from the Northeast and the Midwest. In the wake of COVID, these trends already in place have continued as people and families seek more space for living, and remote work and remote learning has become more accepted. In fact, according to U.S. census bureau estimates and a May 7 CoStar analytics report, among metro areas with populations larger than 750,000 people, the top seven metros for nominal population growth in 2020 were all in the Sunbelt region with Dallas-Fort Worth leading the way. Availability of talent is an often cited reason that companies migrate to the Sunbelt. According to the Clarion Partners, pre-COVID, April 2019 research piece entitled the Rise of the Sunbelt, approximately 50% of the country's millennial population currently live in the Sunbelt region. And with millennials expected to be around 75% of the workforce by 2030, Sunbelt markets should continue to capture more jobs as their younger population continues to grow. The second major factor that supports long-term demand for our portfolio is the well-documented housing shortage across the country. In May, Freddie Mac released a research note updating their earlier 2018 report stating that their estimates of the housing deficit had increased by more than 50% from their 2018 estimate to a now estimated housing deficit of $3.8 million units. According to Freddie Mac, the major reason for the shortfall has been a long-term reduction in single-family construction activity and with less available land, rising construction costs and increasingly tight labor markets. It is difficult to see how these shortfall lessens in the foreseeable future, particularly in our markets where population growth is so consistent and solid. This all creates a positive macro and product sector backdrop for us because as individuals, families, and businesses seek out our Sunbelt markets, they will need places to live, and places to shop for groceries and necessity items. Now turning to our portfolio. Our operations remain strong and steady. For our multifamily portfolio, second quarter 2021 average physical occupancy rose to 96.9%, up 220 basis points from the second quarter of 2020, and up 110 basis points sequentially from the first quarter of 2021. Year-over-year, our same-store revenue grew 3.5%, and our year-over-year same-store NOI was up 6.4%. This year-over-year same-store NOI increase is not only at the top of the class alongside our multifamily counterparts, but I do want to point out that this year-over-year comparison is against our positive second quarter 2020 number, that was also quite good on a relative basis. This combination points out not only the resiliency of our portfolio in times of stress, but the opportunity we have to grow NOI when conditions are more favorable as they are now. I do want to point out a new disclosure in our supplemental that we have included, detailing the significant rent growth acceleration we have seen in our multifamily portfolio this quarter and on through July. For the second quarter, we reported rent growth for new and renewal leases of 11.6% and 5.3%, respectively. And in July, these numbers grew to 21.3% and 7.5%, respectively. Our grocery-anchored retail assets also performed well, reporting a percentage leased of 91.1%, a 30 basis point increase sequentially from the first quarter of 2021. Our core portfolio, excluding redevelopment properties also recorded an increase of 30 basis points sequentially from 95.5% in the first quarter to 95.8% at the end of the second quarter. We continue to be encouraged by our leasing momentum and rent achievement in our grocery-anchored retail portfolio and the trend line is promising, with solid pipeline of additional leasing to follow. We believe that our grocery-anchored retail portfolio is prime to benefit from the strong tailwinds taking place in the grocery-anchored sector in the Sunbelt. Our results in both multi-family and grocery-anchored retail exceeded our internal budgets and along with an improved outlook for the second half of the year contributed to our upward guidance revisions that John will detail later in this call. I could not be prouder of the women and men across our entire company and at our properties for their smart and effective work and their commitment. Importantly, our solid portfolio performance has not only allowed us to focus our energy on this strategic transformation over the past year, but also to execute on our growth strategies to external capital investment. Let me highlight, in May we originated a $17 million real estate loan investment with Novare Group a well-respected and experienced sponsor that we know well and have invested with before for the development of a 316 unit Class A multi-family community in Savannah, Georgia. This is our first investment in Savannah, which has a diverse economy driven by the Port of Savannah, which is the third largest port in the country, as well as manufacturing, aerospace and tourism industries. And it fits squarely in our focused Sunbelt strategy. As part of this investment, we've received an option to purchase the community following stabilization. Then in June, we acquired The Ellison, a 250 unit multifamily community in a dynamic and growing suburb in the Atlanta MSA. This acquisition resulted from a real estate loan investment we originated in 2019 to fund this development. And as another example of our strategic approach to investing with best-in-class developers that builds our pipeline and our visibility to future growth of our high quality multifamily portfolio. Finally, in subsequent quarter end in July, we acquired Alleia at Presidio, a 231 unit multifamily community in Fort Worth, Texas, so our first investment in the Dallas, Fort Worth Metro area. As I mentioned earlier, the DFW Metroplex enjoys excellent demographic, economic and rent growth trends, and is a market that fits squarely within our Sunbelt footprint. In the aggregate, these three transactions represent approximately $135 million of investment in-comprise just shy of 800 Sunbelt multifamily units. This is in addition to the nearly 1,300 units we purchased last year. And we have a solid pipeline of potential investments and we intend to continue to grow while staying true to our strategic focus on premier multifamily assets in high-growth Sunbelt markets. Now let me turn the call over to John. John?

[John Isakson:]

Thanks Joe. Let's start with our high-level second quarter results then we'll discuss FFO, core FFO and AFFO in more detail. And finally, I'll walk through our updated guidance. For the second quarter of 2021 PAC generated revenues of 118.7 million, FFO $.23 per share, core FFO of $0.33 per share and AFFO of $0.17 per share. I would like to remind everyone that our sale of the student housing portfolio last November was the primary reason for the decline in revenues from 2020 to 2021 on both a quarterly and year-to-date basis. As we noted in our SFB, revenue would have grown by almost 7% without the sale of the student housing assets. With respect to core FFO, which we believe is our most significant metric, the second quarter 2021 results of $0.33 per share compared to the prior year quarters $0.21 per share reflects the impact of several items. Lower preferred dividends accounted for $0.10 per share improvement, lower interest expense, and higher purchase option termination revenue, each accounted for $0.5 per share improvement. Finally improved property operations accounted for $0.03 per share improvement in our core FFO. These benefits were offset by the loss of $0.08 per share related to the previously discussed sale of our student housing assets. With respect to AFFO, our $0.17 per share for the second quarter of 2021 as compared to $0.05 per share for the second quarter of 2020 was impacted by the lower preferred stock dividends, student housing sale, lower interest expense, improved property operation results, and the purchase option termination revenue described above. In addition, the company benefited from increased proceeds of accrued interest of $0.03 per share. Joel has already discussed our operational activity and the impressive growth trends we were experiencing in our multifamily portfolio, while the rent growth and occupancy trends are encouraging for our future results, some of the real estate loan investment transaction that closed in the second quarter were expected in the second half of 2021. This means our earnings have shifted forward somewhat, and then our second half results now will be more balanced with our year-to-date numbers. With respect to our balance sheet and capital stack, we continue to work to realign our balance sheet to support our future growth. Our continued intent is to balance our capital needs with our stated intention to reduce our outstanding balance of preferred stock, which ideally would result in negative net issuance on a quarterly basis. We achieved this goal again in the second quarter, the preferred stock issuance was approximately $38 million offset by redemptions totaling, approximately $48 million. Our redemptions this quarter were settled in cash. Again, when we pay our redemptions in cash, there is a deemed dividend which impacts our FFO results. We expect to continue to see an impact from deemed dividends going forward. Beyond the normal rate of redemptions as Joel mentioned, we executed a call of approximately $221 million on all of the preferred Series A stock available to be – available to be called using proceeds from the office transaction. Since the closing of the student housing portfolio last year, we have called or redeemed over $550 million worth of our preferred Series A stock or almost 28% of the amount outstanding as of 9/30/2020. This quarter, we also issued common stock under our ATM program. We raised just over $15 million in the program, at an average price of approximately $10.47 a share. While not a large capital raising effort is important to remember that we have access to the public markets through a variety of different channels and feel good about our ability to raise capital going forward to fund a variety of efforts we are undertaking. Raising common equity even at a small level has the added benefit of continuing our effort to rebalance our preferred and common stock ratio. And we will continue to use common stock raises if and when they're attractively priced and/or strategically valuable. The ATM program is also particularly efficient from a cost standpoint as the company pays significantly less than we would in a fully market offering. Let me now turn to our outlook for the balance of 2021. We are revising our guidance today to reflect the impact of the many operational and capital items we've discussed. From our recent call of preferred stock and the improving trends in our multi-family portfolio to the early closings in some of our real estate loan investment assets, with all of these variables factored in, we now expect core FFO per share in a range of $0.90 to $1 for the full year 2021. Underpinning this guidance saw the following update in assumptions, same store multifamily NOI growth of 5% to 7%. We’re raising this range from our prior range of 2% to 3%, 300 million to 400 million of acquisitions of multi-family properties, which is unchanged from our previous guidance and new real estate loan investment originations, a 50 million to 100 million, which is also unchanged from previous guidance. This guidance continues to include the impact of purchase option termination revenues and CECL reserve reversals as a result of real estate loan investments being repaid, which in combination with the accelerating growth in the multi-family portfolio is helping to offset the dilution of the office portfolio sale in the short-term. The increase in purchase option revenue represents a significant acceleration of payoffs and acquisition of properties that are originally contemplated in 2022. This acceleration will have a material benefit to our results in 2021 to the detriment of the results in 2022. These one-time items will be very difficult to replace going forward, as we have fewer purchase option termination revenue opportunities in our investment loan portfolio today. We expect the dilution from the office transaction will be more fully felt in 2022, but we are focused on deploying the proceeds as accretively and strategically as possible to limit that dilutive impact. In addition to the redeployment of capital, the organic growth in our portfolio reflects the strength of our markets and our investment thesis, and will also offset some of the dilution from the office transaction. We also benefit from the elimination of near-term future apex associated with our office portfolio, which can now be utilized for higher yielding opportunities. I would like to emphasize the sale of the office portfolio on the call of preferred stock for our foundational strategy going forward does have a meeting impact on earnings in the near term. Our results put us in an interesting position. Clearly the strength of the operating property portfolio and its operations is driving performance above our initial guidance at the start of the year. We will be monitoring the aggregate impact of these items and their net result closely as we work our way through our 2022 budget process already underway. In addition to the items mentioned above, we have a large investment loan in California that was initially affected by the pandemic shutdowns and supply chain interruptions. This loan has performed very well through the turmoil and continues to be current. During the pandemic, we reserved against this loan as the construction delays and loan maturities created some concern around the completion timing, lease-up and valuation of the asset. We are pleased to report that the asset has come through the pandemic very well and its lease-up has continued to improve. Our borrowers now considering paying off the loan in 2021, versus the loans maturity in quarter one of 2022. Our 2021 payoff would have the effect of further pulling earnings expected in 2022 into 2021 and exacerbating the dilution impact from the office portfolio in 2022. We will update this guidance is as, and when it becomes appropriate. I'd now like to turn the call to Joel for his final thoughts. Joel?

[Joel Murphy:]

Thank you, John for that great description. Before we began Q&A there are five thoughts I'd like to leave with you. First, we've created a more focused portfolio, improving our long-term access to capital to facilitate sustained growth and enhancing alignment with our stockholders. Second, our markets are growing in population and in jobs and the structural shortage of quality housing, particularly acute in the Sunbelt provides great visibility into the future. Third, in the last nine months, since the student housing sale, we ever deemed over $550 million of our Series A preferred shares which we believe will provide greater flexibility for our balance sheet and enhanced access to capital. Fourth, we have demonstrated the desire and capability to develop a transformative product type and capital strategies and the ability to advance those strategies by executing complex transactions all while maintaining our focus on key operational metrics and organic growth. Fifth, we're positioned for growth, and then a multi-pronged strategy do source and control accretive multifamily opportunities in our Sunbelt markets to grow into next year and beyond. We'll keep you updated as we progress through the balance of this year. And of course, we always appreciate your interest in PAC. Now I'll turn the call back over to Paul. Paul?

[Paul Cullen:]

Thank you, Joel. At this point we'll go ahead and open up for our Q&A session.

[Operator:]

Our first question will come from Michael Lewis with Truist Securities. Please go ahead.

[Michael Lewis:]

Great. Thank you. I wanted to start by asking about this big increase in the same-store NOI guidance. What was the biggest surprise over the last three months that prompted you to go to 5% to 7% from 2% to 3%? Is it as simple as surprise as far as the amount of rent increases that the tenants have been able to swallow here 20% in July? Or is there anything else going on there and the change in the same-store guidance?

[Joel Murphy:]

Yes, thank you, Michael. This Joel. How are you doing? Listen, John may have an add on to that, but let me just modify a little bit when you were, you say surprise. It wasn't like we were just kind of sitting and went, oh my gosh, look what happened. It wasn't that at all. It was just that we have been seeing significant trends. We're just now probably starting to get in place when we last revised our guidance. So that guidance was based on what we saw at the time. And as we said in our SFD, and as I said in my comments, and it's really as you're seeing in a lot of places, particularly in the Sunbelt, there was significant acceleration on new lease replacement as well as on renewals. And we articulated those in our SFD, cap it out in July, which is in our third quarter numbers of 21.3% on new leases. So it was a rapid acceleration of those trends and how we – management believes and our operators believe can pull forward, which is why we raised our guidance.

[Michael Lewis:]

Okay, thanks. I have kind of a two-parter on cap rate, but I wanted to ask about acquisition cap rates for multifamily. Obviously, there's a lot of competition in your markets and I assume those are getting pretty low. And then second, did you – should we assume for the Armour Yards cap rate that's consistent with the Highwoods portfolio cap rate or is it materially different than that?

[Joel Murphy:]

So let me try to take those two. Michael, largely for competitive reasons and also just always trying to manage our real estate tax exposure, we don't report out cap rates publicly, but listen, you're right. There's no doubt, the environment is certainly competitive, and yes, we're seeing cap rate compression. There's no doubt about that. And – but I think a key component from our ability to make the acquisitions we do is the pipeline and we create with our partners. We understand these assets so well, when they come out, it's more than just its X percent lease. I mean, The Ellison, I think leased up to 100% in plus or minus six months. And it wasn't just – that would be something maybe anybody could see, but we saw the tone of those residents when they came in and what they were saying about things. It just gives us the ability to really, I think, feel what we think is going to be good, rent growth, rent growth perspectives. And we've been wisely marrying it up with attractive rates on the property level debt. As far as Armour Yards, we'll talk about all that when that closes after the quarter. But I think the thing that probably goes without saying, but I'll go ahead and say it, that was part of that transaction. The Highwoods people, and I’d say, they’re terrific. They really understand their strategy. And the Armour Yards portfolio is a terrific creative office portfolio, but it was outside what they did, but inside the strategy of what others did. In our transaction with them, they're willing to acquire it at a certain price, but we were – the ability to think that – we knew that that would be “our downside”, if you will, which was still a pretty good place that we had to right, if we wanted to market and sell it for more. So I think it probably goes without saying we would not have exercised that right to sell it to especially terrific counterparty of Northwood, which this is inside their strategy if the economics of that transaction weren't better and what we had inside Highwoods.

[Michael Lewis:]

That makes sense. And then just one more if I can. Did you guys share what's in the guidance in terms of purchase options, termination revenue? And what that is versus what the assumption was previously? I'm just trying to understand maybe what this relative headwind versus 2022 earnings is going to be.

[John Isakson:]

Hey, Michael, this is John. We did not share that specifically because obviously some of that is in process from the quarter and we certainly reported that. And some of that is pipeline, which we just don't have as much visibility on. And that's one of the reasons why we've been cautious about it. So don't have any more than what we put in the guidance.

[Michael Lewis:]

Okay. So you can't – in formulating this $0.90 to $1, you can't share how much of that in this termination maker?

[John Isakson:]

No.

[Michael Lewis:]

Okay. All right. Thank you.

[Joel Murphy:]

Thanks, Michael.

[Operator:]

Our next question will come from Jason Stewart with Jones Trading. Please go ahead.

[Jason Stewart:]

Okay. Thanks for taking the question. And I think the accounting questions have been mostly answered. Congratulations on the capital structure progress in 2Q and beyond. I guess, one question in terms of strategy, as you optimized the capital structure and lower the cost of capital, how does that impact your acquisition strategy? And can you maybe share some thoughts on the way shareholders should think about the return going forward given those changes in the capital structure?

[Joel Murphy:]

All right. Hey Jason, thanks for the comments about the quarter. Good to hear from you. Appreciate your interest. Let me make sure I really – before I start to answer, let me make sure I really understand exactly the question I want to – I know you’re talking about our acquisition strategy going forward. Just why don’t you articulate from that, so I'll make sure I hit it. I'm pretty sure on that.

[Jason Stewart:]

Well, I guess, as you think about what you've done with the capital structure, the cost of capital should be coming down. How does that impact the way you think about acquisitions going forward? And if you could quantify that would be great. If it's not just strategically, how do you think about using a lower cost of capital when you think about multifamily acquisitions, where it's grocery and retail would be great?

[Joel Murphy:]

Got it. That's what I thought. So listen, so certainly with these positive changes, we look at these acquisitions, we look at them in three primary ways. First, we look at accretive; accretive, short-term, mid-term, long-term over the whole period. And you're right, as you work and reduce your overall cost of capital, then your ability to have accretive transactions is improved, right. So that's definitely helpful in the multifamily space and would be in the grocery space as well. What we obviously like about the multifamily in particular which spoke to our rotation as office, which you've talked about before is rotating out of high CapEx into low CapEx, and into a lower growth into a higher growth. So obviously the growth of the portfolio on the multifamily is the second prong of that, which gets us into our IRR analysis and we'll look at that. We'll look at that at both on a relative basis to other deals that we've done, looking at a post-mortem of deals that we've sold and said, what kind of an IRR do we think over time? We're not really an IRR buyer because we don't have a limited life, but we do look out over the horizon to kind of see how that matches up. And the other place we look is price per pound. We look at the cost per unit. We did that on the retail as well, because you want to look at your, how you relate to replacement costs. There was one asset that we really liked that we did the mezz on, they rotated out of this year and we weren't alone, the market loved it. And it just hit a price per pound or price per unit that we just said, it based on the numbers and the rents they're getting, and that probably works, but it just felt funny to us just felt like a little too much altitude. So we look at it those three ways, but the real point of your question was the improvements we’ve done on the balance sheet, does that make it helpful to make accretive acquisition? To answer, certainly, yes.

[Jason Stewart:]

Okay. Thank you for the color. I appreciate that.

[Joel Murphy:]

I feel like there’s a second part of your question. I just – I was going back to Jason. I felt like they were almost wanted to make sure there wasn't a second part to that question that I missed. But if it was, Jason, you come back to us.

[Jason Stewart:]

Yes, sir. Good to go. Thank you.

[Operator:]

Our next question will come from Gaurav Mehta with National Securities. Please go ahead.

[Gaurav Mehta:]

Yes. Good morning. First question on your loan investments, we talked about acceleration of payoffs for certain loans and acquiring some other properties that would have been acquired in 2022. Can you provide more color on what's driving the early payoffs off those loans?

[Joel Murphy:]

Yes, let me talk on this, and then maybe John, I think will also hit it. He's got some thoughts, I'm sure. Gaurav, the biggest thing is just what's going on overall in the market. We have – and if you kind of look at the history of the real estate investment loans, that how long they're out, typically those loans might be 36 to 42 months. And that doesn't mean they all stay during that time, which you’ve got to build it and you've got to lease up. As I mentioned, The Ellison thing went full lease up to 100% in six months. Well, based on what's going on with cap rate compression, as you can appreciate these developers are saying, these are – they're not long-term holders, so they're wanting to go to market. So I think it's the combination of the fact that the operational metrics in the multi space and particularly in the Sunbelt and the assets that we underwrite, we knew when we made these loans that these were going to be good properties and it turns out they in fact have been. So they've come to market faster. I would say that's probably the primary reason, but John, do you have anything else?

[John Isakson:]

One of the things to think about Gaurav is piggyback on Joel's comments, in addition to them leasing up faster, developers were also bringing the properties to market pre-stabilization. And based on how competitive the market has been that's really been accepted. And so when you combine leasing up faster and coming out on a pretty stabilized basis, that adds up to the decent acceleration that we're seeing here.

[Joel Murphy:]

Yes. And John's exactly right, that is a big piece of it. And that actually really does point out something I referenced a second ago. And that was, we really liked, particularly in our mezz properties that visibility to that normally you'd say pre-stabilization, are you taking risk before the lease up at stabilization? Well, when you're the actual manager sitting out there taking leases once a week, once a day, hopefully more than that, just the people are coming in, you just have a better sense of, well, okay, we're at X percent leased and we have great visibility towards stabilization.

[Gaurav Mehta:]

Okay, great. And then second question on your balance sheet. You have negative issuance struggled up stock in second quarter. And I think earlier in the call I think you said that maybe that sort of expecting going forward. Should we expect that you wouldn't be using common stock to fund that negative issuance, maybe provide some more color on how do you expect to fund the negative pressure looking forward?

[John Isakson:]

Yes, thanks, Gaurav. So we have the ability to fund redemptions with common stock or with cash and that's the company's option. And we just – we take whatever is strategically and financially the most beneficial at the time. I mean, obviously, stock moves around, pace of redemptions goes up and down. So it's difficult to predict whether we'll use cash or stock. That depends on a lot of variables that we don't control.

[Gaurav Mehta:]

Okay. Thank you.

[John Isakson:]

Thank you Gaurav. Always good talk to you.

[Operator:]

Next question will come from Barry Oxford with Colliers. Please go ahead.

[Barry Oxford:]

Great. Thanks guys. Joel or John just touching on the mez again, when you're looking at the mez market going forward, what is the inventory sort of look like as far as availability to make new investments, number one. And number two, have the returns changed on the mez financing?

[John Isakson:]

Hey Barry, good to hear from you, thanks for your interest in us. I would say, as to the terms, the terms themselves, if not materially changed, certainly recently of a material nature, there are less purchase option discounts and they were narrower, that's kind of evolved over the last five years how those have come about. But the actual pay rate and the accrued rate, while that might bounce around, here a little bit, here a little bit there over time, not significantly. We've also been keeping ourselves in a good spot. It's important to us making sure there's a good piece of equity, developer equity ahead of that. So I would say those, and as far as overall inventory, we've given the guidance of what we have out there for the year. We feel good about that guidance. I'll tell you, the guys are hustling. They're out there, always talking, we love getting to do our second group with Novare Group, that's Jim Borders, who's one of the best developers in this region. We had a cross-win to our portfolio. We’ve still done multiple deals with Terwilliger Pappas and then and then the folks Oxford and Newport, and others that we've done business with all along. But we do have a definitely stated strategic goal, well actually tactical goal to expand that group to other developers. And then, you know this one that we established a group that John Isakson and Jeff Sherman who runs multifamily have known for a long time catalyst, terrific developer, got a great deep pipeline. They were the ones that developed a terrific property called The Menlo in Jacksonville that we did the mez on and we acquired it. So expanding those opportunities with these first-class developers, but getting it out to new ones and getting out on the road and telling the people like most of these developers, some may choose not to do that structure, but they like us as a partner because we get it. We understand leasing. We understand, there's ebbs and flows, we understand what it's like to be developers of multifamily. So we're optimistic, but it's a big thing for us moving forward is to keep filling that pipeline out.

[Barry Oxford:]

Perfect. Thanks. Thanks for that color. Go ahead.

[John Isakson:]

I think from a structure and pay rate standpoint, I mean, I think everything's been relatively stable. There's certainly been competition in the market. The biggest place that we've seen changes is, as Joel mentioned is the purchase option discount. And that's been – that’s been where there is the most pressure. Everything else is held relatively constant. To Joel's point it bounced around a little bit, but it's really the purchase option discount where we've seen a lot of pressure.

[Barry Oxford:]

Okay. Great, I appreciate the color on that. Just trying to get a sense of when you guys backfill, what type of terms that you will be getting, but that's great to see here?

[Joel Murphy:]

Barry, one group that I also want to mention is TDK. One of the things that we did, once it was okay to get out in the battle a little bit as a result of COVID was jumped on up to Nashville to go see TDK. And what we like about them as counterparty on the mez, is not only do they direct develop terrific properties, they're also a general contractor, that's actually the roots. And so when all this supply chain, disruption, lumber prices, all that stuff and everybody losing their minds about stuff like that, the TDK guys were just, I mean, they were just, I wouldn't call them chill about it, but they were just very relaxed because they understood it. They'd seen it before and we liked that. We liked that kind of vertical integration of that kind of a developer.

[Barry Oxford:]

Perfect. Now all of that makes sense. Appreciate it.

[Operator:]

The next question will come from Aaron Hecht with JMP Securities. Please go ahead.

[Aaron Hecht:]

Hey guys, thanks for taking my question. On your retail assets, how would you describe the trend in demand? Obviously occupancy is down a bit year-over-year, but it looked pretty stabilized in the last couple of quarters as an inflection point then hit. And do you think there's going to be acceleration going forward?

[Joel Murphy:]

Yeah, I do think. I think that's a very good way to characterize it, Aaron. We view that, that you said that loss in occupancy year-over-year, what we'd like it's more important as what you said is the trend line, the sequential improvement. Each little percentage, if you look at is historically where we've been least. I look forward to getting to that spot. And if you look all those retail peers that are out there, everybody's seeing leasing momentum in their markets and we are too. So we're kind of feel like we're working off a low-base, adding in those new deals, keeping them renewed. The other thing that's kind of interesting to look at us is, we didn't have the material negative impacts that a lot of people did and, but what we do now feel is that while we might've kind of had some hangers on that may be paid us rent, that maybe weren't terrific operators. We now feel the confidence to replace them with better operators and a better rent. And that's the way we see the pipeline as it goes on through the rest of the year.

[Aaron Hecht:]

So you're seeing growth in the number of potential tenants that are showing up interested in states over the last couple of months and even continuing going forward, I assume that these are smaller square footage type spots within your retail centers, some more specialty type tenants?

[Joel Murphy:]

No. You're right. This is – we always call this hand-to-hand combat in the trenches on these small deals. It takes us much time and effort to do a 2,500 square foot deal as it might've 10,000 square foot deal. But yeah, and that's actually kind of one of the beauties of the portfolio as you its pressure anchored. So you've got the big anchor and a big chunk of the revenue comes out of that. So yeah, these are largely smaller deals, but this kind of goes back to Aaron, the leg of the stool that I was talking about in the context earlier to answer Jason's question. We also looked in retail historically on the 54 assets that we acquired the price per pound when we bought that was a big marker for us. So what that meant is that our rent structure is relatively low. So you don't have to be really good at math to figure out that it's a lot easier to grow off of $15, $18 rent than it is off of $45 rent. And that's in fact what we're seeing, but ain't your question are more people showing up they are, really what happened is just do a little remembrance. Back in November and December of last year, we found that people were kind of sticking their head up out of the ground, kind of towing the things had they feel, but that was really only happening in maybe our Georgia and Florida assets. But it is prudent to the first quarter that's spread through the rest of the portfolio and the Sunbelt to the other markets. And now what it spread to is those, retail, just somebody to spend walk-in and sign a lease, and then move in 20 days later. What they do is you got to have an idea, they got a location, they put together a business plan, they sign – do an LOI, sign a Letter of Intent, sign that lease, do the build out, hire people, open it. So it's a little bit more of a trailing thing before the income hits. But definitely people are showing up and they're showing up with good attitude like, wow, these are good shopping centers. I'd like to be a part of it.

[Aaron Hecht:]

Yeah. And one more, if I may, we had talked before about the potential to do redevelopment, sounded like different property types within your retail centers. Is that something you've looked into more? Is it further down the road, any kind of update on that potential? And if there is, is there any kind of return profile that you'd be ready to share?

[Joel Murphy:]

Yeah, we will look forward to sharing that, but this is a definite, as they say in the NFL, like point of emphasis with us. We've got this, one of the things that I've really loved watching, when you go through an event like COVID, everybody's got to bring their game every day. And everybody's got to be willing to play a position that they're not really comfortable or used to. I think one of the best things I've seen is that here we've got this incredibly talented multifamily group and this incredibly talented retail group, but yet historically they rarely talked about it, because they were off in their own silo, executing their own strategies really well. Well now the business leaders of those meet, discuss and say, how can we help each other? Not only just on due diligence, but how can we do things together? And that is definitely taking shape. That is a point of emphasis. And we look forward to sharing encouraging things as they're ready.

[Aaron Hecht:]

Appreciate the thoughts guys. Thank you.

[John Isakson:]

Thanks Aaron.

[Operator:]

Ladies and gentlemen, this will conclude our question-and-answer session. I'd like to turn the conference back over to Paul Cullen for any closing remarks.

[Paul Cullen:]

Thank you for joining us this morning and for your interest in Preferred Apartment Communities. If you have any follow-up questions, feel free to reach out to us, and we want to wish you a good rest of your week. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.