Preferred Apartment Communities, Inc.
Q1 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Good morning, and welcome to the Preferred Apartment Communities First Quarter 2021 Earnings Conference Call. . Please note this event is being recorded. I would 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 this morning, and welcome to Preferred Apartment Communities First Quarter 2021 Earnings Call. We hope each of you have had an opportunity to review our first quarter earnings report, which was released yesterday after the market closed. In a moment, I'll turn the call over to Joel Murphy, our Chief Executive Officer, to share some initial thoughts, and then to John Isakson, our Chief Financial Officer, will share some additional details about our financial metrics and capital markets. Then Joe will return to conclude our prepared remarks. Following Joel's remarks, we'll be pleased to answer any questions you may have.

[Joel Murphy:]

Thank you, Paul. Good morning, everyone, and thank you for joining our call today. Though we spoke most recently on our call in early March, just 8 weeks ago, much has happened at PAC since then. As part of our strategy to simplify our business and realign our balance sheet, we announced on April 19 the sale of the majority of our office portfolio to Highwoods Properties. In addition, our first quarter results, which we reported yesterday, demonstrate the continued strength we are seeing in the Sunbelt as well as our portfolio's positive trajectory on several fronts. First, let me take a moment to discuss the rationale behind our office portfolio sale and what it means for PAC going forward. As a part of our broader strategy, we internalized our management and divested our student housing portfolio in 2020. And the continuation of that strategy in 2021, we decided to execute on another strategic transaction to reallocate our capital. We made the decision to sell our office portfolio and realign our business towards lower CapEx, higher growth multifamily assets, complemented by our grocery-anchored retail investments. On April 19, we announced that we had reached an agreement to sell to Highwoods Properties the substantial majority of our office portfolio, plus one office real estate investment loan for $717.5 million. As described in that April 19 release, we intend to monetize the remaining office assets we own, consisting of 3 operating assets and a development site and fully exit office, but we plan to do so thoughtfully and over time.

[John Isakson:]

Thanks, Joel. Let's start with our high level first quarter results, then we'll discuss FFO, core FFO and AFFO. And then I'll walk through our guidance that has been updated to the recently announced office portfolio sale. For the first quarter 2021, PAC generated revenues of $115.7 million, FFO of $0.16 per share, core FFO of $0.25 per share and AFFO of $0.18 per share. Before I get into the year-over-year changes, let me note that our transformational activity over the past year had a significant impact on our results across all metrics, making the year-over-year comparisons less meaningful. I would also point out that our revenues, pro forma for the sale of our student housing portfolio, are down only marginally year-over-year. Outside of the student housing sale, the decrease in interest income due to lower real estate investment loans just offset the increase in our operational revenues for the quarter. With regards to our FFO results, the internalization transaction in the first quarter of last year and the sale of our student housing portfolio had significant impacts on our results, which make prior period comparisons difficult and noisy. With respect to core FFO, which is our most significant metric, the first quarter 2021 result of $0.25 per share compared to the prior year's quarter $0.29 per share reflects the impact of changes in several line items, which are detailed in our supplemental released last night. The most significant items were $0.07 per share decline from the sale of student housing and lower revenues from interest income on investment loans and amortization of purchase option termination payments, which were both $0.06 per share lower. These items were offset by an improvement in the allowance for current expected credit losses and bad debt of $0.10 per share and lower preferred stock dividends of $0.06 per share. With respect to AFFO, our $0.18 for the first quarter 2021, as compared to $0.47 for the first quarter of 2020, was impacted by a decrease in accrued interest of $0.12 per share, again, $0.07 impact from the sale of student housing, lower current interest revenue of $0.04 per share and higher recurring CapEx spending totaling $0.04 per share as well. Additionally, the first quarter 2020 benefited from a onetime payment of earnest money forfeiture totaling $0.06 per share.

[Joel Murphy:]

Thank you, John. Before we begin Q&A, I'd just like to take a few moments to reiterate our strategic focus here at PAC. First, due to the hard work and effort of our team, in the past 16 months, we have internalized our management structure and significantly streamlined our portfolio by fully exiting or materially reducing our exposure to 2 asset classes. By the end of this year, we will be focused primarily in Class A suburban multifamily and grocery-anchored retail. These are 2 complementary asset classes that enjoy attractive growth characteristics and are run by experienced teams. We're excited to demonstrate the power of the PAC Sunbelt platform now that it is more focused. Second, this is the continued benefit of our Sunbelt strategy. Migration of both people and businesses into the Sunbelt continues unabated as the pandemic put a spotlight on the benefit of this region with lower cost of living, lower taxes and higher growth. We have deep relationships and deep market knowledge in the Sunbelt, through which we can create value. Third, we continue to realign our balance sheet to set us up well for our future growth. We continue to reduce our outstanding preferred shares as a percentage of our capital stack. We're highly focused on improving our overall cost of capital, which we believe will have significant long-term benefits to our stockholders. We are proud of our progress to date, but there remains continued good work to be done. We will keep you updated as we progress through the year. And of course, we appreciate your interest in PAC. Now let me turn the call back over to Paul. Paul?

[Paul Cullen:]

Thank you, Joel. At this time, we'd like to go ahead and start our Q&A session.

[Operator:]

. Our first question today comes from Gaurav Mehta with National Securities.

[Gaurav Mehta:]

First question on the guidance. I was wondering if you could provide some color on the impact of purchase option termination revenue that you talked about. Is that something new in this guidance? Or was that embedded in the previous guidance as well? And then how much benefit are you expecting from that portion of the guidance change?

[John Isakson:]

Gaurav, it's John. Thanks for the question. That's one of the things that we've talked about in previous quarters is kind of the lumpiness of these real estate investment loans and when they get paid off. And our previous guidance had not anticipated that we would have the number of loans being repaid, nor the pricing, which has resulted in higher purchase option termination payments than we previously expected. So just an impact from the market improving and the transactional market being aggressive right now.

[Gaurav Mehta:]

Okay. And I guess what's like the full run rate impact of dilution from office transactions? I think, in the press release, you say that it's going to be fully felt in 2022. I'm just trying to understand how much the sale is impacting the earnings.

[John Isakson:]

So again, we're forecasting for 2021 based on an 8/1 closing date. That could move around based on the transaction closing at a different date. And we won't know for 2022 until we see the full redeployment of the proceeds, where that goes and what kind of reinvestment rates we get. So that's just hard to say today.

[Gaurav Mehta:]

Okay. And then for the multifamily acquisition volume of $300 million to $400 million, what's the expected timing of those acquisitions? And is that going to be acquisition of wholly -- fully stabilized properties? Or are you going to target new construction as well?

[John Isakson:]

Guarav, great question. It's spread out over the balance of the year. We don't have firm closing dates on all those yet. The majority are stabilized properties, but we are looking at a couple of pretty stabilized assets where we think we are getting a good acquisition price. And also, we feel real comfortable with our management team's ability to execute the lease-up.

[Gaurav Mehta:]

Okay. And then maybe lastly on the potential redemption of Series A preferred stock. Can you remind us how much of that is callable in 2021?

[John Isakson:]

So it ramps up over the years. So you might remember that when we changed the call period from 10 years to 5 years and the shareholder vote last year, that increased the amount that was available to call then. And it comes in about $30 million, $35 million a month right now. When we closed the office transaction, if we were to close on August 1, we have about $230 million available to call. And then, as I said, it comes in about $30 million, $35 million a month after that.

[Operator:]

Our next question comes from Michael Lewis with Truist Securities.

[Michael Lewis:]

My questions are sort of tangential to a couple of the ones you already got asked. You're going to use office proceeds to redeem preferreds, but obviously, you're still issuing some as well. You said that will be a net reduction in preferreds over the next few quarters. I'm kind of curious, the cost benefit of keeping that machine running. And what I mean by that is you issued 38,000 shares and redeemed 44,000. What -- is there a frictional cost there as opposed to had you not issued any and just redeemed 6,000 in terms of commissions and other fees and such?

[John Isakson:]

So a couple of points there, Michael. With the redemptions in the first quarter, those were all redemptions where the holder basically put the stock back to us and requested the redemption. Obviously, any of our preferred holders can redeem at any time. So that wasn't necessarily a call that we were proactively making. And the reason for keeping the machine running right now is as much liquidity as anything else. We like having access to that channel. Those investors have been sticky. And, historically, that's been a good cost of capital for us, less -- a little bit less so today. But there may come a time when that's a channel that we didn't want access to, but it's very hard to turn off and on. So right now, we're using it to balance our liquidity. Also would point out that the call period for the shares that are being issued is 2 years versus the 5 years in the previous offer. So we do get some benefit there.

[Michael Lewis:]

Okay. Got you. And the other use of proceeds, obviously, for making investments. And I'm curious about cap rates in acquiring apartment properties. And so I realize this $300 million to $400 million that you expect to invest this year will include loans and other things. But as far as the apartment properties, is there $300 million to $400 million out there that you like at prices that you like? Or do you think deploying that capital? How challenging is that?

[John Isakson:]

So just to make sure we're talking about the same thing. We're talking about $300 million to $400 million in asset value. And the answer to your question is yes. So we feel good about the pipeline...

[Joel Murphy:]

And Michael, let me -- this is Joel. Let me add on to that. I agree with John's statement that he just made. And this is really part of our Sunbelt operating leverage. As we continue to grow in the units that we have and have on the ground people in these markets, these teams are really good at ferreting out the right opportunity. Plus also note that we've got some embedded pipeline through the mezzanine loan program, of which we've got significant additional number units that are out there in the program. So we know these assets, and we know them well. And some of those have embedded discounts in them that we could take advantage of. So yes, we feel good about it. We feel good about our operating leverage on that. And also now, we're also seeing the full benefit of the benefits of scale going to the REIT now that we are internalized to the benefits of these scale, make it easier for us to acquire accretively.

[Michael Lewis:]

Okay. And then just lastly for me. You answered a question about -- I guess it's a guidance question about what the office portfolio sale does to your earnings and such. I realize there's a lot up in the air, especially in the near term, in terms of timing of redeployment of proceeds and what those yields will look like and so forth. Is there any expectation at this point that this sale impacts your dividend payment at all, your common dividend?

[John Isakson:]

So Michael, as you said, I mean, there's a lot going on. There's a lot of moving parts. And the Board evaluates the dividend policy every quarter and has the last 10 years, and we will continue to do so.

[Operator:]

Our next question comes from Jason Stewart with JonesTrading.

[Jason Stewart:]

Just a quick follow-up on the last one. Could you just remind us what you've said historically about a payout ratio relative to core FFO, where the comfort zone, sort of maybe boundaries exist in your mind?

[John Isakson:]

Jason, it's John Isakson. We've never really talked about that. That's not something we've ever discussed or guided to.

[Jason Stewart:]

Okay. Fair enough. One question on the office portfolio. I guess, in some of the assets that are remaining, particularly Three Ravinia, there was a little bit of a change in the occupancy. Any thoughts there in terms of specifically how you lease those up, whether that impacts your ability to sell them and price? How that kind of figures into the timing that you mentioned in the beginning?

[Joel Murphy:]

Yes, Jason, thanks. Look, the thing about real estate assets is they all operate under their own individual time lines. You have to look at these things that way, okay? So leases have certain maturity dates, certain extensions. They have certain debt characteristics that are attached to the assets. And then they move through different cycles of are they in lease up? Are they in transition? So we're going to look very prudently and thoughtfully at the remaining assets, which we feel good about. But this is an important piece. We will be retaining pieces of our office team, the same people that have lived and breathed these assets through acquisition and asset management, same team that will be in there dealing with Three Ravinia as we work through that with IHG and the other things on there. And so working through opportunities for leasing up that building going forward.

[Operator:]

This concludes our question-and-answer session. I'd like to turn the call back over to Paul Cullen for any closing remarks.

[Paul Cullen:]

Thank you for joining us today, and thank you for your continued interest in APTS. Good day.

[Operator:]

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