Preferred Apartment Communities, Inc.
Q4 2020 Earnings Call Transcript

Published: 2 Mar 2021

[Operator:]

Good morning and welcome to Preferred Apartment Communities Fourth Quarter 2020 Earnings Conference Call. This conference call is being recorded. And I would like to introduce your host for today’s call, Mr. Paul Cullen, Executive Vice President, Investor Relations. Please go ahead.

[Paul Cullen:]

Thank you for joining us and welcome to Preferred Apartment Communities fourth quarter and full year 2020 earnings call. We hope each of you have had an opportunity to review our fourth quarter earnings report which we released yesterday after the close of the market. 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 prepared remarks. Following Joel’s remarks, we’ll be pleased to answer any questions you might have.

[Joel Murphy:]

Hey. Thank you, Paul. Good morning, everyone, and thank you for joining our call today to discuss our fourth quarter and full year 2020 results. Let me begin by stating that the impact of COVID-19 and the significant wide ranging events of this past year have been and continue to be felt deeply by all of us across the country and the globe. We hope this call finds you and your families well. We sit here today right about at the first anniversary of those unsettling days in the beginning of March 2020 when the realities of the COVID-19 global pandemic became the primary focus of our personal and business attentions. However, while 2020 was a difficult and certainly unprecedented year, it was also a year of significant transformation and strong execution at Preferred Apartment Communities. We began the year as an externally advised REIT that had four operating verticals focused on four distinct asset classes in a COVID free environment. We ended the year as a fully integrated internally managed rate with investments across three asset classes and with a significant reduction in our preferred stock outstanding. In 2020 and going forward we have a renewed investment focus towards our suburban Sunbelt Class A multi-family strategy have begun in earnest, the process of realigning our balance sheet and we are now operating in what we hope and believe to be the latter stages of the pandemic with the benefit of vaccination programs rolling out rapidly worldwide.

[John Isakson:]

Thanks, Joel. And thanks to everyone for joining us this morning. I hope you're all staying safe and healthy. Let me start with our fourth quarter and full year results. For the fourth quarter 2020, PAC generated revenues of $121 million, FFO of negative $0.20 per share, core FFO of $0.31 per share and AFFO of $0.25 per share. For the full year 2020, we reported revenues of $502 million, FFO of negative $3.36 per share, core FFO of $1.07 per share and AFFO of $0.83 per share. I think it's important to articulate how the strategic efforts Joel noted have impacted our results. The sale of our student housing portfolio in the call of our preferred stock in the fourth quarter affected our results in different ways. First, the sale of student housing removed eight assets from our operating portfolio which affected our top line revenue number. As you can see, we had growth in revenue on a year-over-year basis, but the quarter saw a decline. Had we owned the student housing assets the entire quarter, our revenues would have been about $8 million higher. Second, when we called in almost $209 million worth of our Series A preferred stock in cash, we incurred about $21 million in deemed dividends which negatively impacted FFO by $0.41 a share.

[Joel Murphy:]

Hey, thank you, John. Thanks for that detailed covering our financial results. I know that John's comments and some of my earlier comments focused on short-term operational and financial metrics. Obviously, those are very important because and financial metrics obviously those are very important, because they’re how we are judged. But let me take a minute here just to step back away from those measures and summarize our long-term strategy and broader objectives. As I said at the outset, we start 2021 as a far different company than we were at the start of 2020. Given all of we have -- that we have accomplished amid the COVID-19 pandemic, we are entering this year emboldened to do even more to position PAC to take advantage of the opportunities before us. First, we believe our portfolio is tailor-made for the current economic environment. Low tax, business friendly states in the Sunbelt continued to attract families and businesses across the country where the lion's share of the fastest growing MSAs are located in the Sunbelt. According to a pre-COVID April 2019 Clarian Partners Research piece, Sunbelt population growth is expected to increase by another $19 million or 13% over the next decade while non-Sunbelt growth is forecasted to rise only $3 million or 2%. So differently, that could mean that they expect to see more population growth in the Sunbelt in the next two years than non-Sunbelt states in the next 10. The point being that these trends were in place pre-COVID and we believe they will only accelerate in the years ahead. Companies such as Oracle, Hewlett Packard, Tesla, CBRE have relocated their corporate headquarters to Sunbelt states and Amazon and Microsoft are each locating significant hubs in these Sunbelt areas. Microsoft's being here in Atlanta. The suburbs are also experiencing renaissance as millennials de-prioritize urban living and prioritize space for their growing families. Second we believe multi-family offers the best long term growth opportunity for us today. There is a reason we're seeing cap rate compression for high quality suburban Sunbelt assets. This is a relatively low CapEx business as cash flows are resetting higher as demand grows. This demand is discussed in an informative Freddie Mac research piece also issued pre-COVID in February of 2020 which highlights US housing shortages by state and then extrapolates on top of their numbers to take into account historical averages of state to state migration flows. We believe this demonstrates a clear demand driver for housing in many of our markets. We have deep expertise in Sunbelt suburban multifamily including strong developer relationships and a lending platform to create a unique pipeline for pack. This is not to dismiss the diversification benefits of our other asset class in providing stability in our operations and in our opportunities. But we believe incremental allocation to multi-family makes the most sense for us. Third, we will continue to seek out opportunities to enhance our balance sheet, reduce our leverage and lower our cost of capital. We will also continue to work to find ways to refine our portfolio and allocate our capital where we believe we can drive the best risk adjusted returns for our stockholders. For these reasons, we are very excited for the future and feel this is just the beginning. We look forward to continuing to keep you updated as these initiatives take further shape as the year progresses. So thank you. And let me now turn the call back over to Paul. Paul?

[Paul Cullen:]

Great. Operator, at this time of the call, let’s go ahead and open up for our Q&A session.

[Operator:]

First question comes from Gaurav Mehta of National Securities. Please go ahead.

[Gaurav Mehta:]

Yeah. Hi. Good morning. First question on your -- on your apartment portfolio, the 1.5% to 3% same-store NOI guidance that you provided, I was wondering if you could really talk about any market expectations you have within the portfolio I mean are you expecting in the markets to outperform or underperform within your apartment portfolio?

[Joel Murphy:]

Hey, Gaurav, thank you. No, we don't have any -- we don't have any particular sense that any of our markets are going to -- are going to outperform or underperform. I mean we feel pretty good about that range.

[Gaurav Mehta:]

Okay. Second question on your office in retail, I think you’ve touched up on this slightly about your lease expirations in 2021 and 2022. Do you guys have any known move outs within that part of your portfolio and are you expecting -- what kind of tenant retention you expecting for 2021?

[Joel Murphy:]

No look, Gaurav, look you never know what wouldn't necessarily future brings but we feel very -- we feel very good about what's going on in our overall portfolio right now.

[Gaurav Mehta:]

Okay. Lastly within your retail, I think your occupancy is 91% and then EBITDA excluding the redeveloped the properties further redevelopment of your occupancy is 95.6%/ Are you going to talk about what kind of redevelopments are you guys doing in the retail portfolio and what kind of returns you expect on?

[Joel Murphy:]

Hey, that's a -- that’s a great question, Gaurav. And the answer is we're not ready yet. But obviously we are positioning those properties for re-tenanting over time. A lot of times when you do that a lot of times when you do that redevelopment or retail you’re actually using the opportunity to take leases that might be expiring by their natural terms or tenants that have low rents and actually moving out. So it's a very natural thing for us to see a decline actually in occupancy before we are able to announce leases and redevelopment.

[Gaurav Mehta:]

Okay, understood. Thank you. That's all I have.

[Joel Murphy:]

All right. Okay. Thanks Gaurav.

[Operator:]

Thank you. Next question comes from Michael Lewis of Truist Securities. Please go ahead.

[Michael Lewis:]

Great. Thank you. I had a question about the dividend. Is there any economic impact to either existing shareholders or potential new shareholders in terms of the cost basis of the comment or anything else or is this should we think about this really just as an accounting construct?

[Joel Murphy:]

It's really just an accounting construct Michael.

[Michael Lewis:]

Okay. Okay. My second question is student housing sale provided a nice opportunity to get a large chunk of those preferred shares. How do you think about how you're able to continue to do that since it sounds like that's something you want to keep doing? And so can we expect you to be a net seller in any of the property types. It sounds like that one multifamily, but maybe in the retail or the office or is there another way how do you think about your ability to continue to chip away at those preferred.

[Joel Murphy:]

Michael, good question. As we look through different things, we look at all of our assets across all of our product types on a quarterly basis and look at them. And as the example that you gave in the fourth quarter we just felt that with that asset with its age and all of those things we felt with them where the market was and exiting it. That was the right thing for us to do with that particular asset. We continue to do that always. That's a very regular natural thing for us to do quarterly. You did bring up the question that obviously when we do get and have capital that's available from whatever source. We look at the options of what we have that's the best incremental use of that capital in that moment. That can be taking it against the Series A preferred, which we now have the right to do. We still have some opportunity there, but also incremental investment in external growth opportunities for the company.

[Michael Lewis:]

Okay. Great. I'm just going to ask one more another accounting one I guess. This isn't new this quarter, but it's related to the internalization at the beginning of the year. That $38 million of liability is due to the former manager on your balance sheet. Could you talk if and when there are any cash payments that would be needed to settle that?

[Joel Murphy:]

Michael those things that's broken down into two buckets and all of that would be settled in the next two years.

[Michael Lewis:]

Okay. So, those are…

[Joel Murphy:]

I think those are…

[Michael Lewis:]

…will be kind of gradual cash expenses?

[Joel Murphy:]

Not so much gradual as I think they will occur in the next two years and they'll be -- they'll be pretty lumpy. I mean I think they'll occur at points in time each of the two items.

[John Isakson:]

And one component of it would be I think on a fixed time at the end of January of 2023.

[Joel Murphy:]

Three years.

[Operator:]

Thank you. Next question comes from Jason Stewart at JonesTrading. Please go ahead.

[Jason Stewart:]

Hi. Good morning. Thanks. I was hoping you could elaborate on your comments about cap rate compression markets, and where you see acquisition or disposition opportunities by market and then a little bit more detail.

[John Isakson:]

Yeah. Sure. The comment there is obviously this to show Jason and a good question there is that we are in the market to buy things but we're also going to be disciplined. And so in these markets we've seen this in Atlanta, we've seen it in Southwest Florida and other markets across Florida as well where you get into a situation and an asset that we really like they would really fit our portfolio. And we think we're in a good position. We like where we are, but then all of a sudden whether it moves really fast as somebody that just says they're going to buy it and the answer for us at that moment is then we're out. We would -- would we have love to liked to have those assets but not asset -- not on those assets that are dilutive price. In the way we really try to monitor that that has allowed us to get as aggressive as we can reasonably be is that our teams that are in those markets actually go look at them understand them and sometimes we look and say hey well you know what I think the growth possibility for that is even better than what's put out in the broker OEM or they might say you know I think that's a little optimistic. It's not what we're saying over there or the price per pound rental rate is just high on a per unit basis and we might see some supply coming. So it's really -- it's hard to kind of make a generalization or even really be too specific inside markets because you could have one asset in Atlanta that the price went really on another asset and another little submarket in Atlanta where it didn't but there's reasons

[Jason Stewart:]

Okay. That's -- it's really asset by asset. And then assuming the moratorium on evictions is eventually listed. Do you have any expectation for how that's going to impact new lease activity? And are there any markets or submarkets that you see that have a larger check “shadow inventory there?”

[John Isakson:]

No we haven't really seen that. I mean I guess a couple of things we're in pretty solid markets where the overall markets haven't seen a whole lot of that. I mean I'm sure there are more particular assets than mine. But our rent collections have been so high that it's just not a meaningful thing for us to worry about one way or the other.

[Jason Stewart:]

Okay. Fair enough. And then one more on guidance. Could you give us just a little bit more of your thought process in terms of what kind of activity you have for new leases maybe blended lease rates concessions things like that as we sort of build up to your guidance number and multifamily? Thanks.

[John Isakson:]

Yeah. Jason, totally appreciate the question. I mean just in this environment with the pace of the recovery being somewhat uncertain we're just not prepared to talk about those assumptions.

[Operator:]

This concludes our question-and-answer session. Now I'd like to turn the conference back over to Mr. Paul Cullen for any closing remarks. Please go ahead.

[Paul Cullen:]

Thank you for joining us today and also for your interest in Preferred Apartment Communities. I want to wish everyone a good day and take care.

[Operator:]

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