Preferred Apartment Communities, Inc.
Q2 2019 Earnings Call Transcript

Published: 30 Jul 2019

[Operator:]

Good morning, ladies and gentlemen, and welcome to Preferred Apartment Communities Second Quarter 2019 Earnings Conference Call. Please note that today's conference is being recorded. After today's presentation, there'll be an opportunity to ask questions. [Operator Instructions].I would now like to introduce today's conference call, Lenny Silverstein, President and Chief Operating Officer. Please go ahead.

[Lenny Silverstein:]

Thank you for joining us this morning, and welcome to Preferred Apartment Communities' second quarter 2019 earnings call. We hope that each of you have had a chance to review our second quarter earnings report which we released yesterday after the market closed.In a moment, I'll be turning the call over to John Isakson, our Chief Financial Officer, to hear a detailed description of our second quarter operating results. Dan DuPree, our Chairman and CEO, will share his thoughts on the state of the company. Following the conclusion of our prepared remarks, we'll be pleased to answer any questions you might have.Also with us this morning is Jeff Sherman, Executive Vice President and Managing Director of our Multifamily Business Unit; Joel Murphy, CEO of New Market Properties; Boone DuPree, President of Preferred Office Properties; Mike Cronin, our Chief Accounting Officer; and Jeff Sprain, our General Counsel.Begin we begin, I'd like everyone to know that forward-looking statements may be made during the call. These statements are not guarantees of future performance and involve various risks and uncertainties, and actual results may differ materially.There is a discussion about these risks and uncertainties in yesterday's press release. Our press release can be found on our website at pacapts.com. The press release also includes our supplemental financial data report for the second quarter with definitions and reconciliations of non-GAAP financial measures and other terms that may be used in today's discussion. We encourage you to refer to this information during your review of our operating results and financial performance. Unless we otherwise indicate, 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.Before I turn the call over to John, I wanted to take a moment to reflect on how PAC differentiates itself within the public REIT industry. When Preferred Apartment Communities was originated, it was designed as a multifamily company that can harness the power into expertise of third-party developers. We anticipated that in the future, we would want to diversify to some degree from owning and managing purely multifamily assets to include other real estate assets in an account to lessen the risk to our common stockholders and to manage the inevitable ways of business cycle. This strategy has held us in good stead.As you have heard before, and as you will later hear from Dan DuPree, we believe this is a transformative year for our company in several ways. In the end, we want to be abundantly clear that we're looking to continue to harness the roots of our entrepreneurial spirit to take us to the next level. No matter how much we focus on this effort, it is also abundantly clear that the successes we have achieved as a company since our launch and commencement of operations with our IPO, a little over eight years ago, is due in large part to the strength and depth of all of our associates, top to bottom as well as the creation of a positive culture unique to our company.That entrepreneurial effort also extends to our strategically designed and highly successful Series A and mShares preferred stock capital raising program. Through our broker/dealer preferred capital securities, we raised over $142 million in preferred stock sales during this second quarter alone. We are already designing a successful preferred stock capital raising strategy, as these current offerings finish up the end of this year and early next year.I would now like to turn the call over to John Isakson. John?

[John Isakson:]

Thanks, Lenny.For the second quarter 2019, the company generated revenues of almost $114 million, FFO of $0.36 a share, and AFFO of $0.22 a share. You will note that our revenues are up over 18% from the second quarter of 2018 owing to the continued growth in all of our property verticals.For the second quarter, our preferred stock dividend increased by almost $7 million and our common stock outstanding was up by almost 4.5 million shares over the second quarter of 2018.In reviewing the reconciliation of FFO, you may note the decrease in amortization of intangible assets and deferred leasing costs. This line item was down approximately $3.4 million from the same period last year due to a slower pace of multifamily acquisitions. Multifamily assets have the shortest lease terms, so the amortization of these intangibles occurs quickly.As acquisition volume goes down in the segment, the amortization of these items becomes more heavily weighted on our other verticals which have longer lease terms and thus longer amortization periods.Our AFFO decline was driven in part by the decline of almost $4 million in purchase option termination fees and related revenue adjustments due to more of the revenues being booked as accruals of these fees versus actual cash. We booked these fees as accruals of expected payments over the term of the loan. Sometimes our developers pay us early and sometimes we receive the cash payments upon a capital event. In the cases where the accruals are greater than the cash received, the net amount will be a deduction in the calculation of AFFO. When the cash received exceeds the accruals, it will be added in calculating AFFO. Please see the related Footnote 9 in our SFT for further clarification on this point.Our results are also affected by the uninvested cash we had on the balance sheet at the end of the quarter. As we have said in the past, our transactions both acquisitions and mezzanine loans are lumpy and sometimes unpredictable timing can affect both our pace of capital deployment and the realization of returns on our mezzanine loan program.For the second quarter 2019, the company paid a dividend to our common stockholders of $0.2625 per share almost 3% greater than the dividend paid to our common stockholders for the second quarter of 2018. As we have previously discussed, we continue to focus on increasing the flow to our common stock. During the second quarter this year, for example, we issued an aggregate of almost 1 million shares of our common stock in connection with redemptions from our preferred stock and the exercise of warrants previously issued under our Series A preferred stock and unit offerings.Overall, we had approximately 43.7 million shares of common stock outstanding as of June 30, 2019, representing an increase of 10.9% compared to the second quarter last year.From a capital markets perspective, we have seen some interesting developments. Interest rates have declined sharply in the last two quarters and currently sit almost 125 basis points off the recent peak in quarter four of last year. We continue to believe that interest rates will be volatile in 2019 with domestic and global pressures presenting unpredictable conditions. Given the recent volatility, and the uncertainty in the environment, we have taken a cautious approach for acquisition and portfolio financing strategy. Approximately 96% of our permanent property level mortgage debt has fixed interest rates or variable interest rates that are capped.Our borrowings under the line of credit as of today are zero and we believe the current capacity of our line will serve us well for the foreseeable future including the additional $100 million accordion feature we have in the current facility. This feature allows us to expand the total facility up to $300 million.We recently completed the re-filing of our ATM program which has been one of our favorite ways to raise capital when the stock price is accretive to doing so. The new program runs for three years and is set at $125 million. Remember that our growth is fueled by both the common and the preferred stock. So when the common stock price isn't as favorable, we are not limited in our ability to grow.On the acquisition front, we continue to utilize longer-term fixed rate debts for all of our property types and have taken advantage of the recent drop in net interest rates to refinance maturing loans with attractive terms. The company recently converted a floating rate loan on a multifamily asset to a fixed rate 10-year loan with the same lender. The loan extends our maturity, takes some refinance risk off the table, and lowers our rate on the deal by approximately 90 basis points. In addition, the lender waived the prepayment penalties. So the transactional cost create only marginal expenses for the company.We have approximately $100 million of maturing debt in 2019 remaining to refinance. We have already begun the process of securing the debt for the majority of these assets and in most cases have already locked the rate.For our multifamily portfolio, Freddie Mac and Fannie Mae remain our primary lenders. We enjoy preferred borrower status and have excellent relationships with both agencies.It is worth noting that the regulator for the GSEs has signaled that the caps for the agencies will not be raised in 2019 and that uncapped lending will be more closely scrutinized now and in the future. While some of this is political brinksmanship, the prospects of the GSEs losing market share has increased considerably in the last few months. Due to the environment, and the increasing restrictions, GSE spreads have widened marginally, has been transaction volumes have remained strong and the ability for the agencies to do uncapped business has become more difficult.We expect spreads to continue to widen somewhat and like company debt for multifamily assets to become more attractive and competitive. Ultimately the balance between spreads and loan volume will be dictated by the pace of transactions, which at this point show no signs of slowing down.The lender pool for our grocery-anchored retail product remains deep and the demand for that debt remain strong. We have recently seen a contraction in spreads on these deals as the competition for grocery-anchored debt has increased.Office transactions are also financed through life companies with terms that are generally comparable to retail and multifamily although the maturities of these loans may be longer. These are typically larger transactions and the lender pool is smaller than the one for our grocery-anchored retail deals which are a more manageable size. Nonetheless we have seen strong lender demand for office acquisitions and our deep relationships in the lending community continue to serve us well.I'd now like to turn the call over to Dan DuPree.

[Dan DuPree:]

Thanks, John.In our first quarter call, I referred to this as a transformative year, a year in which we intend to set a course and structure that over the next decade, we believe, will put us in a position to continue to deliver value for our shareholders in a consistent and more predictable way.The first step down this road has been to focus on operational results. In the second quarter, our same-store multifamily asset which is comprised of 21 properties and approximately 63% of multifamily revenues achieved total revenue growth of 2.9%. Operating expenses were only up 1.5% and same-store NOI increased by a very strong 3.9%. At the end of the quarter, our same-store occupancy was 95.6%. For the first half of the year, same-store NOI is up 3.5%.In addition to focusing on operating results, we have continued to be patient and disciplined in our approach to new investment. Each of our business units have specifically defined strategies and parameters in which they operate.In multifamily, we are looking generally at markets of a million people or more with solid job growth. Job growth leads to household formations. Our multifamily business is less geographically bound than our other two property types but the majority of our multifamily portfolio is located in the Sunbelt states and Texas.The portfolio is by far the youngest such portfolio at 5.4 years old on average in the publicly traded multifamily REIT universe. In new markets, Joel Murphy, has carefully crafted his retail strategy to be Sunbelt and Mid-Atlantic only grocery-anchored and beyond that focusing on the number one or two market share traditional grocer in a given market. He is proud that the strategy has allowed him to claim that on the heels of five years that numerous retail bankruptcies, new market has experienced the loss of only three tenants to bankruptcies, and chain live store of closure, that being two RadioShacks totaling 4,000 square feet and one 7,000 square foot dress bar. Put it in context, in the aggregate, these represent less than one-fifth of 1% of our 5.4 million square foot retail portfolio.The office strategy is simpler still. We are focused on six markets

[Operator:]

Thank you. We'll now begin the question-and-answer session. [Operator Instructions]. Thank you. Your first question comes from Merrill Ross, Compass Point Research. Go ahead, please.

[Merrill Ross:]

Hi, thank you. I'm wondering as you exit student housing looking at your acquisition activity year-to-date and is being somewhat depressed. Well maybe what I was expecting was may have been aggressive but then having a smaller balance sheet, I'm wondering if you open up into another vertical. Do you follow your developers into another property type or do you feel that there is sufficient opportunity in the three basic units that you have remaining?

[Dan DuPree:]

Merrill this is Dan. And at this point, I think we're really comfortable with the three remaining property types that we have. We have -- as in a bumbling way exclaiming we have great talent, I think in all three of those categories and the key to success is having the talent to execute, this will shrink the balance sheet temporarily.We have an extremely deep pipeline I think of multifamily projects that we're in the process of competing for and of course in office when we do a deal, those deals tend to be larger. And, Joel, has been on the retail front has been very active in his acquisition pipeline. I think he's got over $100 million of acquisitions in the last 90 days. So I think we're going to be able to utilize the capital that we're going to get from the sale of the student. I think we'll be able to use it very, very quickly.But it does got to point to an issue that we alluded to in the comments and that is we ended the quarter with a fairly significant amount of cash on the balance sheet. We're going to stay disciplined as possible to not buying assets just for the sake of buying assets and deploying the capital. There are a number of historical stories in the space where people raise considerable money in the broker/dealer channel and then just went out and bought whatever they could buy. We're not going to do that. We'll take our lumps, if we have undeployed capital for a short period of time.But this is very wordy answer. I think everything I've done this morning has been very wordy but we're going to stay. We're going to stay with the three verticals we have right now.

[Merrill Ross:]

I think discipline is key. Just follow-up on unrelated manner, is there any timetable that the External Manager and the board are looking at in terms of [indiscernible] based on internalization?

[Dan DuPree:]

No, I don't think we put a timeframe on it. We want to be thorough and complete. We think it is an appropriate time to take a deep look at this but we don't have a timeframe, we are being diligent.

[Operator:]

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Lenny Silverstein for closing remarks.

[Lenny Silverstein:]

Thank you very much. We appreciate your time you've all spent with us this morning. We look forward to an exciting quarter coming up for the third quarter and enjoy the rest of the day. Thank you very much.