Preferred Apartment Communities, Inc.
Q4 2017 Earnings Call Transcript

Published: 27 Feb 2018

[Operator:]

Good morning, ladies and gentleman and welcome to the Preferred Apartment Communities Fourth Quarter and Year End 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that today's event is being recorded. I would now like to introduce your host for today's conference call, Mr. Lenny Silverstein, President and Chief Operating Officer. Please go ahead, sir.

[Lenny Silverstein:]

Thank you for joining us this morning and welcome to Preferred Apartment Communities fourth quarter and year ended 2017 earnings call. We hope that each of you have had a chance to review our fourth quarter and yearend earnings report which we released yesterday after the market closed. In a moment, I’ll be turning the call over to John Williams, our Chairman and Chief Executive Officer for his thoughts. Also with us today are Dan DuPree, our Vice Chairman and Chief Investment Officer; Mike Cronin, our Executive Vice President and Chief Accounting Officer; John Isakson, our Chief Capital Officer; Joel Murphy, the Chief Executive Officer of New Market Properties; Boone DuPree, the Chief Executive Officer of Preferred Office Properties; and others from our executive management team. Following the conclusion of our prepared remarks, we’ll be pleased to answer any questions you might have. Before we begin, 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 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 Web site at pacapts.com. The press release also includes our supplemental financial data report for the fourth quarter and year ended with definitions and reconciliations of non-GAAP financial measures and other terms that may be used in today’s call. 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. I’d now like to turn the call over to John Williams. John?

[John Williams:]

Thank you, Lenny. On a macro level, 2017 represented another very strong year of growth and performance for our stockholders. Despite a bump in interest rates, we continue to benefit from a strengthening economy, strong earnings and employment and household formation, and strong demographic growth in our targeted markets. Above all we continue to focus on our operations. We have always said that managing a REIT and its properties is a pennies, nickels and dimes business. And now over 50 years in real estate, this still hasn’t changed. I am very proud of how well our associates performed last year and how we are positioned for a great 2018. I think our solid performance during 2017 also was recommended through our -- was recognized through our inclusion in [RMC] [ph] this past December. Speaking of 2018, I am pleased to report that we believe our capital raising activities will allow us to continue to support our property, acquisition strategy. Both through third party acquisitions and as a result of our real estate loan investment program. We intentionally designed our capital markets program to be flexible in order to take advantage of the variety of capital raising avenues available to us from time to time. For example, we designed our series A and M series preferred stock offering programs to be sold to the independent broker dealer and registered investment advisory channels and not subject to the volatility of the public common stock market. We have sold an aggregate of almost 1.3 million of our preferred stock as of December 31, 2017 and approximately 339 million in 2017 before commissions and expenses. We expect the pace of our sales of our preferred stock to continue for 2018. In today's capital raising environment, if we didn’t have the ability to access capital through sales of our preferred stock through the independent broker dealer and [RA] [ph] channels, we like most other publicly traded REITs would be frozen in terms of growth and profits. We don’t plan to sell any common stock at the current price. So having the distribution of our preferred stock gives us a very distinct competitive advantage. Because of these capital raising activities, we expect to continue to grow during 2018 with accretion to the bottom line utilizing non-recourse primarily fixed rate financing to reduce risk and to mitigate the adverse impact of a rising interest rate environment. We also expect to continue to finance our property acquisitions through single purpose entities which have enabled us to finance each acquisition with no upstream lender guarantees to our operating partnership or [indiscernible]. And no cross-collateralization of property level mortgages. We believe this financing strategy has allowed us to create in effect a fortress like balance sheet for the benefit of all stockholders. As you have heard me say, the measure of a company's success is not simply reflected by a financial performance for just one year but the company's performance over time. Along these lines if you have invested a thousand dollars in our IPO in April 2011 and automatically reinvested all dividends received on your common stock, your average annualized return on investment with us would have been 31.2%. As of December 31, 2017, 31.2%. Speaking of dividends, we have increased our dividend 12 times since the first dividend falling our April 2011 IPO, producing an annualized dividend growth of 15.5%. On a separate note, as you may have noticed in our supplemental financial data report that we released last night, we have decided to report our financial results going forward using the classic NAREIT definition of FFO. This definition uses the standardized methodology that NAREIT adopted in 1992 which is applicable to all REITs. The 2017 numbers that Lenny will present in a moment, include FFO, core FFO and adjusted FFO. However, we have found there is no uniform definition for core FFO and for that matter adjusted FFO with the REIT industry. This lack of uniformity consequently leads to inconsistent reporting of these metrics from REIT to REIT. In other words, no apple to apples to comparison. To avoid this inconsistency and to allow a better comparison of our financial performance to our peers, we will report our financial results going forward on an FFO basis. We will continue to report adjusted FFO but please realize that AFFO may be different from other AFFO. In other words, no apples to apples comparison. Before I turn the call over to Lenny to speak more about our numbers, I want to express my appreciation to all of our associates for their hard work, effort and resiliency during past year. Despite the bedlam produced by hurricanes Harvey and Irma, as well as other weather related disasters, our entire team remained committed and focused on reaching or exceeding our goals for 2017. And we remain committed and focused on hitting our goals for 2018. Our performance numbers that Lenny and Dan will go over with you are among the best of all public REITs, if not the best, and certainly the most [indiscernible] REITs. As a company we remain committed to creating the most unique and positive corporate training and branding in our industry. We want every associate to have immense pride to be committed to our company and above all to never lose focus on what is truly important, our product, our associates and our customers, or TAC. In last December's annual awards banquet, for example, we honored 104 out of our 600 plus associates for their superior individual and property level performance achieved throughout the year. Our leadership education programs called soaring to leadership [indiscernible] to have management level responsibilities and soaring to success management essentials for junior associates, are designed to train our associates on our company's philosophies, [goals] [ph] and objectives, and how they can become more effective in their respective roles in pack. Upon completion of these leadership training programs, we fully expect the participants to disseminate these principles throughout all levels of our company. Let me now call on Lenny to talk you through our numbers. Lenny?

[Lenny Silverstein:]

Thanks, John. Overall, we again produced excellent operating results for the year. Compared to 2016, our 2017 FFO per share increased 46.7%.

[John Williams:]

Why don’t you repeat that Lenny?

[Lenny Silverstein:]

46.7%. And our core FFO per share increased 12.2%. In fact if you look at our past performance not only did our 2017 FFO increase by almost 47% compared to 2016, but our 2016 FFO increased 21.6% compared to 2016. And even more beyond that our 2015 FFO increased 17.5% to 2014. We believe this track record is impressive. Switching to various financial statement metrics, our total assets as of the end of 2017 net of depreciation were almost $3.3 billion, an increase of $832 million or 34% compared to the end of 2016. Now pleased understand that this $832 million of additional asset growth is net of the sale of three multifamily communities last year for an aggregate of approximately $158 million in gross proceeds and which resulted in a $38 million GAAP gain. We routinely review our assets to determine which ones to sell from time to time with the objective of maintaining the youngest multifamily portfolio in the REIT industry. At an average age of just 6.3 years, we believe that the usefulness of our multifamily portfolio compared to our competitors is a distinct advantage for us and our stockholders. Our revenues for 2017 increased almost 47% to $294 million compared to 2016. Following from revenues, our cash flow from operations increased almost 40% to $86 million on a year-over-year basis. Now to put this into perspective, our revenues were 3.2% above our starting guidance for the year. Pretty impressive numbers. Our revenues increased significantly in 2017 compared to 2016 despite the average financial impact caused by hurricanes Harvey and Irma. As we previously reported, the damage caused by these hurricanes reduced our rental revenues significantly at our Port Arthur, Texas, multifamily community as well as adversely effected our rental revenues across many of our Florida communities. We expect that our insurance coverage in Port Arthur as well as our other property level insurance coverages will reimburse us from much of these losses in revenues. When these insurance claims are finally concluded, we believe we will receive aggregate benefits of approximately $387,000 which will be recorded as income on our financial statements at the time of [receipt] [ph]. As a result, we anticipate that these proceeds will have a positive impact on our FFO. For the fourth quarter 2017 we paid a dividend to our holders of record of our common stock and Class A partnership units of $0.25 per share or unit. On a year-over-year basis, our aggregate dividends paid to our common stockholders and unit holders represent a 15% growth rate compared to 2016 which clearly exceeded our goal of 10% and also represents a core FFO payout ratio of only 66.7%, far below our 2017 goal of 75%. Again, we are very pleased with the steady consistency with which we have enabled to increase value for our common stockholders. Going forward, as we noted in our supplemental financial data report released yesterday, we are projecting that our FFO, now this is FFO, for 2018 will be from $1.43 to $1.47 per share with a midpoint of $1.45 per share. I want to emphasize that this guidance is 10% more than our $1.32 per share FFO results for 2017, which would continue our impressive growth track record. We project total revenues for 2018 will be in the range of $400 million to $440 million. We are hopeful of narrowing these ranges as the year progresses. We also currently expect to increase our common stock dividend by an aggregate of at least 10% during 2018 as compared to 2017. At the end of the day, our overriding goal and we can't emphasize this too much, is to drive FFO per share and total returns for our stockholders. Speaking of success, a key component of our strategic plan is our investment program. Let me now turn the call over to Dan DuPree to provide some color on our acquisition activity and our real estate loan investment program. Dan?

[Dan DuPree:]

Thanks, Lenny. Our investment objective is to create grow and manage a best in class portfolio of Class A multifamily assets including student housing together with the targeted, strategic focus on grocery anchored shopping centers and select class A office buildings. In pursuit of this strategy and in addition to carefully considered third party acquisitions, we continue to originate real estate loan investments that ultimately provide a pipeline of attractive off-market acquisition opportunities at contractual discounts, while providing compelling returns during construction. Although we have provided guidance for the year, the timing of these acquisitions and investment activities can vary quarter by quarter and as a result could affect our interim financial results. But in the end, we are focused on full year guidance that we released to the Street last night and mentioned again earlier in our call today. Our real estate loan investment program is a meaningful part of our overall business. Last year excluding land loan investments, we originated five real estate loan investments representing an aggregate commitment of $94 million and acquired six multifamily communities out of this program. We now have a total of 32 active real estate loan investments outstanding. As of year-end aggregating $455 million in commitments of which $389 million has already been drawn. Our loan investment program continued to create a tremendous acquisition pipeline of new multifamily communities aggregating nearly $1.2 billion in estimated market value, if we exercise all of the options embedded in each loan. During 2017, we acquired 10 multifamily communities representing approximately $451 million of capital investment excluding closing cost and over 2500 units. As of December 31, 2017, we owned and managed 34 multifamily communities representing 9521 units in 19 cities across 10 states. We also acquired three student housing communities last year and now on four communities representing a total of 892 units or 2951 beds in four states. As part of our business plan, we also invest in grocery anchored shopping centers through our new market platform. As of December 31, we owned a total of 39 grocery anchored shopping centers in 80 markets across seven states throughout the Mid-Atlantic, Southeast and Texas. In a moment we will ask Joel Murphy to discuss these activities. Additionally and more recently, we began investing in well located, high quality office buildings in the southeastern Texas through our Preferred Office Properties fully owned subsidiary. At the end of 2017, we have almost 1.4 million rentable square feet spread across four properties. As of December 31 last year, our office portfolio was approximately 98% leased with importantly, 8.5 years weighted average remaining lease terms. These stabilized property acquisitions provide predictable earnings for our company which enhanced our ability to provide consistent, predictable, financial results for our shareholders. I will now turn this over to Joel Murphy. Joel?

[Joel Murphy:]

Thanks, Dan. We are intensely focused on the operating results of our portfolio in the new market subsidiary including tenant retention, new leasing, leasing renewals and capital improvements to our centers. We have continued our solid leasing results for the fourth quarter '17 with a 94.5% of our overall portfolio lease which is up 30 basis points sequentially from the end of the third quarter and up 150 basis points on a year-over-year basis. 17 of our 39 centers are now 100% leased. Simply put, we leased vacant space, we kept our centers leased, we renewed at higher rates, we managed our expenses and we had very little bad debt expense. The combination of these positive trends allowed the new market subsidiaries to upstream outstanding results back. Of our 39 centers, we have two centers, each of which are in different stages of value add phases. Excluding these two properties, our core 37 centers, are 96.6% leased as of the end of the fourth quarter, representing an increase, again sequentially of 40 basis points on the end of the third quarter and an increase of 160 basis points year-over-year. We completed two acquisition during the fourth quarter, having an aggregate investment of approximately $62.9 million including acquisition expenses. For the year we completed eight acquisitions, having an aggregate investment of approximately $173 million including acquisition expenses. All of these centers are excellent examples of our focused strategy, anchored by market leading grocer that has a high sales per square foot store, and is located in the solid sunbelt market with good demographics. We also achieved several strategic goals with our portfolio of growth last year. Statistically the following. First, we made a market entry into Charlotte, which was one Harris Teeter center where they are a market dominant grocer. Two, we further penetrated North Carolina with two centers, one with the one I just mentioned in Charlotte and another one we added in Raleigh. Third, we further penetrated South Florida with a public anchored center. Four, we diversified our anchored tenant based, and fifth, we moved up the demographic metrics in our portfolio based on three mile densities and three mile average household income. So we do now, as of the end of the year, own 39 grocery anchored centers, seven sunbelt states, 18 markets, which totals over $4.1 million square feet as over 600 different independent operating leases. We do remain active in the market place on new acquisition opportunities and we are also very diligent on staying inside our tight geographic and product type strategy, while also being very disciplined about our due diligence and our pricing. Now let me turn the call back to John Williams. John?

[John Williams:]

Thank you, Joel. I still believe that fundamentals in real estate for the foreseeable future will be strong and will continue on a positive note. We are very pleased about our financial results for the fourth quarter and for the year, and our growth opportunities. We continue to be able to finance our growth from a variety of sources, including capital available from our sales of our preferred stock offerings. Sales of the common stock through our AGM program, and through overnight transactions and through borrowings under our loan facilities led by Key Bank. By employing these sources of capital, we are confident that we will be able to save our common stockholders from significant dilution. In addition, I firmly believe in the continuing strength and depth of our management team and the quality of our associates. We believe our associate experience comes down to simple principles. Hire great associates, train them well, recognize them for their achievements and reward them for their accomplishments. In the end, this is the key to our success. Before I turn the call over to the operator, there are several questions we have been asked in anticipation of today's call. First question has a multifamily sector peak. I will go and answer this one. Deliveries were strong in 2017, probably having peaked in the third and fourth quarter of last year. But total annual multifamily starts were down 21.60%, 6% compared 2017 to 2016. Also starts of 2017 were down another 10.1% compared to 2016, now 21.6%. So, John, I know you have some statistics you would like to give us.

[John Isakson:]

Sure. Thanks, John. I think it unfortunately declines likely from the battle with rules and regulations which were imposed on the banks in the last couple of years. And as such these rules have put pressure on commercial banks to pursue a more conservative balance sheet. In particular, the [HVCRE] [ph] requirements have caused banks to increase the amount of equity required for the development loans, which as you can imagine, has caused a meaningful drop in loan originations. Personally, I think the rules permitting and starting with 2017, bodes well for multifamily industry as one to lead the lower new supply over time and hire occupancy rates. In fact we have clearly seen our multifamily physical occupancy rate increase over the last couple of months. Which I certainly attribute at least in part to the impact of BASEL III on the overall market.

[John Williams:]

Thank you. The next question is, will you please us some more information about the tax treatment of your 2017 dividends and how the new federal tax law will treat dividends going forward. Lenny, can you answer that for us please?

[Lenny Silverstein:]

Sure. A 100% of our 2017 common stock dividend and almost 27.5% of our preferred stock dividends for 2017 are treated for tax purposes as return of capital. This means you should not incur any tax on any of the common stock dividends you receive for 2017 or on of course on the 2017 preferred stock dividends treated as a return of capital. Rather, your basis and your share should simply be lowered by a like amount. In addition, starting in 2018, under the new federal tax laws that are applicable to real estate investment trust like us, a portion of the stock dividends you receive that are not treated as a return of capital maybe subject to a deduction equal to 20% of the total dividends received. Consequently, this new tax law could lower your overall effective tax rate on the dividends you receive from us or any other REIT, thereby increasing the value of those dividends. We encourage you to consult with your tax advisor for more specific information on these points as they relate to you.

[John Williams:]

Thanks, Lenny. What are you seeing in your grocer anchors, sooner is there any effect on your strategy as it relates to the ecommerce growth in the grocery store sectors, with the respect to the Amazon acquisition of Whole Foods. I will call on Joel Murphy to answer this question. Joel?

[Joel Murphy:]

Yes. Thanks, John. Let me take the back half of that question first, the Amazon Whole Foods acquisition closed in August of '17. It's very interesting that how the private markets have responded. We are continued aggressive pools of capital that are trying to invest in [solid] [ph] grocer anchored centers in the sunbelt. Including private buyers, family offices, pension funds and cross-border capital. Many capital sources believe, as we do, that the Amazon transaction reiterates the importance and the good future prospects of grocery anchored centers to ultimately be successful in the grocery business or acquire the effective execution of a bricks and mortar strategy in connection with ecommerce strategy. We are seeing downward pressure on cap rates for these reasons. And for these centers that are consistent with our strategy which we believe really to be a market vindication in acceptance of our grocery anchored necessity based strategy. As it relates to our centers, specifically, you did hear my description of the solid operating metrics earlier in the call, we are also continuing to have active conversations with our grocery anchors on changes to their stores to take advantage of the opportunities that are presented by the growth of ecommerce. These stores that we, our traditional grocers control a big part of the distribution network. [publics] [ph] 1400 stores, ,Kroger 2700 stores, and they control a big part of the network within one to three miles of our customers' homes. And they are investing capital to remodel stores, buy back stock and invest in technology to further enhance their ecommerce platforms. And specifically at the store level, and we are working with them on this, is we are seeing investment and in-store pickup which is called [indiscernible], buy online and pick up in store. And this has become very successful for Kroger and they are also looking at delivery mechanisms to third party parties like [Used car and Shift] [ph].

[John Williams:]

Thank you, Joel. The next question is, can you please talk about rising interest rates and the effect on the company. John, would you take that, John Isakson.

[John Isakson:]

Sure. Thanks, John. Since September of last year, the 10-year treasury rate has risen about 80 basis points around 2.9% [indiscernible]. And the 7-year has risen over 90 basis points in same period about 2.8%. PAC is fairly well insulated from interest rate increases since all but 8 of our 85 properties of financial fixed loans. These loans generally have longer terms, further insulating us from shorter term spikes in rates. The company has just under $225 million in debt maturities in 2019, about $128 million in 2020 and less than $100 million in 2021. Collectively, this is what the 25% of the total outstanding debt to company has. Said differently, over 75% of our current outstanding debt matures after 2021. The properties that do have floating rate financing are more likely to be assets that have a capital improvement or value add program in place which will lead to a refinancing using an improved NOI. For example, we were examine one of our multifamily acquisition loans in January of 2016 using a preliminary [indiscernible]. Following the completion of some capitalizations on that property, we expect to refinance this line in the near future at a fixed rate of approximately 3.65% to 3.85% on a 35 year term. The balance of this loan represents more than one third of the company's 2019 maturities and approximately a fourth of the company's outstanding floating rate debt. In the current environment, we expect spreads over the base index track to a certain degree. Since contraction will help offset some of the rise in the indexed that we are seeing. In addition, PAC employs more conservative [foreign] [ph] strategy generally and does not pursue max proceeds. This strategy allows for rise in rates which does not materially affect our borrowing strategy or impede our growth plans. In addition, our PAC operating partnership revolver loan led by Key Bank is based over LIBOR but as of today, we have only $61 million outstanding on that facility. Generally speaking, that’s a pretty small percentage of our overall borrowings. John?

[John Williams:]

Thank you, John. And the last question is, what is the overall strategy with your Office subsidiary and how is capital allocated to it. Boone, will you please answer this question.

[Boone DuPree:]

Sure, John. We like the complementary profile of our all investments relative to the REIT's core multifamily holdings. We are buying high occupancy buildings with long-term multiyear leases to corporate customers versus 12 months leases to apartment residents and we get contractual annual rent growth. These characteristics provide predictable earnings throughout the cycle, supplementing the growth we get out of our multifamily student housing businesses. Today, our portfolio of office properties totals approximately 1.5 million square feet, including our recent Armour Yards acquisition close subsequent to year-end and stands 98% leased with more than 8 years of weighted average remaining lease term. We will continue to look for investment opportunities and assets with similar core like attributes as well as selected participation in new development primarily through real estate loan investments or our risk profile to mitigate it by structuring preleasing, cost basis and/or market fundamentals. Similar to PACs real estate loan investment program to date, our development investments provide a pipeline to owning best in class office property, often times in top tier locations or near term acquisition opportunities are loaded. In terms of competing for capital, I think John, Lenny and Dan would agree with me. Multifamily is very much a cornerstone of PAC. We don’t really have a long-term allocation target by product type but multifamily certainly continues to be a priority. That having been said, the REIT does benefit from having a few arrows in its quiver. And with respect to how capital is allocated across them, we operate on meritocracy with the same investment community evaluating each transaction by risk adjusted economics and strategic fit. We will continue to see that allocation first and foremost to our multifamily business but different product types are often and more or less favor different times in the cycle. And we collectively look for opportunities to take advantage of that.

[John Williams:]

Thanks, Boone. I would like to turn the call back to our operator and to open the floor for any other questions or thoughts you may have. Operator?

[Operator:]

[Operator Instructions] Our first question comes from John Benda of National Securities Corporation. Please go ahead.

[John Benda:]

So quickly, it seems like in the next two or three months there are going to be several purchase options windows opening. Could you give us a better idea of what you guys are thinking right now for takedown schedule on those assets.

[John Williams:]

Thanks, John and maybe I can call in Dan DuPree to give us an answer.

[Dan DuPree:]

Yes, John, we have got -- there is probably six projects that will come up for the exercise of the purchase options. We will have a different strategy probably for each one. Each presents a unique opportunity and we are devising those strategies as we -- kind of as we have said here, there is influence on the strategy about where cap rates are and what the purchase option discount will allow us to buy them on. So I know I am giving you sort of squarely answer on this but it's evolving and they will definitely at the end of the day contribute significant value to us in 2018. I am just not exactly sure when they are going to fall in.

[John Benda:]

Okay. Great. Thank you. And then on the retail portfolio. Can you just give us a little more color about the individual leases, specifically any kind of rent escalators that are build in that will help shield Preferred from rate increases forward.

[John Williams:]

Yes. Joel, can you tell us a little bit about your leases and the income increases that you are looking at.

[Joel Murphy:]

Yes. So, John, two things. As we said in the context to [indiscernible] it's rise against or us, whereas you know large piece of our portfolio as you know, we have gone long and have fixed rate debt on those properties. But to address your question about the income side of that is we are seeing attractive rent spreads, I would say it's good news, is we have leases. The bad news is we have leases. We have got leases with credit tenants like Publix and Kroger and Harris Teeter, that are longer term, and they are flat. And some of them saw small amount of increases. So you really need to get your growth and that’s what we really like about the portfolio. So you need to get your growth from the other halfish of the portfolio but we are seeing nice rental streams. You can really do that in three ways. You can lease vacant space, which we are doing. You can award new peoples with contractual options that they can elect, which do have increases. Or third, or space comes which we like, we can move it to market and we do. So we really have been doing all three of those strategies to drive the income growth in the existing portfolio.

[John Benda:]

Okay. And then lastly, I know that there was a loan originated for the [recop] [ph] portfolio for Dawson in marketplace. Can you talk about any future opportunities that there might be in retail development loans.

[John Williams:]

Yes. I think, John, you are right. We have done one deal with Haven Properties on the Dawson, the Kroger deal up there. I think the mezz piece really fits really well with multifamily, the reason it's a little challenging on that grocery store side is there is really two. One, is there is a very small amount of supply coming into the retail space. Historically like over the last 40 years low. And I don’t really see that changing a lot. So there is not that many new opportunities which does bode well for our existing portfolio. Second things is, each of these deals individually is not very big and if you have a signed lease with Publix and Kroger, then developers, it's not at all hard to get 75% financing on that. And since the deal is not very big, they still have to put an equity, this is a very small slice for a mezz. That’s what we have seen in the market. Where I think that will take us, we don’t have anything specific to announce on that now. The right thing to do is we have got deep experience with me and others on my team of developing grocery anchored centers and or doing traditional joint ventures with developers. And that’s something we definitely have on our radar screen in the future. And John, Dan DuPree would like to make a comment.

[Dan DuPree:]

Yes. Just we are anticipating a pretty robust 2018 on mezz loan starts and multifamily and we believe that there is potential selectively in the office side of the business for mezz loans. So mezz loans are going to be a driver for us in 2018, I believe.

[Operator:]

Our next question comes from Jim Lykins of D.A. Davidson. Please go ahead.

[Jim Lykins:]

First, for the properties with the purchase options. For the ones shown in the supplemental was stabilization plus 90 days. When does the purchase option window open for those and specifically any over the near term.

[John Williams:]

I will call in Dan DuPree to answer that. Dan?

[Dan DuPree:]

Yes. We have got a schedule of purchase option exercised dates and we monitor it and we have the ability to adjust those windows to make sure that we hit the windows at a point of stabilization. We have got -- and they are pretty much spread out over the course of the year. We have got six that we are looking at now in 2018, they are not overly weighted in one direction or the other. But the key to them is when they reach stabilization. When we can determine an equitable price for them. So I guess I can circle back with you Jim and give you maybe more specificity on what we are looking at right now but the key to it is simply when these assets are going to reach stabilization, real stabilization. We want to buy these assets in 94%, 95% lease. And we have got one that we are getting ready to exercise here in the next couple of days and others will follow.

[Jim Lykins:]

Okay. When you say six in 2018, is that including the three or four over the next few months that are not shown as the stabilization plus 90 days. Or is that -- are you recounting some of those too?

[Dan DuPree:]

Yes. I mean in 2018 I am counting all those assets, all those properties that we anticipate reaching stabilization in 2018.

[Jim Lykins:]

Okay. All right. And then a new market question, so I guess this one is for Joel. So you guys have 17 retail centers hundred percent occupied, other approaching that number. Would this imply you have got some pretty significant runway to be pushing around? I am just wondering what the -- in the retail environment that we are in right now, with the conversations are likely through tenants right now when they are looking to renew.

[Joel Murphy:]

Jim, on hearing that question I was kind of wondering if you were listening in on my leasing meeting yesterday. We actually talked about that specifically. You know when you do get to that high level of occupancy, so following up on John's question on that, is we do have contractual rent increases. I mean in some they do have options to extend and these are we have kind of an outsized increase on that since it is an option. But when you do get to that 100% lease, they you have an opportunity to get a space back. And not a specific example but you have got space out there at 18 and you feel like you are more of 25 and you have got an opportunity to lease that at 25. What I have told the team is I will be willing to take that space not being occupied for a couple of three months. If that means we can move that market rent up significantly, because that means the next yield that comes after is also going to be at that higher rate. So, yes, when you get to that level of occupancy, you do start to push right.

[Operator:]

Our next question comes from Michael Lewis of SunTrust. Please go ahead.

[Michael Lewis:]

First, I just wanted to ask. I think it's a good move to start quoting NAREIT FFO, makes it more comparable with other companies. But it sounds like when you are quoting FFO per share using a base of share count, I am not really aware of another REIT that does that, and I wonder why that is. Is there an accounting reason or am I correct in assuming that.

[John Williams:]

No. We have just chosen to report on basics.

[Michael Lewis:]

Okay. My second question for John. You started off your comments about interest rates up and obviously the stock prices down. It changes your mix of raising capital options that are available to you. I appreciate the preferred shares but if the tenure continues to rise, obviously those preferred shares become less valuable to investors as well. And I wonder if you think rates are going to continue to go up. Do you expect any kind of slowdown in either the pace of selling those shares or maybe in the price they need to offer.

[John Williams:]

Well, we have had less than 1% of the redemptions on the preferred stock which indicates the strength of paying a monthly dividend of 6% along with a kicker of a warrant. So we have not seen any slowdown in the sales of our preferred stock and as a matter of fact for the first two months of the year, we have had the strongest sales, so we have had since we have been in business.

[Michael Lewis:]

Okay. And then along those same lines...

[John Williams:]

Obviously, Michael, if rates go up another three or four points, we would take another look at the ability to sell that. But that would require a lot of change in underwriting not only from us but every REIT in the business. We are actually -- the fact that we can sell preferred stock at a 6% monthly dividend which is cheaper than the dividend we are paying on our common stock gives us a tremendous competitive advantage. Let's us still be able to buy high quality Class A assets when we can make the proper accretion in spread.

[Michael Lewis:]

Yes. I understand...

[John Williams:]

Michael, we have been in the public markets [indiscernible] for a long time. We know too well what happens when those [indiscernible] cuts off in the public markets. You know, regardless of the amount of money that we can raise and the independent broker dealer channel from time to time, it is far better to have access to some capital. This is kind of worst case scenario, then it is to have access to nothing. So we consider our ability to raise capital through the sale of our preferred and our M shares as a very very significant, distinct competitive advantage for the company.

[Michael Lewis:]

I suppose the answer so far is that, 6% is still good enough to sell at the base you have been selling. Obviously, if the tenure continues to move, you will be forced to reevaluate. Is that fair?

[John Williams:]

Correct.

[Lenny Silverstein:]

Sure.

[Michael Lewis:]

And then along those same lines, the rise in interest rates. Does it impact your strategy at all, not just in raising capital but in deploying it. For example, do you think about favoring shorter lease duration which will be apartments or are you seeing any cap rate pressure on perhaps retail or anything else.

[John Williams:]

As Dan indicated that with this environment, we are going to continue to emphasize and work hard on mezzanine loans because if you consider the discount yet, those loans produce about 20% IRR, and they are very valuable to us. As John mentioned, we are seeing compression in loans. So, so far we don’t see anything hurting us. If we look out a year from now, if interest rates continue to move, we will adjust our strategy accordingly, but as of today, we feel like we will grow the portfolio substantially. We will produce a 10% FFO increase over the FFO of 2017 and we will increase our dividend more than 10% this year. These are the goals that you will see outside my door, that every person in the company aspires to and we are certainly committed to make that happen. And as a further let me -- I hope we have made it clear while we have gone to FFO rather than core FFO, we noticed that every company had another different definition of core FFO, so if you are comparing our core FFO to other companies, the truth is ours is a more conservative core FFO than others. But we thought it would be helpful to the analysts to only compare us in what it an absolute way of comparing apples to apples, and that’s FFO. We have noted some companies that are covered by a lot of analysts don’t even report FFO. We have always reported FFO but we are also reporting core FFO. We have changed that because we think that our stockholders, they deserve to be able to look at us and look at our performance and compare with other companies. So far I think we did pretty good. If you or any other analyst is aware of any company that did a 47% increase in FFO, sent me their name and I will do something very sweet for you.

[Michael Lewis:]

I agree with you on the decision to show FFO. I think it's a good one.

[John Williams:]

Well, I hope you do because we are going it not to harm ourselves, it's just to make sure that we are able to compared effectively.

[Michael Lewis:]

Yes. We could always talk about this offline too. But I think maybe even there is some confusion, I can only guess how it's driving the volatility in the stock today. Maybe something to do with the definition of FFO, I don’t know.

[Lenny Silverstein:]

Well, I think some people are trying to compare our guidance on FFO for 2018 with our performance under core FFO in 2017. And that would make it look like it's fairly flat but that’s absolutely not the actual scene.

[John Williams:]

Yes. You don’t compare core FFO to FFO. Core FFO always outperforms FFO but not with us because we are not back only comparing ourselves to FFO, and we can do it ever since we have been in business. And as Lenny said, we have had substantial increases in FFO over the last '16 and '17 and we are expecting to start the performance again in '18.

[Michael Lewis:]

Understood. Maybe if I could ask just one more. I think you have really answered this for me already, John. But on the dividend yield -- the dividend yield now is about 7%. I was just wondering if that high yield impacts your decision regarding whether to continue raising going forward or if...

[John Williams:]

No, it definitely affects our willingness to sell any common. You can bet that we won't sell any common stock at anything like the price that our common stock is right now. And thank god we have the ability to continue to raise capital, substantial amounts of capital through our preferred program.

[Michael Lewis:]

I understand that. I was asking more if you could continue to raise the dividend at the same 10% pace given that the yields are...

[John Williams:]

We are committed to raising our dividend.

[Michael Lewis:]

Okay.

[John Williams:]

Yes. We will raise it. I will promise you the next call we will talk about our increase in the dividend and in the fourth quarter call we will also talk about another raise of the dividend. We are committed to raising the dividend for 10% and we are committed to increasing the FFO by 10%. That’s a given for this company and I promise you if you are on the call next year this time, you will have the same numbers. With that operator, I think we are concluding the call for today. I want to thank everybody for being on the call. We have a record number of folks on the call, which is very good. And we will see you next quarter.

[Operator:]

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