Preferred Apartment Communities, Inc.
Q4 2012 Earnings Call Transcript

Published: 12 Mar 2013

[Operator:]

Good morning, everyone, and welcome to the Preferred Apartment Communities fourth quarter 2012 earnings conference call. (Operator Instructions) At this time, I would like to turn the conference call over to Mr. Lenny Silverstein, President and Chief Operating Officer.

[Leonard Silverstein:]

Thank you for joining us this morning and welcome to Preferred Apartment Communities fourth quarter 2012 earnings call. We hope that each of you have had a chance to review our fourth quarter earnings report, which we released yesterday. In a moment, I'll be turning the call over to John Williams, our Chairman and Chief Executive Officer, for a review of our performance during the fourth quarter and for his thoughts for fiscal 2012 and 2013. Also with us today are Mike Cronin, our Executive Vice President and Chief Accounting Officer; Bill Leseman, our Executive Vice President, Property Management; John Isakson, our Chief Investment Officer; and Paul Cullen, who directs our marketing efforts. Following the conclusion of our prepared remarks, we'll be pleased to answer any questions you may 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 may be found on our website, at pacapts.com. Our press release on our website also includes an attachment containing our supplemental financial data report for the fourth quarter with definitions and reconciliations of non-GAAP financial measures and other terms, which 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. Now, I'd like to turn the call over to John Williams for his remarks.

[John Williams:]

Thank you, Lenny. Good morning, everyone, and thank you for joining us for our fourth quarter 2012 earnings call. The company reported that net cash from operating activities was approximately $1,200,000 for the fourth quarter of 2012 compared with the net cash from operating activities of approximately $800,000 for the fourth quarter of 2011, an increase of approximately 46%. The company reported AFFO was approximately $1 million for the fourth quarter of 2012 compared with AFFO of approximately $775,000 for the fourth quarter of 2011, an increase of approximately 29%. For the fourth quarter of 2012, the company reported FFO of approximately $993,000 compared with FFO of approximately $622,000 for the fourth quarter of 2011, an increase of approximately 60%. For the fourth quarter of 2012, the company reported net income attributable to common stockholders of $202,000 or approximately $0.04 per share compared to a net loss attributable to common stockholders of $0.23 per share for the fourth quarter of 2011, an increase of approximately $0.27 per share. We have now completed six full quarters of operations since our IPO in April of 2011. We continue to focus on managing our multifamily communities, building our brand and securing additional capital to support future acquisitions. During the fourth quarter, we funded of approximately $5.9 million in mezzanine and other secured investment transactions. Generally, we received a current interest payment of 8% per annum payable monthly, and we'll accrue an additional 6% payable at maturity or at the time the property is sold or refinanced to a third party. With respect to the loans related to financing, the construction of multifamily communities, if we choose to exercise our option to purchase these communities in the future, the accrued 6% additional interest will be recorded as a step-up in bases of the acquired property with no cash changing hands. In fact, the option to purchase allows us to buy brand new community at a wholesale rather than a retail price. This is an outstanding program, which should produce great accretion to the company over the next few years. In addition, during the fourth quarter we commenced efforts to issue $40 million of our securities to qualified institutional buyers for the purpose of acquiring three multifamily properties located in Austin, Texas; Atlanta, Georgia and Raleigh, North Carolina, representing a total of 928 units. We successfully closed this private placement on January 17, 2013, and deployed the net proceeds of that capital raise, six days later, when we acquired these three assets. We believe we've purchased these apartment properties at substantially below replacement cost. As I have mentioned to many of you, we think the cost of these assets was approximately $103,000 per unit and we think the replacement cost could have been as high as $150,000, so a great transaction for the company. Remember, we only seek to make acquisitions that are accretive to our shareholders. The next day on January 24, 2013, we refinanced these assets for seven year non-recourse mortgage financing, which totaled approximately $59 million. Financing included fixed-rate interest only payments of 3.13% per annum due monthly through February 28, 2018. During this period of time, the lowest rates that were given out by our lender, Freddie Mac, was 3.12%. So we missed it by one bill and I am still irritated at John Isakson for that. As a result of these acquisitions, we now have 1,693 units in our portfolio. We declared a dividend on our common stock of $771,000 or $0.145 per share, which was paid on January 15, 2013, to all common stockholders of record as of December 31, 2012. We will continue to seek to have our dividends be tax efficient for which a key driver is the acquisition of additional multifamily communities. Without taking into account, any effects of our capital raising activities, we currently believe that our AFFO for the first quarter of 2013 will be in the range of $875,000 to $1,050,000 and our aggregate common stock dividend obligations will be approximately $772,000. As I have mentioned before, we view AFFO as our primary measure of performance for our company. In other words, it is the cash flow that we use to pay our bills. When we completed our IPO in April 2011, we projected paying a quarterly dividend of $0.125 per share or $0.50 per share annualized. We met that challenge. In fact, we've increased our common stock quarterly dividend three times since our IPO and we are now paying $0.145 per share. This represents a 16% dividend increase since an IPO or approximately 10.6% annual increase. We believe that one of the major reasons people buy our stock is for the dividend and we plan on aggressively increasing our dividend over time. Starting with our first full quarter of operations, our AFFO is more than sufficient to cover these dividends. Frankly, I think these results continue to be very, very sound. On the liability side of the company, I'd like to confirm that other than our $15 million revolving credit facility, we incurred no debt at the company or operating partnership levels. None of our individual property mortgage financing or cross-collateralization for each other and none have any recourse liability upstream to our company or to our operating partnership. We also have no copier lease, no office lease, we have no liabilities at the company level, whatsoever, other than our $50 million revolving credit facility. This remains truly in light of the three properties we just acquired in January. In other words, although our consolidated financial statement show debt for our company, except for our credit facility, our debt resides at the property level and is isolated in separate limited liability companies, I tend to say solid, we've established for each property. In connection with our branding efforts, we believe our operation strategy continues to be well received. In fact, I think it's the most unique of any management company in the country. We are pleased with the robustness of our website and its ease of use. We've made a concerted effort towards transparency, which I believe our stockholders will find refreshing. We hear time and again from our stockholders how pleased they are with our efforts. From a non-financial perspective, our number of direct hits continues to increase and the focus of our inquirers continues to be directed towards our PAC Concierge, PAC Rewards and PAC Partners programs, again, unique in the apartment industry. These are outstanding programs that we have initiated in the multifamily sector. In addition, the feedback received from our current and perspective residence remains very positive and robust. Our primary strategy continues to be to grow our company through acquisitions, for which we'll need capital, at least for the foreseeable future. We routinely assess the various capital raising markets to identify, what we believe is a most reasonable way to raise additional capital based on our needs and plans. As I mentioned earlier, the recent $40 million capital raise, we're just one step along this path. Following the anticipated stockholder approval to this transaction in early May, our common stock flow was doubled as well as our capitalization, which we expect will benefit both our liquidity and trading activity on the NYSE Market Stock Exchange. Fortunately, we believe that our pipeline should allow us to make timely investments, as we raise this capital. Again, we only want to make acquisitions that we believe are accretive to our stockholders. Speaking our pipeline, I am pleased to report, for example, that the development of the 96-unit multifamily community, located adjacent to our Trail Creek Community in Hampton, Virginia, in which we've made a mezzanine loan investment has been completed. Oxford Hampton Partners, the developer of this property reported that the construction was well under budget and the leasing of the apartment units was well ahead of schedule and plans. As we previously reported in connection with making this investment, Preferred Apartment Communities received an option to purchase this new community at a pre-negotiated price. Subject to market conditions, we will seek to purchase this community mid-to-late this year, well ahead of our initial projections. We expect this to be a very, very accretive transaction of the company. Similarly, the development of a 140-unit multifamily community, located adjacent to our existing Summit Crossing community in Atlanta is doing exceptionally well. Construction is ahead of schedule and leasing is doing fantastic. We'll look forward to the completion of this project in the near future. In summary, the industry experts continue to report strong demand for apartments. As job growth picks up, which is historically the most important factor for our apartment success, we believe we'll see increased household formation, which will drive in a positive way, apartment occupancy. Although, production of new apartments has increased as of late, it is still well below historical norms. As a result, we believe the apartment business continues to be on the upswing with wind at our backs. We'll continue to actively manage our communities and as usual do our best to balance vacancies with rent growth, while at the same time provide superior services to our residents. In addition, we'll look to alternatives to fund our growth prospects in light of the current economic climate, with a goal of making any transaction accretive to our earnings. Before I turn the call over to the operator, there are several questions that we've been asked in anticipation of today's call. One of the questions is, how does the company look and calculate NAV, and I am pleased to call on John Isakson, our Chief Investment Officer to tell us exactly how we look at it internally. John?

[John Isakson:]

Thank you, John. We calculate NAV by combining our operating real estate portfolio value, which is calculated using a 5.75% cap rate, which is conservative based on the recent market reports and releases. We combine that with our mezzanine portfolio at face values and then add our other assets, subtract our liabilities, including our mortgage loans payable at face value and our outstanding preferred stock balance. For the fourth quarter, this calculation generated NAV per common share of $11.89. We think that the exercising of the options on the mezzanine loan portfolio, should we decide to exercise those options would be incredibly accretive for the NAV going through the end of 2013.

[John Williams:]

We're also blessed to have Dan DuPree, our Vice Chairman, who has joined us, and he is taking a very strong interest in our mezzanine loan program. I know that you've studied this very closely Dan, do you have any comments relative to the values that are being created through our mezzanine loan program?

[Daniel DuPree:]

John, this really falls under the category of future-looking statements, so I want to caveat with that. But you mentioned earlier in your presentation, our Trail II program in Virginia, and as we're coming to the point in time where we make the decision to exercise our purchase option and then create a strategy for that asset, we've taken pretty strong look at what market conditions are and what that asset should be worth in the marketplace. And kind of to cut through it, we feel like the range per unit of value creation above our purchase option price is somewhere between $15,000 and $20,000 a unit. And that's resting pretty much on a 6 to 6.25 exit cap rate, which is more conservative than what John Isakson said. In our entire mezzanine loan program, right now we have 796 units. If you apply that range of $15,000 to $20,000 a unit, you'll get an overall range of value of somewhere between $12 million and $16 million, which on today's shares would be somewhere between $2.5 and $4 a share. As we get into the exercise of the mandatory preferred, it will drop down to maybe $1.5 to $2 a share. But the 796 units is really only half of where we think we're going to be towards the end of the year, so it's a very meaningful program to the company. It is an obvious in our current numbers, but as we exercise the purchase option, determine the strategy on Trail II, it should become more apparent as we move along.

[John Williams:]

In other words, John and Dan, we currently do not factor in the value of that option in any calculations that we utilize for NAV. And one of the questions that's been asked is how does your pipeline look? Well, I'm pleased to say that we have three additional outstanding mezzanine loans that we expect to close in the next 60 days. One in South Florida; another one in the Tampa area, a phenomenal site in Tampa; and one in Atlanta, actually, adjacent to our home office. So we're very pleased with these additional mezzanine loans. We carefully underwrite them to make sure we exclude risk and that we look to drive the creation of value, which is, what is most important. We also are hoping that we will close another portfolio before the end of the second quarter. And we're seeing very strong opportunities in our pipeline. And these are all in the major markets that we have identified previously and we hope to have some announcements on these potential acquisitions in the coming couple of months. And this actually falls into the next question that we've been asked. Will the company do any other common stock offerings in the future? And I'm going to ask Lenny to talk a little bit about that because we have positioned ourselves wonderfully well to be able to do this through the ability to have a shelf reservation.

[Leonard Silverstein:]

Thanks John. And John is correct, with the completed pipe transaction where we raised $40 million dollars for the company, we are in a position following our Stockholder Meeting on May 9, and I'm assuming the stockholders approved the conversion, thus be eligible to file a shelf registration statement. Our expectations are we will take advantage of that opportunity and that will then put us in a position to be much more efficient in our capital raising efforts as we identify future property acquisitions to raise the capital for those transactions on a much more real-time basis and be more reflective of what are prices in the marketplace. In addition, every time we do that it increases the capitalization of our company, it also increases our liquidity and it should also increase the overall float in our stock and all of these are very beneficial for all of our stockholders. And again, one of the goals that we have as a company is to continue to increase the capitalization of our company to allow us to grow as an organization.

[John Williams:]

Thank you, Lenny. And then we are always asked what we see in terms of leasing trends. Bill Leseman who runs our Management operation is probably one of the most experienced and senior people in the entire property management world and we're delighted to have him to be able to make some comments on what he see is going on in the leasing area currently. Bill.

[William Leseman:]

Thank you, John. We see the leasing transit at our portfolio remaining strong through the first quarter. As you know, in the fourth quarter, all of the properties either hit or exceeded occupancy and that's their income. In the first quarter with the existing portfolio and the three properties that we added, leasing has gone up every month in that quarter, the first quarter, which is typically a slower quarter. We expect that to continue. And, in fact, amplify going into the second quarter.

[John Williams:]

Thank you, Bill. And we've been asked also some of the goals that we've set or some of the goals that I've set for the company. And as you've heard me speak before, I think the primary reason from buying REIT stocks is the dividend. And we would want to continue to aggressively raise our dividend. Since our IPO, we've increased the dividend 16%, annualized 10%. And I like that 10% increase in the dividend. And I hope that in the future our earnings, as so I expect our dividend can be increased in that range. I also think that people are buying our stock, because they think we can accretively add units to our portfolio and we're planning on doing that. We would like to get to a steady state of around 20,000 apartments in the next three-to-four years. And we think that's feasible. We have a great team. We had a great year in 2012. Frankly, we're expecting a great year in 2013. We want to thank all of you for joining us on the call and being part of our company. And now, we'll turn it over to the operator to see if there's any other questions that we can answer.

[Operator:]

(Operator Instructions) And our first question comes from Steve Emerson of Emerson Investment Group.

[Steve Emerson:]

Would you hazard an AFFO range for the year assuming that you're not completing any of the conversions of your mezzanine loan program? And perhaps some of the assumptions that you're looking for, like rent increases, expense increases et cetera.

[John Williams:]

From a revenue increase standpoint, I think our budget is around 4.5% to 5% on the increase in revenues. Usually, as a rule of thumb, you can use an expense increase of about half of the revenue increase, so that would be around 2.5%. We are fighting with the counties and municipalities on taxes and that could cause somewhat of a swing, but we have a very diversified portfolio, lots of different cities, and we think that's important to be able to produce steady predictable results. We only announced AFFO on a quarterly basis going forward. But I wouldn't be surprised if we don't have substantial increases in AFFO and probably another dividend increase in the future. We're working to be able to produce those numbers. And lot of our numbers are predicated to the raise on our preferred and when we actually do another raise on the common, so it's pretty hard for us to predict from a year, but I would say that if you're on this call next year, you're going to be a happy investor.

[Steve Emerson:]

And to further clarify, the net asset value potential from converting your mezzanine loans, the $1.5 to $2 that would be if you converted everything that's in the loan program. And of those 796 units, how many of them possibly should come into the asset value or come into the books this year, how many of them next year?

[John Williams:]

I think that, obviously, Trail II will come into the books this year. There is a good chance that Summit II could come into the books at the end of the year or the first of next year. And then the balance of the units, we think will all come in 2014. And even though the Trail II is going to produce about 20,000 unit in value to the company, internally as Dan said, we'll use the number more like $10,000 to $15,000. But this program is tremendously accretive to the company. It's a great program, because not only do we get good numbers, we get assets that we have signed off in terms of both the location, the quality of the product, the specifications, the quality of the construction. So it's an incredibly good program for the company without taking the risk of development on as most of the REITs do. So we think we have a great system. And as I've mentioned, we will be adding three additional properties, right at 900, we will be closing within the next six weeks. Again great location in Atlanta, great location in Tampa and another great location in South Florida, and we continue to look for quality opportunities that will produce accretive results for us. So thank you, Steve.

[Steve Emerson:]

And the units that are being considered for acquisition, do these mostly come from the units that are currently under management type company?

[John Williams:]

Unfortunately, we run the course on that. So these will be units that will be strictly units that we are looking for in these key cities that we've identified, where we think we have a good opportunity for job growth and for buying assets that we think are under valued where we can bring our special touch to those units and create value and create earnings.

[Operator:]

Our next question comes from Bill Gibson from Legend Merchant.

[Bill Gibson:]

I just wanted to follow-up to make sure I heard you correctly that your goal is 20,000 units in two to three years/

[John Williams:]

I think I said three to four, I hope I did.

[Operator:]

And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

[John Williams:]

Thank you and we had a good group to join us on the call. We appreciate that. Feel free to contact us if you like some additional information. In the meantime, this 2012 was a great year. These are phenomenal numbers, but I wouldn't bet against this that we'll produce great numbers in the future. So thanks again for joining us.

[Operator:]

And ladies and gentleman, we do thank you for attending today's conference call. It has now concluded. You may now disconnect your telephone lines.