Preferred Apartment Communities, Inc.
Q1 2016 Earnings Call Transcript

Published: 4 May 2016

[Operator:]

Good morning and welcome to the Preferred Apartment Communities First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to 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 first quarter 2016 earnings call. We hope that each of you had a chance to review our first quarter 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; Bill Leseman, our Executive Vice President for Property Management; Jeff Sprain, our General Counsel; Randy Forth, our Executive Vice President and Chief Asset Management Officer; John Isakson, our Chief Capital Officer and CEO of Main Street Apartment Homes; Joel Murphy, the President and Chief Executive Officer of New Market Properties; and Paul Cullen, our Chief Marketing Officer. Following the conclusion of our prepared remarks, we'll be pleased to answer any questions you might have. Before we begin, I would 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 website at PACAPTS.com. The press release on our website also includes an attachment containing our supplemental financial data report for the first 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 want to remind everyone that our annual meeting of stockholders is scheduled for this coming Thursday at 9

[John Williams:]

Thanks, Lenny. We had an extraordinary first quarter. The Company operated successfully across all fronts. I would like to complement our management team and associates for their diligence and hard work. As you recall we lay out our Company's 2016 goals during our stockholder earnings call this past March. As a matter of fact within our group of companies we collectively have over 100 goals and are making solid progress on each and every one of them. Our first quarter metrics of normalize our core FFO, adjusted FFO, cash flow, revenue and total assets all reflect outstanding performance as compared to the first quarter of last year. Lenny will give you more details on these numbers in a moment. As we move forward throughout the year we expect adjusted FFO to be a bit lumpy since that metric in particular is reflective from the timing of payment of accrued for outstanding on our whole estate investment loans. As we discussed before, we originate these real estate loans primarily to developers on new class A multi-family communities and student housing where you receive purchase options which allow us to require these communities upon completion and stabilization at a discount so that then fair market value of each of these assets. This program has allowed us to have one of the youngest and highest quality class A multi-family portfolios in the entire country. As you see from our first quarter supplemental financial data report, as of March 31 we had on the books 24 real estate investment loans representing an aggregate approximate value of $312 million in commitments of which $262 million was outstanding and $13.2 million is in accrued interest to date. Accrued interest for example typically is paid and usually prior to the sale of the community whether the sale is to us or to a third-party. The refinancing of that community by the developer or out of excess cash flow during the lease-off the accrued interest is included in our adjusted FFO only at the time it's paid PAC. We expect the continued originate real estate investment loans throughout the year. As we've mentioned before we believe these loans provide PAC with a very nice current return on our investment and in particular provide us a tremendous acquisition pipeline opportunity of new communities that we previously have underwritten and that are designed and built to our specifications. If you recall we're adopting a new technology platform which allow us to have better information and greater efficiency. When we're finished with this escalation before the end of this year, we believe that our technology's pipeline will be second to none of any of the real estate investment trust in the marketplace. Based on our first quarter results and our visibility for the remainder of the year, we believe we will reach out NFFO and dividend goals as previously set out. Like last year, enterprise did not yet reach in appreciably this year as projected. At the end of the first quarter our leverage on assets based on the unappreciated book value was approximately 56% which is comparable to last year. And remember because we believe unappreciated book value measurably reuses the true value of our portfolio our leverage ratio would be substantially lower if it were to measure the instant market value of our assets. We also remain on track throughout the size and profitability of new market properties, our grocery-anchored shopping center division. We still anticipate spending off, selling or distributing these assets into an independent publicly-traded REIT, once we believe these assets have reached sufficient scale and marketing conditions which will allow us to continue to own a piece of this business. Now let me call Lenny to walk you through our numbers. Lenny?

[Lenny Silverstein:]

Thanks, John. Overall we once again produced very good operating results for the first quarter in line with our internal budget and tracking with our guidance. Revenues for the first quarter were almost $42 million or almost 96% greater than the revenues for the first quarter last year. Our normalized FFO for the first quarter 2016 was a little over $7 million compared to approximately $5.2 million for the first quarter of 2015. This represent a normalized FFO of $0.30 per share for the first quarter this year compared to $0.24 per share for the same period last year. On a percentage basis, our NFFO per share increased 25% on a quarter-over-quarter basis. Based on these results, we are narrowing our normalized FFO guidance range for the year to a $1.24 to $1.32 per share. The midpoint of the range continues to represent an approximate 10% in our NFFO per share for 2016 compared to last year, again in line with our previous guidance. Our adjusted FFO for the first quarter 2016 was $8.9 million or $0.38 per share compared to $4.9 million or $0.22 per share for the first quarter 2015. On a percentage basis this represents an almost 73% increase in AFFO per share on our first quarter 2016 over first quarter 2015 basis, which reflects the part the receipt of accrued interest as John described earlier. For the first quarter this year, we've had our stockholders and unit holders a dividend of $19.25 per share or $0.10 per share more than we paid in the first quarter 2015. This represents a growth rate of approximately 11.5% on an annualized basis since June 30, 2011, which was the first quarter in our initial public offering in April 2011. In addition, our first quarter dividend payment represents an NFFO payout ratio of 64.9% and an AFFO payout ratio is only 51%. From an occupancy perspective, our average multi-family occupancy was 94.2% for the first quarter 2016 and our retail portfolio was 94.3% least as of March 31, 2016. We expect the occupancy to continue around these levels for the balance of the year. From a macro perspective, recently released statistics show that home ownership rate in the first quarter 2016 had fallen to approximately 63.5% which is 20 basis points lower than the first quarter of 2015. Green Street Advisors currently projects that the homeownership rate will continue a steady decline to the mid 62% range by 2018. As you may recall just prior to the start of the recent recession in 2007 to 2008 timeframe, homeownership rates peak at almost 70%. It's important to note that a 1% reduction in the homeownership rate creates approximately $1.1 million rental households. As the decline in homeownership continues more people will migrate to rental housing, and while they tend to rent apartments either individually or as roommates in some cases they may rent single family homes. Overall this trend still boasts well for the multi-family sector. Joel will cover the new market metrics in more detail later in the call. Switching to other financial statement metrics, we continue to add quality assets to our portfolio in a meaningful way. For the first quarter, our total assets net of depreciation was slightly over $1.5 billion, representing a 95% in total assets compared to the first quarter of 2015. In addition to increasing total assets, our cash flow from operations this quarter was $13.4 million which represents a 73% increase in cash flow to the first quarter of 2015. A key component of our strategic plan as our investment program. I now want to introduce Dan DuPree to provide some more color on our acquisition activity, our loan investment program and their pipeline. Dan?

[Dan DuPree:]

Yes, thanks, Lenny. We continue to actively pursue both multi-family and grocery-anchored retail acquisitions to our business model. We also make real estate investment loans on selected developments on which we have purchase options. During the year we expect to exercise options to acquire several multi-family communities that we had previously funded through real estate investment loans. During the first quarter we acquired three multi-family communities, one in Tampa, one in Orlando and another one in Atlanta. These represent a total of 1,164 units for an aggregate purchase price of $217 million. Two of the acquisitions resulted from the exercise of purchase options embedded in real estate investment loans for those communities. In addition, we originated one new real estate investment loan, two new bridge loans and a member loan having an aggregate commitment of up to $70 million to partially finance two plan multi-family community projects and two student housing projects. The loans pay current monthly interest ranging from 8.5% to 11% per annum, and although one of the loan accrues deferred interest ranging from 5% to 6% per annum. With respect to each real estate investment loan, we also receive the purchase option to acquire the underlying completed in a stabilized community as a discount to then fair market value of that community at the time of exercise. As of the end of the first quarter we own 22 multi-family communities representing 7,300 units located in 15 cities across eight states. Of course these numbers do not include the activity in new market properties, our grocery-anchored shopping center division. Joel Murphy will outline the new market activity in just a minute. As John mentioned earlier, we had a total of 24 real estate loans outstanding at the end of the quarter. To put this into perspective, this represents a total commitment of $312 million of which $262 million has already been funded. With a total asset value in excess of $100 million; of these 24 loans, 13 represent core class A multi-family communities under development totaling 3,335 units, and six represents student housing communities under development totaling over 4,000 beds. Although we may not exercise all of our purchase options for these communities, we firmly believe that our pipeline provides us with a solid growth opportunity for the future. As you know as part of our business plan, we have invested a portion of our assets in non-multi-family communities such as grocery-anchored shopping centers. We established new market properties as a subsidiary of our preferred apartment communities operating partnership in 2014. The purpose of new market properties is to acquire and operate or invest in the development of grocery-anchored shopping centers that fit out investment criteria in sub-markets within the top 100 MSA generally located in some middle markets. We target market dominant grocery anchors that maintain a number one or number two market share and have high in increasing sales per square foot in that particular sub-market. In addition, new market targets certain selects specialty groceries that have a significant presence in that particular market. Let me now call on Joel Murphy to provide some more color on this effort. Joel?

[Joel Murphy:]

Thanks, Dan. We're very pleased with our first quarter 2016 operation results as well as our active acquisition opportunity pipeline. Our retail portfolio similarly delivered solid operating results for the quarter. Our properties remained well-leased with attractive rent spreads on renewals. On February 29, we acquired Wade Green Village and approximately 75,000 square foot grocery-anchored shopping center located in Atlanta and Midst [ph]. Wade Green Village is currently 93% leased and it's anchored by a highly productive public store which has had a long and successful 23-year operating history in the center. The said position was accomplished through the Class A units of the company's operating partnership. The structure validate the upgrade design of our company and by utilizing these OP units as another form of currency. We achieved favorable tax rate which is a contributor and favorable pricing to us for the benefit of our stockholders. Following the close of the quarter, we placed a very attractive tenure 4% non-recourse loan on this asset from one of our life insurance company lenders. Also subsequent to the quarter and as described in our press release from yesterday, we acquired a six center grocery-anchored portfolio having an aggregate purchase price of $68.7 million. These centers are located in our Sunbelt markets of Georgia, South Carolina and Alabama. Simultaneously with the acquisition, we placed non-recourse tenure first mortgage loans on four of these properties having a fixed rate of 3.97%. As is always the case, none of these lines are cross collateralized or cross defaulted with any of the other properties or loans. We acquired the other two centers with all equity. These are all seasoned properties, five of which are anchored by Publix and one anchored by Walmart Supercenter. All of the Yanker stores enjoy solid sales histories over a long period of time. As of today, we now own 21 grocery-anchored shopping centers in six Sunbelt states totaling approximately 1.9 million square feet. A critical component in retail properties sales at the property level. We have now begun to receive the 2015 annual sales reports from our grocery anchors and we're seeing solid sales growth from our already highly productive sales per square foot grocery-anchors contributes not only to the success of those anchor stores themselves but also to increase foot traffic in the center for the our smaller shop tenants. The primary key to success of any organization is its people, and we continue to build our team. We recently added another seasoned real estate professional, Amy Single [ph] to direct the leasing efforts for our growing portfolio. Dan and I both have a long and positive track record working together with Amy, and we are pleased she has joined the new market team. In addition we have a number of very attractive acquisition opportunities while advancing our pipeline, and we continue to seek investment loan opportunities to set our criteria in our Sunbelt market. Now let me call on John Isakson to update everyone on our Main Street Apartment Homes initiative that we started last year. John?

[John Isakson:]

Thanks, Joel. As we discussed on our last call PAC kicked off its Main Street Initiative in the fourth quarter of 2015. Main Street focuses on longer term finance assets primarily from HUD programs with maturities of up to 40 years and assets that can benefit from a value added program. Our first two acquisitions have been assimilated into the portfolio, one of which was our first value added property, The Villages at Baldwin Park in Orlando. This is a 528-unit property built in 2008 that we will be spending approximately $10,500 per unit on to upgrade unit interiors, common areas and amenities. We already placed 30 units into the renovation program and leasing of those renovated units is meeting or exceeding our pro forma expectations. We're excited about the success of our efforts of The Villages at Baldwin Park and are currently under contract to acquire another similar asset for our Main Street Program. The pipeline for our value added program is strong and we are seeing multiple and creative opportunities in the market for this. I want to emphasize that these assets are no different from our core portfolio in terms of quality location and amenities. The value add simply brings them up to the current market standards in terms of unit finishes amenity upgrades and provides us an opportunity to compete with products of more competitive wrap ups. Although Preferred Apartment Communities does not directly develop multi-family communities, our management team's long successful history prior to forming Preferred Apartment Communities makes us uniquely qualified to take advantage of value added programs like Villages at Baldwin Park. Once our renovation programs have been proven out, we will submit an application to HUD for permanent financing. This can get lengthy process and the approvals require a substantial level of documentation underwriting. By applying for the HUD loans early in the renovation process we can pursue the longer term financing and work on the renovation on parallel tracks. It will also be possible to close on the permanent financing before the completion of the renovation itself. So we're excited about the opportunity to utilize HUD's longer term financing more quickly so as to eliminate as much interest rate risk as possible in the program. Between the market opportunities available today and the attractive longer term debt via significant portions of the company's growth in 2016. Let me now turn the call back to John Williams. John?

[John Williams:]

Thank you, John. As I mentioned before we continue to finance the loans for each of our multi-family and retail shopping centers separately on the non-recourse spaces with no upstream guarantees of preferred apartment communities or our operating partnership and with no cross collateralization of any of these mortgages. Our core class A multi-family portfolio continues to remain among one of the youngest and most modern in the industry. Assuming we exercise purchase options on all or almost of our investments for these type assets. We expect that our already young portfolio will become even younger. As reflected on our most recent annual report stockholders, we just celebrated our fifth anniversary of operations. We've been able to finance our growth from a variety of sources including capital available to us from our sales of our series of redeemable preferred stock and warrants, common stock through our ATM program, borrowings under our loan facilities with key buy and proceeds from first mortgage loans placed on each of our acquired properties. By employing these sources of capital, we are confident that we've been able to save our common stock holders from significant dilution. As I mentioned earlier we're very pleased about our financial results for the first quarter, simply outstanding. Our growth opportunities for the year and the strength of our management team, I believe will set the stage for hitting our numbers for the rest of the year. Presumably the fundamentals in real estate for the foreseeable future will be strong and will continue on a positive note, although we do see a tightening of the credit market for new filament do at least its part to recent bank regulatory changes emanating from congress including pre-reforms. I am confident that his will dampen new construction and permitting, in fact you already see those results. Please remember the strength by our company; we believe we have a unique fortress like balance sheet. We have the newest and most diversified portfolio in the industry, and we our associates and management teams are simply the best. Before I turn the call over to the operator there are several questions we've been asked in an anticipation of today's call. Here is the first question. It looks like 2015 was a great year for apartments; will you talk about your outlook for 2016? And I want to ask John Isakson to respond. John?

[John Isakson:]

Thanks, John. 2015 was a great year, and while we feel good about the economy and the general direction of the market, it is probably the case that the overall growth in rental rates will be positive in 2016. We are seeing some markets start as supplies used primarily in gateway cities in the Western U.S. Fortunately, we are only currently invested in one market with supplies, Houston. We believe the Houston market and the properties we own at Houston are solid long term investment despite the current supply issues. Nationally, permitting and new starts are not a broad concern for us. Current projections estimate that multi-family starts will drop this year to under 350,000 units. The long term average for multi-family starts is approximately 359,000 units annually. Permitting will probably slow this year as banking regulations and investor caution works to curtail the flow of new deals. This will be especially true in markets where there is a perception of owner supply with looming market weakness. Occupancy for our portfolio should be stable within a range for the year, our value added programs should not significantly impact the occupancy of those assets, and our core portfolios well positioned and should enjoy solid results. We have begun implementing revenue management software of our assets which should help us maximize rental rate growth and the occupancy as it gets fully implemented. I think short term interest rates will rise modestly this year. The most recent comments from the open market committee indicate that a review of a rate hike is on the table for June, but the recent economic news does not fully support this hike. Our current thinking is that longer term rates may rise modestly but certainly not dramatically. John?

[John Williams:]

Thanks, John. Next question is how results of your Houston property is holding up? And let me call on Randy to answer that question. Randy?

[Randy Forth:]

Sure, John. We currently own seven multi-family communities in Texas, of which four are located in Houston MSA. We believe we acquired these excellent assets at a great value and underwrote them with Houston MSA. Overall we're not seeing a significant adverse effect of the financial results of these assets. However, our Houston results may be impacted more than the results of properties located elsewhere. One of the design strategies we've implemented from the asset is to diversify our multi-family asset across markets, not just by end markets but also by states. And at the end of the first quarter, we owned 22 communities across eight states. We'll continue to diversify where we acquire multi-family communities in an effort to mitigate essential softness in anywhere of the markets.

[John Williams:]

Thanks, Randy. Will you please shed some light on your same store results for the quarter in light of the rose of a few multi-family communities that comprise the same store numbers? I'll take this question on. Actually this is a good question and some of it when we receive on our last quarterly call. As you know we are still a very young company having started operations in April of 2011, just five years ago. In order to have a valid comp, we need to own the assets for 15 months on a static basis. That is for example after we completed any material CapEx that we budgeted for at the time of acquisition and after we've seen stabilization if we acquired an asset prior to that threshold. Also if we've identified a community to sell and enter it into a listing agreement for sale of that asset, it will fall out of the mix. This is the case with our community call for Trail Creek located in Hampton, Virginia area. So as we continue to grow as a company and acquire more communities, we believe we'll have a better comp set against which to measure same store numbers and to try determine front wise. Today I believe our same store numbers are all equally important because it's based on such a small sub-center communities. Next. Please provide an update on the particular spinoff of your grocery-anchored shopping center. Dan, do you want to take that question?

[Dan DuPree:]

Yes, John. Our strategy to grow this segment of our company continues on track. At quarter end, we had unappreciated growth value of approximately $245 million of grocery-anchored shopping center assets, and we've assembled a truly remarkable and experienced team for this effort. We continue to believe this is a great asset class that will be accruedable overtime for our stockholders. Overall it comprises a relatively small portion of our assets, roughly 15%. We are still seeking a spinoff sale or distribute this assets and to an independent publicly traded REIT once we believed these assets have reached efficient scale and market conditions warrant while continuing to own an investment in those company.

[John Williams:]

Thanks, Dan. How have the new bank regulatory reforms like Basel III impacted the new construction market? John, do you want to take that on again?

[John Isakson:]

Sure, John. Thank you. We're definitely seeing a reduction to developers for new construction, primarily because of Basel III and the HVCRE rule the Basel III has created. It requires more reserves to be held by the bank which makes the loans less profitable, and it's going to require more equity from developers and results, and lower overall leverage on new developments making those developments harder to pencil out. We're already seeing a reduction in the leverage levels allowed by banks and I think that's going to continue. And permitting and new starts this year will fall off especially going towards the end of the year.

[John Williams:]

And one last question. In the past few years maybe adjustment in the dividend, are we going to expect a dividend increase by midterm this year? I'll take that on because I love the increase in dividends. We will go to our board on Thursday and have a full discussion on where we are with our dividend. But given our outstanding results and our current AFFO numbers I think that management will request a dividend increase and confident the board will grant us that ability. So lookout for Thursday afternoon, see if we issue a press release indicating an increase in the dividend. And with that I like to thank you for joining our earnings call and I'd like to turn this back over to the operator to open the floor for additional questions and follows you might have. Operator?

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Ryan Meliker at Canaccord Genuity.

[Ryan Meliker:]

Hey, good morning guys. I had a couple of questions for you. First of all, it looks like you guys had a tremendous amount of success again this quarter raising preferred, you guys have obviously been extremely busy in the acquisition market. Hopefully you guys get some rest sometime soon. And I just wanted to know when you think about your capital stack. You've talked about being comfortable for your leverages from a debt standpoint. As we look at things going forward, what percentage of your capital stack do you think should be common equity? Right now you're somewhere between the 15% to 20% range. Is that where you guys are comfortable or are you looking to maybe tick that up a little bit?

[John Williams:]

I think that's the way. I'll take that question. I think that's the range we're very comfortable with and you'll see us very shortly, and I'll say new shelf from which a portion of that will be an ATM, and we'll be prepared to issue common when the efforts are if it's needed. Our main issue frankly for issuing common is the damn price of the common. We think our common stock is woefully undervalued and we're very reluctant to issue common when we think it's so undervalued and so diluted. We think our preferred stock offering given the way its set up and what we have to pay for it makes it very competitive. But we also realize your thought process were all due to common stocks. So I would guess sometime during the year we will get the stock to cooperate, we will issue some common stock. But we talk about that question all the time and we're very aware of it.

[Ryan Meliker:]

Okay, that's helpful, John, and we agree these prices are starting to want to issue common over the preferred that you guys are able to issue. The second thing I wanted to ask you guys about was you guys have done a great job adding some disclosures. Thank you for that, particularly at the property level detail. John, as you mentioned your same store numbers are not very helpful because it's such a small component of your overall asset base, we fully understand that. You had mentioned in your prepared remarks, your class A property rents, is that the type of rent double that we should be expecting for some of your recently acquired assets? And then can we assume that the assets that are non-comp or somewhere in that same 94.2% occupancy that you identified for the rest of your portfolio?

[John Williams:]

The simple fact is that the properties that we're acquiring generally are even off, in some cases A+ categories, and I think that continues to push our average rent up somewhat. We are looking at a way to give more detail in our presentation, and I think over the course of the year you will see us roll out more initiatives in that area as we add more properties in those numbers becoming relevant. But Dan wants to make a comment. Dan?

[Dan DuPree:]

Yes, Ryan, I just wanted to add that we're going to move towards some form of segment accounting separating out Main Street from the core class A. The typical Main Street deal would be circa 2007 to 2010 or '11. And the fact that it needs or we think it needs some upgrades, it may be reflecting lower rents initially and then moving up again very consistently with our class A core. The Baldwin Park deal is absolutely a class A product. It was built about seven or eight years ago and a lot of competition is coming on top of it, and we're going to be able to increase rent, $200 to $250 a month on a $10,500 investment. So at stabilization its rents will be very consistent with our core class A, but during the process it will be somewhat less.

[John Williams:]

And to give you some more insight baseline I would think that over the course of the next year we have some outstanding assets that are a little bit over, but they're extremely well-located in wonderful assets, and we will evaluate each one of those on a case by case basis but I would suspect you will see us take and move some existing properties in the Main Street or we'll do a value added program. We think this is a good way of continuing to upgrade our portfolio which we always want to do. My goal is on January 1 of each year we'll look at our assets and in every case make sure they're better than they were the year before. That's our philosophy of managing and I think you'll see results if you go look at our portfolio. Did we answer that for you, Ryan?

[Ryan Meliker:]

Yes, I think you did a good job. It sounds like we should expect some stronger same store revenue growth from some of these newly acquired assets as they ramp up to the stabilized level. That's a good summary.

[John Williams:]

That would be a great bet.

[Ryan Meliker:]

Okay, that sounds good. And then last quick thing for you. I'm curious how you guys are thinking about this. So in the quarter you came up with normalized FFO of $0.30, your AFFO is obviously very strong at 38 driven by the deferred interest income that you, or accrued interest income that you were able to recognize in the quarter with some of the transactions that you executed. Going forward, $0.30 as we run rate it we'd get to $1.20 which obviously will be a little bit below your guidance level. What's driving the FFO growth over the next three quarters? Is it simply the external growth from the acquisitions that you're doing or we're going to continue to see more and more acquisitions and each quarter's going to tick up in terms of FFO per share similar to what we saw last year or is there something else going on? And then in terms of the accruals, should we expect any more of those accruals materialize in terms of cash flow throughout the rest of this year.

[John Williams:]

In actuality there is some seasonality to our performance. If you go back and look over the last few years, generally you would see our weakest quarter to be our first quarter and then we would add to the remainder of the year so that our fourth quarter is usually our better quarter. I think that would be what I would look for out there, and it wouldn't take a math genius to take $0.30 and if we say we're going to do $1.28 or $1.29 be able to figure out that we should have some increasing result over the next three quarters. We feel very comfortable with where we think our results are going to be and we think $0.30 is a good number and we think $1.28 will be a good number.

[Ryan Meliker:]

That's helpful. And then with regards to the accruals, should we expect any more of those to be realized in 2016?

[John Williams:]

Absolutely, as I mentioned we have over $13 million of accrued interest already in the books. Now we have not taken that into AFFO, but as Dan mentioned we think that it will be at least two or three assets that will, we call that harvesting the value, and we think we'll be harvesting the value of at least two or three assets during the remainder of the year. Dan, you want to make a comment?

[Dan DuPree:]

I just wanted to clarify that our AFFO number, and one of the reasons why we focus so much of NFFO is because the AFFO number can be very lumpy. It's really impacted by when we harvest the value in these assets. So the run rate on those is going to be much less predictable.

[Ryan Meliker:]

Yes, that's fully understood, and we certainly love to see the harvesting of that value and obviously brings a lot of cash flow into the company. All right, that's all for me. Thanks a lot guys.

[Operator:]

The next question is from Craig Kucera at Wunderlich.

[Craig Kucera:]

Hi, good morning guys. I wanted to ask you about your real estate taxes this quarter. A pretty decent increase and I wasn't sure if that was just the function of rising appraisals or either any one time adjustments in there that we should consider?

[John Williams:]

Well, Craig, I think that we reacted to what happened to us last year. Last year we found that we under accrued and as tax bills came in we have to make adjustments. Based on that you can bet you're beefy that we have correctly accrued this time around and we won't get any negative surprises. So that way we get a positive surprise. But the main thing for us is we just don't want anything negatively impact us over the course of the remainder of the year.

[Craig Kucera:]

Got it, okay. I'm wondering your guidance again. Just kind of revisiting it. I know you said there were going to be several loans that were likely to convert this year but could you, do you have a stencil or kind of a very big picture of what the total dollar amount of acquisitions might be for the rest of this year?

[John Williams:]

Well, we always hesitate to give that number out because it really depends on the ability to find assets that fit our criteria to give us an opportunity to make an accretive transaction. We're not going to do a transaction that we don't think provides an accretion to our stockholders. And in our calendar, buying class A apartments today, I don't know where you have on your overall apartment portfolio the cap rates, but the cap rates could be subsidized based on where the market is going today. So for our sake, we're working, we have to look at a hundred transactions. We make offers maybe on ten and we might buy one. If we find the opportunity we would think that we could grow at least $1 billion this year which would be another doubling of our assets. If you go back and look at our trend line that's about where we've been running, obviously our bait is getting better and so the doubling well stack up after this year. But we're very optimistic about our value added opportunities. We intend to get better yields off of those than in class A, but we're still actually pursuing class A. And then the most important part of our pipeline is our own pipeline through our loan investment program and we have 24 properties lined up. I would think before the end of the year there could be as many as six or seven additional loan investments and we expect that for the portfolio to grow considerably. Dan, you want to add anything to that?

[Dan Dupree:]

No, I think that covered it except the same that right this minute we get better yield out of the value add student housing and the retails than the class A. The class A is more strategic but we're keenly aware of the importance of accretive transactions, not just growing for the sake of growing. But still we're on our way to a very robust year.

[John Williams:]

And remember that we have been quite willing from the advisor [ph] for us to be able to defer fees to insure that we're able to keep our promise to our stockholders that we're going to do accretive transactions and we've done a great deal of deferring and we have a fair amount budgeted for this year. So you'll see us buy some additional class A apartments but at the same time you'll see fee backup…

[Craig Kucera:]

Got it. I got one more and actually your commentary kind of tied to my next question, because it does seem like you're pivoting a bit more to student housing recently. Can you, if you're saying that class A is sort of making inside to five, are you saying student housing may be close to the mid-fives and some of the retail and value added closer to a six? How are you seeing the spectrum of difference if that was today?

[John Williams:]

We'll get Dan's opinion on that. But student housing probably gives us 50 to 75 basis points additional yield. We like student housing because it is residential. The construction is something we're very familiar with, and through our studies we believe the student housing is somewhat recession-proof. Because as you have tough times economically, people tend to go to school more and save through longer. So we like student housing and we think we're getting wonderful results from our seasonality. I was just in Texas last week and visited our properties at Texas A&M, and these are outstanding A++ assets doing extremely well from a rental standpoint and we're quite excited to bring this into our portfolio. It's just part of what we're trying to do, to have a diversified portfolio of real estate assets that we feel comfortable managing and will create value, not only near term but over the long term. Dan?

[Dan DuPree:]

I think you covered, John.

[John Williams:]

They say I'm talking too long. Next?

[Craig Kucera:]

That's it for me. Thank you.

[Operator:]

The next question is from John Benda from National Securities Corp.

[John Benda:]

Hey, good morning everybody. How are you doing today? So just quickly on the value add program, you guys have a total portfolio where you feel that might fall?

[John Williams:]

John, I mean it's hard to say. I mean it's certainly the case that, as we talked about these are accretive transactions and the pipeline is certainly robust, but in terms of where that's going to fall as the percentage portfolio this year, that's hard to say.

[John Williams:]

And as we mentioned, the most important thing is beginning this next quarter we will be segmenting Main Street, so we will pull it out and we will be reporting this information separately and reporting in a way that it should give our stockholders and analysts a good feeling for what we're doing from this Main Street initiative.

[John Benda:]

Okay, is it a test profile for the value add? Will that be more of a kind of a onetime upfront and then then it will kind of normalize the rest of the properties?

[John Williams:]

That's correct. But, John, do you want to answer that?

[John Isakson:]

No, you're exactly right, John, we implement the value add on the front end. We turn it in, it takes a couple of years to get all the units to the program and then you have to stabilize this just as the core property does.

[John Benda:]

Okay, and then on the retail portfolio, I know that you guys mentioned that you take the performance of actually the operators in the centers. And consider about how e-commerce is kind of bug threat to some retail operators with the grocery operators -- some of the you’re your broker was that you're seeing that that help them drive these investment [ph]?

[John Williams:]

Yes, we're seeing great year-over-year numbers. But, Joel, do you want to just give the facts as you've seen them come in?

[Joel Murphy:]

Yes, John. Hey, thanks for that question. I guess it's a variety of things. One, the whole idea of the investment in this by PAC is now just make sure we're investing in solid assets regardless of product type. Within the retail, we're very focused on this thing in grocery-anchored, and for one of the big reasons is our belief is that it is certainly internet-resistant to electronic commerce. Our primary is almost not exclusive, but it certainly well into the primary stage of tenants. Our grocery stores, service users, medical, restaurants and fitness users, which obviously those are people that need to survive and do well in bricks and sticks. As far as the grocery-anchors today internet commerce in the grocery space is about 3%. People think they might grow to 7% or 8% over the next ten years. Our view, my view is that the winners in that are going to be the grocery-anchors because they've already got the distribution network. Do you want to talk about sales? I think you mentioned what part of sales do…

[John Williams:]

We don't have everybody in, but...

[John Benda:]

Just a generalization update of what you're seeing that's kind of help you drive that.

[John Williams:]

Over 3.5%.

[John Benda:]

Oh, wow, great. Okay, and then my question is, I just want some of your comments around the class, I think it's definitely true. When you underwrite assets, do you build in any kind of rent growth?

[John Williams:]

Yes, we're sort of nervous about that because I think -- if I go back to some of my previous rodeos and seen value erosions it's because it's been too much rent growth built into projections. But we're seeing very solid 3%, 4%, 5% rent growth across our marketplaces and given what we think is going to happen to permitting and new construction and what we see happening with millenials and their rent, we feel very good that rent growth for the foreseeable future, that's midterm, I guess the next five years should be at 3% to 5% range.

[John Benda:]

Yes, definitely I agree with you guys. And then just lastly on these loan origination platforms. Is there, I mean do you guys have a kind of ability to control what you're getting at this point to count on a purchase, how do you balance all that out? I mean is it better to take today or make a larger discount into the back end?

[John Williams:]

It's a damn good question, but not…

[John Isakson:]

Thanks, John. John, I'd love to tell you that it's all science but there's a good bit of art too. One, you got to take a look at the individual deal, it is a new launch that in our NFFO we don't recognize directly the value of the discount. So there would be a motivation to take more of the value of the loan in either the current rent or the accrued interest, both of which are recognized in NFFO. But the reality is because we're determined that when we invest in the acquisition of a project, it's going to be accretive, that we have to be clear that we're getting a discount on the purchase option on the back. But we've done a number of these deals at this point and I swear I can't tell you that any of them are exactly the same. But I think, John, we think this is a wonderful way to create a pipeline for the company that goes again. These assets, we've reviewed the locations, we have been involved in the planning, the pro forma and the specifications, and so would know when we harvest the value on these assets. What we're getting in our calendar is probably an asset that's at least 50% better than some asset we choose [ph] to be able to harvest these investments because at the end of the day we will have a better asset, we'll have to spend less money on it and we're quite confident of it having basically sustainable value.

[John Benda:]

All right, great. Thank you very much.

[Operator:]

The next question is from Patrick Kealey of FBR.

[Unidentified Analyst:]

Hey, guys, this is Matt [ph] on for Pat. Looking at acquisitions, have you seen any changes in valuations in your targeted markets and are there any specific markets that you've increasingly appealing over the last few months?

[John Williams:]

Well, I would just say that on the class A there is a lot of competition for the existing product. We've seen cap rate compress, prices go up. So you have to be selective. The bigger, more stable the community. The more compression that takes place in the prices. I think that's pretty much across the board. There was just a deal in Birmingham, Alabama that we liked a lot, but the pricing went probably 40 bits from a cap rate standpoint below where we thought the market ought to be long term. So again we just have to mindful of accretion and careful in our selections.

[John Williams:]

The good news is that if we apply those principles to our existing portfolio, it is so far undervalued by most of the stockholders and analysts and people, it's sort of scary. The numbers that people have on the value of our portfolio, they're so far off it's not to be relevant.

[Unidentified Analyst:]

Okay, thank you. That's helpful.

[John Williams:]

Thanks.

[Operator:]

The next question is from Jim [ph] with DA Davidson.

[Unidentified Analyst:]

Good morning everyone.

[John Williams:]

Hey, Jim.

[Unidentified Analyst:]

Just a couple of questions. So first for the six asset portfolio purchase yesterday. Just wondering if you can be a little more granular with the value add occupancy or if hindsight can be developed or just runs into a significantly below market? Can you just give us a little more color on the value add?

[Joel Murphy:]

Yes, this is Joel Murphy. On that one, that's not a value add acquisition in the retail. I mean those are solid assets, they are well-leased with solid anchors in place, and we'll operate that in our portfolio like we would anywhere, leasing up any remaining vacant space and then working on rents per as leases roll.

[Unidentified Analyst:]

Okay, and I think you were looking at mid-2017 to spin off the retail component. Does this portfolio acquisition change the timing of that at all?

[John Williams:]

No, not really. I don't think we'd be in a position to consider the spin off until we get the full pay up to at least $500 million asset size. But we continue to evaluate it and we would hope that the first half of next year, but that's well it really depends on when we get there in terms of the company being self-sufficient and being able to, yes exactly.

[Unidentified Analyst:]

Great, thanks guys.

[John Williams:]

Thank you, Jim

[Operator:]

The next question is from Steve Shaw [ph].

[Unidentified Analyst:]

Hey, guys. Just wanted to get back to the diversity of the portfolio. John, I know in the recent past you've talked about potential opportunity in the healthcare space. What are your current thoughts there and maybe a potential timeline on things there?

[John Williams:]

Well we are continuing to evaluate, basically senior housing which would be a step towards a healthcare opportunity. And if I had to guess, I would think before the end of the year we might be able to announce something. Before target any initiative that would be different than what we already do and need a lot of work that goes into it, a long thought process, we need to know that we can put together a management team in this product that we feel comfortable with. So my guess is the first start towards anything to do in the medical area would be with senior housing, probably active senior housing because again we consider that multi-family. But we continue to study that story and if we think we can add value for our stockholders we'll surely pursue it.

[Unidentified Analyst:]

Thanks, John.

[Operator:]

The next question is from Robert Ginsberg at Investors Capital.

[Robert Ginsberg:]

Good morning, guys. A quick question about the discount that you're purchasing these assets at. Do you have an idea of the percentage, number one, of what is as oppose to market value that you're able to buy these properties at? Number two, do you have a recent acquisition that you passed on and what was your offer to buy it at a discount and what was it sold for? Do you have any of that information available?

[John Williams:]

I'm going to call on Dan to answer that. But as Dan mentioned before, the key for us is we feel like and we want to have a discount in the acquisition price because what we're doing is accretive to our shareholders. But, Dan, do you want to comment on that?

[Dan DuPree:]

Yes, again, the range of the discount varies from deal to deal. I mean, basically what the deal can stand from an economic standpoint, but they range from 20 to 50 dips, the discount. We've gotten 50, we've accepted 20, it just depends on the deal. And we have in terms of whether or not we're exercising every option, we have decided on one particular asset that the market in which that asset sits is not consistent with what we want long term.

[John Williams:]

So we will pass on an asset if we still like, if that will provide the long term and how far. But if you take across those 24 assets and you apply 40 dip, 30 dip discount, we're talking about millions and millions of dollars. The value that this program is providing to the PAC shareholders and this is an asset that's not on our books yet. It's not reflected anywhere in our financial segments but we all know that it's sitting there waiting to be harvested at some point in time. So it's a great hidden asset for our stockholders and probably it's not reflected in any of our stock price or any of our performance matrix.

[Robert Ginsberg:]

Can I follow up with one question? Can you identify a piece of property that you actually passed on, number one? And it seems like from breaking ground to doors open, it's going to between three years for a project. Is that correct, am I assuming that correctly, number one? And number two, if you have passed on one, what was it, was it change in the region, speaking about apartment rental units or was it economic changes? What caused you guys to say this is not really our cup of tea any longer when you first identified it, it was one that you thought might become part of the portfolio?

[John Williams:]

Let me make a comment on that. For us the way the properties work on the loan program, there is a closing, there is construction and that construction period can be anywhere from 14 months to 18 months, and then there is a period of stabilization as the property's leased up. So -- would be that it would be probably available to us to purchase anywhere from 24 months to 36 months. In the past we have accelerated taking down the property because we want to take advantage of these long term interest rates that we felt like were -- we're not quite as concerned about that as we were a few years ago, because our long term belief is that even though interest rates are going to go up it's going to be in a moderate level, so we're not really as excited to turn in on an asset that we're getting a yield of 14% to 15% total yield that we might get as 8% to 9%. So from that it wouldn't favor us taking an asset down early unless we thought there was a reason. If you call back next month, next call and answer that question, I'll tell you which asset we turned down. But since that asset is being on the market and under contract and being sold to a third party, I don't think I want to decide for that third party why we didn't buy it and why we didn't like it. But I will remember your question in our next call and that asset will have been sold, it will give you full details, but the reason is we just didn't like the asset and we didn't think it had the growth prospects and thought where we want to invest our money is. Probably it's simple. Dan, do you want to answer that?

[Dan DuPree:]

That was so eloquent.

[Robert Ginsberg:]

Well, I want to thank you guys very much, and again congratulations. This is an investment that has really impressed me and it's kind of struck in how you guys have you put it together, so really, really loving it. So thank you very much.

[John Williams:]

Thank you. We don't get a lot of compliments, we appreciate all that we can get.

[Robert Ginsberg:]

Thank you.

[John Williams:]

The next question is from John Benda at National Securities Corp.

[John Williams:]

John, you again?

[John Benda:]

Yes, just a follow-up, something that -- Mr. Williams, just quickly, you mentioned not actually in comment right now and what the common is trading at. So I mean how do you guys close the valuation gap? I'm happy that you mentioned that, and it seems to some because it seemed like the two are old parts. What do you guys think about -- how you approach closing that?

[John Williams:]

We think the number, everybody around here calculates it different, and a lot of variation of what cap rate we'd use. But if our NAV is more than $15, I'd probably jump off our office building. So if we feel like that we're quite sensationally undervalue, recognizing that these are class A apartments then we'd try to go out and buy the five cap rate and I guess most people use six on valuating our assets. That would make a lot of sense to us. And the fact that we have millions of dollars of unrealized profit in our loan to own program, probably means that we're substantially undervalued. But we've been that way for the last two or three years, we just learned to live with it. At some point happy, but we recognize the companies that continues to provide 10% earnings growth and 10% dividend growth probably is a pretty good deal.

[John Benda:]

Thanks for the color. Thank you very much.

[John Williams:]

Thank you.

[John Isakson:]

Thanks, John.

[Operator:]

This concludes our question-and-answer session. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

[John Williams:]

Thank you, everybody.