Preferred Apartment Communities, Inc.
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Good day and welcome to the Preferred Apartment Communities Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Leonard Silverstein, President and Chief Operating Officer. Please go ahead, sir.

[Leonard Silverstein:]

Thank you for joining us this morning and welcome to Preferred Apartment Communities fourth quarter 2015 earnings call. We hope that each of you have had a chance to review our fourth 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; John Isakson, our Chief Capital Officer; Joel Murphy, the President and Chief Executive Officer of New Market Properties and others from our executive management team. Following the conclusion of our prepared remarks, we’ll be pleased to answer any questions you may 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 also includes our supplemental financial data report for the fourth 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. I now would like to turn the call over to John Williams. John?

[John Williams:]

Thank you, Lenny. On a macro level, 2016 represented another very strong year of growth and performance for us and our team. We continue to benefit from a strengthening economy, strong gains in employment, and strong demographic growth in our targeted markets. In large sense, the measure of the company’s success is not simply reflected by financial performance of just one year or one quarter, but the company’s performance over time. Along these lines, if you had invested $1,000 on our IPO in April 2011 and automatically reinvested all of the dividends received on your common stock, your average annualized return on investment with us would have been 20.25% as of December 31, 2016. In a moment, I’ll turn the call over to Lenny Silverstein who will review our numbers with you. Our entire team was committed and focused on reaching or exceeding our goals for 2016, which we did and remains committed and focused on hitting our goals for 2017 which we will do. Our performance numbers that Lenny and Dan will go over with you are among the very best of all the public REITs and certainly the most – REITs. We remain committed to creating the most unique and positive corporate culture and branding in our industry within areas such that have immense pride in fact to be committed to our company, and above all, to never lose focus on what is important; our product, our associates and our customers or PAC. For example, at our annual Awards Banquet held this past December, that was attended by nearly 600 persons who had flew into Atlanta, we honored 78 associates by recognizing superior, individual and property level performance that was achieved on a consistent basis throughout the year. Since we commenced our Awards Banquet in 2014, we have now recognized almost 200 award winners. Our leadership training program called Soaring to Leadership continues to have - management level associates. We’ve already demonstrated proven leadership skills. Soaring to Leadership is designed to enable these leaders to hone their skills, to better develop personal and professional goals to which they will be held accountable and which are aligned with our company’s objectives. Upon completion of the annual leadership training program, we expect that participants will disseminate these ideals throughout all levels of our company. To-date, 32 associates have graduated in this program. Now let me call on Lenny to walk you through our numbers.

[Leonard Silverstein:]

Yeah thanks, John. Overall, we again produced excellent operating results for the year. Compared to 2015, our 2016 FFO increased 21.6%, our core FFO increased 12.9% and our adjusted FFO increased 10.3%. Switching to various financial statement metrics, our total assets as of the end of 2016 net of depreciation were $2.4 billion, an increase of $1.1 billion or almost 87% compared to the end of 2015. Our revenues for 2016 increased 83% to $200.1 million compared to 2015. Following from revenues, our cash flow from operations increased 75% to $61.7 million on a year-over-year basis. For the fourth quarter 2016, we paid a dividend to our holders of record of common stock in Class A partnership units of $0.22 per share or unit. On a year-over-year basis, our aggregate dividends paid to our common stockholders and unit-holders represent a 12.4% growth rate compared to 2015 which exceeded our annual goal of 10% and also represents a core FFO payout ratio of only 63.6% which is far below our 2016 goal of 75%. In addition, our common stock dividend growth rate on an annualized basis since our IPO is 13.9%. Again, we’re very pleased with the steady consistency with which we have been able to increase value for all of our common stockholders. Going forward, we’re again seeking to increase our aggregate dividends paid to our common stockholders and unit-holders for 2017 compared to 2016 by at least 10% and estimating that our core FFO for ‘17 will be from $1.40 to $1.48 per share with a midpoint of $1.44 per share. We’re also projecting total revenues for ‘17 to be in the range of $285 million to $315 million. We’re hopeful of narrowing these ranges as the year progresses. At the end of the day, our overwriting goal, and we really can’t emphasize this too much, is to drive core FFO per share and total return for our stockholders. And 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 business model remains the same. We will continue to focus on our core business which involved acquiring and managing best in class, Class A multifamily and student housing communities. In pursuit of this strategy, we will continue to make real-estate investment loans that ultimately provide us the opportunity to buy Class A assets off market and at a discount. During the year, we expect exercised license to acquire number of multifamily communities that we previously have funded through our real-estate investment loan program. Although we provide a guidance for the year, I want to clarify that 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, at the end of the day, we’re focused on our whole year guidance that we released at the Street last night and mentioned earlier today at our call. During 2016, we acquired six multifamily communities. As of the end of the year, we owned and managed 24 multifamily communities representing 8,049 units in 16 cities across eight states. We also acquired student housing community during 2016 representing 219 units or 679 beds and we expect to acquire additional student housing communities very soon. We originated 12 real-estate loan investments last year representing an aggregate commitment of $162.1 million. Under this program, we now have outstanding 31 real-estate loan investments, aggregating $411.1 million in commitments as of the end of 2016. Our loan investment program has created tremendous pipelines of new multifamily communities totaling over $1 billion in estimated market value. As you know, as part of our business plan, we also invest in non-multifamily communities such as grocery-anchored shopping centers through our new market platform. In just a moment, I’ll ask Joel Murphy to discuss these activities. In late 2016, as a secondary more loaded strategy, we acquired three office buildings for an aggregate purchase price of $277.5 million, representing a total of 1.1 million of gross leasable area. Two of these buildings one in Atlanta and one in the Mountain Brook high end sub-market of Birmingham are iconic to their markets, exceptionally well-leased 10 years plus average lease term remain to credit tenants. IHG, State Farm, Pricewaterhouse, Merrill Lynch, Kinder Morgan and other credit tenants occupied nearly 90% of the space in those two buildings. The third property at Atlanta has already been rezoned for multi-use. This was a strategy when we acquired it. This rezoning will allow us the opportunity to reposition this asset into a multi-use property, key part of which will be a large multifamily community. I’ll now turn the call over to Joel Murphy.

[Joel Murphy:]

Hey, thanks, Dan. 2016 marked a transformative year for New Market. We continue to focus on our strategy of acquiring and operating or investing in the development of grocery-anchored shopping centers located within the top 100 MSAs generally across the Mid-Atlantic, southeast and all through Texas. We target high volume grocery-anchors that maintain a significant maintain share in their particular market as well as certain specialty grocers like Sprouts, Whole Foods, Fresh Market and Trader Joe’s that have high volume stores in a particular market and they also have great real-estate location. During 2016, we grew our portfolio by 17 centers and approximately 2 million square feet with an aggregate purchase price of approximately $350 million. We now own 31 grocery-anchored centers totaling approximately 3.3 million square feet across seven Sunbelt states and having aggregate purchase price of approximately $550 million. 17 of these centers are anchored by Publix and five are anchored by Kroger. We’re also pleased to have added high volume HEB, Harris Teeter and Sprouts stores to our roster of market leading grocery anchors and that also gave us two additional new markets that we liked very much, San Antonio, Texas and Raleigh, North Carolina. We are intensely focused in addition to all these acquisitions the growth of the portfolio, we’re intensely focused on the operating results of our portfolio. We’re particularly pleased with the momentum for our lease renewals and corresponding rent spread not only for 2016, but also those that are already completed for our 2017 rollover. We’re highly focused on tenant retention and driving value to favorable lease renewals. In addition, we’re focused daily on maintaining each of our shopping centers in a first-class manner through proactive maintenance and strategic capital investments all of which would enhance long-term value. As a result of this growth in scale, earnings stream and operational performance, we continue to build our organizational capabilities by attracting and hiring new talent. Also, as we have mentioned previously, we’re continuing our focus on the steps we take into effect a potential spin-off, sale or distribution of these retail assets into an independent publicly traded REIT with PAC continuing to own an investment in New Market. An example of this is the enhanced financial segment reporting and detail on New Market that we commenced disclosing in last year’s third quarter 10-Q. The timing and financial structure of any such transaction of course is dependent upon when New Market will have reached sufficient and sustainable scale and when overall market conditions warrant. Now, let me turn the call back to John Williams.

[John Williams:]

Thanks, Joel and thanks for the great job you and your team are doing. As is our strategy, we’ll continue to [indiscernible] reach of our multifamily retail shopping centers and now office assets separately on a non-recourse spaces with no upstream guarantees of Preferred Apartment Communities or to our operating partnership and with no cross collateralization of any of our mortgages. We call this a fortress balance sheet. Our core Class A multifamily portfolio continues to remain among the youngest and most modern in the industry. And in fact, by the time we release our annual report in a few weeks, in mid-March, the average age of our multifamily communities will be 6.5 years which we believe is one of the youngest, if not the youngest portfolio of any publicly traded REIT. Assuming we exercise the purchase options on all or most of the assets in our real-estate loan investments for these – assets, we expect that our already young portfolio will become even younger. As we have grown the company, we’ve been able to finance our growth from a variety of sources including capital available from sales of our Series A redeemable stock and warrants, common stock through our ATM program, borrowings under our loan facility with KeyBanc, proceeds from first mortgage loans placed on each of our acquired properties and some of the assets from time to time. By employing these sources of capital in 2016, we’re confident that we’ve been able to save our common stockholders from significant dilution. Speaking about preferred stock, I’m pleased to report that on February 14, we closed our $900 million offering of Series A preferred stock and warrants. We’re now moving forward with a follow-on offering of our commission based Series A preferred stock and warrant offerings as well as the newly designed non-commission based -shares preferred stock offering. To-date, we’ve received very positive responses from the infinite broker dealers and registered investment advisor firms to which we will sell these equity securities. As I mentioned earlier, we’re pleased about our financial results for our fourth quarter and for the year and our growth opportunities I still believe the fundamental - for the foreseeable future will be strong and tend to be very positive for us. In addition, I believe firmly in the continuing strength and depth of our management team and the quality of our associates. Above all, we believe our associates’ experience and success comes from four simple principals that I’ve used for over 50 years; hire well, train well, recognize and reward. In the end, this is the key to our success. Before I turn the call over to the operator, there are several questions we’ve been asked in anticipation of today’s call. The first question is, can you provide us some color on the year-over-year same-store NOI results for your multifamily assets? Dan DuPree, would you answer that please?

[Dan DuPree:]

Yes, I will. As you saw from our supplemental finance or data report released last night, our year-over-year same store NOI increased only slightly. Although we have 24 multifamily communities in our portfolio, only seven qualify for same-store comparisons. This gives us a disproportional small subset from which to derive data, the law of small numbers. Nevertheless, our growth revenues were on par with a 3.3% annual growth rate. We got hammered with property tax increases during 2016 and this resulted in only a modest NOI increase. As to the tax increases, we are active acquirers of multifamily communities. As such, these properties are subject to property tax reassessments with the sales price being used as the trigger. Three of the seven properties on our same-store set got into this category and contributed significantly to the anomaly. To show how big an impact our property tax increases had on NOI for 2016, if our property taxes had remained static from ‘15 to ‘16, our NOI would have increased approximately 4.3%. We are obviously aggressively monitoring our property tax increases and taking appropriate action to challenge these increases.

[John Williams.:]

Thank you, Dan. Next question is, would you explain - occupancy numbers went down slightly for 2016 whereas other well REITs maintained an occupancy percentage slightly above PAC. I will answer this question. For as long as I can remember, my theory on occupancy was really not the best but really the financial performance of these assets, our formula is market grip plus vacancy loss expressed as a percentage. This tends to be very unique in the industry, many of the folks that we compete with actually use fiscal occupancy. And that doesn’t take into account a lot of things that could affect our income. We think that our method of really defining occupancy in terms of money is the way to do it. We also have an issue, I think Joel wants to speak to you relative to the occupancy of our shopping centers. Joel?

[Joel Murphy:]

Sure, John. So you might have noticed in our supplemental that the retail occupancy level in the fourth quarter was 93.0%. If you compare that to the end of the third quarter, you’re seeing that number was 94.9%. That change is not an operational change in the portfolio and the delta[ph] is almost completely due to the value add acquisition that we closed on October of Champions Village in Houston, Texas which is a value add opportunity that we acquired and paid for based on 80% occupancy, so we’ve got upside. If you take Champions Village out of the equation, that same set of numbers compared would have been 94.8% on the core portfolio of 30 assets.

[John Williams:]

Thanks, Joel. Next question is, how rise in interest rates affect the tax operations? John, would you please respond to that question?

[John Isakson:]

Sure. Thanks, John. Rise in interest rates in the last three months or so has had an impact on the market in a few ways. It’s a bit hard to provide good deals, tenants [indiscernible] return levels a few months ago and some deals weren’t processed or fallen out have been re-traded. Generally, we think this creates opportunities for us. If interest rates rise in the market, we believe cap rates may rise a bit, depending on how specific fundamental metrics like employment and wage growth perform here in the first half of the year. A strengthened economy generally will be more – to rate movements while the side one will be susceptible to them. In addition, the rise in the index themselves is only half of the equation. [indiscernible] obviously charge a spread in addition to the index and we’ve seen quite a bit of variability in the spreads being charged and think this is a pretty good time for us to leverage our track record experience in more moderate leverage levels to get the most practiced spreads one has to offer the market. Thank you, John.

[John Williams:]

Thank you, John. Next question is, how is the performance of your real-estate loan investment program? Dan, why don’t you answer this question?

[Dan DuPree:]

Yeah. Well we’re in active lease-up on 10 multifamily projects and several student housing properties. During 2017, we expect to exercise purchase options on four to eight of these properties. We expect new loans will keep our outstanding loan balances relatively constant.

[John Williams:]

Thank you, Dan. And then the next question is the question about production and permitting going forward in our business? I’ll take that one myself. We’re expecting production and permit will continue to decline over the next couple of years. I think last year we probably saw a peak of permitting and production in stores. We think the reason for the slowdown there’s various factors including the capital constraints of - and a little bit slowness in the market through the country, particularly in the properties related to San Francisco, Boston and New York. It also appears that levers are peaking and will soon be a [indiscernible] I think that – will be pretty substantial. One of the main drivers for the reduction in permitting seem to be the adverse fallout from Basel III legislation which significantly restrict the amount of leverage developers can obtain on these development financings. Several years ago, the developer to get a 80% to 85% leverage. This has now been replaced with 60% to 65% leverage. Nevertheless, we’re still seeing demand from multifamily continue which should bode well for our industry. The next question, this is for Joel, you added 17 centers to your grocery-anchored portfolio which is a significant increase in scale, how are things going with the on-boarding and operations of these centers? Joel?

[Joel Murphy:]

The on-boarding, that is a lot of scale growth and the company over the last year, the on-boarding has gone exceptionally smoothly. We take a very proactive approach to communicating with our key anchored tenants as an integral part of our due diligence process before making a decision to acquire and we carry that on through the purchase and into the transition. We listen to their experiences, their needs and we work to collaborate with them to increase the center’s traffic and their store sales. Additionally, we have very seasoned third party management teams that work collaboratively with us to implement a proven process we have for on-boarding these new properties so that we have a transition plan in place and ready to launch when we close. We also recently implemented a new accounting system across all aspects of the company which allows us to streamline the financial review process.

[John Williams:]

Thanks, Joel. The next question is, there’s been a huge battery of accounting standards that [indiscernible] acquisition costs and expenses relative to FFO. Can you explain the effects on PAC and the REIT industry? Well, I will ask Mike Cronin, our Chief Accounting Officer answer this question. Mike?

[Mike Cronin:]

Thank you, John. For the last 20 or so years, all acquisition related costs for buying properties have been expensed rather than capitalized pursuant to the accounting rules. Separate and independent of how we treat acquisition costs on GAAP financial statements may read to the late 1990s issued to White Paper standardized methodology on how to derive FFO. According to the White Paper, a REIT can write-back depreciation and amortization of real-estate assets to net income in order to get to FFO, which is a better indicator of how our REIT is operating. But the White Paper does not allow our REIT to write-back acquisition cost to get to FFO, which is why we and other REITs ask them back to get to us called core FFO. Now, with the - to be changed that says that you can capitalize acquisition costs related to an asset purchase, the depreciation and amortization of these acquisition costs will automatically be reflected in FFO. Consequently, because we’ve adopted the new accounting standard as of January 1, 2017, you’ll see a narrowing of spread between our reported FFO and core FFO going forward. John?

[John Williams:]

Thanks, Mike. Next how do you see the timing of your investments over the year affecting your results? And was timing a factor in the fourth quarter of 2016 results? John Isakson, can you respond?

[John Isakson:]

Sure. Thanks, John. For the fourth quarter, timing has had some impact on our results. But even with that, we exceeded our guidance to the Street. We’ve provided guidance for 2017 and I want to emphasize the timing of acquisitions and investment activities can vary quarter-by-quarter and as a result, can affect our interim financial results. But in the end, as we’ve said before, we remain fully focused on our full year guidance that we released to Street last night.

[John Williams:]

Thank you, John. With that, I’d like to thank you for joining us on our earnings call this morning. I’d like to turn the back over to our operator and open the floor for any other questions or thoughts you might have. Operator?

[Operator:]

Thank you. [Operator Instructions]. Our first question will come from Michael Kodesch of Canaccord. Please go ahead.

[Michael Kodesch:]

Hey guys. Thanks for taking my question. I just had a couple here actually. I was wondering, you touched on it right there at the end, but I was wondering if you could walk through some of the underlying guidance assumptions in terms of acquisitions, just the gross amount. I know Dan you mentioned about four to eight properties in the mezz portfolio, but can you guys just kind of talk a little bit about the gross amount that you’re considering for 2017?

[John Williams:]

Dan, you want to answer that, then I’ll make some comments…

[Dan DuPree:]

Yeah was it the gross amount of purchase options exercised or overall options?

[John Williams:]

Overall options for 2017.

[Dan DuPree:]

Really the assumptions we have are predicated in some part, by the capital that we’re going to raise in the Series A Preferred. So, it’s a little bit of unknown, but by and large, we expect to predominantly acquire acquisitions that we’re going to make, we’re going to be in our core multifamily Class A. And I think in the aggregate we expect that we will add somewhere in the neighborhood of $900 million to $1 billion in total assets over the course of the year. I think a reasonable assumption is that 40% to 45% of that’s going to come in multifamily. We still got to focus on retail as we try to gear up and get a scale. So, I think a good portion of the balance is going to come from retail and a lesser portion probably comes from office sources, the capital are going to be Series A Preferred I think this year we’ll probably be selling some more common either through the exercisable warrants or through outright incumbent offering. And we expect to also sell some of our existing assets as they become older and require more capital. I think that will part of the plan. I mean at the end of the day, our dollars are fundable, we’re looking for the best investment opportunities in the highest yield. A great thing about being slightly diversified at this point is that we have options that don’t force us into buying assets that are overvalued, it allows us to make smarter decisions. So that’s a real vague answer I know, but it kind of gives you a flavor I think on where we’re going.

[John Williams:]

Let me add a little bit to that. Dan mentioned in his comments, it just so happens based on the way the timing works out that we have a number of - units in our loan to home program which will mature this year. So we will have I think probably more units that we will acquire under that program than since we’ve actually been in business. And as you recall, but people don’t realize that, were the investment that we have in our mezz program and the value that will be created plus the discount that we get at purchase price to buy these units, we really don’t have to come up with additional money. So the units we harvest in our mezzanine loan program will actually be very accretive to us and that we don’t have to come up with additional capital and there will be considerable numbers of them. We issued a great deal of common shares through our ATM and our – last program so I can’t remember specifically but I think we added over 10% to our common stock number when we did our IPO little over five years ago, we sold 5 million shares and the betting were closing in on 27 million shares and I wouldn’t be surprised if it would be close to 30 million shares by the end of the year. So one of the things that we designed was - from the very beginning is we have lots of arrows in our quiver as opposed to most REITs that only have one source of capital which is the sales stock. We have numerous. We continue to call out portfolio and make sure it’s the most newest, most modern around. We can sell through an ATM program that’s active, we can sell stocks, we have a warrant redemption program. So we have lots of ways that we can bring capital to the table that allows us to continue own great real-estate and to grow our asset base. Did that answer give you an [indiscernible]?

[Michael Kodesch:]

That was great answer. Thanks for all the color on that. Just as a follow up to that, you talked a little bit about preferred issuance, so how is the pace of that trending? Are we still seeing about $40 million or so a month, has that sped up, slowed down or are we kind of in a sweet spot now?

[John Williams:]

No, in actuality it’s - and I’ll let Lenny talk about this - on the microphone but it’s a little bit for us sort of a drill. Once we finished 900 which we did on February 14, we had to start the process all over again. We had to go through and get a FTC registration. We have to go to - and get all our market materials approved. We have to then go back and get selling agreements with all our sellers, now we’re very optimistic they’ll all sign out with us and we’ll have a bunch of new ones, but there’s a process, they all have to go through. They’ll have to come in and do extensive diligence on us and on our assets. We then get another selling agreement signed, the advisors then have to go through an inside program and learn our product all over again. So we are expected in the next two or three months, they’ll be a little bit slower and then ramp up and in actuality, towards the end of the year, we’re expecting $60 million a month. And we actually have two programs we’ll have not only our 1.5 billion program the same as our 900 million Series A program, but we’ll have a new program that we’ll call mShares which allows us to go after managed accounts. Lenny, you want to add to that?

[Leonard Silverstein:]

No, it’s pretty good foundation of it, there’s two different products that are pretty key to that space and we’ve been very successful in that space of brokers and dealers and non-traded REITs and our products that have been very, very well accepted and are continuing to be accepted. Commission product is our Series A Preferred which has been around now for several years and shown success and new products which we’re all excited about is mShares which is a non-commission based product and is geared to accounts that are managed or fee based type of accounts and for the advisors of that [indiscernible]

[John Williams:]

We probably gave you more information that you wanted but…

[Michael Kodesch:]

It’s all good. That’s very, very helpful. I just had one more question I’ll hop back in the queue with anything else. But I noticed that one or two I believe two of the purchase option windows have been pushed out by a couple of months relative to where they were in the -- Anything going on there I mean are the properties stabilizing slower or just a renegotiation of the purchase window, anything we should note there?

[John Williams:]

No, I don’t think there’s a trend there. In several cases, and you’ll hear this probably from all REITs, one of the issues that our developer folks had to deal with is production. And this has caused a lot of the projects just be built slower, it doesn’t change our economics to be honest with you, but it does have a negative effect on those developers because sub-contractors, suppliers everything you can imagine has been slowed for the last couple of years. Now, you’ll see a reverse, it’s probably every year we have something to worry about. Number of years ago, nobody wanted to rent apartments, now everybody wants to rent apartments, but the development has been very slow. This time next year, if you ask that question, we won’t have any problems whatsoever with sub-contractors and suppliers at production, we’ll probably be worrying more about interest rates. There’s never a year that’s not something we have to worry about. But we know what’s coming. Our management team’s been around for 130 years, so we’ve seen all kinds of cycles and we think we’re ready for it.

[Michael Kodesch:]

Alright, great. Thanks, guys. Really appreciate the color.

[John Williams:]

Thank you. Next operator?

[Operator:]

Our next question come will come from Craig Kucera of Wunderlich. Please go ahead.

[Craig Kucera:]

Hey, good morning guys.

[John Williams:]

Thank you.

[Craig Kucera:]

Wanted to talk about the office investment you made this quarter and your thoughts on that going forward. Can you talk about the cap rates that you’re seeing and the types of assets you’re looking to buy this year? I know it’s not going to be a big part of what you’re doing, but just give us some color there and kind of should we think about this as ultimately being akin to what you’ve done with New Market, maybe eventually building critical mass and then spinning it out?

[John Williams:]

Craig, I think you’re very – I think that’s exactly what you’ll think about. Now as you know, we tend to be bunch of slowpokes. As you know, if you hear us over my analysis after everybody, we’re one of the turtles because we want steady projectable results throughout our portfolio. The - situation is opportunistic. We saw great yields, owned properties that had high occupancies with extremely good credit for long lengths of time and it was just an activity. We had to take a look at based on the qualifications we have in our company. Dan’s afraid, he might not say it, but there probably wouldn’t be anybody in the country that would have more experience in high quality office buildings than Dan DuPree. Based on that, I’ll let Dan answer. And we also have Boone DuPree in here, so Dan?

[Dan DuPree:]

Yeah, Craig. It kind of goes to the whole thing about what the market gives you and when it gives it to you, multifamily has been red hot since coming out of the recession, it’s been a great vehicle. It’s where our core competency is. But from time to time, there are parts of the market that are under-recognized, underappreciated, undervalued. We saw that in grocery-anchored retail and we seized the opportunity and we applied – we got Joel Murphy to come in and tackle that. Cap rates on grocery-anchored retail and our product types has been somewhat better than multifamily recently which gave us a chance to cap balance out, flip side is, there’s probably more push to NOI in multifamily because it’s one year leases and grocery-anchored retail you have better credit because of the anchor. But what we’ve found in office and really it was -- we were driven there by Boone was that, that was an undervalued asset class. The rush has been towards core office and prices on core office had been driven up. And what has been left out was best in class suburban or suburban office. The two buildings we bought, the one in Mountain Brook in Birmingham absolutely the best building in Birmingham, 100% leased, credit tenants, Merrill Lynch, Pricewaterhouse, Kinder Morgan, average lease remaining term of 10 plus years. The deal on the latter is – it’s a Kevin Roach designed building, it’s iconic it’s right on the perimeter in the largest office submarket in Atlanta. They have just signed a lease extension for InterContinental Hotel Group that took about 600,000 feet? 500,000 square feet of space. They extended them for a total of 15 years, they’re putting $72 million into this space. Overall project is 98% leased. My point is the cap rates on those buildings because they’re undervalued by the market are probably 100 basis points greater than other product we’re doing. We’ve got to be careful with that because our focus really is on multifamily I mean we understand where our core competency is but we also appreciate the fact that we’re very comfortable having some diversity to our portfolio so that we’re not forced to take money that’s coming in, every two weeks and putting it into product type that has -- that doesn’t give us the full range of return that we could get if we were more diversified. Another long answer.

[John Williams:]

Maybe that gave you the correct –

[Craig Kucera:]

It did. Thank you so much.

[John Williams:]

Operator, next?

[John Williams:]

Do you have another question?

[Craig Kucera:]

I do actually have a couple more, can I give them?

[John Williams:]

Fire away.

[Craig Kucera:]

Okay, great. Just wanted to talk about your, back to multifamily, appreciate the color on the same-store, looking from third to fourth quarter, looked like you had a handful of multifamily assets in Atlanta, Eastern Orlando that had some declines in rent somewhere little healthy. Can you talk about how you feel about those markets and the supply you’re seeing today and how that’s impacting lease -

[John Williams:]

Well remarkably, our Houston properties has shown a great deal of improvement over where we were in ‘15 and ‘16 and we are continuing to be optimistic about Houston. One of the issues that we have that probably does affect our occupancy somewhat is we have several value add projects that are underway that we did substantial improvements within the units, spending anywhere from $9,000 to $11,000 a unit, because those units are effectively taken out of service while we were doing that rehab work, it had an adverse effect not only on our occupancy but also on our performance while we’re doing it because obviously we had units that were taken out of service while we were doing the rehab work and we’re not getting income of – The truth is our multifamily portfolio continues to perform very well and if you had to guess which market was the softest, you’d probably want to guess Houston. But other than that, there’s not really that much difference throughout our entire portfolio and we’re seeing improvements in Houston. We feel way optimistic. We wouldn’t buy anything else in the Houston, but we feel good about what we got we have great assets that are essentially condominiums and are great assets that we continue to expect the performance.

[Craig Kucera:]

Okay, great. One more for me, Joel question for you, I know we discussed the multifamily same-store, can you talk about how now that a number of those assets I think have been in the portfolio for a year or two, how same store is trending in the shopping center portfolio?

[Joel Murphy:]

Craig, we do not discuss internally – I mean externally on the retail, for that, for lot of the same reasons on multifamily. If you look at the entire portfolio of ours since it’s relatively new, I think we might have 11 properties in the pool. That said, what you should take away is really same store is pretty obvious in retail, you can release new space which we’re doing quite well, you can renew space at improved market rents, you can renew new space which we’re doing quite well and you can also have good rent spreads which we’re also doing quite well.

[John Williams:]

And Joel won’t tell you this, he’s checking them up where we’re in based on his performance over ours, but I’ve been -- both him and the guys that we’re going to step it up a little bit -

[Craig Kucera:]

All right. Thanks a lot guys.

[Operator:]

Our next question will come from John Benda of National Securities Corp. Please go ahead.

[John Williams:]

Thank you, John.

[John Benda:]

Hey good morning guys. How are you today?

[John Williams.:]

Good.

[John Isakson:]

Good morning, John.

[John Benda:]

Good morning. So quickly, with the current student housing exposure and I think it’s five or six [indiscernible] mortgage student housing in the future and for-profit education blub of weight, could they begin to have any exposure to full profit and how do you guys go about identifying which schools you want to - properties at?

[John Williams:]

No, we would not be involved in the for-profit schools, we want to be associated with large colleges that we think are growing over time. For instance would be Kennesaw State University here in Metro, Atlanta which has grown tremendously to the point we’re in the second largest institute we have inside of Georgia. Our property there has been finished for a couple of years and has stayed flat out on a 100% occupied since its being completed. So we like large institutions like Texas [indiscernible], Kennesaw, Barbara State University, we’re – I can’t say it but there’s a press release that will come out in the next day or so about something involved in Arizona State University and we like that. It’s a big university over 55,000 students. So we’re very careful where we go in and we’re basically looking for underserved markets where they’re not providing a lot of their own [indiscernible] and where we think there’s an opportunity.

[John Benda:]

Alright. Great. That was very helpful. And then also, just to your comment on asset - for 2017, I know you highlighted that some of the older communities will be reviewed for possible [indiscernible]. Is the age the only driver that you guys look at what you’re considering - capital or are there other factors that might help?

[John Williams:]

I think age would be a significant factor obviously location is either getting better or getting worse, but I’ve always had this theory and I didn’t execute it terribly well to first properties and we’re trying to do better. But when we had started spending a lot of CapEx money, that doesn’t provide income or return on our investments, we started to get concerned. For instance, we have to replace say a – that could be $3,000 $4,000 on our numbers and the residents in those buildings will not pay us one penny more rent to putting on new roots. So we look at expected capital commitments in the future and try to make judgment whether the money we would invest would be worthy or would it continue to erode our internal investment. So a lot of factors they go into it, I think age certainly is one and what we expect to have a spin on that product over the next few years would be certainly a big part of what we decided to do.

[John Benda:]

And just lastly on real-estate taxes, what do you guys see 2017 I know you made a comment on the call about taxes be difficult for some assets. What’s [indiscernible] are they going to be any maintenance, will there be potentially available to you guys or would you take it, should be flat, up, down?

[John Williams:]

Well, some of the portfolio was start getting flat, the issue and Dan spoke to it in his remarks is that as we used to not be this way, 10, 15, 20 years ago, the [indiscernible] would take a number of years to catch up with values. Today, they’ve gotten incredibly smart in fact too smart and they go take up the sales when we’re buying asset and then next year that comes basis of the taxes. You might get one year pass that, but you’ll certainly not get two years. And since we have such a – program, we’re seeing taxes being reset quite often. We fight it like hell, if it weren’t for our taxes, our numbers would be truly spectacular, but it really is a function of the way we do business in fact, that we’re acquiring so many units over time. Dan, you want to make a comment?

[Dan DuPree:]

I guess what I wanted to say it ought to be, the impact of taxes on acquisition should be over time declining percentage because if we’re acquiring I think this year ‘16 we acquired six properties and I mentioned earlier that we expected to exercise purchase options on four to eight projects perhaps this year, if we’re looking at acquisitions between those two things eight to 10 properties, that’s going to have more material impact on a portfolio when we’re looking at same-store that has 15 or 20 assets. But as we continue to grow and the denominator gets larger, the impact of those 8 to 10 acquisitions on the reset on their taxes are going to become progressively less. So I think going forward, you won’t see that it as dramatic an impact as we felt in ‘16 it ought to be declining fairly consistently over time.

[John Williams:]

The good news for us we underwrite correctly. We very well know what the tax – is going to be based on our acquisition price. But once we go through the adjustment period, the taxes become a lot flatter and easy to deal with, it’s just that we’re in a unique position based on me and – in the marketplace.

[Operator:]

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. John Williams for any closing remarks.

[John Williams:]

Thank you so much for joining us. We’re looking forward to an exciting and bright year for PAC in 2017 and we’ll see you the next quarter’s earnings call. Thank you.

[Operator:]

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