Preferred Apartment Communities, Inc.
Q1 2013 Earnings Call Transcript

Published: 7 May 2013

[Operator:]

Good morning and welcome to the Preferred Apartment Communities First Quarter 2013 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. 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, Sir.

[Leonard A. Silverstein:]

Thank you for joining us this morning and welcome to Preferred Apartment Communities first quarter 2013 earnings call. We hope that each of you have 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 a review of our performance during the first quarter and his thoughts for the remainder of 2013. Also with us today are Mike Cronin, our Executive Vice President and Chief Accounting Officer; Dan DuPree, Vice Chairman Of the Board and Lead Independent Director; Rob Gayle, Chief Operating Officer of Preferred Residential Management, our property management company; John Isakson, our Chief Investment Officer; and Paul Cullen, who directs our marketing efforts. Following the conclusion of our prepared remarks, we'll be pleased to answer any questions you may have. Before we begin, I'd like everyone to note that forward-looking statements may be made during our call. These statements are not guarantees of future performance and involve various risks and uncertainties and actual results may differ materially. There is a discussion about these risks and uncertainties in yesterday's press release. Our press release can be found on our website, at pacapts.com. The press released 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, which may be used in today's discussion. We encourage you to refer to this information during your review of our operating results and financial performance. Now, I'd like to turn the call over to John Williams for his remarks. John?

[John A. Williams:]

Thank you, Lenny. Good morning, everyone, and thank you for joining us for our first quarter 2013 earnings call. For the first quarter we reported net cash provided by operating activities excluding the effect of approximately $1.1 million of acquisition cost related to the three communities we acquired this past January of $1,863,401. This represents an increase of approximately $935,000 or a 101% over net cash provided by operating activities for the first quarter of 2012 excluding the effect of non-owned $12 of miscellaneous acquisition cost related to a prior period acquisitions of $928,306. Our first quarter 2013 adjusted FFO or AFFO attributable to common stockholders and unit holders was approximately $898,000, an increase of 16.8% from our AFFO result of approximately $769,000 for the first quarter of 2012. We reported FFFO for the first quarter of 2013 as a loss of approximately $161,000, which reflects the deduction for the approximately $1.1 million for acquisition costs related to the three communities acquired in January 2013, compared with FFO of approximately $491,000 for the first quarter of 2012, which reflects the deduction for acquisition cost of only $912. Our same store net operating income which reflects the operating results for our multifamily communities that we have owned for at least 15 months increased approximately 6.1% for the first quarter of 2013, compared to the first quarter of 2012. This increase is primarily due to increased rental revenues and low operating and maintenance expenses all what – some offset somewhat by higher related taxes and property management fees. We declared a dividend, a quarterly dividend on our common stock of $771,000 non-earning $23 or 0.145 per share, which was paid on April 22, 2013 to all common stockholders of record as of March 28, 2013. As we’ve indicated before, we will continue to see dividends be tax efficient with a large measures aided by continued acquisition activity. Speaking of acquisition, this past January we used net proceeds for our $40 million private placement of Series B Preferred Stock to institutional and other credited investors to acquire three multifamily communities located in Austin, Texas; Atlanta, Georgia and Raleigh, North Carolina. We believe we purchased these properties at below replacement cost and immediately refinanced them with seven year non-recourse mortgage financing which totalled approximately $59 million. Fixed rate interest only paid in months of 3.13% per annum are due in month in February 28, 2018 as it rolls after these acquisitions we now have 1693 units on our portfolio. In late March we closed and partially funded a $12.7 million mezzanine construction loan to partially finance the construction of a multifamily community in Naples, Florida. Just last week we converted an existing land acquisition bridge loan to a mezzanine loan to partially finance the construction of a multifamily community in suburban Tampa, Florida. As it’s typical with these type of multifamily loan investments, we will receive a current interest story of 8% per annum paid monthly and we’ll accrue an additional 6% interest payable at maturity or at the time of property sold or refinanced to a third private party. We also received and this is most important an option to acquire each of these community a predetermined price following final [CO] and stabilization, which we believe allows us to buy them in a wholesale price rather than a retail price. In total, our options to acquire multifamily properties under our mezzanine program, add up to an additional 42 units to our acquisition pipelines. In fact we anticipate acquiring our first property under the company’s mezzanine loan program early this summer. Overall we believe our mezzanine loan program is an outstanding financial structure that should create significant accretion to the company. In addition to focus on our AFFO is the primary driver for mezzanine components of our company, I’d like to confirm that other than our $30 million revolving line of credit we incurred no debt at the company or operating partnership levels. None of our individual property mortgage financing or cost collides with each other and none of them had any recourse liability upstream to the company or to our operating partnership. In other words, although our consolidated financial statement showed debt (inaudible) our net results at the property level and is isolated in each separate limited liability to company we’ve established to own the property. And in connection with our branding efforts we continue to receive positive data and positive feedback from current and perspective residence in particular the PAC Concierge, PAC Rewards and PAC Partners programs, continue to appeal to our residence and help distinguish us from our competitors. Since an overwhelming percentage of our current and perspective residence utilize laptops and mobile devices to search and get information about PAC and PAC’s communities we continue to increase the robustness and ease of use of our website across all platforms. For PAC stockholders and other who follow us, I encourage you to visit our website which we’ve designed in a effort to be transparent, user friendly and highly informative. Our primary strategy continues to grow PAC thought acquisitions for which we’ll need capital at least for the foreseeable future. We keenly assessed the various capital raising markets to identify what we believe is the most reasonable way to raise additional capital based on their needs and plans. As I mentioned earlier, our recent $40 million capital raise were just one step along this path. Following the anticipated stockholder approval to this transaction later this week, our common stock doubled as well as our capitalization which we expect will benefit both our liquidity and trading activity on Nifty market stock exchange. Fortunately, we believe that our pipeline should allow us to make accretive timely investments as we raise capital. In summary, industry experts continue to report strong demand for new apartments, as job growth picks up, which historically is the most important factor for apartments and sales, we believe that we will see increased household formation which will drive apartment occupancy in a positive way. Although production of new apartments has increased as of late, it’s still below historical norms. As a result, we believe the apartment business continues on the upswing with wind at our backs. We will continue to actively manage our communities as usual, do our best to balance vacancies while at the same time, provide superior service to our residents. In addition, we will continue to look at alternatives on how to fund packs, growth prospects in light of the current economic plan with the goal of being to make any transaction accretive to our earnings. Before I turn the call over to the operator, there are several questions that have been mailed in that we would like to ask in anticipation to today’s call. The first question was, can you comment on the value expect to create the mezzanine loan investment program? I will call Lenny to please respond to that.

[Leonard A. Silverstein:]

Well, as John said earlier, we received an 8% current interest rate on mezzanine plus an additional 6% interest rate which is accrued and payable at maturity or sale or refinance. Our purchase option which is really central does this whole program should provide a significant discounted Cap rate in the event that we elect to exercise that purchase option.

[John A. Williams:]

Thank you, Dan. Next I will ask Lacing Prince look like and I’ll ask Rob Gayle to answer that. Rob?

[Robert Gayle:]

Thank you, John. Leasing remains strong and inconsistent. We believe the demographic churns that we have discovered with the formation of the RIET remain in place and should be in place for questions asked.

[John A. Williams:]

Thank you, Rob. And next, we always ask, how does the pipeline for acquisitions look? And let me call on John Isakson to answer that question. John?

[John Isakson:]

Thank you, John. We will see an increase in the pipeline product coming to market especially this time of the year. Currently, we’re reviewing between $7 and $10 deals with the total capitalization between $300 million and $400 million. And in addition to that we will actually have another 3 to 5 deals from an off market source that we are excited to studying in those pipeline to be evaluated.

[John A. Williams:]

Thank you, John. In other words, the pipeline still remains very healthy and we constantly ask about Cap rates and purchase prices. And I can tell you and I think John, if you would make a comment. It should appear as though, we’ve had at least 6 to 8 months of very stable cap rates and pretty stable interest rate. He will make a comment on that.

[John Isakson:]

Yes, sir I would agree with that. As John has said before we really stay out of the core of urban markets in New York’s, in Boston’s and Chicago’s and San Francisco’s. And outside of those we see cap rates being relatively consistent depending on the market between 5.5% and 6.5% and interest rates although they’ve been very volatile over the last 30 days to 60 days spreads have mirrored those, John. So we’ve seen interest rates being generally consistent in all window of between 3% and 3.4%.

[John A. Williams:]

Thank you. And then finally net cash provided by our operating activity through the first quarter of 2013 excluding the effect of calls for acquiring three properties last January, doubled from the year earlier period. How did we do that? Lenny, do you want to answer that for us please?

[Leonard A. Silverstein:]

Sure John. The company’s results for the first quarter of 2013 included, I guess a full quarter of income from three additional mezzanine loans. One which was some at two; second one which was Citi, Park and Charlotte and the third one was Citi, just to up and Pittsburgh. As well as two acquisition, bridge loans, our cross county walk bridge loan down at Tampa which just recently converted into a straight mezzanine loan, as well as our land acquisition bridge loan up in Madison, around Georgia which is the anchored public shopping center. And those were all originated in the second, third and fourth quarters of 2012. And then in addition we had an additional mezzanine loan that we just originated at the end of the first quarter of 2013, which was for our project down in Maples, Florida. I guess on top of that we had the operational income and cash flow generated from the three communities that we acquired back in January. The one is Austin, the one is Atlanta and the one in Raleigh.

[John A. Williams:]

Great, thank you, Lenny. And now operator, we’d like to open it for calls.

[Operator:]

(Operator Instructions) We have a question from Wilkes Graham from Compass Point Research. Please go ahead.

[Wilkes Graham:]

Hi good morning guys.

[John A. Williams:]

Good morning.

[Wilkes Graham:]

John, just a couple of questions. Can you disclose what maybe the effective rents per unit were for the three new assets in the quarter?

[John A. Williams:]

Well, I think you saw our same store results for the three assets we had for 50 months and that was a increase in revenue of about 37. We had other revenue blip that was down but that will be correct itself over the next few quarters and we maintain great expense control other than property taxes which all of the society. But it gave us 6.1% same store increase in NOI. I think that from a revenue stand point, the increase in the acquisitions would pretty well follow what the three other properties are doing.

[Leonard A. Silverstein:]

Correct John and then as – again we are consistently hitting and that’s what the numbers.

[Wilkes Graham:]

So our budgeted numbers are essentially about 4% increase in revenue and about 2% increase in expenses where it came very close to the 4% revenue number. We did a better job and expenses were actually even factored in, property taxes were really close to the 1%.

[Wilkes Graham:]

Okay. Will you disclose the property level rents and occupancies in the 10-Q?

[John A. Williams:]

I don’t think so. We disclose the same store numbers, but we won’t disclose the new acquisitions yet.

[Wilkes Graham:]

Okay. I think that will be helpful when you do that. Can you talk about NOI margin between the three legacy assets and the three acquired assets?

[John A. Williams:]

They all ought to be about the same, actually could be better. I think Austin probably have performed better than we would expect out of legacy assets. And I would guess that Atlanta would be on par and Raleigh could be a little slightly less, but overall, we expect the three new properties that performed right in line with the three legacy properties.

[Wilkes Graham:]

Okay. And I guess if you look at the property financials from the perspectives, of the three new assets, there is a noticeable difference. The NOI margin on the three new assets is on the mid-50s, NOI margin on the three legacy assets in the mid-60s. As you mentioned before the big difference is real estate taxes. So I was just looking for some color on a few…

[John A. Williams:]

I think you actually – to get it through a true number, I think you have to actually look at the next quarter. The first quarter in our calendar has lot of closing cost, it would be inaccurate in lot of provisions, I don’t think using the first quarter will give you an accurate result. So I can tell you is based on our own budgeting we’re expecting to all perform in line.

[Wilkes Graham:]

Okay and then I think on the last call you mentioned funding three mezzanine loans, you’ve funded two already. Do you still plan to fund the third maybe some time this quarter?

[John A. Williams:]

Well actually, glad you asked, as we had expected at the close yesterday or today. I think we expect to close it tomorrow but you have several different institutions, construction lenders, probably half a dozen lawyers in large and it’s just hard for us to give a good prediction, but you can look for another press release tomorrow the next day and it’s another outstanding property and it’s clearly located within 100 yards of our homing efforts. So we’re quite excited about that property and construction.

[Wilkes Graham:]

Okay great. The last question is that – do you confirm that the shareholder’s vote, is it tomorrow?

[John A. Williams:]

It’s Thursday, it will be reported at our annual meeting, but I would rest very comfortable based on the numbers we’ve already seen. I think can we safely say, it’s no we can’t but I am comfortable, I’m sleeping well tonight.

[Wilkes Graham:]

Okay and the shareholders meeting is Wednesday or Thursday?

[John A. Williams:]

Thursday morning.

[Wilkes Graham:]

I got it, okay, thank you. Thanks guys.

[Operator:]

(Operator Instructions) We have a question from (inaudible). Please go ahead.

[Unidentified Analyst:]

I wonder if you could talk about the current capitalization of the company in terms of currents units and what will happen if the various preferred issues were to be converted?

[John A. Williams:]

I will call on Lenny to answer that. Obviously the preferred as you say, cannot be converted for another almost a year and then instead of very modest level, we can go back and pull it up. But I think for the first six months, starting in March or April of last year, the total number would have been around $20,000 and it’s kept at $9 share price. I don’t think it would have much effect or much delusive at all for sometime to come, but Lenny, do you want to make any other thoughts on that?

[Leonard A. Silverstein:]

Are you sure? I mean assuming that the stockholders approve the pipe transaction from last January we will end up with over 11 million common shares outstanding. And in connection with that, with respect to the preferred, the way the preferred works is that, one, those are all rolling closing. So you don’t have any particular closing aggregate necessarily with another, they all have rolling time periods for potential redemption. At the time of those redemptions, you are looking at the dividends paid and then as well the redemption prices going in. So the preferred stock actually is good for us when they want to redeem and get that additional capital that increases the float on the common side, increases liquidity and it helps to stabilize the spread between the bid and the asset side. In connection with the preferred transaction, as we’ve stated on many occasions, we’ll continue to see to increase the capitalization on the common stock side as the market allows and that’s a growth strategy that we currently have. We also have on the redemptions depending upon where the stock price is, we do have the ability at our options to pay a redemption either in cash or in stock which is listed on the stock exchange and we’ll just make that determination on a case by case basis and ask for redemption.

[John A. Williams:]

And this is John again and the philosophy the company will follow is basically our assessment of the stock price in the value of the stock. Today I think the stock is undervalued, so if they were a redemption which they can be for another year, but if there is redemption, we would pay in cash and not pay with stock. If the stock is fairly priced we will redeem the stock, and also realize if there is redemption it’s a redemption at a 10% reduction to the original price. And so in actuality one way of looking at it is that we’re facing common stock at a very, very cheap price. So we think we have walked through this process and we think that the preferred Series A is very accretive to the common shareholders and works well for the company.

[Unidentified Analyst:]

And the $11 million number was after the conversion of the Series B?

[John A. Williams:]

Correct.

[Leonard A. Silverstein:]

Yes.

[Unidentified Analyst:]

Okay. That all I have got. Thank you.

[John A. Williams:]

Great, thank you very much.

[Operator:]

I show no further questions at this time, so I’d like to go and turn the call back to Mr. Williams for closing remarks.

[John A. Williams:]

Well, thank you for joining us and we look forward to being with you on our next call. Thank you.

[Operator:]

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