Preferred Apartment Communities, Inc.
Q3 2014 Earnings Call Transcript

Published: 4 Nov 2014

[Operator:]

Hello and welcome to the Preferred Apartment Communities Third Quarter 2014 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. At this time I would like to introduce your speaker today Lenny Silverstein, President and Chief Operating Officer. Sir, please go ahead.

[Lenny Silverstein:]

Thank you for joining us this morning and welcome to Preferred Apartment Communities third quarter 2014 earnings call. We hope that each of you have had a chance to review our third 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, Rob Gayle the Chief Operating Officer of Preferred Residential Management, our Property Management Company; John Isakson, our Chief Capital Officer; Joe Murphy the President and CEO of our wholly owned subsidiary focused on grocery-anchored necessity retail shopping centers called 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 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 Web site at pacapts.com. The press release on our Web site also includes an attachment containing our supplemental financial data report for the third 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. And now, I'd like to turn the call over to John Williams. John?

[John Williams:]

Thank you Lenny. On a macro level we see the apartment market continuing to perform extremely well. Occupancy levels for our multifamily communities remain close to historical highs. In fact our physical occupancy for the three months ended September 30, 2014 was again approximately 96%. On a practical level this would be considered close to full occupancy since you have to take into account normal resident turnover and model units. With this background, we're extremely pleased to announce that this past September we closed on four multifamily communities located in Nashville, Kansas City, Dallas and Huston. The purchase price was approximately $182 million and represents an aggregate of 1,397 units which we added to our portfolio. These are all Class A assets located in strong submarkets within their respective MSRAs and the tightening quality of products that should fit perfectly into our own portfolio. In September and the first week of October we also acquired nine grocery-anchored necessity retail shopping centers located in the Southeast in Texas for an aggregate purchase price of approximately $113 million. Together with our existing grocery-anchored necessity retail center we now own approximately 694,000 square feet in this sector. Of these shopping centers, seven are anchored by Publix, two by Kroger Group and one by Bi-Lo. As we mentioned before, our strategy is to aggregate a critical mass of necessity retail shopping center assets and then distribute or spin off these assets into an independent publicly traded REIT as soon as we believe we reached scale, with the Preferred Apartment Communities continuing to own an investment in the new REIT. From the financing perspective we use a combination of capital available to us from sales of our Series A redeemable preferred stock and warrants, common stock to our ATM program, borrowings under our loan facilities with KeyBanc and proceeds from first mortgage loans in each of the properties. And particularly we chose not to do a traditional secondary offering of our common stock, because the availability of other capital sources to us and general dilution to the [indiscernible] our existing stockholders and we believe would occur with the traditional secondary offering. Frankly, at our current stock, we are seeking to minimize the sale of common stock. Obviously we believe our stock has substantially more intrinsic value than its current price. Going forward we expect that we'll be able to continue to reduce the outstanding indebtedness under our KeyBanc loan facilities from sales our Series A redeemable preferred stock and warrants through the independent broker dealer and all IA channels. Let me now turn the call back over the Lenny. Lenny.

[Lenny Silverstein:]

Thanks John. Overall, once again we produced the excellent operating results for the third quarter. Our normalized FFO which is basically FFO excluding the effect of acquisition expenses that don’t occur on a regular basis was approximately $4,536,000 for the third quarter 2014 compared to approximately $2.671 million for the third quarter 2013. In dollar terms this represents an increase in normalized FFO of approximately 70% on a period per period basis. On a per share basis, our NFFO was $0.26 for the third quarter of 2014 versus $0.24 for the same period last year for an increase of approximately 8% per share. Adjusted FFO for the third quarter this year was approximately $3,886,000, compared to approximately $2,063,000 for the same period in 2013, or an increase of almost 88%. On a per share basis, our AFFO for this quarter was approximately $0.22 per share compared to $0.19 per share for the third quarter of 2013 or an increase of almost 16% per share. FFO was a negative $1,964,000 or negative $0.11 per share for the third quarter 2014, compared to $2,661,000 or $0.24 per share for the third quarter 2013. Our third quarter 2014 FFO results were significantly affected by the incurrence of approximately $6.5 million of acquisition expenses, substantially all related to the acquisition of four multifamily and eight grocery-anchored necessity retail shopping centers during third quarter 2014. Because NFFO more properly reflects the ongoing performance of our Company, we believe NFFO is the key operating metric for us. As a result for 2015, we’ll be focusing our guidance on normalized FFO which some folks refer to as core FFO. And reflected in our third quarter supplemental financial data report that we released last night total assets for the third quarter 2014 net of depreciation were approximately $688 million an increase of approximately $409 million or 146% compared to the third quarter 2013. Cash flow from operations for the third quarter 2014 was negative $575,000, again reflecting approximately $6.5 million incurred during the quarter attributable to acquisition expenses. Adjusting for these acquisition expenses cash flow from operations equaled approximately $5,925,000. In addition at September 30, 2014, our leverage, as measured by the ratio of our debt to the un-depreciated book value of our total assets was only approximately 60%. The 2014 third quarter increases in normalized FFO adjusted FFO and revenues as compared to the same period in 2013 primarily reflect; first, the results of our bridge and mezzanine loan program; second, the strength of our acquisition program; and third, what we believe is a solid performance at the property level. For the third quarter 2014 we paid the dividend on our common stock of $0.16 per share to all common stockholders of record of September 15, 2014. This represents a 28% overall growth rate from our initial common stock dividend of $0.125 per share or approximately 8.7% on an annualized basis and represents an AFFO distribution payout ratio of only 76.2%. I'm pleased to announce that our Board of Directors has again approved an increase to our quarterly dividend for the fourth quarter 2014. For the fourth quarter the dividend will be increased from $0.16 per share to $0.175 per share or 9.4%. This will represent a 40% overall growth rate in our common stock dividend from our IPO or 11.6% on an annualized basis. We are planning even with this dividend increase to further reduce both our NFFO and AFFO distribution payout ratios going forward. As we’ve indicated before, we’ll continue to seek to have our dividend the tax position which in large measure is aided by our continued acquisition activity. Since our IPO in April 2011, we have continued to acquire and manage multifamily communities building our brand and securing additional capital to support future acquisitions. As John mentioned earlier we’re excited about allocating a small portion of our assets in a necessity retail shopping center sector and believe those financial results will benefit all of our stockholders. Most importantly, we are committed to continuing to grow our earnings both organically and externally. And speaking of success, the key component of our growth strategy is our investment program. I now want to introduce Dan DuPree our Vice Chairman and Chief Investment Officer to provide some more color on our acquisition activities, our mezzanine loan investment program and our retail initiatives. Dan?

[Dan DuPree:]

Thanks Lenny. As we have earlier noted we continue to actively pursue multifamily and grocery anchored necessity retail acquisitions that fit our business model. John mentioned the four acquisitions of multifamily communities that we closed this past quarter for an aggregate purchase price of $182 million that excluding acquisition related expenses are representing an additional 1,397 multifamily units owned by us. These communities are all located in submarkets of MSAs with over 1 million people, strong demographics and importantly solid job growth. These acquisitions are in addition to the nine grocery-anchored necessity retail shopping centers that we acquired during this past September and in one case, the first week of October for an aggregate purchase price of approximately $113 million, again excluding acquisition related expenses. These centers are located in Sun Belt markets, entire states, more specifically Atlanta and Columbus and Georgia, Nashville, Tennessee, Tampa, Orlando and Florida, Huston, Texas and Charleston in the South Carolina market. We financed loans for each of the multifamily and retail shopping center asset separately on a non-recourse basis with no upstream guarantee to Preferred Apartment Communities or our operating partnerships and no cost collateralization of any of the mortgages. The rates on our new multifamily loans range from 3.18% to 3.68% and the rates are on our newly acquired shopping centers range from 3.36% to 4.21%, the variance depending on term loan maturity. Separately now our innovative mezzanine loan investment program continues to enhance our acquisition pipeline by giving us the opportunity to acquire new, modern and well leased multifamily communities at below market prices. That impact our most recent loans provided for purchase options of approximately 50 basis points cap rate discounts at the time of stabilization and acquisition. That’s materially and immediately enhancing the underlying value of the company’s assets. This program enables us to work with a select few highly qualified third party developers to design and execute the development of multifamily communities that meet our specification for quality. It is a collaborative effort that complements our organic growth. As of September 30, we had approximately $169 million in outstanding mezz loan commitments, on which we had funded $147 million. Our portfolio consisted of 15 mezzanine and other loan investments on which we have or expect to have options to acquire 13 multifamily communities upon completion and stabilization. Six of these loans are in advanced stages of lease up, a couple in excess of 90% and one loan, the mezzanine loan for grocery anchored necessity retail shopping center in [indiscernible] Georgia was repaid in full in October, following Publix exercise [indiscernible] to acquire that center. We believe all of these properties are ahead of schedule and under budget and it should be positioned next year for us to concern our purchase options. Assuming we exercise our purchase options to all or most of our mezzanine loan investment projects, our already young portfolio becomes even younger yet. We will continue to vote a modest portion of our assets toward the grocery anchored necessity retail sector. We believe we can buy these assets today at better yield than we can buy multifamily communities and this should create a very nice balance to our portfolio. We continue to have the objective of producing steady earnings growth resulting in increased shareholder value. I want to continue to reiterate that this initiative does not signal a significant change in direction. We are now and we’ll continue to be first and foremost a multifamily real estate investment trust. We’re simply matching up our management talent with a product sector that we believe is relatively under appreciated. Our goal and we can't emphasize this too much, is to drive earnings per share and total return for our shareholders. And let me now turn the call back to John. John?

[John Williams:]

Thank you Dan. As I mentioned earlier, we’re very excited about our financial results for the third quarter. Our growth opportunities, especially as we look forward to our budget for next year and our business program, our management team which we believe is second to none in the entire region history; it gives us a great deal of confidence in the fundamentals in the royalty business and our future going forward. Before I turn the call over the operator, there are several questions that we’ve been asked in anticipation of today's call and we'll run through those. The first question that we were asked is where is the capital coming from exercised mezzanine loan programs, our purchase options and how much money would be required [indiscernible] to acquire these assets and I’ll call Dan DuPree to answer that question.

[Dan DuPree:]

Well, actually very little new capital will be required. The mezz loans are generally sized such that the loans can be converted to satisfy the equity required for the permanent loans on the properties that we acquired through the exercise of a purchase option.

[John Williams:]

Thank you, Dan. The next question was and I think we've answered this, but will you sell a large block of common stock to pay for the multifamily retail shopping center acquisitions you just completed. And I will respond to that, no. We’ve already provided the capital to acquire those facilities. We will be working to pay down our term loan with key buying [ph] which we expect to do in the next several months. Frankly as I’ve said before, we think our stock is relatively underpriced and we prefer not selling common stock at the current price. The next question is about leasing trends. What do they look like for the third quarter and balance of the year and Rob Gayle, I'll ask you to respond to that.

[Rob Gayle:]

Thank you, John. We in term look to be strong for the rest of the year the variability for the portfolios is in a good range to keep up the feet at or around current levels. We operate on a 60 day notice which is different than most in our management of the notices are in good shape.

[John Williams:]

Thank you, Rob. So we are expecting them to perform well going into the balance of the year in the fourth quarter, which is usual but we keep [indiscernible] market we don’t see any adverse effect. And then would you please give us some color on the overall property performance and John Isakson in his capacity is managing our capital program, also runs our asset management program. So John, would you reply to that?

[John Isakson:]

Certainly, thank you John. The properties that performed well this year into the third quarter and to the main factors driving that overall performance is that absorption in the markets we’ve invested in as a matter exceeded the new supply coming online which has given a great boost to our run rate growth. In addition we’ve seen homeownership rate continue to fall and as that trend continues we would expect more of the millennial people coming [indiscernible] multifamily renters.

[John Williams:]

Thank you, John. And the question that we’re asked the most likely is please tell us a little more about how things are going with your grocery store anchor retail shopping centers and what are the future plans. Joel Murphy, why don’t you answer that for us?

[Joel Murphy:]

Thanks John. As said earlier in John and Lenny and Dan's comments we just completed the acquisition of nine of these 10 centers in the last 45 days and we believe these centers will continue to operate as underwritten in the coming years. And we are also very much looking forward to actively managing and leasing these centers under our new ownership so as the partner enhance their market presence in their particular submarket. Also as far as the future, also being mindful of the companies stated 20% capital in non-multifamily assets, we’re beginning discussions with several institutional capital partners that share our desire to be invested in the sector, so that we can actively yet prudently grow our portfolio, consistent with our strategy.

[John Williams:]

Thank you, Joel. And operator with that I’d like to thank everybody that joined us on this earnings call this morning. I’d like to turn the call back over to you and open up the floor for any other questions or follow ups our visitors might have. Operator?

[Operator:]

Yes, thank you. We will now begin the question-and-answer session [Operator Instructions]. You have a question from Michael [Kotis] with MLV & Company.

[Unidentified Analyst:]

So previously I believe you guys mentioned that your target leverage is in a range of 40% to 60% loan to cost. I guess first, is this still the case and then at roughly 50% at 3Q, kind of what is your plan to portfolio [indiscernible] additional equity at this point in time? And then kind of following that with your strong growth or strong potential for growth on the horizon. How does that all kind of sit in with the plan?

[John Williams:]

Well, let me take a crack at it and then I’ll let Lenny and Dan add to that. If you will notice in our supplemental I think we ended up at 60% debt to un-depreciated book value. That will be an anomaly because we added a term loan with KeyBanc that we will pay off very short term. We’ve already made some potential payments on that term loan and I think by this point it will be paid off and we will return to below 50% which would really be our programs target. The next question was how are we going to pay for this and we are very pleased with the growth of our sales of our preferred securities. The security sales are ramping up. This is a wonderful security to use to finance real estate and pay 6% annual dividend and we paid [indiscernible]. It's a great program that allows us to leverage off those funds to make acquisitions and the growth that we’re seeing in those preferred shares, it will lessen the need for common stock. I think Dan would tell you and I’ll call him in a minute. But Dan will tell you we still will sell common stock from time to time. We’re just reluctant to sell a lot of it at this point in time because the damn stock is lower than where we think ought it to be. So Dan you will [indiscernible] at that?

[Dan DuPree:]

The only thing that I would add to that is the success that we’ve had when we raised -- sold common stock through the ATM, where we think we’ve had excellent execution.

[Unidentified Analyst:]

And then I guess maybe on the preferreds, I guess I think you talked about it around 10 million a month is your current trend. You guys kind of see that thing constant moving forward or is now kind of a match front basis?

[John Williams:]

It’s ramping up.

[Unidentified Analyst:]

Okay, great. And then just finally, should we expect any additional G&A since you have a new portfolio transaction, which came in the fourth quarter or do you guys kind of take everything in 3Q?

[John Williams:]

We took all of it in 3Q except one of the shopping center assets closed the first week in October. So that is still over to the fourth quarter of some of the acquisitions cost of that asset but fourth quarter should be relatively cleaner than the third quarter. But please remember that when it comes to FFO, we’re going to be very lumpy. Our business program for next year includes the acquisition of a number of province and shopping centers and conversion of up to six properties off our mezzanine program into ownership. When that occurs, that creates a fair amount of cost that will be dropped into the FFO column. That’s why we’ve urged you and the other analysts, if you really want to have a metric of the Company’s performance, please look at NFFO or core FFO. We think that’s a much more valid way to look and see how this team is performing for our shareholders.

[Dan DuPree:]

Yes, one other thing just to be aware of is just when the fourth quarter comes out, because of the mid-September timing of most of these acquisitions, we only had a couple two or three weeks of D&A for the third quarter. So for the fourth quarter D&A by definitions we expect to be significantly higher.

[Operator:]

Thank you [Operator Instructions]. All right if there is nothing else on the phone at the present time I would like to turn the call back over to management for any closing comments.

[John Williams:]

Well, thank you so much for joining us. We are looking forward to another good fourth quarter. We will be announcing a yearly NFFO projection after our call next year. And we’re expecting frankly good growth and good performance again next year. So thanks for joining us and we’ll listen for your call after the fourth quarter for next year. Thank you.

[Operator:]

Thank you. The conference is now concluded. Thank you for attendees in this presentation. You may now disconnect. Have a nice day.