Preferred Apartment Communities, Inc.
Q1 2015 Earnings Call Transcript

Published: 6 May 2015

[Operator:]

Good morning, ladies and gentlemen and welcome to the Preferred Apartment Communities First Quarter 2015 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. [Operator Instructions] Please note this event is being recorded. I would like to introduce to you you’re host for today’s call, Mr. Lenny Silverstein, President and Chief Operating Officer. Mr. Silverstein, please go ahead.

[Lenny Silverstein:]

Thank you for joining us this morning and welcome to Preferred Apartment Communities first quarter 2015 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, John Isakson our Chief Capital Officer, Joe Murphy the President and Chief Executive Officer of New Market Properties which our wholly owned subsidiary focused on grocery anchored necessity retail shopping centers 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 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 share for the 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 Thursday at 9 AM at our offices. If you haven’t yet boarded, we encourage you to do so. If you have any questions regarding the proposals, please feel free to call me at 770- 818-4147. And now, I'd like to turn the call over to John Williams. John?

[John Williams:]

Thank you, Lenny. Our accounts trail in March, had discussed our guidance for 2015as well as the number of our key management goals for the year. Now, that we’ve just completed our first quarter, let me update you on how we’re doing. Our first goal is to increase normalized FFO per share by 10% or more per annum. So far I think we’re on track to meet this goal based on the midpoint of our guidance of $1.12 to $1.18 per share. Our next goal is to increase our common stock dividend per share by the amount that keeps our overall dividend growth rate, since our IPO to 10% on any allowance basis. The primary driver of our decision to increase our dividend in our AFFO, some people may refer to this as cash available for distribution, add to it [ph] as a matter of fact. This has increased 10% during the first quarter, which gave us the confidence to raise our dividend in the second quarter. With our recent announcement to increase the common stock dividend for the second quarter to $0.18 per share will be an annualized growth rate of 11.1%. We’re on target here. Our next goal is to grow our assets significantly, but at the same time accretively. During the first quarter we increased our total assets by approximately 13% to $789 million and anticipate continue in decrease our asset strategically as the year progresses. We have also stated a goal to achieve and maintain a ratio of debt to unappreciated book value of 50% or less, where we reduced this ratio from 53.5% at the end of the year to 53% as of the end of the first quarter. We’re making very good progress in this area, but blankly this is our status [ph] goal. It will be more difficult to achieve overtime, as our expected acquisitions of multifamily and grocery-anchored retail assets increases as the percentage relative to our mezzanine loan portfolio. Our next goal is to have normalized FFO payout ratio to our common stockholders and unitholders a less than 75%. We hit 75% right on the nose. We’re seeking to have adjusted FFO payout ratio to common stockholders and unitholders of less 90%. For the first quarter, we actually achieved a ratio over 78.9%. Last, we announced that we wanted to list our common stock in the New York Stock Exchange by the end of year, as compared to the NYSE Market, where our common stock is currently listed. As we of today I believe we’re on track to achieve this goal and we’ll be making the applications on it. I’ll now turn the call - as you can see, I believe we’ve had success to date moving toward our 2015 goals, with our entire team remaining committed and focused on reaching or exceeding these goals for the year. On a personal note, one of my goals is to create the most unique and positive corporate culture in the industry. We want every associate to have immense pride impact and to be committed to our company and above all never lose focus on what is truly important to our residents, our retail centers and stock holders and our associates. I’m pleased to report that we had instituted a number of programs by promoting both positive corporate culture and leadership involvement. We believe this will continue to serve back in our stockholder well into the future. Let me now call on Lenny, to tell you some of our achievements for the year.

[Lenny Silverstein:]

Thanks, John. Overall, we again produced to get operating results for the first quarter in line with our internal budgets, enabling us to narrow our normalized FFO guidance range for the year $1.12 to $1.18 per share, while reiterating our midpoint at $1.15 per share. Our normalized FFO for the first quarter of 2015 was $5.2 million compared to $3.9 million for the first quarter of 2014. This represents a NFFO of $0.24 per share for the first quarter of 2015, compared to $0.25 per share for the same period last year. Our NFFO results for the first quarter year-over-year reflected several events peculiar to the way conduct our business. First, in early February, we acquired two properties in Texas that had not yet reached stabilization. Leasing of both properties was well below 85%. We realized that that would impact our first quarter earnings, but also appreciated that has afforded the opportunity to acquire these assets at a meaningful discount to market had we waited for them to stabilize. As of this morning, these two properties are 96% leased. Second, we sold shares of common stock in anticipation of funding several mezzanine loans in the first quarter. The closing of these loans was delayed into the second quarter and then we’ll talk about these loans momentarily. Our adjusted FFO for the first quarter of 2015 was $0.22 per share versus $0.20 per share for the same period last year or an increase of approximately 10% per share. Tweaking to other financial statement metrics, our total assets for the first quarter net of depreciation were approximately $789 million, an increase of approximately $434 million or 122% compared to the first quarter of 2014. As of today we had no borrowings outstanding on our $50 million revolver with KeyBank and only $10 million outstanding on our term loans. By managing our capital and debt resources, we believe we have positioned ourselves well to take advantage of accretive acquisition and mezzanine loan [ph] opportunities, both for multifamily and for grocery-anchored necessity retail. For the first quarter of 2015, we had a dividend on our common stock of $0.175 per share to all common stockholders of record as of March 13, 2015, which represents a 40% increase from our initial quarterly common stock dividend of $0.125 per share or approximately 10.8% on an annualized basis. For the second quarter, based on our projected cash flow from operating activities, our board announced last week that the common stock dividend was being increased $0.15 per share from $0.175 per share to $0.18 per share. This dividend will be payable to common stockholders of record after the close of business on June 15, payable July 15 and will represent approximately 11.1% on an annualized basis. A key component of our strategic plan 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 activity, mezzanine loan investment program and our retail initiative. Dan?

[Dan DuPree:]

Yeah, thanks Lenny. We continue to actively pursue multifamily and grocery-anchored retail acquisitions that fit our business model, in addition to making mezzanine loan investments on selected developments on which we’ve purchased options. For 2015, we’re still expecting to exercise options to acquire several multifamily communities that we previously funded through mezzanine loan investments. Of course, as we’ve noted before the timing of these acquisitions and investment activities can very quarter-by-quarter. During the first quarter we continued our acquisition mezzanine loan origination activities. In January, we funded a mezzanine loan to partially finance a planned300 unit multifamily community in Atlanta. This loan generates a monthly interest of 8.5% per annum and accrued deferred interest of 5% per annum. In January, we also entered into a purchase agreement to acquire a 237 unit multifamily community in Sarasota, which we expect to close later in this month. In February, we acquire two multifamily communities in Texas and Houston, Texas, representing 520 units and we converted a bridge loan to a mezzanine loan to partially finance a 172 unit planned third phase of our Summit Crossing community in Atlanta. In the beginning of the second quarter, we converted a bridge loan to a mezzanine loan to partially finance a 732 bed student housing project in Lubbock, Texas adjacent to the Texas Tech University campus. In addition, just last Friday, we made a mezzanine loan investment and partially financed an 840 bed student housing project adjacent to the Beaver University campus in Waco, Texas. Both of these mezzanine loans pay monthly interest of 8.5% per annum and accrued differed interest of 5% per annum. By way of example, these two mezzanine loans originally were planned to close in the first quarter as Lenny mentioned earlier. With the closing of the Sarasota acquisition, we’ll own 4,083 units with an additional 4,360 units under construction through our mezzanine loan program. As is our strategy we financed the loans for each of the Houston multifamily assets, just describes separately on a non-recourse basis with no upstream guarantees to preferred apartment communities or our operating partnership and no cost collateralization of any of the mortgages. The loans for these acquisitions have interest rates of 3.16% and 3.43%, with maturities of approximately seven years each. Speaking of our mezzanine loan investment strategy, as of March 31st, we had approximately $196 million in outstanding mezzanine and land loan commitments, on which we already funded a $172 million. As a group, these developments are ahead of schedule and on budget and in many cases below budget and they should be positioned for us to consider exercising our purchase options within the purchase option windows disclosed in our first quarter 2015, supplemental financial data report. Timing of the exercise of a purchase option is always a balancing act between our anticipated return on the loan, projected return on the investment once acquired and current and projected interest rate. We are pleased that the lease out activities at the multifamily communities are mezzanine loan portfolio by going very well and in several cases we’re leased in excess of 99% and in almost every cash the rental rates that have been pushed and are higher than originally budgeted. Our multifamily portfolio is among the youngest in the industry and assuming we exercise the purchase on all or most of our mezzanine loans investment projects, this already young portfolio will become materially younger. From financing perspective, we continue to use a combination of capital available with us from the sale 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 mortgages placed on each of our properties. Let me now turn the conversation back to John.

[John Williams:]

Thanks, Dan. As mentioned earlier our financial results for the quarter was consistent with our budgeting. I believe the fundamentals and [indiscernible] for the foreseeable future will continue to be very strong for us at Preferred Apartment Communities. Before I turn the call over to the operator there are several questions we’ve been asking in anticipation of today’s call and for the first question, I’m going to call on Joe Murphy. Please tell us a little more about how things are going with the grocery store anchored retail shop incentive portfolio. Joe?

[Joe Murphy:]

Sure, thanks John. We’re very pleased with the operation results for the retail portfolio for its second full quarter of operation. The portfolio is 95.1% leased and the results for the quarter exceeded our internal underwriting that we put in place when we approved those acquisitions back in the third quarter of 2014 and we exceeded our budget for the first quarter. Similar to the multifamily portfolio our retail portfolio benefits from the positive momentum and job and wage growth in our markets and we also feel good about the positioning of our assets, especially considering the historical lows of new supply of grocery-anchored and other retail space, both nationally and in our market. And also similar to the multifamily portfolio, we have a relatively young portfolio. Our leasing resources are now fully engaged and we see both positive trends in absorption and rent achievement on vacant space and positive trends on renewals of currently leased space. An example of some of these embedded opportunities in our portfolio is a RadioShack deal and our Kroger anchor center you see in Houston, Texas. When RadioShack fell bankruptcy back in January, we aggressively followed this process through the bankruptcy coding to take steps to position ourselves as best we could to maximize the chances for RadioShack to reject its lease and we were pleased that in fact hit a curve. While this gave results in [indiscernible] and in a relatively minor loss of revenue for the first and second quarter, we now have LLI in negotiation on that space, they’re rented at $9 a square foot about the RadioShack rent for a 53% increase. In addition, that far to date we’ve executed renewals with an average rent for at 7% on those renewals. This is just a couple of examples on the asset management focus we’re bringing to the portfolio. A critical component to access [ph] and help renew retail property is the sales at the property level. During the first quarter, we received the sales reports from our grocery-anchors and are happy to report a 2.5% comp store sales increase from our grocery-anchors across the portfolio, which results now in us having an average of over $500 a square foot in sales from these grocery-anchors. This metric not only contribute to the success of the anchor store, but also increased foot traffic in the center for the benefit of our small shop tenant. As John mentioned in his comments, the primary key of success with any organization is its people and I’m very pleased with the assembly of the new market management team. It was completed in the first quarter with the addition of Stephanie Hart running asset management and Michael Aide, working closely with me on our acquisition efforts. Of course Stephanie and Michael have deep experience in relationships in the retail sector and they also benefit from significant public experience in their backgrounds, Stephanie being with me at Cousins Property and Michael being with AmREIT. Now, that we have the second full quarter of operations under our belt and the assembly of the senior management team for new market completed, we’re now fully focused on the pipeline again. We’re working on a series of possible grocery-anchored acquisition that fit our acquisition criteria in our Sunbelt markets and we’re planning to aggressively and prudently pursue them, always keeping management in our shareholders’ interest in only accretive transactions at the forefront of our analysis.

[John Williams:]

Thank you, Joe for that great report. The next question that was found interest, will you please talk about your same store results and I’ll call John Isakson to respond.

[John Isakson:]

Thank you, John. For the first quarter of 2015, our same store was up 3%, almost 3%, that was based on revenue growth of 4.1% and the expense increased to 5.7%. The primary driver for expense increases was weather in the Northeast, snow removal and taxes, property taxes that were up significantly.

[John Williams:]

Thank you, John. And a question on leasing trends for the second quarter and the balance of the year. Bill Leseman, would you respond to that?

[Bill Leseman:]

Yes, thank you. We’re very pleased, in fact chartered [ph] about leasing, as it has happened in the second quarter and as we anticipated it happens to the rest of the year. In particular it has been an uptick on the leasing in our Houston properties and have moved into a 96% lease status. So those have come on quite well.

[John Williams:]

With that I think, I’d like to thank you for joining our call. And then ask the operator to please see if there’s anybody else in the queue that would like to ask a question.

[Operator:]

Absolutely, we will now begin the phone portion of the question-and-answer session. [Operator Instructions] Our first question comes from Paula Poskon of DA Davidson. Please go ahead.

[Paula Poskon:]

Thanks, good effort. I just wondered if you could talk a little bit about what’s happening in Houston, clearly there’s a lot of angst in the investment community with the energy markets doing what they’re doing over the last year or so. What are you seeing in terms of demand, traffic, ability to push rents, move outs et cetera?

[John Williams:]

Well, I’m going to call on John Isakson, but we just - I get a rumor report [ph] the Monday afternoon and I’m looking at the three Houston properties. One is 96% leased, the other one is 97% leased and the other one is 97.7% leased, so I’ll have to say we are very pleased, but I think on a more macro basis, John as some information. John Isakson?

[John Isakson:]

Yes, so Axiometrics is one of the sources that we use for market level data and they recently reported that Houston is the number four job growth city in the country with over 82,000 jobs created on Forbes Australian basis [ph]. And they’re currently forecasting job growth for 2015 of almost a 3% increase and they’re forecasting a 3% increase in rental rate growth as well, market wise. We feel very good about the Houston market.

[Paula Poskon:]

Okay, thanks John.

[John Isakson:]

Thank you, Paula.

[Operator:]

Our next question comes from Wilkes Graham of Compass Point. Please go ahead.

[Wilkes Graham:]

Hi, good morning guys. Just a couple of housekeeping questions, first one - and I apologize if you mentioned any of this, but just the real estate taxes number looked fairly high in the quarter. I wonder if there was anything in there worth discussing?

[John Williams:]

Well, first as you know these accounts and these poverties [ph] are all increasing taxes, substantially we oppose and fight all the tax increases that we look at and we take our own visible, we go ahead and in escrowing and booking the bill that’s put in place because we think that’s a prudent thing to do, but we are fully expecting to get some more ratted down over the course of the year, as we continue to discuss what’s happening with some of these institutions. As a matter of fact, we had a property in Houston, where the tax assessment was actually higher than we what we paid for, which we thought was sort of an extreme, but John I, might have some additional color, you might want him. John?

[John Isakson:]

Thank you, John. I think you covered most of the - well, we’ll appeal all the properties where the tax bills are overly aggressive as John said. And the result of the deals will manifest themselves before the end of the year. So this is the - it will be a third or fourth quarter result, before we know what the results have been.

[Wilkes Graham:]

Okay, thanks and then on the Naples asset, you collected $1.2 million accrued fees during the quarter. Can you just help me understand, what the mechanism is that allows you to receive that income prior to the maturity of the mezz loans?

[John Williams:]

Dan, you or Lenny want to answer this?

[Dan Dupree:]

Yeah, there was excess cash in the operating account for the developer and they chose to [indiscernible] a fair amount of the total accrued early, so that it wasn’t accumulating additional charges on those dollars. They could pay down basically reduce the amount they had outstanding.

[Wilkes Graham:]

Okay, alright. And maybe John, can you just comment generally on the acquisition market for multifamily assets out there?

[John Williams:]

Well, it’s no different than it’s been for the last several years. It’s going to be a tough market, we have to look at perhaps a 100 deals to find 10 that we like and then we make offers on three or four or five and maybe we have one. In many cases we’re able to preemptively [ph] be able to make acquisitions, which is a help to us rather than just be out there bidding with 20 to 30 other bidders. But there are properties available and we continue to seek them out and we want to make sure they’re in market, so if we like we have a budgeted number of acquisitions we will do this year and I think we’ve our own target to be able to make that happen. Frankly, we have two additional assets that we have not announced publically because we’re still going to do diligence, but we hope that perhaps next week we’ll be able to make an announcement on these two wonderful assets. So we’re still seeing assets both in multifamily and in the retail area that work for us and that are accretive to the company and have value for our stockholders.

[Wilkes Graham:]

Thanks, last question. John Isakson, I apologize if you’d mentioned this already, I got pulled away for a second, but can you talk about what sort of where Fannie and Freddie rates are on multifamily mortgages right now and has that changed over the past month or so?

[John Isakson:]

Sure, I think we’re surprised where that Fannie and Freddie are facing issues with the Cap this year. They’re in front of their regulator to give relieve on that, would expect the results for those discussions hopefully sometimes in the next 30 days. I mean, it’s just hard to tell when FHFA is going to make a decision. In the interim with them facing the Cap their rates and spreads have gone up, but they’re planning a participants in the market, where this life insurance companies, mortgage funds, [indiscernible] funds, a lot of those who stepped into take their place were still getting very good quotes from both Freddie and Fannie, as well as other participants. But today versus 30 days ago, I mean maybe spreads are up in the market, maybe they’re upper corner and on certain deals Freddie and Fannie can be higher, just depends on how aggressive they will be.

[John Williams:]

The good news that seems to be other capitals who’re rushing in, so we’re getting some quotes on some of the shopping’s on our items and we’ve had lot of interest on multifamily assets. So we’re a company, we would still put really strong financing on all of our properties relatively now [ph]. We are seeing in our calendar, one of the reasons some of these - the mezzanine loans have been somewhat slower, the close is the banks and even the folks that we have to get permits from, it is an incredibly difficult process. And it seems to be slowing down not only for us, but across the country the development activity. I think you’ll have seen there are actually - for the last 12 months we’re building fewer amounts of family units than the previous twelve months. So there is some breaks been put on production and I think that’s good for the long term for people who invest in apartments, we’re very comfortable with what the market is today.

[Wilkes Graham:]

Thanks, for that and John Isakson, can you say like, are all in rates, as the ten year has moved 30 basis points in the past month or so, are all in rates still below 4%?

[John Isakson:]

Well, I mean for seven year, yes. For ten year it’s going to depend on the leverage level and quality of the level. The less attracted deals are probably pushing up against 4% on ten year money.

[Wilkes Graham:]

Okay, thanks a lot.

[John Isakson:]

But seven year money I would say, across the board is less than 4%.

[Wilkes Graham:]

Okay, thanks you.

[John Isakson:]

You’re welcome.

[Operator:]

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

[John Benda:]

Hey, good morning and how are you today?

[John Williams:]

Great John, thank you.

[John Benda:]

So just a question for you on the mezzanine loan portfolio, in the fourth quarter the Crosstown Walk loan that you guys originated was a second stage of community, so can you talk about some of the organic growth opportunities in the mezz loan portfolio for second phases? I mean, will that be in Encore phase 2? Will that be a fusion phase 2, is there a growth in that portfolio?

[John Williams:]

Let me try –John, let me try to answer that. We love to do second phase deals because we’ve already proved out the success of the project with our first deal. So in our system today there will be a second phase of Crosstown Walk. We’ve already acquired the land and we expect to close that mezz loan I think within the next 30 to 45 days. There’s a third phase of our Summit Crossing property in Atlanta and that is already being closed, it’s underway. There will be a second phase of our property up in Charlotte and we would expect it to close by midsummer. So we’re excited about the opportunities in the second phases, sometimes it works for the second phase and sometimes it doesn’t - well, not be enough land for second phase at Encore or won’t be a second phase for [indiscernible] or our property in Pittsburgh or Williamsburg, but whenever we’re able to do the second phase development, it’s exciting for us because we’ve already proved out values in the first phase Houstand and Crosstown Walk could be a great example. Our rent projections for that second phase were up substantially and so ultimately [ph] when we acquire that property from a development we think it will produce great results for our shareholders.

[John Benda:]

Okay. Then, on the loans where there is a purchase option, but not a purchase option price assigned, and it's a discount to market cap, who actually calculates the market cap rate? And how favorable is that process to APTS?

[John Williams:]

Let me tell you how the process works in actuality. We have a mechanism to resolve a conflict on what the price should be. The developer would have an appraiser, we name an appraiser, then they get a third appraiser. The truth is, I don’t think that we’d ever get to the point where we would round that mechanism. The development partners that we work with are paramounted [ph] as we are paramounted, so I’m sure the process would be a negotiation that will ultimately give us the wide price recognizing that we are expecting a discount to what everybody else would play for that same asset. And we’ve had several of those negotiations, that worked out very well and I think we would be able to do so in the future. But if there was a in pass, we do have a process in place that would allow us to buy the asset at some 40 to 50 bps below what other people would pay for. Dan do you have any comments to bare or -

[Dan DuPree:]

No, that’s covered.

[John Williams:]

So it’s a win-win process for us. We get a brand new asset that we’ve had a chance to inspect, chance to help us secure and look at the land, look at the plans, give them the specs and once the property is mature, we get a chance to lease it up and it gives us the chance to end up with a wonderful great asset at a below market price. And in the meantime we’ve got the current return [ph] mezzanine loans, so it’s a wonderful playing.

[John Benda:]

Okay and then lastly, on the multifamily expansion initiative, you’re looking at the current footprint and what's in the pipeline on the purchase option front, as you guys look to expand, is it going to be entrance into new markets or is it going to be expansion in existing, to kind of leverage overhead and create efficiencies?

[John Williams:]

As far as we can John, we want to stay in markets that we’re already looking at. The two assets that I mentioned that we’re looking at one is in Dallas and that would be a - we’re already in Dallas and that would be a great asset for us. Sarasota, is really sort of in the trade area of Tampa, it’s only a 25 or 30 minute drive from our Tampa asset. So that helps us on the West Coast. So we’re very conscious of that, although I’d have to say you, going back some odd years that I’ve been in the business, it used to be - I’ve to pick up a phone and get into my car and drive and look at these assets. Today, technology allows us to be in constant contact of what is going on at the party level, we have the ability to Skype and mingle [ph] with our managers face to face and we have that wonderful airline Delta that takes us nonstop to wherever we want to go. So we’re a much more efficient operation than we would have been 30 or 40 or 50 years ago. So we’re concerned with concentration, we’re not worried about not being concentrated in some of our markets.

[John Benda:]

All right, great. Thank you very much.

[John Williams:]

Thank you, John. And that looks like our last phone call and I’m going to thank all of you for joining us. If you have any additional questions feel free to get in touch with us. Our queue will be released when Mike?

[Mike Cronin:]

By Monday.

[John Williams:]

So if you have any further questions, please feel free to call. Thank you for joining us and we’ll see you at the next call.

[Operator:]

The conference is now concluded. Thank you for attending today’s call. You may now disconnect.