Preferred Apartment Communities, Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Preferred Apartment Communities’ Second Quarter 2015 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to introduce your host for today’s conference, Lenny Silverstein, President and Chief Operating Officer. Please go ahead, sir.

[Lenny Silverstein:]

Thank you for joining us this morning and welcome to Preferred Apartment Communities’ second quarter 2015 earnings call. We hope that each of you have a chance to review our second quarter earnings report, which we released yesterday after the market closed. In a moment I will 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 Offer; 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; Joel Murphy, the President and Chief Executive Officer of New Market Properties, which is our wholly-owned subsidiary focused on grocery anchored necessity retail shopping centers; Jeff Sprain, our General Counsel; and Paul Cullen, our Chief Marketing Officer. Following the conclusion of our prepared remarks we will 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 uncertainty and actual results may differ materially. There is a discussion about these risks and uncertainties in yesterday’s press release. Our press release can be found on our website at pacapts.com. The press release on our website also includes an attachment containing our supplemental financial data report for the second 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 discussed this morning are based on the basic weighted average shares of common stock in Class A partnership units outstanding for the period. I would now like to turn the call over to John Williams. John.

[John Williams:]

Thank you, Lenny. During the second quarter we commenced several new initiatives that we believe will reflect positively for the Company, our stockholders and our associates. First and foremost, we are pleased to let you know that our common stock became listed for trading on the New York Stock Exchange this past July 17. As you recall, this was one of our goals for 2015. We believe that listing our common stock on the New York Stock Exchange reflects a significant step forward in the growth and direction of our Company. Our common stock continues to be traded under the symbol APTS. As with this accomplishment we believe our other key goals, Company goals, are well in hand. If you will go back to our last quarter’s earnings call we outlined these goals for you. In addition, we learned in June that Preferred Apartment Communities would be included in the Russell 2000 and Russell 3000 indexes. Russell indexes are widely used by investment managers and institutional investors for indexed lines and its benchmarks for passive and active investment strategies. We are pleased with this recognition, which we believe reflects the success of our Company since our IPO. As our Company has grown we are transitioning certain of our key management software systems to a new system. This will include corporate operations, asset and revenue management operations and property level operations across both our multi-family and grocery anchored retail shopping center assets. This software is state of the art technology and will put our systems technology in the category of best-in-class. As you are aware, we have made a number of investments in the college student housing arena. We currently have six loan investments and anticipate growing this niche sector within the Company. Toward this end we recognize that managing student housing, although still multi-family in nature, requires a slightly different skill set. We are pleased to report that Kim Barkwell will be joining us to head up a new property management division focused solely on student housing. Kim has an amazing background in this industry. She has over 25 years of experience in all facets of real estate property management and most recently has served as President of Ambling Management Company, responsible for all aspects of its operations. Kim is recognized by our peers as a leader in this industry and has served in a leadership position for a number of associations within the student housing and general apartment industries. Again, our commitment to best-in-class is shown by Kim’s selection. As I have mentioned before, one of my personal goals is to create the most unique and positive corporate cultures in the industry. During the second quarter we graduated our first class in leadership development. We want every associate to have immense pride impact, to be committed to our Company, and above all to never lose focus on what is truly important – our stockholders, residents and retail tenants. Let me now call on Lenny to tell you of our achievements for this quarter. Lenny.

[Lenny Silverstein:]

Thanks, John. Overall we believe we again produced good operating results for the second quarter, in line with our internal budgets and tracking with our guidance. Our normalized FFO for the second quarter 2015 was $6 million compared to $4.25 million for the second quarter 2014. This represents a NFFO of $0.27 per share for the second quarter 2015 compared to $0.26 per share for the second quarter last year. Based on these results we are narrowing our normalized FFO guidance range for the year to $1.13 to $1.17 per share with our midpoint staying of $1.15 per share. This $1.15 per share represents a 10% increase in our NFFO compared to last year’s NFFO, which is one of our stated goals for 2015. Our adjusted FFO for the second quarter 2015 was $0.30 per share versus $0.21 per share for the same period last year. This represents an increase of approximately 43% per share. Some of this increase reflects our purchase of two strong multi-family communities tied to our outstanding loan investments, which allowed us the opportunity to harvest accrued interest related to these loan investments. As you have heard us talk about many times before, AFFO reflects the strength of a company’s ability to pay dividends to its stockholders. In fact, for the second quarter we paid our stockholders and unitholders a dividend of $0.18 per share, which represents an annualized increase of 11.1% from our IPO in April 2011. This dividend payment represents an AFFO payout ratio of 61%. And speaking of numbers, our cash flow from operations for the three months ended June 30, 2015 was approximately $10.6 million as compared to $5.5 million for the same period in 2014, representing an increase of approximately 93% period over period. In looking at our consolidated statements of operations, you will notice that we reported a net loss attributable to common stockholders from second quarter 2015 compared to net income attributable to common stockholders for the second quarter of 2014. The net loss for the second quarter 2015 is primarily due to significant non-cash expense increases, such as depreciation and amortization, and expenses related to property taxes, interest and property operating and maintenance, arising in connection with the acquisition of 18 multi-families and grocery anchored retail shopping centers since the second quarter of last year. As the ratio of real assets versus loan investments increases, the probability of a more tax efficient dividend also increases. Along with this significant growth we are able to maintain our leverage as measured by the ratio of our debt to the un-depreciated book value of our total assets to 53.1%, basically in line with the 53% leverage at March 31 of this year. From an occupancy perspective our average multi-family physical occupancy was 95.1% for the second quarter this year and our retail portfolio was 95.6% leased as of June 30, 2015. Switching to other financial statement metrics, we continue to add quality assets to our portfolio in a meaningful way. For the second quarter our total assets net of depreciation were approximately $909 million representing an increase of approximately $528 million or 139% compared to the second quarter 2014. At June 30, we had no borrowings outstanding under our revolving credit facility with KeyBanc. By managing our capital and debt resources we continue to believe we have positioned ourselves well to take advantage of acquisitions and loan investment opportunities both for multi-family and grocery anchored necessity retail. 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, our loan investment program and our pipeline. Dan.

[Dan DuPree:]

Thanks, Lenny. We continue to actively pursue multi-family and grocery anchored retail acquisitions that fit our business model in addition to making loan investments on selected developments on which we have purchase options. During the second quarter, we continued our acquisition and loan activities. In April we converted a land acquisition loan to an investment loan of $15.6 million to partially finance a planned 732 bed student housing project adjacent to Texas Tech University in Lubbock, Texas. In May we originated a loan commitment of $15.5 million to partially finance a planned 250 bed student housing project on a terrific site adjacent to Baylor University in Waco, Texas. Each loan carries a current interest rate of 8.5% and accrued deferred interest of 5% per year. In April we originated a land acquisition loan commitment of $2.9 million to fund predevelopment costs for a proposed 542 bed student housing project adjacent to the University of South Florida in Tampa, Florida. This loan pays current monthly interest of 10% per annum. In May, we completed the acquisition of a 237 unit multi-family community in Sarasota, Florida for an aggregate purchase price of $47.4 million. In June, we acquired two multi-family communities, one in Naples, Florida, one in Charlotte, North Carolina representing in the aggregate 592 units which were partially funded through our loan investment program. With the closings of Sarasota, Naples and Charlotte, the projects there, we now own 4,675 units with an additional 4,768 units in various stages of construction through our loan investment program. Included in this program are six student housing community projects in various stages of development representing an aggregate of over 4,000 beds. We generally finance loans for multi-family assets on a non-recourse basis, with no upstream guarantees to Preferred Apartment Communities or our operating partnership and no cross collateralization of any of the mortgages. The loans for the Sarasota, Naples in Charlotte acquisitions have interest rates ranging from 3.27% to 3.87%, both all with maturities of seven years. Speaking of our loan investment strategy, as of June 30 we had $209.3 million in outstanding land and investment loan commitments of which we have already funded $171.5 million. As a group the developments these loans are helping to fund are performing well and we should be in a position to consider exercising our purchase options within the purchase option windows disclosed in our second-quarter 2015 supplemental financial data report. Timing of the exercise of these purchase options is always a balancing act between our anticipated return on the loan, projected return on the investment once acquired and current and projected interest rates. All of the properties acquired so far this year are new having reached stabilization in either 2014 or 2015. In fact, our portfolio of properties is becoming the most modern in our industry. Over 44% of our communities have been delivered to the market since 2012. From a financing perspective we continue to have the flexibility to deploy capital available to us from a combination of our sales – of our Series A redeemable for preferred stock, the sale of our common stock through our ATM program, borrowings under our loan facility with KeyBanc and proceeds from first mortgage loans placed on each of our acquired properties. Having access to efficient capital through multiple sources has allowed us to continue our opportunistic acquisition program. Just this past Friday, for example, we closed on the purchase of another new stabilized 395 unit multi-family community in San Antonio. Let me now turn the call over to Joel Murphy, CEO of our grocery anchored retail shopping center division. Joel.

[Joel Murphy:]

Thanks, Dan. We are very pleased with the operational results for the retail portfolio during our third full quarter of operations. At the end of the second quarter, the portfolio was 95.6% leased an increase of 50 basis points since the end of the first quarter. Additionally, the results of the quarter exceeded our internal underwriting in place and we approved these acquisitions back in the third quarter of 2014. On July 1, we closed on the acquisition of Independence Square in Plano, Texas, an affluent and densely populated northern suburb of Dallas. Independence Square is a 140,000 square foot grocery anchored necessity retail center anchored by a 43,000 square foot Tom Thumb grocery store. Tom Thumb is a strong credit tenant that enjoys significant market share in the Dallas-Fort Worth market and this store generates excellent sales per square foot, consistent with our strategy of focusing on market share leaders with strong sales in the centers that we acquire. Tom Thumb is one of the banners of the corporate combination of Safeway and Albertsons, now the second-largest grocery chain in the United States. The center is 95.8% leased to a variety of tenants that have strong historical occupancy. This is our second retail acquisition in Texas and our first in the DFW Metroplex. Similar to the multi-family portfolio, our retail portfolio is a relatively young one, and it benefits from the positive momentum in job and wage growth in our markets and we also feel very good about the positioning of our assets, especially considering historical lows of new supply grocery anchored and other retail space both nationally and in our markets. We are seeing positive trends both as to absorption and rent achievement on vacant space and positive trends in the renewal of currently leased space. This high retention rate supports our ongoing leasing efforts in the ability to keep tenants and corresponding rollup rents on renewals speaks to the overall health of our portfolio. This is just a small example of the asset management focus we are bringing to the portfolio. A critical component of success and health of any retail property is sales at the property level. We have now received the sales reports from all of our grocery anchors for their 2014 sales. And we are seeing solid sales growth across the portfolio from our already highly productive sales per square foot grocery anchors. This contributes not only to the success of the anchor stores themselves, but also to the increased foot traffic in the center for the benefit of our small shop tenants. The primary key to the success of any organization is its people. While I discussed in last quarter’s call the assembly of our senior management team with the additions of Stephanie Hart and Michael Aide, I am also very pleased that we have continued to attract additional talented associates to drive our business in the acquisition platform and at the property level. Now, we have this third full quarter of operations under our belts and the assembly of the senior management team for new market behind us we are fully focused on the pipeline. We are working on a series of possible acquisitions and investment loan opportunities that fit our criteria in our Sun Belt markets, always keeping our stockholders’ interests at the forefront of our analysis. Now let me turn the call back to John. John.

[John Williams:]

Thanks, Joel, thanks for that great report. As was mentioned earlier, our financial results for the second quarter were consistent with our budget. I believe the fundamentals in the real estate industry are the best I have seen in my 50 years. We continue to see strong growth and we are very optimistic about the next few years. Before I turn the call over to the operator there are several questions that we have been asked in anticipation of today’s call. First question is, why do you emphasize the young age of your portfolio and how does this affect leasing trends? I will ask Bill Leseman to comment on this question.

[Bill Leseman:]

Thank you, John. We emphasize the age because we think it is simply a competitive advantage. First, the newer the portfolio is more relevant and a greater drop to our target market. Frankly, newer is better. Thus the portfolio’s age helps us draw in a greater occupancy and allows us to more consistently grow our rents. Second more on the operating side, the newer portfolio requires less maintenance and less large capital expenditures than older portfolios. Thus helping us to maintain and manage our expenses now and down the road.

[John Williams:]

Great, Bill, thanks. Next question was it appears your normalized FFO for the first half of the year is relatively flat compared to the first six months of 2014. Are you still comfortable with your NFFO annual guidance range? Dan DuPree, would you answer that question please?

[Dan DuPree:]

Yes, sure. We continue to be very comfortable with the whole year guidance we provided at the beginning of the year. We have narrowed this guidance around the same midpoint every quarter since. There are a couple of factors that weigh on the results so far. One is the timing of acquisitions and loan originations, particularly the loan originations. We anticipated the timing pretty closely to what we have achieved in our original guidance. And there will always be a little bit of volatility to our quarterly earnings around the timing of the origination of these loans. The second thing is probably even more interesting. We’ve developed an additional acquisition strategy to counter aggressive market cap rates. Right now, cap rates are continuing to compress across the market and in order to counter that we have a couple of strategies. One, we have acquired five properties to date this year through the end of the quarter. Two of those were acquired as a result of purchase options and discounts embedded in our loans. The other three properties were acquired off market, it means we were able to buy assets that weren’t widely marketed where the craziness prevails. Each of these properties when we closed on the assets were less than 80% physical occupancy or right around 80%. This strategy allowed us to acquire these assets, we believe, at a significant discount even taking into account there was short-term dilution as we finished the lease up. It is important to note that on all three of these properties, within 120 days of closing, each of these properties had physical occupancy in excess of 95%. Again, we believe that taking a very, very short-term hit will inured our benefit in terms of the value creation over time.

[John Williams:]

Thank you, Dan. A question about our same-store numbers. John Isakson, can you explain what we are doing on the same-store for the first six months?

[John Isakson:]

Sure, thanks, John. It is really important to understand that we have a very small sample of our portfolio to make same-store comparisons. It is only six assets. Which is less than 40% of our total units and only about 28% of our total NOI. The sample size is going to grow materially for the fourth quarter of 2015 and into next year as the portfolio grows from 2014 and earlier this year, become available for this comparison. Results sample set one asset can materially impact the number, in our case Trail Creek is underperforming with total revenues down over 6%. This reduces our same-store total revenues by 63% from a 4.4% growth number to 2.5% growth. We are very focused on Trail Creek and bringing it back in line with our other multi-family assets.

[John Williams:]

Thank you, John. I also call on you to talk about student housing. The question is, why do we like student housing and why are we in it?

[John Isakson:]

Well, student housing is a great sub strategy, it is very attractive within the multi-family sector. It is often countercyclical to broader economic trends. And recently enrollment in U.S. universities has been near or at all-time highs. And at the same time a lot of the universities around the country are devoting resources away from on-campus housing, which creates great opportunities in the market for us and we think we are enjoying those with the assets we have invested in.

[John Williams:]

Yes, and I would like to comment on that. We have three properties in our loan program, one which was completed last year, it is about 95% occupied. Another property next to Kennesaw it’s a 100% with a waiting list. The other property is in stark Mississippi it is 95% leased. We expect the two properties at 95% to be 100% leased by the end of August. So we are doing extremely well with the student housing business and we think we have found a wonderful niche for us. So the next question really is, please explain why you sometimes don’t record the purchase price of your acquisitions or loan investments in press releases. Lenny, can you tell us why we do that?

[Lenny Silverstein:]

Sure. Really – quite frankly this is really a strategic decision we have made as the Company. We have noticed that a lot of the municipalities and the county tax authorities are increasingly becoming more aggressive in setting the tax basis for real estate assets. So as a result, we have determined that we don’t necessarily want to give them a roadmap to follow. And as a result we don’t always publish the purchase price of our acquisitions or the value of our loan investments in our press releases strictly for that purpose.

[John Williams:]

Thanks, Lenny. The next question is how is your pipeline and how do you feel about acquisition opportunities? I will call on Dan and Joel to be very specific about that. But as a general rule we see lots of acquisition opportunities. I like to tell people we go through 100 to find one that we like. And so, for us we take that very seriously. And as we have indicated before, if we find a great asset and we want to take and buy it, we have pledged to our stockholders that we want to make those acquisitions accretive, we have been willing and half deferred fees back to our advisor to make sure that we actually do what we have said – do what you say, say what you mean. So, we are deferring fees when necessary to make sure these assets are accretive. But, Dan, do you want to get a little more specific about the multi-family side and Joel about the – from the retail portfolio?

[Dan DuPree:]

Yes, John. Real simple. On the multi-family side we have a very robust pipeline of assets under contractual control and currently in various stages of due diligence. Beyond that the market has an increasingly large supply of product coming to market. So we feel very, very comfortable with what we are looking at going forward in multi-family. Joel?

[Joel Murphy:]

Yes I am similarly pleased with the depth and quality of our investment pipeline. We have a variety of assets we are looking at across the time spectrum from early, mid and late across that. We have three properties under control and we are actively undertaking our due diligence now. We do take a very strong stance on our due diligence protocols to make sure we fully understand all the physical conditions and market conditions of the assets we acquire. And our active pursuit of this pipeline is really always guided by our inherence to the Sun Belt market geography and the type of grocery asset we acquire, which is market leading grocers with strong sales.

[John Williams:]

Thanks, Joel. With that I would like to thank you for joining us for our earnings call this morning. I would like to turn the call back over to the operator and to open it for any other questions or thoughts you might have. Operator?

[Operator:]

Yes, thank you. [Operator Instructions] And the first question comes from Ryan Meliker from Canaccord Genuity.

[Ryan Meliker:]

Hi, good morning guys. I just had a couple of questions. First of all, can you give us what the portfolio’s average multi-family rents were in the quarter?

[John Williams:]

I’m not sure that we can give you that number specifically. But, Bill, would you like to take it…

[Ryan Meliker:]

I guess what happened, as we try to model out the Company it is very difficult with the same – as you highlighted, the same-store portfolio was only 20% of your NOI. So without the detail on the broader portfolio our models are kind of a shot in the dark.

[Bill Leseman:]

Actually what I want to do is follow up and give you the average for the weighted portfolio and I will need to follow up with the [indiscernible]

[Ryan Meliker:]

Okay, that sounds good.

[Bill Leseman:]

We will give you a call afterwards and give you that information.

[Ryan Meliker:]

Thanks. And then the second question I wanted to ask you guys about was can you talk a little bit about what types of cap rates you are seeing for the acquisitions that you are moving forward with? And is that the best use of capital versus incremental mezz loans and development opportunities?

[John Williams:]

Yes, and I think Dan can answer that for you. Dan.

[Dan DuPree:]

Yes, Ryan, I mean clearly on the mezz loans – on the loans we are doing with our developers, the economics are extremely good, both near-term and longer-term. But there is a balance to it. And we have said all along that there is a finite number of mezz loans that we will have at any given point in time because we have to know the developer, be comfortable the developer, be comfortable with the way they are going to act in good times and in bad. So that kind of puts a governor on it. There is not an unlimited supply of mezz loans to do with people we would be comfortable making those loans to. Although, having said that, we are looking to expand that program, but it’s sort of tedious in the underwriting. And in terms of cap rates, right now I would say for a Class A suburban non-rap product depending on the market they would range somewhere between – I mean we can go really low depending on the market, but 5.25 to 5.75 would probably be a fair range. But what I will tell you is so far this year through the purchase option program and this other strategy that I mentioned where we are buying some of the assets short of stabilization, still able to put full debt on them. I would say we are probably on average 30 to 45 basis points better than market and that is – I am pulling that out of somewhere. But I think that is probably pretty close.

[Ryan Meliker:]

Okay, that is helpful. And then with regards to a cap rate in the mid-5s for the assets that you are buying and the stock trading at a pretty substantial discount to that and even your preferred equity including the costs associated with sale being much higher than that. It seems like you are diluting net asset value by raising capital through preferred equity or common [indiscernible] which I know wasn’t done this quarter, to fund that type of growth, whereas you could be so much more accretive on the development side. I realize there is a lot less opportunity on the development side. But how do you balance your cost of capital on the preferred and common equity side with cap rates that are sub 6?

[John Williams:]

Well, I think Dan wants to make a comment. But as a general rule, if you do the math, every asset we buy after we put long-term debt on is accretive, it actually makes us money. Obviously we could get higher up on the risk curve and we could do all mezzanine loans. But we think that is a risky strategy. And as long as we are able to deliver a 10% normalized FFO growth and a 10% dividend growth we think we are performing well for our stockholders while we are measuring the risk that we are willing to take. And we are very careful with our work mezzanine program both in terms of the location, the developer and the quality of those assets. And I think, as Dan says, we keep a governor on ourselves so that we don’t artificially juice our returns by taking too much risk. Dan.

[Dan DuPree:]

Just two quick points. One, where the market might be in the mid-5s I think with the various discounts we are getting we are doing slightly better than that. But we also talked about the cost of our debt on the deals we have done. It was between 3.27 and 3.87. One of the things that the market is giving us to kind of offset the cap rates is giving us historically low long-term debt and we are deploying it.

[Ryan Meliker:]

No, that is helpful and all that makes a lot of sense. I guess with the acquisitions being accretive, does that mean that you have got all the acquisitions – I mean you have done $200 million in acquisitions this year, I think $123 million in the second quarter. That was that built into your FFO guidance at the start of the year and is there more acquisitions built into the FFO guidance? I guess the reason why I am asking that is because I would imagine as acquisitions come in FFO would go up if it is accretive.

[John Williams:]

Well, as Dan said, because cap rates are under pressure, we develop a strategy at the first the year that we were willing – since we have such a wonderful and knowledgeable management operation, that we were willing to buy assets while they are not – while they are construction wise completed they are not [indiscernible] and stabilized. We were willing to take that risk on because we were very comfortable with that based on the strength of our Company. But it does give you a little bit of short-term dilution when you are buying an asset that’s only 75% or 80% leased. Now you will see the benefits of that, frankly, in the last two quarters. Obviously, if you do the math and see where we are now and our one-2015 guidance, if you will do the math you will see that we are expecting very good results in the third and fourth quarter.

[Ryan Meliker:]

Okay. That is helpful. And then just one last one for me. I’m wondering if you guys have given any thoughts to altering the external management structure especially with the amount of acquisitions you guys are doing. Those acquisition fees are a significant amount of cash flow exiting the REIT. And I am just thinking about it from a recurring FFO standpoint. If you’re going to be doing hundreds of millions of acquisitions a year that is almost becoming a recurring expense that on a more recurring FFO basis close to your normalized FFO basis would have to be backed out.

[John Williams:]

We think about it about seven times a day.

[Ryan Meliker:]

Any conclusions to those thoughts?

[John Williams:]

There will probably be a time, but frankly the advisor is not – doesn’t make any money at this [indiscernible]. One of the things that we are able to do, and we have been willing to do, is differed fees so that we can protect the accretion to our stockholders. And really when we take and analyze our cost I would think that our cost that gets loaded back into the REIT would be the lowest in the multi-family industry. So we feel like we operate very efficiently. We have a capital need – the money get can be charged back to the REIT and we don’t feel compelled to do anything at this point in time. I think that there will be a time in the future where we will internalize. But as long as we are providing a 10% growth in our FFO – normalized FFO and a 10% a year increase in dividend that puts us pretty close to the top of the multi-family industry. And as long as we are doing that well we don’t feel like even though we discuss internalization continually with our Board and among senior management, we don’t feel compelled at this point in time to do so.

[Ryan Meliker:]

Okay, John, I think that is really helpful. My only comment in response would be that if you look at your external management fees and your corporate G&A relative to your revenues. And that would include your acquisition fees, your property management fees, everything that other REITs don’t pay that are internalized. You are close to 20% right now versus the industry average of 6%, which – so, when you think about it from that perspective it seems like it is a deterrent and it is probably substantially weighing your FFO multiple.

[John Williams:]

I think John wants to make – John Isakson wants to make a comment. John.

[John Isakson:]

Ryan, I think when you look at the volume of activities that we have had as a percentage of our asset base I mean that is going to happen. But as we have discussed, as the Company continues to grow obviously the pace of acquisitions won’t be the same percentage of the Company. And that is going to drive those expenses down a long way really fast.

[John Williams:]

And, to be honest with you, one of the things that we would do in the interim if we don’t internalize we will restructure our fee program to better reflect our performance. And as we get larger we can afford to do that. But I will tell you that the advisor does not make any money. And we have not made any money since we have come public. But what we are doing is we are giving our stockholders a very good return. Go back and show me any REIT that has increased its dividend at a pace of 11.1% since their IPO, not any that I am familiar with.

[Ryan Meliker:]

I don’t think I could find one. All right, John, that is all for me. Thanks a lot, I appreciate you guy’s help.

[John Williams:]

Thank you.

[Operator:]

Thank you. And the next question comes from Craig Kucera with Wunderlich.

[Craig Kucera:]

Yes, I just wanted to circle back. Ryan really kind of hit a lot of what I wanted to discuss in regards to the external management contract. But is there a trigger that the Board looks at possibly internalized? Because even though I do commend your performance as far as raising the dividend, when you are paying out north of 20% to your manager internally and other externally managed REITs are paying themselves, maybe half that, it is somewhat incredulous to say that you are not making any money…

[John Williams:]

But it’s true.

[Craig Kucera:]

…in context with how other REITs are operating and somehow making ends meet.

[John Williams:]

Well, you have to look at the organization overall. We support a broker dealer that is providing very cheap equity to the Company. So you have to look at – you have to take and look at the whole program. We are very unique Company. There is no Company in the REIT world that is like us. We have a broker dealer that is raising very cheap equity through the non-traded world. That entity has to be supported in a major way. It actually loses money. So if you take and factor in the total cost of our operation I will compare it to anybody else. And by the way, I look at every single financial statement that comes out of any multi-family REIT and to date I cannot tell you exactly what, for instance, Post Properties pays for G&A. I promise you, you cannot go look at their financial statement and tell. But we feel like with the capital on fees at 1.5%, well, we are providing a very cheap cost to our stockholders – and achieving what I think are marvelous results.

[Craig Kucera:]

No, I think your results are fine. But some would look at the preferred equity and say that that’s in certain respects sort of more expensive debt. And so while you are earning excellent returns, you are also doing it by effectively having a more levered balance sheet if you consider that more as a piece of debt. And that is where I think if you were internalized or considering that as a component of your structure that your stock price would probably be [indiscernible] a little better.

[John Williams:]

Yes. Well, we disagree. We don’t think it is debt. We think it is a very cheap equity and so does our accountant. And I have been doing this for 50 years, if I could have over the 50 year period had the cost of equity less than 7%, in this particular case it is 6.6%, I would probably be much wealthier than I am today. So at the end of the day I think you have to look at the overall program. If we internalized it wouldn’t change anything in terms of our operating metrics. Nothing would change. We would just load up the Company with a lot of expenses, quite frankly, that we are absorbing at the advisor level today.

[Craig Kucera:]

Is there a thought with your stock currently trading, your common trading at about a 6.4% yield relative to the preferred? How do you consider your capital raising looking at the cost of the two?

[John Williams:]

Well, obviously, and Dan will want to make a comment because this is one of his hot buttons. I mean we think there needs to be a balance and from time to time we issue common stock when we think it is appropriate. Today, to be quite honest with you, we think we are substantially undervalued. Our NAV probably is in the neighborhood of 13 and 14, and our dividend is probably the highest in the multi-family world. And so we are substantially undervalued. In the issue common stock that we think is substantially undervalued, I don’t know that that is a prudent thing to do. Dan, do you want to make a comment?

[Dan DuPree:]

Yes, I agree with that. The most expensive capital we have in the stack is the common. So we want to raise that judiciously. But going back to the question on the preferred is it debt or is it equity. I remember at the end of the day it is redeemable at your option for stock or cash. If we redeem it in stock it kind of underscores the fact that it is equity. So again, we are a different animal. We understand that our structure causes people to have questions, but we have invested huge amounts of money in the broker dealer. And to John’s point, to date there has been no money made by the advisor. So maybe the numbers are high, maybe we should have been charging more of the fee on the preferred capital that we are raising as opposed to some of the other things so that the numbers are skewed. But as long as we are subsidizing the manager I don’t think anybody has any complaint, has any basis for a complaint about our being externally advised. Now if we were making a considerable amount of money that might be a different situation.

[John Williams:]

Yes, you need to judge us on our performance. 10% a year increase in the dividend, 10% increase in FFO with probably the newest most modern best portfolio in the multi-family industry. And we have accumulated, without question, the best management team around. So we are performing and we expect frankly to continue to perform. Now…

[Craig Kucera:]

Okay, great. Thank you.

[Operator:]

Thank you. And the next question comes from John Benda with National Securities Corp.

[John Benda:]

Hi, good morning [indiscernible]

[John Williams:]

Thanks John.

[Dan DuPree:]

Hi, John.

[John Benda:]

So, with so many acquisitions in the quarter it seems like the acquisitions were ahead of the purchase option windows stated in the loan schedules. Can you just talk about some of the events that precipitated those acquisitions?

[John Williams:]

Sure. Dan, you or John want to comment on that? I mean I will make a general comment and then I will let Dan make a comment. It is a balancing act, as Dan said in his comments. We look today the ability to put historically low loan on these investments we think gives our stockholders great returns over the outlying years, the next two, three, four, five years. And so, to go forward and talk the developer into moving forward with an acquisition we think is prudent because it lets us lock in extremely good debt that we don’t think is necessarily going to be around for the next few years. Dan, do you want to make a follow-up comment?

[Dan DuPree:]

Yes, John, just I mean one case in point. I believe it was CityPark in Charlotte that we were able to lock a rate of 3.27% on the closing date, I think rates were closer to 4% apples-to-apples. We made a decision that we would be materially advantaged by exercising early, if it suited the developer, to get that materially better rate.

[John Williams:]

So, John, it is a numbers game. I mean we make a considerable amount of money on the mezz loan and you’ve got to weigh what you are giving up between the mezz loan and the cap rate you are buying it on, the leverage rate to the leverage and other factors. So…

[John Benda:]

And then it seems like as you guys are originating your – maybe you’re not pursuing but there is more opportunities on the student housing front. So could we infer that, as has been said with the retail segment, that that might one day spun out into a REIT, that that is a similar goal for student housing?

[John Williams:]

Well, it is a little bit different. We consider that student housing is underneath our umbrella of multi-family. So we are not as compelled to spin off student housing as we would with the retail. The retail we’ve announced a specific strategy that we would keep our retail assets below 20% and that at some point in time when the Company can stand on its own two feet it would be spun off to our pack shareholders in a tax advantaged spinoff. So that strategy is announced. We have not announced a strategy with student housing similar to that. Although quite frankly it is an arrow and our quiver and we could do it down the road. We just don’t feel like we are quite as compelled to do it as we are with the retail. Lenny, Dan, you want to make a comment on that?

[Lenny Silverstein:]

No.

[John Benda:]

Okay. And just finally, it seems like in July there was a pretty large origination, $59.1 million, for a project in Irvine, California. Can you just talk about that project and what that is?

[John Williams:]

Yes. It is a unique opportunity and it came to us – we would have probably not seeked an opportunity in California, but we had a wonderful opportunity on an assets that we thought – a location that we thought was irreplaceable in a market where there is now a cap on production. If you went out to Irvine today you could not get a permit to build a multi-family apartment in the area we are at. So this is a tremendous asset, a tremendous location and we are quite optimistic that it will be a very successful project. It is well underway and the market in this area is just tremendous. Now long-term, because it is a little bit of an out layer, this could be an asset that we sell straight away. But we will make that decision as we look at the leasing achievement and how well it rents up, which will probably start in the next year about this time.

[John Benda:]

All right, great. Thank you very much.

[John Williams:]

Thank you.

[Operator:]

Thank you. And the next question comes from John DeMaio with NewBridge.

[John DeMaio:]

Hi, guys. How are you?

[John Williams:]

Good, thank you John.

[John DeMaio:]

A couple questions. The common stock outstanding compared this quarter to last quarter increased by 6 million. That is due to what?

[Lenny Silverstein:]

Well, the common stock outstanding we had a lot of issuances in the latter part of last year. We had a little bit of common stock issued at the very beginning of the first quarter, but I don’t believe we had any common stock issued in the second quarter itself. It’s just a relative basis of shares themselves from a capital raising standpoint.

[John Williams:]

And those shares were all issued through our ATM program. And as we have said in the past, we try to balance and look at our common stock ratio to the preferred stock and make sure that we have a – that we are keeping that always in the front of our mind as to that ratio.

[John DeMaio:]

Okay. This is a general question, something – I see that you have – you are up to about 10 shopping centers now, the retail grocery anchor shopping centers. Okay, a lot of companies, I mean if you keep increasing and keep buying those I would say 18 to 24 months, I am just picking a number, I mean you see a lot of these companies that do spin offs because you have the student housing and the multi-family, would you consider a spinoff of the grocery stores?

[John Williams:]

Yes, it is – not only would we considered it, it is the announced strategy that we will spin off the retail portfolio. My guess is between $400 million and $500 million in total assets would – they would be in a position to stand on their own two feet. And I think somewhere in that range we would spin them off. We expect PAC long-term to keep a significant investment in the portfolio going forward, but we also expect the new market entity to pay us back any investment we’ve made in the past. So, we are getting there in terms of size. But as Joel has mentioned, we have a very defined, specific strategy and we are calling it to the tee. And my guess is probably in a year and a half we will be in a position to do a spinoff, which will be we think tax-free to our PAC shareholders.

[John DeMaio:]

Okay, thank you, guys. Enjoy your day.

[John Williams:]

Thank you.

[Operator:]

Thank you. And as there are no more questions at the present time, I would like to turn the call back over to management for any closing comments.

[John Williams:]

Just thank you for joining us and we hope you will watch us over the next quarter and join us for our third quarter call in November. Thank you very much.

[Operator:]

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