Preferred Apartment Communities, Inc.
Q3 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Good morning, ladies and gentlemen. And welcome to the Preferred Apartment Communities’ Third 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 now like to introduce to you to your host for today’s call, Mr. Lenny Silverstein, President and Chief Operating Officer. Mr. Silverstein the floor is yours.

[Lenny Silverstein:]

Thank you for joining us this morning. And welcome to Preferred Apartment Communities’ third quarter 2015 earnings call. We hope that each of you had a chance to review our third 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, Chief Executive Officer of New Market Properties, which is our wholly-owned subsidiary focused on grocery anchored 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 maybe 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 third quarter, with definitions and reconciliations of non-GAAP financial measures and other terms that maybe 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’d now like to turn the call over to John Williams. John?

[John Williams:]

Thanks, Lenny. We had an extremely solid third quarter. The company operated successfully on all fronts. As you recall, we laid out on our company’s goals early last year. I can say with sudden confidence that we will be successful in all of these goals other than a slight miss on the leverage goal which was not to exceed 6% of un-depreciated book value. When we were doing budget last year we expected to beat [indiscernible] to be up slightly and therefore we will have somewhat decrease our leverage on our new loans. We did not see a measurable increase in interest rates and we made a decision to continue our leverage ratio that we have used since the company’s formation. Even though our un-depreciated book value is slightly over 50%, please remember that the un-depreciated book value measurably reduces the true value of our portfolio. We continue to be on track to grow the size and profitability of new market properties. We anticipate spinning off new market in a tax free or similar type of distribution to our Preferred Apartment Communities common stockholders once we believe is of a size that makes this beneficial for both the company and new market and subject to market conditions. At the time of the spin-off our distribution it is our goal to have all proceeds invested by tax returned overtime with us retaining a meaningful ownership in new market properties. I would now like to call John Isakson to talk about an exciting new initiatives Mainstreet Apartment Homes as a sub-strategy of our multifamily housing focus. John?

[John Isakson:]

Thanks, John. Mainstreet will seek to acquire multifamily properties with longer term financings typically provided by HUD. HUD offers programs for both new construction and acquisitions with extremely long -- with extremely attractive long-term fixed rates for multifamily products. The acquisition loan have a 35-year amortizing terms are assumable and we will target leverage ratios for this product of around 75%. In addition, we will seek out deals recently build with HUD’s Construction Loan programs. These loans have a 40-year amortizing term are also assumable and have equally attractive rates. By comparison, the rates on HUD loans today can be competitive with rates from other lenders for significantly shorter term loans. Mainstreet will be focus on a broader product range within the multifamily sector. Based on the demographic trends in the market today, we believe these assets can be a highly accretive part of our company. The assets in the strategy will be high quality assets, but maybe in smaller sub-markets or older than our core products. Assets in the strategy maybe target for value-add programs. We have a very capable and experienced construction and asset management team, who have deep experience in value-add programs. We hope before the end of the fourth quarter we will close on our first transaction for this strategy in Beaumont, Texas. We will assume the current HUD loan, which will have 31 years term remaining and a 3.75% interest rate. We are excited about adding this additional multifamily strategy to our portfolio. It will utilize the talent and experience within our property management, asset management and construction teams to bring additional value creation for our shareholders. We also think there is enormous short-term and long-term value in the financing programs provided by HUD. John I’ll give it back to you.

[John Williams:]

Thank you, John. And just for your information, John Isakson will be heading up this new program for us. And we’re excited about him taking on this new and very important task. Let me now call on Lenny Silverstein to give you all the numbers. Dan DuPree will speak to our real estate investment, loan and acquisition program and Joel Murphy will speak on our retail program. Then we’ll be glad to answer any questions. Lenny.

[Lenny Silverstein:]

Thanks John. Overall we believe we again produced very good operating results for third quarter in line with our internal budgets and tracking with our guidance. Our normalized FFO for the third quarter 2015 was $7.1 million compared to approximately $4.5 million for the third quarter of 2014. This represents an NFFO of $0.32 per share for the third quarter this year compared to $0.26 per share for the same period last year. And on a percentage basis, this represents a 23% increase in an NFFO per share. Based on these results, we are narrowing our normalized FFO guidance range for the year to a $1.14 to $1.16 per share. This would represent an approximate 10% increase in our NFFO per share compared to last year, one of our stated goals for 2015. Our adjusted FFO for the third quarter 2015 was $0.22 per share as same as last year despite almost $4.9 million additional shares of common stock outstanding this quarter compared to the third quarter 2014. As you’ve heard us talk about many times before, AFFO reflects the strength of our company’s ability to pay dividends to its stockholders. And in fact for the third quarter, we paid our stockholders and unitholders a dividend of $0.18 per share or 12.5% per share more than we paid in the third quarter last year. On an annualized basis since our IPO in April 2011, we’ve increased our dividend almost 10%. In addition, our third quarter dividend payment represents an NFFO payout ratio of only 57% and an AFFO payout ratio of 80.8%. From an occupancy perspective, our average multifamily occupancy was 96% for the third quarter 2015 and our retail portfolio was 94.1% leased as of September 30th. Joe will cover the new market metrics in more detail later in this call. Switching to other financial statement metrics, we continue to add quality assets to our portfolio in a meaningful way. For the third quarter, our total assets net of depreciation were approximately $1.1 billion, representing a 61% increase in total assets compared to the third quarter in 2014. Now, our key component of our strategic plan is our investment program. I now want to introduce Dan DuPree to provide some more color on our acquisition activity, our loan investment program and our pipeline. Dan?

[Dan DuPree:]

Thank you, Lenny. In addition to the activity in our Mainstreet program described earlier by John Isakson, the third quarter was a very busy one. In July, we converted two bridge loans for the Tampa and Irvine projects to real estate loans. These loans will provide construction financing aggregating up to approximately $66 million. During the third quarter, we acquired two multifamily properties totaling 741 units in San Antonio, Texas and Orlando, Florida. Both projects were financed on very attractive terms. At the end of the quarter, we owned 17 multifamily communities comprising 5416 units. We also have an additional 18 multifamily communities in our real estate investment loan program including six student housing communities, comprising an additional 4408 units. Together these totaled over 9800 units, that’s assuming that we exercise all of our purchase options on the projects currently under development. We are continuing to aggressively pursue opportunities that are strategic and accretive covering all three multifamily segments of our business, our traditional Class A product, the new Mainstreet product and our student housing. Now let me turn the call to Joel Murphy. Joel?

[Joel Murphy:]

Thanks Dan. We are very pleased with the operational results of our shopping center portfolio for the third quarter. On July 1st, we closed on acquisition of Independence Square in Plano, Texas which is in affluent and densely populated northern suburb of Dallas. Independence Square is a 140,000 square foot grocery anchored shopping center anchored by 43,000 square foot Tom Thumb grocery store. Tom Thumb is a strong credit tenant that enjoys significant market share in the DFW market. And this store generates excellent sales per square foot, consistent with our strategy 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, which is now the second largest grocery chain in the United States. The center is 94.6% leased to a variety of tenants that have strong historical occupancy. In August, subsequent to last quarter’s call, we placed a seven-year non-recourse first mortgage loan on the center with a fixed rate of 3.93%. This is our second retail acquisition in Texas and our first in the DFW Metroplex. In early September, we closed on acquisition of Royal Lakes marketplace, an approximately 120,000 square foot center anchored by Kroger and located in the Northern Atlanta suburb of Flowery Branch in immediate vicinity of Atlanta Falcons' training facility. This is the third Kroger store in our portfolio and the acquisition of this center is also consistent with our strategy to invest in grocery-anchored centers with market dominant grocers in Sunbelt markets. Kroger operates a full size 70,000 square foot store and the fuel center, both of which were important attributes of Kroger’s market strategies. Significant prominent lease term remains in the Kroger lease and the stores are enjoying an excellent sales trajectory over the last three years. We believe we’ve made a very favorable acquisition on the center that is 84.4% leased and contains a higher amount of on leased space than our other centers acquired to date. This creates and attractive upside value creation opportunity for us in this growing market. Simultaneous with acquisition, we placed a non-recourse first mortgage bridge loan on the property from SunTrust Bank at a rate of LIBOR plus 250. This debt is fully repayable without penalty and it gives us great flexibility in our asset management and upside leasing strategy for this center. We released prior to market open yesterday, the news of another acquisition consisting with our gross-anchored market strategy. This past prior year October 30, we closed on the purchase of Summit Point, which is an approximately 112,000 square foot grocery-anchored center, anchored by 54,000 square foot Publix grocery store. This is in a community of Fayetteville, which is a growing and affluent suburb in the Atlanta market. This is the eight Publix in our portfolio. Publix has significant market share in the Atlanta market and this store also enjoys excellent sales in a very attractive upwards sales trajectory over the last three years. This center is 85% leased and like the Royal Lakes acquisition, we believe we have another solid upside opportunity here through the lease-up of this vacant space. We are establishing reputation in the sector for moving quickly to secure acquisition opportunities, consistent with our strategic objectives. We were awarded the deal on September 8 and in 62 days, we completed all of our detailed property and market due diligence and simultaneously closed the very attracted seven-year 3.57% non-recourse loans with State Farm. With this latest acquisition, we now own 13 grocery-anchored tenants in five Sunbelt states, totaling just over a 1,165,000 square feet. During August and in October after the quarter close, we originated a two tranche bridge loan with an aggregate maximum commitment of $11.6 million in anticipation of a real estate investment loan to support the construction and development of an approximately 200,000 square foot shopping center to be anchored by Kroger and the Dawsonville submarket of Atlanta, adjacent to the North Georgia Premium Outlets owned by Simon Property Company. Consistent with our strategy on the multi-family real estate loans, investment loans, we will attain an option to acquire this shopping center after stabilization. At the end of the third quarter, the portion of the portfolio that we reported on last quarter’s call remained at 95.6 leased. When you add in the independent square, Royal Lake Marketplace acquisitions that both closed in the quarter, the overall portfolio as Lenny mentioned is 94.1% leased. We continue to see positive trends and renewals of our currently leased space and this high retention rates supports our ongoing leasing efforts and our ability to roll up rents upon renewals and that speaks to the overall health of the portfolio. Now, let me turn the call back to John. John?

[John Isakson:]

Thanks, Joel. And before going to floor, as we mentioned earlier, our financial results of the third quarter were superb and consistent with our budgets, guidance and our goals of last year. I believe the fundamentals in all segment, the foreseeable future will continue to be strong and we are optimistic about the coming years. Please remember the strengths of our company. We have a unique quarter light balance sheet. We have the newest and most diversified portfolio in the industry and our associates, the management team are simply the best in the business. Before I turn the call over to the operator, there are several questions we’ve been asked in anticipation of today’s call. First question was, what are you plan on doing about your dividend? Well, I will take that and try to answer it. We are going to the Board later this week to propose a substantial increase in the dividend and we are very hopeful that the Board will approve our recommendation. Next question was why do we emphasize the young age of our portfolio and how does it affect our leasing trends? Bill Leseman, can you answer that question for us?

[Bill Leseman:]

Yes, John. The age or use of our portfolio is an important competitive factor in the portfolio’s operation for several reasons. The newest property tends to be, the more relevant to our renters, just as this year’s car model may be more relevant than car built 7 to 10 years ago. Overall, design, apartment layout amenities and even color schemes. Typically, these assets are located in current economic growth areas where all the portfolios maybe transitioning their market and/or sub markets. And finally, the newer, more useful portfolios didn’t have a lower operating costs and less or pure capital outlays, John.

[John Isakson:]

Quite an answer. What are the drivers behind a successful increase in FFO for the third quarter? Dan, can you answer that for us?

[Dan DuPree:]

Yes, John. There is really three reasons. One is the growth in our NOI on our existing portfolio. Second is the increasing contribution of the properties that we have acquired over the first three quarters of this year and third, an increase of 22% in the outstanding balances in our existing loan, real estate loan portfolio.

[John Isakson:]

Thank you, Dan. And then the question is, why that we don’t -- why we don’t disclose the purchase price of our acquisitions or loan investments in press releases? I think we answered this before, but I will call Lenny to answer it again. Lenny?

[Lenny Silverstein:]

Sure, John. This is really a strategic decision. As many of you know, property taxes are increasingly significantly across the board in all of our markets. And although the details of our acquisitions are laid out in our supplemental financial data report, in 10-Q and 10-K periodic reports, I just don’t want to give a clear roadmap to taxes that are in press releases.

[John Williams:]

Thanks. And what does your pipeline look like and how do you feel about acquisition opportunities? Well, I will start off and then I will call Dan and Joel who are working directly with it. I don’t think we’ve ever had a more active acquisition program all that we’ve seen better opportunities for your companies than we’re seeing currently. Please remember that we look at 100 transactions, we make offers on 10 and buy one. So we are quite active in this area and probably know more about it than any other company in the universe. So I will call Dan to also comment on our pipeline and then followed by Joel.

[Dan DuPree:]

Yeah, John, really the pipeline is robust. And I think the addition of the Mainstreet program even increases the activity that much more as it gives us another vehicle to invest on an accretive basis. But across all three of our market types or product types, again our traditional product, our Mainstreet program and also student housing, we are again very, very active in all three areas.

[John Williams:]

Joel?

[Joel Murphy:]

Yeah, John, I agree with your comments. We do continue to see an increase in the depth and quality of our acquisition, investment loans pipeline and more specifically with opportunities that are consistent with our market strategy. We’ve got a number of transactions that are across the spectrum of the pipeline all the way from project identification, financial and market underwriting and due diligence.

[John Williams:]

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

[Operator:]

[Operator Instructions] You may have a question from Ryan Meliker from Canaccord Genuity. Please go ahead.

[Ryan Meliker:]

Hey, guys. Thanks for taking my questions. First of all, nice quarter and very much appreciate the added disclosures related to the multifamily portfolio, I think that will be a big help going forward. So thank you for that.

[John Williams:]

[Indiscernible] Ryan.

[Ryan Meliker:]

There you go. I guarantee it. The one thing I wanted to talk about was Mainstreet properties. I guess the big question is, why is now the right time to be moving into more secondary markets, like it sounds like Mainstreet will be going for assets that are older in need of more capital. I understand the long-term IRRs driven by the low cost of debt that you get on these assets, but if I recall correctly assets like these typically go down in value over time and then fundamentals might weigh down the portfolio over the course of the cycle. So help us understand why these decisions happening now.

[John Williams:]

Sure. Ryan, I will both John and Dan DuPree to make a comment, but for us we have a world of experience in doing value add developments. And I will assure you that we are looking at high quality developments that we are -- that we think are going to stand the test of time. And frankly, the enormous value in the long-term financing is available to us and the fact that that financing is assumable. We are to believe that there will be some interest rate increase is coming up. And for us, it’s a form of heads to have these 30 to 40-year financing vehicles available to us. So John, do you want to make a comment?

[John Isakson:]

Sure. I think what’s important to understand is that these are high-quality assets and we think they are going to be extremely accretive to the stockholders and I actually don’t see the decline in value over a longer period of time. I think the value of an asset is representative of the company that owns it and manages it. And as good as we are at owning and managing assets and the value add programs, I really don’t think that’s a real risk. In addition, I think when you look at some of the studies that have come out recently about the growth of the rental cohort generally in the population, we are very encouraged about the demand that exists across all markets and the ability to acquire assets at more attractive cap rates in growing markets, I think it’s tremendous for our shareholders. So I don’t have those concerns.

[John Williams:]

Dan, do you want to add to that?

[Dan DuPree:]

Only to reemphasize the comment that you made about the value of the long-term debt, as a general rule at some point in time every deal we have, every project we have is going to have to be refinanced. So it’s more difficult to always be able to figure out what an IRR is going to be on an asset for a whole period. This eliminates that. I don’t think there is really a way to value in the short-term what the effect is of long-term financing. And secondly, Mainstreet really gives us another direction that we can go if the market squeezes our other product types in terms of cap rates and interest rates. So again, I guess the emphasis is really on the word hedge. And don't misunderstand, this is not going to dominate our acquisition program, this is simply another area or direction that we can go depending on what the market giving us at the time. The key to us is as we make acquisition that are very accretive and allow us to grow our NOI on a per share basis.

[John Williams:]

And please remember these are going to be very high quality assets, but our goal would be that if we took you on a tour of a number of our assets that you wouldn’t be able to pick out the one that has the HUD financing on it. And I think we will be successful as I go.

[Ryan Meliker:]

Okay. That's really good color. Thanks, guys. So if I understand correctly, it sounds like the quality of the assets is going to be pretty strong. The real primary difference between the Mainstreet platform and I guess more traditional PAC platform is going to be the HUD financing, but it's going to be similar quality assets in similar quality markets, or markets with at least similar demographics and characteristics. Is that correct, or am I missing something?

[Dan DuPree:]

The only thing you’re missing in that is the value add component, because when we go in acquiring assets that we intend to do value add on the return we get on the added dollars is significant. And typically, the dollars that we will spend will materially enhance the quality of the asset. So I think by and large we will be looking at end of development redevelopment, we will be looking at Class A product anyway.

[Ryan Meliker:]

Got you. So everything in the Mainstreet portfolio will be an acquisition as opposed to a ground-up development followed by redevelopment or value-add type opportunity. Is that correct?

[Dan DuPree:]

Yeah. I mean. Yeah. I mean mezzanine loans on these deals, there is no reason to. It’s not correct.

[Ryan Meliker:]

Fair enough. And then, can you give us some color on what types of IRRs you guys are expecting to generate from Mainstreet?

[Dan DuPree:]

Really not at this time because we are not into and enough at this point to tell you with any accuracy, but suffice to say we are going into the value add components expecting at least nominally higher returns than we are in other product types. And again, that’s primarily because of the return on the incremental dollars.

[Ryan Meliker:]

No, I understand that. All right. That's all for me for now. Thanks a lot, guys. I appreciate all the color. And nice quarter.

[John Williams:]

Thanks Ryan. I appreciate it.

[Operator:]

And our next question is from Aaron Hecht from JMP Securities. Please go ahead.

[Aaron Hecht:]

Good morning, guys. Congrats on the quarter.

[John Williams:]

Thank you.

[Aaron Hecht:]

A couple of questions. In terms of the occupancy rate today at Lakewood Ranch and Avenues at Creekside and Citi Lakes, where does that sit?

[John Williams:]

Well, please remember that one of our strategies for this year is to buy properties that have been completed from a construction standpoint but still on lease side. We get as much of a half percent additional cap weight for those assets. So we would go and buy them with a lot of confidence that we’re going to be able to lease the property very quickly. John, do you have those numbers handy?

[John Isakson:]

Yeah. So the third quarter average for Lakewood Ranch was 94.9, Creekside was 95.7 and Citi Lakes is 76.2 reflecting its status as finishing up leaseup.

[John Williams:]

I think the latest numbers I saw showed the Sarasota property, Lakewood at 99 plus leased. And so we’ve been very successful at buying these properties at a better price and then handling the leaseup ourselves. It’s been a great strategy for us.

[Aaron Hecht:]

Got you. On Citi Lakes, is there an expected stabilization date, where you -- just call it 90 or…

[John Williams:]

Probably another month.

[Aaron Hecht:]

Another month.

[John Williams:]

A month and a half.

[Aaron Hecht:]

Great.

[John Isakson:]

We’re at 85%.

[John Williams:]

We are at 85%, so the Christmas season is not a great leasing season. But I would bet you that in our next call which will be in early February. I bet we will be 98%, 99% leased. Isn’t that right, Roby Gayle? Rob Gayle says yes.

[Aaron Hecht:]

Got you. And then on Trail Creek, the disposition, where are you in that process? And can you comment on an expected cap rate and do you think you're going to book gains on that?

[John Williams:]

We definitely book gains. We are in the process. John, do you want to lay out what the process is.

[John Isakson:]

We’re actually in the middle of the marketing process now. We’ll be receiving offers towards the end of this month with the goal of closing in the first quarter of next year.

[Aaron Hecht:]

Okay. And then on the loan portfolio, looks like a number of the projects are getting pretty close to being fully funded. Obviously, you’ve set out the dates where you have potential purchase options at your disposal. Are there any properties today that you may close on before those windows are open? And are there any properties which you already know you will not be looking to execute your purchase option.

[John Williams:]

Well, we go end to it but the idea is we don’t always execute the purchase option. And if we get closer, those dates we’ll evaluate but we view those loans to end up owning the product and we’ve spent a lot of time making sure that product is built to our specification. And with the developer, it tends to be very close to the company and more work with us. We’re generally able to accommodate a closing schedule that works both for them as well as the company. We will exercise the rip cord and buy a number of those transactions during the first six months of the year. And we’re quite excited about it because these are wonderful developments in great locations. Dan, do you want to make a comment?

[Dan DuPree:]

Just to say, just to kind of reiterate your point that we do these loans as a way to have access to Class A product in markets we want at a -- in a non-fully marketed environment. Inevitably, there will be a deal or two along the way that we may not exercise the option. We’re going to use what we believe to be our best judgment and apply that judgment prudently.

[John Isakson:]

And even if we don’t buy the product, we will still collect the accrued interest and we participate generally in the upside of that development from a sales standpoint.

[Dan DuPree:]

And let me just add one other piece of color on that. We may chose not to exercise an option, not because there is something wrong with the asset, but because there may be a better avenue for us and the company in connection with either flipping the option or having the developer sell it and giving us our payout.

[Aaron Hecht:]

Got you. Thanks for the color, guys. Congrats again.

[John Williams:]

Thank you.

[John Isakson:]

Thanks, Aaron.

[Operator:]

[Operator Instructions] We have a question from Wilkes Graham from Compass Point. Please go ahead.

[Wilkes Graham:]

Hi. Good morning. First question.

[John Williams:]

Good morning, Wilkes.

[Wilkes Graham:]

Good morning. Just a question on -- as I think about how you’ll deploy your capital going forward, can you talk about the size of the retail portfolio today? I know you said when you spin it off, it's going to be a function of the market. But just what the size of it is today and what the pipeline looks like. And if you can give any kind of thoughts on when you think, when it is next year you might spin it off, I think would be helpful.

[John Williams:]

Well, I will let Joel comment on that but all along, we’ve felt like that it would be sometime in ’17. I am reminded of, I think the Supreme Court Justice, Wilkes who said that by the definition of pornography, he couldn't give a definition, but he knew it we could see it. We’re little bit like that with the spin off. We don’t know it depends on Joel making new market profitable, so we don’t know exactly when that is. But I’ll assure you when it happens, we’ll all know it. But Joel, do you want to make a comment.

[Joel Murphy:]

Yeah, John. To answer your first question, the approximate growth asset value of the portfolio right now is plus or minus $200 million. Okay. And so obviously, we’ve got to depipeline, we’re working to grow that and we’ll grow that significantly next year. And I think another way to say what John said is they will know it when we see it. We’re really focused on across all levels of pack, is to build the best portfolio with the most define market strategy and most solid management team that we can and grow those assets, create a good track record with those assets where they’re growing that income. And when market conditions and scale are right and it make sense for the shareholders of PAC, then that’s when this transaction will occur. So, we are obsessing ourselves with growing the portfolio and the team correctly. We’re not obsessing ourselves with forcing anything into an incorrect timing.

[John Williams:]

And the meantime, these are great solid assets producing great income for the company.

[Wilkes Graham:]

Yeah. So then on the Mainstreet side, in your discussion with Ryan, it sounds like apart from the value-added component, these are similar assets to what’s you’re already buying? And the main deferred sharing factor is the HUD loans that you’re assuming and the value-added component? I’m curious if -- and I know you’re just getting into it. But if you expect to be acquiring these at materially higher cap rates then what you’re buying in the normal strategy?

[John Williams:]

We think, we’ll let Dan or John comment, but we think that these are going to be more accretive transaction to the portfolio than our Class A apartments. And Dan or John want to make a comment on that.

[Dan DuPree:]

The only comment I would make is that for sure over the long haul, these assets will be more accretive and will generate greater IRRs, in part because of the debt we employ, in part because of the incremental return we get off the value-add component, John?

[John Isakson:]

Yeah. I think that’s exactly right. And I think these with the value-added just offered us an opportunity to grow the return and get a little bit better IRR than the core strategy.

[John Williams:]

Yeah. We will -- in the value-added program, you typically want to get a return of 20% off the capital invested in the properties has been my rule of thumb for many, many years. And if you -- for your model purposes, if we invest $8 million to $10 million all the units, you could see how that would be the bottomline. It will be -- we will make it a very accretive transaction here, 8 to 10.

[Wilkes Graham:]

Sure. And just to clarify, I think, you said that HUD allows for 75% LTV? Is it -- can I compare that to 65% with the GSEs and say that this strategy model out for a little higher leverage?

[Joel Murphy:]

Yes. Actually, Wilkes, the program allows for a little bit higher than that. It actually will allow you to go a little over 83%. We’re going to be a little bit more conservative and target around 75% for the Mainstreet strategy. So, yes, and the fact that you’re intending to whole of the assets longer and borrowing for a longer period of time, makes a little higher going in leverage a little bit smarter.

[Wilkes Graham:]

Thank you very much. Appreciate it.

[Operator:]

And ladies and gentlemen, showing no further question. This is will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Williams for any closing remarks.

[John Williams:]

Thank you for joining us and we look forward to the first call in the New Year.

[Operator:]

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