Preferred Apartment Communities, Inc.
Q4 2015 Earnings Call Transcript

Published: 10 Mar 2016

[Operator:]

Welcome to the Preferred Apartment Communities Fourth quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Lenny Silverstein, President and Chief Operating Officer. Please go ahead, Mr. Silverstein.

[Lenny Silverstein:]

Thank you for joining us this morning and welcome to Preferred Apartment Communities fourth quarter 2015 earnings call. We hope that each of you have had a chance to review our fourth 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; Randy Forth, our Chief Asset Management Officer; John Isakson, our Chief Capital Officer 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 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 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 newly updated website at PACAPTS.com. The press release on our website also includes an attachment containing our supplemental financial data report for the fourth quarter with definitions and reconciliations of non-GAAP financial measures and other terms that may be used in today's discussion. We encourage you to refer to this information during your review of our operating results and financial performance. Unless we otherwise indicate, all per share results that we discuss this morning are based on the basic weighted average shares of common stock and Class A partnership units outstanding for the period. I now would like to turn the call over to John Williams. John?

[John Williams:]

Thank you, Lenny. On a macro level, the fourth quarter 2015 and indeed 2015 as a whole represented another very strong year of growth and performance for us. We continue to benefit from a strengthening economy, strong gains in employment, strong demographic growth in our target markets. And remember, employment growth fosters household formation which is a key driver for the housing market, including the multifamily industry. For those of you who own our common stock during 2015, our total return to stockholders for 2015 was amazing. According to SNL Financial, our total return to stockholders for 2015 was almost 54%, ranking us second among all exchange listed REITs and significantly exceeding the stockholder returns for both the U.S. multifamily REIT and U.S. REIT in equity indices. In fact, had you invested $1000 in our IPO and reinvested all dividends received on your investment in our common stock, your average annual return would have been 16.6% as of December 31, 2015, very good numbers indeed. On a more granular level, you remember from our prior quarterly calls, stockholders -- we set a number of goals for our stock for 2015. I am pleased to announce we've successfully obtained those goals. For example, we increased our 2015 normalized funds from operation which some refer to as core FFO, 10.5% per share compared to last year, slightly exceeding our goal of 10% per share. But since year 2011, we have increased our normalized FFO a whopping 29% per share on an annualized basis. As impressive as our common stock dividends which have grown by 10% on our fourth quarter 2015 to fourth quarter 2014 basis, matching our 10% goal for the year. In fact, our common stock dividend growth rate is approximately 12.1% on an annualized basis since June 30, 2011, the first full quarter in following our IPO. Our cash flow from operations and revenues for 2015 also increased significantly compared to the prior year. So how did we perform for the year compared to our goals? Our goal was to increase our normalized FFO per share by 10% or more per annum. Check on that one. Increase our common stock dividend per share by an amount that keeps our overall dividend growth rates since our IPO to 10% or more on an annualized basis. Check again. Grow our assets significantly, but at the same time accretively. Check again. Our assets grew a little over 87% during 2015 to $1.3 billion. Achieve and maintain a ratio of debt to unappreciated book value of 50% or less. In this case, we were quite close at 55% and this was a conscious decision because as interest rates stayed low, we decided to maintain our current level of leverage. Have a normalized FFO payout ratio to common stockholders and unit holders of less than 75%. Check. Have an adjusted FFO payout ratio to common stockholders and unit holders of less than 90%. Check again. And finally, to list our common stock on the New York Stock Exchange by year end. Check again. I assure you that our entire team was committed and focused on reaching or exceeding these goals for 2015 and remain committed and focused on hitting our goals again for 2016. Our performance numbers that Lenny and Dan will go over with you are among the very best of all the public REITs and certainly the multifamily REITs. On a personal note, we remain committed to creating the most unique and positive corporate culture and branding in the industry. We want every associate to have immense pride intact, to be committed to our Company and above all, never lose focus of who's important, our residents, our retail tenants and our stockholders. At our most recent annual award banquet with over 350 attendees for example, we honored 57 associates by recognizing superior individual and property level performance that was achieved on a consistent basis throughout the year. Our leadership training program called Soaring To Leadership continues to identify management level associates who have already demonstrated proven leadership skills. Soaring to Leadership is designed to enable these leaders to hone their skills, to better develop personal and professional goals to which they will be held accountable and which are aligned with our Company's objectives. Upon completion of the annual leadership training program, we expect participants will disseminate this information throughout all levels of our company. Let me now call on Lenny to walk you through our numbers. Lenny?

[Lenny Silverstein:]

Thanks, John. Overall, we again produced excellent operating results for the fourth quarter and indeed the full year. Our normalized FFO for the fourth quarter 2014 was $0.34 per share, versus 28% for the same period last year. And let me correct that. That's 2015. This represents a quarter-over quarter increase of approximately 21.4% per share. For the year, our normalized FFO was $1.16 per share, an increase of 10.5% on a per share basis compared to 2014. Our adjusted FFO for the fourth quarter 2015 was $0.23 per share compared to $0.22 per share for the fourth quarter last year. For the full year, our adjusted FFO was $0.97 per share, representing a 15.5% increase compared to 2014. As you saw in last night's earnings release and supplemental financial data report, we're estimating our normalized FFO for 2016 will be from $1.23 to $1.33 per share, with a midpoint of $1.28 per share and project total revenues for 2016 to be in the range of $175 million to $200 million. We're hopeful of narrowing these ranges as the year progresses. At the end of the day, our overriding goal and we really can't emphasize this enough, is to drive NFFO or core FFO per share and total return for all of our stockholders. Switching to other financial statement metrics, our total assets as of the end of 2015 net of depreciation were $1.3 billion, an increase of a little over $600 million or 87% compared to the end of 2014. From a revenue perspective, our revenues increased 69% to almost $34 million for the fourth quarter 2015 compared to the fourth quarter 2014. On an annual basis, we increased revenues 93% to $109 million compared to 2014. Following from revenues, our cash flow from operations increased 29% to approximately $7 million for the fourth quarter of 2015 compared to the fourth quarter of 2014 and 128% to $35 million on a year-over-year basis. For the fourth quarter 2015, we paid a dividend on our common stock of $0.1925 cents per share to all common stockholders of record as of December 15, 2015. As John mentioned earlier, this represents a 10% growth rate compared to the fourth quarter of 2014. In addition, this common stock dividend represents a normalized FFO distribution payout ratio of only 56.6% and adjusted FFO distribution payout ratio of only 82.6% for 2015. Based on the number of shares of our common stock outstanding as of the close of business on December 31, 2015 and the closing price of our common stock on that date, we had a market capitalization of approximately $300 million, together with another estimated $486 million in our Series A redeemable preferred stock. This represents a total equity capitalization of almost $800 million. So obviously we're very proud of these results. Speaking of success, 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 investment program and our retail initiatives. Dan?

[Dan DuPree:]

Thanks, Lenny. We continue to actively pursue multifamily and grocery-anchored retail acquisitions that fit our business model. In addition to making real estate investment loans on selected developments on which we have purchase options. During the year, we expect to exercise options to acquire several multifamily communities that we previously funded through our real estate investment loans. Although we have provided guidance for the year, I want to clarify, that the timing of these acquisitions and investment activities can and usually does vary quarter-by quarter and as a result, could affect our interim financial results. But in the end, we're focused on full-year guidance that we released to the street last night and mentioned earlier today in our call. During the year, we acquired nine multifamily communities, representing a total of 2810 units for an aggregate purchase price of $432 million. We originated an additional $115 million in real estate loan investments for six multifamily communities to be developed by third parties representing an aggregate of 1572 units for which we receive an option to purchase each of the communities upon stabilization and completion at a discount to the then fair-market value for that community. At the end of 2015, we owned an aggregate of 19 multifamily communities located in 14 cities across eight states. As part of our multifamily growth strategy, we also originated three real estate loan investments for student housing communities to be developed by third parties representing a total of 2114 beds. Like with our real estate loan investments for our core Class A multifamily communities, we also received an option to acquire each of these student housing communities upon completion and stabilization at a discount to the then fair-market value for that community. Our aggregate pipeline at the end of 2015 of real estate loan investments for core Class A communities consisted of 13 communities representing a total of 3,573 units and 6 student housing communities representing a total of 4010 beds. Although we may not exercise all of our purchase options, we believe that our pipeline provides us with solid growth opportunity for the future. As of the end of 2015, we had a total of 21 real estate loan investments outstanding representing a total commitment of $282 million, of which $238 million has already been funded. To make this relative, this represents a total asset value in excess of $1 billion. As you know, as part of our business plan, we have invested a small portion of our assets in non-multifamily communities, such as grocery-anchored shopping centers. We established new market properties as a subsidiary of our PAC operating partnership in 2014 to acquire and operate or invest in the development of grocery-anchored shopping centers that fit our investment criteria in sub-markets within the top 100 MSAs generally located in the South and Southeast. We target market dominant grocery anchors that maintain a number 1 or 2 market share and have high and increasing sales-per-square foot stores in that particular sub-market. In addition, we also have employed certain specialty grocers that have a significant presence in a particular market. During 2015, we increased our grocery-anchored shopping center portfolio through the acquisition of four shopping centers representing a total of almost 585,000 square feet of gross leasable area for an aggregate purchase price of $88 million. As of the end of 2015, we owned a total of 14 grocery-anchored shopping centers located in nine cities across five states, located in the South and Sunbelt regions, totaling almost 1.3 million square feet of gross leasable area. Of these shopping centers, eight are anchored by Publix, three by Kroger and the balance by other brokers who have either a share, a significant market share in the particular market or specialty grocers like Whole Foods or Fresh Market. On a portfolio basis, our grocery-anchored shopping centers were almost 94% leased as of year-end. Now, let me call on John Isakson to update everyone on our Main Street Apartment Homes initiative that we started last year. John?

[John Isakson:]

Thanks, Dan. In addition to our focus on traditionally financed core Class A multifamily assets, we've broadened our investment scope to include Class A assets that are intended to be financed with longer term assumable fixed rate debt, typically provided by FHA and HUD programs. These loans have terms of up to 40 years and offer attractive fixed rates because of the financing terms available for these high-quality assets, certain of these assets may be located in smaller sub-markets and may be older than our core product. Today, we have acquired two assets in this program representing a total of 774 units for an aggregate cost of approximately $137 million. By way of example, we assumed an outstanding HUD loan on our first community that carries an interest rate of 3.75% and matures in 2046. We entered into a three-year bridge loan that carries a floating interest rate of 230 basis points over LIBOR for the second community. Our intention is to complete a substantial portion of the value-add renovation on the second community during the term of the bridge loan and then refinance with a HUD loan for 35 years on a fixed-rate basis. We expect to continue to acquire these types of assets through Main Street Apartment Homes. In many respects, the quality of these assets will be the same as our core Class A multifamily which form the foundation of our company. Taking advantage of our deep real estate experience and expertise, Main Street will also be seeking high quality assets that have value-add opportunities in which the community can be acquired and upgraded and then financed at attractive rates for a longer term with HUD or another lender. Let me now turn the call back over to John Williams. John?

[John Williams:]

Thank you, John. And thanks for doing such a great job with this new strategy that we're so excited about. As is our strategy, we continue to finance the loans for each of our multifamily and retail shopping centers separately on the non-recourse basis with no upstream guarantees to Preferred Apartment Communities or our operating partnership and with no cost collateralization of these mortgages. We think that's sort of unique in the REIT world. Our core Class A multifamily portfolio continues to remain among the youngest and most modern in the industry. Assuming we exercise the purchase options on our real estate loan investments for these type assets, we expect that our already young portfolio will become even younger. As we have grown as a company, we have been able to finance our growth from a variety of sources, including capital available to us from our sales of our Series A redeemable preferred stock, 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. By employing these sources of capital in 2015, we're confident we have been able to save our common stockholder from significant dilution. As I mentioned earlier, we're pleased about our financial results for our fourth quarter and for the year. Our growth opportunities are significant and we're also pleased about the strength of our Management Team which I believe was second to none in the industry. Before I turn the call over to the operator, there are several questions that have been mailed in to us ahead of time and we'll go ahead and take those first. The first question is, it looks like 2015 was a great year for apartments. Would you please talk about your outlook for 2016 in terms of rental rates, permitting, occupancy and overall growth prospects. Let me call on John Isakson to respond. John?

[John Isakson:]

Thank you, John. For 2016, we're providing guidance for NFFO of between $1.23 and $1.33 per share and revenue guidance of between $175 million and $200 million. We're still early in the year and as the year progresses, we anticipate narrowing this guidance. To some degree, our NFFO guidance is based on our 2016 goal to increase NFFO per share by 10% or more. In the end, we focus on driving earnings per share. With respect to rental rates and occupancy, this is always a delicate balancing act. We believe the rental market for 2016 will remain strong. We seek to have a mid-90%s occupancy for all of our communities which we believe correlates closely to full occupancy on a practical level. We're now of the size that we're starting to implement revenue management software for our communities to assist us in trying to maximize the balance between rental rates and occupancy. Obviously, this is a focus of ours that we'll continually refine quarter-to quarter, month-to-month and week-to-week. We anticipate interest rates rising over the course of the year, but we believe the pace of rate increases will be measured and gradual. The fed is split on its rate hikes and is generally taking a more cautious approach to managing inflation in light of all the external forces that are currently impacting the economy. John?

[John Williams:]

Our next question, we anticipate additionally will you please discuss the Company's exposure in Texas and in particular the Houston market. Randy Forth, our new Chief Asset Management Officer, was just in Houston last week visiting our assets, so I'll call on Randy to respond. Randy?

[Randy Forth:]

Thank you, John. We currently own seven multifamily communities in Texas, of which four are located in the Houston MSA. At the outset, we believe we acquired these excellent assets at a great value and underwrote them assuming a softening in Houston MSA. Overall, we're not seeing a significant adverse effect on the financial results of these assets. Our Houston financial results may be impacted more than the results of properties located outside of Houston, but nevertheless, we closely monitor all of these assets. One of the design strategies we've implemented from the outset is to diversify our multifamily assets across markets, not just a city and sub-markets, but also by state. As of the end of 2015, we owned 19 communities across eight states. We'll continue to diversify where we acquire our multifamily community in an effort to mitigate potential softness in any one market.

[John Williams:]

Thank you, Randy. The next question is, in light of the relatively few multifamily communities that comprise your same-store results for any particular period, how should we interpret this information? Not with any gravity. Actually, this was a good question. In some respects, we're still a very young company, having started operations following our IPO in April of 2011. In order to have a valid set of comps, we need to own the assets for 15 months on a static basis. That is for example, after we completed any material CapEx that we budgeted for at the time of acquisition and after reaching stabilization, if we acquired an asset prior to that threshold. Also, if we've identified a company to sell, as we have in the case of Trail Creek and have entered into a listing agreement for the sale of that asset, it would fall out of the mix. So as we continue to grow as a company and acquire more communities, we believe we'll have a better comp set against which to measure same-store numbers and it will become more relevant in the future. Next, you recently announced that the board had approved change in the acquisition fee to be paid Preferred Apartment Advisors to a financing type fee. Why did you do this and what is the impact to the company and the stockholders? Let me call on Mike Cronin to answer this question. Mike?

[Mike Cronin:]

Thank you, John. The primary driver for this change was to better reflect, on a FFO per share basis, the accounting impact of closing cost fees for acquisitions. For example, by redesigning these fees as a form of financing fee, we're able to amortize the fees across the lives of the loans utilized to acquire the assets. By contrast, the entire acquisition fee is expensed at the time of an acquisition and thus fully reduces GAAP net income and therefore FFO accordingly. We've run our models on this change and we don't believe it has any material adverse impact on revenues over time. In fact, we believe the impact will be neutral as relates to Preferred Apartment Advisors or Advisor. We also believe the impact will be neutral to PAC's normalized FFO and adjusted FFO because our goal is not to provide guarantees by PAC or our operating partnership on any mortgages utilized in connection with the acquisition of an asset, we have a built-in governor or source to hold down the amount of leverage we can employ. Overall, our leverage as of the end of 2015, as measured by the ratio of our debt to the un-depreciated book value of our total assets was only about 55%. Our goal for 2015 was 50% and we'll continue to strive for this goal.

[John Williams:]

Thanks, Mike. Next, how do things stand with your approach for anchored shopping center growth and the potential spin-off of this company? Dan, do you want to answer that for us?

[Dan DuPree:]

Yes, John. We continue to grow our assets in the grocery-anchored retail segment of our business very rapidly. Our strategy is to grow this segment and it continues on track. At year-end, we had an aggregate un-depreciated book value of approximately $210 million of grocery-anchored shopping center assets and we've assembled a highly experienced team invested in it and created it to accommodate additional growth. We continue to believe this is a great asset class and that it will be very accretive over time for our stockholders. Overall, it comprises a relatively small portion of our assets, roughly 15%. We still are seeking to spin off, sell or distribute these assets into an independent, publicly-traded REIT once we believe these assets have reached sufficient scale and market conditions warrant, while continuing to own an investment in that company. Currently, we're looking at mid to late 2017, although the timing of this could be earlier or later based on a variety of circumstances, some of which may be out of our control. John?

[John Williams:]

Thanks, Dan. You cited the SNL Financial data in your opening remarks which were quite impressive. Do you think you will be able to duplicate these results for 2016? No. I don't. But I would have to say if we continue to produce earnings of north of 10% a year, if we continue to increase our dividend 10% per year, if we continue to have the most robust accounting technical program in the industry, if our Management Team continues to grow and perform like they are, I think our stock will definitely be up. Not 54%, but it should be up substantially. With that, operator, we're ready to take questions from the floor.

[Operator:]

[Operator Instructions]. Our first question comes from Michael Kodesch with Canaccord. Please go ahead.

[Michael Kodesch:]

I guess my first question is just on the current portfolio. I was wondering how the stabilization of Citi Lakes was progressing and then also approximately how are the three Lenox properties and the Stone Creek asset leasing up? And then sort of what's the timeframe and schedule for stabilization there? Thanks.

[John Williams:]

Citi Lakes, I think I saw a report this morning that said it was about 90% leased. I visited the property two weeks ago. My guess is it will be stabilized by the last week of this month. We've had several wonderful leasing weeks and most of the capital improvements that we had planned when we had purchased the asset are now in place, so we're able to proudly call it a PAC asset. So we're quite optimistic it will be stabilized in the next few weeks. Relative to the properties in Houston, I think they already are stabilized and are performing to our expectations,. As we might have mentioned, when we purchased those assets, we had already anticipated some weakness in the Houston market. We actually bought the assets on a return, they contemplated that. I would have to say that the assets are actually performing better than we had expected through our purchase price. John I looks like he's sitting on a tack. Do you want to answer that?

[John Isakson:]

No. I was just going to say that Nashville -- the three assets we bought in Nashville have been absorbed into the portfolio well and their performance has been excellent also.

[John Williams:]

Next question?

[Michael Kodesch:]

I guess moving on to the mez portfolio, what's the pipeline of potential mezzanine developments look like today?

[John Williams:]

Dan, do you want to take that on?

[Dan DuPree:]

Yes. It's, it's an interesting dynamic that as the market is tightening from a debt standpoint, that we're seeing considerably more opportunities in the mez loan program, both inside our group and outside our group which creates interesting opportunities for us. I would tell you, we're sitting on $280 million of commitments, $238 million outstanding and that was as of year-end. It's actually changed a little bit. We'll exercise our purchase options on several of those deals, but I expect that our outstandings on mez loans year-end 2016 will be higher than what they were the end of 2015. So that basically argues for a pretty robust pipeline.

[Michael Kodesch:]

So I guess in the past that you might have mentioned that you're looking into new developer partnerships. I think in the past you guys said you were kind of limited by the fact that all of your partnerships are kind of working on deals at the moment. So I guess how are you guys progressing there? Given that there are more opportunities for mezzanine loan development out there and then the attractive return profile of these investments, how do you see that growing over the course of the next year or two years?

[Dan DuPree:]

One of the things that we have said continuously about the mezzanine loan program and the developer group that we have is that we've had long-standing relationships with those people and that gives us comfort in a multitude of ways. We're being approached by additional developers. But what's really key to that whole process is vetting those groups and being very selective about who we elect to work with. The development business is a funky business and it's really important that you know how people are going to behave in good markets as well as bad markets. So I would say that the number of folks with whom we're having conversation is considerably larger than it has been in the past, but we're being extraordinarily cautious as we approach.

[John Williams:]

One trend that we're noticing, this is John again, one trend that we're noticing and I'm not sure many analysts have picked up on this, but the extraordinarily tough market for developers to get construction financing and it's probably in my 50 years, is probably the toughest it's ever been. I think that's caused by primarily Basel III and Dodd Frank and what is occurring is developers are having to take down their leverage. Should the typical developer would get a 75% loan, he's now looking at something substantially less than that. That gives our mezzanine program a real opportunity. So we're looking at different conditions in the multifamily world because of these issues with construction loans and I think it will play to our advantage quite frankly.

[Operator:]

Our next question comes from Craig Kucera with Wunderlich. Please go ahead.

[Craig Kucera:]

You mentioned you were going to be taking several purchase options out of the multifamily portfolio, mezzanine portfolio. It looks like you have five purchase option windows opening. Are those most likely candidates or are you accelerating some of the other loans in the portfolio?

[John Williams:]

I'll call on Dan, but in the past we have accelerated taking down the purchase options primarily because of these low interest rates. So the trade-off for us is we give up the return that we're getting off the mezzanine, but we lock in a long term loan at very, very attractive rates. So we're quite willing to advance when we close a loan. The window for closing student housing loans generally is in the fall after they finish the lease-up for that new fall quarter. But Dan, do you want to add color?

[Dan DuPree:]

I think we have released in the first quarter that we actually exercised a couple of -- already, both Crosstown and Aster Lely. I'm sorry, Overton. Lely was last year. And there are a couple of others that we're in the process of extending the purchase option period for much of the reason that John mentioned. It's advantageous to both us and the developer. So in those that we're extending would have been two of the ones that would have shown up as coming up this year.

[Craig Kucera:]

And you've got a handful of purchase option prices listed kind of typically in the $40 million range, plus or minus. What kind of an implied cap rate does that represent? And kind of where are you seeing the market relative to those cap rates?

[John Williams:]

In the future when you look at the purchase option, generally we will not have a number that we will have listed. A couple years ago, we moved from an absolute purchase option to a cap rate purchase option. So our typical deal today is we get a discount on the then-current cap rate in the marketplace so it will be a little harder to determine what we're actually paying for the asset until we announce it. But our typical deal is a 40 or 50 basis point discount to the then-prevailing market would be the formula we would use. But the typical apartment size for us is probably $50 million, maybe $60 million.

[Craig Kucera:]

Okay. I know the goal last year was to bring down leverage a bit. Didn't quite get there this year. It sounds like in the near term, we're probably looking at maintaining sort of flattish. Is that the thought that over the long run, the Company's probably going to be running a little closer to 55% or is there any chance that leverage could increase?

[John Williams:]

Well, I don't think it will increase much. The driver for our leverage on our existing portfolio -- we have virtually no leverage in the Company other than securitized mortgages. In fact I was looking this morning, I think we owe KeyBanc $6 million, so we don't -- that's not where we would experience any actual leverage. Our leverage, if we see interest rates go down, so that we're able to protect our cash flow, we would probably take our leverage down on our purchases. The key driver for us, I think John Isakson mentioned it in his remarks, the driver for us is guarantees back up to the Parent Company. So the limiting factor for us is the leverage we're able to get on a first mortgage where PAC itself does not have any guarantees or any substantial carve-out. That's our governor. We do not want to have a lot of debt secured by the Parent Company. In fact, we don't want to have any. That's the way we're able to say we have a fortress-like balance sheet if we're not guaranteed any debt. So that leverage ratio probably has more to do with the debt that we can obtain that we don't have to guarantee. And as long as that debt is available today in the ranges that we've been used to, then that will dictate what our leverage ratio is. John, do you want to add color to that?

[John Isakson:]

No. I think that's right. I agree with John. I don't see the overall leverage level going up and, you know, if we do see a rise in rates or we do see a constriction in credit and debt becomes more difficult from an underwriting standpoint, leverage level could go down. But it's going to be more market dependent than anything else.

[John Williams:]

It wouldn't be inconceivable for us to have assets that were debt free. As a matter of fact, we're looking at several situations today that might be more advantageous for us owning those assets without any debt whatsoever.

[Craig Kucera:]

I've got one more, back to the balance sheet. Then I'll hop in the queue. You're now originating about $100 million of preferred a quarter. How were you thinking about your capital structure sort of strategically and from a longer term basis? Could we continue to see that level with fairly limited ATM common issuance or do you see more of a balance of common and preferred going forward?

[John Williams:]

That's a question we internally look at and debate continuously. I think without question, this year we will, if we think our stock price is appropriate, we'll issue some common stock. To be honest with you, our common stock is so grossly undervalued, I think that we would be stupid to issue the common stock. So when people catch on to the fact that what a great Company this is and how strong our earnings are and how strong our dividend will be, I would suspect that at that point in time we might issue some common stock. I think Dan now is sitting on a tack.

[Dan DuPree:]

Well not on a tack, but I would like to say that one of the things about the common, we're actively looking at a large number constantly of potential assets to acquire and where I see us probably deploying more common stock is when there's a large portfolio or other large possible acquisition that is time-sensitive that would cause us to go into the market, but as John says, even with that, we're not going to cheapen our stock. We know what we think the underlying value of the Company is and we're not anxious to issue stock on a devalued basis.

[John Williams:]

As a matter of fact, if you picked up on a recent acquisition, we actually issued OP units which is like issuing stock on a recent acquisition of a shopping center. We felt we were able to make a tremendous economic deal for us, but it also was a great economic deal for the seller because he was able to avoid taxes. So we're exploring the opportunity to do more transactions like that which are a win-win to both a seller of property as well as to Preferred Apartment Communities.

[Operator:]

Our next question is from Patrick Kealey with FBR. Please go ahead.

[Patrick Kealey:]

I apologize if you went over this. My line actually dropped in the middle of Q&A. First, if we could touch on Main Street, obviously you gave some nice color here today on the assets you have acquired, but maybe give us a sense as we look into 2016 what the pipeline of those assets looks like and how we should expect maybe those acquisitions to blend in with overall kind of multifamily one-off acquisitions as we go through the year?

[John Williams:]

Let me call on John Isakson to answer that. But remember, our goal is that these assets are extremely high quality that we think there should be looked at as A quality properties. We don't want you or anybody else to drive through those properties and be able to distinguish them in any way from any other assets in our portfolio. I'll start off with that and then call on John Isakson. John?

[John Isakson:]

What we're seeing in the market is a balance between assets that have been built with the 221(d)(4) program or have been refinanced with the 223(f) program and the sellers are looking to sell the properties with that debt in place. We see a pretty good pipeline there. And then we're also seeing a really good pipeline for the value-add program and that's giving us an opportunity to be pretty selective about the assets that we go after and the ones that we want to get out of the portfolio for exactly the reasons that John just highlighted. I think the volume for this year is going to be solid. We've got great financing options on the value-add program from a bridge standpoint. We're looking forward to getting these value-adds turned around and getting them into HUD because obviously the rates today, we were looking at the current rates that HUD offers and they're in the low to mid 3%s. Even when you add the PMI on top of that, that's just incredibly attractive financing on a long term basis.

[Patrick Kealey:]

And then maybe turn your attention to your real estate loan portfolio again. You talked about balances for the end of 2016 potentially being higher than where they are here at the end of 2015. So how should we think about the mix of assets that will be in that real estate portfolio? Obviously understanding you have retail in there, you have student housing, along with your multifamily. So do you see more options for developments outside of kind of your traditional multifamily? Maybe going a little bit deeper into student housing, adding on some retail or should we expect that mostly going to be on the multifamily side with those options being a little more one-off in nature?

[John Williams:]

This is John. Again, I'll call on Dan, but we want everybody to understand we're a multifamily company. Our symbol is APTS. So everything we do will be centered around primarily the apartment business. Having said that, I would like to see us add additional retail centers to our loan-to-own program. I think that would be very healthy. We like the student housing business. It's a very good business. There are not a lot of REITs in the business. There are not a lot of professionalism in the business. We think there's a lot of opportunity for us in this business. We have a number of transactions that we plan on harvesting and we have a pipeline of three additional student housing properties that we would expect to close within the next 30 to 45 days. So, yes, our predominant business is going to be the Class A apartment business, but we will seek to do other transactions. Dan?

[Dan DuPree:]

The only thing I would add to that is to date in the retail we have done one mezzanine loan that we did in the first quarter of this year. And we would love to grow that, but my guess is 2016 is going to be dominated by multifamily mezzanine loans to include the student housing loans that John referenced.

[Operator:]

[Operator Instructions]. Our next question comes from John Demeo [ph] with Newbridge Securities. Please go ahead.

[Unidentified Analyst:]

The question I have is your cash flow from 2015 to 2014 was up 128%. You gave guidance on NFFO and revenue. Obviously, I don't expect the cash flow to be up that much this year, but do you have an estimate on this year 2016?

[John Williams:]

We actually don't budget for cash flow because it's a little bit -- it's not as predictable as the other matrix. Lenny, do you want to take a crack at that? You or John? John, we expect, again, very strong cash flow.

[Lenny Silverstein:]

But yes, I mean, a lot of the financial criteria that we're looking at are things that we can actually do a valid projection on which is information that we've already disclosed out to you. With respect to cash flow from operations, there is a lot of information that goes into the accounting treatment between revenues before you get to cash flow. And then most importantly, what we're really looking at is our core FFO which is the true cash that we start having available for adjusted FFO that we can then distribute out for earnings for our stockholders and dividends. So that's why we really don't give out an estimate for our cash flow operations.

[John Williams:]

The matrix that I would look at if I were you is the AFFO. That's a more predictable part of our operating metrics and obviously it's one of the key drivers of our dividend. We have as a goal to pay out around 70% to 75% of our AFFO on the basis of our performance in that area. So cash flow tends to -- if we sell an asset or if we harvest a mezzanine loan, there are a lot of things that produce cash that tend not to be as predictable. I hope that's answered your question.

[Operator:]

And this concludes our question and answer session, as well as our conference. Thank you for attending today's presentation. You may now disconnect your lines.