Preferred Apartment Communities, Inc.

Good morning, and welcome to Preferred Apartment Community's third quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Paul Cullen, Executive Vice President, Investor Relations. Please go ahead.

Thank you for joining us this morning, and welcome to Preferred Department Communities' third quarter 2020 earnings call. We hope each of you have had an opportunity to review our third quarter earnings report, which we released yesterday after the close of the market. In a moment, I'll turn the call over to Joel Murphy, our President and Chief Executive Officer, to share some initial thoughts, and then John Ossigson, our Chief Financial Officer, will share some additional details about financial metrics and capital markets. Then Joel will return to conclude our prepared remarks. Following Joel's remarks, we'll be pleased to answer any questions you might have. Also present with us this morning is Mike Cronin, our Chief Accounting Officer, Jeff Sherman, Michael Aide, and Boon Dupree, the business leaders of our multifamily grocery-anchored retail and office verticals. I'd like everyone to note that forward-looking statements may be made during our call. These statements are not guarantees of future performance and involve various risks and uncertainties. And actual results may differ materially. These risks and uncertainties include, but are not limited to, the impact of COVID-19 pandemic on our business operations and economic conditions in the markets in which we operate, our ability to mitigate the impacts arising from COVID-19, and the information about third quarter and October 2020 rent collections in light of COVID-19. For discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in yesterday's earnings press release, as well as our SEC filings. Our press releases and other SEC filings can be found on our website at pacapts.com. The press release and also includes our supplemental financial data report for the third quarter 2020 with definitions and reconciliations of non-GAAP financial measures and other terms that may be used in today's discussion and the reasons management uses these non-GAAP measures. 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 basic weighted average shares of common stock and Class A partnership units outstanding for the period. I would now like to turn the call over to Joel Murphy. Joel?

Thanks, Paul. Good morning, everyone, and thank you for joining our third quarter call. We hope that you and your families are well. As we stand here in November, we are eight months into this pandemic, and we continue to execute on our strategic and tactical goals. We have all learned to operate in this evolving COVID environment, both at our corporate offices and across our portfolio, and we remain focused on the health and safety of our associates, our residents and tenants, as well as the communities we serve. We expect that COVID will impact the economy and its future growth prospects in ways that may be unpredictable for quite some time. All this, even with the very encouraging news announced yesterday as to the promise of the Pfizer vaccine. But we also believe that in many cases, COVID has served to accelerate trends that were already there, magnifying the importance of high-quality, well-located, and well-run assets. As we reported yesterday, our operational results have been outstanding relative to the current environment in every product type. Cash rent collections, including deferrals, for the third quarter were 99% for multifamily, and 98% for student housing. For Grocery Anchored Retail, we collected 96%, and for office, we collected 99%. We believe this solid performance is driven by two key factors. First, as of today, our portfolio is comprised of 100 owned assets in key asset classes, multifamily, Grocery Anchored Retail, and Class A office. The quality of our portfolio and tenant base provides stability. particularly in times of economic uncertainty. Additionally, each product type is run by specialized management teams with deep sector experience. Second, our Sunbelt suburban market focus allows us to benefit from positive economic drivers, including a diverse employment base, high educational attainment, strong population and employment growth, and rising household incomes. These broadly positive trends reflect the benefit of net migration to the Sun Belt, which has been going on for many years and which has only been accelerated by the COVID-19 pandemic. There's an excellent discussion on these topics in Emerging Trends in Real Estate, the recently issued joint annual report of the Urban Land Institute and PwC, which I urge you to read. Next. Let me now provide an update on each of our business units. For the third quarter, multi-housing comprised 57% of our revenues. Again, our third quarter collections of 99% in our core multifamily business have been outstanding. We have collected 97.4% of multifamily rents for the month of October and expect that to continue to trend towards 99%, as we've seen in previous months by the end of November. Our portfolio consisting of high quality apartment assets in key Sunbelt suburban markets continues to perform well, which we are quite proud of in this environment. For the third quarter, our multifamily year-over-year same store NOI was slightly positive at 0.1%. We are pleased to report that for the quarter, even in light of COVID, Our same store average physical occupancy of 95.6% is identical to what we reported for the third quarter of 2019. While our multifamily same store revenues were down 0.3% from a year ago, we still achieved top line growth. It was just offset by additional bad debt and concessions, both of which we believe will moderate in the coming quarters. As we look ahead, While we are always focused on managing our availability and maintaining a strong and steady occupancy throughout our portfolio, we now have a renewed focus on rent growth as the initial impact of COVID-19 has passed. In fact, our combined rent growth for September move-ins and renewals turned positive for the first time since April, and we expect this trend to continue. Additionally, we are no longer needing to offer rent deferrals to residents, and we're seeing those who have taken advantage of the program previously generally paying current under their new structure. Turnover reigns below 2019 levels, and traffic has improved significantly since the onset of COVID and remains steady and reliable across our portfolio. Our strategy to own newly constructed Class A communities in growing Sunbelt suburban markets has certainly proven resilient during this economic slowdown. We also believe that our strategy will benefit from net migration, employment, and housing trends as the economy recovers. However, I'd be remiss not to mention and thank our associates, as strategy alone can only take us so far. Our associates across the entire company and all product types have worked diligently in an ever-changing climate this year and have not only cared for their own families, but our residents and our tenants. Our results are certainly a reflection of their dedication and I thank them. While operations are taking the spotlight this year, we continue to actively invest in multifamily. During the third quarter, we closed on a $20.7 million real estate investment loan in connection with an Atlanta multifamily development that includes a purchase right at completion with a well respected and well capitalized sponsor that we have done business with several times before. Additionally, subsequent to quarter end, we acquired a 281-unit newly constructed community in a growing suburb of Orlando. Earlier this year, we stated it was our intention to exit the student housing space to concentrate on our core Sunbelt multifamily business. As we announced on November 3rd, we completed the sale of our student housing assets to TPG for approximately $478 million. which resulted in approximately $245 million of net cash proceeds at closing after satisfaction of approximately $233 million of secured mortgage debt and other closing adjustments and costs. TPG is a very experienced institutional real estate owner and operator, and this sale confirms the scope and the diligence of the process we ran with CBRE, the quality of the assets, and the strength of their operational performance. Next, Grocery Anchored Retail comprises approximately 21% of our revenues. Our 100% pure play grocery anchored centers are 92.5% leased. These centers are anchored by market-leading grocers, including Publix, Kroger, and Harris Teeter. We continue to see strong foot traffic at our centers, and all of our shopping centers have remained open throughout the pandemic. Our strong cash collections are continuing to trend positively, with third quarter collections of 95%, an increase of 400 basis points over our second quarter cash collections of 91%. Adjusted for deferrals, our collections for the third quarter were over 96%. This positive trend continued in October, and as of yesterday, our cash collected for October is 96%. We credit this solid outperformance to our 100% focus on grocery anchored centers and Sunbelt markets, as well as our deeply experienced and engaged asset management team. We do remain focused on collecting outstanding rent, both current and deferred, across our retail portfolio. We worked with our tenants to come to mutually beneficial deferral agreements that approached the relationship holistically and for the long term. Examples include obtaining extended term, release of certain lease restrictions on use, and creating out parcel opportunities in our common areas that had previously been lease restricted. In the aggregate, these deferral agreements totaled 1.5 million for the second and third quarters, with repayment primarily over the course of 20 and 21. The specific details of our actions on reserves in connection with our Grocery Anchored Retail portfolio are contained in our supplemental financial data released last night. We believe the headline is the low amount of these reserves on an absolute basis and on a relative basis when compared to the total revenues in our Grocery Anchored segment, when compared to our total company-wide revenues, and when compared to similar disclosures by other public retail owners. This supports our view that Grocery Anchored Retail, located in suburban Sunbelt markets, has significantly outperformed. This solid performance has allowed us to focus on revenue growth. On the leasing front, we continue to be successful with both retaining current tenants and signing new leases. During the third quarter, we signed 185,000 square feet of new leases and renewals, an increase of approximately 66,000 square feet over our second quarter activity. We continue to be pleased with our leasing volume and momentum and our ability to retain tenants and the rental rates we are achieving. Finally, office comprises 22% of our revenues. We continue to enjoy the stability of our multi-year office leases and stand 96% leased as of quarter end across 3.2 million square feet in Sunbelt markets such as Atlanta, Charlotte, and Raleigh. There is no doubt, uncertainty, related to the future of office, while so many continue to work from home. But we have collected 99% of our office rents year to date, and only 11% of our office portfolio is expiring in 21 and 22. Keep in mind that these are high-quality Class A suburban office properties in Sunbelt markets. We believe a more likely consequence of COVID, rather than the demise of the office building, is to have accelerated migration trends to the Sun Belt, particularly from coastal urban markets that were already underway. Now, on to some governance and capital strategy comments. Recently, we announced two important proposals recommended by our board to enhance our governance and improve our capital flexibility. First, was an approval to give common stockholders the ability to amend our company's bylaws. And second, approval to reduce the company's call option on its Series A redeemable preferred stock from 10 years to five years. We believe both of these proposals are stockholder friendly measures and both ISS and Glass Lewis have recommended four votes for both proposals. We issued a press release on November 5th announcing that we adjourned our special stockholders meeting until November 19th to allow stockholders more time to vote on these proposals. As a reminder, we need two-thirds of our outstanding shares to vote in favor of these proposals. As of yesterday, November 9th, approximately 65.4% of shares outstanding had voted. Of these shares, 97.9% and 95.7% had voted in favor on the first and second proposals, respectively. We are very encouraged with the overwhelming support from our stockholders that we have received today. Now let me turn the call over to John Isakson to walk you through more details about our financial performance. John?