Preferred Apartment Communities, Inc.

Good morning and welcome to Preferred Apartment Community's fourth quarter 2020 earnings conference call. This conference call is being recorded. I'd like to introduce to your host for today's call, Mr. Paul Cullen, Executive Vice President, Investor Relations. Please go ahead.

Thank you for joining us and welcome to Preferred Apartment Community's fourth quarter and full year 2020 earnings call. We hope each of you have had an opportunity to review our fourth 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 Chief Executive Officer, to share some initial thoughts, and then John Isaacson, our Chief Financial Officer, will share some additional details about financial metrics and capital markets. Then Joel will return to conclude our pre-prepared remarks. Following Joel's remarks, we'll be pleased to answer any questions you might have. 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 our fourth quarter 2020 and first quarter 2021 rent collections in light of COVID-19. For discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in yesterday's earnings press release, as well as our SEC filings. Our press release and other SEC filings can be found on our website at pacapts.com. The press release also includes our supplemental financial data report for the fourth quarter and full year 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 otherwise indicated, all per share results that we discussed this morning are based on the basic weighted average shares of common stock and Class A partnership units outstanding to the period. I would now like to turn the call over to Joel. Go ahead, Joel.

Hey, thank you, Paul. Good morning, everyone, and thank you for joining our call today to discuss our fourth quarter in full year 2020 results. Let me begin by stating that the impact of COVID-19 and the significant wide-ranging events of this past year have been and continue to be felt deeply by all of us across the country and the globe. We hope this call finds you and your families well. You know, we sit here today right about at the first anniversary of those unsettling days in the beginning of March 2020, when the realities of the COVID-19 global pandemic became the primary focus of our personal and business attentions. However, while 2020 was a difficult and certainly unprecedented year, it was also a year of significant transformation and strong execution at preferred apartment communities. We began the year as an externally advised REIT that had four operating verticals focused on four distinct asset classes in a COVID-free environment. We ended the year as a fully integrated internally managed REIT with investments across three asset classes and with a significant reduction in our preferred stock outstanding. In 2020 and going forward, we have a renewed investment focus towards our suburban Sunbelt Class A multifamily strategy, have begun in earnest the process of realigning our balance sheet, and we are now operating in what we hope and believe to be the latter stages of the pandemic, with the benefit of vaccination programs rolling out rapidly worldwide. Companies have all had to face their own particular challenges that required agile movements, creative thinking, and hard work. I could not be prouder of the women and men across our entire company and at our properties for their smart and effective work this past year that allowed us to perform so well on an operational level. The COVID-19 pandemic has also spotlighted the changing economic and demographic dynamics in our country and accelerated trends that had already begun. This includes the continued and increasing flight to suburban Sunbelt markets and the relative outperformance of high-quality, well-located, and well-run assets. We believe these trends will be in place for the foreseeable future and that they will provide a tailwind for PAC's portfolio. This tailwind is exemplified in our fourth quarter asset level performance. For the fourth quarter and full year 2020, our operational results have been very strong across the board, particularly with respect to our cash collections relative to peer groups. Cash rent collections, including deferrals for the fourth quarter, were 99% for multifamily, 98% for grocery-anchored retail, and 99% for office. More detail can be found in our supplemental financial report filed yesterday evening. We credit this performance to our high-quality portfolio of 116 assets, including real estate loan investments, that is run by dedicated teams with significant sector expertise. We also cannot overstate the benefit of our suburban Sunbelt focus. We have benefited from continued strong economic drivers, including a diverse employment base, high educational attainment, strong population and employment growth, and rising household incomes. We also continue to experience strong positive net migration into our markets, which COVID has only accelerated. This creates a positive feedback loop. As families and businesses continue to seek out our suburban Sunbelt markets, they attract more families and more businesses as a result. And guess what? They need places to live, places to shop for groceries and necessity items, and places for those growing companies to operate their businesses. Our operational performance, portfolio stability, and favorable demographic trends across the company gave us the opportunity to begin implementing certain strategic changes that we believe have set PAC up for accelerated growth in the future. At the end of January 2020, we completed the internalization of our manager. This internalization was an extremely important event for PAC, providing alignment of management and stockholders and meaningfully simplifying our platform. This new structure has allowed PAC to capture the full benefits of the company's scale by eliminating fees to the external manager. As important, the internalization enabled us to be nimble and react quickly and decisively as a management team when the pandemic took hold. We then took strategic steps to focus our portfolio on the areas where we believe we can capture outsized growth. we meaningfully simplified our business by completing the sale of our student housing portfolio for $478 million, and we put two initiatives up to a vote to our common stockholders. One was to improve our governance by giving common stockholders the ability to amend our company's bylaws, and two, to improve our capital stack and balance sheet flexibility by reducing the call option on our Series A preferred stock from 10 years to 5 years. This modification to our ability to call in our preferred stock is significant. This optionality is an important tool in our goal of realigning our balance sheet. These stockholder-friendly measures passed with overwhelmingly positive support in November. We then utilized approximately 85% of the student housing net sales proceeds for the redemption of approximately $209 million of outstanding Series A preferred shares with the remainder allocated towards growing our portfolio through multifamily acquisitions, real estate loan investments, and other corporate purposes. We deployed the balance of this capital successfully, acquiring two newly built Class A multifamily assets in Florida during the fourth quarter. The first was the Blake, a 281-unit community located in Winter Springs, Florida, within the fast-growing Orlando MSA. And the second was the Menlo, a 332-unit community located in a high-demand submarket in Jacksonville. The Menlo opportunity was generated through our real estate loan investment program. These two fourth-quarter acquisitions brought our total investment in multifamily properties during 2020 to approximately $277 million, representing an additional 1,293 units, which is a 12.6% increase over our 2019 year in total. Even taking into account our one fourth quarter asset sale that I'll discuss in a minute of 395 units, we entered the year, ended the year with 11,143 units and 8.8% net year over year increase in unit growth. In addition, We issued real estate investment loans totaling approximately $44 million in commitments supporting the development of an additional 853 units, which we believe demonstrates our belief that this asset class and these markets have strong growth attributes into the future. Multi-housing investments, including our multi-housing real estate investment loans and the partial quarter of student housing property revenues, comprised approximately 55% of our revenue in the fourth quarter. As we look ahead, we believe very strongly in multifamily as the driver of future growth for our company. We believe we are well positioned to drive organic growth through rental rate increases across our portfolio. We have managed controllable expenses and also actively managed our capital expenditures. We believe we have the portfolio and the team in place to take advantage of the tailwinds in our markets. We expect to be active in the acquisition market for quality multifamily properties in our suburban Sunbelt markets. We are seeing that cap rates for quality properties in some of our markets have significantly compressed, in some cases by approximately 25 to 50 basis points in just the last few months. That said, we intend to remain disciplined in our investment decisions. However, we do believe that our deep local market knowledge and relationships and operating teams in those markets, including those with developers through our real estate loan investment program, provide a meaningful competitive advantage. We also will, from time to time, dispose of assets that no longer fit our portfolio's growth profile. And as I just mentioned a minute ago, in the fourth quarter, we sold one multifamily community, the Avenues at Creekside in New Braunfels, Texas. This sale is in line with our desire to exit this non-core market and asset and concentrate our portfolio more strategically. Next, Grocer Anchored Retail comprised approximately 22% of our fourth quarter revenues. Our 100% pure play grocery anchored centers, excluding our redevelopment properties, are 95.6% leased. These centers are largely anchored by market-leading, high-performance grocers, including Publix, Kroger, and Harris Teeter. And we continue to see solid daily foot traffic and strong grocer sales. Based on the 2020 sales results we have received so far from our grocery partners, we are seeing and expect to continue seeing significant sales increases across our portfolio. As we furnished in our rent collection and business update several times last year and once this past January, we were very pleased with our retail rent collections, which were 98% for the fourth quarter. We have reserved 2.3% of our total retail revenue for 2020, which we believe is appropriate. More detail on this is contained in our supplemental. Our focus for 2021 is turned to leasing. We continue to be successful with both signing new leases and tenant retention in the fourth quarter. Our pipeline of New Deal activity has expanded in nearly all of our markets, and market rental rates are holding or growing from pre-pandemic levels. So far in the first quarter of 21, this momentum has accelerated. The performance of our assets and our management team across the board in the company gave us the ability in 2020 to focus on our strategic efforts. The operational team in our grocery-ranked retail group has done an incredible job of navigating the pandemic where there was so much distress and disruption in the broader retail sector. The numbers obviously speak for themselves, but we believe this relative outperformance on rent collections is noteworthy. Finally, suburban office comprised 24% of revenues in the fourth quarter. Our collections for office have also been very strong at 99%, and we have just over 11% of our portfolio leases expiring in 21 and 22. We are 95% leased across our office properties, and our leases are largely with well-capitalized larger corporate users and carry more than seven years of weighted average lease term remaining. While we recognize that work from home continues for many, we also believe in some comments made recently by J.P. Morgan's CEO, Jamie Dimon, saying that the negatives of working from home are being felt more and more the longer staff are away from the office. We have certainly found this to be true in our experience in our Atlanta home office, where we are back in full force and much better for it. We also continue to see corporate migration trends away from coastal urban markets towards cities like Raleigh, Charlotte, and Atlanta, where seven of our nine office buildings are located. We believe these demographic trends will benefit suburban office demand over time and the rapidly increasing rollout of vaccines across the country is pointing towards more people back in their offices. Our focus in 2021 for office has also turned to leasing, as office users appear to be returning to decision-making mode about their space needs. So now I'll turn the call over to John. John?