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spk04: 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.
spk05: 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.
spk02: 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?
spk01: Thanks, Joel. And thanks to everyone for joining us this morning. I hope you're all staying safe and healthy. Let me start with our fourth quarter and full year results. For the fourth quarter of 2020, PAC generated revenues of $121 million, FFO of negative 20 cents per share, core FFO of 31 cents per share, and AFFO of 25 cents per share. For the full year 2020, we reported revenues of $502 million, FFO of negative $3.36 per share, core FFO of $1.07 per share, and AFFO of 83 cents per share. I think it's important to articulate how the strategic efforts Joel noted have impacted our results. The sale of our student housing portfolio and the call of our preferred stock in the fourth quarter affected our results in different ways. First, the sale of student housing removed eight assets from our operating portfolio, which affected our top line revenue number. As you can see, we had growth in revenue on a year-over-year basis, but the quarter saw a decline. Had we owned the student housing assets for the entire quarter, our revenues would have been about $8 million higher. Second, when we called in almost $209 million worth of our Series A preferred stock in cash, we incurred about $21 million in deemed dividends, which negatively impacted FFO by 41 cents a share. Said differently, without the deemed dividend, our FFO would have been positive 21 cents a share versus the negative 20 cents a share reflected in our results. There were obviously other things going on in the quarter, but that alone helps reconcile the FFO per share for the quarter to the solid $0.31 a share in core FFO we generated. This discussion also highlights the importance and relevance of core FFO as a true measure of our operations. Also impacting this quarter's FFO results, though to a lesser extent than the deemed dividends, was decreased interest income from a smaller book of real estate investment loans and the one-time gain in Q4 of 2019 from the sale of our Frey Mac K program investments. Higher purchase option termination revenues and lower interest expense helped to contribute to the strong core FFO result in Q4. As we have said many times, the realization of purchase option revenue is difficult to forecast. With respect to ASFO, our improvement from Q3 to Q4 was driven primarily by an increase in accrued income received from our investment loan book, lower interest expense, and lower capital expenditures in the quarter. I will now turn to our real estate investment loan portfolio. In the fourth quarter, we received full repayments of the Sanibel Straits, E-Town, and Solis Kennesaw II real estate loan investments. plus approximately $3.9 million of deferred interest revenue from these loans. Let me now give a little more detail on our multifamily property segment results. While our operations continue to perform well, as Joel pointed out, we did feel the impact year over year from certain COVID-related operating costs. For the fourth quarter, our multifamily same-store NOI decreased by 1.9%. Our revenues were actually up slightly by 0.1%. The decrease in NOI was primarily driven by a 22% increase in real estate taxes and 24% increase in property taxes, property insurance costs. For the full year, same-store NOI grew by 0.7%. Our same-store occupancy as of December 31, 2020, was 95.6%, an increase of 0.5% over December 31, 2019. Looking now at our balance sheet and capital stack, and again, highlighting Joel's points about our execution on strategic initiatives, when we completed the call of preferred stock and cash, we reduced the balance of our preferred stock by approximately 11% of the total outstanding shares at the end of the quarter. The $209 million call represented approximately 80% of all Series A preferred stock currently available to call at the company's option at that time, post-stockholder vote. This marks the beginning of our drive to realign the balance sheet, reduce our cost of capital, and position the company for long-term growth. With respect to the issuance of our preferred stock, we continue to balance investable capital and liquidity with a desire to reduce the outstanding balance of preferred stock. Ideally, we would like to see net issuance be negative after redemption from the quarter. While we can't control this perfectly, our managing broker-dealer has done an excellent job communicating to the market and helping us manage both sides of this equation. For the quarter, we had net redemptions of about $206 million. This reflects a raise of approximately $52 million, offset by our redemptions, including the call, of about $258 million. For the quarter, all our redemptions were done in cash. As we redeem shares for cash in the future, we would continue to accrue a deemed dividend that will impact our FFO results. If we were to redeem preferred stock for common stock, which is the company's option, we would not incur this deemed dividend. We will continue to focus on the pace of raise and redemptions going forward in conjunction with our other strategic efforts. Let me now turn to our guidance. We're initiating full year guidance for 2021, given our comfort with the performance of our portfolio and our expectations for improvement in the environment. We expect core FFO per share in the range of $0.81 to $0.89 for the full year, underpinning this guidance with the following assumptions. Thanks to our multifamily NOI growth of 1.5% to 3%, new real estate loan investment originations of $50 million to $100 million, This guidance also includes the impact of a decline in purchase option termination revenues and accrued interest received in cash. Please note that this guidance does not include any additional preferred Series A calls. We will update this guidance if, as, and when it becomes appropriate. I would like to turn the call now back to Joel for some further thoughts.
spk02: Joel? Hey, thank you, John. Thanks for that detailed covering our financial results. You know, I know that both John's comments and some of my earlier comments focused on short-term operational and financial metrics. Obviously, those are very important because they're how we're judged. But let me take a minute here just to step back away from those measures and summarize our long-term strategy and broader objectives. As I said at the outset, we start 2021 as a far different company than we were at the start of 2020. Given all that we have accomplished amid the COVID-19 pandemic, we are entering this year emboldened to do even more to position PAC to take advantage of the opportunities before us. First, we believe our portfolio is tailor-made for the current economic environment. Low-tax, business-friendly states in the Sun Belt continue to attract families and businesses across the country, where the lion's share of the fastest-growing MSAs are located in the Sun Belt. According to a pre-COVID April 2019 Clarion Partners research piece, Sunbelt population growth is expected to increase by another 19 million, or 13%, over the next decade, while non-Sunbelt growth is forecasted to rise only 3 million, or 2%. Said differently, that could mean that they expect to see more population growth in the Sunbelt in the next two years than non-Sunbelt states in the next 10. The point being that these trends were in place pre-COVID, and we believe they will only accelerate in the years ahead. Companies such as Oracle, Hewlett-Packard, Tesla, CBRE have relocated their corporate headquarters to Sunbelt states, and Amazon and Microsoft are each locating significant hubs in these Sunbelt areas, Microsoft's being here in Atlanta. The suburbs are also experiencing renaissance as millennials deprioritize urban living and prioritize space for their growing families. Second, we believe multifamily offers the best long-term growth opportunity for us today. There is a reason we're seeing cap rate compression for high-quality suburban Sunbelt assets. This is a relatively low capex business whose cash flows are resetting higher as demand grows. This demand is discussed in an informative Freddie Mac research piece, also issued pre-COVID in February of 2020, which highlights U.S. housing shortages by states and then extrapolates on top of their numbers to take into account historical averages of state-to-state migration flows. We believe this demonstrates a clear demand driver for housing in many of our markets. We have deep expertise in Sunbelt, suburban multifamily, including strong developer relationships, and a lending platform that creates a unique pipeline for PAC. This is not to dismiss the diversification benefits of our other asset classes in providing stability in our operations and in our opportunities, but we believe incremental allocation to multifamily makes the most sense for us. Third, we will continue to seek out opportunities to enhance our balance sheet, reduce our leverage, and lower our cost of capital. We will also continue to work to find ways to refine our portfolio and allocate our capital where we believe we can drive the best risk-adjusted returns for our stockholders. For these reasons, we are very excited for the future and feel this is just the beginning. We look forward to continuing to keep you updated as these initiatives take further shape as the year progresses. So thank you, and let me now turn the call back over to Paul. Paul?
spk05: Great. Operator, at this time of the call, let's go ahead and open up our Q&A session.
spk04: We'll now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. This time, we'll pause momentarily to assemble the roster. First question comes from Gaurav Matta of National Securities. Please go ahead.
spk00: Gaurav Matta Yeah, hi. Good morning. First question on your apartment portfolio, the 1.5% to 3% insurance and guidance that you provided, I was wondering if you could talk about any market expectations you have within the portfolio and are you expecting the markets to underperform within your apartment portfolio?
spk01: Hey, Carl, thank you. No, we don't have any particular sense that any of our markets are going to outperform or underperform. I mean, we feel pretty good about that range.
spk00: Okay. Second question on your office and retail. I think you've testified slightly about your news expirations in 2021 and 2022. Do you guys have any known move-outs within that part of your portfolio? And are you expecting – what kind of tenant retention are you expecting for 2021?
spk02: No, look, you never know what necessarily the future brings, but we feel very good about what's going on in our overall portfolio right now.
spk00: Okay. Lastly, within retail, I think your occupancy is 91%, and then excluding the redevelopment, your occupancy is 95.6%. Are you able to talk about what kind of redevelopment are you guys doing in the retail portfolio and what kind of return rates back then?
spk02: Hey, that's a great question, Bob. And the answer is we're not ready yet, but obviously we are positioning those properties for re-tenanting over time. You know, a lot of times when you do that, redevelopment or retail, you're actually using the opportunity to take leases that might be expiring by their natural terms or tenants that have low rents and actually moving them out. So it's a very natural thing for us to see a decline actually in occupancy before we are able to announce leases and redevelopment.
spk00: Okay. Understood. Thank you. That's all I have.
spk04: Thanks, Rob. Thank you. Next question comes from Michael Lewis of Truist Securities. Please go ahead. Great.
spk03: Thank you. I have a question about the deemed dividend. Is there any economic impact to either existing shareholders or potential new shareholders in terms of the cost basis of the common or anything else? Or is this you know, can we think about this really just as an accounting construct?
spk01: It's really just an accounting construct, Michael.
spk03: Okay, okay. My second question, you know, the student housing sale, you know, provided a nice opportunity to get at a large chunk of those preferred years. You know, how do you think about how you're able to continue to do that since it sounds like that's something you want to keep doing? And so, you know, Can we expect you to be a net seller in any of your property types? It sounds like that wouldn't be multifamily, but maybe in the retailer, the office. Or is there another way? How do you think about your ability to continue to chip away at those preferreds?
spk02: You know, Michael, good question. As we look through different things, you know, we look at all of our assets across all of our product types, you know, on a quarterly basis and look at them. And as the example that you gave in the fourth quarter, we just felt that with that asset, with its age and all of those things, we felt where the market was in exiting it. that that was the right thing for us to do with that particular asset. We continue to do that always. That's a very regular, natural thing for us to do quarterly. You do bring up the question that obviously when we do get and have capital that's available from whatever source, you know, we look at the options of what we have that's the best incremental use of that capital in that moment. That could be taking it against the Series A preferred, which we now have the right to do. We still have some opportunity there. But also incremental investment and external growth opportunities for the company.
spk03: Okay, great. I'm just going to ask one more, another accounting one, I guess. This isn't new this quarter, but it's related to the internalization at the beginning of the year. That $38 million of liability is due to the former manager on your balance sheet. Could you talk if and when there are any cash payments that would be needed to settle that?
spk01: Michael, that's broken down into two buckets, and all of that would be settled in the next two years.
spk03: Okay, so those will be kind of gradual cash expenses?
spk01: Not so much gradual as I think they will occur in the next two years, and they'll be pretty lumpy. I mean, I think they'll occur at points in time, each of the two items.
spk02: And one component of it would be, I think, on a fixed time at the end of January of 23. Right. I believe that's right.
spk04: Three years.
spk02: Yeah.
spk04: Got it. Okay. Thank you. Thank you. Next question comes from Jason Stewart of Jones Trading. Please go ahead.
spk06: Jason Stewart Okay. Good morning. Thanks. I was hoping you could elaborate on your comments about cap rate compression in markets and where you see acquisition or disposition opportunities by market in a little bit more detail.
spk02: Yeah, sure. You know, the comment there is obviously just to show Jason and a good question there is that we are in the market to buy things, but we're also going to be disciplined. And so in these markets, we've seen this in Atlanta. We've seen it in southwest Florida and other markets across Florida as well. where you get into a situation, an asset that we really like, that would really fit our portfolio, and we think that we're in a good position, we like where we are, but then all of a sudden, You know, whether it moves really fast to somebody that just says they're going to buy it, and the answer for us at that moment is, well, then we're out. You know, would we have loved to or liked to have owned those assets but not own those assets at a dilutive price? And the way we really try to monitor that that has allowed us to get as aggressive as we can reasonably be is, you know, that our teams that are in those markets, actually go look at them, understand them. And sometimes we look and say, hey, wow, you know what? I think the growth possibility for that is even better than what's put out in the broker OM. Or they might say, you know, I think that's a little optimistic. It's not what we're seeing over there. Or the price per pound rental rate is just high on a per unit basis, and we might see some supply coming. So it's really... it's hard to kind of make a generalization or even really be too specific inside markets because, you know, you could have one asset in Atlanta that the price went really high and another asset in another little sub-market in Atlanta where it didn't, but there's reasons.
spk06: Okay. That's fair. It's really asset by asset. And then assuming the moratorium on evictions is eventually listed, do you have any expectation for how that's going to impact new lease activity in And are there any markets or submarkets that you see that have, you know, a larger quote-unquote shadow inventory there?
spk02: No, we haven't really seen that. You know, I mean, I guess a couple things. You know, we're in pretty solid markets where the overall markets haven't seen a whole lot of that. I mean, I'm sure there are particular assets that might. But, you know, our rent collections have been so high that it's just not a meaningful thing for us to worry about one way or the other.
spk06: Okay, fair enough. And then one more on guidance. Could you give us just a little bit more of your thought process in terms of what kind of activity you have for new leases, maybe blended lease rates, concessions, things like that as we sort of build up to your guidance number in multifamily? Thanks.
spk01: Yeah, you know, Jason, totally appreciate the question. I mean, just in this environment with the pace of the recovery being somewhat uncertain, we're just not prepared to talk about those assumptions.
spk04: This concludes our question and answer session. I'd like to turn the conference back over to Mr. Paul Cullen for any closing remarks. Please go ahead.
spk05: Thank you for joining us today and also for your interest in preferred apartment communities. I want to wish everyone a good day and take care.
spk04: Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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