Preferred Apartment Communities, Inc.

Q1 2021 Earnings Conference Call

5/11/2021

spk01: pardon me ladies and gentlemen this is an operator the preferred apartment communities call will begin shortly so please continue to hold again the preferred apartment communities call will begin shortly so please continue to hold THE END THE END Thank you. good morning and welcome to the preferred apartment community's first quarter 2021 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 To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. 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.
spk06: Thank you for joining us this morning, and welcome to Preferred Apartment Community's first quarter 2021 earnings call. We hope each of you have had an opportunity to review our first quarter earnings report, which was released yesterday after the market closed. In a moment, I'll turn the call over to Joel Murphy, our Chief Executive Officer, to share some initial thoughts, and then to John Isakson, our Chief Financial Officer, who will share some additional details about our 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 may 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. As you know, actual events and results may differ materially from those forward-looking statements, and the company does not undertake a duty to update any forward-looking statements. These risks and uncertainties include... but are not limited to the impact of COVID-19 pandemic on our business operations, our customers, economic conditions and the markets in which we operate, the global economy and the financial markets, and our ability to mitigate the impacts arising from COVID-19 and those included in our SEC filings. For discussion of these and other risks and uncertainties, you should review the forelooking statements 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 supplemental financial data reports for the first quarter 2021 with definitions and reconciliations of non-GAAP financial measures to the most directly comparable 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 the 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. Go ahead, Joel.
spk05: Thank you, Paul. Good morning, everyone, and thank you for joining our call today. Though we spoke most recently on our call in early March just eight weeks ago, much has happened at PAC since then. As part of our strategy to simplify our business and realign our balance sheet, we announced on April 19th the sale of the majority of our office portfolio to Highwoods Properties. In addition, our first quarter results, which we reported yesterday, demonstrate the continued strength we are seeing in the Sun Belt, as well as our portfolio's positive trajectory on several fronts. First, let me take a moment to discuss the rationale behind our office portfolio sale and what it means for PAC going forward. As a part of our broader strategy, we internalized our management and divested our student housing portfolio in 2020. In a continuation of that strategy in 2021, we decided to execute on another strategic transaction to reallocate our capital. We made the decision to sell our office portfolio and realign our business towards lower capex, higher growth multifamily assets complemented by our grocery anchored retail investments. On April 19th, we announced that we had reached an agreement to sell to Highwoods Properties the substantial majority of our office portfolio plus one office real estate investment loan for $717.5 million. As described in that April 19th release, we intend to monetize the remaining office assets we own, consisting of three operating assets and a development site, and fully exit office, but we plan to do so thoughtfully and over time. Through the monetization of these remaining assets and prudent redeployment of the capital returned to us, we believe we have opportunities to create meaningful incremental value for our stockholders. This transaction, which is slated to close in the third quarter, has several key benefits for PAC. First, this transaction will result in a more simplified business model for PAC. This simplification should result in an enhanced long-term growth profile given the organic growth we see in our Class A suburban Sunbelt multifamily portfolio. This will result in a capital rotation for us from a higher CapEx, lower growth business into a comparatively lower CapEx business with significantly greater near-term ability to grow rent. This capital rotation towards our core competencies allows us to take advantage of operating efficiencies as we grow. This simplification also allows for better leverage on our G&A as we focus our team on these two asset classes down from four previously. Highwoods is a very well-respected owner-operator in the office sector. We truly enjoyed sitting across the table with them on this transaction, which we feel very strongly represents strategic win-wins for both companies. I'd also like to thank our office team for their significant contributions to PACC. This high-quality portfolio was thoughtfully assembled and well-run in typical PAC fashion, and we appreciate the hard work of our office team over the last five years. Second, and no less important, this transaction allows us to continue to realign and rebalance our balance sheet and common and preferred equity ratios. Depending on the exact timing of the office sale, we expect to use a significant portion of the net proceeds to call or redeem our Series A preferred stock. Third, this sale allows us to continue to grow our already significant and strong Sunbelt multifamily business. We grew our multifamily portfolio by acquiring approximately $277 million of multifamily communities in 2020, and added 1,293 units to our already significant portfolio, such that we now own 11,143 units. We also originated 44 million in multifamily real estate investment loans in 2020, supporting an additional 853 units. continue to successfully leverage our deep market knowledge and relationships to uncover attractive opportunities in our Sunbelt markets, and we plan to do so again in 2021 as we grow our portfolio. Aside from this transaction activity, our operations remain steady and consistent. Cash rent collections, including deferrals for the first quarter, were 99% for multifamily and 98% for grocery-anchored retail. More detail can be found on pages 5 and 6 of our supplemental. We attribute this continued solid performance to our first-class team of asset management and leasing professionals, the resilient defensive characteristics of our portfolio of assets, as well as the continued strength of the Sunbelt. We shared with you last quarter a couple of third-party pieces on the strength of the Sunbelt, and we are seeing this strength play through into our business. Sunbelt markets continue to attract companies, investors, and new residents. The key word here is continue. As life-altering and disruptive as the pandemic has been, it does not appear to have shifted the intrinsic forces driving the success of the region. In other words, the reasons why people in business were moving to the Sunbelt before the pandemic are the same reasons why these markets are growing and will continue to grow after the pandemic. This is good news, and that while the pandemic is hopefully temporary and relatively short term, the low cost of living, educational attainment, favorable climate and population growth evidenced in the Sunbelt are here to stay. According to North American Van Lines 2020 Migration Report, the top MSAs for moving destinations were all in the Sunbelt, while the top five MSAs being departed were all in the Northeast, Midwest and West Coast. While the Sunbelt migration trends continued in the last 12 months, the pandemic accelerated the migration to the suburbs. This trend took place across the country, with consumers vacating higher-density urban cores, seeking more living space at a lower cost in the suburbs. In fact, urban centers across the U.S. saw 15% more move-outs in 2020 than in 2019, according to CBRE's analysis of U.S. postal data. Further, address changes to counties within 100 miles of major MSAs increased by 6.5% versus total address change volume increasing for the country by 2.8% in 2020. These are just additional examples of industry narrative trends that we believe bode well for multifamily and grocery-anchored retail assets located in Sunbelt markets. Our solid performance has allowed us to focus our energy on the strategic and portfolio transformation you've seen us execute over the past year. These changes have set us up for accelerated long-term growth. Let me now turn to our multifamily results this quarter. Our occupancy level remains very high at 95.8%, up 20 basis points over the first quarter of 2020. Our year-over-year same-story NOI was modestly negative at 1.1% as the first quarter of 2020 was a very strong pre-COVID quarter for us. These results exceeded our internal budgets for the quarter, and hence we have raised our full-year guidance for same-story NOI growth as we've shown in our supplemental and will be described in more detail by John in a moment. You will remember we previously stated that most of our projected increase was in the back half of the year, but we are off to an excellent start already. From an investment activity standpoint, we closed on a $16.8 million real estate investment loan with Crossland Southeast, a well-respected and experienced sponsor that we know well and have partnered with on one of our retail investments. and this will support the development of a 320-unit Class A multifamily community in Orlando, Florida. This community will be a part of the 1,800-acre Metro West mixed-use development, and with this investment, we received an option to purchase the community following stabilization. We continue to work to uncover attractive real estate loan investments that also allow us to add to our pipeline of future acquisitions. We are encouraged by our leasing momentum in our Grocery Anchored portfolio, and the trend line is promising. In the quarter, we executed over 40,000 square feet of new leases and 171,000 square feet of renewals. We are proud of our consistent performance in our Grocery Anchored portfolio through COVID, and there are more details on our results contained in our supplemental. Let me note that while we have taken steps to streamline our portfolio by product type, we recognize the value of grocery-anchored retail alongside our multifamily assets. We believe grocery-anchored retail complements our multifamily strategy, and the demand drivers, such as Sunbelt Migration and the resurgence of the suburbs, are shared by both. We believe our deep knowledge and market presence should allow us to take advantage of multi-use opportunities as those present themselves, several of which we are working on now. As we emerge from the pandemic, an important part of our story is to look at our operational performance across the pandemic for the last four quarters and how this solid performance, combined with our strategic efforts over this past year, set us up well to take advantage of the current and future opportunity being presented in our markets. By collecting 99% of our multifamily rents and increasing our occupancy, we have demonstrated the defensive characteristics of the portfolio, while now having the ability to grow rents off this solid base. The story is similar in our grocery-ranked retail portfolio, with average rent collections of 95% across the pandemic, a percentage that compares very favorably to many other retail peers. This... Combined with the very positive sales and foot traffic increases by our grocery partners, we are similarly positioned to work to push rents on renewals and new leases in the year ahead. Now, before I turn it over to John, I want to take a moment to recognize an important milestone here at PAC. We celebrated the 10-year anniversary of our IPO in the month of April. I'm extremely proud of the talented women and men who have been instrumental in building our company over the past 10 years. And with our recent accomplishments, we are even more excited for the next 10 years and beyond as the strategic initiatives we have taken over the past 16 months fully take root and create value for our stockholders over time. So now I'll turn the call over to John. John? Thanks, Joel.
spk07: Let's start with our high-level first quarter results. Then we'll discuss FFO, core FFO, and AFFO. And then I'll walk through our guidance that has been updated to the recently announced office portfolio sale. For the first quarter of 2021, PAC generated revenues of $115.7 million, FFO of $0.16 per share, core FFO of $0.25 per share, and AFFO of $0.18 per share. Before I get into the year-over-year changes, let me note that our transformational activity over the past year had a significant impact on our results across all metrics, making the year-over-year comparisons less meaningful. I would also point out that our revenues, pro forma for the sale of our student housing portfolio, are down only marginally year-over-year. Outside of the student housing sale, the decrease in interest income due to lower real estate investment loans just offset the increase in our operational revenues for the quarter. With regards to our FFO results, the internalization transaction in the first quarter of last year and the sale of our student housing portfolio had significant impacts on our results, which made prior period comparisons difficult and noisy. With respect to core FFO, which is our most significant metric, the first quarter 2021 result of $0.25 per share compared to the prior year's quarter, $0.29 per share, reflects the impact of changes in several line items which are detailed in our supplemental leaves last night. The most significant items were $0.07 per share decline from sales student housing and lower revenues from interest income on investment loans and amortization of purchase option termination payments, which were both $0.06 per share lower. These items were offset by an improvement in the allowance for current expected credit losses and bad debt of $0.10 per share and lower preferred stock dividends of $0.06 per share. With respect to AFFO, our $0.18 for the first quarter of 2021 as compared to $0.47 for the first quarter of 2020, was impacted by a decrease in accrued interest of $0.12 per share, again, the $0.07 impact on the sale of student housing, lower current interest revenue of $0.04 per share, and higher recurring capex spending totaling $0.04 per share as well. Additionally, the first quarter of 2020 benefited from a one-time payment of earnest money forfeiture totaling $0.06 per share. Now let me take a moment to walk through this quarter's operational and financial activity. During the first quarter, both of our real estate loan investments on the Newberg multifamily property in Atlanta were paid off, representing $17.9 million in principal, plus a purchase option termination fee of $1.5 million and a collection of $4.3 million of accrued interest income. With respect to our multifamily portfolio, we continue to feel confident in our ability to drive growth. For the first quarter, our same-store revenues were up 0.9%, which reflects the consistent occupancy in our portfolio and the resilience of our markets. While our multifamily same-store NOI decreased by 1.1%, the decrease in same-store NOI was driven primarily by a 7% increase in real estate taxes and property insurance costs. Overall, a healthy comparison when considering that COVID had not yet taken hold in Q1 of last year. With respect to our balance sheet and capital stack, we continue to work to realign our balance sheet to support our future growth. Our intent is to balance our liquidity needs with our stated intention to reduce our outstanding balance of preferred stock, which ideally would result in negative net issuance on a quarterly basis. This quarter, we raised approximately $38 million, offset by redemptions totaling approximately $44 million. Our redemptions this quarter were settled in cash. As a reminder, when we pay our redemptions in cash, there is a deemed dividend which impacts FFO results. We expect to continue to see an impact from deemed dividends going forward. Let me now turn to our outlook for the balance of 2021. We are revising our guidance today to reflect the impact of our recently announced office sale. We now expect core FFO per share in the range of 73 cents to 83 cents for the full year of 2021. Underpinning this guidance are the following updated assumptions. Same-store multifamily NOI growth of 2% to 3%. We're raising this range from our prior range of 1.5% to 3%. $300 million to $400 million of acquisitions of multifamily properties. New real estate loan investment originations of $50 to $100 million. And a closing date of the office transaction of 8-1-21. Our disclosures indicated a closing date in the third quarter. For purposes of this guidance, we assumed August 1st. This guidance also includes the impact of purchase option termination revenues and CECL reserve reversals as a result of real estate investment loans being repaid, which, in combination with the items above, is helping to offset the dilution of the office portfolio sale in the short term. These one-time items will be difficult to replace going forward as we have fewer purchase option termination revenue opportunities. We do not believe that the level of purchase option termination revenue will be replicable going forward. We expect the dilution from the office transaction to be more fully felt in 2022, but we are focused on deploying the proceeds as accretively as possible to limit that dilutive impact. We also benefit from the elimination of near-term future capex associated with our office portfolio, which can now be utilized for higher yielding opportunities. The redeployment of the proceeds will be split among preferred stock calls, acquisitions, and real estate investment loans. The final allocation of proceeds will be governed by the best options available to us at the time of closing. We will update this guidance if, as, and when it becomes appropriate. I'd like to now turn the call back to Joel for some final thoughts.
spk05: Joel? Thank you, John. Before we begin Q&A, I'd just like to take a few moments to reiterate our strategic focus here at PAC. First, due to the hard work and effort of our team, in the past 16 months we have internalized our management structure and significantly streamlined our portfolio by fully exiting or materially reducing our exposure to two asset classes. By the end of this year, we will be focused primarily in Class A suburban multifamily and grocery anchored retail. These are two complementary asset classes that enjoy attractive growth characteristics and are run by experienced teams. We're excited to demonstrate the power of the PAC Sunbelt platform now that it is more focused. Second, this is the continued benefit of our Sunbelt strategy. Migration of both people and businesses into the Sunbelt continues unabated as the pandemic put a spotlight on the benefit of this region with lower cost of living, lower taxes, and higher growth. We have deep relationships and deep market knowledge in the Sunbelt through which we can create value. Third, we continue to realign our balance sheet to set us up well for our future growth. We continue to reduce our outstanding preferred shares as a percentage of our capital stack. We are highly focused on improving our overall cost of capital, which we believe will have significant long-term benefits to our stockholders. We are proud of our progress to date, but there remains continued good work to be done. We will keep you updated as we progress through the year. And of course, we appreciate your interest and impact. Now let me turn the call back over to Paul. Paul?
spk06: Thank you, Joe. At this time, we'd like to go ahead and start our Q&A session.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question today comes from Gaurav Mehta with National Securities.
spk03: Thank you. Good morning. First question on the guidance. I was wondering if you could provide some color on the impact of the shared option termination revenue that you talked about. Is that something new in this guidance or was that embedded in the previous guidance as well? And then how much benefit are we expecting from that portion of the guidance change?
spk07: Hey, Guav, it's John. Thanks for the question. You know, that's one of the things that we've talked about in previous quarters is kind of the lumpiness of these real estate investment loans and when they get paid off. and our previous guidance had not anticipated that we would have the number of loans being repaid, nor the pricing, which has resulted in higher purchase option termination payments than we previously expected. So just an impact from the market improving and the transactional market being aggressive right now.
spk03: Okay. Well, I guess, you know... So what's like the full, you know, run rate impact of dilution from office transactions? I think in the press release, you say that it's going to be fully felt in 2022. I'm just trying to understand how much, you know, the sale is impacting the earnings.
spk07: So, again, you know, we're forecasting for 2021 based on an 8-1 closing date. You know, that could move around based on the transaction closing at a different date. And we won't know for 2022 until we see the full redevelopment of the proceeds, where that goes, and what kind of reinvestment rates we get. So that's just hard to say today.
spk03: Okay. And then for the multifamily acquisition volume of $300 to $400 million, what's the expected timing of those acquisitions? And is that going to be acquisition of fully stabilized properties? Or are you going to target new construction as well?
spk07: Great question. It's spread out over the balance of the year. We don't have farm closing dates on all those yet. The majority are stabilized properties, but we are looking at a couple of pre-stabilized assets where we think we are getting a good acquisition price, and also we feel real comfortable with our management team's ability to actually keep the lease up.
spk03: Okay. And then maybe lastly on the potential redemption of series a perfect start. Can you remind us how much of that is callable in 2021?
spk07: So it ramps up over the years. So you might remember that when we changed the call period from 10 years to five years in the shareholder vote last year, that increased the amount that was available to call then. And it comes in about $30, $35 million a month right now. When we closed the office transaction, if we were to close on August 1st, we'd have about $230 million available to call. And then, as I said, it comes in about $30, $35 million a month after that.
spk03: Okay, thank you. Yes, sir. Thank you. Thanks, Carl.
spk01: Our next question comes from Michael Lewis with Truist Securities.
spk04: Thank you. My questions are sort of tangential to a couple of the ones you already got asked. You know, you're going to use office proceeds to redeem preferreds, but obviously you're still issuing some as well. You know, you said that'll be a net, you know, reduction in preferreds over the next few quarters. I'm kind of curious, you know, the cost benefit of keeping that machine running. And what I mean by that is, you know, you issued 38,000 shares and redeemed 44,000. You know, is there frictional cost there as opposed to had you not issued any and just redeemed 6,000 in terms of, you know, commissions and other, you know, other fees and such?
spk07: So a couple of points there, Michael, with the redemptions in the first quarter, those were all redemptions where the holder basically put the stock back to us and requested the redemption. Obviously, any of our preferred holders can redeem at any time. So that wasn't necessarily a call that we were proactively making. And the reason for keeping the machine running right now is as much liquidity as anything else. You know, we like having access to that channel. You know, those investors have been sticky, and historically that's been a good cost of capital for us, you know, a little bit less so today. But, you know, there may come a time when that's a channel that we didn't want access to, but it's very hard to turn off and on. So right now we're using it to balance out liquidity. Also would point out that the call period for the shares that are being issued is is two years versus the five years in the previous offer. So we do get some benefit there.
spk04: Okay. Got you. And the other use of proceeds, you know, obviously for making investments and, you know, I'm curious about cap rates, you know, in acquiring apartment properties. And so, you know, I realize this 300 to 400 million, you know, that you expect to invest this year will include loans and other things, but You know, as far as the apartment properties, you know, is there 300 to 400 million, you know, out there that you like at prices that you like? Or do you think deploying that capital, you know, how challenging is that?
spk07: So just to make sure we're talking about the same thing, we're talking about 300 to 400 million in asset value. And the answer to your question is yes. So we feel good about the pipeline.
spk05: Yes. And, Michael, this is Joel. Let me add on to that. I agree with John's statement that he just made. And this is really part of our Sunbelt operating leverage. As we continue to grow in the units that we have and have on-the-ground people in these markets, These teams are really good at ferreting out the right opportunity. Plus also know that we've got some embedded pipeline through the mezzanine loan program, of which we've got significant additional number of units that are out there in the program. So we know these assets, and we know them well. And some of those have embedded discounts in them. that we could take advantage of. So, yeah, we feel good about it. We feel good about our operating leverage on that. And also now we're also seeing the full benefit of the benefits of scale going to the REIT now that we are internalized. The benefits of the scale make it easier for us to acquire accretively.
spk04: Okay. And then just lastly from me, you know, you answered a question about, you know, I guess it's a guidance question about what the office portfolio sale does to your earnings and such. You know, I realize there's a lot up in the air, especially in the near term, in terms of timing of redeployment of proceeds and what those yields will look like and so forth. Is there any expectation at this point that this sale impacts your dividend payment at all, your common dividends?
spk07: Hey, so, Michael, as you said, I mean, there's a lot going on. There's a lot of moving parts, and the board evaluates the dividend policy every quarter and has the last 10 years, and we will continue to do so. Thank you. Yes, sir. Thank you, Michael.
spk01: Our next question comes from Jason Stewart with Jones Trading.
spk02: Hey, good morning. Thanks for taking the question. Just a quick follow-up on the last one. Could you just remind us what you've said historically about a payout ratio relative to core FFO where the comfort zone sort of maybe boundaries exist in your mind?
spk07: Hey, Jason, it's John Isakson. You know, we've never really talked about that. That's not something we've ever discussed or guided to.
spk02: Okay, fair enough. One question on the office portfolio. I guess in some of the assets that are remaining, particularly three, Ravinia, there was a little bit of a change in the occupancy. Any thoughts there in terms of specifically how you lease those up, whether that impacts your ability to sell them in price and how that kind of figures into the timing that you mentioned in the beginning?
spk05: Yeah, Jason, thanks. Look, you know, the thing about real estate assets is, you know, they all operate under their own individual timelines. You have to look at these things that way, okay? So leases have certain maturity dates, certain extension dates, certain debt characteristics that are attached to the assets. And then they move through different cycles. Are they in lease up? Are they in transition? So we're going to look very – prudently and thoughtfully at the remaining assets, which we feel good about. But this is an important piece. We will be retaining pieces of our office team, the same people that have lived and breathed these assets through acquisition and asset management same team that will be in there dealing with through Virginia as we work through that, you know, with IHG and the other things on there, and so working through opportunities for leasing up that building going forward. Okay, thanks.
spk01: This concludes our question and answer session. I'd like to turn the call back over to Paul Cullen for any closing remarks.
spk06: Thank you for joining us today and thank you for your continued interest in APTS. Good day.
spk01: The conference is now concluded. Thank you for attending today's
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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