Preferred Apartment Communities, Inc.

Good morning and welcome to the Preferred Apartment Community's second quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please ping all conference specialists 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 pen. To withdraw your question, please press star, then two. Please note this event is being recorded. I'd 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 Duty's second quarter 2021 earnings call. We hope each of you have had an opportunity to review our second 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 John Isaacson, 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. 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 these 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, the economic conditions in the markets in which we operate, the global economy and financial markets, 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 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 pacabts.com. The press release also includes a supplemental financial data report for the second quarter 2021 with definitions and reconciliations of non-GAAP financial measures to most directly compared GAAP financial metrics 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 a basic weighted average share of common stock and Class A partnership units outstanding for the period. I would now like to turn the call over to Joel Murphy.

Go ahead, Joel. Thank you, Paul. Good morning, everyone, and thank you for joining our call today. You know, it is a very exciting time for preferred apartment communities, and we appreciate your interest in our company. I am very proud of our solid performance to date in 2021 and our agile, effective, and continued tactical execution against our strategic goals. As we reported just 12 days ago, and as part of our strategy to simplify our business and realign our balance sheet, We closed on the disposition of five office building assets and one real estate loan investment to Highwoods Properties for approximately $645 million. The closing of this strategic transaction, which we first announced on April 19th, occurred on time and on the same terms. This transaction could not have gone any smoother from beginning to end, and we wish the Highwoods team the best with these high-quality assets. They were an absolute pleasure to work with. This closing marks a significant and important milestone for us in our strategic transformation to realign our business and capital investment towards lower CapEx, higher growth multifamily assets, complemented by our grocery anchored retail investments. We purposely structured our agreement with Highwoods so that we could withdraw the Armory Yards subportfolio from that transaction. We have exercised this right, and as more fully described in our July 29th press release, we are under contract with Northwood Investors, another well-respected counterparty, to sell that portfolio. Northwood has completed their due diligence, posted an earnest money deposit that is non-refundable except in limited circumstances, and we expect this sale to be completed later this quarter. This is further evidence of our intent and capability to monetize our few remaining office assets thoughtfully and over time. For us, this significant strategic milestone continues a process we kicked off at the beginning of 2020 to simplify our business, enhance alignment with stockholders, increase the flexibility of our balance sheet, and ultimately achieve a durable and attractive long-term growth rate. Let me summarize our accomplishments and update you on where we are today. In January of last year, we completed the internalization of our external manager, leading to significant cost savings, a simplified structure, and a stronger alignment of interest with management and our stockholders. In November of 2020, we closed on the disposition in one transaction of our entire student housing portfolio to TPG, another well-respected counterparty, for approximately $479 million. Just a few days later, in November of 20, during a special stockholders meeting, our common stockholders overwhelmingly approved our recommendation to amend our charter to allow common stockholders to propose amendments to our bylaws and to reduce the call option on our Series A preferred stock to five years, both enhancing corporate governance and improving the long-term flexibility of our balance sheet. With that approval in hand, and with a substantial majority of the net proceeds resulting from the student housing sale, we immediately redeemed and called in approximately $209 million of our Series A preferred stock. Now, with a sale of a substantial majority of our office assets less than two weeks ago, and near simultaneous redemption of an additional $221 million of our Series A preferred stock, we are ready to accelerate our pivot to growth building off of what we believe to be one of the highest quality, best positioned portfolios in the public REIT sector. These significant and sequential strategic initiatives were carefully planned in scope and scale and were executed with first-class counterparties at excellent pricing. These steps built upon one another and have resulted in a transformative change of our company through simplification, capital rotation, realignment of our balance sheet, and increased focus on our core Sunbelt multifamily business. These complex strategic transactions and initiatives did not distract us from achieving solid operational performance. To the contrary, our strong operational performance allowed us to make these strategic moves quickly and with conviction. Now let me summarize where we are today. Our 11,255-unit multifamily portfolio is the youngest in the public REIT industry. Our grocery-anchored portfolio is anchored by market-leading grocers such as Publix, Kroger, Harris Teeter, and HEB. Our performance throughout the pandemic is a testament to the high-quality nature of our assets, with rent collections at or above the top of our multifamily and retail tiers. In short, we own great assets operated by a first-class team of professionals and associates and located in vibrant and growing Sunbelt markets. Our multifamily retail assets are aligned, both benefiting from accelerated migration patterns. Let me discuss a couple of these trends and why we believe they will continue into the foreseeable future. First, with regard to migration patterns, Sunbelt markets have enjoyed solid growth for decades, benefiting from business-friendly regulatory structures, lower costs of living, and lower taxes, and drawing in people primarily from the Northeast and the Midwest. In the wake of COVID, these trends, already in place, have continued as people and families seek more space for living, and remote work and remote learning has become more accepted. In fact, according to U.S. Census Bureau estimates, in a May 7th CoStar Analytics report, among metro areas with populations larger than 750,000 people, the top seven metros for nominal population growth in 2020 were all in the Sunbelt region, with Dallas-Forth Worth leading the way. Availability of talent is an often cited reason that companies migrate to the Sunbelt. According to the Clarion Partners pre-COVID April 2019 research piece entitled The Rise of the Sun Belt, approximately 50% of the country's millennial population currently live in the Sun Belt region, and with millennials expected to be around 75% of the workforce by 2030, Sun Belt markets should continue to capture more jobs as their younger population continues to grow. The second major factor that supports long-term demand for our portfolio is the well-documented housing shortage across the country. In May, Freddie Mac released a research note updating their earlier 2018 report, stating that their estimates of the housing deficit had increased by more than 50% from their 2018 estimate to a now-estimated housing deficit of $3.8 million. According to Freddie Mac, the major reason for this shortfall has been a long-term reduction in single-family construction activity, and with less available land, rising construction costs, and increasingly tight labor markets, it is difficult to see how this shortfall lessens in the foreseeable future, particularly in our markets where population growth is so consistent and solid. This all creates a positive macro and product sector backdrop for us because as individuals, families, and businesses seek out our Sunbelt markets, they will need places to live and places to shop for groceries and necessity items. Now turning to our portfolio, our operations remain strong and steady. For our multifamily portfolio, second quarter 2021 average physical occupancy rose to 96.9%, up 220 basis points from the second quarter of 2020, and up 110 basis points sequentially from the first quarter of 21. Year over year, our same-store revenue grew 3.5%, and our year-over-year same-store NRI was up 6.4%. This year-over-year same-story NOI increase is not only at the top of the class alongside our multifamily counterparts, but I do want to point out that this year-over-year comparison is against our positive second quarter 20 number that was also quite good on a relative basis. This combination points out not only the resiliency of our portfolio in times of stress, but the opportunity we have to grow NOI when conditions are more favorable, as they are now. I do want to point out a new disclosure in our supplemental that we have included detailing the significant rent growth acceleration we have seen in our multifamily portfolio this quarter and on through July. For the second quarter, we recorded rent growth for new and renewal leases of 11.6% and 5.3% respectively. And in July, these numbers grew to 21.3% and 7.5% respectively. Our grocery anchored retail assets also performed well, recording a percentage least of 91.1%, a 30 basis point increase sequentially from the first quarter of 21. Our core portfolio, excluding redevelopment properties, also recorded an increase of 30 basis points sequentially from 95.5% in the first quarter to 95.8% at the end of the second quarter. We continue to be encouraged by our leasing momentum and rent achievement in our grocery-anchored retail portfolio, and the trend line is promising, with solid top line of additional leasing to follow. We believe that our grocery-anchored retail portfolio is primed to benefit from the strong tailwinds taking place in the grocery-anchored sector in the Sunbelt. Our results in both multifamily and grocery-anchored retail exceeded our internal budgets, and along with an improved outlook for the second half of the year, contributed to our upward guidance revisions that John will detail later in this call. I could not be prouder of the women and men across our entire company and at our properties for their smart and effective work and their commitments. Importantly, our solid portfolio performance has not only allowed us to focus our energy on the strategic transformation over the past year, but also to execute on our growth strategies through external capital investment. Let me highlight. In May, we originated a $17 million real estate loan investment with Nevere Group, a well-respected and experienced sponsor that we know well and have invested with before. for the development of a 316-unit Class A multifamily community in Savannah, Georgia. This is our first investment in Savannah, which has a diverse economy, driven by the port of Savannah, which is the third largest port in the country, as well as manufacturing, aerospace, and tourism industries. And it fits squarely in our focused Sunbelt strategy. As part of this investment, we received an option to purchase the community following stabilization. Then in June, we acquired the Ellison, a 250-unit multifamily community in a dynamic and growing suburb in the Atlanta MSA. This acquisition resulted from a real estate loan investment we originated in 2019 to fund this development and is another example of our strategic approach to investing with best-in-class developers that builds our pipeline and our visibility to future growth of our high-quality multifamily portfolio. Finally, in subsequent quarter end in July, we acquired ALEA at Presidio, a 231-unit multifamily community in Fort Worth, Texas. It's our first investment in the Dallas-Fort Worth metro area. As I mentioned earlier, the DFW Metroplex enjoys excellent demographic, economic, and rent growth trends and is a market that fits squarely within our Sunbelt footprint. In the aggregate, these three transactions represent approximately $135 million of investment and comprise just shy of 800 Sunbelt multifamily units. This is in addition to the nearly 1,300 units we purchased last year. And we have a solid pipeline of potential investments, and we intend to continue to grow while staying true to our strategic focus on premier multifamily assets and high-growth Sunbelt markets. Now let me turn the call over to John. John?