Preferred Apartment Communities, Inc.

Good day and welcome to the Preferred Apartment Community's third quarter 2021 earnings conference call. All participants will be in a 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 telephone keypad. And 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 Mr. Paul Cullen. Executive Vice President of Investor Relations. Please go ahead, sir.

Thank you for joining us this morning, and welcome to Preferred Department QD's third quarter 2021 earnings call. We hope each of you had an opportunity to review our third quarter earnings report, which was 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 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, economic conditions in the markets in which we operate, the global economy and financial markets, and our ability to mitigate the impacts arising from COVID-19, and those include in our SEC filings. For discussion of these and other risks and uncertainties, you should review our 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 third 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 a 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 for the period. I would now like to turn the call over to Joel Murphy.

Joel, go ahead. Thank you, Paul. Good morning, everyone, and thank you for joining our third quarter call today. Third quarter was a tremendously busy, highly productive, and transformative quarter for PACC. After closing on the sale of the vast majority of our office assets during the quarter, we quickly executed on our already envisioned strategic and tactical plan to redeploy the net proceeds from that sale and from several other capital recycling initiatives that I'll highlight in a moment. To that end, during the quarter, we completed the redemption of approximately $306 million of our preferred stock offerings. We completed $269 million of multifamily acquisitions, and we originated a new $23 million multifamily real estate loan investment. Subsequent quarter end, we've originated two additional multifamily real estate loan investments, totaling $26 million. All of these new capital investments were made in high-quality, Class A, multifamily communities in our target Sunbelt markets. In addition to these strategic and tactical transactions, we posted another quarter of solid operational performance across the entire platform. There are more details in our supplemental, but here are the highlights of these capital redeployment investments. In July, we acquired Alea at Presidio, a 231-unit Class A multifamily community in the Dallas-Fort Worth MSA. In August, we originated a new real estate loan investment of approximately $23 million in connection with the Club Drive Apartments Development, a planned 352-unit Class A multifamily community in the Atlanta MSA. In September, in the space of just one week, we acquired three separate Class A multifamily communities in three separate transactions, adding an additional 797 units to our portfolio. The Anson, the Kingston, and Chestnut Farm represent key additions to our presence in the Nashville, Washington, D.C., and Charlotte markets. Subsequent to quarter end, in mid-October, we originated a new real estate investment loan of approximately $17 million in connection with Menlo II, a planned 337-unit Class A multifamily community in Jacksonville, Florida. By the way, Menlo II is adjacent to the Menlo, a 332-unit community that we acquired in December of 2020. And just last week, we originated an additional real estate loan investment of approximately $9 million in connection with a 246-unit Class A multifamily community also in the Atlanta MSA. In the aggregate, these seven transactions represent approximately $318 million of capital investments in our multifamily business. And over the last 19 months, we have acquired nine Class A apartment communities in our target Sunbelt markets, totaling over 2,500 units. We've also sold two non-core multifamily assets. So we have added about 1,800 units, or said differently, 18% of external growth to now having us over 12,000 units across our Sunbelt multifamily portfolio. Now, more details are contained in our supplemental, but here are the highlights of the major components of the sources of our capital for these new multifamily investments. In July, as previously discussed and disclosed, we sold five office properties and one office real estate loan investment to Highwoods Properties for gross proceeds of $645 million. Also, in July, we sold Vineyards, a 369-unit multifamily community located in Houston, Texas, and the oldest asset in our portfolio for gross proceeds of $62 million. Then, in September, we completed the sale of the Armory Yards subportfolio for gross proceeds of $79.5 million. You will remember, and as previously announced, we purposefully structured our agreement with Highwoods so that we could withdraw the Armory Yards subportfolio from the Highwoods transaction because we felt that we could draw a higher price for this subportfolio through a separate offering to a different pool of investors, since this style of what is known as creative office would appeal to a different pool of investors versus the traditional core office buildings that we sold to Highwoods. We exercised that right, and we closed on that sale on September 8th at a price nearly 11% higher than the price in the Highwoods agreement. And finally, we received payoffs on multiple of our real estate loan investments across six properties, totaling approximately $104 million of principal and $10 million of accrued interest. In the aggregate, the sale of these nine non-core assets and the payoff of these seven previously initiated real estate loan investments generated $407 million of net proceeds after repayment of property level debt and closing costs. Now, these asset sales were purposely panned, and they were well executed with excellent counterparties at very good pricing. Taken together with our multifamily acquisitions and newly originated multifamily real estate loan investments, these well-executed transactions demonstrate our ability to recycle capital out of high CapEx low-growth assets and redeploy capital into low CapEx high-growth multifamily investments, while also improving our balance sheet through the execution of strategic calls of our Series A preferred stock. So over the last two years, we have overhauled our portfolio composition by rotating investment out of non-core student housing and non-core office assets and into our core multifamily business. These significant and sequential strategic initiatives were carefully planned in scope and scale, and were all executed with first-class counterparties at excellent pricing. We crafted a well-planned redeployment strategy, and we executed it rapidly and effectively. These steps built upon one another and have resulted in a transformative change of our company through simplification, capital rotation, the 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. And I'd say to the contrary, our strong operational performance allowed us to make these strategic moves quickly, efficiently, and with conviction. So let me summarize where we are today. We believe that our 1,200-unit multifamily portfolio is the youngest in the public-read industry with an average age of only 6.1 years. 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 peers. In short, we own great assets operated by a first-class team of associates and located in vibrant and growing Sunbelt suburban markets. Now, since the inception of our company just over 10 years ago, we have chosen to focus on the Sunbelt because of the long-term fundamental tailwinds we see here. First, with regard to migration patterns, Sunbelt markets have enjoyed solid growth for decades, benefiting from business-friendly regulatory structures, lower cost of living, and lower taxes, and drawing in people primarily from the Northeast and the Midwest. We expect these trends to continue as the rise of remote work and remote learning have enabled people to move to lower cost areas with more space for living. These population inflows should continue to drive sustained demand for new housing construction as well as for the retail assets that are needed to support that larger population. For the last several quarters, I've shared with you examples of third-party research pieces about these and other macro trends affecting our markets. You'll remember in the first quarter, I talked about the North American Van Lines 2020 Migration Report, CBRE's analysis of postal data. In the second quarter, we talked about U.S. Census Bureau, CoStar, Clarion Partners, and Freddie Mac, particularly about the housing shortage. So this quarter, I want to share some insights from ULI and PWC's Emerging Trends in Real Estate report that was just issued this past October. The following language that I'm going to share with you is pulled directly from this report. First, the dramatic escalation in the number and frequency of people working remotely during the pandemic looks to become permanent for a sizable share of the workforce. Free from a daily commute, remote workers will enjoy a broader range of potential residential locations with profound impacts on individual metro areas and property markets. At the same time, the pandemic has accelerated some existing trends that favor greater suburban growth and vitality. The permanent move to work from home, whether remote or hybrid working, is perhaps the trend with the greatest impact, enabling numerous workers, many of them affluent office workers, to consider a broader range of residential locations. For many of them, the choice will be more suburban. Second, as to the housing shortage, and again, quoting from the ULI and PwC Emerging Trends Report, housing analysts calculate the current level of long-term under-building in a range from 2 million to 5 million total housing units. Costs of both for sale and rental housing are rising much faster in secondary and tertiary markets as people moving away from pricier gateway markets bid up residential prices in the smaller destination markets. Millions of potential homebuyers are priced out of the market because home prices are higher than they can afford in a large and growing number of markets, and prices continue to rise faster than wages. Prospective homebuyers are also burdened by the down payment of housing as prices continue to rise. With so many prospective homebuyers priced out of the for-sale market and thus continuing to rent, upward pressure on rents will likely continue. Third, And again, quoting from this emerging trends report, the popularity of large gateway markets continues to wane in favor of generally smaller smile markets that extend across the southern half of the country. Until recently dismissed as secondary investor markets, the Sunbelt metro areas account for the eight top-rated U.S. markets to watch in overall real estate prospects in this latest emerging trends survey. of the eight top rated markets pac owns assets in six of those eight so i really do urge you take a look at this detailed and well researched report that is issued annually it is always an interesting and informative read so now turning to our sunbelt focus portfolio our operations remain strong and steady for our multi-family portfolio third quarter 2021 average physical occupancy rose to 97.2 percent up 160 basis points from the third quarter of 20, and up 40 points sequentially from the second quarter of 21. Year over year, our same-store revenue grew 7.5%, and our year-over-year same-store NOI was up 8.8%. Same-store revenue increase is right up towards the top of the class of the multifamily REITs. This year-over-year same-story NOI increase is not only solidly in the upper end alongside our multifamily peers, but I also want to point out that this year-over-year comparison is against our slightly positive third quarter 20 same-story NOI number that was also quite good on a relative basis against our peers in the third quarter of 20. This combination taken together points out not only the resiliency of our portfolio in times of stress, but the opportunity and ability we have to grow rents and NOI when conditions are more favorable, as they are now. In our second quarter release, we began sharing some rent growth statistics. Now, for the third quarter, we'll share those again in that we achieved rent growth for new leases of 24.1% for new leases and 8.8% for renewals for a blended 15.6% increase. This positive trend for the quarter has continued into October, and these numbers have actually grown to 25.6% rent growth for new leases and 13.3% renewals for a blended 18.6% increase. We believe that this third quarter and October rent growth performance and numbers are at the very top of the multifamily REIT sector. We also believe that our suburban Sunbelt grocery anchor retail portfolio is primed to benefit from the strong tailwinds taking place in the grocery anchored sector and in the Sunbelt generally. Our portfolio continued its strong momentum during the third quarter. Demand for space in our centers has continued to increase every quarter as we executed over 40,000 square feet of new leases and approximately 98,000 square feet of renewals, attractive spreads. Year-to-date, we have signed approximately 108,000 square feet of new leases and 355,000 square feet of renewals. Our renewal spread trend has increased sequentially each of the last four quarters as we continue to capitalize on our portfolio's strong fundamentals. Our existing tenants and new concepts that are seeking space in our necessity-based centers recognize the benefits of having a high-performing market-dominant grocer anchoring their center. Further, our leasing pipeline of new tenants that are at lease or in active NOIs has never been larger, with significant NOIs set to follow once these leases are signed and these tenants get open for business. Our core retail portfolio has a very high percentage lease, which you can see of 95.4% as of September 30th. Now, you may have noticed that this is a 50 basis points decrease from last quarter. This decrease was almost entirely driven by one 19,000 square foot tenant, which comprises less than one half of 1% of our core portfolio that vacated one of our centers. This departure was actually underwritten at acquisition and actually will create a strategic backfill opportunity for us as we replace a dated concept with a stronger tenant or tenants that will drive significantly more traffic to that center. Our results year-to-date in both multifamily and gross record retail have exceeded our internal budgets and, along with an improved outlook for the remainder of the year, contributed to our upward guidance revisions that John will detail later in the call and as it is contained in our supplemental. Overall, I have to say we could not be more pleased with our team's execution through these complex strategic transactions and initiatives, all while in the midst of a global pandemic. And I want to thank every member of the PAC team for their contributions. Not only did they help us navigate a broad organizational shift to unlock value, but they continue to drive results at the ground level and deliver exceptional performance on leasing and capital reinvestment activity every quarter. So as we sit here today, we feel better than ever in the strength of our platform and look forward to growing our cash flows and creating long-term value for shareholders into 22 and beyond. So now let me turn the call over to John. John?