Q3 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the preferred apartment communities third quarter 2019 earnings Conference call.
After today's presentation, there will be an opportunity to ask questions to actually quite she May press Star then one on your telephone keypad to withdraw your question. Please press Star then too. Please note that this event is being recorded I would now like to introduce your host Lenny Silverstein, President and Chief Operating Officer. Please go ahead Sir.
Thank you for joining us this morning, and welcome to preferred apartment communities third quarter 2019 earnings call.
We hope that each of you have had a chance to review our third quarter earnings report, which we released yesterday after market close.
In a moment I'll be turning the call over to John .
How many chief financial officer to share a detailed description of our third quarter operating results.
Dan Dupree, our chairman and CEO will share his.
State of the company.
Following the conclusion of our prepared remarks, we'll be pleased to answer any questions. You might have also this morning Senior executive team America, any Jeff Sherman Executive Vice President and managing director of our multifamily business units.
Joel Murphy CEO , Newmarket properties that CEO he left.
They didn't get free credit card office properties, All Cohen executive Vice President of managing director prefer cannot community micro now Chief Accounting officer, and just sprain, our general counsel.
Before we begin I'd like everyone knows that forward looking statements may be made during our call. These statements are not guarantees of future performance that involve various risks and uncertainty and actual results may differ materially.
There's a discussion about these risks and uncertainties in yesterday's press release.
Press release can be found on our website <unk> P. H C Hey P T.
Uh huh.
The press release also includes our supplemental financial data report for the third quarter 2019, with definitions and reconciliations of non-GAAP financial measures and the other terms that may be used at today's discussion.
We encourage you to refer to this information during your view of our operating results and financial performance.
We otherwise dedicate all per share results.
That we discussed this morning are based on the basic weighted average shares of common stock and classic partnership units outstanding for the period.
A key component of our success has been asked strategically design and highly successful series H M share preferred stock capital raising programs.
Through our broker dealer preferred capital security, we raised almost $134 million in gross proceeds from our preferred stock sale during the third quarter alone.
[laughter].
As these offerings calls her close over the next team, but we will launch our next preferred stock capital raising strategy designed to enable us to continue our solid growth objectives.
The success of our preferred capital raising program has enabled us to acquire an aggregate of approximately $289 million in new assets and originate almost $15 million in new real estate loan investments during the third quarter of this year.
[laughter] Tempur authority. This year, we now own in aggregate of 101 class a multifamily student housing grocery anchored shopping center and office property in 15 States and 56 markets primarily in the southeast mid Atlantic in Texas.
<unk> real estate loan investments come back that's outstanding almost $460 million.
There are 700 associates, we continue to emphasize our goal of becoming the preeminent publicly traded read on the industry with particular focus on our operating performance.
Training and development of our associates, our culture in alkali ever be getting back to the communities in which we operate.
We're extremely pleased with epic SAP is we've achieved in these areas and look forward to continuing this momentum.
I'd now like turn the call over to John like John .
Thanks Lenny.
Third quarter 2019 pack generated revenues of just over $120 million, that's Oh 31 cents a share and that's about 12 cents a sure you'll note that our revenues are up over 15% compared to the third quarter 2018, owing to the continued growth in all of our property verticals and our assets.
Is up over 10% from the same period last year as well.
For the third quarter, our preferred stock dividend increased by over $7 million to 29.4 million and our common stock outstanding was up almost four and a half million shares over the third quarter 2018 to 44.7 million shares.
In reviewing our financial statements you May know the decrease in operating income despite the growth in top line revenue. It is important to note. This line item includes gain on sale of real estate and we had a significant sale in Q3 of 2018 and no sales in Q3 of 2019, excluding the gain on sale. Our operating income was up 70 per.
Side over the same period 2018.
All right I thought it can be highly variable from quarter to quarter or year to year or we can have dramatic swings the variability in our CFO can be attributed in large part two line items accrued interest income received an amortization of purchased Austin termination revenues.
You will note that for the third quarter this year compared to last year, we had almost 4.3 million less and accrued interest in Conversely.
Well, we book accrued interest income every quarter the actual cash payment of this interest comes in when the borrower under the real estate loan investment has a capital that meaning either a sale or refinancing the property.
Sometimes our developers pass early free cash flow and sometimes we received a cash payments on one of these capital about.
This quarter for example, we did not have any accrued interest income payments. The variance in this line item accounts for more than a total variants sorry about that.
For the third quarter 2019, we paid a dividend or common stockholders, a 26.25 cents per share almost 3% greater than the dividend paid to our common stockholders for the third quarter 2018.
As we have previously discussed we continue to focus on increasing the plot of our common stock during the third quarter. This year. For example, we issued an aggregate of over 1 million shares of our common stock.
And with redemptions of our preferred stock and the exercise of warrants previously issued under our series a preferred stock and unit offerings.
From a capital markets perspective, we've seen some interesting developments in the market interest rates again declined in the third quarter and currently said almost 160 basis points off the recent.
In Q4 last year, although that spread has narrowed in recent transactions.
We continue to believe that interest rates will be volatile with the end of 2019 with global and domestic pressures presenting unpredictable conditions.
Given the recent volatility and uncertainty in the environment, we have containment take a cautious approach to our acquisition of portfolio financing strategy, almost 96% of our permanent property level mortgage debt has fixed interest rates or variable interest rates that are capped.
Our borrowings and a lot of credit as up today or zero and we believe the current cost is a line will serve us well for the foreseeable future, including the additional 100 million dollar accordion feature we haven't a car facility.
The accordion feature allows us to expand the facility up to a total of $300 million.
For a multifamily portfolio, Freddie Mac and Fannie may remain our primary lenders, we enjoy preferred bar where status and have excellent relationships with both agencies. As we noted last quarter. There was considerable concern over the caps to the jesse's and their production volumes going forward.
In the third quarter, EPS, HFSA, Freddies, and Fannies regulator announced a new cap structure that will allow the agencies to produce $100 billion. Each from Q4 2019 through the end of 2020.
That's generally sets the bar at the current production levels. The agencies have been generating it takes considerable pressure and uncertainty out of the market [noise].
Due to the environment any above mentioned concerns Jesse spreads have widened significantly recently as the transaction volume remained strong and the ability for the agencies to do uncapped business had become more difficult.
With this new cap structure, we expect spreads to contract somewhat but in a measured way over a period of months.
The company debt for multifamily assets continues to be attractive and competitive ultimately the ballast credit spreads on loan volume will be dictated by the pace of transactions, which shows no signs of slowing down.
The lender pool for our grocery anchored retail product remains deep and the demand for our debt remains strong. We've recently seen a contraction in spreads for these deals as the competition for grocery anchored that has increased our office transactions are also finance through life companies with terms that are generally comparable to retail multifamily.
Although the maturities maybe longer these are typically larger deals and the lender pool is smaller than the one for our grocery anchored retail deals which are more manageable size. Nonetheless, we're seeing strong lender demand for office acquisitions, and our deep relationships in the lending community continues to serve us well.
Let me now turn the call over to Dan Dupree [laughter] dance.
Thanks, John as we have discussed previously each of our business units as a very specific strategy for creating value.
Multifamily business is focused on more recently developed class a largely suburban properties and markets typically with greater than a million people and good growth.
Nearly three quarters of our multifamily assets are in three stage, Georgia, Florida, Texas overall, we have 34 communities with 10245 units average rents of almost $1400 month or $1.34 square foot.
Our retail strategy as 100% grocery anchored typically anchored by the number one or two market share grocer and the market and located within the mid Atlantic Southeast in Texas.
At the end of Q3, we owned 50 shopping centers in nine states totaling 5000 5.644 million square feet.
Publix and Kroger Slash Harris Teeter.
Our two biggest major tenant.
38 stores occupying a third of RG L.A.
We are now the fourth largest publics landlord in the country.
[noise] our office property strategy is more focused still with six target markets, Atlanta, Charlotte, Raleigh, Nashville, Austin, and Dallas, and which we seek to create a portfolio of class a office properties.
Our real estate loan business has been a driver of both growth and profitability for the company's since the very beginning.
Our loan book stands at $457.9 million with over 383 million of that drawn at quarter's end.
The current book covers 21 alone over 4837 multifamily units.
1800, 95 student housing beds, 195000 square feet of retail space and 187000 square feet of office space.
Our loan book is relatively constant as loans payoff in new loans are initiated.
At the same time, our total assets continue to grow with a result that alone, but that was 1% to 25% of our total assets is now 10%.
Each of our business units were build and operate with teams dedicated solely to the business plan for their respective business unit.
This focus starts with a concentration on operating results.
At the ended the quarter, our asset composition was 48% multifamily and student housing.
22% retail, 20% office and 10%.
Real estate investment loans.
Real estate alone investment.
For the quarter and our multifamily units same store said, we saw revenue growth of 3.5%.
<unk> expenses held to 2.3%.
So same store NOI up a very strong 4.4%.
Our same store occupancy was 95.6%.
All of this reflects a significant benefit from our portfolio being the youngest class a portfolio at 5.4 years old and our public peer group.
Year to date same store NOI growth.
3.7%.
Strong operating result.
And our retail business unit, we continued to focus on leasing where our portfolio excluding redevelopment properties is 94.9% leased.
Over the course of 2019, we had eight grocery anchors with leases rolling all of which we have now renewed their leases at their contractual rates.
We have also had very strong leasing results with our shop renewal effort renewing 162045 square feet year to date with strong rate spread.
Additionally, we signed the 80000 square feet of new leases year to date again very strong operating results.
Year to date, our office subsidiary preferred office properties has signed leases totaling more than 255000 square feet of leasable area for about 8% of the office portfolio, which together bring the port for that portfolio to 97% leased.
Not only are we keeping our office buildings fall, but we are materially driving lease economics at those properties.
The 255000 square feet of leases year to date.
Hundred 50000 square feet or second generation, meaning that we either re let us space vacated by a previous customer or renewed that customer has compared to first generation vacancy, which we inherit when we acquire the property.
On those leases, we achieved an average cash rent roll roll up more than 15% stunning number our portfolio wide weighted average lease term remaining is nearly eight years.
The property level debt, we have on our properties. Our office properties has an average maturity of 13.1 years.
Again, [laughter] strong operating result.
Our internal operating results.
Therefore are solid and this is the foundation for the ultimate success of the company long term.
Well the good handle on operations, our focus has been to tackle major issues that we believe will transform the company and set it up for a long term consistent growth and success.
First in June we announced that we had executed a contract to sell a significant portion of our student housing portfolio to a qualified buyer with considerable experience in this.
Very specialized product.
Still continues to track and we anticipate a fourth quarter closing.
We made this decision notwithstanding our current 97% occupancy across that entire student housing portfolio.
We did this out of a belief that smaller cap publicly traded reach such as pack, our disproportionally vulnerable to periodic oversupply of product and a given market and student housing, creating uneven results over which we have no control.
We have seen this in a couple of our markets.
We'll be retaining two of our student housing properties in order to focus on them to capture more of the value that we believe exists and each.
Similarly earlier this year, we filed an 8-K announcing that we were beginning of process to determine the benefit of pack internalizing, our manager and as a public entity.
There is no doubt that the externally advised structure has been critical to the start and success of pack to date. There is no way, we could have been able to.
Grow the company both in size and results without the structure.
We recognized at the outset, however that there would come a time when the external manager would need to be integrated end to the public company.
We're currently following a process to help determine whether or not this is the correct time.
A couple of weeks ago, we announced a succession plan that will result in Joel Murphy Joel Murphy, assuming the role of CEO on January one 2020.
I plan to remain as executive chairman of the board for at least one year.
Before ceasing day to day involvement and removing the executive <unk> designation from the chairman of the board title.
Joe and I have worked together for over 30 years. Initially he was my attorney and King and Spalding.
But from 1988 on we had been involved in both private and public companies together.
When John Williams passed away 18 months ago, we knew we needed to identify the long term successor.
And as a complement to Joe that we knew we wouldn't have to look outside of the building.
Having worked with Joe for so long I can say without any hesitation that the company will be in great hands.
Beyond Joe there rich as both the company is rich and both experienced personnel and young visionary talent, which bodes well for our future.
I'd like to talk about guidance for a minute.
And the supplemental last night, we talked about internalization related direct and indirect costs that are housed in our numbers.
These costs are extraordinary and would be backed out of FX. So if we were reporting corefive FFO as we did in the past [laughter] because consideration of internalizing. Our external manager was not anticipated when guidance was originally provided a provision for these cost was not included.
If we now adjust our guidance for these costs, adding these costs back to FM. So.
We expect that we will end the year at the low end.
Of our original guidance of $1.44 to $1.50 a share.
[noise] due to our unique source and ability to raise capital and our diversified product strategy.
We are extraordinarily well positioned in the REIT universe to grow through timely accretive investments.
They're currently has a lot of capital in the system that needs to get invested and that has resulted.
And I push in cap rates, particularly in multifamily.
Sector to record levels.
We have taken the position that we would rather have uninvested cash on our balance sheet and available for attractive opportunities. Then do you use that cash in a way that does not add value to our portfolio.
Over the course of the year from time to time, we have had between 40 and $70 million in cash on our balance sheet.
Through the end of Q3, we have had an average daily cash balance after zeroing out our line of credit.
Of over $27 million.
Assuming the cost of this capital is equal to the preferred dividend. This on invested capital as cost pack.
Today 3.6 cents per share.
Having too much cash is the ultimate high class headache.
Headache, but investment discipline does come at a cost.
One final thought.
John Isaacson touched on this briefly if I thought it was a tricky number for us because of our real estate investment land.
Oh on these loans, we receive current interest and additionally, we receive accrued interest. The current interest is booked at both the F., though and a F or.
On the other hand, the accrued interest as booked mostly monthly rather to f., though but not booked a AFFO until the loan pays off getting John already covered does.
This creates a lumpiness in our CFO .
If you think about it you may recall periods in the last several years when our AFFO payout ratio was less than 60%.
This quarter the payout ratio was over 200% the important thing to remember is that today, we have over $27 million and earned but not yet booked a f., though and accrued interest.
Uh huh with all of that having been said I'd like to thank you for joining us on our earning call earnings call. This morning.
Well now turn the call back over to the operator to open the floor for any questions you may have.
Operator, we will now begin the question and answer session to actually quite she May Press Star then one on your Touchtone phone.
Using it speakerphone, please pick up your handset before pressing the keys to withdraw your question. Please press Star then to you at this time, we'll pause momentarily to assemble our roster.
[noise] and our first question will come from Michael Lewis with Suntrust. Please go ahead.
Great. Thank you I wanted to ask how you decide how much asset management and channel easy wave each quarter is there a formula for that or targets or is that kind of a decision made by management during or at the ended the quarter.
Well its its on a case by case basis, Michael I the.
The key is we want to invest to creatively and this is Ben.
Term and by.
The owners of.
The manager.
That that we would subordinate our fees in order to ensure that we're investing at an accretive way.
You know it.
As we go through this process of exploring internalization one of the the nice side benefits as we no longer will have the load of those fees. When we're trying to evaluate the viability of a of an asset be nice to.
I have that behind us.
Right, Okay, and then on the dividend coverage I understand the lumpiness of of the I follow in the accrued interest build up that you have I wanted to ask about you know you're reporting about $2 million a quarter of maintenance capex when I looked at the cash flow statement, you've kind of cancer.
Distantly band around 12 million per quarter of improvements to real estate I guess the question is just you know how given the lumpiness of the ethanol I mean, how should we and investors kind of look at the the cash flow coverage of the dividend and you know how how comfortable you guys are with with the level of the dividend here.
Yeah, what I would tell you on that give you a classic example, and the third quarter.
We had we had none of our mezz loans pay off in the third quarter and it's not something that we frankly control.
Already in the fourth quarter, we've had two mezz loans payoff.
And there's a good chance, we'll we'll end up having a couple of more of this quarter.
It is it as a.
It is.
Our our Mezz loan business. It has been a real driver for the company, but it creates a it creates this company lumpiness Oh on because we don't control when they're going to pay off.
Oh, what I think is important is the fact that and it's continuing to increase.
All of our Mezz loans today appear to us to be very healthy.
And we have $27 million of accrued interest that we that we have not.
Yes captured.
And that will get and that'll get spread out and a lumpy fashion probably over the next.
That 27 million probably over the next year year, and a half two years or providing more than adequate coverage.
Of.
Of our dividend.
Okay. Thanks, and then just one last one for me I want to tasking about the internalization decision and process here and ultimately the outcome it looks like when I when I look in your filings and kind of follow the formula in there for the internalization fee it looks like that could be.
Quite high.
Is there is there a risk here that you have to you know that there's an internalization fee of 100 or $200 million that takes kind of $4 a share out of this company or or am I kind of over <unk>, and my overestimating or over thinking that.
Well that.
Let me frame a little bit different way the best investment well first of all I don't know I mean, we're not at a point of making any announcement about internalization. It's a it's a.
It's a protracted process that both we and the board we the manager and the board want to get right.
Yeah, that's first and foremost.
I think what we have done relative to deferring fees and other things indicate.
A real respect for our shareholder.
And in that regard, but I can tell you Ed Ed almost whatever price the best long term investment.
The best long term investment.
The company will make a this year or any year will be the internalization of the manager.
Regardless of what the near term impact is and I'm not suggesting that its going to be the numbers that you suggested.
I'm, just saying that regardless of of the number it will be the best investment that the company will make.
John did you have something you wanted to add to that Hey, Michael whenever you look at the paying one of the place to think about it the company's capitalization isn't just a common stock, but obviously if the preferred stock as well. So when you start talking about that that $4 a share. That's that's a little misleading I mean, the company from an equity standpoint, as you know well over 2 billion.
Dollars now.
Thanks for answering my questions.
This concludes our question and answer session I would like to turn the conference back over to Dan Dupree for any closing remarks. Please go ahead Sir.
Yeah before we get off the phone <unk>, we we allow Joel Murphy to get a free ride on this call.
And and I can assure you that that any of their questions and we just answered would have been answered a far more astutely by Joel and you can look forward in the future.
To Joel.
Leading this call.
I think all of US again on our side of this call are excited to have Joel.
Taking over the range on January 1st and as I mentioned in my comments, Joe is going to do a terrific job. So.
With that.
Let me say thank you all for.
Participating this morning were available.
Mostly Joel.
To answer questions that you have.
Following the call a again. Thank you you all have a good day.
The conference has now concluded. Thank you for attending today's presentation you may disconnect.