Q4 2020 Preferred Apartment Communities Inc Earnings Call
[music].
Good morning, and welcome to preferred apartment communities fourth quarter 2020 earnings conference call.
This conference call is being recorded and all.
Like to introduce your host for today's call Mr. Paul Cullen Executive Vice President Investor Relations. Please go ahead.
Thank you for joining us and welcome to preferred apartment communities 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 and.
And a moment I will turn the call over to Joel Murphy, our Chief Executive Officer to share. Some initial thoughts and then Jon Isaacson, our Chief Financial Officer will share some additional details about financial metrics and capital markets.
And then Joel will return to conclude a free prepared remarks.
Following joel's remarks, we'll be pleased to answer any questions you might have.
I would like everyone to note that forward looking statements may be made during our call. These statements and our 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 the economic conditions in the markets and 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 rentals.
Actions in light of COVID-19.
For a discussion of these risks and uncertainties you should review the forward looking statement disclosure and yesterday's earnings press release as well as our SEC filings.
Our press release and other SEC filings can be found on our websites and apps.
A P T S dot 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 for operating results and financial performance and.
And that's otherwise indicated all per share results that we discuss 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 Joe Go ahead, Joe Hey, Thank you Paul Good morning, everyone and thank you for joining our call day today to discuss our fourth quarter and 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 when we sit here today right about at the first anniversary of those unsettling days and at the beginning of March 'twenty and 'twenty.
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 and preferred apartment communities.
We began the year as and externally advised REIT that had for operating verticals focused on four distinct asset classes and a COVID-19 free environment.
We ended the year as a fully integrated internally managed REIT with investments across three asset classes and with a significant reduction and 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 and 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 they required agile movements creative thinking and hard work.
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 and it allowed us to perform so well on and operational level.
The COVID-19 pandemic has also spotlighted, the changing economic and demographic dynamics, and our country and accelerated trends and it already begun.
This includes the continued and increasing flight to suburban and 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 and sunbelt focus.
We have benefited from continued strong economic drivers, including a diverse employment base high educational attainment, and strong population and employment growth and rising household incomes.
We also continued to experience and strong positive net migration into our markets, which COVID-19 has only accelerated this creates a positive feedback loop as families and businesses continue to seek out our suburban and sunbelt markets. They attract more families and more businesses as a result, and guess what they need places to live play.
And to shop for groceries, and necessity items and places for those growing companies to operate their businesses.
Yeah.
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 pack up for accelerated growth in the future.
At the end of January 'twenty, and 'twenty, we completed the internalization of our manager there.
This internalization was an extremely important event for pack, providing alignment of management and stockholders and meaningfully simplifying our platform. This new structure has allowed pack to capture the full benefits of the company's scale by eliminating fees to the external manager as important the internalization and.
Enabled us to be nimble and react quickly and decisively as a management team when the pandemic took hold.
Yeah.
We then took strategic steps to focus our portfolio on the areas, where we believe we can capture outsized growth.
And 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 are reducing the call option on our series a preferred stock from 10 years to five years this modification to our ability to call and our preferred stock is.
And this optionality is an important tool and our goal of realigning our balance sheet.
These stockholder friendly measures passed with overwhelmingly positive support and November.
And then utilized approximately 85 per cent of the student housing net sales proceeds for the redemption of approximately $209 million of outstanding series, a preferred shares with remainder allocated towards growing our portfolios and multifamily acquisitions and 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 and 281 unit community located and 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 and new multifamily properties during 'twenty and 'twenty to approximately $277 million, representing an additional 1200 and 93 units, which is a 12, 6% increase over our 2019 year and total.
Yeah.
And even taking into account our one fourth quarter asset sales, but I will discuss in a minute of 200 and drove 395 units. We entered the year ended the year with 11143 units and eight 8% net year over year increase and unit growth.
In addition, we issued real estate investment loans totaling approximately $44 million and commitments supporting the development of an additional 853 units, which we believe demonstrates our believes that this asset class and these markets have strong growth attributes into the future.
Yeah.
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 and the fourth quarter as.
As we look ahead, we believe very strongly and multifamily is 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 tailwind and our markets.
We expect to be active and the acquisition market for quality multifamily properties and our suburban sunbelt markets. We are seeing that cap rates for quality properties and some of our markets have significantly compressed and some cases by approximately 25 to 50 basis points and just the last few months.
That said, we intend to remain disciplined and our investment decisions. However, we do believe that our deep local market knowledge and relationships and operating teams and those market, 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 and no longer fit our portfolio's growth profile and as I, just mentioned a minute ago and the fourth quarter. We sold one multifamily community the avenues at Creekside and 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 grocery anchored retail comprised approximately 22% of our fourth quarter revenues are 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.
<unk> and Harris Teeter, and we continue to see solid daily foot traffic and strong growth for sales.
Based on the 'twenty and 'twenty 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 and 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 two 3% of our total retail revenue for 'twenty and 'twenty, which we believe is appropriate more detail on.
This is contained in our supplemental.
Our focus for 'twenty and 'twenty, one has turned to leasing we continued to be successful with both signing new leases and tenant retention and the fourth quarter. Our pipeline of new deal activity has expanded and nearly all of our markets and market rental rates are holding or growing from pre pandemic levels and.
So far and the first quarter of 'twenty. One this momentum is accelerating.
The performance of our assets and our management team across the board and the company gave us the ability and 2020 do focus on our strategic efforts.
And the operational team and our grocery anchored retail group has done an incredible job of navigating the pandemic, where there was so much distress and disruption and the broader retail sector. The numbers, obviously speak for themselves, but we believe this relative outperformance on rent collections is noteworthy.
Finally <unk>.
Suburban office comprised 24% of revenues and the fourth quarter. Our collections for office have also been very strong and 99% and we have just over 11% of our portfolio leases expiring and 21 and 22 were 95% leased across our office properties and our leases are large.
Lee with well capitalized larger corporate users and carry more than seven years of weighted average lease term remaining.
While we recognize the work from home continues for many we also believe and some comments made recently by J P. Morgan CEO, Jamie Diamond, saying that the negatives of working from home are being felt more and more the longer staff for away from the office. We have certainly found this to be true and our experience and our Atlanta home off.
As well we are back in full force and much better for it.
We also continue to see corporate and migration trends away from coastal urban markets towards cities like Raleigh, Charlotte and Atlanta, where seven of our non 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 and their offices.
Our focus in 'twenty and 'twenty. One for office has also turned to lease his 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.
Thanks, Joel and thanks to everyone for joining us this morning, I hope, you're all staying safe and healthy.
And I start with our fourth quarter and full year results for the fourth quarter 2020 Pac generated revenues of $121 million <unk> of negative <unk> 20 per share core <unk> of 31 cents per share and <unk> 25 per share for.
For the full year 2020, we reported revenues of $502 million <unk> of negative $3 36 per share core <unk> of $1 seven per share and <unk> 83 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 and the fourth quarter affected our results and different ways for.
First the sales student housing and removed eight assets from our operating portfolio, which affected our topline revenue number as you can see we had growth and revenue on a year over year basis for 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 it almost $209 million worth of our series a preferred stock and cash we incurred about $21 million and deemed dividends, which negatively impacted <unk> by 41 a share.
Said differently without the deemed dividend or <unk> would have been positive 21 cents a share versus the negative <unk> 20, a share reflected and our results. There are obviously other things going on and a quarter, but that helped that alone helps reconcile the <unk> per share for the quarter for the solid 31, a share and core <unk> we generate.
This discussion also highlights the importance and relevance of core <unk> was a true measure of our operations.
Also impacting this quarter's <unk> results, though to a lesser extent and the deemed dividend 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 Freddie Mac K program investments.
Our purchase option termination revenues and lower interest expense helped to contribute to the strong core <unk> result in Q4, as we've said many times the realization of purchase option revenue is difficult to forecast.
With respect to SFO, our improvement from Q3 and to Q4 was driven primarily by and increase in accrued income received from our investment loan book lower interest expense and lower capital expenditures and the quarter.
I will now turn to our real estate investment loan portfolio and.
And the fourth quarter, we received full repayments of the Santa both straights E town and soulless Kennesaw, two real estate loan investments plus approximately $3 9 million of deferred interest revenue from these loans.
Now I'll 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-19 related operating costs for the fourth quarter. Our multifamily same store NOI decreased by one 9% our revenues were actually up slightly by <unk> one.
The decrease in NOI was primarily driven by a 22% increase and real estate taxes, and 24% increase and property taxes property insurance costs for the full year same store NOI grew by 7%.
Our same store occupancy as of December 31, 2020 was 95, 6% and increase of half a percent 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.
For $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.
This marks the beginning of our drive to realign the balance sheet and 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 for the desire to reduce the outstanding balance of preferred stock and ideally we would like to see net issuance be negative after redemptions from the quarter.
We can't control. This perfectly are managing broker dealers that are 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 a redemptions, including the call of about $258 million for the quarter, all our redemptions were done and cash.
As we redeem shares for cash and the future. We would continue to accrue a deemed dividend that will impact our <unk> results. If we were to redeem preferred stock for common stock, which is the company's option, we would not incur this deemed dividend.
And we'll continue to focus on the pace of raze and redemptions going forward and conjunction with our other strategic efforts.
Let me now turn to our guidance, we're initiating full year guidance for 'twenty and 'twenty, one given our comfort with the performance of our portfolio and our expectations for improvement and the environment.
We expect core <unk> per share and the range of 81 to 89 for the full year.
Underpinning this guidance for the following assumptions.
Same store multifamily NOI growth of one 5% to 3% new real estate loan investment originations of $50 million to $100 million.
This guidance also includes the impact of a decline and purchase option termination revenues and accrued interest received and 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 protocols Joel.
Thank you John and thanks for that detailed covering our financial results.
I know that both Johns comments and my earlier comments focused on short term operational and financial metrics. Obviously those are very important because they are 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 is a for a different company than we were at the start of 2020.
Given all that we've accomplished amid the COVID-19 pandemic. We are entering this year emboldened to do even more to position pack 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 and the sunbelt continue to attract families and businesses across the country, where the lion's share of the fastest growing msas are located in the sunbelt.
According to a pre Covid April 2019, Clarion partners Research base 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 and the sunbelt and the next two years, the non Sun belt States and the next 10.
The point being that these trends were in place pre COVID-19 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 and Nissan belt areas Microsoft's being here in Atlanta.
The suburbs are also experiencing Renaissance and as millennials day, prioritize urban living and prioritized 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 and an informative Freddie Mac research piece and also issued pre Covid and 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 and many of our markets, we have deep expertise and sunbelt suburban multifamily, including strong developer relationships and a lending platform that creates a unique pipeline for pack. This is not to dismiss the diversification benefits of our other asset classes and per.
Providing stability and our operations and and our opportunities, but we believe incremental allocation day multifamily makes the most sense for us.
Third we will continue to seek out opportunities to enhance our balance sheet and 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.
And for the future and feel this is just the beginning and 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.
Great operator at this time, Nicole lets go ahead and open up for our Q&A session.
We will now begin the question and answer session.
A question you May Press Star then one on your Touchtone phone.
For using a speakerphone, please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble the roster.
First question comes from Gaurav Mehta with National Securities. Please go ahead.
Yeah, Hi, good morning.
First question on John.
And our partner and portfolio.
And one point.
Okay and the people from same store NOI guidance.
And I was wondering if and when.
Talk about any market expectation for you all.
And within the portfolio and you expect.
And the market's won't perform or underperform, we didn't get an apartment portfolio.
Hey, Gaurav. Thank you.
No. We don't have any we don't have any particular sense that any of our markets are going to are going to outperform or underperform and I mean, we feel pretty good about that range.
Okay.
Second question on your office and Ito.
And just a bonded slightly among for lease explorations and small.
And in 'twenty, one and 'twenty two.
Does that have any known move outs within pharma portfolio and are you expecting more and what kind of tenant retention are you expecting for 2021.
And now look you know God, we're lucky you never know what unnecessarily and future of range, but we feel very we feel very good about what's going on and our overall portfolio right now.
Okay.
Lastly, with India and retail.
And I think you are.
Occupancy and 91 concern and then moving now.
Hearing their needle.
And then the development and 95 and 6%.
Do you want to talk about what kind of redevelopment are you guys doing and bennington portfolio and what kind of returns you're expecting.
Hey, that's a great question, Gaurav and and and the answer is we're not ready yet, but obviously, we're positioning those properties.
And for returning over time, and you know a lot of times and when you do that.
Redevelopment and 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 and occupancy before we are able to announce leases and redevelopment.
Okay understood. Thank you and that's all I have.
Alright, thanks crop.
Thank you next question comes from Michael Lewis of True Securities. Please go ahead.
Great. Thank you.
And I had 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 comment or.
Alastair.
So we think about this really just is an accounting construct.
It's really just an accounting construct Michael.
Okay. Okay.
My second question.
Housing sale provider and a nice opportunity to get a large chunk of those per <unk>.
Hum.
How do you think about how and how youre able to conclude from that sense. It sounds like that's something you want to keep doing.
And so you know could.
And we expected to be.
A net seller and any property type it sounds like that one when it comes and multifamily book.
And the retailer.
Yes.
And.
Sure.
And another way you know how and how do you think about and or your ability to conclusions are true.
So for wafers per Hertz.
You know Michael Good question and as we look as we look through there for things we look at all of our assets across all of our product types.
On a quarterly basis and look at them and as an example that you gave and the fourth quarter. We just felt that with that asset with its age and all of those things, we felt with them where the market was and exiting it.
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.
And you bring up the question that obviously, when we do get and have capital that's available from whatever source.
We look at the options of what we have that's the best incremental use of that capital and that moment that could be taking it against the series a preferred which we now have the right to do we still have some.
<unk> there but.
But also incremental investment and external growth opportunities for the company.
Okay great.
And ask one more and other accounting one I guess.
This isn't new this quarter, but it's related to the internalization and at the beginning of the year that that 30 day.
8 million and liabilities to the former manager on your balance sheet.
Hum.
No.
And when they are and cash payments that would be needed to settle that.
Thank you John.
Cycle.
Broken down into two buckets and all of that would be settled in the next.
Two years.
Okay. So those are things.
We'll be kind of gradual cash expenses.
And not so much gradual as I think they they will occur in the next two years and there'll be there'll be pretty lumpy I mean, I think will occur.
At points in time, each of the two items and one and one component of it would be I think on a fixed time at the end of January of 'twenty three I believe that's right.
Yes.
Got it okay. Thank you.
Thank you next question comes from Jason Stewart of Jones trading. Please go ahead.
Hi, good morning. Thanks.
And I was hoping you could elaborate on your comments about cap rate compression and markets and where you see our acquisition or disposition opportunities by market and and a little bit more detail.
Yeah sure you know that you know the comment there was obviously dish to show Jason and a good question. There is and we are in the market too bad things, but we're also going to bleed be disciplined.
And so in these markets we've seen this and in Atlanta.
And we've seen it and.
And southwest Florida.
And other markets across Florida as well.
And you get into a situation and and asset that we really like they would really fit our portfolio and we think there were and a good position, we like where we are but then all of a sudden you know.
And whether it whether it moves really fast and somebody that just says they're going to buy it and the answer for us at that moment as well and were out.
You know, we would we have love too.
Right to own those assets, but not asset not a and those assets and 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 market actually go look at them understand them and sometimes we look and say Hey, Wow, you know what I think the growth Prost possibility for that is even better than whats put out and the broker OEM.
Or they might say you know and I think that's a little optimistic so now what we're saying 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 could have one asset in Atlanta and that the price for them really on and other asset and another little Submarket in Atlanta, where it didnt, but theres reasons.
Okay, that's fair, it's really asset by asset and.
And then assuming the moratorium on evictions and eventually listed do you have any expectation for how that's going to impact new lease activity.
And are there any markets or submarkets that you see that I'm for you know a larger check quote unquote shadow inventory there.
No. We havent really seen that you know I mean, I guess, a couple of things were and pretty solid markets, where the overall markets havent 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.
Okay.
Okay Fair enough and then one more on guidance.
And 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 blend leads blended lease rates concessions and things like that as we sort of build up to your to your guidance number and multifamily.
Yeah.
Yeah.
Yes.
Jason totally appreciate the question I mean, just in this environment with the pace of the recovery being somewhat uncertain. We're just we're just not prepared to talk about those assumptions.
This concludes our question and answer session I would like to turn the conference back over to Mr. Paul Cullen for any closing remarks. Please go ahead.
Thank you for joining us today and also for your interest and preferred apartment communities and wish everyone. A good day and take care.
The conference has now concluded and thank you for attending today's presentation you may now disconnect.