Q1 2021 Preferred Apartment Communities Inc Earnings Call
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Good morning, and welcome to the preferred apartment communities first quarter 2021 earnings conference call on.
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I would now 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 apartment communities first quarter 2021 earnings called the hope each of you had an opportunity to review our first quarter earnings report, which was released yesterday after the market close.
Moments I will turn the call over to Joel Murphy, our Chief Executive officer to share some initial thoughts.
Then to Jon Isaacson, our Chief Financial Officer will share some additional details of better financial metrics and capital markets that Joe 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 on the company does not undertake Judy 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 operations the global economy on the financial markets.
And our ability to mitigate the impacts arising from COVID-19.
And those included in our SEC filings.
For a discussion of these and other risks and uncertainties you should review of the forward looking statements disclosure in yesterday's earnings press release.
As well our SEC filings.
Our press release and other SEC filings can be found on our website.
On a P T S dot com.
Press release, the Ultra includes supplemental financial data report for the first quarter 2021, the 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 the review of our operating results and financial performance unless the otherwise indications all per share results that we discuss this morning are based on the basic weighted average shares of common stock on class a partnership units outstanding for the period.
I would now like to turn the call over to Joe go ahead Joe.
Thank you Paul Good morning, everyone and thank you for joining our call today.
Though we spoke of most recently on our call in early March just eight weeks ago. Much has happened at pack since then its.
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 Highwood properties.
In addition, our first quarter of results, which we reported yesterday demonstrate the continued strength, we're seeing in the sunbelt and as well as our portfolio is 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 pack going forward.
As a part of our broader strategy, we internalized our management and divested our student housing portfolio in 2020.
On the continuation of that strategy in 2021, we decided to execute on another strategic transaction to reallocate our capital.
Made the decision to sell our office portfolio and realign our business towards lower Capex higher growth multifamily access assets.
<unk>, our grocery anchored retail investments.
On April 19th we announced that we had reached an agreement to sell the Highwood 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 the 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 per pack.
This transaction will result in a more simplified business model for pack the.
The simplification should result in an enhanced long term growth profile given the organic growth, we see in our class a suburban sunbelt multifamily portfolio the.
This will result in the capital rotation per us from a higher capex lower growth business until the comparatively lower capex business with significantly greater near term ability to grow rents. This capital rotation towards our core competencies allows us to take advantage of operating efficiencies as we grow.
The simplification also allows for better leverage on our G&A as we focus our team on these two asset classes down from four previously.
<unk> 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 represent strategic win wins for both companies.
I'd also like to thank our office team for their significant contributions to pack. This high quality portfolio was thoughtfully assembled and well run and typical <unk> fashion and we appreciate the hard work of our offers 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 ratio.
Depending on exact timing of the off the sale, we expect to use a significant portion of the net proceeds to call or redeem our series a preferred stock.
Third the sale of 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 1293 units to our already significant portfolio such that we now on 111000.
143 units.
We also originated $44 million in multifamily real estate investment loans in 2020 supporting an additional 853 units.
Continued 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 remained steady and consistent cash.
Cash rent collections, including deferrals for the first quarter were 99% from multifamily and 98% per grocery anchored retail more detail can be found on pages five and six of our supplemental.
We attribute this continued solid performance for 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 the last quarter couple of third party pieces on the strength of the Sun belt, and we are seeing the strength play through into our business.
Sunbelt markets continue to attract continued to attract companies investors and the 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 success of the region.
In other words the reasons why people in business, we're 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 net while the pandemic is hopefully temporary and relatively short term the low cost of living educational attainment favorable climate on population growth evidenced in the sunbelt are here to stay.
According to the North American Van lines 2020 migration report the top Msas from moving destinations for all in the Sunbelt, while the top five MSA being deported where all of in the northeast Midwest and West Coast.
While the Sunbelt migration trends continue in the last 12 continued in the last 12 months the pandemic accelerated the migration of 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 and in 2019. According to CBRE. The analysis of the U S postal data.
Further address changes the counties within 100 miles of major Msas increased by six 5% versus total address change volume increasing for the country by two 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 that you've seen us execute over the last over the past year.
These changes of set us up for accelerated long term growth.
Let me now turn to our multifamily results of this quarter.
Our occupancy level remains very high of 95, 8% of 20 basis points over the first quarter of 2020.
Our year over year same store NOI was modestly negative at one 1% as the first quarter of 2020 was a very strong pre COVID-19 quarter for us.
These results exceeded our internal budgets for the quarter and hence we have raised our full year guidance per same store NOI growth as we've shown in our supplemental and will be described in more and more detail on John in the moment.
You will remember we previously stated the 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 was caused on 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 of 320 unit class a multifamily.
The community in Orlando, Florida.
This community will be of part of the 800 acre Metro West mixed use development and with this investment we see 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 on our grocery anchored portfolio and the trend line is promising in the quarter, we executed over 40000 square feet of new leases and the 171000 square feet of renewals.
We are proud of our consistent performance in our grocery anchored portfolio to of COVID-19 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 of our 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.
But we.
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 and important part of our story is to look at our operational performance across the pandemic for the last four quarters and how the 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 and are.
Markets.
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 of the solid base.
The story is similar in our grocery anchored retail portfolio with average rent collections of 95% across the pan down a percentage. The 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 Pak.
We celebrated the 10th year anniversary of our IPO in the month of April I am 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, Let's start with our high level first quarter results, then I will discuss.
The core SSO and the ASR.
And then I'll walk through our guidance that has been updated for the recently announced the office portfolio sale.
For the first quarter 2021 Pac generated revenues of $115 7 million <unk> 16 per share core <unk> of <unk> 25 per share.
<unk> 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 from the sale of our student housing portfolio are downloading marginal year over year outside of the student housing.
The decrease in interest income due to lower real estate investment loans, just to offset the increase in our operational revenue for the quarter.
With regards to on <unk> results, the internalization transaction on 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 of core <unk>, which is our most significant metrics the.
First quarter 2021 result of 25 cents per share compared to the prior year's quarter point on per share reflects the impact of changes in several line items, which are detailed on our supplemental the waste last night the.
The most significant items were <unk> 70 per share decline from the sale of student housing and lower revenues from the interest income on investment loans and amortization of purchase option termination payments, which was about $6 per share of low <unk>.
Items were offset by an improvement on the allowance for current expected credit losses on bad debt of <unk> 10 per share on lower preferred stock dividends of $6 per share.
With respect to <unk>, our <unk> 18 for the first quarter 2021, as compared to <unk> 47 for the first quarter of 2020 was impacted by a decrease in accrued interest of <unk> 12 per share again, the <unk> impact from the sale of student housing lower current interest revenue of <unk> <unk> per share and higher recurring capex spend.
<unk> per share as well.
Additionally, the first quarter of 2020 has benefited from a one time payment of the earnest money forfeiture totaling $6 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 neighbor multifamily property in Atlanta, We're paid all representing $17 $9 million on principal plus the purchase option termination fee of one 5 billion on the collection of $4 $3 million of accrued interest income.
With respect of our multifamily portfolio, we continue to feel confident in our ability to drive growth for.
For the first quarter, our same store revenues were up 9%, which reflects the consistent occupancy on our portfolio and the resilience of our markets.
While our multifamily same store sale of same store NOI decreased by one 1%. The decrease in same store NOI was driven primarily by 7% increase of real estate taxes and property insurance costs overall of healthy comparison, when considering the COVID-19 had not yet taken hold in Q1 of last year.
With respect to our balance sheet and capital stack, we continue the 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, the 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's a deemed dividend which impacts. The result, we expect to continue to see an impact from deemed dividends going forward.
Let me now part of our outlook for the balance of 2021.
We are revising our guidance today to reflect the impact of our recently announced off of sale.
We now expect core <unk> per share in the range of <unk> 73 to 83 funds for the full year 2021 on.
<unk> the guidance of the following updated assumptions same.
Same store multifamily NOI growth of 2% of 3% we are raising the range from our prior range of one five percentage of 3%.
$300 million of 400 million of the acquisitions of multifamily properties.
New real estate loan investment originations of $50 million to $100 million and the closing date of the office transactions of eight 121.
Our disclosures indicate of the closing date in the third quarter for purposes of this guidance, we assumed all of the Spurs.
This guidance also includes the impact of purchase option termination revenues and simple 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 on the short term. These.
These one time items will be difficult to replace going forward as we had fewer purchase option termination revenue opportunities we.
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 fall from 2022, we are focused on deploying the proceeds accretively as possible the limit that the dilutive impact. We also believe we also benefit from the elimination of near term future capex associated with the off.
The portfolio, which can now the utilized for higher yielding opportunities.
The redeployment of the proceeds will be split among preferred stock halls acquisitions and real estate investment loans. The final allocation of proceeds will be the governed by the best options available to us at the time of Macquarie.
We will update the guidance, if as and when it becomes appropriate.
Now I'll turn the call back to Joe for some final thoughts Joel Thank you John.
Four we began in Q&A I'd, just like to take a few moments to reiterate our strategic focus share pack.
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 on class a suburban multifamily.
<unk> 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 Sun belt platform now that it is more focused.
Second this is the continued benefit of our sunbelt strategy.
The migration of both people and businesses and the the Sunbelt continues unabated as the pandemic put a spotlight on the benefit of this region with lower cost of living and lower taxes and higher growth.
We have deep relationships and deep market knowledge in the sunbelt to which we can create value.
Third we continue to rely on our balance sheet to set us up well for our future growth. We continued 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 impact now let me turn the call back over to Paul Paul.
Thank you Joe at this time, we'd like to go ahead and start our Q&A session.
We will now begin the question and answer session to ask the question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the keys.
I'd like to draw your question. Please press Star then tail.
Our first question today comes from Gaurav Mehta with National Securities.
Thank you.
Morning first question on the guidance.
I was wondering if you could provide some color on the impact of co chair of the auction from mentioned revenue net you talked about on.
Is that something new in this guidance on.
While the embedded in the previous guidance of loan and then how much benefit on expecting from that portion of the diluted change.
Hey, Brian This is John.
Thanks for the question.
That's one of the things that we've talked about in previous quarters is kind of the lumpiness of these.
Real estate investment loads of when they get paid off.
And our previous guidance had not anticipated that we would have the number of loans being repaid.
Nor of the pricing, which has resulted in higher purchase option termination payments than we previously expected. So just just an impact from the the market improving in.
So the transactional market being the aggressive right now.
Okay.
Yes.
Yes.
What's the what's like the full run the.
The impact of dilution from off of transactions.
The press release is it sort of that it's going to the fully phased in 2022 from.
Trying to understand how much the sale of impact on the earnings.
So again.
We're forecasting for 2021 based on an eight one closing day.
That could move around based on of the transaction closing at a different day and we won't know for 2022 until we see the full redeveloped redeployment of the proceeds of where that goes and what kind of reinvestment rates. We get so that's just hard to say today.
Okay, and then for the multifamily acquisition volume of 200 of $400 million, what's the expected timing of on those acquisition is that going to be a commission on holding well fully stabilized properties.
The target and new construction of one.
Great question.
It's spread out over the balance of the year.
Don't have firm closing day for all of those yet.
The majority are stabilized properties, but we are looking at on 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 teams ability to execute the lease up.
Okay, and then maybe lastly on the.
The potential redemption of achieving the platform can you remind us how much of that is callable in 2021.
Yeah.
So it ramps up over the year. So you might remember the when we change the call period from 10 years, the five years.
And the shareholder vote last year.
The increase the amount that was available the call then and it comes in that $30 million to $35 million a month right now when we closed the office transaction. If we were to close on August one we.
We had about $230 million available the call and then as I said it comes in about 30 to 35 million of months after that.
Okay. Thank you.
Historically.
Thanks, Carl our next question comes from Michael Lewis with <unk> Securities.
Great. Thank you.
My questions are sort of tangential to a couple of of the ones you already got.
Youre going to use office proceeds to redeem redeemed preferred, but obviously youre still issuing some as well.
You said that'll be a net reduction in preferreds over the next few quarters.
Kind of curious the cost benefit of keeping that machine running.
And what I've been by that you issued 38000 shares of the deemed 44000.
Well.
Is there a frictional costs there as opposed to had you not issued any and just redeemed 6000 in terms of commissions and other.
The other fees.
Such.
So a couple of points there Michael with the with the redemptions in the first quarter of those were all redemptions, whereas the holder basically put the stock back to us on requested the reduction.
Obviously, the end of our preferred holders can redeem at any time.
Yes that wasn't necessarily a call that we were proactively making and the reason for of keeping the machine running right now is as much liquidity as anything else.
We like having access of that channel.
Yes of those investors have been sticky and historically that's been a.
A good cost of capital for us less of a little bit less so today.
But the.
There may come a time when thats the channel that we didnt want access to but it's very hard to turn off and on so right now we're using it the balance of our liquidity also would point out that the.
Call period for the shares that are being issued two years versus the five years and the.
And the previous offer so we do get some benefit the.
Okay got it.
And the other use of proceeds obviously per for making investments in.
I am curious about cap rates and acquiring apartment properties and so.
The 300, the $400 million.
Do you expect to invest the Sierra will include loans and other things but.
As far as the apartment properties is the 300 the $400 million.
Out there that you'd like at prices that you like.
Or do you think the claim that capital how challenging is that.
So just to make sure we're talking about the same thing we're talking about 300 of 400 million of asset value.
And the answer to your question is yes.
So we feel good about the pipeline yes.
And Michael Lendings, John Let me, let me add on to that I agree with John statement that he just made and this is really part of our Sun belt operating leverage as we continue to grow in the units that we have and have on the ground people on these markets. These teams of really good at ferreting out the right opportunity.
Plus also no.
That we've got.
Some embedded pipeline through the mezzanine loan program of <unk>.
Which you know 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.
The we could take advantage of.
So yes, 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 right now the we're internalized the the benefits of the scale.
It easier for us to acquire Accretively.
Okay, and then just lastly from me.
You answered the question about.
Yes.
I guess, if the guidance question about what the office portfolio of sale does to your earnings and such.
I realize there's a lot of of the year, especially in the near term in terms of timing of redeployment of proceeds on what those yields will look like and so forth.
Is there any expectation at this point.
The sale.
Impacts of your dividend payment of all of your common dividend.
So Michael as you said I mean, there's a lot going on there's a lot of moving parts.
The board evaluates the dividend policy every quarter and as the last 10 years and we will continue to do so.
Okay. Thank you.
The so.
Thank you Michael Our next question comes from Jason Stewart from Jones trading.
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.
The payout ratio relative to core <unk> of where the comfort zone sort of maybe boundaries exist in your mind.
Hey, Jason It's Jon Isaacson, we've never really talked about that that's not something we've ever discussed the guided too.
Okay fair enough.
One question on the office portfolio.
I guess in some of the assets to the remaining particularly free revenue there was a little bit of a change in the in the occupancy any thoughts there in terms of.
Specifically, how you leased those up whether that impacts your ability to Tom and price and how that kind of figures into the timing that you mentioned in the beginning.
Yes, Jason Thanks, looking at the think about real estate assets.
They all operate under their own individual timelines you have to look at these things that way. Okay. So leases have certain maturity day certain extension of certain debt characteristics that are attached to the assets.
And they in there and then they move through different cycles of are they in lease up are they in transition.
So we're going on look Barry.
Prudently and thoughtfully at the remaining assets, which we feel good about the this is an important piece.
We'll be retaining pieces of our office team. The same people that have lived and breathed. These assets through the acquisition and asset management same team that will be in their deal on one of three Virginia.
As we work through that.
With IHG and the other things on their end so working through opportunities for leasing up that building.
Going forward.
Okay. Thanks.
This concludes our question and answer session I would like to turn the call back over to Paul Collin for any closing remarks.
Thank you for joining us today and thank you for your continued interest in <unk>.
Good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.