Q2 2021 Preferred Apartment Communities Inc Earnings Call
Good morning, and welcome to the preferred apartment communities second quarter 2021 earnings Conference call. All participants will be in muscle only mode should you need assistance. Please signal conference specialist for pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you may have.
And then 1 on you touched on China. So withdraw your question. Please press Star then 2.
Please note. This event is being recorded 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 second quarter 2021 earnings call.
We hope each of you have had an opportunity to review our second quarter earnings report, which was released yesterday after the market close 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 Mark.
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Then youll 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 to update any forward looking statements. These risks and.
These 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 the global economy and financial markets, 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 the forward looking statement disclosure in yesterday's earnings press release, as well as our SEC filings or press release and other SEC filings can be found on our website as P. A C T S dot com.
The press release also includes a supplemental financial data report for the second quarter 2021, with definitions and reconciliations of non-GAAP financial measures to most directly comparable GAAP financial metrics and other terms that may be used in today's discussion and the reasons management uses these non-GAAP measures.
We encourage you to refer to this information during your review of our operating results for financial performance.
Unless otherwise indicated all per share results that we discuss this morning are based on a basic weighted average share of common stock and class a partnership units outstanding for the period.
I would now like to turn the call over to Joel Murphy go ahead Joe.
Thank you Paul Good morning, everyone and thank you for joining our call today.
You know it is a very exciting time for preferred apartment communities and we appreciate your interest in our company.
I am very proud of our solid performance to date in 2021, and our agile effective and continued tactical execution against our strategic goals.
As we reported just 12 days ago, and as part of our strategy to simplify our business and realign our balance sheet. We closed on the disposition of 5 office building assets and 1 real estate loan investment to Highwood properties for approximately $645 million.
The closing of this strategic transaction, which we first announced on April 19th occurred on time and on the same terms. This.
This transaction could not have gone any smoother from beginning to end and we wish the high woods team the best with these high quality assets.
They were an absolute pleasure to work with.
This closing marks a significant and important milestone for us in our strategic transformation to realign our business and capital investment towards lower Capex higher growth multifamily assets complemented by our grocery anchored retail investments.
We purposely structured our agreement with high Woods, so that we could withdraw the army yards sub portfolio from that transaction.
We have exercised this right and as more fully described in our July 29th press release, we are under contract with Northwood investors, another well respected counterparty to sell that portfolio.
Northwood has completed their due diligence posted an earnest money deposit that is non refundable, except in limited circumstances, and we expect this sale to be completed later this quarter.
This is further evidence of our intent and capability to monetize our few remaining office assets thoughtfully and over time.
For us this significant strategic milestone continues a process we kicked off at the beginning of 2020 to simplify our business enhance alignment with stockholders increased the flexibility of our balance sheet and ultimately achieve a durable and attractive long term growth rate.
Let me summarize our accomplishments and update you on where we are today.
In January of last year, we completed the internalization of our external manager leading to significant cost savings a simplified structure and a stronger alignment of interest with management and our stockholders.
In November of 2020, we closed on the disposition in 1 transaction of our entire student housing portfolio to TPG, another well respected counterparty for approximately $479 million.
Just a few days later in November of 'twenty during a special stockholders meeting our common stockholders overwhelmingly approved our recommendation to amend our charter to allow common stockholders to propose amendments to our bylaws and to reduce the call option on our series a preferred stock to 5 years, both enhancing corporate.
Governance, and improving our long term flexibility of our balance sheet.
With that approval in hand, and with the substantial majority of the net proceeds resulting from the student housing sale, we immediately redeemed and call day in approximately $209 million of our series a preferred stock.
And now with the sale of a substantial majority of our office assets less than 2 weeks ago and the.
The near simultaneous redemption of an additional $221 million of our series a preferred stock we are ready to accelerate our pivot to growth building off of what we believe to be 1 of the highest quality best positioned portfolios in the public REIT sector.
These significant sequential strategic initiatives were carefully planned and scope and scale and were executed with first class counterparties at excellent pricing.
Still steps built upon 1 another and have resulted in a transformative change of our company through simplification capital rotation, a realignment of our balance sheet and an increased focus on our core sunvil multifamily business.
Complex strategic transactions and initiatives did not distract us from achieving solid operational performance to the contrary our strong operational performance allowed us to make these strategic moves quickly.
Conviction.
Now, let me summarize where we are today, our 11255 unit multifamily portfolio is the youngest in the public REIT industry.
Our grocery anchored portfolio is anchored by a market, leading grocers, such as Publix, Kroger and 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.
And for in short we own great assets operated by a first class team of professionals and associates and located in vibrant and growing sunbelt markets.
Our multifamily and retail assets are aligned both benefiting from accelerated migration patterns. Let me discuss a couple of these trends and why we believe they will continue into the foreseeable future.
First with regard to migration patterns sunbelt markets 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.
In the wake of Covid. These trends already in place have continued as people and families that seek more space for living and remote work and remote learning has become more accepted.
In fact, according to U S Census Bureau estimates in our May 7th Costar analytics report among metro areas with populations larger than 750000 people the top 7 metros for nominal population growth in 2020, we're all in the Sunbelt region with Dallas forth worth leading the way.
Availability of talent is an often often cited reason the companies migrate to the sunbelt core.
Turning to the Clarion partners pre Covid April 2019 research piece entitled the rise of the Sunbelt approximately 50% of the country's millennial population currently live in the Sunbelt region and with millennials expected to be around 75 per cent of the workforce by 2030 Sunbelt markets should continue.
You need to capture more jobs as Theyre younger population continues to grow.
The second major factor that supports long term demand for our portfolio is the well documented housing shortage across the country in May Freddie Mac released research note updating their earlier 2018 report, stating that their estimates of the housing deficit had increased by more than 50%.
From their 2018 estimate.
2 are now estimated housing deficit of $3.8 million.
According to Freddie Mac. The major reason for the shortfall has been a long term reduction in single family construction activity and with less available land rising construction costs and increasingly tight labor markets. It is difficult to see how the shortfall lessons in the foreseeable future.
Particularly in our markets, where population growth is so consistent and solid.
This all creates a positive macro and product sector backdrop for us because as individuals families and businesses seek out our sun belt markets. They will need places to live and places to shop for groceries and necessity items.
Now turning to our portfolio our operations remained strong steady.
For our multifamily portfolio second quarter, 2021 average physical occupancy rose to 96, 9% up 220 basis points from the second quarter of 2020, and up 110 basis points sequentially from the first quarter of 'twenty 1.
Year over year, our same store revenue grew 3.5 per cent and our year over year same store NOI was up 6.4%.
This year over year same store NOI increase is not only at the top of the class alongside our multifamily counterparts, but I do want to point out that this year over year comparison is against our positive second quarter 'twenty number. There was also quite good on a relative basis.
This combination points out not only the resiliency of our portfolio in times of stress.
But the opportunity we have to grow in a law when conditions are more favorable as they are now.
I do want to point out a new disclosure in our supplemental that we have included detailing the significant rent growth acceleration, we have seen in our multifamily portfolio this quarter and on through July.
For the second quarter, we recorded rent growth for new and renewal leases 11 of 11, 6% and 5.3% respectively and in July These numbers grew to 21, 3% and 7.5% respectively.
Our grocery anchored retail assets also performed well recording a percentage leased of 91, 1% a 30 basis point increase sequentially from the first quarter of 'twenty 1.
Our core portfolio, excluding redevelopment properties also reported an increase of 30 basis points sequentially from 95, 5% in the first quarter to 95, 8% at the end of the second quarter.
We continue to be encouraged by our leasing momentum and rent achievement in our grocery anchored retail portfolio and the trend line is promising with solid pipeline of additional leasing to follow.
We believe that our grocery anchored retail portfolio is prime to benefit from the strong tailwind is taking place in the grocery anchored sector in the sunbelt.
Our results in both multifamily and grocery anchored retail exceeded our internal budgets and along with an improved outlook for the second half of the year contributed to our upward guidance revisions that John will detail later in this call.
Could not be prouder of the women and men across our entire company and at our properties for their smart and effective work.
And their commitment.
Importantly, our solid portfolio performance has not only allowed us to focus our energy on the strategic transformation over the past year, but also to execute on our growth strategies through external capital investment.
Let me highlight.
In May we originated a $17 million real estate loan investment with Nevers group, a well respected and experienced sponsor that we know well and have invested with before for the development of a 316 unit class a multifamily community in Savannah, Georgia.
Our first investment in Savannah, which is a diverse economy driven by the port of Savannah, which is the third largest port in the country as well as manufacturing aerospace and tourism industries and it fits squarely in our focused sunbelt strategy as part of this investment we received an option to purchase the community.
Following stabilization.
Then in June we acquired the Ellison, a 250 unit multifamily community.
In a dynamic and growing suburb in the Atlanta MSA.
This acquisition resulted from a real estate loan investment we originated in 2019 to fund. This development and is another example of our strategic approach to investing with best in class developers, they build our pipeline and our visibility to future growth of our high quality multifamily portfolio.
Finally, and subsequent to quarter end in July we acquired Alere and Presidio, a 231 unit multifamily community in Fort Worth, Texas. So our first investment in the Dallas Fort Worth Metro area.
As I mentioned earlier, the DFW metroplex enjoys excellent demographic economic and rent growth trends and is a market that fits squarely within our sunbelt footprint.
In the aggregate. These 3 transactions represent approximately $135 million of investment and comprise just shy of 800 sunbelt multifamily units.
This is in addition to the nearly 1300 units we purchased last year.
And we have a solid pipeline of potential investments and we intend to continue to grow while staying true to our strategic focus on premier multifamily assets in high growth Sunbelt markets now, let me turn the call over to John John.
Thanks, Joe let's start with our high level second quarter results, then we will discuss <unk> core <unk> and <unk> in more detail and finally I'll walk through our updated guidance for the second quarter 2021 Pac generated revenues of $118.7 million <unk> 23 per share.
Core <unk> 33 per share.
<unk> 17 cents per share I.
I would like to remind everyone that our sale of the student housing portfolio last November was the primary reason for the decline in revenues from 'twenty to 'twenty to 2020, 1 on both a quarterly and year to date basis.
As we noted in our SSD revenue would've grown by almost 7% without the sale of the student housing assets.
With respect to core <unk>, which we believe is our most significant metrics. The second quarter 2021 result of <unk> 33 per share compared to the prior year quarter's 21 cents per share reflects the impact of several items.
Lower preferred dividends accounted for 10 cents per share improvement lower interest expense and higher purchase option termination revenue each accounted for a 5 cents per share improvement for.
Finally improve property operations accounted for 3 cents per share improvement in our core F O.
These benefits were offset by the loss of 8 cents per share related to the previously discussed sale of our student housing assets.
With respect to <unk> or <unk> 17 per share for the second quarter 2021, as compared to <unk> <unk> per share for the second quarter of 2020 was impacted by the lower preferred stock dividends student housing sale lower interest expense improved property operations result, and the purchase option termination revenue described above.
In addition, the company benefited from increased receipts of accrued interest of 3 <unk> per share.
So bill has already discussed our operational activity and the impressive growth trends, we are experiencing in our multifamily portfolio, while the rent growth and occupancy trends are encouraging for our future results. Some of the real estate loan investment transaction that closed in the second quarter were expected in the second half of 2021.
This means our earnings have shifted forward somewhat and that our second half results will now be more balanced with our year to date numbers.
With respect to our balance sheet and capital stack, we continue to work to realign our balance sheet to support our future growth. Our continued intend is to balance our capital 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 goal again in the second quarter.
The preferred stock issuance was approximately $38 million offset by redemptions totaling approximately $48 million or redemptions. This quarter were settled in cash again, when we pay our redemptions in cash there is a deemed dividend which impacts our <unk> results. We expect to continue to see an impact from deemed dividends going forward.
Beyond the normal rate of redemptions as Joel mentioned, we executed a call of approximately $221 million on all of the preferred series a stock available to be available to be called using proceeds from the office transaction.
Since the closing of the student housing portfolio last year, we have called or redeemed over $550 million worth for our preferred series a stock for almost 28% of the amount outstanding as of 932020.
This quarter, we also issued common stock under our ATM program for raised just over $15 million in the program at an average price of approximately $10.47, a share while not a large capital raising effort is important to remember that we have access to the public markets through a variety of different channels and feel good about our ability to raise capital going forward to fund a variety of.
Efforts, we are undertaking raise.
Raising common equity even at a small level has the added benefit of continuing our effort to rebalance our preferred and common stock ratio and we will continue to use common stock raises if and when they are attractively priced <unk> strategically valuable.
Same program is also particularly efficient from a cost standpoint, as a company pay significantly less than we would in a fully marketed offering.
Let me now turn to our outlook for the balance of 'twenty 'twenty..1 we are revising our guidance today to reflect the impact of the many operational and capital items, we've discussed for a <unk>.
Recent call a preferred stock and improving trends in our multifamily portfolio to the early closings for some of our real estate loan investment assets with all of these variables factored in we now expect core <unk> per share in the range of 90 to $1 for the full year 2021.
Underpinning this guidance for the following updated assumptions same store multifamily NOI growth of 5 per cent to 7%.
We are raising this range from our prior range of 2 per cent for 3%.
$300 million of $400 million of acquisitions of multifamily properties, which is unchanged from our previous guidance and new real estate loan investment originations of 50 million to $100 million, which is also unchanged from previous guidance.
This guidance continues to include the impact of purchase option termination revenues and seasonal reserve reversals as a result of real estate loan investments being repaid which in combination with the accelerating growth in the multifamily portfolio is helping to offset the dilution of the office portfolio sale in the short term the.
The increase in purchase option revenue represents a significant acceleration of payoffs and acquisition of properties. The originally contemplated in 2022. This acceleration will have a material benefit to our results in 2021 to the detriment of the results in 2020 to these onetime items will be very difficult to replace going forward as we have fewer parts.
This option termination revenue opportunities and our investment loan portfolio today.
We expect the dilution from the office transaction will be more fully felt in 2022, but we are focused on deploying the proceeds accretively and strategically as possible to limit that dilutive impact. In addition to the redeployment of capital the organic growth in our portfolio reflects the strength of our markets and our investment thesis and will also offset some of the dilution for.
For the office transaction, we also benefit from the elimination of near term future Capex associated with our office portfolio, which can now be utilized for higher yielding opportunities.
I would like to emphasize the sale of the office portfolio in the call up for stock Qual foundational to our strategy going forward does have a muting impact on our earnings in the near term our results put us in an interesting position clearly the strength of the operating property portfolio and its operations is driving performance above our initial guidance at the start of the year.
We'll be monitoring the aggregate impact of these items and their net result closely as we work our way through our 2022 budget process already underway.
In addition to the items mentioned above we have a large investment loan in California that was initially affected by the pandemic shutdowns and supply chain interruptions. This law.
Loan has performed very well through the turmoil and continues to be current during the pandemic, we reserved against this loan as the construction delays in loan maturities created some concern around the completion timing lease up in valuation of the asset.
Pleased to report that the asset has come through the pandemic very well and its lease up has continued to improve.
Our borrowers now considering paying off alone in 2021 versus the loans maturity in quarter..1 of 2022.2021 payoff would have the effect of further pulling earnings expected in 2022 into 2021 and exacerbating the dilution impact from the office portfolio. In 2022, we will update this guidance, if as and when it becomes appropriate.
I'd now like to turn the call back to Joe for his final thoughts Joel.
Thank you John for that Great description.
Before we begin Q&A are.
There are 5 thoughts I'd like to leave it here.
First.
We have created a more focused portfolio improving our long term access to capital to facilitate sustained growth and enhancing alignment with our stockholders.
Second our markets are growing in population and in jobs and the structural shortage of quality housing, particularly acute in the sunbelt provides great visibility into the future.
Third in the last 9 months since the student housing sale, we have redeemed over $550 million of our series a preferred shares which we believe will provide greater flexibility for our balance sheet and enhanced access to capital.
Force.
We have demonstrated the desire and capability to develop transformative product type and capital strategies and the ability to advance those strategies by executing complex transactions, all while maintaining our focus on key operational metrics and organic growth.
Fifth we are positioned for growth and have a multi pronged strategy to source and control accretive multifamily opportunities in our sunbelt markets to grow into next year and beyond.
We will keep you updated as we progress through the balance of this year and of course, we always appreciate your interest in pack now.
Now I'll turn the call back over to Paul Paul.
Joe at this point, we'll go ahead and open up for our Q&A session.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone.
A speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2.
Time, we will pause momentarily to assemble our roster.
Our first question will come from Michael Lewis with true Security. Please go ahead.
Alright, great. Thank you I wanted to start by asking about this big increase in the in the same store NOI guidance.
What was the biggest surprise over the last 3 months that prompted you to go to 5.5% to 7% from 2% to 3%.
Is it as simple as surprise as far as.
The amount of <unk>.
Rent increases that that the.
The tenants have been able to swallow here at 20% in July.
Or is there anything else going on there.
Changing the same store guidance.
Yes. Thank you Michael this Joel how are you doing.
Listen John May have an add on to that but let me let me just modify a little bit when you word you say surprised it wasn't like we were just kind of sitting around with Oh, My gosh look what happened.
It wasn't that at all it was just that we have been seeing significant trends. There. We're just now probably starting to get in place when we last revised our guidance.
So that guidance was based on what we saw at the time and as we said in our S. F D and as I said in my comments and it's really as you are seeing in a lot of places, particularly in the sunbelt.
You know this there is significant acceleration on new lease replacement as.
As well as on renewals and we articulated those in our S. F D capping out in July which isn't even when seen in our third quarter numbers of 21, 3% on new leases. So so it was a rapid acceleration of those trends and.
And how we <unk>.
Management believes in our operating believe can pull forward.
Which is why we raised our guidance.
Okay.
I have kind of a 2 parter on cap rates I wanted to ask about acquisition cap rates for multifamily, obviously theres a lot of competition in your markets and I assume those are getting.
Pretty low.
And then second day.
Should we assume for the armor yards cap rate that that's consistent with the high what's portfolio cap rate or is it materially different than that.
So let me try to take those 2 you know Michael you know for largely for competitive reasons and also just always trying to manage our real estate tax exposure you know we don't.
We don't report out cap rates publicly but listen you're right. There is no doubt the environment is certainly competitive and yet we're seeing cap rate compression now there's no doubt about that.
And but I think a key component from our ability to make the acquisitions, we do as the pipeline that we create.
With our partners.
We understand these assets so well when they come out it's more than just it's X percent leased I mean, the Allison I think leased up to a 100% and plus or -6 months.
And it wasn't just that that would be something maybe anybody can see but we saw the tone of those residents when they came in and what they were saying about things and it just gives us the ability to really I think.
Field, what we think is going to be good rent growth range.
Rent growth perspectives and.
And we've been wisely marrying it up with attractive attractive rates.
On the property level debt is for.
For as.
As far as armor yards.
We'll talk about all of that when that closes after the quarter, but I think the the thing that probably goes without saying, but I'll go ahead and say it.
You know that was part of that transaction the hardwoods people and I said this they are terrific.
Really understand their strategy and the army yards portfolio is a terrific creative office portfolio, but it was outside what they did but inside this strategy for what others did in our transaction with them. They are willing to acquire it at a certain price, but we did the ability to think that we knew that that would be.
Quote our downside if you will which is still a pretty good place that we had the right. If we wanted to to market and sell it for more so I think it probably goes without saying, we would not have exercise that right to sell it, especially terrific counterparty of Northwood, which this is inside their strategy is.
The economics of that transaction went better than what we had inside hardwoods.
That makes sense and then just 1 more if I can.
Did you guys share.
What's in the guidance in terms of purchase option termination revenue and what that is versus what the assumption was previously I'm just trying to understand maybe what this relative headwind versus 2022 earnings is kind of a day.
Hey, Michael This is John we did not share that specifically.
Because obviously some of that is in process from the quarter and we certainly reported that.
And some of that is.
Pipeline, which we just don't have as much visibility on and that's 1 of the reasons why we've been cautious about it so.
Don't have any more than what we than what we put in the guidance.
Okay. So you can't.
Formulating this 90 to 1 dollar you can share how much of that is as termination income.
No.
Okay alright, thank you.
Thanks, Michael.
Our next question will come from Jason Stewart with Jones trading. Please go ahead.
Hi, Thanks for taking the question and I think the accounting questions had been mostly answered congratulations on the capital structure progress in <unk> and beyond.
I guess 1 question in terms of strategy as you optimize the capital structure and lower the cost of capital how does that impact your acquisition strategy and can you maybe share some thoughts on the way shareholders should think about the return going forward given those changes in the capital structure.
So hey, Jason Thanks for the comments about the quarter. Good good to hear from me I appreciate your interest.
Let me make sure I really before I start to answer let me make sure I really understand exactly the question I wanted to I know you were talking about our acquisition strategy going forward. Just once you articulate formats I'll make sure I hit it I'm pretty sure on that.
Well I guess as you think about what you've done with the capital structure the cost of capital should be coming down how does that impact the way you think about acquisitions.
Moving forward and if you could quantify that great. If not just strategically how do you think about using a lower cost of capital.
When you think about multifamily acquisitions, where its course for and can we tell them great.
Got it I thought thats, what I thought that just.
So listen so certainly with these positive changes you know we look at these acquisitions.
We look at them 3 primary ways.
First we look at accretive.
Creative short term midterm long term over the whole period and you are right. When you as you work and reduce your overall cost of capital than your ability to have accretive transactions as improved right.
So that's definitely helpful in the multifamily space and would be in the grocery space.
As well.
Well, we obviously like about the multifamily in particular, which bodes for a rotation as office, which you've talked about before is rotating out of high capex.
Into low capex and into a lower growth into a higher growth. So obviously the growth of the portfolio on the multifamily is the second prong of that which gets us into our IRR analysis, and we will look at that we'll look at that it both on a relative basis to other deals that we've done.
Looking at our poorest mode post mortem of deals that we've sold and said you know what kind of IRR do we think over time, we're not really an IRR buyer because we don't have a limited life, but we do look out over the horizon to kind of see how that.
How that matches up and the other place we look is price per pound.
You know, we look at the cost per unit.
We did that on the retail as well because you want to look at your AUR relate to replacement cost.
There was 1 asset that we really liked that we did the mezz on their rotated out of this year and.
We weren't alone the market loved it and it just <unk>.
It just hit a price per pound or price per unit that we just said you know it based on the numbers and the rents they are getting and that probably works, but it just felt funny to us just felt like a little too much altitude.
So we look at it those 3 ways, but the real point of your question was the improvements we down on the balance sheet does that make it helped hold to make accretive acquisitions to answer certainly is yes.
Okay. Thank you for the color I appreciate that.
I feel like there was a second I'm sorry for your question.
I just I always go back to Jason I felt like there were always want to make sure. There wasn't a second part for that question that I missed but if it was Jason you can come back to us.
Yes, Sir good to go thank you.
Our last question will come from Gaurav Mehta with National Securities. Please go ahead.
Yes, good morning.
First question on your loan investments you've talked about extra additional payoffs of certain loans.
Acquiring from 1 of the properties that would have been acquired in 2022.
He can provide more color on what's driving the early payoffs of those loans.
Yeah, Let me let me talk on this and then maybe John I think will also hit it he's got some thoughts I'm sure.
No.
Garb. The biggest thing is just what's going on overall in the market we have.
And if you kind of look at the history of the real estate investment loans that how long there al.
Typically those loans might be 36 to 42 months and that doesn't mean, they all stay during that time, but you've got to build it you gotta do at lease up as I mentioned, the Allison thing went full lease up and 6% to 100% in 6 months well based on what's going on with cap rate compression as you can appreciate these developers are saying.
These are they're not long term older. So they're wanting to go to market. So I think it's the combination of the fact that the operational metrics in the multi space.
And particularly in the Sun belt.
And the assets that we underwrite we knew when we made these loans that these were going to be good properties and it turns out day in fact have been so they've come to market faster I would say that's probably the primary reason, but John do you have anything else 1 of the things to think about clauses piggyback on Joes comments in addition to.
Leasing up faster developers are also bringing the properties to market pre stabilization and based on how competitive the market has been.
That's really been accepted and so.
When you combine leasing up faster and coming out on a pre stabilized basis that adds up to decent acceleration that we're seeing here.
Yes, and that's E. John is exactly right net is a big piece of it in net actually really does point out something I referenced.
A second ago when that was.
We really like particularly in our managed properties that visibility to that normally you would say pre stabilization are you taking risk.
Before full lease up and stabilization will win here the actual manager sitting out there taking leases once a week once a day hopefully more than that just that people are coming in and you just have a better sense of well okay. We're at X percent leased and we have great visibility towards stabilization.
Okay great.
Question on your yes.
Our balance sheet you have negative.
The issuance of preferred.
Stock in second quarter.
Earlier in the call I think you had said that maybe that sort of expecting going forward should.
Should we expect that it would be using common stock to fund that negative issue and maybe provide some more color on how do you expect to fund the net.
For sure and going forward.
Yes, thanks for us so we have the ability to for.
Fund redemptions with common stock or with cash that's the company's option.
And we just we take whatever is the strategically and financially the most beneficial at the time.
Obviously, the stock moves around pace of redemptions goes up and down so it is difficult to predict.
Whether we will use cash for stock that's that depends a lot of variables that we don't control.
Okay. Thank you.
Thank you for all I've always good talk to you.
Okay.
Our next question will come from Barry, Oxford with Colliers. Please go ahead.
Great. Thanks, guys.
Ill or John just touching on the Mezz.
Again.
When you're looking at the mez market going forward, what is the inventory sort of look like as far as availability to make new investments.
<unk> number 1 and number 2 have the returns changed on on on the Mezz financing.
Hey, Barry good to hear from me and thanks for your interest in us.
Yeah.
And I would say I as to the terms and other terms themselves have not materially changed.
Certainly recently.
Of a material nature.
They are less purchase option discounts.
And they were narrower that's kind of evolved over the last 5 years.
How those have come about so, but but the actual pay rate and the accrued ray.
While that might bounce around here, a little bit here, a little bit there overtime not significantly.
We've also been keeping.
Ourselves in a good spot and it's important to us banking share Theres a good piece of of equity developer equity ahead of that.
I would say those in as far as overall inventory, we've given the guidance of what we have out there for the year, we feel good about that guidance and I'll tell you. The guys are hustling, they're out there always talking you know, we love getting to do our second group with Nevers, That's Jim borders.
1 of the best developers in this region.
We added krossel into our portfolio, we still done multiple deals with 2 will occur pappas.
And then the and then the folks Oxford and <unk>.
Newport and others that we've done business with all along.
But we do have a definitely stated strategic goal.
Well actually tactical goal to expand that group to other developers and then this 1 that we established a group that John.
Asics and Jeff Sherman, who runs multifamily have noted known for a long time cash.
Catalyst <unk>.
Terrific developer.
<unk> got a great deep pipeline they were the ones that developed terrific property called the Menlo in Jacksonville that we did the mezz on and we acquired it.
So expanding those opportunities with these first class scalpers, but getting it out to new ones.
And getting out on the road and talented people like most of these developers.
Some may choose not to do that structure, but they like us as a partner because we get it we understand leasing we understand theres ebbs and flows.
We understand what it's like to be developers of multifamily.
So we're optimistic but it's a big it's a big thing for US moving forward is to keep filling that pipeline up.
Perfect.
Thanks for that color.
Go ahead al.
No I think.
From a structure.
Hey rate standpoint, I mean, I think everything has been relatively stable theres certainly been competition in the market. The biggest place that we've seen changes as Joel mentioned as the purchase option discount.
And that's been that's been where there's been the most pressure everything else is held relatively constant to joel's point, it bounce around a little bit but.
It's really the purchase option discount where we've seen.
Where we've seen a lot of pressure.
Okay great.
The color on that just trying to get a sense of.
When you guys backfill what type of terms that you'd be getting but that's that's great cash on it.
Gary very 1 group that.
I also wanted to interest TDK.
1 of the 1 of the things that we did once it was okay to get out and or add a little bit.
As a result of Covid was jumped on up to Nashville.
C TDK and what we like about them as a counterparty on the Mezz is not only day developed terrific properties. They are also a general contractor, that's actually where the routes and so when all this supply chain disruption lumber prices, all that stuff and everybody, losing their minds about stuff like that the TDK gas we're just.
They were just I wouldnt call them chill about it but they were just very relaxed because they understood it they've seen it before.
And we like that we like that kind of vertical integration of that kind of a development.
Perfect No all that makes sense.
I appreciate it.
Okay.
Our next question will come from Aaron Hecht with JMP Securities. Please go ahead.
Hey, guys. Thanks for.
Taking my question.
On your retail assets, how would you describe the trend in demand.
Obviously occupancy is down a bit year over year, but it looks like it's stabilized the last couple of quarters.
Is there as an inflection point then hit.
And do you think theres going to be acceleration going forward.
Yeah, I do think.
We did that the only being is I think thats, a very good way to characterize it erinn.
We view that that you say that loss in occupancy here.
Year over year than what wed like it is more important is what she said is the trend line there.
The sequential improvement.
<unk>.
Each little percentage, if you look at us historically, where we've been leased I look forward to getting to that spot and if you look at other retail peers that are out there everybody seeing leasing momentum in their markets and we are too.
So we're kind of feel like were working off a low base, adding.
Adding in those new deals keeping them renewed the other thing it's kind of interesting to look at us is.
We didn't have the material negative impacts that a lot of people did.
And but what we do now feel.
Is that while we might have kind of had some hangers on that may be paid us rent, but maybe weren't terrific operators, we now feel the confidence to replace them with better operators and a better rent.
And that's the that's the way we see the pipeline as it goes on through the rest of the year.
So youre seeing.
Growth in the number of potential tenants that are showing up interest in spades.
Uh huh.
Over the last several months and even.
<unk> been continuing going going forward.
I assume that these are smaller.
Square footage tight spots within your retail centers.
Some more more specialty type tenants.
No Youre right. This is this is that we always call. This hand to hand combat in the trenches on these small deals. It takes it takes as much time and effort to do a 2500 square for deals at -10000 square foot deal, but yeah, and that's actually kind of 1 of the beauties of the portfolio is grocery anchored so you've got the big anchor and a big chunk of the revenue.
Who comes out of that so yes. These are largely smaller deals, but this kind of goes back to air in the leg of the stool that I was talking about in the context earlier.
To answer Jason's question, we also looked in retail historically on the <unk> for assets that we acquired the price per pound than when we bought that was a big marker for us. So what that meant is that our rent structure is relatively low. So you don't have to be really good at math to figure out.
And it's a lot easier to grow off of $15.18 rent than it is off of $45 rent.
And that's in fact, what we're seeing but to answer your question of more people showing up they are.
Really what happened is just do a little remembrance back in November and December of last year. We found that people are kind of sticking their head up out of the out of the ground kind of tone of things had they feel but that was really only happening and maybe our Georgia and Florida assets.
Moved into the first quarter.
That spread through the rest of the portfolio in the sunbelt to the other markets and know what it's spread to as those retail just somebody just don't walk in and sign a lease and then move in 20 days later.
What they do is you've got to have an idea. They got appraisal location. They put together a business plan they sign an LOI.
On a letter of intent signed lease due to the build out hire people open. It so it's a little bit more of a trailing thing before the income hits, but.
But definitely people are showing up and they're showing up with good attitude like Wow. This is a good shopping centers I would like to be a part of it.
And 1 more if I may we've talked before about the potential to do redevelopment.
It sounded like different property type.
Within your retail centers is.
Is that something you've looked into more further down the road any kind of update on that potential.
If there is there any kind of.
Return profile that you'd be ready to share.
Yes, we will we will look forward to share in that but this is a definite as they say in the NFL a point of emphasis with US. We've got this 1 of the things I've really loved watching when you go through an event like Covid everybody's got to bring their game every day and everybody has got to be willing to play a.
<unk> that theyre, not really comfortable or used to I think 1 of the best things Ive seen is here. We've got this incredibly talented multifamily group this incredibly talented retail group, but yet historically, they rarely talked about it because they were often their own silo executing their own strategy is really well.
We will know the business leaders of those meet discuss and say how can we help each other not only just on due diligence, but how can we do things together.
And that is definitely taking shape that is a point of emphasis and we look forward to sharing.
Encouraging things as they are ready.
Appreciate the thoughts guys. Thank you.
Thanks for.
Ladies and gentlemen, this will conclude our question and answer session.
To turn the conference back over to Paul Cowan for any closing remarks.
Thank you for joining us this morning and for your interest in preferred apartment communities.
Any follow up questions feel free to reach out to us and we want to wish you a good rest of your week. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.