Q3 2021 Preferred Apartment Communities Inc Earnings Call
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Good day and welcome to the preferred apartment communities third quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May press.
Star then one on your telephone keypad and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Paul Cullen Executive Vice President of Investor Relations. Please go ahead Sir.
Thank you for joining us this morning, and welcome to preferred apartment communities third quarter 2021 earnings call. We hope each of you had an opportunity to review our third quarter earnings report, which was released yesterday after the close of the market in a moment I'll turn the call over to Joel Murphy, our Chief Executive officer to share some initial.
Our thoughts and then Jon Isaacson, our Chief Financial Officer will share additional details about financial metrics and capital markets. Then Joel will return to conclude our prepared remarks.
Following Joes 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.
Actual events and results may differ materially from these forward looking statements and the company does not undertake at 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 operate.
The global economy and financial markets.
And our ability to mitigate the impacts arising from COVID-19, and those include in our SEC filings.
For a discussion of these and other risks and uncertainties you should review our forward looking statement disclosure in yesterday's earnings press release, as well as our SEC filings or press release and other SEC filings can be found on our website S. P. A C. A P. T S dot com. The press release also includes our.
Rental financial data report for the third quarter 2021, with definitions and reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures and other terms that may be used in today's discussion and the reasons management uses these non-GAAP measures. We encourage you to refer to this infer.
<unk> during the review of our operating results and financial performance.
Unless 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 Joel Murphy.
Joe go ahead.
Thank you Paul Good morning, everyone and thank you for joining our third quarter call today.
Third quarter was a tremendously busy highly productive and transformative quarter for Pac after closing on the sale of the vast majority of our office assets during the quarter, we quickly executed on our already envision strategic and tactical plan to redeploy the net proceeds from that sale and from several.
<unk> other capital recycling initiatives that I'll highlight in a moment.
To that end during the quarter, we completed the redemption of approximately $306 million of our preferred stock offerings, we completed $269 million of multifamily acquisitions, and we originated a new $23 million multifamily real estate loan investment.
Subsequent to quarter end, we have originated two additional multifamily real estate loan investments totaling $26 million.
All of these new capital investments were made in high quality class a multifamily communities in our target Sunbelt markets. In addition to these strategic and tactical transactions, we posted another quarter of solid operational performance across the entire platform.
There are more details in our supplemental but here are the highlights of these capital redeployment investments.
In July we acquired a layout and Presidio <unk>, a 231 unit class a multifamily community in the Dallas Fort Worth MSA.
In August we originated a new real estate loan investment of approximately $23 million in connection with the club drive apartments to it.
A planned 352 unit class a multifamily community in the Atlanta MSA.
In September in the space of just one week, we acquired three separate class a multifamily communities in three separate transactions, adding an additional 797 units to our portfolio. The Anson the Kingston and Chesnut farm represent key additions to our presence in.
The Nashville, Washington, D C and Charlotte markets subsequent to quarter end in mid October we originated a new real estate investment loan of approximately $17 million in connection with Menlo to a planned 337 unit class a multifamily community in Jacksonville, Florida.
By the way Menlo too is adjacent to the mainland of 332 unit community that we acquired in December of 2020.
Just last week, we originated an additional real estate loan investment of approximately $9 million in connection with the 246 unit class a multifamily community also in the Atlanta MSA.
In the aggregate these seven transactions.
<unk> represent approximately $318 million of capital investments in our multifamily business.
And over the last 19 months, we've acquired nine class a apartment communities in our target sunbelt markets totaling over 2500 units. We've also sold two noncore multifamily assets. So we have added about 1800 gain or said differently, 18% of external growth to now having us over.
12000 units across our sunbelt multifamily portfolio.
Now more details are contained in our supplemental but here are the highlights of the major components of the sources of our capital for these new multifamily investments.
In July as previously discussed and disclosed we sold five office properties and one office real estate loan investment to Highwood properties for gross proceeds of $645 million.
Also in July we sold vineyards are 369 unit multifamily community located in Houston, Texas, and the oldest asset in our portfolio for gross proceeds of $62 million.
Then in September we completed the sale of the armor yards sub portfolio.
For gross proceeds of $79 $5 million your member and as previously announced we purposefully structure our agreement with highways. So that we could withdraw the army yard sub portfolio from the high which transaction because we felt that we could draw a higher price for this sub portfolio through a separate offering to a <unk>.
Different pool of investors since this style of what is known as creative office would appeal to a different pool of investors versus the traditional core office buildings that we sold to Highwood <unk>.
We exercised that right and we closed on that sale on September eight and a price nearly 11% higher than the price in the high Woods agreement.
And finally, we received payoffs on multiple of our real estate loan investments across six properties totaling approximately $104 million of principal and $10 million of accrued interest.
In the aggregate the sale of these nine non core assets and the pay off of the seven previously initiated real estate loan investments generated $407 million of net proceeds after repayment of property level debt and closing costs.
These asset sales, we're purposely planned and they were well executed with excellent counterparties at very good pricing taken together with our multifamily acquisitions and newly originated multifamily real estate loan investments. These well executed transactions demonstrate our ability to recycle capital and have high capex low.
With assets and redeploy capital into low Capex high growth multifamily investments, while also improving our balance sheet through the execution of strategic calls of our series a preferred stock.
So over the last two years, we have overhauled our portfolio composition, a rotating investment out of noncore student housing and non core office asset and into our core multifamily business. These significant and sequential strategic initiatives were carefully planned in scope and scale and we're all.
Heated with first class Counterparties at excellent pricing.
We crafted a well planned redeployment strategy and we execute it rapidly and effectively.
These steps built upon one another and it resulted in a transformative change of our company through simplification capital rotation, a realignment of our balance sheet and increased focus on our core sunbelt multifamily business.
These complex strategic transactions and initiatives did not distract us from achieving solid operational performance.
Say to the contrary our strong operational performance allowed us to make these strategic moves quickly and with conviction.
Let me summarize where we are today.
We believe that our 1200 unit multifamily portfolio is the youngest in the public REIT industry with an average age of only six one years, our grocery anchored portfolio is anchored by market, leading grocers, such as Publix, Kroger and Harris Teeter and HEB our performance throughout the pandemic is a <unk>.
Estimate to the high quality nature of our assets with rent collections at or above the top of our multifamily and retail peers in short we own great assets operated by a first class team of associates associates and located in vibrant and growing sunbelt suburban markets.
Now since the inception of our company just over 10 years ago, we have chosen to focus on the sunbelt because of the long term fundamental tailwind we see here.
First with regard to migration patterns sunbelt markets have enjoyed solid growth for decades benefiting from business friendly regulatory structures lower cost of living and lower taxes and drawing in people primarily from the northeast and the Midwest.
We expect these trends to continue as the rise of remote work and remote learning have enabled people to move to lower cost areas with more space for living.
These population inflows and should continue to drive sustained demand for new housing construction as well as for the retail assets that are needed to support that larger population.
For the last several quarters I've shared with you examples of third party research pieces about these and other macro trends affecting our markets.
You'll remember in the first quarter I talked about the North American Van lines 2020 migration report <unk> analysis of postal data the second quarter, we talked about U S Census Bureau, Costar, Clarion partners and Freddie Mac, particularly about the housing shortage. So this quarter I want to share some insights from U L. I F.
Pwc's emerging trends in real estate report that was just issued this past October the following language that I'm going to share with you is pulled directly from this report.
First the dramatic escalation in the number and frequency of people working remotely during the pandemic are looked at the comp looks to become permanent.
<unk> share of the workforce.
From a daily commute remote workers will enjoy a broader range of potential residential locations with profound impacts on individual metro areas and property markets at the same time, the pandemic has accelerated some existing transit favour greater suburban growth and vitality.
The permanent moved to work from home, whether remote or hybrid working is perhaps the trend with the greatest impact enabling numerous workers. Many of them are fluent office workers to consider a broader range of residential locations for many of them the choice will be more suburban.
Second as to the housing shortage and again quoting from the U L a and Pwc emerging trends report.
Housing analyst calculate the current level of long term under building in a range from 2 million to 502, excuse me 2 million two 5 million total housing units.
Costs of both for sale and rental housing are rising much faster in secondary and tertiary markets as people moving away from pricier Gateway markets did up residential prices in the smaller destination markets.
Millions of potential homebuyers are priced out of the market because home prices are higher than they can afford in a large and growing number of markets and prices continue to rise faster than wages.
That give homebuyers are also burdened by the downpayment of housing as prices continue to rise.
With so many prospective homebuyers priced out of the for sale market and thus continuing to rent upward pressure on rents will likely continue.
Third and again quoting from this emerging trends report.
The popularity of large gateway markets continues to wane in favor of generally smaller smile markets that extend across the southern half of the country until recently dismissed as secondary investor markets. The Sunbelt Metro areas account for the account for the eight top rated U S markets to watch and over.
Raul real estate prospects and this latest emerging trends survey.
Of the eight operated markets pack ons assets in six of those eight.
So really do urge you take a look at this detailed and well research report that is issued annually. It is always an interesting and informative Reed.
So now turning to our Sunbelt focus portfolio, our operations remained strong and steady for our multifamily portfolio third quarter 2021 average physical occupancy rose to 97, 2% up 160 basis points from the third quarter of 'twenty.
And up 40 points sequentially from the second quarter 'twenty one.
Year over year, our same store revenue grew seven 5% and our year over year same store NOI was up eight 8%.
Same store revenue increase is right up towards the top of the class of the multifamily REIT.
This year over year same store NOI increase is not only solidly in the upper end long side, our multifamily peers.
But also want to point out that this year over year comparison is against our slightly positive third quarter 'twenty same store NOI number that was also quite good on a relative basis against our peers in the third quarter of 'twenty.
This combination taken together points out not only the resiliency of our portfolio in times of stress.
But the opportunity and ability we have to grow rents and NOI when conditions are more favorable as they are now.
And our second quarter release, we began sharing some rent growth statistics.
Now for the third quarter, we'll share those again and then we achieved rent growth for new leases of 24, 1%.
For new leases and eight 8% for renewals for a blended 15, 6% increase.
This positive trend for the quarter has continued into October and these numbers have actually grown to 25, 6% rent growth for new leases and 13, 3% renewals for a blended 18, 6% increase.
We believe that this third quarter and October rent growth performance and numbers are at the very top of the multifamily REIT sector.
We also believe that our suburban sunbelt grocery anchored retail portfolio's primed to benefit from the strong tailwind is taking place in the grocery anchored sector and in the sunbelt generally.
Our portfolio continued its strong momentum during the third quarter.
Demand for space in our centers has continued to increase every quarter as we executed over 40000 square feet of new leases and approximately 98000 square feet of renewals.
Attractive spreads.
Year to date, we have signed approximately 108000 square feet of new leases and 355000 square feet of renewals our renewals spread trend has increased sequentially. Each of the last four quarters as we continue to capitalize on our portfolio's strong fundamentals.
Our existing tenants and new concepts that are seeking space and are necessity based centers recognized the benefits of having a high performing market dominant grocer anchoring their center.
Further our leasing pipeline of new tenants that are at least were enacted NOI has never been larger with significant NOL asset to follow once these leases are signed and these tenants get open for business.
Our core.
<unk> portfolio has a very high percentage lease, which you can see of 95, 4% as of September 30, and you may have noticed that this is a 50 basis points decrease from last quarter.
This decrease was almost entirely driven by 119000 square foot tenant which comprises less than one half of 1% of our core portfolio that vacated one of our centers.
This departure was actually underwritten at acquisition and actually will create a strategic backfill opportunity for us as we replace a dated concept with a stronger tenant or tenants that will drive significantly more traffic to that center.
Our results year to date in both multifamily and grocery anchored retail have exceeded our internal budgets and along with an improved outlook for the remainder of the year contributed to our upward guidance revisions that John will detail later in the call and is contained in our supplemental.
Yeah.
Overall I have to say, we could not be more pleased with our team's execution through these complex strategic transactions and initiatives all while in the midst of a global pandemic and I want to thank every member of the Pac team for their contributions not only do they help us navigate a broad organizational shift.
Unlocked value.
But they continue to drive results at the ground level and deliver exceptional performance on leasing and capital reinvestment activity every quarter.
So as we sit here today, we feel better than ever in the strength of our platform and look forward to growing our cash flows and creating long term value for shareholders into 'twenty two and beyond.
So now let me turn the call over to John John.
Thank you Joel.
Wanted to start with our high level third quarter results, then will discuss <unk> fourth.
<unk> and <unk> in more detail and finally I'll walk through our updated guidance that Joe mentioned.
The third quarter 2021, Pac generated revenues of $111 million.
<unk> of negative <unk> 31 per share.
<unk> of <unk> 28 per share and <unk> 40 per share.
I would like to remind everyone that our sale of a student housing portfolio last November as well as our office sale in July that Joe just talked about were the primary reasons for the decline in revenues from 2020 to 2021 on both a quarterly and year to date basis as.
As we noted in our supplemental revenue would've been almost 8% higher without the sale of the student housing and office assets with.
With respect to <unk>. The third quarter 2021 result of 28 per share compared to the prior year quarter's 26 per share reflecting the impact of several items. As previously mentioned <unk> was lower by 14 per share due to the sale of our student housing and office assets, which flows through to core <unk>.
Lower preferred dividends accounted for 13 cents per share improvement in core <unk> finally improved property operations accounted for a six cents per share improvement this quarter.
With respect to <unk>, we generated <unk> 40 per share for the third quarter of 2021 as compared to <unk> <unk> per share for the third quarter of 2020.
Beyond the items listed above for core there was an aggregate of 22 per share and purchase option termination income and accrued interest received this quarter is an excellent example of the Lumpiness. We have discussed in the past related to our real estate loan investment program and our receipt of accrued interest and purchase option income.
As a reminder, our accrued interest and purchase option termination income related to these loans has received when the deal sells to a third party or we exercise our purchase option. The timing of these can be hard to predict.
All of these factors can drive variability in our earnings from quarter to quarter, the purchase options and termination fees have been integral parts of our strategy to date and our loan investment program remains our most accretive investments sleep.
Our lending strategy has already helped to generate attractive returns, but also provides us with a pipeline of potential multifamily acquisitions due to the purchase options, we have and the associated discounts that accompany those options to date as well as great visibility into transaction activity across our markets.
Generally speaking as the multifamily market has improved and pricing is tightened for assets, we have seen a meaningful acceleration in payoffs and conversions of purchase options in our real estate loan investment program over the course of this year, we have seen for loans pay off that resulted in purchase option payments to the company totaling almost $10 million. In addition.
And we have seen three loans convert to owned assets through the execution of the purchase options or a right of first offer to.
To highlight the profitability and accretive newness of the real estate loan investment strategy, Let me offer some high level statistics on the deals that have come full cycle. This year.
We've had real estate investment loans pay off this year for a total of approximately $160 million in principal and accrued interest balances. These loans supported eight multifamily properties, one office property and one land acquisition bridge loan the average IRR on the loans paid off this year was nearly 18%.
With respect to our balance sheet and capital stack in the third quarter, we completed the aggregate redemptions in calls of approximately $306 million of our preferred stock offerings in the third quarter, we issued $37 million of preferred stock, resulting in a net reduction of $269 million for the quarter since.
Since the closing of the student housing portfolio last year, we have called or redeemed over $620 billion worth of our preferred series a stock or over 28% of the total preferred equity outstanding as of September 32020.
Our continued intent is to balance our capital needs with our stated intention to reduce our outstanding balance of preferred stock, which ideally would continue to result in negative net issuance on a quarterly basis.
We also issued common stock under our ATM program, while not a large capital raising efforts. It 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.
Using common equity even at a small level as 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 were attractively priced <unk> strategically valuable.
The ATM program is also particularly efficient from a cost standpoint, as the company pay significantly less than we would in a fully marketed offering.
In addition to the equity side of the ledger, we've been equally focused on our property level debt maturities in structure over the course of the last 24 months, we have refinanced 11 assets, which has reduced our average interest rate on those assets by 60 basis points. In addition, we have been able to pull out more than $100 million in additional proceeds at our lowest cost of capital.
These refinancings reflect the growth in our assets and the strength of the portfolio that Joe mentioned.
We have pushed our maturity schedules with these refinances and currently have only $79 million of permanent debt maturing in the next 24 months and less than 25% maturing in the next five years.
Given the concerns over interest rates with the specter of inflation rising, we're very well positioned to enjoy the rising rental rate market in multifamily and feel comfortable that our downside is protected with ladder debt maturities and a largely fixed debt portfolio.
Let me now turn to our outlook for the balance of 2021, we are revising our guidance today to reflect the impact of the third quarter's performance and milestones. We now expect core <unk> per share in the range of $1 to $1 seven for the full year 2021, reflecting a general increase in our expectations and a tightening of the range as we close in.
On the end of the year.
Underpinning this guidance are the following updated assumptions.
Same store multifamily NOI growth of five 5% to 7%, we're raising this range from our prior guidance of 5%, 7% three.
300 million to $400 million of acquisitions of multifamily properties, which is unchanged from 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 our 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 as.
As I mentioned earlier 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 purchase option termination revenue opportunities in our loan portfolio and investment portfolio. Today. In addition, as we discussed last quarter, our largest loan investment in San Jose, California is scheduled mature in Q1 2022, there is a possibility it will pay off in Q4 of 'twenty, one which would have a dramatic impact on both 2012.
One results to the positive in 2022 results to the negative ultimately this is simply an issue of timing and while our results may be skewed by the timing of the pay off the profitability of alone in the earnings the company receives demonstrate the strength of the investment strategy and the overall market will be monitoring the aggregate impact of these items on our 2022 outlook.
And expect to provide fresh guidance on our fourth quarter earnings call I would like to now turn the call back to Joel for his final thoughts Joe.
Thank you John and thanks for that great breakout of our financial results.
Now before we open up for any Q&A.
Five boss I'd like to leave you with.
First.
We have shown our desire intent and ability to create a more focused multifamily platform with the objective of improving our long term access to capital to facilitate and enhance sustained growth.
Second our markets continued to enjoy outsized growth in population and in jobs and the structural shortage of quality housing, particularly acute in the sunbelt provides an excellent macro backdrop for our investment thesis.
Third in the last 12 months since the student housing sale, we have redeemed over $600 million of our series a preferred shares which we believe will provide greater flexibility to our balance sheet and enhanced access to capital.
Fourth we continue to demonstrate our intent and capability to advance our capital strategies by executing well conceived complex disposition and capital redeployment transactions and strategies, all while maintaining our focus on key operational metrics.
Fifth.
We're not only positioned for growth, but we've demonstrated organically through our strong operational performance and externally a sourcing controlling accretive multifamily opportunities in our sunbelt markets.
So we look forward to keeping you updated on additional progress through the balance of the year and of course, we always appreciate your interest impact now let me turn the call back over to Paul Paul. Thanks, Joe Operator, Let's go ahead and start our Q&A session.
Yes, Sir we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two and at this time, well pause momentarily to assemble our roster.
And the first question will come from Jason Stewart with Jones trading. Please go ahead.
And thank you for taking the question and congratulations on a great quarter and continued execution of a strategy that you've been talking about for some time I wanted to ask a question about the mezzanine loan program and sort of where you think about where you know when you when you talk about passing on opportunities.
And you think about cap rates and you think about acquisition opportunities.
Or what are your pencil to paper.
In terms of where that program goes.
Yes.
Hey, Jason can we cut out just for a second on that could you repeat that for us. Please.
Yes, Sir.
First congratulations Joel great strategy, great execution.
My question was on the mezzanine loan program, and where you think pen to paper in terms of cap rates and where do you think about deploying capital.
So hey, Jason it's John.
The mezzanine loan program is still remains our most.
Attractive and accretive investments Leven is active in.
And as attractive as that market is I mean, we're going to continue to push smart sound investments and that sleeve.
Yeah the <unk>.
Drinking cap rates are or not really.
That fundamentally it doesn't hurt us in terms of exiting the Mezz loan program because it just makes those assets more attractive.
But it does it does create more competition for capital and we certainly have seen an increase in competition for our Mezz loan program, so that offsets it a little bit but overall, we feel great about the Mezz loan program at about our pipeline.
And John if you could put a pencil to paper in terms of where you think or are we is there where would a sort of shake out right now.
You know that that's hard for us to say.
As the as the mezzanine lender.
I don't know what the developers Roy as you know for US I talked about our IRR on those loans is almost 18% of the ones that paid off this year.
You know also adjacent data when you think about their returns I guess than I guess it.
I haven't really thought about it this way minute.
Perhaps unintentional, but benefit in some of these this lowering cap rates is that if you know if the developers to look at our mezzanine loan program, Okay, well that is a piece.
In the capital stack, but its a fixed piece of return so as cap rates of decline and the upside is bigger.
It is the developer as opposed to traditional equity deal versus our Mezz players theyre going to make more money on our mezz deal than they would if they had a traditional equity partner and their side of the deal so and it kind of it kind of strange way it works to our benefit where it doesn't work to our benefit as you know look we like to buy these assets I think of the five assets acquired this year.
Four of them came out of our Mezz programs. So we love the embedded portfolio of the ones. We didn't acquired certainly one for lack of liking him guess, what a lot of other people liked and I and all of a sudden we still have to look at the overall thing in the cap rate and say you know what and just have the investment investment discipline to just say, okay, well, let's take our return.
<unk> and <unk> and move on and let somebody else on it.
But we do like that the obviously the nature of this embedded portfolio and pipeline that we have.
Okay.
Got it okay. Thank you and look you guys deserve a lot of credit for the discipline and the execution that you've you've put together so.
I appreciate that thank you.
Thanks, Jason appreciate the note. Thank you Jason.
This concludes our question and answer session I would like to turn the conference back over to Mr. Paul calling for any closing remarks. Please go ahead.
Thank you for joining us today and your continued interest in preferred apartment communities have a good day.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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