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Edited Transcript of APTS earnings conference call or presentation 26-Feb-19 4:00pm GMT

Q4 2018 Preferred Apartment Communities Inc Earnings Call

ATLANTA Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Preferred Apartment Communities Inc earnings conference call or presentation Tuesday, February 26, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Boone DuPree

Preferred Office Properties, LLC - CEO

* Daniel M. DuPree

Preferred Apartment Communities, Inc. - Chairman & CEO

* Jared Seff

* Jeffery D. Sherman

Preferred Apartment Communities, Inc. - Executive VP & Director of Multifamily Investments

* Joel T. Murphy

Preferred Apartment Communities, Inc. - CEO & President of New Market Properties LLC

* John A. Isakson

Preferred Apartment Communities, Inc. - CFO & Executive VP

* Leonard A. Silverstein

Preferred Apartment Communities, Inc. - Co-Founder, Vice Chairman, President & COO

* Paul Cullen

Preferred Apartment Communities, Inc. - Executive VP & CMO

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Conference Call Participants

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* James O. Lykins

D.A. Davidson & Co., Research Division - VP & Research Analyst

* Michael Robert Lewis

SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Preferred Apartment Communities Fourth Quarter and Year Ended 2018 Earnings conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Jared Seff, Assistant General Counsel. Please go ahead.

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Jared Seff, [2]

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Thank you for joining us this morning, and welcome to the Preferred Apartment Communities Fourth Quarter and Year Ended 2018 Earnings Call. We hope that each of you have had a chance to review our fourth quarter and year ended earnings report, which we released yesterday after the market closed.

In a moment, I'll be turning the call over to Dan DuPree, our Chairman and Chief Executive Officer, for his thoughts. Also with us today are Lenny Silverstein, our Vice Chairman, President and Chief Operating Officer; John Isakson, our Chief Financial Officer; Mike Cronin, our Chief Accounting Officer; and the leaders of our business subsidiaries, Jeff Sherman, Paul Cullen, Joel Murphy and Boone DuPree. Following the conclusion of our prepared remarks, we'll be pleased to answer any questions you might have.

Before we begin, 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, and actual results may differ materially. There's a discussion about these risks and uncertainties in yesterday's press release. Our press release can be found on our website at pacapts.com.

The press release also includes our supplemental financial data report for the fourth quarter and year ended 2018, with definitions and reconciliations of non-GAAP financial measures and other terms that may be used in today's discussion. We encourage you to refer this -- to this information during your review of our operating results and financial performance. Unless we otherwise indicate, 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 now would like to turn the call over to Dan DuPree. Dan?

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [3]

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Thanks, Jared. We had a really strong fourth quarter in terms of FFO growth and for the year again, produced solid dividend and same-store results for our stockholders. We also continued our asset acquisition strategy during 2018. For the year, we acquired a total of 5 multifamily communities, 3 student housing communities, 6 grocery-anchored shopping centers and 3 Class A office buildings. To keep our portfolio fresh, we sold 4 of our older multifamily communities, aggregating almost $70 million of gain on a GAAP basis, and we deployed those net proceeds in the newer properties. Our combined IRR on those 4 transactions was over 20%. These sales clearly impacted our balance sheet and cash flow positively, but had a limited near-term impact on our FFO per share.

Our real estate loan investment program continues to be a mainstay of our growth strategy. During 2018, we acquired 3 multifamily communities through this program, representing an aggregate of $151 million of investment. As of the end of 2018, our loan book contained over $501 million of real estate loan commitments, of which approximately $336 million has been funded. This represents a pipeline of over $800 million of respective assets. All in all, we were able to generate IRRs of approximately 14% to 15% through this program, while getting off-market access to new quality assets through the purchase options, which are embedded in these loans.

We have the distinct competitive advantage in pursuing investments due to the consistency of capital availability provided through our Series A and Series M preferred stock that is sold through Preferred Capital Securities, which is our affiliated broker-dealer. During 2018, we sold an aggregate of almost $453 million of preferred stock through this innovated capital-raising program. This past February-- I guess we're still in February-- alone, we have raised over $52 million, and we expect to continue a strong pace of sales throughout the balance of 2019.

As you've heard us say before, the measure of a company's success is not simply reflected in its financial performance for just 1 year or just 1 quarter, for that matter, but the company's performance over time. With this in mind, if you had invested $1000 in our IPO in April of 2011, and automatically reinvested all dividends received on your common stock, your average annualized return on investment with us would have been 16.7% as of December 31, 2018.

As for dividends, we have increased our common stock dividend 14 times since the first dividend following our IPO, producing an annualized dividend growth rate of 14.4%. We function as a team, and you're going to hear from a number of our key people this morning, who have responsibility over important parts of our strategy. We'll start with our President and Chief Operating Officer, Lenny Silverstein, who will talk about fourth quarter and 2018 results. Lenny?

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Leonard A. Silverstein, Preferred Apartment Communities, Inc. - Co-Founder, Vice Chairman, President & COO [4]

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Thanks, Dan. We once again produced outstanding operating results for the fourth quarter. Revenues for the fourth quarter were $106.3 million or over 30% greater than the revenues earned for the fourth quarter last year. Our FFO for the fourth quarter of 2018 was approximately $16.1 million or $0.38 per share, which represents a 22.6% increase in FFO per share compared to the fourth quarter of last year. These outstanding operating results for the fourth quarter 2018 allowed us to, again, increase our common stock dividend payable for the quarter to $0.26 per share, or 4% greater than the dividend paid to our stockholders for the fourth quarter of 2017.

For the full year, our revenues were $397 million or 35.1% greater than our revenues for 2017. Our 2018 FFO was $1.41 per share, representing a 6.8% increase over 2017, and our total common stock dividends paid for 2018 were $1.02 per share, representing an 8.5% increase over the dividends paid in 2017. In all, we are pleased to report these very strong growth metrics across the board.

During the fourth quarter this year, we also issued an aggregate of approximately 1.2 million shares of our common stock for approximately $16.1 million in connection with the exercise of warrants previously issued under our Series A preferred stock and unit offering. Overall, we had approximately 41.8 million shares of common stock outstanding as of December 31, 2018, representing an increase of approximately 3.2 million shares or 8.3% compared to the end of 2017. As we have previously disclosed, we will continue to focus on increasing the outstanding number of shares of our common stock.

And switching to other financial statement metrics, we continue to add quality assets to our portfolio in a meaningful way. For 2018, our total assets net of depreciation were approximately $4.4 billion for an increase of approximately $1.1 billion or 35.6% compared to 2017. This growth in 2018 was driven primarily by the acquisition of 17 properties partially offset by the sale of 4 properties.

In addition to increasing total assets, our cash flow from operations for 2018 was approximately $145.4 million, which represents a 68.4% increase in cash flow compared to 2017.

John Isakson, our Chief Financial Officer, will now discuss our capital market strategy. John?

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John A. Isakson, Preferred Apartment Communities, Inc. - CFO & Executive VP [5]

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Thanks, Lenny. For 2019, we expect the cap rates on multifamily acquisitions will remain low, with grocery-anchored shopping centers and Class A office acquisition cap rates higher. Interest rates, which have been volatile in the last 12 months, have the potential to stabilize, but current environment remains uncertain. While interest rates in 2018 saw an anticipated rise, what was unexpected, however, was the sudden and dramatic retreat at the end of the year. With the Fed potentially tempering its rate hikes and the equity markets cooling, we could see a more stable rate environment in 2019. Given the recent volatility and the uncertainty in the environment, we have taken a cautious approach to our acquisition and portfolio financing strategy.

Approximately 96% of our permanent property-level mortgage debt has fixed interest rates, where variable interest rates that are capped. You may note that this represents a decline in the percentage of floating rate debt in our portfolio as we refinanced a good portion of our floating rate debt to fixed rate debt in 2018, and we'll look to do more floating to fix conversions in 2019.

We recently closed on the extension of our $200 million corporate line of credit, extending the maturity for 3 years and giving us flexibly for an additional year at the end of the term. Our borrowings under the line of credit as of today are 0, and we believe the current capacities aligned will serve us well for the foreseeable future. In the event we would need to increase the capacities aligned, we have an accordion feature that allows us to expand up to a total of $300 million.

On the acquisition front, we have been utilizing longer-term fixed rate debt for all of our property types and have taken advantage of the recent drop in rates to refinance maturing loans with attractive terms. We have approximately $88 million of maturing debt in 2019 remaining to refinance. We have already begun a process of securing new debt to these assets. And given the current rate environment, we will look to lock in our interest rates as soon as practical.

For our multifamily portfolio, Freddie Mac and Fannie Mae remain our primary lenders. We enjoy preferred borrower status and have excellent relationships with both agencies. Retail assets are financed with life companies and typically for terms equal to our multifamily assets. Our office transactions are also financed primarily through life insurance companies, with terms that are generally comparable to retail and multifamily, although the maturities may be longer.

Jeff Sherman, who's responsible for all aspects of our multifamily business, will now discuss our fourth quarter and 2018 results. Jeff?

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Jeffery D. Sherman, Preferred Apartment Communities, Inc. - Executive VP & Director of Multifamily Investments [6]

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Thanks, John. As we look back in 2018, our multifamily portfolio performed very well. For the year ended December 31, 2018, our same-store set achieved year-over-year rental revenue and total revenue growth of 2.9% and 3.2%, respectively. Same-store net operating income for the year ended December 31, 2018, achieved 3.4% year-over-year growth, reflecting our intensified focus on operational results.

Property management was successful and holding variable expense growth under 3% year-over-year, while our asset management team was able to limit property tax growth at 2.9% year-over-year, this all in an environment in which operational expenses and property taxes are experiencing significant inflation. We believe our 2018 revenue and net operating income results place us in the top group performance among our multifamily REIT peers.

It is also worth noting that in 2019, our same-store set will more than double, from 10 properties to 21 properties. This new composition covers 8 states and 13 MSAs versus the 2018 same-store set, which included 4 states and 7 MSAs.

Moving to investments. We remained active in the fourth quarter with 2 acquisitions, 2 dispositions and 1 real estate loan investment. Our first acquisition, CityPark View South, is a 200-unit Class A community located in Charlotte, North Carolina, and built in 2017. Our second acquisition, Vestavia Reserve, is a 272-unit Class A community, completed in 2017 and located in the Birmingham, Alabama suburb of Vestavia Hills. This acquisition checks so many boxes for us. Vestavia Hills is a high barrier to entry market with excellent schools and an affluent demographic.

As previously mentioned, we also sold 2 assets in the fourth quarter. McNeil Ranch was located in Austin, Texas and built in 1999, making it the oldest property in our portfolio. It sold for close to a 4.4% cap rate on trailing financials, which resulted in an approximate 19% annualized return and generated gain on sale of approximately $13.9 million. Additionally, we sold Stoneridge Farms, a 2005 vintage property located in Nashville, Tennessee. Its sale resulted in an approximate 21% annualized return and generated a gain on sale of approximately $16.8 million. The sale of these properties continues to demonstrate our ability to acquire, operate and dispose of assets to maximize returns to our stockholders. Further, these sales decrease the average age of our multifamily portfolio of 4.3 years old at the time of sale.

As we've outlined previously, our strategy to maintain the youngest portfolio in the industry limits our exposure to capital expenditures over time and assures that our product maintains a competitive advantage in design, function and technology over older product.

Finally, turning to our real estate loan investment program. We closed on an aggregate loan investment of up to $16.7 million for the construction of a 332-unit Class A multifamily community located in Jacksonville, Florida. With the addition of this investment, [the Lux] multifamily investment portfolio now consists of 13 multifamily projects totaling over 4,100 units.

Let me now call on Paul Cullen, the Head of Preferred Campus Communities, our student housing division. Paul?

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Paul Cullen, Preferred Apartment Communities, Inc. - Executive VP & CMO [7]

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Thanks, Jeff. Our student housing strategy remains focused on acquiring best-in-class properties at Tier 1 universities that are located within walking distance to the center of their respective campus. Our portfolio as of the end of 2018 now consists of 7 properties in 4 states across 7 different universities totaling 5,208 beds.

Starting with the successful move-in season this past fall, the fourth quarter's activities reflects a strong start to the 2018-2019 academic year. Our stabilized student portfolio has an average physical occupancy of 97.8% as of December 31, with the entire portfolio having an average physical occupancy of 94.8%. In addition, we continue to see strong operating results with our stabilized properties performing in line with expectations.

Not surprisingly, with rental rates set for the 2019-2020 academic year, we now also have focused our renewing leasing on our existing residents and signing new residents leases. We're working hard to produce another strong lease up.

We continue to actively seek new acquisitions and originate real estate loan investments, which we sometimes call mezzanine loans, for our student housing developments. For our Campus Management, our affiliated student housing property management company, currently is leasing up a new third-party 816-bed student housing development near Kennesaw State University in Atlanta in the Master Plans [and] Village districts, where Preferred Campus Communities currently has Stadium Village student housing community. This new community, as of today, is now approximately 94% pre-leased for the 2019-2020 academic year. KSU has currently an enrollment of approximately 33,000 students.

During the fourth quarter of last year, PAC also originated another mezzanine loan with the same developer to build a second phase with KSU student housing community, currently in lease up. This 543-bed community will be a 5-story mid-rise property. The mezzanine loan community for this second phase is $13.6 million. In all, we look at our student housing division to produce consistent rent growth, steady occupancy metrics for the foreseeable future.

Let me now call on Joel Murphy, the Head of New Market grocery-anchored shopping centers division. Joel?

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Joel T. Murphy, Preferred Apartment Communities, Inc. - CEO & President of New Market Properties LLC [8]

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Thank you, Paul. We are pleased to report another additional quarter and year of overall operating performance. We continue to execute our strategy to acquire, invest in and operate grocery-anchored centers that fit our investment criteria in quality suburban submarkets within the top 100 metros from the Mid-Atlantic, Southeast and now through Texas. We target centers that have market-dominant grocery store anchors that maintain a #1 or #2 market share in that submarket and have high and growing sales volume stores in the particular center. As a result of this focused product-type strategy, we had 0 exposure to the 2018 and early 2019 highly publicized bankruptcy filings of Sears, which includes Kmart; Mattress Firm; Toys "R" Us; and Payless Shoe.

Leasing space for newer tenants and keeping tenants happy are our daily focus. At the end of 2018, our total portfolio consisting of 45 grocery-anchored centers aggregating approximately 4.7 million square feet was 94.3% leased. The portfolio, excluding 2 centers in redevelopment, was 95.9% leased.

We were also particularly pleased with the momentum of our lease renewals this past quarter and year both anchors and in-line tenant. Every grocery store anchor in our portfolio that had a lease rolling in 2018, 4 of them, renewed their leases at their contractual rates. As for 2019, we have 7 grocery-store anchors that have leases rolling and 4 of them have already renewed their leases, again, at their contractual rate. In December of 2018, we closed on Hollymead Town Center in the affluent high barrier-to-entry market of Charlottesville, Virginia, centers anchored by 60,000-square-foot Harris Teeter and shadow anchored by 142,000-square-foot Target store. The acquisition of Hollymead is our first asset in Virginia, and it's also our first center occupied by Target. After the close of the quarter in early January, we acquired Gayton Crossing, a Kroger shadow-anchored shopping center in Richmond. This is our second asset in Virginia and our first in Richmond. It's located in the highly desirable west-end submarket and Kroger has a very high volume store in this center.

Both of these centers are excellent examples of our focused strategy, anchored by a market-leading grocer that has a high-sales-per-square-foot store and located in a quality Sunbelt, Mid-Atlantic suburban submarket with solid interaction.

In addition to excellent operating performance, we achieved several strategic goals with our portfolio during 2018. First, we made a market into -- first market entry into Virginia with these 2 acquisitions; second, we expanded our presence in North Carolina with 1 Publix-anchored center; and third, we further penetrated Central and South Florida with 2 Publix-anchored centers. All of these initiatives enhance our portfolio of 3-mile demographic metrics of density, average household income and educational attainment.

We executed on all cylinders in the fourth quarter and throughout the year, we leased vacant space, kept our centers leased, we renewed at higher rates, we managed our expenses at very little bad debt expense and we grew our portfolio. A combination of these positive trends allowed our new market subsidiary to upstream outstanding results back. As of today, we now own 46 grocery-anchored centers in 8 states, 19 markets, totaling approximately 4.8 million square feet, with more than 700 independent operating leases. 23 of these centers are anchored by Publix, and 13 are anchored by the Kroger and Harris Teeter banners. Both Publix and Kroger are market share leaders. Now they've not yet -- although they have not yet announced 2018 results, each generated approximately $2 billion in earnings in 2017.

Now let me turn the call over to Boone DuPree, the Head of our office division. Boone?

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Boone DuPree, Preferred Office Properties, LLC - CEO [9]

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Thanks, Joel. In the fourth quarter last year, the office division closed 2 new investments, buying Capitol Towers in SouthPark, Charlotte, and originating a development loan for a project called 8 West next to Georgia Tech in Atlanta. 7 days after closing Capitol Towers, we signed a new 33,000-square-foot customer to bring that property to 95% leased. The economic terms and the timing of the deal were substantially ahead of our underwriting, so it was a nice win for the company and a reflection of our strategic local relationships and ability to be nimble.

8 West was an equally positive result for the quarter, marking our first office development loan closing. This is a category of investment that's been highly profitable for PAC, but one we've been selective in entering on the office side. Besides the order qualifiers of high-quality location, product and sponsor, we like the risk/reward of 8 West for a couple of reasons. First, it benefits from a cost basis 20% below other projects coming to market, which means the developer team can offer space for lease at more competitive terms. And second, our investment sits behind $17 million of cash equity, insulating the first loan dollar. As of this call, the developer team is under construction completing site work and targeting a middle of 2020 delivery for the 7-story building. We have over 1 million square feet of lease prospects in the pipeline and expect to have good news to report on that front soon. Like our other PAC development loan investments, we have an option to purchase the property once it has achieved stabilized occupancy.

Excluding 8 West, which is under construction, PAC ended Q4 with 2.6 million square feet of Class A office across the Southeast and Texas. That portfolio was 93% leased, with more than 8 years of weighted-average lease term remaining. Our top 5 tenants, IHG, Albemarle, State Farm, USAA and Harland Clarke represent 43% of the portfolio total base rent and together carry more than 10 years of remaining lease term. The portfolio is financed with mostly long-term fixed-rate live company debt, and excluding our Galleria 75 property, which is planned for redevelopment, the earliest maturity comes in 2028.

We're currently in the thick of several key asset management initiatives, most notably our repositioning of 150 Fayetteville in Raleigh, North Carolina. We acquired this 560,000-square-foot property last July and immediately kicked off design for a full renovation of the building's lobby, plaza, elevators and amenities. Construction will begin in the first quarter of 2019 and is expected to be substantially delivered this summer. For some context, 150 Fayetteville is one of the tallest and most recognizable buildings in downtown Raleigh. These enhancements will reaffirm its iconic stature in Raleigh, which we believe will drive absorption, retention and accelerating lease economics in the building.

Within the portfolio and with each new investment, our goal is to find accretive real estate opportunities, budget to beat underwriting and execute to beat our budget. Our results today reflect that commitment. The weighted-average cap rate or initial NOI yield on purchase price for the portfolio is 7.4% on a GAAP basis. And total GAAP NOI earned through Q4 is approximately $4 million ahead of our internal underwriting, on less than a 2-year average life of the investment. We will continue to bring this level of focus to identifying and executing profitable investments, managing risk within our portfolio and outperforming expectations, while implementing our strategy to build scale in high growth Southeast and Texas major markets where we have relationships and operating expertise. I look forward to providing you updates in coming quarters. And with that, we'll turn the call back to Dan.

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [10]

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Thanks, Boone. Our team has continued to do an excellent job building a carefully constructed portfolio, executing on our strategies and vision and delivering consistently strong financial results. Each operating vertical subsidiary has a distinct investment strategy, which continues to allow us to be targeted within those strategies. Our investments in student housing, grocery-anchored shopping centers and office buildings have proven to complement our core focus on multifamily very well. We continue to believe that all of these investments, together with the cash flow generated from our real estate loan investment program and the line of sight these loans afford to future acquisitions place PAC in a sustainable position to continue to deliver outsized results for our stockholders. That having been said, we are running an IRR business and attempting to fit it into a quarter-to-quarter structure.

Now particularly due to the often unpredictable nature of our mezzanine loan pay-offs, our quarterly results can have outsized swings. With this in mind, we are providing FFO per share guidance in a range for 2019 of about $1.44 per share to $1.50 per share, with the caveat that our better quarterly results will come later in 2019.

As to the swings referenced above, let me give you an example. Our Irvine mezzanine loan that paid off at the end of Q3 last year was extremely lucrative for us. The $68 million loan, one of our largest, actually our second largest, allowed us to book our highest annual interest rate at 16%. Net of our weighted average cost of equity, we estimate this one loan represented a quarterly contribution in FFO in Q1 and Q2 last year of approximately $2.5 million or $0.06 a share. The loan paid off at the end of Q3, and it will take us through the first half of '19 to replace the lost FFO. The good news is that we have new mezzanine loans that we'll be funding over the course of the year and that we expect by the second half of the year, these new loans will largely have backfilled the Irvine loan.

With that, I'd like to thank you for joining us on our earnings call this morning. I'd like to turn the call back to our operator so that she might open the floor for any questions or thoughts you may have. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from Michael Lewis of SunTrust.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [2]

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Dan, I wanted to ask a little bit more about the guidance. Are you able to get -- provide any details on some of the underlying assumptions, such as purchase option income and maybe acquisition's dispositions, new volume, kind of what underlies that FFO rent?

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [3]

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Well, I think, that -- I mean, the big thing is the lumpiness of the payoff of the mezz loans. And the example I gave, that was -- it's kind of ironic. We -- at the end of the third quarter, we had the issue with the overaccrual and it kind of confuses the issue. That was probably -- no, that's not probably -- it has been our most successful mezz loan to date and in part because of the size, but more so because of the interest rate on it. It's 16%, which is 3% to 4% greater than our typical deals, but when these things pay off, and I can't tell you we didn't see this thing paying off. We knew it was going to pay off. Candidly, a mezz loan that we initiated last year in San Jose, California, we expected that, that would go further to offset the loss of revenue from the Irvine deal, and it kind of morphed into a deal that didn't offer us quite the return we thought, but it's the lumpiness of the mezz loan deal. I think when we get through Irvine and, candidly, get through San Jose ultimately, most of our mezz loans are fairly generic in size, and they're fairly generic in structure. We've been talking about a $500 million book for probably the last 18 months. That's where we've been. We're funded at about 60% of the book, but we -- some deals are going to deliver quick; some are going to take a little longer to lease up. They're going to deliver later. And what really is happening in 2019, is we're really feeling the impact first of the Irvine loan and then of others. So when we get to the second half of the year, I think our FFO per share will be much more consistent with what it's been in the past. And -- but I will tell you this also, the days of us telling you on a regular basis that we're going to grow earnings per share in excess of 10%, that was a fairly easy goal for us to achieve when we were a $1 billion company or a $2 billion company. But it's the law of big numbers, and we're not going to be increasing the size of the book by much over time, maybe run in a range of $400 million to $600 million, but I think a more reasonable run rate's going to be somewhere between 7% and 8% or 9%.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [4]

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Okay. Does your 2019 guidance include any material purchase option termination income? And then I also wanted to ask about the equity compensation, what the assumption is for that? It was obviously a negative that helped you in 4Q. What's kind of built into the guidance for that as well?

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [5]

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In terms of -- one of the things we're trying to do with our purchase options in order, in part, to smooth out the lumpiness and become somewhat more predictable is convert the discount into additional accrued interest. It's paid similarly in the waterfall, and so we're in the process of doing that. And I didn't understand the second half of the question. Could you repeat that?

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [6]

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Yes, I guess it's sort of a G&A run rate question, right? The equity -- I kind of realize your stock is -- has been volatile, but you had a negative equity compensation cost in 4Q. And so depending how you include that in your guidance for next year, that could be impactful as well. I was just curious.

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [7]

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You want to -- go ahead, John. Why don't you answer that?

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John A. Isakson, Preferred Apartment Communities, Inc. - CFO & Executive VP [8]

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Mike, the stock awards that were given out by the executive management team, whether -- we don't have that particularly budgeted for 2019 one way or the other. And how that works and what we do is going to largely depend on performance. So I think it's really hard to estimate.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [9]

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Okay. What I'm trying to get at here is, when I strip out the loan loss reserve in 2018, it looks like your FFO isn't growing at all next year. And I guess I'm just kind of wondering, first of all, if that's correct? And then second of all, what are the factors that are causing that? So I understand the loss on the loan and that going to hurt you in the first half of this year especially. The rest of these numbers -- I don't know, right? Anyway, I don't know, maybe this is something to follow up with offline.

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John A. Isakson, Preferred Apartment Communities, Inc. - CFO & Executive VP [10]

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Yes. Mike, I think it's -- why don't you give me a call and let's follow up offline because I do think there's some factors in there that are more complicated than maybe are worth going through off the call.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [11]

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Yes, sure. Could I just ask, do you expect your AFFO to grow in 2019? And can I assume you expect the dividend to be covered by AFFO?

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [12]

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Well, first of all, yes, you can expect AFFO to grow in 2019. And over the course of the year, our dividend will be covered by AFFO as it has every year and not just marginally so, but comfortably so. But as we've had in the past, there may be quarters within the year where we don't cover and it goes back to the mezz loans and the accrued piece, which is booked as FFO, but is not cash received. So it's not AFFO. But I don't have the number in front of me, but I think our AFFO coverage for '18 was around 73%.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [13]

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Let me follow up with that too. The reason I asked that is because it looks like in 3Q, it wasn't covered, and then in 4Q you had this big accrued interest benefit. And if you back that out, I'm not sure it's covered.

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [14]

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Yes. We're going to -- well, you can't back it out. I mean, we get the accrued. That's cash coming in, it's earned, but that's always been sort of the deal with us because of the mezz loans and the amount of accrued interest that we have when they pay off, the numbers are pretty significant. And in -- particularly in probably in Q3, when Irvine settled, there was a -- even though we had over accrued, there was a big accrued payment. So we're going to -- as long as we have the mezz loans, we're going to be lumpy on AFFO coverage, but the expectation is, as it has been in the past, that we comfortably cover our dividends with AFFO sort of -- I mean, it's a big deal that we make out in the marketplace that end the unlisted REIT field, where we're active raising money. And so a few of the sponsors cover their dividend with cash FFO that we do so significantly.

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Operator [15]

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Our next question will come from Jim Lykins of DA Davidson.

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James O. Lykins, D.A. Davidson & Co., Research Division - VP & Research Analyst [16]

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First a question about the Series A and M preferreds. You mentioned $50 million -- or $52 million in February. Can you just give a sense for how to be thinking about that throughout '19? Is this $52 million a good monthly run rate now?

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [17]

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Well, it's a good monthly run rate. I don't know that it's a sustainable run rate. Our budget for the year is to raise $0.5 billion in that space. Obviously, $52 million would signify something -- would signal something greater than that. Yes, the real challenge for us, and this is not an insignificant point, is that this is very, very cheap capital. It gives us a huge competitive edge. You may not -- we may not feel it so much right now, but the thing about the public markets that I've seen over and over again during my career is that when the public market's spigot is on, there's no limit to how much money you can raise as a general rule, but when the spigot is cutoff, there is nothing there. And during the period of 2009, '10, and '11, there -- the run rate of capital raise in the broker-dealer channel was in the neighborhood of $20 billion to $25 billion a year. I mean, a huge amount of money. So we really like what we've been able to do. I think Beyond Blackstone and then maybe an interval fund or 2, we're raising more money in that space than anybody. And I think that's testament to an incredible team that we have both here and out in the field selling our preferred stock. But as we raise this money, we're paying out dividends on it. We're paying out a 6% dividend, the overall cost to us is about 7%. So it really puts pressure on us to find accretive ways within our areas of expertise to invest the dollars in an accretive way. I don't have any hesitation thinking that any multifamily property, for example, is going to be -- that we could buy at cap rates that are available today. I have no hesitation in saying that those will be very, very strong 10-year performers for us. The IRRs and multifamily are as good as any product type that we're involved with, but it does put pressure early on because of the compressed cap rates. So the fact that we're raising all of that money increases the pressure on us to -- I mean, and frankly, it drives the fact that we're a diversified company because we need to be diversified to deal with both quarterly returns as well as what real estate really should function on, which is longer-term IRRs.

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James O. Lykins, D.A. Davidson & Co., Research Division - VP & Research Analyst [18]

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Okay. That is all.

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [19]

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I'm not...

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James O. Lykins, D.A. Davidson & Co., Research Division - VP & Research Analyst [20]

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I'm sorry. Go ahead, Dan.

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [21]

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I was just going to say I've probably answered 2 or 3 questions there. I got going on that one and...

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James O. Lykins, D.A. Davidson & Co., Research Division - VP & Research Analyst [22]

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Yes. That's extremely helpful. And also a retail question, so I guess this one's for Joel, but any color on how same-store leasing trends -- or how same-store leasing is trending? How we should be thinking about 2019? And if you could tell us what assumptions might be in your guidance?

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Joel T. Murphy, Preferred Apartment Communities, Inc. - CEO & President of New Market Properties LLC [23]

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Yes. So, Jim, while that is an initiative that we are working on and will be delivering more of that during the 1 quarter call for '19. The challenge we've had is the portfolio is growing and the pool was so small that to even really talk about same-story was interesting, but maybe really not even relevant to the trajectory of the business. And like on the multifamily side, what's good now is that our pool's going to grow from 10 assets to 21 assets, we'll have now going into '19, I think I have it right, I think we would have 39 assets in our same-store pool. So we're now to the point that next quarter, you can look forward to us delivering you some kind of metrics as it relates to same-store.

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James O. Lykins, D.A. Davidson & Co., Research Division - VP & Research Analyst [24]

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Okay. And how are you thinking about capital recycling for the retail portfolio? You've been on a pretty robust acquisition pace the past few years. Are there any properties that could be candidates to sell?

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Joel T. Murphy, Preferred Apartment Communities, Inc. - CEO & President of New Market Properties LLC [25]

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Yes, there is. I think you always need to think about that and obviously the timing is the way we finance these with mid- or long-range debt that's property related that does give you a window when that debt matures that you then have to run an analysis to say, do we want to sell this or do we want to roll it over and refinance it? And as John mentioned in his remarks, there are a number of pull-out deals, I believe 8, a lot of which were the ones we acquired in 2014 that are coming up in the third quarter for renewal. And right now, our census is based on the financing market and based on how we've been able to grow the NOI and what we think the future of the NOI is going, we're going to roll those over and refi. Now if something came up, if I'm looking at an asset and thought, well, it's not core to us or we think we've really gotten all the NOI we can out of it, we could easily make a decision to sell that asset and so [for now].

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Operator [26]

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Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Dan DuPree for any closing remarks.

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [27]

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Just wanted to tell you that we appreciate your interest in our company. We have a group of people sitting around the table here in Atlanta. I would put these folks up against anybody I've ever had the pleasure of dealing with in my 40-plus-year career. We are laser-focused on creating value for our shareholder, and we look forward to seeing each of you again. And we're available to answer any questions you all might have going forward. Thank you for participating.

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Operator [28]

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The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.