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Edited Transcript of APTS earnings conference call or presentation 31-Jul-18 3:00pm GMT

Q2 2018 Preferred Apartment Communities Inc Earnings Call

ATLANTA Sep 12, 2018 (Thomson StreetEvents) -- Edited Transcript of Preferred Apartment Communities Inc earnings conference call or presentation Tuesday, July 31, 2018 at 3:00:00pm 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

* Jeffery D. Sherman

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

* Jeffrey R. Sprain

Preferred Apartment Communities, Inc. - Executive VP, General Counsel & Corporate Secretary

* 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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* Ian Christopher Gaule

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* James O. Lykins

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

* John Richard Benda

National Securities Corporation, Research Division - Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Preferred Apartment Communities' Second Quarter Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would like to now turn the conference over to Jeff Sprain, Executive Vice President and General Counsel. Please go ahead.

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Jeffrey R. Sprain, Preferred Apartment Communities, Inc. - Executive VP, General Counsel & Corporate Secretary [2]

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Thank you for joining us this morning, and welcome to the Preferred Apartment Communities' Second Quarter 2018 Earnings Call. We hope that each of you had a chance to review our second quarter 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 Executive Vice President and Chief Financial Officer; Mike Cronin, our Executive Vice President and Chief Accounting Officer; and the leaders of our various business subsidiaries. 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 second quarter 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 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 would now 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, Jeff.

I'm pleased to report that we had another very solid quarter. Our company has continued to operate successfully across the board which is a direct reflection of our associates' hard work. As you'll hear in a moment from Lenny, our second quarter portfolio results compared very well to the second quarter of last year. In particular, we were able to harvest value from certain of our purchase option discounts that we received in connection with the origination of the related real estate loan investments. We're going to talk about that a little bit more in a moment.

First, I'd like to talk about what is going on, on a macro basis in our multifamily subsidiary. Cap rates over the last 2 years have compressed between 100 and 125 basis points. At the same time, interest rates have increased between 25 and 70 basis points. It is increasingly difficult at this point in the cycle to acquire properties that are both accretive in the short-term and good long-term investments. In fact, we have concluded that it might be advantageous for our company and stockholders to sell certain of our multifamily assets to capture this increased gain as we assess, in particular, CapEx needs for those assets, the age of the assets, and future supply in their respective submarkets.

Cap rates on properties we have helped finance through our real estate loan investments, in other words, our mezzanine loans, have compressed to a point where, in some cases, the exercise of our purchase option for the underlying community could result in the acquisition being dilutive, especially in the early years. We have determined that, for now, the best course of action is to, on a very limited select basis, sell certain of our purchase options back to the developers.

For purposes of FFO, the value we receive from the sale of the purchase options is considered additional interest on the loans. This additional interest is amortized over the remaining term of the respective underlying loans, with the potential acceleration of the nonamortized portion of the value received if the community is actually sold or refinanced by the developer prior to the expiration of the loan. We have argued for a long time that there is significant value underlying our purchase options which generally has not been recognized in NAV calculations. Now those values will be more difficult to ignore and will give us free or very low cost to capital to invest.

This brings me to the second point I'd like to emphasize. We are greatly advantaged by our multiple avenues of access to capital. We are not forced to sell discounted common stock in order to take advantage of investment opportunities. Think about it, we are genuinely unique in this regard. But because we are raising capital, literally biweekly, through sales of our preferred stock and the independent broker-dealer and registered investment advisory channels, it is important that we have investment flexibility. We have already discussed cap rate compression in Class A multifamily, but cap rates in our grocery-anchored retail and our Class A office platforms remain very attractive and provide both short-term accretion as well as significant long-term value creation. Our unique capital structure makes product diversification essential to a business strategy that is 100% focused on delivering outsized returns to our common shareholders.

And the strength of our company rests in the leadership in our business units. I can say, without reservation, that this is the strongest aggregation of talented people that I have ever had the pleasure to work with, and I have been at this for a very long time. This quarter, rather than having me talk about our various investment activities, I'm going to call on Jeff Sherman, our multifamily business unit EVP, to discuss our multifamily efforts; followed by Paul Cullen, CEO of our Student Housing subsidiary, to update you on activities in his sector. Joel Murphy, CEO of New Market, our retail subsidiary, will then talk about his very active quarter; and Boone DuPree, CEO of Preferred Office Properties, will update you on efforts in his area.

But first, let me turn the call over to Lenny to review our second quarter 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.

Overall, we once again produced very good operating results for the second quarter in line with our internal budgets. Revenues for the second quarter were $96.4 million or almost 36% greater than the revenues for the second quarter last year. Our FFO for the second quarter of 2018 was approximately $15.5 million or $0.38 per share compared to approximately $9.4 million or $0.31 per share for the second quarter 2017. Based on these results, we are reiterating our FFO guidance range for the year of $1.43 to $1.47 per share, which represents an 8% to 12% increase in FFO year-over-year.

These financial results have allowed us to pay a healthy increasing dividend to our common stockholders while, at the same time, maintaining a low payout ratio. Since our first common stock dividend payment following our IPO in April 2011, we've increased our dividend 13 times and produced an annualized dividend growth rate of 14.9%. As we announced at our quarterly stockholder call this past May, we increased our second quarter common stock dividend to $0.255 per share. This represents an 8.5% increase over our common stock dividend paid for the second quarter 2017 and an FFO payout ratio, for the second quarter of only 66.8%.

During the second quarter this year, we also issued an aggregate of almost 102,000 shares of our common stock for an aggregate of approximately $1.2 million in connection with the exercise of warrants previously issued under our Series A preferred stock in unit offerings.

Switching to other financial statement metrics. We continued to add quality assets to our portfolio in a meaningful way. For the second quarter, our total assets, net of depreciation, were approximately $3.7 billion, or approximately $1.1 billion greater than at the end of the second quarter last year. This increase of $1.1 billion of new assets since June 30, 2017, reflects our $4.8 million investment in the Freddie Mac K Program and the net of the sale of 1 multifamily community totaling approximately $43.5 million in gross sale proceeds. This sale produced an annualized return on investment to PAC of 19%. The average age of our multifamily portfolio as of the end of the second quarter is now 5.6 years, which we believe remains the youngest in the industry.

In addition to increasing total assets, our cash flow from operations this quarter was approximately $41.8 million, which represents a 73.4% increase in cash flow compared to the second quarter of 2017.

Although interest rates remained higher than this time last year, there have been no surprises. At the end of the second quarter, our leverage on our assets based on the undepreciated book value was 53.9%, which was basically the same as compared to the second quarter last year. If, however, we measure the leverage against the market value of our assets instead of undepreciated book, our leverage ratio would be substantially lower.

We will continue to closely monitor the relationship between interest rates and cap rate in determining what we believe is the proper financing leverage in connection with our ongoing asset acquisition strategy. As you may have read in our earnings press release last night, PAC's ability to continue to raise capital through independent broker-dealers and registered investment advisors from the sale of our Series A and M shares preferred stock gives us 2 wonderful channels in support of our expected continued acquisition activity.

Jeff Sherman, who is responsible for all of our multifamily efforts, including management, acquisition and real estate loan investments, will now review this division's performance for the second quarter. Jeff?

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Jeffery D. Sherman, Preferred Apartment Communities, Inc. - Executive VP & Director of Multifamily Investments [5]

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Thanks, Lenny.

I'm pleased to announce strong operating results for the multifamily portfolio during the second quarter. Our same-store set achieved second quarter year-over-year rental revenue and total revenue growth of 3.4% and 4.2%, respectively. Same-store net operating income for the second quarter reached 5% year-over-year, will have increased 8% through the first 6 months of 2018 compared to the same period in 2017.

Revenue was driven by a balanced combination of rental rate growth, increased other income and improved occupancy. While additional supply continues to be a headwind adhering to our business plan of investing in newly constructed, Class A, garden and midrise communities in first rate suburbia has marked or kept us from contending with the most oversupplied urban submarkets. We remain optimistic about our ability to continue and push topline revenue while controlling our operating expenses for the remainder of the year.

As we continue to seek to acquire market rate, Class A multifamily communities, we diligently underwrite and make offers as appropriate or remain steadfast in our approach to acquire properties that are both strong market and property level fundamentals and which are accretive during our period of ownership.

We also are currently marketing 2 multifamily communities for sale. As Dan stated earlier, cap rates continue to compress, especially on new Class A properties, given the abundance of capital in the space, which creates an opportunity to evaluate our portfolio and recycle our capital. The assets listed for sale, Stone Rise in suburban Philadelphia and Stoneridge Farms in suburban Nashville, are 2 of the older assets in our portfolio, constructed in 2008 and 2002, respectively. Although they both performed well during our period of ownership, given the rates and expected returns upon sale, it was an easy decision to market the properties. In fact, the marketing process for Stone Rise generated over 130 confidentiality and nondisclosure agreements. Over 30 property tours with 17 offers and 7 investment groups competing in the best and final round.

By way of comparison, 2 years ago, when we first marketed Stone Rise for sale and later pulled it from the sales process, the property only generated 5 offers, all of which were materially below the 7 best and final offers we received this time. It's amazing how the market has changed.

Finally, I'd like to discuss our real estate loan investment program. Through the second quarter this year, we closed on 2 real estate loan investments. In April, we resumed a $30.2-million loan for the construction of a 302-unit property located in Washington DC MSA of Alexandria, Virginia. Then, in May, we provided an $11.9 million loan for the development of a 301-unit community in suburban Nashville. With the addition of these 2 loans, PAC loan investment portfolio now consists of 21 projects totaling approximately 4,700 multifamily units and approximately 2,800 student housing beds and 1 retail center totaling 195,000 square feet. From a total dollar standpoint, as of June 30, our investment loan program had $376.1 million in outstanding loans and $512.8 million in aggregate loan commitments.

The real estate loan investment program has been an integral part of our business model since our initial public offering. It provides us with a pipeline of new properties and carries embedded value with each loan that we recognize in a variety of ways.

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 [6]

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Thanks, Jeff.

We remain focused on performance of our student housing portfolio. During the second quarter, we acquired 3 student housing properties totaling 2,258 beds. The Tradition, an 808-bed community is located walking distance to Texas A&M University; The Retreat, an 894-bed campus-style community, serves the University of Central Florida; and The Bloc, a 556-bed community, is located near Texas Tech University.

The Tradition and Bloc were acquired through our real estate loan investment program, while The Retreat was a third-party marketed acquisition. All 3 of these properties follow our strategy of investing in markets serving large and growing universities and are either pedestrian to campus or offer superior, differentiated products. Preferred Campus Communities, our operating subsidiary, now owns 7 properties in 4 states across 7 different universities totaling 5,208 beds.

Our stabilized student portfolio is also performing extremely well with an average physical occupancy of 96.8% as of June 30. More impressive, as of June 30, the entire portfolio had an average pre-lease occupancy of 87.25% for the upcoming 2018/2019 school year. I'm pleased to report, as of today, the average pre-leasing rates for the upcoming school year is now over 94%, with rental rates trending in the range of 2.8% to 3% above the current 2017/2018 school year. As we transition to this return process across the portfolio, I want to thank the campus management team, led by Kim Hodge, for all their efforts as we prepare for move-in days.

Let me now call on Joel Murphy, the Head of our New Market Grocery-Anchored Retail Division. Joel?

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Joel T. Murphy, Preferred Apartment Communities, Inc. - CEO & President of New Market Properties LLC [7]

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Thanks, Paul.

We continue our focus on the operating results of our growing portfolio, including tenant retention, new leasing, leasing renewals and capital improvements. Our portfolio which, at the end of the second quarter, totaled 43 grocery-anchored centers, was 94.4% leased, an increase of 30 basis points since the end of the first quarter. 17 of our 43 centers are 100% leased.

We have 3 centers in our portfolio that are in different stages of value-add phases or redevelopment. At the end of the second quarter, this core portfolio of 40 properties, excluding these 3 value-add properties, was 96.6% leased. This core portfolio occupancy percentage, on a comparable center basis, meaning, excluding the 4 acquisitions completed in the second quarter, would be 97.1%, a 10-basis-points increase over the second quarter.

During the second quarter, we executed approximately 37,000 square feet of new leasing, including a 22,000 square-foot lease with T.J. Maxx, at Champions Village, in Houston, Texas. T.J. Maxx is a highly respected credit tenant, and we're excited to welcome them to our tenant mix at Champions Village.

We're also particularly pleased with the momentum of our lease renewals this past quarter, both anchors and in-line tenants. We continually -- continue to actively and proactively manage our anchor lease expirations. Of the 11 centers with 2018 anchor expirations, all of our 2018 anchor renewals, totaling 343,000 square feet, are now complete. We also executed approximately 49,000-square feet of in-line tenant renewals for the quarter, and we are actively working on our remaining lease renewals for 2018. Year-to-date, we have executed a total of 101,000 square feet of in-line tenant renewals, and we expect this favorable momentum to continue.

We also continue to actively add value and upgrade each of our shopping centers through the execution of capital projects, including LED lighting, landscaping upgrades, signage, new parking lots and roof replacements. We executed on all cylinders in the second quarter. We leased vacant space, we kept our centers leased, we renewed at higher rates, managed our expenses, had very little bad debt expense, and we grew our portfolio. The combination of these positive trends allowed our new market subsidiary to upstream outstanding results to PAC.

We've also been actively growing our portfolio. During the quarter, we acquired 4 public-anchored shopping centers, 1 in Naples, Florida, 1 in Orlando, Florida, 1 in Atlanta, Georgia and 1 in Nashville, Tennessee. Just after the close of the quarter, on July 6, we acquired another public-anchored center in the Charlotte, North Carolina MSA. The aggregate purchase price for these 5 centers totaled approximately $113.1 million. We are pleased to add these 5 centers to our asset base in these growing markets. 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 solid Sunbelt suburban -- suburban Sunbelt market with excellent demographics.

As of today, we now own 43 grocery-anchored centers in 7 Sunbelt states and 18 markets totaling approximately 4.6 million square feet with nearly 700 independent operating leases. 23 of these centers are anchored by Publix and 11 are anchored by Kroger through its Kroger or Harris Teeter banners. Publix and Kroger are dominant grocery operators. They are market share leaders in our markets and both of which generated approximately $2 billion in earnings in 2017.

We remain active in the marketplace, and we are very focused on new opportunities, but yet we are also very diligent on staying inside our tight geographic and product type strategy, while also being very disciplined about our due diligence and our pricing.

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 [8]

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Thanks, Joel. Last but not least. At quarter end, the company's office portfolio comprised 1.5 million square feet across 5 Class A assets which were 98% leased. The leases in place carry more than 8 years of weighted average remaining term, and our 5 largest customers biannual base rent, which together account for 68% of the portfolio in total, have nearly 10 years of contractual lease term remaining. We pay close attention to assembling our portfolio in a way that manages risks through diversification of geographies, tenant industry, lease expirations, loan maturities, et cetera. And we review each transaction, not just on economic merits, but also in terms of pro forma portfolio composition and in order to manage our long-term exposures.

Within the portfolio, year-to-date, we've executed just over 10,000 square feet of leases, a small number that reflects both the small but growing size of our business and the fact that we have very little vacancy or rollover to market in 2018. The 10,000 square feet includes 3 leases all at our Galleria 75 property in Atlanta which, at quarter end, stood 94% leased. All 3 leases contain the landlord redevelopment right that would allow us to terminate with notice, and the 2 renewals equate to 6% cash roll off. We're talking small numbers relative to PAC's overall business, but it's worth highlighting this kind of strategic success because this is a property we acquired with the intent to eventually redevelop, re-zoning as part of the purchase process to allow significantly more density in the mix of uses. And by keeping it full on an accretive basis while pushing rents despite our redevelopment option, we're afforded a lot of flexibility to patiently wait for the right time to put these 7 acres onto production for higher and better use.

So moving across town, some other notable asset management success. I'm happy to announce that subsequent to quarter end, we delivered a newly constructed 455 space parking deck at our Three Ravinia property, here in Atlanta. We purchased this 813,000-foot building in 2015, knowing we would need to provide additional parking, both to meet the growing needs of our existing tenants and to be competitive in future leasing. And we budgeted these costs into our purchase price analysis. Post closing, we acquired 2 acres of adjoining property on the off-market designed and entitled Bi-storey deck, in completion and construction, under budget, opening for customers earlier this month. We can now provide parking at a range of 4 spaces per 1,000 square feet, a competitive advantage in the market at a time when businesses are occupying space more densely than ever. This investment, along with the building community renovated lobby, business center conference center, café and coffee shop, positions us well for long-term leasing success. And we already have significant interest well ahead of our next rollover in 2020 and 2021.

On the new investments front, we have a relatively narrow focus and pool of inventories to consider both in terms of what constitutes an institutional quality office asset and the geographies we want those concentrations in. So we tend to see larger, individual transactions with more lead times in between. That being said, we've created -- or we've been working hard to create some opportunities we can talk about very soon and are excited about the pipeline beyond that even.

Our focus remains Atlanta, Charlotte, Raleigh, Nashville, Texas, all high-growth markets where we have expertise. We continue to look for the right spots for investments where we can get a good mix of stability and upside opportunity in order to deliver outsized risk-adjusted returns to PAC. Everybody said that we really do wait on a long list of relationships, including leveraging those from PAC-diversified platform, as well as our access to capital on a creative approach to structuring deals, to be successful in these efforts. But for us, this is a show me is better than tell me thing, and we're very much looking forward to talking specifically about our progress in future calls.

With that, let me now turn the call back to Dan.

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [9]

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Thanks, Boone. Despite the ups and downs of the marketplace, our team has continued to do an excellent job, building a carefully constructed portfolio, executing on our strategies and visions, and delivering consistently strong financial results. Our flexibility allows us to be innovative nimble and effective. Our investments in student and 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 by our real estate loan investment program and the potential embedded value we've created through our purchase options place PAC in a sustainable position to continue to deliver consistent outsized results for our shareholders and stockholders.

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 over to the operator and open the floor for any questions or thoughts you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Jim Lykins of D.A. Davidson.

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James O. Lykins, D.A. Davidson & Co., Research Division - VP & Research Analyst [2]

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Just a couple for me. First of all, given that you may be -- or you have the potential for increasing dispositions, is that exclusive of student housing? And also, given the difficulty in making multifamily acquisitions, does that mean that you may be dialing back the preferred programs at all?

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

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Multiple questions there, Jim. I think the message for this call, generally, is discipline. There's an old adage that when people are selling, you ought to be buying, and when people are buying, you ought to be selling. There's limitations that are placed on us with that, but there's a little bit of that in our strategy. And in my career, I have not seen cap rates anywhere close to where they are today, and that does cause us to think that this is a good time to be a seller. That having been said, our core focus is multifamily, it has been from the beginning, it is now, and we expect it to be into the future. So the assets that we have identified as sales candidates, and they're limited, are all traditional multifamily. They are all the oldest or amongst the oldest assets in the portfolio. They're not student housing at this point. We're not an acquirer of student housing, and there's still opportunities -- there's still opportunities in multifamily, but you just have to pick through them. The problem is, it's very difficult to buy assets that -- you have to take cap rates below 5%. And in some cases, on some of the better assets that we've developed, even with our purchase option discount, they're in the 5% range. And we're sort of a victim of our own success. We've attached ourselves to some very, very well-developed properties that have attracted a lot of attention in the marketplace. Your last point about the preferred, I don't see us cutting back. I mean, it's an option, it's something that we could always do. I don't see us doing that right now because, fortunately, we have a couple of other product types that are attractive to us and provide good returns. I mean, the thing about real estate is it doesn't fit nicely into a public company structure. Real estate, done properly, is taking a long view in looking at longer-term IRRs. As a public company, we're mindful of short-term quarter-to-quarter results. We try to be disciplined that we don't overweight one area at the expense of the other. But right now, in our grocery-anchored deals, we get really good short-term results for buying it at cap rates that are 100 to 120 basis points better than multifamily. And on the office side, we're able to acquire assets at good going in yields, but with we think exceptional, long-term IRRs. I know the first 2 deals, we did in office, on our most recent re-forecast, both of them are re-forecasted to IRRs in the 14% to 15% range, which is exceptional. So I think, I covered some questions. I'm not sure if they were yours. But I just did some ...

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James O. Lykins, D.A. Davidson & Co., Research Division - VP & Research Analyst [4]

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Well, another question about preferreds. If you continue to see the amount coming in, increasing, trending higher into Q3, and maybe if you could, give us a little color on where you see that into Q4 as well.

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

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Yes. We -- our original budget for the preferred, for the year, was about $500 million. We believe we're on target for that. We're running from a low of $35 million or $36 million a month to a high of $45 million, $46 million a month. We pick up -- we're picking up more financial advisors on a regular basis, so we would expect that the overall performance would be back end loaded a bit. But it really doesn't need to be in order for us to achieve our goal. So hope that answers that.

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James O. Lykins, D.A. Davidson & Co., Research Division - VP & Research Analyst [6]

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Yes, and one last one for me. With the purchase option, is that something that, going forward, we should be incorporating into our model? And if so, any color you can provide us with on that as well.

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

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Yes. We just want to be disciplined in what we do. We want to invest and invest with assets that are going to be additive to earnings. And there's a lot that goes into the decision. We might exercise a purchase option, and the associated discount -- and buy an asset that has a -- that near term, is a accretive as we would like. If say there was a phase 2 that was attached to it, and our mezzanine program gives us very attractive economics, so you combine the 2 things together. But to your question, it's not going to be a big part of what you can expect going forward. I think the assets that got caught in at this time are ones that just performed so well, and they're so attractive and they're driving so much interest that even with our discount, we can't compete with it. We love them, the mezzanine program because it gives us a great pipeline of assets. We've already closed 1 this year, Green Park purchase option, and we have several others this year that we expect we're going to exercise. But there were a couple that just didn't make sense. And I hope we continue to be disciplined in what we're doing. We're not -- I mean, in some respects, it's to our disadvantage. We are not about just getting bigger. Being big has advantages for sure, but it isn't the driver for us, the absolute driver for us is growing consistent, predictable earnings per share and turning that into increasing predictable growth in our dividend.

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Operator [8]

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The next question comes from Ian Gaule of SunTrust.

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Ian Christopher Gaule, SunTrust Robinson Humphrey, Inc., Research Division - Associate [9]

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Just a few questions about the termination fee income. When should we expect that to be recognized in interest revenue the remainder of this year, some spill over in next year? And was that in the original guidance you provided last quarter as well as the 4Q?

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

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No, it's not reflected in our guidance at all because we kind of dealt with reality when we saw what kind of cap rates several of these properties were likely to attract. But the reason our guidance hasn't really moved is because, again, with the compression in the cap rates, we will likely acquire fewer multifamily assets this year my. I can't tell you by how much. And so instead of getting the return on those now unpurchased assets, we'll be paying down the line of credit, which gives us a lower -- a little bit lower returns. So for now, relating to guidance where it is, I might be in abundance of caution. But we're trying to stay away from getting over our SKUs and think that's the appropriate approach.

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Ian Christopher Gaule, SunTrust Robinson Humphrey, Inc., Research Division - Associate [11]

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Okay. And then how do developers respond to you selling the option back? Are they okay with that? Is it burning bridges there? Just curious what their thoughts are.

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

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I saw that in your thesis this morning. No, actually, it's a win-win. The one thing they're going to be sure of is, when they go to market with these assets, they're going to get the absolute best price in the market because they can run a process. No, they're very happy with it. It'll be good for them, it'll be good for us. We can connect you with any or all of them, I think they'll tell you the same thing.

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Operator [13]

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(Operator Instructions) The next question comes from John Benda of National Securities Corporation.

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John Richard Benda, National Securities Corporation, Research Division - Senior Equity Research Analyst [14]

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Just quickly, I want to talk about the for-sale assets. It almost seemed as if there is a hint of surprise in your sentiment on cap rates. And just, Dan, to the comment that you've never seen cap rates where they are throughout your career, don't you think that today's fundamentals somewhat support them and that there's been this huge shift in home ownership? I mean if you go back to '99, 1995, or early 2000s, you talk to anyone under the age of 30 and you said, "Would you rather buy a home or an apartment?", I would say 95% of people would have said, "Yes, I want to buy a home." But if you look today, today's views and today's first-time homebuyer -- don't you think they're really kind of putting off the home purchase decision and pursuing other avenues and not really skating for that first home, where apartment ownership makes more sense, and that's kind of what's helping support these low cap rates?

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [15]

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I think -- look, I'm going to let John Isakson weigh in on this. John Isakson, I should say, our recently Chief Financial Officer. So a lot of his career depends on how well he answers this question. But what I would say -- I think, so much of the cap rates is just the abundance of capital that's seeking yield in any form or fashion. And if John doesn't agree with me at all, it will also inform his career.

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John A. Isakson, Preferred Apartment Communities, Inc. - CFO & Executive VP [16]

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Well, with that prelude, John, I think your thesis was right of the last few quarters. But recently, we've seen homeownership kind of bottom out and start to tick back up. You've seen home prices and home availability in the market. You've seen the days on the market continue to shrink. Those millennials are starting to buy homes. They are starting to get married, I mean, that trend wasn't going to continue forever. Dan is right about the capital flows. I mean, I think cap rates today are more influenced by capital flows than they are a paradigm shift. But I would agree that we're going to have to see where this goes. If homeownership levels off at 64% to 65%, and we still get sort of 1.2 million to 1.6 million households created a year, we're still going to be in equilibrium, if you look at the new supply of multifamilies coming online. I just think it's a little too early to tell.

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Leonard A. Silverstein, Preferred Apartment Communities, Inc. - Co-Founder, Vice Chairman, President & COO [17]

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John, this is Lenny. One other response to the question you asked is on the sales side. On the sales side, we're not looking just at cap rates in the marketplace. I mean, what we're trying to do, and in particular, selling our older assets is consistent with the strategy and vision we set forth 7 years ago when we started the company. And that is, we'll do an assessment of our property. We'll look at not just the market cap rates in general but we'll look at our CapEx requirements for the property. We'll look at whether the property meets the current physical criteria that we're looking for. And we're also looking at what's the oncoming supply in that particular submarket. And that's one of the things that we have completely focused on which is what drives our multifamily average age down to just a little over 5.5 years as of right now. So we continue to do that, and we'll continue to evaluate our portfolio along some of those lines.

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John Richard Benda, National Securities Corporation, Research Division - Senior Equity Research Analyst [18]

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All right, great. And another two more quickly. One is just on the purchase options. In the beginning, when that program has first started, seems like Preferred was able to negotiate a fixed purchase price upon completion and occupancy. So when was the -- why was the switch made to a discount to market? Was that more of the developers are seeking the market with supply which they had to kind of comply with? How does that come about?

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

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Yes. I mean, that was it. The fixed price existed on really, the first 3 or 4 deals, and we're coming out of a recession. The developers, I mean, candidly, they were happy to hit the process that was reflected in the fixed price. But there was one example early on, I think, it was the deal we did in April, lately. We have a fixed purchase option price and it was -- these are from memory, maybe $3 million profit to the developer. When the asset was valued, the value creation in the -- in that property, it was like $13 million. So the value of our purchase option was around $10 million. Well, that wasn't a fair or appropriate split of the deal. Our policy generally has always been fair is fair. We want the developer to make money because he'll come back to us, and then we want to make a fair return on more dollars. So we concluded, after those first few deals, that the appropriate thing was to try to value the assets, market and derive a fair discount for us.

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John Richard Benda, National Securities Corporation, Research Division - Senior Equity Research Analyst [20]

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And then just real quick. This is more of, I guess, question to the leadership. On prior conference calls, John would always make some remarks regarding firm culture and how important that was. So are the old initiatives that he had in place still there? Are you guys curtailing them or expanding them? And how is the corporate culture continuing past his leadership into the new leadership?

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

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First of all, let me explain, in my office, which is -- which I converted a conference room that John had, I have a phone that -- a Polycom phone in there. And at about 2 or 3 times a day, it makes this really bizarre sound. I mean, it's almost like an eerie siren, nobody has been able to figure it out. I'm pretty much convinced it is John. So if we deviated from something that was so in his heart and at his core, which was creating a culture that was second to none, he would -- I'm convinced, he would haunt me for the rest of time. So we, in fact, tomorrow morning, we have Live with PAC, where we will stream to all of our employees across the country. We provide them with an update. It's critically important that every person that's associated with the company has a sense of connection with the company. And this all goes back to John. We're not walking away from all of the things that we hold dear as a company.

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Operator [22]

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This concludes our question-and-answer session. I would like to turn the conference back over to Dan Dupree, Chairman and Chief Executive Officer, for any closing remarks.

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Daniel M. DuPree, Preferred Apartment Communities, Inc. - Chairman & CEO [23]

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Thank you, operator. Thank you all for participating today. We're available to answer any off-line questions that you might have. I think the message that we wanted to come through most loudly was that we are going to exercise discipline and we are going to make decisions based on both the -- primarily the long-term success of assets. We very much appreciate your support, and look forward to seeing each of you soon. Thank you very much.

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Operator [24]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.