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Preferred Apartment Communities Inc (APTS) Q1 2019 Earnings Call Transcript

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Preferred Apartment Communities Inc  (NYSE: APTS)
Q1 2019 Earnings Call
April 30, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Preferred Apartment Communities First Quarter 2019 Earnings Conference Call. All participants will be on listen-only mode. (Operator Instructions) This conference is being recorded. After today's presentation, there'll be an opportunity to ask questions. (Operator Instructions)

Now I'd like to introduce your host for today's conference call, Mr. Jeff Sprain, General Counsel.

Jeffrey R. Sprain -- Senior Vice President-Legal, General Counsel and Secretary

Thank you for joining us this morning, and welcome to Preferred Apartment Communities' first quarter 2019 earnings call.

We hope that each of you have had a chance to review our first quarter earnings report which we released yesterday after the market close. In a moment, I'll be turning the call over to Dan DuPree, our Chairman of the Board and CEO for his thoughts. 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 know 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 is a discussion about these risks and uncertainties in yesterday's press release. Our press release can be found on our website at www.pacapts.com.

The press release also includes our supplemental financial data report for the first quarter 2019 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 now would like to turn the call over to Dan DuPree. Dan?

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Thanks, Jeff.

We're pleased with our first quarter results. They represent excellent operational focus, coupled with a disciplined approach to each of the strategies in our different business units. I want to take a minute this morning to talk about the quality of the senior management team we have at PAC.

I've been in this business for over 40 years, and have had the opportunity to work with some extraordinary teams, but I believe, top to bottom, this team is the deepest in terms of both talent and work ethic that I've ever worked with. You'll hear this morning first from Lenny Silverstein, our President and Chief Operating Officer, about our first quarter results. Lenny helped found PAC with John Williams in 2011 and helped create our unique capital structure.

Next, John Isakson, our excellent Chief Financial Officer, will discuss capital markets. John enjoys unique and valuable relationships in this space. Joel Murphy is the Chief Executive Officer of our new market subsidiary. He is also the Chairman of our Investment Committee covering all property types. Joel and I have worked together across three platforms for over 30 years. He'll walk you through our active first quarter in terms of our retail activity.

Jeff Sherman will report on our multifamily business, which he leads as Executive Vice President. He's been challenged on the acquisition front because multifamily cap rates have compressed so much, but he has championed the focus on operations and mezz loans which I believe will bear fruit for many quarters to come. Jeff has over 20 years in the multifamily business, covering acquisitions, development and asset management.

Next, you'll hear from Boone DuPree, Chief Executive Officer of our Class A office division. Boone has done an excellent job defining our strategy for this group, implementing it and growing our asset base. He came to us from Cousins Properties, where he played a key role in nearly $2 billion in Class A acquisitions. Paul Cullen is the Chief Executive Officer of the student housing business unit as well as Chief Marketing Officer for Preferred Apartment Communities. As Chief Marketing Officer, he leads our marketing team, which is a critical element of our branding efforts. Paul will speak about our successes in the operations and leasing of our various student housing projects.

I should also say a word about our entire Preferred Capital Securities team. These are the folks who provide us with much of the capital we need to grow our business. Through the end of Q1 year-to-date, they have raised $142 million from the sale of our preferred stocks. Not presenting today but equally important are Kim Hodge, our Chief Property Management Officer; Mike Cronin, our Chief Accounting Officer; Jeff Sprain, from whom you heard a moment ago, our General Counsel; and Randy Forth, who leads our excellent and very experienced asset management team.

When you invest in any company, it is the associates involved in running that company that will ultimately determine how successful your investment will be. From the day we went public in 2011, our common stockholders, who invested with us that day and reinvested their dividends, assuming no transaction costs, would have achieved an 18.2% IRR due to the efforts of this team.

So with that, let's lead off with Lenny.

Leonard A. Silverstein -- President and Chief Operating Officer

Thanks, Dan.

We had a solid first quarter in terms of FFO growth and again produced a strong dividend. As you'll hear more about later, our multifamily same-store sales results were an impressive 3.1% on a quarter-over-quarter basis. We also continued our acquisition -- asset acquisition strategy during the first quarter through the acquisition of an 887-bed student housing community located adjacent to the University of North Carolina, Charlotte, and a 158,000 square foot grocery anchored shopping center in Richmond, Virginia.

To help fund our growth strategy, we originated one real estate loan investment for a new multifamily development in Destin, Florida, and raised an aggregate of over $142 million of capital from sales of our preferred stock through the independent broker-dealer and registered investment advisor channels during the first quarter of this year. As of the end of the first quarter, our real estate loan investment pipeline represents over $1 billion of prospective assets that we have the right to acquire. All in all, we are able to generate IRRs in the low to mid teens through this program, while getting off-market access to new quality assets through the purchase options embedded in these loans as well as rights of first offer.

On a more granular level, our revenues for the first quarter were over $111 million or over 23% greater than the revenues we earned for the first quarter last year. Our FFO for the first quarter 2019 was approximately $17 million or $0.39 per share, representing a 5.4% increase in FFO per share compared to the first quarter of last year. These outstanding operating results for the first quarter this year allowed us to pay a very solid common stock dividend equal to $0.26 per share or 4% greater than the dividend paid to our common stockholders for the first quarter in 2018.

As we have previously discussed, we continue to focus on increasing the float of our common stock. During the first quarter this year, for example, we issued an aggregate of approximately 1.4 million shares of our common stock in connection with redemptions of our preferred stock and the exercise of warrants previously issued under our Series A preferred stock and unit offerings. Overall, we had approximately 43.2 million shares of common stock outstanding as of March 31, 2019, representing an increase of over 4 million shares or 10.3% compared to the first quarter of last year.

Switching to other financial statement metrics. We continue to add quality assets to our portfolio in a meaningful way. As of the end of the first quarter this year, our total assets, net of depreciation, were approximately $4.8 billion or an increase of approximately $392 million or almost 9% compared to December 31st of last year.

As we've said many times before, our success is the result of our ability to function as a team. So let me now call on John Isakson, our Chief Financial Officer, who will discuss our capital market strategy. John?

John A. Isakson -- Chief Capital Officer

Thanks, Lenny.

For 2019, we continue to expect that cap rates on multifamily acquisitions will remain low, with grocery anchored shopping center and Class A office acquisition cap rates higher. In 2018, the low cap rate environment contributed to our decision to sell three assets. One of these assets closed in the first quarter of 2018 and generated a substantial gain. We did not sell any assets in the first quarter of this year, so the variance in that line item will account for the notable variance in our net income number. And while not one of our most important metrics, the difference is worth explaining.

Interest rates have been generally declining in the last three months and currently sit about 75 basis points off the recent peak in Q4 last year. We continue to believe that interest rates will be volatile in 2019, with domestic and global pressures presenting unpredictable conditions. Given the recent volatility and the uncertainty in the environment, we have taken a cautious approach to our acquisition and portfolio financing strategy. Approximately 94% of our permanent property level mortgage debt has fixed interest rates or variable interest rates that have caps.

Already this year, we have refinanced two of our floating rate retail deals into fixed rate loans, in both cases actually reducing the interest rates on the debt and extending the maturity. As we referenced last quarter, we recently closed on the extension of our $200 million corporate line of credit, extending the maturity for three years and giving us flexibility for an additional year at the end of the term.

Our borrowings under line of credit as of today are zero, and we believe the current capacity of the line will serve us well for the foreseeable future. In the event we need to increase the capacity of the line, we have an accordion feature that allows us to expand up to a total of $300 million. We recently filed an updated shelf registration statement of up to $400 million. The shelf gives us the flexibility and optionality to issue common stock and otherwise access the public markets as we see fit when common stock prices are attractive.

On the acquisition front, we've 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 $100 million in maturing debt in 2019 remaining to refinance. We have already begun the process of securing new debt for these assets, and given the current rate environment, we will look to lock in our interest rates as soon as practicable.

For our multifamily portfolio, Freddie Mac and Fannie Mae remain our primary lenders. We have enjoyed preferred borrower status and have excellent relationships with both agencies. It is worth noting that the recent appointment and confirmation of Mark Calabria to head FHFA, the regulatory body for Freddie Mac and Fannie Mae, has raised the probability of GSE reform in the near future. In the current environment, GSE spreads have widened as (inaudible) for debt have remained strong and the ability for the agencies to do uncapped business has become more difficult. We expect spreads to widen somewhat and life company debt for multifamily assets to become more attractive and competitive.

The lender pool for our retail product remains deep and the demand for our debt remains strong. We have recently seen a contraction in spreads for these deals so the competition for grocery anchored debt has increased. Our other transactions are also financed through life companies with terms that are generally comparable to retail multifamily although the maturities may be longer. These are typically larger deals and the lender pool is smaller than the one for retail deals, which are a more manageable size. Nonetheless, we have seen strong lending demand for our office acquisitions and our deep relationships in the lending community continue to serve us well.

Jeff Sherman will now discuss our first quarter 2019 multifamily results. Jeff?

Jeffery D. Sherman -- Executive Vice President of Multifamily Investments

Thanks, John.

I'm pleased to announce strong operating results for the multifamily portfolio during the first quarter of 2019. Our same store set achieved first quarter year-over-year rental revenue and total revenue growth of 3.1% and 2.8%, respectively, while total operating expenses were held to a modest 2.3% increase. This resulted in same store net operating income for the first quarter increasing 3.1%, with physical occupancy averaging 95.2%. Revenue was driven by a combination of rent rate growth and improved occupancy.

Our operating and maintenance expense was down 2.7% compared to the first quarter of 2018 as we began strategically rolling out cost saving measures, including a national contract for our maintenance supplies. We did see an increase in payroll, but the additional expense is generally due to timing of adjustment for employee healthcare costs. Over the course of the year, we expect the annual payroll expense to moderate.

I also want to remind everyone that our 3.1% same store net operating income increase is now calculated from 21 properties as compared to 10 properties in 2018. This new composition covers eight states and 13 MSAs versus the 2018 same store set which included only four states and seven MSAs. It is also worth noting that our complete multifamily portfolio now consists of 32 properties, with an average age of 5.2 years old.

Turning to acquisitions. While we did not acquire any multifamily properties during the first quarter, we continue to see a deep pipeline of quality product. We remain steadfast in our approach to purchase properties that have both the strong market and property level fundamentals and which are accretive during our period of ownership.

We did close on real estate loan investment of up to $10.8 million to construction of a 282-unit Class A multifamily community located in Destin, Florida. This community is located in the heart of Destin, and we believe will serve the premier rental community from the area.

With the addition of this investment, PAC's multifamily loan investment portfolio consists of 14 multifamily projects, totaling over 4,300 units. We continue to see strong interest in our real estate loan investment program, and have been successful in expanding our developer relationships over the last few years.

As we've said before, this loan investment program has been an integral part of our business model since our IPO and provides us the pipeline of new properties and carries embedded value with each loan that can be recognized in a variety of ways.

Let me now call on Joel Murphy, the President and Chief Executive Officer of New Market, our retail division. Joel?

Joel T. Murphy -- President and Chief Executive Officer of New Market Properties, LLC

Thanks, Jeff.

We are pleased to report another strong quarter of overall operating performance. The continued solid results for our growing grocery anchored portfolio are a result of the collaborative efforts of each of our team members, from acquisitions to asset management, leasing, accounting and property management, all working very hard every day to create value for PAC and our stockholders.

We continue to execute our focused strategy to acquire, invest in and operate grocery anchored centers that fit our investment criteria in quality suburban submarkets, within the top 100 metro areas from the mid-Atlantic, southeast Florida and now through Texas.

We target centers that have market dominant grocery store anchors that maintain a number one and number two market share in that sub-market and have high and growing sales per square foot stores. Leasing space, renewing tenants and keeping tenants happy is our daily focus.

At the end of the first quarter, our 4.9 million square foot portfolio was 49.1% leased, and our portfolio, excluding redevelopments, was 95.6% leased. 14 of our 46 centers are 100% leased. In 2019, we have eight grocery store anchors that have leases rolling, and six of them have already renewed their leases at their contractual rates.

In early Q1, we closed on Gayton Crossing, a Kroger Chateau (ph) anchored shopping center in Richmond, Virginia. This is our second asset in Virginia and our first in Richmond. It is located in the highly desirable western submarket, and Kroger has a very high volume store in the center. Gayton Crossing is an excellent example of the focused strategy I just described: anchored by a market-leading grocer that has a high-sales-per-square-foot store and located in a quality, Sun Belt or Mid-Atlantic submarket with solid demographics.

We continue to implement our capital improvement and major repair and maintenance plans. We are mindful to create long-term value for each of our assets, while providing a best-in-class environment from which our tenants do thrive. These projects include (ph) LED lighting and landscaping upgrades, signage, shopping center painting, facade upgrades and new parking lots and roof replacements.

We executed on all cylinders in the first quarter. We leased vacant space. We kept our centers leased. We renewed at higher rates, we managed our expenses and 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.

As of today, we now own 46 grocery anchored centers in eight states and 19 markets, totaling approximately 4.9 million square feet with nearly 800 independent operating leases. 23 of these centers are anchored by Publix and 13 are anchored by the Kroger Harris Teeter (inaudible). Both Publix and Kroger are market share leaders, with Publix reporting adjusted net earnings for 2018 of $2.5 billion and Kroger reporting 2018 adjusted net earnings of $1.7 billion.

(technical difficulty) active in the acquisition marketplace and while we have a deep chateau pipeline and are very focused on new opportunities, we remain diligent to stay inside our tight geographic and product type strategy, while also being very disciplined about our due diligence and our pricing.

Let me now turn the call over to Boone DuPree, the head of our office division. Boone?

Boone DuPree -- Chief Executive Officer of Preferred Office Properties, LLC

Thanks, Joel.

The first quarter for our office division featured an emphasis on asset management as we digested more than 1 million square feet of Class A office properties that we acquired in 2018. We brought on several key new associates, including our Head of Development, Jason Frost; Vice President of Asset Management, Mahesh Mani; and associate Tim Peterson, who supports the team across our different endeavors. With these additions, our capacity grows exponentially, and we are happy to have them join us.

Moving to the portfolio. Today, we own and operate approximately 2.6 million square feet of Class A office property. The portfolio is 93% leased, with approximately eight years of weighted average term remaining under those leases. Our most recent two investments, Capitol Towers in Charlotte and 150 Fayetteville, Raleigh, reflect the geographic focus, which extends beyond Charlotte and Raleigh to include Atlanta, Austin, Dallas, and Nashville.

These six primary markets share two important qualities in common. First, each features long-term high growth trends in population, job creation and wage gains. This is driven generally by advantages in quality of life, cost of living and business friendly political policy. Recent relocation and expansion announcements from Alliance Bernstein, Honeywell, BlackRock, Google, Apple, Amazon, Facebook, and the list goes on, all serve to affirm our thesis.

The second shared quality is our team's individual and collective experience, investing, operating and developing in these six primary markets. In these markets, over the last 10 years, our senior leadership has acquired approximately 6 million square feet of Class A office, operated a cumulative portfolio totaling more than 11 million square feet and delivered new construction office development totaling more than 1 million square feet. Our business is, at its core, a leasing business, and leasing is conducted at the local level. So this depth of experience specific to our primary markets is fundamental to our success.

Moving to updates from the portfolio. Despite no new closed investments in the quarter, we had a lot going on in Q1. Project construction for 8West real estate loan investment in midtown Atlanta is well under way, with good preliminary interest to lease space in the 187,000 square foot building scheduled to deliver the second half of 2020. Like many of PAC's other real estate loan investments, we have an option to purchase the development upon it stabilization.

At Three Ravinia, subsequent to quarter-end we were able to execute on a strategic lease transaction to incrementally reduce exposure to State Farm's 2021 move-out by taking back some space early, collecting a termination payment and partially backfilling that space with a high quality, high growth new customer. The new customer will initially occupy one of the three floors State Farm will return to us, although they have expansion options they may elect to exercise.

In Raleigh, we kicked off an expansive renovation of 150 Fayetteville, including the building's lobbies, plaza and other common areas, to elevate the 30 storey property to premier stature at the top of the downtown Raleigh market. This project is scheduled to be substantially completed in late summer.

We're excited about the prospects of our business and confident in the strategy. Office demand is strong across our six primary markets, and the pipeline in front of us is very full. We will continue to work hard to uncover and execute on good risk adjusted opportunities to make money for our stockholders.

With that, let me now turn the call over to Paul Cullen, the head of Preferred Campus Communities, our student housing division. Paul?

Paul Cullen -- Chief Executive Officer of Preferred Campus Communities, LLC

Thanks, Boone.

Our student housing strategy continues to focus on acquiring best-in-class properties located within walking distance to the center of the respective university campuses that have strong enrollment. As of the end of the quarter, Preferred Campus Communities owned eight properties in five states across eight different universities, totaling 6,095 beds. Interestingly, the average age of our student housing portfolio is only four years old.

With increased (inaudible) across the portfolio and strong operating results in line with budget expectations, we continue to see the benefit from our student housing management team's leasing efforts to gain additional spring leases and maintain stabilized occupancy levels. At the end of the first quarter this year, physical occupancy at our six stabilized student properties was 95.6%.

We see improved future performance at several assets related to the strong pre-leasing velocity for their 2019/2020 academic year and are working toward stabilizing all of our assets despite the expansion of third-party inventory at some of our markets.

Our student housing management team is continuing its pre-leasing efforts and we expect the team to deliver another strong lease-up across the portfolio for the 2019/2020 school year. In fact, we've already passed 80% lease-ups for the entire portfolio for the 2019/2020 school year. I want to take a moment to thank and acknowledge this team for all their efforts, in particular, Brian Harrison, our Asset Manager.

Preferred Campus Communities' most recent acquisition of Haven49, an 887-bed property located adjacent to the campus at UMC Charlotte with an enrollment of 30,000 students was initially part of our real estate development investment program. This property offers our student housing division the opportunity to enter the extremely well located new asset at a growing university.

Preferred Campus Communities has already begun implementing a takeover plan, including capital projects with a focused marketing campaign to win over current and future residents. In the brief period since acquisition, there has been a number of -- meaningful increase in the pre-leasing activity, and the excitement around the new ownership is resulting in higher occupancy and rent growth.

Although there were no new loan originations for student housing in this quarter, we continue to pursue both debt and equity investments in new highly monetized properties neighboring top tier campuses as part of our student housing acquisition strategy, and we remain active participants in many geographic markets.

Finally, we look to grow our student housing portfolio through disciplined investments while sustaining revenue growth and monitoring expenses at existing communities. I look forward to updating you on the portfolio's performance on our next earnings call.

I will now turn the call back to Dan DuPree. Dan?

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Thanks, Paul.

We expect 2019 to be a transformative year for PAC as we seek to build a sustainable program of excellence. We do this in part by leaning into our core strategy of investing into four distinct product classes. We believe this strategy has served us well. We are unique in that we raise capital both through the sale of our common stock to the public market and also through the sale of our preferred stocks through the independent broker-dealer and RIA channels. We have significant capital coming in through the sale of the preferred every two weeks.

Imagine what would happen if over the past two years our only option was to invest in multifamily assets, which have seen unprecedented cap rate compression. Through product diversification, we are able to invest efficiently and accretively. We are fortunate to have strong leaders at the helms of our various business units to execute on their well-defined targeted strategies.

We've had some friends tell us that our cost to capital is too high with our preferred dividend at 6%. Our response is that if we were giving our stockholders a 3% to 4% total return over a number of years, as many people in the public space do, then we would agree that a 6% dividend was too high. But in our case, where we have given our common stockholders in excess of an 18% return since day one, the 6% preferred cost is pretty darn attractive. We are running an IRR business in a quarterly reporting structure, and we're OK with this.

I hope we always take the long view on our investments, even though that might create short-term lumpiness. Last quarter, we signaled FFO guidance for 2019 in a range of $1.44 to $1.50 per share. This guidance remains unchanged. We also indicated that the second half of the year would be the better half. That too remains unchanged.

Quarter one was a pleasant result, but we do not expect a similar result in quarter two. Our real estate loan investment program continues to grow in terms of the number of quality development groups who have invited us to participate in the capital stacks of their development. We currently have over $484 (ph) million in loan commitments to 13 developers, with approximately $338.3 million of the committed amount funded to date.

Finally, several weeks ago, we filed an 8-K in which we acknowledged that we were, on a preliminary basis, exploring the feasibility of internalization. As you can imagine, there is a process to this, and we really can't say any more on that subject.

As always, our overriding objective is to create value through our investments. While we have grown considerably in total assets in spring 2011, we are not driven by size. We've sold seven multifamily assets in the last 18 months simply because it was the right thing to do for the portfolio. We will continue to put our current stockholders first and we expect we will continue to deliver on our promise of excellence.

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

Questions and Answers:

Operator

Thank you. Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) First question is from Mr. Michael Lewis of SunTrust. Please go ahead, sir.

Michael Lewis -- SunTrust -- Analyst

Thank you. Dan, I wanted to go back to something you just said about the guidance. The low end of that 2019 range now implies $0.35 (ph) a quarter the rest of the year. The high end is still only $0.37. You just said $0.39 in 1Q and said that the back half is going to be better. I guess -- may be walk me through that. That that seems a little -- it seems a little confusing to me.

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Befuddling? Yeah, Michael, the -- our guidance remains unchanged. I said at the beginning of my final statement that we expected this to be a transformative year. There are a number of things that we're looking at to try to smooth out lumpiness. The lumpiness, as you know, is created by the mezz loans. They pay off when they pay off. So we -- our outstandings on the mezz loan can -- can vary fairly wildly from quarter to quarter. We're moving away from the notion of the purchase option discount. We're recognizing more consistent gain through increase in accrued interest. These are things that are going to take time, and there are other fairly significant initiatives that we're looking into that may impact -- that may impact earnings over the year. I think it may be a mistake, but I think it's Avalon Bay, they basically has a policy where -- where they don't alter guidance after first quarter results. And for us, with all the things that we're looking at -- and we feel very good about 2019, but looking -- thinking of all the things that we're looking at, we just felt like making any change to guidance at this point would be premature.

Michael Lewis -- SunTrust -- Analyst

Okay. I understand. You're right about Avalon Bay. And I appreciate the uncertainty. My second question: it looks like the deferred interest rate on a few of the loan investments decreased, including this one in San Jose, which is your biggest one. Could you maybe give a little color what's causing that -- that to happen to additional loans?

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Yeah. Well, the main thing that's happening is there is an awful lot of capital chasing a finite number of deals. There is no question that the mezz loans that we're doing today are less attractive than the ones we were doing at the beginning of the cycle. So -- so it's a question of competition. That particular deal in California, they -- there was a -- there was a toggle in their -- in their loan with us that allow them to put in more equity and materially reduce the interest rate and the amount outstanding. We basically renegotiated that deal midstream. And you're right, it does show a reduction in the accrued interest part. But that's -- that is 100% a factor of competition for the -- for the mezz loan dollar and -- or the mezz loan opportunity. That having been said, we've got more -- more developers now, more high quality developers now, that are seeking us out. I think we've got 13 different development groups now, and we've got -- we've got multiple others that we're working on loans for. So we're encouraged that we're going to be able to maintain the outstandings on the -- on the real estate loan investment probably between $450 million and $550 million in commitments. But it's going to be spread out over a larger number of people. But the deals are -- are very competitive.

Michael Lewis -- SunTrust -- Analyst

Okay. And then just lastly -- lastly for me. Dan, you mentioned managing the -- taking the long-term view within this construct of quarters that could -- that could be up or down. I think you've also said in the past that apartments still offer the most attractive long-term risk adjusted opportunity and IRR. I'm just wondering if you still think that's true and how you kind of balance that with being accretive in the short term.

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Well, that -- I mean, that's -- that's the trick. I mean, we're talking about a real estate company that I think is somewhat opportunistic, investing in real estate which is a long-term investment and then trying to fit it into quarterly results. And one of the challenges is to not -- to not go overboard, trying to force quarterly results at the expense of the long-term deal. But yeah, generally speaking, the IRRs on multifamily, as we underwrite our deals, I think are -- continue to be compelling relative to the alternatives. We get different things from different of our product types, and for the moment, I'd say student housing probably operates much like multifamily. Joel at New Market -- we're getting -- we're getting much better short-term accretion benefit from his deals. We're buying them at cap rates the most -- I mean, the retail at maybe 100 basis points or more better than what we can buy the multifamily at. But you've got the anchor tenant that's got a fixed rent, so you're not going to get the bumps over the hold. The multifamily, you get (technical difficulty) which puts real pressure on short-term accretion. But the IRRs are good. But the IRR is a calculation that's predicated on what your assumptions are for exit cap rates. We generally add about 50 basis points over the purchase price cap rate in the calculation, but cap rates for multifamily are so low right now that even if you had (ph) 50 basis points in your IRR calculation, that may or may not be realistic down the road. The office portfolio right now, particularly with GAAP accounting, on straight line rents, we get -- we get a nice pop generally on an acquisition from an accretion standpoint in the early years. That kind of levels out because of straight line, but we've still been able to achieve 2%-plus growth in that portfolio. So our IRRs on the multifamily right now probably look as good or better than -- I mean, on the office, look as good or better than the other areas. That having been said, we can properly underwrite an office building and assume that a tenant is going to move out in year seven and we're going to have to put in TI (ph) and we're going to have downtime and it can be baked into our IRR, but it don't change the fact, and year seven, it kind of stinks. So our challenge is to blend all of this together into a cohesive unit, and when I refer to the transformative aspects of this year, we're working to try and to smooth out some of that while not losing the -- our commitment to value creation. We're very serious about -- and very proud of that 18.2% total return to our shareholders since day one. I don't know that we'll be able to sustain that level but I think we're going to outperform the market, I hope so, going forward. I don't know if I answered a question in there, but talked a long time, Michael. Surely there was some question that I answered, wasn't there?

Michael Lewis -- SunTrust -- Analyst

No. You're uniquely positioned to comment on all these properties (ph), let's say, and it helps. No offense.

Operator

Okay. The next question is from Jim Lykins of D.A. Davidson. Please go ahead.

Jim Lykins -- D.A. Davidson -- Analyst

Hey, good morning, guys. So first with the difficulty in acquiring multifamily right now, when you talk about that, are you also including student housing? Or are you seeing some opportunities there versus the traditional multifamily?

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Well, it's not difficult to acquire multifamily. It's just -- it's difficult to pay what they want you to pay.

Jim Lykins -- D.A. Davidson -- Analyst

Sure.

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

But cap rates have compressed I think equally on multifamily and student housing. They really do operate completely differently. We put them together as a class because there are people sleeping in beds and in units that we provide, but -- but they operate -- they do operate entirely differently. So to answer your question, the difficulty that exists because the cap rates in multifamily extends to student housing.

Jim Lykins -- D.A. Davidson -- Analyst

Okay. And -- and for the purchase options, are there -- or is there any color you can give us on how we should be thinking about that or if your assumptions have changed versus where we were last quarter?

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Well, it was always a source of frustration for us that -- particularly early in the cycle, there was -- there was significant value in the purchase options, and it was never reflected in earnings anywhere other than maybe being sort of amortized over the hold of an asset. We made a decision a while ago to start figuring out how we could recognize the -- the value of those purchase options and monetize them into FFO, which we've done. We sort of morphed from that point to the point where we're opting to increase our -- our accrued interest in new deals that we're originating and eliminating the discount which was always difficult to calculate, and coupling that with a right of first offer so that we continue to control the asset that we're basically recognizing -- recognizing the economic value of the deals on a quarterly basis, and that goes again to my point that we want to smooth out some of the lumpiness in our -- in our earnings calls.

Jim Lykins -- D.A. Davidson -- Analyst

Okay. And -- and one last one, Dan. You mentioned internalization. I know there's not a lot that you can talk about now. But is there just any kind of rough timeline on when we might know something else or maybe what to expect?

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Well, Jim, there are -- there are two lawyers that we have on staff, and three, counting Lenny, and four, counting, Joel. If I -- if I say anything more than what we put out in the 8-K I'm going to be beaten up. But we've always said that from time to time, this was something that we needed to look at. So that's what we're doing.

Jim Lykins -- D.A. Davidson -- Analyst

Okay. Thanks, Dan.

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Thank you, Jim.

Operator

The next question is from Merrill Ross of Boenning & Scattergood. Please go ahead.

Merrill Ross -- Boenning & Scattergood -- Analyst

Good morning. I think over time -- I've been following you for quite some time -- the key has been in the mezzanine loan program that allows you to buy assets at relative discount in multifamily and that's extended now to some development in upstream housing and on office. As you grow your group of contractors, is there any inclination to add another asset class and continue the path of diversification? Or is it more likely that you stay concentrated in the group before that you're currently focused on?

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Merrill, honestly I would tell you that when we started the -- when the Company was started, even though John and Lenny left room for us to invest in something other than multifamily, the expectation is that we would be -- we would be very much a multifamily focused company. We diversified into retail when we realized cap rates were compressing, our ability to raise capital was increasing and candidly that we had access to Joel Murphy with whom I had worked for a number of years in retail. So -- so those things coming together led us to diversify into retail. About that time, one of our developers that we had worked with wanted to get into student housing. We thought that that was a logical extension of our multifamily business, which, as I mentioned a minute ago, has proven to be more -- more different than we had originally thought. And then the office thing was more serendipitous. So what I would tell you is -- is that we have no plans at all at this point to expand beyond the groups that we're in right now. We're really lucky because we have -- we have I think excellent expertise leading the four units that we have. But I can't -- I can't foresee an expansion beyond where we are. But, again, we're an opportunistic company, and if something were to come along that made a lot of sense, then we would -- then we would certainly explore it. And I want to -- I want to stress the point that I made, an earlier comment. What creates the need for this -- for us being a diversified REIT is the fact that we have this money coming in every two weeks. We have to be able to invest that capital accretively and efficiently and quickly and it's an absolute necessity that we have some level of diversification that gives us the opportunity to do that.

Merrill Ross -- Boenning & Scattergood -- Analyst

Yeah, point taken. Thank you.

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Thank you.

Operator

This concludes the question-and-answer session. I'd like to hand the conference back over to Mr. Dan DuPree free for any closing remarks. Excuse me, sir. There is actually another question registered by Rick Murray of Sorin Capital.

Rick Murray -- Sorin Capital -- Analyst

Hi, good morning. I was just curious if you could help us understand a little bit better what your definition of recurring CapEx is because it just seems that the $1.2 million per quarter that you recorded this quarter is really low for a portfolio your size.

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Well, Rick, I think the recurring CapEx is a function of the age of the portfolio as much as anything else. We focus on high quality, newer assets and those newer assets have lower CapEx requirements, and I think that's been a historical trend as well. Yeah, we make a real point of -- of the fact that our portfolio in multifamily is by our measure far and away the youngest in the industry. Paul Cullen speaking on student housing mentioned four year old, on average, portfolio. I think we're about 5.2 years old on our multifamily and that's not by accident. It's because it gives us the opportunity to control CapEx. We're not likely to have any roofs that need to be replaced. In fact, the seven assets that we've sold over the last 18 months, they were in each case sequentially the oldest asset we had at that time, and it was -- and it was because we didn't want to get involved in capital expenditures for which we would not receive increased rent. People expect you -- their roof to be -- to be good and sound and there's space to be dry. They expect their parking lots to be paved and set up. And these are all things that require significant capital if you hold assets long enough. It is a material advantage to us. When you compare us against our great -- other multifamily companies in the space, you compare the ages of our portfolios and you'll see a marked advantage for us in this particular regard.

Rick Murray -- Sorin Capital -- Analyst

Okay. That's helpful. Thank you. Is there a way you could provide us any sense of the distribution of the CapEx by sort of the property types?

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

No. We don't -- we don't disclose that.

Rick Murray -- Sorin Capital -- Analyst

Okay.

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Right. I think that ought to conclude the call. We really appreciate your involvement, your interest in the Company, and look forward to talking to you next quarter. Thank you.

Operator

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may disconnect your telephone.

Duration: 49 minutes

Call participants:

Jeffrey R. Sprain -- Senior Vice President-Legal, General Counsel and Secretary

Daniel M. DuPree -- Chairman of the Board & Chief Executive Officer

Leonard A. Silverstein -- President and Chief Operating Officer

John A. Isakson -- Chief Capital Officer

Jeffery D. Sherman -- Executive Vice President of Multifamily Investments

Joel T. Murphy -- President and Chief Executive Officer of New Market Properties, LLC

Boone DuPree -- Chief Executive Officer of Preferred Office Properties, LLC

Paul Cullen -- Chief Executive Officer of Preferred Campus Communities, LLC

Michael Lewis -- SunTrust -- Analyst

Jim Lykins -- D.A. Davidson -- Analyst

Merrill Ross -- Boenning & Scattergood -- Analyst

Rick Murray -- Sorin Capital -- Analyst

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