UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-34995
Preferred Apartment Communities, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 27-1712193 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3284 Northside Parkway NW, Suite 150, Atlanta, GA 30327
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (770) 818-4100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $.01 per share | APTS | NYSE |
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Series A Redeemable Preferred Stock, par value $0.01 per share
Warrant to Purchase Common Stock, par value $0.01 per share
Series M Redeemable Preferred Stock, par value $0.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrant’s Common Stock, as of April 22, 2019 was 43,355,637.
PART I - FINANCIAL INFORMATION | ||||
INDEX | ||||
Item 1. | Financial Statements | Page No. | ||
2 | ||||
3 | ||||
Item 2. | ||||
Item 3. | ||||
Item 4. | ||||
Item 1. | Legal Proceedings | 68 | ||
Item 1A. | Risk Factors | 68 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 68 | ||
Item 3. | Defaults Upon Senior Securities | 68 | ||
Item 4. | Mine Safety Disclosures | 68 | ||
Item 5. | Other Information | 68 | ||
Item 6. | 68 | |||
Preferred Apartment Communities, Inc. | ||||||||
Condensed Consolidated Balance Sheets | ||||||||
(Unaudited) | ||||||||
(In thousands, except per-share par values) | March 31, 2019 | December 31, 2018 | ||||||
Assets | ||||||||
Real estate | ||||||||
Land | $ | 535,698 | $ | 519,300 | ||||
Building and improvements | 2,826,609 | 2,738,085 | ||||||
Tenant improvements | 131,117 | 128,914 | ||||||
Furniture, fixtures, and equipment | 296,926 | 278,151 | ||||||
Construction in progress | 9,268 | 8,265 | ||||||
Gross real estate | 3,799,618 | 3,672,715 | ||||||
Less: accumulated depreciation | (308,004 | ) | (272,042 | ) | ||||
Net real estate | 3,491,614 | 3,400,673 | ||||||
Real estate loan investments, net of deferred fee income and allowance for loan loss | 311,661 | 282,548 | ||||||
Real estate loan investments to related parties, net | 24,477 | 51,663 | ||||||
Total real estate and real estate loan investments, net | 3,827,752 | 3,734,884 | ||||||
Cash and cash equivalents | 80,403 | 38,958 | ||||||
Restricted cash | 45,482 | 48,732 | ||||||
Notes receivable | 16,340 | 14,440 | ||||||
Note receivable and revolving lines of credit due from related parties | 24,980 | 32,867 | ||||||
Accrued interest receivable on real estate loans | 23,540 | 23,340 | ||||||
Acquired intangible assets, net of amortization of $122,735 and $113,199 | 131,560 | 135,961 | ||||||
Deferred loan costs on Revolving Line of Credit, net of amortization of $346 and $180 | 1,753 | 1,916 | ||||||
Deferred offering costs | 6,346 | 6,468 | ||||||
Tenant lease inducements, net of amortization of $2,261 and $1,833 | 20,371 | 20,698 | ||||||
Receivable from sale of mortgage-backed security | — | 41,181 | ||||||
Tenant receivables (net of allowance of $0 and $1,662) and other assets | 54,662 | 41,567 | ||||||
Variable Interest Entity ("VIE") assets from mortgage-backed pool, at fair value | 568,725 | 269,946 | ||||||
Total assets | $ | 4,801,914 | $ | 4,410,958 | ||||
Liabilities and equity | ||||||||
Liabilities | ||||||||
Mortgage notes payable, net of deferred loan costs and | ||||||||
mark-to-market adjustment of $40,314 and $40,127 | $ | 2,359,939 | $ | 2,299,625 | ||||
Revolving line of credit | 17,000 | 57,000 | ||||||
Real estate loan investment participation obligation | — | 5,181 | ||||||
Unearned purchase option termination fees | 7,276 | 2,050 | ||||||
Deferred revenue | 42,544 | 43,484 | ||||||
Accounts payable and accrued expenses | 40,525 | 38,618 | ||||||
Accrued interest payable | 7,494 | 6,711 | ||||||
Dividends and partnership distributions payable | 20,285 | 19,258 | ||||||
Acquired below market lease intangibles, net of amortization of $17,280 and $15,254 | 46,638 | 47,149 | ||||||
Security deposits and other liabilities | 15,775 | 17,611 | ||||||
VIE liabilities from mortgage-backed pool, at fair value | 544,869 | 264,886 | ||||||
Total liabilities | 3,102,345 | 2,801,573 | ||||||
Commitments and contingencies (Note 11) | ||||||||
Equity | ||||||||
Stockholders' equity | ||||||||
Series A Redeemable Preferred Stock, $0.01 par value per share; 3,050 | ||||||||
shares authorized; 1,804 and 1,674 shares issued; 1,720 and 1,608 | ||||||||
shares outstanding at March 31, 2019 and December 31, 2018, respectively | 17 | 16 | ||||||
Series M Redeemable Preferred Stock, $0.01 par value per share; 500 | ||||||||
shares authorized; 57 and 44 shares issued; 56 and 44 shares outstanding | ||||||||
at March 31, 2019 and December 31, 2018, respectively | 1 | — | ||||||
Common Stock, $0.01 par value per share; 400,067 shares authorized; | ||||||||
43,238 and 41,776 shares issued and outstanding at | ||||||||
March 31, 2019 and December 31, 2018, respectively | 432 | 418 | ||||||
Additional paid-in capital | 1,698,810 | 1,607,712 | ||||||
Accumulated (deficit) earnings | — | — | ||||||
Total stockholders' equity | 1,699,260 | 1,608,146 | ||||||
Non-controlling interest | 309 | 1,239 | ||||||
Total equity | 1,699,569 | 1,609,385 | ||||||
Total liabilities and equity | $ | 4,801,914 | $ | 4,410,958 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Preferred Apartment Communities, Inc. | ||||||||
Condensed Consolidated Statements of Operations | ||||||||
(unaudited) | ||||||||
Three months ended March 31, | ||||||||
(In thousands, except per-share figures) | 2019 | 2018 | ||||||
Revenues: | ||||||||
Rental revenues | $ | 92,238 | $ | 74,261 | ||||
Other property revenues | 2,178 | 1,544 | ||||||
Interest income on loans and notes receivable | 11,288 | 10,300 | ||||||
Interest income from related parties | 5,802 | 4,265 | ||||||
Total revenues | 111,506 | 90,370 | ||||||
Operating expenses: | ||||||||
Property operating and maintenance | 10,792 | 8,805 | ||||||
Property salary and benefits (including reimbursements of $4,079 and $3,609 to related party) | 4,657 | 3,899 | ||||||
Property management fees (including $2,467 and $2,105 to related parties) | 3,267 | 2,756 | ||||||
Real estate taxes | 12,500 | 9,975 | ||||||
General and administrative | 2,614 | 1,841 | ||||||
Equity compensation to directors and executives | 311 | 1,135 | ||||||
Depreciation and amortization | 45,289 | 40,616 | ||||||
Asset management and general and administrative expense fees to related party | 7,829 | 6,241 | ||||||
Insurance, professional fees and other expenses | 2,528 | 1,445 | ||||||
Total operating expenses | 89,787 | 76,713 | ||||||
Waived asset management and general and administrative expense fees | (2,629 | ) | (1,220 | ) | ||||
Net operating expenses | 87,158 | 75,493 | ||||||
Operating income before gains on sales of real estate and trading investment | 24,348 | 14,877 | ||||||
Gains on sales of real estate and trading investment | 4 | 20,354 | ||||||
Operating income | 24,352 | 35,231 | ||||||
Interest expense | 26,756 | 20,968 | ||||||
Change in fair value of net assets of consolidated VIEs from mortgage-backed pools | 141 | — | ||||||
Loss on extinguishment of debt | (17 | ) | — | |||||
Net (loss) income | (2,280 | ) | 14,263 | |||||
Consolidated net loss (income) attributable to non-controlling interests | (492 | ) | (380 | ) | ||||
Net (loss) income attributable to the Company | (2,772 | ) | 13,883 | |||||
Dividends declared to preferred stockholders | (25,539 | ) | (19,517 | ) | ||||
Earnings attributable to unvested restricted stock | (2 | ) | (2 | ) | ||||
Net loss attributable to common stockholders | $ | (28,313 | ) | $ | (5,636 | ) | ||
Net loss per share of Common Stock available | ||||||||
to common stockholders, basic and diluted | $ | (0.66 | ) | $ | (0.14 | ) | ||
Weighted average number of shares of Common Stock outstanding, | ||||||||
basic and diluted | 42,680 | 39,098 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Preferred Apartment Communities, Inc. | ||||||||||||||||||||||||||||
Condensed Consolidated Statements of Stockholders' Equity | ||||||||||||||||||||||||||||
For the three-month periods ended March 31, 2019 and 2018 | ||||||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||
(In thousands, except dividend per-share figures) | Series A and Series M Redeemable Preferred Stock | Common Stock | Additional Paid in Capital | Accumulated Earnings | Total Stockholders' Equity | Non-Controlling Interest | Total Equity | |||||||||||||||||||||
Balance at January 1, 2019 | $ | 16 | $ | 418 | $ | 1,607,712 | $ | — | $ | 1,608,146 | $ | 1,239 | $ | 1,609,385 | ||||||||||||||
Issuance of Units | 2 | — | 128,680 | — | 128,682 | — | 128,682 | |||||||||||||||||||||
Issuance of mShares | — | — | 12,472 | — | 12,472 | — | 12,472 | |||||||||||||||||||||
Redemptions of Series A Preferred Stock | — | 10 | (2,015 | ) | — | (2,005 | ) | — | (2,005 | ) | ||||||||||||||||||
Exercises of warrants | — | 3 | 4,245 | — | 4,248 | — | 4,248 | |||||||||||||||||||||
Syndication and offering costs | — | — | (14,281 | ) | — | (14,281 | ) | — | (14,281 | ) | ||||||||||||||||||
Equity compensation to executives and directors | — | — | 159 | — | 159 | — | 159 | |||||||||||||||||||||
Conversion of Class A Units to Common Stock | — | 1 | 526 | — | 527 | (527 | ) | — | ||||||||||||||||||||
Current period amortization of Class B Units | — | — | — | — | — | 152 | 152 | |||||||||||||||||||||
Net income | — | — | — | (2,772 | ) | (2,772 | ) | 492 | (2,280 | ) | ||||||||||||||||||
Reallocation adjustment to non-controlling interests | — | — | 818 | — | 818 | (818 | ) | — | ||||||||||||||||||||
Distributions to non-controlling interests | — | — | — | — | — | (229 | ) | (229 | ) | |||||||||||||||||||
Dividends to series A preferred stockholders | ||||||||||||||||||||||||||||
($5.00 per share per month) | — | — | (27,418 | ) | 2,685 | (24,733 | ) | — | (24,733 | ) | ||||||||||||||||||
Dividends to mShares preferred stockholders | ||||||||||||||||||||||||||||
($4.79 - $6.25 per share per month) | — | — | (893 | ) | 87 | (806 | ) | — | (806 | ) | ||||||||||||||||||
Dividends to common stockholders ($0.26 per share) | — | — | (11,195 | ) | — | (11,195 | ) | — | (11,195 | ) | ||||||||||||||||||
Balance at March 31, 2019 | $ | 18 | $ | 432 | $ | 1,698,810 | $ | — | $ | 1,699,260 | $ | 309 | $ | 1,699,569 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Preferred Apartment Communities, Inc. | ||||||||||||||||||||||||||||
Condensed Consolidated Statements of Stockholders' Equity, continued | ||||||||||||||||||||||||||||
For the three-month periods ended March 31, 2019 and 2018 | ||||||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||
(In thousands, except dividend per-share figures) | Series A and Series M Redeemable Preferred Stock | Common Stock | Additional Paid in Capital | Accumulated Earnings | Total Stockholders' Equity | Non-Controlling Interest | Total Equity | |||||||||||||||||||||
Balance at January 1, 2018 | $ | 12 | $ | 386 | $ | 1,271,040 | $ | 4,449 | $ | 1,275,887 | $ | 4,879 | $ | 1,280,766 | ||||||||||||||
Issuance of Units | 1 | — | 97,394 | — | 97,395 | — | 97,395 | |||||||||||||||||||||
Issuance of mshares | — | — | 5,209 | — | 5,209 | — | 5,209 | |||||||||||||||||||||
Redemptions of Series A Preferred Stock | — | — | (5,766 | ) | — | (5,766 | ) | — | (5,766 | ) | ||||||||||||||||||
Exercises of Warrants | — | 5 | 7,185 | — | 7,190 | — | 7,190 | |||||||||||||||||||||
Syndication and offering costs | — | — | (9,772 | ) | — | (9,772 | ) | — | (9,772 | ) | ||||||||||||||||||
Equity compensation to executives and directors | — | — | 138 | — | 138 | — | 138 | |||||||||||||||||||||
Conversion of Class A Units to Common Stock | — | 1 | 850 | — | 851 | (851 | ) | — | ||||||||||||||||||||
Current period amortization of Class B Units | — | — | — | — | — | 996 | 996 | |||||||||||||||||||||
Net income | — | — | — | 13,883 | 13,883 | 380 | 14,263 | |||||||||||||||||||||
Reallocation adjustment to non-controlling interests | — | — | 2,434 | — | 2,434 | (2,434 | ) | — | ||||||||||||||||||||
Distributions to non-controlling interests | — | — | — | — | — | (268 | ) | (268 | ) | |||||||||||||||||||
Dividends to Series A preferred stockholders | ||||||||||||||||||||||||||||
($5.00 per share per month) | — | — | (1,166 | ) | (18,038 | ) | (19,204 | ) | — | (19,204 | ) | |||||||||||||||||
Dividends to mShares preferred stockholders | ||||||||||||||||||||||||||||
($4.79 - $6.25 per share per month) | — | — | (19 | ) | (294 | ) | (313 | ) | — | (313 | ) | |||||||||||||||||
Dividends to common stockholders ($0.25 per share) | — | — | (9,802 | ) | — | (9,802 | ) | — | (9,802 | ) | ||||||||||||||||||
Balance at March 31, 2018 | $ | 13 | $ | 392 | $ | 1,357,725 | $ | — | $ | 1,358,130 | $ | 2,702 | $ | 1,360,832 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Preferred Apartment Communities, Inc. | ||||||||
Condensed Consolidated Statements of Cash Flows | ||||||||
(unaudited) | ||||||||
(In thousands) | Three Months Ended March 31, | |||||||
2019 | 2018 | |||||||
Operating activities: | ||||||||
Net (loss) income | $ | (2,280 | ) | $ | 14,263 | |||
Reconciliation of net (loss) income to net cash provided by operating activities: | ||||||||
Depreciation and amortization expense | 45,289 | 40,616 | ||||||
Amortization of above and below market leases | (1,436 | ) | (1,178 | ) | ||||
Deferred revenues and fee income amortization | (1,357 | ) | (943 | ) | ||||
Purchase option termination fee amortization | (4,233 | ) | — | |||||
Noncash interest income amortization on MBS, net of amortized costs | (141 | ) | — | |||||
Amortization of market discount on assumed debt and lease incentives | 494 | 323 | ||||||
Deferred loan cost amortization | 1,552 | 1,480 | ||||||
(Increase) in accrued interest income on real estate loan investments | (3,551 | ) | (2,828 | ) | ||||
Equity compensation to executives and directors | 311 | 1,135 | ||||||
Gains on sales of real estate and trading investment | (4 | ) | (20,354 | ) | ||||
Cash received for purchase option terminations | 1,330 | — | ||||||
Loss on extinguishment of debt | 17 | — | ||||||
Mortgage interest received from consolidated VIEs | 2,598 | — | ||||||
Mortgage interest paid to other participants of consolidated VIEs | (2,598 | ) | — | |||||
Changes in operating assets and liabilities: | ||||||||
(Increase) decrease in tenant receivables and other assets | (8,376 | ) | 625 | |||||
(Increase) in tenant lease incentives | (102 | ) | (2,149 | ) | ||||
Increase (decrease) in accounts payable and accrued expenses | 1,290 | (1,074 | ) | |||||
(Decrease) increase in accrued interest, prepaid rents and other liabilities | (2,441 | ) | 1,502 | |||||
Net cash provided by operating activities | 26,362 | 31,418 | ||||||
Investing activities: | ||||||||
Investments in real estate loans | (29,795 | ) | (68,929 | ) | ||||
Repayments of real estate loans | — | 42,312 | ||||||
Notes receivable issued | (1,890 | ) | (472 | ) | ||||
Notes receivable repaid | — | 5,618 | ||||||
Note receivable issued to and draws on line of credit by related parties | (13,952 | ) | (14,419 | ) | ||||
Repayments of line of credit by related parties | 8,330 | 9,034 | ||||||
Origination fees received on real estate loan investments | 801 | 1,600 | ||||||
Origination fees paid to Manager on real estate loan investments | (401 | ) | (800 | ) | ||||
Purchases of mortgage-backed securities (K program), net of acquisition costs | (18,656 | ) | — | |||||
Mortgage principal received from consolidated VIEs | 679 | — | ||||||
Purchases of mortgage-backed securities | (12,278 | ) | — | |||||
Proceeds from sales of mortgage-backed securities | 53,445 | — | ||||||
Acquisition of properties | (32,540 | ) | (170,072 | ) | ||||
Disposition of properties, net | — | 42,266 | ||||||
Receipt of insurance proceeds for capital improvements | 746 | 412 | ||||||
Additions to real estate assets - improvements | (7,917 | ) | (7,637 | ) | ||||
Deposits (paid) refunded on acquisitions | (511 | ) | 4,021 | |||||
Net cash used in investing activities | (53,939 | ) | (157,066 | ) | ||||
Financing activities: | ||||||||
Proceeds from mortgage notes payable | 57,275 | 123,275 | ||||||
Repayments of mortgage notes payable | (38,324 | ) | (27,350 | ) | ||||
Payments for deposits and other mortgage loan costs | (996 | ) | (1,733 | ) | ||||
Proceeds from real estate loan participants | — | 5 | ||||||
Payments to real estate loan participants | (5,223 | ) | (3,314 | ) | ||||
Proceeds from lines of credit | 126,200 | 86,200 | ||||||
Payments on lines of credit | (166,200 | ) | (114,800 | ) | ||||
Repayment of the Term Loan | — | (11,000 | ) | |||||
Mortgage principal paid to other participants of consolidated VIEs | (679 | ) | — | |||||
Proceeds from repurchase agreements | 4,857 | — | ||||||
Repayments of repurchase agreements | (4,857 | ) | — | |||||
Proceeds from sales of Units, net of offering costs | 128,573 | 93,234 | ||||||
Proceeds from exercises of Warrants | 3,921 | 11,169 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements. | ||||||||
6
Preferred Apartment Communities, Inc. | ||||||||
Condensed Consolidated Statements of Cash Flows - continued | ||||||||
(unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Payments for redemptions of preferred stock | (2,006 | ) | (5,744 | ) | ||||
Common Stock dividends paid | (10,840 | ) | (9,576 | ) | ||||
Preferred stock dividends paid | (24,869 | ) | (18,963 | ) | ||||
Distributions to non-controlling interests | (228 | ) | (221 | ) | ||||
Payments for deferred offering costs | (832 | ) | (1,152 | ) | ||||
Net cash provided by financing activities | 65,772 | 120,030 | ||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 38,195 | (5,618 | ) | |||||
Cash, cash equivalents and restricted cash, beginning of year | 87,690 | 73,012 | ||||||
Cash, cash equivalents and restricted cash, end of year | $ | 125,885 | $ | 67,394 | ||||
Supplemental cash flow information: | ||||||||
Cash paid for interest | $ | 24,318 | $ | 18,938 | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Accrued capital expenditures | $ | 7,308 | $ | 1,735 | ||||
Writeoff of fully depreciated or amortized assets and liabilities | $ | 158 | $ | 135 | ||||
Writeoff of fully amortized deferred loan costs | $ | 415 | $ | 1,331 | ||||
Lessee-funded tenant improvements, capitalized as landlord assets | $ | — | $ | 3,602 | ||||
Consolidation of VIEs (VIE asset / liability additions) | $ | 544,869 | $ | — | ||||
Dividends payable - Common Stock | $ | 11,195 | $ | 9,802 | ||||
Dividends payable - Series A Preferred Stock | $ | 8,447 | $ | 6,456 | ||||
Dividends payable - mShares Preferred Stock | $ | 549 | $ | 96 | ||||
Dividends declared but not yet due and payable | $ | 93 | $ | 106 | ||||
Partnership distributions payable to non-controlling interests | $ | 229 | $ | 268 | ||||
Accrued and payable deferred offering costs | $ | 740 | $ | 342 | ||||
Offering cost reimbursement to related party | $ | 465 | $ | 475 | ||||
Reclass of offering costs from deferred asset to equity | $ | 1,700 | $ | 446 | ||||
Loan receivables converted to equity for property acquisition | $ | 47,797 | $ | — | ||||
Fair value issuances of equity compensation | $ | 384 | $ | 4,612 | ||||
Mortgage loans assumed on acquisitions | $ | 41,550 | $ | — | ||||
Noncash repayment of mortgages through refinance | $ | — | $ | 37,485 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements
March 31, 2019
(unaudited)
1. | Organization and Basis of Presentation |
Preferred Apartment Communities, Inc. is a Maryland corporation formed primarily to own and operate multifamily properties and, to a lesser extent, own and operate student housing properties, grocery-anchored shopping centers and strategically located, well leased class A office buildings, all in select targeted markets throughout the United States. As part of our business strategy, we may enter into forward purchase contracts or purchase options for to-be-built multifamily communities and we may make real estate related loans, provide deposit arrangements, or provide performance assurances, as may be necessary or appropriate, in connection with the development of multifamily communities. As a secondary strategy, we may acquire or originate senior mortgage loans, subordinate loans or real estate loans secured by interests in multifamily properties, membership or partnership interests in multifamily properties and other multifamily related assets and invest a lesser portion of our assets in other real estate related investments, including other income-producing property types, senior mortgage loans, subordinate loans or real estate loans secured by interests in other income-producing property types, membership or partnership interests in other income-producing property types as determined by our manager as appropriate for us. At December 31, 2018, the Company was the approximate 97.9% owner of Preferred Apartment Communities Operating Partnership, L.P., the Company's operating partnership. Preferred Apartment Communities, Inc. has elected to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended, commencing with its tax year ended December 31, 2011. The Company is externally managed and advised by Preferred Apartment Advisors, LLC, or its Manager, a Delaware limited liability company and related party (see Note 6).
As of March 31, 2019, the Company had 43,237,726 shares of common stock, par value $0.01 per share, or Common Stock, issued and outstanding and was the approximate 98.0% owner of the Operating Partnership at that date. The number of partnership units not owned by the Company totaled 879,335 at March 31, 2019 and represented Class A OP Units of the Operating Partnership, or Class A OP Units. The Class A OP Units are convertible at any time at the option of the holder into the Operating Partnership's choice of either cash or Common Stock. In the case of cash, the value is determined based upon the trailing 20-day volume weighted average price of the Company's Common Stock.
The Company controls the Operating Partnership through its sole general partner interest and conducts substantially all of its business through the Operating Partnership. The Company has determined the Operating Partnership is a variable interest entity, or VIE, of which the Company is the primary beneficiary. The Company is involved with other VIEs, such as through its investments in mortgage pools from the Freddie Mac K Program, as discussed in Note 4. New Market Properties, LLC owns and conducts the business of our portfolio of grocery-anchored shopping centers. Preferred Office Properties, LLC owns and conducts the business of our portfolio of office buildings. Preferred Campus Communities, LLC owns and conducts the business of our portfolio of off-campus student housing communities. Each of these entities are wholly-owned subsidiaries of the Operating Partnership.
Basis of Presentation
These consolidated financial statements include all of the accounts of the Company and the Operating Partnership presented in accordance with accounting principles generally accepted in the United States of America, or GAAP. The year end condensed balance sheet data was derived from audited financial statements, but does not contain all the disclosures required by GAAP. All significant intercompany transactions have been eliminated in consolidation. Certain adjustments have been made consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of the Company's financial condition and results of operations. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Amounts are presented in thousands where indicated.
As permitted by the practical expedient within ASC 842, Leases, the Company has elected to report the lease component and non-lease components as one single component within the line entitled Rental Revenues on the Company's Consolidated Statements of Operations. Reimbursement revenue was previously presented in the Company’s Other Property Revenues line item. For presentation purposes, the Company has reclassified its revenue from reimbursements from the Other Property Revenues line into the Rental Revenues line for all periods presented.
8
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
2. | Summary of Significant Accounting Policies |
Variable Interest Entities
A variable interest entity, or “VIE” is an entity that lacks sufficient equity to finance its activities without additional subordinated financial support from other parties, or whose equity holders lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is defined as the party who has a controlling financial interest in the VIE through the (a) power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (b) obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. The Company assesses whether it meets the power and benefits criteria and in performing this analysis, the Company considers both qualitative and quantitative factors, including the Company’s ability to control or significantly influence key decisions of the VIE and the obligation or likelihood for the Company to fund operating losses of the VIE. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, may involve significant judgment, including the determination of which activities most significantly affect the entities’ performance, and estimates about the current and future fair values and performance of assets held by the VIE. If the Company determines that it meets both the power and benefits criteria of the VIE, the Company is deemed to be the primary beneficiary of the VIE and the Company consolidates the entire VIE entity in its consolidated financial statements. For those VIEs which arise from the Company's investment in mortgage-backed securities and which the Company consolidates, it elects the fair value option, under which the assets and liabilities of the consolidated VIE are carried at fair value. The periodic changes in fair value are included in the earnings of the Company and are reported on the line entitled Change in fair value of net assets of consolidated VIE from mortgage-backed pool on the Company's Consolidated Statements of Operations. See Note 4 for discussion related to the Company’s investment in a subordinate tranche of a collateralized mortgage-backed pool during the second quarter 2018 and Note 15 for fair value disclosures related to a consolidated VIE related to this investment.
Real Estate Loans
The Company carries its investments in real estate loans at amortized cost with assessments made for possible loan loss allowances in the event recoverability of the principal amount becomes doubtful. If, upon testing for possible loan loss allowances, the fair value result of the loan or its collateral is lower than the carrying amount of the loan, an allowance is recorded to lower the carrying amount to fair value, with a loss recorded in earnings. The balances of real estate loans presented on the consolidated balance sheets consist of drawn amounts on the loans, net of unamortized deferred loan origination fees and loan loss allowances.
Interest income on real estate loans and notes receivable is recognized on an accrual basis over the lives of the loans or notes. In the event that a loan or note is refinanced with the proceeds of another loan issued by the Company, any unamortized loan fee revenue from the first loan will be recognized as interest revenue at the date of refinancing. Loan origination fees applicable to real estate loans are amortized over the lives of the loans as adjustments to interest income using the effective interest rate method. The accrual of interest on all these instruments ceases when there is concern as to the ultimate collection of principal or interest. Certain real estate loan assets include limited purchase options and either exit fees or additional amounts of accrued interest. Exit fees or accrued interest due will be treated as additional consideration for the acquired project if the Company purchases the subject property. Additional accrued interest becomes due in cash to the Company on the earliest to occur of: (i) the maturity of the loan, (ii) any uncured event of default as defined in the associated loan agreement, (iii) the sale of the project or the refinancing of the loan (other than a refinancing loan by the Company or one of its affiliates) and (iv) any other repayment of the loan.
Evaluations for the possible need for loan loss allowances are performed for each real estate loan investment at least quarterly. Loan loss allowances are needed when it is deemed probable that all amounts due will not be collected according to the contractual terms of the loan. Depending upon the circumstances and significance of risk related to the collectability of the loan, management may determine that (i) the loan should be accounted for as a non-accrual loan because recovery of all contractual amounts due are deemed improbable and that any amounts subsequently received will be used to reduce the loan’s principal balance, (ii) in the event of a modification to the loan granted by the Company as a concession to the borrower who is experiencing financial difficulty, result in the need to apply troubled debt restructuring (“TDR”) accounting guidance, and/or (iii) an allowance for loan loss is required for the loan based upon the value of the underlying collateral and the Company’s evaluation of a possible shortfall with regards to the loan’s repayment based upon an estimated sales price, additional costs (if necessary), estimated selling costs, and amounts due to all lenders.
In connection with the surveillance review process, the Company’s real estate loan investments are assigned an internal risk rating. The internal risk ratings are based on the loan’s current status as compared to underwriting for certain metrics such as total expected construction cost if overruns are noted, construction completion timing if there are delays, current cap rates within the
9
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
MSA, leasing status, rental rates, net operating income, expected free cash flow, and other factors management deems important related to the ultimate collectability of the loan. The final internal risk ratings are influenced by other quantitative and qualitative factors that can result in an adjustment to the ratings. Each loan is given an internal risk rating from “A” to “D”. Loans rated an “A” meet all present contractual obligations and there are no indicators which would cause concern for the borrower’s ability to meet all present contractual obligations. Loans rated a “B” meet all present contractual obligations, but exhibited at least one indication of a negative variation from the underwriting for the loan and/or project. Loans rated a “C” exhibit some weakness that deserves management’s close attention and if uncorrected, may result in deterioration of repayment prospects. For these loans, management performs analyses to verify the borrower’s ability to meet all present contractual obligations, including obtaining an appraisal of the underlying collateral for the loan. Based on the available collateral to satisfy the Company’s outstanding principal and interest contractually due, we may provide for an allowance, move the loan to non-accrual status for future interest recognition or continue monitoring the loan. For loans rated a “D”, the collection of all contractual principal and interest is improbable and management has determined to account for the loan as a non-accrual loan and, if appropriate under the circumstances record a loan loss allowance.
The Company's real estate loan investments are collateralized by real estate development projects and secured further by guaranties of repayment from one or more of the borrowers. The Company's lines of credit receivable are typically only collateralized by personal guaranties, but occasionally may be cross-collateralized by interests in other real estate projects. As a result, the Company regularly evaluates the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan, and/or (iii) the property’s liquidation value. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, the overall economic environment, real estate sector, and geographic sub‑market in which the borrower operates are considered. Such impairment analyses are completed and reviewed by management, utilizing various data sources, including periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, capitalization and discount rates and site inspections.
See the "Revenue Recognition" section of this Note for other loan-related policy disclosures required by ASC 310-10-50-6.
Purchase Option Terminations
The Company will occasionally receive a purchase option on the underlying property in conjunction with extending a real estate loan investment to the developer of the property. The purchase option is often at a discount to the to-be-agreed-upon market value of the property, once stabilized. If the Company elects not to exercise the purchase option and acquire the property, it may negotiate to sell the purchase option back to the developer and receive a termination fee in consideration. The amount of the termination fee is accounted for as additional interest on the real estate loan investment and is recognized as interest revenue utilizing the effective interest method over the period beginning from the date of election until the earlier of (i) the maturity of the real estate loan investment and (ii) the sale of the property.
Revenue Recognition
Multifamily communities and student housing properties
Rental revenue is recognized when earned from residents of the Company's multifamily communities, which is over the terms of the rental agreements, typically of 9 to 15 months’ duration. The Company evaluates the collectability of amounts due from residents and recognizes revenue from residents when collectability is deemed probable, in accordance with ASC 842-30-25-12. The Company disclosed bad debt expense within the Property Operating and Maintenance expense line item in prior periods, but recorded the reduction in revenue against Rental Revenues and Other Property Revenues, as applicable, for the current period.
The Company evaluated the various ancillary revenues within its multifamily leases, including resident utility reimbursements. Having met the criteria that (i) the timing and pattern of transfer for the lease component and associated non-lease components are the same and (ii) that the lease component, if accounted for separately would be classified as an operating lease, the Company has elected the practical expedient under Lease Accounting, ASC 842, paragraph 10-15-42A, to elect reporting the lease component and non-lease components as one single component under “Rental Revenues” recognized in accordance with ASC 842. Lease components such as pet rental fees and parking rental fees as well as non-lease components such as utility reimbursements were previously presented in the Company’s “Other Property Revenues” line item. For presentation purposes, the Company has
10
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
reclassified its revenue from these revenue sources into “Rental Revenues” for all periods presented, for comparability. Revenue from utility reimbursements are considered variable lease payments and are recognized in the period in which the related expenses are incurred.
Grocery-anchored shopping centers and office properties
Our retail leases have original lease terms which generally range from three to seven years for spaces under 5,000 square feet and from 10 to 20 years for spaces over 10,000 square feet. Anchor leases generally contain renewal options for one or more additional periods whereas in-line tenant leases may or may not have renewal options. With the exception of anchor leases, the leases generally contain contractual increases in base rent rates over the lease term and the base rent rates for renewal periods are generally based upon the rental rate for the primary term, which may be adjusted for inflation or market conditions. Anchor leases generally do not contain contractual increases in base rent rates over the lease term and the renewal periods. Our leases generally provide for the payment of fixed monthly rentals and may also provide for the payment of additional rent based upon a percentage of the tenant’s gross sales above a certain threshold level (“percentage rent”). Our leases also generally include tenant reimbursements for common area expenses, insurance, and real estate taxes. Utilities are generally paid by tenants either directly through separate meters or through payment of tenant reimbursements. The foregoing general description of the characteristics of the leases in our centers is not intended to describe all leases and material variations in lease terms may exist.
Our office building leases have original lease terms which generally range from 5 to 15 years and generally contain contractual, annual base rental rate escalations ranging from 2% to 3%. These leases may be structured as “gross” where the tenant’s base rental rate is all inclusive and there is no additional obligation to reimburse building operating expenses, “net” or “NNN” where in addition to base rent the tenant is also responsible for its pro rata share of reimbursable building operating expenses, or “modified gross” where in addition to base rent the tenant is also responsible for its pro rata share of reimbursable building operating expense increases over a base year amount (typically calculated as the actual reimbursable operating expenses in year one of the original lease term).
Base rental revenue from tenants' operating leases is a lease component revenue in the Company's grocery-anchored shopping centers and office properties and is recognized on a straight-line basis over the term of the lease. Revenue based on "percentage rent" provisions that provide for additional rents that become due upon achievement of specified sales revenue targets (as specified in each lease agreement) is recognized only after the tenant exceeds its specified sales revenue target. Revenue from reimbursements of the tenants' share of real estate taxes, insurance and common area maintenance, or CAM, costs represent non-lease component revenue. Having met the criteria that (i) the timing and pattern of transfer for the lease component and associated non-lease components are the same and (ii) that the lease component, if accounted for separately would be classified as an operating lease, the Company has elected the practical expedient under ASC 842, Leases, paragraph 10-15-42A, to elect reporting the lease component and non-lease components as one single component under Rental Revenues recognized in accordance with ASC 842. Reimbursement revenue and percentage rent were previously presented in the Company’s Other Property Revenues line item. For presentation purposes, the Company has reclassified its revenue from reimbursements into Rental Revenues for all periods presented, for comparability. Revenue from reimbursements are considered variable lease payments and are recognized in the period in which the related expenses are incurred. The Company does not record income and offsetting expense for certain variable costs paid directly to third parties by lessees on behalf of lessors.
Non-lease components which do not qualify under the practical expedient primarily include percentage rent, lease termination income and other ancillary revenue (e.g. storage revenue, license fees, late fees, tenant billbacks). These items are recorded under Other property revenues. Lease termination revenues are recognized ratably over the revised remaining lease term after giving effect to the termination notice or when tenant vacates and the Company has no further obligations under the lease. Rents and tenant reimbursements collected in advance are recorded as prepaid rent within other liabilities in the accompanying consolidated balance sheets. The Company evaluated the collectability of the tenant receivable related to rental and reimbursement billings due from tenants and straight-line rent receivables, which represent the cumulative amount of future adjustments necessary to present rental revenue on a straight-line basis, by taking into consideration the Company's historical write-off experience, tenant credit-worthiness, current economic trends, and remaining lease terms. The Company evaluates the collectability of these amounts and recognizes revenue related to tenants where collectability is deemed probable, in accordance with ASC 842-30-25-12. The Company previously recorded bad debt expense within the Property operating and maintenance expense line item, and upon adoption of ASC 842 on January 1, 2019, began recording amounts not deemed probable of collection as a reduction of rental revenues and other property revenues, as applicable.
The Company may provide grocery-anchored shopping center and office building tenants an allowance for the construction of leasehold improvements. These leasehold improvements are capitalized and depreciated over the shorter of the useful life of
11
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
the improvements or the remaining lease term. If the allowance represents a payment for a purpose other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue. Determination of the appropriate accounting for the payment of a tenant allowance is made on a lease-by-lease basis, considering the facts and circumstances of the individual tenant lease. When the Company is the owner of the leasehold improvements, recognition of rental revenue commences when the lessee is given possession of the leased space upon completion of tenant improvements. However, when the leasehold improvements are owned by the tenant, the lease inception date is the date the tenant obtains possession of the leased space for purposes of constructing its leasehold improvements. For our office properties, if the improvement is deemed to be a “landlord asset,” and the tenant funded the tenant improvements, the cost is amortized over the term of the underlying lease with a corresponding recognition of rental revenues. In order to qualify as a landlord asset, the specifics of the tenant’s assets are reviewed, including the Company's approval of the tenant’s detailed expenditures, whether such assets may be usable by other future tenants, whether the Company has consent to alter or remove the assets from the premises and generally remain the Company's property at the end of the lease.
Gains on sales of real estate assets
The Company recognizes gains on sales of real estate based on the difference between the consideration received and the carrying amount of the distinct asset, including the carrying amount of any liabilities relieved or assumed by the purchasing counterparty and net of disposition expenses.
Lessee accounting
The Company has evaluated its leases for which it is the lessee to determine the value of any right of use assets and related lease liabilities. The Company has three ground leases related to our office and grocery-anchored shopping center assets, one of which had been recorded at fair value on the Company's balance sheet at acquisition due to a purchase option the Company deemed probable of exercising. These ground leases generally have extended terms (e.g. over 20 years with multiple renewal options) and generally have base rent with CPI-based increases. The Company evaluated its renewal option periods in quantifying its asset and liability related to these ground leases. In determining the value of its right of use asset and lease liability, the Company used discount rates comparable to recent loan rates obtained on comparative properties within its portfolio. The Company’s right of use asset and related lease liability in accordance with ASC 842-20-30 related to these ground leases are recorded within the Tenant Receivables and Other Assets and the Security Deposits and Other Liabilities line items of the balance sheet, respectively. The Company is also the lessee of furniture and equipment leases such as office equipment, which generally are three to five years with minimal rent increases. The Company determined that the related right of use asset and lease liability for its furniture and equipment leases were immaterial.
12
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
New Accounting Pronouncements
Standard | Description | Date of Adoption | Effect on the Consolidated Financial Statements |
Recently Adopted Accounting Guidance | |||
ASU 2016-02, Leases (Topic 842) ASU 2018-11, Leases (Topic 842) Targeted Improvements | ASU 2016-02 requires a lessor to separate lease components from non-lease components, such as maintenance services or other activities that transfer a good or service to our residents and tenants in a contract. In July 2018, the FASB issued ASU 2018-11 which allowed for a practical expedient for lessors to elect, by class of underlying assets, to not separate lease and non-lease components if both (1) the timing and pattern of revenue recognition are the same for the non-lease component(s) and related lease component and (2) the combined single lease component would be classified as an operating lease. Additional practical expedients were also provided for under ASU 2018-11 related to expired or existing leases. | January 1, 2019 | Having met the criteria that (i) the timing and pattern of transfer for the lease component and associated non-lease components are the same and (ii) that the lease component, if accounted for separately would be classified as an operating lease, the Company has elected the practical expedient within ASU 2018-11, as codified under ASC 842-10-15-42A, to elect reporting the lease component and non-lease components as one single component under “Rental Revenues” recognized in accordance with ASC 842. This change had no material effect on the timing of revenue recognition. The Company has also elected to implement the package of practical expedients provided within ASU 2018-11, as codified under ASC 842-10-65-1(f), which allows the Company not to reassess whether expired or existing contracts contain leases, its lease classification, and any related initial direct costs. |
ASU 2018-20, Leases (ASC 842), Narrow-Scope Improvements for Lessors | ASU 2018-20 eliminates the requirement to record income and offsetting expense for certain variable costs paid for by lessees on behalf of lessors. | January 1, 2019 | The Company no longer records income and expense for property taxes paid directly to the taxing authority by a lessee based on this standard. The effect is a reduction of other property revenues and of property tax expense, with no effect upon net income/loss. |
Recently Issued Accounting Guidance Not Yet Adopted | |||
ASU 2016-13, Financial Instruments - Credit Losses (ASC 326) | ASU 2016-13 requires that financial assets measured at amortized cost basis be presented at the net amount expected to be collected, with the establishment of an allowance for credit losses expected overall, based on relevant information from historical events. | January 1, 2020 | The Company has not yet determined whether its adoption of ASU 2016-13 will have a material impact on its financial statements. |
13
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
3. Real Estate Assets
The Company's real estate assets consisted of:
As of: | ||||||
March 31, 2019 | December 31, 2018 | |||||
Multifamily communities: | ||||||
Properties (1) | 32 | 32 | ||||
Units | 9,768 | 9,768 | ||||
New Market Properties: (2) | ||||||
Properties | 46 | 45 | ||||
Gross leasable area (square feet) (3) | 4,889,011 | 4,730,695 | ||||
Student housing properties: | ||||||
Properties | 8 | 7 | ||||
Units | 2,011 | 1,679 | ||||
Beds | 6,095 | 5,208 | ||||
Preferred Office Properties: | ||||||
Properties | 7 | 7 | ||||
Rentable square feet | 2,578,000 | 2,578,000 | ||||
(1) The acquired second phases of CityPark View and Crosstown Walk communities are managed in combination with the initial phases and so together are considered a single property, as are the Lenox Village and Regent at Lenox Village assets within the Lenox Portfolio. | ||||||
(2) See Note 13, Segment information. | ||||||
(3) The Company also owns approximately 47,600 square feet of gross leasable area of ground floor retail space which is embedded within the Lenox Portfolio and is not included in the totals above for New Market Properties. | ||||||
Multifamily communities sold
The Company had no sales of multifamily community assets during the three-month period ended March 31, 2019.
On March 20, 2018, the Company closed on the sale of its 328-unit multifamily community in Raleigh, North Carolina, or Lake Cameron, to an unrelated third party for a purchase price of approximately $43.5 million, exclusive of closing costs, and debt defeasance-related costs and resulted in a gain of $20.4 million. Lake Cameron contributed approximately $0.2 million of net income to the consolidated operating results of the Company for the three-month period ended March 31, 2018.
14
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
The carrying amounts of the significant assets and liabilities of the disposed property at the date of sale were:
Lake Cameron | ||||
(in thousands) | March 20, 2018 | |||
Real estate assets: | ||||
Land | $ | 4,000 | ||
Building and improvements | 21,519 | |||
Furniture, fixtures and equipment | 3,687 | |||
Accumulated depreciation | (7,220 | ) | ||
Total assets | $ | 21,986 | ||
Liabilities: | ||||
Mortgage note payable | $ | 19,736 | ||
Supplemental mortgage note | — | |||
Total liabilities | $ | 19,736 | ||
Multifamily communities acquired
The Company had no acquisitions of multifamily community assets during the three-month period ended March 31, 2019.
During the three-month period ended March 31, 2018, the Company completed the acquisition of the following multifamily communities:
Acquisition date | Property | Location | Units | ||||
1/9/2018 | The Lux at Sorrel | Jacksonville, Florida | 265 | ||||
2/28/2018 | Green Park | Atlanta, Georgia | 310 | ||||
575 | |||||||
The aggregate purchase prices of the multifamily acquisitions were approximately $106.5 million, exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.
15
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
The Company allocated the purchase prices and capitalized acquisition costs to the acquired assets and liabilities based upon their fair values, as shown in the following table. The purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities.
Multifamily Communities acquired during the three-month period ended | ||||
(in thousands, except amortization period data) | March 31, 2018 | |||
Land | $ | 12,810 | ||
Buildings and improvements | 73,773 | |||
Furniture, fixtures and equipment | 17,969 | |||
Lease intangibles | 4,307 | |||
Prepaids & other assets | 193 | |||
Accrued taxes | (167 | ) | ||
Security deposits, prepaid rents, and other liabilities | (183 | ) | ||
Net assets acquired | $ | 108,702 | ||
Cash paid | $ | 37,427 | ||
Mortgage debt, net | 71,275 | |||
Total consideration | $ | 108,702 | ||
Three-month period ended March 31, 2019: | ||||
Revenue | $ | 2,557 | ||
Net income (loss) | $ | (1,300 | ) | |
Three-month period ended March 31, 2018: | ||||
Revenue | $ | 1,469 | ||
Net income (loss) | $ | (1,523 | ) | |
Capitalized acquisition costs incurred by the Company | $ | 2,347 | ||
Acquisition costs paid to related party (included above) | $ | 1,094 | ||
Remaining amortization period of intangible | ||||
assets and liabilities (months) | 1.5 | |||
Student housing properties acquired
During the three-month period ended March 31, 2019, the Company completed the acquisition of Haven49, a 322-unit, 887-bed student housing property adjacent to the University of North Carolina at Charlotte. The Company effectuated the acquisition via a negotiated agreement whereby the Company accepted the membership interest in the Haven49 project entity in satisfaction of the project indebtedness owed to the Company. See Note 4.
The Company had no acquisitions of student housing property assets during the three-month period ended March 31, 2018.
16
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
The Company allocated the asset's fair value and capitalized acquisition costs to the acquired assets and liabilities based upon their fair values, as shown in the following table. The purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities.
Student housing property acquired during the three-month period ended: | ||||
(in thousands, except amortization period data) | March 31, 2019 | |||
Land | $ | 7,289 | ||
Buildings and improvements | 68,163 | |||
Furniture, fixtures and equipment | 16,966 | |||
Lease intangibles | 983 | |||
Accrued taxes | (158 | ) | ||
Security deposits, prepaid rents, and other liabilities | (2,579 | ) | ||
Net assets acquired | $ | 90,664 | ||
Satisfaction of loan receivables | $ | 46,397 | ||
Cash paid | 2,717 | |||
Mortgage debt, net | 41,550 | |||
Total consideration | $ | 90,664 | ||
Three-month period ended March 31, 2019: | ||||
Revenue | $ | 81 | ||
Net income (loss) | $ | (274 | ) | |
Capitalized acquisition costs incurred by the Company | $ | 1,016 | ||
Acquisition costs to related party | $ | 936 | ||
Remaining amortization period of intangible | ||||
assets and liabilities (months) | 3.5 | |||
New Market Properties assets acquired
During the three-month period ended March 31, 2019, the Company completed the acquisition of Gayton Crossing, a grocery-anchored shopping center located in Richmond, Virginia. The aggregate purchase price was approximately $29.0 million , exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.
The Company had no acquisitions of grocery-anchored shopping center assets during the three-month period ended March 31, 2018.
17
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
The Company allocated the purchase price to the acquired assets and liabilities based upon their fair values, as shown in the following table. The purchase price allocation was based upon the Company's best estimates of the fair values of the acquired assets and liabilities.
New Market Properties' acquisition during the three-month period ended: | ||||
(in thousands, except amortization period data) | March 31, 2019 | |||
Land | $ | 9,109 | ||
Buildings and improvements | 17,093 | |||
Tenant improvements | 698 | |||
In-place leases | 2,609 | |||
Above market leases | 754 | |||
Leasing costs | 769 | |||
Below market leases | (1,515 | ) | ||
Other assets | 34 | |||
Security deposits, prepaid rents, and other | (146 | ) | ||
Net assets acquired | $ | 29,405 | ||
Cash paid | $ | 11,405 | ||
Mortgage debt | 18,000 | |||
Total consideration | $ | 29,405 | ||
Three-month period ended March 31, 2019: | ||||
Revenue | $ | 595 | ||
Net income (loss) | $ | (141 | ) | |
Capitalized acquisition costs incurred by the Company | $ | 569 | ||
Capitalized acquisition costs paid to related party (included above) | $ | 300 | ||
Remaining amortization period of intangible | ||||
assets and liabilities (years) | 7.8 | |||
Preferred Office Properties assets acquired
The Company had no acquisitions of office building assets during the three-month period ended March 31, 2019.
On January 29, 2018, the Company acquired Armour Yards, a collection of four adaptive re-use office buildings comprised of approximately 187,000 square feet of office space in Atlanta, Georgia. The aggregate purchase price was approximately $66.5 million, exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.
The Company allocated the purchase price and capitalized acquisition costs to the acquired assets and liabilities based upon their fair values, as shown in the following table. The purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities.
18
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
Preferred Office Properties' acquisition during the three-month periods ended: | ||||
(in thousands, except amortization period data) | March 31, 2018 | |||
Land | $ | 6,756 | ||
Buildings and improvements | 48,332 | |||
Tenant improvements | 6,201 | |||
In-place leases | 3,762 | |||
Above-market leases | 61 | |||
Leasing costs | 2,181 | |||
Below-market leases | (1,594 | ) | ||
Security deposits, prepaid rents, and other liabilities | (4,335 | ) | ||
Net assets acquired | $ | 61,364 | ||
Cash paid | $ | 21,364 | ||
Mortgage debt, net | 40,000 | |||
Total consideration | $ | 61,364 | ||
Three-month period ended March 31, 2019: | ||||
Revenue | $ | 1,535 | ||
Net income (loss) | $ | (5 | ) | |
Three-month period ended March 31, 2018: | ||||
Revenue | $ | 955 | ||
Net income (loss) | $ | (170 | ) | |
Capitalized acquisition costs incurred by the Company | $ | 817 | ||
Acquisition costs paid to related party (included above) | $ | 665 | ||
Remaining amortization period of intangible | ||||
assets and liabilities (years) | 7.2 | |||
The Company recorded aggregate amortization and depreciation expense of:
Three-month periods ended March 31, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Depreciation: | ||||||||
Buildings and improvements | $ | 22,987 | $ | 17,478 | ||||
Furniture, fixtures, and equipment | 13,133 | 10,512 | ||||||
36,120 | 27,990 | |||||||
Amortization: | ||||||||
Acquired intangible assets | 8,945 | 12,500 | ||||||
Deferred leasing costs | 178 | 91 | ||||||
Website development costs | 46 | 35 | ||||||
Total depreciation and amortization | $ | 45,289 | $ | 40,616 | ||||
At March 31, 2019, the Company had recorded acquired gross intangible assets of $254.3 million, and accumulated amortization of $122.7 million, gross intangible liabilities of $63.9 million and accumulated amortization of $17.3 million. Net intangible assets and liabilities as of March 31, 2019 will be amortized over weighted average remaining amortization periods of approximately 7.9 years and 9.2 years, respectively.
At March 31, 2019, the Company had restricted cash of approximately $18.2 million that was contractually restricted to fund capital expenditures and other property-level commitments such as tenant improvements and leasing commissions.
19
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
Purchase Options
In the course of extending real estate loan investments for property development, the Company will often receive an exclusive option to purchase the property once development and stabilization are complete. If the Company determines that it does not wish to acquire the property, it has the right to sell its purchase option back to the borrower for a termination fee in the amount of the purchase option discount.
Effective January 1, 2019, the Company terminated its purchase options on the Sanibel Straights, Newbergh, Wiregrass and Cameron Square multifamily communities and the Solis Kennesaw student housing property, all of which are partially supported by real estate loan investments held by the Company. In exchange, the Company will receive termination fees aggregating approximately $7.9 million from the developers. These fees are treated as additional interest revenue and are amortized over the period ending with the earlier of (i) the sale of the underlying property and (ii) the maturity of the real estate loans. For the three-month period ended March 31, 2019, the Company recorded approximately $1.2 million of interest revenue related to these 2019 purchase option terminations in addition to approximately $3.1 million of interest revenue for the 464 Bishop and Haven49 purchase options that terminated in the second quarter 2018.
4. Real Estate Loans, Notes Receivable, and Line of Credit
Our portfolio of fixed rate, interest-only real estate loans consisted of:
(Dollars in thousands) | March 31, 2019 | December 31, 2018 | ||||||
Number of loans | 19 | 19 | ||||||
Drawn amount | $ | 338,343 | $ | 336,329 | ||||
Deferred loan origination fees | (2,205 | ) | (2,118 | ) | ||||
Carrying value | $ | 336,138 | $ | 334,211 | ||||
Unfunded loan commitments | $ | 145,879 | $ | 164,913 | ||||
Weighted average current interest, per annum (paid monthly) | 8.47 | % | 8.47 | % | ||||
Weighted average accrued interest, per annum | 4.10 | % | 5.34 | % | ||||
(Dollars in thousands) | Principal balance | Deferred loan origination fees | Loan loss allowance | Carrying value | ||||||||||||
Balances as of December 31, 2018 | $ | 336,329 | $ | (2,118 | ) | $ | — | $ | 334,211 | |||||||
Loan fundings | 29,795 | — | — | 29,795 | ||||||||||||
Loan repayments | (27,781 | ) | — | — | (27,781 | ) | ||||||||||
Loan origination fees collected | — | (403 | ) | — | (403 | ) | ||||||||||
Amortization of loan origination fees | — | 316 | — | 316 | ||||||||||||
Balances as of March 31, 2019 | $ | 338,343 | $ | (2,205 | ) | $ | — | $ | 336,138 | |||||||
Property type | Number of loans | Carrying value | Commitment amount | Percentage of portfolio | ||||||||||
(Dollars in thousands) | ||||||||||||||
Multifamily communities | 14 | $ | 289,610 | $ | 363,338 | 86 | % | |||||||
Student housing properties | 3 | 33,671 | 40,448 | 10 | % | |||||||||
New Market Properties | 1 | 12,857 | 12,857 | 4 | % | |||||||||
Preferred Office Properties | 1 | — | 67,579 | — | % | |||||||||
Balances as of March 31, 2019 | 19 | $ | 336,138 | $ | 484,222 | |||||||||
20
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
The Company's Palisades real estate loan investment was subject to a loan participation agreement with an unaffiliated third party, under which the syndicate was to fund approximately 25% of the loan commitment amount and collectively receive approximately 25% of interest payments, returns of principal and purchase option discount (if applicable). On March 13, 2019, the Company repurchased the loan participant's 25% balance in the loan from the loan participant and at March 31, 2019, carried the entire loan balance on its consolidated balance sheet without reflection of any liability to any third party.
The Company's real estate loan investments are collateralized by 100% of the membership interests of the underlying project entity, and, where considered necessary, by unconditional joint and several repayment guaranties and performance guaranties by the principal(s) of the borrowers. These guaranties generally remain in effect until the receipt of a final certificate of occupancy. All of the guaranties are subject to the rights held by the senior lender pursuant to a standard intercreditor agreement. Prepayment of the real estate loans are permitted in whole, but not in part, without the Company's consent.
Management monitors the credit quality of the obligors under each of the Company's real estate loans by tracking the timeliness of scheduled interest and principal payments relative to the due dates as specified in the loan documents, as well as draw requests on the loans relative to the project budgets. In addition, management monitors the actual progress of development and construction relative to the construction plan, as well as local, regional and national economic conditions that may bear on our current and target markets. The credit quality of the Company’s borrowers is primarily based on their payment history on an individual loan basis, and the Company assigns risk ratings to its real estate loans and notes receivable in credit quality categories as described in Note 2.
The Company continues to monitor each loan and note receivable for potential deterioration of risk ratings and can make no assurances that economic or industry conditions or other circumstances will not lead to future loan loss allowances.
At March 31, 2019, the Company's portfolio of real estate loan investments by credit quality indicator was:
(In thousands) | ||||||||||||||||
Rating indicator | Principal balance | Accrued interest | Receivables for purchase option terminations | Total | ||||||||||||
A | $ | 273,870 | $ | 16,064 | $ | 7,900 | $ | 297,834 | ||||||||
B | 58,357 | 6,268 | — | 64,625 | ||||||||||||
C | 6,116 | 1,208 | — | 7,324 | ||||||||||||
D | — | — | — | — | ||||||||||||
$ | 338,343 | $ | 23,540 | $ | 7,900 | $ | 369,783 | |||||||||
21
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
At March 31, 2019, our portfolio of notes and lines of credit receivable consisted of:
Borrower | Date of loan | Maturity date | Total loan commitments | Outstanding balance as of: | Interest rate | |||||||||||||||
March 31, 2019 | December 31, 2018 | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Preferred Capital Marketing Services, LLC (1) | 1/24/2013 | 12/31/2019 | $ | 1,500 | $ | 763 | $ | 763 | 10 | % | ||||||||||
Preferred Apartment Advisors, LLC (1,2) | 8/21/2012 | 12/31/2019 | 18,000 | 15,843 | 9,778 | 7.5 | % | (3) | ||||||||||||
Haven Campus Communities, LLC (1,4) | 6/11/2014 | 12/31/2018 | 11,660 | 8,374 | 11,620 | 8 | % | |||||||||||||
Oxford Capital Partners, LLC (5) | 10/5/2015 | 6/30/2019 | 8,000 | 4,144 | 4,022 | 12 | % | |||||||||||||
Newport Development Partners, LLC | 6/17/2014 | 6/30/2019 | 2,000 | 1,330 | — | 12 | % | |||||||||||||
Mulberry Development Group, LLC (6) | 3/31/2016 | 6/30/2019 | 500 | 465 | 465 | 12 | % | |||||||||||||
360 Capital Company, LLC (6) | 5/24/2016 | 12/31/2019 | 3,400 | 3,194 | 3,100 | 12 | % | |||||||||||||
360 Capital Company, LLC (1,7) | 7/24/2018 | 12/31/2020 | 8,000 | 7,267 | 6,923 | 8.5 | % | |||||||||||||
Haven Campus Communities Charlotte Member, LLC (1) | 8/31/2018 | N/A | — | — | 10,788 | 15 | % | |||||||||||||
Unamortized loan fees | (60 | ) | (152 | ) | ||||||||||||||||
$ | 53,060 | $ | 41,320 | $ | 47,307 | |||||||||||||||
(1) See related party disclosure in Note 6. | ||||||||||||||||||||
(2) The amounts payable under this revolving credit line were collateralized by an assignment of the Manager's rights to fees due under the Sixth Amended and Restated Management Agreement between the Company and the Manager, or the Management Agreement. | ||||||||||||||||||||
(3) Effective January 1, 2019, the interest rate was increased from 6.0% per annum to 7.5% per annum and the maturity date was extended to December 31, 2019. | ||||||||||||||||||||
(4) The amount payable under this note is collateralized by one of the principals of the borrower's 49.49% interest in an unrelated shopping center located in Atlanta, Georgia and a personal guaranty of repayment by the principals of the borrower. | ||||||||||||||||||||
(5) The amounts payable under the terms of this revolving credit line, up to the lesser of 25% of the loan balance or $2.0 million, are collateralized by a personal guaranty of repayment by the principals of the borrower. | ||||||||||||||||||||
(6) The amounts payable under the terms of these revolving credit lines are collateralized by a personal guaranty of repayment by the principals of the borrower. | ||||||||||||||||||||
(7) The amount payable under the note is collateralized by the developer's interest in the Fort Myers multifamily community project and a personal guaranty of repayment by the principals of the borrower. | ||||||||||||||||||||
On March 27, 2019, the Company entered into a negotiated agreement with the borrowers of the Haven Campus Communities, LLC and Haven Campus Communities Charlotte Member, LLC lines of credit, both of which were in default as of December 31, 2018. The Company received the membership interests of the Haven49 project in exchange for complete settlement of the Haven Campus Communities Charlotte Member, LLC line of credit and the Haven49 mezzanine and member loans. As part of the agreement, payments and credits totaling approximately $3.3 million were applied against the outstanding balance of the Haven Campus Communities, LLC line of credit. The Company retains a pledge of a 49.49% interest in an unrelated shopping center located in Atlanta, Georgia as additional collateral on the Haven Campus Communities, LLC line of credit.
22
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
The Company recorded interest income and other revenue from these instruments as follows:
Interest income | Three months ended March 31, | |||||||
(in thousands) | 2019 | 2018 | ||||||
Real estate loans: | ||||||||
Current interest payments | $ | 7,469 | $ | 8,506 | ||||
Additional accrued interest | 3,385 | 4,726 | ||||||
Origination fee amortization | 315 | 431 | ||||||
Purchase option termination fee amortization | 4,233 | — | ||||||
Total real estate loan revenue | 15,402 | 13,663 | ||||||
Interest income on notes and lines of credit | 1,490 | 902 | ||||||
Interest income from agency mortgage-backed securities | 198 | — | ||||||
Interest income on loans and notes receivable | $ | 17,090 | $ | 14,565 | ||||
The Company extends loans for purposes such as to partially finance the development of multifamily residential communities, to acquire land in anticipation of developing and constructing multifamily residential communities, and for other real estate or real estate related projects. Certain of these loans include characteristics such as exclusive options to purchase the project within a specific time window following project completion and stabilization, the sufficiency of the borrowers' investment at risk and the existence of payment and performance guaranties provided by the borrowers, any of which can cause the loans to create variable interests to the Company and require further evaluation as to whether the variable interest creates a VIE, which would necessitate consolidation of the project.
The Company considers the facts and circumstances pertinent to each entity borrowing under the loan, including the relative amount of financing the Company is contributing to the overall project cost, decision making rights or control held by the Company, guarantees provided by third parties, and rights to expected residual gains or obligations to absorb expected residual losses that could be significant from the project. If the Company is deemed to be the primary beneficiary of a VIE, consolidation treatment would be required.
The Company has no decision making authority or power to direct activity, except normal lender rights, which are subordinate to the senior loans on the projects. The Company has concluded that it is not the primary beneficiary of the borrowing entities and therefore it has not consolidated these entities in its consolidated financial statements. The Company's maximum exposure to loss from these loans is their drawn amount as of March 31, 2019 of approximately $338.3 million. The maximum aggregate amount of loans to be funded as of March 31, 2019 was approximately $484.2 million, which includes approximately $145.9 million of loan committed amounts not yet funded.
The Company has evaluated its real estate loans, where appropriate, for accounting treatment as loans versus real estate development projects, as required by ASC 310. For each loan, the characteristics and the facts and circumstances indicate that loan accounting treatment is appropriate.
The Company is also subject to a geographic concentration of risk that could be considered significant with regard to the 464 Bishop, Dawsonville Marketplace, Falls at Forsyth, Newbergh, Newbergh Capital, Solis Kennesaw, Solis Kennesaw Capital, Solis Kennesaw II, 8West and 8West construction loans, all of which are partially supporting various real estate projects in or near Atlanta, Georgia. The drawn amount of these loans as of March 31, 2019 totaled approximately $89.7 million (with a total commitment amount of approximately $167.8 million) and in the event of a total failure to perform by the borrowers and guarantors, would subject the Company to a total possible loss of the drawn amount.
Freddie Mac K Program investments
On May 23, 2018, the Company purchased a subordinate tranche of Series 2018-ML04, a pool of 20 multifamily mortgages with a total pool size of approximately $276.3 million, from Freddie Mac. The purchase price of the subordinate tranche was approximately $4.7 million and has a weighted average maturity of approximately 16 years, at which time the Company will collect the face value of its tranche of $27.6 million. The yield to maturity of the subordinate tranche is expected to be approximately 11.5% per annum.
23
Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2019
(unaudited)
On March 28, 2019, the Company purchased a subordinate tranche of Series 2019-ML05, a pool of 21 multifamily mortgages with a total pool size of approximately $295.7 million, from Freddie Mac. The Company's tranche of the 2019-ML05 pool pays monthly interest of approximately $103,000. The purchase price of the subordinate tranche was approximately $18.4 million and has a weighted average maturity of approximately 16.1 years, at which time the Company will collect the face value of its tranche of $29.6 million. The yield to maturity of the subordinate tranche is expected to be approximately 8.9% per annum.
The Company has evaluated the structure of the investments under the VIE rules and has determined that, due to the Company's position as directing certificate holder of the two mortgage pools, it is in the position most able to influence the financial performance of the trusts. As the subordinate tranche holder, the Company also holds the first loss position of the mortgage pools. As such, the Company is deemed to be the primary beneficiary of the VIEs and has consolidated the assets, liabilities, revenues, expenses and cash flows of both trusts in its consolidated financial statements as of and for the three-month period ended March 31, 2019. The Company's maximum exposure to loss from the combined mortgage pools from the Freddie Mac K program is approximately $23.9 million. The Company has no recourse liability to either the creditors or other beneficial interest holders of either investment.
Agency Mortgage-Backed Securities investments
In December 2018, the Company began investing in Agency Mortgage-Backed Securities representing undivided (or “pass-through”) beneficial interests in specified pools of fixed-rate mortgage loans. The investments are classified as trading securities. On December 20, 2018, the Company sold its entire position of a pool with associated premium amounts totaling $41.1 million. At December 31, 2018, the Company held a receivable related to this sale transaction of $41.2 million, which was collected upon the settlement of the transaction in January 2019. Additionally, for the quarter ended March 31, 2019, the Company recorded approximately $198,000 in interest income related to these investments.
5. Redeemable Preferred Stock and Equity Offerings
At March 31, 2019, the Company's active equity offerings consisted of:
• | an offering of a maximum of 1,500,000 Units, with each Unit consisting of one share of Series A Redeemable Preferred Stock and one Warrant to purchase up to 20 shares of Common Stock (the "$1.5 Billion Unit Offering"); |
• |