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EX-31.1 - EXHIBIT 31.1 - PREFERRED APARTMENT COMMUNITIES INCexhibit3111.htm
EX-32.2 - EXHIBIT 32.2 - PREFERRED APARTMENT COMMUNITIES INCexhibit3221.htm
EX-32.1 - EXHIBIT 32.1 - PREFERRED APARTMENT COMMUNITIES INCexhibit3211.htm
EX-31.2 - EXHIBIT 31.2 - PREFERRED APARTMENT COMMUNITIES INCexhibit3121.htm
EXCEL - IDEA: XBRL DOCUMENT - PREFERRED APARTMENT COMMUNITIES INCFinancial_Report.xls
EX-10.1 - FOURTH A&R MANAGEMENT AGREEMENT (8-7-14 INVESTMENT GUIDELINES) - PREFERRED APARTMENT COMMUNITIES INCfourth_amendedxandxrestate.htm


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 June 30, 2014
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.)
3625 Cumberland Boulevard, Suite 1150, Atlanta, GA 30339
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (770) 818-4100
 

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 and posted on its corporate website, if any, 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, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer  ¨            Accelerated filer  x            Non-accelerated filer  ¨            Smaller reporting company  ¨
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 August 6, 2014 was 17,140,022.



 
 
INDEX
 
 
 
 
 
 
Page No. 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Consolidated Balance Sheets (unaudited) – as of June 30, 2014 and December 31, 2013
1

 
 
 
 
Consolidated Statements of Operations (unaudited) – Three Months and Six Months Ended June 30, 2014 and 2013
2

 
 
 
 
Consolidated Statements of Stockholders' Equity (unaudited) – Six Months Ended June 30, 2014 and 2013
3

 
 
 
 
Consolidated Statements of Cash Flows (unaudited) – Six Months Ended June 30, 2014 and 2013
4

 
 
 
 
Notes to Consolidated Financial Statements (unaudited)
6

 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30

 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
49

 
 
 
Item 4.
Controls and Procedures
50

 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
50

 
 
 
Item 1A
Risk Factors
50

 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
50

 
 
 
Item 3.
Defaults Upon Senior Securities
50

 
 
 
Item 4.
Mine Safety Disclosures
50

 
 
 
Item 5.
Other Information
50

 
 
 
Item 6.
Exhibits
50

 
 
SIGNATURES     
51

 
 
EXHIBIT INDEX     
52









i

PART I - FINANCIAL INFORMATION


Item 1. Financial Statements
Preferred Apartment Communities, Inc.
Consolidated Balance Sheets
(Unaudited)
 
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
Assets
 
 
 
 
 
 
 
 
 
Real estate
 
 
 
 
Land
 
$
36,270,576

 
$
34,520,000

Building and improvements
 
151,600,470

 
147,510,836

Furniture, fixtures, and equipment
 
22,857,790

 
22,363,098

Construction in progress
 
352,463

 
55,226

Gross real estate
 
211,081,299

 
204,449,160

Less: accumulated depreciation
 
(18,760,757
)
 
(14,133,421
)
Net real estate
 
192,320,542

 
190,315,739

Real estate loans, net of deferred fee income ($16,514,083 and $14,332,658 carried at fair value)
 
116,323,854

 
103,433,147

Real estate loans to related parties, net
 
17,671,052

 
7,164,768

Total real estate and real estate loans, net
 
326,315,448

 
300,913,654

 
 
 
 
 
Cash and cash equivalents
 
9,677,630

 
9,180,431

Restricted cash
 
2,875,643

 
2,064,819

Notes receivable
 
15,596,387

 
10,248,178

Note receivable from related party
 
1,500,000

 
1,500,000

Revolving lines of credit to related parties
 
10,551,204

 
5,358,227

Accrued interest receivable on real estate loans
 
5,519,192

 
3,286,660

Acquired intangible assets, net of amortization of $13,886,914 and $12,569,581
 
344,083

 
907,883

Deferred loan costs, net of amortization of $995,904 and $963,043
 
1,617,847

 
1,719,194

Deferred offering costs
 
6,668,355

 
5,255,636

Tenant receivables and other assets
 
1,919,983

 
1,202,013

 
 
 
 
 
Total assets
 
$
382,585,772

 
$
341,636,695

 
 
 
 
 
Liabilities and equity
 

 
 
 
 
 
 
 
Liabilities
 
 
 
 
Mortgage notes payable
 
$
140,816,950

 
$
140,516,000

Revolving credit facility
 
37,283,306

 
29,390,000

Accounts payable and accrued expenses
 
3,171,512

 
1,638,401

Accrued interest payable
 
484,029

 
443,099

Dividends and partnership distributions payable
 
3,235,741

 
2,900,478

Acquired below market lease intangibles, net of amortization of $402,208
 
430,754

 

Security deposits and other liabilities
 
735,898

 
695,998

Total liabilities
 
186,158,190

 
175,583,976

 
 
 
 
 
Commitments and contingencies (Note 11)
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
Stockholders' equity
 
 
 
 
Series A Redeemable Preferred Stock, $0.01 par value per share; 989,408 shares authorized;
 
 
 
 
115,391 and 89,408 shares issued; 115,221 and 89,313 shares
 
 
 
 
 outstanding at June 30, 2014 and December 31, 2013, respectively
 
1,152

 
893

Common Stock, $0.01 par value per share; 400,066,666 shares authorized; 16,636,359 and
 
 
 
 
15,294,578 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
 
166,363

 
152,945

Additional paid in capital
 
203,130,447

 
177,824,720

Accumulated deficit
 
(8,230,256
)
 
(13,391,341
)
Total stockholders' equity
 
195,067,706

 
164,587,217

Non-controlling interest
 
1,359,876

 
1,465,502

Total equity
 
196,427,582

 
166,052,719

 
 
 
 
 
Total liabilities and equity
 
$
382,585,772

 
$
341,636,695


The accompanying notes are an integral part of these consolidated financial statements.
1



Preferred Apartment Communities, Inc.
Consolidated Statements of Operations
(Unaudited)
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Rental revenues
$
6,044,732

 
$
5,062,433

 
$
11,914,023

 
$
9,362,672

Other property revenues
760,666

 
586,262

 
1,405,708

 
965,052

Interest income on loans and notes receivable
4,492,153

 
1,992,950

 
8,785,595

 
3,288,030

Interest income from related party
767,639

 
27,063

 
1,199,946

 
43,913

Total revenues
12,065,190

 
7,668,708

 
23,305,272

 
13,659,667

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Property operating and maintenance
960,985

 
890,498

 
1,873,534

 
1,480,075

Property salary and benefits reimbursement to related party
609,104

 
553,096

 
1,234,365

 
1,032,983

Property management fees to related party
268,674

 
217,719

 
530,795

 
405,361

Real estate taxes
730,264

 
565,798

 
1,389,313

 
1,015,577

General and administrative
232,765

 
175,149

 
421,604

 
286,605

Equity compensation to directors and executives
445,924

 
290,165

 
890,146

 
599,086

Depreciation and amortization
3,296,780

 
4,884,319

 
5,605,306

 
8,996,622

Acquisition and pursuit costs
162,364

 
3,525

 
350,395

 
202,136

Acquisition fees to related party

 
121,087

 
57,268

 
1,029,487

Management fees to related party
731,521

 
467,763

 
1,420,270

 
851,631

Insurance, professional fees and other expenses
417,939

 
274,643

 
811,914

 
579,052

Total operating expenses
7,856,320

 
8,443,762

 
14,584,910

 
16,478,615

 
 
 
 
 
 
 
 
Operating income (loss)
4,208,870

 
(775,054
)
 
8,720,362

 
(2,818,948
)
Interest expense
1,784,398

 
1,242,829

 
3,500,049

 
2,384,764

Loss on early extinguishment of debt

 
604,337

 

 
604,337

 
 
 
 
 
 
 
 
Net income (loss)
2,424,472

 
(2,622,220
)
 
5,220,313

 
(5,808,049
)
Consolidated net (income) loss attributable
 
 
 
 
 
 
 
to non-controlling interests
(20,366
)
 
36,670

 
(59,228
)
 
98,156

 
 
 
 
 
 
 
 
Net income (loss) attributable to the Company
2,404,106

 
(2,585,550
)
 
5,161,085

 
(5,709,893
)
 
 
 
 
 
 
 
 
Dividends declared to preferred stockholders
(1,600,779
)
 
(745,417
)
 
(3,021,315
)
 
(1,795,932
)
Deemed non-cash dividend to holders of Series B
 
 
 
 
 
 
 
Preferred Stock

 
(7,028,557
)
 

 
(7,028,557
)
Earnings attributable to unvested restricted stock
(6,274
)
 
(4,352
)
 
(10,952
)
 
(9,144
)
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
797,053

 
$
(10,363,876
)
 
$
2,128,818

 
$
(14,543,526
)
 
 
 
 
 
 
 
 
Net income (loss) per share of Common Stock, Available
 
 
 
 
 
 
 
to Common Stockholders, basic and diluted
$
0.05

 
$
(1.26
)
 
$
0.13

 
$
(2.15
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends per share declared on Common Stock
$
0.16

 
$
0.15

 
$
0.32

 
$
0.295

 
 
 
 
 
 
 
 
Weighted average number of shares of Common Stock outstanding:
 
 
 
 
 
 
 
Basic
16,287,354

 
8,198,340

 
15,804,766

 
6,752,050

Diluted
16,421,351

 
8,198,340

 
15,915,384

 
6,752,050


The accompanying notes are an integral part of these consolidated financial statements.
2


Preferred Apartment Communities, Inc.
Consolidated Statements of Stockholders' Equity
For the six months ended June 30, 2014 and 2013
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series A Redeemable Preferred Stock
 
Common Stock
 
Additional Paid in Capital
 
Accumulated (Deficit)
 
Total Stockholders' Equity
 
Non-Controlling Interest
 
Total Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2013
 
$
198

 
$
52,885

 
$
59,412,744

 
$
(9,408,253
)
 
$
50,057,574

 
$
1

 
$
50,057,575

Issuance of Units
 
393

 

 
38,455,112

 

 
38,455,505

 

 
38,455,505

Syndication and offering costs
 

 

 
(6,387,968
)
 

 
(6,387,968
)
 

 
(6,387,968
)
Equity compensation to executives and directors
 

 
21

 
599,065

 

 
599,086

 

 
599,086

Vesting of restricted stock
 

 
330

 
(330
)
 

 

 

 

Vesting of Class B Units and conversion to Class A Units
 

 

 
(479,841
)
 

 
(479,841
)
 
479,841

 

Current period amortization of Class B OP Units
 

 

 
(449,289
)
 

 
(449,289
)
 
449,289

 

Conversion of Series B Preferred Stock to Common Stock
 

 
57,143

 
39,942,857

 

 
40,000,000

 

 
40,000,000

Net loss
 

 

 

 
(5,709,893
)
 
(5,709,893
)
 
(98,156
)
 
(5,808,049
)
Reallocation adjustment to non-controlling interests
 

 

 
(159,504
)
 

 
(159,504
)
 
159,504

 

Distributions to non-controlling interests
 

 

 

 

 

 
(31,560
)
 
(31,560
)
Dividends to series A preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($5.00 per share per month)
 

 

 
(1,105,457
)
 

 
(1,105,457
)
 

 
(1,105,457
)
Dividends to series B preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($17.26 per share)
 

 

 
(690,476
)
 

 
(690,476
)
 

 
(690,476
)
Dividends to common stockholders ($0.295 per share)
 

 

 
(2,431,957
)
 

 
(2,431,957
)
 

 
(2,431,957
)
Balance at June 30, 2013
 
$
591

 
$
110,379

 
$
126,704,956

 
$
(15,118,146
)
 
$
111,697,780

 
$
958,919

 
$
112,656,699

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
 
$
893

 
$
152,945

 
$
177,824,720

 
$
(13,391,341
)
 
$
164,587,217

 
$
1,465,502

 
$
166,052,719

Issuance of Units
 
260

 

 
25,956,181

 

 
25,956,441

 

 
25,956,441

Redemptions of Series A Preferred Stock
 
(1
)
 
59

 
(22,614
)
 

 
(22,556
)
 

 
(22,556
)
Issuance of Common Stock
 

 
12,004

 
9,799,661

 

 
9,811,665

 

 
9,811,665

Syndication and offering costs
 

 

 
(3,289,788
)
 

 
(3,289,788
)
 

 
(3,289,788
)
Equity compensation to executives and directors
 

 
22

 
157,325

 

 
157,347

 

 
157,347

Vesting of restricted stock
 

 
293

 
(293
)
 

 

 

 

Conversion of Class A Units to Common Stock
 

 
1,040

 
565,158

 

 
566,198

 
(566,198
)
 

Current period amortization of Class B OP Units
 

 

 

 

 

 
732,798

 
732,798

Net income
 

 

 

 
5,161,085

 
5,161,085

 
59,228

 
5,220,313

Reallocation adjustment to non-controlling interests
 

 

 
273,394

 

 
273,394

 
(273,394
)
 

Distributions to non-controlling interests
 

 

 

 

 

 
(58,060
)
 
(58,060
)
Dividends to series A preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($5.00 per share per month)
 

 

 
(3,021,315
)
 

 
(3,021,315
)
 

 
(3,021,315
)
Dividends to common stockholders ($0.32 per share)
 

 

 
(5,111,982
)
 

 
(5,111,982
)
 

 
(5,111,982
)
Balance at June 30, 2014
 
$
1,152

 
$
166,363

 
$
203,130,447

 
$
(8,230,256
)
 
$
195,067,706

 
$
1,359,876

 
$
196,427,582


The accompanying notes are an integral part of these consolidated financial statements.
3


Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Six months ended June 30,
 
 
2014
 
2013
Operating activities:
 
 
 
 
Net income (loss)
 
$
5,220,313

 
$
(5,808,049
)
Reconciliation of net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
4,631,503

 
3,683,029

Amortization expense
 
973,803

 
5,313,593

Amortization of above and below market leases
 
(32,940
)
 
(261,695
)
Deferred fee income amortization
 
(592,308
)
 
(145,519
)
Deferred loan cost amortization
 
264,300

 
422,395

(Increase) in accrued interest income on real estate loans
 
(2,232,532
)
 
(900,048
)
Equity compensation to executives and directors
 
890,146

 
599,086

Deferred cable income amortization
 
(9,138
)
 
(5,468
)
Loss on asset disposal
 
2,804

 

Changes in operating assets and liabilities:
 
 
 
 
Decrease (increase) in tenant receivables and other assets
 
174,685

 
(53,426
)
Prepaid interest on operating loans
 
53,308

 

Increase in accounts payable and accrued expenses
 
1,205,655

 
476,796

Increase (decrease) in accrued interest payable
 
40,930

 
(88,486
)
(Decrease) in prepaid rents
 
(58,842
)
 
(4,547
)
(Decrease) increase in security deposits and other liabilities
 
(20,486
)
 
12,090

Increase in deferred income
 
61,658

 

Net cash provided by operating activities
 
10,572,859

 
3,239,751

 
 
 
 
 
Investing activities:
 
 
 
 
Investments in real estate loans
 
(25,201,346
)
 
(25,626,531
)
Repayments of real estate loans
 
2,110,609

 

Notes receivable issued
 
(6,713,545
)
 
(7,546,203
)
Notes receivable repaid
 
1,328,465

 
956,665

Note receivable issued to and draws on line of credit by related party
 
(7,337,953
)
 
(3,597,995
)
Repayments of line of credit by related party
 
1,912,520

 
2,390,186

Acquisition fees received on real estate loans
 
687,378

 
1,017,440

Acquisition fees paid on real estate loans
 
(343,689
)
 
(508,720
)
Acquisition of properties
 
(5,701,393
)
 
(33,476,928
)
Additions to real estate assets - improvements
 
(996,571
)
 
(642,428
)
Proceeds from asset disposal
 
4,773

 

(Increase) in restricted cash
 
(583,994
)
 
(811,880
)
Net cash used in investing activities
 
(40,834,746
)
 
(67,846,394
)
 
 
 
 
 
Financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
13,357,000

 
59,045,000

Payments for mortgage extinguishment
 
(13,056,050
)
 
(56,594,389
)
Payments for deposits and other mortgage loan costs
 
(701,664
)
 
(1,607,394
)
Proceeds from lines of credit
 
19,283,306

 
30,129,147

Payments on lines of credit
 
(11,390,000
)
 
(30,793,414
)
Proceeds from sales of Series B Preferred Stock, net of offering costs
 

 
36,956,575

Proceeds from sales of Units, net of offering costs and redemptions
 
23,342,536

 
35,947,555

Proceeds from sales of Common Stock
 
9,513,500

 

Common Stock dividends paid
 
(4,905,466
)
 
(1,543,539
)
Series A Preferred Stock dividends paid
 
(2,896,958
)
 
(1,598,854
)
Distributions to non-controlling interests
 
(53,670
)
 
(15,513
)
Payments for deferred offering costs
 
(1,733,448
)
 
(749,097
)
Net cash provided by financing activities
 
30,759,086

 
69,176,077

 
 
 
 
 
Net increase in cash and cash equivalents
 
497,199

 
4,569,434

Cash and cash equivalents, beginning of period
 
9,180,431

 
2,973,509

Cash and cash equivalents, end of period
 
$
9,677,630

 
$
7,542,943

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.
4


 
 
 
 
 
Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows (unaudited) - continued
 
 
 
Six months ended June 30,
 
 
2014
 
2013
Supplemental cash flow information:
 
 
 
 
Cash paid for interest
 
$
3,276,678

 
$
2,668,558

 
 
 
 
 
Supplemental disclosure of non-cash activities:
 
 
 
 
Accrued capital expenditures
 
$
199,708

 
$
200,191

Dividends payable - common
 
$
2,658,212

 
$
1,660,034

Dividends payable - preferred
 
$
556,020

 
$
276,946

Deemed non-cash dividend to holders of Series B Preferred Stock
 
$

 
$
7,028,557

Partnership distributions payable to non-controlling interest
 
$
21,509

 
$
16,048

Accrued and payable deferred offering costs
 
$
209,145

 
$
499,932

Reclass of offering costs from deferred asset to equity
 
$
295,319

 
$
189,325

Bridge loans converted to mezzanine loan
 
$
7,416,864

 
$

Mortgage loans assumed on acquisitions
 
$

 
$
69,428,389

Mezzanine loan balance applied to purchase of property
 
$

 
$
6,326,898


The accompanying notes are an integral part of these consolidated financial statements.
5

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements
June 30, 2014
(Unaudited)


1.
Organization and Basis of Presentation

Preferred Apartment Communities, Inc. was formed as a Maryland corporation on September 18, 2009, and elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, effective with its tax year ended December 31, 2011. Unless the context otherwise requires, references to the "Company", "we", "us", or "our" refer to Preferred Apartment Communities, Inc., together with its consolidated subsidiaries, including Preferred Apartment Communities Operating Partnership, L.P., or the Operating Partnership. The Company was formed primarily to acquire and operate multifamily properties in select targeted markets throughout the United States. As part of its business strategy, the Company may enter into forward purchase contracts or purchase options for to-be-built multifamily communities and may make mezzanine loans, provide deposit arrangements, or provide performance assurances, as may be necessary or appropriate, in connection with the development of multifamily communities and other properties. As a secondary strategy, the Company also may acquire or originate senior mortgage loans, subordinate loans or mezzanine debt secured by interests in multifamily properties, membership or partnership interests in multifamily properties and other multifamily related assets and invest not more than 10% of its assets in other real estate related investments, as determined by its Manager (as defined below) as appropriate for the Company. See note 16 for details regarding an amendment of the Company's investment strategy. 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).

The Company completed its initial public offering, or IPO, on April 5, 2011. As of June 30, 2014, the Company had 16,636,359 shares of common stock, par value $0.01 per share, or Common Stock, issued and outstanding and owned units in the Operating Partnership which represented a weighted-average ownership percentage of 99.16% for the three-month period ended June 30, 2014. The number of partnership units not owned by the Company totaled 145,011 at June 30, 2014 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 Company'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 consolidated financial statements include the accounts of the Company and the Operating Partnership. The Company controls the Operating Partnership through its sole general partner interest and plans to conduct substantially all of its business through the Operating Partnership.

Basis of Presentation

The unaudited 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. 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 year end condensed balance sheet data was derived from audited financial statements, but does not include all the disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with our audited financial statements and notes thereto included in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 17, 2014.
    
2.
Summary of Significant Accounting Policies

Use of Estimates

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.

Acquisitions and Impairments of Real Estate Assets

The Company generally records its initial investments in income-producing real estate at fair value at the acquisition date in accordance with ASC 805-10, Business Combinations. The aggregate purchase price of acquired properties is apportioned to the tangible and identifiable intangible assets and liabilities acquired at their estimated fair values. The value of acquired land, buildings


6

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
June 30, 2014
(Unaudited)

and improvements is estimated by formal appraisals, observed comparable sales transactions, and information gathered during pre-acquisition due diligence activities and the valuation approach considers the value of the property as if it were vacant. The values of furniture, fixtures, and equipment are estimated by calculating their replacement cost and reducing that value by factors based upon estimates of their remaining useful lives. Intangible assets and liabilities for multifamily communities include the values of in-place leases, customer relationships, and above-market or below-market leases. In-place lease values are estimated by calculating the estimated time to fill a hypothetically empty apartment complex to its stabilization level (estimated to be 92% occupancy) based on historical observed move-in rates for each property, and which approximate market rates. Carrying costs during these hypothetical expected lease-up periods are estimated, considering current market conditions and include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates. The intangible assets are calculated by estimating the net cash flows of the in-place leases to be realized, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. The acquired in-place lease values are amortized to operating expense over the average remaining non-cancelable term of the respective in-place leases. The values of customer relationships are estimated by calculating the product of the avoided hypothetical lost revenue and the average renewal probability and are amortized to operating expense over the average remaining historical period of residency, plus an estimate of the average expected renewal period. The amounts of above-market or below-market lease values are developed by comparing the Company's estimate of the average market rent to the average contract rent of the leases in place at the property acquisition date any amount. This ratio is applied on a lease by lease basis to derive a total asset or liability amount for the property. The above-market or below-market lease values are recorded as a reduction or increase, respectively, to rental income over the remaining average non-cancelable term of the respective leases, plus any below market probable renewal options. Acquired intangible assets have no residual value.

The Company evaluates its tangible and identifiable intangible real estate assets for impairment when events such as declines in a property’s operating performance, deteriorating market conditions, or environmental or legal concerns bring recoverability of the carrying value of one or more assets into question. The total undiscounted cash flows of the asset group, including proceeds from disposition, are compared to the net book value of the asset group. If this test indicates that impairment exists, an impairment loss is recorded in earnings equal to the shortage of the book value to the discounted net cash flows of the asset group.

Loans and Notes Held for Investment

The Company carries its investments in real estate loans at amortized cost with assessments made for impairment in the event recoverability of the principal amount becomes doubtful. If, upon testing for impairment, the fair value result is lower than the carrying amount of the loan, a valuation allowance is recorded to lower the carrying amount to fair value, with a loss recorded in earnings. Recoveries of valuation allowances are only recognized in the event of maturity or a sale or disposition in an amount above carrying value. The balances of real estate loans presented on the consolidated balance sheets consist of drawn amounts on the loans, net of deferred loan fee revenue. See the "Revenue Recognition" section of this Note for other loan-related policy disclosures required by ASC 310-10-50-6. Certain loans contain contingent exit fees, which are deemed to be embedded derivatives. The Company elects the fair value option for these loans and recognizes in earnings any material changes in fair value.

Deferred Offering Costs

Deferred offering costs represent direct costs incurred by the Company related to current equity offerings, excluding costs specifically identifiable to a closing, such as commissions, dealer-manager fees, and other registration fees. For issuances of equity that occur on one specific date, associated offering costs are reclassified as a reduction of proceeds raised on the date of issue. Our ongoing offering of up to a maximum of 900,000 units, consisting of one share of Series A Redeemable Preferred Stock, or Series A Preferred Stock, and one warrant, or Warrant, to purchase 20 shares of Common Stock, or Units, generally closes on a bimonthly basis in variable amounts. Such offering is referred to herein as the Follow-on Offering, pursuant to our registration statement on Form S-3 (registration number 333-183355), as may be amended from time to time. Deferred offering costs related to the Follow-on Offering and Shelf Offering (as defined in note 5) are reclassified to the stockholders’ equity section of the consolidated balance sheet as a reduction of proceeds raised on a pro-rata basis equal to the ratio of total Units or value of shares issued to the maximum number of Units, or the value of shares, as applicable, that are expected to be issued.

Revenue Recognition

Rental revenue is recognized when earned from residents of the Company's multifamily communities, which is over the terms of rental agreements, typically of 13 months’ duration. Differences from the straight-line method, which recognize the effect of any up-front concessions and other adjustments ratably over the lease term, are not material. The Company evaluates the collectability


7

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
June 30, 2014
(Unaudited)

of amounts due from residents and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of residents to make required payments then due under lease agreements. The balance of amounts due from residents are generally deemed uncollectible 30 days beyond the due date, at which point they are fully reserved.

Rental revenue from tenants' operating leases in the Company's retail shopping center is recognized on a straight-line basis over the term of the lease regardless of when payments are due. The Company estimates the collectability of the accounts receivable related to base rents, straight-line rents, expense reimbursements, and other revenue taking into consideration the Company's historical write-off experience, tenant credit-worthiness, current economic trends, and remaining lease terms.  Substantially all of the lease agreements with anchor tenants contain "percentage rent" provisions that provide for additional rents that become due upon achievement of specified sales revenue targets as defined in their lease agreements. Substantially all lease agreements contain provisions for reimbursement of the tenants' share of real estate taxes, insurance and common area maintenance costs, or CAM, costs. Recovery of real estate taxes, insurance, and CAM costs are recognized as the respective costs are incurred in accordance with the lease agreements.

Interest income on real estate loans and notes receivable is recognized on an accrual basis over the lives of the loans using the effective interest method. 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 over the term of the new loan. Direct loan origination fees and origination or acquisition costs applicable to real estate loans are amortized over the lives of the loans as adjustments to interest income. The accrual of interest on all these instruments is stopped when there is concern as to the ultimate collection of principal or interest, which is generally a delinquency of 30 days in required payments of interest or principal. Any payments received on such non-accrual loans are recorded as interest income when the payments are received. Real estate loan assets are reclassified as accrual-basis once interest and principal payments become current. Certain real estate loan assets include limited purchase options and exit fees or additional interest payments that are due the Company at maturity or in the event of a sale of the property or refinancing of the loan by the borrower to a third party. If the Company purchases the subject property, any accrued exit fee will be treated as additional consideration for the acquired project.

Promotional fees received from service providers at the Company’s properties are deferred and recognized on a straight-line basis over the term of the agreement.

The PAC Rewards program, implemented in the first quarter of 2012, allows residents to accumulate reward points on a monthly basis for actions such as resident referrals and making rent payments online. A resident must rent an apartment from the Company for at least 14 months before reward points may be redeemed for services or upgrades to a resident’s unit. The Company accrues a liability for the estimated cost of these future point redemptions, net of a 35% breakage fee, which is the Company’s current estimate of rewards points that will not be redeemed. In accordance with Staff Accounting Bulletin 13.A.3c, the Company deems its obligations under PAC Rewards as inconsequential to the delivery of services according to the lease terms. Therefore, the expense related to the PAC Rewards Program is included in property operating and maintenance expense on the consolidated statements of operations.

Discontinued Operations

The Company evaluates all disposal groups for held-for-sale classification and for those disposal groups for which it will have no continuing involvement, nor receipt of cash flows post-disposal, for presentation in the consolidated financial statements according to criteria provided by ASC 360-10-45-9. If the disposal group meets the criteria necessary for held for sale classification, the assets and liabilities to be transferred upon sale or disposal are summarized into single line items entitled property held for sale on the consolidated balance sheets, and the results of operations are reclassified into a single line entitled gain/loss from discontinued operations on the consolidated statements of operations and depreciation expense is no longer recorded. Previous periods are similarly reclassified for comparability. In the event a disposal group no longer meets the criteria necessary for held for sale classification, any reclassification adjustments previously made to the assets, liabilities, and results of operations are reversed and depreciation expense is adjusted to recognize any such expense applicable to periods for which the disposal group was classified as held for sale.

New Accounting Pronouncements    
In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-08 (“ASU 2014-08”), Reporting Discontinued Operations and Disclosures of Disposals of Components of Entity. Under this new guidance, a disposal of a component of an entity or a group of components of an entity shall only be reported in discontinued operations if


8

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
June 30, 2014
(Unaudited)

the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. ASU 2014-08 is to be applied prospectively for annual and interim periods beginning on or after December 31, 2014, with early adoption permitted. Early adoption is not permitted for assets that have previously been reported as held for sale in the consolidated financial statements. Therefore, application of this new guidance was not permitted for the Company’s Trail Creek multifamily community, which was reported as held for sale in the Company’s Annual Report on Form 10-K for the twelve-month period ended December 31, 2013 and in the Company's Quarterly Report on Form 10-Q for the three-month period ended March 31, 2014. The Company does not expect the adoption of this guidance to materially impact its financial position or results of operations.

In May 2014, the FASB issued Accounting Standards Update 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a single comprehensive revenue recognition model for contracts with customers (excluding certain contracts, such as lease contracts) to improve comparability within industries. ASU 2014-09 requires an entity to recognize revenue to reflect the transfer of goods or services to customers at an amount the entity expects to be paid in exchange for those goods and services and provide enhanced disclosures, all to provide more comprehensive guidance for transactions such as service revenue and contract modifications. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016 and may be applied using either a full retrospective or a modified approach upon adoption. The Company is currently evaluating the impact this standard may have on its financial statements.

3. Real Estate Assets
The Company's real estate assets consisted of six multifamily communities with 1,929 total units at June 30, 2014 and six multifamily communities with 1,789 total units at June 30, 2013. The acquired second phases of our Trail Creek and Summit Crossing communities are managed in combination with the initial phases of these communities, both of which were acquired in April 2011 and are therefore considered single properties. At June 30, 2014, the combined phases of our Trail Creek communities, which was previously classified as held for sale, was reclassified pursuant to action taken by the investment committee of the Company's Manager.

On February 12, 2014, the Company completed the acquisition of a 66,122 square foot retail shopping center in Woodstock, Georgia, or Woodstock Crossing, for $5,701,393, which approximated the fair value of the acquired assets and assumed liabilities.

The Company allocated the purchase price of Woodstock Crossing to the acquired assets and liabilities based upon their fair values, as follows:
Land
$
1,750,576

Buildings and improvements
3,760,654

Escrow fund for improvements
226,830

Tenant improvements
39,447

In-place leases
245,850

Above market leases
30,051

Leasing costs
123,731

Below market leases
(450,310
)
Other liabilities
(25,436
)
 
 
Net assets acquired
$
5,701,393


The tenant improvements, in-place leases, above market leases, legal fees and commissions, and below-market leases will continue to be amortized over the remaining non-cancelable lease terms, which range from six months to ten years as of June 30, 2014, with a weighted average remaining lease term of 9.0 years as of June 30, 2014. Since the acquisition date of February 12, 2014, Woodstock Crossing contributed approximately $191,000 and $280,000 of revenue and $68,000 and $105,000 of net income to the Company's consolidated results for the three-month and six-month periods ended June 30, 2014, respectively. See note 6 for details regarding the acquisition fee paid related to this transaction. The Company expensed acquisition costs of approximately $268,000 in conjunction with the Woodstock Crossing acquisition.

On January 23, 2013, the Company completed the acquisition of 100% of the membership interests of the following three entities from Williams Multifamily Acquisition Fund, LP, a Delaware limited partnership, or WMAF, an entity whose properties were also managed by Preferred Residential Management LLC.



9

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
June 30, 2014
(Unaudited)

Ashford Park REIT, Inc., the fee-simple owner of a 408-unit multifamily community located in Atlanta, Georgia, or Ashford Park, for a total purchase price of approximately $39.6 million, exclusive of assumed mortgage debt, acquisition-related and financing-related transaction costs. The Company expensed acquisition costs of approximately $455,000 in conjunction with the Ashford Park acquisition.

Lake Cameron REIT, Inc., the fee-simple owner of a 328-unit multifamily community located in Raleigh, North Carolina, or Lake Cameron, for a total purchase price of approximately $30.5 million, exclusive of assumed mortgage debt, acquisition-related and financing-related transaction costs. The Company expensed acquisition costs of approximately $358,000 in conjunction with the Lake Cameron acquisition.

McNeil Ranch REIT, Inc., the fee-simple owner of a 192-unit multifamily community located in Austin, Texas, or McNeil Ranch, for a total purchase price of approximately $21.0 million, exclusive of assumed mortgage debt, acquisition-related and financing-related transaction costs. The Company expensed acquisition costs of approximately $277,000 in conjunction with the McNeil Ranch acquisition.
Amortization of acquired intangible assets for the six-month period ended June 30, 2013 related to the Ashford Park, McNeil Ranch and Lake Cameron communities commenced on January 23, 2013, the date of acquisition. The intangible assets were amortized over a period ranging from the average remaining lease term, which was approximately six to twelve months, to the average remaining lease term plus the average estimated renewal period.
On December 4, 2013, pursuant to the approval of the investment committee of the Manager, the Company entered into an exclusive marketing agreement with an outside firm to market for sale the combined phases of its Trail Creek multifamily community (Trail I and Trail II). The operating results of the community were classified as held for sale at December 31, 2013 and March 31, 2014. Effective on December 4, 2013, the Company ceased recording depreciation on the combined Trail Creek community. On June 20, 2014, again pursuant to approval of the investment committee of the Manager, the Company removed the Trail Creek community from held for sale classification. As such, Trail Creek is included in the Company's consolidated financial statements for all periods presented.

In the second quarter of 2014, the Company recorded depreciation of approximately $435,000 and amortization expense of intangible assets of approximately $167,000 for the period from December 4, 2013 through March 31, 2014 for the combined Trail Creek multifamily community. The depreciation and amortization charges recorded for the three-month and six-month periods ended June 30, 2014 in the following table include these adjustments.

 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Depreciation:
 
 
 
 
 
 
 
Buildings and improvements
$
1,416,130

 
$
959,891

 
$
2,358,876

 
$
1,817,926

Furniture, fixtures, and equipment
1,320,962

 
994,271

 
2,272,627

 
1,865,103

 
2,737,092

 
1,954,162

 
4,631,503

 
3,683,029

Amortization:
 
 
 
 
 
 
 
Acquired intangible assets
558,498

 
2,929,005

 
971,422

 
5,311,290

Website development costs
1,190

 
1,152

 
2,381

 
2,303

Total depreciation and amortization
$
3,296,780

 
$
4,884,319

 
$
5,605,306

 
$
8,996,622




10

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
June 30, 2014
(Unaudited)

4.     Real Estate Loans, Notes Receivable, and Line of Credit

At June 30, 2014, our portfolio of real estate loans consisted of:
 
Project/Property
 
Location
 
Date of loan
 
Maturity date
 
Optional extension date
 
Total loan commitments
 
Approved senior loan held by unrelated third party
 
Current / deferred interest % per annum
 
(1) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
City Park
 
Charlotte, NC
 
9/6/2012
 
9/5/2017
 
N/A
 
$
10,000,000

 
$
18,600,000

 
8 / 6
 
City Vista
 
Pittsburgh, PA
 
8/31/2012
 
6/1/2016
 
7/1/2017
 
12,153,000

 
$
28,400,000

 
8 / 6
 
Madison - Rome
 
Rome, GA (2)
 
11/13/2012
 
9/20/2015
 
N/A
 
5,360,042

 
$
11,500,000

 
8 / 6
 
Lely
 
Naples, FL
 
3/28/2013
 
2/28/2016
 
2/28/2018
 
12,713,242

 
$
25,000,000

 
8 / 6
 
Crosstown Walk
 
Suburban Tampa, FL (3)
 
4/30/2013
 
11/1/2016
 
5/1/2018
 
10,962,000

 
$
25,900,000

 
8 / 6
 
Overton
 
Atlanta, GA
 
5/8/2013
 
11/1/2016
 
5/1/2018
 
16,600,000

 
$
31,700,000

 
8 / 6
 
Haven West
 
Carrollton, GA (4) (6)
 
7/15/2013
 
6/2/2016
 
6/2/2018
 
6,940,795

 
$
16,195,189

 
8 / 6
 
Starkville
 
Starkville, MS (5) (6)
 
6/16/2014
 
11/30/2015
 
6/16/17
 
6,116,384

 
$
18,615,081

 
8.5 / 4.3
 
Founders' Village
 
Williamsburg, VA
 
8/29/2013
 
8/29/2018
 
N/A
 
10,346,000

 
$
26,936,000

 
8 / 6
 
Encore
 
Atlanta, GA (7)
 
11/18/2013
 
8/18/2014
 
N/A
 
16,026,525

 
N/A

 
8 / 2
 
Manassas
 
Northern VA (8)
 
12/23/2013
 
7/31/2014
 
N/A
 
10,932,000

 
N/A

 
8 / 5
 
Irvine
 
Irvine, CA (9)
 
12/18/2013
 
9/30/2014
 
N/A
 
21,000,000

 
N/A

 
8.5 / 4.3
 
Weems Road
 
Atlanta, GA (10)
 
4/14/2014
 
10/14/2014
 
N/A
 
5,700,000

 
N/A

 
8.5 / 4.3
 
Kennesaw
 
Atlanta, GA (6) (11)
 
6/27/2014
 
6/27/2017
 
N/A
 
13,424,995

 
$
34,825,000

 
8.5 / 4.3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
158,274,983

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
All loans are mezzanine loans pertaining to developments of multifamily communities, except as otherwise indicated. The borrowers for each of these projects are as follows: "City Park" - Oxford City Park Development LLC; "City Vista" - Oxford City Vista Development LLC; "Madison - Rome" - Madison Retail - Rome LLC; "Lely" - Lely Apartments LLC; "Crosstown Walk" - Iris Crosstown Partners LLC; "Overton" - Newport Overton Holdings, LLC; "Haven West" - Haven Campus Communities Member, LLC; "Starkville" - Haven Campus Communities - Starkville, LLC; "Founders' Village" - Oxford NTW Apartments LLC; "Encore" - GP - RV Land I, LLC; "Manassas" - Oxford Palisades Apartments LLC; "Irvine" - 360 - Irvine, LLC; "Weems Road" - Weems Road Property Owner, LLC; and "Kennesaw" - Haven Campus Communities - Kennesaw, LLC.
(2) 
Madison-Rome is a mezzanine loan for an 88,351 square foot retail development project. On October 16, 2013, the anchor tenant obtained a certificate of occupancy and took possession of approximately 54,340 square feet of space.
(3) 
Crosstown Walk was a land acquisition bridge loan that was converted to a mezzanine loan in April 2013.
 
 
(4) 
Planned 568-bed student housing community adjacent to the University of West Georgia campus.
 
 
 
 
(5) 
A planned 152-unit, 536-bed student housing community adjacent to the Mississippi State University campus.
(6) 
See note 6 - Related Party Transactions.
 
 
(7) 
Bridge loan of up to approximately $16.0 million to partially finance the acquisition of land and predevelopment costs for a 340-unit multifamily community in Atlanta, Georgia.
(8) 
Bridge loan of up to approximately $10.9 million to partially finance the acquisition of land and predevelopment costs for a 304-unit multifamily community in Northern Virginia. The Company expects to convert this bridge loan to a mezzanine loan by August 21, 2014.
(9) 
Bridge loan of up to $21.0 million to partially finance the acquisition of land and predevelopment costs for a 280-unit multifamily community in Irvine, California.
(10) 
Bridge loan of up to approximately $5.7 million to partially finance the acquisition of land and predevelopment costs for a 310-unit multifamily community in Atlanta, Georgia.
(11) 
Mezzanine loan of up to approximately $13.4 million in support of a planned 198-unit,792-bed student housing community adjacent to the campus of Kennesaw State University in Atlanta, Georgia.


11

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
June 30, 2014
(Unaudited)

The Company's real estate loans 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 borrower. 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. The Encore, Manassas, Irvine and Weems Road loans are also collateralized by the acquired land. The Haven West and Kennesaw loans are additionally collateralized by an assignment by the developer of security interests in unrelated projects. Prepayment of the mezzanine loans are permitted in whole, but not in part, without the Company's consent.

Management monitors the level of credit quality for each of the Company's mezzanine 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 as 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 as such, the Company does not assign quantitative credit value measures or categories to its real estate loans and notes receivable in credit quality categories.
 
 
As of June 30, 2014
 
Carrying amount as of
 
 
Amount drawn
 
Loan Fee received from borrower - 2%
 
Acquisition fee paid to Manager - 1%
 
Unamortized deferred loan fee revenue
 
June 30, 2014

 
December 31, 2013
Project/Property
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
City Park
 
$
10,000,000

 
$
200,000

 
$
100,000

 
$
(59,621
)
 
$
9,940,379

 
$
9,928,017

City Vista
 
12,153,000

 
243,040

 
121,520

 
(70,814
)
 
12,082,186

 
12,063,939

Madison - Rome
 
5,360,042

 
107,201

 
53,600

 
(25,528
)
 
5,334,514

 
5,322,770

Lely
 
11,959,918

 
254,265

 
127,133

 
(64,550
)
 
11,895,368

 
11,402,372

Crosstown Walk
 
10,455,804

 
219,240

 
109,620

 
(37,567
)
 
10,418,237

 
9,997,245

Overton
 
15,214,206

 
332,079

 
166,040

 
(97,391
)
 
15,116,815

 
14,487,178

Haven West
 
6,691,269

 
138,816

 
69,408

 
(42,584
)
 
6,648,685

 
5,582,018

Starkville
 
2,059,047

 
34,600

 
17,300

 
(42,592
)
 
2,016,455

 
1,582,750

Founders' Village
 
9,866,000

 
197,320

 
98,660

 
(73,329
)
 
9,792,671

 
7,572,698

Encore
 
9,007,044

 
320,531

 
160,265

 
(26,870
)
 
8,980,174

 
7,716,421

Manassas
 
10,932,000

 
214,140

 
107,070

 

 
10,932,000

 
10,609,849

Irvine
 
16,559,297

 
298,634

 
149,317

 
(45,214
)
 
16,514,083

 
14,332,658

Weems Road
 
5,344,166

 
94,356

 
47,178

 
(26,740
)
 
5,317,426

 

Kennesaw
 
9,065,401

 
119,500

 
59,750

 
(59,488
)
 
9,005,913

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
134,667,194

 
$
2,773,722

 
$
1,386,861

 
$
(672,288
)
 
$
133,994,906

 
$
110,597,915



12

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
June 30, 2014
(Unaudited)

The Company holds options, but not obligations, to purchase certain of the properties which are partially financed by its mezzanine loans, as shown in the table below. The option purchase prices are negotiated at the time of the loan closing.
 
 
Purchase option window
 
Purchase option price
 
Total units upon completion
Project/Property
 
Begin
 
End
 
 
 
 
 
 
 
 
 
 
 
City Park
 
11/1/2015
 
3/31/2016
 
$
30,945,845

 
284

City Vista
 
2/1/2016
 
5/31/2016
 
$
43,560,271

 
272

Madison - Rome
 
N/A
 
N/A
 
N/A

 
N/A

Lely
 
4/1/2016
 
8/30/2016
 
$
43,500,000

 
308

Crosstown Walk
 
7/1/2016
 
12/31/2016
 
$
39,654,273

 
342

Overton
 
7/8/2016
 
12/8/2016
 
$
51,500,000

 
294

Haven West
 
8/1/2016
 
1/31/2017
 
$
26,138,466

 
160

Starkville
 
9/1/2016
 
11/30/2016
 
(1) 
 
152

Founders' Village
 
2/1/2016
 
9/15/2016
 
$
44,266,000

 
247

Encore
 
N/A
 
N/A
 
N/A

 
340

Manassas
 
N/A
 
N/A
 
N/A

 
304

Irvine
 
N/A
 
N/A
 
N/A

 
280

Weems Road
 
N/A
 
N/A
 
N/A

 
310

Kennesaw
 
9/1/2016
 
11/30/2016
 
(1) 
 
198

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,491

 
 
 
 
 
 
 
 
 
(1) The purchase option price is to be calculated as a discount based on a 50 basis point increase from the market cap rate at the time of exercise of the purchase option.


13

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
June 30, 2014
(Unaudited)

At June 30, 2014, our portfolio of notes and line of credit receivable consisted of:
Borrower
 
Type of instrument
 
Date of loan
 
Maturity date
 
Total loan commitments
 
Carrying Amount
 
Interest rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
360 Residential, LLC
 
Bridge loan
 
3/20/2013
 
12/31/2014
 
$
2,000,000

 
$
440,771

 
8
%
(1) 
TPKG 13th Street Development, LLC
 
Land acquisition loan
 
5/3/2013
 
8/1/2014
 
7,200,000

 
7,200,000

 
8
%
(2) 
Preferred Capital Marketing Services, LLC
 
Promissory note
 
1/24/2013
 
1/23/2015
 
1,500,000

 
1,500,000

 
10
%
 
Riverview Associates, Ltd.
 
Promissory note
 
12/17/2012
 
12/16/2014
 
1,300,000

 
1,300,000

 
8
%
(3) 
Pecunia Management, LLC
 
Subordinated loan
 
11/16/2013
 
11/15/2014
 
200,000

 
200,000

 
10
%
 
Oxford Contracting LLC
 
Promissory note
 
8/27/2013
 
4/30/2017
 
1,500,000

 
1,475,000

 
8
%
(4) 
Preferred Apartment Advisors, LLC
 
Revolving credit line
 
8/21/2012
 
12/31/2015
 
9,500,000

 
8,920,869

 
8
%
(5) 
 
 
 
 
 
 
 
 
$
23,200,000

 
$
21,036,640

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Amendment of the bridge loan which was originated on March 20, 2013. The amounts payable under the terms of the loan, which include an additional 6% deferred interest, are collateralized by guaranties of payment and performance by the principals of the borrower.
(2) Note pays current interest at 8% per annum, plus an additional interest amount necessary to provide the Company with a 14% cumulative simple rate of return through August 31, 2013, scaling upward to 20% per annum on January 1, 2014 and thereafter. The loan was amended on March 17, 2014 to extend the maturity date to August 1, 2014. The borrower paid deferred interest of $351,491 and repaid principal of $164,743 at the date of amendment. The note is collateralized by a pledge of 100% of the membership interests of the project as well as by a first mortgage on the property. See Note 16.
(3) The amounts payable under the terms of the loan are collateralized by an assignment of project documents and guaranties of payment and performance by the principal of the borrower.
(4) The amounts payable under the terms of the loan are collateralized by a personal guaranty of repayment by the principals of the borrower.
(5) The amounts payable under the credit line are collateralized by an assignment of the Manager's rights to fees due under the third amended and restated management agreement, or Management Agreement, between the Company and the Manager. On February 10, 2014, this instrument was amended to increase the commitment amount and extend the maturity date as shown.
Also, the Company originated revolving lines of credit during the second quarter of 2014, as follows:
Borrower
 
Origination date
 
Total loan commitments
 
Interest rate
 
Maturity date
 
Carrying amount at June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Haven Campus Communities, LLC
 
6/11/2014
 
$
4,000,000

 
12
%
 
6/30/2016
 
$
1,630,335

Oxford Capital Partners, LLC
 
6/27/2014
 
4,200,000

 
12
%
 
6/30/2016
 
3,234,958

Newport Development Partners, LLC
 
6/17/2014
 
3,000,000

 
12
%
 
6/30/2016
 
1,745,658

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
11,200,000

 
 
 
 
 
$
6,610,951

The Haven and Newport instruments are collateralized in full by guaranties of repayment issued by the principals of the borrowers, which are not affiliates of the Company. The Oxford line of credit is collateralized by guaranties of repayment issued by the principals of the borrowers, which are not affiliates of the Company, up to the lesser of 25% of the outstanding principal balance or $1,000,000. Haven Campus Communities, LLC is a related party, as described in note 6.


14

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
June 30, 2014
(Unaudited)

The Company recorded interest income and other revenue from these instruments as follows:

 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Real estate loans:
 
 
 
 
 
 
 
 
Current interest payments
 
$
2,628,833

 
$
975,905

 
$
4,928,126

 
$
1,708,085

Additional accrued interest
 
1,697,017

 
678,848

 
3,211,178

 
1,121,837

Deferred loan fee revenue
 
272,399

 
88,383

 
580,856

 
115,694

Total real estate loan revenue
 
4,598,249

 
1,743,136

 
8,720,160

 
2,945,616

Interest income on notes and lines of credit
 
661,543

 
276,877

 
1,265,381

 
386,327

Interest income on loans and notes receivable
 
$
5,259,792

 
$
2,020,013

 
$
9,985,541

 
$
3,331,943


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 at a fixed price within a specific time window following project completion and stabilization, the rights to incremental exit fees over and above the amount of periodic interest paid during the life of the loans, or both. These characteristics can cause the loans to create variable interests to the Company and require further evaluation as to whether the variable interest creates a variable interest entity, or 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 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's real estate loans partially finance the development activities of the borrowers' associated legal entities. Each of these loans create variable interests in each of these entities, and according to the Company's analysis, are deemed to be VIEs, due to the combined factors of the sufficiency of the borrowers' investment at risk, the existence of payment and performance guaranties provided by the borrowers, as well as the limitations on the fixed-price purchase options on the City Park, City Vista, Overton, Crosstown Walk, Lely, Haven West, Founders' Village, and Kennesaw loans. The Company has concluded that it is not the primary beneficiary of the borrowing entities. It has no decision making authority or power to direct activity, except normal lender rights, which are subordinate to the senior loans on the projects. Therefore, since the Company has concluded it is not the primary beneficiary, 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 June 30, 2014 of approximately $85.4 million. The maximum aggregate amount of loans to be funded as of June 30, 2014 was approximately $93.1 million.
The Company is subject to a concentration of credit risk that could be considered significant with regard to the Crosstown Walk, City Park, City Vista, Founders' Village and Manassas real estate loans, the promissory note to Oxford Contracting, LLC, and the revolving line of credit to Oxford Capital Partners, LLC, as identified specifically by the two named principals of the borrowers, W. Daniel Faulk, Jr. and Richard A. Denny, and as evidenced by repayment guaranties offered in support of these loans. The drawn amount of these loans total approximately $58.1 million (with a total commitment amount of $60.1 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 that amount. The Company generally requires secured interests in one or a combination of the membership interests of the borrowing entity or the entity holding the project, guaranties of loan repayment, and project completion performance guaranties as credit protection with regard to its real estate loans, as is customary in the mezzanine loan industry. The Company has performed assessments of the guaranties with regard to the obligors' ability to perform according to the terms of the guaranties if needed and has concluded that the guaranties reduce the Company's risk and exposure to the above-described credit risk in place as of June 30, 2014.

The borrowers and guarantors behind the Crosstown Walk, City Park, City Vista, Founders' Village and Manassas real estate loans, the promissory note to Oxford Contracting, LLC, and the revolving line of credit to Oxford Capital Partners, LLC collectively qualify as a major customer as defined in ASC 280-10-50, as the revenue recorded from this customer exceeded ten percent of the Company's total revenues. The Company recorded revenue from transactions with this major customer within its financing segment of approximately $1.9 million and $1.3 million for the three-month periods ended June 30, 2014 and 2013, respectively.


15

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
June 30, 2014
(Unaudited)

5. Redeemable Preferred Stock and Equity Offerings
The Company's Follow-on Offering is being offered by the dealer manager on a "reasonable best efforts" basis. Each share of Preferred Stock ranks senior to Common Stock and carries a cumulative annual 6% dividend of the stated per share value of $1,000, payable monthly as declared by the Company’s board of directors. Dividends begin accruing on the date of issuance. On June 26, 2014, the Company amended the redemption schedule of the Preferred Stock to allow redemptions at the option of the holder from the date of issuance of the Preferred Stock through the first year subject to a 13% redemption fee. After year one, the redemption fee decreases to 10%, after year three it decreases to 5%, after year four it decreases to 3%, and after year five there is no redemption fee. Any redeemed shares of Preferred Stock are entitled to any accrued but unpaid dividends at the time of redemption and any redemptions may be in cash or Common Stock, at the Company’s discretion. The Warrant is exercisable by the holder at an exercise price of 120% of the current market price per share of the Common Stock on the date of issuance of such warrant with a minimum exercise price of $9.00 per share. The current market price per share is determined using the volume weighted average closing market price for the 20 trading days prior to the date of issuance of the Warrant. The Warrants are not exercisable until one year following the date of issuance and expire four years following the date of issuance.
As of June 30, 2014, offering costs specifically identifiable to Unit offering closing transactions, such as commissions, dealer manager fees, and other registration fees, totaled approximately $10.8 million. These costs are reflected as a reduction of stockholders' equity at the time of closing. In addition, the costs related to the offering not related to a specific closing transaction totaled approximately $6.9 million. As of June 30, 2014, the Company had issued 115,391 Units and collected net proceeds of approximately $104.5 million from the Primary Series A Offering after commissions.  A total of 170 shares of Series A Preferred Stock were subsequently redeemed. The number of Units issued was approximately 11.7% of the maximum number of Units anticipated to be issued under the Primary Series A Offering and the Follow-On Offering. Consequently, the Company cumulatively recognized approximately 11.7% of the approximate $6.9 million deferred to date, or approximately $801,000 as a reduction of stockholders' equity.  The remaining balance of offering costs not yet reflected as a reduction of stockholder's equity, approximately $6.7 million, are reflected in the asset section of the consolidated balance sheet  as deferred offering costs at June 30, 2014.  The remainder of current and future deferred offering costs related to the Follow-on Offering will likewise be recognized as a reduction of stockholders' equity in the proportion of the number of Units issued to the maximum number of Units anticipated to be issued. Offering costs not related to a specific closing transaction are subject to an overall cap of 1.5% of the total gross proceeds raised during the Unit offerings.

Aggregate offering expenses, including selling commissions and dealer manager fees, will be capped at 11.5% of the aggregate gross proceeds of the Primary Series A Offering and the Follow-On Offering, of which the Company will reimburse its Manager up to 1.5% of the gross proceeds of these offerings for all organization and offering expenses incurred, excluding selling commissions and dealer manager fees; however, upon approval by the conflicts committee of the board of directors, the Company may reimburse its Manager for any such expenses incurred above the 1.5% amount as permitted by the Financial Industry Regulatory Authority.

On January 17, 2013, the Company issued 40,000 shares of its Series B Preferred Stock at a purchase price of $1,000 per share through a private placement transaction. The net proceeds totaled approximately $37.0 million after commissions. On May 9, 2013, the common stockholders approved the issuance of Common Stock upon the conversion of the Series B Preferred Stock. As a result of such approval, the Series B Preferred Stock was converted into 5,714,274 shares of Common Stock on May 16, 2013.
On May 17, 2013, the Company filed a registration statement on Form S-3 (File No. 333-188677) for an offering up to $200 million of equity or debt securities, or Shelf Registration Statement, which was declared effective by the SEC on July 19, 2013. Deferred offering costs related to this Shelf Registration Statement totaled approximately $445,000 as of June 30, 2014. These costs will likewise be recognized as a reduction of stockholders' equity in the proportion of the proceeds from securities issued to the maximum amount of securities registered. During November 2013, the Company sold approximately 4.2 million shares of Common Stock and collected net proceeds of approximately $30.7 million, or 16.5% of the total amount of securities available for issuance under the Shelf Registration Statement. These offering costs related to the Shelf Registration Statement will likewise be recognized as a reduction of stockholders' equity in the proportion of the proceeds from securities issued to the maximum amount of securities registered.
On February 28, 2014, the Company filed a prospectus supplement to the Shelf Registration Statement to issue and sell up to $100 million of Common Stock from time to time in an "at the market" offering, or the ATM Offering, through MLV & Co. LLC as


16

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
June 30, 2014
(Unaudited)

sales agent. Through June 30, 2014, the Company sold approximately 1.2 million shares of Common Stock through the ATM offering and collected net proceeds of approximately $9.5 million.
6. Related Party Transactions
John A. Williams, the Company's Chief Executive Officer and Chairman of the Board, and Leonard A. Silverstein, the Company's President and Chief Operating Officer and a member of the Board, are also executive officers and directors of NELL Partners, Inc., which controls the Manager. Mr. Williams is the Chief Executive Officer and President and Mr. Silverstein is the President and Chief Operating Officer of the Manager.

Mr. Williams, Mr. Silverstein and Michael J. Cronin, the Company's Executive Vice President, Chief Accounting Officer and Treasurer are executive officers of Williams Realty Advisors, LLC, or WRA, which is the manager of the day-to-day operations of Williams Opportunity Fund, LLC, or WOF, as well as Williams Realty Fund I, LLC, or WRF.

The Management Agreement entitles the Manager to receive compensation for various services it performs related to acquiring assets and managing properties on the Company's behalf:
 
 
 
 
Three months ended
 
Six months ended
Type of Compensation
 
Basis of Compensation
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees
 
1% of the gross purchase price of real estate assets acquired or loans advanced
 
$
332,902

 
$
475,633

 
$
400,958

 
$
1,538,207

Asset management fees
 
Monthly fee equal to one-twelfth of 0.50% of the total book value of assets, as adjusted
 
493,709

 
314,691

 
960,577

 
580,492

Property management fees
 
Monthly fee equal to 4% of the monthly gross revenues of the properties managed
 
268,674

 
217,719

 
530,795

 
405,361

General and administrative expense fees
 
Monthly fee equal to 2% of the monthly gross revenues of the Company
 
237,812

 
153,072

 
459,693

 
271,139

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,333,097

 
$
1,161,115

 
$
2,352,023

 
$
2,795,199


In addition to property management fees, the Company incurred the following reimbursable on-site personnel salary and related benefits expenses at the properties, which are listed on the Consolidated Statements of Operations:
Three months ended June 30,
 
Six months ended June 30,
2014
 
2013
 
2014
 
2013
$
609,104

 
$
553,096

 
$
1,234,365

 
$
1,032,983


The Manager utilizes its own and its affiliates' personnel to accomplish certain tasks related to raising capital that would typically be performed by third parties, including, but not limited to, legal and marketing functions. As permitted under the Management Agreement, the Manager was reimbursed $218,240 and $148,754 for the six-month periods ended June 30, 2014 and 2013, respectively. These costs are recorded as deferred offering costs until such time as additional closings occur on the Unit offerings or the Shelf Offering, at which time they are reclassified on a pro-rata basis as a reduction of offering proceeds within stockholders’ equity.

The Company's Haven West, Starkville, Kennesaw real estate loans and the Haven Campus Communities' line of credit are supported in part by guaranties of repayment and performance by John A. Williams, Jr., our Chief Executive Officer's son, a principal of the borrowers and a related party of the Company under GAAP.



17

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
June 30, 2014
(Unaudited)

In addition to the fees described above, the Management Agreement also entitles the Manager to other potential fees, including disposition fees based on the lesser of (A) one-half of the commission that would be reasonable and customary; and (B) 1% of the sale price of the asset.

Furthermore, the Manager holds the special limited partnership interest in the Operating Partnership, which entitles the Manager to distributions from the Operating Partnership equal to 15% of any net proceeds from the sale of a property that are remaining after the payment of (i) the capital and certain expenses related to all realized investments (including the sold asset), and (ii) a 7% priority annual return on such capital and expense; provided that all accrued and unpaid dividends on the Series A Preferred Stock have been paid in full.

The Company did not incur any of these other potential fees during the three-month or six-month periods ended June 30, 2014 or 2013.

7. Dividends and Distributions

The Company declares and pays monthly cash dividend distributions on its Series A Preferred Stock in the amount of $5.00 per share per month, prorated for partial months at issuance as necessary. The Company's cash distributions on its Series A Preferred Stock were:
2014
 
2013
Record date
 
Number of shares
 
Aggregate dividends declared
 
Record date
 
Number of shares
 
Aggregate dividends declared
 
 
 
 
 
 
 
 
 
 
 
January 31, 2014
 
89,313

 
$
454,344

 
January 31, 2013
 
19,732

 
$
107,551

February 28, 2014
 
93,005

 
468,337

 
February 28, 2013