Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - PREFERRED APARTMENT COMMUNITIES INCexhibit322apts03312017.htm
EX-32.1 - EXHIBIT 32.1 - PREFERRED APARTMENT COMMUNITIES INCexhibit321apts03312017.htm
EX-31.2 - EXHIBIT 31.2 - PREFERRED APARTMENT COMMUNITIES INCexhibit312apts03312017.htm
EX-31.1 - EXHIBIT 31.1 - PREFERRED APARTMENT COMMUNITIES INCexhibit311apts03312017.htm
EX-12 - EXHIBIT 12 - PREFERRED APARTMENT COMMUNITIES INCexhibit1203312017.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 March 31, 2017
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
paca08.jpg 


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, 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 28, 2017 was 27,962,160.




 
PART I - FINANCIAL INFORMATION
 
 
 
 
INDEX
 
 
 
 
 
 
 
Item 1.
Financial Statements
Page No. 
 
 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
Item 2.

 
 
 
Item 3.

 
 
 
Item 4.

 
 
 
 
 
 
Item 1.
68

 
 
 
Item 1A.
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.
Exhibits
68

 
 
69

 
 
 
 
70







Preferred Apartment Communities, Inc.
Consolidated Balance Sheets
(Unaudited)
 
 
 
 
 
 
 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
 
 
 
 
 
 
Real estate
 
 
 
 
Land
 
$
307,665,224

 
$
299,547,501

Building and improvements
 
1,590,022,871

 
1,513,293,760

Tenant improvements
 
30,906,412

 
23,642,361

Furniture, fixtures, and equipment
 
143,692,656

 
126,357,742

Construction in progress
 
5,539,735

 
2,645,634

Gross real estate
 
2,077,826,898

 
1,965,486,998

Less: accumulated depreciation
 
(110,332,373
)
 
(103,814,894
)
Net real estate
 
1,967,494,525

 
1,861,672,104

Real estate loans, net of deferred fee income
 
195,348,980

 
201,855,604

Real estate loans to related parties, net
 
144,077,171

 
130,905,464

Total real estate and real estate loans, net
 
2,306,920,676

 
2,194,433,172

 
 
 
 
 
Cash and cash equivalents
 
13,365,130

 
12,321,787

Restricted cash
 
53,448,631

 
55,392,984

Notes receivable
 
16,787,881

 
15,499,699

Note receivable and revolving line of credit from related party
 
22,107,866

 
22,115,976

Accrued interest receivable on real estate loans
 
23,440,710

 
21,894,549

Acquired intangible assets, net of amortization of $49,452,620 and $46,396,254
 
80,480,916

 
79,156,400

Deferred loan costs on Revolving Line of Credit, net of amortization of $586,389 and $422,873
 
1,927,264

 
1,768,779

Deferred offering costs
 
3,881,476

 
2,677,023

Tenant receivables (net of allowance of $650,176 and $663,912) and other assets
 
22,068,792

 
15,572,233

 
 
 
 
 
Total assets
 
$
2,544,429,342

 
$
2,420,832,602

 
 
 
 
 
Liabilities and equity
 

 
 
 
 
 
 
 
Liabilities
 
 
 
 
Mortgage notes payable, principal amount
 
$
1,395,287,423

 
$
1,327,878,112

Less: deferred loan costs, net of amortization of $5,435,963 and $4,899,106
 
(23,671,268
)
 
(22,007,641
)
Mortgage notes payable, net of deferred loan costs
 
1,371,616,155

 
1,305,870,471

Revolving line of credit
 
97,000,000

 
127,500,000

Term note payable
 
11,000,000

 
11,000,000

Less: deferred loan costs, net of amortization
 
(13,157
)
 
(40,095
)
Term note payable, net of deferred loan costs
 
10,986,843

 
10,959,905

Real estate loan participation obligation
 
18,295,509

 
20,761,819

Deferred revenues
 
9,256,887

 

Accounts payable and accrued expenses
 
20,299,035

 
20,814,910

Accrued interest payable
 
3,387,559

 
3,541,640

Dividends and partnership distributions payable
 
10,859,650

 
10,159,629

Acquired below market lease intangibles, net of amortization of $4,686,405 and $3,771,393
 
28,694,320

 
29,774,033

Security deposits and other liabilities
 
6,772,416

 
6,189,033

Total liabilities
 
1,577,168,374

 
1,535,571,440

 
 
 
 
 
Commitments and contingencies (Note 11)
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
Stockholders' equity
 
 
 
 
Series A Redeemable Preferred Stock, $0.01 par value per share; 3,050,000
 
 
 
   shares authorized; 1,001,572 and 924,855 shares issued; 987,329 and 914,422
 
 
 
shares outstanding at March 31, 2017 and December 31, 2016, respectively
9,873

 
9,144

Series M Redeemable Preferred Stock, $0.01 par value per share; 500,000
 
 
 
   shares authorized; 1,635 and 0 shares issued and outstanding
 
 
 
at March 31, 2017 and December 31, 2016, respectively
16

 

Common Stock, $0.01 par value per share; 400,066,666 shares authorized;
 
 
 
27,185,373 and 26,498,192 shares issued and outstanding at
 
 
 
March 31, 2017 and December 31, 2016, respectively
271,854

 
264,982

Additional paid in capital
 
960,681,007

 
906,737,470

Accumulated earnings (deficit)
 
5,830,771

 
(23,231,643
)
Total stockholders' equity
 
966,793,521

 
883,779,953

Non-controlling interest
 
467,447

 
1,481,209

Total equity
 
967,260,968

 
885,261,162

 
 
 
 
 
Total liabilities and equity
 
$
2,544,429,342

 
$
2,420,832,602


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 March 31,
 
2017
 
2016
Revenues:
 
 
 
Rental revenues
$
45,363,521

 
$
28,255,599

Other property revenues
8,436,111

 
3,760,083

Interest income on loans and notes receivable
7,947,811

 
6,942,159

Interest income from related parties
4,813,892

 
2,777,940

Total revenues
66,561,335

 
41,735,781

 
 
 
 
Operating expenses:
 
 
 
Property operating and maintenance
6,538,639

 
4,021,362

Property salary and benefits reimbursement to related party
3,028,350

 
2,363,463

Property management fees (including $1,434,471 and $1,071,088 to related parties)
1,901,783

 
1,228,021

Real estate taxes
7,903,801

 
5,173,441

General and administrative
1,505,510

 
919,952

Equity compensation to directors and executives
873,102

 
610,425

Depreciation and amortization
24,826,189

 
15,346,726

Acquisition and pursuit costs (including $0 and $67,131 to related party)
9,002

 
2,763,585

Asset management fees to related party
4,512,514

 
2,766,086

Insurance, professional fees and other expenses
1,291,404

 
1,306,981

Total operating expenses
52,390,294

 
36,500,042

 
 
 
 
Contingent asset management and general and administrative expense fees
(175,082
)
 
(269,601
)
 
 
 
 
Net operating expenses
52,215,212

 
36,230,441

 
 
 
 
Operating income
14,346,123

 
5,505,340

Interest expense
15,008,703

 
8,894,830

 
 
 
 
Net (loss) before gain on sale of real estate
(662,580
)
 
(3,389,490
)
Gain on sale of real estate, net of disposition expenses
30,724,060

 

Net income (loss)
30,061,480

 
(3,389,490
)
 
 
 
 
Consolidated net (income) loss attributable to non-controlling interests
(999,066
)
 
88,561

 
 
 
 
Net income (loss) attributable to the Company
29,062,414

 
(3,300,929
)
 
 
 
 
Dividends declared to Series A preferred stockholders
(14,386,047
)
 
(7,881,735
)
Earnings attributable to unvested restricted stock
(1,705
)
 
(1,451
)
 
 
 
 
Net income (loss) attributable to common stockholders
$
14,674,662

 
$
(11,184,115
)
 
 
 
 
Net income (loss) per share of Common Stock available
 
 
 
to common stockholders, basic and diluted
$
0.54

 
$
(0.49
)
 
 
 
 
Dividends per share declared on Common Stock
$
0.22

 
$
0.1925

 
 
 
 
Weighted average number of shares of Common Stock outstanding,
 
 
 
Basic and diluted
26,936,266

 
22,983,741


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



Preferred Apartment Communities, Inc.
Consolidated Statements of Stockholders' Equity
For the three-month periods ended March 31, 2017 and 2016
(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, 2016
 
$
4,830

 
$
227,616

 
$
536,450,877

 
$
(13,698,520
)
 
$
522,984,803

 
$
2,468,987

 
$
525,453,790

Issuance of Units
 
1,010

 

 
100,979,717

 

 
100,980,727

 

 
100,980,727

Redemptions of Series A Preferred Stock
 
(9
)
 

 
(803,938
)
 

 
(803,947
)
 

 
(803,947
)
Exercises of Warrants
 

 
1,967

 
1,976,547

 

 
1,978,514

 

 
1,978,514

Syndication and offering costs
 

 

 
(11,642,198
)
 

 
(11,642,198
)
 

 
(11,642,198
)
Equity compensation to executives and directors
 

 
19

 
103,992

 

 
104,011

 

 
104,011

Vesting of restricted stock
 

 
75

 
(75
)
 

 

 

 

Conversion of Class A Units to Common Stock
 

 
953

 
645,248

 

 
646,201

 
(646,201
)
 

Current period amortization of Class B Units
 

 

 

 

 

 
506,414

 
506,414

Net loss
 

 

 

 
(3,300,929
)
 
(3,300,929
)
 
(88,561
)
 
(3,389,490
)
Class A Units issued for property acquisition
 

 

 

 

 

 
5,072,659

 
5,072,659

Reallocation adjustment to non-controlling interests
 

 

 
5,872,628

 

 
5,872,628

 
(5,872,628
)
 

Distributions to non-controlling interests
 

 

 

 

 

 
(117,395
)
 
(117,395
)
Dividends to series A preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($5.00 per share per month)
 

 

 
(7,881,735
)
 

 
(7,881,735
)
 

 
(7,881,735
)
Dividends to common stockholders ($0.1925 per share)
 

 

 
(4,435,489
)
 

 
(4,435,489
)
 

 
(4,435,489
)
Balance at March 31, 2016
 
$
5,831

 
$
230,630

 
$
621,265,574

 
$
(16,999,449
)
 
$
604,502,586

 
$
1,323,275

 
$
605,825,861



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



Preferred Apartment Communities, Inc.
Consolidated Statements of Stockholders' Equity, continued
For the three-month periods ended March 31, 2017 and 2016
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series A and Series M Redeemable Preferred Stock
 
Common Stock
 
Additional Paid in Capital
 
Accumulated Earnings(Deficit)
 
Total Stockholders' Equity
 
Non-Controlling Interest
 
Total Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
 
$
9,144

 
$
264,982

 
$
906,737,470

 
$
(23,231,643
)
 
$
883,779,953

 
$
1,481,209

 
$
885,261,162

Issuance of Units
 
784

 

 
78,240,826

 

 
78,241,610

 

 
78,241,610

Redemptions of Series A Preferred Stock
 
(39
)
 
1,371

 
(1,585,353
)
 

 
(1,584,021
)
 

 
(1,584,021
)
Issuance of Common Stock
 

 
142

 
189,296

 

 
189,438

 

 
189,438

Exercises of warrants
 

 
3,389

 
3,849,156

 

 
3,852,545

 

 
3,852,545

Syndication and offering costs
 

 

 
(9,034,401
)
 

 
(9,034,401
)
 

 
(9,034,401
)
Equity compensation to executives and directors
 

 

 
128,028

 

 
128,028

 

 
128,028

Vesting of restricted stock
 

 
77

 
(77
)
 

 

 

 

Conversion of Class A Units to Common Stock
 

 
1,893

 
1,661,782

 

 
1,663,675

 
(1,663,675
)
 

Current period amortization of Class B Units
 

 

 

 

 

 
745,074

 
745,074

Net income
 

 

 

 
29,062,414

 
29,062,414

 
999,066

 
30,061,480

Reallocation adjustment to non-controlling interests
 

 

 
895,485

 

 
895,485

 
(895,485
)
 

Distributions to non-controlling interests
 

 

 

 

 

 
(198,742
)
 
(198,742
)
Dividends to series A preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($5.00 per share per month)
 

 

 
(14,428,279
)
 

 
(14,428,279
)
 

 
(14,428,279
)
Dividends to mShares preferred stockholders
 

 

 
(2,268
)
 

 
(2,268
)
 

 
(2,268
)
Dividends to common stockholders ($0.22 per share)
 

 

 
(5,970,658
)
 

 
(5,970,658
)
 

 
(5,970,658
)
Balance at March 31, 2017
 
$
9,889

 
$
271,854

 
$
960,681,007

 
$
5,830,771

 
$
966,793,521

 
$
467,447

 
$
967,260,968



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



Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Three months ended March 31,
 
 
2017
 
2016
Operating activities:
 
 
 
 
Net income (loss)
 
$
30,061,480

 
$
(3,389,490
)
Reconciliation of net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
18,287,611

 
11,203,056

Amortization expense
 
6,538,578

 
4,143,670

Amortization of above and below market leases
 
(797,582
)
 
(265,410
)
Deferred fee income amortization
 
(284,064
)
 
(264,197
)
Deferred loan cost amortization
 
1,180,186

 
691,207

(Increase) decrease in accrued interest income on real estate loans
 
(1,546,162
)
 
1,075,458

Equity compensation to executives and directors
 
873,102

 
610,425

Other
 
186,912

 
(4,616
)
Gain on sale of real estate
 
(30,724,060
)
 

Changes in operating assets and liabilities:
 
 
 
 
(Increase) in tenant receivables and other assets
 
(1,965,423
)
 
(86,020
)
(Increase) in tenant lease incentives
(2,912,500
)
 

(Decrease) in accounts payable and accrued expenses
 
(716,461
)
 
(1,267,380
)
(Decrease) increase in accrued interest payable
 
(63,808
)
 
721,170

Increase in prepaid rents
 
150,096

 
113,055

Increase in security deposits and other liabilities
 
8,686

 
109,187

Net cash provided by operating activities
 
18,276,591

 
13,390,115

 
 
 
 
 
Investing activities:
 
 
 
 
Investments in real estate loans
 
(16,271,909
)
 
(56,970,287
)
Repayments of real estate loans
 
9,866,000

 
27,695,229

Notes receivable issued
 
(1,263,292
)
 
(3,870,191
)
Notes receivable repaid
 

 
9,505,081

Note receivable issued to and draws on line of credit by related party
 
(7,650,000
)
 
(12,382,910
)
Repayments of line of credit by related party
 
7,553,568

 
5,508,066

Origination fees received on real estate loans
 

 
1,403,422

Origination fees paid on real estate loans
 

 
(701,369
)
Acquisition of properties
 
(138,467,592
)
 
(220,850,440
)
Disposition of properties, net
 
77,793,170

 

Additions to real estate assets - improvements
 
(3,680,079
)
 
(1,461,711
)
Deposits paid on acquisitions
 
(1,837,695
)
 
(2,644,056
)
Decrease in restricted cash
 
4,449,837

 
1,808,375

Net cash used in investing activities
 
(69,507,992
)
 
(252,960,791
)
 
 
 
 
 
Financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
104,300,000

 
151,640,000

Repayments mortgage notes payable
 
(67,140,689
)
 
(2,185,191
)
Payments for deposits and other mortgage loan costs
 
(3,398,718
)
 
(3,716,469
)
Proceeds from real estate loan participants
 
81,632

 
67,066

Payments to real estate loan participants
 
(2,466,500
)
 

Proceeds from lines of credit
 
37,500,000

 
87,500,000

Payments on lines of credit
 
(68,000,000
)
 
(105,000,000
)
Proceeds from Term Loan
 

 
35,000,000

Repayment of the Term Loan
 

 
(5,000,000
)
Proceeds from sales of Units, net of offering costs and redemptions
 
68,986,692

 
90,090,574

Proceeds from sales of Common Stock
 
186,119

 

Proceeds from exercises of warrants
 
4,248,574

 
5,548,468

Common Stock dividends paid
 
(5,740,616
)
 
(4,314,999
)
Series A Preferred Stock dividends paid
 
(13,960,568
)
 
(7,391,620
)
Distributions to non-controlling interests
 
(194,957
)
 
(53,241
)
Payments for deferred offering costs
 
(2,126,225
)
 
(350,012
)
Net cash provided by financing activities
 
52,274,744

 
241,834,576

 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
1,043,343

 
2,263,900

Cash and cash equivalents, beginning of period
 
12,321,787

 
2,439,605

Cash and cash equivalents, end of period
 
$
13,365,130

 
$
4,703,505

 
 
 
 
 

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



 
 
 
 
 
Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows - continued
(Unaudited)
 
 
Three months ended March 31,
 
 
2017
 
2016
Supplemental cash flow information:
 
 
 
 
Cash paid for interest
 
$
13,982,599

 
$
7,842,453

 
 
 
 
 
Supplemental disclosure of non-cash activities:
 
 
 
 
Accrued capital expenditures
 
$
454,528

 
$
710,932

Writeoff of fully depreciated or amortized assets and liabilities
 
$
145,727

 
$
26,988

Lessee-funded tenant improvements, capitalized as landlord assets
 
$
9,256,887

 
$

Dividends payable - Common Stock
 
$
5,970,658

 
$
4,435,489

Dividends payable - Series A Preferred Stock
 
$
4,886,725

 
$
2,769,385

Dividends payable - mShares Preferred Stock
 
$
2,268

 
$

Issuance of fair value of OP Units for property
 
$

 
$
5,072,659

Partnership distributions payable to non-controlling interests
 
$
198,742

 
$
117,392

Accrued and payable deferred offering costs
 
$
1,026,964

 
$
526,659

Offering cost reimbursement to related party
 
$
104,542

 
$
96,101

Reclass of offering costs from deferred asset to equity
 
$
1,369,667

 
$
1,545,488

Extinguishment of land loan for property
 
$

 
$
6,250,000

Proceeds of like-kind exchange funds for dispositions
 
$
31,288,252

 
$

Use of like-kind exchange funds for acquisitions
 
$
27,527,061

 
$

Fair value issuances of equity compensation
 
$
3,728,481

 
$
2,095,545

Mortgage loans assumed on acquisitions
 
$
30,250,000

 
$



The accompanying notes are an integral part of these consolidated financial statements.
6


Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements
March 31, 2017



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 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 and other properties. As a secondary strategy, the Company also may acquire or originate senior mortgage loans, subordinate loans or real estate loan investments secured by interests in multifamily properties, membership or partnership interests in multifamily properties and other multifamily related assets and invest a lesser portion of its assets in other real estate related investments, including other income-producing property types, senior mortgage loans, subordinate loans or real estate loan investments secured by interests in other income-producing property types, or membership or partnership interests in other income-producing property types as determined by its Manager (as defined below) as appropriate for the Company. 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, 2017, the Company had 27,185,373 shares of common stock, par value $0.01 per share, or Common Stock, issued and outstanding and was the approximate 96.8% owner of the Operating Partnership at that date. The number of partnership units not owned by the Company totaled 903,371 at March 31, 2017 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. New Market Properties, LLC owns and conducts the business of our grocery-anchored shopping centers. Preferred Office Properties owns and conducts the business of our portfolio of office buildings. Preferred Campus Communities was formed to acquire 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. 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. The year end condensed balance sheet data was derived from audited financial statements, but does not include all the disclosures required by GAAP. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 1, 2017.
    
2.
Summary of Significant Accounting Policies

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


7

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2017


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 our property acquisitions include the values of in-place leases and (except for student housing properties) above-market or below-market leases. Additional intangible assets for retail and office properties include costs to initiate leases such as tenant improvements, commissions and legal costs.

In-place lease values for multifamily communities 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 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. 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 revenue over the remaining average non-cancelable term of the respective leases, plus any below market probable renewal options.

The fair values of in-place leases for grocery-anchored shopping centers represent the value of direct costs associated with leasing, including opportunity costs associated with lost rentals that are avoided by acquiring in-place leases. Direct costs associated with obtaining a new tenant include commissions, legal and marketing costs, incentives such as tenant improvement allowances and other direct costs. Leasing commissions and tenant improvements are recorded as separate intangible assets for office buildings. Such direct costs are estimated based on our consideration of current market costs to execute a similar lease. The value of opportunity costs is estimated using the estimated market lease rates and the estimated absorption period of the space. These direct costs and opportunity costs are included in the accompanying consolidated balance sheets as acquired intangible assets and are amortized to expense over the remaining term of the respective leases. The fair values of above-market and below-market in-place leases for grocery-anchored shopping centers and office buildings are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the leases, taking into consideration the probability of renewals for any below-market leases for grocery-anchored shopping centers. The capitalized above-market leases and in-place leases and leasing commissions, tenant improvements and lease origination costs for office buildings are included in the acquired intangible assets line of the consolidated balance sheets. Both above-market and below-market lease values are amortized as adjustments to rental revenue over the remaining term of the respective leases for office buildings. The amortization period for grocery-anchored shopping center leases is the remaining lease term plus any below market probable renewal options.

Estimating the fair values of the tangible and intangible assets requires us to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount and capitalization rates, market absorption periods, and the number of years the property is held for investment. The use of estimates requires significant judgment, which if inaccurate, would cause inaccuracies in the Company's purchase price allocations, which could negatively impact the amount of our reported net income. Acquired intangible assets and liabilities 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 fair value, calculated as the discounted net cash flows of the asset group.

Deferred Leasing Costs

Costs incurred to obtain tenant leases for office buildings and grocery-anchored shopping centers are amortized using the straight-line method over the term of the related lease agreement. Such costs include lease incentives, leasing commissions and legal costs. If the lease is terminated early, the remaining unamortized deferred leasing cost is written off.


8

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2017



Revenue Recognition

Real Estate

Rental revenue is recognized when earned from residents of the Company's multifamily communities, which is over the terms of rental agreements, typically of 12 months’ duration. The Company evaluates the collectability 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 grocery-anchored shopping centers and office buildings is recognized on a straight-line basis over the term of the related 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 are recognized in the period in which the related expenses are incurred. 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 estimates 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 may provide retail 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 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 revenues. Determination of the appropriate accounting classification for a tenant allowance is made on an individual basis, considering the facts and circumstances of the nature of the use of the related payment. When the Company is the owner of the leasehold improvements, recognition of lease revenue commences when the lessee is given possession of the leased space upon completion of initial 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. If the improvement is deemed to be a “landlord asset,” and the tenant funds the cost of that improvement, the cost is capitalized as a tenant improvement and deferred revenue which is amortized over the term of the underlying lease into rental revenues. Lessee-funded landlord assets may be required by the terms of the lease, may require the Company's approval to deploy, may be usable by other future tenants, may require the Company's consent to alter or remove from the premises and generally remain the Company's property at the end of the lease.
    
Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with guidance provided by ASC 505-50, Equity-Based Payments to Non-Employees and ASC 718, Stock Compensation. We calculate the fair value of Class B Unit grants and restricted stock units at the date of grant utilizing a Monte Carlo simulation model based upon estimates of their expected term, the expected volatility of and dividend yield on our Common Stock over this expected term period and the market risk-free rate of return. The compensation expense is accrued on a straight-line basis over the vesting period(s). We record the fair value of restricted stock awards based upon the closing stock price on the trading day immediately preceding the date of grant.

Acquisition Costs

Through December 31, 2016, the Company expensed property acquisition costs as incurred, which include costs such as due diligence, legal, certain accounting, environmental and consulting, when the acquisition constituted a business combination. As described below in the section entitled New Accounting Pronouncements, Accounting Standards Update 2017-01 was adopted by the Company effective January 1, 2017, which changed the definition of a business. Under this new guidance, most property acquisitions made by the Company will fall within the category of acquired assets rather than acquired businesses. This distinction


9

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2017


will cause the Company to capitalize its costs for acquisitions, allocate them to the fair value of acquired assets and liabilities and amortize these costs over the remaining useful lives of those assets and liabilities.

New Accounting Pronouncements

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, 2017 and may be applied using either a full retrospective or a modified approach upon adoption. The Company is currently evaluating the pending guidance but does not believe the adoption of ASU 2014-09 will have a material impact on its results of operations or financial condition, primarily because most of its revenue is rental operations, to which this standard is not applicable. The Company does provide significant non-rental services to its residents and tenants related to ancillary services and common area reimbursements. The Company does not believe that the adoption of ASU 2014-09 will materially impact the accounting for these revenues; however, we are continuing to evaluate the impact.

In January 2016, the FASB issued Accounting Standards Update 2016-01 ("ASU 2016-01"), Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. The new standard's applicable provisions to the Company include an elimination of the disclosure requirement of the significant inputs and assumptions underlying the fair value calculations of its financial instruments which are carried at amortized cost. The standard is effective on January 1, 2018, and early adoption is not permitted. The adoption of ASU 2016-01 will not impact the Company's results of operations or financial condition.
 
In February 2016, the FASB issued Accounting Standards Update 2016-02 ("ASU 2016-02"), Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASC 842 supersedes the previous standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is currently evaluating the impacts this standard will have on its results of operations and financial condition but does not believe any material impact will result from its adoption since the Company has minimal activity as a lessee.

In June 2016, the FASB issued Accounting Standards Update 2016-13 ("ASU 2016-13"), Financial Instruments—Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard requires financial instruments carried at amortized cost to be presented at the net amount expected to be collected, utilizing a valuation account which reflects the cumulative net adjustments from the gross amortized cost value. Under existing GAAP, entities would not record a valuation allowance until a loss was probable of occurring. The standard is effective for the Company on January 1, 2020. The Company is currently evaluating methods of deriving initial valuation accounts to be applied to its real estate loan portfolio. The Company is continuing to evaluate the pending guidance but does not believe the adoption of ASU 2016-13 will have a material impact on its results of operations or financial condition, since the Company has not yet experienced a credit loss related to any of its financial instruments.

In August 2016, the FASB issued Accounting Standards Update 2016-15 ("ASU 2016-15"), Statement of Cash Flows—(Topic 326): Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies or establishes guidance for the presentation of various cash transactions on the statement of cash flows. The portion of the guidance applicable to the Company's business activities include the requirement that cash payments for debt prepayment or debt extinguishment costs be presented as cash out flows for financing activities. The standard is effective for the Company on January 1, 2018. The adoption of ASU 2016-15 will not impact the Company’s consolidated financial statements, since its current policy is to classify such costs as cash out flows for financing activities. 

In November 2016, the FASB issued Accounting Standards Update 2016-18 ("ASU 2016-18"), Statement of Cash Flows—(Topic 230): Restricted Cash, which requires restricted cash to be presented with cash and cash equivalents when reconciling the beginning and ending amounts in the statements of cash flows. ASU 2016-18 is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The Company plans to adopt ASU 2016-18 on January 1, 2018. The Company currently reports changes in restricted cash within the investing activities section of its consolidated statements of cash flows and does not expect the adoption of ASU 2016-18 to impact its results of operations and financial condition.


10

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2017



In January 2017, the FASB issued Accounting Standards Update 2017-01 ("ASU 2017-01"), Business Combinations - (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business and provides further guidance for evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. ASU 2017-01 is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The Company adopted ASU 2017-01 as of January 1, 2017. The Company believes its future acquisitions of multifamily communities, office buildings, grocery-anchored shopping centers, and student housing properties will generally qualify as asset acquisitions. Pursuant to ASU 2017-01, acquisition costs have been and will be capitalized and amortized rather than expensed as incurred and the Company reported higher reported net income available to common stockholders resulting from adoption of ASU 2017-01 than it would have under previous guidance.

In February 2017, the FASB issued Accounting Standards Update 2017-05 (“ASU 2017-05”), Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets and for partial sales of nonfinancial assets, and is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of this accounting standard will have on its financial statements.

3. Real Estate Assets

The Company's real estate assets consisted of:

 
 
As of:
 
 
3/31/17
 
12/31/16
Multifamily communities:
 
 
 
 
Properties (1)
 
25

 
24

Units
 
8,132

 
8,049

Grocery-anchored shopping centers:
 
 
 
 
Properties
 
31

 
31

Gross leasable area (square feet) (2)
 
3,295,491

 
3,295,491

Student housing properties:
 
 
 
 
Properties
 
2

 
1

Units
 
444

 
219

Beds
 
1,319

 
679

Office buildings:
 
 
 
 
Properties
 
3

 
3

Rentable square feet
 
1,093,832

 
1,096,834

 
 
 
 
 
(1) The acquired second phases of the Summit Crossing community is managed in combination with the initial phase and so together are considered a single property, as are the three assets that comprise the Lenox Portfolio.
(2) 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 not included in the totals above.

On January 20, 2017, the Company closed on the sale of its 364-unit multifamily community in Kansas City, KS, or Sandstone Creek, to an unrelated third party for a purchase price of $48.1 million, exclusive of closing costs and resulting in a gain of $0.3 million, which is net of disposition expenses including $1.4 million of debt defeasance related costs. Sandstone Creek contributed approximately $0.1 million and $0.3 million of net loss to the consolidated operating results of the Company for the three-month periods ended March 31, 2017 and 2016, respectively.

On March 7, 2017, the Company closed on the sale of its 408-unit multifamily community in Atlanta, GA, or Ashford Park, to an unrelated third party for a purchase price of $65.5 million, exclusive of closing costs and resulting in a gain of $30.4 million, which is net of disposition expenses including $1.1 million of debt defeasance related costs plus a prepayment premium of approximately


11

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2017


$0.4 million. Ashford Park contributed approximately $0.5 million and $0.2 million of net income to the consolidated operating results of the Company for the three-month periods ended March 31, 2017 and 2016, respectively.

The carrying amounts of the significant assets and liabilities of Sandstone Creek and Ashford Park at the dates of sale were:
 
 
Sandstone Creek
 
Ashford Park
 
 
1/20/2017
 
3/7/2017
Real estate assets:
 
 
 
 
Land
 
$
2,846,197

 
$
10,600,000

Building and improvements
 
41,859,684

 
24,075,263

Furniture, fixtures and equipment
 
5,278,268

 
4,222,858

Accumulated depreciation
 
(4,808,539
)
 
(6,816,193
)
 
 
 
 
 
Total assets
 
$
45,175,610

 
$
32,081,928

 
 
 
 
 
Liabilities:
 
 
 
 
Mortgage note payable
 
$
30,840,135

 
$
25,626,000

Supplemental mortgage note
 
$

 
$
6,373,717


Multifamily communities acquired

During the three-month periods ended March 31, 2017 and 2016, the Company completed the acquisition of the following multifamily communities and student housing property:
Acquisition date
 
Property
 
Location
 
Approximate purchase price (millions) (1)
 
Units
 
 
 
 
 
 
 
 
 
2/28/2017
 
Regents on University (2)
 
Tempe, Arizona
 
$
53.3

 
225

3/3/2017
 
Broadstone at Citrus Village
 
Tampa, Florida
 
$
47.4

 
296

3/24/2017
 
Retreat at Greystone
 
Birmingham, Alabama
 
$
50.0

 
312

3/31/2017
 
Founders Village
 
Williamsburg, Virginia
 
$
44.4

 
247

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,080

 
 
 
 
 
 
 
 
 
1/5/2016
 
Baldwin Park
 
Orlando, Florida
 
$
110.8

 
528

1/15/2016
 
Crosstown Walk
 
Tampa, Florida
 
$
45.8

 
342

2/1/2016
 
Overton Rise
 
Atlanta, Georgia
 
$
61.1

 
294

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,164


(1) Purchase prices shown are exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.
(2) A 640-bed student housing community located adjacent to the campus of Arizona State University in Tempe, Arizona.


The Company allocated the purchase prices and, for acquisitions that closed subsequent to January 1, 2017, 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, but are preliminary and are subject to refinement for a period of up to one year from the closing of the acquisitions. The Company does not expect these refinements, if any, to be material.


12

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2017


2017 Multifamily Communities acquired
 
Broadstone at Citrus Village
 
Regents on University
 
Retreat at Greystone
 
Founders Village
 
 
 
 
 
 
 
 
 
 
 
Land
 
$
4,809,113

 
$
7,440,934

 
$
4,077,262

 
$
5,236,611

 
Buildings and improvements
 
34,180,983

 
40,058,727

 
35,336,277

 
32,308,812

 
Furniture, fixtures and equipment
 
6,299,645

 
3,771,432

 
9,125,302

 
5,881,608

 
Lease intangibles
 
1,624,752

 
2,344,404

 
1,844,476

 
1,400,272

 
Mark to market debt assumption asset
 
893,385

 

 

 

 
Prepaids & other assets
 
744,970

 
808,045

 
871,684

 
938,419

 
Escrows
 
67,876

 

 
101,503

 

 
Accrued taxes
 
(108,286
)
 
(71,856
)
 
(139,046
)
 

 
Security deposits, prepaid rents, and other liabilities
 
(24,887
)
 
(377,735
)
 
(108,573
)
 
(103,204
)
 
 
 
 
 
 
 
 
 
 
 
Net assets acquired
 
$
48,487,551

 
$
53,973,951

 
$
51,108,885

 
$
45,662,518

 
 
 
 
 
 
 
 
 
 
 
Cash paid
 
$
18,237,551

 
$
16,488,951

 
$
15,898,885

 
$
14,057,518

 
Mortgage debt
 
30,250,000

 
37,485,000

 
35,210,000

 
31,605,000

 
 
 
 
 
 
 
 
 
 
 
Total consideration
 
$
48,487,551

 
$
53,973,951

 
$
51,108,885

 
$
45,662,518

(1 
) 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2017:
 
 
 
 
 
 
 
 
 
Revenue
 
$
374,000

 
$
471,000

 
$
89,000

 
$

 
Net income (loss)
 
$
(74,000
)
 
$
(342,000
)
 
$
(244,000
)
 
$
(198,000
)
 
 
 
 
 
 
 
 
 
 
 
Capitalized acquisition costs incurred by the Company
 
$
458,000

 
$
290,000

 
$
383,000

 
$
433,000

 
Acquisition costs paid to related party (included above)
 
$
24,000

 
$
60,000

 
$
56,000

 
$
51,000

 
Remaining amortization period of intangible
 
 
 
 
 
 
 
 
 
 assets and liabilities (months)
 
48.7

 
4.5

 
5.5

 
5.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) The Company's real estate loan investment in support of Founders Village was repaid in full at the closing of the acquisition of the property.


13

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2017


2016 Multifamily Communities acquired
Overton Rise
 
Baldwin Park
 
Crosstown Walk
Land
$
8,511,370

 
$
17,402,882

 
$
5,178,375

Buildings and improvements
44,710,034

 
87,105,757

 
33,605,831

Furniture, fixtures and equipment
6,286,105

 
3,358,589

 
5,726,583

Lease intangibles
1,611,314

 
2,882,772

 
1,323,511

Prepaids & other assets
73,754

 
229,972

 
125,706

Escrows
354,640

 
2,555,753

 
291,868

Accrued taxes
(66,422
)
 
(17,421
)
 
(25,983
)
Security deposits, prepaid rents, and other liabilities
(90,213
)
 
(226,160
)
 
(53,861
)
 
 
 
 
 
 
Net assets acquired
$
61,390,582

 
$
113,292,144

 
$
46,172,030

 
 
 
 
 
 
Cash paid
$
20,090,582

 
$
35,492,144

 
$
13,632,030

Mortgage debt (1)
41,300,000

 
77,800,000

 
32,540,000

 
 
 
 
 
 
Total consideration
$
61,390,582

 
$
113,292,144

 
$
46,172,030

 
 
 
 
 
 
Three months ended March 31, 2016:
 
 
 
 
 
Revenue
$
916,000

 
$
2,412,000

 
$
1,052,000

Net income (loss)
$
(251,000
)
 
$
(1,128,000
)
 
$
(453,000
)
Three months ended March 31, 2017:
 
 
 
 
 
Revenue
$
1,267,000

 
$
2,363,000

 
$
1,298,000

Net income (loss)
$
(146,000
)
 
$
(584,000
)
 
$
(41,000
)
 
 
 
 
 
 
Cumulative acquisition costs incurred by the Company
$
115,000

 
$
1,847,000

 
$
319,000

Remaining amortization period of intangible
 
 
 
 
 
 assets and liabilities (months)
0.0

 
0.0

 
0.0


Grocery-anchored shopping center acquired

During the three months ended March 31, 2016, the Company completed the acquisition of the following grocery-anchored shopping center:
Acquisition date
 
Property
 
Location
 
Approximate purchase price (millions) (2)
 
Gross leasable area (square feet)
2/29/16
 
Wade Green Village (1)
 
Atlanta, Georgia
 
$
11.0

 
74,978

 
 
 
 
 
 
 
 
 

(1) See Note 6 - Related party Transactions.
(2) Purchase price shown is exclusive of acquired escrows, security deposits, prepaids, and other miscellaneous assets and assumed liabilities.

The Company allocated the purchase prices 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, but is preliminary and is subject to refinement for a period of up to one year from the closing of the acquisition.
The Company does not expect these refinements, if any, to be material.



14

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2017


New Market Properties 2016 acquisition
 
Wade Green Village
 
Land
 
$
1,840,284

 
Buildings and improvements
 
8,159,147

 
Tenant improvements
 
251,250

 
In-place leases
 
841,785

 
Above market leases
 
107,074

 
Leasing costs
 
167,541

 
Other assets
 
10,525

 
Other liabilities
 
(59,264
)
 
 
 
 
 
Net assets acquired
 
$
11,318,342

 
 
 
 
 
Cash paid
 
$
6,245,683

(1) 
Class A OP Units granted
 
5,072,659

(2) 
Mortgage debt
 

(3) 
 
 
 
 
Total consideration
 
$
11,318,342

 
 
 
 
 
Three months ended March 31, 2016:
 
 
 
Revenue
 
$
84,000

 
Net income (loss)
 
$
(43,000
)
 
 
 
 
 
Three months ended March 31, 2017:
 
 
 
Revenue
 
$
274,000

 
Net income (loss)
 
$
(103,000
)
 
 
 
 
 
Cumulative acquisition costs incurred by the Company
 
$
297,000

 
Remaining amortization period of intangible
 
 
 
 assets and liabilities (years)
 
2.1

 

(1) The contributor had an outstanding $6.25 million bridge loan secured by the property issued by Madison Wade Green Lending, LLC, an indirect wholly owned entity of the Company. Upon contribution of the property, the Company assumed the loan and concurrently extinguished the obligation.

(2) As partial consideration for the property contribution, the Company granted 419,228 Class A OP Units to the contributor, net of contribution adjustments at closing. The value and number of Class A OP Units to be granted at closing was determined during the contract process and remeasured at fair value as of the contribution date of February 29, 2016. Class A OP Units are exchangeable for shares of Common Stock on a one-for-one basis, or cash, at the election of the Operating Partnership. Therefore, the Company determined the fair value of the Units to be equivalent to the price of its common stock on the closing date of the acquisition.

(3) Subsequent to the closing of the acquisition, the Company closed on a mortgage loan on Wade Green Village in the amount of $8.2 million.

Office buildings

In the Company's Annual Report on Form 10-K for the year ended December 31, 2016, the Company reported a misclassified amount of tenant improvements on its acquisition of the Three Ravinia office building. The impact on the Company's Consolidated Balance Sheet for the year ended December 31, 2016 was an understatement of buildings and improvements of approximately $14.2 million and an overstatement of tenant improvements of the same amount, as shown in the table below. The Company assessed the impact of the error, both quantitatively and qualitatively, in accordance with the SEC’s Staff Accounting Bulletin (SAB) No. 99 and SAB No. 108 and concluded that it was not material to the Company’s previously issued Financial Statements. In order to conform previous financial statements with the current period, the Company elected to revise previously issued financial statements the next time such financial statements are filed. The revision had no impact on the Consolidated Statement of Operations, Consolidated Statement of Stockholder’s Equity, or the Consolidated Statement of Cash Flows.





15

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2017


Consolidated balance sheet as of December 31, 2016
As previously reported
 
Adjustment
 
As revised
Real estate
 
 
 
 
 
Building and improvements
$
1,499,129,649

 
$
14,164,111

 
$
1,513,293,760

Tenant improvements
$
37,806,472

 
$
(14,164,111
)
 
$
23,642,361


Three Ravinia acquisition
As previously reported
 
Adjustment
 
As revised
Real estate
 
 
 
 
 
Buildings and improvements
$
133,323,658

 
$
14,164,111

 
$
147,487,769

Tenant improvements
$
20,698,893

 
$
(14,164,111
)
 
$
6,534,782


The error in the prior year purchase price allocation for the Three Ravinia acquisition was related to the expenditure timing of landlord funded tenant allowances and the related recognition of value at the acquisition date.

The Company recorded aggregate amortization and depreciation expense of:
 
 
Three months ended March 31,
 
 
2017
 
2016
Depreciation:
 
 
 
 
Buildings and improvements
 
$
12,421,049

 
$
6,781,145

Furniture, fixtures, and equipment
 
5,866,562

 
4,421,911

 
 
18,287,611

 
11,203,056

Amortization:
 
 
 
 
Acquired intangible assets
 
6,499,570

 
4,133,893

Deferred leasing costs
 
32,391

 
4,857

Website development costs
 
6,617

 
4,920

Total depreciation and amortization
 
$
24,826,189

 
$
15,346,726


At March 31, 2017, the Company had recorded gross intangible assets of $129.9 million, and accumulated amortization of $49.5 million; gross intangible liabilities of $33.4 million and accumulated amortization of $4.7 million. Net intangible assets and liabilities as of March 31, 2017 will be amortized over the weighted average remaining amortization periods of approximately 6.0 years and 9.3 years, respectively.




16

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2017


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

At March 31, 2017, our portfolio of fixed rate, interest-only real estate loans consisted of:
 
Project/Property
 
Location
 
Maturity date
 
Optional extension date
 
Total loan commitments
 
Carrying amount (1) as of
 
Current / deferred interest % per annum
 

 
 
 
 
March 31, 2017
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Multifamily communities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Founders Village
 
Williamsburg, VA
 
8/29/2018
 
N/A
 
$
10,346,000

 

(2 
) 
$
9,866,000

 
8 / 7.5
 
Encore
 
Atlanta, GA
 
4/8/2019
 
10/8/2020
 
10,958,200

 
10,958,200

 
10,958,200

 
8.5 / 5
 
Encore Capital
 
Atlanta, GA
 
4/8/2019
 
10/8/2020
 
9,758,200

 
6,933,429

 
6,748,380

 
8.5 / 5
 
Palisades
 
Northern VA
 
2/18/2018
 
8/18/2019
 
17,270,000

 
16,541,073

 
16,214,545

 
8 / 5
 
Fusion
 
Irvine, CA
 
5/31/2018
 
5/31/2020
 
59,052,583

 
50,514,711

 
49,456,067

 
8.5 / 7.5
 
Green Park
 
Atlanta, GA
 
12/1/2017
 
12/1/2019
 
13,464,372

 
13,464,372

 
13,464,372

 
8.5 / 5.83
 
Summit Crossing III
 
Atlanta, GA
 
2/26/2018
 
2/26/2020
 
7,246,400

 
7,246,400

 
7,246,400

 
8.5 / 7.5
 
Overture
 
Tampa, FL
 
7/21/2018
 
7/21/2020
 
6,920,000

 
6,254,823

 
6,123,739

 
8.5 / 7.5
 
Aldridge at Town Village
 
Atlanta, GA
 
12/27/2017
 
12/27/2019
 
10,975,000

 
10,884,275

 
10,656,171

 
8.5 / 6
 
Bishop Street
 
Atlanta, GA
 
2/18/2020
 
N/A
 
12,693,457

 
11,383,876

 
11,145,302

 
8.5 / 6.5
 
Hidden River
 
Tampa, FL
 
12/3/2018
 
12/3/2020
 
4,734,960

 
4,734,960

 
4,734,960

 
8.5 / 6.5
 
Hidden River Capital
 
Tampa, FL
 
12/4/2018
 
12/4/2020
 
5,380,000

 
4,725,266

 
4,626,238

 
8.5 / 6.5
 
CityPark II
 
Charlotte, NC
 
1/7/2019
 
1/7/2021
 
3,364,800

 
3,364,800

 
3,364,800

 
8.5 / 6.5
 
CityPark II Capital
 
Charlotte, NC
 
1/8/2019
 
1/31/2021
 
3,916,000

 
3,396,856

 
3,325,668

 
8.5 / 6.5
 
Park 35 on Clairmont
 
Birmingham, AL
 
6/26/2018
 
6/26/2020
 
21,060,160

 
20,219,632

 
19,795,886

 
8.5 / 2
 
Fort Myers