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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
 
Fort Myers, FL
 
9/25/2017
 
N/A
 
4,000,000

 
3,765,396

 
3,654,621

 
12 / 0
 
Wiregrass
 
Tampa, FL
 
5/15/2020
 
5/15/2023
 
14,975,853

 
5,253,571

 
1,862,548

 
8.5 / 6.5
 
Wiregrass Capital
 
Tampa, FL
 
5/15/2020
 
5/15/2023
 
3,744,147

 
3,338,073

 
3,268,114

 
8.5 / 6.5
 
360 Forsyth
 
Atlanta, GA
 
12/1/2017
 
N/A
 
3,225,000

 
2,622,518

 
2,520,420

 
12 / 0
 

 

 

 

 
 
 
 
 
 
 

 
Student housing properties:
 

 

 
 
 
 
 
 
 

 
Haven West
 
Atlanta, GA
 
6/2/2018
 
N/A
 
6,940,795

 
6,784,167

 
6,784,167

 
8 / 6
 
Haven 12
 
Starkville, MS
 
6/16/2017
 
11/30/2020
 
6,116,384

 
5,815,849

 
5,815,849

 
8.5 / 6.5
 
Stadium Village
 
Atlanta, GA
 
6/27/2017
 
N/A
 
13,424,995

 
13,329,868

 
13,329,868

 
8.5 / 5.83
 
18 Nineteen
 
Lubbock, TX
 
4/9/2018
 
4/9/2020
 
15,598,352

 
15,584,017

 
15,584,017

 
8.5 / 6
 
Haven South
 
Waco, TX
 
5/1/2018
 
5/1/2019
 
15,455,668

 
15,418,199

 
15,301,876

 
8.5 / 6
 
Haven46
 
Tampa, FL
 
3/29/2019
 
9/29/2020
 
9,819,662

 
9,369,251

 
9,136,847

 
8.5 / 5
 
Haven Northgate
 
College Station, TX
 
6/20/2019
 
6/20/2020
 
64,678,549

 
53,811,320

 
46,419,194

 
6.6 / 1.5
 
Lubbock II
 
Lubbock, TX
 
4/20/2019
 
N/A
 
9,357,171

 
8,967,202

 
8,770,838

 
8.5 / 5
 
Haven Charlotte
 
Charlotte, NC
 
12/22/2019
 
12/22/2021
 
19,581,593

 
196,763

 
5,781,295

 
8.5 / 6.5
 
Haven Charlotte Member
 
Charlotte, NC
 
12/22/2019
 
12/22/2021
 
8,201,170

 
7,240,279

 

 
8.5 / 6.5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New Market Properties:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dawson Marketplace
 
Atlanta, GA
 
11/15/2018
 
11/15/2020
 
12,857,005

 
12,857,005

 
12,613,860

 
8.5 / 5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Crescent Avenue
 
Atlanta, GA
 
7/13/2017
 
N/A
 
6,000,000

 
6,000,000

 
6,000,000

 
9 / 6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
411,116,476

 
340,976,151

 
334,570,242

 
 
 
Unamortized loan origination fees
 
 
 
 
 
 
 
(1,550,000
)
 
(1,809,174
)
 
 
 
Carrying amount
 
 
 
 
 
 
 
 
 
$
339,426,151

 
$
332,761,068

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Carrying amounts presented per loan are amounts drawn, exclusive of deferred fee revenue.
 
(2) The loan extended to Founders Village, with a total commitment of $10.3 million, was paid off during the first quarter.



17

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


The Palisades, Green Park, Stadium Village and 360 Forsyth loans are subject to a loan participation agreement with a syndicate of unaffiliated third parties, under which the syndicate is to fund approximately 25% of the loan commitment amount and collectively receive approximately 25% of interest payments, returns of principal and purchase option discount (if applicable). The Company's Encore loan is subject to a loan participation agreement of 49% of the loan commitment amount, interest payments, and return of principal. The aggregate amount of the Company's liability under the loan participation agreements at March 31, 2017 was approximately $18.3 million.

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 borrowers. These guaranties generally remain in effect until the receipt of a final certificate of occupancy. All of the guaranties are subject to the rights held by the senior lender pursuant to a standard intercreditor agreement. The Crescent Avenue, Haven Northgate, and Fort Myers loans are also collateralized by the acquired land or property. The Haven West, 18 Nineteen and Haven South loans are additionally collateralized by an assignment by the developer of security interests in unrelated projects. Prepayment of the real estate loans are permitted in whole, but not in part, without the Company's consent.

Management monitors the credit quality of the obligors under each of the Company's real estate loans by tracking the timeliness of scheduled interest and principal payments relative to the due dates as specified in the loan documents, as well as draw requests on the loans relative to the project budgets. In addition, management monitors the actual progress of development and construction relative to the construction plan, as well as local, regional and national economic conditions that may bear on our current and target markets. The credit quality of the Company’s borrowers is primarily based on their payment history on an individual loan basis, and 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. At March 31, 2017, none of the Company's real estate loans were delinquent.
    
At March 31, 2017, our portfolio of notes and lines of credit receivable consisted of:

Borrower
 
Date of loan
 
Maturity date
 
Total loan commitments
 
Outstanding balance as of:
 
Interest rate
 
 
 
 
 
3/31/2017

 
12/31/2016

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
360 Residential, LLC (1)
 
3/20/2013
 
6/30/2017
 
$
2,000,000

 
$
1,548,065

 
$
1,472,571

 
12
%
 
Preferred Capital Marketing Services, LLC (2)
 
1/24/2013
 
12/31/2017
 
1,500,000

 
1,034,198

 
1,082,311

 
10
%
 
Oxford Contracting, LLC (1,3)
 
8/27/2013
 
4/30/2017
 
1,500,000

 
1,475,000

 
1,475,000

 
8
%
 
Preferred Apartment Advisors, LLC (1,2,4)
 
8/21/2012
 
12/31/2018
 
15,000,000

 
13,748,764

 
13,708,761

 
8
%
 
Haven Campus Communities, LLC (1,2)
 
6/11/2014
 
12/31/2017
 
11,110,000

 
7,324,904

 
7,324,904

 
12
%
 
Oxford Capital Partners, LLC (1,5)
 
10/5/2015
 
12/31/2017
 
10,650,000

 
8,069,163

 
7,870,865

 
12
%
 
Newport Development Partners, LLC (1)
 
6/17/2014
 
6/30/2017
 
3,000,000

 

 

 
12
%
 
360 Residential, LLC II (1)
 
12/30/2015
 
12/31/2017
 
3,255,000

 
2,994,429

 
2,884,845

 
15
%
 
Mulberry Development Group, LLC
 
3/31/2016
 
6/30/2017
 
500,000

 
229,000

 
177,000

 
12
%
 
360 Capital Company, LLC
 
5/24/2016
 
12/31/2017
 
2,000,000

 
2,506,915

 
1,678,999

 
12
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized loan fees
 
 
 
 
 
 
 
(34,691
)
 
(59,581
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
50,515,000

 
$
38,895,747

 
$
37,615,675

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) The amounts payable under the terms of these revolving credit lines are collateralized by a personal guaranty of repayment by the principals of the borrower.
(2) See related party disclosure in Note 6.
(3) Note was repaid on April 6, 2017.
(4) The amounts payable under this revolving credit line were collateralized by an assignment of the Manager's rights to fees due under the Fifth Amended and Restated Management Agreement between the Company and the Manager.
(5) The amounts payable under the terms of this revolving credit line, up to the lesser of 25% of the loan balance or $2,000,000 are collateralized by a personal guaranty of repayment by the principals of the borrower.


18

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


    
The Company recorded interest income and other revenue from these instruments as follows:
 
 
Three months ended March 31,
 
 
2017
 
2016
Real estate loans:
 
 
 
 
Current interest payments
 
$
7,061,573

 
$
5,092,670

Additional accrued interest
 
4,413,140

 
3,272,655

Deferred loan fee revenue
 
259,174

 
239,599

 
 
 
 
 
Total real estate loan revenue
 
11,733,887

 
8,604,924

Interest income on notes and lines of credit
 
1,027,816

 
1,115,175

 
 
 
 
 
Interest income on loans and notes receivable
 
$
12,761,703

 
$
9,720,099


The Company extends loans for purposes such as to partially finance the development of multifamily residential communities, to acquire land in anticipation of developing and constructing multifamily residential communities, and for other real estate or real estate related projects. Certain of these loans include characteristics such as exclusive options to purchase the project within a specific time window following project completion and stabilization, the sufficiency of the borrowers' investment at risk and the existence of payment and performance guaranties provided by the borrowers, 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 no decision making authority or power to direct activity, except normal lender rights, which are subordinate to the senior loans on the projects. The Company has concluded that it is not the primary beneficiary of the borrowing entities and therefore it has not consolidated these entities in its consolidated financial statements. The Company's maximum exposure to loss from these loans is their drawn amount as of March 31, 2017 of approximately $321.8 million. The maximum aggregate amount of loans to be funded as of March 31, 2017 was approximately $380.6 million.
The Company has evaluated its real estate loans, where appropriate, for accounting treatment as loans versus real estate development projects, as required by ASC 310. For each loan, the characteristics and the facts and circumstances indicate that loan accounting treatment is appropriate.
The Company is also subject to a geographic concentration of risk that could be considered significant with regard to the Haven West, Encore, Encore Capital, Green Park, Stadium Village, Summit Crossing III, Aldridge at Town Village, Bishop Street, Dawsonville Marketplace, Crescent Avenue and 360 Forsyth loans, all of which are partially supporting proposed various real estate projects in or near Atlanta, Georgia. The drawn amount of these loans as of March 31, 2017 totaled approximately $102.5 million (with a total commitment amount of approximately $107.5 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.

5. Redeemable Preferred Stock and Equity Offerings
On February 14, 2017, the Company terminated its offering of up to 900,000 Units, or Follow-on Offering, and on the same day, the Company’s registration statement on Form S-3 (Registration No. 333-211924) (the “$1.5 Billion Follow-on Registration Statement”)  was declared effective by the SEC. This $1.5 Billion Follow-on Registration Statement allows us to offer up to a maximum of 1,500,000 Units, with each Unit consisting of one share of Series A Redeemable Preferred Stock and one Warrant to purchase up to 20 shares of Common Stock (the "$1.5 Billion Unit Offering"). The price per Unit is $1,000, subject to adjustment if a participating broker-dealer reduces its commission. Each share of Preferred Stock ranks senior to Common Stock with respect to dividend rights 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. The redemption schedule of the Preferred Stock allows 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


19

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


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 $19.50 per share. The current market price per share of the Common Stock is determined using the closing price of the common stock immediately preceding the issuance of such Warrant. The Warrants are not exercisable until one year following the date of issuance and expire four years following the date of issuance. The Units are being offered by Preferred Capital Securities, LLC, or PCS, an affiliate of the Company, on a "reasonable best efforts" basis. The Company intends to invest substantially all the net proceeds of the $1.5 Billion Unit Offering in connection with the acquisition of multifamily communities, other real estate-related investments and general working capital purposes. Except as described in the $1.5 Billion Follow-on Registration Statement, the terms of the $1.5 Billion Unit Offering are substantially similar to those under the Follow-on Offering. As of February 14, 2017, which was the final closing of the Follow-on Offering, offering costs specifically identifiable to Unit offering closing transactions, such as commissions, dealer manager fees, and other registration fees, totaled approximately $97.2 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 $14.9 million. As of February 14, 2017, the Company had issued all available Units under the Primary Series A Offering and the Follow-on Offering and collected net proceeds of approximately $891.2 million after commissions. Since the maximum number of Units available to be issued under the Primary Series A Offering and the Follow-on Offering were issued, the Company consequently recognized 100.0% of the approximate $14.9 million deferred offering costs as a reduction of stockholders' equity.  

For the $1.5 Billion Unit Offering, as of March 31, 2017, offering costs specifically identifiable to Unit offering closing transactions, such as commissions, dealer manager fees, and other registration fees, totaled approximately $1.2 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 $1.8 million. As of March 31, 2017, the Company had issued 12,164 Units and collected net proceeds of approximately $11.0 million after commissions under the $1.5 Billion Unit Offering. The number of Units issued was approximately 0.8% 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 0.8% of the approximate $1.8 million deferred to date, or approximately $14,000 as a reduction of stockholders' equity. The remaining balance of offering costs not yet reflected as a reduction of stockholder's equity, approximately $1.8 million, are reflected in the asset section of the consolidated balance sheet as deferred offering costs at March 31, 2017. The remainder of current and future deferred offering costs related to the $1.5 Billion Unit 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 approximately 1.5% (discussed further below) of the total gross proceeds raised during the Unit offerings.

Cumulatively, a total of 14,243 shares of Preferred Stock have been subsequently redeemed from the Primary Series A Offering, the Follow-on Offering, and the $1.5 Billion Unit Offering. 

Aggregate offering expenses, including selling commissions and dealer manager fees, will be capped at 11.5% of the aggregate gross proceeds of the $1.5 Billion Unit Offering, of which the Company will reimburse its Manager up to 1.5% of the gross proceeds of such offering 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 May 5, 2016, the Company filed a registration statement on Form S-3 (File No. 333-211178), or the New Shelf Registration Statement, for an offering of up to $300 million of equity or debt securities, or the Shelf Offering, which was declared effective by the SEC on May 17, 2016. Deferred offering costs related to this Shelf Registration Statement totaled approximately $1.1 million as of March 31, 2017, of which $149,000 has been reflected as a reduction of stockholders' equity. The remaining balance of offering costs not yet reflected as a reduction of stockholder's equity, approximately $951,000, are reflected in the asset section of the consolidated balance sheet as deferred offering costs at March 31, 2017.

On July 18, 2016, the Company filed a prospectus for its registration statement on Form S-3 (Registration No. 333-211178) to issue and sell up to $150 million of Common Stock from time to time in an "at the market" offering (the "2016 ATM Offering") through JonesTrading Institutional Services LLC, FBR Capital Markets & Co, and Canaccord Genuity Inc, as its sales agents. The Company intends to use any proceeds from the 2016 ATM Offering to repay outstanding amounts under our existing senior secured revolving credit facility and for other general corporate purposes, which includes making investments in accordance with the


20

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


Company's investment objectives. Through March 31, 2017, the Company sold 1.7 million shares of common stock through the ATM offering and collected net proceeds of approximately $23.1 million.

On December 2, 2016, the Company’s registration statement on Form S-3 (Registration No. 333-214531) (the “mShares Registration Statement”) was declared effective by the SEC. The mShares Registration Statement allows us to offer up to a maximum of 500,000 shares of Series M Redeemable Preferred Stock (“mShares”), par value $0.01 per share (the “mShares Offering”).  The mShares are being offered by PCS on a "reasonable best efforts" basis. The price per mShare is $1,000. Each mShare ranks senior to Common Stock and on parity with the Series A Preferred Stock with respect to dividend rights and carries a cumulative annual dividend of 5.75% per annum. Beginning one year from the date of original issuance of each mShare, and on each one year anniversary thereafter, the dividend rate increases by 0.25% per annum, up to a maximum of 7.5% per annum. Dividends are payable monthly as declared by the Company’s board of directors and begin accruing on the date of issuance. The redemption schedule of the mShares allows redemptions at the option of the holder from the date of issuance of the Preferred Stock through the first year subject to a 2% redemption fee. After year one, the redemption fee decreases to 1% and after year two there is no redemption fee. Any redeemed mShares 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 Company intends to invest substantially all the net proceeds of the mShares Offering in connection with the acquisition of multifamily communities, other real estate-related investments and general working capital purposes. 

For the mShares Offering, as of March 31, 2017, offering costs specifically identifiable to Unit offering closing transactions, such as commissions, dealer manager fees, and other registration fees, totaled approximately $0.1 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 $1.1 million. As of March 31, 2017, the Company had issued 1,635 Units and collected net proceeds of approximately $1.6 million after commissions under the mShares Unit Offering. The number of Units issued was approximately 0.3% of the maximum number of Units anticipated to be issued under the mShares Offering. Consequently, the Company cumulatively recognized approximately 0.3% of the approximate $1.1 million deferred to date, or approximately $4,000 as a reduction of stockholders' equity. The remaining balance of offering costs not yet reflected as a reduction of stockholder's equity, approximately $1.1 million, are reflected in the asset section of the consolidated balance sheet as deferred offering costs at March 31, 2017. The remainder of current and future deferred offering costs related to the mShares Unit 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 approximately 1.5% (discussed further below) of the total gross proceeds raised during the Unit offerings.

Aggregate offering expenses, including dealer manager fees, will be capped at 11.5% of the aggregate gross proceeds of the mShares Offering, of which the Company will reimburse its Manager up to 1.5% of the gross proceeds of such offering for all organization and offering expenses incurred, excluding 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.

The Company's Series A Preferred Stock and mShares are redeemable at the option of the holder in either cash or the Company's Common Stock, at the Company's option. Since the Company controls the form of redemption, it presents its Series A Preferred Stock and mShares as components of permanent rather than temporary or mezzanine equity on its Consolidated Balance Sheets.

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, Mr. Silverstein, and Daniel M. DuPree comprise the board of directors of Nell Partners, Inc. Mr. Williams is the Chief Executive Officer and Mr. Silverstein is the President and Chief Operating Officer of the Manager. Mr. DuPree is the Chief Investment 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.



21

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


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 March 31,
Type of Compensation
 
Basis of Compensation
 
2017
 
2016
 
 
 
 
 
 
 
Loan origination fees
 
1.0% of the maximum commitment of any real estate loan, note or line of credit receivable
 
$

 
$
701,369

Loan coordination fees
 
As of January 1, 2016, 1.6% of any assumed, new or supplemental debt incurred in connection with an acquired property (1)
 
2,054,140

 
2,261,461

Asset management fees
 
Monthly fee equal to one-twelfth of 0.50% of the total book value of assets, as adjusted
 
3,063,083

 
1,761,004

Property management fees
 
Monthly fee equal to 4% of the monthly gross revenues of the properties managed
 
1,425,401

 
1,062,468

General and administrative expense fees
 
Monthly fee equal to 2% of the monthly gross revenues of the Company
 
1,283,419

 
744,101

Construction management fees
 
Quarterly fee for property renovation and takeover projects
 
71,152

 
40,276

 
 
 
 
 
 
 
 
 
 
 
$
7,897,195

 
$
6,570,679

(1) If an asset is acquired without debt financing, the loan coordination fee is calculated as 1.6% of 63% of the purchase price of the asset.

The Manager may, in its discretion, defer some or all of the asset management, property management, or general and administrative expense fees for properties owned by the Company. Any contingent fees become due and payable to the extent that, in the event of any capital transaction, the net sale proceeds exceed the allocable capital contributions for the asset plus a 7% priority annual return on the asset. A total of approximately $3.9 million of combined asset management and general and administrative expense fees related to the acquired properties as of March 31, 2017 have been deferred by the Manager, of which $3.5 million remains contingent. The Company will recognize any contingent fees in future periods to the extent, if any, it determines that it is probable that the estimated net sale proceeds would exceed the hurdles listed above. As of March 31, 2017, the Company determined that there was insufficient evidence to support recognition of these contingent fees; therefore, the Company has not recognized any expense for the contingent amounts deferred.

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 March 31,
2017
 
2016
$
2,776,967

 
$
2,363,463


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 $115,726 and $126,105 for the three-month periods ended March 31, 2017 and 2016, respectively and PCS was reimbursed $255,695 and $253,767 for the three-month periods ended March 31, 2017 and 2016, respectively. These costs are recorded as deferred offering costs until such time as additional closings occur on the $1.5 Billion Unit Offering, mShares Offering or the Shelf Offering, at which time they are reclassified on a pro-rata basis as a reduction of offering proceeds within stockholders’ equity.



22

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


The Company's Haven West, Haven 12, Stadium Village, 18 Nineteen, Haven South, Haven 46, Lubbock II, Haven Northgate and Haven Charlotte 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.

In addition to the fees described above, the Management Agreement also entitles the Manager to other potential fees, including a disposition fee of 1% of the sale price of a real estate asset. The Manager earned a disposition fee of $1,136,000 on the sale of the Ashford Park and Sandstone Creek properties, which is included in the Gain on sale of real estate, net of disposition expenses line on the Consolidated Statements of Operations. The Manager also receives leasing commission fees. Retail leasing commission fees (a) for new retail leases are equal to the greater of (i) $4.00 per square foot, and (ii) 4.0% of the aggregate base rental payments to be made by the tenant for the first 10 years of the original lease term; and (b) for lease renewals are equal to the greater of (i) $2.00 per square foot, and (ii) 2.0% of the aggregate base rental payments to be made by the tenant for the first 10 years of the newly renewed lease term. There are no commissions payable on retail lease renewals thereafter. Office leasing commission fees (a) for new office leases are equal to 50.0% of the first month’s gross rent plus 2.0% of the remaining fixed gross rent on the guaranteed lease term, (b) in the event of co-broker participation in a new lease, the leasing commission determined for a new lease are equal to 150.0% of the first month’s gross rent plus 6% of the remaining fixed gross rent of the guaranteed lease term, and (c) for lease renewals, are equal to 2% of the fixed gross rent of the guaranteed lease term or, in the event of a co-broker, 6% of the fixed gross rent of the guaranteed lease term. Office leasing commission fees may not exceed market rates for office leasing services. The Manager earned approximately $11,900 in leasing commission fees for the three-months period ended March 31, 2017. No leasing commission fees were earned by the Manager for the three-month period ended March 31, 2016.

The Company holds a promissory note in the amount of $1,034,198 due from Preferred Capital Marketing Services, LLC, or PCMS, which is a wholly-owned subsidiary of NELL Partners.

The Company has extended a revolving line of credit with a maximum borrowing amount of $15.0 million to its Manager.

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 Preferred Stock were:
2017
 
2016
Record date
 
Number of shares
 
Aggregate dividends declared
 
Record date
 
Number of shares
 
Aggregate dividends declared
 
 
 
 
 
 
 
 
 
 
 
January 31, 2017
 
932,413

 
$
4,641,149

 
January 30, 2016
 
482,774

 
$
2,481,086

February 28, 2017
 
977,267

 
4,849,032

 
February 27, 2016
 
516,017

 
2,630,601

March 31, 2017
 
978,694

 
4,893,598

 
March 31, 2016
 
544,129

 
2,770,048

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
14,383,779

 
 
 
Total
 
$
7,881,735


The Company's dividend activity on its Common Stock for the three-month periods ended March 31, 2017 and 2016 was:
2017
 
2016
Record date
 
Number of shares
 
Dividend per share
 
Aggregate dividends paid
 
Record date
 
Number of shares
 
Dividend per share
 
Aggregate dividends paid
March 15, 2017
 
27,139,354

 
$
0.22

 
$
5,970,658

 
March 15, 2016
 
23,041,502

 
$
0.1925

 
$
4,435,489




23

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


The holders of Class A OP Units of the Operating Partnership are entitled to equivalent distributions as those declared on the Common Stock. At March 31, 2017, the Company had 903,371 Class A OP Units outstanding, which are exchangeable on a one-for-one basis for shares of Common Stock or the equivalent amount of cash. Distribution activity by the Operating Partnership was:
2017
 
2016
Record date
 
Payment date
 
Aggregate distributions
 
Record date
 
Payment date
 
Aggregate distributions
March 15, 2017
 
April 14, 2017
 
$
198,742

 
March 15, 2016
 
April 15, 2016
 
$
117,395


8. Equity Compensation
Stock Incentive Plan
On February 25, 2011, the Company’s board of directors adopted, and the Company’s stockholders approved, the Preferred Apartment Communities, Inc. 2011 Stock Incentive Plan to incentivize, compensate and retain eligible officers, consultants, and non-employee directors. On May 7, 2015, the Company's stockholders approved the third amendment to the Preferred Apartment Communities, Inc. 2011 Stock Incentive Plan, or, as amended, the 2011 Plan, which amendment increased the aggregate number of shares of Common Stock authorized for issuance under the 2011 Plan from 1,317,500 to 2,617,500 and extended the expiration date of the 2011 Plan to December 31, 2019.

Equity compensation expense by award type for the Company was:
 
 
 
Three months ended March 31,
 
 Unamortized expense as of March 31,
 
 
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
Quarterly board member committee fee grants
 
$

 
$
24,009

 
$

Class B Unit awards:
 
 
 
 
 
 
Executive officers - 2015
 

 
5,236

 

Executive officers - 2016
 
88,774

 
501,178

 
523,694

Executive officers - 2017
 
656,300

 

 
2,757,493

Restricted stock grants:
 
 
 
 
 
 
2015
 
 

 
80,002

 

2016
 
 
102,500

 

 
34,167

Restricted stock units
 
25,528

 

 
280,815

 
 
 
 
 
 
 
 
Total
 
 
$
873,102

 
$
610,425

 
$
3,596,169


Restricted Stock Grants

The following annual grants of restricted stock were made to members of the Company's independent directors, as payment of the annual retainer fees. The restricted stock grants for the 2015 and 2016 service years vested (or are scheduled to vest) on a pro-rata basis over the four consecutive 90-day periods following the date of grant.
Service year
 
Shares
 
Fair value per share
 
Total compensation cost
2015
 
30,133

 
$
10.62

 
$
320,012

2016
 
30,990

 
$
13.23

 
$
409,998




24

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


Class B OP Units

On January 2, 2015, the Company caused the Operating Partnership to grant 176,835 Class B Units of the Operating Partnership, or Class B OP Units, for service to be rendered during 2015. On January 4, 2016, the Company caused the Operating Partnership to grant 265,931 Class B OP Units for service to be rendered during 2016, 2017 and 2018. On January 3, 2017, the Company caused the Operating Partnership to grant 286,392 Class B OP Units for service to be rendered during 2017, 2018 and 2019.

Prior to January 4, 2016, the Class B Units became Vested Class B Units at the Initial Valuation Date, which was generally one year from the date of grant. Beginning with the 2016 grant, certain Class B Units vest in three equal consecutive one-year tranches from the date of grant. For each grant, on the Initial Valuation Date, the market capitalization of the number of shares of Common Stock at the date of grant is compared to the market capitalization of the same number of shares of Common Stock at the Initial Valuation Date. If the market capitalization measure results in an increase which exceeds the target market threshold, the Vested Class B Units become earned Class B Units and automatically convert into Class A Units of the Operating Partnership (as long as the capital accounts have achieved economic equivalence), which are henceforth entitled to distributions from the Operating Partnership and become exchangeable for Common Stock on a one-to-one basis at the option of the holder. Vested Class B Units may become Earned Class B Units on a pro-rata basis should the result of the market capitalization test be an increase of less than the target market threshold. Any Vested Class B Units that do not become Earned Class B Units on the Initial Valuation Date are subsequently remeasured on a quarterly basis until such time as all Vested Class B Units become Earned Class B Units or are forfeited due to termination of continuous service as an officer of the Company due to an event other than as a result of a qualified event, which is generally the death or disability of the holder. Continuous service through the final valuation date is required for the Vested Class B Units to qualify to become fully Earned Class B Units.

Because of the market condition vesting requirement that determines the transition of the Vested Class B Units to Earned Class B Units, a Monte Carlo simulation was utilized to calculate the total fair values, which will be amortized as compensation expense over the one-year periods beginning on the grant dates through the Initial Valuation Dates. On January 2, 2016, the 176,835 outstanding Class B Units for 2015 became fully vested and earned and automatically converted to Class A Units of the Operating Partnership. On January 4, 2017, all of the 265,931 Class B Units granted on January 4, 2016 became earned and 206,534 automatically vested and converted to Class A Units. Of the remaining earned Class B Units, 29,699 will vest and automatically convert to Class A Units on January 4, 2018 and the final 29,698 earned Class B Units will vest and automatically convert to Class A Units on January 4, 2019, assuming each grantee fulfills the requisite service requirement.

The underlying valuation assumptions and results for the Class B OP Unit awards were:
Grant dates
 
1/3/2017
 
1/4/2016
Stock price
 
$
14.79

 
$
12.88

Dividend yield
 
5.95
%
 
5.98
%
Expected volatility
 
26.4
%
 
26.10
%
Risk-free interest rate
 
2.91
%
 
2.81
%
 
 
 
 
 
Number of Units granted:
 
 
 
 
One year vesting period
 
198,184

 
176,835

Three year vesting period
 
88,208

 
89,096

 
 
286,392

 
265,931

 
 
 
 
 
Calculated fair value per Unit
 
$
11.92

 
$
10.03

 
 
 
 
 
Total fair value of Units
 
$
3,413,793

 
$
2,667,288

 
 
 
 
 
Target market threshold increase
 
$
4,598,624

 
$
3,549,000


The expected dividend yield assumptions were derived from the Company’s closing prices of the Common Stock on the grant dates and the projected future quarterly dividend payments per share of $0.22 for the 2017 awards and $0.1925 for the 2016 awards.

For the 2017 and 2016 awards, the Company's own stock price history was utilized as the basis for deriving the expected volatility assumption.



25

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


The risk-free rate assumptions were obtained from the Federal Reserve yield table and were calculated as the interpolated rate between the 20 and 30 year yield percentages on U. S. Treasury securities on the grant dates.

Since the Class B OP Units have no expiration date, a derived service period of one year was utilized, which equals the period of time from the grant date to the initial valuation date.    

Restricted Stock Units

On January 3, 2017, the Company caused the Operating Partnership to grant 26,900 restricted stock units, or RSUs, for service to be rendered during 2017, 2018 and 2019. The RSUs vest in three equal consecutive one-year tranches from the date of grant. For each grant, on the Initial Valuation Date, the market capitalization of the number of shares of Common Stock at the date of grant is compared to the market capitalization of the same number of shares of Common Stock at the Initial Valuation Date. If the market capitalization measure results in an increase which exceeds the target market threshold, the Vested RSUs become earned RSUs and automatically convert into Common Stock on a one-to-one basis. Vested RSUs may become Earned RSUs on a pro-rata basis should the result of the market capitalization test be an increase of less than the target market threshold. Any Vested RSUs that do not become Earned RSUs on the Initial Valuation Date are subsequently remeasured on a quarterly basis until such time as all Vested RSUs become Earned RSUs or are forfeited due to termination of continuous service as an officer of the Company due to an event other than as a result of a qualified event, which is generally the death or disability of the holder. Continuous service through the final valuation date is required for the Vested RSUs to qualify to become fully Earned RSUs. As of March 31, 2017, a total of 1,200 RSUs had been forfeited.

Because RSUs are valued using the identical market condition vesting requirement that determines the transition of the Vested Class B Units to Earned Class B Units, the same valuation assumptions and Monte Carlo result of $11.92 per RSU were utilized to calculate the total fair value of the RSUs of $320,648, which will be amortized as compensation expense over the three one-year periods ending on each of January 2, 2018, 2019 and 2020.

9. Indebtedness

Mortgage Notes Payable

The following table shows certain details regarding our mortgage notes payable:
 
 
 
Principal balance as of
 
 
 
 
 
Interest only through date (2)
 
Acquisition/
refinancing date
 
March 31, 2017
 
December 31, 2016
 
Maturity date
 
Interest rate (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Multifamily communities:
Stone Rise
7/3/2014
 
24,348,227

 
24,485,726

 
8/1/2019
 
2.89
%
 
8/31/2015
Summit Crossing
4/21/2011
 
19,945,552

 
20,034,920

 
5/1/2018
 
4.71
%
 
5/1/2014
Summit Crossing secondary financing
8/28/2014
 
5,034,582

 
5,057,941

 
9/1/2019
 
4.39
%
 
N/A
Summit II
3/20/2014
 
13,357,000

 
13,357,000

 
4/1/2021
 
4.49
%
 
4/30/2019
Ashford Park
1/24/2013
 

(3) 
25,626,000

 
2/1/2020
 
3.13
%
 
2/28/2018
Ashford Park secondary financing
8/28/2014
 

(3) 
6,404,575

 
2/1/2020
 
4.13
%
 
N/A
McNeil Ranch
1/24/2013
 
13,646,000

 
13,646,000

 
2/1/2020
 
3.13
%
 
2/28/2018
Lake Cameron
1/24/2013
 
19,773,000

 
19,773,000

 
2/1/2020
 
3.13
%
 
2/28/2018
Enclave
9/26/2014
 
24,862,000

 
24,862,000

 
10/1/2021
 
3.68
%
 
10/31/2017
Sandstone
9/26/2014
 

(4) 
30,894,890

 
10/1/2019
 
3.18
%
 
N/A
Stoneridge
9/26/2014
 
26,580,417

 
26,729,985

 
10/1/2019
 
3.18
%
 
N/A
Vineyards
9/26/2014
 
34,775,000

 
34,775,000

 
10/1/2021
 
3.68
%
 
10/31/2017
Avenues at Cypress
2/13/2015
 
22,019,635

 
22,135,938

 
9/1/2022
 
3.43
%
 
N/A
Avenues at Northpointe
2/13/2015
 
27,878,000

 
27,878,000

 
3/1/2022
 
3.16
%
 
3/31/2017
Lakewood Ranch
5/21/2015
 
29,798,178

 
29,950,413

 
12/1/2022
 
3.55
%
 
N/A
Aster Lely
6/24/2015
 
32,960,746

 
33,120,899

 
7/5/2022
 
3.84
%
 
N/A
CityPark View
6/30/2015
 
21,375,389

 
21,489,269

 
7/1/2022
 
3.27
%
 
N/A
Avenues at Creekside
7/31/2015
 
41,143,032

 
41,349,590

 
8/1/2024
 
2.58
%
(5) 
8/31/2016


26

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


Table continued from previous page
 
 
Principal balance as of
 
 
 
 
 
Interest only through date (2)
 
Acquisition/
refinancing date
 
March 31, 2017
 
December 31, 2016
 
Maturity date
 
Interest rate (1)
 
Citi Lakes
9/3/2015
 
43,068,043

 
43,309,606

 
4/1/2023
 
3.15
%
(6) 
N/A
Stone Creek
11/12/2015
 
16,422,445

 
16,497,919

 
10/1/2046
 
3.75
%
 
N/A
Lenox Village Town Center
12/21/2015
 
30,538,670

 
30,717,024

 
5/1/2019
 
3.82
%
 
N/A
Lenox Village III
12/21/2015
 
18,043,652

 
18,125,780

 
1/1/2023
 
4.04
%
 
N/A
Overton Rise
2/1/2016
 
40,526,580

 
40,712,134

 
8/1/2026
 
3.98
%
 
N/A
Baldwin Park
1/5/2016
 
73,910,000

 
73,910,000

 
1/5/2019
 
2.88
%
(7) 
1/5/2019
Baldwin Park secondary financing
1/5/2016
 
3,890,000

 
3,890,000

 
1/5/2019
 
10.88
%
(8) 
1/5/2019
Crosstown Walk
1/15/2016
 
31,921,638

 
32,069,832

 
2/1/2023
 
3.90
%
 
N/A
Avalon Park
5/31/2016
 
61,750,000

 
61,750,000

 
6/5/2019
 
2.98
%
(9) 
N/A
Avalon Park secondary financing
5/31/2016
 
3,250,000

 
3,250,000

 
6/5/2019
 
11.98
%
(10) 
N/A
City Vista
7/1/2016
 
35,567,356

 
35,734,946

 
7/1/2026
 
3.68
%
 
N/A
Sorrel
8/24/2016
 
33,280,079

 
33,442,303

 
9/1/2023
 
3.44
%
 
N/A
Citrus Village
3/3/2017
 
30,250,000

 

 
6/10/2023
 
3.65
%
 
6/09/2017
Retreat at Greystone
3/24/2017
 
35,210,000

 

 
3/1/2022
 
2.83
%
(11) 
2/28/2022
Founders Village
3/31/2017
 
31,605,000

 

 
4/1/2027
 
4.31
%
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
Grocery-anchored shopping centers:
Spring Hill Plaza
9/5/2014
 
9,622,423

 
9,672,371

 
10/1/2019
 
3.36
%
 
10/31/2015
Parkway Town Centre
9/5/2014
 
6,998,126

 
7,034,452

 
10/1/2019
 
3.36
%
 
10/31/2015
Woodstock Crossing
8/8/2014
 
3,028,321

 
3,041,620

 
9/1/2021
 
4.71
%
 
N/A
Deltona Landings
9/30/2014
 
6,891,662

 
6,928,913

 
10/1/2019
 
3.48
%
 
N/A
Powder Springs
9/30/2014
 
7,271,891

 
7,311,197

 
10/1/2019
 
3.48
%
 
N/A
Kingwood Glen
9/30/2014
 
11,530,463

 
11,592,787

 
10/1/2019
 
3.48
%
 
N/A
Barclay Crossing
9/30/2014
 
6,482,915

 
6,517,956

 
10/1/2019
 
3.48
%
 
N/A
Sweetgrass Corner
9/30/2014
 
7,858,334

 
7,900,135

 
10/1/2019
 
3.58
%
 
N/A
Parkway Centre
9/30/2014
 
4,515,227

 
4,539,632

 
10/1/2019
 
3.48
%
 
N/A
Salem Cove
10/6/2014
 
9,546,432

 
9,586,678

 
11/1/2024
 
4.21
%
 
11/30/2016
Independence Square
8/27/2015
 
12,149,089

 
12,208,524

 
9/1/2022
 
3.93
%
 
9/30/2016
Royal Lakes Marketplace
9/4/2015
 
9,800,000

 
9,800,000

 
9/4/2020
 
3.48
%
(12) 
4/3/2017
The Overlook at Hamilton Place
12/22/2015
 
20,550,423

 
20,672,618

 
1/1/2026
 
4.19
%
 
N/A
Summit Point
10/30/2015
 
12,463,327

 
12,546,792

 
11/1/2022
 
3.57
%
 
N/A
East Gate Shopping Center
4/29/2016
 
5,684,996

 
5,719,897

 
5/1/2026
 
3.97
%
 
N/A
Fury's Ferry
4/29/2016
 
6,567,151

 
6,607,467

 
5/1/2026
 
3.97
%
 
N/A
Rosewood Shopping Center
4/29/2016
 
4,410,773

 
4,437,851

 
5/1/2026
 
3.97
%
 
N/A
Southgate Village
4/29/2016
 
7,841,374

 
7,889,513

 
5/1/2026
 
3.97
%
 
N/A
The Market at Victory Village
5/16/2016
 
9,250,000

 
9,250,000

 
9/11/2024
 
4.40
%
 
10/10/2017
Wade Green Village
4/7/2016
 
8,080,065

 
8,116,465

 
5/1/2026
 
4.00
%
 
N/A
Lakeland Plaza
7/15/2016
 
29,578,572

 
29,760,342

 
8/1/2026
 
3.85
%
 
N/A
University Palms
8/8/2016
 
13,427,037

 
13,513,891

 
9/1/2026
 
3.45
%
 
N/A
Cherokee Plaza
8/8/2016
 
25,835,919

 
26,017,293

 
9/1/2021
 
3.23
%
(13) 
N/A
Sandy Plains Exchange
8/8/2016
 
9,379,180

 
9,439,850

 
9/1/2026
 
3.45
%
 
N/A
Thompson Bridge Commons
8/8/2016
 
12,538,483

 
12,619,589

 
9/1/2026
 
3.45
%
 
N/A
Heritage Station
8/8/2016
 
9,280,452

 
9,340,483

 
9/1/2026
 
3.45
%
 
N/A
Oak Park Village
8/8/2016
 
9,576,637

 
9,638,584

 
9/1/2026
 
3.45
%
 
N/A
Shoppes of Parkland
8/8/2016
 
16,428,164

 
16,492,503

 
9/1/2023
 
4.67
%
 
N/A
Champions Village
10/18/2016
 
27,400,000

 
27,400,000

 
11/1/2021
 
3.99
%
(14) 
11/1/2021
 
 
 
 
 
 
 
 
 
 
 
 
Student housing properties:
North by Northwest
6/1/2016
 
33,314,703

 
33,499,754

 
9/1/2022
 
4.02
%
 
N/A
Regents on University
2/28/2017
 
37,485,000

 

 
3/1/2022
 
2.98
%
(15) 
3/1/2022
 
 
 
 
 
 
 
 
 
 
 
 
Office buildings:
Brookwood Office
8/29/2016
 
32,400,000

 
32,400,000

 
9/10/2031
 
3.52
%
 
10/9/2017


27

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


Table continued from previous page
 
 
Principal balance as of
 
 
 
 
 
Interest only through date (2)
 
Acquisition/
refinancing date
 
March 31, 2017
 
December 31, 2016
 
Maturity date
 
Interest rate (1)
 
Galleria 75
11/4/2016
 
5,870,063

 
5,900,265

 
7/1/2022
 
4.25
%
 
N/A
Three Ravinia
12/30/2016
 
115,500,000

 
115,500,000

 
1/1/2042
 
4.46
%
 
1/31/2022
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,395,287,423

 
$
1,327,878,112

 
 
 
 
 
 
    
Footnotes to Mortgage Notes Table
 
(1) Interest rates are fixed, except as indicated.
(2) Following the indicated interest only period (where applicable), monthly payments of accrued interest and principal are based on a 25 to 30-year amortization period through the maturity date.
(3) On March 7, 2017, the Company legally defeased the mortgage loan collateralized by its Ashford Park property, located in Atlanta, GA. In connection with the defeasance, the mortgage and other liens on the property were extinguished and all existing collateral, including various guarantees, were released. As a result of the defeasance, the Company incurred costs associated with a defeasance premium of $1.1 million plus a prepayment premium of approximately $0.4 million.
(4) On January 20, 2017, the Company legally defeased the mortgage loan collateralized by its Sandstone property, located in Kansas City, KS. In connection with the defeasance, the mortgage and other liens on the property were extinguished and all existing collateral, including various guarantees, were released. As a result of the defeasance, the Company incurred costs associated with a defeasance premium of $1.4 million.
(5)  The mortgage instrument was assumed as part of the sales transaction; It accrues interest at a variable rate which consists of the one-month London Interbank Offered Rate, or 1 Month LIBOR, plus 160 basis points. The 1 Month LIBOR index is capped at 5.0%.
(6) Variable rate which consists of 1 Month LIBOR plus 217 basis points. The 1 Month LIBOR index is capped at 4.33%.
(7) Variable rate which consisted of 1 Month LIBOR plus 190 basis points.
(8) Variable rate which consisted of 1 Month LIBOR plus 990 basis points.
(9) Variable rate which consisted of 1 Month LIBOR plus 200 basis points.
(10) Variable rate which consisted of 1 Month LIBOR plus 1100 basis points.
(11) Variable rate which consisted of 1 Month LIBOR plus 185 basis points.
(12) Variable rate which consisted of 1 Month LIBOR plus 250 basis points.
(13) Variable rate which consisted of 1 Month LIBOR plus 225 basis points. The interest rate has a floor of 2.7%.
(14) Variable rate which consisted of 1 Month LIBOR plus 300 basis points. The interest rate has a floor of 3.25%.
(15) Variable rate which consisted of 1 Month LIBOR plus 220 basis points.
The mortgage note secured by our Independence Square property is a seven year term with an anticipated repayment date of September 1, 2022. If the Company elects not to pay its principal balance at the anticipated repayment date, the term will be extended for an additional five years, maturing on September 1, 2027. The interest rate from September 1, 2022 to September 1, 2027 will be the greater of (i) the Initial Interest Rate of 3.93% plus 200 basis points or (ii) the yield on the seven year U.S. treasury security rate plus approximately 400 basis points.

The mortgage note secured by our Royal Lakes Marketplace property has a maximum commitment of $11,050,000. As of March 31, 2017, the Company has an outstanding principal balance of $9.8 million million on this loan. Additional advances of the mortgage commitment will be drawn as the Company achieves incremental leasing benchmarks specified under the loan agreement. This mortgage has a variable interest of 1 Month LIBOR plus 250 basis points, which was 3.48% as of March 31, 2017.


The Company has placed interest rate caps on the variable rate mortgages on its Avenues at Creekside and Citi Lakes multifamily communities. Under guidance provided by ASC 815-10, these interest rate caps fall under the definition of derivatives, which are embedded in their debt hosts. Because these interest rate caps are deemed to be clearly and closely related to their debt hosts, bifurcation and fair value accounting treatment is not required.

The mortgage note secured by our Champions Village property has a maximum commitment of $34.16 million. As of March 31, 2017, the Company has an outstanding principal balance of $27.4 million. Additional advances of the mortgage commitment will be drawn as the Company achieves leasing activity. Additional advances are available through October 2019. This mortgage note has a variable interest of the greater of (i) 3.25% or (ii) the sum of the 3.00% plus the LIBOR Rate, which was 3.99% as of March 31, 2017.



28

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


As of March 31, 2017, the weighted-average remaining life of deferred loan costs related to the Company's mortgage indebtedness was approximately 8.4 years.



Credit Facility

The Company has a credit facility, or Credit Facility, with Key Bank National Association, or Key Bank, which defines a revolving line of credit, or Revolving Line of Credit, which is used to fund investments, capital expenditures, dividends (with consent of Key Bank), working capital and other general corporate purposes on an as needed basis. The maximum borrowing capacity on the Revolving Line of Credit was increased to $150,000,000 pursuant to the Fourth Amended and Restated Credit Agreement, as amended effective December 27, 2016, or the Amended and Restated Credit Agreement. The Revolving Line of Credit accrues interest at a variable rate of one month LIBOR plus 3.25% per annum and matures on August 5, 2019, with an option to extend the maturity date to August 5, 2020, subject to certain conditions described therein.

On January 5, 2016, we entered into a $35.0 million term loan with Key Bank under the Credit Facility, or the 2016 Term Loan, to partially finance the acquisition of the Baldwin Park multifamily community. The Term Loan accrued interest at a rate of LIBOR plus 3.75% per annum. On August 5, 2016, the Company repaid the 2016 Term Loan in full.

On May 26, 2016, the Company entered into a $11.0 million interim term loan with Key Bank, or the Interim Term Loan, to partially finance the acquisition of Anderson Central, a grocery-anchored shopping center located in Anderson, South Carolina. The Interim Term Loan accrues interest at a rate of LIBOR plus 2.5% per annum and the maturity date is May 25, 2017.
The Fourth Amended and Restated Credit Agreement contains certain affirmative and negative covenants, including negative covenants that limit or restrict secured and unsecured indebtedness, mergers and fundamental changes, investments and acquisitions, liens and encumbrances, dividends, transactions with affiliates, burdensome agreements, changes in fiscal year and other matters customarily restricted in such agreements. The amount of dividends that may be paid out by the Company is restricted to a maximum of 95% of AFFO for the trailing rolling four quarters without the lender's consent; solely for purposes of this covenant, AFFO is calculated as earnings before interest, taxes, depreciation and amortization expense, plus reserves for capital expenditures, less normally recurring capital expenditures, less consolidated interest expense.
As of March 31, 2017, the Company was in compliance with all covenants related to the Revolving Line of Credit, as shown in the following table:
Covenant (1)
 
Requirement
 
Result
Net worth
 
Minimum $840,200,000
(2) 
$967,260,968
Debt yield
 
Minimum 8.0%
 
8.68%
Payout ratio
 
Maximum 95%
(3) 
89.5%
Total leverage ratio
 
Maximum 65.0%
 
61.5%
Debt service coverage ratio
 
Minimum 1.50x
 
2.05x

(1) All covenants are as defined in the credit agreement for the Revolving Line of Credit.
(2) Minimum $687 million plus 75% of the net proceeds of any equity offering, which totaled approximately $896 million as of March 31, 2017.
(3)Calculated on a trailing four-quarter basis. For the three-month period ended March 31, 2017, the maximum dividends and distributions allowed under this covenant was approximately $74.1 million.

Loan fees and closing costs for the establishment and subsequent amendments of the Credit Facility are amortized utilizing the straight line method over the life of the Credit Facility. At March 31, 2017, unamortized loan fees and closing costs for the Credit Facility were approximately $1.5 million, which will be amortized over a remaining loan life of approximately 2.3 years. Loan fees and closing costs for the mortgage debt on the Company's properties are amortized utilizing the effective interest rate method over the lives of the loans. Unamortized loan costs related to mortgage notes were approximately $23.7 million, which will be amortized over a weighted-average remaining loan life of approximately 8.4 years. The weighted average interest rate for the Credit Facility was 4.17% for the three-month period ended March 31, 2017. The Revolving Line of Credit also bears a commitment fee on the average daily unused portion of the Revolving Credit Facility of 0.35% per annum.


29

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



Acquisition Facility

On February 28, 2017, the Company entered into a credit agreement, or Acquisition Credit Agreement, with Freddie Mac through Key Bank to obtain an acquisition revolving credit facility, or Acquisition Facility, with a maximum borrowing capacity of $200 million. The purpose of the Acquisition Facility is to finance acquisitions of multifamily communities and student housing communities. The maximum borrowing capacity on the Acquisition Facility may be increased at the Company's request up to $300 million at any time prior to March 1, 2021. The Acquisition Facility accrues interest at a variable rate of one month LIBOR plus a margin of between 1.75% per annum and 2.20% per annum, depending on the type of assets acquired and the resulting property debt service coverage ratio. The Acquisition Facility has a maturity date of March 1, 2022 and has two one-year extension options, subject to certain conditions described therein. At March 31, 2017, unamortized loan fees and closing costs for the establishment of the Acquisition Facility were approximately $0.4 million, which will be amortized over a remaining loan life of approximately 4.9 years. 

Interest Expense

Interest expense, including amortization of deferred loan costs was:
 
 
Three months ended March 31,
 
 
2017
 
2016
 
 
 
 
 
Multifamily communities
 
$
7,407,770

 
$
6,369,125

New Market Properties
 
3,330,253

 
1,327,198

Office buildings
 
1,676,775

 

Student housing communities
 
476,634

 

Interest paid to real estate loan participants
 
670,864

 
428,352

 
 
 
 
 
 
 
13,562,296

 
8,124,675

Revolving Credit Facility and Term Note
 
1,446,407

 
770,155

Interest Expense
 
$
15,008,703

 
$
8,894,830

Future Principal Payments
The Company’s estimated future principal payments due on its debt instruments as of March 31, 2017 were:
Period
 
Future principal payments
 
2017
 
$
122,011,060

(1) 
2018
 
40,961,097

 
2019
 
303,481,061

 
2020
 
60,110,973

 
2021
 
139,326,218

 
thereafter
 
837,397,014

 
 
 
 
 
Total
 
$
1,503,287,423

 
 
 
 
 
(1) Includes the principal amount due of the Company's Revolving Line of Credit of $97.0 million.
10. Income Taxes

The Company elected to be taxed as a REIT effective with its tax year ended December 31, 2011, and therefore, the Company will not be subject to federal and state income taxes after this effective date, so long as it distributes 100% of the Company's annual REIT taxable income (which does not equal net income as calculated in accordance with GAAP and determined without regard for the deduction for dividends paid and excluding net capital gains) to its shareholders. For the period preceding this election date, the Company's operations resulted in a tax loss. As of December 31, 2010, the Company had deferred federal and state tax assets totaling approximately $298,100, none of which were based upon tax positions deemed to be uncertain. These deferred tax assets will most likely not be used since the Company elected REIT status; therefore, management has determined that a 100% valuation allowance is appropriate as of March 31, 2017 and December 31, 2016.



30


11. Commitments and Contingencies

On March 28, 2014, the Company entered into a payment guaranty in support of its Manager's new eleven-year office lease, which began on October 9, 2014. As of March 31, 2017, the amount guarantied by the Company was $6.1 million and is reduced by $567,868 per lease year over the term of the lease.
Certain officers and employees of the Manager have been assigned company credit cards. As of March 31, 2017, the Company guarantied up to $640,000 on these credit cards.
The Company is otherwise currently subject to neither any known material commitments or contingencies from its business operations, nor any material known or threatened litigation.

A total of approximately $3.9 million of combined asset management and general and administrative expense fees related to the acquired properties as of March 31, 2017 have been deferred by the Manager, of which $3.5 million remains contingent at March 31, 2017. The Company will recognize any contingent fees in future periods to the extent, if any, it determines that it is probable that the estimated net sale proceeds would exceed the hurdles listed above.

At March 31, 2017, the Company had unfunded balances on its real estate loan portfolio of approximately $59.8 million.

12. Segment Information

The Company's Chief Operating Decision Maker, or CODM, evaluates the performance of the Company's business operations and allocates financial and other resources by assessing the financial results and outlook for future performance across four distinct segments: multifamily communities, real estate related financing, New Market Properties and office buildings.

Multifamily Communities - consists of the Company's portfolio of owned residential multifamily communities and student housing properties.

Financing - consists of the Company's portfolio of real estate loans, bridge loans, and other instruments deployed by the Company to partially finance the development, construction, and prestabilization carrying costs of new multifamily communities and other real estate and real estate related assets. Excluded from the financing segment are financial results of the Company's Dawson Marketplace grocery-anchored shopping center real estate loan.

New Market Properties - consists of the Company's portfolio of grocery-anchored shopping centers, which are owned by New Market Properties, LLC, a wholly-owned subsidiary of the Company, as well as the financial results from the Company's grocery-anchored shopping center real estate loans.

Office Buildings - consists of the Company's portfolio of office buildings.

The CODM monitors net operating income (“NOI”) on a segment and a consolidated basis as a key performance measure for its operating segments. NOI is defined as rental and other property revenue from real estate assets plus interest income from its loan portfolio less total property operating and maintenance expenses, property management fees, real estate taxes, property insurance, and general and administrative expenses. The CODM uses NOI as a measure of operating performance because it provides a measure of the core operations, rather than factoring in depreciation and amortization, financing costs, acquisition expenses, and other expenses generally incurred at the corporate level.  

The following tables present the Company's assets, revenues, and NOI results by reportable segment, as well as a reconciliation from NOI to net income (loss). The assets attributable to 'Other' primarily consist of  deferred offering costs recorded but not yet reclassified as reductions of stockholders' equity and cash balances at the Company and Operating Partnership levels.

 
 
March 31, 2017
 
December 31, 2016
 
 
 
 
 
Assets:
 
 
 
 
Multifamily communities
 
$
1,272,361,126

 
$
1,166,766,664

Financing
 
388,276,833

 
379,070,918

New Market Properties
 
571,284,399

 
579,738,707

Office buildings
 
296,479,702

 
285,229,700

Other
 
16,027,282

 
10,026,613

Consolidated assets
 
$
2,544,429,342

 
$
2,420,832,602



31

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


 
Total capitalized expenditures (inclusive of additions to construction in progress, but exclusive of the purchase price of acquisitions) for the three months ended March 31, 2017 and 2016 were as follows:

 
 
March 31, 2017
 
March 31, 2016
 
 
 
 
 
Capitalized expenditures:
 
 
 
 
Multifamily communities
 
$
2,373,480

 
$
1,293,507

New Market Properties
 
321,925

 
676,883

Office buildings
 
9,730,318

 

Total
 
$
12,425,723

 
$
1,970,390


 
 
 
 
Three months ended March 31,
 
 
 
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Multifamily communities
 
 
 
$
32,120,081

 
$
26,982,042

Financing
 
 
 
12,332,051

 
9,209,926

New Market Properties
 
 
 
13,435,005

 
5,543,813

Office buildings
 
 
 
8,674,198

 

Consolidated revenues
 
 
 
$
66,561,335

 
$
41,735,781

 
 
 
 
 
 
 
Segment net operating income (Segment NOI)
 
 
 
 
 
 
 
 
 
 
Multifamily communities
 
 
 
$
17,328,800

 
$
14,287,754

Financing
 
 
 
12,332,051

 
9,209,926

New Market Properties
 
 
 
9,370,842

 
4,158,484

Office buildings
 
 
 
6,218,374

 

 
 
 
 
 
 
 
Consolidated segment net operating income
 
45,250,067

 
27,656,164

 
 
 
 
 
 
 
Interest and loss on early debt extinguishment:
 
 
 
 
Multifamily communities
 
 
 
7,884,404

 
6,369,125

New Market Properties
 
 
 
3,330,253

 
1,327,198

Office buildings
 
 
 
1,676,775

 

Financing
 
 
 
2,117,271

 
1,198,507

Depreciation and amortization:
 
 
 
 
Multifamily communities
 
14,683,932

 
12,655,184

New Market Properties
 
7,040,922

 
2,691,542

Office buildings
 
3,101,335

 

Professional fees
 
526,331

 
668,791

Management fees, net of deferrals
 
4,337,432

 
2,496,485

Acquisition costs:
 
 
 
 
 
 
Multifamily communities
 
(20,559
)
 
2,279,847

New Market Properties
 
25,402

 
422,736

Office buildings
 
4,159

 
61,003

Equity compensation to directors and executives
 
873,102

 
610,425

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

Other
 
 
 
331,888

 
264,811

 
 
 
 
 
 
 
Net income (loss)
 
$
30,061,480

 
$
(3,389,490
)



32

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


13. Income (Loss) Per Share

The following is a reconciliation of weighted average basic and diluted shares outstanding used in the calculation of income (loss) per share of Common Stock:
 
 
 
Three months ended March 31,
 
 
 
2017
 
2016
Numerator:
 
 
 
 
 
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 (A)
 
(999,066
)
 
88,561

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

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

 
$
(11,184,115
)
 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted average number of shares of Common Stock - basic
 
26,936,266

 
22,983,741

 
Effect of dilutive securities: (D)
 
 
 
 
 
Warrants
 

 

 
Class B Units
 

 

 
Unvested restricted stock
 

 

 
RSUs
 

 

 
Weighted average number of shares of Common Stock - diluted
 
26,936,266

 
22,983,741

 
 
 
 
 
 
 
Net loss per share of Common Stock attributable to
 
 
 
 
 
common stockholders, basic and diluted
 
$
0.54

 
$
(0.49
)

(A) The Company's outstanding Class A Units of the Operating Partnership (903,371 and 886,520 Units at March 31, 2017 and 2016, respectively) contain rights to distributions in the same amount per unit as for dividends declared on the Company's Common Stock. The impact of the Class A Unit distributions on earnings per share has been calculated using the two-class method whereby earnings are allocated to the Class A Units based on dividends declared and the Class A Units' participation rights in undistributed earnings.

(B) The Company’s shares of Series A Preferred Stock outstanding accrue dividends at an annual rate of 6% of the stated value of $1,000 per share, payable monthly. The Company had 987,329 and 583,110 outstanding shares of Series A Preferred Stock at March 31, 2017 and 2016, respectively.

(C) The Company's outstanding unvested restricted share awards (7,749 and 7,536 shares of Common Stock at March 31, 2017 and 2016, respectively) contain non-forfeitable rights to distributions or distribution equivalents. The impact of the unvested restricted share awards on earnings per share has been calculated using the two-class method whereby earnings are allocated to the unvested restricted share awards based on dividends declared and the unvested restricted shares' participation rights in undistributed earnings. Given the Company incurred a net loss from continuing operations for the three-month periods ended March 31 2017 and 2016, the dividends declared for that period are adjusted in determining the calculation of loss per share of Common Stock since the unvested restricted share awards are defined as participating securities.

(D) Potential dilution from (i) warrants outstanding from issuances of Units from our Series A Preferred Stock offerings that are potentially exercisable into 17,286,660 shares of Common Stock; (ii) 345,789 Class B Units; (iii) 7,749 shares of unvested restricted common stock; and (iv) 25,700 outstanding RSUs are excluded from the diluted shares calculations because the effect was antidilutive. Class A Units were excluded from the denominator because earnings were allocated to non-controlling interests in the calculation of the numerator.



33

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


14. Pro Forma Financial Information (unaudited)

The Company’s condensed pro forma financial results assume the following acquisitions were hypothetically completed on January 1, 2015:
Baldwin Park
Southeastern Six Portfolio
Crosstown Walk
The Market at Victory Village
Overton Rise
Lakeland Plaza
525 Avalon Park
Sunbelt Seven Portfolio
North by Northwest
Champions Village
City Vista
Brookwood Office
Sorrel
Galleria 75
Wade Green Village
Three Ravinia

The Company’s condensed pro forma financial results were:
 
 
 
 
Three months ended March 31,
 
 
 
 
2017
 
2016
Pro forma:
 
 
 
 
 
Revenues
 
$
66,818,016

 
$
63,579,039

 
 
 
 
 
 
 
 
Net income (loss)
 
$
32,659,809

 
$
(4,640,063
)
 
 
 
 
 
 
 
 
Net income (loss) attributable to the Company
 
$
31,574,301

 
$
(4,508,069
)
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
 
$
17,186,549

 
$
(12,433,578
)
 
 
 
 
 
 
 
 
Net income (loss) per share of Common Stock
 
 
 
 
 
attributable to common stockholders,
 
 
 
 
 
Basic and diluted
 
$
0.64

 
$
(0.54
)
 
 
 
 
 
 
 
 
Weighted average number of shares of Common Stock outstanding,
 
 
 
 
 
Basic and diluted
 
26,936,266

 
22,983,741


Material nonrecurring pro forma adjustments which were directly attributable to these business combinations included the pro forma removal of all acquisition costs incurred from the actual historical periods of recognition of approximately $2.7 million for the three-month period ended March 31, 2016. Effective January 1, 2017, we adopted Accounting Standard Update 2017-01, which requires acquisition costs for asset acquisitions to be capitalized and and amortized rather than expensed as incurred. These pro forma results are not necessarily indicative of what historical performance would have been had these business combinations been effective as of the hypothetical acquisition dates listed above, nor should they be interpreted as expectations of future results.

15. Fair Values of Financial Instruments

Fair value is defined as the price at which an asset or liability is exchanged between market participants in an orderly transaction at the reporting date. The Company’s cash equivalents, notes receivable, accounts receivable and payables and accrued expenses all approximate fair value due to their short term nature.

The following tables provide estimated fair values of the Company’s financial instruments. The carrying values of the Company's real estate loans include accrued interest receivable from additional interest or exit fee provisions and are presented net of deferred loan fee revenue, where applicable.



34

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


 
As of March 31, 2017
 
Carrying value
 
 
 
Fair value measurements
using fair value hierarchy
 
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
 
 
 
 
 
 
 
 
Real estate loans (1)
$
339,426,151

 
$
381,814,461

 
$

 
$

 
$
381,814,461

Notes receivable and line of credit receivable
38,895,747

 
38,895,747

 

 

 
38,895,747

 
$
378,321,898

 
$
420,710,208

 
$

 
$

 
$
420,710,208

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Mortgage notes payable (2)
$
1,395,287,423

 
$
1,392,568,430

 
$

 
$

 
$
1,392,568,430

Revolving credit facility
97,000,000

 
97,000,000

 

 

 
97,000,000

Term loan
11,000,000

 
11,000,000

 

 

 
11,000,000

Loan participation obligations
18,295,509

 
18,827,647

 

 

 
18,827,647

 
 
 
 
 
 
 
 
 
 
 
$
1,521,582,932

 
$
1,519,396,077

 
$

 
$

 
$
1,519,396,077

 
As of December 31, 2016
 
Carrying value
 
 
 
Fair value measurements
using fair value hierarchy
 
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
 
 
 
 
 
 
 
 
Real estate loans (1)
$
332,761,068

 
$
374,856,749

 
$

 
$

 
$
374,856,749

Notes receivable and line of credit receivable
37,615,675

 
37,615,675

 

 

 
37,615,675

 
$
370,376,743

 
$
412,472,424

 
$

 
$

 
$
412,472,424

Financial Liabilities:
 
 
 
 
 
 
 
 
 
Mortgage notes payable (2)
$
1,327,878,112

 
1,314,966,652

 
$

 
$

 
$
1,314,966,652

Revolving credit facility
127,500,000

 
127,500,000

 

 

 
127,500,000

Term loan
11,000,000

 
11,000,000

 

 

 
11,000,000

Loan participation obligations
20,761,819

 
21,500,448

 

 

 
21,500,448

 
$
1,487,139,931

 
$
1,474,967,100

 
$

 
$

 
$
1,474,967,100


(1) The carrying value of real estate assets includes the Company's balance of the Palisades, Green Park, Encore and Stadium Village real estate loans, which includes the amounts funded by unrelated participants. The loan participation obligations are the amounts due the participants under these arrangements. Accrued interest included in the carrying values of the Company's real estate loans was approximately $23.4 million and $21.9 million at March 31, 2017 and December 31, 2016, respectively.

(2) The carrying value of mortgage notes payable consists of the principal amounts due reduced by any unamortized deferred loan issuance costs.

The fair value of the real estate loans within the level 3 hierarchy are comprised of estimates of the fair value of the notes, which were developed utilizing a discounted cash flow model over the remaining terms of the notes until their maturity dates and utilizing discount rates believed to approximate the market risk factor for notes of similar type and duration. The fair values also contain a separately-calculated estimate of any applicable additional interest payment due the Company at the maturity date of the loan, based on the outstanding loan balances at March 31, 2017, discounted to the reporting date utilizing a discount rate believed to be appropriate for multifamily development projects.

The fair values of the fixed rate mortgages on the Company’s properties were developed using market quotes of the fixed rate yield index and spread for four, five, seven, ten and 35 year notes as of the reporting date. The present values of the cash flows


35

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


were calculated using the original interest rate in place on the fixed rate mortgages and again at the current market rate. The difference between the two results was applied as a fair market adjustment to the carrying value of the mortgages.

16. Subsequent Events

Between April 1, 2017 and April 30, 2017, the Company issued 13,313 Units and collected net proceeds of approximately $12.0 million after commissions and fees under its $1.5 Billion Unit Offering. Between April 1, 2017 and April 30, 2017, the Company issued 4,338 units and collected net proceeds of approximately $4.2 million after commissions and fees under the mShares offering.

On April 17, 2017, the Company declared a quarterly dividend on its Common Stock of $0.235 per share, payable on July 14, 2017 to stockholders of record on June 15, 2017.

On April 20, 2017, the Company closed on a loan investment of up to approximately $31.5 million to acquire a 6.5 acre site located in San Jose, California that is currently zoned to provide for up to 551 multifamily units and approximately 37,000 square feet of commercial space.

On April 21, 2017 the Company closed on the acquisition of a 80,018 square foot grocery-anchored shopping center located in the Atlanta, Georgia, market. The allocation of this transaction to the fair value of individual assets and liabilities is not presented as the calculations of the allocation were not complete at the date of filing of this Quarterly Report on Form 10-Q.

On April 26, 2017 the Company closed on the acquisition of a 242-unit multifamily community located in Louisville, Kentucky. The allocation of this transaction to the fair value of individual assets and liabilities is not presented as the calculations of the allocation were not complete at the date of filing of this Quarterly Report on Form 10-Q.

On May 3, 2017, the Company granted 24,408 shares of restricted Common Stock to its independent board members, as annual compensation for service on its board of directors. The aggregate fair value of this award, which vests on a straight-line basis over four consecutive quarterly tranches, was $360,018, which was based on the closing price of the Common Stock on the prior business day.



36


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

Significant Developments

During the first quarter 2017, we acquired the following properties:
Property
 
Location
 
Type
 
Units
 
Beds
 
 
 
 
 
 
 
 
 
Regents on University
 
Tempe, AZ
 
Student housing project
 
225

 
640

Broadstone at Citrus Village
 
Tampa, FL
 
Multifamily community
 
296

 
n/a

Retreat at Greystone
 
Birmingham, AL
 
Multifamily community
 
312

 
n/a

Founders Village
 
Williamsburg, VA
 
Multifamily community
 
247

 
n/a

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,080

 
 

The aggregate purchase price of these acquired properties was approximately $195.1 million.

During the first quarter 2017, we sold our Sandstone Creek and Ashford Park multifamily communities located in Kansas City, Kansas and Atlanta, Georgia, respectively, and collected aggregate gross proceeds of $113.6 million. We realized an average annualized return on these two properties of approximately 19.1%.

Our net income per share of $0.54 for the three-month period ended March 31, 2017 was primarily driven by an aggregate realized gain on the sale of our Sandstone Creek and Ashford Park multifamily communities of approximately $30.7 million. The proceeds from the sale of Ashford Park were deposited into a 1031 exchange account to be used for the acquisition of multiple assets in the future. The 1031 mechanism will allow us to defer the tax liability on the sale of this asset and more efficiently redeploy our capital.

As of March 31, 2017, we had cumulatively issued 989,408 units and collected net proceeds of approximately $891.2 million from our offering of our Series A Redeemable Preferred Stock from our Primary Series A Offering and Follow-on Series A Offering. As of March 31, 2017, we had cumulatively issued 12,164 units and and collected net proceeds of approximately $11.0 million from our offerings of Series A Redeemable Preferred Stock from our $1.5 Billion Unit Offering. As of March 31, 2017, we had cumulatively issued 1,635 shares of Series M Preferred Stock and and collected net proceeds of approximately $1.6 million from our mShares Offering. Our Follow-On Series A Offering sold its entire allotment of $900 million Units and was closed on February 14, 2017. Our Series A Redeemable Preferred Stock and our new equity offerings are discussed in detail in the Liquidity and Capital Resources section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

In addition, during this same period, we issued 336,000 shares of Common Stock upon the exercise of Warrants issued in our offerings of our Series A Redeemable Preferred Stock and collected net proceeds of approximately $3.8 million from those exercises.

Forward-looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects," "assumes," "goals," "guidance," "trends" and similar expressions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon our current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following:

•     our business and investment strategy;
•     our projected operating results;
actions and initiatives of the U.S. Government and changes to U.S. Government policies and the execution and impact of these actions, initiatives and policies;
•     the state of the U.S. economy generally or in specific geographic areas;
•     economic trends and economic recoveries;
our ability to obtain and maintain financing arrangements, including through the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac;
•     financing and advance rates for our target assets;

37


•     our expected leverage;
•     changes in the values of our assets;
•     our expected portfolio of assets;
•     our expected investments;
•     interest rate mismatches between our target assets and our borrowings used to fund such investments;
•     changes in interest rates and the market value of our target assets;
•     changes in prepayment rates on our target assets;
•     effects of hedging instruments on our target assets;
•     rates of default or decreased recovery rates on our target assets;
•     the degree to which our hedging strategies may or may not protect us from interest rate volatility;
•     impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;
•     our ability to maintain our qualification as a real estate investment trust, or REIT, for U.S. federal income tax purposes;
•     our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended;
•     availability of investment opportunities in mortgage-related and real estate-related investments and securities;
•     availability of qualified personnel;
•     estimates relating to our ability to make distributions to our stockholders in the future;
•     our understanding of our competition;
•     market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy;
weakness in the national, regional and local economies, which could adversely impact consumer spending and retail sales and in turn tenant demand for space and could lead to increased store closings;
changes in market rental rates;
changes in demographics (including the number of households and average household income) surrounding our shopping centers;
adverse financial conditions for grocery anchors and other retail, service, medical or restaurant tenants;
continued consolidation in the grocery-anchored shopping center sector;
excess amount of retail space in our markets;
reduction in the demand by tenants to occupy our shopping centers as a result of reduced consumer demand for certain retail formats;
the growth of super-centers and warehouse club retailers, such as those operated by Wal-Mart and Costco, and their adverse effect on traditional grocery chains;
our ability to aggregate a critical mass of grocery-anchored shopping centers or to spin-off, sell or distribute them;
the impact of an increase in energy costs on consumers and its consequential effect on the number of shopping visits to our centers; and
consequences of any armed conflict involving, or terrorist attack against, the United States.

Forward-looking statements are found throughout this "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, or SEC, we do not have any intention or obligation to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date of this report. The forward-looking statements should be read in light of the risk factors indicated in the section entitled "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 and as may be supplemented by any amendments to our risk factors in our subsequent quarterly reports on Form 10-Q and other reports filed with the SEC, which are accessible on the SEC’s website at www.sec.gov.
General
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial position. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.


38


Overview

We are an externally managed Maryland corporation formed primarily to acquire and operate multifamily properties in select targeted markets throughout the United States. As part of our business strategy, we may enter into forward purchase contracts or purchase options for to-be-built multifamily communities and we may make real estate related loans, provide deposit arrangements, or provide performance assurances, as may be necessary or appropriate, in connection with the construction of multifamily communities and other properties. As a secondary strategy, we 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 our assets in other real estate related investments, including other income-producing property types, senior mortgage loans, subordinate loans or real estate loans secured by interests in other income-producing property types, or membership or partnership interests in other income-producing property types as determined by Preferred Apartment Advisors, LLC, or our Manager, as appropriate for us. Our investment guidelines limit our investment in these non-multifamily assets to 20% of our assets, subject to increases unanimously approved by our board of directors. On December 12, 2016, our board of directors temporarily suspended this 20% limit. Our board of directors will review and discuss the reinstatement of the 20% limit following a spin-off, sale or distribution of our grocery-anchored shopping centers, if any such transaction occurs.

We seek to generate returns for our stockholders by taking advantage of the current environment in the real estate market and the United States economy by acquiring multifamily assets and shopping centers in our targeted markets.  The current economic environment still provides many challenges for new development, which provides opportunity for current multifamily product to potentially enjoy stable occupancy rates and rising rental rates as the overall economy continues to grow.  As the real estate market and economy stabilize, we intend to employ efficient management techniques to grow income and create asset value.

As market conditions change over time, we intend to adjust our investment strategy to adapt to such changes as appropriate. We continue to believe there are abundant opportunities among our target assets that currently present attractive risk-return profiles. However, in order to capitalize on the investment opportunities that may be present in the various other points of an economic cycle, we may expand or change our investment strategy and target assets. We believe that the diversification of the portfolio of assets that we intend to acquire, our ability to acquire and manage our target assets, and the flexibility of our strategy will position us to generate attractive total returns for our stockholders in a variety of market conditions.

We elected to be taxed as a REIT under the Code effective with our tax year ended December 31, 2011. We also intend to operate our business in a manner that will permit us to maintain our status as a REIT and our exemption from registration under the Investment Company Act. We have and will continue to conduct substantially all of our operations through our Operating Partnership in which we owned an approximate 96.8% interest as of March 31, 2017. New Market Properties, LLC owns and conducts the business of our grocery-anchored shopping centers. Preferred Office Properties, LLC owns and conducts the business of our portfolio of office buildings. Preferred Campus Communities, LLC was formed to acquire off-campus student housing communities. Each of these entities are wholly-owned subsidiaries of the Operating Partnership,

Industry Outlook

We believe continued, albeit potentially sporadic, improvement in the United States' economy will continue for 2017, with continued job growth and improvements in consumer confidence.  The new presidential administration certainly creates more uncertainty in the direction and trajectory of economic growth.  We believe a growing economy, improved job market and increased consumer confidence should help create favorable conditions for the multifamily sector. If the economy continues to improve, we expect current occupancy rates generally to remain stable, on an annual basis, as the current level of occupancy nationwide will be difficult to measurably improve upon.

                The pipeline of new multifamily construction, although increasing nationwide, has been generally in line with demand in most of our markets. Nationally, new multifamily construction is currently at or above average historical levels in most markets. Even with the increase in new supply of multifamily properties, recent job growth and demographic trends have led to reasonable levels of absorption in most of our markets, which in many of our markets has offset or exceeded the new supply coming online.  The absorption rate has led to generally stable occupancy rates with increases in rental rates in most of our markets. We believe the supply of new multifamily construction will not increase dramatically as the constraints in the market (including availability of quality sites and the difficult permitting and entitlement process) will contain further increases in multifamily supply.  It may even be the case that new supply peaks in 2017 and these constraints cause a decline in new multifamily “starts” in 2018 and 2019.  As an offset, the new presidential administration may loosen banking regulation standards, which could cause an increase in

39


available capital for new construction.  Any relaxing of these regulations could lead to more capital for new multifamily development and an increase in supply.

                We believe that a potential reversal in the recent trend of declining cap rates in the multifamily sector may be in the offing. The rising cost of private capital, less debt capital available from traditional commercial banks for real estate loans and a softening of the market in some “Gateway” cities have all put pressure on the pricing dynamic in multifamily transactions.  This could lead to an increase in capitalization rates and a softening price environment, and if this were to occur, then our pipeline of candidate multifamily property acquisitions with returns meeting our investment objectives may expand. 

                We believe that the grocery-anchored shopping center sector benefits from many of the same improving metrics as the multifamily sector, namely improved economy and job and wage growth. More specifically, the types of centers we own and plan to acquire are primarily occupied by grocery stores, service uses, medical providers and restaurants. We believe that these businesses are significantly less impacted by e-commerce than some other retail businesses, and that grocery anchors typically generate repeat trips to the center. We expect that improving macroeconomic conditions, coupled with continued population growth in the suburban markets where our retail properties are located, will create favorable conditions for grocery shopping and other uses provided by grocery-anchored shopping centers. With moderate supply growth following a period of historically low retail construction starts, we believe our centers, which are all generally located in Sun Belt markets, are well positioned to have solid operating fundamentals. The debt market for our grocery-anchored shopping center assets remains strong. Life insurance companies have continued to demonstrate a specific interest in our strategy and we continue to see new participants in the market. Spreads and rates are generally comparable to those for multifamily properties, however, the leverage levels on the retail assets may be slightly lower than the levels on our multifamily assets. During the first quarter we have seen cap rate compression on acquisitions we have been pursuing inside our grocery anchored strategy. We believe, notwithstanding the increase in longer-term U.S. Treasury yields since the election, that the overall capital markets are pricing in stronger rent growth and higher long term occupancy levels, especially so in the grocery anchored sector space. The result of this is that increased capital flows are moving into the grocery anchored sector and investors are willing to accept lower yields to do so, thus putting upward pressure on prices for attractive acquisition opportunities inside our grocery anchored strategy.

                Favorable U.S. Treasury yields and competitive lender spreads have created a generally favorable borrowing environment for multifamily owners and developers. Given the uncertainty around the world's financial markets, fueled in part by the new US President and how his policies may affect domestic and international markets, investors have been wary in their approach to debt markets.  Recent US bond market movements have moderated indexes and the previous rise in rates has pulled back by 20-40 basis points and spreads from the government-sponsored entity, or GSE, lenders have been relatively stable to slightly lower.  Other lenders in the market have had stable to lower rates as well. As the year goes on, we may well see a decline in spreads as the investment community becomes more comfortable with the direction of the market and the US economy. Even with the recent volatility in U.S. Treasury rates, we expect the market to continue to remain favorable for financing multifamily communities, as the equity and debt markets have generally continued to view the U.S. multifamily sector as a desirable investment. Lending by GSEs could be limited by caps imposed by the Federal Housing and Finance Association, which could lead to higher lending costs, although we expect such higher costs to be offset by increased lending activity by other market participants; however, such other market participants may have increased costs and stricter underwriting criteria.

                We believe the combination of a difficult regulatory environment and high underwriting standards for commercial banks will continue to create a choppy market for new construction financing.  In addition, we believe the continued hesitance among many prospective homebuyers to believe the net benefits of home ownership are greater than the benefit of the flexibility offered through renting will continue to work in the existing multifamily sector's favor.  We also believe there will be a continued boost to demand for multifamily rental housing due to the ongoing entry of the “millennial” generation, the sons and daughters of the baby-boom generation, into the workforce. This generation has a higher statistical propensity to rent their home and stay a renter deeper into their life-cycle, resulting in an increase in demand for rental housing. This combination of factors should generally result in gradual increases in market rents, lower concessions and opportunities for increases in ancillary fee income.
Critical Accounting Policies
Below is a discussion of the accounting policies that management believes are critical. We consider these policies critical because they involve significant management judgments, assumptions and estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.

40


Real Estate
Cost Capitalization. Investments in real estate properties are carried at cost and depreciated using the straight-line method over the estimated useful lives of 30 to 50 years for buildings, 5 to 20 years for building and land improvements and 5 to 10 years for computers, furniture, fixtures and equipment. Acquisition costs are generally expensed as incurred for transactions that are deemed to be business combinations. ASU 2017-01, which was released in January 2017, changes 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. We adopted ASU 2017-01 as of January 1, 2017 and believe our future acquisitions of multifamily communities, office buildings, grocery-anchored shopping centers, and student housing communities will generally qualify as asset acquisitions. Pursuant to ASU 2017-01, certain qualifying acquisition costs will be capitalized and amortized rather than expensed as incurred.
Repairs, maintenance and resident turnover costs are charged to expense as incurred and significant replacements and betterments are capitalized and depreciated over the items' estimated useful lives. Repairs, maintenance and resident turnover costs include all costs that do not extend the useful life of the real estate property. We consider the period of future benefit of an asset to determine its appropriate useful life.
Real Estate Acquisition Valuation. We generally recorded the acquisition of income-producing real estate as a business combination through December 31, 2016. In conjunction with our adoption of ASU 2017-01, future acquisitions will require judgment to properly classify these acquisitions as asset acquisitions or business acquisitions.
All assets acquired and liabilities assumed in a business combination are measured at their acquisition-date fair values.
We assess the acquisition-date fair values of all tangible assets, identifiable intangibles and assumed liabilities using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis) and that utilize appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant.
We record above-market and below-market in-place lease values for acquired properties based on the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining average non-cancelable term of the leases. We amortize any recorded above-market or below-market lease values as a reduction or increase, respectively, to rental income over the remaining average non-cancelable term of the respective leases.
Intangible assets include the value of in-place leases, which represents the estimated value of 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. These estimates include estimated carrying costs, such as real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the hypothetical expected lease-up periods. Acquired in-place lease values for multifamily communities are amortized to operating expense over the average remaining non-cancelable term of the respective in-place leases.
The fair values of in-place leases for grocery-anchored shopping centers and office buildings 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. 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. The capitalized above-market leases and in place leases 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 assets, identifiable intangibles and assumed liabilities requires us to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, the number of years the property will be held for investment and market interest rates. The use

41


of different assumptions would result in variations of the values of our acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact their subsequent amortization and ultimately our net income.
Impairment of Real Estate and Related Intangible Assets. We monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate and related intangible assets may not be recoverable or realized. When conditions suggest that an asset group may be impaired, we compare its carrying value to its estimated undiscounted future cash flows, including proceeds from its eventual disposition. If, based on this analysis, we do not believe that we will be able to recover the carrying value of an asset group, we record an impairment to the extent that the carrying value exceeds the estimated fair value of the asset group. Fair market value is determined based on a discounted cash flow analysis. This analysis requires us to use future estimates of net operating income, expected hold period, capitalization rates and discount rates. The use of different assumptions would result in variations of the values of the assets which could impact the amount of our net income and our assets on our balance sheet.

Real Estate Loans

We extend loans for purposes such as to to acquire land and to provide partial financing for the development of multifamily residential communities, student housing communities, grocery-anchored shopping centers and office buildings and for other real estate or real estate related projects. Certain of these loans we extend include characteristics such as exclusive options to purchase the project within a specific time window following expected 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 fall under the definition of a variable interest entity, or VIE, and thus trigger consolidation consideration. We consider the facts and circumstances pertinent to each loan, including the relative amount of financing we are contributing to the overall project cost, decision making rights or control we hold and our rights to expected residual gains or our obligations to absorb expected residual losses from the project. If we are deemed to be the primary beneficiary of a VIE due to holding a controlling financial interest, the majority of decision making control, or by other means, consolidation of the VIE would be required. Arriving at these conclusions requires us to make significant assumptions and judgments concerning each project, especially with regard to our estimates of future market capitalization rates and property net operating income projections. Additionally, we analyze each loan arrangement and utilize these same assumptions and judgments for consideration of whether the loan qualifies for accounting as a loan or as an investment in a real estate development project.

Impairment of Loans and Notes Receivable. We monitor the progress of underlying real estate development projects which are partially financed by our real estate loans and certain of our notes receivable. Draws of interest included in these loans and notes are monitored versus the budgeted amounts, and the progress of projects are monitored versus the estimates in the project timeline. Changes in circumstances could indicate that the carrying amounts of our loans and notes receivable may not be recoverable or realized. Receivables are deemed to be impaired when conditions arise that cause the collection of all interest and principal amounts due according to the terms of the instrument to be improbable. If, based on this analysis, we do not believe that we will be able to collect the amounts due from a loan or note, we record a valuation allowance to the extent that the carrying value exceeds its estimated fair value. Fair market value is determined based on a discounted cash flow analysis and is substantiated by an independent appraisal of the collateral if necessary. This analysis requires us to use future estimates of progress of a project versus its budget, local and national economic conditions and discount rates. The use of different assumptions would result in variations of the values of the loans and notes which could impact the amount of our net income and our assets on our consolidated balance sheets.

Revenue Recognition

We generally lease apartment units under leases with terms of thirteen months or less. We generally lease grocery-anchored shopping centers and office building suites for rental terms of several years. Rental revenue, net of concessions, is recognized on a straight-line basis over the term of the lease. Differences from the straight-line method, which recognize the effect of any up-front concessions and other adjustments ratably over the lease term, are recorded in the appropriate period, to the extent that adjustments to the straight-line method are material.

Revenue from reimbursements of grocery-anchored shopping center and office building tenants' share of real estate taxes, insurance and common area maintenance, or CAM, costs are recognized as the respective costs are incurred in accordance with the lease agreements. We estimate the collectability of the 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 income on a straight-line basis, by taking into consideration our historical write-off experience, tenant credit-worthiness, current economic trends, and remaining lease terms.


42


We recognize gains on sales of real estate either in total or deferred for a period of time, depending on whether a sale has been consummated, the extent of the buyer’s investment in the property being sold, whether our receivable, if any, is subject to future subordination, and the degree of our continuing involvement with the property after the sale, if any. If the criteria for profit recognition under the full-accrual method are not met, we defer gain recognition and account for the continued operations of the property by applying the reduced profit, deposit, installment or cost recovery method, as appropriate, until the appropriate criteria are met.

Other income, including interest earned on our cash, is recognized as it is earned. We recognize interest income on real estate loans on an accrual basis over the life of the loan using the effective interest method. Loan origination fees received from borrowers as incentive to extend the real estate loans, (excluding the amounts paid to the Manager) are amortized over the life of the loan as an additive adjustment to interest income. We stop accruing interest on loans when circumstances indicate that it is probable that the ultimate collection of all principal and interest due according to the loan agreement will not be realized, 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. Interest accrual on real estate loan investments is resumed once interest and principal payments become current.

Equity Compensation

We calculate the fair value of equity compensation instruments such as Class B Units and restricted stock units 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, utilizing a Monte Carlo simulation model, which is performed by an independent third party. The compensation expense is recognized on a straight-line basis over the vesting period(s) and forfeitures are recognized as they occur.

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. We are currently evaluating the pending guidance but do not believe the adoption of ASU 2014-09 will have a material impact on our results of operations or financial condition, primarily because most of our revenue is derived from rental operations, to which this standard is not applicable. We do provide significant non-rental services to our residents and tenants related to ancillary services and common area reimbursements. We do 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 include an elimination of the disclosure requirement of the significant inputs and assumptions underlying the fair value calculations of our 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 our 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. We are currently evaluating the impacts this standard will have on our results of operations and financial condition but do not believe any material impact will result from its adoption since we have 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

43


allowance until a loss was probable of occurring. The standard is effective for us on January 1, 2020. We are currently evaluating methods of deriving initial valuation accounts to be applied to our real estate loan investment portfolio and are continuing to evaluate the pending guidance but do not believe the adoption of ASU 2016-13 will have a material impact on our results of operations or financial condition, since we have not yet experienced a credit loss related to any of our 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 our 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 us on January 1, 2018. The adoption of ASU 2016-15 will not impact our consolidated financial statements, since our 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. We plan to adopt ASU 2016-18 on January 1, 2018. We currently report changes in restricted cash within the investing activities section of our consolidated statements of cash flows and do not expect the adoption of ASU 2016-18 to impact our results of operations or financial condition.

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. We adopted ASU 2017-01 as of January 1, 2017. We believe our 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 we reported higher reported net income available to common stockholders resulting from adoption of ASU 2017-01 than we 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. We are currently evaluating the impact the adoption of this accounting standard will have on our financial statements.

Results of Operations

Certain financial highlights of our results of operations for the first quarter 2017 were:
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
 
 
 
 
2017
 
2016
 
% change
 
 
Revenues
$
66,561,335

 
$
41,735,781

 
59.5
%
 
 
 
 
 
 
 
 
 
 
Per share data:
 
 
 
 
 
 
 
Net income (loss) (1)
$
0.54

 
$
(0.49
)
 

 
 
 
 
 
 
 
 
 
 
FFO (2)
$
0.35

 
$
0.17

 
105.9
%
 
 
 
 
 
 
 
 
 
 
Core FFO (2)
$
0.36

 
$
0.30

 
20.0
%
 
 
 
 
 
 
 
 
 
 
Dividends (3)
$
0.22

 
$
0.1925

 
14.3
%
 
 
 
 
 
 
 
 
 
(1) Per weighted average share of Common Stock outstanding for the periods indicated.
(2) FFO and Core FFO are presented per weighted average share of Common Stock and Class A Unit in our Operating Partnership outstanding for the periods indicated.
(3) Per share of Common Stock and Class A Unit outstanding.
    
Net income per share for the three months ended March 31, 2017 reflects a realized gain on the sale of Sandstone Creek and Ashford Park of approximately $30.7 million, or $1.14 per share. Funds from operations ("FFO") in 2016 reflect acquisition-related

44


costs of approximately $2.8 million. In 2017, the majority of these types of costs are capitalized and depreciated over the life of the acquired assets. Core Funds From Operations Attributable to Common Stockholders and Unitholders ("Core FFO") excludes acquisition costs and certain other costs not representative of our ongoing operations.

The operational highlights of our first quarter 2017 operating results included:

During the first quarter 2017, we acquired the following properties:
 
 
 
 
 
 
 
 
 
 
 
 
Property
 
Location
 
Type
 
Units
 
Beds
 
 
 
 
 
 
 
 
 
 
 
 
 
Regents on University
 
Tempe, AZ
 
Student housing property

225

 
640

 
 
Broadstone at Citrus Village
 
Tampa, FL
 
Multifamily community
 
296

 
n/a

 
 
Retreat at Greystone
 
Birmingham, AL
 
Multifamily community
 
312

 
n/a

 
 
Founders Village
 
Williamsburg, VA
 
Multifamily community
 
247

 
n/a

 
 
 
 
 
 
 
 
1,080

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Our net income per share of $0.54 for the three months ended March 31, 2017 was driven by an aggregate realized gain on the sale of Sandstone Creek and Ashford Park of approximately $30.7 million, or $1.14 per share. The proceeds from one of the properties sold were deposited into a 1031 exchange account to be used for the acquisition of multiple assets in the future. Utilization of a 1031 mechanism allowed us to defer the tax liability on the sale of this asset and more efficiently redeploy our capital. All of the proceeds were redeployed by the end of April 2017.

For the first quarter 2017, our Core FFO payout ratio to our Common Stockholders and Unitholders was approximately 61.7% and our AFFO payout ratio to Common Stockholders and Unitholders was approximately 83.4%. (1) 

For the first quarter 2017, our Core FFO payout ratio (before the deduction of preferred dividends) to our Series A Preferred Stockholders was approximately 59.0% and our AFFO payout ratio (before the deduction of preferred dividends) to our Series A Preferred Stockholders was approximately 66.0%. (1) 

As of March 31, 2017, our total assets were approximately $2.5 billion compared to approximately $1.5 billion as of March 31, 2016, an increase of approximately $1.0 billion, or approximately 65.6%. This growth was driven primarily by the net addition of 25 real estate properties and an increase of approximately $79.0 million of the funded amount of our real estate loan investment portfolio since March 31, 2016.

As of March 31, 2017, the average age of our multifamily communities was approximately 6.9 years, which we believe to be among the youngest in the multifamily REIT industry.

At March 31, 2017, our leverage, as measured by the ratio of our debt to the undepreciated book value of our total assets, was approximately 57.3%.

Cash flow from operations for the quarter ended March 31, 2017 was approximately $18.3 million, an increase of approximately $4.9 million, or 36.5%, compared to approximately $13.4 million for the quarter ended March 31, 2016.

(1) We calculate the Core FFO and AFFO payout ratios to Common Stockholders and Unitholders as the ratio of Common Stock dividends and distributions to Unitholders to Core FFO or AFFO, respectively. We calculate the Core FFO and AFFO payout ratios to Series A Preferred Stockholders as the ratio of Preferred Stock dividends to the sum of Preferred Stock dividends and Core FFO or AFFO, respectively. Since our operations resulted in a net loss from continuing operations for the periods presented, a payout ratio based on net loss is not calculable.


45


 
Owned as of March 31, 2017
 
Potential additions from purchase options in real estate loan investment portfolio (1)
 
Potential total
Multifamily communities:
 
 
 
 
 
Properties
25

 
14

 
39

Units
8,132

 
3,861

 
11,993

Grocery-anchored shopping centers:
 
 
 
 
 
Properties
31

 
1

 
32

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

 
212,800

(2) 
3,508,291

Student housing properties:
 
 
 
 
 
Properties
2

 
8

 
10

Units
444

 
1,874

 
2,318

Beds
1,319

 
5,693

 
7,012

Office buildings:
 
 
 
 
 
Properties
3

 

 
3

Rentable square feet
1,093,832

 

 
1,093,832

 
 
 
 
 
 
(1) We evaluate each project individually and we make no assurance that we will acquire any of the underlying properties from our real estate loan investment portfolio.
(2) Square footage represents area covered by our purchase options and excludes 123,590 square feet owned by the grocery anchor.

Subsequent to Quarter End

On April 17, 2017, we declared a quarterly dividend on our Common Stock of $0.235 per share, payable on July 14, 2017 to stockholders of record on June 15, 2017. This is an increase of $0.015 per share or approximately 6.8% over the quarterly dividend of $0.22 per share paid to common stockholders for the first quarter 2017. This also represents an annualized dividend growth rate of 14.8% since our first dividend following our IPO in April 2011.

On April 20, 2017, we closed on a loan investment of up to approximately $31.5 million to acquire a 6.5 acre site located in San Jose, California that is currently zoned to provide for up to 551 multifamily units and approximately 37,000 square feet of commercial space.

On April 21, 2017 we closed on the acquisition of a 80,018 square foot grocery-anchored shopping center located in the Atlanta, Georgia, market.

On April 26, 2017 we closed on the acquisition of a 242-unit multifamily community located in Louisville, Kentucky.
 
Real Estate Loan Investments

Certain real estate loan investments include limited purchase options and additional amounts of accrued interest, which becomes due in cash to us on the earliest to occur of: (i) the maturity of the loan, (ii) any uncured event of default as defined in the associated loan agreement, (iii) the sale of the project or the refinancing of the loan (other than a refinancing loan by us or one of our affiliates) and (iv) any other repayment of the loan. There are no contingent events that are necessary to occur for us to realize the additional interest amounts. We hold options, but not obligations, to purchase certain of the properties which are partially financed by our real estate loans, as shown in the table below. The option purchase prices are negotiated at the time of the loan closing and are to be calculated based upon market cap rates at the time of exercise of the purchase option, with discounts ranging from between 15 and 60 basis points, depending on the loan.

46


 
 
Purchase option window
 
Total units upon completion (1)
 
Total beds (student housing communities)
Project/Property
 
Begin
 
End
 
 
 
 
 
 
 
 
 
 
 
Multifamily communities:
 
 
 
 
 
 
 
 
Encore
 
1/8/2018
 
5/8/2018
 
340

 
 
Palisades
 
3/1/2018
 
7/31/2018
 
304

 
 
Fusion
 
1/1/2018
 
4/1/2018
 
280

 
 
Green Park
 
11/1/2017
 
2/28/2018
 
310

 
 
Summit Crossing III
 
8/1/2017
 
11/30/2017
 
172

 
 
Overture
 
1/1/2018
 
5/1/2018
 
180

 
 
Aldridge at Town Village
 
11/1/2017
 
2/28/2018
 
300

 
 
Bishop Street
 
10/1/2018
 
12/31/2018
 
232

 
 
Hidden River
 
9/1/2018
 
12/31/2018
 
300

 
 
CityPark II
 
5/1/2018
 
8/31/2018
 
200

 
 
Park 35 on Clairmont
 
S + 90 days (2)
 
S + 150 days (2)
 
271

 
 
Fort Myers
 
N/A (3)
 
N/A (3)
 
224

 
 
Wiregrass
 
S + 90 days (2)
 
S + 150 days (2)
 
392

 
 
360 Forsyth
 
N/A (3)
 
N/A (3)
 
356

 
 
 
 
 
 
 
 
3,861

 
 
Student housing properties:
 
 
 
 
 
 
Haven West
 
N/A
 
N/A
 
160

 
568

Haven 12
 
9/1/2017
 
11/30/2017
 
152

 
536

Stadium Village
 
9/1/2017
 
11/30/2017
 
198

 
792

18 Nineteen
 
10/1/2017
 
12/31/2017
 
217

 
732

Haven South
 
10/1/2017
 
12/31/2017
 
250

 
840

Haven46
 
11/1/2018
 
1/31/2019
 
158

 
542

Haven Northgate
 
10/1/2018
 
12/31/2018
 
427

 
808

Lubbock II
 
11/1/2018
 
1/31/2019
 
140

 
556

Haven Charlotte
 
12/1/2019
 
2/28/2020
 
332

 
887

 
 
 
 
 
 
2,034

 
6,261

 
 
 
 
 
 
 
 
 
New Market Properties:
 
 
 
 
 
 
 
 
Dawson Marketplace
 
12/16/2017
 
12/15/2018
 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5,895

 
 
 
 
 
 
 
 
 
 
 
(1) We evaluate each project individually and we make no assurance that we will acquire any of the underlying properties from our real estate loan investment portfolio.
(2) The option period window begins and ends at the number of days indicated beyond the achievement of a 93% stabilized occupancy rate by the underlying property.
(3) The current land loans are anticipated to be converted to mezzanine loans with purchase option agreements. The units disclosed are projected per site plan.
    

47


Three Months Ended March 31, 2017 compared to 2016

The following discussion and tabular presentations highlight the major drivers behind the line item changes in our results of operations for the three months ended March 31, 2017 versus 2016, as summarized in the tables below:
 
 
Three months ended March 31,
 
Change inc (dec)
 
 
2017
 
2016
 
Amount
 
Percentage
Revenues:
 
 
 
 
 
 
 
 
Rental revenues
 
$
45,363,521

 
$
28,255,599

 
$
17,107,922

 
60.5
 %
Other property revenues
 
8,436,111

 
3,760,083

 
4,676,028

 
124.4
 %
Interest income on loans and notes receivable
 
7,947,811

 
6,942,159

 
1,005,652

 
14.5
 %
Interest income from related parties
 
4,813,892

 
2,777,940

 
2,035,952

 
73.3
 %
Total revenues
 
66,561,335

 
41,735,781

 
24,825,554

 
59.5
 %
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Property operating and maintenance
 
6,538,639

 
4,021,362

 
2,517,277

 
62.6
 %
Property salary and benefits reimbursement to related party
 
3,028,350

 
2,363,463

 
664,887

 
28.1
 %
Property management fees to related parties
 
1,901,783

 
1,228,021

 
673,762

 
54.9
 %
Real estate taxes
 
7,903,801

 
5,173,441

 
2,730,360

 
52.8
 %
General and administrative
 
1,505,510

 
919,952

 
585,558

 
63.7
 %
Equity compensation to directors and executives
 
873,102

 
610,425

 
262,677

 
43.0
 %
Depreciation and amortization
 
24,826,189

 
15,346,726

 
9,479,463

 
61.8
 %
Acquisition and pursuit costs
 
9,002

 
2,763,585

 
(2,754,583
)
 
(99.7
)%
Asset management fees to related parties
 
4,512,514

 
2,766,086

 
1,746,428

 
63.1
 %
Insurance, professional fees and other expenses
 
1,291,404

 
1,306,981

 
(15,577
)
 
(1.2
)%
Total operating expenses
 
52,390,294

 
36,500,042

 
15,890,252

 
43.5
 %
Contingent asset management and general and administrative
 
 
 
 
 
 
 
 
expense fees
 
(175,082
)
 
(269,601
)
 
94,519

 
(35.1
)%
Net operating expenses
 
52,215,212

 
36,230,441

 
15,984,771

 
44.1
 %
 
 
 
 
 
 
 
 
 
Operating income
 
14,346,123

 
5,505,340

 
8,840,783

 
160.6
 %
Interest expense
 
15,008,703

 
8,894,830

 
6,113,873

 
68.7
 %
 
 
 
 
 
 
 
 
 
Net loss before gain on sale of real estate
 
$
(662,580
)
 
$
(3,389,490
)
 
$
2,726,910

 


New Market Properties, LLC

Our New Market Properties, LLC business consists of our portfolio of grocery-anchored shopping centers and our Dawson Marketplace real estate loan supporting a shopping center in the Atlanta, Georgia market. Comparative statements of operations of New Market Properties, LLC for the three months ended March 31, 2017, and 2016 are presented below. These statements of operations include no allocations of corporate overhead or other expenses.


48


 
 
Three months ended March 31,
 
Change inc (dec)
New Market Properties, LLC
 
2017
 
2016
 
Amount
 
Percentage
Revenues:
 
 
 
 
 
 
 
 
Rental revenues

$
9,782,335

 
$
3,873,806

 
$
5,908,529

 
152.5
 %
Other property revenues
 
3,223,018

 
1,159,834

 
2,063,184

 
177.9
 %
Interest income on loans and notes receivable
 
429,652

 
510,173

 
(80,521
)
 
(15.8
)%
Interest income from related parties
 

 

 

 

Total revenues
 
13,435,005

 
5,543,813

 
7,891,192

 
142.3
 %
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Property operating and maintenance
 
1,321,321

 
500,287

 
821,034

 
164.1
 %
Property management fees
 
450,089

 
167,918

 
282,171

 
168.0
 %
Real estate taxes
 
1,964,114

 
597,185

 
1,366,929

 
228.9
 %
General and administrative
 
135,874

 
94,209

 
41,665

 
44.2
 %
Equity compensation to executive
 
104,155

 
19,577

 
84,578

 
432.0
 %
Depreciation and amortization
 
7,040,922

 
2,691,542

 
4,349,380

 
161.6
 %
Acquisition and pursuit costs
 
25,402

 
311,856

 
(286,454
)
 
(91.9
)%
Acquisition fees to related parties
 

 
110,880

 
(110,880
)
 
(100.0
)%
Asset management fees to related parties
 
1,014,718

 
404,139

 
610,579

 
151.1
 %
Insurance, professional fees and other
 
203,089

 
92,187

 
110,902

 
120.3
 %
Total operating expenses
 
12,259,684

 
4,989,780

 
7,269,904

 
145.7
 %
Contingent asset management and general and
 
 
 
 
 
 
 
 
administrative expense fees
 
(21,748
)
 
(79,418
)
 
57,670

 
(72.6
)%
Net operating expenses
 
12,237,936

 
4,910,362

 
7,327,574

 
149.2
 %
 
 
 
 
 
 
 
 
 
Operating income
 
1,197,069

 
633,451

 
563,618

 
89.0
 %
Interest expense
 
3,330,253

 
1,327,198

 
2,003,055

 
150.9
 %
 
 
 
 
 
 
 
 
 
Net loss
 
$
(2,133,184
)
 
$
(693,747
)
 
$
(1,439,437
)
 
207.5
 %

Recent acquisitions

Our acquisitions of real estate assets during 2016 were the primary drivers behind our increases in rental and property revenues and property operating expenses for the three-month period ended March 31, 2017 versus 2016. We acquired the following real estate assets during 2016 and 2017:
Acquisition date
 
Multifamily communities
 
Location
 
Units
 
 
 
 
 
 
 
1/5/2016
 
Baldwin Park
 
Orlando, Florida
 
528

1/15/2016
 
Crosstown Walk
 
Tampa, Florida
 
342

2/1/2016
 
Overton Rise
 
Atlanta, Georgia
 
294

5/31/2016
 
525 Avalon Park
 
Orlando, Florida
 
487

6/1/2016
 
North by Northwest
 
Tallahassee, Florida
 
219

7/1/2016
 
City Vista
 
Pittsburgh, Pennsylvania
 
272

8/24/2016
 
Sorrel
 
Jacksonville, Florida
 
290

2/28/2017
 
Regents on University (1)
 
Tempe, Arizona
 
225

3/3/2017
 
Broadstone at Citrus Village
 
Tampa, Florida
 
296

3/24/2017
 
Retreat at Greystone
 
Birmingham, Alabama
 
312

3/31/2017
 
Founders Village
 
Williamsburg, Virginia
 
247

 
 
 
 
 
 
3,512

(1) A 640-bed student housing community located adjacent to the campus of Arizona State University in Tempe, Arizona.

49


Acquisition date
 
Grocery anchored shopping centers (New Market Properties)
 
Market
 
Gross leasable area (square feet)
 
 
 
 
 
 
 
2/29/2016
 
Wade Green Village
 
Atlanta, Georgia
 
74,978

4/29/2016
 
Southeastern Six Portfolio
 
(1) 
 
535,252

5/16/2016
 
The Market at Victory Village
 
Nashville, Tennessee
 
71,300

7/15/2016
 
Lakeland Plaza
 
Atlanta, Georgia
 
301,711

8/8/2016
 
Sunbelt Seven Portfolio
 
(2), (3) 
 
650,360

10/18/16
 
Champions Village
 
Houston, Texas
 
383,093

 
 
 
 
 
 
 
 
 
 
 
 
 
2,016,694

 
 
 
 
 
 
 
(1) Properties located in Greenville-Anderson, SC, Augusta, GA , Columbia, SC and Birmingham, AL markets.
(2) Properties located in Orlando, FL, Atlanta, GA, Raleigh, NC, San Antonio, TX and Miami-Fort Lauderdale, FL markets.
(3) Includes the purchase of an approximate 0.95 acre outparcel for $1.5 million on December 21, 2016.
Acquisition date
 
Office buildings
 
Market
 
Gross rentable square feet
 
 
 
 
 
 
 
8/29/2016
 
Brookwood Office
 
Birmingham, AL
 
169,489

11/4/2016
 
Galleria 75
 
Atlanta, GA
 
110,597

12/30/2016
 
Three Ravinia
 
Atlanta, GA
 
816,748

 
 
 
 
 
 
 
 
 
 
 
 
 
1,096,834


Rental Revenues

Rental revenue increased due primarily to properties acquired during 2016, as shown in the following table:
 
Three months ended March 31,
 
2017 versus 2016
 
Increase
Rental revenues
Amount (rounded to 000s):
 
Percent of increase
Multifamily communities:
 
 


Acquired during 2017
$
422,000

 
2.5
 %
Acquired during 2016
4,240,000

 
24.8
 %
Acquired during 2011-2015
219,000

 
1.3
 %
Properties sold
(2,057,000
)
 
(12.0
)%
Student housing properties
1,869,000

 
10.9
 %
Office buildings
6,506,000

 
38.0
 %
New Market Properties
5,909,000

 
34.5
 %
 
 
 
 
Total
$
17,108,000

 
100.0
 %

Increases in occupancy rates and in percentages of leased space and rent growth are the primary drivers of increases in rental revenue from our owned properties. Factors which we believe affect market rents include vacant unit inventory in local markets, local and national economic growth and resultant employment stability, income levels and growth, the ease of obtaining credit for home purchases, and changes in demand due to consumer confidence in the above factors.

We also collect revenue from residents and tenants for items such as utilities, application fees, lease termination fees, common area maintenance reimbursements and late charges. The increases in other property revenues for the three-month period ended March 31, 2017 versus 2016 were similarly due to the acquisitions listed above.

Interest income from our real estate loan investments increased substantially for the three-month period ended March 31, 2017 versus 2016, primarily due to the addition of eight real estate loan investments and bridge loans since March 31,2016. Also contributing to the increases in interest income were higher loan balances on real estate loans, from accumulating draws and loan

50


balances as the underlying projects progressed toward completion. The principal amount outstanding on our portfolio of real estate loans and bridge loans increased to approximately $341.0 million at March 31, 2017 from $262.0 million at March 31, 2016.

We recorded interest income and other revenue from these instruments as represented in Note 4 to the Company's Consolidated Financial Statements.
        
Property operating and maintenance expense

Expenses to operate and maintain our properties rose primarily due to the incremental costs brought on by property acquisitions during 2016, as shown in the following table. The primary components of operating and maintenance expense are utilities, property repairs, and landscaping costs. The expenses incurred for property repairs and, to a lesser extent, utilities could generally be expected to increase gradually over time as the buildings and properties age. Utility costs may generally be expected to increase in future periods as rate increases from providing carriers are passed on to our residents and tenants.
 
Three months ended March 31,
 
2017 versus 2016
 
Increase
Property operating and maintenance
Amount (rounded to 000s):
 
Percent of increase
Multifamily communities:
 
 


Acquired during 2017
$
98,000


3.9
 %
Acquired during 2016
587,000

 
23.3
 %
Acquired during 2011-2015
(28,000
)
 
(1.1
)%
Properties sold
(320,000
)
 
(12.7
)%
Student housing properties
338,000

 
13.4
 %
Office buildings
1,021,000

 
40.6
 %
New Market Properties
821,000

 
32.6
 %
 
 
 
 
Total
$
2,517,000

 
100.0
 %

Property salary and benefits reimbursement to related party

We recorded property salary and benefits expense for individuals who handle the on-site management, operations and maintenance of our properties. These costs increased primarily due to the incremental costs brought on by additional personnel necessary to manage and operate properties acquired during 2016, as shown in the following table.
 
Three months ended March 31,
 
2017 versus 2016
 
Increase
Salary and Benefits Reimbursements
Amount (rounded to 000s):
 
Percent of increase
Multifamily communities:


 


Acquired during 2017
$
35,000

 
5.2
 %
Acquired during 2016
428,000

 
64.4
 %
Acquired during 2011-2015
10,000

 
1.5
 %
Properties sold
(201,000
)
 
(30.2
)%
Student housing properties
142,000

 
21.4
 %
Office buildings
251,000

 
37.7
 %
 
 
 
 
Total
$
665,000

 
100.0
 %

Property management fees

We pay a fee for property management services to our Manager in an amount of 4% of gross property revenues as compensation for services such as rental, leasing, operation and management of our multifamily communities and the supervision of any subcontractors; for grocery-anchored shopping center assets, property management fees are 4% of gross property revenues, of which generally 3.5% is paid to a third party management company. Property management fees for office buildings are within the range of 2.0% to 2.75% of gross property revenues, of which 1.5% to 2.25% is paid to a third party management company. The increases were primarily due to properties acquired during 2016, as shown in the following table:

51


 
Three months ended March 31,
 
2017 versus 2016
 
increase
Property management fees
Amount (rounded to 000s):
 
Percent of increase
Multifamily communities:
 
 


Acquired during 2017
$
14,000

 
2.1
 %
Acquired during 2016
208,000

 
30.9
 %
Acquired during 2011-2015
17,000

 
2.5
 %
Properties sold
(74,000
)
 
(11.0
)%
Student housing properties
85,000

 
12.6
 %
Office buildings
142,000

 
21.1
 %
New Market Properties
282,000

 
41.8
 %
 
 
 
 
Total
$
674,000

 
100.0
 %

Real estate taxes

We are liable for property taxes due to the various counties and municipalities that levy such taxes on real property for each of our properties. Real estate taxes rose primarily due to the incremental costs brought on by properties acquired during 2016, as shown in the following table:
 
Three months ended March 31,
 
2017 versus 2016
 
increase
Real estate taxes
Amount (rounded to 000s):
 
Percent of increase
Multifamily communities:
 
 
 
Acquired during 2017
65,000

 
2.4
 %
Acquired during 2016
750,000

 
27.5
 %
Acquired during 2011-2015
(238,000
)
 
(8.7
)%
Properties sold
(311,000
)
 
(11.4
)%
Student housing properties
253,000

 
9.3
 %
Office buildings
844,000

 
30.8
 %
New Market Properties
1,367,000

 
50.1
 %
 

 


Total
$
2,730,000

 
100.0
 %
        
We generally expect the assessed values of our properties to rise over time, owing to our expectation of improving market conditions, as well as pressure on municipalities to raise revenues.  

General and Administrative

The increase was primarily due to higher franchise and net worth taxes, and administrative expenses related to the properties acquired during 2016, as shown in the following table:

52


 
Three months ended March 31,
 
2017 versus 2016
 
increase
General and administrative expense
Amount (rounded to 000s):
 
Percent of increase
 
 
 
 
Taxes, licenses & fees
$
115,000

 
19.6
 %
Multifamily communities:
 
 


Acquired during 2017
23,000

 
3.9
 %
Acquired during 2016
112,000

 
19.1
 %
Acquired during 2011-2015
104,000

 
17.7
 %
Properties sold
(70,000
)
 
(11.9
)%
Student housing properties
72,000

 
12.3
 %
Office buildings
188,000

 
32.1
 %
New Market Properties
42,000

 
7.2
 %
 

 


Total
$
586,000

 
100.0
 %

Equity compensation to directors and executives

Expenses recorded for equity compensation awards increased primarily due to expansions of Class B Unit awards in 2017, the details of which are presented in Note 8 to the Consolidated Financial Statements.
    
Depreciation and amortization

The net increases in depreciation and amortization were driven by:
 
Depreciation and amortization expense by major acquisition category (rounded to 000s)
 
Three months ended March 31,
Depreciation and amortization
2017
 
2016
 
 
 
 
Multifamily communities:
 
 
 
Acquired during 2017
$
677,000

 
7.1
 %
Acquired during 2016
2,802,000

 
29.6
 %
Acquired during 2011-2015
(1,535,000
)
 
(16.2
)%
Properties sold
(932,000
)
 
(9.8
)%
Student housing properties
1,016,000

 
10.7
 %
Office buildings
3,102,000

 
32.7
 %
New Market Properties
4,349,000

 
45.9
 %
 

 

Total
$
9,479,000

 
100.0
 %

Acquisition and pursuit costs and acquisition fees to related parties

The decrease in acquisition fees during the three-month period ended March 31, 2017 versus 2016 was due to the adoption of ASU 2017-01 on January 1, 2017, pursuant to which the Company began capitalizing and amortizing asset acquisition costs.

Asset management fees and general and administrative fees to related party

Monthly asset management fees are equal to one-twelfth of 0.50% of the total book value of assets, as adjusted. General and administrative expense fees are equal to 2% of the monthly gross revenues of the Company. Both are calculated as prescribed by the Management Agreement and are paid monthly to our Manager. These fees rose primarily due to the incremental assets and revenues brought on by office buildings, grocery-anchored shopping centers and multifamily communities acquired during 2016, as shown in the following tables:

53


 
Three months ended March 31,
 
2017 versus 2016
 
increase
Revenues
Amount (rounded to 000s):
 
Percent of increase
Multifamily communities:
 
 
 
Acquired during 2017
$
462,000

 
1.9
 %
Acquired during 2016
4,743,000

 
19.0
 %
Acquired during 2011-2015
236,000

 
1.0
 %
Properties sold
(2,239,000
)
 
(9.0
)%
Student housing properties
1,936,000

 
7.8
 %
Office buildings
8,674,000

 
34.9
 %
New Market Properties
7,891,000

 
31.8
 %
Real estate loans, lines of credit and notes receivable
3,123,000

 
12.6
 %
 
 
 


Total
$
24,826,000

 
100.0
 %

 
Three months ended March 31,
 
2017 versus 2016
 
increase
Gross real estate and real estate loans
Amount (rounded to 000s):
 
Percent of increase
Multifamily communities:
 
 
 
Acquired during 2017
$
137,326,000

 
14.2
 %
Acquired during 2016
186,180,000

 
19.3
 %
Acquired during 2011-2015
3,406,000

 
0.4
 %
Properties sold
(87,678,000
)
 
(9.1
)%
Student housing properties
97,371,000

 
10.1
 %
Office buildings
234,623,000

 
24.3
 %
New Market Properties
315,944,000

 
32.7
 %
Real estate loans
77,952,000

 
8.1
 %
 
 
 


Total
$
965,124,000

 
100.0
 %

Insurance, professional fees and other expenses

The increase consisted of:
 
Three months ended March 31,
 
2017 versus 2016
 
decrease
Insurance, professional fees, and other
Amount (rounded to 000s):
 
Percent of increase
 
 
 
 
Audit and tax fees
$
(76,000
)
 
475.0
 %
Insurance premiums
152,000

 
(950.0
)%
Legal fees and other
(92,000
)
 
575.0
 %
 
 
 


Total
$
(16,000
)
 
100.0
 %


54


Contingent asset management and general and administrative expense fees

The Manager may, in its discretion, defer some or all of the asset management, property management, or general and administrative expense fees for properties owned by us. Any contingent fees become due and payable to the extent that, in the event of any capital transaction, the net sale proceeds exceed the allocable capital contributions for the asset plus a 7% priority annual return on the asset. A cumulative total of approximately $3.5 million of combined asset management and general and administrative expense fees as of March 31, 2017 have been deferred by the Manager. We will recognize any contingent fees in future periods to the extent, if any, we determine that it is probable that the estimated net sale proceeds would exceed the hurdles listed above. As of March 31, 2017, there was insufficient evidence to support recognition of these contingent fees; therefore, we have not recognized any expense for the amounts deferred.

Interest expense

The increases consisted of:
 
Three months ended March 31,
 
2017 versus 2016
 
increase (decrease)
Interest expense
Amount (rounded to 000s):
 
Percent of increase
Multifamily communities:
 
 
 
Acquired during 2017
$
56,000

 
1.0
 %
Acquired during 2016
1,568,000

 
25.6
 %
Acquired during 2011-2015
(10,000
)
 
(0.2
)%
Properties sold
(577,000
)
 
(9.4
)%
Office buildings
1,677,000

 
27.4
 %
Student housing properties
477,000

 
7.8
 %
New Market Properties
2,003,000

 
32.8
 %
Line of Credit and Term note
920,000

 
15.0
 %
 
 
 
 
 
$
6,114,000

 
100.0
 %

Definitions of Non-GAAP Measures

Funds From Operations Attributable to Common Stockholders and Unitholders (“FFO”)

Analysts, managers and investors make certain adjustments to reported net income amounts under U.S. GAAP in order to better assess these vehicles’ operating results. FFO is one of the most commonly utilized Non-GAAP measures currently in practice. In its 2002 “White Paper on Funds From Operations,” which was most recently revised in 2012, the National Association of Real Estate Investment Trusts, or NAREIT, standardized the definition of how Net income/loss should be adjusted to arrive at FFO, in the interests of uniformity and comparability.

The NAREIT definition of FFO (and the one reported by the Company) is:
Net income/loss:
excluding impairment charges on and gains/losses from sales of depreciable property;
plus depreciation and amortization of real estate assets and deferred leasing costs; and
after adjustments for the Company's proportionate share of unconsolidated partnerships and joint ventures.

Not all companies necessarily utilize the standardized NAREIT definition of FFO, so caution should be taken in comparing the Company’s reported FFO results to those of other companies. The Company’s FFO results are comparable to the FFO results of other companies that follow the NAREIT definition of FFO and report these figures on that basis. The Company believes FFO is useful to investors as a supplemental gauge of our operating results. FFO is a non-GAAP measure that is reconciled to its most comparable GAAP measure, net income/loss available to common stockholders.

Core Funds From Operations Attributable to Common Stockholders and Unitholders (“Core FFO”)

Core FFO makes certain adjustments to FFO, which are either not likely to occur on a regular basis or are otherwise not representative of the Company’s ongoing operating performance. For example, the Company incurs substantial costs related to property acquisitions, which, prior to 2017, were required to be recognized as expenses when they were incurred. The Company added back any such acquisition and pursuit costs, including costs incurred in connection with obtaining short term debt financing for acquisitions

55


and beginning January 1, 2016, amortization of loan coordination fees to FFO in its calculation of Core FFO since such costs are not representative of our operating results. The Company also adds back any costs incurred related to the extension of our management agreement with our Manager, realized losses on debt extinguishment and any non-cash dividends in this calculation. Core FFO figures reported by us may not be comparable to those Core FFO figures reported by other companies.

We utilize Core FFO as a measure of the operating performance of our portfolio of real estate assets. We believe Core FFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other real estate companies that are not as involved in ongoing acquisition activities. Core FFO is a non-GAAP measure that is reconciled to its most comparable GAAP measure, net income/loss available to common stockholders.

Adjusted Funds From Operations Attributable to Common Stockholders and Unitholders (“AFFO”)

AFFO makes further adjustments to Core FFO results in order to arrive at a more refined measure of operating and financial performance. There is no industry standard definition of AFFO and practice is divergent across the industry. The Company calculates AFFO as:

Core FFO, plus:
• non-cash equity compensation to directors and executives;
• amortization of loan closing costs, excluding costs incurred in connection with obtaining short term financing related to acquisitions;
• depreciation and amortization of non-real estate assets;
• net loan fees received; and
• accrued interest income received;

Less:
• non-cash loan interest income;
• cash paid for pursuit costs on abandoned acquisitions;
• cash paid for loan closing costs;
• amortization of acquired real estate intangible liabilities; and
• normally-recurring capital expenditures and capitalized retail direct leasing costs.

AFFO figures reported by us may not be comparable to those AFFO figures reported by other companies. We utilize AFFO as another measure of the operating performance of our portfolio of real estate assets. We believe AFFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other real estate companies. AFFO is a non-GAAP measure that is reconciled to its most comparable GAAP measure, net income/loss available to common stockholders. FFO, Core FFO, and AFFO are not considered measures of liquidity and are not alternatives to measures calculated under GAAP.






56


Reconciliation of FFO, Core FFO, and AFFO
to Net Income (Loss) Attributable to Common Stockholders (A)
 
 
 
 
 
 
Three months ended March 31,
 
 
 
 
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders (See note 1)
$
14,674,662

 
$
(11,184,115
)
 
 
 
 
 
 
 
 
Less:
Income (loss) attributable to non-controlling interests (See note 2)
999,066

 
(88,561
)
 
Gain on sale of real estate
 
(30,724,060
)
 

Add:
Depreciation of real estate assets
 
18,131,536

 
11,083,625

 
Amortization of acquired real estate intangible assets and deferred leasing costs
6,531,960

 
4,138,750

 
 
 
 
 
 
 
 
FFO
9,613,164

 
3,949,699

 
 
 
 
 
 
 
 
Add:
Acquisition and pursuit costs
 
 
9,002

 
2,763,585

 
Loan cost amortization on acquisition term note (See note 3)
26,938

 
79,833

 
Amortization of loan coordination fees paid to the Manager (See note 4)
355,550

 
107,844

 
Costs incurred from extension of management agreement with advisor (See note 5)

 
111,613

 
 
 
 
 
 
 
 
Core FFO
10,004,654

 
7,012,574

 
 
 
 
 
 
 
 
Add:
Non-cash equity compensation to directors and executives
873,102

 
610,425

 
Amortization of loan closing costs (See note 6)
 
797,698

 
503,530

 
Depreciation/amortization of non-real estate assets
 
162,693

 
124,351

 
Net loan fees received (See note 7)
 

 
701,369

 
Accrued interest income received (See note 8)
 
2,524,032

 
4,208,906

Less:
Non-cash loan interest income (See note 7)
 
(4,298,502
)
 
(3,238,910
)
 
Cash paid for loan closing costs

 
(4,234
)
 
Amortization of acquired real estate intangible liabilities (See note 9)
(1,816,630
)
 
(494,232
)
 
Normally recurring capital expenditures and leasing costs (See note 10)
(845,915
)
 
(487,912
)
 
 
 
 
 
 
 
 
AFFO
$
7,401,132

 
$
8,935,867

 
 
 
 
 
 
 
 
Common Stock dividends and distributions to Unitholders declared:
 
 
 
 
Common Stock dividends
 
 
$
5,970,658

 
$
4,435,489

 
Distributions to Unitholders (See note 2)
 
198,742

 
117,395

 
Total
 
 
 
$
6,169,400

 
$
4,552,884

 
 
 
 
 
 
 
 
Common Stock dividends and Unitholder distributions per share
 
$
0.22

 
$
0.1925

 
 
 
 
 
 
 
 
FFO per weighted average basic share of Common Stock and Unit outstanding
$
0.35

 
$
0.17

Core FFO per weighted average basic share of Common Stock and Unit outstanding
$
0.36

 
$
0.30

AFFO per weighted average basic share of Common Stock and Unit outstanding
$
0.27

 
$
0.38

 
 
 
 
Weighted average shares of Common Stock and Units outstanding: (A)
 
 
 
 
Basic:
 
 
 
26,936,266

 
22,983,741

 
Common Stock
 
 
925,976

 
616,632

 
Class A Units
 
 
 
27,862,242

 
23,600,373

 
Common Stock and Class A Units
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted Common Stock and Class A Units (B)
 
28,785,670

 
24,192,250

 
 
 
 
 
 
 
 
Actual shares of Common Stock outstanding, including 7,749 and 7,536 unvested shares
 
 
 
 of restricted Common Stock at March 31, 2017 and 2016, respectively
27,193,122

 
23,070,562

Actual Class A Units outstanding
 
 
903,371

 
886,520

 
Total
 
 
 
28,096,493

 
23,957,082

(A) Units and Unitholders refer to Class A Units in our Operating Partnership, or Class A Units, and holders of Class A Units, respectively. Unitholders include recipients of awards of Class B Units in our Operating Partnership, or Class B Units, for annual service which became vested and earned and automatically converted to Class A Units. Unitholders also include the entity that contributed the Wade Green grocery-anchored shopping center. The Class A Units collectively represent an approximate 3.32% weighted average non-controlling interest in the Operating Partnership for the three-month period ended March 31, 2017.
(B) Since our Core FFO and AFFO results are positive for the periods reflected above, we are presenting recalculated diluted weighted average shares of Common Stock and Class A Units for these periods for purposes of this table, which includes the dilutive effect of common stock equivalents from grants of the Class B Units, warrants included in units of Series A Preferred Stock issued, as well as annual grants of restricted Common Stock. The weighted average shares of Common Stock outstanding presented on the Consolidated Statements of Operations are the same for basic and diluted for any period for which we recorded a net loss available to common stockholders.




57


Notes to Reconciliation of FFO, Core FFO and AFFO to Net Income (Loss) Attributable to Common Stockholders

1)
Rental and other property revenues and expenses for the three-month period ended March 31, 2017 include activity for the three multifamily communities and one student housing property acquired during the first quarter 2017 only from their respective dates of acquisition. In addition, the first quarter 2017 period includes a full quarter of activity for the three multifamily communities, 16 grocery-anchored shopping centers, one student housing property and three office buildings acquired during the last three quarters of 2016. Rental and other property revenues and expenses for the three-month period ended March 31, 2016 include activity for the three multifamily communities and one grocery-anchored shopping center only from their respective dates of acquisition during the first quarter 2016.

2)
Non-controlling interests in our Operating Partnership consisted of a total of 903,371 Class A Units as of March 31, 2017. Included in this total are 419,228 Class A Units which were granted as partial consideration to the seller in conjunction with the seller's contribution to us on February 29, 2016 of the Wade Green grocery-anchored shopping center. The remaining Class A units were awarded primarily to our key executive officers. The Class A Units are apportioned a percentage of our financial results as non-controlling interests. The weighted average ownership percentage of these holders of Class A Units was calculated to be 3.32% and 2.61% for the three-month periods ended March 31, 2017 and 2016, respectively.

3)
We incurred loan closing costs for the acquisition of the Village at Baldwin Park multifamily community during the first quarter 2016 on our $35 million acquisition term loan facility, or 2016 Term Loan, and on our $11 million term note. These costs were deferred and are being amortized over the lives of the two instruments. The amortization expense of these deferred costs is an additive adjustment in the calculation of Core FFO.

4)
We pay loan coordination fees to Preferred Apartment Advisors, LLC, our Manager, related to obtaining mortgage financing for acquired properties. Loan coordination fees were introduced to replace acquisition fees and to more accurately reflect the administrative effort involved in arranging debt financing for acquired properties. The portion of the loan coordination fees attributable to the financing are amortized over the lives of the respective mortgage loans, and this non-cash amortization expense is an addition to FFO in the calculation of Core FFO. At March 31, 2017, aggregate unamortized loan costs were approximately $10.3 million, which will be amortized over a weighted average remaining loan life of approximately 9.5 years.

5)
We incurred legal costs pertaining to the extension of our management agreement with our Manager. The three-year extension was effective as of June 3, 2016. Such costs are an additive adjustment to FFO in our calculation of Core FFO.

6)
We incur loan closing costs on our existing mortgage loans, which are secured on a property-by-property basis by each of our acquired real estate assets, and also for occasional amendments to our $150 million syndicated revolving line of credit with Key Bank National Association, or our Revolving Line of Credit. These loan closing costs are also amortized over the lives of the respective loans and the Revolving Line of Credit, and this non-cash amortization expense is an addition to Core FFO in the calculation of AFFO. Neither we nor the Operating Partnership have any recourse liability in connection with any of the mortgage loans, nor do we have any cross-collateralization arrangements with respect to the assets securing the mortgage loans, other than security interests in 49% of the equity interests of the subsidiaries owning such assets, granted in connection with our Revolving Line of Credit, which provides for full recourse liability. At March 31, 2017, aggregate unamortized loan costs were approximately $25.7 million, which will be amortized over a weighted average remaining loan life of approximately 7.9 years.

7)
We receive loan fees in conjunction with the origination of certain investments. These fees are then recognized as revenue over the lives of the applicable loans as adjustments of yield using the effective interest method. The total fees received in excess of amortization income, after the payment of acquisition fees to our Manager are additive adjustments in the calculation of AFFO. Correspondingly, the non-cash income recognized under the effective interest method is a deduction in the calculation of AFFO. We also accrue over the lives of certain loans additional interest amounts that become due to us at the time of repayment of the loan or refinancing of the property, or when the property is sold to a third party. This non-cash income is deducted from Core FFO in the calculation of AFFO.

8)
The Company records deferred interest revenue on certain of its real estate loans. These adjustments reflect the receipt during the periods presented of interest income which was earned and accrued prior to those periods presented on various real estate loans.

9)
This adjustment reflects straight-line rent adjustments and the reversal of the non-cash amortization of below-market and above-market lease intangibles, which were recognized in conjunction with the Company’s acquisitions and which are amortized over the estimated average remaining lease terms from the acquisition date for multifamily communities and over the remaining lease terms for grocery-anchored shopping center assets. At March 31, 2017, the balance of unamortized below-market lease intangibles was approximately $28.7 million, which will be recognized over a weighted average remaining lease period of approximately 9.3 years.
        
10)
We deduct from Core FFO normally recurring capital expenditures that are necessary to maintain our assets’ revenue streams in the calculation of AFFO. No adjustment is made in the calculation of AFFO for nonrecurring capital expenditures, which totaled $1,853,419 and $1,593,847 for the three-month periods ended March 31, 2017 and 2016, respectively. This adjustment also deducts from Core FFO capitalized amounts for third party costs during the period to originate or renew leases in our grocery-anchored shopping centers.








58


Liquidity and Capital Resources

Short-Term Liquidity

We believe our principal short-term liquidity needs are to fund:

operating expenses directly related to our portfolio of multifamily communities, grocery-anchored shopping centers and office buildings (including regular maintenance items);
capital expenditures incurred to lease our multifamily communities, grocery-anchored shopping centers and office buildings;
interest expense on our outstanding property level debt;
amounts due on our Credit Facility;
distributions that we pay to our preferred stockholders, common stockholders, and unitholders;
cash redemptions that we may pay to our preferred stockholders, and
committed investments.

We have a credit facility, or Credit Facility, with Key Bank National Association, or Key Bank, which defines a syndicated revolving line of credit, or Revolving Line of Credit, which is used to fund investments, capital expenditures, dividends (with consent of Key Bank), working capital and other general corporate purposes on an as needed basis. The maximum borrowing capacity on the Revolving Line of Credit is $150.0 million pursuant to the Fourth Amended and Restated Credit Agreement, as amended effective December 27, 2016. The Revolving Line of Credit accrues interest at a variable rate of one month LIBOR plus 3.25% per annum and matures on August 5, 2019, with an option to extend the maturity date to August 5, 2020, subject to certain conditions described therein. At March 31, 2017, we had a balance owed of $97.0 million under the Credit Facility. Interest expense on the Credit Facility was approximately $1.3 million (excluding deferred loan cost amortization of approximately $0.2 million) and the weighted average interest rate was 4.17% for the three-month period ended March 31, 2017.
On May 26, 2016, the Company entered into a $11.0 million interim term loan with Key Bank, or the Interim Term Loan, to partially finance the acquisition of Anderson Central, a grocery-anchored shopping center located in Anderson, South Carolina. The Interim Term Loan accrues interest at a rate of LIBOR plus 2.5% per annum and the maturity date is May 25, 2017.

Fourth Amended and Restated Credit Agreement, as amended effective December 27, 2016, or the Amended and Restated Credit Agreement, contains certain affirmative and negative covenants including negative covenants that limit or restrict secured and unsecured indebtedness, mergers and fundamental changes, investments and acquisitions, liens and encumbrances, dividends, transactions with affiliates, burdensome agreements, changes in fiscal year and other matters customarily restricted in such agreements. The material financial covenants include minimum net worth and debt service coverage ratios and maximum leverage and dividend payout ratios. As of March 31, 2017, we were in compliance with all covenants related to the Fourth Amended and Restated Credit Agreement. Our results are presented in Note 9 to the Consolidated Financial Statements.

On February 28, 2017, we entered into a revolving acquisition credit agreement, or Acquisition Credit Agreement, with Key Bank to obtain an acquisition revolving credit facility, or Acquisition Facility, with a maximum borrowing capacity of $200 million. The sole purpose of the Acquisition Credit Agreement is to finance our acquisitions of multifamily communities and student housing communities prior to obtaining permanent conventional mortgage financing on the acquired assets. The maximum borrowing capacity on the Acquisition Facility may be increased at our request up to $300 million at any time prior to March 1, 2021. The Acquisition Facility accrues interest at a variable rate of one month LIBOR plus a margin of between 1.75% per annum and 2.20% per annum, depending on the type of assets acquired and the resulting property debt service coverage ratio. The Acquisition Facility has a maturity date of March 1, 2022 and has two one-year extension options, subject to certain conditions described therein.

Our net cash provided by operating activities for the three-month periods ended March 31, 2017 and 2016 was approximately $18.3 million and $13.4 million, respectively. The increase in net cash provided by operating activities was primarily due to the incremental cash generated by property income provided by the real estate assets acquired subsequent to March 31, 2016 and an increase in cash collections of interest income from our larger portfolio of real estate loans and notes.

The majority of our revenue is derived from residents and tenants under existing leases at our multifamily communities and retail shopping centers. Therefore, our operating cash flow is principally dependent on: (1) the number of multifamily communities, student housing properties, grocery-anchored shopping centers and office buildings in our portfolio; (2) rental rates; (3) occupancy rates; (4) operating expenses associated with these multifamily communities and retail projects; and (5) the ability

59


of our residents and tenants to make their rental payments. We believe we are well positioned to take advantage of the recent improvements in real estate fundamentals, such as higher occupancy rates, positive new and renewal rates over expiring leases, a declining home ownership rate and a decline in turnover, which we believe are all positive developments in the real estate industry.

We also earn interest revenue from the issuance of real estate-related loans and may receive fees at the inception of these loans for committing and originating them. Interest revenue we receive on these loans is influenced by (1) market interest rates on similar loans; (2) the availability of credit from alternative financing sources; (3) the desire of borrowers to finance new real estate projects; and (4) unique characteristics attached to these loans, such as exclusive purchase options.

Our net cash used in investing activities was approximately $69.5 million and $253.0 million for the three-month periods ended March 31, 2017 and 2016, respectively. Disbursements for property acquisitions were approximately $220.9 million during the first quarter 2016 and approximately $138.5 million during the first quarter 2017. Proceeds from our sale of Ashford Park and Sandstone Creek totaled approximately $77.8 million. Disbursements for real estate loans, net of repayments, were approximately $29.3 million during the first quarter 2016 and approximately $6.4 million during the first quarter 2017.

Cash used in investing activities is primarily driven by acquisitions and dispositions of multifamily properties and retail shopping centers and acquisitions and maturities or other dispositions of real estate loans and other real estate and real estate-related assets, and secondarily by capital expenditures related to our owned properties. We will seek to acquire more multifamily communities and retail shopping centers at costs that we expect will be accretive to our financial results. Capital expenditures may be nonrecurring and discretionary, as part of a strategic plan intended to increase a property’s value and corresponding revenue-generating power, or may be normally recurring and necessary to maintain the income streams and present value of a property. Certain capital expenditures may be budgeted and reserved for upon acquiring a property as initial expenditures necessary to bring a property up to our standards or to add features or amenities that we believe make the property a compelling value to prospective residents or tenants in its individual market. These budgeted nonrecurring capital expenditures in connection with an acquisition are funded from the capital source(s) for the acquisition and are not dependent upon subsequent property operational cash flows for funding.
    

60


For the three-month period ended March 31, 2017, our capital expenditures, not including changes in related payables were:
 
Nonrecurring capital expenditures
 
Recurring capital expenditures
 
 
 
Budgeted at acquisition
 
Other
 
Total
 
 
Total
 
 
 
 
 
 
 
 
 
 
Multifamily communities:
 
 
 
 


 
 
 


Summit Crossing

 

 

 
27,066

 
27,066

Stone Rise

 

 

 
11,043

 
11,043

Ashford Park

 
19,800

 
19,800

 
11,208

 
31,008

McNeil Ranch

 
3,245

 
3,245

 
13,708

 
16,953

Lake Cameron

 
35,000

 
35,000

 
50,414

 
85,414

Stoneridge Farms at the Hunt Club

 
9,408

 
9,408

 
41,173

 
50,581

Vineyards

 
3,798

 
3,798

 
45,140

 
48,938

Enclave

 
14,983

 
14,983

 
49,385

 
64,368

Sandstone

 

 

 
5,938

 
5,938

Cypress

 
9,643

 
9,643

 
25,570

 
35,213

Northpointe

 
6,383

 
6,383

 
30,693

 
37,076

Lakewood Ranch

 

 

 
8,395

 
8,395

Aster at Lely

 

 

 
12,404

 
12,404

CityPark View

 
22,099

 
22,099

 
2,094

 
24,193

Avenues at Creekside

 

 

 
32,470

 
32,470

Citilakes

 
1,599

 
1,599

 
24,704

 
26,303

Stone Creek

 

 

 
20,119

 
20,119

Lenox Portfolio
175,974

 
20,818

 
196,792

 
29,211

 
226,003

Village at Baldwin Park
552,980

 

 
552,980

 
33,911

 
586,891

Crosstown Walk

 
26,757

 
26,757

 
8,436

 
35,193

Overton Rise
10,568

 
10,000

 
20,568

 
13,621

 
34,189

525 Avalon Park

 

 

 
58,152

 
58,152

City Vista

 
9,634

 
9,634

 
2,645

 
12,279

Sorrel
229,543

 

 
229,543

 
5,543

 
235,086

Citrus Village
18,152

 

 
18,152

 
4,415

 
22,567

Retreat at Greystone
10,500

 

 
10,500

 

 
10,500

 
 
 
 
 
 
 
 
 
 
 
997,717

 
193,167

 
1,190,884

 
567,458

 
1,758,342

 
 
 
 
 
 
 
 
 
 
Grocery-anchored shopping centers:
 
 
 
 
 
 
 
 
 
Woodstock Crossing

 
2,625

 
2,625

 

 
2,625

Parkway Town Centre

 
13,812

 
13,812

 

 
13,812

Spring Hill Plaza

 

 

 
17,522

 
17,522

Deltona Landings

 
9,358

 
9,358

 

 
9,358

Sweetgrass Corner

 

 

 
116,942

 
116,942

Salem Cove

 

 

 
16,687

 
16,687

Independence Square

 
1,295

 
1,295

 
5,144

 
6,439

Summit Point

 
3,346

 
3,346

 

 
3,346

The Overlook at Hamilton Place

 

 

 
5,700

 
5,700

Wade Green Village

 
3,645

 
3,645

 
9,487

 
13,132

Anderson Central

 
1,880

 
1,880

 
1,626

 
3,506

East Gate Shopping Center

 
4,190

 
4,190

 

 
4,190

Fairview Market

 
9,290

 
9,290

 
7,041

 
16,331

Fury's Ferry

 
43,420

 
43,420

 
19,466

 
62,886

Rosewood Shopping Center

 

 

 
1,990

 
1,990

The Market at Victory Village

 

 

 
2,800

 
2,800

Lakeland Plaza

 
21,309

 
21,309

 
28,364

 
49,673

Cherokee Plaza

 
16,270

 
16,270

 
14,327

 
30,597

Oak Park Village

 
1,937

 
1,937

 

 
1,937

Sandy Plains Exchange

 
2,115

 
2,115

 

 
2,115

University Palms

 

 

 
2,076

 
2,076

Shoppes of Parkland

 
49,070

 
49,070

 
6,763

 
55,833

Champions Village

 
170,017

 
170,017

 

 
170,017

 
 
 
 
 
 
 
 
 
 
 

 
353,579

 
353,579

 
255,935

 
609,514

 
 
 
 
 
 
 
 
 
 
Student Housing:
 
 
 
 
 
 
 
 
 
North by Northwest
308,956

 

 
308,956

 
21,490

 
330,446

Regents on University

 

 

 
1,032

 
1,032

 
 
 
 
 
 
 
 
 
 
Total
$
1,306,673

 
$
546,746

 
$
1,853,419

 
$
845,915

 
$
2,699,334

    

61


For the three-month period ended March 31, 2016, our capital expenditures not including changes in related payables were:
 
Nonrecurring capital expenditures
 
Recurring capital expenditures
 
 
 
Budgeted at acquisition
 
Other
 
Total
 
 
Total
 
 
 
 
 
 
 
 
 
 
Multifamily communities:
 
 
 
 


 
 
 


Summit Crossing
$

 
$
46,736

 
$
46,736

 
$
31,021

 
$
77,757

Trail Creek

 
10,110

 
10,110

 
23,587

 
33,697

Stone Rise

 
37,987

 
37,987

 
9,404

 
47,391

Ashford Park

 
1,258

 
1,258

 
33,127

 
34,385

McNeil Ranch

 
7,000

 
7,000

 
13,001

 
20,001

Lake Cameron

 
72,133

 
72,133

 
19,174

 
91,307

Stoneridge Farms at the Hunt Club
75,104

 
10,322

 
85,426

 
33,567

 
118,993

Vineyards
45,222

 
12,735

 
57,957

 
31,277

 
89,234

Enclave
159,576

 
5,069

 
164,645

 
27,182

 
191,827

Sandstone
89,857

 
2,677

 
92,534

 
36,142

 
128,676

Cypress
77,666

 
 
 
77,666

 
9,056

 
86,722

Northpointe
25,121

 
2,000

 
27,121

 
6,087

 
33,208

Lakewood Ranch
94,869

 
2,881

 
97,750

 
5,822

 
103,572

Aster at Lely

 
3,000

 
3,000

 
14,965

 
17,965

CityPark View

 

 

 
2,754

 
2,754

Avenues at Creekside
15,000

 

 
15,000

 
36,904

 
51,904

Citilakes
23,120

 

 
23,120

 
10,447

 
33,567

Stone Creek
51,570

 

 
51,570

 
15,411

 
66,981

Lenox Portfolio
21,200

 

 
21,200

 
26,888

 
48,088

Village at Baldwin
24,751

 

 
24,751

 
33,665

 
58,416

Crosstown Walk

 

 

 
4,331

 
4,331

Overton Rise

 

 

 
1,745

 
1,745

 
 
 
 
 
 
 
 
 
 
 
703,056

 
213,908

 
916,964

 
425,557

 
1,342,521

Grocery-anchored shopping centers:
 
 
 
 
 
 
 
 
 
Woodstock

 
6,250

 
6,250

 
185

 
6,435

Parkway Town Centre

 

 

 
9,385

 
9,385

Barclay Crossing
198,123

 

 
198,123

 

 
198,123

Deltona Landings

 

 

 
1,963

 
1,963

Kingwood Glen

 
4,689

 
4,689

 

 
4,689

Parkway Centre

 
25,032

 
25,032

 
31,183

 
56,215

Powder Springs

 

 

 
3,600

 
3,600

Salem Cove

 

 

 
4,574

 
4,574

Independence Square
437,539

 

 
437,539

 
7,227

 
444,766

Royal Lakes

 

 

 
4,238

 
4,238

Summit Point

 
5,250

 
5,250

 

 
5,250

 
 
 
 
 
 
 
 
 
 
 
635,662

 
41,221

 
676,883

 
62,355

 
739,238

 
 
 
 
 
 
 
 
 
 
Total
$
1,338,718

 
$
255,129

 
$
1,593,847

 
$
487,912

 
$
2,081,759


Net cash provided by financing activities was approximately $52.3 million and $241.8 million for the three-month periods ended March 31, 2017, and 2016, respectively. During the 2017 period, our significant financing cash sources were approximately $104.3 million of net proceeds from the mortgage financing transactions and approximately $69.0 million of net proceeds from our offerings of our Series A Redeemable Preferred Stock. During the 2016 period, our significant financing cash sources were approximately $151.6 million of net proceeds from the mortgage financing transactions and approximately $90.1 million of net proceeds from our Follow-On Series A Offering.

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Distributions

In order to maintain our status as a REIT for U.S. federal income tax purposes, we must comply with a number of organizational and operating requirements, including a requirement to distribute 90% of our annual REIT taxable income (which does not equal net income as calculated in accordance with GAAP and determined without regard for the deduction for dividends paid and excluding net capital gains) to our stockholders. As a REIT, we generally will not be subject to federal income taxes on the taxable income we distribute to our stockholders. Generally, our objective is to meet our short-term liquidity requirement of funding the payment of our quarterly Common Stock dividends, as well as monthly dividends to holders of our Series A Redeemable Preferred Stock and our mShares, through net cash generated from operating results.

Our board of directors reviews the Series A Redeemable Preferred Stock and our mShares dividends monthly to determine whether we have funds legally available for payment of such dividends in cash, and there can be no assurance that the Series A Redeemable Preferred Stock and our mShares dividends will consistently be paid in cash. Dividends may be paid as a combination of cash and stock in order to satisfy the annual distribution requirements applicable to REITs. We expect the aggregate dollar amount of monthly Series A Redeemable Preferred Stock and our mShares dividend payments to increase at a rate that approximates the rate at which we issue new Units from our $1.5 Billion Unit Offering.

Our first quarter 2017 Common Stock dividend declaration of $0.22 per share represented an overall increase of 76.0% from our initial Common Stock dividend per share of $0.125 following our IPO, or an annualized dividend growth rate of approximately 13.3% over the same period. Our board of directors reviews the proposed Common Stock dividend declarations quarterly, and there can be no assurance that the current dividend level will be maintained.

We believe that our short-term liquidity needs are and will continue to be adequately funded.

For the three-month period ended March 31, 2017, our aggregate dividends and distributions paid totaled approximately $20.6 million. Our cash flows from operating activities were not sufficient to fund our cash dividend distributions for the quarter due to significant straight-line rent adjustments and accrued interest revenues. Straight-line rent adjustments inherently create timing differences between revenue recognition and cash collection. Similarly, accrued interest revenues are recorded our real estate loan investments, but cash is typically not collected until the loan matures or the property is sold. We expect our cash flow from operations over time to be sufficient to fund both our quarterly Common Stock dividends, Class A Unit distributions and our monthly Series A Redeemable Preferred Stock and mShares dividends.
 
Long-Term Liquidity Needs

We believe our principal long-term liquidity needs are to fund:

the principal amount of our long-term debt as it becomes due or matures;
capital expenditures needed for our multifamily communities and retail shopping centers;
costs associated with current and future capital raising activities;
costs to acquire additional multifamily communities, retail assets or other real estate and enter into new and fund existing lending opportunities; and
our minimum distributions necessary to maintain our REIT status.

We intend to finance our future investments with the net proceeds from additional issuances of our securities, including our $1.5 Billion Unit Offering, our mShares Offering (both as defined below), Common Stock, and units of limited partnership interest in our Operating Partnership, and/or borrowings. The success of our acquisition strategy may depend, in part, on our ability to access further capital through issuances of additional securities, especially our $1.5 Billion Unit Offering, details of which are described below. If we are unsuccessful in raising additional funds, we may not be able to obtain any assets in addition to those we have acquired.

On October 11, 2013, the SEC declared effective our registration statement on Form S-3 (File No. 333-183355) for our offering of up to 900,000 Units, with each Unit consisting of one share of our Series A Redeemable Preferred Stock, stated value $1,000 per share and one Warrant to purchase 20 shares of our Common Stock to be offered from time to time on a “reasonable best efforts” basis. This offering is referred to as the Follow-On Series A Offering. We commenced sales for the Follow-On Series A Offering on January 1, 2014. As of February 14, 2017, we had issued all 900,000 Units from and terminated our Follow-On Series A Offering.


63


On February 14, 2017, the SEC declared effective out registration statement on Form S-3 (Registration No. 333-211924) for our offering for up to 1,500,000 Units, with each Unit consisting of one share of Series A Redeemable Preferred Stock and one Warrant to purchase up to 20 shares of Common Stock, referred to as our $1.5 Billion Unit Offering. The price per Unit is $1,000, subject to adjustment if a participating broker-dealer reduces its commission. We intend to invest substantially all the net proceeds of the $1.5 Billion Unit Offering in connection with the acquisition of multifamily communities, other real estate-related investments and general working capital purposes.

Aggregate offering expenses, including selling commissions and dealer manager fees, will be capped at 11.5% of the aggregate gross proceeds of the $1.5 Billion Unit Offering, of which we will reimburse our 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 our board of directors, we may reimburse our Manager for any such expenses incurred above the 1.5% amount as permitted by the Financial Industry Regulatory Authority.

On December 2, 2016, the SEC declared effective our registration statement on Form S-3 (Registration No. 333-214531), for our offering of up to 500,000 shares of Series M Redeemable Preferred Stock, or mShares, par value $0.01 per share, or the mShares Offering. The price per mShare is $1,000.  We intend to invest substantially all the net proceeds of the mShares Offering in connection with the acquisition of multifamily communities, other real estate-related investments and general working capital purposes. 
        
On July 18, 2016, the Company filed a prospectus for its registration statement on Form S-3 (Registration No. 333-211178) to issue and sell up to $150 million of Common Stock from time to time in an "at the market" offering, or the 2016 ATM Offering, through JonesTrading Institutional Services LLC, FBR Capital Markets & Co, and Canaccord Genuity Inc, as its sales agents. The Company intends to use any proceeds from the 2016 ATM Offering (a) to repay outstanding amounts under our Credit Facility and (b) for other general corporate purposes, which includes making investments in accordance with the Company's investment objectives. Through March 31, 2017, we issued and sold approximately 14,000 shares of our Common Stock for gross proceeds of approximately $0.2 million.

Our ability to raise funds through the issuance of our securities is dependent on, among other things, general market conditions for REITs, market perceptions about us, and the current trading price of our Common Stock. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but the equity and credit markets may not consistently be available on terms that are attractive to us or at all.

The sources to fulfill our long-term liquidity in the future may include borrowings from a number of sources, including repurchase agreements, securitizations, resecuritizations, warehouse facilities and credit facilities (including term loans and revolving facilities), in addition to our Revolving Credit Facility. We have utilized, and we intend to continue to utilize, leverage in making our investments in multifamily communities and retail shopping centers. The number of different multifamily communities, retail shopping centers and other investments we will acquire will be affected by numerous factors, including the amount of funds available to us. By operating on a leveraged basis, we will have more funds available for our investments. This will allow us to make more investments than would otherwise be possible, resulting in a larger and more diversified portfolio.

We intend to target leverage levels (secured and unsecured) between 50% and 65% of the fair market value of our tangible assets (including our real estate assets, real estate loans, notes receivable, accounts receivable and cash and cash equivalents) on a portfolio basis. As of March 31, 2017, our outstanding debt (both secured and unsecured) was approximately 55.0% of the value of our tangible assets on a portfolio basis based on our estimates of fair market value at March 31, 2017. Neither our charter nor our by-laws contain any limitation on the amount of leverage we may use. Our investment guidelines, which can be amended by our board without stockholder approval, limit our borrowings (secured and unsecured) to 75% of the cost of our tangible assets at the time of any new borrowing. These targets, however, will not apply to individual real estate assets or investments. The amount of leverage we will place on particular investments will depend on our Manager's assessment of a variety of factors which may include the anticipated liquidity and price volatility of the assets in our investment portfolio, the potential for losses and extension risk in the portfolio, the availability and cost of financing the asset, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy and the health of the commercial real estate market in general. In addition, factors such as our outlook on interest rates, changes in the yield curve slope, the level and volatility of interest rates and their associated credit spreads, the underlying collateral of our assets and our outlook on credit spreads relative to our outlook on interest rate and economic performance could all impact our decision and strategy for financing the target assets. At the date of acquisition of each asset, we anticipate that the investment cost for such asset will be substantially similar to its fair market value. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits. Finally, we intend to acquire all our real estate assets through separate single purpose entities and we intend to finance each of these assets using debt

64


financing techniques for that asset alone without any cross-collateralization to our other real estate assets or any guarantees by us or our Operating Partnership. We intend to have no long-term unsecured debt at the Company or Operating Partnership levels, except for our Revolving Line of Credit.
Our secured and unsecured aggregate borrowings are intended by us to be reasonable in relation to our tangible assets and will be reviewed by our board of directors at least quarterly. In determining whether our borrowings are reasonable in relation to our tangible assets, we expect that our board of directors will consider many factors, including without limitation the lending standards of government-sponsored enterprises, such as Fannie Mae and Freddie Mac, for loans in connection with the financing of multifamily properties, the leverage ratios of publicly traded and non-traded REITs with similar investment strategies, and general market conditions. There is no limitation on the amount that we may borrow for any single investment.

Our ability to incur additional debt is dependent on a number of factors, including our credit ratings (if any), the value of our assets, our degree of leverage and borrowing restrictions imposed by lenders. We will continue to monitor the debt markets, including Fannie Mae and/or Freddie Mac (from both of whom we have obtained single asset secured financing on all of our multifamily communities), and as market conditions permit, access borrowings that are advantageous to us.

If we are unable to obtain financing on favorable terms or at all, we may have to curtail our investment activities, including acquisitions and improvements to real properties, which could limit our growth prospects. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to raise capital by issuing more securities or borrowing more money. We may be forced to dispose of assets at inopportune times in order to maintain our REIT qualification and Investment Company Act exemption. Our ability to generate cash from asset sales is limited by market conditions and certain rules applicable to REITs. We may not be able to sell a property or properties as quickly as we would like or on terms as favorable as we would like.

Furthermore, if interest rates or other factors at the time of financing result in higher costs of financing, then the interest expense relating to that financed indebtedness would be higher. Higher interest rates on newly incurred debt may negatively impact us as well. If interest rates increase, our interest costs and overall costs of capital will increase, which could adversely affect our transaction and development activity, financial condition, results of operations, cash flow, our ability to pay principal and interest on our debt and our ability to pay distributions to our stockholders. Finally, sellers may be less inclined to offer to sell to us if they believe we may be unable to obtain financing.

As of March 31, 2017, we had long term mortgage indebtedness of approximately $1.4 billion, all of which was incurred by us in connection with the acquisition or refinancing of our real estate properties.

As of March 31, 2017, we had approximately $13.4 million in unrestricted cash and cash equivalents available to meet our short-term and long-term liquidity needs. We believe that our long-term liquidity needs are and will continue to be adequately funded through the sources discussed above.

Off-Balance Sheet Arrangements

As of March 31, 2017, we had 864,333 outstanding Warrants from our sales of Units. The Warrants are 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. The current market price per share is determined using the closing market price of the Common Stock immediately preceding the 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 March 31, 2017, a total of 131,108 Warrants had been exercised into 2,622,160 shares of Common stock and a remaining 449,980 Warrants had passed the initial exercise date and so became potentially exercisable into a total of 8,999,600 shares of Common Stock. The remainder of the Warrants outstanding at March 31, 2017 become potentially exercisable between April 15, 2017 and March 30, 2018 and have exercise prices that range between $14.41 and $19.50 per share. If all the Warrants outstanding at March 31, 2017 became exercisable and were exercised, gross proceeds to us would be approximately $252.9 million and we would as a result issue an additional 17,286,660 shares of Common Stock.


65


Contractual Obligations

As of March 31, 2017, our contractual obligations consisted of the mortgage notes secured by our acquired properties and the Revolving Credit Facility. Based on a LIBOR rate of 0.98% at March 31, 2017, our estimated future required payments on these instruments were:
 
 
Total
 
Less than one year
 
1-3 years
 
3-5 years
 
More than five years
Mortgage debt obligations:
 
 
 
 
 
 
 
 
Interest
 
$
357,637,542

 
$
50,625,179

 
$
93,606,091

 
$
68,712,464

 
$
144,693,809

Principal
 
1,395,287,426

 
19,358,239

 
413,393,465

 
227,437,430

 
735,098,291

Line of Credit:
 
 
 
 
 
 
 
 
 
 
Interest
 
166,485

 
166,485

 

 

 

Principal
 
97,000,000

 
97,000,000

 

 

 

Term note:
 
 
 
 
 
 
 
 
 
 
Interest
 

 

 

 

 

Principal
 
11,000,000

 
11,000,000

 

 

 

Total
 
$
1,861,091,453

 
$
178,149,903

 
$
506,999,556

 
$
296,149,894

 
$
879,792,100


In addition, we had unfunded real estate loan balances totaling approximately $59.8 million at March 31, 2017.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    
Our primary market risk exposure is interest rate risk. All our floating-rate debt is tied to the 30-day LIBOR. As of March 31, 2017, we have variable rate mortgages on our Avenues at Creekside, Citi Lakes, Royal Lakes Marketplace, Baldwin Park, Avalon Park, Cherokee Plaza, Champions Village, Regents on University and Retreat at Greystone properties with a principal amount of approximately $362.7 million. Two of these mortgages have LIBOR effectively capped at 5.0% and 4.33% (all-in rates of 6.6% and 6.5%) under Freddie Mac's capped adjustable-rate mortgage program. The Royal Lakes Marketplace, Cherokee Plaza and Champions Village mortgages of $9.8 million, $25.8 million and $27.4 million, respectively, are uncapped. Our Revolving Line of Credit accrued interest at a spread of 3.25% over LIBOR as of March 31, 2017; this combined rate is uncapped. In addition, we partially financed the acquisitions of the Retreat at Greystone multifamily community in the amount of $35.2 million at LIBOR plus 175 basis points and the Regents on University student housing property in the amount of $37.5 million at LIBOR plus 220 basis points under our Acquisition Credit Facility. We intend to refinance the Regents on University and Retreat at Greystone properties with permanent fixed-rate mortgage financing during 2017. Because of the short term nature of the Revolving Line of Credit and Acquisition Credit Facility instruments, we believe our interest rate risk is minimal. We have no business operations which subject us to trading risk.
    
We have and will continue to manage interest rate risk as follows:

maintain a reasonable ratio of fixed-rate, long-term debt to total debt so that floating-rate exposure is kept at an acceptable level;
place interest rate caps on floating-rate debt where appropriate; and
take advantage of favorable market conditions for long-term debt and/or equity financings.
We use various financial models and advisors to achieve our objectives.

If interest rates under our floating-rate LIBOR-based indebtedness fluctuated by 100 basis points, our interest costs, based on outstanding borrowings at March 31, 2017, would increase by approximately $3.5 million on an annualized basis, or decrease by approximately $3.3 million on an annualized basis. The difference between the interest expense amounts related to an increase or decrease in our floating-rate interest cost is because LIBOR was 0.98% at March 31, 2017, therefore we have limited the estimate of how much our interest costs may decrease because we use a floor of 0% for LIBOR.


66


Item  4.
Controls and Procedures

Evaluation of disclosure controls and procedures.
Management of the Company evaluated, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Accounting Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in the Exchange Act Rule 13a-15(e)) as of March 31, 2017, the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Accounting Officer have concluded that the Company's disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting.

As required by the Exchange Act Rule 13a-15(d), the Company's Chief Executive Officer and Chief Accounting Officer evaluated the Company's internal control over financial reporting to determine whether any change occurred during the quarter ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during such period.
PART II - OTHER INFORMATION

Item 1.
Legal Proceedings

Neither we nor our subsidiaries nor, to our knowledge, our Manager is currently subject to any legal proceedings that we or our Manager consider to be material. To our knowledge, none of our communities are currently subject to any legal proceeding that we consider material.

Item 1A.
Risk Factors

There have been no material changes to our potential risks and uncertainties presented in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the twelve months ended December 31, 2016 that was filed with the SEC on March 1, 2017.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

None.

Item  6.
Exhibits

See Exhibit Index.


67


SIGNATURES
 
 
 
 
 
 
 
 
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
 
 
 
PREFERRED APARTMENT COMMUNITIES, INC.
 
 
 
 
 
 
 
 
 
Date: May 8, 2017
 
By: 
 /s/ John A. Williams
 
 
 
 
 
John A. Williams
 
 
 
 
 
Chief Executive Officer 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Date: May 8, 2017
 
By: 
 /s/ Michael J. Cronin
 
 
 
 
 
Michael J. Cronin
 
 
 
 
 
Executive Vice President, Chief Accounting Officer and Treasurer
 
 
 
 
 
 
 
 
 



68


Index to Exhibits
EXHIBIT INDEX
Exhibit Number
 

Description
4.1
(1) 
10.1
(2) 
10.2
(3) 
10.3
(4) 
10.5
(5) 
10.6
(5) 

12.1
*
 
 
 
31.1
*
31.2
*
32.1
*
32.2
*
101
*
XBRL (eXtensible Business Reporting Language). The following materials from Preferred Apartment Communities, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2017, formatted in XBRL: (i) Consolidated balance sheets at March 31, 2017 and December 31, 2016, (ii) consolidated statements of operations for the three months ended March 31, 2017 and 2016, (iii) consolidated statement of stockholders' equity, (iv) consolidated statement of cash flows and (v) notes to consolidated financial statements.
 
*
Filed herewith
 
(1) 
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on February 24, 2017
 
(2) 
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on January 26, 2017
 
(3) 
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on March 6, 2017
 
(4) 
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on March 29, 2017
 
(5) 
Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on January 9, 2017