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EX-32.2 - EXHIBIT 32.2 - PREFERRED APARTMENT COMMUNITIES INCexhibit322apts03312018.htm
EX-32.1 - EXHIBIT 32.1 - PREFERRED APARTMENT COMMUNITIES INCexhibit321apts03312018.htm
EX-31.2 - EXHIBIT 31.2 - PREFERRED APARTMENT COMMUNITIES INCexhibit312apts03312018.htm
EX-31.1 - EXHIBIT 31.1 - PREFERRED APARTMENT COMMUNITIES INCexhibit311apts03312018.htm
EX-12.1 - EXHIBIT 12.1 - PREFERRED APARTMENT COMMUNITIES INCexhibit1203312018.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, 2018
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
paca15.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 20, 2018 was 39,219,777.




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

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
Item 2.

 
 
 
Item 3.

 
 
 
Item 4.
63

 
 
 
 
 
 
Item 1.

 
 
 
Item 1A.

 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
63

 
 
 
Item 3.
Defaults Upon Senior Securities
63

 
 
 
Item 4.
Mine Safety Disclosures
63

 
 
 
Item 5.
Other Information

 
 
 
Item 6.
63

 
 







Preferred Apartment Communities, Inc.
Consolidated Balance Sheets
(Unaudited)
 
 
 
 
 
(In thousands, except per-share par values)
 
March 31, 2018
 
December 31, 2017
Assets
 
 
 
 
 
 
 
 
 
Real estate
 
 
 
 
Land
 
$
422,361

 
$
406,794

Building and improvements
 
2,146,135

 
2,043,853

Tenant improvements
 
75,531

 
63,425

Furniture, fixtures, and equipment
 
225,553

 
210,779

Construction in progress
 
13,420

 
10,491

Gross real estate
 
2,883,000

 
2,735,342

Less: accumulated depreciation
 
(193,141
)
 
(172,756
)
Net real estate
 
2,689,859

 
2,562,586

Real estate loans, net of deferred fee income
 
278,258

 
255,345

Real estate loans to related parties, net
 
134,786

 
131,451

Total real estate and real estate loan investments, net
 
3,102,903

 
2,949,382

 
 
 
 
 
Cash and cash equivalents
 
19,711

 
21,043

Restricted cash
 
47,683

 
51,969

Notes receivable
 
12,174

 
17,318

Note receivable and revolving line of credit due from related party
 
28,020

 
22,739

Accrued interest receivable on real estate loans
 
29,693

 
26,865

Acquired intangible assets, net of amortization of $84,198 and $73,521
 
100,276

 
102,743

Deferred loan costs on Revolving Line of Credit, net of amortization of $150 and $1,153
 
1,578

 
1,385

Deferred offering costs
 
7,374

 
6,544

Tenant lease inducements, net of amortization of $708 and $452
 
16,318

 
14,425

Tenant receivables (net of allowance of $644 and $715) and other assets
 
28,444

 
37,957

 
 
 
 
 
Total assets
 
$
3,394,174

 
$
3,252,370

 
 
 
 
 
Liabilities and equity
 

 
 
 
 
 
 
 
Liabilities
 
 
 
 
Mortgage notes payable, net of deferred loan costs and
 
$
1,871,966

 
$
1,776,652

          mark-to-market adjustment of $36,008 and $35,397
 
 
 
 
Revolving line of credit
 
13,200

 
41,800

Term note payable, net of deferred loan costs of $0 and $6
 

 
10,994

Real estate loan participation obligation
 
10,798

 
13,986

Deferred revenue
 
31,053

 
27,947

Accounts payable and accrued expenses
 
33,053

 
31,253

Accrued interest payable
 
5,472

 
5,028

Dividends and partnership distributions payable
 
16,460

 
15,680

Acquired below market lease intangibles, net of amortization of $9,554 and $8,095
 
38,991

 
38,857

Security deposits and other liabilities
 
12,349

 
9,407

Total liabilities
 
2,033,342

 
1,971,604

 
 
 
 
 
Commitments and contingencies (Note 11)
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
Stockholders' equity
 
 
 
 
Series A Redeemable Preferred Stock, $0.01 par value per share; 3,050
 
 
 
   shares authorized; 1,348 and 1,250 shares issued; 1,313 and 1,222
 
 
 
shares outstanding at March 31, 2018 and December 31, 2017, respectively
13

 
12

Series M Redeemable Preferred Stock, $0.01 par value per share; 500
 
 
 
   shares authorized; 20 and 15 shares issued and outstanding
 
 
 
at March 31, 2018 and December 31, 2017, respectively

 

Common Stock, $0.01 par value per share; 400,067 shares authorized;
 
 
 
39,208 and 38,565 shares issued and outstanding at
 
 
 
March 31, 2018 and December 31, 2017, respectively
392

 
386

Additional paid-in capital
 
1,357,725

 
1,271,040

Accumulated earnings (deficit)
 

 
4,449

Total stockholders' equity
 
1,358,130

 
1,275,887

Non-controlling interest
 
2,702

 
4,879

Total equity
 
1,360,832

 
1,280,766

 
 
 
 
 
Total liabilities and equity
 
$
3,394,174

 
$
3,252,370


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,
(In thousands, except per-share figures)
2018
 
2017
Revenues:
 
 
 
Rental revenues
$
64,077

 
$
45,363

Other property revenues
11,728

 
8,436

Interest income on loans and notes receivable
10,300

 
7,948

Interest income from related parties
4,265

 
4,814

Total revenues
90,370

 
66,561

 
 
 
 
Operating expenses:
 
 
 
Property operating and maintenance
8,805

 
6,539

Property salary and benefits (including reimbursements of $3,609 and $2,777 to related party)
3,899

 
3,028

Property management fees (including $2,105 and $1,434 to related parties)
2,756

 
1,902

Real estate taxes
9,975

 
7,904

General and administrative
1,841

 
1,505

Equity compensation to directors and executives
1,135

 
873

Depreciation and amortization
40,616

 
24,826

Acquisition and pursuit costs

 
9

Asset management fees to related party
6,241

 
4,513

Insurance, professional fees and other expenses
1,445

 
1,291

Total operating expenses
76,713

 
52,390

 
 
 
 
Contingent asset management and general and administrative expense fees
(1,220
)
 
(175
)
 
 
 
 
Net operating expenses
75,493

 
52,215

 
 
 
 
Operating income
14,877

 
14,346

Interest expense
20,968

 
15,009

 
 
 
 
Net (loss) before gain on sale of real estate
(6,091
)
 
(663
)
Gain on sale of real estate, net of disposition expenses
20,354

 
30,724

Net income
14,263

 
30,061

 
 
 
 
Consolidated net (income) attributable to non-controlling interests
(380
)
 
(999
)
 
 
 
 
Net income attributable to the Company
13,883

 
29,062

 
 
 
 
Dividends declared to preferred stockholders
(19,517
)
 
(14,386
)
Earnings attributable to unvested restricted stock
(2
)
 
(1
)
 
 
 
 
Net (loss) income attributable to common stockholders
$
(5,636
)
 
$
14,675

 
 
 
 
Net (loss) income per share of Common Stock available
 
 
 
to common stockholders, basic and diluted
$
(0.14
)
 
$
0.54

 
 
 
 
Dividends per share declared on Common Stock
$
0.25

 
$
0.22

 
 
 
 
Weighted average number of shares of Common Stock outstanding,
 
 
 
Basic and diluted
39,098

 
26,936


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, 2018 and 2017
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands, except dividend per-share figures)
 
Series A and Series M Redeemable Preferred Stock
 
Common Stock
 
Additional Paid in Capital
 
Accumulated Earnings
 
Total Stockholders' Equity
 
Non-Controlling Interest
 
Total Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
 
$
12

 
$
386

 
$
1,271,040

 
$
4,449

 
$
1,275,887

 
$
4,879

 
$
1,280,766

Issuance of Units
 
1

 

 
97,394

 

 
97,395

 

 
97,395

Issuance of mShares
 

 

 
5,209

 

 
5,209

 

 
5,209

Redemptions of Series A Preferred Stock
 

 

 
(5,766
)
 

 
(5,766
)
 

 
(5,766
)
Exercises of warrants
 

 
5

 
7,185

 

 
7,190

 

 
7,190

Syndication and offering costs
 

 

 
(9,772
)
 

 
(9,772
)
 

 
(9,772
)
Equity compensation to executives and directors
 

 

 
138

 

 
138

 

 
138

Vesting of restricted stock
 

 

 

 

 

 

 

Conversion of Class A Units to Common Stock
 

 
1

 
850

 

 
851

 
(851
)
 

Current period amortization of Class B Units
 

 

 

 

 

 
996

 
996

Net income
 

 

 

 
13,883

 
13,883

 
380

 
14,263

Reallocation adjustment to non-controlling interests
 

 

 
2,434

 

 
2,434

 
(2,434
)
 

Distributions to non-controlling interests
 

 

 

 

 

 
(268
)
 
(268
)
Dividends to series A preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($5.00 per share per month)
 

 

 
(1,166
)
 
(18,038
)
 
(19,204
)
 

 
(19,204
)
Dividends to mShares preferred stockholders
 

 

 
(19
)
 
(294
)
 
(313
)
 

 
(313
)
Dividends to common stockholders ($0.25 per share)
 

 

 
(9,802
)
 

 
(9,802
)
 

 
(9,802
)
Balance at March 31, 2018
 
$
13

 
$
392

 
$
1,357,725

 
$

 
$
1,358,130

 
$
2,702

 
$
1,360,832





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



Preferred Apartment Communities, Inc.
Consolidated Statements of Stockholders' Equity, continued
For the three-month periods ended March 31, 2018 and 2017
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands, except dividend per-share figures)
 
Series A and
Series M Redeemable Preferred Stock
 
Common Stock
 
Additional Paid in Capital
 
Accumulated Earnings
 
Total Stockholders' Equity
 
Non-Controlling Interest
 
Total Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
 
$
9

 
$
265

 
$
906,737

 
$
(23,231
)
 
$
883,780

 
$
1,481

 
$
885,261

Issuance of Units
 
1

 

 
78,241

 

 
78,242

 

 
78,242

Redemptions of Series A Preferred Stock
 

 
2

 
(1,585
)
 

 
(1,583
)
 

 
(1,583
)
Issuance of common stock
 

 

 
189

 

 
189

 

 
189

Exercises of Warrants
 

 
3

 
3,849

 

 
3,852

 

 
3,852

Syndication and offering costs
 

 

 
(9,034
)
 

 
(9,034
)
 

 
(9,034
)
Equity compensation to executives and directors
 

 

 
128

 

 
128

 

 
128

Vesting of restricted stock
 

 

 

 

 

 

 

Conversion of Class A Units to Common Stock
 

 
2

 
1,662

 

 
1,664

 
(1,664
)
 

Current period amortization of Class B Units
 

 

 

 

 

 
745

 
745

Net income
 

 

 

 
29,062

 
29,062

 
999

 
30,061

Reallocation adjustment to non-controlling interests
 

 

 
895

 

 
895

 
(895
)
 

Distributions to non-controlling interests
 

 

 

 

 

 
(199
)
 
(199
)
Dividends to Series A preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($5.00 per share per month)
 

 

 
(14,428
)
 

 
(14,428
)
 

 
(14,428
)
Dividends to mShares preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($4.79 - $6.25 per share per month)
 

 

 
(2
)
 

 
(2
)
 

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

 

 
(5,971
)
 

 
(5,971
)
 

 
(5,971
)
Balance at March 31, 2017
 
$
10

 
$
272

 
$
960,681

 
$
5,831

 
$
966,794

 
$
467

 
$
967,261
















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,
(In thousands)
 
2018
 
2017
Operating activities:
 
 
 
 
Net income
 
$
14,263

 
$
30,061

Reconciliation of net income to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
27,990

 
18,288

Amortization expense
 
12,626

 
6,539

Amortization of above and below market leases
 
(1,178
)
 
(798
)
Deferred revenues and fee income amortization
 
(943
)
 
(284
)
Amortization of market discount on assumed debt and lease incentives
323

 

Deferred loan cost amortization
 
1,480

 
1,180

(Increase) in accrued interest income on real estate loans
 
(2,828
)
 
(1,546
)
Equity compensation to executives and directors
 
1,135

 
873

Gain on sale of real estate
 
(20,354
)
 
(30,724
)
Other
 

 
187

Changes in operating assets and liabilities:
 
 
 
 
Increase (Decrease) in tenant receivables and other assets
 
625

 
(1,965
)
(Decrease) in tenant lease incentives
(2,149
)
 
(2,913
)
(Decrease) in accounts payable and accrued expenses
 
(1,074
)
 
(716
)
Increase in accrued interest, prepaid rents and other liabilities
 
1,502

 
95

Net cash provided by operating activities
 
31,418

 
18,277

 
 
 
 
 
Investing activities:
 
 
 
 
Investments in real estate loans
 
(68,929
)
 
(16,272
)
Repayments of real estate loans
 
42,312

 
9,866

Notes receivable issued
 
(472
)
 
(1,263
)
Notes receivable repaid
 
5,618

 

Note receivable issued to and draws on line of credit by related party
 
(14,419
)
 
(7,650
)
Repayments of line of credit by related party
 
9,034

 
7,554

Loan origination fees received
 
1,600

 

Loan origination fees paid to Manager
 
(800
)
 

Acquisition of properties
 
(170,072
)
 
(165,825
)
Disposition of properties, net
 
42,266

 
107,656

Receipt of insurance proceeds for capital improvements
412

 

Additions to real estate assets - improvements
 
(7,637
)
 
(3,680
)
Deposits refunded (paid) on acquisitions
 
4,021

 
(1,838
)
Net cash used in investing activities
 
(157,066
)
 
(71,452
)
 
 
 
 
 
Financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
123,275

 
104,300

Repayments of mortgage notes payable
 
(27,350
)
 
(67,141
)
Payments for deposits and other mortgage loan costs
 
(1,733
)
 
(3,399
)
Proceeds from real estate loan participants
 
5

 
82

Payments to real estate loan participants
 
(3,314
)
 
(2,467
)
Proceeds from lines of credit
 
86,200

 
37,500

Payments on lines of credit
 
(114,800
)
 
(68,000
)
Repayment of the Term Loan
 
(11,000
)
 

Proceeds from sales of Units, net of offering costs and redemptions
 
87,490

 
68,987

Proceeds from sales of Common Stock
 

 
186

Proceeds from exercises of Warrants
 
11,169

 
4,249

Common Stock dividends paid
 
(9,576
)
 
(5,741
)
Preferred stock dividends paid
 
(18,963
)
 
(13,961
)
Distributions to non-controlling interests
 
(221
)
 
(195
)
Payments for deferred offering costs
 
(1,152
)
 
(2,126
)
Net cash provided by financing activities
 
120,030

 
52,274

 
 
 
 
 
Net decrease in cash, cash equivalents and restricted cash
(5,618
)
 
(901
)
Cash, cash equivalents and restricted cash, beginning of period
73,012

 
67,715

Cash, cash equivalents and restricted cash, end of period
$
67,394

 
$
66,814

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,
(in thousands)
 
2018
 
2017
Supplemental cash flow information:
 
 
 
 
Cash paid for interest
 
$
18,938

 
$
13,983

 
 
 
 
 
Supplemental disclosure of non-cash activities:
 
 
 
 
Accrued capital expenditures
 
$
1,735

 
$
455

Writeoff of fully depreciated or amortized assets and liabilities
 
$
135

 
$
146

Writeoff of fully amortized deferred loan costs
 
$
1,331

 
$

Lessee-funded tenant improvements, capitalized as landlord assets
 
$
3,602

 
$
9,257

Dividends payable - Common Stock
 
$
9,802

 
$
5,971

Dividends payable - Series A Preferred Stock
 
$
6,456

 
$
4,887

Dividends payable - mShares Preferred Stock
 
$
96

 
$
2

Dividends declared but not yet due and payable
 
$
106

 
$

Partnership distributions payable to non-controlling interests
 
$
268

 
$
199

Accrued and payable deferred offering costs
 
$
342

 
$
1,027

Offering cost reimbursement to related party
 
$
475

 
$
105

Reclass of offering costs from deferred asset to equity
 
$
446

 
$
1,370

Extinguishment of land loan for property
 
$

 
$

Proceeds of like-kind exchange funds for dispositions
 
$

 
$
31,288

Use of like-kind exchange funds for acquisitions
 
$

 
$
27,527

Fair value issuances of equity compensation
 
$
4,612

 
$
3,728

Mortgage loans assumed on acquisitions
 
$

 
$
30,250

Noncash repayment of mortgages through refinance
 
$
37,485

 
$

 
 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
 
Cash and cash equivalents
 
$
19,711

 
$
13,365

Restricted cash
 
47,683

 
53,449

Cash, cash equivalents and restricted cash, end of period
$
67,394

 
$
66,814

 
 
 
 
 


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


Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements
March 31, 2018
(unaudited)



1.
Organization and Basis of Presentation

Preferred Apartment Communities, Inc. was formed as a Maryland corporation on September 18, 2009, and elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, effective with its tax year ended December 31, 2011. Unless the context otherwise requires, references to the "Company", "we", "us", or "our" refer to Preferred Apartment Communities, Inc., together with its consolidated subsidiaries, including Preferred Apartment Communities Operating Partnership, L.P., or the Operating Partnership. The Company was formed primarily to acquire and operate multifamily properties in select targeted markets throughout the United States. As part of its business strategy, the Company may enter into forward purchase contracts or purchase options for to-be-built multifamily communities and may make 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, 2018, the Company had 39,208,477 shares of common stock, par value $0.01 per share, or Common Stock, issued and outstanding and was the approximate 97.3% owner of the Operating Partnership at that date. The number of partnership units not owned by the Company totaled 1,070,103 at March 31, 2018 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 portfolio of grocery-anchored shopping centers. Preferred Office Properties, LLC owns and conducts the business of our portfolio of office buildings. Preferred Campus Communities, LLC owns and conducts the business of our portfolio of off-campus student housing communities. Each of these entities are wholly-owned subsidiaries of the Operating Partnership.

Basis of Presentation

These consolidated financial statements include all of the accounts of the Company and the Operating Partnership presented in accordance with accounting principles generally accepted in the United States of America, or GAAP. 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 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 1, 2018. Amounts are presented in thousands where indicated.
    
2.
Summary of Significant Accounting Policies

Acquisitions and Impairments of Real Estate Assets
When the Company acquires property, it allocates the aggregate purchase price to tangible assets, consisting of land, building, site improvements and furniture, fixtures and equipment, and identifiable intangible assets, consisting of the value of in- place leases


7

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2018
(unaudited)


and above-market and below-market leases as described further below, using estimated fair values of each component at the time of purchase. The Company follows the guidance as outlined in ASC 805-10, Business Combinations, as amended by ASU-2017-01.
Tangible assets
The fair values of land acquired is calculated under the highest and best use model, using formal appraisals and comparable land sales, among other inputs. Building value is determined by valuing the property on a “go-dark” basis as if it were vacant, and also using a replacement cost approach, which two results are then reconciled. Site improvements are valued using replacement cost. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases, including leasing commissions and other related costs. 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.
Identifiable intangible assets
In-place leases
Multifamily communities and student housing properties
The fair value of in-place leases are estimated by calculating the estimated time to fill a hypothetically empty apartment complex to its stabilization level (estimated to be 93% 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.
Grocery-anchored shopping centers and office buildings
The fair value of in-place leases 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 calculated 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.
Above-market and below-market lease values
Multifamily communities and student housing properties
These values are usually not significant or are not applicable for these properties.
Grocery-anchored shopping centers and office buildings
The values of above-market and below-market leases are developed by comparing the Company's estimate of the average market rents and expense reimbursements to the average contract rent at the property acquisition date. The amount by which contract rent and expense reimbursements exceed estimated market rent are summed for each individual lease and discounted for a singular aggregate above-market lease intangible asset for the property. The amount by which estimated market rent exceeds contract rent and expense reimbursements are summed for each individual lease and discounted for a singular aggregate below-market lease intangible liability. The above-market or below-market lease values are recorded as a reduction or increase, respectively, to rental revenue over the remaining noncancelable term of the respective leases, plus any below-market probable renewal options.
Impairment assessment
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. When qualitative factors indicate the possibility of impairment, the total


8

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2018
(unaudited)


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.
Revenue Recognition
Multifamily communities and student housing properties
Rental revenue is recognized when earned from residents of the Company's multifamily communities, which is over the terms of 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.
Grocery-anchored shopping centers and office buildings
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 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 revenue. Determination of the appropriate accounting for the payment of a tenant allowance is made on a lease-by-lease basis, considering the facts and circumstances of the individual tenant lease. When the Company is the owner of the leasehold improvements, recognition of rental revenue commences when the lessee is given possession of the leased space upon completion of tenant improvements. However, when the leasehold improvements are owned by the tenant, the lease inception date is the date the tenant obtains possession of the leased space for purposes of constructing its leasehold improvements. For our office buildings, if the improvement is deemed to be a “landlord asset,” and the tenant funded the tenant improvements, the cost is amortized over the term of the underlying lease as rental revenues. In order to qualify as a landlord asset, the specifics of the tenant’s assets are reviewed, including the Company's approval of the tenant’s detailed expenditures, whether such assets may be usable by other future tenants, whether the Company has consent to alter or remove the assets from the premises and generally remain the Company's property at the end of the lease.
Acquisition Costs

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 will cause the Company to capitalize its costs for acquisitions (including, effective July 1, 2017, a 1% acquisition fee), 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.

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Restricted cash includes cash restricted by state law or contractual requirement and relates primarily to real estate tax and insurance escrows, capital improvement reserves and resident security deposits.



9

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2018
(unaudited)


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. The new standard may be applied retrospectively to each prior period presented or prospectively with the cumulative effect, if any, recognized as of the date of adoption. The Company will adopt the new standard on January 1, 2018,when effective, utilizing the modified retrospective transition method with a cumulative effect recognized as of the date of adoption. In addition, the evaluation of non-lease components under ASU 2014-09 will not be effective until Accounting Standards Update No. 2016-02, Leases (Topic 842), ("ASU 2016-02") becomes effective (see further discussion below), which will be January 1, 2019 for the Company. The Company has determined that approximately 90% of its consolidated revenues are derived from either long-term leases with its tenants and reimbursement of related property tax and insurance expenses (considered executory costs of leases) or its mezzanine loan interest income, which are excluded from the scope of the ASU 2014-09. Of the remaining approximately 10% of the Company’s revenues, the majority is comprised of common area maintenance (“CAM”) reimbursements and utility reimbursements, which are non-lease components. The Company has concluded that the adoption of ASU 2014-09 will have no material effect upon the timing of the recognition of reimbursement revenue and other miscellaneous income. The Company also evaluated its amenity and ancillary services to its multifamily and student housing residents and does not expect the timing and recognition of revenue to change as a result of implementing ASU 2014-09. Additional required disclosures regarding the nature and timing of the Company's revenue transactions will be provided upon adoption of ASU 2016-02.

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 Company adopted ASU 2016-01 on January 1, 2018. The adoption of ASU 2016-01 did not impact the Company's results of operations or financial condition but did reduce the required disclosures concerning financial instruments.
 
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 and supersedes the previous standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The new lease guidance requires an entity to separate lease components from non-lease components, such as maintenance services or other activities that transfer a good or service to our residents and tenants in a contract; it also considers the reimbursement of real estate taxes and insurance as executory costs of the lease and requires that such amounts be consolidated with the base rent revenue. For lessors, the consideration in the contract is allocated to the lease and non-lease components on a relative standalone price basis in accordance with the allocation guidance in the new revenue standard.   The Company concluded that adoption of ASU 2016-02 does not change the timing of revenue recognition over the lease component, which remains over a straight line method, though the reimbursement of property tax and insurance, considered executory costs of leasing, will be combined with the base rent revenue and presented within rental income instead of other income within the Company’s income statement. Non-lease components are evaluated under ASU 2014-09, Revenue from Contracts with Customers (Topic 606), discussed above. In its March 2018 meeting, the FASB approved a practical expedient for lessors to elect, by class of underlying assets, to not separate lease and non-lease components if both (1) the timing and pattern of revenue recognition are the same for the non-lease component(s) and related lease component and (2) the combined single lease component would be classified as an operating lease. The Company anticipates adopting ASC 842 utilizing this practical expedient as it relates to its common area maintenance services.

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 will become 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 and is also revising its policies for credit loss on resident and tenant receivables to comply with the expected credit loss model under this guidance. The Company is continuing to evaluate the pending guidance but does not believe the adoption of ASU 2016-13 will have a


10

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2018
(unaudited)


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 and has minimal history of loss on its resident and tenant receivables.

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 Company adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15 did 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. The Company adopted ASU 2016-18 on January 1, 2018 and its adoption of ASU 2016-18 did not impact its results of operations or financial condition, but did change the line upon which changes in restricted cash are presented.

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 adopted this guidance on January 1, 2018. The new standard clarifies that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The amendments also clarify that an entity should allocate consideration to each distinct asset by applying the guidance in Topic 606 on allocating the transaction price to performance obligations for sales to customers. The Company’s sales of nonfinancial real estate assets are generally made to non-customers, which is a scope exception under Topic 606. The Company elected to adopt this practical expedient and the proceeds from real estate sales continue to be recognized as gain or loss on sale of real estate in the Consolidated Statement of Operations.



11

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2018
(unaudited)


3. Real Estate Assets

The Company's real estate assets consisted of:

 
 
As of:
 
 
March 31, 2018
 
December 31, 2017
Multifamily communities:
 
 
 
 
Properties (1)
 
31

 
30

Units
 
9,768

 
9,521

New Market Properties: (2)
 
 
 
 
Properties
 
39

 
39

Gross leasable area (square feet) (3)
 
4,055,714

 
4,055,461

Student housing properties:
 
 
 
 
Properties
 
4

 
4

Units
 
891

 
891

Beds
 
2,950

 
2,950

Preferred Office Properties:
 
 
 
 
Properties
 
5

 
4

Rentable square feet
 
1,539,000

 
1,352,000

 
 
 
 
 
(1) The acquired second and third phase 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) See Note 12, Segment information.
(3) The Company also owns approximately 47,600 square feet of gross leasable area of ground floor retail space which is embedded within the Lenox Portfolio and not included in the totals above for New Market Properties.

Storm-related costs

Remediation of property damages due to Hurricane Harvey at our Stone Creek multifamily community located in Port Arthur, Texas is progressing on schedule, and we anticipate full completion in the third quarter 2018. For the three-month period ended March 31, 2018, rental revenues decreased approximately $252,000 due to lost rental and other property revenues. During the first quarter, we received proceeds from our insurance company of $588,000 for lost rental and other property revenues, which has been reflected in income for the first quarter 2018. We expect to record a full recovery of the remainder of lost rental and other property revenues upon settlement with our insurance carrier and receipt of funds later in 2018.
 
Multifamily communities sold

On March 20, 2018, the Company closed on the sale of its 328-unit multifamily community in Raleigh, North Carolina, or Lake Cameron, to an unrelated third party for a purchase price of approximately $43.5 million, exclusive of closing costs and resulting in a gain of $20.4 million. Lake Cameron contributed approximately $0.2 million and 0.1 million of net income to the consolidated operating results of the Company for the three-month periods ended March 31, 2018 and 2017, respectively.

On January 20, 2017, the Company closed on the sale of its 364-unit multifamily community in Kansas City, Kansas, 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. Sandstone Creek contributed approximately $0.1 million of net loss to the consolidated operating results of the Company for the three-month period ended March 31, 2017.

On March 7, 2017, the Company closed on the sale of its 408-unit multifamily community in Atlanta, Georgia, 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. Ashford Park contributed approximately $0.5 million of net income to the consolidated operating results of the Company for the three-month period ended March 31, 2017.


12

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2018
(unaudited)



Each of the gains recorded for these sales transactions were net of disposition expenses and debt defeasance related costs and prepayment premiums, as described in Note 9.

The carrying amounts of the significant assets and liabilities of the disposed properties at the dates of sale were:
 
 
Lake Cameron
 
Sandstone Creek
 
Ashford Park
(in thousands)
 
March 20, 2018
 
January 20, 2017
 
March 7, 2017
Real estate assets:
 
 
 
 
 
 
Land
 
$
4,000

 
$
2,846

 
$
10,600

Building and improvements
 
21,519

 
41,860

 
24,075

Furniture, fixtures and equipment
 
3,687

 
5,278

 
4,223

Accumulated depreciation
 
(7,220
)
 
(4,809
)
 
(6,816
)
 
 
 
 
 
 
 
Total assets
 
$
21,986

 
$
45,175

 
$
32,082

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Mortgage note payable
 
$
19,736

 
$
30,840

 
$
25,626

Supplemental mortgage note
 

 

 
6,374

 
 
 
 
 
 
 
Total liabilities
 
$
19,736

 
$
30,840

 
$
32,000


Multifamily communities acquired

During the three-month periods ended March 31, 2018 and 2017, the Company completed the acquisition of the following multifamily communities:
Acquisition date
 
Property
 
Location
 
Approximate purchase price (millions) (1)
 
Units
 
 
 
 
 
 
 
 
 
1/9/2018
 
The Lux at Sorrel
 
Jacksonville, Florida
 
$
48.5

 
265

2/28/2018
 
Green Park
 
Atlanta, Georgia
 
58.0

 
310

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
106.5

 
575

 
 
 
 
 
 
 
 
 
2/28/2017
 
SoL (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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
195.1

 
1,080


(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.


13

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2018
(unaudited)


The Company allocated the purchase prices and capitalized acquisition costs to the acquired assets and liabilities based upon their fair values, as shown in the following table. The purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities.

 
 
Multifamily Communities acquired during the three months ended:
 
 
March 31, 2018
 
March 31, 2017
(in thousands)
 
The Lux at Sorrel
 
Green Park
 
Broadstone at Citrus Village
 
SoL
 
Retreat at Greystone
 
Founders Village
 
 
 
 
 
 
 
 
 
 
 
 
 
Land
 
$
5,332

 
$
7,478

 
$
4,809

 
$
7,441

 
$
4,077

 
$
5,315

Buildings and improvements
 
34,768

 
39,005

 
34,181

 
40,059

 
35,336

 
32,792

Furniture, fixtures and equipment
 
7,763

 
10,206

 
6,300

 
3,771

 
9,125

 
5,969

Lease intangibles
 
1,477

 
2,829

 
1,625

 
2,344

 
1,844

 
1,421

Prepaids & other assets
 
123

 
70

 
133

 
51

 
78

 
113

Escrows
 

 

 
68

 

 
102

 

Accrued taxes
 
(13
)
 
(153
)
 
(108
)
 
(72
)
 
(139
)
 

Security deposits, prepaid rents, and other liabilities
 
(70
)
 
(113
)
 
(26
)
 
(377
)
 
(107
)
 
(103
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net assets acquired
 
$
49,380

 
$
59,322

 
$
46,982

 
$
53,217

 
$
50,316

 
$
45,507

 
 
 
 
 
 
 
 
 
 
 
 
 
Cash paid
 
$
17,855

 
$
19,572

 
$
17,625

 
$
15,732

 
$
15,106

 
$
13,902

Mortgage debt, net
 
31,525

 
39,750

 
29,357

 
37,485

 
35,210

 
31,605

 
 
 
 
 
 
 
 
 
 
 
 
 
Total consideration
 
$
49,380

 
$
59,322

 
$
46,982

 
$
53,217

 
$
50,316

 
$
45,507

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
1,001

 
$
469

 
$
1,196

 
$
1,344

 
$
1,218

 
$
1,022

Net income (loss)
 
$
(879
)
 
$
(643
)
 
$
(524
)
 
$
(301
)
 
$
(776
)
 
$
(421
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Capitalized acquisition costs incurred by the Company
 
$
846

 
$
1,501

 
$
458

 
$
290

 
$
383

 
$
1,103

Acquisition costs paid to related party (included above)
 
$
485

 
$
609

 
$
24

 
$
60

 
$
56

 
$
8

Remaining amortization period of intangible
 
 
 
 
 
 
 
 
 
 
 
 
 assets and liabilities (months)
 
3.5

 
13.5

 
0

 
0

 
0

 
0

 
 
 
 
 
 
 
 
 
 
 
 
 
(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.





14

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2018
(unaudited)


Preferred Office Properties

On January 29, 2018, the Company acquired Armour Yards, a collection of four adaptive re-use office buildings comprised of approximately 187,000 square feet of office space in Atlanta, Georgia. The gross purchase price was $66.5 million, exclusive of credited unfunded leasing costs, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.

The Company allocated the purchase prices and capitalized acquisition costs to the acquired assets and liabilities based upon their fair values, as shown in the following table. The purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities.

(in thousands)
 
Armour Yards
 
 
 
Land
 
$
6,756

Buildings and improvements
 
48,332

Tenant improvements
 
6,201

In-place leases
 
3,762

Above-market leases
 
61

Leasing costs
 
2,181

Below-market leases
 
(1,594
)
Security deposits, prepaid rents, and other liabilities
 
(4,335
)
 
 
 
Net assets acquired
 
$
61,364

 
 
 
Cash paid
 
$
21,364

Mortgage debt, net
 
40,000

 
 
 
Total consideration
 
$
61,364

 
 
 
Three months ended March 31, 2018:
 
 
Revenue
 
$
955

Net income (loss)
 
$
(170
)
 
 
 
Capitalized acquisition costs incurred by the Company
 
$
817

Acquisition costs paid to related party (included above)
 
$
665

Remaining amortization period of intangible
 
 
 assets and liabilities (years)
 
7.5



The Company recorded aggregate amortization and depreciation expense of:
 
 
Three months ended March 31,
(in thousands)
 
2018
 
2017
Depreciation:
 
 
 
 
Buildings and improvements
 
17,478

 
12,421

Furniture, fixtures, and equipment
 
10,512

 
5,867

 
 
27,990

 
18,288

Amortization:
 
 
 
 
Acquired intangible assets
 
12,500

 
6,500

Deferred leasing costs
 
91

 
32

Website development costs
 
35

 
6

Total depreciation and amortization
 
40,616

 
24,826


At March 31, 2018, the Company had recorded acquired gross intangible assets of $184.5 million, and accumulated amortization of $84.2 million; gross intangible liabilities of $48.5 million and accumulated amortization of $9.6 million. Net intangible assets and liabilities as of March 31, 2018 will be amortized over the weighted average remaining amortization period of approximately 7.1 years and 9.4 years, respectively.


15

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2018
(unaudited)


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

Our portfolio of fixed rate, interest-only real estate loans consisted of:
(Dollars in thousands)
 
March 31, 2018

 
December 31, 2017
Number of loans
 
23

 
23

Drawn amount
 
$
415,123

 
$
388,506

Deferred loan origination fees
 
(2,079
)
 
(1,710
)
Carrying value
 
$
413,044

 
$
386,796

 
 
 
 
 
Unfunded loan commitments
 
$
144,012

 
$
67,063

Weighted average current interest, per annum (paid monthly)
 
8.39
%
 
8.53
%
Weighted average accrued interest, per annum
 
5.17
%
 
4.99
%

(In thousands)
 
Principal balance
 
Deferred loan origination fees
 
Carrying value
Balances as of December 31, 2017
 
$
388,506

 
$
(1,710
)
 
$
386,796

Loan fundings
 
68,929

 

 
68,929

Loan repayments
 
(30,848
)
 

 
(30,848
)
Loans settled with property acquisitions
 
(11,464
)
 

 
(11,464
)
Origination fees collected
 

 
(800
)
 
(800
)
Amortization of commitment fees
 

 
431

 
431

Balances as of March 31, 2018
 
$
415,123

 
$
(2,079
)
 
$
413,044


Property type
 
Number of loans
 
Carrying value
 
Commitment amount
 
Percentage of portfolio
 
 
 
 
(in thousands)
 
 
Multifamily communities
 
14

 
$
258,210

 
$
392,303

 
63
%
Student housing properties
 
6

 
132,019

 
141,975

 
32
%
Grocery-anchored shopping centers
 
1

 
12,854

 
12,857

 
3
%
Other
 
2

 
9,961

 
12,000

 
2
%
Balances as of March 31, 2018
 
23

 
$
413,044

 
$
559,135

 
 

Certain of the Company's real estate loan investments are subject to loan participation agreements with unaffiliated third parties. The Company's Palisades loan is subject to such an agreement, 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, 2018 was approximately $10.8 million.

The Company's real estate loan investments are collateralized by 100% of the membership interests of the underlying project entity, and, where considered necessary, by unconditional joint and several repayment guaranties and performance guaranties by the principal(s) of the borrowers. These guaranties generally remain in effect until the receipt of a final certificate of occupancy. All of the guaranties are subject to the rights held by the senior lender pursuant to a standard intercreditor agreement. The Crescent Avenue, Haven Northgate and Brentwood loans are also collateralized by the acquired land or property. 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


16

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
March 31, 2018
(unaudited)


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, 2018, none of the Company's real estate loans were delinquent.
    
Our portfolio of notes and lines of credit receivable consisted of:

Borrower
 
Date of loan
 
Maturity date
 
Total loan commitments
 
Outstanding balance as of:
 
Interest rate
 
 
 
 
 
March 31, 2018
 
December 31, 2017
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
360 Residential, LLC (1)
 
3/20/2013
 
 
 
$

 

 
$
2,000

 
12
%
 
Preferred Capital Marketing Services, LLC (3)
 
1/24/2013
 
12/31/2018
 
1,500

 
926

 
926

 
10
%
 
Preferred Apartment Advisors, LLC (2,3,4)
 
8/21/2012
 
12/31/2018
 
18,000

 
15,474

 
14,488

 
6
%
 
Haven Campus Communities, LLC (2,3)
 
6/11/2014
 
12/31/2018
 
11,660

 
11,620

 
7,325

 
8
%
(5) 
Oxford Capital Partners, LLC (2,6)
 
10/5/2015
 
6/30/2018
 
10,150

 
6,788

 
6,628

 
12
%
 
360 Residential, LLC II (1)
 
12/30/2015
 
 
 

 

 
3,255

 
15
%
 
Mulberry Development Group, LLC (2)
 
3/31/2016
 
6/30/2018
 
500

 
500

 
479

 
12
%
 
Mulberry Alexandria Group, LLC
 
7/31/2017
 
6/30/2018
 
2,060

 
2,059

 
1,921

 
12
%
 
360 Capital Company, LLC (2)
 
5/24/2016
 
12/31/2019
 
3,400

 
2,830

 
3,041

 
12
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized loan fees
 
 
 
 
 
 
 
(3
)
 
(6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
47,270

 
40,194

 
$
40,057