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EX-32.2 - EXHIBIT 32.2 - PREFERRED APARTMENT COMMUNITIES INCexhibit322apts09302018.htm
EX-32.1 - EXHIBIT 32.1 - PREFERRED APARTMENT COMMUNITIES INCexhibit321apts09302018.htm
EX-31.2 - EXHIBIT 31.2 - PREFERRED APARTMENT COMMUNITIES INCexhibit312apts09302018.htm
EX-31.1 - EXHIBIT 31.1 - PREFERRED APARTMENT COMMUNITIES INCexhibit311apts09302018.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 September 30, 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
paca18.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 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 October 29, 2018 was 41,049,275.




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

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
Item 2.

 
 
 
Item 3.

 
 
 
Item 4.

 
 
 
 
 
 
Item 1.

 
 
 
Item 1A.

 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
74

 
 
 
Item 3.
Defaults Upon Senior Securities
74

 
 
 
Item 4.
Mine Safety Disclosures
74

 
 
 
Item 5.
Other Information

 
 
 
Item 6.
Exhibits

 
 







Preferred Apartment Communities, Inc.
Consolidated Balance Sheets
(Unaudited)
 
 
 
 
 
(In thousands, except per-share par values)
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
 
 
 
 
 
 
Real estate
 
 
 
 
Land
 
$
490,394

 
$
406,794

Building and improvements
 
2,494,904

 
2,043,853

Tenant improvements
 
105,390

 
63,425

Furniture, fixtures, and equipment
 
261,806

 
210,779

Construction in progress
 
5,353

 
10,491

Gross real estate
 
3,357,847

 
2,735,342

Less: accumulated depreciation
 
(242,579
)
 
(172,756
)
Net real estate
 
3,115,268

 
2,562,586

Real estate loans, net of deferred fee income
 
326,765

 
255,345

Real estate loans to related parties, net
 
60,635

 
131,451

Real estate assets held for sale, net of accumulated depreciation of $6,667 and $0
 
36,360

 

Total real estate and real estate loan investments, net
 
3,539,028

 
2,949,382

 
 
 
 
 
Cash and cash equivalents
 
26,840

 
21,043

Restricted cash
 
59,531

 
51,969

Notes receivable
 
14,285

 
17,318

Note receivable and revolving line of credit due from related party
 
33,140

 
22,739

Accrued interest receivable on real estate loans
 
31,250

 
26,865

Acquired intangible assets, net of amortization of $106,164 and $73,521
 
112,914

 
102,743

Deferred loan costs on Revolving Line of Credit, net of amortization of $667 and $1,153
 
1,118

 
1,385

Deferred offering costs
 
7,741

 
6,544

Tenant lease inducements, net of amortization of $1,398 and $452
 
20,275

 
14,425

Tenant receivables (net of allowance of $1,017 and $715) and other assets
 
41,632

 
37,957

Variable Interest Entity ("VIE") assets from mortgage-backed pool, at fair value
 
262,228

 

 
 
 
 
 
Total assets
 
$
4,149,982

 
$
3,252,370

 
 
 
 
 
Liabilities and equity
 

 
 
 
 
 
 
 
Liabilities
 
 
 
 
Mortgage notes payable, net of deferred loan costs and
 
 
 
 
          mark-to-market adjustment of $38,275 and $35,397
 
$
2,140,583

 
$
1,776,652

Revolving line of credit
 
55,700

 
41,800

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

 
10,994

Real estate loan participation obligation
 
10,495

 
13,986

Unearned purchase option termination fees
 
5,756

 

Deferred revenue
 
37,964

 
27,947

Accounts payable and accrued expenses
 
47,548

 
31,253

Accrued interest payable
 
6,322

 
5,028

Dividends and partnership distributions payable
 
18,188

 
15,680

Acquired below market lease intangibles, net of amortization of $13,342 and $8,095
 
43,155

 
38,857

Security deposits and other liabilities
 
14,586

 
9,407

VIE liabilities from mortgage-backed pool, at fair value
 
257,303

 

Total liabilities
 
2,637,600

 
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; 1,565 and 1,250 shares issued; 1,508 and 1,222
 
 
 
shares outstanding at September 30, 2018 and December 31, 2017, respectively
15

 
12

Series M Redeemable Preferred Stock, $0.01 par value per share; 500
 
 
 
   shares authorized; 37 and 15 shares issued and outstanding
 
 
 
at September 30, 2018 and December 31, 2017, respectively

 

Common Stock, $0.01 par value per share; 400,067 shares authorized;
 
 
 
40,785 and 38,565 shares issued and outstanding at
 
 
 
September 30, 2018 and December 31, 2017, respectively
408

 
386

Additional paid-in capital
 
1,509,411

 
1,271,040

Accumulated earnings (deficit)
 

 
4,449

Total stockholders' equity
 
1,509,834

 
1,275,887

Non-controlling interest
 
2,548

 
4,879

Total equity
 
1,512,382

 
1,280,766

 
 
 
 
 
Total liabilities and equity
 
$
4,149,982

 
$
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 September 30,
 
Nine months ended September 30,
(In thousands, except per-share figures)
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Rental revenues
$
73,640

 
$
50,072

 
$
203,916

 
$
143,677

Other property revenues
13,303

 
9,335

 
37,189

 
26,592

Interest income on loans and notes receivable
13,618

 
9,673

 
37,576

 
26,112

Interest income from related parties
3,671

 
5,820

 
12,310

 
15,971

Total revenues
104,232

 
74,900

 
290,991

 
212,352

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Property operating and maintenance
12,893

 
7,901

 
31,805

 
21,637

Property salary and benefits (including reimbursements of $4,501,
 
 
 
 
 
 
 
$3,200, $12,040 and $8,995 to related party)
4,911

 
3,403

 
13,038

 
9,650

Property management fees (including $2,344, $1,576
 
 
 
 
 
 
 
 $6,604 and $4,582 to related parties)
2,998

 
2,053

 
8,530

 
6,016

Real estate taxes
10,597

 
7,706

 
30,635

 
23,290

General and administrative
2,221

 
1,702

 
6,019

 
4,861

Equity compensation to directors and executives
796

 
863

 
2,881

 
2,608

Depreciation and amortization
44,499

 
28,904

 
127,210

 
82,187

Acquisition and pursuit costs

 

 

 
14

Asset management fees to related party
7,234

 
5,148

 
20,096

 
14,525

Loan loss allowance
3,029

 

 
3,029

 

Insurance, professional fees and other expenses
1,713

 
1,156

 
5,166

 
3,819

Total operating expenses
90,891

 
58,836

 
248,409

 
168,607

 
 
 
 
 
 
 
 
Waived asset management and general and administrative expense fees
(1,934
)
 
(656
)
 
(4,583
)
 
(1,002
)
 
 
 
 
 
 
 
 
Net operating expenses
88,957

 
58,180

 
243,826

 
167,605

 
 
 
 
 
 
 
 
Operating income
15,275

 
16,720

 
47,165

 
44,747

Interest expense
25,657

 
16,678

 
68,972

 
48,085

Change in fair value of net assets of consolidated VIE
 
 
 
 
 
 
 
from mortgage-backed pool
131

 

 
185

 

Loss on extinguishment of debt

 

 

 
888

 
 
 
 
 
 
 
 
Net (loss) income before gain on sale of real estate
(10,251
)
 
42

 
(21,622
)
 
(4,226
)
Gain on sale of real estate, net of disposition expenses
18,605

 

 
38,961

 
37,635

Net income
8,354

 
42

 
17,339

 
33,409

 
 
 
 
 
 
 
 
Consolidated net (loss) attributable to non-controlling interests
(216
)
 
(1
)
 
(456
)
 
(1,097
)
 
 
 
 
 
 
 
 
Net income attributable to the Company
8,138

 
41

 
16,883

 
32,312

 
 
 
 
 
 
 
 
Dividends declared to preferred stockholders
(22,360
)
 
(16,421
)
 
(62,801
)
 
(46,042
)
Earnings attributable to unvested restricted stock
(5
)
 
(4
)
 
(13
)
 
(12
)
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
$
(14,227
)
 
$
(16,384
)
 
$
(45,931
)
 
$
(13,742
)
 
 
 
 
 
 
 
 
Net loss per share of Common Stock available
 
 
 
 
 
 
 
to common stockholders, basic and diluted
$
(0.35
)
 
$
(0.49
)
 
$
(1.16
)
 
$
(0.46
)
 
 
 
 
 
 
 
 
Weighted average number of shares of Common Stock outstanding,
 
 
 
 
 
 
 
Basic and diluted
40,300

 
33,540

 
39,598

 
30,147


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




Preferred Apartment Communities, Inc.
Consolidated Statements of Stockholders' Equity
For the nine-month periods ended September 30, 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
 
3

 

 
311,719

 

 
311,722

 

 
311,722

Issuance of mShares
 

 

 
21,768

 

 
21,768

 

 
21,768

Redemptions of Series A Preferred Stock
 

 
11

 
(9,112
)
 

 
(9,101
)
 

 
(9,101
)
Exercises of warrants
 

 
10

 
12,943

 

 
12,953

 

 
12,953

Syndication and offering costs
 

 

 
(32,043
)
 

 
(32,043
)
 

 
(32,043
)
Equity compensation to executives and directors
 

 

 
413

 

 
413

 

 
413

Vesting of restricted stock
 

 

 

 

 

 

 

Conversion of Class A Units to Common Stock
 

 
1

 
870

 

 
871

 
(871
)
 

Current period amortization of Class B Units
 

 

 

 

 

 
2,468

 
2,468

Net income
 

 

 

 
16,883

 
16,883

 
456

 
17,339

Reallocation adjustment to non-controlling interests
 

 

 
3,571

 

 
3,571

 
(3,571
)
 

Distributions to non-controlling interests
 

 

 

 

 

 
(813
)
 
(813
)
Dividends to series A preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($5.00 per share per month)
 

 

 
(40,655
)
 
(20,913
)
 
(61,568
)
 

 
(61,568
)
Dividends to mShares preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($4.79 - $6.25 per share per month)
 

 

 
(814
)
 
(419
)
 
(1,233
)
 

 
(1,233
)
Dividends to common stockholders ($0.76 per share)
 

 

 
(30,289
)
 

 
(30,289
)
 

 
(30,289
)
Balance at September 30, 2018
 
$
15

 
$
408

 
$
1,509,411

 
$

 
$
1,509,834

 
$
2,548

 
$
1,512,382





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 nine-month periods ended September 30, 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

 
$
(23,232
)
 
$
883,779

 
$
1,481

 
$
885,260

Issuance of Units
 
2

 

 
228,248

 

 
228,250

 

 
228,250

Redemptions of Series A Preferred Stock
 

 
6

 
(4,506
)
 

 
(4,500
)
 

 
(4,500
)
Issuance of common stock
 

 
49

 
76,755

 

 
76,804

 

 
76,804

Exercises of Warrants
 

 
34

 
43,344

 

 
43,378

 

 
43,378

Syndication and offering costs
 

 

 
(26,725
)
 

 
(26,725
)
 

 
(26,725
)
Equity compensation to executives and directors
 

 

 
357

 

 
357

 

 
357

Vesting of restricted stock
 

 

 

 

 

 

 

Conversion of Class A Units to Common Stock
 

 
2

 
1,676

 

 
1,678

 
(1,678
)
 

Current period amortization of Class B Units
 

 

 

 

 

 
2,250

 
2,250

Net income
 

 

 

 
32,312

 
32,312

 
1,097

 
33,409

Reallocation adjustment to non-controlling interests
 

 

 
(1,146
)
 

 
(1,146
)
 
1,146

 

Distributions to non-controlling interests
 

 

 

 

 

 
(622
)
 
(622
)
Dividends to Series A preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($5.00 per share per month)
 

 

 
(45,792
)
 

 
(45,792
)
 

 
(45,792
)
Dividends to mShares preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($4.79 - $6.25 per share per month)
 

 

 
(250
)
 

 
(250
)
 

 
(250
)
Dividends to common stockholders ($0.69 per share)
 

 

 
(21,668
)
 

 
(21,668
)
 

 
(21,668
)
Balance at September 30, 2017
 
$
11

 
$
356

 
$
1,157,030

 
$
9,080

 
$
1,166,477

 
$
3,674

 
$
1,170,151
















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



Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Nine months ended September 30,
(In thousands)
 
2018
 
2017
Operating activities:
 
 
 
 
Net income
 
$
17,339

 
$
33,409

Reconciliation of net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization expense
 
127,210

 
82,187

Amortization of above and below market leases
 
(4,297
)
 
(2,394
)
Deferred revenues and fee income amortization
 
(3,103
)
 
(1,526
)
      Purchase option termination income amortization
 
(6,554
)
 

Amortization of market discount on assumed debt and lease incentives
1,152

 
364

Deferred loan cost amortization
 
5,213

 
3,907

(Increase) in accrued interest income on real estate loans
 
(4,385
)
 
(5,832
)
Change in fair value of net assets of consolidated VIE
 
(185
)
 

Equity compensation to executives and directors
 
2,881

 
2,608

Gain on sale of real estate
 
(38,961
)
 
(37,635
)
Cash received for purchase option terminations
 
5,100

 

Loss on extinguishment of debt
 

 
888

Mortgage interest received from consolidated VIE
 
3,429

 

Mortgage interest paid to other participants of consolidated VIE
 
(3,429
)
 

Loan loss allowance
 
3,029

 

Other
 

 
189

Changes in operating assets and liabilities:
 
 
 
 
(Increase) in tenant receivables and other assets
 
(3,518
)
 
(7,818
)
(Increase) in tenant lease incentives
(6,786
)
 
(11,890
)
Increase in accounts payable and accrued expenses
 
14,470

 
11,641

Increase in accrued interest, prepaid rents and other liabilities
 
3,369

 
2,348

Net cash provided by operating activities
 
111,974

 
70,446

 
 
 
 
 
Investing activities:
 
 
 
 
Investments in real estate loans
 
(145,413
)
 
(119,226
)
Repayments of real estate loans
 
141,729

 
42,495

Notes receivable issued
 
(5,949
)
 
(6,250
)
Notes receivable repaid
 
8,941

 
3,507

Note receivable issued to and draws on line of credit by related parties
 
(39,377
)
 
(25,740
)
Repayments of line of credit by related parties
 
28,566

 
23,468

Loan origination fees received
 
2,919

 
2,593

Loan origination fees paid to Manager
 
(1,459
)
 
(1,296
)
Investment in mortgage-backed securities
(4,739
)
 

Mortgage principal received from consolidated VIE from mortgage-backed pool
705

 

Acquisition of properties
 
(662,918
)
 
(485,010
)
Disposition of properties, net
 
83,636

 
148,101

Receipt of insurance proceeds for capital improvements
412

 

Additions to real estate assets - improvements
 
(36,288
)
 
(12,031
)
Deposits refunded on acquisitions
 
3,552

 
2,429

Net cash used in investing activities
 
(625,683
)
 
(426,960
)
 
 
 
 
 
Financing activities:
 
 
 
 
Proceeds from mortgage notes payable
 
386,559

 
332,428

Payments for mortgage notes payable
 
(66,875
)
 
(121,066
)
Payments for deposits and other mortgage loan costs
 
(7,150
)
 
(11,580
)
Payments for mortgage prepayment costs
 

 
(817
)
Proceeds from real estate loan participants
 
5

 
224

Payments to real estate loan participants
 
(4,372
)
 
(3,467
)
Proceeds from lines of credit
 
362,100

 
190,000

Payments on lines of credit
 
(348,200
)
 
(274,500
)
Repayment of the Term Loan
 
(11,000
)
 

Mortgage principal paid to other participants of consolidated VIE from mortgage-backed pool
(705
)
 

Proceeds from sales of Units, net of offering costs and redemptions
 
303,391

 
206,312

Proceeds from sales of Common Stock
 

 
74,213

Proceeds from exercises of Warrants
 
16,553

 
39,430

Payments for redemptions of preferred stock
 
(9,033
)
 
(4,512
)
 
 
 
 
 
 
 
 
 
 
(Continued on next page)
 
 
 
 

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



Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows - continued
(Unaudited)
 
 
 
 
 
 
 
Nine months ended September 30,
(In thousands)
 
2018
 
2017
Common Stock dividends paid
 
(29,488
)
 
(19,251
)
Preferred stock dividends paid
 
(61,093
)
 
(44,890
)
Distributions to non-controlling interests
 
(762
)
 
(605
)
Payments for deferred offering costs
 
(2,862
)
 
(5,420
)
Net cash provided by financing activities
 
527,068

 
356,499

 
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
13,359

 
(15
)
Cash, cash equivalents and restricted cash, beginning of period
73,012

 
67,715

Cash, cash equivalents and restricted cash, end of period
$
86,371

 
$
67,700

 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash paid for interest
 
$
62,207

 
$
43,493

 
 
 
 
 
Supplemental disclosure of non-cash activities:
 
 
 
 
Accrued capital expenditures
 
$
2,379

 
$
2,532

Writeoff of fully depreciated or amortized assets and liabilities
 
$
1,768

 
$
620

Write off of assets due to hurricane damage (gross value)
 
$

 
$
7,939

Lessee-funded tenant improvements, capitalized as landlord assets
 
$
11,796

 
$
23,818

Dividends payable - Common Stock
 
$
10,377

 
$
8,158

Dividends payable - Series A Preferred Stock
 
$
7,426

 
$
5,481

Dividends payable - mShares Preferred Stock
 
$
170

 
$
90

Dividends declared but not yet due and payable
 
$
216

 
$
33

Partnership distributions payable to non-controlling interests
 
$
272

 
$
212

Accrued and payable deferred offering costs
 
$
322

 
$
479

Offering cost reimbursement to related party
 
$
1,438

 
$
325

Reclass of offering costs from deferred asset to equity
 
$
2,008

 
$
2,193

Fair value issuances of equity compensation
 
$
4,972

 
$
4,088

Mortgage loans assumed on acquisitions
 
$
47,125

 
$
57,324

Noncash repayment of mortgages through refinance
 
$
37,485

 
$
65,000

 
 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
 
Cash and cash equivalents
 
$
26,840

 
$
17,054

Restricted cash
 
59,531

 
50,646

Cash, cash equivalents and restricted cash, end of period
$
86,371

 
$
67,700

 
 
 
 
 


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


Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements
September 30, 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 September 30, 2018, the Company had 40,785,072 shares of common stock, par value $0.01 per share, or Common Stock, issued and outstanding and was the approximate 97.4% owner of the Operating Partnership at that date. The number of partnership units not owned by the Company totaled 1,068,400 at September 30, 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. The Company is involved with other VIEs, such as its investment in the Freddie Mac Series 2018-ML04 mortgage loan pool, as discussed in Note 4. New Market Properties, LLC owns and conducts the business of our portfolio of grocery-anchored shopping centers. Preferred Office Properties, LLC owns and conducts the business of our portfolio of office buildings. Preferred Campus Communities, LLC owns and conducts the business of our portfolio of off-campus student housing communities. Each of these entities are wholly-owned subsidiaries of the Operating Partnership.

Basis of Presentation

These consolidated financial statements include all of the accounts of the Company and the Operating Partnership presented in accordance with accounting principles generally accepted in the United States of America, or GAAP. 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 accounting principles generally accepted in the United States of America. 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.
    


7

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2018
(unaudited)


2.
Summary of Significant Accounting Policies

Variable Interest Entities

A variable interest entity, or “VIE” is an entity that lacks sufficient equity to finance its activities without additional subordinated financial support from other parties, or whose equity holders lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is defined as the party who has a controlling financial interest in the VIE through the (a) power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (b) obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. The Company assesses whether it meets the power and benefits criteria and in performing this analysis, the Company considers both qualitative and quantitative factors, including the Company’s ability to control or significantly influence key decisions of the VIE and the obligation or likelihood for the Company to fund operating losses of the VIE. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, may involve significant judgment, including the determination of which activities most significantly affect the entities’ performance, and estimates about the current and future fair values and performance of assets held by the VIE. If the Company determines that it meets both the power and benefits criteria of the VIE, the Company is deemed to be the primary beneficiary of the VIE and the Company consolidates the entire VIE entity in its consolidated financial statements. For those VIEs which arise from the Company's investment in mortgage-backed securities and which the Company consolidates, it elects the fair value option, under which the assets and liabilities of the consolidated VIE are carried at fair value. The periodic changes in fair value are included in the earnings of the Company and are reported on the line entitled Change in fair value of net assets of consolidated VIE from mortgage-backed pool on the Company's Consolidated Statements of Operations. See note 4 for discussion related to the Company’s investment in a subordinate tranche of a collateralized mortgage-backed pool during the second quarter 2018 and Note 14 for fair value disclosures related to a consolidated VIE related to this investment.

Real Estate Loans

The Company carries its investments in real estate loans at amortized cost with assessments made for impairment in the event recoverability of the principal amount becomes doubtful. If, upon testing for impairment, the fair value result of the loan is lower than the carrying amount of the loan, an allowance is recorded to lower the carrying amount to fair value, with a loss recorded in earnings. The balances of real estate loans presented on the consolidated balance sheets consist of drawn amounts on the loans, net of unamortized deferred loan origination fees and allowances for loan loss. These loan balances are presented in the asset section of the consolidated balance sheets inclusive of loan balances from third party participant lenders, with the participant amount presented within the liabilities section.

Interest income on real estate loans and notes receivable is recognized on an accrual basis over the lives of the loans or notes using the effective interest rate method. In the event that a loan or note is refinanced with the proceeds of another loan issued by the Company, any unamortized loan fee revenue from the first loan will be recognized as interest revenue at the date of refinancing. Direct loan origination fees applicable to real estate loans are amortized over the lives of the loans as adjustments to interest income. The accrual of interest on all these instruments ceases when there is concern as to the ultimate collection of principal or interest. Any payments received on such non-accrual loans are recorded as reductions of principal when the payments are received. Certain real estate loan assets include limited purchase options and either exit fees or additional amounts of accrued interest. Exit fees or accrued interest due will be treated as additional consideration for the acquired project if the Company purchases the subject property. Additional accrued interest becomes due in cash to the Company on the earliest to occur of: (i) the maturity of the loan, (ii) any uncured event of default as defined in the associated loan agreement, (iii) the sale of the project or the refinancing of the loan (other than a refinancing loan by the Company or one of its affiliates) and (iv) any other repayment of the loan.

The Company evaluates the need for a loss reserve on at least a quarterly basis through its surveillance review process. In connection with the surveillance review process, the Company’s real estate loan investments are assigned an internal risk rating. The internal risk ratings are based on the loan’s current status as compared to underwriting for certain metrics such as total expected construction cost if overruns are noted, construction completion timing if there are delays, current cap rates within the MSA, leasing status, rental rates, net operating income, expected free cash flow, and other factors management deems important related to the ultimate collectability of the loan. The final internal risk ratings are influenced by other quantitative and qualitative factors that can result in an adjustment to the ratings. Each loan is given an internal risk rating from “A” to “D”.  Loans rated an “A” meet all present contractual obligations and there are no indicators which would cause concern for the borrower’s ability to meet all present contractual obligations. Loans rated a “B” meet all present contractual obligations, but exhibited at least one indication of a negative variation from the underwriting for the loan and/or project. Loans rated a “C” exhibit some weakness that deserves management’s close attention and if uncorrected, may result in deterioration of repayment prospects. For these loans, management performs


8

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2018
(unaudited)


analyses to verify the borrower’s ability to meet all present contractual obligations, including obtaining an appraisal of the underlying collateral for the loan. For loans rated a “D”, the collection of all contractual principal and interest is improbable and management has determined to account for the loan as a non-accrual loan and, if appropriate under the circumstances record a loan loss allowance.

The Company's real estate loan investments are collateralized by real estate development projects and secured further by guaranties of repayment from one or more of the borrowers. The Company's lines of credit receivable are typically only collateralized by personal guaranties, but occaisionally may be cross-collateralized by interests in other real estate projects. As a result, the Company regularly evaluates the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan, and/or (iii) the property’s liquidation value. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, the overall economic environment, real estate sector, and geographic sub‑market in which the borrower operates are considered. Such impairment analyses are completed and reviewed by management, utilizing various data sources, including periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, capitalization and discount rates and site inspections.
Evaluations for impairment are performed for each real estate loan investment at least quarterly. Impairment occurs when it is deemed probable that all amounts due will not be collected according to the contractual terms of the loan. Depending upon the circumstances and significance of risk related to the collectability of the loan, management may determine that (i) the loan should be accounted for as a non-accrual loan because recovery of all contractual amounts due are deemed improbable and that any amounts subsequently received will be used to reduce the loan’s principal balance, (ii) in the event of a modification to the loan granted by the Company as a concession to the borrower who is experiencing financial difficulty, result in the need to apply troubled debt restructuring (“TDR”) accounting guidance, and/or (iii) an allowance for loan loss is required for the loan based upon the value of the underlying collateral and the Company’s evaluation of a possible shortfall with regards to the loan’s repayment based upon an estimated sales price, additional costs (if necessary), estimated selling costs, and amounts due to all lenders.
Purchase Option Terminations

The Company will occasionally receive a purchase option on the underlying property in conjunction with extending a real estate loan investment to the developer of the property. The purchase option is often at a discount to the to-be-agreed-upon market value of the property, once stabilized. If the Company elects not to exercise the purchase option and acquire the property, it may negotiate to sell the purchase option back to the developer and receive a termination fee in consideration. The amount of the termination fee is accounted for as additional interest on the real estate loan investment and is recognized as interest revenue utilizing the effective interest method over the period beginning from the date of election until the earlier of (i) the maturity of the real estate loan investment and (ii) the sale of the property.

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 adopted the new standard on January 1, 2018 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


9

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2018
(unaudited)


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 July 2018, the FASB issued Accounting Standards Update 2018-11 (“ASU 2018-11”), which provides lessors with a practical expedient in combining lease and non-lease components, if certain criteria are met. The Company believes that adoption of the practical expedient will result in changes in presentation and disclosure of revenue being combined into one revenue component, but will have no material effect on the timing of revenue recognition.

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 investment portfolio and is also revising its policies for credit losses 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 to gauge the materiality of the impact, if any, on its results of operations or financial condition.

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.


10

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2018
(unaudited)



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.

3. Real Estate Assets

The Company's real estate assets consisted of:

 
 
As of:
 
 
September 30, 2018
 
December 31, 2017
Multifamily communities:
 
 
 
 
Properties (1)
 
31

 
30

Units
 
9,852

 
9,521

New Market Properties: (2)
 
 
 
 
Properties
 
44

 
39

Gross leasable area (square feet) (3)
 
4,571,888

 
4,055,461

Student housing properties:
 
 
 
 
Properties
 
7

 
4

Units
 
1,679

 
891

Beds
 
5,208

 
2,950

Preferred Office Properties:
 
 
 
 
Properties
 
6

 
4

Rentable square feet
 
2,099,000

 
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.


Multifamily communities sold

On September 28, 2018, the Company closed on the sale of its 216-unit multifamily community in Philadelphia, Pennsylvania, or Stone Rise, to an unrelated third party for a purchase price of approximately $42.5 million, exclusive of closing costs and resulting in a gain of $18.6 million. Stone Rise contributed approximately $0.5 million and $0.6 million of net income to the consolidated operating results of the Company for the nine-month periods ended September 30, 2018 and 2017, respectively.

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 $0.3 million of net income to the consolidated operating results of the Company for the nine-month periods ended September 30, 2018 and 2017, respectively.


11

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2018
(unaudited)


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 nine-month period ended September 30, 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 $0.4 million of net income to the consolidated operating results of the Company for the nine-month period ended September 30, 2017.

On May 25, 2017, the Company closed on the sale of its 300-unit multifamily community in Dallas, Texas, or Enclave at Vista Ridge, to an unrelated third party for a purchase price of $44.0 million, exclusive of closing costs and resulting in a gain of $6.9 million. Enclave at Vista Ridge contributed approximately $0.1 million of net loss to the consolidated operating results of the Company for the nine-month period ended September 30, 2017.

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:
 
 
Stone Rise
 
Lake Cameron
 
Sandstone Creek
 
Ashford Park
 
Enclave at Vista Ridge
(in thousands)
 
September 28, 2018
 
March 20, 2018
 
January 20, 2017
 
March 7, 2017
 
May 25, 2017
Real estate assets:
 
 
 
 
 
 
 
 
 
 
Land
 
$
6,950

 
$
4,000

 
$
2,846

 
$
10,600

 
$
4,705

Building and improvements
 
18,860

 
21,519

 
41,860

 
24,075

 
29,916

Furniture, fixtures and equipment
 
3,323

 
3,687

 
5,278

 
4,223

 
2,874

Accumulated depreciation
 
(6,766
)
 
(7,220
)
 
(4,809
)
 
(6,816
)
 
(3,556
)
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
22,367

 
$
21,986

 
$
45,175

 
$
32,082

 
$
33,939

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Mortgage note payable
 
$
23,520

 
$
19,736

 
$
30,840

 
$
25,626

 
$
24,862

Supplemental mortgage note
 

 

 

 
6,374

 

 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
$
23,520

 
$
19,736

 
$
30,840

 
$
32,000

 
$
24,862




12

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2018
(unaudited)


Multifamily communities acquired

During the nine-month periods ended September 30, 2018 and 2017, the Company completed the acquisition of the following multifamily communities:
Acquisition date
 
Property
 
Location
 
Units
 
 
 
 
 
 
 
1/9/2018
 
The Lux at Sorrel
 
Jacksonville, Florida
 
265

2/28/2018
 
Green Park
 
Atlanta, Georgia
 
310

9/27/2018
 
The Lodge at Hidden River
 
Tampa, Florida
 
300

 
 
 
 
 
 
 
 
 
 
 
 
 
875

 
 
 
 
 
 
 
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

4/26/2017
 
Claiborne Crossing
 
Louisville, Kentucky
 
242

7/26/2017
 
Luxe at Lakewood Ranch
 
Sarasota, Florida
 
280

9/27/2017
 
Adara Overland Park
 
Kansas City, Kansas
 
260

9/29/2017
 
Aldridge at Town Village
 
Atlanta, Georgia
 
300

9/29/2017
 
The Reserve at Summit Crossing
 
Atlanta, Georgia
 
172

 
 
 
 
 
 
 
 
 
 
 
 
 
2,109


The aggregate purchase price of the multifamily acquisitions for the nine months ended September 30, 2018 was approximately $166.4 million. The aggregate purchase price of the multifamily acquisitions for the nine months ended September 30, 2017 was approximately $373.7 million. Purchase prices shown are exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.



13

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 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 nine months ended:
(in thousands, except amortization period data)
 
September 30, 2018
 
September 30, 2017
 
 
 
 
 
Land
 
$
18,410

 
$
35,552

Buildings and improvements
 
116,767

 
263,212

Furniture, fixtures and equipment
 
27,905

 
62,490

Lease intangibles
 
5,681

 
11,649

Prepaids & other assets
 
238

 
1,305

Accrued taxes
 
(684
)
 
(1,076
)
Security deposits, prepaid rents, and other liabilities
 
(342
)
 
(644
)
 
 
 
 
 
Net assets acquired
 
$
167,975

 
$
372,488

 
 
 
 
 
Cash paid
 
$
55,015

 
$
124,467

Mortgage debt, net
 
112,960

 
248,021

 
 
 
 
 
Total consideration
 
$
167,975

 
$
372,488

 
 
 
 
 
Three months ended September 30, 2018:
 
 
 
 
Revenue
 
$
2,593

 
$
8,944

Net income (loss)
 
$
(1,720
)
 
$
(3,344
)
 
 
 
 
 
Nine months ended September 30, 2018:
 
 
 
 
Revenue
 
$
6,576

 
$
26,380

Net income (loss)
 
$
(5,297
)
 
$
(12,289
)
 
 
 
 
 
Capitalized acquisition costs incurred by the Company
 
$
3,117

 
$
4,597

Acquisition costs paid to related party (included above)
 
$
1,685

 
$
1,978

Remaining amortization period of intangible
 
 
 
 
 assets and liabilities (months)
 
6.6

 
1.5


Student housing properties

During the nine-month periods ended September 30, 2018 and 2017, the Company completed the acquisition of the following student housing properties:
Acquisition date
 
Property
 
Location
 
Units
 
Beds
 
 
 
 
 
 
 
 
 
5/10/2018
 
The Tradition
 
College Station, Texas
 
427

 
808

5/31/2018
 
The Retreat at Orlando
 
Orlando, Florida
 
221

 
894

6/27/2018
 
The Bloc
 
Lubbock, Texas
 
140

 
556

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
788

 
2,258

 
 
 
 
 
 
 
 
 
2/28/2017
 
Sol
 
Tempe, Arizona
 
296

 
639


The aggregate purchase price of the student housing acquisitions for the nine months ended September 30, 2018 was approximately $197.0 million. The aggregate purchase price of the student housing acquisitions for the nine months ended September 30, 2017 was approximately $53.3 million. Purchase prices shown are exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.



14

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 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.
 
 
Student housing properties acquired during the nine months ended:

(in thousands, except amortization period data)
 
September 30, 2018
 
September 30, 2017
 
 
 
 
 
Land
 
$
23,149

 
$
7,441

Buildings and improvements
 
146,856

 
40,059

Furniture, fixtures and equipment
 
27,211

 
3,771

Lease intangibles
 
2,493

 
2,344

Below market leases
 
(54
)
 

Prepaids & other assets
 
309

 
51

Accrued taxes
 
(942
)
 
(72
)
Security deposits, prepaid rents, and other liabilities
 
(719
)
 
(377
)
 
 
 
 
 
Net assets acquired
 
$
198,303

 
$
53,217

 
 
 
 
 
Cash paid
 
$
92,212

 
$
15,732

Mortgage debt, net
 
106,091

 
37,485

 
 
 
 
 
Total consideration
 
$
198,303

 
$
53,217

 
 
 
 
 
Three months ended September 30, 2018:
 
 
 
 
Revenue
 
$
4,159

 
$
1,437

Net income (loss)
 
$
(3,268
)
 
$
(585
)
 
 
 
 
 
Nine months ended September 30, 2018:
 
 
 
 
Revenue
 
$
5,645

 
$
4,144

Net income (loss)
 
$
(5,294
)
 
$
(1,311
)
 
 
 
 
 
Capitalized acquisition costs incurred by the Company
 
$
2,555

 
$
290

Acquisition costs paid to related party (included above)
 
$
1,970

 
$
60

 
 
 
 
 
Remaining amortization period of intangible
 
 
 
 
 assets and liabilities (months)
 
4.2

 
0.0





15

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2018
(unaudited)


New Market Properties

During the nine-month periods ended September 30, 2018 and 2017, the Company completed the acquisition of the following grocery-anchored shopping centers:
Acquisition date
 
Property
 
Location
 
Gross leasable area (square feet)
 
 
 
 
 
 
 
4/27/2018
 
Greensboro Village
 
Nashville, Tennessee
 
70,203

4/27/2018
 
Governors Towne Square
 
Atlanta, Georgia
 
68,658

6/26/2018
 
Neapolitan Way
 
Naples, Florida
 
137,580

6/29/2018
 
Conway Plaza
 
Orlando, Florida
 
117,705

7/6/2018
 
Brawley Commons
 
Charlotte, North Carolina
 
122,028

 
 
 
 
 
 
 
 
 
 
 
 
 
516,174

 
 
 
 
 
 
 
4/21/2017
 
Castleberry-Southard
 
Atlanta, Georgia
 
80,018

6/6/2017
 
Rockbridge Village
 
Atlanta, Georgia
 
102,432

7/26/2017
 
Irmo Station
 
Columbia, SC
 
99,384

8/25/2017
 
Maynard Crossing
 
Raleigh, NC
 
122,781

9/8/2017
 
Woodmont Village
 
Atlanta, GA
 
85,639

9/22/2017
 
West Town Market
 
Charlotte, NC
 
67,883

 
 
 
 
 
 
 
 
 
 
 
 
 
558,137

 
 
 
 
 
 
 

The aggregate purchase price of the New Market Properties acquisitions for the nine months ended September 30, 2018 was approximately $113.1 million. The aggregate purchase price of the New Market Properties acquisitions for the nine months ended September 30, 2017 was approximately $111.6 million. Purchase prices shown are exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.



16

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements – (continued)
September 30, 2018
(unaudited)


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.
 
 
New Market Properties' acquisitions during the nine months ended:


(in thousands, except amortization period data)
 
September 30, 2018
 
September 30, 2017
 
 
 
 
 
Land
 
$
33,290

 
$
20,721

Buildings and improvements
 
67,595

 
84,397

Tenant improvements
 
5,225

 
2,443

In-place leases