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EX-32.2 - EXHIBIT 32.2 - PREFERRED APARTMENT COMMUNITIES INCexhibit322apts3312020.htm
EX-32.1 - EXHIBIT 32.1 - PREFERRED APARTMENT COMMUNITIES INCexhibit321apts03312020.htm
EX-31.2 - EXHIBIT 31.2 - PREFERRED APARTMENT COMMUNITIES INCexhibit312apts03312020.htm
EX-31.1 - EXHIBIT 31.1 - PREFERRED APARTMENT COMMUNITIES INCexhibit311apts3312020.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, 2020
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
paca24.jpg 

Securities registered pursuant to Section 12(b) of the Act:  
Title of each class
 
Trading Symbol
Name of each exchange on which registered
 
Common Stock, par value $.01 per share
APTS
NYSE


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 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 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 May 8, 2020 was 47,585,239.



 
PART I - FINANCIAL INFORMATION
 
 
 
 
INDEX
 
 
 
 
 
 
 
Item 1.
Financial Statements
Page No. 
 
 
 
 
 
Condensed Consolidated Balance Sheets (unaudited) – as of March 31, 2020 and December 31, 2019
2

 
 
 
 
Condensed Consolidated Statements of Operations (unaudited) – Three Months Ended March 31, 2020 and 2019
3

 
 
 
 
Condensed Consolidated Statements of Stockholders' Equity (unaudited) – Three Months Ended March 31, 2020 and 2019

 
 
 
 
Condensed Consolidated Statements of Cash Flows (unaudited) – Three Months Ended March 31, 2020 and 2019

 
 
 
 
Notes to Condensed Consolidated Financial Statements (unaudited)

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

 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk

 
 
 
Item 4.
Controls and Procedures

 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
66

 
 
 
Item 1A.
Risk Factors
66

 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
67

 
 
 
Item 3.
Defaults Upon Senior Securities
67

 
 
 
Item 4.
Mine Safety Disclosures
67

 
 
 
Item 5.
Other Information
67

 
 
 
Item 6.
Exhibits
68

 
 
 
 












Preferred Apartment Communities, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
 
 
 
(In thousands, except per-share par values)
 
March 31, 2020
 
December 31, 2019
Assets
 
 
 
 
Real estate
 
 
 
 
Land
 
$
665,585

 
$
635,757

Building and improvements
 
3,329,579

 
3,256,223

Tenant improvements
 
172,136

 
167,275

Furniture, fixtures, and equipment
 
341,542

 
323,381

Construction in progress
 
16,131

 
11,893

Gross real estate
 
4,524,973

 
4,394,529

Less: accumulated depreciation
 
(461,957
)
 
(421,551
)
Net real estate
 
4,063,016

 
3,972,978

Real estate loan investments, net of deferred fee income of $1,500 and $1,460 and allowance for expected
 
 
 
 
loan loss of $9,796 and $0
 
292,905

 
325,790

Real estate loan investments to related parties, net of deferred fee income of $0 and $16, allowance for expected
 
 
 
 
loan loss of $2,148 and $0 and allowance for doubtful accounts of $1,400 and $1,400
 
2,568

 
23,692

Total real estate and real estate loan investments, net
 
4,358,489

 
4,322,460

 
 
 
 
 
Cash and cash equivalents
 
120,128

 
94,381

Restricted cash
 
43,665

 
42,872

Notes receivable
 
7,321

 
17,079

Note receivable and revolving lines of credit due from related parties
 
9,011

 
24,838

Accrued interest receivable on real estate loans
 
20,186

 
25,755

Acquired intangible assets, net of amortization of $159,330 and $149,896
 
154,351

 
154,803

Deferred loan costs on Revolving Line of Credit, net of amortization of $1,017 and $849
 
1,118

 
1,286

Deferred offering costs
 
3,085

 
2,147

Tenant lease inducements, net of amortization of $4,007 and $3,567
 
19,168

 
19,607

Tenant receivables and other assets
 
90,877

 
65,332

 
 
 
 
 
Total assets
 
$
4,827,399

 
$
4,770,560

 
 
 
 
 
Liabilities and equity
 
 
 
 
Liabilities
 
 
 
 
Mortgage notes payable, net of deferred loan costs and mark-to-market adjustment of $42,739 and $42,807
 
$
2,606,251

 
$
2,567,022

Revolving line of credit
 
191,500

 

Term note payable, net of deferred loan costs of $0 and $511
 

 
69,489

Unearned purchase option termination fees
 
2,019

 
2,859

Deferred revenue
 
38,782

 
39,722

Accounts payable and accrued expenses
 
43,797

 
42,191

Deferred liability to Former Manager
 
22,982

 

Contingent liability due to Former Manager
 
14,911

 

Accrued interest payable
 
8,707

 
8,152

Dividends and partnership distributions payable
 
24,415

 
23,519

Acquired below market lease intangibles, net of amortization of $26,144 and $23,655
 
60,481

 
62,611

Prepaid rent, security deposits, and other liabilities
 
35,405

 
20,879

Total liabilities
 
3,049,250

 
2,836,444

 
 
 
 
 
Commitments and contingencies (Note 11)
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
Stockholders' equity
 
 
 
 
Series A Redeemable Preferred Stock, $0.01 par value per share; 3,050 shares authorized; 2,226 and 2,161 shares
 
 
 
   issued; 2,075 and 2,028 shares outstanding at March 31, 2020 and December 31, 2019, respectively
21

 
20

Series A1 Redeemable Preferred Stock, $0.01 par value per share; up to 1,000 shares authorized; 37 and 5 shares
 
 
 
   issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

Series M Redeemable Preferred Stock, $0.01 par value per share; 500 shares authorized; 106 shares issued;
 
 
 
  98 and 103 shares outstanding at March 31, 2020 and December 31, 2019, respectively
1

 
1

Series M1 Redeemable Preferred Stock, $0.01 par value per share; up to 1,000 shares authorized; 2 and zero shares
 
 
 
   issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

Common Stock, $0.01 par value per share; 400,067 shares authorized; 47,129 and 46,443 shares issued and
 
 
 
outstanding at March 31, 2020 and December 31, 2019, respectively
476

 
464

Additional paid-in capital
 
1,969,534

 
1,938,057

Accumulated (deficit) earnings
 
(191,040
)
 
(7,244
)
Total stockholders' equity
 
1,778,992

 
1,931,298

Non-controlling interest
 
(843
)
 
2,818

Total equity
 
1,778,149

 
1,934,116

 
 
 
 
 
Total liabilities and equity
 
$
4,827,399

 
$
4,770,560

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

2



Preferred Apartment Communities, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
 
 
(In thousands, except per-share figures)
Three months ended March 31,
 
2020
 
2019
Revenues:
 
 
 
Rental and other property revenues
$
111,866

 
$
94,393

Interest income on loans and notes receivable
13,439

 
11,288

Interest income from related parties
2,537

 
5,802

Miscellaneous revenues
3,260

 
23

Total revenues
131,102

 
111,506

 
 
 
 
Operating expenses:
 
 
 
Property operating and maintenance
16,800

 
12,879

Property salary and benefits (including reimbursements of $1,430
 
 
 
and $4,079 to related party)
5,191

 
4,657

Property management fees (including $894 and $2,467 to related parties)
2,003

 
3,267

Real estate taxes and insurance
15,525

 
14,090

General and administrative
6,364

 
1,420

Equity compensation to directors and executives
230

 
311

Depreciation and amortization
49,509

 
45,289

Asset management and general and administrative expense fees to related party
3,099

 
7,829

Provision for expected credit losses
5,133

 

Management internalization expense
178,793

 
45

Total operating expenses
282,647

 
89,787

 
 
 
 
Waived asset management and general and administrative expense fees
(1,136
)
 
(2,629
)
 
 
 
 
Net operating expenses
281,511

 
87,158

 
 
 
 
Operating (loss) income before gain on sale of trading investment
(150,409
)
 
24,348

Gain on sale of trading investment

 
4

Operating (loss) income
(150,409
)
 
24,352

Interest expense
29,593

 
26,756

Change in fair value of net assets of consolidated VIEs from mortgage-backed pools

 
141

Loss on extinguishment of debt

 
(17
)
Gain on land condemnation
479

 

 
 
 
 
Net loss
(179,523
)
 
(2,280
)
Consolidated net loss (income) attributable to non-controlling interests
3,141

 
(492
)
 
 
 
 
Net loss attributable to the Company
(176,382
)
 
(2,772
)
 
 
 
 
Dividends declared to preferred stockholders
(33,068
)
 
(25,539
)
Earnings attributable to unvested restricted stock
(2
)
 
(2
)
 
 
 
 
Net loss attributable to common stockholders
$
(209,452
)
 
$
(28,313
)
 
 
 
 
Net loss per share of Common Stock available
 
 
 
to common stockholders, basic and diluted
$
(4.44
)
 
$
(0.66
)
 
 
 
 
Weighted average number of shares of Common Stock outstanding,
 
 
 
basic and diluted
47,129

 
42,680


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

3


Preferred Apartment Communities, Inc.
Consolidated Statements of Stockholders' Equity
For the three-month periods ended March 31, 2020 and 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands, except dividend per-share figures)
 
Series A, Series A1, Series M and Series M1 Redeemable Preferred Stock
 
Common Stock
 
Additional Paid in Capital
 
Accumulated Earnings
 
Total Stockholders' Equity
 
Non-Controlling Interest
 
Total Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2020
 
$
21

 
$
464

 
$
1,938,057

 
$
(7,244
)
 
$
1,931,298

 
$
2,818

 
$
1,934,116

Cumulative adjustment to reflect the adoption
   of ASU 2016-13
 

 

 

 
(7,414
)
 
(7,414
)
 

 
(7,414
)
 Issuance of Series A preferred shares
 
1

 

 
64,483

 

 
64,484

 

 
64,484

 Issuance of Series A1/M1 preferred shares
 

 

 
34,069

 

 
34,069

 

 
34,069

 Exercise of warrants
 

 

 
8

 

 
8

 

 
8

 Redemptions of Series A preferred stock
 

 
11

 
(9,911
)
 

 
(9,900
)
 

 
(9,900
)
 Syndication and offering costs
 

 

 
(12,360
)
 

 
(12,360
)
 

 
(12,360
)
Equity compensation to executives and directors
 

 

 
156

 

 
156

 

 
156

 Conversion of Class A to common stock
 

 
1

 
1,104

 

 
1,105

 
(1,105
)
 

Current period amortization of Class B Units
 

 

 

 

 

 
74

 
74

 Net income (loss)
 

 

 

 
(176,382
)
 
(176,382
)
 
(3,141
)
 
(179,523
)
 Contributions from minority holders
 

 

 

 

 

 
201

 
201

 Reallocation of minority interest in PAC OP
 

 

 
(513
)
 

 
(513
)
 
513

 

 Distributions to minority holders
 

 

 

 

 

 
(203
)
 
(203
)
Dividends to Series A preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($5.00 per share per month)
 

 

 
(31,100
)
 

 
(31,100
)
 

 
(31,100
)
Dividends to mShares preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($4.79 - $6.25 per share per month)
 

 

 
(1,746
)
 

 
(1,746
)
 

 
(1,746
)
Dividends to Series A1/M1 preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($5.00 and $5.08 - $5.92 per share per month, respectively)
 

 

 
(222
)
 

 
(222
)
 

 
(222
)
Dividends to common stockholders ($0.2625 per share)
 

 

 
(12,491
)
 

 
(12,491
)
 

 
(12,491
)
Balance at March 31, 2020
 
$
22

 
$
476

 
$
1,969,534

 
$
(191,040
)
 
$
1,778,992

 
$
(843
)
 
$
1,778,149


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






4


Preferred Apartment Communities, Inc.
Consolidated Statements of Stockholders' Equity, continued
For the three-month periods ended March 31, 2020 and 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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, 2019
 
$
16

 
$
418

 
$
1,607,712

 
$

 
$
1,608,146

 
$
1,239

 
$
1,609,385

Issuance of Units
 
2

 

 
128,680

 

 
128,682

 

 
128,682

Issuance of mShares
 

 

 
12,472

 

 
12,472

 

 
12,472

Redemptions of Series A Preferred Stock
 

 
10

 
(2,015
)
 

 
(2,005
)
 

 
(2,005
)
Exercises of Warrants
 

 
3

 
4,245

 

 
4,248

 

 
4,248

Syndication and offering costs
 

 

 
(14,281
)
 

 
(14,281
)
 

 
(14,281
)
Equity compensation to executives and directors
 

 

 
159

 

 
159

 

 
159

Conversion of Class A Units to Common Stock
 

 
1

 
526

 

 
527

 
(527
)
 

Current period amortization of Class B Units
 

 

 

 

 

 
152

 
152

Net income
 

 

 

 
(2,772
)
 
(2,772
)
 
492

 
(2,280
)
Reallocation adjustment to non-controlling interests
 

 

 
818

 

 
818

 
(818
)
 

Distributions to non-controlling interests
 

 

 

 

 

 
(229
)
 
(229
)
Dividends to Series A preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($5.00 per share per month)
 

 

 
(27,418
)
 
2,685

 
(24,733
)
 

 
(24,733
)
Dividends to mShares preferred stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($4.79 - $6.25 per share per month)
 

 

 
(893
)
 
87

 
(806
)
 

 
(806
)
Dividends to common stockholders ($0.26 per share)
 

 

 
(11,195
)
 

 
(11,195
)
 

 
(11,195
)
Balance at March 31, 2019
 
$
18

 
$
432

 
$
1,698,810

 
$

 
$
1,699,260

 
$
309

 
$
1,699,569


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















5


Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows
 
(In thousands)
Three-month periods ended March 31,
 
2020
 
2019
Operating activities:
 
 
 
Net (loss) income
$
(179,523
)
 
$
(2,280
)
Reconciliation of net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
49,509

 
45,289

Amortization of above and below market leases
(1,705
)
 
(1,436
)
Deferred revenues and fee income amortization
(1,269
)
 
(1,498
)
Purchase option termination fee amortization
(4,040
)
 
(4,233
)
Amortization of equity compensation, lease incentives, and other noncash expenses
849

 
805

Deferred loan cost amortization
1,781

 
1,552

(Increase) in accrued interest income on real estate loan investments
(3,296
)
 
(3,551
)
Receipt of accrued interest income on real estate loans
8,865

 

Gain on sale of trading investment

 
(4
)
Gain on land condemnation, net of expenses
(479
)
 

Cash received for purchase option terminations
4,800

 
1,330

Loss on extinguishment of debt

 
17

Increase in provision for expected credit losses
5,133

 

Mortgage interest received from consolidated VIEs

 
2,598

Mortgage interest paid to other participants of consolidated VIEs

 
(2,598
)
Changes in operating assets and liabilities:
 
 
 
(Increase) in tenant receivables and other assets
(10,775
)
 
(8,376
)
(Increase) in tenant lease incentives

 
(102
)
Increase in accounts payable and accrued expenses
24,190

 
1,290

Increase in deferred liability to Former Manager
22,851

 

Increase in Contingent liability
15,000

 

Decrease in accrued interest, prepaid rents and other liabilities
(1,282
)
 
(2,441
)
Net cash provided by operating activities
(69,391
)
 
26,362

 
 
 
 
Investing activities:
 
 
 
Investments in real estate loans
(11,631
)
 
(29,795
)
Repayments of real estate loans
53,896

 

Notes receivable issued
(249
)
 
(1,890
)
Notes receivable repaid
10,041

 

Note receivable issued to and draws on line of credit by related parties
(9,624
)
 
(13,952
)
Repayments of notes receivable and lines of credit by related parties
4,546

 
8,330

Origination fees received on real estate loan investments
267

 
801

Origination fees paid to Former Manager on real estate loan investments

 
(401
)
Purchases of mortgage backed securities (K program), net of acquisition costs

 
(30,934
)
Mortgage principal received from consolidated VIEs

 
679

Proceeds from sales of mortgage-backed securities

 
53,445

Acquisition of properties
(125,107
)
 
(32,540
)
Receipt of insurance proceeds for capital improvements

 
746

Proceeds from land condemnation
738

 

Additions to real estate assets - improvements
(12,817
)
 
(7,917
)
Deposits (paid) on acquisitions
(915
)
 
(511
)
Net cash used in investing activities
(90,855
)
 
(53,939
)
 
 
 
 
Financing activities:
 
 
 
Proceeds from mortgage notes payable
81,413

 
57,275

Repayments of mortgage notes payable
(42,252
)
 
(38,324
)
Payments for deposits and other mortgage loan costs
(1,694
)
 
(996
)
Payments to real estate loan participants

 
(5,223
)
Proceeds from lines of credit
284,000

 
126,200

Payments on lines of credit
(92,500
)
 
(166,200
)
Repayment of the Term Loan
(70,000
)
 

Mortgage principal paid to other participants of consolidated VIEs

 
(679
)
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.

6


 
 
 
 
 
 
 
 
Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows - continued
 
 
 
 
(In thousands)
Three-month periods ended March 31,
 
2020
 
2019
Proceeds from repurchase agreements

 
4,857

Repayments of repurchase agreements

 
(4,857
)
Proceeds from the sales of preferred stock and Units, net of offering costs
89,398

 
128,573

Proceeds from exercises of Warrants
44

 
3,921

Payments for redemptions of preferred stock
(9,890
)
 
(2,006
)
Common Stock dividends paid
(12,156
)
 
(10,840
)
Dividends paid to preferred stock and Class A Unitholders
(32,732
)
 
(25,097
)
Payments for deferred offering costs
(7,042
)
 
(832
)
Contributions from non-controlling interests
197

 

 
 
 
 
Net cash provided by financing activities
186,786

 
65,772

 
 
 
 
Net increase in cash, cash equivalents and restricted cash
26,540

 
38,195

Cash, cash equivalents and restricted cash, beginning of year
137,253

 
87,690

Cash, cash equivalents and restricted cash, end of period
$
163,793

 
$
125,885

 
 
 
 
 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
27,190

 
$
24,318

 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Accrued capital expenditures
$
5,552

 
$
7,308

Writeoff of fully depreciated or amortized assets and liabilities
$

 
$
158

Writeoff of fully amortized deferred loan costs
$
718

 
$
415

Consolidation of assets of VIEs
$

 
$
544,869

Noncash extinguishment of notes receivable
$
20,865

 
$

Dividends payable - Common Stock
$
12,491

 
$
11,195

Dividends payable - Series A Preferred Stock
$
10,373

 
$
8,447

Dividends payable - mShares Preferred Stock
$
1,229

 
$
549

Dividends payable - A1/M1 Preferred Stock
$
138

 
$

Dividends declared but not yet due and payable
$
184

 
$
93

Partnership distributions payable to non-controlling interests
$
203

 
$
229

Accrued and payable deferred offering costs
$
880

 
$
740

Offering cost reimbursement to related party
$
40

 
$
465

Reclass of offering costs from deferred asset to equity
$
3,189

 
$
1,700

Loan receivables converted to equity for property acquisition
$

 
$
47,797

Fair value issuances of equity compensation
$
226

 
$
384

Mortgage loans assumed on acquisitions
$

 
$
41,550

Operating lease liabilities assumed from the Former Manager
$
15,912

 
$


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


7

Preferred Apartment Communities, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020
(unaudited)




1.
Organization and Basis of Presentation

Preferred Apartment Communities, Inc. (NYSE: APTS) is a real estate investment trust engaged primarily in the ownership and operation of Class A multifamily properties, with select investments in grocery anchored shopping centers, Class A office buildings, and student housing properties. Preferred Apartment Communities’ investment objective is to generate attractive, stable returns for stockholders by investing in income-producing properties and acquiring or originating real estate loans for multifamily properties. As of March 31, 2020, the Company owned or was invested in 123 properties in 15 states, predominantly in the Southeast region of the United States. Preferred Apartment Communities, Inc. has elected to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended, commencing with its tax year ended December 31, 2011. The Company was externally managed and advised by Preferred Apartment Advisors, LLC, or its Former Manager, a Delaware limited liability company and related party until the Company acquired the Former Manager and NMP Advisors, LLC (the "Sub-Manager"), or the Internalization, on January 31, 2020. Prior to the Internalization transaction, according to the Sixth Amended and Restated Management Agreement, effective as of June 3, 2016, among the Company, the Operating Partnership, and the Former Manager, or the Former Management Agreement, the Company paid acquisition fees and other fees and expense reimbursements to the Former Manager. Following the Internalization transaction that closed on January 31, 2020, the Company no longer pays any fees or expense reimbursements to its Former Manager (see Note 6).

As of March 31, 2020, the Company had 47,578,631 shares of common stock, par value $0.01 per share, or Common Stock, issued and outstanding and was the approximate 98.4% owner of the Preferred Apartment Communities Operating Partnership, L.P., the Company's operating partnership, at that date. The number of partnership units not owned by the Company totaled 774,687 at March 31, 2020 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 controlled the Operating Partnership through its sole general partner interest and conducted substantially all of its business through the Operating Partnership until January 31, 2020. Beginning February 1, 2020, the Company conducts substantially all of its business through PAC Carveout, LLC, or Carveout, a wholly-owned subsidiary of the Operating Partnership. Carveout intends to elect to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended, commencing with its tax year ended December 31, 2020. 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 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 indirect 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. These condensed financial statements were derived from audited financial statements, but do not contain all the disclosures required by GAAP. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2019. 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 results of operations for the three months ended March 31, 2020 and 2019, are not necessarily indicative of the results that may be expected for the full year. 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. During the first quarter of 2020, there was a global outbreak of a novel coronavirus, or COVID-19, that will continue to have an adverse impact on economic and market conditions and trigger a period of economic slowdown in the United States and globally. The potential reach, severity and duration of impacts of the COVID-19 pandemic will cause our estimates and forecasts of future events to be inherently less certain. Actual results could differ from those estimates. Amounts are presented in thousands where indicated.



8

Preferred Apartment Communities, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2020
(unaudited)



Reclassification Adjustments

The Company recorded certain reclassification adjustments on its Condensed Consolidated Statement of Operations for the three-month period ended March 31, 2019, to conform prior period presentation to the current presentation reflective of the internalized structure as shown in the table below. None of these reclassification adjustments were due to error or misstatement.
 
For the three-month period ended March 31, 2019
 
As reported in Quarterly Report on Form 10-Q at March 31, 2019
 
Reclassification adjustments
 
As reported in Quarterly Report on Form 10-Q at March 31, 2020
(in thousands)
 
 
 
 
 
Rental revenues
$
92,238

 
$
(92,238
)
 
$

Other property revenues
$
2,178

 
$
(2,178
)
 
$

Miscellaneous revenues
$

 
$
23

 
$
23

 
 
 
 
 
 
Rental and other property revenues
$

 
$
94,393

 
$
94,393

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Property operating and maintenance
$
10,792

 
$
2,087

 
$
12,879

Real estate taxes
$
12,500

 
$
(12,500
)
 
$

Real estate taxes and insurance
$

 
$
14,090

 
$
14,090

General and administrative
$
2,614

 
$
(1,194
)
 
$
1,420

Insurance, professional fees and other expenses
$
2,528

 
$
(2,528
)
 
$

Management internalization expense
$

 
$
45

 
$
45

 
 
 
 
 
 
    


Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements - (continued)
March 31, 2020


2.
Summary of Significant Accounting Policies

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 undiscounted cash flows of the property, including proceeds from disposition, are compared to the net book value of the property. 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 property.

Current expected credit losses on real estate loan investments

The Company carries its investments in real estate loans at amortized cost that consists of drawn amounts on the loans, net of unamortized deferred loan origination fees and current expected credit losses.

On January 1, 2020, the Company adopted ASU 2016-13, that replaced the incurred loss model with an expected loss model for instruments measured at amortized cost, and requires entities to record credit allowances for total expected future losses on financial assets at the outset of each loan. For each loan in which the Company is the lender, the amount of protection afforded to the Company is estimated to be the excess of the future estimated fair market value of the developed property over the developer’s related obligations (including the Company’s mezzanine or member loan(s)), other loans senior to the Company's, the expected future balance of accrued interest and any other obligations related to the project’s funding. The excess represents the amount of equity dollars in each real estate project plus profit expected to be realized by the developer on the project, both of which are in a subordinate position to the Company's real estate loan investments. This numeric result is expressed as a percentage of the property's expected future fair value (a "loss reserve ratio"), which is then pooled into ranges of loss percentages that was derived from company-specific loss experience. The product of this indicated loss reserve ratio and the expected fully-funded balance (inclusive of an expected future balance of accrued interest) is the initial total expected credit loss reserve. Over the life of the loan, the initial reserve is reevaluated for potential reduction at the achievement of certain milestones in construction and lease-up progress as the project approaches completion and the loan approaches maturity, given no unforeseen degradation in project performance or failure to adhere to the terms of the loan by the borrower/developer. Finally, the loss reserve may be further refined by the Company due to any subjective qualitative factors deemed pertinent and worthy of reflection.
 
The Company implemented this new guidance by applying this model to its existing portfolio of real estate loan investments using the modified retrospective method and in doing so, recorded a cumulative effect adjustment to retained earnings on January 1, 2020. See note 4.

The Company's notes and lines of credit receivable are unsecured and so are assessed for expected future credit loss by individually assessing the expected profit from current development projects in progress, as well as the viability of the personal guarantees of the borrowers.

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 occasionally 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 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.

See the Revenue Recognition section of this Note for other loan-related policy disclosures required by ASC 310-10-50-6.



10

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements - (continued)
March 31, 2020


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.

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 the rental agreements, typically of nine to fifteen months’ duration. The Company evaluates the collectability of amounts due from residents and recognizes revenue from residents when collectability is deemed probable, in accordance with ASC 842-30-25-12.

The Company evaluated the various ancillary revenues within its multifamily leases, including resident utility reimbursements. Having met the criteria that (i) the timing and pattern of transfer for the lease component and associated non-lease components are the same and (ii) that the lease component, if accounted for separately would be classified as an operating lease, the Company has elected the practical expedient under Lease Accounting, ASC 842, paragraph 10-15-42A, to elect reporting the lease component and non-lease components as one single component within the rental and other property revenues line on the Consolidated Statements of Operations. Revenue from utility reimbursements are considered variable lease payments and are recognized in the period in which the related expenses are incurred.

Grocery-anchored shopping centers and office properties
Our retail leases have original lease terms which generally range from three to seven years for spaces under 5,000 square feet and from ten to twenty years for spaces over 10,000 square feet. Anchor leases generally contain renewal options for one or more additional periods whereas in-line tenant leases may or may not have renewal options. With the exception of anchor leases, the leases generally contain contractual increases in base rent rates over the lease term and the base rent rates for renewal periods are generally based upon the rental rate for the primary term, which may be adjusted for inflation or market conditions. Anchor leases generally do not contain contractual increases in base rent rates over the lease term and the renewal periods. Our leases generally provide for the payment of fixed monthly rentals and may also provide for the payment of additional rent based upon a percentage of the tenant’s gross sales above a certain threshold level (“percentage rent”). Our leases also generally include tenant reimbursements for common area expenses, insurance, and real estate taxes. Utilities are generally paid by tenants either directly through separate meters or through payment of tenant reimbursements. The foregoing general description of the characteristics of the leases in our centers is not intended to describe all leases and material variations in lease terms may exist.
Our office building leases have original lease terms which generally range from five to fifteen years and generally contain contractual, annual base rental rate escalations ranging from 2% to 3%. These leases may be structured as gross where the tenant’s base rental rate is all inclusive and there is no additional obligation to reimburse building operating expenses, net or NNN where in addition to base rent the tenant is also responsible for its pro rata share of reimbursable building operating expenses, or modified gross where in addition to base rent the tenant is also responsible for its pro rata share of reimbursable building operating expense increases over a base year amount (typically calculated as the actual reimbursable operating expenses in year one of the original lease term).

Base rental revenue from tenants' operating leases is a lease component revenue in the Company's grocery-anchored shopping centers and office properties and 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 represent non-lease component revenue. Having met the criteria that (i) the timing and pattern of transfer for the lease component and associated non-lease components are the same and (ii) that the lease component, if accounted for separately would be classified as an operating lease, the Company has elected the practical expedient under ASC 842, Leases, paragraph 10-15-42A, to elect reporting the lease component and non-lease components as one single component under rental and other property revenues


11

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements - (continued)
March 31, 2020


recognized in accordance with ASC 842. Revenue from reimbursements are considered variable lease payments and are recognized in the period in which the related expenses are incurred. The Company does not record income and offsetting expense for certain variable costs paid directly to third parties by lessees on behalf of lessors.

Non-lease components which do not qualify under the practical expedient primarily include lease termination income and other ancillary revenue (e.g. application fees, license fees, late fees and tenant billbacks). 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 evaluated 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. In performing a detailed review of each tenant, we determined if the balances were paid in the subsequent month, if if the tenant had requested rent relief in the subsequent month due to COVID-19 circumstances, if the tenant was a credit tenant that was not typically late, and if the tenant had a security deposit on hand. If collection of substantially all of the outstanding balance is not probable, the tenant's rental revenue is recognized on a cash basis and all accrued balances are written off to rental revenue.

The Company evaluates the collectability of these amounts and recognizes revenue related to tenants where collectability is deemed probable, in accordance with ASC 842-30-25-12. Upon adoption of ASC 842, the Company began recording amounts not deemed probable of collection as a reduction of rental and other property revenues, as applicable.

In April 2020, the FASB issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of COVID-19. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated with the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A clarifies that entities may elect to not evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease modification under Topic 842, Leases. Instead, an entity that elects not to evaluate whether a concession directly related to COVID-19 is a modification can then elect whether to apply the modification guidance (i.e. assume the relief was always contemplated by the contract or assume the relief was not contemplated by the contract). Both lessees and lessors may make this election. The Company is evaluating its election on a disaggregated basis, with such election applied consistently to leases with similar characteristics and similar circumstances. The future impact of the Lease Modification Q&A is dependent upon the extent of lease concessions granted to tenants as a result of COVID-19 in future periods and the elections made by the Company at the time of entering into such concessions.

The Company may provide grocery-anchored shopping center 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 properties, 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 with a corresponding recognition of 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.

Gains on sales of real estate assets

The Company recognizes gains on sales of real estate based on the difference between the consideration received and the carrying amount of the distinct asset, including the carrying amount of any liabilities relieved or assumed by the purchasing counterparty and net of disposition expenses.


12

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements - (continued)
March 31, 2020



Lessee accounting

The Company has evaluated its leases for which it is the lessee to determine the value of any right of use assets and related lease liabilities. All of these leases qualify as operating leases. The Company has three ground leases related to our office and grocery-anchored shopping center assets, one of which had been recorded at fair value on the Company's balance sheet at acquisition due to a purchase option the Company deemed probable of exercising. These ground leases generally have extended terms (e.g. over twenty years with multiple renewal options) and generally have base rent with CPI-based increases. The Company evaluated its renewal option periods in quantifying its asset and liability related to these ground leases. In determining the value of its right of use asset and lease liability, the Company used discount rates comparable to recent loan rates obtained on comparative properties within its portfolio. The Company is also the lessee of office space for its corporate headquarters and of furniture and office equipment, which generally are three to five years in duration with minimal rent increases. The Company’s right of use asset and related lease liability in accordance with ASC 842-20-30 related to these leases are recorded within the Tenant Receivables and Other Assets and the Security Deposits and Other Liabilities line items of the balance sheet, respectively. Lease expense for ground leases and furniture and office equipment located at the Company's properties is included in the consolidated statements of operations within property operations and maintenance and expense for office rent and furniture and office equipment in the Company's corporate headquarters are included in general and administrative expense. See note 12 for more disclosures related to the Company's right of use assets and lease liabilities.

New Accounting Pronouncements

Standard
Description
Date of Adoption
Effect on the Consolidated Financial Statements
Recently Adopted Accounting Guidance
ASU 2016-13, Financial Instruments - Credit Losses (ASC 326)
ASU 2016-03 ("CECL") changes how entities will measure credit losses for most financial assets, including loans, which are not measured at fair value through net income. The guidance replaces the existing incurred loss model with an expected loss model for instruments measured at amortized cost, and requires entities to record credit allowances for financial assets rather than reduce the carrying amount, as they do today under the other-than temporary impairment model.
January 1, 2020
Implementation of the new guidance on accounting for financial assets was limited to our real estate loan investments. We have developed a model that derives a reserve ratio based upon the amount of financial protection afforded each instrument. For each loan in which we are the lender, the amount of protection afforded to us is estimated to be the excess of the future estimated fair market value of the developed property over the commitment amount of each loan (including other loans senior to the Company’s), inclusive of accrued interest and other related receivables. The excess represents the amount of equity dollars in each real estate project, which are in a subordinate position to our real estate loan investments. We implemented this new guidance using the modified retrospective basis by recording a cumulative effect adjustment to retained earnings on January 1, 2020 of approximately $7.4 million.




13

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements - (continued)
March 31, 2020


Standard
Description
Date of Adoption
Effect on the Consolidated Financial Statements
Recently Issued Accounting Guidance Not Yet Adopted
ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting
The new standard enables affected entities to elect from a series of practical expedients designed to ease the transition from referenced base rates within contracts designated to be replaced by Reference Rate Reform.
The amendments are effective March 12, 2020 through December 31, 2022.
ASU 2020-04 will potentially be applicable to the Company's variable-rate debt instruments for which the Company is the borrower, which bear interest at a spread over the 1-month London Interbank Offer Rate (1-month LIBOR). Among the practical expedients are the option to elect prospective adjustment of the effective interest rate, foregoing reassessment of any instruments under loan modification rules. The Company is monitoring developments pertaining to Reference Rate Reform and does not currently anticipate ASU 2020-04 to have a material effect on its results of operations.

3. Real Estate Assets

The Company's real estate assets consisted of:
 
 
As of:
 
 
March 31, 2020
 
December 31, 2019
Multifamily communities:
 
 
 
 
Properties (1)
 
35

(1, 2) 
34

Units
 
10,637

 
10,245

New Market Properties:
 
 
 
 
Properties 
 
54

(2) 
52

Gross leasable area (square feet) (3)
 
6,208,278

 
6,041,629

Student housing properties:
 
 
 
 
Properties
 
8

(2) 
8

Units
 
2,011

 
2,011

Beds
 
6,095

 
6,095

Preferred Office Properties:
 
 
 
 
Properties
 
9

(2, 4) 
10

Rentable square feet
 
3,169,000

 
3,204,000

 
 
 
 
 
(1) The acquired second phases of CityPark View and Crosstown Walk communities are managed in combination with the initial phases and so together are considered a single property, as is the Regent at Lenox Village within the Lenox Portfolio.
(2) One multifamily community, two student housing properties, two grocery-anchored shopping centers and two office buildings are owned through consolidated joint ventures.
(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 is not included in the totals above for New Market Properties.
(4) Excludes our 251 Armour property, comprising 35,000 rentable square feet that is under development.




14

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements - (continued)
March 31, 2020


Impacts of COVID-19 Pandemic

The COVID-19 pandemic emerged in December 2019 and has since spread globally, including to every state in the United States. On March 13, 2020, the United States declared a national emergency. Since that time, efforts to contain the spread of COVID-19 have intensified. Several countries, including the United States, have taken steps to restrict travel, temporarily close businesses and issue quarantine orders. The restrictions have resulted in impacts to earnings for commercial real estate, which in turn is expected to affect asset valuations to some degree. The Company does not consider this event to be a triggering event, since no evidence of declining valuations of any consequence have emerged to cause a triggering event, as evidenced by step one analyses performed on a sample of its properties from each segment. The Company found a significant amount of cushion between the asset’s book value and the undiscounted cash flows for the properties evaluated.

The Company's monthly rent collections for the three-month period ended March 31, 2020 have been approximately level across the Company's segments, with a minor dip in collections in March for in-line retail tenants, as such tenants are generally smaller operations that are likely have less access to adequate sources of liquidity to weather economic downturns than grocery anchor tenants and many office tenants. The closure of several in-line tenant businesses and monthly rent collections are beginning to fall. Within our multifamily communities, despite the fact that collections of rents had not yet begun to decline as of March 2020, the Company offered rent deferral plans for the months of April and May 2020. Any deferred rents would be due over the remaining lease term of the individual tenants. Any uncollected deferred rent amounts will be deemed uncollectible. For office tenants, the company evaluated all delinquent receivable balances by performing a detailed review of each tenant. In this review, we determined if the balances were paid in the subsequent month, if tenant had requested rent relief in the subsequent month due to COVID-19 circumstances, if the tenant was a credit tenant that was not typically late, and if the tenant had a security deposit on hand. If the likelihood of the tenant submitting payment was deemed to be less than probable based on the aforementioned criteria, we determined the tenant as being an “at risk” tenant and revenue would be recognized on a cash basis.

Multifamily communities acquired

During the three-month period ended March 31, 2020, the Company completed the acquisition of Altis Wiregrass Ranch, a 392-unit multifamily community located in Tampa, Florida.

The aggregate purchase price of the multifamily acquisition was approximately $84.0 million, exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets and assumed liabilities. The Company acquired no multifamily communities during the three-month period ended March 31, 2019.



15

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements - (continued)
March 31, 2020


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 Community acquired during the three-month period ended
(In thousands, except amortization period data)
 
March 31, 2020
 
 
 
Land
 
$
6,842

Buildings and improvements
 
57,186

Furniture, fixtures and equipment
 
15,522

Lease intangibles
 
4,595

Prepaids & other assets
 
24

Accrued taxes
 
(273
)
Security deposits, prepaid rents, and other liabilities
 
(318
)
 
 
 
Net assets acquired
 
$
83,578

 
 
 
Cash paid
 
$
83,578

Mortgage debt, net
 

 
 
 
Total consideration
 
$
83,578

 
 
 
Three-months ended March 31, 2020
 
 
Revenue
 
$

Net income (loss)
 
$
(240
)
 
 
 
 
 
 
Capitalized acquisition costs incurred by the Company
 
$
171

Acquisition costs paid to related party (included above)
 
$

Remaining amortization period of intangible
 
 
 assets and liabilities (months)
 
17.5

 
 
 


Student housing properties acquired

The Company had no acquisitions of student housing property assets during the three-month period ended March 31, 2020.

During the three-month period ended March 31, 2019, the Company completed the acquisition of Haven49, a 322-unit, 887-bed
student housing property adjacent to the University of North Carolina at Charlotte. The Company effectuated the acquisition via
a negotiated agreement whereby the Company accepted the membership interest in the Haven49 project entity in satisfaction of
the project indebtedness owed to the Company. See Note 4.
















16

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements - (continued)
March 31, 2020


The Company allocated the asset's fair value 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 property acquired during the three-month period ended
(In thousands, except amortization period data)
 
March 31, 2019
 
 
 
Land
 
$
7,289

Buildings and improvements
 
68,163

Furniture, fixtures and equipment
 
16,966

Lease intangibles
 
983

Accrued taxes
 
(158
)
Security deposits, prepaid rents, and other liabilities
 
(2,579
)
 
 
 
Net assets acquired
 
$
90,664

 
 
 
Satisfaction of loan receivables
 
$
46,397

Cash paid
 
2,717

Mortgage debt, net
 
41,550

 
 
 
Total consideration
 
$
90,664

 
 
 
Three-months ended March 31, 2019
 
 
Revenue
 
$
1,991

Net income (loss)
 
$
94

 
 
 
 
 
 
Capitalized acquisition costs incurred by the Company
 
$
1,016

Acquisition costs paid to related party
 
$
936

 
 
 
Remaining amortization period of intangible
 
 
 assets and liabilities (months)
 



Student housing properties

On March 20, 2020, we delivered a written termination notice to the prospective purchaser of six of our student housing properties for their failure to consummate the purchase. Accordingly, we received an additional $2.75 million of forfeited earnest money as liquidated damages.




















17

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements - (continued)
March 31, 2020


New Market Properties assets acquired

During the three-month periods ended March 31, 2020 and 2019, the Company completed the acquisition of the following grocery-anchored shopping centers:
Acquisition date
 
Property
 
Location
 
Gross leasable area (square feet)
 
 
 
 
 
 
 
3/19/2020
 
Midway Market
 
Dallas, Texas
 
85,599

1/29/2020
 
Wakefield Crossing
 
Raleigh, North Carolina
 
75,927

 
 
 
 
 
 
 
 
 
 
 
 
 
161,526

 
 
 
 
 
 
 
1/17/2019
 
Gayton Crossing
 
Richmond, Virginia
 
158,316


The aggregate purchase price of the New Market Properties acquisitions for the three-month periods ended March 31, 2020 and 2019 was approximately $27.7 million and $29.0 million respectively, exclusive of acquired escrows, security deposits, prepaid assets, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.

The Company allocated the purchase prices to the acquired assets and liabilities based upon their fair values, as shown in the following table. The purchase price allocation was based upon the Company's best estimates of the fair values of the acquired assets and liabilities.
 
 
New Market Properties' acquisitions during the three-month periods ended March 31,
(In thousands, except amortization period data)
 
2020
 
2019
 
 
 
 
 
Land
 
$
9,328

 
$
9,109

Buildings and improvements
 
12,264

 
17,093

Tenant improvements
 
2,099

 
698

In-place leases
 
3,043

 
2,609

Above market leases
 
107

 
754

Leasing costs
 
1,237

 
769

Below market leases
 
(359
)
 
(1,515
)
Prepaid taxes and other assets
 
61

 
34

Security deposits, prepaid rents, and other
 
(249
)
 
(146
)
 
 
 
 
 
Net assets acquired
 
$
27,531

 
$
29,405

 
 
 
 
 
Cash paid
 
$
19,640

 
$
11,405

Mortgage debt
 
7,891

 
18,000

 
 
 
 
 
Total consideration
 
$
27,531

 
$
29,405

 
 
 
 
 
Three-month period ended March 31, 2020:
 
 
 
 
Revenue
 
$
408

 
$
691

Net income (loss)
 
$
45

 
$
(90
)
 
 
 
 
 
Three-month period ended March 31, 2019:
 
 
 
 
Revenue
 
$

 
$
595

Net income (loss)
 
$

 
$
(141
)
 
 
 
 
 
Capitalized acquisition costs incurred by the Company
 
$
470

 
$
569

Capitalized acquisition costs paid to related party (included above)
 
$
249

 
$
300

Remaining amortization period of intangible
 
 
 
 
 assets and liabilities (years)
 
10.4

 
7.8




18

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements - (continued)
March 31, 2020


The Company recorded aggregate amortization and depreciation expense of:
 
 
Three-month periods ended March 31,
(In thousands)
 
2020
 
2019
Depreciation:
 
 
 
 
Buildings and improvements
 
$
28,007

 
$
22,987

Furniture, fixtures, and equipment
 
12,388

 
13,133

 
 
40,395

 
36,120

Amortization:
 
 
 
 
Acquired intangible assets
 
8,650

 
8,945

Deferred leasing costs
 
415

 
178

Website development costs
 
49

 
46

Total depreciation and amortization
 
$
49,509

 
$
45,289


At March 31, 2020, the Company had recorded acquired gross intangible assets of $313.7 million, accumulated amortization of $159.3 million, gross intangible liabilities of $86.6 million and accumulated amortization of $26.1 million. Net intangible assets and liabilities as of March 31, 2020 will be amortized over the weighted average remaining amortization periods of approximately 7.2 and 9.1 years, respectively.

At March 31, 2020, the Company had restricted cash of approximately $20.7 million that was contractually restricted to fund capital expenditures and other property-level commitments such as tenant improvements and leasing commissions.

Purchase Options
In the course of extending real estate loan investments for property development, the Company will often receive an exclusive option to purchase the property once development and stabilization are complete. If the Company determines that it does not wish to acquire the property, it has the right to sell its purchase option back to the borrower for a termination fee in the amount of the purchase option discount.
Effective May 7, 2018, the Company terminated its purchase options on the Bishop Street multifamily community and the Haven Charlotte student housing property, both of which were partially supported by real estate loan investments held by the Company, in exchange for termination fees aggregating approximately $5.6 million from the developers.  For the three-month period ended March 31, 2019, the Company recorded approximately $3.1 million of interest revenue related to these purchase option terminations.
Effective January 1, 2019, the Company terminated its purchase options on the Sanibel Straits, Newbergh, Wiregrass and Cameron Square multifamily communities and the Solis Kennesaw student housing property, all of which are partially supported by real estate loan investments held by the Company, in exchange for termination fees aggregating approximately $9.1 million from the developers. These fees are treated as additional interest revenue and are amortized over the period ending with the earlier of (i) the sale of the underlying property and (ii) the maturity of the real estate loans. The Company recorded approximately $1.5 million and $1.2 million of interest revenue related to these purchase option terminations for the three-month periods ended March 31, 2020 and 2019, respectively. Effective March 6, 2020, the Company terminated its purchase option on the Falls at Forsyth multifamily community for $2.5 million.


19

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements - (continued)
March 31, 2020


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

Our portfolio of fixed rate, interest-only real estate loans consisted of:
 
 
March 31, 2020
 
December 31, 2019
Number of loans
 
24

 
27

Number of underlying properties in development
 
17

 
19

(In thousands)
 
 
 
 
Drawn amount
 
$
310,317

 
$
352,582

Deferred loan origination fees
 
(1,500
)
 
(1,476
)
Allowance for loan losses
 
(13,344
)
 
(1,400
)
Carrying value
 
$
295,473

 
$
349,706

 
 
 
 
 
Unfunded loan commitments
 
$
62,866

 
$
61,718

Weighted average current interest, per annum (paid monthly)
 
8.47
%
 
8.48
%
Weighted average accrued interest, per annum
 
3.54
%
 
3.85
%

(In thousands)
 
Principal balance
 
Deferred loan origination fees
 
Loan loss allowance
 
Credit Losses Reserve (CECL)
 
Carrying value
Balances as of December 31, 2019
 
$
352,582

 
$
(1,476
)
 
$
(1,400
)
 
$

 
$
349,706

Opening CECL reserve
 

 

 

 
(7,414
)
 
(7,414
)
Loan fundings
 
11,631

 

 

 

 
11,631

Loan repayments
 
(53,896
)
 

 

 

 
(53,896
)
Loan origination fees collected
 

 
(267
)
 

 

 
(267
)
Amortization of loan origination fees
 

 
243

 


 

 
243

Reductions in reserves due to loan repayments
 

 

 

 
245

 
245

Provision for credit losses
 

 

 

 
(4,775
)
 
(4,775
)
Balances as of March 31, 2020
 
$
310,317

 
$
(1,500
)
 
$
(1,400
)
 
$
(11,944
)
 
$
295,473


Property type
 
Number of loans
 
Carrying value
 
Commitment amount
 
Percentage of portfolio
(In thousands)
 
 
 
 
 
 
Residential properties
 
23

 
$
289,616

 
$
353,989

 
98
%
New Market Properties
 

 

 

 
%
Preferred Office Properties
 
1

 
5,857

 
19,193

 
2
%
Balances as of March 31, 2020
 
24

 
$
295,473

 
$
373,182

 
 

On February 28, 2020, the Company closed on a real estate loan investment of up to approximately $13.4 million in partial support of a 256-unit multifamily community to be located in Charlotte, North Carolina. The loan pays a current monthly interest rate of 8.5% per annum and accrues additional deferred interest of 5.5% per annum and matures on February 28, 2025.

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. Prepayment of the real estate loans are permitted in whole, but not in part, without the Company's consent.


20

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements - (continued)
March 31, 2020



As discussed in note 2, the Company established total expected credit losses against its existing portfolio of real estate loan investments on January 1, 2020. In doing so, it recorded a cumulative effect reduction adjustment to retained earnings of approximately $7.4 million. For the quarter ended March 31, 2020, the Company recorded an aggregate net increase in its provision for expected credit losses of approximately $4.5 million.

As described in note 2, the Company assesses the credit quality of its real estate loan investments by a calculated loss reserve ratio, which is an internally-developed credit quality indicator. Loss reserve ratios reflect the amount of protection afforded by the amount of equity and debt financing subordinate to the Company's position in the project; higher reserve ratios reflect a lower amount of invested dollars junior to the Company's position. The following table presents the Company's aggregation of loan amounts by final reserve ratio as of March 31, 2020:

Final reserve ratio
 
Number of loans
 
Total amount due (in thousands)
0.50
%
 
3

 
$
56,904

1.00
%
 
1

 
6,370

1.50
%
 
9

 
109,735

3.00
%
 
2

 
28,992

4.00
%
 
1

 
125,778

36.26
%
 
1

 
5,924

 
 
 
 
 
 
 
17

 
$
333,703


The COVID-19 pandemic has, and will continue to have, impacts upon the development activity underlying our real estate loan investments, including the availability of labor, the supply and availability of construction materials and the ability to achieve leased stabilization. The Company's Berryessa real estate loan investment carries a 4% final reserve ratio at March 31, 2020. The project is experiencing a temporary construction delay due to effects of the COVID-19 pandemic but is expected to resume shortly. The Company assesses its real estate loan investment portfolio for impacts from COVID-19 at the outset of the project, as well as both quantitatively and qualitatively at the achievement of construction and leasing milestones during the projects' lives.

The Company can make no assurances that economic or industry conditions or other circumstances will not lead to increases in allowances for credit losses.

Management monitors the credit quality of the obligors under each of the Company's real estate loans by tracking the timeliness of scheduled interest and principal payments relative to the due dates as specified in the loan documents, as well as draw requests on the loans relative to the project budgets. In addition, management monitors the actual progress of development and construction relative to the construction plan, as well as local, regional and national economic conditions that may bear on our current and target markets.

The Company's Starkville loan has been in default since August 20, 2019 under the terms of the underlying mezzanine loan agreement. During the fourth quarter of 2019, the Company recorded a specific loan loss reserve related to this loan totaling $1.4 million, reducing its net investment in the Starkville loan from $7.3 million, including accrued interest of $1.2 million, to a carrying amount of $5.9 million. Additionally, in the first quarter of 2020, the Company also recorded a total of $2.1 million in reserves pertaining to this loan under ASU 2016-03, reducing its carrying amount to $3.8 million as of March 31, 2020.




21

Preferred Apartment Communities, Inc.
Notes to Consolidated Financial Statements - (continued)
March 31, 2020


At March 31, 2020, the Company's 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, 2020
 
December 31, 2019
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Capital Marketing Services, LLC (1,7)
 
N/A
 
N/A
 
$

 
$

 
$
650

 
N/A

 
Preferred Apartment Advisors, LLC (1,2,8)
 
N/A
 
N/A
 

 

 
15,178

 
N/A

 
Haven Campus Communities, LLC (1,3)
 
6/11/2014
 
12/31/2018
 
11,660

 
9,011

 
9,011

 
8
%
 
Oxford Capital Partners, LLC (4,5)
 
10/5/2015
 
6/30/2020
 
8,000

 
5,577

 
5,438

 
10
%
 
Mulberry Development Group, LLC (5)
 
3/31/2016
 
6/30/2020
 
750

 
525

 
525

 
12
%
 
360 Capital Company, LLC (5,6)
 
5/24/2016
 
12/31/2020
 
3,400

 
1,218

 
3,394

 
12
%
 
360 Capital Company, LLC (9)
 
N/A
 
N/A
 

 

 
7,754

 
N/A

 
Unamortized loan fees
 
 
 
 
 
 
 

 
(33
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$