Preferred Apartment Communities, Inc. Reports Results for Second Quarter 2020

Three months ended June 30,

Six months ended June 30,

2020

2019

% change

2020

2019

% change

Revenues (in thousands)

$

123,277

$

113,852

8.3

%

$

254,379

$

225,358

12.9

%

Per share data:

Net income (loss) (1)

$

(1.06)

$

(0.66)

—

$

(5.47)

$

(1.32)

—

FFO (2)

$

(0.01)

$

0.36

—

$

(3.39)

$

0.75

—

Core FFO (2)

$

0.21

$

0.36

(41.7)

%

$

0.59

$

0.77

(23.4)

%

AFFO (2)

$

0.05

$

0.22

(77.3)

%

$

0.52

$

0.55

(5.5)

%

Dividends (3)

$

0.175

$

0.2625

(33.3)

%

$

0.4375

$

0.5225

(16.3)

%

(1) Per weighted average share of Common Stock outstanding for the periods indicated.

(2) FFO, Core FFO and AFFO results are presented per basic weighted average share of Common Stock and Class A Unit in our Operating Partnership outstanding for the periods indicated. See Reconciliations of FFO Attributable to Common Stockholders and Unitholders, Core FFO and AFFO to Net Income (Loss) Attributable to Common Stockholders and Definitions of Non-GAAP Measures.

(3)  Per share of Common Stock and Class A Unit outstanding.

2020 Cash Collections of Recurring Rental Revenues (1)

January

February

March

April

May

June

July

Unadjusted for rent deferrals:

Multifamily

100.0

%

99.9

%

99.8

%

98.8

%

98.8

%

98.8

%

98.1

%

Student housing

100.0

%

100.0

%

99.7

%

97.9

%

97.0

%

97.4

%

97.0

%

Office

99.7

%

99.5

%

99.6

%

98.5

%

96.9

%

96.8

%

98.3

%

Grocery-anchored retail

99.4

%

99.4

%

98.9

%

90.0

%

87.6

%

89.2

%

92.0

%

Adjusted for rent deferrals:

Multifamily

100.0

%

99.9

%

99.8

%

99.7

%

99.5

%

98.9

%

98.1

%

Student housing

100.0

%

100.0

%

99.7

%

98.4

%

97.4

%

97.4

%

97.0

%

Office

99.7

%

99.5

%

99.6

%

99.5

%

99.4

%

99.0

%

99.2

%

Grocery-anchored retail

99.4

%

99.4

%

98.9

%

93.6

%

91.8

%

92.2

%

93.2

%

(1) Percent of revenue billed includes recurring charges for base rent, operating expense escalations, pet, garage, parking and storage rent, as well as receivables from U.S. Government tenants, from which collection is reasonably assured.

January

February

March

April

May

June

July

Occupancy:

Multifamily (stabilized)

95.3

%

95.6

%

95.7

%

94.4

%

94.4

%

95.2

%

95.1

%

Student housing

96.0

%

96.2

%

96.1

%

96.0

%

95.8

%

95.8

%

95.8

%

Percent leased:

Office

96.3

%

96.3

%

96.7

%

95.9

%

96.2

%

96.2

%

96.1

%

Grocery-anchored retail

92.9

%

92.6

%

92.6

%

92.5

%

92.5

%

92.7

%

92.8

%

Property

Loan amount (millions)

Maturity date

Rate

Interest only period (years)

Summit Crossing II

$

20.7

7/1/2030

(1)

2

Avenues at Northpointe

33.5

7/1/2027

2.79

%

2

Avenues at Cypress

28.4

7/1/2027

2.96

%

2

CityPark View

29.0

7/1/2030

2.75

%

3

Venue at Lakewood Ranch

36.6

7/1/2030

2.99

%

2

Crosstown Walk

46.5

7/1/2027

2.92

%

2

Aster at Lely

50.4

7/1/2030

2.95

%

2

$

245.1

(1) The new mortgage bears interest at a variable rate of 1 Month LIBOR  plus 278 basis points.

(A) We calculate the Core FFO and AFFO payout ratios to Common Stockholders as the ratio of Common Stock dividends and distributions to Core FFO and AFFO. We calculate the Core FFO and AFFO payout ratios to preferred stockholders as the ratio of Preferred Stock dividends to the sum of Preferred Stock dividends and Core FFO and AFFO. Since our operations resulted in a net loss from continuing operations for the periods presented, a payout ratio based on net loss is not calculable.  See Definitions of Non-GAAP Measures.

(B) Same store net operating income is a non-GAAP measure. See Definitions of non-GAAP Measures.

Owned as of June 30, 2020 (1)

Potential additions from real estate loan investment portfolio (2) (3)

Potential total

Residential communities:

Properties

44

11

55

Units

12,936

2,995

15,931

Beds

6,095

543

6,638

Grocery-anchored shopping centers:

Properties

54

—

54

Gross leasable area (square feet)

6,208,278

—

6,208,278

Office buildings:

Properties

9

(4)

1

10

Rentable square feet

3,169,000

195,000

3,364,000

(1) One multifamily community, two student housing properties, two grocery-anchored shopping centers and two office buildings are owned through consolidated joint ventures.

(2)  We evaluate each project individually and we make no assurance that we will acquire any of the underlying properties from our real estate loan investment portfolio.

(3)  The Company has terminated various purchase option agreements in exchange for termination fees.  These properties are excluded from the potential additions from our real estate loan investment portfolio.

(4)  Excludes our 251 Armour property, comprising 35,000 rentable square feet that is under development.

Aster at Lely Resort

Avenues at Cypress

Avenues at Northpointe

Citi Lakes

Lenox Village

Retreat at Lenox Village

Overton Rise

Sorrel

Venue at Lakewood Ranch

Avenues at Creekside

525 Avalon Park

Vineyards

Citrus Village

Retreat at Greystone

City Vista

Founders Village

Luxe at Lakewood Ranch

Adara at Overland Park

Summit Crossing I

Summit Crossing II

Aldridge at Town Village

City Park View

Crosstown Walk

Claiborne Crossing

Reserve at Summit Crossing

Colony at Centerpointe

Lux at Sorrel

Green Park

Vestavia Reserve

Reconciliation of Net Income (Loss) to Multifamily Communities' Same-Store Net Operating Income (NOI)

Three months ended:

(in thousands)

6/30/2020

6/30/2019

Net (loss) income

$

(15,950)

$

(1,677)

Add:

Equity stock compensation

246

306

Depreciation and amortization

51,793

45,663

Interest expense

31,136

27,611

Management fees

—

8,209

Corporate G&A and other

8,847

1,388

Management Internalization

458

280

Provision for expected credit losses

482

—

Waived asset management and general and administrative expense fees

—

(2,795)

Less:

Interest revenue on notes receivable

10,407

12,093

Interest revenue on related party notes receivable

604

1,632

Miscellaneous revenues

692

1,000

Income from consolidated VIEs

—

584

Gain on extinguishment of debt

(6,156)

(52)

Gains on land condemnation and trading investment

—

747

Property net operating income

71,465

62,981

Less:

Non-same-store property revenues

(74,721)

(62,174)

Add:

Non-same-store property operating expenses

24,614

20,537

Same-store net operating income

$

21,358

$

21,344

Multifamily Communities' Same Store Net Operating Income

Three months ended:

(in thousands)

6/30/2020

6/30/2019

$ change

% change

Revenues:

Rental and other property revenues

$

36,854

$

36,953

$

(99)

(0.3)

%

Operating expenses:

Property operating and maintenance

6,326

6,883

(557)

(8.1)

%

Payroll

2,984

2,843

141

5.0

%

Real estate taxes and insurance

6,186

5,883

303

5.2

%

Total operating expenses

15,496

15,609

(113)

(0.7)

%

Same-store net operating income

$

21,358

$

21,344

$

14

0.1

%

Same-store average physical occupancy

94.7

%

95.4

%

Corporate level expenses related to the management and operations of the Multifamily and Student housing property portfolios are allocated on a per unit basis to Property NOI and are included in Multifamily Same Store NOI.

Reconciliation of Net Income (Loss) to Multifamily Communities' Same-Store Net Operating Income (NOI)

Six months ended:

(in thousands)

6/30/2020

6/30/2019

Net (loss) income

$

(195,473)

$

(3,957)

Add:

Equity stock compensation

476

617

Depreciation and amortization

101,302

90,952

Interest expense

60,729

54,367

Management fees

3,099

16,038

Corporate G&A and other

15,212

2,809

Management Internalization

179,251

325

Provision for expected credit losses

5,615

(5,424)

Waived asset management and general and administrative expense fees

(1,136)

—

Less:

Interest revenue on notes receivable

23,846

23,381

Interest revenue on related party notes receivable

3,141

7,434

Miscellaneous revenues

3,952

1,023

Income from consolidated VIEs

—

725

Gain on extinguishment of debt

(6,156)

(69)

Gains on land condemnation and trading investment

479

751

Property net operating income

143,813

122,482

Less:

Non-same-store property revenues

(148,968)

(120,177)

Add:

Non-same-store property operating expenses

48,792

40,407

Same-store net operating income

$

43,637

$

42,712

Multifamily Communities' Same Store Net Operating Income

Six months ended:

(in thousands)

6/30/2020

6/30/2019

$ change

% change

Revenues:

Rental and other property revenues

$

74,472

$

73,343

$

1,129

1.5

%

Operating expenses:

Property operating and maintenance

12,739

13,221

(482)

(3.6)

%

Payroll

5,795

5,692

103

1.8

%

Real estate taxes and insurance

12,301

11,718

583

5.0

%

Total operating expenses

30,835

30,631

204

0.7

%

Same-store net operating income

$

43,637

$

42,712

$

925

2.2

%

Corporate level expenses related to the management and operations of the Multifamily and Student housing property portfolios are allocated on a per unit basis to Property NOI and are included in Multifamily Same Store NOI.

Preferred Apartment Communities, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

Three months ended June 30,

(In thousands, except per-share figures)

2020

2019

Revenues:

Rental and other property revenues

$

111,574

$

99,127

Interest income on loans and notes receivable

10,407

12,093

Interest income from related parties

604

1,632

Miscellaneous revenues

692

1,000

Total revenues

123,277

113,852

Operating expenses:

Property operating and maintenance

16,841

13,864

Property salary and benefits

5,720

4,828

Property management costs

1,042

3,373

Real estate taxes and insurance

16,506

14,081

General and administrative

8,847

1,388

Equity compensation to directors and executives

246

306

Depreciation and amortization

51,793

45,663

Asset management and general and administrative expense

fees to related party

—

8,209

Provision for expected credit losses

482

—

Management internalization expense

458

280

Total operating expenses

101,935

91,992

Waived asset management and general and administrative

expense fees

—

(2,795)

Net operating expenses

101,935

89,197

Operating income

21,342

24,655

Interest expense

31,136

27,611

Change in fair value of net assets of consolidated

VIEs from mortgage-backed pools

—

584

Loss on extinguishment of debt

(6,156)

(52)

Gain on sale of real estate loan investment

—

747

Net loss

(15,950)

(1,677)

Consolidated net loss attributable to non-controlling interests

266

571

Net loss attributable to the Company

(15,684)

(1,106)

Dividends declared to preferred stockholders

(35,624)

(27,542)

Earnings attributable to unvested restricted stock

(11)

(7)

Net loss attributable to common stockholders

$

(51,319)

$

(28,655)

Net loss per share of Common Stock available to

 common stockholders, basic and diluted

$

(1.06)

$

(0.66)

Weighted average number of shares of Common Stock outstanding,

basic and diluted

48,220

43,703

Reconciliation of FFO Attributable to Common Stockholders and Unitholders, Core FFO and AFFO

to Net (Loss) Income Attributable to Common Stockholders (A)

Three months ended June 30,

(In thousands, except per-share figures)

2020

2019

Net loss attributable to common stockholders (See note 1)

$

(51,319)

$

(28,655)

Add:

Depreciation of real estate assets

40,996

36,310

Depreciation of acquired intangible assets and deferred leasing costs

9,973

8,893

Net loss attributable to Class A Unitholders (See note 2)

(249)

(571)

FFO attributable to common stockholders and unitholders

(599)

15,977

Acquisition and pursuit costs

132

—

Loan cost amortization on acquisition term notes and loan coordination fees (See note 3)

528

493

Payment of costs related to property refinancing

6,863

369

Internalization costs (See note 4)

458

280

Deemed dividends for redemptions of preferred stock

2,772

123

Noncash (income) expense for current expected credit losses (See note 5)

(122)

—

Expenses related to the COVID-19 global pandemic (See note 6)

419

—

Earnest money forfeited by prospective asset purchaser

$

—

(1,000)

Core FFO attributable to common stockholders and unitholders

10,451

16,242

Add:

Non-cash equity compensation to directors and executives

246

306

Amortization of loan closing costs (See note 7)

1,177

1,159

Depreciation/amortization of non-real estate assets

616

460

Net loan origination fees received (See note 8)

200

125

Deferred interest income received (See note 9)

—

2,318

Amortization of lease inducements (See note 10)

447

432

Non-operating miscellaneous revenues

—

1,000

Less:

Amortization of purchase option termination revenues in excess of cash received (See note 11)

(435)

(1,383)

Non-cash loan interest income (See note 9)

(3,109)

(3,658)

Cash received for sale of K Program securities in excess of noncash revenues

—

(274)

Cash paid for loan closing costs

—

(5)

Amortization of acquired real estate intangible liabilities and SLR (See note 12)

(4,144)

(4,324)

Amortization of deferred revenues (See note 13)

(941)

(941)

Normally recurring capital expenditures (See note 14)

(2,124)

(1,563)

AFFO attributable to common stockholders and Unitholders

$

2,384

$

9,894

Common Stock dividends and distributions to Unitholders declared:

Common Stock dividends

$

8,624

$

11,581

Distributions to Unitholders (See note 2)

130

229

Total

$

8,754

$

11,810

Common Stock dividends and Unitholder distributions per share

$

0.175

$

0.2625

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

$

(0.01)

$

0.36

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

$

0.21

$

0.36

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

$

0.05

$

0.22

Weighted average shares of Common Stock and Units outstanding: (A)

Basic:

Common Stock

48,220

43,703

Class A Units

759

877

Common Stock and Class A Units

48,979

44,580

Diluted Common Stock and Class A Units (B)

48,980

45,027

Actual shares of Common Stock outstanding, including 548 and 26 unvested shares

 of restricted Common Stock at June 30, 2020 and 2019, respectively.

49,831

44,273

Actual Class A Units outstanding at June 30, 2020 and 2019, respectively.

742

875

Total

50,573

45,148

(A) Units and Unitholders refer to Class A Units in our Operating Partnership (as defined in note 2), or Class A Units, and holders of Class A Units, respectively. Unitholders include recipients of awards of Class B Units in our Operating Partnership, or Class B Units, for annual service which became vested and earned and automatically converted to Class A Units. Unitholders also include the entity that contributed the Wade Green grocery-anchored shopping center. The Class A Units collectively represent an approximate 1.55% weighted average non-controlling interest in the Operating Partnership for the three-month period ended June 30, 2020.

(B) Since our AFFO results are positive for the periods reflected above, we are presenting recalculated diluted weighted average shares of Common Stock and Class A Units for these periods for purposes of this table, which includes the dilutive effect of common stock equivalents from grants of the Class B Units, warrants included in units of Series A Preferred Stock issued, as well as annual grants of restricted Common Stock and restricted stock units. The weighted average shares of Common Stock outstanding presented on the Consolidated Statements of Operations are the same for basic and diluted for any period for which we recorded a net loss available to common stockholders.

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

Reconciliation of FFO Attributable to Common Stockholders and Unitholders, Core FFO and AFFO

to Net (Loss) Income Attributable to Common Stockholders (A)

Six months ended June 30,

(In thousands, except per-share figures)

2020

2019

Net loss attributable to common stockholders (See note 1)

$

(260,771)

$

(56,968)

Add:

Depreciation of real estate assets

80,771

72,027

Depreciation of acquired intangible assets and deferred leasing costs

18,955

18,016

Net loss attributable to Class A Unitholders (See note 2)

(3,343)

(79)

FFO attributable to common stockholders and unitholders

(164,388)

32,996

Acquisition and pursuit costs

378

—

Loan cost amortization on acquisition term notes and loan coordination fees (See note 3)

1,206

980

Payment of costs related to property refinancing

6,863

424

Internalization costs (See note 4)

179,251

325

Deemed dividends for redemptions of preferred stock

3,316

219

Noncash (income) expense for current expected credit losses (See note 5)

4,408

—

Expenses related to the COVID-19 global pandemic (See note 6)

448

—

Earnest money forfeited by prospective asset purchaser

(2,750)

(1,000)

Core FFO attributable to common stockholders and unitholders

28,732

33,944

Add:

Non-cash equity compensation to directors and executives

476

617

Amortization of loan closing costs (See note 7)

2,343

2,290

Depreciation/amortization of non-real estate assets

1,172

909

Net loan origination fees received (See note 8)

467

526

Deferred interest income received (See note 9)

8,277

5,078

Amortization of lease inducements (See note 10)

886

860

Cash received in excess of (exceeded by) amortization of

purchase option termination revenues  (See note 11)

325

(1,087)

Non-operating miscellaneous revenues

2,750

1,000

Less:

Non-cash loan interest income (See note 9)

(6,128)

(6,982)

Non-cash revenues from mortgage-backed securities

—

(415)

Cash paid for loan closing costs

—

(8)

Amortization of acquired real estate intangible liabilities and SLR (See note 12)

(8,797)

(8,082)

Amortization of deferred revenues (See note 13)

(1,881)

(1,881)

Normally recurring capital expenditures (See note 14)

(3,542)

(2,743)

AFFO attributable to common stockholders and Unitholders

$

25,080

$

24,026

Common Stock dividends and distributions to Unitholders declared:

Common Stock dividends

21,115

22,776

Distributions to Unitholders (See note 2)

333

458

Total

21,448

23,234

Common Stock dividends and Unitholder distributions per share

$

0.4375

$

0.5225

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

$

(3.39)

$

0.75

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

$

0.59

$

0.77

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

$

0.52

$

0.55

Weighted average shares of Common Stock and Units outstanding: (A)

Basic:

47,674

43,194

Common Stock

793

879

Class A Units

48,467

44,073

Common Stock and Class A Units

Diluted Common Stock and Class A Units (B)

48,474

44,755

Actual shares of Common Stock outstanding, including 548 and 26 unvested shares

 of restricted Common Stock at June 30, 2020 and 2019, respectively.

49,831

44,273

Actual Class A Units outstanding at June 30, 2020 and 2019, respectively.

742

875

Total

50,573

45,148

(A) Units and Unitholders refer to Class A Units in our Operating Partnership (as defined in note 2), or Class A Units, and holders of Class A Units, respectively. Unitholders include recipients of awards of Class B Units in our Operating Partnership, or Class B Units, for annual service which became vested and earned and automatically converted to Class A Units. Unitholders also include the entity that contributed the Wade Green grocery-anchored shopping center. The Class A Units collectively represent an approximate 1.64% weighted average non-controlling interest in the Operating Partnership for the six-month period ended June 30, 2020.

(B) Since our AFFO results are positive for the periods reflected above, we are presenting recalculated diluted weighted average shares of Common Stock and Class A Units for these periods for purposes of this table, which includes the dilutive effect of common stock equivalents from grants of the Class B Units, warrants included in units of Series A Preferred Stock issued, as well as annual grants of restricted Common Stock and restricted stock units. The weighted average shares of Common Stock outstanding presented on the Consolidated Statements of Operations are the same for basic and diluted for any period for which we recorded a net loss available to common stockholders.

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

1)

Rental and other property revenues and property operating expenses for the three-month and six-month periods ended June 30, 2020 include activity for the properties acquired during the period only from their respective dates of acquisition. In addition, these periods include activity for the properties acquired since June 30, 2019. Rental and other property revenues and expenses for the three-month and six-month periods ended June 30, 2019 include activity for the acquisitions made during that period only from their respective dates of acquisition.

2)

Non-controlling interests in Preferred Apartment Communities Operating Partnership, L.P., or our Operating Partnership, consisted of a total of 742,413 Class A Units as of June 30, 2020. Included in this total are 419,228 Class A Units which were granted as partial consideration to the seller in conjunction with the seller's contribution to us on February 29, 2016 of the Wade Green grocery-anchored shopping center. The remaining Class A units were awarded primarily to our key executive officers. The Class A Units are apportioned a percentage of our financial results as non-controlling interests. The weighted average ownership percentage of these holders of Class A Units was calculated to be 1.55% and 1.97% for the three-month periods ended June 30, 2020 and 2019, respectively.

3)

We paid loan coordination fees to Preferred Apartment Advisors, LLC, or our Former Manager, to reflect the administrative effort involved in arranging debt financing for acquired properties prior to the Internalization. The fees were calculated as 0.6% of the amount of any mortgage indebtedness on newly-acquired properties or refinancing and are amortized over the lives of the respective mortgage loans. This non-cash amortization expense is an addition to FFO in the calculation of Core FFO and AFFO. At June 30, 2020, aggregate unamortized loan coordination fees were approximately $13.5 million, which will be amortized over a weighted average remaining loan life of approximately 10.2 years.

4)

This adjustment reflects the add-back of (i) consideration paid to the owners of the Former Manager, (ii) accretion of the discount on the deferred liability payable to the owners of the Former Manager and (iii) due diligence and pursuit costs incurred by the Company related to the internalization of the functions performed by the Former Manager.

5)

Effective January 1, 2020, we adopted ASU 2016-03, which requires us to estimate the amount of future credit losses we expect to incur over the lives of our real estate loan investments at the inception of each loan. This loss reserve may be adjusted upward or downward over the lives of our loans and therefore the aggregate net adjustment for each period could be positive (removing the non-cash effect of a net increase in aggregate loss reserves) or negative (removing the non-cash effect of a net decrease in aggregate loss reserves) in these adjustments to FFO in calculating Core FFO.

6)

This additive adjustment to FFO consists of one-time costs for signage, cleaning and supplies necessary to create and maintain work environments necessary to adhere to CDC guidelines during the current COVID-19 pandemic. Since we do not expect to incur similar costs once the COVID-19 pandemic has subsided, we add these costs back to FFO in our calculation of Core FFO.

7)

We incur loan closing costs on our existing mortgage loans, which are secured on a property-by-property basis by each of our acquired real estate assets, and also for occasional amendments to our syndicated revolving line of credit with Key Bank National Association, or our Revolving Line of Credit. Effective April 13, 2018, the maximum borrowing capacity on the Revolving Line of Credit was increased from $150 million to $200 million. These loan closing costs are also amortized over the lives of the respective loans and the Revolving Line of Credit, and this non-cash amortization expense is an addition to FFO in the calculation of AFFO. Neither we nor the Operating Partnership have any recourse liability in connection with any of the mortgage loans, nor do we have any cross-collateralization arrangements with respect to the assets securing the mortgage loans, other than security interests in 49% of the equity interests of the subsidiaries owning such assets, granted in connection with our Revolving Line of Credit, which provides for full recourse liability. At June 30, 2020, unamortized loan costs on all the Company's indebtedness were approximately $32.7 million, which will be amortized over a weighted average remaining loan life of approximately 9.0 years.

8)

We receive loan origination fees in conjunction with the origination of certain real estate loan investments. These fees are then recognized as revenue over the lives of the applicable loans as adjustments of yield using the effective interest method. The total fees received are additive adjustments in the calculation of AFFO. Correspondingly, the amortized non-cash income is a deduction in the calculation of AFFO. Over the lives of certain loans, we accrue additional interest amounts that become due to us at the time of repayment of the loan or refinancing of the property, or when the property is sold. This non-cash interest income is subtracted from Core FFO in our calculation of AFFO. The amount of additional accrued interest becomes an additive adjustment to FFO once received from the borrower (see note 8).

9)

This adjustment reflects the receipt during the periods presented of additional interest income (described in note 7 above) which was earned and accrued prior to those periods presented on various real estate loans.

10)

This adjustment removes the non-cash amortization of costs incurred to induce tenants to lease space in our office buildings and grocery-anchored shopping centers.

11)

Effective March 6, 2020, our purchase option on the Falls at Forsyth multifamily community was extinguished in conjunction with the loan repayment; effective January 1, 2019, we terminated our purchase options on the Sanibel Straits, Newbergh, Wiregrass and Cameron Square multifamily communities and the Solis Kennesaw student housing property; on May 7, 2018, we terminated our purchase options on the Bishop Street multifamily community and the Haven Charlotte student housing property, both of which are (or were) partially supported by real estate loan investments held by us. In exchange, we arranged to receive termination fees aggregating approximately $17.2 million from the developers, which are recorded as revenue over the period beginning on the date of election until the earlier of (i) the maturity of the real estate loan investment and (ii) the sale of the property. The receipt of the cash termination fees are an additive adjustment in our calculation of AFFO and the removal of non-cash revenue from the recognition of the termination fees are a reduction to Core FFO in our calculation of AFFO; both of these adjustments are presented in a single net number within this line. For the three-month periods ended June 30, 2020 and 2019 and the six-month period ended June 30, 2019, we had recognized termination fee revenues in excess of cash received, resulting in the negative adjustments shown to Core FFO in our calculation of AFFO. For the six-month period ended June 30, 2020, cash received exceeded fee revenue amortization, resulting in a net positive adjustment to Core FFO in our calculation of AFFO.

12)

This adjustment reflects straight-line rent adjustments and the reversal of the non-cash amortization of below-market and above-market lease intangibles, which were recognized in conjunction with our acquisitions and which are amortized over the estimated average remaining lease terms from the acquisition date for multifamily communities and over the remaining lease terms for grocery-anchored shopping center assets and office buildings. At June 30, 2020, the balance of unamortized below-market lease intangibles was approximately $57.8 million, which will be recognized over a weighted average remaining lease period of approximately 8.9 years.

13)

This adjustment removes the non-cash amortization of deferred revenue recorded by us in conjunction with Company-owned lessee-funded tenant improvements in our office buildings.

14)

We deduct from Core FFO normally recurring capital expenditures that are necessary to maintain our assets' revenue streams in the calculation of AFFO. This adjustment also deducts from Core FFO capitalized amounts for third party costs during the period to originate or renew leases in our grocery-anchored shopping centers and office buildings. This adjustment includes approximately $31,000 and $71,000 of recurring capitalized expenditures incurred at our corporate offices during the three-month and six-month periods ended June 30, 2020, respectively. No adjustment is made in the calculation of AFFO for nonrecurring capital expenditures. See Capital Expenditures, Grocery-Anchored Shopping Center Portfolio, and Office Buildings Portfolio sections for definitions of these terms.

Preferred Apartment Communities, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except per-share par values)

June 30, 2020

December 31, 2019

Assets

Real estate 

Land

$

671,687

$

635,757

Building and improvements

3,375,631

3,256,223

Tenant improvements

174,565

167,275

Furniture, fixtures, and equipment

354,340

323,381

Construction in progress

22,539

11,893

Gross real estate

4,598,762

4,394,529

Less: accumulated depreciation

(503,467)

(421,551)

Net real estate

4,095,295

3,972,978

Real estate loan investments, net of deferred fee income and allowance for expected loan loss

306,026

325,790

Real estate loan investments to related parties, net

2,568

23,692

Total real estate and real estate loan investments, net

4,403,889

4,322,460

Cash and cash equivalents

60,101

94,381

Restricted cash

56,333

42,872

Notes receivable

7,758

17,079

Note receivable and revolving lines of credit due from related parties

9,011

24,838

Accrued interest receivable on real estate loans

23,046

25,755

Acquired intangible assets, net of amortization

145,187

154,803

Deferred loan costs on Revolving Line of Credit, net of amortization

950

1,286

Deferred offering costs

4,088

2,147

Tenant lease inducements, net

19,103

19,607

Tenant receivables and other assets

89,817

65,332

Total assets

$

4,819,283

$

4,770,560

Liabilities and equity

Liabilities

Mortgage notes payable, net of deferred loan costs and mark-to-market adjustment

$

2,762,291

$

2,567,022

Revolving line of credit

92,500

—

Term note payable, net of deferred loan costs

—

69,489

Unearned purchase option termination fees

1,585

2,859

Deferred revenue

37,862

39,722

Accounts payable and accrued expenses

56,143

42,191

Deferred liability to Former Manager

23,168

—

Contingent liability due to Former Manager

14,880

—

Accrued interest payable

7,927

8,152

Dividends and partnership distributions payable

20,570

23,519

Acquired below market lease intangibles, net of amortization

57,793

62,611

Prepaid rent, security deposits and other liabilities

34,568

20,879

Total liabilities

3,109,287

2,836,444

Commitments and contingencies

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; 2,026 and 2,028 shares outstanding at June 30, 2020 and December 31, 2019, respectively

20

20

Series A1 Redeemable Preferred Stock, $0.01 par value per share; up to 1,000 shares authorized;

  68 and 5 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

—

—

Series M Redeemable Preferred Stock, $0.01 par value per share; 500 shares authorized; 106 shares

  issued; 93 and 103 shares outstanding at June 30, 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;

  5 and zero shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

—

—

Common Stock, $0.01 par value per share; 400,067 shares authorized; 49,283 and 46,443 shares issued

and outstanding at June 30, 2020 and December 31, 2019, respectively

493

464

Additional paid-in capital

1,917,212

1,938,057

Accumulated (deficit) earnings

(206,724)

(7,244)

Total stockholders' equity

1,711,002

1,931,298

Non-controlling interest

(1,006)

2,818

Total equity

1,709,996

1,934,116

Total liabilities and equity

$

4,819,283

$

4,770,560

Preferred Apartment Communities, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

Six-month periods ended June 30,

(In thousands)

2020

2019

Operating activities:

Net (loss) income

$

(195,473)

$

(3,957)

Reconciliation of net (loss) income to net cash provided by operating activities:

Depreciation and amortization expense

101,302

90,952

Amortization of above and below market leases

(3,570)

(3,179)

Deferred revenues and fee income amortization

(2,482)

(3,197)

Purchase option termination fee amortization

(4,475)

(5,617)

Amortization of equity compensation, lease incentives and other non-cash expenses

1,781

1,608

Deferred loan cost amortization

3,424

3,139

Non-cash accrued interest income on real estate loans

(6,156)

(6,734)

Receipt of accrued interest income on real estate loans

8,865

2,318

Gains on sales of real estate loan and trading investment

(479)

(751)

Cash received for purchase option terminations

4,800

1,330

Loss on extinguishment of debt

6,156

69

Increase in provision for expected credit losses

5,615

—

Mortgage interest received from consolidated VIEs

—

8,015

Mortgage interest paid to other participants of consolidated VIEs

—

(8,015)

Changes in operating assets and liabilities:

(Increase) in tenant receivables and other assets

(12,112)

(11,306)

(Increase) in tenant lease incentives

(382)

(314)

Increase in accounts payable and accrued expenses

36,431

11,691

Increase in deferred liability to Former Manager

22,851

—

Increase in contingent liability

15,004

—

Decrease in accrued interest, prepaid rents and other liabilities

(2,234)

(1,416)

Net cash (used in) provided by operating activities

(21,134)

74,636

Investing activities:

Investments in real estate loans

(24,547)

(53,497)

Repayments of real estate loans

53,896

—

Notes receivable issued

(686)

(4,792)

Notes receivable repaid

10,041

10

Notes receivable issued and draws on lines of credit by related parties

(9,624)

(22,766)

Repayments of notes receivable and lines of credit by related parties

4,546

16,103

Origination fees received on real estate loan investments

467

1,051

Origination fees paid to Former Manager on real estate loan investments

—

(526)

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

—

(30,934)

Mortgage principal received from consolidated VIEs

—

2,073

Proceeds from sales of mortgage-backed securities

—

53,445

Acquisition of properties

(185,970)

(154,579)

Receipt of insurance proceeds for capital improvements

—

746

Proceeds from land condemnation

738

—

Additions to real estate assets - improvements

(26,422)

(20,647)

Investment in property development

(50)

—

Deposits paid on acquisitions

(105)

(8,202)

Net cash used in investing activities

(177,716)

(222,515)

Financing activities:

Proceeds from mortgage notes payable

336,849

145,861

Repayments of mortgage notes payable

(134,493)

(57,318)

Payments for deposits and other mortgage loan costs

(10,541)

(3,267)

Debt prepayment and other debt extinguishment costs

(5,919)

—

Payments to real estate loan participants

—

(5,223)

Proceeds from lines of credit

284,000

162,200

Payments on lines of credit

(191,500)

(219,200)

Repayment of Term Loan

(70,000)

—

Mortgage principal paid to other participants of consolidated VIEs

—

(2,073)

Proceeds from repurchase agreements

—

4,857

Payments for repurchase agreements

—

(4,857)

Proceeds from sales of preferred stock and Units, net of offering costs and redemptions

120,497

257,466

Proceeds from exercises of Warrants

29

7,433

Payments for redemptions of preferred stock

(48,202)

(5,115)

Common Stock dividends paid

(24,647)

(22,036)

Preferred stock dividends and Class A Unit distributions paid

(68,538)

(52,112)

Payments for deferred offering costs

(9,701)

(1,868)

Contributions from non-controlling interests

197

—

Net cash provided by financing activities

178,031

204,748

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

(20,819)

56,869

Cash, cash equivalents and restricted cash, beginning of year

137,253

87,690

Cash, cash equivalents and restricted cash, end of period

$