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

Three months ended September 30,

Nine months ended September 30,

2020

2019

% change

2020

2019

% change

Revenues (in thousands)

$

126,697

$

120,203

5.4

%

$

381,076

$

345,561

10.3

%

Per share data:

Net income (loss) (1)

$

(0.79)

$

(0.71)

—

$

(6.21)

$

(2.02)

—

FFO (2)

$

0.17

$

0.31

(45.2)

%

$

(3.17)

$

1.06

—

Core FFO (2)

$

0.26

$

0.35

(25.7)

%

$

0.77

$

1.14

(32.5)

%

AFFO (2)

$

0.07

$

0.12

(41.7)

%

$

0.58

$

0.66

(12.1)

%

Dividends (3)

$

0.1750

$

0.2625

(33.3)

%

$

0.6125

$

0.785

(22.0)

%

(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.

The following chart details monthly cash collections of rental revenues before and after the effect of rent deferrals across all our

operating business lines as of November 9, 2020:

2020 Cash Collections of Recurring Rental Revenues (1)

Unadjusted for rent deferrals:

First quarter

April

May

June

July

August

September

October

Multifamily

99.9

%

98.8

%

98.8

%

98.8

%

98.8

%

99.0

%

99.0

%

98.5

%

Student housing

99.9

%

97.9

%

97.0

%

97.4

%

97.0

%

98.6

%

98.8

%

98.9

%

Office

99.8

%

98.8

%

97.3

%

97.8

%

98.9

%

99.7

%

99.9

%

99.8

%

Grocery-anchored retail (2)

99.4

%

91.5

%

89.7

%

91.5

%

94.1

%

95.0

%

96.4

%

95.6

%

2020 Cash Collections of Recurring Rental Revenues (1)

Adjusted for rent deferrals:

First quarter

April

May

June

July

August

September

October

Multifamily

99.9

%

99.7

%

99.5

%

98.9

%

98.9

%

99.0

%

99.0

%

98.5

%

Student housing

99.9

%

98.4

%

97.4

%

97.4

%

97.0

%

98.6

%

98.8

%

98.9

%

Office

99.8

%

99.7

%

99.8

%

99.9

%

99.8

%

99.7

%

99.9

%

99.8

%

Grocery-anchored retail (2)

99.5

%

96.8

%

95.2

%

95.7

%

96.7

%

96.0

%

97.0

%

96.5

%

(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.

(2) Includes an investment in an unconsolidated joint venture that is not prorated for our ownership percentage.

The following chart details monthly occupancy and percent leased rates across all our operating business lines:

2020 Monthly Occupancy and Percentages Leased

First quarter

April

May

June

July

August

September

October

Occupancy:

Multifamily (stabilized)

95.5

%

94.4

%

94.4

%

95.2

%

95.1

%

96.0

%

95.6

%

95.4

%

Student housing

96.1

%

96.0

%

95.8

%

95.8

%

95.9

%

95.1

%

95.3

%

95.5

%

Percent leased:

Office

96.7

%

95.9

%

96.2

%

96.2

%

96.1

%

95.9

%

95.5

%

95.4

%

Grocery-anchored retail (1)

92.6

%

92.5

%

92.5

%

92.7

%

92.8

%

92.8

%

92.5

%

92.4

%

(1) Includes an investment in an unconsolidated joint venture that is not prorated for our ownership percentage.

Owned as of September 30, 2020 (1)

Potential additions from real estate loan

investment

portfolio (2) (3)

Potential total

Residential properties:

Properties

44

12

56

Units

12,936

3,315

16,251

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. One grocery-anchored shopping center is an investment in

     an unconsolidated joint venture.

(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 and our 4th and

     Brevard land parcel that is slated for future 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)

9/30/2020

9/30/2019

Net loss

$

(3,602)

$

(2,137)

Add:

Equity stock compensation

582

305

Depreciation and amortization

51,794

46,239

Interest expense

29,879

28,799

Management fees

—

8,611

Corporate G&A and other

7,898

1,364

Management Internalization

577

818

Provision for expected credit losses

(152)

—

Waived asset management and general and administrative expense fees

—

(3,081)

Less:

Interest revenue on notes receivable

10,649

12,608

Interest revenue on related party notes receivable

609

2,546

Miscellaneous revenues

608

—

Income from consolidated VIEs

—

591

Loss from unconsolidated joint venture

(120)

—

Loss on extinguishment of debt

(518)

(15)

Gains on sale of real estate and land condemnation

3,310

—

Property net operating income

72,438

65,188

Less:

Non-same-store property revenues

(77,447)

(67,559)

Add:

Non-same-store property operating expenses

26,524

23,872

Same-store net operating income

$

21,515

$

21,501

Multifamily Communities' Same Store Net Operating Income

Three months ended:

(in thousands)

9/30/2020

9/30/2019

$ change

% change

Revenues:

Rental and other property revenues

$

37,383

$

37,490

$

(107)

(0.3)

%

Operating expenses:

Property operating and maintenance

6,733

7,167

(434)

(6.1)

%

Payroll

3,022

3,019

3

0.1

%

Real estate taxes and insurance

6,113

5,803

310

5.3

%

Total operating expenses

15,868

15,989

(121)

(0.8)

%

Same-store net operating income

$

21,515

$

21,501

$

14

0.1

%

Same-store average physical occupancy

95.6

%

95.6

%

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)

Nine months ended:

(in thousands)

9/30/2020

9/30/2019

Net loss

$

(199,075)

$

(6,094)

Add:

Equity stock compensation

1,058

922

Depreciation and amortization

153,096

137,191

Interest expense

90,608

83,166

Management fees

3,099

24,649

Corporate G&A and other

23,109

4,171

Management Internalization

179,828

1,143

Provision for expected credit losses

5,463

—

Waived asset management and general and administrative expense fees

(1,136)

(8,505)

Less:

Interest revenue on notes receivable

34,495

35,989

Interest revenue on related party notes receivable

3,750

9,980

Miscellaneous revenues

4,560

1,023

Income from consolidated VIEs

—

1,316

Loss from unconsolidated joint venture

(120)

—

Loss on extinguishment of debt

(6,674)

(84)

Gains on sale of real estate and land condemnation

3,789

751

Property net operating income

216,250

187,668

Less:

Non-same-store property revenues

(226,417)

(187,737)

Add:

Non-same-store property operating expenses

75,318

64,282

Same-store net operating income

$

65,151

$

64,213

Multifamily Communities' Same Store Net Operating Income

Nine months ended:

(in thousands)

9/30/2020

9/30/2019

$ change

% change

Revenues:

Rental and other property revenues

$

111,855

$

110,833

$

1,022

0.9

%

Operating expenses:

Property operating and maintenance

19,473

20,388

(915)

(4.4)

%

Payroll

8,817

8,711

106

1.2

%

Real estate taxes and insurance

18,414

17,521

893

5.1

%

Total operating expenses

46,704

46,620

84

0.2

%

Same-store net operating income

$

65,151

$

64,213

$

938

1.5

%

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 September 30,

(In thousands, except per-share figures)

2020

2019

Revenues:

Rental and other property revenues

$

114,831

$

105,049

Interest income on loans and notes receivable

10,649

12,608

Interest income from related parties

609

2,546

Miscellaneous revenues

608

—

Total revenues

126,697

120,203

Operating expenses:

Property operating and maintenance

19,278

16,493

Property salary and benefits

6,054

5,360

Property management costs

983

3,534

Real estate taxes and insurance

16,078

14,474

General and administrative

7,898

1,364

Equity compensation to directors and executives

582

305

Depreciation and amortization

51,794

46,239

Asset management and general and administrative expense

fees to related party

—

8,611

Provision for expected credit losses

(152)

—

Management internalization expense

577

818

Total operating expenses

103,092

97,198

Waived asset management and general and administrative

expense fees

—

(3,081)

Net operating expenses

103,092

94,117

Operating income before gain on sale of real estate and loss from

unconsolidated joint venture

23,605

26,086

Loss from unconsolidated joint venture

(120)

—

Gain on sale of real estate, net

3,261

—

Operating income

26,746

26,086

Interest expense

29,879

28,799

Change in fair value of net assets of consolidated

VIEs from mortgage-backed pools

—

591

Loss on extinguishment of debt

(518)

(15)

Gain on land condemnation

49

—

Net loss

(3,602)

(2,137)

Consolidated net loss attributable to non-controlling interests

108

59

Net loss attributable to the Company

(3,494)

(2,078)

Dividends declared to preferred stockholders

(35,909)

(29,446)

Earnings attributable to unvested restricted stock

(96)

(5)

Net loss attributable to common stockholders

$

(39,499)

$

(31,529)

Net loss per share of Common Stock available to

 common stockholders, basic and diluted

$

(0.79)

$

(0.71)

Weighted average number of shares of Common Stock outstanding,

basic and diluted

49,689

44,703

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 September 30,

(In thousands, except per-share figures)

2020

2019

Net loss attributable to common stockholders (See note 1)

$

(39,499)

$

(31,529)

Add:

Depreciation of real estate assets

41,282

37,381

Amortization of acquired intangible assets and deferred leasing costs

9,978

8,386

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

(50)

(59)

Gain on sale of real estate

(3,261)

—

FFO attributable to common stockholders and unitholders

8,450

14,179

Acquisition and pursuit costs

3

—

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

505

511

Payment of costs related to property refinancing

509

170

Internalization costs (See note 4)

577

818

Deemed dividends for redemptions of and non-cash dividends on preferred stock

3,061

152

Expenses incurred on the potential call of preferred stock (See note 5)

46

—

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

138

—

Core FFO attributable to common stockholders and unitholders

13,289

15,830

Add:

Non-cash equity compensation to directors and executives

582

305

Non-cash (income) expense for current expected credit losses (See note 7)

(761)

—

Amortization of loan closing costs (See note 8)

1,288

1,168

Depreciation/amortization of non-real estate assets

621

472

Net loan origination fees received (See note 9)

415

148

Deferred interest income received (See note 10)

375

—

Amortization of lease inducements (See note 11)

448

435

Less:

Amortization of purchase option termination revenues in excess of cash received (See note 12)

(421)

(1,283)

Non-cash loan interest income (See note 10)

(3,317)

(3,763)

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

—

(281)

Cash paid for loan closing costs

(106)

(29)

Amortization of acquired real estate intangible liabilities and SLR (See note 13)

(4,887)

(4,293)

Amortization of deferred revenues (See note 14)

(940)

(940)

Normally recurring capital expenditures (See note 15)

(2,983)

(2,379)

AFFO attributable to common stockholders and Unitholders

$

3,603

$

5,390

Common Stock dividends and distributions to Unitholders declared:

Common Stock dividends

$

8,780

$

11,823

Distributions to Unitholders (See note 2)

226

225

Total

$

9,006

$

12,048

Common Stock dividends and Unitholder distributions per share

$

0.1750

$

0.2625

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

$

0.17

$

0.31

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

$

0.26

$

0.35

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

$

0.07

$

0.12

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

Basic:

Common Stock

49,689

44,703

Class A Units

742

868

Common Stock and Class A Units

50,431

45,571

Diluted Common Stock and Class A Units (B)

50,433

45,768

Actual shares of Common Stock outstanding, including 548 and 20 unvested shares

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

50,449

45,355

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

742

856

Total

51,191

46,211

(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 1.47% weighted average non-controlling interest in the Operating Partnership for the three-month period ended September 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)

Nine months ended September 30,

(In thousands, except per-share figures)

2020

2019

Net loss attributable to common stockholders (See note 1)

$

(300,270)

$

(88,497)

Add:

Depreciation of real estate assets

122,053

109,408

Amortization of acquired intangible assets and deferred leasing costs

28,933

26,402

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

(3,393)

(138)

Gain on sale of real estate

(3,261)

—

FFO attributable to common stockholders and unitholders

(155,938)

47,175

Acquisition and pursuit costs

381

—

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

1,711

1,491

Payment of costs related to property refinancing

7,372

594

Internalization costs (See note 4)

179,828

1,143

Deemed dividends for redemptions of and non-cash dividends on preferred stock

6,377

371

Expenses incurred on the potential call of preferred stock (See note 5)

46

—

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

586

—

Earnest money forfeited by prospective asset purchaser

(2,750)

—

Core FFO attributable to common stockholders and unitholders

37,613

50,774

Add:

Non-cash equity compensation to directors and executives

1,058

922

Non-cash (income) expense for current expected credit losses (See note 7)

3,647

—

Amortization of loan closing costs (See note 8)

3,631

3,458

Depreciation/amortization of non-real estate assets

1,793

1,381

Net loan origination fees received (See note 9)

882

674

Deferred interest income received (See note 10)

8,652

5,078

Amortization of lease inducements (See note 11)

1,334

1,295

Amortization of purchase option termination revenues in excess of cash received (See note 12)

(96)

(2,370)

Non-operating miscellaneous revenues

2,750

—

Less:

Non-cash loan interest income (See note 10)

(9,445)

(10,745)

Non-cash revenues from mortgage-backed securities

—

(696)

Cash paid for loan closing costs

(106)

(37)

Amortization of acquired real estate intangible liabilities and SLR (See note 13)

(13,684)

(12,375)

Amortization of deferred revenues (See note 14)

(2,821)

(2,821)

Normally recurring capital expenditures (See note 15)

(6,525)

(5,122)

AFFO attributable to common stockholders and Unitholders

$

28,683

$

29,416

Common Stock dividends and distributions to Unitholders declared:

Common Stock dividends

29,895

34,599

Distributions to Unitholders (See note 2)

559

683

Total

30,454

35,282

Common Stock dividends and Unitholder distributions per share

$

0.6125

$

0.785

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

$

(3.17)

$

1.06

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

$

0.77

$

1.14

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

$

0.58

$

0.66

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

Basic:

Common Stock

48,351

43,703

Class A Units

776

875

Common Stock and Class A Units

49,127

44,578

Diluted Common Stock and Class A Units (B)

49,144

45,235

Actual shares of Common Stock outstanding, including 548 and 20 unvested shares

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

50,449

45,355

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

742

856

Total

51,191

46,211

(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 1.58% weighted average non-controlling interest in the Operating Partnership for the nine-month period ended September 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.

Notes to Reconciliations of FFO Attributable to Common Stockholders and Unitholders, Core FFO and AFFO to

Net Loss Attributable to Common Stockholders

1)

Rental and other property revenues and property operating expenses for the three-month and nine-month periods ended September 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 September 30, 2019. Rental and other property revenues and expenses for the three-month and nine-month periods ended September 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 September 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 1.47% and 1.90% for the three-month periods ended September 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 September 30, 2020, aggregate unamortized loan coordination fees were approximately $12.8 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 and Former Sub-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)

This adjustment adds back expenses incurred by us to effect an amendment of the Company's charter necessary to allow us to redeem outstanding shares of our Series A Preferred Stock beginning on the fifth anniversary of the date of issuance of the shares of Series A Preferred Stock, rather than the tenth anniversary.

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)

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.

8)

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 September 30, 2020, unamortized loan costs on all the Company's indebtedness were approximately $32.3 million, which will be amortized over a weighted average remaining loan life of approximately 8.9 years.

9)

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 10).

10)

This adjustment reflects the receipt during the periods presented of additional interest income (described in note 9 above) which was earned and accrued on various real estate loans prior to those periods and previously deducted in our calculation of AFFO.

11)

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.

12)

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 all periods presented, 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.

13)

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 September 30, 2020, the balance of unamortized below-market lease intangibles was approximately $54.5 million, which will be recognized over a weighted average remaining lease period of approximately 8.7 years.

14)

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.

15)

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 $28,000 and $100,000 of recurring capitalized expenditures incurred at our corporate offices during the three-month and nine-month periods ended September 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.

See Definitions of Non-GAAP Measures.

Preferred Apartment Communities, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except per-share par values)

September 30, 2020

December 31, 2019

Assets

Real estate 

Land

$

657,286

$

635,757

Building and improvements

3,361,174

3,256,223

Tenant improvements

175,400

167,275

Furniture, fixtures, and equipment

357,010

323,381

Construction in progress

23,677

11,893

Gross real estate

4,574,547

4,394,529

Less: accumulated depreciation

(542,161)

(421,551)

Net real estate

4,032,386

3,972,978

Real estate loan investments, net

307,033

325,790

Real estate loan investments to related parties, net

2,568

23,692

Total real estate and real estate loan investments, net

4,341,987

4,322,460

Cash and cash equivalents

30,337

94,381

Restricted cash

65,690

42,872

Notes receivable

2,894

17,079

Note receivable and revolving lines of credit due from related parties

9,011

24,838

Accrued interest receivable on real estate loans

24,784

25,755

Acquired intangible assets, net of amortization

133,297

154,803

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

879

1,286

Deferred offering costs

4,721

2,147

Tenant lease inducements, net

18,655

19,607

Investment in unconsolidated joint venture

6,851

—

Tenant receivables and other assets

91,956

65,332

Total assets

$

4,731,062

$

4,770,560

Liabilities and equity

Liabilities

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

$

2,765,793

$

2,567,022

Revolving line of credit

33,000

—

Term note payable, net of deferred loan costs

—

69,489

Unearned purchase option termination fees

1,164

2,859

Deferred revenue

36,909

39,722

Accounts payable and accrued expenses

66,283

42,191

Deferred liability to Former Manager

23,373

—

Contingent liability due to Former Manager

14,867

—

Accrued interest payable

8,538

8,152

Dividends and partnership distributions payable

20,971

23,519

Acquired below market lease intangibles, net of amortization

54,483

62,611

Prepaid rent, security deposits and other liabilities

34,823

20,879

Total liabilities

3,060,204

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; 1,991 and 2,028 shares outstanding at September 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;

 103 and 5 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

—

—

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

  issued; 91 and 103 shares outstanding at September 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;

  13 and zero shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

—

—

Common Stock, $0.01 par value per share; 400,067 shares authorized; 49,901 and 46,443 shares issued

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

499

464

Additional paid-in capital

1,882,149

1,938,057

Accumulated (deficit) earnings

(210,218)

(7,244)

Total stockholders' equity

1,672,451

1,931,298

Non-controlling interest

(1,593)

2,818

Total equity

1,670,858

1,934,116

Total liabilities and equity

$

4,731,062

$

4,770,560

Preferred Apartment Communities, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

Nine-month periods ended September 30,

(In thousands)

2020

2019

Operating activities:

Net (loss) income

$

(199,075)

$

(6,094)

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

Depreciation and amortization expense

153,096

137,191

Amortization of above and below market leases

(6,145)

(4,525)

Deferred revenues and other noncash revenues amortization

(3,710)

(4,720)

Purchase option termination fee amortization

(4,896)

(6,900)

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

3,027

2,414

Deferred loan cost amortization

5,177

4,752

Non-cash accrued interest income on real estate loan investments

(9,208)

(10,206)

Receipt of accrued interest income on real estate loans

10,179

2,318

Gains on sales of real estate loan investments, net

—

(751)

Gain on sale of real estate loan and land condemnation

(3,789)

—

Loss from unconsolidated joint ventures

120

—

Cash received for purchase option terminations

4,800

1,330

Loss on extinguishment of debt

6,674

84

Non-cash payment of interest on related party line of credit

—

(637)

Mortgage interest received from consolidated VIEs

—

(13,398)

Mortgage interest paid to other participants of consolidated VIEs

—

13,398

Increase in provision for expected credit losses

5,463

—

Changes in operating assets and liabilities:

(Increase) in tenant receivables and other assets

(15,769)

(12,379)

(Increase) in tenant lease incentives

(382)

(570)

Increase in accounts payable and accrued expenses

46,821

22,399

Increase in deferred liability to Former Manager

22,851

—

Increase in contingent liability

15,013

—

Decrease in accrued interest, prepaid rents and other liabilities

(249)

730

Net cash provided by (used in) operating activities

29,998

124,436

Investing activities:

Investments in real estate loans

(42,193)

(74,668)

Repayments of real estate loans

71,146

—

Notes receivable issued

(793)

(5,399)

Notes receivable repaid

15,012

2,169

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

(9,624)

(30,434)

Repayments of notes receivable and lines of credit by related parties

4,546

26,222

Sale of real estate loan investment

—

747

Origination fees received on real estate loan investments

882

1,347

Origination fees paid to Former Manager on real estate loan investments

—

(674)

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

—

(18,656)

Mortgage principal received from consolidated VIEs

—

5,024

Purchases of mortgage-backed securities

—

(12,278)

Proceeds from sales of mortgage-backed securities

—

53,445

Acquisition of properties

(185,970)

(442,415)