If you're familiar with terms like "Smart Growth" and "Live, Work, Play," then you already have a glimpse into the world of Preferred Apartment Communities (NYSE: APTS). These concepts were coined by the late John Williams, founder and former CEO of Post Properties, Inc. and co-founder of APTS alongside Leonard Silverstein, the REIT's current vice chairman, president, and COO. However, these phrases only scratch the surface of the innovative ideas that have arisen from the collaboration between Williams and Silverstein.
Silverstein explains, "In the fall of 2009, at the depths of the recession, John and I wanted to get back into multifamily investing, but we needed a strategy to raise capital. We discovered that money continued to flow through wealth management channels, while the public markets were shut down." Silverstein, with his expertise as a securities and corporate finance attorney, and Williams, as a client, realized that emulating non-listed REITs could be the key to accessing capital in a more comfortable way.
PAC's initial public offering (IPO) in 2011 was followed by the creation of a non-listed preferred stock in 2012, a new asset class sold through the independent broker-dealer channel. This model has since been adopted by other REITs. With this unique strategy, PAC, as a smaller REIT, needed to differentiate itself from larger apartment REITs. Aaron Hecht, a senior analyst with JMP Securities, explains, "They used a combination of raising capital through preferred stock sales and invested in mezzanine loans with very high yields, both of which were very powerful to their bottom line."
Unlike their competitors, PAC has been able to raise up to $100 million per quarter from their preferred stock program, providing them with a cheaper source of capital. Jim Lykins, a vice president and research analyst for D.A. Davidson & Co., states, "Despite raising a robust level of capital, they are nowhere near being in danger of having too much capital to deploy."
Moreover, PAC's investment strategy goes beyond luxury apartments. While 60 percent of their property portfolio consists of multifamily properties, including student housing, the remaining 40 percent is divided equally between grocery-anchored retail sites and class-A office buildings. This diversification allows them to mitigate risks and adapt to changing market conditions.
Silverstein explains, "Our core focus from the beginning has been multifamily investments because that was John's background. When Dan DuPree and Joel Murphy joined our company, we wanted to take advantage of their backgrounds in retail and office." PAC's diversification is further supported by their dual channels of raising capital through traditional methods and the preferred stock program.
PAC's investments primarily target the Southeast, Texas, and the Mid-Atlantic regions. They focus on non-gateway markets where demographic and economic trends are positive. While they have overlapping investments in different assets within the same market, each vertical is driven by the fundamentals of its respective property sector.
Looking ahead, PAC plans to continue maintaining apartments as the core of their business, predicting sustained growth in this sector. John Isakson, CFO for PAC, believes that continued wage growth and labor participation will contribute to the ongoing success of the multifamily sector. He cites a strong absorption rate in 2018 and expects rent growth of 3 to 3.5 percent in 2019, along with stable occupancy rates of about 95 percent.
Challenges do exist, such as the turnover in PAC's mezzanine loan program, which affected earnings in early 2019. However, analysts anticipate higher earnings in the coming years as these loans are replaced. PAC is well-positioned to navigate these challenges and continue its upward growth trend.
Silverstein is optimistic about the company's future, particularly now that the Federal Reserve has indicated no interest rate hikes for the rest of the year. He says, "The way we're diversified by asset class means we're really set up well for a growing economy. We think it's great for our stockholders."
Preferred Apartment Communities' innovative strategies and diversified investments have positioned them as a force to be reckoned with in the real estate industry. By embracing capital-raising practices through preferred stock sales and focusing on multifamily properties, grocery-anchored retail sites, and class-A office buildings, they have achieved strong growth while mitigating risk. With a promising pipeline of deals and a commitment to maintaining a long-term perspective, PAC is poised to thrive in the ever-changing real estate market.