APTS - Preferred Apartment Communities

[thepupil]

i don't think the price would go down if it was properly communicated. if company put out a deck entitled "$25 by 2025" and outlined how all capital would go toward creating a focused REIT of 95% occupied, almost new, sunbelt multifamily that begs to be bought at NAV by CPT/MAA or the market, then I think  people could understand.

you don't have to yield 7% to have your stock go up and in fact, I'd say it's a negative/red flag if anything. dividend has already been cut and the decrease in earning from office txn and more asset sales on the way is the perfect excuse to take her all the way down.

let's go!  

[Williams406]

3 hours ago, thepupil said:

- I'm comfortable with the retail exposure, but if I could get a <5.75 cap for the stabilized shopping centers (which I don't think is impossible), I'd sell it and accelerate the transition to MF. 

- I'd cut the common dividend to zero and only pay out that which is necessary at year end, all capital goes to taking units from 11K to 15K to 20K sunbelt REIT

- sell non sunbelt multifamily

- stop the loan stuff, harvest capital from that, REIT guys don't want that shit, i don't care if it makes sense

- I would probably not pay down the preferred directly, but would instead use proceeds to buy trophy sunbelt MF properties at trophy prices financed with 50% LTV 10+ year type of debt.

- basically, I'd build scale and focus at all costs and embrace the 4.0 cap and not try to be a value investor about it, would hope to get stock to $20+ as value became more clear and would pay off the pref with stock issuance as it became callable. 

no buybacks, no more dividends than necessary, total pure play by 2025, give the market what it wants, not what it needs. value bedamned, lol

 

I'll have what thepupil's having. "embrace the 4.0 cap..." Wax in the ears and lash me to the mast, lads!

[Gregmal]

I think we'll all ultimately get a little bit(or more) of what we want here. It is funny though how these guys basically built a $5B+ company on the back of yield chasing retail investors. And now they're of admirable size and what to be loved be institutions. As long as they do what they say theyre going to do, I dont see how this doesnt work from here. If you back out the office sale number and put a 7 cap on the rest, you get a number a good bit higher than we needed for a $20+ NAV. Retail IMO is fine but could be refined. Same with non core MF. Frankly I would have thought yesterdays release would have added a $1-2 to the share price, but this is also not anywhere near the radars of most institutional investors. It'll be another INDT where the dopes sit there and make excuses at $35-40 about how its got too many issues and they wait around and ultimately rather pay $60-$70 because it checks more boxes or whatever. I like the loans and their purpose so if they can continue clipping 12-15% while their next class A MF is built, and then buy it out at a discount to market once completed, Im all for it...even if the suits dont like that kind of stuff. 

[CapriciousCapital]

Nice find. I'm getting up to speed on this now. They got about gross asset value for the package. ($689 million properties + $12 million for the 8 west loan = $701 million book versus $715 sale value. After encumbrances it's maybe $260 million cash. They're not out of office yet (the sale is about 60% of their pre-sale office sq ft) since they have the underperforming 814,000 sq ft skyscraper Three Reavina Atlanta (10-k says 92% leased but their website shows they have 16% vacancy currently, mostly entire floors) and 258,000 sq ft Westridge at La Cantera San Antonio. and 169,000 sq ft Brookwood Center Birmingham.

Who knows how the other 40% will end up. My gut is less favorably since HIW passed on them. It's also not thrilling that they plan to use the proceeds to expand in the current market.

Does anyone know about the Maryland corporate-law stuff? Apparently there are some restrictions on a bigger REIT buying them out?

 

Edited April 21, 2021 by CapriciousCapital

[Gregmal]

I think its hard to read through too much about the assets in the sale. The properties selected fit in perfect with the focus at HIW. However they also represent about 10% to HIW EV so perhaps going larger or including more was too much to chew on at the moment. Per the prepared remarks HIW already needed to tap the credit facility and take out a bridge loan + accelerate some asset sales. The properties they bought are a good geographic fit. There still also may be upside from Armour Yards which is part of the deal but also allowed to be shopped.

150 Fayetteville was ~90% leased with ~5 years term so again, I am not sure the read through or assumption of a pass on Three Ravinia is there. All of the Ravinia vacancy was related to State Farm, which has been building a gargantuan 1.5M+ sq/ft campus in Dunwoody; something known for years and was certainly factored into the ~$220 sq/ft foot PAC paid about 5 years ago. Zillow recently grabbed a big chunk of this and named the location its Southeast HQ.(Yea I think Zillows pretty darn interesting all of a sudden too but thats another convo. Yea how's that AI driven, Sun Belt focused auto home buying program looking now?). Here's a lazy link to development going back to the time of purchase.

https://atlanta.curbed.com/2017/9/7/16264644/state-farm-atlanta-perimeter-dunwoody-development-construction

Remember, PAC is HQ in Atlanta, John Williams and his people were the biggest name developers in Georgia for 3 decades...no way he wasn't aware of this. Word is that the original 7 year SF lease at 3 Ravinia was meant to be transitory anyway. I think, much like with a lot else at PAC, its an issue that on the surface raises concerns but when you look in further its a nothing burger, if not actually a positive. 

https://www.bizjournals.com/atlanta/news/2020/08/12/zillow-atlanta-southeastern-hub.html

As I mentioned before, inferior one and two Ravinia just sold for what I calculated to be around $270 sq/ft. Outside of this, "The Perimeter" is currently one of the hottest markets in the country as far as CRE goes. In addition to State Farm's massive new campus thats being built you have Mercedes Benz's US headquarter, and the aforementioned IHG USA HQ. Brookfield is also incredibly active here on the retail side. Not far away are also Microsoft's new Altantic Yards office, Delta HQ, and Deloitte. Personally, I wouldn't be upset if they just kept this location, and I absolutely hate office. It is the literal definition of a trophy property. I could see it alone going for $250M. 

 

 

[CapriciousCapital]

On 3/22/2021 at 1:56 PM, thepupil said:

your way underestimates the outstanding preferred balance. Preferred dividends and issuance costs (which are substantial over time) reduces the additional paid in capital from the prefs, so the notional/liquidation preference is > than the APIC from the prefs.

 

Issuance Costs (~$166mm over the past 4 years)

2020: $25mm

2019: $60mm

2018: $44mm

2017: $37mm

 

Preferred Divvies:

2020: $160mm

2019: $112mm

2018: $38mm

 

 

~$2.0 billion notional is the correct preferred balance. don't want to get too bogged down in the minutiae/miss the bigger picture, but when you multiply pref outstanding * $1000 / pref, you get $2.0 billion. I still like the idea overall and see a pretty clear path to how they could de-lever, make this more of a real REIT and they're incentivized to do so w/ the internalization.

 

I have bought a tiny sliver, just enough to make me curse myself regardless of outcome and do more work.

 

Wish I read your post first but I got the same conclusion. At first glance it looked like it was selling for the magical 67% below book because the balance sheet par value for preferreds is $0.01, not $1000. 1735 + 149 + 106 = 1990 thousand preferreds outstanding. x$1000 face value each gets you to to negative common equity

[thepupil]

on a totally consolidated basis (where you take all the RE and subtract all the liabilities), I got a bear case of -$7.50 / share (lol)

retail at  8 cap = $340mm of equity, multifamily at 6 cap = $840mm, cash pro forma for office = $300mm, Loan book at 50 cents = $135mm 

that is $1.6 billion, less $2.0 billion of corporate pref = negative equity, wasn't counting the odds and ends left on the office

retail at 7 cap, mf at 5 cap, debt book at par, I get to $6.6 / share (lazily not counting remaining office). 

retail at 5.5 cap, mf at 4 cap, debt at par, I get to $25 / share and you have a bunch of warrants that become in the money and solidify your NAV (and they probably pay off prefs w/ common if you get the shares up there. it's that torque from $7-->$25 that makes this interesting. 

I think it's reasonable for someone to look at the above and conclude that this is not good risk/reward, because your upside is so dependent on getting the public market to give you credit for the recent cap rate compression in sunbelt multifamily. But all their (non preferred) debt is single asset/non-recourse, and the preferred is an illiquid non MTM perpetual security held by scattered retail investors. I think that makes the downside much less binary than an an (assets - liabilities - pref = common) addition type of exercise gets you, so I think you have very levered upside, where the downside is probably not so bad, maybe they have to do a big dilutive equity offering that kneecaps your NAV and you lose 30%. if they get the market messaging right and fundamnetals for sunbelt MF remain strong, i think the cap structure will take care of itself over the next 5 years. 

I'd contrast this with something like SRG where you have a similar situation where you have a high coupon debt instrument sucking up all the value creation (Berkshire's loan). Just as there doesn't appear to be much cash left over for common after servicing the Berkshire loan, it doesn't appear to me there's much left over for APTS common once you pay pref divvies. the Berkshire loan is much scarier to me than APTS pref; it matures all at once, is held by a single entity, who isn't an established lender with an interest in maintaining "good relations" with borrowers like a bank would be for example. APTS pref seems very solve-able, and the assets (6 yr old MF buildings) also lower risk. 

this isn't a "put 20% in it because it's got 40% of the market cap in cash and is run by a great family and has 50% upside" type of thing. higher risk and higher reward. 

i'm a pansy, and went from 50 bps upon reading greg's post, to 150 bps as i did a little more work, to 300 bps on sale of the office. 

 

 

 

Edited April 21, 2021 by thepupil

[ERICOPOLY]

I've been reading the posts.  Greg is surprised that the stock didn't go up $1 or $2 after the sale was announced and Greg has also pointed out that the market "the suits" doesn't like the preferreds.  He points out that the value of the properties are obvious, in which case the market sees the value because it is obvious.  So the problem is the preferreds as he has pointed out. 

However... I read the press release by the company and they said they are going to use the sale proceeds to acquire more properties and reduce the preferreds.  How much to each? 

My take is that press release said two things:

1.  The properties can be sold (the quality of the assets is obvious so the market already knew this)

2.  Management would rather buy more properties than retire preferreds.

So the hatred will continue.  Not sure why the stock will pop in that case?

[ERICOPOLY]

It was argued that the office properties were acquired with preferreds.  Well, if a significant amount of the sale proceeds from office properties goes into buying more MF properties then it's a shell game.  They are in effect issuing preferreds to buy MF.  No difference if that coin passes under the office property shell first.

[ERICOPOLY]

I take it the market doesn't like the $1.2b of preferreds versus the $500m. market cap which was ever so recently $300m and the idea of being forced to redeem preferreds with stock on the whim of the investor who holds the preferreds.

Given the events of the past 13 years in the market, these risks matter.

Edited April 21, 2021 by ERICOPOLY
fixing spelling

[ERICOPOLY]

Is this a seller's market or a buyer's market for MF?

Is this the time to issue preferreds and acquire more MF with the proceeds?  (logically that's the same thing as deciding to buy more MF with your cash instead of retiring existing preferreds).

[thepupil]

we will see. there is definitely path dependence on the common stock price / pref redemptions. 

 

 

 

[Gregmal]

I think you can use a liquidation value as a starting point but if the company gets liquidated today, you just had office go off at 6, retail w/ grocery gets you probably a 6.5/7 worst case, loans being asset backed typically and/or having buyout options should see par and multifamily is easily low 4. Except the company isnt being liquidated and won't any time soon. So its a starting point but not a fallback/put option type scenario. With that being said, again, there's stability in the fact that they could put the multifamily up and have $3B offers in the blink of an eye...if for whatever reason its needed. One scenario some folks have mentioned, although it doesnt appear likely, it offloading the office and MF and then having these guys who have spent a ton of their careers doing retail, focus on that. If its a catalyst for rerating I dont mind it, but if I'm looking at a long term growth story I'd prefer they just simplify and stay with MF. Sell a portion of the retail ideally too, keep maybe 15% or so of the NOI there. 

On the sale proceeds, the language is really no different than communicated prior. From the student housing portfolio sale there was a similar breakdown; clear the associated mortgage debt, retire preferreds, use a portion for corporate purpose and focus on multifamily investments. So I suppose it depends on what you are willing to give them credit for. My expectation would be that they use ~$150M to redeem preferred and then take ~$100M and buy $200M in MF mainly from the loan development pipeline. End result from just this aforementioned office asset sale is net reduction in balance sheet debt/liability of ~$400M(assuming they do the above). They didnt seem terribly hot on paying current market for MF assets on the March call. From there you can focus on the remaining office. Using just Ravinia, you could expect another $100M of net proceeds after the repayment of the ~$115M mortgage. 

So you take a lot of this from different angles and its hard exactly to see how receptive the market has been to the announced strategic focus since it overlaps with a lot of the vaccine/market rally, but it definitely liked the March news and from there, I think we couldn't have asked for more in terms of the speed of results obviously manifesting in the office sale. Its still largely ignored that Sun Belt can continue appreciating, which adds even more upside to the equation. Are we really that far away from talking 3 caps on MF?

As pupil mentioned, you can draw lots of conclusions in terms of downside, but 1) it requires scenarios unfolding that won't....IE everything called at once.. while also 2) significant and major market deterioration, and 3) giving absurd multiples/valuations to best in class assets. To use the MF from pupils downside case above, you'd have to price class A MF worse than what they just got for office; thats insane and if you expect that to occur you can probably find an Ackman style fortune to be made in some sort of CMBS/credit product. 

So in a nutshell you are effectively betting those things won't happen and if thats the case you stand to do pretty well here. 

Edited April 21, 2021 by Gregmal

[Gregmal]

As to the path for the shares....these traded 30% higher pre covid. Granted you have to reconfigure a bit with the internalization of the manager and associated adjustment...but they've exited student housing, sold more than 1/2 the office(or at least have a sale contract), reduced debt and preffered.....and Sun Belt assets have been in crazy mode. So all else equal its hard to make the case why the company is less valuable now. But its also not uncommon if you are familiar with this type of stuff and these sort of small cap situations. A few months/quarters ago people were harping on why Pure Cycle wasn't moving either at $8 or whatever. Turns out a few dumb money institutional tards were selling indiscriminately and fast forward now you have a double or so. Like Pure Cycle, PAC is extremely well positioned for most of the likely scenarios that play out going forward. And even in some less than desirable scenarios it still possibly does better than most. 

[ERICOPOLY]

Just thinking out loud here...

1.  If rising inflation were to occur, we should have rising interest rates.  Substantial inflation could lead to substantial interest rates.

2. Today's owners of the preferreds may decide that their yield isn't high enough and may want to exit their investment.

3.  Because the preferreds aren't listed, it may be preferable to redeem their preferreds for common stock instead of selling the preferred to another investor.

So my thought here is that although MF rents can increase annually with inflation, that very scenario may dilute the common.

[Gregmal]

Theres a few things that largely mitigate this. I'm about to run out so Ill try to find it later but there should be a selling agreement(I stumbled upon it a while ago not sure where) with Preferred Capital Securities that basically gives color on much of the mechanics of the preferred. They are still being issued/redeemed however the company is working on netting things out month to month..while blowing out chunks like last Q4 and presumably this Q3/4. But specifically, there are some very onerous redemption fees for the first 3 years IIRC. If you want to redeem within 12 months I think it is something like 12% or so. The company also has to option to settle in cash or stock. Further, the shareholder vote last fall allowed them to be called after 5 years instead of 10. So in order to really get wild you would need to see a glut of the year 4+ issuances come into play which I think is largely what the company is targeting now. They also have a moderately expensive line of credit. So in order for this above risk to really play out, you'd need a glut of older preferred holders to redeem. The company to be short on cash, with no liquidity, and generally I guess a lack of alternatives and no assets to sell. So its there, but ultimately like much of the other stuff, unlikely to really drive a material downside scenario. 

[ERICOPOLY]

If high interest rates were killing the values of fixed income securities across the board,  a 12% penalty may not prove to be enough of a deterrent. 

I am not expecting high interest rates -- I raise the issue only because it's a scenario that would motivate a rational yield-hungry investor to exit the preferred.

 

[ERICOPOLY]

The 2020 Annual Report raises the point that the illiquid private market for their preferreds would also put a discounted price on the securities to deter the preferred holder from that avenue of exit.  I don't know how the private market discount stacks up against the 12% redemption haircut. 

Also, does anyone know who holds these preferreds?  Diversified into lots of investors or is there any single-party concentration?

[thepupil]

yea, there's a lot going on.

gregmal is correct, there are significant prepayment penalties / redemption fees in the early years. It is 13%, 10%, 10%, 5%, 3%, 0%. 

https://s26.q4cdn.com/780969703/files/doc_downloads/stock_information/series/PAC-Series-A-Preferred-Stock-Redemption-Form_2017.pdf

I think a 10 point penalty is pretty significant to a retail pref holder. 

I'd be surprised if there are redemptions before year 5 of a pref shareholders year in holding and even then I don't think a retail pref holder is likelty to redeem and end the 6-7% cash divvy yield which is not available in a ton of REIT prefs these days (PFF ETF SEC yield is 4.7%). that can of course change, but at current rates, I think they'll remain outstanding as long as APTS doesn't call them and. 

it's important to see what's going on with the A pref. every year has positive gross issuance, and 2020 was negative net issuance. i'd expect similar dynamics going forward. they may have to issue some more prefs if they don't have the cash on hand to redeem, or they can issue stock. 

Eric, it's at the holders option to redeem. It's at the company's option as to whether holders get paid back in stock or cash. 

no one likes the  preferred and the risk and opportunity is what APTS cost of capital will be as it addresses that. I think APTS coc should collapse as it becomes a more focused REIT (hence why I'm totally okay with them plowing money into MF at high prices).

that could be wrong and you could have a fun dilution death spiral, but every asset sale at a decent price reduces that risk 

I am assuming these are spread out among tons of retail shareholders based upon how they were distributed. 

this is just the series A which is $1.7B / $2.0B of the prefs

Edited April 21, 2021 by thepupil

[ERICOPOLY]

I'd readily suffer a 10% penalty if I felt I could reinvest at discounts twice as great.  

I think I am projecting the way I would behave in the event of a market dislocation.  Perhaps a diverse group of retail investors won't think that way.

[Williams406]

To Ericopoly's read-through on the press release that management would rather buy more MF than reduce preferred outstanding and the shell game of issuing preferreds/buying office/selling office/buying MF: I don't know this management team well at all, but perusing the shareholder letters from 2018-2020, listening to the recent earnings call, and following the transactions over the past year or so, I get the strong sense that Joel Murphy assumed the CEO role (January 2020) with the intent to disrupt the status quo a bit. 2018's letter--signed by Silverstein (COO and President, founder)--acknowledges some push-back on the diversification strategy while defending it and claims the preferred-funding system are a key, positive differentiator for the company. 2019's letter, the first signed by Joel Murphy after he assumed the CEO spot January 1, 2020, introduced the phrase, repeated in 2020 that "what got us here won't get us there." A couple months after Murphy assumed the CEO spot, Silverstein resigns both from his operating role and the Board and returns to practicing law. I suspect there was some disagreement about the path forward.

This is a different  management team than the one that issued preferred stock to buy office properties. Murphy has communicated the intent to follow a different path than his predecessors and has taken major steps consistent with that. What the balance looks like between growing MF and reducing net preferreds, we'll see.

[ERICOPOLY]

I do have a long position in APTS that I started yesterday which is why I am thinking more about it today.  That's how it works in my brain, unfortunately.  First the positive thoughts, the purchase, and then the creative worries that aren't probability weighted.

 

[thepupil]

by the way, if one thinks the pref is too onerous. one can buy some A1's / M1's directly.

I can think of worse ways to make 6% lol. 

http://pacofferings.com/

 

 

Edited April 21, 2021 by thepupil

[Williams406]

13 minutes ago, ERICOPOLY said:

I'd readily suffer a 10% penalty if I felt I could reinvest at discounts twice as great.  

I think I am projecting the way I would behave in the event of a market dislocation.  Perhaps a diverse group of retail investors won't think that way.

Ericopoly, I'm pretty sure you do have a different mindset than the typical retail investor. The sales channel here are brokers and RIA's so you have to think about the incentives of the brokers/advisers as well. In a market dislocation where you have worried clients do you recommend redemption of non-publicly-traded preferreds--which aren't showing a decline on the monthly statements--at a penalty or do you dump other things that are more obviously painful to mollify the client?

[Gregmal]

9 minutes ago, ERICOPOLY said:

I do have a long position in APTS that I started yesterday which is why I am thinking more about it today.  That's how it works in my brain, unfortunately.  First the positive thoughts, the purchase, and then the creative worries that aren't probability weighted.

 

Haha yup. Perhaps in some ways we think alike. Earlier when you started commenting I said to myself, "he's not trolling, he's hammering out the things that bother him" because I often deal with the same things the same way. As I said much earlier(or maybe in another thread, IDK), I started dabbling with this late last year and early this year. Did some on the ground work on my FL trip. But it took a very good several weeks, maybe even months to really kind of get totally comfortable here. Maybe Im a bit too comfortable. But from first glance, up until probably the March release, it was just never ending risks and stuff that one after another jumped out as a deterrent and only after really kind of weighing out each and then collectively did I start to see things clearer(or at least I hope they are clear!). Or perhaps not "clearer" but just that the stuff that collectively jumps out at you creates an illusion of greater risk than there is likely to be.

There's virtually no risk of 0. The mortgages won't do this., they're low rate, fixed, and in every case I am aware of, net out again the subject property with a positive carry. The preffereds are a "risk", but ultimately I think the terms, and levers that can be pulled make such dire outcome minimally likely. From there, well, if you realistically mark the assets to market you're way ahead of the game. And without even worrying about things possibly getting even rosier, the degree to which you need catastrophe to occur on a grand scale in order for property valuations to crush you here, is also pretty darn out there. Also keep in mind that as we've seen before, in RE, the property can be underwater be also held and carried through turbulence if you've been semi intelligent about your financing. Its like marking AAPL in BRK portfolio to $40 a share. Its possible, but also so extreme that you can probably hedge that into a windfall should it occur, or simply conclude its just a risk one takes being in the market. From there, you're basically at a spot where you need things fundamentally to just not fall apart severely, and a continued execution of whats already starting to be put in place. 

On the retail preferred holders, I'll echo Williams406 sentiment. These people are what we call "stupid risk averse". They like not seeing mark to market. They like the face yield. Their brokers/IA are likely directing them into all sorts of stuff like this...the incentives dont really point towards selling them at a loss because it undermines the investment objectives, even if the objectives are retarded.