APTS - Preferred Apartment Communities

[ERICOPOLY]

I was vaccinated two weeks ago today with the Pfizer shot and studies have shown that the first dose alone gives 80% protection.  Now I'm ready to behave pre-covid, travel, bars, etc... I think it will continue to surprise people how fast things continue to improve because if you have access to a shot there is really no excuse left to be scared of normal life.

That personal experience and rapid psychological shift has encouraged me to agree with Greg's pointing to the pre-covid price (which as he says was before the positive improvements).  It was already my opinion generally, but actually getting the vaccine and experiencing the restlessness first hand helps.

 

[thepupil]

so I posted on twitter about this and just got some substantive pushback which i think dings things a fair bit

$135 million isn't the right NOI for multifamily. that's the 2020 number for multifamily which includes their student portfolio. 

multifamily segment NOI broken down by Q: 

Q1: $36mm

Q2: $34mm

Q3: $33mm

4Q: $31mm

the student housing portfolio was sold in November 2020 so had two months of NOI contribution to the multifamily for 4Q, so run rate is lower than $120mm (4Q*4).

seeing something more like $110-$120mm
 

the difference b/w $110mm and $135mm is $12 / share at a 4 cap. it's the difference between 150% upside and 20%. 

 

Edited April 22, 2021 by thepupil

[Gregmal]

Im definitely looking forward to the Q1 details on 5/11. We should at least get a good scope of whats probably the first real, non covid era(covid life is basically over in GA/FL/etc) quarter, and subsequent figures. You had moving parts all over. The collection rates were sound last year, and I dont think they gave goosed figures with "Adjustments" like many companies did. But they also dont break out SH vs MF, at least to my knowledge. I dont believe student housing, anywhere, was clipping near 90% collections after March. You have a few tack on acquisitions as well. IIRC Blake and Menlo didnt factor in at all. So we'll see a lot of clean(er) figures here and gee golly, I guess this is probably the point of their "simplification strategy" lol.

If you put a gun to my head and said put a cap on grocery/retail and if its outside of 25 bps up or down you're dead, I'd probably put New Market at 6.35. The point being to be realistic and not sensational up or down. Putting it at 8 cap is probably more sensational than putting it at a 5. You could also get cuter about break out non dev. and if you go $240 sq/ft and then run the spec stuff at $130 you get to a $1.3B-ish figure.

Same thing with remaining office, I'd probably say 6.85. So in addition to the recent sale figure that reverts back to the original valuation being around the top end of the 1B-1.3B range.

Loans at par. 

If you(again loosely, which is fun because $100M here or there gets zippy against $50M shares outstanding) net the above, which ignores MF entirely, you're getting mid $2B number plus the loans. If you have a whole lot of time and net mortgage to mortgage and preferred to excess capital and account for acquisition +/- I think you'll spend a ton of time and ultimately still be loosely at the same place as if you just ballpark shit in 10 minutes. But nonetheless the above mid $2B asset figure wipes most if not all the mortgage debt. And you're remaining pieces are MF vs preferred and from there you can also add in a few bucks a share for the remaining bunch of stuff on the b/s but Ive left that out because its not really material to me. Although again, every $100M is $2 per share. But thats the gist. Office sale number IMO should have everyone happy. From here, there's still a ton of levers to pull. If this wasn't a goofy microcap I am sure Murphy would haver his ears full from every RE investor with a minor or more sense of aggression/activist edge because there really are a lot of different ways this can get fixed. If you can pull $750M of preffereds over the next few years at the current coupon and replace it with something more becoming and "market rate", that will also do wonders. There's zero reason, if you look solely at the asset base and size here, that this cant be competitive with the big guys in terms of profile and desirability. The beauty here is that unlike the bigger guys, these guys exclusively own trophy/cream of the crop class A, which I think one also needs to factor into their estimates. If anything is going at a 4 cap(or who knows, maybe lower) in FL/GA its what PAC owns.

Edited April 22, 2021 by Gregmal

[thepupil]

at the risk of looking like the village idiot, I decided the numbers I was using were wrong and that the math isn't quite as favorable. I adjusted my position accordingly and will wait for more info at the risk of missing out. 

Edited April 22, 2021 by thepupil

[Gregmal]

Just a reminder today that as the Federal Pickpocket Program  continues to be expanded(walloping the market and corporations alike) that it seems Americans, especially in high tax areas will continue to be faced with the stark reminder that in order to keep what they earn, they may have to look south. The Sun Belt growth story is powerful and will have a lot of momentum. Every roughly 10% appreciation in asset value here equals almost $10 per share of upside. I think this theme will ultimately be far more powerful than worrying about 50-100 basis point theoretical valuation on assets they arent selling anytime soon. Theres also the added benefit both on a corporate level and individual capital gains level that REITs will likely be favorable investment vehicles under a hostile and aggressive tax regime. Which leads me to...(find me at the FRPH thread)

[ERICOPOLY]

4 hours ago, Gregmal said:

Every roughly 10% appreciation in asset value here equals almost $10 per share of upside. I think this theme will ultimately be far more powerful than worrying about 50-100 basis point theoretical valuation on assets they arent selling anytime soon.

 

 

News like this doesn't suck, unless you are sitting across the table from us:

https://atlantaagentmagazine.com/2021/03/10/zumper-atlanta-apartment-rents-rise-6-4/#:~:text=The median rent for a,Zumper said in a report.

 

[Williams406]

Some personal experience in support of the strength of the tailwinds driving Sunbelt population growth: I moved from a "failed" midwestern state to the Sunbelt within the past two years. Roughly concurrently or subsequently, I know personally a dozen families that have moved just to my area from my old stomping grounds (literally the same city). These aren't recent retirees moving to FL, nor am I. In a couple cases, those families have also brought retired parents with them and siblings' families. The families, in all cases have kids still at home, pre-college. They pulled them from schools. Many left jobs, though in several cases had transportable jobs (or decided to re-build a business in a new place.) In short, there were social and career barriers to making the move. 

The cost of living differential was significant, allowed an easy underwriting of the move financially for most, but has always been there. Political trends were a big immediate factor (I'll leave that there), but the critical mass idea comes in to play. Two of us made the move independently, but others had the same desire to move somewhere else. It took knowing others who had made the move, who you could talk to about their experience, to get them over the hump.

Nearby is a high-end retirement community and I've met some residents there. They moved more recently from my same state in the Midwest and mentioned getting hit with an "exit" tax at the municipal level (technically I think its a house transfer tax). A common refrain from me and many of these new Sunbelters is "Why didn't I do this sooner?" Winters are milder and shorter. Costs are lower. We have Costco nearby. Great restaurants.

Housing around me is largely SF and is extremely hot. 20+ offers right away and you better have everything lined up. Land, same story. Low inventory. It has been a strong market for 10+ years but went red-hot in the past year. Realtors are happy. We live in between two good-sized cities that are both on fire and are getting some population growth here due to "overflow" from those cities. Certainly some investors/flippers are in the market, but I think a lot of demand here, at least, is people, new to the area trying to buy a house. 

A lot of people are on the move and many of them are coming to the Sunbelt. I'm not sure what interrupts that. Tailwinds for now.

 

 

 

[Gregmal]

Yea Ive got similar anecdotes. Almost all my immediate family(teenagers through retirees) moved about a decade ago. Then over the past few years even friends around my age. When down there, I was talking with a few cops who were originally from NY, and spent several years as NYPD. Same as above, "I cant believe I didnt do it sooner". One of my childhood friends moved to the Boca area. Half a year later his parents followed. A year later his wife's family followed. There is a very real network type effect. There's obvious covid fads, but there's also real underlying trends. IE a stationary bike the kills children is probably a fad. But hybrid work from home is real. Sun Belt migration; real. And in the case of the later, as they pick up, they pick up big time. Ive been in touch with a number of agents/brokers/etc in various places down there, and its getting to a point where the homes themselves arent even necessarily that much cheaper than many of the places up North. Which should be bullish for rentals. 

When looking at "how to play the Sun Belt growth story"....theres obviously many ways to get creative. But a big piece of how I view this, is simply that. It's the simplest(MF and retail), highest levered, and probably best directly positioned to do well, IF the thesis is correct. Its the right yo-yo so to speak. So again, the current fundamentals are definitely important, as is the direction management is going. But IMO the biggest driver, more so than all that, is just being in the right place. There's so much upside leverage here that its almost "equationized". If Sun Belt growth continues, then, PAC gives you alpha. Whereas conversely, I disagree with the wild, wipeout scenario downside projections. These are super high quality assets. Financed ideally with respect to the mortgages and IMO relative to the rest of the pie and the subsequent options, financed "manageably" with the preferreds. I have yet to see a credible(and realistic) case where you get anywhere near a total wipeout. So on the entire spectrum, IMO, you kind of have this incredibly levered call on a dominant theme, with safe assets, and plenty of time. Its just a bonus really that they are trading at such a discount to CURRENT value. My money though is on future value. 

[thepupil]

2 hours ago, Gregmal said:

Whereas conversely, I disagree with the wild, wipeout scenario downside projections. These are super high quality assets. Financed ideally with respect to the mortgages and IMO relative to the rest of the pie and the subsequent options, financed "manageably" with the preferreds. I have yet to see a credible(and realistic) case where you get anywhere near a total wipeout. So on the entire spectrum, IMO, you kind of have this incredibly levered call on a dominant theme, with safe assets, and plenty of time. Its just a bonus really that they are trading at such a discount to CURRENT value. My money though is on future value. 

the "total wipeout" is simply the result of a spitball <1 hr excel analysis, it's not a prediction by any means, but I do like to see how things flow w/ various changes in assumptions, it's a different type of position than say MAA which can issue 10 yr debt at 2% and is 30% levered or whatever. a static NAV/existing structure analysis is obviously just the first step,

if i wanted to put my bear hat on I'd do something like this: 

1. APTS can't delever with cash flow and is beholden to the cost common/pref equity capital to do so. 

2. APTS is paying an unsustainable common dividend and has attracted a yieldpig shareholder base. 

3. share issuance at the current yield exacerbates rather than solves, ergo divvy must be cut or price must go up to delever effectively

4. APTS needs to increase its stock px and decrease the divvy, which is hard to to. 

if the common stays where it is, or goes down you'll issue like 3x the market cap over the next few years and value/share will approach the price at which it's issued (which won't be zero but could be lower than $10.

I don't think that will happen. I own some stock. I own some calls. I don't have your conviction that sunbelt mf will appreciate from here, but the torque is definitely there. 

 

[thepupil]

the fact that they're paying a common divvy really grinds my gears, but I think I'll just have to get over it. 

[Gregmal]

Yea you're not wrong, I just dont think those issues become unnavigable now thats there is a clear commitment to selling assets and fixing it. I think your downside scenario is real, which I think can be loosely confirmed by last Q3s price action; Q2/3 Sun Belt started going nuts but the low share price IMO was more so indicating market fears about mass dilution from preferred conversion. To me indicating thats a cog that has weight and validity if things turn south. However I also think Murphy has a plan for this, which if nothing else was confirmed by the shareholder initiative to retract and replace the 10 year call with a 5...which as luck would have it, lines up perfectly with where the issuances started taking place. 2016-2018 is where I think the preferred really started getting out of hand and became viewed in a different, a highly negative light. So you're already ahead of the ball kind of, with the recent sale, more likely being on the table, and visibility into the next few years. I also think, much like with my half assed thesis on the banks....2020 was kind of your worst case scenario, chickens coming home to roost, stress test of sorts. Anything is possible, but if the preferred conversion didnt kill them last year, I have a hard time isolating a future catalyst that would exceed the effects of 2020 covid. And then from there, even trying to envision one, how does it occur in size that prohibits the company from acting in a non destructive way? 

So I guess what I'm trying to convey, is that yes bad things can happen, but they've gotten ahead of the ball and are focused in the right direction. If the things that can bring those risks about are simply scenarios that correlate with "wide scale market correction" then its really little different than most other investments, and two, I still think MF+grocery anchored retail holds its footing better than most.

On the dividend(errr, piker payout) I think its just the result of the fact they've previously built the business off the backs of yield chasing retail investors. Catering to their crowd. Which I dont care for, but understand, because until the institutional support comes along, they still need to placate the shareholder base. If the previous institutional observations are an indicator, it'll probably be at $30 a share when the suits are talking about low cost of capital and 3-5% growth....just the way it works with the "smart"(cough) money. 

[Gregmal]

47 minutes ago, thepupil said:

the "total wipeout" is simply the result of a spitball <1 hr excel analysis, it's not a prediction by any means, but I do like to see how things flow w/ various changes in assumptions, it's a different type of position than say MAA which can issue 10 yr debt at 2% and is 30% levered or whatever. a static NAV/existing structure analysis is obviously just the first step,

if i wanted to put my bear hat on I'd do something like this: 

1. APTS can't delever with cash flow and is beholden to the cost common/pref equity capital to do so. 

2. APTS is paying an unsustainable common dividend and has attracted a yieldpig shareholder base. 

3. share issuance at the current yield exacerbates rather than solves, ergo divvy must be cut or price must go up to delever effectively

4. APTS needs to increase its stock px and decrease the divvy, which is hard to to. 

if the common stays where it is, or goes down you'll issue like 3x the market cap over the next few years and value/share will approach the price at which it's issued (which won't be zero but could be lower than $10.

I don't think that will happen. I own some stock. I own some calls. I don't have your conviction that sunbelt mf will appreciate from here, but the torque is definitely there. 

 

I guess to hammer it directly...is there a scenario where you see preferred redemption, in size, that pivots them from operating from a position of strength? What size do you think that is, and what tips the domino? I'd say probably a $700M number is where they seem to lose options? Anything under $500M I think they have the resources available to tackle. Now they seem to have the asset sale pipeline as well. The $700M sale should net lazily $250M...and then they've also got another $400M lets call it in dispositions wrt remaining office. Sans this, theyre kind of kicking ass and taking names and taking out big chunks on their own time, no?

Edited April 23, 2021 by Gregmal

[gfp]

WSJ with a relevant article this morning -

https://www.wsj.com/articles/apartment-rents-rise-perks-discounts-fade-11619256601?mod=hp_lead_pos1

[ContrarianValue44]

According to https://investors.pacapts.com/news/news-details/2021/Preferred-Apartment-Communities-Inc.-Continues-Simplification-Strategy-with-Agreement-for-Transformational-Office-Portfolio-Sale/default.aspx , the company sold 2.195 million square feet of office space for $717.5M. The company still has a little over 1 million square feet of office properties to sell, which if sold for the same price as the previous portion of the portfolio, should fetch another about $330M, brining the total to about $1047.5M. These remaining office properties also fetch a higher NOI per square foot, however, than the already sold properties, so it wouldn't be suprising if they were sold at closer to $600M, bringing the total to about $1317.5M. In other words, @Gregmal's estimates were spot on for office portfolio value! Thanks for the idea as well @Gregmal, phenomenal potential and a likely double to triple in my opinion.

Disclaimer: my estimates may be off and nothing that I say is investment advice.

Edited April 25, 2021 by ContrarianValue44

[ContrarianValue44]

Am I missing something by the way? @Gregmal estimates the portfolio to be worth between $4.36B and $6B, which sounds like a very reasonable to me. Mortgage notes payable are nearly $2.6B, preferred stock is about $2B, and the current market cap is $531M. Cash is about $30M, which add up to about $5.2B. This on a portfolio that's worth between $4.36B and $6B likely, does not seem like an incredible opportunity. 

Please let me know if there's anything I'm missing, I would love to hear it!

 

[Gregmal]

As it stands now, assuming the sale goes thru and there is no further upside on Armour Yards(there definitely could be), what I have is roughly this.

Office: ~$400M remaining, probably more, see below. But from here, you roughly reduce mortgages by $450M. 

Three Ravinia is minimum a $200M property. Theres a $115M mortgage on it. I think folks are severely underestimating this though. Check out the sale details on 1/2 Ravinia, both complete turds compared to 3. Combined occupancy rate in 70s. Three is a newer, massively bigger(bigger than one and two combined), has better credit tenants, and higher occupancy. The San Antonio property as well. There's another $100M. 100% leased. Major tenant USAA with more than 5 years remaining. Brookwood, again, 100% leased. Merrill, PWC, Kinder...Another $50M. If we're being real, thats your low end on office. $350M with net proceeds around $150M.

So mortgages are 2.2B, and soon to be flat $2B. Cash once office is clear stands around $450M conservatively. Preferreds at $2B. Plus retail and MF.

Retail, as Ive said before, I think a conservative FV is probably 6.25-6.75. Call it $1.2B. I think using 2020 NOI for any real estate company is a pretty safe and conservative base. 

So wiping office at sale value plus conservative estimates have you looking like this.

Preferred+mortgages $4B

Cash+loans $750M

New Market $1.2B

For simplicity sake $2B in assets against $4b in preferred+mortgages means the current MC implies $2.6B or so for the MF(on a $120M NOI implies like high 4s which is dumb). In this case you own a fairly valued entity with a pure play on the Sun Belt growth story, with a management group thats probably just as connected(see developer relationships and Publix) regionally, as anyone out there.

 

Thats your conservative estimates. Which is fine for todays value. But if you want to use more reasonable marks, which again, arent crazy considering if nothing else, what these guys previously did 1000% right, was only buy trophies or cream of the crop assets....you could easily pull another $100M from the office. You could get another $200M on retail. And you could put MF at 4. $25 a share

 

Want to get optimistic? Retail NOI bumps 5% from covid levels(which include non payments, deferrals, and vacancies,). MF grows 3% as roaring housing market keeps people on the sidelines as far as home buying goes but migration continues. As Tepper mentioned, foreign buyers with negative rates dont allow US spread to blow out all that much from here and rates stabilize. Market compresses further and spread narrow for both MF and New Market. None of the loans default and that by itself is basically another $1 per share in your pocket. This scenario? Mid $30s share price. 

So on a scrubbed and highly unrealistic conservative basis you paying FV. I own RYN, OK company, fairly valued, exposed to tailwinds. Should do OK. I recently added to NVR. GARPy maybe...but seems reasonably valued. I mean people are talking about rates ranging from negative to maybe 2-3%. Low future returns on S&P. Here, at worst, you have highly levered exposure to an unstoppable growth market at FV. At best you're buying a dollar at 50-60c and still getting the tailwind. Unless of course you think NY/NJ/MA/CT/CA reverse course, lower or eliminate taxes, (re)fund the police, and get a Hail Mary from global warming to produce 10 decent months of weather a year....then look at CLPR...

 

 

[ContrarianValue44]

6 hours ago, Gregmal said:

As it stands now, assuming the sale goes thru and there is no further upside on Armour Yards(there definitely could be), what I have is roughly this.

Office: ~$400M remaining, probably more, see below. But from here, you roughly reduce mortgages by $450M. 

Three Ravinia is minimum a $200M property. Theres a $115M mortgage on it. I think folks are severely underestimating this though. Check out the sale details on 1/2 Ravinia, both complete turds compared to 3. Combined occupancy rate in 70s. Three is a newer, massively bigger(bigger than one and two combined), has better credit tenants, and higher occupancy. The San Antonio property as well. There's another $100M. 100% leased. Major tenant USAA with more than 5 years remaining. Brookwood, again, 100% leased. Merrill, PWC, Kinder...Another $50M. If we're being real, thats your low end on office. $350M with net proceeds around $150M.

So mortgages are 2.2B, and soon to be flat $2B. Cash once office is clear stands around $450M conservatively. Preferreds at $2B. Plus retail and MF.

Retail, as Ive said before, I think a conservative FV is probably 6.25-6.75. Call it $1.2B. I think using 2020 NOI for any real estate company is a pretty safe and conservative base. 

So wiping office at sale value plus conservative estimates have you looking like this.

Preferred+mortgages $4B

Cash+loans $750M

New Market $1.2B

For simplicity sake $2B in assets against $4b in preferred+mortgages means the current MC implies $2.6B or so for the MF(on a $120M NOI implies like high 4s which is dumb). In this case you own a fairly valued entity with a pure play on the Sun Belt growth story, with a management group thats probably just as connected(see developer relationships and Publix) regionally, as anyone out there.

 

Thats your conservative estimates. Which is fine for todays value. But if you want to use more reasonable marks, which again, arent crazy considering if nothing else, what these guys previously did 1000% right, was only buy trophies or cream of the crop assets....you could easily pull another $100M from the office. You could get another $200M on retail. And you could put MF at 4. $25 a share

 

Want to get optimistic? Retail NOI bumps 5% from covid levels(which include non payments, deferrals, and vacancies,). MF grows 3% as roaring housing market keeps people on the sidelines as far as home buying goes but migration continues. As Tepper mentioned, foreign buyers with negative rates dont allow US spread to blow out all that much from here and rates stabilize. Market compresses further and spread narrow for both MF and New Market. None of the loans default and that by itself is basically another $1 per share in your pocket. This scenario? Mid $30s share price. 

So on a scrubbed and highly unrealistic conservative basis you paying FV. I own RYN, OK company, fairly valued, exposed to tailwinds. Should do OK. I recently added to NVR. GARPy maybe...but seems reasonably valued. I mean people are talking about rates ranging from negative to maybe 2-3%. Low future returns on S&P. Here, at worst, you have highly levered exposure to an unstoppable growth market at FV. At best you're buying a dollar at 50-60c and still getting the tailwind. Unless of course you think NY/NJ/MA/CT/CA reverse course, lower or eliminate taxes, (re)fund the police, and get a Hail Mary from global warming to produce 10 decent months of weather a year....then look at CLPR...

 

 

Thanks for the breakdown, very helpful!

[Gregmal]

Probably one of the better, and most recent comps to what the majority of the company's portfolio looks like. 

https://shoppingcenterbusiness.com/jll-arranges-19-9-million-sale-of-publix-anchored-shopping-center-in-gulf-breeze-florida/

$300 sq/ft. The above is a much newer construction, but generally, location is more relevant than age with grocery anchors. Putting PAC's core New Market properties into the equation at $225 sq/ft gets you to $1.1B,  at $300 sq/ft you get to almost $1.5B and you still get the 1.2M sq/ft of redevelopment properties for free. At $150 sq/ft on the redevelopment your range for New Market is $1.3B-1.65B.(I personally wouldnt use $300 for the whole thing FWIW)

[thepupil]

@Gregmal Feast your eyes on that bad boy. 

 

CPT conference call h/t privateeyecapital on twitter. 

 

Quote

Q - Alua Askarbek
Hi, everyone. Congratulations on a great quarter.

So I just wanted to start off a little bit big picture, comment -- asking more about the transactions market. I know you guys were guiding to about $400 million to $500 million. So how you guys thinking about that? Now that we are about, four or five months into the year end. What opportunities are you seeing out there end market?

A - Unidentified Speaker
Well, definitely, we are seeing opportunities.

The challenge, however, is the pricing, is way, way beyond what we expected. The good news is, since we have a balanced disposition in acquisition program, we expect to get higher prices for our properties are going to sell. And so, we're going to try to make that trade. To go back to our last big acquisition disposition programs in the last cycle, we sold a lot of properties, follow a lot of properties and we were able to upgrade the quality and the quality of the portfolio over time.

But I will tell you, I've never seen cap rates this low in my business career. I'll give you an example of real time property that we were working on last week in Tampa or this week in Tampa, I just got the email yesterday. So the original price talk for this reasonable property in Tampa, it's a middle of the road, new development decent property will call it an a-minus price talk at the beginning of the process was $77 million plus or minus, which would have been in the low for cap rate kind of right Kind of write it --. The price of the property was awarded at a little over $90 million which is a going in cap rate of 3.2 % and in what you with a 3% growth in Revenue over a seven-year period.

The only way you get to a six IRR is to have a 3.75 exit cap rate now. That's what properties are trading for in every Major Market in America today. So I think we'll be able to sell properties and buy properties, but the spread I think between older and newer is definitely going to be really tight and it's a good trade for us and we'll continue to do that but pure Acquisitions are pretty tough. If you don't have a disposition behind it , to try to capture that newer property and capture the capture the lower capex part of the equation as why we would be doing in the first place.

 

Edited April 30, 2021 by thepupil

[Gregmal]

Well, I am not unhappy. And to think just weeks ago we were joking about "how long til we're talking 3 caps?"...some market. Quick read through is "if" there was a need to sell, you could probably expect CPT to pay 3.5-3.75? Is that now being conservative lol? 

Good reason for an early afternoon Guinness. 

[thepupil]

I typically am not a big "short term options before earnigns" guy, but you can buy the May 21 $10 here for 30-35 cents.

seems like a better r/r than an equivalent amount common. 30x leverage on a high LTV  (w/ the pref's) portfolio w/ some reflexivity and tail upside/downside

. will probably print strong rent growth #'s and maybe even provide further clarity on vision for company, etc.

[thepupil]

5 hours ago, thepupil said:

I typically am not a big "short term options before earnigns" guy, but you can buy the May 21 $10 here for 30-35 cents.

seems like a better r/r than an equivalent amount common. 30x leverage on a high LTV  (w/ the pref's) portfolio w/ some reflexivity and tail upside/downside

. will probably print strong rent growth #'s and maybe even provide further clarity on vision for company, etc.

expect these to expire worthless. seems like a myeh Q w/o any real progress on the preferred stock merry go round (which makes sense given that the office sale doesn't close until august). 

[Gregmal]

Been traveling so havent had a chance to thoroughly go through everything yet but quick take is that theres nothing new in there however the read thru on an actual net reduction in preferred via issuance/redemption management is very encouraging.

$300-$400M in MF acquisition guidance doesnt make me too happy if its largely related to existing office sales. Does work however if its incorporating the entire exit of office/proceeds which may be the case given the Aug 1 close date given for HIW sale. Difference based on my assumptions would be about $200M in preferred being reduced. Ideally I'd like to be around $1.5B on the preferred by year end, but that's probably wishful thinking and a '22 target. Wish they would just stop caring about replacing the declining FFO and just go for it. The market is hot right now and IMO whatever their longer term transformational strategy is with respect to asset sales, they could probably accomplish all of it in the next quarter or two given how hot the market for these asset are. But it seems they want to do it more gradually and avoid cutting the dividend. 

[Gregmal]

Key take aways from the call...(all my opinion of course)

Expect net reductions in quarterly preferred outstanding. Again, not huge figures, but no one expects them to be doing this with FFO anyway. The majority of the progress will obviously come from asset sales.

Preferred become callable at run rate ~$35M per month. ~$235M will be callable around the time HIW closes. 

New preferred are being issued really just to manage the liquidity. Not going to continue forever. New preferred are issued with a 2 year call. 

Key inferences....extrapolated from a curiously timed pause, and separately the words "substantial majority", It would appear you're going to see at least $200M of preferred called against the HIW sale. MF acquisition then likely figures in at least $175M net proceeds from remainder of office. Also kind of insinuated some retail and even MF is being shopped. 

Nothing thesis changing here. Potentially some thesis fortifying look throughs. Starting to see a time line and a strategy, although they continue to be coy about communicating all of it. Back half of the year should be fun. 

[aws]

I like the idea and I’ve taken a decent sized position in the post ER dip this week. Experiencing firsthand how difficult it is recently to buy housing at fair value, the prospect of buying a pro-rata share of some at way below fair value is appealing. It’s fun to think that with 11,143 residential units and about 50mm shares outstanding, that for every 4,500 shares you buy (about $42,500 cost) you own the pro-rata equivalent of 1 residential unit, plus about 800 sq/ft of other properties. I may not have been able to buy a new house for myself yet, but I’ve bought some additional look-through properties at least.

The biggest hurdle was getting over my hatred of the preferreds. Constantly issuing shares at 90 cents on the dollar net proceeds to fund redemptions at 100 cents, while paying a 6% coupon, is distasteful. But if that is what opens the opportunity to buy common stock at a fraction of fair value, and to avoid diluting the common while it is below fair value, then it is a necessary evil. If the average holding period for the preferreds is about 10 years, then that comes out to about 7.5% cost between issuance fees and the coupon. I’m hoping between NOI and appreciation that the 7.5% hurdle is met and that at least is a not a net economic drain on common shareholders while outstanding.

The dream is they can get the common up to the upper ends of the ranges discussed here, and that common stock could be issued at fair value to redeem the preferreds. You would first have to get through the warrants which would issue about 25mm shares for 500mm. So if you thought the common might be worth $2b today with 50mm shares outstanding ($40 a share), that would bring it to 2.5b/75mm = 33.33/sh. Then just issue another 50 million shares around 30 bucks and be done. My look-through unit count would decrease, but I’d gladly trade the leverage in today’s common stock for the almost locked in gains from common stock issuance way above today’s price.