All Is Peachy For Preferred Apartment Communities

As I said, APTS is truly an outlier. In addition to its externally-managed platform that invests in multiple property sectors, the company also has a unique balance sheet.

In addition to its common stock (which I own), APTS also utilizes its Series A Redeemable Preferred Stock. This is a non-traded perpetual stock, with a cumulative dividend; and no financial covenants.

On the surface, there's nothing unusual with the APTS' capitalization, however, upon closer inspection, you can see that the company's preferred stock (series A) cannot be accessed through public markets.

The company chose not to do a traditional secondary offering of its common stock, because of the availability of other capital sources and possibility of diluting existing stockholders. The Series A preferred issue allows APTS to finance real estate and pay 5.75% annual dividends, allowing the company to leverage funds to make acquisitions.

The APTS preferred Series A is priced at $1,000 per unit. The Series A Redeemable Preferred Stock ranks senior to APTS' Common Stock with respect to payment of dividends and distribution of amounts upon liquidation, dissolution and winding up. During the last quarter, APTS issued and sold units that resulted in gross proceeds of approximately $100 million.

Many REITs (except PSA) have around 10% of their capital allocated to preferred issues (and not all REITs utilize preferred issuance); however, APTS has a less traditional strategy in which it utilizes a non-traded marketplace to raise preferred capital. There is a big difference: APTS does not charge fees, so the transaction is a par trade. (I can see why this is such a popular part of the capital stack for APTS).

Also, APTS has a more complex balance sheet in terms of its overall leverage, measured by the ratio of its debt to the undepreciated book value of its total assets of approximately 58%. As you can see below, there are no loan maturities before 2018.

The company has crafted a strategy to use its Preferred vehicle to provide investors with a stable source of income. In my view, APTS is functioning more like a commercial mortgage REIT because it is bringing in close to $400 million a year in preferred capital to incubate multiple business lines.

As long as you understand, there are risks to the overweight Preferred capitalization model. Given the success of the common shares, I am not sure why I would want to own the Preferred shares, but for some, it represents a stable source of income tied to the “food, shelter, and more” business model.

The Latest Earnings Scorecard

APT’s FFO for Q1-17 was approximately $9.6 million or $0.35 per share compared to approximately $3.9 million or $0.17 per share for Q1-16. The company’s core FFO was $10 million or $0.36 per share compared to $7 million or $0.30 per share for the first quarter in 2016. This represents a 20% increase in core FFO per share. Here’s a snapshot of APTS FFO and Dividend performance since the IPO.

APTS reiterated its core FFO guidance range for the year of $1.40 to $1.48 per share. The midpoint of range continues to represent the goal to increase core FFO per share by 10% or more for 2017 compared to 2016.

As you can see, APTS has the strongest growth forecasted in the peer group. Now let’s compare the Payout Ratio below: