If you're familiar with the concepts of "Smart Growth" or "Live, Work, Play," then you've already encountered Preferred Apartment Communities (NYSE: APTS). This innovative company, co-founded by the late John Williams and Leonard Silverstein, has brought fresh ideas and strategies to the world of real estate investment. In this article, we'll explore how their diversification and unique approach have positioned them for success in today's growing economy.
A New Model for Capital Access
During the recession of 2009, Silverstein and Williams sought to re-enter the multifamily investing market. They quickly realized that while the public markets were struggling, money continued to flow through wealth management channels. This insight led them to emulate non-listed real estate investment trusts (REITs) and create a new model for accessing capital.
"We wanted to build a better mousetrap, a new paradigm for REITs," says Silverstein. By raising capital through preferred stock sales and investing in high-yield mezzanine loans, Preferred Apartment Communities (PAC) found a powerful strategy that set them apart from larger REITs.
Differentiation Through Strategy
PAC's initial public offering in 2011 was followed by the creation of a non-listed preferred stock in 2012. This new asset class, sold through the independent broker-dealer channel, served as a unique differentiating factor for PAC.
"They used a combination of raising capital through preferred stock sales and invested in mezzanine loans with very high yields," explains Aaron Hecht, a senior analyst with JMP Securities. This approach proved to be highly beneficial to PAC's bottom line.
Unlike their competitors, PAC has been able to raise up to $100 million per quarter from their preferred stock program. This success has provided them with a cheaper source of capital and ensured they can deploy their funds effectively.
Diversification of Assets
While the name suggests a focus on luxury apartments, PAC's portfolio extends beyond just residential properties. Approximately 60 percent of their property portfolio consists of multifamily properties, including student housing. The remaining 40 percent is split evenly between grocery-anchored retail sites and class-A office buildings.
"Diversification works well for PAC," says Jim Lykins, a vice president and research analyst for D.A. Davidson & Co. This strategy prevents PAC from relying too heavily on a single asset class, reducing their risk in case of market fluctuations.
PAC's core focus has always been multifamily investments, but when Dan DuPree and Joel Murphy joined the company, they seized the opportunity to leverage their expertise in retail and office real estate. This diversification is supported by PAC's dual channels of capital raising through traditional methods and the preferred stock program.
Capitalizing on Opportunities
PAC's investments span the Southeast, Texas, and the Mid-Atlantic regions, with a few strategic outliers. By focusing on non-gateway markets that are experiencing positive demographic and economic trends, PAC has positioned itself for long-term success.
"We're looking at regions with good household income, job growth, and vacancy rates," says John Isakson, CFO for PAC. Their in-depth analysis allows them to identify promising opportunities in each asset class.
In terms of technology and amenities, PAC stays ahead of the curve. They prioritize sustainable, long-term amenities like strong broadband and future-proof wiring and piping in their properties. With an average age of just 4.2 years, PAC's apartments benefit from the latest technology, reduced maintenance costs, and lower capital expenditures.
Challenges and Outlook
Despite PAC's success, they are not immune to challenges. A recent turnover in their mezzanine loan program created a drag on earnings, but the expectation is that they will backfill those loans and see higher earnings in the near future.
"We anticipate the company continuing on an upward growth trend, albeit at a more moderate pace," says Lykins. This evolution is natural and mirrors the experiences of their industry peers.
Looking ahead, PAC plans to maintain apartments as the core of their business. With positive trends in wage growth and labor participation, the demand for apartments is expected to remain strong. Stable occupancy rates and rent growth of around 3 to 3.5 percent are anticipated for 2019.
Silverstein is enthusiastic about PAC's prospects, particularly now that the Federal Reserve has indicated no interest rate hikes for the remainder of the year. "We're really set up well for a growing economy," he says. PAC believes their asset class diversification is a strength that benefits their stockholders.
In conclusion, Preferred Apartment Communities has built a successful business model by capitalizing on opportunities, implementing a unique approach to capital access, and diversifying their assets. With a focus on long-term growth and a deep understanding of different property sectors, PAC continues to thrive in today's growing economy.
Caption: Preferred Apartment Communities' diversification strategy positions them for success in a growing economy.
