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Preferred Apartment Communities (NYSEMKT:APTS)

Q2 2014 Earnings Conference Call

August 05, 2014 11:50 AM ET

Executives

Lenny Silverstein - President and COO

John Williams - Chairman and CEO

Dan DuPree - Vice Chairman and CIO

John Isakson - CIO

Analyst

Ryan Mellinger - MLV Company

Ryan Mellinger - MLV & Company

John Benda - National Securities Corp

Craig Kucera - Wunderlich Securities

Wilkes Graham - Compass Point

Operator

Good morning ladies and gentlemen and welcome to the Preferred Apartment Communities Second Quarter 2014 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. Please note this event is being recorded.

I now would like to introduce your host for today Lenny Silverstein, President and Chief Operating Officer. Silverstein, Please go ahead.

Lenny Silverstein

Thank you for joining us this morning and welcome to Preferred Apartment Communities second quarter 2014 earnings call. We hope that each of you have had a chance to review our second quarter earnings report, which we released yesterday after the market closed.

In a moment, I’ll be turning the call over to John Williams, our Chairman and Chief Executive Officer for his thoughts. Also with us today are Dan DuPree, our Vice Chairman and Chief Investment Officer; Mike Cronin, our Executive Vice President and Chief Accounting Officer, Bill Leseman, our Executive Vice President of Property Management; John Isakson, our Chief Capital Officer; and Paul Cullen, our Chief Marketing Officer.

Following the conclusion of our prepared remarks, we'll be pleased to answer any questions you might have. Before we begin, I'd like everyone to note that forward-looking statements may be made during our call. These statements are not guarantees of future performance and involve various risks and uncertainties and actual results may differ materially. There is a discussion about these risks and uncertainties in yesterday's press release.

Our press release can be found on our Web site at pacapts.com. Our press release on our website also includes an attachment containing our supplemental financial data report for the second quarter with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. We encourage you to refer to this information during your review of our operating results and financial performance.

Unless we otherwise indicate, all per share results that we discuss this morning are based on the basic weighted average shares of Common Stock and Class A Partnership Units outstanding for the period.

Now, I would like to turn the call over to John Williams. John?

John Williams

Thank you, Lenny. We continue to be pleased with the performance of our portfolio in the market as a whole. As noted in our supplemental financial data report, as we released last time our same store net operating income increased 6.9%, the second quarter 2014 compared with the second quarter of 2013. And our total revenues increased 4.3% for the same quarter-over-quarter comparison.

I looked at quite a few second quarter financial reports of [indiscernible] and I believe our performance is among the very, very best. On a macro level we see the apartment market continuing to improve, occupancy levels are close to historical highs in fact our physical occupancy for the three months ended June 30, 2014 was almost 96% to be exact. [indiscernible] the level this would be considered close to full occupancy since you have to take into effect normal resident turnover and model units.

With this background, we are extremely pleased to announce that we have four multifamily assets under contract that are require located in Nashville, Kansas City, Dallas and Huston. The purchase price is 181.7 million and represents an aggregate of 1397 units to be added to our portfolio. We expect to close these acquisitions later this quarter or early fourth quarter.

We believe that all these class A assets are in strong submarkets within their respective MSAs and the typing quality of co-ordinance, that should fit perfectly in our portfolio. But those of you have seen our press release yesterday morning; I’m also very pleased to announce an investment strategy that we believe will be extremely important to our stockholders.

At our Board meeting to be held that's coming Thursday, the board is expected to increase our non-multifamily asset allocation from the existing 10% which we would have since our IPO up to 20% of the company’s assets. Although this percentage is still roughly small percentage of our assets, the strategy should position the company to further enhance stockholder value.

Changes to our commitment to this asset class are in existing considerable management experience in this sector and the affirmative Joe Murphy as President and CEO of our retail subsidiary called New Market Properties LLC. Joe has a long, long service track record of success in this sector and we are pleased that Joe will be joining our management team. We will also be bringing Joe on as a member of our company’s board of directors and will be posting his (bawl) [ph] on our website shortly.

Our strategy is to aggregate a critical mass of necessity, retail, shopping center assets and then spin off these assets into an independent publicly traded REIT as soon as we believe we reach scale with Joe remaining as President and CEO of New Market Properties. Moreover there is an expectation that further [indiscernible] will continue to own an investment and it helps substantial in New Market Properties following the spin-off.

Towards this end we currently own one [indiscernible] shopping center and have nine other additional closely anchored necessity retail shopping centers under contract located in the south and southwest. Of these nine assets, seven are anchored by Publix grocery stores, one by Kroger and one by Bi-Lo. We anticipate closing these transactions in the late third quarter or early fourth quarter this year and expect the yields and accretion to our stockholders from these transactions to be very lucrative and very positive.

Let me turn the call back over to Lenny who will go through the numbers. Lenny.

Lenny Silverstein

Thanks John. Overall once again we produced excellent operating results for the second quarter. Our normalized FFO which is basically FFO excluding the effect of acquisition and other costs that do not occur on a regular basis, was approximately $4,254,000 for the second quarter 2014 compared to approximately $2,231,000 for the second quarter last year. This represents an increase in normalized FFO of approximately 91% on a period to period basis. On a per share basis our NFFO was $0.26 for the second quarter of 2014 versus $0.27 for the same period last year. Adjusted FFO for the second quarter this year was approximately $3,411,000 compared to approximately $1,896,000 for the same period in 2013 or an increase of approximately 80%.

On a per share basis our AFFO for this quarter was approximately $0.21 per share compared to $0.23 per share for the second quarter in 2013. FFO was approximately $4,091,000 for the second quarter this year compared to a mega FFO of $5,527,000 for the second quarter in 2013. This represents a pure increase of approximately $9,618,000 on a quarter over quarter basis. On a fair share basis our FFO for the second quarter this year was $0.25 per share compared to a loss of $0.67 per share for the second quarter last year. Although FFO when it compared to basic shares a very large turnaround, I do want to remind everyone that FFO is likely to continue to fluctuate sometimes dramatically as it directly reflects our acquisition activities that occurred during the quarter in question.

As a result we believe normalized FFO and AFFO are better metrics to accept our company’s operating performance. And looking at normalized FFO, AFFO and FFO I want to point out that the weighted average calculation of outstanding shares of common stock for the second quarter of 2013 reflects the timing of the automatic conversion of our series B preferred stock which we sold in our January (1st) [ph] transaction into common stock on May 16, 2013 or in other words mid quarter.

If these share were deemed to have automatically converted as of the beginning of that quarter or April 1, 2013 then our normalized FFO per share for the second quarter 2014 of $0.26 would have been compared to $0.20 normalized FFO per share for the second quarter of last year representing an increase of approximately 30% quarter over quarter.

Similarly our AFFO per share for the second quarter 2014 which was $0.21 per share would have been compared to $0.17 per share of AFFO for the second quarter 2013 representing an increase of approximately 24% quarter over quarter.

As you’ll see in our second quarter supplemental financial data report total assets for the second quarter of 2014 net of depreciation were approximately $383 million, an increase of almost $122 million or 47% compared to the second quarter last year. In addition cash flow from operations was approximately $5,464,000 for the second quarter this year representing an increase of approximately $3 million, or a 120% compared to the second quarter in 2013.

As I’m sure you’ll agree these are great results. In addition at June 30, 2014 our leverage as measured by the ratio of our debt to undepreciated book value of our total assets was only about 44.4%.

The 2014 second quarter increases in normalized FFO, adjusted FFO and FFO, revenues in cash flow from operations as compared to the same period in 2013, primarily reflect first the issuance of new bridge and mezzanine loan investments and the overall success of that program.

Second, what we believe is the outstanding performance at our properties in terms of revenue growth, operating expense controls and net operating income and third, acquisition fee payout for the quarter.

For the second quarter 2014 we paid a dividend on our common stock of $0.16 per share to all common stockholders of record as of June 16. This represents a 28% overall growth rate from our initial common stock dividend of $12.5 per share or approximately 9.4% on an annualized basis and represents an AFFO distribution payout ratio of only 77.9%.

As we’ve indicated before, we will continue to seek out our dividend to be tax efficient, which in large measure is aided by our continued acquisition activity.

Since our IPO in 2011 we’ve continued to acquire and manage multifamily community, building our brand and securing additional capital to support future acquisition. As John mentioned earlier, we are excited about allocating a small portion of our assets in the necessity retail shopping center sector and believe that financial results will benefit all of our stockholders.

We are committed to continuing to grow our earnings both organically and externally. As we do this, we also are dedicated to increasing our dividends over time, while at the same time continuing to maintain a strong payout ratio.

And speaking of success, a key component of our growth strategy is our investment program.

I now would like to introduce Dan DuPree, our Vice Chairman and Chief Investment Officer to provide some more color on our acquisition activities, our mezzanine loan investment programs and our retail initiative. Dan?

Dan DuPree

Yes, thanks Lenny. As we have earlier noted we are actively pursuing acquisitions of multifamily communities that set our business model. As you may have read, we announced on July 28, that we contracted to acquire four excellent multifamily communities located in Nashville, Kansas City, Dallas and Huston representing an aggregate of almost 1400 units.

These properties fits squarely in the sweet spot of our strategy with a closing of this transaction we’ll own 3326 multifamily units with an additional 3491 units under construction that we have a right to acquire to our mezzanine loan investment program. The aggregate purchase price of this portfolio is approximately $181.7 million excluding acquisition and financing related cost.

We expect to finance each community separately with non-repos loans with no upstream guarantees. None of the mortgages will be cost collateral as with any other mortgage that way we are able to keep each asset in a separate silo in order to better protect our stockholders. We have proactively locking the index for our four property loans at 178 and 223 basis points for the five and seven year treasuries respectively.

And communities are all located in submarkets of MSAs that have over 1 million people in population enjoy strong demographics and have excellent job growth. Separately our innovative mezzanine loan investment program continues to enhance our acquisition pipeline by giving us the opportunity to acquire new, modern, well leased multifamily communities at below market rates.

In fact our most recent loans provide the purchase options at approximately 50 basis points cap rate discounts at the time of acquisition, thus materially and immediately enhancing the underlying value of the company’s assets. This program enables us to work with a select few, highly qualified third party developers to design and execute the development of multifamily communities that meet our specifications for quality.

It is a collaborative effort that complements our organic growth. Currently we have approximately a $158 million in mezzanine loan commitments outstanding, one which we have already funded about $134 million. Our portfolio consists of 15 mezzanine and other loan investments on which we have or expect to have options to acquire 13 multifamily communities upon completion and stabilization.

Six of these loans are in advanced stages of lease up for example, we have a mezzanine loan investment for one community, a student housing project located adjacent to the University of West Georgia it is now fully operational. The developer has leased a 100% of the 568 beds in this brand new community.

In fact just last Friday, they moved in over 200 students. We believe all of these properties fit the proverbial ahead of schedule and under budget mold and should be positioned next year for us to consider exercising our purchase options. Assuming we exercise our purchase options to all or most of our mezzanine investment projects, our already young portfolio will become even younger.

We are also excited to be implementing our necessity retail shopping center strategy that John and Lenny mentioned earlier, this should be very accretive to our stockholders. Frankly, we believe we can buy retail assets today at materially better yields than we can buy multifamily communities which should create a very nice balance in our portfolio. This should enable us to continue our objective of producing steady earnings growth resulting in increased shareholder value. We have a first rate management team for this asset class including Joel Murphy who will be joining our management team as President and CEO. Our subsidiary of new market which we’ll be aggregating these assets. I want to reiterate that our new initiative does not signal a change in direction, we are now and will continue to be first and foremost a multifamily community or REIT. We are simply notching up our management talent with a product cycle that we believe is relatively underappreciated. Our goal in all things is to drive earnings and total return for our shareholders. Now let me return the call back to John. John.

John Williams

Thanks Dan. As I mentioned earlier we’re very excited about our financial results for the second quarter, our growth opportunities and strength of our management team which I believe is second to none. I still believe the fundamentals in the multiphase sector for the foreseeable future will be strong and we’ll continue to be on the positive note.

Before I turn the call over to the operator there are several questions that have been sent in to us in anticipation of today’s call and we’d always encourage you to do that so that we can get your questions answered. The first question is, where is the capital coming from to exercise our mezzanine loan purchase options and how much money will be required? I’ll ask Dan DuPree to respond to that.

Dan DuPree

Yes John, part of the beauty of the mezzanine loan program is that the mezz loan amount funded closely approximates the equity needed to acquire the completed asset assuming the placement of a 65% terminal loan. In this way the $158 million in mezz loan commitments today would be sufficient to acquire assets worth at completion about $500 million.

John Williams

So you’re telling me that in actuality company does not have to come out with additional funds when we exercise our mezzanine loans. We’ve already made that investment.

Dan DuPree

That’s correct.

John Williams

Onto next, what do leasing trends look like for the second quarter and for the balance of the year and I’ll call on Bill Leseman to respond to that.

Bill Leseman

Thank you, John. Leasing results for Q2 our second quarter were very-very positive. In fact we leased just our stabilized properties, our leasing was up over 15% in the second quarter and most importantly is our measure of how it impacts our occupancy and rent growth. Occupancy as John mentioned earlier was almost 96% for the second quarter and rent growth over 4% resulting in very strong income growth. Even more impressive for the quarter was leasing at our mezz properties or lease ups as [indiscernible] all of those took off in the quarter, we certainly believe that in quarters three and four that this very strong momentum will continue and carry us through the rest of the year.

John Williams

Thank you, Bill. And next question, would you please give some color on overall property performance? John Isakson would you like to comment on that.

John Isakson

Absolutely, thanks John. We’ve been very pleased with the overall performance of our portfolio and in our market trends. We continue to see solid economic growth and expansion, a new supply coming online in our markets is being well absorbed and rental rate growth is strong. We would expect this trend to continue in the markets we have invested in and are investing in.

John Williams

Right, thank you John. In the next question, would you please elaborate on the company’s decision to move into the necessity retail shopping center asset class? I’ll take that. First, it’s nothing actually new, we’ve had a mezzanine loan on a Publix shopping center in Georgia for a number of years and back in January we actually purchased a Kroger shopping center in North Ohio, so we’ve been focusing on this asset but as we got into it, we saw that there were unique and special badges that could be created. Cap rates and prices were such that's very-very accretive to the company.

So our goal is to use our capital in a way that creates shareholder value, this is not a long term plan for us, we definitely plan on spinning this asset class off in the future when we get up to scale, then ask what is scale, well I don’t know exactly but we’ll know when we get there but it’ll be before the company can be able to support itself on its own and we think that could probably be a year to a year and a half. With that if the operator has the further call, we’d be delighted to take those calls on.

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions) And the first question comes from Ryan Mellinger with MLV Company.

Ryan Mellinger - MLV & Company

Hey good morning guys, nice quarter, good to see your NOI growth so strong. A couple of questions I was hoping you could answer for us, can you give us some color with regards to the announced acquisitions what the incoming yields are or what cap rates you guys are looking at?

Or in other words can you give us confidence surrounding the accretive nature of these acquisitions?

John Williams

Yes, I'll let Dan and maybe John Isakson, talk about both the yields and the financing we would be able to achieve on those assets and they surely will be accretive but Dan will you start off?

Dan DuPree

Yes, John. In terms of the overall retail portfolio that we are acquiring which is included a couple of assets in Nashville that were announced earlier and as well as this most recent seven. Generally speaking first year NOI on project cost, we’re acquiring those on a blended 63, thereabout and that’s typically going to be about 50 or 60 basis points better than what the going in first year NOI on cost will be on the multifamily.

Some of the assets will be higher; some of the assets will be lower depending on location, age of the product, et cetera. In terms of accretion, these in the aggregate including the multifamily and the retail will be accretive in the first year between $0.02 and $0.03 a share and over five years in the aggregate between $0.23 and $0.26 a share.

John Williams

And John Isakson, would you like to comment a little bit on the financing which will help us with this accretion.

John Isakson

Sure, thanks John. As we have always done with the multifamily assets, we will continue to borrow at the 65% leverage levels for the multifamily acquisitions but the retail acquisitions we’re also going to be able to borrow at 65% the spreads for retail are slightly higher, Dan mentioned that the cap rates are 50 to 60 basis points better or higher for retail and the spreads are probably going to eat about 20 to 30 of those away but it’s still over 200 basis points of positive leverage and still be good accretive transactions.

John Williams

And we noticed that we block in the four prominent properties -- [indiscernible] expected based on those loans.

John Isakson

Well we blocked in the end indexes and I expect the spreads on the multifamily assets to be somewhere between a 135 and 140 basis points.

John Williams

And what is that number?

John Isakson

So, that would be for the five year debt that would be about between 3.15 to 3.2% and between 3.55 to 3.6% on the seven year.

John Williams

Great.

Ryan Mellinger - MLV & Company

Great, sounds like good financing, that’s helpful. Can you also give us some color on why you guys decided not to sell [indiscernible] was it you didn’t get the price you were looking for or was there something different about asset that maybe you guys reconsider?

John Williams

Well, we are out trying to buy assets and we actually had an asset that we were very closely considering in Ohio and the truth is we made a determination that that asset that we were trying to sell came out of our mezzanine program, we knew as exceptionally well built, and was a great asset and versus what we were seeing out there we just thought like that if we sold it and bought something else we would be trading down and in business we drove a trade up.

Ryan Mellinger - MLV & Company

So, then why ever even think about marketing the assets? If you feel like it was quarter your portfolio?

John Williams

Well, there was a lot of military personnel attached to that area up there and we were very concerned with the approach to the fence that was coming out of our country and it turned out it didn’t really affect that area as much we were probably being too cautious. The asset is performing exceptionally well and we’re glad we have it.

Ryan Mellinger - MLV & Company

Sounds good, and then I guess another question I would have for you, you talked about the 65% leverage that you're going to get at property level financing for the acquisitions, are you guys still targeting a 50 to 65% overall leverage level excluding the preferred across your company?

John Williams

Long term we're actually likely to be lower, we’re down to 44% unappreciated book value, we would think over time those leverage ratios would continue to go down, the reason 65% is the number we choose to finance the legal department assets is put straight forward, it is the amount of loan that we can get from the agencies and [indiscernible] that allow the parent company not to have to guarantee the debt and that’s one of our hallmarks, we always said, we want to focus balancing. So, to have loan debt unappreciated book and then turn around and not having to guarantee that debt gives us what we think is a very strong position. So we want to continue, we don’t like debt, we don’t like debt we have to guarantee it we will continue to push down our debt levels.

Ryan Mellinger - MLV & Company

That’s helpful, I guess [indiscernible] on how you're tackling that 48% of unappreciated book, you had $175 million of unappreciated book value and then 134 million of real estate loans that you had 141 million of property level debt and 37 million of revolving credit facilities that fits you closer to 60%, is there something else in your calculation I’m missing?

Mike Cronin

We'll have Mike Cronin give you the calculations.

Mike Cronin

I don’t have any [indiscernible] but basically we take the total assets and add back depreciation on the real estate which I think is around 19 million.

Ryan Mellinger - MLV & Company

So, when you think total assets you include non-real estate receivables, revolving line of credit to the related party and accrued interest, other things like that as well?

Mike Cronin

Yes, the total assets.

Ryan Mellinger - MLV & Company

Okay, so total assets. Okay, that’s helpful. And then the last question I have for you guys was, maybe I misunderstood but John and Dan, I thought you had mentioned that effectively you can roll your mezzanine loan interest into a full equity stake in your assets upon conversion of a mezz loan interest in to equity. Is that correct?

John Williams

This is correct. Our mezzanine loan amount would go into the transaction is approximately anywhere from 25 to 30% on basis of pretty conservative calculations. So, now when we go to take in pro forma financing all that property you take all the discount that we were entitled to and that 30% pretty well becomes the mouth of the investment that we need to take and put into the transaction. On the last one we did which was the property up in Summit crossing in neutrality we actually got money back because we had more money investment the mezzanine loan than was immediate for the financing. So, when we get bid into, when we do a mezzanine loan we don’t expect to extend one team or to convert to a permanent loan.

We've already made our investment and that’s one of the wonderful things we don’t have to think about it, we’ve already got the money invested and all we got to do is roll that investment and what will be the ownership and acquisition cost.

Ryan Mellinger - MLV & Company

Got you, so your 25 to 30% that you are talking about is relative to total cost that’s total value of the asset?

John Williams

Yes, absolutely, you got it.

Ryan Mellinger - MLV & Company

And then what type of -- how much capital does the developer typically have to put in, obviously you guys -- I am listening to the take out loan is larger than the construction loan so are we looking at 10% or are we looking at much larger for the balance of the year?

John Williams

The economics we are working now the developer that’s put in between 7 and 10% of hard cash equity and then he will obviously get that out for promoted interest of the success with that development.

Operator

Thank you, next question comes from John Benda with National Securities Corp.

John Benda - National Securities Corp

So question towards just a on the mezzanine loan performance it seems like there is accumulative loans added this quarter, can you guys talk a little more about the pipeline on that?

John Williams

Yes, we’re very blessed and we have a very aggressive pipeline, I spoke between Dan and John we can remember all that -- let me take a stab and then let them fill in for me if I don’t remember them all. We have a property up at Kennesaw University in an area that is very tough to get, its only entitlements and we would expect to start that development at the end of the year, the 1st of next year. As you have heard me speak before we have had an absolutely unbelievably successful development in Tampa, Florida in the Brandon area. The fastest lease up I have been associated with and the developer has put another piece of property on the contract adjacent to that site so that we will have a second phase of that development. We have somebody else [indiscernible]

Dan DuPree

In Naples, Summit for you?

John Williams

Summit, yes we have our Summit development up in North Atlanta that we have been able to secure another phase so we'll do our third phase of that development. [indiscernible] is already baked on our list. The Naples is a bridge loan but it’s being converted into mezzanine loan and then the one we are really excited about is in Irvine, on [indiscernible] probably the best location in Southern California and it helped to start it later on this call.

Dan DuPree

And these are that -- were just mentioned are in addition to what was already published out there.

John Benda - National Securities Corp

And then when you guys take down property, let’s say you take down a property where you have a purchase option, obviously all the (equity) [ph] that has been laid out already. When you think about getting financing on that property would you run it at the same 65%, would you not lever at all?

Dan DuPree

On exercising the purchase option to acquire one of these….

John Benda - National Securities Corp

The investment’s already been made right, so the money’s been laid out. But would you seek to get financing on there, just to get equity back to invest in new projects, new mezz loans, et cetera.

Dan DuPree

You mean over finance take some dollars out?

John Benda - National Securities Corp

Yes.

Dan DuPree

I think it just depends John on where we are in our capital rates, remember we've got an ongoing series A preferred raise in place and I think the only reason we would lever up on an individual asset beyond 65% was if we had a particular need that we weren’t able to satisfy with our series A preferred or an aftermarket type transaction.

John Williams

Yes I think it's mighty tough for us to do that, because it would tend to violate [indiscernible] so we think it's so important that we don’t guarantee a loan. So I would be reluctant to do that, you know we have all these loans on our books and all these wonderful assets and guess what we have not guaranteed a loan on any of them. We don’t even have a bad board proposition or do we have an environmental position, we’re totally claiming. I would almost make you a bet, we are the only company in the REIT world that can make that statement.

John Benda - National Securities Corp

Just quickly, so let’s say you lever a property to you know 70% to 75% and there’s recourse, what’s the rate differential you know from the lenders you on a recourse loan versus a non-recourse loan and let’s say there is recourse to that parent company, how bad is 70% of financing on a multitenant property that’s got 96% occupancy, I mean the risk there seems pretty low.

John Williams

I’ll ask John to comment on that, but I doubt there’s a lot of weight differential in all candor, it’s a general company philosophy. We’re conservative, we’re careful and we don’t like to guarantee debt, ain’t nothing wrong with that.

John Benda - National Securities Corp

No, nothing, not at all. All right. Thanks for your time.

John Isakson

And I agree with you, I don’t think there is a lot of rate differential.

Operator

Thank you, and the next question comes from Larry Raymond with [indiscernible] Capital Management.

Unidentified Analyst

Again, thanks for this call and taking my question, my one single question is that I saw you had issued shares in the second quarter as well as some additional shares in July through an ATM program, and I wanted to understand the process and why you’re selling equity shares through this program at these prices and what your thought is on a going forward basis with regards to the value of the stock.

Lenny Silverstein

This is Lenny and Larry thanks very much for the question. I mean we have an ongoing ATM offering that’s out there and we look to have certain pricing and certain minimum pricing to bring in steady capital. The ATM program from just a quantitative standpoint isn’t like a normal follow on where you’d go out after the market and buy a huge -- sell a huge chunk of shares. It’s just kind of steady, it’s a little bit cash coming in but on a regular steady basis. And it also helps increase the capitalization of the company and as we’ve said previously one of our goals is to continue to increase our common stock capitalization that’s a current goal and it’s a long term goal and it allows us to do that at a fairly efficient pricing.

Unidentified Analyst

Is there a minimum price at which that you wouldn’t sell the shares?

Lenny Silverstein

Absolutely, yes, we talked about that with the company that we used to distribute out those shares.

John Williams

And we’re not really selling that much, how much do we sell (Jeff) [ph] in the last month.

Unidentified Company Representative

Just at $4 million worth, at roughly $9 a share.

John Williams

Yes, so it’s not a lot to be honest with you. But it’s a valuable tool, I think as a company we like to have lots of arrows in our quivers, from the standpoint of being able to access capital. We have our preferred stock which we sell continually and that quite frankly is coming in at ever increasing amounts, we like to know that we can have an ATM and that’s [indiscernible] we have a substantial amount of cash flow that’s coming in through our interest at varying mezzanine loans and the earnings off of our assets so for us, it’s just to make sure we have a reasonable amount of capital coming in as we continue to try to acquire assets in an accretive way.

And you know I think we are doing exactly that, I went back and looked, at the first quarter our FFO number was $0.24 a share, the second quarter its $0.25 a share, and AFFO was $0.25 a share for the second quarter versus $0.26 per share, AFFO was $0.20 per share for the first quarter $0.21 a share for the second quarter and as you’ve heard me say, we think our shareholders pay us a steady predictable results and I don’t think there is anything more steady than each four sequentially we outperformed the quarter we did before.

We are delivering great results and we'll continue to do just that and we're putting our self in a position so we will be able to take a hard look at where we are on our dividend at our next board meeting.

Operator

Thank you and the next question comes from Craig Kucera with Wunderlich Securities.

Craig Kucera - Wunderlich Securities

One question about the quarter, as you just mentioned that kind of $0.25, $0.26 in FFO, can you talk about what maybe takes it down to $0.21?

John Isakson

I think with respect to the guidance, what we are trying to do is trying to be conservative with respect to that and I think where we are right now on our AFFO is $0.21 for the second quarter, our FFO guidance for next quarter the top end of the range is $0.21 as well. So, we’re still within shooting distance of where we are, we would always like to try to achieve the upper end of the range and this year our AFFO was $0.21 that’s the top end of the range.

Now, with AFFO there is lots of adjustments that come off of that as compared to NFFO. NFFO usually have those one-time adjustment like acquisitions and financing cost associated. AFFO we have to back out any of our creative interest that we get. So there is a lot of adjustments which really AFFO gets us down to cash available for distribution that’s really what we try to focus on to make sure we have a great coverage on the dividends that are going out on our common stock.

John Williams

I think the issue for us is we will be closing 300 million assets at the end of the third quarter and the fourth quarter and I think we are just being [indiscernible] absorbing $300 million worth of asset purchases.

But so far if you go back and look at our -- if you go back and take a look at our guidance versus our performance, we’ve actually done pretty well what was our guidance last year, last quarter?

John Isakson

Some of our AFFO guidance was 16 to 21 and we ended up at 21.

John Williams

So, probably we ought to tighten our wings on our guidance and that’s a good point and we'll do it for next quarter.

Craig Kucera - Wunderlich Securities

That’s fine I didn’t know there are any other assumptions in there just to [indiscernible].

John Williams

It’s just [indiscernible].

Craig Kucera - Wunderlich Securities

Fair enough. You mentioned early in the year that you might be accelerating the purchase in some of your mezzanine loan developments and it sounds like based on the commentary you had earlier today that some of our advanced patients leased up, is that still on the table or is that likely off just given the larger acquisition pool you are doing here in the near term?

John Isakson

Yes, I mean there is a sort of a sweet spot for exercising the purchase option that works well for us and works well for the developer. Again we have six projects that are in various stages of lease up, we want to make sure they’re stabilized and any concessions that are granted to achieve initial lease up are burned off but I mean we are pretty optimistic that over the course of next year and then beyond we ought to get into a pretty steady flow of purchase option exercises and we’re replacing the one that the mezzanine loans that we exercise first options on with new mezzanine loans that we’re initiating with the same developer. So, probably -- possibly one this year but my guess is the six that are in lease up right now will all close next year.

Craig Kucera - Wunderlich Securities

Got it. And then finally I know this is all kind of come about relatively very recently and those things contemplated for a while, when you think about staying out the new vehicle to shareholders, do you anticipate that being spun out as an externally managed vehicle or would that be internally managed?

John Williams

Don’t know yet, we don’t know. Ultimately the new energy will have board of directors and have its own direction and I’m sure all of those decisions will be carefully thought out from packed standpoint. The important thing is that we don’t do this and ended up only a piece of the new company I have been asked why. we don’t know the math but if we could end up only 10, 15% of the new company I think that be a wonderful result for Apartment Communities but that board and Joe Murphy will ultimately make the decisions on how they are set up and how they work/

Operator

Thank you. And next question comes from Wilkes Graham with Compass Point.

Wilkes Graham - Compass Point

Good morning, maybe just a follow up or quick on Craig’s question. John, I think I heard you say earlier that you could see a scenario where you would spinoff the retail REIT in a year to year and a half not knowing how big you need to get to scale I mean I think seemingly if it was going to be internally managed it would need to be probably a couple of million dollars of asset so if it was a year to year and a half, what your envisioned in that short of a time frame there would be an externally managed company?

John Williams

I rather not make any commitments. All I know is it’s like the Supreme Court justice instead of (pornography) [ph] he couldn’t give you a definition of it but he could tell you when he saw it. I don’t know that we can tell you exactly the size we'll need to be to spin the development of but our goal is to spin it off into a separate standalone company and we’ll try to work hard to make that happen.

Wilkes Graham - Compass Point

Okay, that was a fine answer. I want to make sure on the cap rate you said I think it was a 63 on the retail portfolio, did you said that was 50 basis points better than what you are seeing in Apartments today or 50 basis points better than what you are planning to buy these formal to company assets in?

John Williams

I will let Dan make a comment but on the retail we actually recently got into it as we think the cap rates are 50 to 60 points favorable to us at this point in time but Dan you want to make a comment on that?

Dan DuPree

Yes, that’s the reason and again the multifamily cap rates vary depending on the market and the age of the asset, the retail assets vary not just because of the location but because frankly of the anchor, the strength of the anchor and what they do relative to packing in the draw for the shots that are in the project and in the retail one of the assets we basically priced in 7.25 and one we priced at a 5.5 it’s a blended rate.

John Williams

And let me a make an editorial since I've seen a number of these assets almost all of them. These are all great assets, they are all with a growing sales by the public’s [indiscernible] they are all in wonderful locations we’ve inspected all of them, these are fabulous fantastic assets that will be the core of this new initiative for us where we are quite excited about it but those obviously -- it's on to me with public they are extremely strong financially and we will lease this as an ability to hopefully increase our relationship with public. So, these are wonderful assets we are excited about the acquisition.

Wilkes Graham - Compass Point

Okay, and I was just trying to confirm, are you saying it’s 50 basis points better than sort of market multifamily cap rates out there or ?

John Williams

50 to 60.

Wilkes Graham - Compass Point

But then of course the market is not necessarily versus the cap rates at which you buy cap rates, you buy multifamily?

Dan DuPree

Yes, I would say probably to market for the kind of assets that we are looking for class A.

Wilkes Graham - Compass Point

Okay, and is that to say that the $189 million acquisition you have announced for the four assets those cap rates are on the high fives?

Dan DuPree

I would say they are in the high five.

John Williams

That's a good guess.

Wilkes Graham - Compass Point

Okay, and then lastly just on the, as you look at the ATM we talked about this in the past, there is some benefits to an ATM in terms of being able to raise cash quickly but if you raise it at a level below NAV it sends a signal to some shareholders that you are willing to raise capital below NAV or that maybe you think your NAV is lower but I recognized that its small amount of money. I think by my math it’s cheaper to raise the series A if you assume your all in cost on the series A is 6.6%, it’s cheaper to raise the series A as long as the stock is below $9.70 and so seeing that you are raising about $15 million a quarter in the series A, you’re doing a little bit in the ATM here and there. You've announced $300 million in acquisitions and you seemingly are going to need $100 million of equity to fund that, how do you think about funding that $100 million?

John Williams

Perhaps, I can say one thing for sure, we absolutely are not going to raise a $100 million through the sale of common stock. We have a variety of different toggles that we can play with and will play with on this. First of all, two thirds of that will come through a project level debt of the 300 million plus. Secondly, we will use our existing lines of credit which will be augmented with in essence, bridge loans, B notes that we’re calling, which will basically take the short term leverage from 65-80% which we will subsequently retire through the preferred -- the series A preferred. We have some existing assets that are under leveraged that we will refinance and then we will use the ATM to some extent because frankly raising money through the ATM is much more cost effective for us than the secondary offering and beyond that point if at all necessary then we’ve got a shelf registration and we can sell common stock, but it’s -- it's number seven on our list of alternatives for raising money to do this.

Wilkes Graham - Compass Point

It sounds like you’re saying you’re basically going to use -- I mean -- I figured that the first 200 million would be (much of) [ph] level financing than the other 100. You can just put that on the line and then pay it down over time with a series A.

John Williams

And we’re having more success with our series A preferred today than the numbers that you indicated. So candidly we don’t think it’s going to take all that long to get to the project level debt from the 80% I mentioned down back down to the 60-65%.

Operator

Yes, thank you. And that is a follow up from Ryan Meliker from MLV & Company.

Ryan Meliker - MLV & Company

Hey guys just one last question and you touched upon it a little bit, but any idea how large the retail company would need to be just for you guys to spin it out and then you talked a little bit, you mentioned the fact that one of the benefits of using the common ATM is growing your market capitalization but then spinning out a retail company will obviously pull that back I would imagine as some of the value of the company goes into a new entity, so I guess the question is how large does the retail company have to be for you have to spin it out and then how large does preferred need to be for you guys to be comfortable spinning off, that size of retail portfolio.

John Williams

I think this is not written in stone but I think $250-300 million we would start looking at the above for the spin the retail operation off.

Ryan Meliker - MLV & Company

And then in terms of the size of preferred, in that realm are you looking at preferred having I'll imagine close to $500 million in assets at that point in time, or is preferred going to be that at the same size.

John Williams

No, no, preferred will be substantially high, we -- if you look at where we are today, we’re close to $400 million in asset size, we’ll close $180 million in four-five weeks, we’ll close another $125 million in a few weeks and we will also be laying on my guess is four-five additional mezzanine loan assets with a possibility of closing one mezzanine loan before the end of the year. I would guess we'll end up somewhere in the neighborhood of $750 million in a balance sheet side by the end of the year and we would certainly expect to double it next year.

John Isakson

Ryan, one other thing in that regard, we talked about the purchase options on the mezzanine, right now on those six that are in lease up and I’m eyeballing this number but to give you kind of an order of magnitude. On those six that are in lease up, that we’ve said would be good candidates for a purchase option exercise next year. We have somewhere in the neighborhood of $90 million in mezz loan right now. So we’re showing that as $90 million in asset today, on exercise of the purchase option that’ll be $300 million in assets, so admittedly that incremental 200 million is going to come from debt but in terms of asset size the exercise of the purchase option has a material impact on us.

John Williams

In a positive way.

Operator

Thank you and at this time I would like to turn the call back over to management for any closing comments.

John Williams

Yes, thank you, we appreciate you joining us for this call, it’s been an exciting quarter for your company, the next six or eight weeks off will be very exciting but remember our (focus) [ph] balance sheet very transparent going into company with very substantial increases in earnings and increases in dividend, that’s what we’re trying to do. Thank you.

Operator

Thank you, the conference is now concluded, thank you for attending today’s presentation, you may now disconnect, have a nice day.

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