Preferred Apartment Communities' (APTS) CEO John Williams on Q2 2016 Results - Earnings Call Transcript

| About: Preferred Apartment (APTS)

Preferred Apartment Communities, Inc. (NYSEMKT:APTS)

Q2 2016 Earnings Conference Call

August 2, 2016 11:00 AM ET

Executives

Lenny Silverstein - President & COO

John Williams - CEO

Dan DuPree - Vice Chairman & CIO

John Isakson - Chief Capital Officer & CEO, Main Street Apartment Homes

Joel Murphy - President & CEO, New Market Properties

Bill Leseman - EVP, Property Management

Randy Forth - EVP & Chief Asset Management Officer

Mike Cronin - EVP & CAO

Analysts

Steve Schott - Compass Pointe

Ryan Meliker - Canaccord Genuity

Patrick Healey - FBR

John Benda - National Securities Corp

Operator

Good morning and welcome to the Preferred Apartment Communities Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lenny Silverstein, President and Chief Operating Officer. Please go ahead.

Lenny Silverstein

Thank you for joining us this morning and welcome to Preferred Apartment Communities second quarter 2016 earnings call. We hope that each of you've 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 for Property Management; Randy Forth, our Executive Vice President and Chief Asset Management Officer; John Isakson, our Chief Capital Officer and CEO of Main Street Apartment Homes; and Joel Murphy, the President and Chief Executive Officer of New Market Properties.

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 website at pacapts.com. The 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 that 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.

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

John Williams

Thanks, Lenny. Our second quarter financial results reflect another strong quarter for our Company. We continue to operate successfully across all fronts and I would like to compliment our management team and our associates for the continued diligence and hardwork.

Lenny will give you more details on our various financial metrics in a moment. From a high level perspective we believe we're tracking towards our core FFO and dividend goals as previously set out. And so not we're going to principally this year and with the impact of Brexit and summer of all events, we don't expect any supports to arrive significantly for about in the year. We continue to follow our practice of buying properties and typically locking in the long terms at the same time. This allows us to walk-in us in a while which generally eliminates interest rate risk for Company.

Also I want to reemphasize that we continued avoiding upstream guarantees or recourse of the pact higher operating partnership, all our cross-colotalization [ph] of our mortgage loans in connection with origination these property level loans. As I mentioned last quarter, we continue to expect adjusted FFO to be a bit lumpy since that metric in particular is reflected of the timing of payment of accrued interest outstanding on our investment loans. As of June 30, we currently have $13.8 million in our accrued interest reflected on our consolidation balance sheet.

This program provides us not only with a favorable interest rate return but also with a great product pipeline built to our specifications. In the end, this program enables us to have one of the youngest and highest quality Class A multi-family portfolio in the entire country. We continue on our operating activities which at the end of day can make or break our financial results. As you've heard me say before, property management is a penny, nickles, and dimes [ph]; and you can only expect what you expect.

Preferred residence management in our team focusing on our multi-family communities takes a very hands on opinion, focusing on our multi-family communities takes a very hands on approach. We have 230 associates of PRM ranging from our on-site leasing personnel, maintenance team members and managers to our corporate staff -- level staff. In addition to managing multi-family communities they also work closely with third-party developers under our whole-site loan and investment approval program to identify current trends in the industry and to assist in the design, lease up and stabilization of these properties. We believe they've done a great job in building a straightforward overall members that reflect well from Preferred communities.

Preferred campus management, our management team specializing in student housing recently commenced operations with our first seasoned housing property acquisition during the second quarter. Like PRM Preferred campus management will manage our student housing communities and more closely with third-party developers under our investment loan program to get them on the latest elements and management techniques for these type communities. Although we consider student housing a subset within multi-family, we do recognize the different needs of students and the different challenges of managing students.

Our student housing management team is highly experienced and we are pleased for the team we have assembled. The multi-family properties on the main street apartment homes, which are managed by PRM consists of well-located most family access they can benefit well return finance of that acquisitions which could be after 35 years these sidelines although difficult to procure can be very favorable to -- We believe our financial and product diversification is healthy and beneficial for all our stockholders.

We are still seeking to sell-out and distributed that new market properties, into an independent public – once we believe the status of movies – with sufficient scale of market condition to acquire. While continuing to own and invest in new market, just recently we entered into our contract to purchase portfolio -- shopping centers from a major -- that is liquidate its assets. We expect these to close in all our eight properties are acquired a little over $500 million. Taking advantage of this unique portfolio opportunity that accelerates the portfolio, they also enabled us to -- very attractive financing audience to these transactions. As a result we expect our board of directors approve increase of our 20% -- for non-assets in order to compensate these actions. We believe this anomaly will reconcile with continuing to acquire multifamily properties, in fact again just a temporary increase with a goal return to 20%, hopefully by the end of the year.

We are continuing our schedule -- installation of our new technology program, this program and platform will allow us to have better information and greater efficiency. Today we successfully installed the technology at its corporate level and unit market properties and expect to complete our installation of our multi-family properties by year end. Prior to completion we believe our technology platform will be of any -- investment for us technology in the market place.

Speaking of technology we also focus intently on the technology to be the port [ph] in our multi-family communities and in particular our student housing communities. With some respects technology – become traditional for our traditional family communities.

Now I will turn the call to Lenny to walk you through all the numbers. Lenny.

Lenny Silverstein

Thanks, John. Over all we once again produced very good operating results for the second quarter in line with our internal budget and tacking with our guidance. Revenue for the second quarter was almost $46 million approximately 90% greater than our revenues from our second quarter last year.

Our normalized FFO for the second quarter 2016 was $0.31 per share compared to $0.27 per share from the same period last year. On percentage base that’s our normalized core FFO per share increase approximately 15% on the quarter-over-quarter bases. On the six month period to date our core FFO was $0.61 per share which represent a 22% increase on a per share bases compared to the first six month 2016. Based on these results we are narrowing our normalized core FFO Guidance range for year to a $1.25 to a $1.29 per share. The mid-point of this range continues to represent an approximately 10% increase in our normalized to core FFO per share for 2016 compared to last year again in-line with our previous guidance. Our adjusted FFO for the second quarter 2016 was $0.31 per share compared to $0.30 for the second quarter of 2015 despite having approximately 1.7 million additional shares of common stock and Class A units outstanding for the second quarter this year compared to the second quarter last year.

For the six months period to-date our adjusted FFO was $0.68 per share which represents a 19% increase on a per share basis compared to the first six months of 2015. For the second quarter we had net income of approximately $0.01 per share compared to net income of approximately $0.02 per share for the second quarter of 2015. For the second quarter of this year we had a net loss attributable to common stock holders of approximately $0.40 per share compared to a net loss attributable to common stock holders of approximately $0.17 per share for the second quarter of 2015. Please be aware that for both net income and net loss attributable to common stockholders they are both adversely affected by the increase in depreciation and amortization charges resulting from our successful acquisition program.

In addition, the increase in net loss attributable to common stockholders for the second quarter this year was primarily driven by the significant increase in dividends paid to our preferred stockholders. For the second quarter this year we paid our stockholders and unit holders a dividend of $0.225 per share representing a 12.5% increase and the quarterly dividend paid for the second quarter 2015. This represents a growth rate of approximately 10.9% on an annualized basis since June 30, 2011 which was the first quarter and following our initial public offering in April of 2011. In addition our second quarter common stock dividend payment where presumably ratio cores FFO payout ratio of 65.2% and then a AFFO payout ratio of 66.9% again continuing our goal of lowering these ratios.

On a same story basis our total revenues for the three months ended June 30, 2016 increased 4.7% compared to the three months ended June 30 last year. Our net operating income increased 3.7% for the second quarter this year compared to the second quarter of last year. By far the biggest impact to our NOI is property taxes which increased 16.5% for the second quarter of this year. Like many of the other [indiscernible] second quarter financial information we're aggressively challenging the significantly increases in our property taxes, in many cases through legal action. Understandably our property taxes were more normal; our NOI would have been significantly higher.

From an occupancy perspective our average multi-family occupancy was 95% for the second quarter 2016 and our retail portfolio was 94.4% leased as of June 30 both representing very solid numbers and we expect occupancy to continue around these levels for balance of the year. And for Joel will cover the new market metrics in more detail later in this call.

Switching to other financial statement metrics, we continue to add quality assets to our portfolio in a meaningful way. For the second quarter our total assets net of depreciation were approximately $1.8 billion representing a 93.3% increase in total assets compared to the second order 2015. In addition to increasing total assets our cash flow from operations this quarter was approximately $19.5 million which represents an 84% increase in cash flow compared to the second quarter last year.

A key component of our strategic plan of our investment program. I now want to introduce Dan DuPree to provide some more color on our acquisition activities, our loan investment program and their pipeline. Dan?

Dan DuPree

Our investment pipeline is robust, we continue to actively pursue those multifamily and grocery anchored retail acquisitions that are accretive and fit our business model. We also make real estate investment loans on selected developments on which we have purchased options. So far in this year we have acquired three projects from our real estate program loan investment program [indiscernible] City Park View in Charlotte and [indiscernible] Pittsburg.

During the second quarter we acquired a 487 unit multifamily community located in the Orlando, and a 679 bed student housing community in Tallahassee, Florida near Florida State University. The Florida State University project is a 100% leased. In addition we originated one real estate investment loan to partially finance a proposed second phase of a 556 bed student housing community located adjacent to the campus of Texas Tech University in Lubbock, Texas. So loan [indiscernible] current month the interest of 8.5% per annum and accrued deferred interest of 5% per annum. We also received a purchase option to acquire the NOI and completed and stabilized community at a discount to the then market, fair market value of the community at the time of exercise.

In May, we sold our first multi-family community Trail Creek Apartments. Trail Creek was a 300 unit community located in Hampton, Virginia. We realized a gain of approximately $4.3 million from this transaction which is not reflected in the calculation of our three reporting metrics of FFO, core FFO and adjusted FFO.

As of the end of the second quarter we own 23 multi-communities representing 7706 six units located in 15 cities across seven states. Of course these numbers do not include the activity of new market properties. We have a total of 25 real estate investment loans outstanding at the end of the quarter. I had to put this in perspective this represents a total commitment of $352 million of which 281 million has already been funded with a total asset cost of approximately $1 billion. Now these 25 loans, 15 represent forward Class A multi-family communities under development totaling 3137 units, eight of the loans represent student housing communities under development. Totaling almost 5400 beds one represents a grocery anchored shopping center projected to have approximately 200,000 square feet of GLA and the last real estate investment loan represents a bridge loan for a projected third party multi-use developments. Although we may not exercise all of our purpose options for these communities we firmly believe that our pipeline provides us with a solid growth opportunity for the future.

Now as you know as part of our business plan we have invested a portion of our assets in non-multi- family assets such as grocery anchored shopping centers.

Let me now call on Joel Murphy to provide some color on this effort. Joel?

Joel Murphy

Thanks, Sam. New market strategies require an operate or investment development of grocery anchored shopping centers that fit our investment criteria and suburban sub-markets within the Top 100 MSA in some Sunbelt states. We target market dominant grocer rankers and maintain a number one and number two market share and have high increasing sales per square foot stores in particular sub-market. In addition we target certain select specialty grocer such as sprout, the whole foods or fresh market that either had the significant presence in that particular market or is located on superior real estate with a high sales per square foot store. We're also very pleased with our second quarter operational results and with our acquisition pipeline.

Our retail portfolio is 94.4% leased as of the end of the quarter and we're particularly pleased with the momentum of our lease renewals. We have already completed the renewal of 55% of the space and we have chosen to renew and that was rolling in 2016. These renewals have been complete and attractive weighted average rents per add of 4.5%. A critical component of the success and health of any retail property sales or the property level. We have now begun to precede the sales reports from our grocery anchors for their 2015 sales and we're seeing very solid comp store sales growth for those stores that reported thus far in an average of 6.1% above our already highly productive sales per square foot stores. Our portfolio average is now approximately $579 a foot in sales for our grocery anchors.

We believe this sales contributes not only success for the anchor stores themselves but also to increase traffic in the center for the benefit of our small shop tenants. During the second quarter we acquired seven grocery anchored shopping centers having an aggregate purchase price of approximately 84.2 million. Simultaneously with these acquisitions we placed non-recourse, 10 year first mortgage loans on four of these properties at a rate of 3.97%, we acquired two centers for all equity without any mortgage financing and acquired one center by assuming an existing first mortgage CMBS loan having a maturity date in 2024 with an increase rate of 4.4%. These are all solid properties consistent with our strategy, six of which are anchored by publics and one anchored by Walmart super center.

Subsequent to the close of the second quarter we acquired [indiscernible] approximately 300,000 square foot center anchored by 30,000 sprouts grocery store and 86,000 square foot department store.

We financed this acquisition utilizing a non-recourse 10 year 3.85% first mortgage loan. We now are on 23 grocery-anchored shopping centers in 12 markets in six Sunbelt states totaling just shy of 2.3 million square feet, 15 of these centers are anchored by public.

As John mentioned earlier and is fully more described in our recently filed 8K we entered into a definitive agreement acquired portfolio of eight grocery anchored shopping centers from Heinz [ph] for a total purpose price of approximately 209.1 million. These centers are located in Georgia, Florida, North Carolina, and Texas and are anchored by market share leaders such as [indiscernible] Kroger, AGB and [indiscernible].

This portfolio acquisition marks our entry into North Carolina through a rally MSA acquisition and we're also pleased to head [indiscernible] club to our roaster of grocery anchors and subscribed in the 8K these brings our subject to customer closing additions but we anticipate the first seven of these acquisitions to close this month.

Now let me call on John Isakson [indiscernible] everyone on our main street apartment's homes initiative that we started last year. John?

John Isakson

Thanks, Joel. As we have discussed in recent calls, PACAPTS office main street initiative in the fourth quarter of 2015. Main Street focuses on value add and financed assets with maturities up to 40 years. Main Street is acquired three assets to-date totaling over 250 million in total capitalization. Our first acquisition was an assumption of a HUD financed asset in Texas but at that 37 years left on its loan with an interest rate of 3.76%. The two assets most recently acquired [indiscernible] are both value add properties with excellent market opportunities and strong fundamental property characteristics. Both assets were financed with a bridge program to get the value add program up and running ultimately we plant to roll these properties in the HUD 223F program which is a fixed rate 35 year loan that currently has an all-in rate of 3.85%. Given that we're borrowing near that level today for 10 year loans on our core portfolio we continue to believe that this is an excellent hedge against medium and long term interest rate risks and offers us a balance in maturities in our portfolio going forward.

The application process for HUD loans can be lengthy and the approvals require a substantial level of documentation underwriting. By applying for the HUD loans early in the renovation process we can pursue the long term financing and complete the renovation on parallel tracks. It will also be possible to close on the permanent financing before the completion of the renovation itself, but further installation from the interest risk for the value add program.

I want to emphasize that the value add properties we're pursuing are no different from our core portfolio in terms of quality allocation and amenities. The value add program simply brings on to current market standards in terms of unit conditions and amenities and provides us an opportunity to compete with newer product at more competitive rent levels. Although Preferred Apartment Communities does not direct or develop multi-family communities, our management team's long successful history prior to forming the company makes us uniquely qualified to take advantage of value add programs by Villages at Baldwin Park and 525 Avalon Park.

Let me now turn the call back over to John Williams. John?

John Williams

Thanks, John. Our core Class A multi-family portfolio continues to remain strong and among the youngest and most modern in the industry, we remain strong and among the youngest and most modern in the industry assuming we exercise the purchase options at all of our most -- most of our real estate loan investments for these type assays, we expect that our already young portfolio will become even younger.

As reflected in our most recent annual report to stockholders, we just celebrated our fifth anniversary of operations this past April. We have been able to finance our growth from a variety of sources including capital available to us from sales and redeemable preferred stock in March, common stock through our ATM program, moorings under our loan facilities [ph] and proceeds from first mortgage loans placed on each of our acquired properties. By appointing these sources of capital, we're confident we've been able to save our common stockholders from significant dilution. As I mentioned earlier, we're pleased about our financial results for the second quarter, our growth opportunities for the balance of the year and the strength of our management team. Price Waterhouse Cooper is our outside auditor and Ernst and Young is our outside tax advisor. Although PWC and E&Y are independent, third-party advisors, they are integral to the success of our company and the transparency of our financial disclosures.

I still believe that the MLs and real estate for the foreseeable future will be strong and will continue on a positive note although we continue to see the tightening of the credit market for those new developments, due at least in part to recent regulatory changes emanating from Congress, including the Bazel 3 reforms. I am confident this will dampen new construction and permitting, which should have been packed. Please remember the strengths of our Company; we have a unique balance sheet, we have one of the newest and most diversified portfolios in the industry, and I believe our associates and management teams are simply the best.

For product department advisors said at Investor Day, significant amounts of time and money building up our management team in order to try to provide the best service in management we can to our residents and tenants. We try to provide the best results we can for our stockholders. We continue to focus on our operations on all fronts, recognizing that this is the lifeblood of our Company. In fact, we are already seeing those results.

Before I turn the call over to the operator, there are several questions we've been asked in anticipation of today's call. The first question is, how does our outlook for apartments look for the balance of 2016? John Isakson, would you like to respond?

John Isakson

Sure. Thanks, John. We continue to feel good about the economy and the general direction of the apartment market. Some markets across the country are starting to feel the impacts of the ramp up in production and the new supplies and deliveries in the market. Many of these are gateway markets which we have avoided. We believe the general decline in home ownership will boost demand in our markets. In conjunction with this trend, we believe new supply may top out and start to decline, which should also reduce the pressure on absorption.

It looks like permitting is slowing somewhat this year as banking regulations and investor caution works to curtail the flow of new deals. This will be especially true in markets where there is a perception of oversupply or looming market weakness. Nevertheless, we don't believe this will be a great concern to us; the turnover for our portfolio should be stable within a range for the year. Our value added programs did not significantly impact the occupancy of those assets and our core portfolio is well positioned and should enjoy solid results. We have begun implementing revenue management software at our assets, which should again help us maximize rental rate growth and occupancy as it gets fully implemented this year.

Let me reiterate what John said a few minutes ago, about the economy, at least on a macro level. We believe the influences and employment gains, along with financial impact being caused by Brexit and Bazel 3 bode well for us and we remain bullish on our industry.

John Williams

Thanks, John. A further question is how are the results of your Houston properties holding up? And let me call on Randy Forth up to answer that question. Randy?

Randy Forth

Thanks, John. We currently own seven multifamily units in Texas, of which four are located in the Houston MSA. We believe we acquired these excellent assets at a great value and underwrote them pending the softness of the Houston MSA. Even so, our Houston assets continue to perform well, combined with second quarter gains in both occupancy and total revenue, net operating income for our Houston portfolio will also have shown a quarter-over-quarter increase had we not conservatively increased our real estate real estate tax accruals to reflect projected tax increases as John mentioned earlier.

John Williams

Thank you, Randy. A third question: will you please shed some light on your same store results for the fourth quarter in light of the wealth of a few multifamily communities that comprise your same store? I'll take that on.

As you know, we're still a very young company. We started operations on our IPO in April 2011, just five years ago. In order to have a balance of cons, we need to own assets for 15 months on a static basis; that is, for example, after we've completed any material CapEx that we've budgeted for. At the time of acquisition and after reaching stabilization, we are acquiring an asset prior to that threshold. As Lenny mentioned earlier, our same store sales [ph] were strong for the second quarter at 4.7%. From an operational perspective, our same store multifamily NOI was quite solid at 3.7%. That would have been even higher but for significant increases in property taxes that we -- and for the amount of the entire REIT industry are experiencing. As a sideline to that, we have newer assets, which I think are actually more affected by taxes and increases than older, more stabilized properties. So that's just the cross we have to bear.

Another question is please update us on the potential spinoff of your grocery-anchored shopping center group? Dan, would you respond?

Dan DuPree

Sure. Our strategy to grow this segment of our company continues on track; at quarter end, we had an aggregate, unappreciated book value of approximately $322 million in grocery-anchored shopping center assets. And we really have put together a truly remarkable team for this effort. Once we close the Heinz portfolio, as Joe mentioned earlier, we'll cross the $500 million threshold. When we believe new market has reached sufficient sustainable scale, and market conditions warrant, we will pursue the spinoff, sale, or distribution of these assets into an independent, publicly traded REIT, while continuing to own an investment in this company.

John Williams

Thank you, Dan. And with that, I'd like to thank you for joining us on our call, and I'd like to turn this back over to the operator for further questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Steve Schott at Compass Pointe.

Steve Schott

Hi guys. Why did Heinz want the option to exclude the eight retail assets?

Joel Murphy

We negotiated a deal with them to buy all eight on a portfolio basis and the Heinz guys thought that if we made a move on that for the portfolio, that they'd basically give us a bit of a portfolio discount, which we liked and they wanted the ability. Which we were fine with, to see if they could pull it out and sell it for more. So we're very happy to buy it at our price and we're also trying to own the other seven at the allocated price if they end up selling Champions to somebody else.

Steve Schott

Okay. Any significant lease expirations near term in that portfolio?

Joel Murphy

No, I wouldn't say anything that is looming or pending on those. You know, some of the grocery anchors on those leases are in fact five years from expiration, but that's not at all unusual. On the other assets that we've acquired, we've had personal interviews with the grocery stores; we understand what they're doing as far as CapEx. And we feel very good that all those lease renewals will be extended.

Steve Schott

Okay. And I know, Len, you touched on the property taxes. How should we be thinking about those going forward for the rest of the year?

John Williams

Well, I think that we now have a pretty good handle on where the real estate taxes are. A lot of bills have come in, so we feel like that, going forward, the number we've accrued for is accurate in going down significantly from our earlier accrued number. Even though we have noticed a decrease, some of them are still very much outside of where they ought to be. In particular, Houston. And we're going to send somebody and challenge those numbers.

They shouldn't charge us taxes -- property taxes in increase of what we purchased the property for. So we'll be taking some battles. But I think the numbers going forward, we've very comfortable with.

Operator

The next question is from Ryan Meliker at Canaccord Genuity.

Ryan Meliker

Hey guys. I have a couple of questions. I think first, can you guys touch on -- in early June, you guys filed an 8-K amending your external management structure and termination provisions. Can you just kind of walk us through what you guys did there and what changed?

John Williams

As you know, at some point in time, in the future, we will probably internalize. And frankly, those negotiations with our Board was really an opportunity for aligning our management agreement with that possibility. One of the provisions we had in the old management agreement was profits participation on returns over a threshold going forward. That's a nontraditional, it's more in the REIT world, and it's not traditional in public companies. It was a number that could have cost stockholders a lot of money going forward, and so we chose to eliminate that in conjunction for a three-year rolling contract. The reason we wanted a three-year rolling contract was that we're hiring a fantastic group of management folks and to have a one-year contract probably put many of them in jeopardy.

So the Board felt like it was fair to give those folks a three-year contract that rolled, which protected our young management associates and in conjunction with that, we eliminated the profits participation, which more normalized our agreement.

At the end of the day, we hear a lot about internal and external management. I'll have to say that I look at almost every single, at least multifamily, report that comes out. And I'm seeing those balance sheets, those P&Ls, as well as anybody, I'll defy anybody that can tell me how much of these public companies are spending in terms of G&A and running their platform. You can't do it by looking at the financial statements. It's pretty simple. There's three lines: asset management fee, G&A fee, and a property management fee. So we are very transparent. We today are operating, I think, cheaper, than any of the other companies out there. So I think we have a good contract that's fair for our stockholders, it's fair to our management team. I think it puts us in a position to easily convert to an internal management system going forward. It was negotiated by not only the independent members of our Board, but all the other independent members of our Board, and gave it a very clean opinion that what we were doing was more than fair. But we went through quite an involved process that took actually a year, and we got it to the point where I think we came up with something very fair for the stockholders, and very fair for the management team. Lenny, would you like to add anything?

Lenny Silverstein

No. I think it was a very well discussed, well negotiated document. At the end of the day, the most important part was to make sure that it was fair from a financial view to all of our stockholders, which we all as a collective group achieved.

Ryan Meliker

All right, that's helpful. If I recall correctly, the termination provision includes a three-times annual fees dropping down to two and a half times, I think a year from now or so. And then if I recall, there's even opportunities for the fee to be waived altogether in a -- I guess if you call it something more along the lines of an entire sale of the company. Is that correct? Am I reading that correctly?

Lenny Silverstein

This is Lenny. I'm not sure what the waiver is that you're requesting, unless it's referring to -- we have a current small loan facility between PAC and PAA, the outside advisor. That's the only potential -- and other than that, I'm not quite sure what waiver you're referring to.

Dan DuPree

Ryan, the termination with Conn's, there is a waiver. There's not a -- if there is cause, they can get a variance [ph]. And that's only fair. If we defraud the company, cook the books, anything like that, they have an absolute right to terminate us. And we think that's more than fair.

Ryan Meliker

Okay. All that makes sense and then just one follow up on that would be why did you guys elect to do this this June? Was there -- did you find -- were you seeing -- experiencing pressure from investors, was it about the -- that it was always something you wanted to do and just took you until June to get it done? Or is it that you're closer to potentially internalizing now that warrants the need to have this change in place?

John Williams

Well, it was actually, the process started a year and a half ago from June. It took -- that's why -- it took far longer than I thought it should have, to be quite honest with you, and far more money than I thought it should have. The driver from our standpoint was that we were having resistance from bringing in top-level management, if we only had a one-year contract. When Joel Murphy joined us and Randy Forth joined us, as a for instance, we told them we were confident that we'd be able to change each of the management agreements to a more fair term, which is three years or, in some cases, 2½ years. If we hadn't been able to do that, we would not have been able to retain such outstanding management as Joel Murphy or Randy Forth. So the driver for us was making sure we had a term that was more than fair.

The Board, frankly, just took a long time, so that it made sure their independents -- that they protected the shareholders and felt like they were getting a good deal in return. So the negotiations took a year and a half and just happened to have ended in June. It probably should have ended in June of a year ago, but they just ended in June. I'd probably say ended in June over a year ago but just…

Ryan Meliker

Okay, that makes sense. And then on the City Vista [ph] loan, looks at end of the quarter you had $16.1 million loan balance. It sounds like you converted that to -- I'm assuming somewhere in lines of $3.5 million loan balance and a 96% stake in the asset is the asset, is that correct?

John Williams

I'll let Bill answer that.

Bill Leseman

Ryan, basically we converted the loan into a joint venture investment in that project. So the $3.6 million that you mentioned has an equity investment that we've put into the deal.

Ryan Meliker

Got you. So you basically converted the full $16 million loan into what, 96% of the equity in the joint venture?

John Williams

Let me get John give some more clarity on that. John Isakson?

John Isakson

Ryan, basically what we did is, if you take the $16 million when we converted into the JV, $3.6 million got repaid in addition to getting back our accrued interest and then $12.5 million converted into the 96% JV.

Ryan Meliker

Got you. So $3.6 million got repaid.

John Williams

Ryan, I don't know if tax authorities are listening but one of the reasons we do that in all cander is that it allows us not to reflect a sale and we're able to keep same ownership effectively. We might do more of these because the taxing authorities are probably listening to all our calls but certainly listening to all our press releases. So we ought to give them a road map to how to chart some more taxes.

Ryan Meliker

Okay, that's helpful. And then one last one for me with regards to Haven West, looks like in the second quarter you guys terminated your option. I'm wondering can you just give us some color surrounding that why did you elect to terminate the option, why not -- the option I would assume had some value to it? Why not just try to sell the option even if it was selling it back to the developer or what happened to what was going on there?

John Williams

Well, I'm not saying with the developer. Generally, if we own -- feel comfortable with the assets, we'll let them go sell it. And that gives them an incentive to try to sell it through as much as they can and I hope they are very successful at it. That partly is a little bit smaller school than we were today want to have an investment in from a housing standpoint. And it's -- we try to tell everybody that even though we have these options that necessarily would mean that we will exercise those options. We've got a nice turn on that investment and they are not selling to a third-party and we hope they will be successful. I think that contract exhausted in the next 30 days and we'll get a nice bump in our AFFO because we'll capture the accrued interest in that project. So we'll get a good result, and I hope the developer gets a good result.

Ryan Meliker

I guess that's helpful, do you know are they selling to a third-party at a lower price than your option price?

John Williams

No they are selling it -- we think at a little bit higher but we don't know if we're 100% sure but I hope they sell it for a huge amount of money because if they are successful, ultimately we will be successful. Dan wants to make a comment.

Dan DuPree

Ryan, I mean your comment about capturing the value of the purchase option is about -- I would tell you going forward there will probably -- there won't probably, there will be instances where we get compensated for releasing the option but in this particular case, we didn't think the differential and what they were going to get from the third-party, and what our purchase option was it, it was really worth the effort.

John Williams

And we'll disclose that at promotion, property close [ph]. You won't be able to tell what happened but we made a decision based on what we thought about the housing population of that location and how we wanted to allocate our capital.

Ryan Meliker

Okay, that's helpful. That's it for me, thanks.

John Williams

Thanks, Ron.

Operator

The next question is from Patrick Healey at FBR.

Patrick Healey

Good morning and thanks for taking my questions. Just kind of starting off on the multi-family portfolio, I appreciate the macro comments you guys had. Maybe if you can kind of drilldown a little bit in the micro -- any market you say maybe outsized rent growth, maybe lagging rent growth or any trend you're seeing and maybe how we should think about that as it comes to your capital allocation here over the next several quarters?

John Williams

We'll see if Bill Leseman wants to make a comment on that but generally other than Houston, we are actually seeing good performance across the Board, not outside performance but good solid performance and for us that's more important; to get a nice revenue increased, almost 4% tends to be a solid result. And I take that quarter-over-quarter if you look at our annual report, we talk about Rabbit -- sorry, the Hare versus the Turtle, and we're growing to be a turtle, we're growing consistent quality results overtime than be up and down. We think that our shareholders appreciate the predictability of our return. So we feel very good about all that markets, we actually feel very good about Houston. We marked those assets very reasonably priced and based on that price we're getting good performance and we pay Houston as Randy said, long-term is a great place to own growth. So we did a lot about those assets. Bill?

Bill Leseman

I don't think I can add to that John, I think you're on the mark.

John Williams

For us Bill seems to be strong and -- world site tends to be a little bit neighborhood for unit. We're probably glad we don't have a lot of win options in the Midtown area, we've been lined up today for instance. And we don't probably anticipate buying anything else in Houston until we see a little bit better return. But the market other than these gateway cities tends to be pretty solid and strong, and I think if you looked at the results of MAA and some of those other guys who are more into the markets like we are, I think you will see same results.

Patrick Healey

Okay, great. That's very helpful. And then maybe turning to the housing initiatives, obviously you have one asset and more in the pipeline but the lending platform -- so maybe give us your thoughts on kind of the acquisition environment for student housing assets today, maybe your thoughts on adding to that portfolio, maybe call inorganically outside domestic lending program. And then when thinking about that through the lending program, some of the large public operators have agreements with universities. So as you gain scale on that platform, is it something similar where you partner with a developer, provide lending and ultimately start working on a given university in phases, something that we could ultimately see flow through here overtime?

John Williams

I think you will see additional loans as it related to student housing, our criteria for student housing over the last year or two in terms of location has solidified, we're more and more picky about location, we're more and more picky about the size and the growth of the university, we want to invest money in. And we are actively pursuing acquisitions. We close the transaction in Tallahassee during the second quarter and we were right on the mark, it was not such well managed and had some capital leads and we've been able to put those capital leads into that program, the property is 100% leased, it's wonderfully located. We're pursuing other opportunities but it's just like -- and of course we're aiming the shopping centers, we might look at 100 transactions and find one that works. So we had two or three close calls over additional suit and housing purchases, the last 30 days, we weren't able to close the deal we're meeting there. Dan you want to add to that?

Dan DuPree

No, I think you handed that pretty much. Our objective in student housing is to grow the portfolio, the advantage that we feel like we have in that related to our traditional multi-family is -- there is less compression in cap rates although cap rates have compressed in the space. We're into the period of time in the year where more product will be brought to market, we'll be looking at more product because people who have completed their lease up for the coming calendar year. But I think the key here is that we're learning as we go; we're learning about the importance of locations, learning about the significance of the size of the school.

Patrick Healey

Okay, great. Thanks for the time.

John Williams

Thank you.

Operator

The next question is from John Benda at National Securities Corp.

John Benda

Good morning. A few questions I want to ask. Just quickly, on the tax situation, looks like the majority of acreage you're having in Texas; and on the portfolio are you guys getting any tax abatements as you do in the developments or even with main street as you redevelop and value property from local governments?

John Williams

We continue to look at both acquisitions and opportunities for their tax abatements. We haven't been successful but have generally to get a tax abatement county or municipality, generally impose some conditions that might be a bigger task. Certainly we won't do one, we just haven't been able to do one up from that. Tax abatements are very helpful, particularly in these added municipalities are fine to the push taxes as hard as they are but they keep -- they shouldn't be able to tax us on values that we don't think are realistic and we think we'll be successful to lot of challenges, in fact we've already started having some good news. So we think we're in line but as I said before, we have a very new portfolio, a lot of new acquisitions, both from our MS programs as well as other acquisitions and what you will find is when those parties change hands, they are getting very sophisticated in the bill that they go through over the records and pull out what has happened from a purchase price standpoint. So I think that probably given our inquisitive nature in our growth, it probably affects us more disportionate brand that sort of tired and slow, not doing much work.

John Benda

Alright, great thank you. And then on news, I think about capital opportunities and how we moving -- I think about you know cap opportunities. And how can you cap that program what are some of the core companies from development that are going to directly transfer over to a value-added program?

John Williams

Well, all of our properties that we're building today, would have granite countertops, nine foot ceiling, sometimes much higher than that; upgraded light fixtures, upgraded bathrooms, different types of flooring, hard wood etcetera, great amenities, incredible technology; all of those things are important, the good news is that these students are requiring more technology than we typically do put and in their apartments. So that is a challenged article to keep up what's going on with student housing and that tends to be one of the positives for us being in that business.

But Class A apartments now are much better than they were say 25 to 30 years ago when I was directly developing, consequently, I think millennial are willing to stay longer in these apartments because they are some well-built, so well designed, great closet space, great living areas and great amenities; in fact we are opening up a property program encore that has a roof top of pools, wonderful exercise equipment, demonstration kitchens, high-quality interiors with fridge and stoves better than I have in my own house. And these types of additions along with great landscape that we're known for in pool areas I think attract a resident who is willing to stay in those apartments longer, that's why we seeing less turnover in a while we are -- I think are seeing the client in home-own show [ph].

John Benda

Great, thank you very much.

Operator

The last question is from Jim Raken [ph] at D.A. Davidson.

Unidentified Analyst

Good morning, everyone.

John Williams

Good morning, Jim. You're last but not least.

Unidentified Analyst

Good to hear I am not the least. With average multi-family occupancy at 94.7% for the quarter, can you talk about the balance between maintaining high occupancy and also pushing rents over the next year or so?

John Isakson

We work our butts over them all the time and that's the key to the business. If you rents too much or your occupancy drops, and if you are not aggressive enough; your occupancy tends to be little high. We've always felt like the 95% we were as close to as we can get, sort of ideal, it represents the fact we are pushing rents and still not having a lot of vacancy. And as you know, vacancy cost you money because you have to keep the heat there and lights on. So we think that if report occupancies in 94.5% to 96% range, we're right on point as to where we need to be. As was mentioned, we're in the process of putting in a revenue management system. I typically have not been in favor of that but as we now are hitting up to over 10,000 apartments, the computer and revenue management system can do it better than we can do it, generally hands-on.

So by the end of the year we expect to be a fully implemented revenue management system and that revenue management system allows us to set the parameters of what occupancy we want. So we will be setting an occupancy staying over around 95% and 95.5%, and I think the revenue management system will allow us to get there. I complement our folks in the environment we're in, to be at 95% occupancy, and that's really money that we are collecting, you don't have to look to our definition of occupancy, and money in the buying because more important than have to do best. So we're doing a good job from that standpoint and right on target where I think we will be.

Unidentified Analyst

Okay, that's some great color. And also a bit of a philosophical question; student housing, you talked about growing the portfolio but how do you see this segment evolving over the next couple of years relative to multi-family and retail?

John Williams

It will be -- it's hard to say, that would be very tough to predict. We want to make investments where we can create the most value for our stockholders, our shareholders. And so we'll be led in that direction, and as Dan said, student housing -- the cap rates are compressing a little bit, and we've have great results in retail, and that's frankly we stepped up to buy behind. We're driven by one thing, and that is giving our shareholders a great return and then a great dividend. We're committed to growing the company 10% a year, and I mean 10% a year; absolutely, positively no doubts about it. And we'll invest the money for we think we can get that. We're not going to any B&C apartments and we're not doing crazy stuff but we'll adjust our investments in consumer housing and retail and core multi-family in a way that will help us get to that 10% dividend -- and realize our 10% dividend is what steadily declining AFFO; so we're not only increasing the dividend, we're making that dividend more safe and more secure.

Unidentified Analyst

Okay, very helpful. Thanks, John.

John Williams

Thank you. Operator, that's our last call. And we want to thank everybody for joining us, and we'll see you next quarter.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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