Preferred Apartment Communities: Tread Carefully

Summary

• At first glance, Preferred Apartment Communities looks like a strong value prospect for REIT-oriented investors.
• The company's shares are trading on the cheap, but there are significant underlying problems.
• Debt aside, the business' high preferred equity value and the cash needs on that front take most of the value away from common holders.
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One interesting, small-sized, diversified REIT on the market today is Preferred Apartment Communities (APTS). Contrary to its name, the company owns not only apartments, it owns grocery anchors, some office properties, and up until recently, it owned some student housing units. The firm’s low price/operating cash flow and low price/FFO (funds from operations) metrics make it look like an excellent value prospect at first glance, but when you start to dig deeper, you find justification for why the business is priced the way it is. With significant equity structural issues to contend with, common shareholders should be wary about adding Preferred Apartment Communities to portfolios.

A look at Preferred Apartment Communities

For a firm with a market cap of $393.22 million as of this writing, Preferred Apartment Communities has a large footprint. As of the end of the second quarter last year, the business had around 100 properties to its name spread across 34 markets in 13 states. It also had 14 real estate loan investments. While the company has operations in several states, Florida, Georgia, Texas, and North Carolina account for 78% of its presence.

Instead of looking at the business as a whole, it’s best to think of it as multiple businesses. The first of these is its multifamily set of operations. As of last year, this part of the firm controlled 12,936 units. This ignores 2,995 through its real estate loan investment program. Most of the multifamily business involves apartments, but it did have 2,011 units spread across eight properties under its student housing business. This has since been sold off, with the company collecting, by the end of 2020, $478.7 million for them. The bulk of the student housing portfolio was located between Texas, Florida, and North Carolina, with those states representing 36%, 26%, and 15%, respectively, of that unit’s presence.

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.