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Equity REIT Basket Strategy: Added 100 APTS AT $8.29

|Includes: Preferred Apartment Communities (APTS)


I woke up early this morning, probably still suffering from post traumatic stress disorder after dealing with Google's Blogger website last night.

The source of my nightmares was described in my post published last night. Stocks, Bonds & Politics: Added 50 BWG at $17.01/Added 100 APTS at $8.29/Bought 50 AINV at $7.94-Roth IRA/Sold 361+BTZ at $13.45-Taxable Account

Entire sections of that post were deleted after I saved the material. I elected to publish the post with entire paragraphs and sections missing and to rewrite portions of that blog here at SeekingAlpha.

The two main discussions suffering from widespread deletions involved the add of 100 APTS and 50 shares of AINV.

Bought 100 APTS at $8.29-Averaged Down (see Disclaimer)

This purchase was made pursuant to my Equity REIT Common and Preferred Stock Basket Strategy. The preceding linked post contains a discussion of this strategy as well as snapshots of my net realized gains. I have not yet realized a loss which will happen at some point.

As explained in a March 2014, I started a tactical sector rotation into Equity REITs in September 2013: Equity REIT Common and Preferred Stock Table as of 3/5/14

Link to Update Published 9/9/14

Snapshot of Trade:

Company Description: Preferred Apartment Communities (NYSEMKT:APTS) is a relatively new and externally managed REIT primarily focused on apartments with the intention of growing its retail assets to 20% of the total.

Key Developments Page at Reuters

Company Website: Preferred Apartment Communities

This is a link to possibly the most comprehensive article published at Seeking Alpha discussing this REIT which is now available only to "PRO" subsribers. I left one meaningless comment to that article, just pointing out that the apartment complex that APTS was acquiring in "Nashville" was in Gallatin, TN. I live in Brentwood, TN (small cities in America) which is nearby. The metropolitan Nashville area is robust (see generally: "Nashville Takes Its Turn in the Spotlight" - NYT)

An article published in Seeking Alpha back in August contained a chart estimating the market value per share of REIT apartment properties. The estimate then was $10.69 per share. I have no opinion on that valuation, and simply offer it for whatever it may be worth. The valuation estimate is dated due to the large acquisitions recently made by APTS discussed below. The article does contain a good discussion about the supply/demand factors for Apartment REITs.

Fourth Amended and Restated Management Agreement Updated_Investment Guidelines 8-7-14

Dividends: APTS is currently paying a quarterly dividend of $.16 per share. Preferred Apartment Communities, Inc. Announces Third Quarter 2014 Common Stock Dividend Assuming a continuation of that rate, the dividend yield at a total cost of $8.29 per share is about 7.72%.

Since its IPO in 2011, APTS has raised its quarterly dividend several times, starting with a $.125 dividend rate in 2011 Dividend Date & History

Prior Trade: This purchase is an average down. I previously bought another 100 share lot at $8.75 in an IRA account. Item # 3 Bought Regular IRA 100 APTS at $8.75 This last purchase was made in a taxable account.

Recent Acquisitions: When I first bought shares, I noted that APTS had announced two large acquisitions that more than doubled this REIT's size.

Based on recent press releases, the acquisitions were completed in late September and in early October.

A. Apartments: The four apartment complexes have an aggregate of 1,397 units and are located in the Kansas City, Kansas, Nashville, Tennessee, Dallas, Texas and Houston, Texas "areas". The aggregate purchase price was approximately $182 million, exclusive of acquisition- and financing-related transaction costs.

Preferred Apartment Communities, Inc. Announces Acquisition of Four Multifamily Communities with 1,397 Units (September 29, 2014) SEC Filed Press Release

Google Map Showing Location of "Nashville" Apartment Complex: Stoneridge Farms-Google Maps

Another apartment complex is near "Houston", but is actually located in Katy, Tx.: Vineyards Apartments - Google Maps; Katy,TX | Vineyards Apartments

The two other apartment complexes appear to be:

Estancia Townhomes in Dallas- Google Maps

Sandstone Creek-Google Maps (just outside of Kansas City); Overland Park, KS-Sandstone Creek Apartments

In my earlier discussion, I had some concerns about the financing given that the small market capitalization of the company. As of 6/30/14, there were 16,636,359 shares outstanding giving the company a capitalization of about $138M assuming a $8.29 price

The financing for this acquisition appears to be on favorable terms. The acquisitions were financed in part by separate first mortgages "Two of the first mortgage loans, aggregating approximately $59.6 million, have maturity dates of October 1, 2021, have a fixed interest rate of 3.68% per annum, are interest-only for the first three years and thereafter amortize based on a 30-year amortization. The other two first mortgage loans, aggregating approximately $60.3 million, have maturity dates of October 1, 2019, have a fixed interest rate of 3.18% per annum, and amortize based on a 30-year amortization."

The aggregate total of those mortgages is $119.8M leaving about $62.2M to be financed with other funds.

While APTS did not specifically state the sourcing of those additional funds, one source is the REIT's new bank facility. 8-K KeyBank Credit Agreement The other is through a continuing private placement of a 6% preferred stock with a $1,000 par value. As of 9/30/14, there were 135,109 shares of this series A preferred stock outstanding, page 22 10-Q 3Q2014

Given the size of the likely draw, I would anticipate relatively soon another share issuance to pay down any draw from that facility. I may be wrong however.

B. Grocery Anchored Retail Shopping Centers (properties acquired by APTS wholly owned subsidiary New Market Properties, LLC)

APTS completed the purchase "of six grocery-anchored necessity retail shopping centers with an aggregate of approximately 438,000 rentable square feet in the Orlando and Tampa, FL, Atlanta and Columbus, GA, Charleston, SC, and Houston, TX areas for an aggregate purchase price of approximately $74.2 million, exclusive of acquisition- and financing-related transaction costs." Preferred Apartment Communities Those acquisitions were financed with separate first mortgages maturing on 10/1/2019, bearing fixed interest rates of either 3.48% or 3.58%.

Another acquisition was completed on 10/6/14 and consisted of a grocery anchored (Publix) retail shopping center in Nashville, TN containing 62,400 rentable square feet. The purchase price was $14.2 exclusive of acquisition and financing related transaction cost. The acquisition was financed with a first mortgage loan maturing on 11/2/2024 bearing a fixed interest rate of 4.21%. Preferred Apartment Communities

That property is located in Murfreesboro, TN (Middle Tennessee State University; famous civil war battle) Nashville Post

APTS acquired two other Middle Tennessee Publix anchored retail centers earlier in the year, containing a combined 127,200 square feet. The purchase price was $24.1M financed in part by a $17.1M mortgage. Those properties are located in Smyrna, TN (Nissan car factory located nearby) and Spring Hill, TN (GM's Saturn factory was located in Spring Hill)

I believe those properties may be viewed using Google Maps

Publix Super Market at Spring Hill Village - Google Maps

Publix Super Market at Smyrna Crossing - Google Maps

Recent Earnings Report: Due to the recently announced proposed acquisitions, the company as configured, prior to the closings of those acquisitions, is not that important or predictive of future results.

Preferred Apartment Communities reported second quarter FFO of $4.091+M or $.25 per share. Normalized funds from operations was given at $.26 per share. AFFO was reported at $.21 per share. Same store rental revenues rose 4.3% during the quarter compared to the second quarter of 2013, while NOI increased by 6.99% on the same basis.

Rationale: With this purchase, my goal is to exit the position with a 10% annualized total return. Most of that return will likely be generated by the dividend.

At the current quarterly rate, the dividend yield is about 7.72% at a total cost of $8.29.

Risks: One substantial risk involves all of the recently announced acquisitions. Those acquisitions will more than double the REIT's size and will have to be financed successfully. Whenever a company grows this fast, there is always some danger that it will grow too fast or grow too much at the wrong time.

The company discusses risks incident to its operations starting at page 5 of its last SEC filed Annual Report: PAC-10-K 12/31/2013

One major disadvantage applicable to the REIT structure is the requirement that at least 90% of the net income has to be distributed to shareholders. This avoids taxation at the corporate level for the amounts so distributed and consequently results in decent dividend yields.

There is no free lunch however. Money is flying out the door with every dividend payment and nothing (or close to it) is being retained to grow the business. The REIT raises capital through stock (both common and preferred) as wells as bond issuances. That cost money.

When APTS sold 3,870,968 shares at a public offering price of $7.75 last November, the underwriter discount was $.42625 per share leaving the company with net proceeds (before its own expenses) of $7.32375 per share. The total gross proceeds were $30M and APTS received $28,350,002 before further subtracting its costs (e.g. legal). Final Prospectus Supplement (Shelf Takedown Nov 2013)

Prior to announcing this share offering, the price was $8.21. These offering will knock the price, which is one reason sometimes to just wait for one to happen before considering a purchase.

I have view the ongoing need for capital raises as a negative, but it exists with every REIT. I am not signaling out APTS. The only question is the chunk taken by the underwriters will vary depending on a number of factors including their risks.

Stock and bond prospectuses can be found by going to the SEC page for APTS. I can quickly call them up by entering 424B5 in the "Filter Results" box. Search Results for APTS' SEC Form 424B5

The external management is a major negative, though I do not view external management as unusual for a small REIT in its formative growth stage. An investor needs to review the compensation arrangements for the external management. Page 21, 10-Q 3Q2014

Charts/Technical: The price recently broke under its 50 day SMA line. The APTS chart at StockCharts shows the 200 day line at 8.23 which is slightly below the line shown by other services. The relative strength is low. My first 100 share lot purchase was made when the stock was above both the 50 and 200 day lines.

see also: APTS Stock Chart-MarketWatch

I subscribe to IBD which currently gives this stock a composite ranking of 66 (ranked #93 in the finance-property grouping), which is not good. The accumulation/distribution is bad at an "E" rating (red circle at IBD meaning what red normally means). So the technicals are not good using those indicators.

For those who have followed me over the years, dumpster diving is my modus operandi. I am both a value and contrarian individual in more ways than just my investing approach. I also focus on income generation as noted in my SA Profile page.

Future Buys/Sells: I may average down in 50 shares lots, but I doubt that more than 50 more shares will be purchased in the IRA due to risk considerations. In my Roth IRA, the dividends are not taxable when paid or withdrawn under current law which in effect turns the non-tax favored REIT distribution into a tax free one.

As noted in my Blog, I started Roth conversions in October 2008, the most propitious time to consummate a conversion due to the tax issue, and I intend to complete the transfer of my regular IRA assets into the Roth before the mandatory distribution requirement comes into being. Hopefully, I will never need to draw on those Roth IRA funds in retirement. My retirement plan is to draw funds out of that account only as the last funding source to meet expenses.

There could be a downdraft when APTS announces a share offering to help for the previously discussed acquisitions. I will wait for that to happen before making a decision on an average down price. I now own 200 shares.

(APTS) closed yesterday at $8.23.

Disclosure: The author is long APTS.

Additional disclosure: Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.