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Income from Multi-Family Properties

12/06/2019 5:00 am EST

Focus: REITS

Douglas Gerlach

President, ICLUBcentral, Inc.

Founded in 2011, Preferred Apartment Communities (APTS) — referred to as PAC — is a REIT focused on producing dividend growth and total stockholder return via a portfolio of multi-family properties, notes Doug Gerlach, editor of SmallCap Informer.

The current yield of PAC is around 7.6%, but with Funds from Operations expected to grow in the high single digits and a P/FFO Ratio below 10, the combination for an attractive total return looks to be in place with the concerns of investors being quite overblown.

Though classified as a Residential REIT, Preferred Apartment Communities also owns retail and office properties as well as real estate loans.

At the end of third quarter 2019, its asset composition was 48% multifamily and student housing; 22% retail; 20% office; and 10% real estate investment loan investments. (We note that the firm is in the process of divesting its student housing properties.)

As is standard when analyzing REITs, we have replaced EPS with Funds from Operations per Share (FFO/S) in our analysis. Revenues have grown rapidly since the REIT was founded in 2011.

Since 2012, revenues have grown at an annualized 79% to reach $397.3 million in 2018. FFO/S have also grown well, averaging 18.8% a year since 2012. For the third quarter ended September 30, 2019, total revenues grew 15.3% while FFO/S grew 13.7%.

The key multi-family segment saw same-store revenue growth of 3.5%. Expenses held steady at 2.3%, so same-store net operating income (NOI) was up a very strong 4.4% on same-store occupancy of 95.6%.

Management points to the young age of its properties relative to peers as being a key selling point and keeping occupancy high.

We see the potential for the REIT to support a high P/FFO of 12, thus providing a future high price of $26.20. On the downside, a low P/FFO of 8 times TTM FFO/S provides a low price of $11.90.

The current reward/risk ratio is 8.2:1, better than our minimum desired 3:1 ratio, and the REIT is a buy up to $15.50. From the current price, the projected total annual return is 20.5% including an average 6.2% yield.

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